According to a release from FHA, the new guidelines are intended to “improve a lender’s ability to objectively consider a borrower’s risk and reduce additional credit requirements or ‘overlays’ that exceed FHA’s own lending standards”—restoring security to the agency’s recently depleted Mutual Mortgage Insurance Fund without forcing lenders to over-tighten their standards.
“We want to provide revised guidance for our lenders so that they are confident in offering affordable mortgage loans to responsible borrowers under a reasonable set of guiding principles,” said FHA Commissioner Carol Galante. “We hope to bring more certainty to the market
by helping lenders apply a set of consistent underwriting standards.”
Chief among the changes is a set of “compensating factors” for lenders to use when considering borrowers whose debt-to-income percentages exceed established ratios (31 percent for housing costs and 43 percent for total discretionary debt).
For borrowers with credit scores above 580 (reduced from 620 previously), FHA will allow maximum housing/debt ratios of 37 and 47 percent as long as the borrower has “verified and documented liquid cash reserves” equal to at least three months of mortgage payments or if their new monthly payment is less than $100 (or 5 percent) more than their previous payment.
Maximum ratios of 40 and 50 percent may be allowed if there are at least two compensating factors.
Borrowers with credit scores below 580 and borrowers without credit scores may not exceed the original ratios.
HUD also extended the requirements to apply to all credit qualifying FHA refinances.
Acknowledging that more stringent requirements may delay some homebuyers’ plans, FHA asserts many of the estimated 16,000-19,000 borrowers affected by the document will be able to adjust their financial situations “within a year or two.”
Though an effective date for the changes hasn’t yet been published, HUD said it won’t come before March 11, 2014.