How Mortgage Underwriters Evaluate Borrowers With FHA Total Scorecard

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How Mortgage Underwriters Evaluate Borrowers With FHA Total Scorecard

This BLOG On How Mortgage Underwriters Evaluate Borrowers With FHA Total Scorecard Was UPDATED On May 18th, 2018

The United States Department Of Housing And Urban Development (HUD) FHA TOTAL Scorecard enables mortgage underwriters to analyze and evaluate mortgage borrowers overall credit/income worthiness and instant automated eligibility or denial by FHA. Borrowers who want to qualify for FHA Loans needs to meet all mortgage guidelines under HUD 4000.1 FHA Handbook. FHA TOTAL Scorecard is the same as Fannie Mae and/or Freddie Mac Automated Underwriting System. Loan officers can enter borrowers data to FANNIE MAE DU AUS or FREDDIE MAC LP AUS. The decision of FHA TOTAL Scorecard rendered by Fannie Mae is DU FINDINGS and Freddie Mac is LP FINDINGS automated approval. The Automated Underwriting System is also referred to as AUS.

  • FHA TOTAL Scorecard was implemented and launched by HUD, the parent of Federal Housing Administration (FHA) to help mortgage underwriters determine the credit worthiness and predictability of borrowers future ability to repay their new home loan
  • Also as the potential default rate of the new FHA Loan needs to be evaluated
  • All data of borrowers submitted to FHA TOTAL Scorecard is quickly analyzed with using an automated standardized scoring system
  • It results in fairness and impartiality and renders a determination that is impartial
  • The mortgage underwriter normally inputs data including the completed 1003 mortgage application into the FHA TOTAL Scorecard
  • Within seconds, the system will render a decision of approval or denial on the subject borrower
  • This system is a real time automated response

FHA TOTAL Scorecard During Mortgage Process

FHA has developed a credit assessment engine known as the FHA TOTAL Mortgage Scorecard to analyze the credit worthiness of borrowers and to predict the likelihood of default for FHA Loans.

  • The FHA TOTAL Scorecard is used with FHA loans that are submitted through the automated underwriting system also referred to as AUS
  • The FHA Total Scorecard helps mortgage lenders manage workflow while analyzing and expediting the endorsement process
  • After evaluating borrower’s mortgage credit risk profile, FHA TOTAL Scorecard makes a recommendation of “Accept” or “Refer”
  • An “Accept” classification means that the FHA will insure the borrower’s loan with reduced documentation
  • “Refer” means that the lender will be required to manually underwrite the loan
  • Not all mortgage lenders do manual underwrites on referred findings
  • Compensating factors are required for manually underwritten mortgage loans
  • Example of compensating factors are the following:
    • higher down payment
    • second income with at least one year longevity but not used as qualified income
    • reserves, and verification of rent with payment shock of less than 5%

Basics Of FHA Total Scorecard And Purpose

One very important matter to understand is lenders cannot decline a loan solely based on a FHA TOTAL scorecard risk assessment. Human underwriting intervention still needs to take place.

Some of the things that FHA Scorecard TOTAL does not do include:

  • Determining Loan To Value or Debt To Income Ratio
  • The Automated Underwriting System calculates and analyzes this
  • Deny mortgage loan application
  • Full analysis and review subject property to see if it is eligible for financing
  • Assessing requirements of down payment on home purchase down payment

FHA does require that all transactions be scored through TOTAL. FHA Streamline Refinance Mortgage Loans are exempt and so are mortgage borrowers with no credit scores:

  • Each AUS finding using TOTAL provides mortgage lender with result of documents
  • Mortgage Underwriters will receive the result documents from TOTAL
  • The mortgage underwriter then makes its decision on risk factors 
  • The last TOTAL score run must be included in the case binder which has been submitted by the Housing and Urban Development (HUD)
  • This is regardless of what the results and evaluations are
  • It may mean that readings and evaluation may differ from the decision

Automated Approval Versus Lender Overlays

There are many instances where FHA TOTAL Scorecard will render an approve/eligible per Automated Underwriting System, however, a mortgage underwriter will deny a borrower. This is due because every lender/investor can have additional lending guidelines called lender overlays.

Here are basics of an approve/eligible where borrowers fully qualify and get an automated approval:

  • 580 credit scores
  • Front end DTI 46.9%/Back end DTI 56.9%
  • Outstanding collections and charged off accounts do not have to be paid
  • Gift Funds allowed
  • Non-Occupant Co-Borrowers allowed
  • Recent late payments in past 12 months
  • Late payments after housing event and/or bankruptcy

All of the above factors are allowed to get an automated approval and FHA will insure the FHA Loans of the borrower. However, it is up to the mortgage lender to set their own mortgage guidelines. As long as borrowers meet the above guidelines, FHA TOTAL Scorecard can render an automated approval. Lenders are allowed to have stricter mortgage guidelines that is above and beyond FHA Guidelines.

Here are examples of lender overlays that a particular lender can impose:

  • Higher credit scores than the minimum of 580 required by FHA
  • Most lenders will require 620 to 640 credit scores
  • Many lenders will have overlays on debt to income ratios where they may cap it at 45% to 50%
  • Lenders can require outstanding collections and charged off accounts to be paid off
  • Non-occupant co-borrowers can be added for borrowers with higher credit scores
  • Late payments in past 12 months may not be allowed
  • Late payments after housing event or bankruptcy may not be allowed

The good news is that not all FHA Lenders have the same mortgage lending requirements. Gustan Cho Associates Mortgage Group at Loan Cabin Inc. are direct lenders and have no overlays on government and conventional loans. We just go off FHA TOTAL Scorecard and the automated system renders an accept, we will close the loan. Not just close the loan but will close it on time. We have zero overlays and just go off FHA TOTAL Scorecard/AUS FINDINGS. To qualify, please call or text us for faster response at 262-716-8151.

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