When FHA was created, HUD s mission statement proclaimed that every American was entitled to home ownership and a suitable living environment.

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1 The Basics of FHA

2 When FHA was created, HUD s mission statement proclaimed that every American was entitled to home ownership and a suitable living environment. To support that mission, the government created FHA, a special loan program to help all those Americans entitled to, but prevented from, buying a home for one reason or another. Today: HUD s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality affordable rental homes: utilize housing as a platform for improving quality of life; build inclusive and sustainable communities free from discrimination; and transform the way HUD does business. The recovery of the nation s housing market presents the industry with many challenges and opportunities. As a mission-driven organization, MSF s goal is to provide sustainable homeownership options for qualified borrowers. We realize there has been a lot of change coming from FHA lately. And, while neither the nature nor pace of change can be altered, we appreciate your partnership as we work to implement the changes introduced. We are here to support you as we continue working together to serve the nation s home buyers and renters.

3 Transaction Types Purchase Owner Occupied Primary Residence ONLY Max LTV 96.50% Gross loan amount, including the financed up-front mortgage insurance premium, may not exceed 100% LTV Base loan amount, before addition of the up-front mortgage insurance premium may never exceed the statutory loan limit for the county in which the property is located. FHA County Loan Limits CLTV 100% - Government 2 nd Mortgage or HUD-approved non-profit (Lesser of purchase price or appraised value + closing costs, pre-paid expenses, repairs and reasonable discount points paid by borrower) May be used to meet the borrower s down payment requirement. (Restrictions apply see MSF s Seller s Guide) Rate/Term Refinance Full Qualifying Max LTV 97.75% If the borrower is refinancing a non-fha loan and has owned the property less than one year, the LTV is calculated using the lesser of the borrower s purchase price or the new appraised value. CLTV 97.75%

4 Transaction Types Continued Cash-Out Refinance (TX A6 not allowed) Max LTV 85% before the addition of the up-front mortgage insurance premium If the borrower has owned the property as his or her primary residence for less than one year, LTV is calculated using the lesser of the borrower s purchase price or the new appraised value. CLTV 85% Streamline Refinance with Appraisal Max LTV 97.75% before addition of the up-front mortgage insurance premium CLTV New Subordinate Financing Not Allowed Existing or modified re-subordinated financing Max CLTV is 125% of original appraised value shown on Refinance Authorization screen in FHA Connection Streamline Refinance Without Appraisal Max LTV N/A CLTV New Subordinate Financing Not Allowed Existing or modified re-subordinate financing Max CLTV is 125% of original appraised value shown on the Refinance Authorization screen in FHA Connection

5 Special Programs $100 HUD REO Program LTV Case numbers issued prior to April 28, 2011, up to 105% of the lesser of the purchase rice or sales price when financing repair escrow included in the sales contract. Repair escrows may not exceed $5,000 regardless of LTV 3-4 Units not permitted CLTV Secondary financing not allowed HUD Foreclosed Homes ONLY Earnest money of $1,000 required for properties listed above $50,000 & $500 for properties listed for less than $50,000. Earnest money will be returned at closing as a credit on the Closing Statement. HUD may pay up to 3% of the purchase price towards closing costs Search for available HUDHomeStore.com Can be used in conjunction with FHA 203K and Good Neighbor Next Door program (FAQs: Good Neighbor Next Door Sales)

6 Special Programs Continued Streamlined 203K Standard FHA guidelines apply Full Doc/Qualifying only Owner Occupied only Manufactured Homes not allowed Purchase or Rate/Term only Max DTI 31/43 Min of $5,000 repairs required & Max of $35,000 (See Escrow Holdbacks for repairs less than $5,000) Desk review required on all appraisals No Structural repairs allowed. Examples of allowable improvements include but are not limited to: Roofs, gutters, downspouts, Heating & air conditioning, Upgrade/repair plumbing, septic, well and electrical systems, Replacement of flooring, windows, doors, siding, Weatherization, painting, basement waterproofing, Minor remodels that do not involve structural repairs (cannot move or remove load bearing walls), Purchase and installation of appliances, Handicapped accessibility improvements, Repair/remove/install deck or patio no luxury items such as hot tubs, swimming pools, BBQ or outdoor fireplaces/kitchens are permitted

7 Special Programs Continued Escrow Holdbacks HUD REO Properties (also allowed on non-hud REO properties (See MSF Seller s Guide for more details) Repair escrow amount is stated on purchase agreement, addendum may be required once escrow amount calculated if higher than what was in original contract. Holdback amount is 110% of highest bid For financed escrow holdbacks, max loan amount calculation is the lesser of 110% of highest bid plus base loan amount (excluding UFMIP) or 105% LTV Two bids for each repair required for existing construction. Must be from professionally and or appropriately licensed, bonded, registered engineer or home inspector or tradesperson. Appraisal will be completed as is. Appraisal addendum must be reviewed by underwriter to determine required repairs. Fully executed escrow agreement required in closing package Required after repairs are completed Fannie Mae Form 1004D Appraisal with photos for stick-built and HUD for a Manufactured Home Refer to HUD Handbook , 4.6.a-e Escrow holdbacks are allowed up to a maximum of $5000 (See 203K for repairs greater than $5000) One draw permitted

8 Special Programs Continued Back to Work (HUD Mortgagee Letter ) As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a per-foreclosure sale, deed-in-lieu, or foreclosure. Many borrowers were forced to file for bankruptcy to discharge or restructure their debts. FHA recognizes these hardships, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage. FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that: Certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower s control; The borrower has demonstrated full recovery from the event; and, The borrower has completed housing counseling. Satisfactory Credit Requirements: The borrower s credit history is clear of late housing or installment debt payments, and major derogatory credit issues on revolving accounts; Any open mortgage is current and shows 12 months satisfactory payment history. Mortgages may have been brought current through loan modification, which may be temporary or permanent so long as all payments have been documented as being received in accordance with the modification agreement(s)

9 Special Programs Continued Back to Work (HUD Mortgagee Letter ) Required Documentation of Loss of Employment or Loss of Income: Documentation of a reduction in the borrower s Household Income of 20% or more for a period of at least 6 months that resulted from the Loss of Employment, Loss of Income, or a combination of both. Loss of Employment: A written Verification of Employment (VOE) evidencing the termination date or in cases where the prior employer is no longer in business: A written termination notice, or Other publicly available documentation of the business closure, and Loss of Income Documentation of receipt of unemployment income The lender must verify and document the Borrower s Household Income prior to Loss of Income by obtaining: A written VOE evidencing prior income; or Signed tax returns or W-2s evidencing prior income Loss of Income based on seasonal and part-time employment: In addition to the above requirements, verification and documentation of a two year history of seasonal employment in the same field just prior to the Loss of Income

10 Special Programs Continued Back to Work (HUD Mortgagee Letter ) Required Documentation of Economic Related Events: Economic Event-Related Collections and Judgments: The lender must verify and document all collections and judgments were the result of the Economic Event. For borrowers with open collection accounts or judgments, the lender must also meet the requirements of Handbook , Section 4.C.2.e, Analysis of Collections and Judgments. Economic Event-Related Mortgage Foreclosure: A minimum of 12 months have elapsed since the date of foreclosure or deed-in-lieu; and The foreclosure or deed-in-lieu was the result of the Economic Event Economic Event-Related Short Sale: A minimum of 12 months have elapsed since the date of sale; and The short sale was the result of Economic Event.

11 Special Programs Continued Back to Work (HUD Mortgagee Letter ) Required Documentation of Economic Related Events: Economic Event-Related Chapter 7 Bankruptcy: A minimum of 12 months have elapsed since the date of discharge of the bankruptcy; and The bankruptcy was the result of the Economic Event Economic Event-Related Chapter 13 Bankruptcy: The Chapter 13 Bankruptcy was discharged prior to loan application and all required bankruptcy payments were made on-time, or a minimum of twelve 12 months of the payout period under the bankruptcy has elapsed and all required bankruptcy payments were made on time; and The bankruptcy was the result of the Economic Event If the Chapter 13 Bankruptcy was not discharged prior to loan application, the lender must also verify and document that the borrower has received permission from the Bankruptcy Court to enter into the subject mortgage transaction.

12 Mortgage Insurance Upfront Premiums Required on all loans regardless of LTV Calculated as a percentage of the base loan amount May be financed May be paid by borrower or seller Seller paid up-front mortgage insurance (UFMIP) is included in the 6% seller contribution limitation If paid at closing and not financed, the entire amount must be paid Partial payment with partial financing is not allowed. Effective for FHA loans for which the case number is assigned on or after June 3, 2013, for FHA traditional purchase and refinance products, the upfront premium, shown in basis points below, will be charged for all amortization terms. Mortgage Type Up-front Mortgage Insurance Premium Upfront Premium Requirement Purchase Money Mortgages and Full-Credit Qualifying Refinance Transactions Streamline Refinance Transactions with and without an Appraisal 175 BPS 175 BPS

13 Mortgage Insurance Continued Annual Premiums Required on all loans regardless of LTV Calculated as a percentage of the base loan amount Based on loan term and LTV 1/12 th of the calculated annual amount must be included in the proposed mortgage payment and housing ratio Cancellation of the annual premium will be considered after the LTV reached 78% of the original appraised value, provided the borrower has paid the premium at least five years Effective for FHA loans for which the case number is assigned on or after June 3, 2013, for FHA traditional purchase and refinance products, the upfront premium, shown in basis points below, will be charged for all amortization terms. LTV Annual Mortgage Insurance Premiums Mortgages with amortization terms > 15yrs Annual Premium < 95% 130 BPS > 95% 135 BPS Mortgages with amortization terms < 15yrs < 90% 45 BPS > 90% 70 BPS

14 UFMIP Refunds Up-front Mortgage Insurance Premium Refunds (UFMIP) A portion of the up-front mortgage insurance premium my be refunded to borrowers who refinance from one FHA loan to another FHA loan: FHA FHA rate and term refinance FHA FHA cash-out refinance Streamline refinance with our without an appraisal Must refinance within the first three years of the existing mortgage term Amount of refund is found in Refinance Authorization Screen in FHA Connection Use the unearned up-front mortgage insurance premium refund for the month the new loan funds and not the month the loan closes. Maximum refund 80% if refinanced in the first month of the existing mortgage term Minimum refund 10% if refinanced in 36 th month of the existing mortgage term Amount of refund is used in maximum mortgage refinance calculations see Refinance section of MSF Seller s Guide If the amount of the UFMIP refund is < to the UFMIP for the new loan, the amount is not refunded directly to the borrower but rather shown as a credit on the HUD-1 Settlement Statement

15 UFMIP Refunds Continued If the amount of the UFMIP exceeds the new UFMIP for the new loan, the amount of the new UFMIP is credited as the UFMIP refund on the HUD-1 Settlement Statement HUD refunds the difference between the unearned UFMIP shown on the Refinance Authorization screen in FHA Connection and the new UFMIP to the DE lender who underwrote and insured the loan The servicing lender refunds the difference to the borrower upon receipt of the funds from HUD The difference may not be shown as a credit on the HUD-1 Settlement Statement No refund is given when the loan is refinanced from FHA to Conventional or the property is sold For the up-front mortgage insurance premium refund table refer to FHA Mortgage Letter Moratorium on Risk Based Mortgage Insurance Premiums

16 Interested Party Contributions Interested party / Seller Contributions Allowed up to 6% of the sales price, Interested party contributions may not exceed the actual amount of closing costs, pre-paid expenses, and discount points. The seller (or other interested third parties such as real estate agents, builders, developers, etc or a combination of parties) may contribute. UFMIP when paid by an interested party, is included in the 6% limitation Interested Party must pay all or no UFMIP Partial financing of UFMIP is not allowed. Any interested party contribution exceeding 6% of the sales price results in a dollar for dollar reduction to the sales price before calculating the maximum loan amount. Items such as the owner s title policy that are customarily paid by the seller are not included in the 6% limitation. Items customarily paid by the seller may vary by state Documentation indicating a fee is typically seller-paid may be required.

17 Interested Party Contributions Inducements to purchase Expenses paid by the seller above and beyond reasonable and customary closing costs and pre-paid expenses are considered an inducement to purchase and result in a dollar for dollar reduction to the sales price before applying the appropriate LTV ratio. The value of the item(s) must be deducted from the sales price and the appraised value of the property (if not already done so by the appraiser) before applying the LTV ratio Value of items must be established and cannot reflect zero value Either garage sale value or if new, a receipt for the cost must be provided. Inducements to purchase include but are not limited to the following: Seller-paid closing costs and pre-paids in excess of 6% of the purchase price or in excess of the actual closings costs and pre-paid expenses Repair allowances Excess rent credit Gift funds that do not meet the gift requirements in the Gift Funds section of the MSF Seller s Guide, including someone other than a family member paying off debts.

18 Mortgage Credit Analysis Overview The purpose of underwriting is to determine a borrower s ability and willingness to repay the mortgage debt, thus limiting the probability of default and collection difficulties, and to examine the property offered as security for the loan to determine if it is sufficient collateral. The Four C s of Credit (Credit History, Capacity to Repay, Cash to Close, and the Collateral) are evaluated during the underwriting process. Analyzing the Borrower s Credit Past credit performance serves as the most useful guide in determining a borrower s attitude toward credit obligations and predicting a borrower s future actions. A borrower who has made payments on previous and current obligations in a timely manner represents reduced risk. Conversely, if the credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, strong compensating factors will be necessary to approve the loan. When analyzing a borrower s credit history, examine the overall pattern of credit behavior, rather than isolated occurrences of unsatisfactory or slow payments. A period of financial difficulty in the past does not necessarily make the risk unacceptable if the borrower has maintained a good payment record for a considerable time period since the difficulty. When delinquent accounts are revealed, the lender must document their analysis as to whether the late payments were based on a disregard for financial obligations, an inability to manage debt, or factors beyond the control of the borrower, including delayed mail delivery or disputes with creditors.

19 Mortgage Credit Analysis Continued Derogatory Credit such as but not limited to judgments, collections, bankruptcy and foreclosure. While minor information occurring two or more years in the past does not require explanation, major indications of derogatory credit-including judgments, collections, and any other recent credit problems-require sufficient written documentation from the borrower. The borrower s explanation must make sense and be consistent with other credit information in the file. Credit Inquiries All inquiries reported on the credit report must be explained in writing, regardless of AUS response Derogatory Credit Explanations Accept or Approve responses do not always require credit explanation letters (subject to underwriter s discretion) All Refer responses loans for borrowers having derogatory credit must contain a credit explanation letter at the time of initial loan submission. All of the following must be explained: Late payment Collections, judgments, and public records, regardless of time frame Loans requiring a manual downgrade to a refer response require credit explanations for loan characteristics requiring the underwriter to manually downgrade a AUS approve or accept response, refer to the Underwriting section of the MSF Seller s Guide

20 Mortgage Credit Analysis Continued Chapter 7 Bankruptcies A borrower with a Chapter 7 Bankruptcy discharged less than two years prior to the loan application is ineligible unless there are documented extenuating circumstances beyond the borrower s control Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations Chapter 13 Bankruptcies/Credit Counseling Document at least one year into the payout plan has elapsed Document all required payments have been made on time (Credit Counseling additionally, document which debts/trade lines are/were included in the payment plan) If borrower is still in repayment, obtain court (Credit Counseling Counseling Agency) permission to enter into new debt i.e. new mortgage Include Chapter 13 payment in the debt ratio if the BK is not paid in full

21 Mortgage Credit Analysis Continued Foreclosure A borrower with a foreclosure or deed-in-lieu of foreclosure within the most recent three years is ineligible for FHA Financing unless an Approve or Accept response is received through the AUS and significant extenuating circumstances beyond the borrower s control and there is evidence of re-established good credit. Loans for borrowers with foreclosures less than one year old will not be considered regardless of AUS response. Mortgage Solutions will consider approval of a loan where the non-borrowing spouse has a foreclosure within the most recent three years and the foreclosure occurred during the borrower s marriage to the non-borrowing spouse. Must be approved by a DE Underwriter. If the loan receives an AUS Approve or Accept response and the borrower had a foreclosure within the most recent three years, the loan must be manually downgraded to a Refer response Full manual underwrite is required and the file must be documented according to manual underwriting requirements.

22 Mortgage Credit Analysis Continued Short Sales FHA permits loans to borrowers whose credit history indicates a short sale, provided all of the following are met: The borrower must have made all mortgage payments within the month due for the 12 months prior to the short sale Borrowers who executed a short sale after completing a permanent modification are eligible for FHA financing, provide the borrower made at least 12 months payments on the permanent modification and all payments on the permanent modification were made within the month due for the 12 months prior to the short sale. Borrowers who completed a short sale on a loan that was under a temporary modification plan at the time of the short sale are ineligible for FHA financing for three years after the short sale. The short sale must serve as payment in full on the existing liens, and the existing mortgage servicer may not require repayment of the difference between the mortgage balance and the short payoff Borrowers must be relocating to a new geographical location that is not within a reasonable commuting distance. Borrowers in default on their mortgage at the time of a short sale are ineligible for FHA financing for three years after the date of the short sale unless the borrower experienced and can document significant extenuating circumstances beyond their control. For additional information, refer to the following resources: FHA Mortgagee Letter Short Sales

23 Mortgage Credit Analysis Continued Short Refinances Mortgage Solutions does not allow short refinances/short payoffs for the subject property currently owned by the borrower. Judgments (For case numbers assigned on or after October 15, 2013) Regardless of the amount of the outstanding judgments, the lender must determine if the judgment was a result of: The borrower s disregard for financial obligations, or The borrower s inability to manage debt, or Extenuating circumstances Judgments must be satisfied prior to closing unless all of the following items are provided: Fully executed repayment agreement Evidence timely payments have been made for a minimum 3-month period prior to application date o The payment must be included in the DTI ratios when qualifying the borrower o Borrowers are not allowed to prepay the scheduled payments in order to meet the 3 month requirement Title commitment may not reflect judgment as an encumbrance of record o Must be satisfied to insure proper lien position See Credit section of MSF Seller s Guide for additional requirements regarding Judgments and other derogatory credit history.

24 Mortgage Credit Analysis Continued Payment History Purchase, Full Qualifying Rate/Term, and Cash-out Refinance Transactions Mortgage late payment must be due to significant, documented extenuating circumstance beyond the borrower s control and will be evaluated on a case-by-case basis. Loans receiving Approve or Accept responses are approvable without explanations, provided the mortgage late payments do not require a manual downgrade to a Refer response. (Refer to the Manual Downgrades section the MSF Seller s Guide.) Streamline Refinance Transactions Minimum 6 payments made, at least 6 payments have passed since the first payment due date, and at least 210 days have passed from the closing date of the mortgage. Must meet FHA Net-Tangible Benefit to borrower guidelines Mortgage payment history on the existing loan past 12 months All mortgage payments must have been made within the month due.

25 Mortgage Credit Analysis Continued Credit Scores Minimum Credit Scores 1 Unit Properties All borrowers must have a minimum credit score of Unit Properties All borrowers must have a minimum credit score of 600 o o Manual underwriting for borrowers without credit scores is not allowed No minimum credit score requirement on FHA Gold with Approved/Eligible findings. (See HUD ) Credit Report Requirements All credit reports must be tri-merge credit reports Credit reports must be dated within 120 days of the note date The following credit report discrepancies require a new credit report: o Social Security number is incorrect The following credit report discrepancies do not require a new credit report o o Last name or minor corrections if allowed by AUS Misspelled first names and or missing or incorrect suffixes (Jr./Sr.) require a new credit report unless the name variation appears in the AKA section of the credit report or is allowed by AUS

26 Mortgage Credit Analysis Continued Non-Traditional Credit Requirements Minimum Trade lines/references for Borrowers All borrowers must have a minimum of one valid credit scores Each credit reference must have at least 12 months satisfactory history Three trade lines may be a combination of traditional references and acceptable nontraditional references, however there is no rental history requirement as described in the following section for manually underwritten loans. All trade lines must be reported on a non-traditional credit report. For joint loans, the borrower s and co-borrower s combination of trade lines must yield a total of three traditional and or non-traditional trade lines. Borrowers on joint loans are not required to have three trade lines per borrower. Rather, the three trade line requirement is applied to the loan and not each individual borrower. A joint trade line reported on each borrower s individual credit report is one trade lie and may not be counted as two separate trade lines. Trade lines on which the borrower is an authorized user may not be counted as a traditional or non-traditional trade line Non-traditional credit may not be used to offset a borrower s poor credit history.

27 Mortgage Credit Analysis Continued Manually Underwritten Loans with Limited Trade lines Requires Non-traditional Credit References as outlined below Non-traditional credit cannot be used to offset a borrower s poor credit, regardless of whether or not a credit score exists. Mortgage Solutions requires a borrower to have a 12-month history renting. Rent verification must be documented with one of the following: 12 months canceled checks Verification of rent from an apartment complex or management company Bank Statements showing direct payment to the apartment complex or management company. In addition to the rental history described above, Mortgage Solutions requires at least three additional non-traditional trade lines, each having at least 12-month satisfactory history. Mortgage Solutions will not approve FHA loans for borrowers without credit scores. Non-occupant co-borrowers are only permitted when the occupying borrower has sufficient credit references outlined below, including 12-month rental history. Debt Ratios are limited to 31/43, regardless of the number and type of non-traditional credit references provided

28 Mortgage Credit Analysis Continued Manually Underwritten Loans with Limited Trade lines Continued... FHA provides the following guidance in establishing that a borrower has sufficient references for evaluating bill paying habits. Credit references must be reported on a credit vendor generated Non-traditional Mortgage Credit Report (when a non-traditional credit is unavailable, 12-months canceled checks are required for all references if the borrower rents from an individual, 12-months canceled checks are required, even if rental verification is also provide on the Non-traditional Mortgage Credit Report) Group One Housing related references Provide 12-month history with no late payments from any of the following: Rental History having no late payments > 30 days in the most recent 12-months as described above, Mortgage Solutions requires 12-month rental history Utility Companies (gas, electric, water, landline home phone, or cable TV)

29 Mortgage Credit Analysis Continued Liabilities See also Credit History of MSF Seller s Guide All mortgage, installment, revolving, child support, and alimony obligations must be included in the borrower s ratios Revolving debt may be excluded from the ratios, if the account will be paid off prior-to or at closing, provided all of the following requirements are documented: o o o o The borrower may not have had any late payments on revolving, installment, or mortgage debts in the most recent 24-months The borrower may not have had any judgments, public records or collections, other than medical, in the most recent 24-months Gifts may not be used to payoff revolving debt for qualification purposes If the borrower has any of the derogatory credit describe above, the revolving debt must be included in the ratios, regardless of whether the account will be paid off and or closed prior-to or at closing When the credit report does not provide a minimum payment for revolving debt, use the greater of $10 or 5% of the outstanding balance.

30 Mortgage Credit Analysis Continued Excluded Liabilities Union dues Child care expenses Installments debts with fewer than ten payments remaining unless there is an impact on the borrower s ability to make timely payments in the months immediately after closing, particularly of the borrower has no reserves. All loans for borrowers who receive a gift to pay down or payoff installment debt are subject to the gift overlays described in the Gift Funds section of the MSF Seller s Guide. Co-signed debts, subject to all of the following documentation: Evidence the person for whom the borrower co-signed has made the payments and Evidence all payments have been made within the month due (Evaluated on a case-bycase basis for a minimum 12-month period) and Evidence the person making the payments is obligated on the excluded co-signed liability

31 Mortgage Credit Analysis Continued Excluded Liabilities Continued... Mortgage assumptions The borrower remains obligated on a mortgage loan that was subsequently assumed. To exclude the mortgage debt from the liabilities, one of the following two requirements must be documented: Verification of mortgage indicating that the individual(s) who assumed the mortgage have made at least 12 payments on time or The appraisal or closing statement from the sale of the property indicates the LTV on the assumed loan is < 75% Student loans that are deferred more than 12 months Six month deferments stating the borrower may be eligible for additional deferment are not acceptable unless documentations is provided showing the borrower qualifies for an extension and that extension will cause a deferment period extending at least 12 months past the loan closing. Loans secured by borrower s own funds such as 401k loans Assets securing the loan may not be included as assets to close or otherwise considered as available to the borrower. An independent 3 rd party must provide the borrower funds Seller, real estate agent, broker, lender or other interested party may not provide such funds Unacceptable borrower funds include but are not limited to; signature loans, cash advance on credit cards, borrowing against household goods and furniture and other similar unsecured financing.

32 Effective Income Stability of Income We do not impose a minimum length of time a borrower must have held a position of employment to be eligible. However, the lender must verify the borrower s employment for the most recent 2yrs. If the borrower indicates he or she was in school or in the military during any of this time, the borrower must provide evidence supporting this claim, such as college transcripts or discharge papers. The borrower also must explain any gaps in employment spanning one month or more. Allowances for seasonal employment, such as is typical in the building trades, etc., may be made if documented by the lender. To analyze and document the probability of continued employment, lenders must examine the borrower s past employment record, qualifications for the position, previous training and education, and the employer s confirmation of continued employment. A borrower who changes jobs frequently within the same line of work, but continues to advance in income or benefits, should considered favorable. In the analysis, income stability takes precedence over job stability. In some cases, a borrower may have recently returned to the work force after an extended absence. In these circumstances, the borrower s income may be considered effective and stable provided the following conditions apply: The borrower that has been employed in the current job for six months or more, and The borrower can document a 2yr work history prior to the absence from the work force. Acceptable documentation includes traditional employment verifications, copies of W-2 s or paystubs. An example of an acceptable employment situation includes a person that took several years off of work to raise children and then returned to the workforce. Situations not meeting the criteria listed above may by considered as compensating factors only.

33 Effective Income 4506-T A fully executed IRS Form 4506-T must be included in all loan files except for streamline refinance transactions. Two year s transcripts are required. Income may not be used in calculating the borrower s debt-to-income ratios if it comes from any source that cannot be verified, is not stable, or will not continue. From HUD Handbook D.1a Acceptable Sources of Income Alimony and Child Support Provide court recorded evidence the income will continue at least three years after the loan closes via one of the following: Final divorce decree Fully executed legal separation agreement Voluntary payment agreement Provide evidence borrower has been receiving the payments for the most recent 12-months via one of the following: Canceled checks Deposit Slips Tax Returns Court records, such as a Friend of the Court statement Child support payments may be grossed up Alimony payment not be grossed up

34 Effective Income Continued Automobile Allowances Only the amount of the allowance that exceeds actual automobile expenses may be used for qualification Amount of allowance is calculated using borrower s most recent two-years IRS form Employee Business Expenses If the borrower uses the standard per-mile rate in calculating the automobile expenses, as opposed to the actual cost method, the portion that the IRS considers depreciation may be added to income The borrower s monthly car payment must be included in the ratios Employer verification that auto allowance payments have been received for 2-years and is likely to continue for 3 years

35 Effective Income Continued Commission Income The following is required for borrowers whose commission income is 25% or more of their total income: The commission portion of the borrower s income is averaged over the most recent two years Copies of the borrower s personal tax returns are required, and un-reimbursed business expenses from Schedule A of the 1040s must be deducted from the gross commission before averaging the commission income If commission income is declining, it cannot be used without evidence of significant compensating factors If the borrower has received commission income at least 12-months but less than two years, the commission income may be used for qualification purposes at underwriter discretion and will be averaged over a 24-month period

36 Effective Income Continued Disability Income Eligible, provided the disability income will continue at least three years after loan closing Grossing up non-taxable income (not all disability income is non-taxable) Borrower files tax returns: Non-taxable disability income may be grossed up by the tax rate used to calculate the borrower s most recent year s income tax. Borrower is not required to file tax returns: Non-taxable disability income may be grossed up by 25% Overtime and Bonus Income Provide documentation that the borrower has received the overtime and or bonus income for the past two years, and that it is likely to continue Income is averaged over most recent two years If Income is declining, income cannot be used without justification by the lender and documentation supporting the justification If income varies significantly from year-to-year, income must be averaged over a period of time greater than two years Overtime and bonus income are ineligible if the verification of employment indicates it s unlikely to continue

37 Effective Income Continued Part-time Primary Employment Income Document the stability of income and likelihood of ongoing employment 12-month history on current job Income is averaged unless able to determine set schedule of minimum guaranteed hours Example: A registered nurse may have worked 24 hours per week for the last year. Although this job is less than the 40-hour work week, it is the borrower s primary employment, and should be considered effective income. Part-time Income from a Second Job Borrower has received second job income for the most recent two years in conjunction with primary job and it is likely to continue FHA defines part-time income as jobs taken to supplement the borrower s income from regular employment, such as a second job that is less than 40 hours per week. Rental Income Converting Existing Primary Residence to a Rental Property Applies to properties vacated within 60-days of loan application. Single-family residences: Rental income from the borrower s current primary residence is permitted, provide at least of the following FHA requirements is met: o The borrower obtains new employment or a job transfer that is not within a reasonable commuting distance of the current primary residence or

38 Effective Income Continued Converting Existing Primary Residence to Rental Property Continued... The borrower has a 25% equity position in the current primary residence as evidenced by an appraisal completed by an FHA approved appraiser If one or both of the requirements above are met, all of the following documentation is required: Fully executed lease agreement (a 25% vacancy factor will be applied to the monthly rent stated on the lease agreement) and Evidence of the borrower s receipt of the security deposit and or first month s rent per lease agreement and Evidence of the borrower s receipt of funds deposited into his or her bank account

39 Effective Income Continued Additional Investment Properties Owned by the Borrower Not the Subject Property Properties acquired during the current calendar year Rental income must be documented with all of the following: Fully executed lease agreement(s) between the borrower and the renter(s) A 25% vacancy factor will be applied to the lesser of the appraiser s estimate of rental income for the unit(s) or the actual rental income stated on the lease agreement(s) If the units are not currently leased, rental income may not be used for qualification Evidence of the borrower s receipt of funds deposited into his or her bank account Rental income for properties acquired in previous calendar years must be calculated using Schedule E of IRS Form 1040 For additional guidance when using Rental Income to qualify please refer to the Income Section of the MSF Seller s Guide

40 Effective Income Continued Retirement Income Provide documentation per AUS Income must continue for at least 3 years Self-Employed Income Borrower s who own 25% or more of any business are considered self-employed Self-employed income is eligible, provided the borrower has been self-employed at least two years, and the income is averaged over the most recent two year period Income from borrowers who have been self-employed at least one but less than two years may be used for qualification at underwriter s discretion, provided the borrower has: o o o o At least two years of successful prior employment in the same line of work or At least two years of successful employment in a related occupation or A combination of one year of successful employment and formal education or training in the same or related occupation Income from borrowers self-employed less than one year is ineligible The following income documentation is required for loans having AUS refer responses: Signed and dated individual tax returns for the most recent two years, including all schedules. Significant declining income may not be used to qualify the borrower(s) Signed and dated corporate or partnership returns for the most two years, including all schedules. Significant declining income may not be used to qualify the borrowers(s)

41 Effective Income Continued Self-employed Income Continued... Year-to-date profit and loss statement and balance sheet-if the income on the current profit and loss statement shoes a significant increase in income from the previous years returns, the income calculation must be based on the tax returns. Business credit report If the borrower is required to file quarterly returns, income from the quarterly returns may be used to qualify the borrower For information about calculating income using tax returns, refer to MGIC Learning Center Self-Employed Borrowers (Basic and Advanced) Social Security Income Social Security Income must continue for at least three years If borrower is not of retirement age, continuance must be documented Grossing up non-taxable Social Security Income: Borrower files tax returns: Non-taxable Social Security income may be grossed up by the tax rate used to calculate the borrower s last year s income tax IRS Tax Chart Borrower is not required to file tax returns: Non-taxable Social Security income may be grossed up by 25%

42 Effective Income Continued Trust Income Document trust income with the following: Copies of the trust agreement or trustee statement showing: o o o The amount of the trust and Frequency of distribution(s) and Duration and guarantee of payments-must be at least three years If trust account funds are being used for borrower s funds to close, provide evidence the distribution will not have a negative impact on borrower s income from the trust. See the Income Section of the MSF Seller s Guide for additional Acceptable Income sources such as but not limited to: Dividend & Interest, Employer Subsidized Mortgage Payments, Borrower s Employed by a Family Owned Business, Government Assistance Programs, Military Income, Notes Receivable, Projected Income, Rental Income (2-4 Unit Properties), Boarder Income, Roommate Income, Seasonal Employment, and Unemployment.

43 Assets Assets Acceptable sources of funds to close and documentation requirements are described below. For AUS Approve or Accept responses, refer to findings for documentation requirements. All verifications of funds must be dated within 45 days of the loan application and within 90 days of the note for existing construction or 120 days of the note for new construction. Internet bank statements are acceptable with the following: Full internet header on printout and Borrower name and partial account number and Bank statement to cross-reference or Full account number on print out and bank statement to cross-reference or Borrower s name and full account number on print out Down Payment Assistance Programs (DPA) See MSF Guidelines for approved DPAs Loans priced to Gold - HUD allowed DPAs are acceptable

44 Assets Continued Gift Funds In order for funds to be considered a gift there must be no expected or implied repayment of the funds to the donor by the borrower. Deposits made to a joint account by a non-borrowing spouse are not considered gifts, provided the non-borrowing spouse and borrower are joint account owners on the subject bank account Large deposit verification is still required. Acceptable Donors Borrower s relative Domestic partner Close friend with a clearly defined and documented family-type relationship Borrower s employer or labor union Governmental agency or public entity Ineligible Donors Any person or entity with an interest in the sale of the property, such as the seller, real estate agent, broker, or builder (unless a relative) Any person or entity associated with any party having an interest in the transaction. See Asset section of MSF Seller s Guide for additional guidance regarding acceptable assets and documentation including but not limited to; Gifts of Equity, Large Deposits, Stocks and Bonds, etc.

45 Borrower Eligibility Eligible Borrowers U.S. Citizens with a valid U.S. Social Security Number Permanent Resident Aliens Non-Permanent Resident Aliens Inter Vivos or Living Revocable Trusts See Borrower Eligibility section of MSF Seller s Guide for documentation requirements, restrictions, and a list of Ineligible Borrowers including but not limited Foreign Nationals and any party listed on LDP/GSA lists. Non-Occupying Co-Borrowers May be added to improve ratios May not be added to overcome any borrower s derogatory credit history Not allowed on Cash-out transactions Max LTV 75% or less when a parent is selling a residence to a child and is also a coborrower Max financing is allowed for borrowers related by blood, marriage, or law or for unrelated individuals that can document evidence of a long-term family-type relationship, provided the non-occupant co-borrower is not a interested party to the transaction and the property is a single-family residence

46 Borrower Eligibility Credit Alert Interactive Voice Response System (CAIVRS) HUD s CAIVRS is a Federal government-wide repository of information on those individuals with delinquent or defaulted Federal debt on those for whom a payment of an insurance claim has occurred. Examples include but are not limited to: VA Mortgage, Title I Loan, Federal Student Loan, SBA Loan, and Federal Taxes Lenders Access CAIVRS through the FHA Connection. Lenders must screen all borrowers, including nonprofit agencies acting as a borrower, using CAIVRS (except on streamline refinances).

47 Borrower Eligibility Credit Alert Interactive Voice Response System (CAIVRS) continued If CAIVRS indicates the borrower is presently delinquent or has had a claim Paid within the previous three years on a loan made or insured by HUD on His or Her behalf, the borrower is not eligible except as described below. Exception to this rule may be Granted under the following situations: Assumptions. If the borrower sold the property, with or without a release of liability, to an individual who subsequently defaulted, the borrower is eligible, provided he or she can prove the loan was not in default at the time of assumption. Divorce. A borrower may be eligible if the divorce decree or legal separation agreement awarded the property and responsibility for payment to the former spouse. However, if a claim was paid on a mortgage default prior to the divorce, the borrower is not eligible. Bankruptcy. When the property was included in a bankruptcy that was caused by circumstances beyond the borrower s control (such as the death of a principal wage earner or serious long-term uninsured illness), the borrower may be eligible if the borrower meets the requirements in Paragraph 2-3 E of the For more complete details see Chapter 2 Section 2-5 A-C of the

48 Borrower Eligibility Continued Limited Denial of Participation (LDP) and General Services Administration (GSA) Commonly referenced as LDP/GSA HUD s LDP and the U.S. GSA s List of Parties Excluded from Federal Procurement and Non Procurement Programs. A person suspended, debarred, or otherwise excluded from participation in the Department s programs is not eligible to participate in FHA-insured mortgage transactions. The lender must examine HUD s LDP list and the Government-wide GSA list and document this review on the HUD WS/92900-PUR. If the name of the borrower, seller, listing or selling agents, processor, or loan officer appears on either list, the application is not eligible for mortgage insurance. Check HUD s LDP list by going to Check the Federal Governments GSA list by going to An exception may be made for a seller on the GSA list when the property being sold is a seller s principal residence.

49 Manual Underwriting What does it mean to Manually Underwrite your loan? When you receive a Refer response from an AUS such as DO/DU, Mortgage Solutions Financial can potentially Manually Underwrite your loan file. Additionally, the underwriter has discretion or may be required to downgrade your AUS Approve or Accept to a manual underwrite. This means an underwriter will personally review all documentation contained in the loan file and use their discretion to approve the loan: i.e. Credit, Capacity, Collateral, and all other supporting documentation. Our practice at MSF is to take a consistent, common sense approach to underwriting. The loan must make sense and be of benefit to the borrower. Manual Underwritten loans often pose a higher risk factor thus may require loan level price adjustments and additional time for a thorough review.

50 Do You Know What Makes a Good Loan? Do you know what an Underwriter is looking at when evaluating your loan? If you don't, you should. Every Mortgage Professional should know how to underwrite a file as well as know the difference between good and bad risk. There is a level of risk in every loan. The key to success is to understand the difference between good risk and bad risk. You have probably heard the term: Layers of Risk but do you fully understand what that means? What exactly does Layers of Risk mean and how does it affect your loan? The assessment of risk is based on the 3 C's; Credit, Capacity and Collateral.

51 Do You Know What Makes a Good Loan? Credit (Willingness to repay) Adverse of derogatory credit information (or Credit Score) High Balance-to-limits (>50% of high credit limit in use) High overall utilization of revolving credit (>60% of revolving accounts are in use). Are they a "heavy" user of debt? Credit history for a short duration Several inquiries Do they have any delinquent credit? If so, what is the nature of the delinquency and is it likely to continue? Are there collections? If so, for how much and what are they i.e. Medical, Non-sufficient Funds Checks, Non-paid Utilities, etc. This is an important aspect because it can tell an underwriter if the borrower might simply ignore obligations.