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FHA guidelines: Mortgage lenders call for “specificity”

by Karen Lawson
November 3rd, 2010

Mortgage loans failing to meet FHA guidelines must be manually underwritten, but current FHA requirements allow lenders flexibility in approving such loans. The Mortgage Bankers Association (MBA) addressed its concerns in a letter to FHA, and noted ” A greater emphasis on specificity in policies is necessary to give underwriters comfort that their manual underwriting decisions can withstand a post-technical review.”

FHA Loans: Stricter manual underwriting may affect some borrowers

FHA allows flexible underwriting for cases involving applicants who have little or no standard credit, but who can provide proof of creditworthiness. Non-traditional credit is typically viewed as a higher risk, and loan underwriters may be less willing to approve such loans if they’re unclear about FHA guidelines.

The problem with the current system involves interpretation; if an underwriter interprets FHA guidelines in a way that leads to loan approval, the mortgage lender in question could later be held accountable by FHA whether or not the mortgage is in default. Mortgage lenders believe that if they are going to fall under closer scrutiny by FHA, then FHA needs to makes its guidelines crystal clear.

An unintentional aspect of FHA tightening its guidelines without providing specifics to lenders for circumstances requiring manual underwriting could be that mortgage lenders will err on the side of caution when manually underwriting FHA loans. Borrowers who could previously qualify under less stringent criteria may no longer qualify for FHA loans if mortgage lenders and underwriters are fearful of approving FHA loans using manual underwriting.

Another consequence of FHA failing to provide “specificity” in its manual underwriting guidelines could impact mortgage loan underwriters who in good faith manually underwrite mortgages that are later found to be non-compliant with FHA requirements. With HUD/FHA increasing their enforcement of underwriting policies, FHA lenders and their underwriters would come under additional pressure for decisions made when manually underwriting FHA loans.

Mortgage Bankers Association: Requesting additional FHA input

The MBA is also asking HUD to initiate underwriting requirements that would help lenders weed out potential problems during the application process.

Evaluating “payment shock”: This would require lenders to compare applicants’ current housing payment with their proposed mortgage payment for determining whether applicants can sustain making higher payments over the long term.
Historical debt management review: The MBA suggests that FHA include a requirement for lenders to evaluate how applicants have managed debt over the previous 12 month period. The purpose of this requirement is determining whether borrowers who’ve carried debt over time are paying off debt solely for the purpose of gaining mortgage loan approval.

The MBA suggests that mortgage loan underwriting is an art rather than a science, and that considering individual circumstances on a case-by-case basis remains an important aspect of approving mortgage applications. Finding the right balance of regulation and enforcement with the variances necessary for evaluating mortgage applications individually is a major challenge for mortgage lenders and FHA.

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