Do you have an FHA mortgage or plan to have one in the future?
Do you have Student Loan Debt?
Do you hope to refinance in the future?
Than this post applies to you.
The FHA is designed to make homeownership more affordable. By insuring loans, FHA allows the lender to offer you a better deal. This includes
- Lower down payments
- Lower closing costs
- Easy credit qualifying
New rules have recently been released which may affect your or a loved one’s ability to obtain an FHA loan or, if you/they have a pre-existing loan, to refinance.
What are the new rules?
Calculating the DTI and Reporting on Self-Employment Income:
Banks and other lenders pay close attention to your currently debt-to-income ratio (DTI) when deciding how much money they will lend you. The higher the DTI, the harder it is to get a loan. The following changes will effect how lenders look at your DTI:
- The treatment of student loans when calculating a borrower’s DTI has changed. Previously loans in deferment for at least 12 months were not included. Now, all loans are brought into the calculation. Read more about changes to FHA’s treatment of student loan debt here.
- Authorized users of credit cards must include the card’s monthly minimum payment in their DTI unless proof of payment for the last 12 months by the primary card holder can be provided.
- A smaller percent of installment and car loans (with 10 or fewer statements) are included in the DTI.
If you are self employed you should be aware of the following changes:
- To use self-employment income on a mortgage application, borrowers must show two years of actual work experience, including tax returns.
- See additional changes and read more about the ones above here.
Refinancing can be a great way to to decrease mortgage payments. The new rules have made refinancing easier in some ways.
- The FHA Streamline Refinance product has been modified. If you have a pre-existing FHA loan, you do not need to show proof of employment, income, or credit to refinance.
- Appraisals are not required.
- You do need to show proof of 3 months of on-time loan payments, have had the loan for at least 210 days, and demonstrate that there is a Net Tangible Benefit in the refinance.
- Net Tangible Benefit is loosely described as a reduction in (principal+interest+mortgage insurance) by 5% or more.
- Get more details here.
Who does this effect?
- The following statistics reveals how much student debt exists within the US. As of 2016, 48 million Americans owe nearly $1.3 trillion in student loan debt. In 2012, 66% of graduates from public colleges had debt, with an average of $25,550; 75% of students graduating from private nonprofit colleges had debt with an average of $32,300; and 88 percent of graduates from for-profit colleges had debt with an average of $39,950 (source). This implies that when some of these individuals apply for a mortgage, they will face a higher DTI and may have more difficulty obtaining a one.
- Those with a substantial amount of credit card debt, for which payments are missing in the last year, will see an increase in their DTI, also reducing their access to affordable credit.
- Underwater borrowers benefit from not having to obtain a home appraisal when refinancing. You can use the original purchase price of your home as its “current value”, meaning you avoid penalties and the additional costs associated with a higher value home.
Questions? Contact your local lender, or call us if you need a referral.