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.

Comments (2)
Thinking about Purchasing a Home or possibly Refinancing your current home, Please contact us at 856-853-1234 or e/m Money@RonWohlfarth.com
Thank you
Posted by RonWohlfarth | Thursday, January 30 2014 at 3:14PM ET
The mortgagee clause 14-02 on HUD's website gives better information about this change. The mortgagee calls for the VA residual income test when a lender is using residual income as a compensating factor only and is not required for all mortgages. This pertains to a loan that is manually underwritten, complex in nature, and not all loan applications. The qualifiying ratios are also staggered depending on the borrower's credit score, the loan size, and the compensating factors that exist. The residual income test can be used as a compensating factor to help improve a file, but will not be a sole contributor for an approval or a declination.
Posted by Amber M | Tuesday, January 28 2014 at 11:41AM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.