last updated: october 20 fha guidelines nations direct ... · rent credit ... median credit score...

Last Updated: October 20th

, 2014

FHA Guidelines

FHA Underwriting Guidelines Nations Direct Mortgage, LLC. of 75 These guidelines are not a commitment to lend. Program, rates, terms and conditions are subject to change without notice. This information is intended for

Mortgage and Real Estate Professionals only and should not be distributed to consumers or other third parties. ©2014 Nations Direct Mortgage, LLC.

Nations Direct Mortgage FHA Guidelines

Contents 4506-T ...................................................................................................................................................................................... 9

APPRAISAL ............................................................................................................................................................................... 9

PROPERTY ADDRESSES ........................................................................................................................................................ 9

AGE AND DATE OF APPRAISAL ............................................................................................................................................ 9

APPRAISER REQUIREMENTS .............................................................................................................................................. 10

FORM REQUIREMENTS ...................................................................................................................................................... 10

APPRAISALS OF PROPERTIES LOCATED IN DECLINING MARKETS ..................................................................................... 10

PHOTOGRAPHS .................................................................................................................................................................. 11

HUD-OWNED PROPERTIES ................................................................................................................................................ 11

SECOND APPRAISAL REQUIREMENTS – SALES WITHIN 180 DAYS OF SELLER ACQUISITION ............................................ 11

APPRAISAL PORTABILITY ................................................................................................................................................... 12

APPRAISAL RESOURCES ..................................................................................................................................................... 12

ASSETS ................................................................................................................................................................................... 12

AGE OF ASSET STATEMENTS ............................................................................................................................................. 12

LARGE DEPOSITS ................................................................................................................................................................ 12

CASH SAVED AT HOME ...................................................................................................................................................... 12

CHECKING AND SAVINGS ACCOUNTS................................................................................................................................ 13

EARNEST MONEY DEPOSITS .............................................................................................................................................. 13

PROCEEDS FROM THE SALE OF A PERSONAL ASSET ......................................................................................................... 13

PROCEEDS FROM THE SALE OF REAL ESTATE .................................................................................................................... 13

REAL ESTATE COMMISSION FROM SUBJECT PROPERTY ................................................................................................... 13

RENT CREDIT ...................................................................................................................................................................... 14

RETIREMENT SAVINGS ....................................................................................................................................................... 14

SAVINGS BONDS ................................................................................................................................................................ 14

SECURED LOANS ................................................................................................................................................................ 14

STOCKS AND/OR BONDS ................................................................................................................................................... 15

SWEAT EQUITY .................................................................................................................................................................. 15

HELPFUL LINKS – ASSETS ................................................................................................................................................... 15


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AUS – TOTAL SCORECARD SYSTEM ....................................................................................................................................... 15

BORROWERS – ELIGIBLE AND INELIGIBLE ............................................................................................................................. 15

ELIGIBLE BORROWERS ....................................................................................................................................................... 15

INELIGIBLE BORROWERS ................................................................................................................................................... 16

HELPFUL LINKS – AUS ........................................................................................................................................................ 16

BUY-DOWNS .......................................................................................................................................................................... 16

CASE NUMBER ASSIGNMENT/TRANSFER .............................................................................................................................. 16

BORROWERS ...................................................................................................................................................................... 16

PROPERTY ADDRESSES ...................................................................................................................................................... 16

ORDERING CASE NUMBERS ............................................................................................................................................... 17

CASE NUMBER TRANSFERS ............................................................................................................................................... 17

CASH RESERVES ..................................................................................................................................................................... 18

3 TO 4-UNIT PROPERTIES .................................................................................................................................................. 18

NON-TRADITIONAL CREDIT ............................................................................................................................................... 18

FEWER THAN TEN PAYMENTS REMAIN ON EXCLUDED DEBT ........................................................................................... 18

CLOSING COSTS ..................................................................................................................................................................... 18

ALLOWABLE/NON-ALLOWABLE CLOSING COSTS .............................................................................................................. 18

CLOSING REQUIREMENTS ..................................................................................................................................................... 19

PROPERTY ADDRESSES ...................................................................................................................................................... 19

CLOSING REQUIREMENTS ................................................................................................................................................. 19

ESCROW STATES ................................................................................................................................................................ 20

COMPENSATING FACTORS .................................................................................................................................................... 20

CONDOMINIUMS ................................................................................................................................................................... 22

SITE CONDOMIUMS ........................................................................................................................................................... 22

CONDOMINIUM RESOURCES ............................................................................................................................................ 23

CONFLICT OF INTEREST ......................................................................................................................................................... 23

CREDIT HISTORY .................................................................................................................................................................... 23

CREDIT INQUIRIES.............................................................................................................................................................. 23

DEROGATORY CREDIT EXPLANATIONS .............................................................................................................................. 23

NON-TRADITIONAL CREDIT REQUIREMENTS – BORROWERS HAVE CREDIT SCORES ....................................................... 23

RENT VERIFICATION .......................................................................................................................................................... 23

FORECLOSURES ................................................................................................................................................................. 24


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FHA Guidelines



CHAPTER 7 BANKRUPTCIES ............................................................................................................................................... 25

CHAPTER 13 BANKRUPTCIES ............................................................................................................................................. 25

JUDGMENTS ...................................................................................................................................................................... 25

TAX LIENS ........................................................................................................................................................................... 27

AUTHORIZED USER ACCOUNTS ......................................................................................................................................... 27

DISPUTED ACCOUNTS ........................................................................................................................................................ 27

MORTGAGE LATE PAYMENTS ............................................................................................................................................ 29

SHORT SALES ..................................................................................................................................................................... 30

EXTENUTING CIRCUMSTANCES-STANDARD ...................................................................................................................... 30

HUD’S “BACK TO WORK” INITIATIVE- EXTENUATING CIRCUMSTANCES ........................................................................... 31

DEFAULTED CAIVR NUMBERS ........................................................................................................................................... 33

CREDIT HISTORY RESOURCES ............................................................................................................................................ 33

CREDIT REPORTS .................................................................................................................................................................... 33

AGE OF CREDIT REPORTS................................................................................................................................................... 33

CREDIT SCORES ...................................................................................................................................................................... 34

MEDIAN CREDIT SCORE (REPRESENTATIVE CREDIT SCORE).............................................................................................. 34

MINIMUM CREDIT SCORES ............................................................................................................................................... 34

DISCLOSURES/FORMS ........................................................................................................................................................... 34

REQUIRED DISCLOSURES AND FORMS .............................................................................................................................. 34

DOWN PAYMENT REQUIREMENTS ....................................................................................................................................... 34

PURCHASE TRANSACTIONS ............................................................................................................................................... 34

DOWN PAYMENT REQUIREMENT RESOURCES ................................................................................................................. 34

DOWN PAYMENT ASSISTANCE .............................................................................................................................................. 35

EMPLOYMENT HISTORY/VERIFICATION ................................................................................................................................ 35

EMPLOYMENT HISTORY .................................................................................................................................................... 35

EMPLOYMENT GAPS .......................................................................................................................................................... 35

MATERNITY LEAVE ............................................................................................................................................................. 35

EMPLOYMENT RESOURCES ............................................................................................................................................... 35

ENERGY EFFICIENT MORTGAGES .......................................................................................................................................... 35

ESCROWS ............................................................................................................................................................................... 35

ESCROW HOLDBACKS ............................................................................................................................................................ 36

BANK-OWNED PROPERTIES ............................................................................................................................................... 36


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FHA Guidelines



GEOGRAPHIC RESTRICTIONS ................................................................................................................................................. 36

ELIGIBLE LENDING AREAS .................................................................................................................................................. 36

COMMUNITY PROPERTY STATES ....................................................................................................................................... 36

ARIZONA ............................................................................................................................................................................ 36

CALIFORNIA ....................................................................................................................................................................... 37

COLORADO ........................................................................................................................................................................ 37

HAWAII .............................................................................................................................................................................. 37

MICHIGAN ......................................................................................................................................................................... 37

NEVADA ............................................................................................................................................................................. 37

OREGON ............................................................................................................................................................................ 37

TEXAS ................................................................................................................................................................................. 37

UTAH.................................................................................................................................................................................. 37

WASHINGTON ................................................................................................................................................................... 38

GIFT FUNDS ........................................................................................................................................................................... 38

GIFT DONORS .................................................................................................................................................................... 38

GIFT OF EQUITY ................................................................................................................................................................. 38

INELIGIBLE SOURCES FOR DOWN PAYMENT ..................................................................................................................... 38

GIFT DOCUMENTATION..................................................................................................................................................... 38

GIFT OR GRANT PROGRAMS ............................................................................................................................................. 39

INCOME ................................................................................................................................................................................. 39

ALIMONY AND CHILD SUPPORT ........................................................................................................................................ 39

AUTOMOBILE ALLOWANCES ............................................................................................................................................. 40

COMMISSION INCOME ...................................................................................................................................................... 40

DISABILITY INCOME ........................................................................................................................................................... 40

DIVIDEND AND INTEREST INCOME .................................................................................................................................... 40

EMPLOYER SUBSIDIZED MORTGAGE PAYMENTS (EMPLOYER DIFFERENTIAL PAYMENTS) .............................................. 41

BORROWERS EMPLOYED BY A FAMILY-OWNED BUSINESS .............................................................................................. 41

GOVERNMENT ASSISTANCE PROGRAMS .......................................................................................................................... 41

MILITARY INCOME ............................................................................................................................................................. 41

NOTES RECEIVABLE INCOME ............................................................................................................................................. 41

OVERTIME AND BONUS INCOME ...................................................................................................................................... 41

PART-TIME PRIMARY EMPLOYMENT ................................................................................................................................ 42


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PART-TIME INCOME FROM A SECOND JOB ....................................................................................................................... 42

RENTAL INCOME ................................................................................................................................................................ 42

RETIREMENT INCOME ....................................................................................................................................................... 45

SEASONAL INCOME (SEASONAL COACHING, HOLIDAY EMPLOYMENT, ETC.) .................................................................. 45

SELF-EMPLOYED BORROWERS .......................................................................................................................................... 45

SOCIAL SECURITY INCOME ................................................................................................................................................ 45

TRAILING SPOUSE INCOME ............................................................................................................................................... 46

TRUST INCOME .................................................................................................................................................................. 46

UNEMPLOYMENT INCOME ................................................................................................................................................ 46

INCOME/EMPLOYMENT RESOURCES ................................................................................................................................ 46

INDUCEMENTS TO PURCHASE ............................................................................................................................................... 46

INDUCEMENT TO PURCHASE RESOURCES ........................................................................................................................ 47

INSURANCE ............................................................................................................................................................................ 47

HAZARD INSURANCE ......................................................................................................................................................... 47

FLOOD INSURANCE ............................................................................................................................................................ 47

CONDOMINIUM FIDELITY/LIABILITY INSURANCE ............................................................................................................. 47

HO-6 POLICY ...................................................................................................................................................................... 47

LAND CONTRACTS ................................................................................................................................................................. 48

LAND CONTRACT RESOURCES ........................................................................................................................................... 48

LIABILITIES ............................................................................................................................................................................. 48

EXCLUDED LIABILITIES ....................................................................................................................................................... 48

LOAN TERMS ......................................................................................................................................................................... 49

FIXED RATE MORTGAGES .................................................................................................................................................. 49

ARMS ................................................................................................................................................................................. 49

LTV/CLTV ............................................................................................................................................................................... 49

PURCHASES........................................................................................................................................................................ 49

RATE AND TERM REFINANCE ............................................................................................................................................ 50

CASH-OUT REFINANCE ...................................................................................................................................................... 50

STREAMLINE REFINANCE WITH OR WITHOUT AN APPRAISAL .......................................................................................... 50

HUD REO WITH REPAIR ESCROW ...................................................................................................................................... 51

NON-OCCUPYING BORROWERS ........................................................................................................................................ 51

INCREASE IN FAMILY SIZE .................................................................................................................................................. 51


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IDENTITY OF INTEREST TRANSACTIONS ............................................................................................................................ 51

MAXIMUM/MINIMUM LOAN AMOUNTS.............................................................................................................................. 52

NATIONS DIRECT MAXIMUM LOAN AMOUNTS ................................................................................................................ 52

MORTGAGE INSURANCE ....................................................................................................................................................... 53

UP-FRONT MORTGAGE INSURANCE.................................................................................................................................. 53

ANNUAL MORTGAGE INSURANCE..................................................................................................................................... 54

UP-FRONT MORTGAGE INSURANCE PREMIUM REFUNDS ................................................................................................ 54

MULTIPLE FHA LOANS ........................................................................................................................................................... 55

MULTIPLE FHA LOAN RESOURCES ..................................................................................................................................... 55

MULTIPLE PROPERTIES .......................................................................................................................................................... 55

NET TANGIBLE BENEFIT ......................................................................................................................................................... 56

STREAMLINE REFINANCE TRANSACTIONS......................................................................................................................... 56

RATE AND TERM REFINANCE TRANSACTIONS .................................................................................................................. 56

STATE-REQUIRED NET TANGIBLE BENEFIT FORMS ........................................................................................................... 57

NEW CONSTRUCTION ............................................................................................................................................................ 57

PROPERTY TAXES ............................................................................................................................................................... 58

NEW CONSTRUCTION RESOURCES .................................................................................................................................... 58

NON-OCCUPANT CO-BORROWERS ....................................................................................................................................... 58

OCCUPANCY .......................................................................................................................................................................... 59

POWER OF ATTORNEY ........................................................................................................................................................... 59

PRIVATE ROADS ..................................................................................................................................................................... 59

PROPERTY ELIGIBILITY ........................................................................................................................................................... 60

ELIGIBLE ............................................................................................................................................................................. 60

INELIGIBLE ......................................................................................................................................................................... 60

PROPERTY FLIPPING/SELLER SEASONING ............................................................................................................................. 61

91 TO 180-DAYS SINCE SELLER ACQUISITION: .................................................................................................................. 61

12 MONTHS SINCE SELLER ACQUISITION .......................................................................................................................... 62

PROPERTY FLIPPING RESOURCES ...................................................................................................................................... 62

PROPERTY INSPECTIONS ....................................................................................................................................................... 62

INSPECTION REQUIREMENTS FOR REQUIRED REPAIRS .................................................................................................... 62

HUD REO PROPERTIES ....................................................................................................................................................... 62

TERMITE, WELL AND SEPTIC INSPECTIONS ....................................................................................................................... 62


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FHA Guidelines



SNOW CLAD ROOF INSPECTIONS ...................................................................................................................................... 63

CHINESE DRYWALL ............................................................................................................................................................ 63

FEMA-DECLARED DISASTER AREAS ................................................................................................................................... 64

METHAMPHETAMINE CONTAMINATION .......................................................................................................................... 64

PROPERTY INSPECTION RESOURCES ................................................................................................................................. 64

PURCHASES/PURCHASE AGREEMENTS ................................................................................................................................. 65

PURCHASES OF SHORT SALES ............................................................................................................................................ 65

PURCHASE/CONSTRUCTION AGREEMENTS ...................................................................................................................... 65

QUALIFYING RATES ................................................................................................................................................................ 65

FIXED RATE MORTGAGES .................................................................................................................................................. 65

ADJUSTABLE RATE MORTGAGES ....................................................................................................................................... 65

RATIOS ................................................................................................................................................................................... 65

MAXIMUM RATIOS ............................................................................................................................................................ 65

PAYOFF LETTERS ................................................................................................................................................................ 65

CASH-OUT REFINANCE TRANSACTIONS ............................................................................................................................ 66

RATE AND TERM REFINANCE TRANSACTIONS .................................................................................................................. 66

STREAMLINE REFINANCE TRANSACTIONS......................................................................................................................... 68

ADDING OR DELETING BORROWERS/CREDIT QUALIFYING STREAMLINE REFINANCE ..................................................... 70

STREAMLINE REFINANCE WITH APPRAISAL ...................................................................................................................... 70

STREAMLINE REFINANCE WITHOUT APPRAISAL ............................................................................................................... 71

HELPFUL LINKS - REFINANCE TRANSACTIONS ................................................................................................................... 71

REO PROPERTIES ................................................................................................................................................................... 71

SEASONING REQUIREMENTS ................................................................................................................................................. 72

PURCHASES........................................................................................................................................................................ 72

CASH-OUT REFINANCES..................................................................................................................................................... 72

RATE AND TERM REFINANCES ........................................................................................................................................... 72

STREAMLINE REFINANCES ................................................................................................................................................. 72

SELLER CONTRIBUTIONS........................................................................................................................................................ 72

SELLER CONTRIBUTION RESOURCES ................................................................................................................................. 72

SOCIAL SECURITY VERIFICATION ........................................................................................................................................... 73

SUBORDINATE FINANCING .................................................................................................................................................... 73

SUBORDINATE FINANCING RESOURCES ............................................................................................................................ 74


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TITLE ...................................................................................................................................................................................... 74

MINERAL RIGHTS – EXCEPTIONS TO TITLE ........................................................................................................................ 74

DEED RESTRICTIONS .......................................................................................................................................................... 74

UTILITIES ................................................................................................................................................................................ 75

WATER SYSTEMS/WELLS/SEPTIC SYSTEMS ........................................................................................................................... 75

COMMUNITY WATER SYSTEMS ......................................................................................................................................... 75

SHARED WELLS .................................................................................................................................................................. 75


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FHA Guidelines



4506-T

• 4506 1040 transcript results for the most recent available tax year must be ordered and obtained

from IRS for all income sources.

o For borrowers employed by a family-owned business, must order and obtain the most

recent 2 years’ available 1040 transcripts from the IRS.

� If the most recent tax year transcript is not available: Obtain the previous year’s

transcript and proof of extension for most recent year. If the extension is expired

(loans closing with a note date on or after October 15th

) must obtain tax return and

transcript for most recent year.

� For income derived from self-employment, other business income, or rentals,

qualifying income calculations must include the amounts verified with the most

recent available tax transcript. If the loan is closing with a note date on or after

October 15th

, qualifying income must include most recent year’s figures, and a

transcript for that year must be ordered and obtained

APPRAISAL

PROPERTY ADDRESSES

• The property addresses on the appraisal, case number assignment, flood certification,

mortgage, and note must be identical. However, abbreviation of “Street,” “Road,” etc. is

acceptable, even if “Street” or “Road” is fully spelled in another document. This is the only

acceptable variance.

• Use the standardized USPS address. Compare the USPS address to the legal description on

the title commitment and use the city in the legal description if that differs from the USPS

address

AGE AND DATE OF APPRAISAL

• The appraisal effective date must be after the case received date unless one of the

following applies: o Appraisal was originally ordered for a conventional loan that subsequently converted

to an FHA loan or o Appraisal is for a HUD REO property or o Appraisal was ordered for a government guaranteed loan such as a VA loan

that subsequently converted to an FHA loan o Documentation of prior non-FHA loan type required

• All appraisals are valid for a period of 120 days • Refinance transactions require a new appraisal, regardless of the age of the appraisal used for

any recent purchase or refinance transaction(s) o The loan approval date is the date the DE underwriter signs the 92900-LT –

Loan Transmittal


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FHA Guidelines



• The validity period of an appraisal may be extended for up to 120 days, provided all of the

following requirements are met: o Fannie Mae form 1004D o The original appraiser must be an FHA roster appraiser in good standing at the time of

the update o A new Fannie Mae form 1004MC – Market Conditions Addendum must be provided

with the update form o If the update was ordered by any lender other than the original lender indicated on the

initial appraisal, the original appraisal must also be attached o Only one appraisal update is permitted o The validity period of the update is 120 days o Summary updates are not permitted for loans having any one or more of the

following characteristics: � The original appraisal expired prior to the effective date on the update � An underwriter extended the original appraisal for 30 days � Property has declined in value � Building improvements to the property cannot be observed from the street or

public way

� Exterior inspection of the property reveals deficiencies or other significant

changes that did not exist at the time of the original appraisal

APPRAISER REQUIREMENTS

- All appraisals must be ordered through a Nations Direct approved management company.

FORM REQUIREMENTS

• 1-unit residences require Fannie Mae Form 1004 • 2 to 4-unit residences require Fannie Mae Form 1025 • Condos, including site condos require Fannie Mae Form 1073 • Market Conditions Addendum, Fannie Mae Form 1004MC is required for all appraisals

APPRAISALS OF PROPERTIES LOCATED IN DECLINING MARKETS

• A property is located in a declining market if the “Neighborhood” section of the appraisal indicates the neighborhood is declining

• At least two comps must have closed within 90 days prior to the appraisal date (if

recent comparable sales are not available, the appraiser must provide a detailed

explanation) o The comparable sales that closed within 90 days prior to the appraisal date must be

“as similar as possible to the subject property” • In addition to at least three sales comparables, two active listing or pending sale comparables

are required in comp position 4-6 or higher

o The listing and/or pending sale comparables must have typical marketing times for the area and must be similar to the subject property in size and sales price

o Listing comps must be adjusted to reflect list to sales price ratios for the market o Pending sale comps must be adjusted to reflect the contract purchase price – If the

sales price is not available, pending sale comps must be adjusted to reflect typical list to sales price ratios


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FHA Guidelines



PHOTOGRAPHS

Photographs are required for all of the following rooms: • Living rooms • Kitchens • Bathrooms

HUD-OWNED PROPERTIES

• Appraisals are obtained by the Management and Marketing (M & M) company contracted by HUD – To obtain the appraisal, contact the M & M company designated as the “asset manager” for the property – Asset manager contact information is located in the property listing on the HUD Homes Website.

• Maximum financing is calculated using the lower of the purchase price or appraised value o If the purchase price is higher than the appraised value and the borrower wishes to

continue with the transaction, he or she must pay the difference with acceptable verified assets. A second appraisal supporting the purchase price may not be obtained.

• Appraisals are valid for 120 days o The original appraisal ordered by the company marketing the property is used at no

cost to the borrower. o If the appraisal is more than 120 days old, a new appraisal is required

� If the new appraised value is lower than M & M appraisal, borrowers may proceed with the transaction with no adjustment to the sales price or may withdraw the offer to purchase and receive a full refund of earnest money deposit. Borrowers who choose to proceed with the purchase must pay the difference between the sales price and appraised value plus the minimum down payment and required closing costs and pre-paid expenses

� If the new appraised value is higher than the M & M appraisal, the sales price will

not be adjusted, and the LTV will be calculated using the lower of the original appraised value or sales price

SECOND APPRAISAL REQUIREMENTS – SALES WITHIN 180 DAYS OF SELLER

ACQUISITION

A second appraisal is required if any of the following are true, regardless of any property flipping

exemption that may apply: • Resale of a property is between 91 and 180 days following seller acquisition and resale

price is 100% or more above the seller acquisition cost • Second appraisal must be completed on the appropriate full appraisal form • If the value indicated on the second appraisal is more than 5% lower than the value indicated on

the original appraisal, the lower value of the second appraisal must be used to calculate maximum loan amounts and LTV/CLTV

• If the value indicated on the second appraisal is no more than 5% less than the value indicated on the original appraisal or the value indicated on the second appraisal exceeds the value on the original appraisal, the value of the original appraisal is used to calculate maximum loan amounts and LTV/CLTV

• For additional requirements and restrictions, refer to Property Flipping • Borrowers are not permitted to pay for the second appraisal


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FHA Guidelines



APPRAISAL PORTABILITY

• The original appraisal must be provided to Nations Direct and no new appraisal may be

ordered unless one of the following is true:

o The underwriter determines the appraisal contains material deficiencies and it does not meet FHA’s requirements and standards or

o The appraisal was performed by an appraiser who is on Nations Directs ineligible appraiser list or o The original lender is not transferring the appraisal in a timely manner, and the

borrower stands to suffer financial loss because the loan cannot close in a timely

manner • For additional appraisal portability guidance, refer to the following resources:

o Instructions for transferring a Nations Direct appraisal to another lender, refer to the Appraisal Portability, FHA Mortgagee Letter 2009-29

APPRAISAL RESOURCES

• FHA Residential Appraisal Requirements – Appendix D, Attachment to FHA Mortgagee Letter 2005-48 – Revisions to Appraisal Protocol

• Appraiser Independence, FHA Mortgagee Letter 2009-28 • Appraisal Portability, FHA Mortgagee Letter 2009-29 • Appraisal Validity Periods, FHA Mortgagee Letter 2009-30 • Second Appraisal Reporting Requirements, FHA Mortgagee Letter 2009-48 • Appraisal Performance Standards and Sanctions, FHA Mortgagee Letter 2009-41 • Adoption of the Appraisal Update and/or Completion Report, FHA Mortgagee Letter 2009-51 • HUD REO Appraisal Validity Period and Second Appraisals, FHA Mortgagee Letter 2010-08

ASSETS

Acceptable sources of funds to close and documentation requirements are described below. For TOTAL Scorecard Approve or Accept responses, refer to the findings for the number of required statements.

AGE OF ASSET STATEMENTS

As conditioned for by Total Scorecard/DU findings. For manually approved loans, most recent 60 days’

worth of statements.

LARGE DEPOSITS

• Purchase Transactions: HUD requires verification of any one deposit or aggregate of deposits (not including payroll direct deposits) that exceeds 2% of the sales price

• Refinance Transactions: Nations Direct does not require verification of large deposits

CASH SAVED AT HOME

• Borrowers who do not have bank accounts may use cash saved at home • Allowable amount is determined on a case-by-case basis and decision is based on

borrower’s overall income and obligations and the length of time it took the borrower to save the money

• Borrower must explain in writing the length of time over which the funds were saved and how the funds were accumulated

• Borrower must provide evidence the funds were deposited into a bank account prior-to-closing


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FHA Guidelines



CHECKING AND SAVINGS ACCOUNTS

• All large deposits must be verified, regardless of whether the funds are required for closing. “Large deposits” are designated on a case-by-case basis and are non-payroll deposits that are unusual and high for the borrower’s income and obligations

• Manually underwritten loans require one of the following: • A VOD and most recent bank statement or

• Two most recent months bank statements (if the bank statements do not show the previous month’s ending balance, three bank statements are required)

• When one or more of the bank account owners is not a borrower on the loan, the non-borrowing joint account owner(s) must provide a letter stating the borrower has access to the funds. However, if the account is joint with a non-borrowing spouse and there are no additional joint account owners, an access letter is not required

• Non-Sufficient Funds (NSFs) showing on a borrower’s bank statement(s) are generally an indication of the borrower’s financial mismanagement and are considered a negative layer of risk. Written explanations are required.

• Overdraft protection withdrawals are generally considered a neutral factor and are not considered negatively. Overdraft protection funds are frequently unsecured loans or lines of credit and may not be used for the borrower’s EMD or funds to close unless they are transferred from another asset account held by the borrower and do not constitute an unsecured loan or line of credit.

EARNEST MONEY DEPOSITS

• All earnest money deposits must be verified in accordance with the large deposit requirements • Acceptable verification of EMD must be one or more of the following:

o Copy of the borrower’s canceled check o A copy of the bank statement or internet printout showing the check cleared the borrower’s

bank account o Certification from the EMD holder and separate evidence of source of funds o If the EMD was a gift, it must be from an acceptable source and must be documented with

both of the following: � A fully executed gift letter and � Evidence of the donor’s withdrawal of funds (Copy of the canceled check,

bank statement showing check cleared or bank-validated withdrawal slip)

PROCEEDS FROM THE SALE OF A PERSONAL ASSET

The borrower may sell a car, motorcycle, recreational vehicle, jewelry, stamp, coin, or baseball

card collection, etc. The following documentation is required: • Evidence of borrower’s ownership of the asset and • Estimate of the asset’s value and • Bill of sale and • Copy of purchaser’s check and • Evidence of deposit of purchaser’s check into borrower’s bank account

PROCEEDS FROM THE SALE OF REAL ESTATE

• HUD-I Settlement Statement required

REAL ESTATE COMMISSION FROM SUBJECT PROPERTY

• Real estate commission from the subject property may be used as funds to close when the borrower is the licensed real estate agent for the property


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FHA Guidelines



• A family member who is a licensed real estate agent for the subject property may give the

borrower commission received from the subject property. The following documentation is

required:

o Fully executed gift letter

o HUD-I settlement statement reflecting credit of the family member/realtor’s commission

o Ratio requirements are subject to Nations Directs discretion on borrowers whose funds

to close are derived from a gift, grant or eligible down payment assistance program

RENT CREDIT

• Provide a copy of the rent-with-option-to-buy agreement that clearly defines the terms and conditions, including rent credit

• The portion of rent credit that exceeds fair market rents for the area may be credited toward borrower’s funds to close (i.e. If the monthly fair market rent for the property is $750 and the option-to-buy agreement indicates a monthly rent credit of $800, then $50 times the number of payments the borrower has made may be credited to the borrower)

• Fair market rents for the area are estimated by the appraiser • If the borrower lived in the property rent-free or paid rent below fair market value, the difference

between rent paid and fair market rent must be treated as an inducement to purchase resulting in a dollar-for-dollar reduction in the sales price before calculating the maximum LTV (i.e. If the monthly fair market rent is $500 and the borrower paid $350 in monthly rent, then $150 times the number of payments the borrower made must be deducted from the purchase price before the maximum purchase LTV is calculated)

RETIREMENT SAVINGS

• Document balances with the most recent statement • Document the terms and conditions for withdrawal and/or borrowing, regardless of whether

the borrower is using funds to close

o When funds may only be withdrawn in the event of the borrower’s retirement or death, the funds may not be used as reserves

• When used as reserves, 60% of the vested account balance may be used • When funds are used to close on the subject loan, proof of liquidation is required,

regardless of TOTAL Scorecard response

SAVINGS BONDS

• Provide copies of bonds indicating ownership • Provide evidence of redemption value • Provide evidence proceeds were deposited to borrower’s bank account

SECURED LOANS

• Borrowed funds are acceptable, provided they are fully secured by investment accounts or real property such as stocks, bonds, real estate, etc.

• The secured loan must be obtained through an independent third party lender. Interested parties (sellers, realtors, etc.) may not supply loans, even when the loan is secured by an asset

• Unacceptable borrowed funds include, but are not limited to, signature loans, cash

advances on credit cards, loans secured by household goods such as furniture, etc.


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FHA Guidelines



STOCKS AND/OR BONDS

• Provide most recent two months’ brokerage statements • Proof of liquidation is not required with Total Scorecard Approve or Accept response • Proof of liquidation is required for manual underwriting approval

SWEAT EQUITY

Not allowed

HELPFUL LINKS – ASSETS

• HUD Handbook 4155.1, 5.B

AUS – TOTAL SCORECARD SYSTEM

A TOTAL Scorecard response is required for all loan purposes except Streamline Refinances.

BORROWERS – ELIGIBLE AND INELIGIBLE

ELIGIBLE BORROWERS

• U.S. Citizens with a valid U.S. Social Security Number • Permanent Resident Aliens

o Copy of permanent residency document issued by the Bureau of Citizenship and Immigration Services within the Department of Homeland Security required

o Evidence of a valid Social Security Number required • Non-Permanent Resident Aliens, provided they:

o Have a valid SSN and o Occupy the property as a principal residence and o Are eligible to work in the U.S. – Copy of Employment Authorization Document (EAD)

issued by the Department of Homeland Security required. There must be at least one remaining year of authorization to work unless the borrower has a previous history of EAD renewal

� Only borrowers having refugee or asylee status granted by the USCIS are automatically eligible to work in the United States. Therefore, refugee or asylee borrowers are not required to provide an EAD

• Inter vivos or “living” revocable trusts, provided the individual borrower fulfills all of the

following requirements:

o Remains a beneficiary of the trust o Occupies the property as a principal residence o The trust must appear on the mortgage or deed of trust o Individual borrowers are not required to appear on the mortgage, deed of trust,

property deed or title unless state law requires it o All borrowers must appear on the note with the trust o Attorney opinion letter required – In California only, in lieu of the attorney opinion letter, a

California Trust Certificate, is permitted


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FHA Guidelines



INELIGIBLE BORROWERS

Any borrower not listed as eligible, including but not limited to: • Any individual without a valid U.S. Social Security Number • Individuals with a U.S. Individual Taxpayer Identification Number (ITIN) - An ITIN is formatted

like a SSN but begins with “9”. No valid SSN begins with “9” • Investors • Foreign nationals and borrowers with diplomatic immunity • Illegal aliens

HELPFUL LINKS – AUS

HUD Handbook 4155.1, 4.A.1-8

BUY-DOWNS

Ineligible

CASE NUMBER ASSIGNMENT/TRANSFER

BORROWERS

• The borrower’s name on the case number assignment must match the borrower’s

name on the note and mortgage o The following name discrepancies are the only acceptable variations:

� James Everett Brown, James E. Brown, James Brown � William Smith Jr., William Smith, William R. Smith, William Ryan Smith, Jr.,

William Ryan Smith, William R. Smith, Jr. o The following name discrepancies must be resolved prior to the loan closing (this list is

not all-inclusive and name discrepancies are reviewed on a case-by-case basis): � Name discrepancies due to marriage (Case number shows Mary Smith,

but documentation and/or the note and mortgage shows Mary Jones) � Hyphenated name discrepancies (Case number shows Bill Smith, but

documentation and/or the note and mortgage shows Bill Smith-Jones) � Middle name discrepancies (Case number shows Bill John Smith, but

documentation and/or the note and mortgage shows Bill Robert Smith) � First name discrepancies (Case number shows Bill Smith, but

documentation and/or the note and mortgage shows William Smith) � Last name prefix discrepancies (Case number shows Bill St. Pete, but

documentation and/or the note and mortgage shows Bill Stpete)

PROPERTY ADDRESSES

• FHA case numbers are assigned to the property and remain with the property, regardless of borrower changes after a prior sales transaction for the property fails to close. For additional information, see Case Number Expiration

• The property addresses on the appraisal, case number assignment, flood certification, mortgage, and note must be identical. However, abbreviation of “Street,” “Road,” etc. is acceptable, even if “Street” or “Road” is fully spelled in another document. This is the only acceptable variance


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o Use the standardized USPS address. Compare the USPS address to the legal description on the title commitment and use the city in the legal description if that differs from the USPS address

ORDERING CASE NUMBERS

• Case numbers may not be ordered unless the Nations Direct has received a completed application, case # request form, and the borrower has a property – Nations Direct must certify in FHA Connection that “at the time of requesting a case number they have an active loan application for the subject borrower and property”

• Old case numbers may not be used to circumvent new FHA requirements • Duplicate case numbers may not be ordered to circumvent using an appraisal already

performed for the subject property • Case numbers must be ordered and received prior to the appraisal effective date unless one

of the following exceptions applies: o Appraisal was originally ordered for a conventional loan that subsequently converted

to an FHA loan or o Appraisal is for a HUD REO property or o Appraisal was ordered for a government guaranteed loan such as a VA loan

that subsequently converted to an FHA loan o Documentation of prior non-FHA loan type required

• Case validation warnings must be resolved and duplicate case numbers may not be ordered to resolve a duplicate address, circumvent the case transfer requirement or any other case validation warning

• HUD will not assign a Streamline refinance case number until the loan being refinanced meets

all of the following seasoning requirements: o 210 days have passed since the closing date of the FHA loan being refinanced and o The borrower has made at least six payments on the FHA loan being refinanced and o At least six full months have passed since the first payment due date of the FHA loan

being refinanced o FHA does not permit ordering a case number as a rate and term refi to circumvent

these requirements and FHA will not revise a case assigned as a rate and term or cash-out to a Streamline refinance.

Beginning April 18, 2011, FHA will begin auto-canceling case numbers for which there has been no activity within the most recent six months since the last action in FHA Connection. If there has been not activity in the most recent six months, the only case numbers that will not be cancelled are those for which the upfront mortgage insurance premium has been paid or an appraisal update has been entered in FHA Connection within the most recent six months. The following FHA Connection activities are the only items FHA considers “Last Activity”:

• Case number assignment • Appraisal logging completed • FHA issued firm commitment • FHA has received the insurance application and subsequent updates • FHA has issued a Notice of Return (NOR) and/or received additional insuring resubmissions

CASE NUMBER TRANSFERS

Case numbers are transferred through FHA Connection • DE lender must perform case number transfer

o Complete the required information: � FHA Case Number


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FHA Guidelines



� New Originator ID � New Sponsor/Agent ID, if applicable Date of Assignment Letter

CASH RESERVES

• All reserves included in the TOTAL Scorecard data must be documented • Cash reserves may not include funds received as a gift, regardless of the source • 60% of the vested balance of a 401k may be used - Must document terms and

conditions for withdrawal and/or borrowing and that the borrower is eligible for

withdrawals

3 TO 4-UNIT PROPERTIES

3 months PITI is required on all 3 to 4-unit transactions, regardless of TOTAL Scorecard findings

NON-TRADITIONAL CREDIT

Is not allowed

FEWER THAN TEN PAYMENTS REMAIN ON EXCLUDED DEBT

Substantial reserves are a major compensating factor when excluding installment debts with fewer than

ten remaining payments

CLOSING COSTS

ALLOWABLE/NON-ALLOWABLE CLOSING COSTS

• Borrowers may pay customary and reasonable closing costs, subject to the following limitations: o Commitment and/or lock-in fees may only be charged when the interest rate and

discount points, if any, are guaranteed to the borrower in writing for a minimum of 15 days

o Fees and charges must be reasonable and customary and comply with all Federal, State and local regulations and predatory lending rules

o Broker Fees: � Lenders may not charge both an origination fee and a broker fee � A broker fee may only be charged if the borrower pays the “fee directly to a

mortgage broker” and the “borrower independently engages a mortgage broker exclusively to seek financing and pays the broker directly.” The mortgage broker cannot be the same as the originating lender and the lending institution may not pay the broker fee

o Brokers may charge only those discount points required to buy down the loan’s interest rate – The discount points charged must be reasonable and customary


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CLOSING REQUIREMENTS

PROPERTY ADDRESSES

The property addresses on the appraisal, case number assignment, mortgage, and note must be identical. However, abbreviation of “Street,” “Road,” etc. is acceptable, even if “Street” or “Road” is fully spelled in another document. This is the only acceptable variance

o Use the standardized USPS address. Compare the USPS address to the legal description on the title commitment and use the city in the legal description if that differs from the USPS address.

CLOSING REQUIREMENTS

• In addition to the underwriter-performed VOE, a verbal VOE must be submitted with the

funding request o Verbal VOEs for hourly, salaried, or commission income borrowers must be completed within 10 business days of the note and must confirm the borrower is currently employed and must address the probability of continued employment. If the company representative states they do not perform verbal verifications, confirm borrower is still employed via a receptionist, phone extension directory and/or active voice mail box. If the company representative indicates they do not comment on probability of continued employment, indicate that response on Verbal Verification of Employment,

o Verifications for active-duty military borrowers may be in the form of a military Leave and Earnings Statement (LES) dated within 30 days of closing

o Verifications for self-employed borrowers must be within the most recent 30 days and must be obtained from a third party such as a CPA, regulatory agency or the applicable licensing bureau and verification of the business’ phone listing and address via phone book, the internet or directory assistance is also required

o Verification of employment/certification of non-employment income is required for all

loans prior-to-funding and must be completed on Verbal Verification of Employment, • Interest credit allowed - Loan must close by the 5th calendar day of the month preceding the

first payment date • Interest abatement not allowed • In states where property taxes are paid in arrears, the tax pro-rations paid by the seller at

closing may be used to reduce the borrower’s required cash-to-close, and the borrower may bring less than 3.5% to closing. Lenders must always verify the borrower has assets from an acceptable source that are at least 3.5% of the purchase price, regardless of the amount of tax pro-rations credited for taxes paid in arrears.

• For rate and term and streamline refinance transactions, the existing escrow balance of the loan being refinanced may be credited to the borrower, provided the amount of the escrow balance is not netted from the total payoff amount on the payoff statement.

o The current escrow balance must be stated in the escrow section of the payoff statement o No more than the escrow balance may be credited to the borrower and the credit

must be listed in the 200 section of the HUD-I Settlement Statement o If the borrower’s escrow balance is deducted from the total payoff amount on the payoff

statement and/or HUD-I Settlement Statement or the escrow balance is credited in the 100 section of the HUD-I Settlement Statement, FHA requires the maximum loan amount for streamline and rate and term refis to be re-calculated using the reduced principal balance after netting out the escrow balance.

• For cash-out refinance transactions, the existing escrow balance of the loan being refinanced may be credited to the borrower, provided the escrow balance is included on the payoff statement and the amount of the escrow credit does not exceed the actual escrow balance. For cash-out refinance transactions only, in lieu of crediting the existing escrow balance to the borrower in section 100 or 200 of the HUD-I Settlement Statement, the escrow may be netted from the final payoff figure.

• For FHA to FHA refinance transactions, the up-front mortgage insurance premium refund


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FHA Guidelines



may be credited to the borrower in the 200, 800 or 900 section of the HUD-I Settlement Statement

• All closing/funding conditions must be collected and provided in the closing package • Any changes to loan amount, upfront MIP, cash-to-close, interest rate, points, PITI, etc.

must be reviewed by underwriting prior to closing and disbursing loan • Principal reductions are required when the total of lender and/or seller credits reflected on the

HUD-I Settlement Statement exceeds the total of the actual closing costs, pre-paid expenses and discount points.

• Principal reductions are required when the borrower receives any cash back at a

purchase transaction closing o Documented funds paid by the borrower outside of closing for items such as the EMD,

appraisal or credit report may be refunded to the borrower at closing – Document funds paid outside of closing with one of the following:

� Cancelled checks � Bank statement showing transfer of funds � Money order receipts and evidence of source of funds

• Closing documents must be signed and notarized on or before the closing date indicated on the closing documents, regardless of the state in which the property is located and/or whether it’s an escrow state

• A fully executed Social Security Number Validation, must be included in the loan package

for all borrowers

ESCROW STATES

• Arizona • California • Hawaii • Idaho • Montana • Nevada • Oregon • Utah • Washington

COMPENSATING FACTORS

Ratio guidelines may be exceeded when compensating factor(s) that support loan approval are

documented in the file. The remarks section of HUD Form 92900-LT must contain the underwriter’s list of compensating factors that were used to justify approval. The following items are FHA-recognized compensating factors:

• The borrower has successfully demonstrated the ability to pay housing expenses equal to or

greater than the proposed monthly housing expense for the new mortgage in the most recent

12-24 months

• The borrower makes a down payment ≥ 10% of the purchase price or for refinance transactions, there is a strong equity position

• The borrower has demonstrated the ability to accumulate savings and demonstrates a conservative attitude toward the use of credit


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• The borrower’s previous credit history indicates the borrower is able to devote a greater portion of income to housing expenses

• The borrower receives documented compensation or income not reflected in the effective income on HUD Form 92900-LT but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits

• There is only a minimal increase in the borrower’s housing expense • The borrower has substantial cash reserves (at least three months PITI) after closing • The borrower has substantial non-taxable income that was not grossed up when calculating

the effective income • The borrower has a potential for increased earnings, as indicated by job training or education in

the borrower’s profession • The home is being purchased as a result of relocation of the primary wage-earner, and the

secondary wage-earner has an established history of employment, is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. Available employment must be documented in the file – No income for the trailing spouse is included in the ratios


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CONDOMINIUMS

• Condos must be located in HUD-approved projects and the condo project must be listed as approved in FHA’s Condominium Search Engine. When searching for approved condos, make certain “HRAP/DELRAP” is selected in the “Approval Method” drop down of the search engine. Only streamline refinance transactions without appraisals and purchases of HUD REO properties do not require evidence of condominium approval.

o For all FHA loan purposes, Nations Direct will not approve or permit closing of any condominium-unit located in a project that is listed as “denied” or “ineligible”. Additionally, the condominium project may not have any characteristics listed in the “Ineligible Projects” section of Conventional Underwriting Guidelines

o “HRAP” refers to condos approved by HUD through the HUD Review and Approval process o DELRAP refers to condos approved by a DE lender through the DE Lender and Approval

process – Nations Direct will not approve condominium projects through DELRAP. • If a condominium project’s approval expires or FHA removes the project approval after a

case number is received, the loan may close, provided the case number correctly indicates the condominium project ID and all case expiration requirements defined in the “Case Number Assignment/Transfer” section of this document are met.

• Underwriters must certify the condominium-unit is located within an approved project and the project continues to meet FHA’s requirements.

• If the “Document Status” indicates “unrecorded” or “not on file,” forward all recorded Declarations, By-Laws and Amendments to the attention of “Condo Processing” at the appropriate HOC. Turn time is generally one week before the “Document Status” field is revised by FHA.

• An HO-6 homeowner’s policy in an amount ≥ 20% of the appraised value is required. The monthly payment must be included in the ratio calculation, and escrows must be collected for the annual premium at closing

• If flood insurance is required, an NFIP policy must be obtained by the homeowner’s association. Borrower purchased flood insurance is not permitted unless the property is a site condominium. Loans must be denied if the HOA does not maintain adequate flood insurance, regardless of FHA condominium approval status

• In Colorado, HOA Association Assessments have a “super-lien” position over the first mortgage.

For both condominiums and PUDs, provide the following prior to closing:

o A copy of the HOA by-laws indicating HOA assessments are subordinate to the first lien or o A subordination agreement executed by a representative of the HOA indicating that all

current and future HOA assessments are subordinate to the first lien mortgage • Condos are ineligible unless at least 30% of the units within the entire project are sold and the

homeowners have been in control of the Homeowner’s Association at least 12 months.

• Condos are ineligible unless at least 51% of the units within the entire project are non-FHA insured

loans.

SITE CONDOMIUMS

Site condos do not require FHA approval, provided the property is a fully detached single-family site condo

• Appraisal must be completed on Fannie Mae Form 1073 – Condominium appraisal form • Condo rider must be included


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FHA Guidelines



• Section of the Act is 203(b) • ADP code is 431 (ARMS) or 734

CONDOMINIUM RESOURCES

• Condominium Approval Process for Single-Family Housing, FHA Mortgagee Letter 2011-22 • FHA’s Condominium Mortgage Insurance Webpage

CONFLICT OF INTEREST

Transactions in which the realtor and the broker are the same individual are ineligible.

CREDIT HISTORY

CREDIT INQUIRIES

Inquiries within the most recent 90 days must be explained in writing, regardless of Total Scorecard response

DEROGATORY CREDIT EXPLANATIONS

• Accept or Approve responses do not require credit explanation letters • All “refer” response loans for borrowers having derogatory credit must contain a credit

explanation letter at the time of initial submission. All of the following must be explained: o Late payments within the most recent two years o Collections, charge-offs, judgments, and public records, regardless of time frame

NON-TRADITIONAL CREDIT REQUIREMENTS – BORROWERS HAVE CREDIT SCORES

• Each credit reference must have at least a 12 month history • A joint trade line reported on each borrower’s individual credit report is one trade line • Trade lines on which the borrower is an authorized user may not be counted as a traditional or • non-traditional trade line • Non-traditional credit may not be used to offset a borrower’s poor credit, regardless of

whether or not a credit score exists • Borrowers having fewer than three traditional trade lines are ineligible for 3 to 4-unit purchase

or rate and term refinance transactions. However, Streamline refinances of 3 to 4-unit properties are permitted

NON-TRADITIONAL CREDIT REQUIREMENTS – OCCUPANT BORROWERS DO NOT

HAVE CREDIT SCORES Non-traditional credit cannot be used to offset any borrower’s poor credit.

RENT VERIFICATION

• Rent verification must be documented with one of the following:

• 12 months canceled checks • Verification of rent from an apartment complex or management company • Bank statements showing direct payment to the management company, apartment

complex or management company

• Borrowers having fewer than three traditional trade lines are ineligible for 3 to 4-unit purchase


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FHA Guidelines



or rate and term refinance transactions. However, Streamline refinances of 3 to 4-unit properties are permitted

• Total Scorecard Approve or Accept responses may be honored when one borrower has a credit score but the other does not, provided the borrower with the credit score will occupy the property.

• If only non-occupant co-borrowers have credit scores, the Approve or Accept response must be downgraded to a “refer,” And is ineligible for financing with Nations Direct.

• Non-occupant co-borrowers are only permitted when the occupying borrower has sufficient credit references outlined above, including a 12 month rental history

• If the non-occupant co-borrowers do not have scores, but the occupying borrowers have credit scores, Total Scorecard response requirements are based on the occupant borrower’s credit scores.

• If the non-occupant co-borrower’s scores are lower than the occupant borrower’s scores, the ratio guidelines and Total Scorecard response requirements are based on the lowest credit score for all borrowers

• FHA provides the following “guidance in establishing that a borrower has sufficient

references for evaluating bill paying habits:”

• Credit references must be reported on a credit vendor generated Mortgage Credit Report, If

the borrower rents from an individual, 12 months canceled are checks required, even if rental

verification is also provided. Borrower may not have any rental housing payments ≥ 30 days

in the most recent 12 months

FORECLOSURES

• A borrower with a foreclosure or deed-in-lieu of foreclosure within the most recent *three years is ineligible for FHA financing. An LOE documenting significant extenuating circumstances must exist and there must be evidence of re-established good credit. If the foreclosed loan was an FHA loan, the three year time frame is measured from the date FHA paid the insurance claim.

• Defaulted time share loans are not considered foreclosures. • If the loan receives a Total Scorecard Approve or Accept response and the borrower had a

foreclosure within the most recent three years, the loan must be manually downgraded to a “refer” response – Full manual underwrite is required and the file must be documented according to manual underwriting requirements.

• If the borrower’s mortgage was included in the Chapter 7 Bankruptcy, and the credit report reflects a foreclosure but does not indicate the foreclosure completion date, a letter from the servicer is necessary to determine the foreclosure date. FHA does not permit lenders to use the bankruptcy discharge date. The borrower is eligible for FHA financing three years from the date the servicer indicates the foreclosure was financed.

• If the borrower’s mortgage was included in the Chapter 7 Bankruptcy and the credit report does not reflect a foreclosure, a letter from the servicer must indicate the mortgage was paid in full, that no additional liabilities exist and there was NO foreclosure. The borrower is eligible for FHA financing two years from the date of the Chapter 7 Bankruptcy discharge, provided all other FHA requirements are met.

• 120+ day mortgage late(s) and/or NOD reporting on credit are generally treated as foreclosures. However, exceptions will be considered on a case by case basis, with AUS approval and at underwriter discretion based upon past credit performance and overall assessment of file. *For qualification requirements for “standard extenuating circumstance” exceptions, see “Extenuating Circumstance” section. Exceptions with only 12 months seasoning may be


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FHA Guidelines



considered; See “Back to Work Initiative-Extenuating Circumstance” section for requirements on case numbers assigned 8/15/2013 through 9/30/2016.

CHAPTER 7 BANKRUPTCIES

• A borrower with a Chapter 7 Bankruptcy discharged less than *two years is ineligible unless an Approve or Accept response is received through the Total Scorecard System and significant extenuating circumstances exist. Loans for borrowers with bankruptcies discharged less than one year will not be considered, regardless of Total Scorecard response

• If the loan receives a Total Scorecard Approve or Accept response and the borrower had a bankruptcy discharged within the most recent two years, the loan must be manually downgraded to a “refer” response – Full manual underwrite is required and the file must be documented according to manual underwriting requirements.

• If the borrower’s mortgage was included in the Chapter 7 Bankruptcy, and the credit report reflects a foreclosure but does not indicate the foreclosure completion date, a letter from the servicer is necessary to determine the foreclosure date. FHA does not permit lenders to use the bankruptcy discharge date. The borrower is eligible for FHA financing three years from the date the servicer indicates the foreclosure was financed.

• If the borrower’s mortgage was included in the Chapter 7 Bankruptcy and the credit report does not reflect a foreclosure, a letter from the servicer must indicate the mortgage was paid in full, that no additional liabilities exist and there was NO foreclosure. The borrower is eligible for FHA financing two years from the date of the Chapter 7 Bankruptcy discharge, provided all other FHA requirements are met. *For qualification requirements for “standard extenuating circumstance” exceptions, see “Extenuating Circumstance” section. Exceptions with only 12 months seasoning may be considered; See “Back to Work Initiative-Extenuating Circumstance” section for requirements on case numbers assigned 8/15/2013 through 9/30/2016.

CHAPTER 13 BANKRUPTCIES

• Document at least one year into the payout plan has elapsed. • Document all required payments have been made on time • If borrower is still in repayment, obtain court permission to enter into the new mortgage • If the borrower is still in repayment, include the Chapter 13 payment in the debt ratio • If the loan receives a Total Scorecard Approve or Accept response and the borrower had a

bankruptcy discharged within the most recent two years, the loan must be manually downgraded to a “refer” response – Full manual underwrite is required and the file must be documented according to manual underwriting requirements.

JUDGMENTS

• Judgments must be paid in full prior to closing unless both of the following items are provided:

o Fully executed repayment agreement. o Evidence timely payments have been made (Evaluated on a case-by-case

basis generally for a minimum 12-month period) – The payment must be included in the debt-to-income ratios when qualifying the borrower

o Judgments belonging to a non-borrowing spouse are subject to all of the above requirements when the borrowers live in or purchase a property located in a community property state

• All outstanding judgments on title must be removed prior-to-closing


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o For cash-out refinances, proceeds may be used to payoff outstanding judgments at closing. Underwriter exception approval required and exceptions are granted on a case-by-case basis.

COLLECTIONS AND JUDGMENTS

FOR CASE NUMBERS ORDERED ON OR AFTER OCTOBER 15, 2013

This guidance applies to all FHA programs with the exception of non-credit qualifying streamline

refinances. Medical collections and charge off accounts are excluded from this guidance.

• Documentation Requirements: Collection Accounts and Judgments

o Loans receiving Total “Approve/Eligible” findings: Since Total Scorecard takes all

negative credit accounts into consideration, there are no documentation or letter of

explanation requirements for loans with collection accounts or judgments.

o Manually underwritten loans:

� The lender must document reasons for approving a mortgage when the

borrower has collection accounts of judgments. Regardless of the amount of

outstanding collection accounts or judgments, the lender must determine if

the collection account or judgment was a result of:

• The borrower’s disregard for financial obligations;

• The borrower’s inability to manage debt; or

• Extenuating circumstances

� The borrower must provide a letter of explanation with supporting documentation

for each outstanding collection account and judgment. The letter and supporting

documentation must be consistent with other credit information in the file.

o Capacity Analysis-Collections

� Collections accounts don’t have to be paid off, but a capacity analysis for

borrowers with an aggregate balance of $2000 or more is required as described

below. Unless prohibited by state law, collection accounts of a non-borrowing

spouse in a community property state are included in the cumulative balance.

Medical collections and charge off accounts are excluded from this guidance and

do not require resolution.

� Capacity analysis includes any of the following actions:

• Accounts paid off in full or at time of close; funds used to payoff must

be verified as from an acceptable source

• Borrower makes payment arrangements with the creditor. Terms of

payment plan must be verified with letter from creditor, or stated on

credit bureau. The monthly payment must be included in the debt

ratio.

• If evidence of a payment arrangement is not available, calculate the

payment using 5% of the outstanding balance of each collection and

include in the debt ratio.

o Regardless of the Total Scorecard findings (Approve/Eligible or Refer), the payment

amounts must be included in the borrower’s debt ratio.


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o Capacity Analysis-Judgments

� Judgments must be paid off before loan is closed, unless borrower has made an

agreement with the creditor to make regular and timely payments. Must obtain

copy of agreement and evidence that payments were made on time per

agreement, and documentation showing a minimum of 3 months’ payments have

been made prior to credit approval. Borrowers are not allowed to prepay

scheduled payments in order to meet the required 3 month minimum.

� Must include the agreed-upon payment amount in the calculation of the

borrower’s debt ratio.

� Judgments of a non-borrowing spouse in a community property state must be

paid in full prior to close, or meet the exception guidance for judgments above,

unless excluded by state law.

TAX LIENS

• Tax liens must be paid in full unless a written payment plan is evidenced. A full 12 months

of the plan must be documented and paid.

• If the borrower is required to make regular payments, the payment must be included in the

ratios.

• If the government holding the tax lien is unwilling to subordinate the tax lien, it must be paid

in full and released prior to closing

AUTHORIZED USER ACCOUNTS

• For the purposes of determining the number of valid trade lines, authorized user trade lines are not considered as one of the borrower’s trade lines

• If the account on which the borrower is an authorized user is in the name of the non-borrowing spouse and the property is located in a community property state or the borrower(s) reside in a community property state, the debt must be included in the ratios.

• If the borrower has little or no usable credit and has only authorized user accounts, supplemental non-traditional credit are not allowed.

DISPUTED ACCOUNTS

If the credit report reveals that the borrower is disputing any credit accounts or public records, the

mortgage loan application must be referred to a DE underwriter for review (manual underwrite), unless:

• the account has a zero balance; • the account is marked as “paid in full” or “resolved; OR • the account has both a balance less than $500 and the date of the dispute is more than 24

months old.

For Case Numbers assigned on or after 10/15/2013:

Handling of Disputed Accounts


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The existence of potentially inaccurate information on borrower’s credit report resulting in a dispute

must be reviewed by an underwriter. Since disputed accounts are not considered in the credit score

utilized by Total Scorecard, the lender must consider them in the underwriting analysis as described

below.

Guidance for TOTAL Mortgage Scorecard Accept/Approve loans with disputed accounts

Disputed Derogatory Credit Accounts greater than or equal to $1,000

If the cumulative outstanding balance of disputed

derogatory credit accounts of all borrowers is equal

to or greater than $1,000, the mortgage application

must be downgraded to a “Refer” and a DE

underwriter is required to manually underwrite the

loan as described above.

Disputed Derogatory Credit Accounts less

than $1,000

If the cumulative outstanding balance of disputed

derogatory credit accounts of all borrowers is less

than $1,000, a downgrade is not required.

Excluded Accounts

• Disputed medical accounts are excluded from the $1,000 limit and do not require documentation.

• Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use are also excluded from the $1,000 limit. However, the lender must provide in the case binder a credit report, letter from the creditor, or other appropriate documentation to support the dispute, such as a police report disputing the fraudulent charges.

• Disputed derogatory credit accounts are defined as follows:

o Disputed charge offs

o Disputed collection accounts

o Disputed accounts with late payments in the last 24 months

• Disputed derogatory accounts of a non-borrowing spouse in a community property state are not

included in the cumulative balance for determining a manual downgrade.

• Non-derogatory disputed accounts are excluded for the $1,000 cumulative total.

• Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report

• Non-derogatory disputed accounts include the following:

o Disputed accounts with 0 balance

o Disputed accounts with late payments dated 24 months or older, and

o Disputed accounts paid current and as agreed.


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• If a borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated

on the credit report as being disputed, the lender is not required to downgrade the application to a

“Refer.” However, underwriter must analyze the effect of the disputed accounts on the borrower’s

ability to repay the loan. If the disputed payment amount is less than the amount indicated on the

credit report, the borrower must provide documentation of the lower payments.

MORTGAGE LATE PAYMENTS

• Regardless of refinance type, the borrowers must be current on the existing loan at the time of

closing. The borrower must have made the payment for the month prior to funding within the

month prior to funding. Therefore, if a loan funds in May, the borrower is considered current on

the existing loan if the April mortgage payment was made within the month of April. The payoff,

in and of itself, does not demonstrate the borrower is current or demonstrate an acceptable

mortgage payment history.

• Borrowers with any lates in the last 12 months from date of case number assignment are

deemed ineligible.

The following items or combination of the following items constitutes acceptable evidence of timely mortgage

payments: o Verification of mortgage from a third party credit reporting provider indicating the

mortgage payment history through the month prior to funding o Payment history provided by the current servicing lender indicating the mortgage

payment history through the month prior to funding (If the borrower makes payments to a private individual, a mortgage history from the individual is not permitted)

o Bank statements provided by the borrower that show direct payments to the servicing lender through the month prior to funding

o Cancelled checks provided by the borrower that show timely payments through the 12 months prior to funding

• Streamline refinances: o Mortgage payment history on the existing loan is < 12 months – All mortgage payments

must have been made within the month due o Mortgage payment history on existing loan is ≥ 12 months – The existing mortgage

may not have any 30-day late mortgage payments within the most recent 12 months. • Purchases and rate and term refinances:

o Mortgage lates must be due to extenuating circumstances and will be evaluated on a case-by-case basis.

• Cash-out refinances: o If the mortgage payment history indicates the borrower has made at least 12

payments on the loan being refinanced, all payments for the most recent 12 months must have been made within the month due

o If the mortgage payment history indicates the borrower has made at least six but fewer than 12 mortgage payments on the loan being refinanced, all payments must have been made within the month due

o If the mortgage payment history for the loan being refinanced indicates the borrower has made fewer than six mortgage payments, the loan is ineligible for cash-out.


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FHA Guidelines



SHORT SALES

FHA permits loans to borrowers whose credit history indicates a short sale, provided all of the

following conditions are met: • The borrower must have made all mortgage payments within the month due for the 12 months

prior to the short sale - *24 months seasoning required. If the borrower was late prior to short

sale, 36 months seasoning is required.

o Borrowers who executed a short sale after completing a permanent modification are eligible for FHA financing, provided the borrower made at least 12 payments on the permanent modification and all payments on the permanent modification were made within the month due for the 12 months prior to the short sale

Borrowers who completed a short sale on a loan that was under a temporary modification plan at the time of the short sale are ineligible for FHA financing for three years after the short sale If loan that was “Short Sold” was FHA, full 3 years’ seasoning required.

• The borrower must have made all installment debt payments within the month due for

the 12 months prior to the short sale • The short sale must serve as payment in full on the existing liens, and the existing mortgage

servicer may not require repayment of the difference between the mortgage balance and the short payoff.

• Borrowers may not execute a short sale to “take advantage of declining market conditions and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance”.

• Borrowers in default on their mortgages at the time of a short sale are ineligible for FHA financing for three years after the date of the short sale.

• Borrower(s) may not have had a previous bankruptcy or foreclosure. • For additional information, refer to Short Sales and Short Pay Offs, FHA Mortgagee Letter

2009-52. **For qualification requirements for “standard extenuating circumstance” exceptions, see “Extenuating Circumstance” section. Exceptions with only 12 months seasoning may be considered; See “Back to Work Extenuating Circumstance” section for requirements on case numbers assigned 8/15/2013 through 9/30/2016.

EXTENUTING CIRCUMSTANCES-STANDARD

• In order to qualify for seasoning exceptions on BK 7, foreclosure, and short sales under the standard extenuating circumstance exception, must document serious illness or death of a wage earner, and the borrower has re-established good credit since. Divorce is not considered an extenuating circumstance. Must be manually underwritten.


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FHA Guidelines



HUD’S “BACK TO WORK” INITIATIVE- EXTENUATING CIRCUMSTANCES

Foreclosure, Deed-in-Lieu, Short Sale, and Chapter 7 and 13 Bankruptcies.

FHA ML 2013-26: For purchase money transactions only, FHA is allowing for consideration of borrowers who have experienced a verifiable “Economic Event” which resulted in foreclosure, deed-in lieu, short sale, or bankruptcy, with a minimum of 12 months seasoning since event. This special initiative is effective for case numbers assigned 8/15/2013 thru 9/30/2016.

• In order to qualify, four key components must be documented, no exceptions. See below for full definitions: o Borrower must demonstrate Satisfactory Credit History prior to Economic Event, o Credit impairments were due to Economic Event beyond borrower’s control , o Borrower has demonstrated full recovery from the event, and o Borrower has completed HUD-approved housing counseling.

• Satisfactory Credit History: the credit report must show that the borrower has a previous history

of making payments as agreed prior to Economic event. o An analysis of the borrower’s credit history will include a review of the overall pattern of

credit behavior, rather than isolated occurrences of slow payments. A period of financial difficulty in the past does not necessarily make the risk unacceptable if the borrower has maintained a good payment record for a considerable time period since the difficulty.

o When delinquent accounts are reported, the reason for late payments will be reviewed. An analysis will be made to determine if delinquency was due to a disregard for financial obligations, an inability to manage debt, or factors beyond the control of the borrower.

o While minor derogatory information occurring two or more years in the past does not require explanation, major indications of derogatory credit, including judgments, collections, and any other recent credit problems, require sufficient written explanation from the borrower. The borrower's explanation must make sense and be consistent with other credit information in the file.

• Economic Event: is defined as any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes at least a 20% reduction in borrower’s or other “Household Member’s” income for a minimum of 6 months. o “Household Member” is defined as individual residing at borrower’s primary residence

� at the time of the Economic Event, AND who was also a co-borrower on the borrower’s previous mortgage.

o Loss of Employment must be documented with the following: � Written termination notice, or � Other public available documentation of business closure, and � Documentation of receipt of unemployment income, including 1099s or tax returns.

o Loss of Income: must verify and document the Borrower’s Household Income prior to Loss of Income by obtaining the below.

� Written VOE evidencing prior income, or � Paystubs, or � Signed tax returns or W-2s evidencing prior income.


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FHA Guidelines



o Lender must verify and document that all collections, judgments , foreclosures, short sales, Chapter 7 and 13 Bankruptcies were a result of an Economic Event. Borrowers with open collection or judgments must still meet all applicable HUD/NDM guidelines.

• Recovery from an Economic Event is defined as the re-establishment of satisfactory credit for minimum of 12 months. o Recovery/Seasoning is determined as follows:

� Foreclosure/Deed-in-Lieu/Short Sale: minimum of 12 months have elapsed since the date completed.

� Chapter 7 Bankruptcy: A minimum of 12 months have elapsed since the date of bankruptcy discharge.

� Chapter 13 Bankruptcy: the Chapter 13 was discharged prior to the loan application and all required bankruptcy payments were made on time, OR a minimum of 12 months of the pay-out period under the bankruptcy has elapsed and all required bankruptcy payments were made on time.

o Satisfactory Credit History-Subsequent to Economic Event: � The borrower’s credit history must not reflect any late housing or installment debt

payments, or any major derogatory credit issues on revolving accounts. � All open mortgages are current and show 12 months satisfactory payment history.

Mortgages that have been brought current through a loan modification, which may be temporary or permanent, are acceptable, as long as all payments have since been paid as agreed.

• Housing Counseling Requirements: o Participants must receive one-on-one homeownership counseling or a combination of

homeownership education and counseling for a minimum of one hour from a HUD-approved

housing counseling agency. The housing education may be provided by HUD-approved housing

counseling agencies, state housing finance agencies, approved intermediaries or their sub-

grantees, or through an on-line course. A list of agencies can be obtained online

http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfmor, or by calling 1-800-569-4287.

o Counseling must be completed a minimum of 30 days but no more than 6 months prior to the

date initial 1003 is signed.

o Housing counseling may be conducted in person, via telephone, or via internet.

o Counseling activities must be limited to the geographic area specified in the agency’s approved

housing counseling plan.

o The counseling must address

� the cause of the economic event, and

� the actions taken to overcome the economic event and reduce the likelihood of

reoccurrence.

o Any housing counseling fee must be charged in accordance with 24 C.F.R. §214.313, and must be

reasonable, affordable, customary and commensurate with the services provided.

• Required Disclosures

o Housing counseling agencies must provide the following disclosures to all clients:

� An explicit description of any financial relationships between the agency and any lender;

� A statement that the borrower is not obligated to pursue a loan with a lender; and

� A statement that “Completion of this housing counseling program and receipt of a letter

of completion of counseling does not qualify {you/the borrower} for an FHA loan. A

lender will have to determine if {you/the borrower} qualify for a loan. You understand

that you may not be approved for a loan.”


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FHA Guidelines



� The agency must provide information on alternative services, programs and products

that are available.

• Required Documentation

o The lender must verify and document that:

� The borrower has completed the required pre-purchase housing counseling by obtaining

letter issued by the Participating Housing Counseling Agency on agency letterhead that

includes

• agency’s Tax Identification Number (TIN)

• borrower’s name

• counselor’s name

• certification that counseling was delivered in accordance with ML 2013-26

requirements

• date upon which counseling was completed

• borrower’s signature

• signature of an authorized official of the counseling agency providing the

counseling, and

• certification that the borrower received the proper disclosures from the housing

counseling agency

DEFAULTED CAIVR NUMBERS

• Credit Alert Interactive Voice Response System

(CAIVRS) - Results must be obtained through FHA

Connection • If the borrower is currently delinquent on any federal debt, VA mortgage, Title I Loan, Federal

student loan, SBA loan, Federal taxes or has a lien against the property for debt owed to the United States, the borrower is not eligible until the delinquent account is brought current or satisfied

• For additional information, including exceptions and resolving conflicting information, refer to

HUD Handbook 4155.1, 4.A.7.a-g

CREDIT HISTORY RESOURCES

• HUD Handbook 4155.1, 4.C • Non-Traditional Credit Verification and Evaluation, FHA Mortgagee Letter 2008-11

CREDIT REPORTS

• Individual credit reports are required for unmarried borrowers who do not have joint accounts • Credit for married borrowers may be pulled jointly or individually

AGE OF CREDIT REPORTS

• All credit reports must be tri-merge credit reports or Residential Mortgage Credit Reports • Credit reports must be dated within 60 days of underwriting and must be dated within 120

days of the note • The following credit report discrepancies require a new credit report:

• Social Security number is


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FHA Guidelines



incorrect • Last name is incorrect • Middle initial is incorrect • Misspelled first names and/or missing or incorrect suffixes (Jr./Sr.) require a new

credit report unless the name variation appears in the AKA section of the credit report

CREDIT SCORES

MEDIAN CREDIT SCORE (REPRESENTATIVE CREDIT SCORE)

The following methodology is used to determine a borrower’s representative credit score: • Three Scores – Use the middle credit score • Two Scores – Use the lowest credit score • One Score – That score is used

MINIMUM CREDIT SCORES

• All borrowers must have a minimum credit score as noted below: 1. Standard FHA: 640 2. GNMA Portfolio: 600 A co-borrower without credit scores is permitted if they are occupying the property and

the primary borrower has valid credit scores.

DISCLOSURES/FORMS

REQUIRED DISCLOSURES AND FORMS

• In addition to the other forms listed in Government Forms and Disclosures, HUD/VA Addendum to Uniform Residential Loan Application, HUD Form 92900-a is required for all FHA loans.

DOWN PAYMENT REQUIREMENTS

PURCHASE TRANSACTIONS

• The borrower must make a minimum down payment of 3.5% of the lesser of the sales

price or appraised value

o In states where property taxes are paid in arrears, the tax pro-rations paid by the seller at closing may be used to reduce the borrower’s required cash-to-close. . Lenders must always verify the borrower has assets from an acceptable source that are at least 3.5% of the purchase price, regardless of the amount of tax pro-rations credited for taxes paid in arrears.

DOWN PAYMENT REQUIREMENT RESOURCES

• HUD Handbook 4155.1, 2.A


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FHA Guidelines



DOWN PAYMENT ASSISTANCE

• Seller funded DPAs are not permitted • For information about acceptable down payment assistance, refer to Gift Funds and

Subordinate Financing

EMPLOYMENT HISTORY/VERIFICATION

EMPLOYMENT HISTORY

• Borrowers must have a two-year history of employment prior to application • Job changes are acceptable, provided the borrower’s income remains stable • The following borrowers may be approved for FHA loans without a two-year employment

history prior to application: o Students who provide college transcripts or a college diploma o Individuals recently discharged from the military o Individuals who recently rejoined the workforce after an extended absence (FHA

defines “extended” as six months or more) to care for children, family members, etc. – Evidence of two years employment prior to leaving the work force and evidence of six months employment in new position are required

• 4506-T transcripts are required for most loans • Verbal verifications of employment required on all loans

o In addition to the underwriter-performed VOE, a verbal VOE must be submitted with the funding request – See Closing Requirements

EMPLOYMENT GAPS

• Written explanation required for gaps in employment ≥ Six months

MATERNITY LEAVE

• A borrower’s regular, stable income may be considered as acceptable income when a maternity leave occurs. The employer must state in writing on their letterhead that the borrower’s employment and wages will not be adversely affected and will be available when the borrower returns to work. The borrower must state in writing his or her intent to return to work.

EMPLOYMENT RESOURCES

• HUD Handbook 4155.1, 4.D.1.a-h • Income

ENERGY EFFICIENT MORTGAGES

Energy efficient mortgages are not permitted – This includes all programs and loan purposes

ESCROWS

• Escrow waivers not allowed on any FHA loan o Escrows are required for all of the following:


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FHA Guidelines



• Real estate taxes • Monthly mortgage insurance premiums • Hazard insurance premiums, including flood insurance, wind insurance, etc. • Special assessments • Ground rents

• Property tax escrows for new construction properties must be calculated based on the fully assessed property value – Obtain actual tax amounts from the local tax assessor’s office

• For purchases of properties located in California only, taxes may be calculated using 1.25% of

the appraised value of the property.

ESCROW HOLDBACKS

NOT ALLOWED

BANK-OWNED PROPERTIES

Repair escrows are not acceptable.

GEOGRAPHIC RESTRICTIONS

ELIGIBLE LENDING AREAS

Properties may be located in all U.S. states in which Nations Direct is currently licensed.

COMMUNITY PROPERTY STATES

• The following states are community property states: • Arizona • California • Idaho • Nevada • Texas • Washington

• Community property guidelines must be followed if the subject property is located in a community property state or the borrower(s) reside in a community property state

• Unless the loan is a Streamline Refinance, a credit report is required for all non-borrowing spouses

• Debts of non-borrowing spouses must be counted in the borrower’s qualifying ratios for all credit qualifying loans.

ARIZONA

• Santa Ana Homeownership Center jurisdiction • Condos, including FHA-approved condos, that do not meet both of the following requirements are

ineligible: • Homeowners have been in control of the Homeowner’s Association at least 12 months and • 90% of units within the entire project are sold • New construction attached condos and PUDs are ineligible


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FHA Guidelines



CALIFORNIA

• Santa Ana Homeownership Center jurisdiction • Condos, including FHA-approved condos that do not meet both of the following requirements are

ineligible: • Homeowners have been in control of the Homeowner’s Association at least 12 months and

o 90% of-units within the entire project are sold • For purchase transactions, property taxes may be calculated using the higher of 1.25% of

• the purchase price or the actual tax rate

COLORADO

• Denver Homeownership Center jurisdiction • Net Tangible Benefit Worksheet required • In Colorado, HOA Association Assessments have a “super-lien” position over the first mortgage.

� For both condominiums and PUDs, provide the following prior to closing: • A copy of the HOA by-laws indicating HOA assessments are subordinate to the

first lien o A subordination agreement executed by a representative of the HOA indicating that all

current and future HOA assessments are subordinate to the first lien mortgage

HAWAII

• Santa Ana Homeownership Center jurisdiction • Properties located in Lava Flow Zones 1 and 2 are not allowed • Properties located in Lava Flow Zone 3 are allowed

MICHIGAN

• Philadelphia Homeownership Center jurisdiction

NEVADA

• Santa Ana Homeownership Center jurisdiction • Condos, including FHA-approved condos, that do not meet both of the following requirements

are ineligible:

• Homeowners have been in control of the Homeowner’s Association at least 12 months and

o 90% of units within the entire project are sold • Nevada version of Net Tangible Benefit Worksheet required

OREGON

• Santa Ana Homeownership Center jurisdiction

TEXAS

• Denver Homeownership Center jurisdiction • Primary Residences (“Homestead Properties”): Purchases and rate-term refinances only: Cash-

out refinance transactions not allowed • Borrower may not receive any cash back on rate and term or streamline refinance transactions • Manufactured homes not allowed

UTAH

• Denver Homeownership Center jurisdiction


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FHA Guidelines



WASHINGTON

• Santa Ana Homeownership Center jurisdiction

GIFT FUNDS

Deposits made to a joint account by a non-borrowing spouse are not considered gifts, provided the non-borrowing spouse and borrower are joint account owners on the subject bank account – Large deposit verification is still required

GIFT DONORS

Eligible donors listed below may provide funds for the borrower’s down payment, closing costs, pre-

paid expenses and/or discount points: • Borrower’s relative • Gifts of equity from a family member, subject to all requirements in Gift of Equity • Close friend with a clearly defined and documented family-type relationship • Borrower’s employer or labor union • Governmental agency or public entity that has a program to provide homeownership

assistance to low and moderate-income families or first-time homebuyers

GIFT OF EQUITY

• Only family members may provide gifts of equity on a property being sold to other family members

• If the home is not the donor’s primary residence, the LTV is limited to 85% unless there is documented evidence the borrower leased the property for the past six months. Subject to additional guidelines from mortgage insurance.

• If the family member is also the non-occupant co-borrower, the LTV is limited to 75% • The family member’s proceeds may only be used for the gift of equity and payment of closing

costs, discount points and pre-paid expenses – The proceeds may not be used to payoff debt on behalf of the borrower, and the borrower may not received cash back at closing

INELIGIBLE SOURCES FOR DOWN PAYMENT

• Any person or entity with an interest in the sale of the property, such as the seller, real estate agent, broker or builder

• Any person or entity associated with any party having an interest in the transaction –

For exceptions, see Gift of Equity

GIFT DOCUMENTATION

• FHA requires all of the following: o Fully executed gift letter – For an acceptable gift letter, refer to FHA Gift Letter – A gift

letter must contain the following verbiage: “These funds are a true gift with no expectation or obligation on the applicant’s part to repay me at any time. Furthermore, the funds given to the applicant were not made available to me from any person or entity with an interest in the sale of the property, including the seller, real estate agent or broker, builder, loan officer or any entity associated with them.”

o Evidence of donor’s withdrawal of funds (e.g. Copy of donor’s canceled check, bank statement or bank-validated withdrawal slip)

� If donor’s statement shows a recent large deposit, FHA requires evidence of


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FHA Guidelines



the source of deposit � Cash-on-hand is never an acceptable source of donor’s gift funds

o Evidence of deposit into borrower’s account • Excess gift funds may not be considered as reserves for 3-4 unit properties • All gift fund documentation must be satisfied prior-to-closing

GIFT OR GRANT PROGRAMS

• Gifts or Grants fall into the following categories: o True gifts or grants – No repayment is required and no lien is placed against the

property – funds are listed as a gift in the assets section of the 1003 o Individual Development Account (IDA) Programs – Borrower participates in a savings

program facilitated by a non-profit organization. Once the savings goal is met, the non-profit organization provides matching funds (the amount varies depending on the program) – Borrower-saved funds are listed as an asset on the 1003 – IDA matching funds are listed as a gift in the assets section of the 1003

• Non-profit agencies must be FHA-approved by the appropriate FHA Homeownership Center. For a list of FHA-approved non-profits, refer to HUD Approved Non-Profit Search Engine:

INCOME

Income may not be used in calculating the borrower’s debt-to-income ratios if it comes from any source

that cannot be verified, is not stable, or will not continue.” – From HUD Handbook 4155.1, 4.D.1.a Acceptable sources of income are described in the sections below:

• Loans receiving a Total Scorecard Approve or Accept response - Refer to the TOTAL Scorecard findings for documentation requirements.

• Manually underwritten loans, including loans receiving a TOTAL Scorecard “refer” response and loans manually downgraded from an Approve to a “refer” response – Full income documentation required. Refer to documentation requirements in HUD Handbook 4155.1, 4.D-E and the TOTAL

Scorecard User Guide

ALIMONY AND CHILD SUPPORT

• Provide evidence the income will continue at least three years after the loan closes via one or

more of the following: o Final divorce decree o Fully-executed legal separation agreement o Voluntary payment agreement

• Provide evidence the borrower has been receiving the payments for the most recent 12 months via one of the following (periods of fewer than 12 months may be acceptable, provided the lender documents the payer’s ability and willingness to make timely payments, minimum of 3 months is required):

o Canceled checks o Deposit slips o Tax returns o Court records, such as a Friend of the Court statement

• If non-taxable, child support income may be grossed up: o Borrower files tax returns: Non-taxable Child Support income may be grossed up by the

“tax rate used to calculate the borrower’s last year’s income tax”

o Borrower is not required to file tax returns: Non taxable Child Support income


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FHA Guidelines



may be grossed up by 25%

• Alimony income may not be grossed up • For documentation requirements for loans with TOTAL Scorecard Approve or Accept

responses, refer to the Total Scorecard findings

AUTOMOBILE ALLOWANCES

• Only the amount of the allowance that exceeds actual automobile expenses may be used for qualification

• Amount of allowance is calculated using borrower’s most recent two years’ IRS form

2106 – Employee Business Expenses

o “If the borrower uses the standard per-mile rate in calculating the automobile expenses, as opposed to the actual cost method, the portion that the IRS considers depreciation may be added to income”

o The borrower’s monthly car payment must be included in the ratios • Employer verification that auto allowance payments will continue is required.

COMMISSION INCOME

The following is required for borrowers whose commission income is 25% or more of their income: • The commission portion of the borrower’s income is averaged over the most recent two years • Copies of the borrower’s personal tax returns are required, and un-reimbursed business

expenses from Schedule A of the 1040s must be deducted from the gross commission before averaging the commission income.

• If commission income is declining, it cannot be used. • If the borrower has received commission income at least one year but less than two years, the

commission income may be used for qualification purposes, provided the lender documents the income is likely to continue and the underwriter’s rationalization is documented in writing in the file.

• If the borrower has received commission income less than one year, the income is not eligible for qualification purposes unless the borrower’s income was re-structured from salary to commission and the borrower works in the same or similar position with the same

employer

DISABILITY INCOME

• Eligible, provided the disability income will continue at least three years after loan closing • Non-taxable disability income may be grossed up (not all disability income is non-taxable):

o Borrower files tax returns: Non-taxable disability income may be grossed up by the “tax rate used to calculate the borrower’s last year’s income tax”

o Borrower is not required to file tax returns: Non taxable disability income may be grossed up by 25%

DIVIDEND AND INTEREST INCOME

• Eligible, provided borrower has a two year history of receiving dividend and/or interest income • Dividend and interest income is averaged over the most recent two years using tax returns • If the borrower’s funds to close are derived from any of the accounts that provide dividend

and/or interest income, subtract the portion of funds that will be depleted from the asset’s account balance before calculating dividend and interest income


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FHA Guidelines



EMPLOYER SUBSIDIZED MORTGAGE PAYMENTS (EMPLOYER DIFFERENTIAL

PAYMENTS)

• Eligible as income if the employer pays the mortgage company directly • May not be used to offset the mortgage payment

BORROWERS EMPLOYED BY A FAMILY-OWNED BUSINESS

• Borrower must document that he or she does not have ownership in the company via signed personal tax returns or signed corporate tax returns showing all of the owners and the percentage of the company each owns

• If the borrower owns 25% or more of the family business, the borrower is self-employed and

subject to Self Employment requirements.

GOVERNMENT ASSISTANCE PROGRAMS

• Eligible, provided documentation the income will continue at least three years after the loan

closes is included in the file.

MILITARY INCOME

• Eligible Income is documented with a copy of the borrower’s Leave and Earnings Statement (LES) - Refer to the AUS findings for specific documentation requirements.

• In addition to the borrower’s base pay and provided evidence of continuance is verified in writing, some allowances and additional pay types showing on the LES may be included in the borrower’s qualifying income

• Allowances are non-taxable and may be grossed up by the “tax rate used to calculate the borrower’s last year’s income tax”.

• Additional pay, such as pro-pay, hazard pay, etc. is taxable and may not be grossed up.

NOTES RECEIVABLE INCOME

Eligible, provided all of the following are documented: • Copy of the note indicating payment amount the borrower receives and how long the payments

will continue (The payments must continue for at least three years after the loan closes) and

• Evidence the borrower has consistently received the income from the note for the most recent 12 months via one or more of the following: • Cancelled deposit slips • Cancelled checks • Tax returns

OVERTIME AND BONUS INCOME

• Eligible, provided borrower has received the overtime and/or bonus income for the past two

years, and it’s likely to continue

• Income is averaged over most recent two years • If income is declining, income cannot be used without justification by the lender and

documentation supporting the justification must be included in the file. • If income varies significantly from year-to-year, income must be averaged over a

period of time greater than two years. Overtime and bonus income are ineligible if the verification of employment indicates it’s unlikely to continue


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FHA Guidelines



PART-TIME PRIMARY EMPLOYMENT

• Eligible, provided the lender can document the stability of income and likelihood of ongoing employment .

PART-TIME INCOME FROM A SECOND JOB

Eligible, provided borrower has received second job income for the most recent two years, and it’s likely to continue

• FHA defines part-time income as “jobs taken to supplement the borrower’s income from regular employment, such as a second job that is less than 40 hours per week”

• If income from a second job has been received less than two years, it may be acceptable, provided the lender justifies the use of it in writing and that justification is documented in the file evidence the income is likely to continue is required

RENTAL INCOME

CONVERTING EXISTING HOMES TO RENTALS • Single-family residences:

o Rental income from the borrower’s current primary residence is permitted, provided at least one of the following FHA requirements is met:

� The borrower obtains new employment or a job transfer that is not within a reasonable commuting distance of the current primary residence or

� The borrower has a 25% equity position in the current primary residence as evidenced by an acceptable appraisal or comparing unpaid principal balance to the original sales price dated within the most recent six months. An exterior-only appraisal may be used to determine the borrower’s equity position.

o If one or both of the requirements above are met, all of the following documentation is required:

� Fully executed lease agreement (A 25% vacancy factor will be applied � monthly rent stated on the lease agreement) and � Evidence of the borrower’s receipt of the security deposit and � Evidence of the borrower’s deposit of the security deposit to his or her

bank account • 2 to 4-unit properties:

o Rental income from the unit the borrower is vacating is not permitted o Rental income may be used from the currently rented units only. Rental income is

calculated using Schedule E of IRS Form 1040 only, regardless of property

acquisition date. Therefore, if the borrower acquired the property within the current

calendar year, the ratios are calculated using the full PITI for the property the

borrower is vacating

2-UNIT SUBJECT PROPERTY – PURCHASE Rental income from the second unit may be used, provided all of the following

documentation is provided: • Fully executed lease agreement – Borrower may provide a copy of the seller’s fully

executed existing lease agreement or a fully executed new lease agreement. If neither an existing or new lease agreement exists, rental income is not permitted

• A 25% vacancy factor will be applied to the lesser of the appraiser’s estimate of rental income for the unit or the actual rental income stated on the lease agreement


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FHA Guidelines



• Maximum financing of 96.5% of the lesser of the purchase price or appraised value is permitted

3 TO 4-UNIT SUBJECT PROPERTY – PURCHASE

• If a non-occupant co-borrower is added to the loan, the LTV is limited to 75% • Loan must receive a TOTAL Scorecard Approve or Accept response • Loans that receive a TOTAL Scorecard “error” response due to the absence of credit scores

are ineligible. • Loans that receive an Approve or Accept response but none of the occupant borrowers

have credit scores are ineligible. • LTV < 90%:

o Rental income from the non-owner occupied units is permitted, subject to all of

the following documentation: o A fully executed lease agreement and o A 25% vacancy factor will be applied to the lesser of the appraiser’s

estimate of rent or the actual monthly rent stated on the lease agreement

o If the non-owner occupied units are not currently leased, rental income

may not be used for qualification • FHA requires the property to be self-sufficient – The monthly PITI divided by the net

rental income after applying FHA’s vacancy factors may not exceed 100%.

• Three months’ reserves required. 2-UNIT SUBJECT PROPERTY – RATE AND TERM REFINANCE

• Rental income from the non-owner occupied unit is permitted subject to all of the

following documentation: • Property was purchased during a previous calendar year - Rental income from

the unit the borrower does not occupy is calculated using Schedule E of IRS Form 1040. Lease agreements may not be used for properties acquired in previous calendar years.

• Property was purchased during the current calendar year - Rental income from the unit the borrower does not occupy is permissible, subject to all of the following documentation:

o Fully executed lease agreement between the borrower and renter o A 25% vacancy factor will be applied to the lesser of the appraiser’s

estimate of rental income for the unit or the actual rental income stated on the lease agreement

o If the second unit is not currently leased, no rental income is permitted • Maximum LTV is 97.75% 3 TO 4-UNIT SUBJECT PROPERTY – RATE AND TERM AND CASH OUT REFINANCES • The loan must receive a Approve or Accept response • Loans that receive an “error” response due to the absence of credit scores are ineligible • Loans that receive an Approve or Accept response but none of the occupying borrowers

have credit scores are ineligible • LTV < 90%:

o Rental income from the non-owner occupied units is permitted, subject to all of the following documentation:

� Property acquired in current calendar year: • A fully executed lease agreement • A 25% vacancy factor will be applied to the lesser of the appraiser’s

estimate of rent or the actual monthly rent stated on the lease


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FHA Guidelines



agreement • If the non-owner occupied units are not currently leased, rental

income may not be used for qualification � Property acquired in previous calendar years:

• Rental income from the units the borrower does not occupy is calculated using Schedule E of IRS Form 1040. Lease agreements may not be used to calculate rental income from properties acquired in previous calendar years

• LTV 90% - 97.75%: o The borrower must qualify with the full PITI. Rental income from the units the

borrower does not occupy may not be used, regardless of acquisition date • FHA requires the property to be self-sufficient – The monthly PITI divided by the net

rental income after applying FHA’s vacancy factors may not exceed 100%

• Three months’ reserves required •

2-UNIT SUBJECT PROPERTY – STREAMLINE REFINANCE • Minimum credit score – 620 • FHA’s maximum loan amount calculations apply • If the loan transaction is a credit qualifying Streamline refinance, rental income is

calculated in accordance with the policies in 2-Unit Subject Property – Rate and Term

Refinance

3 TO 4-UNIT SUBJECT PROPERTY – STREAMLINE REFINANCE • Minimum credit score – 620 • FHA’s maximum loan amount calculations apply • If the loan is a credit qualifying streamline refinance, rental income is calculated in

accordance with the policies in 3 to 4-Unit Subject Property – Rate and Term Refinance

ADDITIONAL INVESTMENT PROPERTIES OWNED BY THE BORROWER – NOT THE

SUBJECT PROPERTY � 1 to 2-unit properties acquired during the current calendar year – Rental income

must be documented with all of the following items:

• Fully executed lease agreement(s) between the borrower and the renter(s) • A 25% vacancy factor will be applied to the lesser of the appraiser’s estimate

of rental income for the unit(s) or the actual rental income stated on the lease agreement(s)

• If the units are not currently leased, rental income may not be used for qualification. Additional conditions may apply

� 1 to 4-unit properties acquired in previous calendar years – Rental income is calculated using Schedule E of IRS Form 1040

� 1 to 4-unit properties acquired during the current calendar year - Lease agreements

may not be used to calculate rental income, and the borrower must qualify with the full

PITI.

BOARDER INCOME Eligible, provided both of the following conditions are fulfilled:

• Boarder is related by blood, marriage or law and • Boarder income is shown on borrower’s tax returns

ROOMMATE INCOME • Ineligible


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FHA Guidelines



RETIREMENT INCOME

• Eligible, provided it will continue at least three years after the loan closes

SEASONAL INCOME (SEASONAL COACHING, HOLIDAY EMPLOYMENT, ETC.)

• Eligible, provided the borrower has received the income for the most recent two years and

the borrower expects to be hired next season.

SELF-EMPLOYED BORROWERS

• Borrowers who own 25% or more of any business are considered self-employed. • Self-employed income is eligible, provided the borrower has been self-employed at least two years, and

the income is averaged over the most recent two year period. • Income from borrowers who have been self-employed at least one year but less than two years may be

used for qualification, provided the borrower has: • At least two years of successful prior employment in the same line of work or • At least two years of successful employment in a related occupation or • A combination of one year of successful employment and formal education or

training in the same or related occupation. • Income from borrowers self employed less than one year is ineligible. • The following documentation is not required for loans having Total Scorecard Approve or Accept

responses: o Business tax returns are not required, provided all the following requirements are fulfilled:

� Individual tax returns show increasing self-employed income over the most recent two years and

� Funds to close are not coming from the borrower’s business accounts and � Loan is not a cash-out refinance

o Profit and loss statements and balance sheets, provided the income used to qualify does not exceed the previous two year average of income shown on the tax returns. However, the balance sheets and profit and loss statements are required if more than seven months have elapsed since the business’ tax year ending date and income from each self-employed business is > 5% of the borrower’s stable income

• If the borrower is required to file quarterly tax returns, income from the quarterly returns may be used to qualify the borrower .

• Business credit report • For information about calculating income using tax returns, refer to HUD Handbook 4155.1,

4.D.5-8 o Capital losses carried over from previous years may NOT be added back to the income.

SOCIAL SECURITY INCOME

• Eligible, provided the social security income will continue for at least three years after the loan closes

• If borrower is not of retirement age, continuance must be documented • Non-taxable Social Security income may be grossed up:

o Borrower files tax returns: Non-taxable Social Security income may be grossed up by the “tax rate used to calculate the borrower’s last year’s income tax”

o Borrower is not required to file tax returns: Non taxable Social Security income may be grossed up by 25%


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FHA Guidelines



TRAILING SPOUSE INCOME

• Ineligible • Trailing spouse income may be considered as a compensating factor only, provided all of the

following requirements are fulfilled: o Primary wage earner is relocating for the purpose of new or transferred employment and o The trailing spouse has an established history of employment and is expected to

return to work and o There is evidence of available employment within the trailing spouse’s profession and

that available employment is within reasonable commuting distance of the subject

property

TRUST INCOME

• Eligible, provided the borrower will receive “guaranteed, constant payments” for at least three years after the loan closes

• Document trust income with the following: o Copy of the trust agreement or trustee statement showing:

� The amount of the trust and � Frequency of distribution(s) and � Duration of payments – Must be at least three years

o If trust account funds are being used for borrower’s funds to close, provide evidence the distribution will not have a negative impact on borrower’s income from the trust

UNEMPLOYMENT INCOME

• Eligible, provided all of the following are documented: o Borrower has received unemployment income annually for the most recent two years and o Borrower works in a seasonal profession, such as landscaping or construction or works

for a resort, etc., so there is reasonable assurance the unemployment income will

continue

INCOME/EMPLOYMENT RESOURCES

• HUD Handbook 4155.1

INDUCEMENTS TO PURCHASE

Expenses paid by the seller above and beyond reasonable and customary closing costs and pre- paid


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FHA Guidelines



expenses are considered an inducement to purchase and result in a dollar-for-dollar reduction to the sales price before applying the appropriate LTV ratio. Inducements to purchase include but are not limited to the following:

• Seller-paid closing costs and pre-paids in excess of 6% of the purchase price or in excess of the actual closing costs and pre-paid expenses

• Decorating allowances • Repair allowances • Moving costs • Excess rent credit • Gift funds that do not meet the gift requirements in the “Gift Funds” section of this document,

including someone other than a family member paying off debts • Personal property items not normally included in the purchase of a home (e.g. boats, cars, riding

lawn mowers, furniture, televisions, etc.) • Sales commissions paid on behalf of the borrower on the sale of the borrower’s present residence • Borrower does not pay real estate commission on the sale of a present home when the real

estate broker or agent is involved in both transactions and the seller of the property purchased by the borrower pays a real estate commission exceeding that typical for the area

INDUCEMENT TO PURCHASE RESOURCES

• HUD Handbook 4155.1, 2.A.4.a-c

INSURANCE

HAZARD INSURANCE

• All FHA loans must have sufficient Hazard Insurance coverage at the time of closing.

FLOOD INSURANCE

• Any loan in a flood zone must have Flood Insurance. • Flood insurance policy must be a NFIP policy – Flood insurance provided by private providers is

not permitted. • If the subject property is a condominium-unit, the NFIP policy must be obtained by the

homeowner’s association. Borrower purchased flood insurance is not permitted unless the property is a site condominium. Loans must be denied if the HOA does not maintain adequate flood insurance, regardless of FHA condominium approval status

CONDOMINIUM FIDELITY/LIABILITY INSURANCE

• Each project must have $1,000,000 business liability insurance coverage with the HOA named as the insured

• Projects having > 20 units must show evidence of Fidelity (employee dishonesty) coverage ≥ three months HOA income with the HOA named as the insured/

• Site Condominiums – Liability insurance is not required. • Must be provided prior-to-close

HO-6 POLICY

• Required for all attached units unless documentation that the master condo policy includes


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FHA Guidelines



the same interior unit coverage is provided – Interior coverage in the master policy must include replacement of improvements and betterment coverage to cover any improvements made to the unit

• HO-6 policy that covers fixtures, equipment, and other personal property inside individual units is required unless the master policy meets all guides stated above

• Must be ≥ 20% of the unit’s appraised value • HO-6 Policy applies to PUDs having any coverage maintained under a master policy • HO-6 insurance premium must be included in the ratios, and escrows must be collected at

closing

LAND CONTRACTS

• Payoff of a land contract or contract for deed when the borrower does not currently have title to the property may be processed as either a purchase or rate and term refinance. These loans are considered on a case by case basis with management approval prior to underwriting.

LAND CONTRACT RESOURCES

• HUD Handbook 4155.1, 2.B.6.a-c • FHA Refinance Transactions, FHA Mortgagee Letter 2011-11 • FAQ on FHA Mortgagee Letter 2011-11

LIABILITIES

• All mortgage, installment, revolving, child support and alimony obligations must be

included in borrower’s ratios. • Auto leases must be included in the borrower’s ratios, regardless of remaining term. • Revolving debt may be excluded from the ratios, if the account will be paid off prior-to or

at closing, provided all of the following requirements are documented in the file: • The borrower may not have had any late payments on revolving, installment, or

mortgage debts in the most recent 24 months • The borrower may not have had any judgments, public records, non-housing related

charge-offs or collections, other than medical, in the most recent 24 months • Gifts may not be used to pay off revolving debt for qualification purposes • If the borrower has any of the derogatory credit described above, the revolving debt

must be included in the ratios, regardless of whether the account will be paid off, paid

down and/or closed prior to or at closing. • When the credit report does not provide a minimum payment for a revolving debt, use the

greater of $10 or 5% of the outstanding balance • Debts paid by a borrower’s schedule C business may not be excluded from the ratios. • If the borrower obtains a new HELOC, or re-subordinates an existing HELOC, the monthly

payment is calculated using the higher of the maximum accessible line of credit or existing

balance/

EXCLUDED LIABILITIES

• 401K loans • Union dues


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FHA Guidelines



• Child care expenses • Installment debts with fewer than ten payments remaining unless there is an impact to the

borrower’s ability to make timely payments in the months immediately after closing, particularly if the borrower has no reserves

• Co-signed debts, subject to all of the following documentation: o Evidence the person for whom the borrower co-signed has made the payments and o Evidence all payments have been made within the month due (Evaluated on a case-by-

case basis generally for a minimum 12-month period) and o Evidence the person making the payments is obligated on the excluded co-signed

liability • Mortgage assumptions – The borrower remains obligated on a mortgage loan that was

subsequently assumed. To exclude the mortgage debt from the liabilities, one of the following two requirements must be documented:

o “approve” or “accept” responses � A copy of the divorce decree requiring the spouse to make the payments or � A copy of the assumption agreement and the transfer deed indicating the

property was transferred to the new owner • Student loans that are deferred more than 12 months from the closing date:

LOAN TERMS

FIXED RATE MORTGAGES

• 10, 15, 20-year fixed rate mortgages without temporary buy-downs • 15 and 30-year fixed rate mortgages without temporary buy-downs

ARMS

5/1 CMT adjustable-rate mortgages without temporary buy-downs

LTV/CLTV

PURCHASES

• LTV: o Maximum LTV - 96.5% o Gross loan amount, including the financed up-front mortgage insurance premium, may

not exceed 100% LTV o Base loan amount, before addition of the up-front mortgage insurance premium, may

never exceed the lesser of the statutory loan limit for the county in which the property is located :

� SFR and borrower’s credit score is ≥ 640 for FHA Standard Product, 600 for GNMA Portfolio Product

• Contiguous 48 States - $625,500 • Hawaii, Alaska and Virgin Islands - $938,250

• CLTV o Government Second Mortgage – 100% of acquisition cost (lesser of purchase price or

appraised value + closing costs, pre-paid expenses, repairs and reasonable discount points)

o HUD-approved non-profit agency that is considered an instrumentality of government


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FHA Guidelines



- 100% of acquisition cost (lesser of purchase price or appraised value + closing costs, pre- paid expenses, repairs and reasonable discount points) – May be used to meet the borrower’s down payment requirement

o A HUD-approved non-profit agency that is not considered an instrumentality of government may provide secondary financing for closing cost, pre-paid expense and discount point assistance only. The borrower must make the required 3.5% down payment from a documented and acceptable source, and the combined amount of the first and second liens must not exceed the FHA’s statutory loan limit for the county in which the property is located.

RATE AND TERM REFINANCE

• LTV: o Maximum LTV – 97.75%, provided the borrower is not refinancing a previous

investment property re-occupied within the most recent 12 months - o If the borrower is refinancing a non-FHA loan and has owned the property less than

one year, the LTV is calculated using the lesser of the borrower’s purchase price or the new appraised value.

o If the borrower re-occupied a previous investment property within 12 months of the loan application, the maximum LTV is 85%

� Acceptable re-occupancy documentation includes, but is not limited to, utility

bills, property assessment statements, bank statements and similar items

• CLTV – 97.75% o If the subordinate lien is a line of credit, the CLTV is calculated using the

maximum accessible credit limit and not the outstanding balance

CASH-OUT REFINANCE

• LTV – 85% before addition of the up-front mortgage insurance premium o If the borrower has owned the property as his or her primary residence for at least a

year or the borrower acquired the property through inheritance and occupies or will occupy the property, use 85% of the new appraised value

o If borrower has owned the property as his or her primary residence for less than one year, use 85% of the lesser of the purchase price or appraised value

o If the loan is secured by a previous investment property re-occupied by the borrower within 12 months of the loan application, the transaction must be underwritten and closed

as a rate and term refinance with a maximum LTV of 85% � Acceptable re-occupancy documentation includes, but is not limited to utility

bills, property assessment statements, bank statements and similar items

• CLTV – 85% o If the subordinate lien is a line of credit, the CLTV is calculated using the

maximum accessible credit limit and not the outstanding balance.

STREAMLINE REFINANCE WITH OR WITHOUT AN APPRAISAL

• LTV – o For the purposes of calculating the annual mortgage insurance premium, the LTV is

based on the original appraised value indicated on the Refinance Authorization Screen • CLTV

o New Subordinate Financing – Not allowed o Existing or modified re-subordinated financing:


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FHA Guidelines



� Streamline Without an Appraisal – Maximum CLTV is 100% of original appraised value shown on Refinance Authorization screen in FHA Connection

� Streamline With an Appraisal – Maximum CLTV is 100% of the new appraised value o If the subordinate lien is a line of credit, the CLTV is calculated using the maximum

accessible credit limit and not the outstanding balance

HUD REO WITH REPAIR ESCROW o Property must be owned by HUD and listed on http://www.hudhomestore.com o Purchase Contract must reflect that the property is a 203(b) and Asset Manager fees must be listed o REO Contract required and signed by the Asset Manager o Appraisal is valid for 90-days and the value must be greater than or equal to the sales price o Repairs are allowed to be completed after closing with escrow holdback with the following criteria:

o Appraisal must list all repairs needed with cost breakdown of each repair o Contractor invoice required with valid license number and itemized repair costs o Escrow Holdback must be financed at 110% of total repair costs up to a maximum of $5,000 o Closing Agent must provide fully completed Holdback Form and signed by escrow officer, lender

agent, and borrower(s) o The estimated HUD should reflect $200 fee paid to NDM for processing holdback o Completion Inspection Report (CIR) fee must be disclosed on GFE and paid by borrower o All repairs must be completed within 15 days after closing o NDM will authorize all disbursements from escrow account with confirmation from contractor

showing payment in full for repairs o Any excess proceeds from holdback will be applied to loan principal

o Condominium Projects that are not approved must have an exception in writing from HUD to be eligible o Gift funds are allowed, but if used, Debt Ratio maximum is 50% regardless of DU Recommendation o HUD may credit up to 3% in closing costs

NON-OCCUPYING BORROWERS

• Maximum LTV is 75% or less when a parent is selling a residence to a child and is also a co-borrower

• Maximum financing is allowed for loans having non-occupant co-borrowers related by blood, marriage or law or for unrelated individuals that can document evidence of a long-term family-type relationship provided the non-occupant co-borrower is not the seller and the property is a single-family residence

• Maximum LTV is 75% when property is 2 to 4-units and there is one or more non-occupant co-borrower(s)

• Not allowed for cash-out refinances, unless the non-occupant co-borrower(s) are on the loan being refinanced.

INCREASE IN FAMILY SIZE

• At underwriters discretion, Max LTV of 96.50% on present FHA-insured property when a

second FHA loan is requested because the current residence is too small for the legal

dependents occupying the property. Satisfactory evidence proving such will be required.

IDENTITY OF INTEREST TRANSACTIONS

Identity of interest transactions are sales transactions between parties with family relationships or


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FHA Guidelines



business relationships. • Maximum LTV is 85% of purchase price • Maximum financing is permissible when any one of the following exceptions exists:

o A family member purchases another family member’s primary residence o A family member purchases a family member’s investment property or second home

AND the borrower has been a tenant for at least six months prior to the sales contract o An employee of a builder purchases one of the builder’s new homes or models as his or

her primary residence o A current tenant purchases the property that he or she has rented from a family member

or someone with whom the borrower has a business relationship for at least six months prior to the sales contract (If there is no identity of interest between the seller and borrower, maximum financing is permitted even when the borrower has been leasing the property fewer than six months)

o A corporation transfers an employee to another location, purchases the employee’s

home and then sells the home to another employee.

MAXIMUM/MINIMUM LOAN AMOUNTS

• In addition to the appropriate LTV calculation, the base loan amount, before addition of the up-front mortgage insurance premium, may not exceed the statutory loan limit for the county in which the property is located as published by HUD – Refer to FHA Mortgage Limits

o For FHA to FHA refinance transactions only, the loan limits in effect beginning October 1, 2011 thru November 17, 2011 only may be exceeded, provided all of the following requirements are met:

� The loan being refinanced is an existing FHA-insured mortgage � Gross loan amount, including financed UFMIP does not exceed the original

principal balance of the loan being refinanced � For cash-out and rate and term refis, the loan does not exceed the applicable LTV

limitation. For Streamline refinance transactions without an appraisal, the loan amount does not exceed the existing balance minus the UFMIP refund plus the new UFMIP.

� The loan does not exceed maximum loan amounts described below � The loan amount does not exceed the loan limits in effect prior to October 1, 2011 � The new loan term does not exceed the term of the loan being refinanced plus 12

years � For cash-out and rate and term refinance transactions, the new principal and

interest plus monthly mortgage insurance payment may not exceed the existing principal and interest plus monthly mortgage insurance payment. For Streamline refis, FHA’s Net Tangible Benefit requirements continue to apply

� No minimum principal balance is required for the existing FHA loan • Gross loan amount, including the financed up-front mortgage insurance premium (UFMIP), can

exceed the county’s statutory mortgage loan limit by an amount ≤ to the amount of the financed UFMIP

• All loans must be rounded down to the nearest whole dollar

NATIONS DIRECT MAXIMUM LOAN AMOUNTS

• SFR and borrower’s credit score is ≥ 640 for FHA Standard Product, 600 for GNMA Portfolio Product:

o Continuous 48 States - $625,500


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FHA Guidelines



o Hawaii, Alaska and Virgin Islands - $1,094,625 • 2-Units and borrower’s credit score is ≥ 640 for FHA Standard Product, 600 for GNMA Portfolio:

o Contiguous 48 states - $800,775 o Hawaii, Alaska and Virgin Islands - $1,201,150

• 3 Units and borrower’s credit score is ≥ 640 for FHA Standard Product, 600 for GNMA Portfolio o Contiguous 48 states - $967,950 p Hawaii, Alaska and Virgin Islands - $1,451,925

• 4 Units and borrower’s credit score is ≥ 640 for FHA Standard Product, 600 for GNMA Portfolio p Contiguous 48 states - $1,202,925 o Hawaii, Alaska and Virgin Islands - $1,804,375

MORTGAGE INSURANCE

When the case number is input correctly to Total Scorecard, the correct MI will show on the

automated underwriting findings.

UP-FRONT MORTGAGE INSURANCE

• Calculated as a percentage of the base loan amount • Based on loan term and loan purpose • May be financed • May be paid by borrower or seller - Seller-paid up-front mortgage insurance premium is

included in the 6% seller contribution limitation • If paid at closing and not financed, the entire amount must be paid – Partial payment with


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FHA Guidelines



partial financing is not allowed

ANNUAL MORTGAGE INSURANCE

• Calculated as a percentage of the base loan amount • Based on loan term, LTV and loan purpose • 1/12th of the calculated annual amount must be included in the proposed mortgage payment

and housing ratio • For the purposes of calculating the annual mortgage insurance premium for a Streamline

without an appraisal, the LTV is based on the original appraised value indicated on the Refinance Authorization Screen

Case Numbers Assigned before June 3, 2013

Cancellation of the annual premium will be considered after the LTV reaches 78% of the original

appraised value, provided the borrower has paid this premium for at least five years. There is no annual mortgage insurance premium for loans closed with LTVs ≤ 78% and the annual premium will be canceled when the LTV reaches 78% of the original appraised value, even if the

borrower has been paying the premium less than five years. Case Numbers Assigned on or after June 3, 2013

FHA will collect the annual MIP:

• For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.

• For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.

UP-FRONT MORTGAGE INSURANCE PREMIUM REFUNDS

Borrowers who refinance from one FHA loan to another FHA loan within the first three years of the

existing loan term are eligible for a refund of a portion of the UFMIP paid on the loan being refinanced: • FHA – FHA rate and term refinance • FHA – FHA cash-out refinance • Streamline refinance without appraisal • Streamline refinance with appraisal • Amount of refund is found in Refinance Authorization Screen in FHA Connection – Use the

unearned up-front mortgage insurance premium refund for the month the new loan funds and not

• the month the loan closes • Maximum refund – 80% if refinanced in the first month of the existing mortgage term • Minimum refund – 10% if refinanced in 36th month of the existing mortgage term • Amount of refund is used in maximum mortgage refinance calculations – See Refinance section • If the amount of the UFMIP refund is ≤ to the UFMIP for the new loan, the amount is not


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FHA Guidelines



refunded directly to the borrower but rather shown as a credit in section, 200, 800 or 900 of the HUD-I Settlement Statement

• If the amount of the UFMIP refund exceeds the new UFMIP, the amount of the new

UFMIP is credited as the UFMIP refund on the HUD-I settlement statement.

o HUD has not yet determined how they will refund the difference between the unearned UFMIP shown on the Refinance Authorization screen in FHA Connection and the new UFMIP to the borrower

o The difference may not be shown as a credit on the HUD-I settlement statement • No refund is given when loan is refinanced from FHA to conventional or the property is sold • The up-front mortgage insurance premium refund table is found in Moratorium on Risk

Based Mortgage Insurance Premiums, FHA Mortgagee Letter 2008-22

MULTIPLE FHA LOANS

FHA considers any individual who is obligated on an FHA note and/or holds title to a property encumbered by an FHA-insured mortgage to have interest in an FHA-insured property. Borrowers obligated on an FHA-insured mortgage and/or holding title to a property encumbered by an FHA-insured mortgage may not be approved for another FHA loan unless one of the following exceptions applies:

• Relocations – If the borrower’s job relocates to a location that is not within reasonable commuting distance from the existing home, he or she may obtain a new FHA insured primary residence loan. The relocation may be the employer’s or borrower’s choice, and sale of the present home is not required

• Increase in family size – Borrowers are permitted to obtain a second FHA insured primary residence loan when the existing home no longer meets the family’s needs due to increase in the number of legal dependents. Documentation of the increase in dependents, evidence of the current home’s size and failure to meet the family’s needs, and paydown of the existing FHA mortgage to a 75% LTV are required (secondary liens do not need to be paid off or paid down). A current appraisal is used to verify the size and value of the current home.

• Vacating a jointly owned property – If the borrower is vacating a primary residence that will

remain occupied by a co-borrower, the borrower may obtain another FHA-insured primary residence loan.

• Non-occupying co-borrower – A non-occupying co-borrower on a family member’s FHA-insured principal residence may have a joint interest in that property as well as in a principal residence of his or her own.

MULTIPLE FHA LOAN RESOURCES

HUD Handbook 4155.1, 4.B.2.d

MULTIPLE PROPERTIES

Borrowers are limited to ownership of seven units when the subject property is within close proximity to a group of properties owned by the borrower. Each unit in a multi -unit property counts toward the seven-unit limitation. (i.e., If a borrower owns a four-family apartment building, four units must be counted toward the borrower’s seven-unit limitation.) FHA defines “close proximity” as properties within a two-block radius from one another


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FHA Guidelines



NET TANGIBLE BENEFIT

STREAMLINE REFINANCE TRANSACTIONS

• Fixed Rate to Fixed Rate – New fixed principal and interest plus the new annual MIP must be at least 5% lower than the current fixed principal and interest plus the current annual MIP

• Fixed Rate to ARM - New ARM principal and interest plus the new annual MIP must be at least 5% lower than the current fixed principal and interest plus the current annual MIP

• One-Year ARM to ARM - New ARM principal and interest plus the new annual MIP must be at least 5% lower than the current ARM principal and interest plus the current annual MIP

• Fixed Rate to One-Year ARM – New ARM interest rate must be at least 2% lower than the current fixed rate

• One-Year ARM to Fixed Rate – New fixed interest rate may not exceed the current ARM rate by more than 2%

• ARM in Fixed Rate Period to Fixed Rate – New fixed rate principal and interest plus the new annual MIP must be at least 5% lower than the current fixed (hybrid ARM) principal and interest plus the current annual MIP

• ARM in Fixed Rate Period to One-Year ARM – New ARM interest rate must be at least 2% lower than the current fixed (hybrid ARM) rate

• ARM in Adjustable Rate Period to One-Year ARM – New ARM principal and interest plus new annual MIP must be at least 5% lower than the current Hybrid ARM principal and interest plus current annual MIP

• Loans that reduce the borrower’s loan term may be underwritten and closed as Streamline refinances, provided the appropriate net tangible benefit requirement listed above is also met. Reduction of the borrower’s loan term, in and of itself, is not a net tangible benefit.

• The number of months required to recapture the borrower-paid closing costs shown in sections 800, 1100 and 1200 of the Good Faith Estimate and HUD-I Settlement Statement may not

exceed 48 months

RATE AND TERM REFINANCE TRANSACTIONS

• For the following transactions, the new principal and interest payment plus the new annual • MIP must be at least 4% less than the current principal and interest plus the current

mortgage insurance, if applicable: o Existing fixed rate to new fixed rate o Existing fixed rate to new ARM p Existing ARM currently in its fixed rate period to new fixed rate o Existing ARM currently in its initial fixed rate period to new hybrid ARM o Existing ARM currently in its adjustable period to new one-year ARM o Existing fixed rate to new ARM

• The number of months required to recapture the borrower-paid closing costs shown in sections 800, 1100 and 1200 of the Good Faith Estimate and HUD-I Settlement Statement may not exceed 48 months

• The following transactions are exempt from the rate and term net tangible benefit requirements: � The new Loan has a shorter amortization period than the loan being refinanced (For

example, the loan being refinanced is a 30 year fixed rate mortgage, and the new rate and term refinance is a 15 year fixed rate mortgage)

� The rate and term refinance is the result of a court-ordered divorce buyout – A copy of the divorce decree is required


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FHA Guidelines



� The loan being refinanced is a balloon mortgage, and the new loan is a fixed rate mortgage

� If the rate and term refinance consolidates a first mortgage and purchase money second or seasoned second mortgage, exemption from net tangible benefit requirement is reviewed on a case-by-case basis and will not be granted if the payment is increasing and the note on the second is not due in the near future

STATE-REQUIRED NET TANGIBLE BENEFIT FORMS

FHA Refinance Net Tangible Benefit Worksheet, may not be used in lieu of any state-required net tangible benefit forms. When a state requires a net tangible benefit form, the appropriate form must be completed.

NEW CONSTRUCTION

• Any property less than one year old at the time of application is classified as New Construction, regardless of previous occupancy. One year is determined by the date the certificate of occupancy was issued.

• No construction draws allowed • Refinances of new construction draw loans must be submitted as purchase transactions • Cash-out refinances permitted up to an 85% LTV • If a property is less than one year old but being sold by a lender that foreclosed on the builder, new

construction documentation, including termite certification and treatment, is not required – Although new construction documentation is not required, Nations Direct requires a copy of the certificate of occupancy.

• Construction exhibits are not required for re-sales of properties that are less than one year

old, provided all of the following criteria are met: o Property is 100% complete, including all on and offsite improvements and o Re-sale is an arms-length transaction

• New construction properties fall into the following categories: o Proposed Construction - Excavation of construction site has not yet begun and foundation is

not yet in place. Not Allowed with NDM. o Under Construction – Any construction phase after site excavation but appraiser

indicates construction is not yet complete. Not allowed with NDM. o Existing Construction Less Than One Year Old – Property is complete and

appraisal is completed as is.

To calculate the maximum mortgage, refer to the calculation formulas contained in Property Underwriting

and Eligibility, FHA Mortgagee Letter 2009-16 – The maximum base loan amount before addition of the financed up-front mortgage insurance premium is the lesser of the calculations below:

o Statutory loan limit for the county in which the property is located or Nations Directs loan limit: SFR:

o Continuous 48 States - $625,500 q Hawaii, Alaska and Virgin Islands - $1,094,625

• 2-Units: o Contiguous 48 states - $800,775 p Hawaii, Alaska and Virgin Islands - $1,201,150

• 3 Units o Contiguous 48 states - $967,950

p Hawaii, Alaska and Virgin Islands - $1,451,925


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FHA Guidelines



• 4 Units p Contiguous 48 states - $1,202,925 o Hawaii, Alaska and Virgin Islands - $1,804,375

o 96.5% of the appraised value or o 96.5% of the total cost-to-construct, including hard costs and soft costs such as

building permits, plus the cost of the land, if separate. If the land has been owned more than six months or was received as an acceptable gift, the value of the land may be used instead of the cost of the land or

o The total existing indebtedness on the construction loan being paid off: Land plus the total cost to construct, including soft costs, plus borrower paid closing costs, pre-paid expenses and borrower paid discount points. If the land has been owned more than six months or was received as an acceptable gift, the value of the land may be used instead of the cost of the land

• Land equity may be used for borrower’s investment • Sweat equity – Not permitted • Borrower may receive cash back for documented funds (canceled checks and paid

receipts required) paid during construction. • Purchase 92900-LT required

PROPERTY TAXES

Property tax amounts included in the PITI and property tax escrows must be calculated based on the

fully assessed property value – Obtain actual tax amounts from the local tax assessor’s office • For new construction properties only, taxes may also be calculated using the higher of 1.25% of

the appraised value of the property or the actual tax rate.

NEW CONSTRUCTION RESOURCES

• HUD Handbook 4155.1, 2.B.5.a-d • HUD Handbook 4155.1, 2.B.7.a-b

NON-OCCUPANT CO-BORROWERS

• May be added to improve ratios • May not be added to overcome any borrower’s derogatory credit history • Must have a principal residence in the United States unless one of the following exception

applies: o Non-occupant co-borrower is in the military and stationed overseas

• Not allowed for cash-out refinances unless non-occupant co-borrowers were original borrowers on loan being refinanced.

• If the non-occupant co-borrowers do not have scores, but the occupying borrowers have credit scores, the requirements are based on the occupant borrower’s credit scores.

• If the non-occupant co-borrower’s scores are lower than the occupant borrower’s scores, the ratio guidelines and TOTAL Scorecard response requirements are based on the lowest credit score for all borrowers.

• 2 to 4-unit properties limited to LTVs ≤ 75% • Maximum LTV is 75% or less when a parent is selling a residence to a child and is also a

co-borrower. • Maximum financing is allowed for borrowers related by blood, marriage or law or for unrelated

individuals that can document evidence of a long-term family-type relationship, provided the


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FHA Guidelines



non-occupant co-borrower is not an interested party to the transaction and the property is a single-family residence.

OCCUPANCY

Owner occupied primary residences only. Non-owner streamline refinances are considered on a case by case basis with management approval.

POWER OF ATTORNEY

• Powers of Attorney meeting the following criteria are acceptable to FHA and Nations Direct: o The application and purchase agreement must be signed by all parties to the loan and

may not be signed by an individual with power of attorney for any of the borrowers

The following exceptions are permitted: � Power of Attorney may be used for the application and application disclosures if the

borrower is on active military duty and deployed overseas or on an unaccompanied tour. Nations Direct must obtain the service member’s signature on the 1003 via mail or fax.

� Incapacitated borrowers – Provide evidence the signer has authority to purchase

the property and obligate the borrower.

� Provide a copy of the Durable Power of Attorney specifically designed to survive

incapacity and avoid the need for court proceedings.

o Purchase or rate and term refinance only. Military durable power of attorney permitted for cash-out transactions. Cash-out transactions may not close with any power of attorney other than a military durable power of attorney.

• All signatures on the power of attorney must be notarized, and the power of attorney must be reviewed by a Nations Direct underwriter. All signatures must match the signatures in the file/

• The POA must be specific to the Nations Direct loan and indicate the property address unless it’s a Military Durable POA

• There must be more than one borrower on the loan and at least one borrower must be present at closing

• POA is not allowed for single borrower transactions

PRIVATE ROADS

• Must be protected by a permanent recorded easement reviewed and approved by the DE underwriter.

• Must be owned and maintained by a Homeowner’s Association. • Private road maintenance agreement may be required per underwriter discretion. • Road must “provide all-weather access to all buildings for essential and emergency use,

including access for deliveries, service, maintenance and fire equipment.” All-weather roads

are defined as “surfaces over which emergency vehicles can pass in all types of weather.”


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FHA Guidelines



PROPERTY ELIGIBILITY

ELIGIBLE

• Property size - FHA does not have a minimum square footage requirement - All properties must be marketable in the area and have adequate sanitary facilities and suitable living, cooking, sleeping, and eating space.

• Owner occupancy required. • 1 - 4-units:

o 2 to 4-unit properties are ineligible for cash-out refinance transactions o 3 to 4-unit HUD REO properties are ineligible

• Condominiums – must be FHA-approved under HUD’s “HRAP” program. Condos approved by another lender under HUD’s “DELRAP” program not eligible for financing. – See “Ineligible” section below for ineligible condos

• PUDs o Homeowner’s assessments must be subordinate to the FHA mortgage. Provide one of

the following items as documentation of HOA assessment subordination (Required for all loans except Streamline refinances):

� PUD by-laws indicating all homeowner’s association assessments are subordinate to mortgage liens or

� Subordination agreement executed by a representative of the homeowner’s association or

� Title commitment stating that the title company will insure over any homeowner’s association assessment liens or

� Letter on letterhead from the title company indicating that PUD liens cannot take

first lien position in the state in which the property is located or � ALTA 9 or ALTA 5 title endorsement � 60-Day letters may not be provided in lieu of one of the documents above

• Modular homes – not eligible • Leaseholds

o Attorney’s opinion letter stating all warranties are met is required o For FHA’s leasehold guidelines, refer to HUD Handbook 4150.1, Chapter 6, Sections

32-33 • Manufactured homes – Not eligible

• Mixed use properties - Not eligible

INELIGIBLE

• Any property where the seller is not the owner of record • Any property being re-sold within 30 days where the seller is an individual or is not exempt

pursuant to FHA and VA Property Flipping, • Investment Properties • Manufactured homes

• Single-wide manufactured homes, regardless of loan purpose or current servicer • 2 to 4-unit properties are ineligible for cash-out refinance transactions • 3 to 4-unit properties are ineligible if borrowers do not have credit scores • Second homes • Co-operatives • Modular Homes • Mobile Homes


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FHA Guidelines



• Working farms, ranches and orchards • Properties located in Wrightwood, California are ineligible unless the following documentation

is provided (FHA issues a case number warning stating, “Warning: Appraisal problem (unstable soil) for 92397 Wrightwood areas: property specific approval required due to

liquefaction): o Geotechnical survey prepared by an engineer or geologist with competency in the field.

The survey must reference the property and indicate the home is reasonably safe from future damage caused by soil conditions on the site and

• Properties having both a stick-built and manufactured home located on the same parcel or property unless the manufactured home is unoccupied and utilities are not hooked up

• If at least 50% of the units within the entire project are not sold and the Homeowner’s Association has not been in control at least 12 months, condos in the following states are ineligible, regardless of units sold and/or HOA status

• For all FHA loan purposes, Nations Direct will not approve or permit closing of any condominium-unit located in a project that is listed as “denied” or “ineligible”

• Purchases of 3 to 4-unit HUD REO properties are ineligible • Mixed use/commercial properties.

Properties that have any one of the following characteristics are ineligible: o Commercial enterprises o Boarding Hotels/motels o Condo-tels o Tourist homes o Private clubs o Bed and breakfast establishments o Fraternity/sorority houses o Properties having Chinese drywall or properties previously having Chinese drywall, regardless of

any drywall removal and/or efforts to cure the damage o Properties located in a “cancer cluster” or other health hazard area unless the local health

authority provides written certification that the subject property is not affected by the health hazard and the borrower provides a written certification acknowledging the health hazard and its resolution.

PROPERTY FLIPPING/SELLER SEASONING

91 TO 180-DAYS SINCE SELLER ACQUISITION:

If property is being sold between 91 and 180 days of the seller’s acquisition and the sales price increases by 100% or more, a second FHA appraisal is required (this applies to all purchase transactions, regardless of seller’s property flipping exemption status). The only exemptions from this second appraisal requirement are for properties located in a presidentially declared disaster area or properties inherited by the seller within 91 – 180 days of the borrower’s execution of the purchase agreement. The following criteria applies:

• If property is a bank-owned REO, the selling bank may provide evidence of foreclosure amount. If new sales price is not 100% more than the foreclosed amount, the second appraisal is not required

• If the value indicated on the second appraisal is more than 5% lower than the value indicated on the original appraisal, the lower value of the second appraisal must be used to calculate maximum loan amounts and LTV/CLTV

• Maximum loan amount must be based on the lower of the two appraised values • Appraisal must be ordered in compliance with FHA


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FHA Guidelines



12 MONTHS SINCE SELLER ACQUISITION

If property was purchased within the previous 12 months and the new sales price increases by 5% or more, Nations Direct will require documentation to support the increased value including any rehabilitation or remodeling. A second FHA appraisal may be required at the underwriter’s discretion

PROPERTY FLIPPING RESOURCES

• Temporary Exemption from Compliance with FHA’s Regulation on Property Flipping Extension of Exemption - 2012

• HUD Handbook 4155.2, 4.7.a-h

PROPERTY INSPECTIONS

INSPECTION REQUIREMENTS FOR REQUIRED REPAIRS

• Repair inspections must confirm all required repairs are satisfactorily completed and must meet

the requirements below: o HUD Form 92051 – Compliance Inspection Report – Completed by the appraiser or HUD

Fee Inspector or o Fannie Mae Form 1004D– Update Completion Report may be used in lieu of a

compliance inspection report, provided the property does not require structural repairs, is not new construction and/or a manufactured home

o For new construction requirements, refer to Government Forms and Disclosures, p If a 10 year warranty and final inspection is being documented instead of a building

permit and final Certificate of Occupancy, the final inspection must be performed by an FHA fee inspector

o Inspections that require architectural expertise (structural and/or system repairs) must be completed on HUD form 92051 by a HUD Fee Inspector

o Documentation to support the repairs may be documented by a “professionally and/or appropriately licensed, bonded, registered engineer or home inspector or tradesperson”

• For additional repair requirements, refer to HUD Handbook 4155.2, 4.6.a-e and the HOC Reference Guide

• In addition to the final inspection requirements above, if chipped, cracked or peeling paint repair

was required for a property built prior to 1978, the following requirements must be met: o Homeowner completed the repair on his or her own home – A letter from the homeowner

stating that he or she completed the repair is required o Property owner/landlord completed the repair – The individual who completed the work must

provide a copy of the EPA or state-lead training certification in his or her name o A contractor completed the repair - The contractor who completed the work must provide

a copy of the EPA or state-lead training certification in his or her name

HUD REO PROPERTIES

Lead based paint evaluation required for all FHA-financed HUD owned properties constructed prior to 1978 • Lead based paint evaluation is ordered by the marketing and management company

after ratification of the sales contract indicating the borrower is obtaining FHA financing. • If lead based paint stabilization is required, it must be completed prior to close.

TERMITE, WELL AND SEPTIC INSPECTIONS

• Proposed, under construction and existing less than one year require mandatory inspections or


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FHA Guidelines



analysis and treatment when applicable, even if previously occupied. • If property is bank-owned and the bank foreclosed on the builder, inspection requirements are the

same as existing construction.

TERMITE INSPECTIONS For existing properties greater than one year old, termite inspection and/or treatment is required only

if the appraiser indicates any of the following: • The appraiser indicates there may be active infestation • Termite inspections are mandated by state or local jurisdiction • Termite inspections are customary in the area • May also be required at lender’s discretion

WELL INSPECTIONS • For existing properties greater than one year old, a water test or well inspection is required if the

appraiser indicates any of the following: o Tests and/or inspections are mandated by state or local jurisdiction o Knowledge that well water may be contaminated or well is not functioning properly o Water supply relies on a water purification system due to the presence of contaminants o There is evidence of the following:

� Corrosion of pipes

� Areas of intensive agriculture within ¼ mile � Coal mining or gas drilling operations within ¼ mile � A dump, junkyard, landfill, factory, gas station, or dry cleaning operation within ¼

mile � Unusually objectionable taste, smell or appearance of well water.

• When water tests are required, they must include all microbiological and chemical tests required

by the municipality. At minimum, the water must be tested for “lead and acute contaminants, including nitrates, nitrites and acute contaminants such as total and fecal coliform.” The testing must also include any other contaminants of local concerns.

SEPTIC INSPECTIONS For existing properties greater than one year old, a septic test or inspection is required if the

appraiser notes any of the following: • Evidence of system failure • Septic inspections are mandated by state or local jurisdiction • Septic inspections are customary in the area • May be required at lender’s discretion

SNOW CLAD ROOF INSPECTIONS

If the roof is not visible due to snow, the appraiser must inspect the interior of the home for evidence of roof problems. Any evidence of roof damage must be noted in the appraisal, and the appraiser must indicate he or she was unable to observe the roof due to snow coverage. If the appraiser indicates there’s evidence of roof damage inside the home, a roof inspection must be requested by the underwriter – Appraisers are required to observe/inspect the attic by inserting their head and shoulders in to the attic space.

CHINESE DRYWALL

If Nations Direct is made aware that Chinese drywall is currently present or previously existed in the

home, we will not approve, nor fund the loan, regardless of any drywall removal and/or efforts to cure the damage.


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FHA Guidelines



FEMA-DECLARED DISASTER AREAS

Properties being purchased and/or refinanced within a FEMA- declared disaster area require the

following documentation from the appraiser who completed the original appraisal: • Interior and exterior inspection indicating the property is still standing and in acceptable condition • Written description of the neighborhood condition • Photographs of the interior and exterior of the property • If property damage is found, an itemized list of damages with repair estimates must be included • If property damage is structural or there are other complex damages, a qualified third party

must inspect the damages and provide evidence the property has been satisfactorily repaired • If the local jurisdiction requires building permits, inspections and/or a certificate of occupancy, they

must be included in the file • Regardless of the estimated cost to complete, repairs must be completed prior to the loan

being cleared-to-close.

• A 442 will be required prior to the loan closing.

• For additional information, refer to FHA’s Natural Disaster Protocols FAQ

METHAMPHETAMINE CONTAMINATION

To mitigate health hazards resulting from prior methamphetamine (meth) manufacture and/or

consumption, properties having meth contamination require meth remediation. The following remediation

protocols must be followed and documented in the file prior to the loan being issued a clear-to-close

status: • Report by a certified industrial hygienist that includes all of the following elements:

o Initial site survey o Pre-remediation base-line testing results o Remediation protocols that cite and conform to local guidelines and/or regulations (In

the absence of local guidelines, EPA guidance must be followed) o Post-remediation testing results o Certification as of a final testing date of contamination levels below recommended levels (BRL)

and that state the property, including the site and all structures, is safe for habitation by both humans and pets

• Affidavit signed by the borrowers that states they attest to: o Being aware of the contamination and its adverse impact o Acceptance of the remediation efforts, testing and reports

• The property must meet all other HUD minimum property requirements Individuals having knowledge the property has been identified as a meth house must notify the appraiser

who must: • If the appraisal inspection occurs during the remediation phase, including completion of related

repairs, the appraiser must complete the appraisal subject to a certification that the property, including the site and dwelling, is safe for habitation.

• Address any long term stigma and impact on the value and or marketability caused by the meth

contamination.

PROPERTY INSPECTION RESOURCES

• Repair and Inspection Requirements, FHA Mortgagee Letter 2005-48 • Homeownership Reference Guide • HUD Handbook 4155.2, 4.6.a-e • FHA’s Natural Disaster Protocols FAQ • FHA’s Meth Remediation Protocols FAQ


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FHA Guidelines



PURCHASES/PURCHASE AGREEMENTS

PURCHASES OF SHORT SALES

A purchase transaction is considered a short sale when the new purchase price is less than the total of all existing liens on the property and the existing servicer(s) will receive proceeds that are less the current lien balance(s).

• Copy of the fully executed short sale agreement is required. Short sale agreement must be valid through the closing date on the new purchase transaction

• Purchase transaction must be an arms-length transaction. Non-arms-length transactions are ineligible.

• The borrower may not pay any portion of the seller’s liens or short sale fees

PURCHASE/CONSTRUCTION AGREEMENTS

• Purchase agreements and all addendums must be signed by all occupying borrowers o Borrowers added after the original purchase agreement was executed are not required to

sign the initial purchase agreement but must sign the addendum(s) executed on or after the date the borrower was added to the loan.

• Non-occupant co-borrowers may but are not required to sign the purchase agreement/ • All changes to any specifications listed in the initial purchase agreement require an addendum to

the purchase agreement. The addendum must be fully executed by all borrowers and sellers and real estate agents, if applicable.

QUALIFYING RATES

FIXED RATE MORTGAGES

Borrowers are qualified at note rate

ADJUSTABLE RATE MORTGAGES

5/1 ARMS – Borrowers are qualified at note rate

RATIOS

MAXIMUM RATIOS

• TOTAL Scorecard Approve or Accept o Maximum housing ratio – Refer to the TOTAL Scorecard findings o Maximum total debt ratio – Refer to the TOTAL Scorecard findings.

PAYOFF LETTERS

• Payoff letters for each lien being paid off must be included in the file. • Mortgage payoffs must indicate the borrower is current. The borrower may make the payment for

the funding month prior to closing or include the payment in the payoff. If the borrower does not make the payment for the funding month prior to closing, the borrower must have made the payment for the month prior to funding within the month due. Therefore, if a loan funds in April, the borrower must have made the March payment within the month of March


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FHA Guidelines



CASH-OUT REFINANCE TRANSACTIONS

• Maximum loan amount is calculated using FHA Maximum Mortgage Worksheet – Cash-Out Refinance,

• Maximum LTV – 85% o Owned as borrower’s principal residence at least one year (FHA requires the borrower to

have made at least six monthly payments) – Maximum LTV is calculated using the appraised value

� If the borrower inherited the property and occupies or will occupy the property as his or her primary residence, the maximum LTV is 85% of the new appraised value, regardless of acquisition date

o Owned as borrower’s principal residence less than one year – Maximum LTV is calculated using the lesser of purchase price or appraised value (When using the purchase price to calculate LTV, documented repairs cannot be included) .

o If the loan is secured by a previous investment property re-occupied by the borrower within 12 months of the loan application, the transaction must be underwritten and closed as a rate

and term refinance with a maximum LTV of 85% � Acceptable re-occupancy documentation includes, but is not limited to utility

bills, property assessment statements, bank statements and similar items.

• Maximum CLTV – 85% - If the subordinate lien is a line of credit, the CLTV is calculated using the maximum accessible credit limit and not the outstanding balance/

• 2 to 4-unit properties are ineligible for cashout. • Mortgage payment history requirements are based on the seasoning requirements below:

o If the mortgage payment history indicates the borrower has made at least 12 payments on the loan being refinanced, all payments for the most recent 12 months must have been made within the month due.

o If the mortgage payment history indicates the borrower has made at least six but fewer than 12 mortgage payments on the loan being refinanced, all payments must have been made within the month due.

o If the mortgage payment history for the loan being refinanced indicates the borrower has made fewer than six months payments, the loan is ineligible for cash-out. Borrowers who inherited the property within the most recent six months are not required to meet the six month seasoning requirement.

• Cash-out explanation is required • If revolving debt will be paid at close, the most recent account statement is required unless the last

reported month on the credit report is within 30 days of the loan closing. • Non-occupant co-borrowers not permitted unless they were borrowers on the loan being refinanced • Not allowed in the state of Texas for primary residences (“Homestead Properties”).

RATE AND TERM REFINANCE TRANSACTIONS

• Cash back at closing may not exceed $500 and may only be the result of minor adjustments at closing. Unexplainable cash back to the borrower on the HUD may delay your closing and/or funding or require the originating lender to make a principle reduction to loan amount after closing.

• The following items may be paid through and included in the rate and term refinance loan amount, provided the total does not exceed :

� Payoff off of existing principal balance, per diem interest through loan payoff, escrow shortages and late fees (no other fees, including delinquent interest and the pro-rated mortgage insurance premium indicated on the payoff may be included)


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FHA Guidelines



� Closing costs � Pre-paid expenses � Discount points � Equity to ex-spouse � Purchase money seconds � Junior liens > 12 months old (If junior lien is a HELOC, there may not have been

draws totaling more than $1000 in the most recent 12 months unless the funds were used for documented home improvements) � Partial payoff of a junior lien may be financed in the rate and term refinance,

provided FHA’s seasoning requirements are met and the existing second is re-subordinated to the new mortgage. Modification of the existing second lien is permitted at the time of re-subordination. FHA’s CLTV requirements apply

• Property value is calculated using the applicable formula below: o For FHA – FHA rate and term refinances, value is based on appraised value o For Non FHA – FHA rate and term refinances, if the borrower has owned the property less

than one year, the LTV is calculated using the lesser of the borrower’s purchase price or the new appraised value

o For Non-FHA – FHA rate and term refinances, if the borrower has owned the property at

least 12 months, the LTV is calculated using the new appraised value • Maximum CLTV – 97.75% - If the subordinate lien is a line of credit, the CLTV is calculated using

the maximum accessible credit limit and not the outstanding balance • Maximum LTV – 97.75%

o If the borrower re-occupied a previous investment property within the most recent 12 months, the maximum LTV is 85%

• Net Tangible Benefit Requirement o For the following transactions, the new principal and interest payment plus the new

annual MIP must be at least 4% less than the current principal and interest plus the current mortgage insurance, if applicable:

� Existing fixed rate to new fixed rate � Existing ARM currently in its fixed rate period to new fixed rate

o The number of months required to recapture the borrower-paid closing costs shown in sections 800, 1100 and 1200 of the Good Faith Estimate and HUD-I Settlement Statement may not exceed 48 months

o The following transactions are exempt from the rate and term net tangible benefit requirements:

� The new Loan has a shorter amortization period than the loan being refinanced (For example, the loan being refinanced is a 30 year fixed rate mortgage, and the new rate and term refinance is a 15 year fixed rate mortgage)

� The loan being refinanced is a ARM or one-year ARM, and the new loan is a fixed rate mortgage

� The loan being refinanced is an interest only loan � The rate and term refinance is the result of a court-ordered divorce buyout – A copy

of the divorce decree is required � The loan being refinanced is a balloon mortgage, and the new loan is a fixed rate

mortgage � If the rate and term refinance consolidates a first mortgage and purchase money

second or seasoned second mortgage, exemption from net tangible benefit requirement is reviewed on a case-by-case basis and will not be granted if the payment is increasing and the note on the second is not due in the near future


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FHA Guidelines



o To calculate the borrower’s payment reduction and number of months to recapture the closing costs, use FHA Refinance Net Tangible Benefit Worksheet.

STREAMLINE REFINANCE TRANSACTIONS

• If the subject property was previously the borrower’s investment property and the borrower re-occupied the property within 12 months of the loan application, the maximum LTV is 85%

• Loan must be FHA-insured and the borrower must have made at least six consecutive payments on the existing FHA loan

• FHA will not assign a Streamline refinance case number until the loan being refinanced meets all

of the following seasoning requirements: • 210 days have passed since the closing date of the FHA loan being refinanced

and • The borrower has made at least six payments on the FHA loan being refinanced

and • At least six full months have passed since the first payment due date of the FHA loan

being refinanced. • FHA does not permit ordering a case number as a rate and term refi to circumvent

these requirements and FHA will not revise a case assigned as a rate and term or cash-out to a Streamline refinance

• May be originated with or without an appraisal – Streamline transactions with an appraisal must be

underwritten and closed as credit-qualifying Streamlines only

• FHA Secure loans that were delinquent at the time of loan financing are not eligible to be refinanced under the Streamline Refinance Program

• Modified loans and loans involving any FHA Loss Mitigation are ineligible for Streamline Refinance • Funds required for closing must be verified from an acceptable source. Because Streamline

refinance transactions are underwritten manually, full asset documentation is required. • Social security number verification required with one of the following:

• W-2, paystub, passport � Copies of social security card � Fully executed Social Security Administration Authorization

• Loans in modification or for which foreclosure proceedings have been started are not eligible • All mortgage late payments require written explanation and evidence of extenuating circumstances

o Mortgage payment history < 12 months – All mortgage payments must have been made within the month due

o Mortgage payment history ≥ 12 months – No 30-day late mortgage payment in the most recent 12 months.

Excessive interest or late payment fees indicated on the payoff requires the borrower to provide a written explanation

• While ratios are not calculated, Nations Direct does not approve Streamline loans if none of the

borrowers have income. The 1003 must include the current employer’s name, address, phone number, borrower’s job title and length of time on job. The following documentation requirements

apply: o Salary hourly or commission income – Verbal VOE is required o Active-duty military income – Verbal VOE is required o Borrower works in a seasonal profession but is currently receiving unemployment

income – Proof the borrower is currently receiving unemployment income and Nations Direct performs a verbal verification of employment evidencing the borrower has been employed in a seasonal position at least two years. If the climate in which the borrower works indicates the borrower should be currently employed in his or her seasonal position, but the borrower is currently receiving unemployment, the loan will be denied


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FHA Guidelines



o Self-employed or partnership income – Provide a copy of a current valid business license or evidence of the business’ existence through Lexis Nexis

o Rental income as the borrower’s only source of income – Copy of current lease(s) required o Social security income and borrower is ≥ 62 years of age – No verification is required

o Pension income – Provide a bank statement documenting direct deposit of the borrower’s pension income or a copy of the borrower’s pension award letter

o IRA or 401k distribution income: - Provide a copy of the borrower’s written distribution plan from the investment company or three months’ bank statements identifying the consistent monthly deposit

o Child support or alimony income – Provide a current friend of the court letter or copy of the borrower’s divorce decree or support order and the most recent three months’ bank statements showing consistent deposits in the amount of the support or alimony

o Disability income or social security income and borrower is ≤ 62 years of age – Provide a bank statement documenting direct deposit of income or a copy of the borrower’s social security award letter or a copy of the borrower’s disability award letter

o Loans that have two borrowers who were both employed on the application for loan being refinanced but one is no longer employed – As long as acceptable income verification as described above is obtained for the employed or income-receiving borrower, no further verification is needed.

o Loans having no borrowers who receive income - Ineligible • Cash back at closing may not exceed $500 and may only be the result of minor adjustments at

closing. Unexplainable cash back to the borrower on the HUD may delay your closing and/or funding or require the originating lender to make a principle reduction to loan amount after closing

• Subordinate Financing o New subordinate financing not allowed o Existing or modified subordinate financing – Max CLTV 100% - If the subordinate lien is a

line of credit, the CLTV is calculated using the maximum accessible credit limit and not the outstanding principal balance

� Streamline without appraisal – Calculate CLTV using original appraised value indicated on the Refinance Authorization Screen in FHA Connection

� Streamline with appraisal – Calculate CLTV using new appraised value. • Loan must provide a Net Tangible benefit to the borrower – To calculate the borrower’s payment

reduction and number of months to recapture the closing costs, use FHA Refinance Net

Tangible Benefit Worksheet, o Fixed Rate to Fixed Rate – New fixed principal and interest plus the new annual MIP must

be at least 5% lower than the current fixed principal and interest plus the current annual MIP o Fixed Rate to Hybrid ARM - New hybrid ARM principal and interest plus the new annual

MIP must be at least 5% lower than the current fixed principal and interest plus the current annual MIP

o One-Year ARM to ARM - New ARM principal and interest plus the new annual MIP must be at least 5% lower than the current ARM principal and interest plus the current annual MIP

o One-Year ARM to Fixed Rate – New fixed interest rate may not exceed the current ARM rate by more than 2%

o ARM in Fixed Rate Period to Fixed Rate – New fixed rate principal and interest plus the new annual MIP must be at least 5% lower than the current fixed (hybrid ARM) principal and interest plus the current annual MIP

o ARM in Adjustable rate period to Fixed Rate – New fixed rate may not exceed the current hybrid ARM rate by more than 2%


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FHA Guidelines



o Loans that reduce the borrower’s loan term must be underwritten and closed as a rate and term refinance.

o The number of months required to recapture the borrower-paid closing costs shown in sections 800, 1100 and 1200 of the Good Faith Estimate and HUD-I Settlement Statement may not exceed 48 months.

� To calculate the net tangible benefit and number of months to recapture costs and view a list of loans exempt from the 48 months to recoup requirement, use FHA

Refinance Net Tangible Benefit Worksheet, • Loans should not be run through Total Scorecard. However, non-credit qualifying Streamline

transactions inadvertently run through Total Scorecard are permitted, and documentation of values is not required

o Loans inadvertently run through Total Scorecard must be manually underwritten, regardless of the Total Scorecard response. The DE Underwriter must enter the CHUMS number and sign and date the 92900-a and 92900-LT.

• Sections I, II, III, IV, VII, l-m of section VIII, IX and X of the 1003 must be completed in their entirety. • Loan may not be processed and underwritten until the borrowers and originator complete the

1003 and addendum to the 1003 (HUD form 92900-A)

ADDING OR DELETING BORROWERS/CREDIT QUALIFYING STREAMLINE REFINANCE

• Borrowers may be added to the loan without credit qualification, provided the original borrower(s) also remain on the loan

• Borrowers may only be deleted from the existing loan without credit qualifying if one of the

following requirements is met: o An assumption of a mortgage that does not contain a due-on-sale clause occurred

more than six months prior to application and the assumptor can document that he or she has made the mortgage payments since assumption or

o Following assumption of a mortgage in which the due-on-sale clause was not triggered, such as a property transfer resulting from divorce or devise or descent, and the assumption occurred more than six months prior to application and the remaining owner-occupant can demonstrate he or she has made the payment since assumption.

• If deleting a borrower from the loan causes any of the following, the borrower must be credit

qualified:

o Deletion of the borrower will trigger a due-on-sale clause or o The borrower assumed a mortgage that did not contain a due-on-sale clause but

limited assumptions only to creditworthy borrowers and the assumption occurred less than six months previously or

o The borrower assumed a mortgage that did not contain a due-on-sale clause but the property was assumed less than six months prior to application as the result of a divorce, devise or descent

• Credit qualifying Streamlines require the underwriter to determine the borrower will make the

mortgage payment by evaluating all of the following:

Income documentation Credit history/liabilities Debt-to-income ratios Transaction may be completed with or without an appraisal

STREAMLINE REFINANCE WITH APPRAISAL • Maximum loan amount is calculated using the same method as a Streamline Without an

Appraisal.


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FHA Guidelines



o Base loan amount may not exceed the original principal balance of the loan being refinanced

o Base loan amount may not exceed the statutory loan limit for the county in which the property is located

• Streamline refinance transactions with appraisals must be underwritten and closed as credit-qualifying Streamline refinances only

• Repairs indicated in the appraisal are not required unless chipped, cracked or peeling paint exists in the interior or on the exterior of a home built prior to 1978

• Value is based on appraised value, regardless of seasoning • Loan term – up to 30 years

STREAMLINE REFINANCE WITHOUT APPRAISAL

• Maximum loan amount is calculated using FHA Maximum Mortgage Worksheet – Streamline with and without Appraisal, o Base loan amount may not exceed the original principal balance of the loan being

refinanced o Base loan amount may not exceed the statutory loan limit for the county in which the

property is located • Non-owner occupied properties and second homes not permitted – FHA permits second homes and • investment properties, provided the loan is a streamline without an appraisal and the new loan is

not an ARM, but Nations Direct does not allow 2nd homes or investment properties • Loan term is the lesser of the remaining term of the existing mortgage plus 12 years or 30 years • This is the only type of refinance that can be secured by a condo in a development that is no

longer FHA approved

HELPFUL LINKS - REFINANCE TRANSACTIONS

• HUD Handbook 4155.1, 3.A-C • HUD Handbook 4155.1, 6.C • FHA Refinance Transactions, FHA Mortgagee Letter 2011-11 • Frequently Asked Questions on FHA Mortgagee Letter 2011-11

REO PROPERTIES

REO properties are owned by HUD, a bank or another entity that foreclosed on the property. • Amendatory Clause is not required • Real estate certification is not required for HUD-owned properties but is required for all other REO

properties • The addendum to the HUD-I Settlement statement must be signed by the foreclosing lender. The

addendum to the HUD-I settlement statement is not required for HUD-owned properties • Utilities must be turned on and the appraiser must note they are fully operable at the time of inspection

- If the appraisal is completed without the utilities being turned on, the following condition must be satisfied prior to the loan being cleared to close:

o Satisfactory inspection from a licensed contractor or qualified inspector certifying the mechanical systems have been turned on and are functioning properly. Only required if not part of or included in appraisal from approved appraiser

• If a property is less than one year old but being sold by a lender that foreclosed on the property, new

construction documentation is not required


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FHA Guidelines



SEASONING REQUIREMENTS

PURCHASES

See Property Flipping

CASH-OUT REFINANCES

• If property is owned as borrower’s principal residence less than one year, LTV is calculated using the lower of the purchase price or new appraised value

• If property is owned as borrower’s principal residence at least one year, LTV is calculated using new appraised value

• If the mortgage payment history for the loan being refinanced indicates the borrower has made fewer than six months payments, the loan is ineligible for cash-out

• If the subject property is a previous investment property re-occupied by the borrower within the

most recent 12 months, the loan is ineligible for cash-out

RATE AND TERM REFINANCES

• FHA – FHA – No seasoning required – LTV is calculated using the appraised value • Non FHA – FHA – If property is owned less than one year, LTV is calculated using the lower of

the purchase price or new appraised value; If property is owned at least one year, LTV is calculated using new appraised value

• If the subject property is a previous investment property re-occupied by the borrower within the

most recent 12 months, the maximum LTV is 85%

STREAMLINE REFINANCES

• Borrower must have made at least six consecutive mortgage payments on the existing FHA loan • With appraisal – LTV and CLTV are calculated using new appraised value • Without appraisal – LTV and CLTV are calculated using original property value from Refinance

Authorization Screen in FHA Connection

SELLER CONTRIBUTIONS

• Seller contributions allowed up to 6% of the sales price - If seller contributions exceed the actual amount of closing costs, pre-paid expenses and discount points, refer to Inducements to

Purchase • UFMIP, when paid by the seller, is included in the 6% limitation • Seller must pay all or no UFMIP – Partial financing of UFMIP is not allowed • Any seller contribution exceeding 6% of the sales price results in a dollar for dollar reduction to the

sales price before calculating the maximum loan amount • Items such as the owner’s title policy that are customarily paid by the seller are not included in the 6%

seller contribution limitation o Items customarily paid by the seller vary by state o Documentation indicating a fee is typically seller-paid may be required

SELLER CONTRIBUTION RESOURCES

• HUD Handbook 4155.1, 2.A.3.a-d


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FHA Guidelines



SOCIAL SECURITY VERIFICATION

Social security verification is required for all borrowers on all files: • W-2, paystub, passport, etc. • Copies of social security cards • Fully executed Social Security Administration Authorization, • Social Security Verification is not required for non-borrowing spouses

SUBORDINATE FINANCING

Subordinate financing includes any financing that creates a lien against the subject property, even if it is

a “soft”, “silent”, or “forgivable” second.

• All non-profit agencies must be HUD-approved – Refer to HUD’s Non-Profit Search Engine o HUD-approved non-profit agencies that are classified as government instrumentalities may

provide funds for down payment, closing costs, pre-paid expenses, repairs and discount points o HUD-approved non-profit agencies that are not instrumentalities of government may not provide

any of the borrower’s minimum down payment requirement but may provide closing costs, pre-paid expenses, discount points and down payments in excess of the minimum down payment

• Seller-held seconds not permitted • Borrower must be qualified with any required payment unless the payment is deferred at least three

years • The following entities may provide secondary financing for the borrower’s entire cash investment,

including down payment, closing costs, pre-paid expenses, discount points and repairs:

o Valid City, County, State or Federal government agency o HUD-approved non-profit agency that is also classified as an instrumentality of government o Maximum CLTV is 100% of acquisition cost (lesser of purchase price or appraised value plus

closing costs, pre-paid expenses, appraiser-required repairs and reasonable discount points)

• A family member may provide a second mortgage for the borrower’s entire down payment requirement, closing costs, pre-paid expenses and discount points

• A HUD-approved non-profit agency that is not considered an instrumentality of government may provide secondary financing for closing cost assistance only. The borrower must make the required 3.5% down payment from a documented and acceptable source, and the combined amount of the first and second liens must not exceed the FHA statutory limit for the county in which the property is located

• With advanced approval from FHA, other organizations and private individuals may provide secondary financing for closing cost assistance only – The borrower must make the required 3.5% down payment from a documented and acceptable source, and the combination of the first and second mortgages may not exceed the applicable LTV ratio (96.5% for purchases) and may not exceed the statutory loan limit for the county in which the property is located

• Underwriter must examine a sample of the note and deed to verify that the allowable governmental

agency, the HUD-approved non-profit, or the family member is the actual lien holder

o Purchase transactions – Copies of the fully-executed note and mortgage are required at closing o Refinance transactions – Copies of the fully-executed note and mortgage are required prior-to-

closing • Subordinate financing that requires a special designated servicer for the first lien or imposes any

servicing or resale restrictions on the first lien is not allowed. • Must meet all additional requirements for subordinate financing as stated in HUD Handbook

4155.1, 5.C.1-6


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FHA Guidelines



SUBORDINATE FINANCING RESOURCES

HUD Handbook 4155.1, 5.C.1-6

TITLE

• Effective date of title commitment must be no older than 60 days as of initial underwrite and within 120 days of the note

• 12 month chain of title required – Property must meet all FHA and anti-flipping policies in FHA’s property flipping amendment and the “Property Flipping” section of this document

• Properties held in a life estate are ineligible • All occupant borrowers take title to the property • Non-occupant co-borrowers take title to the property • Co-signers provide income and assets for qualification but do not take title or sign the security

instruments or purchase agreement • Non-borrowers are permitted to take title with borrowers

o Non-borrowers must sign all documents necessary to ensure the FHA first mortgage is a valid

enforceable lien (usually the mortgage, TIL and right of rescission, when applicable)

• Borrowers who are on title but not on the original note may refinance the property, provided the loan is

not a Streamline refinance transaction

o Refer to the Seasoning section of this document for seasoning requirements and determining property value

o Mortgage history must be acceptable • For purchase transactions, the seller must be in title to the property. The owner of record on the title

commitment, appraisal and AVM must match the name of the seller on the purchase agreement. If property ownership is not evident, a chain of title is required. Refer to the Property Flipping section of this document for seller seasoning requirements

MINERAL RIGHTS – EXCEPTIONS TO TITLE

Exceptions to title for Mineral Rights are acceptable as long as the title company states in writing that there

are no mineral rights on the property at the time of loan closing.

DEED RESTRICTIONS

• Properties subject to deed restrictions are not eligible

• In addition any deed restrictions with the following characteristics are ineligible:

o Single-family use restrictions when the property is a two- to four-family property o Deed restriction creates or provides for a lien that would be prior to the lien of the

home mortgage or provides for the elimination of the home mortgage lien

• The terms and provisions of the restrictive agreements or restrictive covenants must be commonly acceptable to the private institutional mortgage investors in the area where the mortgaged premises are located

• Title company must provide an endorsement to the title policy that affirmatively insures that no violation of any such restrictive agreement or restrictive covenant exists and that any future violation shall not result in forfeiture or reversion of title is required.


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FHA Guidelines



UTILITIES

All utilities must be turned on and the appraiser must note that they are fully operable at the time of inspection. If the appraisal is completed without the utilities being turned on, the following condition must be satisfied prior

to the loan being cleared to close: • Satisfactory inspection from a licensed contractor or qualified inspector certifying the mechanical

systems have been turned on and are functioning properly. Only required if not part of or included

in appraisal from approved appraiser.

WATER SYSTEMS/WELLS/SEPTIC SYSTEMS

• If public or community water and/or sewer is available, hook-up is required unless the cost to connect to the public/community system is > 3% of the property value

• All individual water wells must comply with local and/or state health authority having jurisdiction over

the property location o Springs, lakes, rivers or cisterns are not permitted (Homeownership Centers have the

authority to make exceptions for cisterns if they are common to the area) o Dug wells are acceptable, provided they meet state and local requirements, the water quality

and quantity is acceptable, and the dug well does not affect the property’s marketability • Wells may not be located within the foundation walls of a new construction dwelling unless the property

is located in an arctic or sub-arctic region. Wells may not be located within the foundation walls of an existing construction property unless the local jurisdiction “recognizes and permits such a location”

• For well and septic distance requirements, refer to the Water Systems section of the

Homeownership Center Reference Guide

COMMUNITY WATER SYSTEMS

Refer to HUD Handbook 4075.12, HUD Handbook 4150.2, 3-6 and the Community Water Systems

section of the Homeownership Reference Guide

SHARED WELLS

• Permitted for existing properties that cannot feasibly be connected to an acceptable public or community water supply system.

• May not service more than four living units or properties – If more than four units are serviced by the well, the well is subject to the requirements listed above for community water systems

• Valve required for each dwelling’s service line • Recorded shared well agreement that provides irrevocable water rights to the subject property

Required. An Agreement must be binding upon all signatory parties and their successors in title • For additional information, refer to the Shared Wells section of the Homeownership

Reference Guide

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