New FHA Handbook and Rental History

New FHA Handbook and Rental History

All week major news outlets (ex: The AtlanticBloombergWashington Post) have covered the rental crisis happening in our nation. It’s reported that by 2025, over 13 million people will spend more than 50 percent of their salary on rent. That is a crisis.

Why does this matter to you?

Lenders have guideline on how much income a buyer can spend on housing (principle, interest, taxes, insurance and HOA). This is known as front-end ratio (read more here).

For FHA loans, popular among first-time homebuyers, the ratio is 31% of the person’s salary. As mortgage lenders, we have a responsibility to ensure our clients make their mortgage payments every month. But if a client already spends half of his/her income on rent, a home loan doesn’t seem possible.

I want to also note that with the new FHA handbook, the lender must determine rental history for the most recent 12-month period.

What does this mean for millennials who live at home? The lender must still obtain verification from the property owner to prove the buyer lives rent free.