FHA TRAINING WORKBOOK

Transcription

1 FHA TRAINING WORKBOOK A Comprehensive Guide to FHA Lending with Finance of America LYNNE GONZALES Account Executive o: (925) f: (949) lgonzales@financeofamerica.com FAMWholesale.com

2 Introduction WELCOME TO FINANCE OF AMERICA MORTGAGE FHA TRAINING The promise of what Finance of America Mortgage offers to its valued business partners will change the landscape of our industry and transform the home mortgage experience for your customers. It is our goal to provide our third party originators with the very best in loan products, customer service levels and quality training. This workbook outlines the FHA loan program guidelines at Finance of America and is designed to help you originate more FHA loans. We have included important information including how to submit a loan with Finance of America as well as several checklists to help you and your team process your loans quicker which will result in a timely delivery of service to your customers. It is our goal to help you deliver positive experiences to your customers and it is the most critical focus for us at Finance of America. We thank you for the opportunity to serve you as a third party loan originator and to help your serve your customers. ABOUT THIS WORKBOOK This workbook is divided into sections to help you easily navigate to the information you need. At the end you will find important resource links and checklists. You can start at the beginning and work your way through the entire workbook or jump to the sections that pertain to your exact scenario. We also have additional training resources available for you at our website at 1 P age

3 EVERYTHING YOU NEED TO KNOW Table of Contents HISTORY OF FHA... 4 OVERVIEW OF FHA... 5 DIFFERENCE BETWEEN FHA AND CONVENTIONAL... 6 BENEFITS OF FHA... 7 PRODUCTS... 8 GUIDELINES... 9 PURCHASE TRANSACTIONS REFINANCE TRANSACTIONS SPECIAL GUIDELINES LOAN AMOUNTS LOAN LIMITS LOAN TERMS DOWN PAYMENT SELLER CONTRIBUTIONS BORROWER ELIGIBILITY CREDIT INCOME DEBT-TO-INCOME RATIO ASSETS FINANCED PROPERTIES MORTGAGE INSURANCE PROPERTY APPRAISAL REQUIREMENTS HIGH BALANCE LOANS OTHER FHA LOAN PROGRAMS P age

4 CASE NUMBERS, CAIVRS AND LDP AND GSA REQUIREMENTS UNDERWRITING LOAN SUBMISSION STEPS FORMS CHECKLISTS RESOURCES GLOSSARY P age

5 HISTORY OF FHA THE FEDERAL HOUSING ADMINISTRATION The Federal Housing Administration (FHA) is a government corporation that was created in 1934 to help stabilize the housing market during the Great Depression. The goal was to set a standard for housing conditions and to create a financing system that would help buyers by insuring loans for them. FHA fell under the regulation of the U.S. Department of Housing and Urban Development (HUD) in FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue. Today FHA is the largest insurer of mortgages in the world, and provides an affordable way for the home buyers to own their own homes. The agency has helped to raise the number of homeowners in the nation. In fact, homeowners make up 64.9% of the nation's population today. 4 P age

6 OVERVIEW OF FHA FHA MORTGAGE FINANCING An FHA mortgage is a government-backed home loan with more flexible lending requirements than those for conventional mortgages. FHA loans are available with fixed interest rates or with adjustable rates. FHA loans have somewhat less stringent down payment and credit requirements than conventional mortgages. They require a down payment as low as 3.5% of the sales price, and borrowers may qualify even without a long standing credit history or top-notch credit scores. FHA APPROVED LENDERS FHA does not lend money. Instead, FHA, insures loans. The insurance removes or minimizes the default risk lenders face when buyers invest less than 20% down in a transaction. FHA approved lenders are authorized to: Take loan applications Process loan applications Underwrite loan files to established FHA guidelines. Direct Endorsement (DE) allows lenders the authority to commit FHA insurance. 5 P age

7 DIFFERENCE BETWEEN FHA AND CONVENTIONAL FHA Specific Disclosures Loan Transmittal Summary (LT) vs. FNMA 1008 URLA (Uniform Residential Loan Application) vs. FNMA 1003 Addendum to the URLA (HUD A) Conditional Commitment DE Statement of Appraised Value (HUD B)-FAM will supply & complete this form Case #s -Broker to request on FAM website CAIVRS Database Search-FAM will complete this task LDP & GSA Database Search-Broker to complete FHA SPECIFIC DISCLOSURES Important Notice to Homebuyer (HUD B 11/2014) For your Protection: Get a Home Inspection Informed Consumer Choice Disclosure Amendatory Clause/Real Estate Certification Notice to Homebuyer (Assumption of HUD/FHA Mortgages) Arm Disclosure (if applicable) NOTE: Examples and links to FHA specific disclosures are in the resource section at the end of this workbook. 6 P age

8 BENEFITS OF FHA FHA loans will always have a place in the market whether their costs rise or fall. The FHA requirements for credit score and down payments are far lower than for conventional loans. Borrowers can technically qualify for an FHA loan with credit scores of at least 580 and a down payment of just 3.5 percent, according to HUD. FHA provides the following benefits: Reduces down payment requirements Comparatively relaxed underwriting guidelines Interest rates that are similar to those of conventional loan programs OVERVIEW Down Payment 3.5% Up to 85% cash out refinance All funds may come from a gift Seller can pay up to 6% toward all closing costs Non-Occupant Co-Borrowers are allowed with true blended ratios No Cash Reserves (1 and 2 unit properties) Credit Leniency BK 2 years, Foreclosures 3 years, Short Sales 3 years Streamline Refinances 7 P age

9 Assumable PRODUCTS PRODUCT NAME - FHA 203B Purchase or Refinance of 1-4-unit primary residence FIXED PRODUCTS 15 and 30 Year for standard loan amounts and 30 years only on high balance loan amounts ARM PRODUCTS 5/1 ARMs on standard loan amounts 5/1 ARMs on high balance loan amounts 1/1/5 caps, 2.00% Margin, Index is one year US Treasury Not available for streamline refinances 8 P age

10 GUIDELINES THE BASICS 1. Primary Residence Only Units 3. Purchase, Rate and Term and Cash Out Minimum Credit Score* 5. High Balance 6. Second Homes and Non-Owner are not allowed on any type of purchase or refinance 7. FHA limits borrowers to one FHA loan at a time. The following are potential exceptions: a. Borrower relocating a reasonable distance away from prior home b. Family size increased/decreased c. Vacating jointly-owned property (Divorce) d. Non-occupant Co-Borrower NOTE: *Finance of America minimum score requirement. 9 P age

11 GUIDELINES TABLE Primary Residence Purchase PROPERTY TYPE LTV CLTV FICO: FICO: Standard loan High Bal loan amounts amounts 1-4 units Simple Refinance 1 PROPERTY TYPE LTV CLTV FICO: FICO: Standard loan High Bal loan amounts amounts 1-4 units Rate/Term Refinance 2 PROPERTY TYPE LTV CLTV FICO: FICO: Standard loan High Bal loan amounts amounts 1-4 units units Cash-Out Refinance PROPERTY TYPE LTV CLTV FICO: FICO: Standard loan High Bal loan amounts amounts 1-4 units Streamline Refinance 3 PROPERTY TYPE LTV CLTV FICO: FICO: Standard loan High Bal loan amounts amounts 1-4 units See Notes 4 125% ) Simple Refinance refers to a no cash-out refinance of an existing FHA-insured Mortgage in which all proceeds are used to pay the existing FHA insured mortgage lien on the subject Property and costs associated with the transaction. 2) Rate and Term Refinance refers to a no cash-out refinance of any Mortgage in which all proceeds are used to pay existing mortgage liens on the subject Property and costs associated with the transaction percent for Principal Residences that have been owner-occupied for previous 12 months, or owner-occupied since acquisition if acquired within 12 months, at case number assignment; 85 percent for a Borrower who has occupied the subject Property as their Principal Residence for fewer than 12 months prior to the case number 10 P age

12 assignment date; or if owned less than 12 months, has not occupied the Property for that entire period of ownership. 3) Streamline Refinance refers to the refinance of an existing FHA-insured Mortgage requiring limited Borrower credit documentation and underwriting. There are two different streamline options available. Credit Qualifying The Mortgagee must perform a credit and capacity analysis of the Borrower, but no appraisal is required. Non-Credit Qualifying The Mortgagee does not need to perform credit or capacity analysis or obtain an appraisal. 4) No maximum LTV on a streamline refinance. The loan must meet Maximum Insurable Mortgage guidelines. 11 P age

13 PURCHASE TRANSACTIONS The Borrower may not receive any cash back through a purchase, other than an amount representing: A reimbursement for the Borrower s overpayment of fees Costs paid by the Borrower in advance; earnest money deposit, appraisal or credit report fees; or A legitimate real estate tax credit in locales where real estate taxes are paid in arrears. If the Borrower receives an allowable amount of cash back, the minimum Borrower contribution must be met and verified. Refer to Loan Amount Calculation Worksheet below. PURCHASE LOAN CALCULATION WORKSHEET Base Loan Amount A $ X 96.5% = Lesser of Sales Price or Appraised Value Max LTV Base Loan Amount Minimum Down Payment B $ - $ = $ Sales Price Max Base Loan Amount Min Down Payment Up Front MIP C $ X 1.75* = $ Base Loan Amount (*older case # vary, see charts) Up Front MIP 12 P age

14 Total Loan Amount D $ + $ = $ Base Loan Amount Up Front MIP Total Loan Amount 13 P age

15 REFINANCE TRANSACTIONS NO CASH OUT REFINANCE/REGULAR REFINANCE Below are requirements for no cash out refinances. The current mortgage must be a NON-FHA fixed rate or ARM. Single Family, Owner Occupied Primary Residence Only Maximum mortgage is the LOWER of 97.75% of appraisal or Existing Debt Calculation Existing debt includes payoff of existing 1st, PM 2nd, jr. lien over 12 months, closing costs, prepaid expenses, borrower paid repairs, and discount points. If any portion of funds of equity line in excess of $1000 in last 12 months, for purposes other than repairs and rehab. of property the line of credit may not be included. Property owned less than 12 months, must use lesser of original purchase price + expenditures for repairs, or current appraised value Modified/Restructured loans are okay to be paid off, as long as the loan is not delinquent and no late payments in past 12 months, unless AUS decision is Approve/Eligible. Current lender must supply letter that they will not file deficiency Proceeds to buy out ex-spouse are okay Borrower may not receive more than $500 at closing Non-Occupant Co-Borrower may be added 2nd Liens may subordinate, up to 97.75% (case numbers as of 9/7/2010) Terms of subordinate lien must not have a balloon or prepayment penalty Payments are calculated in qualifying 14 P age

16 NO CASH OUT REFINANCE LOAN CALCULATION WORKSHEET LTV Factor Method A $ X 97.75% = Appraised Value Max Mortgage #1 Existing Debt Method B $ + $ = $ Payoff 1 st, PM 2 nd seasoned Jr. Lien or Closing Costs -nonrecurring, prepaids and discount points Max Mortgage #2 Up Front MIP C $ X 1.75* = $ Lower of Max #1 and Max #2 (*older case # vary, see charts) Up Front MIP Total Loan Amount D $ + $ = $ Lower of Max #1 and Max #2 Up Front MIP And EEM upgrades if any Total Loan Amount 15 P age

17 STREAMLINE REFINANCE Below information details the general requirements for a Streamline FHA Refinance. Loan must be an FHA insured loan, not delinquent, 6 months old (212 days) or case number will not be assigned. Fixed Rate Only, no new ARM loans. Net Tangible Benefit - The refinance must result in an immediate payment reduction (Reducing the term of the mortgage is NOT a net tangible benefit, by itself). Lowering the borrower s monthly P&I payment, plus the annual MIP, by at least 5% OR Refinancing from an ARM to a Fixed. The table below defines permissible minimum thresholds. From To Fixed Fixed Rate Reduction of at least 5% of P&I and MIP One-Year ARM New interest rate no greater than 2% above the current interest rate of the ARM Hybrid ARM, during fixed period Reduction of at least 5% of P&I and MIP Hybrid ARM, during adjustable period New interest rate no greater than 2% above the current interest rate of the Hybrid ARM LTV/CLTV REGARDLESS OF PROPERTY STATE OR VALUE Type of Transaction Max LTV 1 Max CLTV 2 Credit Qualifying w/appraisal 97.75% 125% Credit Qualifying w/out Appraisal See Note 3 125% Non-Credit Qualifying w/appraisal 97.75% 125% Non-Credit Qualifying w/out Appraisal See Note 3 125% 1 - The loan must meet maximum insurable mortgage guides 2 - The max CLTV may vary depending on the type of subordinate financing 16 P age

18 3 - No maximum LTV on a streamline refinance without an appraisal. The loan must meet maximum insurable mortgage guidelines. MAXIMUM INSURABLE MORTGAGE STREAMLINE REFINANCE WITH APPRAISAL CREDIT QUALIFYING MAX INSURABLE MORTGAGE IS THE LOWER OF: The outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and the new UFMIP. OR 97.75% of appraised value of the property, plus the new UFMIP. NON-CREDIT QUALIFYING MAX INSURABLE MORTGAGE CANNOT EXCEED: The outstanding principal balance minus the applicable refund of the UFMIP, PLUS the new UFMIP. An appraisal may not be used to increase the insurable mortgage balance beyond the sum of the outstanding principal balance and the new UFMIP. The new loan balance may NOT include closing costs, prepaid items or other financing. The outstanding principal balance may include interest charged by the servicing lender when the payoff is not received on the first day of the month, but may NOT include delinquent interest, late charges or escrow shortages. Discount points may not be included the new mortgage. MAXIMUM INSURABLE MORTGAGE STREAMLINE REFINANCE WITHOUT APPRAISAL At the time of case number, the original value must be obtained from FHA Connection The maximum insurable mortgage cannot exceed: o The outstanding principal bal. minus the applicable refund of the UFMIP, plus the new UFMIP. o The outstanding principal balance may include interest charged by the servicing lender when the payoff is not received on the first day of the month, but may not include delinquent interest, late charges or escrow shortages. Condo project approval is not required. Recently listed properties. Listing must be cancelled at least 1 day prior to the date of the loan application. A letter of intent to occupy from the borrower is required. 17 P age

19 MAXIMUM MORTGAGE CALCULATION WITHOUT APPRAISAL $ Unpaid principal balance* of existing FHA loan - The LESSER of: $ Unearned UFMIP (from FHA Refinance Authorization or appropriate MIP Refund Schedule) OR $ New Estimated UFMIP = Maximum Base Loan Amount before UFMIP + New UFMIP = Total New Loan Amount including UFMIP *May include interest charged when payoff is not received on the first day of the month. Cannot include delinquent interest, late charges or escrow shortages or MIP. 18 P age

20 MAXIMUM MORTGAGE CALCULATION WITH APPRAISAL Calculation A: $ Outstanding Principal Balance* - ( ) The LESSER of: $ Unearned UFMIP (from FHA Refinance Auth. or appropriate MIP Refund Schedule) OR $ New Estimated UFMIP + Closing costs** + Prepaids (includes per diem interest to end of month on new loan, hazard insurance and real estate tax deposits needed to establish escrow account) - Lender Credit for Closing Costs and Prepaid Items = Total A Calculation B: $ Total B = Appraised Value x 97.75% *Outstanding Principal Balance May include Interest, but not delinquent interest, late charges or escrow shortages **Discount points may not be included in the loan amount, must be paid from borrower s funds. Calculation C: $ Total C = Max County Limit New Mortgage Amount: $ Maximum Base Mortgage (Lowest of Totals A, B and C) + New UFMIP (If financed) $ Total New Mortgage Amount 19 P age

21 CASH OUT REFINANCE Below are details and requirements for a cash out FHA refinance: FHA will insure a cash out refinance, up to 85% of appraised value with the following requirements: Properties owned 12 months or more, use current appraised value. Properties owned less than 12 months use lesser of purchase price or appraised value. All Borrowers must hold title to property for at least six months. Modified/Restructured loans are not eligible for a cash out refinance. Borrowers whose loans are delinquent or in arrears are not eligible. Non-Occupant Borrowers may not be added to qualify. Existing or new subordinate financing to a maximum CLTV of 85%. Modified subordinate financing is acceptable to a maximum CLTV of 85%. 1-4 units, 3-4 unit properties must pass self-sufficiency test. Properties owned free and clear may be financed as cash-out transactions. Listing agreements on subject property must have been cancelled 6 mos. prior to loan application or subject to max 70% LTV/CLTV. CASH OUT REFINANCE WORKSHEET Max LTV Calculation A $ X 85% = Appraised Value Base Loan Amount Up Front MIP C $ X 1.75* = $ Base Loan Amount Total Loan Amount (*older case # vary, see charts) Up Front MIP D $ + $ = $ Base Loan Amount Up Front MIP Total Loan Amount 20 P age

22 SPECIAL NOTE ON CALCULATING INSURANCE ON FHA REFINANCES About Prepayment (excerpt from Important Notice to Homebuyers Disclosure): This notice is to advise you of the requirements that must be followed to accomplish a prepayment of your mortgage, and to prevent accrual of any interest after the date of prepayment. You may prepay any or all of the outstanding indebtedness due under your mortgage at any time, without penalty. However, to avoid the accrual of interest on any prepayment, the prepayment must be received on the installment due date (the first day of the month) if the mortgagee stated this policy in its response to a request for a payoff figure. Otherwise, you may be required to pay interest on the amount prepaid through the end of the month. The mortgagee can refuse to accept prepayment on any date other than the installment due date. NOTE: For all FHA mortgages closed on or after January 21, 2015, mortgagees may only charge interest through the date the mortgage is paid in full. BEST PRACTICE WHEN REFINANCING AN EXISTING FHA LOAN THAT WAS ORIGINATED PRIOR TO JANUARY 21ST, 2015: ASSUME INTEREST WILL BE CHARGED THROUGH THE END OF THE MONTH PAYOFF IS RECEIVED UNTIL OR UNLESS YOUR PAYOFF DEMAND STATES OTHERWISE. BEST PRACTICE WHEN REFINANCING AN EXISTING FHA LOAN THAT WAS ORIGINATED PRIOR TO JANUARY 21ST, 2015: ASSUME INTEREST WILL BE CHARGED THROUGH THE END OF THE MONTH PAYOFF IS RECEIVED UNTIL OR UNLESS YOUR PAYOFF DEMAND STATES OTHERWISE. 21 P age

23 SPECIAL GUIDELINES IDENTITY OF INTEREST Identity of Interest is when there is a relationship between someone included in the transaction and the borrower(s). This includes family or business relationships and is limited to 85% LTV with the following exceptions: An employee of builder purchasing builder s new home as primary. A tenant purchases rented property, evidencing at least 6 months as tenant immediately predating the sales contract. A corporation transfers an employee, purchases that employee s home, then sells home to another employee. Family member purchases another family member s primary residence. NOTE: If property is seller s investment property, max mortgage is lesser of either 85% of appraised value or the appropriate LTV ratio percentage applied to sales price, plus or minus required adjustments. The 85% limit may be waived if family member has been tenant in subject property for at least 6 months. TRANSACTIONS AFFECTING MAXIMUM MORTGAGE There are several guidelines to be aware of that can have an effect on the FHA transaction. These guidelines include the following: Non-Occupant Co-Borrowers Permitted for purchases, no cash out refinances - all LTVs, and cash out refinances (must be on title, cannot add) up to 85%. 2-4 units max LTV is 75%. Must be immediate family member (others, case by case) or max LTV is 75%. Housing and obligations are included in the DTI ratios. Credit, income and assets must be verified. Must sign Note and Security Instrument and all other closing documents. 22 P age

24 3 And 4 Unit Properties The maximum mortgage is limited so that the ratio of the monthly mortgage payment divided by the monthly net rental income does not exceed 100%. o o o Monthly payment is principal, interest, taxes, insurance, mortgage insurance and any HOA dues. Net rental income is appraiser s estimate of fair market rent from ALL units, incl. borrower s own unit, less the appraiser s estimate for vacancies, or 15%*, whichever is greater (Santa Ana HOC). The above calculations are only to determine max loan amount, borrower must still qualify as usual, and projected rent may only be used as gross income and not to offset mortgage payment. o Borrower must have 3 months PITI reserves, cannot be a gift. PROPERTIES UNDER CONSTRUCTION OR EXISTING LESS THAN ONE YEAR In these circumstances the loan is limited to 90% LTV, with the following exceptions: Construction completed more than one-year preceding borrower s signature on HUD92900-A. The dwelling s site plans and materials were approved by VA, an eligible DE Underwriter, or an FHA certified builder prior to construction. Local jurisdiction issued BOTH a building permit AND a Certificate of Occupancy or equivalent. The dwelling is covered by a builder s ten-year warranty plan acceptable to HUD. PROPERTY FLIPPING Property flipping is when properties are purchased and resold in a short period of time for a considerable profit. Only owners of record may sell properties that will be financed using FHA insured mortgages. No sales or assignment of contract. Any resale of a property may not occur 90 or fewer days from the last sale to be eligible for financing Exceptions to follow. Re-sales between 91 and 180 days where the new sales price exceeds previous price by 100% or more, additional appraisal will be required. FAM may require additional documentation to support resale value of property sold more than 90 days and up to 12 months. Restrictions do not apply to a builder selling a newly built home. Appraisers are required to analyze prior sales of subject property. FAM will require documentation to support increased value including any rehabilitation or remodeling, to possibly include a second appraisal. 23 P age

25 RESALES OCCURRING 90 DAYS OR LESS EXCEPTION If the owner sells a property within 90 days after the recorded date of acquisition, it is not eligible, unless it falls into one of the following exceptions: o Sales by HUD of REO s o Sales by other US Government entities o Sales by nonprofits approved by HUD o Sales acquired by inheritance o Sales by employers or relocation agencies o Sales by mortgage companies, their subsidiaries and any vendors hired by these exempt entities o Sales by State and Federally chartered financial institutions and Government sponsored enterprises (Fannie Mae and Freddie Mac) o Sales by local and state government agencies o Sales of properties within Presidentially-Declared Disaster Areas NOTE: Properties acquired by individuals, investment groups, REO property-re-sellers or others whose intent is the purchase, repair and reselling of the property are not exempt from the 90-day resale restriction Property Flipping Red Flags and Documentation Requirements All title transfers in the previous 12 months must be documented and reviewed in detail. Any increase in property value (including repairs and upgrades) in the previous 12 months must be reviewed, supported and documented by the Appraiser and Underwriter. A field review or second appraisal may be required at Underwriter s discretion. Conversion of Primary Residence to Rental Effective with Case numbers ordered on or after September 19, 2008, ML , rental income on current primary residence being vacated, may not be considered, with the following exclusions (this applies solely to a principal residence being vacated in favor of another principal residence): Relocations Homebuyer is relocating with new employer or transferring with current employer. Properly executed lease agreement of at least one year. Evidence of security deposit and/or Evidence of first month s rent paid to homeowner. Sufficient Equity in Vacated property. 25% equity, determined by a current appraisal, less than 6 months old. Rental income may NOT be derived from a family member. 24 P age

26 LOAN AMOUNTS FHA MAXIMUM LOAN AMOUNTS The National Housing Act establishes the maximum mortgage limits and the mortgage amounts for all FHA mortgage insurance programs. The limits are calculated based the median house prices in each geographic area. FHA loan limits vary based on a variety of housing types and the state and county in which the property is located, and are published annually, to be effective for each calendar year. FHA loan limits are set by HUD, and vary from county to county. Current loan amount limits can be found online at: MAXIMUM MORTGAGE CALCULATION - PURCHASE 96.5% of the lesser of sales price or appraised value (base loan amount) Does not include Up Front MIP (UFMIP) Borrower must have minimum of 3.5% down payment (Can be gift) Closing costs may not be used in minimum 3.5% calculation Seller Concessions maximum 6% MAXIMUM MORTGAGE CALCULATION REFINANCE No Cash Out and Streamline Refinances with appraisal 97.75% of appraised value (base loan amount). Cash out Refinances - 85% of appraised value. 25 P age

27 LOAN LIMITS FHA Maximum LTVs and Mortgage Insurance FHA mortgage insurance protects the lender in the event of borrower default. FHA borrowers will pay for the cost of mortgage insurance two ways: Up-Front Mortgage Insurance Premium (UFMIP) and Annual Mortgage Insurance Premium (also referred to as the periodic or monthly MIP, as the cost is assessed annually, but premiums are collected as part of the borrower s monthly payments). The chart below illustrates the maximum loan-to-value ratios for specific FHA transactions, and lists the UFMIP required by those programs. The UFMIP is a charge that can be financed back into the loan amount or paid in cash. Transaction Maximum LTV UFMIP Purchase 96.50% (3.5% down pmt.) Rate-Term Refinance 97.75% if owner occupied for the previous 12 months 85% if borrower has not occupied as principal residence for <12 months prior to case number date or if owned less than 12 months and has not occupied the property for the entire period of ownership 1.75% 1.75% FHA to FHA Streamline with Appraisal 97.75% 1.75% * EXCEPT CERTAIN LOANS INSURED BEFORE 5/31/2009 UFMIP DECREASED TO.01% FHA to FHA Streamline without Appraisal n/a 1.75% EXCEPT CERTAIN LOANS INSURED BEFORE 5/31/2009 UFMIP DECREASED TO.01% Cash-out Refinance 85% 1.75% 26 P age

28 LOAN TERMS FIXED RATE 15 and 30 years FIXED-PERIOD ADJUSTABLE-RATE MORTGAGE (ARMS) 30-year term only *Due to market variances, ARM loans may be subject to additional pricing requirements. *ARMs are not eligible for Streamline Refinances. 5/1 FIXED-PERIOD TERM First adjustment is months after the first payment date. Adjusts annually with 1% maximum increase or decrease per adjustment. Conversion options are not allowed. INDEX Weekly average on U.S. Treasury securities adjusted to a constant maturity of one year. LIFE CAP 5% above the start rate LIFE FLOOR 5% below the start rate, but never lower than the margin MARGIN 2.00% PAYMENT ADJUSTMENT DATE First adjustment is the first of the month following the interest rate adjustment and every 12 months thereafter High Balance: 30 years 5/1 fixed-period term First adjustment is months after the first payment date. Adjusts annually with 1% maximum increase or decrease per adjustment. ARMs are not eligible for Streamline Refinances. Application of Unused Borrower Funds from an Escrow Account on an Existing Mortgage in FHA-Insured Refinance Transactions Refer to the Asset section of the guidelines Standard Loan Amounts. Maximum Base Loan Amount cannot exceed the FHA Statutory Mortgage Limits for each county and under no circumstances will a county s mortgage limit be less than the floor or greater than the ceiling as outlined in the table below. 27 P age

29 Lowest Maximum Highest Maximum Continental US Alaska and Hawaii (Floor) (Ceiling) 1-Unit $271,050 $417,000 2-Unit $347,000 $533,850 3-Unit $419,425 $645,300 4-Unit $521,250 $801,950 1-Unit $271,050 $625,500 2-Unit $347,000 $800,775 3-Unit $419,425 $967,950 4-Unit $521,250 $1,202,925 HIGH BALANCE LOAN AMOUNTS Maximum Base Loan Amount cannot exceed the FHA Statutory Mortgage Limits for each county and under no circumstances will a county s mortgage limit be less than the floor or greater than the ceiling as outlined in the table below. Lowest Maximum Highest Maximum (Floor) (Ceiling) 1-Unit $417,001 $625,500 Continental 2-Unit $533,851 $800,775 US 3-Unit $645,301 $967,950 4-Unit $801,951 $1,202,925 1-Unit $625,501 $938,250 Alaska and 2-Unit $800,776 $1,201,150 Hawaii 3-Unit $967,951 $1,451,925 4-Unit $1,202,926 $1,804,375 Refer to the "High Balance" section of the FHA Guidelines for additional FHA High Balance guideline overlays. Maximum loan limits are determined by geographic areas. A complete schedule of FHA mortgage limits for all areas is available at: 28 P age

30 DOWN PAYMENT FHA requires a Minimum Required Investment of 3.5% of the sales price invested in the transaction. This money must be their own funds; however, FHA considers Gift Funds to be the borrower s own funds. GIFT FUNDS Gifts can be in any amount and they can cover ALL or PART of the down payment required. Acceptable sources for Gift Funds include: Direct family members Employers Non-profit organizations Someone with a close relationship with the borrower A governmental agency that has a program providing homeownership assistance to low or moderate income families or first time homebuyers FHA has a definitive way of documenting the movement of Gift Funds. THE FOLLOWING IS REQUIRED TO USE GIFT FUNDS The dollar amount The donor s name, address, telephone number The Borrower must be named The donor s relationship to the Borrower The donor s signature A statement that no repayment is required Must contain language asserting that the funds given were not made to the donor from any person with an interest in the sale of the property. Gift Letter The gift giver will need to complete a Gift Letter specifically stating that the money is a gift and repayment of the funds is not expected. They will also need to provide documentation to prove they had the ability to give the gift to the borrower (usually in the form of a bank statement showing the funds were available at the time the gift was given. A copy of the gift check and proof of the borrower depositing the funds into their bank also need to be included in the file. Cash on Hand is NOT an acceptable source of Gift Funds. 29 P age

31 Gift Letter Example 30 P age

32 SELLER CONTRIBUTIONS INTERESTED PARTY CONTRIBUTIONS Interested parties in a real estate transaction refers to sellers, real estate agents, builders, developers or any other person or entity with an interest in the transaction. FHA limits the contributions interested parties can make to the real estate transaction. FHA allows the interested party to contribute up to 6% of the sales price of a property towards a borrower s closing costs, origination fees or discount points. NOTE: No portion of the seller assist can be used towards the borrower s 3.5% down payment. ADDITIONAL APPRAISAL REQUIREMENTS FOR INTERESTED PARTY CONTRIBUTIONS A transaction with an interested party contribution has the following (additional) appraisal requirements. The appraisal must indicate the amount of the contribution. The appraiser must comment on the impact the contribution has to the final value of the property. The appraiser must demonstrate the effect this has on final value. The comparable sales must be adjusted by the value of the contributions as recognized by the market, in the appraiser s opinion, not just dollar for dollar amount of the contribution. Any comparables sold with financing and/or sales concessions must reflect the difference between what the comparables actually sold for with and without concessions. Positive adjustments for sales or financing concessions are not acceptable. 31 P age

33 BORROWER ELIGIBILITY GENERAL GUIDELINES FOR ELIGIBILITY U.S. Citizen Permanent Resident Aliens Non-Permanent Resident Aliens All Borrowers must have a valid Social Security Number Title must be held in individual names only FHA will insure loans used to finance owner-occupied, 1-4 family properties. This means that a borrower taking an FHA loan is signing loan documents stating that they intend to move into the property and occupy it as their primary residence. An FHA loan cannot be used to purchase an investment property; however, the purchase of a 2-4-unit property is allowable, provided the borrower will occupy one of the units. While US citizenship is not required for FHA mortgage eligibility, FHA insures mortgages made to individuals with valid Social Security numbers. Permanent resident aliens may be eligible for FHA insured financing, provided the borrower satisfies the same requirements, terms and conditions as those for US Citizens, and they are able to provide proof that they are a lawful permanent resident alien. Non-permanent resident aliens may be eligible for FHA financing as long as the property will be their primary residence, they have a valid social security number (with exceptions for those who are employed by the World Bank, a foreign embassy, or an equivalent employer as identified by HUD), they are eligible to work in the United States and they satisfy the same requirements, terms and conditions as those for US Citizens. Non-US Citizens without lawful residency in the United States are NOT eligible for FHA insured financing. Eligible Borrowers US Citizens Permanent Resident Aliens Non-Permanent Resident Aliens Ineligible Borrowers Foreign Nationals Partnerships Corporations 32 P age

34 CREDIT CREDIT SCORES Finance of America s minimum credit score on all FHA Loans is 640 Minimum Credit Score 640 (regardless of AUS findings) All borrowers must have a credit score CREDIT REQUIREMENTS All borrowers must have at least one valid credit score. Credit will be closely examined over past months, with greater emphasis on past 12 months. Borrower s housing payment history is very important. Student loans deferred over 12 months are considered. o The Mortgagee must include all Student Loans in the Borrower s liabilities, regardless of the payment type or status of payments. o If the payment used for the monthly obligation is: less than 1 percent of the outstanding balance reported on the Borrower s credit report, and less than the monthly payment reported on the Borrower s credit report; o The Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor. o Regardless of the payment status, the Mortgagee must use either: the greater of: 1 percent of the outstanding balance on the loan; or the monthly payment reported on the Borrower s credit report; or the actual documented payment, provided the payment will fully amortize the loan over its term Payoff of Debt to Qualify o Is allowed if the account is paid in full prior to closing, with a credit supplement showing a zero balance. o Gift funds for deb payoff is acceptable. Open 30-day charge accounts, require balance to be paid in full each month. If assets to cover unpaid balance in addition to funds needed to close transaction, and are verified and submitted to AUS, the debt may be excluded. If sufficient assets are not verified, entire balance is included in ratios. 33 P age

35 MORTGAGE CREDIT REJECT When a Mortgage Credit Reject is in existence: Must be addressed on the LT and included in the loan file May not be deleted or disregarded Second Signature from Lender management is required If a Mortgage Credit Reject exists on a previous Case Number Assignment for the borrower, a credit alert/warning will be noted on the current case number assignment. The Mortgage Credit Reject must also be addressed as described above. NON-TRADITIONAL CREDIT REPORTS Non-traditional Mortgage Credit Reports are not allowed. CREDIT EVALUATION CAIVRS All Borrower s need to be checked through FHA s CAIVRs system The system checks for delinquent federal debt Any issues will need to be cleared FAM will access CAIVRS through the FHAC This is informational only to you as a sponsored broker Must be ordered on all borrowers Any delinquency must be cleared, or not eligible for FHA loan Should a delinquency or issued be uncovered by FAM you will be promptly notified NON-PURCHASING SPOUSE S CREDIT MUST BE PULLED SEPARATELY, IN COMMUNITY PROPERTY STATES Credit score is not to be considered, but Debts will be considered in payments/monthly obligation Negative credit that may impact title on subject property, may be required to be paid Verify previous/current housing obligations Follow AUS, or for manually underwritten loans the following applies: Rental verification: Credit report, management service or 12 months cancelled checks. Mortgage Verification Credit Report, Verification of Mortgage or 12 months cancelled checks. 34 P age

36 NOTE: If the borrower has privately held mortgage, FAM will require 12 months cancelled checks. NOTE: if the borrower is renting from a private party FAM will require 12 months cancelled checks. CONSUMER CREDIT COUNSELING Acceptable with 12 months payments made on time Need approval of CCC organization LATE PAYMENTS AND DELINQUENT CREDIT ITEMS Any mortgage tradeline, including lines of credit, during the most recent 12 months consisting of more than one 30 days late is considered. NOTE: If risk decision was accepted and the late payments and delinquent credit items appeared on the CR & considered by AUS, manual downgrading and further documentation are not required for manual underwrites, if any of the above items appeared on the CR, the loan is ineligible. MORTGAGE CREDIT REJECT Must be addressed on the LT May not be deleted or disregarded Second signature from FAM Management is required COLLECTIONS, DISPUTED ACCOUNTS & JUDGMENTS The following guidance for Collections, Disputed Accounts and Judgments must be followed for all case numbers assigned BEFORE October 15, 2013: DISPUTED TRADELINES If a credit report reveals that the borrower is disputing any credit accounts, Manual Downgrade of a TOTAL Scorecard Approve/Accept recommendation to a Manual Underwrite is not required if: 35 P age

37 The disputed account has a zero balance OR The disputed account is marked as "paid in full" or "resolved or The disputed account is both: less than $500 AND More than 24 months old, based on the date of the dispute COLLECTION ACCOUNTS AND JUDGMENTS Collections are not required to be paid off as a condition of the mortgage approval. Court-ordered judgments must be paid off. NOTE: The following guidance for Collections, Disputed Accounts and Judgments must be followed for all case numbers assigned ON OR AFTER October 15, COLLECTIONS Collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance, unless excluded by state law. All medical collections and charge off accounts are excluded from this guidance and do not require resolution. A capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000 is required. Capacity analysis includes any of the following actions: At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required). The borrower makes payment arrangements with the creditor. If the borrower has entered into a payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly payment is required. The monthly payment must be included in the borrower s debt-to-income ratio. If evidence of a payment arrangement is not available, the Underwriter must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower s debt-to-income ratio. Regardless of the Accept/Approve/Refer recommendation by TOTAL Mortgage Scorecard, the Underwriter must include the payment amount in the calculation of the borrower s debt-toincome ratio. 36 P age

38 DOCUMENTATION REQUIREMENTS FOR MANUAL UNDERWRITE The Underwriter must document reasons for approving a mortgage when the borrower has collection accounts. Regardless of the amount of outstanding collection accounts, the Underwriter must determine if the collection account was a result of: o The borrower s disregard for financial obligations OR The borrower s inability to manage debt OR Extenuating circumstances. o The borrower must provide a letter of explanation with supporting documentation for each outstanding collection account. The explanation and supporting documentation must be consistent with other credit information in the file. AUTOMATED (TOTAL) UNDERWRITE There are no documentation or letter of explanation requirements for loans with collection accounts run through TOTAL Mortgage Scorecard receiving an Accept/Approve despite the presence of collection accounts. These accounts have been already taken into consideration in the borrower s credit score. If TOTAL Mortgage Scorecard generates a Refer, the lender must manually underwrite the loan in accordance with the guidance above applicable to manually underwritten loans with collection accounts. DISPUTED ACCOUNTS Disputed derogatory credit accounts are defined as follows: Disputed charge-off accounts, Disputed collection accounts, and Disputed accounts with late payments in the last 24 months DISPUTED DEROGATORY ACCOUNTS INDICATED ON THE CREDIT REPORT If the credit report utilized by TOTAL Mortgage Scorecard indicates that the borrower is disputing derogatory credit accounts, the borrower must provide a letter of explanation and documentation supporting the basis of the dispute. The lender must analyze the documentation provided for consistency with other credit information in the file to determine if the derogatory credit account should be considered in the underwriting analysis. GUIDANCE FOR TOTAL MORTGAGE SCORECARD ACCEPT/APPROVE LOANS WITH DISPUTED ACCOUNTS Disputed Derogatory Credit Accounts greater than or equal to $1,000: If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is equal to or greater than $1,000, the mortgage application must be downgraded to a Refer and a DE underwriter is required to manually underwrite the loan as described above. Disputed Derogatory Credit Accounts less than $1,000: If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is less than $1,000, a downgrade is not required. 37 P age

39 Excluded Accounts: Disputed medical accounts are excluded from the $1,000 limit and do not require documentation, Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use are also excluded from the $1,000 limit. However, the lender must provide in the case binder a credit report, letter from the creditor, or other appropriate documentation to support the dispute, such as a police report disputing the fraudulent charges NON-DEROGATORY DISPUTED ACCOUNTS AND DISPUTED ACCOUNTS NOT INDICATED ON THE CREDIT REPORT Non-derogatory disputed accounts include the following types of accounts: Disputed accounts with zero balance, disputed accounts with late payments aged 24 months or greater, and Disputed accounts that are current and paid as agreed. If a borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the lender is not required to downgrade the application to a Refer. However, the lender must analyze the effect of the disputed accounts on the borrower s ability to repay the loan. If the dispute results in the borrower s monthly debt payments utilized in computing the debt-to-income ratio being less than the amount indicated on the credit report, the borrower must provide documentation of the lower payments. NON-DEROGATORY DISPUTED ACCOUNTS ARE EXCLUDED FROM THE $1,000 CUMULATIVE TOTAL Disputed derogatory credit accounts of a non-purchasing spouse in a community property state are not included in the cumulative balance for determining if the mortgage application is downgraded to a Refer. JUDGMENTS Judgments must be paid off. An exception to the payoff of a court ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments. The borrower must provide a copy of the agreement and evidence that payments were made on time in accordance with the agreement, and a minimum of three months of scheduled payments have been made prior to credit approval. Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months of payments. Furthermore, lenders are instructed to include the payment amount in the agreement in the calculation of the borrower s debt-to-income ratio. FHA requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the exception guidance for judgments above, unless excluded by state law. 38 P age

40 DOCUMENTATION REQUIREMENTS Manual Underwrite: The Underwriter must document reasons for approving a mortgage when the borrower has judgments. Regardless of the amount of outstanding judgments, the Underwriter must determine if the collection account or judgment was a result of: The borrower s disregard for financial obligations OR The borrower s inability to manage debt OR Extenuating circumstances The borrower must provide a letter of explanation with supporting documentation for each outstanding judgment. The explanation and supporting documentation must be consistent with other credit information in the file. Automated (TOTAL) Underwrite: If TOTAL Mortgage Scorecard generates a Refer, the lender must manually underwrite the loan in accordance with the guidance above applicable to manually underwritten loans with collection accounts and judgments. SHORT SALE Borrower is not eligible if short sale on previous residence was to: Take advantage of declining market conditions, and Purchase similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value. Borrower current at time of short sale is considered eligible for a new FHA mortgage if, from the date of application: All mortgage payments on the prior mortgage were made within the month due for the 12 months preceding the short sale AND Installment debt payments for the same time period were on time Borrower in default at time of short sale: Not eligible for 3 years from the date of the pre-foreclosure sale Exceptions may be made to the three years for isolated cases only Default was due to circumstances beyond the borrower s control AND Credit was satisfactory prior to the circumstances that led to default Loans with borrowers in default must be manually underwritten SEASONING REQUIREMENTS FOR SHORT SALE Seasoning requirements for short sales may only be waived if all lien holders have accepted the short sale as payment in full. There can be no deficiency balance nor can any portion of any lien be converted to consumer debt. If the short sale was greater than 3 years prior to the date of the application and AUS is an Accept, no need to manual downgrade. 39 P age

41 The credit report must reflect a zero balance on mortgage liens included in the short sale OR documentation must be obtained to support no further obligation. BANKRUPTCY Credit report must accurately reflect bankruptcy with the correct code, or the loan must be downgraded to a manual underwrite. The code is commonly a 7 (CoreLogic, Credco and Old Republic), but may vary depending on the credit vendor. If the loan does not meet manual guidelines, the report must be corrected and the loan re-run through the AUS. The 1003 Loan Application must reflect a yes response to the bankruptcy question if the borrower filed within the past 7 years. AUS Findings must be reviewed to determine if finding is present for the BK. If not present, but credit report and 1003 reflects the BK accurately, an assumption may be made the BK was correctly read by the AUS. However, when the finding is present, but the code is not accurate, it cannot be assumed that the BK was correctly read by the AUS. Chapter 7 must have been discharged for at least 2 years, if less, an exception may be made if over 12 months, and reason was due to documented extenuation circumstances. Chapter 13 acceptable with minimum 12 payments made on time, and court approval for new financing. High Balance Cash Out Transactions no BK in past 7 years. FORECLOSURE/DEED IN LIEU Generally, 3 years must have elapsed to qualify for a new home loan. FORECLOSURE High Balance Cash Out, no foreclosures in past 7 years Foreclosures with Accept from AUS, and greater than 3 years prior to the date of the loan application do not require manual downgrade. Credit Report must reflect zero balance on mortgage liens, OR documentation must be obtained to support no further obligation. Credit report must reflect the correct code for AUS to read foreclosure accurately, or the loan will require a manual downgrade. The code is generally an 8 (CoreLogic, Credco and Old Republic), but may vary depending on the credit vendor. If the loan does not meet manual underwriting guidelines, the credit report must be corrected and the loan must be re-run through AUS Loan Application must reflect a yes response to the foreclosure question. AUS Findings must be reviewed to determine if a finding is present for foreclosure. If not present, but the credit report and the 1003 reflect the foreclosure accurately, an assumption may be made that the foreclosure was correctly read by the AUS. In cases where the finding is present but the code is not accurate, it cannot be assumed that the foreclosure was correctly read by the AUS. 40 P age

42 INCOME CALCULATING THE BORROWER'S EFFECTIVE INCOME To be able to use a borrower s income in the ratio calculations, it must be considered effective, which means it is likely to continue for at least the first three years of the mortgage, and is income that is verifiable and stable. As with other loan programs, FHA insured loans will look back at the borrower s previous two-year employment and income history to determine whether their income is stable and likely to continue. Lenders are required to document the borrower s income and employment history, verify the accuracy of the amounts of income being reported, and determine if the income can be considered Effective Income in accordance with FHA underwriting guidelines. Generally, income may not be used in calculating the borrower s ratios if it comes from any source that cannot be verified, is not stable or will not continue. Only income that is legally derived, and if required, properly claimed on the borrower s tax returns can be considered Effective Income. EMPLOYMENT HISTORY FHA does not require a minimum length of time that a borrower must have held a position of employment; however, the lender must document and verify the borrower s employment for the most recent two full years. The borrower must explain any gaps in employment that span one month or more. If a borrower indicates he or she was in school or in the military during the previous two years, and therefore not working, the borrower must provide evidence supporting this such as college transcripts or discharge papers. FREQUENT JOB CHANGES Borrowers with frequent job changes generally may be demonstrating a lack of stability. If a borrower has changed jobs more than 3 times in the previous 12 months, or has changed lines of work, the lender must take additional steps to document that the borrower s income is stable. The lender must obtain: Transcripts of training and education demonstrating qualification for the new position, or Employment documentation evidencing continual increases in income and/or benefits Also, large swings or changes in income will also lead an underwriter to question the stability of the income. A borrower who changes jobs frequently within the same line of work, but 41 P age

43 continues to advance in income or benefits should not be penalized for those job changes, provided he or she has held steady employment without gaps. GAPS IN EMPLOYMENT For borrowers with a gap in employment of six months or longer, the borrower s current income can be used as Effective Income if it can be documented that the borrower has been at their current job for at least 6 months, and a two-year work history prior to the gap in employment can be documented. CALCULATING EFFECTIVE INCOME Salary and Hourly Income: In calculating Effective Income, the underwriter will use the base salary of the borrower, as long as the income has been and will likely continue to be earned consistently. The underwriter will also look at the prior two years of W-2 to analyze the stability of the current income. If earnings are similar or increasing at a normal rate, they will use the current base income as the borrower s Effective Income. When determining Effective Income of a borrower paid hourly, if the hours do not vary, the hourly rate will be used as Effective Income. If the hours vary, a two-year average of earnings will be used. If the hours vary and there is a documented increase in the borrower s pay rate, a 12-month average of hours at the current rate of pay is used to determine Effective Income. Overtime and Bonus Income: Overtime and Bonus income may be used to qualify if the borrower has received the income for the past two years and it is likely to continue. Overtime and Bonus income received over a period of between one and two years may be acceptable if it has been consistently earned for at least one year and it is reasonably likely to continue. In the event that Overtime or Bonus income has declined from the previous year by 20% or more, the current year s income must be used. The higher income from the previous year cannot be averaged in to boost the Overtime or Bonus income calculation. Part-Time Income: Part-time Employment refers to employment that is not the borrower s primary employment and is generally performed for less than 40 hours per week. Income from part time employment can be used as Effective Income if the borrower has worked the part time job uninterrupted for the past two years and the current position is likely to continue. The Underwriter will average the income over the previous two years. If there is a documentable increase in the borrower s rate of pay, the lender can use a 12- month average of hours at the current rate of pay. This means that if the borrower worked 20 hours a week for the first ten months of the year at a rate of $9.00 per hour, but received a pay raise to $11.00 two months ago and still works 20 hours, the income used to qualify would be the average hours worked (20) at $11.00 per hour. 42 P age

44 Seasonal Income: Seasonal employment is not year round, regardless of the number of hours per week the borrower works on the job. Income from seasonal employment can be counted as Effective Income, provided the borrower has worked in the same line of work for the previous two years and is reasonable likely to be rehired for the next season. Unemployment compensation can be included in Effective Income calculations for those with Effective income from seasonal employment. Effective Income for borrowers with seasonal employment is calculated by averaging the income over the previous two-year period. Disability Income: Disability Benefits can be received from the Social Security Administration, Department of Veterans Affairs, other public agencies, or a private disability insurance provider. Borrowers must provide documentation verifying the receipt of benefits from the provider. Disability income may be used as Effective Income, provided it will continue for the first three years of the mortgage. If the Award s documentation does not have a defined expiration date, the lender can consider the income as likely to continue. Under no circumstances may the lender inquire into or request documentation concerning the nature of the disability or the medical condition of the borrower. The lender must use the most recent amount of benefits received to calculate Effective Income. Alimony, Child Support or Maintenance Income: Alimony, Child Support and Maintenance Income refers to income received from a former spouse or partner or from a non-custodial parent of the borrower s minor dependent children. If listed in a final divorce decree, legal separation agreement or court order, and the borrower has received Alimony, Child Support or Maintenance Income consistently for the previous three months, the lender may use the current payment when calculating the borrower s Effective Income. If the borrower has a voluntary payment agreement (not court ordered or listed in a legal document), the borrower must provide documentation showing receipt of the payments consistently over the previous six months in order for the payment to be used in calculating Effective Income. If the borrower cannot document consistent receipt of the income for the most recent six months, an average of the income received over the previous two years can be used to calculate Effective Income. If the income has been received for less than two years, an average of the income received over the time of receipt can be used. 43 P age

45 Government Assistance Programs: Income received under a welfare program, unemployment income, workman's compensation, payments for foster children, etc., is acceptable subject to documentation from the paying agency provided the income is expected to continue at least three years. New Job: For those borrowers about to start a new job, if the borrower has a guaranteed, non-revocable contract for the new employment that will begin within 60 days of loan closing, the income is acceptable for qualifying purposes. The lender must also verify the borrower will have sufficient income or cash reserves to support the mortgage payments and any other obligations during the interim between loan closing and the start of employment. (This may be appropriate for situations such as a teacher whose contract begins with the new school year, or a physician beginning residency after the loan is scheduled to close.) Employment in Family-Owned Businesses: Borrowers employed by businesses owned by family members are required to provide additional income documentation. These borrowers must provide the normal verification of employment and pay stubs, and also provide evidence that he or she is not an owner of the business. This may include copies of the borrower's signed personal tax returns or a signed copy of the corporate tax return showing ownership percentages. Self-Employment Income: A borrower with a 25% or greater ownership interest in a business is considered self-employed for mortgage financing purposes. Income from selfemployment is considered Effective Income if the borrower has been self-employed for two years or more. For borrowers with less than two years self-employment, the following guidelines apply: 1. Between one and two years: Must have at least two years previous successful employment in that or a related occupation to be counted as Effective Income. 2. Less than one year: The income derived from self-employment may not be used as Effective Income. If income from Self-employment is derived from a business with a greater than 20% decline in income over the analysis period, that income may not be considered Effective Income unless it can be documented that the decline in income was due to extenuating circumstances, And That the Income Has Been Stable or Increasing for The Previous 12 Months. Commission Income: A borrower s income is considered to be commission when he or she is paid contingent upon the conducting of a business transaction or the performance of a service. Commission income can be used as Effective Income when it has been earned for at least one year in the same or a similar line of work and it is reasonable likely to continue. Commission income is calculated by using the lesser the average net commission income earned over the previous two years or the average net commission income earned over the 44 P age

46 previous one year. Unreimbursed business expenses are to be subtracted from the gross commission income, thereby reducing the Effective Income. Rental Income: FHA considers rental income to be income received or to be received from the subject property or other real estate holdings. Rent received for properties owned by the borrower can be used as income to qualify if the lender can document that the rental income is stable. Net rental income is added to the borrower s gross income the borrower s total mortgage payment is NOT reduced by the net subject property rental income. Net rental income is calculated by using the lesser of 75% of fair market rent reported by the appraiser, or 75% of the rent reflected in the lease or rental agreement. Gross rent is reduced by 25% to account for vacancies and maintenance to the property. If the borrower resides in one or more units of a multiple-unit property and charges rent to tenants of other units, that rent may be used for qualifying purposes. However, projected rent of only the additional units (not the owner-occupied unit) may be considered, and only after deducting the 25% of the gross rent to account for vacancies and maintenance to the property. Again, this may not be used as a direct offset to the mortgage payments. Net rental income is calculated by averaging the amounts listed on Schedule E of the borrower s tax returns. Depreciation, which is a paper loss and not an actual loss, may be added back in to the net income or loss. Positive net rental income is added to the borrower s Effective Income. Should there be a loss or negative net rental income, it is listed in the borrower s liability. If a borrower is vacating a property and intends to hold it as a rental property and buy another property, there are guidelines about counting the rental income as Effective Income for qualification. This income may be counted when: The borrower is relocating the new residence is located at least 100 miles from the previous residence If the borrower does not have a history of rental income since the last tax filing, they must have at least 25% equity in the property. This would be proven by an appraisal; however, this appraisal does NOT need to be completed by an FHA Appraiser. VERIFICATION OF INCOME Verification of Borrower s employment history for previous 2 years required. Gaps of over 30 days must be explained. If borrower has a gap of employment for more than 6 months in past 2 yrs. the loan must be manually downgraded (regardless of AUS findings). 45 P age

47 Salaried Borrowers: VOE covering 2-year period and most recent paystub; or 2 years W2 s, plus paystub, plus verbal VOE Back to Work Force, with 6 months on current job, and Prior 2-year work history (ex, someone who took time off to raise children) Part-Time Income: Part time, second job, seasonal, overtime and bonus income may be used for qualification if the income has been received for at least 2 years, and its continuance is likely. Income is averaged for 2 years. Commission Income: Commission income must have 2-year history, Document with 2 years tax returns (subtract 2106 expense) Self-Employment Income: Borrower with a 25 percent or greater ownership interest in a business is considered self-employed. Signed and dated individual tax returns (1040 s), plus all applicable schedules, for the most recent two years. Signed copies of federal business income tax returns for the last two years, with all applicable schedules, if the business is a corporation, an "S" corporation, or a partnership. A business showing a significant decline in income over the period analyzed is not acceptable and will not qualify for FHA financing. OTHER TYPES OF INCOME Alimony and Child Support AUS loans may follow automated underwriting and documentation requirements. Retirement, disability, social security income must have evidence that 3 years continuance is likely. Document with awards letters or other documentation. Disability income, public assistance income, military allowances and social security income are not subject to federal income taxes, and may be grossed up by 25%. Any Non Taxable Income may be grossed up by 25%. 46 P age

48 RENTAL INCOME Rental Income received for properties owned is acceptable if the borrower can document rental income is stable. The following documentation may be considered: Current lease or rental agreement if property obtained since last tax period ONLY. 85% of rental income is used to qualify borrower. Tax returns for previous 2 years. Boarder income is acceptable only if the parties are related by blood, marriage or law. 47 P age

49 and income is on filed previous year s tax returns. DEBT-TO-INCOME RATIO Automated Approval (DO/LP) ratios per findings (see DTI restrictions under high balance loan amount section) Manual underwrite o Maximum ratios are 31%/43% o Higher ratios may be acceptable only if the borrower has at least 3 very strong compensating factors and at underwriter s discretion Housing ratio is computed as PITI plus MI, HOA fees, ground rent, special assessments and payments on secondary financing to income. 48 P age

50 ASSETS Under most FHA programs, the borrower is required to make a minimum downpayment into the transaction of at least 3.5% of the lesser of the appraised value of the property or the sales price. Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement. Funds used to cover the required minimum downpayment, as well as closing costs and fees, must come from acceptable sources and must be verified and properly documented. Below are acceptable forms for assets. Remember, all assets must be seasoned and verifiable. BORROWER S OWN FUNDS Checking and Savings: Checking and Savings Accounts are acceptable. Must provide the following documentation: Most recent 2 months bank statements OR Computer generated VOD, with 2-month average balance AND One-month bank statement with prior and current balance. Remember, ANY recent large increase (non-payroll deposits) and new accounts must be explained and documented. Loans Secured by 401k: Loans that are secured by a personal 401k are acceptable to use to verify assets. Documentation must be provided to verify. Sale of Personal Assets, Etc.: Borrowers may elect to sell personal assets to obtain their downpayment or assets needed to qualify for an FHA loan. As in all other verification documentation, a bill of sale and proof of funds must be provided. GIFTS Gifts are acceptable from: Relatives, including gifts of equity, close friend with defined interest in borrower, borrower's employer or labor union, charitable organization, real estate agents who are relatives. Government agency or public entity program that provides homeownership assistance to low and moderate-income families or first-time homebuyers. Grant funds from HUD approved entity. 49 P age

51 FINANCED PROPERTIES NUMBER OF FINANCED PROPERTIES A borrower may have a maximum of 4 financed properties (commercial properties, vacant lots, multi-family properties and properties owned free and clear are not included in the limitation). The subject property is included in limitation. Properties that are owned by all borrowers on the transaction are included in the limitation. 50 P age

52 MORTGAGE INSURANCE Remember the FHA is not a mortgage lender but rather a mortgage insurer. And, like other insurers, the FHA collects regular payments known as premiums which fund the claims it pays to lenders. FHA mortgage insurance premiums are split into two parts. UFMIP The first part is the Upfront Mortgage Insurance Premium (UFMIP). Under the FHA's new plan, UFMIP is paid at the time of closing and is equal to 1.35% of the loan. This means that for every $100,000 in the loan size, the upfront mortgage insurance premium paid is $1,350. Most borrowers add their upfront MIP to their mortgaged amount because UFMIP does not count against loan-to-value (LTV). UFMIP is the FHA mortgage insurance premium that is paid at closing in the form of cash, or financed in the loan amount. Here are the detail regarding UFMIP. UFMIP must be 100% financed or 100% paid in cash, no partial financing Annual MIP is collected in monthly payments and calculated in ratios Upfront Premiums are refunded ONLY to borrowers refinancing to another FHA insured mortgage within a 3-year time period. The refund will be calculated in FHA connection when case number is ordered. Premiums vary, see next two pages for factors. Cancellation of MIP Refer to Mortgage Insurance Amounts grid for MIP cancellation info For case # assignments prior to June 3: The annual MIP may be cancelled by HUD once unpaid principal balance reaches 78% of the lower of the initial sales price or the appraised value based on the initial amortization schedule. FHA s calculation of the 78% threshold is based on the Loan amount, excluding the UPFIP Initial sales price or ori9ginal appraised value, whichever is less MIP cancellation of a Streamline refinance without an appraisal is determined based on the original appraised value provided by HUD 51 P age

53 NOTE: regardless of the computed loan-to-value ratio, all but 15-year term mortgages will have annual premiums for the greater of 5 years or until the amortized LTV reaches 78% (Mortgagee Letter 00-46) FHA ANNUAL MORTGAGE INSURANCE PREMIUM (MIP) The second type of FHA mortgage insurance is annual. Annual MIP rates vary based on the length of the loan, the amount borrowed, and the initial loan's LTV. The new FHA MIP schedule is effective January 26, 2015 and applied to all loans with FHA Case Numbers assigned on, or after, this date. Loans above $625,000 are subject to an additional 25 basis point (0.25%) annual FHA MIP increase. Again, these changes only affect the FHA annual mortgage insurance premiums for 2015, and only for loans greater than 15 years in length. The Upfront premium (which borrowers are also required to pay) will remain at its current level of 1.75% of the base loan amount. Additionally, the MIP rates for 15-year loans will remain unchanged. The FHA Annual MIP premium is the premium that will be collected in the borrower s monthly payment. It is in addition to the UFMIP. The charts below outline the factors for the annual premiums based on loan terms and LTVs. 52 P age

54 UFMIP AND THE LOAN ESTIMATE The up-front mortgage insurance premium amount will print in section B of the Loan Estimate under; Services Borrower Did Not Shop For and is included in the closing costs calculation. Then it is deducted from the Cash to Close, excluding the amount of the mortgage insurance premium, thus reducing the amount of Cash to Close. Please review the appropriate section below for Purchase and Refinance transactions. PURCHASE LOANS For Purchase loans or any loan when the Standard Form check box is selected in the Calculating Cash to Close section on the Loan Estimate screen. Up-front mortgage insurance is added as a cost and then deducted from the Cash to Close by reducing the down payment Down Payment/Funds from Borrower; thus excluding the upfront mortgage insurance premium from Estimated Cash to Close. 53 P age

55 If the Total Loan Amount is higher than the sales price, then the up-front mortgage insurance premium is added as a cost and deducted from the cash to close by including the premium amount in Closing Cost Financed, thus excluding the up-front mortgage insurance premium from Estimated Cash to Close. Loan Estimate Purchase Example Page One 54 P age

56 Loan Estimate Purchase Example Page Two REFINANCE For refinance loans when the Alternative Form check box is selected in the Calculating Cash to Close section on the Loan Estimate screen. When the Alternative Form check box is selected on Loan Estimate screen for a refinance loan, the up-front mortgage insurance is included in the Total Loan Amount and deducted from Total Closing Costs (J); thus excluding the premium amount from the Estimated Cash to Close. 55 P age

57 Loan Estimate Refinance Example Page One 56 P age

58 Loan Estimate Refinance Example Page One 57 P age

59 CALCULATING AN FHA MORTGAGE AMOUNT AND MONTHLY PAYMENT As with other loan programs, the FHA loan amount and monthly payment will be calculated correctly when accurate information is entered into your loan origination software. Understanding the calculations and having the ability to calculate the payments manually is a key element of being an MLO. In the following example, we are going to calculate a Base Loan Amount, a Total Loan Amount, and a PITI payment. Step 1: Finding the Base Loan Amount The Base Loan Amount is simply the Loan Amount excluding the UFMIP SALES PRICE OR APPRAISED VALUE - DOWN PAYMENT ($) = BASE LOAN AMOUNT Step 2: Calculating the Monthly MIP BASE LOAN AMOUNT X MIP FACTOR Annual MIP/12 = Monthly MIP Step 3: Calculating the UFMIP to get the Total Loan Amount The Total Loan Amount is the Loan Amount including the financed UFMIP BASE LOAN AMOUNT X UFMIP FACTOR (1.75%) = UFMIP $ AMOUNT BASE LOAN AMOUNT + UFMIP $ AMOUNT = TOTAL LOAN AMOUNT 58 P age

60 Step 4: Calculating Monthly Payment TOTAL LOAN AMOUNT / 1000 X FACTOR for INTEREST RATE = MONTHLY P & I + MONTHLY MIP + MONTHLY TAXES + MONTHLY INSURANCE = FHA PITI PAYMENT 59 P age

61 PROPERTY FHA PROPERTY ELIGIBILITY FHA insured financing is available on single family housing, modular homes, 2-4 unit properties and FHA approved Condominiums or units in a Planned Unit Development. FHA insured financing is not available on Co-ops (a type of ownership in which the shares in a building are transferred instead of ownership to a property), properties that don't meet HUD's minimum property standards, or properties with deed restrictions that contain a first right of refusal. Eligible Properties Single Family Residence (Detached or Attached) Modular Homes 2-4 Units Condos* Ineligible Properties Properties not meeting HUD's minimum property standards Co-Ops Properties with deed restrictions that limit transferability of title or contain a right of NOTE: All condos must be FHA approved. CONDOS At this time, Condo projects must be approved projects, and will either appear under the HRAP/DELRAP (HUD Review Approval Process) DELRAP (DE Lender Review Approval Process) o DE (Direct Endorsement) lender reviews the Condo Documents o Not available through FAM at present time Pre-HRAP/DELRAP Project Approvals 60 P age

62 o These are any project approvals approved prior to the inception of the HRAP/DELRAP process (December 7 th 2009) HO-6 or Walls In insurance is required on all Condos $2 Million Liability per occurrence insurance required CHECKING FOR FHA APPROVED CONDOS You must search on HUD s website to verify that a condo is a HUD approved Condo. You can search on HUD s website at this location: STEP ONE: Search for a HRAP/DELRAP Condo by inputting MINIMAL DATA State City Status: Approved STEP TWO: Once you have verified that the condo is a HUD approved Condo you will print out the approval page and submit it with your package. 61 P age

63 Checking Pre-HRAP/DELRAP Review the results and search for possible matches **TIP** If the Condo name was missing from the initial approval the Tract Number will be listed as Condo Name. You can find this in the legal description for your property. 62 P age

64 INELIGIBLE PROPERTIES Superfund Sites: A Superfund site is an uncontrolled or abandoned place where hazardous waste is located, possibly affecting local ecosystems or people. Properties located within a Superfund Site are ineligible if the appraiser indicates any of the following: OR The Superfund Site has an adverse effect on marketability The site is hazardous and/or presents health or safety concerns Unacceptable Properties: Condo projects with pending litigation Condominiums with less than 400 square feet Cooperatives Dome or Geothermal homes Houseboats Lava Zones 1 & 2 (Hawaii) Leasehold condos Manufactured housing Marijuana production: Any property where marijuana is grown or processed, regardless of quantity or state law, is unacceptable. Mobile homes Multi-family dwelling (2 units or more) Condos or PUDs Multi-family dwelling with more than 4 units New or Proposed PUD projects created by conversion Properties in less than average condition Properties with agricultural use. No working farms, no hobby farms, ranches, orchards and/or commercial operations. No Schedule F income or loss for subject property. Properties located in a Superfund Site (if appraiser indicates an adverse effect on marketability or health/safety concerns) Properties with Chinese drywall Properties with items that affect basic habitability and/or health and safety issues. Security bars: there must be an emergency release latch for at least one window in each room where the security bars are located Properties without a permanent heating source Hawaii properties without a heating source: A lack of heat source must be common to the area, the appraiser must provide three comparable sales without a permanent heating source with same elevation, the subject property must be suitable for yearround occupancy. Properties without a full kitchen (working sink, working stove & cabinets) or full bath facilities are not eligible. Properties without full utilities installed to meet all local health and safety standards Unimproved land Unique properties for which marketability cannot be determined 63 P age

65 APPRAISAL REQUIREMENTS FHA GENERAL APPRAISAL GUIDELINES Must be completed by an FHA approved appraiser CASE NUMBER Must be ordered PRIOR to appraisal being ordered Termite Reports/Clearances not mandatory, but may be required if on contract or with underwriter s discretion Well/Septic not mandatory Appraisals are valid up to 120 days. If appraisal expires, the case # must be canceled and a new case # assigned Appraisals may not be reused after the mortgage for which the appraisal was ordered has closed. An operating income stmt must be provided for all 2-4 unit properties The appraisal must state that the property is average or above condition Appraiser must follow HUD standards Mechanical Certifications must be made by appraiser, including; electrical, plumbing and heating certifications Head and Shoulder inspections must be made on all attics FHA Case number must be on all pages of appraisal NOTE: Need at least 2 comps dated within 90 days of appraisal, and two current pending sales or active listings MC addendum required. FHA APPROVED APPRAISER FHA requires an appraisal to be done by a qualified, competent and knowledgeable Appraiser. A list of qualified Appraisers is maintained on the FHA Appraiser Roster, available through FHA Connection. Only Appraisers on the roster may be selected by the mortgagee to conduct an appraisal for FHA insured financing. In order to be listed on the roster, an Appraiser must be either a state-certified residential appraiser or a state-certified general Appraiser. Once an FHA appraisal has been completed, that appraisal stands with that property for 6 months. Even if a borrower does not complete the transaction, the completed appraisal and its value will be assigned to any future FHA borrower for a period of 6 months. 64 P age

66 The value listed on an appraisal must be reassessed if the loan does not close within 120 days. This is done by the FHA Appraiser, who will provide the lender with a re-certification of value. FHA AMENDATORY CLAUSE FHA requires that the buyer of a property receive a clause in their sales contract that contains the following language: It is expressly agreed that notwithstanding any other provisions of this contract, the purchase shall not be obligated to complete the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise, unless the purchaser has been given in accordance with HUD/FHA or VA requirements, a written statement by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $. The purchaser shall have the privilege and option of proceeding with consummation of the contract without regard to the amount of the appraised valuation. The appraised valuation is arrived at to determine the maximum mortgage the Department of Housing and Urban Development will insure. HUD does not warrant the value or condition of the property. The purchaser should satisfy himself/herself that the price and condition of the property are acceptable. As per FHA amendatory language, the property MUST appraise at a value equal to or greater than the sales price. The buyer cannot be forced to pay more than the appraised value of the home, and FHA will only insure the loan based on the lower of the sales price or appraised value. The buyer has the option to negate the sales contract if the appraised value is lower than the agreed upon price, and will be entitled to a full refund of their earnest money deposit. VERIFYING HUD S MINIMUM PROPERTY STANDARDS/MINIMUM PROPERTY REQUIREMENTS In addition to assigning a market value to a property, FHA Appraisers are tasked with making sure the property meets FHA's minimum property standards. They will review the property for potential health and safety issues such as peeling paint, rotting wood, missing handrails, etc. The list below outlines additional requirements for FHA appraisals. Must note in appraisal report which utilities are on at the time of inspection. All utilities must be on at the time of the appraisal inspection. If all utilities are not on at time of appraisal the appraisal will not be acceptable regardless of value. The Appraiser must observe and test all appliances and other electrical and plumbing functions to verify that they are in proper working order. Must open and close all built-in cabinets/drawers to ensure that they are in proper working order. The Appraiser must examine the roof and any area unable to be seen must be inspected from the underside of the unobservable area. 65 P age

67 The Appraiser must note and report all soil conditions, grade and drainage. Make a note of all utility easements and whether the subject property lies inside of one. All common area of condos and multi-family dwellings must be photographed. Examples include hallways, laundry rooms, lobby/foyer, storage areas and rec facilities All comparable property photos must be shot at an angle to include the side of the comparable. The Appraiser must consider all three approaches to value. If the Appraiser finds the property does not meet HUD s Property Acceptability Criteria, he or she will note all repairs necessary to make the property comply with HUD s Property Acceptability Criteria. Those repairs will need to be completed and re-inspected prior to the loan going to settlement. It is important to note that although an FHA Appraiser may call for repairs to be completed, FHA does not offer the borrower any warranty or guarantee about the value or condition of the property. Home buyers should still be encouraged to get a private home inspection. RE-INSPECTION AND REVIEW REQUIREMENTS FOR DISASTER AREAS Lender requires additional property re-inspection and review requirements on loans secured by properties located in disaster areas. Any adverse event (including, but not limited to: fire, earthquake, landslide, hurricane, flood, tornado, thunderstorm, etc.) that may have impacted a subject property must be evaluated in terms of its effect on the subject s habitability, marketability and value. It is important to note that not all disaster areas as determined by Lender are qualified as FEMA disaster declarations. Lender will lend on properties that are located in declared disaster areas provided the if the following requirements are adhered to AND DOCUMENTED IN THE LOAN FILE. VALUATIONS PERFORMED ON OR BEFORE THE DISASTER DATE One of the following documents must be provided: Appraisal Update The document must address the specific disaster and indicate any apparent damage. If subject property has sustained more than minor cosmetic damage, a new interior appraisal is required and all damage must have been repaired prior to funding. A 1004D (Completion of Repairs) is to be completed with photos prior to funding. If there is no damage, the appraiser/inspector must provide the following commentary: Property is free from damage and the disaster had no effect on value or marketability. 66 P age

68 INSPECTION OF PROPERTY CONDITION An Inspection of the property condition may not be completed in lieu of an Appraisal Update. 2075/2070 STREAMLINED INSPECTION In the event of multiple adverse events (e.g. one hurricane followed by another) the Appraisal Update, Inspection of Property Condition or 2075/2070, must occur after the most recent event. VALUATIONS PERFORMED AFTER THE DISASTER DATE An interior inspection is required in all Declared Disaster areas for one year from the date of the disaster declaration. All comparables should be post-disaster. However, if sufficient comparables are not available, then the appraiser must provide current photos (post disaster) of the subject and comparables. (MLS photos or photos used for previous appraisals are unacceptable). If the appraisal indicates damage: The extent of the damage must be addressed. Completion of repairs is required evidenced by Form 1004D, Appraisal Update and/or Completion Report, with photos, prior to funding. If the appraisal indicates no damage: The appraiser/inspector must provide the following commentary: Property is free from damage and the disaster had no effect on value or marketability. FHA Streamline loans without an Appraisal Lender requires an exterior inspection to be performed by a Licensed Property Inspector OR a FHA-approved appraiser to ensure that the property has not been damaged. Non-Standard Appraisals (Property Valuation Update, 1075, 2055, 2075 and 2095) Not allowed until one year after the date of the disaster declaration. 67 P age

69 HIGH BALANCE LOANS Other than FHA High Balance guideline overlays listed below, all FHA High Balance loans must meet standard Lender FHA guidelines. CREDIT High Balance Cash-Out transactions: Foreclosure or Bankruptcy is not allowed within the most recent 7 years. CREDIT SCORE FHA High Balance Cash-Out transactions require a minimum 660 credit score. All other standard credit score requirements apply. DTI 50% maximum DTI in any of the following situations: Credit score is < 680 OR Subordinate financing exists 55% maximum DTI in the following situation: Credit score is >=680 AND No subordinate financing exists APPRAISAL REQUIREMENTS Loan Amounts <= $1,000,000 One Full FHA Appraisal Loan Amounts > $1,000,000 <= $2,000,000 One Full FHA Appraisal by a Certified Appraiser A Desk Review with data verification or Enhanced Desk Review with data certification The lesser of the appraised value, the Review Value or the Sales Price will be used to determine the LTV/CLTV of the transaction Loan Amounts > $2,000,000 Loan amounts > $2mil not eligible 68 P age

70 OTHER FHA LOAN PROGRAMS ENERGY EFFICIENT MORTGAGE (EEM) The borrower may upgrade their home by installing energy efficient improvements and incorporate the cost into the mortgage. 100% of improvements may be financed into the loan. EEM s are allowed on purchase and regular rate and term refinances only and are not allowed on cash out refinances or streamlines. EEM General Guidelines: Central Heat and Air, dual-pane windows, attic/wall insulation, water heater, sunscreens and more Existing 1-2 unit properties, purchase or refinance Maximum amount of EEM is lesser of 5% of The value of the property, or 115% of the median area price of a single family dwelling, or 150% of conforming Freddie Mac limit Weatherization may be added in addition to EEM improvements No appraisal requirement of improvements Must have Home Energy Ratings System (HERS) report, the cost may be financed in the loan. 69 P age

71 CASE NUMBERS, CAIVRS AND LDP AND GSA REQUIREMENTS FHA CASE NUMBER Each FHA loan is assigned an individual 10-digit loan number, called a Case Number. As a sponsored broker you will not order your own FHA Case Number. Finance of America(FAM) will obtain this through the FHAC (FHA Connection). NOTE: As a sponsored broker you will not have access to the FHAC and you will not order the FHA Case Number. CAIVRS CAIVRS stands for Credit Alert Interactive Voice Response System. CAIVRS is a database created by HUD that lists people who are delinquent or in default on federal debt. There are six (6) governmental agencies that report delinquencies/defaults to this federal computerized tracking system (Dept. of Ed., FHA, VA Education, GI (mortgage) Loans, Rural Housing Admin., Small Business Admin., and the Dept. of Justice (Civil Levies). Any reported default from any of these 6 agencies will be listed on the search report. Included in the search results will be an agency phone number listed for further action and resolution on the part of the borrower. The lender is responsible for obtaining the final resolution of this claim from the borrower prior to closing. The borrower must pay off the delinquency or make satisfactory repayment arrangements with the agency reporting the default. In many cases the borrower will be unable to quickly resolve the reported issue, which will delay or terminate the transaction. CAIVRs should be on the Case Number Printout. Finance of America will access CAIVRS through the FHAC As a sponsored broker you will not have access to the FHAC. This is informational only to you as a sponsored broker Must be ordered on all borrowers Any delinquency must be cleared, or not eligible for FHA loan 70 P age

72 Should a delinquency or issued be uncovered by FAM you will be promptly notified LIMITED DENIAL OF PARTICIPATION (LDP) Limited Denial of Participation, also called LDP, is a compliance sanction. It is usually imposed by a HUD Field Office, and is effective only within that geographic area and typically for only one year. Essentially, the LDP list includes individuals being denied participation in HUD programs, usually due to a rule or guideline violation. All parties to a transaction, including real estate agents, buyers, and sellers, will be searched to ensure they have not been sanctioned for any violations. If any party appears on the lists, the loan is not eligible for FHA insurance and must be denied. GENERAL SERVICES ADMINISTRATION (GSA) (Excluded Parties List Service, General Services Admin) Database can be accessed at Use FAM LDP/GSA Workflow and Participants List 71 P age

73 UNDERWRITING FHA UNDERWRITING OPTIONS Lenders use FHA s Technology Open to Approved Lenders (TOTAL) Mortgage Scorecard, which is a tool to assist the lender in managing its workflow and accelerating the mortgage insurance endorsement process. TOTAL Mortgage Scorecard works in combination with various automated underwriting systems, but does not take the place of the lender s responsible consideration of risk and credit worthiness. TOTAL Mortgage Scorecard evaluates the overall creditworthiness of the applicants based on a number of credit variables and determines an associated risk level of a loan s eligibility for insurance by FHA. FHA loans can be submitted to the AUS through TOTAL Mortgage Scorecard. All information contained in a loan file will be entered into TOTAL Mortgage Scorecard and submitted to the AUS. The computer will weigh the strengths and weaknesses of the loan file to provide a Feedback Certificate/Finding Report, which documents results of the credit risk evaluation and identifies the credit report utilized for the scoring event. The use of TOTAL Mortgage Scorecard doesn t lessen the lender s responsibility to underwrite files based on FHA standards. When a loan is approved this way, the DE underwriter (Direct Endorsement approved by FHA to underwrite to their guidelines) will review the file to ensure that the information entered into the AUS matches the information in the file, and that the appropriate supporting documentation is included in the file prior to the loan closing. The underwriter must still underwrite all appraisals according to standard FHA requirements. If the AUS issues a Refer or a Refer/Eligible loan decision, it means that the AUS is unable to render a decision on the file, and that a DE underwriter will need to look at the file with a human eye to determine if the loan meets FHA guidelines and can be approved. The underwriter will then fully review this file, including all calculations and documentation; this is called manual underwriting. LAYERED RISK (TOTAL AND MANUAL) If 3 of the following risk factors are present, management review and approval is required. If 4 of the following risk factors are present, the loan is not eligible. Unstable work history Payment shock that exceeds 150% Less than 3 tradelines that have been active within the past 3 years for a minimum of 24-month duration Any late payments in the last 12 months High DTI Total gift funds 72 P age

74 ABILITY TO REPAY (ATR) FORM An Ability to Repay (ATR) form must be completed by a Lender Underwriter and retained in every loan file. 73 P age

75 LOAN SUBMISSION STEPS Brokering FHA loans has a different submission process than conforming loans. FAM is here to help you and make certain that your loans are submitted correctly. Each FHA loan is assigned an individual 10-digit loan number, called a Case Number. As a sponsored broker you will not order your own FHA Case Number. Finance of America(FAM) will obtain this through the FHAC (FHA Connection). NOTE: As a sponsored broker you will not have access to the FHAC and you will not order the FHA Case Number. NOTE: All FHA loans must have a case number assignment to be insured. SUBMITTING A FHA LOAN Step One: Step Two: Log into and Submit your online request for an FHA case number by clicking on Order FAM FHA Case Number. Complete the information to order your FHA Case number. Enter your information under Requestor Name, and Phone. Enter the Property Address and the Borrower(s) and information. Enter your NMLS number under Originator ID. If the transaction is a refinance, enter the existing FHA Case number. (see details under submitting an FHA Streamline in the next section.) Step Three: Once you have submitted your request, FAM will order the FHA Case Number through FHAC. Case numbers are ordered in FHA Connection by Finance of America Case numbers are assigned to the subject property Case number must be reflected on all HUD documents Case number printout is required with loan submission Streamline Refinances need previously assigned case number Must be ordered PRIOR to ordering an FHA Appraisal Step Four: Step Five: FAM will you the new case number and Refinance Authorization (if applicable) AVM Requests may be made at this time. Use the Lender Notes to state you need the AVM ordered. 74 P age

76 Step Six: Order LDP and GSA All parties to the transaction must be cleared in both databases to check for individuals that have been denied participation in FHA s insurance programs OR other government contracts or programs because of wrong doing LDP (Limited Denial of Participation Database can be accessed at cipation GSA (Government Services Administration) (ELPS - Excluded Parties List Service) Database can be accessed at NOTE: Use FAM LDP/GSA Workflow and Participants Form SUBMITTING A STREAMLINE FHA REFINANCE Step One: Step Two: Follow the steps listed above for submitting a FHA Loan and order a new case number on our website, will need old case number, select streamline refinance. Need LDP and GSA run for all parties to transaction, include in submission. Step Three: CAIVRS NOT required on streamlines. Step Four: Minimum Credit Score is 640. Step Five: Step Six: Credit Report Score Only, Mortgage Rating Only Report. Mortgage lates in past 12 months on subject or ANY other property is unacceptable. Please submit credentials for THIS type of report in order for FAM to import it properly. The incorrect credentials may result in a FULL report application to be complete in its entirety, No INCOME is to be listed. Step Seven: Income/Employment documentation: Salaried all employment info on 1003, including phone number 75 P age

77 Self Employed Business license, CPA letter or other 3rd party verification of business. (411.com or similar does not meet requirement) DO NOT submit tax returns Other income types, see FAM guidelines (retirement, SSI, etc.) Step Eight: FAM will perform Lender Certification for Employment/Income NOTE: Do not run AUS Manual underwrite only. STREAMLINE DOCUMENTATION Assets Need 2 months bank statements, if assets are needed to close Copy of Hazard Insurance is required at submission Unused MIP refinance authorization is calculated in FHA Connection No cash may be taken out $500 max at closing Subordinate financing may remain in place subject to re-subordination, MAX CLTV is 100% New individuals may be added to title without credit review Removing individuals from title - original loan must credit qualify, with employment, income and assets Partial Claims, modified loans, are NOT allowed in Streamline Program Tax Impounds: Use amount shown on Prelim or proof from county of new tax amount. Refer to FHA MIP / Case Number Chart for appropriate MIP 76 P age

78 ORDERING YOUR CASE NUMBER Log on to 1. Click on Order FAM FHA Case Number 77 P age

79 2. Complete the FHA Case Number Assignment Form 78 P age

80 3. Select the ADP Automated Data Processing Code You will need to complete the ADP Code when ordering your FHA Case Number. Click on the drop down and select if the loan is a fixed or arm and if it is a condo fixed or condo arm. 79 P age

81 PROGRAM ID SELECT DEFAULT SETTING You will need to complete the Program ID when ordering your FHA Case Number. Click on the drop down and select the default setting or P age

82 NOTE: When ordering a new case number on the FAM website you will need to select Appraisal Required on all Streamline Refinances with FAM. 81 P age

83 FORMS FORMS WHO SIGNS WHAT AND WHEN 82 P age

84 THE LOAN TRANSMITTAL SUMMARY LT Page 1 (Borrower and Property Information) The type of FHA loan is detailed in the SOA section of the Loan Transmittal Summary and is 203B in the case of an FHA standard loan. 203B Page 1 (Mortgage Information) The Mortgage Information section of the Loan Transmittal Summary includes information on the type of loan, the loan information with and without the UFMIP, purpose, secondary financing and gift funds, including source of funds. Accuracy is very important when completing this form. 83 P age

85 Page 1 (Signatures) 9/The FHA (DE) Underwriter will sign and date the LT and include their CHUMS ID Number. Page 3 Sponsored Originators Page 3 of the 92900a is to be used by sponsored originators. This means that the broker must complete under Sponsored Originations their company name, tax ID and Company NMLS number. 84 P age

86 HUD/VA ADDENDUM The HUD/VA Addendum to the Uniform Residential Loan Application is required on all FHA loans and must include FAM information as listed below. Effective August 1, 2016 Form HUD A (08/01/2016) VA Form a (06/2014) is required for all FHA Case Numbers issued after 8/1/2016. Link to revised HUD A HUD/VA Addendum to Uniform Residential Loan Application: Finance of America Mortgage 1390 Willow Pass Rd, Suite #560 Concord, CA P age

87 FHA SPECIFIC DISCLOSURES Important Notice to Homebuyer (HUD B 11/2014) The lender must provide the borrower with a copy of form HUD B, Important Notice to Homebuyers, signed by the borrower and provide the borrower with a copy to keep for the borrower s records when the borrower applies for the mortgage. Page two of the HUD B contains updated language informing borrowers that mortgagees may only charge interest through the date the mortgage is paid in full as well as information on Monthly Insurance Premiums. 86 P age

88 FORM HUD CN - FOR YOUR PROTECTION: GET A HOME INSPECTION The ''For Your Protection: Get a Home Inspection'' form (HUD CN) is an FHA specific form and conveys important information to prospective homebuyers about the importance of getting a home inspection. Required at First Contact: Lenders are required to provide this form to prospective homebuyers at first contact, be it pre-qualification, pre-approval, or at the time of initial loan application. In any case, the lender must provide the form to the prospective homebuyer no later than at the time of initial loan application. Requirements: The form must be provided on all transactions that will involve FHA mortgage insurance on an existing property. (The form need not be provided in transactions involving proposed or new construction.) No Signature Required: The form does not need to be signed by the borrower and should not be included in the case binder submitted for insurance endorsement. 87 P age

89 Informed Consumer Choice Disclosure Lenders must provide a prospective FHA borrower with an informed consumer choice disclosure notice if, in the lenders judgment, the prospective FHA borrower may qualify for similar conventional mortgage products offered by the lender. The lender should base this judgment on their initial assessment of the prospective FHA borrower s eligibility for a conventional mortgage product. If a lender is unsure about a prospective FHA borrower s eligibility for a conventional mortgage product, the lender should provide the prospective FHA borrower with an informed consumer choice disclosure notice. FAM requires the Informed Consumer Choice Disclosure on all FHA products. 88 P age

90 AMENDATORY CLAUSE/REAL ESTATE CERTIFICATION The FHA Amendatory Clause/Real Estate Certification Form provides verbiage that amends any aspect of the sales contract that may require a buyer to forfeit earnest money, pay a penalty, or contribute additional funds to close in the event a property fails to appraise at the contract sales price. Below is an example of the top portion of the disclosure which details the names of the buyers, sellers, property address etc. Top of Amendatory Clause/Real Estate Certification The bottom of the disclosure is the signature section of the disclosure. 89 P age

91 TOP OF AMENDATORY CLAUSE/REAL ESTATE CERTIFICATION 90 P age

92 NOTICE TO HOMEOWNER (ASSUMPTION OF HUD/FHA MORTGAGES) This disclosure must be provided by the lender at application and must be signed by the borrower. The disclosure explains important information regarding appraisals, mortgage insurance and assumptions. 91 P age

93 ARM DISCLOSURE (IF APPLICABLE) 92 P age

94 CHECKLISTS FHA CHECKLIST FAM Submission Form Case Number Assignment Printout LT Loan Transmittal Net Tangible Benefit Worksheet 1003 Initial and typed, all sections to be completed HUD A, pages 1 and 2 completed and signed by borrower LDP/GSA Worksheet and Printouts for all parties verified Credit Report, score only (min 640), plus mortgage rating no mortgage lates Copy of Social Security Card and/or SS Authorization Form signed by borrower Hazard Insurance, coverage at least at or above loan amount Copy of Original Note, reflecting old case number Purchase agreement Secondary financing documentation, if applicable (Max CLTV 125%) Employment/Income documentation, if applicable Asset documentation if needed to close, 2 months bank statements, and source of all non-payroll deposits Preliminary Title Report Appraisal Loan Estimate Borrower s Signed Credit Auth Important Notice to Homebuyer FHA Disclosure/Notice to Homeowner/Assumption Notice Informed Consumer Choice Disclosure ARM Disclosure if applicable 93 P age