Modules 4 & 5: Using the TOTAL Mortgage Scorecard and Manual Underwriting

Transcription

1 Modules 4 & 5: Using the TOTAL Mortgage Scorecard and Manual Underwriting Single Family Housing Policy Handbook Title II Insured Housing Program Forward Mortgages Origination through Post-Closing/Endorsement John J. Phillips Senior Underwriter Processing and Underwriting Division Philadelphia Homeownership Center Federal Housing Administration (FHA) Eric O. McDowel Senior Underwriter Processing and Underwriting Division Philadelphia Homeownership Center Federal Housing Administration (FHA) 1

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3 Objective To review some of FHA Single Family policies to effectively conduct both a TOTAL Scorecard and Manual Underwrite evaluation. 3

4 Retirement of the TOTAL Scorecard User Guide The TOTAL Scorecard User Guide will be retired upon effective date of HUD Handbook (June 15, 2015). Unless otherwise specifically announced, the use and the applicable polices of FHA s Mortgage Scorecard will be contained in, Section 4, Underwriting the Borrower Using the TOTAL Mortgage Scorecard in HUD Handbook

5 How Does TOTAL Work? TOTAL is based on a mathematical scorecard equation using several credit variables combined with automated underwriting systems (AUS) functionalities. The scorecard element provides a risk recommendation. The AUS provides the documentation element. 5

6 Automated System Integrity The Mortgagee is responsible for the integrity of the data elements entered into the AUS to ensure the valid outcome of the mortgage credit risk evaluation performed by TOTAL. The Mortgagee is responsible for having a full understanding on the operating system applications, processes, and procedures it uses to ascertain TOTAL Scorecard risk evaluations. TOTAL is a tool and not a substitute for the Mortgagee s reasonable consideration of risk and credit worthiness. 6

7 Automated System Functionality TOTAL Mortgage Scorecard is available for Mortgagees to use for the purposes of prequalifying mortgage loan applicants. 7

8 Automated System Functionality (cont.) FHA will not recognize the risk assessment, nor will information be transmitted from TOTAL Mortgage Scorecard to FHA Connection (FHAC), for endorsement processing without an FHA case number. The Mortgagee must score the mortgage at least once after FHA case number assignment. It is imperative that Mortgagees enter the FHA case number into their Loan Origination System or AUS as soon as it is assigned and request a scoring event from TOTAL. 8

9 Use of TOTAL Scorecard Mortgagees using TOTAL remain solely responsible for prudent underwriting practices and the final underwriting decision. Mortgagees are expected to exercise both sound judgment and due diligence in the underwriting of a loan to be insured by FHA. 9

10 Program Scoring Requirements All transactions must be scored through the TOTAL Mortgage Scorecard, except: Streamline Refinance transactions; Assumptions; and Home Equity Conversion Mortgages (HECMs). Reference II A a Qtr. 2 FY15 10

11 Feedback Certificate/Finding Report Each AUS using the TOTAL Mortgage Scorecard provides a Feedback Certificate/Finding Report, which documents the results of the credit risk evaluation and identifies the credit report utilized for the scoring event. The Feedback Certificate/Finding Report upon which the Mortgagee makes its underwriting decision prior to endorsement must be included in the case binder. Reference II A 4 a Qtr. 2 FY15 11

12 HUD Employee and TOTAL Scorecard If the mortgage involves a HUD employee, the Mortgagee must score the transaction through TOTAL. If the file receives an Accept, the Mortgagee must: Underwrite the transaction in accordance with the guidance in the Underwriting the Borrower Using the TOTAL Mortgage Scorecard section; Submit conditional loan for HUD underwriting approval; and Submit the underwritten case binder to the Processing and Underwriting Division Director at the jurisdictional HOC for final underwriting approval. Reference II A a Qtr. 2 FY15 12

13 The Mortgagee and TOTAL Mortgage Scorecard The Mortgagee must: Submit data to the TOTAL Mortgage Scorecard through an approved AUS vendor in a data format that is acceptable to the AUS vendor as described in the TOTAL Mortgage Scorecard Developer s Guide. Reference II A 4 a Qtr. 2 FY15 13

14 The Mortgagee and TOTAL Mortgage Scorecard (cont.) The Mortgagee must: Ensure full compliance with all FHA eligibility requirements and all requirements of HUD Handbook , Section 4., Underwriting the Borrower Using the TOTAL Mortgage Scorecard. Reference II A 4 a Qtr. 2 FY15 14

15 The Mortgagee and TOTAL Mortgage Scorecard (cont.) The Mortgagee must: Verify the information used to score the mortgage through TOTAL, but does not need to analyze the credit history unless otherwise stated in HUD Handbook , section entitled, Underwriting the Borrower Using the TOTAL Mortgage Scorecard, if an Accept or Approve recommendation is received. Reference II A 4 a Qtr. 2 FY15 15

16 The Mortgagee and TOTAL Mortgage Scorecard (cont.) The Mortgagee must: Verify the integrity of all data elements entered into the AUS to ensure the outcome of the mortgage credit risk evaluation from TOTAL Scorecard. Reference II A 4 a Qtr. 2 FY15 16

17 The Mortgagee and TOTAL Mortgage Scorecard (cont.) The Mortgagee: May not accept or deny an FHA-insured mortgage based solely on a risk assessment generated by TOTAL Mortgage Scorecard. Reference II A 4 a Qtr. 2 FY15 17

18 The Underwriter and TOTAL Mortgage Scorecard The underwriter must: Underwrite all appraisals according to standard FHA requirements. Conduct a manual underwrite on mortgage applications where TOTAL issues a Refer decision. Reference II A 4 a Qtr. 2 FY15 18

19 Automated Underwriting System Data Entry Requirements The Mortgagee: Must verify the integrity of the data elements entered into the AUS to ensure the outcome of the mortgage credit risk evaluation performed by TOTAL is valid. These data elements include: Borrower s Credit Report; Borrower s Liabilities/Debt; Borrower s Effective Income; Borrower s Assets/Reserves; Adjusted Value; and Borrower s Total Mortgage Payment including Principal, Interest, Taxes, and Insurance (PITI). Reference II A 4 a Qtr. 2 FY15 19

20 Automated Underwriting System Data Entry Requirements: Third-Party Originators The Mortgagee may permit a sponsored Third-Party Originator (TPO) to enter data into the AUS. Both the Mortgagee and its TPO must ensure and verify all data entered into the AUS. The Mortgagee remains ultimately responsible for ensuring the data entered into the AUS is correct. Reference II A 4 a Qtr. 2 FY15 20

21 New Versions of TOTAL Mortgage Scorecard From time to time, FHA will release new versions of the TOTAL Mortgage Scorecard. FHA will announce the date that the new version will be implemented. All mortgages being scored for the first time will be scored using the new version. For mortgages with a case number, the mortgages will be scored using the version that was effective when the case number was assigned. Existing mortgages scored without a case number will be scored according to the version number tag that is provided in the TOTAL file by the AUS provider (if none, then the current version will be used). All mortgages without a case number will be scored using the new version 90 days after the new version is implemented. Reference II A 4 a Qtr. 2 FY15 21

22 Risk Classification If the Feedback Certificate/Finding Report shows an Accept or Approve, it will be referred to as Accept. Reference II A 4 a Qtr. 2 FY15 22

23 The Recommendation Accept or Refer Risk Recommendation TOTAL Eligible or Ineligible Program / Product AUS Regardless of the AUS used to request the scoring event, the same risk recommendation will result. 23

24 The Recommendation (cont.) Regardless of the AUS used to request the scoring event, the same risk recommendation will result: Data integrity; and Operating systems applications. - LOS - AUS 24

25 Recommendation: Accept/Eligible If the Feedback Certificate/Finding Report shows an Accept/Eligible recommendation, the mortgage may be eligible for FHA s insurance endorsement provided the Mortgagee verified that: Data entered into the AUS is accurate; All supporting documentation is consistent with the scoring event data elements; and The entire mortgage application complies with all FHA requirements. Reference II A 4 a Qtr. 2 FY15 25

26 Recommendation: Accept/Ineligible If the Feedback Certificate/Finding Report shows an Accept/Ineligible recommendation, the Borrower s credit and capacity would meet the threshold for approval, but the mortgage does not fully comply with FHA s eligibility requirements. The Mortgagee must analyze the Feedback Certificate and determine if the reason for the ineligibility is one that can be resolved in a manner that complies with FHA underwriting requirements. Reference II A 4 a Qtr. 2 FY15 26

27 Recommendation: Accept/Ineligible If the Mortgagee can correct the reason for ineligibility, the Mortgagee may rescore the mortgage in the AUS. When the reason for ineligibility cannot be corrected in the AUS, the Mortgagee may underwrite the mortgage using the following requirements for an Accept mortgage, but must resolve the reason for ineligibility in accordance with FHA requirements and must provide an explanation of the resolution in the remarks section of form HUD LT, FHA Loan Underwriting and Transmittal Summary. Reference II A 4 a Qtr. 2 FY15 27

28 Recommendation: Accept/Ineligible (cont.) Typical reasons for an Accept/Ineligible recommendation may include but are not limited to: Loan amount that exceeds the FHA Statutory Loan Limits; Property type submitted does not correspond to the Section of the Act selected in the AUS; Insufficient reserves on a 3-or 4 unit property; and Insufficient funds for closing. Reference II A 4 a Qtr. 2 FY15 28

29 Recommendation: Refer The underwriter must manually underwrite any mortgage application for which: The Feedback Certificate shows a Refer recommendation; Any result other than those described in HUD Handbook , Section 4 Underwriting the Borrower Using the TOTAL Mortgage Scorecard; or An Accept risk classification was manually downgraded. Reference II A 4 a Qtr. 2 FY15 29

30 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting 30

31 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting The Mortgagee must downgrade and manually underwrite any mortgage that received an Accept recommendation if: The mortgage file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard. Reference II A 4 a Qtr. 2 FY15 31

32 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (cont.) The Mortgagee must downgrade and manually underwrite any mortgage that received an Accept recommendation if: Additional information, not considered in the AUS recommendation, effects the overall insurability of the mortgage. Reference II A 4 a Qtr. 2 FY15 32

33 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (cont.) The Mortgagee must downgrade and manually underwrite any mortgage that received an Accept recommendation if: The Borrower has $1,000 or more collectively in Disputed Derogatory Credit accounts. Reference II A 4 a Qtr. 2 FY15 33

34 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (cont.) The Mortgagee must downgrade and manually underwrite any mortgage that received an Accept recommendation if: The date of the Borrower s bankruptcy discharge as reflected on bankruptcy documents is within two years from the date of case number assignment. Reference II A 4 a Qtr. 2 FY15 34

35 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (cont.) The Mortgagee must downgrade and manually underwrite any mortgage that received an Accept recommendation if: The case number assignment date is within three years of the date of the transfer of title through a foreclosure sale. Reference II A 4 a Qtr. 2 FY15 35

36 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (cont.) The Mortgagee must downgrade and manually underwrite any mortgage that received an Accept recommendation if: The case number assignment date is within three years of the date of the transfer of title through a Deed-in-Lieu (DIL) of foreclosure. Reference II A 4 a Qtr. 2 FY15 36

37 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (cont.) The Mortgagee must downgrade and manually underwrite any mortgage that received an Accept recommendation if: The Mortgage Payment history requires a downgrade as defined in Housing Obligations/Mortgage Payment History. Reference II A 4 a Qtr. 2 FY15 37

38 Mortgage Payment Downgrade: Obligations/Mortgage Payment History Purchase and No Cash-Out Refinance Purchase and No Cash-Out Refinance Transactions Transactions Downgraded to a Refer if any mortgage trade line reflects: Most recent 12 months > 3 x 30 Three or more late payments of greater than 30 Days > 1 x 60 + > 1 x 30 One or more late payments of 60 Days plus one or more 30-Day late payments. > 1 x 90 One payment greater than 90 Days late. * A Mortgage Payment is considered delinquent if not paid within the month due. ** Modified Mortgage utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments. Reference II A 4 a Qtr. 2 FY15 38

39 Mortgage Payment Downgrade: Obligations/Mortgage Payment History Purchase and No Cash-Out Refinance Transactions (cont.) Cash-Out Refinance Transactions Downgraded to a Refer if any mortgage trade line reflects: Any delinquency within 12 months of the case assignment date; or A current delinquency. *A Mortgage Payment is considered delinquent if not paid within the month due. **Modified Mortgage utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments. Reference II A 4 a Qtr. 2 FY15 39

40 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting The Mortgagee must downgrade and manually underwrite any mortgage application that received an Accept recommendation if: The Borrower has an undisclosed mortgage debt. Reference II A 4 a Qtr. 2 FY15 40

41 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (cont.) The Mortgagee must downgrade and manually underwrite any mortgage application that received an Accept recommendation if: Business income shows a greater than 20 percent decline over the analysis period. Reference II A 4 a Qtr. 2 FY15 41

42 Borrower Eligibility Requirements and Underwriting the Borrower Using the TOTAL Mortgage Scorecard In the Origination/Processing section under, General Mortgage Insurance Eligibility the new HUD Handbook addresses Borrower Eligibility policies concerning: Delinquent Federal Debt and Delinquent Federal Non-Tax Debt; Credit Alert Verification Reporting System (CAIVRS); and Suspended and Debarred Individuals (Excluded Parties). 42

43 Delinquent Federal Non-Tax Debt vs. Delinquent Federal Tax Debt Federal Non-Tax Debt Federal Tax Debt CAIVRS (or other means) Does not report on CAIVRS Debt Collection Improvement Act Borrower must resolve their federal non-tax debt in accordance with the Debt Collection Improvement Act. Delinquency must be resolved (paid satisfied or payment arrangement) Clear CAIVRS Report 43

44 Applicability of Automated Underwriting System Rules If the mortgage application must be manually downgraded, the Mortgagee must cease its use of the AUS and comply with all requirements for manual underwriting when underwriting a downgraded mortgage. Reference II A 4 a Qtr. 2 FY15 44

45 Case Study: Downgrade Credit Report Mortgage 12 months 1 x 30, 1 x 60 Revolving 12months 0 x 30 Car Loan 12 months 0 x 30 Delinquent Federal Student Loan: CAIVRS $7500 Borrower has applied for FHA purchase transaction. Borrower has an established credit history. Reflected is the borrower s last 12 months. An Accept risk classification was received. Should a downgrade to a manual underwrite be issued? 45

46 Case Study: Downgrade (cont.) Credit Report Mortgage 12 months 1 x 30, 1 x 60 / One or more late payments of 60 plus one or more 30 day Revolving 12months 0 x 30 Car Loan 12 months 0 x 30 Delinquent Federal Student Loan: CAIVRS $7500 / Not a Downgrade but, Borrower Eligibility Borrower has applied for FHA purchase transaction. Borrower has an established credit history. Reflected is the borrower s last 12 months. An Accept risk classification was received. Should a downgrade to a manual underwrite be issued? YES 46

47 Rescoring Requirements The Mortgagee must rescore a mortgage when: Any data element of the mortgage change; and/or New Borrower information becomes available. Reference II A 4 a Qtr. 2 FY15 47

48 Tolerance Levels The Mortgagee is not required to rescore a mortgage if the following data elements change from the last scoring event within the described tolerance levels: When assessing... Cash Reserves Income Tax and Insurance Escrow Rescore is not required if: Cash Reserves verified are not less than 10% below the previously scored amount Income verified is not less than 5% below the previously scored amount The cumulative monthly tax and insurance escrow does not result in more than a 2% increase in the Total Mortgage Payment to Effective Income ratio (PTI) Reference II A 4 a Qtr. 2 FY15 48

49 Case Study: Tolerance Levels Original Scoring Event Changes: Principal & Interest $1000 Principal & Interest $1000 Taxes 200 Taxes 210 Insurance 40 Insurance 65 HOA 25 HOA 77 Debts 500 Debts 500 TOTAL PTI $1265 / 30% TOTAL PTI $1352 / 32% TOTAL Fixed Payment $ 1765 / 42% TOTAL Fixed Payment Borrower s Effective Monthly Income $4250 Is this case required to be rescored through TOTAL? $ 1852/ 44% 49

50 Case Study: Tolerance Levels (cont.) Original Scoring Event Changes: Principal & Interest $1000 Principal & Interest $1000 Taxes 200 Taxes 210 Insurance 40 Insurance 65 HOA 25 HOA 77 Debts 500 Debts 500 TOTAL PTI $1265 / 30% TOTAL PTI $1352 / 32% TOTAL Fixed Payment $ 1765 / 42% TOTAL Fixed Payment Borrower s Effective Monthly Income $4250 $ 1852/ 44% Is this case required to be rescored through TOTAL? NO 50

51 Credit Report Requirements The Mortgagee must obtain a credit report with information from at least two credit repositories for each Borrower who will be obligated on the Mortgage Note. Reference II A 4 b Qtr. 2 FY15 51

52 Non-Borrowing Spouse Community Property State: Consent and Authorization The Mortgagee must obtain a non-borrowing spouse s consent and authorization where necessary to; verify specific information required to process the mortgage application, including the consent to verify their SSN with the Social Security Administration (SSA). Reference II A 1 a Qtr. 2 FY15 52

53 Credit Report: Non-borrowing Spouse The Mortgagee must obtain a credit report for a nonborrowing spouse who resides in a community property state, or if the subject property is located in a community property state. The credit report must indicate the non-borrowing spouse s SSN was matched with the SSA, or the Mortgagee must provide separate documentation indicating that the SSN was matched with the SSA only where an SSN exists. Reference II A 4 b Qtr. 2 FY15 53

54 Credit Report: Non-borrowing Spouse Where an SSN does not exist for a non-borrowing spouse, the credit report must contain, at a minimum, the non-borrowing spouse s full name, date of birth, and previous addresses for the last two years. The Mortgagee does not submit the non-borrowing spouse credit report as part of the TOTAL Scorecard risk evaluation. Reference II A 4 b Qtr. 2 FY15 54

55 Inconsistencies: Credit Report and Mortgage File The Mortgagee must obtain a new credit report and rescore the mortgage through TOTAL if the underwriter identifies inconsistencies between any information in the mortgage file and the original credit report. Reference II A 4 b Qtr. 2 FY15 55

56 Evaluating Credit History TOTAL 56

57 Collection Accounts, Charge Off Accounts, Accounts with Late Payments in the Previous 24 Months, and Judgments An explanation of collection accounts, charge off accounts, accounts with late payments, Judgments, or other derogatory information within the last 24 months is not required. Reference II A 4 b Qtr. 2 FY15 57

58 Disputed Derogatory Credit Accounts Disputed Derogatory Credit Account refers to disputed charge off accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months. Reference II A 4 b Qtr. 2 FY15 58

59 Disputed Derogatory Credit Accounts: Exclusions The following accounts can be excluded from consideration in the underwriting analysis: Medical accounts; and Disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use To exclude these balances, the Mortgagee must include a copy of the police report or other documentation from the creditor to support the status of the accounts. Reference II A 4 b Qtr. 2 FY15 59

60 Disputed Derogatory Credit Accounts: Applicability Credit report utilized by TOTAL Mortgage Scorecard indicates that the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the mortgage must be downgraded to a Refer and manually underwritten. Disputed Derogatory Credit Accounts of a non-borrowing spouse in a community property state are not included in the cumulative balance for determining if the mortgage application is downgraded to a Refer. Reference II A 4 b Qtr. 2 FY15 60

61 Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report Non-Derogatory Disputed Accounts include the following types of accounts: Disputed accounts with zero balance; Disputed accounts with late payments aged 24 months or greater; and Disputed accounts that are current and paid as agreed. Reference II A 4 b Qtr. 2 FY15 61

62 Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report (cont.) Non-Derogatory Disputed Accounts the Mortgagee: Is not required to downgrade the application to a Refer; Must analyze the effect of the disputed accounts on the Borrower s ability to repay the mortgage; and Must provide acceptable documentation from the borrower if the the dispute results in the Borrower s monthly debt payments utilized in computing the Debt-to-Income (DTI) ratio being less than the amount indicated on the credit report. Reference II A 4 b Qtr. 2 FY15 62

63 Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report (cont.) Non-derogatory disputed accounts are excluded from the $1,000 cumulative balance. Reference II A 4 b Qtr. 2 FY15 63

64 Judgments Judgment refers to any debt or monetary liability of the Borrower, and the Borrower s spouse in a community property state unless excluded by state law, created by a court, or other adjudicating body. The Mortgagee must verify that court-ordered Judgments are resolved or paid off prior to or at closing. Reference II A 4 b Qtr. 2 FY15 64

65 Judgments: Exception Policy Clarification Exception: A Judgment is considered resolved if the Borrower has: entered into a valid agreement with the creditor to make regular payments on the debt; has made timely payments for at least three months of scheduled payments; and the Judgment will not supersede the FHA-insured mortgage lien. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments. Note: All judgment liens must be subordinated. Reference II A 5 a Qtr. 2 FY15 65

66 Judgments: Payment Agreement The Mortgagee must: Include the payment amount in the agreement in the Borrower s monthly liabilities and debt; Obtain a copy of the agreement; Evidence for at least three months that payments were made on time in accordance with the agreement; and Include the subordination agreement for any liens existing on title. Reference II A 4 b Qtr. 2 FY15 66

67 Inaccuracy in Debt Considered When an inaccuracy in the amount or type of debt or obligation is revealed during the application process and the correct information was not considered by the AUS, the Mortgagee must: Verify the actual monthly payment amount; Re-submit the mortgage for evaluation by TOTAL if the cumulative change in the amount of the liabilities that must be included in the Borrower s debt increases by more than $100 per month; and Determine that the additional debt was not/will not be used for the Borrower s Minimum Required Investment (MRI). Reference II A 4 b Qtr. 2 FY15 67

68 Bankruptcy: Discharge Period The Mortgagee must document the passage of two years since the discharge date of any bankruptcy. If the bankruptcy was discharged within two years from the date of case number assignment, the mortgage must be downgraded to a Refer and manually underwritten. Reference II A 4 b Qtr. 2 FY15 68

69 Pre-Foreclosure Sales (Short Sales) Definition: Short Sale: Refers to any sale of real estate that generates proceeds that are less than the amount owed on the property and the lien holders agree to release their liens and forgive the deficiency balance on the real estate. Reference II A 4 b/ 5 a Qtr. 2 FY15 69

70 Short Sale: Period The Mortgagee must document the passage of three years since the date of the short sale. If the short sale occurred within three years of the case number assignment date, the mortgage must be downgraded to a Refer and manually underwritten. If the credit report does not verify the date of the transfer of title by short sale, the Mortgagee must obtain the short sale documents. A Borrower is generally not eligible for a new FHA-insured mortgage if they relinquished a property through a short sale within three years from the date of case number assignment. This three-year period begins on the date of transfer of title by short sale. Reference II A 4 b Qtr. 2 FY15 70

71 Foreclosure The Mortgagee must manually downgrade to a Refer if the Borrower had a foreclosure in which title transferred from the Borrower within three years of case number assignment. If the credit report does not verify the date of the transfer of title through the foreclosure, the Mortgagee must obtain the foreclosure documents. Reference II A 4 b Qtr. 2 FY15 71

72 Deed-in-Lieu (DIL) of Foreclosure The Mortgagee must manually downgrade to a Refer if the Borrower had a DIL of foreclosure in which title transferred from the Borrower within three years of case number assignment. If the credit report does not verify the date of the transfer of title by DIL of foreclosure, the Mortgagee must obtain a copy of the DIL of foreclosure. Reference II A 4 b Qtr. 2 FY15 72

73 Credit Counseling/Payment Plan Participating in a consumer credit counseling program does not require a downgrade to a manual underwriting. No explanation or other documentation is needed. Reference II A 4 b Qtr. 2 FY15 73

74 Housing Obligation/Mortgage Payment History A Housing Obligation/Mortgage Payment refers to the monthly payment due for rental or properties owned. A Mortgage Payment is considered delinquent if not paid within the month due. A mortgage that has been modified must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments. Reference II A 4 b Qtr. 2 FY15 74

75 Mortgage Payment Downgrade: Obligations/Mortgage Payment History Purchase and No Cash-Out Refinance Transactions Purchase and No Cash-Out Refinance Transactions Downgraded to a Refer if any mortgage trade line reflects: Most recent 12 months > 3 x 30 Three or more late payments of greater than 30 Days > 1 x 60 + > 1 x 30 One or more late payments of 60 Days plus one or more 30 Day late payments. > 1 x 90 One payment greater than 90 Days late. * A Mortgage Payment is considered delinquent if not paid within the month due. ** Modified Mortgage utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments. Reference II A 4 b Qtr. 2 FY15 75

76 Mortgage Payment Downgrade: Obligations/ Mortgage Payment History Cash-Out Refinance Transactions Cash-Out Refinance Transactions Downgraded to a Refer if any mortgage trade line reflects: Any delinquency within 12 months of the case assignment date; and/or A current delinquency. *A Mortgage Payment is considered delinquent if not paid within the month due. **Modified Mortgage utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments. Reference II A 4 b Qtr. 2 FY15 76

77 Timeshare: Evaluation of Payment History If a loan is secured by a Timeshare and the trade line is identified as: A mortgage for a TOTAL underwrite the trade line must be evaluated as a mortgage. An installment debt for a TOTAL underwrite the trade line is evaluated as an installment debt. Reference II A 4 b Qtr. 2 FY15 77

78 Evaluating Liabilities and Debts 78

79 Inquiries The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios. The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the borrower s required funds to close on the property being purchased. Material Inquiries refer to inquires that may potentially result in obligations incurred by the Borrower for other mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries. Reference II A 4 b Qtr. 2 FY15 79

80 Closed-end Debts Paid Off Within 10 Months Closed-end debts do not have to be included if: They will be paid off within 10 months; and The cumulative payments of all such debts are less than or equal to 5 percent of the Borrower s gross monthly income. The Borrower may not pay down the balance in order to meet the 10-month requirement. Reference II A 4 b Qtr. 2 FY15 80

81 Authorized User Accounts Accounts for which the Borrower is an authorized user must be included in a Borrower s DTI ratio unless the Mortgagee can obtain documentation to evidence: The primary account holder has made all the required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower s DTI. Reference II A 4 b Qtr. 2 FY15 81

82 Undisclosed Debt Other Than a Mortgage When a debt or obligation (other than a mortgage) not listed on the mortgage application and/or credit report and not considered by the AUS is revealed during the application process, the Mortgagee must: Verify the actual monthly payment amount; Re-submit the mortgage for evaluation by TOTAL if the cumulative change in the amount of the liabilities that must be included in the Borrower s debt increases by more than $100 per month; and Determine that any funds borrowed were not/will not be used for the Borrower s MRI (Minimum Required Investment). Reference II A 4 b Qtr. 2 FY15 82

83 Undisclosed Mortgage When a debt or obligation that is secured by a mortgage not listed on the mortgage application and/or credit report and not considered by the AUS is revealed during the application process, the Mortgagee must downgrade to a Refer and manually underwrite the mortgage. Reference II A 4 b Qtr. 2 FY15 83

84 Alimony, Child Support, or Other Maintenance For alimony, if the Borrower s income was not reduced by the amount of the monthly alimony obligation in the Mortgagee s calculation of the Borrower s gross income, the Mortgagee must verify and include the monthly obligation in its calculation of the Borrower s debt. Child support and other maintenance are to be treated as a recurring liability and the Mortgagee must include the monthly obligation in the Borrower s liabilities and debt. The Mortgagee must calculate the Borrower s monthly obligation from the greater of: The amount shown on the most recent decree or agreement establishing the Borrower s payment obligation; or The monthly amount of the garnishment. Reference II A 4 b Qtr. 2 FY15 84

85 Alimony, Child Support, or Other Maintenance (cont.) The Mortgagee must obtain the official signed divorce decree, separation agreement, maintenance agreement, or other legal order. The Mortgagee must also obtain the Borrower s pay stubs covering no less than 28 consecutive Days to verify whether the Borrower is subject to any order of garnishment relating to the alimony, child support, or other maintenance. The Mortgagee must calculate the Borrower s monthly obligation from the greater of: The amount shown on the most recent decree or agreement establishing the Borrower s payment obligation; or The monthly amount of the garnishment. Reference II A 5 a Qtr. 2 FY15 85

86 Deferred Obligations: Clarification Deferred Obligations refer to liabilities that have been incurred but where payment is deferred or has not yet commenced, including accounts in forbearance. The Mortgagee must verify and include deferred obligations in the calculation of the Borrower s debt. Reference II A 4 b Qtr. 2 FY15 86

87 Deferred Obligations: Clarification (cont.) Mortgagee must use the actual monthly payment to be paid on a deferred liability, whenever available. If the actual monthly payment is not available, for: Installment Debt: 5 percent of the outstanding balance to establish the monthly payment. Student Loan: 2 percent of the outstanding balance to establish the monthly payment. Reference II A 4 b Qtr. 2 FY15 87

88 Installment Loans Installment Loans refer to loans, not secured by real estate, that require the periodic payment of principal and interest. The Mortgagee must include the monthly payment shown on the credit report, loan agreement, or payment statement to calculate the Borrower s debts. Reference II A 4 b Qtr. 2 FY15 88

89 Installment Loan Monthly Payment Clarification If the credit report does not include a monthly payment for the loan, the Mortgagee must use the amount of the monthly payment shown in the loan agreement or payment statement and enter it into TOTAL Mortgage Scorecard. If the monthly payment shown on the credit report is utilized to calculate the monthly debts, no further documentation is required. If the credit report does not include a monthly payment for the loan, or the payment reported on the credit report is greater than the payment on the loan agreement or payment statement, the Mortgagee must obtain a copy of the loan agreement or payment statement documenting the amount of the monthly payment. Reference II A 4 b Qtr. 2 FY15 89

90 Revolving Charge Accounts: Documentation The Mortgagee must use the credit report to document the terms, balance, and payment amount on the account, if available. Where the credit report does not reflect the necessary information on the charge account, the Mortgagee must: Obtain a copy of the most recent charge account statement; or Use 5 percent of the outstanding balance to document the monthly payment. Reference II A 4 b Qtr. 2 FY15 90

91 30-Day Accounts 30-Day Accounts refer to a credit arrangement that requires the Borrower to pay-off the outstanding balance on the account every month. The Mortgagee must verify the Borrower paid the outstanding balance in full on every 30-Day Account each month for the past 12 months. Reference II A 4 b Qtr. 2 FY15 91

92 30-Day Accounts (cont.) 30-Day Accounts that are paid monthly on time for the past 12 months are not included in the Borrower s DTI. If the credit report reflects any late payments in the last 12 months, the Mortgagee must utilize 5 percent of the outstanding balance as the Borrower s monthly debt to be included in the DTI. Reference II A 4 b Qtr. 2 FY15 92

93 Contingent Liabilities A Contingent Liability refers to a liability that may result in the obligation to repay only when a specific event occurs. For example, a contingent liability exists when an individual can be held responsible for the repayment of a debt if another legally obligated party defaults on the payment. Contingent liabilities may include cosigner liabilities and liabilities resulting from a mortgage assumption without release of liability. Reference II A 4 b Qtr. 2 FY15 93

94 Contingent Liabilities (cont.) The Mortgagee must include monthly payments on contingent liabilities in the calculation of the Borrower s monthly obligations unless the Mortgagee verifies and documents that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default or the other legally obligated party has made 12 months of timely payments. The Mortgagee must calculate the monthly payment on the contingent liability based on the terms of the agreement creating the contingent liability. Reference II A 4 b Qtr. 2 FY15 94

95 Contingent Liabilities: Mortgage Assumptions The Mortgagee must obtain the agreement creating the contingent liability or assumption agreement and deed showing transfer of title out of the Borrower s name. Note: The Mortgagee verifies and must document that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default. Reference II A 4 b Qtr. 2 FY15 95

96 Contingent Liabilities: Cosigned Liabilities If the cosigned liability is not included in the monthly obligation, the Mortgagee must obtain documentation to evidence that the other party to the debt has been making regular on-time payments during the previous 12 months, and does not have a history of delinquent payments on the loan. Reference II A 4 b Qtr. 2 FY15 96

97 Contingent Liabilities: Divorce The Mortgagee must obtain a copy of the divorce decree ordering the spouse to make payments. Reference II A 4 b Qtr. 2 FY15 97

98 Collection Accounts A Collection Account refers to a Borrower s loan or debt that has been submitted to a collection agency by a creditor. Medical Collections, are not required to be paid, satisfied, or considered in the Borrower s qualifying ratios. Reference II A 4 b Qtr. 2 FY15 98

99 Collection Accounts (cont.) If the credit reports used in the analysis show a cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must: Verify that the debt is paid in full at the time of or prior to settlement using an acceptable source of funds; Verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower s DIT; or If a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrower s DTI ratio. Reference II A 4 b Qtr. 2 FY15 99

100 Collection Accounts (cont.) Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower s ability to pay all collection accounts, unless specifically excluded by state law. The Mortgagee must provide the following documentation: Evidence of payment in full, if paid prior to settlement; or The payoff statement, if paid at settlement; or The payment arrangement with creditor, if not paid prior to or at settlement. If the Mortgagee uses 5 percent of the outstanding balance, no documentation is required. Reference II A 4 b Qtr. 2 FY15 100

101 Charge Off Accounts A Charge Off Account refers to a Borrower s loan or debt that has been written off by the creditor. Charge off accounts do not need to be included in the Borrower s liabilities or debt. Reference II A 4 b Qtr. 2 FY15 101

102 Private Savings Clubs Private Savings Club refers to a non-traditional method of saving by making deposits into a member-managed resource pool. If the Borrower is obligated to continue making ongoing contributions under the pooled savings agreement, this obligation must be counted in the Borrower s total debt. The Mortgagee must verify and document the establishment and duration of the Borrower s membership in the club and the amount of the Borrower s required contribution to the club. The Mortgagee must also obtain the club s account ledgers and receipts, and verification from the club treasurer that the club is still active. Reference II A 4 b Qtr. 2 FY15 102

103 Private Savings Clubs (cont.) Under this situation, if the Borrower is obligated to continue making ongoing contributions under the pooled savings agreement, this obligation must be counted in the Borrower s total debt. How would the Mortgagee enter this identify this account? Reference II A 4 b Qtr. 2 FY15 103

104 Private Savings Clubs (cont.) How would the Mortgagee enter this identify this account? The Mortgagee needs to identify the monthly obligation as a monthly liability in the Borrower s DTI and verify that there AUS has identified this account in its transmission to TOTAL. Reference II A 4 b Qtr. 2 FY15 104

105 Business Debt in Borrower s Name When a self-employed Borrower states debt appearing on their personal credit report is being paid by their business, the Mortgagee must obtain documentation to evidence the following: Reference II A 4 b Qtr. 2 FY15 105

106 Business Debt in Borrower s Name (cont.) The company has been making regular on-time payments during the previous 12 months without delinquency; The debt is paid out of company funds; and The debt was considered in the cash-flow analysis of the Borrower s business. Reference II A 4 b Qtr. 2 FY15 106

107 Business Debt Considered in Cash Flow Analysis When the personal Borrower s debt is being paid by the Borrower s business, then is considered: In the cash flow analysis and the Borrower s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented as paid out of company funds, the Borrower s business tax returns may show an interest expense related to the obligation, only the interest portion of the debt can be considered in the cash flow analysis. Reference II A 4 b Qtr. 2 FY15 107

108 Negative Income Negative income must be subtracted from the Borrower s gross monthly income, and not treated as a recurring monthly liability unless otherwise noted. Reference II A 4 b Qtr. 2 FY15 108

109 Source of Funds for Debts Paid Prior to Close The Mortgagee must document that the funds used to pay off debts prior to closing came from an acceptable source, and the Borrower did not incur new debts that were not included in the DTI ratio. Reference II A 4 b Qtr. 2 FY15 109

110 Obligations Not Considered Debt Medical collections Federal, state, and local taxes, if not delinquent and no payments are required Automatic deductions from savings, when not associated with another type of obligation Federal Insurance Contributions Act (FICA) and other retirement contributions, such as 401(k) accounts Collateralized loans secured by depository accounts Utilities Child care Commuting costs Union dues Insurance, other than property insurance Open accounts with zero balances Voluntary deductions, when not associated with another type of obligation Reference II A 4 b Qtr. 2 FY15 110

111 Income Requirements 111

112 Feedback Certification: General Income Requirements As we have discussed, the Mortgagee must review the Feedback Certificate for accuracy and validate the data provided for TOTAL s risk evaluation. Reference II A 4 b Qtr. 2 FY15 112

113 Feedback Certification: General Income Requirements (cont.) The Mortgagee must: Document the Borrower s income; Document employment history; Verify the accuracy of the amounts of income being reported; and Determine if the income can be considered as Effective Income. Reference II A 4 b Qtr. 2 FY15 113

114 General Income Requirements Effective Income refers to income that may be used to qualify a Borrower for a mortgage. Effective Income must: Be likely to continue through at least the first three years of the mortgage; Be documentable; Be legally derived; Be reported to the IRS when required; and Subtract negative income from the Borrower s gross monthly income. Reference II A 4 c Qtr. 2 FY15 114

115 Employment Related Income Employment Income refers to income received as an employee of a business that is reported on IRS Form W-2. The Mortgagee may use Employment-related Income as Effective Income in accordance with the standards provided for each type of Employment-related Income. Reference II A 4 c Qtr. 2 FY15 115

116 Employment Related Income (cont.) For all Employment related Income, the Mortgagee must verify the Borrower s most recent two years of employment and income, and document using one of the following methods: Traditional Current Employment Documentation; or Alternative Current Employment Documentation. Reference II A 4 c Qtr. 2 FY15 116

117 Traditional Current Employment Documentation To verify the borrowers current employment, the Mortgagee must obtain: The most recent pay stub; and A written Verification of Employment (VOE) or an electronic verification acceptable to FHA covering the most recent two years. Reference II A 4 c Qtr. 2 FY15 117

118 Alternative Current Employment Documentation To verify the borrowers current employment, the Mortgagee must obtain: Copies of the most recent pay stub that shows the Borrower s year-to-date earnings; Copies of the original IRS W-2 forms from the previous two years; and a Telephone employment certification Document current employment by telephone, sign and date the verification documentation, and note the name, title, and telephone number of the person with whom employment was verified. Reference II A 4 c Qtr. 2 FY15 118

119 Re-verification of Employment Re-verification of employment must be completed within 10 Days prior to the date of the Note. Verbal re-verification of employment is acceptable. Reference II A 4 c Qtr. 2 FY15 119

120 Past Employment Documentation: Current Employment for Two Years Direct verification of the Borrower s employment history for the previous two years is not required if all of the following conditions are met: The current employer confirms a two-year employment history, or a paystub reflects a hiring date of a minimum of two years; Only base pay is used to qualify (no Overtime or Bonus Income); and The Borrower executes IRS Form 4506, Request for Copy of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two tax years. Reference II A 4 c Qtr. 2 FY15 120

121 Past Employment Documentation: Current Employment Less Than Two Years (cont.) If the Borrower has not been employed with the same employer for the previous two years and/or not all conditions previously discussed are not able to be met (Counting Overtime/Bonus), then the Mortgagee must obtain one or a combination of the following for the most recent two years to verify the applicant s employment history: W-2(s); VOE(s); Electronic verification acceptable to FHA; and Evidence supporting enrollment in school or the military during the most recent two full years. Reference II A 4 c Qtr. 2 FY15 121

122 Primary Employment Primary Employment is the Borrower s principal employment. Primary Employment is generally full-time employment. The Mortgagee may use primary employment income as Effective Income. Reference II A 4 c Qtr. 2 FY15 122

123 Calculation of Effective Income: Salary Salary refers to Income that has been and will likely be consistently earned, the Mortgagee must use the current salary to calculate the Effective income. Reference II A 4 c Qtr. 2 FY15 123

124 Calculation of Effective Income: Hourly Hourly Wage Earners whose: Hours do not vary, the Mortgagee must consider the Borrower s current hourly rate to calculate Effective Income. Hours vary, the Mortgagee must average the income over the previous two years. If the Mortgagee can document an increase in pay rate, the Mortgagee may use the most recent 12-month average of hours at the current pay rate. Reference II A 4 c Qtr. 2 FY15 124

125 Overtime and Bonus Income Overtime and Bonus Income refers to income that the Borrower receives in addition to the Borrower s normal salary. Reference II A 5 b Qtr. 2 FY15 125

126 Overtime and Bonus Income The Mortgagee may use Overtime and Bonus Income as Effective Income if the Borrower has received this income for the past two years and it is reasonably likely to continue. Periods of Overtime and Bonus Income less than two years may be considered Effective Income if the Mortgagee documents that the Overtime and Bonus Income has been consistently earned over a period of not less than one year and is reasonably likely to continue. Reference II A 5 b Qtr. 2 FY15 126

127 Overtime and Bonus Income: Calculation Calculation: The Mortgagee must average the Overtime or Bonus Income over the previous two years. However, if the Overtime or Bonus Income from the current year decreases by 20% or more from the previous, the Mortgagee must use the current year s income. Reference II A 5 b Qtr. 2 FY15 127

128 Seasonal Employment Seasonal Employment refers to employment that is not year round, regardless of the number of hours per week the Borrower works on the job. Reference II A 5 b Qtr. 2 FY15 128

129 Seasonal Employment The Mortgagee may consider Seasonal Employment income as Effective Income if the Borrower: Has worked the same line of work for the past two years; and Is reasonably likely to be rehired for the next season. The Mortgagee may consider unemployment income as Effective Income for those with effective Seasonal Employment income. Reference II A 5 b Qtr. 2 FY15 129