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FHA Makes it Easier to Qualify: Big Changes in Derogatory Credit Guides

Jeff Mifsud
Nov 26, 2013

With Mortgagee Letters 2013-24, 25, & 26, the policy change in several areas of derogatory credit makes it easier for borrowers to qualify for a mortgage. Here’s what you need to know about these changes: Effective for case numbers assigned on or after Aug. 15, 2013-Sept. 30, 2016 For Purchase Money Loans Only (excluding the HECM): Borrowers that experienced an Economic Event (a decrease of income by 20 percent or more for at least six months) that resulted in serious derogatory credit such as a short sale, foreclosure, or bankruptcy, may be eligible if: A. The loss of employment or income was due to an extenuating circumstance beyond his or her control and can be documented; B. A Satisfactory credit history has been restored for a period of 12 months; and C. Housing counseling has been completed. Effective for case numbers assigned on or after Oct. 15, 2013 Changes below apply to all FHA programs except FHA Non-Credit Qualifying Streamline Refinances and the Home Equity Conversion Mortgage: 1. Judgments must be paid off or the borrower must have a payment arrangement that has at least a three-month payment history prior to the loan application and paid according to terms. 2. On manually underwritten loans with collections totaling less than $2,000, FHA does not require resolution of the accounts. However, the underwriter must document an acceptable reason for approving the loan and the borrower must provide a letter of explanation and supporting documentation if necessary. 3. For loans with Collections or Judgments that receive a TOTAL Mortgage Scorecard decision of ‘Accept/Approve’ the lender does not have to provide a letter of explanation or documentation from the borrower. If TOTAL generates a ‘Refer’ decision, the loan must be manually underwritten. 4. In all cases, if the total of all collections is equal to or greater than $2,000, the borrower will have to do one of the following: A. Pay off collections in full (funds must be verified). B. Make payment arrangements with the creditors (monthly payment to be included in the ratios). C. If no payment arrangement is made, then five percent of the balance(s) must be included in the ratios (borrower must qualify with this additional payment). 5. For disputed accounts totaling less than $1,000, the loan is not automatically required to be manually underwritten when an ‘Accept/Approve’ is received. Loans with disputed accounts equal to or greater than $1,000 must be manually underwritten. 6. Medical collections and charge offs are excluded from the above guides and DO NOT require resolution. Because each lender has their own guidelines for FHA loans, consult your FHA DE Underwriter for questions. Now is a great opportunity to get out of your office and inform your real estate agent partners about these changes. If you need presentations you can use right away, log on to Go FHA! Jeff Mifsud is founder of Michigan-based Mortgage Seminars LLC, a former FHA underwriter with 15-plus years of experience originating FHA loans, an FHA expert for and creator of The FHA Originator, a monthly FHA newsletter. Jeff may be reached by phone at (248) 403-8181 or visit
Nov 26, 2013