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Manual Underwriting 8/4/2009 1. 2 Manual Underwriting For loans receiving a Refer score from an AUS or where borrower has no credit score (required to.

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Presentation on theme: "Manual Underwriting 8/4/2009 1. 2 Manual Underwriting For loans receiving a Refer score from an AUS or where borrower has no credit score (required to."— Presentation transcript:

1 Manual Underwriting 8/4/2009 1

2 2 Manual Underwriting For loans receiving a Refer score from an AUS or where borrower has no credit score (required to score through AUS). For loans receiving a Refer score from an AUS or where borrower has no credit score (required to score through AUS). In Fiscal Year 2008 in the Philadelphia HOC 24% of endorsed purchase loans and 39% of endorsed credit-qualifying refinance loans were manually underwritten. In Fiscal Year 2008 in the Philadelphia HOC 24% of endorsed purchase loans and 39% of endorsed credit-qualifying refinance loans were manually underwritten. 8/4/2009

3 3 Manual Underwriting Credit No minimum credit score. No minimum credit score. If credit score is below 500, a 10% down payment is required. If credit score is below 500, a 10% down payment is required. Past credit performance is the key to evaluating future performance. omap.asp?address= C.1.a Past credit performance is the key to evaluating future performance. omap.asp?address= C.1.a omap.asp?address= C.1.a omap.asp?address= C.1.a 8/4/2009

4 Manual Underwriting Credit Credit pattern more important than single incidents. Payment history for previous mortgage or rent most important. fomap.asp?address= C.1.b Credit pattern more important than single incidents. Payment history for previous mortgage or rent most important. fomap.asp?address= C.1.b fomap.asp?address= C.1.b fomap.asp?address= C.1.b Explanations required for significant credit problems, late payments, recent inquiries. fomap.asp?address= C.1.c Explanations required for significant credit problems, late payments, recent inquiries. fomap.asp?address= C.1.c fomap.asp?address= C.1.c fomap.asp?address= C.1.c 8/4/2009 4

5 5 Manual Underwriting Chapter 7 Bankruptcy Borrower has reestablished good credit, or chosen not to incur new credit obligations. Borrower has reestablished good credit, or chosen not to incur new credit obligations. 2 years have passed since discharge, 1 year if bankruptcy due to circumstances beyond borrower’s control. 2 years have passed since discharge, 1 year if bankruptcy due to circumstances beyond borrower’s control. prod/infomap.asp?address= C.2.g prod/infomap.asp?address= C.2.g prod/infomap.asp?address= C.2.g prod/infomap.asp?address= C.2.g 8/4/2009

6 Manual Underwriting Chapter 13 Bankruptcy 1 year successful payments under plan. 1 year successful payments under plan. Permission of court is required. Permission of court is required. fomap.asp?address= C.2.h fomap.asp?address= C.2.h fomap.asp?address= C.2.h fomap.asp?address= C.2.h 8/4/2009 6

7 Manual Underwriting Let’s have another little quiz. 8/4/2009 7

8 8 Manual Underwriting Must collections be paid off? Must collections be paid off? Collections need not be paid off, but borrower must provide a written explanation for them. Collections need not be paid off, but borrower must provide a written explanation for them. How about judgments? How about judgments? Judgments must be repaid in full or be under an approved repayment plan. Judgments must be repaid in full or be under an approved repayment plan. fomap.asp?address= C.2.e fomap.asp?address= C.2.e fomap.asp?address= C.2.e fomap.asp?address= C.2.e 8/4/2009

9 Manual Underwriting Collections and Judgments The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments. The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments. The borrower must explain, in writing, all collections and judgments. The borrower must explain, in writing, all collections and judgments. fomap.asp?address= C.2.d fomap.asp?address= C.2.d fomap.asp?address= C.2.d fomap.asp?address= C.2.d 8/4/2009 9

10 10 Manual Underwriting Employment/Income Must verify employment, income for 2 full years. Allowances for school, maternity. fomap.asp?address= D.1.b Must verify employment, income for 2 full years. Allowances for school, maternity. fomap.asp?address= D.1.b fomap.asp?address= D.1.b fomap.asp?address= D.1.b Overtime, bonus can be used if documented for 2 years and likely to continue. fomap.asp?address= D.2.b Overtime, bonus can be used if documented for 2 years and likely to continue. fomap.asp?address= D.2.b fomap.asp?address= D.2.b fomap.asp?address= D.2.b 8/4/2009

11 Manual Underwriting Employment/Income Income must reasonably be expected to continue for 3 years. Income must reasonably be expected to continue for 3 years. fomap.asp?address= D.2.a fomap.asp?address= D.2.a fomap.asp?address= D.2.a fomap.asp?address= D.2.a 8/4/

12 Manual Underwriting Self-Employment Borrower must have been successfully self- employed for at least 2 years, or Borrower must have been successfully self- employed for at least 2 years, or Self-employed at least 1 year and self- employment is in the same field as previous employment. No credit if less than 1 year. Self-employed at least 1 year and self- employment is in the same field as previous employment. No credit if less than 1 year. fomap.asp?address= D.4.c fomap.asp?address= D.4.c fomap.asp?address= D.4.c fomap.asp?address= D.4.c 8/4/

13 13 Manual Underwriting Other Income Can Be Used As Well Retirement. fomap.asp?address= D.2.j Retirement. fomap.asp?address= D.2.j fomap.asp?address= D.2.j fomap.asp?address= D.2.j Social Security. fomap.asp?address= D.2.k Social Security. fomap.asp?address= D.2.k fomap.asp?address= D.2.k fomap.asp?address= D.2.k Alimony, child support. fomap.asp?address= E#1 Alimony, child support. fomap.asp?address= E#1 fomap.asp?address= E#1 fomap.asp?address= E#1 8/4/2009

14 Manual Underwriting Non-Taxable Income May Be “Grossed Up.” Percentage of gross-up may not exceed borrower’s actual tax rate. Percentage of gross-up may not exceed borrower’s actual tax rate. No additional allowances for dependents. No additional allowances for dependents. Lender must document the percentage used. Lender must document the percentage used. If the borrower is not required to file a tax return, use a 25% tax rate. If the borrower is not required to file a tax return, use a 25% tax rate. fomap.asp?address= E.5.b fomap.asp?address= E.5.b fomap.asp?address= E.5.b fomap.asp?address= E.5.b 14 8/4/2009

15 Manual Underwriting How about another test? 8/4/

16 Manual Underwriting “Off the books” or “under the counter” income can be used… A. For self-employed borrowers only. B. Only as a compensating factor. C. Never. 8/4/

17 Manual Underwriting The answer is C. Never. 8/4/

18 Manual Underwriting Rental Income Income from rental properties the borrowers already owns. Income from rental properties the borrowers already owns. Income from a 2-4 unit property the borrower is purchasing and in which he/she will reside. Income from a 2-4 unit property the borrower is purchasing and in which he/she will reside. Income from a principal residence that borrower will vacate and rent out. Income from a principal residence that borrower will vacate and rent out. 8/4/

19 Manual Underwriting Income from investment properties must be documented through… A current lease or an agreement to lease. A current lease or an agreement to lease. A rental history over the previous 24 months that is free of unexplained gaps greater that three months. A rental history over the previous 24 months that is free of unexplained gaps greater that three months. fomap.asp?address= E.4.a fomap.asp?address= E.4.a fomap.asp?address= E.4.a fomap.asp?address= E.4.a 8/4/

20 Manual Underwriting Projected income from multi-unit property the borrower will occupy Gross income can be used after deducting the HOC's vacancy and maintenance factor (15%). Gross income can be used after deducting the HOC's vacancy and maintenance factor (15%). It may not be used as a direct offset to the mortgage payment. It may not be used as a direct offset to the mortgage payment. fomap.asp?address= E.4.b fomap.asp?address= E.4.b fomap.asp?address= E.4.b fomap.asp?address= E.4.b 8/4/

21 21 Manual Underwriting Vacating and Renting A Current Residence Concerns have arisen about borrowers seeking FHA loans to purchase a home when they already own another home. Concerns have arisen about borrowers seeking FHA loans to purchase a home when they already own another home. Borrower claims that current home will be rented. Counts rent as income to qualify for new loan. Borrower claims that current home will be rented. Counts rent as income to qualify for new loan. Borrower closes on new loan and abandons former property. Borrower closes on new loan and abandons former property. 8/4/2009

22 Manual Underwriting Vacating and Renting A Current Residence FHA does not want to encourage this practice. FHA does not want to encourage this practice. Income from the rental of the borrower’s current principal residence may not be counted. Income from the rental of the borrower’s current principal residence may not be counted. prod/infomap.asp?address= E.4.g prod/infomap.asp?address= E.4.g prod/infomap.asp?address= E.4.g prod/infomap.asp?address= E.4.g Except for situations where… Except for situations where… 8/4/

23 23 Manual Underwriting Vacating and Renting A Current Residence Borrower is relocating to an area not within commuting distance and there is an executed lease of at least one year; or Borrower is relocating to an area not within commuting distance and there is an executed lease of at least one year; or LTV on current home does not exceed 75%. LTV on current home does not exceed 75%. 8/4/2009

24 Manual Underwriting Vacating and Renting A Current Residence Philadelphia HOC vacancy factor of 15% must be applied to rental income. Philadelphia HOC vacancy factor of 15% must be applied to rental income. Determination of 75% LTV must be based on appraisal or on a comparison of principal balance to the original sales price. Determination of 75% LTV must be based on appraisal or on a comparison of principal balance to the original sales price. fomap.asp?address= E.4.h fomap.asp?address= E.4.h fomap.asp?address= E.4.h fomap.asp?address= E.4.h 8/4/

25 Manual Underwriting Just a reminder… Self Sufficiency test for 3 and 4 unit properties. Self Sufficiency test for 3 and 4 unit properties. Monthly PITI / Net Monthly Income < 100%. Monthly PITI / Net Monthly Income < 100%. Net Monthly Income = market rent for all units (including unit occupied by borrower) less the greater of appraiser’s vacancy allowance, or HOC vacancy allowance (15%). Net Monthly Income = market rent for all units (including unit occupied by borrower) less the greater of appraiser’s vacancy allowance, or HOC vacancy allowance (15%). fomap.asp?address= B.4 fomap.asp?address= B.4 fomap.asp?address= B.4 fomap.asp?address= B /4/2009

26 26 Manual Underwriting Employment/Income Documentation Verification of Employment (VOE) from current employer and most recent pay stub. fomap.asp?address= d Verification of Employment (VOE) from current employer and most recent pay stub. fomap.asp?address= d fomap.asp?address= d fomap.asp?address= d Or, pay stubs covering most recent 30 day period, W-2s from the previous two years, and an oral VOE. prod/infomap.asp?address= e Or, pay stubs covering most recent 30 day period, W-2s from the previous two years, and an oral VOE. prod/infomap.asp?address= e prod/infomap.asp?address= e prod/infomap.asp?address= e 8/4/2009

27 27 Manual Underwriting Employment/Income Documentation To document self-employment, borrower must submit tax returns for last two years. To document self-employment, borrower must submit tax returns for last two years. YTD income must be verified through profit & Loss Statements. YTD income must be verified through profit & Loss Statements. fomap.asp?address= D.4.d fomap.asp?address= D.4.d fomap.asp?address= D.4.d fomap.asp?address= D.4.d 8/4/2009

28 28 Manual Underwriting Qualifying Ratios “Front” ratio = Housing payment (PITI) / monthly income. “Front” ratio = Housing payment (PITI) / monthly income. Standard is 31%. Standard is 31%. May be exceeded with compensating factors. May be exceeded with compensating factors. fomap.asp?address= F.2.b fomap.asp?address= F.2.b fomap.asp?address= F.2.b fomap.asp?address= F.2.b 8/4/2009

29 Manual Underwriting Qualifying Ratios “Back” ratio – Housing payment plus other installment debt /monthly income. “Back” ratio – Housing payment plus other installment debt /monthly income. Standard is 43%. Standard is 43%. May be exceeded with compensating factors. May be exceeded with compensating factors. fomap.asp?address= F.2.c fomap.asp?address= F.2.c fomap.asp?address= F.2.c fomap.asp?address= F.2.c 8/4/

30 30 Manual Underwriting Qualifying Ratios Where exceeded, underwriter must cite at least one compensating factor. fomap.asp?address= F.3.a Where exceeded, underwriter must cite at least one compensating factor. fomap.asp?address= F.3.a fomap.asp?address= F.3.a fomap.asp?address= F.3.a Compensating factors include reserves, large down payment, minimal increase and others. fomap.asp?address= F.3.b Compensating factors include reserves, large down payment, minimal increase and others. fomap.asp?address= F.3.b fomap.asp?address= F.3.b fomap.asp?address= F.3.b 8/4/2009

31 Manual Underwriting Reserves Reserves are not required except for … Reserves are not required except for … 3-4 unit properties fomap.asp?address= B.4.d 3-4 unit properties fomap.asp?address= B.4.d fomap.asp?address= B.4.d fomap.asp?address= B.4.d Insufficient credit borrowers. fomap.asp?address= C.3.c Insufficient credit borrowers. fomap.asp?address= C.3.c fomap.asp?address= C.3.c fomap.asp?address= C.3.c 31 8/4/2009

32 32 Manual Underwriting What Is Non-Traditional Credit? Refers to borrowers with a credit history insufficient to generate a credit score through Equifax, Experian or TransUnion. Refers to borrowers with a credit history insufficient to generate a credit score through Equifax, Experian or TransUnion. New policy establishes two categories of non- traditional credit references, and two categories of borrowers. New policy establishes two categories of non- traditional credit references, and two categories of borrowers. fomap.asp?address= f fomap.asp?address= f fomap.asp?address= f fomap.asp?address= f 8/4/2009

33 33 Manual Underwriting Group 1 Non-Traditional Credit References Rental housing payments. Rental housing payments. Utility payments (gas, electric, water). Utility payments (gas, electric, water). Land-line telephone. Land-line telephone. Cable TV. Cable TV. 8/4/2009

34 Manual Underwriting What do these Group 1 references have in common? They can all be tracked to a particular property address. 8/4/

35 35 Manual Underwriting Group 2 Non-Traditional Credit References Insurance (medical, auto, life, renter’s). Insurance (medical, auto, life, renter’s). Child care. Child care. Retail stores, including rent-to-own. Retail stores, including rent-to-own. Internet/cell phone. Internet/cell phone. Personal loans/auto leases. Personal loans/auto leases. History of savings. History of savings. 8/4/2009

36 Manual Underwriting 8/4/ What do these Group 2 references have in common? They track to a person, not a property. They track to a person, not a property.

37 37 Manual Underwriting Non-Traditional Credit Borrowers Non-Traditional Credit Borrowers Borrowers with at least three credit references, including at least one Group 1 reference. “Insufficient Credit” Borrowers Borrowers who lack at least one Group 1 credit reference or at least three credit references. “Insufficient Credit” Borrowers Borrowers who lack at least one Group 1 credit reference or at least three credit references. 8/4/2009

38 38 Manual Underwriting Non-Traditional Credit Underwriting No history of delinquency on rental payments. No history of delinquency on rental payments. No more than one 30 day delinquency on other payments. No more than one 30 day delinquency on other payments. No collection accounts/court records within last twelve months. No collection accounts/court records within last twelve months. fomap.asp?address= C.3.a fomap.asp?address= C.3.a fomap.asp?address= C.3.a fomap.asp?address= C.3.a 8/4/2009

39 39 Manual Underwriting Insufficient Credit Underwriting Insufficient credit borrowers must meet those standards plus... Insufficient credit borrowers must meet those standards plus... Qualifying ratios based on occupant borrowers only, 31/43 ratios are hard and fast and two months reserves required. Qualifying ratios based on occupant borrowers only, 31/43 ratios are hard and fast and two months reserves required. fomap.asp?address= C.3.c fomap.asp?address= C.3.c fomap.asp?address= C.3.c fomap.asp?address= C.3.c 8/4/2009

40 Manual Underwriting Insufficient Credit Underwriting Can you think of a loan that you used to do but maybe you can’t under this policy? /4/2009

41 Manual Underwriting Insufficient Credit Underwriting Lenders talk about FHA’s “kiddie condo” program. Lenders talk about FHA’s “kiddie condo” program. As an alternative to paying for a dorm or renting, parents buy a condo for their child to live in while at college. As an alternative to paying for a dorm or renting, parents buy a condo for their child to live in while at college. The child is the occupant borrower, and they co- sign. The child is the occupant borrower, and they co- sign. 41 8/4/2009

42 Manual Underwriting Insufficient Credit Underwriting Some of those deals may not work anymore. Some of those deals may not work anymore. If the occupying borrower is an Insufficient Credit borrower, you can’t use the income or credit of non-occupying co-borrowers. If the occupying borrower is an Insufficient Credit borrower, you can’t use the income or credit of non-occupying co-borrowers. 42 8/4/2009

43 43 Manual Underwriting Documentation Requirements Non-Traditional Mortgage Credit Report (NTMCR) is preferred. Non-Traditional Mortgage Credit Report (NTMCR) is preferred. Independent verification of credit references where NTMCR not available. Independent verification of credit references where NTMCR not available. Borrower-supplied references unacceptable. Borrower-supplied references unacceptable. fomap.asp?address= #7 fomap.asp?address= #7 fomap.asp?address= #7 fomap.asp?address= #7 8/4/2009

44 Property Eligibility Most kinds of homes qualify. 44 8/4/2009

45 45 Property Eligibility Property must consist of 1-4 units. Property must consist of 1-4 units. Detached, semi-detached, attached, condo are eligible. Detached, semi-detached, attached, condo are eligible. Existing and new construction (stick-built and modular) are eligible. Existing and new construction (stick-built and modular) are eligible. Manufactured homes are eligible. Manufactured homes are eligible. Co-ops restricted to developments where HUD insures master mortgage. Co-ops restricted to developments where HUD insures master mortgage. 8/4/2009

46 Property Eligibility Question: Are mixed-use properties acceptable? 8/4/

47 Property Eligibility Yes they are. So long as the commercial space does not exceed 25% of the gross square footage. map.asp?address= g map.asp?address= g 8/4/

48 48 Property Eligibility Condominiums Generally, the condo project must be pre- approved by FHA. fomap.asp?address= C.11.b Generally, the condo project must be pre- approved by FHA. fomap.asp?address= C.11.b fomap.asp?address= C.11.b fomap.asp?address= C.11.b Lender can use “spot” loan procedure for units in non-approved projects. ortgagee/1996ml.cfm Lender can use “spot” loan procedure for units in non-approved projects. ortgagee/1996ml.cfm ortgagee/1996ml.cfm ortgagee/1996ml.cfm 8/4/2009

49 Property Eligibility Condominiums Effective 10/01/09, condo projects may be approved by DE lenders or FHA. Effective 10/01/09, condo projects may be approved by DE lenders or FHA. Spot loan process terminated effective 10/01/09. Spot loan process terminated effective 10/01/09. ML ers/mortgagee/index.cf ML ers/mortgagee/index.cf ers/mortgagee/index.cf ers/mortgagee/index.cf 8/4/

50 Property Eligibility Condominiums Direct Endorsement Lender Review and Approval Process (DELRAP). Direct Endorsement Lender Review and Approval Process (DELRAP). First 5 approvals under DELRAP must be submitted to applicable HOC for review. First 5 approvals under DELRAP must be submitted to applicable HOC for review. HUD Review and Approval Process (HRAP). HUD Review and Approval Process (HRAP). Condo projects consisting of manufactured homes must go through HRAP. Condo projects consisting of manufactured homes must go through HRAP. 8/4/

51 Property Eligibility Condominiums Revised project approval checklists are provided in ML Revised project approval checklists are provided in ML Projects of 3 or fewer units can have only one unit insured by FHA. Projects of 3 or fewer units can have only one unit insured by FHA. Projects with 4 or more units can have no more than 30% of the units insured by FHA. Projects with 4 or more units can have no more than 30% of the units insured by FHA. FHAC will calculate number of active insured loans in project. FHAC will calculate number of active insured loans in project. 8/4/

52 Property Eligibility Condominiums Condominium projects must be re-certified every two years. Condominium projects must be re-certified every two years. Projects approved within the period 10/01/08 – 09/30/09 will be carried over to the new approved list. Projects approved within the period 10/01/08 – 09/30/09 will be carried over to the new approved list. Projects approved prior to that will not appear on the approved list and will have to be approved under the new criteria. Projects approved prior to that will not appear on the approved list and will have to be approved under the new criteria. 8/4/

53 Condominiums Currently, there are 573 approved condo projects in Michigan. Currently, there are 573 approved condo projects in Michigan. Only 54 have been approved since 10/01/08. Only 54 have been approved since 10/01/08. In the Philadelphia HOC jurisdiction there are 10,432 approved condos projects. In the Philadelphia HOC jurisdiction there are 10,432 approved condos projects. Only 486 approved since 10/01/08. Only 486 approved since 10/01/08. 6/8/

54 Property Eligibility Site Condos Effective June 12, 2009, site condo projects need not be approved. Effective June 12, 2009, site condo projects need not be approved. New policy affects one unit detached site condo projects only. New policy affects one unit detached site condo projects only. Condo rider must be included in FHA case binder. Condo rider must be included in FHA case binder. Appraisals should be conducted using Fannie Mae Form Appraisals should be conducted using Fannie Mae Form /4/

55 Property Eligibility Condominiums No project approval required for Streamline refinances. No project approval required for Streamline refinances. No project approval required for HUD REO loans. No project approval required for HUD REO loans. 8/4/

56 Property Eligibility Condominiums List of approved condos available through FHA Connection. Click on Single Family, then Single Family Origination, then FHA Approval Lists, then Condominiums. FHA Connection. Click on Single Family, then Single Family Origination, then FHA Approval Lists, then Condominiums. hud.gov at https://entp.hud.gov/idapp/html/condlook.cfm hud.gov at https://entp.hud.gov/idapp/html/condlook.cfm https://entp.hud.gov/idapp/html/condlook.cfm 56 8/4/2009

57 Condominiums 57 7/23/2009

58 Condominiums 58 7/23/2009

59 Property Eligibility Property Eligibility Getting a condo project approved. Handbook REV-1, Chapter 11. Handbook REV-1, Chapter 11. Effective 10/01/09, new procedures outlined in ML will be used. Effective 10/01/09, new procedures outlined in ML will be used. Use checklists in ML for project approval requests after that. Use checklists in ML for project approval requests after that. 8/4/

60 Property Eligibility Mail requests for condo approval to… U.S. Dept. HUD Philadelphia Home Ownership Center ATTN: Technical Branch 100 Penn Square East Philadelphia, PA U.S. Dept. HUD Philadelphia Home Ownership Center ATTN: Technical Branch 100 Penn Square East Philadelphia, PA Allow at least 4 weeks for approval unless there are environmental issues. Allow at least 4 weeks for approval unless there are environmental issues. 8/4/

61 Property Eligibility Manufactured Homes ML ers/mortgagee/index.cf ML ers/mortgagee/index.cf ers/mortgagee/index.cf ers/mortgagee/index.cf At least 400 square feet. At least 400 square feet. Constructed after 06/15/76 with certification label as to compliance with Federal standards. Constructed after 06/15/76 with certification label as to compliance with Federal standards. Classified as real estate, but need not be taxed as real estate. Mortgage covers site and home. Classified as real estate, but need not be taxed as real estate. Mortgage covers site and home. 8/4/

62 Property Eligibility Manufactured Homes Built and remains on a permanent chassis. Built and remains on a permanent chassis. Must be affixed to a permanent foundation that has been certified by an engineer. Must be affixed to a permanent foundation that has been certified by an engineer. Elevation at or above 100 year flood plain. Elevation at or above 100 year flood plain. Must be on original site. Must be on original site. Manufactured homes in condominium projects are now eligible. Manufactured homes in condominium projects are now eligible. 8/4/

63 63 Property Eligibility Flipping Rule Seller must be legal owner of property. omap.asp?address= c Seller must be legal owner of property. omap.asp?address= c omap.asp?address= c omap.asp?address= c Seller must have owned property at least 91 days at the time the borrower signs the sales contract. rod/infomap.asp?address= e Seller must have owned property at least 91 days at the time the borrower signs the sales contract. rod/infomap.asp?address= e rod/infomap.asp?address= e rod/infomap.asp?address= e 8/4/2009

64 Property Eligibility Flipping Rule If seller owns days and new price is double previous price, 2 nd appraisal required. fomap.asp?address= f If seller owns days and new price is double previous price, 2 nd appraisal required. fomap.asp?address= f fomap.asp?address= f fomap.asp?address= f FHA reserves the right to impose additional requirements on properties owned between 91 days and 12 months, but has never exercised that right. FHA reserves the right to impose additional requirements on properties owned between 91 days and 12 months, but has never exercised that right. 8/4/

65 Property Eligibility Is the Flipping Rule violated? You be the judge. 65 8/4/2009

66 Property Eligibility Property Flipping Scenario #1 Seller acquired property on December 15, Seller acquired property on December 15, FHA borrower signs sale contract on March 5, FHA borrower signs sale contract on March 5, FHA case number issued March 18, FHA case number issued March 18, Loan closes April 30, Loan closes April 30, /4/2009

67 Property Eligibility Property Flipping Scenario #1 Seller owned property for 81 days when borrower signed sales contract. Seller owned property for 81 days when borrower signed sales contract. Seller owned property for 94 days when FHA case number was issued. Seller owned property for 94 days when FHA case number was issued. Seller owned property for 137 days when loan closed. Seller owned property for 137 days when loan closed. Was flipping rule broken? Was flipping rule broken? 67 8/4/2009

68 Property Eligibility Property Flipping Scenario #1 68 8/4/2009

69 Property Eligibility Property Flipping Scenario #1 Why is this property ineligible? Seller owned property for 81 days when borrower signed sales contract. Seller owned property for 81 days when borrower signed sales contract. Minimum period of ownership is 91 days. Minimum period of ownership is 91 days. 8/4/

70 Property Eligibility Let’s look at another Flipping scenario. 70 8/4/2009

71 Property Eligibility Flipping Rule Scenario # 2 Property acquired by seller for $100,000 on 11/1/08. Property acquired by seller for $100,000 on 11/1/08. Sales contract signed by FHA borrower on 3/15/09 with $198,000 price. Sales contract signed by FHA borrower on 3/15/09 with $198,000 price. FHA case number issued 03/18/09. FHA case number issued 03/18/09. Loan closed May 2, Loan closed May 2, /4/2009

72 Property Eligibility Flipping Rule Scenario # 2 Property was owned by seller for 136 days when borrower signed sales contract. Property was owned by seller for 136 days when borrower signed sales contract. Sales price is 98% higher than acquisition price. Sales price is 98% higher than acquisition price. Seller owned property for 139 days when case number was issued and 184 days when loan closed. Seller owned property for 139 days when case number was issued and 184 days when loan closed. Is a second appraisal required? Is a second appraisal required? 72 8/4/2009

73 Property Eligibility Flipping Rule Scenario # /4/2009

74 Property Eligibility Flipping Rule Scenario # 2 Why isn’t a second appraisal required? Seller owned property for 136 days (between 91 and 180) but Seller owned property for 136 days (between 91 and 180) but Price paid by FHA borrower was only 98% higher than price paid by seller. Price paid by FHA borrower was only 98% higher than price paid by seller. 8/4/

75 Property Eligibility Flipping Rule If second appraisal is required, mortgage amount must be based on lesser of two values. If second appraisal is required, mortgage amount must be based on lesser of two values. When appraisal data is logged into FHAC, lower value will automatically be selected to compare against mortgage amount. When appraisal data is logged into FHAC, lower value will automatically be selected to compare against mortgage amount. 8/4/

76 Property Eligibility Flipping Rule Exceptions for HUD, VA, USDA REO, Fannie Mae, Freddie Mac, nonprofits, estate sales, and corporate relocations. Exceptions for HUD, VA, USDA REO, Fannie Mae, Freddie Mac, nonprofits, estate sales, and corporate relocations. fomap.asp?address= h fomap.asp?address= h fomap.asp?address= h fomap.asp?address= h 76 8/4/2009

77 Property Eligibility Flipping Rule Waiver applicable until 5/10/10 also exempts sales by lenders of foreclosed properties, or sales by property disposition firms they hire. Waiver applicable until 5/10/10 also exempts sales by lenders of foreclosed properties, or sales by property disposition firms they hire. 4&_dad=portal&_schema=PORTAL 4&_dad=portal&_schema=PORTAL 4&_dad=portal&_schema=PORTAL 4&_dad=portal&_schema=PORTAL 8/4/

78 Property Eligibility Flipping Rule Does it matter how much the seller spent on repairs? Does it matter how much the seller spent on repairs? NO NO Does it matter how much profit the seller is earning? Does it matter how much profit the seller is earning? NO NO 8/4/

79 Appraisals What is the value of the property? 8/4/

80 Appraisals Who can perform an FHA Appraisal? ML Implements provision of HERA regarding certification of appraisers. ortgagee/2008ml.cfm ML Implements provision of HERA regarding certification of appraisers. ortgagee/2008ml.cfm ortgagee/2008ml.cfm ortgagee/2008ml.cfm Until 10/01/09, any licensed appraiser who was on FHA’s Appraiser Roster as of 09/30/08 can perform an FHA appraisal. Until 10/01/09, any licensed appraiser who was on FHA’s Appraiser Roster as of 09/30/08 can perform an FHA appraisal. 8/4/

81 Appraisals Who can perform an FHA Appraisal? After 09/30/09, only certified residential or certified general may be selected. After 09/30/09, only certified residential or certified general may be selected. Lender responsible for selecting only certified appraisers. Lender responsible for selecting only certified appraisers. 8/4/

82 82 Appraisals HUD Handbook CHG-1 s/hsgh/4150.2/index.cfm HUD Handbook CHG-1 s/hsgh/4150.2/index.cfm s/hsgh/4150.2/index.cfm s/hsgh/4150.2/index.cfm Determines the value of the property. Determines the value of the property. Determines the marketability of the property. Determines the marketability of the property. Identifies observable health and safety deficiencies. Identifies observable health and safety deficiencies. 8/4/2009

83 83 Appraisals Not a home inspection. Conducted primarily to determine value for mortgage insurance purposes. Not a home inspection. Conducted primarily to determine value for mortgage insurance purposes. Conducted for benefit of lender and FHA, not borrower. Conducted for benefit of lender and FHA, not borrower. Does not guarantee property condition. Does not guarantee property condition. fomap.asp?address= a fomap.asp?address= a fomap.asp?address= a fomap.asp?address= a 8/4/2009

84 Appraisals Lenders are required to provide form HUD CN, "For Your Protection: Get a Home Inspection" to borrowers at first contact, be it pre- qualification, pre-approval, or initial application. Lenders are required to provide form HUD CN, "For Your Protection: Get a Home Inspection" to borrowers at first contact, be it pre- qualification, pre-approval, or initial application. In any case, the lender must provide the form to the borrower no later than initial loan application. In any case, the lender must provide the form to the borrower no later than initial loan application. fomap.asp?address= C.2.g fomap.asp?address= C.2.g fomap.asp?address= C.2.g fomap.asp?address= C.2.g 8/4/

85 Appraisals 8/4/

86 86 Appraisals FHA appraisal reporting similar to conventional. FHA appraisal reporting similar to conventional. FHA appraisal forms same as conventional. FHA appraisal forms same as conventional. FHA uses Fannie Mae appraisal and repair standards. FHA uses Fannie Mae appraisal and repair standards. 8/4/2009

87 Appraisals One of the following forms must be used… 1004CManufactured homes. 1004CManufactured homes. 1073Individual condominium units 1073Individual condominium units unit properties unit properties. 1004All one unit other properties. 1004All one unit other properties. Plus… Form 1004MC, Market Conditions Addendum. fomap.asp?address= c Plus… Form 1004MC, Market Conditions Addendum. fomap.asp?address= c fomap.asp?address= c fomap.asp?address= c 8/4/

88 Appraisals The appraiser must note those repairs necessary to make the property comply with FHA's MPR, or MPS, together with the estimated cost to cure. The appraiser must note those repairs necessary to make the property comply with FHA's MPR, or MPS, together with the estimated cost to cure. The lender determines which repairs for existing properties must be made for the property to be eligible for FHA-insured financing. The lender determines which repairs for existing properties must be made for the property to be eligible for FHA-insured financing. fomap.asp?address= a fomap.asp?address= a fomap.asp?address= a fomap.asp?address= a 8/4/

89 Appraisals Examples of Conditions That Would Not Normally Require Repairs Worn floor finishes. Worn floor finishes. Worn carpets Worn carpets Holes in window screens. Holes in window screens. Small crack in a windowpane. Small crack in a windowpane. fomap.asp?address= b fomap.asp?address= b fomap.asp?address= b fomap.asp?address= b 8/4/

90 Appraisals Examples of Conditions That Would Normally Require Repairs Conditions that affect the health and safety of the occupants. Conditions that affect the health and safety of the occupants. Conditions that affect the security of the home. Conditions that affect the security of the home. Physical deficiencies or conditions affecting structural integrity. Physical deficiencies or conditions affecting structural integrity. fomap.asp?address= c fomap.asp?address= c fomap.asp?address= c fomap.asp?address= c 8/4/

91 Appraisals Lead-Based Paint If the property was built before 1978, defective paint surfaces must be treated. If the property was built before 1978, defective paint surfaces must be treated. Includes any out-buildings, fences and other surfaces. Includes any out-buildings, fences and other surfaces. fomap.asp?address= d fomap.asp?address= d fomap.asp?address= d fomap.asp?address= d 8/4/

92 Appraisals Examples of tests that are no longer mandatory. Wood-destroying insects/organisms. Wood-destroying insects/organisms. Well water. Well water. Septic systems. Septic systems. Flat or unobservable roof. Flat or unobservable roof. 8/4/

93 Appraisals Typical conditions that would require further inspection or testing by qualified individuals Infestation - evidence of termites. Infestation - evidence of termites. Inoperative or inadequate plumbing, heating, or electrical systems. Inoperative or inadequate plumbing, heating, or electrical systems. Structural failure in framing members. Structural failure in framing members. fomap.asp?address= d fomap.asp?address= d fomap.asp?address= d fomap.asp?address= d 8/4/

94 Appraisals Typical conditions that would require further inspection or testing by qualified individuals Leaking or worn-out roofs. Leaking or worn-out roofs. Cracked masonry or foundation damage. Cracked masonry or foundation damage. Drainage problems Drainage problems fomap.asp?address= d fomap.asp?address= d fomap.asp?address= d fomap.asp?address= d 8/4/

95 95 Appraisals Other Property Requirements Certain FHA requirements regarding well and septic distances and other requirements remain applicable. Certain FHA requirements regarding well and septic distances and other requirements remain applicable. See Valuation Protocol in Revised Appendix D issued with ML and Revised Appendices A and C issued in ML for further guidance. See Valuation Protocol in Revised Appendix D issued with ML and Revised Appendices A and C issued in ML for further guidance. 8/4/2009

96 Appraisals Underwriting the Appraisal Lenders are responsible for properly reviewing appraisals and determining if the appraised value is accurate. Lenders are responsible for properly reviewing appraisals and determining if the appraised value is accurate. Lenders are responsible equally with the appraisers, for the integrity, accuracy and thoroughness of the appraisals. Lenders are responsible equally with the appraisers, for the integrity, accuracy and thoroughness of the appraisals. fomap.asp?address= b fomap.asp?address= b fomap.asp?address= b fomap.asp?address= b 96 8/4/2009

97 Appraisals Underwriting the Appraisal Are subject property and comparable sales similar in structure type, neighborhood, and sales timeframes? Are subject property and comparable sales similar in structure type, neighborhood, and sales timeframes? Are adjustments reasonable? Are adjustments reasonable? 97 8/4/2009

98 Appraisals Underwriting the Appraisal Rules of thumb Individual adjustments should not exceed 10%. Individual adjustments should not exceed 10%. Net adjustments should not exceed 15%. Net adjustments should not exceed 15%. Sum of adjustments should not exceed 25%. Sum of adjustments should not exceed 25%. 98 8/4/2009

99 99 Appraisals In Declining Markets No official definition of declining market.. No official definition of declining market.. Refers to a neighborhood, market area, or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times. Refers to a neighborhood, market area, or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times. fomap.asp?address= a fomap.asp?address= a fomap.asp?address= a fomap.asp?address= a 8/4/2009

100 100 Appraisals In Declining Markets FHA has not established a list of areas that it considers to be declining. FHA has not established a list of areas that it considers to be declining. FHA has no special down payment, mortgage insurance, or underwriting requirements for properties in an areas with declining values. FHA has no special down payment, mortgage insurance, or underwriting requirements for properties in an areas with declining values. 8/4/2009

101 Appraisals In Declining Markets Determined by appraiser on a case-by-case basis; or Determined by appraiser on a case-by-case basis; or Determined by lender based on data services or feedback from LP or DU. Determined by lender based on data services or feedback from LP or DU. fomap.asp?address= fomap.asp?address= fomap.asp?address= fomap.asp?address= /4/

102 102 Appraisals In Declining Markets Appraiser Determination Recorded by appraiser in One-Unit Housing Trends portion of Neighborhood section on appraisal. Recorded by appraiser in One-Unit Housing Trends portion of Neighborhood section on appraisal. Must be identified by the conclusions of the Fannie Mae 1004MC, Market Conditions Addendum. The appraiser must provide a summary comment and support for all conclusions relating to the market trend. Must be identified by the conclusions of the Fannie Mae 1004MC, Market Conditions Addendum. The appraiser must provide a summary comment and support for all conclusions relating to the market trend. Fannie Mae 1004MC, Market Conditions Addendum Fannie Mae 1004MC, Market Conditions Addendum 8/4/2009

103 Appraisals In Declining Markets 103 8/4/2009

104 Appraisals In Declining Markets Appraiser Determination Appraisals of properties located in declining markets must include at least 2 comparable sales that closed within 90 days and 2 current listings. Appraisals of properties located in declining markets must include at least 2 comparable sales that closed within 90 days and 2 current listings. In cases where compliance with this requirement is difficult or not possible due to the lack of market data, a detailed explanation is required. In cases where compliance with this requirement is difficult or not possible due to the lack of market data, a detailed explanation is required. fomap.asp?address= c fomap.asp?address= c fomap.asp?address= c fomap.asp?address= c 8/4/

105 105 Appraisals In Declining Markets Lender Determination S&P/Case-Schiller Index e/sp/en/us/page.topic/indices_csmahp/0,0,0,0, 0,0,0,0,0,1,1,0,0,0,0,0.html S&P/Case-Schiller Index e/sp/en/us/page.topic/indices_csmahp/0,0,0,0, 0,0,0,0,0,1,1,0,0,0,0,0.html e/sp/en/us/page.topic/indices_csmahp/0,0,0,0, 0,0,0,0,0,1,1,0,0,0,0,0.html e/sp/en/us/page.topic/indices_csmahp/0,0,0,0, 0,0,0,0,0,1,1,0,0,0,0,0.html Federal Housing Finance Agency Federal Housing Finance Agency 8/4/2009

106 106 Appraisals In Declining Markets Lender Determination National Association of Realtors age National Association of Realtors age age age Feedback from Desktop Underwriter or Loan Prospector. Feedback from Desktop Underwriter or Loan Prospector. 8/4/2009

107 107 Appraisals In Declining Markets A second appraisal is required when The loan amount, excluding the UFMIP, exceeds $417,000; and The loan amount, excluding the UFMIP, exceeds $417,000; and LTV, excluding UFMIP, equals or exceeds 95% (or is a cash-out refinance per ML 09-08); and LTV, excluding UFMIP, equals or exceeds 95% (or is a cash-out refinance per ML 09-08); and T he property is determined by the appraiser or lender to be in a declining market. T he property is determined by the appraiser or lender to be in a declining market. omap.asp?address= b omap.asp?address= b omap.asp?address= b omap.asp?address= b 8/4/2009

108 108 Appraisals In Declining Markets Second Appraisals ML ers/mortgagee/2008ml.cfm ML ers/mortgagee/2008ml.cfm ers/mortgagee/2008ml.cfm ers/mortgagee/2008ml.cfm Do not order a new case number. Do not order a new case number. Second appraisal must be performed by an FHA roster appraiser. Second appraisal must be performed by an FHA roster appraiser. Must conform with HUD Minimum Property Requirements. Must conform with HUD Minimum Property Requirements. 8/4/2009

109 109 Appraisals In Declining Markets Second Appraisals If property is a one unit detached home, appraiser may perform exterior-only appraisal using Fannie Mae Form If property is a one unit detached home, appraiser may perform exterior-only appraisal using Fannie Mae Form For other properties, appraiser must perform full appraisal. For other properties, appraiser must perform full appraisal. Cost of second appraisal may be passed on to the borrower. Cost of second appraisal may be passed on to the borrower. 8/4/2009

110 110 Appraisals In Declining Markets Using the Second Appraisal Use the second appraisal to calculate the mortgage amount where the second appraised value is more than 5 per cent below the first appraised value. Use the second appraisal to calculate the mortgage amount where the second appraised value is more than 5 per cent below the first appraised value. If second appraisal is used, enter that appraisal data into FHA Connection. If second appraisal is used, enter that appraisal data into FHA Connection. 8/4/2009

111 Appraisals In Declining Markets Will you be ordering many second appraisals in Michigan? 8/4/

112 Appraisals In Declining Markets Probably not. Remember those mortgage limits? -Niles-Benton Harbor$298,750 -Kalamazoo$286,200 -Detroit-Warren-Troy$297,500 -Monroe$297,000 -Ann Arbor$345,000 Not many loans in Michigan will likely exceed $417,000. 8/4/


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