Important FHA Changes
FHA has made changes to how Collections, Charge Offs, Judgments and Disputed Accounts are handled. These changes are effective as of October 15th, 2013. Please see below a summary of the FHA Mortgagee letters 2013-24 and 2013-25 and if you have any questions please contact us. Thank you.
- These new rules are applicable for FHA case numbers issued on and after October 15, 2013
COLLECTIONS AND/OR CHARGE OFF ACCOUNTS
- Medical collections and/or charge offs are excluded from this guidance.
- A letter of explanation from the borrower(s) is:
- Not required for loans receiving an approved/eligible from FHA Total Scorecard (DU).
- Is required for all manually underwritten loans. In addition to the letter of explanation, the borrower(s) must provide supporting documentation that provides the DE underwriter with evidence that the collection account was not the result of the borrower’s disregard for financial obligation and/or inability to manage debt.
- Payment plan
- Must be considered if the aggregate balance of all outstanding collections is equal to or greater than $2000.
- Considered for both manual underwrites and loans receiving a FHA Total Scorecard (DU) A/E decision.
- Medical collections are EXCLUDED from this aggregate.
- Unless excluded by State law, the collection accounts of a non-purchasing spouse in a community property State are INCLUDED in this aggregate.
- One of the following actions MUST be taken if the aggregate from all borrowers is $2000 or higher. (Note: If borrower A total is $1500 and borrower B total is $600 the sum is over $2000 and therefore the guidance applies.)
- Payment in full at or prior to closing (with the source of funds properly verified
- If a payment plan has been made with creditor, include the agreed upon amount in the DTI.
- If a payment plan has not been made, 5% of the balance must be included in DTI.
- Applies to all loans, whether approved by Total Scorecard (DU) or manually underwritten.
- All judgments (including medical) must be paid in full at or prior to closing.
- An exception may be given if the borrower has entered into an agreement with the creditor. Full documentation of the payment agreement required AND a minimum of 3 months of scheduled payments have been made. Borrowers may NOT prepay the scheduled payments in order to satisfy the 3 month requirement.
- Payments must be included in the DTI.
- Unless exempt by State law, the judgments of a non-purchasing spouse, in a community property State, included in this guidance.
DISPUTED ACCOUNTS – DEROGATORY INFORMATION ON THE REPORT
- This category is used to determine if a manual downgrade to a loan is required, if the loan is approved by Total Scorecard (DU) and there are derogatory disputed items on the borrower’s credit report.
- Derogatory disputed information is defined as:
- Disputed collection accounts – OR
- Disputed charge off accounts – OR
- Disputed accounts with late payments in the last 24 months
- Excluded from the calculation are:
- Disputed medical accounts.
- Accounts that are the result of identity theft; credit card theft and/or unauthorized use. However, there must be appropriate documentation, such as a police report, to substantiate the theft and/or unauthorized use claim. If proper documentation cannot be obtained, then the accounts are included in the calculation.
- Cumulative outstanding balances from all borrowers are $1,000 or higher the file must be downgraded to a “Refer”. (Note: If borrower A total is $500 and borrower B total is $600 the sum is over $1000 and therefore the guidance applies.)
- The DE underwriter will then consider this derogatory disputed information in the credit analysis as a manual underwrite.
- If the disputed information is isolated and the overall credit profile of the borrower is acceptable, the DE underwriter may leave the file with an open dispute.
- If the disputed information is not isolated and/or the overall credit profile of the borrower is not acceptable, the DE underwrite may require that the dispute be satisfactorily resolved before the loan can be closed.
- Cumulative outstanding balances from all borrowers are $999 or less, a downgrade is NOT required.
DISPUTED ACCOUNTS – NON DEROGATORY INFORMATION ON THE REPORT
- Non-Derogatory disputed information is defined as:
- Disputed accounts with zero balance
- Disputed accounts that are current and paid as agreed
- Disputed accounts with late payments aged 24 months or longer
- Non-derogatory disputed accounts do NOT require a manual downgrade.
- The DE underwriter IS required to consider the disputed accounts and the potential impact to the borrower’s ability to repay the loan, including the impact to the DTI.