Manual Underwriting Credit Guidelines On VA And FHA Loans

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Manual Underwriting Credit Guidelines On VA And FHA Loans

This BLOG On Manual Underwriting Credit Guidelines On VA And FHA Loans Was UPDATED On October 19th, 2018

MANUAL UNDERWRITING CREDIT GUIDELINES ON VA AND FHA LOANS:

VA and FHA allows for manual underwrites. Conventional Loans do not. Manual Underwriting is when borrowers cannot get an approve/eligible per automated underwriting system. Case files with a yield of refer/eligible per automated underwriting system are eligible for manual underwriting on FHA and VA Home Loans.

  • General credit requirements on Manual Underwriting Credit Guidelines On VA And FHA Loans:
    • The underwriter must look at the borrowers overall pattern of credit
    • No late payments in past 24 months
    • Isolated derogatory payments due to extenuating circumstances is acceptable with proper documentation
    • Lenders does not need to consider the credit of the non-borrowing spouse
    • Even in community property states

Payment History In Past 24 Months

Payment history in past 24 months will be evaluated. Late Payments after bankruptcy and/or housing event will be reviewed by mortgage underwriters:

Types of payment history:

  • The underwriter will evaluate the borrowers payment history in the following order:
    • 1) previous housing expense(mortgage or rent)
    • 2)installment debts
    • 3) revolving accounts

Underwriter will consider acceptable housing payment if the borrower has made mortgage or rent payments on time for the last 12 months:

  • Cannot have no more than 2 times 30 day late payments in the last 24 months
  • The underwriter may approve the borrower if they have no major derogatory payments on revolving accounts in the last 12 months
  • Major derogatory tradelines is considered
  • Major derogatory credit is one times 90 days late payments and/or 3 late payments in past 12 months
  • 60 day late payments

Manual Underwriting Credit Guidelines On Collection Accounts

Outstanding collection and charged off accounts do not have to be paid off to qualify for FHA and/or VA Loans. However, recent outstanding collections and/or collections are carefully looked at on manual underwriting.

Collection accounts for manual underwriting credit guidelines require the following:

Mortgage Underwriters must determine if collection accounts were a result of:

  • the Borrower’s disregard for financial obligations without extenuating circumstances
  • the Borrower’s inability to manage debt will be considered;
  • or extenuating circumstances

Underwriters must analyze borrowers documentation provided for consistency with other credit tradelines and information. This is required to determine if borrower derogatory credit tradelines should be considered in the underwriting analysis.

Exempt From Mortgage Underwriting Analysis

The following are exempt and can be excluded from consideration in the underwriting analysis:

  • disputed medical collection accounts no matter what the outstanding balance 
  • credit disputes which are being disputed due to identity theft, credit card theft or unauthorized use
  • consumers needs to provide documentation of identity theft and/or fraudulent activities and disputing credit tradelines
  • accepted documents to identity theft and/or fraud is to provide lender with copy of police report and/or documents provided by creditors to document and/or verify above

If credit reports show borrowers are disputing derogatory credit tradelines, borrowers needs either to retract it and/or provide letter of explanation as of why the tradelines are in dispute. If credit dispute is due to fraud and/or identity theft, borrowers needs to provide police report and/or other documentation to prove dispute is legitimate.

Any non-medical collections if the overall outstanding balance is under $1,000 is exempt from retraction of credit dispute. Any late payment credit disputes with outstanding balance under $1,000 is exempt from retraction.

Manual Underwriting Credit Guidelines On Judgments And Tax Liens

Borrowers with Judgments:

Judgment refers to any debt or monetary liability of consumers. Mortgage borrowers can qualify for home loans with outstanding judgments with a written payment plan and three months of payment seasoning.

Exception for Judgments and Tax-Liens:

A Judgment is considered resolved if borrowers has entered into a valid agreement with the creditor to make regular payments on the debt:

  • Borrowers needs to have made timely payments for at least three months of scheduled payments
  • Judgments will not supersede the VA and/or FHA-insured mortgage lien
  • The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments

The same mortgage guideline that applies on judgments applies on tax liens.

  • Borrower can enter into a written payment agreement with the Internal Revenue Service
  • Needs three months of payment seasoning
  • Cannot pre-pay the three months upfront in order to qualify
  • The three months of payments needs to be seasoned

VA And FHA Mortgage Guidelines During And After Chapter 13 Bankruptcy

Getting a loan while in a Chapter 13 is allowed on VA and FHA Loans.

  • There is no waiting period to qualify for FHA and VA Loans during Chapter 13 Bankruptcy repayment plan
  • There is no waiting period to qualify for VA and FHA Loans after Chapter 13 Bankruptcy discharged date

However, any VA and/or FHA Loans that has not been seasoned two years after bankruptcy discharged date needs to be manually underwritten:

  • A Chapter 13 bankruptcy does not disqualify a Borrower from obtaining a VA and/or FHA-insured Mortgage
  • This only holds true if at the time of case number assignment at least 12 months of the pay-out period under the bankruptcy has elapsed
  • Lenders must determine that during this time, the Borrower’s payment performance has been satisfactory
  • Lenders need to make sure all required payments have been made on time
  • Borrowers needs written permission from bankruptcy court trustee to enter into the mortgage transaction

FHA And VA Guidelines In Qualifying After Housing Event

Getting a mortgage after short sale, Foreclosure or Deed in Lieu:

  • A Borrower is generally not eligible for a new FHA-insured Loan if the Borrower had a short sale, foreclosure or a DIL of foreclosure in the three-year period prior to the date of case number assignment
  • This three-year period date starts on the date of DIL or the date that the Borrower transferred ownership of the Property to the foreclosing Entity/designee
  • Lenders may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner but exceptions are very unlikely
  • Borrowers has re-established good credit since the foreclosure with no late payments
  • Divorce is not considered an extenuating circumstance
  • An exception may, however, be granted where a Borrower’s Mortgage was current at the time of the Borrower’s divorce, the ex-spouse received the Property and the Mortgage 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

Gustan Cho Associates at Loan Cabin Inc. will exempt verification of rent if borrowers have been living rent free with family. Rent Free Letter Form provided by Gustan Cho Associates at Loan Cabin Inc. needs to be completed and sign. This letter can be used in lieu of Verification Of Rent.

Here are some things to consider when looking at a Manual underwrite.

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