3555 1chapter10

User Manual: 3555

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HB-1-3555

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CHAPTER 10: CREDIT ANALYSIS

7 CFR 3555.151

10.1 INTRODUCTION

To be eligible for a guaranteed loan, an applicant must have a credit history that

demonstrates that they are reasonably able and willing to repay the loan and meet

obligations in a manner that enables the lender to draw a logical conclusion about the

applicant’s commitment to the indebtedness. It is the applicant’s overall credit

management skill (e.g. including repayment patterns, credit utilization, and level of

experience using credit), not solely the existence of delinquent credit accounts – that has

an effect on the eventual default risk of a mortgage. The lender must analyze the entire

credit history for each applicant listed on the mortgage application. The extent of the

analysis will vary based on whether the lender uses a traditional method to underwrite the

loan manually, or is assisted by the Agency’s automated underwriting system.

This chapter discusses the Agency’s minimum criteria for assessing an applicant’s

credit history. A lender may impose more stringent criteria. The lender must obtain

several types of third-party verifications to determine whether the applicant’s credit

history meets the Agency’s criteria. The lender must evaluate the credit history for each

applicant who will be party to the note. An applicant’s credit record does not have to be

perfect to be eligible for a guaranteed loan as long as any isolated instance is fully

explained and supported with documentation. A few instances of credit problems can be

acceptable, if the lender determines that an applicant’s overall credit record demonstrates

an ability and willingness to repay obligations. This chapter discusses the credit

documentation that is part of the loan application package for manually underwritten

loans and loans utilizing the Agency’s automated underwriting system. Loans that

receive an “Accept” underwriting recommendation from the Agency’s automated

underwriting system eliminates the need for the lender to document the credit

qualification decision, provided the lender has validated the credit score in accordance

with Section 10.5 of this Chapter. Loans that receive an underwriting recommendation

other than “Accept” may require additional documentation of the lender’s decision for

loan approval. If any applicant is delinquent on a non-tax Federal debt additional

documentation and further evaluation will be required.

10.2 CREDIT ELIGIBLITY REQUIREMENTS

The lender must investigate all major indications of derogatory credit to determine

whether the reported information is accurate, and whether there is an acceptable

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explanation for the problem that may justify an exception. Failure to understand the

nature of a credit problem could cause an application to be rejected on the basis of

inaccurate or incomplete information. Attachment 10-A illustrates the method used to

evaluate an applicant’s credit history when a loan is manually underwritten by an

approved lender and does not qualify for abbreviated documentation noted in Chapter 15

of this Handbook. These indicators must be followed consistently; however, the lender

can make exceptions in limited circumstances, as described in Paragraph 10.8.

Attachment 10-B illustrates the hierarchy of the credit review.

In addition to analyzing the credit report, an applicant is automatically ineligible for a

guaranteed loan if they are presently delinquent on a non-tax Federal debt.

If the applicant(s) has had a previous Agency loan that resulted in a loss to the

Government, has been settled, or is subject to settlement, additional documentation may

be required of the applicant(s) to determine if the loss incurred was beyond the control of

the applicant and if any identifiable reasons for the loss still exist.

The lender must verify that the applicant has no delinquent Federal debt through the

Credit Alert Verification Reporting System (CAIVRS). CAIVRS is a Federal

government-wide repository of information on those individuals with delinquent or

defaulted Federal debt, and those for whom a payment of an insurance claim or guarantee

loss claim has occurred. An applicant with an outstanding judgment obtained by the

United States in a Federal court, other than the United States Tax Court, is not

eligible for a guarantee unless otherwise stated in this Chapter.

Lenders are responsible for screening all applicants using HUD’s Credit Alert

Verification Reporting System. When a lender utilizes the Agency’s automated

underwriting system, the CAIVRS confirmation is automatically retrieved once the

application is entered. When a lender does not utilize the Agency’s automated

underwriting system, the lender must obtain and record in the lender’s mortgage file the

CAIVRS confirmation number. For manually underwritten loans, the Agency will obtain

a CAIVRS confirmation number in GLS through the service available. Each request of

the CAIVRS service for the same applicant will record different confirmation numbers.

Lender instructions for accessing CAIVRS are included in Appendix 7. The presence

of delinquent non-tax Federal debt cannot be waived by a lender.

10.3 CREDIT REPORT REQUIREMENTS

The credit report the lender uses to assist in the assessment of credit eligibility must

come from a recognized credit repository and cannot be provided by a credit reporting

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agency that is affiliated with the lender in any way. Credit reports can be no greater than

120 days old at loan closing. Types of credit reports include:

 Automated Merged Credit Reports;

 Residential Mortgage Credit Report (RMCR).

A. Automated Merged Credit Reports

An automated merged credit report – also known as a multi-merged credit report

(MMCR) or Three-Repository Merged Credit Report (TRMCR) - combines in-file credit

reports from multiple repositories into a single report. A joint merged credit report

includes all credit repository credit data on two individual applicants who are married to

each other.

The report must meet the requirements of Fannie Mae, Freddie Mac, FHA or VA,

which include, but are not limited to the following requirements:

 The report should include all information from three different credit repositories,

or two repositories, if that is the extent of the data available for the applicant.

 The report must include all credit and legal information reported for the applicant

from the three (or two, if applicable) in-file credit reports not considered obsolete

under the Fair Credit Reporting Act (FCRA), including information for the last

seven years regarding bankruptcies, judgments, law suits, foreclosures, and tax

liens.

B. Residential Mortgage Credit Reports

A residential mortgage credit report is a detailed account of the applicant’s credit,

employment and residency history, as well as public records information.

The report must meet the requirements of Fannie Mae, Freddie Mac, FHA or VA,

which include, but are not limited to the following requirements:

 The report must include a certification that it meets the standards for a residential

mortgage credit report.

 Include a check with the creditor within 90 days of the credit report for each

applicant’s account with a balance.

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 Verify each applicant’s current employment and income, if obtainable. If unable

to verify and certify to the applicant’s current employment, state a reason for not

completing an interview with the applicant’s employer.

 Provide a detailed account of the applicant’s employment history.

Any credit report must:

 Not be more than 120 days old when the loan is closed;

 Be accurate and complete;

 Provide an account of the credit, residence history, and public record information

for each applicant who is a party to the note;

 Be submitted as an original document, either the original electronic version or the

printed report delivered by the credit reporting agency;

 Have no whiteouts, erasures or alterations;

 Indicate the name and address of the consumer reporting agency;

 Show the primary repository from which the particular information was pulled for

each account listed; and

 Show the name of the party ordering the report;

Lenders must order an RMCR if any of the following circumstances apply:

 An applicant disputes accounts;

 An applicant claims that collections, judgments, or liens reflected as open on the

credit report have been paid and cannot provide separate supporting

documentation;

 An applicant claims that a debt shown on the credit report has a different balance

and/or payment and cannot provide a statement less than 30 days old; or

 The lender’s underwriter determines that it would be prudent to utilize a RMCR

rather than a tri-merged report to properly underwrite the loan.

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If a credit report indicates other credit inquiries have been made by the applicant in

the 90 days prior to the date of the credit report, the lender should determine why the

inquiry was made and whether credit was obtained by the applicant.

10.4 CREDIT REPORT VERSIONS

For mortgages assessed through the Agency’s automated underwriting system, a

decision underwriting score is obtained for each applicant as further explained in

Paragraph 10.7 of this Chapter. Credit scoring models consider the primary types of

credit obtained by the applicant based on the mix of the applicant’s various credit

accounts. Among other things, scoring models consider the following risk factors when

assigning a credit score to an applicant:

 Number and age of accounts

 Payment history (length of payment history and habit of payment)

 Credit utilization (the amount of debt, new credit obtained, type of credit, open

credit cards)

 Recent attempts to obtain new credit (inquiries)

In obtaining those scores, the following scoring models are recognized in the

Agency’s automated underwriting system in the order listed. Any model other than the

source noted below will not be recognized by the system.

Scoring Model

Source Description Scoring Model Code

Experian Experian/Fair Isaac risk Model v3 15

Experian New Experian Fair Isaac Model (FICO II) 6

Equifax Beacon 5.0 13

Equifax Beacon 96 3

Transunion FICO Risk Score Classic (04) 14

Transunion FICO® Risk Score, Classic (98) 9

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If lenders are not using the Agency’s underwriting system, utilizing credit scores to

underwrite manually underwritten mortgages is the preferred method. For manually

underwritten loans, lenders should ensure the credit models noted above are utilized in

the underwriting decision.

10.5 VALIDATING THE CREDIT SCORE TO ESTABLISH THE APPLICANT’S

CREDIT REPUTATION

Credit scores are an integral part of the risk assessment. Credit scores are used to

underwrite a borrower’s credit reputation. Too little information, or information that is

significantly inaccurate makes the credit score unusable for underwriting. A usable score

ensures that the credit score is adequately indicative of an applicant’s credit reputation

and to ensure a fair evaluation to applicants in using credit scores to evaluate their overall

credit reputation. If an applicant does not have a usable credit score in connection with

their loan request, then the use of nontraditional credit references is acceptable.

For applicants with usable credit scores, the loan can continue to be underwritten with

the automated underwriting system, subject to Section 10.7A of this Chapter. The

automated underwriting system does not dynamically validate the credit score used for

the underwriting recommendation. It remains the underwriter’s responsibility.

Applicants without usable credit scores will be manually underwritten to arrive at a

conclusion that the applicant’s credit reputation is acceptable.

A validated score does not wholly indicate that the applicant’s credit reputation is

acceptable. Even if the score exceeds the credit score as indicated in Section 10.7 of this

Chapter, the credit score must be validated and the lender must determine that the

applicants have satisfactorily established the willingness and ability to manage and repay

obligations as agreed.

Once the credit reputation is established, the lender will evaluate the overall layering of

risk in credit, capacity and collateral.

Validating the Credit Score. Two or more eligible tradelines are necessary to validate

an applicant’s credit report score. Eligible tradelines consist of credit accounts

(revolving, installment etc.) with at least 12 months of repayment history reported on the

credit report. At least one applicant whose income or assets are used for qualification

must have a valid credit report score.

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Confirm the applicant has at least two eligible tradelines reported to the credit bureau.

The tradeline may be open, closed and/or paid in full by the applicant. Eligible tradelines

include:

 Loan (secured or unsecured);

 Revolving (generally a credit which is not repaid by a certain number of

installments);

 Installment credit (generally repaid through a specified number of

installments such as automobile, recreational vehicle, or student loans);

 Credit card (offered by banking institutions, commercial enterprises and

individual retail stores. Consumers make purchases on credit and if payment

is made within a stipulated period of time, no interest is charged);

 Collection (an account whereby an original creditor transfers an unpaid,

delinquent balance to a collection agency to retrieve any monies owed);

 Charge-off (is the declaration by a creditor that an amount of debt is unlikely

to be collected)

 Authorized user accounts may not be considered in the credit score and credit

reputation analysis unless the applicant provides documentation that they have

made payments on the account for the previous 12 months prior to

application.

The following are not considered an eligible tradeline to validate the credit score:

 Public records such as bankruptcies, tax liens, and judgments that appear on

the credit report are not considered an extension of credit and therefore not

included in this credit analysis step.

 Disputed accounts are not considered in the credit score and are not

considered an eligible tradeline to validate credit.

 Deferred loans such as deferred student loans without 12 months of repayment

history are not eligible tradelines to validate credit.

Insufficient information. A credit score can be generated if a repository’s file

includes only one tradeline, however, the lender must not use any score based on fewer

than two tradelines. If the credit report cannot establish the required number of eligible

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tradelines to validate the credit score, establish a minimum payment history through use

of a non-traditional report as explained in Paragraph 10.6 of this Chapter. Non-

traditional credit may not be used to enhance poor payment records or low credit scores.

Validating GUS credit scores. Loans underwritten with the assistance of the

Agency’s automated underwriting system that receive an “Accept” recommendation are

also subject to the credit score validation of this Paragraph. GUS applications receiving

an “Accept” underwriting recommendation, that fail to meet the credit score validation

test using a traditional credit report, must be downgraded to a “Refer” by the lender. In

these instances the use of a non-traditional credit history will be required.

10.6 OBTAINING NON-TRADITIONAL CREDIT HISTORY

Some applicants may not have an established credit history, but credit verified

through alternative sources may indicate a willingness to pay recurring debts. Neither the

lack of a credit history on a traditional credit report nor the applicant’s decision to not use

traditional credit can be used as a basis for rejection. For this type of applicant, the

lender will utilize alternative credit verification to establish the applicant’s willingness to

repay the requested loan. The alternative credit tradeline may be open, closed and/or

paid in full by the applicant. It must have at least 12 months of repayment history

reported to be a valid alternative source to support validation of a credit score. The lender

may develop a Non-Traditional Mortgage Credit Report (NTMCR). A NTMCR may be

used as a substitute for an RMCR or MMCR/TRMCR. An NTMCR may not be used to

offset derogatory references found in the applicant’s RMCR or MMCR/TRMCR; it

should not be utilized to enhance the credit history of an applicant with a poor payment

record or to manufacture a credit report for an applicant without a verifiable credit

history.

The preferred method is all nontraditional credit references be verified by a credit

bureau and reported back to the lender as a nontraditional mortgage credit report in the

same manner as traditional credit references and uploaded into GUS. Supplemental

credit reports cannot be uploaded into GUS. See Section 5.2A of Chapter 5 of this

Handbook for additional guidance.

If a NTMCR is impractical, or such a service is unavailable, a lender may choose to

obtain independent verification of trade references. Two trade references are required

when at least one of the trade references includes verification of rental housing payments

or mortgage loan payments. If unavailable, at least three trade references must be used to

determine if an applicant has a sufficient credit history. Traditional tradelines with a 12

month payment history listed on the credit report can be combined with eligible

nontraditional tradelines to obtain the required number of tradelines noted in this

paragraph.

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Acceptable forms of documentation for a NTMCR include:

 Cancelled checks;

 Third-party verifications; or

 Non-traditional credit report for the following non-traditional credit sources that

include the creditor’s name, date the account was opened, account balance,

monthly payment due, and payment history reported in 0x30, 0x60, 0x90 format.

Subjective statements such as “satisfactory” or “acceptable” are not an acceptable

format for repayment history confirmation. Rural Development will accept

reports by providers who develop bill payment histories.

Acceptable non-traditional tradeline sources include recent 12-month payment record

of the following:

 Rent payments;

 Utility payment records (if utilities were not included in any rent payments) such

as gas, electricity, water, land-line home telephone service or cable TV;

 Insurance payments (excluding those premiums paid through payroll deductions,

for example - employee group health plans) such as medical (other than those

provided as an employee benefit through salary), automobile, life and household,

or renter’s insurance. Insurance premiums paid other than monthly, such as

quarterly or annually, will require documentation that meet a full 12 months

history of payment;

 Payments to child care providers – made to a business providing such a service;

 School tuition;

 Payments to local stores (department, furniture, appliance and specialty stores);

 Payments for the uninsured portions of any medical bills;

 Internet/cell phone services;

 Automobile leases;

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 A personal loan from an individual (other than a family member) with repayment

terms in writing and supported by cancelled checks or money order receipts to

document repayment;

 A documented 12-month history of saving by regular deposits (at least

quarterly/non-payroll deducted/no NSF checks reflected), resulting in a reserve

account equal to three months of proposed mortgage payments (PITI) as a cash

reserve post-closing; or

 Any other reference which gives insight into the applicant’s willingness to make

periodic payments on a regular basis for credit obligations.

Payments made to relatives for credit sources are ineligible as a non-traditional trade

reference.

For this section a recent account is defined as an account which was closed no more

than six months from the guaranteed loan application with the lender.

Lenders should exercise caution when evaluating applicants with non-traditional

credit histories. Generally these applicants may be considered a higher risk than

applicants who have credit scores meeting the criteria in this Chapter. Applicants may

only have one 30 day delinquency on any non-traditional trade line within the last 12

months. 60 and 90 day delinquencies, as well as reports of disconnection notices or

collection accounts/court records (other than medical) filed in the past 12 months are

unacceptable. Ratios for housing expense and debt-to-income expense should be

minimal.

10.7 CREDIT SCORES

Using credit scores in underwriting. A credit score is a numeric representation of

financial behavior, based on information found in a credit report. Credit scores are

primarily based on five factors:

 Payment history

 Amounts owed

 Length of credit history

 New Credit, and,

 Types of credit used.

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A lower score represents a higher credit risk, while a higher score indicates a lower

credit risk.

Credit scores are an effective tool in evaluating an applicant’s credit reputation. As a

quantitative measurement of risk, credit scores enable an underwriter to process mortgage

applications more accurately and quickly, and with a greater degree of confidence. The

use of credit scores speed up the approval process for an applicant who represents a low

credit risk and allows the underwriter more time to analyze the creditworthiness of a

higher-risk applicant. These scores objectively evaluate all the information in the

applicant’s repository credit file at the time the credit score was created. A strong

correlation between mortgage performance and credit scores has been identified. The use

of credit scores in underwriting can reduce the risk of originating mortgages with

unacceptable credit risk.

Accompanying reason codes with reported credit scores indicate why a credit score is

not higher and can assist the lender in identifying credit factors that need to be addressed

in determining the applicant has an acceptable credit reputation.

For manually underwritten loans or loans underwritten with the assistance of the

Agency’s automated underwriting tool, GUS, the lender must satisfactorily establish the

applicant’s willingness and ability to repay and manage obligations in accordance with 7

CFR 3555 and this Handbook.

A. Acceptable Credit Scores for Manually Underwritten Loans

Underwriting manually with validated credit scores. The lender must perform a

detailed review of all aspects of the applicant’s credit history. Credit scores will be

utilized to underwrite manually underwritten loans. Applicants with validated credit

scores (See Section 10.5 of this Chapter) of 640 or greater meet the minimum credit

reputation provided indicators of unacceptable credit, as addressed below, are not present

in the applicant’s credit file. The presence of collections, charge-offs, judgments,

disputed accounts, authorized user tradelines and payment shock in the credit analysis, as

described in this Chapter, may require further evaluation and documentation by the

lender.

Refer to Attachment 10-B and Section 10.8 for guidance when considering granting

an exception for extenuating circumstances to the credit standards set forth in this

Chapter.

Determining the credit score for manual underwriting.

 If the applicant’s credit report has three scores, the middle score should be

used as the representative score.

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 If the applicant has two scores, the lower of the two should be used as the

representative score.

 If the applicant has a repeating score, that score will be utilized.

 If the applicant has one score, a NTMCR must be developed for manually

underwritten loans. Each applicant must be evaluated separately.

Indicators of unacceptable credit. The following indicators require documentation

meeting the criteria of Section 10.8 to approve an applicant’s loan request for manually

underwritten loans:

 Foreclosure within 3 years:

 Including pre-foreclosure activity, such as a pre-foreclosure sale or short sale

in the previous 3 years (refer to Attachment 10-B for additional guidance);

 Bankruptcy within 3 years:

 Chapter 7 bankruptcy discharged in the previous 3 years;

 An elapsed period of less than 3 years, but not less than 12 months, may

be acceptable if the applicant meets the criteria of Section 10.8 of this

Chapter.

 Chapter 13 bankruptcy that has yet to complete repayment (repayment plan in

progress) or has completed payment in the most recent 12 months.

 Plans that are completed for 12 months or greater do not require a credit

exception in accordance with Section 10.8;

 Late mortgage payments if any mortgage trade line during the most recent 12

months shows 1 or more late payments of greater than 30 days.

 Late rent payments paid 30 or more days late within the last 12 months.

Lender actions when indicators of unacceptable credit are present on manually

underwritten loans. When indicators of unacceptable credit are present and the lender

proposes to approve a credit exception, the lender will refer to Section 10.8 of this

Chapter to determine if an exception to credit can be granted. A lender is required to

obtain documentation to support an approval of the loan request, based upon the criteria

of Section 10.8. Documentation will be retained in a lenders permanent loan file.

Low credit score loan requests. A credit exception with supportive documentation

confirming the circumstances leading to derogatory credit that attributed to the low credit

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score is required for all loans receiving a credit score of 639 or below. Circumstances

must meet criteria, as outlined in Section 10.8 of this Chapter to be eligible for a credit

exception. Loans with credit scores of 580 or below should not be approved.

Lender actions when inaccurate information is reported. Credit trade-lines that list

the applicant as an “authorized user” cannot be considered in the underwriting decision

unless another applicant in the mortgage transaction is the owner of the trade-line, or the

owners of the trade-line is the spouse of an applicant, or the applicant can provide

documented evidence that they have made the payments on the authorized user account

for 12 months preceding application. Refer to Section 10.12 of this Chapter for further

guidance.

Lender actions when collections are reported. Lenders will follow guidance in

Section 10.9 when collections are reported on the credit report.

Lender actions when judgments are reported. Lenders will follow guidance in

Section 10.10 when judgments are reported on the credit report. Applicants who have

outstanding Federal judgments (other than IRS) that are open and unsatisfied are

ineligible for the SFHGLP. Applicants who have an IRS tax debt are ineligible if a

repayment plan is not underway. If a repayment plan is underway, the lender will

determine if the repayment plan meets the criteria of a credit exception in accordance

with Section 10.8 of this Chapter.

Lender actions when disputed accounts are reported. Lenders will follow guidance in

Section 10.11 when an applicant has disputed tradeline references.

Obtaining rental history for manually underwritten loans. Lenders will follow

Section 10.13 for guidance in obtaining rental history for manually underwritten loans.

Loan requests with validated credit scores of 680 or greater are not subject to rental

verification for manually underwritten loans.

Underwriting with no credit score. The use of non-traditional credit references as

described in Section 10.6 of this handbook is acceptable if the applicant does not have a

credit score, OR the credit score cannot be validated in accordance with Section 10.5 of

this Chapter. If the required number of traditional or nontraditional tradelines cannot be

documented, the loan is ineligible.

The lenders evaluation and conclusion that the credit reputation is acceptable. The

lender’s underwriting decision to approve a mortgage must be based on an overall

evaluation of the risks documented in the mortgage file. Underwriters must consider the

entire credit profile of each applicant and not approve a loan based upon a single

component. The lender may consider the strength of some components against the

weakness of one component to arrive at a conclusion. The lender must document the

evaluation in the lender’s permanent mortgage file. Whenever there is evidence of

layered risk, more conservative underwriting standards must be utilized.

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B. Acceptable Credit Scores for Automated Underwriting

The Agency’s automated underwriting system will determine the applicable score

when developing an underwriting recommendation and may utilize a single score. The

credit score utilized by GUS represents the overall credit reputation risk for the loan

transaction. Indicators of unacceptable credit, as described in Section 10.8A above are

already considered in the risk evaluation considered by the automated underwriting

system when rendering an underwriting recommendation. The underwriting score is

located in the “Credit Report” section of the GUS Underwriting Findings Report.

Validating the credit score utilized by GUS. GUS credit scores are subject to

validation to ensure a usable credit score is utilized for underwriting. This will ensure

both the score is adequately indicative of an applicant’s credit reputation and fairness to

the applicant in using credit scores to evaluate their overall credit reputation. Lenders

will follow Section 10.5 of this Chapter to ensure the credit scores are usable in the

underwriting analysis. GUS does not dynamically complete this step.

Downgrading an “Accept” Underwriting Recommendation. The lender may down

grade the underwriting recommendation even when minimal requirements are met and an

“Accept” underwriting recommendation is received, based upon their business rules and

regulations, which may represent a more conservative approach.

The following represent examples when a lender will downgrade an “Accept”

underwriting recommendation to a Refer and manually underwrite. A request for

conditional commitment occurs in GUS when a lender performs a final submittal on the

credit and underwriting page.

 Unable to validate the credit score. The underwriting score located in the

Credit Report section of the GUS Underwriting Findings Report cannot be

validated. Non-traditional credit must be utilized to support the credit

reputation of the applicants. Refer to Section 10.5 to validate credit scores.

 Manually input liabilities. Accounts that have been manually input into the

liabilities section of GUS and do not appear on the credit report have not had

the opportunity to be considered in the credit evaluation by GUS. This will

require an “Accept” underwriting recommendation to be downgraded to a

“Refer.” Exceptions to the downgrade include manual entry of child support,

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alimony or garnishments from the applicant’s salary. Credit supplements

obtained outside of GUS may not be used to verify debts to retain an “Accept”

recommendation.

 Disputed accounts. Disputed accounts as further outlined in Section 10.11 of

this Chapter may require a manual down grade of an “Accept” underwriting

recommendation.

 Authorized user accounts. Tradelines that are authorized user accounts that

do not meet the criteria as outlined in Section 10.12 of the Chapter may

require a down grade of the an “Accept” underwriting recommendation.

 Potential derogatory or contradictory information. If the lender is aware of

any potential derogatory or contradictory information that is not any part of

the data submitted to GUS or if there is any erroneous information in the data

submitted to GUS. GUS will evaluate credit for significant credit indicators

such as bankruptcy discharges, foreclosure sales, Deed-in-Lieu (DIL) of

foreclosure and late mortgage payments. A lender must independently review

information regarding the following:

 Pre-foreclosure sale. A pre-foreclosure sale (short sale) transfer

occurred within three years of the request for conditional commitment.

Refer to Attachment 10-B for further guidance.

10.8 CREDIT EXCEPTIONS

Credit history problems do not always reflect an unwillingness to meet financial

obligations. If the lender believes that the applicant is creditworthy, the lender should

document on the underwriter’s analysis the reasons that an exception is justified.

Exceptions should be made only in the following types of situations. Attachment 10-B of

this Chapter can assist lenders with their credit decision.

 Temporary situation. The circumstances that caused the credit problems were

temporary in nature, beyond the applicant’s control, and the circumstances have

been removed and resolved for the 12 months prior to application. Examples

include a temporary loss of job, delay or reduction in benefits, illness, or dispute

over payment for defective goods or services.

 Reduced housing expenses. The loan will significantly reduce the applicant’s

housing expenses, which will result in improved debt repayment ability. A

significant reduction in housing expenses would be 50 percent or more.

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It remains the lender’s responsibility to underwrite the mortgage application request.

The individual loan file should contain clear evidence that the lender evaluated the credit

information for each applicant and arrived at a conclusion that the applicant’s credit

history (even if brief or non-traditional) demonstrates an ability to handle financial

obligations successfully. No Agency-granted concurrence is required for credit

exceptions. Applicants must provide supporting documentation that meets these

requirements to ensure the lender’s permanent loan file is well documented and

supported. The lender must retain the underwriter’s documentation as part of the case

file that supports the decision to waive derogatory credit. Documentation will also be

noted on the underwriting transmittal summary to include the supporting documentation

provided by the applicant(s) to explain the reason(s) for derogatory information (e.g.

undisclosed debts, judgments, bankruptcies, etc.) for all loans that do not qualify for

abbreviated documentation noted in Chapter 15 of this Handbook. The lender must

determine if the explanation and supportive documentation makes sense and whether it is

consistent with other information in the credit report. The applicant(s) documentation

should confirm the nature of the event that led to the derogatory credit deficiencies and

illustrate that they had no reasonable options other than to default on their financial

obligations. The event, the severity of the resulting hardship, and the extent of the

applicant(s) efforts to resolve the situation should be taken into consideration when

making an underwriting decision. Documentation provided by the applicant(s) may open

new questions. The lender’s underwriter must use careful underwriting judgment in

evaluating loan requests involving derogatory credit.

The lender is not authorized to make an exception in the case of an applicant with a

delinquency on a Federal debt, or with an outstanding judgment obtained by the United

States in a Federal court, other than the United States Tax Court. Evidence of payment

arrangements is acceptable for IRS Federal tax judgments. The approved lender’s

underwriter must determine if the elapsed portion of the repayment period is of

appropriate duration. An applicant(s) who has been delinquent during the repayment

period is ineligible for a guaranteed loan.

10.9 COLLECTION ACCOUNTS

Collection accounts are factored into the credit score. Collection accounts will be

considered in the analysis of credit and capacity.

Paying an outstanding collection account is not justification, in itself, that would

establish an applicant’s willingness to meet obligations in an acceptable manner.

Payment of the collection account may cause the depletion of cash resources that may

otherwise be available as reserves or for closing costs. The lender is responsible for

determining which collection accounts, if any, should be paid in full by the applicant

prior to or at loan closing. The repayment in full of unpaid collections is not a condition

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of mortgage approval. Whether a collection account represents a greater risk is entirely

the lender’s decision, regardless of the credit score. This decision will be based upon

several factors including the credit profile of the applicant(s), the amount of meaningful

financial reserves available, the unpaid balance of the collection accounts, and whether

they pose a threat to the first mortgage lien and are likely to affect the applicant’s equity

or ability to repay the requested loan. Lenders must conclude the applicant did not

disregard his or her financial obligations. Outside factors, such as disputes, illness, loss

of job may have contributed. Lenders will evaluate all outstanding collection accounts.

Lender underwriters should perform additional analysis when making credit

determinations if they encounter collection accounts that have:

 A record of irregular payments; or

 No satisfactory arrangements for repayment; or

 Payment in full within the last 6 months just prior to application, unless the

applicant had been previously making regular payments.

Manually underwritten loans with collections reported. For a manually underwritten

loan, the lender must document mitigating circumstances in accordance with Section 10.8

of the Chapter, subject to the capacity analysis described below, for approving a loan

request when collection accounts are present and remain unpaid. The preferred method

to document a lender’ decision to leave collections unpaid is the underwriting analysis.

For each outstanding collection account, the applicant must provide a letter of

explanation together with documentation supporting the applicant’s justification. The

supporting documentation and explanation must be consistent with other credit

information in the file.

Collections reported for the automated underwriting system – GUS “Accept”. For

loans underwritten with the assistance of GUS when an “Accept” recommendation is

received, lenders remain responsible for considering the existence of unpaid collections

and the history of the collection accounts in the final credit analysis and loan making

decision, subject to the capacity analysis described below. A letter of explanation or

documentation supporting the presence of unpaid collections is not required when the

underwriting recommendation is an “Accept. The lender will document reasons for

approving a loan request when collection accounts remain unpaid. The preferred method

to record the lenders analysis/reasons for approving the loan is to document their

justification on the credit liability line under “notes” on the “Assets and Liabilities” page

beside each individual collection.

Capacity analysis when collections are reported – all underwriting types. Unpaid

open collections could affect the future ability of an applicant to repay a mortgage when

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creditors pursue collection. Ensure all collections and charge-offs are listed on the loan

application as a liability. Collections meeting the omission policy noted below can be

omitted from the total debt to income ratio. Additional documentation is not required to

omit those collections meeting criteria below.

In an effort to minimize future risk of open collections left unpaid, the lender will

consider the following during the capacity analysis of the loan request, regardless of the

method utilized to underwrite:

1) Determine if the total outstanding balance of all collections accounts of all

applicants is equal to or greater than $2,000. Unless excluded by state law,

collection accounts of a non-purchasing spouse in a community property state are

included in the cumulative balance of all collections.

2) Remove all medical collections and all types of charge off accounts from the total

balance. Medical collections and charge off accounts must be clearly identifiable

on the credit report.

3) If the remaining outstanding balance of collection accounts are equal to or greater

than $2,000, any of the following actions will apply:

a. Payment in full of all collection accounts at or prior to closing.

b. Payment arrangements are made with each creditor for each collection

account remaining outstanding. A letter from the creditor or evidence on

the credit report is required to validate the payment arrangements. The

agreed upon monthly payment for each outstanding collection account

will be included in the borrower’s debt-to-income ratio.

c. In the absence of a payment arrangement, the lender will utilize in the

debt-to-income ratio a calculated monthly payment. For each collection

utilize 5% of the outstanding balance to represent the monthly payment.

10.10 NON-FEDERAL JUDGMENTS

The presence of court-ordered non-Federal judgments must be considered in the

credit analysis. Unpaid judgments may represent an applicant’s disregard for credit

obligations. Lenders must document reasons for approving a mortgage when the

applicant has judgments. Usually judgments are paid in full prior to loan eligibility.

The following is applicable to all underwriting types.

1) Open and unpaid non-federal judgment. Non-federal judgments that are open

and unpaid are ineligible for SFHGLP.

2) Exception to open and unpaid judgment – repayment plan underway. An

exception to payment in full of outstanding judgments can be made when the

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applicant(s) have a payment arrangement with the creditor and have made regular

and timely payments for the three months prior to loan application. Prepaying

scheduled payments as a means of meeting minimum requirements is

unacceptable. Lenders will obtain a copy of the payment agreement and validate

payments have been made in accordance with the payment agreement. The

payment agreement will be included in the debt-to-income ratio.

Unless precluded by state law, judgments of a non-purchasing spouse in a community

property state will be paid in full or meet the exception guidance provided in this

Paragraph.

Note: With the exception of an IRS tax debt with a repayment plan underway, an

outstanding Federal judgment that is open and remains unsatisfied is ineligible for the

SFHGLP.

10.11 DISPUTED ACCOUNTS

Disputed accounts on an applicant’s credit report are not considered in the credit

score.

Manually underwritten loans. For manually underwritten loans, all disputed accounts

with outstanding balances/payments must have a letter of explanation and documentation

supporting the basis of the dispute. Those debts that have been excluded from the debt

ratios must have evidence in the permanent loan file to support a justifiable dispute.

Evidence may include correspondence form the applicant/their attorney to the creditor.

The lender is responsible for analyzing the documentation presented and confirming that

the explanation and supporting documentation are consistent with the credit record

during the underwriting analysis.

Automated Underwriting System – GUS “Accept”. Loans underwritten with the

assistance of GUS that receive an underwriting recommendation of “Accept” will be

downgraded to a “Refer” and manually underwritten unless the following conditions are

met on the credit report:

1) The disputed trade line has a zero dollar balance.

2) The disputed trade line is marked “paid in full” or “resolved.”

3) The disputed trade line has a balance owed of less than $500 and is more than

24 months old.

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Loans downgraded for failure to meet any of these conditions are subject to a manual

review and require the submission of the complete underwriting case file.

10.12 AUTHORIZED USER TRADE LINES

The lender must review credit report trade lines in which the applicant has been

designated as an authorized user in order to ensure that any open trade lines are an

accurate reflection of the applicant’s credit history. Closed authorized trade lines require

no consideration. An authorized user account that is classified as “terminated” on the

credit report is equal to a closed trade line.

Manually underwritten loans. Lenders must ensure open authorized user tradelines

reported on the credit report are an accurate reflection of the applicant’s independent

approach to credit repayment and credit history.

Automated Underwriting System – GUS “Accept”. For loans underwritten with the

assistance of GUS that receive an underwriting recommendation of “Accept” and are

supported by credit reports that designate the applicant on an open authorized user of

trade lines, the lender will obtain evidence of one the following:

 The trade line(s) in question is owned by another applicant on the mortgage

loan application.

 The owner of the trade line is the spouse of an applicant.

 The applicant has made payments on the account for the previous 12 months

prior to application.

 There are two or more other tradelines listed on the credit report, which are

not authorized user accounts, with at least 12 months of payment history listed

to validate the credit score.

In the event one of the conditions cannot be met, an underwriting recommendation of

“Accept” must be downgraded to a “Refer” and the file must be manually underwritten.

10.13 RENT HISTORY

Manually underwritten loans. Some first time homebuyers do not have a verifiable

housing or rent payment history. In such cases, a rent history is not required. If the

applicant’s and co-applicant’s credit score is under 680 and the applicant(s)/co-

applicant(s) has a rent payment history, the lender should obtain a rent payment reference

either as part of credit report, or directly from the landlord, or through cancelled checks

covering the most recent 12 months prior to the loan application. When a private

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individual is the applicant’s present landlord, 12 months’ worth of cancelled checks

indicating a satisfactory rent payment history is preferred. Written verifications by

independent management companies and private landowners may be accepted in lieu of

canceled checks or money order receipts. If the applicant does not have a full 12 month

history, verify any previous payment made in the last 12 months. Written verification

must include creditor name, date of the rental agreement or when the contract began and

the monthly payment due. Payment history must be reported in 0x30, 0x60, 0x90 day

format. Statements such as “satisfactory” or “acceptable” are not valid.

It remains the lender’s responsibility to confirm the applicant’s history of payment

towards housing expense is acceptable. One rent or mortgage payment paid 30 or more

days late within the last 12 months is an indicator of unacceptable credit unless the new

mortgage loan request will reduce shelter costs significantly and contribute to improved

repayment ability. Lenders may consider extenuating circumstances surrounding late

rent payments under Paragraph 10.8 of this Chapter.

Lender’s should carefully underwrite loan applicants who live rent free or do not

have a recent 12-month history of paying rent.

Applicants with credit scores of 680 and above are not subject to verification of rent

or housing history.

Automated Underwriting System – GUS “Accept”. Loans underwritten with GUS

that receive an “Accept” underwriting recommendation are not subject to verification of

rent or housing history. Lenders who enter the rent payment under current housing

expense on the Combined Monthly Housing Expense section of the Income and Expenses

page of GUS are not subject to rental verification if an “Accept” underwriting

recommendation is received. If a loan is manually down-graded to a Refer and requires a

manual underwrite; the applicant pays rent; and the credit score is below 680, rental

verification will be required.

10.14 PAYMENT SHOCK

The term “payment shock” signifies the increase in housing expenses experienced by

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an applicant. Payment shock is defined as a percentage under the following formula:

(New Principal Interest Taxes and Insurance (PITI)



Previous Housing Expense) – 1

a. The applicant’s new PITI is $187.00 and their former rent was $100.00.

b. 187.00  100.00 = 1.87; 1.87 - 1 = .87; .87 = 87 percent

c. The payment shock in this example is 87 percent.

a. The applicant’s new PITI is $345.00 and their former rent was $150.00.

b. 345.00  150.00 = 2.30; 2.30 - 1 = 1.30; 1.30 = 130 percent

c. The payment shock in this example is 130 percent.

a. The applicant’s new PITI is $2,000.00 and their former rent $1,000.00

b. 2,000.00  1,000.00 = 2.00; 2.00 - 1 = 1.00; 1.00 = 100 percent

c. The payment shock in this example is 100 percent.

In cases where the applicant did not have a housing expenses prior to purchasing a

home, such as if the applicant was living with relatives, payment shock cannot be

measured as a percentage.

Manually underwritten loans. Payment shock by itself (without the presence of

other risks) is not an additional risk layer. Payment shock is a risk layer for underwriters

to consider when the PITI ratio exceeds 29% and the proposed mortgage payment is

100% or greater than current housing expense. Payment shock is not a risk layer and

requires no further supportive documentation if the PITI ratio is 29% or less.

In cases where payment shock is 100 percent or higher and qualifying PITI ratios are

exceeded as noted above, as well as in cases where the applicant did not have a housing

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expense prior to purchasing a home, no additional risk layering (such as adverse credit

waivers, debt ratio waivers, or temporary buydown) should be allowed without strong

compensating factors. Acceptable compensating factors include, but are not limited to,

the following examples:

 The applicant(s) has an ability to accumulate savings or cash reserves;

 The applicant(s) has a demonstrated conservative attitude toward using credit;

 The applicant(s) has potential for increased earnings, as indicated by job training

or education in the applicants profession;

 The applicant(s) has a representative credit score of 680 or higher.

Automated Underwriting System – GUS “Accept”. Payment shock is part of the

underwriting risk evaluation and is not subject to further evaluation or documentation

unless disclosed in the GUS Underwriting and Findings Analysis.

10.15 NON-PURCHASING SPOUSE CREDIT HISTORY

The non-purchasing spouse’s (NPS) credit history is not considered a reason to deny

a loan application. In community property states, the non-purchasing spouse’s

obligations must be considered in the debt-to-income ratio unless excluded by State law.

Lenders must comply with applicable lending laws in community property states.

Lenders must obtain a credit report that meets the requirements of this Chapter for the

non-purchasing spouse in order to determine the debts that must be counted in the debt-

to-income ratio.

The Agency’s automated underwriting system will retrieve credit reports for

applicants only. Therefore, lenders must obtain an acceptable credit report outside of the

system. Liabilities for a non-purchasing spouse should be entered on the “Asset and

Liabilities” page in the liability section. When recording the debt, lenders should

reference the liability as a non-purchasing spouse debt in the “Notes” data field of the

credit liability line. Lenders will retain a copy of the non-purchasing spouse credit report

in their permanent mortgage file. Submit a copy to Rural Development when requesting

a commitment for Loan Note Guarantee. Loans that received an “Accept” in the

Agency’s automated underwriting system, GUS, do not require a downgrade to “Refer”

when manually inputting and capturing the debts of a NPS.

Community property states include: Arizona, California, Idaho, Louisiana, Nevada,

New Mexico, Texas, Washington and Wisconsin. Puerto Rico allows property to be

owned as community property as do several Indian jurisdictions. Alaska is an opt-in

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community property state. Property is separate unless both parties agree to make it

community property through a community property agreement or a community property

trust.

10.16 PRUDENT UNDERWRITING

It is the Agency’s expectation that lenders will act responsibly when originating and

underwriting SFHGLP loans. Rural Development does not re-underwrite the mortgage

loan application request. This remains the approved lender’s responsibility. When

lending to low- and moderate-income applicants, lenders are expected to use professional

judgment and rely upon prudent underwriting practices to determine the likelihood of

successful homeownership. The use of the Agency’s automated underwriting system

does not replace the judgment of experienced underwriters. The automated underwriting

system is a tool that helps evaluate the credit risk of the loan request. The lender must

evaluate and confirm the representation of accurate data. The Agency expects lenders to

employ prudent underwriting judgment in assessing whether a loan should be approved

and submitted to the Agency.

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Attachment 10-A

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(12-01-14) SPECIAL PN

ATTACHMENT 10-A

CREDIT UNDEWRITING

This attachment illustrates the approach to reviewing credit history when a loan is

manually underwritten by an approved lender.

Credit score over 680: Perform a basic level of underwriting to confirm the

applicant has an acceptable credit reputation. Perform additional analysis if the

applicant’s credit history has indicators of unacceptable credit as noted in Paragraph 10.7

of this Chapter.

Credit score 679 to 640: Perform a comprehensive level of underwriting.

Underwrite all aspects of the applicant’s credit history to establish the applicant has an

acceptable credit reputation. Credit scores in this range indicate the applicant’s

reputation is uncertain and will require a thorough analysis by the underwriter of the

credit to draw a logical conclusion about the applicant’s commitment to making

payments on the new mortgage obligation. The applicant’s credit history should

demonstrate his or her past willingness and ability to meet credit obligations.

Credit score less than 640: Perform a cautious level of underwriting. Perform a

detailed review of all aspects of the applicant’s credit history to establish the applicant’s

willingness to repay and ability to manage obligations as agreed. Unless there are

extenuating circumstances documented in accordance with this Chapter, a credit score in

this range is generally viewed as a strong indication that the applicant does not have an

acceptable credit reputation.

Little or no credit history: The lack of credit history on the credit report may be

mitigated if the applicant can document a willingness to pay recurring debts through

other acceptable means such as third party verifications or cancelled checks. Due to

impartiality issues, third party verifications from relatives of household members are not

permissible. Lenders can develop a Non-Traditional Credit Report for applicants who

do not have a credit score in accordance with Paragraph 10.6 of this Chapter.

An applicant with an outstanding judgment obtained by the United States in a

Federal court, other than the United States Tax Court, is not eligible for a guarantee

unless otherwise stated in this Chapter.

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Attachment 10-B

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(03-09-16) SPECIAL PN

ATTACHMENT 10-B

THE CREDIT REVIEW

This attachment illustrates the order and importance of a credit review when

evaluating how payments by an applicant will be made. Applicants are expected to have

acceptable credit, a stable income and no recent unsupported debt problems. To meet

these requirements, applicants must prove they are creditworthy and unlikely to default

on the loan requested. This attachment is intended to assist lenders in their analysis of

the credit file when combining the presence of the following items with the applicant’s

credit score in the underwriting decision. Exceptions are noted for files that are

underwritten with the assistance of the Agency’s automated underwriting system.

Previous Rental or Mortgage Payment History

 The applicant’s housing obligation payment history holds significant importance

when evaluating credit. It is an indicator of the applicant’s ability to pay the

mortgage payment in the future. Applicants who make rental or mortgage

payments equal to or above the anticipated mortgage payment generally

demonstrates the applicant can pay the future mortgage loan payment. Other

eligibility requirements also apply. Generally, unless there is major derogatory

credit noted in the credit file, an applicant is considered to have an acceptable

credit history if she/she does not have late housing payments.

 Applicants who live rent-free prior to purchasing a home may require the lender

to cautiously approach a loan decision. Sometimes applicants live rent free for

supported reasons. For example, applicants may still live at home with parents

while in college, may have lived in military provided housing, or living with

someone having a lease and wasn’t on the lease. Living rent free and proposing to

exceed the repayment ratios outlined in Chapter 11 of this handbook may

represent a high risk when unsupported. Lenders must approach this type of

applicant prudently if approving an application.

 Automated Underwriting System – GUS “Accept.” Loans underwritten with

GUS that receive an “Accept” underwriting recommendation are not subject to

additional rental or mortgage payment history documentation.

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Attachment 10-B

Page 2 of 9

 Lenders who enter rent on the “Income and Expenses” GUS application page

are not subject to a VOR/rent verification when the file receives an “Accept”

underwriting recommendation.

 Files that have been underwritten with GUS, and receive an “Accept”

underwriting recommendation require no further documentation with the

presence of late mortgage payments as they have already been considered by

the scorecard.

 Manually underwritten loans. Files that are manually underwritten will be

analyzed in accordance with the guidance provided at Section 10.13 of this

Chapter. The consideration of a credit exception in accordance with Section 10.8

will be supported with documentation validating the exception meets the criteria

as outlined in that Section.

Recent and/or Undisclosed Debts and Inquiries

 Lenders must determine the purpose of any recent debts as the indebtedness may

have been incurred to obtain funds to close the loan. Any new debt and payment

must be included in the final underwriting analysis.

 An applicant must provide a satisfactory explanation for any significant debt

noted on the credit report, but not included on the loan application.

 Manually underwritten loans. Add recent and undisclosed debts to the

loan application. Consider these debts in the credit underwriting analysis.

 Automated Underwriting System – GUS “Accept”. Confirm and include

any monthly payment amount for debts not considered in the automated

underwriting system recommendation. Resubmit the loan for an updated

underwriting recommendation.

 If the debt was not reported on the credit report uploaded into GUS

and are manually added to the “Asset and Liabilities” application

page of GUS, the lender will downgrade the “Accept” to a “Refer”

and manually underwrite the file. Exception: the manual entry of

child support, alimony, garnishments and other debts that are not

typically reflected on a credit report will not require a downgrade.

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(03-09-16) SPECIAL PN

 A lender may have the debt added to the credit report and re-

associate the new credit report that includes the previously recent

or undisclosed debt in a subsequent underwriting recommendation

request.

 Credit supplements obtained outside of GUS may not be used to

verify debts to retain an “Accept” recommendation.

 Lenders must apply due diligence when reviewing the

documentation in the loan file to determine if there is any

potentially derogatory or contradictory information that is not part

of the data submitted to GUS or if there is erroneous information

in the data submitted to GUS. If the lender is aware of any

contradictory, derogatory or erroneous information, lenders are

obligated to take action. For example if the lender is aware of

debts, late payments or derogatory information that has not been

made available to the data submitted to GUS, or there is a Federal

judgment, a risk analysis decision of “Accept” must be

downgraded and the file manually underwritten.

Collections

 A collection account refers to an applicant’s loan or debt that has been submitted

to a collection agency by a creditor.

 Manually underwritten loans:

 Collections indicate an applicant’s regard for credit obligations, and must be

considered in the creditworthiness analysis.

 Ensure all open collections are listed on the loan application under liability.

 Collection accounts are not required to be paid off as a condition of a

guarantee. Paragraph 10.9 of this Chapter outlines additional actions required

when the outstanding balance of all collections collectively exceeds $2,000.

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Attachment 10-B

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 The lender must document reasons for approving a mortgage when the

applicant has collection accounts. The applicant must explain, in writing

and/or provide supportive documentation, for all collections as outlined in

Paragraph 10.9 of this Chapter.

 Automated Underwriting System – GUS “Accept”

 Ensure all open collections are listed on the loan application under liability on

the “Assets and Liabilities” page of GUS.

 Omit any collections that are eligible in the capacity analysis as outlined in

Paragraph 10.9 of this Chapter.

Non-Federal Judgments

 Court-ordered judgments MUST be paid off before the mortgage loan is eligible

for a guarantee unless the applicant provides documentation indicating that

regular payments have been made on time in accordance to a documented

agreement with a creditor. Paragraph 10.10 outlines additional actions and

requirements of a documented payment agreement.

 If a loan is underwritten with the assistance of the Agency’s automated

underwriting system, then regardless of the underwriting recommendation, the

findings report will require the lender to obtain evidence of payoff for any

outstanding judgments shown on the credit report. Lenders are reminded the

“Declaration” questions within the Agency automated underwriting system or

when completed manually should accurately reflect a response representative of

the applicant’s credit status.

Delinquent Federal Non-Tax Debt

 Lenders must determine if the applicants have delinquent federal non-tax debt.

Information may be obtained from public records, credit reports, or equivalent

and must check all applicants’ against the Credit Alert Verification Reporting

System (CAIVRS). See Appendix 7 for instructions on checking CAIVRS.

 Delinquent Federal non-tax debts are ineligible for a SFHGLP unless the

delinquency is resolved.

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(03-09-16) SPECIAL PN

 Delinquent Federal non-tax debt also refers to applicant(s) who have had a

previous SFHGLP debt which was settled, or is subject to settlement, or whether

SFHGLP otherwise suffered a loss on a loan to one or more of the applicants.

The applicant(s) are ineligible unless the applicant qualifies for an exception

granted by SFHGLP.

 If the SFHGLP suffered any loss related to a previous loan, a loan

guarantee shall not be issued unless SFHGLP determines the loss was

beyond the applicant’s control and any identifiable reasons for the loss no

longer exist.

Delinquent Federal Tax Debt

 Applicants with delinquent Federal tax debt are ineligible.

 Tax liens may remain unpaid if the applicant has entered into a valid repayment

agreement with the federal agency owed to make regular payments on the debt

and the applicant has made timely payments for at least three months of scheduled

payments. The applicant cannot prepay scheduled payments in order to meet the

required minimum of three months of payments.

 Payments will be included in the DTI ratio.

 Documentation will include IRS evidence of the repayment agreement and

verification of payments made.

Previous Mortgage Foreclosure and Deed-in-Lieu of Foreclosure

 An applicant is generally not eligible for a new guarantee, if during the prior three

years the applicant’s previous real property was foreclosed on or they have given

a deed-in-lieu of foreclosure.

 The lender may grant an exception in accordance with Paragraph 10.8 of this

Chapter.

 The inability to sell the property due to a job transfer or relocation to another area

does not qualify as an extenuating circumstance.

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Attachment 10-B

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

 Divorce is not considered an extenuating circumstance. However, an applicant

whose loan was current at the time of a divorce in which the ex-spouse received

the property and the loan was later foreclosed may qualify as an exception.

Chapter 7 Bankruptcy

Manually underwritten loans.

 A Chapter 7 bankruptcy (liquidation) does not disqualify an applicant from

obtaining a mortgage loan if at least three years have elapsed since the date of the

discharge of the bankruptcy. During this time, the applicant must have re-

established good credit or chosen not to incur new credit obligations.

 An elapsed period of less than 3 years may be acceptable for a loan guarantee if

the applicant can show the bankruptcy was caused by extenuating circumstances

beyond their control and has since exhibited a documented ability to manage their

financial affairs in a responsible manner for a reasonable period of time following

discharge. Eligible mitigating circumstances must meet Section 10.8 of this

Chapter. Supporting documentation must be submitted with the loan guarantee

request. Generally a borrower whose bankruptcy has been discharged less than 1

year should be ineligible to enable the applicant to re-establish their credit.

 The lender must document the applicant’s current situation indicates the events

that led to the bankruptcy are not likely to recur.

 When a Chapter 7 bankruptcy absolved the mortgage debt for the applicant, any

foreclosure or remaining foreclosure pending is an action against the property, not

the applicant. The foreclosure action is not considered as an indicator of

unacceptable credit in the applicant’s evaluation. A loan underwritten with the

assistance of GUS will not be required to be manually down-graded when the

bankruptcy discharge included the mortgage debt.

 If an applicant has a real estate mortgage discharged in a Chapter 7 bankruptcy,

however a foreclosure action is not concluded, the applicant may remain in

ownership of the property. In this example, title must be transferred to the lender

of the pending foreclosure in order to remove the applicant from ownership and

responsibility of real estate taxes and homeownership dues of the property. If title

is not transferred, the applicant will be subject to Chapter 8, Section 8.2A of this

Handbook for retention of a dwelling.

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(03-09-16) SPECIAL PN

Automated Underwriting System – GUS “Accept”. If the underwriting recommendation

from GUS is an “Accept”, no further documentation regarding the bankruptcy is

required.

Chapter 13 Bankruptcy

 Chapter 13 bankruptcy plan in progress. A Chapter 13 bankruptcy plan in

progress does not disqualify an applicant from obtaining a mortgage loan,

provided the following criteria, applicable to all underwriting methods, can be

met:

 the lender documents 12 months of the debt restructuring plan has elapsed;

and

 the applicant’s payment performance has been satisfactory; and

 all required payments were made on time; and

 the applicant must receive written permission from the bankruptcy

court/trustee to enter into a mortgage transaction.

 Manually underwritten loans. In addition to the criteria set forth for a plan in

progress, a credit exception in accordance with Section 10.8 of this Chapter

by the lender will be required. Include the payment in the debt ratios of the

applicant(s).

 Automated Underwriting System – GUS “Accept”. When a plan is in

progress, and GUS has rendered an “Accept” underwriting recommendation, a

credit exception in accordance with Section 10.8 of this Chapter is not

required. Include payment(s) on the “Asset and Liabilities” application page

of GUS.

 Chapter 13 bankruptcy plan completed.

 Manually underwritten loans. A completed Chapter 13 bankruptcy plan

will not require a credit exception provided the applicants have

demonstrated a willingness to meet obligations when due for the full 12

months prior to the date of loan application.

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 Automated Underwriting System – GUS “Accept”. The discharge date of

the completed plan has been considered by the scorecard and is reflected

in the overall credit score. No additional documentation is required.

Consumer Credit Counseling Plans

 An applicant who has experienced credit or financial management problems in the

past may have elected to participate in consumer counseling sessions to learn how

to correct or avoid such problems in the future. Participation in a consumer credit

counseling program does not disqualify a applicant from obtaining a mortgage

loan, provided:

 the lender documents that one year of the pay-out period has elapsed

under the plan; and

 the applicant’s payment performance has been satisfactory and all required

payments have been made on time; and

 written permission from the counseling agency to enter into the mortgage

transaction and counselor recommendation of the applicant as a good

credit risk is required.

 Manually underwritten loans. For manually underwritten loans, the lender must

evaluate the applicant’s credit in accordance with Paragraph 10.8 of this Chapter.

Some creditors may still report the applicant as delinquent, even though they have

agreed to accept a lesser payment. This must be considered in the analysis of the

applicant’s overall credit. Include the repayment plan payment in the liabilities of

the applicant(s).

 Automated Underwriting System – GUS “Accept”. The Agency’s automated

underwriting system does not trigger a requirement for additional documentation

since the credit scores already reflect the degradation in credit history. No further

explanation or other documentation is required when a lender utilized the

Agency’s automated underwriting system and receives an “Accept” underwriting

recommendation. Include payment(s) for repayment on the “Assets and

Liabilities” application page of GUS.

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Attachment 10-B

Page 9 of 9

(03-09-16) SPECIAL PN

Evaluating Credit Involving Short Sales

The following criteria are applicable to both manual and automated underwriting types.

 A short sale is considered a pre-foreclosure activity or event.

 An applicant is ineligible for a mortgage loan if they pursued a short sale

agreement on their principal residence to take advantage of declining market

conditions and purchases at a reduced price a similar or superior property within a

reasonable commuting distance.

 If an applicant was current at the time of short sale, or in the case of divorce at

time of divorce, they may be eligible for a new mortgage loan. The prior

mortgage payment history must reflect all mortgage payments due were made on

time for the 12 month period preceding the short sale, or time of divorce, and all

installment debt payments for the same period were also made within the month

due.

 An applicant in default on their mortgage at the time of the short sale (or pre-

foreclosure sale) is generally not eligible for a new mortgage loan for three years

from the date of pre-foreclosure sale.

 The lender may grant an exception in accordance with Paragraph 10.8 of this

Chapter.

Charge-Off Accounts

A charge-off is the declaration by a creditor that an amount of debt is unlikely to be

collected. The presence of a charge-off is already reflected in the credit score and

does not need to be included in the applicant’s long-term liabilities or debt. If the

applicant has entered into an agreed upon repayment plan with the creditor, a liability

payment will be included in the long-term liability/debt.

 Manually underwritten loans. For a manually underwritten loan, the lender

will consider a charge-off as a derogatory credit item, to be addressed in with

any credit exception considered, if the applicant’s credit score is below 640.

See Section 10.7A of this Chapter regarding evaluating the credit of

applicants with low credit scores.

 Automated Underwriting System – GUS “Accept”. No documented credit

exception is required.

3555 1chapter10

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