3 Important Changes to FHA Loans September 2015

New Guidelines

FHA is going through a significant overhaul of it’s underwriting guide, as well as the guidelines in that guide.

While there are many small changes that will affect some people, there are several major changes that will affect a larger number of borrowers using a FHA mortgage to purchase, or refinance a home.

If we are going to keep score on whether these changes are good, or bad for consumers, I am going to lean toward the “bad for consumer” team inching out ahead of the positive changes for borrowers.  When I say “bad for consumers” I really just mean that the change could make it more difficult for some borrowers, while “good” will make it easier for others.

1. Installment Debt with Less than 10 Months

This change brings clarification to previous FHA underwriting guidelines regarding allowing the lender to exclude the payment from your debt to income ratios for any installment account with less than 10 months remaining.

A common example of how this guideline is used on conventional loans is automobile loans with less than 10 months left.  Your car payment is usually pretty significant, and the ability to exclude that payment can make a huge difference in your debt to income ratios.

The catch with the FHA version of this guideline is that the total of the remaining payments cannot exceed 5% of your gross monthly income.  If we are talking about a car payment as the installment debt, this could be difficult qualify unless you only have a month or two left on the loan term.

2. Multiple FHA Loans

If you have a FHA loan on your current home, and want to move to another City or County and want to use another FHA loan to buy your new home, it just got a little more difficult.

In order to obtain to a second FHA loan for your primary residence, your new home must be more than 100 miles from your current home.

The previous guideline was a little less strict requiring the new home to be at least 50 miles from your other home, and it had to “make sense” that you were moving.

3. Deferred Payments on Student Loans

The actual guideline refers specifically to deferred payments, and the most common case of this affecting FHA borrowers is student loan debt.

The new guideline requires that a payment be considered to any loan with deferred payments.  If there is no payment listed on your credit report, you can either contact the creditor for a statement showing what the payment would be if you were to start making the payment today, or the lender will apply a payment equal to 2% of the balance of the loan.

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In most cases, especially for student loan debt, the actual payment comes out to about .5% of the account balance.  For example, a 2% payment on $50,000 in student loan debt would be $1,000.  As you can see, this is a guideline change that will impact many borrowers.

The previous guideline allowed the lender would not have to count payments in your debt to income ratio if you could prove that the payments were deferred for at least 12 months from the 1st payment date on the new mortgage.

Review Your Pre-Approval

If you have been pre-approved for an FHA loan and are currently looking for a home to buy, you need to immediately contact your lender and determine whether or not these changes will affect your approval.

You do not want to be caught off guard with an accepted offer only to find out later that your lender was unaware of changes that could change the terms of your loan, or worse yet, cause you to no longer qualify for the loan that you thought you were approved for.