FHA Underwriting Guidelines
Posted on December 11, 2008
Filed Under FHA Home Loans, Home Loans | 1 Comment
FHA Underwriting Guidelines
The 4 C’s of Credit:
Credit History
Cash to Close
Capacity to Repay
Collateral
All of these topics will be discussed in this post. There will be revisions to these policies over time so pay attention to the FHA website they will affect a borrowers ability to qualify. These guidelines are extrapolated from the 4155.1 published in 2004.
The underwriter needs to evaluate the credit history and determine that the borrower has sufficient cash to close, a debt to income ratio that meets the FHA guidelines.
Mortgage Eligibility:
Borrowers, Co-Borrowers, Co-Signers:
The borrowers must plan to live in the property. A non-occupant co-borrower must have a residence in the United States (see exemptions). A c0-borrower or co-signer may not have a financial interest in the property (see exemptions).
Borrower and co-borrower’s income, assets, credit and liabilities are considered when determining creditworthiness. The borrower and co-borrower are both obligated to the mortgage note and they sign the security instrument.
Co-signers do not own the property but they are obligated for the mortgage and must sign the loan application and other documents. They don’t sign the security instruments. Their income, assets, liabilities and credit are considered to determine creditworthiness.
Citizenship and Immigration Status:
A borrower does not have to be a citizen of the United States of America but the lender does have to determine residency status.
Lawful Permanent Resident Aliens: (see guide)
Non-Permanent Resident Aliens: (see guide)
Minimum Age: When a mortgage note can be legally enforced in jurisdiction where the property is located.
Non-Purchasing Spouses: (see guide)
Credit report is used to determine debt to income ratio but is not to be used for credit for credit denial. If the borrower or property are in community property state the debts of a non purchasing spouse are used to determine debt to income ratio.
Military Personnel: If an immediate family member occupies the property as a principal residence than a military family member may be an occupant owner even though stationed elsewhere.
Living Trusts: (see guide)
Credit Analysis:
A credit blemish here and there are not always a flat out reason for credit denial. There are many factors that come into play in underwriting credit and the best policy is to work with your lender who understands the credit qualifying criteria. He / She will be able to advise you about corrective actions that can be taken to improve your credit if the underwrite determines that at the present time you do not qualify for fha insured financing due to credit.
Many factors are taken into consideration such as: type of blemish, how old is the derogatory credit, what caused the late payment or collection & alternative credit sources. Many borrowers think they have bad credit when in fact they may have credit that is acceptable to the fha lender.
The underwriter will pay special attention to the following while determining creditworthiness:
Previous Mortgage or Rental Payment History: Provide the most recent 12 month rental or mortgage history. Verification of Mortgage, Verification of Rent from landlord or Canceled checks front and bank side. The lender might accept bank statements showing the amount of rent or mortgage being automatically deducted each and every month for the exact amount shown on the payment coupon from lender or rental agreement.
Recent or Undisclosed Debts:
The lender will look at any recent debt to find out if is being used toward the cash required for the down payment. Also, any inquiries in the last 90 days will be examined. An explanation will be required for any significant debt that shows on the credit report but is stated on the loan application.
Collections and Judgments:
To qualify for an FHA insured loan judgments do not have to be paid off if you have an agreement with the creditor for monthly payments and can provide documentation showing the payments have been made? The same is true with collections.
Past Foreclosures:
A borrower who has foreclosed or given a deed in lieu of foreclosure during the last 3 years generally will not qualify for an FHA insured loan. However, the lender will consider exceptions due to extenuating circumstances which will require a letter of explanation and complete documentation as well as re-established credit since the foreclosure or deed in lieu. Not being able to sell the home due to a job transfer or relocation do not qualify as reasons.
Bankruptcy:
Can I purchase a home if I’ve had a bankruptcy or am currently in Chapter 13?
Chapter 7: 2 years must have elapsed, re-established credit and or chosen to not incur new debt and document financial responsibility If 12 months has elapsed but less than 2 years and it can be documented that the bankruptcy was due to extenuating circumstances. Lender must document that needs to document that the events that led to the bankruptcy are not likely to occur again based on the borrowers current situation.
Chapter 13:
At least 12 months must have elapsed since the chapter 13 bankruptcy payout period began and the borrower has made each payment on time. The borrower also must receive permission from the court to enter into a home loan transaction.
Consumer Credit Counseling Payment Plans:
This is treated much like a Chapter 13 Bankruptcy. 12 months of the payout period must expire and all payments to have been made on time. Permission from the counseling agency to enter into a home loan mortgage transaction must be received in writing.
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