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Mortgage Requirements 2015

Mortgage Requirements guide a borrower’s ability to repay the loan as well as the lender’s ability to lend. Whether buying a home or refinancing an existing home you must know the restrictions that will allow you to make better long-term financial decisions.

The focus here is on FHA loans as those are the more popular types of mortgage loans today. Everything in the lending industry is about risk assessment.

The Basics
There are 3 key elements to any mortgage transaction.
  • Credit - Your credit score & history are the driving factor in today's market.
  • Debt to Income (DTI) - This ratio determines how much of a payment you can afford under the lending guidelines.
  • Loan to Value (LTV) - This ratio determines how much you borrow against the value of the property.

FHA Mortgage Requirements 2015

The most common of FHA loans is the FHA 203(b) Program and here are the minimum requirements to qualify.

Please Note: If you need more detailed documentation on FHA Mortgage Requirements, you can review the FHA Lender Manual.

Credit Score and Established Trade Lines
Credit Score - The Federal Housing Administration insures FHA loans and did not used to require a minimum FICO score. The new FHA Policy changes requires a minimum FICO score of 580 for 3.5% down payment and anyone purchasing with a score lower than 580 will require 10% down payment.

However, lenders have their own requirements that are in addition to those of the Federal Housing Administration. The minimum mid-score in a tri-merge report must be at 620 or better.

Less than a handful of lenders will accept mid-scores down to 580 but you will need to have other compensating factors such as a larger down payment, a good amount of reserves, low DTI, and the loan will require Direct Underwriting (DU) approval or need to be manually underwritten.

Generally, lenders have been increasing their minimum FICO score mortgage requirement and some are now requiring a 640 mid-score as the cut off.

Established Trade Lines - FHA mortgage requirements state that you must have at least two lines of credit that you have maintained for at least 2 years. Some lenders can use alternative lines of credit (such as cell-phone / home-phone bills, utility bills, rent history, car insurance, and the like,..) to establish payment history.

To find out more about your credit, you can download a free credit report at any of the three credit bureaus and we could help you review it.
Late Payments, Collections, Bankruptcies, Liens, Judgments, Foreclosures, and Child Support
Late Payments - FHA does not have mortgage requirements for late payments however; individual lenders have restrictions on late payments made in the last 12 months. Greater emphasis is placed on late mortgage or rent payments in the last 12 months. Lenders may overlook a period of late payments on revolving and installment accounts as long as your overall payment history is not consistently poor.

Any mortgage late payments made in the last 12 months means that the loan will require manual underwriting and approvals are on a case-by-case basis.

Collections - FHA mortgage requirements do not specify that all collection be paid off. Collections are evaluated on a case-by-case basis though certain lenders may require collections to be paid.

Bankruptcies - Chapter 7 must be discharged for at least 2 years with no late payments since the date of discharge.

Chapter 13 must be discharged for at least 1 year with no late payments on any credit trade line since the date of discharge and no late payments to the court on the bankruptcy.

Liens - FHA mortgage requirements will not allow for any delinquent federal debt such as student loans or tax liens.

Judgments - FHA requires that all open judgments be paid in full and released from the land records prior to closing.

Foreclosures - FHA eligibility requires that at least 3 years have passed since the date of the foreclosure.

Child Support - FHA mortgage requirements do not allow for any past due child support on the credit report. The past due child support must be brought current and released by the court.

If you are paying court ordered child support, it is considered a liability payment (even though it may not show up on your credit report or your pay stubs as wage garnishment) and counts against your debt ratio (DTI). Receiving court ordered child support is considered a source of income.
Down Payment and Gift Funds
Down Payment - FHA mortgage requirements for a home purchase have a minimum down payment of 3.5% of the sale price. The down payment must be sourced and seasoned and must come from the borrower or the donor of gifted funds.

According to the new FHA Policy changes, 10% down payment will be required for anyone purchasing with a FICO score lower than 580.

Gift Funds - Down payment funds can be gifted from a relative, spouse, or a domestic partner. The gifted funds must be sourced and seasoned and cannot be borrowed by the donor.
Seller Concessions and Reserves
Seller Concessions - FHA mortgage requirements allow for seller concessions of up to 6% of the sales price.

The new FHA Policy changes limit seller concessions to 3% of the sale price.

Reserves - FHA does not have any financial reserve requirements on single family homes and duplexes. Three months of reserves are required on 3 to 4 unit family homes.
Income (W2, 1099/Self-Employed, Part-Time, Other)
W2 - FHA requires 2 years of employment with stable income using W2 forms as proof of income.

1099/Self-Employed - FHA requires last 2 years of tax returns as proof of income. A borrower that transitioned from a W2 employee to self employed in the last 2 years is not eligible.

Part-Time - FHA allows for income from part time employment as long as it has been for no less than 2 years.

Other Income - FHA allowable income includes court ordered child support, alimony, stock dividends, military allowances, disability, retirement, and more.
Qualifying DTI Ratios, Contingent Liability, Projected Obligations
Qualifying DTI Ratios - FHA mortgage requirements allow for DTI ratios of 31% / 43%. The front ratio of 31% is your housing expense ratio. It is the proposed mortgage payment (PITI) divided by the gross monthly income. The back ratio of 43% is your total monthly obligations ratio. It is the gross monthly payment, which includes all your monthly minimum obligations and the newly proposed mortgage payment (PITI), divided by the gross monthly income.

This means that the total monthly debt payment with the new mortgage payment cannot exceed 43% of total gross monthly income. In order to exceed these ratios, the borrower must have strong compensating factors.

Contingent Liability - A borrower who co-signed for another person's debt is liable for that debt. This debt obligation can be excluded from the debt ratios if the borrower can prove that the payments made on that loan were made 100% by the other person and on time over the course of the last 12 months.

Projected Obligations - FHA mortgage requirements state that any debt repayment (such as student loans) that is supposed to begin within 12 months must be included in the debt ratios.
Monthly MI and Up-front MIP
Monthly MI - FHA loans require a monthly Mortgage Insurance (MI) payment. The payment is calculated as 0.55% of the loan amount and divided by 12 months. Example: $200,000 x 0.55% = $1100 then $1100/12 = $91.67 monthly MI. MI will continue on an FHA loan until the principal balance is paid down to 78% LTV of the original loan amount. Without paying anything additional towards principal, this is usually about 10 years on a regular amortized schedule. The minimum term for FHA MI is 5 years.

Up-front MIP - FHA mortgage requirements have an up-front MIP of 1.75% (of the loan amount) on purchases and on refinancing from a conventional into an FHA loan. Refinancing from an FHA into another FHA has a requirement of only 1.50%. The up-front MIP is amortized over 7 years and if a borrower chooses to refinance or sell the property during those 7 years, that borrower will receive and prorated refund of the up-front MIP.

The new FHA Policy changes require 2.25% up-front MI for purchases.
Rental History and Living with Family
Rental History - Good rental history for the last 12 months is important. A lender will require a Verification of Rent (VOR) from a Rental Management Company. Some lenders will accept 12 months of cancelled checks showing rental history if the landlord is a private owner.

Living with Family - FHA mortgage requirements allow for no rental history if the borrower is living with family. However, this may be at the discretion of the particular lender.
FHA mortgage requirements state that the property occupancy must be a primary residence. No investment property or second home ownership is allowed.

FHA mortgage requirements allow for non-occupant co-borrowers.
Loan Limits
Each county and state has specific loan limits. FHA mortgage requirements allow regular FHA loans to a limit of $417,000 and Jumbo FHA to $625,000. Find out what FHA loan limits are relevant to your county and state.

FHA Mortgage Requirements for Refinancing

Conventional to FHA (Rate and Term)
  • Borrower must meet FHA mortgage requirements as detailed above.
  • Conventional loan may not be delinquent.
  • An FHA appraisal is required.
  • The up-front MIP will be 1.75% of the loan amount.
  • Any second liens must be subordinated to FHA being the first lien, unless combined into one loan.
  • Loan must not exceed 97.75% LTV.
FHA Cash-out / Debt Consolidation
  • Borrower must already have an FHA loan and meet FHA mortgage requirements as detailed above.
  • Borrower must have 12 months of seasoning as a primary residence with no mortgage late payments to get to 85% LTV.
  • The up-front MIP will be 1.5% of the loan amount.
  • Purchased properties with less than 12 months of seasoning must use 85% LTV of purchase price.
  • Only on 1 to 2 unit dwellings.
  • Non-occupant borrowers may not be added in order to meet FHA's credit underwriting guidelines or for income purposes.
FHA Streamline (Rate and Term)
  • Borrower must already have an FHA loan and meet FHA mortgage requirements as detailed above.
  • Base loan amount must not exceed the amount of original Mortgage Note.
  • No appraisal is necessary unless base amount of new loan will exceed the amount of original Mortgage Note.
  • The up-front MIP will be 1.5% of the loan amount.
  • Borrower must have 6 months of payments.
  • If refinancing with less than 12 months of seasoning no delinquent payments allowed.
  • If refinancing with more than 12 months of seasoning no more than 1x30 late payments allowed in the last 12 months and last 3 months must be on time payments.
  • The payment reduction has to be 5% or greater of the total previous payment.
  • The borrower may not receive cash from loan proceeds in excess of $500.
  • Any subordinate financing may remain in place as long as it is subordinated on title and does not exceed 125% Combined Loan to Value (CLTV). For FHA streamlines with out an appraisal, the property value is based on the original appraised value of the previous FHA loan.
  • The term of the new mortgage must be the lesser of 30 years or the unexpired term of the mortgage plus 12 years. A borrower cannot refinance from a 15 year loan to a 30 year loan.
  • No termite report is required.
  • Borrower cannot be late, delinquent, or in default of any federal debt.

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