12/14/2015. What it is

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1 The topics of this class apply to the underwriting of FHA Title II Forward mortgages for the purchase or non-streamline refinance of 1-4 unit Single Family Residences. This information correlates to FHA guidelines and does not take into consideration additional credit policy overlays you may be subject to due to secondary market restrictions or individual lender credit risk policies. While manual underwriting may not be necessary for most of your FHA files, its unique requirements can leave you scrambling with frustrated borrowers and referral partners when you don t employ a pro-active approach for EVERY FHA file. Not only do you need to understand the policies for manual underwriting, it s crucial that you recognize when these policies will be in play even on a file that has received an Automated Underwriting System (AUS) approval from FHA s TOTAL Scorecard (TOTAL). 1

2 1. Understand what manual underwriting is. 2. Determine when manual underwriting is required. 3. Learn where to find the rules for manual underwriting. 4. Determine the key differences between manual underwriting guidelines and the automated underwriting guidelines of FHA TOTAL Scorecard. 5. Develop an action plan for every FHA file to avoid potential problems during underwriting. 1. FHA Total Scorecard Manual Downgrade Chart 2. FHA Compensating Factor Chart (with Residual Income Calculation Instructions) 3. FHA Credit Summary Chart for Manual Underwriting 4. FHA File Action Plan What it is Analysis of borrower credit by the underwriter using specific (and more stringent) criteria (compared to underwriting with TOTAL) as dictated by the FHA Handbook. 2

3 What it isn t A way around a TOTAL Scorecard Refer decision that allows complete underwriter discretion regarding credit acceptability. The underwriter MUST be able to satisfy specific credit criteria and effective income must be documented in order to justify the approval of a referred loan decision. When the loan: involves borrowers without a credit score that were not scored against FHA s TOTAL Scorecard or received a Refer scoring recommendation from TOTAL, or received an Accept scoring recommendation that was downgraded to a Refer by the underwriter due to the presence of one or more conditions that require a downgrade. 3

4 If the mortgage file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard the loan must be downgraded. Example 1: Borrower is using Expected Income to qualify such as a teacher who will start a new teaching position after loan closing documented by an employment contract. The findings require a paystub. The income information entered into TOTAL is not from a paystub. Example 2: Bank statements reveal multiple NSF check charges. When there is additional information, not considered in the Automated Underwriting System (AUS) recommendation, that affects the overall insurability of the mortgage the loan must be downgraded. Examples: Borrower has had a CAIVRS claim within the last 3 years or the borrower is on the LDP (Limited Denial of Participation) list. Downgrade required if the credit report reveals that the borrower has disputed derogatory accounts collectively in excess of $1,000. Derogatory accounts are defined as: collection (except medical), charge off (except medical), or any account with late payment in last 24 months Note: Disputed accounts that resulted from documented identity theft or accounts owned solely by a non-borrowing spouse may be disregarded. 4

5 Downgrade required if a Chapter 7 or 13 bankruptcy has been discharged within 2 years from the case number assignment date. Downgrade required if the case number assignment date is within three years of the date of the transfer of title through a pre-foreclosure sale (short sale). Downgrade required if the case number assignment date is within three years of the date of the transfer of title through a foreclosure or a Deed-in-Lieu (DIL) of foreclosure. 5

6 Purchase and No Cash-Out Refinance Downgrade required if any mortgage trade line, including mortgage lineof-credit payments, during the most recent 12 months reflects: three or more late payments of greater than 30 Days; one or more late payments of 60 Days plus one or more 30 Day late payments; or one payment greater than 90 Days late. A modified mortgage must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments. Cash-Out Refinance Downgrade required if any mortgage trade line, including mortgage lineof-credit payments, reflects: a current delinquency; or any delinquency within 12 months of the case number assignment date. A modified mortgage must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments. Downgrade required if borrower has undisclosed mortgage debt. 6

7 Downgrade is required if business income shows a greater than 20 percent decline over the analysis period. Downgrade is required if the loan involves a borrower with no credit score. TOTAL cannot evaluate a borrower with no score. NOTE: The FHA TOTAL Scorecard Manual Underwriting Downgrade Chart is your reference for the downgrade conditions just discussed. 7

8 Handbook, II, A, 5 Manual Underwriting of the Borrower 8

9 1 Topic Manual Underwriting TOTAL Required Reserves 1-2 unit properties 1 month PITI¹ ² No requirement ¹principal, interest, taxes, insurance ²The reserve requirement changed for1-2 unit properties from 1 month of the Total Monthly Mortgage Payment to 1 month PITI with the new Handbook. 2 Topic Manual Underwriting TOTAL Source of Reserves Gifts not allowed Gifts allowed 3 Topic Manual Underwriting TOTAL Compensating Factors Required when debt-to-income (DTI) ratios exceed 31/43 Not required More in-depth detail to come 9

10 4 Topic Manual Underwriting TOTAL Non-Traditional Credit Allowed* Not allowed *Handbook , II, A, 5, a, ii, (B) and II, A, 5, a, iii has complete guidance and more detail will be discussed in the coming slides 5 Topic Manual Underwriting TOTAL Satisfactory Credit Specific criteria must be applied to traditional and nontraditional credit that is typically more stringent than TOTAL guidelines. Determined by TOTAL within FHA TOTAL underwriting guidelines. And yep, you guessed it! More to come on this topic as well 10

11 Lowest Minimum Decision Score Maximum Qualifying Ratios (%) Acceptable Compensating Factors or Nontraditional/ Insufficient Credit 31/43* Not applicable. Borrowers with minimum decision credit scores below 580, or with Non-traditional or Insufficient Credit may not exceed 31/43 ratios. 580 and above 31/43* No compensating factors required. * Energy Efficient Mortgages are allowed ratios of 33/45 Lowest Minimum Decision Score Maximum Qualifying Ratios (%) Acceptable Compensating Factors 580 and above 37/47 One of the following: Verified and documented cash reserves equal to at least three total monthly mortgage payments (1-2 units) or six total monthly mortgage payments (3-4 units). New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and there is a documented twelve month housing payment history with no more than one 30 day late payment. In cash-out transactions all payments on the mortgage being refinanced must have been made within the month due for the previous 12 months. Residual Income 11

12 Lowest Minimum Decision Score Maximum Qualifying Ratios (%) Acceptable Compensating Factors 580 and above 40/40 Borrower has established credit lines in his/her own name open for at least six months but carries no discretionary debt (i.e., monthly total housing payment is only open installment account and borrower can document that revolving credit has been paid off in full monthly for at least the previous six months). Lowest Minimum Decision Score Maximum Qualifying Ratios (%) Acceptable Compensating Factors 580 and above 40/50 Two of the following: Verified and documented cash reserves equal to at least three total monthly mortgage payments (1-2 units) or six total monthly mortgage payments (3-4 units). New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and there is a documented twelve month housing payment history with no more than one 30 day late payment. In cash-out transactions all payments on the mortgage being refinanced must have been made within the month due for the previous 12 months. Verified and documented significant additional borrower (not household) income that is not considered effective income (Overtime, bonuses, part-time or seasonal income verified for more than one year and likely to continue). Inclusion of this income must reduce the ratios to not more than 37/47. Residual Income. Gross Effective Monthly Income¹ ² - State income taxes³ - Federal income taxes³ - Municipal or other taxes³ - Retirement or Social Security³ - Proposed total mortgage payment - Estimated maintenance and utilities⁴ - Job related expense (e.g., child care)⁵ = Monthly Residual Income for Family Support ¹ Income from occupying borrowers only ² Non-taxable income may not be grossed up for this calculation ³ Federal and state taxes must be used to determine appropriate deductions or paystub if taxes not available ⁴ Multiply total living area (sq. ft.) x.14 ⁵ Child care letter is not required (as it is on a VA loan) and should not be requested 12

13 Residual income may be used as a compensating factor when it meets or exceeds the stated amounts in the table below. Note that all household members must be counted for family size except for individuals who are fully supported from a verified source of income not included in the effective income of the loan. 13

14 DOCUMENTATION If a borrower has no credit score a lender must either obtain a Non-Traditional Mortgage Credit Report (NTMCR) developed by a credit reporting agency or independently develop the credit history per the guidelines found in , II, A, 5, a, ii. Sufficiency of Credit References The credit history must include three credit references, including at least one of the following: rental housing payments (subject to independent verification if the borrower is a renter); telephone service; or utility company reference (if not included in the rental housing payment), including: o gas; o electricity; o water; o television service; or o internet service. Sufficiency of Credit References (cont d) If the lender can t obtain all three credit references from the prior list, the following sources of unreported recurring debt may be used: insurance premiums not payroll deducted (for example, medical, auto, life, renter s insurance); payment to child care providers made to businesses that provide such services; school tuition; retail store credit cards (for example, from department, furniture, appliance stores, or specialty stores); rent-to-own (for example, furniture, appliances); payment of that part of medical bills not covered by insurance; 14

15 Sufficiency of Credit References (cont d) a documented 12-month history of savings evidenced by regular deposits resulting in an increased balance to the account that: o were made at least quarterly; o were not payroll deducted, and; o caused no insufficient funds (NSF) checks; an automobile lease; a personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments; or a documented 12-month history of payment by the Borrower on an account for which the Borrower is an authorized user. Satisfactory Credit Defined The following credit requirements are unique to manual underwriting. Other credit requirements also apply just as they do for underwriting with TOTAL. Refer to , II, A, 5 for complete guidelines. All housing and installment debt payments on time for the previous 12 months. No more than two 30 day late mortgage payments or installment payments in the previous 24 months. No major derogatory credit on revolving accounts in the previous 12 months. (Major derogatory credit on revolving accounts must include any payments made more than 90 days after the due date, or three or more payments more than 60 days after the due date.) Underwriter must document and justify a loan approval when there are ANY collection or charge off accounts present. 15

16 Satisfactory Credit Defined (cont d) Borrowers in a Credit Counseling Payment Plan must document o one year of the pay out period has elapsed under the plan; o all required payments have been made on time; and o borrower has received written permission from the counseling agency to enter into the mortgage transaction. Borrowers in a Chapter 13 Bankruptcy must document o one year of the pay out period has elapsed under the plan; o all required payments have been made on time; and o borrower has received written permission from the court to enter into the mortgage transaction. Wait periods for Foreclosure, Deed in Lieu, and Short Sales may be dropped from 3 years to 1 year with documented extenuating circumstances or if borrower was current on payments for previous 12 months before the Short Sale. Wait periods for Chapter 7 Bankruptcy may be dropped from 2 years to 1 year with documented extenuating circumstances. 16

17 If your loan receives a TOTAL Scorecard Approve then Review the TOTAL Scorecard Manual Downgrade Chart for any conditions that will require a downgrade to manual underwriting. NO triggering conditions? Follow your AUS findings to document the file and underwrite. If your loan receives a TOTAL Scorecard Refer or must be downgraded from Accept to Refer then follow these 4 steps 17

18 1. Verify and document reserve requirements and source. 1 month PITI for 1-2 unit 3 months PITI for 3-4 units Gifts not allowed. Must be borrower s own funds. 2. Note ratios. Ratios above 31/43 (33/45 for Energy Efficient Mortgages) will require compensating factors. Review the Compensating Factors Chart for requirements. 3. If any borrower has no credit score or insufficient credit, nontraditional credit history will have to be established. Review the FHA Credit Summary Chart for Manual Underwriting for requirements. 4. All manually underwritten traditional and non-traditional credit borrowers must meet the Satisfactory Credit Standards. See the FHA Credit Summary Chart for Manual Underwriting for requirements If all manual underwriting requirements can be met, then your file may be eligible for underwriting approval. NOTE: The FHA Mortgage File Action Plan Chart is your reference for this process. 18

19 Because getting a loan closed IS Rocket Science! 19