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Underwriting denial because of CAIVRS
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FHA Credit Guidelines

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The FHA loan underwriters focus primarily on the quality of credit over the last 12 months. They are not overly concerned about minor late payments which happened 18, 24 or 36 months ago.  However, all collections, excluding medical, must be paid in full prior to closing (preferably prior to application) or have a documented payment plan.  They do require letters of explanation for all late payments. Underwriters are more concerned about whether the loan makes sense and that you have addressed and corrected whatever issues created the past credit problems.

FHA credit guidelines can seem complicated as far as documentation but the credit guidelines or credit qualification requirements are actually slack compared to a Conventional loan.

FHA Credit Score: 

Most loans on the market today are credit score driven with the exception of FHA which is one of the best loan programs on the market for people with minor issues that have lowered their scores.

Please keep in mind that FHA may not be credit scoredriven but most lenders are.  They have the prerogative to maintain higher standards than FHA and each lender has a different cut off score (the least that they will accept).

Since you are here and if you are interested in understanding scores, this is the break down:

• A score of 720 and above will get you into a conventional conforming loan with the lowest rates available (Fannie Mae and Freddie Mac). These rates are 1% above the 10 year T-Bill.
• In the non-conforming market credit scores will determine your interest rate. You may be in this market for many reasons, not just score. It could be because your loan amount exceeds conventional guidelines (jumbo), the house does not qualify, no down payment, high debt ratios, credit history issues, or you could be self employed and don’t show enough income to qualify.
• Credit scores above 680 will get you the best rates in this market which is 1 to 2 points higher than the conforming market, depending on the type of loan you are getting.
• Scores from 620 to 680 could put you as much as 3 to 4 points higher in rate, and you can still qualify for a zero down program.

Mortgage and Rent payments:

This has to be your number one priority. If you have been more than 30 days late on your rent or mortgage payment in the last 12 months you will not qualify for a Fannie Mae, Freddie Mac,  FHA, or VA loan.   There are sometimes exceptions, … if you have a very high score, lots of assets, and a legitimate documented excuse, you may get a waiver.

Car payment and installment loans:

Your history should reflect no 60 day late payments and no more than one 30 day late to get a conforming loan. The non-conforming loans allow these and again the rate depends on how many late payments you have had.  Again, FHA credit requirements prefer no lates in the last 12 months.

Revolving accounts (credit cards): 

You should not have any payments 60 days late and no more than two payments 30 days late in the last two years for a conforming loan.  FHA allows it with a good explanation as long as they did not occur in the last 12 months.

Collections, Judgments, and Liens: 

Fannie Mae, Freddie Mac, FHA and VA require that all be paid in full and they prefer that they be at least two years old. FHA will sometimes make an exception on the length of time or if they are on a current payment plan in which case all other things must be good.

Bankruptcy: 

Fannie Mae and Freddie require 4 years from discharge date. FHA only requires 2 years after a chapter 7, a good excuse, and re-established credit. Actually, you can qualify for an FHA loan if you are still in chapter 13 (for at least a year) and  have been paying on time through the courts.   You must also get court approval which does happen often!

Non conforming lender requirements vary quite a bit. As a general rule they do want to see reestablished credit unless you are putting 20% down. There are some lenders that will lend with one day out of discharge. Your credit score is very important on these programs. Again, you need a broker to sort out the details for you. Guess what, that’s free, and no obligation. They will look at your entireportfolio and if they can’t get you in something now, they will counsel you on the steps you need to take to get in a loan later. Be sure you seek out a broker that has ALL the products on the market including FHA.

Foreclosure: 

Generally, a foreclosure of your primary residence must be at least three years old and have been caused by circumstances out of your control, such as: death of the primary wage earner, layoff, or long term serious illness. Non-conforming lenders do vary but will normally require a substantial down payment if it is less than 3 years old.

Repossessions: 

The guidelines on this are about the same as a foreclosure except that it cannot have a deficiency balance for a conforming or FHA loan. The non-conforming market doesn’t care about the balance if it is more than three years old and again, their guidelines vary from one lender to another.

Student Loans:

Defaulted student loans will haunt you for the rest of your life. Unless they are re-affirmed or paid off you will never get a conforming, FHA, or VA loan.  However, the non-conforming market generally does not care about them at all except in extreme cases to the tune of $50k or more.

Previous Marriage:

Be careful here. The conforming market could care less about your divorce agreement with respect to your debt. If you signed, you are still accountable. FHA will sometimes make a wavier if you can show the divorce decree that states it is the other parties responsibility and all other things are good. (These debts will also affect your debt to income unless you can prove the other party is paying with 12 months cancelled checks.) The non-conforming lenders will normally accept the divorce decree.

Credit Depth: 

Generally this term refers to how many trade lines you have, how long you have had them and their amounts. Most lenders want to see at least a two-year history and at least 4 trade lines. Some require one of those trade lines to have had a balance over a certain dollar amount ($5,000). In the non-conforming market these requirements vary between lenders.

You can see how poor credit will cost you a lot of money in higher interest. It is important to take care of your credit and monitor it often, as it sometimes contains errors.

FHA loans do not have a zero down payment mortgage but the down payment can be as little as 3.5%.

Here is the exciting part, … those funds (3.5%) can be aGift and come from a family member, charity, or your employer.

The person providing the gift will have to provide a gift letter and their funds will have to be sourced.  The provider will have to show where the money came from by supplying copies of withdrawal slips and bank statements.

• Traditional Guidelines:
  • Neither the lack of traditional credit history, nor the lifestyle of the borrower may be used as a basis for rejection.
  • Collections: Based upon the surrounding circumstances, and as determined by our underwriter, these do not necessarily have to be paid.
  • Judgment: Judgments are required to be paid off before the mortgage loan is eligible for insurance. However, exceptions can be made if the borrower has been making regular timely documented payments and the creditor is willing to subordinate the judgment to the insured mortgage.
  • Foreclosure: A borrower whose previous residence or other real property was foreclosed on, or who has given a deed-in-lieu of foreclosure within the previous three years is not generally eligible. Exceptions can be made based upon extenuating documented circumstances.
  • Chapter 7 Bankruptcy: Will not disqualify a borrower if at least two years have passed since the bankruptcy was discharged.
  • Chapter 13 Bankruptcy: A borrower paying off debt under Chapter 13 may also qualify if at least one year of the pay out period has elapsed with satisfactory payment performance and the court approves the borrower entering into a mortgage transaction.
• Aliens: FHA will insure mortgages made to lawful permanent resident aliens under the same terms and conditions as a US citizen.
• No Income Restrictions.
• Higher Ratios: HUD’s standard ratio guidelines are 29% (maximum exception of 36%) of your gross income for housing and 41% (maximum exception of 50%) of your gross income for housing plus other creditors. Borrowers may, at the underwriter’s discretion, be allowed to extend beyond these ratios based upon sufficient compensating factors.
• Down Payment: The minimum down payment is approximately 3.5%. While credit quality can affect this qualifying requirement, the typical borrower only needs the standard HUD guideline of 3.5% to be approved.
• Gifts: 100% gift funds are acceptable. The donor may be a relative of the borrower, the employer or labor union, a governmental agency, a not for profit private organization, or close friend with a clearly defined interest in the borrower. No repayment of any gift may be expected or implied. Sellers are allowed to pay all closing costs on behalf of the borrower, up to 6% of the purchase price.
• Reserves: There are no reserve requirements for one and two-family unit residences. Three months reserves are required for three and four-family unit residences.
• Multifamily: Three and four family unit residences, regardless of occupancy status, must be self-sufficient. The maximum mortgage is limited so that the ratio of the mortgage payment, divided by the monthly net rental income does not exceed 100%. The net rental income is the appraiser’s estimate of fair market rent from all units (including the unit chosen by the borrower for occupancy), less the allowance for vacancies and maintenance (which is 15%). 85% of the rental income that is expected from the non-occupied units is added to the borrower’s income for qualifying purposes. Down payment is calculated the same as single-family units.
• Overtime, Bonus, and Part-time Income: Overtime and/or bonus income received for a period of less than two years is acceptable where the underwriter determines that there are reasonable expectations of its continuance. An earning trend over the period of time of receipt must be established and analyzed. Part-time income means income from jobs taken in addition to the normal regular employment to supplement the borrower’s income. The same rules apply for determining using it as a part of qualifying.
• Extended Absence From Workforce: In some cases, the borrower may have recently returned to the work force after an extended absence. The borrower’s income may be considered effective and stable, provided the borrower has been employed in the current job for 6 months or more and the borrower can document a 2 year work history prior to the absence from the work force.
• Rental Income: Rental income from relatives residing on the premises is acceptable, provided the rental income is shown on the borrower’s tax returns.
• Cash Saved at Home: Borrowers who meet the “cash borrower” profile (no traditional credit, no bank accounts, etc.), who have saved cash at home and are able to adequately demonstrate the ability to do so, are permitted to have this money included, with satisfactory explanation, as an acceptable source of funds to close a mortgage loan.
• Child care expenses are NO LONGER included as debt.
• Non Occupant Co-Borrowers: When there are two or more borrowers, but one or more will not occupy the property as a primary residence, the maximum mortgage is usually limited to 75% loan to value. However, maximum financing is available for borrowers related by blood or for unrelated individuals that can document evidence of family type or long-standing and substantial relationship not arising out of the loan transaction. Qualifying is determined by the underwriter.
• Assumable: All FHA loans are assumable.
• Electronic/Online Payroll: The industry as a whole recognizes that some employers use online payroll for pay stubs and W-2s. These types of documentation are acceptable.
• Rate Adjustments: There are no interest rateadjustment “penalties” for higher loan to values with FHA fixed rate loans. The rate, is the rate, is the rate.
• Secondary Financing: Secondary financing is not allowed with an FHA loan. The only acceptable second mortgage is with an approved HUD gifting agent, such as down payment assistance provided by a gov’t agency in the form of a “silent” second mortgage. Piggie Back seconds/HELOCS are simply not allowed.
• Home Inspection: A home inspection may or may not be required on a property, depending on various factors. Typically, you will find it is not required, but is recommended on any existing residence.
• Pest Inspection: A termite inspection is required for all existing properties.
• Closing Costs: Closing costs charged to the borrower are restricted and may, in fact, be less than conventional closing costs (dependent upon your lender or broker).