Updated July 2, 2012

This mortgagee letter institutes a new prerequisite for self-employed buyers applying for FHA-insured mortgage financing.

FHA requires P&L balance sheet for self-employed buyers

HUD Handbook 4155.1.4.D.4.f
Amended by Mortgagee Letter 2012-3

Effective: April 1, 2012

As of April 1, 2012, the Federal Housing Administration (FHA) requires a self-employed individual applying for an FHA-insured mortgage to provide a profit & loss (P&L) balance sheet if they filed their last tax return before the last quarter. An individual qualifying with income greater than the average of their past two tax returns is also required to produce an audited P&L balance sheet or signed quarterly tax returns obtained from the Internal Revenue Service (IRS).

 

Rescinded by mortgagee letter 2012-10

This law establishes new requirements for buyers to pay off collections and judgments in order to obtain FHA mortgage financing.

FHA requires buyers to pay off collections and judgments

HUD Handbook 4155.1.4.C.2.e
Amended by Mortgagee Letter 2012-3

Effective: July 1, 2012

Beginning July 1, 2012,homebuyers obtaining Federal Housing Administration (FHA)-insured financing are subject to new rules under the FHA’s electronic credit analysis program, the TOTAL Mortgage Scorecard. The TOTAL Mortgage Scorecard is used by lenders in conjunction with automated underwriting systems (AUS’s) to evaluate creditworthiness to determine the risk level of an FHA loan.

Using this system, the FHA will no longer require the lender to review mortgage applications with disputed accounts if:

  • the total outstanding balance of all disputed credit accounts or collections is less than $1,000; and
  • it has been at least two years since the dispute on the account.

Any disputed credit accounts or collections with singular or cumulative balances totaling $1,000 or more must be resolved by the buyer. The buyer can resolve payments by:

  • making a minimum of three months of agreed payments; or
  • paying all debts in full prior to or at the time of closing.

The payments for the account must be included in the calculation of the borrower’s debt-to-income ratio (DTI), and the lender must have documentation supporting the payment agreements or a receipt of debt paid in full.

Any disputed accounts or collections reported incorrectly, either through identity theft, credit card theft or unauthorized use will be excluded from the $1,000 policy. To dispute fraudulent charges, the mortgagee must prove the borrower filed a police report or reported identity theft. The mortgagee must also prove that disputed accounts are resolved, verified as not being a debt, arranged for payment or paid in full.

The buyer is not required to pay off any collection balance less than $1,000 as a term of the mortgage approval. The FHA also requires court-ordered judgments are paid off before the mortgage loan is eligible for FHA insurance.

 

This law expands the definition of a family member for buyers applying for FHA-insured loans.

FHA expands the definition of a family member

HUD Handbook 4155.1.9.1.f
Amended by Mortgagee Letter 2012-3

Effective: April 1, 2012

As of April 1, 2012, the Federal Housing Administration (FHA) expands the definition of a family member for Identity and Interest transactions in which the buyer and the seller share family ties, to include:

  • brother or stepbrother;
  • sister or stepsister;
  • uncle; and
  • aunt.

Additionally, the definition of a parent or grandparent is extended to include:

  • a step-parent or grandparent; and
  • a foster parent or grandparent.