Effective for FHA case numbers issued on or after September 14, 2015, the Federal Housing Administration (FHA) implemented some changes to their underwriting guidelines which may significantly affect the ability of homebuyers to qualify for this program. Addressed herein are a few of the more significant changes.
Previously, as long as a borrower could demonstrate that student loan payments were deferred for at least one year from the closing date of the loan, the payment amount would not be included in the calculation of the borrower’s debt to income ratio.
The new rule states that for all deferred debt, including student loans, a payment amount of 2% of the outstanding balance will be included in the debt to income ratio.
Authorized Signer Accounts
Currently when a borrower is listed as only an authorized signer on a credit card, no monthly payment has been required to be included in the borrower’s debt to income ratio.
The new rule states that the payment must now be included in the borrower’s debt to income ratio unless it can be demonstrated that the account holder has made the payments on the account for the 12 months preceding the case number issuance date.
Payments on Revolving Debt
If a debt will be paid in full over the next 10 months FHA currently does not included that payment in the borrower’s debt to income ratio. The new rule states that you must evaluate the CUMULATIVE monthly payment of such debt to determine if the total monthly payment exceeds 5% of the borrower’s gross monthly income and any amount that exceeds 5% will be included in the debt to income ratio. The borrower also is not permitted to pay down debt in order to meet the 10 month requirement.
For accounts which are paid in full each month and no payment amount is shown, a payment amount of 5% of the outstanding debt will be included in the debt to income ratio UNLESS it can be shown that the account was paid in full for all of the preceding 12 months and there were no late charges.
Definition of a “Family Member”
A family member includes parents, grandparents, children, domestic partner or spouse, siblings, aunts and uncles and in-laws. Cousins have been removed from the definition of family members and in-laws have been added.
The definition of family member most often comes into play when determining acceptable sources of gift funds as they must be received from a family member.
“Grossing Up” of Non-Taxable Income
Previously FHA allowed for the “grossing up” of non-taxable income such as social security and disability income by 25% to account for the fact that these funds are generally non-taxable. In other words, if the borrower was receiving $1000 in Social Security income monthly, the allowable income was $1250 ($1000 x 125%). The percent used to gross up income has now been reduced to 15%.
These recent changes by FHA are part of a consolidation by FHA of numerous handbooks, mortgagee letters and policy statements issued over the past several years. As such, the new manual is extensive and includes many changes, clarifications, etc. This article is intended to merely touch on a few of the more commonly seen circumstances encountered by borrowers. I will provide additional guidance as to some of the more significant changes in subsequent articles and always welcome questions from homebuyers and Realtors regarding their particular circumstances.