FHA recently (September 15, 2015) applied some changes to their mortgage qualification process and criteria. Many of this round of FHA changes affect first time home buyers, especially those in or recently graduated from college. If you are a first time home buyer currently searching for a home and hoping to use an FHA loan, this information will be important to you.
Job Changes and Job History
First time buyers and new graduates are most likely to have frequent job changes in the past and perhaps gaps in employment history. These two factors are now closely reviewed and may affect the ability to obtain an FHA loan. If there are more than 3 job changes over the last year, home buyers must document that those changes were either for training purposes or resulted in better pay and benefits each time. Gaps of 6 or more months in employment history will also be problematic. Borrowers must demonstrate consistent employment over the last year and some work history over the last 2 years. Failure to do so will prevent that borrowers income from being used for mortgage approval.
Part-time and Bonus Pay
Certain types of pay are also coming under greater scrutiny. Part-time employees and individuals who rely on bonus or overtime pay must provide a 2 year history. For part-time income, the average of the two years will be used, unless income increased dramatically recently, in which case the average of the last 12 months will be used. For bonus and overtime pay, a two year history of consistent earnings must be provided to demonstrate the likelihood of overtime and/or bonus pay continuing in the future.
The handling of deferred loans will have the biggest impact on college students and new graduates. The entire balance of a deferred loan will be used in monthly debt calculations (rather than what the actual monthly payment will be when payments begin). So if a student owes $50,000 in deferred student loans, FHA will consider $50,000 as the monthly payment on that loan. This will make it difficult, and in most cases impossible, for students to qualify for an FHA loan if they have deferred student loans.
One of the best features of FHA loans is the ability for home buyers to receive gifted funds from family members to use towards the down payment on a home. FHA now limits individuals considered as family members. Cousins, nieces, nephews and close friends are not eligible.
Authorized User Accounts
Students and first time buyers often have themselves added as authorized users to a parent’s credit card in order to build credit history. In the past, borrowers could easily have that debt disregarded. That is no longer the case. Those accounts must have a 12-month history of on-time payments in order to be removed from calculations.
Understanding How FHA Changes Affect First Time Home Buyers
There are additional changes that apply as of September 15, 2015. The ones listed above have the most impact on first time home buyers and student/graduate home buyers. If you were pre-approved for an FHA loan prior to September 15th, it is important to touch base with your lender and update your pre-approval. If you are planning to purchase a home in the future, keep the above information in mind. Understanding how these FHA changes affect first time home buyers will allow you to plan accordingly and improve your chances of approval.