manual underwriting

Manual UnderwritingManual Underwriting

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For loans receiving a Refer score For loans receiving a Refer score from an AUS or where borrower has from an AUS or where borrower has no credit score (required to score no credit score (required to score through AUS).through AUS).

In Fiscal Year 2008 in the In Fiscal Year 2008 in the Philadelphia HOC Philadelphia HOC 24%24% of endorsed of endorsed purchase loans and purchase loans and 39%39% of endorsed of endorsed credit-qualifying refinance loans credit-qualifying refinance loans were manually underwritten. were manually underwritten.

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Manual UnderwritingManual UnderwritingCreditCredit No minimum credit score.No minimum credit score. If credit score is below 500, a 10% If credit score is below 500, a 10%

down payment is required.down payment is required. Past credit performance is the key Past credit performance is the key

to evaluating future performance. to evaluating future performance. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.1.a

8/4/2009

Manual UnderwritingManual UnderwritingCreditCredit Credit pattern more important than single Credit pattern more important than single

incidents. Payment history for previous incidents. Payment history for previous mortgage or rent most importantmortgage or rent most important. . http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.1.b

Explanations required for significant Explanations required for significant credit problems, late payments, recent credit problems, late payments, recent inquiries. inquiries. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.1.c

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Chapter 7 BankruptcyChapter 7 Bankruptcy Borrower has reestablished good Borrower has reestablished good

credit, or chosen not to incur new credit, or chosen not to incur new credit obligations.credit obligations.

2 years have passed since discharge, 2 years have passed since discharge, 1 year if bankruptcy due to 1 year if bankruptcy due to circumstances beyond borrower’s circumstances beyond borrower’s control. control.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.2.g8/4/2009


Chapter 13 BankruptcyChapter 13 Bankruptcy 1 year successful payments under 1 year successful payments under

plan.plan. Permission of court is required.Permission of court is required. http://www.fhaoutreach.gov/FHAHandboo

k/prod/infomap.asp?address=4155-1.4.C.2.h

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Let’s have another little quiz.Let’s have another little quiz.

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8

Manual UnderwritingManual Underwriting Must collections be paid off?Must collections be paid off?

Collections need not be paid off, but Collections need not be paid off, but borrower must provide a written borrower must provide a written explanation for them.explanation for them.

How about judgments?How about judgments?

Judgments must be repaid in full or Judgments must be repaid in full or be under an approved repayment be under an approved repayment plan.plan.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.2.e8/4/2009

Manual UnderwritingManual UnderwritingCollections and JudgmentsCollections and Judgments The lender The lender mustmust document reasons document reasons

for approving a mortgage when the for approving a mortgage when the borrower has collection accounts or borrower has collection accounts or judgments.judgments.

The borrower The borrower mustmust explain, in explain, in writing, all collections and writing, all collections and judgments.judgments.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.2.d8/4/2009 9

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Employment/IncomeEmployment/Income Must verify employment, income for Must verify employment, income for

2 full years. Allowances for school, 2 full years. Allowances for school, maternity. maternity. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.D.1.b

Overtime, bonus can be used if Overtime, bonus can be used if documented for 2 years and likely to documented for 2 years and likely to continue. continue. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.D.2.b

8/4/2009


Employment/IncomeEmployment/Income Income must reasonably be expected Income must reasonably be expected

to continue for 3 years. to continue for 3 years. http://www.fhaoutreach.gov/FHAHandboo

k/prod/infomap.asp?address=4155-1.4.D.2.a

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Self-EmploymentSelf-Employment Borrower must have been successfully Borrower must have been successfully

self-employed for at least 2 years, orself-employed for at least 2 years, or Self-employed at least 1 year and self-Self-employed at least 1 year and self-

employment is in the same field as employment is in the same field as previous employment. No credit if previous employment. No credit if less than 1 year.less than 1 year.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.D.4.c

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Other Income Can Be Used As WellOther Income Can Be Used As Well Retirement. Retirement.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.D.2.j

Social Security. Social Security. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.D.2.k

Alimony, child support. Alimony, child support. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.E#1 8/4/2009


Non-Taxable Income May Be “Grossed Non-Taxable Income May Be “Grossed Up.”Up.”

Percentage of gross-up may not exceed Percentage of gross-up may not exceed borrower’s actual tax rate.borrower’s actual tax rate.

No additional allowances for dependents.No additional allowances for dependents. Lender must document the percentage Lender must document the percentage

used.used. If the borrower is not required to file a If the borrower is not required to file a

tax return, use a 25% tax rate. tax return, use a 25% tax rate. http://www.fhaoutreach.gov/FHAHandbook/pro

d/infomap.asp?address=4155-1.4.E.5.b148/4/2009


How about another test?How about another test?

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““Off the books” or “under the Off the books” or “under the counter” income can be used…counter” income can be used…

A.A. For self-employed borrowers only.For self-employed borrowers only.

B.B. Only as a compensating factor.Only as a compensating factor.

C.C.Never.Never.

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The answer is C. The answer is C. NeverNever..

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Rental IncomeRental Income Income from rental properties the Income from rental properties the

borrowers already owns.borrowers already owns. Income from a 2-4 unit property the Income from a 2-4 unit property the

borrower is purchasing and in which borrower is purchasing and in which he/she will reside.he/she will reside.

Income from a principal residence Income from a principal residence that borrower will vacate and rent out.that borrower will vacate and rent out.

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Income from investment properties Income from investment properties must be documented through…must be documented through…

A current lease or an agreement to A current lease or an agreement to lease. lease.

A rental history over the previous 24 A rental history over the previous 24 months that is free of unexplained months that is free of unexplained gaps greater that three months.gaps greater that three months.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.E.4.a

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Projected income from multi-unit Projected income from multi-unit property the borrower will occupyproperty the borrower will occupy

Gross income can be used after Gross income can be used after deducting the HOC's vacancy and deducting the HOC's vacancy and maintenance factor (15%). maintenance factor (15%).

It may It may notnot be used as a direct offset be used as a direct offset to the mortgage payment.to the mortgage payment.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.E.4.b

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Manual UnderwritingManual UnderwritingVacating and Renting A Current Vacating and Renting A Current

ResidenceResidence Concerns have arisen about borrowers Concerns have arisen about borrowers

seeking FHA loans to purchase a home seeking FHA loans to purchase a home when they already own another home. when they already own another home.

Borrower claims that current home will Borrower claims that current home will be rented. Counts rent as income to be rented. Counts rent as income to qualify for new loan.qualify for new loan.

Borrower closes on new loan and Borrower closes on new loan and abandons former property.abandons former property.

8/4/2009


Vacating and Renting A Current Vacating and Renting A Current ResidenceResidence

FHA does not want to encourage this FHA does not want to encourage this practice.practice.

Income from the rental of the Income from the rental of the borrower’s current principal residence borrower’s current principal residence may not be counted.may not be counted.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.E.4.g

Except for situations where…Except for situations where…8/4/2009 22

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Borrower is relocating to an area not Borrower is relocating to an area not within commuting distance within commuting distance and and there is an executed lease of at least there is an executed lease of at least one year; one year; oror

LTV on current home does not LTV on current home does not exceed 75%.exceed 75%.

8/4/2009



Philadelphia HOC vacancy factor of Philadelphia HOC vacancy factor of 15% must be applied to rental income.15% must be applied to rental income.

Determination of 75% LTV must be Determination of 75% LTV must be based on appraisal or on a comparison based on appraisal or on a comparison of principal balance to the original of principal balance to the original sales price.sales price.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.E.4.h

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Manual UnderwritingManual UnderwritingJust a reminder…Just a reminder… Self Sufficiency test for 3 and 4 unit Self Sufficiency test for 3 and 4 unit

properties.properties. Monthly PITI / Net Monthly Income Monthly PITI / Net Monthly Income << 100%. 100%. Net Monthly Income = market rent for all Net Monthly Income = market rent for all

units (including unit occupied by borrower) units (including unit occupied by borrower) less the greater of appraiser’s vacancy less the greater of appraiser’s vacancy allowance , or HOC vacancy allowance allowance , or HOC vacancy allowance (15%). (15%).

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.2.B.4

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Manual UnderwritingManual UnderwritingEmployment/Income Employment/Income

DocumentationDocumentation Verification of Employment (VOE) Verification of Employment (VOE)

from current employer and most from current employer and most recent pay stub. recent pay stub. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.1.3.d

Or, pay stubs covering most recent Or, pay stubs covering most recent 30 day period, W-2s from the 30 day period, W-2s from the previous two years, and an oral VOE.previous two years, and an oral VOE.http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.1.3.e8/4/2009

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Employment/Income DocumentationEmployment/Income Documentation To document self-employment, borrower To document self-employment, borrower

must submit tax returns for last two years.must submit tax returns for last two years. YTD income must be verified through YTD income must be verified through

profit & Loss Statements.profit & Loss Statements. http://www.fhaoutreach.gov/FHAHandbook/prod/

infomap.asp?address=4155-1.4.D.4.d

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Qualifying RatiosQualifying Ratios ““Front” ratio = Housing payment Front” ratio = Housing payment

(PITI) / monthly income. (PITI) / monthly income. Standard is 31%. Standard is 31%. May be exceeded with compensating May be exceeded with compensating

factors.factors. http://www.fhaoutreach.gov/FHAHandboo

k/prod/infomap.asp?address=4155-1.4.F.2.b

8/4/2009


Qualifying RatiosQualifying Ratios ““Back” ratio – Housing payment plus Back” ratio – Housing payment plus

other installment debt /monthly other installment debt /monthly income.income.

Standard is 43%.Standard is 43%. May be exceeded with compensating May be exceeded with compensating

factors.factors. http://www.fhaoutreach.gov/FHAHandboo

k/prod/infomap.asp?address=4155-1.4.F.2.c

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Qualifying RatiosQualifying Ratios Where exceeded, underwriter must Where exceeded, underwriter must

cite at least one compensating factor. cite at least one compensating factor. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.F.3.a

Compensating factors include Compensating factors include reserves, large down payment, reserves, large down payment, minimal increase and others. minimal increase and others. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.F.3.b

8/4/2009


ReservesReserves Reserves are not required except for Reserves are not required except for

…… 3-4 unit properties 3-4 unit properties

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.2.B.4.d

Insufficient credit borrowers. Insufficient credit borrowers. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.3.c

318/4/2009

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What Is Non-Traditional Credit? Refers to borrowers with a credit Refers to borrowers with a credit

history insufficient to generate a history insufficient to generate a credit score through Equifax, credit score through Equifax, Experian or TransUnion.Experian or TransUnion.

New policy establishes two categories New policy establishes two categories of non-traditional credit references, of non-traditional credit references, and two categories of borrowers.and two categories of borrowers.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.1.7.f

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Group 1 Non-Traditional Credit Group 1 Non-Traditional Credit ReferencesReferences

Rental housing payments.Rental housing payments. Utility payments (gas, electric, Utility payments (gas, electric,

water).water). Land-line telephone.Land-line telephone. Cable TV.Cable TV.

8/4/2009


What do these Group 1 references What do these Group 1 references have in common?have in common?

They can all be tracked to a They can all be tracked to a particular property address.particular property address.

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Group 2 Non-Traditional Credit Group 2 Non-Traditional Credit ReferencesReferences

Insurance (medical, auto, life, renter’s).Insurance (medical, auto, life, renter’s). Child care.Child care. Retail stores, including rent-to-own.Retail stores, including rent-to-own. Internet/cell phone.Internet/cell phone. Personal loans/auto leases.Personal loans/auto leases. History of savings.History of savings.

8/4/2009


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What do these Group 2 references What do these Group 2 references have in common?have in common?

They track to a person, not a They track to a person, not a property.property.

37


Non-Traditional Credit BorrowersNon-Traditional Credit Borrowers

Borrowers withBorrowers with at least three credit at least three credit references, including at least one references, including at least one Group 1 reference.Group 1 reference.

““Insufficient Credit” BorrowersInsufficient Credit” BorrowersBorrowers who lack at least one Group Borrowers who lack at least one Group 1 credit reference or at least three 1 credit reference or at least three credit references.credit references.

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Non-Traditional Credit UnderwritingNon-Traditional Credit Underwriting No history of delinquency on rental payments.No history of delinquency on rental payments. No more than one 30 day delinquency on No more than one 30 day delinquency on

other payments.other payments. No collection accounts/court records within No collection accounts/court records within

last twelve months.last twelve months. http://www.fhaoutreach.gov/FHAHandbook/prod/info

map.asp?address=4155-1.4.C.3.a

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Insufficient Credit UnderwritingInsufficient Credit Underwriting Insufficient credit borrowers must meet Insufficient credit borrowers must meet

those standards plus...those standards plus... Qualifying ratios based on occupant Qualifying ratios based on occupant

borrowers only, 31/43 ratios are hard and borrowers only, 31/43 ratios are hard and fast and two months reserves required. fast and two months reserves required.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.3.c

8/4/2009


Insufficient Credit UnderwritingInsufficient Credit Underwriting

Can you think of a loan that you used to Can you think of a loan that you used to do but maybe you can’t under this do but maybe you can’t under this policy?policy?

++

408/4/2009


Insufficient Credit UnderwritingInsufficient Credit Underwriting Lenders talk about FHA’s “kiddie Lenders talk about FHA’s “kiddie

condo” program.condo” program. As an alternative to paying for a dorm As an alternative to paying for a dorm

or renting, parents buy a condo for or renting, parents buy a condo for their child to live in while at college.their child to live in while at college.

The child is the occupant borrower, The child is the occupant borrower, and they co-sign.and they co-sign.

418/4/2009


Insufficient Credit UnderwritingInsufficient Credit Underwriting Some of those deals may not work Some of those deals may not work

anymore.anymore. If the occupying borrower is an If the occupying borrower is an

Insufficient Credit borrower, you Insufficient Credit borrower, you can’t use the income or credit of can’t use the income or credit of non-occupying co-borrowers.non-occupying co-borrowers.

428/4/2009

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Manual UnderwritingManual UnderwritingDocumentation RequirementsDocumentation Requirements Non-Traditional Mortgage Credit Non-Traditional Mortgage Credit

Report (NTMCR) is preferred.Report (NTMCR) is preferred. Independent verification of credit Independent verification of credit

references where NTMCR not references where NTMCR not available.available.

Borrower-supplied references Borrower-supplied references unacceptable.unacceptable.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.1#7

8/4/2009

Property EligibilityProperty Eligibility

Most kinds of homes qualify.Most kinds of homes qualify.

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Property must consist of 1-4 units.Property must consist of 1-4 units. Detached, semi-detached, attached, Detached, semi-detached, attached,

condo are eligible.condo are eligible. Existing and new construction (stick-Existing and new construction (stick-

built and modular) are eligible.built and modular) are eligible. Manufactured homes are eligible.Manufactured homes are eligible. Co-ops restricted to developments Co-ops restricted to developments

where HUD insures master mortgage. where HUD insures master mortgage.

8/4/2009


Question: Question: Are mixed-use Are mixed-use properties acceptable?properties acceptable?

8/4/2009 46


Yes they areYes they are..

So long as the commercial space does So long as the commercial space does

not exceed not exceed 25% 25% of the gross of the gross square footage.square footage.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.2.g

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CondominiumsCondominiums Generally, the condo project must be Generally, the condo project must be

pre-approved by FHA. pre-approved by FHA. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.1.C.11.b

Lender can use “spot” loan procedure Lender can use “spot” loan procedure for units in non-approved projects. for units in non-approved projects. http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/1996ml.cfm

8/4/2009


CondominiumsCondominiums Effective 10/01/09, condo projects may Effective 10/01/09, condo projects may

be approved by DE lenders or FHA.be approved by DE lenders or FHA. Spot loan process terminated effective Spot loan process terminated effective

10/01/09.10/01/09. ML 09-19ML 09-19. .

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cf

8/4/2009 49


CondominiumsCondominiums Direct Endorsement Lender Review and Direct Endorsement Lender Review and

Approval Process (DELRAP). Approval Process (DELRAP). First 5 approvals under DELRAP must be First 5 approvals under DELRAP must be

submitted to applicable HOC for review.submitted to applicable HOC for review. HUD Review and Approval Process HUD Review and Approval Process

(HRAP).(HRAP). Condo projects consisting of manufactured Condo projects consisting of manufactured

homes must go through HRAP.homes must go through HRAP.

8/4/2009 50


CondominiumsCondominiums Revised project approval checklists are Revised project approval checklists are

provided in ML 09-19.provided in ML 09-19. Projects of 3 or fewer units can have Projects of 3 or fewer units can have

only one unit insured by FHA.only one unit insured by FHA. Projects with 4 or more units can have no Projects with 4 or more units can have no

more than 30% of the units insured by more than 30% of the units insured by FHA.FHA.

FHAC will calculate number of active FHAC will calculate number of active insured loans in project.insured loans in project.

8/4/2009 51


CondominiumsCondominiums Condominium projects must be re-Condominium projects must be re-

certified every two years.certified every two years. Projects approved within the period Projects approved within the period

10/01/08 – 09/30/09 will be carried over 10/01/08 – 09/30/09 will be carried over to the new approved list.to the new approved list.

Projects approved prior to that will not Projects approved prior to that will not appear on the approved list and will appear on the approved list and will have to be approved under the new have to be approved under the new criteria.criteria.

8/4/2009 52

CondominiumsCondominiums

Currently, there are 573 approved Currently, there are 573 approved condo projects in Michigan.condo projects in Michigan.

Only 54 have been approved since Only 54 have been approved since 10/01/08.10/01/08.

In the Philadelphia HOC jurisdiction In the Philadelphia HOC jurisdiction there are 10,432 approved condos there are 10,432 approved condos projects.projects.

Only 486 approved since 10/01/08.Only 486 approved since 10/01/08.

6/8/2009 53


Site CondosSite Condos Effective June 12, 2009, Effective June 12, 2009, site condo site condo

projects need not be approvedprojects need not be approved. . New policy affects one unit detached New policy affects one unit detached

site condo projects only.site condo projects only. Condo rider must be included in FHA Condo rider must be included in FHA

case binder.case binder. Appraisals should be conducted using Appraisals should be conducted using

Fannie Mae Form 1073.Fannie Mae Form 1073.

8/4/2009 54


CondominiumsCondominiums No project approval required for No project approval required for

Streamline refinances.Streamline refinances. No project approval required for No project approval required for

HUD REO loans.HUD REO loans.

8/4/2009 55



List of approved condos available List of approved condos available through through

FHA Connection. Click on FHA Connection. Click on Single Single FamilyFamily, then , then Single Family Single Family OriginationOrigination, then , then FHA Approval ListsFHA Approval Lists, , then then CondominiumsCondominiums. .

hud.gov at hud.gov at https://entp.hud.gov/idapp/html/condlook.cfm

568/4/2009


577/23/2009


587/23/2009


Getting a condo project approved.Getting a condo project approved. Handbook 4150.1 REV-1, Chapter Handbook 4150.1 REV-1, Chapter

11.11. Effective 10/01/09, new procedures Effective 10/01/09, new procedures

outlined in ML 09-19 will be used.outlined in ML 09-19 will be used. Use checklists in ML 09-19 for Use checklists in ML 09-19 for

project approval requests after that.project approval requests after that.

8/4/2009 59


Mail requests for condo approval to…Mail requests for condo approval to… U.S. Dept. HUDU.S. Dept. HUD

Philadelphia Home Ownership CenterPhiladelphia Home Ownership CenterATTN: Technical BranchATTN: Technical Branch100 Penn Square East100 Penn Square EastPhiladelphia, PA 19107-3389Philadelphia, PA 19107-3389

Allow at least 4 weeks for approval Allow at least 4 weeks for approval unlessunless there are environmental issues. there are environmental issues.

8/4/2009 60


Manufactured HomesManufactured Homes ML 09-16ML 09-16. .

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cf

At least 400 square feet.At least 400 square feet. Constructed after 06/15/76 with Constructed after 06/15/76 with

certification label as to compliance with certification label as to compliance with Federal standards.Federal standards.

Classified as real estate, but need not be Classified as real estate, but need not be taxed as real estate. Mortgage covers taxed as real estate. Mortgage covers site and home.site and home.

8/4/2009 61


Manufactured HomesManufactured Homes Built and remains on a permanent chassis.Built and remains on a permanent chassis. Must be affixed to a permanent foundation Must be affixed to a permanent foundation

that has been certified by an engineer.that has been certified by an engineer. Elevation at or above 100 year flood plain.Elevation at or above 100 year flood plain. Must be on original site.Must be on original site. Manufactured homes in condominium Manufactured homes in condominium

projects are now eligible. projects are now eligible.

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Property EligibilityProperty EligibilityFlipping RuleFlipping Rule Seller must be legal owner of Seller must be legal owner of

property. property. http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.7.c

Seller must have owned property at Seller must have owned property at least 91 days at the time the least 91 days at the time the borrower signs the sales contract.borrower signs the sales contract.http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.7.e

8/4/2009


Flipping RuleFlipping Rule If seller owns 91-180 days If seller owns 91-180 days andand new new

price is double previous price, 2price is double previous price, 2ndnd appraisal required.appraisal required.http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.7.f

FHA reserves the right to impose FHA reserves the right to impose additional requirements on properties additional requirements on properties owned between 91 days and 12 months, owned between 91 days and 12 months, but has never exercised that right.but has never exercised that right.

8/4/2009 64


Is the Flipping Rule violated? You Is the Flipping Rule violated? You be the judge.be the judge.

658/4/2009


Property Flipping Scenario #1Property Flipping Scenario #1 Seller acquired property on Seller acquired property on

December 15, 2008.December 15, 2008. FHA borrower signs sale contract on FHA borrower signs sale contract on

March 5, 2009.March 5, 2009. FHA case number issued March 18, FHA case number issued March 18,

2009.2009. Loan closes April 30, 2009.Loan closes April 30, 2009.

668/4/2009


Property Flipping Scenario #1Property Flipping Scenario #1 Seller owned property for 81 days Seller owned property for 81 days

when borrower signed sales when borrower signed sales contract.contract.

Seller owned property for 94 days Seller owned property for 94 days when FHA case number was issued.when FHA case number was issued.

Seller owned property for 137 days Seller owned property for 137 days when loan closed.when loan closed.

Was flipping rule broken?Was flipping rule broken?

678/4/2009


Property Flipping Scenario #1Property Flipping Scenario #1

688/4/2009


Property Flipping Scenario #1Property Flipping Scenario #1

Why is this property ineligible?Why is this property ineligible? Seller owned property for Seller owned property for 81 days 81 days

when borrower signed sales when borrower signed sales contract.contract.

Minimum period of ownership is Minimum period of ownership is 91 91 daysdays..

8/4/2009 69


Let’s look at another Flipping Let’s look at another Flipping scenario.scenario.

708/4/2009


Flipping Rule Scenario # 2Flipping Rule Scenario # 2 Property acquired by seller for Property acquired by seller for

$100,000 on 11/1/08.$100,000 on 11/1/08. Sales contract signed by FHA Sales contract signed by FHA

borrower on 3/15/09 with $198,000 borrower on 3/15/09 with $198,000 price.price.

FHA case number issued 03/18/09.FHA case number issued 03/18/09. Loan closed May 2, 2009.Loan closed May 2, 2009.

718/4/2009


Flipping Rule Scenario # 2Flipping Rule Scenario # 2 Property was owned by seller for 136 days Property was owned by seller for 136 days

when borrower signed sales contract.when borrower signed sales contract. Sales price is 98% higher than acquisition Sales price is 98% higher than acquisition

price.price. Seller owned property for 139 days when Seller owned property for 139 days when

case number was issued and 184 days case number was issued and 184 days when loan closed. when loan closed.

Is a second appraisal required? Is a second appraisal required?

728/4/2009


Flipping Rule Scenario # 2Flipping Rule Scenario # 2

738/4/2009


Flipping Rule Scenario # 2Flipping Rule Scenario # 2

Why isn’t a second appraisal Why isn’t a second appraisal required?required?

Seller owned property for Seller owned property for 136 136 days days (between 91 and 180) (between 91 and 180) butbut

Price paid by FHA borrower was Price paid by FHA borrower was only only 98%98% higher than price paid by higher than price paid by seller.seller.

8/4/2009 74


Flipping RuleFlipping Rule If second appraisal is required, If second appraisal is required,

mortgage amount must be based on mortgage amount must be based on lesser of two values.lesser of two values.

When appraisal data is logged into When appraisal data is logged into FHAC, lower value will automatically FHAC, lower value will automatically be selected to compare against be selected to compare against mortgage amount.mortgage amount.

8/4/2009 75


Flipping RuleFlipping Rule Exceptions for HUD, VA, USDA Exceptions for HUD, VA, USDA

REO, Fannie Mae, Freddie Mac, REO, Fannie Mae, Freddie Mac, nonprofits, estate sales, and nonprofits, estate sales, and corporate relocationscorporate relocations. .

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.7.h

768/4/2009


Flipping RuleFlipping Rule Waiver applicable until 5/10/10 also Waiver applicable until 5/10/10 also

exempts sales by lenders of exempts sales by lenders of foreclosed properties, or sales by foreclosed properties, or sales by property disposition firms they hire.property disposition firms they hire.

http://portal.hud.gov/portal/page?_pageid=73,3912104&_dad=portal&_schema=PORTAL

8/4/2009 77


Flipping RuleFlipping Rule Does it matter how much the seller Does it matter how much the seller

spent on repairs?spent on repairs?

NONO Does it matter how much profit the Does it matter how much profit the

seller is earning?seller is earning?

NONO

8/4/2009 78

AppraisalsAppraisals

What is the value of the property?What is the value of the property?

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Who can perform an FHA Appraisal?Who can perform an FHA Appraisal? ML 08-39ML 08-39. Implements provision of . Implements provision of

HERA regarding certification of HERA regarding certification of appraisers.appraisers.http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2008ml.cfm

Until 10/01/09, any licensed appraiser Until 10/01/09, any licensed appraiser who was on FHA’s Appraiser Roster as who was on FHA’s Appraiser Roster as of 09/30/08 can perform an FHA of 09/30/08 can perform an FHA appraisal.appraisal.

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Who can perform an FHA Who can perform an FHA Appraisal?Appraisal?

After 09/30/09, only certified After 09/30/09, only certified residential or certified general may residential or certified general may be selected. be selected.

Lender responsible for selecting only Lender responsible for selecting only certified appraisers.certified appraisers.

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82


HUD Handbook 4150.2 CHG-1HUD Handbook 4150.2 CHG-1http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4150.2/index.cfm

Determines the value of the Determines the value of the property.property.

Determines the marketability of the Determines the marketability of the property.property.

Identifies observable health and Identifies observable health and safety deficiencies.safety deficiencies.

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83


Not a home inspection. Conducted Not a home inspection. Conducted primarily to determine value for primarily to determine value for mortgage insurance purposes. mortgage insurance purposes.

Conducted for benefit of lender and Conducted for benefit of lender and FHA, not borrower.FHA, not borrower.

Does not guarantee property Does not guarantee property condition.condition.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.1.a

8/4/2009


Lenders are required to provide form Lenders are required to provide form HUD-92564-CN, "HUD-92564-CN, "For Your Protection: For Your Protection: Get a Home InspectionGet a Home Inspection" to borrowers " to borrowers at first contact, be it pre-qualification, at first contact, be it pre-qualification, pre-approval, or initial application.pre-approval, or initial application.

In any case, the lender must provide In any case, the lender must provide the form to the borrower the form to the borrower no later no later thanthan initial loan application. initial loan application.

http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.3.C.2.g

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86


FHA appraisal reporting similar to FHA appraisal reporting similar to conventional.conventional.

FHA appraisal forms same as FHA appraisal forms same as conventional.conventional.

FHA uses Fannie Mae appraisal and FHA uses Fannie Mae appraisal and repair standards.repair standards.

8/4/2009

AppraisalsAppraisalsOne of the following forms must be One of the following forms must be

used…used… 1004C1004C Manufactured homes.Manufactured homes. 10731073 Individual condominium unitsIndividual condominium units 10251025 2-4 unit properties.2-4 unit properties. 10041004 All one unit other properties.All one unit other properties. Plus… Form 1004MC, Plus… Form 1004MC, Market Market

Conditions Addendum.Conditions Addendum.http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.4.c

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AppraisalsAppraisals The appraiser must note those repairs The appraiser must note those repairs

necessary to make the property comply necessary to make the property comply with FHA's MPR, or MPS, together with with FHA's MPR, or MPS, together with the estimated cost to cure. the estimated cost to cure.

The lender determines which repairs for The lender determines which repairs for existing properties must be made for the existing properties must be made for the property to be eligible for FHA-insured property to be eligible for FHA-insured financing.financing.

http://www.fhaoutreach.gov/FHAHandbook/http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.5.aprod/infomap.asp?address=4155-2.4.5.a

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Examples of Conditions That Would Examples of Conditions That Would Not Normally Require RepairsNot Normally Require Repairs

Worn floor finishes.Worn floor finishes. Worn carpetsWorn carpets Holes in window screens.Holes in window screens. Small crack in a windowpane.Small crack in a windowpane. http://www.fhaoutreach.gov/http://www.fhaoutreach.gov/

FHAHandbook/prod/infomap.asp?FHAHandbook/prod/infomap.asp?address=4155-2.4.5.baddress=4155-2.4.5.b

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AppraisalsAppraisalsExamples of Conditions That Would Examples of Conditions That Would

Normally Require RepairsNormally Require Repairs Conditions that affect the health and Conditions that affect the health and

safety of the occupants.safety of the occupants. Conditions that affect the security of the Conditions that affect the security of the

home.home. Physical deficiencies or conditions Physical deficiencies or conditions

affecting structural integrity. affecting structural integrity. http://www.fhaoutreach.gov/FHAHandbook/http://www.fhaoutreach.gov/FHAHandbook/

prod/infomap.asp?address=4155-2.4.5.cprod/infomap.asp?address=4155-2.4.5.c

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Lead-Based PaintLead-Based Paint If the property was built before If the property was built before

1978, defective paint surfaces must 1978, defective paint surfaces must be treated.be treated.

Includes any out-buildings, fences Includes any out-buildings, fences and other surfaces.and other surfaces.

http://www.fhaoutreach.gov/http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?FHAHandbook/prod/infomap.asp?address=4155-2.4.2.daddress=4155-2.4.2.d

8/4/2009 91


Examples of tests that are no Examples of tests that are no longer mandatory.longer mandatory.

Wood-destroying insects/organisms.Wood-destroying insects/organisms. Well water.Well water. Septic systems.Septic systems. Flat or unobservable roof.Flat or unobservable roof.

8/4/2009 92


Typical conditions that would require Typical conditions that would require further inspection or testing by further inspection or testing by qualified individualsqualified individuals

Infestation - evidence of termites.Infestation - evidence of termites. Inoperative or inadequate plumbing, Inoperative or inadequate plumbing,

heating, or electrical systems .heating, or electrical systems . Structural failure in framing members.Structural failure in framing members. http://www.fhaoutreach.gov/FHAHandbook/http://www.fhaoutreach.gov/FHAHandbook/

prod/infomap.asp?address=4155-2.4.5.dprod/infomap.asp?address=4155-2.4.5.d

8/4/2009 93

AppraisalsAppraisalsTypical conditions that would require Typical conditions that would require

further inspection or testing by further inspection or testing by qualified individualsqualified individuals

Leaking or worn-out roofs. Leaking or worn-out roofs. Cracked masonry or foundation Cracked masonry or foundation

damage. damage. Drainage problemsDrainage problems http://www.fhaoutreach.gov/FHAHandbook/http://www.fhaoutreach.gov/FHAHandbook/

prod/infomap.asp?address=4155-2.4.5.dprod/infomap.asp?address=4155-2.4.5.d

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95


Other Property RequirementsOther Property Requirements Certain FHA requirements regarding Certain FHA requirements regarding

well and septic distances and other well and septic distances and other requirements remain applicable.requirements remain applicable.

See Valuation Protocol in Revised See Valuation Protocol in Revised Appendix D issued with ML 05-48 and Appendix D issued with ML 05-48 and Revised Appendices A and C issued in Revised Appendices A and C issued in ML 06-09 for further guidance.ML 06-09 for further guidance.

8/4/2009


Underwriting the AppraisalUnderwriting the Appraisal Lenders are responsible for properly Lenders are responsible for properly

reviewing appraisals and determining if reviewing appraisals and determining if the appraised value is accurate.the appraised value is accurate.

Lenders are responsible equally with Lenders are responsible equally with the appraisers, for the integrity, the appraisers, for the integrity, accuracy and thoroughness of the accuracy and thoroughness of the appraisals.appraisals.

http://www.fhaoutreach.gov/FHAHandbook/http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.1.bprod/infomap.asp?address=4155-2.4.1.b

968/4/2009


Underwriting the AppraisalUnderwriting the Appraisal Are subject property and Are subject property and

comparable sales similar in comparable sales similar in structure type, neighborhood, and structure type, neighborhood, and sales timeframes?sales timeframes?

Are adjustments reasonable?Are adjustments reasonable?

978/4/2009


Underwriting the AppraisalUnderwriting the Appraisal

Rules of thumbRules of thumb Individual adjustments should not Individual adjustments should not

exceed 10%.exceed 10%. Net adjustments should not exceed Net adjustments should not exceed

15%.15%. Sum of adjustments should not Sum of adjustments should not

exceed 25%.exceed 25%.

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99

Appraisals In Declining Appraisals In Declining MarketsMarkets

No official definition of declining No official definition of declining market..market..

Refers to a neighborhood, market area, Refers to a neighborhood, market area, or region that demonstrates a decline or region that demonstrates a decline in prices or deterioration in other in prices or deterioration in other market conditions as evidenced by an market conditions as evidenced by an oversupply of existing inventory or oversupply of existing inventory or extended marketing times. extended marketing times.

http://www.fhaoutreach.gov/FHAHandbook/http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.9.aprod/infomap.asp?address=4155-2.4.9.a

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100


FHA has not established a list of FHA has not established a list of areas that it considers to be areas that it considers to be declining.declining.

FHA has no special down payment, FHA has no special down payment, mortgage insurance, or underwriting mortgage insurance, or underwriting requirements for properties in an requirements for properties in an areas with declining values. areas with declining values.

8/4/2009


Determined by appraiser on a case-Determined by appraiser on a case-by-case basis; orby-case basis; or

Determined by lender based on data Determined by lender based on data services or feedback from LP or DU.services or feedback from LP or DU.

http://www.fhaoutreach.gov/http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?FHAHandbook/prod/infomap.asp?address=4155-2.4.10address=4155-2.4.10

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102


Appraiser DeterminationAppraiser Determination Recorded by appraiser in Recorded by appraiser in One-Unit One-Unit

Housing TrendsHousing Trends portion of portion of NeighborhoodNeighborhood section on appraisal.section on appraisal.

Must be identified by the conclusions of Must be identified by the conclusions of the Fannie Mae 1004MC, the Fannie Mae 1004MC, Market Market Conditions AddendumConditions Addendum. The appraiser . The appraiser must provide a summary comment and must provide a summary comment and support for all conclusions relating to support for all conclusions relating to the market trend.the market trend.

8/4/2009


1038/4/2009


Appraiser DeterminationAppraiser Determination Appraisals of properties located in declining Appraisals of properties located in declining

markets must include at least 2 comparable markets must include at least 2 comparable sales that closed within 90 days and 2 sales that closed within 90 days and 2 current listings.current listings.

In cases where compliance with this In cases where compliance with this requirement is difficult or not possible due to requirement is difficult or not possible due to the lack of market data, a detailed the lack of market data, a detailed explanation is required.explanation is required.

http://www.fhaoutreach.gov/FHAHandbook/prod/http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.9.cinfomap.asp?address=4155-2.4.9.c

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105


Lender DeterminationLender Determination S&P/Case-Schiller IndexS&P/Case-Schiller Index

http://www2.standardandpoors.com/phttp://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/ortal/site/sp/en/us/page.topic/indices_csmahp/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html

Federal Housing Finance Agency Federal Housing Finance Agency http://www.fhfa.gov/Default.aspx?http://www.fhfa.gov/Default.aspx?Page=14Page=14

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Lender DeterminationLender Determination National Association of RealtorsNational Association of Realtors

http://www.realtor.org/research/resehttp://www.realtor.org/research/research/ehspagearch/ehspage

Feedback from Desktop Underwriter Feedback from Desktop Underwriter or Loan Prospector.or Loan Prospector.

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107


A second appraisal is required when A second appraisal is required when The loan amount, excluding the UFMIP, The loan amount, excluding the UFMIP,

exceeds $417,000; exceeds $417,000; andand LTV, excluding UFMIP, equals or exceeds LTV, excluding UFMIP, equals or exceeds

95% (or is a cash-out refinance per ML 09-95% (or is a cash-out refinance per ML 09-08); 08); andand

T he property is determined by the T he property is determined by the appraiser or lender to be in a declining appraiser or lender to be in a declining market.market.

http://www.fhaoutreach.gov/FHAHandbook/prod/http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.10.binfomap.asp?address=4155-2.4.10.b

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Second AppraisalsSecond Appraisals ML 08-09ML 08-09. .

http://www.hud.gov/offices/adm/hudclhttp://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2008ml.cfmips/letters/mortgagee/2008ml.cfm

Do not order a new case number.Do not order a new case number. Second appraisal must be performed Second appraisal must be performed

by an FHA roster appraiser.by an FHA roster appraiser. Must conform with HUD Minimum Must conform with HUD Minimum

Property Requirements.Property Requirements.

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Second AppraisalsSecond Appraisals If property is a one unit detached If property is a one unit detached

home, appraiser may perform home, appraiser may perform exterior-only appraisal using Fannie exterior-only appraisal using Fannie Mae Form 2055. Mae Form 2055.

For other properties, appraiser must For other properties, appraiser must perform full appraisal.perform full appraisal.

Cost of second appraisal may be Cost of second appraisal may be passed on to the borrower.passed on to the borrower.

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Using the Second AppraisalUsing the Second Appraisal Use the second appraisal to calculate Use the second appraisal to calculate

the mortgage amount where the the mortgage amount where the second appraised value is more than second appraised value is more than 5 per cent below the first appraised 5 per cent below the first appraised value.value.

If second appraisal is used, enter that If second appraisal is used, enter that appraisal data into FHA Connection.appraisal data into FHA Connection.

8/4/2009


Will you be ordering many second Will you be ordering many second appraisals in Michigan?appraisals in Michigan?

8/4/2009 111


Probably not.Probably not.

Remember those mortgage limits? Remember those mortgage limits?

-- Niles-Benton HarborNiles-Benton Harbor $298,750$298,750-- KalamazooKalamazoo $286,200$286,200-- Detroit-Warren-TroyDetroit-Warren-Troy $297,500$297,500-- MonroeMonroe $297,000$297,000-- Ann ArborAnn Arbor $345,000 $345,000

Not many loans in Michigan will likely Not many loans in Michigan will likely exceed $417,000.exceed $417,000.

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manual underwriting

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