FHA Turns to Residual Income Test to Qualify Borrowers
The Federal Housing Administration has elected to use the Department of Veterans Affairs' residual income test as a new compensating factor to qualify borrowers with high debt-to-income ratios.
Under the new manual underwriting guidelines that go into effect April 21, applicants that pass the VA residual income test can have DTI ratios of up to 37% on the front end and 47% on the back end. The standard DTI limit is 31/43 with no compensating factors.
FHA currently allows borrowers to exceed the standard 31/43 DTI ratio if they make a downpayment of 10% or more.
But that compensating factor and others will be eliminated when the new FHA manual underwriting guidelines go into effect in April. FHA eliminated most of the traditional compensating factors. There will be four compensating factors going forward, including the VA residual income test.
Lenders are concerned the changes will tighten underwriting and reduce the pool of eligible FHA borrowers.
But FHA officials contend it will expand access to credit for borrowers with 620 to 680 credit scores.