Articles in Category: Debt Ratios

April 18, 2016

On the New FHA Student Loan Policy

We’ve gotten a variety of questions and comments about the FHA’s recent update of policy regarding student loans, deferred obligations, and what calculation the lender is supposed to use when a borrower applies for an FHA mortgage with student loan debt in his or her name. Under the previous FHA loan policy, student loans that were in deferred status were still required to be included in the debt to income ratio by the lender. This was done by taking the balance of the student loan debt and using a percentage of it to calculate an estimated monthly mortgage payment if an actual payment wasn’t available at application time. The updated FHA loan policy for deferred obligations now excludes student loan debt. The rule for deferred obligations–a financial obligation which will | more...

April 14, 2016

New FHA Loan Policy For Student Loan Debt

By Joe Wallace

Recently we wrote about the new FHA loan guidelines for student loan debt. The FHA and HUD have issued a mortgagee letter updating previous policies. According to FHA Mortgagee Letter 2016-08, the old FHA loan policy for student loan debt “required Mortgagees to calculate a monthly payment for deferred Student Loans using 2 percent of the outstanding balance, and include the payment in the Borrowers Debt-to-Income ratio for qualification purposes. Further, FHA policy currently does not differentiate between non-deferred Student Loans, which are in payment plans that do not fully amortize the loan, and other Installment Loan debt.” But now, FHA loan rules have changed, and while the “effective date” for these new policies isn’t until summer, the FHA states lenders can start using the new guidelines right away. “This | more...

April 12, 2016

FHA Loans And Your Debt-To-Income Ratio: What You Should Know

By Joe Wallace

A borrower’s debt-to-income ratio or DTI is an important calculation the lender must make when processing an FHA home loan application. Your monthly debts, compared to your lender-verified income, will help determine your acceptability as a credit risk and your ability to pay your mortgage. But how does the lender process your debt information to arrive at the ratio? HUD 4000.1 establishes guidelines for the lender to follow in order to establish the borrower’s DTI. On pages 249 and 250 we find the following: “The Mortgagee must determine the Borrowers monthly liabilities by reviewing all debts listed on the credit report, URLA, and required documentation. All applicable monthly liabilities must be included in the qualifying ratio.” Some types of debt may be omitted by the lender in certain cases. For | more...

April 8, 2016

FHA Loan Income Verification Rules: Military Income

By Joe Wallace

Military members and veterans have plenty of reasons why they might choose an FHA mortgage or refinance loan. Regardless of the reasons why you choose to go FHA, there are rules for military income verification you should know that will help both in the planning stages and when you’re submitting paperwork to the lender. To begin, military income is not simply defined as basic pay. Military pay can include a variety of things. HUD 4000.1 has a definition that clears up any ambiguity about the basic pay and allowances allowed to be included in the debt to income ratio once verified: “Military Income refers to income received by military personnel during their period of active, Reserve, or National Guard service, including: –base pay –Basic Allowance for Housing –clothing allowances –flight | more...

April 7, 2016

FHA Loan Income Standards: Stable and Reliable Income From Part Time Sources

By Joe Wallace

A reader asked us a question about FHA loan standards for income verification recently; “I was told today that my part time job could not be used because its not on a continuous basis. Is that true? I have worked this job part time for the last 4 years and its through out the year.” “Its home health care so I watch patients here and there throughout the year. As mentioned I have been employed there since 2012. Why will FHA not approve that income because I have not worked there in the last 30 days but Im still an employee. I also have a full time job.” FHA loan rules are very clear about the nature of part-time income when it comes to verifying it for the FHA loan. | more...

March 30, 2016

FHA Loan Rules For Income and Debt Calculation: Collections

By Joe Wallace

FHA loan rules cover a lot of ground when it comes to a borrower’s creditworthiness. There are minimum FICO score requirements, instructions to the lender for reviewing the borrower’s record on-time payments (12 months of reliable payments on all financial obligations is strongly recommended), and much more. One area that is also covered in HUD 4000.1 is what the lender should do if collections are included in borrower’s credit history. The presence of a collection action on a loan applicant’s record may be cause for concern, but there are instructions to the lender on how to view collection accounts and what to do if those collections fall within the lender’s “tolerance” for loan approval. What will the lender require under FHA loan rules if the loan can move forward? HUD | more...

March 29, 2016

FHA Loan Rules For Debt Calculation: Installment Loans, Revolving Charge Accounts

By Bruce Reichstein

It’s easy to forget that FICO scores are not the only credit issue lenders will examine when reviewing your FHA mortgage loan application. A lender isn’t just concerned with your scores; your ability to repay the loan and make your monthly mortgage payment requires a review of a potential borrower’s income and debt. The lender has different standards depending on the type of debt. For example, changes to FHA loan rules published last year require the lender to take student loan debt into account–even if the loan isn’t payable yet. Such debts are known as “deferred obligations” and if no monthly payment is available, the lender must take a percentage of the total debt to make the monthly payment estimation. FHA loan rules in HUD 4000.1 also include standards for | more...

March 28, 2016

FHA Loan Questions: Student Loan Debt

By Joe Wallace

We get many questions about FHA loans in the comments section. Recently we’ve fielded several queries about student loan debts and how they relate to FHA mortgage loan approval. Once reader asks, “What about student loans, that are ‘in school’, and not even due and payable? We tried to get the Income Based Repayment, from the servicer, and they told us the loans are not due payable yet, therefore they can not be calculated for the Income Based Repayment. That doesnt seem fair. The statement says they are not due for 5 years, and then an additional 6 months after I graduate.” FHA loan rules in HUD 4000.1 address student loans that have not yet come due as “deferred obligations” which page 180 of HUD 4000.1 describes as, “liabilities that | more...

March 2, 2016

FHA Home Loan Rules: Non-Borrowing Spouses

By Joe Wallace

Some legally married couples who want to purchase a home don’t necessarily want to do so with both spouses on the mortgage loan. Does an FHA loan require both spouses to submit to a credit check even though only one will be the borrower? The answer depends not on FHA loan requirements, but whether or not the couple live or are purchasing a home in a state with community property laws that have something to say about the nature of the debts incurred once the couple are legally married. FHA loan rules in this area are found in HUD 4000.1, which has a section dedicated to instructing the lender how to process the credit information for a non-borrowing spouse in community property states. This portion of the FHA loan rules | more...

March 1, 2016

FHA Loan Rules: , Student Loans, Co-Signing and “Contingent Liabilities”

By Joe Wallace

We’ve gotten a variety of questions in the comments section in early 2016 about FHA loan rules for student loans, co-signing, and how the FHA loan program rules view things like deferred obligations and contingent liabilities. Those two terms can be a bit confusing, so it’s good to know what they are and how they can affect your FHA loan application. A deferred obligation is basically any arrangement that resembles a student loan deferment where an amount is owed, but the payment for that obligation may be reduced or delayed as part of an arrangement made between the lender and borrower. In cases where this type of debt is concerned, HUD 4000.1 states that the loan officer must: “…use the actual monthly payment to be paid on a deferred liability, | more...