As FHA continues to make efforts to strengthen their capital reserve requirements and focus on making quality loans for qualified borrowers, we can all expect for there to be some sensible changes to remove credit risk from the mortgage industry. Beginning October 15th 2013 there will be some updates made to the current FHA mortgage underwriting standards. These new changes may make it a bit more challenging for Massachusetts residents to obtain mortgage financing with a FHA insured mortgage program. The key to adapting to any mortgage underwriting change is education and preparation.
There are two major changes that are being rolled out next month for all FHA programs except for reverse mortgages and FHA Streamlines, and they are; updates to the current collection account guidelines and updates to the disputed account guidelines.
Changes to Collection Account and Judgment Guidelines
FHA does not require collection accounts to be paid off as a condition of a mortgage approval. However, FHA does realize that this creditor’s collection attempts could negatively affect a borrower’s ability to repay his or her mortgage in a timely manner. To help reduce this risk FHA is requiring lenders to change the way they evaluate collection accounts with balances over $2,000. These balances and minimum monthly payments must now be included in the borrower’s DTI (debt to income) ratio if they are not being paid off before closing.
To determine the monthly payment to be implemented into the borrower’s DTI, either the borrower a) Has to provide a letter from the creditor showing the agreed upon monthly debt payment or b) the lender will use a calculation of 5% of the remaining balance of each collection account to determine the monthly liability.
IMPORTANT: Medical collection accounts are not included in this guideline.
Changes to Disputed Account Guidelines
The change to the disputed account guideline is for accounts in dispute that have derogatory balances over $1,000. The important thing to remember is that this is for derogatory accounts. For potential Massachusetts borrowers that have derogatory disputed accounts on their credit report, the lender will now be obligated to manually underwrite the loan. This can lead to the use of an underwriter’s discretion to either approve or deny the file.
IMPORTANT: Disputed Medical accounts are excluded from the $1,000 limit and will require documentation. Also, non-derogatory disputed accounts are excluded from the $1,000 limit.
These changes are just the minimum standard updates that are required by FHA. You will find that many lenders will have their own overlays that may have more stringent standards than laid out above. Remember, the key to a successful mortgage transaction is preparation.