Attachment 10-B The Credit Review

This attachment illustrates the order and importance of a credit review when evaluating how payments by an applicant will be made. Applicants are expected to have acceptable credit, a stable income and no recent unsupported debt problems. To meet these requirements, applicants must prove they are creditworthy and unlikely to default on the loan requested. This attachment is intended to assist lenders in their analysis of the credit file when combining the presence of the following items with the applicant’s credit score in the underwriting decision. Exceptions are noted for files that are underwritten with the assistance of the Agency’s automated underwriting system.

Previous Rental or Mortgage Payment History

 The applicant’s housing obligation payment history holds significant importance when evaluating credit. It is an indicator of the applicant’s ability to pay the mortgage payment in the future. Applicants who make rental or mortgage payments equal to or above the anticipated mortgage payment generally demonstrates the applicant can pay the future mortgage loan payment. Other eligibility requirements also apply. Generally, unless there is major derogatory credit noted in the credit file, an applicant is considered to have an acceptable credit history if she/she does not have late housing payments.

 Applicants who live rent-free prior to purchasing a home may require the lender to cautiously approach a loan decision. Sometimes applicants live rent free for supported reasons. For example, applicants may still live at home with parents while in college, may have lived in military provided housing, or living with someone having a lease and wasn’t on the lease. Living rent free and proposing to exceed the repayment ratios outlined in Chapter 11 of this handbook may represent a high risk when unsupported. Lenders must approach this type of applicant prudently if approving an application.

Automated Underwriting System – GUS “Accept.” Loans underwritten with GUS that receive an “Accept” underwriting recommendation are not subject to additional rental or mortgage payment history documentation.

Lenders who enter rent on the “Income and Expenses” GUS application page are not subject to a VOR/rent verification when the file receives an “Accept” underwriting recommendation.

Files that have been underwritten with GUS, and receive an “Accept” underwriting recommendation require no further documentation with the presence of late mortgage payments as they have already been considered by the scorecard.

Manually underwritten loans. Files that are manually underwritten will be analyzed in accordance with the guidance provided at Section 10.13 of this Chapter. The consideration of a credit exception in accordance with Section 10.8 will be supported with documentation validating the exception meets the criteria as outlined in that Section.

Recent and/or Undisclosed Debts and Inquiries

Lenders must determine the purpose of any recent debts as the indebtedness may have been incurred to obtain funds to close the loan. Any new debt and payment must be included in the final underwriting analysis.

An applicant must provide a satisfactory explanation for any significant debt noted on the credit report, but not included on the loan application.

Manually underwritten loans. Add recent and undisclosed debts to the loan application. Consider these debts in the credit underwriting analysis.

Automated Underwriting System – GUS “Accept”. Confirm and include any monthly payment amount for debts not considered in the automated underwriting system recommendation. Resubmit the loan for an updated underwriting recommendation.

If the debt was not reported on the credit report uploaded into GUS and are manually added to the “Asset and Liabilities” application page of GUS, the lender will downgrade the “Accept” to a “Refer” and manually underwrite the file. Exception: the manual entry of child support, alimony, garnishments and other debts that are not typically reflected on a credit report will not require a downgrade.

A lender may have the debt added to the credit report and re-associate the new credit report that includes the previously recent or undisclosed debt in a subsequent underwriting recommendation request.

Credit supplements obtained outside of GUS may not be used to verify debts to retain an “Accept” recommendation.

Lenders must apply due diligence when reviewing the documentation in the loan file to determine if there is any potentially derogatory or contradictory information that is not part of the data submitted to GUS or if there is erroneous information in the data submitted to GUS. If the lender is aware of any contradictory, derogatory or erroneous information, lenders are obligated to take action. For example if the lender is aware of debts, late payments or derogatory information that has not been made available to the data submitted to GUS, or there is a Federal judgment, a risk analysis decision of “Accept” must be downgraded and the file manually underwritten.

Collections

A collection account refers to an applicant’s loan or debt that has been submitted to a collection agency by a creditor.

Manually underwritten loans:

Collections indicate an applicant’s regard for credit obligations, and must be considered in the creditworthiness analysis.

Ensure all open collections are listed on the loan application under liability.

Collection accounts are not required to be paid off as a condition of a guarantee. Paragraph 10.9 of this Chapter outlines additional actions required when the outstanding balance of all collections collectively exceeds $2,000.

The lender must document reasons for approving a mortgage when the applicant has collection accounts. The applicant must explain, in writing and/or provide supportive documentation, for all collections as outlined in Paragraph 10.9 of this Chapter.

Automated Underwriting System – GUS “Accept”

Ensure all open collections are listed on the loan application under liability on the “Assets and Liabilities” page of GUS.

Omit any collections that are eligible in the capacity analysis as outlined in Paragraph 10.9 of this Chapter.

Non-Federal Judgments

Court-ordered judgments MUST be paid off before the mortgage loan is eligible for a guarantee unless the applicant provides documentation indicating that regular payments have been made on time in accordance to a documented agreement with a creditor. Paragraph 10.10 outlines additional actions and requirements of a documented payment agreement.

If a loan is underwritten with the assistance of the Agency’s automated underwriting system, then regardless of the underwriting recommendation, the findings report will require the lender to obtain evidence of payoff for any outstanding judgments shown on the credit report. Lenders are reminded the “Declaration” questions within the Agency automated underwriting system or when completed manually should accurately reflect a response representative of the applicant’s credit status.

Delinquent Federal Non-Tax Debt

Lenders must determine if the applicants have delinquent federal non-tax debt. Information may be obtained from public records, credit reports, or equivalent and must check all applicants’ against the Credit Alert Verification Reporting System (CAIVRS). See Appendix 7 for instructions on checking CAIVRS.

Delinquent Federal non-tax debts are ineligible for a SFHGLP unless the delinquency is resolved.

Delinquent Federal non-tax debt also refers to applicant(s) who have had a previous SFHGLP debt which was settled, or is subject to settlement, or whether SFHGLP otherwise suffered a loss on a loan to one or more of the applicants. The applicant(s) are ineligible unless the applicant qualifies for an exception granted by SFHGLP.

If the SFHGLP suffered any loss related to a previous loan, a loan guarantee shall not be issued unless SFHGLP determines the loss was beyond the applicant’s control and any identifiable reasons for the loss no longer exist.

Delinquent Federal Tax Debt

Applicants with delinquent Federal tax debt are ineligible.

Tax liens may remain unpaid if the applicant has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the applicant has made timely payments for at least three months of scheduled payments. The applicant cannot prepay scheduled payments in order to meet the required minimum of three months of payments.

Payments will be included in the DTI ratio.

Documentation will include IRS evidence of the repayment agreement and verification of payments made.

Previous Mortgage Foreclosure and Deed-in-Lieu of Foreclosure

An applicant is generally not eligible for a new guarantee, if during the prior three years the applicant’s previous real property was foreclosed on or they have given a deed-in-lieu of foreclosure.

The lender may grant an exception in accordance with Paragraph 10.8 of this Chapter.

The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.

Divorce is not considered an extenuating circumstance. However, an applicant whose loan was current at the time of a divorce in which the ex-spouse received the property and the loan was later foreclosed may qualify as an exception.

Chapter 7 Bankruptcy

Manually underwritten loans.

A Chapter 7 bankruptcy (liquidation) does not disqualify an applicant from obtaining a mortgage loan if at least three years have elapsed since the date of the discharge of the bankruptcy. During this time, the applicant must have re-established good credit or chosen not to incur new credit obligations.

An elapsed period of less than 3 years may be acceptable for a loan guarantee if the applicant can show the bankruptcy was caused by extenuating circumstances beyond their control and has since exhibited a documented ability to manage their financial affairs in a responsible manner for a reasonable period of time following discharge. Eligible mitigating circumstances must meet Section 10.8 of this Chapter. Supporting documentation must be submitted with the loan guarantee request. Generally a borrower whose bankruptcy has been discharged less than 1 year should be ineligible to enable the applicant to re-establish their credit.

The lender must document the applicant’s current situation indicates the events that led to the bankruptcy are not likely to recur.

When a Chapter 7 bankruptcy absolved the mortgage debt for the applicant, any foreclosure or remaining foreclosure pending is an action against the property, not the applicant. The foreclosure action is not considered as an indicator of unacceptable credit in the applicant’s evaluation. A loan underwritten with the assistance of GUS will not be required to be manually down-graded when the bankruptcy discharge included the mortgage debt.

If an applicant has a real estate mortgage discharged in a Chapter 7 bankruptcy, however a foreclosure action is not concluded, the applicant may remain in ownership of the property. In this example, title must be transferred to the lender of the pending foreclosure in order to remove the applicant from ownership and responsibility of real estate taxes and homeownership dues of the property. If title is not transferred, the applicant will be subject to Chapter 8, Section 8.2A of this Handbook for retention of a dwelling.

Automated Underwriting System – GUS “Accept”. If the underwriting recommendation from GUS is an “Accept”, no further documentation regarding the bankruptcy is required.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy plan in progress. A Chapter 13 bankruptcy plan in progress does not disqualify an applicant from obtaining a mortgage loan, provided the following criteria, applicable to all underwriting methods, can be met:

the lender documents 12 months of the debt restructuring plan has elapsed; and

the applicant’s payment performance has been satisfactory; and all required payments were made on time; and

the applicant must receive written permission from the bankruptcy court/trustee to enter into a mortgage transaction.

Manually underwritten loans. In addition to the criteria set forth for a plan in progress, a credit exception in accordance with Section 10.8 of this Chapter by the lender will be required. Include the payment in the debt ratios of the applicant(s).

Automated Underwriting System – GUS “Accept”. When a plan is in progress, and GUS has rendered an “Accept” underwriting recommendation, a credit exception in accordance with Section 10.8 of this Chapter is not required. Include payment(s) on the “Asset and Liabilities” application page of GUS.

Chapter 13 bankruptcy plan completed.

Manually underwritten loans. A completed Chapter 13 bankruptcy plan will not require a credit exception provided the applicants have demonstrated a willingness to meet obligations when due for the full 12 months prior to the date of loan application.

Automated Underwriting System – GUS “Accept”. The discharge date of the completed plan has been considered by the scorecard and is reflected in the overall credit score. No additional documentation is required.

Consumer Credit Counseling Plans

An applicant who has experienced credit or financial management problems in the past may have elected to participate in consumer counseling sessions to learn how to correct or avoid such problems in the future. Participation in a consumer credit counseling program does not disqualify a applicant from obtaining a mortgage loan, provided:

the lender documents that one year of the pay-out period has elapsed under the plan; and

the applicant’s payment performance has been satisfactory and all required payments have been made on time; and

written permission from the counseling agency to enter into the mortgage transaction and counselor recommendation of the applicant as a good credit risk is required.

Manually underwritten loans. For manually underwritten loans, the lender must evaluate the applicant’s credit in accordance with Paragraph 10.8 of this Chapter. Some creditors may still report the applicant as delinquent, even though they have agreed to accept a lesser payment. This must be considered in the analysis of the applicant’s overall credit. Include the repayment plan payment in the liabilities of the applicant(s).

Automated Underwriting System – GUS “Accept”. The Agency’s automated underwriting system does not trigger a requirement for additional documentation since the credit scores already reflect the degradation in credit history. No further explanation or other documentation is required when a lender utilized the Agency’s automated underwriting system and receives an “Accept” underwriting recommendation. Include payment(s) for repayment on the “Assets and Liabilities” application page of GUS.

Evaluating Credit Involving Short Sales

The following criteria are applicable to both manual and automated underwriting types.

A short sale is considered a pre-foreclosure activity or event.

An applicant is ineligible for a mortgage loan if they pursued a short sale agreement on their principal residence to take advantage of declining market conditions and purchases at a reduced price a similar or superior property within a reasonable commuting distance.

If an applicant was current at the time of short sale, or in the case of divorce at time of divorce, they may be eligible for a new mortgage loan. The prior mortgage payment history must reflect all mortgage payments due were made on time for the 12 month period preceding the short sale, or time of divorce, and all installment debt payments for the same period were also made within the month due.

An applicant in default on their mortgage at the time of the short sale (or pre-foreclosure sale) is generally not eligible for a new mortgage loan for three years from the date of pre-foreclosure sale.

The lender may grant an exception in accordance with Paragraph 10.8 of this Chapter.

Charge-Off Accounts

A charge-off is the declaration by a creditor that an amount of debt is unlikely to be collected. The presence of a charge-off is already reflected in the credit score and does not need to be included in the applicant’s long-term liabilities or debt. If the applicant has entered into an agreed upon repayment plan with the creditor, a liability payment will be included in the long-term liability/debt.

Manually underwritten loans. For a manually underwritten loan, the lender will consider a charge-off as a derogatory credit item, to be addressed in with any credit exception considered, if the applicant’s credit score is below 640. See Section 10.7A of this Chapter regarding evaluating the credit of applicants with low credit scores.

Automated Underwriting System – GUS “Accept”. No documented credit exception is required.