Written By: Bonnie Wilt-Hild
As we all jump back into the FHA game it seems that guidelines are changing as rapidly as the FHA program itself is changing. Each week new mortgagee letters are being issued to appropriate new and expanded guidelines and this week is no different.
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FHA has long allowed non-traditional credit guidelines for borrowers who demonstrate no traditional credit trade lines. The approach that was always taken was that if a borrower chooses not to incur debt as a means to manage their financial responsibilities then that individual should be looked upon favorably as he or she managed their financial affairs without incurring debt. In these instances it was the lenders responsibility to develop an overall credit history using non-traditional credit sources to determine the borrowers ability to make monthly payments in a timely fashion.
When considering the directive, lenders had a lot of leeway where that task was concerned. From rental housing payments to school tuition, just about any monthly expense where their borrower was required to make a monthly payment was acceptable for HUD purposes.
On April 29, 2008, HUD issued Mortgagee letter 08-11 and all of this has now changed. There are now new guidelines in effect for non-traditional credit sources, which will now place references in Group I or Group II categories. Additionally, borrowers who have no non-traditional credit sources from Group I, will be considered insufficient credit borrowers and will have to fall under a whole different set of guidelines, which are far more stringent than any guidelines instituted by FHA in the past. These new guidelines could make it a little more difficult for borrowers who have no current housing expense to obtain FHA financing.
To sum it up, Group I references are non-traditional references for rental expense and normal household expenses such as utilities, landline phone lines and cable T.V. Any other alternative credit references will fall into Group II references and borrowers who can demonstrate no Group I references will be considered insufficient credit borrowers. There are several guidelines that will apply to these borrowers in addition to demonstrating 3 acceptable sources of non-traditional credit. A few of these guidelines are as follows:
1. The borrower may have no collection accounts appearing on their credit report within the most recent 12 months.
2. There may be no more then 1x30 day late in the most recent 12 months on any of the non-traditional credit trade lines.
3. Borrowers ratio’s may not exceed the 31/43% housing to income and debt to income ratio guidelines.
4. The borrower must have 2 months PITI in reserves after closing which must be borrowers own funds and can not come from gifts, grants etc.
5. There may be no non-occupying co-borrowers used to help the borrower qualify.
There are additional guidelines where these cases are concerned so I strongly recommend pulling the mortgagee letter and sharing it with staff. The changes will have a large impact on a lot of groups particularly certain minority groups and new immigrants who could previously obtain home loan financing using non-traditional credit as a means to develop an overall credit history.
The link for the mortgagee letter is listed below for easy access. While reading the letter I will recommend contemplating what additional changes may be ahead where the FHA program is concerned and perhaps modification of any types of strategic business plans to compensate for tightening of regulation.
I do believe that FHA will continue to serve the low to moderate income segment in the future as effectively as they have in the past but I also believe that there will be some necessary changes where the program is concerned to ensure financial stability of the agency as well as the overall housing market. From a lender standpoint, the best you can do is prepare for the inevitable and make sure your staff stays abreast of the new information. Happy lending.
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/
Need FHA Training? CLICK HERE: http://www.FHA-Classes.org
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
