Excluding Debt from your Loan Application

There are certain debts that show up on your credit that can be excluded from your Debt to Income ratio (DTI) when applying for a mortgage. Some debts, however, cannot be excluded and may affect your ability to qualify for a loan.

The most common debts borrowers try to omit from their DTI are:

• Student loans with deferred payments
• Car loans paid by someone else
• Installment loans with less than 10 payments left
• Business loans paid by a self-employed business.

In order for any of these debts to even be considered for omission, certain stipulations apply.

Student Loans

FHA loans do not allow student loans to be excluded for deferred student loans. All student loans, including deferred student loans must have a monthly payment calculated in the debt to income ratio.

Conventional guidelines do not permit the deferment of student loans. If you are applying for a Conventional mortgage, you will have to count the estimated payment into your DTI regardless of how long the loan will be deferred.

Car Loans

Car loans must have 12 months cancelled checks to show that these debts were paid by someone else. If the car loan is less than 12 months old, it is not possible to omit this payment from the DTI.

Further, the loan applicant must be a co-signer on the car loan, and not the primary borrower. This means that the person paying for the car loan must also be on the car note as the primary borrower.
A car lease, however, can never be omitted from the DTI. When you turn a leased car into the car dealership, it is expected that you will lease or buy another car, incurring a debt that would be similar to your current car lease payment.
Conventional and Government guidelines allow for the exclusion of car loans paid by someone else if the above documentation is provided.

Installment Loans

Most lenders still allow the omission of installment loans with less than 10 payments from the DTI. There are a few lenders who will not allow this now, so it is best not to count on it as a guarantee.

Conventional and Government guidelines both allow for the exclusion of these debts, but some lenders could have a credit overlay that is impossible to overcome.

Business Loans

Business loans are tricky to exclude, and are at the underwriter’s discretion.

When attempting to omit business loans, remember that it is always easier to prove that installment loans are paid by a business because these loan payments have a fixed amount.
Revolving debts have revolving payments, so it is extremely difficult to prove that a business has been paying for this account for 12 months.
Documentation that is necessary to prove that a loan is paid by a business includes, but is not limited to:

• 12 months cancelled checks from a business account
• Business account bank statements sourcing the funds may be required
• If the account reports on your credit report as being a business account, this could also help sway the underwriter into omitting accounts paid by your business. Or the original note showing that the account is a business debt could help the cause as well.

Help Your Loan Get Approved Faster

For the past twenty years, three standard mortgage practices have occurred behind the scenes during the mortgage process:

• Verification of Employment (VOE)
• Changing of the “mortgagee clause” on your homeowner’s insurance (HOI) declaration page
• Credit supplements, such as a Verification of Mortgage (VOM) or supplements to verify credit card or student loan monthly payments

In the past these three procedures have usually occurred without the applicant’s knowledge. The lender was just required to send in a copy of the applicant’s signed Borrower’s Authorization that gave written permission to release information. But privacy policies have tightened on the employer, HOI, and consumer-credit levels, and these standard practices now need the mortgage applicant’s verbal approval before they are completed. 

If you are alerted by your Human Resources or Payroll Department that Miracles Happen, LLC is requesting a Verification of Employment, please give them permission to provide this information.
Likewise, if your HOI company lets you know they have received a request from Miracles Happen, LLC to change the mortgagee clause (basically just changing the lender name) on your insurance declaration page, please give your permission to make the change.

You may also receive a phone call from our credit vendor, Credit Plus. This is the credit agency that Miracles Happen uses to pull your initial credit report. As you work with Credit Plus quickly, you will need to provide any needed information or perform any requested conference calls with your current creditors. This will help to expedite the underwriting process. If you ever feel uncomfortable returning a call to Credit Plus or providing them with any requested information, please feel free to call us (Miracles Happen, LLC) contact first to verify their authenticity.

Following these three basic suggestions will help your team at Miracles Happen, LLC  prepare your loan file for underwriting in a timely manner. Please be sure to call at anytime to discuss further. We look forward to speaking with you soon.

The Basic Details to Know about FHA Mortgage Refinance Loans

Refinancing an FHA mortgage loan is very similar to refinancing other types of mortgage loans, both conventional loans, VA loans and USDA mortgage loans.

FHA mortgage loans has its own list of requirements and regulations that govern refinance loans.  If you’re considering an application for an FHA refinance, here are a few general things you should know about going into the process.
In the FHA loan rulebook under the section, “Purpose of a Refinance Transaction” we learn, ” A refinance transaction is used to pay off an existing real estate debt with the proceeds of a new mortgage;
–for borrower(s) with legal title, and
–on the same property”.

The rules also state that an FHA borrower is “eligible to refinance the loan, as long as he/she has legal title, even if he/she was not originally on the loan.” That’s important to know in cases where a home was inherited or otherwise had ownership transferred in a way permitted under FHA loan rules.
How much can an FHA borrower refinance the loan for? According to the section titled, Maximum Percentage of Financing for a Refinance” we learn that there is no set dollar amount for FHA refinances. Instead, “The maximum percentage of financing for a refinance transaction is governed by:
–the occupancy status of the property
–the use of the loan proceeds, and
–how and when the property was purchased”.

The rule book adds that in general, an FHA refinance loan “may never exceed the statutory limit, except by the amount of any new upfront mortgage insurance premium (UFMIP). However, the maximum mortgage may exceed the statutory limit on certain specialty products.” Contact a participating FHA lender to learn which of those specialty products might be available to you–not all lenders may offer them.

Under “Types Of Refinances” we learn;
“FHA insures several different types of refinance transactions, including
–streamline refinances of existing FHA-insured mortgages made with or without appraisals
–no cash out refinances (rate and term) of conventional and FHA-insured mortgages, where all proceeds are used to pay existing liens and costs associated with the transactions
and
–cash out refinances.”

FHA FICO Score Minimums

It's true that the FHA does list a minimum FICO score of 500, but very few lenders offer this financing option.  Many lenders have "Overlay's", or "Additional Required Guidelines" to qualify for a home mortgage.  Why is this? The lower the fico score, the higher the likelihood of the borrower defaulting. The risk of a borrower defaulting can count negatively against the lender and the loan officer.

HUD tracks borrowers defaults and tracks which lenders and loan officers were involved in the transaction and wrote the loans, it si called "Lenders Compare Ratio". The FHA's Lender Compare Ratio is calculated for all lenders. This ratio is geographically based, comparing the rate of early defaults and claims for single family loans in a geographic area to other mortgagees in the same area.

Both the mortgage lender and the loan officer have Compare Ratios that follow them throughout their careers.  The more defaults that their borrowers have, HUD can essentially not allow that entity or person to issue FHA loans in the future. So the risk factor is not just there for FHA but also for the lending entity and the loan officer.

Many lenders have a minimum FICO score requirement of 620 to a 640. This is to mitigate their risk with their Compare Ratio. To only require a 3.5% down payment, a minimum score of 580 is required. 

The minimum required FICO Score to get an FHA loan is 500.  For borrowers who have FICO scores below 580, 10% down payment of 10% equity for a refinance is required with FICO scores below 580 (500 to 579).

However, these score requirements are the FHA minimums, not the lender’s standards. Many lenders FICO scores vary from the FHA loan rules and are usually more strict than the FHA guidelines FICO score requirements.

There are a few items a person can do to improve their credit score or even correct credit reports (without paying third parties to do so on the borrower’s behalf). Paying off or paying down debt, paying accounts on time are the best ways to improve your scores.

Credit scores are a critical part of the loan approval process. Striving to get a high credit score and a repayment history with 12 months of not missing a payment is vital to increasing your FICO scores.

To be eligible for an FHA loan, you have a maximum of one (1) non-mortgage late in the past 12 months. Though this is not recommended, it is possible to have one late payment in the past 12 months.

Whether your FICO score is in the 700's, 800's or if your FICO score is on the lower end of the minimum standard of FHA, we can help you get the financing you need to either purchase a home or refinance your current FHA loan.

The Truth About "No Closing Costs" Loans

When shopping around for a mortgage, a lender may offer you “no closing costs” on your loan.

The words “no closing costs” sound quite enticing as these costs can range from 2-5% of the loan amount. For a $200,000 loan, that range can be from $4,000 to $10,000 – quite a bit of money!

One thing you need to know about these types of loans, however. There’s no such thing as a free lunch. You’ll either pay for those costs yourself or you’ll pay through a higher interest rate. No bank or lender will pay these fees for you.

What are closing costs?

Closing costs are just as the name implies: the fees you’re charged in connection with obtaining your loan. These fees include:

• Origination – The fee lenders charge for arranging your loan.
• Title survey – Background check on the home’s title to ensure it’s free and clear of liens or other issues.
• Title insurance – Lenders request this insurance to protect themselves and you if it’s discovered later that the title isn’t clean.
• Attorney’s fees – What the title attorney charges to endorse a clear title and close your loan.
• Recording fee – What your local town or county charges for recording the new record.
• Underwriting fee – This fee covers the cost of the underwriter – the company that evaluates your mortgage.

Loan Refis: Closing costs “rolled in”

For people refinancing a loan, closing costs are generally rolled into the new loan. This is because people refinance to take equity out of home to pay down credit card debt, fund a college tuition, or make home improvements. 

Or, you may be underwater and are refinancing to take advantage of a lower interest rate. In this case, you aren’t taking cash out but your closing costs are still rolled into the new loan.

Home Purchases: Where closing costs come into play

In order to entice you into doing a loan application for a home purchase, a bank or lender may advertise “no closing cost” loans. This type of advertising is patently false as you will have to pay closing costs – even if the lender “waives” them.

What does this mean?
First, you will need to pay the local recording fees, escrow and insurance pre-payments. No bank will pay these fees for you as they’re non-negotiable – everyone has to pay them. (Even I had to pay them when I purchased my new home.)
Second, in order to offset the cost of the other fees, such as the appraisal fee or attorney’s fee, the lender will increase the interest rate. So you end up paying much more on the back-end.
Picture a scale – perfectly balanced. You have the loan’s interest rate on one side and your fees on the other. To keep the scale balanced, a lender offering to “waive” your fees will need to increase the interest rate in order to keep the scale balanced.

 

Tip: Look for the lowest combination of rate + fees

Generally speaking, banks charge lower fees and higher interest rates. Mortgage brokers have higher costs and lower rates. Every lender has their own scale – which is why it pays to compare apples-to-apples using your Good Faith Estimate.

One other word of advice: Be extremely wary of paying an up-front application fee or “deposit.” Some lenders will charge you $500 to $700 deposit to begin your loan application process. Don’t fall for it.

Once you change your mind and decide to go with another lender, you lose this deposit. (See my post, “Good Faith Deposit and Other Upfront Fees” for additional details.)

As always, what’s most important, when shopping for a mortgage, is choosing the right company that will deliver.

Here at Miracles Happen, we work with you every step of the way – from delivering pre-filled out forms to coming to your home for a closing. See our Customer Review page for the unvarnished truth (we let our customers do the talking and don’t change a thing they say).

And, if you’re ready to begin home shopping – give us a call. Or, simply get your no-hassle rate quote in seconds!

Do's and Don'ts While Your Loan is Being Underwritten

Any change in your employment, income, or credit profile, no matter how small or seemingly insignificant, can adversely affect your loan approval. It is critical that you follow this list of Do's and Don'ts while your loan is being reviewed by an underwriter: 

• Do make the minimum monthly payments on your consumer debt until your new loan closes and funds. Any deviation from this may negatively affect your mortgage application.
• Do make sure that your mortgage payments are no more than 15-days late until your new loan closes and funds. As your application gets closer to settlement, please inform your Meridian Home Mortgage contact if you are at risk of paying your mortgage payment more than 15 days late.
  
  **Never pay your mortgage payment 30 or more days beyond the initial due date**
• Do answer or return calls from the Title Company working on your application. On occasion there are outdated or unreleased liens which can cloud the ownership of your property, or similar situations which require the Title Company to contact you and request information to clear your title in preparation of your potential closing.
• Do fax or email us any items that we request from you immediately. These items are required by the underwriter. All of the documents in your file have an expiration date. Every day that passes between the underwriter’s request and the time you provide them means additional items have the potential to expire. We will always be battling the underwriter to crunch time frames on your behalf and to immediately establish the first available closing date.
• Do hold onto all of the pay stubs, bank statements, retirement account statements, pension statements and social security statements that you receive electronically and through the mail until your new loan closes and funds. You may be required to provide them.
• Do not resign from your current job or retire during the loan process. If you have an opportunity to leave your current job for a better opportunity please reach-out to us prior to making a decision to determine how it might affect your loan.
• Do not open any new credit accounts or apply for new credit accounts prior to your new mortgage loan closing. Any new account or credit inquiry can easily be identified by the underwriter and may put your application at risk. We understand there are life situations that arise, such as the need to apply for student loans to finance a child’s upcoming college semester. We ask that you discuss these types of scenarios with us prior to taking action.
• Do not make any balance transfers on your existing credit card balances. Any new account or balance transfer may slow your mortgage application process.
• Do not pay off any existing consumer credit accounts in full (e.g. credit cards, auto loans, etc.) unless it is through the natural progression of making your minimum monthly payment.

Following these instructions will help to prevent any delays in your loan closing. Please call us at anytime if you have any questions or if you would like to discuss any specific scenario.

Things to Know before Your Loan is Reviewed by an Underwriter

After you have completed your loan applicaiton and provided your documents, all loans must be reviewed by an underwriter. No matter if your loan is a Conventional, FHA, VA or USDA loan, it must be reviewed by an underwriter to verify all documents, information and data. 

Before your loan is submitted to an underwriter, we prepare your file to be reviewed so it is prepared for the underwriter to do their part and move to closing. There is a lot of preparation done by many people to get a loan to this point. The borrower, the loan officer, assistants and processors prepare a file to get a loan ready to be reviewed by an underwriter and also jr. underwriters. Once a file has been approved, usually a "Conditional Approval" is issued on every file. There are several things that the borrower (you) can do to help us move your loan both to underwriting and to get a clear to close as quickly and efficiently as possible.

Underwriting

The underwriter acts as a “gate keeper," protecting the interest of the lender and safeguarding the limited funds they have to lend. Underwriters follow strict black-and-white guidelines established by industry investors. These guidelines are harsher than they were during the mortgage lending boom of 2002 – 2008. The days of what many industry professionals describe as “common sense underwriting" are long gone. 

Once an underwriter reviews your loan application (whether for a purchase or a refinance) they will issue one of three determinations: a Conditional Approval, a Suspension, or a Denial.

When a Conditional Approval is issued, a member of our Pipeline Team will call you immediately to review the approval and discuss any conditions needed before we can schedule your loan to close.
Rest assured that an underwriter issuing a Suspension or Denial on your loan does not end your relationship with Miracles Happen. This is where Miracles Happen steps in to defend you, as your advocate. We have an entire team at Miracles Happen dedicated to overcoming underwriting objections, re-working your application, and unearthing underwriting errors.
Still, we will be candid with you at anytime during the process if we do not believe your application has an opportunity to close. Just know that we are devoted to exhausting every last ounce of effort to match your family’s financial situation to a qualified loan program.

While we will be shouldering most of the work, we have come up with a small list of things that you can do to help ensure that your loan closes as quickly as possible. Please do your best to adhere to Miracles Happen's list of Do's and Don'ts while your loan is being underwritten.
Here are a couple of other important things to know:

• Turn-times vary
  Depending on the type of loan for which you are applying and the saturation of the current market, the underwriting process for your application may take up to 5-14 days. A large portion of Miracles Happen's service to you is to gently, but proactively, nudge the underwriter to review your file as quickly as possible.

• Disclosure Mailings:
  You will most likely continue to receive loan disclosures throughout the process, either electronically or through the mail from your designated lender. Although there may be cover letters with these lender disclosures that state you need to sign and return them, there is no need for you to take any action. They are simply being sent to you by the lender so that they remain in compliance with State and Federal disclosure laws. Feel free to discard these documents.

We appreciate your cooperation and patience while your loan is being underwritten. Please do not hesitate to call with any questions or concerns that you might have. We look forward discussing your upcoming Conditional Approval with you very soon.

FHA Mortgage insurance to be reduced

Great news for the housing industry is coming to the mortgage industry. Many industry professionals and those in leadership positions have been avocation for a reduction of the mortgage insurance premium for FHA loans.

The high monthly premiums has deterred many guest time home buyers from getting financing due to higher premiums on the monthly payments of mortgage insurance.

The monthly premiums will be reduced from 1.35% to .85%. This would equate from $135 per month to $85 per month for every $100,000 borrowed. This is a big difference to many home buyers that are looking to purchased a home that will allow them to have the cash flow to purchase  a house rather than rent.

A reduction of the Mortgage Insurance premiums is going to go into effect soon.

FHA Loans and Verifiable Income: Alimony, Child Support, and Maintenance Payments

Borrowers applying for an FHA home loan have good reason to consider listing alimony, child support, and maintenance payment income on their loan applications.

Not all wish to have this type of income included in their application data, but when accompanied by proper documentation and when verified by the lender, these types of “non-employment income” can be used to help calculate the borrower’s debt-to-income ratio for FHA loan approval.

But what does the FHA require in order to verify and approve these income sources for the FHA loan?

According to the FHA official site, “Alimony, child support, or maintenance income may be considered effective, if
–payments are likely to be received consistently for the first three years of the mortgage
–the borrower provides the required documentation”

What does that documentation include? FHA rules say the borrower must provide a court order, divorce decree, separation agreement, and/or a statement of voluntary payments or other paperwork that shows in writing what the terms of the agreement are and how much per payment. Your lender may also require evidence that payments have been received over the previous year, which can include receipts, deposit slips, tax statements, or court records.

If payments have started but have not been going for a full year, FHA loan rules state, “Periods less than 12 months may be acceptable, provided the lender can adequately document the payer

FHA Loans and Student Loan Deferments

“If applying for FHA and student loans are in deferment until after the closing date, does it have to show a year after the first payment is due? For example, if the payment is due July 1, 2012 does it have to show July 15, 2012 or later?”
 
This question is addressed in the FHA loan rules spelled out in HUD 4155.1, Chapter 4 Section C. It’s covered in the section titled, “Borrower Liabilities: Projected Obligations and Obligations Not Considered Debt” and includes a list of things the FHA does not consider debt for the purposes of calculating a borrower’s debt-to-income ratio for an FHA home loan.

Student loans are specifically addressed in this section, which states, “Debt payments such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing must be included by the lender as anticipated monthly obligations during the underwriting analysis.”

But the rules also add, “Debt payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12-month timeframe.”

If a borrower has a student loan which has been deferred, it may or may not qualify to be excluded from the debt to income ratio calculation based on when it becomes due according to FHA policy. Will the lender’s individual policy vary from this? Could a lender require the debt to be included anyway based on the due date? It’s possible–but your experiences may vary depending on which lender you are working with.

FHA loan rules also have a list of other financial obligations and circumstances which do not have to be included in the debt to income ratio. The FHA lists them in the rule book as follows:
“Obligations not considered debt, and therefore not subtracted from gross income, include

FHA Loans and Verifiable Income: Alimony, Child Support, and Maintenance Payments

Borrowers applying for an FHA home loan have good reason to consider listing alimony, child support, and maintenance payment income on their loan applications.

Not all wish to have this type of income included in their application data, but when accompanied by proper documentation and when verified by the lender, these types of “non-employment income” can be used to help calculate the borrower’s debt-to-income ratio for FHA loan approval.

But what does the FHA require in order to verify and approve these income sources for the FHA loan?

According to the FHA official site, “Alimony, child support, or maintenance income may be considered effective, if
–payments are likely to be received consistently for the first three years of the mortgage
–the borrower provides the required documentation”

What does that documentation include? FHA rules say the borrower must provide a court order, divorce decree, separation agreement, and/or a statement of voluntary payments or other paperwork that shows in writing what the terms of the agreement are and how much per payment. Your lender may also require evidence that payments have been received over the previous year, which can include receipts, deposit slips, tax statements, or court records.

Do Government Assistance Payments Count As Verifiable Income?

One frequently asked questions about FHA home loans involves government benefits and/or government assistance payments. Can these income sources be used for the purpose of getting an FHA guaranteed home loan?

Under the right circumstances, the answer is yes. It’s not automatic–the lender must verify the source of the income and also determine how long that income will last.

According to HUD 4155.1 Chapter 4 Section E, “Income received from government assistance programs is acceptable for qualifying, as long as the paying agency provides documentation indicating that the income is expected to continue for at least three years.”
Borrowers aren’t simply out of luck if that income will not last for three years; it can’t be used as income, but it can be considered in other ways according to the FHA loan rulebook, which specifically says, “If the income will not be received for at least three years, it may be considered as a compensating factor.”

Some borrowers want to know if unemployment benefits are included in this set of rules, but there are separate guidelines for unemployment found in HUD 4155.1 Section E, which says “Unemployment income must be documented for two years, and there must be reasonable assurance that this income will continue. This requirement may apply to seasonal employment.”
What about VA benefits for service-connected disabilities? Does the FHA recognize this type of income?

According to the rules, “Direct compensation for service-related disabilities from the Department of Veterans Affairs (VA) is acceptable income for qualifying, provided the lender receives documentation from the VA.”

However, FHA loan applicants should know that GI Bill housing payments are not considered acceptable, which may have a lot to do with the nature of such benefits–they are only available while school is in session and eventually expire within a set number of months–therefore such payments would not be considered “likely to continue”.

Can My Spouse Apply Alone For An FHA Loan?

If a married couple has an extremely high debt to income ratio, can only one spouse be on the mortgage loan and leave the other spouse off? This is a situation where some spouses may have less credit but double my income and very low debt to income ratio. Is it possible that the spouse can qualify using only their income and credit to qualify for an FHA loan?”


There are several factors which may apply in a situation like this. Borrowers should know that when applying for FHA home loans, credit scores, employment history, verifiable income and other factors will figure into loan approval.

That said, assuming all the above requirements are met, the basic question is whether a borrower can apply for an FHA loan independently of the spouse. This depends on community property laws which may apply in the state where the loan is issued.

Community property laws concern the disposition of debts and property within the context of a marriage. Community property states generally may require both spouses to be obligated together on a real estate loan.

For this reason, borrowers should discuss community property issues with the lender and/or a lawyer where appropriate to make sure all rights and responsibilities are understood. In many cases a simple discussion of community property laws with the lender may suffice–if the borrower simply needs information. If the borrower needs legal advice, consulting a lawyer is the best course of action.
Unfortunately there are no quick answers to this question–not all states have community property laws, and those laws may differ from state to state.

Debt To Income Ratio Rules:

In the circumstances that one has a large amount of debt and the payments have been paid by another person, IE., A parent, ex-spouse, another person, can that debt not be counted on my debt ratios?

There are two basic factors at work when the lender is reviewing a borrower’s debt-to-income ratio. One is the borrower’s current debt load compared to the amount of income coming in. The other is how the new FHA loan payment would affect that debt load.

If a debt is in the borrower’s name, those debts would have to be considered, regardless of the extenuating circumstances. However, if there is a payment being made on the borrower’s behalf may or may not be considered as a compensating factor.

The basic answer to this question is that it may depend on the lender. A strict interpretation of FHA loan rules might lead one to believe that the borrower’s debts in this case are simply included in the ratio but not the payments from another person that has been making the payments for a minimum of 12 months and a paper trail can be provided showing payments coming out of that persons bank account then that debt can not be counted against the person getting the mortgage loan.

But if those payments are “likely to continue” in the eyes of the lender, there might be some flexibility possible. But saying that should not be construed as a guarantee or a promise that such arrangements will be approved by the lender or the FHA.

Matters such as these would be handled on a case-by-case basis. Borrowers should be prepared to fully document the situation, get written guarantees or other certifications that might convince a lender to favorably view the arrangement. But at the end of the day, it may be the lender’s call or the decision might be made based on the requirements of the financial institution or even the applicability of state law.

Income from a New Job

Many FHA loan applicants want to know if taking a new job will affect their chances at FHA loan approval. FHA loan rules are designed to help guide loan officers through the qualification process for a variety of scenarios including those where the borrower may have “projected income” that could be factored into the borrower’s debt-to-income ratio.

What do FHA loan rules say about projected income? How is it defined? The answers to these questions and more can be found in HUD 4155.1 Chapter Four, Section E.

“Projected income is acceptable for qualifying purposes for a borrower scheduled to start a new job within 60 days of loan closing if there is a guaranteed, non-revocable contract for employment.”
That is simple enough–FHA loan rules allow for projected income when there is documented evidence and legally binding agreements between the borrower and employer. But the rules also require the lender to verify not only the income, but also the ability to afford the loan in the meantime.

From Chapter Four; “The lender must verify that the borrower will have sufficient income or cash reserves to support the mortgage payment and any other obligations between loan closing and the start of employment.”

There are additional stipulations in Chapter Four–the projected income doesn’t help if the loan closes more than sixty days before the borrower begins his or her new employment. Chapter Four says as much:

“The loan is not eligible for endorsement if the loan closes more than 60 days before the borrower starts the new job. To be eligible for endorsement, the lender must obtain from the borrower a pay stub or other acceptable evidence indicating that he/she has started the new job. Examples: A teacher whose contract begins with the new school year, or a physician beginning his/her residency fall into this category.”

There are situations where projected income can be used, and those where it is not, but it should also be noted that the lender may have additional requirements in this area above and beyond FHA loan rules. Check with your loan officer about your specific needs to get a better understanding of what might be possible.

Part-Time Employment Income for Income on an FHA Mortgage Loan

FHA loan rules include a requirement that the lender verify sources of income and employment. Some types of income may or may not be permitted on the FHA loan application, and FHA loan rules printed in HUD 4155.1 explain what’s permitted or not allowed.

One area some borrowers may be concerned with in this area is part time income. Does the FHA allow a lender to verify and count as income the earnings from a part-time job? The rules for this are found in Chapter Four Section D of HUD 4155.1 under the heading “Salary, Wage, And Other Forms Of Income”. It says:

“Part-time and seasonal income can be used to qualify the borrower if the lender documents that the borrower has worked the part-time job uninterrupted for the past two years, and plans to continue. Many low and moderate income families rely on part-time and seasonal income for day to day needs, and lenders should not restrict consideration of such income when qualifying these borrowers.”
Note the emphasis on both part-time and seasonal income. That’s an important thing to know for affected borrowers who derive significant income from a seasonal position. Chapter Four also tells the lender, “Part-time income received for less than two years may be included as effective income, provided that the lender justifies and documents that the income is likely to continue.”

What does the FHA consider “part-time”? Chapter Four states, “For qualifying purposes, ‘part-time’ income refers to employment taken to supplement the borrower’s income from regular employment; part- time employment is not a primary job and it is worked less than 40 hours.”

Chapter Four has instructions for the lender about part time or seasonal income that does not live up to the rules, stating:

“Part-time income not meeting the qualifying requirements may be considered as a compensating factor only.” That can help some borrowers, but not others. Discuss your specific situation with a loan officer to learn what your part-time income might be able to do for your chances at FHA loan approval.

Does Alimony/Child Support Count As Income?

We’ve been discussing topics this week related to FHA loan rules for income and employment. The participating FHA lender is responsible for verifying an FHA loan applicant’s employment and income to make sure it is a stable and reliable source of income.

Not all forms of income can be used on the FHA loan application. Sporadic income that is not consistent income such as sales from online websites (ie. Ebay, Amazon, Paypal), for example, may not qualify, and certain types of commissions may not qualify depending on their frequency. GI Bill housing stipends cannot be used because they are not “likely to continue” past a certain number of months.

Then there is the common question about child support and/or alimony payments. Can this form of income, if declared on the FHA loan application, be used to qualify for the mortgage?
Chapter Four of HUD 4155.1 provides the answers.

“Alimony, child support, or maintenance income may be considered effective, if
• payments are likely to be received consistently for the first three years of the mortgage
• the borrower provides the required documentation, which includes a copy of the
− final divorce decree
− legal separation agreement,
− court order, or
− voluntary payment agreement, and
• the borrower can provide acceptable evidence that payments have been received during the last 12 months, such as
− cancelled checks
− deposit slips
− tax returns, or
− court records.”

Are FHA loan applicants with less than 12 months of child support or alimony income left out in the cold? Not if certain conditions are met, according to Chapter Four:

“Periods less than 12 months may be acceptable, provided the lender can adequately document the payer’s ability and willingness to make timely payments.”

Previous Mortgage Housing Obligations and Your Credit

When you fill out your FHA loan application paperwork online or in person, it’s obvious that part of the qualification process involves having your credit scores examined and your employment verified.
What may not be so obvious is that the lender is also looking for patterns of reliability in areas such as the timely payment of your monthly obligations. Some FHA loan applicants might mistakenly assume that while late or missed mortgage payments might be a factor that missed rent payments aren’t held in the same esteem.

Is this true? Not according to HUD 4155.1 Chapter Four, Section C, which has instructions for the lender on checking credit report data. A strict interpretation of Chapter Four reveals that there is no difference between how the FHA or the lender should view late or missed mortgage payments OR the equivalent in meeting monthly rental obligations.

“The borrower’s housing obligation payment history holds significant importance when evaluating credit. The lender must determine the borrower’s housing obligation payment history through the

• credit report
• verification of rent received directly from the landlord (for landlords with no identity-of-interest with the borrower)
• verification of mortgage received directly from the mortgage servicer, or
• review of canceled checks that cover the most recent 12-month period.”

The FHA takes this issue seriously enough to include the following note to the lender; “The lender must verify and document the previous 12 months’ housing history even if the borrower states he/she was living rent-free.”

A lender may not reject an FHA loan application on the basis of a one-time missed payment, or a period of financial difficulty that the borrower can show is now resolved. But much is left to the lender’s discretion. It’s good to know this before you apply for an FHA mortgage loan. Knowing what the lender is looking for in your credit history is a very good thing to understand fully as you get ready to apply.

Student Loans and Debt-To-Income Ratios

When you apply for an FHA loan, your lender must calculate the amount of income you have versus the amount of debt you currently pay on and factor in the amount of your projected mortgage. The amount of debt is compared to your income to determine whether or not you can afford the loan based on FHA guidelines.

In general, borrowers should have less that 40% of their income taken up by recurring financial obligations. FHA rules explain exactly how much debt to income you can have and still qualify for an FHA mortgage. These ratios can vary depending on the borrowers status as a self-employed person or other factors.

The overall debt picture is important when the lender is trying to figure out if a borrower is a good credit risk, but certain types of debt don’t factor in right away–for example, a student loan that is not yet due but may become due within a year or so of the home loan closing. Can this student loan debt be used in the debt-to-income ratio calculation?

FHA loan rules in HUD 4155.1 Chapter Four, Section C addresses this issue, stating:
“Debt payments such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing must be included by the lender as anticipated monthly obligations during the underwriting analysis.”

However, FHA loan rules also add, “Debt payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12-month time frame.” Borrowers who have a student loan deferred in such a manner should bring paperwork to the lender to show this will happen–the lender will need to document this accordingly.

It may be best to request deferment paperwork before you start the loan application process for an FHA mortgage loan. This will speed the process up by having the paperwork ready to turn in with the other documents with your mortgage application. If you’ve already applied for an FHA loan and you don't have the deferment paperwork, it is best to request the deferment paperwork on your student loans and request that they expedite the process in getting the deferment letter to you.

Down Payments & FHA Mortgage Loans

Many people talk about "No Down Payment Loans" and how can I buy a house with "No Money Down"?

So What's the real story with FHA Loans and No Money Down loans?

FHA home loans do not feature a no-money-down option. FHA loan rules state that the minimum required down payment is as follows: “For purchase transactions, the maximum LTV is 96.5% percent (the reciprocal of the 3.5% required investment).”

The acronym “LTV” stands for loan-to-value and is, in simple terms, the amount of the loan after the down payment has been made. An LTV of 96.5% basically means that the borrower gets a loan for 96.5% of the total amount of the purchase (rather than 100% because of the 3.5% down payment required and made by the borrower.)

There is also sometimes a bit of confusion over what constitutes a down payment. Do closing costs and other FHA loan expenses count as part of this 3.5% minimum down payment? Not according to the FHA loan rulebook:

“Closing costs (non-recurring closing costs, pre-paid expenses, and discount points) may not be used to help meet the borrower’s minimum required investment.” That means your down payment is made separately from these other costs and expenses.

There is no specific, set dollar amount for the down payment. Since it is calculated as a percentage of the loan amount, the borrower must work together with the lender to determine the amount of the down payment.

FHA loan applicants should know that while 3.5% is the minimum required down payment, it is not the only amount that may be put down. Borrowers are free to pay more and there is no penalty for early payoff of the FHA mortgage.

You may find a larger down payment to be a financial advantage over the lifetime of the FHA loan. Discuss your goals with the loan officer and ask how a larger down payment can be helpful over a 15-year or 30-year mortgage.