Did you know a family Memember can Lend the borrower their downpayment and closing cost? Read the 4155

Family Member Lending-Family members (defined below) may help with the costs of acquiring a home in the form of a gift or a loan. All such gifts must also meet the requirements of paragraph 2-10(C). FHA permits family member to lend on a secured or unsecured basis, up to 100 percent of the homebuyer's required cash investment. This lending may include the downpayment, closing costs, prepaid expenses and discount points. If the money lent by the family member is secured against the subject property, whether borrowed from an acceptable source or from the family member's own savings, only the family member provider(s) may be the note holder. FHA will not approve any form of securitization of the note that results in any entity other than the family member being the note holder, whether at loan settlement or at any time during the mortgage life cycle.
Further, if the funds that are lent by the family member are borrowed from an acceptable source, the homebuyer may not be a co-obligor on that note (e.g., the son and daughter-in-law may not be co-obligors on the note used to secure money borrowed by the parents that in turn was lent for the down payment).

The following financing terms and conditions also apply:

1. The maximum insurable mortgage is not affected by gifts or loans from family members.

2. The combined amount of financing may not exceed 100 percent of the lesser of the property's value or sales price, plus normal closing costs, prepaid expenses, and discount points. While the family member may lend 100 percent of the cash investment requirements, cash back to the homebuyer (beyond refund of any earnest money deposit) at closing is not acceptable.

3. If periodic payments of the secondary financing are required, the combined payments may not exceed the borrower's reasonable ability to pay. The secondary financing payments are to be included in the total debt-payment-to-income ratio (i.e., the "back-end" ratio) for qualifying purposes.

4. The second lien may not provide for a balloon payment within five years from the date of execution.

5. If the family member providing the secondary financing borrows those funds, the source may not be any entity with an identity-of-interest in the sale of the property, including the seller, builder, loan officer, real estate agent, etc. Mortgage companies that have retail banking affiliates may have that entity make a loan to the family member, providing the secondary financing for the home purchase. However, the lending institution may not make such financing available under terms and conditions more favorable than to other borrowers (i.e., there may not be any special considerations provided in connection between making the mortgage and lending funds to family members to be used as secondary financing for the purchase of the home).

6. An executed copy of the document outlining the terms of the secondary financing must be maintained in the lender’s file. An executed copy of this agreement also must be provided in the endorsement binder.

For the purposes of this paragraph, a “family member” is defined as a child, parent, or grandparent of the borrower or borrower’s spouse. Included in this definition are legally adopted sons or daughters (and a child who is a member of an individual's household, if placed with such individual by an authorized agency for legal adoption by that individual), and foster children. The term "child" means a son, stepson, daughter, or stepdaughter.

FHA Tip: Down Payment can be borrowerd?

Did you know that there are circumstances where your borrower can borrower the down payment? This is per the 4155
Collateralized Loans. Funds can be borrowed for the total required investment as long as satisfactory evidence is provided that the funds are fully secured by investment accounts or real property. Such assets may include stocks, bonds, real estate (other than the property being purchased), etc.
In addition, certain types of loans secured against deposited funds, such as signature loans, the cash value of life insurance policies, loans secured by 401(k)s, etc., in which repayment may be obtained through extinguishing the asset; do not require consideration of a repayment for qualifying purposes. However, in such circumstances, the asset securing the loan may not be included as assets to close or otherwise considered as available to the borrower.
An independent third party must provide the borrowed funds. The seller, real estate agent or broker, lender, or other interested third party may not provide such funds. Unacceptable borrowed funds include signature loans, cash advances on credit cards, borrowing against household goods and furniture and other similar unsecured financing

FHA Tip: FHA only allows a borrower to have one FHA loan except..

HUD only allows a borrower to have 1 FHA loan. Unless... according to the 4155 there are 4 scenerios that allow an exception to this rule:

"A.Relocations. If the borrower is relocating and re-establishing residency in another area not within reasonable commuting distance from the current principal residence, 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. The relocation need not be employer mandated to qualify for this exception. Further, if the borrower returns to an area where he or she owns a property with an FHA-insured mortgage, it is not required that the borrower re-establish primary residency in that property in order to be eligible for another FHA insured mortgage.
B. Increase in Family Size. The borrower may be permitted to obtain another home with an 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 provide satisfactory evidence of the increase in dependents and the property’s failure to meet the family's needs.
The borrower also must pay down the outstanding mortgage balance on the present property to a 75 percent or lower loan-to-value (LTV) ratio. A current residential appraisal must be used to determine LTV compliance. Tax assessments, market analyses by real estate brokers, etc., are not acceptable as proof of LTV compliance.
C. 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.
D. Non-Occupying Co-Borrower. A non-occupying co-borrower on property being purchased with an FHA-insured mortgage as a principal residence by other family members may have a joint interest in that property as well as in a principal residence of their own with a FHA-insured mortgage. (See paragraph 1-8 B for additional information).
Under no circumstances may investors use the exceptions described above to circumvent FHA’s ban on loans to private investors and acquire rental properties through purportedly purchasing "principal residences." Considerations in determining the eligibility of a borrower for one of these exceptions are the length of time the previous property was owned by the borrower and the circumstances that compel the borrower to purchase another residence with an FHA-insured mortgage. In all other cases, the purchasing borrower either must pay off the FHA-insured mortgage on the previous residence or terminate ownership of that property before acquiring another FHA-insured mortgage "

Keep in mind scenerio B is very hard to prove.

FHA Tip Counting Future Raise

FHA allows a borrower to use a raise if it is documented by the employer and received 60 days from the date of closing. Remember that the underwriter will look at the over all risk and make sure that this makes sense. Sometimes underwriters will require that the paystub is received showing the raise before closing. Make sure you know what the 4155.1 says so that you can communicate this with your underwriter and discuss the risk that the file could have with out the documentation. This information is found in 4155.1 Rev 5 Paragraph 2-7

Condo's

requires that condo's be approved by FHA. You can check the condo approvals by going to this web site https://entp.hud.gov/idapp/html/condlook.cfm. Here you will find your Condo ID.

If you Condo is not approved you can refer to Mortgage Letter 8-1-96 and possibly do a spot approval. You will need the Home Owners Association to complete items 1-13. This will be submitted with you loan and the DE underwriter has the authority to approve Spot condo's

The section of the act for condo's is 234(c). The ADP code if it is a Fixed rate is 734, if it is an ARM 731 and if it is a buy down it is 797


Town homes and PUD fall under the FHA section of the ACT 203b and do not have to be approved by HUD.

The MIP is calculated the same as on the 203b program (previously this was not the case but changed with Mtg letter 2005-38)

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
Prepaids
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.

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

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.

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

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. "

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

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.

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.