Why Choose FHA

 Max LTV 96.50% on purchases and up to 97.75% for refinances

 Less conservative credit requirements
 Gift funds of 100%
 Flexible Asset Sources
 6% seller contribution
 Non occupying co-borrowers allowed
 Manual underwrite allowed

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Basic Eligibility Requirements

GENERAL

 FHA requirements are the minimum

requirements. Lenders can uniformly
impose more stringent guidelines.
 1-4 owner occupied residential properties
only
 3.50% statutory investment required

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 Basic Eligibility Requirements
Continued….
OCCUPANCY

 The house must be the principal residence of at least one borrower (principal
residence is where the borrower lives the majority of the calendar year)
 Occupancy must occur within 60 days of closing (per the security instrument) and
continue for one year.
 To prevent circumvention of the restrictions on FHA-insured mortgages to investors,
FHA generally 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 certain situations such as relocations, increase in
family size (existing loan must be paid down to 75% LTV, vacating jointly owned
property, and non occupying co-borrower.

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Vacating Residence
Rental income on the property being vacated, reduced by the appropriate
vacancy factor as determined by the jurisdictional FHA Homeownership
Center (see http://www.hud.gov/offices/hsg/sfh/ref/sfh2-21u.cfm) may be
considered in the underwriting analysis under the following circumstances:

 Relocations: The homebuyer is relocating with a new employer, or being

transferred by the current employer to an area not within reasonable and
locally recognized commuting distance. A properly executed lease
agreement (i.e., a lease signed by the homebuyer and the lessee) of at
least one year’s duration after the loan is closed is required. FHA
recommends that underwriters also obtain evidence of the security deposit
and/or evidence the first month’s rent was paid to the homeowner.

 Sufficient Equity in Vacated Property: The homebuyer has a loan-to-value

ratio of 75 percent or less, as determined by either a current (no more
than six months old) residential appraisal or by comparing the unpaid
principal balance to the original sales price of the property. The appraisal,
in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an
exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for
condominium units, form Fannie Mae1075/Freddie Mac 466.

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 Basic Eligibility Requirements
Continued….
NON-OCCUPYING CO-BORROWER

 1 unit properties if the LTV is going to exceed 75%

 Maximum financing is available for borrowers related by blood, or for individuals that
can document evidence of a family type, long standing and substantial relationship
not arising out of the loan transaction.
 Unless otherwise exempted (i.e. military service, U.S. citizens living abroad), non
occupying co-borrowers or co-signers must have a principal residence in the U.S.
 Not allowed for cash out refinance over 85% LTV.

CONCESSIONS AND INDUCEMENTS

 The sellers (or other interested third parties such as real estate agents, builders,
developers, etc or combination of parties) may contribute up to 6% of the properties
sales price toward the actual closing costs, prepaid expenses, and discount points.
 A required dollar for dollar reduction to the sales price before applying the
appropriate LTV ratios is required when there are excessive contributions (6% limit
exceeded), Inducements to purchase (such as decorating allowance, moving
allowance, personal property that is not customarily left, cash allowance for
repairs/upgrades, and gift funds not meeting FHA criteria (which includes payment of
borrower debt by someone other than a family member)

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 Basic Eligibility
Requirements Continued….
IDENTITY OF INTEREST (a sales transaction between parties with family
relationships or business relationships).

 Restricted to 85% LTV unless:

1) A family member purchasing another family member’s principal residence.
If investment property max mortgage is lesser of 85% or appropriate LTV unless
tenant in property for 6 months prior to contract.
2) An employee of the builder is purchasing one of the builders new homes or
models as a principal residence.
3) A current tenant purchasing the property they occupied for at least 6
months prior to the sales contract. This must be fully documented. (note: IOI does
not apply to tenants purchasing their current residence where the only relationship is
that of tenant/landlord)
4) Short sales are not allowed with IOI.

Note: If there is a gift of equity, the loan is also an Identity of Interest

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FHA Credit Guidelines
FHA requires a borrower to demonstrate an acceptable repayment
history of all debts. If the credit history continuously reflects slow
or late payments, strong offsetting factors will be necessary. The
following credit guidelines are FHA’s “base line” credit criteria.

 Mortgage or Rental History (for manually u/w loans) The payment

history of the borrower's housing obligations holds significant importance in evaluating
credit. The lender must determine the borrower's payment history of housing
obligations through either the credit report, verification of rent directly from the
landlord (with no identity-of-interest with the borrower) or verification of mortgage
directly from the mortgage servicer, or through canceled checks covering the most
recent 12-month period.

 Recent and/or Undisclosed Debts The lender must ascertain the purpose of
any recent debts, as the indebtedness may have been incurred to obtain part of the
required cash investment on the property being purchased. Similarly, the borrower
must provide a satisfactory explanation for any significant debt that is shown on the
credit report but not listed on the loan application. The borrower must explain in
writing all inquiries shown on the credit report in the last 90 days.

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 FHA Credit Guidelines Continued

 Collections and Judgments Court-ordered judgments must be paid

off before the mortgage loan is eligible for FHA insurance endorsement. (An
exception may be made if the borrower has agreed with the creditor to
make regular timely payments on the judgment and documentation is
provided that the payments have been made in accordance with the
agreement). Collections and judgments indicate a borrower's regard for
credit obligations and must be considered in the analysis of
creditworthiness with the lender documenting its reasons for approving a
mortgage where the borrower has collection accounts or judgments. The
borrower must explain in writing all collections and judgments

 Previous Mortgage Foreclosure. A borrower whose previous

principal residence or other real property was foreclosed, short sale, or has
given a deed-in-lieu of foreclosure within the previous three years is
generally not eligible for a new FHA-insured mortgage. However, if the
foreclosure was the result of documented extenuating circumstances that
were beyond the control of the borrower and the borrower has
reestablished good credit since the foreclosure, the lender may grant an
exception to the three-year requirement. Extenuating circumstances include
serious illness or death of a wage earner, but do not include the inability to
sell the house because of a job transfer or relocation to another area

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FHA credit guidelines
continued…..

Bankruptcy A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower
from obtaining an FHA-insured mortgage if at least two years have elapsed since the
date of the discharge of the bankruptcy. Additionally, the borrower must have
reestablished good credit or chosen not to incur new credit obligations. The borrower
also must have demonstrated a documented ability to responsibly manage his or her
financial affairs. An elapsed period of less than two years, but not less than 12
months, may be acceptable if the borrower can show that the bankruptcy was
caused by extenuating circumstances beyond his or her control and has since
exhibited a documented ability to manage his or her financial affairs in a responsible
manner. Additionally, the lender must document that the borrower's current situation
indicates that the events that led to the bankruptcy are not likely to recur.
A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-
insured mortgage provided the lender documents that one year of the payout period
under the bankruptcy has elapsed and the borrower's payment performance has
been satisfactory (i.e., all required payments made on time). In addition, the
borrower must receive permission from the court to enter into the mortgage
transaction.

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 GRATE FHA GUIDELINES
 Minimum FICO of 620 for all loans regardless of Aus Decision.
 Owner Occupied Only
 No Manufactured Homes
 Non Traditional Credit is not allowed regardless of AUS decision
 Max LTV may be reduced by 5% for cash out refinances in declining markets.
Declining markets are determined by investor list or appraisal.
 DTI max of 50% on manually underwritten loans

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Debt Analysis and Liabilities
Debt to Income Ratios

 Debt to Income Ratios are 31/43 without AUS approval

 Exceptions to Debt to Income ratios may be exceeded on a case by case basis and the
borrower MUST have one or more compensating factors (which must be verifiable).
 A List of compensating factors may be found at
http://www.hud.gov/offices/hsg/sfh/faqs/atl1cre.cfm
Liabilities
 Debts- (less than 10 months) must be counted if the amount of the debt affects the
borrowers ability to make the mortgage payment- this is underwriter discretion
 Alimony- Can reduce from income rather than add as long term liability
 Co-signed loans- Will be considered long-term debt unless it can be verified, with 12
months canceled checks from the other (primary) borrower is making the payments
and no history of delinquency is reported. Debt must be reflected as co-signed on credit
report.
 Revolving Debt- If revolving debt shown on the credit report has an outstanding
balance and no monthly payment is given, a minimum of 5% of the balance or $10
(whichever is greater) should be counted as payment. A minimum payment is not
required on a revolving debt with a zero balance.
 Student loan payments that are deferred for at least 12 mos from date of closing do not
have to be included in liabilities. A loan in forbearance is not considered deferred and
will be included in debt.

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Compensating Factors
 The borrower has successfully demonstrated the ability to pay housing
expenses equal to or greater than the proposed monthly housing expense
for the new mortgage over the past 12-24 months.

 The borrower makes a large downpayment (ten percent or more) toward

the purchase of the property.

 The borrower has demonstrated an ability to accumulate savings and a

conservative attitude toward the use of credit.

 Previous credit history shows that the borrower has the ability to devote a
greater portion of income to housing expenses

 The borrower receives documented compensation or income not reflected

in effective income, but directly affecting the ability to pay the mortgage,
including food stamps and similar public benefits.

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Compensating Factors
Continued
 There is only a minimal increase in the borrower's housing expense.

 The borrower has substantial documented cash reserves (at least three
months' worth) after closing.

 The borrower has substantial nontaxable income (if no adjustment was

made previously in the ratio computations).

 The borrower has a potential for increased earnings, as indicated by job

training or education in the borrower's profession.

 The home is being purchased as a result of relocation of the primary wage-

earner, and the secondary wage-earner has an established history of
employment, is expected to return to work, and reasonable prospects exist
for securing employment in a similar occupation in the new area. The
underwriter must document the availability of such possible employment.

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Income and Employment
 Application MUST identify the most recent 2 years of employment
 If the employment history indicates that he or she was in school or the military
during any of this time, the borrower must supply evidence supporting this
declaration such as college transcripts or discharge papers.
 4506-T must be obtained at closing for the borrower
 The last 2 years W-2’s are required for verification of employment. In lieu of W-2’s
underwriters can accept a VOE.
 Even if a written VOE is obtained FHA requires at least 1 paystub
 If loan is manually underwritten gaps of employment over 30 days must be
explained, if AUS approved gaps of employment over 6 months must be explained.
 If using self employment income both personal and business tax returns must be
provided (a business credit report will also be required on corporations and “S”
corps).
 Bonus and Overtime must be averaged for the past two years and acceptable
probability of continuance must be determined.
 Commission must be averaged for past two years plus any year to date (tax
returns will be required)
 Self Employment income is considered stable and effective if 2 or more years
(between 1 and 2 years may be considered on a case by case basis)
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Income and Employment
Continued
 Unemployment Income must be documented for two years.
Reasonable assurance of its continuance is also required.
 Seasonal Income can sometimes be used for qualifying. Its
not uncommon to also have out of season income from
unemployment compensation. If a 2 year history and an
acceptable probability of continuance can be established for these
income sources then you should be able to use this income for
qualifying purposes.
 Alimony and Child Support must be verified to continue for
at least 3 years. Must provide copy of divorce decree, legal
separation agreement, or voluntary payment agreement AND
evidence received for past 12 months (at the discretion of the
underwriter periods of less than 12 months may be acceptable)

15
Three and Four Unit Properties
 Three- and Four-Unit Properties.
Regardless of occupancy status, the property must be self-sufficient (i.e., the maximum
mortgage is limited so that the ratio of the monthly mortgage payment, divided by
the monthly net rental income, does not exceed 100 percent). The mortgage
calculations described below are in addition to the calculations detailed in

1.The monthly payment is the principal, interest, taxes, and insurance (PITI), including
mortgage insurance, plus any homeowners' association dues, computed at the note
rate (no consideration for buydowns may be given).

2.Net rental income is the appraiser's estimate of fair market rent from all units,
including the unit chosen by the borrower for occupancy, less the appraiser's
estimate for vacancies or the vacancy factor used by the jurisdictional HOC,
whichever is greater. This calculation is used only to determine the maximum loan
amount. Borrowers must still qualify for the mortgage based on income, credit, cash
to close, and the projected rents received from the remaining units. The projected
rent may only be considered as gross income for qualifying purposes; it may not be
used to offset the monthly mortgage payment.

3.The borrower must have reserves equivalent to three months' PITI after closing on
purchase transactions. Reserves cannot be derived from a gift.

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Asset and Source of Funds
Analysis
 Source of Funds- all funds for the borrower’s investment in the property
must be verified and documented. Funds may come from several sources
including:

Savings and Checking Accounts- FHA allows 1 month bank statement (all
pages), as long as it shows a beginning balance and ending balance. VOD is also
acceptable as long as it shows average balance.

Gift Funds- need fully executed gift letter signed by donor and borrower. Need copy
of canceled check or withdrawal document and evidence of deposit. Donor must be
blood relative or documentation of long term family type relationship is required. If
funds are provided at closing we must have bank statement from donor and copy
of certified check.

Down Payment Assistance Programs- Cannot be seller funded, require a 600

FICO score, need gift letter signed by borrower, and need evidence of HUD
approval.

401K- We take 60% of vested balance

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 FHA Loan Amounts

FHA Loan Amount Calculations (see worksheets on FHA TAB):

A) Purchase- 96.50% lesser of sales price or appraised value

Check FHA limits per county here:

https://entp.hud.gov/idapp/html/hicostlook.cfm

B)   FHA Up Front Mortgage Insurance Premium (UFMIP) is 1.75% of base loan

amount. The total loan amount cannot exceed 100% of value/salesprice

C) Monthly MIP next slide

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FHA Property Requirements

A borrower can purchase or refinance the following property types:

 One to four unit properties

 FHA approved condominiums or spot approvals (until Oct 1st)
 PUDs
 New construction

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FHA Property Flipping
Seller must be the “owner of record” for at least 91 days or borrowers
are not eligible for FHA financing.

Exceptions:
 State and federally chartered financial institutions and government
sponsored entities (FHMA, FHLMC, GNMA, etc.)
 Local and state agencies
 Non profits approved to purchase HUD properties at a discount
 Employer relocation agencies
 Builders selling a new home
 HUD REO properties where HUD is the seller

If owned between 91-180 days and the sales price exceeds

100% of the price paid by the seller, a second appraisal is
required.

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FHA Minimum Property
Standards and Inspections
Each property must comprise a single readily marketable real estate entity.
The property must must be free of health and safety hazards. Utilities and
other facilities should be independent for each unit and must include:

 A continuing and sufficient supply of safe, potable water under adequate

pressure and of adequate quality for all household uses.
 Sanitary facilities and safe method of sewage disposal
 Heating adequate for health and comfort
 Domestic hot water
 Electricity for lighting and equipment

21
FHA Minimum Property Standards and
Inspections, Continued

 Lead Based Paint- If the property was built before 1978, the appraiser should
note the condition and location of all defective paint (chipping. flaking, or peeling) in
the home. This includes all interior and exterior surfaces- walls, stairs, deck porch,
railing, windows, and doors.

 Lead Based Paint Inspections- If the home was built before 1978 and lead
based paint is present, a lead paint inspection is required. A requirement to correct
the problem will be made on the appraisal if applicable. Please note that the lead
based pain inspection must be signed by the appraiser.

22
FHA Minimum Property Standards and Inspections,
Continued
FHA no longer mandates automatic inspections for the following items
and/or conditions for existing properties:

 Wood destroying insects and organisms (unless state specific or there is

evidence of active infestation)
 Well water test unless mandated by local law, use of purification system or
knowledge of contamination
 Septic certification unless evidence of system failure or mandated by local
law
 Flat or unobservable roof certification

23
FHA Minimum Property Standards and
Inspections, Continued
If the appraiser reports a potential deficiency that may pose a threat to the
safety of the occupants or the security and soundness of the property, the
underwriter will require an inspection of the condition to determine
whether repairs are necessary to mitigate or resolve the problem.

Examples of conditions that will require automatic inspections include, but are
not limited to:

 Standing water against foundation and excessively damp basements

 Hazardous materials on the site or within the improvements
 Faulty or defective mechanical systems
 Evidence of possible structural failure (e.g., settlement or bulging foundation wall)
 Leaking or worn out roofs
 Defective paint surfaces in home built prior to 1978
 Defective paint surfaces in home built after 1978 where the finish in unprotected

24
FHA Minimum Property Standards and
Inspections, Continued
Septic Systems FHA requires each living unit to have a sewage disposal system that
is adequate to dispose of all domestic wastes in a manner that does not create a
nuisance or in any way endanger the public health.

Septic Certification for existing properties is required when:

5. There is evidence of system failure

6. It is mandated by state or local jurisdiction
7. It is customary for the area
8. The underwriter determines that a certification is necessary

Connection must be made to a public sewer or community sewer system if connection

costs are reasonable. ‘Reasonable’ is defines as costing 3% or less of the
estimated value of the property. If the connection costs exceeds the 3%
‘reasonable’ definition, the existing on-site systems will be acceptable provided
they are functioning properly and meet the requirements of the local health
department.

25
FHA Minimum Property Standards and
Inspections, Continued
Water Supply and Wells

Each living unit must have domestic hot water and a continuing and sufficient supply of
potable water under adequate pressure and of appropriate quality for all household
uses.

Well certification for existing properties is required when:

7. It is mandated by state or local jurisdiction

8. There is knowledge that well water may be contaminated.
9. There is evidence of one or more of the following: Corrosion of pipes (plumbing),
areas of intensive agriculture within ¼ mile, coal mining or gas drilling operations
within ¼ mile, or unusually objectionable taste, smell, or appearance of well
water.

Appraiser must note domestic well must be a minimum of 50 feet from a septic
tank, 100 feet from the septic tank’s drainage field, and minimum of 10
feet from the property line.
26
FHA Minimum Property
Standards and Inspections
(cont.)
Some additional appraisal requirements in comparison to a
conventional appraisal but not limited to:

 Appraiser must access, observe and comment on the crawl space

 Appraiser must access, observe and comment on the attic

 Appraiser must comment if the utilities are off on a vacant property. If so, a re-
inspection of the utility will need to be done by the appraiser to confirm it is in
proper working order.

27
FHA Resources
 www.hud.gov
 https://entp.hud.gov/idapp/html/mrtg-p
(intro to FHA connection)
 http://www.hud.gov/offices/adm/hudclips/lett
(mortgagee letters)
 Any one of your friendly Guaranteed Rate
loan officers

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Thank you, please contact us for more
information

 Joe Caltabiano  Dana Zito

 Senior Vice President  Vice President
 O: 773-290-0335  O: 773-435-7925
 F: 773-435-0607  F: 773-435-0607
 E:dana.zito@guaranteedrate.com
 E: Joe@guaranteedrate.com  https://www.guaranteedrate.com/danaz
 https://www.guaranteedrate.com/joe ito

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