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INTRODUCTION TO THE FHA LOAN PROGRAM
Introduction to FHA 2
The Federal Housing Administration (FHA) is a division of the U.S. Department of Housing and Urban Development (HUD).
The goals of this division are to insure FHA mortgage loans (also known as government mortgages), expand homeownership opportunities, increase minority homeownership, make the home buying process less complicated and expensive, and assist existing homeowners in avoiding foreclosure.
FHA-insured mortgages can be used to purchase homes and to refinance existing mortgages.
FHA loans are designed for low to moderate income borrowers who are unable to make a large downpayment.
The most popular FHA loan has a minimum cash investment requirement of 3.5 percent but permits 100 percent of the money needed at closing to be a gift from an acceptable source or an acceptable secondary financing source.
FHA Features and Benefits
• Lower down payment at competitive rates
• Total cash investment may be as low as 3.5%
• Loan(s) to 100% of total investment with gift from an eligible source
• Seller may pay pre-paids & closing costs up to 6% (or may be paid by broker through "premium pricing")
• Cash reserves as required by AUS (except for 3 & 4 units, then 3-month PITI needed or as required per
Manual underwriting requirements)
• Minimum credit score of 620 (Streamlines require 640)
• Higher and flexible qualifying ratios
• Non-occupying co-borrowers allowed on purchase and rate/term refinance loans
• Upfront MIP may be financed
• Borrower may request "Streamline Refinance" (to reduce rate and payment)
• FHA Loans are assumable (and require qualifying)
• No pre-payment penalties
FHA PROGRAM BENEFITS
Introduction to FHA 4
Glossary of 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).
GLOSSARY OF FHA TERMS
Introduction to FHA 5
Glossary of FHA Terms, Continued
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.
GLOSSARY OF FHA TERMS
Introduction to FHA 6
Required Disclosures
In addition to the required RESPA disclosures FHA requires the following additional disclosures:
FAMC Submission Form
• Can be found on the FAMC Website
• Required at submission
Lead Based Paint Disclosure
• Executed at application
Real Estate Certification and Amendatory Clause
• Executed on or before real estate contract date
• See HUD Handbook
Initial HUD/VA Addendum to Uniform Residential Loan Application - HUD 92900-A
• Executed at application
• Pages 1 and 2 signed at initial application
• Pages 1 through 4 signed at closing
REQUIRED DISCLOSURES
Introduction to FHA 7
Required Disclosures, Continued
Important Notice to Homebuyers – HUD 92900-B
• Executed at application
Informed Consumer Choice Disclosure Notice
• Executed at application
FHA ARM disclosure (if applicable)
• Provide to borrower within 3 days of application.
• 5/1 ARM disclosures can be found on our website at: www.franklinamerican.com
GET FHA FORMS HERE:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/forms
REQUIRED DISCLOSURES
Introduction to FHA 8
Broker/EMB FHA Purchase & Full Credit QualifyingSimple Refinance Submission Form
REQUIRED DISCLOSURES
Introduction to FHA 9
Lead-Based Paint DisclosurePurchases only – for properties built prior to 1978
REQUIRED DISCLOSURES
Introduction to FHA 10
Real Estate Certification and Amendatory Clause –Language from the FHA Handbook
REQUIRED DISCLOSURES
Introduction to FHA 11
REQUIRED DISCLOSURES
Introduction to FHA 12
How to complete the HUD-92900-A addendum for Sponsored Originator Transactions
REQUIRED DISCLOSURES
Introduction to FHA 14
How to complete the HUD-92900-A addendum for Principal Agent Transactions
CAIVRS All borrowers must be screened using CAIVRS (Credit Alert Interactive Voice Response System), except for
Streamline refinances. CAIVRS is a Federal government-wide repository of information on those individuals
with delinquent or defaulted federal debt, or who have had an FHA or VA insurance claim paid on a previous
mortgage loan.
Delinquent Federal Debts
Delinquent Federal Non-Tax Debt
Borrowers are ineligible for an FHA insured mortgage with delinquent federal non-tax debt, including
deficiency judgements and other debt associated with past FHA-insured mortgages.
• Any debt that is confirmed as valid and in delinquent status must be resolved in order for a borrower to
become eligible
• Documentation must be included in the file from the creditor agency to support the verification and
resolution of the debt. A clear CAIVRS report is required for all debt reported through CAIVRS.
If a borrower is currently delinquent on an FHA-insured mortgage, they are ineligible for a new FHA-insured
mortgage unless the delinquency is resolved.
CAIVRS AND DELINQUENT DEBT
Introduction to FHA 18
Delinquent Federal Tax Debt
Borrowers with delinquent federal tax debt and no valid repayment agreement in place are ineligible.
Tax liens may remain unpaid if:
• The Borrower has entered into a valid repayment agreement with the federal agency owned to make
regular payments, AND
• The Borrower has made at least three of the scheduled payments on time. The borrower cannot prepay
scheduled payments in order to meet the required minimum of three months of payments.
• Verification that the Borrower does not have a lien against their property for a debt owed to the federal
government. If a lien is in place, the lien holder must subordinate the tax lien to the new FHA-insured
mortgage.
• Documentation from the IRS evidencing the repayment agreement and verification of payments made
must be included in the file.
• The payment amount must be included in the DTI ratio
CAIVRS AND DELINQUENT DEBT
Introduction to FHA 19
LDP/SAM
Suspended and Debarred Individuals
The following entities must be checked against HUD's Limited Denial of Participation (LDP) list at
http://portal.hud.gov/hudportal/HUD?src=/topics/limited_denials_of_participation or the System for Award
Management (SAM) Excluded Party List https://www.sam.gov/. Any entity noted on either of the LDP or SAM
lists will cause the loan to be ineligible.
• Borrower(s)
• Seller(s)
• Loan Officer
• Loan Processor
• Loan Underwriter
• Listing Agent
• Selling Agent
• Appraiser
• Settlement Agent
NOTE: FAMC is responsible for checking the LDP/SAM list on all entities.
LDP/SAM
Introduction to FHA 20
Requesting a Case Number
When can I request a Case Number?
The loan must first be locked or registered with FAMC and a copy of the URLA/1003 must be provided.
Remember to also account for any Compliance – related waiting periods before ordering the appraisal.
How do I request a Case Number?
The FHA Case Number Request Form for SOs must be fully completed and sent to FAMC via email.
Where do I send my Case Number request?
A specific FHA Case Number Request email address has been created for each Operations Center. Please
submit your request to the corresponding office for that loan file.
California Operations Center: [email protected]
Massachusetts Operations Center: [email protected]
Tennessee Operations Center: [email protected]
Texas Operations Center: [email protected]
Pennsylvania Operations Center: [email protected]
CASE NUMBER REQUEST
Introduction to FHA 21
Requesting a Case Number, Continued
Who is eligible for this service?
We will provide this service to any of our business partners that are Sponsored Originators.
When should I expect to receive my Case Number?
If a fully completed request form is received by 4:00pm local time, it will be processed the same day. However
it is very important to note that FAMC will not provide the Case Number Assignment until the following
business day, as the request must first pass FHA’s overnight validation process and be returned clear of any
warning messages.
Requests received after 4:00 PM local time will be treated as next day submissions.
Incomplete request forms will be processed once all necessary information is received, according to the
timeframe stated above.
How will the Case Number be returned to me?
FAMC will email the Case Number Assignment to the email address provided on the request form.
REQUESTING A CASE NUMBER
Introduction to FHA 22
Automated Underwriting
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 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. All FHA loans must
be scored through TOTAL with the exception of Streamline Refinance Transactions.
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.
HUD Home Page: http://www.hud.gov/
Lenders Page: http://www.hud.gov/groups/lenders.cfm
Mortgagee Letters: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/
RESOURCES AND TECHNOLOGY
Introduction to FHA 23
Resources and Technology
The best way to stay up to date with FHA requirements is to sign up for HUD’s Housing E-mail list:
http://portal.hud.gov/hudportal/HUD?src=/subscribe
FHA Resource Center: Search online knowledge base: http://portal.hud.gov/hudportal/HUD?src=/library
HUD Handbook 4000.1 is a consolidated, consistent, and comprehensive single source for FHA Single Family
Housing Policy.
Handbook is accessible via HUD Clips:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh
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
RESOURCES AND TECHNOLOGY
Introduction to FHA 24
Helpful Links
Please refer to the Franklin American Mortgage website under Resources for more
information.
http://www.hud.gov/ – HUD web address
http://portal.hud.gov/hudportal/HUD?src=/FHAFAQ - FHA Frequently Asked Questions Site
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips– HUD clips where to
find handbooks, Mortgagee letters, and other processing and underwriting guidance
https://www5.hud.gov/Ecpcis/main/ECPCIS_List – HUD LDP list (must be checked for all parties to
transaction including real estate agents, buyer, seller, appraiser, etc.)
https://entp.hud.gov/idapp/html/condlook.cfm – FHA approved condominium search (All condominiums
must be approved and listed on FHA’s list of approved condos)
https://entp.hud.gov/idapp/html/hicostlook.cfm – FHA maximum mortgage limits (check maximum
mortgage limit for are in which you are lending. Limits are set based on state and county location)
HELPFUL FHA LINKS
Introduction to FHA 25
http://www.hud.gov/localoffices.cfm – List of HUD field offices
http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm – Additional RESPA information
(completing HUD settlement sheet/CD and addendum, Affiliated Business Arrangement Format etc.)
http://portal.hud.gov/hudportal/documents/huddoc?id=92900-lt.pdf
FORMS: FHA Loan Underwriting and Transmittal Summary
http://portal.hud.gov/hudportal/documents/huddoc?id=92800-5b.pdf
FORMS: Conditional Commitment.
Resources to help struggling FHA homeowners learn their options to avoid foreclosure andscams:
• National Servicing Center:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc
• HUD Approved Counseling Agencies: http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
• Customer-focused websites: http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure
HELPFUL FHA LINKS
Introduction to FHA 26
Helpful Links, Continued
Sections of the Act
FHA Loan Programs come under the jurisdiction of HUD (the Department of Housing and Urban
Development). HUD has numerous loan programs known as "Titles".
• 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.
203 (b) Description – Regular
• Fixed Rate or ARM
• Can be used for 1-4 unit properties
• Used for condos and PUD’s
• Requires Upfront Mortgage Insurance Premiums (UFMIP) and Monthly Mortgage Insurance Premium
(MIP)
• Most widely used section
• Energy Efficient Mortgage (EEM)
203 (h) Disaster Program
FHA PROGRAMS (“SECTIONS”)
Introduction to FHA 27
Closing Costs
HUD allows FHA borrowers to pay reasonable and customary closing costs and fees that are
necessary to close the mortgage.
Non-Allowable Closing Costs
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” (includes credit report, appraisal, title, etc.).
• Origination fee not limited to 1%.
CLOSING COSTS INFORMATION
Introduction to FHA 28
Calculating Cash-to Close
The three items that make up a buyer’s cash-to-close are:
Down payment
+ Closing Costs and Fees Paid by the Borrower
+ Pre-paid Closing Costs Paid by the Borrower
______________________________________
= Total Cash-To-Close
TOTAL: For the purpose of verifying sufficient cash-to-close, Cash Reserves (after closing) are not required
for 1-2 unit properties except as required by total scorecard.
Manual (except non-credit qualifying streamline refinance transactions)
• 1 – 2 Unit Properties: Verify and document one (1) month’s PITIA**
• 3 – 4 Unit Properties: Verify and document three (3) month’s PITIA**
** PITIA = Principal, Interest, Taxes, Insurance and other Assessments (special assessments , HOA dues, etc.).
CALCULATING CASH-TO-CLOSE
Introduction to FHA 29
Estimating Pre-Paid Closing Costs
ITEM ESTIMATE PRE-PAID
- Monthly UFMIP (can be financed): 0 months
- Hazard Insurance Premiums: 14 months
- Flood Insurance Premiums: (if applicable) 14 months
- Pre-paid Interest: 15 days
- Taxes: (varies with month and state)
ESTIMATING PRE-PAID CLOSING COSTS
Introduction to FHA 30
Upfront Mortgage Insurance PremiumAn Upfront Mortgage Insurance Premium (UFMIP) is required on all FHA mortgage programs offered by
Franklin American Mortgage Company. The maximum mortgage may never exceed the statutory limits,
except by the amount of financed UFMIP.
Monthly Mortgage Insurance PremiumFHA mortgages require an additional Mortgage Insurance Premium (MIP) that is collected monthly. The
percentage amount of the monthly premium varies by program, LTV, and loan term.
FHA Simple and Streamline submissions MUST include a copy of the “Refinance Authorization/Credit
Query” documenting the original endorsement date (see below).
UPFRONT /ANNUAL MORTGAGE INSURANCE
PREMIUMS
Introduction to FHA 31
Restrictions to Maximum FHA Amounts
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 Transactions
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. The home must be
the Seller’s primary residence.
• An employee of a builder purchasing one of the builder's new homes as a principal residence.
• A corporation transferring an employee out of an area, purchasing the transferred employee's home, and
reselling to another employee.
• 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.
RESTRICTIONS TO MAXIMUM
FHA LOAN AMOUNTS
Introduction to FHA 36
RESTRICTIONS TO MAXIMUM
FHA AMOUNTS
Introduction to FHA 37
Restrictions to Maximum FHA Loan Amounts, Continued
Restrictions to Maximum FHA Loan Amounts, Continued
Family Member is defined as follows:
Child, parent, or grandparent;
• Child is defined as son, stepson, daughter, or stepdaughter;
• Parent or grandparent includes a step-parent/grandparent or foster parent/grandparent
Spouse or domestic partner
Legally adopted son or daughter, including a child who is placed with the borrower by an authorized agency
for legal adoption
Foster child
Brother, stepbrother
Sister, stepsister
Uncle
Aunt
Son-in-law, daughter-in-law, farther-in-law, mother-in-law, brother-in-law, or sister-in-law of the borrower
Note: This applies to identity-of-interest and gift funds
RESTRICTIONS TO MAXIMUM
FHA AMOUNTS
Introduction to FHA 38
Restrictions to Maximum FHA Loan Amounts, Continued
Number of FHA Loans
A borrower is not permitted to have more than one (1) FHA loan outstanding at any given time, except under
situations as described below:
RESTRICTIONS TO MAXIMUM
FHA AMOUNTS
Introduction to FHA 39
Borrower EligibilityPlease refer to the FAMC Wholesale Lending Guide for complete Residency Guidelines at:Product Information & Guidelines>Underwriting Guidelines>FHA>Borrower Eligibility>Residency
Co-Borrowers:
A co-borrower is an individual applying for a mortgage loan other than the primary borrower, who occupies the
property, whose name appears on the mortgage note, and who is jointly and severally liable for the mortgage
debt.
Non-Occupant Co-Borrowers:
A non-occupant co-borrower is an individual applying for the loan that has an ownership interest in the property, but the
subject property is not their principal residence. Non-occupant co-borrowers take title to the property at
settlement, and must execute the note and security instruments as required by state law. Additionally, a non occupant co-
borrower may not be added to the loan transaction to meet qualifying requirements for a cash-out refinance.
Non-occupant co-borrowers are allowed provided they meet the guidelines in the Product Description and the following
criteria:
• Must have a principal residence in the U.S., unless exempted due to military service with overseas assignments,
or as a U.S. citizen living abroad.
• Must not have an interest in the financial transaction, including but not limited to a seller, broker, real estate
agent, or builder.
BORROWER ELIGIBILITY
Introduction to FHA 40
Borrower Eligibility, continuedNon-Occupant Co-Borrowers, Continued:
For non-occupying co-borrower transactions, the maximum LTV is limited to 75% LTV.
The LTV can be increased to a maximum of 96.5% if the borrowers are family members, provided the
transaction does not involve the following:
• A family member selling to a family member who will be a non-occupying co-borrower.
• A transaction on a two- to four- unit property; 1-Unit maximum allowed.
Non-Borrowing Spouse or Domestic Partner:
A non-borrowing spouse or domestic partner is a person who has an ownership interest in the security property.
Non-borrowing spouses or domestic partners are required to sign the security instrument and other
applicable documentation in order to perfect a lien in accordance with the governing state law. The option to
waive any property right by virtue of being the owner’s spouse or domestic partner must be in accordance
with applicable state law. CAIVRS is not required for Non-borrowing spouses or domestic partners in
community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and
Wisconsin).
The following guidelines apply for non-borrowing spouses or domestic partners in community property states:
• Debts of a non-borrowing spouse must be counted in the borrower’s qualifying ratios.
• The non-borrowing spouse or domestic partner’s credit performance and credit score is generally not a
consideration.
Note: There are additional requirements for a Non-Borrowing Spouse/Domestic Partner; please refer to the Lending
Guide for complete guidelines.
BORROWER ELIGIBILITY, CONTINUED
Introduction to FHA 41
Borrower's Cash Investment
The cash investment in the property must equal the difference between the amount of the insured mortgage,
excluding any upfront MIP, and the total cost to acquire the property including pre-paid expenses and closing
costs. All funds for the borrower's investment in the property must be verified and documented from
acceptable sources.
Minimum Downpayment Requirements
A downpayment is the difference between the sale price of real estate and the base loan amount which is
paid by the borrower.
On purchase transactions, a minimum downpayment of 3.5% (Minimum Required Investment (MRI), based
on the lesser of the sales price or appraised value is required. The MRI must be clearly documented and may
come from the following sources:
• From the borrower’s own funds:
• An acceptable gift source (refer to Gifts), or
• An acceptable secondary financing source, refer to Secondary/Subordinate Financing.
• When the borrower’s minimum required investment is provided by a source other than the borrower, clear
documentation must be obtained to support the permissible nature of those funds.
Closing costs paid by the borrower are not permitted to be used as a source of funds towards the 3.5%
minimum required investment (MRI).
Seller’s real estate tax proration to be received or credited at closing may not be considered at the time of
underwriting as the source of the applicant’s required funds to close.
FUNDS TO CLOSE
Introduction to FHA 42
FUNDS TO CLOSE
Introduction to FHA 43
Minimum Cash Reserve Requirements
Reserves are a predetermined amount of cash the borrower is required to have available after the downpayment, closing costs and pre-paid expenses are paid at loan closing. Reserve requirements are specific to property type and how the transaction was underwritten (TOTAL or Manual). This requirement assures that the borrower has resources available in case an unforeseen financial problem arises that might impede the borrower's ability to make monthly mortgage payments on time.
(TOTAL) Three (3) month’s PITIA is required on all 3-4 unit purchase and refinance transactions, regardless of AUS Findings.
Reserve Requirements (TOTAL)Document reserves per AUS. All assets submitted to AUS must be verified and documented.
Reserves do not include:• The amount of cash taken at closing in a cash-out transaction• Any incidental cash received at closing• Equity in another property• Borrowed funds from any source
Refer to FHA Product Descriptions for specific reserves requirements
FUNDS TO CLOSE
Introduction to FHA 44
Reserve Requirements (Manual) except non-credit qualifying streamline refinance transactions
•1-2 Unit Properties: Verify and document one (1) month’s PITIA
•3-4 Unit Properties: Verify and document three (3) month’s PITIA
•For manually underwritten transactions, these funds may NOT be considered as cash reserves:o Gift fundso Equity in another propertyo Borrowed funds from any sourceo The amount of cash taken at closing in a cash-out transaction.o Any incidental cash received at closing.
Refer to FHA Product Descriptions for specific reserve requirements
Reserves include cash and other liquid assets that borrowers can easily convert to cash by:•Drafting or withdrawing funds from an account,•Liquidating a cash-equivalent asset,•Redeeming vested funds, or•Obtaining a loan secured by assets from a fund administrator or an insurance company.
Unacceptable sources of reserves include:•Proceeds from a cash-out refinance•Equity in real property•Funds that can only be accessed upon retirement or job termination•Gift funds, except on 1 or 2-unit properties under limited circumstances (refer to Gifts)
Types of Assets
Assets are reviewed to determine if
the borrower(s) will meet the
requirements for closing costs,
downpayments, and reserves, refer
to Validation and Evaluation Large
Deposits and New Accounts.
When assets are used for the
downpayment or closing costs,
documentation must be provided
to evidence and verify the sale or
liquidation of the funds.
The borrower’s credit card may be
used to pay fees outside of closing;
refer to Wholesale Lending Guide
for full requirements.
TYPES OF ASSETS
Introduction to FHA 45
TYPES OF ASSETS
Introduction to FHA 46
Types of Assets, Continued
Checking and Saving Accounts • Funds from checking and saving accounts are permitted to be used for reserves, downpayment, and closing
costs.
• The funds must be verified with a VOD or a current bank statement. If a VOD is not obtained, a statement showing the previous month’s ending balance for the most recent month is required.
• All large deposits must be documented. Any single deposit in excess of 1% of the property sales price is considered a large deposit.
• If the borrower is not the sole owner of the account, all non-borrower parties on the account must verify in writing that the borrower has full access and use of the funds.
• For additional information on documentation guidelines, refer to Validation Requirements.
Sale of Personal Property
•Utilize the lesser of the estimated value or actual sales price when determining funds to close•Obtain all of the following:
• Satisfactory estimate of the value of the item (i.e. auto dealers, philatelic or numismatic association, written appraiser by a qualified appraiser with no financial interest in transaction),
• Copy of the bill of sale• Evidence of receipt• Deposit of proceeds
Note: Proof of sale is not required
TYPES OF ASSETS
Introduction to FHA 47
Types of Assets, continued
Earnest Money Deposit
Earnest Money Deposit (Sale contract deposits) for the purchase of the secured property is an acceptable source of funds for the down payment and closing costs. If the amount of the earnest money deposit exceeds 1% of the sales price or appears excessive based on borrower’s history of accumulating savings, the deposit amount and source of funds must be documented.
Verify earnest money with one of the following:• Copy of borrower’s cancelled check• Bank statement showing the earnest money check clearing• Documentation from the deposit-holder showing receipt and deposit of earnest money funds
Verify the source of funds with one of the following:• Bank statement showing no undocumented recent large deposits, or• VOD with an average balance sufficient to cover the amount of the earnest money deposit• If the source of the earnest money deposit was a gift, it must be verified and documented in
accordance with gift fund requirements
Source of Funds• Only one-month bank statement is required if previous months balance is reported on bank statement• Document funds for recently opened accounts and individual deposits of more than 1% of adjusted
value• Salary advance cannot be considered as an asset for funds to close
TYPES OF ASSETS
Introduction to FHA 48
Types of Assets, continuedGift Funds
Eligible Donors include: Borrower’s family member – reference Identity of Interest section for definition Close friend with a clearly defined and documented interest in the borrower Charitable origination that does not replenish available gift funds with seller contributions. Governmental agency or public entity that has a program providing homeownership assistance to low or
moderate income families; or first-time homebuyers Family members entitled to real estate commission from subject property provided they are a licensed real
estate agent Only family members may provide gift of equity The borrower’s employer or labor union
Ineligible donors include: Any person or entity with an interest in the sales of the property, including by not limited to:
The builder The seller (except gift of equity for relative) The developer The real estate agent The mortgage broker Other interested party to the transaction
Any gift or down payment assistance source where the provider is reimbursed either directly or indirectly by the seller or any interested third party, commonly known as “seller-funded” DPA.
TYPES OF ASSETS
Introduction to FHA 49
Types of Assets, continued
Gift Letter and Source of FundsThe following documentation is required regardless of when the gift is provided:
Gift Letter A gift letter is required to validate the gift from the donor. The gift letter must contain all of the following:
Indicate the donor’s name, address, phone number Indicate donor’s relationship to the borrower Match the exact amount of the gift A statement that no repayment is required Be signed by the donor and borrower
Source of Funds Regardless of when gift funds are made available to a borrower, the Underwriter must be able to
determine that the gift funds were not provided by an unacceptable source and were the donor’sown funds.
If the gift funds are being borrowed by the donor and documentation from the bank or othersavings account is not available, the donor must provide written evidence that the funds wereborrowed from an acceptable source and not from a party to the transaction
At the underwriter’s discretion, additional documentation may be required to substantiate that thegift was derived from an acceptable source by the donor including but not limited to a sourced andseasoned bank statement.
Donor’s cash-on-hand is not an acceptable source.
TYPES OF ASSETS
Introduction to FHA 50
Types of Assets, continuedGift Funds, cont.
Gifts as Cash Reserves (TOTAL)
Deposited Prior To Closing• Excess gift funds in the borrower’s account may be used as cash reserves (1- and 2-unit properties only) and
may be included in the borrower’s account balance when submitting to TOTAL. The gift should be identifiedseparately as gift funds on the FHA Loan Transmittal and 1003.
Provided At Closing• Excess funds from gifts remaining after loan closing may NOT be used as cash reserves. Gift must be
submitted to TOTAL as “gift funds” and not included in borrower’s account balance.
Gifts as Cash Reserves (Manually Underwritten Loans)• Gifts may not be counted as part of the borrower’s reserves under any circumstances for manually
underwritten transactions Refer Reserve Requirements-Manually underwritten loans.
Gifts of EquityOnly eligible family members may provide equity credit as a gift on a property being sold to other family members.
- Refer to Identity of Interest and Family Member definitionA gift letter signed and dated by the donor and the borrower that includes all the following is required:
- The donor’s name. address, and telephone number;- The donor’s relationship to the borrower- The amount of the equity gift; and- A statement that no repayment is required
TYPES OF ASSETS, CONTINUED
Introduction to FHA 51
Types of Assets, continued
Gift Transfer Documentation
LIABILITIES
Introduction to FHA 52
Please refer to the FAMC Wholesale Lending Guide for a complete list of Liabilities guidelines at:Underwriting Guidelines>FHA>General Underwriting Guidelines>Liabilities
Installment Accounts:Closed-end installment debts do not have to be included if: They will be paid off within 10 months; and The cumulative payments are less than or equal to 5% of the borrower’s gross monthly income. The borrower may not pay down the balance in order to meet the 10-month requirement
Student Loans• All student loans must be included in the borrower’s DTI, regardless of the status of the loan or payment type.
‒ Loans in deferment or forbearance may not be excluded.• One of the following two options are required for determining the qualifying payment.
• Utilize the greater of:‒ 1% of the outstanding loan balance, OR‒ The monthly payment reflected on the credit report.
• The actual payment only if it is fixed and fully amortized.‒ Written documentation from the student loan provider is required.
Example 1:Credit report reflects a $25,000 balance and a payment of $100.00.Written documentation indicates non-fixed plan.Qualifying payment must be $250.00.
Example 2:Credit report reflects a balance of $30,000 and a payment of zero.Written documentation indicates a fixed and fully amortized payment of $200.00 to begin in 18 months.Qualifying payment is $200.00.
LIABILITIES
Introduction to FHA 53
Liabilities, continued
Revolving Accounts: The monthly payment shown on the credit report must be used for qualifying. If the credit report does not include a monthly payment, 5% of the current outstanding balance must
be used for qualifying. Open accounts with zero balances are not included in debts.
Business Debt in Borrower’s Name Business debt reported on the Borrower’s personal credit report must be included in the DTI
calculation, unless it is can documented that the debt is being paid by the Borrower’s business, andthe debt was considered in the cash flow analysis of the Borrower’s business.
The debt is considered in the cash flow analysis when the Borrower’s business tax returns reflect abusiness expenses related to the obligation, equal to or greater than the amount of paymentsdocumented as paid out of company funds. When the Borrower’s business tax returns show aninterest expense related to the obligation, only the interest portion of the debt is considered in thecash flow analysis.
When a self-employed Borrower states debt appearing on their personal credit report is being paid bytheir business, documentation that the debt is paid out of company funds is required and
The debt must be considered in the Underwriter’s cash flow analysis of the Borrower’s business.
LIABILITIES
Introduction to FHA 54
Alimony and Child Support Since there are tax consequences of alimony payments, the monthly alimony obligation may
be treated as a reduction from the borrower's gross income when calculating qualifying ratios, rather than as a monthly obligation. If the borrower’s income was not reduced by the monthly amount of the monthly alimony obligation in the calculation of the borrower’s income, it must be included as a monthly obligation in the calculation of the borrower’s debt.
Child support must be treated as a recurring liability and the monthly obligation must be included in the borrower’s liabilities and debt.
Verification and documentation of the monthly obligation must be obtained. (Divorce decree, separation agreement, maintenance agreement or other legal order.)
Borrower’s paystubs covering no less than 28 consecutive days are required to verify whether the borrower is subject to any order of garnishment relating to the alimony, child support or maintenance.
Calculation is based on the greater of:- The amount shown on the most recent decree or agreement establishing the
borrower’s payment obligations; or- The monthly amount of the garnishment
LIABILITIES
Introduction to FHA 55
Contingent Liabilities:A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment. A monthly payment must be included in the calculation of the borrower’s monthly obligations:
Unless documentation is provided that there is no possibility that the debt holder will pursue debt collection against the borrower should default occur, OR
The other legally responsible obligated party has made the most recent 12 months of payments on time. Satisfactory evidence of these payments is required.
If the debt must be included, it must be calculated based upon the terms of the contingent liability agreement.
Co-signed Obligations:The monthly payment on a co-signed loan may be excluded from the long term debt if:
Satisfactory documentation is provided to evidence that the other party to the debt hasbeen making regular on-time payments during the most recent 12 months, AND
There is no history of delinquent payments on the loan.
LIABILITIES
Introduction to FHA 56
Mortgage Assumptions and/or Transfer through DivorceThe obligation is considered a contingent liability unless the following documentation requirementsare met: Divorce Agreement:
- A copy of the divorce decree requiring ex-spouse to make the payments, if applicable Assumption (not through a divorce agreement)
- A copy of the Loan Assumption Agreement- A copy of the deed showing title transfer out of the borrower’s name- Payment history on the mortgage showing the most recent 12 payments have been made
on time unless proof is provided that the borrower is legally released from liability throughthe assumption.
Authorized User AccountsAccounts in which the borrower is an authorized user must be included in the Borrower’s DTI: Unless documentation is provided to evidence that the primary account holder has made all
required payments on the account for the previous twelve (12) months. If less than three (3) payments have been required on the account in the previous 12 months,
then the payment must be included in the borrower’s DTI.
LIABILITIES
Introduction to FHA 57
Open Ended/30-Day AccountsA 30-Day account refers to a credit arrangement that requires the Borrower to pay the outstandingbalance in full on the account in full each month. In order for the debt to be excluded, the followingrequirements must be met:
It must be verified that the borrower paid the outstanding balance in full on the accounteach month for the past 12 months.
The credit report cannot reflect any late payments in the past 12 months. Sufficient funds must be verified to pay the balance in full (in addition to those funds
required for closing, including reserves)If the above requirements cannot be met, 5% of the outstanding balance must be included forqualifying.
Deferred Obligations Must be included in DTI regardless of length of deferment Required documentation: obtain written documentation to evidence of outstanding
balance, terms of the deferred liability, including evidence of anticipated monthly payment, if available
Installment debt calculation: include actual monthly payment or 5% of outstanding balance
LIABILITIES
Introduction to FHA 58
Non-Borrowing Spouse• Obtain SSA-89 for non-borrowing spouse and validate social security number (required if the subject
property is in a community property state or the non-borrowing spouse currently resides in a community property state.)
• If non-borrowing spouse does not have SSN• Verify lack of SSN with the Social Security Administration or one of their authorized service
providers • Where an SSN does not exist for a non-borrowing spouse, a manual credit report must be
provided and contain, at a minimum, the non-borrowing spouse’s full name, date of birth, and previous addresses for the last two years.
• Apply all of the following when a community property state applies:• Community property state applies when:
• Subject property is located in a community property state; or• Borrowers current residence is located in a community property state (Arizona, California,
Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin).• Obtain credit report for non-borrowing spouse
• Except non-credit qualifying streamline refinance• Debts must be included in borrower’s qualifying ratios, except for obligations excluded by state
law• Credit performance and credit score is generally not a consideration.
LIABILITIES
Introduction to FHA 59
Obligations not to be considered:
Medical collections Federal, state, and local taxes, if not delinquent and no payments are
required Automatic deductions from savings, when not associated with another type
of obligation Federal Insurance Contributions Act (FICA) and other retirement
contributions, such as 401(k) accounts Collateralized loans secured by depository accounts Utilities Child care Commuting costs Union dues Insurance, other than property insurance Open accounts with zero balances Voluntary deductions when not associated with another type of obligation
EMPLOYMENT AND INCOME
Introduction to FHA 60
Please refer to the FAMC Wholesale Lending Guide for a complete list of Employment and Incomeguidelines at: Underwriting Guidelines>FHA>General Underwriting Guidelines>Employment andIncome
Employment History and Continuance
Establishing stable monthly income is based on the type of income received, the length of time received, and whether
or not the income is likely to continue.
• The borrower's employment must be documented for the most recent two (2) years. • Gaps of employment:
o Two year work history must be documented prior to gap in employmento Gaps of six (6) months or more (1 month or more for AUS Refer loans) must be fully explained by the
borrower• Borrower must be employed on the current job for at least six (6) months as of the case number
assignment date.• Documentation of time spent in college or military service can be included to make up the two (2) year
period. Time spent in high school cannot be used as part of borrower’s 2-year employment history• Frequent Changes in Employment
• If borrower has changed jobs more than 3 times in the previous 12 months, or has changed lines of work, the following additional steps to verify and document the stability of employment income is required:
– Transcripts of training or education demonstrating qualification for a new position; or– Employment documentation evidencing continual increases in income and/or benefits– Additional analysis is not required for types of employment that regularly require a borrower to
work for various employers (Temporary Companies or Union Trades).
EMPLOYMENT AND INCOME
Introduction to FHA 61
Employment History and Continuance, continued
Only employment and income used for qualification must be verified, except self-employment income, which must always be verified and analyzed to determine whether a loss or reduction to income must be considered.
The income of each borrower must be analyzed to determine whether it can reasonably be expected to continue at least three (3) years.
Reduced employment and income requirements apply to FHA streamlines; however, reduced documentation for Streamlines does not apply to credit-qualifying Streamlines.
Employment Related Documentation
• A completed and signed IRS Form 4506-T is required for all borrowers at application and closing and must be
included in the loan file, excluding non-credit qualifying FHA streamlines. For additional information, refer to
4506-T Requirements.
TOTAL:
•Full Documentation - Unless otherwise specified by AUS:
– The most recent paystub and one of the following:
• A written Verification of Employment (VOE) covering two full years; or
• An acceptable electronic verification covering the same information
– Re- verification of income is required; refer to Verbal Verification of Employment. FAMC to obtain.NOTE: For borrowers obligated to pay Child Support/Alimony, Refer to Liabilities–Alimony/Child Support
EMPLOYMENT AND INCOME
Introduction to FHA 62
Employment Related Documentation, continued
Manual:
•Full Documentation – Obtain the following:
- The most recent pay stubs covering a minimum of 30 consecutive days(if paid weekly or
bi-weekly, paystubs covering a minimum of 28 consecutive days) that show year-to-date
earnings, and one of the following:
Written Verification of Employment (VOE) covering two years; or
An acceptable electronic verification
- Re-verification of income is required; refer to Verbal Verification of Employment
•Alternative Documentation – Obtain the following:
- Copies of the pay stubs covering the most recent 30 consecutive days (if paid weekly or
bi-weekly), pay stubs must cover a minimum of 28 consecutive days showing year-to-
date earnings;
- Copies of IRS W-2 forms from the previous two years; and
- Document current employment and include the name, title and telephone number of
the individual that verified the employment. Must be obtained by Broker/EMB Lender.
- Re- verification of income is required. Refer to Verbal Verification of Employment. FAMC
to obtain
FHA QUALIFYING RATIOS
Introduction to FHA 63
Please refer to the FAMC Wholesale Lending Guide for a complete list of Ratio guidelines at:Underwriting Guidelines>FHA>General Underwriting Guidelines>Ratios and Compensating Factors
"Top Ratio": The total mortgage payment to effective income-to-income (also known as “front”) ratio is calculated
by dividing total monthly housing expenses for the financed property by the effective monthly income.
"Bottom Ratio”: The total fixed payment ratio (also known as DTI or “back”) ratio is calculated by dividing the total
of all monthly obligations by the effective monthly income.
These ratios may only be exceeded with an AUS-Accept recommendation that meets published FAMC credit
guidelines (see FAMC FHA Product Description for full details).
TOTAL:o FICO < 640: DTI cannot exceed 45%, regardless of AUS results.o FICO > 640 : As per AUS
Manual:o Refer to Ratios and Compensating Factors in FAMC Wholesale Lending Guide for complete requirements.
Refer to EEM Program for qualifying guidelines on energy efficient mortgages.
For new construction properties, borrowers must be qualified using the estimated real estate taxes based upon the completed property improvements, not the unimproved lot taxes.
CREDIT POLICIES AND ANALYSIS
Introduction to FHA 65
Please refer to the FAMC Wholesale Lending Guide for a complete list of Credit guidelines at:Underwriting Guidelines>FHA>General Underwriting Guidelines>Credit Analysis
Automated Underwriting
AUS Requirements
An FHA TOTAL Scorecard recommendation is required for all FHA loans except for streamline refinance transactions. The loan must be underwritten to the applicable standards and guidelines in accordance with AUS Findings and modified by Franklin American Mortgage Company's Product Descriptions. All terms and conditions of the loan and underwriting information must match the data on which the AUS Findings are based.
AUS Acceptability
30-year FHA loans which meet FAMC minimum credit requirements and receive an AUS-Approve recommendation
and are successfully validated by FAMC, will be approved upon successful validation 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
• The loan must not contain characteristics which require a downgrade to manual underwriting.
• There is no indication of fraudulent loan documentation.
CREDIT POLICIES AND ANALYSIS
Introduction to FHA 66
Manual Downgrades
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.
– Federal taxes (If in accepted repayment agreement, must be current and have no history of
late payments).
– FHA and VA loans.
– Small Business Administration (SBA) loans.
– Liens placed against borrower’s property for a debt owed to the
US Government.
• Foreclosure: Foreclosure, Deed-In-Lieu of Foreclosure or Pre-Foreclosure Sale, Short Sale
completed within three years of the case number assignment date. The three-year period begins
on the date of the transfer of title.
• Bankruptcy: The date of the borrower’s bankruptcy discharge as reflected on bankruptcy
documents is within two (2) years from the date of the case number assignment.
CREDIT POLICIES AND ANALYSIS
Introduction to FHA 67
Manual Downgrades, continued
• The borrower has undisclosed mortgage debt (only has to be downgraded if all requirements
for this topic in the Lending Guide are not met).
• The mortgage payment history by transaction type requires a manual downgrade (Refer to
Credit History section in the applicable Product Description)
• Additional information not considered in the AUS recommendation that effects the overall
insurability of the loan (Refer to Inaccuracy in Debt Consideration)
• Business Income shows a greater than 20% decline over the analysis period
• The Borrower has disputed derogatory accounts with a cumulative balance of $1000 or more
• The file contains information or documentation that cannot be entered into or evaluated by
TOTAL Mortgage Scorecard
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.
Compensating factors, as listed in FAMC Wholesale Lending Guide>FHA General Underwriting Ratios and
Compensating Factors, 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 AND ANALYSIS
Introduction to FHA 68
Inquiries All inquiries within the past 90 days must be reviewed to ensure that all debts, including any
new payments resulting from material inquiries listed on the credit report are used to calculate
the debt ratios. If an inquiry results in a debt, regardless of the amount of time passed since
the inquiry was made, the payment must be included and the debt must be considered in the
AUS results.
The Underwriter must also determine that any recent debts were not incurred to obtain any
part of the Borrower’s required funds to close on the subject property.
NOTE: If credit report contains inquiries beyond 90 days, those debts must be reviewed and considered.
Credit History and Credit Scores
•Credit history and credit scores are required for each borrower on the application.•Non-traditional credit is not permitted.•Minimum credit score is 620, regardless of AUS.
• Streamline refinance transactions require a minimum 640 credit score.• FHA Jumbo transactions require:
‒ Purchase and Rate/Term Refinance: 660 minimum credit score‒ Streamline and Cash-Out Refinance: 680 minimum credit score
CREDIT POLICIES AND ANALYSIS
Introduction to FHA 69
FHA Credit Policies
Maximum Number of Financed PropertiesThere are no restrictions on the number of financed properties owned by the borrower(s) for Standard Loan Amounts. Refer to Product Description for FHA Jumbo.
Number of Borrowers per Transaction The number of borrowers per loan transaction is restricted to four (4) borrowers.
PROPERTY ELIGIBILITY
Introduction to FHA 70
Eligible Properties Individual programs and products may have more restrictive
guidelines. Refer to the individual product description to
determine property eligibility.
• 1-4 unit attached or detached primary residence including
condominiums and PUDs.
• Condominiums must be FHA-approved, refer to
Condominium and PUD projects.
• 3-4 unit properties are subject to an additional “self-
sufficiency” test. See the Maximum/Minimum Loan Amount
section of the product description.
• REO Properties. These include properties owned by HUD,
Fannie Mae, Freddie Mac, VA, USDA, and banking
institutions.
• Log homes.
• Modular Homes (must have 2nd level review in
Underwriting)
• Mixed use properties.
• New Construction – refer to New Construction.
Please refer to the FAMC Wholesale Lending Guide for a complete list of Property guidelines at:Underwriting Guidelines>Property Eligibility>FHA
• Ineligible Properties • Any property where the seller is not the owner of record.• Properties being re-sold within 90 days of the seller's acquisition
date (refer to Property Flipping in FAMC Lending Guide).• Properties which are not primarily residential in nature and use (see
FAMC Lending Guide for full requirements).• Manufactured or mobile housing.• Leasehold condominium, Spot condominium, Multi-unit
condominium. Refer to Ineligible Condominium and Project Characteristics in the FAMC Lending Guide for additional ineligible condo and project characteristics.
• Properties with sinkholes• Properties with new of existing PACE liens• Ranches, orchards, working or hobby farms, commercial operations• Co-ops.• Dome homes, Geothermal, Earth Berm.• Builder Trade Equity.• Any property that does not meet HUD’s minimum property
requirements and minimum property standards. • Properties with individual water purification systems required to
make the water safe for human consumption• Fraternity and Sorority houses• Vacation homes• Properties subject to Private Transfer Fee Covenants• Properties that do not meet HUD minimum property requirements
and standards
PROPERTY ELIGIBILITY
Introduction to FHA 71
Condominium and PUD Projects
• Site condominiums are single-family detached dwellings encumbered by a declaration of condominium
covenants or condominium form of ownership. Condominium project approval is not required for site
condominiums; however, the condominium rider must be included in the FHA case binder submitted for
insurance endorsement, and the loan closed under Section 203(b).
• Condominiums must be FHA-approved. The project must be listed on FHA's approved condominium
project list at https://entp.hud.gov/idapp/protect/condlook.cfm
• If a project is no longer approved or does not meet Lender Certification Criteria, then only an FHA-
to-FHA streamline refinance without an appraisal is permitted (this does not apply when the
subject property is a HUD REO).
• PUDs do not require FHA approval.
Leasehold Estates
• A leasehold estate is a way of holding title to real estate in which the mortgagor does not actually own
the property and instead has a recorded long-term lease. Generally, leasehold estates are eligible. The
appraisal must indicate market acceptance of leasehold estates as well as meet all HUD documentation
requirements for leasehold estates.
• For 1-4 unit properties, including a one (1) family unit in a condominium project, the mortgage must be
a real estate held on leasehold under:
• A lease having a term of not less than 10 years beyond the maturity date of
the mortgage OR
• A lease of not less than 99 years which is renewable.
APPRAISAL
Introduction to FHA 72
FHA AppraisalsAll appraisals must be ordered with strict adherence to Franklin American Mortgage Company’s guidelines for Appraiser Independence Requirements (AIR).
The appraiser’s status must be verified within FHA Connection under Single Family FHA/Single Family Origination/FHA Approval Lists/Appraisers.
The effective date of the appraisal cannot be before the case number assignment date. Requirements in the Product Description must be followed.
Second AppraisalsFranklin American Mortgage Company must order all second appraisals. A second case number is not to be used.
Appraisal, value, and payment requirements: The value from the second appraisal must be used for LTV calculation if it exceeds 5% less than
the value from the first appraisal. (only applies for Property Flipping) If the second appraisal value is higher than the initial appraisal, the value from the second
appraisal may not be used. The borrower may not be charged for the second appraisal.
PROPERTY INSPECTION
Introduction to FHA 73
Termite, Well, and Septic Inspections
•A copy of the termite/pest inspection is required to be included in the file on any FHA loan if evidence exists that a termite/pest inspection was ordered, requested, required and/or completed, even if the borrower elected to have a termite/pest inspection completed.
•For existing properties over one (1) year old, inspection is only required if:
– The appraisal indicates there may be a problem or that problems are common in the area.
– Required by the sales contract
•Properties under one (1) year old require mandatory inspection, treatment, and testing, even if previously occupied. Refer toFHA New Construction.
Well and Septic Inspections
•An inspection of a water purification system is required if the appraiser observes any deficiencies.
•When an individual water system is present, the water quality must meet the requirements of the health authority with jurisdiction.
•Water samples used for water tests analysis may not be provided by an individual with any financial interest in the transaction
•Properties with water purification systems are not eligible for FHA financing if the system is required to make the water safe.
•Systems installed to improve the taste or softness of the water are acceptable.
•The appraiser must visually inspect the onsite sewage.
•Refer to FHA Property Eligibility.
•Refer to FHA Handbook 4000.1 Chapter 3 for specific inspection requirements for water supply systems and septic systems.
Please refer to the FAMC Wholesale Lending Guide for complete list of Property Inspection Guidelines at:
Product Information & Guidelines>Property Eligibility>FHA>Property Inspections
REFINANCE TRANSACTIONS
Introduction to FHA 74
Refinance Transactions**Please refer to the FAMC Wholesale Lending Guide for a complete list of Refinance guidelines at:
Product Information & Guidelines>Product Descriptions>FHA>Refinances
A refinance transaction is a mortgage loan used to payoff an existing real estate obligation on the same property for
borrower(s) with legal title to the subject property. Not all borrowers have to be obligated on the loan being paid off.
The types of refinance transactions available are:
• Rate/term refinances
• Simple Refinance
• Streamline refinances without appraisals
• Cash-out refinances
A rate/term refinance (Limited Cash-Out) is a transaction in which the proceeds from the new loan are used to repay
the unpaid principal balance and current interest due on the existing first mortgage, closing costs, pre-paid items,
points, and any subordinate financing used solely to acquire the property or any junior lien over 12-months-old. Any
cash-back to the borrower must not exceed $500 ($0 in Texas), and must be due to minor changes at closing and/or
fees. For additional requirements and guidelines, refer to Rate/Term Refinances.
The mortgage history is limited to a 1 x 30-day payment within the last 12 months, or since date of note if less than 12
payments have been made.**
REFINANCE TRANSACTIONS
Introduction to FHA 75
A simple refinance permitted for owner-occupied principal or HUD approved secondary residences with an existing
FHA-Insured mortgage. The underwriter must review the borrower’s employment documentation or obtain utility bills
to evidence the borrower currently occupies the property as their principal residence.
•Maximum LTV/CLTV
• 97.75% for principal residence
• 85% for HUD approved secondary residence
•Utilize “Simple Refinance Worksheet” to calculate max mortgage
•Maximum mortgage amount is lesser of:
• Nationwide mortgage limit
• Maximum LTV based on adjusted value, and program
• Cash back to the borrower at closing may not exceed $500 (Must be zero in Texas)
• Sum of existing debts and costs associated with the transaction
• Unpaid principal balance of the 1st mortgage as of the month prior to disbursement
• Interest due on the existing mortgage
• MIP due on the existing mortgage
• Late charges
• Escrow shortages
• Allowable costs including borrower-paid costs associated with new mortgage
• Borrower-paid repairs required by appraisal
• Less any UFMIP refund
•The mortgage history is limited to a 1 x 30-day payment within the last 12 months, or since date of note if less than 12
payments have been made.**
REFINANCE TRANSACTIONS
Introduction to FHA 76
A streamline refinance is designed to lower the monthly principal and interest payments on an existing FHA mortgage. Cash-
back is limited to $500 ($0 in Texas), and must be due to changes in the payoff at closing.
• Streamline Refinance transactions are permitted for 1 unit owner-occupied principal or HUD approved secondary
residences with an existing FHA-insured mortgage.
• All Streamline Refinance transactions do not require an appraisal.
• At the time the case number is assigned the original value from FHAC for the loan being refinanced must be
obtained and used as the appraised value. If the original value is not provided, the LTV ratio must be considered to
be less than 90% for the purpose of determining the term of the annual premium.
• Streamline transactions are either credit qualifying or non-credit qualifying.
• All streamline refinance transactions are not subject to the National Housing Act’s statutory loan limits or
Nationwide mortgage limits.
• CAIVRS not required.
• FAMC’s minimum credit score requirements apply.
• Streamlines require manual underwriting. Loans may be scored through TOTAL, but the findings are invalid.
• Loans seasoned less than 6 months since the first payment due date or 210 days from note date to case number
assignment are not permitted. Minimum of 6 consecutive payments required.
• Standard loan amounts that 2-4 unit properties are permitted on streamlines if the loan being refinanced is current serviced by FAMC AND 2 unit properties are permitted on streamlines for FHA Jumbo the loan being refinanced is currently serviced by FAMC.
•Loans with less than a 12 month mortgage history on the loan being refinanced require the following:
– Full tri-merge credit report
– 0 x 30 on ANY mortgages held by the borrower
– Any bankruptcy or foreclosure must be discharged in the required 24 or 36 months, respectively.
REFINANCE TRANSACTIONS
Introduction to FHA 77
A cash-out refinance is a transaction in which the loan amount exceeds the amount necessary to repay any
existing mortgage liens and closing costs. A refinance transaction is considered a cash-out refinance if the
borrower receives “cash back” in an amount exceeding $500, as evidenced on the Closing Disclosure. For
additional information, refer to Cash-Out Refinance.
• Cash-out is permitted for owner-occupied principal residences only.• Cash-out refinances are not allowed in the state of Texas• Income from a non-occupant co-borrower may not be used to qualify.• The subject property must have been owned and occupied by the borrower as their principal
residence for the twelve (12) months prior to the date of case number assignment.o Exception for inheritance: borrower is not required to occupy for minimum period of time,
provided borrower has not treated the subject property as an investment property at any point since inheritance of the property
• Payment history requirements:o Borrower must have 0 x 30 late mortgage payments in last 12 months on any property
where any Borrower has an ownership interest o Properties with a mortgage must have a minimum of 6 months mortgage paymentso Properties owned free and clear may be refinanced as cash-out transactions
• The underwriter must review the borrower’s employment documentation, OR obtain utility bills to evidence the borrower has occupied the subject property as their principal residence.
• Maximum LTV/CLTV 85%
**Please refer to the FAMC Wholesale Lending Guide for a complete list of Refinance guidelines at:
Product Information & Guidelines>Product Descriptions>FHA>Refinances
REFINANCE TRANSACTIONS
Introduction to FHA 78
Payoff Land Contract • Unrecorded Land Contract – can be processed as a purchase or a refinance transaction. An existing
land contract might not necessarily be recorded; however, the borrower(s) may be in title. If treated as a purchase, the purchase transaction with maximum financing is allowed as long as HUD’s Identity of Interest requirements are satisfied.
• Recorded Land Contract – processed as a refinance transaction with maximum financing if borrower receives no cash-back• Property acquired less than 12 months prior to loan application, all proceeds must payoff
outstanding balance of land contract, plus any eligible repairs/renovations• Adjusted value is lesser of:
• Current appraised value; or• Total cost to acquire the property (original sales price + documented costs for
repairs/renovation + allowable closing costs and reasonable discount points if treated as a refinance)
• If borrower acquired property less than 12 months and receives more than $500 cash-back, max LTV is 85%
• Payoffs are required on all existing mortgages
Properties Recently Listed For Sale All Refinance Transactions:
Evidence the listing agreement was canceled at least one day prior to application.The loan file must also document a letter of intent signed by the borrower acknowledging they do not intend to relist the property for 12 months after the note date.
REFINANCE TRANSACTIONS
Introduction to FHA 79
Building on Own Land • Underwritten and processed as purchase, but closed as refinance:
• All AUS and FHAC records to reflect purchase• MyFAMC to reflect refinance and construction-to-permanent• Settlement statement or similar legal documents must be prepared as a refinance
transaction• Payoff of an interim loan is permitted • One time construction-to-permanent loans are not permitted • Eligible if land is already owned by borrower for greater than 6 months from case number
assignment date• Borrower must have contracted with a builder to construct improvements:
• Builder must be a licensed contractor • Copy of license must be uploaded to Imaging as “Property Valuation”
• Borrower may act as a general contractor only if the borrower is a licensed contractor• Borrower’s funds to close must met TOTAL or manual underwriting guidelines• If land was given as a gift to borrower, donor cannot be a prohibited source – standard gift
guidelines to be followed and documentation required• Borrower cannot receive cash-back from additional equity in property but may replenish own cash
expenditures for any borrower-paid extras over and above contract and out-of-pocket expenses not included in builder’s price – itemization is required
REFINANCE TRANSACTIONS
Introduction to FHA 80
Building on Own Land, cont. • Minimum required investment:
• Mortgage is calculated using the purchase LTV limits (96.5%)• Utilize “FHA Building on Own Land Worksheet” to calculate max mortgage amount• Maximum mortgage amount calculated using lesser of the property value or the
documented acquisition cost• Document acquisition costs include:
• Builder’s price or sum of all subcontractor bids and materials• Value of the land as shown in the site value of the appraisal; and• Interest and other costs associated with a construction loan obtained by borrower-
to-fund construction
Access “Building On Own Land Maximum Mortgage Worksheet” on the Website under Forms.
REFINANCE SUBMISSION FORMS
Introduction to FHA 81
Broker/EMB FHA Purchase and Full Credit Qualifying
Simple Refinance Submission Form
FHA Streamline Refi Q.image Submission Form
NEW CONSTRUCTION
Introduction to FHA 85
New Construction
New Construction Categories
The first step in determining the correct documentation for FHA new construction cases is todetermine the construction category. The category is determined by the stage of construction at thetime the appraisal is performed and noted under “General Description” in the “Improvements”section of the appraisal. The categories are:
Existing Less Than 1-Year Old: Property is 100% complete the issuance of the Certificate ofOccupancy or equivalent was less than one year prior to the date of the appraisal. Theproperty must have never been occupied.
Under Construction: The period from the first placement of permanent material through100% completion with no Certificate of Occupancy or equivalent.
Proposed Construction: Property where no concrete or permanent material has beenplaced. Digging of footing and placement of rebar is not considered permanent.
The beginning date for the term “less than 1- year old” is the earliest of: Date of Certificate of Occupancy, or Date of completion on building inspection card, or Date of letter from local (or state) authority showing acceptable completion of
construction.If the above dates are not available, sufficient documentation must be provided to establish finalcompletion of construction.
NEW CONSTRUCTION
Introduction to FHA 86
Documentation Requirements by Construction CategoryIn all cases, the documentation required as detailed below must be sufficient to enable the underwriter tomake the following certification on page 3 of the HUD-92900-A: “If this is new construction, the lendercertifies that the property is 100% complete (both on-site and off-site improvements) and the propertymeets HUD’s minimum property standards and local building codes.”
EXISTING LESS THAN 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” or may be marked “subject to required inspections” for
properties which require termite inspections. Either is acceptable as long as the house was 100%
complete at the time of the appraisal and not subject to any further conditions or inspections
other than evidence of termite inspection/treatment.
If early start letter is in the file, treat as proposed construction.
NEW CONSTRUCTION
Introduction to FHA 87
The following table contains the construction documentation requirements for EXISTING LESS THAN 1-YEAR OLD:
NEW CONSTRUCTION
Introduction to FHA 88
UNDER CONSTRUCTION: Appraisal performed after
concrete or other permanentmaterials are placed but beforehome is 100% complete.
Marked “subject to completionper plans and specs” if home is <90% complete.
Marked “subject to repairs oralterations” if home is > 90%complete (only buyer preferenceitem remain – floor coverings,appliances, landscaping, etc.).
If early start letter is in file, treatas proposed construction.
The following table contains the construction documentation requirements for
UNDER CONSTRUCTION:
NEW CONSTRUCTION
Introduction to FHA 89
The following table contains the constructiondocumentation requirements for
PROPOSED CONSTRUCTION:
PROPOSED CONSTRUCTION: Approved prior to the beginning
of construction by a ConditionalCommitment/DE Statement ofAppraised Value (HUD-92800.5B)or Early Start Letter.
Appraisal performed beforeconcrete or other permanentmaterials are placed.
Initial pictures show theunimproved property.
Marked “subject to completion per plans and specs”
NEW CONSTRUCTION
Introduction to FHA 90
PROPOSED CONSTRUCTION, cont.:
Certificate of Occupancy EquivalentRequirements:
• Inspection card reflecting all inspectionsAND
• Certification from the DE Underwriterthat the inspection card is equivalent toa CO and that the city/county or localjurisdiction does not issue a CO.
NOTE: Certification from DE Underwriter should be done on letterhead, reference the FHA case number, borrower name, and property address, include a statement that local jurisdiction does not issue Certificate of Occupancy, and be signed and dated by the DE Underwriter and include CHUMS ID number.