A little wrong, yes.
Some brokers just aren’t as educated as the other guys are when it comes to guidelines and what they think you can’t do. Or they are just too lazy to know the guidelines and do what it takes.
When it comes to FHA lending there are 2 options. Get it approved by an automated underwriting system (fannie mae DU / freddie mac LP), or get it manually underwritten by a Direct Endorsement underwriter. This underwriter is literally putting her signature on the line to endorse this loan and saying it meets FHA standards and qualifications. If more than a few loans they sign off on go delinquent, it’s their job and their license.
The automated systems will only approve to a certain point; when the risk factor is too great for a computer system to sign off on, it refers the loan to a DE underwriter. This is when a loan must be manually underwritten, and you can see some dirty deals done through FHA.
The FHA manual is rather large book and a boring read, so I’ll just try to hit a few of the main guidelines.
Must be 2 years out of chapter 7 bankruptcy discharge.
Must be at least 1 year into a chapter 13 bankruptcy payment plan and have made payments on time (they can refi and buy out of it, or purchase during this).
Must be 3 years out of foreclosure.
No credit score minimum (although many lenders won’t go below 500).
Must show proven ability to repay the loan. DTI max 35/45 (give or take).
A good job history is needed. At least need to show 2 years history, with any gaps in employment explained. To use overtime income to qualify, they must have a history of recieving it, and show reasonable expectation of it to continue (verification of employment will ask this).
Underwriters will mainly be looking at the last 12 months credit history. Any delinquencies will need to be explained and usually won’t get away with more than a handful on revolving accounts. Installment delinquencies will be harder to get away with; and rarely will you ever get by with a mortgage late. The key to getting approved with shakey credit history is a good Letter of Explanation; usually a sickness in the family or something giving a good reason why they got behind on bills is best, not a “we couldn’t pay” or “we forgot”. A good Letter of Explanation will make or break the deal.
If the loan fits the guidelines, and you can explain why the problems came about, and explain that they are now overwith and will not continue, you have a loan.
FHA is key, and will be for a long time to come without subprime lenders around. You have to find a broker who knows how to do this stuff, not someone who just has an FHA license. And also, not very many lenders do manual underwrites as it is risky. Most only take automated approval files.
There you have my FHA secrets in a nutshell. If any of you other brokers who do these loans see something I missed, let me know.