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         FHA Credit Guidelines           

CREDIT SCORES: On October 4th, 2010 HUD issued rules relating to borrowers credit score.  Borrower's who are applying for a FHA mortgage now need to have a certain minimum scores. Keep in mind that Lenders may impose higher standards than HUD in order to protect themselves from losses and have the ability to sell the mortgages on the secondary markets.  The new credit score requirements are:

  • Borrowers with a minimum decision credit score at or above 580 are eligible for maximum financing.

  • Borrowers with a minimum decision credit score between 500 and 579 are limited to 90 percent LTV.

  • Borrowers with a minimum decision credit score of less than 500 are NOT eligible for FHA-insured mortgage financing.

  • Borrowers with a non-traditional credit history or insufficient credit are eligible for maximum financing but must meet the underwriting guidance for non-traditional credit.

  • Borrowers using 203(h), Mortgage Insurance for Disaster Victims, are eligible for 100 percent financing and no downpayment is required, provided that the borrowers have a minimum credit score of 500 (borrowers with decision credit scores below 500 are not eligible for FHA financing).

Get Your Credit Report Now! Credit Scores, while not perfect, they do give an indication of the borrower’s credit history. Borrowers with Credit Score above 620 will generally be able to get approved through the use of automated underwriting engines. Borrowers with Credit Score below 620 may not get approved through the automated engines and have to go through a manual underwriting process. Manual underwriting usually takes a few extra days and a little more documentation. Once again it will be the overall pattern of credit that will be evaluated. 

BORROWER WITH NO CREDIT:

HUD recognizes that some borrowers may not have yet established a credit history. For those borrowers, and those who do not use traditional credit, the lender will try and develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means. This is called Non-Traditional Credit.  Specific guidelines in dealing with this were released on April 29 ,2008.   In trying to establish credit a borrower may consider applying for a secured credit or debit cards or rebuilding their credit history.

CONSUMER CREDIT:

Borrower’s with accounts that were 60 days or more past due in the last 12 months will greatly reduce their chances of being approved, unless they have a solid explanation and other compensating factors. Borrowers with isolated 30 day late payments should be able to be approved provided the rest of their accounts are paid satisfactory.

 

COLLECTIONS & JUDGMENTS: 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 that risk, FHA is requiring the lender to follow the guidelines on collection accounts with an aggregate balance equal to or greater than $2,000, as described below.

If the Automated Underwriting System using the TOTAL Mortgage Scorecard rates the mortgage as an Accept and the cumulative outstanding balance of all collections of all borrowers is less than $2,000 the lender is not required to consider or evaluate collection accounts.

Else, if the cumulative outstanding balance of all collections of all borrowers is equal to or greater than $2,000 the lender must include monthly payments in the borrower’s debt-to-income ratio for accounts that will remain open subsequent to closing.

Collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance. A lender must analyze the impact of the borrower’s ability to pay all collection accounts, including those of the non-purchasing spouse (with the exception of obligations excluded by state law).

They will almost always require that court-ordered judgments be paid-off before the mortgage loan may fund. (An exception may be made if the borrower has been making regular and timely payments on the judgment and the creditor is willing to subordinate that judgment to the insured mortgage.) Previous or current collections of judgments are considered when evaluating a borrower’s credit profile.

PREVIOUS MORTGAGE FORECLOSURE: A borrower whose previous residence or other real property was foreclosed on or has given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an insured mortgage. However, if the foreclosure of the borrower's principal residence was the result of extenuating circumstances beyond the borrower's control and the borrower has since established good credit, an exception may be granted.

Extenuating circumstances do not include the ability to sell a house when transferring from one area to another or divorce.

BANKRUPTCY - CHAPTER 7 LIQUIDATION: A bankruptcy (Chapter 7 liquidation) will not disqualify the borrower if at least two years have passed since the bankruptcy was discharged and the borrower has re-established good credit (or has chosen not to incur new credit obligations), and has demonstrated an ability to manage financial affairs. An elapsed period of less than two years (but not less than twelve months) may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited an ability to manage financial affairs and the borrower's current situation is such that the events leading to the bankruptcy are not likely to recur.

BANKRUPTCY – CHAPTER 13: A borrower paying off debts under Chapter 13 of the Bankruptcy Act may qualify if one year of the pay-out period has elapsed and performance has been satisfactory. The borrower must also receive court approval to enter into the mortgage transaction.

NON-PURCHASING SPOUSE:  If a married borrower is purchasing a property by himself/herself, the credit obligations of the spouse must be included with the application and will be factored in with the borrower's credit obligations and used to determine the financial capacity of the borrower only if the borrower lives in a community property state.  Furthermore, the non-purchasing spouse may be required to sign a security instrument or documentation relinquishing all rights to the property.       

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