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 10.5 ? 01/25/22

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 ......................................................................................11 a. Applications and Disclosures ............................................................................11

i. Contents of the Mortgage Application Package............................................11 ii. Disclosures and Legal Compliance..............................................................18 iii. Application Document Processing ..............................................................20

b. General Mortgage Insurance Eligibility .............................................................27

i. Mortgage Purpose ........................................................................................27 ii. Borrower Eligibility........................................................................................28 iii. Occupancy Types........................................................................................35 iv. Property Eligibility and Acceptability Criteria ...............................................38 v. Legal Restrictions on Conveyance (Free Assumability) ..............................48

2. Allowable Mortgage Parameters .......................................................................49 a. Maximum Mortgage Amounts...........................................................................49

i. National Housing Act's Statutory Limits ........................................................49 ii. Nationwide Mortgage Limits.........................................................................50 iii. Financing of Upfront Mortgage Insurance Premium ...................................51 iv. Calculating Maximum Mortgage Amounts on Purchases ...........................51

b. Loan-to-Value Limits .........................................................................................51

i. LTV Limitations Based on Borrower's Credit Score (Applies to All Transactions) ..............................................................................................51

ii. Purchase ......................................................................................................51 iii. Refinance ....................................................................................................54 iv. New Construction........................................................................................54

c. Required Investment .........................................................................................54

i. Total Required Investment............................................................................54 ii. Minimum Required Investment ....................................................................54

d. Maximum Mortgage Term ................................................................................54

e. Mortgage Insurance Premiums ........................................................................55

i. Upfront Mortgage Insurance Premium .........................................................55 ii. Annual (or Periodic) Mortgage Insurance Premium.....................................55

3. Underwriting the Property .................................................................................55

a. Property Acceptability Criteria...........................................................................55

i. Defective Conditions .....................................................................................56 ii. Minimum Property Requirements and Minimum Property Standards..........56

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 10.5 ? 01/25/22

iii. Minimum Required Repairs.........................................................................64 iv. Leased Equipment ......................................................................................64 v. Appraisal Review .........................................................................................64 vi. Quality of Appraisal .....................................................................................64 vii. Chain of Title ..............................................................................................64 ix. Reconsideration of Value ............................................................................64 b. Required Documentation for Underwriting the Property ...................................65

c. Conditional Commitment Direct Endorsement Statement of Appraised Value.65

4. Underwriting the Borrower Using the TOTAL Mortgage Scorecard (TOTAL)66 a. Underwriting with an Automated Underwriting System .....................................66

i. Use of TOTAL Mortgage Scorecard .............................................................66 ii. Requirements for the Submission of Data through TOTAL Mortgage

Scorecard ...................................................................................................66 iii. Function of TOTAL Mortgage Scorecard ....................................................66 iv. Feedback Certificates: Risk Classification and Related Responsibilities

(TOTAL) .....................................................................................................68 v. Accept Risk Classifications Requiring a Downgrade to Manual Underwriting

(TOTAL) .....................................................................................................68 vi. Applicability of Automated Underwriting System Rules (TOTAL) ...............69 vii. TOTAL Mortgage Scorecard Tolerance Levels for Rescoring ...................69

b. Credit Requirements (TOTAL)..........................................................................69

i. General Credit Review Requirements (TOTAL) ...........................................69 ii. Credit Reports (TOTAL)...............................................................................70 iii. Evaluating Credit History (TOTAL)..............................................................71 iv. Evaluating Liabilities and Debts (TOTAL) ...................................................77

c. Income Requirements (TOTAL)........................................................................86

i. General Income Requirements (TOTAL)......................................................86 ii. Employment Related Income (TOTAL)........................................................87 iii. Primary Employment (TOTAL)....................................................................89 iv. Part-Time Employment (TOTAL) ................................................................89 v. Overtime, Bonus or Tip Income (TOTAL)....................................................90 vi. Seasonal Employment (TOTAL) .................................................................90 vii. Employer Housing Subsidy (TOTAL) .........................................................91 viii. Employed by Family-Owned Business (TOTAL) .......................................91 ix. Commission Income (TOTAL) ....................................................................92 x. Self-Employment Income (TOTAL) .............................................................93 xi. Additional Required Analysis of Stability of Employment Income (TOTAL) 94 xii. Other Sources of Effective Income (TOTAL) .............................................95 xiii. Unacceptable Sources of Income (TOTAL) ............................................108

d. Asset Requirements (TOTAL) ........................................................................109

i. General Asset Requirements (TOTAL) ......................................................109 ii. Source Requirements for the Borrower's Minimum Required Investment

(TOTAL) ...................................................................................................112 A Family Member may provide the Borrower's MRI in accordance with

Section 203(b)(9)(B) of the National Housing Act. ...................................113

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 10.5 ? 01/25/22

iii. Sources of Funds (TOTAL) .......................................................................115 iv. Unacceptable Sources of Funds (TOTAL)................................................133 e. Final Underwriting Decision (TOTAL) .............................................................134 i. Documentation of Final Underwriting Review Decision (TOTAL) ...............134 ii. Conditional Approval (TOTAL) ...................................................................135 iii. HUD Employee Mortgages (TOTAL) ........................................................135 iv. Notification of Borrower of Approval and Term of the Approval (TOTAL).135

5. Manual Underwriting of the Borrower ............................................................136 a. Credit Requirements (Manual)........................................................................136

i. General Credit Requirements (Manual)......................................................136 ii. Types of Credit History (Manual) ...............................................................136 iii. Evaluating Credit History (Manual)............................................................140 iv. Evaluating Liabilities and Debts (Manual) .................................................148

b. Income Requirements (Manual) .....................................................................158

i. General Income Requirements (Manual) ...................................................158 ii. Employment Related Income (Manual)......................................................158 iii. Primary Employment (Manual)..................................................................160 iv. Part-Time Employment (Manual) ..............................................................161 v. Overtime, Bonus or Tip Income (Manual)..................................................161 vii. Employer Housing Subsidy (Manual) .......................................................162 viii. Employed by Family-Owned Business (Manual) .....................................163 ix. Commission Income (Manual) ..................................................................164 x. Self-Employment Income (Manual) ...........................................................164 xi. Additional Required Analysis of Stability of Employment Income .............166 xii. Other Sources of Effective Income (Manual) ...........................................167 xiii. Unacceptable Sources of Income (Manual) ............................................180

c. Asset Requirements (Manual) ........................................................................181

i. General Asset Requirements (Manual) ......................................................181 ii. Source Requirements for the Borrower's Minimum Required Investment

(Manual) ...................................................................................................184 iii. Sources of Funds (Manual) .......................................................................185 iv. Unacceptable Sources of Funds (Manual)................................................204

d. Final Underwriting Decision (Manual) .............................................................205

i. Duty of Care/Due Diligence (Manual) .........................................................205 ii. Specific Underwriter Responsibilities (Manual)..........................................205 iii. Underwriting of Credit and Debt (Manual) .................................................205 iv. Underwriting of Income (Manual) ..............................................................206 v. Underwriting of Assets (Manual)................................................................206 vi. Verifying Mortgage Insurance Premium and Mortgage Amount (Manual)206 vii. Calculating Qualifying Ratios (Manual) ....................................................206 viii. Approvable Ratio Requirements (Manual) ..............................................207 ix. Documenting Acceptable Compensating Factors (Manual) .....................208 x. Borrower Approval or Denial (Manual).......................................................211

6. Closing...............................................................................................................213

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 10.5 ? 01/25/22

a. Mortgagee Closing Requirements ..................................................................213 i. Chain of Title...............................................................................................213 ii. Title ............................................................................................................213 iii. Legal Restrictions on Conveyance (Free Assumability)............................216 iv. Closing in Compliance with Mortgage Approval........................................216 v. Closing in CMS's Name .............................................................................216 vi. Required Forms ........................................................................................216 vii. Certifications.............................................................................................216 viii. Projected Escrow.....................................................................................217 ix. Closing Costs and Fees ............................................................................217 x. Disbursement Date ....................................................................................219 xi. Per Diem Interest and Interest Credits......................................................219 xii. Signatures ................................................................................................219

b. Mortgage and Note .........................................................................................220 i. Definitions ...................................................................................................220 ii. Standard.....................................................................................................220

c. Disbursement of Mortgage Proceeds .............................................................220 i. Standard for Disbursement of Mortgage Proceeds ....................................220 ii. Required Documentation for Disbursement of Mortgage Proceeds ..........220

7. Programs and Products ...................................................................................221 a. 203(k) Rehabilitation Mortgage Insurance Program .......................................221

CMS no longer offers 203(k) financing. This section is maintained for historical purposes. ..................................................................................221

i. Overview .....................................................................................................221 ii. Borrower Eligibility......................................................................................221 iii. Property Eligibility ......................................................................................221 iv. Application Requirements .........................................................................222 v. Case Number Assignment Data Entry Requirements ...............................222 vi. Standard 203(k) Transactions...................................................................223 vii. Limited 203(k) Transactions.....................................................................227 viii. Appraisals for Standard 203(k) and Limited 203(k).................................230 ix. Maximum Mortgage Amount for Purchase ...............................................232 x. Maximum Mortgage Amount for Refinance ...............................................232 xii. Mortgage Insurance Premium..................................................................233 xiii. Underwriting ............................................................................................234 xiv. Closing ....................................................................................................236 xv. Data Delivery............................................................................................238

b. Disasters and 203(h) Mortgage Insurance for Disaster Victims .....................239

i. Definition .....................................................................................................239 ii. Eligibility Requirements ..............................................................................239 iii. Eligibility Documentation Requirements....................................................240 iv. Refinancing Policy.....................................................................................241 v. Using Section 203(k) with 203(h) for Rehabilitation...................................241

c. Refinances ......................................................................................................241

i. Overview .....................................................................................................241

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 10.5 ? 01/25/22

ii. General Eligibility........................................................................................243 iii. Temporary Interest Rate Buydowns..........................................................244 iv. Upfront Mortgage Insurance Premium Refunds .......................................244 v. Cash-Out Refinances ................................................................................245 vi. No Cash-Out Refinances ..........................................................................246

d. New Construction............................................................................................261

i. Definitions ...................................................................................................261 ii. Eligible Property Types ..............................................................................261 iii. Required Inspections for New Construction Financing .............................261 iv. Required Documentation for New Construction Financing .......................263 vi. Documents to be Provided to Appraiser at Assignment ...........................263 vii. Property Considerations ...........................................................................264 viii. Mortgagee Review of Appraisal...............................................................264 ix. Completion of Construction.......................................................................266

e. Building on Own Land .....................................................................................266

i. Definition .....................................................................................................266 ii. Eligibility .....................................................................................................266 iii. Calculating the Maximum Mortgage Amount ............................................267 iv. Minimum Required Investment .................................................................267 v. Borrower's Additional Equity in the Property..............................................267 vi. Required Documentation ..........................................................................267

f. HUD Real Estate Owned Purchasing ..............................................................268

i. Definition .....................................................................................................268 ii. Sales Contract and Required Supporting Documentation .........................269 iii. Ordering Case Numbers ...........................................................................270 iv. Appraisals .................................................................................................270 v. Occupancy Types ......................................................................................270 vi. Maximum Mortgage Amounts ...................................................................270 vii. Additional Section 203(b) With Repair Escrow Requirements .................271 vii. Additional $100 Down Requirements for FHAC Insuring Application ......271

g. Condominiums................................................................................................272

i. Units Not Requiring Approval......................................................................272 ii. Requirements for Units in approved Condominium Projects .....................272 iii. Single-Unit Approval..................................................................................279 iv. Site Condominium.....................................................................................291

8. 203(k) Consultant Requirements.....................................................................292 a. Overview .........................................................................................................292

b. Consultant Duties............................................................................................292

i. Feasibility Study/Plan Review .....................................................................292 ii. Consultant Inspection.................................................................................292 iii. Architectural Exhibits.................................................................................292 iv. Work Write-Up and Cost Estimate............................................................292

v. Draw Request Inspection...........................................................................293

vi. Change Order ...........................................................................................293

vii. Work Stoppages or Deviations from the Approved Write-Up ..................293

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 10.5 ? 01/25/22

c. Consultant Fee Schedule................................................................................293 i. Feasibility Study/Plan Review .....................................................................293 ii. Work Write-up............................................................................................293 iii. Draw Inspection Fee .................................................................................293 iv. Change Order Fee ....................................................................................294 v. Re-inspection Fee......................................................................................294 vi. Mileage Fee ..............................................................................................294

d. Architectural Exhibit Review ...........................................................................294

e. Preparing the Work Write-Up and Cost Estimate...........................................294 i. Conformance with Minimum Property Requirements or Minimum Property294 ii. Health and Safety.......................................................................................294

f. Feasibility Study/Plan Review ..........................................................................295

g. Draw Request Inspection................................................................................295

h. Change Order .................................................................................................295

i. Additional Required Documentation.................................................................295 i. 203(k) Consultant's Certification.................................................................295 ii. Consultant/Borrower Agreement................................................................296 iii. Inspections and Draw Requests ...............................................................296 iv. Change Order Requests ...........................................................................296

9. Commencement of the Appraisal....................................................................297 a. Information Required before Commencement of Appraisal ...........................297

b. Additional Information Required Before Commencement of an Appraisal on New Construction ..........................................................................................297

10.General Appraiser Requirements....................................................................298

11.Acceptable Appraisal Reporting Forms and Protocols ................................299 a. Additional Documentation Required for Appraisals of New Construction.......299

b. Application of Minimum Property Requirements and Minimum Property Standards by Construction Status .................................................................300

i. Existing Construction ..................................................................................300 ii. New Construction.......................................................................................300 iii. Determination of Defective Conditions ......................................................300 iv. Inspection by a Qualified Individual or Entity.............................................301

c. Minimum Property Requirements and Minimum Property Standards.............302

i. Legal Requirements....................................................................................302 ii. Legal and Land Use Considerations ..........................................................303 iii. Externalities ...............................................................................................305 iv. Site Conditions ..........................................................................................307 v. New Construction Site Analysis .................................................................311 vi. Excess and Surplus Land .........................................................................311 vii. Characteristics of Property Improvements ...............................................312

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 10.5 ? 01/25/22

d. Gross Living Area ...........................................................................................315 i. Definition .....................................................................................................315 ii. Required Analysis and Reporting...............................................................315 iii. Additions and Converted Space ................................................................315 iv. Partially Below-Grade Habitable Space ....................................................316 v. Bedrooms ..................................................................................................316

e. Appliances ......................................................................................................316 i. Definition .....................................................................................................316 ii. Standard.....................................................................................................316 iii. Required Analysis and Reporting ..............................................................316

f. Swimming Pools ..............................................................................................317

g. Utilities ? Mechanical Components.................................................................317 i. Heating and Cooling Systems.....................................................................318 ii. Electrical System........................................................................................318 iii. Plumbing System ......................................................................................318

h. Roof Covering .................................................................................................319

i. Structural Conditions........................................................................................319

j. Defective Paint .................................................................................................319

k. Attic Observation Requirements .....................................................................319

l. Foundation .......................................................................................................320 i. Basement....................................................................................................320 ii. Sump Pumps .............................................................................................320

m. Crawl Space Observation Requirements.......................................................320

n. Environmental and Safety Hazards ................................................................321 i. Lead-Based Paint .......................................................................................321 ii. Methamphetamine Contaminated Property ...............................................321 iii. Wood Destroying Insects/Organisms/Termites ........................................321

o. Repair Requirements ......................................................................................322 i. Limited Required Repairs ...........................................................................322 ii. As-Is Condition and Cosmetic Repairs ......................................................322 iii. Defective Conditions Requiring Repair .....................................................322 iv. Conditions Requiring Inspection by a Qualified Individual or Entity ..........322

p. Utility Services ................................................................................................323 i. Definition .....................................................................................................323 ii. Required Analysis and Reporting...............................................................323 iii. Public Water Supply Systems ...................................................................323 iv. Community Water Systems ......................................................................324 v. Individual Water Supply Systems ..............................................................324 vi. Shared Wells.............................................................................................325 vii. Community Water Systems .....................................................................326

q. Onsite Sewage Disposal Systems ..................................................................326 i. Definition .....................................................................................................326 ii. Required Analysis and Reporting...............................................................326

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

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