Written By: Glenn Michaels, Op-Ed Contributor
In 2013 the United States Department of Housing and Urban Development (HUD) put forth several mortgagee letters how to treat borrowers that were out of work and now back to work.
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These mortgagee letters changed the way FHA DE Underwriters look at credit for borrowers that were out of work and now back to work. The way we look at applicants that had a Chapter 7 bankruptcy, foreclosure, judgments, collections, and credit disputes
Judgments always had to be paid off at or before closing. Now, if a borrower has a judgment in a payment plan at least six (6) months prior to the mortgage loan application and the payment plan is being paid as agreed the judgment does not have to be satisfied at or before the closing. The monthly payment must be counted in the qualifying ratios. If the monthly payment increases the qualifying ratios to an unacceptable amount then the judgment will have to be satisfied to obtain the FHA financed mortgage.
Foreclosures always required a three (3) year wait prior to obtaining another mortgage with FHA financing. Now, if the borrower can furnish proof that they were out of work and that was the prime reason that they went into foreclosure, they need to wait only one (1) year.
FHA never required collection accounts to paid off. Now there is a cumulative amount of collection accounts to keep your eye open for. If a borrower has $2,000.00 or more in cumulative collections the FHA underwriter must conduct a capacity analysis. Recently I had a loan with more than $3,600.00 of unpaid or unresolved collection items on their credit report. The capacity analysis required a five (5) percent payment of the collection items if the cumulative total exceeds $2,000.00. The capacity allowance with the collection accounts has to still qualify the mortgage. If the borrower does not qualify doing the capacity analysis then pay off collection items to show less than $2,000.00 cumulative collections so the capacity analysis is no longer required.
Disputed items and charge offs do not impact a borrower’s credit score. A borrower with a cumulative total of $1,000.00 or more in cumulative disputed items will not impact the credit score and the file may be downgraded to a “refer” or “caution” by DU/LP with TOTAL Scorecard.
Manual underwriting rules also recently changed. Mortgagee Letter 2014 – 02 gives underwriters the rules how to handle manual underwriting. When reviewing ML 2014 – 02 make sure you know the compensating factors allowed for a loan file that is going to be manually underwritten. Make sure you know that the maximum qualifying ratios are spelled out in the mortgagee letter along with the number of compensating factors required.
In ML 2014 – 02 HUD adopted a new compensating factor, called Residual Income Calculation. This calculation has been used for years by the Veterans Administration (VA) and this is based on the geographic area of the property and the number of family members. So far I have not had one (1) FHA applicant that was manually underwritten has passed this calculation to use as a compensating factor.
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Underwriters beware of these changes and others. If you do not always have access to the FHA Connection go to www.fha.gov then go to “resources” and click mortgagee letters.
About The Author
Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
