II.A.5.a. Credit Requirements (Manual) (09/14/15)

© HUD Single Family Housing Policy Handbook 4000.1

Included in this section are:

i. General Credit Requirements (Manual)
ii. Types of Credit History (Manual)
iii. Evaluating Credit History (Manual)
iv. Evaluating Liabilities and Debts (Manual)

i. General Credit Requirements (Manual)

FHA’s general credit policy requires Mortgagees to analyze the Borrower’s credit history, liabilities, and debts to determine creditworthiness.

The Mortgagee must either obtain a Tri-Merged Credit Report (TRMCR) or a Residential Mortgage Credit Report (RMCR) from an independent consumer reporting agency.

The Mortgagee must utilize the same credit report and credit scores sent to TOTAL.

The Mortgagee must obtain a credit report for each Borrower who will be obligated on the mortgage Note. The Mortgagee may obtain a joint report for individuals with joint accounts.

The Mortgagee must obtain a credit report for a non-borrowing spouse who resides in a community property state, or if the subject Property is located in a community property state. The credit report must indicate the non-borrowing spouse’s SSN, where an SSN exists, was matched with the SSA, or the Mortgagee must either provide separate documentation indicating that the SSN was matched with the SSA or provide a statement that the non-borrowing spouse does not have an SSN. Where an SSN does not exist for a non-borrowing spouse, the credit report must contain, at a minimum, the non-borrowing spouse’s full name, date of birth, and previous addresses for the last two years.

The Mortgagee is not required to obtain a credit report for non-credit qualifying Streamline Refinance transactions.

ii. Types of Credit History (Manual)

If a traditional credit report is available, the Mortgagee must use a traditional credit report. However, if a traditional credit report is not available, the Mortgagee must develop the Borrower’s credit history using the requirements for Non-Traditional and Insufficient Credit.

(A) Traditional Credit (Manual)If the TRMCR or RMCR generates a credit score, the Mortgagee must utilize traditional credit history.

(1) Requirements for the Credit ReportCredit reports must obtain all information from at least two credit repositories pertaining to credit, residence history, and public records information; be in an easy to read and understandable format; and not require code translations. The credit report may not contain whiteouts, erasures, or alterations. The Mortgagee must retain copies of all credit reports.The credit report must include:

• the name of the Mortgagee ordering the report;
• the name, address, and telephone number of the consumer-reporting agency;
• the name and SSN of each Borrower; and
• the primary repository from which any particular information was pulled, for each account listed.

A truncated SSN is acceptable for FHA mortgage insurance purposes provided that the mortgage application captures the full nine-digit SSN.

The credit report must also include:

• all inquiries made within the last 90 Days;
• all credit and legal information not considered obsolete under the Fair Credit Reporting Act (FCRA), including information for the last seven years regarding:
  • bankruptcies;
  • Judgments;
  • lawsuits;
  • foreclosures; and
  • tax liens; and
• for each Borrower debt listed:
  • the date the account was opened;
  • high credit amount;
  • required monthly payment amount;
  • unpaid balance; and
  • payment history.

(2) Updated Credit Report or Supplement to the Credit ReportThe Mortgagee must obtain an updated credit report or supplement if the underwriter identifies inconsistencies between any information in the mortgage file and the original credit report.

(3) Credit Information Not Listed on Credit ReportA Mortgagee must develop credit information separately for any open debt listed on the mortgage application but not referenced in the credit report by using the procedures for Independent Verification of Non-Traditional Credit Providers.

(4) Specific Requirements for Residential Mortgage Credit ReportIn addition to meeting the general credit report requirements, the RMCR must:

• provide a detailed account of the Borrower’s employment history;
• verify each Borrower’s current employment and income through an interview with the Borrower’s employer or explain why such an interview was not completed;
• contain a statement attesting to the certification of employment for each Borrower and the date the information was verified; and
• report a credit history for each trade line within 90 Days of the credit report for each account with a balance.

(B) Non-Traditional and Insufficient Credit (Manual)For Borrowers without a credit score, the Mortgagee must either obtain a Non-Traditional Mortgage Credit Report (NTMCR) from a credit reporting company or independently develop the Borrower’s credit history using the requirements outlined below.

(1) Non-Traditional Mortgage Credit Report

(a) DefinitionAn NTMCR is designed to access the credit history of a Borrower who does not have the types of trade references that appear on a traditional credit report and used either as:

• a substitute for a TRMCR or an RMCR; or
• a supplement to a traditional credit report that has an insufficient number of trade items reported to generate a credit score.

(b) StandardMortgagees may use a NTMCR developed by a credit reporting agency that verifies the following information for all non-traditional credit references:

• the existence of the credit providers;
• that the credit was actually extended to the Borrower; and
• the creditor has a published address or telephone number.

The NTMCR must not include subjective statements such as “satisfactory” or “acceptable,” must be formatted in a similar fashion to traditional references, and provide the:

• creditor’s name;
• date of opening;
• high credit;
• current status of the account;
• 12-month history of the account;
• required monthly payment;
• unpaid balance; and
• payment history in the delinquency categories (for example, 0x30 and 0x60).

(2) Independent Verification of Non-Traditional Credit ProvidersThe Mortgagee may independently verify the Borrower’s credit references by documenting the existence of the credit provider and that the provider extended credit to the Borrower.

• To verify the existence of each credit provider, the Mortgagee must review public records from the state, county, or city or other documents providing a similar level of objective information.

1. To verify credit information, the Mortgagee must:
   • use a published address or telephone number for the credit provider and not rely solely on information provided by the applicant; and
   • obtain the most recent 12 months of canceled checks, or equivalent proof of payment, demonstrating the timing of payment to the credit provider.

1. To verify the Borrower’s rental payment history, the Mortgagee must obtain a rental reference from the appropriate rental management company, provided the Borrower is not renting from a Family Member, demonstrating the timing of payment of the most recent 12 months in lieu of 12 months of canceled checks or equivalent proof of payment.

(3) Sufficiency of Credit ReferencesTo be sufficient to establish the Borrower’s credit, the credit history must include three credit references, including at least one of the following:

• rental housing payments (subject to independent verification if the Borrower is a renter);
• telephone service; or
• utility company reference (if not included in the rental housing payment), including:
  • gas;
  • electricity;
  • water;
  • television service; or
  • Internet service.

If the Mortgagee cannot obtain all three credit references from the list above, the Mortgagee may use the following sources of unreported recurring debt:

• insurance premiums not payroll deducted (for example, medical, auto, life, renter’s insurance);
• payment to child care providers made to businesses that provide such services;
• school tuition;
• retail store credit cards (for example, from department, furniture, appliance stores, or specialty stores);
• rent-to-own (for example, furniture, appliances);
• payment of that part of medical bills not covered by insurance;
• a documented 12-month history of savings evidenced by regular deposits resulting in an increased balance to the account that:
  • were made at least quarterly;
  • were not payroll deducted, and;
  • caused no insufficient funds (NSF) checks;
• an automobile lease;
• a personal loan from an individual with repayment terms in writing and supported by canceled checks to document the payments; or
• a documented 12-month history of payment by the Borrower on an account for which the Borrower is an authorized user.

iii. Evaluating Credit History (Manual)

(A) General Credit (Manual)The underwriter must examine the Borrower’s overall pattern of credit behavior, not just isolated unsatisfactory or slow payments, to determine the Borrower’s creditworthiness.The Mortgagee must not consider the credit history of a non-borrowing spouse.

(B) Types of Payment Histories (Manual)The underwriter must evaluate the Borrower’s payment histories in the following order: (1) previous housing expenses and related expenses, including utilities; (2) installment debts; and (3) revolving accounts.

(1) Satisfactory CreditThe underwriter may consider a Borrower to have an acceptable payment history if the Borrower has made all housing and installment debt payments on time for the previous 12 months and has no more than two 30-Day late Mortgage Payments or installment payments in the previous 24 months.The underwriter may approve the Borrower with an acceptable payment history if the Borrower has no major derogatory credit on revolving accounts in the previous 12 months.Major derogatory credit on revolving accounts must include any payments made more than 90 Days after the due date, or three or more payments more than 60 Days after the due date.

(2) Payment History Requiring Additional AnalysisIf a Borrower’s credit history does not reflect satisfactory credit as stated above, the Borrower’s payment history requires additional analysis.The Mortgagee must analyze the Borrower’s delinquent accounts to determine whether late payments were based on a disregard for financial obligations, an inability to manage debt, or extenuating circumstances. The Mortgagee must document this analysis in the mortgage file. Any explanation or documentation of delinquent accounts must be consistent with other information in the file.The underwriter may only approve a Borrower with a credit history not meeting the satisfactory credit history above if the underwriter has documented the delinquency was related to extenuating circumstances.

(C) Payment History on Housing Obligations (Manual)The Mortgagee must determine the Borrower’s Housing Obligation payment history through:

• the credit report;
• verification of rent received directly from the landlord (for landlords with no Identity of Interest with the Borrower);
• verification of Mortgage received directly from the Servicer; or
• a review of canceled checks that cover the most recent 12-month period.

The Mortgagee must verify and document the previous 12 months’ housing history. For Borrowers who indicate they are living rent-free, the Mortgagee must obtain verification from the property owner where they are residing that the Borrower has been living rent-free and the amount of time the Borrower has been living rent free.

A Mortgage that has been modified must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments.

(D) Collection Accounts (Manual)

(1) DefinitionA Collection Account is a Borrower’s loan or debt that has been submitted to a collection agency through a creditor.

(2) StandardThe Mortgagee must determine if collection accounts were a result of:

• the Borrower’s disregard for financial obligations;
• the Borrower’s inability to manage debt; or
• extenuating circumstances.

(3) Required DocumentationThe Mortgagee must document reasons for approving a Mortgage when the Borrower has any collection accounts.The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding collection account. The explanation and supporting documentation must be consistent with other credit information in the file.

(E) Charge Off Accounts (Manual)

(1) DefinitionCharge Off Account refers to a Borrower’s loan or debt that has been written off by the creditor.

(2) StandardThe Mortgagee must determine if Charge Off Accounts were a result of:

• the Borrower’s disregard for financial obligations;
• the Borrower’s inability to manage debt; or
• extenuating circumstances.

(3) Required DocumentationThe Mortgagee must document reasons for approving a Mortgage when the Borrower has any Charge Off Accounts.The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding Charge Off Account. The explanation and supporting documentation must be consistent with other credit information in the file.

(F) Disputed Derogatory Credit Accounts (Manual)

(1) DefinitionDisputed Derogatory Credit Account refers to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.

(2) StandardThe Mortgagee must analyze the documentation provided for consistency with other credit information to determine if the derogatory credit account should be considered in the underwriting analysis.The following items may be excluded from consideration in the underwriting analysis:

• disputed medical accounts; and
• disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use provided the Mortgagee includes a copy of the police report or other documentation from the creditor to support the status of the account in the mortgage file.

(3) Required DocumentationIf the credit report 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.If the disputed derogatory credit resulted from identity theft, credit card theft or unauthorized use balances, the Mortgagee must obtain a copy of the police report or other documentation from the creditor to support the status of the accounts.

(G) Judgments (Manual)

(1) DefinitionJudgment refers to any debt or monetary liability of the Borrower, and the Borrower’s spouse in a community property state unless excluded by state law, created by a court, or other adjudicating body.

(2) StandardThe Mortgagee must verify that court-ordered Judgments are resolved or paid off prior to or at closing.Judgments of a non-borrowing spouse in a community property state must be resolved or paid in full, with the exception of obligations excluded by state law.Regardless of the amount of outstanding Judgments, the Mortgagee must determine if the Judgment was a result of:

• the Borrower’s disregard for financial obligations;
• the Borrower’s inability to manage debt; or
• extenuating circumstances.

Exception

A Judgment is considered resolved if the Borrower has entered into a valid agreement with the creditor to make regular payments on the debt, the Borrower has made timely payments for at least three months of scheduled payments and the Judgment will not supersede the FHA-insured mortgage lien. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments.

The Mortgagee must include the payment amount in the agreement in the calculation of the Borrower’s Debt-to-Income (DTI) ratio.

The Mortgagee must obtain a copy of the agreement and evidence that payments were made on time in accordance with the agreement.

(3) Required DocumentationThe Mortgagee must provide the following documentation:

• evidence of payment in full, if paid prior to settlement;
• the payoff statement, if paid at settlement; or
• the payment arrangement with creditor, if not paid prior to or at settlement, and a subordination agreement for any liens existing on title.

(H) Bankruptcy (Manual)

(1) Standard: Chapter 7A Chapter 7 bankruptcy (liquidation) does not disqualify a Borrower from obtaining an FHA-insured Mortgage if, at the time of case number assignment, at least two years have elapsed since the date of the bankruptcy discharge. During this time, the Borrower must have:

• re-established good credit; or
• chosen not to incur new credit obligations.

An elapsed period of less than two years, but not less than 12 months, may be acceptable, if the Borrower:

• can show that the bankruptcy was caused by extenuating circumstances beyond the Borrower’s control; and
• has since exhibited a documented ability to manage their financial affairs in a responsible manner.

(2) Standard: Chapter 13A Chapter 13 bankruptcy does not disqualify a Borrower from obtaining an FHA-insured Mortgage, if at the time of case number assignment at least 12 months of the pay-out period under the bankruptcy has elapsed.The Mortgagee must determine that during this time, the Borrower’s payment performance has been satisfactory and all required payments have been made on time; and the Borrower has received written permission from bankruptcy court to enter into the mortgage transaction.

(3) Required DocumentationIf the credit report does not verify the discharge date or additional documentation is necessary to determine if any liabilities were discharged in the bankruptcy, the Mortgagee must obtain the bankruptcy and discharge documents.The Mortgagee must also document that the Borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.

(I) Foreclosure and Deed-in-Lieu of Foreclosure (Manual)

(1) StandardA Borrower is generally not eligible for a new FHA-insured Mortgage if the Borrower had a foreclosure or a DIL of foreclosure in the three-year period prior to the date of case number assignment.This three-year period begins on the date of the DIL or the date that the Borrower transferred ownership of the Property to the foreclosing Entity/designee.ExceptionsThe Mortgagee may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner, and the Borrower has re-established good credit since the foreclosure.Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a Borrower’s Mortgage was current at the time of the Borrower’s divorce, the ex-spouse received the Property, and the Mortgage was later foreclosed.The inability to sell the Property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.

(2) Required DocumentationIf the credit report does not indicate the date of the foreclosure or DIL of foreclosure, the Mortgagee must obtain the Closing Disclosure, deed or other legal documents evidencing the date of property transfer.If the foreclosure or DIL of foreclosure was the result of a circumstance beyond the Borrower’s control, the Mortgagee must obtain an explanation of the circumstance and document that the circumstance was beyond the Borrower’s control.

(J) Pre-Foreclosure Sales (Short Sales) (Manual)

(1) DefinitionPre-Foreclosure Sales, also known as Short Sales, refer to the sales of real estate that generate proceeds that are less than the amount owed on the Property and the lien holders agree to release their liens and forgive the deficiency balance on the real estate.

(2) StandardA Borrower is generally not eligible for a new FHA-insured Mortgage if they relinquished a Property through a Short Sale within three years from the date of case number assignment.This three-year period begins on the date of transfer of title by Short Sale.

(a) Exception for Borrower Current at the Time of Short SaleA Borrower is considered eligible for a new FHA-insured Mortgage if, from the date of case number assignment for the new Mortgage:

• all Mortgage Payments on the prior Mortgage were made within the month due for the 12-month period preceding the Short Sale; and
• installment debt payments for the same time period were also made within the month due.

(b) Exception for Extenuating CircumstancesThe Mortgagee may grant an exception to the three-year requirement if the Short Sale was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner, and the Borrower has re-established good credit since the Short Sale.Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a Borrower’s Mortgage was current at the time of the Borrower’s divorce, the ex-spouse received the Property, and there was a subsequent Short Sale.The inability to sell the Property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.

(3) Required DocumentationIf the credit report does not indicate the date of the Short Sale, the Mortgagee must obtain the Closing Disclosure, deed or other legal documents evidencing the date of property transfer.If the Short Sale was the result of a circumstance beyond the Borrower’s control, the Mortgagee must obtain an explanation of the circumstance and document that the circumstance was beyond the Borrower’s control.

(K) Credit Counseling/Payment PlanParticipating in a consumer credit counseling program does not disqualify a Borrower from obtaining an FHA-insured Mortgage, provided the Mortgagee documents that:

• one year of the pay-out period has elapsed under the plan;
• the Borrower’s payment performance has been satisfactory and all required payments have been made on time; and
• the Borrower has received written permission from the counseling agency to enter into the mortgage transaction.

iv. Evaluating Liabilities and Debts (Manual)

(A) General Liabilities and Debts (Manual)

(1) StandardThe Mortgagee must determine the Borrower’s monthly liabilities by reviewing all debts listed on the credit report, URLA, and required documentation.All applicable monthly liabilities must be included in the qualifying ratio. Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the Borrower’s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement.Accounts for which the Borrower is an authorized user must be included in a Borrower’s DTI ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower’s DTI.Negative income must be subtracted from the Borrower’s gross monthly income, and not treated as a recurring monthly liability unless otherwise noted.Loans secured against deposited funds, where repayment may be obtained through extinguishing the asset and these funds are not included in calculating the Borrower’s assets, do not require consideration of repayment for qualifying purposes.

(2) Required DocumentationThe Mortgagee must document that the funds used to pay off debts prior to closing came from an acceptable source, and the Borrower did not incur new debts that were not included in the DTI ratio.

(B) Undisclosed Debt and Inquiries (Manual)

(1) StandardWhen a debt or obligation is revealed during the application process that was not listed on the mortgage application and/or credit report, the Mortgagee must:

• verify the actual monthly payment amount;
• include the payment amount in the agreement in the Borrower’s monthly liabilities and debt; and
• determine that any unsecured funds borrowed were not/will not be used for the Borrower’s MRI.

The Mortgagee must obtain a written explanation from the Borrower for all inquiries shown on the credit report that were made in the last 90 Days.

(2) Required DocumentationThe Mortgagee must document all undisclosed debt and support for its analysis of the Borrower’s debt.

(C) Federal Debt (Manual)

(1) DefinitionFederal Debt refers to debt owed to the federal government for which regular payments are being made.

(2) StandardThe Mortgagee must include the debt. The amount of the required payment must be included in the calculation of the Borrower’s total debt to income.

(3) Required DocumentationThe Mortgagee must include documentation from the federal agency evidencing the repayment agreement and verification of payments made, if applicable.

(D) Alimony, Child Support, and Maintenance (Manual)

(1) DefinitionAlimony, Child Support, and Maintenance are court-ordered or otherwise agreed upon payments.

(2) StandardFor Alimony, if the Borrower’s income was not reduced by the amount of the monthly alimony obligation in the Mortgagee’s calculation of the Borrower’s gross income, the Mortgagee must verify and include the monthly obligation in its calculation of the Borrower’s debt. Child Support and Maintenance are to be treated as a recurring liability and the Mortgagee must include the monthly obligation in the Borrower’s liabilities and debt.Child Support and Maintenance are to be treated as a recurring liability and the Mortgagee must include the monthly obligation in the Borrower’s liabilities and debt.

(3) Required DocumentationThe Mortgagee must obtain the official signed divorce decree, separation agreement, maintenance agreement, or other legal order.The Mortgagee must also obtain the Borrower’s pay stubs covering no less than 28 consecutive Days to verify whether the Borrower is subject to any order of garnishment relating to the Alimony, Child Support, and Maintenance.

(4) Calculation of Monthly ObligationThe Mortgagee must calculate the Borrower’s monthly obligation from the greater of:

• the amount shown on the most recent decree or agreement establishing the Borrower’s payment obligation; or
• the monthly amount of the garnishment.

(E) Non-Borrowing Spouse Debt in Community Property States (Manual)

(1) DefinitionNon-Borrowing Spouse Debt refers to debts owed by a spouse that are not owed by, or in the name of the Borrower.

(2) StandardIf the Borrower resides in a community property state or the Property being insured is located in a community property state, debts of the non-borrowing spouse must be included in the Borrower’s qualifying ratios, except for obligations specifically excluded by state law.The non-borrowing spouse’s credit history is not considered a reason to deny a mortgage application.

(3) Required DocumentationThe Mortgagee must verify and document the debt of the non-borrowing spouse.The Mortgagee must make a note in the file referencing the specific state law that justifies the exclusion of any debt from consideration.The Mortgagee must obtain a credit report for the non-borrowing spouse in order to determine the debts that must be counted in the DTI ratio.

(F) Deferred Obligations (Manual)

(1) DefinitionDeferred Obligations (excluding Student Loans) refer to liabilities that have been incurred but where payment is deferred or has not yet commenced, including accounts in forbearance.

(2) StandardThe Mortgagee must verify and include deferred obligations in the calculation of the Borrower’s liabilities.

(3) Required DocumentationThe Mortgagee must obtain written documentation of the deferral of the liability from the creditor and evidence of the outstanding balance and terms of the deferred liability. The Mortgagee must obtain evidence of the actual monthly payment obligation, if available.

(4) Calculation of Monthly ObligationThe Mortgagee must use the actual monthly payment to be paid on a deferred liability, whenever available.If the actual monthly payment is not available for installment debt, the Mortgagee must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment.

(G) Student Loans (Manual)

(1) DefinitionStudent Loan refers to liabilities incurred for educational purposes.

(2) StandardThe Mortgagee must include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.

(3) Required DocumentationIf the payment used for the monthly obligation is:

• less than 1 percent of the outstanding balance reported on the Borrower’s credit report; and
• less than the monthly payment reported on the Borrower’s credit report;

the Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor.

(4) Calculation of Monthly ObligationRegardless of the payment status, the Mortgagee must use either:

• the greater of:
  • 1 percent of the outstanding balance on the loan; or
  • the actual documented payment; or
• if the actual documented payment is less than 1 percent of the outstanding balance, the Mortgagee may use the lower payment only if it will fully amortize the loan over its term.

(H) Installment Loans (Manual)

(1) DefinitionInstallment Loans (excluding Student Loans) refer to loans, not secured by real estate, that require the periodic payment of P&I. A loan secured by an interest in a timeshare must be considered an Installment Loan.

(2) StandardThe Mortgagee must include the monthly payment shown on the credit report, loan agreement or payment statement to calculate the Borrower’s liabilities.If the credit report does not include a monthly payment for the loan, the Mortgagee must use the amount of the monthly payment shown in the loan agreement or payment statement.

(3) Required DocumentationIf the monthly payment shown on the credit report is utilized to calculate the monthly debts, no further documentation is required.If the credit report does not include a monthly payment for the loan, or the payment reported on the credit report is greater than the payment on the loan agreement or payment statement, the Mortgagee must obtain a copy of the loan agreement or payment statement documenting the amount of the monthly payment. If the credit report, loan agreement or payment statement shows a deferred payment arrangement for an Installment Loan, refer to the Deferred Obligations section.

(I) Revolving Charge Accounts (Manual)

(1) DefinitionA Revolving Charge Account refers to a credit arrangement that requires the Borrower to make periodic payments but does not require full repayment by a specified point of time.

(2) StandardThe Mortgagee must include the monthly payment shown on the credit report for the Revolving Charge Account. Where the credit report does not include a monthly payment for the account, the Mortgagee must use the payment shown on the current account statement or 5 percent of the outstanding balance.

(3) Required DocumentationThe Mortgagee must use the credit report to document the terms, balance and payment amount on the account, if available.Where the credit report does not reflect the necessary information on the charge account, the Mortgagee must obtain a copy of the most recent charge account statement or use 5 percent of the outstanding balance to document the monthly payment.

(J) 30-Day Accounts (Manual)

(1) DefinitionA 30-Day Account refers to a credit arrangement that requires the Borrower to pay off the outstanding balance on the account every month.

(2) StandardThe Mortgagee must verify the Borrower paid the outstanding balance in full on every 30-Day Account each month for the past 12 months. 30-Day Accounts that are paid monthly are not included in the Borrower’s DTI. If the credit report reflects any late payments in the last 12 months, the Mortgagee must utilize 5 percent of the outstanding balance as the Borrower’s monthly debt to be included in the DTI.

(3) Required DocumentationThe Mortgagee must use the credit report to document that the Borrower has paid the balance on the account monthly for the previous 12 months. The Mortgagee must use the credit report to document the balance, and must document that funds are available to pay off the balance, in excess of the funds and Reserves required to close the Mortgage.

(K) Business Debt in Borrower’s Name (Manual)

(1) DefinitionBusiness Debt in Borrower’s Name refers to liabilities reported on the Borrower’s personal credit report, but payment for the debt is attributed to the Borrower’s business.

(2) StandardWhen business debt is reported on the Borrower’s personal credit report, the debt must be included in the DTI calculation, unless the Mortgagee can document that the debt is being paid by the Borrower’s business, and the debt was considered in the cash flow analysis of the Borrower’s business. The debt is considered in the cash flow analysis where the Borrower’s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented as paid out of company funds. Where the Borrower’s business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis.

(3) Required DocumentationWhen a self-employed Borrower states debt appearing on their personal credit report is being paid by their business, the Mortgagee must obtain documentation that the debt is paid out of company funds and that the debt was considered in the cash flow analysis of the Borrower’s business.

(L) Disputed Derogatory Credit Accounts (Manual)

(1) DefinitionDisputed Derogatory Credit Accounts refer to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.

(2) StandardIf the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the Mortgagee must include a monthly payment in the Borrower’s debt calculation.The following items are excluded from the cumulative balance:

• disputed medical accounts; and
• disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use.

Disputed Derogatory Credit Accounts of a non-borrowing spouse in a community property state are not included in the cumulative balance.

(M) Non-derogatory Disputed Account and Disputed Accounts Not Indicated on the Credit Report (Manual)

(1) DefinitionNon-Derogatory Disputed Accounts include the following types of accounts:

• disputed accounts with zero balance;
• disputed accounts with late payments aged 24 months or greater; or
• disputed accounts that are current and paid as agreed.

(2) StandardIf a Borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the Mortgagee 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 DTI ratio being less than the amount indicated on the credit report, the Borrower must provide documentation of the lower payments.

(N) Contingent Liabilities (Manual)

(1) DefinitionA Contingent Liability is a liability that may result in the obligation to repay only where a specific event occurs. For example, a contingent liability exists when an individual can be held responsible for the repayment of a debt if another legally obligated party defaults on the payment. Contingent liabilities may include Cosigner liabilities and liabilities resulting from a mortgage assumption without release of liability.

(2) StandardThe Mortgagee must include monthly payments on contingent liabilities in the calculation of the Borrower’s monthly obligations unless the Mortgagee verifies that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default or the other legally obligated party has made 12 months of timely payments.

(3) Required Documentation

(a) Mortgage AssumptionsThe Mortgagee must obtain the agreement creating the contingent liability or assumption agreement and deed showing transfer of title out of the Borrower’s name.

(b) Cosigned LiabilitiesIf the cosigned liability is not included in the monthly obligation, the Mortgagee must obtain documentation to evidence that the other party to the debt has been making regular on-time payments during the previous 12 months, and does not have a history of delinquent payments on the loan.

(c) Court Ordered Divorce DecreeThe Mortgagee must obtain a copy of the divorce decree ordering the spouse to make payments.

(4) Calculation of Monthly ObligationThe Mortgagee must calculate the monthly payment on the contingent liability based on the terms of the agreement creating the contingent liability.

(O) Collection Accounts (Manual)

(1) DefinitionA Collection Account refers to a Borrower’s loan or debt that has been submitted to a collection agency by a creditor.

(2) StandardIf the credit reports used in the analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must:

• verify that the debt is paid in full at the time of or prior to settlement using an acceptable source of funds;
• verify that the Borrower has made payment arrangements with the creditor; or
• if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI ratio.

Collection accounts of a non-borrowing spouse 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, unless specifically excluded by state law.

(3) Required DocumentationThe Mortgagee must provide the following documentation:

• evidence of payment in full, if paid prior to settlement;
• the payoff statement, if paid at settlement; or
• the payment arrangement with creditor, if not paid prior to or at settlement.

If the Mortgagee uses 5 percent of the outstanding balance, no documentation is required.

(P) Charge Off Accounts (Manual)

(1) DefinitionCharge Off Account refers to a Borrower’s loan or debt that has been written off by the creditor.

(2) StandardCharge Off Accounts do not need to be included in the Borrower’s liabilities or debt.

(Q) Private Savings Clubs (Manual)

(1) DefinitionPrivate Savings Club refers to a non-traditional method of saving by making deposits into a member-managed resource pool.

(2) StandardIf the Borrower is obligated to continue making ongoing contributions under the pooled savings agreement, this obligation must be counted in the Borrowers’ total debt.The Mortgagee must verify and document the establishment and duration of the Borrower’s membership in the club and the amount of the Borrower’s required contribution to the club.

(3) Required DocumentationThe Mortgagee must also obtain the club’s account ledgers and receipts, and verification from the club treasurer that the club is still active.

(R) Obligations Not Considered DebtObligations not considered debt include:

• medical collections
• federal, state, and local taxes, if not delinquent and no payments required
• automatic deductions from savings, when not associated with another type of obligation
• Federal Insurance Contributions Act (FICA) and other retirement contributions, such as 401(k) accounts
• collateralized loans secured by depository accounts
• utilities
• child care
• commuting costs
• union dues
• insurance, other than property insurance
• open accounts with zero balances
• voluntary deductions, when not associated with another type of obligation