FHA Underwriting Guidelines

[Pages:193]FHA Underwriting

Guidelines

FHA Underwriting Guidelines | Table of Contents

Table of Contents

MiMutual Underwriting ___________________________________________________________________ 15 Philosophy ____________________________________________________________________________________ 15 Program Description ____________________________________________________________________________ 16

Requirements and Restrictions _____________________________________________________________ 17 Loan Requirements _____________________________________________________________________________ 17 Loan Restrictions (Ineligible) _____________________________________________________________________ 17 LTV/CLTV Maximums ___________________________________________________________________________ 17

Purchase ____________________________________________________________________________________________ 17 Rate/Term Refinance___________________________________________________________________________________ 17 Streamline Refinance __________________________________________________________________________________ 17 Cash Out Refinance ____________________________________________________________________________________ 17 Qualified Mortgages with Rebuttable Presumption ___________________________________________________ 18 Manual Downgrades____________________________________________________________________________ 19

Collateral Requirements __________________________________________________________________ 20 Eligible Collateral ______________________________________________________________________________ 20 Ineligible Collateral _____________________________________________________________________________ 20 Appraisals ____________________________________________________________________________________ 21

Appraiser Independence ________________________________________________________________________________ 21 Uniform Appraisal Dataset (UAD) _________________________________________________________________________ 21 Approved Appraisers___________________________________________________________________________________ 22 Appraisal Order Process ________________________________________________________________________________ 22

Appraisal Integrity __________________________________________________________________________________ 22 Revisions Due to Sales Contract Amendments _______________________________________________________________ 23 Appraisal Delivery Requirements _________________________________________________________________________ 23 Appraisal Report Forms_________________________________________________________________________________ 23 Value Reconsideration Request __________________________________________________________________________ 24 Appraisal Portability ___________________________________________________________________________________ 24

Correspondent Transfers _____________________________________________________________________________ 24 Broker Transfers ____________________________________________________________________________________ 25 Second Appraisals _____________________________________________________________________________________ 25 Second Appraisal by Original Mortgagee _________________________________________________________________ 25 Second Appraisal by Second Mortgagee _________________________________________________________________ 26 Appraisal Updates _____________________________________________________________________________________ 26 Appraisal Effective Date ________________________________________________________________________________ 27 Appraisal Validity Period ________________________________________________________________________________ 27 Minimum Photograph Requirements ______________________________________________________________________ 27 Subject Property Exterior _____________________________________________________________________________ 27 Subject Property Interior _____________________________________________________________________________ 28 Comparables Sales, Listings, Pending Sales, Rentals, Etc _____________________________________________________ 28 Subject Property Deficiencies__________________________________________________________________________ 28 Condominium Projects _______________________________________________________________________________ 28 Adjusted Value ________________________________________________________________________________ 28 Purchase Transactions__________________________________________________________________________________ 28 Refinance Transactions _________________________________________________________________________________ 28 FEMA Declared Disaster Area Policy _______________________________________________________________ 29 Modular Home Eligibility ________________________________________________________________________ 29 Special Flood Hazard Areas (SFHAs) ________________________________________________________________ 30 Proposed / New Construction in SFHAs ____________________________________________________________________ 30 Repair Escrows ________________________________________________________________________________ 30

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FHA Underwriting Guidelines | Table of Contents

Acreage ______________________________________________________________________________________ 31 Legal Restrictions on Conveyance _________________________________________________________________ 31

Leased Equipment _____________________________________________________________________________________ 31 Age-Restricted Communities _____________________________________________________________________ 31 Effective Age and Remaining Economic Life _________________________________________________________ 31 Zoning _______________________________________________________________________________________ 31 Externalities___________________________________________________________________________________ 32 Properties Listed For Sale within the Last 6 Months (Refinances) ________________________________________ 32

Cash Out Transactions__________________________________________________________________________________ 32 Rate/Term Transactions ________________________________________________________________________________ 32 Attic _________________________________________________________________________________________ 32 Crawl Space ___________________________________________________________________________________ 32 Roof _________________________________________________________________________________________ 33 Inspection and Life Expectancy ___________________________________________________________________________ 33 Snow Covered Roof ____________________________________________________________________________________ 33 Multiple Parcels of Land _________________________________________________________________________ 33 Property Seasoning _____________________________________________________________________________ 33 Determining Phase of Construction _______________________________________________________________________ 33 Seller Seasoning (Purchases) _____________________________________________________________________________ 33 Termite Inspections ____________________________________________________________________________ 34 Map of TIP (Termite Infestation Probability) Zones ___________________________________________________ 35 Water and Sewage Systems Requirements __________________________________________________________ 35 Minimum Distance Between the Well and the Source of Pollution _______________________________________________ 35 Distance Sketch without a Well or Septic Report _____________________________________________________________ 36 Water System ________________________________________________________________________________________ 36

Water Well Minimum Property Requirements for Existing Construction ________________________________________ 36 Water Well Minimum Property Standards for New Construction ______________________________________________ 36 Restrictions ________________________________________________________________________________________ 36 Individual Water Supply System (Well) __________________________________________________________________ 37 Shared Well________________________________________________________________________________________ 37 Community Well ____________________________________________________________________________________ 39 Public Connection___________________________________________________________________________________ 39 Water Testing ______________________________________________________________________________________ 39 Water Purification Systems ___________________________________________________________________________ 40 Sewage System _______________________________________________________________________________________ 40 Individual Sewage System (Septic) ______________________________________________________________________ 40 Public Connection___________________________________________________________________________________ 40 Building on Own Land ___________________________________________________________________________ 40 Borrower Eligibility ____________________________________________________________________________________ 41 Maximum Mortgage Amount ____________________________________________________________________________ 41 Minimum Required Investment __________________________________________________________________________ 41 Borrower's Additional Equity in the Property ________________________________________________________________ 41 Required Documentation _______________________________________________________________________________ 41 Three and Four Unit Properties ___________________________________________________________________ 42 Existing Construction Less than One Year Requirements _______________________________________________ 42 Documentation Requirements for Maximum Financing ________________________________________________________ 42 Financing LTV Limit ____________________________________________________________________________________ 43 Docs to Be Provided to Appraiser Upon Order _______________________________________________________________ 43 Property Considerations ________________________________________________________________________________ 43

Condominiums __________________________________________________________________________ 44 FHA HOA Questionnaire _________________________________________________________________________ 44 Insurance Requirements_________________________________________________________________________ 44

Hazard/Liability Insurance (Project Approval)________________________________________________________________ 44 HO-6 (Loan Level) _____________________________________________________________________________________ 44

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FHA Underwriting Guidelines | Table of Contents

Fidelity Bond / Fidelity Insurance (Project Approval) __________________________________________________________ 45 Flood (Project and Loan Level) ___________________________________________________________________________ 45 Eligible Projects ________________________________________________________________________________ 46 Site Condominiums _____________________________________________________________________________ 47 Condominium Requirements _____________________________________________________________________ 48 Condominium Conversions_______________________________________________________________________ 48 HUD Condominium Certifications/Questionnaire _____________________________________________________ 48 FHA Concentration _____________________________________________________________________________ 48 When Condo Project Approval is Not Required_______________________________________________________ 48

Credit__________________________________________________________________________________ 49 Documentation Requirements ____________________________________________________________________ 49

Verification of Institutional Mortgage History _______________________________________________________________ 49 Verification of Rental Payment History _____________________________________________________________________ 49 Land Contract/Contract for Deed _________________________________________________________________________ 49 Lease with Option to Purchase ___________________________________________________________________________ 49 Credit Reports _________________________________________________________________________________ 50 Minimum Decision Credit Score (MDCS) ____________________________________________________________ 50 Valid Credit Score ______________________________________________________________________________ 50 Evaluating Credit History ________________________________________________________________________ 50 Collection Accounts, Charge Off Accounts, Accounts with Late Payments in the Previous 24 Months, and Judgments _______ 50

Handling of Collection Accounts________________________________________________________________________ 51 Disputed Accounts_____________________________________________________________________________________ 51

Disputed Derogatory Accounts Indicated on the Credit Report________________________________________________ 51 Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report _____________________ 52 Judgments ___________________________________________________________________________________________ 52 Inaccuracy in Debt Considered ___________________________________________________________________________ 52 Bankruptcy __________________________________________________________________________________________ 53 Pre-Foreclosure Sale (Short Sale) _________________________________________________________________________ 53 Foreclosure/Deed-in-Lieu (DIL) of Foreclosure _______________________________________________________________ 53 Consumer Credit Counseling _____________________________________________________________________________ 53 Housing Payment History _______________________________________________________________________________ 54 Purchases _________________________________________________________________________________________ 54 No Cash Out (Rate/Term) Refinances____________________________________________________________________ 54 Cash Out Refinances and Refer Recommendations _________________________________________________________ 54 Hardship Modifications__________________________________________________________________________ 54 Purchases ___________________________________________________________________________________________ 54 Refinances ___________________________________________________________________________________________ 54 Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt _________________________________________ 54 Delinquent Federal Tax Debt _____________________________________________________________________ 55 Consumer Credit Counseling _____________________________________________________________________ 55 Borrowers/Co-Borrowers ________________________________________________________________________ 55 Occupying ___________________________________________________________________________________________ 56 Non-Occupying Co-Borrowers____________________________________________________________________________ 56 Credit Inquiries ________________________________________________________________________________ 56 Authorized User Accounts _______________________________________________________________________ 56 Business Debt in Borrower's Name ________________________________________________________________ 56 Installment Debt _______________________________________________________________________________ 57 Deferred Obligations____________________________________________________________________________ 57 Student Loans _________________________________________________________________________________ 57 Revolving Charge Accounts_______________________________________________________________________ 57 Open 30-Day Charge Accounts ____________________________________________________________________ 58 Contingent Liability _____________________________________________________________________________ 58 Mortgage Assumptions _________________________________________________________________________________ 59

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FHA Underwriting Guidelines | Table of Contents

Cosigned Liabilities ____________________________________________________________________________________ 59 Court-Ordered Divorce _________________________________________________________________________________ 59 Debts Paid Prior to Closing _______________________________________________________________________ 59 Federal Debt __________________________________________________________________________________ 59 Undisclosed Debt ______________________________________________________________________________ 59 Undisclosed Debt Other Than a Mortgage __________________________________________________________________ 59 Undisclosed Mortgage Debt _____________________________________________________________________________ 60 Alimony, Child Support, or Other Maintenance ______________________________________________________ 60 Obligations Not Considered Debt__________________________________________________________________ 60 Payment Plans_________________________________________________________________________________ 61 Subordinating a Lien ____________________________________________________________________________ 61 MiMutual In-file Credit Reports ___________________________________________________________________ 61 Extenuating Circumstances_______________________________________________________________________ 62

Employment/Income _____________________________________________________________________ 63 Documentation Requirements ____________________________________________________________________ 63 Effective Income _______________________________________________________________________________ 63 Hourly or Salaried Employees_____________________________________________________________________ 63

Salary _______________________________________________________________________________________________ 64 Hourly ______________________________________________________________________________________________ 64 Overtime and Bonus Income _____________________________________________________________________ 64 Second Jobs/Part-Time Income ___________________________________________________________________ 64 Seasonal Employment __________________________________________________________________________ 65 Employed by Family-Owned Business ______________________________________________________________ 65 Union Employees ______________________________________________________________________________ 65 Commission Income ____________________________________________________________________________ 65 1099 Employees _______________________________________________________________________________ 66 Negative Income _______________________________________________________________________________ 66 Automobile Allowances _________________________________________________________________________ 66 Self-Employed _________________________________________________________________________________ 67 Additional Required Analysis of Stability of Employment Income ________________________________________ 68 Frequent Changes in Employment ________________________________________________________________________ 68 Gaps in Employment ___________________________________________________________________________________ 68 Temporary Reduction in Income __________________________________________________________________________ 68 Alimony, Child Support, or Maintenance Income _____________________________________________________ 69 Social Security Income __________________________________________________________________________ 69 Social Security Income Received for a Child _________________________________________________________ 70 Disability Benefits ______________________________________________________________________________ 70 Social Security Disability ________________________________________________________________________________ 71 VA Disability__________________________________________________________________________________________ 71 Private Disability ______________________________________________________________________________________ 71 Pension ______________________________________________________________________________________ 71 Individual Retirement Account (IRA) and 401(k) ______________________________________________________ 72 Military Income ________________________________________________________________________________ 72 Foster-Care Income _____________________________________________________________________________ 72 Non-Taxable Income ____________________________________________________________________________ 73 Short Term Disability / Workman's Comp ___________________________________________________________ 73 Foreign Income ________________________________________________________________________________ 73 Ineligible Income Sources ________________________________________________________________________ 73 Expected Income _______________________________________________________________________________ 74 Income Transcript Verification ____________________________________________________________________ 74 Full Tax Return Transcripts (1040s) ________________________________________________________________________ 74 W2 Transcript Waiver __________________________________________________________________________________ 75

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FHA Underwriting Guidelines | Table of Contents

Timing of Tax Returns ___________________________________________________________________________ 75 Additional Documentation Requirements __________________________________________________________________ 76

Rental Income _________________________________________________________________________________ 76 Rental Income Received from the Subject Property ___________________________________________________________ 76 Limited or No History of Rental Income __________________________________________________________________ 76 History of Rental Income _____________________________________________________________________________ 77 Limited or No History of Rental Income __________________________________________________________________ 77 History of Rental Income _____________________________________________________________________________ 77 Rental Income from Other Real Estate Holdings (TOTAL) _______________________________________________________ 77 Limited or No History of Rental Income __________________________________________________________________ 78 History of Rental Income _____________________________________________________________________________ 78 Limited or No History of Rental Income __________________________________________________________________ 78 History of Net Rental Income __________________________________________________________________________ 78 Boarders of the Subject Property _________________________________________________________________________ 79 Three- and Four-Unit Properties (Self-Sufficiency Rental Income) ________________________________________________ 79

Assets _________________________________________________________________________________ 80 Minimum Required Investment (MRI) ______________________________________________________________ 80

Source Requirements for the Borrower's MRI _______________________________________________________________ 80 Reserves _____________________________________________________________________________________ 81

Required Reserves for Three- to Four-Unit Properties _________________________________________________________ 81 Source of Funds________________________________________________________________________________ 81

Checking and Savings Accounts___________________________________________________________________________ 81 Cash on Hand_________________________________________________________________________________________ 82 Retirement Accounts___________________________________________________________________________________ 82 Access Letters _________________________________________________________________________________ 82 Large Deposits _________________________________________________________________________________ 82 Gifts (Personal and Equity) ______________________________________________________________________ 83 Acceptable Sources for Gift Funds ________________________________________________________________________ 83 Donor's Source of Funds ________________________________________________________________________________ 83 Gift Letter ___________________________________________________________________________________________ 83 Documenting the Transfer of Gift Funds____________________________________________________________________ 84 Gifts of Equity ________________________________________________________________________________________ 84 Gift Funds/Grants by Charitable Organizations _______________________________________________________ 84 Collateralized Loans ____________________________________________________________________________ 85 Retirement Account Loans _______________________________________________________________________ 85 Sale of Personal Property ________________________________________________________________________ 85 Sale of Real Property____________________________________________________________________________ 86 Real Estate Commission from Sale of a Subject Property _______________________________________________ 86

Refinance Transactions ___________________________________________________________________ 87 Types of Refinances ____________________________________________________________________________ 87 General Borrower Eligibility ______________________________________________________________________ 87 Current Status of the Mortgage Being Refinanced ____________________________________________________ 87 Mortgage Payoffs ______________________________________________________________________________ 87 Cash-Out Refinances ____________________________________________________________________________ 88

Housing Payment History _______________________________________________________________________________ 88 Additional Underwriting and Eligibility Criteria_______________________________________________________________ 89 At-a-Glance Eligibility __________________________________________________________________________________ 89 No Cash Out Refinances _________________________________________________________________________ 90 Rate and Term Refinance _______________________________________________________________________________ 90

Maximum Mortgage Amount Calculation ________________________________________________________________ 91 Refinancing to Buy Out Title-Holder Equity _______________________________________________________________ 91

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FHA Underwriting Guidelines | Table of Contents

Refinancing to Pay Off Recorded Land Contracts ___________________________________________________________ 91 Additional Underwriting and Eligibility Criteria ____________________________________________________________ 92 Simple Refinance ______________________________________________________________________________________ 92 Maximum Mortgage Amount Calculation ________________________________________________________________ 92 Additional Underwriting and Eligibility Criteria ____________________________________________________________ 93 UFMIP Refunds ________________________________________________________________________________ 93 Refund Amount Selection _______________________________________________________________________________ 93 Refund Amount Calculation _____________________________________________________________________________ 93 Non-Occupying Co-Borrowers ____________________________________________________________________ 94 Texas Refinances_______________________________________________________________________________ 94 50(f)(2)______________________________________________________________________________________________ 95 Cash Out and Principal Curtailments _______________________________________________________________ 96

Purchase Transactions ____________________________________________________________________ 97 Calculating Maximum Mortgage Amount ___________________________________________________________ 97 Residential Purchase Agreement __________________________________________________________________ 97 Earnest Money Deposit (EMD) ____________________________________________________________________ 97 Amendatory Clause_____________________________________________________________________________ 97 Real Estate Certification _________________________________________________________________________ 98 For Your Protection Get a Home Inspection _________________________________________________________ 98 Short Sales____________________________________________________________________________________ 98 Properties Purchased at Auction __________________________________________________________________ 99 Interested Party Contributions____________________________________________________________________ 99 Inducements to Purchase ________________________________________________________________________ 99

Personal Property ____________________________________________________________________________________ 100 Sales Commission ____________________________________________________________________________________ 100 Rent Below Fair Market________________________________________________________________________________ 100 Property Flipping______________________________________________________________________________ 100 Restriction on Resales Occurring 90 Days or Fewer After Acquisition ____________________________________________ 101 Resales Occurring Between 91 Days and 180 Days After Acquisition _____________________________________________ 101 Exceptions to Time Restrictions on Resale _________________________________________________________________ 101 Seller's Acquisition Cost _______________________________________________________________________________ 101 Prior Sales ___________________________________________________________________________________ 101 12 Month Chain of Title ________________________________________________________________________ 102 Three- and Four-Unit Properties _________________________________________________________________ 102 Paying Off Debt at Closing ______________________________________________________________________ 102 Purchase Transactions with Identity of Interest _____________________________________________________ 102 Determining Property Taxes on New Construction Dwellings __________________________________________ 103 Reacquisition of a Formerly-Owned Property _______________________________________________________ 103 Non-Occupying Co-Borrowers ___________________________________________________________________ 103 Secondary Financing Provided by Governmental Entities______________________________________________ 104 Downpayment Assistance Programs ______________________________________________________________ 106 Seller Utilizing a Relocation Company _____________________________________________________________ 106 Relocation Company Takes Power of Attorney______________________________________________________________ 106 Double Escrow_______________________________________________________________________________________ 106 Relocation Company Acts as Seller without Taking Title_______________________________________________________ 107 Reimbursement of Buyer-Paid Costs ______________________________________________________________ 107

General Provisions ______________________________________________________________________ 108 Documentation Requirements ___________________________________________________________________ 108 Occupancy ___________________________________________________________________________________ 108

Military Personnel Eligibility ____________________________________________________________________________ 108

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FHA Underwriting Guidelines | Table of Contents

Citizenship ___________________________________________________________________________________ 108 Permanent Resident Aliens _____________________________________________________________________________ 109 Non-Permanent Resident Aliens _________________________________________________________________________ 109 Additional Immigration Status___________________________________________________________________________ 109

Social Security Number_________________________________________________________________________ 110 Translated Documents _________________________________________________________________________ 110 Legal Name __________________________________________________________________________________ 110

Married Names ______________________________________________________________________________________ 110 Maximum Number of Financed Properties/Multiple Properties ________________________________________ 110 Maximum Number of Borrowers Allowed __________________________________________________________ 110 Age of Borrower ______________________________________________________________________________ 111 Signature Requirements for all Application Forms ___________________________________________________ 111

Borrower's Authorization ______________________________________________________________________________ 111 Form HUD-92900-A Part IV _____________________________________________________________________________ 111 Borrower's Authorization for Use of Information Protected under the Privacy Act __________________________________ 111 Power of Attorney (at Closing) __________________________________________________________________ 112 Rescission ___________________________________________________________________________________ 112 Tax and Insurance Escrows ______________________________________________________________________ 112 Flood Insurance_______________________________________________________________________________ 113 Hazard Insurance______________________________________________________________________________ 113 Non-Homestead Property Taxes _________________________________________________________________ 113 Title Companies/Settlement Agents ______________________________________________________________ 113 Title Requirements ____________________________________________________________________________ 114 Redemption Periods on Title ____________________________________________________________________________ 114 Schedule B __________________________________________________________________________________________ 114 Delinquent Property Taxes ______________________________________________________________________ 114 Mortgage Payoffs _____________________________________________________________________________ 114 Verifications _________________________________________________________________________________ 114 Information Obtained via Internet _______________________________________________________________________ 114 Age of Documents_____________________________________________________________________________ 115 Non-Borrowing Spouse_________________________________________________________________________ 115 Electronic Signatures___________________________________________________________________________ 116 Ineligible Documents for eSignature ______________________________________________________________________ 116 Trusts _______________________________________________________________________________________ 116 Eligible Borrowers ____________________________________________________________________________________ 116 Eligible Properties ____________________________________________________________________________________ 116 Required Documentation ______________________________________________________________________________ 117 Exception for Trust Certificate Authorized States ____________________________________________________________ 117 Other Title and Closing Requirements ____________________________________________________________________ 117 Ineligible ___________________________________________________________________________________________ 117 LDP/SAM Lists ________________________________________________________________________________ 118 Requirements for Requesting an FHA Case Number __________________________________________________ 118 FHA Case Number Assignment Cancellation ________________________________________________________ 118 Reinstating FHA Case Numbers __________________________________________________________________________ 119 CAIVRS ______________________________________________________________________________________ 119 Assumptions ________________________________________________________________________________________ 119 Divorce ____________________________________________________________________________________________ 119 Bankruptcy _________________________________________________________________________________________ 119 Debt-to-Income Ratios _________________________________________________________________________ 120 Mortgage Payment Expense to Effective Income (the Housing Ratio) ____________________________________________ 120 Total Fixed Payment to Effective Income (the Debt Ratio) _____________________________________________________ 120 FHA Policy Limiting the Number of Mortgages per Borrower___________________________________________ 120 Exceptions __________________________________________________________________________________________ 121

Relocation________________________________________________________________________________________ 121 Increase in Family Size ______________________________________________________________________________ 121 Vacating a Jointly-Owned Property ____________________________________________________________________ 121

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