October 18, 2017
How does FHA deal with a borrower’s financial hardship? That is an important question, and the answers may surprise some who expect the same types of financial qualifications from FHA mortgages as from conventional loans. What is the reality?
Basic FHA Loan Financial Requirements
FHA loan FICO score minimums are 580 and higher for maximum financing and the lowest down payment. Lenders may have higher requirements, but the FHA minimum FICO score allows those who wouldn’t be considered for a conventional mortgage.
Debt-to-income ratio requirements for FHA mortgage loans (which may vary depending on FICO scores) will vary some among lenders, too but you’ll find that your total payments must not (generally speaking) exceed 43% of your monthly income.
How Does FHA Deal With Financial Hardship?
Depending on the nature of your financial hardship, you may find specific FHA loan rules addressing your situation. Other FHA loan rules are general guidance to the lender advising loan approval (or more favorable consideration for loan approval) for borrowers who can demonstrate that some past issues were beyond the borrower’s control and are not likely to happen again.
In other cases, there is specific guidance for the lender which shows the FHA has a desire to help borrowers who have experienced financial trouble in the past.
For example, let’s examine what the FHA loan handbook, HUD 4000.1, has to say on page 261 about borrowers who are applying for an FHA mortgage loan and who have participated in a credit counseling program:
“Participating in a consumer credit counseling program does not disqualify a Borrower from obtaining an FHA-insured Mortgage, provided the Mortgagee documents that:
-one year of the pay-out period has elapsed under the plan;
-the Borrower’s payment performance has been satisfactory and all required payments have been made on time;
-and the Borrower has received written permission from the counseling agency to enter into the mortgage transaction.”
FHA Loan Rules For Public Assistance Income
Borrowers who are on some form of public assistance, receive certain types of government payment, or who are on disability payments will find that FHA loan rules are designed to prevent such income from being overlooked just because it is from an assistance program. The FHA has certain requirements of this income-it must be dependable and likely to continue for a specific period into the mortgage loan. But borrowers cannot be denied simply because they receive such assistance.
Consider as an example the rules found in HUD 4000.1 about Social Security disability pay:
“The Mortgagee must verify and document the Borrower’s receipt of benefits from the SSA, VA, or private disability insurance provider. The Mortgagee must obtain documentation that establishes award benefits to the Borrower. If any disability income is due to expire within three years from the date of mortgage application, that income cannot be used as Effective Income. If the Notice of Award or equivalent document does not have a defined expiration date, the Mortgagee may consider the income effective and reasonably likely to continue.”
And let’s take a look at the final sentence of this section which instructs the lender, “Under no circumstance may the Mortgagee inquire into or request documentation concerning the nature of the disability or the medical condition of the Borrower.”
As you can see, public assistance and related types of payment are perfectly acceptable for the purposes of qualifying for an FHA mortgage loan, as long as the income meets FHA loan standards.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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