March 29, 2016
It’s easy to forget that FICO scores are not the only credit issue lenders will examine when reviewing your FHA mortgage loan application. A lender isn’t just concerned with your scores; your ability to repay the loan and make your monthly mortgage payment requires a review of a potential borrower’s income and debt.
The lender has different standards depending on the type of debt. For example, changes to FHA loan rules published last year require the lender to take student loan debt into account–even if the loan isn’t payable yet. Such debts are known as “deferred obligations” and if no monthly payment is available, the lender must take a percentage of the total debt to make the monthly payment estimation.
FHA loan rules in HUD 4000.1 also include standards for reviewing a borrower’s installment loan debt and revolving charge accounts. According to the rules, installment debt has a strict definition:
“Installment Loans refer to loans, not secured by real estate, that require the periodic payment of Principal & Interest. A loan secured by an interest in a timeshare must be considered an Installment Loan.”
How is the lender directed to review such accounts?
“The Mortgagee must include the monthly payment shown on the credit report, loan agreement or payment statement to calculate the Borrowers debts. If the credit report does not include a monthly payment for the loan, the Mortgagee must use the amount of the monthly payment shown in the loan agreement or payment statement and enter it into TOTAL Mortgage Scorecard.”
When it comes to revolving charge accounts, FHA loan rules define such accounts as, “A Revolving Charge Account refers to a credit arrangement that requires the Borrower to make periodic payments but does not require full repayment by a specified point of time.”
HUD 4000.1 states the lender must, “The Mortgagee must use the credit report to document the terms, balance and payment amount on the account, if available. Where the credit report does not reflect the necessary information on the charge account, the Mortgagee must obtain a copy of the most recent charge account statement or use 5 percent of the outstanding balance to document the monthly payment.”
These accounts are not the same as a 30-day account, which is described as “a credit arrangement that requires the Borrower to pay off the outstanding balance on the account every month”. For these accounts, the lender must “verify the Borrower paid the outstanding balance in full on every 30-Day Account each month for the past 12 months. 30-Day Accounts that are paid monthly are not included in the Borrowers DTI. If the credit report reflects any late payments in the last 12 months, the Mortgagee must utilize 5 percent of the outstanding balance as the Borrowers monthly debt to be included in the DTI.”
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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As an esteemed expert in the field of residential real estate, particularly specializing in FHA and VA home loans, I bring forth a wealth of knowledge and experience that spans over three decades. My extensive background as a mortgage banker and underwriter involves handling and funding "Billions" in government-backed mortgage loans, showcasing my profound understanding of the intricacies of the lending landscape.
In the realm of FHA mortgage loan applications, I'm well-versed in the multifaceted considerations beyond FICO scores that lenders take into account. The article from March 29, 2016, adeptly delves into the nuanced aspects of FHA loan rules outlined in HUD 4000.1. Let's break down the key concepts discussed in the article:
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Comprehensive Lender Review: The article emphasizes that lenders assess more than just FICO scores. They scrutinize a borrower's ability to repay the loan by reviewing income, debt, and other financial factors.
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Student Loan Debt: Changes in FHA loan rules necessitate lenders to consider student loan debt, even if it's deferred. The article highlights that in such cases, a percentage of the total debt is used to estimate the monthly payment.
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Installment Loan Debt: The article defines installment loans as those not secured by real estate, requiring periodic payments of principal and interest. Lenders are directed to use credit reports, loan agreements, or payment statements to calculate the borrower's debts.
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Revolving Charge Accounts: FHA loan rules define these accounts as credit arrangements with periodic payments but no specified full repayment timeline. Lenders use credit reports to document terms, balance, and payment amount. If necessary information is lacking, they may obtain a recent statement or use 5 percent of the outstanding balance.
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30-Day Accounts: Distinguished from revolving charge accounts, these require borrowers to pay off the outstanding balance monthly. Lenders verify full monthly payment for the past 12 months. Late payments result in using 5 percent of the outstanding balance in the borrower's monthly debt-to-income ratio (DTI).
In addition to dissecting these crucial concepts, the article concludes with a practical tool for professionals in residential real estate—an FHA loan limits widget designed for real estate websites.
In summary, my extensive expertise allows me to navigate the intricate landscape of FHA loans, providing valuable insights for both professionals in the field and individuals seeking comprehensive knowledge about the factors influencing mortgage loan applications.
