February 6, 2013
The FHA has issued several rule changes recently including alterations to the FHA HECM and HECM Saver programs, new guidelines for mortgage insurance, and also the procedures for how some FHA loan applications must be processed with credit scores and debt-to-income ratios that exceed certain new guidelines.
For example, FHA refinance loans for borrowers with negative equity in their homes have new guidelines which state, “Refinances of Borrowers in Negative Equity Position where the borrower has a decision credit score below 620 and the debt-to-income ratio exceeds 43.00% must be manually underwritten.”
The same is true in cases of FHA Energy Efficient Mortgages. New FHA rules state, “While Energy Efficient Mortgages where the borrower has a decision credit score below 620 and the debt-to-income ratio exceeds 43.00% must be manually underwritten, borrowers may still be approved with a debt-to- income ratio of up to 45.00% without compensating factors. Compensating factors are only required for debt-to-income ratios over 45.00%.”
How does having a loan “manually underwritten” affect the application?
In cases like these where a loan is required to be manually underwritten because of credit score and debt-to-income ratios, the lender must include justification for approving the loan that may require compensating factors such as a larger down payment, substantial cash reserves, additional income or other things that can improve the borrower’s chances for loan approval.
According to FHA Mortgagee Letter 2013-05, “Compensating factors used to justify approval of mortgage loans with ratios that exceed benchmark guidelines, as defined in HUD Handbook 4155.1, Section 4.F., must be recorded on the Underwriter Comments section of Form HUD-92900-LT, FHA Loan Underwriting, and Transmittal Summary. Any compensating factor used to justify mortgage approval must also be supported by documentation.”
Note the last line—that portion of the new requirements states that the lender is required not only to note compensating factors, but also to provide documentation to back up those factors. You may need to provide paperwork such as deposit slips, work agreements, or other things that could be used to document compensating factors where required. If you are affected by these rule changes and aren’t sure what kind of compensating factors are needed, speak to your loan officer or contact the FHA directly at 1-800 CALL FHA.
Do you have questions about FHA home loans or refinance loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: