Risk Analysis And The Five Cs: Mortgage Qualification

Gustan Cho Associates

With FHA-insured loans, the risk analysis is critically important, so it is a good idea to review the file in detail before even submitting it. The underwriter will look at adverse trade lines, high loans-to-values, high ratios, heavy credit uses, lack of savings, and reserves. The riskier the loan, the more compensating factors should be presented with the file. The loan officer should prescreen the loan for risk and compensating factors. The broker should always be looking for the big picture and weigh all factors the way the underwriter will.

Remember the five Cs when putting together an FHA loan and mortgage qualification. Look at the borrower’s credit, capacity, capital, collateral, and characteristics. If the loan officer feels that there are multiple layers of risk, then he or she should look for acceptable compensating factors to offset them. The FHA has a published list of compensating factors that may be used as a guide.

Minimum Credit Scores

FHA requires a FHA insured mortgage loan applicant to have a minimum of 580 FICO credit score to qualify for a 3.5% down payment home purchase loan.  Any FHA mortgage loan applicant with a credit score of 620 FICO and under, the front end debt to income ratio cap is 31%.  The front end debt to income ratio is the principal, interest, taxes, and insurance or PITI divided by the mortgage loan borrower’s monthly gross income.  The maximum back end debt to income ratio is capped at 43% for mortgage loan borrowers with credit under 620 FICO.  Borrowers with credit scores of 620 FICO or higher, the front end debt to income ratios are capped at 46.9% and the back end debt to income ratios are capped at 56.9%.

Unsatisfied Collection Accounts And Charge Off Accounts

If you have old collection accounts with balances owed on them, FHA categorizes into two categories:  Medical collections and non-medical collections.  Medical collections are often ignored by mortgage lenders unless the mortgage lender have their own internal mortgage investor overlays.  Investor overlays are extra lending guidelines on top of the minimum FHA guidelines imposed by HUD.  For example, a home buyer will qualify for a FHA loan with $10,000 of unpaid medical collections under HUD lending guidelines, however, the mortgage lender may require that the medical collections be paid off in order for the mortgage loan applicant to qualify with their company.  If you are denied a mortgage loan due to unpaid medical collections in Illinois, Florida, California, Washington, Indiana, or Wisconsin, please contact us at www.gustancho.com.  We have no mortgage lender overlays and will just go off automated findings per DU FINDINGS or LP FINDINGS via Automated Underwriting System.

Non-Medical Collection Accounts

With non-medical collections, 5% of the unpaid balance is calculated when the underwriter is calculating the borrower’s debt to income ratios.  Again, HUD does not require that you pay off an old collection account with balances on it, however, the particular mortgage lender may have overlays where they may require you to pay off the old collection account balance before they will allow you to qualify your.  If the collection account has a large balance, you can make a written payment agreement with the creditor and the minimum monthly payment agreement will be used towards your mortgage qualification in determining your debt to income ratios.

Waiting Period After Bankruptcy, Foreclosure, Deed In Lieu Of Foreclosure, And Short Sale

FHA has mandatory waiting period to qualify for a FHA loan after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale.  There is a two year waiting period after bankruptcy discharge date to qualify for a FHA loan.  There is a three year waiting period to qualify for a FHA loan after a foreclosure or deed in lieu of foreclosure from the recorded date of the foreclosure which is reflected on the county recorder of deeds office or the date of the sheriff’s sale.  There is a three year waiting period to qualify for a FHA loan after a short sale reflected on the HUD settlement statement of the short sale.

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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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