FHA Basics

1. FHA Basics High Level Overview of FHA

2. Learning Objectives Define what is FHA Explain FHA requirements Comprehend Seller Contributions Describe standards and documentation for income, asset, credit, and property Explain the different types of FHA transactions Navigate tools and resources within B2B Resource Center

3. What is FHA? Federal Housing Administration. FHA is a division of the Department of Housing and Urban Development (HUD) Approves lenders for direct Endorsement Status. This status enables the lender to approve and close the loan before it is sent to FHA for insurance Designed for borrowers to buy a home with little or no money down Seller contributions allowed* Interest rates are very competitive Not credit scored driven Gift funds are allowed Loans are assumable if the investor approves

4. What are the main requirements? 3% required investment with maximum LTV of 97.75% Two year employment history Borrower can have little or no credit history Alternative credit is allowed Co-borrowers are allowed Non-occupant Co-borrowers allowed Monthly Debt-to-Income (DTI) ratio to 43% US Citizenship is not a requirement with a valid Social Security Number Permanent and non-permanent aliens are eligible No reserve (savings) is required

5. FHA Loans – 2/2/2 Rule Years Employment History

6. Occupancy Will allow an investment property on a Streamline without an appraisal only, however Chase will not You can only own 1 high LTV insured FHA loan unless one of the following apply: Relocation Increasing family size Vacating a jointly owned property Non-occupying co-borrower

7. Mortgage Credit Analysis Worksheet This worksheet has been updated as of 9/30/07 to reflect changes to the percentage of financeable closing costs.

8. Seller Contributions The seller can pay 6% Typical seller paid items (1/2 transfer) are not included in the 6% calculation Seller CONCESSIONS result in a dollar for dollar reduction in the sales price prior to applying the LTV calculations (any amount that exceeds 6% or unusual items such as furniture, cars, decorating allowances)

9. Identity of Interest Transactions Reduces the LTV allowed (85% typically) unless one of the following A family member buys another family members PRIMARY residence (proof needed) A current tenant purchases current residence but proof of 6 months residency required An employee of a builder buying builder’s new homes or model homes

10. Other LTV Transactions A non-occupying co-borrower is allowed on FHA transactions and need not be immediate family, however, the LTV is restricted to 75% If a non-occupying borrower is related by blood, marriage or law then the LTV can go to maximum of 97.75% (single family only, cannot be a 2,3 or 4 unit)

11. Three & Four Unit Properties Additional criteria apply (properties must be considered self sufficient) Buy downs may be used but not for qualifying purposes Borrower must have 3 months reserves. This amount can not be a gift Appraisers fair market rent schedule used to determine cash flow. Proposed rental income can be used as income only and not used to offset debt

12. Humor Checkpoint - Income “I bought a two story house…one story before I bought it and a different story afterwards.”

13. Income Standards Income is reviewed very similar to conventional standards OT/Commission/2nd job/bonus needs a 24 month reviewed history If income OT, Commission or bonus exceeds 25% of total income, 1040s required Income must be considered stable and effective and likely to continue. We use past history to determine likelihood of continuance.

14. Income Documentation 1 pay stub reflecting at least 1 month’s income 2 years W-2s For S/E borrowers - Schedule A, signed 1040’s and a YTD P&L A pay stub is ALWAYS required in W-2d employees. NO VOE ONLY. Pay stubs must be computer generated and include borrower’s name, company and at least the last 4 of the SS#.

15. Humor Checkpoint - Assets “Our borrowers have an electric home--- everything in it is Charged.”

16. Asset Standards Gifts. Gifts can be from family members or closely established relationships (not part of transaction). Gifts can also be from non-profit organizations such as a church. FHA also allows loans from family members and non-profit and employers. Borrower must qualify with payment. DPA programs that are approved by Chase (see Lotus notes database for approved DPA programs) are eligible. Seller contributions allowed for CC and PP to a max of 6%. (can never be part of down payment)

17. Asset Documentation Follow AUS findings or 2 months bank statements, all pages showing borrower as owner Last period of 401k Statement (proof of liquidation required) Completed Gift letter. Donor’s ability. Proof of transfer at close is copy of check, copy of withdraw notice and HUD1 to reflect gift amount.

18. Humor Checkpoint - Credit “Our borrowers went through debt consolidation---now they have only ONE bill that they won’t pay.”

19. FHA Credit Standards It must make sense! Min credit score - NONE Last 24 months most closely reviewed Housing history most important Collections over 12 months old need not be paid however, they are reviewed as negative credit. Collections less than 12 months old reviewed on a case by case.

20. Credit Documentation 3 Merge credit report or RMCR Credit letter signed by borrower Supporting documentation for credit letter if requested or if needed to strengthen file Inquiry letters are still technically needed if an inquiry is on the credit report in the last 3 months with no indication of new debt

21. Property Standards NO MANUFACTURED HOMES. FHA allows but Chase does not. Modular homes are allowed Home cannot have previously sold in the last 3 months. (Flipping guidelines) If in the last 12 months but over 3 months old, a 2nd appraisal will be required. Brokers responsible for picking the FHA panel appraiser, cannot be on Chase review list (review list guidelines still apply)

22. FHA Condos FHA maintains a database of HUD approved condos. Database is at HUD.GOV or on FHA connection(FHA connection is much easier) If Condo is NOT FHA approved, a spot condo may be allowed UFMIP is now required on all HUD condos as is monthly mortgage insurance. (change in 2006) PUDs have no additional requirements Spot Condos Required documentation: FHA spot condo questionnaire, last 2 meetings minutes, condo by-laws, condo budget Brokers will have an issue on the questionnaire regarding “Number of currently FHA insured units in the subdivision”. This is not an optional question and must be completed. Broker can use public records, the appraiser, door to door surveys or any other method appropriate to obtain this data but needs to explain the source

23. Types of Transactions FHA Purchase FHA Cash out FHA Rate/Term FHA Streamline with an appraisal FHA Streamline without an appraisal

24. FHA Rate/Term Used to pay off existing first lien only. Can not pay off 2nd unless it is seasoned with no draws over $1000 in the last 12 months. 2nd can be re-subordinated Max cash back to borrower not to exceed $250.00 Can roll in CC and PP Max LTV is 97% Appraisal required Can pay off non-FHA lien Fully income / asset /credit qualifying

25. FHA Purchase 3% down payment required 33/43 ratios Complete Contract of sale all pages signed FHA Amendatory clause and R/E certification must be part of contract or part of disclosure package Non-arms length allowed however capped at 85% (specials rule apply)

26. FHA Cashout Now goes to 95% LTV Must be seasoned one Year in TITLE No late mortgage payments in the last 12 months 1 and 2 family units only allowed Non-occ co-borrowers not allowed If unable to meet all above standards, borrower may qualify for 85% No max cash back limits

27. FHA Streamline with Appraisal Income qualifying not required if new PITI does not increase more than $50.00 . Must reflect a drop in rate or term. Credit qualifying not required. VOM is required with no more than 1x30 (unless Chase to Chase then VOM not required) Original parties must stay in title (can not drop a co-borrower) Appraisal required. Can roll CC and PP to 97% of appraised value FHA Streamline without Appraisal Same as with an appraisal but can only roll CC and PP up to original loan amount

28. Important Websites FHA connection - https://entp.hud.gov/clas/index.cfm FHA Mortgagee letters - http://www.hud.gov/offices/hsg/mltrmenu.cfm County limits - https://entp.hud.gov/idapp/html/hicostlook.cfm Training Resources: http://trainingcentral.jpmorganchase.com/stc/student1/cst_link.htm?COURSE=student1&CODE=HMWPFHARS http://trainingcentral.jpmorganchase.com/stc/student1/cst_link.htm?COURSE=student1&CODE=HMFHAJAREC

29. Questions? Thank you for your participation!