Homebuyers Lose Again As FHA Tightens Guidelines

Despite declining FHA loanrnoriginations (from 120,917 in April 2013 to 105,995 in July), HUD issuedrnMortgagee Letter 2013-24 on August 15,  tightening FHA borrowerrnrestrictions effective October 15 .  FHA raised  upfront and monthlyrnmortgage insurance premiums (and made monthly MIP effective for the life of thernloan) earlier this year, leaving FHA loans far less desirable for manyrnbuyers.  The new guidelines will most affect credit challenged buyers,rnthose least likely to qualify for loans outside the FHA program.</p

For borrowers with collections andrncharged off accounts totaling over $2,000, FHA now requires lenders using thernTotal Scorecard underwriting system to include for the first time monthlyrnpayments on charged off accounts.  While some collections report arnminimum payment on credit reports, most do not, and lenders will assume arnpayment of 5% of the outstanding balance.  Adding the assumed paymentsrnwill raise buyers’ debt ratios, reduce their purchasing power, and potentiallyrnprevent some from purchasing homes.</p

Guidelines for loans underwrittenrnmanually are even more stringent, requiring letters of explanation andrnsupporting documentation from borrowers on all charged off/collectionrnaccounts.  Underwriters will have to determine if the account resultedrnfrom a “borrower’s disregard for financial obligations, inability to managerndebt, or extenuating circumstances”.  Minimum payments must still be addedrnto debt ratios, whether the charge offs/collections total $2000 or not.</p

Medical bills are exempt from thernnew guidelines, but old credit card accounts, utility bills, and otherrnliabilities must be included.  Lenders (who have historically ignored manyrncharge offs) will have to be vigilant to ensure they correctly calculaternclients’ debt ratios, especially while doing buyer pre-approvals.</p

HUD’s continued guideline changesrnhave left many FHA borrowers seeking alternatives such as Fannie Mae’s 5% downrnpayment program.  Those with challenged credit scores and debt ratiosrnabove Fannie requirements now face additional hurdles to obtainingrnfinancing.  Astute buyers  will examine their credit reports andrnobtain pre-approval letters well in advance of writing sales offers to avoidrnpotential delays and stress during the loan process.

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