HUD/FHA's Origination Through Post-Closing/Endorsement Handbook (4000.1)
This site provides information on the policy and
procedural changes in FHA requirements effective with the new
HUD Handbook 4000.1. These became effective 9/14/2016. FHA
publishes periodic changes and quarterly updates to this
Handbook. These changes and updates, along with the most current
version of HUD Handbook 4000.1,
as well as other HUD Handbooks, may be found online at
As your trusted expert in mortgage loan
quality and performance software solutions,
we strive to provide our customers with a better understanding of every aspect of mortgage loan requirements and management. The Federal Housing Administration Handbook (4000.1) became effective on September 14, 2015.
Use our helpful tool below to gain
better understanding of the recent policy and procedural changes
with details on credit, appraisal, quality control and
The HUD 4000.1 Handbook policies referenced in this Section will supersede FHA's credit policies primarily contained in HUD's 4155.1 Mortgage Credit Handbook and various Mortgagee Letters.
HUD/FHA will now require evidence of source of funds for an Earnest Money Deposit (EMDs) in excess of 1% of the Sales Price. Also, for any recent deposits & recently opened accounts of more than 1% of the Adjusted Value (the lower of the Sales Price or Appraised Value) the source of these funds must be documented.
Lenders will now have to include deferred obligations in the Borrower's liabilities (i.e. all student loans should be counted as liabilities, regardless of the payment type or status of payments. The lender must use either the Greater of: 1) 1% of the outstanding balance of the loan (instead of 2%) OR 2) the monthly payment reported on the Borrower's credit report OR the actual documented payment, provided the payment will fully amortize the loan over its term.
Documents contained in the loan file may not be more than 120 days old at the time of the Disbursement Date.
Appraisal reassignments made (at the Borrower's request) must be done within five business days.
In order to obtain an additional FHA loan, a Borrower who is relocating must establish a new residence in an area more than 100 miles from the Borrower's current principal residence.
The maximum LTV percentage in a tenant-landlord transaction will be limited to 85%.
Cases in which it is discovered that there is undisclosed mortgage debt OR if any business income declines by more than 20% must be downgraded to a "Refer" and manually underwritten.
If the Borrower has a loan secured by an interest in a timeshare it must be considered as an installment loan and a recurring obligation.
For Borrowers who are paid hourly and whose hours vary, the lender must average income for the past two years when calculating income.
If a Borrower earns Overtime or Bonus income and such income has decreased by 20% or more from the previous year, the lender must utilize the current year's income in qualifying the borrower.
The percentage of Non-Taxable income that may be added to a Borrower's gross income estimate will not be able to exceed the greater of 15% or the appropriate tax rate for the borrower. Also, if the Borrower was not required to file a Federal Tax Return for the previous tax reporting period, use 15% to gross-up any non-taxable income.
In calculating the effective Net Rental Income from other real estate owned by a Borrower, lenders will now be required to utilize a 75% factor for vacancy, maintenance and collection loss.
Audited Profit and Loss Statements or signed quarterly tax
returns obtained from the IRS will be required to document
self-employment income whenever the income used to qualify
the Borrower exceeds the two year average of
The draft 4000.1 Handbook is silent on this topic which implies that secondary financing for Borrowers 60 years of age or older will no longer be permitted.
On Manually Underwritten loans, any surplus gift funds may not be considered as cash reserves.
On cash-out refinance transactions, the subject property must have been owned and occupied by the Borrower as their Principal Residence for the 12 months prior to the date of the FHA case number assignment.
On cash-out refinance transactions, the maximum Combined Loan-To-Value (CLTV) ratio is 85%.
Lenders will be required to take additional steps to verify and document the stability of a Borrower's employment income if he/she has changed jobs more than three times in the previous 12 month period or has changed lines of work. Example: transcripts of training/educationdemonstrating qualification for a new position.
Closed-end debts do not have to be included in the
qualifying Debt-To-Income (DTI) ratios if they will be paid
off within 10 months and "the cumulative payments of all
debts are less than or equal to 5% of the Borrower's gross
monthly income". Also, the Borrower may not pay down the
balance in order to meet the 10
For manually underwritten loans, obtain pay stubs covering a
min. of 30 consecutive days (if paid weekly pay stubs must
cover a min .of 28 consecutive days) showing year-to-date
earnings AND one of the following:
1. a written VOE) covering two years OR
2. an electronic verification
On an FHA Rate and Term refinance transaction, a new requirement will be to limit the LTV to 85% for a Borrower who has occupied the subject property as their Principal Residence for fewer than 12 months prior to the FHA case number assignment OR if owned less than 12 months, has not occupied the property for that entire period of ownership.
On an FHA streamline refinance transaction, a Net Tangible
Benefit test must be conducted. A Reduction in Term is now
being considered as a net
Mortgagees will now be allowed to charge Tax Service Fees to FHA Borrowers as long as such fees are deemed reasonable and customary. It should be noted that the 4000.1 Handbook is silent on this specific topic but HUD/FHA has indicated in their listing of Frequently Asked Questions (FAQs) that Tax Service Fees will now be an allowable charge.
A new refi option is the "Simple Refinance Program" and is for those FHA Mortgagors who wish to pay off their existing loan and obtain a new loan with a lower interest rate. No cash-back will be allowed under this program. The "simple refinance" does not have Net Tangible Benefit test requirement.
HUD has issued a recent clarification to existing policy that states that a Family Member's name can be listed on the Agreement of Sale but not be a Co-Borrower on the loan transaction.
In light of the upcoming TILA, RESPA Integrated Disclosure (TRID) changes being implemented industry-wide on October 3, 2015, HUD had indicated that the "Settlement Agent" Certification that must be executed on FHA loan transaction can be modified to delete the phrase "which I have prepared".
When receiving Gift Funds in a loan transaction, HUD/FHA now requires evidence to document the withdrawal of such funds from the Donor's savings or checking account along with copies of these Bank Statements.
Any refunds of the Borrowers' Paid Outside of Closing (POCs) fees (i.e. appraisal fees or credit reports) may now be used towards a Borrower's minimum required investment (MRI) - if the lender can document that the POCs were initially paid with the Borrower's own funds.
Any payments towards utilities as part of a Borrower's Home Owner Association (HOA) fees may be subtracted from the total HOA fees when calculating the Borrower's Housing Expenses ratios.
The HUD 4000.1 Handbook policies referenced in this Section will supersede FHA's appraiser and property requirements primarily contained in HUD's 4150.2 Handbook and various Mortgagee Letters.
It is stated in the Appraisal Report and Data Delivery Guide that a property's location in a "non-disclosure" state does not remove the appraiser from the requirement to research, report, and analyze the prior sale history of the subject and comparable properties.
For properties that have individual water and/or sewer
systems (wells & septic), the Mortgagee must require
that they be connected to a public or community system
whenever feasible and available at a reasonable cost.
However, no guidelines are provided in the 4000.1 Handbook
as to what would be considered as a
On new construction cases, the Appraiser must obtain from the Mortgagee a fully executed Form HUD-92541 (Builder's Certification) dated no more than 30 days prior to the date of the appraisal along with documents related to New Construction (e.g. Plans, Specs, etc.).
The non-residential portion of the Total Floor Area of a property may not exceed 49%. Properties must be legally permitted and conform to current zoning requirements. The term "Total Floor Area" is not defined by HUD in the 4000.1 Handbook.
Appraisers will now be required to indicate whether or not the subject property can be legally rebuilt if destroyed, if the property has a legal non-conforming zoning designation.
Appraisers will be required to notify the Mortgagee if the
subject dwelling or related property improvements are
located within an Easement of an Overhead Electric Power
Transmission Line or if they appear to be located within an
unsafe distance of the power line
A definition of what HUD considers to be Excess/Surplus Land is provided in the 4000.1 HB but a better definition needs to be provided as to what would be considered as Surplus Land along with examples. For example, how would an appraiser arrive at a value for a property containing 20 acres with comparable sales containing only 5 acres?
Appraisers must report when the subject property has security bars on the bedroom windows or doors. There is no further guidance provided as to what conditions (if any) an underwriter must take when this information is provided by the appraiser.
Appraisers must operate all conveyed appliances (such as a dishwasher) and observe their performance. The Appraiser must notify the Mortgagee of any deficiency if an appliance is found to be inoperable.
Appraisers must observe the roof of a property to determine whether there are deficiencies that present a health and safety hazard or do not allow for reasonable future utility. The Appraiser must report if the roof has less than 2 years of remaining life, and make the appraisal subject to inspection by a professional roofer.
Appraisers will be required to notify the Mortgagee if the property has a sump pump that is not properly functioning at the time of the appraisal. A sump pump may be hardwired by an acceptable wiring method or may have a factory electrical cord that is to be connected to a receptacle suitable for such use.
Appraisers will be required to take many more photographs during their on-site visit. Some examples include: kitchen, bathrooms, bedrooms, any other rooms representing overall condition, basement, attic, crawl space, any updates or repair conditions. In addition, photos of common areas and shared amenities will be required on condos.
Appraisers must consider and attempt all approaches to value and must develop and reconcile each approach that is relevant.
No reference is made to HUD Form 54114 in the 4000.1 Handbook. Although the completion of this Form was not deemed mandatory by HUD, many DE underwriters utilize this Form as a means to provide consistent feedback on their review findings (if any).
The HUD 4000.1 Handbook policies referenced in this Section will
supersede FHA's Quality Control and Compliance requirements
primarily contained in HUD's 4060.1 Handbook and
various Mortgagee Letters.
It is stated that Mortgagees must select loans for post-closing reviews on a monthly basis with the selection comprising loans closed in the prior month. Mortgages that are selected must be reviewed within 60 days from the end of the prior one-month period.
Loan transactions that are selected for pre-closing review must be reviewed after the Mortgage is approved by an FHA Direct Endorsement (DE) underwriter, and prior to closing.
The Mortgagee's required FHA QC sample size must comply with the following balance of pre & post-closing reviews: Pre-Closing Reviews - 10% or less of the total sample and Post-Closing Reviews - 90% or more of the total sample. Mortgagees that close nine or fewer loans during the prior one-month period must select at least one loan for pre-closing review.
As part of a pre and post-closing review, HUD has outlined a total of 22 areas that must be addressed as part of a post-closing review and 17 areas as part of a pre-closing review.
Mortgagees must re-verify, in writing or electronically if available, mortgage payments or rental payments made by the borrower(s) as part of a post-closing review.
Mortgagees must perform targeted field reviews on 10% of the Mortgages selected for the monthly post-closing QC sample, as well as on all Early Payment Defaults (EPDs).
Mortgagees must verify that a "Fair Housing Poster" is
prominently displayed in the Mortgagee's home office and any
branch offices that deal with borrowers and the general
public. However, there is no formal site review of a
mortgagee's offices (including nontraditional branch and
direct lending offices) required
The HUD 4000.1 Handbook policies referenced in this Section will
supersede FHA's 203(k) and Consultant requirements primarily
contained in HUD's 4240.4 Handbook as well as various
Mortgagee Letters - most notably Mortgagee Letter 2000-25.
There are two types of 203(k) rehabilitation mortgages: Standard 203(k) and Limited 203(k).
For mixed-use properties, a total of 51% of the Gross Building Area (GBA) must be for residential use and any commercial use will not affect the health & safety of the occupants.
The Mortgagee must obtain a Work Plan from the Borrower detailing all of the proposed repairs or improvements. The Borrower may develop the Work Plan themselves or engage an outside party - including a Sec. 203(k) Consultant. However, a Sec. 203(k) Consultant fee may not be charged under the Limited 203(k) program.
An As-Is Appraisal is required in cases involving Flipping and in certain refi transactions (i.e. the property was acquired by the Borrower w/i 12 months of the FHA case # assignment date).
Section 203(k) Maximum Mortgage Worksheets have been created for use by HUD based on the type of loan transaction being processed (limited 203(k) purchase, standard 203(k) purchase, standard refinance with property acquired less than 12 months, etc.).
The maximum CLTV for secondary financing provided by private individuals and other organizations is 110% of the After Improved Value. Also, an updated MIP chart is provided along with instructions as to how to calculate the correct LTV.
There is a revised Rehabilitation (Self-Help) Loan Agreement Form that has been created for use by HUD when a lender approves a Borrower to act as a General Contractor or doing their own work.
The procedures for the establishment and management of the
Rehab Escrow Account have been enhanced with detailed
accounting system criteria established. Also, it is stated
that the Mortgagee must release funds within five (5)
business days after receipt of a properly executed draw
request and title update
Under the Limited 203(k) program, it is stated that, when
releasing funds from the Rehab Escrow Account, the Mortgagee
may issue checks solely to the contractor, or issue checks
to the Borrower and the contractor
In the "Overview" portion of the 203(k) Consultant Requirements section of the 4000.1HB, it is stated that a203(k) Consultant is required for all Standard 203(k) mortgages and "may be used for Limited 203(k) mortgages". However, the 4000.1 Handbook further indicates that any Section 203(k) Consultant fee may not be financed under the Limited 203(k) program?
The maximum 203(k) Consultant fees (for preparation of the Work Write-Up and review of architectural exhibits) reflected in the 4000.1 Handbook are identical to those cited in Mortgagee Letter 1995-40. Also, it is indicated that the 203(k) Consultant may charge $100 per draw request.
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