Written By: Glenn Michaels, Op-Ed Contributor
Anyone that has been in the mortgage industry for a long while remembers the “wild west” of mortgage lending. During this time we had all kinds of exotic mortgage programs. Literally, if a prospective borrower had a body pulse he was able to purchase a home.
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The so called, “mortgage meltdown” came and went destroying numerous subprime mortgage lenders and numerous areas of the country suffered as well with declining real estate values. It got to a point where people were “underwater” on their mortgage.
The Qualifying Mortgage (QM) programs were good for borrowers that could provide evidence of their income and assets and show a good credit profile along with good collateral. Borrowers that were in cash businesses or in business that report to the United States Department of the Treasury’s Internal Revenue Service (IRS) far less than what they were actually earning. The QM products for the most part eliminated the stated income, and no income check programs. The self – employed borrower in order to purchase a home now has to show more income to the IRS or they could not obtain mortgage financing.
The so called “wild west” of mortgage financing is back. There are institutional investors out there if you look that have non – QM mortgage loan programs. These institutional investors will allow a borrower to obtain mortgage financing with less documentation. Some of the institutional investors allow one (1) year tax return, some allow a year of bank statements and more alternative programs.
The FHA is allowing borrowers to qualify purchasing a home with a credit score as low as 500. The FHA is the subprime of today. During the subprime phase of mortgage lending mortgage products were designed for borrowers with lower credit scores for a price or rate adjustment due to the risk. This was also known as “risked based pricing.” The riskier the loan more funds had to be put down and there was an adjustment in the rate and price.
The FHA allows a borrower to purchase a home with credit scores as low as 500 if your warehouse bank and institutional investor will allow you to finance these borrowers and to purchase these loans. The FHA and some institutional investors will with 10% down allow FHA financing for borrowers with credit scores between 500 and 579. Borrowers that have credit scores of 580 or more can put 3 ½% down. Borrowers that have lower credit scores will often when put through an Automated Underwriting System (AUS) will often receive a “REFER” or a “CAUTION” and now the loan must be manually underwritten.
FHA loans manually underwritten must be underwritten in accordance to Mortgagee Letter 2014 – 02. If the Direct Endorsed (DE) Underwriter believes that the borrower meets the FHA requirements and any or all issues are all in the past or resolved and the DE can get the borrowers “housing to income” (HTI) and their “debt to income” (DTI) within the restraints of the Mortgagee Letter 2014 – 02 and have compensating factors as outlined in Mortgagee Letter 2014 – 02 you have a FHA mortgage loan.
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Individuals with low credit scores had some kind of credit issue that impacted their credit. If the credit problem or issue was resolved and their credit score is 500 or more they may be able to obtain FHA financing if their income and liabilities are in line with Mortgagee Letter 2014 – 02.
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.
