Supporting Neighborhood Stabilization Programs June 19, 2012

U.S. Department of Housing and Urban Development

FHA Mortgage Financing

FHA Mortgage Financing

Supporting Neighborhood Stabilization Programs

Presenters

Presenters

• ArleneArlene NunesNunes, FHA

• FHA

• John Laswick, HUD

D id N HUD

• David Noguera, HUD

• Matthew Callahan, Enterprise Subcontractor – Broker/Owner of Civic Center Home Loans

Broker/Owner of Civic Center Home Loans && ReNew Real Estate Sales

e

Objecti

Objective

•• To explore the use of FHA home financing in To explore the use of FHA home financing in Neighborhood Stabilization Programs

Areas Co ered

Areas Covered:

11. FHA Home Financing Overview FHA Home Financing Overview

2. Layering NSP Subsidies With FHA Loans 33. S Special FHA Issues in NSP Programs i l FHA I i NSP P

PART 1

FHA O er ie

PART 1:

FHA Overview

•• FHA financing can be a good fit for home buyers FHA financing can be a good fit for home buyers in NSP programs.

• FHA insures mortgage loans made by approvedFHA insures mortgage loans made by approved lenders

• FHA origginators include federallyy-chartered financial institutions (banks, credit unions), mortgage banks and brokers.

• FHA M FHA Morttgage IInsurance hhellps recyclle mortgage capital back to local markets.

FHA O er ie

FHA Overview

FHA Supports the Success of Local NSP by: FHA Supports the Success of Local NSP by: •• Serving more qualified buyers Serving more qualified buyers.

• Incorporating NSP and other home buying subsidies.

subsidies.

• Lowering the down payment requirement. •• Providing rehabilitation funds that can be Providing rehabilitation funds that can be

er

FHA O

ie

FHA Overview

• Th 203k The 203k mortgage may not exceed the lesser of the sales priice t t d th l f th l and rehabilitation cost, or 110% of the after-improved value.

• FHA 203(k) loans may be used to purchase a home and finance its rehabilitation. Funds for rehabilitation are pplaced in an escrow

account and repairs are completed after loan closing.

FHA 203b loans may be used to purchase a home with a mortgage FHA 203b loans may be used to purchase a home with a mortgage not to exceed 96.50% of the lesser of the sales price or the

FHA O er ie

FHA Overview

M

Maxiimum FHA morttgage lilimitits are establi blishhedd

• FHA t

based on metropolitan areas or non-metroppolitan.

• Maximum mortgage term is 30 years.

• FHA does not set interest rates or points. TheseFHA does not set interest rates or points. These are negotiable between the borrower and lender. • Eliggible ppropperties include 1-4 four units.

• Condominiums must be located in FHA-approved projects.

FHA Overview

FHA Overview

• FHA loans require an Upfront Mortgage

IInsurance PPremiium (UFMIP) (UFMIP) equall t to 1 75% 1.75% off the loan amount. It is usually financed into the loan.

• FHA-insured loans are also subject to an Annual Mortgage Insurance Premium (MIP) for

h l ith t t th 15

purchase loans with terms greater than 15 years and an LTV greater than 78%, the MIP is 1.25% of the loan amount.

FHA O

i

FHA Overview

There are three key borrower underwriting There are three key borrower underwriting questions:

• Does the borrower have sufficientDoes the borrower have sufficient documented income?

• Does the borrower have enouggh verified

assets for the down payment and all other

expenses necessary to close the loan?

D th b t FHA’s creditdit

• Does the borrower meet FHA’

requirements and demonstrate both the willinggness and abilityy to reppayy the loan?

FHA O er ie

FHA Overview

• The FHA The FHA-insured first mortgage insured first mortgage, when combined

• when combined

with any second mortgage or other junior lien from a government agency or nonprofit agency considideredd an iinstrumentalility off government, may not result in cash back to the borrower. •• The FHA insured first mortgage cannot exceed The FHA-insured first mortgage cannot exceed

the FHA statutory limit for the area where the

property is located. The combined indebtedness of the mortgages may, however, exceed the FHA

statutory limit. However, NSP limits the

maximum CLTV to 100% maximum CLTV to 100%.

FHA Overview

Income Sources

FHA Overview – Income Sources

• All income used to qualify for an FHA loan must be verified, stable and expected to continue.

Undocumented or “stated’ income sources or “stated’ income sources • Undocumented

can not be used to qualify for an FHA loan.

•• Borrowers must have a documented two year Borrowers must have a documented two year employment history with explanations for

gaps.

• Automated system - explanation required for gaps greater than 6 months

• Manual underwrite Manual underwrite – explanation needed for any gap

FHA O er ie

Income S o rces

FHA Overview – Income Sources

• Acceptable sources of income include:Acceptable sources of income include: - Wages and salaries

- CommissionsCommissions

- Business operations - Government benefitsGovernment benefits

- Alimony and child support.

•• Income must be documented through pay stubs Income must be documented through pay stubs, W-2s, tax returns or other means depending

FHA O er ie

Income S o rces

FHA Overview – Income Sources

• Accepptable sources of income mayy also include direct payments from governments that

subsidize the borrower.

M C di C ifi (MCC) ff d

• Mortgage Credit Certificates (MCC) offered through state and local housing finance

agencies are a great way to boost the NSP agencies are a great way to boost the NSP borrower’s home buying power.

• Section 8 Voucher payments.

• MCCs and Section 8 may be used as additions to gross income or to offset the monthly

FHA Overview Income Sources

FHA Overview – Income Sources

Special considerations in NSP programs:

• FHA will consider income from non-occupying co-borrowers and co-signors. NSP

participants who will own and occupy the participants who will own and occupy the home must meet the household income reqquirements, but the non-occupy_pyingg co-signor income will be excluded from this eligibility calculation.

• PPre-purchhase counseling shhould focus onli ld f helping NSP borrowers properly document their income.

e a os b e docu e ed

FHA Overview – Qualifying Ratios

• F For manually underwritten lloans: ll d itt

- Total monthly housing payment or “front

ratio” mayy not exceed 31% of ggross monthlyy income.

- Total monthly installment payment or “back ratio” may not exceed 43% of gross monthly ratio may not exceed 43% of gross monthly income.

• Higgher ratios possible with documentedposs compensating factors.

t

FHA Overview – Qualifying Ratios

• FFrontt andd bbackk endd ratitios can bbe hihighher ffor automated, underwritten loans receiving an

Apppprove or Acceppt scoringg recommendation

from FHA’s TOTAL Scorecard.

• Compensating factors need not be cited for

l i i A A i

loans receiving an Approve or Accept scoring recommendation.

t t t t

FHA Overview – Down Payment

• BBorrowers must makke a miiniimum ddown payment equall to at least 3.5% of the lesser of the sales price or appraised value. • NSP limits the maximum CLTV to 100% even if a higher CLTV

would otherwise be permitted by FHA. An NSP program could would otherwise be permitted by FHA. An NSP program could assist a buyer with closing costs as a grant but not as a lien against the property that would cause the CLTV to exceed 100%

100%. Other eligible sources such as gifts seller credits etcOther eligible sources such as gifts, seller credits, etc. can be used for this purpose to prevent the NSP buyer from being encumbered for more than the current market value of the property.

-FHA Overview – Down Payment

• AAcceptable sources for the down paymentt t bl f th d include, among other sources,

- Earnest moneyy depposit

- Savings and checking accounts

- Cash accumulated with private savings club - IRAs 401(k) IRAs,401(k), Keogh and Thrift SavingsKeogh and Thrift Savings

- Stocks and Bonds - Gifts

S

Seconddary financiing (i(inclluding NSPNSP fundds))f

FHA Overview – Down Payment

• UUnacceptable sources for the down paymentt t bl f th d

include contributions, either directly or indirectly, from a party with an interest in the transaction –p y 2008 HERA Law

• Interested parties include sellers, real estate

t b k d l d

agents, brokers, and lenders.

• The NSP program sponsor may also be

considered an interested party if they take on considered an interested party if they take on these roles.

FHA Overview – Down Payment

• FHA d FHA does nott sti tipullatte a miiniimum conttributitionib toward the home purchase price from the

borrower’s own funds.

• Many NSP programs and some FHA lenders do require a minimum borrower contribution toward th

the hhome purchhase.

• NSP program administrators should clarify if a minimum borrower contribution will be required minimum borrower contribution will be required for their particular program. Also check for FHA lender overlays.

FHA Overview - Credit

• MiMiniimum credit score ffor eli dit ligibilit ibility for an FHA f FHA loan is 500.

•• Minimum credit score for an LTV over 90% is Minimum credit score for an LTV over 90% is 580.

• Most FHA lenders require a credit score of 620Most FHA lenders require a credit score of 620 or more.

• FHA has sppecial pprovisions for qqualifyyingg

borrowers with non-traditional or insufficient credit (no credit score).

FHA Overview - Credit

• In certain situations FHA may require that the

debts and obligations of a non-borrowing spouse be considered as the borrower’s debts

be considered as the borrower s debts.

• Pre-purchase counseling in NSP programs

should always include a review of the borrower’ss should always include a review of the borrower tri-merged mortgage credit report.

o

Limits CLTV   to cost to   acquire   property   No pre‐purchase counseling   required   Pre‐purchase counseling

requirement  for  purchasers  of

NSP properties Income

Income  of of non non‐occupying co occupying  co‐  

borrowers  or co‐signors  

considered   in qualifying.

Non occupying  

Non‐occupying co signors co‐signors

excluded from  eligibility  

calculation.

Recap f FHA NSP Differences

Recap of FHA-NSP Differences

PART 2:

Layering N

SP Subsidies

PART 2:

Layering NSP Subsidies

Buyer’s Contribution FHA Fi t M t

FHA First Mortgage

+

Mortgage Credit Certificate (If Available)

NSP Second Mortgage

Deferred Repayment Loan

Closing Cost Assistance

Part 3

: Special FHA Issues

FHA Secondary financing requirements: FHA Secondary financing requirements:

• The provider of the NSP assistance must be a

ggovernmental entityy or an approved non-profitpp p

organization operating as an instrumentality of a local government agency.

• NSP subordinate financing must be approved by the lender who funds the first mortgage.

•• FHA does not directly approve secondary financing FHA does not directly approve secondary financing

programs for governments or non-profit instrumentalities of government.

Special FHA Issues

FHA Secondary financing requirements FHA Secondary financing requirements

(continued):

• Repayment must be deferred for at least five yyears.p y

• Deed restrictions and covenants may not survive foreclosure by a senior lien holder.

• Accrued interest charges may not cause long-term, negative amortization.

• Shared appreciation plans must be proportional to the amount of the NSP investment.

Special FHA Issues

Cost-to-Acquire: Cost to Acquire:

• Except as noted below, the CLTV of all liens cannot exceed 100% of the cost to acqquire the pproppertyy. The cost to acquire the property is the sales price plus

borrower-paid closing costs, discount points, repairs and rehabilitation expenses and prepaid expenses

rehabilitation expenses and prepaid expenses.

• For FHA, the cost to acquire may exceed the appraised

value of the pp propertyy when the source of the secondaryy

financing is an approved government or non-profit

assistance program . However, NSP limits the maximum CLTV to 100%

Special FHA Issues

• Limiting the Amount of the NSP Subsidy

• NSP programs typically provide home buyer

i t t t t d i

assistance up to a stated program maximum. • Lenders often request the maximum NSP

assistance even the borrower could qualify assistance even the borrower could qualify with less.

• To avoid this problem, establish a minimumTo avoid this problem, establish a minimum housing expense ratio (e.g. 30%) below which the NSP subsidy will be reduced.

Special F

HA Iss es

Special FHA Issues

• Usingg 203K Loans in NSP Proggrams

• FHA 203K loans have not been widely used in NSP acquisition-rehabilitation strategies.

• One simple option: the NSP program first acquires the home, completes essential

repairs and then facilitates acquisition of the repairs and then facilitates acquisition of the home by a home buyer using a 203(k) loan to complete the balance of the required

’

Special F

HA Iss es

Special FHA Issues

FHA Appraisal Requirements

• FHA appraisals are valid for 120 days. • FHA appraisals may be extended for:

- 30 days by the lender’s underwriter to 30 days by the lender s underwriter to permit closing; or

- for 120 dayys througgh the comppletion byy the appraiser of FNMA Form 1004d

• Except for 203k loans, the lender should not ordder appraiisal until th l til the NSP programNSP

administrator has confirmed that repairs and impprovements have been comppleted.

Special F

HA Iss es

Special FHA Issues

FHA Appraisal Requirements (continued) FHA Appraisal Requirements (continued)

• The lender’s underwriter bears the primary

responsibility for determining the eligibility of a responsibility for determining the eligibility of a property for FHA insurance and for the quality of the appraisal report.

• Underwriter is allowed to communicate with the appraiser, to request clarifications and to discuss components of the appraisal that influence its

components of the appraisal that influence its quality.

Special FHA Issues

Working with NSP Lease-Purchase Programs

• Some NSP programs are considering

i l ti l h i iti ti

implementing lease-purchase initiatives as way to expand utilizing of the NSP program and to serve more eliggible buyyers.

• A government, or non-profit entity approved by HUD to act as a borrower, may use FHA loans

t i th h t i t l

to acquire the home, enter into a

purchase contract and then allow the lease-ppurchaser to assume the FHA loan when the

t

Special FHA Issues

W ki

Working withith NSP Lease-PNSP L Purchhase PPrograms

(continued)

•• The government or non profit remains The government or non-profit remains

responsible for the monthly payments on the FHA loan and must demonstrate the financial capacitity to pay.

• In the event of a default, the government or non-profit is not eligible for FHA Loss Mitigation

profit is not eligible for FHA Loss Mitigation measures.

• See HUD Handbook 4155 1 Chapter 4 A 6 forSee HUD Handbook 4155.1 Chapter 4.A.6 for more information.

Special F

HA Iss es

Special FHA Issues

FHA Lender Overlays FHA Lender Overlays

• Most FHA lenders impose underwriting and

program overlays which exceed FHA’s minimum program overlays which exceed FHAs minimum requirements.

• NSP program administrators should encouraggep g participation from a wide-range of lenders so as to increase the chances that NSP program

participants can be approved for FHA financing participants can be approved for FHA financing.

Special F

HA Iss es

Special FHA Issues

•• Imposing Local NSP Program Overlays on Imposing Local NSP Program Overlays on FHA Borrowers

• NSP program administrators should carefullyNSP program administrators should carefully consider the benefit of imposing underwriting requirements that exceed FHA’s minimum underwriting requirements

underwriting requirements.

• Imposing local NSP program underwriting variances may reduce lender interest or their variances may reduce lender interest or their ability to support the NSP program.

Special FHA Issues

• Lead Capture in NSP Programs

• Many NSP programs provide applicant leadsMany NSP programs provide applicant leads to participating lenders, non-profit

organizations and real estate agents.

• The referrals should be tracked and the lead recipients held accountable for how the leads are processed and evaluated

are processed and evaluated.

• Reward lead recipients who convert referrals to NSP borrowers with more leads.

PART 4:

Mortgage-Ready Buyers

•• Documenting income and asset sourcesDocumenting income and asset sources.

• Importance of the borrower’s federal income tax return in the FHA loan approval process tax return in the FHA loan approval process. • Understanding that the loan approval process

is dyynamic and onggoingg.

• While FHA loans allow for some deferred student loan debt to be excluded,

ddocumenttatition confifirmiing th the ddefferrall periiodd is always required.

Part 4:

Mortgage

Ready Buyers

Part 4:

Mortgage-Ready Buyers

• On manually underwritten loans, collection accounts and charged-off debts must be

addressed by the borrower. There is no such requirement for loans with TOTAL Accept or requirement for loans with TOTAL Accept or Approve scoring recommendations.

• “Dispputed” deroggatoryy credit must be resolved (very hard and time consuming) NSP applicants should be cautioned to avoid filing frivolous credit disputes

disputes.

• Periods of unemployment will require additional documentation to demonstrate that the

Mortgage-Ready Buyers

•• Borrowers relying on gift funds should be Borrowers relying on gift funds should be counseled on the requirements for properly

documenting gift funds before the gift funds are transfferredd to thhe bborrower.

• Borrowers should be cautioned that any un-sourced deposit to their bank account may sourced deposit to their bank account may jeopardize their loan approval.

• “Loan Approval” is a dynamic and continuing Loan Approval is a dynamic and continuing process until the loan closes.

eso rces

FHA R

FHA Resources

Federal Housing Administration (FHA): Temporary Exemption from Compliance with FHA's Regulation on Property Flipping from Compliance with FHA's Regulation on Property Flipping Extension of Exemption:

http://www.gpo.gov/fdsys/pkg/FR-2011-12-28/pdf/2011-33411.pdf

NSP Policy Alert: Guidance on FHA Mortgage Insurance for NSP Grantees:

https://www hudnsphelp info/media/resources/NSPFHAMortgageInsuranceGui https://www.hudnsphelp.info/media/resources/NSPFHAMortgageInsuranceGui dance_052310.pdf

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