topic Re: FHA criteria and Overlays in Mortgage Loans

FHA criteria and Overlays

Anonymous — Thu, 07 Nov 2019 16:01:33 GMT

Hello,

I'm a few years out from a financial disaster and subsequent messy divorce when many non-mortgage accounts became delinquent and were charged off and placed into collections. I've been working hard to rebuild and have paid off or settled 9 accounts since then. I'm considering buying a home with an FHA loan and 3.5% down and recently pulled my mortgage scores and they showed a mid of 602. I realize this number is above the 580 score that FHA requires for that down payment but understand that lenders often have more stringent criteria. I have excellent income and low debt. I realize that each situation and lender is different, but do any of the following issues (individually or collectively) rise to the level of a deal breaker?

- 2016/17 IRS debt of 18k. No levy or garnishment. Have been in an approved repayment plan of $275/mo for 5 months.

- March 2019 I had approx 10 inquires for car loan (had trouble getting loan then)

- No new charge offs or lates (except as mentioned below) for 2 years. All rent payments on time

- One collection account left (non-medical, professional services placed in 2016, 20k). Unlikely to be collected. My DTI can absorb the 5% for this if necessary

- As mentioned above, several charge offs still remain on my report from 2015-2016 but show as zero balance / settled

- I have a couple CC accounts (total 9k) left that are listed as charged off in 2016, are not reported as in collections, show a balance, and are reporting as late every month

I know it would be a pretty messy and thick file. But, is it possible with FHA and some lenders or do I stay with NACA? Thanks for any advice/feedback

Re: FHA criteria and Overlays

Mortgage-Specialist — Thu, 07 Nov 2019 16:06:06 GMT

As the majority of lenders have overlays, you would just need to find an FHA lender wothout any overlays, then you'd need to narrow it down to one who will give you good pricing (when it comes to interest rate and closing costs)

Re: FHA criteria and Overlays

VALoanMaster — Thu, 07 Nov 2019 19:05:37 GMT

@Anonymous wrote:
Hello,
I'm a few years out from a financial disaster and subsequent messy divorce when many non-mortgage accounts became delinquent and were charged off and placed into collections. I've been working hard to rebuild and have paid off or settled 9 accounts since then. I'm considering buying a home with an FHA loan and 3.5% down and recently pulled my mortgage scores and they showed a mid of 602. I realize this number is above the 580 score that FHA requires for that down payment but understand that lenders often have more stringent criteria. I have excellent income and low debt. I realize that each situation and lender is different, but do any of the following issues (individually or collectively) rise to the level of a deal breaker?

- 2016/17 IRS debt of 18k. No levy or garnishment. Have been in an approved repayment plan of $275/mo for 5 months.
- March 2019 I had approx 10 inquires for car loan (had trouble getting loan then)
- No new charge offs or lates (except as mentioned below) for 2 years. All rent payments on time
- One collection account left (non-medical, professional services placed in 2016, 20k). Unlikely to be collected. My DTI can absorb the 5% for this if necessary
- As mentioned above, several charge offs still remain on my report from 2015-2016 but show as zero balance / settled
- I have a couple CC accounts (total 9k) left that are listed as charged off in 2016, are not reported as in collections, show a balance, and are reporting as late every month

I know it would be a pretty messy and thick file. But, is it possible with FHA and some lenders or do I stay with NACA? Thanks for any advice/feedback

I think the bigger issue you'll have is getting an automated underwriting system (AUS) approval due to the charge offs that are reporting as late every month.

If you do not get an AUS approval, you'll have a bigger issue with lender overlays in my opinion. For example: Plenty of lenders will do an FHA loan with a 600 scores as long as you have an automated approval but a lot of them will require a 620 score if the file has to be manually underwritten.

If you can, I would focus on settling the remaining the charge offs for 2 reasons.

1) You do want these accounts to turn into collections.

2) You can settle them for pennies on the dollar and that will increase your scores

Re: FHA criteria and Overlays

homeloanexpert — Fri, 08 Nov 2019 13:36:00 GMT

Hello ElChorro,

Based on your written scenario you appear to be perfect candidate for an FHA home loan. Yes your credit is less than perfect but FHA does not require that you have perfect credit. First, all medical bills are disregarded, all collections less than $2,000.00 will be disregarded, and all charge offs are disregarded. As you know if you have collections over $2, 000.00, the lender is required to hit you with the 5% imaginary payment which is then added to your DTI which effectively reduces your buying power.

Any seasoned loan officer understands that old charged off accounts can be resold over and over again and may appear to be new collections. There's a simple work around that is painless and we do in our end (as a lender) so the underwriter will know that these are previously charged off accounts by the original creditor, but resold and many cases uncollectable. As far as the automated underwriting approval, most likely you won't get one which means that your loan will be downgraded to a manually underwritten loan.There are many lenders that will not go below 620 and require an AUS Approve/Eligible. But there are some lender like my company, that go down to 550 on FHA and VA and will also allow a Manual. You just need to find the right lender and an experienced LO.

Best wishes to you!

Re: FHA criteria and Overlays

Anonymous — Sat, 09 Nov 2019 23:19:02 GMT

Thank you for the replies. The information is very helpful!

Re: FHA criteria and Overlays

SusieQ954 — Fri, 24 Jul 2020 00:55:12 GMT

@homeloanexpert wrote:
Hello ElChorro,
Based on your written scenario you appear to be perfect candidate for an FHA home loan. Yes your credit is less than perfect but FHA does not require that you have perfect credit. First, all medical bills are disregarded, all collections less than $2,000.00 will be disregarded, and all charge offs are disregarded. As you know if you have collections over $2, 000.00, the lender is required to hit you with the 5% imaginary payment which is then added to your DTI which effectively reduces your buying power.

Any seasoned loan officer understands that old charged off accounts can be resold over and over again and may appear to be new collections. There's a simple work around that is painless and we do in our end (as a lender) so the underwriter will know that these are previously charged off accounts by the original creditor, but resold and many cases uncollectable. As far as the automated underwriting approval, most likely you won't get one which means that your loan will be downgraded to a manually underwritten loan.There are many lenders that will not go below 620 and require an AUS Approve/Eligible. But there are some lender like my company, that go down to 550 on FHA and VA and will also allow a Manual. You just need to find the right lender and an experienced LO.

Best wishes to you!

Sorry old thread, @homeloanexpert... but, just to clarify, the $2,000 is an aggregate of outstanding collection accounts, not individual accounts of $2,000 or more to apply the 5% DTI add on? Correct?

Re: FHA criteria and Overlays

homeloanexpert — Fri, 24 Jul 2020 09:39:35 GMT

@SusieQ954

Correct