Your Mortgage : FHA Eases Qualifications for First-Timers


Thousands of new home buyers--especially first-timers--are likely to find it far easier to qualify for a Federal Housing Administration (FHA) mortgage, thanks to a major overhaul of the agency's underwriting and credit standards that took effect nationwide on Friday.

The changes are intended to eliminate what FHA officials call "unnecessary barriers" for loan applicants whose income profiles or debt ratios don't quite fit the standard mold, but who are reasonable credit risks.

The rule changes should also make FHA more attractive to consumers and lenders by easing tough, post-appraisal property fix-up requirements and opening FHA to the electronic revolution under way in the mortgage market.

For the first time, FHA will now insure loans originated by lenders using automated underwriting programs to cut loan approval times dramatically. It will also accept computer-generated, merged in-file credit reports that short-circuit the traditional, hands-on credit analysis.

FHA's new flexibility on underwriting standards should have major significance for moderate-income home buyers this spring because the agency is the country's largest source of low-down payment, federally insured mortgage money. Over 650,000 purchasers--450,000 of them buying a home for the first time--took out FHA mortgages during the last fiscal year.

Here's what the rules overhaul could mean to you:

--Standard debt-to-income ratios no longer will be cast in concrete. Your local lender will be encouraged to look harder for "compensating factors" in your financial situation whenever your debts exceed FHA's traditional "29/41" ratios. The 29 refers to your monthly housing expense as a percentage of your monthly income. The 41 refers to your housing costs plus other recurring consumer debts, such as auto loan payments, expressed as a percentage of monthly income.

Loan officers often interpret ratios like these as Holy Writ, and turn down applicants whose debt levels exceed the limits. But FHA Commissioner Nicolas P. Retsinas, said, "We never intended them to be so strict" that borrowers who were actually good credit risks would be rejected on ratios alone.

Take, for example, a young couple who've been paying 35% or more of their monthly income as rent on an apartment for the last year or two. They've never missed a rent check, never been late. They've demonstrated that they can handle a higher-than-typical monthly housing ratio.

Yet a loan underwriter strictly adhering to FHA's 29% standard could reject the couple's application out of hand. Under Retsinas' new guidelines, however, that shouldn't happen anymore. FHA's marching orders to lenders nationwide as of Feb. 3 are to "judge the overall merits of (a) loan application" and to exceed the 29/41 ceilings whenever there are "other factors" that show the applicants' "ability and willingness to make timely mortgage payments."

--FHA's standards on what constitutes income, how many hours a week you have to work, and other tests are either being eased or clarified. Under traditional FHA rules, loan officers could only count as "income" salary or other money that you as a borrower could "reasonably" expect to keep earning for the next five years. Now this standard will be cut to three years. Bonus and overtime earnings will be considered income for loan application purposes even if you haven't received such income during each of the prior two years.

And if your main job involves less than 40 hours a week, underwriters no longer will count your income as arising from "part-time employment" requiring a two-year history to document stability.

--Child-care expenses no longer will be included in the definition of recurring monthly debt for calculation of income-to-debt ratios. In his letter to mortgage lenders, Retsinas explains that although child care can be costly, "We believe that most families, in assessing their financial priorities, will find alternate means of caring for their young children if such costs become burdensome."

--FHA applicants using funds from community-based "savings clubs" for their down payment or closing money no longer will be treated by underwriters as if their cash is "borrowed" and must be repaid. This policy change should be particularly helpful to home buyers from Asian, West Indian and other groups who traditionally use informal, cooperative clubs as a way to accumulate savings.

--Property repair requirements by appraisers that are not essential to the "safety or soundness" of a home no longer will have to be enforced by lenders as a condition of granting an FHA mortgage. This should be welcome news to property sellers, realty agents and buyers who've found themselves forced into costly and time-consuming--but essentially cosmetic--repairs simply because an appraiser insisted on them before the loan could close.

The underlying message of all these changes: There's a new, more flexible, less rule-bound FHA in the market for 1995 that intends to compete for your mortgage business--not just be your lender of last resort.

Distributed by the Washington Post Writers Group .

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