Credit Guidelines In Mortgage Underwriting Process

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This guide covers credit guidelines in mortgage underwriting process. Just because a borrower meets the minimum credit score requirements and the debt-to-income ratio does not mean that they automatically qualify for a mortgage loan. There are credit guidelines in mortgage underwriting process. Loan Officers must thoroughly review credit reports and ensure borrowers meet credit guidelines in mortgage underwriting process.

On FHA loans, borrowers must comply with FHA policies and the policies outlined within this document: Credit Report and Scores in the mortgage underwriting process. A tri-merge credit report is required on all loans. Streamline Refinance transactions; it is used solely to validate the credit score.

Credit Score Methodology and Credit Guidelines In Mortgage Underwriting Process

The following criteria may be used to determine each borrower’s credit score using the “middle/lower” method. If a borrower has three valid credit scores, the middle score (numerical middle of the three scores) is used in the mortgage underwriting process. If three valid scores exist for a borrower, but two are the same, the duplicate score is used in the mortgage underwriting process. If there are two valid scores for a borrower, the lower of the two scores is used. If there is one valid score for a borrower, that score is used in the mortgage underwriting process.

Loan-Score Selection in Mortgage Underwriting Process And Credit Guidelines

After selecting the appropriate Credit Score for each borrower, the Loan Score must be determined. If there is more than one borrower, the lowest selected Credit Score among all borrowers is the Loan Score. When there is only one borrower, the selected Credit Score for that borrower is also the Loan Score.

Minimum Credit Scores In Mortgage Underwriting Process

Minimum Credit Scores:

• 580 FICO or greater than 96.5% LTV or 3.5% down payment on FHA Loans
• 500 to 579 credit scores require a 10% down payment on FHA Loans
• VA Loans do not have credit score requirements
• However, to get approved/eligible for VA Loans, Veteran Borrowers should have at least 580 credit scores

FHA Purchase And Rate/Term Refinance

• 580 if LTV >90%
• 560 if LTV≤90%
• 600 if High Balance

FHA Streamline Refinance And Credit Guidelines In Mortgage Underwriting Process

• 620 Credit Scores can have 46.9% front end and 56.9% back end debt to income ratio
• 580 if LTV >90%
• 560 if LTV ≤90%
• 600 if High Balance

Borrowers Without Credit Scores

• Not eligible
• Assume 580 for pricing
• Cash-Out Refinance
• 620

Conforming Balance

• 600 if LTV >75% but ≤80%
• 560 if LTV≤75%

High Balance Mortgage Loans

• 600 if LTV ≤75%

Credit Analysis In Mortgage Underwriting Process

Loans receiving a Refer/Eligible must be manually downgraded and underwritten. HUD requires the Underwriter to manually downgrade to a manual underwrite based on standard FHA guidelines if any of the following credit characteristics exist. Loans with credit score <620 and DTI ratio >43% (effective with case numbers assigned on or after April 1, 2013). Additional derogatory credit references are received that were not included on the credit report evaluated by TOTAL Scorecard. Suspended and debarred individuals may not be approved, even though manual underwriting if any party (borrower, seller, loan officer, listing or selling agent, appraiser) is included on the LDP or GSA list.

Effective with case numbers assigned on or after October 15, 2013: Loans in which borrower(s) have disputed accounts with a cumulative outstanding balance equal to or greater than $1,000. 

Effective with case numbers assigned before October 15, 2013: Disputed accounts or disputed public records are indicated on the credit report. If the credit report or credit report supplement indicates that the disputed accounts meet any one of the following requirements, FHA does not require a manual downgrade if:

• The disputed account is “paid in full,” “resolved,” or
• The disputed account is less than $500 and more than 24 months
• Borrower(s) have delinquent federal debt and do not receive a clear CAIVRs number
• Borrower(s) have a foreclosure or deed-in-lieu of foreclosure in the most recent three years
• Borrower(s) have a bankruptcy in the most recent two years

Borrower(s) most recent 12-month mortgage histories reflect. Three or more late payments ≥30 days, or more payments> 90 days late.

Credit Guidelines In Mortgage Underwriting Process Bankruptcy (BK) – Chapter 7

Requires at least two years from the discharge date, and the borrower must have re-established good credit or chosen not to incur any new credit.

• Seasoning of fewer than two years but no (defined as death or long-term disability of the primary wage earner) responsibly.
• Documentation must be provided to prove that the borrower’s current situation indicates that the BK is likely to remain the same.

How Is Bankruptcy Viewed In the Mortgage Underwriting Process

The borrower may be eligible during and after Chapter 13 Bankruptcy:

• At least 12 payments have been made under the Chapter 13 Bankruptcy Repayment Plan, and
• All payments have been made on time, and
• The borrower has written permission from the BK court to enter into the mortgage transaction.
• Refer to the Manual Downgrade topic.

CAIVRS (Credit Alert Verification Reporting System)

A CAIVRS screening must be performed on all obligors on the loan. Screening is not required on a non-borrowing spouse. If CAVIRS screening indicates an applicant is delinquent on a Federal debt or has had a claim paid on an FHA-insured loan within the previous three years, the borrower is NOT eligible for a new FHA loan. Exceptions are allowed only under the following circumstances—an individual who subsequently defaulted. The borrower must prove that the loan was current at the time of the assumption. A divorce decree or legal separation agreement awarded the property and responsibility to the former spouse. The borrower is not eligible if FHA paid a claim on their mortgage in default before the divorce. 

Collection Accounts and Qualifying For Mortgage Loans

Collection accounts must belong. The borrower must provide a letter of explanation and supporting documentation consistent with the explanation for all collection accounts. Excluding medical collections and charge-off accounts must meet the following capacity analysis: Capacity Analysis Requirement.

Paid in full at closing or before closing. The funds used for payment must be verified and sourced and approved payment arrangements.

The monthly payment amount must be verified and included in the borrower’s debt-to-income ratio for all transactions, regardless of the TOTAL Scorecard recommendation. No payment arrangements. 5% of each outstanding collection account balance must be included in the borrower’s debt-to-income ratio for all transactions, regardless of the TOTAL Scorecard recommendation

Manually Underwritten Loans

Collection accounts must be considered in underwriting the loan. The lender must document the reasons for approving a mortgage when the borrower has collection accounts. The borrower must provide an explanation for all collection activity. The presence of collection accounts has been considered in the borrower’s credit history. No further review is required. HUD does not require the pay-off of outstanding collection accounts as a condition for approval. May be required at the discretion of the Underwriter.

Consumer Credit Counseling (CCC)

These guidelines apply only to manually underwritten loans. For loans that receive approval through TOTAL Scorecard, no further documentation/evaluation is required. Borrowers participating in a consumer credit counseling program may be eligible with documentation that one year of the pay-out period has elapsed under the plan. 

Disputed Accounts During Mortgage Process

Effective with case numbers assigned on or after October 15, 2013: Borrower(s) disputing derogatory credit account(s) must provide a letter of explanation and documentation to support the reason for the dispute. If the borrower is disputing medical accounts, a letter of explanation and supporting documentation are not required. Disputed accounts include non-medical. Derogatory charge-off accounts, and disputed collections, and disputed accounts with late payments within the most recent 24 months.

Disputed Account(s) Analysis Requirements

Disputed Account: Disputed Accounts Analysis Requirement: The cumulative outstanding balance of all borrower account(s) is greater than or equal to $1,000. The mortgage application must be downgraded to a “Refer,” and a Direct Endorsement underwriter must underwrite the loan. Manually. The cumulative outstanding balance of all borrower account(s) is less than $1,000.  A manual downgrade to a “Refer” is not required.

Excluded Accounts, Regardless Of The Amount

Do not require documentation. Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized uses are excluded from the $1,000 limit. Documentation, such as a police report disputing the fraudulent charges, must be provided. If the credit report or credit report supplement indicates that the disputed accounts meet any one of the following requirements, a manual downgrade is not required:

• The disputed account(s) are non-derogatory; or
• The disputed account(s) have a zero balance; or
• The disputed account(s) indicate “paid in full,” or “resolved,”; or
• The disputed account(s) are less than $1,000; or
• The disputed account(s) with late payments aged 24 months or more; or
• The disputed account(s) is current and paid as agreed.
• If the dispute results in the borrower’s monthly debt payment being less than indicated on the credit report, the borrower must provide documentation to support the lower payment.

How Is Foreclosure Viewed In the Mortgage Underwriting Process

Suppose the borrower has had past delinquencies or has defaulted on an FHA-insured loan. In that case, there is a three-year waiting period before the borrower can regain eligibility for another FHA-insured mortgage. The three-year waiting period begins when FHA pays the initial claim to the lender. This includes deed-in-lieu of foreclosure and judicial and other forms of foreclosure. Foreclosure or deed-in-lieu of foreclosure on a non-FHA loan requires three years of seasoning. Exceptions are possible if the foreclosure results from documented extenuating circumstances. 

Judgments Credit Guidelines In Mortgage Underwriting Process

Effective with case numbers assigned on or after October 15, 2013: Judgments must be paid in full before loan approval, except for a court-ordered judgment with payment arrangements. If payment arrangements have been made with the creditor of a court-ordered judgment and three months’ scheduled payments were made before loan approval, payment in full is not required.  The following requirements must be met:

• The verified payment must be included in the DTI.
• The borrower must provide a copy of the payment agreement and evidence that the payments were made per the agreement.
• Prepayment of the scheduled payments to meet the minimum three-month requirement is not allowed.
• In a community property state, non-purchasing spouse judgments must be paid in full or meet the payment arrangement requirements detailed above.

Manual Underwriting Credit Guidelines In Mortgage Underwriting Process

For manually underwritten loans, judgments must be considered in underwriting the loan.  The lender must document the reasons for approving a mortgage when the borrower has one or more judgments. The borrower must provide an explanation for all judgments reflected on the credit report. Court-ordered judgments must be paid off if the title. Judgments not on the title may remain unpaid if the borrower has a repayment plan with at least two payments made before the contract date.

Mortgage/Rental History And Credit Guidelines in Mortgage Underwriting Process

Credit score <620 requires verification of mortgage/rental history. This does not apply to borrowers living rent-free, provided the rent-free status is documented. Non-traditional credit must be documented using a Non-Traditional Mortgage Credit Report (NTMCR). Direct verifications may be obtained only when an NTMCR is impractical or the service is unavailable. Non-traditional credit may be used when the borrower does not have the type of credit that appears on a traditional credit report or to supplement an insufficient number of tradelines.

Non-Traditional Credit Guidelines in Mortgage Underwriting Process

Credit guidelines in non-traditional credit may not be used to offset derogatory credit, create a credit report for a borrower without a verifiable credit history, or enhance a poor payment history.

Non-Traditional Credit Guidelines in Mortgage Underwriting Process

• Include Three Credit References
• This includes at least one from Group I and
• Exhaust all Group I references before considering Group II references

Group I references include rental housing payments and utility company references. Eligible Group II references include medical, Life, Automobile, and Renters Insurance Covenant which is not included in the payroll deduction. Payment to child care providers – made to a business providing such services. School tuition. Retail stores – department, furniture, appliance stores, specialty stores; rent to own – i.e., payment of medical bills not covered by insurance

They have documented 12-month history of saving by regular, non-payroll deducted deposits resulting in an increasing balance to the account. No NSF activity was reported on auto leases or personal loans to document the payments. Non-traditional credit references must include a minimum of 12 months history with no late rental payments in the past 12 months. No more than one 30-day late payment on all other references. No collection accounts/court records reporting (other than medical) within the last 12 months

Insufficient Non-Traditional Credit And Credit Guidelines In Mortgage Underwriting Process

For Mortgage Borrowers with no credit references or only Group II References, Ratios may not exceed 31%/43% and must be computed only on those borrowers occupying the property. Ratio increases based on compensating factors are not allowed. HUD requires two months of reserves. One month of reserves is one month of principal, interest, tax, and principal (PITI). Reserves cannot be gifted. Borrowers need their funds for reserves.

Short Sale and Pre-Foreclosure Credit Guidelines in Mortgage Underwriting Process

Borrowers are not eligible for a new FHA loan if they have a short-sale agreement with their current lender on their owner-occupant principal home. The homeowners who have taken advantage of the short-sale guidelines to give up the higher-priced home and purchase a new one at a lower price must wait three years after the short sale eligible Suppose the borrower had made all monthly mortgage payments on time up to the short sale date with no late payments before the short sale.

Liens from the IRS do not require a subordination agreement unless there is evidence the Internal Revenue Service demands a first lien position. Other tax liens can stay not paid if. If a borrower is under a repayment plan, the regular payments must be included in DTI ratios.

There is no waiting period for borrowers who had a short sale, but before the short sale, they have made all monthly payments on time for the past 12 months. Installment debt payments for the mortgage in the years from the short sale date or pre-foreclosure sale. A borrower who sold his/her property under FHA’s pre-foreclosure sale. Mortgage Borrowers who need to qualify for a mortgage loan with a lender with no overlays, please contact us at Gustan Cho Associates. Contact us today at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available evenings, weekends, and holidays seven days a week.