Kentucky FHA Program guidelines have been updated as follows:
For a Kentucky FHA Purchase Loan, we can go down to a 600 credit score with the minimum down payment of 3.5%. No bankruptcies or foreclosures in the last 2 years.
If you are getting cash out, then the max loan to value or equity position is limited to 85% of the homes value. For example, if you had a home that was valued at $100,000, then the max loan for a FHA Cash Out in Kentucky would be $85,000.00. You still have to may mortgage insurance for life of loan so think carefully about using FHA for a cashout refinance.
The maximum debt to income ratios will be set by the AUS when we run it, but for a refer, it will be limited to 31% and 43% respectively. For example, if you make $3000 a month gross income, the max house payment would be $930.00 piti, and the maximum monthly payments including the new house payment would be $1290.00. So in the above example, the most you could have left in monthly bills listed on the credit report would be $360.00–If you had child support this would count in the dti calculation on the backend ratio of 43%
The seller can pay up to 6% of the buyer’s closing costs and prepaids (property taxes, home insurance for 1st years escrows) of the sales price. So, if you purchased a home for $100,000.00, the seller could give you a concession at closing to pay your closing costs and prepaids. A lot of Kentucky First Time homebuyers use this to limit their cash to close.
The minimum down payment of 3.5% for Kentucky FHA Loans can come from a family member in the form of a gift, or can be borrowed from a 401k, retirement account, or secured asset like a car.
• Seller must own the property a minimum of 90 days prior to the contract date.
FHA loans do not require a termite or home inspection, but they do require a HUD appraisal by a FHA approved Appraiser.
The following changes are effective for all Kentucky FHA case numbers assigned on or after June 3, 2013: FHA is changing the duration for the collection of MIP
o For all mortgages with an original principal LTV of 90% or less, regardless of loan term, the annual MIP will be assessed for 11 years.
o For all mortgages with an original principal LTV greater than 90%, regardless of loan term, the annual MIP will be assessed for the entire life of the loan.
Loans of 15 year terms or less with LTV 78% or less will pay an MIP amount of 45 bps.
FHA Streamlines Prior to June 2009
FHA Streamlines with case numbers dated June 11, 2012 or later will have new MIP rules applied. If the loan being refinanced was endorsed on or before May 31, 2009, the new Streamline will receive a flat annual MIP of 55 basis points, regardless of loan amount, and the UFMIP ratio will decrease to 0.01% of the base loan amount.
Senior Loan Officer
American Mortgage Solutions, Inc.
800 Stone Creek Pkwy, Ste 7,
Louisville, KY 40223
This guidance is effective for all case numbers assigned on or after
October 15, 2013.
Documentation Requirements: Collection Accounts and Judgments
Applicable to Manually Underwritten Loans:
The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments.
Regardless of the amount of outstanding collection accounts or judgments, the lender must determine if the collection account or judgment was a result of:
the borrower’s disregard for financial obligations;
the borrower’s inability to manage debt; or
The borrower must provide a letter of explanation with supporting documentation for each outstanding collection account and judgment. The explanation and supporting documentation must be consistent with other credit information in the file.
Applicable to Loans Run Through TOTAL Mortgage Scorecard:
TOTAL Mortgage Scorecard Accept/Approve – There are no documentation or letter of explanation requirements for loans with collection accounts or judgments run through TOTAL Mortgage Scorecard receiving an “Accept/Approve” despite the presence of collection accounts or judgments. These accounts have been already taken into consideration in the borrower’s credit score. If TOTAL Mortgage Scorecard generates a “Refer,” the lender must manually underwrite the loan in accordance with the guidance above applicable to manually underwritten loans with collection accounts and judgments.
Collections – FHA does not require collection accounts to be paid off as a condition of mortgage approval. However, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the borrower’s ability to repay the mortgage. To mitigate this risk, FHA is requiring a capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000, as described below.
If the total outstanding balance of all collection accounts for all borrowers is equal to or greater than $2,000, the lender must perform a capacity analysis as detailed below. Unless excluded under state law, collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance.
All medical collections and charge off accounts are excluded from this guidance and do not require resolution.
Capacity analysis includes any of the following actions:
At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required).
The borrower makes payment arrangements with the creditor. If the borrower has entered into a payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio.
If evidence of a payment arrangement is not available, the lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower’s debt-to-income ratio.
TOTAL Mortgage Scorecard Accept/Approve/Refer – Regardless of the Accept/Approve/Refer recommendation by TOTAL Mortgage Scorecard, the lender must include the payment amount in the calculation of the borrower’s debt-to-income ratio.
Judgments – FHA requires judgments to be paid off before the mortgage loan is eligible for FHA insurance. 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. The borrower must provide a copy of the agreement and evidence that payments were made on time in accordance with the agreement, and a minimum of three months of scheduled payments have been made prior to credit approval.
Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months of payments. Furthermore, lenders are instructed to include the payment amount in the agreement in the calculation of the borrower’s debt-to-income ratio.
FHA requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the exception guidance for judgments above, unless excluded by state law.
Disputed Derogatory Accounts Indicated on the Credit Report
If the credit report utilized by TOTAL Mortgage Scorecard indicates that the borrower is disputing derogatory credit accounts, the borrower must provide a letter of explanation and documentation supporting the basis of the dispute. The lender must analyze the documentation provided for consistency with other credit information in the file to determine if the derogatory credit account should be considered in the underwriting analysis.
Guidance for TOTAL Mortgage Scorecard Accept/Approve loans with disputed accounts.
Disputed Derogatory Credit Accounts greater than or equal to $1,000
If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is equal to or greater than $1,000, the mortgage application must be downgraded to a “Refer” and a Direct Endorsement underwriter is required to manually underwrite the loan as described above.
Disputed Derogatory Credit Accounts less than $1,000
If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is less than $1,000, a downgrade is not required.
Disputed medical accounts are excluded from the $1,000 limit and do not require documentation.
Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use are also excluded from the $1,000 limit. However, the lender must provide in the case binder a credit report, letter from the creditor, or other appropriate documentation to support the dispute, such as a police report disputing the fraudulent charges
Disputed derogatory credit accounts are defined as follows:
disputed charge-off accounts,
disputed collection accounts, and
disputed accounts with late payments in the last 24 months.
Disputed derogatory credit accounts of a non-purchasing spouse in a community property state are not included in the cumulative balance for determining if the mortgage application is downgraded to a “Refer”.
Non-derogatory disputed accounts are excluded from the $1,000 cumulative total.
Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report.
Non-derogatory disputed accounts include the following types of accounts:
disputed accounts with zero balance,
disputed accounts with late payments aged 24 months or greater, and
disputed accounts that are current and paid as agreed.
If a borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the lender is not required to downgrade the application to a “Refer.” However, the lender must analyze the effect of the disputed accounts on the borrower’s ability to repay the loan. If the dispute results in the borrower’s monthly debt payments utilized in computing the debt-to-income ratio being less than the amount indicated on the credit report, the borrower must provide documentation of the lower payments.
HA has published the following guideline updates, which will be effective for all loans with case numbers assigned on or after September 9th
Specific verbiage for Well Water Testing has been added indicating that it must be performed by a disinterested party in a method acceptable to the local health authority. The borrower or any other interested party may not have contact with the sample. Additionally, cases mandating a Well Water Test have been added to include (but not limited to) the following
Newly constructed properties and/or wells
Properties with deficiencies in the well or well water as determined by an appraiser
Areas where water has been reported or is otherwise known to be unsafe
Properties located in close proximity to dumps, landfills, industrial sites, farms, or other sites that could contain hazardous waste
Properties where distance between well and septic systems is less than 100 feet
Clarification issued indicating Overtime, Bonus, or Tip Income must be calculated using the lesser of
Average Overtime, Bonus, or Tip income earned over the previous 2 years (or if earned less than 2 years, the total length of time it has been received); OR
Average Overtime, Bonus, or Tip income earned over the previous year
All requirements regarding unreimbursed business expenses and Commission Income or Automobile Allowances has been completely removed to align with current IRS tax laws
Mortgagees and Third Party Originators have been specifically added to the list of parties to which Interested Party Contribution (IPC) limits apply, with the exception that Premium Pricing credits do not apply to the IPC limit unless the mortgagee is also acting as the seller, agent, builder, or developer.
Rent Below Fair Market has been defined as an inducement to purchase when the borrower is allowed to live in the property rent free or at a rental amount more than 10 percent under the fair market rent as determined by the appraiser.
Disaster Certifications and new Appraisals in Disaster Areas must now be dated at least 14 days after the Incident Period start date. NOTE: This requirement is in addition to the standard Century Disaster Area Policy.
Clarification has been added that Reduction in Term for Streamline Refinances refers specifically to the reduction of the remaining amortization period of the existing mortgage.
Manual Underwriting Tips for FHA
Don’t Forget to Submit!
Verbal VOE, paystub(s) covering most recent 30 day period, W2’s for the past 2 years
2 year employment history
At least 1 months reserves from the borrower’s own funds (cannot be a gift); 3 months required for 3-4 unit properties
VOR or 12 months cancelled checks if credit does not report last 12 months housing history
LOX for any derogatory credit or any late payments within the last 24 months
31/43% FHA (no compensating factors required)
What can trigger a downgrade to manual underwrite?
$1,000 or more in Disputed Derogatory Credit Accounts
20% or greater decline in self employed income
Mortgage lates in the last 12 months (see guidelines for full list)
Payment History Requirements:
All mortgage and installment loan payments must have been on time within the last 12 months and no more than two 30 day lates within the last 24 months
No derogatory credit on revolving accounts in the last 12 months
FHA – Underwriting must follow DU to determine if a collection account must be paid, even on a manual underwrite. Typically DU will require the following:
If the credit report shows a cumulative balance of $2,000 or more for collection accounts:
The debt(s) must be paid in full prior to or at closing, or
Payment arrangements must be made with the creditor and the monthly payment included in the DTI, or
A monthly payment of 5% of the outstanding balances of each collection must be included in the borrower’s DTI.
Collection accounts of non-borrowing spouses in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts. Community property states are Arizona, California, Texas, Washington, and Wisconsin.
I’m often asked if having certain types of credit or loans is better or worse than other types of credit or loans.
I get questions like, “John, is it better to have a car loan or a mortgage for my scores?” I also hear, “John, is it better to have a secured card or an unsecured card for my scores?”
In fact, you can swap in almost any type of credit-related account and I’ve been asked about that scenario.
I’ve been getting this type of question for almost 15 years now, and it seems that people believe there’s value or a penalty for having certain types of loans or accounts on your credit reports. That’s completely understandable and, thankfully, almost a complete myth.
First, let’s tackle the secured credit card, versus the unsecured credit card, versus the charge card question. The assumption is that the type of card has a direct impact on your credit scores. That’s an incorrect assumption, meaning, you’re not penalized or rewarded for having one type of card over another.
That doesn’t mean one form of plastic isn’t better or worse for your credit than another. For example, a secured credit card is easier to max out than an unsecured credit card.
Why? The reason is because secured cards have considerably lower credit limits than unsecured credit cards. It has nothing to do with the fact that one is secured and one isn’t. It has everything to do with the credit limits.
When it comes to installment loans, the issue of credit limits disappears because installment loans don’t have credit limits. They do, however, have original loan amounts.
An auto loan is likely to have a considerably lower loan amount than a mortgage, home equity loan and perhaps even a student loan. And, balances do matter on installment loans, albeit slightly.
Exactly like credit cards, credit scores do not treat installment loans of one variety or another differently. The collateral issue of balances can cause variable score impact, however.
One thing we haven’t addressed yet is the issue of missing payments and defaulting. Defaulting on a credit card, secured card, charge card, auto loan, mortgage, or any other kind of credit card, is treated equally — as one default.
You’re not penalized because you’ve defaulted on one variety of credit account versus another. You can, however, have a much larger default amount on a mortgage than any other type of credit account and that’s where the score impact can be variable.
The bottom line is: it’s not really the type of account that’s important, but it’s the incident that matters.
One Exception to the Rule
There is one very small exception to this rule. In fact, it’s so small that I thought very hard about omitting it.
There’s a chance your score could be negatively impacted if you have too many finance company accounts on your credit reports. These are the loans offered by consumer finance lenders who often target the near or subprime consumer.
Notwithstanding the consumer finance issue, the lender is also meaningless in your scores. So, you don’t get rewarded for doing business with a large, well-known credit card issuer and you don’t get penalized for doing business with a subprime credit card issuer.
In fact, credit scores are brand agnostic when it comes to your credit accounts. The most important factor is how you manage them.
Editor’s Note: This article by John Ulzheimer was originally published on MintLife.
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.
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.