Is That FHA’s Guideline?

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As most underwriters would agree, underwriting a mortgage is more of an art than exact science. However, when taught to underwrite, the first thing we learned is that we must color with the lines. By this I mean guidelines. That’s right, use whatever colored crayons you would like, but you must color within the lines. These lines are provided for underwriters from a variety of sources, FNMA, FHLMC, VA and yes FHA.

So as each case crosses our desks, we begin to create the picture, the financial one that is, of our perspective borrowers using all of our artistic ability and crayons with the hope that the final masterpiece is a clear financial picture of our perspective applicants. Hopefully the masterpiece will demonstrate that the individual is a credit worthy consumer who is deserving of a mortgage loan but this is not always the case.

Guidelines that were established under each program type are meant to provide a useful guide for underwriters to help them determine if the applicant has the willingness and ability to repay the debt for which they have applied. FHA, just like the others provides us with guidelines as to what is acceptable from a credit risk perspective for their purposes. What this means is that under these conditions the case will or will not be insurable by HUD. But this is not an underwriter’s only consideration.

Very recently I have had a lot of people, processors, loan originators and even management personnel ask the same question, “Is that FHA’s guideline?” Let me say there is no definite answer to this question. In some instances the answer is yes, it’s FHA’s guideline and in other instances the answer is no it’s not FHA’s guideline. In both cases however documentation requirements can vary from underwriter to underwriter and most instances from case to case.

Just as no two-loan applications are alike, no set standard can apply in all cases. Yes you will always perform a credit report however no two credit reports are alike so from a documentation standpoint you may need additional information and in some cases that information may appear more excessive than in a similar case. The same would apply with paystubs, bank statements and so on. It is also very possible that the guideline may be FHA’s guidelines but due to information contained in the case the underwriter may need to review additional information in order to determine if the case meets an acceptable risk threshold.

Keep in mind that FHA’s guidelines, more so than the FNMA and FHLMC, can be ambiguous. The have a tendency to rely heavily on underwriter discretion. Take collections for instance, the 4155 clearly states that collections as a rule do not have to be paid in full but I have to tell you, if they are significant enough and there is a concern that they may result in some sort of wage garnishment, I will request that they be paid. This is not FHA’s guideline but from a prudent underwriting standpoint it might just be required.

Take it a step further, FHA does not require collections be paid in full but if a borrowers credit report demonstrates that every account appearing on the credit report has been charged off and are now collections, I am more than likely going to decline the case as the borrower has not demonstrated the willingness and possible the ability to repay debt. So although the guideline in itself does not state that the collections need to be paid, the collections in themselves can bear significant weight on the overall loan file and what additional documentation the underwriter might need in order to develop enough information to warrant loan approval.

So to state that every documentation request is a FHA guideline is incorrect. FHA does however state that it is the DE underwriter’s responsibility to determine that the case is an acceptable risk and if he or she needs additional documentation that falls out of the norm of guidelines then to request that documentation is acceptable.

Remember, insurability is not the only issue the underwriter is considering when underwriting the loan. There is also salability from a secondary market standpoint, not to mention overall loan performance. FHA may insure the loan without certain documentation, however, if the case is a first payment default, the institution that employs the underwriter might have to buy the loan back. Enough of that and even the support staff will be unemployed.

So the next time you ask is that an FHA guideline, remember that it sometimes takes the blending of many colors to create a masterpiece and you might just need to go the box of 64 crayons instead of limit yourself to the box 8. Think of it as a blending of guidelines to insure overall loan quality and insurability not to mention future employment.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.