FHA Loan Requirements for 2014

The Department of Housing and Urban Development (HUD) has implemented numerous changes to its Federal Housing Administration mortgage insurance requirements, commonly referred to as an FHA mortgage. My goal is to provide the current requirements to qualify for an FHA loan, at least the important ones that everyone should know, as they currently stand, and then update this article throughout the year as those requirements change.

The big question that everyone has is….drum roll please….”What is the minimum credit score for a Ohio FHA mortgage”?

That question is easier asked than answered. There are 3 answers, which I will break down as follows:

Technical Answer: per FHA’s Mortgagee Letter 10-29 your middle credit score must be a 500 or higher to obtain a Ohio FHA mortgage. To qualify for maximum financing (3.5% down payment with an FHA purchase mortgage in Ohio) you must have a 580 or higher middle credit score, and if you are putting 10% down then you will need a 560 or higher credit score.

These are the technical requirements as laid out by HUD, but remember, HUD isn’t the one lending you the money. The banks are. The banks/lenders can choose to implement stricter guidelines, which they have. Thus, this was the technical answer, not really feasible in the real world.

Might Be Possible Answer: Currently I know of 1 lender that is abiding by part of HUD’s guidelines. This lender offers maximum financing on FHA mortgages (3.5% down payment if you are buying a home in Ohio) if you have a middle credit score of 580 or higher. And they claim to offer FHA mortgages in Ohio with 10% down payment if you have a 560 or higher credit score. That is the lowest credit score they will accept, 560.

So why did I refer to this answer as “Might Be Possible”? In the 3 years that I have been doing business with this lender, it has become more and more difficult to actually get loans closed with them. They are slow, they ask for everything short of a DNA sample, and even then on occasion turn a file down. Is it possible to get an FHA mortgage with a 560 or a 580 score, yes. Is it likely, maybe.

Yes, you can get an FHA mortgage Answer: a client with a middle score of 620 or higher has a much better chance at obtaining an FHA mortgage. There are a handful more lenders offering FHA loans with a 620, and all the lenders I know of offer FHA financing with a 640 or higher middle score.

There are other qualifications, but looking at credit score alone, you have a much better chance at obtaining a Ohio FHA mortgage when your credit score is above a 620. That applies for FHA purchase mortgages, FHA refinance and FHA Streamline refinance.

Some other items to keep in mind when figuring out if you qualify for an FHA mortgage:

Debt to Income Ratio for Ohio FHA Mortgages

Again, lenders have the freedom to enforce stricter requirements than HUD does. So even though HUD will approve FHA financing with a debt to income ratio up to 56.99%, that doesn’t mean that all lenders will. To be safe, you would want your debt to income ratio no higher than 43%.

Collection Accounts and Ohio FHA Financing

In August 2013 HUD revised the guidelines on Collection Accounts and FHA mortgages. The new guidelines require that lenders perform a “capacity analysis” when the total amount of all collections is $2,000 or greater. Medical collections are not considered in the $2,000 cap.

The “Capacity Analysis” requires one of the following to take place:

• At the time of or prior to closing, payment in full of the collection account(s)
• The borrower makes payment arrangements with the collection creditor. A letter from the creditor verifying the monthly payment is required. The monthly payment will be included in the borrower’s debt to income ratio
• Lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower’s debt to income ratio

So it is feasible to obtain an FHA mortgage with outstanding collection accounts.

FHA Loan Limits in Ohio

Please see my previous article Ohio FHA loan limits regarding 2014’s new loan limits.

Previous Bankruptcy and an FHA Loan in Ohio

Per HUD’s requirements, a Chapter 7 bankruptcy should be discharged a minimum of 2 years, and that during those 2 years you reestablished good credit, or chose not to incur new credit obligations. Negative credit after a bankruptcy, such as collections or judgments, can be difficult to overcome when trying to obtain a new loan.

HUD has the same requirement for Chapter 13 bankruptcy, 2 years from the discharge date. However, if you are currently in a Chapter 13 bankruptcy, you may be able to obtain a new FHA mortgage provided that the lender documents that:

• one year of the pay-out period under the bankruptcy has elapsed
• your payment performance has been satisfactory and all required payments have been made on time, and
• you have received written permission from the bankruptcy court to enter into the mortgage transaction

Previous Foreclosure (including property that was included in a Bankruptcy and not reaffirmed)

You may be eligible for a Ohio FHA mortgage 3 years after the property transferred out of your name. Generally, you can find that date on the County Auditor’s website. A list of Ohio County Auditor sites and contact info can be found here: Ohio County Auditors

Previous Short-Sale and FHA mortgages

You may be eligible for a new FHA mortgage immediately after completing a short-sale. However, if you pursued a short sale to take advantage of declining market conditions or to purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value, then you would not be eligible for a FHA financing.

To be eligible for a Ohio FHA loan immediately after a short-sale you must have made all mortgage payments on time for the previous 12 months and have no other late payments in the last 12 months on other debt.

If you are in default (120 days late or in pre-foreclosure or foreclosure) at the time of short-sale, then the FHA foreclosure guidelines would be followed.

FHA Back to Work Guidelines

This is where things get a little dicey. In August 2014 HUD released new guidelines, commonly referred to as Back to Work guidelines. These rules allow for a borrower to qualify for a new FHA purchase mortgage after suffering a bankruptcy, foreclosure, deed in lieu of foreclosure or short-sale at least 12 months ago. Basically these new guidelines make it possible to qualify for FHA financing 12-24 months after a major derogatory credit event.

Before you get excited, let’s go over the requirements to qualify. As stated in HUD Mortgagee Letter 13-26, “FHA is allowing for the consideration of borrowers who have experienced an Economic Event AND can document that:

• certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
• the borrower has demonstrated full recovery from the event; and,
• the borrower has completed housing counseling 

So, what does FHA consider an “Economic Event”. “An Economic Event is any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrower’s Household Income of twenty (20) percent or more for a period of at least six (6) months.”

In order to qualify under the Ohio FHA Back to Work program, you must be able to document the following:

• the exact date the loss of employment or income took place
• the income received for the 6 months prior to the loss of employment or income for the entire household
• the income received for the 6 months after the loss of employment or income for the entire household

OK, but what does FHA consider “full recover from the event”. FHA deems a borrower to have satisfactory credit if there are no late payments on mortgages, installment loans, or credit cards for the previous 12 months.

And don’t forget the housing counseling. It must be a minimum of one hour of one on one counseling from a HUD approved housing counseling agency and it must be completed at least 30 days before applying for a mortgage, but no more than 6 months before applying. In theory, if you applied for a mortgage before completing the housing counseling, the loan officer would be able to advise you whether it was feasible to qualify under the Back to Work guidelines. At that point, the loan officer would have to turn your file down, as you don’t currently qualify because you haven’t completed housing counseling. Once you had completed the counseling, and waited 30 days, then you could re-apply.

Lastly, the lender will have to be able to determine that the derogatory credit (foreclosure, bankruptcy, short-sale, etc.) was a direct result of the loss of employment and/or income. This provides quite a bit of grey area.

If you have any additional questions on qualifying for FHA financing in Ohio you can complete the free Ohio FHA Interest Rate Quote request, or Contact Me