How Mortgage Underwriting Process View Credit Guidelines
Credit / Underwriting in mortgage underwriting process
Loans must comply with FHA policies and the policies outlined within this document.
Credit Report and Scores in mortgage underwriting process
A tri-merge credit report is required on all loans. For Streamline Refinance transactions, it is used solely to validate the credit score.
Credit Score Methodology
The following criteria may be used to determine each individual borrower’s credit score using the “middle/lower” method.
If there are three valid credit scores for a borrower, the middle score (numerical middle of the three scores) is used in mortgage underwriting process
If there are three valid scores for a borrower but two of the scores are the same, the duplicate score is used in mortgage underwriting process
If there are two valid scores for a borrower, the lower of the two scores is used.
If there is one valid score for a borrower, that score is used in mortgage underwriting process
Loan Score Selection in Mortgage Underwriting Process
After selecting the appropriate Credit Score for each borrower, the Loan Score must be determined.
If there is more than one borrower, the lowest selected Credit Score among all borrowers is the Loan Score.
When there is only one borrower, the selected Credit Score for that borrower is also the Loan Score.
Minimum Credit Scores In Mortgage Underwriting Process
Minimum Credit Scores; 580 FICO or greater then 96.5% LTV
Purchase and Rate/Term
580 if LTV >90%
560 if LTV≤90%
600 if High Balance
580 if LTV >90%
560 if LTV ≤90%
600 if High Balance
Borrowers without a credit score
Assume 580 for pricing
Cash Out Refinance
600 if LTV >75% but ≤80%
560 if LTV≤75%
600 if LTV ≤75%
Credit Analysis In Mortgage Underwriting Process
Loans that receive a Refer/Eligible must be manually downgraded and underwritten manually.
HUD requires the underwriter to manually downgrade to a manual underwrite based on standard FHA guidelines if any of the following credit characteristics exist:
Loans with credit score <620 and DTI ratio >43% (effective with case numbers assigned on or after April 1, 2013).
Additional derogatory credit references are received that were not included on the credit report evaluated by TOTAL Scorecard.
Suspended and debarred individuals may not be approved, even though manual underwriting, if any party (borrower, seller, loan officer, listing or selling agent, appraiser) is included on the LDP or GSA list.
Effective with case numbers assigned on or after October 15, 2013: Loans in which borrower(s) have disputed accounts with a cumulative outstanding balance equal to or greater than $1,000.
Effective with case numbers assigned before October 15, 2013: Disputed accounts or disputed public records are indicated on the credit report. If the credit report or credit report supplement indicates that the disputed accounts meet any one of the following requirements, FHA does not require a manual downgrade if:
The disputed account has a zero balance or
The disputed account is “paid in full” or “resolved” or
The disputed account is less than $500 and more than 24 months
Borrower(s) have delinquent federal debt and do not receive a clear CAIVRs number
Borrower(s) have a foreclosure or deed-in-lieu of foreclosure in the most recent three years
Borrower(s) have a bankruptcy in the most recent two years
Borrower(s) most recent 12-month mortgage histories reflects:
Three or more late payments ≥30 days, or
One or more late payment of 60 days plus one or more 30-day late payment, or
One or more payment > 90 days late
Bankruptcy (BK) – Chapter 7
Requires at least two years from the discharge date, and the borrower must have re-established good credit or chosen not to incur any new credit.
Seasoning of less than two years but no less than 12 months may be acceptable if the borrower:
Can show that the bankruptcy was caused by extenuating circumstances beyond the borrower’s control (defined as death or long-term disability of the primary wage earner) and
Has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.
Documentation must be provided to evidence that the borrower’s current situation indicates that the events which led to the BK are not likely to recur.
Exceptions to the two year seasoning requirements may be permitted based on “Back to Work – Extenuating Circumstances”, see guidelines below for additional details.
How Is Bankruptcy Viewed In Mortgage Underwriting Process
Borrower may be eligible provided that:
At least 12 payments have been made under the BK plan, and
All payments have been made on time, and
The borrower has written permission from the BK court to enter into the mortgage transaction.
Refer to Manual Downgrade topic.
CAIVRS (Credit Alert Verification Reporting System)
A CAIVRS screening must be performed on all obligors on the loan. Screening is not required on a non-borrowing spouse. If CAVIRS screening indicates an applicant is delinquent on a Federal debt or has had a claim paid on an FHA insured loan within the previous three years, the borrower is NOT eligible for a new FHA loan.
Exceptions are allowed only under the following circumstances:
The borrower sold the property, with or without a release of liability, to an individual who subsequently defaulted. The borrower must prove that the loan was current at the time of the assumption
A divorce decree or legal separation agreement awarded the property and responsibility for payment to the former spouse. The borrower is not eligible if FHA paid a claim on his/her mortgage in default prior to the divorce.
The borrower may be eligible for an FHA-insured mortgage if:
The property was included in a bankruptcy caused by circumstances beyond the borrower’s control, such as the death of the principal wage earner, or a serious long-term uninsured illness.
Eligible Back to Work – Extenuating Circumstances, see guidelines below for additional details.
FHA does not require outstanding collection accounts to be paid off as a condition of loan approval.
The presence of collection accounts has been considered in the borrower’s credit history. A letter of explanation or supporting documentation is not required.
Collection accounts must be considered when underwriting the loan. The borrower must provide a letter of explanation and supporting documentation consistent with the explanation, for all collection accounts.
Collection accounts with an aggregate balance equal to or greater than $2,000, excluding medical collections and charge off accounts, must meet the following capacity analysis:
Collection Account (s) Status:
Capacity Analysis Requirement:
Paid in full at closing or prior to closing
The funds used for payment must be verified and sourced
Approved payment arrangements
The monthly payment amount must be verified and included in the borrower’s debt-to-income ratio for all transactions, regardless of the TOTAL Scorecard recommendation
No payment arrangements
5% of each outstanding collection account balance must be included in the borrower’s debt-to-income ratio for all transactions, regardless of the TOTAL Scorecard recommendation
Effective with case numbers assigned before October 15, 2013
Manually underwritten loans:
Collection accounts must be considered in underwriting the loan. The lender must document the reasons for approving a mortgage when the borrower has collection accounts. The borrower must provide an explanation for all collection activity and any Back to Work – Extenuating Circumstances.
The presence of collection accounts has been considered in the borrower’s credit history. No further review is required.
FHA does not require the pay-off of outstanding collection accounts as a condition for approval. May be required at the discretion of the Underwriter.
Consumer Credit Counseling (CCC)
These guidelines apply only to manually underwritten loans. For loans that receive an approval through TOTAL Scorecard, no further documentation/evaluation is required.
Borrowers that are participating in a consumer credit counseling program may be eligible with documentation of the following:
One year of the pay-out period has elapsed under the plan.
The borrower’s payment history has been satisfactory and all required payments have been made on time, and
The borrower has received written permission from the counseling agency to enter into the mortgage transaction.
Effective with case numbers assigned on or after October 15, 2013:
Borrower(s) disputing derogatory credit account(s) must provide a letter of explanation and documentation to support the reason for the dispute. If the borrower is disputing a medical accounts, a letter of explanation and supporting documentation are not required.
Disputed accounts include non-medical
Derogatory charge-off accounts, and
Disputed collections; and
Disputed accounts with late payments with in the most recent 24 months.
Disputed account(s) analysis requirements are as follows:
Disputed Accounts Analysis Requirement:
Cumulative outstanding balance of all borrower account(s) is greater than or equal to $1,000
• The mortgage application must be downgraded to a “Refer” and a Direct Endorsement underwriter is required to manually underwrite the loan
Cumulative outstanding balance of all borrower account(s) is less than $1,000
+ A manual downgrade to a “Refer” is not required
Excluded Accounts, Regardless Of The Amount
• Disputed medical accounts are excluded from the $1,000 limit and do not require documentation
• Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized uses are excluded from the $1,000 limit. Documentation, such as a police report disputing the fraudulent charges, must be provided.
If the credit report or credit report supplement indicates that the disputed accounts meet any one of the following requirements, a manual downgrade is not required:
The disputed account(s) are non-derogatory; or
The disputed account(s) have a zero balance; or
The disputed account(s) indicate “paid in full” or “resolved”; or
The disputed account(s) are less than $1,000; or
The disputed account(s) with late payments aged 24 months or more; or
The disputed account(s) is current and paid as agreed.
If the dispute results in the borrower’s monthly debt payment being less than indicated on the credit report, the borrower must provide documentation to support the lower payment.
How Is Foreclosure Viewed In Mortgage Underwriting Process
If the borrower has had past delinquencies or has defaulted on an FHA insured loan, there is a three-year waiting period before the borrower can regain eligibility for another FHA-insured mortgage. The three-year waiting period begins when FHA pays the initial claim to the lender. This includes deed-in-lieu of foreclosure, as well as judicial and other forms of foreclosures.
Foreclosure or deed-in lieu of foreclosure on a non-FHA loan requires three years seasoning.
Exceptions are possible if the foreclosure was the result of documented extenuating circumstances that were beyond the borrower’s control, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure. Exceptions
Divorce is not considered an extenuating circumstance; however an exception may be granted where a borrower’s loan was current at the time of the divorce, the ex-spouse received the property, and the loan was later foreclosed.
The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.
Effective with case numbers assigned on or after October 15, 2013:
Judgments must be paid in full prior to loan approval , with the exception of a court ordered judgment with payment arrangements. If payment arrangements have been made with the creditor of a court ordered judgment and three months scheduled payments were made prior to loan approval, payment in full is not required. The following requirements must be met:
The verified payment must be included in the DTI.
The borrower must provide a copy of the payment agreement and evidence that the payments were made in accordance with the agreement.
Prepayment of the scheduled payments in order to meet the minimum three month requirement , are not allowed.
In a community property sate, non-purchasing spouse judgments must be paid in full, or meet the payment arrangement requirements detailed above.
Manually underwritten loans:
Judgments must be considered in underwriting the loan. The lender must document the reasons for approving a mortgage when the borrower has one or more judgments. The borrower must provide an explanation for all judgment reflected on the credit report.
Court-ordered judgments must be paid off if on title. Judgments not on title may remain unpaid if borrower has a repayment plan in place with a minimum of two payments made prior to the date of the contract.
Credit score <620 require verification of mortgage/rental history . This does not apply to borrowers who are currently living rent free provided the rent free status is documented.
Non-traditional credit must be documented using a Non-Traditional Mortgage Credit Report (NTMCR). Direct verifications may be obtained only when a NTMCR is impractical or the service is not available.
Non-traditional credit may be used when the borrower does not have the type of credit that appears on a traditional credit report or to supplement an insufficient number of tradelines.
Non-traditional credit may not be used to:
Offset derogatory credit; or
Create a credit report for a borrower without a verifiable credit history; or
Enhance a poor payment history
Non-traditional credit must:
Include three credit references, including at least one from Group I, and
Exhaust all Group I references prior to considering Group II references
Group I references include rental housing payments or utility company references.
Eligible Group II references include:
Medical, life, auto or renters insurance coverage that is not payroll deducted
Payment to child care providers – made to a business providing such services
Retail stores – department, furniture, appliance stores, specialty stores; rent to own – i.e., furniture, appliances
Payment of medical bills not covered by insurance
Internet/cell phone services
Documented 12 month history of saving by regular, non-payroll deducted deposits resulting in an increasing balance to the account. No NSF activity reported.
Personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments.
Non-traditional credit references must include a minimum of 12 months history with:
No history of delinquency on rental housing payments
No more than one 30-day late payment on all other references
No collection accounts / court records reporting (other than medical) within the last 12 months
Insufficient Non-Traditional Credit
For borrowers with no credit references or only Group II references:
A satisfactory credit history with at least 12 months of history must include no more than one 30-day delinquency on any Group II reference, and no collection accounts/court records (other than medical) filed within the last 12 months, and
Ratios may not exceed 31%/43% and must be computed only on those borrowers occupying the property. Ratio increases based on compensating factors are not allowed.
Two months cash reserves from the borrower’s own funds are required. Gift funds may not be used to satisfy this requirement.
Short Sale / Pre-Foreclosure
A borrower is not eligible for a new FHA-insured mortgage if he/she pursued a short sale agreement on his/her principal residence to take advantage of declining market conditions and purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value.
A borrower is considered eligible for a new FHA-insured mortgage if from the date of loan application for the new mortgage, all:
Mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and
Installment debt payments for the same time period were also made within the month due.
A borrower in default on his/her mortgage at the time of the short sale or pre-foreclosure sale is not eligible for a new FHA-insured mortgage for three years from the date of the short sale or pre-foreclosure sale. A borrower who sold his/her property under FHA’s pre-foreclosure sale.
Default was due to circumstances beyond the borrower’s control, such as the death of a primary wage earner, long-term uninsured illness or a Back to Work – Extenuating Circumstance; and
The credit report indicates satisfactory credit prior to the event that caused the default.
IRS tax liens do not require a subordination agreement unless there is evidence that the IRS has demanded a first lien position.
Other tax liens may remain unpaid if the lien holder subordinates the tax lien to the FHA mortgage.
If borrower is under a repayment plan, the regular payments must be included in DTI ratios.
Back to Work – Extenuating Circumstances due to an “Economic Event”
An “Economic Event” is when a borrowers has experienced an occurrence beyond their control, that resulted in a loss of income, loss of employment, or a combination of both. TOTAL Scorecard “Refer” recommendations or the manual downgrade of an “Accept/Approve” recommendation, may be eligible for FHA purchase transaction financing provided all the following requirements are met:
The “Economic Event” lasted at least 6 months; and
The “Economic Event” resulted in a 20% or more reduction in the borrower’s household income;
Documented evidence that the delinquencies were due to the “Economic Event” must be provided;
Borrower must have reestablished a “Satisfactory Credit” history for at least 12 months;
Borrower must have fully recovered from the “Economic Event”;
Housing counseling is required, as follows:
The borrower must attended an approved housing counseling program at least 30 days, but no more than 180 days prior to initial application. Counseling must be performed by a HUD approved housing counseling agency, state housing finance agency, approved intermediaries or their sub-grantees.
Counseling may be conducted in person, via telephone, via internet , or other methods approved by HUD.
Upon completion of the required counseling, the borrower will be given a Counseling Certificate of Completion that must include the counselor’s handwritten signature. In instances that the counseling certificate is received electronically or via other means and does not include a counselors handwritten signature, the borrower must obtain the counselors signature. This may be accomplished by faxing or emailing the certificate to the counselor to obtain their handwritten signature.