CMS FHA Underwriting Guidelines

FHA Underwriting Guidelines Effective With Case Numbers Assigned On or After 9/14/15

FHA Underwriting Guidelines

Mortgage Lending Division

Version 8.7 ? 01/06/20

DOCUMENT OVERVIEW

Purpose

The following document describes the responsibilities and requirements of the Carrington Mortgage Services, LLC (CMS) Mortgage Lending Division Underwriter (Underwriter) when reviewing and underwriting Federal Housing Administration (FHA) mortgage loans with case numbers assigned on and after September 14, 2015.

Table of Contents

1. Origination/Processing ......................................................................................33 a. Applications and Disclosures ............................................................................33 i. Contents of the Mortgage Application Package............................................33 ii. Disclosures and Legal Compliance..............................................................40 iii. Application Document Processing ..............................................................42 b. General Mortgage Insurance Eligibility .............................................................49 i. Mortgage Purpose ........................................................................................49 ii. Borrower Eligibility........................................................................................50 iii. Occupancy Types........................................................................................56 iv. Property Eligibility and Acceptability Criteria ...............................................59 v. Legal Restrictions on Conveyance (Free Assumability) ..............................67

2. Allowable Mortgage Parameters .......................................................................68 a. Maximum Mortgage Amounts...........................................................................68 i. National Housing Act's Statutory Limits ........................................................68 ii. Nationwide Mortgage Limits.........................................................................69 iii. Financing of Upfront Mortgage Insurance Premium ...................................70 iv. Calculating Maximum Mortgage Amounts on Purchases ...........................70 b. Loan-to-Value Limits .........................................................................................70 i. LTV Limitations Based on Borrower's Credit Score (Applies to All Transactions) ..............................................................................................70 ii. Purchase ......................................................................................................70 iii. Refinance ....................................................................................................73 iv. New Construction........................................................................................73 c. Required Investment .........................................................................................73 i. Total Required Investment............................................................................73 ii. Minimum Required Investment ....................................................................73 d. Maximum Mortgage Term ................................................................................73

e. Mortgage Insurance Premiums ........................................................................74 i. Upfront Mortgage Insurance Premium .........................................................74 ii. Annual (or Periodic) Mortgage Insurance Premium.....................................74

3. Underwriting the Property .................................................................................74 a. Property Acceptability Criteria...........................................................................74 i. Defective Conditions .....................................................................................75 ii. Minimum Property Requirements and Minimum Property Standards..........75 iii. Minimum Required Repairs.........................................................................83 iv. Leased Equipment ......................................................................................83

CMS Policies & Procedures Proprietary and confidential. For Internal use only. Do not distribute externally.

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FHA Underwriting Guidelines

Mortgage Lending Division

Version 8.7 ? 01/06/20

v. Appraisal Review .........................................................................................83 vi. Quality of Appraisal .....................................................................................83 vii. Chain of Title ..............................................................................................83 ix. Reconsideration of Value ............................................................................83 b. Required Documentation for Underwriting the Property ...................................84

c. Conditional Commitment Direct Endorsement Statement of Appraised Value.84

4. Underwriting the Borrower Using the TOTAL Mortgage Scorecard (TOTAL)85 a. Underwriting with an Automated Underwriting System .....................................85

i. Use of TOTAL Mortgage Scorecard .............................................................85 ii. Requirements for the Submission of Data through TOTAL Mortgage

Scorecard ...................................................................................................85 iii. Function of TOTAL Mortgage Scorecard ....................................................85 iv. Feedback Certificates: Risk Classification and Related Responsibilities

(TOTAL) .....................................................................................................87 v. Accept Risk Classifications Requiring a Downgrade to Manual Underwriting

(TOTAL) .....................................................................................................87 vi. Applicability of Automated Underwriting System Rules (TOTAL) ...............88 vii. TOTAL Mortgage Scorecard Tolerance Levels for Rescoring ...................88

b. Credit Requirements (TOTAL)..........................................................................88

i. General Credit Review Requirements (TOTAL) ...........................................88 ii. Credit Reports (TOTAL)...............................................................................89 iii. Evaluating Credit History (TOTAL)..............................................................90 iv. Evaluating Liabilities and Debts (TOTAL) ...................................................95

c. Income Requirements (TOTAL)......................................................................104

i. General Income Requirements (TOTAL)....................................................104 ii. Employment Related Income (TOTAL)......................................................105 iii. Primary Employment (TOTAL)..................................................................107 iv. Part-Time Employment (TOTAL) ..............................................................107 v. Overtime, Bonus or Tip Income (TOTAL)..................................................108 vi. Seasonal Employment (TOTAL) ...............................................................108 vii. Employer Housing Subsidy (TOTAL) .......................................................109 viii. Employed by Family-Owned Business (TOTAL) .....................................109 ix. Commission Income (TOTAL) ..................................................................110 x. Self-Employment Income (TOTAL) ...........................................................111 xi. Additional Required Analysis of Stability of Employment Income (TOTAL)112 xii. Other Sources of Effective Income (TOTAL) ...........................................113 xiii. Unacceptable Sources of Income (TOTAL) ............................................126

d. Asset Requirements (TOTAL) ........................................................................126

i. General Asset Requirements (TOTAL) ......................................................126 ii. Source Requirements for the Borrower's Minimum Required Investment

(TOTAL) ...................................................................................................129 A Family Member may provide the Borrower's MRI in accordance with

Section 203(b)(9)(B) of the National Housing Act. ...................................130 iii. Sources of Funds (TOTAL) .......................................................................132 iv. Unacceptable Sources of Funds (TOTAL)................................................150

e. Final Underwriting Decision (TOTAL) .............................................................151

CMS Policies & Procedures Proprietary and confidential. For Internal use only. Do not distribute externally.

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FHA Underwriting Guidelines

Mortgage Lending Division

Version 8.7 ? 01/06/20

i. Documentation of Final Underwriting Review Decision (TOTAL) ...............151 ii. Conditional Approval (TOTAL) ...................................................................152 iii. HUD Employee Mortgages (TOTAL) ........................................................152 iv. Notification of Borrower of Approval and Term of the Approval (TOTAL).152

5. Manual Underwriting of the Borrower ............................................................153 a. Credit Requirements (Manual)........................................................................153

i. General Credit Requirements (Manual)......................................................153 ii. Types of Credit History (Manual) ...............................................................153 iii. Evaluating Credit History (Manual)............................................................157 iv. Evaluating Liabilities and Debts (Manual) .................................................165

b. Income Requirements (Manual) .....................................................................175

i. General Income Requirements (Manual) ...................................................175 ii. Employment Related Income (Manual)......................................................175 iii. Primary Employment (Manual)..................................................................177 iv. Part-Time Employment (Manual) ..............................................................178 v. Overtime, Bonus or Tip Income (Manual)..................................................178 vii. Employer Housing Subsidy (Manual) .......................................................179 viii. Employed by Family-Owned Business (Manual) .....................................180 ix. Commission Income (Manual) ..................................................................181 x. Self-Employment Income (Manual) ...........................................................181 xi. Additional Required Analysis of Stability of Employment Income .............183 xii. Other Sources of Effective Income (Manual) ...........................................184 xiii. Unacceptable Sources of Income (Manual) ............................................196

c. Asset Requirements (Manual) ........................................................................197

i. General Asset Requirements (Manual) ......................................................197 ii. Source Requirements for the Borrower's Minimum Required Investment

(Manual) ...................................................................................................200 iii. Sources of Funds (Manual) .......................................................................201 iv. Unacceptable Sources of Funds (Manual)................................................220

d. Final Underwriting Decision (Manual) .............................................................221

i. Duty of Care/Due Diligence (Manual) .........................................................221 ii. Specific Underwriter Responsibilities (Manual)..........................................221 iii. Underwriting of Credit and Debt (Manual) .................................................221 iv. Underwriting of Income (Manual) ..............................................................222 v. Underwriting of Assets (Manual)................................................................222 vi. Verifying Mortgage Insurance Premium and Mortgage Amount (Manual)222 vii. Calculating Qualifying Ratios (Manual) ....................................................222 viii. Approvable Ratio Requirements (Manual) ..............................................223 ix. Documenting Acceptable Compensating Factors (Manual) .....................224 x. Borrower Approval or Denial (Manual).......................................................226

6. Closing...............................................................................................................228

a. Mortgagee Closing Requirements ..................................................................228

i. Chain of Title...............................................................................................228 ii. Title ............................................................................................................228 iii. Legal Restrictions on Conveyance (Free Assumability) ............................229

iv. Closing in Compliance with Mortgage Approval........................................229

CMS Policies & Procedures Proprietary and confidential. For Internal use only. Do not distribute externally.

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FHA Underwriting Guidelines

Mortgage Lending Division

Version 8.7 ? 01/06/20

v. Closing in CMS's Name .............................................................................229 vi. Required Forms ........................................................................................229 vii. Certifications.............................................................................................229 viii. Projected Escrow.....................................................................................230 ix. Closing Costs and Fees ............................................................................230 x. Disbursement Date ....................................................................................232 xi. Per Diem Interest and Interest Credits......................................................232 xii. Signatures ................................................................................................232

b. Mortgage and Note .........................................................................................233

i. Definitions ...................................................................................................233 ii. Standard.....................................................................................................233

c. Disbursement of Mortgage Proceeds .............................................................233

i. Standard for Disbursement of Mortgage Proceeds ....................................233 ii. Required Documentation for Disbursement of Mortgage Proceeds ..........233

7. Programs and Products ...................................................................................234

a. 203(k) Rehabilitation Mortgage Insurance Program .......................................234

i. Overview .....................................................................................................234 ii. Borrower Eligibility......................................................................................234 iii. Property Eligibility ......................................................................................234 iv. Application Requirements .........................................................................235 v. Case Number Assignment Data Entry Requirements ...............................235 vi. Standard 203(k) Transactions...................................................................236 vii. Limited 203(k) Transactions.....................................................................240 viii. Appraisals for Standard 203(k) and Limited 203(k).................................243 ix. Maximum Mortgage Amount for Purchase ...............................................245 x. Maximum Mortgage Amount for Refinance ...............................................245 xii. Mortgage Insurance Premium..................................................................246 xiii. Underwriting ............................................................................................247 xiv. Closing ....................................................................................................249 xv. Data Delivery............................................................................................251

b. Disasters and 203(h) Mortgage Insurance for Disaster Victims .....................252

i. Definition .....................................................................................................252 ii. Eligibility Requirements ..............................................................................252 iii. Eligibility Documentation Requirements....................................................253 iv. Refinancing Policy.....................................................................................254 v. Using Section 203(k) with 203(h) for Rehabilitation...................................254

c. Refinances ......................................................................................................254

i. Overview .....................................................................................................254 ii. General Eligibility........................................................................................256 iii. Temporary Interest Rate Buydowns..........................................................257 iv. Upfront Mortgage Insurance Premium Refunds .......................................257 v. Cash-Out Refinances ................................................................................258 vi. No Cash-Out Refinances ..........................................................................259

d. New Construction............................................................................................273

i. Definitions ...................................................................................................273

ii. Inspections or Warranties for Maximum Financing ...................................273

CMS Policies & Procedures Proprietary and confidential. For Internal use only. Do not distribute externally.

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