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FHA Streamlines Application Process


WASHINGTON — If you automatically associate the words "Federal Housing Administration home mortgage" with bureaucratic paperwork hassles at application and glacial processing times before closing, you may need to update your image.

Beginning this summer, thousands of mortgage applicants across the country will get the first glimpse of a new, electronic FHA, where you don't have to carry stacks of your most personal records to your loan officer's desk, and where the average mortgage processing time drops from six weeks to six days.

As part of a series of steps to streamline itself, FHA has just joined with the Federal Home Loan Mortgage Corp. (Freddie Mac)--the private sector mortgage giant--to use Freddie Mac's highly acclaimed "Loan Prospector" computerized underwriting system to originate FHA loans. In a pilot program, an estimated 4,000 to 6,000 FHA applicants will be evaluated with the same technology Freddie Mac uses for conventional borrowers.

They'll get a preliminary go or no-go decision on the credit portions of their application within about 1 1/2 to four minutes of submitting their basic data--probably while they're still seated with a loan officer. More important, they'll also get a shot at what FHA applicants rarely have been permitted: the opportunity to waive certain of the standard paperwork submissions or ironclad rules the agency traditionally has required be fulfilled before approving a mortgage.

For example, applicants who obtain a preliminary credit green light by computer may be allowed exceptional flexibility in such areas as debt-to-income ratios, asset and employment verifications, tax returns and credit file dings. Rather than having to meet FHA's 41% rule on maximum total monthly debt compared with total monthly income, applicants with higher debt-to-income ratios may be waved through if they're identified by Loan Prospector as solid credit risks.

Other waivers of standard FHA rules that applicants may get by using the computerized underwriting system:

* Borrowers receiving alimony or child support won't have to present court documents or other official papers to "prove" this income. All they'll need is to show three months of bank statements indicating regular receipt of the funds.

* Applicants with credit dings won't necessarily have to submit detailed written explanations for late payments on their consumer debt accounts.

* Self-employed applicants won't need to haul in their business tax returns or produce year-to-date profit-and-loss balance sheets.

* Tenants won't need to produce documentary verification of rent payments if their credit reports over the last four years show at least four open or active credit accounts.

These and other waivers of traditional federal application rules are made possible by the Loan Prospector system's "artificial intelligence"--complex, statistics-based decision-making software that enables underwriters to focus on the essential credit-worthiness variables for a particular individual and bypass the nonessential.

In preparation for its FHA pilot, Freddie Mac analyzed a sample of 60,000 loans out of 1.4 million mortgages insured by the agency during 1991-'92. By examining borrowers' credit files as they appeared at the time of application and then tracking their payment behavior up to the present, Freddie Mac experts were able to design a risk-factor scoring program custom-tailored to FHA borrowers, said Jon Voigtman, Freddie's director of automated underwriting.

Freddie Mac performed a similar analysis on its own vast portfolio of loans prior to launching Loan Prospector for conventional mortgages nearly two years ago. More recently, the firm joined with Wall Street rating agency Standard & Poor's Co. to launch a computerized evaluation system for home loan applicants with troubled credit histories--so-called B and C borrowers.

Computerized underwriting of FHA loans should open the door to thousands of credit-worthy, moderate-income renters to buy a home, Voigtman said. The FHA program's low down payment requirements should make it a natural first choice in financing for large numbers of would-be buyers. But too many of them are "scared away" from home buying of any sort, he said, "because they perceive the whole [FHA] application procedure to be so intrusive and painful."

So will automated underwriting take all the pain and intrusiveness out of an FHA application? Don't bank on it. After all, you're asking to borrow money. But at its best, electronic underwriting ought to save you time--measured in weeks, not hours--and even dollars. Freddie Mac's conventional Loan Prospector users report origination-cost savings of $345 to $700 per mortgage.

If FHA lenders can do the same--and pass it on to you, the customer--you should be ahead on both counts.

Distributed by the Washington Post Writers Group.

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