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An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, or FHA for short. Popular with first-time homebuyers, FHA home loans require lower minimum credit scores and down payments than many conventional loans. Although the government insures the loans, they are offered by FHA-approved mortgage lenders. Below are a number of questions about FHA qualifying guidelines.
1. If someone has had a Ch. 7 Bankruptcy, what's the timeframe needed before they are eligible for an FHA mortgage?
Two years. Can do after 1 year on an exception basis only (circumstances beyond their control…such as death of a spouse…divorce….cancer)
2. Ch13 timeframe?
Must be in it for a minimum of 1 year with no late payments. So a borrower currently in a Ch 13 BK is eligible to buy a home, with CH-13 payments in debt ratios and court approval.
3. If someone has had a foreclosure, what's the timeframe until they are eligible?
0-3 years. Normal is 3 years. Can be 2 years on an exception basis (circumstances beyond their control…same as above). Can be 0 years if foreclosure/lates were after a divorce was final and the property and debt was awarded to the other spouse. No lates or foreclosures until divorce was final.
4. If someone filed a Ch 7 BK and included their mortgage in it, what's the timeframe until they are eligible?
The clock begins on the date the mortgage was satisfied (3 years from then). What that means is that if the bank foreclosed and it took them a year to sell the property, 3 year seasoning countdown begins from date of sale of property.
5. Can you do a cash-out refi to pay off the remaining balance on a Ch 13 Bankruptcy?
Yes. You can go up to 85% loan to value, assuming there have been no lates on the BK13 or the mortgage.
6. If you have an open tax lien and are currently in a payment plan with the IRS, do you have to pay it off at or prior to closing?
No, the IRS can subordinate their lien to the new mortgage and they do routinely do so (purchase loans more common than refinance)
7. What's the maximum number of months left on an installment loan that allows you to remove it from the DTI?
10 mos. However, if the payment exceeds $300/mo and will hinder the borrower’s ability to make the mortgage payment in the 1st 10 months, then it will need to be paid to zero. Underwriter's discretion.
8. Do you have to pay off collection accts and charge-off's prior to closing?
No, FHA does not require it. The loan of course still has to qualify based on credit. However, new policies can only allow collections up to $1,000 total. Any amount above that has to be paid off and settled.
9. When do you need to build alternate credit?
When the borrower/s do not have 3 open active trade lines for 12 months on their report.
10. How is alt credit built and evaluated?
Document 12 months good payment history on rents, utility bills, cell phone, furniture rental, car or renters insurance, etc.
11. How long does a student loan need to be deferred for you to leave it out of the ratio's?
Used to be twelve months from the expected closing date. However, new regulations now require future payments to be included into total monthly debts
12. If the middle FICO score is under 620, what are the ways we can try to get it up?
We can do a credit simulation to determine a game plan to increase credit scores. Paying off old collection accounts may actually bring scores down.
13. Can you gross up Child Support income? Military allowances?
Yes, it will depend on the borrowers tax bracket…either 15% or up to 25%. Same with Military housing allowances and other non-taxable military allowances. (the word pay usually makes it taxable). Military are generally better off with VA loans.
14. How long must you have been receiving child support (or alimony) to be able to use it as income?
12 months, and it must be documented that it was received on time (i.e. cancelled checks front and back, last 12 months bank deposits broken out on statement, county summary sheet). It also needs to continue for a minimum of 3 years (if child is over 15, child support income may not qualify).
15. On a multi-family purchase, how do you establish the rent to be used for income?
Based on the appraisal. The appraiser will show the current fair market rents and you can use 85% of that. Occupant co-borrowers okay to 96.5% Loan To Value. For 3 and 4 units, gross rental income must cover mortgage PITI payment for property to qualify
16. On a multi-family refinance, what needs to be provided if you are using rental income?
Two years of Schedule E from their tax returns.
17. What income docs are required for a self-employed borrower?
2 years of 1040's and a current YTD P&L. The P&L does not need to be audited unless specifically called for by the underwriter. In cases where there has been a large increase in income over the past year, an audited P&L will likely be called for. Lines 13 and 31 of the schedule C are added up for the past 2 years and divided by 24 months. If income was lower in the past year, the lower of the past 12 months may be used.
18. What is considered alternate documentation when it comes to verifying income?
2 years W-2's and 30 days of consecutive pay stubs. The standard way is a VOE and 1 recent pay stub.
19. If someone has recently returned to the work force after an extended absence (possibly even for a number of years….for example: a woman returning to work after having children and decided to stay home and raise them) do they need to wait for 2 years to re-establish an employment history to allow you to use their income?
No. If they are back to work for a minimum of 6 months and can document, prior to leaving the work force, that they had a complete 2 year full-time history, the income can be used.
20. If someone is currently renting the home they are looking to purchase, can the seller/landlord give them a down payment credit for the rent they have paid?
Yes and No. The seller/landlord can give a credit but only for payments made in excess of the fair market rent. For example, if the fair market rent for the house is $1000/mo and the purchaser paid $1200/mo, then the $200 that was paid over and above the fair market rent could be used as a credit. Lease option, option credit may be used if documented.
21. Does FHA allow stated income loan programs?
No, all loans are fully documented with tax returns, W-2's, paystubs, or awards letters. However we have seen "automated approval" with ratios to 59%. Self-employed borrowers who become W-2' borrowers in the same field may only need 30 day's paystubs to qualify. There's also no limit to the number of non-occupant co-signers to help qualify.
22. Is FHA only for First Time Home Buyers?
NO. It is popular among first time home buyers due to their forgiving guidelines on credit score, cash availability and debt to income ratios.
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