FHA Underwriting At-A-Glance Purchase Transactions

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1 FHA Underwriting At-A-Glance Purchase Transactions Lender/Investor restrictions may be more limiting than noted. Verify additional restrictions with lender. Criteria 1 unit 2-4 unit 96.5% Max LTV (before UFMIP) 85% limitation if home purchased from person or entity w/family or business relationship Exceptions: -Home is currently family member s prim res -Applicant has been living in home for 6 mos prior to contract -Employee of builder may purchase new or model home from builder -Corporate transfer-may purchase home employer owns 2-unit - same Maximum Mortgage MIP DTI Min Credit Score Base loan (before UFMIP) cannot exceed HUD county/area limit UFMIP 1.75% >15 yr term < 15 yr term < 95%.50% <90% None >95%.55% >90%.25% 31/43 or As accepted by AUS or lender None per FHA 620 per most lenders/investors as of 3/10/ unit: -Property must be self sufficient. -Mortgage amount limited by the monthly pymt created by the mortgage. -Monthly pymt of PITI +HOA cannot exceed net rental income. -Net rental income determined by appraiser declared market rent of all units reduced by vacancy factor. -Vacancy factor is greater of appraiser determined or HOC determined. 2-unit same 3-4 unit: Ratios apply but note that housing payment cannot exceed net rental income (see maximum mortgage) 1

2 Income Wage Earner: -2 year history of employment unless college/training recently completed and borrower is employed in field -Most recent paystub showing 30 days of earnings -2 yrs W2s -If working for family owned business tax returns required -Borrowers who own 25% or more of company are considered self-employed -In cases of skilled employment may use letter of hire if borrower hasn t started job. Must be guaranteed, nonrevocable, and start work within 60 days of closing. Borrow must have sufficient funds for living expenses until then. Self-Employed -Two year history of self-employment -Two years tax returns + YTD P&L Commission Income -Two year history required w/ few exceptions -If more than 25% of income is from commissions 2 yrs tax returns required Part-time Income -2 yr history req unless stability can be documented Child Support/Alimony -12 month history -Supporting documents -3 yr continuance (verify ages of children) -May be grossed up by tax rate used on last yrs tax return. If not required to file return use 25%. Bonus Income -Full two-year-plus average Car Allowance -Acceptable but borrower must provide tax returns. Any car expenses claimed on form 2106 will be deducted from income. Overtime -Two-year-plus average unless employer verifies hours are required as part of regular work week. Rental Income from other properties owned -2 year avg history as per tax returns use net rents and add depreciation -If less than two yr history provide lease and calculate net rent using HOC vacancy factors Rental Income from current primary residence being vacated -Allowed only in cases of relocation by employer outside of reasonable commuting distance OR -Proof of 25% equity in home. -Requires 1 yr signed lease and underwriter may want proof of security deposit -Rental Income to be reduced by HOC vacancy factor Seasonal/Construction/Trade Income -2 yr avg history preferred -Unemployment income acceptable in two year avg Boarder Income -Allowed if boarder is related by blood, marriage or law and income has been claimed on last 2 years tax returns Social Security -Must have likelihood of 3 year continuance -Award letter and proof of receipt usually bank stmts Truck Drivers -Salary/hourly process as W2 wage earners -Pd by mile or trip process as commission income -Paid by 1099 process as self-employed Other Income -Must provide stability and documentation requirements -See Handbook Rev 5 for additional guidance with the following addition: Rental Income from units not occupied by borrower -Net rental income determined by appraiser declared market rent reduced by vacancy factor. May only use rents on units not occupied by borrower. -Vacancy factor is greater of appraiser determined or HOC determined. 2

3 Debt Credit Installment debts incl alimony/child support -If less than 10 months pymts left may be excluded from ratios if they will not interfere with borrower s ability to make mortgage payment immediately after closing. Typically must count if borrower has limited or no cash after closing. Payments on 401K, Savings Plan loans -Not counted in ratios Student Loan Pymts -May be disregarded if re-payment does not commence prior to 12 months after closing. Must document deferment. Judgements -If resubordinated with payment plan, paymnts must be calculated into ratios. Chap 7 BK -Eligible 2 yrs after discharge date or 1 yr with extenuating circumstances. Chap 13 BK -Must have 12 months good payment history on BK plan -Permission from court to purchase new home Consumer Credit Counseling - as Chap 13 BK Foreclosure, Deed-in-Lieu, Short Sale -Eligible 3 yrs from trustee sale -If foreclosure was included in BK, wait is 3 yrs from BK discharge -If foreclosure was on HUD insured property, wait is 3 yrs from date claim was paid per CAIVRS -Less with documented extenuating circumstances and re-established credit Judgements -Must be paid or resubordinated. Payment plan requires payment to be included into ratios. Collections -HUD doesn t require payment -Underwriter may require depending on amount and date incurred Non-Traditional Credit -Allowed but few lenders/investors will accept. Acceptable Sources for Down Payment Savings, Stocks, Money Market, etc -2 months statements showing balance/value and clearly showing borrower as owner Gift funds -Family, close friends (with no financial interest), employers, and charitable organizations (with no financial interest) are acceptable donors. Loans from immediate family -Unsecured or secured against the subject property. Payment must be calculated in ratios. Secured loans -Can be collateralized by investment accounts or real property. Payments on loans against deposited funds (401K, etc) aren t considered in ratios. Trade Equity -Borrower can trade real property as part of cash investment. 3

4 Acceptable Sources for Down Payment (cont d) Sale of Personal Property -Requires third party estimate of worth and proof of sale. Bridal Registry Accounts -Account is opened prior to wedding to allow family and friends to deposit cash gifts. Sweat Equity -Labor performed or materials furnished by the borrower before closing on existing or new construction. Commission from Sale -Family member who is licensed real estate agent and entitled to the commission from the sale can gift commission to borrower. Rent Credit -When purchasing a home currently being rented, the amount of rental payments that exceed the fair market rent can be considered part of the cash investment. Reserves Closing Costs Non- Occupying Co- Borrowers Not required per FHA however may contribute to Approve determination by AUS Allowable -All costs reasonable and necessary to close the loan Restrictions -Borrower may not pay tax service fee -Borrower may pay only 1% in origination fee Allowed without LTV restriction if co-borrower is related by blood, family or law, or un-related party can document family-type relationship. If co-borrower does not qualify LTV is restricted to 75%. 2 unit unit - 3 months PITI Gift funds not allowed Allowed but LTV is restricted to 75% Financing Concessions Lender Paid Costs Seller, builder or realtor can pay up to 6% of the sales price toward: -Closing costs -Prepaids -Discount points -Buydown fees -UFMIP (must pay entire amount or nothing) -Carpet allowances, etc (must be paid to third party). Must be completed prior to closing. Some underwriters will grant exception. The lender can pay for closing costs and prepaids through premium pricing. These amounts do not count toward maximum 6% contribution explained above. Repair Escrows -Allowed for FHA required repairs in certain circumstances, usually due to weather -$500 minimum -Must withhold 1 ½ times the cost of the repair per appraiser or professional contractor estimate 4

5 More Than One FHA Loan Not allowed. Following exceptions apply: -Co-Owned Home, One Party Vacates (example: divorce) -Non-occupying co-borrowers can purchase their own primary residence via FHA -Moving outside of reasonable commute distance -Outgrow Home (must have 25% equity on existing home) Assumability Yes. Must qualify through servicing lender. Property Restrictions Condos -Must be FHA approved or eligible for spot approval Manufactured Housing -400 sq ft min -Built after July Must have red certification label -Must be classified as real property -Never moved (must be documented) -Permanent foundation -Engineering cert on foundation (may be original) Cannot be part of a project -No shared driveways, parking, garages, etc Utilities -Must be separate gas and electric meters for each unit -Must be separate water heaters for each unit Windows -Windows must by 2 x3 and no more than 44 from floor in each unit. If not unit cannot be considered in value. This document is meant for reference purposes only. For full underwriting guidelines refer to HUD Handbooks and Mortgage Letters. Copyright 2009 MortgageCurrentcy.com 5