Written By: Hina Habib
FHA backed loans are facing delinquencies that could lead to a big loss for the government. Reasons for this is due to less amount of down payments and low credit score requirements in the past. These previous requirements made this possible for every average employed citizen to buy a house with affordable down payment and 100% gift funds. There were no credit score requirements and if a borrower did not have any scores FHA allowed using nontraditional credits to get the loan approval requirement. Nontraditional credits are still allowed on loan transactions if the borrower qualifies with other criteria.
Need FHA Training? CLICK HERE: http://www.FHA-Classes.org
Talking about nontraditional credits, these are trade lines which are not reported on credit and used to build credit for a borrower for that loan transaction only. This includes phone bill, electric bill, water bill and any other store bills where a borrower is making monthly payments. Once letters from these creditors are received with a 12 month history, these were supposed to be added on the credit as a trade line. Rent is considered one of the strongest nontraditional credit and utility bills placed at the second strongest trade line.
After 2008/2009, FHA got a little stricter with the guidelines but still did loans for the borrowers not able to get financing at the banks. Considering these flexible guidelines in the past and the consequences, the Federal Housing Authority had to do amendments to the current requirements and expect less of a loss in future.
In the recent changes, FHA will also now require borrowers to have minimum credit scores of 580 if they want a loan with a minimum down payment. The down payment requirement is 10% for a borrower with less than 580 or between 500-579 scores. Borrowers are required to have their own funds of 10%. Gift funds cannot be used with scores below 580. In some overlays from lender seller concession is also not allowed with scores below 580. Moving further, all judgments need to be paid before the closing. A payment arrangement is accepted in certain cases and requires borrowers to make 3 timely payments towards these judgments.
Need FHA Training? CLICK HERE: http://www.FHA-Classes.org
On the other hand, an FHA streamline refinance does not have any minimum credit score limit. Streamline refinance means refinancing those borrowers currently insured by the Federal Housing Authority. The new rules for FHA streamline mortgage require no appraisal, no proof of employment and no credit check. The only requirement is that the borrower should be current on the mortgage and should have made all payments on time in the last 12 months. FHA has also reduced their fees for streamline mortgages.
We are hoping that in the near future, with improved FHA guidelines, we can reduce the number of default borrowers. A lot of borrowers are underwater and since many of them did not have a large down payment, they are getting careless about keeping these houses.
About The Author
Hina Habib - As an NAMP® staff writer, Hina Habib has been working as a Loan Processor with mortgage industry for more than 15 years now. Hina is a loan processing instructor for Loan Processor University (www.LoanProcessorTraining.org). She has ample experience of structuring and processing FHA, VA and Conventional loans. She worked with an established Correspondent Lender/ Mortgage Broker for 13 years. After her promotion as a Senior Loan Processor she trained loan officers and other processors. Currently she is working with a strong and established banking institute as a Mortgage Processor II. She is very well informed with the current on going changes in the mortgage history and can help answer your questions more accurately. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
