Well, between the new regulations for closing statements/disclosures that went into effect this last week and major changes that have been rolled out by the FHA, which affects the closing process – it is a busy time in real estate.
Let’s look at the changes the FHA is rolling out and their impact on borrowers:
There are two categories of changes, good and bad:
Positive (yes there are a few)
- Business Debt (in the borrowers name) – this can now be excluded but there has to be proof that the business pays for the obligation and it is considered in the business cash flow. This is one of the reasons keeping business accounts separate is so critical.
- 30 Day Credit Accounts (mostly used for Business) – Accounts must show the balance has been paid every month for the last 12 months and that there are reserves to cover any current balances.
- Large Deposits – The source of large deposits exceeding 1% of the sales price and/or appraised value will need to be provided
- Income from Capital Gains – Can be used as effective income but requires 3 years of returns
- Hourly Employees whose hours don’t vary: Current hourly rate will be used to calculate effective income.
- Hourly Employees whose hours DO vary: to calculate income, it will be averaged over the previous 2 years. If a pay rate increase can be documented, it will be used to figure the current income.
- The Maximum Loan to Value (LTV) for a credit score of 500-579 will be limited to 90% of LTV.
- Loan to Value for a credit score of 580 or higher is eligible for the Max Financing of 96.5% of LTV.
- Loan to Value for Refinance – 85% max for a property that is occupied for less than 12 months, 97.75% if occupied for 12 months or longer
- Multiple FHA Mortgages: to have more than one FHA loan at a time the borrower must be relocating for employment and establishing a new principle residence in an area more than 100 miles from the borrower’s current principal residence.
- Using rental income (from a residence you are not selling): borrower must be moving more than 100 miles from current principal residence. They also must provide the following: one year lease, confirmation of receipt of security deposit or first month’s rent, an appraisal showing 25% equity and additional items
- If the borrower has deferred obligations, they must be included as a liability. For example, deferred student loans. If the payment is not available, then 5% will be used for non-student loans and 2% will be used for student loans.
- Capital Losses will be deducted from the total income.
This is the new normal when it comes to FHA lending. With these new restrictions there will be good buyers that have a problem getting an FHA loan. This could open the door for investors who want the opportunity to be the bank and provide owner carry financing.
Diana D. Hill