In Part One of this two-part series, we discussed the new regulations that simplified requirements for self-employed borrowers, non-tax filers, and those with seasonal or irregular income. In Part Two, we will discuss how the new rules affect borrowers who have previously opened accounts using their Social Security Number (SSN).
For borrowers who already have a SSN-linked checking account, savings account, credit cards or other forms of credit, FHA now requires lenders to review at least two years of bank statements for deposits. This is an important change compared to previous policies, which only required lenders to review one year of bank statements. During the review process, lenders are encouraged to consider all types of deposits such as social security benefits, retirement savings, overtime pay, bonus income, and any other source of non-employment income. This process will help to accurately verify the borrower’s actual income over time.
In addition, FHA is now requiring lenders to conduct an analysis of the borrower’s total monthly debts versus total monthly income. This is known as the Debt-to-Income Ratio (DTI), and the goal is to ensure that the borrower’s total monthly debt payments don’t exceed a certain percentage of their total monthly income. The maximum allowable DTI ratio varies depending on the type of loan, but generally speaking, it should be no more than 45%. If the borrower’s DTI exceeds this threshold, they may need to take additional steps to reduce their debt in order to make them a more attractive loan candidate.
Finally, FHA has revised its policy on verifying the continuity of employment for borrowers who have held their current job for less than two years. Under the previous policy, borrowers were required to provide proof of continuous employment for at least two years prior to submitting a loan application. However, the new rules now allow lenders to accept alternative documentation for borrowers who have been employed with their current employer for fewer than two years. For example, a borrower could provide six months of pay stubs, a signed and dated reference letter from the employer verifying their employment, and a copy of their most recent W2 form in order to still qualify for an FHA loan.
The recent changes to FHA loan documentation guidelines represent a major shift in policy, and are intended to make it easier for borrowers to qualify for FHA-insured mortgages. By simplifying the income documentation process, lenders can better verify a borrower’s ability to repay the loan, and borrowers can be confident that their loan application will be approved.
Overall, the Federal Housing Authority's recent updates to its income documentation rules have made the process of securing an FHA-insured mortgage much easier for borrowers.The revised guidelines include changes to policies regarding self-employed borrowers, non-tax filers, and those with seasonal or irregular income. Additionally, the revisions also require lenders to review at least two years of bank statements for deposits, analyze the borrower’s total monthly debts versus total monthly income, and provide alternative documentation if the borrower's current employment is fewer than two years. These changes are aimed at simplifying the application process, providing more accurate income verification, and making it easier for borrowers to qualify for FHA-insured mortgages.
This article was contributed on Oct 10, 2023
