Although FHA guidelines became a little more strict in 2019, an FHA loan is still one of the best ways to buy a home. Not only do FHA loans provide a low down payment, they also offer very flexible underwriting guidelines. Several popular FHA loan guidelines which can save a home purchase include…
- Qualifying with student loan debt
- FHA debt to income ratio
- FHA loan transfer (FHA case file assignment)
- Manual underwriting – When automated approvals don’t work
- Higher FHA loan limits
- Low down payment & FHA down payment assistance
2019 FHA Loan Limits Includes More Buyers
2019 FHA loan limits increased quite a bit, which allows more buyers to use these benefits. The minimum FHA loan limit, which covers most counties, increased to $314,827. This is a dramatic increase from the 2018 loan limit of $294,515. Then, there are “FHA high cost areas” which allow FHA loan amounts to $726,525! 3.5% down payment up to $726,525? Yep! That’s almost a $50,000 increase in loan size to help buyers in areas with higher purchase prices.
FHA Loan Transfer to Save a Denied Loan
Recently, we were able to turn around a loan that had an FHA underwriting denial with another mortgage lender. After discussing the details, we felt there was a good chance of loan approval. So, we received the file on Thursday afternoon, September 12th. Fortunately, FHA loans allow for transferring the FHA case file ID and FHA appraisal. Therefore, it saves a lot of time. Yet, there is a negative of an FHA loan transfer. If a denial is placed in FHA’s system, the new lender must fully document why it now works.
On the 6th business day we received the clear to close and the closing package was sent out. That may sound impressive. Especially when, by law, loans may only close so quickly. But, there were a lot of complications that were overcome with the help of both real estate agents, buyers, closing attorney and our team of processor, underwriting, and closers. Working together is always key!
Have an FHA loan denial and feel there’s a case for getting it done? Let us take a look.
FHA Loan Guideline Hurdles Overcome
On the above purchase, there were backup offers to this popular home in a hot Wilmington NC market. So not only was there a time deadline, there was a lot going on with the loan. Here are just a few examples:
- 2 buyers plus 2 non occupying co borrowers in another state
- Appraisal originally did not meet HUD minimum standards
- 8 sources of income to document including self employment
Fortunately, we all went to closing on September 23rd. Everyone contributed and everyone won. All because the buyers got the home using our ability to use FHA guidelines.
FHA Loan Debt to Income Ratio Guidelines
One of the best qualities of an FHA loan includes the ability to qualify with a higher level of debt. So, an FHA loan debt to income ratio (DTI for short) comes in two parts. First is the most popular total debt to income ratio, which is total debt payments divided by total income. Generally, the maximum FHA total DTI is 50 – 55%. Then, there is the FHA housing debt to income ratio. This is the total new housing payment divided by the income. If either number is too high for the buyer’s scenario, it could cause a denial.
Even though higher FHA loan debt to income ratio is allowed, it still needs to make sense. In order to get an FHA loan approval with a high debt ratio, compensating factors help.
FHA Guidelines Compensating Factors
More often these days, an FHA loan automated approval is just not available. Maybe there are some risks like lower credit score, higher debt to income ratio, low assets, gift funds, self employed, or maybe all of these at once. Yes, that happens! That’s where FHA manual underwriting may save the day! Which we explain in a second as well. So, if a borrower has a lower credit score or other elevated risk, these compensating factors could help.
- Verifiable on-time rent history
- Asset reserves – assets left over after the loan
- Extended time on job
- High residual income – net monthly income after expenses
- Strong explanation for previous issue
- Isolated credit issue
FHA Manual Underwriting
Talk about compensating factors. These strengths can help a buyer close on an FHA loan even without an automated approval. When it comes to FHA manual underwriting, lenders are required to be more cautious. Although, compensating factors allow FHA manual underwriting to extend up to a 40% housing ratio and 50% total debt to income ratio. Standard manual FHA debt to income ratios are only 31/43%, so going to 40/50% is very flexible.
FHA Guidelines Change March 2019
Effective March 2019, FHA guidelines require all borrowers under a 620 credit score and over a 43% debt ratio must be manually underwritten. Fortunately, we offer FHA manual underwriting.
Furthermore, FHA manual underwriting helps buyers that have experienced foreclosure, short sales, or bankruptcy. Just because an automated approval is not available, do not give up!
Conventional vs FHA Guidelines
Recently, we worked with buyers in Annapolis, MD where FHA guidelines saved the day again. The buyers needed a home loan that allowed a low down payment, gift funds, higher loan limit, higher debt to income ratio, and had to close quick in hot market.
In this case, FHA guidelines for debt to income ratio beat conventional. Fannie Mae or Freddie Mac automated underwriting systems would not approve a conventional loan. Mainly because of debt ratio. But, the debt ratio was well within FHA loan requirements. Another solution included the Anne Arrundel County FHA loan limit being $517,500, which allowed a low 3.5% down payment on a $500,000 purchase price. Finally, the buyer’s non borrowing spouse got a loan in order to gift down payment funds to his borrowing spouse.
Yes, you read that right! Someone can borrow funds from certain sources and then give it as a gift to the buyer. We just need to adequately document all sources.
FHA Student Loan Guidelines
Talk about something that causes high debt to income ratios and that is student loan debt! Getting a college education is so expensive and many employers demand higher education. For many, that means student loan debt. Additionally, student loans have varied payment options which include…
- Income based repayment student loans
- Graduated payment student loans
- Fixed payment student loans
- Deferred payment student loans
Like other home loans, FHA student loan guidelines have their own way of calculating debt to income ratios when student loans are involved. The old way was FHA would exclude student loans with payments deferred over 1 year after closing. VA is the only one that will allow that now. But, that went away a few years ago for FHA. So, FHA student loan guidelines require any variable, income based, or deferred payments to be calculated at 1% of the outstanding balance. This can really hurt a buyer’s qualification!
Student Loan Payment Alternative Solutions
If the student loan payments are causing an issue, FHA debt to income ratio guidelines will allow a higher limit. Potentially, around 55%. Maybe a smidge more. Furthermore, Fannie Mae guidelines are very flexible when income based payments are involved. Fannie allows using the student loan income based repayment rather than 1% of the balance. Even if the IBR payment is $0, it may be used with proof of the IBR payment. So, we would explore this option if it works better for the buyer. Keep in mind Fannie conventional loans allow as little as 3% down payment too!
FHA Down Payment Assistance
Probably the most popular FHA feature is low down payment. FHA not only allows a low 3.5% down payment, it also gets more flexible.
- Down payment gift
- Gift of equity – Using home equity as down payment when buying from family
- Allows down payment assistance
- $100 down payment for HUD owned REO properties (FHA foreclosures)
- Alternative sources allowed such as retirement loans
- Seller paid closing cost assistance keeps out of pocket low too
So, its obvious when it comes to the down payment, FHA allows a lot of down payment flexibility. If there is a problem coming up with the FHA down payment, we offer several types of down payment assistance. We currently offer the following DPA programs…
- VHDA for Virginia buyers
- NC Housing Finance Agency DPA for first time & repeat buyers
- Chenoa Fund for most states
- Federal Home Loan Bank of Atlanta’s Affordable Housing Program
By us combining an FHA first mortgage and one of these DPA products, it can help more buyers overcome the down payment hurdle. Note: These DPA products may not be combined with another lender’s first mortgage. We must provide the first mortgage and the DPA.