The toughest part of my job is saying, “No”.
I’ve had to say it a little more than normal, and a little later than normal on a few deals recently. And I think it is important that we as an industry take a look at the fall-out from last minute loan declines.
The scenario we have here is a FHA purchase for a married borrower. The wife’s credit score was too low to qualify so we removed her from the loan and used the husband only. However with FHA, guidelines require non-borrowing spouse’s debt to be considered for underwriting, even judgments must be considered. For FHA, judgments must be satisfied/paid off or on a payment plan at closing with three consecutive recent payments.
In my scenario, the borrower stated that had made payments on the judgments previously, but stopped after losing her job. She was asked to get a new payment plan in place bu our underwriter, and show proof of her past payments to the collection agency.
The spouse did just that and showed the new current payment plan with the first installment ready to go, and the proof of past payments. The past payments were however garnishments, albeit voluntary. The previous payments were also of a different amount.
The underwriter determined FHA would not insure the loan due to the fact the borrower failed to maintain consistent and timely payments. And did not have 3 current consecutive payments on the new payment plan and cannot pay those payments in advance. The borrower has simply not shown a willingness to repay. This is both a Credit and Character issues for underwriters.
The issue this creates is two fold. One the borrower supplied all these items over the course of a three week period. We are in escrow obviously and the back and forth between underwriter, LO and borrower to clarify the judgment issue pushes against contract contingencies.
In this case, the borrowers spouse, whose medical bills and subsequent judgment all happened before the marriage was the determining factor for the loan declination. I think FHA should reconsider the means by which it requires borrower to document and satisfy judgment payment plans. As well as examine the likelihood of the judgment impacting the purchase of a property where the borrowers spouse is not on title. The are many assumptions we can make about the risk inherent in these files. There are other factors that certainly make an underwriter decline a deal. No reserves, other poor credit items, etc. etc.
The only way for an Originator to fully prepare for any issues during contract, is to completely process the file prior to submission. That in itself is a costly endeavor but may be required to prevent last minute declines.