Wholesale FHA Guideline Manual 1 | P a g e
Wholesale FHA Guideline Manual (Effective 9/22/2014) 1 | P a g e TABLE OF CONTENTS PROGRAM GUIDE ……………………………………………………………………………….. PAGE 4 LTV AND LOAN LIMITS ……………………………………………………………….. PAGE 4 TRANSACTIONS …………………………………………………………………………………… PAGE 5 PURCHASE …………………………………………………………………………………. PAGE 5 STREAMLINE ……………………………………………………………………………… PAGE 6 RATE & TERM ……………………………………………………………………………. PAGE 8 CASHOUT …………………………………………………………………………………. PAGE 9 CREDIT & UNDERWRITING ………………………………………………………………….. CREDIT REPORT AND SCORES …………………………………………………….. PAGE 10 PAGE 10 DISPUTED/JUDGMENTS/COLLECTION ACCOUNTS ……………………….. PAGE 10 AUS/Manual …………………………………………………………………………….. PAGE 12 BACK TO WORK INITITAVE …………………………………………………………. PAGE 19 BANKRUPTCY CHAPTER 7 …………………………………………………………… PAGE 19 BANKRUPTCY CHAPTER 13 ………………………………………………………… PAGE 20 FORECLOSURE …………………………………………………………………………… PAGE 20 SHORT SALE & PRE FORECLOSURE ……………………………………………….. PAGE 20 MODIFICATIONS ………………………………………………………………………… PAGE 21 JUDGMENTS ……………………………………………………………………………….. PAGE 21 TAX LIENS …………………………………………………………………………………. PAGE 21 CAIVRS …………………………………………………………………………………… … PAGE 21 BORROWER ELIGIBILITY ……..………………………………………………………………. PAGE 21 NON‐PERMANENT RESIDENT ALIENS …………………………………………… PAGE 21 PERMANENT RESIDENT ALIENS ……………………………………………………. PAGE 22 NON-OCCUPYING CO-BORROWERS ……………………………………………… PAGE 22 NON-BORROWING SPOUSE …………………………………………………………. PAGE 22 IDENTITY OF INTEREST ……………………………………………………………… PAGE 23 LIABILITIES ………………………………………………………………………………………….. PAGE 23 ALIMONY ………………………………………………………………………………….. PAGE 23 CONTINGENT LIABILITY …………………………………………………………….. PAGE 23 INSTALLMENT …………………………………………………………………………… PAGE 24 LEASE PAYMENTS ……………………………………………………………………….. PAGE 24 REVOLVING DEBT ……………………………………………………………………….. PAGE 24 MULTIPLE FHA LOANS …………………………………………………………………. PAGE 24 ASSETS ……………………………………………………………………………………………… PAGE 24 CHECKING & SAVING ACCOUNTS ………………………………………………. PAGE 24 STOCK/INVESTMENT/RETIREMENT ACCOUNTS …………………………….. PAGE 25 GIFT FUNDS ……………………………………………………………………………… PAGE 25 EQUITY CREDIT………………………………………………………………………….. PAGE 26 SWEAT EQUITY ………………………………………………………………………….. PAGE 26 RENT CREDITS ……………………………………………………………………………. PAGE 27 DOWN PAYMENT ASSISTANCE ……………………………………………………… PAGE 27 NSF ……………………………………………………………………………………………..PAGE 27 LARGE DEPOSITS ………………………………………………………………………. PAGE 27 TAX CREDITS……………………………………………………………………………… PAGE 27 COLLATERAL ……………………………………………………………………………………….. PAGE 28 FLIP PROPERTIES ………………………………………………………………………. PAGE 28 2 | P a g e FLIP WAIVER ……………………………………………………………………………. PAGE 29 PROPERTIES LISTED FOR SALE …………………………………………………… PAGE 29 3 – 4 UNIT PROPERTIES ………..…………………………………………………… PAGE 30 ESCROW HOLDBACKS …………………………………………………………………. PAGE 30 MANUFACTURED HOMES …………………………………………………………… PAGE 31 PROPERTY OVERLAYS …………………………………………………………………. PAGE 35 INSURANCE ………………………………………………………………………………………… PAGE 35 DOCUMENTATION ………………………………………………………………………………... PAGE 36 3 | P a g e Program Guide This FHA Program Guidelines provides a general overview of the FHA products and policies eligible for delivery to Endeavor America for financing consideration. The details are based on the policies outlined in the HUD Handbooks (4155) and applicable Mortgagee Letters. This document should be used solely as a reference to Endeavor America’s interpretation and overlay restrictions of HUD’s Handbooks and does not constitute a commitment to lend. Endeavor America’s Credit Philosophy The Endeavor America credit philosophy is to offer GSE loan programs with minimal overlays to our clients. Endeavor America evaluates each loan individually based solely on the borrower(s) credit worthiness and in accordance with the following principles: All loans must be submitted to DU/LP/TOTAL Scorecard and receive an Approved or Accept rating with the exception of FHA Streamline Refinances. All FHA policies (collectively defined in the 4155.1, Mortgage Credit Analysis for Mortgage Insurance Handbook and subsequent Mortgagee Letters) have been met. All requirements of the Desktop Underwriter or Loan Prospector approval have been met. All prudent factors have been weighed and evaluated on the loan file and no reasonable doubt remains about the borrower(s) ability meet the terms of the loan. LTV and Loan Limits Minimum & Maximum Loan Amount The minimum total loan amount Endeavor America will lend on is $75,000 and the total maximum loan amount (excluding UFMIP) cannot exceed the FHA Statutory Mortgage Limits for the applicable county. Conforming Balance and High Balance loan amounts are available. A complete schedule of FHA mortgage limits by county is available at: https://entp.hud.gov/idapp/html/hicostlook.cfm The following current maximum loan limits for conforming first mortgages are: Units 1 2 3 4 Conforming Limit County Limits or up County Limits or up County Limits or up County Limits or up to to to to $417,000 $533,850 $645,300 $801,950 High Balance $417,001 to FHA $533,851 to FHA $645,301 to FHA $801,951 to FHA County County County County Limit Limit Limit Limit Minimum FICO 580 580 580 580 4 | P a g e Loan to Value (LTV) On non-streamline transactions, the LTV is the base loan amount divided by the lesser of the appraised value or the purchase price. Occupancy Primary Residence All 1 2 3 Purpose Purchase Rate & Term Refinance Cashout Streamline with Appraisal Streamline without Appraisal Units 1-4 1-4 1-4 1-4 1-4 Base LTV 96.5% 97.75% 85% 97.75% 2 100% 2,3 CLTV 96.5% 1 97.75% 85% 125% 125% CLTV may exceed 96.5% if secondary financing is provided by a government agency The new loan amount may not exceed the original loan amount on credit qualifying streamlines The LTV is based on the original purchase price of the property Mortgage Insurance Mortgage Insurance is required on all loans. Refer to the following charts for details on UPFMIP and monthly MIP. Case Numbers Assigned on or after June 3, 2013 TRANSACTION BASE LOAN AMOUNT ≤$625,000 ≤$625,000 >$625,000 >$625,000 Streamline Loans Endorsed on ALL LOAN AMOUNTS Non Streamlines Loans Endorsed After May 31, 2009 or Prior to May 31, 2009 TRANSACTION Non Streamlines Loans Endorsed After May 31, 2009 BASE LOAN AMOUNT ≤$625,000 ≤$625,000 >$625,000 >$625,000 ALL LOAN AMOUNTS Streamline Loans Endorsed on ALL LOAN AMOUNTS LTV ≤95% >95% ≤95% >95% ALL UFMIP 1.75% 1.75% 1.75% 1.75% .01% ANNUAL MIP TERMS >15 YRS 1.30 1.35 1.50 1.55 .55 LTV ≤78.01‐90.00% >90% ≤78.01‐90.00% >90% ≤78.00 ALL UFMIP 1.75% 1.75% 1.75% 1.75% 1.75% .01% ANNUAL MIP TERMS ≤15 YRS .45 .70 .70 .95 .45 .55 or Prior to May 31, 2009 Transactions Eligible Transactions Purchase Streamline Refinance Rate/Term Refinance Cash Out Refinance Purchase On all purchase transactions, the subject property must be the primary borrower’s principal residence. To be considered a principal residence, the borrower must not own a superior property in regards to size and proximity to work, and the borrower must occupy the subject property within 60 days of signing the security instrument and continue to occupy the property for at least the next 365 days. 5 | P a g e Maximum Loan Amount The maximum loan amount on a purchase is calculated by taking the maximum loan to value (LTV) for the selected program and multiplying it by the lesser of the purchase price or appraised value. Property Tax Calculation CA Properties Refinances: Use amount on title, unless property purchased in last 12 months. Then use the higher of actual amount on title or 1.25% of previous purchased price. Purchases: Use the higher of actual amount on title or 1.25% of purchase price. All Other States Refinances: Use amount on title. Purchases: Use the amount on title unless tax information sheet completed by title shows a higher amount. Streamline Refinance A Streamline Refinance is the rate and term refinance of a subject property where the existing loan was originated and is held as an FHA loan. Since the original loan was already underwritten to FHA standards and loan deemed credit worthy, Streamline Refinances are designed to have minimal document requirements but require strict guidelines which must be specifically adhered to. Below are the guideline requirements which apply to streamline refinances: The loan may not be submitted to Endeavor America until all of the following have been met: o 210 days have passed since the closing date of the existing mortgage o The borrower(s) have made 6 loan payments o At least 6 months have passed since the borrower(s) was required to may their first loan payment If a borrower(s) on the original loan are not on the new loan, the loan must be considered a credit qualifying streamline and income documentation provided Debt, liens and judgments other than the existing FHA mortgage may not be paid through the transaction Although appraisals on streamline transactions are not permitted, accidental orders of appraisals on primary residences may be accepted on a case by case exception, but under no circumstance may an appraisal be ordered on second home or investment property. When an appraisal was accidently ordered but is not being used, the original value of the loan being paid off will be used to calculate the LTV/CLTV and the appraised value will be provided on the Refinance Authorization. Streamlines are not to be submitted thru DU/LP/Scorecard. However, if one is mistakenly ran, the loan must be downgraded to a manual underwrite and fully underwritten by the underwriter A qualifying net tangle benefit must exist for the borrower(s) There may not have been any mortgage delinquencies in the past 3 months and a maximum of a 1x30 in the past 12 months1 1 If a borrower has withheld payments due to a Formal or Informal Disaster Forbearance, the borrower’s payment history should be analyzed, as noted above, based on the period prior to and, where applicable, following the forbearance period. 6 | P a g e No new subordinate financing is allowed and all existing junior liens must be resubordinated A maximum of $500 cash back to the borrower is allowed at the close of escrow Non-Credit Qualifying Streamlines Non-credit qualifying streamlines are permitted on transactions where all parties on the note of the current FHA mortgage are on the new loan application. Non-Credit Qualifying Streamlines – “Mortgage Only” Non-credit qualifying streamlines – “mortgage only” follow the same guidelines as noncredit qualifying streamlines with the exception that a tri merge credit report is not provided by the broker. On these loans, Endeavor America will order a “mortgage only” credit report thru one of its vendors, rating the mortgages on the subject property only. For pricing purposes, the loan will be treated as a “Standard” loan with a qualifying fico score of 700. Credit Qualifying Streamlines Credit qualifying streamlines are permitted on transactions where at least on party originally obligated on the existing FHA mortgage will be remaining on the new mortgage. These loans are treated as manual underwrites and as such, are limited to a maximum 43% backend debt to income ratio. Maximum Loan Amount for Streamline Refinance Streamline Non-Credit Qualifying without Appraisal Primary Residence: The loan amount may not exceed the existing principal balance, plus up to 60 days interest, plus the new UFMIP, minus the UFMIP refund Second Home and Investment Property: The loan amount may not exceed the existing principal balance Credit Qualifying Streamline with Appraisal (Primary Residence Only) The maximum loan amount will be the lesser of the two: The loan amount may not exceed the existing principal balance, plus up to 60 days interest, plus the new UFMIP, minus the UFMIP refund 97.75% of the appraised value, plus the new UFMIP Net Tangible Benefit for Streamline Refinances All Streamline Refinances must have a net tangible benefit to the borrower in order to be eligible for financing with FHA. Below is the matrix for the criteria for a loan meeting the net tangible benefit criteria. Any streamline loan that does not meet at least one of these criteria, must be underwritten as a standard rate and term refinance. 7 | P a g e IF EXISTING LOAN IS A: THE NEW LOAN REQUIREMENT IS: FIXED RATE THE NEW PRINCIPAL, INTEREST AND MONTHLY MORTGAGE INSURANCE PAYMENT MUST BE REDUCED BY 5% INTEREST RATE MAY NOT BE 2% HIGHER THAN EXISTING RATE THE NEW PRINCIPAL, INTEREST AND MONTHLY MORTGAGE INSURANCE PAYMENT MUST BE REDUCED BY 5% INTEREST RATE MAY NOT BE 2% HIGHER THAN EXISTING RATE ONE-YEAR ARM HYBRID ARM (3YR, 5YR,7YR) DURING FIXED RATE PERIOD HYBRID ARM (3YR, 5YR,7YR) DURING ADJUSTIBLE RATE PERIOD Rate/Term Refinance FHA defines a rate and term refinance as any loan that pays off an existing FHA, VA or Conventional first lien and/or qualified subordinate financing. Endeavor America requires the following on rate and term refinances: 1‐4 unit Primary Residence only A full appraisal Loans must receive an accept using DU/LP/Total Scorecard Maximum LTV/CLTV for Rate/Term Refinance The maximum loan amount will be calculated as the lesser of: 97.75% of the appraised value (or acquisition cost as applicable), or The sum of the outstanding balance of the first lien up to two months of pro rate MIP if paying off an FHA mortgage, closing costs and prepaid, borrower paid discount points, purchase money seconds, non‐purchase money second liens ONLY IF at least 12 payments have been made (see Subordinate Financing topic below), prepayment penalties, accrued late charges, escrow shortages, borrower paid repairs required by the appraisal, minus any refund of UFMIP. Prepaid expenses are limited to per diem interest and hazard/flood property taxes and mortgage insurance impound). If the loan being paid off is NOT an FHA loan and the borrowers have owned and occupied the property less than one year prior to application date, the LTV is based on the lesser of the current appraised value or original acquisition cost (sales price plus any documented costs to repair, rehabilitate, renovate or weatherize the property plus closing costs including reasonable discount points) or total of all mortgage liens held against the property. Use current appraised value for all other scenarios. Delinquent interest, late charges, or escrow shortages may not be included in the outstanding principal balance of the mortgage being paid off for the maximum mortgage calculation. Occupancy of Former Investment Property The following guidelines apply when a borrower is occupying a property formerly used as an investment property: If re‐occupied as a Primary Residence for 12 months or more prior to the initial loan application date: Maximum financing allowed. If re‐occupied for less than 12 months prior to the initial loan application date: Allowed as a Rate/Term Refinance only, but LTV/CLTV is limited to 85%. 8 | P a g e Secondary Financing Subordinate liens, regardless of seasoning, may remain outstanding provided the combined liens do not exceed the maximum CLTV 97.75%. Subordinate liens may be paid off on rate and term refinance provided they meet one of the following scenarios: The lien being paid off was used its entirety to purchase the subject property The lien being paid off is a credit line with a total of less than $1,000 drawn on in it in the previous 12 months The lien being paid off is a non-purchase secondary lien that has at least 12 months of timely payments made on it In all other scenarios, the subordinate lien must remain subordinated or the transaction treated as a cash-out refinance. Net Tangible Benefit All refinances must provide a net tangible benefit borrower when required by any state or local regulation. Cash Out Refinance FHA defines a Cash Out Refinance as any refinance that pays off any existing non-purchase money, debt or judgment and in cases where the borrower(s) receive more than $500 cash back at the close of escrow. Endeavor America requires the following on cash out refinances: 1‐4 unit Primary Residence only A full appraisal No new non-occupying borrowers At least a 6 month payment history on the subject property 0x30 mortgage lates in the past 12 months Maximum LTV/CLTV for Cash Out Refinance Maximum 85% LTV/CLTV If the borrower has owned and occupied the property for less than one year prior to loan application, the LTV/CLTV is limited to the lesser of the appraised value or the original sales price. If the borrower recently inherited the property and is occupying or will occupy the property as a primary residence, 85% LTV/CLTV based on current appraised value is allowed regardless of the length of ownership. Occupancy of Former Investment Property When a borrower is re‐occupying a property formerly used as an investment property, the transaction must comply with all Rate/Term refinance policies but is limited to a maximum 85% LTV/CLTV. Secondary Financing 9 | P a g e New subordinated financing is not allowed. However, modifying an existing subordinate lien to lower the total indebtedness is not considered a new subordinate lien and may remain in place. (If the secondary financing is an equity line, the maximum amount of the equity line is used in the CLTV calculation). Net Tangible Benefit All refinances must provide a net tangible benefit to the borrower as required by state or local regulations. Principal Reduction Principal reductions allow for an immediate reduction of the original principal balance without a modification of the original terms of the loan. Endeavor America currently allows for principal reductions on refinance transactions where the borrower is receiving excess cash back per program guidelines and/or for excess credit for rate chosen up to the lessor of $2,000 or 2% of the total loan amount. Under no circumstances may the proceeds from a principal reduction be used to offset the minimum required funds a borrower(s) must bring in to close escrow. As a reminder, the maximum cash to borrower per product is listed in the table below. Credit / Underwriting Loans must comply with FHA policies and the policies outlined within this document. Refer to Chapter 4 of the HUD 4155.1 for additional guidelines not addressed within this section. Credit Report and Scores A tri‐merge credit report dated within 120 days of the funding date is required on all loans. For Streamline Refinance transactions, it is used solely to validate the credit score. Credit Score Methodology The following criteria may be used to determine each individual borrower's credit score using the "middle/lower" method. If there are three valid credit scores for a borrower, the middle score (numerical middle of the three scores) is used. If there are three valid scores for a borrower but two of the scores are the same, the duplicate score is used. If there are two valid scores for a borrower, the lower of the two scores is used. If there is one valid score for a borrower, that score is used. Loan Score Selection After selecting the appropriate Credit Score for each borrower, the Loan Score must be determined. If there is more than one borrower, the lowest selected Credit Score among all borrowers is the Loan Score. When there is only one borrower, the selected Credit Score for that borrower is also the Loan Score. Disputed Accounts For case numbers assigned before 10/15/2013: 10 | P a g e If the credit report reveals that the borrower is disputing any credit accounts, the loan is not eligible for financing with Endeavor America unless the disputed account reflects any of the following: The disputed account has a zero balance The disputed account is showing as being paid or resolved The disputed account balance is less than $500 and the dispute is more than 24 months old For case numbers assigned on or after 10/15/13: If the credit report utilized by DU indicates that the borrower is disputing derogatory credit accounts, the borrower must provide a letter of explanation and documentation supporting the basis of the dispute. Endeavor America must analyze the documentation provided for consistency with other credit information in the file to determine if the derogatory credit account should be considered in the underwriting analysis. If the cumulative outstanding balance of all disputed derogatory credit accounts of all borrowers is less than $1,000, the loan is eligible for financing with Endeavor America. If the cumulative outstanding balances for all borrowers is equal to or greater than $1,000, FHA requires a manual downgrade of the loan, which Endeavor America does not currently offer. It should be noted that disputed medical accounts are excluded from the $1,000 limit and do not require additional documentation. Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use are also excluded from the $1,000 limit but will require the borrower to provide supporting documentation such as a letter from the creditor or a police report disputing the fraudulent charges. Disputed derogatory credit accounts are defined as: Disputed charge off accounts Disputed collection accounts, and Disputed accounts with late payments in the last 24 months. Judgment, Collection, Charge Off Accounts For case numbers assigned before 10/15/2013: All judgments appearing on the credit report must be paid in full at time of close of escrow, regardless of the dollar amount. However, collection and charge off accounts may be ignored, provided the loan receives an Approved/Eligible finding from DU. For case numbers assigned on or after 10/15/13: Judgments will be required to be paid in full at the time of close of escrow, unless the borrower has made an agreement with creditor to make regular and timely payments and provides evidence of this arrangement, as well as all payments (minimum of three schedule payments for judgments) have been made on time. Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months payments, and the monthly payment must be considered in the borrower’s debt to income ratio. Charge Off accounts and medical collections, will also continue to adhere to the previous guideline and be ignored provided the loan receives an Approved/Eligible find from DU. However, if the total outstanding balance of all collection accounts for all borrowers (excluding medical collections and charge offs) is equal to or greater than $2,000, FHA and Endeavor America require one of the following actions to be performed: At the time of or prior to closing, the collection account is paid in full and acceptable source of funds are documented, or The borrower makes payment arrangements with the creditor and the borrower is qualified with the monthly payment and written evidence of the monthly amount is documented, or Endeavor America qualifies the borrower(s) with a monthly payment equal to 5% of the outstanding balance of each collection. 11 | P a g e IRS Payment Plan In instances where the borrower initiates a payment plan with the IRS for taxes due (that have not yet become a lien or judgment), Endeavor America will accept the payment plan provided the borrower is qualified with the monthly obligation and the follow documentation is met: If the payment plan is initiated after the loan is submitted and the first payment is not due until after the loan is closed, no evidence of payment is required if the borrower qualifies with the payment in the DTI If the payment plan has been in place prior to loan submission, the broker must provide evidence the payments have been made in a timely manner for a minimum 12 months (or for all payments if shorter), the borrower is current on the payment plan, and the borrower qualifies with the full amount of the payment plan in their DTI. AUS Endeavor America requires most loans to receive and an Approve/Eligible finding thru DO/DU. Manual underwrites are allowed under the “Advantage” program only for the following scenarios: Short Sales in default at the time of the Short Sale with Extenuating Circumstances: (Death, Severe documented illness, forced job re-location etc) Chapter 13 BKs with 12 months of timely payments made and court approval if applicable Chapter 13 BKs discharged less than 2 years Back to Work Initiative Where the ex-spouse of the borrower was award a property, along with the debt, and the property subsequently defaulted. Borrower’s with spouses without a FICO score Seasonal workers/teachers currently unemployed Handwritten Paystubs or those not reflecting YTD information Downgrades due to previous foreclosure(s) seasoned three years but not reporting on the credit report. All manual underwrites are subject to a risk based pricing adjustment. Maximum ratios may not exceed 31%/43% for case numbers assigned before 4/21/2014 and must include at least 2 months PITI in reserves for 1-2 unit properties or 3 months PITI in reserves for 3-4 unit properties (may not use gift funds for reserves). In additional, all borrowers housing history must be validated for the previous 12 months and reflect no late payments. Manual Underwrite Past credit performance is the most useful guide to determining a borrower’s attitude toward credit obligations, and predicting a borrower’s future actions. Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan. When analyzing a borrower’s credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments. A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred. 12 | P a g e Documenting and Analysis of Delinquent Accounts The underwriter must document the analysis of delinquent accounts, include whether late payments were based on: A disregard for financial obligations An inability to manage debt, or Factors beyond the borrower’s control Minor derogatory information occurring two or more years in the past does not require an explanation. Major indications of derogatory credit, such as judgments, collections, and other recent credit problems, require sufficient written explanation from the borrower. The explanation must make sense, and be consistent with other credit information in the file. Lack of Established Credit History The lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application. Some prospective borrowers may not have an established credit history. For these borrowers, including those who do not use traditional credit, the lender must obtain a non-traditional merged credit report (NTMCR) from a credit reporting company, or develop a credit history from: utility payment records rental payments automobile insurance payments, and other means of direct access from the credit provider, as described in HUD Evaluating Non-Traditional Credit and Insufficient Credit If the underwriter determines that borrower has insufficient credit or non-traditional credit references must be used to build a borrower’s credit profile to evaluate bill paying habits, the credit history must: include three credit references, including at least one from the Group I (below), and exhaust all Group I references prior to considering Group II (below) for eligibility purposes, as Group I is considered more indicative of a borrower’s future housing payment performance. Group Number Group I Group II Types of Credit References Rental housing payments (subject to independent verification if the borrower is a renter Utility company reference (if not included in the rental housing payment), including o Gas o Electricity o Water o Land-line home telephone service, and o Cable/Dish TV Note: If the borrower is renting from a private party, including from a family member, cancelled checks must accompany the VOR. Insurance premiums not payroll deducted (medical, auto, life, renter’s insurance) 13 | P a g e Payment to child care providers made to businesses that provide such services School tuition Retail store credit cards Rent to own Payment of that part of medical bills not covered by insurance Internet/cell phone services A documented 12 month history of savings evidenced by regular deposits resulting in an increased balance to the account that o Were made at least quarterly o Were not payroll deducted, and o Caused no insufficient funds (NSF) checks Automobile leases A personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments. In addition to the above guidance, borrowers with non-traditional or an insufficient credit history must: Have a satisfactory credit history of at least 12 months in duration Have no history of delinquent rental housing payments Have no more than one 30-day delinquency on payments due to creditors Have no collection accounts/court records reporting (other than medical) filed within the past 12 months Have 2 months PITI in reserves post close (gift funds not allowed) One month Non-Occupant co-borrowers are not permissible on those transactions were the underwriter is using non-traditional credit or where they have deemed the borrower(s) to have an insufficient credit history. Manual Qualifying Ratios (effective for all case numbers assigned on or after April 21, 2014. 1. Non-traditional or Insufficient credit ratios Total monthly mortgage payment may not exceed 31% of gross effective monthly income (33% for Energy Efficient Homes; and Total monthly fixed payment may not exceed 43% of gross effective monthly income (45% for Energy Efficient Homes) Borrowers with non-traditional, or insufficient credit may not exceed the 31/43 ratios (33/45 for EEH) regardless of whether they meet one or more compensating factors. The qualifying ratios for insufficient credit borrowers are computed using income only from borrowers occupying the property and obligated on the loan. Non-occupant co-borrower 14 | P a g e income may not be included. Income from non-occupant co-borrowers may be included in the ratios for non-traditional credit borrowers. 2. Decision score of 580 or above, and no compensating factors. Maximum qualifying ratios may not exceed: Total monthly mortgage payment may not exceed 31% of gross effective monthly income (33% for EEH); and Total monthly fixed payment may not exceed 43% of gross effective monthly income (45% for EEH) 3. Decision score of 580 or above, and one compensating factor. Maximum qualifying ratios may not exceed: Total monthly mortgage payment may not exceed 37% of gross effective monthly income; and Total monthly fixed payment may not exceed 47% of gross effective monthly income. Approved compensating factors: Verified and documented cash reserves equal to at least three total monthly mortgage payments (1-2 units); or six total monthly mortgage payments (3-4 unit) New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and there is a documented twelve monthly housing payment history with no more than one 30 day late payment. Residual income 4. Decision score of 580 or above, and two compensating factors. Maximum qualifying ratios may not exceed: Total monthly mortgage payment may not exceed 40% of gross effective monthly income; and Total monthly fixed payment may not exceed 50% of gross effective monthly income. Approved compensating factors: Verified and documented cash reserves equal to at least three total monthly mortgage payments (1-2 units); or six total monthly mortgage payments (3-4 unit) New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and there is a documented twelve monthly housing payment history with no more than one 30 day late payment. Residual income Verified and documented significant additional income that is not considered effective income (i.e., part time income or seasonal income verified for more than one year but less than two years) 5. Decision score of 580 or more with no discretionary debt Discretionary debt is determined as follows: established credit lines in borrowers own name open for at least six months with no balance (housing payment is only account with an 15 | P a g e outstanding balance and borrower can document that revolving credit has been paid off in full monthly for at least the previous six months) Total monthly mortgage payment may not exceed 40% of gross effective monthly income; and Total monthly fixed payment may not exceed 40% of gross effective monthly income For borrowers meeting this criteria no other compensating factors are required. Compensating factors cited to support the underwriting decision must be recorded in the Underwriter Comments on the 92900 LT. Documenting Acceptable Compensating Factors Verified and Documented Cash Reserves Verified and documented cash reserves may be cited as a compensating factors subject to the following requirements: Reserves are equal or exceed three total monthly mortgage payments (1 & 2 Units) or Reserves are equal or exceed six total monthly mortgage payments (3 & 4 units) Funds and/or “assets” that are NOT to be considered as cash reserves: Gifts Equity from another property Borrowed funds Cash received at closing in a cash-out refinance transaction or incidental cash received at closing in the loan transaction The borrowers retirement accounts (IRA, Thrift Savings, 401K and Keogh accounts) may be used as retirement funds subject to the following conditions Minimal Increase in Housing Payment Only 60% of the vested amount of the account, less any outstanding loans may be used. The account must be documented with the most recent depository or brokerage account statement Evidence that the retirement account allows for withdrawals under conditions other than in connection with the borrowers employment termination, retirement or death If withdrawals can be made only in connection with the borrowers employment termination, retirement or death the retirement account may not be used to calculate the borrowers cash reserve requirements A minimal increase in housing payment may be cited as a compensating factor subject to the following requirements The new total monthly mortgage payment does not exceed the current total payment by the lesser of $100.00 or 5%; and There is a documented 12 month housing history with no more than one 30 day late payment. **In cash out transactions all payments there can be no 30 day late payments for the previous 12 months** 16 | P a g e No Discretionary Debt No discretionary debt may be cited as a compensating factor subject to the following requirements; Borrowers housing payment is the only open account with an outstanding balance that is not paid off monthly; and The credit report shows established credit lines in the borrowers name open for at least six months; and The borrower can document that these accounts have been paid off in full monthly for at least the past six months Credit lines assigned to the borrower as an authorized user to not qualify for this criteria. Significant additional income not reflected in gross effective income Additional income from bonuses, overtime, part time or seasonal employment that is not reflected in gross qualifying income can be cited as a compensating factor subject to the following requirements The income is verified and documented that the borrower has received for at least one year, and it will likely continue; and The income, if it were included in gross effective income, is sufficient to reduce the qualifying ratios to not more than 37/47 Income from non-borrower spouses or other parties not obligated for the mortgage may not be counted under this criteria This compensating factor may only cited in conjunction with another compensating factor when qualifying ratios exceed 37/47 but are not more than 40/50%. Residual Income Residual income may be cited as a compensating factor provided it can be documented and it is at least equal to the applicable amounts for household size and geographic region. Residual income is calculated in accordance with the following: Calculate the total gross monthly income of all occupying borrowers and deduct from gross monthly income the following items: State income tax Federal income tax Municipal or other income taxes Retirement or social security Proposed total monthly fixed payment Estimated maintenance and utilities Job related expenses (child care) Subtract the sum of the deductions above from gross monthly income of all occupying borrowers; the balance is residual income Taxes (state,federal,social security, Medicare) can be calculated from tax returns and or recent paystubs For estimated utilities in all states, multiply the living area of the property (square feet) by $0.14. 17 | P a g e Example: 1,500 square feet X.14 $210.00 per month To use residual income as a compensating factor, count all members of the household of the occupying borrowers without regard to the nature of their relationship and without regard to whether they are joining on title or not. Exception: you may omit any individuals from “family size” who are fully supported from a source of verified income which is not included in effective income in the loan analysis. These individuals must voluntarily provide sufficient documentation to verify their income to qualify for this exception. Table of residual income by Region for loan amounts of $79,999 and below Family Size 1 2 3 4 5 Over 5 Northeast Midwest South $390 $382 $382 $654 $641 $641 $788 $772 $772 $888 $868 $868 $921 $902 $902 Add $75 for each additional member up to a family of seven West $425 $713 $859 $967 $1004 Table of residual income by Region for loan amounts of $80,000 and above Family Size 1 2 3 4 5 Over 5 Northeast Midwest South $450 $441 $441 $755 $738 $738 $909 $889 $889 $1025 $1003 $1003 $1062 $1039 $1039 Add $80 for each additional member up to a family of seven West $491 $823 $990 $1117 $1158 The Regions on the Table of Residual Income include the following states: Region States Northeast Midwest CT, MA, ME, NH, NJ, NY, PA, RI, VT IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI South AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK, PR, SC, TN, TX, VA, VI, WV AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY West Reserve Requirements All manually underwritten loans must meet or exceed the following minimum reserve requirements: Reserves are defined as: The sum of verified and documented borrower funds: minus 18 | P a g e The sum the borrower is required to pay at closing, including the cash investment, closing costs, prepaid expenses, any payoffs that are a condition of loan approval, and any other expense required to close the loan; But not including The amount of cash taken at settlement in cash-out transaction or incidental cash received at settlement in other loan transactions, gift funds in excess of the amount required for the cash investment and other expenses, equity in another property, and borrowed funds from any source. 1 and 2 unit Properties: Reserves must equal or exceed one month total monthly mortgage payment 3 and 4 unit properties: Reserves must equal or exceed three total monthly mortgage payments Manual underwriting requirements can also be found in Mortgagee Letter 2013-26 at: http://portal.hud.gov/hudportal/documents/huddoc?id=14-02ml.pdf Back To Work Initiative – Extenuating Circumstances Endeavor America currently participates in FHA’s Back to Work Program as outlined in Mortgagee Letter 13-26 for case numbers assigned on or after 8/15/2013. As these loans do not receive an Approve/Eligible DU finding, they must treated as manual underwrites and are limited to a maximum debt ratio of 31%/43%. This program allows for consideration of borrowers who have experienced an Economic Event and can document that: Certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control; The borrower has demonstrated full recovery from the event thru “satisfactory credit”; and, The borrower has completed housing counseling A summary of the requirements for the Back to Work Program as follows: Satisfactory credit must have been established prior to the Economic Event The Economic Event must document that credit impairments were due to Economic Event, defined as Loss of Employment/Income of at least 20% for a minimum of 6 months. The Loss of Employment is verified with: a written termination notice, or other publically available documentation of business closure, and documentation of receipt of unemployment Income The Loss of Income is verified with: a written VOE evidencing prior income, or signed tax returns, paystubs, or W-2s evidencing prior income A full recovery from the Economic Event by the borrower for a minimum of 12 months from the event, as demonstrated by a satisfactory payment history since the event, an The has completed a HUD-approved housing counseling at least 30 days prior to the application date, but no more than 6 months prior to the loan application date FHA defines an Economic Event as any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrower’s Household Income of twenty (20) percent or more for a period of at least six (6) months. (The onset of an Economic Event is the month of Loss of Employment/Income) Please see Mortgagee Letter 13-26 for complete requirements for this program: http://nahrep.org/downloads/hud-document.pdf 19 | P a g e Bankruptcy – Chapter 7 Requires at least two years from the discharge date, and the borrower must have re‐established good credit or chosen not to incur any new credit. Seasoning of less than two years but no less than 12 months may be acceptable if the borrower: Can show that the bankruptcy was caused by extenuating circumstances beyond the borrower’s control (defined as death or long‐term disability of the primary wage earner) and Has since exhibited a documented ability to manage his/her financial affairs in a responsible Manner and documentation is provided to evidence that the borrower’s current situation indicates that the events which led to the BK are not likely to recur. Bankruptcy – Chapter 13 A chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA insured mortgage, provided that the lender documents that: One year of the payout period under the bankruptcy has elapsed, and The borrower’s payment performance has been satisfactory and all required payments have been made on time, and The borrower has received written permission from the bankruptcy court to enter into the mortgage transaction. Total Scorecard/AUS approval Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy. If the Chapter 13 has not been discharged for a minimum period of 2 years the loan must be downgraded to a Refer and evaluated by a DE underwriter. Foreclosure A borrower is not eligible for FHA financing with a previous foreclosure, deed-in-lieu of foreclosure for three years. The three year seasoning for a foreclosure is effective with the deed transferring title back to the lender/investor. Second Mortgage foreclosure A second mortgage may continue to show derogatory on the credit report after the title has been transferred back to the lender. If the lender can obtain documentation to support the second mortgage was secured against the subject property foreclosed, the outstanding lien may be excluded, and considered seasoned based on the first lien transferred back to the lender at foreclosure. Short Sale / Pre‐foreclosure A borrower is not eligible for FHA financing if they have had a short sale or pre-foreclosure within the past three years. However, the waiting period may be waived provided that he/she did not pursue a short sale agreement on his/her principal residence to take advantage of declining market conditions and to purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value. In addition, in order to waive the three year waiting period, all of the following criteria must have been met: The Mortgage payments on the prior mortgage were made within the month due for the 12‐ month period preceding the short sale date, and All installment debt payments for the same time period were also made within the month due. The borrower’s previous home was not secured by a FHA mortgage 20 | P a g e Endeavor America will entertain exceptions to borrowers who were in default at the time of the short sale, only in cases of Extraordinary Circumstances were the default was due to circumstances beyond the borrower’s control and the credit report reflects a satisfactory credit history prior to the circumstances that caused the default. These loans will be treated as a manual underwrite and be subject to maximum ratios of 31%/43%. Modifications If the borrower’s credit report reflects a loan modification within the past three years from Endeavor’s note date, in order to be eligible for financing, the loan must have been paid on time for the twelve months prior to and all months after the loan modification in addition to receiving an approve/eligible finding per DU. If a modification within the past 3 years is discovered during underwriting that is not reflected on the credit report, evidence of the mortgage history documenting the payment history above is required. For borrowers with modifications outside of 3 years from Endeavor’s note date, no additional documentation is needed and the loan will be underwritten according to Endeavor America’s standard guideline for the chosen program. Judgments Court‐ordered judgments must be paid off if on title. Judgments not on title may remain unpaid if Borrower(s) have a repayment plan in place and a minimum of three payments made prior to the date of the loan application. Tax Liens IRS tax liens do not require a subordination agreement unless there is evidence that the IRS has demanded a first lien position. All other tax liens may remain unpaid if the lien holder subordinates the tax lien to the FHA mortgage. If the borrower(s) are under a repayment plan, and the lien is to be subordinated, the regular payments must be included in DTI ratios. CAIVRS (Credit Alert Verification Reporting System) A CAIVRS screening must be performed on all obligors on the loan. If CAVIRS screening indicates an applicant is delinquent on a Federal debt or has had a claim paid on an FHA insured loan within the previous three years, the borrower is not eligible for a new FHA loan, with the exception of the following circumstances: The borrower sold the property, with or without a release of liability, to an individual who assumed the mortgage and subsequently defaulted. A divorce decree or legal separation agreement awarded the property and responsibility for payment to the former spouse. The borrower is not eligible if FHA paid a claim on his/her mortgage in default prior to the divorce. The property was included in a bankruptcy caused by circumstances beyond the borrower’s control, such as the death of the principal wage earner, or a serious long‐term uninsured illness and the borrower meets the requirements for previous bankruptcy described in Chapter 4 of the HUD 4155.1 Borrower Eligibility All borrower(s) on the loan must be a natural person. Title may not be taken in the name of: Trust Corporation Partnership Real Estate Syndication 21 | P a g e Non‐Permanent Resident Aliens Non-Permanent Resident Aliens are considered eligible borrowers, provided all of the following are met: The subject property is for primary residence only The borrower is eligible to work in the U.S. Evidence of valid Social Security number is obtained Evidence of residency and work status to be obtained through documentation from US Bureau of Citizenship and Immigration Services (USCIS), formerly INS. Documentation requirement(s) include: Copy of the Employment Authorization Card, I‐688B. This card carries an expiration date. If the card expires in less than one year, a legible copy of the previously expired card(s) is required to evidence a history of regular renewals. Permanent Resident Aliens Permanent Resident Aliens are considered eligible borrowers with the same requirements as US Citizens with the exception that they must additionally provide evident of lawful permanent residency as documented by a valid Alien Registration Receipt Card (I-551) Non‐Occupying Co‐Borrowers Non-Occupying Co-Borrower(s) are allowed on all transactions with the exception of cash out transactions, where they may not be added. The maximum LTV/CLTV on transactions with nonoccupying co-borrowers is limited to 75% except under the following scenarios: On a 1 unit property where the non-occupying co-borrower(s) are as: Parent/Grand Parent Sibling Aunt/Uncle Niece/Nephew Spouse/Domestic Partner Mother and Father In-Laws Non-occupying co-borrower’s debts, including their primary housing expense, must be included in the combined ratios when ran thru AUS. For non-occupant co-borrowers who currently rent, a Verification of Rent must be obtained (VOR). (Endeavor America requires, as part of its prudent underwriting policy, that all private party VORs be supported by cancelled checks) If a nonoccupying co-borrower currently lives rent free, Endeavor America will not allow the borrower to remain on the loan, as satisfactory validation of his or her primary housing expense would not be able to be obtained. Non‐Borrowing Spouse In community property states, a credit report is required to be obtained on the non-borrowing spouse and his or her debts included in the qualifying ratio of the borrower(s). The following states are considered community property states per FHA: Arizona California Idaho Louisiana Nevada New Mexico Texas 22 | P a g e Washington Wisconsin Although the non-borrowing spouse’s debts need to be taken into account, his or her credit history may not be taken into consideration. Identity of Interest Transactions Identity of Interest Transactions are defined as transactions between family members, business partners or other business affiliates and are restricted to a maximum LTV/CLTV of 85%. Maximum financing may be obtained however, under the following circumstances: The borrower is purchasing the subject property from a valid "family member”i and the subject property was that family member’s primary residence. o A valid family member is considered a child, parent, grandparent, sibling, aunt or uncle. (biologic, step or adopted) The borrower is the current tenant in the subject property and he or she can document via lease or cancelled checks, that they have been renting the property for at least the 6 months prior to the execution of the signed sales contract (see rent credit section for additional requirements on market rent) The subject property is being sold by a corporation who purchased the home of its employee for the purpose of reselling it to the borrower who is also an employee of the corporation. The maximum mortgage calculation is not affected by a sales transaction between a tenant and a landlord with no identity-of-interest relationship. Liabilities Alimony Payments Alimony payments must be treated as a monthly obligation, rather than as a reduction to the borrower’s income. Contingent Liability FHA defines a contingent liability as a debt they may be excluded from qualifying ratios, where the borrower(s) are co-signers of the debt and primary obligator has evidenced they are the responsible party for repayment of the debt. If the borrower(s) are a co‐signer of a debt, it must be listed as the borrower’s debt and counted in the qualifying ratios unless the borrower can provide conclusive evidence from the debt holder that there is no possibility the debt holder will pursue debt collection against him/her should the other party default. Co‐Signed Obligations: If the borrower is a co‐signer, or otherwise co‐obligated on a car loan, student loan, mortgage, or any other obligation, no contingent liability applies unless the borrower(s) obtain documented proof that the primary obligor has been making payments during the previous 12 months on a regular basis and does not have a history of delinquent payments on the liability. Mortgage Debt: If a borrower is obligated on an outstanding mortgage secured by a property which has been sold by assumption, Contract for Deed or traded within the last twelve months without a release of 23 | P a g e liability, or a property was transferred because of divorce, the mortgage is not considered a contingent liability unless the following circumstances apply: The payment history reflects 0 x 30 for the last 12 months, or An appraisal or closing statement from the sale of the property supports a value that results in a 75% LTV ratio (the outstanding balance on the mortgage loan, minus any UFMIP, cannot exceed 75% of the appraised value or sales price), or A copy of the divorce decree ordering the former spouse to make payments or the assumption agreement and deed showing transfer of title out of the borrower’s name is provided. Installment Debt Installment debt with less than 10 payments remaining may be excluded from DTI ratios, if justified by the underwriter, so long as the borrower’s ability to pay the mortgage of the subject property during the remaining months is not compromised and the borrower has two months PITI in reserves. Installment debt however, may never be paid down to less than 10 months in order to exclude the debt from qualifying ratios. Lease Payments Automobile lease payments must always be included in qualifying ratios regardless of the number of months remaining on the lease contract. Revolving Debt Revolving debt must be included in qualifying ratios regardless of the remaining months left to pay it off or if it will be paid off thru escrow. If the credit report does not show a specific minimum monthly payment, the actual payment should be obtained using the current statement from the creditor. If the statement cannot be provided, the monthly payment must be calculated using the greater of 5% of the outstanding balance or $10. It is however acceptable, if a revolving account has been closed, to pay off the debt thru escrow and exclude the monthly payment since the account effectively become an installment account. Multiple FHA Loans A borrower may not have more than one existing FHA loan except under the one of the following circumstances: The borrower(s) are relocating to an area outside of reasonable commuting distance of their existing residence to his or her place of employment The borrower(s) family size and/or number of dependents has increased since the purchase of the existing property to the point where it no longer meets the family’s needs and an appraisal is obtained to evidence the existing property has at least 25% equity in it. The borrower(s) are vacating a jointly owned home, where they were not the primary obligators on the existing FHA loan The borrower(s) will be non-occupying borrowers for a property that will be purchased by a qualified family member as their primary residence Assets Checking & Savings Account (or Equivalent) Endeavor America follows DU findings on non-manual underwrites. At a minimum, the most recent actual bank statement covering a full month must be provided and reflect the beginning and ending account balance. (VODs are not acceptable) If the statements do not reflect a beginning or ending 24 | P a g e balance, then an additional month’s bank statement will be needed. Any large deposits reflected in the statement must be explained via a signed written LOE and if the funds are to be used, the source of the large deposits must be properly documented. (See section “Large Deposit” for further clarification on large deposits). A transaction history may be used in cases where an updated balance is needed, or to document EMD withdraws provided the transaction history reflects the institutions name, the account number, the borrower’s name and is either stamped by the bank or has a URL at the top/bottom of the page. Stock / Investment / Retirement Accounts Endeavor America follows DU findings on non-manual underwrites. For loans scored through DU, only 60% of the vested amount of the account may be used as evidenced by the most recent depository or brokerage account statement. In addition, evidence must be provided that the retirement account allows for withdrawals for conditions other than in connection with the borrower's employment termination, retirement, or death. If withdrawals can only be made under these circumstances, the retirement account may not be included as cash reserves. If any of these funds are also to be used for loan settlement, that amount must be subtracted from the amount included as cash reserves For manually underwritten loans, assets such as IRAs, thrift savings plans, and 401(k)s, etc., may be included in the underwriting analysis up to 60% of value unless the borrower provides conclusive evidence that a higher percentage may be withdrawn after subtracting any federal income tax and any withdrawal penalties. Unlike non-manual underwriters, evidence of redemption of these funds is required. Gift Funds Gift funds are an acceptable source of assets for both down payment and reserves provided the donor is a relative of the borrower and the gift letter includes all of the following information: The amount of the gift given States no portion of the gift must be repaid Has the donor(s) name, address, telephone number and relationship to the borrower Is signed by both the donor and the borrower In addition to being a relative of the borrower, gift funds may also be from: The borrower’s employer or labor union A close friend with a clearly defined and documented interest in the borrower A charitable organization A governmental agency or public entity that as a program providing home ownership assistance to low and moderate income families or first time homebuyers. Note: Cousins and relatives of non-purchasing spouses and close family friend’s must be documented to support the relationship to the borrower; birth certificates, marriage license etc. An LOX to support the relationship without supporting documentation will not be acceptable to meet the documentation requirements. Documenting the Transfer of Gift Funds The mortgagee must verify and document the transfer of gift funds from the donor to the borrower in accordance with the requirements below: If the gift funds are in the borrower’s account, obtain the donor’s bank statement showing the withdrawal and evidence of the deposit into the borrower’s account 25 | P a g e If the gift funds are to be provided at closing, obtain the certified check or money order, cashier’s check, wire transfer or other official check, and a bank statement showing the withdrawal from the donors account Note: Any large deposits to the donor’s bank statement that would question the source of the gift funds may be required to be documented. Verifying Acceptability of Gift Fund Sources Regardless of when gift funds are made available to a borrower, the lender must be able to determine that the gift funds were not provided by an unacceptable source, and were the donor’s own funds. When the transfer occurs at closing, the lender is responsible for verifying that the closing agent received the funds from the donor for the amount of the gift and that the funds were from an acceptable source. Equity Credit Only family members may provide an equity credit as a gift on property being sold to other family members. A gift letter must be provided to support the equity credit between family members. Sweat Equity Labor performed, or materials furnished by the borrower before closing on the property being purchase may be considered the equivalent of a cash investment, to the amount of the estimated cost of the work or materials. Note: Sweat equity may also be “gifted” Additional Sweat Equity requirements: Sweat Equity Category Existing Construction Proposed Construction Borrower’s Labor Delayed Work Cash Back Sweat Equity on Other Properties Source of Funds Evidence Requirement Only repairs or improvements listed on the appraisal are eligible for sweat equity. Any work completed or materials provided before the appraisal are not eligible The sales contract must indicate the task to be performed by the borrower during construction The borrower must demonstrate his/her ability to complete the work in a satisfactory manner. The lender must document the contributory value of the labor either through: appraisers estimate, or cost-estimating service The following cannot be included as sweat equity: Delayed work Clean up Debris removal, and General Maintenance Cash back to the borrower is not permitted in sweat equity transactions Sweat equity is not acceptable on properties other than the subject property being purchased If the borrower furnishes funds and materials he/she must provide evidence of the: 26 | P a g e Source of the funds, and Market value of the materials Rent Credit The cumulative amount of rental payments that exceed the appraiser’s estimate of fair market rent may be considered accumulation of the borrower cash investment. The loan must include: Rent with option to purchase agreement, and Appraiser’s estimate of market rent The underwriter must treat the rent as an inducement to purchase, with an appropriate reduction to the mortgage, if the sales agreement reveals that the borrower Has been living rent free, or Has an agreement to occupy the property as a rental considerably below fair market value in anticipation of eventual purchase Down Payment Assistance programs FHA does not approve down payment assistance programs providing gifts administered by a charitable organization. FHA does not allow a charitable organization/nonprofit entity to provide gifts to pay off: installment loans; credit cards; collections; judgments; liens; and similar debts. The lender is required to ensure that a gift provided by a charitable organization meets the appropriate FHA requirements, and that the transfer of funds is property documented. For more information on Gift funds, and use of acceptable gift funds refer to section 5-B-10 in the 4155. http://portal.hud.gov/hudportal/documents/huddoc?id=4155-1_5_secB.pdf Large Deposits On purchase transactions, if there is a large increase in an account, or the account was recently opened, the lender must obtain an explanation and supporting documentation from the borrower of the source of the funds. Obtain an explanation and documentation for recent large deposits cumulatively in excess of 2% of the property sales price, and Verify that any recent debts were not incurred to obtain part, or all, of the required cash investment on the property being purchased. For refinance transactions; deposits cumulatively in excess of the lessor of 10% of borrower’s gross income or $1000.00 will require a signed letter of explanation from the borrower in order to back out the deposit from the borrower’s available assets. If the assets are to be used as available funds, a paper trail evidencing the source of funds will also be needed NSF Non-sufficient fund charges can be an indicator that a borrower is currently going thru a financial struggle and should be analyzed by the underwriter. If there are significant NSF charges on the borrower’s account, the borrower must provide a satisfactory signed LOE explaining the reason for the charges. 27 | P a g e States with Taxes Paid in Arrears When the subject property is located in a state that requires taxes paid in arrears, the County Tax, City Tax and Assessment adjustments (found on 200 series of the first page of the HUD-1), may be used towards the borrower’s closing costs. The tax credit may not be used to help the borrower meet the required minimum investment for the transaction. Collateral Flip Properties Property flipping is a practice whereby a recently acquired property is resold for a considerable profit. These type transactions are allowed if the property is not misrepresented and/or the value of it is not artificially inflated. In an effort to prevent illegal property flipping, FHA implemented the following property flipping policy: Only owners of record may sell properties that will be financed using FHA‐insured mortgages, Any re‐sale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing (See Flip Waiver Section of our guidelines for re-sales fewer than 91 days), and For sales that occur between 91 and 180 days, where the new sales price exceeds the previous sales price by one hundred percent (100%) or more, Endeavor America & FHA will require an additional appraisal validating the property’s value. Sale by the Owner of Record FHA considers the re‐sale date as, the date of execution of a sales contract by the buyer. The property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. This applies to all FHA purchase money mortgages Regardless of the time between re‐sales. Exceptions to the 90‐Day Restriction (Also see Flip Waiver) Exceptions to the 90 day restriction can be made if any of the following apply: The property is sold by HUD of its own Real Estate Owned (REO) properties The property is sold by other US Government agencies The property is sold by a HUD approved non-profit group at a discount and with resale restrictions The subject property is being sold by a seller who recently inherited the property The property is being sold by an employer or relocation agency in connection with the relocation of employees The property is being sold by state and federally charted institutions and Government Sponsored Enterprises The subject property is a foreclosed property being sold by a stated licensed mortgage lender The subject property is being sold any entity that sells foreclosed properties on behalf of an exempt lender or financial institution The subject property is sold by a local or state government agency The subject property is a previously foreclosed or abandoned property and has been acquired, rehabilitated and is being resold by an entity using funds from, and performing 28 | P a g e under agreements with state and local government agencies, under the Neighborhood Stabilization Program Re‐sales Occurring Between 91 and 180 Days Following Acquisition A second appraisal made by another appraiser is required if the re‐sale price is 100% or more over the price paid by the seller when the property was acquired. The cost of this second appraisal may not be charged to the homebuyer; but may be paid by the seller or mortgage broker. Both of the FHA appraisals must be prepared by separate independent appraisers and both appraisers must be on HUD’s roster list of Approved Appraisers with valid, unexpired licenses. If any repairs need to be made, the completion of the repairs must be evidenced on both appraisals. If there is a conflict in value between the two appraisals, the valuation on the first appraisal will be used provided the valuation of the 2nd appraisal is not less than 5% of the appraised value of the first. In cases where the 2nd appraisal has a valuation 5% lower than the first appraisal, the valuation of the 2nd appraisal will be used for qualifying. Re‐Sales Occurring Between 91 Days and 12 Months Following Acquisition FHA and subsequently Endeavor America reserves the right to require additional documentation to support the re‐sale value if the resale price is five percent 5.00% or greater than the lowest sales price of the property during the preceding twelve (12) months. Documentation may include, but is not limited to, an appraisal from another appraiser. Flip Waiver http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_11873.pdf Effective through December 31, 2014, FHA has implemented a property flipping waiver for properties that have been resold within 90 days of last acquisition and do not meet the Exception to the 90‐day restriction criteria detailed above. To protect FHA borrowers against predatory practices of "flipping", where properties are quickly resold at inflated prices to unsuspecting borrowers, the waiver is limited to those sales meeting the following general conditions: All transactions must be arms‐length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions A second appraisal must be ordered from Endeavor America The appraiser provides a detailed list of improvements made to the subject property since it was last acquired The seller provides evidence of the increase in value thru sufficient renovation, repair, and/or rehabilitation (if no repairs were made, the appraiser must make comment on the justification for the increase is sales price) The property was marketed openly and fairly via MLS, auction, FSBO, developer marketing or public website A property inspection report by a licensed home inspector is ordered by the broker. Property Listed for Sale Properties that were previously listed for sale in the past 12 months are eligible for all transaction types, provided that the listing was expired or cancelled prior to application date. 3-4 Unit Properties 29 | P a g e In addition to AUS requirements, FHA requires that all 3-4 unit properties meet the following additional requirements: The property must be “self-sufficient” as determined by the following test calculation: o Total Monthly PITI payment < The projected rents for all units as determined by the appraiser minus the HOC vacancy and maintenance factor (of the appraiser determined vacancy factor if higher) 3 months PITI in reserves regardless of loan type (gift funds are not allowed for reserves) Example of Self-Sufficient 3-4 unit property 4 Unit property with total monthly rents of $4,000 per Appraisal form 1007/216. Santa Ana HOC vacancy/maintenance factor of 15% Monthly PITI of the project $3200 $3200 < $3400 ($4,000 rent x 85% HOC factor) Escrow Holdbacks At times, particularly in adverse weather conditions, completion of repairs to the subject property in order to meet FHA standards are not possible. In these cases, Endeavor America allows for an escrow holdback provided all of the following requirements have be met: The subject property is currently habitable and free of any health and safety issues There is legitimate cause on why deferred repairs cannot be completed prior to the loan closing, but will be completed within 6 months The appraiser comments that there is a minimum of $500 worth of repairs but no more than $5,000 An estimate is provided from a licensed contractor or other qualified professional Escrow for the repairs is funded at 150% of the amount of the estimate HUD REO Property On HUD REO properties that require no more than $5,000 for repairs to meet FHA’s property requirement, 110% of the estimated cost of the repairs may be included in the mortgage amount. Appraisal/ Purchase Contract Requirements: FHA appraisal completed by HUD’s Assets management company Appraisal is valid for 120 days from the effective date of the appraisal Purchase contract must be a valid HUD REO contract ratified within 120 days of the effective date of the appraisal, or lender must order a new appraisal Repair Escrow At least $500 and no more than $5000 worth of repairs to meet MPR Escrow amount may equal 110% of the estimated cost of repairs, up to $5,500 Borrower will be required to execute a Repair Escrow Holdback agreement Cost of repairs is determined by the appraisal completed by HUD’s Asset Management company Borrower must provide a licensed contractor bid which itemizes the cost of each repair Properties must be habitable and safe prior to loan closing. Under no circumstance will a loan close with repairs impacting livability or integrity of the property structure All repairs must be completed within 90 days of closing, exterior repairs may be extended based on inclement weather 30 | P a g e Manufactured Homes Endeavor America will lend on manufactured homes on purchase, rate & term, streamline and cash out transactions with a minimum 620 qualifying fico score for single wide properties and a 580 qualifying fico for all others. Restrictions Max loan amount is the county limits. If property is located on more than 10 acres, max land value is 30% of total appraised value FHA Connection The quality of data contained in FHA’s databases is important for accurate processing and recordkeeping. Therefore, manufactured housing data must be correct. The following clarifications are provided for data entry on the loan applications and FHA Connection screens: FHA Connection, Case Number Assignment Screen, must contain the appropriate two-digit Program ID Code: 77 for manufactured housing loans not processed as construction-permanent loans. FHA Connection, Appraisal Logging Screen, must contain the Manufactured Housing indicator (source document – appraisal). Please key in Y for Yes. Eligibility & General Requirements - Title II A Manufactured Home is a structure that is transportable in one or more sections and is designed and constructed to the Federal Manufactured Construction and Safety Standards and is labeled. To be eligible for financing, all manufactured homes must comply with the following: have a floor area of not less than 400 square feet; be constructed after June 15, 1976, in conformance with the Federal Manufactured Home Construction and Safety Standards, as evidenced by an affixed certification label in accordance with 24 CFR; be classified as real estate and taxed as real property (but not be treated as real estate for purposes of state taxation); the mortgage must cover both the manufactured home and its site; built and remains on a permanent chassis, designed to be used as a dwelling with a permanent foundation; fee simple title with ALTA 7 endorsement; the home must not have been installed or occupied previously at any other location or site; If in flood zone (ML 09-37) finished grade elevation beneath the home or if a basement is used, the grated beneath the basement shall be or above the 100-year return frequency flood elevation. FEMA form 81-31 “elevation certificate” must be dated and executed after the appraisal date. Modular construction is also a factory-built home, but is treated the same as stick-built housing. Special State Requirements 31 | P a g e Additions, Modifications, and Special State Requirements - Additions or structural modifications may put the home at risk if changes were not performed in accordance with the Federal Manufactured Home Construction Safety Standards. Some states require a state agency (often this is the State Administrative Agency) to approve all modifications to manufactured homes once they leave the factory. The appraiser and underwriter are held responsible for knowing the local regulations on this. If the area where the manufactured home is located has such requirements, then the property must meet these requirements or it shall be deemed ineligible for FHA insurance. If the appraiser observes changes to the original home, an inspection by the State Administrative Agency, which inspects manufactured homes for compliance, is required. If there is no State Administrative Agency willing to inspect such homes, the lender may obtain a report from a licensed professional engineer or registered architect, indicating the structural modifications/additions were made in accordance with Federal Manufactured Home Construction and Safety Standards (CFR3280). HUD Handbook 4150.2 Chapter 8 and HUD Handbook 4155.2 Chapter 4. If the certification cannot be obtained then the manufactured home is unacceptable and should be rejected. Foundation Compliance All foundation systems, new and existing, must meet the FHA guidelines in effect at the time of the certification. The current guidelines are published in the Permanent Foundations Guide for Manufactured Housing (HUD-4930.3G), dated September 1996. A certification attesting to compliance with this handbook must be obtained from a licensed professional engineer or registered architect. Certification attesting compliance with HUD's PFGMH must be: 1. Completed by a licensed professional engineer or registered architect, who is licensed/registered in the state where the manufactured home is located. 2. Site specific and contain the engineer's or registered architect's signature, seal, and/or state license/certification number. In states where seals are issued, the seal must be on the certification. 3. The foundation certification, showing that the foundation meets the guidelines published in the PFGMH that were in effect at the time of certification, is acceptable for future FHA loans, provided there are no alterations and/or observable damage to the foundation. Certification on Foundation Compliance is not required in the loan file or insuring binder for: 1. FHA to FHA refinance transactions provided that no modifications have been made to the foundation or structure from the date of the effective certification. 2. FHA/HUD Real Estate Owned (REO) Division sales. Permanent Foundations Guide for Manufactured Housing (HUD- 4930.3G), and software can be ordered from HUD-user online or by calling (800) 245-2691. For additional information on eligibility requirements for manufactured homes and foundation systems, see Mortgagee Letter 2009-16, HUD Handbook 4150.2 Chapter 8, and HUD Handbook 4155.2 Chapter 4 32 | P a g e Manufactured Housing Certificates can be obtained thru any vendor. Recommended: Hayman Residential Engineering Services. www.haymanengineering.com Site The manufactured unit must not have been installed or occupied previously at any other site or location. Manufactured units may be moved only from the manufacturer's or dealer's lot to the site on which the unit will be insured. If a permanent foundation is to be constructed under an existing eligible unit, the unit may be jacked up in order to install a new foundation. (See summary of main requirements in Appendix 11, item 12 of HUD Handbook 4145.1 Rev2.) (24CFR203.43f) Tags All manufactured homes must have an affixed HUD certification label, also known as a HUD tag located on the outside of the home. If the home is a multi-wide unit, each unit must have label. In some instances, the unit may not be sequentially numbered. Appraisers are to list the manufactured unit's label number(s) on the appraisal report. If for any reason the labels are missing, from the home; appraisers should either REJECT the property or notify the lender and condition the appraisal for documentation verifying HUD labels were issued to the manufactured home. In some states a manufactured -home may - not be resold if missing a label. HUD does not reissue tags for manufactured homes; however the Department can issue a letter of label (tag) verification lieu of rejecting the property. HUD will accept documentation from IBTS - Institute for Building Technology and Safety (Current HUD Contractor) verifying HUD labels were issued to the manufactured home if the tags are not affixed to the home at the time of appraisal. The lender is to include this documentation in the file submitted to HUD. Information regarding a request of label verification can be found at HUD's Manufactured Housing website. Endeavor America requirements on Manufactured Homes: 1. Engineer's Foundation Report: Provide copy of engineer's foundation report verifying subject foundation meets HUD/FHA manufactured home permanent foundation guidelines (PFGMH dated 091986). Must also verify subject property has not been moved from another location and that no changes to the original structure have been made. Must be stamped/sealed by an engineer licensed in subject state & license must be valid. 2. Additions: If additions have been made to the dwelling, provide certification from local authority that governs manufactured housing. Report must state that the addition meets all applicable local/state codes/specs. If there is no local authority, then a licensed engineer within the subject state may certify the addition to the property. Concern is addition impacting the structural integrity of the original structure. 3. Elevation Cert: 33 | P a g e An elevation certificate is required "IF" the subject manufactured home is located in flood hazard area. 4. Ineligible Properties a. All Condos (including site condos), Co-Op, Parks. b. Leasehold c. Multi-Unit d. Leasehold 5. Septic and Well Inspection only needed if: The appraiser observes evidence of system failure or suspects a problem with the system, or It is customary to obtain inspections in the area, or Inspections are mandated by the State or local jurisdiction 6. If the Title reflects title elimination has been recorded on the manufactured home and the tax section of title verifies it as being taxes as real property, no additional conditions are required. Survey requirements must be removed from the final title. 7. New Construction. A property delivered to the site within the last 12 months is considered new construction and the following documents are required: a. b. c. d. Manufacturer’s Warranty Certificate of Occupancy Document purchase price and delivery/setup expenses (sales contract) NPCA 99a and 99b Soil treatment 8. Manufactured Home Tag Verification: All manufactured homes must have an affixed HUD certification label (tag) located on the outside of the home. If the home is a multi-wide unit, each unit must have a label. If for any reason the labels are missing, appraisers must REJECT the property and notify the lender. HUD does not reissue labels for manufactured homes. However, HUD has authorized the Institute for Building Technology and Safety (IBTS) to issue letters of label verification for units for which it can locate the necessary information within its data base. Effective January 2007 a consumer may request a letter of label verification from IBTS by visiting the IBTS website at http://www.ibts.org/label_req.htm and completing an online request form or submitting the request form via fax at: 703437-6894. The information needed by IBTS to issue a letter of label verification can be found on the above website and will generally appear on the data plate inside the home in one of three locations: on or near the main electrical panel, in a kitchen cabinet or in a bedroom closet. 34 | P a g e The data plate has a map of the United States to let the consumer know the Wind Zone and Snow Load for which their home was built. The processing time for IBTS is expected to be 3-5 business days and costs $50. URGENT requests are given the highest priority, and are completed within 24 -36 hours of request (1-2 business days). The cost of an URGENT request is $75. These costs are non-refundable if the home is not located in the IBTS database. You can also contact IBTS by calling 703-481-2012. Property Overlays Condo project must be on FHA’s approved list. EALS only accepts condo projects that are HRAP approved. (https://entp.hud.gov/idapp/html/condlook.cfm) No Co-Ops Insurance Hazard Insurance Hazard insurance provides coverage that compensates the property owner for physical damage to a property by fire, wind, or other natural disasters. It generally does not cover damage caused by flood, earthquake, and/or other types of hazards that typically require special coverage or an endorsement to the homeowner’s policy. Areas that are subject to localized hazards, such as flood, sinkhole, mine subsidence, volcanic eruption, hurricane, and high winds that are not covered by hazard property insurance will require special coverage. General Requirements The requirement for hazard insurance is the same for all loan programs with the exception of manufactured homes. At a minimum, the mortgaged premises must be protected against loss or damage from fire and other dangers within the scope of standard extended coverage. The coverage should provide for claims to be settled on a replacement cost basis. The policy must contain the standard clause that provides the insurer will notify the named mortgagee at least 10 days before any reduction in coverage or cancellation of the policy. Manufactured Homes The minimum amount of coverage is determined by the insurer Deductibles For single-family and multiple-unit properties, the maximum deductible may be up to $2,500 of the amount of the policy. Hazard Coverage Refinance loans must have a minimum of two months remaining coverage from the first payment date of note. Flood Insurance A Standard Flood Hazard Determination (flood certificate) is required for all loans. Flood insurance is required if all or part of the property improvements are located in a Special Flood Hazard Area (SFHA). Flood insurance is required even if the mortgaged premises are above the 100-year flood boundary. 35 | P a g e Special Flood Hazard Areas Flood insurance is required on properties located within the following SFHA zones: A AR/AH A99 AO AR/AO AR AH V AR/A A1-A30 V1-V30 AR/AE AE VE AR/A1-30 If the Flood Designation Area on the flood certificate indicates “None” because the subject area has not yet been mapped by FEMA, Endeavor America does not require flood insurance to make the loan eligible for purchase. Maximum Available through NFIP The maximum insurance available under the appropriate National Flood Insurance Program (max NFIP) is $250,000 per unit. This maximum available also applies to PUD projects. Required Coverage on 1-4 Unit Properties If flood insurance is required on 1-4 unit properties, the coverage must be for the lowest of the following: • 100% of the replacement cost of the dwelling, based on the hazard insurance policy (Dwelling Coverage A). • The maximum insurance available under the appropriate National Flood Insurance Program (NFIP). • Greater than or equal to the unpaid principal balance of the loan. Deductibles The deductibles for 1-4 unit properties and PUD policies may not exceed a maximum of $5,000. PUD master policy deductibles may not exceed a maximum of $25,000. Wind Insurance Windstorm coverage is generally included under the standard extended coverage policy through an endorsement. If the policy excludes or limits the windstorm coverage, it is not acceptable. The borrower must obtain a separate policy or endorsement from another commercial insurer that, with the existing policy, provides adequate total coverage. The maximum deductible for windstorm coverage may not exceed 5% of the limit maintained for dwelling coverage, or the maximum allowed under state law. Documentation The following lists the most commonly used forms and certifications required by FHA. Additional certifications and or documents may be required depending upon the scenario. FHA FORM HUD‐92900‐A HUD‐92900‐LT HUD‐92900‐B FORM NAME HUD/VA Addendum to Uniform Residential Loan Application FHA Loan Underwriting and Transmittal Summary Important Notice to Homebuyers Informed Consumer Choice Disclosure WHEN REQUIRED All transactions All transactions All purchase transactions All transactions 36 | P a g e HUD‐92561 Hotel and Transient use of property Real Estate Certification / Amendatory Clause IRS 4506‐T Request for tax transcripts Required on all purchase transactions if not contained within the purchase agreement Required on all loans except Non‐Qualifying Streamline Refinance 37 | P a g e
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