Written By: Glenn Michaels
When credit scores are obtainable it must be used to determine eligibility for FHA insured mortgage loans. The scores used are the middle score for a borrower with three scores, or the lower score when a borrower only has two scores. After examining each borrower’s credit in the transaction a decision score must be determined. A mortgage transaction multiple borrowers you must use the middle or lowest score for the borrowers, The decision score determines the loan to value and the pricing of the loan since most mortgages are risk based pricing.
When there are multiple borrowers with credit scores you will use the borrower’s decision score for the borrower with the lowest middle score or lowest of two scores. On purchase transactions select the borrower with the lowest middle score or the lower of two scores.
If the decision score is 580 or more the loan is eligible for maximum financing. If the decision score is between 500 and 579 the borrower must put ten (10%) percent down or 90% financing.
Borrowers with no credit scores are eligible for a FHA mortgage using non – traditional credit. The borrower must have at least one (1) PITI cash reserves and no lateness on the nontraditional credit items. The non – traditional credit items must be placed on a Residential Mortgage Credit Report. You may not use nontraditional credit to replace bad credit references.
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Does the deal make sense when you look at the borrower’s credit explanation, credit score, credit profile and the loan’s loan to value. When examining the credit examine the overall credit.
Recently I had cash out refinance transaction with a decision score of “549”. The borrower had a stroke, while ill his wife charged everything resulting in a divorce and a Chapter 7 bankruptcy. The borrower chose not to reestablish his credit but was showing an excellent asset profile. The loan to value (LTV) was 37%. Desk Top Underwriter (DU) with FHA TOTAL approved the loan since the Automated Underwriting Systems (AUS) are more like to approve a mortgage loan with a low loan to value.
When validating the paper work in the loan file, I recognize that the borrower appears to have resolved his credit issues. The medical problem is under the control and the borrower is back to work for three years without further incidence. The divorce and bankruptcy took place five (5) years ago and there is minor credit all being paid on time.
A loan with a 37% thirty seven percent loan to value demonstrates the risks associated with the loan are more on the borrower than the lender. I approved the loan and so did DU /TOTAL.
In this case the borrower’s credit profile appears to have been resolved and the FHA should not have any issues with this file.
About The Author
Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
