FHA Has Changed A Lot of Guidelines effective 9/14/15 That Can Hurt or Help Buyers

New FHA changes effective 9/14/15
New FHA guidelines effective 9/14/15

Below are the FHA guideline changes effective for FHA case file numbers assigned on or after September 14, 2015.

Below are the topics and the new guideline language which replaces the prior rules often because the prior rules were not specific enough.

Assets:  This section applies to anything pertaining to documenting assets on an FHA loan

Gift funds – documenting transfer:

Requires donor’s bank statement, showing withdrawal of funds.

Earnest Money:

Document source of funds if amount exceeds 1% of sales price, or appears excessive based on borrower’s savings history.

Large Deposit Definition:

For recently opened accounts and recent individual deposits of more than 1 percent of the Adjusted Value (lesser of purchase price minus inducements or the appraised value), the mortgagee must obtain documentation of the               deposits. The mortgagee must also verify that no debts were incurred to obtain part, or all, of the minimum required investment.

Joint Funds Access:

Manual underwriting and TOTAL Scorecard: If the Borrower does not hold the deposit account solely, all non-Borrower parties on the account must provide a written statement that the Borrower has full access and use of the funds.

Retirement Accounts:

*Most recent monthly or quarterly account statement.
*Use 60% and deduct existing loans unless there is “conclusive” evidence that a                                                                       higher percentage may be withdrawn.
*Evidence of liquidation is required if any portion is required for funds to close.

Interested Party Credits/Costs Paid Outside Closing/Minimum Required Investment:

On the HUD 1 settlement statement, the lender may apply interested party credits to the closing costs and prepaid items, including any items paid outside closing (POC). The refund of the borrower’s POCs may be used toward the borrower’s minimum required investment (MRI) if the lender documents that the POCs were paid with the borrower’s own funds.

Real Estate Tax Credits/Minimum Required Investment:

Where real estate taxes are paid in arrears, the seller’s real estate tax credit may be used to meet the MRI if the
Mortgagee documents that the Borrower had sufficient assets to meet the MRI and the Borrower paid closing
costs at the time of underwriting. This permits the Borrower to bring a portion of their MRI to the closing
and combine that portion with the real estate tax credit for their total MRI.

Credit – This section pertains to documenting credit on a FHA loan

Satisfactory Credit:

A lender may approve a borrower if:

  • Acceptable payment history and
  • No major derogatory credit on revolving accounts in the last 12 months.

“Acceptable payment history” means:

  • The borrower made all housing and installment debt payments on time for the previous 12 months, and
  • There are no more than two 30-day late mortgage or installment payments in the last 24 months.

“Major derogatory credit” means:

  • Payments made more than 90 days after the due date, or
  • 3 or more payments made more than 60  days after the due date.

Derogatory Event – Wait Period Definition:

Defines as ‘from event date to the new loan case number order date’.

Non-Traditional Mortgage Credit Report (NTMCR):

NTMCR is not required. For borrowers without a credit score, either:

  • Obtain an NTMCR, or
  • Develop a credit history using alternative
    references subject to documentation and
    verification guidelines, including:

    • Review of public records to verify the provider’s existence
    • Verification of credit information using published addresses and telephone numbers, and
    • Retention of the most recent 12 months of canceled checks or equivalent proof of payment.

Medical Collections:

Specifically designated as obligation; not considered debt and can be disregarded.

Charge-Offs:

  • Defined as loans or debts written off by the creditor.
  • The lender must:
    • Determine why they exist,
    • Document reasons for approving the loan and,
    • Obtain a letter of explanation from the borrower and supporting documentation.

Documents/Processing

Age of Documents:

Existing and new construction: 120 days

Handling of Documents:

Documents can’t be transmitted from or though equipment of interested third parties or unknown parties.

Application Signatures:

All borrowers must sign both the initial and final 1003.

Borrower’s Authorization Form:

Must Obtain.

Disclosures:

Single list of required disclosures.

CAIVRS:

VERIFIED delinquent federal debt makes the borrower ineligible.

Federal Tax Liens:

Tax liens may remain unpaid if the borrower has entered into a valid repayment agreement and has made at least 3 months of timely payments. Payments may not be prepaid.

Excluded Parties List:

Check all parties to the transaction including processor, underwriter, appraiser and 203(k) consultant.

Reverification of Employment:

Required within 10 days of loan note date.

Fees

Tax Service Fee:

Not mentioned.

Prepaids:

Prepaid items include flood and hazard insurance premiums, MIPs, real estate taxes and per diem interest. There is no longer a 15-day interest requirement when estimating GFE.

Per Diem Interest and Interest credits:

Per Diem Interest – May collect from disbursement date to the date amortization begins.
Interest Credit – Lender may begin amortization up to 7 days prior to the disbursement date and provide an interest credit. Per diem interest credit may not be used to meet the borrower’s MRI.
Calculation – Per diem must be computed using 1/365th of annual rate

Glossary Definitions

Family Member:

Family Member is defined as follows, regardless of actual or perceived sexual orientation, gender identity, or legal marital status:

  • Child, parent, or grandparent
    • A child is defined as a son, stepson, daughter, or
    stepdaughter
    • A parent or grandparent includes a stepparent/
    grandparent or a foster parent/ grandparent
  • Spouse or domestic partner
  • Legally adopted son or daughter, including a child
    who is placed with the borrower by an authorized
    agency for legal adoption
  • Foster child
  • Brother, stepbrother
  • Sister, stepsister
  • Uncle
  • Aunt
  • Son-in-law, daughter-in-law, father-in-law, mother-
    in-law, brother-in-law, or sister-in-law of the Borrower.

Income/Employment

Part Time Employment Income:

Two years of uninterrupted part-time income is required.

  • Average the income over the prior 2 years or
  • Use a 12-month average of hours at the current
    pay rate if the lender documents an increase in
    pay rate.

Self-Employed-Declining Income:

Income from a business with a greater than 20% decline in income over the analysis period is not acceptable.
• If using an AUS, the lender must downgrade to manual underwriting.

If there has been a 20% or greater decline, the income is still deemed stable if:
• The reduction was the result of documented extenuating circumstances,
• The income has been stable or increasing for at least 12 months, and
• The borrower qualifies using the reduced income.

Frequent Job Changes:

If the borrower has changed jobs more than 3 times in the prior 12 months or has changed lines of work, the lender must obtain:

  • Transcripts of training and education demonstrating qualification for the new position, or,
  • Employment documentation evidencing continual increases in income and/or benefits

Hourly Earnings Calculations:

  • If the hours do not vary, use the hourly rate.
  • If the hours vary, use a two-year average.
  • If the hours vary and there is a documented
    increase in pay rate, use a 12-month average
    of hours at the current pay rate

Overtime and bonus Income Calculations:

  • General Rule – Overtime or bonus income must have been received for the past 2 years.
  • Exception – Periods between 1 and 2 years may be acceptable if consistently earned for at least 1 year and likely to continue.
  • How to calculate the income:
  • Average over 2 years.
  • If the income from the current year decreases by
    20% or more from the prior year, use the current
    year’s income.

Commission Income:

  • Earned for at least 1 year in same or similar line of work and likely to continue.
  • Calculate by subtracting unreimbursed business expenses from the lesser of:
    • The average net commission earned over the past 2 years (or however long it’s been earned) and
    • The average income earned over the prior 1 year.

Voluntary Alimony or Child Support Payments:

Allowed if using a voluntary payment agreement, the lender:

  • Obtains 12 months canceled checks, deposit slips, or tax returns,
  • If there is evidence of receipt for the most recent 6 months, may use the current payment to calculate income;
  • If there are not 6 months of consistent payments, may average the income received over the prior 2 years, or less if the income has not been received that long.

Rental Income on Retained Primary Residence:

  • Rental income may be counted when relocating and new residence is located at least 100 miles from previous residence.
  • If no history of rental income since the last tax filing, borrower must have 25% equity.

Non-Taxable Income:

Gross up using greater of 15% or actual tax rate. If borrower did not file a return, use tax rate of 15%.

Pension Income Calculation:

  • Use current amount, if consistent.
  • Fluctuating amounts require use of 2-year (or time of receipt, if less) average

401 K Income Calculation:

  • Use current amount if consistent.
  • Fluctuating amounts require use of 2-year (or time of receipt, if less) average

Gaps In Employment:

Manual underwriting and TOTAL Scorecard: Gaps of less than 6 months require no explanation.

Temporary Income Reduction:

For borrowers with a temporary reduction of income due to a short-term disability or similar temporary leave, lenders may consider the Borrower’s current income as effective Income, if it can verify and document that:

  • The Borrower intends to return to work;
  • The Borrower has the right to return to work;
  • The Borrower qualifies for the mortgage,taking into account any reduction of income due to the circumstance.

For Borrowers returning to work before, or at the time of, the first Mortgage Payment due date, the mortgagee may use the Borrower’s pre-leave income.
For Borrowers returning to work after the first Mortgage Payment due date, the mortgagee may use the Borrower’s current income plus available surplus liquid asset Reserves, above and beyond any required Reserves, as an income supplement up to the amount of the Borrower’s pre-leave income. The amount of the monthly income supplement is the total amount of surplus Reserves divided by the number of months between the first payment due date and the
Borrower’s intended date of return to work.

Insurance

Flood Insurance:

Amount at least equal to the lesser of either:

  • The outstanding balance of the mortgage, less estimated land costs or
  • The maximum amount of the NFIP insurance available with response to the property improvements

Liabilities

Deferred Loans:

All deferred obligations (including loans in forbearance), regardless of when they will commence, must be included in the qualifying ratios. The lender must obtain evidence of:

  • The deferral
  • The outstanding balance
  • The terms of liability and
  • The anticipated monthly payment.

For installment debt, the lender must use

  • The actual monthly payment, or
  • If the actual payment is unknown,
    • The terms of the debt or
    • 5% of the outstanding balance.

For student loan, the lender must use

  • The actual monthly payment, or
  • If the actual monthly payment is zero, or is not available, use 2% of the outstanding balance.

Installment Debt < 10 months payments:

TOTAL Scorecard and Manual UW: May be excluded from ratios only if:

  • They have remaining cumulative payments of less than, or equal to, 5% of the borrower’s gross monthly income and
  • The borrower may not pay the debts down to achieve this percentage.

Alimony and Child Support:

  • May be treated either as reduction from gross income or as a monthly obligation.
  • Obtain pay stubs covering at least 28 consecutive days to verify whether the borrower is subject to any order of
    garnishment.
  • Calculate the monthly obligation from the greater of:
    • The amount shown on the most recent decree or agreement establishing the obligation or
    • The monthly amount of the garnishment.

Revolving Accounts/Monthly payment Calculations:

  • 5% of the outstanding balance or
  • Payment shown on credit report or statement.

30-Day Account (Accounts requiring payment in full each month):

  • Not included in ratios if borrower has paid in full every month for past 12 months.
  • If there were late payments in the last 12 months, include 5% of the balance in the ratios.
  • Lender must document sufficient funds to pay off the balance and close the loan.

Authorized User Accounts:

If the primary account holder has made all required payments on the account for the previous 12 months, debt does not have to be included in borrower’s ratios. If less than 3 payments have been required on the account in the previous 12 months, the payment must be included in ratios.

Occupancy

Multiple FHA Loans:

Borrower may obtain second FHA loan for new principal residence when relocating for employment and current residence is more than 100 miles from new residence area.

Property

Acceptable Mixed Use:

A minimum of 51% of the entire building square footage is required for residential use.

Refiances

Rate and Term Refinance Types:

  • Rate and Term (refinance any mortgage –requires appraisal).
  • Simple Refinance (refinance FHA-insured mortgage – requires appraisal).
  • Streamline Refinance (no appraisal).
  • Streamline Refinance – Credit Qualifying (no appraisal).

Rate and Term Maximum LTV:

  • 97.75% if owner-occupied for previous 12 months, or owner-occupied since acquisition if acquired within the last 12 months, at case number date.
  • 85% if borrower has not occupied as principal residence for <12 months prior to case number date, or if owned less than 12 months and has not occupied the property for the entire period of ownership.
  • 85% for all HUD-approved secondary residences.

Cash Out LTV:

Owned and occupied as principal residence for 12 months* prior to case number assignment date: 85% of appraised value. *exceptions allowed for inheritance

Rate and Term – Short Payoffs:

Existing note holder must write off remaining debt in short payoff scenario.

Skipped Payments:

Payments for all mortgages secured by the subject property must have been paid within the month due for the month prior to mortgage disbursement. (This would allow for a skipped payment.)

Streamline Refinances

Streamline Refinance Net Tangible Benefit – Term Reduction:

Reduction in term alone constitutes net tangible benefit if the new rate does not exceed the current rate and payment (Principal + Interest + Monthly-Paid Annual MI) does not increase by more than $50).

Underwriting

TOTAL Scorecard Manual Downgrade Requirements:

Manual downgrades are required when:

  • Delinquent federal debt is present.
  • CAIVRS claim is present unless erroneous or qualifies for exception listed below:
    • Assumption: loan was current prior to the assumption.
    • Divorce: home and debt assigned to ex-spouse and mortgage was not in default at the time.
    • Bankruptcy: mortgage was included in a bankruptcy due to extenuating circumstances.
  • Borrower is named on excluded party list.
  • Foreclosure, short sale, or DIL within 3 years.
  • BK discharged within 2 years.L
  • Late mortgage payments on purchase or r/t refi
    • 3 or more > 30 days or
    • • 1 or more 60 days plus 1 or more 30 day
    • • or 1 >90 days.
  • Any mortgage tradeline (incl. 2nd liens) that has less than 6 months history.
  • >$1000 in disputed derogatory accounts.
  • Cash-out refinance reflects:
    • Delinquent payment in last 12 months or
    • Currently delinquent or
    • Non-occupant co-borrower is present.
  • AUS conditions cannot be met.
  • Derogatory or any other credit information has not been considered by TOTAL (includes multiple NSF checks on bank statement).
  • A borrower or co-borrower has no credit score.
  • Undisclosed mortgage debt is discovered.
  • Business Income shows a >20% decline over the analysis period.

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Written By: Russell Smith

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