FHA – Credit History.
Written by:
Misty Nixon
NAMP Volunteer Writer
In my last writing we briefly touched on some of the credit issues you may come across while processing FHA loans. Did you know that collection agencies pull credit once the account has been bought from another agency? If you come across a borrower with several collections on their credit report, look to see if they appear to be duplicates. Chances are they have been sold recently to a new company. I do this by obtaining a credit supplement from your credit bureau. I ask them to update the account to its original inception date and delete any duplicate accounts. This way my underwriter will see that even though there has been recent activity on these collection accounts they are over 2 years old and will not be required to be paid off. FHA concentrates on what you have done in the recent 2 years. As we already know, medical collections do not count against your borrowers and do not need to be paid before closing. Some agencies charge per account to be updated and some charge a flat fee for up to 6 updates then it goes up, regardless what the fee is, you will be passing that fee onto the borrower at closing on the Settlement Statement along with the invoice from the credit bureau. You must have that in order to charge for it on the Settlement Statement also known as the HUD 1.
After I have narrowed down my collection items, I look to see if they have previously owned a home and had any mortgage payments that were late. If so, you would want to obtain a Verification of Mortgage from that company to verify if they are accurately reporting those late payments. If they are truly in fact late, you need to document why. Was it due to a divorce, a death in the family etc. You will need to include that in your detailed letter of explanation to go in the file. I actually had a customer who proved a rather large lending institution wrong. They misapplied 1 payment and caused him to have a rolling late payment for 12 months. That drastically dropped his score but he was able to document he was never late and was able to secure financing for his new home purchase.
If you find after reviewing your credit report and see that there just really aren’t any good open accounts you will want to obtain 3 alternate credit letters. This is where the customer has his electric company, insurance, phone or something of significance to write a credit reference letter for them showing how long they have had that account and that it has never been late. You want to sell the underwriter that this will not happen again and you had a very good reason for them.
You may find you have rather large collection items such as car repossession. It has been my experience one of my underwriters allowed my customer to make payment arrangements on that large debt and make 3 monthly payments on the account to prove they have every intention of paying the debt off. You cannot make 3 payments in one month. That does not serve as payment history. They would need to make 3 payments at the same time in 3 consecutive months. You will also need to obtain the payment arrangement agreement from the creditor stating the arrangements and document those payments have cleared the bank and include this in your detailed Letter of Explanation to the underwriter.
If all has failed and you are still not able to obtain approval for your borrower you can always get a co-signer. They would need to qualify for the mortgage on their credit, income, assets, etc. I’m doing one of those right now. This particular customer has 2 jobs but the underwriter would only allow me to use his primary job, as he did not have that 2nd job for 2 years in order to be counted as 2nd job income and he does not qualify for the loan due to this reason because he was initially approved with both incomes (we will talk more about that in the next issue). My customer fully documented how the company had been recruiting him and it was even in the same line of work. He was able to work Monday – Thursday on his primary job and Friday, Saturday and Sunday on his 2nd job. He was an IT Technician and in high demand but it did not matter because he did not have the two-year history of having 2 jobs. You can see know how the significance of a co-signer can help out a situation like this. The co-signer would need to sign all the documents at closing just as the primary borrower does. In some cases where the co-signer is located out of town such as mine was, I obtained and got approved a Power of Attorney for the sister who lived here.
One important thing in situations as these, once you have had a loan denied for income issues you will need to start all over again with your co-signer by re-submitting your loan and providing all the necessary disclosures and items for your co-signer as you did your primary borrower. It is basically a new loan even though the property address is still the same the parameters of the loan are completely different now.
In the next issue we will discuss income and self-employed borrowers and the importance of documenting work history, overtime, bonuses etc. When most borrowers are asked at application how much do you earn they don’t tell you that most of the income is from overtime and/or bonus income. These 2 items play a very important factor in calculating income. We will go over next issue.
**For FHA Training Classes Visit http://www.FHAtraining.org.
About the Writer. As one of NAMP's volunteer writers, Misty Nixon is currently a NAMP member in good standing. Feel free to email Misty at: misty@mortgageprocessor.org. Or, if you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.
Misty Nixon
NAMP Volunteer Writer
In my last writing we briefly touched on some of the credit issues you may come across while processing FHA loans. Did you know that collection agencies pull credit once the account has been bought from another agency? If you come across a borrower with several collections on their credit report, look to see if they appear to be duplicates. Chances are they have been sold recently to a new company. I do this by obtaining a credit supplement from your credit bureau. I ask them to update the account to its original inception date and delete any duplicate accounts. This way my underwriter will see that even though there has been recent activity on these collection accounts they are over 2 years old and will not be required to be paid off. FHA concentrates on what you have done in the recent 2 years. As we already know, medical collections do not count against your borrowers and do not need to be paid before closing. Some agencies charge per account to be updated and some charge a flat fee for up to 6 updates then it goes up, regardless what the fee is, you will be passing that fee onto the borrower at closing on the Settlement Statement along with the invoice from the credit bureau. You must have that in order to charge for it on the Settlement Statement also known as the HUD 1.
After I have narrowed down my collection items, I look to see if they have previously owned a home and had any mortgage payments that were late. If so, you would want to obtain a Verification of Mortgage from that company to verify if they are accurately reporting those late payments. If they are truly in fact late, you need to document why. Was it due to a divorce, a death in the family etc. You will need to include that in your detailed letter of explanation to go in the file. I actually had a customer who proved a rather large lending institution wrong. They misapplied 1 payment and caused him to have a rolling late payment for 12 months. That drastically dropped his score but he was able to document he was never late and was able to secure financing for his new home purchase.
If you find after reviewing your credit report and see that there just really aren’t any good open accounts you will want to obtain 3 alternate credit letters. This is where the customer has his electric company, insurance, phone or something of significance to write a credit reference letter for them showing how long they have had that account and that it has never been late. You want to sell the underwriter that this will not happen again and you had a very good reason for them.
You may find you have rather large collection items such as car repossession. It has been my experience one of my underwriters allowed my customer to make payment arrangements on that large debt and make 3 monthly payments on the account to prove they have every intention of paying the debt off. You cannot make 3 payments in one month. That does not serve as payment history. They would need to make 3 payments at the same time in 3 consecutive months. You will also need to obtain the payment arrangement agreement from the creditor stating the arrangements and document those payments have cleared the bank and include this in your detailed Letter of Explanation to the underwriter.
If all has failed and you are still not able to obtain approval for your borrower you can always get a co-signer. They would need to qualify for the mortgage on their credit, income, assets, etc. I’m doing one of those right now. This particular customer has 2 jobs but the underwriter would only allow me to use his primary job, as he did not have that 2nd job for 2 years in order to be counted as 2nd job income and he does not qualify for the loan due to this reason because he was initially approved with both incomes (we will talk more about that in the next issue). My customer fully documented how the company had been recruiting him and it was even in the same line of work. He was able to work Monday – Thursday on his primary job and Friday, Saturday and Sunday on his 2nd job. He was an IT Technician and in high demand but it did not matter because he did not have the two-year history of having 2 jobs. You can see know how the significance of a co-signer can help out a situation like this. The co-signer would need to sign all the documents at closing just as the primary borrower does. In some cases where the co-signer is located out of town such as mine was, I obtained and got approved a Power of Attorney for the sister who lived here.
One important thing in situations as these, once you have had a loan denied for income issues you will need to start all over again with your co-signer by re-submitting your loan and providing all the necessary disclosures and items for your co-signer as you did your primary borrower. It is basically a new loan even though the property address is still the same the parameters of the loan are completely different now.
In the next issue we will discuss income and self-employed borrowers and the importance of documenting work history, overtime, bonuses etc. When most borrowers are asked at application how much do you earn they don’t tell you that most of the income is from overtime and/or bonus income. These 2 items play a very important factor in calculating income. We will go over next issue.
**For FHA Training Classes Visit http://www.FHAtraining.org.
About the Writer. As one of NAMP's volunteer writers, Misty Nixon is currently a NAMP member in good standing. Feel free to email Misty at: misty@mortgageprocessor.org. Or, if you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.
posted by Editor in Chief at 10:31 AM
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