FHA (The Federal Housing Administration) has a long history in America dating back to 1934 with the Housing Act. The goal to promote homeownership has not changed since it’s roots throughout many cabinet position Housing Secretaries. From the first Cabinet position in 1934 home ownership was promoted by making home financing affordable to average Americans for very little money down and lending guidelines that were not so stringent. FHA is not a lender, they do not lend money as an investor, their primary responsibility is to insure/guarantee loans that are made through an approved FHA Lender that meet FHA guidelines. The FHA provides government guarantee in the event a borrower defaults on an FHA insured loan. This safety net for the lender allows an FHA approved lender to be much more flexible in the qualifying for a mortgage loan. If a borrower cannot fulfill their financial responsibilities and and goes into foreclosure the original lender that funded the loan is insured for the loss or at least part of the loss. In order for FHA to insure any loan that is in default against losses, the private mortgage lender like a bank, credit union or mortgage company need to be an FHA approved lender and follow the FHA guidelines when the loan was originated. Mortgage Lenders that did not follow the FHA guidelines when the mortgage was originated will not be insured. There are strict mortgage lending guidelines for any FHA mortgage applicant and FHA mortgage lender established by HUD, Housing of Urban Development which has oversight of FHA. These guidelines referred to as FHA minimum guidelines must be followed for the mortgage loan to be insured.
Many people myself included immediately believe FHA borrowers must have a 2 year work history or at least in the same field. This is only half true and the verbiage according to FHA is fuzzy on the subject. FHA Guidelines read that a FHA Mortgage applicant needs two years of employment history to qualify for a FHA insured loan. This terminology confuses many loan officers including myself so let’s dig deeper. The two year employment history does not mean that a FHA mortgage loan applicant must have be employed or have steady employment for the past 2 years (24 months) with the same employer. In fact a FHA imortgage loan applicant can have multiple jobs the past two years and even gaps of employment. Even extended gaps of employment may be permitted but there are additional guidelines when it comes to extended gaps of employment. FHA guidelines state the mortgage loan applicant must have been employed 2 years overall. For example only, An employee who applies for a FHA insured loan is allowed to work for one year at Acme Electrical Systems and taken a couple of years off looking for work, then obtained full time employment at Not so Current Software and worked another year and is currently working. This mortgage applicant does not have 24 months (2 years) of steady employment history with the same company but he does have an overall two year employment history. When FHA states 2 years of employment history this is what they mean by it.
If you are told you do not qualify for a FHA insured loan because you have to many gaps between employment the last two years or you have been told you do not have steady employment history for at least two years this is not following minimum FHA guidelines. You may have not been employed steadily for two years with the same employer and have incurred gaps in employment so this is a more stringent policy or guideline imposed by the lender above FHA Minimum guidelines. This is called a Lender overlay! Lenders often have overlays ( more restrictive guideline above FHA minimum Guidelines), this is perfectly legal, however you can qualify for a FHA Loan having held multiple jobs and have gaps in employment in the past two years. You will not qualify with a lender that has overlays but you can qualify for a FHA Loan from a lender that has no overlays.
HUD as mentioned above is the oversight entity over FHA, they impose minimum FHA guidelines for FHA insured loans. These guidelines are the most important guidelines. These must be complied with by the FHA approved lender and the FHA insured loan borrower. If these guidelines are not met and complied with then the Mortgage loan will not insure the loan if the borrower defaults on the mortgage loan. The other type of FHA Guidelines are Lender imposed policies exceeding the FHA minimum guidelines for a FHA insured loan. Every mortgage lender can impose additional more restrictive or stringent policies on top of the FHA minimum guidelines. Many mortgage lenders will not consider a FHA insured loan for a borrower/applicant with a FICO score less than 640. However, FHA minimum guidelines state a FHA applicant may qualify for a FHA insured loan with a minimum of 580 FICO credit score and a minimum of 3.5% down payment. FHA Minimum guidelines will allow a loan applicant to qualify for a FHA insured loan with 500 FICO score and 10% down, this borrower will pay an interest rate higher than the best rate but this is allowable following the FHA minimum guidelines. A FHA lender can require a borrower ( mortgage applicant ) to have two years of steady employment history with the same company, an overlay above the FHA minimum guidelines. Many FHA approved lenders will require any old unpaid collections or unpaid charge offs on a borrower’s credit profile be paid off but according to FHA minimum guidelines they do not have to be paid off to qualify for a FHA insured loan. A borrower can have prior bad credit, open collections, prior bankruptcy, prior foreclosure, gaps in employment and Low FICO Credit Scores, judgements, recent late payments, or other credit issues, debt to income ratio challenges but there are dozens of mortgage lenders such as The Larry Stepp Team at Gustan Cho Associates that do not have any overlays. If you meet the FHA minimum guidelines then we can often get through the automated underwriting system. Gaps In Employment
For one reason or another it has been a rough year for you but through it all you have been employed by multiple employers and you want to qualify for a FHA insured loan. According to FHA minimum guidelines you can have multiple jobs the past two years and still qualify for a FHA insured loan. If you were employed for less than 6 months and changed jobs your current job is your new income, however the FHA approved lender will require you have been employed at your new job for at least 30 days and 30 days of pay stubs will be required prior to the FHA approved lender issuing “clear to close” and fund the FHA insured loan. Some mortgage applicants may have been unemployed for more than 6 months, however FHA guidelines state you must have been at your new job at least 6 months. It is allowable to have been unemployed for many years as long as there is a two year employment history and you have been employed at least 6 months.
To obtain a FHA insured loan a borrower must be at least 18 years old to qualify. Young married couples may qualify if one of the borrowers is at least 18 years old. A FHA insured loan borrower must be a United States Citizen or a permanent resident alien to qualify for a FHA loan. Any Non-permanent resident aliens must have a valid social security number and be in the United States lawfully and hold a legal U.S. residence proof of residency.
Prior to 2008 no income verification and stated income mortgage loans were available but no more. There has to be documented income for any government insured mortgage loan. There is also specific maximum debt to income (DTI) ratio caps incorporated by FHA. A maximum of 46.9 % front end debt to income ratio and 56.9 % maximum back end is allowed for a FHA insured mortgage loan for any applicants with credit scores of at least 620 or higher. The borrower applicant with credit scores below FICO 620 the maximum allowable debt to income ratio front end is 31% and the maximum allowable back end debt to income ratio is 43%. Any loan requiring manual underwriting are capped at 31% debt to income and 43% back end debt to income ratios.
Many Americans have part-time income, overtime income and bonus income and as long as the FHA Mortgage applicant has at least a two year history earning part time, overtime or bonus income from the same company it can be used to qualify. All overtime, part time or bonus income must come from the same employer it cannot come from multiple employers over two years.
If a borrower discloses and wants to use Social Security income, pension income or disability income this can be used as documented income. Disability income can be grossed up by 25% provided the mortgage loan applicant gets a NET check monthly. Any cash income cannot be used towards income for the purpose of qualification.
Self employed borrowers or 1099 wager earners qualifying for a FHA insured loan must provide two years of tax returns and/or two years 1099 to qualify for a FHA insured loan. A borrower can have multiple business and/or been employed by multiple employers that issued 1099’s but two years of tax returns or 1099 will be need to be provided.
Miscellaneous income such as child support, alimony, and royalty income can be used for income qualification but there must be documentation provided stating this income will continue for the following three years.
The Larry Stepp Team at Gustan Cho Associates is available 7 days a week, holidays and weekends for your assistance. We look forward to being your guide through this qualifying maze.
Larry Stepp 407-922-4755 LarryS.HomesNetwork@gmail.com