Credit History:

The borrower's most recent 2-year credit history will receive the closest scrutiny, whether by an Automated System or an FHA Underwriter. The borrower’s overall performance in paying debts as agreed will be evaluated. If the file is approved by AUS, the findings may be utilized as conditions. For manual underwriting, the FHA Underwriter must consider the risk and compensating factors to override an Automated System referral, or underwrite a Borrower who has no credit profile yet established.

If a borrower has no established credit history, the Lender MUST develop a credit profile from alternative sources such as rent, utility bills, rental payments, etc. The basic hierarchy of credit evaluation is the manner of payments made on:

• Rental payments (direct verification or cancelled checks to cover the past 12 months with no lates).
• Utilities - Verify the same as rental payments.
• Installment debts (verify no lates in past 12 months). Count the monthly payment of all debt with 10 months or more remaining in the debt ratio. If the debt will be paid off earlier than 10 months, but the monthly payment exceeds 2% of the gross monthly income of the Borrower, the ratio should reflect this debt and be analyzed accordingly in the credit decision.
• Revolving accounts (including store accts). Evaluate case by case. Use the monthly payment on the credit report if shown, or obtain a copy of the billing statement if the Borrower pays less than the “rule of thumb” 5% of balance per month.

Undisclosed Debt(s): Borrower must address any debt revealed on the credit report that was not disclosed on his/her application. All inquiries on the credit report that have occurred within the most recent 90 days must be explained and if new credit is opened, must be verified. Newly opened debt must be verified to not be related to the Purchase (loan) transaction.

Alimony: Because of the tax consequences of alimony payments, it is acceptable to deduct the amount of the monthly alimony payment from the Borrower’s income rather than include the payment as a debt in the ratio.

Child Support: Verify the amount of the support to be paid by the Borrower by obtaining a copy of the Support Order (through the court system or another legal avenue). Verify how long the support will remain in payment by documenting the age of the child(ren). Consider child support (and alimony, if desired) as recurring installment debt. Any payment remaining for 10 months or more (or over 2% of the gross monthly income of the Borrower) must be included in the debt ratio.

Contingent Liability: Contingent liability exists when our Borrower will be held responsible for payment of a debt should another party jointly obligated for the payment default on said payment. Unless the borrower can provide conclusive evidence that there is NO POSSIBILITY that the debt holder will pursue debt collection against him should the other party default, the following rule applies:

For both mortgages and other debt, if the borrower remains obligated for the debt payment, and has not been released from payment liability, the Primary Obligor (the other “co-signing” party) must provide satisfactory written documentation that he has been making 100% of the payments, all paid on time, without any lates occurring  for at least the past 12 months. (If the other party cannot document timely payment on the account, then the monthly payment must be included in the borrower's debt to ratio.)

Projected Obligations: Debt payment(s) that are scheduled to begin repayment within 12 months of the first payment of the mortgage must be considered in the debt ratio. (Example, deferred student loans, balloon payments, etc.). The Lender must enter the expected (or actual, if known) monthly payment, and include in the debt ratio.

Debts NOT Included In Ratio: Unlike other loan types, FHA DOES NOT consider 401k loan repayments as a monthly debt in the ratio. Also NOT included: union dues, childcare, commuting costs, voluntary deductions through payroll.

Collections: FHA does NOT arbitrarily require that all collections be paid off prior to closing. The reasons for the collections and the way in which the Borrower has dealt with the accounts will be evaluated on a case-by-case basis. Webster Bank has established the guideline that ALL collections will be paid off prior to closing for MANUALLY underwritten loans. For loans that have obtained an automated approval, the findings will determine the way in which the open collections are examined and resolved.

Open Judgments: Both Automated and manual underwriting require that all open judgments  be paid in full and released from the land records prior to closing. Proof of the satisfaction of the account(s) must be retained in the loan file.

Previous Foreclosure: Usually a Borrower is not eligible for an FHA mortgage if a previous residence went into foreclosure (or deed in lieu of foreclosure) within the most previous 3 years. The overall risk of the loan will be analyzed based on extenuating circumstances at the time of the foreclosure.

Bankruptcy:

Chapter 7: Borrower’s discharge of bankruptcy should be 2 years or more previous to the loan application and the Borrower should show reestablished credit with all recent credit accounts paid as agreed since the bankruptcy.

Chapter 13: The Borrower may qualify without the bankruptcy being discharged. The Borrower must show at least 1 year paying as court ordered through the Chapter 13 restructure. The court must approve a new FHA mortgage loan transaction and must provide a copy of the payment printout for the Borrower.  Any debts outside the B/K msut show no late payments since B/K started.

Assets:

DU/LP findings may be utilized to determine type of asset verification required if the file is underwritten through automation.

Files manually underwritten will require the most recent 2 months bank statements for each account used in the transaction. The statements must show the ownership and activity on the accounts and must show beginning and ending balances (to cover a full 3 month period for an average balance). All large deposits must be documented for the source of funds for the increase.

Earnest money deposit(s) must be verified. The bank account used for the deposit(s) must show the balance before the deposit left the account and must also show ending balance after the deposit(s) cleared.

Non-Purchasing Spouses:

If required by state law in order to perfect a valid and enforceable first lien, the non-purchasing spouse may be required to sign either the security instrument or documentation evidencing that he or she is relinquishing all rights to the property. If the non-purchasing spouse executes the security instrument for such reasons, he or she is not considered a borrower for our purposes and need not sign the loan application. In all other cases, the non-purchasing spouse is not to appear on the security instrument or otherwise take title to the property at loan settlement.

Where there are non-purchasing spouses who sign security instruments relinquishing their rights to the property pursuant to applicable state laws, these non-purchasing spouses do not have to sign the mortgage note. Signing the security instrument for such purposes does not make the non-purchasing spouse a co-borrower.

Except for the obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios if the borrower resides in a community property state or the property to be insured is located in a community property state. Although the non-purchasing spouse's credit history.

It iss not to be considered a reason for credit denial, a credit report that complies with the requirements of paragraph 2-4 must be obtained for the non-purchasing spouse in order to determine the debt to income ratio.

 

Debt to Income Ratios: 

Debt to income ratios are the calculations underwriters use to determine whether a borrower can qualify for a mortgage. They are used to determine if you have the capacity to repay your mortgage. There are two calculations. The first or Front Ratio is your housing expense-to-income ratio. This is your proposed mortgage payment (principle, interest, taxes, mortgage insurance, and homeowners insurance) divided by your gross monthly income. The second or Back Ratio is your total monthly obligations-to-income ratio. This is your gross monthly payment including Mortgage PITI divided by your gross monthly income.

The only tricky part is understanding what is and is not included in your total obligations and what can and cannot be included in your gross monthly income. Below is a list of things to remember when you are totaling all of your payments and all of your income. 

Total Monthly Payments

Mortgage Payment:
Include principle, interest, county property taxes, and insurance (PITI).

Installment Accounts:
Do not count installment loans that have less than 9 months remaining; except for Freddie Mac loans, ... they count everything.

Revolving Accounts (credit cards):
Include the minimum payment on all open accounts.

Co-signed Loans:
You will also have to include these, unless you can show twelve months of cancelled checks from the person that is paying the loan and the loan must not have any late payments.

Child Support:
Must be included.

Loans from a Previous Marriage:
Must be counted if you are getting a Conventional, Conforming loan. However, If your divorce papers clearly divide up the liabilities, FHA and non-conforming loans do not count them.

Do Not Include:
Utilities, telephone services, auto insurance, or childcare. (VA loans do include childcare.)

Rental Liabilities
If you own more than one home or income property the mortgage payments will be included as a debt unless the LTV on that property is less than 75%.  This is new as of September 2008 according to mortgagee letter 2008-25.  You can download the letter from this link: Mortgagee Letter 2008-25

Gross Monthly Income

Overtime:
Overtime cannot be counted unless you have been receiving it consistently for two years and your employer will say that it is more than likely to continue into the future.

Bonus:
Follows the same rule as overtime.

Commission:
Normally commission requires a two-year history in order for it to be used. People changing from a salaried job to a commission job have tough times getting mortgage loans until they can show two years in the field. There are no-income verification loans on the market with slightly higher rates for people paid by commission.

Self-Employed:
You must be self-employed for two years. Your usable income for a loan is the bottom line on your federal tax return AFTER all the deductions. There are things you can add back such as depreciation but to be perfectly honest, most self employed people have difficulty achieving the required monthly gross income because of all the tax write offs. Again, that is why it is so wonderful that there are non-conforming loans that allow higher debt to income ratios and no-income verification programs.

Child support:
You can use child support if you can prove that you will receive it for an additional three years.  The only acceptable proof of payment is cancelled checks or a print out from the court if it is being paid through the court system.

Alimony:
Alimony follows the same rule as child support.

Required Ratios

Conventional Loans:
Fannie Mae and Freddie Mac allow a maximum of 28% for the front ratio and 36% for the back ratio. (28/36)

Non-Conventional:

FHA allows 31/43 and VA only uses the back ratio of 41% as a guideline. VA also calculates what they call Adequacy Of Effective Income and Balance Remaining for Family Support. This is a very complicated worksheet so I won't go into it here. Ask your Loan Officer or give me a call for more details.

Non-Conforming Loans:
This term simply means they do not conform to the rigid, strict guidelines of conventional loans. Thank goodness! These loans usually only use the back ratio and I have seen them go as high as 55%.

Now you have all the information you need to get more accurate results from the calculators I have included for you on this site.