FHA Credit -- Understanding what works

By
Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

credit

Piecing together your credit can sometimes be confusing. That's why you should always seek a qualified loan officer that is a FHA Expert.

In all honesty, credit is not as difficult as it may seem and FHA has made it easier for you to qualify for your dream home. There are just some important facts that the average consumer needs to know.

Several key facts :

  • You don't need credit scores. No minimum credit scores.
  • Non-traditional credit can be used. 
  • Very flexible on credit issues when it comes to collections, charge-offs, judgment, and even liens.

What an underwriter looks for usually is good established credit in the last 12 months. This is not written in stone, but definitely helps. The beauty about FHA loans is the fact that your credit could be less than perfect less than 12 months while purchasing a house. It comes down to the reasons why and a make sense approach. We understand that things happen in life. But they do need to be documented.

 

 
Great assets of a FHA mortgage and the credit requirements

  • A Chapter 7 bankruptcy (liquidation) needs to be 2 years old from date of discharge. Less than 2 years depending on extenuating circumstances.
  • A Ch 13 can be 12 months out of bankruptcy while in repayment (not discharged), as long as you can show 12 months of payments on time.
  • Usually want to see reestablished credit with no lates after a bankruptcy. But the best part of this is that the underwriter at his or her discretion can overturn the time frame of a bankruptcy depending on if the circumstances were out of your control.

                    -- Death in the family

                    -- Loss of job(s)

                    -- Sometimes divorce --  not always, depending on the circumstances.

  • Consumer Credit Counseling -- sometimes viewed the same way as a Ch. 13 bankruptcy, guidelines are similar. The lender needs to see a 12-month payment history from the credit-counseling agency showing satisfactory payments and a letter from agency saying that the loan will not adversely affect the applicant's ability to repay current debts.
  • Foreclosure -- Generally 3 years must have passed. But the catch here is, we don't use the date when you went into foreclosure. It's 3 years from the date that the house was sold after it went into foreclosure. This is on HUD insured loans. There are extenuating circumstances and exceptions that can be made.
  • Delinquency or Default on Federal debt -- This seems to be overlooked by many loan officers. You can not obtain a FHA loan if delinquent or obligated on any type of federal lien. ie. school loans, etc.  The account would need to be brought current, paid, or otherwise satisfied. And a payment plan is satisfactory as long as it's in writing and that you have established some payments on time. 

 

What happens if I have no credit at all?

We call this non-traditional credit. Here is a list of things that we could use. But we would need some type of proof.  And we usually want to show a 12 month payment history on letterhead from that agency, store, or company.

  • car insurance -- showing your monthly or quarterly payment, how long, never late, how much a month.
  • utility bills
  • cell phone bill
  • repayment of loans or past debt -- doctor bills, collection accounts, etc etc
  • store accounts and so much more....  anything that can be documented to show a credit history on paper



Unique credit traits of a FHA loan that conventional loans don't offer :

  • At the discretion of the underwriter, collection accounts and medical collections can be opened. More times or none though, collections outside of medical usually have to be paid off.
  • Many say that if you have a lien show up on credit, that it needs to be paid in full. It depends on the type of lien and if it doesn't show up on title. Example : If you have car repo that is now a lien on your credit, as long as you have a repayment agreement and have made at least 6 months of payments on time, this is acceptable.

 

SummaryFHA loans can be manually underwritten even if it comes back as a refer. As long as we can determine decent credit risk, several things can be overlooked. But we would need compensating factors. 2 months reserves is usually a big one. There are others.

 

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

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Rainer
50,858
Patsy Ittner, Your Premier Broker Selling St. Augustine Real Estate
Little Fox Realty - Saint Augustine, FL
This is a very comprehensive and illuminating post.  Thanks.  But I'm wondering, have things changed any since you wrote it in July?  The news is so bad about mortgages, and I'm wondering if FHA is followings suit. 
Aug 28, 2007 07:21 AM #36
Rainer
37,448
Aaron Gordon
Branch Manager - Las Vegas, NV
Home Loan Consultant - Las Vegas, NV

Jeff--- Great post!!

What about mortgage lates?  I saw a post on another blog where the guy said he got an FHA approval on a loan with 2x30. 

Could the overall strength of the file get the underwriter to ignore a 2x30 in your opinion??

Thanks!

Sep 02, 2007 05:11 AM #37
Rainer
44,384
John Popp
Charlotte, NC
Jeff, another good post - LOs and realtors do need to understand FHA
Sep 02, 2007 05:58 AM #38
Ambassador
746,389
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

J.R.......  thanks for the compliment and hopefully more to follow.

Valerie.....  I totally agree 110%....  not everyone can do FHA and in my opinion, they aren't doing their clients any service. If you can't do their loan conventional, then their only option is subprime. And yes, I so can't wait until they raise their loan amounts.

James..... my pleasure. Thanks for stopping by and for the comments.

Patsy....  no, things haven't really changed in July. Yes, there have been a lot of changes in the mortgage industry, but not with FHA. FHA is strong and kicking. Thanks for your polite comments.

Aaron.....  mortgage lates. I could still get a 2 x 30 in the last year, but it all comes down to the LTV, income ratios, compensating factors, possibly the fico score, possibly reserves as a 401-k plan, and the reason why they were late. And possibly the previous history.

What's great about FHA is that even if you get a refer eligible  by the computer system, it can still be manually underwritten.  And then it becomes the discretion of the underwriter. It's a beautiful thing. And thanks for the kind words.

John....   Loan officers need to understand this more than anyone. What's sad is that not all who even can do FHA know how to do it correctly. And some are just lazy and use their sales approach or sales techniques to sell broken promises.  thanks for the compliment.

Sep 02, 2007 06:43 AM #39
Rainer
1,408
Eric Sunsdahl
Citizens State Bank NYA - Norwood Young America, MN

Very nice post, great info. 

I work at a bank and we are getting it back here soon. I think this will be the future for all of us and will also help out a lot of customers that are getting burned now with subprime.

Sep 19, 2007 03:31 AM #40
Rainer
1,958
Valerie Van de Zilver
Zilver Realty Group - Irvine, CA

Jeff,

Is it correct that under the proposed "FHA Secure" guidelines lenders will no longer have to go through the "audit" process to become an FHA approved lender?  I was told by someone that under the new proposal, lenders will simply have to post a bond.

It makes me shudder, remembering all the mortgage companies that came into existence over the past few years when Dept. of Real Estate licensing was no longer required in California. 

Your thoughts?

Valerie

 

 

Sep 30, 2007 03:00 AM #41
Rainer
185,285
Matthew Rosov
Amerisave Mortgage Corporation - Laurel, MD
Certified Mortgage Planning Specialist
Jeff - thanks for shaing on FHA loans.  Look forward to hearing more advanced topics.
Oct 01, 2007 04:19 AM #42
Rainmaker
225,458
Tim Bradford
Cleveland, OH
NMLS 250013

Jeff,  

I submit my loans to DU and on a current loan, I believe DU is now applying a Credit Score Min.    If I look at the proposed MIP risked based premiums and the DU refer on this loan, it appears as if the 600 is the threashold for a REFER.   

My particular case has a 585 middle score, basically caused by a number of older medical collections.  My ratios are 25/39 and I have over 45,000 in reserves.   What do you think???    And, what ratios does the underwriter have to follow when approving a refer.     I have heard 29/41 and 33/43.    What have you heard???

Oct 05, 2007 02:37 AM #43
Ambassador
746,389
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Eric.....   this should have always been the first choice before subprime. But yes, for many, FHA is making a come back, but mostly because those subprime programs were deleted making other lenders seek other programs. Kind of sad, when FHA was the better choice to begin with....at least in my opinion.

 

Valerie..... I am not 100% sure on this. I have heard both sides of the stories. Not sure if some of it is rumor. I know that you can get a sponsor from other lenders or be a sponsor, but I am not sure how it works. All I know is that my company is fully approved with delegated underwriting, which is the best out there. We underwrite everything in-house.

The FHA secure should not be any different when it comes to underwriting and what companies can do it. Now, I know that you don't have to be FHA approved to do the Reverse mortgages. Maybe this is what you meant?

 

Matthew R. ....  my pleasure. I am just finishing a post up on APR, which should be interesting.

 

Tim......    a refer can be manually underwritten which is the beauty of FHA. The ratios were raised many years ago to 31/43. The underwriter can make any decision as they want, as long as they can simply justify why. My first question would be in regards to the credit. Do they have 3 to 4 tradelines older than 12 months?  A rental history?  And how long of a job history. But with your ratios and the cash reserves and with some credit, this would be easily approved in my opinion. 

I know some of my competitors companies won't go below a 600. We will go down to a 500, because of our investors who we sell to. Hope this helps some. 

Oct 05, 2007 02:50 AM #44
Rainmaker
225,458
Tim Bradford
Cleveland, OH
NMLS 250013

Jeff, 

I can get the underwriter's approval. 

Here are the details. 99 month perfect history on Mobile Home, 41 month perfect history on Car loan., 93 month perfect history on JCP account.   and a number of other older accounts PAA.    Did have CC with his wife that did go delq in 2003 that had a balance of 5,000.    Credit bureau has not updated since that time, but the borrower did pay off the account 6 months ago.     Maybe the larger charge off was the reason for the REFER.    But I did ask one of my processors and she said she has been getting more REFER than in the past.     That is why I thru on the table the that DU might have started a Min Score requirement for automated approval.  

Oct 05, 2007 03:02 AM #45
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Tim... they change and or tweak the FHA system or DU system off and on. I am sure if will be tweaked more this year than any year because of what has happened in the market place. That is the beauty about having an FHA underwriter in-house that you can go to. And if you know most of what you can do prior to underwriting, this should always be beneficial to you and your clients. It's those that make promises on not knowing what they can do and then the underwriter denies the loan. 

Overall, it sounds like your have a very sellable  loan.  thanks

Oct 05, 2007 03:36 AM #46
Rainmaker
291,056
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing
Jeff, as usual great information.  How will the proposed FHA guidelines that indicate minimum credit scores change this.  The lenders that I've worked with here in California are very credit score driven, even for FHA loans.  In some ways, isn't the final underwriting investor driven because they don't want to lose their FHA underwriting ability?
Oct 05, 2007 03:58 AM #47
Rainer
34,635
Carl Pruitt
FHA Loan Advice - Buford, GA
http://FHALoanAdvice.com

The minimum credit scores are still far below what would possibly pass on a conventional loan. It is a good idea to price extra risk into the MIP because it will help make sure that the program remains solvent. I am a little worried that they will not fix the LTV issues which show up on the new schedule. Namely, requiring 5% down from borrowers with no credit score. I feel this will unnecessarily block out some deserving first time buyers and have sent a comment on this to HUD. (Although I do remember doing a lot of FHA loans when the down payment required was 5% minus $500 to use the quick formula)

I know the traditional line of thinking is that 100% financing is too risky, but I think that is primarily a subprime issue. FHA loans put a lot of emphasis on job stability and income that was never there on subprime loans, so I believe that going to 100% without having the increased sales prices generated by the down payment assistance programs would not be unnecessarily risky. We really don't need to make FHA into the "new sub-prime" as people say. There is a difference in that FHA underwriting requires common sense underwriting. The underwriters look at the patterns in people's credit reports and consider the explanations. They don't just arbitrarily overlook everything that happened before the last 12 months the way subprime lenders used to.

Oct 10, 2007 02:43 PM #48
Ambassador
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Kate....  As far as I know, FHA still has no credit score requirements. Sure, there have been some proposed changes for next year. As it stands right now, many investors won't buy loans with credit scores under 500. I know a few lenders that won't do a FHA loan under 600. That I think is ridiculous. One of FHA's requirements is to have decent to a good credit history in the last 12 months. You could have had bad credit previous to this which would have lowered your credit scores. 

What are your minimum credit scores that the investors are looking for? In regards to what underwriters want and will take?  We underwrite our own FHA loans so I don't have to rely on an investor. We will take some risks, but being careful that we don't jeopardize our FHA license. ... our FHA DE...  delegate underwriting.

 

Carl.... yes, credit scores can be lower on a FHA loan than a conventional loan... usually. There are still some factors that a a loan approved FHA could still be approved conventionally, which a lower score. It can depend on the LTV or debt to income rations... assets can play a large roll also.

I do agree that no credit scores which would then make the client put 5% down, could hurt the whole FHA movement. Hopefully they can tweak this. In all honesty, I haven't really looked at the new propose changes yet, which I will do this weekend. 

Overall, I agree, there is more emphasis placed on job stability and income that subprime does not look at as much. Which is why I love FHA because of the common sense underwriting and not just go by a matrix. But there is a lot of fear in today's market place because of what subprime loans were approved which has put fear into HUD and FHA. There is some correction taking place, but hopefully it won't hurt us that much. Time will tell...

Oct 12, 2007 08:02 AM #49
Rainmaker
120,857
Richard Sweum
1st Security Bank - Everett, WA

Great Stuff Jeff.  What I have found, and I shared this on another post, is that some LO's toss around "manual underwriting" like it will solve all the ills of a refer.  Essentially, using it as a marketing ploy. 

Your post was very informative and posts like this go a long way to clarifying FHA loans for R's and newer LO's.

Thanks!

Oct 12, 2007 03:28 PM #50
Rainer
180
Scott Jones
MEDIAFAM - Kingwood, TX

Jeff Great Stuff.

I heard from a broker today that investors are ditching the 203ks.

Have you heard anything about this?

I know the paperwork is a killer but its a good program.(Especially the Streamline 203K's)

I think if the reform bill passes you will be Very Busy! 

 

 

Oct 13, 2007 03:11 PM #51
Rainer
8,329
Scot Rife
A Major U.S. Bank - Springboro, OH
Way to simplify the complicated!
Nov 22, 2007 12:22 AM #52
Rainer
10,964
Ronald Miller
Monarch Mortgage - Fredericksburg, VA

Hello Jeff,

I am new to the Active Rain Community and came across your group and am vary impressed with the content. I too am a big fan of the FHA program and find it works well for the good and bad credit consumers. Just about every time I meet with a client my first thoughts are can this work through FHA. In my market place with the rising gas prices and lack of consumer confidence, consumers are in no hurry to let go of their hard earned cash due to a vary uncertain economy, which adds even more value to FHA. Keep up the good work.

Ron

Nov 22, 2007 12:38 AM #53
Ambassador
746,389
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

RICH.......  you make a great point about how some loans officers do throw manual underwriting around. I am working on one deal to where another lender had it first and the loan officer said the loan will not be a problem. It was a problem and they didn't close the loan.

Thanks for the compliments and that you enjoyed this. 

SCOTT J. ...... I have not heard a thing about this as of yet. There are 2 types of 203-ks and it's a great way to get a buyer into a home that needs some work done, or rehabbing the home.  I honestly don't see this program going anywhere. I would love to know where that broker got their information from.

SCOTT R. ..... thanks.... 

RONALD......  welcome to Active Rain and thanks for the kind words. FHA will always be there. It was just amazing on how many ran away from this, especially when so many started selling subprime. SAD... you make some good points. Thanks for your input and feedback.

Nov 22, 2007 03:47 AM #54
Rainmaker
72,619
John Jones
Briggs Freeman Sotheby's International Realty - Dallas, TX

good post.  there are many lenders that are starting to change their requirements on borrowers with no credit score, but FHA is still OK with it. 

Oct 13, 2008 10:17 AM #55
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