For most first time home buyers, a Federal Housing Administration (FHA) mortgage loan is the most attractive option for financing a purchase. For instance, conventional loans typically require no less than 20% as a down payment for a mortgage loan. Conversely, FHA loans have traditionally only required 3.5% down payment for qualifying borrowers, while offering other financial incentives to first time home buyers.
Recently, however, the Federal Housing Administration has made several changes to the guidelines to qualify for a FHA loan. Some of these changes are for the better, but most experts agree that the majority of the changes make it more difficult for first time home buyers to qualify for a FHA loan. It is important for any person seeking to purchase his or her first home to understand the requirements to qualify for a FHA loan in order to determine the best option for financing and to determine the price range of the home he or she can purchase.
For starters, one of the most significant changes to FHA loan requirements is the minimum credit score to obtain a loan. New FHA borrowers must have a minimum credit score of 500 to qualify for any FHA loan. However, anyone with a credit score between 500 and 579 will have to pay a down payment of 10% on the mortgage. This is a significant increase from the former 3.5% down payment required for FHA loans. Borrowers with a credit score above 580 can still qualify for a loan with the traditional 3.5 % down payment. Before beginning to consider a new home purchase, borrowers who have struggled in the recovering economy should certainly check their credit score, as the increased down payment for lower credit scores can prevent them from being able to purchase.
Other important new rules which FHA mortgage candidates should be aware of include those regarding student loan payments and short term debts. Previously, underwriters could exclude most student loan payments from debt-to-income ratios. This will no longer be available for FHA loan applicants. Obviously, this means that it will be more difficult for new home buyers with significant student loan debt to qualify for a FHA loan. In addition, the new rules require lenders to verify that the borrower paid the outstanding balances on all 30-day accounts, such as credit cards, in full, for each month for the past 12 months. If the borrower did not pay the outstanding balances, the debt is not excluded from the debt to income ratio. If the borrower made the payments, but any payment over the previous 12 months was late, then 5% of the balance is included in the debt to income ratio. If all payments were made timely, the lender can exclude 30-day accounts paid monthly from the borrower’s debt-to-income ratio.
Further, under the new rules, lenders are required to take additional steps to verify the stability of a borrower’s income if he or she has changed lines of work or changed jobs more than 3 times in the previous 12 months.
It is also important to understand that the FHA has limits on the amount a homeowner can borrow in each geographical area. These limits can change from time to time, so make sure to research the current lending limit in your location before considering a FHA loan.
On the bright side, one new rule which actually benefits holders of a FHA loan is a reduction in the mortgage insurance premiums associated with FHA loans. The annual fees charged by the FHA to guarantee a mortgage will be cut by 0.5%, to equal 0.85% of the loan balance, which will save most FHA loan borrowers close to $900 annually in their mortgage premiums.
In sum, the new FHA rules are changing the market for first time home buyers, and any person considering applying for a FHA loan should understand the rules and plan accordingly before entering the market to search for a new home. If you have any questions regarding the foregoing, we urge you to consult with your real estate attorney.
Berlin Patten Ebling, PLLC
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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