Transcript FHA 203(k) Underwriting Seminar - Team

FHA 203(k) Rehabilitation Loan
Program Underwriting Seminar
October 4, 2011
FHA 203(k) Underwriting Seminar
Topics for Discussion:
• Program Overview/Re-engineering
• FHA 203(k) Specific Disclosures
• Streamline FHA 203(k) vs. Full FHA 203(k)
• Permits
• Contractor Acceptance Procedures
• Plan Review, Specifications of Repairs, Estimates
• Contingency Reserves
• Appraisal Requirements
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FHA 203(k) Underwriting Seminar
Topics for Discussion:
• Maximum Loan-to-Value
• Maximum Mortgage Calculation
• Underwriting Considerations
• Funding Issues
• M&T Draw Process
• M&T Resources
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Industry Statistics and M&T Experience
• Americans have spent on avg. approx $125 billion annually in
home renovation since 2008
• Overall new construction lending down 72% since 2005
– 2.1 Million starts in 2005 compared to 585,000 in 2010
– 2011 down 2.3% - some estimates as low as 570,000 starts this year
• National Association of Home Builders:
– Remodeling Market Index – Combines ratings of current remodeling activity
with indicators of future activity.
• Up 10% in Q1 2011
– Softened somewhat in Q2 2011 but it is still the second highest RMI since
Q3 2007
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Industry Statistics and Commentary
• According to the Harvard University’s Joint Center for Housing
Study, 2010 results indicate greater spending on larger
remodeling projects, as well as core home improvement projects
such as window and roof replacement.
– Kitchen remodels were up nationwide by 191% year-over-year. Average
major kitchen remodel is $57,000 (minor is $21,000);
– Bathroom remodels increased 30 percent. Average bathroom remodeling
project is $16,000
• According to this same study, they are forecasting a 13 percent
increase from April through June; and spending on renovations
may increase 3.5% annually through 2015.
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Industry Statistics and Commentary
• U.S. Unemployment Rate as of last month is 9.1%.
• Big Box Stores
– Earlier this year, Home Depot announced they must hire 60,000 seasonal
associates
– Lowes just introduced the Home Improvement App for iPhone and iPod
• National Retail Federation
– U.S. Consumer confidence at a 3 year high earlier this year; Retail spending
increased 0.4% in the second quarter
• Driving force of this surge in home rehabilitation will be the
baby boomers
– The first of whom are reaching 65 and are preparing their homes for
retirement. They need better lighting, less barriers, more things in
convenient locations.
– In 2011, 13% of the US population is age 65 or older
– It’s estimated that there are 75 million people in the “baby boomer”
generation (those born from 1946 to 1964)
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Why FHA 203(k)?
• Traditional Loan Options Less Prevalent in the Current Market
– Disappearance of second mortgage loans. Second lien production down
80% since 2008
– Home Equity Line of Credit – Borrowers have less equity to tap into
 Home values down 31% since July 2006
 100% LTV’s no longer available. Typical LTV is now 90%
• Limited Competition. Fragmented Market. Few Lenders play in
the 203K Arena.
• 80% of US homes are 20+ yrs old.
– Home improvement activity appears to be migrating from simple
replacement projects and energy retrofits to broader remodels / upgrades.
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Why FHA 203(k)?
• Negative Equity: 22.3% of all mortgage holders are upside
down. This represents 14 million homes
– FHA 203(k) permits after-improved value
• Foreclosures – 2.2 million as of 2010.
– One of the primary tenets of the program is to assist potential homeowners
with acquiring and rehabilitating single family properties.
• Short Sales; REO’s; distressed sales
– Another principle of the program is to restore the existing housing stock
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Industry FHA 203(k) Rehab Volume Trend
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FHA 203(k) at M&T
• M&T has experienced rapid growth since late 2008 and has
become the third largest 203(k) lender in the country only
behind Wells Fargo and Bank of America
• This significant growth in volume has warranted closer
management. The Six Sigma 203(k) Rapid Improvement
Process initiative, effort commenced in the fall of 2010 and
continues today.
• Core 203(k) RIP Committee is comprised of approximately 40
individuals and includes Sales, Product Development, Ops,
Accounting, Risk, Technology, Asset Management, LSS
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FHA 203(k) at M&T
• M&T EasyBuild Construction & FHA 203(k) Rehabilitation
Dichotomy:
EasyBuild
FHA 203(k)
2006
2010
$800+M
$20M
$20M
$600+M
• Originated 1400+ units in 2010
• Issued 11,285 draw checks in 2010
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M&T Rehabilitation Program
Product Mix
Channel Mix
11%
2%1%
34%
42%
47%
63%
203(k)
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203(k) Streamline
HomeStyle
Remodel
Retail
Broker
Correspondent
2011 Opportunities
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Increase Correspondent business
Improve product knowledge
Improve file quality & U/W productivity
Better tracking & communication to customers
throughout the draw process
• Better technology
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Pre-Settlement:
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Corresp Announcement (PB2010-20)
Contractor Acceptance Checklist (Exhibit 03-099) - MEME
Contractor’s Resume (Exhibit 02-410)
FHA 203(k) Borrower’s Acknowledgement (VMP457).
Homeowner/Contractor Agreement (VMP744)
Borrower’s Identity of Interest Certification (VMP601)
Consultant’s Identity of Interest Certification (VMP602)
203(k) Permit Certification (Form 8000)
Plan Review / Specification of Repairs signed by Consultant (not
required for 203(k) Streamlines) (VMP600) - Consultant
• Draw Request Form (HUD Form 2452) (not required for 203(k)
Streamlines)
• 203(k) Maximum Mortgage Worksheet (VMP435)
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• Revised during re-engineering efforts.
• No longer require SS# - easier for the
Contractor
• More space to fill in data
Contractor must sign and date
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It is very important that this
disclosure is read and understood
by the applicant(s). It is extremely
informative. All mortgage staff
members involved with 203(k)s
should read it in its entirety.
The applicant(s)
must check one
of these boxes
to instruct M&T
how to apply the
net interest
income on the
rehabilitation
repair escrow
account.
SAMPLE COPY ONLY
All applicant(s) must sign and date
here.
The loan officer
must sign and
date here.
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This dollar amount must
match the amount of the
individual contractor’s
estimate.
On a standard 203(k), if there
is more than one contractor,
the sum of the totals of all
the Homeowner/Contractor
Agreements must equal the
Total of Repairs on the
Specification of Repairs and
entered on line B1 of the
203(k) maximum mortgage
worksheet.
This is the
date that the
work will be
completed. It
must be no
later than 6
months from
the closing
date.
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On a streamline 203(k) the
sum of the total of all the
Homeowner/Contractor
Agreements must be entered
on line B1 of the 203(k)
maximum mortgage
worksheet.
Each non-signature page
must be initialed by the
applicant(s) and the
contractor. For a streamline
203(k) the contractor must
also provide a detailed
estimate, signed and dated
by all the applicant(s) and the
contractor for the work being
completed.
SAMPLE COPY ONLY
Page 2 must also be
initialed by the
applicant(s) and the
contractor.
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This page must be signed and dated by
the applicant(s) and the contractor. By
signing this agreement, the contractor is
agreeing to do the project for the dollar
amount on page 1of this agreement. It is
important that the dollar amount equals
the contractor’s estimate.
SAMPLE COPY ONLY
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The 203(k) loan
requires a specific
Identity-of-Interest
Certification form.
Make sure the one
you use includes the
required language
and has all the
parties listed as in
this form. There
can be no Identityof-Interest on a
203k with any other
parties involved in
the transaction,
including the
contractor and
borrower(s).
This blank
must be
checked
indicating
that the
Borrower’s
will occupy
the
residence.
The
borrower(s)
sign and
date here.
SAMPLE COPY ONLY
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This form is completed
by the HUD approved
FHA Consultant for a
standard 203(k).
Consultant’s software
packages may differ so
the format may not be
exactly the same from
each one.
On a standard 203(k)
the consultant must
sign and date here or
he/she may provide a
separate signed and
dated certification.
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SAMPLE COPY ONLY
The 203(k) loan requires a
specific Identity-ofInterest Certification
form. Make sure the one
you use includes the
required language and
has all the parties listed as
in this form. There can be
no Identity-of-Interest on
a 203k with any other
parties involved in the
transaction, including the
contractor and
borrower(s).
• Revised during reengineering efforts
• Must be
completed by the
Consultant or local
municipality
• Borrower must
sign
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This form is completed by the HUD
approved FHA Consultant for a
standard 203(k). Consultant’s
software packages may differ so the
format may not be exactly the same
from each one. However it must
document the detail of repairs for
all applicable construction line
items. These line items must
correlate to the line items on the
Draw Request. Line item #1 is
always for Masonry; line item #2 is
always for Siding, etc. Each line
item will have a subtotal. These
subtotals are brought over to the
last page for a “Recap of Subtotals”.
SAMPLE COPY ONLY
For purposes of this training, line
items 4 through 35 are NOT included.
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NOTE: Permit fees,
consultant fee,
architectural fees and
engineering fees are
NOT to be listed in any
of the line items in the
Specification of
Repairs nor in line
#35, miscellaneous.
These items must be
listed separately on
the 203k MMWS. If
they were put in the
Spec of Repairs in
error, they would be
included in the max
mortgage calculation
twice.
This bottom section is
preferred but not
always in all
consultants’ software.
At a minimum the
borrower(s) and the
contractor must sign
this Re-Cap of
Subtotals of the
Specification of
Repairs.
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This is the final page of
the Specification of
Repairs. It lists each line
item description and the
sub-total for all of the 35
construction line items
and totals them in line
36, TOTAL COST OF
REPAIRS. This should
mirror the Draw Request.
Line item 35 is for
miscellaneous repairs
that do not “fit” in the
other 35 line items. For
example, if the property
is a HUD REO and HUD is
paying for Lead Based
Paint repair, the amount
would be listed
separately on line 35.
The TOTAL COST OF
REPAIRS, line 36, is to be
entered on line B1 of the
203k MMWS.
The consultant will
recommend a % for
contingency reserves but
the underwriting can
override.
The consultant must sign and date here and
include his/her FHA Consultant ID#.
This form is completed by the HUD approved FHA
Consultant for a standard 203(k). He/she breaks
down the total cost of the renovation project into 35
construction line items. The consultant completes
column 1 prior to underwriting. After closing and
work progresses, the consultant (after his/her
inspection) determines how much money from each
line item is to be paid and enters it in column 3.
The consultant also completes
the Suggested Contingency
Reserve Amount as a
percentage.
SAMPLE COPY ONLY
The Totals of repairs, Line 36, is what is entered
on Line B1 of the 203(k) maximum mortgage
worksheet.
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SAMPLE COPY ONLY
Page 2 does NOT need any signatures prior to closing.
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SAMPLE COPY ONLY
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The “As-Is” value is
always the sales
price on a purchase
(except for a HUD
REO) and the “As-Is”
value is the “As-Is”
value stated on the
appraisal for
refinances.
Line 36 (Totals) on the
Draw Request is entered
here (B1)for a standard
203(k) and the total of all
the contractor’s
estimates are entered for
a streamline 203(k).
SAMPLE
SAMPLE
COPY
COPY
ONLY
ONLY
The borrower(s) sign the final worksheet
at closing.
The borrower(s) sign the final worksheet
at closing.
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This form must be
complete when the loan
is submitted to
underwriting to
determine the maximum
insurable mortgage
amount.
Streamline 203(k) vs. Full 203(k)
• Program Option Eligibility Matrix
• Definition of Structural Repair
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Program Option Eligibility Matrix
PARAMETER
FHA 203(k) - FULL
FHA 203(k) – STREAMLINE
Eligible Properties
•1-4 Family including HUD REO’s
• Mixed Use
• 1 Family including HUD REO’s
• 2-4 Family
Repair Amounts
• Minimum $5,000; no max up to FHA max mortgage amount.
• No minimum; maximum rehabilitation amount is $35,000
including any fees not paid out-of-pocket.
(Line B14 of the MMWS cannot exceed $35,000)
Repair Types
• Structural and non-structural.
• Landscaping or site amenities.
• No outbuildings.
• Non-structural only.
• No landscaping or site amenities.
• No outbuildings.
Plan Review / Specification of
Repairs
• Required by HUD Consultant.
• The Consultant’s work write-up must be detailed and include
estimates for labor and materials.
• The Underwriter must be satisfied that the estimates provided
by the borrower are in-line with the Consultant’s. The higher of
the two should be used in calculating the maximum mortgage.
• No plan review or Consultant required.
Contingency Reserve
•15% minimum required.
• If Consultant quotes > 15%, the higher amount must be used.
• M&T has discretion to impose a higher figure.
• 10% minimum required.
• 15% required if utilities not on or if property is vacant.
• M&T has discretion to impose a higher figure.
Draw Disbursements
• Consultant inspects property and identifies the percentage of
work complete to date.
• Maximum 5 draws.
• 10% holdback on each disbursement.
• Checks cut in contractor and borrower’s names.
• First draw limited to 50% of total repair costs, incl. labor.
• Maximum 2 draws.
• No holdbacks.
• Checks cut in contractor and borrower’s names.
• No more than 2 payments per specialized contractor.
Inspections and Title Updates
• Required prior to each disbursement.
• Two bringdowns performed: one at 50% of renovation dollars
advanced and one at final draw
•
Homeowner-Contractor
Agreements
• Required for each Contractor.
• Required for each Contractor.
Mortgage Payment Reserve
• Up to 6 months of PITI can be financed, if the home is not
habitable during renovation.
• Borrower must move into property within 30 days of
closing. Mortgage payments may not be escrowed.
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•
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For inspections, case-by-case depending on the number
of contractors
Certificates from municipalities are acceptable in lieu
Only 1 bringdown at final draw is performed
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Permits
• Municipality Requirements
• Refinance vs. Purchase and application for permits
• Delays in Rehabilitation Project post-closing (19% of
issues)
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Building Permits
Building Permits
Proper building permits are required prior to any
monies being advanced for a particular repair type.
The requirements of the municipality in which the
property is located must be adhered to. A lender’s
permit certification must be signed by an official of
the municipality for all 203(k) transaction types
indentifying all recorded permits.
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Active Loans Problem Categories Analysis
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Contractor Acceptance
• Maximum 3 Subcontractors or General Contractor
Required
• NO Self-Help
• Relatives/employers not permitted (no Identity of
Interest)
• Correspondent Bulletin 2010-020
• Contractor Acceptance Checklist
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Contractor Acceptance
Contractor Acceptance
Contractor acceptance is required for all transactions, both
Standard and Streamlines. All rehab must be performed by a
qualified and experienced contractor chosen by the borrower
and completed in a workmanlike manner.
• Borrowers may not use relatives/employers as their contractors;
review Identity of Interest disclosure for details on other restrictions.
• Borrower is limited to a total of 3 sub-contractors or a General
Contractor will be required.
• The borrower may NOT act as the General Contractor. “Self-Help”
loans are NOT permitted
• Contractor’s Resume, should be completed by all contractors.
• The Underwriter must validate the Contractor(s) selected by the
borrowers are acceptable to lender.
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Plan Review/Specifications of
Repairs/Estimates
• Plan Review/Specifications of Repairs (not required
for 203(k) Streamline transactions)
• Draw Request form
• Repair Estimates
• Estimates from “box stores” (i.e. Lowes/Home Depot)
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Repair Estimates
Repair Estimates
• Borrowers must provide written contractor estimates for all work
being included in their repair escrow.
− Estimates should include the cost for labor and materials.
− Estimates must itemize all work being included.
− All estimate amounts must match the Homeowner/Contractor
Agreement(s), Form 2420.
− Compare with appraisal to ensure all required repairs match and
have estimates.
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Repair Estimates
– Materials or appliance estimates from “box stores” (i.e. Home
Depot, Lowe’s, etc.) must be accompanied by labor estimates from
the installing contractor who will install the materials.
 Whether the installing contractor is independent OR a sub-contractor
for a store, they must still provide an executed Homeowner/Contractor
agreement, and be “Accepted” by lender.
 Exception: free-standing appliances (or items that do not require
installation or labor to install) may be presented as stand-along
estimates (i.e. free-standing stove, washer, dryer).
 Paint must always be accompanied by a labor estimate.
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Contingency Reserves
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Appraisal Requirements
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Document Expirations/Extensions
Declining Market Policy
Second Appraisals
Properties Listed for Sale
Mixed-Use, Multi-Family Homes
Appraisal Requirements
Appraisal Extensions and Expiration
• Appraisals are good for 120 days. If a borrower signs a valid
contract or is approved for a loan prior to the expiration date
of the appraisal, the term of the appraisal may be extended
by an FHA DE Underwriter for 30 days to allow for the
approval of the borrower and the closing of the loan.
Appraisals expired beyond this one-time extension (That do
not close within 150 days of the application date) are NOT
eligible for an “Appraisal Update Report” (FNMA 1004D).
M&T will require a full 1004 (or applicable form) to be
completed. The appraiser must include a Market Conditions
Addendum (100MC) with all appraisal reports.
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Declining Markets Policy
A property is determined to be in a Declining Market
if the appraiser indicates that the property is located
in a declining area in both the neighborhood section
as well as in the housing trend section, and/or
determine if there is an “over-supply” of properties,
OR the property is identified by Desktop Underwriter
(DU) or Loan Prospector (LP) through Total
Scorecard as being located in an area of concern.
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Declining Markets Policy
• If deemed by the appraiser to be in a Declining Market OR if
there is an “over-supply” – the appraisal must include:
– Two(2) comparables (as similar as possible to subject) closed
within 90 days prior to the effective date of the appraisal, and
– Two (2) active listings or pending sales in comp position 4-6 or
higher (in addition to the three settled sales comps in position 1-3).
The listing/pending sales MUST included the original list price, any
revised list prices, and total DOM (days on market); adjust active
LISTINGS to reflect list-to-sale price ratios for the market; and
adjust PENDING sales to reflect the contract purchase price or
reflect list-to-sale price ratios for the market.
– Absorption rate analysis on the 1004 MC.
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Second Appraisals
Second Appraisals
• A second appraisal will be required when:
− The loan amount (excluding the UFMIP) will exceed $417,000, and
− The LTV (excluding the UFMIP) is equal to or greater than 95%, and
− The property is determined as being in a declining market.
• The second appraisal must be completed by an FHA approved appraiser,
selected by the DE Lender underwriting the loan. The Lender is NOT to
request a second case number through FHA Connection, but to
independently engage the appraiser.
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Second Appraisals
Second Appraisals
• If the second appraisal has an estimated value more than
5% lower than the original appraisal, the maximum mortgage
must be calculated using the lower of the two appraised
values. The second appraisal must be included in the FHA
insurance binder. If the second appraisal is used to
recalculate the maximum mortgage amount, the appropriate
information from that appraisal must be entered into the
appraisal logging screen in FHA Connection.
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Properties Listed for Sale
Properties Listed for Sale
• Properties currently listed for sale are NOT eligible for FHA
refinances, whether fully qualifying, rate/term or, streamline.
• Properties previously listed and then canceled, are eligible
for a Rate-Term/Streamline Refinance subject to the
following:
− M&T requires that the file contain conclusive evidence, from a
third party source, that the listing was canceled at least one full
day prior to the application date.
− Any property currently listed for sale upon or after the date of
application will be ineligible for an FHA refinance transaction
with M&T.
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Mixed-Use Property
Q:
Can we utilize FHA financing for a mixed-use
property?
A:
Yes, under the full 203(k) program ONLY. The
maximum living units would be 4. The
commercial component on a one-story dwelling
can’t be over 25%; on a 2-story it can’t be greater
than 49%; and on a 3-story it can’t be over 33%.
The renovations can only be done to the
residential portion.
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Maximum Loan-to-Value
Property Type
1-4 Unit Primary
uMax
Purchase
Rate/Term Refi
Max LTV
Max CLTV
Max LTV
Max CLTV
96.50%
96.50%
110.00%u
110.00%u
LTV/CLTV for condominiums is 100%
For PURCHASES, divide the base mortgage amount by the LESSER of:
• The sum of the sales price plus the total rehabilitation cost; OR
• The after-improved appraised value.
For REFINANCES, divide the base mortgage amount by the LESSER of:
• The unpaid principal balance plus the total rehabilitation cost (Line B14
from the HUD-92700); note that B-14 does not include prepaids/closing
costs; OR
• The as-is value of the property as determined by the appraiser plus the
total rehabilitation (Line B14 from the HUD-92700); note that B-14 does
not include prepaids/closing costs; OR
• The after-improved appraised value.
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Maximum Mortgage Calculation
• Common Issues
• Examples
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Maximum Mortgage Calculation
• Execution of the FHA 203(k) Maximum Mortgage Worksheet
(form HUD-92700) is required.
• For PURCHASES, the base mortgage amount is calculated by
multiplying 96.50% times the LESSER of:
– The sum of the Sales Price plus the Total Rehabilitation Cost; OR
– 110% of After-Improved Value.
• For REFINANCES, the base mortgage amount is calculated by
the LESSER of:
– Sum of existing liens, the total rehabilitation cost, borrower-paid closing
costs, prepaids, the discount points of the prepaid costs minus any MIP
refund; OR
– Sum of the As-Is value plus total rehab cost or 110% of After-Improved
value multiplied by the 97.75% LTV factor.
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Example #1: Purchase
Let’s Complete a Maximum Mortgage Worksheet
for a Purchase
John and Mary are first-time homebuyers. They
found a property they like at 11 Washington Drive,
Clifton Park, NY and have successfully negotiated a
purchase price of $95,000. The Seller has owned the
property for 5 years. The property is in need of some
repair. Foundation repair is required, so the loan will
be a full 203(k).
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Example #1: Purchase-Continued
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Contract Sales price is $95,000.00 (Line A-1)
“As-Is” Value is $95,000 (Line A-2)
After-Improved Value is $130,000.00 (Line A-3)
Estimate of Repairs $25,000.00 (Line B-1)
15% Contingency Reserve will be required (Line B-2)
3 Inspections @ $100 each and 2 Title Updates @ $100 (Line B-3)
The Consultant Fee will be $600.00 (Line B-7)
Building Permit will cost $150.00 (Line B-8)
Rate is 4.25% with 0 discount points (Line B-12)
LTV Factor is 96.50%. Case number obtained on 8/1/11. Upfront
premium 1.00%. Annual premium 1.15%
Example #1: Purchase
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Example #1:
Purchase
Max
Mortgage
Worksheet
Page 1
Example #2: Streamline 203(k)
Let’s Complete a Maximum Mortgage Worksheet
for a Purchase
Tom and Sue Jones have lived at 123 Main Street,
New York, NY for 3 years. They would like to make
some improvements to their home, all are cosmetic in
nature. One contractor will be doing the work. Their
current mortgage is an FHA. So there will be an MIP
refund of $2,300.00
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Example #2: Streamline 203(k)-Continued
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Existing Debt is $295,000.00 (Line A-1)
“As-Is” Value is $300,000.00 (Line A-2)
The After-Improved Value is $315,000,00 (Line A-3)
Borrower Paid Closing Costs will be $2,700.00 with prepaids of
$2,600.00 (Line A-5)
Initial Estimate of Repairs is $28,800.00 (Line B-1)
A 10% Contingency Reserve is required (Line B-2)
1 Inspection @ $100.00 and 1 Title Update @ $100.00 (Line B-3)
Building Permit Fee is $100 (Line B-8)
Interest Rate is 4.875% with 0 points (Line B-12)
LTV factor is 97.75%. Case Number Dated 8/1/11. Upfront MI is
1.00%, annual MI is 1.15%
Example #2:
Streamline
203(k)
Max Mortgage
Worksheet
Page 1
61
Example #3: Purchase HUD REO
Needing Lead Based Paint Abatement
Jack and Jill Brown are purchasing a home located at
653 Ushers Road in Ballston Lake, NY. It is a HUD
foreclosure. Their loan officer has obtained a copy of
the Property Condition Report, the “As-Is” Appraisal
and the Lead Based Paint Report from the realtor
and has gone over the reports with Mr. and Mrs.
Brown. Based on the required repairs and the
repairs the Browns want to do to the property, this will
have to be a full 203(k).
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Example #3: Purchase HUD REO Needing
Lead Based Paint Abatement-Continued
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•
•
Contract Sales price is $90,000.00 (Line A-1)
“As-Is” Value is $89,000.00 (Line A-2)
After-Improved Value is $150,000 (Line A-3)
Closing Costs total $2,700.00 (Line A-5)
Repairs will cost $40,000 (Line B-1)
Lead Based Paint Abatement will cost $5,000 (Included in Line B-1)
A 15% Contingency is required (Line B-2)
4 Inspections @100 ea. and 2 Title Updates @ $100 ea. (Line B-3)
Consultant’s Fee will be $700.00 (Line B-7)
The Building Permit Fee is $150.00 (Line B-8)
Interest rate is 5.00% with 0 discount (Line B-12)
HUD credit towards lead base paint abatement will be $4,000
(Reflected in Line C-4)
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Example #3:
Purchase
HUD REO
Needing
Lead Base
Abatement
Max Mortgage
Worksheet
Page 1
64
Underwriting Considerations
• Debt-to-Income Ratios/Compensating Factors
• Identity of Interest/Conflict of Interest
– Not Permitted
– Employee of a Lender
• Property Flipping
• Lowest Sales Price in Last 12 Months
• Nontraditional Credit/Insufficient Credit/Thin Credit Profile
– Credit Score Required: Nontraditional Credit Not Permitted in Lieu of Score
– Insufficient Credit/Thin Credit Profile: Credit Score Provided
 Group I and Group II Credit Reference Requirements
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Underwriting Considerations
• Refinance Considerations
– Second Mortgage Payoffs and Seasoning Requirement
– No Cash Back
• Additional Consideration
– Loan Amounts Exceeding $400,000
– Refer Findings Report
– Streamline Refinance Transactions
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Debt-to-Income Ratios

Debt-to-Income Ratio Guidelines: The following applies for loans that have DTI ratios above the prescribed 43%
maximum, even when FHA Total Scorecard approval has been obtained.
DTI Range
< = 43%
> 43% and <=50%
>=50%
Compensating
Factors
Minimum FICO
Total Scorecard Approved
Compensating Factors
620-639
Required
2 required (from list below)
640
Required
2 required (from list below)
Not permitted.
1. Reserves (liquid or non-liquid) of at least two (2) months PITI (Gift funds may
not be considered)
2. LTV <= 90%
3. Residual income >= 1.5 months PITI *
4. Payment shock of less than 25% **
5. Documented additional income not being used to quality
* Residual Income = Gross income less sum of housing payment and all debts.
** Payment shock = Take the amount of the new payment, minus the amount of the old payment, and then divide that number by
the old payment. Example: Currently paying $650. New payment is $1,015. Payment shock = 56.15%.
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Identity of Interest Example #1
• Borrower works for ABC Remodeling as a secretary.
She wants to use ABC Remodeling as her contractor
on the 203K.
• Not Allowed--due to the “Conflict of Interest”. There
is a business relationship between the contractor and
borrower.
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Identity of Interest Example #2
CONTRACTOR RELATED
• If the borrower is related to the contractor and the contractor is
self-employed as the sole contractor/owner of the firm then this
would be a conflict of interest. This is not allowed.
• If a relative (i.e. borrower's Dad) works for the selected
Contractor that is a large firm and Dad has no ownership in the
firm and the quote for renovations comes from the firm and is
not signed by the relative (i.e. Dad) then you do not have an
identity of interest and can approve the loan.
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Identity of Interest Example #3
LANDLORD/TENANT
• Permitted only if the landlord/tenant relationship is the ONLY
relationship. If the landlord/tenant has an additional layer (i.e.
blood relationship or marriage or law), it is not eligible.
• Borrower (tenant) is purchasing landlord’s house and has lived
there for 3 years. The landlord is the grandfather.
• Not allowed--the borrower has a family relationship with the
landlord.
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Anti-Flipping Policy
Property flipping is a practice whereby a property is sold a short
period of time after it is purchased by a seller for a considerable
profit with an artificially inflated value and often abetted by a
lender’s collusion with an appraiser.
The list of EXEMPT entities (Sellers who do not have to comply
with anti-flipping, regardless of length of ownership) Sales by HUD
of its Real Estate Owned can be located in ML2006-14.
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Anti-Flipping Policy—Exempt List
•
•
•
•
Sales by other US government agencies
Sales by non-profits approved to purchase HUD REO’s
Sales of properties acquired thru inheritance
Sales of properties purchased by employers or relocation
agencies connected with relocations of employees
• Sales of properties by state and federally chartered financial
institutions and GSE’s (Fannie and Freddie)
• Sales of properties by local and state government agencies
• Sales of properties located in federal disaster areas designated
by the President
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Anti-Flipping Policy
Anti-flipping requirements for the properties owned by sellers for 180-360 days
can be located in ML2006-14.
Properties owned by sellers for less than 180 days are not permitted by M&T,
unless they are an EXEMPT entity (noted above).
M&T may require a 2nd appraisal for properties sold >180 days if the resale
value is 100% or the resale value is >5% than the lower sales price.
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Lowest Sales Price in 12 Months
Clarification on Chain of Title Requirement
• Mortgagee Letters 95-40 and 00-25 state the Direct Endorsement
lender must obtain evidence of prior ownership when a property
was sold in the last year and that prior ownership must be reviewed
for undisclosed identity of interest transactions. Lenders are
reminded that this is a continuing requirement and applies to ALL
transactions. The 203(k) mortgage must be based on the lowest
sales price in the last year.
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Lowest Sales Price in 12 Months
Lowest Sales Price in the Last 12 Months
• Guideline applies regardless of the entity conducting the transfer.
(no exemptions as with the Property Flipping Rule)
• Only exception is with an inheritance. Current sales price may be
utilized.
• If a foreclosing entity acquired a property at auction and the auction
price was below their foreclosed outstanding balance, the
outstanding balance may be utilized in the maximum mortgage
calculation if properly documented by the foreclosing lender.
Documentation reflecting the last transfer or sales price may
include the foreclosure deed, affidavit of debt or sheriff’s sale notice
to name a few.
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Lowest Sales Price in the Last 12 Months
Example #1:
Sales contract with a purchase price of $80,000.
Seven months ago the seller (private individual)
acquired the property for $50,000 at a foreclosure
auction. Maximum mortgage calculation will be based
on $50,000.
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Lowest Sales Price in the Last 12 Months
Example #2:
Sales contract with a purchase price of $50,000.
Eight months ago, the seller (the foreclosing entity
themselves) took the property via foreclosure for the
remaining outstanding loan balance of $18,000.
Maximum mortgage calculation will be based on
$18,000.
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Lowest Sales Price in the Last 12 Months
Example #3:
Sales contract with a purchase price of $90,000.
Eleven months ago, the seller acquired the property
via inheritance for $1.00. Maximum mortgage
calculation will be based on $90,000.
Recommendation is for 2 appraisal reports to support
the $90,000 sales price.
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Non-Traditional
Non-Traditional Credit
When a borrower has no credit score, no traditional
credit (appearing on credit report), and/or is deemed
“Out of Scope” by the AUS Engine, the loan is
ineligible for FHA financing with M&T. Manually
underwritten loans are ineligible for FHA financing
with M&T, regardless of FICO score.
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Insufficient Credit
Insufficient Credit
•
Insufficient credit is defined when „the information in the standard credit
report is not sufficient for the lender to make a prudent underwriting
decision‟ (even if a Total Scorecard Approve/Accept/Eligible was obtained).
Insufficient credit is also identified when there is a “thin-file” credit report,
where a credit score was generated, but based only on a few tradelines.
(Example: Your borrower has a 705 FICO score, but it is based on only two
tradelines – a gas card with 6m history and a credit card with 9m history. This would
be deemed a “thin-file” credit profile, and could, at underwriter discretion, require
augmentation by alternate/non-traditional credit references).
M&T will allow augmentation of insufficient credit on a loan where the
borrower meets the minimum FICO score requirements AND receives an
approval thru the AUS Total Scorecard, but the underwriter deems the
credit history to be “shallow” or “thin.”
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Insufficient Credit
The following guidance is for the borrowers with an
insufficient credit history:
• Qualifying ratios are to be computed only on those
occupying the property and obligated on the loan, and may
not exceed 31% for the top ratio and 43% for the bottom
ratio (regardless of AUS approval).
• Borrowers should have two (2) months of cash reserves
following mortgage loan settlement from their own funds (no
cash gifts should be counted).
• No more than one 30-day delinquency on payments due to
any non-traditional credit reference (see below);
• No public records/judgments/collection accounts/court
records reporting (other than medical) in the last 12 months.
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Insufficient Credit
• Compensating factors are not applicable, and should NOT
be used as approval leverage, for borrowers with insufficient
credit
• Non-traditional credit references may not be used to
enhance or overcome any poor credit history on a traditional
credit report.
• Augmentation of the borrower’s existing thin/shallow credit
must be developed with non-traditional/alternate credit
references. The lender must develop a verifiable credit
history (from the traditional credit report and non-traditional
sources listed below) of at least three (3) references
covering the most recent 12 months activity from date of
application.
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Insufficient Credit
FHA defines non-traditional references in two GROUPS (see below).
All GROUP I references should be exhausted, and understand why
they are not available, before reviewing GROUP II references.
• GROUP I Credit References include:
– Rental Payment History
» Direct Written Verification of Rental History (VOR) is acceptable if the
landlord is a professional management firm (the professional
management firm must be independently verified, i.e. Yellow Pages
listings, etc.) OR
» Satisfactory 12 month rental payment history, as certified by a Credit
Reporting Agency, OR
» Satisfactory 12 months consecutive canceled checks from borrower
» A copy of the front and back of each check is required when canceled
checks are provided as documentation. The print must be legible, the
date of the bank endorsement for deposit must be clearly evident on the
back of each check, and the check must clearly identify the servicer,
landlord or management company.
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Insufficient Credit
–
–
–
–
–
–
Payment of Utilities (not included in the monthly rent)
Electricity
Gas / Fuel Oil, etc.
Water
Payment of Cable Television Service
Payment of Home Land-Line Telephone Service
• GROUP II Credit References include:
– Payment of Cellular Phone Service / Internet Providers
– Payments for Automobile Insurance, Life Insurance Policies
(excluding payroll deducted), Renter’s Insurance
– Payment for Child Care
– Payment of a Private Loan
– Must be documented by a written agreement
– Must be accompanied by 12months canceled checks
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Insufficient Credit
– Payments to Local Stores
» Department Stores
» Furniture / Appliance Stores
» Specialty Stores /Rental Stores, etc.
– Payments of School Tuition
– Documented 12 months history of saving by regular deposits (at
least quarterly/non-payroll deducted/no NSFs), resulting in an
observed, documented, increasing balance to the account.
• What constitutes an “acceptable” Alternate Credit or NonTraditional Credit reference letter?
– Prepared on Creditor’s letterhead
– Dated (valid for 90 days, like other credit docs)
– Signed by Creditor
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Additional Underwriting Considerations
• Refinance Considerations
– Second Mortgage Payoffs and Seasoning Requirement
– No Cash Back
• Additional Consideration
– Loan Amounts Exceeding $400,000
– Refer Findings Report
– Streamline Refinance Transactions
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Funding Issues
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Top 10 Funding Issues
1. Permit Fees on Maximum Mortgage Worksheet should appear on
B8– contractor including in B1 which is not correct
2. Contractor Acceptance Checklist missing or incomplete– Product
Bulletin 2010-020 distributed 6/29/10 with an effective date of
registrations dated on or after 7/28/10
3. 203k Fees not consistently reflected on HUD 1 settlement statement
as per M&T’s RESPA interpretation – Product Bulletin 2010-009
distributed 4/9/10 with an effective date of registrations on or after
4/14/10
4. Contractor work write up not included in appraisal
5. Liability Insurance which is current, not expired, and covers the
rehabilitation total
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Top 10 Funding Issues Continued
6.
7.
Work write ups do not equal B1
HUD REO – must have an as is appraisal from HUD and the after
improved appraisal
8. Lead Based Paint disclosures not complete or missing
a. If hazards are present must provide the 203k
Financing LBP Agreement addendum
9. Rehabilitation Loan Agreement incomplete
a. Dates and signatures missing
b. Suggest 6 months from close date to complete
project for consistency
10. In general - Agreements, write ups, estimates and proposals
missing signatures, initials & dated where applicable
a. Please do not use highlighters on any documents-all
our files are scanned upon purchase which if
highlighter is used makes document illegible
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Top 10 HUD-1 Review Issues
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1.
All Rehab. Money from the Max. Mtge. Worksheet not
reflected/collected on the HUD1
2.
Sections B thru I at the top of page 1 missing information
and/or not accurate
3.
Lines mislabeled or not labeled at all for fees collected
4.
Failure to collect 2 month cushion for each tax in the escrow
reserves
5.
Missing signatures and dates from all applicable parties
Top 10 HUD-1 Review Issues-Continued
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6.
Comparison page does not match the last GFE issued in the file
7.
Charges for 2nd appraisals and/or core logic on the HUD1 & the
supporting documentation is not in the file
8.
Provide proof that the taxes/hazard/flood have been paid (POC
on HUD1 is not recognized as proof)
9.
Grant and/or homebuyer assistance program funds listed as a
credit on the HUD1 and the supporting documentation is not in
the file
10.
Lead Based Paint Stabilization Funds are not reflected on HUD1
M&T Draw Process
• Department Overview/Expectation Setting
• Process Flow
• Problem Loan Categories
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Active Loans Problem Categories Analysis
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M&T Resources
• MEME
– 203(k) Reference Guide
– Product Pages
– FHA Underwriting and Eligibility Standards
• M&T University
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MEME
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