User Manual: 3555
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CHAPTER 10: CREDIT ANALYSIS
7 CFR 3555.151
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
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
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
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.
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
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
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.
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
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 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
Loan (secured or unsecured);
Revolving (generally a credit which is not repaid by a certain number of
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
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
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
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
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Acceptable forms of documentation for a NTMCR include:
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:
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;
Payments to local stores (department, furniture, appliance and specialty stores);
Payments for the uninsured portions of any medical bills;
Internet/cell phone services;
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
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
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
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:
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 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
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
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.
If the applicant has two scores, the lower of the two should be used as the
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
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 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
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.
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”
Disputed accounts. Disputed accounts as further outlined in Section 10.11 of
this Chapter may require a manual down grade of an “Accept” underwriting
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.
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
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
(03-09-16) SPECIAL PN 10-19
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
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
10.11 DISPUTED ACCOUNTS
Disputed accounts on an applicant’s credit report are not considered in the credit
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.
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
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
(03-09-16) SPECIAL PN 10-21
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
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
(03-09-16) SPECIAL PN 10-23
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-
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
community property state. Property is separate unless both parties agree to make it
community property through a community property agreement or a community property
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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(12-01-14) SPECIAL PN
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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(03-09-16) SPECIAL PN
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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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”
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
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
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
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.
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.
Page 4 of 9
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.
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
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
The inability to sell the property due to a job transfer or relocation to another area
does not qualify as an extenuating circumstance.
Page 6 of 9
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
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
the lender documents 12 months of the debt restructuring plan has elapsed;
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
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
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.
Page 8 of 9
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
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
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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(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
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
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.