Transcript No Slide Title

Originating & Processing
FHA Loans
Characteristics of an FHA
Borrower
 Breathing
 Low or no cash available
 High Loan-to-Value
 Below average credit score (credit challenged)
 No FICO score
 Previous Bankruptcy, Credit Counseling
 Non-resident alien
 Looking for a better fixed rate than Conventional
What is the Federal Housing
Administration?
The Federal Housing Administration,
generally known as “FHA”, provides
mortgage insurance on loans made by
FHA-approved lenders, on single family
and multifamily homes including
manufactured homes, duplexes and
condos.
What is FHA Mortgage Insurance?
FHA mortgage insurance
provides lenders with
protection against losses as
the result of homeowners
defaulting on their
mortgage loans.
What is so special about
FHA?
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FHA underwriting is the most “Common Sense” approach
to underwriting on the market
FHA Premiums are usually higher than other programs
Yet, their rates are still lower than Conventional
Lower monthly MI & Down Payment when compared
beside a similar Conventional Loan
Highlights of FHA Financing
 Owner-Occupied Only
 One FHA loan per borrower (there are exceptions to this rule)
 3.5% Down-payment Requirement
 Down-payment - gift or funds may be borrowed from family members
 Ratios 31/43 (including temporary buy-downs)
 Cash reserves are not required (unless a manual underwrite)
 Maximum allowed seller contribution is 6%
 Mortgages are assumable
 Non-occupant co-borrowers are acceptable
 Non-resident aliens are acceptable; valid social security card & a valid working visa
Origination Fee /
Discount Points
ORIGINATION FEE
calculated on base loan amount
DISCOUNT POINT
calculated on total loan amount, which
includes UFMIP
Sales Concessions
Must be subtracted dollar-for-dollar from sales price
1. Upgrade allowances or credits
2. Decorating allowance
3. Moving expense
4. Excess rent credit
Seller Contributions /
Financing Concessions
Are NOT subtracted dollar-for-dollar. However, contributions are
limited to 6% of sales price.
1.
Buyer’s closing costs
2.
Prepaid items
3.
Discount Points
4.
Interest Rate Buydowns
5.
Other payment supplements
a. Mortgage Interest (not allowed on ARMs)
b. UFMIP
6.
Condo or homeowner association fees
Underwriting Note: Seller contributions / Financing Concessions must
be clearly stated on sales contract.
Upfront Mortgage Insurance
Premium – Currently 1.75%
• Required for all loans and property types
• Partially refunded if the loan is paid off within the first three years
• After three years the entire full premium is earned by HUD
• Can be financed into loan OR paid as a cash payment at closing
UPFRONT MIP CALCULATION
$140,000
Base Loan
Amount
x
0.0175
Premium Rate
=
$2450
Upfront Premium
$142450.00
Total Loan Amount
with MIP
Monthly Mortgage Insurance
Reasons Why Borrowers use FHA
There
are very few counties left in IL
that exceed the max mortgage amount
for SFR
The standard amount is $271,050
These Counties will allow higher due to
cost of living:
Cook
Dekalb
Dupage
Grundy
Kane
Kendall
Lake
 The loan amount allowed is $365,700
 This is considered a High Balance
FHA loan and additional adjustments
on the rate are required due to the
loan type. These do not show on our
rate sheet and must be priced out
with the lock desk.
FHA
Maximum
Mortgage
Limits
for
High Cost
Areas in
Illinois
Maximum Mortgage Limits
https://entp.hud.gov/idapp/html/hicostlook.cfm
Enter in the state and/or county to find out the max
mortgage amount allowed
Closing Costs
Closing Costs
Underwriting Note:
Borrower can only be charged for actual fees incurred and
documented within transaction. The dollar amount and party
responsible for payment must be indicated for all charges,
including any costs paid outside of closing on the Good Faith
Estimate and HUD-1.
Closing Costs cont.
 May charged and collected from mortgagors those customary and
reasonable costs necessary to close.
 Except for discount points, these fees may also be used to meet the
homebuyer’s minimum investment requirements.
 Mortgagors may not pay a tax service fee.
 Seller’s maximum contribution to the homebuyer’s actual closing,
prepaid expenses, discount points, and other financing concessions
remains at 6 percent of the sales price.
 Only the actual cost for services may be charged to the mortgagor.
 All fees and charges must comply with Federal and State disclosure laws
and other applicable laws and regulation.
FHA Underwriting
& Processing
Automated Underwriting
FHA loans can be underwritten by either Desktop Underwriter or Loan Prospector.
 Approved/Eligible or Accept findings
 Refer findings may be eligible for a manual underwrite
 Manual underwrite requires a fully processed loan
 Bankruptcy papers must be provided at original submission
 NO Exceptions to the need for BK papers. The UW will need to verify that a
property was not included in the BK and a foreclosure still pending that has
not hit the credit report or fraud report
 Ratios cannot exceed 31/43 on existing and new construction
Note: Your underwriter is allowed to request additional items as
needed to document the file regardless of what the findings state. The
UW is responsible to document the file regardless of the findings.
Please RESPECT your FHA underwriter!
Income Requirements
Borrower must be at current position for a min of 6 months. the lender
must verify the borrower's employment for the most recent two full
years. Multiple jobs, change in careers, and large gaps may
disqualify the borrower.
Overtime and Bonus Income
Both overtime and bonus income may be used to qualify if the borrower
has received such income for the past two years and it is likely to
continue.
Commission Income
Commission income must be averaged over the previous two years. The
borrower must provide copies of signed tax returns for the last two years,
along with the most recent pay stub. (Unreimbursed business expenses
must be subtracted from gross income.)
Retirement and Social Security Income (Gross up by 25% only if needed)
Retirement and social security income require verification from the source
(former employer, Social Security Administration) or federal tax returns. If
any benefits expire within the first full three years, the income source may
be considered only as a compensating factor.
Part-time Income
Part-time/second job income, seasonal employment (i.e. umpiring,
baseball games in summer, working at a department store during the
holiday shopping season), may be used in qualifying if the lender
documents that the borrower has worked the part-time job
uninterrupted for the past two years and will continue to do so.
For qualification purposes, part-time income refers to jobs taken to
supplement the borrower’s income from regular employment (i.e. a second
job – not meaning primary jobs of less than 40 hours per week.)
Alimony, Child Support or Maintenance Income
Income in this category may be considered as effective if such
payments are likely to be consistently received for the first three
years of the mortgage. The borrower must provide a copy of the final
divorce decree, legal separation agreement, or voluntary payment
agreement, as well as evidence that payments have been received during
the last twelve months. Periods less than twelve months are not
acceptable, as the payer’s ability and willingness to make timely
payments has not been adequately demonstrated.
Other Income Situations
 If a borrower states they work 40 hours a week and the paystubs
show less, the income will be averaged.
 Self employed borrowers must be self employed for 2 years and
an average of the income from tax returns will be used. To
calculate accurately, a cash flow analysis form will be used. The
AGI Method or Sam Method is acceptable.
 All W-2’s for the past 2 years for a borrower must reflect on the
1003. In addition, a verbal (at a min) or a written (best choice)
VOE should be provided to clarify job history, continuance in
same line of work and is REQUIRED if using any bonus, Overtime
or other income outside of the normal wages.
 SSI can only be grossed up IF income is shown as NOT taxed on
tax returns. Percentage to gross up will range from 115% - 125%
based on income. Please reference tax charts
Income Documentation
Income alternative documentation is as follows:
Verbal
verification of employment, most recent 30-day
paystub and a copy of the last previous two years of W-2’s.
NOTE: A 4506 (Request for copy of tax form) is required on
all loan submissions
4506T transcripts will be used to check for Unreimbursed
expenses, additional income not disclosed, rental properties,
etc. It is highly recommended that the LO request a copy of
the tax returns at their initial appointment to eliminate
surprises!
Important Facts to Remember when
Calculating Ratios
Installment Debt
If installment debt has ten months of payments or less by closing do not include
the payment in borrower’s debt ratio. Installment debt exclusion is at the
discretion of the underwriter and may not necessarily be excluded.
Profit Sharing Loans
FHA does not consider profit sharing loans or 401K loans when calculating
borrower’s debt ratio.
Co-signed Obligations
Not considered as long as documentation shows the borrower/co-signer has not
made payments on the loan over the past twelve months, along with evidence
that the other party is making payments.
Projected Obligations
If a debt payment, such as a student loan, is scheduled to begin within twelve
months of the mortgage loan closing, it must be included into the monthly
obligations in underwriting the loan.
Credit
Credit review depends on the type of
underwriting performed.
 FICO scores – FSB requires 620 minimum
 The most recent 12-months and the past 24-months are
considered to determine credit worthiness of the borrower
Credit History
Past Credit Performance
Serves as the most useful guide to determine how the borrower will
govern future credit obligations
Late or Slow Payments
The general pattern of credit behavior must be examined rather than isolated
occurrences of unsatisfactory or slow payments. Underwriting emphasizes on
the borrower’s most recent 12-month payment history
Credit History Not Established
Those borrowers who choose not to use credit, neither the lack of credit nor the
lifestyle of the borrower may be used for loan rejection. However, three or four
references must be provided such as rent verification, utility payments, cell
phone, pager etc.
Credit History Cont.
Bankruptcy
Chapter 7: The borrower must have completed two years since the
bankruptcy was discharged and reestablish excellent credit history. Less than
two years may be acceptable if the borrower can show it was caused by
extenuating circumstances beyond their control, such as death of a principal
wage earner, loss of employment due to closing of employer or serious longterm illness. Divorce is NOT an extenuating circumstance.
Chapter 13: The borrower must have completed 1 year repayment, paid on
time and must have court approval of the proposed new mortgage transaction.
Foreclosure
A borrower whose previous residence was foreclosed on or who has given a
deed-in-lieu of foreclosure within the past three years is not eligible for a loan.
However, if the foreclosure was the result of extenuating circumstances as
describes previously, an exception may be made.
Credit Counseling
A borrower who is participating in a Credit Counseling program will be treated
in the same manner as a Chapter 13 Bankruptcy. A 12-month history from the
Credit Counseling Agency will be required.
Non Occupant Co-Borrowers
(aka Co-signors)
 Allowed but must be family member(s)
 Borrower is not required to be employed as ratios are calculated
off all income and liabilities
 One unit properties only
 Non Occupying co borrowers can be applicable for 2 – 4 unit
properties but a min 25% down payment is required
 Both occupying and non occupying borrowers:
 1) take title to the property at settlement
 2) are obligated on the mortgage note and
 3) must sign all security instruments
Transactions that Affect Maximum
Mortgage
 Identity-of-Interest; defined as a sales transaction between
parties with family relationships or business relationships
 Restricted to 85% LTV ratio, unless family member purchasing
another family members home as a principal residence; or
 Family member has been a tenant in the subject property for at
least six months immediately predating the sales contract.
 Three-to-Four Unit Properties
 Property must be self sufficient (i.e., net rental income covers
PITI, calculation: All units x 75% = Net Rental.)
 Rent may only be considered as gross income, it may not be
used to offset the monthly mortgage payment.
 Borrower must have reserves to equal three months of PITI after
closing.
Max Mortgage Worksheets
 Max mortgage worksheets are available for all refinance
situations
 The worksheets assist in calculating the correct loan amount that
will be allowed
 Not required for underwriting, as the UW will complete their own,
but helpful for getting the loan amount right for your borrower.
 Refinance Worksheet – Cash out
 Refinance Worksheet – Rate – Term
 Refinance worksheet – streamline without appraisal
 Refinance worksheet – streamline with appraisal
Secondary Financing
 The FHA insured first mortgage when combined with any
second mortgage, may not result in cash back to the
borrower.
 The sum of all liens cannot exceed 100% of the cost to
acquire the property (Purchase transactions only)*See
Product.
 The FHA insured first mortgage cannot exceed the
maximum mortgage limit set by the area.
 Refinances: Subordinate liens whenever they are taken may
remain outstanding provided the FHA first lien mortgage
meets eligibility criteria (LTV may exceed the max mortgage
allowed for the refinance transaction type).
Compensating Factors
Qualifying ratios may exceed 31/43 if any of the following
compensating factors exist: (with new QM rules, the compensating
factors must show to get the AUS approval for higher DTI)
 Large downpayment is made, at least 10%
 Borrower has demonstrated conservative attitude toward use of credit
 Ability to accumulate savings
 Previous credit history shows borrower has ability to devote a great portion of
income to housing expense
 Borrower receives compensating or income not reflected in the effective income
 A small increase in borrower’s housing expense, 10% or less
 Borrower has substantial cash reserves after closing, at least three-months PITI
 Borrower has substantial non-taxable income
 Borrower has potential for increased earnings
 New construction, energy efficient home
FHA Property
and Appraisal Issues
Underwriting guidelines include property considerations for both existing and
new construction properties
FHA has specific minimum property standards.
 “As-is” property may NOT qualify
 Property standards require for the property to be SAFE and SOUND
For existing properties FHA appraiser must operate ALL
 Plumbing fixtures
 Furnace
 Air Conditioning, if applicable
Condominiums require FHA approval which include review of plans and specs.,
etc…
 FL condos are not allowed
 Condo approval packet available for the Homeowner Association to
complete
 FSB will assist with the submission of the packet, but will not gather all
the needed documents.
Loan submission on new construction must include:
 Builder’s Certificate (92541) – only if NO 10-year Warranty
 Occupancy Certificate
 Subterranean Termite Report
 Building Permit
 Builder’s Warranty of Completion (92544)
Repair Requirements
As of January 1, 2006, FHA no longer requires repairs for these types of minor
cosmetic deficiencies to bring a property into compliance with FHA Minimum
Property Requirements…
* Missing handrails
* Cracked or damaged exit doors that are otherwise operable
* Cracked window glass
* Defective paint surfaces in homes constructed post 1978
* Minor plumbing leaks (such as leaky faucets)
* Defective floor finish or covering (worn through the finish, badly soiled
carpeting)
* Evidence of previous (non-active) Wood Destroying Insect/Organism damage
where there is no evidenceof unrepaired structural damage
* Rotten or worn out counter tops
* Damaged plaster, sheetrock or other wall and ceiling materials in homes
constructed post- 1978
* Poor workmanship
* Trip hazards (cracked or partially heaving sidewalks, poorly installed
carpeting)
* Crawl space with debris and trash
* Lack of an all weather driveway surface
Inspection Requirements
FHA no longer mandates automatic inspections for the following items and/or
conditions in existing properties…
* Wood Destroying Insects/Organisms
* Well
* Septic
* Flat and/or unobservable roof
However, if the appraisal shows or specifically requests a need for further
inspection of these items, we will require them as a condition.
Examples of conditions that will continue to require automatic inspections include,
but are not limited to…
* Standing water against the foundation and/or excessively damp
basements
* Hazardous material on the site or within the improvements
* Faulty or defective mechanical systems (electrical, plumbing or heating)
* Evidence of possible structural failure (e.g. settlement or bulging
Mortgagee Letters
Are issued by HUD to address changes in FHA policy or updated
policy.
To view any Mortgagee letters visit:
http://www.hudclips.org/cgi/index.cgi
Streamline Refinance
What is a Streamline
Refinance?
STREAMLINE REFINANCES are designed to lower the monthly principal and
interest payments on a current FHA-insured mortgage and must involve no
cash back to the borrower except for minor adjustments at closing not to
exceed $250.
 The mortgage to be refinanced must already be FHA insured
 The mortgage to be refinanced should be current (not delinquent)
 No cash may be taken out on mortgages refinanced using the
streamline refinance process
Underwriting Note: Streamline Refinances are
UNDERWRITTEN MANUALLY
Streamlines made easy…
Documentation to include in your file submission:
 VOM or mortgage only credit report with a verified 12-month history
 Current mortgage statement showing interest rate and payment amount
 Evidence of social security number
 Payoff showing only 30 days of interest
 New Case Number with MIP Refinance Authorization (order through FSB)
 All Sections of 1003 completed with the exception of IV, V, VI and a-k of VIII
 Important Notice to Homebuyer (92900B)
 FHA Transmittal (92900)
 All other State, Federal and FHA specific loan disclosures
If the new loan amount exceeds the ORIGINAL LOAN balance on the existing
mortgage:
 A current FHA appraisal is required usually
Underwriting Note: Interest will be charged through the end of the
month in which the refinance closing occurs
regardless of actual closing date.
Streamline Refinance
of an FHA Mortgage
Net Tangible Benefit.
There must be a net tangible benefit to the borrower for the streamline refi
to be approved. A net tangible benefit is defined as:
1) A 5% reduction to the principal and interest (P&I) of the mortgage
payment plus the annual mortgage insurance premium (MIP) or
2) Refinancing from an ARM to a FRM
SUBORDINATE FINANCING: It may remain in place without regard to
the total indebtedness against the property. The borrower is not required
to satisfy any outstanding subordinate liens as long as they clearly will be
subordinated to the new FHA-insured refinance mortgage.
Calculating an FHA Loan
Calculating an FHA Loan
 Minimum down-payment = 3.5% X Sales Price
 Borrower must be able to document down payment funds either
through funds in bank or gift.

Sales Price x 3.5% = min down payment to be verified

If 1003 states cash needed to close above the 3.5%, then enough
funds must be verified to meet this number

AUS will generate an Approve/Refer for not enough funds showing on
1003
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Variety of ways to obtain down payment
True or False?
1. With the exception of the 15 Year Fixed, FHA
requires mortgage insurance for life of the loan.
TRUE
2. The monthly MIP will automatically drop off when the
loan to value falls below 80%.
FALSE
3. Part of the UFMIP is refunded if the loan were to be
paid off within the first 3 years if refinanced with a new
FHA loan.
4. FHA does recognize and allows various down payment
assistance programs.
TRUE
5. Wedding gifts of money are allowed to be used as a
down payment?
TRUE
6. A borrower who does not qualify on his/her own can
obtain any non-occupying co-borrower to qualify.
FALSE
TRUE
True or False?
7. FICO scores are determining factor when
qualifying a borrower under an FHA program.
FALSE
8. On an FHA transaction, the entire down payment can be TRUE
gifted.
9. FHA qualifying guidelines require a minimum of two
months cash reserves after closing.
FALSE
10. A non-resident alien can qualify for an FHA loan with
only a valid social security card and valid working visa.
TRUE
11. FHA offers a 15 and 30-Year fixed and 1/1 Adjustable
Rate ARM only.
FALSE
12. The Seller can contribute up to 6% in financing
contributions.
TRUE
13. The maximum FHA loan amount is the same form
county to county.
FALSE
True or False?
14. The Lender is not restricted as to what fees or
closing costs can be charged to the borrower that
are customary and reasonable.
15. Basic FHA qualifying ratios are 31/43.
TRUE
TRUE
16. FHA does not consider profit sharing or 401K loans in
the monthly payment when calculating the borrower’s
debt ratios.
TRUE
17. Relative to a borrower’s credit history, FHA
concentrates on the past 12 months and considers the
past 24 months.
TRUE
18. Chapter 7 Bankruptcy will not disqualify the borrower if
at least two years have passed since the bankruptcy
was discharged and the borrower has reestablished
credit.
TRUE
19. The FHA appraiser is required to operate all plumbing
fixtures, furnace and air conditioning.
TRUE
True or False?
20. The FHA appraiser must complete a disclosure
referred to as the “VC” sheet which indicates any
and all repairs required to the property to meet
FHA property standards.
FALSE
21. FHA project approval is required for all condominium
properties regardless of age of the property.
TRUE
22. An appraisal is required on all Streamline Refinance
transactions.
FALSE
Questions…
1. The Loan Origination fee is a percentage of:
Base Loan
Total Loan
2. The discount points are a percentage of:
Base Loan
Total Loan
Questions…
3. The minimum cash investment required by the
borrower is what percent of the sales price?
3.5%
4. An FHA loan program is regulated by what government agency?
Fannie Mae
Freddie Mac
Ginnie Mae
Housing and Urban Development
5. Who is a good candidate for an FHA loan?
First time homebuyer, low-income family, little or no down
payment borrower, or a less than acceptable conventional
credit quality borrower.
6. What two FHA disclosures are required to be signed at the time
of purchase contract?
“For Your Protection: Get a Home Inspection” and
“ Purchase Addendum to the Sales Contract”
Manufactured Homes
DO WE NEED TO
DISCUSS?
(Slides 60-62)
Manufactured Homes
 General Eligibility for Existing Properties
 Property built before 1976 is not eligible
 Singlewide homes are not eligible
 Floor area no less than 600 square feet for a double wide.
 Must be constructed in conformance with the Federal Manufactured
Home Construction and Safety Standards, evidenced by an affixed
certification label. If produced after June 15,1991 (HUD Guidelines is
1976) home will bear the seal. Homes without a seal will not be
eligible.
 Dwelling must be classified and taxed as real estate.
 MUST NOT have been installed or occupied previously at any other
side or location.
Manufactured Homes
 General Eligibility for Proposed Construction Properties
 Must have a site-built permanent foundation.
 Must be permanently attached to foundation by anchoring devices.
 Must have permanent utilities, installed and protected from freezing.
 Towing hitch or running gear MUST be removed (tongues, axels, brakes,
wheels, and lights.) The chassis must stay in place.
 Must be a properly enclosed crawl space with a continuous permanent
foundation-type construction.
 MUST NOT have been installed or occupied previously at any other site or
location.
 Must be a Builder’s Certification, Form HUD-92541 for all site work, including the
permanent foundation.
Manufactured Homes
 ALL MANUFACTURED HOMES MUST BE HUD APPROVED
 Prior to the manufactured unit being delivered to the site and/or placed on
the foundation, a Manufacturer’s Certificate must be provided to the lender
showing the following information:
 FHA Case Number and address on property;
 The label (metal plate) number of the unit as shown on the Federal Manufactured
Home construction and Safety Standard Data Plate on the exterior of each home.
 To qualify for the maximum loan-to-value, the dwelling must:
 Have a structural engineers report verifying the foundation and any additions to the
structure do not affect the structure. Room additions, garage, etc.
 Have an effective age that matches the mortgage term
 If the dwelling is < 1 year old, refer to NEW construction guidelines.
 Structural engineers report
 Builders certificate
 Agreement to execute builder’s warranty of completion of construction
 Floor plans
 Description of materials
 To qualify for the maximum loan-to-value, the dwelling must NOT have been
installed or occupied at any other side or location.
This training has been a
overview of the FHA program
 There are many other niches that can be used
 Kiddie Condo
 DPA/Grants
 203K & 203Ks (watch for this Spring 2015)
 203h – Disaster Victim Loan
 1X Close CTP (Construction to perm)(watch for Spring 2015?)
If you have a scenario and are just not sure how it will fit,
email [email protected]. We will help you
structure the loan and know what to ask for from your
borrower.

On behalf of
we would like to
for attending our training seminar!