The Five C’s Of Mortgage Underwriting Leading To Clear To Close

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The Five C’s Of Mortgage Underwriting Leading To Clear To Close

This BLOG On The Five C’s Of Mortgage Underwriting Leading To Clear To Close Was UPDATED And PUBLISHED On August 5th, 2019

The Five C's Of Mortgage Underwriting Leading To Clear To Close

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 the following:
    • adverse trade lines
    • high loans-to-values
    • high ratios
    • heavy credit uses
    • lack of savings
    • 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
  • Loan Officers should always be looking for the big picture
  • They should weigh all factors the way the underwriter will

In this article, we will cover and discuss The Five C’s Of Mortgage Underwriting Leading To Clear To Close.

Processing And Underwriting The Five C’s Of Mortgage Underwriting Leading To Clear To Close 

Processing And Underwriting The Five C's Of Mortgage Underwriting Leading To Clear To Close 

Remember The Five C’s Of Mortgage Underwriting Leading To Clear To Close when putting together a loan package:

  • Look at The Five C’s Of Mortgage Underwriting Leading To Clear To Close:
    • credit
    • capacity
    • capital
    • collateral
    • 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
  • HUD, the parent of FHA has a published list of compensating factors that may be used as a guide

Credit Of The Five C’s Of Mortgage Underwriting

Credit Of The Five C's Of Mortgage Underwriting

FHA requires borrowers to have a minimum of 580 credit score to qualify for a 3.5% down payment home purchase loan.

  • Any FHA mortgage loan applicant with a credit score of 620 and under are considered higher risk borrowers
  • Underwriters will analyze the following
    • front end debt to income ratio is the principal, interest, taxes, and insurance or PITI divided by borrower’s monthly gross income
    • The maximum debt to income ratio is capped at 43% for borrowers with credit under 620 normally to get an approve/eligible per Automated Underwriting System Approval
  • Borrowers with credit scores of 620 or higher, the front end debt DTI are capped at 46.9% and the back end DTI are capped at 56.9% to get an approve/eligible per AUS

Outstanding Collection Accounts And Charge Off Accounts

Outstanding Collection Accounts And Charge Off Accounts

HUD does not require borrowers to pay outstanding old collection accounts with balances or charged-off accounts. Other government and conventional loan programs do not require outstanding collections and charged-off accounts to be paid to qualify for owner occupant home loans. However, FHA has the most lenient guidelines when it comes to derogatory credit.  However, The Five C’s Of Mortgage Underwriting mandates that mortgage underwriters evaluate prior derogatory tradelines.

FHA categorizes collections into two categories:

  • Medical collections
  • Non-medical collections

Medical Versus Non-Medical Collection Accounts

Medical Versus Non-Medical Collection Accounts

Medical collections are often ignored by lenders unless the mortgage lender has its own investor overlays:

  • Investor overlays are extra lending guidelines on top of the minimum FHA guidelines imposed by HUD
  • For example, here is a case scenario:
    • a home buyer will qualify for an FHA loan with $10,000 of unpaid medical collections under HUD lending guidelines
    • However, the lender may require that the medical collections be paid off in order for a loan applicant to qualify with their company
  • If denied a mortgage loan due to outstanding collections and charged-off accounts, please contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response
  • Or email us at gcho@loancabin.com
  • We have no overlays and will just go off automated findings per DU FINDINGS or LP FINDINGS via Automated Underwriting System

Non-Medical Collection Accounts

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 outstanding collection accounts to be paid
  • However, the particular lender may have overlays
  • They may require borrowers to pay off the old collection account balance
  • With non-medical outstanding collections with greater than $2,000 balance, HUD requires underwriters to take 5% of the outstanding balance and use it as hypothetical monthly debt in DTI Calculations
  • If the collection account has a large balance, borrowers can make a written payment agreement with the creditor
  • The minimum monthly payment agreement will be used towards mortgage qualification in determining debt to income ratios in lieu of the 5% of outstanding balance rule

Waiting Period After Housing Event

what are Waiting Period After Housing Event

All agency loan programs have a mandatory waiting period to qualify 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 FHA, VA, USDA Loans
  • There is a three-year waiting period to qualify for FHA and USDA loans after housing event
  • Housing event is the following:
    • foreclosure
    • deed in lieu of foreclosure
    • short sale
  • VA requires a two year waiting period after housing event and Chapter 7 Bankruptcy to qualify for VA Home Loans

Waiting period start date is from the recorded date of the foreclosure which is reflected in the county recorder of deeds office or the date of the sheriff’s sale.

  • There is a three-year waiting period to qualify for an FHA and USDA loan after a short sale reflected on the HUD settlement statement of the short sale

Borrowers can have prior bad credit, housing event, bankruptcy in the past. However, re-established credit and no late payments after a period of bad credit is key of The 5’c Of Mortgage Underwriting.

Related> How do you qualify for a mortgage loan?

Related> Mortgage qualification

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