FHA Fixed Rate & ARM Underwriting Guidelines

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1 Contents... 1 Links to FHA Websites... 8 Transaction Types... 9 HUD Section of the Act and ADP Codes... 9 Construction to Permanent Financing Two Time Close... 9 Installment Land Contract Non-Arm s Length Transaction/Identity-of-Interest Transaction Properties that do not comply with High Ratio Criteria Property Flipping Policy Purchase Transactions Refinance Transaction Cash Out Refinance Transaction No Cash Out Refinance Transaction Streamline With and Without Appraisal No Credit Qualifying Refinance Transaction Streamline with Credit Qualifying Restructured or Short Payoffs Secondary Financing General Government Agencies Non-Profit Agencies Family Member Lending Other Organizations and Private Individuals Borrowers 60 Years of Age or Older Occupancy Primary Residence R e v i s e d

2 Second Home Investment Property Property Types and Standards or 4-Family Unit Properties Condominiums Federally Declared Disaster Areas Ineligible Properties Inspection Requirements for Existing Properties Lead Based Paint Hazards New and Proposed Construction Planned Unit Development (PUD) Private Road Access and Maintenance Repair Requirements for Existing Properties Sewage Systems Soft Market/Declining Values Solar Energy Systems Unique Properties Utilities Not Turned On/Mechanical Systems Water Supply Wood Destroying Insects/Organisms Zoning Borrower Eligibility Borrowers, Co-Borrowers and Co-Signers Borrower s Age Citizenship and Immigration Status Ineligible Borrowers Living Trusts Maximum Number of FHA Insured Loans per Borrower Military Personnel R e v i s e d

3 Non-Occupant Co-Borrower Non-Purchasing Spouse Income Documentation Requirements Age of Documents Alimony and Child Support Income Automobile Allowance/Expense Account Payments Boarder Income Bonus and Overtime Income Capital Gain Income Commission Income Employer Differential Payments Employment by Family Owned Business Government Assistance Programs Interest and Dividend Income Military Income Mortgage Credit Certificates Non-Taxable Income Notes Receivable Part-Time/Second Job Income Projected Income Rental Income Retirement and Social Security Income Salaried or Hourly Wage Income Seasonal Employment Income Section 8 Home Ownership Vouchers Self-Employment Tip Income Trust Income R e v i s e d

4 Unemployment Income VA Benefit Income Liabilities and Qualifying Ratios Alimony Child Support Compensating Factors Co-Signed Debt Employee Business Expense Installment Debt Lease Payments Mortgage Assumptions Obligations Not Considered Debt Real Estate Loans Revolving Debt Student Loans/Deferred Loans Qualifying Rates Qualifying Ratios Credit Requirements Documentation Requirements Age of Documents Authorized User Accounts Bankruptcy Collection Accounts/Charged Off Accounts Consumer Credit Counseling Credit Alert Interactive Voice Response System (CAIVRS) Credit Score Requirements Delinquent Federal Debt Disputed Accounts Foreclosure/Deed-in-Lieu of Foreclosure R e v i s e d

5 HUD s Limited Denial of Participation (LDP) and Government Services Administration (GSA) Lists Inquiries Judgments Late Payments Mortgage/Rental Payment History Pre-Foreclosure Sale/Short Sale Recent and Undisclosed Debt Tax Liens Unverified Liabilities Assets Documentation Requirements Age of Documents Business Accounts Cash on Hand Cash Reserve Requirements Checking and Savings Accounts/Certificates of Deposit Commission from the Sale of the Property Deposit on Sales Contract Disaster Relief Grant Employer Assistance Plans Employer Guaranty Plans Funds Needed to Close Gifts Gifts of Equity Private Savings Clubs Rent with Option to Purchase Retirement Funds Sale of Personal Assets Sale of Real Estate R e v i s e d

6 Savings Bonds Secured Loans Stocks/Bonds/Mutual Funds Sweat Equity Trade Equity Unsecured Loans Third Party Contributions/Inducements to Purchase Third Party Contributions Inducements to Purchase Interest Rate Buy Downs Temporary Interest Rate Buy Downs Mortgage Insurance Upfront Mortgage Insurance Premium (UFMIP) Monthly Mortgage Insurance Premium (MMIP) Appraisal Requirements Documentation Requirements Age of Documents Uniform Residential Appraisal Report FNMA Form Individual Condominium Unit Appraisal Report FNMA Form Small Residential Income Property Appraisal Report FNMA Conditional Commitment Direct Endorsement Statement of Appraised Value HUD Form B Builder s Certification of Plans, Specifications, and Site HUD Form Repair Requirements FHA TOTAL Scorecard General Approve/Eligible or Accept/Eligible Recommendations Approve/Ineligible or Accept/Ineligible Recommendations Refer/Eligible Recommendations R e v i s e d

7 Refer/Ineligible Recommendations Error System Overrides and Manual Downgrades Tolerances Loan Approval Expiration Date Work Completion Escrow Procedures/Escrow Holdbacks Weather Related Holdbacks R e v i s e d

8 Links to FHA Websites HUD Reference Guide HUDCLIPS HUD Website for Lenders Statutory Loan Amount Limit HUD Accepted Insured Ten-Year Protection Plans HUD Approved Non-Profit Agencies 8 R e v i s e d

9 Transaction Types HUD Section of the Act and ADP Codes Section of the Act Description ADP Code for DE 203(b) Basic Home Mortgage Insurance (b) ARM (c) Condominium (c) Condominium /ARM 731 Construction to Permanent Financing Two Time Close General 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 and the property meets one of the "high ratio" eligibility criteria found in the New and Proposed Construction section of this guide. Maximum Loan Amount The LTV factor (see Calculation Worksheet for Purchases) is applied to the lesser of the appraised value or the documented acquisition cost of the property which includes the following: o o The builder's price, or the sum of all subcontractor bids, materials, etc.; 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); o interest and other costs associated with any construction loan obtained by the borrower to fund construction of the property; o the closing costs to be paid by the borrower; and o Reasonable discount points. Equity in the land (value or cost, as appropriate, minus the amount owed) may be used for the borrower's entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85% of the appraised value. Replenishment of the borrower's own cash expended during construction is not considered as "cash back," provided the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds used for construction. Note that 3- or 4-Family Unit Properties have additional requirements that may further restrict the maximum insurable loan amount. 9 R e v i s e d

10 Installment Land Contract General If the borrower will use the loan to complete payment on a land contract, contract for deed or other similar type financing arrangement in which the borrower does not have title to the property, the new mortgage may be processed as either a purchase or a refinance transaction with maximum FHAinsured financing if the borrower receives no cash at closing and the property meets one of the "high ratio" eligibility criteria found in the New and Proposed Construction section of this guide. Maximum Loan Amount The LTV factor (see Calculation Worksheet for Purchases or for Rate/Term Refinances) is applied to the lesser of the appraised value or the total cost to acquire the property. The total cost to acquire the property includes: o the original purchase price; o any documented costs the purchaser incurred for rehabilitation, repairs, renovation, or weatherization); and o If treated as a refinance, allowable closing costs and reasonable discount points. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85% of the appraised value. Replenishment of the borrower's own cash expended for repairs, improvements, renovation, etc., is not considered as "cash back," provided the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds spent for those purposes. Note that 3- or 4-Family Unit Properties have additional requirements that may further restrict the maximum loan amount. Non-Arm s Length Transaction/Identity-of-Interest Transaction General An identity-of-interest transaction is a sales transaction between parties with family or business relationships. An identify-of-interest transaction does not include an employer/employee transaction when purchasing the seller s principal residence. Maximum Loan Amount The maximum LTV factor is restricted to 85% (be sure to use 85% on the Calculation Worksheet for Purchases). Maximum financing above 85% LTV is permissible under the following circumstances (use Calculation Worksheet for Purchases when determining maximum loan amount): o Family Member Purchase - A family member purchases another family member's primary residence. If a property is sold from one family member to another and is the seller's investment property, the maximum mortgage is the lower of either 85% of the appraised value or the appropriate LTV ratio percentage applied to the sales price, plus or minus required adjustments. A 10 R e v i s e d

11 family member is defined as a borrower s child, parent, grandparent, spouse, legally adopted sons or daughters, child who is placed with the borrower by an authorized agency for legal adoption, and foster children. A child is defined as a son, stepson, daughter, or stepdaughter. o Builder s Employee Purchase - An employee of a builder purchases one of the builder's new homes or models as a principal residence. o Tenant Purchase - A current tenant, including a family member 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 is required to verify occupancy. The maximum mortgage calculation is not affected by a sales transaction between a tenant and a landlord with no identity of interest relationship. o Corporate Transfer - A corporation transfers an employee to another location, purchases that employee s home, and then sells the home to another employee. Note that 3- or 4-Family Unit Properties have additional requirements that may further restrict the maximum loan amount. Properties that do not comply with High Ratio Criteria Maximum Loan Amount With the exception of identity of interest transactions and cash-out refinances which are restricted to 85% LTV, the maximum insurable mortgage for a property that does not meet any of the "high ratio" eligibility criteria, found in the New and Proposed Construction section of this guide, is limited to the lesser of the statutory loan limit for the area or: o 90% of the lesser of the appraised value or the documented acquisition cost of the property (construction to perm); or o 90% of the lesser of the appraised value or the total cost to acquire the property (installment land contract); or o 90% of the lesser of the appraised value or the adjusted sales price (purchase); or o 90% of the appraised value (seasoned credit qualifying no cash-out refinance); or o 90% of the lesser of the appraised value or original sales price (unseasoned credit qualifying no cash-out refinance). Note that 3- or 4-Family Unit Properties have additional requirements that may further restrict the maximum loan amount. 11 R e v i s e d

12 Property Flipping Policy Owner of FHA requires the subject property seller to be the owner of record. Record To be eligible for a mortgage insured by FHA, the property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. This requirement applies to all FHA purchase money mortgages regardless of the time between resale. Documentation to verify that the seller is the owner of record must be included in the loan file. This documentation may include, but is not limited to, a property sales history report, a copy of the recorded deed from the seller, or other documentation, such as a copy of a property tax bill, title commitment or binder, demonstrating the seller s ownership of the property and the date it was acquired. Definitions FHA defines the seller s date of acquisition as the date of settlement on the seller s purchase of that property. The resale date is the date of execution of the sales contract by the buyer that will result in a mortgage to be insured by FHA. Resale Time The following requirements apply to all property sellers: Restriction 90 or Fewer Days o Transactions with sales price greater than or equal to a 20% increase over the property seller s acquisition cost require the following: The second full appraisal must be ordered by Caliber Funding The borrower cannot pay for the second full appraisal The lower of the two appraised values must be used to qualify o The appraisals must verify the property seller has completed sufficient legitimate renovation, repair and rehabilitation work on the subject property to substantiate the increase in value or, in cases where no such work is performed, the appraiser must provide appropriate explanation of the increase in property value since the prior transfer of title. o All transactions must be arms-length; no identity of interest between buyer, property seller or third parties. o Specific ways to ensure an arms length transaction include: Property seller currently holds title to the property. LLCs, corporations or trusts serving as property sellers must meet all applicable state and federal law. No pattern or previous flipping activity exists on the property (as evidenced by multiple title transfers within the past 12 months). The property was marketed openly and fairly (any sales contracts with Resale Time Restriction 91 to 180 Days assignment of contract of sale may be a red flag). When a resale occurs between 91 and 180 days and the new sales price exceeds the previous sales price by 100% or more, additional documentation validating the property s value is required. A second appraisal made by another FHA approved appraiser is required if the 12 R e v i s e d

13 Resale Time Restriction Within 12 Months resale price is 100% or more over the price paid by the seller when the property was acquired. Documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value may be obtained, but a second appraisal is still required. The cost of the second appraisal may not be charged to the homebuyer. FHA also has flexibility to examine and require additional evidence of appraised value when properties are re-sold within 12 months. If the resale date is more than 90 days after the date of acquisition by the seller but before the end of the twelfth month following the date of acquisition, FHA reserves the right to require additional documentation from the lender to support the resale value if the resale price is 5% or greater than the lowest sales price of the property during the preceding 12 months. At FHA s discretion, such documentation may include, but is not limited to, an appraisal from another appraiser. Provided that the URAR shows that the most recent sale of the property occurred at least one year previously, no additional documentation is needed to establish compliance with the time restrictions. However, if there is conflicting information in the file, the discrepancy must be resolved before the loan is eligible for FHA financing. Purchase Transactions General Maximum financing is permitted if the property meets one of the "high ratio" eligibility criteria found in the New and Proposed Construction section of this guide. Maximum Loan Amount The LTV factor (see Calculation Worksheet for Purchases) is applied to the lesser of the appraised value or the adjusted sales price. The adjusted sales price is calculated as follows: o Sales price as shown on the purchase contract; o Minus the interested third party contributions that exceed the 6% limit (see the Interested Party Contributions section of this guide for details); o Minus any inducements to purchase (see the Interested Party Contributions section of this guide for details); o Plus the repairs and improvements required by the appraiser as essential for property eligibility, which will be paid by the borrower, and for which the sales contract identifies the borrower as responsible for payment and completion of the repairs. Only repairs and improvements required by the appraiser may be included. The amount that may be added is limited to the lowest of the following: the amount by which the value of the property exceeds the sales price; or the appraiser s estimate of repairs and improvements; or the amount of the contractor s bid, if applicable. Any repairs completed by the borrower before the appraisal was performed are not eligible for inclusion in this calculation; 13 R e v i s e d

14 o Plus the cost of weatherization items being paid by the borrower. These items include thermostats, insulation, storm windows and doors, weather stripping and caulking, etc. These items may be added to both the sales price and the appraised value before calculating the loan amount. A contractor s statement of cost of work completed or a buyer s estimate of the cost of materials must be submitted (see HUD Handbook for details). The amount that may be added is: $2,000 without a separate value determinations; or up to $3,500 if supported by a value determination by an approved appraiser; or more than $3,500 subject to a value determination by an approved appraiser and a separate on-site inspection by an FHA approved fee inspector. Note that 3- or 4-Family Unit Properties have additional requirements that may further restrict the maximum loan amount. Refinance Transaction Cash Out General Maximum term is 30 years. The subject property must be a primary residence. In order to be eligible for a cash out refinance, all borrowers on the new loan must have been on the subject s title for at least 6 month. The 6 months is measured from the existing loan note date to the date of application for the new loan The subject may not be listed for sale at the time of application. If previously listed, the listing agreement on the subject property must have been canceled at least six months prior to the loan application date or else the loan will be limited to 70% LTV. The appraisal used for the purchase of the subject property may not be re-used for the refinance, even if it is still valid. A new appraisal must be obtained. A Refinance Authorization Number must be obtained from FHA Connection if the existing loan to be paid off is FHA insured. 0 x 30 days or more late in the last 12 months for all mortgages secured by subject property, regardless of DU findings. IMPORTANT: loan file must include documentation covering the full 12 months subject payment history (unless the property has been owned less than 12 months) up to the time of closing. If subject owned less than 12 months, there may be no late payments of 30 days or more for length of time owned, regardless of DU findings. The file must include proof that the mortgage being refinanced is paid current for the month due. Properties owned free and clear may be refinanced as cash-out transactions. Cash-out refinances for debt consolidation represent considerable risk, especially if the borrowers have not had an attendant increase in income. Such transactions must be carefully evaluated. Any co-borrower being added to the loan must be an occupant of the property. 14 R e v i s e d

15 Maximum Loan Amount If a co-borrower is added, the original borrower must be in title for at least 12 months and must also be on the existing note and mortgage for at least 12 months. Non-occupant borrowers may not be added for a cash-out refinance. Texas properties not eligible if: existing lien is subject to Texas Section 50(a)(6); existing 2 nd lien is subject to Texas Section 50(a)(6); borrower receives any cash back at closing (even as little as $1). The mortgage amount, excluding the financed UFMIP, may never exceed the statutory limits. The maximum loan amount must be calculated by using the Cash-Out Refinance Worksheet. Existing secondary liens may be subordinated, providing that the CLTV does not exceed 85% and all other eligibility criteria in the Secondary Financing section of this guide are met. If the existing second lien holder requires modification to the lien (typically a reduction in the amount of the lien), it is not considered to be new subordinate financing. New subordinate financing is permitted, providing the CLTV does not exceed 85%, and all other eligibility criteria in the Secondary Financing section of this guide are met. Note that 3- or 4-Family Unit Properties have additional requirements that may further restrict the maximum insurable loan amount. Refinance Transaction No Cash Out General The subject may not be listed for sale at the time of application. If previously listed, the listing agreement must have been canceled at least one day prior to the date the loan application is taken. Maximum term is 30 years. The subject property must be a primary residence. 0 x 30 days or more late in the last 12 months for all mortgages secured by subject property, if manually underwritten. If the property was acquired less than one year prior to the application for new financing, and is not already an FHA-insured loan, the lesser of the original sales price or the current appraised value will be used to determine the maximum loan amount. If subject owned less than 12 months, there may be no late payments of 30 days or more for length of time owned, if manually underwritten. The borrower may not receive any cash back, except for minor adjustments at closing not to exceed $500, unless the subject is located in the state of Texas, in which case the borrower may not receive any cash back at closing. The appraisal used for the purchase of the subject property may not be re-used for the refinance, even if it is still valid. A new appraisal must be obtained. A Refinance Authorization Number must be obtained from FHA Connection if the existing loan to be paid off is FHA insured. 15 R e v i s e d

16 Ex-Spouse/Co- Borrower Equity Buy Out Maximum Loan Amount IMPORTANT: loan file must include documentation covering the full 12 months subject payment history (unless the property has been owned less than 12 months) up to the time of closing. The file must include proof that the mortgage being refinanced is paid current for the month due. Texas properties not eligible if: existing lien is subject to Texas Section 50(a)(6); existing 2 nd lien is subject to Texas Section 50(a)(6); borrower receives any cash back at closing (even as little as $1). When the purpose of the new loan is to refinance an existing mortgage in order to buy out the equity belonging to an ex-spouse or co-borrower, the specified equity to be paid is considered property-related indebtedness, and is eligible to be included in the new mortgage calculation. The divorce decree, settlement agreement, or other bona fide equity agreement must be provided to document the equity awarded to the ex-spouse or coborrower. All parties must have jointly owned the subject property for 12 months preceding the date of the Mortgage application. Parties who inherit an interest in the property do not have to satisfy this requirement. All parties must be able to demonstrate they occupied the subject property as their primary residence (e.g., driver's license, bank statement, credit card bill, utility bill, etc. mailed to the individual at the subject property). Parties who inherit an interest in the property do not have to satisfy this requirement. All parties must provide a signed, written agreement that states the terms of the property transfer and the disposition of the proceeds (divorce decree or separation agreement, buy-out agreement). The Borrower who acquires sole ownership of the property may receive no cash out from the proceeds of the refinance. The party who is buying out the other party's interest must be able to qualify for the Mortgage under standard underwriting guidelines. Maximum financing is permitted if the property meets one of the "high ratio" eligibility criteria found in the New and Proposed Construction section of this guide. The mortgage amount, excluding the financed UFMIP, may never exceed the statutory limits. The maximum loan amount must be calculated using the Rate and Term Refinance Worksheet. In order to include the payoff of a HELOC in the new loan amount, the file must include proof that either the total of draws taken within the past 12 months are $1,000 or less, or if the draws total to more than $1,000, proof that they were used for repairs and rehabilitation of the property. Existing secondary liens may be subordinated provided that the CLTV does not exceed 100% and all other eligibility criteria in the Secondary Financing section of this guide are met. 16 R e v i s e d

17 New subordinate financing is not permitted. Note that 3- or 4-Family Unit Properties have additional requirements that may further restrict the maximum insurable loan amount. Refinance Transaction Streamline With and Without Appraisal No Credit Qualifying General Requirements for No Credit Qualifying Streamline Refinances The existing mortgage that will be refinanced must be FHA insured. Borrowers who refinanced their delinquent non-fha ARM loans into an FHASecure mortgage are not eligible for the streamline refinance program. They are eligible for the fully qualifying FHA Refinance Transaction No Cash Out or the fully qualifying FHA Refinance Transaction Cash Out programs only. These loans are identified in FHA Connection with a Case Type of Conventional Delinquent. System edits within FHA Connection will prevent lenders from streamline refinancing FHASecure loans that were previously delinquent non-fha ARM loans. At time of application, the borrower must have made at least 6 payments on the FHA loan being refinanced. A net tangible benefit must result from the refinance, which means that the loan must comply with one of the following scenarios. o The new total mortgage payment (PITI) must be at least 5% less than the existing payment, if: Going from a fixed rate to a fixed rate Going from an ARM to an ARM Going from a fixed rate loan to a hybrid ARM (5/1/ or 7/1) Going from a GPM to a fixed rate Going from a GPM to an ARM Going from a 203(k) to a 203(b) Going from a 235 to a 203(b). o The interest rate on the new loan must be at least 2% below the interest rate of the current mortgage, if going from a fixed rate to a one-year ARM. o The interest rate on the new loan may be no greater than 2% above the current rate if going from a one-year ARM to a fixed rate. o The total mortgage payment (PITI) for the new loan may not increase by more than 20% if going from a hybrid ARM (5/1 or 7/1) to a fixed rate loan. If a net tangible benefit as defined above will not be realized, the loan is not eligible as a streamline refinance, with or without credit qualifying. The borrower may not receive any cash back, except for minor adjustments at closing not to exceed $500, unless the property is located in the state of Texas, in which case the borrower may not receive any cash back at closing. Streamline refinances can be made with or without an appraisal, unless the property is located in West Virginia, in which case an appraisal must be obtained. Second homes and investment properties are not permitted for any streamline refinancing. HUD's Credit Alert Interactive Voice Response System (CAIVRS) need not be 17 R e v i s e d

18 checked, but HUD s Limited Denial of Participation (LDP) and General Services Administration (GSA) exclusion lists are still required checks for all borrowers and for the loan officer. Documentation verifying the social security number is required for all borrowers. Mortgage credit underwriting is not required. The lender must include a signed and dated cover letter on letterhead certifying that the borrower is employed and has income at the time of loan application. Effective for FHA case numbers assigned on or after March 11, 2010, the file must include documentation to support the employment/income certification noted above. The following table outlines the specific documents needed based on the income type. Income Type Required Documentation Salary/W-2 Wages Verbal VOE Self-Employment Alimony/Separate Maintenance Annuity Child Support Interest/Dividend IRA/Keogh Note Receivable Pension/Retirement Rental Income Retirement, Survivor s Benefit, or Disability from Social Security Administration Trust Income VA Benefits Other Verification of self-employed applicant s business Copy of divorce decree, settlement agreement, or court payment record Most current institutional statement Copy of child support court order Document showing ownership of interest bearing account or copy of current statement showing interest income Most current bank statement or letter from administrator Copy of Note or most current statement Most current bank statement or benefit award letter or most current W-2/1099 Copy of current lease Award letter or most current deposit statement Copy of trust agreement or trustee s statement Award letter or most current deposit statement Clearly identify the source of the income and provide documentation supporting its receipt 18 R e v i s e d

19 A tri-merge credit report is required for all borrowers. All borrowers must have at least one (1) credit scores. See the program matrix for the minimum required credit score. 0 x 30 days or more late in the last 12 months for all mortgages secured by subject property. IMPORTANT: loan file must include documentation covering the full 12 months subject payment history (unless the property has been owned less than 12 months) up to the time of closing. If subject has been owned less than 12 months, there may be no late payments of 30 days or more for the length of time owned. The file must include proof that the mortgage being refinanced is paid current for the month due. Any assets needed to close must be verified. No-cost refinances, in which a premium interest rate is charged to defray the borrower's closing costs and/or prepaid items, are permitted. A current Refinance Authorization Number must be obtained from FHA Connection. Individuals may be added to the title on a streamline refinance without credit worthiness review and without triggering due-on-sale clauses. Deletion of a borrower must be processed as a Streamline Refinance with Credit Qualifying, unless the loan meets one of the following scenarios: o The existing loan must have been legally assumed more than 6 months ago and the remaining borrower must document that he or she solely made the mortgage payments during that time. File must include the following documentation: copies of the most recent 6 months consecutive mortgage payment checks; copy of the Quit Claim Deed showing transfer of ownership at least 6 month prior; evidence that the existing loan was legally assumed by the borrower at least 6 months prior. o The property was transferred as a result of a divorce decree, or by devise or descent, and the assumption or quit claim of interest occurred more than 6 months ago and the remaining owner-occupant can demonstrate that he or she has made the mortgage payments during this time. The file must include the following documentation: copies of the most recent 6 months consecutive mortgage payment checks (not acceptable if the checks are drawn on a joint account involving the deleted borrower); copy of the divorce decree and property settlement statement or Certificate of Devise or Descent; copy of the Quit Claim Deed showing the transfer of ownership occurred at least 6 months ago. Subordinate financing may remain in place, provided that the CLTV does not exceed 100%. New subordinate financing may not be obtained. If the appraised value is such that the borrower would be better advised to 19 R e v i s e d

20 Streamline Refinances WITHOUT an Appraisal No Credit Qualifying Streamline Refinance WITH an Appraisal- No Credit Qualifying proceed as if no appraisal had been made, the appraisal may be ignored and not used. A notation of this decision must be made in the "remarks" section of form HUD LT. If a natural disaster has occurred within the past 90 days, the property must be inspected by an FHA approved appraiser or inspector. At a minimum, the exterior of the subject and the subject s neighborhood must be inspected. However, in any situation where the appraiser notes defects in the exterior inspection, a full appraisal report with an interior and exterior inspection is required. Photographs of the subject exterior must be provided. The appraiser must confirm that the property is free from damage. If the re-inspection indicates damage, the extent of the damage must be addressed. Completion of the repairs is required as evidenced by Form 1004D/442, Appraisal Update and/or Completion Report, with photos, before the loan can close. If the subject is located in a condominium project which is no longer FHA approved or which does not meet the approval criteria, the loan is eligible as a streamline refinance without an appraisal only. Texas properties not eligible if: existing 1 st lien is subject to Texas Section 50(a)(6); existing 2 nd lien is subject to Texas Section 50(a)(6); borrower receives any cash back at closing (even as little as $1). In addition to the above general requirements, the following apply to a streamline refinance without an appraisal. The maximum insurable mortgage must be calculated by using the Streamline Worksheet for Refinance without Appraisal. The term of the mortgage is the lesser of 30 years or the remaining term of the mortgage plus 12 years. The original appraised value shown on the Refinance Authorization must be used for entry into the H20 appraised value field, for calculating the annual MIP, and for calculating the CLTV if applicable. In addition to the above general requirements, the following apply to a streamline refinance with an appraisal. The maximum insurable mortgage must be calculated by using the Streamline Worksheet for Refinance with Appraisal. FHA does not require repairs to be completed (except for lead-based paint repairs or for health and safety issues); however, the underwriter may require completion of repairs as a condition of the loan. Termite certification is not required unless the appraiser notes a problem. Termite related repairs are not required unless considered a health and safety issue. The appraisal used for the purchase of the subject property may not be re-used for the refinance, even if it is still valid. A new case number and a new appraisal must be obtained. 20 R e v i s e d

21 Refinance Transaction Streamline with Credit Qualifying General Requirements for Credit Qualifying Streamline Refinances Streamline Refinance Credit Qualifying Documentation Borrowers must credit qualify for a streamline refinance if deletion of a borrower or borrowers will trigger the due on sale clause. Credit-qualifying streamline refinances contain all the normal features and requirements of a streamline refinance, including the requirement for the remaining borrower to make at least 6 payments on the existing loan, but provide a level of assurance of continued performance on the mortgage. The loan must be manually underwritten by a DE Underwriter and must meet all FHA creditworthiness requirements. The maximum loan amount is calculated the same as for a no credit qualifying streamline with or without an appraisal. The loan file must include evidence that the remaining borrowers have an acceptable credit history and ability to make payments. Income must be verified as required by normal FHA guidelines. (Note if the loan is run through DU, it is not eligible as a streamline, and must be done as a regular credit qualifying refinance.). Credit history as shown on the tri-merge credit report must be considered. Payment ratio and DTI ratio must be calculated to demonstrate that borrower will have the ability to continue to make the mortgage payments. Assets needed to close must be verified. May be done with or without an appraisal. Restructured or Short Payoffs General Loans with restructured or short payoffs are ineligible for financing. A restructured or short payoff loan is a mortgage in which the terms of the original transaction have been changed, resulting in either the absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan. Restructured loans result in forgiveness of a portion of principal or interest on either the first or second mortgage, or application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness, or conversion of any portion of the original mortgage debt to a soft subordinate mortgage, or conversion of any portion of the original mortgage debt from secured to unsecured. Additional documentation to identify a restructured or short payoff loan may be required such as HUD-1 s, payoff demands, or evidence of source funds of principal balance pay-downs to substantiate principal reduction transactions. 21 R e v i s e d

22 Secondary Financing General General All types of secondary financing must be approved by Caliber s Underwriting Department prior to loan closing. Evidence of the approval must be retained in the loan file. Any financing (other than the FHA-insured first mortgage) that creates a lien against the property is considered secondary financing and not a gift, even if it is a soft or silent second (i.e., has no monthly repayment provisions) or has other features forgiving the debt. Documentation from the provider of the secondary financing must show the amount of funds provided to the borrower in each transaction and copies of the loan instruments are to be included in the endorsement binder. Costs incurred for participating in a down payment assistance secondary financing program may only be included in the amount of the second lien. FHA reserves the right to reject any secondary financing that does not serve the needs of the intended borrower or where it believes the costs to the participants outweigh the benefits derived by the homebuyer. If the subordinate financing requires a payment to be made by the borrower, it must be included in the qualifying ratios. Government Agencies General Federal, state, local government, and nonprofit agencies considered instrumentalities of government may provide secondary financing for the borrower's entire amount of required funds to close. When secondary financing is provided by a government agency, the secondary lien must be made or held by the eligible government body or instrumentality. Government units cannot use agents including nonprofit or for-profit enterprises to make the second lien, regardless of the source of funds. They can, however, be used to service the subordinate lien if regularly scheduled payments are made by the borrower. Example: Even if funds used for secondary financing funds are from an acceptable source, such as HUD HOME, a government unit, or an eligible nonprofit instrumentality, the subordinate lien must be in the name of the eligible entity, such as the state, county, city, or eligible non-profit instrumentality. The required monthly payments for the insured mortgage and the second mortgage or lien, plus other housing expenses and all recurring charges, cannot exceed the borrower's reasonable ability to pay. The source, amount, and repayment terms must be disclosed in the mortgage application, and the borrower must acknowledge that he or she understands and agrees to the terms. Maximum Loan The FHA-insured first mortgage, when combined with any second mortgage or 22 R e v i s e d

23 Amount other junior liens from government agencies and non-profit agencies considered instrumentalities of government may not result in cash back to the borrower. The sum of all liens cannot exceed 100% of the cost to acquire the property. The cost to acquire is the sales price plus borrower-paid closing costs, discount points, repair and rehabilitation expenses, and prepaid expenses. Only exception to this is for properties located in West Virginia, which are limited to 100% CLTV in all cases. The cost to acquire may exceed the appraised value of the property under these types of government assistance programs. The FHA insured first mortgage cannot exceed the FHA statutory limit for the area where the property is located. However, the combined indebtedness may exceed the FHA statutory limit. Non-Profit Agencies General HUD approved nonprofit agencies can be found at Proof of HUD s approval of the nonprofit agency, and, if applicable, evidence that the HOC has determined the agency to be an instrumentality of government must be included in the loan file. The required monthly payments for the insured mortgage and the second mortgage or lien, plus other housing expenses and all recurring charges, cannot exceed the borrower's reasonable ability to pay. The source, amount, and repayment terms must be disclosed in the mortgage application, and the borrower must acknowledge that he or she understands and agrees to the terms. Maximum Loan Amount Agencies that are approved by HUD as a nonprofit agency and are considered by the appropriate HOC to be instrumentalities of government may provide secondary financing under the terms outlined in Government Agencies above. Nonprofit agencies that are approved by HUD but are not considered instrumentalities of government may provide secondary financing under the same conditions as described in Government Agencies above, provided that: o The borrower makes a down payment of at least 3.5% of the lesser of the appraised value or the sales price of the property. o The combined amount of the first and second mortgages does not exceed the statutory loan limit for the area where the property is located. o The FHA-insured first mortgage, when combined with any second mortgage or junior lien from the nonprofit agency, may not result in cash back to the borrower. 23 R e v i s e d

24 Family Member Lending General A family member is defined as a child, parent, or grandparent of the borrower or borrower s spouse. Included in this definition are legally adopted sons or daughters (and a child who is a member of an individual's household, if placed with such individual by an authorized agency for legal adoption by that individual), and foster children. The term "child" means a son, stepson, daughter, or stepdaughter. If the family member providing the secondary financing borrows those funds, the source may not be any entity with an identity-of-interest in the sale of the property, including the seller, builder, loan officer, real estate agent, etc. If the funds that are lent by the family member are borrowed from an acceptable source, the homebuyer may not be a co-obligor on that note (e.g., the son and daughter-in-law may not be co-obligors on the note used to secure money borrowed by the parents that in turn was lent for the down payment). If the money lent by the family member is secured against the subject property, whether borrowed from an acceptable source or from the family member s own savings, only the family member provider(s) may be the note holder. FHA will not approve any form of securitization of the note that results in any entity other than the family member being the note holder, whether at loan settlement or at any time during the mortgage life cycle. An executed copy of the document outlining the terms of the secondary financing must be maintained in the loan file and included in the endorsement binder. If periodic payments of the secondary financing are required, the combined payments may not exceed the borrower's reasonable ability to pay. The secondary financing payments are to be included in the total debt-paymentto-income ratio for qualifying purposes. The second lien may not provide for a balloon payment within five years from the Maximum Loan Amount date of execution. FHA permits family member lending on a secured or unsecured basis, up to 100% of the borrower s required funds to close. This lending may include the down payment, closing costs, prepaid expenses, and discount points. The maximum insurable mortgage is not affected by loans from family members. The combined amount of financing may not exceed 100% of the lesser of the property's appraised value or sales price, plus normal closing costs, prepaid expenses, and discount points. Only exception to this is for properties located in West Virginia, which are limited to 100% CLTV in all cases. While the family member may lend 100% of the cash investment requirements, cash back to the homebuyer (beyond refund of any earnest money deposit) at closing is not permitted. 24 R e v i s e d

25 Other Organizations and Private Individuals General Other organizations and private individuals may provide secondary financing. The secondary financing must be disclosed at the time of application. Any periodic payments must be level and monthly. There may be no balloon payment during the first ten years. There may be no prepayment penalty after the borrower gives the lender 30 days notice. The required monthly payment, under both of the FHA-insured first mortgage and the second mortgage or lien, plus other housing expenses and all recurring charges, cannot exceed the borrower s reasonable ability to pay. Maximum Loan Amount The combined amount of the first and second mortgages may not exceed the applicable LTV ratio. The required minimum cash investment may not be financed. The combined amount of the first and second mortgage may not exceed the maximum mortgage limit for the area. Borrowers 60 Years of Age or Older General Borrowers 60 years of age or older may borrow the required cash investment for purchasing a principal residence, provided: o The provider of the secondary financing is a relative, a close friend with clearly defined interest in the borrower, the borrower's employer, or an institution established for humanitarian or welfare purposes. o The provider of the secondary financing may not have an identity-of-interest in the sale of the property, such as with a builder or seller, or with any person or organization associated with the builder or seller. o The note or other evidence of indebtedness may not bear an interest rate exceeding the interest rate of the insured mortgage. Maximum Loan Amount The principal amount of the insured mortgage loan, plus the note or other evidence of indebtedness in connection with the property, may not exceed 100% of the value, plus prepaid expenses. Only exception to this is for properties located in West Virginia, which are limited to 100% CLTV in all cases. 25 R e v i s e d

26 Occupancy Primary Residence General A primary residence is a property that will be occupied by the borrower for the majority of the calendar year. At least one borrower must occupy the property and sign the security instrument and the mortgage note for the property to be considered owner-occupied. The security instruments require a borrower to establish bona fide occupancy in the home as the borrower's principal residence within 60 days after signing the security instrument with continued occupancy for at least one year. Any person individually or jointly owning a home covered by an FHA insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations as described in the Maximum Number of FHA Insured Loans per Borrower section of this guide. Military personnel are considered occupant-owners, and are eligible for maximum financing if a member of the immediate family will occupy a property as the principal residence, whether or not the military person is stationed elsewhere. Second Home General A second home is a property the borrower occupies in addition to his or her primary residence. Second homes are not eligible for FHA financing. Investment Property General An investment property is a property that is not occupied by the borrower as a principal residence or as a second home. Investment properties are not eligible for FHA financing. 26 R e v i s e d

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