Last month FHA took steps to mitigate their lending risks by announcing updates to its automated DU loan approval.
For its part, the FHA said it is taking necessary steps to address some of the risk trends apparent in its single-family /condo portfolio and flagged as concerning in its 2018 Report to Congress.
Here’s the profile of FHA loans that are affected:
1) Cash out refinances (max LTV is 85%)
2) Lower credit scores (below 620)
3) High debt-to-income ratios (higher than 49%).
Bad News and Good News:
1) Bad News – FHA is limiting its automated “DU” (Desktop Underwritten) loan approvals to 3 cases
2) Good News – A DU decline can be “overridden” by an underwriter who has “direct endorsement authority” to “manually underwrite” the loan. A “direct endorsement authority” is an additional level of approval that allows lenders to underwrite a loan, close it without prior review by HUD and still have a “sellable loan” in the “secondary market (Wall Street).
A “manual underwrite” takes into account 4 “compensating” factors.
1) Down Payment. If your borrower has a 10% down payment (vs. 3.5&) FHA can approve a buyer with credit scores as low as 550 (vs. 580 or 620).
2) High Credit Scores. If your borrowers have 800 credit scores but high debt ratios, its likely can still be approved.
3) Low “Debt to Income Ratios.” If your buyer has a higher than acceptable monthly house payment (PITI) but no credit card debt – that’s a positive in the eyes of an underwriter. Conversely if a buyer has a low house payment – but high consumer debt – their loan is often approved.
4) There are also human factors
When buying a home and shopping for a loan, don’t just rely on your bank. Banks don’t offer the wide array of programs a private mortgage broker can. It doesn’t hurt to speak with your bank, but you should always be comparing what they have to offer with a mortgage broker – you may be surprised. Though FHA is changing some of its underwriting exceptions, a mortgage broker can point you in the direction of the type of loan that’s best for you in your current financial situation.
Distinct Strategies. Record-Setting Results.