FHA Underwriting Guidelines changes for Disputes on Credit Report

For most borrowers working with credit repair companies, "Disputes" listed on credit report are not allowed for most lenders under FHA Guidelines. Here is the revision FHA made effective October 15, 2013, to following:

*Guidance on collections and disputed accounts
*Clarify guidance on judgments

This guidance applies to all FHA programs with the exception of non-credit qualifying streamline refinances and the Home Equity Conversion Mortgage.

HUD 4155.1, Mortgage Credit Analysis for Mortgage Insurance 4.C.2.d, Collections and Judgments is re-named Credit Analysis of Collections and Judgments 4.C.2.e, Paying Off Collections and Judgments is re-named Capacity Analysis of Collections and Judgments 4.C.2.f, Previous Mortgage Foreclosure is re-named Handling of Disputed Accounts Re-designation of sections; Previous Mortgage Foreclosure through Short Sales, starting with 4.C.2.g to 4.C.2.m. HUD 4155.1 4.C.2.d Credit Analysis of Collections and Judgments Collections and judgments may indicate a borrower’s disregard for credit obligations and must be considered in the creditworthiness analysis. The guidance below applies to loans with collection accounts and all judgments. Medical collections and charge off accounts are excluded from this guidance. Documentation Requirements: Collection Accounts and Judgments Applicable to Manually Underwritten Loans: The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments. Regardless of the amount of outstanding collection accounts or judgments, the lender must determine if the collection account or judgment was a result of:  the borrower’s disregard for financial obligations;  the borrower’s inability to manage debt; or  extenuating circumstances. The borrower must provide a letter of explanation with supporting documentation for each outstanding collection account and judgment. The explanation and supporting documentation must be consistent with other credit information in the file. Applicable to Loans Run Through TOTAL Mortgage Scorecard: TOTAL Mortgage Scorecard Accept/Approve – There are no documentation or letter of explanation requirements for loans with collection accounts or judgments run through TOTAL Mortgage Scorecard receiving an "Accept/Approve" despite the presence of collection accounts or judgments. These accounts have been already taken into consideration in the borrower’s credit score. If TOTAL Mortgage Scorecard generates a "Refer," the lender must manually underwrite the loan in accordance with the guidance above applicable to manually underwritten loans with collection accounts and judgments. 4155.1 4.C.2.e Capacity Analysis of Collections and Judgments Collections - FHA does not require collection accounts to be paid off as a condition of mortgage approval. However, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the borrower’s ability to repay the mortgage. To mitigate this risk, FHA is requiring a capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000, as described below. If the total outstanding balance of all collection accounts for all borrowers is equal to or greater than $2,000, the lender must perform a capacity analysis as detailed below. Unless excluded under state law, collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance. All medical collections and charge off accounts are excluded from this guidance and do not require resolution. Capacity analysis includes any of the following actions:  At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required).  The borrower makes payment arrangements with the creditor. If the borrower has entered into a payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio.  If evidence of a payment arrangement is not available, the lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower’s debt-to-income ratio. TOTAL Mortgage Scorecard Accept/Approve/Refer - Regardless of the Accept/Approve/Refer recommendation by TOTAL Mortgage Scorecard, the lender must include the payment amount in the calculation of the borrower’s debt-to-income ratio.   4155.1 4.C.2.e Capacity Analysis of Collections and Judgments Continued Judgments - FHA requires judgments to be paid off before the mortgage loan is eligible for FHA insurance. An exception to the payoff of a court ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments. The borrower must provide a copy of the agreement and evidence that payments were made on time in accordance with the agreement, and a minimum of three months of scheduled payments have been made prior to credit approval. Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months of payments. Furthermore, lenders are instructed to include the payment amount in the agreement in the calculation of the borrower’s debt-to-income ratio. FHA requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the exception guidance for judgments above, unless excluded by state law. Reference : For information on the Credit Analysis of Judgments, see HUD Handbook 4155.1 4.C.2.d. HUD 4155.1 4.C.2.f Handling of Disputed Accounts, Continued Disputed Derogatory Accounts Indicated on the Credit Report If the credit report utilized by TOTAL Mortgage Scorecard indicates that the borrower is disputing derogatory credit accounts, the borrower must provide a letter of explanation and documentation supporting the basis of the dispute. The lender must analyze the documentation provided for consistency with other credit information in the file to determine if the derogatory credit account should be considered in the underwriting analysis. Guidance for TOTAL Mortgage Scorecard Accept/Approve loans with disputed accounts . Disputed Derogatory Credit Accounts greater than or equal to $1,000 If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is equal to or greater than $1,000, the mortgage application must be downgraded to a "Refer" and a Direct Endorsement underwriter is required to manually underwrite the loan as described above. Disputed Derogatory Credit Accounts less than $1,000 If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is less than $1,000, a downgrade is not required. Excluded Accounts  Disputed medical accounts are excluded from the $1,000 limit and do not require documentation.  Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use are also excluded from the $1,000 limit. However, the lender must provide in the case binder a credit report, letter from the creditor, or other appropriate documentation to support the dispute, such as a police report disputing the fraudulent charges. Mortgagee Letter 2013-24, Continued HUD 4155.1 4.C.2.f Handling of Disputed Accounts, Continued Disputed derogatory credit accounts are defined as follows:  disputed charge-off accounts,  disputed collection accounts, and  disputed accounts with late payments in the last 24 months. Disputed derogatory credit accounts of a non-purchasing spouse in a community property state are not included in the cumulative balance for determining if the mortgage application is downgraded to a "Refer". Non-derogatory disputed accounts are excluded from the $1,000 cumulative total. Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report. Non-derogatory disputed accounts include the following types of accounts:  disputed accounts with zero balance,  disputed accounts with late payments aged 24 months or greater, and  disputed accounts that are current and paid as agreed. If a borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the lender is not required to downgrade the application to a "Refer." However, the lender must analyze the effect of the disputed accounts on the borrower’s ability to repay the loan. If the dispute results in the borrower’s monthly debt payments utilized in computing the debt-to-income ratio being less than the amount indicated on the credit report, the borrower must provide documentation of the lower payments. Paperwork Reduction Act The information collection requirements contained in this document are pending approval by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control number 2502-0059. In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.

Reference from:  U.S. Department of Housing and Urban Development
Mortgagee Letter 2013-24

Big Changes with FHA Mortgage Insurance

With FHA PMI changes effective April 1, FINALIZE YOUR CONTRACT AND GET YOUR FHA CASE NUMBER ON YOUR FHA LOAN AS SOON AS POSSIBLE!

FHA PMI MORTGAGE INSURANCE CHANGES EFFECTIVE APRIL 1, 2013

Subject:

Revision of Federal Housing Administration (FHA) policies concerning cancellation of the annual Mortgage Insurance Premium (MIP) and increase to the annual MIP

Purpose:

Consistent with FHA’s ongoing efforts to strengthen the Mutual Mortgage Insurance Fund, FHA is:

-Revising the period for assessing the annual MIP

-Removing the exemption from the annual MIP for loans with terms of 15 years or less and Loan to Value (LTV) ratios of less than or equal to 78 percent at origination

-Increasing the annual MIP on all forward mortgages except single family forward streamline refinance transactions that refinance existing FHA loans that were endorsed on or before May 31, 2009 

DETAILS:

For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP)) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.

For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.

Note: FHA calculates LTV as a percentage by dividing the loan amount (prior to the financing of any UFMIP) by the lesser of the purchase price (if applicable) or the appraised value of the home. For streamline refinances without appraisals, FHA uses the original appraised value of the property to calculate the LTV.

Under Public Law 111-229(1)(b), FHA may adjust its mortgage insurance premium rates, as measured in basis points (bps), by Mortgagee Letter.

The first table shows the previous and the new annual MIP rates by amortization term, base loan amount and LTV ratio. All MIPs in this table are effective for case numbers assigned on or after April 1, 2013.

Term > 15 Years
Base Loan Amt.      LTV                       Previous MIP                      New MIP
≤ $625,500                ≤ 95.00%               120 bps                                130 bps
≤ $625,500                > 95.00%               125 bps                                135 bps

> $625,500                ≤ 95.00%               145 bps                                150 bps

> $625,500                > 95.00%               150 bps                                155 bps

Term ≤ 15 Years

≤ $625,500              78.01% - 90.00%     35 bps                                 45 bps

≤ $625,500              > 90.00%                  60 bps                                 70 bps

> $625,500              78.01% - 90.00%     60 bps                                 70 bps

> $625,500              > 90.00%                  85 bps                                  95 bps

The second table shows the previous and the new effective annual MIP rates for loans with an LTV of less than or equal to 78 percent and with terms of up to 15 years.

The new annual MIP for these loans is effective for case numbers assigned on or after June 3, 2013.

Term ≤ 15 Years
Base Loan Amt. LTV              Previous MIP                New MIP
Any Amount ≤ 78.00 %          0 bps                               45 bps

DEAR JENNY: What type of loan do I need?

"I want to purchase a home and need additional money to renovate the house."

Jenny recommends: FHA Streamline 203k
Easy to use program specifically designed for those who wish to make improvements on a home they own, or would like to buy. Allows you to finance repair costs up to $35,000 - within your FHA purchase or refinance itself.

"I want to purchase a HUD home but it needs minor repairs."

Jenny recommends: FHA Repair Escrow 203b

Intended to facilitate uncomplicated rehabilitation to a home being purchased from HUD. The funds for the repairs and reserve contingency are borrowed and cannot be more than $5,000 combined.

"I want to purchase a mobile home."

Jenny recommends: Manufactured Home Loan

Our financing program offers Manufactured home loans for clients with FICOs as low as 620.

"I want to purchase a home in a rural area."

Jenny recommends: Guaranteed Rural Housing Loan

Designed to assist households in obtaining housing in rural areas. Loans are limited to applicants with incomes that do not exceed state and local Rural Development (RD) median income limits and property designated as rural by RD.

"I want to build a new manufactured home and purchase the lot too."

Jenny recommends: One Time Close, Construction to Permanent Loan

A true one-time close construction to permanent loan for new manufactured and modular homes. Finances lot purchase and a permanent loan all wrapped in one.

Dallas Morning News articles: DFW Rents see record rise in 2011 / Home Mortgage Outlook for 2012

Couple great articles to share with your "on the fence" clients:

Here are 2 articles in Dallas Morning News Briefing on January 6th 2012:

D-FW rents see record rise in 2011-

North Texas apartment renters paid almost 5 percent more in 2011, the biggest annual increase on record.
At the end of 2011, DFW apartment rents averaged a record $804 a month, the Carrollton-based apartment analyst said Thursday. And most new North Texas rental units start above $1,000.
~DMN

Home mortgage outlook:

Fran Nothaft, chief economist at mortgage giant Freddie Mac, is predicting that residential mortgage rates will be "relatively low during the first half of the year, with rates edging up during the second half."
This week, nationwide rates for 30-year fixed home loans were a record low 3.91 percent.
That means the payment on a $200,000 mortgage is less than $950 (principle and interest) a month. Most new apartments in the Dallas area will run you more than that.
~DMN

Can you qualify for an FHA loan?

FHA loan programs have become popular again as a reliable option for home buyers since the revival of the mortgage industry the past few years. It is a loan program that offers easier qualification and the least amount of down payment. So what do you need to know about it? Here are a few key guidelines:

Down Payment
Minimum 3.5% of the sales price is required from buyer's fund or gift from family member.

Seller Concession
Seller can pay up to 6% of the sales price for closing cost. This does not have to include owner title policy, survey, and home warranty.

Minimum Credit Score
To qualify with 3.5% down payment, your minimum mid credit score has to be 580 or higher. If buyer has 10% down, then the credit score to qualify will be even lower. (We can qualify most buyers down to 580 with 3.5% down payment versus many major banks who cannot due to their own requirements.)

Assets
Most buyers do not need large amounts of assets showing in their bank or retirement fund. Just enough for the down payment will be sufficient.

Appraisal
All properties must pass HUD standards, but that doesn't mean the house has to be perfect. The major items to look for are roof, structure, and foundation. Minor safety hazard items may have to be addressed too, but often are very workable.

Previous Foreclosure or Bankruptcy on Record
ANY previous foreclosure or bankruptcy history on your credit record has to pass at least 3 years from foreclosure date or 2 years from bankruptcy discharged date for consideration.

Purchasing a HUD Foreclosure Home
HUD foreclosure homes are simple and easy to finance with an FHA loan. HUD already has an appraisal for the buyer and, if any repairs are needed, HUD will allow escrow repairs. Not many lenders will work with it, but we do.

Time to Close
Buyers with good solid credit history and income can close their loan as fast as 3 weeks (1 week for option period and 1 week for appraisal and 1 week for underwriting).

FHA 203(k) Loan Program - Turning “Fixer-Uppers” into Dream Homes

What is the Section 203(k) Loan Program?

If you want to buy a home that needs repair or finance needed repairs to your current home, the Section 203(k) loan program by the U.S. Department of Housing and Urban Development (HUD) may be a good option for you. This program allows you to finance the purchase of a house—or refinance your current mortgage—and include the cost of its repairs through a single mortgage.

The Section 203(k) loan program is HUD’s primary Program for the rehabilitation and repair of single family properties. Section 203(k) loans are provided through HUD-approved mortgage lenders nationwide and insured by the Federal Housing Administration (FHA), which is part of HUD. “Section 203(k)” refers to the law, part of the National Housing Act, which allows FHA to make this mortgage insurance available.

The loans are beneficial for low and moderate income individuals or families since the loan down payment can be as little as 3 percent. While individuals, local governments, and non-profit organizations may participate as borrowers in the program, the property must be used as a principal residence by an individual or family.

How the Loan Works

You can take out a Section 203(k) loan as a 15 or 30 year fixed-rate mortgage or as an Adjustable Rate Mortgage (ARM) from a HUD-approved lender. The total amount of your mortgage will be based on the projected value of your home after the renovation is completed, taking into account the cost of the work. A portion of your loan is used to pay for the purchase of the home, or in the case of a refinance, to pay off any existing debt. The remainder is placed in an interest-bearing account on your behalf and released in stages as rehabilitation is completed.

FHA requires that you use a minimum of $5,000 toward eligible repairs or improvements and that you complete the repairs within six months after the loan’s closing depending on the extent of work to be completed. This first $5,000 primarily covers eliminating building code violations, modernizing, or making health and safety-related upgrades to the home or its garage. You may add minor or cosmetic repair after this requirement is satisfied, if applicable. You cannot include improvements for commercial use or luxury items, such as tennis courts, gazebos, or new swimming pools.

JENNY'S TIPS: FHA vs Conventional Loans and VA Loans

One of the most popular questions I get asked by my home buyers is "What is the difference between FHA loans, conventional loans (Fannie Mae and Freddie Mac) and VA loans?"  VA loans are available for qualifying Veterans only. 

Here is a general comparison:

                                                                                                                                                

FHA                                 Conventional                     VA Loans

 

3.5% Down                     5% with high                        0% down
Payment                          credit score                     

6% Maximum                  3%                                         6%

Contribution

for closing cost                  

Up Front Mortgage         No Upfront MIP                Varies depends

Insurance Premium                                                 on Veteran's status

(MIP) Financed into

the Loan                                                                                     

 

 

Monthly Mortgage         Monthly Mortgage                 None

Insurance                        Insurance with 20%

                                       Down

580 minimum                 Higher credit score               620 typically

credit score                     required                           

                                                                        

Max 1 FHA Loan            Max 4 Loans:                        Depends on

per person on                  1 Primary Residence           Veteran's entitlement  

primary residence           3 Investment Properties

These are general guidelines. Borrowers should be reviewed on a case-by-case basis. In today's market, mortgage guidelines are constantly changing as regulators try to "fix" the industry. The trend is that mortgage qualifications will only get tougher.  Best to talk to an experience loan professional and do a pre-qualification analysis. 

Mortgage Case Study: Home Buyer with 580 Credit Score

We closed a FHA loan with a home buyer that has a mid fico score of 580, which is below the current standard now of 640. The process does require more planning for the loan officer and buyers.

Here are the things we evaluated: (The best plan for a real estate professional is to work with a loan officer to evaluate the buyers ability to purchase a home, or just contact us.)

Credit - Their credit of course is less than ideal, but one major factor not listed on the credit report is their rental history. They had an excellent rental history and no collection or charged offs from any apartments they ever lived.

Assets - I recommended them to have (on top of their down payment) at least 2 months PITI (principle, interest, taxes and insurance) saved in any of their retirement, 401K, checking, or savings account.

Bank Statements - Bank statements took time to plan and execute. I reviewed their most recent 2 months statements and it is obvious they are spending more than what they made. Underwriters will view that as failure for the home buyers to budget their finances, and therefore cannot afford to purchase a house. I sat down with the buyers and worked out a budget for them to follow. After 2 months following the budget, they closed on their loan and were very happy.

I sincerely believe home ownership is for everyone. It does take planning, working the plan, and willingness to change your life style to fit a mortgage into the budget.

New FHA Lending Standards

Starting in early summer, the Federal Housing Administration is tightening lending standards in an effort to bolster its dwindling reserves. The new lending standards will make it tougher for some prospective buyers to purchase a home by requiring a higher down payment than the typical 3.5 percent for some borrowers, higher insurance premiums and reduced seller concessions.

Securing FHA-insured mortgages are attractive to borrowers because down payments are only 3.5 percent. Most conventional loans now require 20 percent down, keeping many creditworthy borrowers on the sidelines.

New Guidelines

The new rules — which are temporary and take effect this summer — come after more than a year of stringent standards from lenders. Among them:

Better Credit Score — New borrowers will have to have a minimum credit score of 580 to qualify for a 3.5 percent down payment. Previously, there was no minimum score. Those with lower scores will have to make at least a 10 percent down payment. The average credit score of FHA-insured borrowers is 693.

Higher Insurance Premiums — Buyers who get an FHA-insured loan will soon have to pay a higher initial insurance premium. The new premium will be 2.25 percent of the value of total loan amount, up from 1.75 percent now. A $100,000 mortgage would require a payment of $2,250, or $500 more. But buyers can roll the added cost into the loan amount.

Reduction in Seller Concessions — Starting this summer, sellers will not be able to offer as much help to buyers to pay their closing costs. The maximum amount of assistance will drop to 3 percent of the value of the property, from the current 6 percent.

FHA removes anti-flipping rule

Another FHA rule change could help foreclosure-plagued markets like Las Vegas, Phoenix, Miami, Detroit and Los Angeles, making it easier for investors to “flip” houses to buyers who use FHA-insured loans.Effective Feb. 1, the federal government will waive for one year an FHA anti-flipping rule that prohibits insuring a mortgage on a home owned by the seller for less than 90 days.The new rule lets investors buy today and re-sell as quickly as possible. The move is to allow REO homes purchased by investors to resell as quickly as possible, helping stabilize real estate prices and revitalize neighborhoods after the U.S. housing market collapse.This new rule will open up a new pool of homes to buyers. Waiving the 90-day flip rule is being heralded by many real estate investors as a boon to their ability to buy, rehab and resell foreclosed homes on a more efficient time line.

(Article courtesy of RealtyTrac newsletter)