fha guidelines - pbm wholesale guide.pdf · fha retail 11-23-2015 . table of contents . 1 ......

FHA Guidelines

1 FHA Retail 11-23-2015

Table of Contents 1. Table of Contents…………………………………………………………………………………………………..……1-2

2. Product ............................................................................................................................................................ 3

3. Category ........................................................................................................................................................... 3

4. Sub-Category .................................................................................................................................................. 3

5. Age Of Documentation ................................................................................................................................ 3

6. LTV Other Restrictions ............................................................................................................................... 3

7. State Restrictions & County Limits ........................................................................................................ 3

8. Property Restrictions ............................................................................................................................. 3-4

9. Occupancy ....................................................................................................................................................... 4

11. Underwriting Method ............................................................................................................................. 4-5

12. Qualifying Ratio ............................................................................................................................................ 5

13. Qualifying Rate .............................................................................................................................................. 5

14. Escrow Waiver ............................................................................................................................................... 6

15. Prepaid Items Including Per Diem Interest ........................................................................................ 6

16. Living Or Inter Vivos Revocable Trust ................................................................................................. 6

17. Documentation Requirements ............................................................................................................ 6-7

18. Credit Score Restrictions ........................................................................................................................... 8

19. Borrower Eligibility .............................................................................................................................. 8-10

20. Borrower Eligibility Continued ............................................................................................................ 10

21. Employment Verification And Income Types............................................................................10-12

22. Assets ............................................................................................................................................................. 13

23. Reserves........................................................................................................................................................ 14

24. Subordinate Financing ............................................................................................................................ 14

25. Seller Contributions ................................................................................................................................ .14

26. MIP Requirements ..............................................................................................................................14-15

27. Temporary Buydowns ............................................................................................................................. 16

28. DownPayment Criteria .....................................................................................................................16-18

29. Other Real Estate ....................................................................................................................................... 18

30. Miscellaneous Criteria .................................................................................................................. ....18-19

31. Appraisal Requirement…………………………………………………………………………………………..19-21

32. Termite Report……………………………………………….……………………………………………………...21-22

33. Overall Credit/Retail Credit/Installment Credit …………………………………………………...23-25

34. Bankruptcy .................................................................................................................................................. 26

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35. Foreclosure Or Deed In Lieu .................................................................................................................. 26

36. Short Sale………………………………………………………………………………………………………………….…27

37. Loan Modifications ................................................................................................................ … ………….27

38. HUD Mortgage Rejects ............................................................................................................................. 27

39. Resale Value Of Property ........................................................................................................................ 28

40. Refinance Rate/Term…………………………………………………………………………………………..………28

41. Cash-Out Refinance ......................................................................................... …………………………..28-29

42. HUD REO Properties…………………………………………………………………………………………..…..29-30

43. Departing Residence ............................................................................................................................. ...30

44. Solar System ................................................................................................................................................ 31

45. Compensating Factors ............................................................................................................................. 31

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PRODUCT

• 30 YEAR (FHAF) • 15 YEAR (FH15) • 5/1 ARM (FH5A) • FHA Jumbo (FHAJ) 30 year only • FHA 5/1 Arm Jumbo 30 Year (F5AJ)

CATEGORY

FHA Section of Act ADP Codes for DE Property Types

203 b 703 SFR Site 203b/ Condo 234c 734 Condo

203 b 729 ARM

SUB-CATEGORY STANDARD

AGE OF DOCUMENTATION • APPRAISAL: no older than 120 days at time of funding. • CREDIT: no older than 120 days at time of funding. • INCOME: no older than 120 days at time of funding. • ASSETS: no older than 120 days at time of funding.

LTV OTHER

RESTRICTIONS

• Flip Transactions: Restrictions apply (see FHA Flip Guidelines) • Identity of Interest

STATE RESTRICTIONS

& COUNTY LIMITS

• All purchase transactions must have a fully executed Purchase Contract and Transfer Disclosure Statement per CA state law.

• All loans must adhere to State and Local Property Laws (carbon monoxide, smoke detectors and lead based paint guidelines) o If the appraiser notes the absence of a working carbon monoxide detector and

appraisal is “Subject To” - A 1004D will be required evidencing the completion of the requirements.

o If the appraiser notes the absence of a working carbon monoxide detector, but appraisal reads, “AS IS” – a 1004D will still be required as this is a health and safety issue.

o If the appraiser does not mention the absence of a working carbon monoxide detector in the appraisal report, neither a 1004D nor a Lender’s Certification evidencing completion will be required in regards to the carbon monoxide detector.

• Loan amount county specific (refer to HUD MSA Link below) https://entp.hud.gov/idapp/html/hicostlook.cfm

PROPERTY RESTRICTIONS

• SFR detached and attached units • PUDs • 2-4 Units • 3-4 Units (see reserve requirements)

o The subject property must be self-sufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly payment, divided by the monthly net rental income, does not exceed 100 percent). The mortgage amount calculations are in the referenced Handbook 4155.1:2.B.4.a-d

o http://portal.hud.gov/hudportal/HUD?src=/program_offices/admini

stration/hudclips/handbooks/hsgh

https://entp.hud.gov/idapp/html/hicostlook.cfm

http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh%20

http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh%20

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PROPERTY RESTRICTIONS

CONTINUED

• Condominiums o FHA approved condos only o Condo- HOA Certification;

50% Occupancy required < 15% HOA dues delinquency < 30% FHA concentration Reserves = 10% of budget for capital expenditures & deferred maintenance. Fidelity Bond Insurance - > 20 units in the project require not less than 3 months

aggregate assessments on all units plus reserve funds. HO6 Coverage Underwriter to complete “Lenders Certification for Individual Unit Financing

Form” (located in “Forms” Folder) NOTE: Condo projects that are subject to expire within 60 days of Application need to contact Corporate Govt. Underwriting for further direction.

OCCUPANCY • Owner Occupied

UNDERWRITING METHOD

• DU – Approve/Eligible ONLY (must adhere to documentation & eligibility rules to qualify) • Manual Underwrites and Downgrade to Manual Underwrite require the following for FHA

Loans; o Exception from Corporate Underwriting o DTI 31%/43% o Exception to DTI above requires Corp Exception and must meet FHA ML 2014-02

Residual & DTI requirements below. Provide proof of ML2014-02 requirements at time of exception submission

ML 2014-02- Case Numbers Assigned on or After April 21, 2014

Minimum Decision Credit Score

Maximum Qualifying Ratios (%)

Acceptable Compensating Factors

640 and > 31 / 43 No Compensating Factor Required

640 and > 37 47 One of the following: • Verified and documented cash reserves equal to at

least three total monthly mortgage payments (1-2 units) or six total monthly mortgage payments (3- 4 units).

• New total monthly mortgage payment is not

more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and a there is documented twelve month housing payment history with no more than one 30 day late payment.

• In cash-out transactions all payments on the

mortgage being refinanced must have been made within the month due for the previous 12 months.

• Residual Income

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UNDERWRITING METHOD

CONTINUED

640 and > 40 / 40 • Borrower has established credit lines in his/her own name open for at least six months but carries no discretionary debt (i.e., monthly total housing payment is only open installment account and borrower can document that revolving credit has been paid off in full monthly for at least the previous six months).

640 and > 40 / 50 Two of the following: • Verified and documented cash reserves equal to at least three total monthly mortgage payments (1-2 units) or six total monthly mortgage payments (3-4 units).

• New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and a there is documented twelve month housing payment history with no more than one 30 day late payment.

• In cash-out transactions all payments on the

mortgage being refinanced must have been made within the month due for the previous 12 months.

• Verified and documented significant additional income that is not considered effective income (i.e., part-time or seasonal income verified for more than one year but less than two years).

• Residual Income.

QUALIFYING RATIO

• 620-639 = 37/47% DTI AUS~ ACCEPT/ELIGIBLE ONLY • 640 > = 55% DTI AUS~ ACCEPT/ELIGIBLE ONLY

o With AUS Approval Greater than 55% requires Lender Specific Notification and o Corporate 2nd Approval and o An additional pricing hit may apply

• 600-619 for FHA Fixed/Conforming Products ONLY = DTI 31%/43% o Must Have a DU Approve

LP Allowed with Corporate Exception ONLY Cash-Out Refinance • Minimum 640-679 = 50% DTI AUS~ ACCEPT/ELIGIBLE ONLY • 680 and above = 55% DTI AUS~ ACCEPT/ELIGIBLE ONLY • 600-639 for FHA Fixed/Conforming Products ONLY = DTI 31%/43%

o Must Have a DU Approve LP Allowed with Corporate Exception ONLY

QUALIFYING

RATE Note Rate • 30 Year (FHAF) • 5/1 ARM (FH5A) & (F5AJ)

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ESCROW WAIVER Not Allowed Impounds are required

PREPAID ITEMS

INCLUDING PER DIEM INTEREST

Prepaid items are collected at closing to cover accrued and un-accrued hazard insurance premiums mortgage insurance premiums taxes Flood Insurance per diem interest, and other similar fees and charges

Per Diem Interest

o PBM must disclose a minimum of 15 days of prepaid interest on the Good Faith Estimate.

LIVING OR INTER VIVOS

REVOCABLE TRUST

• Not Allowed

DOCUMENTATION REQUIREMENTS

• Loan will have to be run through DU and receive Approve/Eligible. o Page 3 of 92900-A must include underwriter’s signature, date and ZFHA. o Page 3 of the 92900-A, Date Approval Expires is 90 calendar days from the oldest

exhibit in the file. Note-If credit package is updated after approval, the approval expiration date will require updating based on the oldest exhibit.

• LDP/GSA required on all parties • CAIVRS required on all borrowers also required for Non-Borrowing Spouse

Underwriters may not rely on clear CAIVRS approval when there is an independent evidence of conflicting delinquent Federal obligations. The Underwriter must o Document the resolution of any conflicting information, and o Contact the appropriate Homeownership Center (HOC) for instructions or

documentation to support the borrower’s eligibility if the CAIVRS message seems erroneous, or Date of claim payment needs to be established.

The HOC may provide lenders with o Information about

when the three-year waiting period described in HUD 4155.1 4.A.2.g will elapse, or

erroneous social security numbers, and o Instructions on processing requirements for other HUD-related defaults and claims.

• The Fully executed Amendatory/Escape Clauses are required for all FHA, VA and CHF30 loans and MUST be signed and dated by all parties prior to the Note Date.

• Make sure you are reviewing the Purchase Contracts and/or escrow instructions for fully executed Amendatory/Escape Clause verbiage.

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DOCUMENTATION REQUIREMENTS

CONTINUED

Amendatory Escape Clause • If the purchase contract or escrow instructions are not reflecting the Amendatory/Escape

Clause verbiage the Underwriters MUST condition the loan with a PTD/UTR for executed form. These forms must be executed prior to final loan approval. o The Amendatory/Escape Clause signed/dated by all parties CAN NOT be a funding

condition since it is required to be fully executed (signed and dated by all parties) prior to the Note date (Prior to Loan Documents).

o If the Amendatory or escape clause verbiage is included in the purchase contract or escrow instructions you will not need a separate document.

o If Amendatory or escape clause verbiage is not in the purchase agreement or escrow instructions, you MUST have a separate document signed and dated by all parties prior to the Note Date. (Prior to Loan Documents) This document cannot be signed and date at loan documents.

o Funders MUST review the Amendatory/Escape Clause forms prior to funding to make sure they are fully executed by all parties prior to the Note Date (Prior to Loan Documents) Funding will be delayed if the form(s) are not fully executed by all parties prior to

the Note Date (Prior to Loan Documents). • There are situations with non-traditional sellers (Fannie Mae, Freddie Mac, federal, state

and local government agencies, and mortgagees disposing of REO assets) where this requirement does not apply.

• Click the link and see attached for an example of the FHA amendatory clause

http://portalapps.hud.gov/FHAFAQ/controllerServlet?method=showPopup&faqId=1-6KT-2099

• LT Signature Section- o Signature Section must be completed as follows;

“FHA Total Scorecard” and Final DU Date to be included in signature section and Chums ID # to reflect ZFHA.

Underwriter Chums # must reflect in the appraisal section (Pg 1 of LT) LT Underwriter Comment Attachment

• File Risk Review- This form must be completed by the DE Underwriter on all FHA Loans

with the exception of the regular FHA Streamline (Effective Immediately). The form is located in the “Forms” section of the PBM Manual.

92900-A Requirements FORM WHO SIGNS WHEN TO SIGN

URLA Loan Application - Initial Borrower (s) and Loan Officer Application Initial HUD Addendum 92900a pg 1 Loan Officer or Lender for TPO Application Initial HUD Addendum 92900a pg 2 Borrower (s) (2 x) Application URLA Loan Application - Final Borrower (s) and Loan Officer Prior to or at closing Final HUD Addendum 92900a pg 1 Lender (DE Underwriter or

officer authorized to bind) Initial Approval

Final HUD Addendum 92900a pg 2 Borrower (s) (2 x) At closing Final HUD Addendum 92900a pg 3 DE Underwriter Final Approval Final HUD Addendum 92900a pg 4 Borrower;

Lender At closing Post-closing



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CREDIT SCORE RESTRICTIONS

• Full 3 merge credit report required with all borrowers showing a minimum of one credit score.

• All mortgages must have a mortgage history of 0 x 30 in the last 12 months • Representative credit score:

o Use middle of 3 or lowest of 2 o Use middle representative score from all borrowers

• All borrower(s) (including a Non-Purchasing Spouse) MUST have a valid- legally obtained – Social Security Number or an Exception must be granted from Corporate. This includes any borrower with known SSN (Social Security) issues.

• Per Santa Ana HOC (HUD)- 1) You are required to obtain a credit report for the non-borrowing spouse (aka non-

purchasing spouse) 2) If the non-borrowing spouse does not have a legally issued SSN, the credit report

cannot be obtained using a “fill-in” SSN (e.g. 999-99-9999 or other variation). The report must be obtained using the non-borrowing spouse’s Name and Address ONLY.

3) If credit was obtained using the TIN or an SSN obtained outside legal channels, a credit report must be obtained using these numbers (i.e. the non-borrowing spouse’s name and number they provide).

Note: This guidance does not constitute authorization for anyone to run credit under an alternative name or social security number. Note: If your non-borrowing spouse does not have a social security number the file must be down-graded to a Manual Underwrite along with Corporate Exception Approval noted above.

BORROWER ELIGIBILITY

• US Citizens • First time homebuyers • Permanent Resident Aliens (Green Cards)

A copy of the Green Card is required for all permanent resident aliens whose income and/or assets are being used to qualify for the loan. A copy of the front and back of the card is required and must be included in the loan file.

o While the Green Card itself states “Do Not Duplicate” for the purpose of replacing the original card, U.S. Citizenship and Immigration Services (USCIS) allows photocopying of the Green Card. Making an enlarged copy or copying on colored paper may alleviate any concerns the borrower may have about photocopying.

• Non-permanent Aliens (Required Visas) All non-permanent resident aliens must provide evidence of a valid, acceptable visa. A copy of the unexpired visa must be included in the loan file evidencing one of the following visa classes:

o A Series (A-1, A-2, A-3): These visas are given to officials of foreign governments, immediate family members and support staff. Only those without diplomatic immunity, as verified on the visa, are allowed.

o E-1 Treaty Trader & E-2 Treaty Investor: this visa is essentially the same as an H-1 or L-1; the title refers to the foreign country’s status with the United States

o G Series (G-1, G-2, G-3, G-4, G-5): These visas are given to employees of international organizations that are located in the United States. Some examples include the United Nations, Red Cross, World Bank, UNICEF & the International Monetary Fund. Verification that the applicant does not have diplomatic immunity must be obtained from the applicant’s employer and /or by viewing the applicants passport

o H-1 (includes H-1B and H-1C), Temporary Worker: this is the most common visa given to foreign citizens who are temporarily working in the United States

o L-1, Intra-Company Transferee: an L-1 visa is given to professional employees whose company’s main office is in a foreign country.

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BORROWER ELIGIBILITY CONTINUED

o TN, NAFTA Visa: Used by Canadian or Mexican citizens for professional or business purposes.

o TC, NAFTA Visa: Used by Canadian citizens for professional or business purposes • Non-occupant co-borrowers

It is permissible to add a non-occupant co-borrower to a purchase or a refinance transaction as long as the occupant borrower has an established credit history and credit score. The credit score of the non-occupant co-borrower may not be used to satisfy FHA requirements. o Mortgages with non-occupying co-borrowers are limited to one-unit properties. If the

LTV will exceed 75%. o If parents are selling to a child, the parent cannot be the co-borrower with that child on

the new mortgage unless the LTV is 75% or less. o For maximum financing the non-occupant borrower must be related by blood,

marriage, law or be an unrelated individual that can document evidence of a family-type, longstanding, and substantial relationship.

o Non-occupying co-borrowers must have a principal residence in the U.S. unless exempted due to military service with overseas assignments, or a U.S. citizens living abroad

• Non-Purchasing Spouse Any non-purchasing spouse must have a valid Social Security Number. If the non-purchasing spouse does not have a valid Social Security Number, the credit report will not be valid, therefore, not acceptable as AUS Approve/Eligible.

• Identity of Interest (Non ARMs Length) Identity-of-interest transactions on principal residences are restricted to a maximum LTV ratio of 85%. Identity-of-interest is defined as a sales transaction between parties with family relationships or business relationships. Financing above the 85% maximum for identity-of-interest transactions is permitted under certain circumstances, as described below;

EXCEPTION DESCRIPTION

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. NOTE: 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.

Tenant Purchase A current tenant, including a family member tenant, purchases the property where he/she has rented for at least six months immediately predating the sales contract. NOTE: A lease or other written evidence to verify occupancy is required. The maximum mortgage calculation is not affected by a sales transaction between a tenant and a landlord with no identity-of-interest relationship

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BORROWER ELIGIBILITY CONTINUED

Builder’s Employee Purchase An employee of a builder purchases on of the builder’s new homes or models as a principal residence.

Corporate Transfer A corporation • Transfers an employee to another location • Purchases the employee’s home, and • Sells the home to another employee

For the purpose of Identity of Interest transactions, the definition of family member includes:

o Child, parent, or grandparent o Spouse o Legally adopted son or daughter, including a child who is placed with the borrower by

an authorized agency for legal adoption, and o Foster child o Brother or stepbrother o Sister or stepsister o Uncle or Aunt

Note: A child is defined as a son, stepson, daughter, or stepdaughter. A parent or grandparent includes a step-parent/grandparent or foster parent/grandparent.

• All Borrowers must provide evidence of a Valid Social Security Number. (i.e. Social Security

card, pay stub, W-2, print out from Social Security Admin.) A printed copy of the Inco Check or Interthinx is also acceptable.

EMPLOYMENT VERIFICATION AND

INCOME TYPES

• Must meet all employment conditions per DU Approve/Eligible • Verbal or Full Verification of Employment required at the time of underwriting. • Verbal Verification of Employment (VVOE) dated within 10 days of funding. VVOE may be

obtained the day of funding. • Self Employed Borrowers

o A P&L and balance sheet is required if more than a calendar quarter has elapsed since date of most recent calendar or fiscal-year end tax return was filed by the borrower. Additionally, if income used to qualify the borrower exceeds the two year average

of tax returns, an audited P&L or signed quarterly tax returns obtained from the IRS are required.

o Borrowers, who have sufficient declining income compared to the previous 2 years, require an explanation from accountant as to the stability of self-employment income.

• Social Security Administration (SSA) income including, but not limited to, Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), and Social Security income, can be used to qualify the borrower if the income has been verified, and is likely to continue for at least a three year period from the date of closing. o Lender must verify income by obtaining from the borrower any of the following

documents: Federal tax returns; The most recent bank statement evidencing receipt of income from the SSA; A Proof of Income letter or “Benefits Letter” that evidences income from the SSA.

(Visit www.ssa.gov for an explanation of types of letters issued by the SSA o In addition to verification of income, the lender must document the continuance of this

income by obtaining from the borrower; A copy of the last Notice of Award letter which states the SSA’s determination on

the borrower’s eligibility for SSA income, or Equivalent document that establishes award benefits to the borrower If any income from the SSA is due to expire within three years from the date of

loan closing, that income may only be considered as a compensating factor

http://www.ssa.gov/

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INCOME TYPES

CONTINUED

o If the Notice of Award or equivalent document does not have a defined expiration date, the lender shall consider the income effective and likely to continue. The lender should not request additional documentation from the borrower to demonstrate continuance of Social Security Admin income. Under no circumstances may lenders inquire into or request documentation concerning the nature of the disability or the medical condition of the borrower. NOTE: Pending or current re-evaluation of medical eligibility for benefit payment is not considered an indication that the benefit payment is not likely to continue. NOTE: An initial Notice of Award letter (or its equivalent) may specify a start date for receipt of income in the future. Lenders may consider this income as effective income as of the start date specified in the Notice of Award Letter. The borrower must have other income to qualify for the mortgage until the start date for receipt of income.

NOTE: Other forms of long-term disability income (such as worker’s compensation or private insurance) may be considered qualifying income with a reasonable expectation of continuance. Lenders should use procedures similar to those noted above to verify such income.

• Temporary Disability – Borrowers with a continuous 2 year work history who are

currently receiving temporary disability (i.e. maternity leave, workman’s comp etc.) must provide the follow information from the HR Dept of Borrower’s employer; 1. Position held at the time of leave is available to borrower upon return to work at the

same income. 2. Human Resource Dept. to state the date borrower is to return to full time employment 3. Borrower to provide letter of intent to return to work. Letter must state date of return. 4. Borrower’s temporary income can be used to qualify only if all of the information

above is provided. • New Employment – Follow DU findings and;

o Borrowers about to start a new job and has a guaranteed, non-revocable contract for employment that will begin within 60 days of loan closing, the income is acceptable for qualifying purposes.

o Lender must verify that 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.

o If the loan will close more than 60 days before the borrower’s employment begins, the loan is not eligible.

• Part-Time/Second Job Income- Part-Time & Second Job income can be used to qualify the

borrower if the lender documents; o The borrower has worked at the part-time or second job uninterrupted for the past

two years, and o Borrower(s) plan to continue

Part-time or second job income received for less than two years may be included as effective income, provided that the lender justifies and documents that the income is likely to continue. Part-time or second job income not meeting the qualifying requirements may be considered compensating factor only. NOTE: For qualifying purposes, “part-time” income refers to employment taken to supplement the borrower’s income from regular employment; part-time employment

• All faxed documents must clearly identify the name and number of the party who is

verifying Borrower(s) information. PBM must be able to verify the information given is accurate.

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INCOME TYPES

CONTINUED

• Internet downloads are acceptable as long as they include, name, title and number of the person who has verified borrower(s) information. Internet downloads must also include the URL address, date and time printed.

• Employment Gaps- AUS to be followed - ***Underwriter discretion is required for

borrower(s) explanation for employment gap greater than 1 month, but less than 6 months. o For employment gaps greater than 6 months, borrower must be on the new job a

minimum of 6 months in order to use the income to qualify. • For information on effective income, see HUD Handbook 4155.1, paragraphs 4.D.1.a and

4.D.2.a • Mortgage Credit Certificate

If a government entity subsidizes the mortgage payments, either through direct payments or through tax rebates, such as Mortgage Credit Certificates, these payments can be considered as acceptable income if verified in writing. Either type of subsidy may be added to gross income or may be used to directly offset the mortgage payment before calculating the qualifying ratios.

• 2106 Business Mileage – Auto Allowances and Expense Account Payments – Only the

amount by which the borrower’s automobile allowance or expense account payments exceed actual expenditures may be considered income. To establish the amount to add to gross income, the borrower must provide: o IRS Form 2106, Employee Business Expenses, for the previous two years, and o Employer verification that the payments will continue.

If the borrower uses the standard per-mile rate in calculating automobile expenses, as opposed to the actual cost method, the portion that the IRS considers depreciation may be added back to income. Expenses that must be treated as recurring debt include: o The borrower’s monthly car payment, and o any loss resulting from the calculation of the difference between the actual

expenditures and the expense account allowance.

IRS BASIS REDUCTION AMOUNT For automobiles a taxpayer uses for business purposes, the portion of the business standard mileage rate treated as depreciation is, 22 cents per mile for 2011, 23 cents per mile for 2012, and 23 cents per mile for 2013.

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ASSETS

• Must meet all asset conditions per DU Approve/Eligible • Verify, document and determine acceptability of assets being utilized • All faxed documents must clearly identify depository/investment firm’s name, account

number and source of information. PBM must be able to verify the information given is accurate.

• Internet downloads are acceptable as long as they include, name, title and number of the person who has verified borrower(s) information. Internet downloads must also include the URL address, date and time printed

• Acceptable sources of funds; o Depository Accounts- if a Verification of Deposit (VOD) is not obtained, a statement

showing the previous month’s ending balance for the most recent month is required. If the previous month’s balance is not shown, then obtain statement(s) for the most recent 2 months to verify sufficient funds to close.

NOTE: If the borrower does not hold the deposit account solely, all non-borrower parties on the account must provide a written statement that the borrower has full access and use of the funds.

o Gift funds – See Down Payment Criteria Section for gift requirements o Stocks and Bonds – obtain brokerage statement(s) for each account for the most

recent 2 months. The borrower(s) actual receipt of funds must be verified and documented if used for down payment.

o Retirement Accounts- obtain the most recent statements for each account to verify sufficient funds to close. Document the terms and conditions for withdrawal and/or borrowing and that the borrower is eligible for withdrawals. Use only 60% of the amount in the account unless the borrower presents documentation supporting a greater amount after subtracting any taxes or penalties for early withdrawal. The borrower(s) actual receipt of funds must be verified and documented only if used for funds to close.

NOTE: When a retirement account is used for down payment and/or closing costs only 60% of the remaining balance is allowed for reserves. Remember, when liquidating funds against a retirement or 401k account, underwriter must deduct the liquidated funds prior to the 60% calculation.

o Sale of Home/Real Estate- obtain a HUD-1 or the equivalent closing statement to

evidence the sale of the property. If the borrower is being transferred by his or her company under a guaranteed sales plan, obtain an executed buyout agreement and accompanying settlement statement indicating that the employer or relocation service takes responsibility for the outstanding mortgage debt.

o Earnest Money Deposit- Verify and document the deposit amount and source of funds, if the amount of the earnest money deposit; Exceeds 2 percent of the sales price, or Appears excessive based on the borrower’s history of accumulating savings.

• Large Deposits- If there is a large increase in an account, or the account was recently

opened, borrower must provide a credible explanation and document the source of funds. All large deposits exceeding income deposits must be sourced and seasoned.

• Real Estate Commission From Sale of The Subject Property o If the borrow is a licensed real estate agent entitled to a real estate commission from

the sale of the property being purchased, then he/she may use that amount for the cash investment, with no adjustment to the maximum mortgage required.

o A family member entitled to the commission may also provide it as a gift funds to the borrower.

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RESERVES Determined by DU unless otherwise noted below: • 1 or 2 Unit – verify all cash reserves are submitted thru AUS • 3 or 4 Unit – regardless if the transaction is a purchase or refinance, 3 months reserves in

liquid funds are required after closing. Gift funds and proceeds from the transaction are not permissible to meet the reserve requirements.

• Funds received from subject transaction cannot be counted to meet the reserve requirements. (i.e. cash received from a refinance transaction)

• See asset section for acceptable sources of funds.

SUBORDINATE FINANCING

• Subordinate Financing allowed (Institutional financing only) • The CLTV is limited to 103% (of the lesser of the sales price or appraised value) when the

FHA first lien is combined with a subordinate lien from an instrumentality of government or government agency that is providing down payment and/or closing cost assistance in the form of secondary financing.

• Underwriters are required to reflect EIN on HUD’s FHA Loan Underwriting and Transmittal Summary in conjunction with secondary financing assistance grants, or DPA (Down Payment Assistance) to the borrower when the borrower is receiving an FHA First Mortgage

SELLER CONTRIBUTIONS

• Limited to 6% of the lesser of the property’s sales price or appraised value

MIP REQUIREMENTS

UFMIP MUST be paid in full. The UFMIP can be financed into loan or paid in cash. Cents cannot be financed this must be paid in cash at closing.

New MIP Amounts set forth in this table are effective for case numbers assigned on or after January 26, 2015

• Case Cancellations may be allowed so borrowers can obtain the reduced MIP Rates as noted in the Mortgagee Letter 15-01. These “Temporary” cancellations will only be available for active FHA case numbers within 30 days of the Mortgagee Letter Effective date January 26, 2015. Temporary cancelation request after January 15, 2015 until February 25, 2015.

• FHA Case Cancelations will be completed by Corporate ONLY. “No Exceptions”

Term > 15 years Base Loan Amount LTV Previous MIP New MIP

< $625,500 < 95.00% 130bps 80bps < $625,500 > 95.00% 135bps 85bps >$625,500 <95.00% 150bps 100bps >$625,500 >95.00% 155bps 105bps

Terms < 15 Years Base Loan Amount LTV Previous MIP New MIP

<$625,500 78.01%-90.00% 45bps 45bps <$625,500 >90.00% 70bps 70bps >$625,500 78.01%-90.00% 70bps 70bps >$625,500 >90.00% 95bps 95bps

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MIP REQUIREMENTS

CONTINUED

All MIPs in this table are effective for case numbers assigned on or after April 1, 2013

Term > 15 years Base Loan Amount LTV Previous MIP New MIP

< $625,500 < 95.00% 120bps 130bps < $625,500 > 95.00% 125bps 135bps >$625,500 <95.00% 145bps 150bps >$625,500 >95.00% 150bps 155bps

Terms < 15 Years Base Loan Amount LTV Previous MIP New MIP

<$625,500 78.01%-90.00% 35bps 45bps <$625,500 >90.00% 60bps 70bps >$625,500 78.01%-90.00% 60bps 70bps >$625,500 >90.00% 85bps 95bps

The new annual MIP for these loans is effective for case numbers assigned on or after June 3, 2013

Term < 15 years Base Loan Amount LTV Previous MIP New MIP

Any Amount <78.00% 0bps 45bps For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP: • For all mortgages regardless of their amortization terms, any mortgage involving an

original principal obligation (excluding financed Up-Front MIP (UFMIP) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.

• For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.

Note: FHA calculates LTV as a percentage by dividing the loan amount (prior to the financing of any UFMIP) by lesser of the purchase price (if applicable) or the appraised value of the home. For streamline refinances with appraisals, FHA uses the original appraised value of the property to calculate the LTV. The table below shows the previous and the new duration of annual MIP by amortization term and LTV ratios at origination.

TERM LTV(%) PREVIOUS NEW < 15 yrs < 78 No annual MIP 11 years < 15 yrs > 78-90.00 Cancelled at 78% LTV 11 years < 15yrs > 90.00 Cancelled at 78% LTV Loan Term > 15 yrs < 78 5 years 11 years > 15yrs > 78-90.00 Cancelled at 78% LTV & 5 years 11 years > 15 yrs > 90.00 Cancelled at 78% LTV & 5 years Loan Term

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TEMPORARY BUYDOWNS

Not Allowed

DOWNPAYMENT CRITERIA

• Borrower(s) minimum down payment requirements 3.5% of the lesser of the appraised value of property or sales price and any borrower closing costs & fees.

• Borrowers that pay any costs out of closing (POC) i.e. appraisal, credit etc. and will be applying that cost towards their 3.5% down payment, must document and source that the funds came from and cleared borrowers account, prior to Final Loan Approval and/or Loan Docs. If a credit card is used, those funds cannot be applied towards the 3.5% down payment.

• Acceptable sources of funds: o Earnest money deposit o Checking and savings accounts o Savings Bonds o IRAs o 401K & Keogh accounts o Stocks & Bonds o Thrift Savings o Sales proceeds o Sale of personal property o Gift (from an acceptable source/fully documented)

All FHA loans must be run through DU on the Web or in the Portal when gift funds are used to qualify. The total amount of the gift funds must be entered into DU, not just the amount of the gift that was used for the down payment. (Sample of DU below)

The following Condition must be noted on DU to qualify for Total Score Card ZFHA AUS: • A gift was entered as a source of down payment. The loan is ineligible for FHA insurance if any

of the down payment funds are provided by (a) the seller or any other person or entity that financially benefits from the transaction, or (b) any 3rd party that is reimbursed directly or indirectly by the seller or any other person or entity that financially benefits from the transaction.

An outright gift of the cash investment is acceptable if the donor is:

The borrower’s relative The borrower’s employer or labor union (See 4155.1 5.B.8.b) A close friend with a clearly defined and documented interest in the borrower A charitable organization (See 4155.1 5.B.4.h-j for guidelines) A governmental agency or public entity that has a program providing home

ownership assistance to low- and moderate-income families, or first-time homebuyers.

• Gift Requirements o It is the Underwriter’s responsibility to review and clear all conditions that apply to

the gift funds. o If gift conditions are moved to “Prior to Funding” they will be required to be “UTR”

Underwriter to Review” condition ONLY. Funding dept. will NOT be allowed to clear gift funds condition.

o Condition must be cleared by Underwriter or Underwriting Manager with a DE Authority.

o If condition is cleared by someone other than the original DE Underwriter, the DE clearing the UTR Conditions will be required to notate that they cleared the gift funds on the LT with their Chums#.

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CONTINUED

Definition of a family member includes: Child, parent, or grandparent, spouse, brother, stepbrother, sister, stepsister, uncle or aunt, legally adopted son or daughter, including a child who is placed with the borrower by an authorized agency for legal adoption, and foster child. • Gift of Equity

o Only family members may provide equity credit as a gift on property being sold to other family members.

o The restrictions on gifts previously discussed in this topic and the restriction on equity credit may be waived by the jurisdictional Homeownership Center(HOC), provided that the seller is contributing to or operating an acceptable affordable housing program.

If the gift funds…. Then…..

• Are in the borrower’s account

Obtain • A copy of the withdrawal

document showing that the withdrawal is from the donor’s account, and

• The borrower’s deposit slip & bank statement showing the deposit

• Are to be provided at closing, and

• Are in the form of a certified check from the donor’s account

Obtain • Bank statement showing the

withdrawal from donor’s account, and

• Copy of the certified check

• Are to be provided at closing, and

• Are in the form of a cashier’s check, money order, official check or other type of bank check

• Have the donor provide a withdrawal document or cancelled check for the amount of the gift, showing that the funds came from the donor’s personal account (Copy of W/D documentation; Copy of borrower’s check stub for cashier’s check, official check or other type of bank check reflecting donors name and account number to match the gift letter)

• When funds are being wired directly from the donor’s account into escrow/title obtain a copy of the Wire Transfer Advice.

• The Wire Transfer Advice must reference the donor’s account number or Bank name and donor name as noted on the gift letter.

• Are being borrowed by the donor, and

• documentation from the bank or other savings account is not available

• Have the donor provide written evidence that the funds were borrowed from an acceptable source, not from a party to the transaction, including the lender

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CONTINUED

• IMPORTANT: Cash on Hand is NOT an acceptable source of gift funds DPA(Down Payment Assistance)/GRANT • City/County DPA Assistance Programs: Any financing other than the first mortgage that

creates a lien against the property is considered secondary financing even if it is a “soft” or “silent” second (which has no repayment provision) or has other features forgiving the debt.

• The underwriter must obtain from the provider of any secondary financing, and include in each endorsement binder documentation evidencing the provision of the borrower’s required minimum cash investment (also known as down payment assistance) from an eligible source, a copy of the Gift letter showing the amount of funds provided to the borrower for that transaction, and copies of the loan instruments. i.e. (Note/Deed of Trust/Loan Agreement/Program Approval w/terms)

• CHF30 (Grant): See Guidelines in Quick Look Manual

OTHER REAL ESTATE

• Max number of financed properties = 4 • Max number of FHA loans = 1

MISCELLANEOUS CRITERIA

• Each borrower (regardless of income source) must complete and sign separate IRS Form 4506-T at application and again with loan documents.

• 4506-T Form must be signed and dated at application and again with loan documents for all Tax returns in the loan file. o Example: If you have 1040’s and 1120’s in the loan file, a separate 4506-T form is

required to be signed and dated for the 1040’s and 1120’s. • 4506-T form signed and dated MUST be processed (transcripts) for all tax returns in the

loan file that are being used for income qualifying only. i.e. 1040’s, 1120’S and 1065’s. • 4506T Requirements; Process 4506T 1040 Transcripts is required for all loan unless W-2

exception issued by corporate underwriting.

o If W-2 exception is approved IRS 4506T W-2 transcripts are required to be processed. If most recent year has an extension a 4506 must be processed and state “no record”, a copy of the extension must be obtained and evidence of any monies owed must be documented paid to the IRS or evidence of refund. In cases of W-2 borrowers only with extensions a 4506 for the W-2 should be processed for the extension year.

o W-2 Only Exceptions are for an hourly or salaried employee. o Investor may pull 4506T if the job title would constitute filing 2106 expenses-

Example: teachers, police/sheriff officers, real estate agents, sales representatives, truck drivers (long distance, trip or load pay base).

• If 4506T results reflect income/loss information that we did not have documented in our file we must require two years 1040’s that match the 4506 results.

2014 Tax Return Transcripts

Loans Funded on or after June 15, 2015 must include the 2014 Tax Return Transcripts to be eligible for purchase. If a borrower has filed an extension, we require:

1. Evidence in the file that the Extension was filed, and 2. A 2014 Tax Transcript showing “No Record of return filed, “ and 3. For salaried borrowers: A 2013 transcript and current paycheck stub, and 2014 W-2 4. For self-employed borrowers; A 2013 transcript and P & L and Balance Sheet for 2014 5. For retired borrowers: In Cases where the borrower is not required to file, transcripts

are still required. If “No Results” feedback is received, provide a copy of the feedback in the Loan file with supporting income documentation.

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MISCELLANEOUS CRITERIA

CONTINUED

Note: Loans that do not require income (non-credit qualifying FHA Streamlines) are exempt. • Short Sale Fees paid by the borrower – Borrowers may pay additional fees and

payments in connection with purchasing a short sale property that are typically the responsibility of the seller. Examples of short sale fees and payments include, but are not limited to the following: o Short sales processing (i.e., short sale negotiation fees, buyer discount fees, short sale

buyer fees) NOTE: The Short sale processing fee is not a common and customary charge and must be treated as a sales concession if any portion is reimbursed by an interested party to the transaction.

o Negotiated short payoff to a subordinate lien holder, and o Payment of delinquent taxes or delinquent homeowner association (HOA) dues.

NOTE: the above referenced fees are non GFE fees. • Maximum allowable short sale fees that can be paid by the borrower are 3% of the sales

price. • These fees and payments cannon be financed into the loan amount and must be included

on the HUD-1 settlement statement. Borrowers must fund the cost of the additional fees and payments with their own funds. The additional funds to complete the transaction must be documented.

• The sales contract will identify if the property being purchased is a short sale property. • The transaction must be an arm’s length (i.e., all parties are unaffiliated and unrelated). • Underwriter must diligently review the purchase transaction for unusual fees, payments,

and other possible “Red Flags” that could indicate fraudulent activity related to the short sale.

• Document Requirements – o The sales contract executed by all parties with details of the additional fees and

payments. o A copy of the executed arm’s length affidavit(s) verifying all parties (borrower, seller,

listing and buying agents) are unaffiliated and un related) o The HUD-1 Settlement Statement that includes all borrower paid short sale fees and

payments, and o Source of client’s funds used to cover the short sale fees and payments.

APPRAISAL REQUIREMENTS

o One full appraisal required o FHA Certified Appraiser o Case Assignment Date Must Be Before Appraisal Inspection Date o 1004D as required by appraisal or DE Underwriters conditions o Age of Appraisal o Appraisal report is good for 120 days, but if appraisal is 90 days or older at

underwriting, the following will be required; o Underwriter to condition loan: o “Recertification required if loan not funded on or before Conditional Commitment

Expiration date” o A recertification of value performed by the original appraiser on a 1004D only. o If the appraisal does exceed 120 days, the case # must be cancelled and a new case #

issued, prior to ordering the new appraisal. o See FHA Case Number Cancellation Process in Policy & Procedures

• Lead Base Paint- o Chipping and peeling paint noted on an appraisal (by appraiser or in photos of

appraisal) for home built prior to 1978 requires that certification of a Paint Abatement licensed contractor.

o If the home was built after 1978, work can be completed by the seller or a licensed painter. All bare wood must be primed or painted and verified by appraiser, paint contractor, termite company, or lender.

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CONTINUED

Homeowners performing renovation, repair or painting work on their own home are exempt from the rule but are encouraged to learn to perform lead-safe work practices.

Property owners/landlord who renovate, repair, or prepare surfaces for painting pre-1978 rental housing must be certified and follow lead-safe work practices required by the rule.

Contractors who perform the repair must be certified and must follow specific work practices to prevent lead contamination.

FHA Roster appraisers and inspectors as well as other independent third parties may perform inspections to verify if painting repairs have been performed as required. These inspections are to determine completion of the repairs, not compliance with the Rule.

If the repair has been made by a contractor and/or property owner/landlord if rental housing, the underwriter must provide with a copy of the EPA or state led training certificate in the name of the party who performed the work. If the repair was made by the homeowner on their own home, the homeowner must provide the underwriter a letter stating that the homeowner made the repair and an inspection to verify completion of the repair is required.

o Non Permitted Room Additions require; o The quality of the work to be described in the appraisal and deemed acceptable

“Workmanlike Quality” by the appraiser. o The addition does not result in a change in the number of units comprising the subject

property. (i.e. a 1 unit converted into a 2 unit) o If the appraiser gives the unpermitted addition value, the appraiser must be able to

demonstrate market acceptance by the use of comparable sales with similar addition footage as the subject property.

o Non-permitted additions are typical for the market area and a typical buyer would consider the “unpermitted” additional square footage to be part of the overall square footage of the property.

o The appraiser to acknowledge if city/county permits exist. • New Construction-

o New construction must be 90% or more completed, including existing less than one year old.

o In cases where a building permit and a certificate of occupancy are issued by a city/county building department that performs a minimum of three inspections (typically the footing, framing and final) the 1004D can be issued by an FHA Appraiser for completion of unit.

o In cases where a building permit is not issued prior to construction and a Certificate of Occupancy upon completion of construction AND condominium unit is one year old or less must have either an Early Start letter (with a minimum of three inspections by an FHA Roster Inspector) or be covered by a HUD-approved ten-year warranty plan (with a final inspection by a FHA Roster Inspector) to be eligible for high-ratio mortgage insurance. Projects are still required to be on the FHA-Approved condominium list

o New Construction required completed forms o Builder’s Certification of Plans, Specifications and Site, form HUD-92541 o Builder’s Warranty, form HUD-92544 o Building Permit and Certification of Occupancy or 10-year Warranty and Final

Inspection signed and dated by the City/County Building Department. o Wood Infestation Report (Termite Soil) NPMA 99a and 99b o Local Health Authority well water analysis or septic report, where applicable. o Compliance Inspection Report- HUD-92051 required if any of the following –

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CONTINUED

o Off- Site Improvements Incomplete (Streets, Sidewalks, items that effect the home value & access)

o On- Site Improvements Incomplete (Roofs, Driveways, Landscaping, Fencing, Plumbing, Drywall, Walkways, Cabinets, etc.)

• New Construction 100% complete (Existing less than one year old) o Builder’s Certification of Plans, Specifications and Site, form HUD-92541 o Builder’s Warranty, form HUD-92544 o Wood Infestation Report (Termite Soil) NPMA 99a and 99b o Local Health Authority well water analysis or septic report, where applicable.

• Pools- o At minimum, swimming pools must comply with all local ordinances (perimeter

fencing, covers, etc.) and if empty or non-functioning, the pool must be secured by a cover that would be sufficiently sturdy to prevent a person from falling in the pool or through the cover or filled with water. If perimeter fencing is not available exterior doors to back yard must have door alarms.

o All gates to back yard must have self-closing devices. Non-functioning pools (and related equipment) which are not covered must be repaired. Swimming pools whose sides are unstable must be repaired or removed and the surrounding land re-graded.

TERMITE REPORT

• Termite Repairs- A Termite Report/Pest Inspection is required on an FHA loan when;

1. If the appraisal is made subject to an inspection by a qualified Pest Control Specialist. OR

2. When it is a requirement of the Purchase Contract. o When a termite report is required, ALL Section 1 items must be cleared by the termite

company or licensed contractor and referenced on the termite clearance prior to funding. If the clearance states items were completed by others and appear to be completed in a workman like manner, it must note the party that performed the work.

o Section 2 items that are required to be repaired are listed in the table below. The items listed below are the most critical items, but there are other items that may require repair (i.e. health & safety, structural, misc. repairs) Section 2 items that are not listed below should be reviewed with Corporate Underwriting for determination of repair requirements.

Section 2 Items Requirement for Completion Any indication of water leak or stain on ceilings

Inspected and/or repaired by licensed roofer

All other major water leaks or stains (includes Hot Water Heater)

Inspected and repaired by a licensed plumber or general contractor. The appraiser or termite company may inspect minor leaks

Loose or broken toilets Inspected by appraiser or licensed contractor

Broken or inoperable faucets Inspected by appraiser or licensed contractor

Broken or inoperable doors Inspected by appraiser or licensed contractor

Broken or cracked windows Repaired by licensed contractor

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TERMITE REPORT REQUIRED

Mold Inspected and repaired by a licensed Mold Abatement Company.

Structural wood replacement or repairs Structural wood repairs: i.e. a general or building contractor must complete removal and replacement of a patio deck, stairs, walls or beams. All wood that is replaced or repaired must be painted. Exposed wood of any kind is not acceptable. The inspector must state that the wood has been primed and/or painted.

Cosmetic wood replacement or repairs Cosmetic wood repairs: i.e. doors, door jams, a licensed contractor, or the seller can complete the repairs. All wood that is replaced or repaired must be painted. Exposed wood of any kind is not acceptable. The inspector must state that the wood has been primed and/or painted.

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OVERALL CREDIT RETAIL CREDIT

INSTALLMENT CREDIT

• Determined by DU • Inquiries on Credit Report- Detailed letter of explanation (LOE) required by the borrower.

NOTE: These inquiries that may potentially result in obligations incurred by the borrower(s) for other mortgages, auto loans, leases, or other installment loans must be explained.

• Age of Credit Report o If a credit report is over 45 days old at funding, a Soft-Pull credit report must be obtained

(no FICO’s required) to determine any changes. If there are no significant changes to the Soft-Pull Report compared to the original

credit report, the original credit report can be used to fund the loan but CANNOT be older than 90 days (120 days for new construction) at funding.

If there are significant changes to the Soft-Pull Report, including any new debt or significant increases in credit balances/payments, a new credit report must be pulled and re-submitted to DU/LP. The file must then be re-underwritten to include the new credit and DU/LP findings.

NOTE: A copy of the Soft-Pull is to be placed under Branch Documents in the loan package.

• Non-Traditional credit NOT allowed • Credit Cards are not allowed to be paid off to qualify, unless all funds being used to pay off

the credit cards are borrower(s) own funds (401K or gift not allowed) and account is closed. o If accounts not closed, DE Underwriter must document the reason why payments are

not considered a factor in borrower(s) ability to pay loan. (i.e. borrower has proof that account has no purchase activity for the last 12 months.)

• Lender is responsible to include that following liabilities; o Debts disclosed on the borrower(s) credit report o Debts disclosed on the borrower(s) mortgage loan application

Alimony Child support Separate maintenance agreements Negative rent on other real estate owned Mortgage debt (PITI) on other real estate owned Installment debt

NOTE: Because of the tax treatment of alimony, the lender may reduce the borrower’s monthly gross income by the amount of the alimony payments rather than include it as a debt obligation. If this option is chosen, do not include the alimony payment as a liability. NOTE: Installment debts with fewer than ten payments remaining maybe excluded from the ratio calculation. However, payments that could significantly impact the DTI, greater than $100, may not be excluded.

• Underwriter is required to review bank statements (if applicable) for any recurring debts that could result in payments not included on the credit report or loan application.

• These payments could impact the DTI (i.e. auto loan, automatic withdrawals, credit cards, school loans, time shares, child support not documented by a divorce decree etc.)

• Non-Purchasing Spouse- Except for obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios. The underwriter must determine if the liabilities will have an impact on the borrower’s ability to make the mortgage payment. o When a Legal Separation Agreement has been filed and recorded, HUD will still require

the Non-Borrowing Spouse Credit Report to be obtained. o Only the Debts disclosed on filed and recorded Legal Separation Agreement as to

ownership will NOT be required to be added to the borrower’s debt ratio for qualifying.

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INSTALLMENT CREDIT CONTINUED

• Non-Purchasing Domestic Partner – If borrower(s) indicate domestic partner status and one partner is not on the loan follow Non-Purchasing spouse guidelines for credit.

• Co-Signed Obligations- If the individual applying for an FHA-insured mortgage is a co-signer or is otherwise co-obligated (co-obligated meaning both parties must be financially liable for the debt in order to exclude the debt from the DTI.) on a car loan, student loan, mortgage, or any other obligation – contingent liability applies unless; o The lender obtains documented proof that the primary obligor has been making

payments during the previous 12 months on a regular basis, and o Does not have a history of delinquent payments on the loan, and o A copy of the contract etc. to show all parties are financially liable for the loan.

• Federal Tax Lien – o If a borrower currently has outstanding IRS or State tax liens; is in a current payment

arrangement of 3 months or greater; it’s for the current tax year, add the debt to the DU and continue with the AUS approval.

o If the borrower currently has outstanding IRS or State Tax liens; is in a current payment arrangement of 3 months or greater; is for a pervious tax year, Manual down grade required.

• Projected Obligations- Debt payments, such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing, Debt payments do not have to be classified as projected obligations if the borrower

provides written evidence that the debt will be deferred to period outside the 12-month timeframe. o Deferred Payments: must be included in the anticipated monthly obligations

during the underwriting analysis. Proof of monthly payment amount must be provided ( NO Exception Allowed) . Mo Debt payments do not need to be included in analysis, if evidence the debt will be deferred to a period outside the 12-month time frame.

o Forbearance Payments: must be reviewed very carefully. FULL documentation of forbearance is required. Can’t be the result of a delinquent payment. Some types of forbearance programs may be acceptable, this would be determined on a case-by-case basis.

• Disputed Accounts – Disputed credit accounts are generally not considered in the borrower’s credit report, FHA requires loans of borrowers with derogatory disputed accounts of $1,000 or more (excluding medical) to be manually underwritten. o FHA has revised the policy on manual downgrades to reflect the risk associated with

derogatory disputed accounts for factors such as age and size of outstanding balance

IF And Then

the Automated Underwriting System

using the TOTAL Mortgage Scorecard rates

the mortgage as an Accept,

the total outstanding balance of all disputed derogatory credit accounts (excluding medical) is less than $1000

downgrade to a manual underwrite is not required

disputed derogatory credit accounts (excluding medical) have an aggregate balance equal to or in excess of $1000

downgrade to a manual underwrite

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INSTALLMENT CREDIT CONTINUED

o Non-Purchasing Spouse - Disputed derogatory credit accounts of a non-purchasing spouse in a community property state are not included in the cumulative balance for purposes of determining if the mortgage application is downgraded to a “Refer”

o Medical 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, etc., are also excluded from the $1,000 limit. However, the lender must provide a credit report, letter from the creditor, or other appropriate documentation to support the dispute, such as a police report disputing the fraudulent charges in the case binder.

o Disputed derogatory credit accounts are defined as: disputed charge off accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.

• Collection Accounts – To mitigate the risk of collections and the borrower’s ability to repay the mortgage, FHA is requiring the lender to follow the guidelines on collection accounts with an aggregate balance equal to or greater than $2,000, as described below.

Capacity analysis includes any of the following actions: o 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.

o If evidence of a payment arrangement is not available, the lender 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

o Non Purchasing Spouse – Collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance. A lender must analyze the impact of the borrower’s ability to pay all collection accounts, including those of the non-purchasing spouse (with the exception of obligations excluded by state law) in accordance with the guidance stated in HUD 4155.1 4.A.5.b and 4.C.2.e.

o Medical Accounts & Charge Offs – Medical collections and charge offs are excluded from this guidance.

IF

And Then

the Automated Underwriting System using the TOTAL Mortgage Scorecard rates the mortgage as Accept

The cumulative outstanding balance of all collection of all borrowers is less than $2000

The underwriter is not required to consider or evaluate collection accounts

The cumulative outstanding balance of all collections of all borrowers is equal to or greater than $2000

The underwriter must include monthly payments in the borrower’s debt-to-income ratio as stated in HUD 4155.1 4.C.2.e for accounts that will remain open subsequent to closing.

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BANKRUPTCY • Chapter 7 – Must be 2 years from the discharge date of bankruptcy • Chapter 13 - Must reflect greater than 2 years from discharge date or manual downgrade

required (Per Total Scorecard) PBM does not allow manual downgrade. Corporate review on case by case only. o Satisfactory re-established credit required o Clear CAIVRS

Underwriters may not rely on clear CAIVRS approval when there is an independent

evidence of conflicting delinquent Federal obligations. The Underwriter must o Document the resolution of any conflicting information, and o Contact the appropriate Homeownership Center (HOC) for instructions or




erroneous social security numbers, and o instructions on processing requirements for other HUD-related defaults and claims.

NOTE: Initial Application date can’t be until after the required time frame has elapsed & AUS findings must be an Approve/Eligible.

FORECLOSURE OR

DEED IN LIEU

• None allowed in the last 3 years from the recording date of the Trustees Deed to the date on new contract or 3 years from date of HUD Claim if prior FHA loan. o (Note: 3 years is determined from Trustee Deed (page 2) by date of sale and purchase

price. If no dollar amount & date are reflected you will use the recording date.) • Satisfactory re-established credit • Clear CAIVRS

Underwriters may not rely on clear CAIVRS approval when there is an independent evidence of conflicting delinquent Federal obligations. The Underwriter must o Document the resolution of any conflicting information, and o Contact the appropriate Homeownership Center (HOC) for instructions or




erroneous social security numbers, and o Instructions on processing requirements for other HUD-related defaults and claims.

• In a case where a non-borrowing spouse or a non-occupying co borrower has benefited from the home that was foreclosed on in any way, the 3 year waiting period would apply. (i.e. tax credit etc.)


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SHORT SALE

• Short sale (pre-foreclosure) none allowed in last 3 years if delinquent on mortgage at time of short sale.

• Borrower current at the time of Short Sale – Borrowers are considered eligible for new FHA-insured mortgage from the date of loan application for new mortgage; o All mortgage payments due on the prior mortgage were made within the month due

for the 12 month period preceding the short sale, and o All installment debt payments for the same time period were also made within the

month due. • Borrowers are not eligible for new FHA – insured mortgage if they pursued a short sale

agreement on his or her principal residence simply to; o Take advantage of declining market conditions, and o Purchase at a reduced price a similar or superior property within a reasonable

commuting distance • Borrowers in default at the time of Short Sale – Borrowers in default on their mortgage at

the time of short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.

• Exceptions: Lender may make exceptions to this rule for borrowers in default on their mortgage at the time of short sale if; o The default was due to circumstances beyond the borrower’s control (such as death of

primary wage earner, long term un-insured illness etc., and o The review of the credit report indicates satisfactory credit prior to the circumstances

beyond the borrower’s control that caused the default, and o Exceptions require Corporate Underwriting Approval.


LOAN MODIFICATIONS • Borrower to provide a copy of the Loan Modification Agreement • Borrower to provide a Letter of Explanation (LOE) regarding financial hardship at the time

of Loan Modification Approval (if applicable) or explain the reason a Loan Modification was completed.

• Underwriter to determine if financial hardship (if applicable) is still a factor for qualifying or determine if the financial hardship has been resolved.

HUD MORTGAGE REJECTS

• On the screen shot for the Mortgage Reject, write on any free space: o “SEE ATTACHED DOCUMENTATION REGARDING REJECT OVERTURN/ REBUTTAL”.

• On your LT, be sure to write in UW Comment section: o “SEE ATTACHED UW NOTES INCLUDING INFO ON MORTGAGE REJECT OVERTURN”

• On your UW Notes, be sure to give a detailed explanation on what is different or has changed that supported overturning the prior reject. Underline that portion (don’t forget, highlighter doesn’t show up on what gets seen by FHA or investors). If it is a critical comment, place it in bold or all CAPS or at least underline it.

• On the actual documentation used to support the overturn, write directly on the supporting documentation “used to support overturn of original mortgage reject”. Writing notes on paperwork in the files regardless of loan type is now highly encouraged.

NOTE: See Policy and Procedures Section N – Mortgage Credit Reject Verification Process for further details on HUD Mortgage Rejects.

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RESALE VALUE OF PROPERTY

FHA reserves the right to require additional documentation from a lender to support the resale value of a property if: • the resale date is more than 90 days(91st day) after the date of acquisition by the seller but

before the end of the twelfth month following the date of acquisition, and • the resale price is 5% or greater than the lowest sale price of the property during the

preceding 12 months. • D.E. Underwriter’s discretion as to whether to accept an AVM or to request a Full 2nd

Appraisal based on the review of the AVM comparables as they relate to the original appraisal. Note: The comparables must be within a reasonable distance of the subject property and within FHA required time frame.

REFINANCE

RATE/TERM • Minimum 640 FICO and above = 55% DTI

o With AUS Approval Greater than 55% requires Lender Specific Notification and o Corporate 2nd Approval and o An additional pricing hit may apply

• Minimum 600-639 for FHA Fixed/Conforming Products ONLY = DTI 31%/43% o Must Have a DU Approve

LP Allowed with Corporate Exception ONLY • FHA UPFRONT MIP REFUND-

o All refinanced loans with unearned UPFRONT FHA MIP must be credited to the unpaid principal balance at closing.

o The refund can be found on the FHA Refinance Authorization statement in FHA Connection.

o The unearned UPFRONT MIP is deducted from the current unpaid principal balance to calculate the new loan amount.

• Maximum loan amount is the lesser of the LTV in the Maximum LTV table or the existing debt calculation as described below.

• To calculate existing debt, add together the amount of the applicable items listed below, any refund of UFMIP must then be subtracted from the total: o Existing 1st lien, any purchase money 2nd lien or any junior liens over 12 months old

(CLTV < 97.75%), borrower paid closing costs, prepaid items, borrower paid repairs per the appraisal and lender discount points.

o Other fees acceptable by the appropriate Homeownership Center (HOC) o The amount of the existing first mortgage may include up to 60 days interest

maximum, but may not include delinquent interest and must be current for month due. o Prepaid expenses may include the per diem interest, hazard insurance, mortgage

insurance, and any real estate tax deposits needed to establish the escrow account. • If the property was acquired less than one year before the loan application, the lower of the

two calculations, 97.75% of original value or the original liens of the property w/o closing costs & prepaids must be used.

• Subordinate financing may remain in place (up to 97.75% CLTV) if the homeowner qualifies with scheduled payments on all liens.

• NOTE: $500 cash back is allowed for minor adjustments in Estimated HUD-1 versus Final HUD-1.

CASH-OUT REFINANCE

• Minimum 640-679 = 50% DTI • Minimum 600-639 for FHA Fixed/Conforming Products ONLY = DTI 31%/43%

o Must Have a DU Approve LP Allowed with Corporate Exception ONLY

• 680 and above = 55% DTI • 85% Max LTV based on the current appraised value, subject to all of the following.

o Property has been owned and the borrower’s principal residence for at least 12 months prior to loan application date.

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CASH-OUT REFINANCE CONTINUED

o No payment may be more than 30 days late within the last 12 months. Payment must be current for the month due.

o 1-4 Units; however, 3-4 Units have additional credit requirement.

The subject property must be self-sufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly payment, divided by the monthly net rental income, does not exceed 100 percent). The mortgage amount calculations are in the referenced Handbook 4155.1: 2.B.4.a-d

http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh

o New secondary financing is limited to 85% CLTV. o Existing subordinate financing is acceptable as long as;

The existing subordinate financing is calculated on the total available amount of second vs. current balance, plus the amount of the new first and cannot exceed 85%

o Any co-borrower added must be an occupant of the property and credit qualify. o A statement from the borrowers disclosing the purpose for the cash out is required.

• FHA UPFRONT MIP REFUND- o All refinanced loans with unearned UPFRONT FHA MIP must be credited to the unpaid

principal balance at closing. o The refund can be found on the FHA Refinance Authorization statement in FHA

Connection. o The unearned UPFRONT MIP is deducted from the current unpaid principal balance to

calculate the new loan amount

HUD REO PROPERTIES

• Repairs and improvements required by the appraiser as essential for property eligibility may be added to the sales price before calculating the mortgage amount. For the cost of repairs and improvements to be eligible for inclusion in the mortgage amount, the sales contract or addendum must identify the borrower has an escrow repair allowance. The amount that may be added to the sales price before calculating the maximum mortgage amount is the lowest of:

a) The appraisers estimate of repairs and improvements; or b) The amount of the contractors bid, if available.

• Only repairs and improvements required by HUD and/or appraiser may be included. • The amount that cannot be financed into the mortgage will become part of the borrower’s

required cash investment. • Lender must establish an escrow account to ensure completion of all required repairs. • Maximum loan amount:

o Value or sales price (+) repairs (less) 3.5% = base loan amount (+) UFMIP financed = Maximum Loan Amount (not to exceed 100% LTV)

o DU Approve/Ineligible for “Loan Amount Exceeds” is acceptable only if repair escrow is financed, otherwise DU must be Approve/Eligible

• HUD Appraisals- o HUD NO longer provides an FHA “as-is” appraisal for establishing market value. o A new appraisal is required with new case number, follow standard FHA appraisal

guidelines.

o Appraiser must be provided with the HUD REO contract at time of request. Appraiser must issue the appraisal in “AS IS” condition. With Repairs noted with Cost to Cure.

o Validity period- Appraisals are valid for a period of 120 days from the effective date of the appraisal. Appraisal validity period can be extended up to 30 additional days in order to close escrow. Contract MUST be ratified prior to the 120 day expiration date to allow the 30 day extension



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HUD REO PROPERTIES CONTINUED

o HUD will not renegotiate or adjust the purchase price after contract ratification. o A second appraisal may not be ordered to support a higher purchase price. In the

event the appraisal is over 4 months old at the time of contract ratification, the buyer will be required to obtain a new FHA “as-is” appraisal at the buyers expense.

o If the buyer is securing a loan that does not involve FHA financing, then the buyer’s lender will order a new appraisal on the property at the buyer’s expense, regardless of whether they overbid the property or not.

• Pools: o HUD REO Properties do not require pools to be filled, which differs from front-end FHA

transactions. o Pools are not required to be covered as long as there is a secure fence surrounding the

backyard. o FHA lenders are to obtain an “as-is” statement from the buyer accepting the pool in

“as-is” condition.

NOTE: Underwriter to condition for pool to be filled with (water or dirt) as repair escrow completion requirement. • FHA 203(b) with Escrow Repairs-

o The MPR Repairs cannot total more than $4,999. o The repair credit is never a credit to the buyer. Borrowers financed escrow repair

funds that are not used to pay for repair will be applied as a principal reduction. o PBM allows up to 30 days after closing for MPR repairs to be completed. Once the

repairs have been completed, the lender will inspect the contractor’s work and disburse the funds to the appropriate parties.

o The repair escrow only applies to the FHA 203(b) financing. The repair escrow does not apply to financing outside of 203(b) or to cash purchases

Condominium Projects - FHA case numbers are required even if project is not

approved. Underwriter will only be required to validate HO6 Insurance. Underwriter will not be required to make any loan level certifications on HOA dues, litigation and/or occupancy requirements to obtain insured loan per HUD.

DEPARTING RESIDENCE

Sufficient Equity in Vacated Property The borrower has a loan-to value (LTV) ratio of 75% or less, as determined by: • A residential appraisal no more than six months old, or • Comparing the unpaid principal balance to the original sales price of the property.

Note: The appraisal may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, Exterior-Only Inspection Residential Appraisal Report or, for condominium units, form Fannie Mae 1075/Freddie Mac 466, Exterior-Only Inspection Individual Condominium Unit Appraisal Report.

• A properly executed lease agreement (that is, a lease signed by the borrower and the lessee) of at least one year’s duration after the loan is closed is required.

• FHA Departing Residence Form MUST be completed when the borrower is retaining their current Primary Residence. o (Quick-Look Manuals=Policy & Procedures=Forms )

Employer Relocations Requires an Exception: The borrower is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally-recognized commuting distance. A properly executed lease agreement (that is, a lease signed by the borrower and the lessee) of at least one year’s duration after the loan is closed is required. Note: FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence that the first month’s rent was paid to the lessee.

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SOLAR SYSTEM • All Solar Contracts must be previewed by Corporate prior to approval • An energy system is considered to be personal property, rather than part of the real

property, if it is leased or operates under a power purchase agreement (PPA). When an energy system is present, the underwriter must verify if the solar system is owned, leased, or subject to a PPA.

• When an energy system is subject to a lease or PPA that has been prepaid and is included in the sales contract, then the value of the system agreement must be treated as an inducement to purchase. The transfer of a lease or PPA to the new owner that is not prepaid is not considered an inducement to purchase.

COMPENSATING FACTORS Compensating factors used for mortgage approval must be supported by documentation.

• The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12-24 months.

• The borrower makes a large down payment (ten percent or more) towards the purchase of the property.

• The borrower has demonstrated an ability to accumulate savings and a conservative attitude towards the use of credit.

• Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.

• The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits.

• There is only a minimal increase in the borrower’s housing expense. • The borrower has substantial documented cash reserves (at least three months’ worth)

after closing. In determining if an asset can be included as cash reserves or cash to close, the lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so absent of retirement or job termination

• Funds borrowed against these accounts may be used for loan closing, but are not to be considered as cash reserves. “Assets” such as equity in other properties and the proceeds from a cash-out refinance are not to be considered as cash reserves. Similarly, funds from gifts from any source are not to be included as cash reserves.

• The borrower has substantial non-taxable income (if no adjustment was made previously in the ratio computations).

• The borrower has a potential for increased earnings, as indicated by job training or education in the borrower’s profession.

• The home being purchased as a result of relocation of the primary wage-earner, and the secondary wage-earner has an established history of employment, is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. The underwriter must document the availability of such possible employment.

PBM FHA Guidelines are based on FHA Guidelines (4155.1 & 4155.2), FHA Total Mortgage Scorecard and recent PBM HUD Audits. As a result of the HUD Audits and HUD Insuring Reviews PBM gathered information to include in our guidelines. NOTE: PBM FHA Guidelines do not include any additional overlays.