Credit Guidelines In Mortgage Underwriting Process

This BLOG On Credit Guidelines In Mortgage Underwriting Process Was UPDATED November 7th, 2017

Credit Guidelines In Mortgage Underwriting Process

Just because a borrower meets the minimum credit score requirements and debt to income ratio does not mean that they automatically qualify for a mortgage loan.
  • There are Credit Guidelines In Mortgage Underwriting Process.
  • Loan Officers need to thoroughly review borrower’s credit reports and make sure that borrowers meet Credit Guidelines 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 And Credit Guidelines In Mortgage Underwriting Process

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 And Credit Guidelines 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 or 3.5% down payment on FHA Loans
  • 500 to 579 credit scores require 10% down payment on FHA Loans
  • VA Loans do not have credit score requirements
  • However, to get approve/eligible on VA Loans, Veteran Borrowers should have at least 580 credit scores

Purchase And Rate/Term

  • 580 if LTV >90%
  • 560 if LTV≤90%
  • 600 if High Balance

Streamline Refinance And Credit Guidelines In Mortgage Underwriting Process

  • 620 Credit Scores can have 46.9% front end and 56.9% back end debt to income ratio
  • 580 if LTV >90%
  • 560 if LTV 90%
  • 600 if High Balance

Borrowers Without Credit Scores

  • Not eligible
  • Assume 580 for pricing
  • Cash Out Refinance
  • 620

Conforming Balance

  • 600 if LTV >75% but ≤80%
  • 560 if LTV≤75%

High Balance Mortgage Loans

  • 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

Credit Guidelines In Mortgage Underwriting Process 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.

How Is Bankruptcy Viewed In Mortgage Underwriting Process

Borrower may be eligible during and after Chapter 13 Bankruptcy:

  • At least 12 payments have been made under the Chapter 13 Bankruptcy Repayment 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.
  • No Waiting Period After Chapter 13 Bankruptcy Discharged date with The Gustan Cho Team at USA Mortgage.

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. 

Collection Accounts And Qualifying For Mortgage Loans

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 
  • 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.

Disputed Accounts During Mortgage Process

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 Account:

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 Credit Guidelines In Mortgage Underwriting Process

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

Judgments Credit Guidelines In Mortgage Underwriting Process

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 state, non-purchasing spouse judgments must be paid in full, or meet the payment arrangement requirements detailed above.

Manual Underwriting Credit Guidelines In Mortgage Underwriting Process

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.

Mortgage/Rental History And Credit Guidelines In Mortgage Underwriting Process

  • 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 And Credit Guidelines In Mortgage Underwriting Process

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 Needs:

  • Include Three Credit References 
  • This Includes 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
  • Utility company references

Eligible Group II references include:

  • Medical, Life, Automobile, Renters Insurance Covenrat that is not included in payroll deduction
  • Payment to child care providers – made to a business providing such services
  • School tuition
  • 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

  • Auto Leases
  • 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 late rental payments in past 12 months
  • 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 And Credit Guidelines In Mortgage Underwriting Process

For Mortgage Borrowers with no credit references or only Group II References, the following applies:

  • 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.

Tax Liens And Credit Guidelines In Mortgage Underwriting Process

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.

Qualifying For Mortgage Loan With No Overlays

Mortgage Borrowers who need to get qualified for a mortgage loan with a direct lender with no lender overlays, please contact The Gustan Cho Team at USA Mortgage. Contact us today at 262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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