As this year ends and 2014 begins, you should probably postpone your real estate investment plans until after reading the changes in progress for FHA guidelines and exceptions. Before discussing the guidelines, we should be clear that there will always be exceptions to those guidelines. For example, HUD handbook states that a borrower’s total debt should not exceed 41% of his or her income, but there are exceptions such as larger down payments and other compensating factors. Even though exceptions are available, keep in mind that the bigger picture is more important to HUD than the individual criteria.
When applying for a FHA insured mortgage loan in 2014, here are 5 major guidelines used to decide your fate:
Anyone who has bought a house can tell you about the level of documentation that goes into signing a mortgage. But in 2014, new lending rules will draw even more emphasis on document verification. Lenders will be required to provide a various amount of financial records in order to verify the potential home buyer’s ability to repay the loan. This will apply to conventional and FHA loans.
The Federal Housing Administration is tightening its mortgage-eligibility requirements for borrowers. A noticeable change, which will take effect Jan. 10, has to do with the debt-to-income ratio. There are two kinds of debt-to-income ratios, often referred to as DTIs. Front-end ratio, measures the percentage of the borrower’s income necessary to cover the proposed mortgage payments and related housing expenses. Back-end ratio, measures what percentage of income would be needed to pay those housing expenses and all other recurring debt, including credit-card accounts, car payments and student loans. Qualified Mortgage rule, or QM (see below). As a result of this new rule, many lenders will draw the line at 43% DTI in 2014. This could put financing out of reach for some borrowers.
Down payments will remain the same for FHA loans which is 3.5%. This is the same percentage required over the last few years. However, your credit score may effect that percentage. If your credit score is above a 580, you qualify for the low down payment option. However, if your credit score is below 580, you are required to make at least a 10% down payment, according to HUD’s current rules and guidelines.
Potential home owners must have a credit score above 500 in order to be eligible for an FHA loan in 2014. The revised guidelines states that borrowers with credit scores below 620 and a DTI above 43% must go through a stricter, manual underwriting process. As well, mortgage companies can set their own minimum required credit score in order to qualify for lending.