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HUD Announces Tightening Of Credit Requirements On FHA Loans

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HUD Announces Tightening Of Credit Requirements On FHA Loans

This BLOG On HUD Announces Tightening Of Credit Requirements On FHA Loans Was PUBLISHED On April 4th, 2019

HUD, the parent of FHA, is the agency that sets FHA Mortgage Guidelines.

  • FHA Loans has always had the most lenient lending guidelines when it comes to getting an approve/eligible per automated underwriting system (AUS)
  • It was much easier to get an automated approval on FHA Loans than any other government and/or conventional loan programs
  • Although borrowers do not have to pay outstanding collections and charge off accounts on FHA, VA, USDA, Conventional loans, FHA is the easiest loan programs to get an AUS Approval
  • Last month, HUD Announces Tightening Of Credit Criteria in getting AUS Approval
  • HUD has recently changed its mortgage underwriting system criteria to get an approve/eligible per AUS in March 2019
  • These changes reprogramed the algorithm in getting the Automated Underwriting System Approval of borrowers with lower credit scores, higher DTI, cash-out refinance, and those with more layered risks when it comes to FHA TOTAL ScoreCard
  • In this blog, we will cover the topic of HUD Announces Tightening Of Credit to get AUS Approval

We are going to try and answer questions about what it means to our Borrowers when FHA Tightens Credit Requirements. With HUD Announces Tightening Of Credit, more borrowers will be getting a refer/eligible per AUS so manual underwriting will become more common with under 640 credit scores.

HUD Announces Tightening Of Credit And How AUS TOTAL ScoreCard Will Be Affected

Alex Carlucci, Senior Vice President of Mortgage Banking at Gustan Cho Associates at Loan Cabin Inc. is one of our top producers. He originated and closes more FHA Loans with under 620 credit scores than any other loan officer at Gustan Cho Associates Mortgage Group. Since HUD Announces Tightening of credit criteria last week, Alex Carlucci has seen a large percentage of refer/eligible per automated underwriting system findings. This is what Alex Carlucci stated:

To understand the changes, you might need to learn a little about the “foreign language” spoken in Mortgage World. AUS TOTAL Scorecard is, quite literally: Automated Underwriting System that has been developed by FHA as Technology Open To Approved Lenders. The best way for me to explain it is to say that this is AI (artificial intelligence) underwriting. We use AUS for virtually all loans that are approved of ANY kind. Behind that Automated approval, an Underwriter reviews the documents we submit to support the AUS Findings. What FHA is saying with the newest publication for HUD Announces Tightening Of Credit means that HUD wants to reduce layered risks. HUD also wants tougher loans to be manually underwritten. That is to say, that a REAL person, (not just a computer program) has to approve the “risk” of loaning money to buy the house. This could be great – or this could be disastrous. That’s what I want to try and explain. A little more mortgage world language you might want to understand… REFER or ACCEPT. With an AUS system, we don’t get a flat out “denied.” It takes an IRL Underwriter to do that. So, it’s important to understand that in the past a Loan Officer might put all of your information into the system and then we hit “submit” for an AUS finding. When that finding came back ACCEPT we would write a pre-approval letter. You would go find a house, knowing that your pretty well sure it’s a done deal as far as getting your loan. NOW, there’s a better than 40% chance we will get findings from AUS of REFER. So what does THAT mean? For our Team, it means we are going to request all mortgage docs upfront. We are going to submit your loan for a pre-approval from an Underwriter. We have 48 hour guaranteed response time from our Underwriting Group, so we are delaying issuing that approval for 2 days – but your will still get a pre-approval letter, and be sent on your way to buy a house. Sounds pretty good, right? Well, our Team has decades of experience. Yes, we are likely as old as your parents, but we KNOW our stuff. Even without submitting it to the Underwriting Department, we know what we can likely do, and what we can’t. So why the worry about how FHA Tightens Credit Requirements, if it just means an Underwriter should approve your loan upfront – before you write a contract… especially if you get a REFER from the AUS system? (because that IS what I’m saying)I’m concerned about a couple of things here. One, I’m concerned that people will be told by mortgage loan officers that they don’t qualify for an FHA loan because the findings from the AUS system come back as a REFER/ELIGIBLE PER AUS. That was not the intent of the FHA Message about this credit tightening. What FHA said is that they want a REAL PERSON to make the “risk” decision.

HUD Announces Tightening Of Credit

HUD Announces Tightening Of Credit Mean More Manual Underwriting

HUD Announces Tightening Of Credit means that more and more FHA borrowers will get a refer/eligible per automated underwriting system findings. What this means is that lenders need to have a human mortgage underwriter process and underwrite FHA Loans. FHA Manual Underwriting Guidelines needs to apply:

Here are FHA Manual Underwriting Guidelines:

  • Timely payments in the past 12 to 24 months
  • Debt to income ratio of 31/43 with no compensating factors
  • DTI of 37/47 with one compensating factor
  • DTI of 40/50 with two compensating factors
  • Verification of rent
  • Borrowers with no rental verification will need a rent-free letter completed and signed by the landlord

What Are Compensating Factors

Compensating Factors are positive factors viewed by lenders. Compensating factors reduces layered risk. Here are examples of compensating factors:

  • Three months of reserves
  • One month of reserves is one month of principal, interest, taxes, and insurance (PITI)
  • Little to no payment shock (5% or less in an increase from rent payment and/or $100)
  • Significant additional income not used as qualifying income such as a part-time job with at least a year seasoning
  • Residual Income which means borrowers have extra income after paying all of their debt
  • Larger down payment than the minimum down payment required

Borrowers who need to qualify for a mortgage with lower credit scores and/or bad credit via manual underwriting with a direct lender with no overlays, please contact us at Gustan Cho Associates at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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