FHA Connection

Effective on all loan applications signed by borrowers on or after May 1, 2004, the Federal Housing Administration requires that in all instances when a credit bureau score is obtained from a credit report, lenders input the figure into the FHA Connection data system when underwriting an FHA loan, according to a mortgagee letter by the U.S. Department of Housing and Urban Development (HUD).

A HUD spokesman said the new data input requirement is relevant information that will help FHA improve the risk management of its loans.

The three national credit-reporting agencies — Equifax, Experian and TransUnion — each independently collect data from creditors, public records agencies and other sources of financial information to generate and provide a credit bureau score to lenders, said HUD. The three agencies use software developed by Fair Isaac and Company to determine a credit score, widely known as a FICO score, to identify a borrower’s level of future credit risk, according to myFICO.com.

HUD reminded lenders that borrowers without credit bureau scores are not disqualified or ineligible to receive FHA insurance on a mortgage as policies regarding nontraditional credit remain intact. Not all borrowers have an established credit history and nontraditional credit reports and verification can be used to measure risk, including a borrowers’ payment history of housing expenses, installment debts and revolving accounts, the department said.

The organization also noted that certain borrowers, such as approved nonprofit, state and local government agencies, will not have credit bureau scores. In the cases where a borrower is not required to have a credit bureau score, or one is not generated due to insufficient trade lines on the credit report, the lender must indicate this by inputting “n/a” in the credit bureau score field in the FHA Connection.

Credit bureau scores are not required for streamline refinance transactions, HUD said.

As of May 1, FHA requires that lenders using an automated underwriting system (AUS) to underwrite FHA-insured mortgages must also use the TOTAL (Technology Open To Approved Lenders) Mortgage Scorecard. TOTAL lets lenders know whether FHA automatically approves the loan or if manual underwriting is needed. Once the loan application is evaluated by TOTAL, a permanent record of the credit bureau score is created in the FHA Connection, therefore no additional entries are necessary and a manual reentry of the score cannot be allowed, according to the letter.

While the FHA Connection has been modified to capture lender input of borrower credit bureau scores, these scores can changed only if they are rescored through the AUS, HUD added.