The Federal Housing Administration published revised lending standards on Wednesday for manually underwritten borrowers to help lenders more objectively consider borrower risk and align the rules with the FHA’s own lending standards.
The new guidelines are designed to encourage lenders to use a defined set of parameters and “compensating factors” to make responsible, risk-based underwriting decisions. The guidance also addresses high debt-to-income ratios and a lack of capital that can lead to high default rates and foreclosure.
“We want to provide revised guidance for our lenders so that they are confident in offering affordable mortgage loans to responsible borrowers under a reasonable set of guiding principles,” FHA Commissioner Carol Galante said. “We hope to bring more certainty to the market by helping lenders apply a set of consistent underwriting standards.”
Most FHA-insured loans are currently underwritten automatically through systems that score applications based on FHA criteria, which takes into account credit scores and other loan factors. When borrowers are not scored because they do not have credit scores or when the scorecard provides a “Refer” scoring recommendation, lenders are required to manually underwrite the borrower.
The guidance contains revisions on reserve requirements, establishing maximum qualifying ratios based on credit score and compensating factors and a revised list of acceptable compensating factors with documentation requirements used in the assessment.