INTRODUCTION TO FHA /JUNE, 2016
INTRODUCTION TO THE FHA LOAN PROGRAM
Introduction to FHA 2
The Federal Housing Administration (FHA) is a division of the U.S. Department of Housing and Urban Development (HUD). The goals of this division are to:
Insure FHA mortgage loans (also known as government mortgages) Expand homeownership opportunities Increase minority homeownership Make the home buying process less complicated and expensive Assist existing homeowners in avoiding foreclosure
FHA-insured mortgages can be used to purchase homes and to refinance existing mortgages. FHA loans are designed for low to moderate income borrowers who are unable to make a large down payment. The most popular FHA loan has a minimum cash investment requirement of 3.5 percent but permits 100 percent of the money needed at closing to be a gift from an acceptable source or an acceptable secondary financing source.
FHA CUSTOMER TYPE CHART
Introduction to FHA 3
FHA Features and Benefits
• Lower down payment at competitive rates
• Total cash investment may be as low as 3.5%
• Loan(s) to 100% of total investment with gift from an eligible source
• Seller may pay pre-paids & closing costs up to 6% (or may be paid by broker through "premium pricing")
• Cash reserves as required by AUS (except for 3 & 4 units, then 3-month PITI needed or as required per
Manual underwriting requirements)
• Minimum credit score of 620 (Streamlines require 640)
• Higher and flexible qualifying ratios
• Non-occupying co-borrowers allowed on purchase and rate/term refinance loans
• Upfront MIP may be financed
• Borrower may request "Streamline Refinance" (to reduce rate and payment)
• FHA Loans are assumable (and require qualifying)
• No pre-payment penalties
FHA PROGRAM BENEFITS
Introduction to FHA 4
Required Disclosures
In addition to the required RESPA disclosures FHA requires the following additional disclosures: FAMC Submission Form
• Can be found on the FAMC Website
• www.franklinamerican.com>Forms>FHA
Lead Based Paint Disclosure
• Executed at application
• May be part of the purchase agreement
Real Estate Certification
• A separate certification is not needed if the sales contract contains a statement that there are no other
agreements between parties and the terms constitute the entire agreement between the parties, and all
parties are signatories to the sales contract submitted at the time of underwriting.
Amendatory Clause
• Must be signed and dated prior to final underwriting approval if the Conditional Commitment was not
provided to the borrower before executing the sales contract.
Initial HUD/VA Addendum to Uniform Residential Loan Application - HUD 92900-A
• Executed at application
• Pages 1 and 2 signed at initial application
• Pages 1 through 4 signed at closing
REQUIRED DISCLOSURES
Introduction to FHA 5
Required Disclosures, Continued Important Notice to Homebuyers – HUD 92900-B
• Executed at application
Informed Consumer Choice Disclosure Notice
• Executed at application
FHA ARM disclosure (if applicable)
• Provide to borrower within 3 days of application.
• 5/1 ARM disclosures can be found on our website at: www.franklinamerican.com
GET FHA FORMS HERE:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/forms
REQUIRED DISCLOSURES
Introduction to FHA 6
Lead-Based Paint Disclosure Purchases only – for properties built prior to 1978
REQUIRED DISCLOSURES
Introduction to FHA 7
Real Estate Certification and Amendatory Clause – Language from the FHA Handbook
REQUIRED DISCLOSURES
Introduction to FHA 8
REQUIRED DISCLOSURES
Introduction to FHA 9
How to complete the HUD-92900-A addendum for Sponsored Originator Transactions
REQUIRED DISCLOSURES
Introduction to FHA 10
REQUIRED DISCLOSURES
Introduction to FHA 11
How to complete the HUD-92900-A addendum for Principal Agent Transactions
REQUIRED DISCLOSURES
Introduction to FHA 12
Important Notice to Homebuyers
REQUIRED DISCLOSURES
Introduction to FHA 13
REQUIRED DISCLOSURES
Introduction to FHA 14
Informed Consumer Choice Disclosure
CAIVRS All borrowers must be screened using CAIVRS (Credit Alert Interactive Voice Response System), except for
Streamline refinances. CAIVRS is a Federal government-wide repository of information on those individuals
with delinquent or defaulted federal debt, or who have had an FHA or VA insurance claim paid on a previous
mortgage loan.
Delinquent Federal Debts Delinquent Federal Non-Tax Debt
Borrowers are ineligible for an FHA insured mortgage with delinquent federal non-tax debt, including
deficiencies and other debt associated with past FHA-insured mortgages.
• Any debt that is confirmed as valid and in delinquent status must be resolved in order for a borrower to
become eligible
• Documentation must be included in the file from the creditor agency to support the verification and
resolution of the debt. A clear CAIVRS report is required for all debt reported through CAIVRS.
If a borrower is currently delinquent on an FHA-insured mortgage, they are ineligible for a new FHA-insured
mortgage unless the delinquency is resolved.
CAIVRS AND DELINQUENT DEBT
Introduction to FHA 15
Delinquent Federal Debts, continued Delinquent Federal Tax Debt
Borrowers with delinquent federal tax debt and no valid repayment agreement in place are ineligible.
Tax liens may remain unpaid if:
• The Borrower has entered into a valid repayment agreement with the federal agency owned to make
regular payments, AND
• The Borrower has made at least three of the scheduled payments on time. The borrower cannot prepay
scheduled payments in order to meet the required minimum of three months of payments.
• Verification that the Borrower does not have a lien against their property for a debt owed to the federal
government. If a lien is in place, the lien holder must subordinate the tax lien to the new FHA-insured
mortgage.
• Documentation from the IRS evidencing the repayment agreement and verification of payments made
must be included in the file.
• The payment amount must be included in the DTI ratio
CAIVRS AND DELINQUENT DEBT
Introduction to FHA 16
LDP/SAM
Suspended and Debarred Individuals
The following entities must be checked against HUD's Limited Denial of Participation (LDP) list at
http://portal.hud.gov/hudportal/HUD?src=/topics/limited_denials_of_participation or the System for Award
Management (SAM) Excluded Party List https://www.sam.gov/. Any entity noted on either of the LDP or SAM
lists will cause the loan to be ineligible.
• Borrower(s)
• Seller(s)
• Loan Officer
• Loan Processor
• Loan Underwriter
• Listing Agent
• Selling Agent
• Appraiser
• Settlement Agent
NOTE: FAMC is responsible for checking the LDP/SAM list on all entities.
LDP/SAM
Introduction to FHA 17
Requesting a Case Number
When can I request a Case Number?
The loan must first be locked or registered with FAMC and a copy of the URLA/1003 must be provided.
Remember to also account for any Compliance – related waiting periods before ordering the appraisal.
How do I request a Case Number?
The FHA Case Number Request Form for SOs must be fully completed and sent to FAMC via email.
Where do I send my Case Number request?
A specific FHA Case Number Request email address has been created for each Operations Center. Please
submit your request to the corresponding office for that loan file.
California Operations Center: [email protected]
Massachusetts Operations Center: [email protected]
Tennessee Operations Center: [email protected]
Texas Operations Center: [email protected]
Pennsylvania Operations Center: [email protected]
CASE NUMBER REQUEST
Introduction to FHA 18
Requesting a Case Number, Continued Who is eligible for this service?
We will provide this service to any of our business partners that are Sponsored Originators.
When should I expect to receive my Case Number?
If a fully completed request form is received by 4:00pm local time, it will be processed the same day. However
it is very important to note that FAMC will not provide the Case Number Assignment until the following
business day, as the request must first pass FHA’s overnight validation process and be returned clear of any
warning messages.
Requests received after 4:00 PM local time will be treated as next day submissions.
Incomplete request forms will be processed once all necessary information is received, according to the
timeframe stated above.
How will the Case Number be returned to me?
FAMC will email the Case Number Assignment to the email address provided on the request form.
REQUESTING A CASE NUMBER
Introduction to FHA 19
Automated Underwriting
TOTAL is HUD’s proprietary credit evaluation system, used within an Automated Underwriting System (AUS)
to evaluate the borrower’s credit history and other application variables, and return either an
accept/approve recommendation or refer the loan for traditional underwriting. TOTAL is automatically
accessed when an FHA loan is submitted for underwriting via previously-approved AUS products, including
Freddie Mac's Loan Prospector (LP) and Fannie Mae’s Desktop Underwriter (DU) system. All FHA loans must
be scored through TOTAL with the exception of Streamline Refinance Transactions.
On-line Resources:
HUD's "Home Page" links to a broad variety of HUD-related topics. HUD’s “Lenders Page” links to specific
FHA lending information, including mortgagee letters, mortgage limits, program descriptions, HUD contacts,
phone numbers, e-mail addresses, etc.
HUD Home Page: http://www.hud.gov/
Lenders Page: http://www.hud.gov/groups/lenders.cfm
Mortgagee Letters: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/
RESOURCES AND TECHNOLOGY
Introduction to FHA 20
Resources and Technology The best way to stay up to date with FHA requirements is to sign up for HUD’s Housing E-mail list:
http://portal.hud.gov/hudportal/HUD?src=/subscribe
FHA Resource Center: Search online knowledge base: http://portal.hud.gov/hudportal/HUD?src=/library
HUD Handbook 4000.1 is a consolidated, consistent, and comprehensive single source for FHA Single Family
Housing Policy.
Handbook is accessible via HUD Clips:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh
FAMC Wholesale Lending Website:
Handy links to the above and many other sources of industry information can be accessed at FAMC’s
website under “Resources”
https://www.franklinamerican.com/ext/wholesale?npage=wholesaleHome
RESOURCES AND TECHNOLOGY
Introduction to FHA 21
Helpful Links Please refer to the Franklin American Mortgage website under Resources for more
information.
http://www.hud.gov/ – HUD web address
http://portal.hud.gov/hudportal/HUD?src=/FHAFAQ - FHA Frequently Asked Questions Site
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips – HUD clips where to
find handbooks, Mortgagee letters, and other processing and underwriting guidance
https://www5.hud.gov/Ecpcis/main/ECPCIS_List – HUD LDP list (must be checked for all parties to
transaction including real estate agents, buyer, seller, appraiser, etc.)
https://entp.hud.gov/idapp/html/condlook.cfm – FHA approved condominium search (All condominiums
must be approved and listed on FHA’s list of approved condos)
https://entp.hud.gov/idapp/html/hicostlook.cfm – FHA maximum mortgage limits (check maximum
mortgage limit for are in which you are lending. Limits are set based on state and county location)
HELPFUL FHA LINKS
Introduction to FHA 22
http://www.hud.gov/localoffices.cfm – List of HUD field offices
http://portal.hud.gov/hudportal/documents/huddoc?id=92900-lt.pdf
FORMS: FHA Loan Underwriting and Transmittal Summary
http://portal.hud.gov/hudportal/documents/huddoc?id=92800-5b.pdf
FORMS: Conditional Commitment.
Resources to help struggling FHA homeowners learn their options to avoid foreclosure and scams:
• National Servicing Center:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc
• HUD Approved Counseling Agencies: http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
• Customer-focused websites: http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure
HELPFUL FHA LINKS
Introduction to FHA 23
Helpful Links, Continued
Sections of the Act
FHA Loan Programs come under the jurisdiction of HUD (the Department of Housing and Urban
Development). HUD has numerous loan programs known as "Titles".
• The home loan programs offered by FAMC and covered in this manual fall under the "Title II" program.
• FHA loan programs are known as "Sections", and each Section is associated with a number. Below is an
overview of these Sections.
203 (b) Description – Regular
• Fixed Rate or ARM
• Can be used for 1-4 unit properties
• Used for condos and PUD’s
• Requires Upfront Mortgage Insurance Premiums (UFMIP) and Monthly Mortgage Insurance Premium
(MIP)
• Most widely used section
• Energy Efficient Mortgage (EEM)
FHA PROGRAMS (“SECTIONS”)
Introduction to FHA 24
Closing Costs
HUD allows FHA borrowers to pay reasonable and customary closing costs and fees that are
necessary to close the mortgage.
Non-Allowable Closing Costs
Federal, State and local regulations and predatory lending rules apply. Check your local and state
guidelines, they could be more restrictive.
Additional Closing Cost Guidelines
• Commitment (lock-in) fees require a written guarantee of the interest rate
and discount points (if any) for at least 15 days.
• Third-party fees may not be “marked up” (includes credit report, appraisal, title, etc.).
• Origination fee not limited to 1%.
CLOSING COSTS INFORMATION
Introduction to FHA 25
Calculating Cash-to Close
The three items that make up a buyer’s cash-to-close are:
Down payment
+ Closing Costs and Fees Paid by the Borrower
+ Pre-paid Closing Costs Paid by the Borrower
______________________________________
= Total Cash-To-Close
TOTAL: For the purpose of verifying sufficient cash-to-close, Cash Reserves (after closing) are not required
for 1-2 unit properties except as required by total scorecard.
Manual (except non-credit qualifying streamline refinance transactions)
• 1 – 2 Unit Properties: Verify and document one (1) month’s PITIA**
• 3 – 4 Unit Properties: Verify and document three (3) month’s PITIA**
** PITIA = Principal, Interest, Taxes, Insurance and Association Fees.
CALCULATING CASH-TO-CLOSE
Introduction to FHA 26
Estimating Pre-Paid Closing Costs
ITEM ESTIMATE PRE-PAID
- Monthly UFMIP (can be financed): 0 months
- Hazard Insurance Premiums: 14 months
- Flood Insurance Premiums: (if applicable) 14 months
- Pre-paid Interest: 15 days
- Taxes: (varies with month and state)
ESTIMATING PRE-PAID CLOSING COSTS
Introduction to FHA 27
Upfront Mortgage Insurance Premium An Upfront Mortgage Insurance Premium (UFMIP) is required on all FHA mortgage programs offered by
Franklin American Mortgage Company. The maximum mortgage may never exceed the statutory limits,
except by the amount of financed UFMIP.
Monthly Mortgage Insurance Premium FHA mortgages require an additional Mortgage Insurance Premium (MIP) that is collected monthly. The
percentage amount of the monthly premium varies by program, LTV, and loan term.
FHA Simple and Streamline submissions MUST include a copy of the “Refinance Authorization/Credit
Query” documenting the original endorsement date (see below).
UPFRONT /ANNUAL MORTGAGE INSURANCE
PREMIUMS
Introduction to FHA 28
UPFRONT/ANNUAL MORTGAGE INSURANCE
PREMIUMS
Introduction to FHA 29
FHA MAXIMUM MORTGAGE AMOUNT
AND MIP WORKSHEET
Introduction to FHA 30
FHA MAXIMUM MORTGAGE AMOUNT
AND MIP WORKSHEET
Introduction to FHA 31
FHA MAXIMUM MORTGAGE AMOUNT
AND MIP WORKSHEET
Introduction to FHA 32
Restrictions to Maximum FHA Amounts Certain types of loan transactions affect the amount of financing available and the calculation of the
maximum mortgage amount.
These include: Identity-of-Interest, Non-Occupying Co-Borrowers, and additional FHA loans.
Identity of Interest Transactions
Identity-of-Interest is defined by HUD as a sales transaction between parties with a family or business
relationship. These transactions are usually restricted to a maximum loan-to-value of 85%. However,
maximum financing is permissible under the following circumstances:
• A family member purchasing another family member's home as a principal residence. The home must be the
Seller’s primary residence.
• An employee of a builder purchasing one of the builder's new homes as a principal residence.
• A corporation transferring an employee out of an area, purchasing the transferred employee's home, and
reselling to another employee.
• A current tenant purchasing the property that he or she has rented for at least six (6) months immediately
predating the sales contract. A lease or other written evidence must be submitted to verify occupancy.
RESTRICTIONS TO MAXIMUM
FHA LOAN AMOUNTS
Introduction to FHA 33
RESTRICTIONS TO MAXIMUM
FHA AMOUNTS
Introduction to FHA 34
Restrictions to Maximum FHA Loan Amounts, Continued
Restrictions to Maximum FHA Loan Amounts, Continued Family Member is defined as follows:
Child, parent, or grandparent;
• Child is defined as son, stepson, daughter, or stepdaughter;
• Parent or grandparent includes a step-parent/grandparent or foster parent/grandparent
Spouse or domestic partner
Legally adopted son or daughter, including a child who is placed with the borrower by an authorized agency
for legal adoption
Foster child
Brother, stepbrother
Sister, stepsister
Uncle
Aunt
Son-in-law, daughter-in-law, farther-in-law, mother-in-law, brother-in-law, or sister-in-law of the borrower
Note: This applies to identity-of-interest and gift funds
RESTRICTIONS TO MAXIMUM
FHA AMOUNTS
Introduction to FHA 35
Restrictions to Maximum FHA Loan Amounts, Continued Number of FHA Loans
A borrower is not permitted to have more than one (1) FHA loan outstanding at any given time, except under
situations as described below:
RESTRICTIONS TO MAXIMUM
FHA AMOUNTS
Introduction to FHA 36
Please refer to the FAMC Wholesale Lending Guide for complete Borrower Eligibility guidelines at: Underwriting Guidelines>FHA>Borrower Eligibility Non-Occupant Co-Borrowers
For non-occupying co-borrower transactions, the maximum LTV is limited to 75% LTV.
The LTV can be increased to a maximum of 96.5% if the borrowers are family members, provided the
transaction does not involve the following:
• A family member selling to a family member who will be a non-occupying co-borrower.
• A transaction on a two- to four- unit property.
Non-Borrowing Spouse or Domestic Partner:
A non-borrowing spouse or domestic partner is a person who has an ownership interest in the security property.
Non-borrowing spouses or domestic partners are required to sign the security instrument and other
applicable documentation in order to perfect a lien in accordance with the governing state law. The option to
waive any property right by virtue of being the owner’s spouse or domestic partner must be in accordance
with applicable state law. CAIVRS is not required for Non-borrowing spouses or domestic partners in
community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and
Wisconsin).
The following guidelines apply for non-borrowing spouses or domestic partners in community property states:
• Debts of a non-borrowing spouse must be counted in the borrower’s qualifying ratios.
• The non-borrowing spouse or domestic partner’s credit performance and credit score is generally not a
consideration.
BORROWER ELIGIBILITY
Introduction to FHA 37
Borrower's Cash Investment
The cash investment in the property must equal the difference between the amount of the insured mortgage,
excluding any upfront MIP, and the total cost to acquire the property including pre-paid expenses and closing
costs. All funds for the borrower's investment in the property must be verified and documented from
acceptable sources.
Minimum Downpayment Requirements
A downpayment is the difference between the sale price of real estate and the base loan amount which is
paid by the borrower.
On purchase transactions, a minimum downpayment of 3.5% (Minimum Required Investment (MRI), based
on the lesser of the sales price or appraised value is required. The MRI must be clearly documented and may
come from the following sources:
• From the borrower’s own funds:
• An acceptable gift source (refer to Gifts), or
• An acceptable secondary financing source, refer to Secondary/Subordinate Financing.
• When the borrower’s minimum required investment is provided by a source other than the borrower, clear
documentation must be obtained to support the permissible nature of those funds.
Closing costs paid by the borrower are not permitted to be used as a source of funds towards the 3.5%
minimum required investment (MRI).
Seller’s real estate tax proration to be received or credited at closing may not be considered at the time of
underwriting as the source of the applicant’s required funds to close.
FUNDS TO CLOSE
Introduction to FHA 38
Types of Assets
Assets are reviewed to determine if
the borrower(s) will meet the
requirements for closing costs,
downpayments, and reserves, refer
to Validation and Evaluation Large
Deposits and New Accounts.
When assets are used for the
downpayment or closing costs,
documentation must be provided
to evidence and verify the sale or
liquidation of the funds.
The borrower’s credit card may be
used to pay fees outside of closing;
refer to Wholesale Lending Guide
for full requirements.
TYPES OF ASSETS
Introduction to FHA 39
TYPES OF ASSETS
Introduction to FHA 40
Types of Assets, continued Gift Funds
Eligible Donors include:
Borrower’s family member – reference Identity of Interest section for definition Close friend with a clearly defined and documented interest in the borrower Charitable origination that does not replenish available gift funds with seller contributions. Governmental agency or public entity that has a program providing homeownership assistance to low or
moderate income families; or first-time homebuyers Family members entitled to real estate commission from subject property provided they are a licensed real
estate agent Only family members may provide gift of equity The borrower’s employer or labor union
Ineligible donors include:
Any person or entity with an interest in the sales of the property, including by not limited to: The builder The seller (except gift of equity for relative) The developer The real estate agent The mortgage broker Other interested party to the transaction
Any gift or down payment assistance source where the provider is reimbursed either directly or indirectly by the seller or any interested third party, commonly known as “seller-funded” DPA.
TYPES OF ASSETS, CONTINUED
Introduction to FHA 41
Types of Assets, continued Gift Transfer Documentation
LIABILITIES
Introduction to FHA 42
Please refer to the FAMC Wholesale Lending Guide for a complete list of Liabilities guidelines at: Underwriting Guidelines>FHA>General Underwriting Guidelines>Liabilities
Installment Accounts: Closed-end installment debts do not have to be included if: They will be paid off within 10 months; and
The cumulative payments are less than or equal to 5% of the borrower’s gross monthly income. The borrower may not pay down the balance in order to meet the 10-month requirement
Student Loans All student loans must be included in the borrower’s DTI, regardless of the status of the loan or payment type. • Loans in deferment or forbearance may not be excluded. • One of the following two options are required for determining the qualifying payment.
• Utilize the greater of: • 1% of the outstanding loan balance, OR • The monthly payment reflected on the credit report.
• The actual payment only if it is fixed and fully amortized. • Written documentation from the student loan provider is required.
Example 1: Credit report reflects a $25,000 balance and a payment of $100.00. Written documentation indicates non-fixed plan. Qualifying payment must be $250.00.
Example 2: Credit report reflects a balance of $30,000 and a payment of zero. Written documentation indicates a fixed and fully amortized payment of $200.00 to begin in 18 months. Qualifying payment is $200.00.
LIABILITIES
Introduction to FHA 43
Non-Borrowing Spouse • Obtain SSA-89 for non-borrowing spouse and validate social security number (required if the subject
property is in a community property state or the non-borrowing spouse currently resides in a community property state.)
• If non-borrowing spouse does not have SSN
• Verify lack of SSN with the Social Security Administration or one of their authorized service providers
• Where an SSN does not exist for a non-borrowing spouse, a manual credit report must be provided and contain, at a minimum, the non-borrowing spouse’s full name, date of birth, and previous addresses for the last two years.
• Apply all of the following when a community property state applies:
• Community property state applies when: • Subject property is located in a community property state; or • Borrowers current residence is located in a community property state (Arizona, California,
Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). • Obtain credit report for non-borrowing spouse
• Except non-credit qualifying streamline refinance • Debts must be included in borrower’s qualifying ratios, except for obligations excluded by state
law • Credit performance and credit score is generally not a consideration.
LIABILITIES
Introduction to FHA 44
Obligations not to be considered: Medical collections Federal, state, and local taxes, if not delinquent and no payments are
required Automatic deductions from savings, when not associated with another type
of obligation Federal Insurance Contributions Act (FICA) and other retirement
contributions, such as 401(k) accounts Collateralized loans secured by depository accounts Utilities Child care Commuting costs Union dues Insurance, other than property insurance Open accounts with zero balances Voluntary deductions when not associated with another type of obligation
EMPLOYMENT AND INCOME
Introduction to FHA 45
Please refer to the FAMC Wholesale Lending Guide for a complete list of Employment and Income guidelines at: Underwriting Guidelines>FHA>General Underwriting Guidelines>Employment and Income
Employment History and Continuance
Establishing stable monthly income is based on the type of income received, the length of time received, and
whether or not the income is likely to continue.
• The borrower's employment must be documented for the most recent two (2) years. • Gaps of employment:
o Two year work history must be documented prior to gap in employment o Gaps of six (6) months or more (1 month or more for AUS Refer loans) must be fully explained by
the borrower
• Documentation of time spent in college or military service can be included to make up the two (2) year period. Time spent in high school cannot be used as part of borrower’s 2-year employment history
• Frequent Changes in Employment
FHA QUALIFYING RATIOS
Introduction to FHA 46
Please refer to the FAMC Wholesale Lending Guide for a complete list of Ratio guidelines at: Underwriting Guidelines>FHA>General Underwriting Guidelines>Ratios and Compensating Factors
"Top Ratio": The total mortgage payment to effective income-to-income (also known as “front”) ratio is calculated
by dividing total monthly housing expenses for the financed property by the effective monthly income.
"Bottom Ratio”: The total fixed payment ratio (also known as DTI or “back”) ratio is calculated by dividing the total
of all monthly obligations by the effective monthly income.
These ratios may only be exceeded with an AUS-Accept recommendation that meets published FAMC credit
guidelines (see FAMC FHA Product Description for full details).
TOTAL: • FICO < 650: DTI cannot exceed 45%, regardless of AUS results. • FICO > 650 : As per AUS
Manual: • Refer to Ratios and Compensating Factors in FAMC Wholesale Lending Guide for complete
requirements.
Refer to EEM Program for qualifying guidelines on energy efficient mortgages. For new construction properties, borrowers must be qualified using the estimated real estate taxes based upon the completed property improvements, not the unimproved lot taxes.
FHA QUALIFYING RATIOS
Introduction to FHA 47
CREDIT POLICIES AND ANALYSIS
Introduction to FHA 48
Please refer to the FAMC Wholesale Lending Guide for a complete list of Credit guidelines at: Underwriting Guidelines>FHA>General Underwriting Guidelines>Credit Analysis
Automated Underwriting
AUS Requirements
An FHA TOTAL Scorecard recommendation is required for all FHA loans except for streamline refinance transactions. The loan must be underwritten to the applicable standards and guidelines in accordance with AUS Findings and modified by Franklin American Mortgage Company's Product Descriptions. All terms and conditions of the loan and underwriting information must match the data on which the AUS Findings are based.
AUS Acceptability
30-year FHA loans which meet FAMC minimum credit requirements and receive an AUS-Approve recommendation and are
successfully validated by FAMC, will be approved upon successful validation if they meet these FHA requirements:
• The data entered into the AUS meets FHA guidelines and is true, complete, and accurate, AND
• The loan does not contain characteristics that would require a downgrade to manual underwriting (see below),
AND
• The entire loan package meets all other FHA requirements except for those specifically not required because the
loan was evaluated by an AUS, AND
• There is no indication of fraudulent loan documentation.
Any loan with a term of less than 30 years will be accepted with an AUS approval as long as it also receives a 30 year term
AUS approval, which will be run internally by FAMC.
CREDIT POLICIES AND ANALYSIS
Introduction to FHA 49
Manual Downgrades
HUD requires the underwriter to manually downgrade an AUS-Accept recommendation to “Refer” and
perform a complete manual underwrite based on standard FHA guidelines if any of the following
conditions exist:
• Delinquent Federal Debt: As revealed by public records, credit information or CAIVRS, including:
– Federally-guaranteed student loans.
– Federal taxes (If in accepted repayment agreement, must be current).
– FHA and VA loans.
– Small Business Administration (SBA) loans.
– Liens placed against borrower’s property for a debt owed to the
US Government.
• Foreclosure: Foreclosure, Deed-In-Lieu of Foreclosure or Pre-Foreclosure Sale, Short Sale
completed within three years of the case number assignment date.
• Bankruptcy: The date of the borrower’s bankruptcy discharge as reflected on bankruptcy
documents is within two (2) years from the date of the case number assignment.
CREDIT POLICIES AND ANALYSIS
Introduction to FHA 50
Manual Downgrades, continued
• The borrower has undisclosed mortgage debt
• The mortgage payment history by transaction type requires a manual downgrade (Refer to
Credit History section in the applicable Product Description)
• Additional information not considered in the AUS recommendation that effects the overall
insurability of the loan (Refer to Inaccuracy in Debt Consideration)
• Business Income shows a greater than 20% decline over the analysis period
• The Borrower has disputed derogatory accounts with a cumulative balance of $1000 or more
• The file contains information or documentation that cannot be entered into or evaluated by
TOTAL Mortgage Scorecard
Manual Overrides of AUS-Refer
Loans receiving an AUS-Refer must receive a loan transmittal or second review and signature. If manually
approved, the Underwriting Manager must note with detailed reasons for approving the loan, including
compensating factors.
Compensating factors, as listed in FAMC Wholesale Lending Guide>FHA General Underwriting Ratios and
Compensating Factors, must be carefully considered by the Underwriting Manager for their applicability
to the individual circumstances and whether or not they are relevant, appropriate and sufficient to
overcome the AUS-Refer recommendation and the particular risk factors of the individual file.
CREDIT POLICIES AND ANALYSIS
Introduction to FHA 51
Inquiries
All inquiries within the past 90 days must be reviewed to ensure that all debts, including any new
payments resulting from material inquiries listed on the credit report are used to calculate the debt
ratios. If an inquiry results in a debt, regardless of the amount of time passed since the inquiry was
made, the payment must be included and the debt must be considered in the AUS results.
The Underwriter must also determine that any recent debts were not incurred to obtain any part of
the Borrower’s required funds to close on the subject property.
NOTE: If credit report contains inquiries beyond 90 days, those debts must be reviewed and considered.
Credit History and Credit Scores
Credit history and credit scores are required for each borrower on the application. Non-traditional credit is not permitted. Minimum credit score is 620, regardless of AUS.
• Streamline refinance transactions require a minimum 640 credit score. Maximum Number of Financed Properties There are no restrictions on the number of financed properties owned by the borrower(s) for Standard Loan Amounts. Refer to Product Description for FHA Jumbo. Number of Borrowers per Transaction The number of borrowers per loan transaction is restricted to four (4) borrowers.
PROPERTY ELIGIBILITY
Introduction to FHA 52
Eligible Properties Individual programs and products may have more restrictive
guidelines. Refer to the individual product description to
determine property eligibility.
• 1-4 unit attached or detached primary residence
including condominiums and PUDs.
• Condominiums must be FHA-approved, refer to
Condominium and PUD projects.
• 3-4 unit properties are subject to an additional “self-
sufficiency” test. See the Maximum/Minimum Loan
Amount section of the product description.
• REO Properties. These include properties owned by HUD,
Fannie Mae, Freddie Mac, VA, USDA, and banking
institutions.
• Log homes.
• Modular Homes (must have 2nd level review in
Underwriting)
• Mixed use properties.
• Age restricted properties (with completed Age Restricted
Properties Form).
• New Construction – refer to New Construction.
Ineligible Properties • Any property where the seller is not the owner of record.
• Properties being re-sold within 90 days of the seller's acquisition
date (refer to Property Flipping in FAMC Lending Guide).
• Properties which are not primarily residential in nature and use
(see FAMC Lending Guide for full requirements).
• Manufactured or mobile housing.
• Leasehold condominium.
• Spot condominium.
• Multi-unit condominium.
• Co-ops.
• Dome homes.
• Builder Trade Equity.
• Any property that does not meet HUD’s minimum property
requirements and minimum property standards.
• Properties with individual water purification systems required to
make the water safe for human consumption
• Fraternity and Sorority houses
• Vacation homes
• Properties subject to Private Transfer Fee Covenants • Properties that do not meet HUD minimum property requirements
and standards
Please refer to the FAMC Wholesale Lending Guide for a complete list of Property guidelines at: Underwriting Guidelines>Property Eligibility>FHA
PROPERTY ELIGIBILITY
Introduction to FHA 53
Condominium and PUD Projects
• Site condominiums are single-family detached dwellings encumbered by a declaration of condominium
covenants or condominium form of ownership. Condominium project approval is not required for site
condominiums; however, the condominium rider must be included in the FHA case binder submitted for
insurance endorsement, and the loan closed under Section 203(b).
• Condominiums must be FHA-approved. The project must be listed on FHA's approved condominium
project list at https://entp.hud.gov/idapp/protect/condlook.cfm
• If a project is no longer approved or foes not meet Lender Certification Criteria, then only an FHA-
to-FHA streamline refinance without an appraisal is permitted.
• PUDs do not require FHA approval.
Leasehold Estates
• A leasehold estate is a way of holding title to real estate in which the mortgagor does not actually own
the property and instead has a recorded long-term lease. Generally, leasehold estates are eligible. The
appraisal must indicate market acceptance of leasehold estates as well as meet all HUD documentation
requirements for leasehold estates.
• For 1-4 unit properties, including a one (1) family unit in a condominium project, the mortgage must be
a real estate held on leasehold under:
• A lease having a term of not less than 10 years beyond the maturity date of
the mortgage OR
• A lease of not less than 99 years which is renewable.
APPRAISAL
Introduction to FHA 54
FHA Appraisals All appraisals must be ordered with strict adherence to Franklin American Mortgage Company’s guidelines for Appraiser Independence Requirements (AIR). The appraiser’s status must be verified within FHA Connection under Single Family FHA/Single Family Origination/FHA Approval Lists/Appraisers. The effective date of the appraisal cannot be before the case number assignment date. Requirements in the Product Description must be followed.
Second Appraisals Franklin American Mortgage Company must order all second appraisals. A second case number is not to be used. Appraisal, value, and payment requirements:
Form 2055 is permitted. The value from the second appraisal must be used for LTV calculation if it exceeds 5% less than
the value from the first appraisal. (only applies for Property Flipping) If the second appraisal value is higher than the initial appraisal, the value from the second
appraisal may not be used. The borrower may not be charged for the second appraisal.
PROPERTY INSPECTION
Introduction to FHA 55
Termite, Well, and Septic Inspections
Properties under one (1) year old require mandatory inspection, treatment, and testing, even if previously occupied.
See FHA New Construction Guidelines in FAMC Wholesale Lending Guide for more information.
For existing properties over one (1) year old, inspection and/or testing is only required if:
• The appraisal indicates there may be a problem or that problems are common in the area.
• Mandated by the state or local jurisdiction (see below) • Required by the sales contract • A water purification system is present. If the water supply does not test safe without
the purification system, the property is ineligible because of the required maintenance escrow.
• When utilities (water, gas, electric) are NOT on at the time of appraisal the appraiser must condition for further inspection to determine if the utilities are in proper working order.
Shared Well •Appraiser must obtain a copy of the shared well report and indicate any readily observable deficiencies
• A copy of the shared well agreement must be included with the appraisal report
For properties with wells and other water systems refer to: http://portal.hud.gov/hudportal/HUD?src=/FHAFAQ
For properties with septic systems refer to http://portal.hud.gov/hudportal/HUD?src=/FHAFAQ
REFINANCE TRANSACTIONS
Introduction to FHA 56
Please refer to the FAMC Wholesale Lending Guide for complete Refinance guidelines at: Underwriting Guidelines>FHA>Mortgage Eligibility>Refinance Transactions
Refinance Transactions
A refinance transaction is a mortgage loan used to payoff an existing real estate obligation on the same property
for borrower(s) with legal title to the subject property. Not all borrowers have to be obligated on the loan being
paid off.
The types of refinance transactions available are:
• Rate/term refinances (limited cash out): A no cash-out refinance of any mortgage in which all proceeds
are used to pay off eligible existing liens on the subject property and eligible costs associated with the
transaction.
• Simple Refinance: A no cash-out refinance of an existing FHA-insured mortgage in which all proceeds are
used to pay off the existing FHA-insured mortgage on the subject property and eligible costs associated
with the transaction. An appraisal is required.
• Streamline refinances without appraisals: A refinance of an existing FHA-insured loan, with no appraisal
required. There are two options available:
• Credit Qualifying
• Non-Credit Qualifying
• Cash-out refinances: A refinance of any mortgage to take additional proceeds not limited to a specific
purpose or a withdrawal of equity when there is no existing mortgage.
NEW CONSTRUCTION
Introduction to FHA 57
Please refer to the FAMC Wholesale Lending Guide for a complete list of New Construction guidelines at: Underwriting Guidelines>Property Eligibility>FHA>New Construction New Construction Categories
The first step in determining the correct documentation for FHA new construction cases is to determine the construction category. The category is determined by the stage of construction at the time the appraisal is performed and noted under “General Description” in the “Improvements” section of the appraisal. The categories are:
Existing Less Than 1-Year Old: Property is 100% complete the issuance of the Certificate of Occupancy or equivalent was less than one year prior to the date of the appraisal. The property must have never been occupied.
Under Construction: The period from the first placement of permanent material through 100% completion with no Certificate of Occupancy or equivalent.
Proposed Construction: Property where no concrete or permanent material has been placed. Digging of footing and placement of rebar is not considered permanent.
Equal Housing Lender; Franklin American Mortgage Company, 6100 Tower Circle, Suite 600, Franklin, TN 37067. Company NMLS #1599. For mortgage banking professionals only; not authorized for distribution to consumers or third-parties.
All info herein is current as of 6/4/15 and subject to change without notice. 6.22.16