Wednesday, March 26, 2008

The 6% Seller Contribution can pay for...?

We have already addressed that FHA allows up to a 6% seller contribution (this does not take in to account and contribution that seller may make to a DPA) . The 6% contribution is the accumulation of fees paid by the seller, builder or realtor on behalf of the borrower. The 6% can not go towards down payment but it can cover:
Discount Points
Buydown Fees
Buyers closing Costs
Up-Front MIP (must cover all or none)
Can pay one years HOA fees or property taxes.

If these fees were to go toward upgrades in the property this would be considered an unacceptable concession, unless it was required by the property inspection or appraisal (in this case however it would not be necessary to the count these cost towards the seller concession fee).

However up grades can be made but payment must go to a third party and is not considered part of the seller concession even if not required by the appraisal or inspection. This scenario would require that it is part of the REPC stating the improvements made and who the third party funds will go to. The upgrades must usually be complete prior to closing and confirmed as completed by the appraiser or inspector. Even in this case the cost of improvements need not be considered as part of the 6% contributions.

Tuesday, March 25, 2008

What is the Section of the ACT and ADP Code?

What is the Section of the ACT and ADP Code?
FHA applicable Section of the act and ADP code is required to be on the Loan Application and the MCAW.

What is the Section of the Act? FHA loans are authorized by Congress. The ACT that Congress approved the program is referred to the Section of the ACT. In addition there are sub categories that fall under ADP codes. An example of this is a Standard 30 year fixed FHA loan falls under the section of the act 203(b) and if it is not a condo the ADP code is 703. If it is an ARM the section of the ACT is the same but the ADP code is 729. Make sure you always use the correct section of the act and ADP code. Please find an attached table breaking these down.

FHA Section of the Acts and ADP codes
Loan Description -Section of the ACT -ADP Code*
Fixed Rate -203(b)- 703
Arm Rate 203(b)- 729
Buydown- 203(b) -796

Fixed Rate Rehab Program-203(k) -702
Arm and Type -234 (c ) -734
ARM Condo -234 (c ) -731
Fixed Rate Condo-234(c)-734
Condo Under $50,000-234 (c ) -749
Condo-Buydown -234 (c ) -797

Buydowns and under priced homes take presidents
*Direct endorsement if FHA processed the 700 is replaced with 200

Thursday, March 20, 2008

Self Employed Income

Self-Employed borrowers -FHA considers a borrower owning 25% or more of a business as being self employed. If someone has 1099 income this does not make them self employed. However the documentation requirements are the same if more than 25% of the borrowers income is from commission income.

Why is this important to identify if someone is self employed or not if the documentation requirements are the same? When using the AU systems many times self employed status adds an extra layer of risk and you can loose an approval and get a refer.

FHA considers income from self-employed stable if they have been self employed for two or more years.
Between One and Two Years- an individual self-employed between one and two years must have at least two years of documented previous successful employment (or combination of one year of employment and formal education or training) in the line of work in which the borrower is self-employed or in a related occupation.
Less than one year-The income from a borrower self employed Less than one year may not be considered effective income.

The following documentation is needed for self employed borrower.

Two years Personal and business signed tax returns with all scheduled including W2's 1099's and K1's (Accept loans don't require Business tax returns if 1040's show increasing self employed income over the past two years, and funds to close are not coming form business accounts and the transaction is not a cash-out transaction)

A P&L is not required on a loan that gets an Accept. A P&L on Manuel underwrites is required. Refer require a P&L if

  • 7 months have elapsed since the business tax years ending date and income and
    Income to the self-employed borrower from each individual business is greater than 5% of his or her stable monthly income.

Analyzing Self employed income-The lender must establish the borrower's earnings trend over the previous two years but may average the income over three years, if all three years tax returns are provided. If the borrowers provides quarterly tax returns, the analysis can include income through the period covered by the tax fillings. If the borrower is not subject to quarterly tax fillings or does not file quarterly returns (form IrS 1040 ES), the income shown on the P&L statement maybe included in the analysis, provided the income stream based on the P&L statement is consistent with previous years earnings (I read this and have always said what would be the point than) If the P&L submitted for the current year show an income stream consistently greater than what is supported by the previous years tax returns, the analysis of income must be predicated solely on the income verified through the tax return..

Underwriters will have a problem with income that is declining from year to year. You would need to have a reasonable explanation for declining income and support that the income trend is no longer declining.

Wednesday, March 19, 2008

Manuel underwriting and Ratio's

FHA allows Manuel underwriting although I would always send my loan through DU/LP first (we'll talk about that later). If you do get a Refer you can still do a Manuel underwrite. Remember when having a Manuel uw you must be within FHA ratio guidelines which are 31/43 (new construction meeting CABO requirements can go to 33/45). Compensating factors can help support a higher Ratio. You must be able to provide documentation for the compensating factors.
Here is a list of items the could be considered compensating factors.

  • Less than a 10% increase from old rent/housing payment to the new housing expense
  • A borrower’s excellent savings ability (as shown by savings accounts, IRA’s etc)
  • 3 or more months cash reserves (house payments after closing) that are not part of a gift
  • Limited use of credit, conservative attitude towards the use of credit
  • Borrower has potential for increased earnings (career ladder)
  • Borrower has income that cannot be used as qualifying income
  • Larger than minimum down payment
  • Debt Ratios significantly under maximums
  • Strong credit or credit scores
  • Time on the job, the longer the better
  • Time at current residence, the longer the better
  • Down payment has been saved by borrower verses getting a gift
  • Large Down Payment
  • No recent (last 12 months) derogatory accounts or prior derogatory accounts were caused by extenuating circumstances.
  • Energy efficient dwelling

Wednesday, March 12, 2008

FHA Tip: Seller Contrubutions

FHA Tip: FHA allows a seller to pay up to 6% towards buyers closing cost. If the seller wishes to contribute to a DPA (Down Payment Assistance) program the amount gifted does not count towards the 6% seller contibution (concessions). If the seller wished to contribute up to 6% towards closing cost plus make a 3% donation to a DPA the borrower could get into a home with nothing down. I have included other information on Seller contributions from the 4155.1 below.

"Seller Contributions. The seller (or other interested third parties such as real estate agents, builders, developers, etc., or a combination of parties) may contribute up to six percent of the property's sales price toward the buyer's actual closing costs, prepaid expenses, discount points, and other financing concessions. Contributions exceeding six percent of the sales price or exceeding the actual cost of prepaid expenses, discounts points, and other financing concessions will be treated as inducements to purchase, thereby reducing the amount of the mortgage. Closing costs normally paid by the borrower are considered contributions if paid by the seller. Inducements to purchase are described in paragraph B, below.
The six percent limitation also includes seller payment for permanent and temporary interest rate buydowns and other payment supplements, payments of mortgage interest for fixed rate mortgages and GPMs only (but not principal), mortgage payment protection insurance, and payment of UFMIP.
Fees typically paid by the seller under local or state law, or local custom, such as real estate commissions, charges for pest inspections, fees paid for trustees to release a deed of trust, etc., are not considered contributions. The dollar limit for seller contributions is calculated by using Attachment A on the HUD-92900-PUR/HUD-92900WS. Each dollar exceeding FHA's six percent limit must be subtracted from the property's sales price before applying the appropriate LTV ratio. "

Tuesday, March 11, 2008

FHA Tip Gift Funds

FHA TIP-FHA allows a gift to be used for the 3% required down payment. You need to know that FHA is very strict in the documentation of the gift fund transactions. Each step of gift transaction must be verified from going out of the donors account to being deposited in the borrowers account and also include a gift letter. The transaction for the exact dollar amount must be verified going from the donors account to the Borrowers account. The verification of the transaction into the borrowers account must verify a balance to cover the required down payment and closing cost the borrower would need to bring to closing. Look at the 1003 (or 92900 HUD) details of transaction the dollar amount from the borrower, you have disclosed in this part of the application will be what the underwriter will want verified as assets.

I have provided two sample gift letters I found on the internet. The second gift letter I attached allows the donors bank to certify that the donor has enough funds to cover the gift without disclosing the donors balance. If you use this option to document the donors ability you would still need a copy of the donors check and a copy of the deposit slip showing the gift funds going to the borrowers account.

If you use a bank statement or account history to document the transaction keep in mind the underwriter will look at all deposits and if there is anything that looks unusual they will ask for verification of source of the unexplained deposits. Sometimes it maybe easier to use a VOD.

The following is additional information taken directly from the 4155.1 that you will find helpful

"Gift Funds. An outright gift of the cash investment is acceptable if the donor is the borrower’s relative, the borrower's employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower. The gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. Gifts from these sources are considered inducements to purchase and must be subtracted from the sales price. No repayment of the gift may be expected or implied. (As a rule, we are not concerned with how the donor obtains the gift funds provided they are not derived in any manner from a party to the sales transaction. Donors may borrow gift funds from any other acceptable source provided the mortgage borrowers are not obligors to any note to secure money borrowed to give the gift.) This rule also applies to properties of which the seller is a government agency selling foreclosed properties, such as the Veterans Administration or Rural Housing Services. Only family members may provide equity credit as a gift on a property being sold to other family members. These restrictions on gifts and equity credit may be waived by the jurisdictional HOC provided that the seller is contributing to or operating an acceptable affordable housing program.

FHA deems the payment of consumer debt by third parties to be an inducement to purchase. While FHA permits sellers and other parties to make contributions of up to six percent of the sales price of a property toward a buyer's actual closing costs and financing concessions, this policy applies exclusively to the provision of mortgage financing. Other expenses paid on behalf of the borrower must result in a dollar-for-dollar reduction to the sales price. The dollar-for-dollar reduction to the sales price also applies to gift funds not meeting the requirement that the gift be for down payment assistance and is provided by an acceptable source. When someone other than a family member has paid off debts, the funds used to pay off the debt must be treated as an inducement to purchase and the sales price must be reduced by a dollar-for-dollar amount in calculating the maximum insurable mortgage.

If the gift funds are to be provided at closing:

a. If the transfer of the gift funds is by certified check made on the donor's account, the lender must obtain a bank statement showing the withdrawal from the donor's account, as well as a copy of the certified check.

b. If the donor purchased a cashier's check, money order, official check, or any other type of bank check as a means of transferring the gift funds, the donor must provide a withdrawal document or canceled check for the amount of the gift, showing that the funds came from the donor's personal account. If the donor borrowed the gift funds and cannot provide documentation from the bank or other savings account, the donor must provide written evidence that those funds were borrowed from an acceptable source, i.e., not from a party to the transaction, including the lender. "Cash on hand" is not an acceptable source of the donor's gift funds.

Regardless of when the gift funds are made available to the homebuyer, the lender must be able to determine that the gift funds ultimately were not provided from an unacceptable source and were indeed the donor's own funds. When the transfer occurs at closing, the lender remains responsible for obtaining verification that the closing agent received funds from the donor for the amount of the purported gift and that those funds came from an acceptable source. "

We will review DPA (Down payment assistant ) programs later

Monday, March 10, 2008

FHA Use a MCAW instead of a 1008

w FHA Tip Use a MCAW instead of 1008
FHA Tip Use a MCAW instead of 1008

FHA Tip of the Day: FHA does not use a 1008 "Uniform Underwriting and Transmittal Summary. They use a Mortgage Credit Analysis Worksheet -Purchase Transaction known as a MCAW (HUD 92900-PUR) or
Mortgage Credit Analysis Worksheet (HUD-92900-WS) used for Refinance transaction. I have included a copy of each along with the instructions. Notice you can find the form numbers at the bottom of the page. I am sure you will find these in your loan origination systems.

Make sure you use the correct MCAW for your transaction. The next step which is a must, make sure the MCAW is completed correctly. You will use this form to communicate with the underwriter how you are structuring your loan. The work sheet should be complete including the case number, section of the act and include CAIVRS in box 16 and the LDP/GSA which you can get in FHA connection.

Any seller paid closing cost must be listed in Box 5. This does not include money given to a DPA. A seller can pay up to 6% closing cost plus their contribution to a DPA. It the seller is paying more closing cost than the borrower has the difference will go toward reducing the sales price. The borrower would still have to bring in the required 3% down payment from their own funds. The great thing about FHA is they consider gifts as the borrowers own funds.

Box 10a must match your sales contract on form HUD (92900-PUR). Line 10 H must show at least 3% needing to come from borrowers funds.

12I list all gift funds (92900-PUR)

Box 13 so often the monthly mip is not included (this is calculated by taking .50% x box 3a/12) hazard insurance, taxes and any HOA fees must be included.

When doing an FHA streamline loan box 5, 11, 12, 14, and 15 of the HUD-92900-WS will be left blank.

Refinance loans that have a MIP refund should be entered on line 10d of the HUD-92900-WS.

You will want to use your MIP streamline worksheet to determine your loan amount which we will go over on another day.

Not all Origination systems automatically calculate this MCAW correctly. Until you know you system I would double check the figures manually. This also will give you great insight on how the MCAW is used as a very helpful tool in underwriting the file.

Friday, March 7, 2008

FHA does not securitize mortgage loans. They Endorse (Insure) them.

Today's FHA Tip: FHA doe not purchase (securitize) mortgage loans. They only insure (endorse) them. A closed FHA loan must receive a Mortgage Insurance Crertificate (MIC).

The process for this goes as follows, an FHA loan must be originate, underwritten and closed and funded meeting FHA guidelines as outlined in the Handbooks, guides and mortgagee letters for a Title II lender.
When the lender closed the loan they will collect the upfront MI and submit the funds to HUD, now days this is usually done as a wire. Lenders have only 10 days to get the funds to HUD or incur a late fee. A lender may have to send the original FHA loan file (aka the case binder) to the HOC (Home Ownership Center, in our case Denver) for review many lenders are authorized to insure their own loans (this privilege is based on default rate). In both case if requirements are meet in the originating, processing, underwriting, closing and funding areas the MIC can be issued. Only at this point is the loan considered an endorsed FHA loan and the loan is officially insured. If a loan does not receive a MIC it is not considered an endorsed FHA loan regardless of how it is closed. Everyone has a problem when this happens.

When doing a refinances from an FHA loan to an FHA, before determining you can do a streamline loan or giving any MIP Refunds (we will talk about Stream line loans and MIP Refund later) make sure the loan is insured (aka endorsed). You can find this information in FHA Connection by using the old FHA case number. FHA Connection will also show if they have an up front MIP refund which can be applied towards their new upfront MIP.

If FHA receives a case binder that is incomplete the lender will receive a NOR (Notice of Return). If a lender receives an NOR they may contact the broker for help to get the problem resolved.

Why do I bring this up? 1- This will give you the heads up to always check the old case number in FHA Connection to make sure the previous loan was endorsed if your doing an FHA refinance. You may find the loan amount on the NOTE is not the loan amount that was endorsed, if a mistaken was made in calculating the original loan amount the lender may have had to pay this down and this could impact your numbers on the new loan. Unfortunately I have seen my share of FHA loans that were not endorsed or the loan amount was adjusted, even though it doesn't happen that often.

2-IF you are contacted by a Lender because they have received a NOR please give them as much help as you can to get the loan endorsed. Lenders will usually try to resolve this themselves before contacting the broker. This is in the best interest of everyone.

Keep in mind the review for endorsement its not a complete audit of the file only a cursory review in most cases.