The adage goes: the only constant is change.
That’s certainly the case when it comes to real estate lending. In a previous blog post, we discussed how mixed-use properties can qualify for FHA loans. Today, we’re going to discuss how recent changes in policy could impact your clients’ ability to qualify for an FHA loan in 2022.
Here’s what you need to know about new FHA requirements.
FHA applicants must have a minimum FICO score of 580 when seeking a mortgage with a low-down payment.
Eligible buyers can qualify for a low down payment of just 3.5% with a score of 580 or higher. The new requirement means they will need a 10% down payment to qualify with a lower FICO score between 500 to 579.
Homebuyers should check their credit score before considering buying a home. If their score is below 580, they should decide if putting down 10% is the right strategy for their finances. It often makes more sense for those thinking of buying a home to first pay down their debt to improve their credit score, and then start saving for a lower down payment.
New loan limits will also apply in 2022.
This is actually good news for buyers, as the baseline limit is rising from $365,360 to $420,680. The increase comes closer to rising housing prices. It’s important to keep in mind it varies based on location and type of home. Effective as of January 2022 the amount available for an FHA-backed home loan is as follows for single-family (one-unit) homes:
- Low-Cost Area: $420,680
- Mid-Range Area: $420,681-$970,799
- High-Cost Area: $970,800
- AK, HI, Guam, & Virgin Islands: $1,456,200
Concessions are made for the high cost of construction in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
FHA Debt-to-Income Ratio
This is an important number for homeowners to track.
The debt-to-income ratio (DTI) measures the percentage of a home buyers’ pretax income spent on monthly debt payments. This includes all debt both mortgage and rent, as well as credit card balances, student loans, lines of credit, etc. The FHA looks at not just the FICO score but also the DTI which must be no higher than 50%. As well, they also consider the Total Mortgage Payment to Effective Income Ratio (PTI). In this case, the ratio can’t exceed 40% for those with a minimum credit score of 580.
The property in question must still meet the following criteria:
- Principal residence occupied by at least one owner within 60 days of closing
- Single-family home, including townhomes and high-rise condos or a manufactured home built on a permanent foundation
- The only investment property allowed is a multifamily home with up to four units with one unit occupied by the owner
- The home must pass an FHA appraisal
- Flipping property is not allowed, therefore buyers can’t purchase a home within 90 days of the property’s prior sale
- Title of the property must be in the buyer’s name or a living trust at settlement
The bottom line is that homebuyers can still benefit from FHA loans. However, they will require better credit scores if they want to avoid putting 10% down.