Underwriting and Processing

No. An FHA appraisal primarily determines the market value of the property and verifies compliance with HUD’s Minimum Property Requirements (MPR) regarding safety, soundness, and security. The appraiser identifies readily observable defective conditions but does not perform the exhaustive testing of a home inspection. If the appraiser cannot determine if a system meets standards, they may require a qualified inspection. Lenders are required to provide the form “For Your Protection: Get a Home Inspection” to prospective homebuyers at the first contact to ensure they understand the importance of an independent home inspection.

If a borrower has $1,000 or more collectively in disputed derogatory credit accounts (charge-offs, collections, or late payments), the loan must be downgraded to a manual underwrite. However, disputed medical accounts and disputes resulting from identity theft or unauthorized use are excluded from this cumulative balance, provided police reports or creditor documentation are submitted. For non-derogatory disputed accounts, a downgrade is not required, but the lender must analyze the impact on the borrower’s ability to repay. If manually underwritten, a monthly payment for the disputed accounts must be included in the debt calculation.

Yes, borrowers can use gift funds for their Minimum Required Investment (MRI) provided the donor is an acceptable source, such as a family member, employer, charitable organization, or close friend with a documented interest. The donor cannot be an interested party to the transaction, such as the seller or real estate agent. The lender must document the transfer with a signed gift letter stating no repayment is required and evidence of the funds moving from the donor’s account to the borrower or settlement agent. Cash on hand is not an acceptable source for donor gift funds.

Self-employment income generally requires a two-year history. If the borrower has been self-employed between one and two years, it may be considered if they were previously employed in the same line of work for two years. The lender must obtain signed individual and business tax returns for the most recent two years, along with a year-to-date Profit and Loss statement if a calendar quarter has passed since the last tax filing. Income stability is critical; if the business shows a greater than 20 percent decline in income over the analysis period, the loan requires a manual downgrade.

A manual underwrite is required if the TOTAL Mortgage Scorecard issues a “Refer” recommendation or if specific risk factors force a downgrade from an “Accept” result. These triggers include undisclosed mortgage debt, significant disputed credit accounts, or recent foreclosure events. In a manual underwrite, the lender must rigorously analyze the borrower’s credit, income, and assets without relying on the automated risk assessment. This involves adherence to stricter qualifying ratios, typically 31/43 percent, unless the borrower has significant compensating factors like cash reserves, residual income, or a minimal increase in housing expense.

Lenders must include all student loans in the borrower’s liabilities, regardless of payment status. If the credit report shows a monthly payment greater than zero, that amount is used. If the credit report indicates a zero payment, or the actual payment is less than the reported amount, the lender must use either the actual documented payment (if above zero) or 0.5 percent of the outstanding loan balance. Payments may only be excluded if written documentation confirms the loan has been forgiven, canceled, discharged, or paid in full. Suspended payments due to COVID-19 allow using the pre-suspension amount.

A Chapter 7 bankruptcy does not automatically disqualify a borrower if at least two years have passed since the discharge date and the borrower has re-established good credit. An exception for a period less than two years, but not less than 12 months, may be granted if the bankruptcy was caused by extenuating circumstances. For Chapter 13 bankruptcy, the borrower must have completed at least 12 months of the payout period with satisfactory payment performance and receive court permission to enter the mortgage transaction. If the bankruptcy discharge was within two years, the loan requires a manual underwrite.

To start the origination process, the Mortgagee must obtain a completed Uniform Residential Loan Application (URLA) and the HUD Addendum (Form HUD-92900-A) signed by all borrowers. The lender must verify the borrower’s identity using a valid government-issued photo ID and validate their Social Security Number. The mortgage file must contain all information relevant to the approval decision, including employment history, income, assets, and credit reports. Lenders are strictly prohibited from accepting documents related to income or credit that have been handled by interested parties, such as real estate agents or sellers, to ensure the integrity of the application data.

Documents used for underwriting, including income, employment, and asset verification, generally must not be more than 120 days old at the Disbursement Date. Exceptions are made for documents where the validity is not affected by time, such as divorce decrees or tax returns. For appraisals, the initial validity period is 180 days from the effective date of the report. If the appraisal expires before disbursement, it may be extended with an appraisal update, which is valid for one year from the original effective date. “Day one” is calculated as the day after the document’s issue date.

The TOTAL Mortgage Scorecard evaluates a borrower’s credit risk but does not replace the lender’s responsibility to ensure FHA eligibility. It generates a risk classification of either “Accept” or “Refer.” An “Accept” classification indicates the borrower is an acceptable credit risk, allowing for reduced documentation and waiving the need for a manual credit analysis, provided the data entered is accurate,. However, specific risk factors, such as $1,000 or more in disputed derogatory credit or a bankruptcy discharge within two years, trigger a mandatory downgrade to manual underwriting, even if the scorecard returns an “Accept” result.