FHA Program Guide
October, 2011
Meet Our DE Underwriters
Jeannette
DeMartini
Sherry
Barnes
Diane
Shugrue
Lori
Mathews
Susie
Berry
Joy
Bean
Erin
Murphy
Tammie
Bohannan
Maria
Ignacio
Marianne
Seltenrich
Helen
Smith
Clare
Lavino
Julie
Riccio
Be a G-Man! Talk the talk…
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HUD/FHA
Direct Endorsement (DE)
CAIVRs
LDP
GSA
MIP (Upfront & Annual)
Base Loan Amount
Total Loan Amount
URLA vs. 1003
92900 A (Addendum to the URLA)
92900 LT vs. 1008
Case #
FHAC (FHA Connection)
HOC (Home Ownership Center)
DELRAP/HRAP Condo Approvals
HECM (Forward vs. Reverse)
Mortgagee Letter
4
History of FHA

FHA was formed in 1934, to bring back the
housing market after post 1929 stock market
crash, by assisting homebuyers with low down
payment

The Federal Housing Administration is a
Federal Agency within the Department of
Housing and Urban Development (HUD)

FHA does not provide the funds to borrowers
for home loans

FHA provides mortgage insurance on loans
made by FHA-Approved lenders throughout
the US, as protection against default by
borrowers
Doesn’t FHA make me
jump through hoops?
FHA– Swiss Army Knife of Qualifying
•
FHA will be fulfilling their “mission” to stabilize
housing for many years to come
•
Permanently approved to $625,500 for high cost
•
Down Payment 3.5%
•
Up to 85% cash out refinance
•
All funds may come from a gift
•
Seller can pay up to 6% toward all closing costs
•
Non-Occupant Co-Borrowers are allowed with
true blended ratios
•
No Cash Reserves (1 and 2 unit properties)
•
Credit Leniency – BK 2 years, Foreclosures 3
years, Short Sales 3 years (sometimes less)
•
Streamline Refis & Fully Assumable
•
Finance Up Front MIP in Loan Amount
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7
FHA Products
Purchase or Refi of 1-4 unit primary residence - FHA 203b
•
Fixed Products - 15 and 30 Years, Regular and High
Balance
•
Arm Products - 1 Year Arm, 3/1 and 5/1 ARMs,
1/1/5 caps, 2.25% Margin
•
Temporary Buydown (built in pricing on rate sheet)
•
Funds may come from lender, seller, borrower or other party
•
Funds from seller must be included in max seller contribution
of 6%
•
May not be more than 2% below Note Rate
•
Qualifying rate is the Note Rate
Well Designed Arms
“No Payment Shock”
8
Case Numbers – requested on-line at
our website www.pcmloan.com

As a sponsored broker you will not have access to the FHAC (FHA
Connection)

Upon submitting your online request for Case #
•

PCM will email you the new case number and Refinance
Authorization (if applicable)
All FHA loans must have a case # assignment to be insured
•
Case numbers are ordered in FHA Connection by PCM
•
Case numbers are assigned to the subject property
•
Case number must be reflected on all HUD documents
•
Case number printout is required with loan submission
•
Streamline Refinances need previously assigned case number
•
Case #s automatically cancelled by HUD after 6 months of inactivity (can be reinstated
under certain circumstances) New ML 11-10
•
You must have active loan application & property to request Case # New (ML-11-10)
9
CAIVRs through FHA Connection-PCM will
do this piece of processing

CAIVRs Credit Alert Interactive Voice Response System
checks for delinquent federal debt, should be on Case
Number Printout
•
PCM will access CAIVRS through the FHAC
•
This is informational only to you as a sponsored broker
•
Must be ordered on all borrowers
•
Any delinquency must be cleared, or not eligible for FHA
loan
•
Should a delinquency or issued be uncovered by PCM
you will be promptly notified
CAIVRs: Not a
Spelunking Term!
10
LDP & GSA Databases

All parties to the transaction must be cleared in both
databases (Government lists of bad players)

LDP (Limited Denial of Participation
•

GSA (Excluded Parties List Service)
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
Database can be accessed at
http://portal.hud.gov/portal/page/portal/HUD/topics/limited_den
ials_of_participation
Database can be accessed at https://www.epls.gov/
Use PCM Job Aid and Participants List
11
Maximum LTV’s
Effective 10/1/2011
Purchase
No Cash Out/Streamline Refi
Cash Out Refinance
96.50%
97.75%
85%
FHA Mortgage Limits
Region
1 Unit
2 Units
3 Units
4 Units
Low Cost Areas
$271,050
$347,000
$419,425
$521,250
High Cost Areas
$625,500
$800,775
$967,950
$1,202,925
Alaska & Hawaii
$938,250
$1,201,162
$1,451,925
$1,804,387
A complete schedule of FHA mortgage limits for all areas is available at:
https://entp.hud.gov/idapp/html/hicostlook.cfm
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Maximum Loan Amount

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
High Balance Loan Amounts PCM High Balance pricing applies when base
loan amount is over $417,000
Maximum Mortgage Calculation - Purchase
•
96.5% of the lesser of sales price or appraised value
•
Does not include Up Front MIP (UFMIP)
•
Borrower must have minimum of 3.5% down payment (Can be gift)
•
Closing costs may not be used in minimum 3.5% calculation
•
Seller Concessions maximum 6%
Maximum Mortgage Calculation – Refinance
•
No Cash Out and Streamline Refinances 97.75% of appraised value
•
Cash out Refinances - 85% of appraised value
FHA loan limits are set by HUD, and vary from county to county. Current loan
amount limits can be found online at
https://entp.hud.gov/idapp/html/hicostlook.cfm
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FHA Mortgage Insurance Premium (MIP)

Up Front MIP (UFMIP) the FHA mortgage insurance premium is paid at closing in the form of cash, or
financed in the loan amount.

UFMIP must be 100% financed or 100% paid in cash, no partial financing

Annual MIP is collected in monthly payments and calculated in ratios
Upfront and Annual MIP-For Case numbers as of 4-18-2011
Purchase and Full-Credit Qualifying Refinance
Greater than 15 year terms
15 year or less terms
LTV
UFMIP
Annual
LTV
UFMIP
Annual
> 95%
1.00%
1.15%
> 90%
1.00%
0.50%
<= 95%
1.00%
1.10%
< 90%
1.00%
0.25%
<=78%
1.00%
none
Streamline Refinance
UFMIP = 1.00%; Annual MIP follows the above grids.
LTV is based on the existing mortgage or a new LTV based on a new FHA appraisal
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Upfront MIP
in Box #3
on 2010 GFE
Upfront MIP
$6,750
$6,750
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FHA Mortgage Insurance Premium (MIP)

Upfront Premiums are refunded ONLY to borrowers refinancing to
another FHA insured mortgage within a 3 year time period. The refund
will be calculated in FHA connection when case number is ordered.

The annual MIP will be automatically cancelled with the following
conditions:
• Loan terms over 15 years the MIP will be cancelled when the LTV ratio
reaches 78%, as long as the Borrower has paid MIP for at least 5 years
• Loan terms 15 years and less and with LTV ratios 78% and greater, the
annual MIP will be cancelled when the LTV ratio reaches 78%,
irrespective of the length of time the Borrower has paid the MIP
• Loan terms 15 years and less and with LTV ratios of 78% or less will
not be charged an annual MIP
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FHA Purchases

The Borrower may not receive any cash back through a
purchase, other than an amount representing:
• A reimbursement for the Borrower’s overpayment of fees
• Costs paid by the Borrower in advance; earnest money deposit,
appraisal or credit report fees; or
• A legitimate real estate tax credit in locales where real estate taxes
are paid in arrears
• If the Borrower receives an allowable amount of cash back, the
minimum Borrower contribution must be met and verified

See Loan Amount Calculation Worksheet
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FHA Purchase Loan Calculation
Base Loan Amount
A $
X
96.5%
Lesser of Sales Price or
Appraised Value
=
Max LTV
Base Loan Amount
Minimum Down Payment
B $
- $
Sales Price
= $
Max Base Loan Amount
Min Down Payment
Up Front MIP
C $
X
1.00%
= $
Base Loan Amount
Up Front MIP
Total Loan Amount
D $
+ $
Base Loan Amount
= $
Up Front MIP
Total Loan Amount
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No Cash Out Refinance – Regular Refinance

Current mortgage must be a NON-FHA fixed rate or ARM

Single Family, Owner Occupied Primary Residence

Maximum mortgage is the LOWER of 97.75% of appraised value or Existing Debt
Calculation
•
Existing Debt includes payoff of existing 1st, PM 2nd, jr. lien over 12 months, closing
costs, prepaid expenses, borrower paid repairs, and discount pts
•
If any portion of funds of equity line in excess of $1000 in last 12 months, for purposes
other than repairs and rehab. of property the line of credit may not be included.

Property owned less than 12 months, must use lesser of original purchase price +
expenditures for repairs, or current appraised value

Proceeds to buy out ex-spouse are okay

Borrower may not receive more than $500 at closing

Non-Occupant Co-Borrower may be added

2nd Liens may subordinate, up to 97.75% (case numbers as of 9/7/2010)
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Terms of subordinate lien must not have a balloon,
No prepayment penalty (with 30 days notice)
Payments are calculated in qualifying
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No Cash Out Refinance Worksheet
LTV Factor Method
A $
X
97.75%
=
Appraised Value
Max Mortgage #1
Existing Debt Method
B $
+ $
Payoff 1st , PM 2nd or
seasoned Jr. Lien
=
$
Closing Costs -nonrecurring, prepaids and
discount points
Max Mortgage #2
Up Front MIP
C $
X
1.00%
=
$
Lower of Max #1 and Max #2
Up Front MIP
Total Loan Amount
D $
Lower of Max #1 and Max #2
+ $
=
Up Front MIP
And EEM upgrades if any
$
Total Loan Amount
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Cash Out Refinance

FHA will insure a cash out refinance, up to 85% of
appraised value with the following requirements:
• Properties owned 12 months or more, use current appraised value
• Properties owned less than 12 months use lesser of purchase price
or appraised value
• All Borrowers must hold title to property for at least six months
and minimum 6 payments must be made on existing loan
• Borrowers whose loans are delinquent or in arrears are not eligible
• Non-Occupant Borrowers may be not be added to qualify.
• Existing or new subordinate financing to a maximum CLTV of 85%
• Modified subordinate financing is acceptable to a maximum CLTV of
85%
• 1 -4 units, 3-4 unit properties must pass self-sufficiency test
• Properties owned Free and clear may be financed as cash-out
transactions
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Cash Out Refinance Worksheet
Max LTV Calculation
A $
X
85%
=
Appraised Value
Base Loan Amount
Up Front MIP
C $
1.00%
X
= $
Base Loan Amount
Up Front MIP
Total Loan Amount
D $
+ $
Base Loan Amount
= $
Up Front MIP
Total Loan Amount
22
FHA Streamline Refinance

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Current loan must be an FHA insured mortgage
Mortgage must be current, not delinquent
Must result in lowering monthly Principal and Interest
Payments-Must meet Net Tangible Benefit test
Order new case number on PCM website, select Streamline
Refinance
MIP refund will be disclosed on Refinance Authorization
LDP/GSA is required
Manual Underwrite, do not run through AUS
Credit report is now required - minimum credit score is 640
Max cash back $500
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FHA Streamline Refinance (cont.)

Verification of Mortgage is required, no lates in past 12 months

Seasoning: 6 payments must have been made AND 6 mos. must have passed
since 1st payment was due AND 210 days from closing of first

Credit Report (tri-merge or mortgage only) used to validate credit score and
mortgage history

Employment and Income must be stated on 1003 and 92900LT-some types of
income require documentation-see PCM guidelines

Funds to close (if needed) must be verified

Subordinate financing may remain in place to a maximum CLTV of 125%

Investment properties may be streamlined without Appraisal

Deleting individuals from title/original loan must credit qualify

Premium Pricing okay to cover closing costs

Tax impounds, use amount from prelim unless proof of new taxes
county

Condo Project Approval-not required
from
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Net Tangible Benefit (Streamline Refis) Part I:
Net Tangible Benefit-Streamline Refis: Part II
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FHA Streamline Refi Maximum Mortgage
Calculation WITHOUT Appraisal
$_____________ Unpaid principal balance* of existing FHA loan
- _____________Lesser of Refund credit of UFMIP or 1% of principal balance
=______________Base Loan Amount before UFMIP
+ _____________ New UFMIP
= _____________ New Loan Amount including UFMIP
*May include interest charged when payoff is not received on the first day of the
month up to 60 days
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FHA Streamline Refinance without Appraisal-from
our worksheet
Maximum Insurable Mortgage Amount
Outstanding Principal Balance (The outstanding principal balance may include interest
charged by the servicing lender when the payoff is not received on the first day of the month
but may not include delinquent interest, late charges or escrow shortages)
UFMIP Refund*
MINUS-
PLUS+
$0.00
$0.00
1% of Outstanding Principal Balance
New UFMIP (the lesser of 1% of the Outstanding Principal Balance or UFMIP
Refund)
$0.00
Base loan amount before UFMIP (subtotal of Outstanding Principal Balance and UFMIP
refund)
$0.00
New UFMIP
$0.00
Maximum Insurable Mortgage cannot exceed this amount. (Note: Cannot
exceed the regulatory county limit where property is located)
*Any additional UFMIP refund due the borrower to be refunded directly to borrower by
HUD post closing
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Streamline Refinance with Appraisal
The maximum insurable mortgage is the lower of:
Outstanding principal balance* minus the lesser of refund of UFMIP
or 1% of principal balance, plus closing costs, prepaid items to
establish the escrow account and the new UFMIP
OR
97.75% of the appraised value of the property plus the new
UFMIP
*May include interest charged when payoff is not received on the first day
of the month up to 60 days
FHA Streamline Refi Maximum Mortgage Calculation
WITH Appraisal-from our worksheet
Please note: Any additional UFMIP refund due the borrower will be refunded
directly to borrower by HUD post closing
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Eligible Borrowers

U.S. Citizen

Permanent Resident Aliens

Non-Permanent Resident Aliens

All Borrowers must have a valid
Social Security Number

Title must be held in individual names
only
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Occupancy

Owner Occupied Principle Residence

Investment Properties are available on Streamline refis
without an appraisal only
FHA limits borrowers to one FHA loan at a time. The
following are potential exceptions:

• Borrower relocated a reasonable distance away from prior home
• Family size increased/decrease
• Vacating jointly-owned property (Divorce)
• Non-occupant Co-Borrower
32
Transactions Affecting Maximum Mortgage

Identity of Interest– Family or business relationships Limited to 85% LTV with the following exceptions:
•
Family member purchases another family member’s home as
primary residence
Note: If property is seller’s investment property, max mortgage is lesser of either
85% of appraised value or the appropriate LTV ratio percentage applied to sales
price, plus or minus required adjustments. The 85% limit may be waived if family
member has been tenant in subject property for at least 6 months
•
•
•
An employee of builder purchasing builder’s new home as
primary
A tenant purchases rented property, evidencing at least 6 months
as tenant immediately predating the sales contract
A corporation transfers an employee, purchases that employee’s
home, then sells home to another employee
33
Transactions Affecting Maximum Mortgage

Non-Occupant Co-Borrowers
• Permitted for purchases, no cash out refinances - all LTVs
• Not allowed on Cash Out Transactions
• 2-4 units max LTV is 75%
• Must be immediate family member (others, case by case) or max
LTV is 75%
• Housing and obligations are included in the DTI ratios. Credit,
income and assets must be verified
• Must sign Note and Security Instrument and all other closing
documents
34
Transactions Affecting Maximum Mortgage

3 and 4 unit properties The maximum mortgage is limited so that
the ratio of the monthly mortgage payment divided by the monthly net
rental income does not exceed 100%
•
Monthly payment is principal, interest, taxes, insurance, mortgage
insurance and any HOA dues.
•
Net rental income is appraiser’s estimate of fair market rent from
ALL units, incl. borrower’s own unit, less the appraiser’s estimate
for vacancies, or 15%*, whichever is greater (Santa Ana HOC)
•
The above calculations are only to determine max loan amount,
borrower must still qualify as usual, and projected rent may only
be used as gross income and not to offset mortgage payment
•
Borrower must have 3 months PITI reserves, cannot be a gift
35
Transactions Affecting Maximum Mortgage

Properties under Construction or Existing less
than one Year Limited to 90% LTV, with the
following exceptions:
•
Construction completed more than one year
preceding borrower’s signature on HUD92900-A
•
The dwelling’s site plans and materials were
approved by VA, an eligible DE Underwriter, or an
FHA certified builder prior to construction
New Construction?
Call us…
Local jurisdiction issued BOTH a building permit
AND a Certificate of Occupancy or equivalent
•
•
The dwelling is covered by a builder’s ten-year
warranty plan acceptable to HUD
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Condo Project Approvals:

HRAP (HUD Review Approval Process)
•
Submit direct to HUD for Project Approval
• http://www.hud.gov/offices/hsg/sfh/condo/
•
Use a third party Project Approval Company
• http://www.projectapprovals.com/
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
DELRAP (DE Lender Review Approval Process)
•
DE (Direct Endorsement) lender reviews the Condo Documents
•
PCM does not process DELRAP approvals but we lend behind them
Recertification Process (for expiring projects approved on/after January 1, 2000)
•
PCM does not process Recertifications at present time
• Submit direct to HUD for Recertifications
• http://www.hud.gov/offices/hsg/sfh/condo/
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Condo Project Approvals-continued

For HRAP and DELRAP approved projects-PCM will need:
• FHA Condo Review Form completed by HOA
• PCM must warrant the following items:
• Owner Occupancy ratio
• HOA delinquencies-generally not to exceed 15% (if > 15% we will need
to review the Budget
• FHA Concentration in project
• Presale ratio

Project Approval Not Required on Site Condos

HO-6 (Walls in) required on ALL Condos

2 Million Liability per occurrence required on ALL Condos
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Condo projects must the following criteria:

50% presold

50% owner occupied

No more than 10% owned by any one investor

No more than 15% of units more than 30 days delinquent (including REO)

Any pending litigation or special assessments must be reviewed carefully and may/may not be
acceptable

No more than 25% of floor space can be commercial use.

Need budget to show that at least 10% is allocated to reserves

Master insurance must show 100% cost replacement and liability coverage for all common
elements, commercial space and public ways of project.

HO-6 walls in coverage (if not included in master policy) required with 20% of appraised value
and maximum of 5% deductible. This must be impounded.

Fidelity coverage for any projects over 20 units is required (HOA dues x 3 x #units + reserves)

FHA concentration 30% or less
39
Documentation Required on Condo Projects

Condominium project must be either HRAP/DELRAP approved
in FHA connection.

HOA Questionnaire completed in full (link to PCM HOA form)

Master insurance and HO-6 coverage policy

Last two meetings minutes

Budget

Documentation to show FHA concentration
40
FHA Property Flipping

Property flipping is when properties are purchased and
resold in a short period of time for a considerable profit

FHA requires that
•
Only owners of record may sell properties that will be financed
using FHA insured mortgages. No sales or assignment of contract.
•
Any resale of a property may not occur 90 or fewer days from the
last sale to be eligible for financing-Exemptions to be discussed in
subsequent slide
•
Resales between 91 and 180 days where the new sales price
exceeds previous price by 100% or more, additional
documentation will be required
41
FHA Property Flipping (cont.)
Resales Occurring 90 days or less

If the owner sells a property within 90 days after the date of acquisition,
it is not eligible, unless it falls into one of the following exceptions:
• Sales by HUD of REO’s
• Sales by other US Government entities
• Sales by nonprofits approved by HUD
• Sales acquired by inheritance
• Sales by employers or relocation agencies
• Sales by mortgage companies, their subsidiaries and any vendors hired by these
exempt entities
• Sales by State and Federally chartered financial institutions and Government
sponsored enterprises (Fannie Mae and Freddie Mac)
• Sales by local and state government agencies
Please Note: Properties acquired by individuals, investment groups, REO property-re-sellers or others
whose intent is the purchase, repair and reselling of the property are not exempt
from the 90-day resale restriction-This is a PCM guideline based on investor overlays. HUD issued a waiver.
42
FHA Property Flipping (cont.)

Resales Occurring between 91 and 180 days from
acquisition
•
If resale price is 100% or more over seller’s acquisition price, a
second appraisal will be required. Properties with close to a 100%
increase in value may be subject to a second appraisal, and/or
documentation to substantiate increase.
•
Additional documentation showing the costs and details of
improvements
•
The cost of the second appraisal may not be charged to the
homebuyer
43
Appraisals/Property Requirements

Must be completed by an FHA approved appraiser

CASE NUMBER Must be ordered PRIOR to appraisal being complete

Termite Reports/Clearances no longer mandatory

Well/Septic not mandatory

The appraisal report must be dated within 90 days prior to receipt of the
credit package, and dated within 120 days of the Note date

NOTE: Need at least 2 comps dated within 90 days of appraisal, and two
current pending sales or active listings. 1004 MC addendum required.
44
Appraisals/Property Requirements (cont.)

Appraisals may not be reused after the mortgage for which
the appraisal was ordered has closed.

An operating income stmt must be provided for all 2-4 unit properties

The appraisal must state that the property is average or above condition

Appraiser must follow HUD standards

Mechanical Certifications must be made by appraiser, including ;
electrical, plumbing and heating certifications

FHA Case number must be on all pages of appraisal
45
Second Appraisal Requirements:


Resale date is between 91 and 180 days following
acquisition of property by the seller AND
The resale price is 100% or more over the price paid by the
seller
Note: Borrower cannot pay for the second appraisal.
46
Conversion of Primary Residence to Rental
Effective with Case numbers ordered on or after September 19, 2008,
ML 2008-25, rental income on current primary residence being vacated,
may not be considered, with the following exclusions:
• Relocations – Homebuyer is relocating with new employer or
transferring with current employer
• Properly executed lease agreement of at least one year
• Evidence of security deposit and/or
• Evidence of first month’s rent paid to homeowner
• Sufficient Equity in Vacated property
• LTV of 75% or less, determined by a current appraisal, less than 6
months old or by comparing the unpaid principal balance to original
sales price
• PCM will require a signed lease agreement
47
Occupancy of Former Investment Property
New from ML 11-11 (effective April 14th, 2011)
48
Qualifying Ratios

Automated Approval (DO/LP) ratios per findings
•

Note: we generally don’t see ratios over 46 on top or 57 on bottom get
approved.
Manual underwrite
• Maximum ratios are 31%/43%
• Higher ratios may be acceptable only if the borrower has at least
3 very strong compensating factors and at underwriter’s
discretion
• Minimum Credit Score is 640

Housing ratio is computed as PITI plus MI, HOA fees, ground rent,
special assessments and payments on secondary financing to income.
49
Credit Evaluation
Note: Get credit
authorization
before pulling
credit on NPS!

Minimum Decision Credit Score 640 (regardless of AUS
findings)

All borrowers must have credit score

Non-purchasing spouse’s credit must be pulled
separately, in community property states
(CALIFORNIA), negative credit is not to be considered,
but debts will be considered in payments.

Credit will be closely examined over past 12 – 24
months, with greater emphasis on past 12 months

Borrower’s housing payment history is very important

Student loans deferred over 12 months are not
considered
50
Credit Evaluation (cont.)

CAIVRS
• All Borrower’s need to be checked through FHA’s CAIVRs system
• The system checks for delinquent federal debt
• Any issues will need to be cleared

Verify previous/current housing obligations-Can be waived with AU
approval
•
Rental verification: Credit report, management service or 12
months cancelled checks. Note: if the borrower is renting from a
private party PCM will require 12 months cancelled checks.
•
Mortgage Verification Credit Report, Verification of Mortgage or
12 months cancelled checks. Note: if the borrower has privately
held mortgage, PCM will require 12 months cancelled checks.
51
Credit Evaluation (cont.)

Collections
• FHA does not require collections to be paid, the PCM underwriter
will consider entire credit history and may require certain
collections to be paid as a condition of loan approval
• The borrower must explain all collections in writing
• Medical collections do not have to be paid off

Judgments
• Court-ordered judgments must be paid
• Documented re-payment plans are the exception
• The borrower must explain in writing all judgments
52
Credit Evaluation (cont.)

Foreclosure/Short Sale/Deed in Lieu
• 3 years must have elapsed – can be less than 3 years
under certain circumstances-see PCM guidelines

Bankruptcy
• Chapter 7 must have been discharged for at least 2 years
• Chapter 13 acceptable with minimum 12 payments made
on time, and court approval for new purchase

Credit Counseling
• Acceptable with 12 months payments made on time
• Need approval of CCC organization
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Employment and Income

Verification of Borrower’s employment history for previous 2 years
required. Gaps of over 30 days must be explained.

Salaried borrowers,
• VOE covering 2 year period and most recent paystub; or
• 2 years W2’s, plus paystub, plus verbal VOE
• Back to Work Force, with 6 months on current job, and prior 2 year
work history (example: someone who took time off to raise
children)
• Part time, second job, seasonal, overtime and bonus income may be
used for qualification if the income has been received for at least 2
years, and it’s continuance is likely. Income is averaged for 2 years.
• Commission income must have 2 year history, document with 2
years tax returns (subtract 2106 expense)
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Employment and Income (cont.)
Self-employment income:
• Borrower with a 25 percent or greater ownership interest in a
business is considered self-employed
• Signed and dated individual tax returns (1040’s), plus all applicable
schedules, for the most recent two years.
• Signed copies of federal business income tax returns for the last two
years, with all applicable schedules, if the business is a corporation,
an "S" corporation, or a partnership.
• A business showing a significant decline in income over the period
analyzed is not acceptable and will not qualify for FHA financing
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Self Employed Income (continued)
Tax Return and Financial Documentation Requirements
Commission income
•Commission income must be averaged over the previous two years, based upon signed tax returns and a recent paystub
•Unreimbursed business expenses must be subtracted from gross income
•Individuals whose commission income shows a decrease from one year to the next require significant compensating factors to
allow for loan approval
•Borrowers with commission income received between one and two years may be considered favorably provided the
underwriter is able to make a sound rationalization for acceptance and can document the likelihood of continuance
•If it is sufficient, base salary without commission may be used to qualify.
•Commissions earned less than one year are not considered effective income
•Exceptions may be made in those situations where the borrower's compensation was changed from a salary to commission
within a similar position with the same employer
All transactions require a signed 4506-T by all parties on the loan
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Employment and Income (cont.)
Other Types of Income

Alimony and Child Support, must have proof receipt of payment for
12 months, with 3 years remaining.

Retirement, disability, social security income must have evidence
that 3 years continuance is likely. Document with awards letters or
other documentation.

Disability income, public assistance income, military allowances and
social security income are not subject to federal income taxes, and
may be “grossed up” by 25%
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Employment and Income (cont.)

Rental Income received for properties owned is acceptable
if the borrower can document rental income is stable.

The following documentation may be considered:
• Current lease if property obtained since last tax period ONLY
• Tax returns indicating 12 month rental history
• 12 months rental history must be free of unexplained gaps greater
than three months
• 85% of rental income is used to qualify borrower (Santa Ana
HOC)
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Closing Costs

Broker may charge and collect from borrowers those customary and
reasonable local fees necessary to close the mortgage.

Broker Compensation maximum is 3.5%

Broker may not charge fees for services not performed (underwriting,
funding, etc.)

Impounds are mandatory-At all LTVs

Borrowers may not pay a tax service fee

Borrower may pay all other closing costs
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Assets
 Borrower’s own funds
• Checking and Savings
• Cash saved at home, adequately demonstrated ability to do so, and must fit
cash type borrower
• Loans secured by 401K
• Sale of personal asset, etc
 Gifts are acceptable from:
• Relatives, including gifts of equity, close friend with defined interest in
borrower, borrower's employer or labor union, charitable organization, real
estate agents who are relatives
• Government agency or public entity program that provides homeownership
assistance to low and moderate-income families or first-time homebuyers.
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Asset Verification

Funds in bank account
•
•
•
•
Most recent 2 months bank statements or
One month bank statement with prior and current balance or
Computer generated VOD, with 2 month average balance
Any recent large increase and new accounts must be explained and
documented
 Cash saved at home is verified by the following:
• Satisfactory evidence of the ability to accumulate such savings and must
be cash type borrower
• Satisfactory written explanation as to how such funds were accumulated
and the amount of time taken to do so.
• Required funds to close must be deposited in a financial institution or
held by the escrow/title company
• Borrower must meet profile: No checking or savings Accts., Limited credit
 Grant funds from an organization that meets HUD’s guidelines.
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Gift Funds


Gift Funds – Gift Letter should contain:
•
The dollar amount
•
The donor’s name, address, telephone number
•
The Borrower must be named
•
The donor’s relationship to the Borrower
•
The donor’s signature
•
A statement that no repayment is required
•
Must contain language asserting that the funds given
were not made to the donor from any person with an
interest in the sale of the property.
See PCM Gift Letter sample.
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Document source of Gift Funds
Evidence of the source and transfer of funds is
also required
• If the funds are in the Borrower’s account, a
copy of the cancelled check or withdrawal slip
showing that withdrawal is from the donor’s
account. A copy of the deposit slip or bank
statement showing the deposit of the funds into
the Borrower’s account is also required.
• If the funds are to be provided at closing,
documentation must be provided to verify that
the funds were withdrawn from the donor’s
account. (i.e. cashiers check must have name
and account number of donor, and bank
statement or other documentation to show the
donors’ account number, etc).
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Down Payment Assistance
Down payment assistance from interested parties, i.e. seller
funded DPA are no longer acceptable to FHA

Some programs have been deemed ineligible, check with your account
executive for eligibility, by providing the name and details of the DAP

Nonprofit and Non-profit Instrumentality of Government DAPs: DAP in
the form of a lien
•

Must be approved by FHA and PCM. Please check with your Account
Executive for PCM approval, and on HUD’s website:
http://www.hud.gov/offices/hsg/sfh/np/sfhdap01.cfm
Government entities (grants not funded by seller or builder contributions)
offering secondary financing in the form of a lien, must meet FHA
guidelines, as outlined in ML94-2, ML02-22 and in 4155.1 Rev-5,
paragraph 1-13A.
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Seller/Interested Party Contribution

A transaction with an interested party contribution has the following
(additional) appraisal requirements.
• The appraisal must indicate the amount of the contribution
• The appraiser must comment on the impact the contribution has to
the final value of the property
• The appraiser must demonstrate the effect this has on final value
• The comparable sales must be adjusted by the value of the
contributions as recognized by the market, in the appraiser’s
opinion, not just dollar for dollar amount of the contribution
• Any comparables sold with financing and/or sales concessions must
reflect the difference between what the comparables actually sold
for with and without concessions
• Positive adjustments for sales or financing concessions are not
acceptable
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FHA and more Links

Easy to navigate FHA Site: www.fha.gov

4155 Online NOW!: http://www.fhaoutreach.gov/FHAHandbook/prod/contents.asp?address=4155-1

HUD FAQs http://www.fhaoutreach.gov/FHAFAQ/

HUD Lenders Page http://www.hud.gov/groups/lenders.cfm

HUD Condo Lookup https://entp.hud.gov/idapp/html/condlook.cfm

HUD Condo Mortgage Insurance (Project Approval Guidance) http://www.hud.gov/offices/hsg/sfh/condo/

HUD Loan Limits https://entp.hud.gov/idapp/html/hicostlook.cfm

HUD Mortgagee Letters http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/

FHA Wikipedia: http://portal.hud.gov/portal/page?_pageid=73,1829262&_dad=portal&_schema=PORTAL

Santa Ana HOC Center http://www.hud.gov/offices/hsg/sfh/talk/addr_sna.cfm

FHA DAP Approved List http://www.hud.gov/offices/hsg/sfh/np/sfhdap01.cfm
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