New FHA Guidelines
On September 14 FHA issued a new handbook for FHA mortgages. You can download the new guidelines here.
Some of the major changes are listed here below:
Tax Liens ( Improvement):
Tax liens may remain unpaid if the borrower has entered into a valid repayment agreement and has made at least 3 months of timely payments (formerly it was 6).
Payments may not be “pre-paid” and the tax authority must agree to subordinate the lien to the 1st TD.
Commissions Income ( Improvement):
Commissions can be used to qualify with just a 1 year history (formerly 2 years).
Voluntary Alimony or Child Support Payments (Good News):
They can now be counted if there is a 6-12 month history of receipts.
Multiple FHA loans:
Borrower may now ONLY obtain second FHA loan for new principal residence when relocating for employment and their current residence is more than 100 miles from new residence area.
Mixed Use Condos (Improvement):
Formerly: No more than 25% of the total floor space could be devoted to commercial use, now 51% can be commercial.
Satisfactory Credit -this has been more clearly defined to include:
- No 90 day late payments for revolving, installment debt payments accounts in the last 12 months.
- The borrower has made all housing payments on time for the previous 12 months – no 30 day late payments.
- no more than (2) 30 day mortgage late in the last 24 months
Looking to buy real estate in Orange County, CA? email Jesse Madison now and get started!
NEW FHA Guideline Changes by category:
FHA Changes affecting credit:
- IRS Tax Liens- tax liens are allowed to remain open with repayment plan, three months payments and subordination agreement are required. MORE RESTRICTIVE
- judgments are allowed to remain open with repayment plan and three-month payments. MORE RESTRICTIVE
- Deferred debt must be included in debt ratio MORE RESTRICTIVE
- Authorized user accounts must always be included in debt ratios. MORE RESTRICTIVE
- For all revolving accounts and deferred installment loans, including student loans when no payment exists on the credit report, we will use the greater of $10 or 2% on student loans; greater of $10 or 5% on all other debt. IMPROVEMENT
- When an installment loan in repayment, including student loans in repayment, shows no monthly payment on the credit report, a statement is required. MORE RESTRICTIVE
- On re-established credit, we will allow one collection account with a maximum of $500. Account must be dated more than 12 months prior to application. IMPROVEMENT
- When an account is paid by a business, we must show the business related debt on the tax return. Now, we must also show that the debt was considered in the cash flow analysis of the borrower’s business. MORE RESTRICTIVE
- Cumulative outstanding collection account balances of $2,000 or greater must be paid off at or prior to settlement or verify borrower has made payment arrangements and hit the DTI, or, use 5% of the balance in the DTI. MORE RESTRICTIVE
- See Hud handbook for additional guidance if borrower’s reside in a community property state.
- For a short sale borrower if they were current at the time of the short sale, we can finance before 3 years if the loan is manually downgraded with no mortgage or installment lates in the 12 months prior to short sale date AND 12 months prior to application date. MORE RESTRICTIVE
- 30 day accounts must now have 0x30 in the past 12 months AND must document they have funds to pay the account in full. If the credit report reflects any late payments in the last 12 months, the Mortgagee must utilize 5% of the outstanding balance as the Borrower’s monthly debt to be included in the DTI. In addition to the 5% the borrower must have the assets to cover the outstanding balance. MORE RESTRICTIVE
- Balance sheet is not required for schedule C self- employed borrowers .IMPROVEMENT
- If the borrower has more than 3 jobs in 12 months, we need to show required schooling or consistent increase in pay to qualify.MORE RESTRICTIVE
-transcripts of training and education demonstration qualification for a new position; or
-employment documentation evidencing continual increases in income and/or benefits.
- In addition to a copy of the VA Award Letter, a copy of VA Form 26-8937 (Verification of VA Benefits) is required to prove income. MORE RESTRICTIVE
- Capital gains or losses generally occur only one time, and should not be considered when determining Effective Income. However if a consistent gain or loss, 3 years tax returns are required to evaluate. CLARIFICATION
- Future income no longer requires a paystub. The loan can close with an offer letter, provided that employment begins prior to close. IMPROVEMENT
- Non-taxable income gross-up rate is capped at 15% instead of 25%. MORE RESTRICTIVE
- When qualifying a borrower receiving commission income, a 1-year history receiving commission with the same employer is required. IMPROVEMENT
- For borrowers serving in our military, the active duty expiration date on their LES must be at least 12 months out, OR we must have a LOX from the borrower stating their intention to re-enlist. CLARIFICATION
- When a rental property is not listed on the Schedule E, we must obtain a 12 month lease agreement, verify 25% equity in the property, and date of acquisition. MORE RESTRICTIVE
- We must obtain documentation from the private disability insurance provider showing the amount of the assistance with the expiration date of the benefits, if any, and the Federal tax return OR the most recent bank statement to evidence receipt of income . MORE RESTRICTIVE
- Expected income from a family-owned business is not allowed. CLARIFICATION
FHA Changes regarding Assets:
- Large deposits are defined as 1% of adjusted purchase price or appraised value. MORE RESTRICTIVE
- For borrowers using joint bank statements; all non- Borrower parties (even spouses) on the account must provide a written statement that the Borrower has full access to use of the funds. CLARIFICATION
- A salary advance cannot be used for funds to close. CLARIFICATION
FHA Changes regarding Property
- Max age of appraisal is 240 days with an update (update extends appraisal, instead of update good for 120). IMPROVEMENT
- Veterans on active duty are allowed to finance their home as a primary residence, provided we can document the home is occupied by the Veteran’s spouse . IMPROVEMENT
- There are a number of site considerations. Refer to FHA 4000.1 handbook for guidance. CLARIFICATION
- All common areas/common elements for condominium properties are to be included. This included, but are not limited to lobby/foyer, hallways, laundry facilities, storage areas, recreation facilities. CLARIFICATION
- Comparable photos taken by the appraiser are to be shot at an angle, such that one of the sides is available . CLARIFICATION
FHA Changes regarding Purchase specific Changes:
- Letter from homeowner is required if borrower is living rent free. CLARIFICATION
- When a borrower is relocating, the new home must be at least 100 miles away from their current residence. MORE RESTRICTIVE
- If a borrower is converting their primary residence to an investment property, it must be 100 miles away, they must have a security deposit, one year lease, AND 25% equity in the converted property. MORE RESTRICTIVE
- There are no more HOC vacancy factors – 25% vacancy rate across the board. MORE RESTRICTIVE
- Any EMD greater than 1% of the value of the home must be documented . MORE RESTRICTIVE
- Any gift funds used toward an EMD must be documented, even if it is less than 1% of the value of the home. CLARIFICATION
- Gifts of equity always require a gift letter. Purchase Agreement is not acceptable . MORE RESTRICTIVE
- On a Purchase transaction, a second lien from a HUD-approved nonprofit cannot cover a borrower’s minimum required investment . MORE RESTRICTIVE
- If subordinate financing exists, the total of both mortgages may not exceed the national mortgage limit. IMPROVEMENT
- For a non-permanent resident alien, an Employment Authorization Document (EAD) is required. MORE RESTRICTIVE
For more information on purchasing Orange County Real Estate with just 3.5% dow using new FHA guidelines please call Jesse Madison at 949-306-8416