FHA Loan Program Guidelines

Transcription

1 The following guidelines apply to all DIRECTORS MORTGAGE FHA loan programs. All loans must adhere to the criteria of these guidelines or the individual loan programs. While DIRECTORS MORTGAGE makes every attempt to include all guidelines, the user is also encouraged to consult the HUD HANDBOOK which can be found at: Please note, however, that DIRECTORS MORTGAGE FHA Guides will supersede any conflict with the HUD HANDBOOK. DIRECTORS MORTGAGE may, at its discretion allow exceptions to the guidelines. Exceptions must be requested by a Loan Officer or Processor. Any exception granted will have a price adjustment. DIRECTORS MORTGAGE s philosophy is to weigh all the risk factors inherent in the loan file. Consideration is given to each individual transaction, applicant profile, documentation provided, and collateral. Because each loan is unique, underwriters are expected and encouraged to use professional judgment in making a lending decision based on the entire profile presented and the relative risk for DIRECTORS MORTGAGE. DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 1

2 Our commitment to fairness and equal opportunity is clear. In keeping with that, all transactions/borrowers will be treated in a consistent and fair manner. And all customers/clients should receive the HIGHEST level of customer service. Table of Contents Appraisal 4 Borrower Eligibility 4 Cash Reserves 5 Condo/PUD 5 Conversion of Current Home to Second Home/Investment Property 5 Credit 6 Documentation 8 Down Payment/Funds to Close 8 Escrow/ Escrow Holdbacks 13 Good Neighbor Next Door 13 HUD REO s 13 Income 16 Liabilities 21 Loan Terms 22 DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 2

3 Mortgage Insurance/Upfront MIP 23 Maximum Mortgage Calculations 23 Number of Properties Owned 24 Occupancy 25 Property Eligibility 25 Ratios 28 Recently Listed Properties 28 Refinances 28 Seller Contributions 30 Subordinate Financing 30 Title Reports 31 Underwriting 31 DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 3

4 Appraisal General Guidelines Must be completed by a FHA approved appraiser Age of appraisal: DIRECTORS MORTGAGE will not accept appraisals dated more than 120 days (existing & new construction) prior to the note date. An Appraisal Update is required on all appraisals dated more than 120 days prior to the note date. If the appraisal indicates that the subject property was previously sold within the last 12 months, the underwriter is required to determine the change in value. If the value has increased 20% or more, the lender must document improvements that support the increase and/or the appraiser must document rapid increases in value within the market. Field review or second appraisal may be required by underwriting. Appraiser must inspect the attic and crawl space for any deficiencies, test all systems components i.e..water, electric, furnace, etc to insure all are in working order OR include the statement property meets HUD handbooks & HUD REO Properties see the HUD REO Section of these guides. Borrower Eligibility Eligible: US Citizens Permanent Resident Aliens Non-permanent resident Aliens Lawful Permanent Resident Aliens: DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 4

5 FHA will insure the mortgage under the same terms and conditions as U.S. citizens. The Mortgage file must Include evidence of the permanent residency, and Indicate that the borrower is a lawful permanent resident alien on the Uniform Residential Loan Application (URLA) NOTE: The Citizenship and Immigration Services (USCIS) within the Dept. of Homeland Security provides evidence of lawful, permanent residency status. Nonpermanent Resident Aliens: FHA will also insure a mortgage made to a nonpermanent resident alien provided that the Property will be the borrower's principal residence Borrower has a valid SSN, and Borrower is eligible to work in the U.S. as evidenced by an Employment Authorization Document (EAD) issued by USCIS. NOTE: The Social Security card cannot be used as evidence of work status. If the authorization for temporary residency status will expire within one year and a prior history of residency status renewals exists, the lender may assume continuation will be granted. If there are no prior renewals, the lender must determine the likelihood of renewal, based on information from the USCIS. Ineligible Borrowers: Non-U.S. Citizens with no lawful residency in the U.S. are not eligible for FHA-insured mortgages. Foreign nationals. Borrowers with diplomatic immunity. Borrowers without social security numbers. All SS numbers require third party verification for validity. Anyone listed on HUD LDP or GSA lists (includes: borrowers, seller, listing & selling real estate agents, loan officers, loan processors, escrow & title officers, or any other person involved in transaction DIRECTORS MORTGAGE will make loans to individuals only. Cash Reserves Condos/PUD s As determined by DU/LP. 3-4 units require 3 months reveres (cannot be derived from gift) See converting current home to rental for special consideration. Attached condominiums must be approved be FHA. The approved list can be located at In addition we must certify the following Provide a completed condo questionnaire At least 50% of units must sold and be O/O. No more than 10% of the units may be owned by one investor. No more that 25% of floor may be for commercial use. No more than 15% of the HOA may be 30 days or more in arrears. Max FHA concentration is 30% (be will shown on the HUD approved list) DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 5

6 Detached condominiums (site Condos) do not require project approval. Conversion of current residence to investment property When borrowers are departing a primary residence and converting it into a rental property, borrowers should qualify for both PITI payments. There are 2 exceptions to this rule: Exceptions: Rental income on the property being vacated, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA Homeownership Center (see may be considered in the underwriting analysis under the following circumstances: Relocations: The homebuyer 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 (i.e., a lease signed by the homebuyer and the lessee) of at least one year s duration after the loan is closed is required. FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month s rent was paid to the homeowner. Sufficient Equity in Vacated Property: The homebuyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property. The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466. A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year s duration after the loan is closed is required. FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month s rent was paid to the homeowner. Credit History Acceptable Individual Credit Reports: Residential Mortgage Credit Report Alternate credit is NOT acceptable. All loans require submission to the AUS Total Scorecard with credit scores Credit documents should be no older than 90 days Credit Score Determination Use: lower of two (2), middle of three (3). Use the lowest score of all borrowers on the loan. DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 6

7 Minimum Trade line requirement: Minimum 3 trade lines with a recent 12 month history Credit Score Requirements: Minimum credit score: 640 except streamlines that require a 680. Total Scorecard Accept: The TOTAL scorecard accept recommendation does not require an explanation of adverse credit, or other derogatory information, however, there must be evidence of payoff for any outstanding judgments shown on the credit report. Recent and/or Undisclosed Debts. The lender must determine the purpose of any recent debts as the indebtedness may have been incurred to obtain part of the required cash investment. See the following for documentation requirements: Verify the actual monthly payment amount Include the monthly payment amount and resubmit the loan if the liability is greater than $100 per month, and Determine that any funds borrowed were not/will not be used for the homebuyers cash investment into the transaction. A borrower must provide a satisfactory explanation for any significant debt that is shown on the credit report but not listed on the loan application. Written explanation is required for all inquiries shown on the credit report in the last 90 days. Collections and Judgments. Collection accounts trigger neither an explanation requirement not a hypothetical monthly payment to be used in qualifying the borrowers. The presence of collection accounts in the borrower s credit history already result in lowering the credit scores used in the TOTAL and, thus, no further information needed. Paying off collections and judgments: Collection accounts are not required to be paid off as a condition of the mortgage approval however, court-ordered judgments must be paid off. Exception: An exception on a court-ordered judgment may be made if the borrower Has an agreement with the creditor to make regular and timely payments, and Has provided 12 months documentation indicating that payments have been made according to the agreement Credit History (cont.) Previous Mortgage Foreclosure or Short Sale. DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 7

8 Bankruptcy. Not eligible for new FHA-insured mortgage if during the last 4 years (no exceptions) Chapter 7 Bankruptcy: Not eligible for new FHA-insured mortgage if during last 4 years, and Have re-established good credit, or Chosen not to incur new credit obligations Chapter 13 bankruptcy: Not eligible for new FHA-insured mortgage if during last 4 years from discharged date, and Have re-established good credit, or Chosen not to incur new credit obligations Consumer Credit Counseling Payment Plans: The borrower s decision to participate in consumer credit counseling does not trigger a requirement for additional documentation since the credit scores already reflect the degradation in credit history. The borrower s credit history, not voluntary participation in consumer credit counseling, is the important variable in scoring the mortgage and, thus, no explanation or other documentation is needed. Non-purchasing Spouses. The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington & Wisconsin. If the borrower resides in or the subject property is located in a community property state and only one spouse is the borrower, a credit report of the non-purchasing spouse must be pulled and all of the debts included in the qualifying ratios for the loan. The payment history is not factored into the loan decision and CAVIRS, LDP & GSA checks are not completed for the non-purchasing spouse. This applies for all Purchase or Refinance Transactions. Documentation AGE OF DOCUMENTATION Credit documentation may not be dated more than 90 days prior to the Note date. Credit documentation includes all: Income documents Asset Documents Credit reports Preliminary title reports Appraisal documentation may not be dated more than 120 days prior to the note date. Please refer DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 8

9 Down Payment/ Funds to Close to Appraisal section for any additional requirement. A. Seller Contributions. The seller (or other interested third parties such as real estate agents, builders, developers, etc., or a combination of parties) may contribute up to 6% of the property's sales price toward the buyer's actual closing costs, prepaid expenses, discount points, and other financing concessions. B. Inducements to Purchase. Certain expenses paid on behalf of the borrower, as well as other inducements to purchase, result in a dollar-for-dollar reduction to the sales price before applying the appropriate LTV ratio. These inducements include: Contributions exceeding 6% of the sales price Contributions exceeding the actual cost of prepaid expenses, discount points, and other financing concessions Decorating allowances Repair allowances Moving costs, and Other costs determined appropriate by the HOC Excess rent credit (see rent credit section of guides) Gift funds not meeting requirements (see gift funds section of guides) All funds for the borrower's investment in the property must be verified and documented. Acceptable sources of these funds include the following: Earnest Money Deposit. Verify with documentation, 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 Satisfactory documentation includes: A copy of the borrower's canceled check. Certification from the deposit-holder acknowledging receipt of funds, or Separate evidence of the source of funds is also acceptable. Evidence of source of funds includes a VOD or bank statement showing that at the time the deposit was made the average balance was sufficient to cover the amount of the earnest money deposit. Savings and Checking Accounts. As required by AUS findings. Obtain an explanation and documentation for recent large deposits and verify that recent debts were not incurred to obtain part, or all, of the required cash investment on the property being purchased Gift Funds. Who can provide a gift: DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 9

10 Borrowers relative A close friend with a clearly defined and documented interest in the borrower Borrowers employer or labor union Charitable organization *these must be on DMI s approved list or sent in for an exception* Governmental agency or public entity that has a program providing home ownership assistance to: low & moderate income families, or first-time homebuyers *these must be on DMI s approved list or sent in for an exception* Gift letter requirements: Down Payment/ Funds to Close (cont) Show the donor s name, address, telephone number Donor s relationship to the borrower and that no repayment is required The dollar amount of the gift on the application or in a gift letter for each cash gift received Signed by all parties Documenting the Transfer of gift funds: If the gift funds are in the borrower's account Then obtain a copy of the withdrawal document showing that the withdrawal is from the donor's account, and the borrower's deposit slip and 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 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 are to be provided at closing, and are in the form of an electronic wire transfer to the closing agent obtain a bank statement showing the withdrawal from the donor's account, and copy of the certified 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. have the donor provide documentation of the wire transfer. Note: The lender must obtain and keep the documentation of the wire transfer in its mortgage loan application binder. While the document does not need to be provided in the insurance binder, it must be available DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 10

11 for inspection by FHA's Quality Assurance Division (QAD) when that office conducts its onsite review of lenders. are being borrowed by the donor, and have the donor provide written evidence documentation from the bank or other that the funds were borrowed from an savings account is not available acceptable source, not from a party to the transaction, including the lender. IMPORTANT: Cash on hand is not an acceptable source of donor gift funds. IRA s, Thrift savings plans, 401K s and Keogh accounts. Up to 60% of the value of assets may be included in the underwriting analysis. Document the terms and conditions for withdrawal and/or borrowing, and that the borrower is eligible for these withdrawals. NOTE: Liquidation evidence is not required Stocks and bonds. The monthly or quarterly statement provided by the stockbroker or financial institution managing the portfolio may be used to verify the value of stocks and bonds. NOTE: Verify actual receipt of funds must be verified and documented Down Payment/ Funds to Close (cont) Savings Bonds. Government issued bonds are counted at the original purchase price, unless eligibility for redemption and the redemption value are confirmed. NOTE: The actual receipt of funds at redemption must be verified Sales Proceeds. The net proceeds from an arm's-length sale of a currently owned property may be used for the cash investment on a new house. A fully executed HUD-1 Settlement Statement must be provided as satisfactory evidence of the cash sales proceeds accruing to the borrower. If the property has not sold by the time of underwriting, loan approval must be conditioned upon verifying the actual proceeds received by the borrower. The lender must document the Actual sale and Sufficiency of the net proceeds required for settlement. Trade Equity. The borrower may agree to trade his or her real property to the seller as part of the cash investment. The amount of the borrower's equity contribution is determined by Using the lesser of the property s appraised value or sales price, and subtracting all liens against the property being traded along with any real estate commission In order to establish the property value, the borrower must provide DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 11

12 a residential appraisal no more than six months old to determine the property s value, and Evidence of ownership also is required. NOTE: if the property being traded has an FHA-insured mortgage, assumption of that mortgage is not allowed. Sale of Personal Property. If the borrower intends to sell personal property items (cars, recreational vehicles, stamps, coins, baseball card collections, etc.) to obtain funds required for closing, the borrower must provide: Satisfactory estimate of their worth, and Evidence the items have been sold. The estimated worth of the items being sold may be in the form of: Published value estimates issued by organizations, such as automobile dealers, philatelic or numismatic associations, or a separate written appraisal by a qualified appraiser with no financial interest in the loan transaction. Only the lesser of this estimate of value or the actual sales price is considered as assets to close. Employer's Guarantee Plans. If the borrower's employer guarantees to purchase the borrower's previous residence as the result of relocation, the borrower must submit evidence of the agreement and the net proceeds must be guaranteed. Employer Assistance Plans. If the employer pays the following to attract or retain valuable employees, the payment is considered employee compensation: Down Payment/ Funds to Close (cont) Employee's closing costs Mortgage insurance premium, or Any portion of the cash investment An adjustment to the maximum mortgage amount is not required. If the employer provides this benefit after loan settlement, the borrower must provide evidence of sufficient cash for closing. A salary advance, however, cannot be considered as assets to close since it represents an unsecured loan. Rent Credit. The cumulative amount of the rental payments that exceed the appraiser's estimate of fair market rent may be considered accumulation of the borrower's cash investment. The following MUST be included Rent w/option to purchase agreement, and DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 12

13 Appraiser s estimate of market rent. Conversely, treat the rent as inducement to purchase with an appropriate reduction to the mortgage, IF the sales agreement reveals that the borrower Has been living in the property rent-free, or Has an agreement to occupy the property as a rental considerably below fair market value in anticipation of eventual purchase. Exceptions may be granted in situations, such as when a builder fails to deliver a property at an agreed-to time and then permits the borrower to occupy that or another unit for less-thanmarket rent temporarily until construction is complete. Cash saved at home or Cash Accumulated with Private Savings Club. Not Eligible Escrow/ Escrow Holdbacks Good Neighbor Next Door Features and Requirements Commission from Sale. If the borrower is a licensed real estate agent entitled to a real estate commission from the sale of the property being purchased, that amount may be used for the cash investment with no adjustment to the maximum mortgage required as long as it does not exceed 6%. A family member entitled to the commission also may provide gift funds to the homebuyer. Disaster Relief Grants and Loans. Grants or loans from state and federal agencies [e.g., Federal Emergency Management Agency (FEMA)] that provide immediate housing assistance to individuals displaced due to natural disaster may be used for the borrower's cash investment. Secured or unsecured disaster relief loans administered by the Small Business Administration (SBA) also may be used. However, if the SBA loan will be secured against the property being purchased, it must be clearly subordinate to the FHA-insured mortgage. Any monthly payment arising from such a loan must be included in the qualifying ratios. Escrows are required on all FHA loans. Escrow holdbacks are NOT allowed. Exceptions will be considered for HUD REO properties. Must purchase a HUD owned home in a targeted area. Visit and click on Good neighbor Next door for borrower type to bring up eligible properties. Eligible borrowers: Law enforcement officer. Firefighters. Emergency medical Technicians (EMTS). Private and public K-12 grade teachers (must buyer in same school district as working in). Must be full time employees. Borrowers may not own or have owned property in the 12 months preceding the offer date. Borrower borrowers 50% of sales price and HUD carries a silent second for the remaining 50%. No interest or payments are required on this "silent second" mortgage if you live in the home for the entire 36 month occupancy period. You may be required to pay a pro-rata portion of the discount to HUD should you fail to fulfill the three year DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 13

14 occupancy requirement. Down payment requirement is $100. Closing Costs and prepaids can be financed into the loan amount. Appraisal is provided by HUD. Repair escrows up to $5,000 will be considered on a case by case basis. HUD Owned properties (REO) All other standard credit income and documentation apply. Occupancy Owner occupied only Eligible Properties 1-4 units PUD Condos; must be approved by HUD, except for site condos detached) Appraisals An appraisal is issued by an HUD M& M contractor at no cost and should be available at the time the contract is signed. Obtain a copy from the realtor or M&M contractor. Valid for 120 days (A new appraisal may only be ordered if the one provided is expired). An appraisal is issued by an HUD M& M contractor HUD REO appraisals will be offered using one of the following 3 approaches; 1. Subject property is insurable in its as-is conditions with no repairs. 2. Subject property is insurable in its as-is state with repairs costing $5,000 or less with repair escrow. o This would require an exception for the escrow hold back. o 110% of repairs may be financed into the loan. o Add 110% to the sales price to determine the acquisition cost 3. Uninsurable Properties offered for sale "Uninsured" do not meet, in their "as-is" condition, FHA s Minimum Property Standards and the cost of repairs is estimated to exceed $5,000. Uninsurable properties qualify only for Section 203(k) financing and, depending on the scope and extent of repairs needed, the Streamlined (k) Limited Repair Program. These are not offered in house but may be brokered. Escrowed repairs when required by the appraisal Require an exception; should be ordered early in the process. When approved; 110% or repairs costs, as noted by the appraisal can be added to the sales price to determine the acquisition and may potential be financed (see loan amount calculation below). Lock period must extend past the closing date to include the days approved for the holdback DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 14

15 Loan Amount Calculation Loan amount is calulated the same as any other FHA purchase using the lower of the sales price/aquistion price and the as is appraised value. Case Number Processing Obtain a new FHA Case Number for applications. When entering the case information in FHA Connection, mortgagees should select "Real Estate Owned" for Processing Type. When processing, the Computerized Homes Underwriting Management System (CHUMS) will require a response to the following question, "Was this case previously sold as a Property Disposition?" Always check YES when processing a loan application for FHA-insured financing on an REO property. The mortgagee should complete the "Previous Case Number" field. This field is designed to track REO properties sold with FHA-insured financing and whether they are subsequently sold by the individuals who purchased them from HUD. If entry of the previous case number triggers an error message, the underwriter should request that the processing and underwriting division of their Homeownership Center (HOC) post the number in the CHUMS property disposition file. Note: the appraisal fields in the FHA Connection should be left blank when obtaining a new case number for REO loans. If the REO property is a condominium, FHA Connection will require the entry of the condo ID. If FHA financing was approved on the sales contract, the condominium development must be an approved compliance with the condominium procedures Note: Site condominiums do not require FHA approval and must be processed under Section 203(b). Additional HUD required Forms Radon Gas and Mold Notice and Release Agreement (must be included with the sales contract and fully executed. Form HUD-92300, Mortgagee's Assurance of Completion HUD-92051, Compliance Inspection Report, after the completion of repairs. Review of the HUD Sales Contract The HUD sales contract (form HUD-9548) must be fully completed and signed by the submitting selling broker, the M&M Contractor and the prospective purchaser. If applicable, the Lead-Based Addendum may be attached. The HUD sales contract must specify the: DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 15

16 Sales price Financing terms Amount of closing costs HUD will pay at settlement Real estate commission HUD will pay Closing date Line 5 - of the sales contract represents actual borrower financing and closing costs to be paid on their behalf by HUD (the seller) out of the sales proceeds. It does not represent an amount which the borrower may finance in the mortgage. Only the actual amount of closing and financing costs will be paid by HUD at settlement. The borrower will not be credited at settlement for any unused portion. Prepaid items may not be paid out of the amount on Line 5. Line 8 of the sales contract will specific be the percentage of discount, if any, which will be applied to the sales price at settlement. Where the price will be discounted, the mortgage amount will be based on that discounted sales price, not the contract sales price. Line 9- of the sales contract will be the number of days, normally 45 or 60, in which the sale must be closed. If the contract is not complete, and/or there are questions about the terms or conditions or if the contract must be amended as a condition of loan approval, contact the M&M contractor. May be used with the Good Neighbor Next Door feature. All other features of FHA loans not address here would apply per our guideline. Income documentation Full Documentation type is permitted only. 4506T required to be executed by all borrowers on all loans. EFFECTIVE INCOME The anticipated amount of income, and the likelihood of its continuance, must be established to determine a borrower's capacity to repay mortgage debt. Income may not be used in calculating the borrower's income ratios if it comes from any source that cannot be verified, is not stable, or will not continue. This section describes acceptable types of income, procedures for calculating effective income, and requirements for establishing income stability. STABILITY OF INCOME Minimum of 2 year employment history is required. This includes jobs that are seasonable, as long as the meet requirements for seasonable income. Schooling in combination w/new employment typically does not meet this requirement; however we will look at these on a case by case only. DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 16

17 The AUS Accept recommendation does not require an explanation for gaps in employment of six months or less, during the most recent two years SALARIES, WAGES, AND OTHER FORMS OF EFFECTIVE INCOME A. Overtime and Bonus Income. Both overtime and bonus income may be used to qualify if the borrower has been employed with the same employer for two years and received such income for the past two years and it is likely to continue. The lender must develop an average of bonus or overtime income for the past two years, If employment verification states that such income is unlikely to continue, it may not be used for qualifying. Periods of less than two years may be acceptable provided the lender justifies and documents in writing the reason for using the income for qualifying purposes. Income documentation (cont) An earnings trend also must be established and documented for overtime and bonus income. If either type shows a continual decline, the lender must provide a sound rationalization in writing for including the income for borrower qualifying. If bonus income varies significantly from year to year, a period of more than two years must be used in calculating the average income. B. Part-Time Income. Part-time/second job income, including employment in seasonal work, may be used in qualifying if the lender documents that the borrower has worked the part-time job uninterrupted for the past two years and will continue to do so. Seasonal income. Seasonal employment is considered uninterrupted and may be used in qualifying if the lender documents that the borrower has worked the same type of job for the past two years and Expects to be rehired during the next season. A Verification of employment from employer would satisfy these two conditions. C. Military Income. In addition to base pay, military personnel may be entitled to additional forms of pay, such as Income from variable housing allowances, clothing allowances, flight or hazard pay, rations, and proficiency pay These types of pay are acceptable, provided its probability of continuance is verified in writing. An additional consideration may be the tax-exempt nature of some of these payments (see paragraph P for additional information.) D. Commission Income. Commission income must be averaged over the previous two years. The borrower must provide: DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 17

18 copies of signed tax returns for the last two years, and Most recent pay stub. NOTE: Unreimbursed business expenses must be subtracted from gross income if borrower receives more than 25 percent of his / her annual income from commissions. Commission income showing a decrease from one year to the next requires significant compensating factors to allow for loan approval. Commissions earned for less than one year are not considered effective income. (Borrower must be employed with the same employer for two years to use commission income) E. Retirement and Social Security Income. Retirement and social security income require verification from the source (former employer, Social Security) or federal tax returns. If any benefits expire within the first full three years, the income source may be considered only as a compensating factor. F. Alimony, Child Support, or Maintenance Income. Income in this category may be considered as effective income if the borrower documents: Income documentation (cont) Provide a copy of the final divorce decree, legal separation agreement, or voluntary payment agreement, Evidence that payments have been received during the most recent 3 months. Acceptable evidence of payment includes using deposits on bank statements, canceled checks, deposit slips, tax returns, and court records. Must continue for at least 3 years G. Notes Receivable. A copy of the note must be presented to establish the amount and length of payment. The borrower also must provide Copy of the Note to establish the amount and length of payment, and Evidence that these payments have been received consistently for the last twelve months, which may include deposit slips, canceled checks, or tax returns. I If the borrower is not the original payee on the note, the lender must also establish that the borrower is now a holder in due course and able to enforce the note. H. Interest and Dividends. Interest and dividend income may be used, provided that documentation (tax returns or account statements) supports a two-year history of receipt. This income must be averaged over the two years. Any funds derived from these sources and required for the cash investment must be subtracted before the projected interest or dividend income is calculated. I. Mortgage Credit Certificates. If a government entity subsidizes the mortgage payments, either through direct payments or through tax rebates. All government entities must be approved thru DMI s secondary marketing department and is subject to availability of funds. J. VA Benefits. Direct compensation, such as for a service-related disability, is acceptable, subject to documentation from the VA. Education benefits, used to offset education expenses, are not acceptable. DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 18

19 K. Government Assistance Programs. Income received from government assistance programs is acceptable, subject to documentation from the paying agency, provided the income is expected to continue at least three years. If the income is not expected to be received for at least three years, such income may be considered as a compensating factor. (Unemployment income must be documented for two years. Reasonable assurance of its continuance is also required. This requirement may apply to individuals employed on a seasonal basis, such as farm workers, resort employees, etc.) L. Rental Income. Rent received for properties owned by the borrower is acceptable if the lender can document the stability of rental income through a current lease an agreement to lease, a rental history over the previous 24 months that is free of unexplained gaps greater than three months. (Student, seasonal, or military renters, or property rehabilitation would provide such an explanation). A separate schedule of real estate is not required for rental properties, provided all properties are shown on the URLA. NOTE: The underwriting analysis may not consider rental income from any property being vacated by the borrower, except: Income documentation (cont) Relocations- the home buyer 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 of at least 1 years duration after the loan is closed is required. Also obtain evidence of security deposit and / or first month s rent check and proof if was deposited into borrowers account Sufficient Equity in Vacated property: Equity of departed property must be 75% or less, as determined by a current (no more than 6 months old) residential appraisal. The appraisal may be on 2055 exterior, 1075 exterior condo unit M. Boarder income. Rental income from boarders is acceptable IF the borrowers are related by blood, marriage or law. The rental income may be considered effective, if shown on the borrower s tax return. If not on the tax return, may only be used as a comp factor. Income documentation for boarder income is as follows: Most recent schedule E on IRS 1040 form, and Current leases/rental agreements N. Automobile 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. DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 19

20 To establish the amount add to gross income, the borrower must provide the following: IRS Form 2106, Employee Business Expenses, for the previous two years, and Employer that these payments will continue. If the borrower uses the standard per-mile rate in calculating automobile expenses, the portion that the IRS considers depreciation may be added back to income. Expenses that must be treated as a recurring debt include: The borrowers monthly car payment, and Any loss resulting from the calculation of the difference between the actual expenditures and the expense account allowance O. Trust Income. Income from trusts may be used if guaranteed, constant payments will continue for at least the first three years of the mortgage term. Documentation is required and includes: copy of the Trust Agreement, confirming amount, frequency of distribution, and Duration of payments. Income documentation (cont) Trust Funds may be used for the required cash investment if the borrower provides adequate documentation that the withdrawal of funds will not negatively affect income. The borrower may use funds from the trust account for the required cash investment, but the trust income used to determine repayment ability cannot be affected negatively by its use. P. Nontaxable Income. If a particular source of regular income is not subject to federal taxes (e.g., certain types of disability and public assistance payments, military allowances), the amount of continuing tax savings attributable to the nontaxable income source may be added to the borrower's gross income. The percentage of income that may be added may not exceed the appropriate tax rate for that income amount, and no additional allowances for dependents are acceptable. The lender must document and support the adjustments (the amount the income is "grossed up") made for any nontaxable income source. Child support income cannot be grossed up. The lender should use the tax rate used to calculate last year's income tax for the borrower. If the borrower is not required to file a federal income tax return, the tax rate to use is 25 percent. Q. Projected Income. Projected or hypothetical income is not acceptable for qualifying purposes. EMPLOYMENT BY FAMILY OWNED BUSINESSES Borrowers employed at businesses owned by their family member(s) are required to provide additional income documentation. These borrowers must provide the normal verification of employment, pay stubs, and evidence that they are not an owner of the business. This evidence may include: DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 20

21 copies of the borrower's signed personal tax returns, or a signed copy of the corporate tax return showing ownership percentage. SELF-EMPLOYED BORROWERS A borrower with a 25 percent or greater ownership interest in a business is considered self-employed for FHA mortgage loan underwriting purposes. Income documentation (cont) Minimum Length of Self-Employment. 2 years are required (no exceptions) Length of self-employment is documented by: Most recent personal federal taxes w/all applicable schedules, signed & dated Most recent business federal taxes (if ownership greater than 25%) w/all applicable schedules, signed & dated Liabilities Recurring Obligations. The borrower's liabilities include all installment loans, revolving charge accounts, real estate loans, alimony, child support, and all other continuing obligations. In computing the debt-to-income ratios, the lender must include the monthly housing expense and all other additional recurring charges extending ten months or more, including payments on installment accounts, child support or separate maintenance payments, revolving accounts and alimony, etc. Debts lasting less than ten months must be counted if the amount of the debt affects the borrower's ability to make the mortgage payment during the months immediately after loan closing; this is especially true if the borrower will have limited or no cash assets after loan closing. Car leases must always be counted regardless of months remaining. The following additional information deals with revolving accounts and alimony payments: 1. Revolving Accounts. If the account shown on the credit report has an outstanding balance, monthly payments for qualifying purposes must be calculated at the greater of 5 percent of the balance or $10 (unless the account shows a specific minimum monthly payment). 2. Alimony. Because of the tax consequences of alimony payments, the lender may choose to treat the monthly alimony obligation as a reduction from the borrower's gross income in calculating qualifying ratios, rather than as a monthly obligation. Contingent Liabilities. A contingent liability exists when an individual will be held responsible for payment of a debt, should another party, jointly or severally obligated, default on that payment. In order to exclude debt, the following documentation is needed: If debt was assigned to ex-spouse & the credit history has been clean, provide divorce decree w/all pages showing all debts assigned 12 months front / back of cancelled checks or corresponding bank statements and no DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 21

22 history of delinquent payments during that time Projected Obligations. If a debt payment, such as a student loan, is scheduled to begin within twelve months of the mortgage loan closing (such as student loans), the lender must include the anticipated monthly obligation in the underwriting analysis. Debt Payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12 month timeframe. Obligations Not Considered Debt. Obligations not to be considered debt (or subtracted from gross income) include federal, state, and local taxes; FICA or other retirement contributions such as 401(k) accounts (including repayment of debt secured by these funds) commuting costs union dues open accounts with zero balances automatic deductions to savings accounts child care Voluntary deductions. Liabilities (cont) PAYOFF OF REVOLVING DEBT TO QUALIFY Allowed. Non-purchasing Spouses. If required by state law in order to perfect a valid and enforceable first lien, the non-purchasing spouse may be required to sign either the security instrument or documentation evidencing that he or she is relinquishing all rights to the property. When the security instrument is executed for this reason, the non-purchasing spouse is Not considered a borrower, and Not required to sign the loan application NOTE: In all other cases, the non-purchasing spouse does not Appear on the security instrument or Take title to the property at loan settlement Non-Purchasing Spouse Credit History: Except for the obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower's qualifying ratios if the borrower resides in a community property state or Property to be insured is located in a community property state. DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 22

23 Non-Purchasing Spouse Credit History: The non-purchasing spouse's credit history is not to be considered a reason for credit denial, however, the non-purchasing spouse s credit report that complies with the requirements of the above non-purchasing guides must be obtained for the non-purchasing spouse in order to determine the debt-to-income ratio Loan Terms 30 year fixed rate 15 year fixed rate 5/1 ARM 3/1 ARM 2-1 buy-downs allowed Calculated using the actual payment method for pricing. Maximum Loan Amount/LTV / CLTV LTV CLTV Purchase 96.5% 100% Rate and Term 97.75% 97.75% Cash out 85% 85% The maximum insurable mortgage is the lesser of: (1) the statutory loan limit for the area (typically a county or metropolitan statistical area (MSA)) or (2) the applicable loan-to-value (LTV) limit. Most FHA mortgages require payment of an up-front mortgage insurance premium (UFMIP). The statutory loan amount and loan-to-value limits described above do not include the UFMIP. Additions to the Mortgage Amount. Not Eligible Mortgage Insurance Upfront and Monthly The UFMIP for purchase transactions and full qualifying FHA refinances is 1%. The Chart below reflects the monthly MIP factors. LTV Annual for Loans >15 Years) LTV Annual for Loans < 15 Years < % 78%.00% > % to 90%.25% <90%.50% UFMIP may be 100% financed in or 100% paid in cash. DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 23

24 Maximum Mortgage Calculation The maximum insurable mortgage is the lesser of the statutory loan limit for the area (typically a county, or metropolitan statistical area (MSA)), or applicable loan-to-value (LTV) limit, applied to the lesser of the sales price or the appraised value. The current statutory maximums can be found at the web site below Certain types of loan transactions affect the amount of financing available and the calculations of the maximum mortgage. These transactions include identity-of-interest, properties with non-occupying co-borrowers, three- and four-unit properties, properties for which a house will be constructed by the borrower on his or her own land or as a general contractor, as a general contractor, payoffs of land contracts, and transactions involving properties under construction or less than year old A. Identity-of-Interest Transactions. Identity-of-interest transactions on principal residences are restricted to a maximum LTV ratio of 85 percent. Identity-of-interest is defined as a sales transaction between parties with family relationships or business relationships. However, maximum financing above 85 percent LTV is permissible under the following circumstances: 1. A family member purchases another family member's home as a principal residence. If a property is sold from one family member to another and is the seller's investment property, the maximum mortgage is the lesser of either: a. 85 percent of the appraised value, or b. The appropriate LTV ratio percentage applied to the sales price, plus or minus required adjustments. The 85 percent 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. 2. An employee of a builder purchases one of the builder's new homes or models as a principal residence. 3. A current tenant purchases the property that he or she has rented for at least six months immediately predating the sales contract. (A lease or other written evidence must be submitted to verify occupancy.) 4. A corporation transfers an employee to another location, purchases that employee's home, and then sells the home to another employee. B. Non-occupying Borrowers. When there are two or more borrowers, but one or more will not occupy the property as a principal residence, the maximum mortgage is limited to a 75 percent LTV. However, maximum financing, is available for borrowers related by blood, marriage or law (spouses, parent-child, siblings, stepchildren, aunts-uncles/nieces-nephews, etc.), or for unrelated individuals that can document evidence of a family type, longstanding, and substantial relationship not arising out of the loan transaction. All borrowers, regardless of DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 24

25 occupancy status, must sign the security instrument and mortgage note. If a parent is selling to a child, the parent cannot be the co-borrower with the child on the new mortgage unless the loan-to-value is 75 percent or less. (Purchases Only) To reduce risk exposure, mortgages with non-occupying co-borrowers are limited to one-unit properties if the LTV will exceed 75 percent. While we do not object to legitimate transactions in which non-occupant borrowers assist in the financing of the property -- such as when parents help their children buy a first home -- this arrangement may not be used by non-occupant borrowers to develop a portfolio of rental properties. The degree of financial contribution by the non-occupant borrower, and the number of properties similarly owned may indicate that an investor loan has become the practical reality and that, in effect, family members are acting as "straw buyers." FHA does not impose additional underwriting criteria on such transactions, such as specific qualifying ratios the occupying-borrower must meet individually. Lenders must judge each transaction on its merits. C. Three- and Four-Unit Properties. Regardless of occupancy status, the property must be selfsufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100 percent). The mortgage calculations described below are in addition to the standard calculations. 1. The monthly payment is the principal, interest, taxes, and insurance (PITI), including mortgage insurance, plus any homeowners' association dues, computed at the note rate (no consideration for buy downs may be given). 2. Net rental income is the appraiser's estimate of fair market rent from all units, including the unit chosen by the borrower for occupancy, less the appraiser's estimate for vacancies or the vacancy factor used by the jurisdictional HOC, whichever is greater. 90% of this value is used to offset debt. Maximum Mortgage Calculation (cont) This calculation is used only to determine the maximum loan amount. Borrowers must still qualify for the mortgage based on income, credit, cash to close, and the projected rents received from the remaining units. The projected rent may only be considered as gross income for qualifying purposes; it may not be used to offset the monthly mortgage payment. 3. The borrower must have reserves equivalent to three months' PITI after closing on purchase transactions. Reserves cannot be derived from a gift. D. Building on Own Land. If the borrower acts as a general contractor, and builds a house on land that the borrower already owns, or acquires land separately, maximum financing is available if the borrower receives no cash from the settlement. The appropriate LTV limits are applied to the lesser of: 1. The appraised value; or 2. The documented acquisition cost of the property, which includes: (a) the builder's price, or the sum of all subcontractor bids, materials, etc.; (b) cost of the land (if the land has been owned more than six months or was received as an acceptable gift, the value of the land may be used instead of its cost); (c) interest and other costs associated with any construction loan obtained by the borrower to fund construction of the property; (d) the DIRECTORS MORTGAGE FHA Guidelines Last Updated Page 25