Danny Salas

Fannie Mae and FHA Announce New Automated Underwriting Criteria

Hey Realtor…What This Means To You!

Any change in underwriting criteria is a change to where, when, and how your escrow will close.  Probably the biggest change…FHA is moving to a conventional-type style of appraisal ordering…HVCC type requirements. 

Also, when a property is located in a declining area, the appraisal report must be accompanied by a form addressing this concern.  This, from Fannie Mae’s website concerning FHA:

“The Uniform Residential Appraisal Report (URAR) and the form HUD-92800.5B, Conditional Commitment/DE Statement of Appraised Value are required. Also, a Market Conditions Addendum is required (Fannie Mae Form 1004MC/ Freddie Mac Form 71).”

DO/DU/TOTAL Mortgage Scorecard…Uh…What’s That?

You really want to know?  DO is an abbreviation for Desktop Originator.  DU is an abbreviation for Delegated Underwriting.  Both are internet-based automated underwriting engines for Fannie Mae.   FHA TOTAL Mortgage Scorecard is FHA’s Interent-Based Automated Underwriting Engine.  Here’s how it works:

First, an application is taken.  Second, a credit report is ordered.  A credit report is assigned a re-issue number.  Third, you combine the application and the credit report.  Fourth, you import your application into Fannie Mae’s Website, insert your re-issue number for your credit report (this enables you to use the same report, avoiding another inquiry on a client’s credit report), and submit to the website’s automated engine (DO or DU) to ask for an approval.  The website breaks down the information on the credit report and application and determines if the client is eligible for financing.  When running government loans like FHA or VA, an additional layer of underwriting criteria is applied (FHA TOTAL Mortgage Scorecard), to determine eligibility. 

Gift Funds

The source of the down payment will effect the type of approval that you receive from FHA TOTAL Mortgage Scorecard.  In the past, the website’s automated engine couldn’t determine the difference between a non-profit organiztion, a family member, an employer, or Government Assistance Program;  like a city’s Down Payment Assistance Program (DAP).  Now, FHA Total Mortgage Scorecard is able to determine these differences and apply them to the decision.

Less Than 10 Months On Installment Loans

In the past, whenever someone had less than ten payments left, on any installment debt, FHA would NOT calculate that payment against a borrower qualifying ratios (percentages of income going toward a borrower’s monthly obligations).  So, if someone owed $4,280 on a car loan, and their monthly payment was $430, the $430 would NOT hit their qualification requirements.  Now, since the payment is greater than $100 per month, the less than ten month rule would NOT apply.  This is a major change. 

Condo Conversions

FHA is removing the requirement that an apartment building, that has been converted to a condo project, be existing as a condo project for one year before an FHA application is taken to finance one of the condo units.  Nice…a good change!

Related Must Reads

FHA Update
Why You Can’t Close A Loan In Six Days Anymore

 

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FHA Update

FHA announces credit policy changes

Fri, 2009-09-18 09:10 —

HUD’s Logo

Federal Housing Administration (FHA) Commissioner David H. Stevens has announced plans to implement a set of credit policy changes that will enhance the agency’s risk management functions. Stevens also announced his intention to hire a chief risk officer for the first time in the FHA’s 75-year history. Both actions come as the agency’s annual independent actuarial study is being completed. The study will be sent to Congress in November and is expected to show the capital reserve ratio dropping below the congressionally-mandated threshold of two percent. The changes announced today will strengthen the FHA’s reserves and better manage risk.

No Taxpayer Assistance

“To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action,” said Commissioner Stevens. “That said, given the size and scope of the FHA and its importance to today’s market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections.”

“By keeping affordable loans flowing, particularly to the growing ranks of first-time homebuyers, the FHA has been critical to our nation’s economic and housing market recovery,” said U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan. “As we begin to move from recession to recovery, these changes will not only ensure FHA’s financial strength but they will also help to further strengthen our nation’s economy.”

FHA’s congressionally mandated capital reserve ratio, which is determined by the independent actuarial study, measures excess reserves above and beyond projected losses over the next 30 years. FHA continues to hold more than $30 billion in its total reserves today, or more than 4.4 percent of its insurance in force. Additionally, FHA’s full faith and credit insurance means that there is no risk to homeowners or bondholders, even in the event that the capital reserve ratio drops below the two percent threshold mandated by Congress. With the FHA’s higher average credit scores and tighter credit policies announced today, the FHA fund is expected to produce revenue for the U.S. Treasury.

The FHA’s risk management functions are currently dispersed across a number of offices. The chief risk officer will oversee the coordination of FHA’s efforts to concentrate risk management in a single division devoted solely to managing and mitigating risk to the FHA’s insurance fund – across all FHA programs.

In addition to adding a chief risk officer, the FHA is proposing specific credit policy changes that are largely focused on ensuring responsible lending and risk management for FHA-approved lenders. These changes build on lessons learned in the credit crisis and seek to align the FHA with the Administration’s goal of regulatory reform. As the FHA’s stable of lenders grows, these lenders must have “skin in the game.” These credit changes will do that by ensuring they have long-term interest in the performance of the loans they originate.

Changes being pursued by Mortgagee Letter, effective Jan. 1

Require submission of audited financial statements by supervised mortgagees

Requires supervised mortgagees to submit audited annual financial statements to FHA. This new requirement is a prudent safeguard that permits FHA to ensure that those entities with which it does business are adequately capitalized to meet potential needs. FHA is aware that the majority of supervised and non-supervised mortgagees are already required to prepare audited financial statements for various regulatory bodies, Government Sponsored Enterprises (GSEs), and investors. Given these existing requirements, FHA’s new policy will help to reduce risk at limited new costs for approved mortgagees.

Modify procedures for streamline refinance transactions

Revises current procedures for streamline refinance transactions to establish new requirements for seasoning, payment history, income verification, and demonstration of net tangible benefit to the borrower; provide for collection of credit score information when available; and to cap maximum LTV at 125 percent. An appraisal will be required in all cases where a borrower wants to add closing costs to the transaction. These revisions bring documentation standards for streamline refinance transactions in line with other FHA loan origination guidelines, ensures the borrower’s capacity to repay the new mortgage, and prohibits the dangerous practice of loan churning, where borrowers raise cash through successive cash-out refinancings that put them further in debt.

Require appraiser independence in loan origination

Provides new guidelines on ordering appraisals for FHA-insured mortgages and reaffirms existing policy on FHA requirements regarding appraiser independence and geographic competence. Mortgage brokers and commission based lender staff are prohibited from ordering appraisals. FHA does not require the use of Appraisal Management Companies or other third party providers, but does require that lenders take responsibility to assure appraiser independence. While FHA’s existing policies regarding appraiser independence are consistent with the Home Valuation Code of Conduct (HVCC), FHA will adopt language from the Code to ensure full alignment of FHA and GSE standards.

Modify appraisal validity period

FHA’s appraisal validity period will be reduced to four months for all properties including existing, proposed and new construction. Previous validity periods were six months for existing properties and up to twelve months for proposed and under construction properties. This provides for more accurate home values used for underwriting FHA-insured mortgages during volatile housing market conditions.

Appraisal portability

Provides new guidelines that allow a second appraisal to be ordered under a limited set of circumstances when a borrower switches from one lender to another and restates the requirement that the first lender must transfer the appraisal to the second lender at the request of the borrower. This will prevent delays in closing that often occur when a loan is transferred to a new lender.

Changes being pursued by rule-making process

Modify mortgagee approval and participation in FHA loan origination

Lenders seeking approval to originate, underwrite, or service an FHA loan must meet the eligibility criteria for a supervised or non-supervised mortgagee. Mortgagees with this approval status must assume liability for all the loans they originate and/or underwrite. Loan correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility. These policy changes will require the FHA approved mortgagee to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee. These changes align FHA with the GSEs and will potentially increase the number of loan correspondents (mortgage brokers) who are eligible to originate FHA-insured loans while providing for more effective oversight of loan correspondents through the FHA approved mortgagees.

Increase net-worth requirements for mortgagees

The FHA plans to propose to increase the net-worth requirement for approved mortgagees to meet industry standards. The requirement is currently at $250,000 and has not been increased since 1993. HUD is proposing an initial increase of approximately $1 million that would be in place within one year of the enactment of this rule. To maintain consistency with industry standards, HUD may propose that the net worth requirements be increased further in future years to a level comparable to those required by GSEs and other market institutions. These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund.

Understanding FHA – Why It’s King

Why FHA?

When considering buying a home, the number of loan options available, are not as rampant as they were a couple of years ago.  The most popular loan, in the past eighteen months, has been a loan through The Federal Housing Administration (FHA).  FHA loans enable a small down payment that can be a gift from a family member, flexible underwriting guidelines, and the home that’s being purchased, while needing to be in somewhat good shape, doesn’t have to have the clearances, like a termite clearance, as they used to require. 

Down Payment

Again; 3.5% is the minimum down payment required.  This may be a gift from a family member, or even a fiance. 

Seller Credits

Another great aspect of FHA loans is that they work similarly to conforming loans.  Generally, when a home buyer puts less than ten percent down, the seller is restricted from contributing more than three percent, of the sales price, towards a buyer’s closing costs.  However, if a home buyer puts more than ten percent down, the seller may credit the buyer six percent, of the sales price, towards the buyer’s costs.  FHA still allows the smaller 3.5% down payment, however, enables the seller to credit a full six percent of the price. 

Why Is My Impound Account So Expensive?

With FHA loans, it is required that a buyer set up an impound account through the bank.  An impound account is a fund account used as reserves to pay incremental fees, like taxes, homeowner’s insurance, and mortgage insurance, when they become due.  So, it’s important to understand that the impound account funds are not costs, they’re just recurring fees that will need to be paid throughout the life of homeownership, anyway. 

For example, taxes are due twice a year; April & November.  So, let’s take a borrower whose escrow is closing in September.  If the seller is current on their taxes, then they would have paid for the July through December Tax Bill, in April.  When a home buyer closes their escrow, they would owe the seller September through December.  Also, due to the fact that real estate interest is paid in arrears, the first borrower’s payment wouldn’t be due until November…when the 2nd tax installment is due.  So, if a borrower closes in September, the impound account would want four months, plus, the six month installment, plus one extra month, so that there are funds in the account at all time, and never short. 

Buyer’s Market

In a market like the one we’re in, currently, bear in mind that sellers need to sell.  Most of the transactions that I’m financing have some sort of credit from the seller, to the buyer.  Even foreclosed upon banks are crediting buyers.  And, quite a few have a full six percent seller credit.  Here’s how it can benefit the buyer.  Again, with FHA financing, the seller may pay six percent of the sales price.  So, closing costs generally run about 2.5% of the sales price.  Impounds can run from one to 2.5%  of the sales price.  This depends on when the escrow closes.  So, what do you do with the remaining credit amount, if the total closing cost and impound account only totals 4.5%?  Pay down the buyers interest rate!  That’s right, the remaining funds can be used to pay points to lower the interest, and therefore, monthly payment of the buyer. 

3.5% Down and Nothing Else

With the above mentioned example.  A buyer can move into a home, put only 3.5% down, have the seller pay their closing costs, their impound account, and their interest rate down to more comfortable monthly payment.  And, let’s say the buyer closes at the beginning of the month.  September, in this example.  Their first payment wouldn’t be due until November 1.  So, they would move into the home and not have a payment for the whole month of September and October.  Not to mention the $8,000 tax credit…

Credit Scores

FHA has a credit risk score requirement of 620 or greater.  However, there are still banks that will allow less than this.  very few of them, and they may run out of their ability to fund loans with scores lower than 620, in the very near future. 

Qualifying Ratios

I’m still getting approvals with front-end ratios up to 47%.  That would be forty-seven percent of a buyer’s gross income going toward their housing costs.  Principal and interest, taxes, and all insurances.  And, on some occassions, the back end ratio is still going up to 65%.  That would be sixty-five percent of the clients gross income going toward principal and interest, taxes, all insurances, and other monthly obligations.  Other monthly obligations might be items like a car payment, credit card debt, alimony or child support, and any other financial obligation that the bank will obtain information on. 

The Property Itself

In the old days, FHA required that a homebuyer receive a termite inspection and clearance.  A few years ago, FHA wanted to be as competative as conventional loans, and therefore, they changed their policy to match Fannie Mae and Freddie Mac’s.   Even if an agent writes into the purchase contract that an termite inspection will be ordered, a buyer and seller may change their minds, and write an addendum to the contract stating, “buyer and seller waive the right to a termite report and clearance.” 

Mortgage Insurance

Many years ago, you couldn’t buy a home, unless you had twenty percent down.  Then the insurance companies got involved and requested to the banks that they be able to insure a percentage of the loan amount, to enable buyers to put less than twenty percent down.  The monthly insurance payments were costly, however, it did enable more homebuyers to participate in the American Dream.  Then FHA stepped in and wanted to lower that monthly mortgage insurance payment, however, they still needed to cover their risk.  So, they split up the mortgage insurance into two parts.  One part would be financed into the loan amount, and the other part would be paid on a monthly basis.  Financing the portion in the loan amount would lower the monthly payment for the homebuyer, making the purchase more affordable. 

$8,000 Tax Credit

If you purchase your home and the escrow closes before November 30, 2009, you qualify for the $8,000 tax rebate from the federal government.  2008 Tax Form 5405 is an amendment to a first time home buyer’s 2008 returns.  So there is no waiting for filing your 2009 1040 tax returns.

Home Loan Documentation Since The Mortgage Credit Crisis

Stated Income…What’s That?

The days of Stated Income (where you state your income on an application and do not provide any tax returns, paystubs, etc.) are gone.  This article will give insight as to what lending insitutions expect and need, as documentation, in order to be able to sell the loan in the secondary market (GSE’s like Fannie Mae and Freddie Mac).

The (Not So) Good ‘Ole Days

Since the early 1990’s, lending institutions felt as though they could sell real estate loans, in the secondary market, as long as values continued to climb, and there was a world-wide appetite for these loans.   Why should clients have to provide more and more documentation?  It’s fair to say that it eventually got so bad that the least documentation in the file, the easier is was to package the loan and still “sell” it, for a profit.

Then…The Well Went Dry

After the meltdown of the lending industry, it became apparent that documenting everything was going to take precedence.  Here is the outcome:

Think in “Two’s”

Two Paystubs – Lenders want to document a full month’s income.  Generally, employees are paid either every other week, or twice a month.  Therefore, if you’re paid weekly, the bank will want to see four paystubs.  Bare in mind that if you have a long escrow period, you will have to continue to update these paystubs, throughout the escrow time period.

Two Bank Statements - Lenders will want to be certain that the funds being used in the transaction, are actually, the borrowers’ funds.  So, funds just can’t show up, at the last minute, or even show a significant deposit into a borrower’s account without tracing exactly where the funds came from.  Therefore, it will be required that a borrower provide two monthly bank statements showing no significant deposits (that cannot be documented).  This satisfies the lenders’ desire to “season” the funds.  401(k)’s generally come out in quarterly statements.  Therefore the most recent quarterly statement would be acceptable.  Same as investment accounts, or any stock portfolios…they generally have quarterly statements, however, if they do not, than two months would be required.  Make certain that if your statements indicated, “Page 5 of 5,” that you provide all five pages.  Even if page five is your reconcilliation page, banks will want all five pages.

Two W-2’s & Two 1040’s - The lender will want to document two solid years of employment, in the same line of work.  There are exceptions to this rule, for example if one was in college, or schooling, and can document training for the desired field.  However, for the most part, two years’ W-2’s will show the pay structure and history of the borrower.  Some lenders may indicate that 1040 Federal Tax Returns are not required.  Be weary of these lenders, as almost ALL lenders are currently processing a form called a 4506-T form.  It enables the lender to verify that the income information that was provided to the lender IS IN FACT WHAT WAS FILED WITH THE IRS.  So, make sure you’re not suprised, at the close of your escrow, when the borrower cannot fund their loan because they filed 2106 expenses on their 1040 tax returns, thereby, lowering their taxable income (what can be used for qualifying to purchase a home).

Two Years’ Residence History – this is self explanatory

Other Items of Importance (on a case by case basis)

Self Employed Borrowers

SE Borrowers may have to submit K-1’s.  Corporate tax returns will be required for any borrower whose corporation is owned 25% or more, by that borrower.

Occasionally, a signed  Year-to-Date Profit & Loss might be requested from an underwriter, or a copy of two years of a business license (to document two years in the same line of work).

Twelve months’ cancelled checks (front & back) for any liability that a business pays, as opposed to the borrower’s own, personal checking account, can be used to offset any payment obligations that could effect that borrower qualifying for their loan.  If the business pays an auto payment, and it’s supported by cancelled checks, than the company is already writing off that payment and therefore, the borrower should not have to be hit with that monthly payment, also, to qualify.

Be prepared to write letters of explanation.  In a world where underwriters are being deligient to protect their positions and lending institutions, everyone needs to be prepared to dot their “i’s” and cross their “t’s.”

Retirees

Award Letters or 1099’s from the outfit paying the compensation detail how much income is paid out and sometimes for what period of time the borrower may be receiving the income.  Again, 1040 Federal Tax Returns are another source for taxable retired income.

A perfect example is Social Security Compensation.  Each year Social Security provides an award letter to every recipient of those funds.

Investors

1040 Tax Returns will have your Schedule E.  This is the area whereby your “net” income or loss is determined for each real property that you own.  Since the Mortgage Credit Crises, if you do not have two years of schedule E income, than rental income cannot be used to qualify you for your next real estate purchase.  Even if you’re renting your existing primary residence…unless…you can determine 20 to 30% equity in your current residence (by appraisal by an approved appraiser to that particular lender), documentation of the signed rental or lease agreement, and a copy of the deposit check and deposit of the security deposit from the renter who will be renting your home, once you purchase your new home.

HUD-1 on any properties purchased or sold within the last year or so (if a property was on your schedule E for 2008, yet you sold it in December of 2008, you would need a HUD-1 to document the “Net” income or loss … loss.

FANNIE MAE Allows for up to 10 financed 1-4 unit properties to be owned.

FREDDIE MAC Allows for up to 4 financed 1-4 unit properties to be owned.

Divorcees

In the case of a divorce, we would need to document either contractual liabilities or any alimony or child support received by either party.  A full, complete copy of the final FILED and STAMPED decree would be required to determine any other the above concerns.

Generally three months’ bank statements, as opposed to two months, would be requested from a lender.  Documenting the deposit of the said alimony payments or child support payments for proof of receival.  Sometimes, an underwriting for a lender may request 12 months cancelled checks (front & back) to verify payments are being received.

Gift Funds

Gift funds are very important.  As mentioned above, sourcing, or seasoning your down payment and closing cost funds are imperative.  Generally, a good lender will provide you with detailed instructions, as to how to document a gift and transfer the funds properly.

Military Personel

DD-214, or discharge papers, will be required.  Leaving & Earnings Statement for retirees that earn their retirement income from the military.  and off-base housing letters for those still enrolled in military services to our country.

Everyone

…will need to provide proper copies of identity.  Drivers’ Linceses, I.D.’s, Passports, Social Security Cards, are some examples of acceptable forms of I.D.’s.