Despite declining FHA loan
originations (from 120,917 in April 2013 to 105,995 in July), HUD issued
Mortgagee Letter 2013-24 on August 15, tightening FHA borrower
restrictions effective October 15 . FHA raised upfront and monthly
mortgage insurance premiums (and made monthly MIP effective for the life of the
loan) earlier this year, leaving FHA loans far less desirable for many
buyers. The new guidelines will most affect credit challenged buyers,
those least likely to qualify for loans outside the FHA program.
For borrowers with collections and
charged off accounts totaling over $2,000, FHA now requires lenders using the
Total Scorecard underwriting system to include for the first time monthly
payments on charged off accounts. While some collections report a
minimum payment on credit reports, most do not, and lenders will assume a
payment of 5% of the outstanding balance. Adding the assumed payments
will raise buyers’ debt ratios, reduce their purchasing power, and potentially
prevent some from purchasing homes.
Guidelines for loans underwritten
manually are even more stringent, requiring letters of explanation and
supporting documentation from borrowers on all charged off/collection
accounts. Underwriters will have to determine if the account resulted
from a “borrower’s disregard for financial obligations, inability to manage
debt, or extenuating circumstances”. Minimum payments must still be added
to debt ratios, whether the charge offs/collections total $2000 or not.
Medical bills are exempt from the
new guidelines, but old credit card accounts, utility bills, and other
liabilities must be included. Lenders (who have historically ignored many
charge offs) will have to be vigilant to ensure they correctly calculate
clients’ debt ratios, especially while doing buyer pre-approvals.
HUD’s continued guideline changes
have left many FHA borrowers seeking alternatives such as Fannie Mae’s 5% down
payment program. Those with challenged credit scores and debt ratios
above Fannie requirements now face additional hurdles to obtaining
financing. Astute buyers will examine their credit reports and
obtain pre-approval letters well in advance of writing sales offers to avoid
potential delays and stress during the loan process.