Scott Short
Automated Underwriting Systems (AUS–when the computer underwrites the loan based on specific lender overlays) are unable to determine the existence of extenuating circumstances that resulted in a bankruptcy, foreclosure, deed-in-lieu, pre-foreclosure or short sale (ie: the computer cannot read written extenuating circumstances). If a client has appropriate documentation that these events occurred, the minimum time period has elapsed, and the program does not require an AUS decision, then the loan may be manually underwritten. (If your client is applying for a conventional loan; good luck finding a lender who will take on the risk of manually underwriting a loan). The loan must meet all manual underwriting requirements, including documentation, minimum credit scores and maximum loan-to-value. It is not mandatory that the loan must be procured from a financial institution by keeping one’s assets as collateral, as there are now well-established companies who provide not only quick payday loans but also provide low interest, you could look here where my cousin recently took a loan for her.
To document the existence of extenuating circumstances, the loan file must include all of the following:
  • A signed, written statement from the borrower’s third-party and documentation confirming that this was an isolated occurrence that significantly reduced the borrower’s income and/or increased their expenses
  • No evidence that the borrowers had unacceptable credit prior to the problems
  • Evidence that the borrowers have reestablished acceptable credit with at least four references for at least two years, including one traditional credit reference (an account that would appear on a credit report), and one housing related reference (e.g. a PG&E, SMUD or Comcast bill).
Note: If the derogatory information involved tradeline credit (an account that appears on your credit report), the reestablished credit must also be for tradeline credit. If the derogatory information involved non-credit payment references, either tradelines or non-credit payment references can be used.
  • Evidence on the credit report and other credit documentation that the borrower’s present credit is current
  • Evidence that no new public records checks, no 60-day late payments, no more than two 30-day late payments and no housing lates exist for the most recent 24 months
  • If the client is unable to obtain thirdparty documentation confirming the extenuating circumstances or reestablishment of credit, the derogatory or adverse credit information cannot be offset.
For a new FHA loan: Foreclosure: A borrower whose previous residence or other real property was foreclosed on, sold through a short sale, or was given a deed-in-lieu of foreclosure within the previous three years is generally not eligible. If the foreclosure was greater than three years prior to the date of the application, and the risk decision (AUS) received is an accept, the loan does not need manual downgrading (manual underwrite in the eyes of FHA means that your ratios are 31% housing /43% debt-to-income) and foreclosure documentation is not required. Find expert advice on loans and mortgages at HighGate Property Investments. Remember, FHA counts from the day the mortgage insurance claim was paid to the lender, not the trustee sale date – sometimes it can take months before the claim is paid. Have your mortgage professional check with FHA to confirm the date the claim was paid. Click here for more info and pertinent articles by our experts.
Late Payments, Collection Accounts, and Delinquent Credit Items These adverse items include (according to OnQFinancial’s site):
  • Collection, tax lien, charge-off, or judgment
  • Any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months consisting of more than one 30-day late
If the risk decision (AUS) received were an “accept” and the items above appeared on the credit report and were considered by the AUS, manual downgrading (manual underwrite-meaning lower ratios and more conservative) is not required and further documentation is not required. Follow FHA standard guidelines regarding payment of judgments and/or collections.
Compensating Factors: Underwriters must record on the “remarks” section of the FHA underwriting transmittal the compensating factor(s) used to support loan approval. (The computer cannot read the written comments from the underwriter that are required by FHA when they insure or audit the loan.) Any compensating factor used to justify mortgage approval must be supported by documentation. Compensating factors that may be used to justify approval of mortgage loans with ratios exceeding FHA guidelines are listed below.
  • The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12 to 24 months.
  • The borrower makes a large down payment (10% or more) toward the purchase of the property.
  • The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.
  • Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.
  • The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits.
  • There is only a minimal increase in the borrower’s housing expense.
  • The borrower has substantial documented cash reserves (at least three months’ PITI) after closing. In determining if an asset can be included as cash reserves or cash to close, the lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so absent retirement or job termination.
  • Funds borrowed against these accounts may be used for loan closing, but are not to be considered as cash reserves. “Assets” such as equity in other properties and the proceeds from a cash-out refinance are not to be considered as cash reserves. Similarly, funds from gifts from any source are not to be included as cash reserves.
  • The borrower has substantial nontaxable income (if no adjustment was made previously in the ratio computations).
  • The borrower has a potential for increased earnings, as indicated by job training or education in the borrower’s profession.
  • The home is being purchased as a result of relocation of the primary wage-earner, and the secondary wage-earner has an established history of employment, is expected to return to work, and has reasonable prospects for securing employment in a similar occupation in the new area. The underwriter must document the availability of such possible employment.
Reviewing the Borrower’s Credit History: When reviewing the borrower’s credit history and credit report, attention must be paid to the following:
  • Delinquent Accounts When delinquent accounts arerevealed, the underwriter must determine whether:
  • The late payments were due to a disregard for, or an inability to manage, financial obligations, or
  • Due to factors beyond the control of the borrower, including delayed mail or disputes with creditors.
  • Minor Derogatory Information Minor derogatory information occurring two or more years in the past does not require explanation.
  • Major Derogatory Information The following items require a detailed written explanation from the borrower:
    • Major indications of derogatory credit, including judgments and collections
    • Any other recent credit problems
    The borrower’s explanation must be reasonable and be consistent with other credit information in the loan file.
  • Previous Rental or Mortgage Payment History The payment history of the borrower’s housing obligations is of significant importance in evaluating credit. The underwriter must determine the borrower’s payment history of the housing obligations through either:
    • The credit report, directly from the landlord (with no identity-of interest with the borrower) or mortgage servicer, or
    • Canceled checks covering the most recent 12 month period.
  • Recent and/or Undisclosed Debts The underwriter must determine the purpose of any recent debts as the indebtedness may have been incurred to obtain part of the required cash investment on the property being purchased.Similarly, a satisfactory explanation must be provided by the borrower to account for the omission of any significant debt shown on the credit report but not listed on the loan application. The borrower must explain all inquiries shown on the credit report in the last 90 days.
  • Collections and Judgments Collection accounts are not automatically required to be paid off as a condition for loan approval. However, court-ordered judgments must be paid off before the mortgage loan is eligible for insurance endorsement.
    An exception may be made if the:
    • Borrower has been making regular and timely payments on the judgment, and
    • Creditor is willing to subordinate that judgment to the insured mortgage
    Both collections and judgments indicate the borrower’s regard for credit obligations and must be considered in the analysis of creditworthiness. The borrower must explain in writing all collections and judgments.
I wanted to write this article to help the REALTOR® understand what a lender needs to consider after derogatory credit. If you can prep your client about these concerns you will be helping them facilitate the process.
If you have any questions or comments, you can email me: Scott Short, Comstock Mortgage at sshort@comstockmortgage.com or call 916-977-1233.
Source: Second Mortgage