FHA Mortgagee Letter 2014-02 Manual Underwriting

Bulletin #2014-14

April 15, 2014

** FHA Mortgagee Letter 2014-02 Manual Underwriting **

Overview

On January 21, 2014, HUD issued Mortgagee Letter (ML) 2014-02 outlining revised manual underwriting requirements for certain FHA loan transactions. The ML provides new reserve requirements for manually underwritten loans, as well as defines new compensating factors that must be used in order to exceed FHA's standard qualifying ratios (31/43 or 33/45 for EEMs). The new requirements are effective for case numbers assigned on or after April 21, 2014.

Definition of Manually Underwritten Loans The requirements for manually underwritten transactions apply to: ? AUS-Refers (FAMC accepts refers for Bankruptcy only) ? AUS-Approve/Accepts that are manually downgraded (FAMC does not purchase manually

downgraded loans) ? Credit-qualifying streamline refinance transactions The requirements do not apply to: ? Non credit-qualifying streamline refinance transactions ? AUS-Approve/Accepts that are not manually downgraded

New Reserve Requirements The ML also imposes minimum reserve requirements for all manually underwritten transactions. The following reserve requirements apply for all manual underwrites regardless of ratios: ? 1-2 Unit Properties: Reserves must equal or exceed one total monthly mortgage payment. ? 3-4 Unit Properties: Reserves must equal or exceed three total monthly mortgage

payments.

For manually underwritten transactions, these funds may NOT be considered as cash reserves: ? Gifts ? Equity in real property ? Borrowed funds ? Cash received at closing in a cash out refinance transaction or incidental cash received at

closing ? More than 60% of the vested amount of any retirement account, less outstanding loans

(other normal documentation requirements apply)

Loans without Compensating Factors Manually underwritten transactions that do not meet any of the newly-defined compensating factors (as listed in the chart below), will be limited to ratios of 31/43 (33/45 for EEMS), without exception.

NOTE: As a reminder, FAMC will only accept manual underwriting on non-credit qualifying streamlines and AUS Refers due to Bankruptcy only.

Minimum Decision Credit Score < 650 ? FAMC will retain its current 45% maximum DTI ratio for transactions where the Decision

Score is < 650. ? Additionally, a new front ratio of 37% will be added as of the effective date above, resulting

in ratio limits of 37/45 for manually underwritten transactions where the Decision Score is < 650. ? Borrowers with ratios up to this maximum will have to meet ONE of the compensating factors as required by FHA, listed in the chart below. ? Manually underwritten loans run through an AUS receiving an Approve/Accept recommendation will continue to only require the 45% maximum DTI (with no front ratio requirement).

Minimum Decision Credit Score 650

37/47 Maximum ? Transactions with a Decision Score of 650+ will allow ratios up to 37/47, which matches the

new FHA guidance as detailed in the ML. ? Borrowers with ratios up to this maximum must meet ONE of the compensating factors as

required by FHA, listed in the chart below.

40/50 Maximum ? If a borrower needs to take advantage of FHA's maximum 40/50 ratios, the Decision Score

must be 650+ and the borrowers must meet TWO of the compensating factors as required by FHA and listed in the chart below.

FAMC Manual Underwriting Requirements

Compensating Factors

Minimum Decision Credit

Score

- No compensating factors required - EEM allows stretch ratios 33/45

640+

Maximum Ratios

EXISTING

31/43

Maximum Ratios Case #s on/after 4/21/14

31/43

One of the following:

1. 3 months PITI cash reserves (12 units) or 6 months PITI cash reserves (3-4 units)

2. New PITI does not exceed the lesser of $100 or 5% above old PITI; AND a full 12 mos. housing history w/ max 1x30 or 0x30 for cash out

3. Residual Income

640-649 650+

na/45 na/na

37/45 37/47

Two of the following:

1. 3 months PITI cash reserves (12 units) or 6 months PITI cash reserves (3-4 units)

2. New PITI does not exceed the lesser of $100 or 5% above old PITI; AND a full 12 mos. housing history w/ max 1x30 or 0x30 for cash out

3. Residual Income 4. Bonus/OT/PT/seasonal income

(of the borrower only) that is verified >1 but ................
................

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