Correspondent FHA Miscellaneous Updates and Clarifications Before and After Matrix Effective May 6, 2013

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1 Identity-of- Interest Transactions Identity-of-Interest Transactions Identity-of-Interest Identity-of-interest is defined as a transaction between family members, business partners or other business affiliates. Identity-of-interest transactions are restricted to a maximum LTV of 85%. However, maximum financing above 85% is permissible under the following circumstances: family member purchasing another family member s principal residence, employee of builder purchasing home from builder, current tenant purchasing home she has rented for at least six (6) months predating the sales contract (with lease or other written evidence), or a sale by corporations purchasing an employee s home and reselling to another employee. Identity-of-Interest Transactions Identity-of-Interest An identity-of-interest transaction is defined as a sale between parties with family or business relationships. Identity-of-interest transactions are restricted to a maximum LTV of 85%. However, maximum financing above 85% is permissible under the following circumstances: family member purchase: A family member purchases another family member s home as a principal residence. If the property is sold from one family member to another and is the seller s investment property, the maximum mortgage is the lesser of: 85% of the appraised value, or the appropriate LTV factor applied to the sales price, plus, or minus required adjustments. Notes: The 85% limit may be waived if the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy. A family member is defined as a borrower s child (son, stepson, daughter, stepdaughter), parent, stepparent, grandparent, step grandparent, spouse, brother, stepbrother, sister, stepsister, legally adopted son or daughter, including a child who is placed with the borrower an authorized agency for legal adoption, and foster child. A builder s employee purchase An employee of a builder purchases one of the builder s new homes or models as a principal residence. A tenant purchase A current tenant, including a family member tenant, purchases a property they have rented for at least six (6) months immediately predating the sales contract (with a lease or other written evidence to verify occupancy), or Corporate transfer: A corporation transfers an employee to another location, or A corporation purchasing an employee s home and reselling the home to another employee. Page 1 of 8

2 Student Loans in Forbearance No current section Student Loans in Forbearance If a student loan is deferred and repayment is scheduled to begin within twelve months from the date of the mortgage loan closing, the anticipated monthly obligation must be included in the debt ratio, unless written evidence that the debt will be deferred to a period outside this time-frame, is provided. Notes: Student loans in forbearance are technically in default and must always be included in the borrower s debt ratios. Student loans cannot be used towards the transaction as either income or assets. If the RMCR or In-file Credit Report does not reflect a monthly payment amount, a copy of the Note or a letter from the creditor must be used to determine the monthly payment amount. FHA Right of First Refusal for PUDs (PUD Review not Required on FHA Transactions) Planned Unit Developments (PUDs) PUDs do not require pre-approval by FHA or the underwriter Note: PUDs with Rights of First Refusal are not eligible for FHA financing, per SunTrust Mortgage guidelines. A PUD is defined as a mixed-use residential development of single-family dwellings in conjunction with rental, condominium, cooperative or town house properties. A residential development should be processed as a PUD if it has the following minimum characteristics: a homeowner association that holds either title in fee or a lease of prescribed length on the common area, mandatory membership of all unit owners (or units) in the association, the right of all unit owners to participate by vote in the operation of the association, lien supported assessment of the members to meet the association s budgeted operating costs (special assessments may be handled differently), and the appraisal for a detached PUD must be ordered as a detached PUD, not as a single family residence. Planned Unit Developments (PUDs) PUDs do not require pre-approval by FHA or the underwriter A PUD is defined as a mixed-use residential development of single-family dwellings in conjunction with rental, condominium, cooperative or town house properties. A residential development should be processed as a PUD if it has the following minimum characteristics: a homeowner association that holds either title in fee or a lease of prescribed length on the common area, mandatory membership of all unit owners (or units) in the association, the right of all unit owners to participate by vote in the operation of the association, and lien supported assessment of the members to meet the association s budgeted operating costs (special assessments may be handled differently). The appraisal for a detached PUD must be ordered as a detached PUD, not as a single-family residence. Page 2 of 8

3 Conversion of Existing Primary Residence to Rental Property Conversion of Existing Primary Residence This guidance applies solely to a principal residence being vacated in favor of another principal residence. The housing payments for the current primary residence and the new proposed primary residence must be included in the debt to income calculation. Underwriters are not permitted to include rental income from a primary residence being vacated in favor of another principal residence unless one of the following applies: the homebuyer has a 75% LTV/TLTV or less, as determined by a current (dated within sixty [60] days of the Note date for the new transaction) residential appraisal (may be exterior-only) on the current primary residence, OR Conversion of Existing Primary Residence When a borrower vacates a principal residence in favor of another principal residence, the rental income, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA HOC, may be considered in the underwriting analysis, under the circumstances listed below. The housing payments for the current primary residence and the new proposed primary residence must be included in the debt to income calculation. Underwriters are not permitted to include rental income from a primary residence being vacated in favor of another principal residence unless one of the following applies: the homebuyer has a 75% LTV/TLTV or less, as determined by a current (dated within sixty [60] days of the Note date for the new transaction) residential appraisal (may be exterior-only) on the current primary residence, OR Page 3 of 8

4 Lender Required Documents/Properties Built in Accordance with ML Lender Required Documents/Properties Built in Accordance with ML Elimination of Master Appraisal Report (MAR) Complete appraisal package or Master Appraisal Report (MAR) is always required, including the information listed below, if the property is under construction or existing. Verification that the property conforms with plans and specs. Notation that there are no health and safety issues. Clear photographs of each diagonally opposite front and rear corner of the house to record adequate grading and drainage of the site with the appraiser s statement that grading and drainage is acceptable. Notation of a final inspection if the property is proposed construction or under construction less than 90% completed. Notation that all utilities were on and functional when the appraisal was completed (if the property is complete). Complete appraisal package is always required, including the information listed below, if the property is under construction or existing. Verification that the property conforms with plans and specs. Notation that there are no health and safety issues. Clear photographs of each diagonally opposite front and rear corner of the house to record adequate grading and drainage of the site with the appraiser s statement that grading and drainage is acceptable. Notation of a final inspection if the property is proposed construction or under construction less than 90% completed. Notation that all utilities were on and functional when the appraisal was completed (if the property is complete). Streamline Refinances (STM to STM Transactions Only) Loan Terms Streamline Refinance without an appraisal: Term is lesser of 30 years or remaining term plus 12 years. Streamline Refinance with an appraisal: 10, 15, 20, 25, and 30 year fixed rate Note: A reduction in the loan term without a net tangible benefit must be processed, underwritten, and closed as a no cash-out (rate/term) refinance. Loan Terms Streamline Refinance without an appraisal: The maximum loan term is the lesser of 30 years or remaining term plus 12 years. Streamline Refinance with an appraisal: 10, 15, 20, 25, and 30 year fixed rate Note: A reduction in the loan term without a net tangible benefit must be processed, underwritten, and closed as a no cash-out (rate/term) refinance. Page 4 of 8

5 Disclaimer to Additions to the Mortgage Amount Additions to the Mortgage Amount An increase in the maximum mortgage amount is permitted only when the appraised value exceeds the sales price; any remaining costs become part of the borrower s settlement requirements. The increase may not exceed HUD s basic mortgage limits for the area where the property is located, except for solar energy systems. Allowable additions to the mortgage amount are discussed under the headings below. repairs and improvements, energy-related weatherization items, and solar energy systems Repairs and Improvements: The table below provides the requirements necessary to add the amount of repairs and improvements in the loan amount. IF the repairs are required by the appraiser and the value reflects these requirements, repairs were not completed prior to the appraisal, and sales contract or addendum identifies the borrower as responsible for paying for the repairs THEN the amount that may be added to the sales price before calculating the maximum mortgage is the lowest of: the amount the value of the property exceeds the sales price, the appraiser s estimate of repairs and improvements, or the amount of the contractor s bid, if available. Reference: See Section 1.05b: Reviewing Sales Contracts in the Correspondent Seller Guide for additional information.. Additions to the Mortgage Amount Only Correspondent lenders that have a Direct Endorsement Underwriter on staff may underwrite and submit for purchase loan transactions involving a base loan amount increase for repairs and improvements, energy-related weatherization items, and solar energy systems on loans delivered to SunTrust Mortgage. Property repairs and energy upgrades must be complete for SunTrust Mortgage to purchase the loan. An increase in the maximum mortgage amount is permitted only when the appraised value exceeds the sales price; any remaining costs become part of the borrower s settlement requirements. The increase may not exceed HUD s basic mortgage limits for the area where the property is located, except for solar energy systems. Allowable additions to the mortgage amount are discussed under the headings below. repairs and improvements, energy-related weatherization items, and solar energy systems Repairs and Improvements: The table below provides the requirements necessary to add the amount of repairs and improvements in the loan amount. IF the repairs are required by the appraiser and the value reflects these requirements, repairs were not completed prior to the appraisal, and sales contract or addendum identifies the borrower as responsible for paying for the repairs THEN the amount that may be added to the sales price before calculating the maximum mortgage is the lowest of: the amount the value of the property exceeds the sales price, the appraiser s estimate of repairs and improvements, or the amount of the contractor s bid, if available. Reference: See Section 1.05b: Reviewing Sales Contracts in the Correspondent Seller Guide for additional information. Page 5 of 8

6 Additions to the Mortgage Amount, continued Energy-Related Weatherization Items If weatherization items are to be added to the property and paid for by the borrower, the cost may be added to both the sales price and the value before determining the maximum mortgage amount. Examples of weatherization items are shown below. Thermostats Insulation Storm windows and doors Weather stripping and caulking, etc. Energy-Related Weatherization Items If weatherization items are to be added to the property and paid for by the borrower, the cost may be added to both the sales price and the value before determining the maximum mortgage amount. Examples of weatherization items are shown below. Thermostats Insulation Storm windows and doors Weather stripping and caulking, etc. Solar Energy Systems The cost of the solar energy systems may be added directly to the mortgage amount (before adding the UFMIP) after applying the LTV ratio limits. Important facts to remember when considering adding the solar energy system are listed below. The statutory mortgage limit for the area also may be exceeded by 20% to accommodate the cost of the system. The amount that may be added to the mortgage is limited to the lesser of the solar energy systems replacement cost or its effect on the property s market value. Both active and passive solar systems are acceptable as are wind-driven systems. See HUD-Handbooks Rev-1 and for additional information. Solar Energy Systems The cost of the solar energy systems may be added directly to the mortgage amount (before adding the UFMIP) after applying the LTV ratio limits. Important facts to remember when considering adding the solar energy system are listed below. The statutory mortgage limit for the area also may be exceeded by 20% to accommodate the cost of the system. The amount that may be added to the mortgage is limited to the lesser of the solar energy systems replacement cost or its effect on the property s market value. Both active and passive solar systems are acceptable as are wind-driven systems. See HUD- Handbooks Rev-1 and for additional information. Page 6 of 8

7 Mortgage Insurance UFMIP Refunds All refunds for FHA upfront mortgage insurance premiums have been eliminated, except for FHA-to-FHA refinance transactions. UFMIP Refunds All refunds for FHA upfront mortgage insurance premiums have been eliminated, except for FHA-to-FHA refinance transactions. If the borrower is refinancing their current FHA loan to another FHA loan within three (3) years from the date of closing, a refund credit may be applied to the new loan transaction. The amount of the refund cannot exceed the new UFMIP being charged on the new loan transaction. The following table shows the three (3) year UFMIP refund schedule. Upfront Mortgage Insurance Premium Refund Percentages Month of Year Year If the borrower is refinancing their current FHA loan to another FHA loan within three (3) years from the date of closing, a refund credit may be applied to the new loan transaction. The amount of the refund cannot exceed the new UFMIP being charged on the new loan transaction. Use FHA Connection to determine the UFMIP Refund the borrower is eligible for. Condominiums This subtopic is being removed Condominiums Condominium loans are subject to the same upfront and monthly premium charge and termination schedule as reflected in this topic for all other 203(b) loans. Page 7 of 8

8 Section 1.16a Resale/Deed Restrictions FHA Loan Program Section Short Sale and Restructured Mortgage Loans New Topic Credit Requirements for Restructured Mortgages Resale/Deed Restrictions The following guidelines apply to traditionally underwritten and AUS processed loans. Properties subject to any deed restrictions are acceptable as long as all of the following criteria are met: Note: Any other deed restrictions are not eligible for FHA financing. In addition, a loan is not eligible for FHA financing if: the property has a third party transfer fee recorded in the deed; the property is subject to consent of a third party (right of first refusal); the property is subject to any legal restrictions on conveyances, except as outlined above. No current guidelines Resale/Deed Restrictions The following guidelines apply to traditionally underwritten and AUS processed loans. Properties subject to any deed restrictions are acceptable as long as all of the following criteria are met: Note: Any other deed restrictions are not eligible for FHA financing. In addition, a loan is not eligible for FHA financing if: the property has a third party transfer fee recorded in the deed; the property is subject to any legal restrictions on conveyances, except as outlined above. Credit Requirements for Restructured Mortgages A restructured mortgage loan is defined as a mortgage loan in which the terms of the original transaction have been changed resulting in a restructure of debt through a modification of the original loan that results in new loan terms. If the transaction involves refinancing of any lender s mortgage that has previously been restructured including with a reduction in principal, forgiveness of debt, created a soft second mortgage is eligible for refinancing with SunTrust Mortgage. The borrower must be 0 x 30 in the last 12 months under the restructured loan agreement. Page 8 of 8