FHA Scorecard Makes Its Mark
Author: Joseph Corno – President – We Be Consulting and Seminars
The Federal Housing Administration’s (FHA) recently introduced TOTAL Mortgage Scorecard has incorporated differences between FHA Loans and products from Fannie Mae® and Freddie Mac® via an automated underwriting system (AUS). It also has changed the way to submit an FHA Loan for lenders.
There are numerous advantages to FHA Loans vs. Conventional Underwriting. The FHA scorecard has incorporated many traditional compensating factors and allows reduced documentation on approvals.
Here’s how it works:
Income: Cosigner income mingles with the main borrowers’ income to become one underwritten income. The scorecard has increased income ratios not realized through traditional underwriting, as the underwriting system can approve more than the traditional 41 percent back ratio.
While traditional income verification requires employment verification, two years of
W-2s and one month’s pay stubs, the scorecard requests verification based on a rated risk. The AUS can process a six-month employment history for those with a recent educational degree.
Credit: FHA allows for A- and B-credit borrowers. A one-year minimum “reestablished credit history” is needed for a major medical or family-death derogatory-credit experience. Two years is needed for all other derogatory-credit experiences, including bankruptcy.
If credit is reestablished fro two years on a bankruptcy that does not include a foreclosure, a borrower can obtain an FHA loan two years after the discharge date. A Chapter 13 borrower can obtain FHA financing with court approval while in bankruptcy. With a foreclosure, the reestablished-credit minimum extends to three years.
AUS and traditional submissions can include “alternative credit” – such as payments for or to utilities, mobile phones, vehicle insurance and more – for credit history.
Assets: FHA allows savings at home for assets. The differing automated-approval levels determine if an explanation letter is needed and if the borrower used a check for the earnest money deposit of has a checking account. As the AUS calculates the risk grade, the system determines the number of bank statements necessary to satisfy the loan file’s grade, if a deposit verification can satisfy it alone of if the system requires the statements and deposit verification.
An example of the scorecard’s compensating factoring is found with a relative gift, which can be used as a borrower asset. The strength of the gift – not being used on the transaction – can improve AUS findings. A donor letter and cashier check usually are required, but there is no “sourcing” of donor funds and deposit into the borrower funds.
Nonprofit grants are utilized for down payment assistance. The group needs to be acceptable to the secondary market investor where you submit the loan. The scorecard AUS will process the gift assistance.
The loan-processing system considers compensating factors such as holding a second job, not counted earlier because of a short employment history. Others include attending a budgeting class, obtaining an academic degree and receiving set pay increases. Strong factors for obtaining a better approval with fewer conditions include possessing cosigners (which improve ratios), residual assets after purchasing, long employment with one employer and rent payments that closely mirror mortgage payments.
If the AUS fails, you can submit the loan file traditionally. However, this file must correct or improve previously entered data. The scorecard also will deny a borrower at maximum ratios with minimum reestablished credit and using savings at home and/or a nonprofit gift.
If you have not taken a recent look at FHA loans and the scorecard, now may be time.