Manual Underwriting
8/4/2009
1
Manual Underwriting


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.
8/4/2009
2
Manual Underwriting
Credit
 No minimum credit score.
 If credit score is below 500, a 10% down
payment is required.
 Past credit performance is the key to evaluating
future performance.
http://www.fhaoutreach.gov/FHAHandbook/prod/inf
omap.asp?address=4155-1.4.C.1.a
8/4/2009
3
Manual Underwriting
Credit
 Credit pattern more important than single
incidents. Payment history for previous
mortgage or rent most important.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.C.1.b

Explanations required for significant credit
problems, late payments, recent inquiries.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.C.1.c
8/4/2009
4
Manual Underwriting
Chapter 7 Bankruptcy
 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.
 http://www.fhaoutreach.gov/FHAHandbook/
prod/infomap.asp?address=4155-1.4.C.2.g
8/4/2009
5
Manual Underwriting
Chapter 13 Bankruptcy
 1 year successful payments under plan.
 Permission of court is required.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.C.2.h
8/4/2009
6
Manual Underwriting
Let’s have another little quiz.
8/4/2009
7
Manual Underwriting
Must collections be paid off?
Collections need not be paid off, but borrower
must provide a written explanation for them.
 How about judgments?
Judgments must be repaid in full or be under an
approved repayment plan.


http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.C.2.e
8/4/2009
8
Manual Underwriting
Collections and 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.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.C.2.d
8/4/2009
9
Manual Underwriting
Employment/Income
 Must verify employment, income for 2 full years.
Allowances for school, maternity.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.D.1.b

Overtime, bonus can be used if documented for
2 years and likely to continue.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.D.2.b
8/4/2009
10
Manual Underwriting
Employment/Income
 Income must reasonably be expected to
continue for 3 years.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.D.2.a
8/4/2009
11
Manual Underwriting
Self-Employment
 Borrower must have been successfully selfemployed for at least 2 years, or
 Self-employed at least 1 year and selfemployment is in the same field as previous
employment. No credit if less than 1 year.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.D.4.c
8/4/2009
12
Manual Underwriting
Other Income Can Be Used As Well
 Retirement.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.D.2.j

Social Security.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.D.2.k

Alimony, child support.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.E#1
8/4/2009
13
Manual Underwriting
Non-Taxable Income May Be “Grossed Up.”
 Percentage of gross-up may not exceed
borrower’s actual tax rate.
 No additional allowances for dependents.
 Lender must document the percentage used.
 If the borrower is not required to file a tax
return, use a 25% tax rate.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.E.5.b
8/4/2009
14
Manual Underwriting
How about another test?
8/4/2009
15
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.
8/4/2009
16
Manual Underwriting
The answer is C. Never.
8/4/2009
17
Manual Underwriting
Rental Income
 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 principal residence that borrower
will vacate and rent out.
8/4/2009
18
Manual Underwriting
Income from investment properties must be
documented through…
 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.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.E.4.a
8/4/2009
19
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%).
 It may not be used as a direct offset to the
mortgage payment.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.E.4.b
8/4/2009
20
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.
 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.
8/4/2009
21
Manual Underwriting
Vacating and Renting A Current Residence
 FHA does not want to encourage this practice.
 Income from the rental of the borrower’s
current principal residence may not be counted.
 http://www.fhaoutreach.gov/FHAHandbook/
prod/infomap.asp?address=4155-1.4.E.4.g
 Except for situations where…
8/4/2009
22
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
 LTV on current home does not exceed 75%.
8/4/2009
23
Manual Underwriting
Vacating and Renting A Current Residence
 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.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.E.4.h
8/4/2009
24
Manual Underwriting
Just a reminder…
 Self Sufficiency test for 3 and 4 unit properties.
 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%).

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.2.B.4
8/4/2009
25
Manual Underwriting
Employment/Income Documentation
 Verification of Employment (VOE) from
current employer and most recent pay stub.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.1.3.d

Or, pay stubs covering most recent 30 day
period, W-2s from the previous two years, and
an oral VOE.
http://www.fhaoutreach.gov/FHAHandbook/
prod/infomap.asp?address=4155-1.1.3.e
8/4/2009
26
Manual Underwriting
Employment/Income Documentation
 To document self-employment, borrower must
submit tax returns for last two years.
 YTD income must be verified through profit &
Loss Statements.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.D.4.d
8/4/2009
27
Manual Underwriting
Qualifying Ratios
 “Front” ratio = Housing payment (PITI) /
monthly income.
 Standard is 31%.
 May be exceeded with compensating factors.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.F.2.b
8/4/2009
28
Manual Underwriting
Qualifying Ratios
 “Back” ratio – Housing payment plus other
installment debt /monthly income.
 Standard is 43%.
 May be exceeded with compensating factors.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.F.2.c
8/4/2009
29
Manual Underwriting
Qualifying Ratios
 Where exceeded, underwriter must cite at least
one compensating factor.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.F.3.a

Compensating factors include reserves, large
down payment, minimal increase and others.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.F.3.b
8/4/2009
30
Manual Underwriting
Reserves
 Reserves are not required except for …
 3-4 unit properties
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.2.B.4.d

Insufficient credit borrowers.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.C.3.c
8/4/2009
31
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.
 New policy establishes two categories of nontraditional credit references, and two categories
of borrowers.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.1.7.f
8/4/2009
32
Manual Underwriting
Group 1 Non-Traditional Credit References
 Rental housing payments.
 Utility payments (gas, electric, water).
 Land-line telephone.
 Cable TV.
8/4/2009
33
Manual Underwriting
What do these Group 1 references have in
common?
They can all be tracked to a particular
property address.
8/4/2009
34
Manual Underwriting
Group 2 Non-Traditional Credit References
 Insurance (medical, auto, life, renter’s).
 Child care.
 Retail stores, including rent-to-own.
 Internet/cell phone.
 Personal loans/auto leases.
 History of savings.
8/4/2009
35
Manual Underwriting
What do these Group 2 references have in
common?
They track to a person, not a property.
8/4/2009
36
Manual Underwriting

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.
8/4/2009
37
Manual Underwriting
Non-Traditional Credit Underwriting
 No history of delinquency on rental payments.
 No more than one 30 day delinquency on other
payments.
 No collection accounts/court records within last
twelve months.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.C.3.a
8/4/2009
38
Manual Underwriting
Insufficient Credit Underwriting
 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.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.4.C.3.c
8/4/2009
39
Manual Underwriting
Insufficient Credit Underwriting
Can you think of a loan that you used to do but
maybe you can’t under this policy?
+
8/4/2009
40
Manual Underwriting
Insufficient Credit Underwriting
 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.
 The child is the occupant borrower, and they cosign.
8/4/2009
41
Manual Underwriting
Insufficient Credit Underwriting
 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.
8/4/2009
42
Manual Underwriting
Documentation Requirements
 Non-Traditional Mortgage Credit Report
(NTMCR) is preferred.
 Independent verification of credit references
where NTMCR not available.
 Borrower-supplied references unacceptable.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-1.1#7
8/4/2009
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Property Eligibility
Most kinds of homes qualify.
8/4/2009
44
Property Eligibility





Property must consist of 1-4 units.
Detached, semi-detached, attached, condo are
eligible.
Existing and new construction (stick-built and
modular) are eligible.
Manufactured homes are eligible.
Co-ops restricted to developments where HUD
insures master mortgage.
8/4/2009
45
Property Eligibility
Question:
Are mixed-use
properties acceptable?
8/4/2009
46
Property Eligibility
Yes they are.
So long as the commercial space does not exceed
25% of the gross square footage.
http://www.fhaoutreach.gov/FHAHandbook/prod/info
map.asp?address=4155-2.4.2.g
8/4/2009
47
Property Eligibility
Condominiums
 Generally, the condo project must be preapproved by FHA.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.1.C.11.b

Lender can use “spot” loan procedure for units
in non-approved projects.
http://www.hud.gov/offices/adm/hudclips/letters/m
ortgagee/1996ml.cfm
8/4/2009
48
Property Eligibility
Condominiums
 Effective 10/01/09, condo projects may be
approved by DE lenders or FHA.
 Spot loan process terminated effective 10/01/09.
 ML 09-19.
http://www.hud.gov/offices/adm/hudclips/lett
ers/mortgagee/index.cf
8/4/2009
49
Property Eligibility
Condominiums
 Direct Endorsement Lender Review and
Approval Process (DELRAP).
 First 5 approvals under DELRAP must be
submitted to applicable HOC for review.
 HUD Review and Approval Process (HRAP).
 Condo projects consisting of manufactured
homes must go through HRAP.
8/4/2009
50
Property Eligibility
Condominiums
 Revised project approval checklists are provided
in ML 09-19.
 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.
 FHAC will calculate number of active insured
loans in project.
8/4/2009
51
Property Eligibility
Condominiums
 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 prior to that will not appear
on the approved list and will have to be
approved under the new criteria.
8/4/2009
52
Condominiums




Currently, there are 573 approved condo
projects in Michigan.
Only 54 have been approved since 10/01/08.
In the Philadelphia HOC jurisdiction there are
10,432 approved condos projects.
Only 486 approved since 10/01/08.
6/8/2009
53
Property Eligibility
Site Condos
 Effective June 12, 2009, site condo projects
need not be approved.
 New policy affects one unit detached site condo
projects only.
 Condo rider must be included in FHA case
binder.
 Appraisals should be conducted using Fannie
Mae Form 1073.
8/4/2009
54
Property Eligibility
Condominiums
 No project approval required for Streamline
refinances.
 No project approval required for HUD REO
loans.
8/4/2009
55
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.
 hud.gov at
https://entp.hud.gov/idapp/html/condlook.cfm
8/4/2009
56
Condominiums
7/23/2009
57
Condominiums
7/23/2009
58
Property Eligibility
Getting a condo project approved.
 Handbook 4150.1 REV-1, Chapter 11.
 Effective 10/01/09, new procedures outlined in
ML 09-19 will be used.
 Use checklists in ML 09-19 for project approval
requests after that.
8/4/2009
59
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 19107-3389
 Allow at least 4 weeks for approval unless there
are environmental issues.
8/4/2009
60
Property Eligibility
Manufactured Homes
 ML 09-16.
http://www.hud.gov/offices/adm/hudclips/lett
ers/mortgagee/index.cf
 At least 400 square feet.
 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.
8/4/2009
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Property Eligibility
Manufactured Homes
 Built and remains on a permanent chassis.
 Must be affixed to a permanent foundation that
has been certified by an engineer.
 Elevation at or above 100 year flood plain.
 Must be on original site.
 Manufactured homes in condominium projects
are now eligible.
8/4/2009
62
Property Eligibility
Flipping Rule
 Seller must be legal owner of property.
http://www.fhaoutreach.gov/FHAHandbook/prod/inf
omap.asp?address=4155-2.4.7.c

Seller must have owned property at least 91 days
at the time the borrower signs the sales contract.
http://www.fhaoutreach.gov/FHAHandbook/p
rod/infomap.asp?address=4155-2.4.7.e
8/4/2009
63
Property Eligibility
Flipping Rule
 If seller owns 91-180 days and new price is
double previous price, 2nd appraisal required.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.7.f

FHA reserves the right to impose additional
requirements on properties owned between 91
days and 12 months, but has never exercised
that right.
8/4/2009
64
Property Eligibility
Is the Flipping Rule violated? You be the
judge.
8/4/2009
65
Property Eligibility
Property Flipping Scenario #1
 Seller acquired property on December 15, 2008.
 FHA borrower signs sale contract on March 5,
2009.
 FHA case number issued March 18, 2009.
 Loan closes April 30, 2009.
8/4/2009
66
Property Eligibility
Property Flipping Scenario #1
 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 137 days when loan
closed.
 Was flipping rule broken?
8/4/2009
67
Property Eligibility
Property Flipping Scenario #1
8/4/2009
68
Property Eligibility
Property Flipping Scenario #1
Why is this property ineligible?

Seller owned property for 81 days when
borrower signed sales contract.

Minimum period of ownership is 91 days.
8/4/2009
69
Property Eligibility
Let’s look at another Flipping scenario.
8/4/2009
70
Property Eligibility
Flipping Rule Scenario # 2
 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.
 FHA case number issued 03/18/09.
 Loan closed May 2, 2009.
8/4/2009
71
Property Eligibility
Flipping Rule Scenario # 2
 Property was owned by seller for 136 days when
borrower signed sales contract.
 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.
 Is a second appraisal required?
8/4/2009
72
Property Eligibility
Flipping Rule Scenario # 2
8/4/2009
73
Property Eligibility
Flipping Rule Scenario # 2
Why isn’t a second appraisal required?

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.
8/4/2009
74
Property Eligibility
Flipping Rule
 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.
8/4/2009
75
Property Eligibility
Flipping Rule
 Exceptions for HUD, VA, USDA REO, Fannie
Mae, Freddie Mac, nonprofits, estate sales, and
corporate relocations.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.7.h
8/4/2009
76
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.

http://portal.hud.gov/portal/page?_pageid=73,391210
4&_dad=portal&_schema=PORTAL
8/4/2009
77
Property Eligibility
Flipping Rule
 Does it matter how much the seller spent on
repairs?
NO
 Does it matter how much profit the seller is
earning?
NO
8/4/2009
78
Appraisals
What is the value of the property?
8/4/2009
79
Appraisals
Who can perform an FHA Appraisal?
 ML 08-39. Implements provision of HERA
regarding certification of appraisers.
http://www.hud.gov/offices/adm/hudclips/letters/m
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.
8/4/2009
80
Appraisals
Who can perform an FHA Appraisal?
 After 09/30/09, only certified residential or
certified general may be selected.
 Lender responsible for selecting only certified
appraisers.
8/4/2009
81
Appraisals

HUD Handbook 4150.2 CHG-1
http://www.hud.gov/offices/adm/hudclips/handbook
s/hsgh/4150.2/index.cfm



Determines the value of the property.
Determines the marketability of the property.
Identifies observable health and safety
deficiencies.
8/4/2009
82
Appraisals




Not a home inspection. Conducted primarily to
determine value for mortgage insurance
purposes.
Conducted for benefit of lender and FHA, not
borrower.
Does not guarantee property condition.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.1.a
8/4/2009
83
Appraisals



Lenders are required to provide form HUD92564-CN, "For Your Protection: Get a Home
Inspection" to borrowers at first contact, be it prequalification, pre-approval, or initial application.
In any case, the lender must provide the form
to the borrower no later than initial loan
application.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.3.C.2.g
8/4/2009
84
Appraisals
8/4/2009
85
Appraisals



FHA appraisal reporting similar to conventional.
FHA appraisal forms same as conventional.
FHA uses Fannie Mae appraisal and repair
standards.
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Appraisals
One of the following forms must be used…
 1004C
Manufactured homes.
 1073
Individual condominium units
 1025
2-4 unit properties.
 1004
All one unit other properties.
 Plus… Form 1004MC, Market Conditions
Addendum.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.4.c
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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 lender determines which repairs for existing
properties must be made for the property to be
eligible for FHA-insured financing.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.5.a
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Appraisals
Examples of Conditions That Would Not
Normally Require Repairs
 Worn floor finishes.
 Worn carpets
 Holes in window screens.
 Small crack in a windowpane.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.5.b
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Appraisals
Examples of Conditions That Would Normally
Require Repairs
 Conditions that affect the health and safety of
the occupants.
 Conditions that affect the security of the home.
 Physical deficiencies or conditions affecting
structural integrity.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.5.c
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Appraisals
Lead-Based Paint
 If the property was built before 1978, defective
paint surfaces must be treated.
 Includes any out-buildings, fences and other
surfaces.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.2.d
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Appraisals
Examples of tests that are no longer
mandatory.
 Wood-destroying insects/organisms.
 Well water.
 Septic systems.
 Flat or unobservable roof.
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Appraisals
Typical conditions that would require further
inspection or testing by qualified individuals
 Infestation - evidence of termites.
 Inoperative or inadequate plumbing, heating, or
electrical systems .
 Structural failure in framing members.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.5.d
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Appraisals
Typical conditions that would require further
inspection or testing by qualified individuals
 Leaking or worn-out roofs.
 Cracked masonry or foundation damage.
 Drainage problems

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.5.d
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Appraisals
Other Property Requirements
 Certain FHA requirements regarding well and
septic distances and other requirements remain
applicable.
 See Valuation Protocol in Revised Appendix D
issued with ML 05-48 and Revised Appendices
A and C issued in ML 06-09 for further
guidance.
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Appraisals
Underwriting the Appraisal
 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.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.1.b
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Appraisals
Underwriting the Appraisal
 Are subject property and comparable sales
similar in structure type, neighborhood, and
sales timeframes?
 Are adjustments reasonable?
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Appraisals
Underwriting the Appraisal
Rules of thumb
 Individual adjustments should not exceed 10%.
 Net adjustments should not exceed 15%.
 Sum of adjustments should not exceed 25%.
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Appraisals In Declining Markets



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.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.9.a
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Appraisals In Declining Markets


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.
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Appraisals In Declining Markets



Determined by appraiser on a case-by-case basis;
or
Determined by lender based on data services or
feedback from LP or DU.
http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.10
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Appraisals In Declining Markets
Appraiser Determination
 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.
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Appraisals In Declining Markets
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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.
 In cases where compliance with this requirement
is difficult or not possible due to the lack of
market data, a detailed explanation is required.

http://www.fhaoutreach.gov/FHAHandbook/prod/in
fomap.asp?address=4155-2.4.9.c
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Appraisals In Declining Markets
Lender Determination
 S&P/Case-Schiller Index
http://www2.standardandpoors.com/portal/sit
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
http://www.fhfa.gov/Default.aspx?Page=14
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Appraisals In Declining Markets
Lender Determination
 National Association of Realtors
http://www.realtor.org/research/research/ehsp
age
 Feedback from Desktop Underwriter or Loan
Prospector.
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Appraisals In Declining Markets
A second appraisal is required when
 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
 T he property is determined by the appraiser or
lender to be in a declining market.

http://www.fhaoutreach.gov/FHAHandbook/prod/inf
omap.asp?address=4155-2.4.10.b
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Appraisals In Declining Markets
Second Appraisals
 ML 08-09.
http://www.hud.gov/offices/adm/hudclips/lett
ers/mortgagee/2008ml.cfm
 Do not order a new case number.
 Second appraisal must be performed by an FHA
roster appraiser.
 Must conform with HUD Minimum Property
Requirements.
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Appraisals In Declining Markets
Second Appraisals
 If property is a one unit detached home,
appraiser may perform exterior-only appraisal
using Fannie Mae Form 2055.
 For other properties, appraiser must perform
full appraisal.
 Cost of second appraisal may be passed on to
the borrower.
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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.
 If second appraisal is used, enter that appraisal
data into FHA Connection.
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Appraisals In Declining Markets
Will you be ordering many second appraisals
in Michigan?
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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.
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