Recent FHA Guideline Changes and Highlights

Mortgage and Lending with MadisonMortgageGuys

FHA Guideline Changes in Wisconsin, Illinois and Minnesota

In the summer of 2015 the Federal Housing Administration (FHA) made some changes to a wide range of its guidelines. The goal is to make sure prospective buyers are financially ready right now to buy a home and there is a reasonable chance that they can continue to afford the home. Listed below are the major highlights of the changes and a review of a few lesser known guidelines and how they can influence a loan approval.

Down Payment Gifts need more Documentation

FHA will still allow family and friends to provide gifts to buyers in order to cover the down payment. However, a letter from the donor is not going to be satisfactory.

Buyers need to get a bank statement from the donor showing the source of the gift funds as well as a copy of the cashier's check. Furthermore, the buyer will need to get a printout of their account reflecting the balance before and after the gift.

Calculation of Income from Side Jobs

People that have a 2nd job will need to show at least 2 years of work history at the other job in order to have it count towards their overall income. The income will also be averaged over the most previous 24 months.

There is an exception to the 24 month average. If the borrower received a raise at the second job, the income will be averaged over the most recent 12 months.

Explanation of Significant Bank Deposits

FHA has gotten very specific when reviewing large deposits in the borrower's bank account. A large deposit is any amount over 1% of the prospective home's selling value. The value will be decreased by any concession offered by the seller.

An example will make this easier to understand. Suppose that a young married couple is considering a home purchase of a property valued at $225,000. The seller has agreed to pay up to $3,000 in closing costs. A significant deposit would be calculated in the following manner:


                                    Home value                             $225,000

                                    Less seller concession             - $3,000

                                    New value                               $222,000

                                    Multiply by                                         1%


                                    Significant deposit                     $2,220


Therefore, any deposit to the borrower's account over $2,220 will need to be properly documented.

Changes in Employment

For borrowers that have changed their main source of income at least 3 times within a 12 month period, FHA will ask for some documentation. The changes in job must show at least one of the following advantages:

  1. Significant higher income
  2. Better benefits (health insurance, retirement account, more time off)
  3. The job resulted in better training for the borrower's career

Decrease in Income for Self Employed People

Self-employed people will face a unique situation when qualifying for an FHA loan. If their income has dropped over 20% then the person cannot use that income. It may be possible to use the income if it has increased in the previous 12 months. However, the borrower will need to verify the increase. In addition, the borrower will have to be approved for the loan using the lower income amount.

Bonuses or OvertimeFHA Guideline Changes WI IL MN

Borrowers that receive a bonus or commission, will need to show a history of 24 months. If the extra income has not been received for at least 24 months then a 12 month history can be used but ONLY if the extra amounts have been consistent and predictable during that time. The borrower will also need to show proof that the extra income has a high probability of continuing in the near future.

More Than One FHA Mortgage

Most of the time a person that has an existing FHA mortgage cannot apply for a 2nd FHA loan. But there is an exception.

If the borrower's main employment requires them to move to a new location that is a minimum of 100 miles away from their current main residence, then the borrower may apply for a 2nd FHA loan. The borrower's income will need to be high enough to qualify for both mortgages unless they can rent out the previous home.

Using Rental Income From Previous Residence

In order to count the rental income from the borrower's former residence the borrower will need to document equity in the home that is at least 25%. If the borrower does not have that much equity, but the income was listed on the previous year's tax return, then the income may be used to qualify for the new mortgage.

How to Convert Your Primary Residence to a Rental Property

Student Loan Payments and Other Deferred Loans

Previous to the recent FHA changes, it was possible for lenders to ignore any deferred loan when considering prospects for a home loan. Student loans are one of the primary forms of deferred loans. Since many student loans do not require payment until well after graduation, borrowers could get a home loan rather easily.

That rule has changed for deferred student loans. Any student loan will need to be treated as if the borrower is currently paying it for debt to income ratio calculations.

Loans That Should Pay Off Within the Year

Prior to the guideline change, installment loans that were scheduled to pay out in less than 10 months could be excluded from the debt to income ratios. However, that has changed with a very specific rule. If the total of all the upcoming payments are more than 5% of the borrower's gross income, the debt must be used in the calculations.

Accounts that Require Payment At End of Each Month

Certain accounts will require the borrower to pay them off at the end of each month. One famous example is American Express credit cards. Instead of allowing borrowers to pay the credit card debt off over time, American Express asks that their balance is paid completely each month. As long as the borrower can show that all 12 of the most recent payments were made on time, the balance is not counted as part of the normal debt to income ratio calculation.

If the borrower has paid the 30 day account late even one time in the recent 12 months, 5% of the current balance will be added to the debt calculations.

Credit Card debt for Authorized User

The mortgage rules of FHA used to state that if a person was only an authorized user of a credit card then that debt would not be included in their debt ratio. The new rules reversed that and expressly state the debt must be included in the debt ratio.

EXCEPTION: If the borrower can show that they did not make the last 12 monthly payments and that the primary card owner made the payments then the borrower can exclude this card from their debt.

Mixed Use Homes Have new Rules

Certain buildings may have a retail or industrial front with living quarters in the back or top of the property. For this type of mixed use building, FHA may approve a loan on the property if at least 51% of the usable square footage is deemed to be residential. This 51% rule is an increase over the old rule.

Using Income Not Subject to Federal Tax

Certain types of income are not taxed by the federal government, such as disability payments and benefits from the social security administration. Formerly, this type of income was also not allowed for FHA loan applicants either. These kinds of income are now allowed for borrowers with proper documentation.

Reducing Overall Term for Streamlined Refinance

A streamline FHA refinance loan formerly had a requirement that the new loan payment could not be higher than the old payment. However, that has changed. If the remaining term is lower with the new loan and the new payment is no more than $50 over the previous payment, the loan can be approved.

Mortgage Insurance Premiums are Lower

The past few years of growth in the real estate industry has yielded a higher balance in the reserve account managed by FHA. This has prompted a decrease in the annual mortgage insurance premium. Prior to the drop, the mortgage insurance rate was 1.35% of the loan's outstanding balance. This charge was spread out over the next 12 month's payments. Now the rate is 0.85%.

View current FHA mortgage insurance premiums!

Here is a chart that will show the benefit of the lower mortgage insurance rate.

Home Price



Mortgage insurance rate



Yearly Amount



Monthly Amount



Monthly savings with new rate



The lower mortgage insurance rate is applicable to FHA purchase loans, the Back To Work loan and 203k program.

One more change worth noting; all FHA loans that have a down payment of only 10%, or less, will require the mortgage insurance to be paid for the life of the mortgage.

If the down payment is over 10% the mortgage insurance is only enforced for 11 years.

Reviewing these changes in the FHA mortgage guidelines proves that it is imperative to work with an experienced mortgage lender that keeps up to date with the latest regulations. An experienced loan officer can review your income, credit and assets and help determine the best loan for your needs.

Additional FHA Mortgage Resources:

Top Real Estate Blogs On FHA Loans via David R. Millar
How FHA Loans Can Be Problematic For Sellers via Bill Gassett
10 FHA Guidelines EVERY Home Buyer Should Know via Luke Skar
Find Out Which Type of Homes Can DISQUALIFY Your Mortgage Pre-Approval

Comments (27)

Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC

Inlanta Mortgage

Congratulates on earning a feature on an outstanding post.

Good luck and success.

Lou Ludwig

Feb 26, 2016 09:10 AM
MadisonMortgageGuys .com

Thanks for the comps Lou Ludwig. It's appreciated!

Feb 26, 2016 01:06 PM
Ryan Huggins - Thousand Oaks, CA - Thousand Oaks, CA
Residential Real Estate and Investment Properties

Great info on the new FHA requirements!  Thanks for posting this.

Feb 26, 2016 09:23 AM
MadisonMortgageGuys .com

You bet Ryan Huggins - Thousand Oaks, CA. With so many changes in the past year, it was past due to get these out there!

Feb 26, 2016 01:07 PM
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

More and more it appears to me that a 95% LTV conventional where PMI will eventually drop off is the way to go.

Feb 26, 2016 09:34 AM
MadisonMortgageGuys .com

It's hard to disagree with that statement Tammy Lankford. For some though, it will be harder, if not impossible to qualify for a conventional mortgage. Without the excellent credit, rates go up quickly and conventional rates already tend to be higher than most governemnt programs. 

For those that have great credit, conventional is the way to go. It's even better for first time home buyers as that down payment requirement is even less. Thanks so much for the comment!

Feb 26, 2016 01:10 PM
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

What a great post. I'm so glad that you're up on everything and thank you for sharing this. 

Feb 26, 2016 10:20 AM
MadisonMortgageGuys .com

Thank you Karen Fiddler, Broker/Owner. You're right, there's been a lot to keep up with over the past couple of years. It can be hard to keep track of it all. Expect more posts like this in the future :-) 

Feb 26, 2016 01:13 PM
Rose Mary Justice
Synergy Realty Pros - Dandridge, TN
Synergy Realty Pros

A number of changes for sure. It takes experience to keep up with the rules. A good post to keep us on our toes.

Feb 26, 2016 10:25 AM
MadisonMortgageGuys .com

Yes, so many changes indeed Rose Mary Justice. Keeping everyone informed is key and we hope to do that more as the year progresses. So stay on those toes, we've got more to come :-)

Feb 26, 2016 01:16 PM
Robin Hobbs
Front Gate Realty - Madison, MS

Thanks for all the helpful info. I just had a deal go south due to a buyer having deferred student loans in the amt of $70k! She had the score, but the change in this rule kicked it out.

Feb 26, 2016 01:26 PM
MadisonMortgageGuys .com

Robin Hobbs, it's crazy how many borrowers don't qualify now because of that one rule change. I'm not sure if you read the embedded article above about that, but Brad Yzermans did a wonderful job going into the details of the deferred student loan changes.

Feb 27, 2016 12:11 AM
Compass - La Jolla, CA
San Diego Partner - The Private Client Network

I wonder if investors will create even stricter overlays to these guidelines as many were already required by underwriters even though fha didn't have a guideline specifying.  

Feb 26, 2016 02:27 PM
MadisonMortgageGuys .com

Good point Joy Bender. I am willing to bet overlays already exist for some, if not all of these FHA guides. With so many lenders, it's hard to go into specific lender guides. 

Feb 27, 2016 12:18 AM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Thanks for sharing the new guidelines Inlanta Mortgage - Madison ....

Feb 26, 2016 03:19 PM
MadisonMortgageGuys .com

You're very welcome Praful Thakkar. Thanks for taking the time to check them out!

Feb 27, 2016 12:15 AM
Terry McCarley
Coastal Real Estate - Cape Coral FL - Cape Coral, FL

Great information and much deserved featured post!  Bookmarked for easy reference.

Feb 26, 2016 06:25 PM
MadisonMortgageGuys .com

Thanks you Terry McCarley!

Feb 27, 2016 12:19 AM
Kat Palmiotti
eXp Commercial, Referral Divison - Kalispell, MT
Helping your Montana dreams take root

Very useful information; thanks for sharing!

Feb 26, 2016 08:07 PM
MadisonMortgageGuys .com

You're very welcome, we're glad you found it useful Kat Palmiotti!

Feb 27, 2016 10:47 AM
Carol Tunis
Florida Homes Realty & Mortgage - Saint Augustine, FL
Carol Tunis...a "HouseSold" name!

Wow!  Thanks for the concise info!  It's greatly appreciated!

Feb 26, 2016 10:22 PM
MadisonMortgageGuys .com

Happy to share the FHA changes and updates Carol Tunis. Thanks for taking the time to look them over!

Feb 27, 2016 10:48 AM
Ron Aguilar
Gateway Mortgage Group - Saint George, UT
Mortgage & Real Estate Advisor since 1995

My favorite is Gift Funds. The Donor may cover up their information on the bank statements. Make sure they do not do this...

Feb 26, 2016 10:45 PM
MadisonMortgageGuys .com

Excellent reminder Ron Aguilar!  I've seen that happen a number of times over the years.  

Feb 27, 2016 10:50 AM
Elizabeth Weintraub Sacramento Broker
Elizabeth Anne Weintraub, Broker - Sacramento, CA
Put 40 years of experience to work for you

Wow, mortgage insurance for the term of the loan now? Guess there is more than one way to force borrowers to refinance.

Feb 27, 2016 11:04 AM
MadisonMortgageGuys .com

No one wants to see them collect mortgage insurance forever Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents. We just hope that changes back again in the near future. 

Feb 29, 2016 12:32 AM
Craig Cooper
Chase International Real Estate - Tahoe City, CA
Creating-Preserving-Growing Wealth in Real Estate

Thank you for the great information presented and this will have to be set up as a bookmark for further reference.

Feb 27, 2016 11:12 AM
MadisonMortgageGuys .com

A pleasure Craig Cooper. Thanks for the comp, we're happy you found it useful!

Feb 29, 2016 12:33 AM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Nothing like making it easier for home buyers.  We need to be making it easier for home buyers.  The problems that caused the last crash are not present at this time and they are being overly cautious.  

Feb 29, 2016 06:41 AM
MadisonMortgageGuys .com

I can't disagree Gene Riemenschneider. Although we certainly don't want to go back to the way it was. The happy medium needs to be found!

Feb 29, 2016 11:11 PM
Michael Kaim
Berkshire Hathaway HomeServices Professional Realty - Mentor, OH
Real Estate team serving the Cleveland Area

Great information, thanks for sharing Inlanta Mortgage - Madison 

Mar 01, 2016 09:55 AM
MadisonMortgageGuys .com

Thank you Michael Kaim. I appreciate the comp and the follow!

Mar 02, 2016 01:00 PM
Gary L. Waters Broker Associate, Bucci Realty
Bucci Realty, Inc. - Melbourne, FL
Eighteen Years Experience in Brevard County

Interesting information. Thanks for the update.  I don't stay on top of these mortgage changes as much as I should. 

Mar 10, 2016 04:14 AM
MadisonMortgageGuys .com

You're welcome Gary L. Waters, Broker Owner, Waters Realty of Brevard, LLC. It can be helpful to stay up to date on guidelines. Stay tuned as we hope to do this more often. 

Mar 10, 2016 11:21 PM
Elizabeth R. Elstien

Appreciate the detailed info.

Jun 19, 2016 04:38 PM
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • GRI • HAFA • PSC Calabasas CA

I'm afraid they are about to be changed again..... 

Would you update us on the recent FHA guidelines? Thank you.

Mar 11, 2017 08:13 PM
MadisonMortgageGuys .com

Let me see what I can find out Inna Ivchenko. I don't recall seeing any updates lately but maybe I just missed them.  

Mar 14, 2017 05:49 PM
MadisonMortgageGuys .com
MadisonMortgageGuys - Oconomowoc, WI
Your local mortgage company serving 47 states!

After speaking with the branch manager (who is also a Loan Officer) and looking through HUD's mortgagee letters, I was unable to come up with any big changes since this post was written. 

Infact, this post is still very relevant today in terms of FHA mortgage guidelines.

I am wondering if what you are seeing is more of a lender overlay vs an actualy FHA guideline change

Hope that helps and I'll be keeping my eye out for new updates to keep this post fresh.

Thanks Inna Ivchenko!

May 08, 2017 09:31 AM