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by G. Steven Bray
The new FHA handbook is now in effect, and I think you’re going to find the new loan guidelines reduce your pool of potential homebuyers.
That said, probably the biggest change is a mostly positive one. The old handbook allowed for a lot of underwriter discretion. With FHA suing lenders to buy back defaulted loans, many lenders had instructed their underwriters to adopt conservative interpretations of the guidelines. In contrast, in the new handbook the guidelines are more black and white. Very little is left to underwriter discretion.
Unfortunately, some of those black and white rules are even more conservative than what underwriters were applying before the new handbook and are likely to prevent some marginal homebuyers from qualifying.
A change likely to impact many first-time homebuyers concerns student loans. With the previous rules, FHA would allow us to ignore student loans that were deferred greater than 12 months. The new rules eliminate this exemption. All student loans must be considered in a borrower’s debt ratio.
Student loan servicers often don’t report a monthly payment for a deferred loan, and the new rules say we must use 2% of the loan balance if the servicer won’t report a payment. Fortunately, loan servicers typically will provide a payment based on the loan’s current balance if the borrower asks, and this payment typically is closer to 1%.
The change makes FHA more consistent with conventional loan programs. However, Fannie Mae allows us to use 1% of the loan balance if the servicer won’t report a monthly payment.
FHA still provides one advantage over conventional loans. It allows the use of the actual payment for income-based student loan repayment plans. These plans often have payments that are less than 1% of the loan balance.
Next week we’ll look at several other significant changes.