HUD Real Estate Owned (REO) Loan Program Guide

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1 Table of Contents HUD Real Estate Owned (REO) Loan Program Guide Wholesale Lending January 9, 2014 Program Guide... 2 Pacific Union Financial Credit Philosophy... 2 Ability to Repay and Qualified Mortgages... 2 Program Parameters... 3 LTV and Loan Limits... 3 Maximum Loan Amount... 3 Maximum Loan-To-Value... 3 Mortgage Insurance... 3 Case Numbers... 4 REO Case Number Processing... 5 Transactions... 5 Eligible Transactions... 5 Borrowers... 5 Assets... 5 General... 5 Earnest Money Deposit... 5 Income and Employment... 5 Credit / Underwriting... 5 Liabilities... 6 Qualifying Rate... 6 Multiple FHA Loans... 6 Collateral... 6 HUD REO... 6 Additional Sales Incentives... 6 Review of the HUD Sales Contract... 7 REO Appraisal... 8 Repair Escrow... 8 Pacific Union REO Holdback Account Administration Completion of Repairs Escrow Repair Documentation Requirements: Insurance Geographic Restrictions Pricing and Fees Documentation HUD REO Loan Program Wholesale Lending page 1 of 12 01/09/2014

2 Program Guide This FHA Program Guide provides an overview of the FHA products and policies eligible for delivery to Pacific Union Financial, LLC (PacUnion) for financing consideration. The details are based on the policies outlined in the HUD Handbooks and applicable Mortgagee Letters. This document also identifies overlay restrictions specific to Pacific Union Financial. Through the Property Disposition Insured Sales Program, HUD offers its Real Estate Owned (REO) properties for sale with FHA-insured financing available. Properties must meet FHA s Minimum Property Requirements (MPR) to be eligible for this program. Escrow holdbacks are allowed for HUD REO insurable properties that require at least $500 and no more than $5,000 in repairs to meet HUD s MPR. Pacific Union Financial Credit Philosophy The PacUnion philosophy is to offer the HUD REO program loans with minimal overlays to our clients. Pacific Union Financial evaluates HUD REO loans in accordance with the following principles: All loans must be submitted to TOTAL Scorecard except the following: Loans for borrowers without a credit score. Manual underwriting is allowed on the following: Loans that receive a Refer recommendation through TOTAL Scorecard. Loans in which the borrower does not have a credit score. Loans for which a Manual Downgrade is required per HUD guidelines. Loans with credit scores <620 and a DTI >43%. Each loan is evaluated in accordance with: FHA policies (collectively defined in the , Mortgage Credit Analysis for Mortgage Insurance Handbook and subsequent Mortgagee Letters). Desktop Underwriter (DU) or Loan Prospector (LP) recommendations. Loans that do not receive a TOTAL Scorecard approval via DU or LP may not be resubmitted to the other automated underwriting system. Policies as outlined within this Program Guide. Each loan applicant is underwritten individually, and all credit standards are applied consistently to each borrower. All factors are weighed when evaluating a loan file. The underwriting decision is not based on any single item or factor. Ability to Repay and Qualified Mortgages Pacific Union is committed to complying with Ability-to-Repay and Qualified Mortgage rules (ATR/QM) by making a reasonable, good-faith determination that borrowers have a reasonable ability to repay the loan in accordance with the polices set forth within The Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) guidelines. Factors considered in making this determination include the borrower s income, assets and employment status (if relied on) against the mortgage loan payment, ongoing expenses related to the mortgage loan or the subject property, payments on simultaneous loans secured by the subject property, other debt obligations, and alimony HUD REO Loan Program Wholesale Lending page 2 of 12 01/09/2014

3 Program Parameters and child-support payments as required by the HUD/FHA. A borrower s credit history is also considered in the evaluation and must comply with HUD/FHA policies. Pacific Union will utilize reasonably reliable third party sources of information. HUD REO loan program parameters, credit and underwriting standard guidelines remain the same as the standard FHA Loan Program Guide. Refer to the FHA Loan Program Guide for additional details. LTV and Loan Limits Maximum Loan Amount FHA maximum base loan amount is calculated by multiplying the lesser of the sales price, subject to certain required adjustments, or appraised value by the required minimum investment of 3.5%, with the exception of the $100 Down Program (when approved by HUD). The maximum base loan amount (excluding UFMIP) cannot exceed the FHA Statutory Mortgage Limits for the applicable county. A complete schedule of FHA mortgage limits by county is available at The total loan amount may include the UFMIP and the amount of the escrow repairs (if applicable). Closing cost and pre-paids may not be included in the loan amount. Conforming Balance and High Balance loan amounts are available up to the following loan amounts: Units Conforming Balance (Maximum) High Balance (Minimum to Maximum) 1 $417,000 $417,001 to FHA County Limit 2 $533,850 $533,851 to FHA County Limit 3 $645,300 $645,301 to FHA County Limit 4 $801,950 $801,951 to FHA County Limit Maximum Loan-To-Value Primary Residence Purchase Transactions: Without escrow repairs: 96.50% LTV/CLTV 100% LTV/CLTV for $100 Down Program (when approved by HUD). See Mortgage Insurance for details regarding financing UFMIP. With escrow repairs: Up to 110% of the lesser of the sales price or appraised value in repair cost may be added to the maximum loan amount. Mortgage Insurance For $100 Down Program only: Upfront Mortgage Insurance Premiums (UFMIP) may not be financed if the As Is appraised value is equal to the sales price or if financing the UFMIP will result in the LTV (without repair escrow) exceeding 100% based on the As Is appraised value. HUD REO Loan Program Wholesale Lending page 3 of 12 01/09/2014

4 o Examples of when UFMIP cannot be financed: $100,000 As Is appraised value $100,000 Sales Price $ 100 Down Payment $ 99,900 Base Loan Amount $ 1,748 UFMIP $ 99,900 Total Loan Amount $100,000 As Is appraised value $100,000 Sales Price $ 100 Down Payment $ 99,900 Base Loan Amount $ 5,500 Repair Escrow $105,400 Final Base Loan Amount With Repair Escrow $ 1,845 UFMIP $105,400 Total Loan Amount UFMIP may be financed if the sales price is less than the As Is appraised value by an amount equal to or greater than the UFMIP and financing the UFMIP will not result in the LTV (without repair escrow) exceeding 100% based on the As Is appraised value. o Examples of when UFMIP may be financed: $100,000 As Is appraised value $ 95,000 Sales Price $ 100 Down Payment $ 94,900 Base Loan Amount $ 1,660 UFMIP $ 96,560 Total Loan Amount $100,000 As Is appraised value $ 95,000 Sales Price $ 100 Down Payment $ 94,900 Base Loan Amount $ 5,500 Repair Escrow $100,400 Final Base Loan Amount With Repair Escrow $ 1,757 UFMIP $102,157 Total Loan Amount Refer to Mortgage Insurance guidelines in FHA Loan Program Guide for UFMIP and Monthly Mortgage Insurance Premiums (MIP) percentages. Case Numbers The loan officer s name and NMLS number must be provided when requesting an FHA case number. FHA Connection will not issue a case number if the loan originator s name or NMLS number is not provided. HUD REO Loan Program Wholesale Lending page 4 of 12 01/09/2014

5 REO Case Number Processing A new FHA case number is required. The Property Disposition Program Sales Contract (purchase agreement) will provide the current FHA Case Number without the last number. A FHA Connection (FHAC) Case Query must be performed to obtain the complete 10 digit FHA Case Number. Contact the applicable HUD Asset Manager if unable to obtain the current 10 digit Case Number. Transactions Eligible Transactions Purchase transactions only. Property must be occupied by the borrower as their primary residence. Occupancy must take place within 60 days after signing the security instrument, with continued occupancy for one year. Borrowers Refer to Borrowers guidelines in the FHA Loan Program Guide. Assets General Borrowers must have sufficient cash from their own funds to cover the required 3.5% minimum down payment, based on the lesser of the sales price or appraised value; unless the down payment is provided by a Government Entity or the borrower is purchasing a $100 down payment HUD Real Estate Owned (REO) property (when approved by HUD). Refer to the Additional Sales Incentives guidelines below and the Government Entity guidelines in the FHA Loan Program Guide. The minimum down payment may not be provided by the seller, any entity that may financially benefit from the transaction or any person who is reimbursed by a prohibited source. Refer to Chapter 5 of the HUD for guidelines not addressed in this section. Earnest Money Deposit Must be verified if the earnest money deposit exceeds 2% of the sales price OR appears excessive based on the borrower s income and savings history. The amount of the earnest money may vary between $500 and $2,000 depending on the property specific requirements defined by HUD. Income and Employment Refer to Income and Employment guidelines in the FHA Loan Program Guide. Credit / Underwriting Refer to the Credit/Underwriting guidelines in the FHA Loan Program Guide. HUD REO Loan Program Wholesale Lending page 5 of 12 01/09/2014

6 Liabilities Refer to the Liabilities guidelines in the FHA Loan Program Guide. Qualifying Rate Refer to Qualifying Rate guidelines in FHA Loan Program Guide. Multiple FHA Loans Refer to Multiple FHA Loans guidelines in the FHA Loan Program Guide. Collateral HUD REO REO properties are offered for sale using one of the HUD marketing approaches listed below: Insurable: Properties marketed as "Insurable" are those that meet FHA's Minimum Property Requirements (MPR) for existing housing at the time of the appraisal in their as-is" condition without repairs being necessary. Insurable with Repair Escrow: A property that requires at least $500 but no more than $5,000 for repairs to meet FHA's MPR as estimated by the Property Condition Report (PCR) and as reviewed and determined to be reasonable by the appraiser. Is eligible to be marketed for sale in its "as-is" condition with FHA mortgage insurance under the 203(b) repair escrow program, provided the borrower(s) establishes a cash escrow to ensure the completion of the required repairs. Loan amount may include up to 110 percent of the estimated cost of repairs, not to exceed $5,500. Uninsurable (Not eligible for financing from Pacific Union Financial at this time): Properties offered for sale "Uninsurable" do not meet, in their "as-is" condition, FHA s MPR and the cost of repairs identified by the appraiser to meet MPR or MPS are estimated to exceed $5,000. Uninsurable properties are only eligible for 203(k) financing and are not eligible for financing from PacUnion at this time. Additional Sales Incentives HUD offers various incentives in conjunction with properties acquired through foreclosure. The incentives may include but are not limited to the following: $100 down payment (when approved by HUD) when using FHA financing. Sales allowances that can be used for closing costs, down payment or to make repairs to the property. Broker (Realtor) bonuses for owner-occupied sales. If a discounted sales price is being provided, the mortgage amount will be based on the lesser of the "as-is" value or the discounted sales price, not the contract sales price. Additional incentives must be authorized by HUD. They will be noted in writing on either the HUD Sales Contract or on a cover letter accompanying the HUD sales contract. Asset HUD REO Loan Program Wholesale Lending page 6 of 12 01/09/2014

7 Manager s will not allow other incentives based on oral instructions from borrowers, realtors or any other parties. Review of the HUD Sales Contract Line 3: Bid amount, the amount of earnest money borrower has deposited and the holder of the earnest money. Line 4: The first block on Line 4 of the sales contract should be checked and the type of financing provided should indicate a 203(b) or 203(b) repair escrow. The amount shown for cash due at closing and balance by mortgage do not include the FHA MIP, prepaid expenses or closing cost Seller has agreed to fund into the mortgage. If the transaction involves a repair escrow, the Said mortgage involves a repair escrow amount to $ block should be check and the amount of the escrow included. REO properties that are condominiums which are offered for sale with FHA mortgage insurance should be processed under Section 234(c), even though Section 203(b) is specified on the sales contract. Line 5: The amount on Line 5 of the sales contract represents the actual amount the borrower is financing and closing costs paid out of the sales proceeds on the borrower s behalf by HUD (the seller). Properties sold with discounts are not eligible for closing cost assistance. HUD agreed closing cost should cover actual cost only; the borrower will not be credited for any unused portion. Closing costs and prepaid expenses may not be included in the mortgage amount. Line 8: The percentage discount, if any, that will be applied to the sales price at settlement. If the price will be discounted, the mortgage amount will be based on that discounted sales price, not the contract sales price. Line 9: Specifies the number of days, normally 45 or 60, allowed to close the transaction. The "Radon Gas and Mold Notice and Release Agreement" must be included with sales contract and must be fully executed by all purchasers of the subject property. This disclosure is provided by the HUD Asset Manager. Contact the applicable HUD s Asset Manager if the contract is not complete, with questions about the terms or conditions or if the contract must be amended as a condition of loan approval. HUD REO Loan Program Wholesale Lending page 7 of 12 01/09/2014

8 REO Appraisal Upon conveyance of properties to HUD's REO inventory, HUD's Asset Manager (AM) will obtain an as-is appraisal (not as-repaired) for each HUD REO property to determine the listing price. HUD's REO appraisal will be provided at no charge, when a current appraisal is available. If not provided, contact the HUD Asset Manager to obtain a copy of the most current appraisal. HUD requires that the REO appraisal obtained by the HUD Asset Manager, if available, is utilized for the underwriting process. If a new appraisal is needed, the appraisal must be completed as an as-is appraisal in accordance with the procedures outlined in Appendix A-1 of HUD Handbook An asrepaired appraisal is not acceptable. A new/second appraisal MAY be obtained at the borrower s expense if: The Asset Manager did not provide a HUD REO appraisal. A valid ratified contract was not executed within 120 days of the HUD provided REO appraisal effective date. The DE Underwriter determined that there are material deficiencies with the current HUD REO appraisal. A new/second appraisal may NOT be obtained for the sole purpose of supporting a sales price that is higher than the value on the current appraisal. The original appraisal provided by the Asset Manager must be used, if a valid HUD sales contract was executed prior to the expiration date of the appraisal. If the sales contract is executed by HUD prior to the expiration of the appraisal, the validity period may be extended an additional 30 days (in total, a 150-day validity period is allowed). If a new/second appraisal results in a lower as-is property value, HUD will not decrease the sales price. The borrower will be responsible for the additional cash or the offer to purchase the property can be withdrawn and the borrower will receive a full refund of the earnest money deposit. If a new/second appraisal results in a higher as-is value, HUD will not increase the sales price. The allowable mortgage amount is based on the lesser of the sales price or updated appraised value. For additional details regarding the Appraisal topic, refer to the Collateral guidelines in the FHA Loan Program Guide. Repair Escrow Allowed for HUD REO properties that require at least $500 and no more than $5,000 worth of repairs to meet MPR. Escrow amount may be equal 110 percent of the estimated cost of repairs, up to $5,500. Borrower will be required to execute a PacUnion Repair Escrow Holdback Agreement. Repair escrow must be financed in the FHA loan, and may not be taken from HUD proceeds at closing. HUD determines the cost of the necessary repairs, based upon the appraisal, Real Estate Asset Manager s inspection and/or staff inspections, as necessary. Funds are held by PacUnion in an escrow account until the repair requirements are completed. HUD REO Loan Program Wholesale Lending page 8 of 12 01/09/2014

9 Prior to closing the borrower must provide two licensed contractor bids which clearly line itemize the cost for each repair needed and a copy of each contractor s license. Properties must be habitable and safe prior to loan approval. Under no circumstance may a loan be closed if the repairs needed will affect the livability or the integrity of the property structure (i.e., lack of gas, electricity, or plumbing, HVAC or foundation defects). If additional repairs needed to make the property insurable are revealed during the borrower purchased home inspection, a copy of the inspection report detailing the repairs and bids from two licensed contractors that include a an itemized list of the repair cost must be submitted to the Underwriter for review. If approved, the underwriter will prepare an Underwriter with an Addendum To The Escrow Repair Agreement to itemize the repairs that must be completed. This addendum will be attached to the Repair Escrow Holdback Agreement. The total escrow amount will be the total of the required repairs per the HUD REO Contractor and any additional repairs identified in the borrower s obtained home inspection report, not to exceed a total of $5000. Repairs eligible for a repair escrow: Repair roofs, gutters and downspouts Repair/Replacement/Upgrade of existing HVAC systems Repair/Replacement/Upgrade of plumbing and electrical systems Repair/Replacement of flooring Painting, both exterior and interior Weatherization, including storm windows and doors, insulation, weather stripping, etc. Purchase and installation of appliances, including free standing ranges, refrigerators, washer/dryer, dishwashers and microwave ovens Minor repair to exterior decks, patios, porches Minor mold remediation Window and door replacements and exterior wall re-siding Other minor repair(s) as indicated as being cosmetic in nature and conform to HUD s repair escrow requirements Repairs ineligible for a repair escrow: Major rehabilitation or major remodeling, such as the relocation of a load bearing wall New construction (including room additions) Any repair that, according to the appraiser s report, not cosmetic in nature Repair of structural damage Repair(s) requiring detailed drawings or architectural exhibits Any repair or improvement requiring a work schedule longer than 60 days Repair/Rehabilitation activities that require more than one final disbursement Swimming pool repairs Foundation work/repairs Roof replacement System issues for plumbing, electricity or the delivery of heating fuel Any needed repairs that create a livability issue Repairs that will cause the borrower to be displaced from the property for more than 30 days during the time the repairs are being completed HUD REO Loan Program Wholesale Lending page 9 of 12 01/09/2014

10 Pacific Union REO Holdback Account Administration Repair escrow accounts are administered by PacUnion. The repair escrow funds must be included in the mortgage amount. The HUD-1 must include a $200 Escrow Repair Admin Fee from the US Department of HUD to Pacific Union Financial, LLC. The fee is required to cover the expense for the final inspection of the repairs completed. Note: To ensure that the fee appears on the HUD-1 as a Seller expense, this requirement must be a closing condition. Documentation of the repair escrow account must be reviewed and approved by a DE Underwriter before the loan is cleared to close. See Escrow Repair Documentation Requirements guidelines. The Pacific Union Escrow/Draw Specialist will disburse the escrow to compensate the borrower or the contractor, as appropriate. If actual repair costs are less than the amount escrowed, the balance of the escrow will be applied to reduce the outstanding principal balance of the mortgage. If the escrow is inadequate, or if additional items of repair are discovered at some subsequent date, it is the borrower's responsibility to bear the additional cost. If the borrower fails to complete the required repairs within 90 days of closing or such additional time as is determined reasonable or the repairs are unsatisfactory, the escrow amount will be applied to reduce the outstanding principal balance of the mortgage. Completion of Repairs All repairs must be completed within 90 days of closing. If exterior repairs are needed, the 90 days may be extended due to inclement weather. Satisfactory completion of repairs may be documented by the Inspector utilizing one of the following: HUD Form line 14 checked and signed by the Fee Inspector, DE Staff Inspector, Appraiser or HUD Inspector. FNMA Appraisal Update and/or Completion Report (Form 1004D) completed by the Appraiser. If the borrower performed the minor repairs, receipts for the items needed to make the repairs and fee inspection is required. If a contractor/vendor performed any or all of the repairs, the borrowers acknowledgment of satisfactory completion and approval to pay the contactor/vender must be provided via execution of the Pacific Union Escrow Completion Package. The borrower must contact the PacUnion customer service at , to obtain an Escrow Completion Package that includes the following: Pacific Union Mortgagor s Repair Escrow Completion Letter to be signed by the borrower Pacific Union Waiver and Release Upon Final Payment to be signed by the contractor W-9 to be completed and signed by the contractor HUD REO Loan Program Wholesale Lending page 10 of 12 01/09/2014

11 The completed Pacific Union Escrow Completion Package may be returned to PacUnion as follows: Mail to: Pacific Union Financial, LLC Escrow/Draw Specialist 1603 LBJ Freeway, Suite 500 Farmers Branch, TX Fax: Upon receiving the Pacific Union Escrow Completion Package, the Escrow/Draw Specialist must order a HUD fee inspection to verify that the repairs meet HUD MPR s. See HUD s website ( for a listing of inspectors. The fee inspector must be provided a copy of HUD s list of required repairs prior to the inspection. PacUnion is responsible for paying the fee inspector; the inspection cost may not be paid from the proceeds of the repair escrow account. PacUnion will disburse the escrow to compensate the borrower or the contractor(s), as appropriate. See Pacific Union REO Holdback Account Administration for additional guidelines. Escrow Repair Documentation Requirements: In addition to the standard FHA loan documentation requirements, when the transaction includes an repair escrow, the following is required: Conditional Commitment Direct Endorsement Statement of Appraised Value (HUD B) under the Specific Commitment Conditions : o The Assurance of Completion box must be checked and the escrow amount must be completed. o The last box See the following conditions on the back: must be checked with the repairs to be completed listed and the #8 must be listed for Repairs to be completed on the back of the Conditional Commitment. Final Inspection/Compliance Report (HUD 92051) or Fannie Mae Appraisal Update and/or Completion Report (Form 1004D). Mortgagee s Assurance of Completion (HUD 92300): Insurance o o Must reflect the escrow amount. The Mortgagee s Assurance of Completion, pages 1 & 2, must be signed/dated by a Pacific Union Escrow/Draw Specialist prior to loan approval and page 4 after completion of the repairs. Refer to Insurance guidelines in the FHA Loan Program Guide. Geographic Restrictions Refer to Geographic Restrictions guidelines in the FHA Loan Program Guide. HUD REO Loan Program Wholesale Lending page 11 of 12 01/09/2014

12 Pricing and Fees Refer to Pricing and Fees in the FHA Loan Program Guide. Documentation The following lists the most commonly used forms and certifications required by FHA REO properties. For additional required certifications and/or documents, refer to Documentation guidelines in the FHA Loan Program Guide. Form Form Name When Required HUD or Fannie Mae 1004D HUD HUD B Compliance Inspection Report Mortgagee s Assurance of Completion Conditional Commitment Direct Endorsement Statement of Appraised Value Pacific Union Repair Escrow Agreement Pacific Union Repair Escrow Agreement Addendum Pacific Union Escrow Completion Package After the completion of escrowed repairs Must be included in case binder submissions for loans with a repair escrow Transactions that require a repair escrow account Transactions that require a repair escrow account When additional repairs are required per a borrower-paid home inspection Transactions that require completion of repairs by a contractor HUD REO Loan Program Wholesale Lending page 12 of 12 01/09/2014

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