Mortgagee Letter 99-
The Most Important Updates to FHA Guidelines
Since 2003
The following pages include the most important updates to FHA Guidelines from January of 2003 through September of 2007. Many of these changes have made it significantly easier for originators to use FHA loans to help customers buy or refinance a home. If you have specific questions on how to take advantage of these changes however please feel free to call us for assistance.
Sincerely,
Jeff Mifsud
Founder – Mortgage Seminars
FHA sales and processing training for the mortgage industry
(877) 342-9100
Mortgagee Letter Updates to 4155.1 Rev. 5
Table Of Contents
Subject Page
FHASecure Refinance p. 3
Revised Borrower’s Closing Costs p. 8
FHA Repair and Inspection Requirements p. 9
Revised Refinance Transactions, p. 12
Homeownership Vouchers, p. 14
SS# Verification, p. 15
Qualifying Ratios & Child Support, p. 17
Lender Accountability for Appraisals, p. 18
Property Flipping Update, p. 20
Property Flipping Original Letter, p. 21
Property Flipping Chart, p. 23
Streamline “k” p. 24
Seller Concessions and Appraisals, p. 29
MORTGAGEE LETTER 2007-11
September 5, 2007
TO: ALL APPROVED MORTGAGEES
ALL FHA ROSTER APPRAISERS
SUBJECT: The FHASecure Initiative and Guidance on Appraisal Practices in
Declining Markets
The Federal Housing Administration is pleased to announce an initiative that will enable homeowners to refinance various types of adjustable rate mortgages (ARMs) that have recently “reset.” This mortgagee letter describes how lenders and homeowners may refinance mortgages that, due to the increased mortgage payment following the reset, have become delinquent. The mortgagee letter also reiterates guidance to lenders about making objective decisions regarding the underlying collateral in declining markets. The FHASecure initiative, which is a temporary program designed to provide refinancing opportunities to homeowners and to increase liquidity in the mortgage market, requires that the loan application be signed no later than December 31, 2008.
Refinancing Non-FHA Adjustable Rate Mortgages Following Resets
FHA is currently doing a significant business in refinancing non-FHA mortgages for borrowers who are current under their existing mortgage. This mortgagee letter extends eligibility to borrowers who became delinquent under their current mortgage following the reset of the interest rate.
FHA recognizes that many lenders are engaged in a variety of loss mitigation activities to keep borrowers in their homes, and applauds these efforts. This mortgagee letter explains credit policies for refinance transactions involving non-FHA adjustable rate mortgages where the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due.
These instructions are designed to permit homeowners, who previous to their reset, demonstrated an ability to meet their mortgage obligations, an opportunity to refinance into a prime-rate FHA-insured mortgage. In many cases homeowners may be permitted to include mortgage payment arrearages into the new loan amount, subject to existing geographical mortgage limits and the loan-to-value limit shown below.
Eligibility Highlights of the FHASecure Initiative
• The mortgage being refinanced must be a non-FHA ARM that has reset.
• The mortgagor’s payment history on the non-FHA ARM must show that, prior to the reset of the mortgage, the mortgagor was current in making the monthly mortgage payments, i.e., the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due.
• If there is sufficient equity in the home, under additional eligibility instructions provided below, FHA will insure mortgages that include missed mortgage payments.
• Under certain conditions explained below, FHA will insure first mortgages where (1) the existing note holder writes off the amount of indebtedness that cannot be refinanced into the FHA insured mortgage; or (2) either the FHA-approved lender making the new mortgage or the existing note holder may take back a second lien that includes closing costs, arrearages or previous secondary financing if the indebtedness exceeds FHA prescribed LTV and maximum mortgage amount limits.
• Mortgagees must determine, as part of the underwriting process, that the reset of the non-FHA ARM monthly payments caused the mortgagor’s inability to make the monthly payments and that the mortgagor has sufficient income and resources to make the monthly payments under the new FHA-insured refinancing mortgage.
Additional Information About the FHASecure Initiative
• Maximum FHA loan-to-value ratios
The maximum loan-to-value limits are shown below and are applied to the appraiser’s estimate of value, exclusive of any upfront mortgage insurance premium.
Maximum Loan-to-Value Ratios
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
• Calculating the Maximum FHA Mortgage Amount
The amount of the FHASecure mortgage may not exceed either the geographical maximum mortgage limits or the loan-to-value ratios shown above. FHA will permit the inclusion of the existing first lien, any purchase money second mortgage, closing costs, prepaid expenses, discount points, prepayment penalties, and late charges. FHA will also permit arrearages (principal, interest, taxes and insurance) to be added into the new loan amount provided the arrearages arose after the reset.
• Subordinate Financing Under the FHASecure Initiative
If the new maximum FHA loan is not enough to pay off the existing first lien, closing costs and arrearages, the lender may execute a second lien at closing to pay the difference. The combined amount of the FHASecure first mortgage and any subordinate non-FHA insured lien may exceed the applicable FHA loan-to-value ratio and geographical maximum mortgage amount. If payments on the second are required, they must be included in qualifying the borrower. If payments are deferred, they must be so for no less than 36 months to not be considered in the qualifying ratios. Borrowers need not yet have missed any mortgage payments to be eligible for this type of subordinate financing.
• Underwriting the Mortgage/Qualifying the Borrower
FHA encourages all approved lenders to use FHA’s TOTAL Mortgage Scorecard to obtain risk classifications on each mortgage originated under the FHASecure initiative. If TOTAL renders an “accept/approve,” the mortgagee’s underwriter need not perform a personal review of the borrower’s credit history and capacity to repay. However, in the more likely event that the risk class is a “refer,” the underwriter must:
1. Determine that the homeowner has the capacity to make future mortgage payments as well as pay all other obligations. The payment-to-income ratio and debt-to-income ratios remain 31 percent and 43 percent, respectively. Compensating factors are to be provided by the underwriter when the ratios are exceeded.
2. Analyze the homeowner’s overall credit history, especially payments on the existing mortgage. The underwriter must determine that the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due and that other recurring obligations were paid on time. If the borrower was offered partial forbearance after interest rate reset, the underwriter must determine that he/she has made payments under the forbearance agreement in a timely manner.
3. Provide comments in the “remarks” section of the mortgage credit analysis worksheet that he or she has determined that the cause of the borrower’s inability to make payments was directly related to the increased payment attributable to the reset and not due to a disregard for obligations.
• Tax consequences for a borrower when the note holder writes off a portion of the amount to pay off the first mortgage
FHA recognizes that there may be tax consequences resulting from debt relief. However, since FHA does not provide tax guidance, it recommends borrowers—and mortgage lenders—in such situations seek competent tax advice.
• Other considerations of which the mortgagee must be aware when refinancing these mortgages.
The FHASecure initiative for refinancing borrowers harmed by non-FHA ARMs that have recently reset is not to be used to solicit homeowners to cease making timely mortgage payments; FHA reserves the right to reject for insurance those mortgage applications where it appears that a loan officer or other mortgagee employee suggested that the homeowners could stop making their payments, refinance into a FHA insured mortgage, and keep, as cash, the amount of payments not made on time.
Appraisal Practices in Declining Markets
Historically, FHA has provided a counter-cyclical force in helping to stabilize declining housing markets and will continue to do so. In fact, much of FHA’s business activity this year has been in those states (e.g., Ohio, Michigan, Indiana) that have suffered sustained depreciation of home prices due to job losses and increased foreclosures. Nevertheless, recent property value declines in certain markets suggest the need to reiterate our guidance to mortgage lenders to ensure that appraisers are providing accurate property valuations. A declining market could be as small as a neighborhood or as large as an entire state, and no standard definition exists other than home prices are falling.
Appraiser Responsibilities
The purpose of the appraisal is to provide the lender/client with an accurate, and adequately supported, opinion of market value. It is the appraiser’s responsibility to determine whether a property being appraised is located in a declining market.
The neighborhood section of each property specific appraisal form contains a housing trends section where the appraiser marks a box indicating property values are increasing, stable or declining. Whichever box is selected, the appraiser is certifying that he/she has performed an objective analysis of quantifiable data supporting the observations made.
If a property is located in a declining market, the appraiser must provide an explanation in the “Market Conditions” section of the appraisal report that includes relevant information in support of the conclusions relating to trends in property values, demand/supply and marketing time. The appraiser must also provide a description of the prevalence and impact of sales and financing concessions and/or down payment assistance in the subject’s market area. Other areas of discussion may include days on market, list-to-sale price ratios, and/or financing availability.
Lender Responsibilities
The mortgagee’s responsibility is to properly review the appraisal and determine that the appraised value used to support the mortgage is accurate and adequately supported.
Lenders are reminded that if the appraiser they selected provides a poor or even fraudulent appraisal that leads the Department to insure a mortgage at an inflated amount, the lender is held equally responsible with the appraiser for the violation if the lender knew or should have known. FHA will pursue appropriate enforcement actions against both or either party if necessary. Lenders accept responsibility, equally with the appraisers for the integrity, accuracy and thoroughness of the appraisal submitted to FHA for mortgage insurance purposes.
If you should have any questions concerning this Mortgagee Letter, call 1-800-CALLFHA.
Sincerely,
Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner
MORTGAGEE LETTER 2006-04
January 27, 2006
TO: ALL APPROVED MORTGAGEES
SUBJECT: Revised Borrower’s Closing Costs Guidelines
This Mortgagee Letter rescinds paragraph 5-2 of handbook HUD 4000.2, REV-3. This paragraph lists closing costs and other fees that may be collected from the borrower. This amendment is part of FHA’s efforts to align its business process with industry practice and is effective for all mortgages endorsed for FHA-insurance on or after the date of this Mortgagee Letter.
Mortgagees may charge and collect from mortgagors those customary and reasonable costs necessary to close the mortgage. Except for discount points, these fees may also be used to meet the homebuyer’s minimum investment requirement. Due to existing requirements, mortgagors may not pay a tax service fee, and may not be charged an origination fee greater than one percent on forward mortgages (plus the supplemental origination fee on Section 203(k) rehabilitation mortgages), nor more than two percent on FHA’s Home Equity Conversion Mortgages. Mortgagees are also reminded that aggregate charges may not violate FHA’s tiered pricing rules.
The seller’s maximum contribution to the homebuyer’s actual closing, prepaid expenses, discount points, and other financing concessions remains at 6 percent of the sales price. Seller contributions in excess of 6 percent will continue to require a dollar-for-dollar reduction to the mortgage.
This change also eliminates geographic disparities for those lenders operating within the jurisdiction of more than one Homeownership Center (HOC) such as the costs of inspection fees. However, FHA will not allow “mark-ups,” i.e., charging a fee to the mortgagor for an amount greater than that charged the mortgagee by the service provider; only the actual cost for the service may be charged the mortgagor.
FHA believes that by no longer prescribing borrower’s paid closing costs, a significant impediment to the use of its programs has been eliminated. FHA-approved mortgagees advised us that sellers sometimes balked at accepting a sales contract from a homebuyer wishing to use FHA-insured financing because its guidelines differ from standard practice and do not consider regional variations. The unintended consequence was that the homebuyer was then forced into a less suitable and often more expensive mortgage product. Please note that all fees and charges must comply with Federal and State disclosure laws and other applicable laws and regulations.
If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888) 696-4687, Denver (800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888) 827-5605.
Sincerely,
Brian D. Montgomery Assistant secretary for Housing-
Federal Housing Commissioner
December 19, 2005
MORTGAGEE LETTER 2005-ML-48
TO: ALL APPROVED MORTGAGEES
ALL APPROVED APPRAISERS
SUBJECT: FHA Repair and Inspection Requirements for existing
properties and revisions to FHA Appraisal Protocol
In September 2005, the Federal Housing Administration (FHA) issued
Mortgagee Letter 2005-34, which announced the adoption of four of Fannie
Mae's revised appraisal reporting forms as well as the release of Revised
Appendix D of Handbook 4150.2, CHG-1. This Mortgagee Letter provides
additional guidance regarding FHA's repair and inspection requirements for
existing properties and the use of the Fannie Mae appraisal reporting forms.
All appraisal guidance for new construction that serves as security for
FHA-insured mortgages remains unchanged beyond the clarification in the
Revised Appendix D that the appraiser may appraise a home that is under
construction and that is 90% or more complete without benefit of plans and
specifications.
In a continuing effort to reform and standardize its appraisal requirements,
FHA has shifted from its historical emphasis on the repair of minor property
deficiencies and now only requires repairs for those property conditions that
rise above the level of cosmetic defects, minor defects or normal wear and
tear. FHA Roster Appraisers are reminded to report all readily observable
property deficiencies, as well as any adverse conditions discovered performing
the research involved in completing the appraisal, within the appraisal
reporting form. Lenders should use professional judgment and rely upon
prudent underwriting practices in determining when a property condition poses
a threat to the safety of an occupant and/or jeopardizes the soundness and
structural integrity of the property, such that additional inspections and/or
repairs are necessary.
Revisions to the appraisal reporting guidance contained in Chapters 2 and 3
of Handbook 4150.2, CHG-1 are limited to those described in this Mortgagee
Letter and Mortgagee Letter 2005-34 and Revised Appendix D. The specific
areas of guidance that are rescinded by this Mortgagee Letter are delineated
below. FHA intends to retire and replace Handbook 4150.2, CHG-1 in the
near future.
Repair Requirements
As stated in Revised Appendix D, FHA now permits an "as-is" appraisal for
existing properties that serve as security for FHA-insured mortgages when
minor property deficiencies, which generally result from deferred maintenance
and normal wear and tear, do not affect the safety of the occupants or the
security and soundness of the property. FHA no longer requires repairs for
these types of minor cosmetic deficiencies to bring a property into
compliance with FHA Minimum Property Requirements. Specifically, the
guidance provided in Handbook 4150.2, CHG-1, Chapter 3, Paragraph 3-6,
A-7 referencing all-weather road surfaces; Paragraph 3-6, A-8 referencing
poor workmanship; Paragraph 3-6, A-11 referencing debris and trash in
crawl space; Paragraph 3-6, A-16 referencing steps without a handrail;
Paragraph 3-6, C referencing bare floors, badly soiled carpeting and cracked
plaster and sheetrock is no longer applicable. Additionally, the guidance
provided in Handbook 4905.1, REV-1, Chapter 2, Paragraph 2-7, A-2
referencing all weather road surfaces; Paragraph 2-8 referencing poor
workmanship and Paragraph 2-14, C referencing crawl spaces with debris
and trash is no longer applicable. Any reference to the Valuation Condition
form (form HUD-92564-VC) and protocol for its completion contained in
Handbook 4150.2 is no longer applicable as well. Examples of minor
property conditions that no longer require automatic repair for existing
properties include, but are not limited to:
* Missing handrails
* Cracked or damaged exit doors that are otherwise operable
* Cracked window glass
* Defective paint surfaces in homes constructed post 1978
* Minor plumbing leaks (such as leaky faucets)
* Defective floor finish or covering (worn through the finish, badly soiled
carpeting)
* Evidence of previous (non-active) Wood Destroying Insect/Organism
damage where there is no evidence of unrepaired structural damage
* Rotten or worn out counter tops
* Damaged plaster, sheetrock or other wall and ceiling materials in homes
constructed post- 1978
* Poor workmanship
* Trip hazards (cracked or partially heaving sidewalks, poorly installed
carpeting)
* Crawl space with debris and trash
* * Lack of an all weather driveway surface
Examples of property conditions that may represent a risk to the health and
safety of the occupants or the soundness of the property for which FHA will
continue to require automatic repair for existing properties include, but are
not limited to:
* Inadequate access/egress from bedrooms to exterior of home
* Leaking or worn out roofs (if 3 or more layers of shingles on leaking or
worn out roof, all existing shingles must be removed before re-roofing)
* Evidence of structural problems (such as foundation damage caused by
excessive settlement)
* Defective paint surfaces in homes constructed pre-1978
* Defective exterior paint surfaces in home constructed post-1978 where the
finish is otherwise unprotected.
Lenders must review the appraisal to determine whether the appraiser has
reported any property conditions that will affect the health and safety of the
occupants or the security and the soundness of the property and must
require immediate repair where the property condition poses a threat to
these criteria.
Inspection Requirements
FHA no longer mandates automatic inspections for the following items and/or
conditions in existing properties:
* Wood Destroying Insects/Organisms: inspection required only if evidence of
active infestation, mandated by the state or local jurisdiction, if customary to
area, or at lender's discretion
* Well (individual water system): test or inspection required if mandated by
state or local jurisdiction; if there is knowledge that well water may be
contaminated; when the water supply relies upon a water purification system
due to presence of contaminants; or when there is evidence of:
Corrosion of pipes (plumbing)
Areas of intensive agriculture within 1/4 mile
Coal mining or gas drilling operations within 1/4 mile
Dump, junkyard, landfill, factory, gas station, or dry cleaning operation within
1/4 mile
Unusually objectionable taste, smell or appearance of well water
(superceding the guidance in Mortgagee Letter 95-34 that requires well
water testing in the absence of local or state regulations)
* Septic: test or inspection required only if evidence of system failure, if
mandated by state or local jurisdiction, if customary to the area, or at
lender's discretion
* Flat and/or unobservable roof
Consequently, the guidance provided in Handbook 4150.2, Chapter 3,
Paragraph 3-6, A-6 referencing mandatory termite inspections for any
structure that is ground level and for any structure where wood touches the
ground; Paragraph 3-6, A-5 referencing mandatory well and septic tests;
and Paragraph 3-6, A-12 referencing mandatory inspections for a flat roof
is no longer applicable. Additionally, the guidance provided in Handbook
4905.1, REV-1, Chapter 2, Paragraph 2-5, B-1 referencing mandatory well
water tests is no longer applicable. In cases where well tests are necessary,
as described above, FHA's existing testing standards outlined in Chapter 3,
Paragraph 3-6, A-5a. of Handbook 4150.2 remain in effect and supercede
Mortgagee Letter 95-34. If the appraiser reports a potential property
deficiency that may pose a threat to the safety of the occupants or the
security and soundness of the property, the lender will require an inspection
of the condition to determine whether repairs are necessary to mitigate or
resolve the problem. Examples of conditions that will continue to require
automatic inspections include, but are not limited to:
* Standing water against the foundation and/or excessively damp basements
* Hazardous materials on the site or within the improvements
* Faulty or defective mechanical systems (electrical, plumbing, or heating)
* Evidence of possible structural failure (e.g., settlement or bulging
foundation wall)
Additional Changes to Appendix D, Valuation Protocol
As a result of these changes in FHA's repair and inspection requirements for
existing properties, Revised Appendix D of Handbook 4150.2, CHG-1 has
been updated. The following pages in Revised Appendix D have been updated
to reflect these changes: 2, 4, 19, 23, 27, 50, 55, 60, 85, 92, 112, 116
and 120. Revised Appendix D is attached to this Mortgagee Letter and will
be available online at:
Conditional Commitment Form
Mortgagee Letter 2005-34 instructed the mortgagee to provide a copy of the
completed form HUD-92800.5B (Conditional Commitment Direct Endorsement
Statement of Appraised Value) to the mortgagor at least five business days
prior to loan closing. The five-business day delivery date prior to loan
closing of the Conditional Commitment form is hereby rescinded and lenders
are instructed to ensure that the mortgagor receives either a completed copy
of HUD 92800.5B, or a copy of the completed appraisal report, at or before
loan closing.
This Mortgagee Letter is effective for all appraisals performed on or after
January 1, 2006.
If you have any questions regarding this Mortgagee Letter, please contact
your local Homeownership Center (HOC) in Atlanta (888) 696-4687, Denver
(800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888)
827-5605.
Sincerely,
Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner
October 31, 2005
MORTGAGEE LETTER 2005-43
TO: ALL APPROVED MORTGAGEES
SUBJECT: Revised Refinance Transactions
The Federal Housing Administration (FHA) has revised a number of underwriting instructions regarding refinance transactions. These changes are designed to provide expanded alternatives for homeowners wishing to refinance their mortgages, and offer greater flexibility to mortgagees in processing and underwriting certain refinance transactions. These guidelines, which are effective for mortgages endorsed on or after the date of this Mortgagee Letter, are summarized below and will appear as revised pages to handbook HUD-4155.1 REV-5 when revised in 2006.
Summary of Changes
Cash-Out Refinances: Under the terms and conditions described below, FHA will insure a cash-out refinance of up to 95% of the appraiser’s estimate of value. The eligibility conditions that must be met include:
• The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.
• If said property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and is current for the month due.
• The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.
• Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.
• Any co-borrower or co-signer being added to the note must be an occupant of the property. Non-occupant owners may not be added in order to meet FHA’s credit underwriting guidelines for the mortgage.
“No Cash Out” (Rate and Term) Refinances and Streamline Refinances: These instructions remain in effect except for the following modifications and additions:
• The mortgage being refinanced must be current for the month due.
• In determining the existing debt as part of the mortgage amount calculation, the mortgagee may include accrued late charges and escrow shortages.
• At closing, the borrower may not receive cash back in excess of $500.
• Prepaid expenses may include the per diem interest to the end of the month on the new loan, hazard insurance premium deposits, monthly mortgage insurance premiums, and any real estate tax deposits needed to establish the escrow account regardless whether the mortgagee refinancing the existing loan is also the servicing lender for that mortgage.
Shortening the Term: Previous instructions provided for an allowance of $50 before triggering a credit review when a borrower shortens the term of the mortgage. However, in light of the increase in mortgage amounts over the past several years, this has become an unrealistic threshold. Therefore, a mortgage on a principal residence may be refinanced to a shorter-term mortgage, provided the monthly principal and interest increases no more than 20 percent. This additional latitude will allow more borrowers to shorten the term of the mortgage without the need for full underwriting.
Refinancing a FHA-Hybrid Adjustable Rate Mortgage to a Fixed Rate: A Hybrid ARM, (3-, 5, 7-, or 10-year mortgage) may be streamline refinanced to a fixed rate mortgage, with or without an appraisal, provided that the payment will not increase by more than 20 percent and all mortgage payments must have been made within the month due for the past 12 months or the period the mortgage has been in force, if shorter.
If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647), or Santa Ana (888-827-5605).
Sincerely,
Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner
July 29, 2005
MORTGAGEE LETTER 2005 - 32
TO: ALL APPROVED MORTGAGEES
SUBJECT: Underwriting Section 8 Homeownership Vouchers—Updated Instructions
In Mortgagee Letter 2001-20 (ML 2001-20), which describes the underwriting procedures for loan applications where the homebuyer receives a monthly homeownership assistance payment (as known as a subsidy) under the housing choice voucher homeownership program, the Federal Housing Administration (FHA) announced that it would consider additional underwriting guidelines. Since that time, FHA has monitored loan performance and examined alternative underwriting methodologies and is pleased to present the more flexible guidelines described below.
Highlights of Major Change
Mortgage lenders may now treat the monthly homeownership assistance payment as an “offset” to the monthly mortgage payment, i.e., reduce the payment by the amount of the homeownership assistance payment before dividing by the monthly income to determine the payment-to-income and debt-to-income ratios. However, in order to use this procedure for qualifying the borrower, the homeownership assistance payment funds must not pass through the hands of the homebuyer, i.e., the homeownership assistance payment must either be paid directly to the servicing lender or placed into an account that only the servicing lender may access. If the homeownership assistance payment is made directly to the homeowner, that amount may only be considered as income in qualifying the borrower, in accordance with the instructions in ML 2001-20 which remain intact for qualifying borrowers whose homeownership assistance payment is not paid to the servicing lender.
FHA believes these new underwriting guidelines will increase homeownership opportunities for those homebuyers who receive Section 8 monthly homeownership assistance payments while not increasing the risk of borrower defaults on the mortgage. Mortgage lenders are reminded to identify all Section 8 subsidized mortgage loans by entering “88” as the program identification code in the FHA Connection or functional equivalent.
If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647), or Santa Ana (888-827-5605).
Sincerely,
Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner
May 24, 2005
MORTGAGEE LETTER 2005 - 27
TO: ALL APPROVED MORTGAGEES
SUBJECT: Social Security Number Validation
The Federal Housing Administration (FHA) is pleased to announce that beginning June 18, 2005, it will validate social security numbers (SSNs) for consistency with borrower names and dates of birth. This enhancement to the social security number validation procedures described in Mortgagee Letter 2004-17 is provided at no cost to the mortgage lender and is a further measure designed to reduce incidents of identity theft and fraud in FHA’s single-family mortgage insurance programs. This process integrates FHA’s access to various external databases including, in some cases, the Social Security Administration (SSA).
How the process works
Lenders will enter the borrower’s name, SSN and birthdate at the borrower/address validation screen through the FHA Connection (FHAC) or its functional equivalent. The system will query various external databases to determine the validity, consistency, and correlation of the data elements. The online verification process provides an overall confidence rating in real-time. Validating SSNs at this stage in loan processing will give lenders the opportunity to correct SSNs, names, and dates of birth before case number assignment. All construction types except proposed new construction require the entry of the three elements for each borrower.
What “acceptable confidence rating” means and how case numbers are assigned
Acceptable confidence rating means the system has matched the borrower’s three data elements with information contained in the other databases. This match indicates there is a high probability that all three data elements (name, date of birth, and SSN) belong to the same person. An acceptable confidence rating allows a case number to be assigned and the lender may continue to process the loan.
What it means when the online verification process does not result in case number assignment
A case number will not be assigned when the verification indicates that the three data elements did not match sufficiently to provide an acceptable confidence rating. In these cases the lender may either correct any or all of those three data fields which will then trigger additional verification attempts, or, if it believes that those borrower information fields are correct, it can override the online validation, continue with all other data entries into FHA Connection, and the application will be placed in the “holds tracking” mode. This results in an overnight verification attempt with the SSA through its own database. A case number will normally be assigned the next business day following successful verification by SSA. However, depending on time of submission and SSA's business cycle, two-day case number assignments may occur.
Circumstances where the overnight matching with SSA fails
On the holds tracking screen, FHA will communicate whatever information regarding mismatched data fields is provided by SSA, including transposed numbers, date of birth inconsistency, complete failure to match, etc., but no case number will be issued. However, if the borrower produces conclusive documentation that the SSA database is in error (e.g., borrower name change following recent marriage), the lender may provide such documentation supporting the validity of the SSN to the jurisdictional Homeownership Center (HOC). If, upon its review, the HOC staff believes the documentation to be valid, it will manually issue a case number.
Other instances when this validation process is performed
This validation process will also be performed when borrower name, date of birth or SSN is changed after the case number has been assigned. Should the validation of the new information fail, a case warning will remain on the loan and the lender will need to resolve the inconsistency before the mortgage may be endorsed.
Lender Responsibility
Although FHA is providing these tools, mortgagees are reminded it is their responsibility, and not FHA’s, to verify each borrower’s SSN, as well as each borrower’s identity. FHA is providing this validation process to protect the insurance funds it manages.
Form HUD-92900-A, Addendum to the Uniform Residential Loan Application
Form HUD-92900-A has been modified, at the request of SSA, to provide disclosure to, and consent by the borrower to verify his/her SSN against SSA data through computer matching services. This document is available on and must be used for all new loan applications taken on or after June 18, 2005.
FHA Loans Only
This verification service, provided by FHA at no cost to its approved mortgagees, may only be used for processing loans for FHA insurance. Mortgagees are not to use this service to verify SSNs for other than FHA mortgages.
If you have any questions regarding this Mortgagee Letter, please contact your Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378),
Philadelphia (800-440-8647), or Santa Ana (888-827-5605).
Sincerely,
Assistant Secretary for Housing-
Federal Housing Commissioner
April 13, 2005
MORTGAGEE LETTER 2005 - 16
TO: ALL APPROVED MORTGAGEES
SUBJECT: Revised Qualifying Ratios and Treatment of Child Support
The following changes to Federal Housing Administration’s (FHA) instructions regarding qualifying ratios and the treatment of child support in the underwriting analysis are effective immediately. Each is designed to enhance homeownership opportunities for low- and moderate-income individuals and families.
• Qualifying Ratios: FHA’s benchmark payment-to-income and debt-to-income ratios of 29% and 41%, respectively, were promulgated before Congress enacted recent federal tax cuts. Consequently, most borrowers seeking FHA mortgage insurance have enjoyed a reduction to their federal income tax during the last several years, thus increasing their buying power and disposable income.
Therefore, for manually underwritten mortgages where the Direct Endorsement (DE) underwriter must make the credit decision, the qualifying ratios are raised to 31% and 43%. This change will allow a larger number of deserving families to purchase their first home while not increasing the risk of default. As always, if either or both ratios are exceeded on a manually underwritten mortgage, the lender must describe the compensating factors used to justify mortgage approval. For those borrowers who qualify under FHA’s Energy Efficient Homes (EEH), as described in handbook HUD-4155.1 REV-5, paragraph 2-19, the “stretch ratios” are increased to 33% and 45%.
• Treatment of Child Support: Paragraph 2-7 Q of handbook HUD-4155.1 REV-5 does not permit the “grossing up” of child support income in calculating the qualifying ratios. However, after considerable review, the Department has decided to permit properly documented child support to be grossed up under the same terms and conditions as other non-taxable income sources.
If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378),
Philadelphia (800-440-8647), or Santa Ana (888-827-5605).
Sincerely,
John C. Weicher
Assistant Secretary for Housing-
Federal Housing Commissioner
January 28, 2005
MORTGAGEE LETTER 2005-06
TO: ALL APPROVED MORTGAGEES
SUBJECT: Lender Accountability for Appraisals
This Mortgagee Letter is to remind mortgagees of their responsibilities to obtain high quality appraisals for properties that will be security for FHA-insured mortgages. These responsibilities are contained in an amendment to 24 CFR 203.5 that was published in the Federal Register on July 20, 2004 and which became effective August 19, 2004. This rule also amended 24 CFR 25.9 to make submission of, or causing to be submitted, documentation relating to an appraisal that does not satisfy FHA requirements a ground for administrative action by the Mortgagee Review Board. As explained in the preamble to this final rule, HUD is imposing a standard of accountability to which lenders, sponsor lenders, and loan correspondent lenders will be held that is the same as the standard used to impose civil money penalties for program violations. That standard is one of knowing (actual knowledge) or had reason to know.
HUD handbooks and mortgagee letters specify certain actions that a mortgagee should take to help ensure that appraisals comply with FHA requirements. However, the fact that a mortgagee has taken such actions does not automatically mitigate the standard imposed by this final rule if despite compliance with the requirements, the lender is found to have known or had reason to know about the deficient appraisal.
Background
Since 1991, when passage of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created systemic state licensure and certification requirements for appraisers, FHA has reiterated the responsibility of lenders to critically review and analyze FHA appraisals. The direction and guidance provided to lenders in previous mortgagee letters included the following:
• “A DE lender that selects its own appraiser must accept responsibility, equally with the appraiser, for the integrity, accuracy and thoroughness of the appraisal and will be held accountable by HUD for the quality of the appraisal.”
• “Lenders are reminded that if the appraiser they selected provides a poor or even fraudulent appraisal which leads the Department to insure a mortgage at an inflated amount, the lender is held equally responsible with the appraiser for the violation.”
• “Lenders accept responsibility, equally with the appraisers, for the integrity, accuracy and thoroughness of the appraisals, and will be held accountable by HUD”
Handbook 4060.1 REV-1, Change 1, Mortgagee Approval Handbook, dated November 24, 2003, revised and updated the Department’s requirements for maintaining and implementing a Quality Control Program for the origination and servicing of HUD/FHA insured mortgages. Chapter 6 contains detailed explanations for quality control plans including appraisal review.
Highlights of Final Rule
The final rule:
a) codifies FHA’s requirement that mortgagees are accountable, along with appraisers, for the quality of appraisals on properties securing FHA-insured mortgages;
b) specifically provides that lenders that submit appraisals to HUD which do not meet FHA requirements are subject to the imposition of sanctions by the HUD Mortgagee Review Board;
c) applies to both sponsor lenders that underwrite loans and loan correspondent lenders that originate loans on behalf of their sponsors; and
d) is designed to ensure that lenders are aware of their responsibilities with respect to appraisals and provide homeowners with an accurate statement of the appraised value of their home as well as help assure homeowners that the condition of the home meets FHA standards.
e) clarifies that the standard of accountability to which lenders, sponsor lenders, and loan correspondent lenders will be held is the same as the standard used to impose civil money penalties for program violations, and that standard is one of knowing (actual knowledge) or had reason to know.
Purpose of the Rule
The success of the FHA single family mortgage insurance program, and HUD’s ability to safeguard the FHA Insurance Fund, depends significantly on the quality of appraisals on properties that are to be security for insured mortgages. Section 203(b)(2) of the National Housing Act (12 U.S.C. 1709(b)(2)) provides the method for calculating the maximum mortgage amount that FHA can insure. The calculations required by statute are based on the appraised value of the property that is security for the mortgage. If a mortgagor defaults and the mortgagee conveys title to the property in exchange for payment of the mortgage insurance benefits, FHA must then manage and sell the property in order to recoup its insurance loss. If the appraisal was accurate, the loss to FHA will be minimal. If the appraisal was inaccurate, or the appraiser was negligent in reporting readily observable defects, HUD’s return on any sale of a property that was overvalued or in poor condition could be significantly reduced, thereby increasing the loss to the FHA Insurance Fund.
If you have any questions concerning this Mortgagee Letter, please contact your local Homeownership Centers in Atlanta (888) 696-4687, Denver (800) 543-9378, Philadelphia
(800) 440-8647, or Santa Ana (888) 827-5605 (these are all toll free numbers).
Sincerely,
John C. Weicher
Assistant Secretary for Housing-
Federal Housing Commissioner
January 26, 2005
MORTGAGEE LETTER 2005-05
TO: ALL APPROVED MORTGAGEES
SUBJECT: Property Flipping Prohibition Technical Amendments
This Mortgagee Letter alerts lenders that on December 23, 2004, HUD published an interim rule in the Federal Register at 69 FR77114. This rule amends regulations at 24 CFR 203.37a that prohibit property flipping in HUD’s single family mortgage insurance programs and provides additional exceptions to the time restrictions on sales contained in the May 1, 2003 Federal Register (68 FR 23370). The interim rule (and this Mortgagee Letter) becomes effective for mortgages endorsed on or after January 24, 2005 and public comments to the interim rule may continue to be made through February 22, 2005.
The interim rule includes two additional categories of properties exempted from the time restrictions:
• Inherited Properties: The interim rule provides that properties acquired through inheritance that are subsequently sold are not subject to the restrictions of the property flipping rule.
• Real Estate Owned Sales by Federal Agencies: In addition to properties acquired and sold by FHA following default by the mortgage borrower, single-family properties sold by all other Federal government agencies are not subject to the restrictions of the property flipping rule.
The guidance contained in ML 2003-07, as modified by this interim rule, remains in force.
If you have any questions concerning this Mortgagee Letter, please contact your local Homeownership Centers in Atlanta (888-696-4687); Philadelphia (800-440-8647); Denver (800-543-9378) or Santa Ana (888-827-5605).
Sincerely,
John C. Weicher
Assistant Secretary for Housing-
Federal Housing Commissioner
May 22, 2003
MORTGAGEE LETTER 2003-07
TO: ALL APPROVED MORTGAGEES
ALL FHA ROSTER APPRAISERS
SUBJECT: Prohibition of Property Flipping
On May 1, 2003, the Department of Housing and Urban Development published a final rule in The Federal Register amending the mortgage insurance regulations to prevent the practice of flipping on properties that will be financed with Federal Housing Administration (FHA) insured mortgages. Property flipping is a practice whereby a recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser. These changes to existing credit policies, in effect for all mortgage loan applications signed on or after June 2, 2003, will eliminate the most egregious examples of predatory flips of properties within the FHA mortgage insurance programs and, thus, preclude home purchasers using FHA financing from becoming victims of predatory flipping activity.
This Mortgagee Letter provides a synopsis of the final rule, as well as specific guidance to assist lenders in complying with these new requirements. We urge mortgage lenders and appraisers to review the entire published final rule as well.
Highlights of Final Rule
The final rule requires that: a) only owners of record can sell properties that will be financed using FHA insured mortgages; b) any re-sale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) that for re-sales that occur between 91 and 180 days where the new sales price exceeds the previous sales price by 100 percent or more, FHA will require additional documentation validating the property’s value. In addition, the rule provides flexibility for FHA to examine and require additional evidence of appraised value when properties are re-sold within 12 months.
Sale by Owner of Record
To be eligible for a mortgage insured by FHA, the property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. This requirement applies to all FHA purchase money mortgages regardless of the time between re-sales.
The mortgage lender must obtain documentation verifying that the seller is the owner of record and submit this to HUD as part of the insurance endorsement binder; it is to be placed behind the appraisal on the left side of the case binder. This documentation may include, but is not limited to, a property sales history report, a copy of the recorded deed from the seller, or other documentation such as a copy of a property tax bill, title commitment or binder, demonstrating the seller’s ownership of the property and the date it was acquired.
Re-sales Occurring 90 Days or Less Following Acquisition
If a property is re-sold 90 days or fewer following the date of acquisition by the seller, the property is not eligible for a mortgage insured by FHA. FHA defines the seller’s date of acquisition as the date of settlement on the seller’s purchase of that property. The re-sale date is the date of execution of the sales contract by the buyer that will result in a mortgage to be insured by FHA.
As an example, a property acquired by the seller is not eligible for a mortgage to be insured for the buyer unless the seller has owned that property for at least 90 days. The seller must also be the owner of record.
Re-sales Occurring Between 91 and 180 Days Following Acquisition
If the re-sale date is between 91 and 180 days following acquisition by the seller, the lender is required to obtain a second appraisal made by another appraiser if the resale price is 100 percent or more over the price paid by the seller when the property was acquired.
As an example, if a property is re-sold for $80,000 within six months of the seller’s acquisition of that property for $40,000, the mortgage lender must obtain a second independent appraisal supporting the $80,000 sales price. The mortgage lender may also provide documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value but must still obtain the second appraisal. The cost of the second appraisal may not be charged to the homebuyer.
FHA also reserves the right to revise the re-sale percentage level at which this second appraisal is required by publishing a notice in the Federal Register.
Re-sales Occurring Between 91 Days and 12 Months Following Acquisition
If the re-sale date is more than 90 days after the date of acquisition by the seller but before the end of the twelfth month following the date of acquisition, FHA reserves the right to require additional documentation from the lender to support the re-sale value if the re-sale price is 5 percent or greater than the lowest sales price of the property during the preceding 12 months. At FHA’s discretion, such documentation may include, but is not limited to, an appraisal from another appraiser.
FHA will announce its determination to require the additional appraisal and other value documentation, such as an automated valuation method (AVM), through a Federal Register issuance. This requirement may be established either nationwide or on a regional basis, at FHA’s discretion.
Exceptions to 90-day Restriction
The final rule exempts properties acquired by an employer or relocation agency in connection with the relocation of an employee from the time restriction on re-sales. Re-sales by HUD under its Real Estate Owned (REO) program are not subject to the time restrictions. However, any subsequent re-sale of such a property must meet the 90-day threshold in order for the mortgage to be eligible as security for FHA insurance. The Homeownership Centers (HOCs) do not have the authority to waive the regulatory requirements set forth in the final rule.
The restrictions established by the final rule are not intended to apply when a builder is selling a newly built home or is building a home for a homebuyer wishing to use FHA-insured financing. HUD will more fully address this issue through issuance of the Federal Register notice provided for in § 203.37a(b)(4)(iv) of the final rule.
Date of Property Acquisition Determined by the Appraiser
In addition, mortgage lenders may rely on information provided by the appraiser in compliance with the updated Standard Rule 1-5 of the Uniform Standards of Professional Appraisal Practice (USPAP). This rule requires appraisers to analyze any prior sales of the subject property that occurred within specific time periods, now set for the previous three years for one-to-four family residential properties.
As a result, the information contained on the Uniform Residential Appraisal Report (URAR) describing the Date, Price and Data for Prior Sales for the subject property and the comparables is to include all transactions that occurred within three years of the date of the appraisal. Appraisers are responsible for considering and analyzing any prior sales of the property being appraised and the comparables that occurred within three years of the date of the appraisal.
Therefore, provided that the URAR completed by the appraiser shows the most recent sale of the property to have occurred at least one year previously, no additional documentation is required from the mortgage lender. The mortgage lender remains accountable for verifying that the seller is the owner of record and may rely on information developed by the appraiser for this purpose if provided. However, if the lender obtains conflicting information before loan settlement, it must resolve the discrepancy and document the file accordingly.
Summary of Property Flipping Regulations In Effect June 2, 2003
|Prior Sale Occurred |0-90 Days |91-180 Days |
|Eligibility for FHA |Not Eligible |Eligible provided: |
|Financing |Exceptions include relocation agencies and |Re-sale price to FHA mortgagors is less than 100% |
| |re-sales by employers to employees and sales by |greater than previous sale or |
| |HUD of Real Estate Owned. |If 100% or more greater than previous sale, second |
| |The HOCs cannot grant exceptions. |appraisal supports value |
If you have any questions regarding this Mortgagee Letter, please contact your Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800- 440-8647), or Santa Ana (888-827-5605).
Sincerely,
John C. Weicher
Assistant Secretary for Housing-
Federal Housing Commissioner
April 29, 2005
MORTGAGEE LETTER 2005-19
TO: ALL APPROVED MORTGAGEES
ALL APPROVED APPRAISERS
ALL APPROVED 203(k) CONSULTANTS
SUBJECT: “Streamline(K)” Limited Repair Program
The Department of Housing and Urban Development has developed a limited repair program, designated as the Streamline(K) Limited Repair Program, to augment its existing 203(k) program. The 203(k) program has been the primary tool of the Federal Housing Administration (FHA) for providing insured mortgage financing for the purchase of single-family properties in need of rehabilitation. The Streamline(K) program is a modification of the 203(k) program to facilitate purchase transactions in which the property needs minor rehabilitation work, as identified in a pre-purchase home inspection or the FHA appraisal. The Streamline(K) program is intended to assist homeowners with basic repairs costing between $5,000 and $15,000. Unlike the standard 203(k) program, any FHA approved mortgagee may originate a Streamline(K) mortgage. The mortgage amount will allow for acquisition of the property and up to $15,000 in the loan proceeds to be applied toward repair/rehabilitation of the property as detailed below. The Mortgagee Letter is effective for all case number assignments issued on or after June 4, 2005.
Streamline 203(K) Eligible Work Items
Use of the Streamline(K) program is limited to properties with the following work category items:
• Repair/Replacement roofs, gutters and downspouts
• Repair/Replacement/upgrade of existing HVAC systems
• Repair/Replacement/upgrade of plumbing and electrical systems
• Repair/Replacement of existing flooring
• Minor remodeling, such as kitchens, which does not involve structural repairs
• Exterior and interior painting
• Weatherization: including storm windows and doors, insulation, weather stripping, etc.
• Appliances - when at least $3,000 of basic home repairs are involved. Appliances may include free-standing ranges, refrigerators, washers/dryers, dishwashers and microwaves and may not exceed $2,000 in total cost.
• Improvements for accessibility for persons with disabilities
Repairs must comply with all local codes and ordinances. The mortgagor and/or contractor must obtain all required permits prior to the commencement of work. Once the mortgage is approved and closed, the list of repair items cannot be changed unless the Direct Endorsement (DE) Underwriter approves a written change order. Change orders are limited to unforeseen conditions that are discovered during the course of the rehabilitation process (such as hidden damage caused by termites, mold or water damage). Costs related to change orders cannot be used to increase the mortgage amount. Change orders may result in the reallocation of mortgage proceeds among cost categories or in the substitution of work items covered by the proceeds. Therefore, any change order permitting additional work must also delete a corresponding dollar amount of previously approved rehabilitation work. If change orders result in a net cost increase, the mortgagor is responsible for the additional costs. If change orders result in a net cost decrease, the excess mortgage proceeds must be used to reduce the principle balance of the mortgage. If, for any reason, the costs incurred during the rehabilitation exceed the mortgage amount, the mortgagor is responsible for the additional costs.
The cost of work to be performed must be at least $5,000, and the overall cost of repairs or improvements must not be greater than $15,000. Program requirements for HUD’s Section 203(b) and 203(k) Home Purchase and Rehabilitation loan apply if not addressed by this letter.
Streamline 203(K) Ineligible Work Items
Properties that require the following work items are not eligible for financing under the Streamline(K):
major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
new construction (including room additions);
repair of structural damage;
repairs requiring detailed drawings or architectural exhibits;
any environmental mitigations including modifications involving disturbance of painted surfaces in pre-1978 properties or any lead based paint abatement;
landscaping or similar site amenity improvements;
any repair or improvement requiring a work schedule longer than six (6) months; or
rehabilitation activities that require more than two (2) payments per specialized contractor.
Mortgagors may not use the Streamline(K) program to finance any required repairs arising from the appraisal that do not appear on the list of Streamline 203(K) Eligible Work Items or that would:
Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”;
Require plans or architectural exhibits;
Require a plan reviewer;
Require more than six months to complete (HUD will not grant extensions);
Result in work not starting within 30 days after loan closing; or
Cause the mortgagor to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted. (HUD anticipates that, in a typical case, the mortgagor would be able to occupy the property after mortgage loan closing).
Acceptance of Contractors and Rehabilitation Criteria
The mortgagor must use the services of one or more contractors to complete the repairs. Mortgagees may not approve “self-help” arrangements in which the mortgagor is performing the work, unless the mortgagor can sufficiently demonstrate to the mortgagee that he or she has the necessary expertise and experience to competently perform the work (i.e., mortgagor is an electrician and will perform electrical repairs/upgrades to the property securing the mortgage loan). Such “self-help” arrangements are strongly discouraged unless the mortgagor’s ability to competently perform the work in a timely and workmanlike manner is self-evident and easily documented.
The mortgagor will select the contractor or contractors who will provide estimates for work to be done. The mortgagee will work directly with the mortgagor, reviewing the mortgagor’s proposed work plan and cost estimates to ensure the planned work meets all program and repair requirements as noted by the appraiser on the VC Form (form HUD-92564), unless addressed prior to mortgage loan closing. Since this is a limited repair program, no general contractor is required. However, the mortgagor must provide the mortgagee with a written cost estimate(s) and references from a duly licensed and bonded contractor(s) for each specialized repair or improvement. If “self-help” arrangements are utilized, the mortgagor must provide written estimates from the suppliers of the materials that the mortgagor will purchase. Only “fixed price” contracts, which are subject to written change orders approved by the DE Underwriter in the event of unforeseen conditions, are acceptable. “Cost plus” or “time and material” contracts are prohibited. The mortgagee is responsible for ensuring that the cost of the repair is reasonable and customary for the area in which the property is located. When the mortgagee determines a repair(s) is eligible under the Streamline(K) Limited Repair program, the preparation of architectural exhibits, as listed in Handbook 4240.4 REV-2, Paragraph 3-2, is not required.
The cost estimate(s) must clearly state the nature and type of repair and the cost for completion of the work item and must be made even if the mortgagor is performing some or all of the work under a self-help arrangement. The mortgagee must review the contractor’s credentials, work experience and client references and may require the mortgagor to provide additional cost estimates if necessary. After review, the selected contractor(s) must agree in writing to complete the work for the amount of the cost estimate and within the allotted time frame. A copy of the contractor’s cost estimate(s) and the Homeowner/Contractor Agreement(s) must be placed in the insuring binder. The contractor must finish the work in accordance with the written estimate and Homeowner/Contractor Agreement and any approved change order. As in the standard 203(k) program, the Rehabilitation Construction Period begins when the mortgage loan is closed.
Streamline 203(K) Supplemental Origination Fee
For a Streamline (K) mortgage, the mortgagee may collect a supplemental origination fee equal to the greater of $350.00 or 2.5% of the cost of the improvement project not to exceed $375.00 from the mortgagor for the rehabilitation portion of the mortgage. This is in addition to the origination fee of one percent of the mortgage amount related to the purchase price.
Valuation Conditions/Appraisal Requirements
For the Streamline(K) mortgage, the mortgagee must request the assignment of a HUD case number and select an appraiser from the FHA Appraiser Roster. Since a 203(k) Consultant will not provide a “Specification of Repairs - Work Write-Up” for a Streamline(K) case, the appraiser must complete the form HUD-92564-VC (VC Form) as part of the appraisal determining the after-improved value.
When a mortgagor applies for a Streamline(K) mortgage based on needed repairs identified by a pre-purchase home inspection, the FHA appraiser must be provided with information regarding the mortgagor’s planned repairs and a copy of the pre-purchase home inspection and confirm that the repair is necessary and may be accomplished without a fee consultant, work write-up, plans or exhibits. Additionally, the appraiser must note any health and safety deficiency or FHA Minimum Property Requirements (MPR) on the VC Form that the proposed repair plan does not address.
Completion and Payments
No more than two payments may be made to the contractor, or to the mortgagor if the mortgagor is performing the work under a self-help arrangement. The first payment is intended to defray material costs and shall not be more than 50% of the estimated costs of all repairs/improvements. When permits are required from a local or State building authority, permit fees will be reimbursed to the contractor at closing (1) if they are included in the contractor’s estimate or (2) if not included in the estimate but all proceeds are not needed for the completion of the improvement. The final payment to the contractor will be made following completion of all work and release of any and all liens arising out of the contract or submission of receipts or other evidence of payment covering all subcontractors or suppliers who could file a legal claim. When necessary, the mortgagee may arrange a payment schedule, not to exceed two (2) releases, per specialized contractor (an initial release plus a final release.) Mortgagees are to issue payments solely to the contractor, except if the mortgagor is performing the work under a self-help arrangement, in which case the mortgagor may be reimbursed for materials purchased in accordance with the previously obtained estimates; the mortgagor may not be compensated for his or her labor.
To eliminate the need and cost for an inspection of the completed repair(s) or improvement(s), the mortgagee may accept receipts or proof of completion of the work to the homeowner’s satisfaction from the contractor. Before a final release is made, the mortgagor must sign a statement acknowledging that the work has been completed in a workmanlike and satisfactory manner.
Maximum Mortgage Amount
The Department is concerned about the value of property after the improvements are completed. Amortization of the Streamline 203(K) mortgage will begin at the closing of the loan, which is defined as the settlement date as it appears on the HUD-1 Settlement Statement. A Maximum Mortgage Worksheet (form HUD-92700) is required for the Streamline (K) program.
Data Entry Requirements
In processing a Streamline(K) mortgage in the FHA Connection, a mortgagee must enter “203KS” in the 203(k) Consultant ID field in the Case Number Assignment Screen (and the Insurance Application Screen) to identify the Streamline(K) product. For a regular 203(k) mortgage, the mortgagee must continue to enter a valid 203(k) Consultant ID. Also, the mortgagee must enter the amount of the repairs in the Repair Escrow Amount field in the Insuring Application Screen. In the event that the mortgagee had originally begun processing the case as a purchase mortgage without repairs, the mortgagee should update the existing case date in the Case Number Assignment screen, changing the ADP Code to a valid 203(k) ADP Code and the Construction Code to Substantial Rehabilitation.
Closeout Requirements
A mortgagee making a Streamline(K) mortgage will be required to electronically certify the closeout. However, unlike the standard 203(k) program, the mortgagee will not be required to forward the closeout documents to the HOC. The closeout package will be retained by the mortgagee in its origination and servicer’s case file. The mortgagee will enter information onto the 203(k) Closeout screen on the FHA Connection and thereby certify, electronically, that the Streamline(K) mortgage has been properly closed out. Proper close-out means that the mortgagee will certify that it has reviewed and verified for accuracy the following without limitations: mortgagor’s acknowledgement of satisfactory completion, evidence of release of lien(s), mortgagee’s inspection report(s), change orders, mortgagee accounting of the escrow funds, and record of disbursements.
Information Collection Requirements
The information collection requirements referred to in this Mortgagee Letter have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control numbers 2502-0527 and 2502-0538. In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.
If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888) 696-4687, Denver (800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888) 827-5605.
Sincerely,
John C. Weicher
Assistant secretary for Housing-
Federal Housing Commissioner
January 4, 2005
MORTGAGEE LETTER 2005-02
TO: ALL APPROVED MORTGAGEES and APPROVED APPRAISERS
SUBJECT: Seller Concessions and Verification of Sales
This Mortgagee Letter reiterates and clarifies Federal Housing Administration (FHA) policy regarding the responsibilities of mortgagees and appraisers in reporting sales concessions and verification of sales data. FHA requires mortgagees to provide appraisers with all financing data and sales concessions for properties to be security for an FHA-insured loan. Appraisers are required to identify and report sales concessions and properly address and/or adjust the comparable sale transactions to account for sales concessions in the appraisal of all properties to be security for an FHA-insured loan. Sales concessions influence the price paid for real estate. Sales concessions may be in the form of loan discount points, loan origination fees, interest rate buy downs, closing cost assistance, payment of condominium fees, builder incentives, down payment assistance, monetary gifts or personal property given by the seller or any other party involved in the transaction. The Department of Housing and Urban Development’s Handbook 4150.2, “Valuation Analysis for Home Mortgage Insurance for Single Family One-to Four- Unit Dwellings”, Chapter 4, provides appraisal instructions. This Mortgagee Letter reiterates and further clarifies that guidance.
Mortgagee Requirements
1. On any real estate purchase transaction, the mortgagee must provide the appraiser with a complete copy of the ratified sales contract, including all addenda, for the subject property that is to be appraised.
2. The mortgagee must provide the appraiser with all financing data and sales concessions for the subject property granted by anyone associated with the transaction. Sales concession information must include gifts and/or down payment assistance, which may or may not be included in the contract of sale.
3. If the mortgagee requests a reconsideration of value, the appraiser must be provided with any amendments to the contract that occurred after the effective date of the appraisal.
4. In accordance with HUD Handbook 4155.1 Rev-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties”, Chapter 1 section 2 (1-7A), contributions from sellers or other interested third parties to the transaction that exceed six (6) percent of the sales price or other financing concessions are to be treated as inducements to purchase, thereby reducing the amount of the mortgage. Each dollar exceeding the six percent limit must be subtracted from the property’s sale price before applying the appropriate loan to value (LTV) ratio.
5. The dollar-for-dollar reduction to the sales price also applies when gift funds do not meet FHA requirements. Acceptable sources of gift funds down payment assistance are outlined in HUD Handbook 4155.1 Rev-5, Chapter 2, section 3 (2-10C).
Appraiser/Appraisal Requirements
1. The appraiser must report the total dollar amount of the loan charges and/or concessions to be paid by any party on behalf of the borrower and describe which party provided the concession in the Subject Section of the appraisal report. Use of an addendum with the heading “Loan Charges/Sales Concessions” may be required due to limited space provided in the appraisal reporting form.
2. The appraiser must also verify all sales transactions for seller concessions and report those findings in the appraisal. If the sale cannot be verified with someone who has first-hand knowledge of the transaction (i.e., buyer, seller or one of their representatives), the appraiser must clearly state how the sale was verified and explain to what extent.
3. In the Sales Comparison Analysis, Sales or Concession Section, the appraiser must report the type and the amount of sales or financing concessions for each comparable sale listed. If no concessions exist, the appraiser must note “none.”
4. The appraiser is required to make market-based adjustments to the comparable sales for any sales or financing concessions that may have affected the sales price. The adjustment for each comparable sale must reflect the difference between the sales price with the sales concessions and what the property would have sold for without the concessions. In the Sales Comparison Analysis, Sales or Financing Concessions Section, the appraiser must report the adjustment applicable to each comparable sale listed.
5. The appraiser must provide an analysis of the current agreement of sale, contract, option or listing for the subject property and an analysis of all prior transfers of the subject property that occurred within three (3) years prior to the effective date of the appraisal. If the contract of sale for the subject property is not provided to the appraiser, the appraiser must report the steps or efforts taken to obtain the current agreement of sale.
6. In the Sales Comparison Analysis, Sales or Financing Concessions Section, the appraiser must provide analysis of all prior transfers of the comparable sales that occurred within one (1) year prior to the effective date of the appraisal. If the data is unavailable, the appraiser must note what steps were taken during the normal course of business to obtain and report the information.
If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888) 696-4687, Denver (800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888) 827-5605, (these are toll-free numbers).
Sincerely,
John C. Weicher
Assistant Secretary for Housing- Federal Housing Commissioner
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- assistant secretary for housing federal housing commisioners
- gas station financing
- part i mortgage lenders and mortgage loans
- mortgage lenders and mortgage loans
- first heritage
- transaction overview freddie mac
- ginnie mae new daily pool issued tape
- developing an effective capital liquidity plan
- survey on residential mortgage lending
- first magnus spec
Related searches
- 99 down 99 month kia
- rushmore loan services mortgagee clause
- home point financial mortgagee clause
- wells fargo home mortgagee clause
- cars 99 down 99 month
- wells fargo mortgagee clause for insurance
- rushmore loan management services mortgagee clause
- 99 down 99 a month
- hyundai 99 down 99 month
- 99 down 99 month
- bank of america mortgagee clause loss payee
- jp morgan chase mortgagee clause