July 11, 2022
During the global COVID-19 pandemic, many house hunters experienced a loss of income because of coronavirus-related employment gaps, job losses, and similar financial hardship. When you are applying for a mortgage loan, late and missed payments can have a negative effect on your ability to find an affordable home loan.
There were many forms of relief for COVID-19-related economic hardship, but as the fallout from COVID continues, it’s clear that some additional measures are needed.
That’s one likely reason the FHA has announced updated COVID-19 credit qualifying guidelines for borrowers trying to buy a home with an FHA mortgage.
In early July 2022 the FHA announced new guidelines for participating FHA lenders. These new guidelines permit more flexibility for the lender when qualifying a borrower who may have income or employment gaps as described above.
According to the FHA, “salaried and hourly wage-earners, as well as self-employed individuals” who were affected by the pandemic who can now show stability in their income may have a better chance at loan approval according to a press release published on the FHA official site.
“The changes we are announcing today further our efforts to facilitate recovery from COVID-19 and support access to homeownership, particularly for populations most deeply impacted by the pandemic,” said Federal Housing Commissioner Julia Gordon, who was quoted in the press release.
Gordon adds, “The pandemic affected the livelihoods of tens of millions of workers in this country, particularly workers of color and those at the lower end of the wage scale.”
“Limiting these families’ homeownership opportunities because of the unavoidable impacts of an unprecedented global health crisis, when they are otherwise well-qualified for a mortgage, is unnecessary and contrary to this Administration’s goals and FHA’s mission.”
What are the new guidelines? That will depend on a few variables but in essence, the FHA Lender’s Handbook has been updated to include specific instructions to lenders who need to verify a borrower’s income.
For example, a borrower who earns an hourly wage is typically required to provide the lender with two years’ worth of income information, and in cases where there was a pay raise the lender can use the most recent 12-month pay average.
The Lender’s Handbook has been updated to include an exception for a “COVID-19 Related Economic Event” and now says; the lender is permitted to use “the current hourly rate” instead of the average mentioned above.
In cases where the applicant is paid a steady wage but does not have predictable hours, the lender is required to use the lesser of the average income earned since the COVID-19-related event or the average of the income earned for a year to two years leading up to the economic event.
What is a COVID-19-related economic event? In the FHA’s view, it is a “temporary loss of employment, temporary reduction of income or temporary reduction of hours worked during the Presidentially Declared COVID-19 National Emergency.”
There are new guidelines for salaried and non-salaried employees as well as for those employed full-time or part-time, self-employed borrowers, and others. These new policies may be used by participating lenders now if they so choose but the new rules must be used no later than September 5, 2022.