However, depending on how lenders interpret the guidelines, Gastelum explained that clients could have their applications denied because they have not had two years of uninterrupted, consistent employment.
“Ultimately it comes down to interpretation of the guidelines. One lender might say, ‘Oh, he was out of work for a week, so the second hire won’t work because the job was interrupted.’ yeah. The problem is, Mortgage Credit Denial To be honest, (MCR) is like your scarlet letter,” Gastelum said.
When a lender denies an FHA application, the next lender won’t even be able to review the application because the underwriter has to do extra work to override that MCR, mortgage experts tell Housing Wire. Told.
All FHA mortgage lenders U.S. Department of Housing and Urban Development (HUD) A database called FHA Connection that is used to guarantee and generate FHA case numbers associated with a borrower’s mortgage application. If a borrower was denied her FHA mortgage, she was required to complete an MCR report for that denial. That changed on September 11th.
Loan officers say FHA’s announcement in early September that it will waive the requirement for FHA-approved lenders to flag rejected loans in the FHA Connection system will help rejected borrowers overcome the stigma. He said it’s a step in the right direction because it doesn’t have to be done.
In an environment where interest rates are rising and it is becoming more difficult for first-time buyers to enter the market, borrowers will no longer have to deal with files containing MCRs for six months. Even after the six-month period ends, the borrower’s case number will still be appended to their Social Security number.
Demand for FHA loans has increased over the past year, accounting for 23.8% of mortgage applications in August 2023, up from 17% a year earlier. Mortgage Bankers Association.
According to data compiled by , FHA/VA’s share of total mortgage originations in the second quarter of 2023 was 22.9%, up from 18% in the second quarter of 2022. Inside Mortgage Finance and urban research institute.
Loan officers said the FHA exemption gives borrowers a fairer chance at obtaining a loan. Borrowers are not subject to lenders’ different underwriting interpretations that could lead to denial of their mortgage application.
“It (MCR) is a subjective bias based on the credit risk tolerance of the particular lender you started with.” “This is a good move,” said CEO Billy Taylor. hometown financial companySaid.
“We are really excited about this change because it will provide more opportunities for loan officers and more opportunities for buyers to get a second chance.” Michael Borodinsky, Vice President and Branch Manager caliber mortgageSaid.
Overcoming overlays
Although FHA’s credit requirements are strict, borrowers can receive an FHA loan without a credit score. In fact, HUD prohibits lenders from denying a borrower’s FHA loan application solely because of a lack of credit history.
In these cases, lenders will ask for documentation, such as a letter from your landlord that shows you paid your rent on time, and your payment history with your utility company, cell phone, or internet provider.
But lenders have an overlay. This is in addition to the federal regulations issued because lenders must sell these loans to investors who do not want to purchase high-risk loans.
“These overlays may be higher standards, or they may be lower debt-to-income (DTI) ratios, but they still exist on a subjective basis for each lender. , borrowers don’t know that they qualify for a loan if their credit score is less than 640 or 620, and that the loan could be denied and then approved elsewhere. You may not realize it,” Borodinsky said.
Generally, to qualify for an FHA loan, FHA requires a minimum credit score of 580 and a 3.5% down payment. FHA guidelines require borrowers with credit scores between 500 and 579 to make a down payment of at least 10%. However, you may also face more stringent requirements. Lenders may require a lower loan-to-value (LTV) ratio or require the borrower to make a larger down payment.
Ted Tozer said there are many reasons for MCR., non-resident fellows urban research instituteFormer Director of the Housing Finance Policy Center (HFPC) Ginny Mae.
“It could be low credit scores, it could be geography. Maybe they’re looking at a soft market where home prices could go down. But you don’t want that 3.5% down payment to tip your portfolio into a portfolio where it’s very likely to exceed 100% LTV,” Tozer noted.
Industry participants frequently complained that FHA Connection often did not provide enough information about mortgage credit denials to determine why applicants were denied, a senior company official said. Associate Attorney Peter Idziak said. Polunski Beitel Green.
“The lender’s own standards may be higher or different and may be in addition to FHA qualifications,” Idziak said.
For those looking to purchase a home, the new exemption is necessary to avoid the possibility of misrepresentation of actual creditworthiness, said JR Yunathan, SVP and California Mortgage Production Manager. California Bank & TrustSaid
“A waiver granted does not necessarily open up a new avenue to competition, as they could have done so previously. It will only open new avenues if it rejects the loan file/borrower on the basis of the fact that it exists, thereby eliminating the ability to compete,” Yunathan pointed out.
Whether an applicant is visiting a financial institution for the first or second time, the financial institution must have sufficient financial information to assess credit risk.
“Lenders should feel confident enough to know what questions to ask, how to analyze your income, how to analyze your risk profile and all the rest. It shouldn’t make that much of a difference, because lenders should be in a position to ‘ask the right questions to really understand,”’ Tozer said.
A beggar cannot be a chooser.
While loan officers agree that the waiver will make FHA loans more accessible to borrowers, LOs interviewed by Housing Wire do not expect the waiver to increase production.
In a competitive environment, lenders were already going the extra mile to approve loans that would have been rejected or had already been rejected by other lenders.
“We’re more likely to underwrite a 500 credit score than a big bank who says, ‘We don’t want that risky loan in our portfolio,'” Hometown Lenders’ Taylor says. “We don’t want to take on 500, 520, 560 borrowers, so we don’t want to take them on.”
Instead of simply rejecting borrowers with low credit scores, Hometown Lenders will perform manual underwriting on applicants with low credit scores for approval, he said.
The FHA loan program requires lenders to require manual underwriting if a borrower has a credit score below 620 and a DTI above 43%. According to HUD, a borrower can qualify with his credit score of 580 and her DTI of 50%.
“That (loan origination) is the only way we get income. I don’t think it (new exemption) will affect us at all, we are just looking to see if that borrower has an MCR. Deaf,” Taylor said.
Level 2 underwriting is required to override an existing MCR. That means two underwriters have permission to override her MCR on her FHA connection system, so the file must be underwritten.
Gastelum said there will be no credit rejections for mortgages, so you won’t have to deal with second underwriting.
“There won’t be any more business. If anything, it will bring some of the borrowers turned down by other companies back into the market faster,” Gastelum said.
FHA loan limits have been increased to up to $1 million or more, and mortgage insurance premiums on FHA loans have been reduced by 30 basis points this year to cushion mortgage interest rates from surging in line with home price inflation.
Some loan officers argue that while FHA’s decision to reduce the MIP is a step in the right direction, the Home Loan Advance Payment Premium (UFMIP) is equal to 1.75% of the base loan amount, and the He pointed out that the same premium would apply. Compared to traditional loans, they can still be burdensome for the borrower.
But affordability remains a challenge for renters, Taylor noted, as tackling the issue will require wages to rise and house prices to fall.
“Removing MCR is not going to change affordability, which is the real reason people don’t have access to housing,” Taylor said.
But Borodinsky said every little bit helps, citing the toughest mortgage origination market he’s ever seen.
“Anything that moves the needle even a little bit is welcome, because beggars cannot choose in this market. “It’s unlike any other market we’ve seen in over 30 years in that there are problems,” Borodinsky said.
