FHA Announces Important Guideline Changes
The purpose of this Mortgagee Letter (ML) is to:
Modify documentation requirements for self-employed borrowers,
Provide new guidance on disputed accounts, and
Expand the current definition of family members for identity of interest
transactions.
The new guidance in this section of the ML is effective for case numbers assigned on or after
April 1, 2012, and will apply to all FHA insured loans except non-credit qualifying
streamline refinance loans and Home Equity Conversion Mortgage loans.
Below is a matrix with old and new documentation requirements for
self-employed
borrowers.
NEW Guidance for Self-Employed Income Borrowers
P&L and Balance Sheet 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.Same requirements as an“Accept”.
New Guidance for Disputed Accounts
If the Automated Underwriting System using the TOTAL Mortgage Scorecard rates the mortgage loan application as an Accept, the mortgage application will no longer be referred to a
DE underwriter for review due to
disputed accounts, as long as these accounts meet both of the following conditions: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 lender must obtain documentation supporting the payment arrangements or that the debt has been paid off. 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 unauthorized use, etc., will be excluded from the $1,000 limit under the terms shown below.The mortgagee must provide in the case binder, 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.
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.Mortgagees must document the case binder
showing each account was resolved or paid in full.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.FHA continues to require judgments to be
paid off before the mortgage loan is eligible for FHA insurance.*
New Guidance for Identity of Interest Transactions
For the purpose of
Identity of Interest transactions, the definition of family member includes:
child, parent, or 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, stepsisteruncle, and aunt Note: A child is defined as a son, stepson, daughter, or stepdaughter. A parent or grandparentincludes a step-parent/grandparent or foster parent/grandparent.
As stated in handbook HUD 4155.1 2.B.2.b, identity-of-interest transactions may result in a
reduced maximum loan-to-value limitation.
Joel Lobb
(NMLS#57916)Senior Loan Officer
502-905-3708 cell
502-813-2795 fax
jlobb@keyfinllc.com
Key Financial Mortgage Co. (NMLS #1800)*
107 South Hurstbourne Parkway*
Louisville, KY 40222*
