| FHA Loan Programs |
TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION
1-1 WHAT FHA INSURES ........................................................................................... 1-1
SECTION 1: OCCUPANCY STATUS
1-2 PRINCIPAL RESIDENCES .................................................................................... 1-1
1-3 SECONDARY RESIDENCES................................................................................. 1-1
1-4 INVESTMENT PROPERTIES................................................................................ 1-1
1-5 NONPROFIT ORGANIZATIONS AND GOVERNMENT AGENCIES ............... 1-1
SECTION 2: MAXIMUM MORTGAGE AMOUNTS
1-6 MAXIMUM MORTGAGE AMOUNT ................................................................... 1-1
1-7 MAXIMUM MORTGAGES FOR PURCHASE TRANSACTIONS...................... 1-1
1-8 TRANSACTIONS THAT AFFECT MAXIMUM MORTGAGE CALCULATIONS 1-1
SECTION 3: SETTLEMENT REQUIREMENTS
1-9 SETTLEMENT REQUIREMENTS......................................................................... 1-1
SECTION 4: REFINANCE TRANSACTIONS
1-10 REFINANCING....................................................................................................... 1-1
1-11 CALCULATING THE MORTGAGE AMOUNT ON REFINANCES................... 1-1
1-12 STREAMLINE REFINANCES ............................................................................... 1-1
SECTION 5: SECONDARY FINANCING
1-13 SECONDARY FINANCING................................................................................... 1-1
CHAPTER 2 MORTGAGE CREDIT ANALYSIS
2-1 OVERVIEW............................................................................................................. 2-1
2-2 MORTGAGE ELIGIBILITY (BORROWERS)....................................................... 2-1
2-3 ANALYZING THE BORROWER’S CREDIT ....................................................... 2-1
2-4 CREDIT REPORT REQUIREMENTS.................................................................... 2-1
2-5 CREDIT ELIGIBILITY REQUIREMENTS ........................................................... 2-1
SECTION 2: EFFECTIVE INCOME
2-6 STABILITY OF INCOME....................................................................................... 2-1
2-7 SALARIES, WAGES, AND OTHER FORMS OF INCOME................................. 2-1
2-8 EMPLOYMENT BY FAMILY-OWNED BUSINESS............................................ 2-1
2-9 SELF-EMPLOYED BORROWERS........................................................................ 2-1
SECTION 3: BORROWER’S CASH INVESTMENT IN THE PROPERTY
2-10 FUNDS TO CLOSE................................................................................................. 2-1
SECTION 4: TYPES OF LIABILITIES
2-11 LIABILITIES ........................................................................................................... 2-1
SECTION 5: BORROWER QUALIFYING
2-12 DEBT TO INCOME RATIOS ................................................................................. 2-1
2-13 COMPENSATING FACTORS................................................................................ 2-1
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October 2003 iii
SECTION 6: SPECIAL UNDERWRITING INSTRUCTIONS
2-14 TEMPORARY INTEREST RATE BUYDOWNS .................................................. 2-1
2-15 ADJUSTABLE RATE MORTGAGES.................................................................... 2-1
2-16 CONDOMINIUM UNITS: UTILITY EXPENSES ................................................. 2-1
2-17 CONSTRUCTION- PERMANENT MORTGAGE PROGRAM ............................ 2-1
2-18 MORTGAGE ASSISTANCE FOR DISASTER VICTIMS [Section 203(h)] ......... 2-1
2-19 ENERGY EFFICIENT HOMES (EEH) .................................................................. 2-1
2-20 ENERGY EFFICIENT MORTGAGE (EEM) PROGRAM..................................... 2-1
CHAPTER 3 DOCUMENTATION AND OTHER PROCESSING REQUIREMENTS
SECTION 1: UNDERWRITING DOCUMENTATION
3-1 APPLICATION PACKAGE.................................................................................... 3-1
3-2 DOCUMENTATION STANDARDS ...................................................................... 3-1
3-3 REAL ESTATE CERTIFICATION......................................................................... 3-1
3-4 AMENDATORY CLAUSE ..................................................................................... 3-1
SECTION 2: PROCESSING REQUIREMENTS
3-5 POWER OF ATTORNEY ....................................................................................... 3-1
3-6 LOAN APPLICATION DOCUMENT PROCESSING........................................... 3-1
3-7 SEVEN-UNIT DOCUMENTATION ..................................................................... 3-1
3-8 HOTEL AND TRANSIENT USE............................................................................ 3-1
3-9 SALES CONTRACT AND LOAN CLOSING ....................................................... 3-1
3-10 LENDER RESPONSIBILITY AT CLOSING......................................................... 3-1
SECTION 3: FAIR HOUSING AND OTHER FEDERAL REQUIREMENTS
3-11 FEDERAL STATUTES AND REGULATIONS..................................................... 3-1
3-12 FHA-PROCESSED HUD EMPLOYEE LOANS.................................................... 3-1
CHAPTER 4 ASSUMPTIONS
4-1 GENERAL ............................................................................................................... 4-1
4-2 RESTRICTIONS OF THE HUD REFORM ACT OF 1989 .................................... 4-1
4-3 RELEASE FROM LIABILITY................................................................................ 4-1
4-4 CREDIT-WORTHINESS REVIEW PROCESSING............................................... 4-1
4-5 LTV REDUCTION REQUIREMENTS................................................................... 4-1
APPENDICES
I. SINGLE FAMILY HOC JURISDICTIONS............................................................
II. CLOSING COSTS AVERAGES FOR STATES.....................................................
4155.1 REV-5
iv October 2003
FORMS RELEVANT TO HANDBOOK 4155.1
Form # Form Name OMB Approval
Number
HUD 92564-VC Valuation Condition-Notice to Lender 2502-0538
HUD 92564-HS Homebuyers Summary 2502-0538
HUD 92900-A Addendum to URLA 2502-0059
URLA (FNMA
1003 / FHLMC 65) Uniform Residential Loan Application N/A
HUD 92900-PUR Mortgage Credit Analysis Worksheet Purchase
Money Mortgage 2502-0059
HUD 92900-WS Mortgage Credit Analysis Worksheet 2502-0059
HUD-1 Settlement Statement 2502-0265
GFE Good Faith Estimate
HUD 92300 Mortgagee Assurance of Completion 2502-0189
URAR (FNMA
1004 / FHLMC 70) Uniform Residential Appraisal Report N/A
HUD 92800.5B Conditional Commitment-DE Statement of
Appraised Value 2502-0494
VA-CRV VA-Certificate of Reasonable Value 2900-0045
HUD 92210 Request for Credit Approval of Substitute
Mortgagor 2502-0036
HUD 92210.1 Approval of Purchaser and Release of Seller 2502-0036
HUD 92561 Borrower’s Contract with Respect to Hotel and
Transient Use of Property 2502-0059
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October 2003 1-1
CHAPTER 1
UNDERWRITING THE MORTGAGE
1-1 WHAT FHA INSURES. FHA insures mortgages on properties that consist of
detached or semi-detached dwellings, townhouses or row houses, and individual
units within FHA-approved condominium projects. Except as otherwise stated in
this Handbook, FHA's single-family programs are limited to owner-occupied
principal residences only. FHA will not insure mortgages on commercial
enterprises, boarding houses, hotels and motels, tourist houses, private clubs, bed
and breakfast establishments, and fraternity or sorority houses.
SECTION 1: OCCUPANCY STATUS
1-2 PRINCIPAL RESIDENCES. A principal residence is a property that will be
occupied by the borrower for the majority of the calendar year. At least one
borrower must occupy the property and sign the security instrument and the
mortgage note for the property to be considered owner-occupied. Our security
instruments require a borrower to establish bona fide occupancy in the home as
the borrower's principal residence within 60 days after signing the security
instrument with continued occupancy for at least one year.
To prevent circumvention of the restrictions on FHA-insured mortgages to
investors, we generally will not insure more than one mortgage for any borrower.
Any person individually or jointly owning a home covered by a mortgage insured
by FHA in which ownership is maintained may not purchase another principal
residence with FHA mortgage insurance except under the situations described
below. Properties previously acquired as investment properties are not subject to
these restrictions.
We will not insure a mortgage if we conclude that the transaction was designed to
use FHA mortgage insurance as a vehicle for obtaining investment properties,
even if the property to be encumbered will be the only one owned using FHA
mortgage insurance. We do not object to homebuyers using FHA mortgage
insurance more than once if compatible with the homebuyer’s needs and
resources as follows:
A. Relocations. If the borrower is relocating and re-establishing residency in
another area not within reasonable commuting distance from the current
principal residence, the borrower may obtain another mortgage using FHA
insured financing and is not required to sell the existing property covered
by a FHA-insured mortgage. The relocation need not be employer
mandated to qualify for this exception. Further, if the borrower returns to
an area where he or she owns a property with an FHA-insured mortgage, it
is not required that the borrower re-establish primary residency in that
property in order to be eligible for another FHA insured mortgage.
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1-2 October 2003
B. Increase in Family Size. The borrower may be permitted to obtain
another home with an FHA-insured mortgage if the number of legal
dependents increases to the point that the present house no longer meets
the family's needs. The borrower must provide satisfactory evidence of
the increase in dependents and the property’s failure to meet the family's
needs.
The borrower also must pay down the outstanding mortgage balance on
the present property to a 75 percent or lower loan-to-value (LTV) ratio. A
current residential appraisal must be used to determine LTV compliance.
Tax assessments, market analyses by real estate brokers, etc., are not
acceptable as proof of LTV compliance.
C. Vacating a Jointly Owned Property. If the borrower is vacating a
residence that will remain occupied by a co-borrower, the borrower is
permitted to obtain another FHA-insured mortgage. Acceptable situations
include instances of divorce, after which the vacating ex-spouse will
purchase a new home, or one of the co-borrowers will vacate the existing
property.
D. Non-Occupying Co-Borrower. A non-occupying co-borrower on
property being purchased with an FHA-insured mortgage as a principal
residence by other family members may have a joint interest in that
property as well as in a principal residence of their own with a FHAinsured
mortgage. (See paragraph 1-8 B for additional information).
Under no circumstances may investors use the exceptions described above to
circumvent FHA’s ban on loans to private investors and acquire rental properties
through purportedly purchasing “principal residences.” Considerations in
determining the eligibility of a borrower for one of these exceptions are the length
of time the previous property was owned by the borrower and the circumstances
that compel the borrower to purchase another residence with an FHA-insured
mortgage. In all other cases, the purchasing borrower either must pay off the
FHA-insured mortgage on the previous residence or terminate ownership of that
property before acquiring another FHA-insured mortgage.
1-3 SECONDARY RESIDENCES. A secondary residence is a property the
borrower occupies in addition to his or her principal residence. Secondary
residences are only permitted when the appropriate Home Ownership Center
(HOC) agrees that an undue hardship exists, meaning that affordable rental
housing that meets the needs of the family is not available for lease in the area or
within reasonable commuting distance to work, and the maximum loan amount is
85 percent of the lesser of the appraised value or sales price. Direct Endorsement
(DE) lenders are not authorized to grant hardship exceptions. Any request for a
hardship exception must be submitted by the lender in writing to the appropriate
HOC. HOC jurisdictions are listed in Appendix I. A borrower may have only
4155.1 REV-5
October 2003 1-3
one secondary residence at any time. All the following conditions must be met
for secondary residences:
A. The secondary residence must not be a vacation home or otherwise used
primarily for recreational purposes; and
B. The borrower must obtain the secondary residence because of seasonal
employment, employment relocation, or other circumstances not related to
recreational use of the residence; and
C. There must be a demonstrated lack of affordable rental housing meeting
the needs of the borrower in the area or within a reasonable commuting
distance of the borrower's employment. Documentation to support this
must include:
1. A satisfactory explanation from the borrower of the need for a
secondary residence and the lack of available rental housing in the
area that meets the need.
2. Written evidence from local real estate professionals who verify a
lack of acceptable rental housing in the area.
1-4 INVESTMENT PROPERTIES. An investment property is a property that is
not occupied by the borrower as a principal residence or as a secondary residence.
With permission from the appropriate HOC, private investors, including nonprofit
organizations not meeting the criteria described in paragraph 1-5 A, may obtain
FHA-insured mortgages for the following reasons:
A. Purchasing HUD Real Estate Owned (REO) properties. Owner occupancy
is not required when the jurisdictional HOC sells the property and permits
the purchaser to obtain FHA-insured financing on the investment property.
B. Streamline refinancing without appraisals. See paragraph 1-12 for
additional qualifying information.
C. Underwriting Considerations:
1. Individual investors who credit qualify may assume mortgages made
on investment properties. This applies to the transactions described in
paragraphs 1-4 A and B, as well as to investment properties purchased
before the 1989 ban on investors that have been subsequently
streamline refinanced.
2. Qualifying ratios, the treatment of projected rental income, etc., are
described in Chapter 2, paragraph 2-7 M.
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1-4 October 2003
3. ARMs and graduated payment mortgages (GPMs) are not permitted on
investment properties.
4. Except for streamline refinances in which the mortgage was originally
insured in the name of a business, FHA will not insure loans made
solely in the name of a business entity (such as a corporation,
partnership, or sole proprietorship) or trust. One or more individuals,
along with the business entity or trust, must be analyzed for
creditworthiness. The individual(s) and the business entity or trust
must appear on the mortgage note. The business entity, trust, or
individual(s) may appear on the property deed or title. All parties
appearing on the property deed or title must also appear on the security
instrument (i.e., mortgage, deed of trust, security deed).
1-5 NONPROFIT ORGANIZATIONS AND STATE AND LOCAL
GOVERNMENT AGENCIES. Nonprofit organizations and state and local
government agencies are permitted to purchase properties with FHA-insured
mortgages, subject to the conditions listed below. These government and
nonprofit organizations are eligible for the same percentage of financing available
on owner-occupied principal residences. Nonprofit agencies may only obtain
FHA-insured fixed rate mortgages, and only an existing FHA-insured mortgage is
eligible for refinancing and may never result in equity withdrawal.
A. Nonprofit Organizations. Nonprofit organizations that intend to sell or
lease the property to low- or moderate-income individuals (generally
defined as income not exceeding 115 percent of the applicable median
income) may obtain FHA-insured financing on rental property. The
appropriate HOC is responsible for determining the nonprofit agency's
eligibility to participate in FHA programs; the DE lender is responsible for
determining the agency’s financial capacity for repayment. Lenders also
must verify that the agency is approved as a participating nonprofit agency
as of the date of underwriting. Lenders can verify nonprofit approval
status by visiting the HUD Website at www.hud.gov.
B. Nonprofit Approval. In order to qualify to purchase properties with
FHA-insured mortgages and to obtain the same percentage of financing
available to owner-occupants, HUD must approve the nonprofit agency.
The nonprofit must:
1. Be of the type described in Section 501(c)(3) as exempt from
taxation under Section 501(a) of the Internal Revenue Code of
1986; and
2. Have a voluntary board, and no part of the net earnings of the
organization or funds from the transaction may benefit any board
member, founder, contributor, or individual.
4155.1 REV-5
October 2003 1-5
3. Have two years’ experience as a provider of housing for low- and
moderate- income persons.
A nonprofit agency not meeting the above requirements, including
religious and charitable organizations, may only purchase properties
backed by FHA mortgage insurance under the conditions described for
other investors in paragraph 1-4A.
Detailed instructions on qualifying nonprofit organizations as mortgagors,
including documentation requirements, are contained in Mortgagee Letter
2002-01. Questions concerning a nonprofit agency’s approval should be
directed to the appropriate HOC.
C. State and Local Government Agencies. State and local government
agencies involved in the provision of housing may obtain FHA-insured
financing provided the agency meets the criteria described below. Loan
applications from these entities may be processed under the DE program
without prior approval from the appropriate HOC.
The agency must provide evidence from its legal counsel that the agency
has the legal authority and capacity to become the borrower, that the state
or local government is not in bankruptcy, and that there is no legal
prohibition that would prevent the lender from obtaining a deficiency
judgment (if permitted by state law for other types of borrowers) on FHA's
behalf in the event of foreclosure or deed-in-lieu of foreclosure. Credit
reports, financial statements, bank statements, CAIVRS/LDP/GSA checks
are not required.
4155.1 REV-5
1-6 October 2003
SECTION 2: MAXIMUM MORTGAGE AMOUNTS
1-6 MAXIMUM MORTGAGE AMOUNT. The maximum insurable mortgage is
the lesser of: (1) the statutory loan limit for the area (typically a county or
metropolitan statistical area (MSA)) or (2) the applicable loan-to-value (LTV)
limit.
Most FHA mortgages require payment of an upfront mortgage insurance premium
(UFMIP). The statutory loan amount and loan-to-value limits described in this
Handbook do not include the UFMIP. All descriptions of maximum insurable
mortgages throughout this Handbook, unless otherwise stated, exclude UFMIP.
A. Statutory Loan Amount Limits. The statutory loan amount limits vary
by program and the number of family units within the dwelling, and apply
to both purchases and refinances. For most programs, they may be
increased when housing costs for the area support higher limits. The
National Housing Act specifies the maximum loan amount for each
program.
In high-cost areas, the maximum 203(b) mortgage amount (for a one-unit
property) can be increased by the appropriate HOC to 95 percent of the
median one-family house price in the area or 87 percent of the Federal
Home Loan Mortgage Corporation (Freddie Mac) limit, whichever is less.
Higher limits are available in Hawaii, Alaska, Guam, and Virgin Islands
but must be justified by local house prices.
The current FHA standard and high-cost area mortgage limits can be
accessed from the lender Web page on HUD’s Web site at www.hud.gov
or on FHA Connection at https://entp.hud.gov/clas/. A Mortgagee Letter
is also issued each year announcing the new mortgage limits.
The standard area-wide mortgage limits and the maximum high-cost limits
are indexed to the Freddie Mac conforming loan limit. Therefore, as the
conventional conforming loan limits increase, the FHA loan limits also
increase.
B. Loan-to-Value Limitations.
The mortgage insurance program, whether the loan is for the purchase of a
property or for the refinance of an existing debt, the age of the property,
and several additional criteria (as per paragraph 1-8) are used to determine
the maximum LTV percentage available to the borrower. This LTV
percentage is then applied to the lesser of the sales price or the appraised
value, as described in paragraph 1-7.
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October 2003 1-7
1-7 MAXIMUM MORTGAGES/CASH INVESTMENT REQUIREMENTS
FOR PURCHASE TRANSACTIONS. The property’s sales price, subject to
certain required adjustments as described in A-C below, or the appraised value, if
less, is multiplied by a loan-to-value ratio. The resulting amount is the maximum
mortgage that FHA will insure. The borrower must make a cash investment at
least equal to the difference between the sales price and the resulting maximum
mortgage amount.
Except for certain property and transaction types as described in 1-8 below, the
lower of the adjusted sales price or the appraised value is multiplied by the factor
shown in the chart below. The resulting amount is the maximum loan that FHA
will insure provided that the mortgagor has made a cash investment of at least
three percent of the contract sales price.
Borrower-paid closing costs may be used to meet the three percent minimum cash
investment. If the borrower pays no closing costs at settlement, the loan amount
must be reduced sufficiently so that the three percent minimum cash investment is
met.
The maximum LTV limits shown below are functions of the property’s appraised
value or the adjusted sales price (whichever is less) and the State in which the
property is located. (A list of states and their closing costs averages may be found
in Appendix II.) The maximum LTVs for most purchase transactions are as
follows:
Maximum Loan-to-Value Percentages
(Purchase Transactions Only on Proposed and Existing Construction)
States with Average Closings Costs At or Below 2.1 Percent of Sales Price
• 98.75 percent: For properties with values/sales prices equal to or less than $50,000.
• 97.65 percent: For properties with values/sales prices in excess of $50,000 up to
$125,000
• 97.15 percent: For properties with values/sales prices in excess of $125,000.
States with Average Closings Costs Above 2.1 Percent of Sales Price
• 98.75 percent: For properties with values/sales prices equal to or less than $50,000.
• 97.75 percent: For properties with values/sales prices in excess of $50,000.
4155.1 REV-5
1-8 October 2003
Our definition of closing costs does not include discount points or prepaid items
and, thus, these fees and expenses cannot be used in meeting the cash investment
requirements; see paragraph 1-9 A for additional information including a
description of closing costs eligible for meeting the minimum cash investment
requirement.
The borrower may pay for the appraisal and credit report with a credit card.
However, when these fees are paid for in this manner, they may not be counted in
meeting the minimum investment requirement.
Closing costs paid by the seller or lender may not be used to meet the minimum
investment requirement. Subject to the limits described below, we are not
concerned with the dollar amount of any particular fee charged to the seller.
A. Seller Contributions. The seller (or other interested third parties such as
real estate agents, builders, developers, etc., or a combination of parties)
may contribute up to six percent of the property's sales price toward the
buyer's actual closing costs, prepaid expenses, discount points, and other
financing concessions. Contributions exceeding six percent of the sales
price or exceeding the actual cost of prepaid expenses, discounts points,
and other financing concessions will be treated as inducements to
purchase, thereby reducing the amount of the mortgage. Closing costs
normally paid by the borrower are considered contributions if paid by the
seller. Inducements to purchase are described in paragraph B, below.
The six percent limitation also includes seller payment for permanent and
temporary interest rate buydowns and other payment supplements,
payments of mortgage interest for fixed rate mortgages and GPMs only
(but not principal), mortgage payment protection insurance, and payment
of UFMIP.
Fees typically paid by the seller under local or state law, or local custom,
such as real estate commissions, charges for pest inspections, fees paid for
trustees to release a deed of trust, etc., are not considered contributions.
The dollar limit for seller contributions is calculated by using Attachment
A on the HUD-92900-PUR/HUD-92900WS. Each dollar exceeding
FHA's six percent limit must be subtracted from the property's sales price
before applying the appropriate LTV ratio.
B. Inducements to Purchase. Certain expenses (beyond those described
above) paid on behalf of the borrower, as well as other inducements to
purchase, result in a dollar-for-dollar reduction to the sales price before
applying the appropriate LTV ratio. These inducements include
decorating allowances, repair allowances, moving costs, and other costs as
determined by the appropriate HOC. We also require dollar-for-dollar
4155.1 REV-5
October 2003 1-9
reductions to the sales price for excess rent credit (see 2-10 N), as well as
for gift funds not meeting the requirements stated in Chapter 2.
Personal property items such as cars, boats, riding lawn mowers, furniture,
televisions, etc., given by the seller to consummate the sale result in a
reduction to the mortgage. The value of the item(s) must be deducted
from the sales price and the appraised value of the property (if not already
done so by the appraiser) before applying the LTV ratio. However, certain
items, depending upon local custom or law, may be considered as part of
the real estate transaction with no adjustment to the sales price or
appraised value necessary. These items include ranges, refrigerators,
dishwashers, washers, dryers, carpeting, window treatments, and other
items as determined by the jurisdictional HOC. That office determines if
these items affect value and are considered customary. Replacement of
existing equipment or other realty items by the seller before closing, such
as carpeting or air conditioners, does not require a value adjustment
provided no cash allowance is given to the borrower.
In addition, if the seller or builder of the property agrees to pay any
portion of the borrower's sales commission on the sale of the borrower’s
present residence, the amount paid by the seller or builder is an
inducement to purchase and must be subtracted dollar for dollar from the
sales price before the LTV ratio is applied. Similarly, a borrower not
paying real estate commission on the sale of a present home constitutes a
sales concession, if the real estate broker or agent is involved in both
transactions and the seller of the property purchased by the borrower pays
a real estate commission exceeding that typical for the area. In these
situations, the amount paid by the seller above the normal real estate
commission is considered an inducement to purchase and must be
subtracted from the sales price of the property being purchased before
applying the LTV ratio.
C. Additions to the Mortgage Amount. In some cases, the maximum
mortgage amount may be increased. Except for solar energy systems
discussed below, an increase generally is permitted only when the
appraised value exceeds the sales price. Only the amount by which the
value exceeds the sales price may be added; any remaining costs become
part of the borrower's settlement requirements. The following may result
in an increase to the mortgage amount:
1. Repairs and Improvements. Repairs and improvements required
by the appraiser as essential for property eligibility and to be paid
by the borrower may be added to the sales price before calculating
the mortgage amount. (The appraised value will reflect these
requirements.) For the cost of repairs and improvements to be
eligible for inclusion in the mortgage amount, the sales contract or
4155.1 REV-5
1-10 October 2003
addendum must identify the borrower as responsible for paying for
or otherwise completing the repairs or improvements.
The amount that may be added to the sales price before calculating
the maximum mortgage amount is the lowest of:
a. The amount the value of the property exceeds the sales price; or
b. The appraiser's estimate of repairs and improvements; or
c. The amount of the contractor's bid, if available.
Only repairs and improvements required by the appraiser may be
included. Any repairs completed by the borrower on the property
before the appraisal is made are not eligible for inclusion in
calculating the maximum mortgage. The amount that cannot be
financed into the mortgage will become part of the borrower's
required cash investment.
If repairs cannot be completed before loan closing due to weatherrelated
delays, the lender must establish an escrow account to
ensure eventual completion of all required repairs. See HUD
Handbook 4145.1 REV-2 for details.
2. Energy-Related Weatherization Items. If weatherization items
are to be added to the property and paid for by the borrower, the
mortgage amount may be increased by the cost of those items as
described below. Weatherization items include thermostats,
insulation, storm windows and doors, weather stripping and
caulking, etc. These items may be added to both the sales price
and the appraised value before determining the maximum
mortgage amount. (A contractor's statement of cost of work
completed or a buyer's estimate of the cost of materials must be
submitted. See HUD Handbook 4150.1 REV-1 for details.) If the
weatherization items cannot be completed before loan closing due
to weather-related delays, the lender must establish an escrow
account to ensure eventual completion of all items. See HUD
Handbook 4145.1 REV-2 for details.
The amount that may be added in calculating the maximum
mortgage is:
a. $2000 without a separate value determination; or
b. Up to $3500 if supported by a value determination by an
approved or FHA roster appraiser or DE underwriter; or
c. More than $3500 subject to a value determination by an
approved or FHA roster appraiser or DE underwriter and a
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October 2003 1-11
separate on-site inspection made by a FHA-approved fee
inspector or DE staff appraiser.
3. Solar Energy Systems. The cost of solar energy systems may be
added directly to the mortgage amount (before adding the UFMIP)
after applying the LTV ratio limits. The statutory mortgage limit
for the area also may be exceeded by 20 percent to accommodate
the cost of the system.
The amount that may be added to the mortgage is limited to the
lesser of the solar energy system's replacement cost or its effect on
the property's market value. Both active and passive solar systems
are acceptable, as are wind-driven systems. See HUD Handbooks
4150.1 REV-1 and 4930.2 for details.
1-8 TRANSACTIONS THAT AFFECT MAXIMUM MORTGAGE
CALCULATIONS. Certain types of loan transactions affect the amount of
financing available and the calculation of the maximum mortgage. These
transactions include identity-of-interest, properties with non-occupying coborrowers,
three- and four-unit properties, properties for which a house will be
constructed by the borrower on his or her own land or as a general contractor,
payoffs of land contracts, and transactions involving properties under construction
or less than a year old. Unless otherwise stated in this Handbook, the mortgage
calculation procedures described in paragraph 1-6 also apply.
A. Identity-of-Interest Transactions. Identity-of-interest transactions on
principal residences are restricted to a maximum LTV ratio of 85 percent.
Identity-of-interest is defined as a sales transaction between parties with
family relationships or business relationships. However, maximum
financing above 85 percent LTV is permissible under the following
circumstances:
1. A family member purchases another family member's home as a
principal residence.
If a property is sold from one family member to another and is the
seller's investment property, the maximum mortgage is the lesser
of either:
a. 85 percent of the appraised value, or
b. The appropriate LTV ratio percentage applied to the sales
price, plus or minus required adjustments.
The 85 percent limit may be waived if the family member
has been a tenant in the property for at least six months
4155.1 REV-5
1-12 October 2003
immediately predating the sales contract. A lease or other
written evidence must be submitted to verify occupancy.
2. An employee of a builder purchases one of the builder's new
homes or models as a principal residence.
3. A current tenant purchases the property that he or she has rented
for at least six months immediately predating the sales contract.
(A lease or other written evidence must be submitted to verify
occupancy.)
4. A corporation transfers an employee to another location, purchases
that employee’s home, and then sells the home to another
employee.
B. Non-Occupying Borrowers. When there are two or more borrowers, but
one or more will not occupy the property as a principal residence, the
maximum mortgage is limited to a 75 percent LTV. However, maximum
financing, as described in paragraph 1-7, is available for borrowers related
by blood, marriage or law (spouses, parent-child, siblings, stepchildren,
aunts-uncles/nieces-nephews, etc.), or for unrelated individuals that can
document evidence of a family-type, longstanding, and substantial
relationship not arising out of the loan transaction. All borrowers,
regardless of occupancy status, must sign the security instrument and
mortgage note. If a parent is selling to a child, the parent cannot be the coborrower
with the child on the new mortgage unless the loan-to-value is
75 percent or less.
To reduce risk exposure, mortgages with non-occupying co-borrowers are
limited to one-unit properties if the LTV will exceed 75 percent. While
we do not object to legitimate transactions in which non-occupant
borrowers assist in the financing of the property–such as when parents
help their children buy a first home–this arrangement may not be used by
non-occupant borrowers to develop a portfolio of rental properties. The
degree of financial contribution by the non-occupant borrower, and the
number of properties similarly owned, may indicate that an investor loan
has become the practical reality and that, in effect, family members are
acting as "strawbuyers." FHA does not impose additional underwriting
criteria on such transactions, such as specific qualifying ratios the
occupying-borrower must meet individually. Lenders must judge each
transaction on its merits.
C. Three- and Four-Unit Properties. Regardless of occupancy status, the
property must be self-sufficient (i.e., the maximum mortgage is limited so
that the ratio of the monthly mortgage payment, divided by the monthly
net rental income, does not exceed 100 percent). The mortgage
4155.1 REV-5
October 2003 1-13
calculations described below are in addition to the calculations detailed in
paragraphs 1-6 and 1-7.
1. The monthly payment is the principal, interest, taxes, and
insurance (PITI), including mortgage insurance, plus any
homeowners' association dues, computed at the note rate (no
consideration for buydowns may be given).
2. Net rental income is the appraiser’s estimate of fair market rent
from all units, including the unit chosen by the borrower for
occupancy, less the appraiser’s estimate for vacancies or the
vacancy factor used by the jurisdictional HOC, whichever is
greater.
This calculation is used only to determine the maximum loan
amount. Borrowers must still qualify for the mortgage based on
income, credit, cash to close, and the projected rents received from
the remaining units. The projected rent may only be considered as
gross income for qualifying purposes; it may not be used to offset
the monthly mortgage payment.
3. The borrower must have reserves equivalent to three months' PITI
after closing on purchase transactions. Reserves cannot be derived
from a gift.
D. Building on Own Land. If the borrower acts as a general contractor, and
builds a house on land that the borrower already owns, or acquires land
separately, maximum financing is available if the borrower receives no
cash from the settlement. The appropriate LTV limits are applied to the
lesser of:
1. The appraised value; or
2. The documented acquisition cost of the property, which includes:
(a) the builder's price, or the sum of all subcontractor bids,
materials, etc.; (b) cost of the land (if the land has been owned
more than six months or was received as an acceptable gift, the
value of the land may be used instead of its cost); (c) interest and
other costs associated with any construction loan obtained by the
borrower to fund construction of the property; (d) the closing costs
to be paid by the borrower; and (e) reasonable discount points.
Equity in the land (value or cost, as appropriate, minus the amount owed)
may be used for the borrower's entire cash investment. However, if the
borrower receives more than $250 cash at closing, the loan is limited to 85
percent of the sum of the appraised value and allowable closing costs.
Replenishment of the borrower's own cash expended during construction
4155.1 REV-5
1-14 October 2003
is not considered as "cash back," provided the borrower can substantiate
with cancelled checks and paid receipts all out-of-pocket funds used for
construction.
E. Paying Off Land Contracts. If the borrower will use the loan to
complete payment on a land contract, contract for deed, or other similar
type financing arrangement in which the borrower does not have title to
the property, the new mortgage may be processed as either a purchase or a
refinance transaction with maximum FHA-insured financing if the
borrower receives no cash at closing. If all loan proceeds are used to pay
the outstanding balance on the land contract and eligible repairs,
renovations, etc., the appropriate LTV ratio is applied to the lesser of:
1. The appraised value; or
2. The total cost to acquire the property (the original purchase price,
plus any documented costs the purchaser incurs for rehabilitation,
repairs, renovation, or weatherization), plus allowable closing costs
and, if treated as a refinance, reasonable discount points.
Equity in the property (original sales price minus the amount owed) may
be used for the borrower's entire cash investment. However, if the
borrower receives more than $250 cash at closing, the loan is limited to
85 percent of the sum of the appraised value and allowable closing costs.
Replenishment of the borrower's own cash expended for repairs,
improvements, renovation, etc., is not considered as "cash back," provided
the borrower can substantiate with cancelled checks and paid receipts all
out-of-pocket funds spent for those purposes.
F. Properties Under Construction or Existing Construction Less than
One Year Old
Properties not meeting the criteria shown below are considered as under
construction or existing construction-less than one year old and are limited
to 90 percent financing, i.e., 90 percent of the lesser of the appraiser’s
estimate of value or sales price, plus or minus the adjustments required by
paragraph 1-7, A-C. For a property to be eligible for greater than 90
percent financing, whether or not it has been previously occupied, it must
meet one of the criteria described below. Otherwise, the property is
classified as "under construction" or "less than one year old" and is limited
to 90 percent financing.
1. Construction was completed more than one year preceding the
borrower's signature on the Addendum to Uniform Residential
Loan Application (form HUD-92900-A, page 2); or
2. The dwelling's site plans and materials were approved by the
Department of Veterans Affairs (VA), an eligible DE underwriter,
4155.1 REV-5
October 2003 1-15
or a builder under FHA's builder certification procedures, (see
HUD Handbook 4145.1 REV-2) before construction began; or
3. The local jurisdiction has issued both a building permit (prior to
construction) and a Certificate of Occupancy or equivalent.
(NOTE: This paragraph does not apply to condominiums or
manufactured housing because of the special circumstances
regarding their approval.); or
4. The dwelling is covered by a builder's ten-year insured warranty
plan that is acceptable to HUD; or
5. The dwelling will be moved to a new location and the property is
eligible for an insured mortgage at the new location by one of the
methods described in 2 above.
4155.1 REV-5
1-16 October 2003
SECTION 3: SETTLEMENT REQUIREMENTS
1-9 SETTLEMENT REQUIREMENTS. For each transaction, the lender must
estimate the settlement requirements to determine the cash required to close the
mortgage transaction. In addition to the minimum cash investment described in
paragraph 1-7, additional borrower expenses, including those described in A-I
below, must be included in the total amount of cash the borrower must provide at
mortgage settlement. The difference between the amount of the FHA-insured
mortgage, excluding any UFMIP, and the total cost to acquire the property,
including these expenses, determines the cash needed for closing a loan eligible
for FHA mortgage insurance.
A. Closing Costs. These include those FHA-approved non-recurring costs
associated with the mortgage transaction, including the appraisal fee, any
inspection fees, the actual cost of credit reports, the loan origination fee,
settlement fee, deposit verification fees, home inspection service fees up to
$300, the cost of title examination and title insurance, document
preparation fees (if performed by a third-party not controlled by the
lender), property survey fees, attorney's fees, recording fees, transfer
stamps, and taxes, as well as test and certification fees, such as flood-zone
determination fees, water tests, and other costs as determined by the
appropriate HOC.
B. Prepaid Items. Prepaid items are collected at closing to cover accrued
and unaccrued hazard insurance and mortgage insurance premiums, taxes
and per diem interest, and include other similar fees and charges. The
lender must use a minimum of 15 days of per diem interest in its estimate
of prepaid items.
To reduce the burden on borrowers whose loans were scheduled to close at
the end of the month but did not due to unforeseen circumstances, lenders
and borrowers may agree to credit the per diem interest to the borrower
and have the mortgage payments begin the first of the succeeding month.
However, the dollar amount of the cash credit is not to be used to reduce
the minimum cash investment.
C. Discount Points. Discount points that are being paid by the borrower
become part of the total cash investment but are not eligible for meeting
the minimum cash investment requirement.
D. Non-Realty (Chattel) or Personal Property. Non-realty or personal
property items that the borrower agrees to pay for separately, including the
amount subtracted from the sales price in determining the maximum
mortgage, are included in the total cash requirements for the loan.
4155.1 REV-5
October 2003 1-17
E. Closing Costs Not Eligible for Meeting the Cash Investment
Requirement. Certain closing costs, such as commitment fees for
guaranteeing the rate or points, and fees such as any ineligible real estate
broker fees or any portion, or any such allowable fee not previously
included in meeting the investment requirement are included in calculating
the total cash needed to close the mortgage.
F. UFMIPs. Any UFMIP amounts paid in cash are added to the total cash
settlement requirements. The UFMIP must be entirely financed into the
mortgage (except for any amount less than $1) or paid entirely in cash and
all mortgage amounts must be rounded down to a multiple of $1.
G. Repairs and Improvements. Repairs and improvements (or any portion)
to be paid by the borrower that cannot be financed into the mortgage are
part of the borrower’s total cash requirements.
H. Real Estate Broker Fees. If the borrower is represented by a real estate
buyer-broker and must pay a fee directly to the broker, that expense must
be included in the total of the borrower's settlement requirements and
appear on the HUD-1 Settlement Statement.
If the seller pays the buyer-broker fee as part of the sales commission, this
is not to be considered an inducement to purchase or part of the 6 percent
seller contributions limitation, provided that the seller is paying only the
normal sales commission typical of that market. The lender must obtain a
copy of the original listing agreement and compare it with the HUD-1
Settlement Statement to determine if the seller paid a buyer-broker fee in
addition to the normal sales commission for that market. If the seller paid
an additional commission for the buyer-broker fee, then this is considered
an inducement to purchase.
I. Mortgage Broker Fees. If the borrower must pay a fee directly to a
mortgage broker, that expense must be included in the total of the
borrower's cash settlement requirements and appear on the HUD-1
Settlement Statement. (This requirement applies to instances in which the
borrower independently engages a mortgage broker to seek financing and
pays the broker directly. The payment may not come from the lending
institution.)
J. Premium Pricing on FHA Insured Mortgages. Lenders may pay the
borrower's allowable closing costs and/or prepaid items by "premium
pricing”. Closing costs paid in this manner need not be included as part of
the 6 percent seller contribution limit. The funds derived from a premium
priced mortgage:
4155.1 REV-5
1-18 October 2003
1. May never be used to pay any portion of the borrower's
downpayment.
2. Must be disclosed on the Good-Faith Estimate (GFE) and the
HUD-1 Settlement Statement. The GFE and HUD-1 must include
an itemized statement indicating which items are being paid on the
borrower's behalf; disclosing only a lump sum is not acceptable.
Also, the amount paid on the borrower's behalf for each item may
not exceed the allowable fee permitted by the jurisdictional HOC.
2. Must be used to reduce the principal balance if the premium
pricing agreement establishes a specific dollar amount for closing
costs and prepaid expenses with any remaining funds, in excess of
actual costs, reverting to the borrower.
3. May not be used for payment of debts, collection accounts, escrow
shortages or missed mortgage payments, or judgments.
K. Yield Spread Premiums. Yield spread premiums (YSP) are not part of
the cash required to close but must be disclosed to borrowers on the Good
Faith Estimate (GFE) and HUD-1 Settlement Statement in accordance
with the Real Estate Settlement Procedures Act (RESPA) requirements.
4155.1 REV-5
October 2003 1-19
SECTION 4: REFINANCE TRANSACTIONS
1-10 REFINANCING. A refinance transaction involves repaying an existing real
estate debt from the proceeds of a new mortgage that has the same borrower(s)
and the same property. As long as the borrower has legal title (even though not
originally on the loan), the borrower is eligible to refinance the loan.
The following must be considered when processing a refinance transaction:
A. Maximum Percentage of Financing: The maximum percentage of
financing is governed by the occupancy status of the property, the use of
the loan proceeds, and how and when the property was purchased. FHA
will insure several different types of refinance transactions including
streamline refinances of existing FHA-insured mortgages made with and
without appraisals, "no cash-out" refinances of conventional and FHAinsured
mortgages where all proceeds are used to pay existing liens and
costs associated with the transaction, and "cash-out" refinances.
B. Maximum Term. The maximum term of any refinance with an appraisal
is 30 years. A streamline refinance (see Section 1-12) without an
appraisal is limited to the remaining term of the existing mortgage plus 12
years (not to exceed 30 years).
C. Re-Using an Appraisal. FHA appraisals on existing properties remain
valid for six months. However, they cannot be re-used during this period
once the mortgage, for which the appraisal was ordered, has closed. An
appraisal used for the purchase of a property cannot be used again for a
subsequent refinance, even if six months have not passed. A new
appraisal is required for each refinance transaction requiring an appraisal.
D. Refinance Authorization. A lender must obtain a Refinance
Authorization Number from the FHA Connection or functional equivalent
for all FHA-to-FHA refinances.
E. “Skipped” Payments Not Acceptable. Lenders are not permitted to
allow borrowers to “skip” payments. The borrower is either to make the
payment when it is due or bring the monthly mortgage payment check to
settlement. When the new mortgage amount is calculated, FHA does not
permit the inclusion of any mortgage payments "skipped" by the
homeowner in the new mortgage amount. For example, a borrower whose
mortgage payment is due June 1 and expects to close the refinance before
the end of June is not permitted to roll the June mortgage payment into the
new FHA loan amount.
4155.1 REV-5
1-20 October 2003
1-11 MORTGAGE AMOUNTS ON REFINANCES.
A. "No Cash-Out" Refinances with Appraisals (Credit Qualifying). The
maximum mortgage is the lower of the loan-to-value or the existing debt
calculation described below, and may never exceed the statutory limit
except by the amount of any new upfront MIP:
1. LTV Ratio Applied to Appraised Value: Multiply the appraised
value of the property by the appropriate factor, as shown in the
chart below, for the property’s value and the state where it is
located. (A list of states and their closing costs averages may be
found in Appendix II.) Any appraisal requirements, including
repairs, must be complied with before the mortgage is eligible for
insurance endorsement.
Maximum Loan-to-Value Percentages
States with Average Closings Costs At or Below 2.1 Percent of Sales Price
• 98.75 percent: For properties with appraised values equal to or less than $50,000.
• 97.65 percent: For properties with appraised values in excess of $50,000 up to
$125,000
• 97.15 percent: For properties with appraised values in excess of $125,000.
States with Average Closings Costs Above 2.1 Percent of Sales Price
• 98.75 percent: For properties with appraised values equal to or less than $50,000.
• 97.75 percent: For properties with appraised values in excess of $50,000.
2. Existing Debt. Add together the amount of the existing first lien,
any purchase money second mortgage, any junior liens over 12
months old, closing costs, prepaid expenses, borrower paid repairs
required by the appraisal, discount points, and other fees as
determined acceptable by the appropriate HOC and then subtract
any refund of UFMIP. (If any portion of the funds of an equity
line of credit in excess of $1000 was advanced within the past
twelve months and was for purposes other than repairs and
rehabilitation of the property, the line of credit is not eligible for
inclusion in the new mortgage.)
4155.1 REV-5
October 2003 1-21
The amount of the existing first mortgage may include the interest
charged by the servicing lender when the payoff will not likely be
received on the first day of the month (as is typically assessed on
FHA-insured mortgages). The amount also may include any
prepayment penalties assessed on a conventional mortgage or FHA
Title I loan. The amount of the existing first mortgage may not
include delinquent interest, late charges, or escrow shortages.
Prepaid expenses may include the per diem interest to the end of
the month on the new loan, hazard insurance premium deposits,
mortgage insurance premium, and any real estate tax deposits
needed to establish the escrow account.
Subordinate liens, including credit lines, regardless of when taken,
may remain outstanding, provided the FHA-insured mortgage
meets our eligibility criteria for mortgages with secondary
financing as described in Section 5 of this chapter.
If the purpose of the new loan is to refinance an existing mortgage
to buy out an ex-spouse's or other co-borrower's equity, the
specified equity to be paid is considered property-related
indebtedness and is eligible for inclusion in calculating the new
mortgage. The divorce decree, settlement agreement, or other
bona fide equity agreement must be provided to document the
equity awarded to the ex-spouse or co-borrower.
If the property was acquired less than one year before the loan
application and is not already FHA-insured, in addition to the
calculations described above, the original sales price of the
property also must be considered in determining the maximum
mortgage. With conclusive documentation, expenditures for
repairs and rehabilitation incurred after the purchase of the
property may be added to the original sales price in calculating
the mortgage amount.
B. "Cash-Out" Refinances. “Cash-out” refinances are only permitted on
owner-occupied principal residences and are limited to a combined LTV
(FHA-insured first and any subordinate liens) of 85 percent of the
appraised value, provided the property has been owned by the borrower
for at least one year. If the property was purchased less than one year
preceding the loan application, the mortgage amount must be calculated
using the lesser of the appraised value or the original sales price of the
property multiplied by 85 percent. Properties owned free and clear may
be refinanced as cash-out transactions.
4155.1 REV-5
1-22 October 2003
“Cash-out” refinances for debt consolidation represent considerable risk,
especially if the borrowers have not had an attendant increase in income.
Such transactions must be carefully evaluated.
1-12 STREAMLINE REFINANCES. 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. Streamline refinances can be made with or without
an appraisal. On streamline refinances with an appraisal, Form HUD 92564-VC
is required, but the Homebuyer Summary is not required. FHA does not require
repairs to be completed (except for lead-based paint repairs) on streamline
refinances with appraisals; however, the lender may require completion of repairs
as a condition of the loan.
HUD's Credit Alert Interactive Voice Response System (CAIVRS) need not be
checked, but HUD’s Limited Denial of Participation (LDP) and General Services
Administration (GSA) exclusion lists are still required checks for all borrowers.
FHA does not require a credit report (except for the credit-qualifying streamline
refinances described below) or a termite inspection on this type of loan, but the
lender may require either one or both as part of its credit policy.
Lenders may use an abbreviated version of the Uniform Residential Loan
Application (URLA) that omits sections IV, V, VI, and a-k of VIII, provided all
other required information is captured. Furthermore, while the lender must assure
itself that it is in compliance with Equal Credit Opportunity Act (ECOA) and all
other regulations, the loan application need not be signed by the borrower(s) until
loan closing.
Streamline refinance processing and underwriting instructions are described
below. The mortgage amount limits may never exceed the statutory limits except
by the amount of any new upfront MIP.
A. Streamline Refinances WITHOUT an Appraisal. The maximum
insurable mortgage is the lower of the two calculations shown below:
1. Original Loan Amount: The original principal balance on the
mortgage (which will include any upfront mortgage insurance
premium) plus the new upfront premium that will be charged on
the refinance, or
2. Existing Debt: Add the sum of the existing FHA insured first lien,
closing costs, reasonable discount points and the prepaid expenses
necessary to establish the escrow account, and subtract any refund
of upfront mortgage insurance premiums (UFMIP). The existing
first lien may include the interest charged by the servicing lender
when the payoff is not received on the first day of the month as is
4155.1 REV-5
October 2003 1-23
typically assessed on FHA mortgages, but may not include
delinquent interest, late charges or escrow shortages.
This mortgage calculation process applies only to owner-occupied
properties. Investment properties, even if originally acquired as
principal residences by the current borrowers, may only be
refinanced for the outstanding principal balance. The term of the
mortgage is the lesser of 30 years or the remaining term of the
mortgage plus 12 years.
Streamline refinances by investors or for secondary residences may
only be made without an appraisal and may be made solely in the
business entity's name if previously insured in the business entity's
name. The new security instruments will contain FHA's standard
provision permitting acceleration of the mortgage upon assumption
by an investor or as a secondary residence; however, FHA does not
intend to authorize the lender to exercise the acceleration provision
if the investor assumptor is found to be creditworthy.
Although a property purchased as a principal residence, under
certain circumstances as described in the security instruments, may
be rented, a streamline refinance without an appraisal does not
"convert" the mortgage to one eligible for assumption by an
investor.
B. Streamline Refinance WITH an Appraisal (No Credit Qualifying).
The maximum insurable mortgage is the lower of the appropriate loan-tovalue
ratio applied to the appraiser’s estimate of value or the sum of the
existing indebtedness and related closing costs and prepaid expenses for
the refinance; both are described below.
1. LTV Ratio Applied to Appraised Value: Multiply the appraised
value of the property by the appropriate factor as shown in the
chart below for the property’s value and the State where it the
property is located. (A list of states and their closing costs
averages may be found in Appendix II.)
4155.1 REV-5
1-24 October 2003
Maximum Loan-to-Value Percentages
States with Average Closings Costs At or Below 2.1 Percent of Sales Price
• 98.75 percent: For properties with appraised values equal to or less than $50,000.
• 97.65 percent: For properties with appraised values in excess of $50,000 up to $125,000
• 97.15 percent: For properties with appraised values in excess of $125,000.
States with Average Closings Costs Above 2.1 Percent of Sales Price
• 98.75 percent: For properties with appraised values equal to or less than $50,000.
• 97.75 percent: For properties with appraised values in excess of $50,000.
2. Existing Debt: Add the sum of the existing FHA insured first lien,
closing costs, reasonable discount points and the prepaid expenses
necessary to establish the escrow account, and subtract any refund of
upfront mortgage insurance premiums (UFMIP) as described below.
The existing first lien may include the interest charged by the
servicing lender when the payoff is not received on the first day of
the month as is typically assessed on FHA mortgages, but may not
include delinquent interest, late charges or escrow shortages.
C. "Credit-Qualifying" Streamline Refinances. “Credit-qualifying”
streamline refinances contain all the normal features of a streamline
refinance, but provide a level of assurance of continued performance on
the mortgage. The lender must provide evidence that the remaining
borrowers have an acceptable credit history and ability to make payments.
The following must be considered when processing a credit-qualifying
transaction:
1. Mortgage Amount. The maximum loan amount is the same as in
A (without appraisal) or B (with appraisal) above, as appropriate.
2. Credit Documentation/Qualifying. The lender must provide a
verification of income, a credit report, compute the debt-to-income
ratios and determine that the borrower will continue to make
mortgage payments.
3. Purposes. Credit-qualifying streamline refinances may be used
for the following:
4155.1 REV-5
October 2003 1-25
a. When a change in the mortgage term will result in an
increase in the mortgage payment. (This is only permitted
for owner-occupied principal residences, secondary
residences meeting the requirements of paragraph 1-3, and
those investment properties purchased by governmental
agencies and eligible nonprofit organizations described in
paragraph 1-5.)
b. When deletion of a borrower or borrowers will trigger the
due-on-sale clause.
c. Following an assumption of a mortgage that does not
contain restrictions (e.g., due-on-sale clause) limiting
assumptions only to creditworthy borrowers and the
assumption occurred less than six months previously.
d. Following an assumption of a mortgage in which the
transferability restriction (i.e., due-on-sale clause) was not
triggered, such as in a property transfer resulting from a
divorce decree or by devise or descent and the assumption
occurred less than six months previously.
D. Additional Information on Streamline Refinances.
1. Appraisal, Termite Inspection, and Credit Report Fees. We do
not require an appraisal, termite inspection, or credit report on
streamline refinances (except credit qualifying streamline
refinances). However, the associated fees may be paid by the
borrower out-of-pocket (i.e., not financed) if law, banking
regulations, or its secondary market investors require the lender to
obtain these services on a streamline refinance made without a
FHA appraisal.
2. Cash-to-Close. Borrowers are not required to provide evidence of
cash-to-close.
.
3. Withdrawn Condominium Approvals. If approval of a
condominium project has been withdrawn, FHA will insure only
streamline refinances without appraisals for that condominium
project.
4. Underwriting. Mortgage credit underwriting is not required
except for credit qualifying streamline refinance. The loan
application and form HUD 92900-WS must be submitted;
however, the sections regarding income, assets, and debts and
4155.1 REV-5
1-26 October 2003
obligations need not be completed (unless the borrowers are credit
qualified).
5. Shortening the Term of Mortgage. A mortgage on a principal
residence may be refinanced to a shorter-term mortgage, provided
the new monthly principal and interest payment increases no more
than $50. (The $50 latitude is not available for mortgages on
investment properties or secondary residences, unless the borrower
qualifies under the provisions described in paragraphs 1-3 and 1-4.)
Since streamline refinances are designed to reduce the borrower's
principal and interest payments on a current FHA-insured mortgage,
that portion of the borrower's payment for escrowed items need not
be considered.
6. Delinquent Mortgages. Delinquent mortgages are not eligible for
streamline refinancing until the loan is brought current. However,
if the mortgage is delinquent by no more than two monthly
payments, the refinancing lender may pay the borrower's mortgage
to bring the payments current provided no obligation is placed on
the borrower to repay the funds used to bring the mortgage current.
7. "No-Cost" Refinances. “No-cost” refinances, in which the lender
charges a premium interest rate to defray the borrower's closing
costs and/or prepaid items, are permitted. The lender may also
offer an interest-free advance of amounts equal to the present
escrow balances on the existing mortgage to establish a new
escrow account.
8. Holding Period before Eligibility. A borrower who assumed or
took title subject to an FHA-insured mortgage, without being credit
qualified and with the previous mortgagors receiving a release of
liability, must have owned the property for at least six months
before being eligible for the streamline refinance program without
credit qualifying. This rule applies to mortgages that do not
contain restrictions limiting the assumption only to creditworthy
assumptors. Typically those mortgages were made prior to
December 1989.
9. Adding or Deleting Individuals on Title. Individuals may be
added to the title on a streamline refinance without credit
worthiness review and without triggering due-on-sale clauses.
Individuals can be deleted from the title on a streamline refinance
only under the circumstances described in paragraph 1-12 C, above
or:
4155.1 REV-5
October 2003 1-27
a. When an assumption of a mortgage not containing a dueon-
sale clause occurred more than six months previously
and the assumptor can document that he or she has made
the mortgage payments during this interim period; or
b. Following an assumption of a mortgage in which the
transferability restriction (due-on-sale clause) was not
triggered, such as in a property transfer resulting from a
divorce decree or by devise or descent, and the assumption
or quit-claim of interest occurred more than six months
previously and the remaining owner-occupant can
demonstrate that he or she has made the mortgage
payments during this time.
10. Seven-Unit Exemptions. An eligible investor that has a financial
interest in more than seven rental units, as described in 24 CFR
203.42, may only refinance without appraisals.
11. Subordinate Financing. Subordinate financing may remain in
place, regardless of the total indebtedness against the property on
streamline refinances, with or without appraisals. The borrower is
not required to satisfy any outstanding subordinate liens, as long as
they will clearly be subordinate to the new FHA-insured refinance
mortgage.
12. Proceeding as if No Appraisal was Completed. If the appraised
value is such that the borrower would be better advised to proceed
as if no appraisal had been made, the appraisal may be ignored and
not used. A notation of this decision must be made in the
"remarks" section of form HUD-92900-WS.
13. Geographic Areas. Lenders may solicit and process streamline
refinances applications from any area of the country, provided the
lender is approved for DE by at least one HOC.
14. ARM to ARM. An ARM may be refinanced to another ARM,
provided that an immediate payment reduction occurs and that the
maximum interest rate of the new mortgage does not exceed the
maximum interest rate of the old mortgage being refinanced.
These refinances may be transacted with or without an appraisal.
15. ARM to Fixed Rate. An ARM may be refinanced to a fixed rate
mortgage, with or without an appraisal, provided the interest rate
on the new fixed-rate mortgage will be no greater than 2
percentage points above the current rate of the ARM. In addition,
all mortgage payments must have been made within the month due
4155.1 REV-5
1-28 October 2003
for the past 12 months or the period the mortgage has been in
force, if shorter. If the new fixed rate mortgage will be at a rate
lower than the existing rate of the ARM thus reducing the
homeowner’s monthly mortgage payment, the “within the month
due,” (i.e., not more than 30 days late), rule is not applicable.
16. Fixed-Rate to ARM. Fixed-rate mortgages may be refinanced to
a one-year ARM, with or without an appraisal, provided the
interest rate of the new mortgage is at least 2 percentage points
below the interest rate of the current mortgage.
An ARM may be used for refinancing only on principal residences.
17. Graduated Payment Mortgages (GPM) to Fixed-Rate. Section
245 GPMs may be refinanced, with or without an appraisal, to a
fixed-rate mortgage provided the new mortgage payment will not
exceed the current mortgage payment. (If the streamline refinance
is completed without an appraisal, the new mortgage amount may
exceed the statutory limit by the accrued negative amortization and
the new UFMIP.)
18. GPM to ARM. A GPM may be refinanced to an ARM, provided
the note rate results in a reduction to the current principal and
interest payments. (If the streamline refinance is completed
without an appraisal, the new mortgage amount may exceed the
statutory limit by the accrued negative amortization and the new
UFMIP.)
19. Section 203(k) to Section 203(b). Section 203(k) Rehabilitation
mortgages may be refinanced into a Section 203(b) mortgage after
all work is complete. The rehabilitation work is considered
complete by a fully executed certificate of completion, the
rehabilitation escrow account has been closed with a final release,
and the lender has entered the required close out information into
the FHA Connection or its functional equivalent. The new
mortgage will be subject to the appropriate insurance premium
applicable to a new Section 203(b) mortgage.
20. Section 235 to Section 203(b). Lenders may refinance Section
235 mortgages to Section 203(b) mortgages using the streamline
underwriting procedures described in paragraph 1-12. Any
overpaid subsidy that has been paid by the lender to HUD and is
part of the borrowers' mortgage account can be included in the
Section 203(b) mortgage amount, provided the mortgage amount
does not exceed the maximum mortgage permitted under
paragraphs 1-12 A or 1-12 B as appropriate.
4155.1 REV-5
October 2003 1-29
Furthermore, if HUD has a junior lien that was part of the original
Section 235 financing, HUD will subordinate the junior lien to the
Section 203(b) mortgage that refinances the Section 235 mortgage.
4155.1 REV-5
1-30 October 2003
SECTION 5: SECONDARY FINANCING
1-13 SECONDARY FINANCING.
Any financing (other than the FHA-insured first mortgage) that creates a lien
against the property is considered secondary financing and not a gift, even if it is a
“soft” or “silent” second (i.e., has no monthly repayment provisions) or has other
features forgiving the debt.
Documentation from the provider of the secondary financing must show the
amount of funds provided to the borrower in each transaction and copies of the
loan instruments are to be included in the endorsement binder. Costs incurred for
participating in a downpayment assistance secondary financing program may only
be included in the amount of the second lien. FHA reserves the right to reject any
secondary financing that does not serve the needs of the intended borrower or
where it believes the costs to the participants outweigh the benefits derived by the
homebuyer. Permissible secondary financing arrangements include:
A. Government Agencies. Federal, state, and local government agencies, as
well as nonprofit agencies considered instrumentalities of government (see
B, below), may provide secondary financing for the borrower's entire cash
investment. The second lien itself must be made or held by the eligible
governmental body or instrumentality. Neither governmental units nor
their established nonprofit instrumentalities may use “agents,” including
other nonprofits or for-profit enterprises to make the second lien
regardless of the source of those funds. In other words, even if the funds
used for the secondary financing were derived from an acceptable source
such as HUD HOME funds or from a unit of government or the eligible
nonprofit instrumentality, the subordinate lien must be in the name of the
eligible entity, i.e., the state, county, city or eligible nonprofit
instrumentality must be the lien holder. This authority cannot be
delegated to another party that is not itself permitted to provide this level
of secondary financing. These other entities, however, may be used to
service the subordinate lien if regularly scheduled payments are to be
made by the mortgagor. Loans secured by secondary mortgages are
subject to the conditions described below.
1. The FHA-insured first mortgage, when combined with any second
mortgage or other junior liens from government agencies may not
result in cash back to the borrower. The sum of all liens cannot
exceed 100 percent of the cost to acquire the property. The cost to
acquire is the sales price plus allowable borrower-paid closing
costs, discount points, repair and rehabilitation expenses, and
prepaid expenses. The cost to acquire may exceed the appraised
value of the property under these types of government assistance
programs. The FHA insured first mortgage cannot exceed the
4155.1 REV-5
October 2003 1-31
FHA statutory limit for the area where the property is located. The
combined indebtedness, however, may exceed the FHA statutory
limit.
2. The required monthly payment under both the insured mortgage
and the second mortgage or lien, plus other housing expenses and
all recurring charges, cannot exceed the borrower's reasonable
ability to pay.
3. The source, amount, and repayment terms must be disclosed in the
mortgage application, and the borrower must acknowledge that he
or she understands and agrees to the terms.
B. Nonprofit Agencies. Nonprofit agencies that meet the criteria described
in paragraph 1-5 B and are considered instrumentalities of government
may provide secondary financing under the terms outlined in A, above.
The appropriate HOC is responsible for approving the nonprofit agency,
as well as determining if it can be considered an instrumentality of
government. To obtain this status the nonprofit must be an entity
“established by a governmental body or with governmental approval or
under special law to serve a particular public purpose or designated by law
(statute or court opinion).” FHA also requires that the unit of government
that established the nonprofit also must either exercise organizational
control, operational control, or financial control of the nonprofit in its
entirety or, at minimum, the specific homebuyer assistance program that is
using FHA’s credit enhancement. The HOCs review applications from
nonprofits that purport to be instrumentalities of government and make
approval decisions based on information submitted by the nonprofit.
Nonprofit agencies not considered instrumentalities of government that
otherwise meet the criteria described in paragraph 1-5 B may provide
secondary financing under the same conditions as described in A, above,
provided the borrower makes a cash investment of at least 3 percent of the
acquisition cost and the combined amount of the first and second
mortgages do not exceed the statutory loan limit for the area where the
property is located. The jurisdictional HOC is responsible for approving
the nonprofit agency.
C. Other Organizations and Private Individuals. Other organizations and
private individuals may provide secondary financing under the following
conditions:
1. The combined amount of the first and second mortgages do not
exceed the applicable LTV ratio and the maximum mortgage limit
for the area.
4155.1 REV-5
1-32 October 2003
2. The repayment terms of the second mortgage must not provide for
a balloon payment before ten years (or other such term acceptable
to FHA), unless the property is sold or refinanced, and must permit
prepayment by the borrower, without penalty, after giving the
lender 30 days advance notice.
3. The required monthly payment under both the insured mortgage
and the second mortgage or lien, plus other housing expenses and
all recurring charges, cannot exceed the borrower's reasonable
ability to pay. Any periodic payments due on the second mortgage
are due monthly and are essentially the same in dollar amount.
D. Borrowers 60 Years of Age or Older. Borrowers 60 years of age or
older may borrow the required cash investment for purchasing a principal
residence, provided:
1. The donor or lender is a relative of the borrower, a close friend
with clearly defined interest in the borrower, the borrower's
employer, or an institution established for humanitarian or welfare
purposes.
2. The donor or lender’s interest is not solely in the sale of the
property, such as a builder or seller, or any person or organization
associated with builders or sellers.
3. The principal amount of the insured mortgage loan, plus the note
or other evidence of indebtedness in connection with the property,
may not exceed 100 percent of the value, plus prepaid expenses.
4. The note or other evidence of indebtedness may not bear an
interest rate exceeding the interest rate of the insured mortgage.
E. Family Member Lending. Family members (defined below) may help
with the costs of acquiring a home in the form of a gift or a loan. All such
gifts must also meet the requirements of paragraph 2-10(C). FHA permits
family member to lend on a secured or unsecured basis, up to 100 percent
of the homebuyer's required cash investment. This lending may include
the downpayment, closing costs, prepaid expenses and discount points. If
the money lent by the family member is secured against the subject
property, whether borrowed from an acceptable source or from the family
member's own savings, only the family member provider(s) may be the
note holder. FHA will not approve any form of securitization of the note
that results in any entity other than the family member being the note
holder, whether at loan settlement or at any time during the mortgage life
cycle.
4155.1 REV-5
October 2003 1-33
Further, if the funds that are lent by the family member are borrowed from
an acceptable source, the homebuyer may not be a co-obligor on that note
(e.g., the son and daughter-in-law may not be co-obligors on the note used
to secure money borrowed by the parents that in turn was lent for the
down payment).
The following financing terms and conditions also apply:
1. The maximum insurable mortgage is not affected by gifts or loans
from family members.
2. The combined amount of financing may not exceed 100 percent of
the lesser of the property's value or sales price, plus normal closing
costs, prepaid expenses, and discount points. While the family
member may lend 100 percent of the cash investment
requirements, cash back to the homebuyer (beyond refund of any
earnest money deposit) at closing is not acceptable.
3. If periodic payments of the secondary financing are required, the
combined payments may not exceed the borrower's reasonable
ability to pay. The secondary financing payments are to be
included in the total debt-payment-to-income ratio (i.e., the "backend"
ratio) for qualifying purposes.
4. The second lien may not provide for a balloon payment within five
years from the date of execution.
5. If the family member providing the secondary financing borrows
those funds, the source may not be any entity with an identity-ofinterest
in the sale of the property, including the seller, builder,
loan officer, real estate agent, etc. Mortgage companies that have
retail banking affiliates may have that entity make a loan to the
family member, providing the secondary financing for the home
purchase. However, the lending institution may not make such
financing available under terms and conditions more favorable
than to other borrowers (i.e., there may not be any special
considerations provided in connection between making the
mortgage and lending funds to family members to be used as
secondary financing for the purchase of the home).
6. An executed copy of the document outlining the terms of the
secondary financing must be maintained in the lender’s file. An
executed copy of this agreement also must be provided in the
endorsement binder.
4155.1 REV-5
1-34 October 2003
For the purposes of this paragraph, a “family member” is defined
as a child, parent, or grandparent of the borrower or borrower’s
spouse. Included in this definition are legally adopted sons or
daughters (and a child who is a member of an individual's
household, if placed with such individual by an authorized agency
for legal adoption by that individual), and foster children. The
term "child" means a son, stepson, daughter, or stepdaughter.
4155.1 REV-5
October 2003 2-1
CHAPTER 2
MORTGAGE CREDIT ANALYSIS
2-1 OVERVIEW. The purpose of underwriting is to determine a borrower’s ability
and willingness to repay the mortgage debt, thus limiting the probability of
default and collection difficulties, and to examine the property offered as security
for the loan to determine if it is sufficient collateral. The “Four C’s of Credit”
(Credit history, Capacity to repay, Cash to close, and the Collateral) are evaluated
during the underwriting process.
This chapter on mortgage credit analysis describes procedures for evaluating the
credit history, the borrower’s capacity to make payments, and whether sufficient
cash assets are available to close the mortgage. It provides the requirements on
the types of income that may be considered in qualifying the borrower, the
liabilities that must be included in the determining creditworthiness, and the debtto-
income ratios and compensating factors used in the underwriting process.
These underwriting instructions are FHA’s “base-line” credit policies. For those
lenders using FHA-approved automated underwriting systems (AUS) or those
employing FHA’s TOTAL mortgage scorecard, there will be a considerable
number of revisions to these policies, including documentation requirements, as
described in other FHA issuances.
2-2 MORTGAGE ELIGIBILITY (BORROWERS). Generally, we will insure
mortgages made to individuals only. Under the conditions described in Chapter 1,
we will also insure mortgages made to state and local government agencies and
approved nonprofit organizations.
A. Borrowers, Co-Borrowers and Co-Signers. Borrowers and Coborrowers
take title to the property and are obligated on the mortgage note
and must also sign the security instrument. The co-borrower’s income,
assets, liabilities, and credit history are considered in determining
creditworthiness.
Co-signers do not hold ownership interest in a property, but are liable for
repaying the obligation and must sign all documents with the exception of
the security instruments. The co-signer's income, assets, liabilities, and
credit history are considered in determining creditworthiness for the
mortgage and the co-signer must complete and sign the loan application.
We do not permit an individual to take an ownership interest in the
property at settlement without signing the mortgage note and all security
instruments.
The following conditions also apply to co-borrower and co-signer
eligibility:
4155.1 REV-5
2-2 October 2003
1. A co-borrower or a co-signer may not be a party that has a
financial interest in the transaction, such as the seller, builder, real
estate agent, etc. Exceptions may be granted if the seller and coborrower/
co-signer is related to the owner by blood, marriage or
law.
2. An individual signing the loan application must not be otherwise
ineligible for participation. (See paragraph 2-5).
3. Unless otherwise exempted (e.g., military service with overseas
assignments, U.S. citizens living abroad), any non-occupying coborrowers
or co-signers must have a principal residence in the
United States.
All references to co-borrowers – including the 75 percent LTV limits
(paragraph 1-8(B)), etc. – apply equally to co-signers (except co-signers
do not take title to the property or sign the security instruments).
B. Citizenship and Immigration Status. Citizenship of the United States is
not required for eligibility. When a mortgage loan applicant indicates on
the loan application that he or she holds something other than U.S.
citizenship, the lender must determine residency status from the
documentation provided by the borrower.
Lawful Permanent Resident Aliens: For those borrowers with lawful
permanent resident alien status, FHA will insure the mortgage under the
same terms and conditions as U.S. citizens. The lender must document the
mortgage file with evidence of permanent residency and indicate on the
Uniform Residential Loan Application (URLA) that the borrower is a
lawful permanent resident alien. Evidence of lawful permanent residency
is issued by the Bureau of Citizenship and Immigration Services (BCIS)
(formerly the Immigration and Naturalization Service) within the
Department of Homeland Security.
Non-Permanent Resident Aliens: FHA will also insure a mortgage made
to a non-permanent resident alien provided that the property will be the
borrower's principal residence, the borrower has a valid SSN, and the
borrower is eligible to work in the U.S. as evidenced by an Employment
Authorization Document (EAD) issued by BCIS. If the authorization for
temporary residency status will expire within one year and a prior history
of residency status renewals exists, the lender may assume continuation
will be granted. If there are no prior renewals, the lender must determine
the likelihood of renewal, based on information from the BCIS.
Although social security cards may indicate work status, such as “not valid
for work purposes,” an individual’s work status may change without the
4155.1 REV-5
October 2003 2-3
change being reflected on the actual social security card. Therefore, the
social security card is not to be used as evidence of work status for nonpermanent
resident aliens; the BCIS employment authorization document
is to be used instead.
Non-U.S. Citizens with no lawful residency in the U.S. are not eligible for
FHA-insured mortgages.
C. Borrower's Age. There is no maximum age limit for a borrower. The
minimum age is the age at which the mortgage note can be enforced
legally in the state or other jurisdiction in which the property is located.
D. Non-Purchasing Spouses. If required by state law in order to perfect a
valid and enforceable first lien, the non-purchasing spouse may be
required to sign either the security instrument or documentation
evidencing that he or she is relinquishing all rights to the property. If the
non-purchasing spouse executes the security instrument for such reasons,
he or she is not considered a borrower for our purposes and need not sign
the loan application. In all other cases, the non-purchasing spouse is not
to appear on the security instrument or otherwise take title to the property
at loan settlement.
Where there are non-purchasing spouses who sign security instruments
relinquishing their rights to the property pursuant to applicable state laws,
these non-purchasing spouses do not have to sign the mortgage note.
Signing the security instrument for such purposes does not make the nonpurchasing
spouse a co-borrower.
Except for the obligations specifically excluded by state law, the debts of
the non-purchasing spouse must be included in the borrower’s qualifying
ratios if the borrower resides in a community property state or the property
to be insured is located in a community property state. Although the nonpurchasing
spouse's credit history is not to be considered a reason for
credit denial, a credit report that complies with the requirements of
paragraph 2-4 must be obtained for the non-purchasing spouse in order to
determine the debt-to-income ratio.
E. Military Personnel. Military personnel are considered occupant-owners
and are eligible for maximum financing if a member of the immediate
family will occupy the property as a principal residence, even if the
service person is stationed elsewhere.
F. Living Trusts. Property held in a living trust is eligible for FHA
mortgage insurance for owner-occupied property, as long as an individual
borrower remains the beneficiary and occupies the property as a principal
residence. The lender must be satisfied that the trust provides reasonable
4155.1 REV-5
2-4 October 2003
means to assure that the lender will be notified of any subsequent change
of occupancy (for owner-occupant loans only) or transfer of beneficial
interest. The trust must appear on the security instrument (i.e., mortgage,
deed of trust, security deed). The individual borrower must appear on the
security instrument when required to create a valid lien under state law;
otherwise, the individual borrower is not required to appear. The owneroccupant,
if any, and other borrower(s), if any, must appear on the note
with the trust. The individual borrower(s) is not required to appear on the
property deed or title.
4155.1 REV-5
October 2003 2-5
SECTION 1: CREDIT HISTORY
2-3 ANALYZING THE BORROWER’S CREDIT. Past credit performance serves
as the most useful guide in determining a borrower’s attitude toward credit
obligations and predicting a borrower’s future actions. A borrower who has made
payments on previous and current obligations in a timely manner represents
reduced risk. Conversely, if the credit history, despite adequate income to support
obligations, reflects continuous slow payments, judgments, and delinquent
accounts, strong compensating factors will be necessary to approve the loan.
When analyzing a borrower's credit history, examine the overall pattern of credit
behavior, rather than isolated occurrences of unsatisfactory or slow payments. A
period of financial difficulty in the past does not necessarily make the risk
unacceptable if the borrower has maintained a good payment record for a
considerable time period since the difficulty. When delinquent accounts are
revealed, the lender must document their analysis as to whether the late payments
were based on a disregard for financial obligations, an inability to manage debt, or
factors beyond the control of the borrower, including delayed mail delivery or
disputes with creditors.
While minor derogatory information occurring two or more years in the past does
not require explanation, major indications of derogatory credit–including
judgments, collections, and any other recent credit problems–require sufficient
written explanation from the borrower. The borrower's explanation must make
sense and be consistent with other credit information in the file.
Neither the lack of credit history nor the borrower's decision not to use credit may
be used as a basis for rejecting the loan application. We also recognize that some
prospective borrowers may not have an established credit history. For those
borrowers, and for those who do not use traditional credit, the lender must
develop a credit history from utility payment records, rental payments, automobile
insurance payments, or other means of direct access from the credit provider. The
lender must document that the providers of non-traditional credit do, in fact, exist
and verify the credit information. Documents confirming the existence of a nontraditional
credit provider may include a public record from the state, county, or
city records, or other means providing a similar level of objective confirmation.
To verify the credit information, lenders must use a published address or
telephone number for that creditor.
As an alternative, the lender may elect to use a non-traditional mortgage credit
report developed by a credit-reporting agency, provided that the credit reporting
agency has verified the existence of the credit providers and the lender verifies
that the non-traditional credit was extended to the applicant. The lender must
verify the credit using a published address or telephone number to make that
verification.
4155.1 REV-5
2-6 October 2003
The basic hierarchy of credit evaluation is the manner of payments made on
previous housing expenses, including utilities, followed by the payment history of
installment debts, and then revolving accounts. Generally, an individual with no
late housing or installment debt payments should be considered as having an
acceptable credit history, unless there is major derogatory credit on his or her
revolving accounts.
When reviewing the borrower's credit and credit report, the lender must pay
particular attention to the following:
A. Previous Rental or Mortgage Payment History. The payment history
of the borrower's housing obligations holds significant importance in
evaluating credit. The lender must determine the borrower's payment
history of housing obligations through either the credit report, verification
of rent directly from the landlord (with no identity-of-interest with the
borrower) or verification of mortgage directly from the mortgage servicer,
or through canceled checks covering the most recent 12-month period.
B. Recent and/or Undisclosed Debts. The lender must ascertain the
purpose of any recent debts, as the indebtedness may have been incurred
to obtain part of the required cash investment on the property being
purchased. Similarly, the borrower must provide a satisfactory
explanation for any significant debt that is shown on the credit report but
not listed on the loan application. The borrower must explain in writing
all inquiries shown on the credit report in the last 90 days.
C. Collections and Judgments. Court-ordered judgments must be paid off
before the mortgage loan is eligible for FHA insurance endorsement. (An
exception may be made if the borrower has agreed with the creditor to
make regular and timely payments on the judgment and documentation is
provided that the payments have been made in accordance with the
agreement.) FHA does not require that collection accounts be paid off as a
condition of mortgage approval. Collections and judgments indicate a
borrower’s regard for credit obligations and must be considered in the
analysis of creditworthiness with the lender documenting its reasons for
approving a mortgage where the borrower has collection accounts or
judgments. The borrower must explain in writing all collections and
judgments.
D. Previous Mortgage Foreclosure. A borrower whose previous principal
residence or other real property was foreclosed or has given a deed-in-lieu
of foreclosure within the previous three years is generally not eligible for a
new FHA-insured mortgage. However, if the foreclosure was the result of
documented extenuating circumstances that were beyond the control of the
borrower and the borrower has re-established good credit since the
foreclosure, the lender may grant an exception to the three-year
4155.1 REV-5
October 2003 2-7
requirement. Extenuating circumstances include serious illness or death of
a wage earner, but do not include the inability to sell the house because of
a job transfer or relocation to another area.
E. Bankruptcy. A Chapter 7 bankruptcy (liquidation) does not disqualify a
borrower from obtaining an FHA-insured mortgage if at least two years
have elapsed since the date of the discharge of the bankruptcy.
Additionally, the borrower must have re-established good credit or chosen
not to incur new credit obligations. The borrower also must have
demonstrated a documented ability to responsibly manage his or her
financial affairs. An elapsed period of less than two years, but not less
than 12 months, may be acceptable if the borrower can show that the
bankruptcy was caused by extenuating circumstances beyond his or her
control and has since exhibited a documented ability to manage his or her
financial affairs in a responsible manner. Additionally, the lender must
document that the borrower’s current situation indicates that the events
that led to the bankruptcy are not likely to recur.
A Chapter 13 bankruptcy does not disqualify a borrower from obtaining
an FHA-insured mortgage provided the lender documents that one year of
the payout period under the bankruptcy has elapsed and the borrower’s
payment performance has been satisfactory (i.e., all required payments
made on time). In addition, the borrower must receive permission from
the court to enter into the mortgage transaction.
F. Consumer Credit Counseling Payment Plans. Participation in a
consumer credit counseling payment program does not disqualify a
borrower from obtaining an FHA-insured mortgage provided the lender
documents that one year of the pay-out period has elapsed under the plan
and the borrower’s payment performance has been satisfactory (i.e., all
required payments made on time). In addition, the borrower must receive
written permission from the counseling agency to enter into the mortgage
transaction.
2-4 CREDIT REPORT REQUIREMENTS.
A. Traditional Credit Reports. Credit reports submitted with each loan
must contain all credit available in the accessed repositories. They also
must provide an account of all credit, residence history, and public records
information available in the credit repositories of each borrower
responsible for the mortgage debt. The minimum credit report required by
FHA is a "three repository merged" credit report (TRMCR). A
Residential Mortgage Credit Report (RMCR) from an independent
consumer-reporting agency also may be used. One report is required for
each borrower, or a joint report may be obtained for a married couple.
4155.1 REV-5
2-8 October 2003
The following are requirements for traditional credit reports:
1. The TRMCR submitted must be an original received electronically
and printed on the lender's printer or delivered by the creditreporting
agency. The report must not have whiteouts, erasures, or
alterations. It must indicate the name, address, and telephone
number of the consumer-reporting agency; and each account listed
must show the primary repository from which the particular
information was pulled. The name of the company ordering the
report must be shown.
2. The credit report must include all credit and legal information not
considered obsolete under the Fair Credit Reporting Act, including
bankruptcies, judgments, law suits, foreclosures, and tax liens that
have occurred within the last seven years. All inquiries made
within the last 90 days must also be included on the report. Credit
reports that fail to show bankruptcies, judgments, lawsuits,
foreclosures and tax liens must be supplemented with a corrected
report. Lenders must retain all copies of all credit reports and
document in writing an analysis of the reasons for any
discrepancies between the credit reports. If a lender receives any
information inconsistent with the information on the credit report,
the lender must reconcile the inconsistency.
3. The credit report must identify each borrower's name and social
security number. For each debt listed, the report also must show
the date the account was opened, the high credit amount, the
required payment, the unpaid balance, and the payment history, as
contained in the credit repositories. The report must be in an easyto-
read and understandable format, and it should not require code
translations.
4. The lender must also develop credit information separately for any
open debt that is listed on the loan application but not referenced
on the credit report. Accounts listed as "rate by mail only" or
"need written authorization" require separate written verification.
5. While the TRMCR should prove sufficient for processing most
loan applications, the following circumstances require an RMCR:
a. The borrower(s) disputes the ownership of accounts on the
TRMCR; or
b. The borrower(s) claims that collections, judgments, or liens
listed as open on the TRMCR have been paid and cannot
provide separate documentation supporting this claim; or
4155.1 REV-5
October 2003 2-9
c. The borrower claims that certain debts shown on the TRMCR
have different balances and/or payments and cannot provide
current statements (less than 30 days old) attesting to this
claim; or
d. The lender's underwriter determines that it would be prudent to
use an RMCR in lieu of a TRMCR to underwrite the loan
properly.
6. RMCRs must access at least two named repositories and meet all
the requirements for the TRMCR, plus the following:
a. Provide a detailed account of the borrower's employment
history.
b. Verify each borrower's current employment and income (if
obtainable). It also must include a statement attesting to
certification of employment and date verified. If this
information is not obtained through an interview with the
employer, the credit reporting agency must state why this
action was not taken.
c. Each account with a balance must have been checked with
the creditor within 90 days of the credit report.
B. Credit Report Requirements (Non-Traditional). A Non-Traditional
Mortgage Credit Report (NTMCR) is designed to assess the credit history
of a borrower without the types of trade references normally appearing on
a traditional credit report. It can be used either as a substitute for a
TRMCR or an RMCR for a borrower without a credit history with
traditional credit grantors or as a supplement to a traditional credit report
having an insufficient number of trade items reported. A NTMCR may
not, however, be used to enhance the credit history of a borrower with a
poor payment record or to manufacture a credit report for a borrower
without a verifiable credit history. It also may not be used to offset
derogatory references found in the borrower's traditional credit, such as
collections and judgments.
The following conditions apply when using non-traditional credit
reporting:
1. If the information obtained through the standard credit report is not
sufficient for the lender to make a prudent underwriting decision,
the lenders may use a NTMCR developed by a credit-reporting
agency that documents all non-traditional credit references.
Otherwise, the lender must develop its own non-traditional credit
history that is consistent with the requirements for credit reporting
agencies described in paragraph 2-4.
4155.1 REV-5
2-10 October 2003
2. The credit-reporting agency should consider only the types of
credit that require the mortgage applicant to make periodic
payments on a regular basis. These types of credit include rental
housing; utilities (if not included in the rental payment); telephone
service; cable television service; insurance payments (excluding
those paid through payroll deductions), such as medical,
automobile, life, household, and renter's insurance; payments to
child care providers; school tuition; payments to local stores;
payments for the uninsured portion of any medical bills; etc.
2-5 ELIGIBILITY FOR FEDERALLY-RELATED CREDIT. A borrower must
be rejected if any of the following conditions apply:
A. HUD Limited Denial of Participation (LDP) and the U.S. General
Services Administration’s “List of Parties Excluded from Federal
Procurement and Non-Procurement Programs” (GSA List) A person
suspended, debarred, or otherwise excluded from participation in the
Department’s programs is not eligible to participate in FHA-insured
mortgage transactions. The lender must examine HUD’s LDP list and the
government-wide General Services Administration’s (GSA) “List of
Parties Excluded from Federal Procurement or Nonprocurement
Programs” and document this review on the HUD 92900-WS/92900-PUR.
If the name of the borrower, seller, listing or selling real estate agents, or
loan officer appears on either list, the application is not eligible for
mortgage insurance. A lender may check HUD’s LDP list by going to
www.hud.gov and the Federal government’s list of excluded parties by
going to http://epls.arnet.gov. (An exception shall be made for a seller on
the GSA list when the property being sold is the seller’s principal
residence.)
B. Delinquent Federal Debts. If the borrower, as revealed by public
records, credit information, or HUD’s Credit Alert Interactive Voice
Response System (CAIVRS), is presently delinquent on any Federal debt
(e.g., VA-guaranteed mortgage, Title I loan, Federal student loan, Small
Business Administration loan, delinquent Federal taxes) or has a lien,
including taxes, placed against his or her property for a debt owed to the
U.S., the borrower is not eligible until the delinquent account is brought
current, paid, otherwise satisfied, or a satisfactory repayment plan is made
between the borrower and the Federal agency owed and is verified in
writing. Tax liens may remain unpaid provided the lien holder
subordinates the tax lien to the FHA-insured mortgage. If any regular
payments are to be made, they must be included in the qualifying ratios.
Since the IRS routinely takes a second lien position without the necessity
of independent documentation, eligibility for FHA mortgage insurance
will not be jeopardized by outstanding IRS tax liens remaining on the
4155.1 REV-5
October 2003 2-11
property unless the lender has information that the IRS has demanded a
first-lien position.
Although eligibility for an FHA-insured mortgage may be established by
performing the actions described above, the overall analysis of the
creditworthiness must include consideration of a borrower's previous
failure to make payments to the Federal agency in the agreed-to manner
and must document its analysis of how the previous failure does not
represent a risk of mortgage default.
C. CAIVRS. HUD’s CAIVRS is a Federal government-wide repository of
information on those individuals with delinquent or defaulted Federal debt
and on those for whom a payment of an insurance claim has occurred.
Lenders must screen all borrowers, including nonprofit agencies acting as
a borrower, using CAIVRS (except on streamline refinances). If CAIVRS
indicates the borrower is presently delinquent or has had a claim paid
within the previous three years on a loan made or insured by HUD on his
or her behalf, the borrower is not eligible except as described below.
Lenders access CAIVRS either through the FHA Connection or functional
equivalent or by calling 301-344-4000 on a touch-tone telephone. Lenders
must write the CAIVRS authorization code for each borrower on the
HUD-92900-WS/92900-PUR. Exceptions to this rule may be granted
under the following situations:
1. Assumptions. If the borrower sold the property, with or without a
release of liability, to an individual who subsequently defaulted,
the borrower is eligible, provided he or she can prove the loan was
not in default at the time of assumption.
2. Divorce. A borrower may be eligible if the divorce decree or legal
separation agreement awarded the property and responsibility for
payment to the former spouse. However, if a claim was paid on a
mortgage in default prior to the divorce, the borrower is not
eligible.
3. Bankruptcy. When the property was included in a bankruptcy
that was caused by circumstances beyond the borrower's control
(such as the death of the principal wage earner or serious long-term
uninsured illness), the borrower may be eligible if the borrower
meets the requirements in Paragraph 2-3 E.
While FHA may delete erroneous information regarding a borrower
falsely indicated as having defaulted on a FHA mortgage, such as
incorrect social security number reporting, it will not remove correct
CAIVRS information even if the borrower is judged eligible under the
conditions described above.
4155.1 REV-5
2-12 October 2003
Lenders may not rely upon a clear CAIVRS approval when in possession
of independent evidence of delinquent federal obligations and must
document the resolution of any conflicting information. If the lender has
reason to believe the CAIVRS message is erroneous or needs to establish
the date of claim payment, the lender must contact the appropriate HOC
for instructions or documentation to support the borrower's eligibility.
The appropriate HOC can provide information when the three-year
waiting period will elapse or if the social security number in CAIVRS is
erroneous. The HOC will also provide instructions to lenders regarding
processing requirements for other HUD-related defaults and claims (e.g.,
Title I loans).
We cannot alter or delete CAIVRS information reported from other
Federal agencies, such as the Department of Education, Veterans Affairs,
etc. The borrower and/or the lender must contact those agencies to correct
or remove erroneous or outdated information. We do not require a "clear"
CAIVRS authorization number as a condition for mortgage endorsement,
but the lender must document and justify its approval based on the
exceptions described above.
4155.1 REV-5
October 2003 2-13
SECTION 2: EFFECTIVE INCOME
The anticipated amount of income, and the likelihood of its continuance, must be
established to determine a borrower's capacity to repay mortgage debt. Income may not
be used in calculating the borrower's income ratios if it comes from any source that
cannot be verified, is not stable, or will not continue. This section describes acceptable
types of income, procedures for calculating effective income, and requirements for
establishing income stability.
2-6 STABILITY OF INCOME. We do not impose a minimum length of time a
borrower must have held a position of employment to be eligible. However, the
lender must verify the borrower's employment for the most recent two full years.
If a borrower indicates he or she was in school or in the military during any of this
time, the borrower must provide evidence supporting this claim, such as college
transcripts or discharge papers. The borrower also must explain any gaps in
employment spanning one month or more. Allowances for seasonal employment,
such as is typical in the building trades, etc., may be made if documented by the
lender.
To analyze and document the probability of continued employment, lenders must
examine the borrower’s past employment record, qualifications for the position,
previous training and education, and the employer's confirmation of continued
employment. A borrower who changes jobs frequently within the same line of
work, but continues to advance in income or benefits, should be considered
favorably. In this analysis, income stability takes precedence over job stability.
In some cases, a borrower may have recently returned to the work force after an
extended absence. In these circumstances, the borrower's income may be
considered effective and stable provided the following conditions apply:
A. The borrower has been employed in the current job for six months or
more, and
B. The borrower can document a two-year work history prior to the absence
from the work force. Acceptable documentation includes traditional
employment verifications, copies of W-2's or paystubs.
An example of an acceptable employment situation includes a person that
took several years off of work to raise children and then returned to the
workforce. Situations not meeting the criteria listed above may be
considered as compensating factors only.
2-7 SALARIES, WAGES, AND OTHER FORMS OF EFFECTIVE INCOME.
The income of each borrower to be obligated for the mortgage debt must be
analyzed to determine whether it can reasonably be expected to continue through
at least the first three years of the mortgage loan. If the borrower intends to retire
4155.1 REV-5
2-14 October 2003
during this period, the effective income must be the amount of documented
retirement benefits, social security payments, or other payments expected to be
received in retirement. No inquiry may be made regarding possible future
maternity leave.
In most cases, the borrower’s income will be limited to salaries or wages. Income
from other sources can be included as effective income with proper verification
by the lender. Procedures for analyzing other acceptable income sources besides
salaries and wages are described below:
A. 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. The lender must develop an average of
bonus or overtime income for the past two years, and the employment
verification must not state that such income is unlikely to continue.
Periods of less than two years may be acceptable provided the lender
justifies and documents in writing the reason for using the income for
qualifying purposes.
An earnings trend also must be established and documented for overtime
and bonus income. If either type shows a continual decline, the lender
must provide a sound rationalization in writing for including the income
for borrower qualifying. If bonus income varies significantly from year to
year, a period of more than two years must be used in calculating the
average income.
B. Part-Time Income. Part-time/second job income, including employment
in seasonal work, 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. Seasonal employment (e.g., umpiring
baseball games in summer, working at a department store during the
holiday shopping season) is considered uninterrupted and may be used in
qualifying if the lender documents that the borrower has worked the same
type of job for the past two years and expects to be rehired during the next
season. Income from a part-time position that has been received for less
than two years may be included as effective income, provided the lender
justifies and documents that the income's continuance is likely. Income
from part-time positions not meeting these requirements may be
considered as a compensating factor only.
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.) If
a borrower's regular employment involves less than a typical 40-hour
workweek, the stability of that income should be evaluated as any other
regular, on-going primary employment. For example, a registered nurse
4155.1 REV-5
October 2003 2-15
may have worked 24 hours per week for the last year. Although this job
requires less than 40 hours of work per week, it is the borrower's primary
employment and is to be considered effective income.
We recognize that many low- and moderate-income families rely on parttime
and seasonal income for day-to-day needs. Lenders must not restrict
the consideration of such income sources in qualifying these borrowers.
C. Military Income. In addition to base pay, military personnel may be
entitled to additional forms of pay. Income from variable housing
allowances, clothing allowances, flight or hazard pay, rations, and
proficiency pay is acceptable, provided its probability of continuance is
verified in writing. An additional consideration may be the tax-exempt
nature of some of these payments (see paragraph Q for additional
information.)
D. 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.)
Individuals whose commission income shows a decrease from one year to
the next require significant compensating factors to allow for loan
approval. Borrowers with commission income received for more than one
but less than two years may be considered favorably provided the
underwriter is able to make a sound rationalization for acceptance and can
document the likelihood of continuance.
Commissions earned for less than one year are not considered effective
income. Exceptions may be made for situations in which the borrower's
compensation was changed from a salary to commission within a similar
position with the same employer. A borrower also may qualify when the
portion of earnings not attributed to commissions would be sufficient to
qualify the borrower for the mortgage.
E. Retirement and Social Security Income. 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.
F. 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. Acceptable
4155.1 REV-5
2-16 October 2003
evidence of payment regularity includes cancelled checks, deposit slips,
tax returns, and court records. Periods less than twelve months may be
acceptable, provided the payer’s ability and willingness to make timely
payments is adequately documented by the lender.
G. Notes Receivable. A copy of the note must be presented to establish the
amount and length of payment. The borrower also must provide evidence
that these payments have been received consistently for the last twelve
months, which may include deposit slips, cancelled checks, or tax returns.
If the borrower is not the original payee on the note, the lender must also
establish that the borrower is now a holder in due course and able to
enforce the note.
H. Interest and Dividends. Interest and dividend income may be used,
provided that documentation (tax returns or account statements) supports a
two-year history of receipt. This income must be averaged over the two
years. Any funds derived from these sources and required for the cash
investment must be subtracted before the projected interest or dividend
income is calculated.
I. Mortgage Credit Certificates. If a government entity subsidizes the
mortgage payments, either through direct payments or through tax rebates,
these payments can be considered as acceptable income if verified in
writing. Either type of subsidy may be added to gross income or may be
used to directly offset the mortgage payment before calculating the
qualifying ratios.
J. Employer Differential Payments. If the employer subsidizes the
mortgage payments through direct payments, the amount of the payments
is considered gross income; it may not be used to offset the mortgage
payment directly, even if the employer pays the servicing lender directly.
K. VA Benefits. Direct compensation, such as for a service-related
disability, is acceptable, subject to documentation from the VA.
Education benefits, used to offset education expenses, are not acceptable.
L. Government Assistance Programs. Income received from government
assistance programs is acceptable, subject to documentation from the
paying agency, provided the income is expected to continue at least three
years. If the income is not expected to be received for at least three years,
such income may be considered as a compensating factor.
(Unemployment income must be documented for two years. Reasonable
assurance of its continuance is also required. This requirement may apply
to individuals employed on a seasonal basis, such as farm workers, resort
employees, etc.)
4155.1 REV-5
October 2003 2-17
M. Rental Income. Rent received for properties owned by the borrower is
acceptable if the lender can document that the rental income is stable.
Examples of stability may include a current lease, an agreement to lease,
or a rental history over the previous 24 months that is free of unexplained
gaps greater than three months. (Student, seasonal, or military renters, or
property rehabilitation would provide such an explanation). A separate
schedule of real estate is not required for rental properties, provided all
properties are shown on the URLA.
If the borrower resides in one or more units of a multiple-unit property and
charges rent to tenants of other units, that rent may be used for qualifying
purposes. However, projected rent of additional units only and not the
owner-occupied unit(s) may be considered gross income only after
deducting the HOC’s vacancy and maintenance factor. They may not be
used as a direct offset to the mortgage payments.
Income from roommates in a single-family property to be occupied as the
borrower's primary residence is not acceptable. Rental income from
boarders is acceptable if the boarders are related by blood, marriage, or
law. The rental income may be considered effective income if shown on
the borrower's tax returns. Otherwise, the income only may be considered
a compensating factor and must be documented adequately by the lender.
The following is required to verify all rental income:
1. Schedule E of IRS Form 1040. Depreciation may be added back
to the net income or loss shown on Schedule E. Positive rental
income is considered gross income for qualifying purposes;
negative rental income must be treated as a recurring liability. The
lender must be certain that the borrower still owns each property
listed, by comparing the Schedule E with the real estate owned
section of the residential loan application. (If the borrower in the
same general area owns six or more units, a map disclosing the
locations must be submitted evidencing compliance with FHA's
seven-unit limitation. See paragraph 4-8 for additional
information.)
2. Current Leases. If a property was acquired since the last income
tax filing and is not shown on Schedule E, a current signed lease or
other rental agreement must be provided. The gross rental amount
must be reduced for vacancies and maintenance by 25 percent (or
the percentage developed by the jurisdictional HOC), before
subtracting PITI and any homeowners' association dues, etc., and
applying the remainder to income (or recurring debts, if negative).
4155.1 REV-5
2-18 October 2003
N. Eligible Investment Properties. If the property to be insured is an
eligible investment property or sold through FHA's REO program, the
following calculations of qualifying ratios apply:
1. Subtract the monthly payment (PITI) from the monthly net rental
income of the subject property (gross rents, minus the 25 percent
reduction or HOC’s percentage reduction for vacancies and
repairs). If this calculation yields a positive number, add the
number to the borrower's monthly gross income. If the calculation
results in a negative number, consider it a recurring monthly
obligation; then
2. Calculate the mortgage payment-to-income ratio (top or front-end
ratio) by dividing the borrower's current housing expense
(principal residence) by the monthly gross income. (The monthly
gross income will include any positive cash flow from the subject
investment property.); and
3. Calculate the total fixed payment-to-income ratio (bottom or backend
ratio) by dividing the borrower's total monthly obligations,
including any net loss from the subject investment property, by the
borrower's total monthly gross income.
O. Automobile Allowances and Expense Account Payments. Only the
amount by which the borrower's automobile allowance or expense account
payments exceed actual expenditures may be considered income. The
borrower must provide IRS Form 2106, Employee Business Expenses, for
the previous two years to establish the amount of income that may be
added to gross income. The borrower also must provide verification from
the employer that these payments will continue. (If these calculations
show a loss, that amount must be treated as a recurring debt. If the
borrower uses the standard per-mile rate in calculating automobile
expenses, as opposed to the actual cost method, the portion that the IRS
considers depreciation may be added back to income.) Additionally, the
borrower's monthly car payment must be treated as a recurring debt; it
may not be offset by the car allowance.
P. Trust Income. Income from trusts may be used if guaranteed, constant
payments will continue for at least the first three years of the mortgage
term. Documentation is required and includes a copy of the Trust
Agreement, or other trustee's statement, confirming amount, frequency of
distribution, and duration of payments. Funds from the trust account also
may be used for the required cash investment with adequate
documentation.
Q. Non-Taxable Income. If a particular source of regular income is not
subject to federal taxes (e.g., certain types of disability and public
assistance payments, military allowances), the amount of continuing tax
4155.1 REV-5
October 2003 2-19
savings attributable to the non-taxable income source may be added to the
borrower's gross income. The percentage of income that may be added
may not exceed the appropriate tax rate for that income amount, and no
additional allowances for dependents are acceptable. The lender must
document and support the adjustments (the amount the income is "grossed
up") made for any non-taxable income source. Child support income
cannot be grossed up. The lender should use the tax rate used to calculate
last year's income tax for the borrower. If the borrower is not required to
file a federal income tax return, the tax rate to use is 25 percent.
R. Projected Income. Projected or hypothetical income is not acceptable for
qualifying purposes. However, exceptions are permitted to this rule for
income from cost-of-living adjustments, performance raises, bonuses, etc.,
which are both verified by the employer in writing and scheduled to begin
within 60 days of loan closing.
If a borrower is about to start a new job and has a guaranteed, nonrevocable
contract for employment that will begin within 60 days of loan
closing, the income is acceptable for qualifying purposes. The lender also
must verify that the borrower will have sufficient income or cash reserves
to support the mortgage payments and any other obligations during the
interim between loan closing and the start of employment. (This condition
may be appropriate for situations such as teachers whose contracts will
begin with the new school year, or physicians who will begin residency
after the loan is scheduled to close.) However, if the loan will close more
than 60 days before the borrower’s employment begins, the loan is not
eligible for endorsement until the lender provides a pay stub or other
acceptable evidence that the borrower has begun the new job.
2-8 EMPLOYMENT BY FAMILY-OWNED BUSINESSES. Borrowers
employed at businesses owned by their family member(s) are required to provide
additional income documentation. These borrowers must provide the normal
verification of employment, pay stubs, and evidence that they are not an owner of
the business. This evidence may include copies of the borrower's signed personal
tax returns or a signed copy of the corporate tax return showing ownership
percentages.
2-9 SELF-EMPLOYED BORROWERS. A borrower with a 25 percent or greater
ownership interest in a business is considered self-employed for FHA mortgage
loan underwriting purposes.
The following conditions apply to underwriting self-employed borrowers:
A. Minimum Length of Self-Employment. Income from self-employment
is considered stable and effective if the borrower has been self-employed
for two or more years. The high probability of failure during the first few
4155.1 REV-5
2-20 October 2003
years of a business makes the following requirements necessary for
individuals who have been self-employed less than two years:
1. Between One and Two Years. An individual self-employed
between one and two years must have at least two years of
documented previous successful employment (or a combination of
one year of employment and formal education or training) in the
line of work in which the borrower is self-employed or in a related
occupation to be eligible.
2. Less than One Year. The income from a borrower self-employed
less than one year may not be considered effective income.
B. Documentation Requirements. The following documents are required
from self-employed borrowers:
1. Signed and dated individual tax returns, plus all applicable
schedules, for the most recent two years.
2. Signed copies of federal business income tax returns for the last
two years, with all applicable schedules, if the business is a
corporation, an "S" corporation, or a partnership.
3. A year-to-date profit-and-loss (P&L) statement and balance sheet.
4. A business credit report on corporations and "S" corporations.
C. Analyzing Income. The lender must establish the borrower's earnings
trend over the previous two years but may average the income over three
years, if all three years' tax returns are provided. If the borrower provides
quarterly tax returns, the analysis can include income through the period
covered by the tax filings. If the borrower is not subject to quarterly tax
filings or does not file quarterly returns (Form IRS 1040 ES), the income
shown on the P&L statement may be included in the analysis, provided the
income stream based on the P&L statement is consistent with the previous
years' earnings. If the P&L statements submitted for the current year
show an income stream considerably greater than what is supported by the
previous years' tax returns, the analysis of income must be predicated
solely on the income verified through the tax returns.
To determine if the business can be expected to continue to generate
sufficient income for the borrower's needs, lenders must analyze carefully
the business's financial strength, the source of its income, and the general
economic outlook for similar businesses in the area. Annual earnings that
are stable or increasing are acceptable. Conversely, a borrower whose
4155.1 REV-5
October 2003 2-21
business shows a significant decline in income over the period analyzed is
not acceptable, even if current income and debt ratios meet our guidelines.
There are four basic types of business structures: sole proprietorships,
corporations; limited liability ("S" corporations); and partnerships. Each
type requires slightly different forms of analysis.
The following provides additional information on analyzing tax returns:
1. Individual Tax Returns (IRS Form 1040). The amount shown
on the IRS Form 1040 as "adjusted gross income" either must be
increased or decreased, based on the lender's analysis of the
individual tax returns and any related tax schedules. Particular
attention must be paid to the following:
a. Wages, Salaries, and Tips. An amount shown under this
heading may indicate that the individual is a salaried
employee of a corporation or has other sources of income.
It also may indicate that the spouse is employed, in which
case the income must be subtracted from the adjusted gross
income in the analysis.
b. Business Income or Loss (from Schedule C). The sole
proprietorship income calculated on Schedule C is business
income. Depreciation or depletion may be added back to
adjusted gross income.
c. Rents, Royalties, Partnerships, Etc. (from Schedule E).
Any income received from rental properties or royalties
may be used as income after adding back any depreciation
shown on Schedule E.
d. Capital Gain or Loss (from Schedule D). This transaction
generally occurs only one time, and it should not be
considered in determining effective income. However, if
the business has a constant turnover of assets resulting in
gains or losses, the capital gain or loss may be considered
in determining the income, provided the borrower has at
least three years' tax returns evidencing capital gains. An
example includes an individual who purchases old houses,
remodels them, and sells them for a profit.
e. Interest and Dividend Income (from Schedule B). This
income, which is taxable and tax-exempt, may be added
back to the adjusted gross income only if it has been
received for the past two years and is expected to continue.
4155.1 REV-5
2-22 October 2003
(If the interest-bearing asset will be liquidated as a source
of the cash investment, the lender must adjust accordingly.)
f. Farm Income or Loss (from Schedule F). Any depreciation
shown on Schedule F may be added back to the adjusted
gross income.
g. IRA Distributions, Pensions, Annuities, and Social Security
Benefits. The non-taxable portion of these items may be
added back to the adjusted gross income, if the income is
expected to continue for the first three years of the
mortgage.
h. Adjustments to Income. Certain adjustments to income
shown on the IRS Form 1040 may be added back to the
adjusted gross income. Among these adjustments are IRA
and Keogh retirement deductions, penalties on early
withdrawal of savings, health insurance deductions, and
alimony payments.
i. Employee Business Expenses. These expenses are actual
cash expenses that must be deducted from the borrower's
adjusted gross income.
2. Corporate Tax Returns (IRS Form 1120). Corporations are
state-chartered businesses owned by their stockholders.
Compensation to its officers, generally in proportion to the
percentage of ownership, is shown on the corporate tax returns and
will appear on individual tax returns. If the borrower's percentage
of ownership is not shown, it must be obtained separately from the
corporation's accountant, with evidence that the borrower has the
right to those funds. Once the adjusted business income is
determined, it should be multiplied by the borrower's percentage of
ownership in the business.
In analyzing the corporate tax returns, lenders must adjust for the
following:
a. Depreciation and Depletion. The corporation's depreciation
and depletion must be added back to after-tax income.
b. Taxable Income. Taxable income is the corporation's net
income before federal taxes. It must be reduced by the tax
liability.
4155.1 REV-5
October 2003 2-23
c. Fiscal Year vs. Calendar Year. If the corporation operates
on a fiscal year that is different from the calendar year, an
adjustment must be made by the lender to relate corporate
income to the individual tax return.
d. Cash Withdrawals. The borrower's withdrawal of cash
from the corporation may have a severe negative impact on
the corporation's ability to continue operating.
3. "S" Corporation Tax Returns. An "S" corporation is generally a
small, start-up business, with gains and losses passed on to
stockholders in proportion to each stockholder's percentage of
business ownership. The income for the owners comes from W-2
wages and is taxed at the individual rate.
The "compensation of officers" line on the IRS Form 1120S is
transferred to the borrower's IRS Form 1040. Both depreciation
and depletion may be added back to income in proportion to the
borrower's share of income. However, income also must be
deducted proportionately by the total obligations payable by the
corporation in less than one year. The borrower's withdrawal of
cash from the corporation may have a severe negative impact on
the corporation's ability to continue operating and must be
considered in the analysis.
4. Partnership Tax Returns. A partnership is formed when two or
more individuals form a business and share in profits, losses, and
responsibility for running the company. Each partner pays taxes
on his or her proportionate share of the partnership’s net income.
Both general and limited partnerships report income on the IRS
Form 1065; this form must be reviewed by the lender to assess the
viability of the business. The partner's share of income is carried
over to Schedule E of IRS Form 1040. Both depreciation and
depletion may be added back to income in proportion to the
borrower's share of income. However, income also must be
deducted proportionately by the total obligations payable by the
partnership in less than one year. The borrower's withdrawal of
cash from the partnership may have a severe negative impact on
the partnership's ability to continue operating and must be
considered in the analysis.
4155.1 REV-5
2-24 October 2003
SECTION 3: BORROWER'S CASH INVESTMENT IN THE PROPERTY
2-10 FUNDS TO CLOSE. The cash investment in the property must equal the
difference between the amount of the insured mortgage, excluding any upfront
MIP, and the total cost to acquire the property including prepaid expenses and
closing costs as described in paragraph 1-9.
All funds for the borrower's investment in the property must be verified and
documented. Acceptable sources of these funds include the following:
A. Earnest Money Deposit. If the amount of the earnest money deposit
exceeds 2 percent of the sales price or appears excessive based on the
borrower's history of accumulating savings, the lender must verify with
documentation the deposit amount and the source of funds. Satisfactory
documentation includes a copy of the borrower's cancelled check. A
certification from the deposit-holder acknowledging receipt of funds and
separate evidence of the source of funds is also acceptable. Evidence of
source of funds includes a verification of deposit or bank statement
showing that at the time the deposit was made the average balance was
sufficient to cover the amount of the earnest money deposit.
B. Savings and Checking Accounts. A verification of deposit (VOD), along
with the most recent bank statement, may be used to verify savings and
checking accounts. If there is a large increase in an account, or the
account was opened recently, the lender must obtain a credible
explanation of the source of those funds.
C. Gift Funds. An outright gift of the cash investment is acceptable if the
donor is the borrower’s relative, the borrower's employer or labor union, a
charitable organization, a governmental agency or public entity that has a
program to provide homeownership assistance to low- and moderateincome
families or first-time homebuyers, or a close friend with a clearly
defined and documented interest in the borrower. The gift donor may not
be a person or entity with an interest in the sale of the property, such as the
seller, real estate agent or broker, builder, or any entity associated with
them. Gifts from these sources are considered inducements to purchase
and must be subtracted from the sales price. No repayment of the gift may
be expected or implied. (As a rule, we are not concerned with how the
donor obtains the gift funds provided they are not derived in any manner
from a party to the sales transaction. Donors may borrow gift funds from
any other acceptable source provided the mortgage borrowers are not
obligors to any note to secure money borrowed to give the gift.) This rule
also applies to properties of which the seller is a government agency
selling foreclosed properties, such as the Veterans Administration or Rural
Housing Services. Only family members may provide equity credit as a
gift on a property being sold to other family members. These restrictions
4155.1 REV-5
October 2003 2-25
on gifts and equity credit may be waived by the jurisdictional HOC
provided that the seller is contributing to or operating an acceptable
affordable housing program.
FHA deems the payment of consumer debt by third parties to be an
inducement to purchase. While FHA permits sellers and other parties to
make contributions of up to six percent of the sales price of a property
toward a buyer's actual closing costs and financing concessions, this
policy applies exclusively to the provision of mortgage financing. Other
expenses paid on behalf of the borrower must result in a dollar-for-dollar
reduction to the sales price. The dollar-for-dollar reduction to the sales
price also applies to gift funds not meeting the requirement that the gift be
for downpayment assistance and is provided by an acceptable source.
When someone other than a family member has paid off debts, the funds
used to pay off the debt must be treated as an inducement to purchase and
the sales price must be reduced by a dollar-for-dollar amount in
calculating the maximum insurable mortgage.
Documentation Requirements. The lender must document the gift funds
by obtaining a gift letter, signed by the donor and borrower, that specifies
the dollar amount of the gift, states that no repayment is required, shows
the donor’s name, address, telephone number and states the nature of the
donor’s relationship to the borrower. In addition, the lender must
document the transfer of funds from the donor to the borrower, as follows:
1. If the gift funds are in the homebuyer's bank account, the lender
must document the transfer of the funds from the donor to the
homebuyer by obtaining a copy of the canceled check or other
withdrawal document showing that the withdrawal is from the
donor's account. The homebuyer's deposit slip and bank statement
that shows the deposit is also required.
2. If the gift funds are to be provided at closing:
a. If the transfer of the gift funds is by certified check made
on the donor's account, the lender must obtain a bank
statement showing the withdrawal from the donor's
account, as well as a copy of the certified check.
b. If the donor purchased a cashier's check, money order,
official check, or any other type of bank check as a means
of transferring the gift funds, the donor must provide a
withdrawal document or canceled check for the amount of
the gift, showing that the funds came from the donor's
personal account. If the donor borrowed the gift funds and
cannot provide documentation from the bank or other
4155.1 REV-5
2-26 October 2003
savings account, the donor must provide written evidence
that those funds were borrowed from an acceptable source,
i.e., not from a party to the transaction, including the
lender. "Cash on hand" is not an acceptable source of the
donor's gift funds.
Regardless of when the gift funds are made available to the
homebuyer, the lender must be able to determine that the
gift funds ultimately were not provided from an
unacceptable source and were indeed the donor's own
funds. When the transfer occurs at closing, the lender
remains responsible for obtaining verification that the
closing agent received funds from the donor for the amount
of the purported gift and that those funds came from an
acceptable source.
NOTE: FHA does not “approve” down payment assistance programs in
the form of gifts administered by charitable organizations (i.e.,
nonprofits). Mortgage lenders are responsible for assuring that the gift to
the homebuyer from the charitable organization meets the appropriate
FHA requirements and the transfer of funds is properly documented. In
addition, FHA does not allow nonprofit entities to provide gifts to
homebuyers for the purpose of paying off installment loans, credit cards,
collections, judgments, and similar debts.
D. Collateralized Loans. Funds can be borrowed for the total required
investment as long as satisfactory evidence is provided that the funds are
fully secured by investment accounts or real property. Such assets may
include stocks, bonds, real estate (other than the property being
purchased), etc.
In addition, certain types of loans secured against deposited funds, such as
signature loans, the cash value of life insurance policies, loans secured by
401(k)s, etc., in which repayment may be obtained through extinguishing
the asset; do not require consideration of a repayment for qualifying
purposes. However, in such circumstances, the asset securing the loan
may not be included as assets to close or otherwise considered as available
to the borrower.
An independent third party must provide the borrowed funds. The seller,
real estate agent or broker, lender, or other interested third party may not
provide such funds. Unacceptable borrowed funds include signature
loans, cash advances on credit cards, borrowing against household goods
and furniture and other similar unsecured financing.
4155.1 REV-5
October 2003 2-27
E. Sales Proceeds. The net proceeds from an arms-length sale of a currently
owned property may be used for the cash investment on a new house. A
fully executed HUD-1 Settlement Statement must be provided as
satisfactory evidence of the cash sales proceeds accruing to the borrower.
If the property has not sold by the time of underwriting, loan approval
must be conditioned upon verifying the actual proceeds received by the
borrower. The lender must document both the actual sale and the
sufficiency of the net proceeds required for settlement.
F. Trade Equity. The borrower may agree to trade his or her real property
to the seller as part of the cash investment. The amount of the borrower's
equity contribution is determined by subtracting all liens against the
property being traded (along with any real estate commission) from the
lesser of that property's appraised value or sales/trade price.
Value must be determined by a residential appraisal no more than six
months old. Evidence of ownership also is required. Additionally, if the
property being traded has an FHA-insured mortgage, assumption
processing requirements and restrictions apply (see Chapter 4 for
additional information).
G. Sale of Personal Property. If the borrower intends to sell personal
property items (cars, recreational vehicles, stamps, coins, baseball card
collections, etc.) to obtain funds required for closing, the borrower must
provide a satisfactory estimate of their worth, in addition to conclusive
evidence the items have been sold. The estimated worth of the items
being sold may be in the form of published value estimates, such as those
issued by automobile dealers, philatelic or numismatic associations, or a
separate written appraisal by a qualified appraiser with no financial
interest in the loan transaction. Only the lesser of this estimate of value or
the actual sales price is considered as assets to close.
H. Employer's Guarantee Plans. If the borrower’s employer guarantees to
purchase the borrower's previous residence as the result of relocation, the
borrower must submit evidence of the agreement and the net proceeds
must be guaranteed.
I. Employer Assistance Plans. If the employer, to attract or retain valuable
employees, pays the employee's closing costs, mortgage insurance
premium, or any portion of the cash investment, this payment is
considered employee compensation and no adjustment to the maximum
mortgage amount is required. If the employer provides this benefit after
loan settlement, the borrower must provide evidence of sufficient cash for
closing. A salary advance, however, cannot be considered as assets to
close since it represents an unsecured loan.
4155.1 REV-5
2-28 October 2003
J. Savings Bonds, Etc. Government issued bonds are counted at original
purchase price, unless eligibility for redemption and redemption value are
confirmed. Actual receipt of funds at redemption must be verified.
K. IRAs, Thrift Savings Plans, 401(k)s & Keogh Accounts. Assets such as
IRAs, thrift savings plans, and 401(k)s, etc., may be included in the
underwriting analysis up to only 60 percent of value unless the borrower
provides conclusive evidence that a higher percentage may be withdrawn
after subtracting any federal income tax and any withdrawal penalties.
Evidence of redemption is required.
L. Stocks and Bonds. The monthly or quarterly statement provided by the
stockbroker or financial institution managing the portfolio may be used to
verify the value of these securities. Actual receipt of funds must be
verified and documented.
M. Cash Saved At Home. Borrowers who have saved cash at home and are
able to demonstrate adequately the ability to do so are permitted to have
this money included as an acceptable source of funds to close the
mortgage. To include such funds in assessing the homebuyer's cash assets
for closing, the money must be verified–whether deposited in a financial
institution or held by the escrow/title company–and the borrower must
provide satisfactory evidence of the ability to accumulate such savings.
The asset verification process requires the borrower to explain in writing
how such funds were accumulated and the amount of time taken to do so.
The lender must determine the reasonableness of the accumulation of the
funds based on the borrower's income stream, the time period during
which the funds were saved, the borrower’s spending habits, documented
expenses and the borrower’s history of using financial institutions. (All
other factors being equal, individuals with checking and/or savings
accounts are less likely to save money at home than an individual with no
history of such accounts.)
N. Rent Credit. The cumulative amount of the rental payments that exceed
the appraiser's estimate of fair market rent may be considered
accumulation of the borrower's cash investment. Both the rent-withoption-
to-purchase agreement and the appraiser's estimate of market rent
must be included in the endorsement package.
Conversely, if the sales agreement reveals that the renter has been living in
the property (or one owned by the seller) rent-free, or that an agreement
was made allowing the renter to occupy at a rental amount considerably
below fair market value in anticipation of eventual purchase of the
property, this situation must be treated as an inducement to purchase with
an appropriate reduction to the mortgage. Exceptions may be granted in
4155.1 REV-5
October 2003 2-29
situations, such as when a builder fails to deliver a property at an agreed-to
time and then permits the borrower to occupy that or another unit for lessthan-
market rent temporarily until construction is complete.
O. Sweat Equity. Labor performed or materials furnished by the borrower
before closing, on the property being purchased, may be considered as the
equivalent of a cash investment, to the extent of the estimated cost of the
work or materials. (Sweat equity may be "gifted" subject to the gift
requirements and additional requirements shown below.) Additionally,
the following apply to sweat equity:
1. On existing construction, only the repairs or improvements listed
on the appraisal are eligible for sweat equity. Any work completed
or materials provided before the appraisal is made are not eligible.
On proposed construction, the sales contract must indicate the
tasks to be performed by the homebuyer during construction.
2. The borrower's labor may be considered as the equivalent of cash,
if the borrower can demonstrate his or her ability to complete the
work in a satisfactory manner. The lender must document the
contributory value of the labor through either the appraiser's
estimate or a cost estimating service.
3. Delayed work (on-site escrow), clean up, debris removal, and other
general maintenance cannot be included as sweat equity.
4. There can be no cash back to the borrower in these transactions.
5. Sweat equity on a property other than the property being purchased
is not acceptable. Compensation for work performed on other
properties must be in cash and be properly documented.
6. Evidence of the source of funds used to purchase and the market
value of the materials must be provided if the borrower furnishes
these.
P. Commission from Sale. If the borrower is a licensed real estate agent
entitled to a real estate commission from the sale of the property being
purchased, that amount may be used for the cash investment with no
adjustment to the maximum mortgage required. A family member entitled
to the commission also may provide gift funds to the homebuyer.
Q. Disaster Relief Grants and Loans. Grants or loans from state and
federal agencies [e.g., Federal Emergency Management Agency (FEMA)]
that provide immediate housing assistance to individuals displaced due to
natural disaster may be used for the borrower's cash investment. Secured
4155.1 REV-5
2-30 October 2003
or unsecured disaster relief loans administered by the Small Business
Administration (SBA) also may be used. However, if the SBA loan will
be secured against the property being purchased, it must be clearly
subordinate to the FHA-insured mortgage. Any monthly payment arising
from such a loan must be included in the qualifying ratios.
R. Cash Accumulated with Private Savings Clubs. Some borrowers may
choose to use non-traditional methods of saving money by making
deposits into private savings club. Often, these private savings clubs pool
resources for use among the membership.
If a homebuyer claims that the cash to close an FHA-insured mortgage is
from savings held with a private savings club, the borrower must be able
to adequately document the accumulation of those assets with the club.
While such clubs are not supervised banking institutions, the clubs must –
at a minimum– have account ledgers, receipts from the club, verification
from the club treasurer, and identification of the club so that the lender can
reverify the information provided. The underwriter must be able to
determine that it was reasonable for the borrower to have saved the money
claimed and that there is no evidence these funds were borrowed with an
expectation of repayment.
4155.1 REV-5
October 2003 2-31
SECTION 4: LIABILITIES
2-11 TYPES OF LIABILITIES. The following are types of liabilities that must be
considered in qualifying borrowers:
A. Recurring Obligations. The borrower's liabilities include all installment
loans, revolving charge accounts, real estate loans, alimony, child support,
and all other continuing obligations. In computing the debt-to-income
ratios, the lender must include the monthly housing expense and all other
additional recurring charges extending ten months or more, including
payments on installment accounts, child support or separate maintenance
payments, revolving accounts and alimony, etc. Debts lasting less than ten
months must be counted if the amount of the debt affects the borrower's
ability to make the mortgage payment during the months immediately
after loan closing; this is especially true if the borrower will have limited
or no cash assets after loan closing.
The following additional information deals with revolving accounts and
alimony payments:
1. Revolving Accounts. If the account shown on the credit report has
an outstanding balance, monthly payments for qualifying purposes
must be calculated at the greater of 5 percent of the balance or $10
(unless the account shows a specific minimum monthly payment).
2. Alimony. Because of the tax consequences of alimony payments,
the lender may choose to treat the monthly alimony obligation as a
reduction from the borrower's gross income in calculating
qualifying ratios, rather than as a monthly obligation.
B. Contingent Liabilities. A contingent liability exists when an individual
will be held responsible for payment of a debt, should another party,
jointly or severally obligated, default on that payment. Unless the
borrower can provide conclusive evidence from the debt holder that there
is no possibility the debt holder will pursue debt collection against him or
her should the other party default, the following rules apply to contingent
liabilities:
1. Mortgage Assumptions. When a borrower remains obligated on an
outstanding FHA-insured, VA-guaranteed, or conventional
mortgage secured by a property that has been sold or traded within
the last twelve months without a release of liability, or is to be sold
on assumption without a release of liability being obtained,
contingent liability must be considered unless:
4155.1 REV-5
2-32 October 2003
a. The originating lender of the mortgage being underwritten
obtains from the servicer of the assumed loan a payment
history showing that mortgage has been current during the
previous 12 months; or
b. An appraisal or closing statement from the sale of the
property supports a value that results in a 75 percent LTV
ratio [i.e., the outstanding balance on the mortgage loan
(minus any UFMIP, if applicable) cannot exceed 75 percent
of the appraised value or sales price].
2. Co-Signed Obligations. If the individual applying for an FHAinsured
mortgage is a co-signer–or is otherwise co-obligated on a
car loan, student loan, mortgage, or any other obligation –
contingent liability applies unless the lender obtains documented
proof that the primary obligor has been making payments during
the previous 12 months on a regular basis and does not have a
history of delinquent payments on the loan.
C. Projected Obligations. If a debt payment, such as a student loan, is
scheduled to begin within twelve months of the mortgage loan closing, the
lender must include the anticipated monthly obligation in the underwriting
analysis, unless the borrower provides written evidence that the debt will
be deferred to a period outside this timeframe. Similarly, balloon notes
that come due within one year of loan closing must be considered in the
underwriting analysis.
D. Obligations Not Considered Debt. Obligations not to be considered debt
(or subtracted from gross income) include federal, state, and local taxes;
FICA or other retirement contributions such as 401(k) accounts (including
repayment of debt secured by these funds); commuting costs; union dues;
open accounts with zero balances; automatic deductions to savings
accounts; child care; and voluntary deductions.
4155.1 REV-5
October 2003 2-33
SECTION 5: BORROWER QUALIFYING
The paragraphs below discuss debt-to-income ratios and the compensating factors that
may be used to exceed the qualifying ratios. As evidenced by the description of
compensating factors, ratios can be exceeded when significant compensating factors
exist. We also do not set an arbitrary percentage that ratios may never exceed; however,
the underwriter should judge the overall merits of the loan application and determine
what compensating factors apply and the extent to which ratios may be exceeded.
Underwriting requires careful analysis of the many aspects of the mortgage. Each loan is
a separate and unique transaction, and there may be other factors that demonstrate the
borrowers' ability and willingness to make timely mortgage payments. There is a danger
of "layering flexibilities" in assessing mortgage insurance risk, and simply establishing
that a loan transaction meets minimal standards does not necessarily constitute prudent
underwriting. The lender is responsible for adequately analyzing the probability that the
borrower will be able to repay the mortgage obligation in accordance with the terms of
the loan.
2-12 DEBT-TO-INCOME RATIOS. Ratios are used to determine whether the
borrower can reasonably be expected to meet the expenses involved in
homeownership, and otherwise provide for the family. The lender must compute
two ratios:
A. Mortgage Payment Expense to Effective Income. If the total mortgage
payment (principal and interest; escrow deposits for real estate taxes,
hazard insurance, the mortgage insurance premium, homeowners'
association dues, ground rent, special assessments, and payments for any
acceptable secondary financing) does not exceed 29 percent of the gross
effective income, the relationship of the mortgage payment to income is
considered acceptable. A ratio exceeding 29 percent may be acceptable
only if significant compensating factors as discussed in paragraph 2-13 are
documented and are recorded on the mortgage credit analysis worksheet.
Typically, for borrowers with limited recurring expense, greater latitude is
permissible on this ratio than on the total fixed payment ratio described
below.
B. Total Fixed Payment to Effective Income. If the total of the mortgage
payment and all recurring charges does not exceed 41 percent of the gross
effective income, the relationship of total obligations to income is
considered acceptable. A ratio exceeding 41 percent may be acceptable
only if significant compensating factors as discussed in paragraph 2-13 are
documented and are recorded on the mortgage credit analysis worksheet.
2-13 COMPENSATING FACTORS. Compensating factors that may be used to
justify approval of mortgage loans with ratios exceeding our benchmark
guidelines are those listed below. Underwriters must record on the "remarks"
4155.1 REV-5
2-34 October 2003
section of the HUD 92900-WS/HUD 92900-PUR the compensating factor(s) used
to support loan approval. Any compensating factor used to justify mortgage
approval must be supported by documentation.
A. The borrower has successfully demonstrated the ability to pay housing
expenses equal to or greater than the proposed monthly housing expense
for the new mortgage over the past 12-24 months.
B. The borrower makes a large downpayment (ten percent or more) toward
the purchase of the property.
C. The borrower has demonstrated an ability to accumulate savings and a
conservative attitude toward the use of credit.
D. Previous credit history shows that the borrower has the ability to devote a
greater portion of income to housing expenses.
E. The borrower receives documented compensation or income not reflected
in effective income, but directly affecting the ability to pay the mortgage,
including food stamps and similar public benefits.
F. There is only a minimal increase in the borrower's housing expense.
G. The borrower has substantial documented cash reserves (at least three
months’ worth) after closing. In determining if an asset can be included as
cash reserves or cash to close, the lender must judge whether or not the
asset is liquid or readily convertible to cash and can be done so absent
retirement or job termination. Also see paragraph 2-10K.
Funds borrowed against these accounts may be used for loan closing, but
are not to be considered as cash reserves. “Assets” such as equity in other
properties and the proceeds from a cash-out refinance are not to be
considered as cash reserves. Similarly, funds from gifts from any source
are not to be included as cash reserves.
H. The borrower has substantial non-taxable income (if no adjustment was
made previously in the ratio computations).
I. The borrower has a potential for increased earnings, as indicated by job
training or education in the borrower's profession.
J. The home is being purchased as a result of relocation of the primary wageearner,
and the secondary wage-earner has an established history of
employment, is expected to return to work, and reasonable prospects exist
for securing employment in a similar occupation in the new area. The
underwriter must document the availability of such possible employment.
4155.1 REV-5
October 2003 2-35
MORTGAGE CREDIT ANALYSIS
SECTION 6: SPECIAL UNDERWRITING INSTRUCTIONS
2-14 Temporary Interest Rate Buydowns. Interest rate buydowns are designed to
reduce the borrower’s monthly payment during the early years of the mortgage
and are permitted only on purchase transactions. Buydowns may only be used on
fixed-rate mortgages.
Buydown funds may come from the seller, lender, borrower or other party. Funds
from the seller or any other interested third party are considered seller
contributions and must be included in the six percent limit on seller contributions
(see paragraph 1-7A). Lenders must ensure that the funds described in the escrow
agreement have been placed in escrow before or at closing and that the agreement
meets the requirements described below.
Buydowns on eligible loans not meeting all the criteria described in paragraph A,
below, may be considered only as compensating factors. However, all buydowns
must comply with the escrow agreement requirements in paragraph B, below.
A. Underwriting Requirements for Qualifying Borrowers at the Buydown
Interest Rate.
1. The mortgage must be a fixed rate loan on an owner occupied
principal residence.
2. The buydown must not result in a reduction of more than two
percentage points below the interest rate on the note.
3. The buydown must not result in more than a one-percentage point
annual decrease in the interest rate. The borrower’s payment may
change only once a year.
B. Additional Interest Rate Buydown Instructions.
1. Lender-funded buydowns on fixed-rate purchase money mortgages
through premium pricing are acceptable provided that the funds
generated do not result in a reduction of more than 2 percentage
points below the note rate.
2. The lender must establish that the eventual increase in mortgage
payments will not affect the borrower adversely and likely lead to
default. The underwriter must document that the borrower meets
one of the following criteria:
4155.1 REV-5
2-36 October 2003
a. The borrower has a potential for increased income that
would offset the scheduled payment increases, as indicated
by job training or education in the borrower's profession or
by a history of advancement in the borrower's career with
attendant increases in earnings.
b. The borrower has a demonstrated ability to manage
financial obligations in such a way that a greater portion of
income may be devoted to housing expenses. This criterion
also may include borrowers whose long-term debt, if any,
will not extend beyond the term of the buydown agreement.
c. The borrower has substantial assets available to cushion the
effect of the increased payments.
d. The cash investment made by the borrower substantially
exceeds the minimum required.
3. Escrow Agreement Requirements. A copy of the escrow
agreement, signed by the borrower and the provider of funds, must
accompany the loan application. (The underwriter may condition
the loan approval for an executed buydown agreement at closing.)
The following are requirements for the escrow agreement:
a. The agreement must provide that any escrow funds not
distributed at the time the mortgage loan is prepaid be
applied to the outstanding balance due on the mortgage.
However, in the event of foreclosure, the claim for
mortgage insurance benefits must be reduced by the
amount remaining in the buydown escrow account.
b. The agreement must not permit reversion of undistributed
escrow funds to the provider if the property is sold or the
mortgage is prepaid in full. The agreement may provide
that assistance payments continue to buyers who assume
the mortgage. Unless the borrower establishes the escrow
account, unexpended escrow funds may not be provided to
the borrower in cash.
c. The escrow funds must be held in an escrow account by a
financial institution supervised by a federal or state agency.
Payments must be made by the escrow agent to the lender
or its servicing agent. However, if the escrow payments are
not received for any reason, it is the borrower's
responsibility to make the total payment set forth in the
4155.1 REV-5
October 2003 2-37
mortgage note. FHA has no objection to the lender holding
and administering the escrow funds for up to 60 days when
there is an outstanding forward commitment to sell the
mortgage.
2-15 ADJUSTABLE RATE MORTGAGES (ARMs). Borrowers must qualify for
one-year ARMs using the mortgage payments based upon the contract or initial
interest rate plus 1 percentage point (i.e., the anticipated maximum second-year
interest rate) if the loan-to-value ratio is 95 percent or greater.
2-16 CONDOMINIUM UNITS–UTILITY EXPENSES. With proper
documentation, such as that which is available from the utility company, the
portion of a condominium fee that is clearly attributable to utilities may be
subtracted from the Homeowners Association (HOA) dues before computing
ratios.
2-17 CONSTRUCTION–PERMANENT MORTGAGE PROGRAM. A
construction-permanent mortgage combines the features of a construction loan, a
short-term interim loan for financing the cost of construction, and the traditional
long-term permanent residential mortgage. For mortgage insurance and LTV
purposes, we consider it to be a purchase transaction. The mortgage lender makes
the loan directly to an approved borrower/homebuyer. There is one closing that
occurs prior to the start of construction. At closing, funds are disbursed to cover
purchase of the land, with the balance of the mortgage proceeds placed in an
escrow account to be disbursed as construction progresses. The loan is insured
after construction is complete.
Program Information.
A. Disbursement of Funds. It is the lender's responsibility to obtain written
approval from the borrower before each draw payment is provided to the
builder.
B. Construction Period Fees. Unless a separate agreement has been made
specifying responsibility, construction loan interest, commitment fees,
inspection fees, title update charges, real estate taxes, hazard insurance,
and other financing charges incurred during the construction period are to
be paid by the builder.
C. Interest Rate. The permanent mortgage loan interest is established at
closing. However, a lender may offer a "ceiling/floor," whereby the
borrower may "float" the interest rate during construction. The agreement
must provide that, at the point of interest rate lock-in, the permanent
mortgage will not exceed a specific maximum interest rate based on
market fluctuations, as well as permit the borrower to lock-in at a lower
rate depending on the market. The borrower must qualify for the
4155.1 REV-5
2-38 October 2003
mortgage at the maximum rate at which the permanent mortgage may be
set.
D. Disclosure. The lender must provide a disclosure to the borrower
explaining that the loan is not eligible for FHA mortgage insurance until
after either a final inspection or issuance of a certificate of occupancy by
the local governmental jurisdiction (whichever is later), and that FHA has
no obligation until the mortgage is endorsed for insurance.
E. Amortization. Amortization must begin no later than the first of the
month following 60 days from the date of either the final inspection or
issuance of certificate of occupancy, whichever is later.
F. Endorsement. The lender must submit a request for endorsement after
final inspection or issuance of certificate of occupancy (but within 60 days
of the date the latter of these events occur). During construction, the loan
is not FHA-insured.
G. Remitting UFMIP. FHA must receive the UFMIP within 15 days of
closing or other time period as may be prescribed by FHA.
H. Maximum Mortgage Amount. The maximum mortgage amount is
determined by applying LTV limits to the lesser of the appraised value or
the acquisition cost. The acquisition cost includes the contractor's price to
build, cost of the land, and allowable closing costs. (If the land has been
owned more than six months or was received as an acceptable gift, the
value of the land may be used instead of its cost.)
I. Equity in the Land. Equity in the land may be used for the borrower's
cash investment. However, if the advancement of the permanent loan
results in the borrower receiving cash out in excess of $250, the maximum
LTV is limited to 85 percent. If the contractor of the improvements is also
the seller of the land, the total acquisition cost for maximum mortgage
purposes is the purchase price to the borrower.
J. Other Underwriting Considerations. The following criteria must be met
for a loan to be considered a construction/permanent loan and to be
eligible for FHA mortgage insurance:
The borrower must own or be purchasing the lot (or, if owned by the
contractor, the lot must be included in the total contract price).
(1) The borrower must have secured or will secure the loan in his or
her own name.
4155.1 REV-5
October 2003 2-39
(2) The borrower has contracted with a builder to construct the
improvement. (This program is not available to a borrower acting
as his or her own general contractor, unless the borrower is a
licensed builder by profession. In this case, the acquisition cost
must be determined by the actual documented cost to construct the
improvements.)
(3) The balance on the loan, when it is fully drawn, must be verified.
The construction escrow account, if one was established, must be
fully extinguished; any remaining funds must be applied to the
outstanding balance of the permanent loan.
(4) If the borrower purchased the lot within the past 6 months, he or
she must provide a copy of the HUD-1 or other settlement
statement showing the acquisition cost. If the borrower owns the
lot free-and-clear, the borrower must provide a copy of the
Warranty Deed showing no vendor's lien, a copy of the release of
lien, or a copy of the HUD-1 or other settlement statement showing
ownership.
(5) If the initial draw on the loan was for the purpose of paying off the
lot, a statement verifying the amount must be provided.
(6) The borrower must provide a copy of the fully executed sales
agreement, which includes the contractor's price to build. (A
Mechanic's and Material man’s lien is not sufficient.)
(7) If the borrower is including extras over and above the contract
specification and/or is paying out-of-pocket costs over and above
the interim loan, the borrower must provide a breakdown of the
extras and the cost of each and canceled checks and paid receipts
for all out-of-pocket construction costs.
K. Documentation Requirements. The loan is to be closed using standard
FHA documentation, with the addition of a Construction Rider to the Note
and a Construction Loan Agreement. These construction documents may
be in any form acceptable to the lender, but they must provide that all
special construction terms end when the construction loan converts to a
permanent loan. After conversion, only the permanent loan terms (using
standard documents) continue to be effective, thus making the permanent
loan eligible for FHA mortgage insurance.
Prior to endorsement, the DE underwriter must be provided with the
following:
4155.1 REV-5
2-40 October 2003
1. Certification, signed by the borrower after conversion to the
permanent loan, that the mortgaged property is free-and-clear of all
liens other than the mortgage.
2. Verification that the construction loan has been fully drawn down.
3. Copies of canceled checks and paid receipts for all the borrower's
out-of-pocket construction costs.
2-18 MORTGAGE INSURANCE FOR DISASTER VICTIMS [Section 203(h)].
FHA provides mortgage insurance to assist victims of Presidentially-declared
disasters. Under this program, individuals or families whose residences were
destroyed or damaged to such an extent that reconstruction or repair is necessary
are eligible for 100 percent financing for the purchase of a home. The Federal
Emergency Management Agency (FEMA) provides listings of the specific
affected counties and cities and corresponding declaration dates. This
information can be found on the Internet at http://www.fema.gov/disasters.
The procedures described are in effect whenever a disaster is declared by the
President and remain in effect for one year from the date of the President's
declaration.
A. Program and Underwriting Requirements.
The borrower's previous residence must have been in the disaster area and
must have been destroyed or damaged to such an extent that
reconstruction or replacement is necessary. The borrower must provide
conclusive evidence of this fact. Documentation showing a permanent
residence in the affected area before the disaster includes a valid driver's
license, a voter registration card, utility bills, etc. Documentation
regarding destruction of the residence includes an insurance report, an
inspection report by an independent fee inspector or government agency,
or conclusive photographic evidence showing the destruction or damage.
The borrower may have been the owner of the property or a renter of the
property affected.
The borrower is eligible for 100 percent financing of the sales price and no
down payment is required. (However, closing costs and prepaid expenses
not paid by the seller must be paid by the borrower in cash or paid through
premium pricing.)
Maximum mortgage amounts are the same as for Section 203(b)/203(h).
A list can be accessed from the lender Web page on HUD’s Website at
www.hud.gov or on FHA Connection at https://entp.hud.gov/clas/.
The program is limited to one-unit detached homes or units in an approved
condominium project. "Spot units" in condominiums are eligible also.
4155.1 REV-5
October 2003 2-41
Two-, three-, and four-unit properties may not be purchased under the
Section 203(h) program.
The borrower's mortgage loan application must be submitted to the lender
within one year of the President's declaration of the disaster.
ARMS may be used with the Section 203(h) program.
B. Using Section 203(k) with 203(h) for Rehabilitation Mortgages. The
requirement for a dwelling to be completed more than one year preceding
the date of the application for mortgage insurance under Section 203(k)
does not apply to properties in the disaster area. Damaged residences are
eligible for Section 203(k) mortgage insurance regardless of the age of the
property. The residence needs only to have been completed and ready for
occupancy for eligibility under Section 203(k). The percentage of
financing is determined by the type of mortgage being made (i.e., normal
LTV ratios apply to Section 203(k) mortgages made in these areas).
Homes that have been demolished, or will be razed as part of the
rehabilitation work, are eligible provided the existing foundation system is
not affected and still will be used. The complete foundation system must
remain in place.
2-19 ENERGY-EFFICIENT HOMES (EEH). The benchmark qualifying ratios may
both be exceeded by up to 2 percentage points when the borrower is purchasing or
refinancing an EEH. These higher housing expense- and obligations-to-income
ratios are justified due to the anticipated energy costs savings and become 31
percent and 43 percent, respectively. The appropriate HOC determines if a
property qualifies for EEH designation. The original documentation attesting to
energy efficiency is required on resales.
All properties meeting the Council of American Building Officials (CABO) 1992
Model Energy Code (MEC) are considered energy efficient and eligible for the
two percentage points increase in the qualifying ratios.
4155.1 REV-5
2-42 October 2003
2-20 ENERGY EFFICIENT MORTGAGE (EEM) PROGRAM. The FHA EEM
Program is for existing properties. An EEM recognizes the energy savings of a
home that has "cost effective" energy saving improvements, which increase the
energy efficiency of a home. Because the home is energy efficient, the
occupant(s) will save on utility costs and, thus, be able to devote more income to
the monthly mortgage payment. Energy efficiency improvements can include
energy saving equipment and active and passive solar technologies.
Under the FHA EEM Program, a borrower can finance into the mortgage 100
percent of the cost of eligible energy efficient improvements, subject to certain
dollar limitations, without an appraisal of the energy efficient improvements. To
be eligible for inclusion into the mortgage, the energy efficient improvements
must be "cost effective" (i.e., the total cost of the improvements, including
maintenance costs, must be less than the total present value of the energy saved
over the useful life of the improvements). The mortgage includes the cost of the
energy efficient improvements, in addition to the usual mortgage amount
normally permitted.
A. Basic Program Requirements.
1. Existing one- and two-unit properties are eligible. Three- and
four- unit existing properties are not eligible.
2. The cost of any improvement to the property that will increase the
property's energy efficiency and that is determined to be "cost
effective" is eligible for financing into the mortgage. Its cost may
be added to the mortgage amount up to the greater of:
a. 5 percent of the property's value (not to exceed $8,000); or
b. $4,000.
"Cost effective" means that the total cost of the improvements,
including any maintenance costs, is less than the total present value
of the energy saved over the useful life of the energy improvement.
The FHA maximum loan limit for the area may be exceeded by the
cost of the energy efficient improvements.
3. The cost of the energy improvements, including maintenance costs,
and the estimate of the energy savings must be determined based
upon a physical inspection of the property by a home energy
ratings system (HERS) representative or energy consultant.
The HERS representative or energy consultant must be an
independent entity; it cannot be related, directly or indirectly, to
the seller of the property or the prospective borrower. The
contractor selected by the borrower to install the energy efficient
4155.1 REV-5
October 2003 2-43
improvements may not be related, directly or indirectly, to the
HERS representative or energy consultant. The HERS
representative or energy consultant may be a utility company; a
local, state, or federal government agent; an entity approved by a
local, state, or federal government agency specifically for the
purpose of providing home energy ratings on residential properties;
or a nonprofit organization experienced in conducting home energy
ratings of residential properties.
4. The home energy rating report prepared by the HERS
representative or energy consultant must be in writing and
provided to the prospective borrower and lender. The report must
contain the following information:
a. Address of the property.
b. Name of the current owner(s) of the property.
c. Date of the property inspection.
d. Description of the energy features currently in the property.
This description must include, at a minimum, a description
of the insulation R values in ceilings, walls and floors;
infiltration levels and barriers (caulking, weatherstripping
and sealing); a description of the windows (storm windows,
double pane, triple pane etc.) and doors; and a description
of the heating (including water heating) and cooling
systems.
e. Description of the modifications recommended to improve
the energy efficiency of the property.
f. Estimated costs of the energy improvements, their useful
life, and the costs of any maintenance over the useful life.
g. Present estimated annual utility costs before installation of
the energy efficient improvements.
h. Estimated annual utility costs after installation of the
energy efficient improvements.
i. Estimated annual savings in utility costs after installation of
the energy efficient improvements.
j. Printed name(s) and signature(s) of the person(s) that
inspected the property and prepared the report, as well as
the date of preparation of the report.
k. The following certification statement, signed by the
person(s) who inspected the property and prepared the
report, must accompany the report:
"I certify, that to the best of my knowledge and belief, the
information contained in this report is true and accurate and
I understand that the information in this report may be used
in connection with an application for an energy efficient
4155.1 REV-5
2-44 October 2003
mortgage to be insured by the Federal Housing
Administration of the United States Department of Housing
and Urban Development."
For streamline refinance transactions, the borrower's monthly payment for
principal and interest for the refinance mortgage (which will include the
cost for the energy efficient improvements) must be lower than the
monthly principal and interest on the current mortgage.
B. Escrow Account Specifications. An escrow account may be established
for no more than three months after loan closing to allow for installation
of the energy efficient improvements. The lender, a utility company, a
nonprofit organization, or a government agency may administer the
escrow account. The escrow account must be insured and be established
at a financial institution supervised by a federal agency.
C. Processing and Underwriting Requirements.
1. The lender will process the mortgage loan application and qualify
the borrower using our standard underwriting requirements and
qualifying ratios. If the borrower elects to have an EEM and add
the cost of the energy efficient improvements to the mortgage, the
lender must take the following additional steps:
a. Obtain a report prepared by a HERS representative or
energy consultant showing the estimated costs of installing
the energy efficient improvements, including any
maintenance costs, and the estimated annual savings in
utility costs that will result from the installation of the
energy efficient improvements.
b. Using the HERS or energy consultant's report, the lender
must determine that the energy efficient improvements are
"cost effective" by calculating the present cost of the
energy improvements, including maintenance costs (if any)
over the useful life of the improvements and the present
value of the energy savings over the useful life of the
energy improvements. If the energy efficient
improvements meet the "cost effective" test (i.e., present
cost of improvements is less than the present value of the
energy savings), the lender may add 100 percent of the cost
of the energy efficient improvements (subject to the dollar
limits described above in B. 4.) to the otherwise allowable
maximum mortgage amount. No appraisal of the energy
efficient improvements is necessary, and the borrower need
not meet any further credit standards. If the energy
4155.1 REV-5
October 2003 2-45
efficient improvements meet the "cost effective" test, the
full cost of the improvements can be added to the
borrower's base loan amount, without a determination of
value and without further credit qualification.
c. The lender calculates the UFMIP on the full mortgage
amount, which will include the cost of the energy
improvements.
D. Escrow Account. We will insure the mortgage before the energy efficient
improvements are installed provided the lender establishes an escrow
account and deposits into it the funds to pay for the energy efficient
improvements. The escrow account shall be for a period of no more than
90 days. If the improvements are not installed within 90 days, the lender
must apply the funds held in escrow to a prepayment of the principal
balance of the mortgage. The escrow account may be established by the
lender and administered by the lender, a utility company, a nonprofit
organization, or a government agency. However, the lender is responsible
for assuring FHA that the escrow has been cleared. Lenders shall execute
Form HUD 92300 Mortgagee Assurance of Completion to indicate that
the escrow for the energy efficient improvements has been established.
Subsequently, the lender is responsible for notifying FHA that the
improvements have been made and that the escrow has been cleared. The
installation of the improvements may be inspected by the lender, the
HERS, or an FHA fee inspector. The borrower may be charged an
inspection fee in accordance with the appropriate HOC fee schedule.
F. Home Energy Rating Report. The lender must include a copy of the
home energy rating report, performed by the HERS representative or
energy consultant, in the closing package, when requesting insurance
endorsement.
2-21 ADVANCE MORTGAGE PAYMENTS PROHIBITED. We do not permit, as
a condition for making a FHA insured mortgage, a lender to collect from the
borrower advance payment(s) of the mortgage. Borrowers are not to be required
to write post-dated checks, give cash, or otherwise make mortgage payments to
the lender in advance of the borrowers mortgage payment requirements under the
security instruments.
4155.1 REV-5
October 2003 3-1
CHAPTER 3
DOCUMENTATION AND OTHER PROCESSING REQUIREMENTS
This chapter describes the documentation requirements for each loan submitted
for mortgage insurance and the specific requirements lenders must observe in
processing and underwriting FHA-insured mortgages. The lender is responsible
for asking sufficient questions to elicit a complete picture of the borrower's
financial situation, source of funds for the transaction, and the intended use of the
property. All information must be verified and docuemtned. The lender must
also verify and document the identity of the loan applicant(s).
SECTION 1: UNDERWRITING DOCUMENTATION
3-1 APPLICATION PACKAGE. The application package must contain all
documentation supporting the lender's decision to approve the mortgage loan.
When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements,
consistent with other information in the application, to clarify or to supplement
the documentation submitted by the borrower.
All documents may be up to 120 days old at the time the loan closes (180 days for
new construction) unless this or other applicable HUD instructions specify a
different timeframe, or the nature of the document is such that its validity for
underwriting purposes is not affected by being older than the number of
prescribed days (e.g., divorce decrees, tax returns). Updated, written verifications
must be obtained when the age of the documents exceed these limits. Verification
forms or documents used as an alternate to these verifications must pass directly
between the lender and the provider without being handled or transmitted by any
third party or using any third party’s equipment. No document used in the
processing or underwriting of a loan may be handled or transmitted by or through
an interested third party to the transaction.
The Verification of Deposit (VOD) and Verification of Employment (VOE) may
be faxed documents or printed pages from the Internet if they clearly identify their
sources (e.g., contain the names of the borrower’s employer or
depository/investment firm). The lender is accountable for ascertaining the
authenticity of the document by examining information included in a document’s
headers and footers. The lender should verify the authenticity of printed Web
pages by examining the pages for similar information. A printed Web page also
must show its uniform resource locator (URL) address, as well as the date and
time the document was printed.
Lenders may not accept or use documents relating to the credit, employment or
income of borrowers that are handled by or transmitted from or through interested
third parties (e.g., real estate agents, builders, sellers) or by using their equipment.
4155.1 REV-5
3-2 October 2003
The following documents are generally required for mortgage credit analysis in
all transactions except for certain streamline refinances:
A. Loan Application. Uniform Residential Loan Application (URLA),
signed and dated by all borrowers and the lender, and the Addendum to
the URLA (form HUD-92900-A).
B. Mortgage Credit Analysis Worksheet. Form HUD 92900-WS or HUD-
92900-PUR, as appropriate.
C. Social Security Number Evidence. For all borrowers, including US
citizens, the lender is required to document a valid SSN for each borrower,
co-borrower, and co-signer on the mortgage. All individuals eligible for
legal employment in the US must have a SSN. Each borrower must
provide the lender with evidence of his or her own valid SSN as issued by
the Social Security Administration (SSA). This applies to purchase
money loans and all refinances, including streamline refinances. While
the actual social security card is not required, the lender is required to
validate the SSN. Lenders may use various means for validating the SSN
including examining the borrower’s pay stubs, passport, valid tax returns,
and may use service providers including those with direct access to the
SSA. The lender is also required to resolve any inconsistencies or
multiple SSNs for individual borrowers that are revealed during loan
processing and underwriting. (Also see paragraph 2-2 B).
D. Credit Report. The lender must obtain a credit report on all borrowers
who will be obligated on the mortgage note (except for streamline
refinance transactions).
E. Verification of Employment (VOE). VOE and the borrower’s most
recent pay stub are to be provided. “Most recent” means at the time the
initial loan application is made. If the document is not more than 120
days old when the loan closes (180 days old on new construction), it does
not have to be updated.
Alternative Documentation. As an alternative to obtaining a VOE, the
lender may obtain the borrower’s original pay stub(s) covering the most
recent 30-day period, along with original IRS W-2 Forms from the
previous two years. The pay stub(s) must show the borrower's name,
social security number, and year-to- date earnings. Any copies of the W-2
Form not submitted with the borrower's income tax returns are considered
"original" W-2’s. (These original documents may be photocopied and
returned to the borrower.) The lender also must verify by telephone all
current employers. The loan file must include a certification from the
lender that original documents were examined and the name, title, and
telephone number of the person with whom employment was verified. For
all loans processed in this manner, the lender also must obtain a signed
4155.1 REV-5
October 2003 3-3
copy of Form IRS 4506 Request for Copy of Tax Form, Form IRS 8821, or
a document that is appropriate for obtaining tax returns directly from the
IRS. The lender also may use an electronic retrieval service for obtaining
W-2 and tax return information.
If the employer will not give telephone confirmation of employment or if
the W-2 indicates inconsistencies (e.g., FICA payments not reflecting
earnings), standard employment documentation must be used.
F. VOD. VOD and most recent bank statements are to be provided. “Most
recent” means at the time the initial loan application is made. Provided
the document is not more than 120 days old when the loan closes (180
days old on new construction), it does not have to be updated.
Alternative Documentation. As an alternative to obtaining a VOD, the
lender may obtain from the borrower original bank statement(s) covering
the most recent three-month period. Provided the bank statement shows
the previous month's balance, this requirement is met by obtaining the two
most recent, consecutive statements.
G. Federal Income Tax Returns. Federal income tax returns (both
individual returns and business returns) for the past two years, including
all applicable schedules, for self-employed borrowers, are required.
Commissioned individuals must provide individual federal income tax
returns for the past two years. The lender must obtain signed Forms IRS
4506, IRS 8821, or whatever form or electronic retrieval service is
appropriate for obtaining tax returns directly from the IRS for any loan for
which the borrower's tax returns are required.
H. Sales Contract. The sales contract and any amendments or other
agreements and certifications are to be included in the case binder. Either
an original or a certified true copy of the sales contract received by the
lender is required.
I. Real Estate Certification. Real estate certification, signed by the buyer,
seller, and selling real estate agent or broker (if not contained within the
purchase agreement) are required. Also see paragraph 3-3, below.
J. Verification of Rent or Payment History of Present/Previous
Mortgages. This document must be in the form of a direct verification
from the landlord or mortgage servicer or through information shown on
the credit report.
K. Uniform Residential Appraisal Report (URAR). The URAR and
Valuation package must be included in the endorsement binder except for
streamline refinances made without appraisals.
4155.1 REV-5
3-4 October 2003
L. Explanatory Statements. Explanatory statements or additional
documentation necessary to make a sound underwriting decision are to be
included in the case binder.
3-2 DOCUMENTATION STANDARDS.
A. Application Forms. Application forms must be signed and dated by all
borrowers applying for the mortgage and assuming responsibility for the
mortgage debt.
B. Verifications. Rather than requiring borrowers to sign multiple
verification forms, the lender may ask the borrower to sign a general
authorization form that gives the lender blanket authority to verify
information needed to process the mortgage loan application, such as past
and present employment records, bank accounts, stock holdings, etc. If
the lender uses such an authorization, he or she must attach a copy of the
authorization to each verification sent. Additionally, lenders may use selfadhesive
signature labels for laser printed verifications. Each label must
completely and clearly indicate its use and must contain the Privacy Act
notification.
C. Documents Signed in Blank. Lenders may not have borrowers sign
documents in blank, or on blank sheets of paper.
3-3 REAL ESTATE CERTIFICATION. The borrower, seller, and the selling real
estate agent or broker involved in the sales transaction must certify that the terms
and conditions of the sales contract are true to the best of their knowledge and
belief and that any other agreement entered into by any of the parties in
connection with the real estate transaction is part of, or attached to, the sales
agreement.
If the sales contract contains a provision that there are no other agreements
between parties and that the terms of the sales contract constitute the entire
agreement between the parties, the certification specified in the above paragraph
is not needed if all parties are signatories to the sales contract submitted at the
time of underwriting.
3-4 AMENDATORY CLAUSE. An amendatory clause must be included in the
sales contract when the borrower has not been informed of the appraised value by
receiving a copy of Form HUD-92800.5B, Conditional Commitment/DE
Statement of Appraised Value or VA-CRV before signing the sales contract. The
amendatory clause must contain the following language:
"It is expressly agreed that notwithstanding any other provisions of this contract,
the purchaser shall not be obligated to complete the purchase of the property
described herein or to incur any penalty by forfeiture of earnest money deposits or
4155.1 REV-5
October 2003 3-5
otherwise unless the purchaser has been given in accordance with HUD/FHA or
VA requirements a written statement by the Federal Housing Commissioner,
Department of Veterans Affairs, or a Direct Endorsement lender setting forth the
appraised value of the property of not less than $_________. The purchaser shall
have the privilege and option of proceeding with consummation of the contract
without regard to the amount of the appraised valuation. The appraised valuation
is arrived at to determine the maximum mortgage the Department of Housing and
Urban Development will insure. HUD does not warrant the value or the condition
of the property. The purchaser should satisfy himself/herself that the price and
condition of the property are acceptable."
The actual dollar amount to be inserted in the amendatory clause is the sales price
stated in the contract. If the borrower and seller agree to adjust the sales price in
response to an appraised value that is less than the sales price, a new amendatory
clause is not required. However, the loan application package must include the
original sales contract with the same price as shown on the amendatory clause,
along with the revised or amended sales contract. The Amendatory Clause is not
required on HUD REO sales, sales where the seller is Fannie Mae, Freddie Mac,
the Department of Veterans Affairs, Rural Housing Services, other Federal, State
and local government agencies, mortgagees disposing of REO assets, or sellers at
foreclosure sales and those sales where the borrower will not be an owneroccupant
(e.g., sales to nonprofit agencies).
4155.1 REV-5
3-6 October 2003
SECTION 2: PROCESSING REQUIREMENTS
3-5 POWER OF ATTORNEY. Power of attorney may be used for closing
documents, including page four of the Addendum to the URLA and the final
URLA if it is signed at closing. Any power of attorney, whether specific or
general, must comply with state law and allow for the mortgage note to be
enforced legally in that jurisdiction. It is the lender's responsibility to assure that
clear title can be conveyed in the event of foreclosure.
Except for the conditions described below, the initial loan application may not be
executed by using a power of attorney (i.e., it must be signed by all borrowers).
Either the initial loan application or the final, if one is used, must contain the
signatures of all borrowers.
A. Military Personnel. Power of attorney may be used for military
personnel on overseas duty or on an unaccompanied tour. The lender
should obtain the service person's signature on the application by mail or
fax machine.
B. Incapacitated Borrowers. Power of attorney may be used for
incapacitated borrowers who are unable to sign the mortgage application.
The lender must provide evidence that the signer has authority to purchase
the property and to obligate the borrower. Acceptable evidence includes a
durable power of attorney specifically designed to survive incapacity and
avoid the need for court proceedings. The incapacitated individual must
occupy the property to be insured (except on eligible investment property).
3-6 LOAN APPLICATION DOCUMENT PROCESSING. Due to various
disclosure requirements and our long-standing belief that borrowers are best
served when certifications they must make are divulged as early as possible in the
loan application process, the application for mortgage insurance must be signed
and dated by the borrower(s) before the loan is underwritten. However, we also
recognize the burden on lenders and borrowers of having various documents resigned
by the borrower after the loan application has been taken.
To alleviate this burden, lenders are permitted to process and to underwrite the
loan after the borrower completes an initial URLA and initial Addendum. If the
lender asks the borrower to complete an initial Addendum, based on the
preliminary information obtained at loan application, it is not necessary to have a
final loan application or final Addendum signed before underwriting. The
underwriter must condition the loan approval for the final URLA and final
Addendum to be signed and dated by the borrower(s) anytime before or at
closing.
Page one of the initial Addendum must be signed by the interviewer; page one of
the final Addendum may be signed by anyone authorized to bind the company in
4155.1 REV-5
October 2003 3-7
its business dealing with HUD. Page four of the Addendum must be signed by
the borrower at closing.
The underwriter must have the final Addendum and URLA before underwriting
the loan application, whether or not the borrower signs it. If the lending
institution uses only one loan application that serves as both the initial and final,
the institution still must obtain a completed final Addendum before underwriting
the loan. A copy of any initial and final application must be submitted as part of
the endorsement package. A satisfactory letter of explanation from the borrower
addressing any significant variances between the initial application and final
application is also required.
If the lender chooses not to complete an initial Addendum (i.e., the lender asks the
borrower to sign a completed Addendum before the loan is underwritten),
simultaneous appraisal and mortgage credit review is permissible, if the lender
discloses to the borrower that the lender’s DE underwriter may adjust the
appraised value. The disclosure statement below becomes part of the official file
submitted to FHA for endorsement and must be signed by the borrower(s).
"I (we) understand that my (our) application for an FHA-insured mortgage is
being processed under the Direct Endorsement (DE) program. The lender has
advised me (us) that the appraiser has assigned a value of $_________ to the
property being purchased. I am (we are) aware that the official determination will
be made by the DE underwriter when he/she reviews the report. It is understood
that I (we) may elect to cancel the application or renegotiate with the seller if the
DE underwriter reduces the value below the amount set forth in the sales contract
or requires additional repairs for which the seller will not be responsible."
3-7 SEVEN-UNIT LIMITATION. Qualified investor entities are limited to a
financial interest (i.e., any type of ownership, regardless of type of financing) in
seven rental dwelling units, when the subject property is part of, adjacent to or
contiguous to a property, subdivision or group of properties owned by the
investor. Each dwelling unit in two-, three-, and four-family properties counts
toward the seven-unit limitation. The rental units in an owner-occupied two-,
three-, or four-unit property also count toward this limitation. The lender is
responsible for assuring compliance with this regulation (see 24 CFR 203.42 for
additional information). Waivers to the seven-unit limitation can only be initiated
by the jurisdictional HOC for good cause.
4155.1 REV-5
3-8 October 2003
3-8 HOTEL AND TRANSIENT USE. The lender must obtain a hotel and transient
use certification (Form HUD-92561), signed by the borrower, for every
application on a two-, three-, or four-family dwelling. This certification also is
required for a single-family dwelling that is one of a group of five or more
dwellings held by the same borrower. Fulfilling this requirement assures FHA
that the property will not be used for hotel or transient purposes, or otherwise
rented for periods less than 30 days.
3-9 SALES CONTRACTS AND LOAN CLOSING. Except for houses sold by
FHA under its Real Estate Owned (REO) program, we are not a party to the sales
agreement. When a sales contract contains conditions that, if performed, would
violate our requirements, the lender must obtain an addendum or modification to
the sales agreement that would allow for conformance to those requirements.
Nevertheless, failure to perform a condition of the contract will not be grounds for
denying loan endorsement, provided the loan closes in compliance with all
regulations and policies. For example, the sales contract may require the seller to
pay an amount in excess of our present limits. Provided the lender closes the loan
in accordance with our requirements, endorsement will not be withheld. The sales
contract need not refer to FHA financing to be valid.
3-10 LENDER RESPONSIBILITY AT CLOSING. The lender is required to
resolve all problems regarding title to the real estate and to review all documents
to assure compliance with all conditions of the commitment, close the loan before
the expiration of the FHA-issued certificate of commitment or DE approval and
expiration of the credit documents, and to submit the loan documents for
insurance within 60 days of loan closing or disbursement, whichever is later.
The following are required at closing:
A. Signatures. Signatures of all individuals appearing on the loan
application must appear on the mortgage note. All owners of the property
to be vested in title must sign the security instruments (i.e., mortgage, deed
of trust, or security deed). In order to create a valid first lien, to pass clear
title, or to waive inchoate rights, any individual whose signature is
required by state law must sign the security instruments and/or note. All
applicants must sign and date all closing documents where appropriate.
B. Closing in Compliance with Loan Approval. The loan must close in the
same manner in which it was underwritten and approved. Except for the
conditions described in paragraph 2-2 D, additional signatures on the
security instruments and/or mortgage note of individuals not reviewed
during mortgage credit analysis may be grounds for withholding
endorsement.
4155.1 REV-5
October 2003 3-9
SECTION 3: FAIR HOUSING AND OTHER FEDERAL REQUIREMENTS
3-11 FEDERAL STATUTES AND REGULATIONS. Federal statutes and
regulations concerning fair housing and equal credit opportunities apply to FHA's
single-family mortgage insurance programs. Lenders and FHA must abide by
these statutes and regulations for new originations and assumption transactions.
These regulations include:
A. Fair Housing Act (42 USC 3605). This act prohibits discrimination
against individuals based on their race, color, religion, sex, handicap,
familial status, or national origin for the availability of residential real
estate related transactions, i.e., making or purchasing loans or providing
other financial assistance: 1) for purchasing, constructing, improving,
repairing, or maintaining a dwelling, or 2) secured by residential real
estate. HUD is responsible for enforcing the Fair Housing Act.
Information regarding this act may be obtained from the HUD Office of
Fair Housing and Equal Opportunity, 451 Seventh Street, S.W.,
Washington, DC 20410-2000.
The Fair Housing Act prohibits the following:
1. Discrimination in Making Loans and Providing Other
Financial Assistance. Prohibited practices include, but are not
limited to, failing or refusing to provide information regarding the
availability of loans or other financial assistance; application
requirements, procedures or standards for the review and approval
of loans or financial assistance; or providing information that is
inaccurate or different from that provided to others because of
race, color, religion, sex, handicap, familial status, or national
origin.
2. Discrimination in the Terms and Conditions for Making
Available Loans or Other Financial Assistance. Unlawful
conduct includes: a) using different policies, practices or
procedures in evaluating or in determining creditworthiness of any
person in connection with the provision of any loan or other
financial assistance secured by residential real estate, or b)
determining the type of loan or other financial assistance to be
provided, or fixing the amount, interest rate, duration or other
terms for a loan or other financial assistance, because of race,
color, religion, sex, handicap, familial status, or national origin.
B. Equal Credit Opportunity Act (ECOA) (15 USC 1601 et seq.). ECOA
prohibits discrimination in the extension of credit on the basis of race,
color, religion, national origin, sex, marital status, or age; because all or
part of the borrower's income derives from public assistance; or because
4155.1 REV-5
3-10 October 2003
the borrower has in good faith exercised any right under the Consumer
Credit Protection Act. The act and Regulation B of the Board of
Governors of the Federal Reserve System (12 CFR Part 202) outline rules
to be observed in evaluating the creditworthiness of borrowers. Under no
circumstances can the source of confidential credit information be
disclosed to third parties, except as required by law.
ECOA prohibits the lender from the following:
1. Making any oral or written statement, in advertising or otherwise,
to borrowers or prospective borrowers that would discourage on a
prohibited basis a reasonable person from making or pursuing an
application.
2. Inquiring whether income stated in an application is derived from
alimony, child support, or separate maintenance payments, unless
the creditor discloses to the borrower that such income need not be
revealed if the borrower does not want the lender to consider it in
determining the borrower's creditworthiness.
3. Inquiring about the sex, race, color, religion, or national origin of
an applicant (except as provided in 12 CFR 202.13 regarding
information for monitoring purposes).
4. Inquiring about birth control practices, or intentions concerning the
bearing and rearing of children, or capability to bear them.
Notice of Action Taken on Application. Regulation B requires that a
borrower be notified of action taken by the creditor within 30 days after
receiving the completed application. All applications submitted for
underwriting are considered completed applications for the purpose of
complying with the notification requirements of Regulation B. Actions
that are to be taken by HUD or the DE lender include:
1. Issuing a Firm Commitment or DE approval;
2. Rejecting the borrower for mortgage credit reasons; and
3. Notifying the borrower of the lender's inability to process the
application because certain items are incomplete or were not
submitted.
The maximum time limit for notification is 30 days after the date the DE
underwriter receives the application. Under no circumstances is the
processing of an application to be delayed in such manner that the required
notification to the borrower cannot be provided by the lender within this
limit. The notification to the borrower must be provided within 30 days
after a loan application is resubmitted or a reconsideration request is
4155.1 REV-5
October 2003 3-11
received by the DE lender (or the appropriate HOC for FHA-processed
cases). For the purposes of complying with the notification requirements
of Regulation B, resubmissions and reconsiderations are considered new
applications.
Rejection/Denial of Loan. If a loan is rejected, the lender must complete
a rejection notice consistent with the requirements of Regulation B. (On
FHA-processed loans, FHA issues a rejection notice directly to the
lender.) At least one credit aspect must be rejected before an overall
rejection can be issued. The rejection notice must provide specific reasons
for the rejection. (Delinquent credit accounts need not be listed.) The
lender must retain case binders on rejected loans for 26 months from the
date the application is received by the DE underwriter or rejected by the
appropriate HOC. The rejection notice must contain all the reasons for
denial/ineligibility and any counter proposals to effectuate loan approval,
such as reduced mortgage amount, etc.
C. Fair Credit Reporting Act (FCRA). This legislation is intended to
control collection and dissemination of information about granting credit
to the borrower. It is designed primarily to ensure that consumer reporting
agencies exercise fairness, confidentiality, and accuracy in preparing and
disclosing credit information.
The following conditions apply:
1. When adverse action is taken based, in whole or in part, on a credit
report, the lender must disclose to the borrower the name, address,
and, if available, the telephone number of the credit reporting
agency issuing the report. The notice must indicate that the
borrower is entitled to request from the credit reporting agency
information reported to the lender that was used as a reason for
rejection.
2. The notice of adverse action must be given at the time of notice of
mortgage rejection, or within a reasonable time thereafter. Any
such notice should be retained in the application file.
D. Executive Order 11063. Executive Order 11063, as amended by
Executive Order 12259, prohibits discrimination in lending practices
involving housing and related facilities financed, insured, or guaranteed by
the federal government.
E. Section 527 of the National Housing Act. Section 527 prohibits denial
of a federally related mortgage loans on of the basis of sex.
4155.1 REV-5
3-12 October 2003
F. Minimum Principal Loan Amount. Section 535 of the National
Housing Act prohibits lenders from requiring, as a condition of providing
a loan to be insured by FHA, that the loan amount equal or exceed a
minimum amount established by the lender. In addition, Section 330(a) of
the 1990 National Affordable Housing Act prohibits a variation in
mortgage charge rates ("tiered pricing") that exceed 2 percent for FHAinsured
mortgages made by a lender on dwellings located within an area.
(See 24 CFR Part 202.20 for additional information.)
G. Home Mortgage Disclosure Act (HMDA). HMDA and Regulation C of
the Federal Reserve Board require lenders to collect and to report
information pertaining to applications for mortgage loans, in addition to
data regarding originations and purchases of such loans.
1. All institutions making FHA-insured mortgages must report
information pertaining to those mortgages or applications for
mortgages. Institutions exempt from the reporting requirements
discussed below must report their FHA mortgage application
activity to HUD.
2. All depository institutions having assets of at least $10 million,
including assets of a parent company and located in a Metropolitan
Statistical Area (MSA), are required to report all types of loan
applications (i.e., conventional, HUD, VA, and RECD) to its
regulator. Reports from a subsidiary must be sent to the regulator
designated for its parent company. Depository institutions need
not send an additional report to HUD covering only its HUD
mortgage insurance activity.
3. All non-depository institutions having assets of at least $10
million, including assets of a parent company and located in an
MSA, must report all types of loan applications (i.e., conventional,
FHA, VA, or RHS) to HUD, who is the designated regulator for
non-depository institutions.
4. Loan correspondents and their sponsors both must report their loan
activity. The correspondent must report all loans closed in its
name as loan originations, even if the loans are simultaneously
transferred to a sponsor at the loan closing. The sponsor reports
such loans as loan purchases. For applications that are denied,
however, the information required by HMDA must be reported by
the entity that made the underwriting decision to deny the loan.
3-12 FHA-INSURED MORTGAGES FOR HUD EMPLOYEES. The jurisdictional
HOC must process applications made by HUD employees, except for streamline
refinance applications. The lender is to process and underwrite the mortgage and
4155.1 REV-5
October 2003 3-13
submit to the HOC for final signoff and approval. Such cases are to be sent to the
attention of the Processing and Underwriting Division Director.
4155.1 REV-5
October 2003 4-1
CHAPTER 4
ASSUMPTIONS
4-1 GENERAL. All FHA insured mortgages are assumable. However, FHA has
placed certain restrictions on the assumability of FHA-insured mortgages
originated since 1986. Depending on the date of loan origination, a
creditworthiness review of the assumptor by the lender may be required.
Mortgages originated before December 1, 1986 generally contain no restrictions
on assumability. To determine what restrictions to assumability have been placed
on the mortgage, the lender must review the legal documents of the mortgage.
Additional details regarding assumability are contained in HUD Handbook 4330.1
REV-5, "Administration of Insured Home Mortgages." Lenders should note that
some mortgages executed in years 1986 through 1989 contain language that is not
enforced due to later Congressional action. Mortgages from that period are now
freely assumable, despite any restrictions stated in the mortgage.
4-2 RESTRICTIONS OF THE HUD REFORM ACT OF 1989. Mortgages closed
on or after December 15, 1989 require credit qualification of those borrowers
wishing to assume the mortgage. This policy applies to borrowers who take title
to properties subject to the mortgage, without assuming personal liability for the
debt. It also applies to borrowers who assume and agree to pay the mortgage.
The creditworthiness review requirement spans the life of the mortgage.
Assumptions without credit approval are grounds for acceleration of the
mortgage, if permitted by applicable state law and subject to HUD approval,
unless the seller retains an ownership interest in the property or the transfer is by
devise or descent.
In addition, private investors are prohibited from assuming insured mortgages that
are subject to the restrictions of the 1989 Act. This restriction applies whether or
not there is a release of liability by the lender of the selling mortgagor.
4-3 RELEASE FROM LIABILITY. The lender completes a form HUD-92210,
Request for Credit Approval of Substitute Mortgagor, or other similar form used
by the lender. Execution of this form does not formally release the borrower from
personal liability on the mortgage note.
The execution of form HUD-92210.1, Approval of Purchaser and Release of
Seller, or other similar form used by the lender, constitutes a formal release of
liability. Only the lender can execute the release of liability. The lender is
required to release all parties from liability when the assuming borrower is found
creditworthy.
4155.1 REV-5
4-2 October 2003
The following requirements apply:
A. Mortgages Subject to the 1989 Act. Mortgages subject to the 1989 Act
require that the lender automatically prepare the release from liability,
thereby releasing the original owner when he or she sells by assumption to
a creditworthy assumptor who executes an agreement to assume and to
pay the mortgage debt, thus becoming the substitute borrower.
The due-on-sale clause generally is triggered when any owner is deleted
from title, except when that party's interest is transferred by devise,
descent, or in other circumstances in which the transfer cannot legally lead
to exercise of the due-on-sale, such as a divorce in which the party
remaining on title retains occupancy.
B. Mortgages Not Subject to the 1989 Act. Mortgages executed before
December 15, 1989 require that the lender honor all former owners'
written requests to process a formal release from liability. Lenders must
grant a release from liability if the assumptor is creditworthy and agrees to
execute a statement agreeing to assume and to pay the mortgage debt.
4-4 CREDITWORTHINESS REVIEW PROCESSING. Creditworthiness of the
assumptor is determined in accordance with standard mortgage credit analysis
requirements by the lender that is the holder or servicer of the mortgage. The DE
lender may also use an approved authorized agent to process assumptions.
Assumption creditworthiness review processing must be completed within 45
days from the date the lender receives all necessary documents. Allowable fees
for assumption processing are described in HUD Handbook 4330.1 REV-5,
Chapter 4.
There are a number of servicing lenders that neither originate mortgages nor are
approved under the DE program. In these situations, if the servicer is either a
supervised or non-supervised financial institution, it may contract with a DEapproved
lender to underwrite its credit qualifying assumptions. The DE
underwriter must indicate his or her CHUMS identification number on the
mortgage credit analysis worksheet. The fee is to be negotiated between servicer
and DE lender. In addition, supervised lenders with a HUD-approved authorized
agent relationship may have the agent underwrite its credit qualifying
assumptions.
The following requirements apply:
A. Credit Review. The lender reviews the assumptor's credit if the mortgage
being assumed is held or serviced by a DE-approved lender.
B. Documentation Requirements. Same as those described in Chapter 3 of
this Handbook.
4155.1 REV-5
October 2003 4-3
C. Secondary Financing. Secondary financing or other borrowed funds may
be used by the assuming borrowers, provided the repayment terms are
clearly defined and included in the underwriting analysis.
D. Seller Contributions. Cash contributions from the seller in order to
facilitate an assumption are not acceptable. The existing mortgage
balance must be reduced by the amount of the contribution. However, the
seller may pay the assumptor's normal closing costs (processing fee and
credit report) with no reduction to the mortgage.
E. Assumptions by Other Legal Entities. An assumption solely in the
name of a corporation, partnership, sole proprietorship, trust, etc., is not
acceptable if a creditworthiness review is required.
4-5 LTV REDUCTION REQUIREMENTS. Certain mortgages, depending on
when originated, may require a reduction to the outstanding principal balance,
when assumed by investors or as secondary residences.
A. Investors. When assuming mortgages not subject to the 1989 Act,
originated by an owner-occupant pursuant to a VA Certifications of
Reasonable Value (CRV) issued, or for which a DE underwriter signed an
appraisal report on or after February 5, 1988, investors must pay down the
outstanding mortgage balance to a 75 percent LTV ratio, if the owneroccupant
requests a release of liability. Either the original or the current
appraised value of the property may be used to determine compliance with
the 75 percent LTV limitation. This requirement continues throughout the
life of the mortgage.
B. Owner-Occupants. When assuming a property as a secondary residence,
for which a VA CRV was issued, or for which a DE underwriter signed an
appraisal report on or after February 5, 1988 (but before January 27,
1991), owner-occupants must pay down the outstanding mortgage balance
to an 85 percent LTV ratio. Either the original appraised value or the
current appraised value of the property may be used to determine
compliance with the 85 percent LTV limitation.
Mortgages pursuant to a VA CRV, or a DE lender appraisal report or
master appraisal report issued or signed on or after January 27, 1991, may
not be assumed as secondary residences, except under the hardship
provisions described in paragraph 1-3. (This does not apply to mortgages
exempt from the investor prohibitions.)
| Free Appraisals for approved applicants |
This Handbook describes the basic mortgage credit underwriting
requirements for singlefamily (one to four units) mortgage loans
insured under the National Housing Act.
For each loan FHA insures, the lender must establish that the
borrower has the ability and willingness to repay the mortgage
debt. This decision must be predicated on sound underwriting
principles consistent with the guidelines, rules, and regulations
described throughout this Handbook and must be supported by
sufficient documentation.
These underwriting guidelines discuss the types of transactions
and properties eligible for mortgage insurance, and FHA's
requirements for determining the borrower's ability and
willingness to repay the debt.
Information regarding valuation and architectural requirements
can be found in HUD Handbooks 4150.1 REV-1 and 4145.1 REV-2,
CHG-1, respectively. These underwriting guidelines apply to
mortgages insured under Sections 203(b) and 234(c) of the
National Housing Act, and are also generally applicable to other
single-family mortgage insurance programs (except where
inconsistent with special features of those programs).
Other single-family mortgage insurance programs are described
in HUD Handbook 4000.2 REV-2.
This Handbook provides direction to lenders and FHA staff and is
based on FHA 's experience in insuring single-family mortgages.
While it is not FHA's intent to insure mortgages that are likely to
result in default, regardless of the borrower's equity, lenders
may exercise some discretion in the underwriting of home
mortgages where the borrower's financial and other
circumstances are not specifically addressed by this
Handbook. However, lenders are expected to exercise both
sound judgment and due diligence in the underwriting of loans
to be insured by FHA. For ease of reading, we have chosen to
use “lender” in lieu of “mortgagee” throughout this user guide.
However, “lender” is to be interpreted as a FHA-approved
mortgagee as described
