FHA Loan Expert Blog

October 20, 2008
MORTGAGEE LETTER 2008-33
TO:    ALL APPROVED MORTGAGEES
          ALL HUD-APPROVED HOUSING COUNSELING AGENCIES
SUBJECT: Home Equity Conversion Mortgage (HECM) for Purchase Program
 The Housing and Economic Recovery Act of 2008 (HERA) provides HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds.  Section 2122(a)(9) of HERA amends section 255 of the National Housing Act to authorize the Department of Housing and Urban Development (HUD) to insure HECMs used for the purchase of a 1- to 4-family dwelling unit.   Accordingly, eligible mortgagors now have the opportunity to purchase a principal residence with HECM loan proceeds.  HECM for purchase transactions, for which the FHA case number is assigned on or after January 1, 2009, must satisfy existing program requirements and the provisions of this Mortgagee Letter.

 The Federal Housing Administration (FHA) defines “HECM for Purchase” as a real estate purchase where title to the property is transferred to the HECM mortgagor, which the mortgagor will occupy as a principal residence, and, at the time of closing, the HECM first and second liens will be the only liens against the property.  HECM mortgagors must occupy the property within 60 days from the date of closing.  Lenders are required to ensure all outstanding or unpaid obligations incurred by the prospective mortgagor, in connection with the HECM transaction, are satisfied at closing. 

Eligible Property Types

 Only properties where construction is completed, as defined in Mortgagee Letter 2007-06, are eligible for FHA insurance under the HECM for Purchase program.  Loan proceeds may be used to satisfy outstanding payment obligations associated with a land contract, contract for deed or other similar purchasing arrangements that will ensure the property, which will be used as collateral for the HECM, meets FHA’s title requirements.  Those requirements, as provided in section 255(b)(4) of the National Housing Act and implemented in the HECM regulations at 24 CFR 206.45, provide, in part, that the HECM must be on real estate held in fee simple, or on a leasehold under a lease for not less than 99 years which is renewable, or under a lease having a remaining period of not less than 50 years beyond the date of the 100th birthday of the youngest mortgagor.  
Ineligible Property Types

 The following property types are ineligible for FHA insurance under the HECM for Purchase program:

• Cooperative units; 
• Newly constructed principal residence where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority;
• Boarding houses;
• Bed and breakfast establishments;
• Existing manufactured homes built before June 15, 1976; and
• Existing manufactured homes built after June 15, 1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g. data plate and HUD certification label) and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide.

Property Flipping

Prospective mortgagors should be alert to efforts to coerce them into obtaining a reverse mortgage as part of a purchase contractual obligation, or purchasing a distressed home in need of substantial repairs but being sold at or above market rate.

 As such, HECM lenders must take steps to ensure that: a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) for resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property’s value.  Lenders providing HECM financing for purchase transactions must comply with guidance provided in Mortgagee Letter 2006-14.
 
Refinancing and Existing Upfront Mortgage Insurance Premium (MIP)

 The HECM refinance authority is only applicable when the property that serves as collateral for FHA-insurance remains the same.  Therefore, existing HECM mortgagors who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders must enter the transaction into FHA Connection as a new HECM.

Monetary Investment

 Consistent with existing policy, the maximum claim amount and principal limit will continue to be calculated in accordance HECM regulations at 24 CFR 206.3, HUD Handbook 4235.1 REV-1, and applicable MLs.  At closing, HECM mortgagors must provide a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources.
HECM mortgagors may choose to provide a larger investment amount in order to retain a portion of the available HECM proceeds for future draws.
Required Investment Examples

Example #1 Example #2 Example #3
Appraised Value/MCA*$300,000
Sales price                      $300,000 Appraised Value/MCA*$300,000
Sales price                     $325,000 Appraised Value/MCA*$300,000
Sales price                      $280,000
Principal Limit**           $199,500 Principal Limit**          $199,500 Principal Limit**           $199,500
Minus Loan Fees             $ 15,500 Minus Loan Fees            $  15,500 Minus Loan Fees             $  15,500
Avail. HECM proceeds  $184,000 Avail. HECM proceeds  $184,000 Avail. HECM proceeds   $184,000
Req. Investment              $116,000 Req. Investment              $141,000 Req. Investment                $ 96,000
* Appraised Value/MCA is defined as the maximum claim amount and is used to determine the principal limit which is the lesser of the appraised value or the FHA national mortgage limit.  The principal limit is the maximum amount available to the HECM mortgagor.
** Assumes the age of the youngest HECM mortgagor is 67 and a principal limit factor of .665 for a 5% expected average mortgage interest rate. 

In each example above, loan fees are deducted from the principal limit of the HECM.  However, it is not required that loan fees be deducted from HECM proceeds.  The mortgagor may pay loan fees as part of the required monetary investment and use all HECM proceeds toward the purchase transaction.

Funding Sources

HECM mortgagors must use cash on hand or cash from the sale or liquidation of the mortgagor’s assets for the required monetary investment.
  
Verification of Funding Sources

Lenders will be required to verify the source of all funds prior to closing.  A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts.  If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds.  Such documentation must be provided in the FHA case binder.  Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement. 

Gap Financing

 Consistent with existing regulatory requirements at 24 CFR 206.32(a), HECM mortgagors may not obtain a bridge loan (also known as “gap financing”) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction.  This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing. 
 

Gap Financing Example

A prospective HECM mortgagor completes the required reverse mortgage counseling and receives an estimate stating the required monetary investment could be $25,000.  The prospective HECM mortgagor has $20,000 in liquid assets but is short the remaining $5,000.  The prospective HECM mortgagor cannot take $5,000 from a credit card or obtain interim financing in order to deposit the money into their banking account in anticipation of being required to bring this amount to closing.  However, the prospective HECM mortgagor may obtain the $5,000 from an allowable FHA funding source. 

Enhanced Counseling

 HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.

Right of Rescission

 The three-day right of rescission period is not applicable to HECM for Purchase transactions.  Therefore, all initial advances may be disbursed on the day of closing by the settlement agent.  However, FHA encourages lenders to seek their counsel’s opinion to assure compliance with Federal or State laws.

Closing Guidance

 Lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:

• Will serve as the principal residence of the HECM mortgagor.
• Construction is complete and a certificate of occupancy or its equivalent has been issued.
• Any construction loan financing for the property, which will serve as the collateral for the HECM loan, is satisfied and the HECM liens will be in a first and second lien position and, at the time of closing, no other liens against the property exist.

 Consistent with existing lending practices, lenders are responsible for determining whether a particular HECM loan is open or closed-end credit.  In accordance with 24 CFR 206.43, lenders must comply with the regulatory disclosure requirements.

Data Entry

 Instructions on how to enter HECM for Purchase transactions into FHA Connection and Insurance Accounting Collection System will be provided in a separate instruction.
 

Information Collection Requirements

The information collection requirements contained in this Mortgagee Letter were approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).  Approval of HECM Program is covered by OMB control number
2502-0524, with disclosures requirements being covered by OMB control numbers 2502-0265 and 2502-0059.  An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a valid control number.

 If you have questions regarding this Mortgagee Letter, please call FHA’s Resource Center at
1-800-CALL-FHA (1-800-225-5342).  Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

       Sincerely,
       Brian D. Montgomery
       Assistant Secretary for Housing-
          Federal Housing Commissioner

PDF Version: Mortgagee Letter Hope For Homeowners

The amount of the H4H mortgage may not exceed a nationwide maximum mortgage limit of $550,440.  The LTV of the H4H mortgage is limited to 90 percent of current appraised value of the property, including the UFMIP.  The proceeds from the new H4H mortgage will be applied to the existing senior mortgage, and extinguish all mortgage-related debts under all existing mortgages including: 
 
• Advances by existing lenders/servicers for taxes, hazard insurance and/or mortgage insurance; and

• Out of pocket third party legal expenses of the existing lenders/servicers associated with foreclosures and preservation and protection (See Mortgagee Letters 2007-03 and 2005-30)

PDF Version: Hope For Homeowners Mortgagee Letter 

Appraisals

The appraisal for the H4H mortgage must be performed by an appraiser on the FHA Appraiser Roster and conducted using FHA guidelines, which can be found in the Resources box at hud.gov/groups/appraisers.cfm. 

However, the appraisal must have been specifically ordered for the H4H transaction and the appraisal should be no more than 3 months old at the time of loan closing.  If an appraisal is more than 3 months old because of transactional delays, the appraisal may be acceptable with an explanation that addresses how the appraisal meets existing FHA standards and the requirement for “current” appraised value. The lender may require a new appraisal, if the appraisal and written explanation are insufficient.

Prevailing Appraised Value

If an appraisal is ordered by the current lender or servicer and a new appraisal is ordered by a different lender that will originate the new loan under this Program, the value provided in the appraisal ordered by the new lender will prevail as the appraisal accepted for obtaining FHA insurance.

Appraisal Practices in Declining Markets
 
 It is expected that many of the properties financed under this Program will be located in declining market areas.  Therefore, the following guidance is provided to assist lenders in ensuring that appraisers are providing accurate property valuations.  A declining market could be as small as a neighborhood or as large as an entire state, and no standard definition exists, other than a market in which home prices are falling. 

Appraiser Responsibilities

The purpose of the appraisal is to provide the lender/client with an accurate, and adequately supported, opinion of market value.  It is the appraiser’s responsibility in performing the appraisal to determine whether a property is located in a declining market.
The neighborhood section of each property specific appraisal form contains a subsection on housing trends where the appraiser must mark a box indicating whether property values are increasing, stable or declining.  Whichever box is selected, the appraiser is certifying that he or she has performed an objective analysis of quantifiable data supporting the observations made.

The appraiser must provide an explanation in the “Market Conditions” section of the appraisal report that includes relevant information in support of the conclusions about appraised value relating to trends in property values, demand/supply and marketing time.  The appraiser must also provide a description of the prevalence and impact of sales and financing concessions and/or down payment assistance in the subject’s market area.  Other areas of discussion may include days on market, list-to-sale price ratios, and/or financing availability.
 
Appraisers and lenders are reminded that a comparable sale should not be more than six months old and should represent a closed sale. The appraiser may utilize comparables that are more than six months old but only with a clear explanation and justification.  The lender may require a new appraisal, if the appraisal and written explanation are insufficient. The appraiser is not permitted to use a comparable greater than 12 months old (see Comparable Selection, page D-6 of Valuation Protocol).

Lender Responsibilities

The lender’s responsibility is to properly review the appraisal and determine that the appraised value used to support the loan amount of the new FHA-insured mortgage is accurate and adequately supported.  Lenders may determine, through services such as the S&P/Case-Schiller Index, Office of Federal Housing Enterprise Oversight (OFHEO) House Price Index or any index developed by its successor, the Federal Housing Finance Agency, or National Association of Realtors (NAR) statistics, that the appraised value is supportable.

Lenders are reminded that, if the appraiser they select provides a poor or fraudulent appraisal that leads FHA to insure a mortgage at an inflated amount, the lender is held equally responsible with the appraiser for the violation if the lender knew or should have known of the defects or the fraud in the appraisal.  FHA will pursue appropriate enforcement actions against both or either party.  Lenders accept responsibility, equally with appraisers for the integrity, accuracy and thoroughness of the appraisal submitted to FHA for mortgage insurance purposes.

Lenders should inform appraisers that the purpose of the appraisal is for the H4H Program, advising them that a copy will be shared with subordinate lien holders and must be provided to the borrower.

PDF Version: Hope For Homeowners Mortgagee Letter

Property Eligibilty

• The property must be the borrower’s primary and only residence in which they have an ownership interest (if there are non-occupant co-borrowers, they will need to quit claim their interest in the property prior to the occupying co-borrowers applying for the H4H Program);

• Only 1 unit properties are eligible, including condominium units, cooperative units and manufactured housing permanently affixed to realty.

PDF Version: Hope For Homeowners Mortgagee Letter

Mortgage Eligibility

• The mortgage being refinanced must have been originated on or before January 1, 2008;

• Each holder of an existing senior mortgage being refinanced must:

1. Waive all prepayment penalties and late payment fees (including insufficient funds fees) on the mortgage.  Prepayment penalties are defined in the Federal Reserve Board’s Regulation Z (Truth in Lending), 12 CFR 226.32(d)(6);

2. Agree to accept the proceeds of the new H4H mortgage as payment in full, and

3. Release their outstanding mortgage liens.

• Each holder of an existing subordinate mortgage must:

1. Waive all prepayment penalties and late payment fees (including insufficient funds fees) on the mortgage.  Prepayment penalties are defined in the Federal Reserve Board’s Regulation Z (Truth in Lending), 12 CFR 226.32(d)(6); and

2.  Release their outstanding mortgage liens.

• Any type of mortgage is eligible for refinancing under the H4H Program, including conventional (prime, Alt-A, subprime) or government-backed (FHA, VA, or Rural Development), fixed-rate or an adjustable rate mortgage; and

• The mortgage being refinanced may have a variety of payment characteristics, including interest only, payment option, negative amortization and/or any other exotic features.

PDF Version: Mortgagee Letter for Hope For Homeowners

 Borrower Eligibility

• Borrowers who are current or delinquent  on their mortgage at the time of the refinance are eligible for this Program, if they:   

o Have not intentionally defaulted on their mortgage or any other debt (Intentionally defaulted means the borrower had available funds that could pay the mortgage and other debts without hardship.  Debts subject to a documented bona fide dispute may be excluded.) AND

o Have made a minimum of six (6) full payments during the life of the existing senior mortgage (full payment is defined as what was acceptable to the lender for meeting the monthly payment obligation under the terms and conditions of the mortgage).

• Borrowers must reside in the property securing the loan being refinanced, and may not have an ownership interest in other residential real estate, including second homes and/or rental properties.

• Borrowers cannot have been convicted of fraud under state and Federal laws in the last 10 years. 
o Similar to its validation tool for social security numbers, FHA will use an automated tool at the time of case number assignment that will check the borrower’s name against several databases for convictions of fraud and an ownership interest in other residential properties.  In the event that the lender receives a warning at case number assignment and believes it is in error, it must provide evidence to the appropriate Homeownership Center documenting that the borrower has not been convicted of fraud or does not have an ownership interest in other residential properties.  Once the Homeownership Center evaluates the documentation, it will determine whether to lift the warning.

• Borrowers must certify that they did not knowingly or willfully provide material false information to obtain the existing mortgages being refinanced under the H4H Program.

• As of March 1, 2008, the borrower’s aggregate total monthly mortgage payment debt-to-income ratio (DTI) on all existing mortgages must be greater than 31 percent of the borrower’s gross monthly income. The total monthly mortgage payment is defined as the fully-indexed and fully-amortized Principal, Interest, Taxes and Insurance (PITI) payment (this includes principal and interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens).

FHA recognizes that reconstructing the borrower’s prior total monthly mortgage payment DTI as of March 1, 2008 may be difficult, especially as the H4H Program nears its sunset date.  To comply with this eligibility requirement, lenders must obtain:

1. From the borrower, evidence that the prior mortgage DTI was more than 31 percent on March 1, 2008, such as pay stubs for March 2008, or a signed and dated copy of the individual 2008 Federal tax return, when available, to determine gross monthly income for that month (earnings divided by 12), or W-2s, financial records, or verification of employment from the borrower’s employer. 

Lenders may also rely on the borrower’s signed and dated 2007 Federal tax return if the lender has no reason to believe that the borrower’s income in March 2008 was materially different than the income reported on the 2007 Federal tax return.

• To determine March 2008 income for self-employed borrowers, obtain a copy of the quarterly tax return that contains income stream information for March 2008 or a signed and dated Profit and Loss Statement and balance sheet that contains income stream information for March 2008 or a signed and dated copy of the individual 2008 Federal tax return, when available, (earnings divided by 12).

2. From the servicer of the mortgage, the borrower’s total monthly mortgage payment due for March 2008, including any amounts due on subordinate liens.
 
• For mortgages without escrow accounts, the lender should obtain tax and insurance information from the borrower.  If the borrower does not provide insurance information, then the servicer of the mortgage should estimate the monthly cost of hazard insurance (and flood insurance, if applicable) based on the property’s location and the rates in effect for 2008.  If the borrower does not provide real estate tax information, the lender should obtain it from public records.

September 19, 2008

MORTGAGEE LETTER 2008-25

TO: ALL APPROVED MORTGAGEES

SUBJECT: Converting Existing Homes to Rentals—Underwriting Instructions

Through this Mortgagee Letter, the Federal Housing Administration (FHA) takes steps to immediately respond to an unscrupulous practice arising in the housing mortgage market that poses a risk to FHA, FHA-approved lenders, and consequently to FHA’s ability to help new homeowners.

Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence. This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities arising in the marketplace.

Due to FHA’s concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages. Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter. The exclusion of rental income from property being vacated is being instituted on a temporary basis while FHA further analyzes this situation to determine whether permanent measures may need to be taken. This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated. In either case, this guidance is directed to preventing the practice known as “buy and bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage. Although the property being vacated will not have a mortgage insured by FHA, surrounding properties may and, thus, FHA may be indirectly negatively affected should that property result in a foreclosure.

Exceptions:

Rental income on the property being vacated, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA Homeownership Center (see 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.

The guidance in this Mortgagee Letter applies solely to a principal residence being vacated in favor of another principal residence. This Mortgagee Letter is not applicable to existing rental properties disclosed on the loan application and confirmed by tax returns (Schedule E of form IRS 1040).

It is important to note that if the property being vacated had a mortgage insured by FHA, eligibility for a second FHA insured mortgage can only occur under the exemptions described in handbook HUD-4155.1 REV-5, paragraph 1-2.

If you have any questions regarding this Mortgagee Letter, call 1-800-CALLFHA.

Sincerely,

Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner

MORTGAGEE LETTER 2008-16
TO:  ALL APPROVED MORTGAGEES
SUBJECT: Risk-Based Premiums for FHA Mortgage Insurance

Effective with new FHA case number assignments on or after July 14, 2008, FHA will implement risk-based premiums on one- to four-unit single family mortgages.  The premium matrix is shown below, replacing the premium matrix in Mortgagee Letter 00-38, which identifies the current mortgage insurance premiums for FHA’s single family programs.

FHA Single Family Mortgage Insurance
Upfront and Annual Mortgage Insurance Premiums
 (Loan Terms > 15 years)
Effective as of July 14, 2008
All premiums are specified in basis points (0.01%)

Decision Credit Score  (FICO)          

LTV….850-680….679-640….639-600….599-560….559-500….499-300.NON-TRADITIONAL

<= 90.00..125/50..125/50..125/50....150/50..175/50..175/50..150/50

90.01-95.00..125/50..125/50..150/50....175/50..200/50..n/a..175/50

> 95..125/55..150/55..175/55..200/55….225a/55….n/a…..200/55

a. A first-time homebuyer, with HUD-approved counseling, will pay only 200 basis points for the upfront mortgage insurance premiums.
The premium grid is based solely on the prospective borrower’s credit bureau score and the loan-to-value ratio; both are defined below. 

Future Changes to the Risk-based Premium Schedule

It is FHA’s intent to make any subsequent changes to the risk-based premium schedule only on an annual basis and make them effective at the beginning of the fiscal year.  FHA’s fiscal year begins October 1 and ends September 30.
 
Highlights Regarding FHA’s Risk-Based Premiums

• UFMIP will range from 1.25 percent of the loan amount for lower-risk borrowers to 2.25 percent for riskier borrowers.
• No borrower who qualifies for a FHA-insured mortgage will pay more than 2.25 percent on the upfront mortgage insurance premium (UFMIP) and 55 basis points for the annual premium.
• Borrowers with credit bureau scores must be risk-classified by FHA’s TOTAL Mortgage Scorecard.
• Those in risk categories without a premium shown are not eligible for FHA-insured mortgage financing.
• Borrowers without credit bureau scores will need to be manually underwritten and deemed as eligible based on criteria described in Mortgagee Letter 2008-11; the mortgage insurance premium will be determined by the loan-to-value ratio for the non-traditional column in the premium schedule.

Loan-to-Value

For risk-based premium purposes, the loan-to-value ratio, computed to two decimals (e.g., 95.65), is calculated by dividing the mortgage amount prior to adding on any upfront mortgage insurance premium by the sales price or appraised value, whichever is less.  Please note that for purchase transactions, the loan-to-value will be the percentage of the sales price (or appraised value) that is borrowed, e.g., 97.75 percent, as prescribed by law.  While borrowers must have at least a three percent cash investment into the property, a portion of their closing costs may be used to meet that amount.

For refinance transactions, which often include closing costs in the loan amount, the LTV is determined by dividing the loan amount prior to adding on any upfront mortgage insurance premium by the appraiser’s estimate of value.

“Decision Credit Score” Defined 
 
If a credit score is available, it must be used to determine the decision credit score for the application and the premium to be charged.  A “decision credit score” is determined for each applicant according to the following rule: when three scores are available (one from each repository), the median (middle) value is used; when only two are available, the lesser of the two is chosen; when only one is available that score is used.

Multiple Borrowers.  If more than one individual is applying for the same mortgage, the lender must determine the decision credit score for each individual borrower and then select the lower (or lowest if more than two borrowers). That “decision” credit score is then used to determine the appropriate insurance premium in conjunction with the LTV ratio. 
 

Multiple Borrowers/One Without Credit Score(s).  The borrower representing the greatest risk to the Department will determine the premium charged.  For example, if the decision credit score for one borrower is between 559-500 and the other borrower is in the non-traditional credit category, the decision credit score between 559-500 is used to determine the premium.  However, if the decision credit score for one borrower is between 639-600, and the other borrower is in the non-traditional credit category, the non-traditional credit category is used to determine the premium.

Multiple Borrowers/Ineligible Score.  Borrowers who fall into a cell with no premium price shown are not eligible for FHA-insured financing.  Lenders may consider reducing the loan-to-value ratio to 90 percent or removing the borrower from the loan to proceed with the application.

Borrower Disputes Credit Score.  If the mortgage applicant(s) disputes the accuracy of the credit report and, thus, the credit scores:

• The borrower may delay the transaction and work to repair his/her credit, or
• The borrower may pay the mortgage insurance premium based on the credit score generated (and LTV)
 
Non-Traditional Credit

For premium purposes, the borrower representing the greatest risk to the Department will determine the premium to be charged (see Multiple Borrowers/One Without Credit Score(s)).  For underwriting purposes, borrowers with non-traditional credit (or insufficient credit) must qualify based on the underwriting guidance described in Mortgagee Letter 2008-11.

To clarify the guidance in Mortgagee Letter 2008-11 regarding ‘thin-file’ credit reports, the intention was to give lenders the option to also use non-traditional credit sources should they have a minimum trade line requirement to use a credit bureau score.  While the premium charged is based on the borrower representing the greatest risk to the Department, for underwriting purposes lenders may use non-traditional credit methodology to make their determination on the borrower’s willingness to repay the new FHA-insured mortgage.

Refinancing Delinquent Loans into FHASecure

For borrowers refinancing delinquent non-FHA ARMs the Upfront mortgage insurance premiums (UFMIP) is set at 2.25 percent of the base loan amount (loan amount excluding UFMIP) regardless of the loan-to-value (LTV) ratio. 

Automated underwriting systems will provide lenders with a feedback message that will inform them of the premium to be charged without recognizing that the loan being refinanced is delinquent. Therefore, the feedback message providing the premium message will caution lenders that if the loan being refinanced is delinquent, then the premium is 2.25 percent for the UFMIP and .55 percent for annual premium when LTV ratio greater than 95 percent; if the LTV ratio is equal to or less than 95 percent, the annual premium is .50 percent.
 

Borrowers who refinance their delinquent non-FHA ARM loan into FHASecure and subsequently wish to refinance to another FHA-insured mortgage must use a refinance product that requires full qualifying, e.g., a rate and term refinance.  Once the FHA-to-FHA full qualifying refinance is insured, these borrowers will be able to take advantage of FHA’s Streamline Refinance program.

Underwriting Rules When Using FHA’s TOTAL Mortgage Scorecard

If TOTAL renders a refer risk classification or triggers a review rule, the mortgagee’s Direct Endorsement underwriter must determine whether the borrower qualifies for the mortgage using the basic underwriting and eligibility requirements outlined in Mortgagee Letter 2004-47 (TOTAL Mortgage Scorecard User Guide) and handbook HUD-4155.1 REV-5.  However, once determined as eligible for a FHA-insured mortgage, the insurance premium charged is as shown in the matrix above.   

Review Rules for FHA’s TOTAL Mortgage Scorecard include excessive payment-to-income ratios and debt-to-income ratios; and from the credit files, a previous mortgage foreclosure within 3 years, a bankruptcy discharged within 2 years and late mortgage payments.  TOTAL will refer the application for underwriting analysis if any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months shows:

• 3 or more late payments of greater than 30 days; or
• 1 or more late payments of 60 days plus one or more 30-day late payments; or
• 1 payment greater than 90 days late

Although FHA will be charging a slightly higher mortgage insurance premium for certain categories of riskier transactions (e.g., borrowers with low credit bureau scores and high LTVs), those transactions referred by TOTAL are to be fully and properly underwritten.  The increased premiums compensate FHA somewhat for the risk represented by the combination of LTV and credit bureau score, but are not themselves grounds for underwriter approval of a mortgage. The Refer decision from TOTAL suggests that, absent additional factors that can be documented by the underwriter, the credit risk of the loan may be too great FHA to insure. Such mortgages, which may exhibit other risk-layering characteristics beyond credit bureau score and LTV, are to be approved solely on the underwriter’s judgment of the likelihood of successful and sustained homeownership, not on the insurance premium collected. 

If the underwriter approves a loan for which non-credit review rules are triggered, i.e., excessive payment-to-income ratios and debt-to-income ratios, the borrower will pay the mortgage insurance premium based on the decision credit score and LTV ratio. 

First-Time Homebuyer with HUD-Approved Pre-Purchase Counseling

First-time homebuyers (as defined below) who will be obtaining a mortgage with an LTV greater than 95 percent and whose decision credit score is in the 559-500 range are entitled to a reduction of their upfront mortgage insurance premium from 2.25 percent to 2.00 percent provided the homebuyer completes HUD-approved pre-purchase counseling. 
 
A first-time homebuyer is an individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase (closing date) of the property.  A first-time homebuyer includes any individual that has only owned with a former spouse while married and also includes an individual who has only owned a principal residence not permanently affixed to a permanent foundation, or a property that was not in compliance with State, local, or model building codes and cannot be brought into compliance for less than the cost of constructing a permanent structure.  If any of the occupant-owners on the mortgage meet this definition, then the mortgage is considered as having been made to a first-time homebuyer.

Pre-purchase counseling must be obtained from a HUD-approved housing counseling agency, a participating agency of a HUD-approved housing counseling intermediary or a state Housing Finance Agency receiving HUD housing counseling grant funds, and the counseling must occur prior to execution of the sales agreement.  With this requirement, it is FHA’s intent to encourage borrowers to participate in meaningful counseling prior to the decision to purchase a home, not to create an incentive or burden for lenders to have borrowers re-execute the sales contract in order to receive a reduced premium.

The counseling may be completed up to one year before the homebuyer signs a purchase agreement (executes a sales contract) for the subject property. It must be one-on-one, face-to-face counseling unless a hardship can be demonstrated, and then the counseling may be conducted one-on-one over the telephone.  The counseling must consist of, but is not limited to: 

• Budgeting and credit, including an analysis of the household’s unique financial/credit situation;
• Assessing homeownership readiness, including an evaluation of home and monthly payment affordability;
• Development of a written action plan outlining the steps the household and the counselor will take to help the household meet their goals;
• Financing a home, including a discussion of alternative types of mortgage loans/features and special financing products, common lending documents, and steps in the loan application, approval, and closing processes;
• Shopping for a home, including understanding the professionals involved in the process; and
• Maintaining a home, including preventive maintenance, taxes, and insurance;   

Even if group sessions or homebuyer education classes cover the topics above, they do not meet the level of one-on-one counseling needed to receive the reduced mortgage insurance premium.  To find a list of housing counseling agencies, please visit the Department’s website at hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.

Programs Covered by Risk-Based Premiums

Risk-based premiums and the requirements described in this mortgagee letter apply to those forward mortgages insured under FHA’s Mutual Mortgage Insurance (MMI) fund, the Section 203(k) rehabilitation mortgage insurance program, and individual condominium units insured under Section 234(c).  Risk-based premiums do not apply to mortgages insured under Title I of the National Housing Act, nor to reverse mortgages under FHA’s Home Equity Conversion Mortgage (HECM).  Risk-based premiums also do not apply to Section 223(e)(declining neighborhoods), Section 238(c)(Military Impact areas in Georgia and New York), Section 247 (Hawaiian Homelands), and Section 248 (Indian Reservations).
 
Refinance Transactions

The mortgage insurance premium for refinance transactions will depend on several variables.  These include whether the refinance is of a FHA-insured mortgage to another FHA-insured mortgage, as under FHA’s streamlined refinance options, is a rate-and-term refinance or is a refinance under the FHASecure initiative.  Except for streamlined refinances and mortgage refinancing under the FHASecure initiative, the new LTV and new decision credit score determine the mortgage insurance premiums. Additional information is provided below:

Full Qualifying Refinances (e.g., rate-and-term; FHASecure refinance of a conventional mortgage not presently delinquent; cash-out refinances; any that require complete underwriting).  These refinances are subject to the mortgage insurance premiums based on the LTV and decision credit score for the refinance application.

Streamline Refinances.  The mortgage insurance premiums charged are subject to whether the existing FHA-insured loan being streamline refinanced was charged premiums based on A) the pre-July 14, 2008 premium structure of 150/50 basis points or B) the post July 14, 2008  LTV/decision credit score premium schedule.  The following examples illustrate the appropriate premiums that will be charged for streamline refinances.

A. FHA-insured loans pre-July 14, 2008/Borrower paid 150/50 basis points

• Borrowers with an existing FHA-insured loan where the case number for the streamline refinance transaction was assigned before July 14, 2008, will be charged 150 basis points upfront and 50 basis points annually.  On subsequent streamline refinances where the case number is assigned on or after July 14, 2008 borrowers will be charged 100 basis points upfront and 50 basis points annually. 

• Borrowers with an existing FHA-insured mortgage where the case number for the streamline refinance transaction was assigned on or after July 14, 2008, will be charged 100 basis points upfront and 50 basis points annually.  On subsequent streamline refinances borrowers will be charged 100 basis points upfront and 50 basis points annually.

B. FHA-insured loans On or After July 14, 2008/Borrower paid Risk-based Premium

• Borrowers with an existing FHA-insured mortgage (purchase or full qualifying refinance transaction) where the case number for that existing mortgage was assigned on or after July 14, 2008, will be charged premiums on the subsequent streamline refinance transaction using the decision credit score and LTV for the existing mortgage being refinanced. 

• If the streamline refinance transaction is “credit qualifying” (with or without an appraisal) premiums are based on the new decision credit score and the LTV from the existing mortgage being refinanced.

Borrowers who refinanced their delinquent non-FHA ARM into an FHASecure mortgage are not eligible to streamline refinance their FHASecure mortgage.  The refinance transaction subsequent to the FHASecure mortgage must be a full qualifying refinance.
Previous Case Number.  To determine the case number of the loan being refinanced, lenders may use the Case Query screen in FHA Connection using the borrower’s name, address and/or social security number. 

Premium Feedback.  The Case Number Assignment screen in FHA Connection will provide a feedback message with the appropriate premium to be charged for refinance transactions.

Refund of Upfront Premiums.  Refunds of upfront premiums are available to borrowers refinancing to another FHA-insured mortgage within a three-year time period, as shown below. 

      Upfront Mortgage Insurance Premium Refund Percentages
 Month of Year
Year 1 2 3 4 5 6 7 8 9 10 11 12
1 80 78 76 74 72 70 68 66 64 62 60 58
2 56 54 52 50 48 46 44 42 40 38 36 34
3 32 30 28 26 24 22 20 18 16 14 12 10

On any refinance where the MIP refund exceeds the Upfront MIP required on the new loan, the overage will be refunded directly to the borrower from HUD.  The lesser of the MIP refund or the new upfront MIP should be subtracted from the unpaid principal balance before calculating the new mortgage amount.

Type of Refinance Risk-Based Premium Information
Cash-Out Refinances Premiums based on new LTV and credit bureau score/see premium matrix
Rate-and-Term Refinance
(no cash out) Premiums based on new LTV and credit bureau score/see premium matrix
FHA Secure/Not Delinquent Premiums based on new LTV and credit bureau score/see premium matrix
FHA Secure/Delinquent Premium is 2.25% upfront.  Annual premium is 55 basis points if LTV > 95%; otherwise, 50 basis points
Streamlined Refinance of RBP Loan
  Premiums based on previous LTV and previous credit bureau score/FHA will provide feedback with initial values/Any refund to be applied to new upfront premium
“Credit qualifying” Streamlined Refinance Premiums based on new credit bureau score and previous LTV/FHA will provide feedback with initial values/ Any refund to be applied to new upfront premium
Streamline Refinance with new case number assigned prior to July 14, 2008 Premium is 1.50 percent upfront and .50 percent annually/ Any refund to be applied to new upfront premium
Streamline Refinance with new case number assigned on or after July 14, 2008 Premium is 1.00 percent upfront and .50 percent annually/ Any refund to be applied to new upfront premium
15 Year and Shorter-Term Mortgages

Mortgages with terms of 15 years or fewer have a slightly different upfront and annual premium structure due to the risk shorter-term mortgages represent.  The mortgage insurance premium matrix is shown below:

FHA Single Family Mortgage Insurance
Upfront Mortgage and Annual Mortgage Insurance Premiums
Loan Terms of 15 Years or Fewer

Effective as of July 14, 2008
All premiums are specified in basis points (0.01%)

Decision Credit Score (FICO)
LTV 850-680 679-640 639-600 599-560 559-500 499-300 NON-TRADITIONAL

= 90.00 
100/0
 
100/0 
125/0 
150/0 
175/0 
175/0 
150/0

90.01-95.00 
100/25
 
125/25 
150/25 
175/25 
200/25 
n/a 
175/25

> 95 
125/25
 
150/25 
175/25 
200/25 
200/25 
n/a 
200/25

Systems

Lenders are reminded of the importance of data integrity to ensure that the appropriate premium is charged and that the data submitted to TOTAL and FHA Connection is accurate.  Also, system edits will prevent lenders from Streamline Refinancing FHASecure loans that were previously delinquent non-FHA ARM loans.

Additional Information about FHA’s Risk-Based Premiums

• Except for streamline refinances, premiums are the same for purchase and refinance transactions, i.e., based solely on the decision credit bureau score and the loan-to-value ratio
• There are no “add-ons” to the premiums or other adjustments to the mortgage insurance premiums for property type, e.g., multiple unit properties and mortgages on manufactured housing
• The source of the downpayment is not a factor in determining the mortgage insurance premium

If you should have any questions concerning this Mortgagee Letter, call 1-800-CALLFHA.

    Sincerely,

    Brian D. Montgomery
    Assistant Secretary for Housing-
         Federal Housing Commissioner

All-

New FHA Mortgagee Letter:

May 22, 2008

MORTGAGEE LETTER 2008-15

TO: ALL APPROVED MORTGAGEES

SUBJECT: FHA Loan Underwriting and Transmittal Summary, Form HUD-92900-LT and Addendum to Uniform Residential Loan Application, form HUD-92900-A 

The Federal Housing Administration (FHA) has developed form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary (LT) to replace both mortgage credit analysis worksheets, HUD-92900-PUR and HUD-92900-WS (MCAWs).  Lenders are reminded that they are still responsible for calculating the mortgage amount in accordance with existing FHA statutory requirements and documenting that calculation in the loan origination file.  By signing and dating this form (when required) underwriters are providing their final decision to approve the loan application for FHA mortgage insurance.  The HUD-92900-LT does not replace but will be used in conjunction with the HUD-92700-WS, the 203(k) Maximum Mortgage Worksheet…

To read this mortgagee letter and any attachments in their entirety, please visit: hud.gov/offices/adm/hudclips/letters/mortgagee/ view the 2008 letters and click on the letter of your choice. Mortgagee Letters from previous years can be found on the same page.

All HUD Forms can be found online at: hud.gov/offices/adm/hudclips/forms/

Is there a max CLTV on an FHA refinance?  Let’s settle this dispute right here and now with Mortgagee Letter 2005-43 dated October 31, 2005 with states:

“Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.”

Clearly there is no CLTV limit.  I hope this helps some borrowers refinance into the FHA low rate first mortgage.  Now, getting the second mortgage to subordinate will be a subject of a future article.  One mortgage battle at a time around here.

(source=portal.hud.gov/fha/reference/ml2005/05-43ml.doc)