Advertisements

Divorce

This may sound harsh, but divorce is not a good excuse for bad credit.

Considering the number of credit explanation letters I see in FHA loan submissions which prominently promote divorce as the explanation for borrowers’ credit foul-ups, it appears clear to me that many loan officers are not aware of this fact. As a result, many loan submission files end up unnecessarily in the turn-down stack.

I know that divorce is very frequently associated with the bad credit showing on many borrowers’ credit reports. I also know that just as frequently, the dates and times coincide between the bad credit and the divorce as well. How then, you ask, can the borrower get a mortgage?

Here are two tactics to possibly deal with the problem.

1. Get an automated approval.

Of course, this is the most obvious answer. No credit explanations are required when an automated approval through FHA Total Scorecard exists. Easier said than done, though, when the borrower has low credit scores. But before you go asking the borrower for more documentation, make sure that you are submitting the loan to FHA Total Scorecard with very accurate and complete information. In particular, be sure to include all of the borrowers assets that fit into the rules. Assets can often make the difference between an approval and a referral to the underwriter. However, most of the time this first option does not work out if any of the bad credit occurred recently.

2. Be nosy. Ask the borrower a lot more questions.

You may have to dig into the borrowers privacy almost to the point that you start to make them angry. Unfortunately, you cannot help them without more information. Here’s why. Divorce may not be a good excuse for bad credit – but the reason behind the divorce is usually a very acceptable excuse.

Many borrowers are reluctant to talk about the details because they tend to be emotionally painful. But if you take the time to explain your motivation to them, you can usually get enough background information to locate a real excuse. There are often painful details such as an alcoholic spouse, or a drug problem, or an ex-spouse that was laid off or just couldn’t hold a job for one reason or another. Problems for which the divorce was actually a solution.

The key to getting a borrower who has had credit problems approved for an FHA loan is to have a documented reason for the credit problems, some evidence that the problem has been solved, and a plan for making sure the problem doesn’t reoccur. The more recent the credit problem, the better the excuse must be. When you have the borrower compose their explanation letter from the point of view of the problems that led to the divorce being their excuse, with the divorce being the solution to the problem, you have vastly increased the chances for loan approval. As difficult as it is, the borrower absolutely must explain the painful details of why they had to divorce their former spouse without leaving much out. This is the only way the underwriter is going to be able to look at the problem as having been beyond the borrowers’ control, and as a problem that has been solved.

A Few Caveats

Over the last few posts, I have been giving some tips on how to get FHA loans approved that may sound alien to many loan originators who have entered the mortgage business since the advent of automated underwriting. In many cases, these tips might even surprise FHA underwriters who entered the business during the same time period!

As a reaction to the ongoing credit crisis, many underwriters with less experience are very naturally and understandably leaning toward the safe side of decision making as a defense mechanism against the present onslaught of poorly processed files. This won’t last forever and not every underwriter is doing so now. In other words, if you are a mortgage broker you may have to carefully measure which lender you submit your file to. Right now, some of the less prominent lenders might be more likely to consider a good explanation letter.

You are also going to have to carefully balance your own situation. If you have in-house underwriters and they don’t want to see tough loans, just save up these techniques for later and spend your time marketing for more loans rather than fighting with your underwriters. On the other side, if your underwriters are willing to consider extenuating circumstances or you are a mortgage broker with more choices, don’t take that as an opportunity to try to work the system and get every bad credit borrower you find into an FHA loan. With experience, you will start to recognize the borrowers who truly do deserve a loan now. Counsel the others on how to improve their credit picture and buy a home later, but do not waste their time and yours tilting at windmills trying to get a mortgage for them before they are really ready. When originating FHA loans you should make sure the new mortgage is really a benefit to that borrower.

FHA Guidelines: New Risk Based Mortgage Insurance Guidelines


Related posts:

  1. It Was The Underwriting, Stupid Pt. 2
  2. Divorce Payouts and FHA Loans
  3. FHA Training: 5 Effective Tips To Make Sure FHA Loans Get Approved And Close On Time
  4. FHA Training: 3 Power Tips For Writing Effective FHA Credit Explanation Letters
  5. It Was The Underwriting, Stupid

Tagged with: • • •

Filed under: HUD Regulations • Industry Information • Originating FHA Loans

Like this post? Subscribe to my RSS feed and get loads more!