- (rental income continued) If there is available history of rental income, it is necessary to calculate the rental income by averaging the amounts shown on the Schedule E. Depreciation, mortgage interest, t axes, insurance, and any HOA dues shown on the Schedule e may be added back to the net income or loss. If the property has been owned for less than two years, it is necessary to annualize the rental income for the length of time the property has been owned. Finally, if the rental income is being derived from the property being vacated by the borrower, the borrower must be relocating to an area ore than 100 miles from their current principal residence; 25 % of the equity in the property must be verified with a full appraisal. The appraisal does not have to be completed by a FHA roster appraiser; a lease must be obtained of at least one year’s duration from closing, and obtain evidence of the payment o the security deposit or first month’s rent. As for the requirements to document income (if there is limited or no history of rental income) an appraisal evidencing market rest is needed, along with the borrower having at least 25% equity in the property: Two-to-four units – verify and document the proposed rental income by obtaining an appraisal showing fair market rent and the prospective leases; one-unit – verify and document the proposed rental income by obtaining a FNMA Form 1004/FHLMC Form 70, Uniform residential Appraisal Report; FNMA Form 1007/FHLMC Form 1000, Single Family Comparable Rent Schedule; FHLMC Form 998 (Operating Income Statement, showing fair market rent); and the prospective lease; history of rental income – obtain the most recent two-years tax returns including Schedule E. In conclusion, the calculation requirements are as follows: Limited or no history of rental income – to calculate the rental income from real estate other than the subject property where there is no history of rental income since the previous tax filing, deduct the principal, interest, taxes, and insurance (PITI) from the lessor of the monthly operating income report on FHLMC Form 998, or 75% of the lesser of the fair market rent reported by the appraiser, or the rent reflected in the lease or other rental agreement. History of net rental income- calculate the net rental income by averaging the amount shown on the Schedule E provided the borrower continues to on all properties included on the Schedule E (depreciation shown on Schedule E may be added back to the net income or loss; if the property has been owned for less than two years, annualize the rental income for the length of time the property has been owned; for properties with less than two years of rental history, document the date acquired by providing the deed, settlement statement or similar legal documents; positive net rental income is added to the borrower’s effective income. Negative rental income must be included as a debt/liability).
- Non-borrowing spouse, community property – more restrictive and more defined policy. The additional have been added to this policy: (1) An authorization from a non-borrowing spouse must be obtained to verify information needed for the application processing which includes consent to verify their SSN with the SSA; (2) the credit report must indicate the non-borrowing spouse’s SSN where an SSN exists, was matched wit4h the SSA, or the file must contain separate documentation indicating the SSN was match with SSA or provide a statement that non-borrowing spouse does not have an SSN. When SSN does not exist, a manual credit report must be provided and contain at minimum the NBS full name, DOB, and previous two-year address history.
- Definition of family member – is a more defined policy, based on the following: Family member is defined as follows, regardless of actual or perceived sexual orientation, gender identity, or legal marital status: (1) Child, parent, or grandparent where a child is defined as a son, stepson, daughter, or stepdaughter and a parent/grandparent includes a step-parent/grandparent or foster parent/grandparent; (2) spouse or domestic partner; (3) legally adopted son or daughter, including child who is placed with the borrower by an authorized agency for legal adoption; (4) foster child; (5) brother, step-brother; (6) sister, step-sister; (7) Uncle; (8) Aunt; or (9) son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the borrower.
- Secondary financing. refinance – relaxed policy. A new subordinate financing is permitted under the same terms as a purchase, except in the case of a streamline -which does have restrictions.
- Secondary financing purchase, family member – it is a more defined policy as to where there is a CLTV ratio if the base loan amount and secondary financing can not exceed 100%.
- Secondary financing purchase, institutional or private – policy is more defined because (1) the CLTV ratio of the base loan amount and secondary financing must not exceed the applicable FHA limit, and (2) the base loan amount and secondary financing amount must not exceed the Nationwide Mortgage limits.
- Rental income – the policy has not only become a more restrictive policy, but also a more defined police and in quite a long list of ways. When it comes to rental income from the subject property, for a two to four family dwelling unit, and there is limited or no history of recent income, it is necessary to verify and document the proposed rental income from the appraisal showing fair market rent. With small residential income property, that has an appraisal report and the prospective leases, if the borrower has a history of rental income for the subject property since the precious tax filing, verifying the existing rental income by obtaining the most recent tax returns, including a Schedule E, from the previous two years will work. For properties with les than two years of rental income history, documentation of the date the property was acquired is necessary, by providing the deed, settlement statement, or similar legal documents, As for the calculation requirements: The net subject property rental income must be an adjustment to the borrower’s gross monthly income. The borrower’s total mortgage payment can not be reduced by the net subject properties rental income. Further, if there is limited to no rental income history verification, the lesser of the following must be used: 75% of the lesser of (1) the fair market rent reported by the appraiser or (2) the rent reflect in the lease or rental agreement.
To be continued…….
- Income calculation, hourly – it is now a more defined policy. For those employees who are paid hourly: (1) Hours do not vary – the borrower’s current hourly rate is used to calculate effective income; (2) hours vary – the income must be average over the previous two years. If an increase in pay rate is documented, then the most recent 12-month average of hours may be used at the current pay rate; (3) total-document per AUS; (4) manual – copies of paystubs covering most recent consecutive 30 days (if paid weekly or bi-weekly), paystubs must cover a minimum of 28 consecutive days showing YTD earnings; (5) copies of IRS W-2 forms from previous two years.
- Project income – relaxed policy. There is a need to verify and document the amount of the expected income with the employer, it must begin within 60 days of closing: (1) Verify sufficient income of funds to support obligations until income received; (2) VOE’s to document two-year work history; (3) paystub from current job; (4) new job must be in same line of work; (5) FAMC to confirm start date; (6) SSI-retirement income may be used if it is guaranteed to begin within 60 days of closing.
- Re-verification of employment – Became a more restrictive policy, where an initial verbal VOE (or written VOE) must be in the file at time of submission to FAMC, and FAMC is to complete verbal re-verification within ten calendar days of closing.
- Zoning – the policy is not only more restrictive, but also more defined. If a property does not comply with the current zoning, but is accepted by the “local zoning authority, the appraiser must report the property as “Legal-Non-Conforming.” All properties stated as such must meet the following elements: (1) Appraiser must proved a brief explanation and include a statement whether the property can be rebuilt in the event of full or partial destruction; (2) the appraiser ends up stating that the property cannot be rebuilt, the property is ineligible for FHA financing.
- VA disability – it has become a more defined policy in that there is a need to obtain VA Form 26-8937, showing the amount of assistance and any of the following: (1) Federal tax returns, and (2) the most recent bank statement showing funds received from VA.
- Significant derogatory credit (i.e. bankruptcy, foreclosure, deed in lieu, short sale) – more defined policy. The applicable waiting period must have elapsed since the date of the derogatory event of the time of case number assignment.
- Living rent free, manual underwrite – policy has become more restrictive and more defined. The policy required for the borrowers who indicate they are living rent-free, provide verification from the property owner where they are living. It must indicate the amount of time borrower has been living rent free.
- Building on own land – Became a more restrictive and a more defined policy due to additional requirements being added: (1) Eligible if the land is already owned by the borrower for greater than six months from the case number assignment; (2) the borrower must have contracted with a builder to construct the improvements; (3) the builder must be a licensed contractor; (4) the borrower may act as the general contractor, only if the borrower is a licensed contractor.
To be continued………
- Donor requirements, gift documentation – more restrictive policy. Donor’s bank statement is required in all cases, either prior to closing o at closing.
- Reserves, total scorecard – a more defined policy with the policy staying the same as the previous and that all assets must be submitted to AUS – with it being documented and verified.
- Occupancy, active duty – not only a more restrictive, but also more defined policy. Someone on active duty is till considered an owner occupant if a family member will occupy the subject property as their primary residence, or the borrower intends to occupy the subject property upon discharge. The following are required, if applicable: (1) A letter from the borrower stating their intent to occupy the subject property upon discharge from military service of a family member will not occupy the subject property as their principal residence; (2) a copy of the borrower’s military orders evidencing the borrower’s active duty status and that the duty station is more than 100 miles from the subject property.
- Age of credit documents – More restrictive policy. 120 days for both existing homes and new construction.
- Boarder income – This is both more relaxed and a more defined policy. Boarder income can be defined s the borrower’s dwelling unit. This type of income can only be considered if the borrower has a two-year history of receiving income from boarders – shown on their most recent tax returns – and the borrower is currently receiving the income. Following are the requirements: (1) Obtain the most recent two years tax returns, evidencing the income; (2) copy of the current boarder lease; (3) the income is calculated by using the lesser of the two year average or the current boarder lease.
- Swimming pools – more restrictive policy in where a lender must confirm all swimming pools meet local ordinances.
- Inquiries – more defined policy. All inquired within the past 90- days must be reviewed to ensure that all debts, including any new debt payments resulting from material inquired listed on the credit report, are used to calculate the debt ratios. If nay inquire results in a debt, regardless of the amount of time passed since the inquiry was made, the payment must be included and the loan must be manually downgraded. If t he credit report contains inquired beyond 90 days, those must be reviewed an considered. Also, the underwriter must determine that nay recent debts were not incurred to obtain any part of the borrower’s required funds to close the subject property.
- Energy efficient mortgages – both relaxed and more defined. In regards to this policy, the maximum amount of the financeable energy package is the lesser of: (1) the dollar amount of the cost-effective energy package as determined by the home energy audit, or (2) the lesser of 5% of the adjusted value, 115% of the median area price of a single family dwelling, or 150% of the national conforming mortgage limit.
- Self-employed borrowers, manually underwritten – a more restrictive policy due to there needing to be a completed signed business tax returns for most recent two years and a business credit report is required.
To be continued………
Recently FHA had some changes in policy, some becoming more restrictive, some more defined, and some relaxed. Over the next few days we will give a brief breakdown for these FHA guideline changes.
- Student loan/deferred debt – more restrictive policy in which deferred obligations must be included; an actual payment must be used for repayment (even if the payment is zero); if payment is deferred, they have to calculate 2% if the payment is either unavailable or is zero.
- Acceptable credit history, manual – more defined policy. The underwriter can now consider a borrower to have acceptable credit history if: (1) All housing and installment debt payments made on time for the previous 12 months; (2) no more than 2 x 30 day late mortgage installment payments in the previous 24 months; (3) no revolving account payments more than 90 days late in the previous 12 months, or three or more revolving payments made more than 60 days late.
- Refinancing options, FHA to FHA – more defined policy for a simple refinance (appraisal always required), a streamline refinance (no appraisal – an option), rate/term, and cash-out.
- Streamline refinance, fund to close – a relaxed policy. The funds that are needed to close, in excess of the total new mortgage payment, can be verified with: (1) VOD and most recent bank statement; (2) a statement showing previous month’s ending balance for the most recent month required (if the previous month’s balance is not shown, then the most recent two-months statements).
- Net tangible benefit, streamline – relaxed policy, when it comes to Fixed-to-Fixed, Fixed-to-ARM, ARM-to-Fixed, ARM-to-ARM, and reduction in term. Fixed-to-Fixed: New combined rate must be at least 0.5% below the prior interest rate plus MIP rate. Fixed-to-ARM: New combined rate must be at least 2% below the prior interest rate plus MIP rate. ARM-to-Fixed: New combined rate must be at least 2% above the prior interest rate plus MIP rate. ARM-to-ARM: New combined rate must be at least 1% below the prior interest rate plus MIP rate. Reduction in term: (1)The mortgage term is reduced; (2) the new interest rate does not exceed the current interest rate; (3) the combined principle, interest, and MIP payment of the new mortgage does not exceed the combined principle, interest, and MIP of the refinanced mortgage by more than $50.
- Net tangible benefit rate/term – relaxed policy in that it is no longer required.
- Grossing up non-taxable income – it is a more restrictive policy. The percentage of non-taxable income that can be added cannot exceed the greater of 15% or the appropriate tax rate for the income amount, based on the borrower’s tax rate for the previous year. If the borrower was not required to file a federal tax return for the previous tax reporting period, the non-taxable income may be grossed by 15%.
- Relocation policy eligibility to obtain additional FHA insured mortgage – not only is it a more restrictive policy, but also a more defined policy in that a borrower may be eligible to obtain another FHA-insured mortgage without being required to sell an existing property secured by an FHA insured loan, if the borrower (1) relocated or has relocated for an employment related reason and (2) establishes or has established a new principle residence in an area more than 100 miles from the borrower’s current residence. If the borrower moves back to the original area, the borrower is not required to live in the original house and may obtain a new FHA-insured mortgage on a new principal residence provided the two above requirements are met.
To be continued…..
One challenge in meeting FHA guidelines is that property condition rules are not explicity clear. Instead, an appraiser determines whether a home meets FHA standards. There are also variations on guidelines for repairs by state. However, based on the past history of what has been approved as meeting FHA standards, repairs that address key defects seem essential to meeting FHA lending requirements. Following are typical repairs that address key defects:
- Termite damage: Conditions that could lead to an infestation include an inadequate crawl space and earth-to-wood contact.
- Plumbing problems: Water leaks, missing valves, and loose or missing fixtures can all stall an FHA approval.
- Security bars: Security bars must have a safety release mechanism, such as a latch, which permits residents to exit through the window in case of emergency.
- Roof: Roof leaks are often a deal breaker for FHA appraisers. Look for deteriorating roofing material and signs of water entry on walls or ceilings.
- Environmental hazards: Any signs of toxic materials, asbestos, or other contaminants must be repairs and/or removed.
- Electrical issues: Check for incomplete lines, missing electrical conduits or switch plates, or insecure sub-panels.
- Crawl space: Crawl spaces must be a minimum of 18 inches from the bottom of the joists to the ground.
- Swimming pools: A swimming pool must have a perimeter fence and a latch on the gate at least 54 inches high to prevent a child from entering.
- Smoke and carbon monoxide detectors: Detectors must be present as required by state code.
- Windows: All panes must be present and intact.
- Water heaters: Water heaters must be raised off the floor.
- Automatic garage doors: Doors should have an operating sensor to prevent them from closing when there is an obstruction.
Failing to make these repairs will almost certainly make a home ineligible for FHA financing.
According to U.S. Department of Housing and Urban Development (HUD), FHA requires that financed properties meet the following standards
- Safety. The home should protect the health and safety of the occupants
- Security. The home should protect the security of the property
- Soundness. The property should not have physical deficiencies or conditions affecting its structural integrity
FHA does not require the repair of cosmetic or minor defects, deferred maintenance and normal wear if they do not affect the safety, security, or soundiness. Following are examples of such problems:
- Missing handrails
- Cracked or damaged exit doors that are otherwise operable
- Cracked window glass
- Defective paint surfaces in homes constructed post-1978
- Minor plumbing leaks (such as leaky faucets)
- Defective floor finish or covering (worn through the finish, badly soiled carpeting)
- Evidence of previous (non-active) wood destroying insect/organism damage where there is no evidence of unrepaired structural damage
- Rotten or worn out counter tops
- Damaged plaster, sheetrock, or other wall and ceiling materials in homes constructed post-1978
- Poor workmanship
- Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
- Crawl space with debris and trash
- Lack of an all weather driveway surface
Following are some issues that may be faced with FHA:
Electrical and Heating
The electrical box should not have any frayed or exposed wires. All habitable rooms must have a functioning heat source.
Roofs and Attics
The roofing must keep moisture out. The roofing must be expected to last for at least two more years. The appraiser must inspect the attic for evidence of possible roof problems. The roof cannot have more than three layers of roofing. If the inspection reveals the need for roof repairs and the roof already has thee or more layers of roofing, the FHA requires a new roof.
The water heater must meet local building codes, and must convey with the property.
Hazards and Nuisances
A number of conditions fall under this category. They include, but are not limited to
- Contaminated soil
- Proximity to a hazardous waste site
- Oil and gas wells located on the property
- Heavy traffic
- Airport noise and hazards
- Other sources of excessive noise
- Proximity to something that could explode, like a high-pressure petroleum line
- Proximity to high-voltage power lines
- Proximity to a radio or TV transmission tower
The property must provide safe and adequate access for pedestrians and vehicles, and the street must have an all-weather surface so that emergency vehicles can access the property under any weather conditions.
Any defective structural conditions and any other conditions that could lead to future structural damage must be remedied before the property can be sold. These include defective construction, excessive dampness, leakage, decay, termite damage, and continuing settlement.
If an area of the home contains asbestos that appears to be damaged or deteriorating, FHA requires further inspection by an asbestos professional.
The home must have a toilet, sink, and shower.
Anecdotal evidence suggests that FHA requires properties to have working kitchen appliances, particularly a working stove. However, FHA documents do not mention any requirements regarding appliances.
For a manufactured home to be eligible under FHA, there are certain elements that the home must meet:
- Have a floor area of not less than 400 square feet
- Be constructed after June 15, 1976, in conformance with the Federal manufactured home construction and safety standards, as evidenced by an affixed certification label in accordance with 24 CFR Section 3280.8
- Be classified as real estate
- The mortgage must cover both the manufactured unit and its site and shall have a term of not more than 30 years from the date amortization begins
- Be built and remain on a permanent chassis
- Be designed to be used as a dwelling with a permanent foundation built to FHA criteria
- The finished grade elevation beneath the manufactured home or the grade beneath the basement shall be at or above the 100-year return frequency flood elevation
- The home must not have been installed or occupied previously at another site or location