Presents
FHA Introduction
Jan 2010
FHA Features
• 3.5% minimum down payment on purchase (96.5% LTV)
• Refinance rate and term max LTV is 97.75%
• Up to 85% LTV for cash out refinance. No $$ max for cash out.
• ALL down payment/cost can be gifted by family
• Same note rate regardless of LTV (adds for fico and property type)
• Can refinance from conventional to FHA
• FHA High Balance: max loan amount $729,750 subject to county limits.
• Mortgage Insurance percentages do not increase for jumbo loans.
• FHA to FHA refi (Streamline): no appraisal nor income qualification
except on HPM (High Priced Mortgages)
• 6% seller credit includes reoccurring and non-reoccurring closing costs
• More lenient on foreclosure (3 year) or BK history (2 yr on CH 7, Chapter
13 BK must be 1 yr from filing, can remain open).
• No need to worry about qualifying for mortgage insurance separately
• Available for BOTH first time homebuyers and CURRENT homeowners
• No maximum income limits for FHA’s low 3.5% downpayment
• Low credit score pricing adjustments more attractive than conventional
How to Spot an FHA File
• Borrower has limited funds for a down payment
• Loan has a high LTV (over 90% in a declining
market)
• Loan requires MI but borrower’s fico is too low for
MI
• When DTI is over 45% (when MI is required)
• Source of down payment is a gift or community 2nd
and borrower has less than 5% of own funds to
bring to close
• Non-occupying co-borrower qualifications are less
restrictive than conventional
• Student loan payments push DTI too high
• 85% cash out
FHA may not be right when…
• Your loan is a second home or non-owner occupied
• You have a RUSH file. FHA takes a little bit longer to
close (30 days with us)
• Your condo is not FHA approved
• The LTV is below 80%
• The buyer already has an FHA loan (he can only have
one at a time!)
• There is a non-borrowing spouse (FHA requires debts
be included in DTI in community property states)
• The home was last sold within 91 days
FHA Advantages vs. Conventional
• Lower minimum downpayment of 3.5%.
• No appraisal required for FHA to FHA
streamline refinance
• Manual underwriting allowed for DU Scorecard
refer loans
• FHA’s monthly mortgage insurance premium
for 90% LTV and above is less than private MI
for conventional loans
FHA Advantage vs. Conventional
• High DTI compared to conventional loan. Fannie Mae
now requires max DTI of 45% (back end). FHA can
insure up to 45%(front)/ 55%(back) depending on DU
scorecard.
• Max DTI doesn’t change even on High Balance loans
(may go up to 45%/55% depending on DU).
• Family member can gift everything, including 3.5%
downpayment requirement and ALL closing cost.
FHA Advantage vs. Conventional
• Seller can credit up to 6% of ALL closing cost
(recurring and non-recurring). That means
seller can pay hazard insurance and tax
impounds.
• Non-occupying co-borrower transactions do
not have separate LTV/DTI restrictions on the
occupying borrowers.
Comparison FHA MIP vs. Conventional MI
In a declining market, FHA may approve loans that conventional mortgage insurance will not:
– When FICO is below 700
– When LTV is higher than 90%
– When C/O LTV is over 80%
Note: The monthly payment on FHA can be very competitive with conventional loans. Some people
believe that FHA payments are much more expensive but this is not true. Compare the full
monthly payment including mortgage insurance for the following example:
Loan amount $200,000, LTV 90%, FICO 720, Rate 5.5, 30 yr fixed, conventional MI from Radian
FHA insured: Conventional with Radian MI:
L/A: 200k L/A: 200k
L/A with UFMIP financed: 203,500 Interest: 5.5% term 360
Interest: 5.5% term 360 Principal&Interest = 1,135.58
Principal&Interest = 1,155.45 MI at .62% = 103.33
MI at .5% = 83.33 Total P&I + MI = 1,238.91
Total P&I + MI = 1,238.78
Credit Guidelines for
FHA
Social Security Number
Requirements
• Borrower’s social security number will be
verified- no T.I.N’s allowed.
• Provide drivers license and social security card
at submission
• Verify social security number on paystubs /
W-2’s / 1040’s match.
• Credit obtained must be under SSN that the
Social Security Administration has on record for
borrower
Employment History
– No time requirement current job
– 2 year inclusive history required on 1003
– Less is acceptable if borrower can document
recently graduated student
– Acceptable explanations are required if
sporadic job history and changes in
profession - must make sense - decision based
on verifying capacity to repay
– Probability of continued employment is very
important: Income Stability over job stability
– Recently returned to work - requires current
job for 6 mos + and document min 2 year work
history prior to the gap of employment
DOWNPAYMENT SOURCES
▪ Savings ▪ Sale of personal
property (must document
▪ Secured funds value and sale)
▪ Gifts - from ▪ Sale proceeds
relative or
significant ▪ 401K (use 60% of value)-
other must provide evidence the
▪ Cash - if funds can be accessed.
borrower meets ▪ Investments
profile ▪ Community Seconds
Credit History
• Looking for payment pattern to
determine payment habits
• Focus on last 12 months
• Collection accounts, charge-offs and
liens require satisfactory
explanation and documentation
Borrower’s Credit
• Credit explanations must make sense and be supported
with documentation. Letters of explanation DO matter!
• Housing obligation and payment shock have significant
importance in evaluating overall credit profile
• When required, verification of current rent must be
obtained directly from an apartment complex or rental
management agency. For any private landlord, 12
months cancelled checks are required
• Delinquency after a bankruptcy is severely penalized –
case by case approvals only.
Bankruptcies
– Chapter 7
Must document the BK was caused by extenuating
circumstances beyond the borrowers control and must
document financial responsibility for exception if underwriter
recommends approval
• Must be discharged for at least 2 years
• Must show at least 3 trades with at least a 12 month
reporting history for reestablished credit
– Chapter 13
• One year payout with perfect performance
• Court approval of loan required
• BK payment will be included in debt ratio calculations
For both - Provide full BK docs and discharge papers. On
Chapter 13, need BK payment history from the court
Other Credit Items
• Foreclosure - must to be more than 3
years from end of foreclosure to date
of application
• Delinquent Federal Debts
– Delinquent student loans and unpaid
federal tax liens will be verified through
FHA Connection
– Borrower not eligible unless account is
current, paid or otherwise satisfied prior
to close of escrow
Underwriting
• Minimum FICO 620 (under $417K)
• Minimum FICO 660 (above $417k)
• Minimum FICO 640 for Streamline Refinance
• Loan can be either manually underwritten or
underwritten through DU TOTAL Scorecard
• Scorecard has different approval parameters than
conventional DU
• Brokers should not run Scorecard themselves. Wait for
our PUF DE Underwriter to do it.
• FHA underwriting guidelines are listed in HUD
publication 4155. These are the manual underwriting
guidelines. Some things allowed in the 4155 are not
allowed through Scorecard
DEBT TO INCOME RATIO
Manual Underwriting
• 31% Front end ratio (housing debt)
• 43% Back end ratio (total debt)
-- Determines if borrower(s) have the ability to repay the mortgage
-- Must have DU findings showing Approved/Eligible to exceed
31%/43%
.
DU Scorecard Automated Underwriting
May approve DTI’s as high as 45%/56%
Please note that the front end ratio is extremely important. Scorecard
will not approve a front end ratio significantly over 45%. Calculate
both ratios when you are structuring your loans.
Which Liabilities Count
In the Ratios?
• Recurring obligations
• Revolving Credit
• Installment Debt - include student loans unless deferred > 12 mos
• Check the paystubs! Check for Credit Union payments, other
payments not reflected on credit. Note: 401K payments are not
counted as debt.
• Child Support/Alimony payments
• “Buy and Bail” policy in effect , similar to Agency. To use rental
income on departure property requires minimum 25% equity
evidenced by a FNMA appraisal (2055 for SFR, Full appraisal 1073 for
condos)
• In community property states, any debt of the non-borrowing
spouse must be included in debt ratio!!
Identity of Interest Transactions-
Limits to Maximum Financing
• Identity of Interest is defined by FHA as a transaction between: Family
members, business partners or other business affiliates. Non-arms length
transactions.
• Usually restricted to 85% LTV HOWEVER- maximum financing is
permissible under any of the following circumstances:
-Family member purchasing another family member’s principal
residence only
- Current tenant purchasing property they rented at least (6) months
prior to the sales contract. A lease or other written evidence must be
submitted verifying occupancy. (usually cancelled checks)
- Employee of builder buying one of the builder’s new or model homes
as principal residence
- Sales by corporations that transfer employees out of an area,
purchase the transferred employee’s home, and then resell it to
another employee
- NOTE: Gift equity transaction ok to 96.5%- only acceptable from
family member AND when seller is selling their own primary residence
Other Transactions Affecting
Maximum Financing
• Non –Occupying Co-Borrowers are restricted to a maximum LTV of 75% except under the following
circumstances:
- Borrowers are related by blood, marriage, or law, or
- Unrelated individuals that can document evidence of a family-type,
longstanding and substantial relationship not arising out of the loan transaction, and
- Property is a 1 unit dwelling
• NOTE: If parent is selling to a child, the parent CANNOT be the co-borrower with the child on the
new mortgage, unless the LTV is 75%
• 3 and 4 Unit Properties
- Maximum mortgage is limited so that the ratio of the monthly mortgage payment (PITI)
divided by the monthly net rental income does not exceed 100%. Property must be
completely self-sufficient (include the market rents for owner occupied unit)
- Monthly net rental is the rent for all units less the FHA allowance for vacancies-25% or
percentage allowed by FHA local office (15% in CA)
- NOTE: 3 months reserves from borr own funds are required (not gift funds)
• LTV/TLTV may not exceed 85% on a cash-out refinance
Citizenship and Immigration
Status
• U.S. Citizenship not required
• Lawful Permanent Resident Aliens are acceptable - document
with copy of entire valid Resident Alien Card
• Document evidence of permanent residency issued by Bureau
of Citizenship and Immigration Services (BCIS)- part of Dept of
Homeland Security
• Non-permanent Resident Aliens acceptable with the following
stipulations: property being purchased is the borrower’s
principal residence. Will require:
* Valid Social Security number
* Borrower must have Employment Authorization Document
issued by the BCIS
* Temporary residency status that expires within one
year AND there is a history of residency status
renewals- assume the continuation will be granted
Collateral
Guidelines for
FHA
Eligible Properties
▪ 1-4 Units
▪ Townhouses or Row Homes
▪ FHA approved Condos
▪ PUDs
Possible Property Repairs
• Anything that appears to be a Health, Safety, or
Structural Issue
• Correction of building code violations
• Termite Certification- only if required by
municipality and/or appraiser calls for it
• Roof Repair or Replace- minimum 2 year life
• Well water test-if required by municipality
and/or appraiser calls for it
• Septic Certification -if required by municipality
and/or appraiser calls for it
• Wet Basement/toxic mold
Required Disclosures and
Forms
• FHA Addendum & Real Estate Cert -
(Amendatory Clause) signed at time of purchase
contract by all borrower(s), seller(s), realtor(s).
• 2900A- FHA Addendum to Loan Application-
Borrower(s) to sign page 2 at application- then
sign page 4 at closing
• Informed Consumer Choice - to be signed within
3 days of application
• For Your Protection Get a Home Inspection
(form 92564
• Standard State and Federal required disclosures
- signed & dated within compliance
FHA Refinance Options
• Streamline Refinance without an Appraisal -
FHA to FHA refinance - No cash out
• Streamline Refinance with an Appraisal
• No Cash Out Refinance - max cash to
borrower $500
• Cash Out Refinance - up to 85% LTV
STREAMLINE REFINANCE
w/out appraisal
• FHA to FHA refinance
•Take Advantage of Lower Interest Rates
• Income and Assets Not Listed on 1003. Job is listed without
income amounts. Verbal VOE req’d.
• Payoff needs to reflect loan is current; a 12mos mortgage history
is not required
• No Appraisal required
•Must show a Net Tangible Benefit to the borrower:
Reduction in mortgage payment by 5%, or
Fixed to ARM: reduction in rate by at least 2%, or
ARM to Fixed: Increase in rate by no more than 2%
• Lender assist is acceptable to pay closing costs
ABSOLUTELY NO CASH OUT AT CLOSING
STREAMLINE REFINANCE
w/out appraisal
Continued
• Same borrowers must be on new FHA
loan as were on previous FHA loan
• Must have made at least 6 pymts on
previous loan
• New loan amount equals the outstanding
principal balance minus the refund of
UFMIP (Up front mtg insurance premium)
plus the new UFMIP on the refinance.
STREAMLINE REFINANCE
w/appraisal
• Used when a Streamline without an Appraisal does not allow a high
enough loan amount to close AND the borrower believes the property value
has appreciated since the last FHA loan closed.
•Includes full payoff, closing costs, pre-paids (no second mortgages) up to
the maximum based on the appraisal
• Income and Assets same as Streamline w/o Appraisal
• 12 month satisfactory mortgage history required
Must have paid 6 payments to the existing mtg
Must have owned the property at least 12 mos to use the
appraised value
• Only Lead Based Paint Repairs Required and Termite Cert
•Max loan amount 97.75% of appraised value plus new UFMIP premium
Again, absolutely no cash out at closing
NO CASH OUT REFINANCE
Conventional to FHA refinance
Appraisal Required
Borrower must credit qualify and occupy
the property as a primary residence
For lien consolidation, the liens must be
one year old or used for improvements
May buy out ex-spouse’s Equity
Loan amount to 97.75% LTV’s
Maximum $500 cash out at closing
CASH OUT REFINANCE
• Borrow up to 85%of appraised value
• Home must be owned for at least one year
• Owner Occupied 1-2 units Only
• All borrowers must be on title 12 mos or inherited. Trust NOT
allowed.
• 0 x 30 days late - 12 mos mortgage history
• Full Document Refinance
• Appraisal required
• Pull cash out of free and clear properties
• Debt Consolidation ok
• Repairs required if noted on appraisal or safety issue
FHA JUMBO - 1st Time
Homebuyers + Other Info
• FHA Jumbo is any loan over $417,000
• Link to check county limits:
https://entp.hud.gov/idapp/html/hicostlook.cfm
For “Limit Type” choose FHA Forward
• 1ST Time Homebuyers can be acceptable with
overlays from investors- generally 660 + credit score
required for the FHA Jumbo purchase transaction .
Min 3 tradelines seasoned > 24 mos required
• 12 mos rental verification- 0 x 30 required
• With DU Scorecard Approval max DTI 45% .
• Manual Underwrite max DTI 31/43- no exceptions
Minimum Submission
Requirements
• POINT 3.2 FILE
• 92900A – FHA Addendum to 1003 executed by borrower on page 2
• GFE/TIL
• Social Security card and drivers license for all borrowers
• Borrower Authorization
• LOANS IN COMMUNITY PROPERTY STATES: non-borrowing spouse: provide spouse’s
individual credit report .
• CASE # evidence from FHA Connect - to include CAIVRS checked . Pacific Union Financial, LLC
as originator
• Purchase Contract if applicable and Amendatory Clause signed same date
• Credit report
• 1 Mos Complete Bank Statements to support assets needed to close
• If gift used to close, provide gift letter and proof of donor ability
• 1 paystub including 30 days year to date income for each borrower (30 days consecutive)
• Income:
Salaried: Min 1 yr W-2
Self-Employed, >25% commission or rental income: 2 yrs complete 1040’s
• Mortgage statements for all properties owned. If impounds not shown, need tax certs and hazard
insurance declaration pages
• Appraisal and/or Title if a purchase.
• Signed 4506T at time of application
• Signed disclosures
Mortgage Insurance
• All FHA loans have mortgage insurance
• FHA loan approval also approves the
insurance. No separate approval required.
• Insurance is paid both up front (UFMIP)
and monthly (MIP).
• Insurance is in effect until LTV reaches
78%
Up Front Mortgage Insurance Premium
(UFMIP)
▪ Paid on every transaction - can be financed
• PURCHASES - 1.75%
• Credit-Qualifying Refis - 1.75%
• Streamline Refis - 1.5%
Mortgage Insurance Premium (MIP)
▪ Annual Premiums
▪ Paid on every transaction and impounded
monthly
• Purchases and Refis Terms > 15 Yrs
LTV OR = 95% = 0.55%
•Purchases and Refis Terms 90% = 0.25%
Maximum Loan Amount
Example
FHA allows the Upfront Mortgage Insurance Premium
(UFMIP) to be financed, so each FHA loan has two
loan amounts – the base loan amount and the high
loan amount (including UFMIP)
$360,000.00 Purchase Price/Appraised Value
X 96.500% (Max LTV for loan amt > $125,000)
$347,400 = Base Loan Amount
$ 12,600 = Minimum 3.5% Required Investment
Seller paid closing costs can never exceed actual charged
amount.
Calculating Mortgage
Insurance Premium (Upfront)
• Purchase Price: $360,000
• Base Loan Amount : $347,400
Purch price x 96.5% LTV
Multiply by Upfront MIP factor x 1.75%
Upfront MIP amount $ 6079.50
. Upfront MIP amount (UFMIP) $ 6079.50
Add Base Loan Amount $347,400
Total Loan or High Loan Amount $353,479.50
$6,079.50 is added to $347,400 and
financed. $.00 is paid in cash at
closing for UFMIP.
$353,479.50 = TOTAL LOAN OR HIGH Loan Amount
(PITI based on this figure.)
NOTE: Origination Fee and Discount Points based on
Low Loan Amount
Financed UFMIP Sample
Purchase Price: $200,000
Max LTV: 96.5%
Max Base L/A: $193,000
Down payment: 3.5% = $7,000
UFMIP: 1.75% x 193k = $3,377.50
Base L/A + Financed UFMIP $196,377
LTV w/ Financed UFMIP: 98.19%
Rate: 5.5%
P&I at 193k: $1,095.83
P&I at 196.377k: $1,115.01
Difference: $19.18/month
CLOSING COSTS
Borrower is required to put 3.5% into transaction
as of January 1, 2009
FHA Allowable Closing Costs - Generally closing
costs are to be customary and “reasonable” per FHA.
TAX SERVICE FEE is an unallowable FHA fee
Appraisal Fee, recording fees, Final Inspection Fee,
Attorney’s fees, Credit Report Fee, Survey, Title
Insurance fees, Notary Fees - always the exact fee per
vendor. Copies of Invoices required for the file.
▪ Loan Discount Fee – cost to buy down rate- not a
Broker fee.
** Seller’s contribution allowed up to 6% not to
exceed actual costs
Pacific Union Financial, LLC
Lender Fees
• Credit Report (evidenced by Invoice): $
• Processing (retail processed here) $495.00
• Underwriting $995.00
• Doc Drawing $245.00
• Discount Points are negotiated with borrower-
Section 32 High Cost Loans are never allowable
Online Requirements
FHA processing requires online registration
of the loan and various checks through
FHA Connection. Loan officers and
processors are responsible for these
steps.
FHA Case Number Assignment
Each FHA loan has an individual case number assigned. It is created
through the FHA Connection website.
The case number should be assigned as soon as you have a borrower
application and the property is determined.
A case number locks that borrower and property into Pacific Union.
Once set, no other lender can work the loan unless we assign the
case number to them.
You will need to submit a printout of the case number with your loan
submission.
An FHA appraiser is also chosen and logged at this time as part of the
initial case number assignment.
When the case number is pulled, a CAIVRS is also run. CAIVRS
checks whether the borrower is in default on any government debts.
Limited Denial of Participation
(LDP)
• LDP lists people who are not allowed to borrow or be part of
originating an FHA loan. This list must be checked prior to doc for all
parties connected with the loan. The processor usually runs this
check.
• Inclusion on the list is a result of action taken by a HUD field office or
the Deputy Assistant Secretary for Single Family or Multi-Family
Housing.
• A party is usually excluded for federal delinquent debt.
• The name of each party to the transaction is input separately into the
LDP search engine. Includes all borrowers, realtors, Builder, seller,
Mortgage Broker/ Originator, Title Co, Escrow Officer, Title Officer,
Broker Processor, Appraiser, Appraisal Co. If the party’s name is on
the list, that party has the burden of proving she/he/they is/are not
barred from participating in HUD Programs.
• The list is in alphabetical order. Print out and place appropriate LDP
pages in the file. U/W reviews.
• LDP may be accessed at : www.hud.gov/Ecpcis/main/EDPCOS_List
and thru FHA Connect
General Services Administration
(GSA)
• GSA’s Excluded Parties Listing System (EPLS)
identifies people and companies that are excluded
by the U.S. Government from receiving Federal
contracts and subcontracts as well as from certain
types of Federal financial and non financial
assistance and benefits.
• The name of each party in your loan transaction
must be input separately into the GSA search
engine. Parties include all borrowers, realtors,
escrow officer, Title Company, Broker/originator,
builder, seller. If any party’s name is on the list, that
party has the burden of proving he or she is not
barred from being involved in FHA transactions.
• GSA list may be accessed from FHA Connection and
the GSA site at www.epls.gov
Online Resources
■ HUD: http://www.hud.gov/
■ HUD Clips: www.hudclips.gov
■ Limited Denial Participation Lists:
www.hud.gov/Ecpcis/main/ECPCIS_List
■ GSA (General Services Administration
Lists: www.epls.gov
■ HUD Lender page:
www.hud.gov/groups/lenders.cfm
■ FHA Connection:
https://entp.hud.gov/clas/index.cfm