What Underwriters don't tell you...

You can see for yourself how vague the government can be.  Why is this? You may ask.  Because FHA allows the underwriter to choose how much of a risk the Lender might incur.  Lender's have what we call a compare ratio.  This ratio is forclosure rate of loans the Lender has closed compared to overall Fha loans that the Lender has closed.  If this compare ratio becomes too high...the Lender is notified by Hud and can be Audited for Fraud, or poor quality control, or just poor underwriting.  Hud will then fine, suspend, or terminate such lender.

If you wish to check a specific Lender's compare ratio you can do so at:

https://entp.hud.gov/sfnw/public/

Now, here's how it goes.  Typically underwriter's look at the layer of risk involved within the loan.  They use score cards. You can see how you score by going to this website selecting tools and score a manually underwritten loan:

http://www.fhaok.com/home.htm

Most Lender's have shyed away from manually underwritten loans and use one of two types of computer audomated approval systems. These are called Desktop Underwriter (DU) or Loan Prospector (LP).  The scorecard is audomated and reviews all of your personal information along with your credit report.  The advantage of the Lender using these approval systems is that it better insures that Freddie Mac and Fannie Mae will garanty these loans.

 Alternative Credit aka Non-Traditional Credit

   FHA insured loans, which are quickly becoming the mortgage of choice unless you have 20% down payment and 720 credit scores, allows people to obtain mortgage financing if they are shy on an established credit history reported to the credit bureaus.  Typically, a borrower needs to the following shown on their credit report for it to be considered "established": 

• At least three trade lines (credit accounts) in good standing.
• Two of the three trade lines must be at least 12 months old.
• One trade line must be at least 24 months old.
• Three credit scores per borrower.

Sometimes, if someone does not have established credit that is reported to the credit bureaus, they need to use "alternative credit" or "non traditional" credit, which may be acceptable with FHA financing.   Proving you have credit that is not reported to the bureaus requires that you obtain documentation from three different sources that you have made on time payments to during the last 12 months.   

Possible types of non-traditional credit (preferred--at least one of these types of sources are required):

• rent payments
• utilities (telephone, electricity, gas, water, garbage, cable, etc.)--not included in housing payment.

Other acceptable sources of non-traditional credit are (two out of three sources may come here):

• insurance (medical, auto, life, renter's, etc).
• payment to child care providers
• internet/cell phone service
• personal loan with terms in writing supported with canceled checks
• department, furniture, rent-to-own stores, etc.
• a documented 12 month history of saving by regular deposits (at least quarterly) that are not payroll (automatic) deducted.

Note:  Debts that are paid automatically from your payroll are not allowed to be used in documenting non-traditional credit.  Lenders want to make sure that you are able to make timely payments "voluntary".

The "form of proof" can be:

• canceled checks for the last 12 months, or
• written letter from creditor which is written on their letterhead, includes your name and account number stating the you have made on-time payments during the last twelve months.   The letter should include what the payment amount is and the total amount due.

In order to qualify for a non-traditional credit approval with FHA, over the last 12 months, there must be:

• No late payments for housing.
• No collections or court records reporting (with the exception of medical).
• No more than one 30 day delinquency on payments due to other creditors.

Qualifying ratios are restricted to 31% for the payment to income ratio and 43% for the total debt to income ratio.   Two months reserves (two months mortgage payments in savings after closing) is also required.  When non-traditional credit is used, the mortgage is a "manual underwrite" meaning that you need to allow for more time during the underwriting process as a real live human is underwriting your transaction.