FHA
Reopens the Housing Market to Those with
Damaged Credit
during
Recession
On Thursday August 15th 2013,
FHA announced a new set of guidelines
under the FHA program specifically
geared toward homeowners and prospective
homeowners adversely impacted by the
Great
Recession.
These changes are
on Handling of Collections and Disputed
Accounts. (See Mortgagee Letter 2013-24
for detail information).
This guidance is effective for all case
numbers assigned on or after October
15th, 2013.
This program reopens the housing market
to a many borrowers who would otherwise
have been waiting for 3-7 years to tick
off the clock--depending on their
initial credit issue--before being able
to qualify for a mortgage.
As a result of the recent
recession
many borrowers who experienced
unemployment or other severe reductions
in income, were unable to make their
monthly mortgage payments, and
ultimately lost their homes to a
pre-foreclosure sale, deed-in-lieu, or
foreclosure. Some borrowers were forced
to file for bankruptcy to discharge or
restructure their debts. Because of
these recent recession-related periods
of financial difficulty, borrowers’
credit has been negatively affected. FHA
recognizes the hardships faced by these
borrowers, and realizes that their
credit histories may not fully
reflect their true ability or
propensity to repay a mortgage.
The program will require prospective
borrowers to thoroughly document
the nature of the "Economic Event," that
it resulted in derogatory credit, and
that there has been a satisfactory
recovery from the Event per the new
guidelines. The "Back to Work" program,
as it's called, doesn't constitute a
free pass for those who would
otherwise be unable to qualify for
financing.
A summary of new guidelines is shown
below. For complete and detail
information about these changes, please
visit
http://www.hud.gov/answers or view a
copy of the Mortgagee Letter 2013-24
from
http://www.texasfivestarrealty.com/documents/FHA_Mortgagee_Letter_2013-24_Collections_and_Charge-offs.pdf
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.
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 inability to manage debt;
or
·
Extenuating circumstances.
·
The borrower’s disregard for financial
obligations
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.
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.
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.
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 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.
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