Conventional, FHA and VA mortgage loans in Phoenix may soon become harder to obtain for those with a troubled credit history. Currently, a borrower with up to $5,000 in collections may still eligible to purchase a home in Phoenix, in many cases. The new guideline change could also affect current Phoenix home purchase transactions you may have in process.
The following policy change was announced from U.S. Bank Home Mortgage, specifically relating to the Correspondent Lending Division's Underwriting policy for all loan products including FHA, VA and Conventional loans.
Collections, Charge-Offs, Judgments, Garnishments and Liens:
Delinquent credit must be paid off at or prior to closing. This includes taxes, judgments, collections, charged-off accounts, tax liens, mechanics' liens, and liens that have the potential to affect US Bank's lien position or diminish the borrower's equity.
Documentation of the satisfaction of these liabilities, along with verification that there were funds sufficient to satisfy these obligations, must be included in the underwriting file.
Per the US Bank memo, this policy will be effective Monday, October 4, 2010, for all loans submitted for underwriting to a USBHM Underwriting Center, for MI Contact Underwriting and loans submitted for purchase by their Delegated Correspondents.
All collection accounts (including medical collections) and charged-off accounts do not have to be paid off at or prior to closing if the total balance of all accounts combined is $1,000 or less. No minimum monthly payment has to be included in monthly debt unless one has been set up and the borrower has been paying a set amount.
Collection accounts or charged-off accounts that exceed the above $1,000 limit in combined balances do not have to be paid off at or prior to closing, provided all of the following are documented:
- A strong credit profile
- Meaningful financial reserves
- Evidence that the accounts pose no threat to our first mortgage lien
This announcement is not industry wide, but specifically relates to loans delivered to US Bank Home Mortgage through Correspondent Lending. US Bank Home Mortgage is known as one of the more conservative residential lenders, sometimes coming out with guideline changes up to 6 months before other lenders. This memo also doesn't insinuate that all lenders will change the guidelines they use to underwrite, rather with the tightening of the market, there is possiblility. However, if this does become more prevalent your clients will become frustrated that they didn't have adequate time to prepare additional cash reserves, you will have to cancel your Phoenix home purchase contracts and your real estate career will suck.
About the Author
My name is David Krushinsky and I am a Phoenix mortgage specialist that is truly passionate about my profession and the result is that nearly 100% of my business is by referral from satisfied clients, trusted financial advisors and the most experienced REALTOR®'s in the Phoenix area.
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Awesome post and I get to be the first to comment! thanks for continually writing good stuff for the home buying consumer David!
Hi David -- It would be interesting to see the impact this has on the % of loans denied for this very reason. Thanks for the education, I learn something everyday on here! :)
David, This is great info! I"m shocked that they will let someone close with collections and charge offs, etc. Wow!
I have never had a buyer who was able to close a loan if there were any outstanding liens or collection accounts of any amount. they were always paid at closing.
It is interesting. I have a feeling that credit standards will loosen a bit when the economy starts to improve. They need to lend money to make money.
Thanks for the Post David. It is very interesting.
Good info. Very interesting. I did not know that they still allowed it. I know back in the subprime days, when things were goofy, a lot of stuff was "overlooked"...
I would expect other lenders to follow. #5 said what I was going to say. Thanks for the post.
I am wondering if other banks besides US Bank Home Loans will adopt this?
Thanks- Someone told me that collections might start to be counted towards the dti as well. Not sure what lender.
Most large lenders have their own overlays/terms for selling loans to GSE's/HUD, but generally they all eventually conform.
Renee - Thank you for sharing all of the great ideas you have, many of which I have stolen and used.
Chris - I think this change would have a higher impact than many perceive. Many of our first time home buyers already have trouble verifying funds to close. This could force them to use funds to pay off collections; in lieu of their down payment, closing costs and prepaid items. Just another obstacle to make the home buying process even more challenging.
Marcy - We have had many clients who have closed without paying off their collection accounts. In fact, it's more likely today than a few years ago. Many of the subprime borrowers had to pay off all collections. Here are the direct guidelines from Fannie Mae's Underwriting Manual.
Past-Due, Collections, and Charge-Off Accounts
Accounts that are reported as past due (not reported as collection accounts) must be brought current.
•· For one-unit, owner-occupied properties, borrowers are not required to pay off outstanding collections or charge-offs-regardless of the amount-provided the collection will not threaten Fannie Mae's first-lien position.
Note: If the lender marks the collection account Paid By Close in the online loan application, DU will issue a message in the Findings report stating that the collection must be paid.
•· For two- to four-unit owner-occupied and second home properties, collections and charge-offs totaling more than $5,000 must be paid in full prior to or at closing.
•· For investment properties, individual accounts equal to or greater than $250 and accounts that total more than $1,000 must be paid in full prior to or at closing.
Lane - I agree 100%. Banks don't make money by not lending. It's a matter of time.
Missy - I think they will, but maybe not right away. SunTrust is usually quick and I haven't heard anything from them yet.
David - I am still able to get medical collections waived with relatively no problem. On another note though (and I just recently blogged about this), I have actually been seeing a considerable improvement in the credit ratings and financial stability of my borrowers for the past year or two.
The borrowers I am working with today are much more financially stable than the borrowers I worked with a few years ago. I'm seeing higher fico scores, less derogs and more reserves. Kind of freaky considering that our economy has absolutely devastated so many people.
The one thing that I haven't managed to increase in the past 3yrs are my production numbers. While I am working with more financially stable borrowers, I am still working with less of them. My production numbers (as well as my income) are still down 40% from 2007. While 2010 is proving to better than 2009 (and 2009 was better than 2008), I have still not recovered to previous levels of production but am working my @$$ off in trying to do the best I can.
David- Are you sure??? That's not what my bank said.....where's your proof? Are you just trying to stir the pot??? LOL
Great informative post. Take Care My Friend :)
Of course I am... :)
Interesting stuff. Will be interesting to see how previously defaulted borrowers will be treated when they re-enter the housing market to purchase. For example, if you had a short sale on your credit report but did not receive a deficency waiver, will the lender hold that potential future debt against the borrower?
Jonathan Osman - Charlotte Real Estate
Thanks Jonathan. I would be willing to bet they will, if the account still shows as a collection or an outstanding amount owed.