On Behalf of HUD & The FHA Welcome to our session on How to Manually Underwrite an FHA Mortgage

1. On Behalf of HUD & The FHA Welcome to our session onHow to Manually Underwrite an FHA Mortgage

2. Housekeeping Phone lines ~ Q&A ~ Polling Activities • Phone lines – muted • Questions – chat panel • Interactivity – voting tools and polling questions 2

3. Your Instructor Judy Nash-Ellis 3

4. FHA Subject Matter Expert Welcome to our guest, Lisa Ellis, Credit Policy Specialist from FHA, Office of Single Family Program Development - who will be responding to participant questions and offering additional guidance during today’s webinar 4

5. Polling Questions How long have you been in the mortgage industry? How long have you been working with FHA mortgage loans? 5

6. HUD’s Mission 6 • Create affordable homes for all. • Work to strengthen the housing market. • Bolster the economy and protect the consumer. • Improve the quality of life for all free from • discrimination. • Transform the way HUD does business

7. How to Manually Underwrite an FHA Mortgage 7

8. Course Objectives 8 • Know policies and processes to manually underwrite • an FHA mortgage loan application. • Explain which transactions require a manual underwrite. • Describe the manual underwrite documentation • requirements. • Analyze/determine acceptable credit risk for an FHA • loan endorsement: • Recognize compensating factors in making an • overall risk decision on a loan. • Resources: • HB 4155.1 - http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh/4155.1 • TOTAL Scorecard User Guide - http://portal.hud.gov/hudportal/documents/huddoc?id=total_userguide.pdf • Mortgagee Letters - http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/letters/mortgagee

9. Course Overview • LTV Requirements • Income Documentation • Cash Investment Requirements • Asset Documentation • Required Reserves • Ratios • Compensating Factors • Credit • Major occurrences • Last 24 months • Short Sales • Previous bankruptcy or foreclosure • Collections • Consumer Credit Counseling • Mortgagee Letter 2013-5 • LDP/GSA Requirements • CAIVRS Requirements • LDP/GSA Details • CAIVRS Details • Manual Underwrite 9

10. Polling Questions 10

11. When is Manual Underwriting Required? 11 When a loan receives a Refer through TOTAL? When a loan cannot be scored through TOTAL due to insufficient credit or other factors? When a downgrade is required where there is additional information not considered through TOTAL or documentation requirements per the TOTAL findings cannot be met? D. Streamline refinancing? E. All of the above.

12. Answer 12 E. All of the above.

13. Manual Underwrite 13

14. Manual Underwrite 14 • A Refer from TOTAL. • Downgrade to a Refer. • Streamline refinances, credit and income review and documentation not required. • DE Underwriter will review and document the file: • Credit, Income, & Assets • MPS & MPR.

15. Credit 15 • Follow the Hierarchy of Credit Review (HB 4155, Chapter 4 C. ): • 1st: Previous housing expenses INCLUDING utilities. • 2nd: installment debts. • 3rd: revolving debts.

16. Credit Scores When a credit score is available, it must be used to determine eligibility for FHA insured financing. Decision Credit Score: Credit Score Used. Credit Report Reflects: Three credit scores (one from each repository) - the middle score is used. Two credit scores - the lower of the two scores is used. One credit score - that score is used. 16

17. Credit Scores Cont’d … 17 • Case Numbers Assigned on or after 10/04/10: • When the decision credit score is: • 580 and above: Maximum financing. • 500-579: Maximum LTV 90.00%. • 499 and below: Not eligible for FHA insured financing. • Does not apply to: • HECM. • Title I. • Sections 247, 248, 223(e) and 238. • Resource: ML 10-29: • http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-29ml.pdf

18. Credit 18 • Review credit for the past two years. • Overall review of entire reported accounts: • Items over two years and not major should not be considered. • Major indications of derogatory credit, such as a judgment, bankruptcy and foreclosure. All require sufficient written explanation. • Accounts reviewed for patterns of delinquency: • Disregard for financial obligations. • Inability to manage debt. • Factors that are beyond the borrower’s control. • Issue was isolated. • All explanations must make sense and be consistent. • Most situations will need documentation to support decision.

19. Credit Cont’d … 19 • Housing payment must be documented: • Credit Report. • Verification of Mortgage. • Verification of Rent: • Identity of Interest transactions require more documentation. • Review of canceled checks for past • 12 months. • Letter rent free.

20. Credit Cont’d … 20 • Major items: • Judgments. • Tax Liens. • Collections and Charge-offs. • Bankruptcy. • Short Sales. • Consumer Credit Counseling.

21. Judgments 21 • Court-Ordered Judgments must be • paid off: • Unless – Acceptable Repayment. • Repayment Plan with Creditor: • Agreement with creditor to make regular and timely payments. • Payments made according to agreement. • Payment must be included in Ratios to qualify.

22. Tax Liens 22 • IRS routinely takes second position • May remain unpaid if lien holder subordinates. • If in a repayment plan, include in qualifying ratios.

23. Collections 23 Reference: Handbook 4155.1 4.C.2.d. • Delinquent credit that has NOT • gone to court. • Not required to be paid in full. • Borrower must explain in • writing, all collections.

24. 24

25. Bankruptcy 25 • Chapter 13: • Repayment of some or all debt. • Chapter 7: • Discharges all debt.

26. Chapter 13 Requirements 26 • 12 months of payments. • Permission to enter mortgage transaction. • Complete copy of bankruptcy paperwork.

27. Chapter 7 Requirements 27 • Two years since DISCHARGE. • Extenuating circumstances - Over one year from DISCHARGE.

28. Bankruptcy Scenario 28 • Tom and Betty Jones filed for • Chapter 7 Bankruptcy which was • discharged in August 2010. • Are they eligible for an FHA • loan?

29. Answer 29 Yes. The borrower is eligible for an FHA loan since the bankruptcy was discharged more than two years ago.

30. 30 • Occurs when a borrower cannot pay the mortgage payment over a period of time. • Borrower must wait three years before they are eligible for FHA financing, starting from the date the borrower lost control of the property. • A “C” code will appear in the Credit Alert Verification Reporting System (CAIRVS).

31. Foreclosure Scenario James William’s property was foreclosed and an FHA claim was paid March 2009. According to documentation submitted with the December 2012 loan application, the borrower’s wife became ill and passed away October 2008. The borrower’s credit report showed all debts are current with no lates except for unpaid medical collections dating back to 2009. James found a property priced at $210,000 and has $62,050 in savings to apply toward the purchase of the property. Since the borrower documented circumstances beyond his control, and the claim was paid March 2009 is this borrower eligible for another FHA insured loan? 31

32. Answer Yes, the borrower is eligible for another FHA insured mortgage. It has been three years since the claim was paid. This scenario shows the borrower documented circumstances beyond his control but it was not necessary in this case. 32

33. Short Sales 33

34. Mortgagee Letter 09-52 34 Mortgagee Letters: http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/letters/mortgagee

35. PFS/Short Sale Scenario 35 Mary Smith recently relocated from Colorado to Florida due to a job transfer. She sold her home in Colorado using a short sale. She was current on her mortgage in Colorado at the time of the short sale but had late payments six months prior to the short sale. The short sale occurred three months ago. Is this borrower eligible for a FHA loan?

36. Answer 36 No, the borrower is not eligible for an FHA loan since the borrower had mortgage lates within 12 months prior to the short sale and 12 months have not passed since the date of the short sale. This is required regardless of the fact that this is a relocation situation. (Ref: ML 09-52). Scenario does not meet credit history requirement and not eligible for FHA financing. Reference: Mortgagee Letter 2009-52.

37. Consumer Credit Counseling 37 • One year of repayment under the plan. • Document all accounts included in the plan. • Document the repayment plan with no lates during the course of enrollment. • Written permission from the agency to enter into the mortgage transaction.

38. Credit Explanations 38 • All derogatory credit (past 24 months) and for major occurrences. • Document the file to support your credit decision.

39. Mortgage Letter 2013-5 39 • Manual Underwriting: • Decision Credit Scores below 620. • Debt to Income Over 43%. • Effective Date: • Case Nos. Assigned on or after April 1, 2013. • Applies to EEMs: • Debt to Income Up to 45%. • Compensating Factors Exceeding 45%.

40. Mortgage Letter 2013-5 Cont’d … 40 http://portal.hud.gov/hudportal/documents/huddoc?id=13-05ml.pdf • Applies to FHA’s Refinance of Borrowers in Negative Equity Positions. • All must be scored through TOTAL except: • Streamline Refinance. • HECMs. • Title 1. • Loans involving borrowers without credit scores. • Resource: ML 13-5:

41. What Questions Do You Have? 41

42. Let’s Review • Credit • Major occurrences • Last 24 months • Short Sales • Judgments • Previous bankruptcy or foreclosure • Collections • Consumer Credit Counseling • Mortgagee Letter 2013-05 42

43. LDP/SAM & CAIVRS 43

44. What Lists Must be Checked to Determine Eligibility 44 LDP - Limited Denial of Participation - Individuals who have been barred from doing business with the Federal Government. System for Award Management (SAM) - U.S. General Services Administration – List of parties who have been barred from doing business with the Federal Government. CAIVRS - HUD’s Credit Alert Verification Reporting System. It includes individuals with Delinquent or Defaulted Debt and/or for whom an insurance claim has been paid.

45. HUD Limited Denial of Participation (LDP) and Federal Lists 45 • To check HUD's LDP lists go to:http://portal.hud.gov/hudportal/HUD?src=/topics/limited_denials_of_participation. • To check the SAM list of excluded parties go to: https://www.sam.gov.

46. Limited Denials of Participation 46

47. Limited Denial of Participation Site 47

48. LDP/SAM 48 • If the borrower, seller, listing or selling real estate agent or loan officer is on the LDP and/or SAM lists, then the application must be rejected. • Exception can be made if a seller is on the SAM list but the property being sold is the seller’s principal residence.

49. CAIVRS THE CREDIT ALERT VERIFICATION REPORTING SYSTEM 49

50. CAIVRS Cont’d … 50 • Access via FHA Connection only. • Must have access to FHA Connection.