FHA Credit Guidelines
31%/43% of gross income. Where there is justification for exceeding the
standard qualifying ratios, the underwriter must fully document two compensating factors, as defined by HUD guidelines.
If interest rate increases over that on underwriting approval by more than
1%, or if discount point(s) increase at all, loan must be re-underwritten.
Re-underwriting includes a new application form and mortgage credit analysis worksheet.
Cash Reserves: 3 months reserves required on 3-4 Family properties (no gifts allowed)
The borrower’s most recent 2-year credit history will receive the closest
scrutiny, whether by an Automated System or an FHA Underwriter. The
borrower’s overall performance in paying debts as agreed will be evaluated. If the file is
approved by AUS, the findings may be utilized as conditions. For manual underwriting, the FHA Underwriter must consider the risk and compensating
factors to override an Automated System referral, or underwrite a Borrower who has no credit profile yet established.
borrower has no established credit history, the Lender MUST develop a
credit profile from alternative sources such as rent, utility bills, rental
payments, etc. The basic hierarchy of credit evaluation is the manner of payments made on:
- Rental payments (direct verification or cancelled checks to cover the
past 12 months with no lates).
- Utilities - Verify the same as rental payments.
- Installment debts (verify no lates in past 12 months). Count the monthly
payment of all debt with 10 months or more remaining in the debt ratio.
If the debt will be paid off earlier than 10 months, but the monthly payment exceeds 2% of the gross monthly income of the Borrower, the
ratio should reflect this debt and be analyzed accordingly in the credit
- Revolving accounts (including store accts). Evaluate case by case. Use
the monthly payment on the credit report if shown, or obtain a copy of
the billing statement if the Borrower pays less than the “rule of thumb”
5% of balance per month.
Undisclosed Debt(s): Borrower must address any debt revealed on the
credit report that was not disclosed on his/her application. All inquiries on
the credit report that have occurred within the most recent 90 days must
be explained and if new credit is opened, must be verified. Newly opened debt must be verified to
not be related to the Purchase (loan) transaction.
Alimony: Because of the tax consequences of alimony payments, it is
acceptable to deduct the amount of the monthly alimony payment from the Borrower’s income rather than include the payment as a debt in the ratio.
Child Support: Verify the amount of the support to be paid by the Borrower
by obtaining a copy of the Support Order (through the court system or another legal avenue). Verify how long the support will remain in payment
by documenting the age of the child(ren). Consider child support (and alimony, if desired) as recurring installment debt. Any payment remaining
for 10 months or more (or over 2% of the gross monthly income of the Borrower)
must be included in the debt ratio.
Contingent Liability: Contingent liability exists when our Borrower will be
held responsible for payment of a debt should another party jointly obligated
for the payment default on said payment. Unless the borrower can provide conclusive evidence that there is NO POSSIBILITY that the debt holder will
pursue debt collection against him should the other party default, the following rule applies:
For both mortgages and other debt, if the borrower remains obligated for the debt payment, and has
not been released from payment liability, the Primary Obligor (the other “co-signing” party)
must provide satisfactory written documentation that he has been making 100%
of the payments, all paid on time, without any lates occurring for
at least the past 12 months. (If the other party cannot document timely payment on the
account, then the monthly payment must be included in the borrower's
debt to ratio.)
Projected Obligations: Debt payment(s) that are scheduled to begin
repayment within 12 months of the first payment of the mortgage must be
considered in the debt ratio. (Example, deferred student loans, balloon payments, etc.). The Lender must enter the expected (or
actual, if known) monthly payment, and include in the debt ratio.
Debts NOT Included In Ratio:
Unlike other loan types, FHA DOES NOT consider 401k loan repayments as a monthly debt in the ratio. Also NOT
included are: union dues, childcare, commuting costs, voluntary deductions
through payroll. However, ... some lenders do count 401K payments
especially if they show up on a pay-stub. This is called: lender
Collections: FHA does NOT arbitrarily require that all collections be paid
off prior to closing. The reasons for the collections and the way in which the
Borrower has dealt with the accounts will be evaluated on a case-by-case basis. Webster Bank has established the guideline that ALL collections
will be paid off prior to closing for MANUALLY underwritten loans. For loans that have obtained an
automated approval, the findings will determine the way in which the open collections are examined and resolved.
Open Judgments: Both
Automated and manual underwriting require that all open judgments be
paid in full and released from the land records prior to closing. Proof of the satisfaction of the
account(s) must be retained in the loan file.
Previous Foreclosure: Usually a Borrower is
not eligible for an FHA mortgage if a previous residence went into foreclosure (or deed in lieu of
foreclosure) within the most previous 3 years. The overall risk of the loan
will be analyzed based on extenuating circumstances at the time of the foreclosure.
Chapter 7: Borrower’s discharge of bankruptcy should be 2 years or
more previous to the loan application and the Borrower should show reestablished
credit with all recent credit accounts paid as agreed since the bankruptcy.
Chapter 13: The Borrower may qualify without the bankruptcy being
discharged. The Borrower must show at least 1 year paying as court ordered
through the Chapter 13 restructure. The court must approve a new FHA mortgage loan transaction and must provide a copy of the
payment printout for the Borrower. Any debts outside the B/K msut
show no late payments since B/K started.
DU/LP findings may be utilized to determine type of asset verification
required if the file is underwritten through automation.
Files manually underwritten will require the most recent 2 months bank
statements for each account used in the transaction. The statements must show the ownership and activity on the accounts and must show beginning
and ending balances (to cover a full 3 month period for an average balance).
All large deposits must be documented for the source of funds for the increase.
Earnest money deposit(s) must be verified. The bank account used for the
deposit(s) must show the balance before the deposit left the account and must also show ending balance after the
Amounts: All FHA loan amounts are rounded DOWN to the nearest whole dollar