Some major changes are starting today that will tighten the income guidelines for most conventional loans. These changes will be for loans bought by Fannie Mae, which includes most conventional loans. These changes will cause more borrowers to have to get a FHA loan because they cannot qualify for a conventional loan.
On Monday, Fannie Mae is lowering the maximum debt-t0-income ratio for loans sold to Fannie Mae to 45% for loans with 20% down or more. Currently, the maximum FHA loan debt-to-income ratios generally allow up to 55% and that is with only 3.5% down. As you can see, that is a dramatic difference in qualification guidelines for a conventional loan vs a FHA loan. If you put less than 20% down on a conventional loan your will need mortgage insurance. The mortgage insurance companies impose even tougher guidelines requiring a 41% debt-t0-income ratio AND a 720 credit score.
For a very quick overview, your debt-to-income ratio is your total housing payment (mortgage + monthly property taxes + monthly home insurance) + your current debt obligations (debt obligations are only items that appear on your credit such as car loans, student loans, credit card minimum monthly payments…NOT items like phone bills, etc..), divided by your gross before tax monthly income. So for example if you make $6,000 per month, have a car payment of $500/mo and credit cards of $200/mo, the maximum total housing payment you could qualify with a 20% conventional loan would be $2,000/mo and the maximum for a 3.5% down FHA loan would be $2,600. And if you put <20% down on a conventional loan, the maximum payment you could qualify for would be $1,760.
So as you can see, the new changes will restrict what many home buyers can qualify for with a conventional loan even if they put 20%+ down. However if you have 20%+ down payment, and can qualify based on the credit and income ratio standards of a conventional loan, it is the best choice as it has no mortgage insurance.
As usual, I like to end with a reminder of some highlights of FHA loans.
- FHA loan interest rates are still hovering around record lows
- Only 3.5% down needed to qualify FHA loan and that 3.5% does not have to be your own money, it can be a gift from a relative
- Maximum FHA loan limits go up to $729,750 in many counties to get a FHA loan in California and the rest of the U.S.
- Flexible income and credit qualifications
- FHA loan credit score standards are liberal, if you think you have bad credit your may still qualify for a FHA loan
- Non-occupying co-signers are allowed to help you qualify
Give me a call (858-922-7899) or email (homeloan8@gmail.com) if you have any questions at all about getting approved for a FHA Loan.
Warmest Regards,
Rob Chomentowski
Sr. Loan Officer (and FHA specialist)
858-922-7899
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