Much has been written about the new mortgage rules that came onto the scene over the last couple of years. The Qualified Mortgage (QM) rule, for example, has generated thousands of headlines in the last year alone.
Many of our readers have asked how these industry changes will affect the FHA mortgage underwriting process in 2015. As it turns out, the new lending guidelines have had very little impact on the way FHA loans are underwritten.
Here’s why: The QM rule is designed to prevent risky lending practices that were never permitted under FHA underwriting standards. So it hasn’t really changed the underwriting process for these government-backed loans.
In December 2013, the Department of Housing and Urban Development (HUD) published a press release to clarify its stance on all of this. According to the release, HUD’s definition states that a QM mortgage loan must…
- require periodic payments without risky features,
- have loan terms no longer than 30 years,
- limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (with exceptions for Title II Manufactured Housing and other special programs), and
- be insured or guaranteed by FHA or HUD.
These stipulations apply to all single-family residential home loans that “HUD insures, guarantees or administers,” according to the corresponding entry in the Federal Register.
These requirements will not significantly alter the FHA underwriting process in 2015, because Federal Housing Administration loans have traditionally fallen within this mold.
As HUD explained in their December 2013, news release:
“Currently, HUD does not insure, guarantee or administer mortgages with risky features such as loans with excessively long terms (greater than 30 years), interest-only payments, or negative-amortization payments where the principal amount increases.”
Additionally, FHA underwriting guidelines already required mortgage lenders to assess the borrower’s ability to repay the debt. So there wasn’t much to change in 2014 or 2015.
Underwriting Process and Guidelines at a Glance
The FHA underwriting process is outlined in HUD Handbook 4155.1, Chapter 1, Section A. According to the handbook, the underwriter’s main responsibility is to “determine the borrower’s ability and willingness to repay a mortgage debt to limit the probability of default … and examine the property offered as security to determine if it is sufficient collateral.”
So the primary purpose of underwriting is to ensure that the borrower has the financial capacity to make the monthly mortgage payments. This is done by analyzing tax records, bank statements, pay stubs, and other financial documents.
Above all, the FHA underwriter must “make a reasonable and good-faith determination of the mortgagor’s [i.e., borrower’s] repayment ability at the time of consummation.” Verifying repayment ability is also the central theme of the QM rule.
Qualifying for a Loan
Generally speaking, borrowers must have:
- A down payment of at least 3.5% of the purchase price or appraised value
- A credit score of around 600 or higher (not set in stone)
- A total debt-to-income ratio no higher than 43% (also not set in stone)
- Verifiable income that is sufficient to repay the debt
Once the borrower’s file has been thoroughly reviewed, the underwriter will either approve it or reject it. He or she may also issue a “conditional approval” and give a list of conditions that have to be resolved before the loan can close. When the FHA underwriter is satisfied that both the borrower and the property meet the lender’s and HUD’s guidelines, the borrower is considered “clear to close.”
This is how the FHA underwriting process has worked for years, and it will remain this way in 2015 despite the new mortgage rules mentioned earlier. To learn more about this process, refer to Chapter 1 of HUD Handbook 4155.1, or visit our educational website at FHAhandbook.com.
Disclaimer: This article provides a quick overview of the FHA underwriting process in 2015. Mortgage underwriting is a complex and in-depth process that varies from one borrower to the next, due to the many different components involved. This article is not meant to be a comprehensive guide to FHA underwriting guidelines or requirements. The Department of Housing and Urban Development establishes all guidelines for this program. Visit www.HUD.gov to learn more.