Mortgagee Letter 2012-3 announces several key guideline changes on topics of self-employment, disputed credit, outstanding collections and identity of interest definitions. These changes are good from the perspective that they offer much clearer underwriting requirements on several key topics so not as much is left to interpretation or opinion. All of these changes are effective for cases assigned on and after April 1st.
New Requirement for AUS Approve/Accept & Manual Underwriting: A P&L and Balance Sheet is required if more than a calendar quarter has elapsed since date of most recent calendar or fiscal-year end tax return was filed by the borrower – with no exceptions. Additionally, if income used to qualify the borrower exceeds the two year average of tax returns, an audited P&L or signed quarterly tax returns obtained from IRS are required.
Topic: Disputed Credit Accounts
New Requirement: AUS Accept/Approve does not need to be downgraded to a Refer and manually underwritten as long as
• the total outstanding balance of all disputed credit accounts or collections are less than $1,000, and
• Disputed credit accounts or collections are aged two years from date of last activity as indicated on the most recent credit report.
If the borrower has individual or multiple disputed credit accounts or collections with singular or cumulative balances equal to or greater than $1,000, the accounts must be resolved (e.g. payment arrangements with a minimum three months of verified payments made as agreed) or paid in full, prior to, or at the time of closing. The payments arranged for the accounts must be included in the calculation of the borrower’s debt-to-income ratios.
Disputed credit accounts or collections resulting from identity theft, credit card theft, or of unauthorized use, etc., will be excluded from the $1,000 limit under the terms shown below. The mortgagee must provide a credit report or letter from the creditor, or other appropriate documentation, to support that the borrower filed an identity theft or police report to dispute the fraudulent charges. Mortgagees must provide documentation in the case binder to show all disputed or collection accounts are resolved, verified as not a debt to the borrower, arrangements made for payment, or paid in full.
Topic: Outstanding Collection Accounts & Court-Ordered Judgments
New Requirement: If the total outstanding balance of all collection accounts is equal to or greater than $1,000 the borrower must resolve the accounts (e.g. entered into payment arrangements with minimum three months verified payments- paid as agreed) or paid in full at the time of, or prior to closing. If the total outstanding balance of all collection accounts is less than $1,000, the borrower is not required to pay off the collection accounts as a condition of mortgage approval.
Note: Paying “down” of balances on disputed accounts and collections to reduce the singular or cumulative balance to below $1,000, is not an acceptable resolution of accounts.
An exception to the payoff of a court-ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments, and provides documentation indicating that a minimum of three months payments have been made according to the agreement. The monthly payment must be included in the borrower’s debt-to-income ratio.
Topic: Identity of Interest Transaction
New Requirement: The definition of a family member for establishing “identity of interest” purposes has been expanded to include a child, parent, grandparent, spouse, legally adopted son or daughter, including a child who is placed with the borrower by an authorized agency for legal adoption, foster child, brother, stepbrother, sister, stepsister, uncle, and aunt.
Please be sure to read the Mortgagee Letter in its entirety.