FHA Basics For Success - Mortgage Solutions Financial

Calculating Cash to CloseCalculating Cash-to CloseThe three items that make up a buyer’s cash-to-close are: Downpayment Closing Costs and Fees Paid by the Borrower Pre-paid Closing Costs Paid by the Borrower Total Cash-To-CloseTOTAL: For the purpose of verifying sufficient cash-to-close, Cash Reserves (after closing) are not requiredfor 1-2 unit properties except as requiredby total scorecard.Manual (except non-credit qualifying streamline refinance transactions) 1 – 2 Unit Properties: Verify and document one (1) month’s PITIA** 3 – 4 Unit Properties: Verify and document three (3) month’s PITIA**** PITIA Principal, Interest, Taxes, Insurance and other Assessments (special assessments , HOA dues, etc.).Page 21

Estimating Pre-Paid Closing CostsPage 22

Upfront MIP / Annual MIPUpfront Mortgage Insurance PremiumAn Upfront Mortgage Insurance Premium (UFMIP) is required on all FHA mortgage programs offered byMortgage Solutions Financial. The maximum mortgage may never exceed the statutory limits,except by the amount of financed UFMIP.Monthly Mortgage Insurance PremiumFHA mortgages require an additional Mortgage Insurance Premium (MIP) that is collected monthly. Thepercentage amount of the monthly premium varies by program, LTV, and loan term.FHA Simple and Streamline submissions MUST include a copy of the “Refinance Authorization/CreditQuery” documenting the original endorsement date (see below).Page 23

Upfront MIP / Annual MIPPage 24

Max Loan AmountWorksheetPage 25

Restrictions to FHAMax Loan AmountsRestrictions to Maximum FHA AmountsCertain types of loan transactions affect the amount of financing available and the calculation of themaximum mortgage amount.These include: Identity-of-Interest, Non-Occupying Co-Borrowers, and additional FHA loans.Identity of InterestTransactionsIdentity-of-Interest is defined by HUD as a sales transaction between parties with a family or business relationship. Thesetransactions are usually restricted to a maximum loan-to-value of 85%. However, maximum financing is permissible under thefollowing circumstances: A family member purchasing another family member's home as a principal residence. The home must be the Seller’s primaryresidence. An employee of a builder purchasing one of the builder's new homes as a principal residence. A corporation transferring an employee out of an area, purchasing the transferred employee's home, and reselling to anotheremployee. A current tenant purchasing the property that he or she has rented for at least six (6) months immediatelypredating the sales contract. A lease or other written evidence must be submitted to verify occupancy.Page 26

Restrictions to FHAMax Loan AmountsRestrictions to Maximum FHA Loan Amounts, ContinuedPage 27

Restrictions to FHAMax Loan AmountsRestrictions to Maximum FHA Loan Amounts, ContinuedFamily Member is defined as follows:Child, parent, or grandparent; Child is defined as son, stepson, daughter, or stepdaughter; Parent or grandparent includes a step-parent/grandparent or foster parent/grandparentSpouse or domestic partnerLegally adopted son or daughter, including a child who is placed with the borrower by an authorized agency for legaladoptionFoster childBrother, stepbrother Sister,stepsister UncleAuntSon-in-law, daughter-in-law, farther-in-law, mother-in-law, brother-in-law, or sister-in-law of the borrowerNote: This applies to identity-of-interest and gift fundsPage 28

Borrower EligibilityBorrower EligibilityCo-Borrowers:A co-borrower is an individual applying for a mortgage loan other than the primary borrower, who occupies theproperty, whose name appears on the mortgage note, and who is jointly and severally liable for the mortgagedebt.Non-Occupant Co-Borrowers:A non-occupant co-borrower is an individual applying for the loan that has an ownership interest in the property, but thesubject property is not their principal residence. Non-occupant co-borrowers take title to the property atsettlement, and must execute the note and security instruments as required by state law. Additionally, a non occupant coborrower may not be added to the loan transaction to meet qualifying requirements for a cash-out refinance.Non-occupant co-borrowers are allowed provided they meet the guidelines in the Product Description and the followingcriteria: Must have a principal residence in the U.S., unless exempted due to military service with overseas assignments,or as a U.S. citizen living abroad. Must not have an interest in the financial transaction, including but not limited to a seller, broker, real estateagent, or builder.Page 29

Borrower EligibilityBorrower Eligibility, continuedNon-Occupant Co-Borrowers, Continued:For non-occupying co-borrower transactions, the maximum LTV is limited to 75% LTV.The LTV can be increased to a maximum of 96.5% if the borrowers are family members, provided the transaction does notinvolve the following: A family member selling to a family member who will be a non-occupying co-borrower. A transaction on a two- to four- unit property; 1-Unit maximum allowed.Non-Borrowing Spouse or Domestic Partner:A non-borrowing spouse or domestic partner is a person who has an ownership interest in the security property.Non-borrowing spouses or domestic partners are required to sign the security instrument and other applicable documentation in orderto perfect a lien in accordance with the governing state law. The option to waive any property right by virtue of being the owner’sspouse or domestic partner must be in accordance with applicable state law. CAIVRS is not required for Non-borrowing spouses ordomestic partners incommunity property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington andWisconsin).The following guidelines apply for non-borrowing spouses or domestic partners in community property states: Debts of a non-borrowing spouse must be counted in the borrower’s qualifying ratios. The non-borrowing spouse or domestic partner’s credit performance and credit score is generally not a consideration.Note: There are additional requirements for a Non-Borrowing Spouse/Domestic Partner; please refer to the Lending Guide for completeguidelines.Page 30

Funds to CloseBorrower's Cash InvestmentThe cash investment in the property must equal the difference between the amount of the insured mortgage, excluding any upfrontMIP, and the total cost to acquire the property including pre-paid expenses and closing costs. All funds for the borrower's investmentin the property must be verified and documented from acceptable sources.Minimum Downpayment RequirementsA downpayment is the difference between the sale price of real estate and the base loan amount which is paid by the borrower.On purchase transactions, a minimum downpayment of 3.5% (Minimum Required Investment (MRI), based on the lesser of the salesprice or appraised value is required. The MRI must be clearly documented and maycome from the following sources: From the borrower’s own funds: An acceptable gift source (refer to Gifts), or An acceptable secondary financing source, refer to Secondary/Subordinate Financing. When the borrower’s minimum required investment is provided by a source other than the borrower, clear documentation mustbe obtained to support the permissible nature of those funds.Closing costs paid by the borrower are not permitted to be used as a source of funds towards the 3.5% minimum requiredinvestment (MRI).Seller’s real estate tax proration to be received or credited at closing may not be considered at the time ofunderwriting as the source of the applicant’s required funds to close.Page 31

Funds to CloseMinimum Cash ReserveRequirementsReserves are a predetermined amount of cash the borrower is required to have available after the downpayment, closingcosts and pre-paid expenses are paid at loan closing. Reserve requirements are specific to property type and how thetransaction was underwritten (TOTAL or Manual). This requirement assures that the borrower has resources available incase an unforeseen financial problem arises that might impede the borrower's ability to make monthly mortgagepayments on time.(TOTAL) Three (3) month’s PITIA is required on all 3-4 unit purchase and refinance transactions, regardless of AUS Findings.Reserve Requirements (TOTAL)Document reserves per AUS. All assets submitted to AUS must be verified and documented.Reserves do not include: The amount of cash taken at closing in a cash-out transaction Any incidental cash received at closing Equity in another property Borrowed funds from any sourceRefer to FHA guidelines for any specific reserve reqirementsPage 32

Funds to CloseReserve Requirements (Manual) except non-credit qualifying streamline refinance transactions 1-2 Unit Properties: Verify and document one (1) month’s PITIA 3-4 Unit Properties: Verify and document three (3) month’s PITIA For manually underwritten transactions, these funds may NOT be considered as cash reserves:o Gift fundso Equity in another propertyo Borrowed funds from any sourceo The amount of cash taken at closing in a cash-out transaction.o Any incidental cash received at closing. Refer to FHA Product Descriptions for specific reserve requirementsReserves include cash and other liquid assets that borrowers can easily convert to cash by: Drafting or withdrawing funds from an account, Liquidating a cash-equivalent asset, Redeeming vested funds, or Obtaining a loan secured by assets from a fund administrator or an insurance company.Unacceptable sources of reserves include: Proceeds from a cash-out refinance Equity in real property Funds that can only be accessed upon retirement or job termination Gift funds, except on 1 or 2-unit properties under limited circumstances (refer to Gifts)Page 33

Types of AssetsTypes of AssetsAssets are reviewed to determine if theborrower(s) will meet the requirements forclosing costs, downpayments, and reserves,refer to Validation and Evaluation LargeDeposits and New Accounts.When assets are used for thedownpayment or closing costs,documentation must be provided toevidence and verify the sale or liquidationof the funds.The borrower’s credit card may be used topay fees outside of closing; refer toWholesale Lending Guide for fullrequirements.Page 34

Types of AssetsTypes of Assets, ContinuedChecking and Saving Accounts Funds from checking and saving accounts are permitted to be used for reserves, downpayment, and closing costs. The funds must be verified with a VOD or a current bank statement. If a VOD is not obtained, a statementshowing the previous month’s ending balance for the most recent month is required. All large deposits must be documented. Any single deposit in excess of 1% of the property sales price is considered a large deposit. If the borrower is not the sole owner of the account, all non-borrower parties on the account must verify in writing that the borrower has fullaccess and use of the funds. For additional information on documentation guidelines, refer to ValidationRequirements.Sale of Personal Property Utilize the lesser of the estimated value or actual sales price when determining funds to close Obtain all of the following: Satisfactory estimate of the value of the item (i.e. auto dealers, philatelic or numismatic association, writtenappraiser by a qualified appraiser with no financial interest in transaction), Copy of the bill of sale Evidence of receipt Deposit of proceedsNote: Proof of sale is not requiredPage 35

Types of AssetsTypes of Assets, continuedEarnest Money DepositEarnest Money Deposit (Sale contract deposits) for the purchase of the secured property is an acceptable source offunds for the down payment and closing costs. If the amount of the earnest money deposit exceeds 1% of the salesprice or appears excessive based on borrower’s history of accumulating savings, the deposit amount and source offunds must be documented.Verify earnest money with one of the following: Copy of borrower’s cancelled check Bank statement showing the earnest money check clearing Documentation from the deposit-holder showing receipt and deposit of earnest money funds Verify thesource of funds with one of the following: Bank statement showing no undocumented recent large deposits, or VOD with an average balance sufficient to cover the amount of the earnest money deposit If the source of the earnest money deposit was a gift, it must be verified and documented inaccordance with gift fund requirementsSource of Funds Only one-month bank statement is required if previous months balance is reported on bank statement Document funds for recently opened accounts and individual deposits of more than 1% of adjusted value Salary advance cannot be considered as an asset for funds to closePage 36

Types of AssetsTypes of Assets, continuedGift Funds Overlay – All Loans with a credit score below 640 require 2 months reserves, verification of rent, max 150% payment shock andbe 0x30 over the last 12 months for all obligations.Eligible Donors include: Borrower’s family member – reference Identity of Interest section for definition Close friend with a clearly defined and documented interest in the borrower Charitable origination that does not replenish available gift funds with seller contributions. Governmental agency or public entity that has a program providing homeownership assistance to low or moderate incomefamilies; or first-time homebuyers Family members entitled to real estate commission from subject property provided they are a licensed real estate agent Only family members may provide gift of equity The borrower’s employer or labor unionIneligible donors include: Any person or entity with an interest in the sales of the property, including by not limited to: The builder The seller (except gift of equity for relative) The developer The real estate agent The mortgage broker Other interested party to the transaction Any gift or down payment assistance source where the provider is reimbursed either directly or indirectly by the seller or anyinterested third party, commonly known as “seller-funded” DPA.Page 37

Types of AssetsTypes of Assets, continuedGift Letter and Source ofFundsThe following documentation is required regardless of when the gift is provided:Gift LetterA gift letter is required to validate the gift from the donor. The gift letter must contain all of the following: Indicate the donor’s name, address, phone number Indicate donor’s relationship to the borrower Match the exact amount of the gift A statement that no repayment is required Be signed by the donor and borrowerSource of Funds Regardless of when gift funds are made available to a borrower, the Underwriter must be able to determine that the gift fundswere not provided by an unacceptable source and were the donor’sown funds. If the gift funds are being borrowed by the donor and documentation from the bank or other savings account is not available,the donor must provide written evidence that the funds wereborrowed from an acceptable source and not from a party to the transaction At the underwriter’s discretion, additional documentation may be required to substantiate that the gift was derived from anacceptable source by the donor including but not limited to a sourced andseasoned bank statement. Donor’s cash-on-hand is not an acceptable source.Page 38

Types of AssetsTypes of Assets, continuedGift Funds, cont.Gifts as Cash Reserves (TOTAL) Deposited Prior To Closing Excess gift funds in the borrower’s account may be used as cash reserves (1- and 2-unit properties only) and may be included inthe borrower’s account balance when submitting to TOTAL. The gift should be identified separately as gift funds on the FHALoan Transmittal and 1003. Provided At Closing Excess funds from gifts remaining after loan closing may NOT be used as cash reserves. Gift must be submitted toTOTAL as “gift funds” and not included in borrower’s account balance.Gifts as Cash Reserves (Manually Underwritten Loans) Gifts may not be counted as part of the borrower’s reserves under any circumstances for manually underwritten transactionsRefer Reserve Requirements-Manually underwritten loans.Gifts of Equity Only eligible family members may provide equity credit as a gift on a property being sold to other family members.- Refer to Identity of Interest and Family Member definition A gift letter signed and dated by the donor and the borrower that includes all the following is required:- The donor’s name. address, and telephone number;- The donor’s relationship to the borrower- The amount of the equity gift; and- A statement that no repayment is requiredPage 39

Types of AssetsTypes of Assets,continuedGift Transfer DocumentationPage 40

LiabilitiesInstallment Accounts:Closed-end installment debts do not have to be included if: They will be paid off within 10 months; and The cumulative payments are less than or equal to 5% of the borrower’s gross monthly income. The borrower may not pay down the balance in order to meet the 10-month requirementStudent Loans All student loans must be included in the borrower’s DTI, regardless of the status of the loan or payment type. Loans in deferment or forbearance may not be excluded.One of the following two options are required for determining the qualifying payment. Utilize the greater of: 1% of the outstanding loan balance, OR The monthly payment reflected on the credit report. The actual payment only if it is fixed and fully amortized.‒ Written documentation from the student loan provider is required.Example 1:Example 2:Credit report reflects a 25,000 balance and apayment of 100.00.Written documentation

FHA-insured mortgages can be used to purchase homes and to refinance existing mortgages. FHA loans are designed for low to moderate income borrowers who are unable to make a large down payment. The most popular FHA loan has a minimum cash investment requirement of 3.5 percent but permits 100