November 28, 2022
FHA home loans are often misunderstood. Some think they are need-based loans like some offered via the USDA program, while others believe FHA mortgages can only be approved for first-time home buyers.
Typically, we write that FHA mortgages do not actually offer extra perks for first-time buyers, but there is a new exception to that notion you should know about.
What kind of exception?
In 2022, HUD made a policy change and issued a mortgagee letter announcing that in 2022 the FHA would allow participating lenders to consider positive rental history as a factor in home loan approval.
Typically, such rental verification is not a part of most credit reports provided for FHA-insured products that require credit approval and “when provided,” rental verification, “generally exists as separate documentation” the lender may decide to consider.
HUD will allow postive rental history thanks in part due to housing market studies that show borrowers with good rental history “may represent lower credit risk” and may show an improvement in credit scores if that were included in the factors making up those scores according to the HUD official site.
Doing may give the lender a “more complete” credit picture for the FHA borrower.
There are some things to know about this rental history option. For example, you must meet the FHA requirements for being a first-time home buyer.
That means either you never owned a home before or have not owned a home in the last three years. In other areas, FHA loans do not offer an advantage for the first-time home buyer but where positive rental history goes there IS an advantage for the borrower.
And what does the FHA require from that positive rental history itself?
HUD 4000.1, the FHA Single Family Lender’s Handbook, has been updated with the most current FHA loan policy, which includes this:
“Positive Rental Payment History refers to the on-time payment by a borrower of all rental payments in the previous 12 months. A rental payment is considered to be on time when it is paid within the month due.”
Additional requirements include a rule that the transaction must be a purchase loan, it must include one borrower identified as a first-time home buyer, and the minimum FICO score is 620 in order for rental history to be included.
Furthermore, rental payments must have been made for a minimum of $300 or more for the last 12 months.
Make an appointment with a participating FHA loan officer if you meet these requirements and want to know how the new rental payment rules may affect your transaction.