Credit History: 

  

The borrower's most recent 2-year credit history will receive the closest scrutiny, whether by an Automated System or an FHA Underwriter. The borrower’s overall performance in paying debts as agreed will be evaluated. If the file is approved by AUS, the findings may be utilized as conditions. For manual underwriting, the FHA Underwriter must consider the risk and compensating factors to override an Automated System referral, or underwrite a Borrower who has no credit profile yet established.If a borrower has no established credit history, the Lender MUST develop a credit profile from alternative sources such as rent, utility bills, rental payments, etc. The basic hierarchy of credit evaluation is the manner of payments made on:

• Rental payments (direct verification or cancelled checks to cover the past 12 months with no lates).
• Utilities - Verify the same as rental payments.
• Installment debts (verify no lates in past 12 months). Count the monthly payment of all debt with 10 months or more remaining in the debt ratio. If the debt will be paid off earlier than 10 months, but the monthly payment exceeds 2% of the gross monthly income of the Borrower, the ratio should reflect this debt and be analyzed accordingly in the credit decision.
• Revolving accounts (including store accts). Evaluate case by case. Use the monthly payment on the credit report if shown, or obtain a copy of the billing statement if the Borrower pays less than the “rule of thumb” 5% of balance per month.

Undisclosed Debt(s): Borrower must address any debt revealed on the credit report that was not disclosed on his/her application. All inquiries on the credit report that have occurred within the most recent 90 days must be explained and if new credit is opened, must be verified. Newly opened debt must be verified to not be related to the Purchase (loan) transaction.

Alimony: Because of the tax consequences of alimony payments, it is acceptable to deduct the amount of the monthly alimony payment from the Borrower’s income rather than include the payment as a debt in the ratio.

Child Support: Verify the amount of the support to be paid by the Borrower by obtaining a copy of the Support Order (through the court system or another legal avenue). Verify how long the support will remain in payment by documenting the age of the child(ren). Consider child support (and alimony, if desired) as recurring installment debt. Any payment remaining for 10 months or more (or over 2% of the gross monthly income of the Borrower) must be included in the debt ratio.

Contingent Liability: Contingent liability exists when our Borrower will be held responsible for payment of a debt should another party jointly obligated for the payment default on said payment. Unless the borrower can provide conclusive evidence that there is NO POSSIBILITY that the debt holder will pursue debt collection against him should the other party default, the following rule applies:
For both mortgages and other debt, if the borrower remains obligated for the debt payment, and has not been released from payment liability, the Primary Obligor (the other “co-signing” party) must provide satisfactory written documentation that he has been making 100% of the payments, all paid on time, without any lates occurring for at least the past 12 months. (If the other party cannot document timely payment on the account, then the monthly payment must be included in the borrower's debt to ratio.)

Projected Obligations: Debt payment(s) that are scheduled to begin repayment within 12 months of the first payment of the mortgage must be considered in the debt ratio. (Example, deferred student loans, balloon payments, etc.). The Lender must enter the expected (or actual, if known) monthly payment, and include in the debt ratio.

Debts NOT Included In Ratio: Unlike other loan types, FHA DOES NOT consider 401k loan repayments as a monthly debt in the ratio. Also NOT included: union dues, childcare, commuting costs, voluntary deductions through payroll.

Collections: FHA does NOT arbitrarily require that all collections be paid off prior to closing. The reasons for the collections and the way in which the Borrower has dealt with the accounts will be evaluated on a case-by-case basis. Webster Bank has established the guideline that ALL collections will be paid off prior to closing for MANUALLY underwritten loans. For loans that have obtained an automated approval, the findings will determine the way in which the open collections are examined and resolved.

Open Judgments: Both Automated and manual underwriting require that all open judgments be paid in full and released from the land records prior to closing. Proof of the satisfaction of the account(s) must be retained in the loan file.
Previous Foreclosure: Usually a Borrower is not eligible for an FHA mortgage if a previous residence went into foreclosure (or deed in lieu of foreclosure) within the most previous 3 years. The overall risk of the loan will be analyzed based on extenuating circumstances at the time of the foreclosure.

Bankruptcy:

Chapter 7: Borrower’s discharge of bankruptcy should be 2 years or more previous to the loan application and the Borrower should show reestablished credit with all recent credit accounts paid as agreed since the bankruptcy.
Chapter 13: The Borrower may qualify without the bankruptcy being discharged. The Borrower must show at least 1 year paying as court ordered through the Chapter 13 restructure. The court must approve a new FHA mortgage loan transaction and must provide a copy of the payment printout for the Borrower. Any debts outside the B/K msut show no late payments since B/K started.

Assets:
DU/LP findings may be utilized to determine type of asset verification required if the file is underwritten through automation.
Files manually underwritten will require the most recent 2 months bank statements for each account used in the transaction. The statements must show the ownership and activity on the accounts and must show beginning and ending balances (to cover a full 3 month period for an average balance). All large deposits must be documented for the source of funds for the increase.
Earnest money deposit(s) must be verified. The bank account used for the deposit(s) must show the balance before the deposit left the account and must also show ending balance after the deposit(s) cleared.

Non-Purchasing Spouses:
If required by state law in order to perfect a valid and enforceable first lien, the non-purchasing spouse may be required to sign either the security instrument or documentation evidencing that he or she is relinquishing all rights to the property. If the non-purchasing spouse executes the security instrument for such reasons, he or she is not considered a borrower for our purposes and need not sign the loan application. In all other cases, the non-purchasing spouse is not to appear on the security instrument or otherwise take title to the property at loan settlement.
Where there are non-purchasing spouses who sign security instruments relinquishing their rights to the property pursuant to applicable state laws, these non-purchasing spouses do not have to sign the mortgage note. Signing the security instrument for such purposes does not make the non-purchasing spouse a co-borrower.
Except for the obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios if the borrower resides in a community property state or the property to be insured is located in a community property state. Although the non-purchasing spouse's credit history. It is not to be considered a reason for credit denial, a credit report that complies with the requirements of paragraph 2-4 must be obtained for the non-purchasing spouse in order to determine the debt to income ratio.

Debt to Income Ratios:
Debt to income ratios are the calculations underwriters use to determine whether a borrower can qualify for a mortgage. They are used to determine if you have the capacity to repay your mortgage. There are two calculations. The first or Front Ratio is your housing expense-to-income ratio. This is your proposed mortgage payment (principle, interest, taxes, mortgage insurance, and homeowners insurance) divided by your gross monthly income. The second or Back Ratio is your total monthly obligations-to-income ratio. This is your gross monthly payment including Mortgage PITI divided by your gross monthly income.
The only tricky part is understanding what is and is not included in your total obligations and what can and cannot be included in your gross monthly income. Below is a list of things to remember when you are totaling all of your payments and all of your income.

Total Monthly Payments

Mortgage Payment:
Include principle, interest, county property taxes, and insurance (PITI).

Installment Accounts:
Do not count installment loans that have less than 9 months remaining; except for Freddie Mac loans, ... they count everything.

Revolving Accounts (credit cards):
Include the minimum payment on all open accounts.

Co-signed Loans:
You will also have to include these, unless you can show twelve months of cancelled checks from the person that is paying the loan and the loan must not have any late payments.

Child Support:
Must be included.

Loans from a Previous Marriage:
Must be counted if you are getting a Conventional, Conforming loan. However, If your divorce papers clearly divide up the liabilities, FHA and non-conforming loans do not count them.

Do Not Include:
Utilities, telephone services, auto insurance, or childcare. (VA loans do include childcare.)

Rental Liabilities
If you own more than one home or income property the mortgage payments will be included as a debt unless the LTV on that property is less than 75%. This is new as of September 2008 according to mortgagee letter 2008-25. You can download the letter from this link: Mortgagee Letter 2008-25

Gross Monthly Income

Overtime:
Overtime cannot be counted unless you have been receiving it consistently for two years and your employer will say that it is more than likely to continue into the future.

Bonus:
Follows the same rule as overtime.

Commission:
Normally commission requires a two-year history in order for it to be used. People changing from a salaried job to a commission job have tough times getting mortgage loans until they can show two years in the field. There are no-income verification loans on the market with slightly higher rates for people paid by commission.

Self-Employed:
You must be self-employed for two years. Your usable income for a loan is the bottom line on your federal tax return AFTER all the deductions. There are things you can add back such as depreciation but to be perfectly honest, most self employed people have difficulty achieving the required monthly gross income because of all the tax write offs. Again, that is why it is so wonderful that there are non-conforming loans that allow higher debt to income ratios and no-income verification programs.

Child support:
You can use child support if you can prove that you will receive it for an additional three years. The only acceptable proof of payment is cancelled checks or a print out from the court if it is being paid through the court system.

Alimony:
Alimony follows the same rule as child support.

Required Ratios

Conventional Loans:
Fannie Mae and Freddie Mac allow a maximum of 28% for the front ratio and 36% for the back ratio. (28/36)

Non-Conventional:

FHA allows 31/43, can go as high as 55% and VA only uses the back ratio of 41% as a guideline. VA also calculates what they call Adequacy Of Effective Income and Balance Remaining for Family Support.

Property Type and Occupancy
HUD does not insure non-owner purchase transactions. However, HUD will insure a refinance of a non-owner-occupied fixed-rate loan under the Streamline refinance program. Refer to Streamline Refinance for additional information.

Primary Residence
A primary residence is a property that will be occupied by the borrower the majority of the calendar year and meets the following criteria:

• 1-4 units family homes, PUDs, Site condominiums, FHA-approved condominiums, and HUD-owned properties.
• At least one borrower must occupy the property and sign the Note and security instrument for the property to be considered owner-occupied.
• The borrower must occupy the property within 60 days after the loan closes with continued occupancy for at least one year. The only exceptions allowed are due to hardship or extenuating circumstances.
• 3-4 unit properties require an Occupancy Declaration to be included in the loan file.
• There is no limit on the maximum acreage for FHA loans.

Generally, FHA will not insure more than one mortgage for any borrower. Any person individually or jointly owning a home covered by a mortgage insured by FHA in which ownership is maintained may not purchase another principal residence with FHA mortgage insurance, except under the conditions below:

• Relocation: If the borrower is relocating and reestablishing residency in another area not within reasonable commuting distance from the current principal residence (generally at least 50 miles away), the borrower may obtain another mortgage using FHA-insured financing and is not required to sell the existing property covered by a FHA-insured mortgage. Refer to the local FHA Homeownership Center for detailed information.

Second Primary Residence

• Increase in family size: The borrower may be permitted to obtain another home with a FHA-insured mortgage if the number of legal dependents increases to the point that the present house no longer meets the family’s needs. The borrower must also:
  • Provide satisfactory evidence of the increase in dependents and the property’s failure to meet the family’s needs.
  • Pay down the outstanding mortgage balance on the present property to a 75% or less loan to value ratio, exclusive of any financed mortgage insurance premium.
• Vacating a jointly owned property: If the borrower is vacating a residence that will remain occupied by a co-borrower, the borrower is permitted to obtain another FHA-insured mortgage. Acceptable situations include instances of divorce after which the vacating ex-spouse will purchase a new home or one of the co-borrowers will vacate the existing property.
• Non-occupying co-borrower: A non-occupying co-borrower on an FHA-insured mortgage being purchased as a principal residence by other family members may have a joint interest in that property as well as the principal residence that is covered by an FHA mortgage.

Properties Listed for Sale
Refinances on properties listed for sale are not permitted. Properties previously listed for sale must have been off the market and the listing canceled in the time frames described below:

• Rate and Term Refinances: The listing agreement must be canceled at least one day prior to the date the loan application is taken.
• Cash Out Refinances: Listing agreements on the subject property must be canceled six months prior to the loan application date or the loan is subject to a maximum loan-to-value of 70%.

In all circumstances, listing agreements must be canceled prior to the loan application. A copy of the canceled/expired listing should be placed in the file and a search of the current multiple listing service should be completed to verify that the property is not currently listed by a different agency.
Note: This policy does not apply to FHA Streamline loans.

Eligible Borrowers
Eligible borrowers include individuals and investors (under limited circumstances). Eligible borrowers must provide evidence of valid Social Security numbers (SSN) on all FHA loans. Evidence includes a copy of the borrower’s:

• Social Security card (Tax Identification numbers (TINs) are not allowed)Or
• Pay stub, W-2, or other government-issued card that includes the borrower’s Social Security number.

In addition, FHA requires validation of Social Security numbers for consistency with the borrower’s name and date of birth through FHA Connection and ECHO systems or its equivalent.
Non-Permanent Residents
Non-permanent resident aliens are eligible provided they:

• Occupy the property as a principal residence
• Have a valid Social Security number
• Are eligible to work in the United States

Escrow/Impound Accounts
Escrow/impound accounts are required for property taxes and insurance. The amount must be included in qualifying ratios.

Refinance

Non-FHA to FHA If the property was acquired less than one year before the loan application and is not already FHA-insured, the original sales price of the property (rather than the appraised value) must be used in determining the maximum mortgage. With conclusive documentation, expenditures for repairs and rehabilitation incurred after the purchase of the property may be added to the original sales price when calculating the mortgage amount.

Cash-Out A cash-out is a first lien in which the loan proceeds may include the funds required to pay off any existing liens, related prepaids, closing costs, and the disbursement of cash to the borrower.

Streamline Refinance The FHA Streamline refinance program is designed to lower the monthly principal and interest payments on a current FHA-insured mortgage. Streamline refinances are subject to the following requirements:

• A minimum 620 credit score is required. Note: The credit report is only used to validate the credit score on FHA non-credit qualifying Streamline transactions.
• Cash-back to the borrower is not allowed with the exception of minor adjustments at closing provided the amount does not exceed $500.
• Allowed with or without an appraisal
• Must result in an immediate payment reduction to the borrower
• Non-owner-occupied ARM or fixed-period ARM loans are not eligible for the Streamline refinance program.

FHA UFMIP and ANNUAL Changes Mortgagee Letter 12-04

FHA UFMIP and ANNUAL Changes Mortgagee Letter 12-04 On December 23, 2011, the President signed into law the Temporary Payroll Tax Cut Continuation Act of 2011 (Public Law 112-78), which requires FHA to increase the Annual MIP it collects by 10 basis points (bps). This change is effective for case numbers assigned on or after April 9, 2012. Increase to Up-Front Mortgage Insurance Premium - Financed 1 time into new loan The UFMIP will be increased from 1 percent to 1.75 percent of the base loan amount for case numbers assigned on or after April 9, 2012. This increase applies regardless of the amortization term or LTV ratio. Increase to Annual Mortgage Insurance Premium - Paid Monthly Loan Term > Greater than 15 Years Base Loan Amount LTV Effective Annual MIP Any Amount Below <95.00% April 9, 2012 120 bps Any Amount Above >95.00% April 9, 2012 125 bps Term Less than 15 Years with LTV above 78% Any Amount Below <90.00% April 9, 2012 35 bps Any Amount Above >90.00% April 9, 2012 60 bps Increase to Annual Mortgage Insurance Premium on Mortgages with a High Outstanding Base Loan Amount - NOT IN ARIZONA Term > 15 Years Base Loan Amount LTV Effective Annual MIP ˜ $625,500 ˜ 95.00% June 11, 2012 120 bps ˜ $625,500 > 95.00% June 11, 2012 125 bps Above $625,500 ˜ 95.00% June 11, 2012 145 bps Above $625,500 > 95.00% June 11, 2012 150 bps Term ˜ 15 Years with LTV above 78% ˜ $625,500 ˜ 90.00% June 11, 2012 35 bps ˜ $625,500 > 90.00% June 11, 2012 60 bps Above $625,500 ˜ 90.00% June 11, 2012 60 bps Above $625,500 > 90.00% June 11, 2012 85 bps Decrease to Annual Mortgage Insurance Premium on Certain Streamline Refinance Transactions The Annual MIP will be 55 bps, regardless of base loan amount for all FHA loans endorsed on or before May 31, 2009. The endorsement date is on the Case Query screen of FHA connection. This change is effective for case numbers assigned on or after June 11, 2012. Decrease to Up-Front Mortgage Insurance Premium on Certain Streamline Refinance Transactions The UFMIP will decrease from 1 percent to .01 percent of base loan amount for all FHA loans endorsed on or before May 31, 2009. The endorsement date is on the Case Query screen of FHA connection. This change is effective for case numbers assigned on or after June 11, 2012. Reminder that the following bullet points must be met prior to ordering a case # (reference ML 11-10) A case number assignment cannot be ordered until loan documents and a signed application is received from a borrower. HUD is closely monitoring this requirement to ensure case number assignments are not being ordered to locked down guideline changes. • Request case numbers only when they have an active loan application for the subject borrower and property; and • Certify at the time of requesting a case number that they have an active loan application for the subject borrower and property; and • Provide the subject borrower’s name and social security number for all new construction (proposed construction and existing construction less than one year old).