Important Notice to Homebuyers – HUD 92900-B (12/04)
Executed at application
Informed Consumer Choice Disclosure Notice
Executed at application
FHA ARM disclosure (if applicable)
Provide to borrower within 3 days of application.
FHA 1 year, 3/1 and 5/1 ARM disclosures can be found on our website at: www.franklinamerican.com
GET FHA FORMS HERE: http://www.hud.gov/offices/adm/hudclips/forms/
FAMC FHA Training for Loan Originators – 10/08 2
For Your Protection: Get a Home Inspection – Form HUD-92564-CN 3 FAMC FHA Training for Loan Originators – 10/08
Real Estate Certification and Amendatory Clause – Language from the FHA Handbook 4 FAMC FHA Training for Loan Originators – 10/08
HUD/VA Addendum to the URLA – Form HUD-92900-A pg. 1 5 FAMC FHA Training for Loan Originators – 10/08
6 HUD/VA Addendum to the URLA – Form HUD-92900-A pg. 2 FAMC FHA Training for Loan Originators – 10/08
7 HUD/VA Addendum to the URLA – Form HUD-92900-A pg. 3 FAMC FHA Training for Loan Originators – 10/08
8 HUD/VA Addendum to the URLA – Form HUD-92900-A pg. 4 FAMC FHA Training for Loan Originators – 10/08
Important Notice to Homebuyers Form HUD-92900-B pg. 1 9 FAMC FHA Training for Loan Originators – 10/08
Important Notice to Homebuyers – Form HUD-92900-B pg. 2 10 FAMC FHA Training for Loan Originators – 10/08
Informed Consumer Choice Disclosure – No Form # - See ML 99-23 Pg. 1 11 FAMC FHA Training for Loan Originators – 10/08
Informed Consumer Choice Disclosure – No Form # - See ML 99-23 Pg. 2-instructions 12 FAMC FHA Training for Loan Originators – 10/08
Positive Program Revisions
Industry-standard property and appraisal requirements (ML 2005-48)
"As is" appraisals allowed for minor property defects.
VC Sheets & Homebuyer Summary forms no longer required.
Termite, well and septic inspections no longer mandatory (existing properties >1 year old), unless noted by appraiser or required on sales contract.
Expanded refinance opportunities (ML 2005-43)
Cash-out refis available to 95% LTV.
The current month’s payment can be “rolled-in” to the new loan.
Current FHA borrowers can refinance to a shorter term without credit qualifying provided their P & I increases no more than 20%.
Industry-standard closing costs and fees (ML 2006-04)
All “reasonable and customary” borrower-paid closing costs can be used to meet the minimum investment requirement (excludes prepaid expenses and discount points). Please see page 22 for more detailed closing cost information .
13 FAMC FHA Training for Loan Originators – 10/08
Resources and Technology
Automated Underwriting: With Mortgagee Letter 2004-01, FHA introduced the TOTAL Mortgage Scorecard (TOTAL). TOTAL is HUD’s proprietary credit evaluation system, used within an Automated Underwriting System (AUS) to evaluate the borrower’s credit history and other application variables, and return either an accept/approve recommendation or refer the loan for traditional manual underwriting. TOTAL is automatically accessed when an FHA loan is submitted for underwriting via previously-approved AUS products, including Freddie Mac's Loan Prospector (LP) and Fannie Mae’s Desktop Underwriter (DU) system. As of the date of this publication, the current TOTAL User’s Guide is dated December, 2004, published as an attachment to Mortgagee Letter 2004-47.
FHA Connection: HUD requires lenders to use the Internet to complete a number of functions. HUD’s interactive system, called “The FHA Connection”, was originally introduced in Mortgagee Letter 97-14. Once approved, mortgagees need to obtain a password and then will be able to request FHA case number assignments, appraiser assignments, refinance authorizations, CAIVRS authorizations, transfer cases, etc. FHA Connection: https://entp.hud.gov/clas/
On-line Resources: HUD's "Home Page" links to a broad variety of HUD-related topics. HUD’s “Lenders Page” links to specific FHA lending information, including mortgagee letters, mortgage limits, program descriptions, HUD contacts, phone numbers, e-mail addresses, etc.
TIP: The best way to stay up to date with FHA requirements is to sign up for HUD’s Housing E-mail list: http://www.hud.gov/offices/hsg/sfh/ref/hsgregst.cfm
FHA Resource Center: Three easy ways to get the facts!
Search online knowledge base: answers.hud.gov .
Call: (800) CALLFHA or (800) 225-5342
TDD: (877) TDD-2HUD (877) 833-2483).
FAMC Wholesale Lending Website: Handy links to the above and many other sources of industry information can be accessed at FAMC’s website under “ Resources ” https://www.franklinamerican.com/ext/wholesale?npage=wholesaleHome
Guidelines | Rates | Forms | Lock Loans | Automated Underwriting | Underwriting | Loan Status | Closing | Resources
14 FAMC FHA Training for Loan Originators – 10/08
Glossary of FHA Terms
FHA– The Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development (HUD) , administers various single-family mortgage insurance programs. These programs operate through FHA-approved lending institutions which submit applications to have the property appraised and the buyer's credit approved. These lenders fund the mortgage loans, and HUD insures the total loan amount. HUD does not make direct loans to help people buy homes.
HUD – U. S. Department of Housing and Urban Development, a governmental agency with varied housing-related duties, including – administration of the FHA loan program, supervision of the governmental agency Ginnie Mae (GNMA) , and public oversight of the government- sponsored entities (GSEs) Fannie Mae and Freddie Mac. HUD is also charged with enforcing the Real Estate Settlement Procedures Act (RESPA) and Federal Fair Housing Laws.
Agency – A governmental entity with which we do lending business. In this case, HUD (also known as FHA).
Government National Mortgage Association (GNMA) – Popularly called "Ginnie Mae", this governmental agency is supervised by HUD. Ginnie Mae's primary role is to guarantee investors the timely payment of principal and interest on mortgage-backed securities (MBS) backed by federally insured or guaranteed loans — mainly FHA and VA loans. GNMA is known as one of the "Big Three" in the "Secondary Market".
Conditional Commitment – Form used to indicate approval of the FHA appraisal. When completed by HUD this form is properly called a “Conditional Commitment”, but when completed by a Direct Endorsement (DE) lender, this form is properly called a "DE Statement of Appraised Value". Form HUD-92800.5B (9/2004).
Direct Endorsement – Established in 1983, Direct Endorsement is the process that enables DE-approved lenders to consider single-family mortgage applications without first submitting paperwork to HUD.
15 FAMC FHA Training for Loan Originators – 10/08
FHA Programs (“Sections”)
FHA Loan Programs come under the jurisdiction of HUD (the Department of Housing and Urban Development). HUD has numerous loan programs known as "Titles". One popular home improvement program (no equity or appraisal needed!) falls under "Title I".
The home loan programs offered by FAMC and covered in this manual fall under the "Title II" program.
FHA loan programs are known as "Sections", and each Section is associated with a number. Below is an overview of these Sections.
16 FAMC FHA Training for Loan Originators – 10/08 Description Section No. Characteristics: Regular 203(b) -Fixed Rate or ARM -can be used for 1 to 4-unit properties -used for PUDS, but NOT Condos -Requires Upfront & Annual Renewal MMI -most widely used section Condos 234(C) -used only for condos (No PUDS) -Requires Upfront & Annual Renewal MMI -Fixed Rate or ARM
Calculating Base Loan Amounts
The initial calculation of the Maximum Base* FHA loan amount involves 3 steps:
STEP 1 Determine if the subject property is located in "Low" Closing Costs
State or a "High" Closing Costs State - see chart, next page.
STEP 2. Determine the lesser of sales price and appraised value. If appraised value is not available, use the sales price in Step 3.
STEP 3. Multiply Step 2 answer by the appropriate loan formula listed below.
LOW CLOSING COSTS STATES
Guam Virgin Islands
(Purchase Transactions/Low Closing Costs States) 17 FAMC FHA Training for Loan Originators – 10/08
**AV/SP = the lesser of Appraised Value / Sales Price.
*This calculation does NOT apply to Refinances.
The “Base” loan amount is the amount prior to adding the financed mortgage
insurance premium and/or the costs of energy-efficient upgrades.
Maximum Base Loan Amount Formulas Low Closing Costs State AV/SP**equals or less than $50,000 AV/SP greater than $50,000 up to $125,000 #1 X 98.75% #2 X 97.65% ------------------------ --------------------------- Maximum Base Loan Maximum Base Loan AV/SP > than $125,000 #3 X 97.15% --------------------------- Maximum Base Loan 18 FAMC FHA Training for Loan Originators – 10/08
Calculating Base Loan Amounts
The initial calculation of the Maximum Base* FHA loan amount involves 3-steps:
STEP 1. Determine if the subject property is located in "Low" Closing Costs State or a "High" Closing Costs State - see chart, next page.
STEP 2. Determine the lesser of sales price and appraised value. If appraised value is not available, use the sales price in Step 3.
STEP 3. Multiply Step 2 answer by the appropriate loan formula listed below.
HIGH CLOSING COSTS STATES
Alabama Michigan Puerto Rico
Alaska Missouri Rhode Island
Arkansas Minnesota South Carolina
Connecticut Mississippi South Dakota
District of Columbia Montana Tennessee
Delaware North Carolina Texas
Florida North Dakota Virginia
Georgia Nebraska Vermont
Hawaii New Hampshire West Virginia
Iowa New Jersey
Kansas New York
( Purchase Transactions/ High Closing Cost States) 19 FAMC FHA Training for Loan Originators – 10/08
AV/SP**equals or less than $50,000 AV/SP greater than $50,000
*The “Base” loan amount is the amount prior to adding the financed mortgage insurance premium.
**AV/SP = the lesser of Appraised Value / Sales Price.
*This calculation does NOT apply to Refinances.
* The “Base” loan amount is the amount prior to the adding the financed mortgage insurance premium and/or the costs of energy upgrades.
Maximum Base Loan Amount Formulas High Closing Costs State 20 FAMC FHA Training for Loan Originators – 10/08
Calculating the Minimum Investment
The 3% Minimum Cash Investment may include the following
1. Down Payment
2. Reasonable and customary closing costs paid by the borrower (HUD’s definition of closing costs does not include prepaid expenses or discount points)
3. Combination of 1 & 2
The remaining cash-to-close (required by lender/title/escrow) may be paid by the seller, or lender using "premium pricing".
(For purchase transactions) 21 FAMC FHA Training for Loan Originators – 10/08
Closing Costs Information (per Mortgage Letter 2006-04)
In an effort to modernize the FHA lending program and align it more closely with conventional lending requirements, in January, 2006, HUD virtually eliminated the old list of non-allowable closing costs and fees.
HUD now allows FHA borrowers to pay reasonable and customary closing costs and fees that are necessary to close the mortgage!
Non-Allowable Closing Costs
Tax service fee not allowed (regulatory-can’t be eliminated without legislation)
Federal, State and local regulations and predatory lending rules apply. Check your local and state guidelines, they could be more restrictive.
Additional Closing Cost Guidelines
Commitment (lock-in) fees require a written guarantee of the interest rate and discount points (if any) for at least 15 days.
Third-party fees may not be “marked up”.
Origination fee limited to 1%.
Except for prepaid expenses and discount points, closing costs and fees may also be used
to meet the homebuyer’s minimum investment requirement.
22 FAMC FHA Training for Loan Originators – 10/08
Calculating Total Loan Amounts (for purchase transactions) Base Loan Amount: May not exceed the county's "Statutory" loan limit. (see https://entp.hud.gov/idapp/html/hicostlook.cfm ) Total Loan Amount: May exceed the county's loan limit, but only by the amount of financed Up-Front MIP (UFMIP). 23 FAMC FHA Training for Loan Originators – 10/08
Up-Front /Annual Mortgage Insurance Premiums
FHA has published Mortgagee Letter 2008-22 which implements a one-year moratorium on FHA “Risk-Based” Mortgage Insurance Premiums, as required by the Housing and Economic Recovery Act of 2008. This legislation prohibits FHA from basing MI Premiums on the borrower’s credit score.
The revised premium structure is as follows, and is effective for FHA case numbers assigned on or after October 1, 2008.
Low Closing Costs States AV/SP equal or less than $50,000 AV/SP greater than $50,000 #1 X 98.75 #2 X 97.65% ______________________ ____________________ Maximum Base Loan* Maximum Base Loan* AV/SP greater than $125,000 #3 X 97.15 __________________________ Maximum Base Loan* High Cost Closing States AV/SP equals or less than $50,000 AV/SP greater than $50,000 #4 X 98,75% #5 X 97.75% _____________________________ ________________________ Maximum Base Loan * Maximum Base Loan * * Subject to required minimum 3% cash investment TIP: Access FHA’s “Maximum Mortgage and Cash Needed Calculator” http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/mortca.xls (for purchases only) 25 FAMC FHA Training for Loan Originators – 10/08
Step #2 Select UFMIP Factor and Multiply by Base Loan Amount Total Loan Amount Calculation (cont’d) 26 FAMC FHA Training for Loan Originators – 10/08 30-Year Loan 15-Year Loan Base Loan Amount X 1.75 = Upfront MIP + Base Loan Amount = Total Loan Amount Base Loan Amount X 1.75 = Upfront MIP + Base Loan Amount = Total Loan Amount
The three items that make up a buyer’s Cash-to-Close are:
+ Closing Costs and Fees Paid by the Borrower
+ Prepaid Closing Costs
= Total Cash-To-Close
(For the purpose of verifying sufficient cash to close, Cash Reserves ( after closing) are not required for 1-2 unit properties.)
Earlier, you learned how to calculate FHA Down Payments.
You also learned that, subject to minimal limitations, HUD now allows borrowers to pay all “reasonable and customary” Closing Costs.
The last item to be included in the buyer's Cash-to-Close is Prepaid Closing Costs:
Estimating Prepaid Closing Costs 28 FAMC FHA Training for Loan Originators – 10/08
Calculating Exercise for purchase transaction
The following exercises are designed to help you work through the new FHA Loan Underwriting and Transmittal Summary (HUD form 92900-LT). This form will replace the current Mortgage Credit Analysis Worksheet (MCAW) and must be utilized after October 1, 2008. You can obtain a copy of this new form on the Franklin American Mortgage Company website and click on the Forms tab.
Certain types of loan transactions affect the amount of financing available and the calculation of the maximum mortgage amount.
These include: Identity-of-Interest, Non-Occupying Co-Borrowers, and Additional FHA Loans.
Identity-of-Interest is defined by HUD as a sales transaction between parties with a family or business relationship. These transactions are usually restricted to a maximum loan-to-value of 85%. However, maximum financing is permissible under the following circumstances:
A family member purchasing another family member's home as a principal residence.
An employee of a builder purchasing one of the builder's new homes as a principal residence.
A current tenant purchasing the property that he or she has rented for at least six (6) months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy.
A corporation transferring an employee out of an area, purchasing the transferred employee's home and reselling to another employee.
NON-OCCUPYING CO-BORROWER TRANSACTIONS
When there are two or more borrowers, but one will not occupy the property as a principal residence, the maximum mortgage is generally limited to 75% LTV .
However, maximum financing is available for borrowers related by blood, marriage or law (spouses, parent-child, siblings, stepchildren, aunts-uncles/nieces-nephews, etc.), or for unrelated individuals that can document evidence of a family-type, long standing and substantial relationship not arising out of the loan transaction.
Limited to 75% LTV if a parent is selling to a child and acting as a non-occupying co-borrower
Limited to a one-unit property if LTV exceeds 75% (regardless of a qualifying relationship)
No individual ratio requirements for the occupying-borrower
This provision must not be misused by borrowers to develop a portfolio of rental properties.
34 FAMC FHA Training for Loan Originators – 10/08
Restrictions to Maximum FHA Loan Amounts (cont’d)
ADDITIONAL FHA LOAN TRANSACTIONS
A borrower owning a principal residence with a HUD-insured mortgage that he or she intends to keep may not purchase another principal residence with HUD mortgage insurance unless:
The borrower is relocating (and re-establishing residency) to another area not within reasonable commuting distance of the current principal residence. A good rule of thumb is more than 50 miles.
The borrower's number of dependents has increased to the point where the present home no longer meets the family's needs. In such cases, the following conditions apply:
The borrower must provide satisfactory evidence of the increase in dependents and how the property no longer meets the family's needs, and
The borrower must pay down the outstanding mortgage balance on the present property to 75% or less LTV ratio (excluding any financed MIP). The original HUD appraisal may be used to determine compliance with the 75% LTV requirement, or HUD will accept any other residential appraisal (conventional, HUD or VA).
The borrower has vacated a jointly-owned property and the residence will remain occupied by a co-mortgagor. Acceptable situation is a divorce scenario.
The borrower will be a non-occupying co-borrower on property being purchased as a principal residence by other family members (as previously referenced).
In all other cases, the purchasing borrower must either pay off the FHA-insured mortgage on the previous residence or terminate ownership of the property.
35 FAMC FHA Training for Loan Originators – 10/08
1. Installment Accounts: Generally, count only debts with 10 or more payments remaining. However, debts with less than 10 payments remaining must be included if they are significant and would affect the borrower’s repayment ability, especially if the borrower has limited reserves after closing.
2. Revolving Accounts: Use payment shown on the credit report. If no payment is shown, use the greater of $10.00 or 5% of the unpaid balance. A lower payment may be used if verified by the most recent statement.
3. Alimony Payments: Because of the tax consequences of alimony payments, the lender may choose to treat the monthly alimony obligation as a reduction to the borrower's gross income rather than as a monthly debt.
4. Contingent Liabilities: When a borrower has sold a property within the last twelve months, and allowed the loan to be assumed without obtaining a release of liability, contingent liability must be considered unless:
Mortgage payment history shows no lates during the past 12 months; or,
An appraisal or closing statement indicates a 75% LTV for the assumed loan.
5. Co-signed Obligations: Debt must be counted unless documentation indicates that the primary obligor has been making the payments on a regular basis, and does not have a history of delinquent payments on the loan over the past 12 months.
6. Obligations Not to be Considered: Child care expenses, commuting costs, union dues, open accounts with zero balances, any voluntary deductions, or a loan against a 401k plan.
36 FAMC FHA Training for Loan Originators – 10/08
“ Effective” Gross Income
“ Effective Gross Income”: Income, that once documented according to FHA underwriting guidelines, may be used in the calculation of FHA's qualifying ratios.
However, an income stream that is not considered as "effective" may still assist the borrower in qualifying as compensating income.
POTENTIAL INCOME STREAMS / GUIDELINES
Verify 2-year work history.
Written explanation for job-gaps, job-hopping, etc.
FHA allows the use of part-time, overtime, and bonus incomes, with a 2 year history.
2. SELF EMPLOYMENT/COMMISSION
Use average of last 24-months of net income, documented by tax returns and profit & loss statement. Income on the profit & loss will NOT be considered effective income when it is not consistent with income shown on previous year’s tax returns.
Self Employment = 25% or more ownership interest
3. RECENTLY ENTERED THE WORKFORCE
- College Transcripts / Military Discharge Papers may be used to complete the 2-year work history.
4. RENTAL INCOME
For "Seasoned" rentals, use Schedule E of Federal 1040's.
For newer rentals, use 80% to 90% of gross rental, based upon the vacancy allowance for the state in which the property is located: 10% vacancy allowance: AZ, AK, CA, CO, IA, ID, MN, MT, NV, OR, WA, WI 15% vacancy allowance: AL, CT, DE, Dist of Columbia, FL, GA, IL, IN, KS, KY, LA, MA, ME, MD, MI, MO, MS, NC, NE, ND, NH, NJ, NM, NY, OH, PA, RI, SC, SD, TN, TX, VA, VT, WV, WY, 20% vacancy allowance: AR, OK, UT
"Boarder Income" may be considered as Effective Income if the boarder is related to borrower and the income is reported on the borrower's tax return!
Verify current vacancy allowances: http://www.hud.gov/offices/hsg/sfh/ref/sfh2-21u.cfm
37 FAMC FHA Training for Loan Originators – 10/08
“ Effective” Gross Income (cont’d)
Non-occupying Co-borrowers are acceptable for FHA loans.
FHA allows the lumping of all income and debts, and then calculating the ratios.
See page 15 for further information.
6. NON-PURCHASING SPOUSES
Non-purchasing spouses (NPS) are allowed by HUD. The NPS will not be considered a borrower and need not sign the loan application, even if state law requires the NPS to either sign the security instrument or documentation that he/she is relinquishing all rights to the property.
The NPS may not take title to the property.
A credit report (RMCR or TRMCR) is required on the NPS, and his/her debts must be considered in the qualifying ratios if the borrower or the property is located in a community property state (see below). A negative credit history on the NPS is not to be considered a reason for credit denial. (see 4155.1 Rev-5, Par 2-2 D.)
Community Property States : Arizonia, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin
38 FAMC FHA Training for Loan Originators – 10/08
FHA Qualifying Ratios
For manually underwritten loans
"Top Ratio" 31% guideline
"TOTAL MORTGAGE PAYMENT"
divided by “GROSS EFFECTIVE INCOME”
"Bottom Ratio” 43% guideline
"TOTAL MONTHLY PAYMENTS“
divided by “GROSS EFFECTIVE INCOME”
39 FAMC FHA Training for Loan Originators – 10/08
Gift Funds Documentation
Eligible: Borrower’s relative, spouse, domestic partner, or close friend with a clearly defined and documented interest in the borrower. Borrower’s employer or labor union. A charitable organization that does not replenish available gift funds with seller contributions. A governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers. ( 4155.1 REV-5 Par 2-10-C)
Ineligible: Any person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. ( 4155.1 REV-5 Par 2-10-C)
Gift Deposited Prior to Closing:
If sufficient funds to close (including the gift funds) are not already verified on the bank statement or VOD submitted with the initial underwriting file, a gift letter and full documentation of the gift transfer is required, including:
evidence of donor’s account ownership and ability to give the gift,
copy of donor’s cancelled check or bank-validated withdrawal slip, and
evidence of deposit into borrower’s account.
Donor’s cash-on-hand is not an acceptable source.
Gift letter must contain donor’s name, address, phone, and relationship to borrower; match the exact amount of gift, state that gift is not repayable, and be signed by donor and borrower.
Gifts deposited prior to closing and documented in this manner may be included in the borrower’s account balance when submitting to TOTAL, but should be identified separately as gift funds on the MCAW and 1003.
Excess gift funds may be used as cash reserves (1- and 2-unit properties only). ( ML 04-44 , 4155.1 REV-5 Par 1-8-C).
If sufficient funds to close (including the gift funds) are already verified in the borrower’s account at the time of initial underwriting submission , the gift details may be listed on the loan application in lieu of a gift letter. The gift details will serve to document the increased account balance, and further documentation of transfer from donor to borrower’s account is not required. ( TOTAL Scorecard User Guide Ch 2 “Asset Information”)
40 FAMC FHA Training for Loan Originators – 10/08
Gift Funds Documentation (cont’d)
AUS-underwritten loans (cont’d)
Gift received at closing:
Full gift letter required.
Gift must be submitted to TOTAL as “gift funds” and not included in borrower’s account balance.
Excess gift funds may NOT be used as cash reserves.
By check: Copy of cashier’s check or other bank check purchased by donor, and evidence that funds used to purchase check were withdrawn from donor’s own account. Donor’s personal check or cash-on-hand is not acceptable. NOTE: To avoid funding delays, copies of these documents must be provided and cleared prior to docs.
By wire: Copy of incoming wire evidencing deposit into settlement agent’s account on or before the day of closing.
Full gift letter always required: Must contain donor’s name, address, phone, and relationship to borrower; match the exact amount of gift, state that gift is not repayable, and be signed by donor and borrower.
Excess gift funds may NOT be used as reserves.
Gift received prior to closing: Document as for AUS-underwritten loans, “Gift not on deposit”.
Gift received at closing: Document as for AUS-underwritten loans, “Gift received at closing”.
41 FAMC FHA Training for Loan Originators – 10/08
The FHA TOTAL Scorecard engine, used in conjunction with both DO and LP to evaluate FHA loan applications and issue underwriting recommendations, has proven to be a reliable indicator of borrower creditworthiness. To take advantage of the highest possible credit and documentation relief and to achieve the best possible results for your borrowers, FAMC recommends that all applicable FHA loans, except streamline refinance transactions, be AUS-evaluated prior to submission to FAMC for validation.
FAMC requires the following FHA loans to be submitted through DO or LP:
Credit indicator score cannot be <580 regardless of AUS Findings or
Ratios > 31/43, or
Mortgage history shows 2 x 30 in the last 12 months, or
LTV is > 85% on a cash-out refinance .
30-year FHA loans which receive an AUS-Approve recommendation and are successfully validated by FAMC, will be approved if they meet these FHA requirements:
the data entered into the AUS meets FHA guidelines and is true, complete, and accurate, and;
the loan does not contain characteristics that would require a downgrade to manual underwriting (see below), and;
the entire loan package meets all other FHA requirements except for those specifically not required because the loan was evaluated by an AUS, and;
there is no indication of fraudulent loan documentation.
Any loan with a term of less than 30 years will be accepted with an AUS approval as long as it also receives a 30 year term AUS approval, which will be run internally by FAMC.
AUS approvals on cash-out refinance transactions exceeding 85% LTV are void if the mortgage history does not meet the 0x30 requirement outlined in Mortgagee Letter 2005-43.
42 FAMC FHA Training for Loan Originators – 10/08
Credit Policies (cont’d)
HUD requires the underwriter to manually downgrade an AUS-Accept recommendation to “Refer” and perform a complete manual underwrite based on standard FHA guidelines if any of the following conditions exist:
Delinquent Federal Debt: as revealed by public records, credit information or CAIVRS, including
Federally-guaranteed student loans
FHA and VA loans
Small Business Administration (SBA) loans
Liens placed against borrower’s property for a debt owed to the U. S. Government.
Foreclosure: Completed within three years of loan application.
Bankruptcy: Chapter 7 or 13 discharged within two years of loan application.
Disputed accounts: If the credit report reveals that borrower is disputing any credit accounts or public records.
Suspended and Debarred Individuals: If any party to the loan is included on the LDP or GSA list, including
Listing or selling Real Estate Agent
43 FAMC FHA Training for Loan Originators – 10/08
Manual Overrides of AUS-Refer
Loans receiving an AUS-Refer must receive a loan transmittal or second review and signature. If manually approved, the Underwriting Manager must note with detailed reasons for approving the loan, including compensating factors as discussed below.
Depending upon the overall risk profile of the file, these compensating factors, which will not have already been considered by the AUS, may be given consideration for a manual override approval of an AUS-Refer:
Documented erroneous credit information: Supported by a new credit report that has the erroneous information removed.
Additional income not used: Borrower receives documented income that could not be used for qualifying but directly enhances the borrower’s ability to repay the mortgage.
Substantial non-taxable income: A substantial amount of borrower’s income is non-taxable (provided income was not already “grossed-up”).
Trailing income: Home is being purchased due to relocation of primary wage earner and secondary wage-earner has an established work history, is expected to return to work, and reasonable prospects for employment in a similar occupation exist in the new area. Document the work history and the availability of similar employment in the new area.
Potential for increased earnings: As evidenced by documented job training or education in the borrower’s profession. This does not include projected routine salary increases.
Other compensating factors, as listed in HUD Handbook 4155.1 Rev-5, Par. 2-13, must be carefully considered by the Underwriting Manager for their applicability to the individual circumstances and whether or not they are relevant, appropriate and sufficient to overcome the AUS-Refer recommendation and the particular risk factors of the individual file.
Credit Policies (cont’d) 44 FAMC FHA Training for Loan Originators – 10/08
Credit Policies (cont’d)
Manual Underwriting Eligibility
FAMC allows the following FHA loans to be manually underwritten:
Credit indicator score is ≥ 580 and
Ratios are ≤ 31/43, and
Mortgage history shows ≤ 1 x 30 in the last 12 months, and
LTV is ≤ 85% on a cash-out refinance.
Streamline refinance transactions should be manually underwritten. If however, a streamline is submitted to AUS, documentation supporting the values that were entered (income, assets, etc.) must be provided with the file.
FHA Credit Policy
(consolidated from HUD Handbook 4155.1 Rev-5, Par. 2-3)
Major derogatory = collection, charge-off or judgment, regardless of age or medical origin . Must be carefully evaluated as an indicator of past credit performance when analyzing the borrower's creditworthiness. Requires explanation unless file is AUS-Accept.
Minor derogatory = regular trade line where the most recent late payment is more than 2 years old. Does not require explanation.
Recent credit problem = regular trade line where the most recent late payment is less than 2 years old. Requires explanation unless file is AUS-Accept.
Collections, charge-offs, and judgments of any age must be explained
All other lates < 2 years old are considered “recent” and must be explained
Collection accounts do not have to be paid off but must be considered
Judgments must be satisfied or have repayment arrangements that meet FHA requirements
Alternative credit cannot compensate for recent adverse credit (< 2 years old)
Bankruptcy and Foreclosure:
Chapter 13: 1-year into the pay-out period, satisfactory payments, and Court approval
Chapter 7: 2-year "waiting period" from discharge with 2 years clean credit
Foreclosure: 3 year "waiting period" from date foreclosure was completed with clean credit
45 FAMC FHA Training for Loan Originators – 10/08
Checking The Credit Alert System
For all FHA and VA loans except streamline refinance transactions, lenders must screen all borrowers using HUD's
An acceptable “clear” CAIVRS code begins with the letter “A”. A CAIVRS code beginning with any other letter indicates the borrower is presently delinquent or has had a claim paid within the previous three years on a Government-insured loan made on his/her behalf. These borrowers are generally not eligible for FHA financing.
Exceptions may be considered under the following situations:
Assumptions. If the Borrower sold the property, with or without a release of liability, to a mortgagor who subsequently defaulted and it can be established that the loan was not in default at the time of assumption, the borrower may be eligible.
Divorce. A borrower may be eligible if the divorcee 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 in default at the time of 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 the principal wage earner or serious long-term uninsured illness), the borrower may be eligible.
If the processor has reason to believe the CAIVRS message is erroneous or must establish the date of claim payment, the lender must contact the appropriate HOC for instructions or documentation to support the borrower's eligibility.
46 FAMC FHA Training for Loan Originators – 10/08
Using the Credit Alert Interactive Voice Response System - "CAIVRS"
Separate CAIVRS request: While logged-in to The FHA Connection , https://entp.hud.gov/clas/ (see pg 4), select Single Family FHA / Single Family Origination / Case Processing / CAIVRS Authorization. In the drop-down for SSN/TIN Indicator select SSN * . Enter the SSN for the first borrower. Continue until you have selected the SSN indicator and entered the SSN for each borrower on the loan. Enter your company’s 10-digit FHA Number in the Lender ID box. In the Agency drop-down box select HUD-FHA Single Family. SEND. If successfully completed, a CAIVRS authorization number beginning with an “A” will be returned and should be entered on the MCAW. Include a printout of the authorization screen in the loan file.
* The “TIN” (Tax Payer Identification Number) option does not apply. Each individual FHA borrower must provide evidence of his/her own valid SSN as issued by the Social Security Administration.
Checking The Credit Alert System (cont’d) 47 FAMC FHA Training for Loan Originators – 10/08
Case Number, Appraisal & Termite
Order the Case Number and Appraisal.
While logged-in to The FHA Connection (FHAC) , select Single Family FHA / Single Family Origination / Case Processing / Case Number Assignment / Establish a New Case.
Complete the Borrower/Address Validation screen. FHAC will standardize the address and compare the name, date of birth and Social Security Number (SSN) of each borrower against various databases. If no discrepancies are found, FHAC will bring up the Case Number Assignment Screen.
Your company’s 10-digit mortgagee number should be entered under Originator ID. FAMC’s 10-digit mortgagee number ( 7784800005 ) should be entered under Sponsor ID.
Complete all of the requested information.
Watch for the interactive tools included throughout the screen, as well as other helpful links located at the top and/or bottom of each screen.
Print and retain the Case Number Assignment screen for inclusion in the processed loan file.
Forward the completed Appraisal Report and the completely processed loan file to FAMC for underwriting review.
Validity Period of Appraisals: Existing: 6 months Proposed: 12 months
Existing vs. Proposed: http://www.hud.gov/offices/hsg/sfh/ref/sfhp1-8b.cfm
Termite Report Conditions
If “Active Infestation” is noted on termite report: Evidence of full treatment is required.
If “Conducive Conditions” are noted on termite report: Please call an FAMC closer or funder for required remedy.
214-496-1900 (TX Ops Center) or 615-778-1000 (TN Ops Center).
48 FAMC FHA Training for Loan Originators – 10/08
FHA New Construction
The first step in determining the correct documentation for FHA new construction cases is to determine the construction category. The category is determined by the stage of construction at the time the appraisal is performed, and noted under “General Description” in the “Improvements” section of the appraisal. Following are the:
FHA New Construction Categories
1. Existing Construction < 1 year old
Appraisal performed after the home is 100% complete but prior to one year following completion of construction.
Appraisal should be marked “as is” . Appraisal may be marked, “subject to required inspection” for termite states. Either is acceptable as long as the house was 100% complete at the time of appraisal and not subject to any further inspection other than evidence of termite treatment (NPCA 99a/b as required).
New construction exhibits are required when the house is less than 1 year old, even if previously occupied (HOC Reference Guide, Ch 1 Page 1-08b).
2. Under Construction
Appraisal performed after concrete or other permanent materials are placed but before home is 100% complete.
Marked “subject to completion per plans and specs” if home is < 90% complete. Appraiser must be provided with the plans and specs.
Marked “subject to repairs or alterations” if home is > 90% complete (only buyer preference item remain – floor coverings, appliances, landscaping, etc.). Appraisal may be performed without plans and specs (ML 2005-48)
3. Proposed Construction
Appraisal performed before concrete or other permanent materials are placed.
Initial pictures show the unimproved property.
Marked “subject to completion per plans and specs”. ( Appraiser must obtain plans and specs from the Builder. Per ML 2006-33, lenders no longer need copies of the plans and specs.)
49 FAMC FHA Training for Loan Originators – 10/08
Required New Construction Exhibits – UNDER CONSTRUCTION “ High Ratio”: LTV > 90% “Low Ratio”: LTV ≤ 90% 50 FAMC FHA Training for Loan Originators – 10/08 ONE OF THE FOLLOWING: ONE OF THE FOLLOWING: Building Permit (or equivalent) AND Certificate of Occupancy (or equivalent) by the local authority. BOTH ARE REQUIRED : If the local authority does not issue both a BP and CO, then a 10-yr Warranty must be provided. THIS OPTION IS NOT ACCEPTABLE FOR CONDOS. Certificate of Occupancy (or local equivalent) THIS OPTION IS NOT ACCEPTABLE FOR CONDOS. 10-yr Warranty Acceptance Letter AND Certificate of Occupancy (or local equivalent) THIS OPTION IS NOT ACCEPTABLE FOR CONDOS. 10-yr Warranty Acceptance Letter AND Final Inspection by HUD Fee Inspector (appraiser may not perform the final inspection) Final Inspection by HUD Fee Inspector PLUS ALL OF THE FOLLOWING: PLUS ALL OF THE FOLLOWING: In Termite States : NPCA-99a (always) Add NPCA-99b if soil treatment method is used In Termite States : NPCA-99a (always) Add NPCA-99b if soil treatment method is used Health Authority Approval on well and septic, if applicable Health Authority Approval on well and septic, if applicable Builders Certification (HUD-92541) signed & dated up to 30 days prior to appraisal date Builders Certification (HUD-92541) signed & dated up to 30 days prior to appraisal date Builder’s 1-Year Warranty (HUD-92544) “Warranty of Completion of Construction”
Required New Construction Exhibits – PROPOSED CONSTRUCTION “ High Ratio”: LTV > 90% “Low Ratio”: LTV ≤ 90% 51 FAMC FHA Training for Loan Originators – 10/08 ONE OF THE FOLLOWING: ONE OF THE FOLLOWING: Building Permit (or equivalent) AND Certificate of Occupancy (or equivalent) by the local authority. BOTH ARE REQUIRED : If the local authority does not issue both a BP and CO, then a 10-yr Warranty must be provided. THIS OPTION IS NOT ACCEPTABLE FOR CONDOS. Certificate of Occupancy (or local equivalent) THIS OPTION IS NOT ACCEPTABLE FOR CONDOS. 10-yr Warranty Acceptance Letter AND Certificate of Occupancy (or local equivalent) THIS OPTION IS NOT ACCEPTABLE FOR CONDOS. 10-yr Warranty Acceptance Letter AND Final Inspection by HUD Fee Inspector Final Inspection by HUD Fee Inspector 3 Inspections by HUD Fee Inspector (footing/ framing/final). 1 st & 2 nd inspections must be cleared by FAMC prior to docs. Only the 3 rd (final) inspection may be cleared at funding . APPRAISAL MUST BE COMPLETED PRIOR TO START OF CONSTRUCTION. If construction was underway at the time of appraisal, LTV is limited to 90% unless the builder provides a 10-yr warranty or Early Start Letter. PLUS ALL OF THE FOLLOWING: PLUS ALL OF THE FOLLOWING: Termite States : NPCA-99a (always) Add NPCA-99b if soil treatment method is used Termite States : NPCA-99a (always) Add NPCA-99b if soil treatment method is used Health Authority Approval on well and septic, if applicable Health Authority Approval on well and septic, if applicable Builders Certification (HUD-92541) signed & dated up to 30 days prior to appraisal date Builders Certification (HUD-92541) signed & dated up to 30 days prior to appraisal date Builder’s 1-Year Warranty (HUD-92544) “Warranty of Completion of Construction”
For LTV > 90%, these properties must have a 10-year warranty or be processed as proposed construction:
All condominiums (BP/CO option not acceptable for condos)
All new construction in areas that do not provide both a BP and CO or acceptable equivalents
Areas with no Construction Authority (does not issue Building Permit and Certificate of Occupancy)
In areas where a local construction authority does not monitor construction by issuing both a Building Permit and Certificate of Occupancy (or equivalent), LTV is limited to 90% unless the builder provides a 10-year warranty, or unless 3 inspections (footing, framing and final) are performed by a HUD Fee Inspector and supplemented by one of the following, issued by a DE Underwriter prior to the start of construction :
Form HUD-92800.5b “Conditional Commitment/DE Statement of Appraised Value” or
Early Start Letter (required text per HUD Handbook 4145.1 REV-2, Appendix 6).
An FAMC DE Underwriter can issue and date the “Conditional Commitment” using the date of the appraisal, provided the appraisal submitted with the underwriting file was performed and dated prior to the start of construction (before concrete or other permanent materials were placed).
Properties Under Construction
If construction was underway at the time of the appraisal, LTV is limited to 90% unless a 10-year Warranty is provided or unless builder can supply an Early Start Letter issued by a DE Underwriter prior to the start of construction. FAMC will not “back-date” Early Start Letters to accommodate unapproved, “premature” construction (see HUD Handbook 4145.1 Par 4-5).
FHA New Construction (cont’d) 52 FAMC FHA Training for Loan Originators – 10/08
Obtaining and Verifying the Documentation
FAMC finds that problems often arise when examination of the FHA new construction documentation is allowed to take place at funding. This is because there is a great deal of misconception and misunderstanding about the requirements, especially in areas where there is no local construction authority that issues both Building Permits (BP) and Certificates of Occupancy (CO) .
To protect our brokers from the embarrassment of a failed closing or delayed funding due to inadequate documentation, FAMC generally requires that all new construction exhibits and inspections be provided, and cleared by the FAMC Underwriter prior to release of the closing package. A few exceptions to that rule are listed below.
New Construction Exhibits Allowable at Closing
Builder’s 1-Year Warranty (HUD-92544) “Warranty of Completion of Construction”
Final Inspection by HUD Fee Inspector – when one of the following has been previously cleared by the Underwriter :
- 10-yr Warranty Acceptance Letter, or
- 2 Inspections by HUD Fee Inspector (footing and framing) plus the “Proposed” Appraisal or Early Start Letter.
FAMC’s “Certificate of Occupancy Approved List”
When using the CO option (not acceptable for condos), the CO must be submitted PRIOR TO DOCS unless FAMC has previously verified that both BPs and COs (or acceptable equivalents) are issued by the city or county having construction authority over the property’s location. For these verified locations, the BP must be supplied prior to release of the closing package, but the condition for the CO can be moved to funding. The “Certificate of Occupancy Approved List” is located on the FAMC Website under FORMS / FHA.
FHA New Construction (cont’d) 53 FAMC FHA Training for Loan Originators – 10/08
4150.2 Appendix D (published as an attachment to ML 2005-34)