Earlier this year, HUD released Mortgagee Letter 2012-3 which featured tougher underwriting guidelines. This week they released ML 2012-10 which effective immediately recinds the guidelines that would impact:

• paying off collections and judgements; and
• disputed accounts

All other guidelines address in ML 2012-3, including those that address income of self employed borrowers, are still going into effect.

Per ML 2012-3, the old guidance (which is now the “effective” guidance per ML 2012-10) does not automatically require collections to be paid off however judgements do need to be satisfied and paid off.  Disputed accounts are to be referred to underwriting (and most likely will need to be removed from the credit report).

Again, we’ll need to see how banks and lenders treat this rescission of guidelines or if they opt to stick with the tougher requirements by creating their own underwriting overlays.

UPDATE 6/19/2012: HUD has rescinded some of the guidelines issued in this Mortgagee Letter. Specifically those addressing collections and disputed accounts.

In late February, HUD released Mortgagee Letter 2012-3 with tougher guidelines for self-employed borrowers, disputed accounts and collections. Over the weekend, HUD amended the guidelines to have the disputed accounts and collections go into effect on July 1, 2012.  However the new guidelines for self employed borrowers went into effect for case numbers as of April 1, 2012.  

Here is a quick(?) 4-1-1 of the new guidelines:

Income documentation requirements for self-employed borrowers:

A P&L and Balance Sheet is required if more than a calendar quarter has elapsed since the date of most recent calendar or fiscal-year end tax return was filed by the borrower with no exceptions.

If income used to qualify the borrower exceeds the two year average of tax returns, an audited P&L or signed quarterly tax returns obtained from the IRS are required.

NOTE: This is in addition to providing two years your most recent complete (all schedules) personal and business tax returns. Borrowers who are doing an FHA non-credit qualifying streamline refi may be exempt.

Disputed accounts on your credit report: 

When an account on your credit report shows as being disputed, the application will be referred to a DE underwriter for review unless:

• The TOTAL oustanding balance of all disputed credit accounts or collections are less than $1000; and
• Disputed credit accounts or collections are aged two years from the date of the last activity as indicated on the most recent credit report.

Disputed credit accounts or collections resulting from identity theft, credit card theft, or unathorized use, etc., will be excluded from the $1000 limit provided acceptable supporting documentation can be provided, such as a police report.

Disputes on authorized user accounts are also factored into the $1000 limit.

NOTE: Conventional financing has really cracked down on disputed accounts as well.

Collections:

If the total outstanding balance of all collection accounts is equal to or greater than $1000 the borrower must resolve the accounts (e.g. enter into payment arrangements with minimum three months verified payments) or paid off in full at time of or prior to closing. 

If the total outstanding balance is less than $1000, the borrower is not required to pay off the collection accounts as condition of the mortgage approval.

NOTE: If you're paying off collections, please consult with your mortgage originator before you do and remember to always obtain documentation to show your account is satisfied and paid in full.

If you're planning on paying down balances of disputed accounts and collections to reduce the accumulative balance to $1000, you can forget about it.  HUD says this is a no-go. 

But wait… there's more! 

As Washington is a community property state, if a non-purchasing spouse has outstanding collections and/or disputed accounts, the unpaid balances must be considered in the $1000 cumulative limit UNLESS documentation can be provided to document the debt incurred prior to the marriage – it's possible an attorney's opinion letter may be required stating the borrower was not responsible for that debt.

Medical collections are included (NOT excluded) from the $1000 cumulative limit. This is possibly the most surprising to me as FHA, in the past, has been more forgiving of medial debts. Not so anymore.  

Yet…I'm also reading in the FAQs that unpaid charge-offs are not factored into the $1000 accumulative limit. I find this interesting as lenders view charge-offs as collections. Although HUD might be okay with charge-off's, I would anticipate lender underwriting over-lays on this one.

Speaking of underwriting overlays, we still need to see how lenders will embrace the new guidelines. Although the disputed accounts and underwriting guidelines for collections have been delayed until July, it's quite possible some lenders might implement these guidelines earlier.

Stay tuned and get started on your preapproval for your mortgage EARLY.

If I can help you with a home located anywhere in Washington, please contact me.