Presentation on theme: "Originating & Processing FHA Loans Characteristics of an FHA Borrower Breathing Low or no cash available High Loan-to-Value Below average credit."— Presentation transcript:
Originating & Processing FHA Loans
Characteristics of an FHA Borrower Breathing Low or no cash available High Loan-to-Value Below average credit score (credit challenged) No FICO score Previous Bankruptcy, Credit Counseling Non-resident alien Looking for a better fixed rate than Conventional
What is the Federal Housing Administration? The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders, on single family and multifamily homes including manufactured homes, duplexes and condos.
What is FHA Mortgage Insurance? FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans.
What is so special about FHA? FHA underwriting is the most “Common Sense” approach to underwriting on the market FHA Premiums are usually higher than other programs Yet, their rates are still lower than Conventional Lower monthly MI & Down Payment when compared beside a similar Conventional Loan
Highlights of FHA Financing Owner-Occupied Only One FHA loan per borrower (there are exceptions to this rule) 3.5% Down-payment Requirement Down-payment - gift or funds may be borrowed from family members Ratios 31/43 (including temporary buy-downs) Cash reserves are not required (unless a manual underwrite) Maximum allowed seller contribution is 6% Mortgages are assumable Non-occupant co-borrowers are acceptable Non-resident aliens are acceptable; valid social security card & a valid working visa
ORIGINATION FEE calculated on base loan amount DISCOUNT POINT calculated on total loan amount, which includes UFMIP Origination Fee / Discount Points
Must be subtracted dollar-for-dollar from sales price 1. Upgrade allowances or credits 2. Decorating allowance 3. Moving expense 4. Excess rent credit Sales Concessions
Seller Contributions / Financing Concessions Are NOT subtracted dollar-for-dollar. However, contributions are limited to 6% of sales price. 1.Buyer’s closing costs 2.Prepaid items 3.Discount Points 4.Interest Rate Buydowns 5.Other payment supplements a.Mortgage Interest (not allowed on ARMs) b.UFMIP 6. Condo or homeowner association fees Underwriting Note: Seller contributions / Financing Concessions must be clearly stated on sales contract.
Upfront Mortgage Insurance Premium – Currently 1.75% Required for all loans and property types Partially refunded if the loan is paid off within the first three years After three years the entire full premium is earned by HUD Can be financed into loan OR paid as a cash payment at closing UPFRONT MIP CALCULATION $140,000 Base Loan Amount x Premium Rate = $2450 Upfront Premium $ Total Loan Amount with MIP
Monthly Mortgage Insurance
Reasons Why Borrowers use FHA
FHA Maximum Mortgage Limits for High Cost Areas in Illinois There are very few counties left in IL that exceed the max mortgage amount for SFR The standard amount is $271,050 These Counties will allow higher due to cost of living: Cook Dekalb Dupage Grundy Kane Kendall Lake The loan amount allowed is $365,700 This is considered a High Balance FHA loan and additional adjustments on the rate are required due to the loan type. These do not show on our rate sheet and must be priced out with the lock desk.
Maximum Mortgage Limits https://entp.hud.gov/idapp/html/hicostlook.cfm Enter in the state and/or county to find out the max mortgage amount allowed
Underwriting Note: Borrower can only be charged for actual fees incurred and documented within transaction. The dollar amount and party responsible for payment must be indicated for all charges, including any costs paid outside of closing on the Good Faith Estimate and HUD-1.
Closing Costs cont. May charged and collected from mortgagors those customary and reasonable costs necessary to close. Except for discount points, these fees may also be used to meet the homebuyer’s minimum investment requirements. Mortgagors may not pay a tax service fee. Seller’s maximum contribution to the homebuyer’s actual closing, prepaid expenses, discount points, and other financing concessions remains at 6 percent of the sales price. Only the actual cost for services may be charged to the mortgagor. All fees and charges must comply with Federal and State disclosure laws and other applicable laws and regulation.
FHA FHA Underwriting & Processing
Automated Underwriting FHA loans can be underwritten by either Desktop Underwriter or Loan Prospector. Approved/Eligible or Accept findings Refer findings may be eligible for a manual underwrite Manual underwrite requires a fully processed loan Bankruptcy papers must be provided at original submission NO Exceptions to the need for BK papers. The UW will need to verify that a property was not included in the BK and a foreclosure still pending that has not hit the credit report or fraud report Ratios cannot exceed 31/43 on existing and new construction Please RESPECT your FHA underwriter! Please RESPECT your FHA underwriter! Note: Your underwriter is allowed to request additional items as needed to document the file regardless of what the findings state. The UW is responsible to document the file regardless of the findings.
Income Requirements Borrower must be at current position for a min of 6 months. the lender must verify the borrower's employment for the most recent two full years. Multiple jobs, change in careers, and large gaps may disqualify the borrower. Overtime and Bonus Income Both overtime and bonus income may be used to qualify if the borrower has received such income for the past two years and it is likely to continue. Retirement and Social Security Income (Gross up by 25% only if needed) Retirement and social security income require verification from the source (former employer, Social Security Administration) or federal tax returns. If any benefits expire within the first full three years, the income source may be considered only as a compensating factor. Commission Income Commission income must be averaged over the previous two years. The borrower must provide copies of signed tax returns for the last two years, along with the most recent pay stub. (Unreimbursed business expenses must be subtracted from gross income.)
Alimony, Child Support or Maintenance Income Income in this category may be considered as effective if such payments are likely to be consistently received for the first three years of the mortgage. The borrower must provide a copy of the final divorce decree, legal separation agreement, or voluntary payment agreement, as well as evidence that payments have been received during the last twelve months. Periods less than twelve months are not acceptable, as the payer’s ability and willingness to make timely payments has not been adequately demonstrated. Part-time Income Part-time/second job income, seasonal employment (i.e. umpiring, baseball games in summer, working at a department store during the holiday shopping season), may be used in qualifying if the lender documents that the borrower has worked the part-time job uninterrupted for the past two years and will continue to do so. For qualification purposes, part-time income refers to jobs taken to supplement the borrower’s income from regular employment (i.e. a second job – not meaning primary jobs of less than 40 hours per week.)
Other Income Situations If a borrower states they work 40 hours a week and the paystubs show less, the income will be averaged. Self employed borrowers must be self employed for 2 years and an average of the income from tax returns will be used. To calculate accurately, a cash flow analysis form will be used. The AGI Method or Sam Method is acceptable. All W-2’s for the past 2 years for a borrower must reflect on the In addition, a verbal (at a min) or a written (best choice) VOE should be provided to clarify job history, continuance in same line of work and is REQUIRED if using any bonus, Overtime or other income outside of the normal wages. SSI can only be grossed up IF income is shown as NOT taxed on tax returns. Percentage to gross up will range from 115% - 125% based on income. Please reference tax charts
Income Documentation Income alternative documentation is as follows: Verbal verification of employment, most recent 30-day paystub and a copy of the last previous two years of W-2’s. NOTE: A 4506 (Request for copy of tax form) is required on all loan submissions 4506T transcripts will be used to check for Unreimbursed expenses, additional income not disclosed, rental properties, etc. It is highly recommended that the LO request a copy of the tax returns at their initial appointment to eliminate surprises!
Important Facts to Remember when Calculating Ratios Installment Debt If installment debt has ten months of payments or less by closing do not include the payment in borrower’s debt ratio. Installment debt exclusion is at the discretion of the underwriter and may not necessarily be excluded. Profit Sharing Loans FHA does not consider profit sharing loans or 401K loans when calculating borrower’s debt ratio. Co-signed Obligations Not considered as long as documentation shows the borrower/co-signer has not made payments on the loan over the past twelve months, along with evidence that the other party is making payments. Projected Obligations If a debt payment, such as a student loan, is scheduled to begin within twelve months of the mortgage loan closing, it must be included into the monthly obligations in underwriting the loan.
Credit Credit review depends on the type of underwriting performed. FICO scores – FSB requires 620 minimum The most recent 12-months and the past 24-months are considered to determine credit worthiness of the borrower
Credit History Past Credit Performance Serves as the most useful guide to determine how the borrower will govern future credit obligations Late or Slow Payments The general pattern of credit behavior must be examined rather than isolated occurrences of unsatisfactory or slow payments. Underwriting emphasizes on the borrower’s most recent 12-month payment history Credit History Not Established Those borrowers who choose not to use credit, neither the lack of credit nor the lifestyle of the borrower may be used for loan rejection. However, three or four references must be provided such as rent verification, utility payments, cell phone, pager etc.
Credit History Cont. Bankruptcy Chapter 7: The borrower must have completed two years since the bankruptcy was discharged and reestablish excellent credit history. Less than two years may be acceptable if the borrower can show it was caused by extenuating circumstances beyond their control, such as death of a principal wage earner, loss of employment due to closing of employer or serious long- term illness. Divorce is NOT an extenuating circumstance. Chapter 13: The borrower must have completed 1 year repayment, paid on time and must have court approval of the proposed new mortgage transaction. Foreclosure A borrower whose previous residence was foreclosed on or who has given a deed-in-lieu of foreclosure within the past three years is not eligible for a loan. However, if the foreclosure was the result of extenuating circumstances as describes previously, an exception may be made. Credit Counseling A borrower who is participating in a Credit Counseling program will be treated in the same manner as a Chapter 13 Bankruptcy. A 12-month history from the Credit Counseling Agency will be required.
Non Occupant Co-Borrowers (aka Co-signors) Allowed but must be family member(s) Borrower is not required to be employed as ratios are calculated off all income and liabilities One unit properties only Non Occupying co borrowers can be applicable for 2 – 4 unit properties but a min 25% down payment is required Both occupying and non occupying borrowers: 1) take title to the property at settlement 2) are obligated on the mortgage note and 3) must sign all security instruments
Transactions that Affect Maximum Mortgage Identity-of-Interest; defined as a sales transaction between parties with family relationships or business relationships Restricted to 85% LTV ratio, unless family member purchasing another family members home as a principal residence; or Family member has been a tenant in the subject property for at least six months immediately predating the sales contract. Three-to-Four Unit Properties Property must be self sufficient (i.e., net rental income covers PITI, calculation: All units x 75% = Net Rental.) Rent may only be considered as gross income, it may not be used to offset the monthly mortgage payment. Borrower must have reserves to equal three months of PITI after closing.
Max Mortgage Worksheets Max mortgage worksheets are available for all refinance situations The worksheets assist in calculating the correct loan amount that will be allowed Not required for underwriting, as the UW will complete their own, but helpful for getting the loan amount right for your borrower. Refinance Worksheet – Cash out Refinance Worksheet – Rate – Term Refinance worksheet – streamline without appraisal Refinance worksheet – streamline with appraisal
Secondary Financing The FHA insured first mortgage when combined with any second mortgage, may not result in cash back to the borrower. The sum of all liens cannot exceed 100% of the cost to acquire the property (Purchase transactions only)*See Product. The FHA insured first mortgage cannot exceed the maximum mortgage limit set by the area. Refinances: Subordinate liens whenever they are taken may remain outstanding provided the FHA first lien mortgage meets eligibility criteria (LTV may exceed the max mortgage allowed for the refinance transaction type).
Compensating Factors Qualifying ratios may exceed 31/43 if any of the following compensating factors exist: (with new QM rules, the compensating factors must show to get the AUS approval for higher DTI) Large downpayment is made, at least 10% Borrower has demonstrated conservative attitude toward use of credit Ability to accumulate savings Previous credit history shows borrower has ability to devote a great portion of income to housing expense Borrower receives compensating or income not reflected in the effective income A small increase in borrower’s housing expense, 10% or less Borrower has substantial cash reserves after closing, at least three-months PITI Borrower has substantial non-taxable income Borrower has potential for increased earnings New construction, energy efficient home
FHA Property and Appraisal Appraisal Issues
Underwriting guidelines include property considerations for both existing and new construction properties FHA has specific minimum property standards. l “As-is” property may NOT qualify l Property standards require for the property to be SAFE and SOUND Condominiums require FHA approval which include review of plans and specs., etc… l FL condos are not allowed l Condo approval packet available for the Homeowner Association to complete l FSB will assist with the submission of the packet, but will not gather all the needed documents. For existing properties FHA appraiser must operate ALL l Plumbing fixtures l Furnace l Air Conditioning, if applicable Loan submission on new construction must include: l Builder’s Certificate (92541) – only if NO 10-year Warranty l Occupancy Certificate l Subterranean Termite Report l Building Permit l Builder’s Warranty of Completion (92544)
Repair Requirements As of January 1, 2006, FHA no longer requires repairs for these types of minor cosmetic deficiencies to bring a property into compliance with FHA Minimum Property Requirements… Missing handrails Cracked or damaged exit doors that are otherwise operable Cracked window glass Defective paint surfaces in homes constructed post 1978 Minor plumbing leaks (such as leaky faucets) Defective floor finish or covering (worn through the finish, badly soiled carpeting) Evidence of previous (non-active) Wood Destroying Insect/Organism damage where there is no evidenceof unrepaired structural damage Rotten or worn out counter tops Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post Poor workmanship Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting) Crawl space with debris and trash Lack of an all weather driveway surface
Inspection Requirements FHA no longer mandates automatic inspections for the following items and/or conditions in existing properties… Wood Destroying Insects/Organisms Well Septic Flat and/or unobservable roof However, if the appraisal shows or specifically requests a need for further inspection of these items, we will require them as a condition. Examples of conditions that will continue to require automatic inspections include, but are not limited to… Standing water against the foundation and/or excessively damp basements Hazardous material on the site or within the improvements Faulty or defective mechanical systems (electrical, plumbing or heating) Evidence of possible structural failure (e.g. settlement or bulging foundation walls)
Mortgagee Letters Are issued by HUD to address changes in FHA policy or updated policy. To view any Mortgagee letters visit:
What is a Streamline Refinance? STREAMLINE REFINANCES STREAMLINE REFINANCES are designed to lower the monthly principal and interest payments on a current FHA-insured mortgage and must involve no cash back to the borrower except for minor adjustments at closing not to exceed $250. The mortgage to be refinanced must already be FHA insured The mortgage to be refinanced should be current (not delinquent) No cash may be taken out on mortgages refinanced using the streamline refinance process UNDERWRITTEN MANUALLY Underwriting Note: Streamline Refinances are UNDERWRITTEN MANUALLY
Streamlines made easy… Documentation to include in your file submission: VOM or mortgage only credit report with a verified 12-month history Current mortgage statement showing interest rate and payment amount Evidence of social security number Payoff showing only 30 days of interest New Case Number with MIP Refinance Authorization (order through FSB) All Sections of 1003 completed with the exception of IV, V, VI and a-k of VIII Important Notice to Homebuyer (92900B) FHA Transmittal (92900) All other State, Federal and FHA specific loan disclosures If the new loan amount exceeds the ORIGINAL LOAN balance on the existing mortgage: A current FHA appraisal is required usually Underwriting Note: Interest will be charged through the end of the month in which the refinance closing occurs regardless of actual closing date.
Net Tangible Benefit. There must be a net tangible benefit to the borrower for the streamline refi to be approved. A net tangible benefit is defined as: 1)A 5% reduction to the principal and interest (P&I) of the mortgage payment plus the annual mortgage insurance premium (MIP) or 2)Refinancing from an ARM to a FRM SUBORDINATE FINANCING: SUBORDINATE FINANCING: It may remain in place without regard to the total indebtedness against the property. The borrower is not required to satisfy any outstanding subordinate liens as long as they clearly will be subordinated to the new FHA-insured refinance mortgage. Streamline Refinance of an FHA Mortgage
Calculating an FHA FHA Loan
Calculating an FHA Loan Minimum down-payment = 3.5% X Sales Price Borrower must be able to document down payment funds either through funds in bank or gift. Sales Price x 3.5% = min down payment to be verified If 1003 states cash needed to close above the 3.5%, then enough funds must be verified to meet this number AUS will generate an Approve/Refer for not enough funds showing on 1003 Variety of ways to obtain down payment
True or False? 1. With the exception of the 15 Year Fixed, FHA requires mortgage insurance for life of the loan. TRUE 2. The monthly MIP will automatically drop off when the loan to value falls below 80%. FALSE 3. Part of the UFMIP is refunded if the loan were to be paid off within the first 3 years if refinanced with a new FHA loan. TRUE 4. FHA does recognize and allows various down payment assistance programs. TRUE 5. Wedding gifts of money are allowed to be used as a down payment? TRUE 6. A borrower who does not qualify on his/her own can obtain any non-occupying co-borrower to qualify. FALSE
True or False? 7. FICO scores are determining factor when qualifying a borrower under an FHA program. FALSE 8. On an FHA transaction, the entire down payment can be gifted. TRUE 9. FHA qualifying guidelines require a minimum of two months cash reserves after closing. FALSE 10. A non-resident alien can qualify for an FHA loan with only a valid social security card and valid working visa. TRUE 11. FHA offers a 15 and 30-Year fixed and 1/1 Adjustable Rate ARM only. FALSE 12. The Seller can contribute up to 6% in financing contributions. TRUE 13. The maximum FHA loan amount is the same form county to county. FALSE
True or False? 14. The Lender is not restricted as to what fees or closing costs can be charged to the borrower that are customary and reasonable. TRUE 15. Basic FHA qualifying ratios are 31/43.TRUE 16. FHA does not consider profit sharing or 401K loans in the monthly payment when calculating the borrower’s debt ratios. TRUE 17. Relative to a borrower’s credit history, FHA concentrates on the past 12 months and considers the past 24 months. TRUE 18. Chapter 7 Bankruptcy will not disqualify the borrower if at least two years have passed since the bankruptcy was discharged and the borrower has reestablished credit. TRUE 19. The FHA appraiser is required to operate all plumbing fixtures, furnace and air conditioning. TRUE
True or False? 20. The FHA appraiser must complete a disclosure referred to as the “VC” sheet which indicates any and all repairs required to the property to meet FHA property standards. FALSE 21. FHA project approval is required for all condominium properties regardless of age of the property. TRUE 22. An appraisal is required on all Streamline Refinance transactions. FALSE 1. The Loan Origination fee is a percentage of: Base Loan Total Loan Questions… 2. The discount points are a percentage of: Base Loan Total Loan
3. The minimum cash investment required by the borrower is what percent of the sales price? Questions… 4. An FHA loan program is regulated by what government agency? Fannie Mae Freddie Mac Ginnie Mae Housing and Urban Development 3.5% 5. Who is a good candidate for an FHA loan? First time homebuyer, low-income family, little or no down payment borrower, or a less than acceptable conventional credit quality borrower. 6. What two FHA disclosures are required to be signed at the time of purchase contract? “For Your Protection: Get a Home Inspection” and “ Purchase Addendum to the Sales Contract”
Manufactured Homes DO WE NEED TO DISCUSS? (Slides 60-62)
Manufactured Homes General Eligibility for Existing Properties Property built before 1976 is not eligible Singlewide homes are not eligible Floor area no less than 600 square feet for a double wide. Must be constructed in conformance with the Federal Manufactured Home Construction and Safety Standards, evidenced by an affixed certification label. If produced after June 15,1991 (HUD Guidelines is 1976) home will bear the seal. Homes without a seal will not be eligible. Dwelling must be classified and taxed as real estate. MUST NOT have been installed or occupied previously at any other side or location.
Manufactured Homes General Eligibility for Proposed Construction Properties Must have a site-built permanent foundation. Must be permanently attached to foundation by anchoring devices. Must have permanent utilities, installed and protected from freezing. Towing hitch or running gear MUST be removed (tongues, axels, brakes, wheels, and lights.) The chassis must stay in place. Must be a properly enclosed crawl space with a continuous permanent foundation-type construction. MUST NOT have been installed or occupied previously at any other site or location. Must be a Builder’s Certification, Form HUD for all site work, including the permanent foundation.
Manufactured Homes ALL MANUFACTURED HOMES MUST BE HUD APPROVED Prior to the manufactured unit being delivered to the site and/or placed on the foundation, a Manufacturer’s Certificate must be provided to the lender showing the following information: FHA Case Number and address on property; The label (metal plate) number of the unit as shown on the Federal Manufactured Home construction and Safety Standard Data Plate on the exterior of each home. To qualify for the maximum loan-to-value, the dwelling must: Have a structural engineers report verifying the foundation and any additions to the structure do not affect the structure. Room additions, garage, etc. Have an effective age that matches the mortgage term If the dwelling is < 1 year old, refer to NEW construction guidelines. Structural engineers report Builders certificate Agreement to execute builder’s warranty of completion of construction Floor plans Description of materials To qualify for the maximum loan-to-value, the dwelling must NOT have been installed or occupied at any other side or location.
This training has been a overview of the FHA program There are many other niches that can be used Kiddie Condo DPA/Grants 203K & 203Ks (watch for this Spring 2015) 203h – Disaster Victim Loan 1X Close CTP (Construction to perm)(watch for Spring 2015?) If you have a scenario and are just not sure how it will fit, We will help you structure the loan and know what to ask for from your
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