FHA Changes 1 Any single deposit that exceeds 25% of the total monthly qualifying income on the loan. Additionally, any questionable deposits or deposit patterns may be considered a large deposit at the underwriter s discretion. Large deposits are defined as 1% of adjusted purchase price or appraised value. Questionable deposits must still be addressed. If the client has a joint account with someone other than the co-client and is not named on the statement, a VOD must be ordered and clearly show that the client has full, authorized access to the funds. If the client is named on a bank statement with someone other than the co-client, no access letter is required and it may be assumed that the client has full access to the funds. For clients using joint bank statements; all non-borrower parties (even spouses) on the account must provide a written statement that the Borrower has full access to use of the funds. 2 3 If any repayment is required on employer assistance, the payment should be factored into the client s DTI ratio. A salary advance cannot be used for funds to close. If a client is receiving employer assistance, a salary advance cannot be considered as assets to close.
FHA Changes 4 5 Judgments, liens and IRS tax liens must be paid prior to or at close. If the judgment is paid prior to close, a satisfaction of judgment is required. If the judgment is being paid at close, a payoff letter is required. Judgments, liens and IRS tax liens must be paid prior to or at close. If the judgment is paid prior to close, a satisfaction of judgment is required. If the judgment is being paid at close, a payoff letter is required. An authorized user account can be excluded from the client s ratios without obtaining 12 months canceled checks to prove another party is responsible for the debt - Underwriter comments are required in AMP when a debt is excluded. 6 7 8 9 10 If a payment is deferred beyond 12 months of close, payment can be excluded with proper documentation. For revolving and installment debt on the credit report, if there is no payment listed and no further documentation is provided to show the correct monthly payment, use the greater of 5% of the existing balance or $10 to calculate the monthly payment. On installment loans, if there is no payment listed and no further documentation is provided to show the correct monthly payment, use the greater of 5% of the existing balance or $10 to calculate the monthly payment. Re-established credit guides do not allow any new public records or collections within the last 24 months for bankruptcy, 36 months for foreclosure. Allow tax lien to remain open with repayment plan, 3 months payments and tax lien subordination agreement. Allow judgments to remain open with repayment plan and 3 month payments. (subject to underwriter discretion) Authorized user accounts must always be included in debt ratios. Student loans/deferred debt must be included in debt ratio. For all revolving accounts and deferred installment loans, including student loans when no payment exists on the credit report, we will use the greater of $10 or 2% on student loans; greater of $10 or 5% on all other debt. When an installment loan in repayment, including student loans in repayment, shows no monthly payment on the credit report, a statement is required. On re-established credit, we will allow one collection account with a maximum of $500. Account must be dated more than 12 months prior to application. Payments must be made when due (i.e. prepayment not allowed). Payments must be made when due (i.e. prepayment not allowed). Any Authorized User account showing on a client s credit report must always be included in their debt ratio. All deferred debt (including student loans) must always be included in the debt ratio. Applies to all FHA.
FHA Changes 11 12 13 14 When an account is paid by a business, there must be acceptable evidence that the debt was paid out of the business funds with 12 months of canceled checks. The business tax returns show a business-related expense to the debt. Accounts, excluding medical, $2,000 in aggregate will have a 5% payment of the totaled amount included in the DTI. If the client qualifies with the payment, then accounts do not need to be paid. If client does not qualify with the 5% payment, then the client must do either one of the following: - Payoff total collections and charge-offs, excluding medical - Provide proof of the lower payment from the creditor if the client is participating in a payment arrangement with the creditor. Short sale not allowed within 3 years of the credit report date AND must meet re-established credit requirements. For 30 day charge accounts where no payment is showing OR the payment showing is the same as the balance, qualify the client by one of the following methods: - Qualify the client with the full balance as a payment; no asset statement or credit card account statement needed. - Qualify by excluding the pay in full balance; document assets from acceptable liquid accounts (I.e. checking, savings, mutual funds, etc.) in the amount of the balance. - Qualify with the actual monthly payment; obtain the credit card account statement to validate the monthly payment. If a credit card account statement is obtained and it shows both a Pay in Full balance AND a monthly revolving payment: - Client must qualify with the sum of those 2 payments as one debt. - If client is unable to qualify with the Pay In Full balance, liquid assets in the amount of the balance will need to be obtained in order to exclude the balance from the DTI. - The monthly revolving payment must ALWAYS be included in the client s DTI. - 30-Day accounts that are paid monthly on time for 12 months are not included in the borrower s DTI. - If the credit report reflects any late payments in the last 12 months, the Mortgage must utilize 5% of the total outstanding balance as the Borrower s monthly debt to be included in the DTI 15 Qualifying credit report used by underwriting for loan approval When an account is paid by a business, we must show the business related debt on the tax return. Now, we must also show that the debt was considered in the cash flow analysis of the borrower s business. Cumulative outstanding collection account balances of $2,000 or greater must be paid off prior to close, or verify borrower has made payment arrangements and hit the DTI, or, use 5% of the balance in the DTI. For a short sale client if they were current at the time of the short sale, we can finance before 3 years if the loan is manually downgraded with no mortgage or installment lates in the 12 months prior to short sale date AND 12 months prior to application date. (Would require an excep. by Norcom) 30 day accounts must now have 0x30 in the past 12 months AND must document they have funds to pay the account in full. All credit reports must be included in loan file. LOX for additional credit pulls. Further documentation may be required. Charge-offs are not considered collections anymore and will be excluded. This is in addition to medical, which is currently excluded. I.E. American express the borrower would need to show sufficient funds to pay the bill. Run AUS as paid in full credit must show account as 30 days. I.E. credit report prior to credit repair
A YTD profit and loss statement and balance sheet are required for all self-employed borrowers. 16 If the client has been with the current employer for less than 12 months, related training or experience may be substituted to satisfy the 12 month qualification requirement. Also, the underwriter must make comments on approval. 17 YTD profit and loss and balance sheet required. Balance sheet is not required for schedule C self-employed clients. If the borrower has more than 4 jobs in 12 months, we need to show required schooling or consistent increase in pay to qualify. Schedule C borrowers no longer need to provide a balance sheet. No exception for union workers since Union is generally treated as one job since the jobs are secured by the union and the hourly rate is steady. In order to use Capital Gains Income, a 3-year history and consistent earnings are required. The underwriter must develop an average of the income for the last 3 years to use in qualifying. If the income is declining, only the most recent previous year s income divided by 12 should be used to calculate the qualifying income. 18 Any Capital losses must be deducted from income. Capital Gain income is still used to qualify. Projected Income is not allowed. Client must have offer letter at application and begin new position prior to close. 19 Non-taxable income may be grossed up by the tax rate used on last year s income tax. Non-taxable income may only be grossed up by 25% for the following reasons: - Client does NOT have to file a Federal Income Tax Return. - Client s tax rate was 25% for the previous year s income tax. - Client has zero taxable income after taxes are filed and adjustments are made. 20 Future income no longer requires a pay stub. We are okay to close with an offer letter, provided that employment begins prior to close. Non-taxable income gross-up rate is capped at 15% instead of 25%. Maximum income can be grossed up by the borrowers tax rate from the previous year up to 15% cap.
When qualifying a client receiving commission income, a 2-year history receiving commission in the same line of work is required. When qualifying a client receiving commission income, a 1-year history receiving commission with the same employer is required. Based off the most recent file tax year 21 For clients serving in our military, a verification statement must clearly show the payment amount and future continuance. 22 When a rental property is not listed on the Schedule E, we must obtain a 12 month lease agreement. The lesser of the estimated market rent or the lease agreement, minus the vacancy factor, must be used as the qualifying rental income. 23 For clients serving in our military, the active duty expiration date on their LES must be at least 12 months out, OR we must have a LOX from the client stating their intention to re-enlist. When a rental property is not listed on the Schedule E, we must obtain a 12 month lease agreement, verify 25% equity in the property, and date of acquisition. To show the date of acquisition, a client may provide the deed, Settlement Statement, or similar doc. 24 Long Term Disability must obtain ONE of the following: - Disability policy - Benefit statement - Award Letter Future Earnings: silent. We must obtain documentation from the private disability insurance provider showing the amount of the assistance with the expiration date of the benefits, if any, and the Federal tax return OR the most recent bank statement to evidence receipt of income. Expected income from a family-owned business is not allowed. 25
For Alimony, Child Support, or Maintenance Income obtain one of the following, including all pages and the payment terms: Divorce decree, Final separation agreement, Legal agreement, or Court decree. 26 An FHA insured first mortgage cannot exceed the FHA statutory limit for the area where the property is located. The combined indebtedness, however, may exceed the FHA statutory limit. 27 28 Approve only: Not all pages of divorce decree needed, only pages applicable to Client s situation. If subordinate financing exists, the total of both mortgages may not exceed the national mortgage limit. First page, last page, and award. However if borrower owns Real estate or other debt listed on the credit report, additional pages could be required. Maximum age of all docs is 120 days. Max age of all docs is 120 days. Max age of application, income, and asset documents at close is 120 days. For a non-permanent resident alien, evidence of a valid, acceptable visa is required. For a non-permanent resident alien, an Employment Authorization Document (EAD) is required. 29 The spouse s release (certification and authorization) to order and receive a credit report must be obtained. 30 For non-borrowing spouses (NBS), we must obtain an authorization and consent to verify their SSN with the SSA. We must verify that the NBS s SSN was matched with the SSA. In community property states. The max number of days of per diem interest that may be credited to the client at closing varies by transaction type as follows: - 7 days max; nance- 10 days max 31 A maximum of 7 days per diem interest credit is allowed on all transactions (/). Interest credit may not be used to meet borrower s MRI. Per diem computed using factor of 1/365 of the annual rate.
For an appraisal, the recertification of value must be dated within 120 days of close. Max age of appraisal is 240 days (update extends appraisal, instead of update good for 120). Appraisal still must be re-certified prior to original appraisal expiration. 32 Veteran must live in home full-time to consider a home their primary residence. Veterans on active duty are allowed to finance their home as a primary residence, provided we can document the home is occupied by the Veteran s spouse. A client is considered a veteran when he is enlisted and on active duty. We do need documentation that the home is occupied by family (i.e. cell, cable, phone, internet bills). 33
A rent-free borrower does not need to prove he/ she is living rent-free. 34 Letter from homeowner is required if client is living rent free. When a client indicates they are living rent free, a letter from the homeowner is required to verify. When a client is relocating, the new property cannot be within reasonable commuting distance. 35 For additional FHA Loan. When a client is relocating, the new home must be at least 100 miles away from their current residence. All other restrictions remain the same. If a client is converting their current primary residence to an investment property, proposed rental income may only be used to qualify if the client meets all of the following requirements: - Relocating with a new employer or being transferred by current employer to an area not within reasonable and locally recognized commuting distance AND can provide proof that a security deposit was received and deposited into the client s account. - OR, a new appraisal completed by an FHA approved appraiser (1004, 2055, or 1075) verifies the client has 25% equity in their existing current primary residence. 36 If a client is converting their primary residence to an investment property, it must be 100 miles away, they must have a security deposit, one year lease, AND 25% equity in the converted property. Refer to the FHA Vacancy Factor table for the required factor based on the property s geographic location. 37 There are no more HOC vacancy factors - 25% vacancy rate across the board. All rental properties follow a 25% vacancy rate. If any amount of the EMD is applied towards the funds to close and the client does NOT have at least 2 times of the amount verified in the account, then the source and receipt of funds must be documented. 38 All EMD Verified. The EMD may be gifted from an acceptable source. Signed gift letter required certifying the funds were not obtained from an unacceptable source. 39 Any gift funds used toward an EMD must be documented, even if it is less than 1% of the value of the home.
41 42 Signed and dated Gift Letter including: Donor s name, address and phone number, Donor s relationship to the client, Dollar amount of the gift, Client 40 Signature. The sum of all liens cannot exceed 100% of the cost of acquisition ( price + closing costs). When using net proceeds from an arms-length sale, a copy of the executed HUD-1/settlement statement from the sale of the home signed by the buyer, seller, or their authorized agents that identifies the client as seller, settlement date, property sold, purchase price, new proceeds, and disposition of all liens. Nationwide Mortgage Limits Secondary Financing for Borrower s MRI CLTV Limitations Governmental Entities and HOPE Grantees The insured first mortgage cannot exceed the FHA Nationwide Mortgage Limit for the area in which the property is located. Gifts of equity always require a gift letter Agreement is not acceptable. HUD Approved Nonprofits The insured first mortgage cannot exceed the FHA Nationwide Mortgage Limit for the area in which the property is located. Any secondary The secondary financing of the Borrower s MRI must fully comply with the additional requirements in Source Requirements for the Borrower s MRI. No maximum Combined Loan-to- Value (CLTV) financing may not be used to meet the Borrower s MRI No maximum Combined Loan-to- Value (CLTV) Family Members The insured first mortgage cannot exceed the FHA Nationwide Mortgage Limit for the area in which the property is located. The secondary financing may not be used to meet the Borrower s MRI CLTV ratio of the Base Loan Amount and the secondary financing amount must not exceed 100% of the Adjusted Value When using net proceeds from an arms-length sale, a copy of the executed HUD-1/settlement statement from the sale of the home signed by the buyer, seller, or their authorized agents that identifies the client as seller, settlement date, property sold, purchase price, new proceeds, and disposition of all liens. Private Individuals and Other Organizations The Base Loan and secondary financing amounts must not exceed the Nationwide Mortgage Limits for the area in which the property is located. The secondary financing may not be used to meet the Borrower s MRI CLTV ratio of the Base Loan Amount and the secondary financing amount must not exceed the applicable FHA LTV limit. Any gift of equity requires a gift letter. The mortgagee must also verify and document that the transaction was arms-length, and that the Borrower is entitled to the net sales proceeds. Letter from settlement attorney is sufficient
Topic 43 Credit Credit 44 Max 0x30 mortgage payment history in the last 12 months from application date. Max 2x30 on installment or revolving accounts in the prior 12 months. Max 2x30 on installment/revolving accounts in the last 12 months from application date. The maximum lates allowed on housing and installment are 0x30 in last 12 months and 2x30 in last 24 months or manual underwriting will be required. The maximum lates allowed on revolving debts are 1x90 OR 3x60 in the last 12 months. or manual underwriting will be required. 45 Income On a client s pay history, we need the most recent pay stub(s) with a minimum of 30 days YTD earnings. On refer eligible loans, we must have 30 consecutive days pay stubs. 28 days for weekly and bi-weekly clients. Income 46 Analyzing the stability of rental income is dependent on situation. When analyzing the stability of rental income on refer eligible loans, the client must have a lease and 24-month rental history. History is proven with lease agreement and tax returns. 47 Income On refer loans, a 12 month alimony/child support history must be documented. < 12 months receipt may be acceptable if the payer s ability and willingness to make timely payments is adequately documented. No Percent in decrease of income. On refer, the required income history for alimony/child support is going from 12 to 3 months. If self employment decreases by 20% needs to be downgraded to refer On refer eligible loans, a 3 month alimony/child support history must be documented. 48
49 50 51 52 53 54 55 56 Max CLTV on SL with appraisal is 125%. Max CLTV on SL with appraisal is 97.75%. On a Streamline transaction without an appraisal, the maximum CLTV is 125%. On Streamline transactions, we do not need to prove occupancy On a Streamline transaction, a minimum of 6 months of consecutive mortgage payments must have been made. If the loan being paid off has < 12 months history, max 0x30 lates. If the loan being paid off has 12 months history, max 1x30 in the most recent 12 months. Max 0x30 in most recent 3 months. A net tangible benefit as a result of the streamline is required as follows: - Fixed rate loan or 3/5/7/10 ARM during initial period a minimum immediate 5% reduction in principal, interest, and MIP is required. - 1 Yr ARM or 3/5/7/10 Yr ARM during the adjustable period the new fixed rate must be 2% below the client s current ARM rate. FHA SL: A reduction in the mortgage term is permitted as long as the 5% reduction in principal, interest, and MIP is met as well. All funds to close must be fully documented on a Streamline transaction. No Tax Service Fee There is no maximum CLTV on Streamline without an appraisal. On all Streamline transactions, the client must prove occupancy with utility bills or employment documentation. SS# verified through a 3rd party or through the use of income documentation. On Streamline transactions, the maximum lates allowed are 1x30 in the past 12 months. Net tangible benefit is calculated based on a reduction in the total rate (see FAQ). Net tangible benefit on SL is calculated based on a reduction in the total rate for same or greater term. For term reduction, rate cannot increase, and payment cannot increase more than $50. The mortgage must verify borrower s funds to close, excess of the total Mortgage Payment of the new mortgage accordance with Sources of Funds. Additionally, the Mortgagee only on Streamline refinances may provide an unsecured interest-free mortgage to escrow a new escrow account in an amount not to exceed the escrow balance on the existing mortgage. On Streamline transactions, we do not need to document funds to close as long as they are less than the client s new total payment. Tax Service Fee to be Charged