FHA loan programs were created to help people in the United States obtain homeownership, an integral component to the American Dream. This remains the goal of FHA today. Therefore, to help as many as prudently possible, FHA maintains a commonsense approach to underwriting, the process of reviewing a loan application to verify all information given and evaluate the borrower’s credit history to determine whether the borrower qualifies for the loan for which they have applied and to quantify the risk the lender will assume.
What this means is that, as opposed to many conventional loan programs that use automated underwriting and approval systems, FHA loans are reviewed in detail to look at all aspects of the borrower’s qualifying criteria as well as the “big picture” to see if loan scenario makes sense and can be deemed an acceptable risk to the lender and FHA. Therefore, FHA approves loans that can be considered “outside the box”.
As a rule, FHA underwriters follow the “Four C’s” evaluation process. The Four C’s stand for:
- Credit history,
- Capacity to repay,
- Cash to close,
- and Collateral.
FHA underwriting guidelines provide direction, consistency and a clear understanding of the elements involved in evaluating the credit worthiness and financial capacity of an applicant and the adequacy of the proposed collateral.
All FHA loans must conform to their respective housing requirements. The loans must typically be insurable and eligible for inclusion in pools of mortgage backed-securities. All FHA loans generally must conform to the standards and guidelines established by HUD.