Comments on: FHA Mortgage Insurance Fund Down 40%

By: To the Students from the April 15, 2009 Current Issues/FHA Class at Veridian Cove : ceforward.com

Thu, 16 Apr 2009 00:17:47 +0000

[...] Here is the March report I promised to find on FHA delinquencies. The FHA Home Mortgage Insurance Fund is down by 40% according to a January report. [...]

By: Esko Kiuru

Esko Kiuru — Sun, 18 Jan 2009 06:45:13 +0000

The Business Week article about a host of one-time subprime lenders moving over to do FHA is scary. Evidently the FHA approval process is rather weak and they can get in without thorough background checks. Let’s hope they can weed out any bad apples that were approved.

By: Rhonda Porter

Rhonda Porter — Thu, 15 Jan 2009 21:38:42 +0000

Kary ~~you're wrong about credit...~~but we should probably move this to another post that's actually on credit. We're hijacking this one from it's original content. I'll find one that will be more suitable to carry on the conversation.

By: Kary L. Krismer

Kary L. Krismer — Thu, 15 Jan 2009 20:10:00 +0000

I assume by “ideal” you mean ideal for a good credit score. Ideal for making a home loan would be 4 tradelines of any age, on which nothing but current charges are owing, and no defaults of record in the past 7 years.

But that brings up another absurdity of the credit score system. Owing $10,000 on one credit card is worse than owing $2,500 on four, assuming in both cases the debtor has four credit cards and the credit limit on each is $11,000. That’s nuts, and should not even be a distinction when it comes to making a mortgage loan.

By: Rhonda Porter

Rhonda Porter — Thu, 15 Jan 2009 19:53:47 +0000

Kary, car loans will ding your credit when they’re new–doesn’t matter what the payment is and credit scoring of your mortgage does not factor the property value. It’s simply how much is owed compared to the original debt and/or credit line.

What’s ideal is 4 tradelines that are at least 24 months old with less than 30% of the available balance of the credit line used.

By: Kary L. Krismer

Kary L. Krismer — Thu, 15 Jan 2009 18:58:04 +0000

By over-encumbered I meant owning a property worth $300,000 that they owe $350,000 on. I wasn’t referring to credit card debt. Being over-encumbered they have fewer options for dealing with the debt than someone with equity.

As to the car loan–which is worse? Having two car loans that are both over a year old, or having no credit at all? My understanding was that no credit was worse. Also, my understanding was that if you took one of those two cars and traded it in, to get lower payments and/or a lower balance, that the new loan would ding your credit score more than the old one, where for purposes of a mortgage loan, a debtor making such a move would be a good thing, not a bad thing.

By: Rhonda Porter

Rhonda Porter — Thu, 15 Jan 2009 18:48:09 +0000

Kary, Someone who is overencumbered in debt probably would not have a high credit score…unless they have low balances on their debts (30% or below of the available credit lines). Once you’ve utilized over 30% of available credit, you’re dinged and hit harder once you use 50% or more of your available credit.

Two car loans that are one year old will not help your credit at all. Even if you put 50% down on the car, what’s looked at is the original loan balance to the current balance.

Your scenario is not accurate.

By: cautious buyer

cautious buyer — Thu, 15 Jan 2009 18:25:02 +0000

Jillayne, I seem to remember you commenting on this months ago. Something to the effect of “Lets not act surprised when FHA starts to have trouble”

Are you psychic?

By: Kary L. Krismer

Kary L. Krismer — Thu, 15 Jan 2009 16:27:00 +0000

Okay, so you’re both saying FICO score is taken into account to some extent.

What I’m saying is that’s stupid. Someone with a fully paid for house and car, no credit cards and $1,000,000 in the bank would probably have a low FICO score. Someone with an overencumbered house loan, two car loans that are one year old, and $30,000 of credit card debt that they’ve been swimming with for a year could probably have a very high FICO score. Which would you rather make a home loan to?

By: Jillayne Schlicke

Jillayne Schlicke — Thu, 15 Jan 2009 15:47:13 +0000

Hi biliruben and Kary,

Today, FHA has loan originators send the file through FHA’s “TOTAL Scorecard System” which looks at the following five factors.

FICO Score
Monthly Housing Expense Ratio
Number of Montly Payments in Reserve
Loan to Value Ratio
Loan Term

FHA considers these to be the highest risk factors.

Let’s analyze these one at a time starting at the bottom. Most everyone has a 30 year fixed. LTV: Most FHA borrowers purchasing a home are at the maximum LTV and many have zero cash reserves left after closing.

It’s interesting that FHA doesn’t look at the total debt to income ratio. With all the news over the last two years about credit score fraud, personally I think they should completely do away with it and manually underwrite everything again, but I’m partial to manual underwriting. It does take more time.

As we now know from the hearings, FHA’s systems are 20 years of out date. I’m wondering why they don’t just revert to manual underwriting at this point.

If you end up getting a low “score” through FHA’s TOTAL system, then the file is referred to a human underwriter (manual underwriting.)

There are a few things I would take a closer look at as an FHA underwriter: Has the originator provided verifiable, stable monthly income AND ALSO payment shock, which Rhonda has mentioned several times:

If this is a purchase transaction, what was the homebuyer’s monthly rent payment and how higher is their mortgage payment?

FHA (human) underwriters also fully underwrite the FHA appraisal before the file is approved.