FHA-Credit Changes

FHA’s Mortgagee Letters dated 2012 -3 stipulates the following:

• If the borrower on the transaction has disputed collection account (s), and the loan is approved by the AUS (Automated Underwriting System) HUD will not require the loan be referred to a Direct Endorsement Underwriter for recommendation as long as the collection are:  1) the total outstanding amount of the collection is less than $1000 and, 2) the disputed collection is greater than 2 years old.

• If the borrower has multiple disputed collection accounts and the aggregate of these are $1000 or greater;  payment arrangement must have been made and there must be a paper trail of having made the payments for the past three (3) months, or paid in full prior to, or at closing.  If there is a paper trail of payment arrangements; the payments for these accounts must be added in the borrower’s debt to income ratio (DTI).

FHA does not make paying off collections a condition of approval for a loan; but will not insure a loan with an outstanding court- ordered judgment.  FHA guidelines require that all court-ordered judgments be satisfied prior to or at closing.

Why add in the payments in the DTI (debt to income ratio) of a borrower on a disputed collection account in which there is an arrangement to make payments? 

Answer:  Most borrowers and especially first time home buyer sometimes have a tendency to want the house which provides them with everything they desire.  Without thinking about the consequences, of course. This includes all the amenities for good living, beauty, and conveniences.  That said; these buyers sometimes forget that their budget is already being stretched somewhat and monthly items such as utilities, food, car insurance, health insurance, clothing, and medical bills are not included in their debt to income ratios.  If there is a collection with a payment; it can throw the debt to income ratio out of bounds, and could actually put the borrower (s) in jeopardy of not being able to make their mortgage payment in a timely manner. This could eventually cause default, so it is much better to catch a debt to income ratio that is out of line prior to closing the loan.

Any monthly obligation that a borrower is paying can make a big difference when those monthly payment start at the first of each and every month. People sometimes take on more than they can actually swing on a monthly basis, because they have forgotten they actually like to go out to dinner occasionally.  This is when they begin to realize they have made a blunder.  Sometimes they want to blame the lender, but the buck stops with a potential borrower taking into consideration and making a budget at application adding up all monthly obligations to see if there is sufficient money to pay these necessities.

It is always necessary that a borrower (s) take responsibility for being knowledgeable and up-to-date on the loan process; their debts and other obligations, and the funds being used for down-payment and closing cost.  When applying for a loan; it is especially important that all borrowers remember that they have to pay the same miscellaneous expenses along with the new mortgage loan payment, regardless.  This can and does sometimes provide near and instant danger of mortgage default when people forget the above mentioned other items.

Safe harbor for and standard rule for a FHA loan product debt ratios are:  31% housing ratio and 43% total DTI (debt to income).

• Age limits for acquiring a FHA product?  – there is no maximum age limit and the minimum age is the age for which a mortgage note can be legally enforced in the state, or other jurisdiction, where the property is located.
• FHA product guidelines for credit score? 

1. With a 580 credit score, a potential borrower is eligible for maximum financing.  Note:  The credit must still meet certain criteria. The credit score alone does not institute loan approval.
2. Between 500 and 579- a potential borrower is only eligible for 90% financing.  Note:  The credit must sills meet certain criteria.  The score alone does not constitute loan approval.
3. 500 or less- a potential is NOT eligible for financing under FHA’s regulations.

Please note that loan approval is NOT based solely on FHA guidelines.  Each lender has some of their own credit requirements which may or may not be taken into consideration.  There are some lenders who will NOT take credit scores less than 620 to 640.  This lessens their risk potential for making the loan.  Most potential applicants who have credit scores lower than 600, may have derogatory credit, insufficient credit, or no credit at all.