For FHA case #’s ordered on or after 10/15/13
New Guidance from FHA on collections, Judgments & disputed accounts
Collections: If the total outstanding balance of all collections (excluding medical collections) of the borrower and the non-participating spouse in community property states equal or exceed $2000, Essex will perform a capacity analysis, regardless of AUS findings.
Capacity analysis includes any one of the following:
1. Borrower pays in full all collections with cumulative balance equal to or exceeding $2000 (paying down below $2000 is NOT allowed). Acceptable source of funds required.
2. Borrower makes payment arrangements with creditor and either a letter from the creditor or credit supplement to verify the payment is required. Borrower must qualify with the payments.
3. Lender must calculate a payment based on 5% of the outstanding balance of each collection. Borrower must qualify with the payments.
Judgments: FHA requires judgments to be paid off before the loan is eligible. An exception to the payoff of a court ordered judgment may be made if the borrower has an existing written agreement with the creditor and a minimum of 3 payments have been made as agreed. A copy of the agreement and evidence of a 3 month payment history required. Borrower is not able to prepay the scheduled payments to meet the minimum required. (note: FHA requires non-participating spouse judgments in a community property state to be paid in full or meet the exception noted above).
Disputed derogatory accounts: (defined as: disputed charge offs, disputed collection accounts and disputed accounts with late payments in the last 24 months).
1. Disputed Derogatory accounts with a cumulative balance greater than or equal to $1000: loan must be downgraded to a “refer” and manually underwritten with no consideration to Total scorecard findings or approval. All ratio, credit & documentation requirements would apply.
2. Disputed Derogatory accounts with cumulative balance less than $1000 do not require a manual downgrade.
3. Excluded Disputed accounts: Medical accounts are excluded from the $1000 limit AND derogatory disputed accounts resulting from identity theft, credit card theft or unauthorized use. Lender must provide documentation to prove the theft or unauthorized use.
4. Disputed derogatory accounts of a non-participating spouse are NOT considered in $1000 cumulative balance.
Should you have any additional questions , please see your department manager.
Essex advises that all originators read the Mortgagee Letter