FHA Rule Changes for 2014: MIP, Debt Ratios and More

Reader question: “I have purchased a home before, but it was with a conventional home loan. So I’m not very familiar with the FHA program. I am planning to purchase a home in 2014 and would like to use an FHA loan to reduce my upfront costs (smaller down payment). In doing research, I’ve encountered quite a few stories about new FHA rules for 2014. Does that mean all of the current rules will be replaced next year? Is there a list somewhere of the new guidelines that will be used in 2014? I just don’t want to read a bunch of outdated information, or go into the process more confused than I am now.”

Actually, most of the FHA rules that were in place in 2013 have been carried over to this year. HUD made several changes to the program over the last 12 - 18 months. These changes will apply to mortgages originated in 2014, as well.

Biggest FHA Change: MIP Cancellation Policy

One of the biggest FHA changes for 2014 is the revised MIP cancellation policy. Going forward, most borrowers who use this program will have to pay their mortgage insurance premiums (MIP) for the life of the loan — or until they sell or refinance. Previously, borrowers could cancel MIP when their loan-to-value (LTV) ratio reached a certain level.

This is a big deal, when you consider that the annual MIP can be anywhere from 0.45% to 1.55% of the base loan amount. (It varies based on the size of the loan and the term or length.) You can download our FHA handbook if you want to learn more about this and other FHA rule changes for 2014.

Rule Change Regarding Credit Scores, Debt Ratios

There was another rule introduced for borrowers with credit scores below 620 and debt-to-income ratios above 43%. Borrowers in this “zone” must undergo a more thorough underwriting process. This creates another obstacle to approval, and could even shut out some borrowers who might have qualified before this rule change went into effect. See Mortgagee Letter 2013-05 for more on this one.

Another big FHA rule change for 2014 has to do with another mortgage-lending rule, known as the Qualified Mortgage or QM. The QM rule went into effect on January 10, 2014. It eliminates certain risky loan features, like balloon payments. It also requires borrowers to have a debt-to-income ratio no greater than 43% (there’s that number again). HUD recently stated that they will apply the QM rule definition to FHA loans in 2014. So it seems to be setting the bar for all mortgages across the board.

If you really want to get into the nitty-gritty of FHA rule changes for 2014, I recommend reading through HUD Handbook 4155.1. There are several sections that explain the basic eligibility requirements for borrowers. Whenever HUD makes a change, addition or revision to this program, they issue a “Mortgagee Letter” to update lenders. If you do a Google search for “Mortgagee Letters,” you’ll find all of the recent FHA changes for 2014 (as well as an archive of letters from past years).

Also, don’t hesitate to speak to an HUD-approved mortgage lender. They will be able to answer all of your questions, and can explain how these rule changes might affect you when you apply for an FHA-insured home loan.