FHA Credit Guidelines

Qualifying Ratios:

31%/43% of gross income. The underwriter will have to thoroughly document two compensating factors, as specified by HUD guidelines, when there is justification for exceeding standard qualifying ratios.

Loan must be re-underwritten if interest rate increases over that on underwriting approval by more than 1% or if discount point(s) increase at all. Re-underwriting will include a mortgage credit analysis worksheet and a new application.

Cash Reserves: 3 month reserves required on 3-4 family properties (no gifts allowed)

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Credit History:

An Automated System or an FHA Underwriter will thoroughly review the borrower’s most recent 2-year credit history. The borrower will be evaluated based on how well they paid their debts as agreed. The findings can be applied as conditions, if the file is accepted by AUS. For manual underwriting, the FHA Underwriter will have to consider compensating factors and risk to underwrite a Borrower who has not established any credit yet or override an Automated System referral.

If the borrower not established any credit, the Lender will have to create a credit profile from other sources such as utility bills, rental payments, rent, etc. The manner the payments are made on is the basic hierarchy.

· Installment debts should verify no late payments in the last 12 months. With 10 months or more remaining in the debt ratio, count the monthly payment of all the debts. If a debt should be paid off earlier than 10 months, but the payment is over 2% of the monthly gross income of the borrower, the ratio should reflect this debt and be evaluated accordingly in the credit decision.
· Rental payments should have no cancelled checks to cover the past 12 months rent and no late payments or direct verification.
· Utilities- has to be verified the same as rental payments.
· Revolving accounts, including store accounts, has to be evaluated case by case. Acquire a copy of the billing statement if the borrower pays less than the “rule of thumb” 5% of balance per month or use the monthly payment on the credit report.

Undisclosed Debt(s): A borrower has to address any debt that is shown on the credit report and was not disclosed on his/her application. Any item(s) on the credit report that occurred within the most recent 90 days will have to be explained and if new credit is opened it will have to be verified. The newly opened debt has to be verified to make certain it is not related to the Purchase (loan) transaction.

Alimony: It is acceptable to deduct the alimony payment amount from the Borrower’s income rather than include it in the ratio as a debt, because of the tax consequences of alimony payments.

Child Support: By acquiring a copy of the Support Order either through the court system or another legal avenue, the lender can verify the amount the Borrower has to pay. The lender also has to verify how long the Borrower has to make child support payments by recording the age of the child(ren). A Lender can think of child support or alimony as a recurring installment debt. Any payments that will remain to be paid for 10 months or more (or over 2% of the Borrower’s gross monthly income) will have to be included in the debt ratio.

Contingent Liability: The Borrower is held responsible for payment on a debt that he/she is together obligated to when the other party defaults payment, this is called contingent liability. If the Borrower can’t supply conclusive evidence that there is NO POSSIBILITY that the debt holder will pursue debt collection against him/her should the other party default, the following rule applies:

If the borrower remains obligated for the debt payment, and has not been removed from the payment liability, the Primary Obligor (the other “co-signing” party) has to furnish acceptable written documentation that he/she has made 100% of all the payments and all of them made on time without any of them being late for at least 12 months. If the other party can’t furnish the documents to show timely payments on the account, then the monthly payment will have to be included in the borrower’s debt to ratio.

Projected Obligations: If the Borrower has a debt payment that is scheduled to start repayment within the next 12 months of the first mortgage payment it will have to be considered in the debt ratio. (Examples: balloon payments, deferred student loans, etc.) The Lender will have to enter the expected or actual monthly payment, and include the debt ratio.

Debts NOT Included In Ratio: Unlike other loan types, FHA DOES NOT count 401k loan repayments as a monthly debt in the ratio. Others that are NOT included are: union dues, commuting costs, childcare and voluntary deductions through payroll. However, there are a few lenders that will consider 401k payments especially if they can show a pay-stub, this is called lender discretion.

Collections: FHA does NOT randomly require that all collections be paid off before the closing. The explanations for the collections and the way that the Borrower has handled the accounts will be evaluated on a case-by-case basis. Webster Bank set up the guideline that ALL collections will be paid in full prior to closing for MANUALLY underwritten loans. For those loans that have acquired an automated approval, the findings will determine the way in which the open collections are examined and resolved.

Open Judgments: Both automated and manual underwritings demand that all open judgments will be paid off in full and released from the land records before closing. Proof of account(s) satisfaction must be held in the loan file.

Previous Foreclosure: A Borrower will usually not be eligible for an FHA mortgage if a prior residence went into foreclosure, (or deed in lieu of foreclosure), within the most previous 3 years. The overall loan risk will be evaluated based on extenuating circumstances at the time of the foreclosure.

Bankruptcy:

Chapter 7: The Borrower should have discharged their bankruptcy 2 or more years prior to the loan application. The Borrower should have also re-established credit and had all recent credit accounts paid as agreed since the bankruptcy.

Chapter 13: The Borrower may have a chance to qualify with the bankruptcy being discharged. The Borrower will have to show at least 1 year of paying as court ordered through the Chapter 13 restructure. The court has to approve a new FHA loan transaction for the Borrower and will have to furnish them with a copy of the payment printout. Any debt outside the B/K has to show no late payments since the start of B/K.

Assets:

DU/LP findings may be applied to determine type of asset verification, if the file is underwritten though automation,

Files that are manually underwritten will require 2 months of the most recent bank statements for each account used in the transaction. Each statement will have to show ownership of the account and any of the activity on the account has to show beginning and ending balances that will cover 3 full months of an average balance. All large deposits will have to be recorded for the source of funds for the increase.

Any earnest money deposit(s) will have to be verified. The bank account used for the deposit(s) will have to show the balance before and after once the deposit(s) cleared.

Loan Amounts: All amounts on a FHA loan are rounded down to the nearest whole dollar ($1.00) increment.