April 2015, Issue 04
HUD/FHA's Origination Through Post-Closing/Endorsement Handbook (4000.1)
Major Policy & Procedural Changes - Effective on September 14, 2015
PART ONE - Mortgage Credit Policies
Several months ago, HUD/FHA posted a draft copy of its "Origination Through Post-Closing/Endorsement" (Handbook 4000.1) Handbook on its website for industry groups to read and provide comments to HUD before a final version becomes effective. Also, several additional sections of this draft Handbook were added - some as recently as March 18, 2015. The three most recent additions included the following:
1. A Quality Control, Oversight & Compliance section
2. A new 203(k) rehabilitation mortgage insurance program and 203(k)
Consultant section
3. An FHA appraisal and property requirements section.
The focus of this LendingLogics Newsletter will be to provide an overview of the major mortgage credit underwriting policy and procedural changes being implemented so that our industry partners can plan for them accordingly.
Outlined below are some of the major underwriting changes being implemented (please note that this is not an all-encompassing list):
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.
The previous threshold was 2% for EMDs and recent deposits.
Lenders will now have to include deferred obligations in the Borrower's liabilities. For example, a student loan deferred more than 12 months must now be counted as a recurring obligation and, if the monthly payment is not yet known, use 2% of the outstanding balance to establish the payment amount (for installment debts use terms of the debt or 5% of the outstanding balance).
Previously, such debts were not counted as a recurring obligation.
Documents contained in the loan file may not be more than 120 days old at the time of the Disbursement Date.
Previously, documents could be 180 days old if the property involved new construction.
Appraisal reassignments made (at the Borrower's request) must be done within five business days.
Previously, there was no time frame established for such actions.
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.
Previously, there was no specific mileage limitation.
The maximum LTV percentage in a tenant-landlord transaction will be limited to 85%.
Previously, if the tenant & landlord do not have an identity of interest relationship - the maximum mortgage calculation is not affected and the LTV is not 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.
Previously, there was no requirement to downgrade to a "Refer" for these circumstances.
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.
Previously, such loans were not considered as installment loans.
For Borrowers who are paid hourly and whose hours vary, the lender must average income for the past two years when calculating income.
Previously, there was no requirement to average income for such hourly workers.
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.
Previously, HUD/FHA had no such requirement and most underwriters would use a two year average as effective income.
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's income amount, based on the Borrower's tax rate for the previous year. Also, if the Borrower was not required to file a Federal Tax Return for the previous tax reporting period, the lender may only "Gross-Up" the Non-Taxable income by 15%.
Previously, such income could be "Grossed-UP" by 25% by the underwriter when calculating effective 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.
Previously, three of the four HUD Homeownership Centers (Philadelphia, Atlanta and Santa Ana) permitted lenders to use an 85% factor for properties located in their respective jurisdictions.
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 tax returns.
In the past, HUD/FHA did not require that P&L Statements be audited since they can be very expensive.
With advance approval, HUD/FHA allowed Borrowers 60 years of age or older to borrow the required funds to close for the purchase of a principal residence.
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.
Previously, any surplus gift funds could be counted 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.
Previously, only mortgages with less than 6 months of payment history were not eligible for a cash-out refinance.
On cash-out refinance transactions, the maximum Combined Loan-To-Value (CLTV) ratio is 85%.
Previously, existing or modified subordinate liens were allowed to remain outstanding and/or new subordinate liens could have been offered to facilitate the refinance.
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. The lender must obtain: transcripts of training and/or education demonstrating qualification for a new position OR employment documentation evidencing continual increases in income and/or benefits.
These are new requirements.
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 month requirement.
This 5% Rule is a new requirement and will impact Borrowers that have any large debts that are due to be paid off soon.
For manually underwritten loans, the mortgagee must now obtain the Borrower's most recent pay stubs covering a minimum of 30 consecutive days (if paid weekly or bi-weekly, pay stubs must cover a minimum of 28 consecutive days) that show the Borrower's year-to-date earnings AND one of the following:
1. a written Verification of Employment (VOE) covering two years OR
2. an electronic verification acceptable to FHA
Previously, FHA did not require pay stubs on manually underwritten loan transactions.
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.
Previously, there was no such 85% LTV limitation.
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 tangible benefit.
Previously, a reduction in term was NOT considered as a net tangible benefit.
The proposed changes outlined above are not an all-encompassing listing of underwriting policy and procedural changes being implemented by HUD upon issuance of the 4000.1 Handbook. It is highly recommended that all of those entities that are currently involved with FHA financing access the www.hud.gov website - then type in "Hudclips" & search for the 4000.1 Housing Handbook. The entire draft Handbook is accessible for all to read.
The next LendingLogics Newsletter will focus on the major FHA appraisal and property requirements changes being proposed in the 4000.1 Handbook. Look for this Publication in the upcoming weeks.
Gerry Glavey, SVP - Chief Credit Officer, LoanLogics
Mr. Glavey was the former Director of the Processing &Underwriting Division in the Philadelphia HOC for an 11 year period (2000 thru 2011) and has a total of 37 years' experience with HUD/FHA.
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This material is provided as a general information service by LoanLogics, Inc. and its applicable subsidiaries and affiliates ("LoanLogics"), and is not intended to provide financial, regulatory or legal advice on any specific matter. The information contained herein reflects the views of LoanLogics and sources reasonably believed by LoanLogics to be reliable as of the date of this publication. LoanLogics does not make any representation or warranty regarding the accuracy of the information contained in this material, and there is no guarantee that any projection, forecast or opinion in this material will be realized. Any links provided from outside sources are subject to expiration or change. 2015 LoanLogics, Inc. All Rights Reserved.
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