In analyzing a borrower's credit and applying the fha credit requirement, past credit performance serves as the most useful guide in determining the attitude toward credit obligations. A borrower who has made payments on previous or current obligations in a timely manner represents a reduced risk. Conversely, if the credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, strong compensating factors will be necessary to approve the loan.
When an underwriter looks at a borrower's Fico Scores/Reports , it is the overall pattern of credit behavior that must be examined rather than isolated occurrences of unsatisfactory or slow payments causing bad credit. If a borrower had a period of financial difficulty in the past, this does not necessarily mean that the loan will be denied, particularly if a good payment record has been maintained since.
When bad credit accounts are revealed, the underwriter is looking to determine if the cause of the late payments is due to financial mismanagement or extenuating circumstances. There is a big difference between these two items which will be discussed later
Most underwriters will ignore minor derogatory information occurring two or more years ago. However, major indications of derogatory credit, including judgments and collections, and any other recent credit problems, require sufficient written explanation from the borrower. The borrower's explanation must make sense and be consistent with other credit information in the file. Underwriters will look very closely to make sure that all dates correspond to the explanation
The basic hierarchy of credit evaluation is the manner of payments made on previous housing expenses, including utilities, followed by the payment history of installment debts then revolving accounts.
Generally, an individual with no late housing or installment debt payments should be considered as having an acceptable credit history unless there is major derogatory credit on his or her revolving accounts.
CREDIT SCORES: Borrower's who are applying for a FHA mortgage do not need to have a certain minimum Get Your Equifax Credit Report Now! In fact HUD does not impose any minimum credit score standards. While some lenders may impose minimum Get Your Equifax Credit Report Now! this is not and FHA requirement and is a lenders choice in order for them to minimize their risk of potentially problematic loans. Fico Scores/Reports while not perfect do give an indication of the borrower's credit history. Borrowers with Fico Scores/Reports above 620 will generally be able to get approved through the use of automated underwriting engines. Borrowers with Fico Scores/Reports below 620 may not get approved through the automated engines and have to go through a manual underwriting process. Manual underwriting usually takes a few extra days and a little more documentation. Once again it will be the overall pattern of credit that will be evaluated.
HUD recognizes that some borrowers may not have as yet established a credit history. For those borrowers, and those who do not use traditional credit, the lender will try and develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means. Neither the lack of credit history nor the borrower's decision not to use credit may be used as a basis for rejection. In trying to establish credit a borrower may consider applying for a secured credit or debit cards or rebuilding their credit history.
CONSUMER CREDIT: Borrower's with accounts that were 60 days or more past due in the last 12 months will greatly reduce their chances of being approved, unless they have a solid explanation and other compensating factors. Borrowers with isolated 30 day late payments should be able to be approved provided the rest of their accounts are paid satisfactory.
COLLECTIONS & JUDGMENTS: HUD does not always require that collection accounts be paid off as a condition for loan approval. Most underwriters will also not consider medical collection in their overall evaluation. Especially if the other credit of the borrower is satisfactory and the collection are not extremely large. They will almost always require that court-ordered judgments be paid-off before the mortgage loan may fund. (An exception may be made if the borrower has been making regular and timely payments on the judgment and the creditor is willing to subordinate that judgment to the insured mortgage.) Previous or current collections of judgments are considered when evaluating a borrower's credit profile.
PREVIOUS MORTGAGE FORECLOSURE: A borrower whose previous residence or other real property was foreclosed on or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an insured mortgage. However, if the foreclosure of the borrower's principal residence was the result of extenuating circumstances beyond the borrower's control and the borrower has since established good credit, an exception may be granted.
Extenuating circumstances do not include the ability to sell a house when transferring from one area to another or divorce.
BANKRUPTCY - CHAPTER 7 LIQUIDATION: A bankruptcy (Chapter 7 liquidation) will not disqualify the borrower if at least two years have passed since the bankruptcy was discharged and the borrower has re-established good credit (or has chosen not to incur new credit obligations), and has demonstrated an ability to manage financial affairs. An elapsed period of less than two years (but not less than twelve months) may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited an ability to manage financial affairs and the borrower's current situation is such that the events leading to the bankruptcy are not likely to recur.
BANKRUPTCY - CHAPTER 13: A borrower paying off debts under Chapter 13 of the Bankruptcy Act may qualify if one year of the pay-out period has elapsed and performance has been satisfactory. The borrower must also receive court approval to enter into the mortgage transaction.
NON-PURCHASING SPOUSE: If a married borrower is purchasing a property by himself/herself, the credit obligations of the spouse must be included with the application and will be factored in with the borrower's credit obligations and used to determine the financial capacity of the borrower only if the borrower lives in a community property state. Furthermore, the non-purchasing spouse may be required to sign a security instrument or documentation relinquishing all rights to the property
CREDIT ELIGIBILITY REQUIREMENTS: In addition to the credit analysis described above, a borrower must be rejected for any of the following reasons:
A) Suspensions and debarments. A borrower suspended, debarred, or otherwise excluded from participation in the Department's programs is not eligible for a FHA-insured mortgage. The lender will examine HUD's Limited Denial of Participation (LDP) List" and the government wide General Services Administration's (GSA) "List of Parties Excluded from Federal Procurement or Nonprocurement Programs". If the name of any party to the transaction appears on either list, the application is not eligible for mortgage insurance. (An exception may be made when a seller appears on the LDP list and the property being sold is the seller's principal residence.)
B) Delinquent Federal debts: If the borrower is presently delinquent on any Federal debt (e.g., VA-guaranteed mortgage, Title I loan, Federal student loan, Small Business Administration loan, delinquent Federal taxes, etc.) or has a lien, including taxes, placed against his or her property for a debt owed to the United States, the borrower is not eligible until the delinquent account is brought current, paid or otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing. Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA insured mortgage and, if any regular payments are to be made, they are included in the qualifying ratios. Tax liens may be eligible for inclusion in a refinance in some cases.
C) Credit Alert Interactive Voice Response System (CAIVRS): Lenders must screen all borrowers using CAIVRS (except on streamline refinances). If CAIVRS indicates the borrower is presently delinquent or has had a claim paid within the previous three years on a loan made or insured by HUD on his or her behalf, the borrower is not eligible. Exceptions to this may be granted under the following situations:
1)Assumptions: If the borrower sold the property, with or without a release of liability, to a mortgagor who subsequently defaulted and it can be established that the loan was not in default at the time of assumption, the borrower is eligible.
2)Divorce: A borrower may be eligible if the divorce decree or legal separation agreement awarded the property and responsibility for payment to the former spouse. However, if a claim was paid on a mortgage in default at the time of the divorce, the borrower is not eligible.
3)Bankruptcy: When the property was included in a bankruptcy that was caused by circumstances beyond the borrower's control (such as the death of the principal wage earner or serious long-term uninsured illness, etc.), the borrower may be eligible.
CO-SIGNED LOANS: Also know as contingent liability, exists when an individual would be held responsible for payment of a debt should another party jointly or severally obligated default on that payment. Unless the borrower can provide conclusive evidence that there is no possibility the debt holder will pursue debt collection against him or her should the other party default, the following rules regarding contingent liability apply:
1)Mortgage Assumptions: When a mortgage applicant remains obligated on an outstanding FHA-insured, VA-guaranteed, or conventional mortgage secured by a property which has been sold or traded within the last twelve months without a release of liability, or is to be sold on assumption without a release of liability being obtained, contingent liability must be considered unless:
A) The originating lender of the mortgage being underwritten obtains from the servicer of the loan assumed a payment history showing that mortgage has been current during the previous 12 months; or, b)An appraisal or closing statement from the sale of the property supports a value that results in a 75 percent loan-to-value ratio.
2)Co-signed obligations: If the individual applying for a FHA insured mortgage is a cosigner or otherwise co-obligated on a car loan, student load, or any other obligation including a mortgage, contingent liability applies unless the lender obtains documentation that the primary obligor has been making payments on a regular basis and does not have a history of delinquent payments on the loan over the past twelve months.
FUTURE OBLIGATION: If a debt payment, such as a student loan, is scheduled to begin within twelve months of the mortgage loan closing, the underwriter will include the anticipated monthly obligation in the underwriting analysis unless the borrower can provide evidence that the debt may be deferred to a period outside this timeframe.
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