Government Loans Federal Housing Administration

Transcription

1 Module 5 Module 5 Government Loans

2 Explanation: This pdf is only a copy of the module slides. To proceed through the course, you must read and click through each slide.

3 (FHA) The, generally known as FHA, was established in 1934 to improve the construction and financing of housing. A part of the United States Department of Housing and Urban Development (HUD), FHA provides mortgage insurance on single family, multifamily and manufactured homes throughout the United States and its territories. When the FHA was created, the housing industry was flat on its back: 3 Two million construction workers had lost their jobs. Terms were difficult to meet for homebuyers seeking mortgages. Mortgage loan terms were limited to 50 percent of the property s market value, with a repayment schedule spread over three to five years and ending with a balloon payment. America was primarily a nation of renters. Only four in 10 households owned homes. 3 United States Dept. of Housing and Urban Development.. About the. June 2009

4 (FHA) Since its creation, FHA has had a major influence on real estate financing. Many of the mortgage loan programs, which are taken for granted today, were initiated by the FHA. For example, before FHA, it was common practice to make real estate loans for short periods of time. Loans then were not fully amortized and every few years borrowers had to renegotiate loans with their lenders. This created problems particularly during the great Depression of the 1930 s. During the Great Depression lenders were not willing or able to renew loans and as a result, massive foreclosures occurred. Major loan reforms spearheaded by FHA included: Fully amortized loans. Low down payment loans. Low interest rates. Mandatory collection of taxes and fire insurance premiums in an Escrow Account Standards for qualifying the borrowers.

5 The following FHA programs and guidelines are provided for the professional in the mortgage industry. What follows is intended to be a resource for mortgage loan originators, underwriters, and mortgage processors. The following information is designed as a guide only. Please use caution as every lender has the authority to make determinations as to what is or is not acceptable in the grey areas or in the strength of the borrower, for their company. In addition, many lenders apply more restrictive underwriting overlays to existing HUD guidelines to mitigate their risk. Mortgage professionals are advised to communicate with their lender regarding specific overlays that may apply. FHA programs and guidelines are a work in progress and HUD makes changes to the guidelines often. The author has made an attempt to keep abreast of any HUD changes however; if any concerns arise please refer to the hud.gov website as they are the one, the only, and the final authority. The accuracy of the information that follows is not guaranteed. The information is available in the HUD Rev 5 handbook and is available on their web site

6 FHA Direct Endorsement Lender The term FHA direct lender is a lender authorized to approve loans for FHA Insurance without prior submission to FHA (HUD). The correct term is FHA Direct Endorsement Lender (DE). The purpose of the program is to save time in the mortgage process. For a lender to be eligible for the direct endorsement program, they must comply with fairly strict guidelines set forth by HUD. These guidelines include HUD s review of the company s experience, sound lending practices, financial strength, and overall business conduct. Under FHA s Direct Endorsement (DE) program, approved lenders may underwrite and close mortgage loans without FHA s prior review or approval. This includes all aspects of the mortgage loan application, property analysis, and borrower underwriting.

7 Implementation of Final Rule FR 5356 F 02 On June 11, 2010 HUD released MORTGAGEE LETTER : Implementation of Final Rule FR 5356 F 02, : Continuation of FHA Reform Strengthening Risk Management through Responsible FHA Approved Lenders. The rule increased the net worth requirements for all FHA approved lenders and eliminated FHA approval of loan correspondents. As stated in the final rule referenced above, FHA increased its net worth requirements in two phases as described next.

8 Implementation of Final Rule FR 5356 F 02 Phase One Effective May 20, 2010, all new applicants for FHA approval as a lender or mortgagee, irrespective of size, were required to have a net worth of at least $1,000,000, of which no less than 20 percent must be liquid assets consisting of cash or its equivalent acceptable to the Secretary. Effective May 20, 2011, all lenders approved as of May 20, 2010 were required to meet the $1,000,000 net worth with 20 percent liquid assets requirement. The only exception was for small lenders that were approved as of May 20, 2010 and meet the SBA small business requirement (13 CFR , Sector 52). Lenders that meet SBA s small business status were required to have a net worth of at least $500,000 with no less than 20 percent in liquid assets.

9 Implementation of Final Rule FR 5356 F 02 Phase Two Effective 2013 and beyond lender net worth requirements, irrespective of size, stipulate that all FHAapproved mortgagees have a net worth of $1 million plus an additional net worth of one percent of the total volume in excess of $25 million of FHA single family insured mortgages originated, underwritten, purchased, or serviced during the prior fiscal year, up to a maximum required net worth of $2.5 million. No less than 20 percent of the mortgagee s required net worth must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

10 HUD Loan Correspondents Rule Change On May 20, 2010, FHA revised its lender approval policy to eliminate the approval of loan correspondents. As of January 1, 2011, loan correspondents no longer have access to HUD s secure system, the FHA Connection. Loan correspondents are permitted to continue their participation in FHA programs by establishing a sponsorship relationship with an FHA approved mortgagee. Loan correspondents must be registered as sponsored originators in the FHA Connection by a sponsoring mortgagee. Mortgagees may register a sponsored originator via the sponsored originator maintenance screen in the FHA Connection. Sponsored third party originators must have an established correspondent relationship with an FHA approved lender in order to originate FHA transactions. The Direct Endorsement lender takes full responsibility for approving and monitoring their correspondents.

11 Mortgagee Letter A non FHA approved sponsored third party originator does not hold a Title II Origination Approval Agreement and may not purchase or hold FHA insured loans. 4 An FHA approved mortgagee acting as a sponsored third party originator is authorized to originate Title II mortgage loans for sale or transfer to a sponsoring FHA approved lender or mortgagee who holds a valid Title II Origination Approval Agreement 4 See 24 CFR for the regulatory definition of a sponsored third party originator.

12 Where We You Now Many of the mortgage loan programs, which are taken for granted today, were initiated by the FHA. Major loan reforms spearheaded by FHA include all of the following except: a. The first adjustable rate mortgages (ARM) loans. b. Fully amortized loans. c. Low down payment loans. d. Low interest rates. Major loan reforms spearheaded by FHA included: Fully amortized loans. Low down payment loans. Low interest rates. Mandatory collection of taxes and fire insurance premiums in an Escrow Account Standards for qualifying the borrowers

13 Closing Loans in the Name of Non FHA Approved Sponsored TPOs Section 203(b) of the National Housing Act specifies that in order for a mortgage to be eligible for FHA insurance it must have been made to, and be held by, a mortgagee approved by the Secretary (12 U.S.C. 1709(b)(1)). Therefore, non FHA approved sponsored third party originators may not close loans in their own name. Instead, loans originated by a non FHA approved sponsored third party originator must close in the name of the sponsoring FHA approved mortgagee. Since December 31, 2010, entities that were previously approved as FHA approved Loan Correspondents but have not converted or obtained new FHA lender approval as a Title II Mortgagee, are no longer FHA approved lenders and may not close loans in their own name.

14 Closing Loans in the Name of FHA Approved Mortgagees Acting as Sponsored TPOs If an FHA approved mortgagee chooses to act in the capacity of a sponsored third party originator and originate loans for underwriting and approval by another sponsoring FHA approved mortgagee, the originating mortgagee due to its approval by the Secretary and in accordance with the requirements of the National Housing Act may close the loans for which it acts as a sponsored third party originator in its own name. As of August 22, 2011, the FHA Connection was updated to permit an FHA approved mortgagee acting as a sponsored third party originator to have a Mortgage Insurance Certificate (MIC) issued in its own name. The sponsoring mortgagee must use the FHA Connection Insurance Application Screen to notify FHA in whose name the FHA approved mortgagee acting as a sponsored thirdparty originator or the sponsoring mortgagee the MIC should be issued, and to what location the MIC should be mailed.

15 Closing Loans in the Name of FHA Approved Mortgagees Acting as Sponsored TPOs (Continued) FHA approved DE lenders that sponsor third party originators are responsible for ensuring that each third party originator they sponsor adheres to FHA s requirements when originating loans for that lender. HUD expects sponsoring mortgagees to diligently monitor and evaluate the activities and performance of all third party originators they sponsor, including FHA approved mortgagees acting as sponsored third party originators. For information on Quality Control requirements for Direct Endorsement lenders that sponsor third party originators, see HUD Handbook Rev. 2 Chapter 7 and Mortgagee Letter

16 Closing Loans in the Name of FHA Approved Mortgagees Acting as Sponsored TPOs (Continued) Failure of a sponsored third party originator to comply with FHA requirements may result in FHA taking administrative action against the sponsoring mortgagee involved in the loan transaction. If an FHA approved mortgagee violates FHA requirements while acting as a sponsored third party originator during a loan transaction, the Department may take administrative action against both the sponsoring mortgagee for its failure to ensure loans originated through its sponsored third party originator comply with FHA requirements, and also against the FHA approved mortgagee acting as a sponsored third party originator for its violation of FHA requirements. Such administrative action may be brought against the sponsoring mortgagee, the FHA approved mortgagee acting as a sponsored third party originator, or any individual acting on either party s behalf and may include, but is not limited to, action by the Mortgagee Review Board, suspension, debarment or limited denials of participation, and/or the imposition of civil money penalties or other civil penalties and assessments.

17 FHA Mortgage Insurance Premiums The is NOT a lender FHA Insures the loan. FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner s default. Loans must meet certain requirements established by FHA to qualify for insurance. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment.

18 Upfront Premiums (UFMIP) Effective for FHA loans for which the case number is assigned on or after April 9, 2012, for FHA Single Family (SF) traditional purchase and refinance products, the upfront mortgage insurance premium, shown in basis points below (BPS), will be charged for all amortization terms. Purchase Money Mortgages and Full Credit Qualifying Refinances 175 BPS Streamline Refinances that were endorsed on or before May 31, BP

19 Annual Premiums Effective for FHA loans for which the case number is assigned on or after April 9, 2012, FHA will increase the annual premiums collected on a monthly basis. For FHA traditional purchase and refinance products, the annual premium, shown in basis points below, is to be remitted on a monthly basis, and will be charged based on the initial loan to value ratio and length of the mortgage according to the following schedule: LTV = or < 95 percent > 95 percent Annual Premiums for Loans > 15 Years 120 BPS 125 BPS The annual premium for amortization terms equal to or less than 15 years is collected according to the following schedule. LTV Annual Premiums for Loans > 15 Years = or <78 percent NONE = or < 90 percent 35 BPS > 90 percent 60 BPS SF forward mortgages with amortization terms of 15 years or less, and loan to value (LTV) ratio of 78% or less, remain exempt from Annual MIP.

20 Up Front Mortgage Insurance Premium (UFMIP) Calculations Sales Price/Value X 96.5% LTV = Base Loan Amount Base Loan Amount X 1.75% = Up Front Mortgage Insurance Premium (UFMIP) Base Loan Amount + UFMIP = Total Loan Amount with UFMIP Annual Mortgage Insurance Premiums \Monthly Mortgage Insurance Premiums (Monthly MIP) Calculations Sales Price/Value X 96.5% LTV = Base Loan Amount Base Loan Amount X 1.25% = Annual Mortgage Insurance Premium Annual Mortgage Insurance Premium \12 Months = Monthly MIP

21 A lender authorized to approve loans for FHA Insurance without prior submission to FHA (HUD) is called: a. An Automatic Approval Lender. b. A Prior Approval Lender. c. A Direct Endorsement Lender d. A Correspondent Lender. The term FHA direct lender is a lender authorized to approve loans for FHA Insurance without prior submission to FHA (HUD). The correct term is FHA Direct Endorsement Lender (DE). The purpose of the program is to save time in the mortgage process. Under FHA s Direct Endorsement (DE) program, approved lenders may underwrite and close mortgage loans without FHA s prior review or approval. This includes all aspects of the mortgage loan application, property analysis, and borrower underwriting

22 Effective for all FHA loans closed after January 1, 2001, the FHA annual MIP is to be automatically cancelled under the following 3 conditions: For mortgages with terms more than 15 years, the Annual Mortgage Insurance Premium cancelled when the LTV ratio reaches 78%, provided the borrower has paid the annual MIP for at least five years. For mortgages with terms 15 years and less, and LTVs ratios above 78.1%, the Annual Mortgage Insurance Premium is canceled when the LTV reaches 78% regardless of the length of time the borrower has paid the annual MIP. For mortgages with terms 15 years or less, and LTVs at or below 78% at the time of origination Annual Mortgage Insurance Premiums are not charged. Cancelation of the Annual Mortgage Insurance Premium also means the mortgage loan is not insured by FHA.

23 Annual Mortgage Insurance Premiums \Monthly Mortgage Insurance Premiums (Monthly MIP) Calculations (Continued) FHA will determine when a borrower has reached the 78% loan to value ratio based on the lower of the sales price or appraised value at origination. New appraised values will not be considered. For example, if the lower of the sales price or the appraised value at origination was $100,000, when the loan amount reaches $78,000, FHA will no longer collect annual mortgage insurance premiums on the loan. Cancellation of the annual mortgage insurance premiums will normally be based on the scheduled amortization of the loan. However, in cases where the loan payments have been accelerated or modified, cancellation can be based on the actual amortization of the loan as provided to HUD by the servicing mortgagee.

24 Loan Limits The FHA sets limits on the maximum amount of loan funds available to a borrower relative to housing costs in a given area. By law, FHA Lenders cannot insure loans that exceed certain amounts based on the metropolitan area or county in which the property is located. Each year, HUD sets the FHA loan limits by county for all 50 states. Information regarding FHA Loan Limits in a specific county may be obtained at: Most FHA mortgages require the payment of an upfront mortgage insurance premium (UFMIP). The statutory loan amounts and LTV limits discussed in this chapter do not include the UFMIP ( A.1.b

25 Mortgagee Letter Forward Mortgages: The FHA national loan limit floor remains at 65 percent of the national conforming loan limit (which remains at $417,000 for a one unit property) for the period November 18, 2011 through December 31, FHA national floor limits by property size, as follows: One Unit $271,050 Two Unit $347,000 Three Unit $419,400 Four Unit $521,250

26 Mortgagee Letter (Continued) Forward Mortgages: For areas designated as high cost in 2008 under the Economic Stimulus Act of 2008 (ESA), the FHA national loan limit ceiling is $729,750 for a one unit property. The ESA maximum FHA loan limits (the ceiling) by property size for period stated in this mortgagee letter are as follows: One Unit $729,750 Two Unit $934,200 Three Unit $1,129,250 Four Unit $1,403,400

27 Mortgagee Letter (Continued) Home Equity Conversion Mortgages: The FHA maximum loan limit and claim amount for HECMs were not affected by H.R and remain unchanged. The maximum claim amount and limit for HECM s remain at $625,000 for calendar year Special Exceptions for Alaska, Hawaii, Guam and Virgin Islands : For areas designated as high cost in 2008 under the Economic Stimulus Act (ESA), the FHA national loan limit ceiling is $729,750 for a one unit property. The ESA maximum FHA loan limits (the ceiling) by property size for period stated in this mortgagee letter are as follows: One Unit $729,750 Two Unit $934,200 Three Unit $1,129,250 Four Unit $1,403,400

28 Calculating Maximum Mortgage Amounts on Purchases The maximum mortgage amount that FHA will insure is calculated by multiplying the appropriate LTV factor by the lesser of the property s: Sales price, subject to certain required adjustments, or Appraised value In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value of the property or the sales price. For purchase money mortgages, the LTV is 96.5 percent, i.e., the reciprocal of the 3.5 percent down payment requirement. The examples that follow will use 96.5 percent and apply it to the lesser of the appraiser s estimate of value or the adjusted sales price. The examples do not include UFMIP or closing costs to be paid by the borrower.

29 Calculating Maximum Mortgage Amounts on Purchases (Continued) The maximum mortgage on a purchase transaction is calculated by applying 96.5 percent to the lesser of either the appraiser s estimate of value or the contract price for the property minus any required adjustments. Sales Price: $218,000 Appraiser s Estimate of Value: $220,000 Maximum Mortgage: $218,000 x 96.5% = $210,370 Down payment: $218, ,370 = $7630 The maximum mortgage shown does not include any upfront mortgage insurance premium, and the example does not consider any closing costs that must be paid by the borrower.

30 Calculating Maximum Mortgage Amounts on Purchases (Continued) Closing costs (non recurring closing costs, pre paid expenses, and discount points) may not be used to help meet the borrower s minimum required investment. ( A.2.c) The borrower may use a credit card to pay for the appraisal and credit report. These costs cannot be considered to help meet the required investment.( A.2.d)

31 FHA Purchase Money Mortgages and Full Credit Qualifying Refinances require an Up Front MIP of: a. 2.25% b. 1.75% c. 1.00% d. 3.80% Effective for FHA loans for which the case number is assigned on or after April 9, 2012, for FHA Single Family (SF) traditional purchase and refinance products, the upfront mortgage insurance premium, shown in basis points below (BPS), will be charged for all amortization terms. Purchase Money Mortgages and Full Credit Qualifying Refinances 175 BPS Streamline Refinances that were endorsed on or before May 31, BP

32 Interested Third Party Contributions ( A.3.b) A third party contribution is a payment by the seller and/or another interested third party, or a combination of parties toward the borrower s costs to close. The seller and/or third party may contribute up to six percent of the lesser of the property s sales price or the appraised value toward the buyer s closing costs, prepaid expenses, discount points and other financing concessions. The six percent limit also includes: third party payment for permanent and temporary interest rate buydowns, and other payment supplements payments of mortgage interest for fixed rate mortgages mortgage payment protection insurance, and payment of the upfront mortgage insurance premium (UFMIP). Contributions exceeding six percent are considered inducements to purchase. Payment of real estate commissions or fees, typically paid by the seller under local or state law, or local custom, is not considered an interested third party contribution. ( A.3.d)

33 Condominium Project Eligibility Mortgagee Letter B Condominium Approval Process for Single Family Housing The (FHA) has implemented major changes to its guidelines on mortgage insurance requirements for condominium projects. Lenders will have two condominium project approval processing options. The applicable documentation requirements will be the same for each option: HUD Review and Approval Process (HRAP). Direct Endorsement Lender Review and Approval Process (DELRAP), outlined in this Mortgagee Letter. This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects. Condominium Project Guidelines

34 Condominium Project Eligibility Mortgagee Letter B Condominium Approval Process for Single Family Housing (Continued) The condominium guidelines include the following: Condominium project approval is not required for Site Condominiums. Site Condominiums are defined as single family totally detached dwellings (no shared garages or any other attached buildings) encumbered by a declaration of condominium covenants or condominium form of ownership. Minimum number of units: Projects must consist of two or more units. Insurance Coverage: Projects must be covered by hazard and liability insurance and, when applicable, flood and fidelity insurance (See Section VI, Insurance Requirements).

35 Condominium Project Eligibility Mortgagee Letter B Condominium Approval Process for Single Family Housing (Continued) The condominium guidelines include the following: Right of First Refusal: Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation at 24 CFR part100. Commercial Space: No more than 25 percent of the property s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogenous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.

36 Condominium Project Eligibility Mortgagee Letter B Condominium Approval Process for Single Family Housing (Continued) The condominium guidelines include the following: Investor Ownership: No more than 10 percent of the units may be owned by one investor. This limitation also applies to developers/builders that subsequently rent vacant and unsold units. For condominium projects with ten or fewer units, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete. Delinquent Home Owners Association (HOA) Dues: No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments.

37 Condominium Project Eligibility Mortgagee Letter B Condominium Approval Process for Single Family Housing (Continued) The condominium guidelines include the following: Pre sales: At least 50 percent of the total units must be sold prior to endorsement of a mortgage on any unit. Valid presales include: Copies of sales agreements and evidence that a mortgagee is willing to make the loan; Evidence that units have closed and are occupied; OR Information from a developer/builder that lists all of the units already sold, under contract, or closed (e.g. a spreadsheet, chart, or listing used for the company s own tracking purposes) that is accompanied by a signed certification from the developer.

38 Condominium Project Eligibility Mortgagee Letter B Condominium Approval Process for Single Family Housing (Continued) The condominium guidelines include the following: Owner occupancy Ratios: At least 50 percent of the units of a project must be owner occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies). Budget Review: Mortgagees must review the homeowners association budget (the actual budget for established projects or the projected budget for new projects) for all projects. This review must determine that the budget is adequate. and: Re certification required every 2 years.

39 HUD Condominium Approval List The condominium project must be on HUD s approval list. The list is available through the internet at:

40 FHA Extends Wavier of Property Flipping Rule (24 CFR a(b)(2)) In the December 28, 2011 issue of the Federal Register (Vol. 76, No. 249, Pages ) the (FHA) published notice that it is extending the waiver of the FHA Regulation prohibiting property flipping in connection with FHA insured loans until December 31, The notice announces that FHA is extending the availability of the temporary waiver of its regulation that prohibits the use of FHA financing to purchase single family properties that are being resold within 90 days of the previous acquisition, until December 31, This waiver, which was first issued in January 2010, took effect for all sales contracts executed on or after February 1, 2010, and was extended in February The waiver was set to expire on December 31, 2011, and therefore HUD is extending the waiver for another calendar year. Prior to the waiver, a mortgage was not eligible for FHA insurance if the contract of sale for the purchase of the property that is the subject of the mortgage is executed within 90 days of the prior acquisition by the seller and the seller does not come under any of the exemptions to this 90 day period that are specified in the regulation. The waiver is applicable to all single family properties being resold within the 90 day period after prior acquisition.

41 FHA Extends Wavier of Property Flipping Rule (24 CFR a(b)(2)) (Continued) The waiver is subject to the following conditions: All transactions must be arms length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. Some ways that the lender can ensure that there is no inappropriate collusion or agreement between parties is to assess and determine the following: 1. The seller holds title to the property; 2. LLCs, corporations, or trusts that are serving as sellers were established and are operated in accordance with applicable state and Federal law; 3. No pattern of previous flipping activity exists for the subject property, as evidenced by multiple title transfers within a 12 month time frame (chain of title information for the subject property can be found in the appraisal report); 4. The property was marketed openly and fairly, via MLS, auction, For Sale by Owner offering, or developer marketing (any sales contracts that refer to an "assignment of contract of sale," which represents a special arrangement between seller and buyer may be a red flag).

42 FHA Extends Wavier of Property Flipping Rule (24 CFR a(b)(2)) (Continued) In cases in which the sales price of the property is 20 percent or more over and above the seller's acquisition cost, the waiver will only apply if the lender: 1. Justifies the increase in value by retaining in the loan file supporting documentation and/or a second appraisal which verifies that the 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 provides appropriate explanation of the increase in property value since the prior title transfer; and 2. Orders a property inspection and provides the inspection report to the purchaser prior to closing. The lender may charge the borrower for this inspection. The use of FHA approved inspectors or 203(k) consultants is not required. The inspector must have no interest in the property or relationship to the seller, and must not receive compensation for the inspection from any party other than the lender. Also, the Inspector may not compensate anyone for the referral of the inspection. Additionally, the inspector may not receive any compensation for referring or recommending contractors to perform any repairs recommended by the inspection, and may not be involved with performing any repairs recommended by the inspection.

43 Where Are We Now? Which of the following guidelines is correct regarding the condominium project approval process for single family housing? a. Projects must consist of ten or more units. b. At least 70 percent of the units of a project must be owner occupied or sold to owners who intend to occupy the units. c. No more than 10 percent of the units may be owned by one investor. d. No more than 10 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments. Condominium project approval is not required for Site Condominiums. Site Condominiums are defined as single family totally detached dwellings (no shared garages or any other attached buildings) encumbered by a declaration of condominium covenants or condominium form of ownership. Minimum number of units: Projects must consist of two or more units. Insurance Coverage: Projects must be covered by hazard and liability insurance and, when applicable, flood and fidelity insurance (See Section VI, Insurance Requirements).

44 Where Are We Now? (Continued) Right of First Refusal: Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation at 24 CFR part100. Commercial Space: No more than 25 percent of the property s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogenous with residential use, which is free of adverse conditions to the occupants of the individual condominium units. Investor Ownership: No more than 10 percent of the units may be owned by one investor. This limitation also applies to developers/builders that subsequently rent vacant and unsold units. For condominium projects with ten or fewer units, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete. Delinquent Home Owners Association (HOA) Dues: No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments.

45 FHA Extends Wavier of Property Flipping Rule (24 CFR a(b)(2)) (Continued) 2. Continued At a minimum, the inspection must include: I. The property structure, including the foundation, floor, ceiling, walls and root: II. The exterior, including siding, doors, windows, app1li1enant structures such as decks and balconies, walkways and driveways; III. The roofing, plumbing systems, electrical systems, heating and air conditioning systems; IV. All interiors; and V. All insulation and ventilation systems, as well as fireplaces and solid fuel burning appliances. 3. The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for Purchase program.

46 FHA Extends Wavier of Property Flipping Rule (24 CFR a(b)(2)) (Continued) Exemptions On June 7, 2006, a final rule, contained in a(c), was published to broaden the exemptions from the 90 day resale restriction as follows: 1. Sales by HUD of REO and single family assets in revitalization areas; 2. Sales by another agency of the United States Government of REO single family propel1ies pursuant to programs operated by these agencies; 3. Sales by nonprofit organizations approved to purchase HUD REO at a discount with resale restrictions; 4. Sales of properties that were acquired by the sellers through inheritance;

47 FHA Extends Wavier of Property Flipping Rule (24 CFR a(b)(2)) (Continued) Exemptions (Continued) 5. Sales of properties purchased by an employer or relocation agency in connection with the relocation of an employee; 6. Sales of properties by state and federally chartered financial institutions and any other Government Sponsored Enterprise (GSE); 7. Sales of properties by local and state government agencies; and 8. Sales of properties located in Presidentially Declared Disaster Areas, but only upon announcement by HUD through the issuance of a Mortgagee Letter.

48 Eligible Borrowers ( A.1) The following borrower types are eligible: 1. U.S. Citizens residing within the U.S 2. Permanent Resident Aliens 3. Non Permanent Resident Aliens

49 Eligible Borrowers ( A.1) (Continued) 4. Non Occupant Co Borrowers. When there are two or more borrowers, but one or more will not occupy the property as his/her principal residence, the maximum mortgage is limited to75% loan to value (LTV). However, maximum financing is available for borrowers related by blood, marriage, or law, such as spouses parents children siblings stepchildren aunts uncles, and nieces nephews, or unrelated individuals who can document evidence of a long standing, substantial familytype relationship not arising out of the loan transaction. If a parent is selling to a child, the parent cannot be the co borrower with the child, unless the LTV is 75% or less.

50 Eligible Borrowers ( A.1) (Continued) All borrowers, including United States (U.S.) citizens, must have a valid Social Security Number (SSN) and must provide evidence of that SSN to the lender ( A.1.a). The lender is responsible for: 1. documenting an SSN for each borrower, co borrower, or cosigner on the mortgage 2. validating each SSN either through: entering the borrower s name, date of birth and SSN in the borrower/address validation screen through the FHA Connection (FHAC) or its functional equivalent examination of the borrower s pay stubs, W 2 forms, valid tax returns obtained directly from the Internal Revenue Service (IRS), or other documentation acceptable to FHA, or use of a service provider, including those with direct access to the Social Security Administration (SSA), and resolving, if necessary, any inconsistencies or multiple SSNs for individual borrowers that are revealed during loan processing and underwriting.

51 Eligible Borrowers ( A.1) (Continued) Employees of the World Bank, foreign embassies, etc., may not be required to have an SSN. Conclusive evidence of this exception must be provided.

52 Borrowers, Co Borrowers and Cosigners ( A) Borrowers and Co borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co borrower s income, assets, liabilities, and credit history are considered in determining creditworthiness. Cosigners do not hold ownership interest in a property, but are liable for repaying the obligation and must sign all documents with the exception of the security instruments. The cosigner s income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the cosigner must complete and sign the loan application.

53 Borrowers, Co Borrowers and Cosigners ( A) (Continued) The following conditions also apply to co borrower and cosigner eligibility: 1. A co borrower or a cosigner may not be a party that has a financial interest in the transaction, such as the seller, builder, real estate agent, etc. Exceptions may be granted if the seller and coborrower/cosigner is related to the owner by blood, marriage or law. 2. An individual signing the loan application must not be otherwise ineligible for participation. 3. Unless otherwise exempted (e.g., military service with overseas assignments, U.S. citizens living abroad), any non occupying co borrowers or cosigners must have a principal residence in the United States.

54 Where Are We Now? The (FHA) published a notice that it is extending the waiver of the FHA Regulation prohibiting property flipping in connection with FHA insured loans: a. Until December 31, b. Until December 31, c. Only with properties under contact as of July 1, d. FHA is not extending the waiver of the FHA Regulation prohibiting property flipping. The notice announces that FHA is extending the availability of the temporary waiver of its regulation that prohibits the use of FHA financing to purchase single family properties that are being resold within 90 days of the previous acquisition, until December 31, This waiver, which was first issued in January 2010, took effect for all sales contracts executed on or after February 1, 2010, and was extended in February The waiver was set to expire on December 31, 2011, and therefore HUD is extending the waiver for another calendar year. Prior to the waiver, a mortgage was not eligible for FHA insurance if the contract of sale for the purchase of the property that is the subject of the mortgage is executed within 90 days of the prior acquisition by the seller and the seller does not come under any of the exemptions to this 90 day period that are specified in the regulation. The waiver is applicable to all single family properties being resold within the 90 day period after prior acquisition.

55 Citizenship and Immigration Status ( A.3.c) Citizenship of the United States is not required for eligibility. When a mortgage loan applicant indicates on the loan application that he or she holds something other than U.S. citizenship, the lender must determine residency status from the documentation provided by the borrower. Lawful Permanent Resident Aliens For those borrowers with lawful permanent resident alien status, FHA will insure the mortgage under the same terms and conditions as U.S. citizens. The lender must document the mortgage file with evidence of permanent residency and indicate on the Uniform Residential Loan Application (URLA) that the borrower is a lawful permanent resident alien. Evidence of lawful permanent residency is issued by The U.S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security provides evidence of lawful, permanent residency status.

56 Nonpermanent Resident Aliens FHA will also insure a mortgage made to a nonpermanent resident alien provided that the property will be the borrower s principal residence, the borrower has a valid SSN, and the borrower is eligible to work in the U.S. as evidenced by an Employment Authorization Document (EAD) issued by BCIS. If the authorization for temporary residency status will expire within one year and a prior history of residency status renewals exists, the lender may assume continuation will be granted. If there are no prior renewals, the lender must determine the likelihood of renewal, based on information from the BCIS. Although social security cards may indicate work status, such as not valid for work purposes, an individual s work status may change without the change being reflected on the actual social security card. Therefore, the social security card is not to be used as evidence of work status for nonpermanent resident aliens; the BCIS employment authorization document is to be used instead. Borrowers residing in the U.S. by virtue of refugee or asylum status granted by the USCIS are automatically eligible to work in this country. An EAD is not required. EAD is not required.

57 Non Lawful Residency Non U.S. citizens who do not have lawful residency in the U.S. are not eligible for FHA insured mortgages

58 Non Purchasing Spouses ( A.5) If required by state law in order to perfect a valid and enforceable first lien, the non purchasing spouse may be required to sign either the security instrument or documentation evidencing that he or she is relinquishing all rights to the property. If the non purchasing spouse executes the security instrument for such reasons, he or she is not considered a borrower for our purposes and need not sign the loan application. In all other cases, the non purchasing spouse is not to appear on the security instrument or otherwise take title to the property at loan settlement. Where there are non purchasing spouses who sign security instruments relinquishing their rights to the property pursuant to applicable state laws, these non purchasing spouses do not have to sign the mortgage note. Signing the security instrument for such purposes does not make the nonpurchasing spouse a co borrower.

59 Multiple Loans to One Borrower ( B.2.c) To prevent circumvention of the restrictions on making FHA insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance. 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 HUD B.2.d. Generally the borrower is not eligible to acquire another FHA insured mortgage until he/she has either: paid off the FHA insured mortgage on the previous residence, or terminated ownership of that residence.

60 Multiple Loans to One Borrower ( B.2.c) (Continued) A borrower may be eligible to obtain another FHA insured mortgage without being required to sell an existing property covered by an FHA insured mortgage if the borrower is: 1. Relocation Relocating and establishing residency in an area outside reasonable commuting distance from his/her current principal residence. If the borrower subsequently returns to the area where he/she owns a property with an FHA insured mortgage, he/she is not required to re establish primary residency in that property in order to be eligible for another FHA insured mortgage. The relocation need not be employer mandated to qualify for this exception.

61 Multiple Loans to One Borrower ( B.2.c) (Continued) 2. Increase in family size A borrower may be eligible for another home with an FHA insured mortgage if the number of his/her legal dependents increases to the point that the present house no longer meets the family s needs. The borrower must provide satisfactory evidence of the increase in dependents and the property s failure to meet family needs, and that the Loan To Value (LTV) ratio equals 75% or less, based on the outstanding mortgage balance and a current appraisal. If not, the borrower must pay the loan down to 75% LTV or less. A current residential appraisal must be used to determine LTV compliance. Tax assessments and market analyses by real estate brokers are not acceptable proof of LTV compliance.

62 In a FHA transaction the seller and/or third party may contribute up to what percent of the lesser of the property s sales price or the appraised value toward the buyer s closing costs, prepaid expenses, discount points and other financing concessions? a. 4% b. 3% c. 2% d. 6% The seller and/or third party may contribute up to six percent of the lesser of the property s sales price or the appraised value toward the buyer s closing costs, prepaid expenses, discount points and other financing concessions. The six percent limit also includes: third party payment for permanent and temporary interest rate buydowns, and other payment supplements payments of mortgage interest for fixed rate mortgages mortgage payment protection insurance, and payment of the upfront mortgage insurance premium (UFMIP).

63 Multiple Loans to One Borrower ( B.2.c) (Continued) 3. Vacating a jointly owned property A borrower may be eligible for another FHA insured mortgage if he/she is vacating a residence that will remain occupied by a co borrower. 4. Non occupying co borrower A borrower may be qualified for an FHA insured mortgage on his/her own principal residence even if he/she is a non occupying co borrower with a joint interest in a property being purchased by other family members as their principal residence with an FHA insured mortgage.

64 Eligible Properties 1 4 unit and PUDs 1 unit condominiums Modular / prefabricated homes Fee Simple/Leaseholds A mortgage, to be eligible for insurance, must be on real estate held in fee simple, or on leasehold under a lease for not less than 99 years which is renewable, or under a lease having a period of not less than 10 years to run beyond the maturity date of the mortgage.( )

65 Ineligible Properties Second Homes Investment Property (except Streamline Refinances) Co ops Mobile homes Condo / PUD Hotel Spec Homes Sub Leaseholds

66 Un Acceptable Sites FHA guidelines require that a site be rejected if the property being appraised is subject to hazards, environmental contaminants, noxious odors, offensive sights or excessive noises to the point of endangering the physical improvements or affecting the livability of the property, its marketability or the health and safety of its occupants. Rejection may also be appropriate if the future economic life of the property is shortened by obvious and compelling pressure to a higher use, making a long term mortgage impractical.( A)

67 Operating and Abandoned Oil or Gas Wells ( D.2) If an operating well is located in a single family subdivision, no new or proposed construction may be built within 75 feet of the operating well unless mitigation measures are taken.

68 Abandoned Well ( D.3) A letter may be obtained from the responsible authority in the state government stating that the subject well was safely and permanently abandoned. When such a letter is provided, a dwelling may be located no closer than 10 feet from the abandoned well. When a letter is not provided, the dwelling must be located at least 300 feet from the abandoned well. The lender is responsible for obtaining the letter; the appraiser must note the location of the well and verify the existence of the letter.

69 Overhead High Voltage Transmission Lines ( J) No dwelling or related property improvement may be located within the engineering (designed) fall distance of any pole, tower or support structure of a high voltage transmission line, radio/tv transmission tower, microwave relay dish or tower or satellite dish (radio, TV cable, etc.). For field distance analysis, the appraiser may use tower height as the fall.

70 Flood hazard Areas ( L) The Federal Emergency Management Agency (FEMA) determines Special Flood Hazard Areas nationwide, (SFHA). FEMA issues Flood Hazard Boundary Maps to designate these areas in a community. A special flood hazard may be designated as Zone A, AO, AH, Al 30, AE, A99, VO or Vl 30, VE or V. Only those properties within zones 'A' and 'V' require flood insurance. Zones 'B' or 'C' do not require flood insurance because FEMA designates only zones 'A' and 'V as "Special Flood Hazard Areas."

71 Flood hazard Areas ( L) (Continued) An appraisal report with a positive indication in a Special Flood Hazard Area (SFHA) activates a commitment requirement for flood insurance coverage. The appraiser must quantify the effect on value, if any, for properties within a designated flood map. A lender shall reject a property in any of these circumstances: if the property is subject to frequently recurring flooding if there is any potential hazard to life or safety if escape to higher ground would not be feasible during severe flooding conditions

72 Per FHA guidelines if an operating well is located in a single family subdivision, no new or proposed construction may be built within how many feet of the operating well unless mitigation measures are taken. a. 100 b. 300 c. 75 d. 200 Operating and Abandoned Oil or Gas Wells ( D.2) If an operating well is located in a single family subdivision, no new or proposed construction may be built within 75 feet of the operating well unless mitigation measures are taken.

73 Stationary Storage Tanks Stationary Storage tanks containing flammable or explosive material pose potential hazards to housing, including hazards from fire and explosions. If the property is within 300 feet of a stationary, storage tank containing more than 1000 gallons of flammable or explosive material, the site is ineligible.

74 Minimum Credit Scores and Loan to Value Ratios ML In accordance with the final Federal Register Notice [FR 5404 N 02] on minimum decision credit scores and LTV ratios for FHA insured single family mortgages, the new requirements are: Borrowers with a minimum decision credit score at or above 580 are eligible for maximum financing. Borrowers with a minimum decision credit score between 500 and 579 are limited to 90 percent LTV. Borrowers with a minimum decision credit score of less than 500 are not eligible for FHAinsured mortgage financing. Borrowers with a non traditional credit history or insufficient credit are eligible for maximum financing but must meet the underwriting guidance in HUD C.3.

75 Analyzing Borrower Credit FHA considers past credit performance as the most useful guide to determine a borrower s attitude toward credit obligations and an indication of a borrower s future actions. Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan. ( ) In general, when analyzing a borrower s credit history, a FHA underwriter will examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments. A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred. Underwriters must determine if the financial difficultly has been corrected and if the borrower is back on his/her feet financially.

76 Analyzing Borrower Credit (Continued) The lender must document the analysis of delinquent accounts, including whether late payments were based on: a disregard for financial obligations an inability to manage debt, or factors beyond the borrower s control, such as delayed mail delivery, or disputes with creditors. Minor derogatory information occurring two or more years in the past does not require an explanation. Major indications of derogatory credit, such as judgments, collections, and other recent credit problems, require sufficient written explanation from the borrower. The explanation must make sense, and be consistent with other credit information in the file.

77 Non Traditional Credit The lack of a credit history, or the borrower s decision to not use credit, may not be used as the basis for rejecting the loan application ( C.1.d). Some prospective borrowers may not have an established credit history. For these borrowers, including those who do not use traditional credit, the lender must obtain a non traditional merged credit report (NTMCR) from a credit reporting company, or develop a credit history from: utility payment records rental payments automobile insurance payments, and other means of direct access from the credit provider, as described in HUD

78 Non Traditional Credit (Continued) FHA prefers that all non traditional credit references be verified by a credit bureau and reported back to the lender as NTMCR in the same manner as traditional credit references. Only if an NTMCR is impractical or such a service is unavailable may a lender choose to obtain independent verification of trade references. In order for the underwriter to determine that a borrower has sufficient credit references to help evaluate bill paying habits, the credit history must: include three credit references, including at least one from Group I (below), and exhaust all Group I references prior to considering Group II for eligibility purposes, as Group I is considered more indicative of a borrower s future payment performance. Group I and Group II categories ( C.5.f) of credit references the underwriter can use to determine if a borrower has a sufficient credit history are listed next:

79 Non Traditional Credit (Continued) Group 1 Rental housing payments (subject to independent verification if the borrower is a renter) Utility company reference (if not included in the rental housing payment), including gas electricity water land line home telephone service, and cable TV. If the borrower is renting from a family member, the lender should request independent documents to prove regularity of payments, such as cancelled checks.

80 Non Traditional Credit (Continued) Group 2 Insurance premiums not payroll deducted ( medical, auto, life, renter s insurance) Payment to child care providers made to businesses that provide such services School tuition Retail stores credit cards (for example, from department, furniture, appliance stores, or specialty stores) Rent to own (for example, furniture, appliances) Payment of that part of medical bills not covered by insurance Internet/cell phone services A documented 12 month history of savings evidenced by regular deposits resulting in an increased balance to the account that were made at least quarterly were not payroll deducted, and caused no insufficient funds (NSF) checks Automobile leases A personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments

81 Evaluating Non Traditional Credit ( C.3.a) When evaluating a borrower with non traditional credit history, a satisfactory credit history, at least 12 months in duration, must include: no history of delinquency on rental housing payments no more than one 30 day delinquency on payments due to other creditors, and no collection accounts/court records reporting (other than medical) filed within the past 12 months. When evaluating a borrower with no credit references, or only Group II a satisfactory credit history, at least 12 months in duration, must include ( C.3.b): no more than one 30 day delinquency on payments due to any Group II reference, and no collection accounts/court records reporting (other than medical) filed within the past 12 months

82 Evaluating Non Traditional Credit ( C.3.a) (Continued) To enhance the sustainability of homeownership for borrowers with insufficient credit histories, the qualifying ratios ( C.3.c): are computed only on those borrowers occupying the property and obligated on the loan. Nonoccupant co borrowers may not be included. may not exceed 31% for the payment to income ratio and 43% for the total debt to income (DTI) ratio. Borrowers should have two months of cash reserves following mortgage loan settlement from their own funds. No cash gifts from any source should be counted in the cash reserves for borrowers with insufficient credit histories ( C.3.d).

83 Evaluating Non Traditional Credit ( C.3.a) (Continued) Hierarchy of Credit Review ( C.2.a) Evaluating credit involves reviewing payment histories in the following order: first: previous housing expenses, including utilities, second: installment debts, third: revolving accounts. Generally, a borrower is considered to have an acceptable credit history if he/she does not have late housing or installment debt payments, unless there is major derogatory credit on his/her revolving accounts.

84 Mortgagee Letter Subject Miscellaneous Underwriting Issues Rescission of Disputed Accounts and Collection Accounts Guidance (Mortgagee Letter ) In order to provide clarification of policies concerning Disputed Accounts and Collection Accounts through future guidance, FHA is rescinding the new guidance on the following topics in Mortgagee Letter (ML) , which was to become effective July 1, 2012: Handling of Disputed Accounts, Public Records FHA Total User Guide Chapter 2, and Handbook C.2.e, Paying off Collections and Judgments. All other guidance in ML , which became effective April 1, 2012, remains in effect. Effective Date This rescission is effective immediately

85 Collections and Judgments ( C.2.d) Collections and judgments indicate a borrower s regard for credit obligations, and must be considered in the creditworthiness analysis. The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments. The borrower must explain, in writing, all collections and judgments. FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, court ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement. An exception to the payoff of a court ordered judgment may be made if the borrower has: an agreement with the creditor to make regular and timely payments, and provided documentation indicating that payments have been made according to the agreement.

86 Where Are We Now? FHA borrowers with a minimum decision credit score at or above 580 are eligible for a. maximum financing. b. maximum financing not to exceed 90% LTV. c. Must have strong compensating factors for loan approval. d. Are not eligible for FHA financing. In accordance with the final Federal Register Notice [FR 5404 N 02] on minimum decision credit scores and LTV ratios for FHA insured single family mortgages, the new requirements are: Borrowers with a minimum decision credit score at or above 580 are eligible for maximum financing. Borrowers with a minimum decision credit score between 500 and 579 are limited to 90 percent LTV. Borrowers with a minimum decision credit score of less than 500 are not eligible for FHAinsured mortgage financing. Borrowers with a non traditional credit history or insufficient credit are eligible for maximum financing but must meet the underwriting guidance in HUD C.3.

87 Bankruptcy or Foreclosure Chapter 7 bankruptcy should be discharged at least 2 years. Borrowers are required to have good reestablished credit since the discharge or should not have any new credit since the discharge. Chapter 7 bankruptcies less than 2 years but greater than 12 months are allowed provided the borrower can prove the bankruptcy was caused by extenuating circumstances beyond the borrower s control and that the event leading to the bankruptcy is not likely to reoccur. In addition, borrower is required to document his ability to manage his financial affairs ( C.2.g). Chapter 13 bankruptcy is permitted if one year of the payout has occurred and all payments have been made on time. Permission from the court is required in order for borrower to obtain a new mortgage ( C.2.h).

88 Bankruptcy or Foreclosure (Continued) Consumer Credit Counseling is permitted as long as the borrower has been making the payments timely for a minimum of 12 months. Written permission from the counseling agency is required in order to obtain a new mortgage ( C.2.i). Foreclosures must be greater than 3 years old to be eligible for FHA financing. If the foreclosure was due to extenuating circumstances beyond the borrower s control (i.e. loss of primary wage earner, serious illness, etc), and the borrower has good re established credit, the file may be eligible ( C.2.f).

89 Borrower Liabilities ( C.4.b) When computing the debt to income (DTI) ratio, the lender must include the following recurring obligations: additional recurring charges extending ten months or more, such as payments on installment accounts child support or separate maintenance payments revolving accounts, and alimony.

90 Borrower Liabilities ( C.4.b) (Continued) Debts lasting less than ten months must be included if the amount of the debt will affect the borrower s ability to pay the mortgage during the months immediately after loan closing, especially if the borrower will have limited or no cash assets after loan closing. Monthly payments on revolving or open ended accounts, regardless of their balances, are counted as liabilities for qualifying purposes even if the accounts appear likely to be paid off within ten months or less.

91 Revolving Account Minimum Monthly Payment ( C.4.c) If the credit report shows a revolving account with an outstanding balance but no specific minimum monthly payment, the payment must be calculated as the greater of: 5% of the outstanding balance, or $10 If the actual monthly payment is documented from the creditor or the lender obtains a copy of the current statement reflecting the monthly payment, that amount may be used for qualifying purposes.

92 Projected Obligations ( C.6.a) Debt payments such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing must be included by the lender as anticipated monthly obligations during the underwriting analysis. Debt payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12 month timeframe.

93 Obligations Not Considered Debts ( C.6.b) Obligations not considered debt, and therefore not subtracted from gross income, include: Federal, state, and local taxes Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds) commuting costs union dues open accounts with zero balances automatic deductions to savings accounts child care, and voluntary deductions.

94 Ratios ( ) Maximum Ratios of 31/43%. Higher ratios may be eligible with compensating factors determined by an underwriter.

95 Compensating Factors Benchmark Guidelines ( F.3.b) Compensating factors that may be used to justify approval of mortgage loans with ratios that exceed FHA benchmark guidelines include: The borrower has successfully demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly housing expenses for the new mortgage over the past months. The borrower makes a large down payment of 10% or higher toward the purchase of the property. The borrower has demonstrated an ability to accumulate savings, and

96 Compensating Factors Benchmark Guidelines ( F.3.b) (Continued) A borrower s previous credit history shows that he/she has the ability to devote a greater portion of income to housing expenses. The borrower receives documented compensation or income that is not reflected in effective income, but directly affects his/her ability to pay the mortgage. This type of income includes food stamps and similar public benefits. There is only a minimal increase in the borrower s housing expense. The borrower has substantial documented cash reserves (at least three months worth) after closing. The lender must judge if the substantial cash reserve asset is liquid or readily convertible to cash, and can be done so absent retirement or job termination, when determining if the asset

97 Compensating Factors Benchmark Guidelines ( F.3.b) (Continued) Funds and/or assets that are not to be considered as cash reserves include equity in other properties, and proceeds from a cash out refinance. The lender may use a portion of a borrower's retirement account, subject to the following conditions. To account for withdrawal penalties and taxes, only 60% of the vested amount of the account may be used. The lender must document the existence of the account with the most recent depository or brokerage account statement. In addition, evidence must be provided that the retirement account allows for withdrawals under conditions other than in connection with the borrower's employment termination, retirement, or death. If withdrawals can only be made under these circumstances, the retirement account may not be included as cash reserves. If any of these funds are also to be used for loan settlement, that amount must be subtracted from the amount included as cash reserves. Similarly, any gift funds that remain in the borrower's account following loan closing, subject to proper documentation, maybe considered as cash.

98 Where Are We Now? Per FHA guidelines when computing the borrowers debt to income (DTI) ratio, the lender must include the following recurring obligations: a. additional recurring charges extending ten months or more, such as payments on installment accounts. b. commuting costs c. union dues d. open accounts with zero balances Obligations Not Considered Debts ( C.6.b) Obligations not considered debt, and therefore not subtracted from gross income, include: Federal, state, and local taxes Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds)

99 Where Are We Now? (continued) Obligations Not Considered Debts ( C.6.b) commuting costs union dues open accounts with zero balances automatic deductions to savings accounts child care, and voluntary deductions.

100 Compensating Factors Benchmark Guidelines ( F.3.b) (Continued) The borrower has substantial non taxable income. The borrower has a potential for increased earnings, as indicated by job training or education in his/her profession.

101 Acceptable Sources of Borrower Funds ( B.1.b) Acceptable sources of borrower funds Earnest money deposit Savings and checking accounts Cash saved at home Cash accumulated with private savings club Savings bonds IRAs 401(k) and Keogh account Stocks and Bonds Thrift Savings Plans Gift Funds Sales proceeds

102 Acceptable Sources of Borrower Funds ( B.1.b) (Continued) Sale of personal property Commissions from sale Trade Equity Rent Credit Sweat Equity Collateralized loans Grants and loans Employer s Guarantee Plans Employer Assistance Plans

103 Earnest Money Deposit ( B.2.a) The lender must verify and document the deposit amount and source of funds, if the amount of the earnest money deposit: exceeds 2% of the sales price, or appears excessive based on the borrower s history of accumulating savings. Satisfactory documentation includes a copy of the borrower s cancelled check certification from the deposit holder acknowledging receipt of funds, or separate evidence of the source of funds. Separate evidence includes a verification of deposit (VOD) or bank statement showing that the average balance was sufficient to cover the amount of the earnest money deposit at the time of the deposit.

104 Gift Funds ( B) The gift donor may not be a person or entity with an interest in the sale of the property, such as: the seller the real estate agent or broker the builder, or an associated entity. Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price.

105 Gift Donor s Source of Funds ( B.4.e) As a general rule, FHA is not concerned with how a donor obtains gift funds, provided that the funds are not derived in any manner from a party to the sales transaction. Donors may borrow gift funds from any other acceptable source, provided the mortgage borrowers are not obligors to any note to secure money borrowed to give the gift. Equity Credit ( B.4.f) Only family members may provide equity credit as a gift on property being sold to other family members. The restrictions on gifts previously discussed in this topic and the restriction on equity credit may be waived by the jurisdictional Homeownership Center (HOC), provided that the seller is contributing to or operating an acceptable affordable housing program.

106 Gift Letter Requirement ( B.5.a) The lender must document any gift funds through a gift letter, signed by the donor and borrower. The gift letter must: show the donor s name, address, telephone number specify the dollar amount of the gift, and state the nature of the donor s relationship to the borrower, and that no repayment is required. The borrower must list on the loan application or in a gift letter, for each cash gift received, the: donor s name, address, telephone number donor s relationship to the borrower, and dollar amount of the gift.

107 Gift Letter Requirement ( B.5.a) (Continued) The lender must document the transfer of gift funds from the donor to the borrower. a copy of the withdrawal document showing that the withdrawal was from the donor s account, and the borrower s deposit slip and bank statement showing the deposit.

108 Appraisal Requirements A full appraisal from a FHA approved appraiser is required. The validity period for all appraisals on existing, proposed and under construction properties is 120 days ( d). If the appropriate Homeownership Center determines that soft market conditions exist in certain areas or markets, it may shorten the term of appraisals for substantial rehabilitation upon advance notice to lenders. The term of the appraisal begins on the day the home is inspected by the FHA approved appraiser and this date appear on the Uniform Residential Appraisal Report.

109 FHA Policy on Appraisal Extensions ( f) If a borrower signs a valid sales contract or is approved for a loan prior to the expiration date of the appraisal, the term of the appraisal may be extended, at the option of the lender, for 30 days to allow for the approval of the borrower and closing of the loan.

110 Appraisal Transfer and Change of Client Name when the Borrower Switches Lenders ( i) In cases where a borrower has switched lenders, the first lender must, at the borrower s request, transfer the case to the second lender. FHA does not require that the client name on the appraisal be changed when it is transferred to another lender. In accordance with the Uniform Standards of Professional Appraisal Practice (USPAP), the second lender is not permitted to request that the appraiser change the name of the client within the appraisal report unless it is a new appraisal assignment. To effect a client name change, the second lender and the original appraiser may engage in a new appraisal assignment wherein the scope of work is limited to the client name change. A new client name should include the name of the client (lender) and HUD.

111 Ordering a Second Appraisal when he Borrower Switches Lenders ( j) FHA prohibits appraiser shopping, where lenders order additional appraisals in an effort to assure the highest possible value for the property, and/or the least amount of deficiencies or repairs are noted and required by the appraiser. However, in the case where a borrower switches from one FHA lender (first lender) to a second lender, and an appraisal was ordered by and completed for the first lender, a second appraisal may be ordered by the second lender if the: first appraisal contains material deficiencies, as determined by the Direct Endorsement underwriter for the second lender appraiser performing the first appraisal is on the second lender s exclusionary list of appraisers, or

112 Where Are We Now? The validity period for all FHA appraisals on existing, proposed and under construction properties is: a. 120 days b. 6 months c. 9 months d. 90 days The validity period for all appraisals on existing, proposed and under construction properties is 120 days ( d). If the appropriate Homeownership Center determines that soft market conditions exist in certain areas or markets, it may shorten the term of appraisals for substantial rehabilitation upon advance notice to lenders. The term of the appraisal begins on the day the home is inspected by the FHA approved appraiser and this date appear on the Uniform Residential Appraisal Report.

113 Ordering a Second Appraisal when he Borrower Switches Lenders ( j) (Continued) failure of the first lender to provide a copy of the appraisal to the second lender in a timely manner would cause a delay in closing, posing potential harm to the borrower, which includes events outside the borrower s control such as loss of interest rate lock purchase contract deadline foreclosure proceedings, and/or late fees. For the first two scenarios above, the lender must ensure that copies of both appraisals are retained in the case binder. For the third scenario, the appraisal from the first lender must be added to the case binder when it is received. In all cases, the lender must document why a second appraisal was ordered and retain the explanation in the case binder.

114 Module 5 End of Module 5 Government Loans Proceed to the Module 5 quiz