F.H.

A Loan Principles__________________
A Guide to better understanding

G.C.M. School of Mortgage Finance

FHA LOAN PRINCIPLES

A GUIDE TO BETTER UNDERSTANDING

The History of FHA Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development's (HUD) Office of Housing in 1965. When the FHA was created, the housing industry was flat on its back:

Two million construction workers had lost their jobs. Terms were difficult to meet for homebuyers seeking mortgages. Mortgage loan terms were limited to 50 percent of the property's market value, with a repayment schedule spread over three to five years and ending with a balloon payment. America was primarily a nation of renters. Only four in 10 households owned homes.

During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war. In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA's emergency financing kept cash-strapped properties afloat. The FHA moved in to steady falling home prices and made it possible for potential homebuyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s.
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By 2001, the nation's homeownership rate had soared to an all time high of 68.1 percent as of the third quarter that year. The FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio. In the more than 60 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world. HUD has helped greatly with that success.

What is the Federal Housing Administration? The Federal Housing Administration, generally known as "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934. What is FHA Mortgage Insurance? FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner's default. Loans must meet certain requirements established by FHA to qualify for insurance. Why does FHA Mortgage Insurance exist? Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan. There is more flexibility in calculating household income and payment ratios. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost to the homeowner will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property -whichever is longer. How is FHA funded? FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community
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development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.

THE BASICS: Highlights

FHA is not credit score driven o Lenders may apply their own limitations on minimum credit scores (ie. Lender requires that all loans with scores below 580 go for a second review/approval by their corporate office prior to approving the loan) No income limits Not restricted to first time homebuyers Citizenship is not a requirement o Available to permanent resident aliens o Available to non-permanent resident aliens (must provide evidence they are eligible for work in the US and that alien will be expected to work in the country at least the first 3 years of the loan term) The home must be the principal residence for at least 1 borrower Can refinance from a conventional loan (conforming or non-conforming) to a new FHA loan.

Ratios 31/41% (back ratio can be 43% if EEM)- any house built after 1994 can qualify for Energy Efficient Mortgage (EEM) High ratio loans permitted without additional qualification requirements or increased MIP premiumsmust be approved through automated underwriting system (AUS) and is at discretion of lender/underwriter.

If loan is declined through the AUS system, the file can still be submitted for a manual UW, but will require plenty of compensating factors Reserves are not required o Reserves may be needed as a compensating factor for excessive ratios on manually underwritten loans.

Monthly MIP is automatically discontinued after 5 years, or when 22% (78% LTV) has been invested in the loan, whichever is later. *

On any FHA loan ( purchase or refinance) which the LTV is under 80%, upfront mip and monthly MIP will still be required to be paid for 5 years
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 Flexible source of funds, which may result in no out-of-pocket cash by the borrower:
o Gift funds from a non-profit entity may be used for entire down payment and

allowable financing costs.*

o Gift funds (cash or equity) from relatives may be used to pay debts, as well as

down payment and allowable closing costs. Verification of funds donors ability to give funds required*-this will be reviewed under down payment section. o Loans from family members may be unsecured or secured by the property being purchased o Sweat Equity may be considered and may be gifted by relatives if properly documented o Cash saved at home- mattress money Borrower profile and budget required Document how funds were accumulated Funds must be deposited in escrow account or financial institution until closing.

BASIC REQUIREMENTS (overview)

Credit Requirements FHA is not the last resort for borrowers who cannot obtain a loan due to poor credit history FHA loan programs are not designed for high risk or sub-prime borrowers The last 24 months of credit is carefully analyzed

Traditional credit history is not required. However alternative (non-traditional) credit must be attempted/documented. All derogatory credit must be explained by borrower. All inquiries must be explained by the borrower
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HUD does not demand collection accounts to be paid off as a condition for loan approval on many occasions, it is up to the discretion of the underwriter if any collections must be paid off, based on the overall loan package. Federal tax liens may remain unpaid, as long there is an outstanding arrangement of repayment, the amount of the payment must be included in qualifying ratios, and the creditor would have to subordinate the lien. Judgments: o Court ordered judgments MUST be paid prior to or at closing. o Must verify judgment has been released. o Borrower must provide a satisfactory explanation for the judgment and it must be consistent with information in the file.

Bankruptcy: 2 yr wait from chapter 7 discharge date. o Borrower must have re-established satisfactory credit or not have incurred new debt after the bankruptcy. o Circumstances leading up to the BK must be explained/documented and not expected to reoccur. o Chapter 13 BK borrower may be eligible after 1 year of satisfactory pay-out, along with permission of a trustee, must receive court approval prior to entering into a mortgage o Consumer credit counseling (CCCS) treated the same as a chapter 13 BK Foreclosures or Deed in Lieu of Foreclosures must have NOT occurred within previous 3 years. Borrowers delinquent on any federal debts (ie. Federal student loans) are not eligible. Installment accounts with 10 payments or less are not counted in debt to income ratios (DTI)
o Exceptiona installment debts less than 10 months may be

considered/counted if ratios are tight (too close to 31/43%) and the payment is high.

Contingent liability: exists when an individual would be held responsible for payment of a debt should another obligated party default on the payment. (ie: cosigned obligations)
o Debt MUST be included in (DTI), UNLESS: Lender will require documentation the (other) co-obligor has been

making the payments without the assistance of the borrower AND the co-obligor has made the last 12 months of payments on time (no lates in the last 12 months)
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 Verification from lien holder (who they are paying) required AND proof via cancelled checks, or bank statement (showing automatic withdraw from co-obligors acct.)

Non-traditional credit Designed to assess the credit history for borrowers without the types of trade references normally appearing on a traditional credit report. o It can be substitute for a traditional credit report, or to supplement a traditional credit report to meet number of trades reported. o MAY NOT be used to enhance the credit of borrowers with a poor payment record or to manufacture a credit report for those without a verifiable credit history. o MAY NOT be used to offset derogatory references found on credit report. o Non-traditional items used must be sent to credit reporting agency (ie. Kroll, Credco) to complete a non-traditional credit report. Only the types of credit that require periodic payments on a regular basis are considered to show responsible payment history: Rental payments Utilities Telephone Cable television Insurance (car, auto, rental) Payments to local stores (furniture, car dealerships etc.)

Compensating factors such as: Assets, down payment amount, savings pattern, employment stability etcare essential when using nontraditional credit. When using alternative credit ratios must be as low as possible and not exceed 31/43% -- variations on that are up to the discretion of the underwriter/lender

Employment Employment and income must be verified for the most recent 2 full years o school transcripts may be used to complete a two year employment history Any gaps in employment over 30 days must be explained (and may be subject to documenting)
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 All income must be verifiable through the IRS All files to have a completed 4506 Documentation of employment: o Written VOE and the borrowers most recent pay stub covering a 30 period o Alternative: (if a VERBAL VOE is to be completed) borrower must provide check stub covering most recent 30 days and copies of last 2 yrs W2 forms. If bonus or overtime income is to be used, it must be reflected on VOE and supported by last 2 yrs W2s o If income varies significantly from year to year, a period of more than 2 yrs must be used in calculating average income. o Employer (as comment on VOE) must provide a satisfactory explanation for any income discrepancies between the VOE and supporting documentation.

Commission income must be averaged over the previous 2 yrs and must be continuing Must provide last 2 yrs tax returns Un-reimbursed business expenses must be subtracted from gross income Commissions earned in less than one year are not considered effective income EXEPTION: the borrowers compensation was changed from salary to commission within a similar position with the same employer

Retirement/Pension, SS and disability income o Verification from the source (ie. Former employer, SS admin) OR last two years of federal tax returns required. o This income must continue for the first 3 years of the loan o If is other than SS income, taxing status must be documented Part-time income may be used to qualify if its uninterrupted and has been received over the most recent 2 yr period. o Seasonal employment may be used if the borrower has worked the same type of job for the past two years and expects to be rehired during the next season in the same line of work Projected income (not acceptable for qualifying purposes) EXCEPT: o This is mainly used when working with a person who is being transferred to a different (out of state) location by their new employer. o Employment must begin within 60 days of the loan closing. o A guaranteed, non-revocable contract for new employment is provided
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o Must verify the borrower will have sufficient income or reserves to support the mortgage payments and any other obligations during the interim between loan closing and start of employment. o If the loan will close more than 60 days before the employment begins, the loan is not eligible for endorsement until the lender provides a pay stub or other acceptable evidence the borrower has actually begun the job

Calculating salaried and wage earner income: Semi-monthly: 24 weeks X gross pay / by 12 months = monthly income Biweekly: 26 weeks X gross pay / by 12 months = monthly income Weekly pay period: 52 weeks X gross pay / by 12 months = monthly income Hourly: rate of pay X 40 hrs X 52 weeks / by 12 months = monthly income Salaried: annual salary / 12 months = monthly income Never ask the borrower how much money they make per month, obtain an original pay stub and use calculations above. Calculating self employed borrowers: A borrower with 25% or greater ownership interest in a business and who is self employed for two or more years is considered self employed. For types of business structures (sole proprietorship, corporations, S corporations, and partnerships) o Documentation required: Sole proprietorship o Most recent 2 yrs tax returns with Sch C o Profit and loss statement Corporation o Most recent 2 yrs personal tax returns o Most recent 2 yrs corporate tax returns o W2 forms o Profit and loss statement o Business credit report Partnership o Most recent 2 yrs personal tax returns
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o Most recent 2 yrs partnership tax returns with K-1 forms o Profit and loss statement o Business credit report Contract worker o Most recent 2 yrs tax returns o 1099 forms o Ytd pay stub covering the most recent 30 day period o Copy of current contract o Reasonable expectation that income will continue for at least 3 years of the loan FHA LOAN PRODUCTS (overview) FHA Single Family Home Loan Program Fixed rate loans are FHA's most popular type of loan. These loans are fully amortized and have no pre-payment penalty. FHA offers the following terms for the fixed rate real estate mortgage program.

30 year 15 year

All FHA loans can be paid off or refinanced at any time. They are assumable but subject to loan qualifying. This type of loan can be used for any of the following types of properties.

single family home 2 units - duplex 3 units - triplex 4 units four plex

The maximum FHA loan is subject to where the property is located and they type of property. FHA 2/1 Buy-Down Loan Program FHA Buy-down loans are simply a 30 or 15 year fixed rate mortgages where the borrower (or the seller) have prepaid interest rate buy-down fee's to obtain a 1% or 2% lower interest rate for the first 1 or 2 years. The borrower will be qualified based on the note rate (which will be 1 or 2% higher than the start rate)
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The advantage of the FHA 2/1 Buy-down is that this lowers the initial monthly mortgage payments and allows borrowers to qualify for a higher sales price home or if they are refinancing an existing mortgage, to further lower the payments. This loan provides the benefit of a lower start rate but the stability of a fixed rate loan. For each of the first one or two years (dependant of if they did a 1/1 or 2/1 buy-down) the loans interest will go up only 1% minimally affecting the monthly payment. Once again, they may "streamline refinance" the loan to a fixed rate mortgage almost anytime.

Following is an example of how the initial "Buy-Down" fee is calculated: Example: Standard 30 Year FHA Loan $100,000 Loan Amount 8% interest rate = $8,000 a year in interest. With the 2/1 buy-down the transaction would be as follows: $100,000 Loan Amount 1st. year = 6% Interest rate = $6,000 in interest, a savings of $2,000 2nd. year = 7% interest rate = $7,000 in interest, a savings of $1,000 3rd - 30th. year = 8% interest rate = $8,000 in interest The 2/1 Buy-Down is a normal 30 year loan but they pre-pay for a decreased interest rate for the first two years. So in the above example, the lender would charge $3,000 fee to "buy-down" the loan, since this is the difference in interest. This is just an example of how the loan works and the actual "buy-down" fee will vary based on the loan amount and interest rate. The benefit of this program is that it will allow for lower payments in first years and will help a homebuyer qualify for a larger loan based on the FHA qualifying guidelines FHA Loans - FHA Adjustable Rate Mortgage Loan The FHA adjustable rate mortgage loan (a.k.a. Variable, ARM) is one of the best adjustable rate mortgages available. You may use this FHA loan program for 1-4 unit homes, as well as condominiums, townhomes, and PUDs. FHA does not offer an initial low "teaser" rate like most other adjustable rate
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mortgages, therefore it will normally start at a slightly higher rate than most other adjustable loans. FHA adjustable mortgages are designed to protect the home owner from larger payment and interest rates adjustments common with other loans. The yearly interest can rise or decrease no more than 1% per year vs. 2% for a conventional loan. The lifetime cap of the FHA adjustable mortgage is no more than 5% over the initial start rate vs. 6% for a conventional loan.

Therefore, a FHA can take 5 years before reaching its maximum rate vs. a conventional loan can cap in only 3 years. FHA's adjustable rate mortgage is based on the economic indicator index called the 1Yr. T-Bill. You can predict what the interest rate will adjust to by working through the ARM interest rate formula which is as follows:

Index + Margin = Fully Indexed Rate (current 1 Yr. T-Bill Rate) + (percentage, usually 2.75%) = Interest Rate

Example: Index = 5.25% + Margin of 2.75% = Fully Indexed Rate = 8.00% Other benefits of the FHA adjustable rate mortgage is that they can "streamline refinance" to a FHA fixed rate mortgage at anytime. Also, since they qualify at the lower start rate, they can qualify for a larger loan amount and a higher sales price home.

FHA PURCHASE

The borrower must make a statutory investment of at least 3% of the contract sales price. Borrower-paid closing costs may be used to meet the three percent minimum cash investment. If the borrower pays no closing costs at settlement, the loan amount must be reduced sufficiently so that the three percent minimum cash investment is met.
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FHAs definition of closing costs does not include discount points or prepaid items and, thus, these fees and expenses cannot be used in meeting the cash investment requirements. The borrower may pay for the appraisal and credit report with a credit card. However, when these fees are paid for in this manner, they may not be counted in meeting the minimum investment requirement. Closing costs paid by the seller or lender may not be used to meet the minimum investment requirement. Subject to the limits described below, FHA is not concerned with the dollar amount of any particular fee charged to the seller. A. Seller Contributions. The seller (or other interested third parties such as real estate agents, builders, developers, etc., or a combination of parties) may contribute up to 6% of the property's sales price toward the buyer's actual closing costs, prepaid expenses, discount points, and other financing concessions. Contributions exceeding 6% of the sales price or exceeding the actual cost of prepaid expenses, discounts points, and other financing concessions will be treated as inducements to purchase, thereby reducing the amount of the mortgage. Seller is allowed to contribute over the 6%, if he is paying the NONAllowable closing costs the borrower may not pay. Costs normally paid by the borrower are considered contributions if paid by the seller. Inducements to purchase require dollar for dollar reduction to the sales price before applying the appropriate LTV ratio, examples: o Inducements to purchase (such as decorating allowance, moving allowance, personal property that is not customarily left, cash allowance for repairs/upgrades etc..) o Excessive rent credit o Gift funds not meeting FHA criteria (including payment of borrower debts by someone other than family member) NON-ALLOWABLES The following are fees that HUD will NOT allow the buyer to pay in a purchase transaction: o Underwriting o Tax Service o Doc Prep (lender)* (can only be pd by borrower if paid to a 3rd party) o Processing o Courier o Transfer & assignment
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B.

o Admin fee o Doc review These fees must be paid by the Seller, and can be in Addition to the 6% seller contribution. It is imperative in an FHA purchase transaction, that the contract be correctly worded as to the Sellers contributions. If it does not specifically state that the seller is paying the non-allowables in addition to the agreed upon contribution amount, the nonallowables will be included in that amount. A suggestion is that the contract be worded as:
the seller agrees contribute X amount towards borrowers settlement costs including: Prepaids Discount points Closing costs including (or in addition to) those fees that are not allowed to be paid by the borrower

The 6% limitation also includes seller payment for permanent and temporary interest rate buydowns and other payment supplements, payments of mortgage interest for fixed rate mortgages and GPMs only (but not principal), mortgage payment protection insurance, and payment of UFMIP. Fees typically paid by the seller under local or state law, or local custom, such as real estate commissions, charges for pest inspections, fees paid for trustees to release a deed of trust, etc., are not considered contributions. Closing Costs BORROWER MAY PAY that are Included in the Amount that MAY BE FINANCED into the Loan: Appraisal Document Preparation Fee* Tax Stamps or Local Mtg. Tax Credit Report (If Paid to Third Party) Test and Certification Fees Inspection Fee Title Examination Fee (Such as Water and Sewer Tests) Origination Fee Title Insurance Survey (Max. 1% of Base Loan) Deposit Verification Fee* Flood Certification* Repairs Listed on Appraisal Home Inspection Service Fee Attorneys Fees Energy-Related Items (Up to $200) Recording Fee Real Estate Broker Fees Courier Fee (Refinance Only) Pest Inspection
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Financing Concessions SELLER MAY PAY: Closing Costs Discount Points Prepaids Buydown Subsidy Up-Front MIP Mortgage Payment Protection Insurance First Year Advance Payments of Property Taxes & Homeowners Association Dues Sales Concessions SELLER MAY NOT PAY: Excess Rent Credit Buyer-Broker Moving Expenses Personal Property Items

Fees Decorating Allowances

Maximum Loan-to-Value Percentages (Purchase Transactions Only on Proposed and Existing Construction) States with Average Closings Costs Above 2.1 Percent of Sales Price 98.75 percent: For properties with values/sales prices equal to or less than $50,000. 97.75 percent: For properties with values/sales prices in excess of $50,000. SHORTCUT: When seller is paying all of the buyers closing costs, use 97% LTV to make sure minimum statutory investment by buyer is met. If amount paid by seller does not cover all closing costs, borrowers max loan amount goes up to 97.75% LTV - since he will be paying part of the closing costs himself.

Closing Costs. These include those FHA-approved non-recurring costs associated with the mortgage transaction, including the appraisal fee, any inspection fees, the actual cost of credit reports, the loan origination fee, settlement fee, deposit verification fees, home inspection service fees up to $300, the cost of title examination and title insurance, document preparation fees (if performed by a third-party not controlled by the lender), property survey fees, attorney's fees, recording fees, transfer stamps, and taxes, as well as test and certification fees, such as flood-zone determination fees, water tests, and other costs as determined by the appropriate HOC. Prepaid Items. Prepaid items are collected at closing to cover accrued and unaccrued hazard insurance and mortgage insurance premiums, taxes and per diem interest, and include other similar fees and charges. The lender must use a minimum of 15 days of per diem interest in its estimate of prepaid items.
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To reduce the burden on borrowers whose loans were scheduled to close at the end of the month but did not due to unforeseen circumstances, lenders and borrowers may agree to credit the per diem interest to the borrower and have the mortgage payments begin the first of the succeeding month. However, the dollar amount of the cash credit is not to be used to reduce the minimum cash investment. Discount Points. Discount points that are being paid by the borrower become part of the total cash investment but are not eligible for meeting the minimum cash investment requirement. Non-Realty (Chattel) or Personal Property. Non-realty or personal property items that the borrower agrees to pay for separately, including the amount subtracted from the sales price in determining the maximum mortgage, are included in the total cash requirements for the loan. Closing Costs Not Eligible for Meeting the Cash Investment Requirement. Certain closing costs, such as commitment fees for guaranteeing the rate or points, and fees such as any ineligible real estate broker fees or any portion, or any such allowable fee not previously included in meeting the investment requirement are included in calculating the total cash needed to close the mortgage. UFMIPs. Any UFMIP amounts paid in cash are added to the total cash settlement requirements. The UFMIP must be entirely financed into the mortgage (except for any amount less than $1) or paid entirely in cash and all mortgage amounts must be rounded down to a multiple of $1. Repairs and Improvements. Repairs and improvements (or any portion) to be paid by the borrower that cannot be financed into the mortgage are part of the borrowers total cash requirements. Real Estate Broker Fees. If the borrower is represented by a real estate buyer-broker and must pay a fee directly to the broker, that expense must be included in the total of the borrower's settlement requirements and appear on the HUD-1 Settlement Statement. If the seller pays the buyer-broker fee as part of the sales commission, this is not to be considered an inducement to purchase or part of the 6% seller contributions limitation, provided that the seller is paying only the normal sales commission typical of that market. The lender must obtain a copy of the original listing agreement and compare it with the HUD-1 Settlement Statement to determine if the seller paid a buyer-broker fee in addition to the normal sales commission for that market. If the seller paid an additional commission for the buyer-broker fee, then this is considered an inducement to purchase.
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Mortgage Broker Fees. If the borrower must pay a fee directly to a mortgage broker, that expense must be included in the total of the borrower's cash settlement requirements and appear on the HUD-1 Settlement Statement. (This requirement applies to instances in which the borrower independently engages a mortgage broker to seek financing and pays the broker directly. The payment may not come from the lending institution.) Premium Pricing on FHA Insured Mortgages. Lenders may pay the borrower's allowable closing costs and/or prepaid items by "premium pricing. Closing costs paid in this manner need not be included as part of the 6% percent seller contribution limit. The funds derived from a premium priced mortgage: 1. May never be used to pay any portion of the borrower's down payment. 2. Must be disclosed on the Good-Faith Estimate (GFE) and the HUD-1 Settlement Statement. The GFE and HUD-1 must include an itemized statement indicating which items are being paid on the borrower's behalf; disclosing only a lump sum is not acceptable. Also, the amount paid on the borrower's behalf for each item may not exceed the allowable fee permitted by the jurisdictional HOC. Premium pricing must be used to reduce the principal balance, if the premium pricing agreement establishes a specific dollar amount for closing costs and prepaid expenses with any remaining funds, in excess of actual costs, reverting to the borrower. Premium pricing may not be used for payment of debts, collection accounts, escrow shortages or missed mortgage payments, or judgments. Yield Spread Premiums. Yield spread premiums (YSP) are not part of the cash required to close but must be disclosed to borrowers on the Good Faith Estimate (GFE) and HUD-1 Settlement Statement in accordance with the Real Estate Settlement Procedures Act (RESPA) requirements. On FHA loans, brokers are only permitted to charge 1% origination (or mortgage broker fee) calculated on the BASE loan amount without UFMIP. Brokers can only make a total of 5% points combined between the front and back of the loan.

To prevent circumvention of the restrictions on FHA-insured mortgages to investors, FHA generally will not insure more than one mortgage for any borrower. Any person individually or jointly owning a home covered by a mortgage insured by FHA in which ownership is maintained may not purchase another principal residence with FHA
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mortgage insurance except under the situations described below. Properties previously acquired as investment properties are not subject to these restrictions. A. Relocations. If the borrower is relocating and re-establishing residency in another area not within reasonable commuting distance from the current principal residence, the borrower may obtain another mortgage using FHA insured financing and is not required to sell the existing property covered by a FHA-insured mortgage. The relocation need not be employer mandated to qualify for this exception. Further, if the borrower returns to an area where he or she owns a property with an FHA-insured mortgage, it is not required that the borrower re-establish primary residency in that property in order to be eligible for another FHA insured mortgage. B. Increase in Family Size. The borrower may be permitted to obtain another home with an FHA-insured mortgage if the number of legal dependents increases to the point that the present house no longer meets the family's needs. The borrower must provide satisfactory evidence of the increase in dependents and the propertys failure to meet the family's needs. The borrower also must pay down the outstanding mortgage balance on the present property to a 75 percent or lower loan-to-value (LTV) ratio. A current residential appraisal must be used to determine LTV compliance. Tax assessments, market analyses by real estate brokers, etc., are not acceptable as proof of LTV compliance. C. Vacating a Jointly Owned Property. If the borrower is vacating a residence that will remain occupied by a co-borrower, the borrower is permitted to obtain another FHAinsured mortgage. Acceptable situations include instances of divorce, after which the vacating ex-spouse will purchase a new home, or one of the co-borrowers will vacate the existing property. The borrower must be able to qualify on their own, and may be viewed as a 1st time home buyer, having a previous FHA loan, is not always a compensating factor. D. Non-Occupying Co-Borrower. A non-occupying co-borrower on property being purchased with an FHA-insured mortgage as a principal residence by other family members may have a joint interest in that property as well as in a principal residence of their own with a FHA-insured mortgage. Under no circumstances may investors use the exceptions described above to circumvent FHAs ban on loans to private investors and acquire rental properties through purportedly purchasing principal residences. Considerations in determining the eligibility of a borrower for one of these exceptions are the length of time the previous property was owned by the borrower and the circumstances that compel the borrower to
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purchase another residence with an FHA-insured mortgage. In all other cases, the purchasing borrower either must pay off the FHA-insured mortgage on the previous residence or terminate ownership of that property before acquiring another FHA-insured mortgage. SECONDARY RESIDENCES. A secondary residence is a property the borrower occupies in addition to his or her principal residence. Secondary residences are only permitted when the appropriate Home Ownership Center (HOC) agrees that an undue hardship exists, meaning that affordable rental housing that meets the needs of the family is not available for lease in the area or within reasonable commuting distance to work, and the maximum loan amount is 85 percent of the lesser of the appraised value or sales price. Direct Endorsement (DE) lenders are not authorized to grant hardship exceptions. Any request for a hardship exception must be submitted by the lender in writing to the appropriate HOC. A borrower may have only one secondary residence at any time. All the following conditions must be met for secondary residences: A. The secondary residence must not be a vacation home or otherwise used primarily for recreational purposes; and B. The borrower must obtain the secondary residence because of seasonal employment, employment relocation, or other circumstances not related to recreational use of the residence; and C. There must be a demonstrated lack of affordable rental housing meeting the needs of the borrower in the area or within a reasonable commuting distance of the borrower's employment. Documentation to support this must include: A satisfactory explanation from the borrower of the need for a secondary residence and the lack of available rental housing in the area that meets the need. 2. Written evidence from local real estate professionals who verify a lack of acceptable rental housing in the area. INVESTMENT PROPERTIES. An investment property is a property that is not occupied by the borrower as a principal residence or as a secondary residence. With permission from the appropriate HOC, private investors, including nonprofit organizations, may obtain FHA-insured mortgages for the following reasons: A. Purchasing HUD Real Estate Owned (REO) properties. Owner occupancy is not required when the jurisdictional HOC sells the property and permits the purchaser to obtain FHA-insured financing on the investment property. B. Streamline refinancing without appraisals.
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1.

C.

Underwriting Considerations:

Individual investors who credit qualify may assume mortgages made on investment properties. ARMs and graduated payment mortgages (GPMs) are not permitted on investment properties. Except for streamline refinances in which the mortgage was originally insured in the name of a business, FHA will not insure loans made solely in the name of a business entity (such as a corporation, partnership, or sole proprietorship) or trust. One or more individuals, along with the business entity or trust, must be analyzed for creditworthiness. The individual(s) and the business entity or trust must appear on the mortgage note. The business entity, trust, or individual(s) may appear on the property deed or title. All parties appearing on the property deed or title must also appear on the security instrument (i.e., mortgage, deed of trust, security deed).

ASSETS:
Liquid assets Savings Checking Certificate of deposit Investment accounts with check writing privileges

DOWN PAYMENT: Earnest Money Deposit. If the amount of the earnest money deposit exceeds 2 percent of the sales price or appears excessive based on the borrower's history of accumulating savings, the lender must verify with documentation the deposit amount and the source of funds. As a rule of thumb, have a copy of the cancelled earnest money check in the file, basically document the check was cashed in order to give credit at the closing table. Savings and Checking Accounts. A verification of deposit (VOD), along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a
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large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds. Gift Funds. An outright gift of the cash investment is acceptable if the donor is the borrowers relative, the borrower's employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower. The gift donor may NOT be a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. Gifts from these sources are considered inducements to purchase and must be subtracted from the sales price. No repayment of the gift may be expected or implied. Only family members may provide equity credit as a gift on a property being sold to other family members. These restrictions on gifts and equity credit may be waived by the jurisdictional HOC provided that the seller is contributing to or operating an acceptable affordable housing program.
o Regardless of when the gift funds are made available to the homebuyer, the lender

must be able to determine that the gift funds ultimately were not provided from an unacceptable source and were indeed the donor's own funds. When the transfer occurs at closing, the lender remains responsible for obtaining verification that the closing agent received funds from the donor for the amount of the purported gift and that those funds came from an acceptable source. This is part of the loan processing and is generally completed prior to loan approval and prior to closing. Collateralized Loans. Funds can be borrowed for the total required investment as long as satisfactory evidence is provided that the funds are fully secured by investment accounts or real property. Such assets may include stocks, bonds, real estate (other than the property being purchased), etc. o In addition, certain types of loans secured against deposited funds, such as signature loans, the cash value of life insurance policies, loans secured by 401(k)s, etc., in which repayment may be obtained through extinguishing the asset; do not require consideration of a repayment for qualifying purposes. However, in such circumstances, the asset securing the loan may not be included as assets to close or otherwise considered as available to the borrower. Sales Proceeds. The net proceeds from an arms-length sale of a currently owned property may be used for the cash investment on a new house. A fully executed HUD-1 Settlement Statement must be provided as satisfactory evidence of the cash sales proceeds accruing to the borrower. If the property has not sold by the time of underwriting, loan approval must be conditioned upon verifying the actual proceeds received by the borrower. The
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lender must document both the actual sale and the sufficiency of the net proceeds required for settlement. Sale of Personal Property. If the borrower intends to sell personal property items (cars, recreational vehicles, stamps, coins, baseball card collections, etc.) to obtain funds required for closing, the borrower must provide a satisfactory estimate of their worth, in addition to conclusive evidence the items have been sold. The estimated worth of the items being sold may be in the form of published value estimates, such as those issued by automobile dealers, philatelic or numismatic associations, or a separate written appraisal by a qualified appraiser with no financial interest in the loan transaction. Only the lesser of this estimate of value or the actual sales price is considered as assets to close. Employer Assistance Plans. If the employer, to attract or retain valuable employees, pays the employee's closing costs, mortgage insurance premium, or any portion of the cash investment, this payment is considered employee compensation and no adjustment to the maximum mortgage amount is required. If the employer provides this benefit after loan settlement, the borrower must provide evidence of sufficient cash for closing. A salary advance, however, cannot be considered as assets to close since it represents an unsecured loan. Savings Bonds, Etc. Government issued bonds are counted at original purchase price, unless eligibility for redemption and redemption value are confirmed. Actual receipt of funds at redemption must be verified. IRAs, Thrift Savings Plans, 401(k)s & Keogh Accounts. Assets such as IRAs, thrift savings plans, and 401(k)s, etc., may be included in the underwriting analysis up to only 60 percent of value unless the borrower provides conclusive evidence that a higher percentage may be withdrawn after subtracting any federal income tax and any withdrawal penalties. Evidence of redemption is required. Stocks and Bonds. The monthly or quarterly statement provided by the stockbroker or financial institution managing the portfolio may be used to verify the value of these securities. Actual receipt of funds must be verified and documented. Cash Saved At Home. Borrowers who have saved cash at home and are able to demonstrate adequately the ability to do so are permitted to have this money included as an acceptable source of funds to close the mortgage. To include such funds in assessing the homebuyer's cash assets for closing, the money must be verifiedwhether deposited in a financial institution or held by the escrow/title companyand the borrower must provide satisfactory evidence of the ability to accumulate such savings. The asset verification process requires the borrower to explain in writing how such funds were accumulated and the amount of time taken to do so. The lender must determine the
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reasonableness of the accumulation of the funds based on the borrower's income stream, the time period during which the funds were saved, the borrowers spending habits, documented expenses and the borrowers history of using financial institutions. (All other factors being equal, individuals with checking and/or savings accounts are less likely to save money at home than an individual with no history of such accounts.) Rent Credit. The cumulative amount of the rental payments that exceed the appraiser's estimate of fair market rent may be considered accumulation of the borrower's cash investment. Both the rent-with-option-to-purchase agreement and the appraiser's estimate of market rent must be included in the endorsement package. Conversely, if the sales agreement reveals that the renter has been living in the property (or one owned by the seller) rent-free, or that an agreement was made allowing the renter to occupy at a rental amount considerably below fair market value in anticipation of eventual purchase of the property, this situation must be treated as an inducement to purchase with an appropriate reduction to the mortgage. Cash Accumulated with Private Savings Clubs. Some borrowers may choose to use nontraditional methods of saving money by making deposits into private savings club. Often, these private savings clubs pool resources for use among the membership. If a homebuyer claims that the cash to close an FHA-insured mortgage is from savings held with a private savings club, the borrower must be able to adequately document the accumulation of those assets with the club. While such clubs are not supervised banking institutions, the clubs must at a minimum have account ledgers, receipts from the club, verification from the club treasurer, and identification of the club so that the lender can re-verify the information provided. The underwriter must be able to determine that it was reasonable for the borrower to have saved the money claimed and that there is no evidence these funds were borrowed with an expectation of repayment. Sweat Equity. Labor performed or materials furnished by the borrower before closing, on the property being purchased, may be considered as the equivalent of a cash investment, to the extent of the estimated cost of the work or materials. (Sweat equity may be "gifted" subject to the gift requirements and additional requirements shown below.) Additionally, the following apply to sweat equity: On existing construction, only the repairs or improvements listed on the appraisal are eligible for sweat equity. Any work completed or materials provided before the appraisal is made are not eligible. On proposed construction, the sales contract must indicate the tasks to be performed by the homebuyer during construction. The borrower's labor may be considered as the equivalent of cash, if the borrower can demonstrate his or her ability to complete the work in a satisfactory manner.
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The lender must document the contributory value of the labor through either the appraiser's estimate or a cost estimating service. Delayed work (on-site escrow), clean up, debris removal, and other general maintenance cannot be included as sweat equity. There can be no cash back to the borrower in these transactions. Sweat equity on a property other than the property being purchased is not acceptable. Compensation for work performed on other properties must be in cash and be properly documented. Evidence of the source of funds used to purchase and the market value of the materials must be provided if the borrower furnishes these.

FHA REFINANCES

A refinance transaction involves repaying an existing real estate debt from the proceeds of a new mortgage that has the same borrower(s) and the same property. As long as the borrower has legal title (even though not originally on the loan), the borrower is eligible to refinance the loan. Re-Using an Appraisal. FHA appraisals on existing properties remain valid for six months. However, they cannot be re-used during this period once the mortgage, for which the appraisal was ordered, has closed. An appraisal used for the purchase of a property cannot be used again for a subsequent refinance, even if six months have not passed. A new appraisal is required for each refinance transaction requiring an appraisal. Skipped Payments Not Acceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is either to make the payment when it is due or bring the monthly mortgage payment check to settlement. When the new mortgage amount is calculated, FHA does not permit the inclusion of any mortgage payments "skipped" by the homeowner in the new mortgage amount. For example, a borrower whose mortgage
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payment is due June 1 and expects to close the refinance before the end of June is not permitted to roll the June mortgage payment into the new FHA loan amount. Maximum Term. The maximum term of any refinance with an appraisal is 30 years. A streamline refinance without an appraisal is limited to the remaining term of the existing mortgage plus 12 years (not to exceed 30 years). FHA does not require a credit report (except for the credit-qualifying streamline refinances described below) or a termite inspection on this type of loan, but the lender may require either one or both as part of its credit policy. STREAMLINE REFINANCE Streamline refinances are designed to lower the monthly principal and interest payments on an existing FHA mortgage. This applies when the current mortgage loan is an FHA loan and is refinancing into another FHA loan. Can be underwritten with or without an appraisal NO credit underwriting is required for streamline refis with or without appraisal* o Closing costs and discount points may NOT be financed into the loan if the loan is processed with no appraisal o Repairs may NOT be included Can add additional borrowers without qualifying Can refinance to a lesser term without credit qualifying as long as the P&I increases no more than 20% Delinquent taxes/escrow shortfalls and late fees (must be reflected on the payoff statement) MAY be included in the refinance loan Borrower may not receive more than $500 at closing (note: the loan may NOT be underwritten in a manner designed to have the borrower receive cash at closing) No termite report is required The only documentation required is a mortgage verification or copies of 12 months cancelled mortgage payment checks, front and back. No in-file credit report is required, unless the lender chooses this method to verify existing mortgage. ARMs
All these refinances will be treated the same. The streamline refi need only result in an immediate payment reduction to the borrower to be eligible.

o Fixed rate to hybrid ARM o 1yr ARM to hybrid ARM

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o Hybrid to hybrid ARM

o A hybrid ARM (3, 5, 7 or 10 year) may be streamline refinanced with or without appraisal to a fixed rate mortgage provided that The payment will not increase by more than 20% All mortgage payments must have been made within the month due for the past 12 months (or the period the mortgage has been in force, if shorter) Streamline Refinances WITHOUT an Appraisal. The maximum insurable mortgage is the lower of the two calculations shown below: Original Loan Amount: The original principal balance on the mortgage (which will include any upfront mortgage insurance premium) plus the new upfront premium that will be charged on the refinance, or Existing Debt: Add the sum of the existing FHA insured first lien, closing costs, reasonable discount points and the prepaid expenses necessary to establish the escrow account, and subtract any refund of upfront mortgage insurance premiums (UFMIP). The existing first lien may include the interest charged by the servicing lender when the payoff is not received on the first day of the month as is typically assessed on FHA mortgages, but may not include delinquent interest, late charges or escrow shortages. This mortgage calculation process applies only to owner-occupied properties. Investment properties, even if originally acquired as principal residences by the current borrowers, may only be refinanced for the outstanding principal balance. The term of the mortgage is the lesser of 30 years or the remaining term of the mortgage plus 12 years (not to exceed 30 yr term) Streamline refinances by investors or for secondary residences may only be made without an appraisal and may be made solely in the business entity's name if previously insured in the business entity's name. Additional information: Appraisal and credit report: Although HUD does not require an appraisal on streamline refinances where closing costs are not financed into the loan, if the lender is required by law or banking regulations or its investors to obtain an appraisal, the fee may be paid by the borrower as an out of pocket expense.
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Cash to close: Since streamline refinances are in HUDs best interesto borrowers are not required to provide evidence of cash to close. o Since a streamline refi is designed to reduce the P&I on a current FHA mortgage, the portion of the borrowers payment for escrowed items will not be considered.

Underwriting: Although a 1003 is required (of course!) those sections regarding income, assets, debts and obligations need not be completed. A 30-year mortgage on a principal residence may be refinanced to a shorter term, provided the new monthly principal and interest payment increases no more than $50.

Delinquent mortgages are generally not eligible for streamline refinance until the loan is brought current. However, if the mortgage is delinquent by no more than two monthly payments, the refinancing lender may pay the borrowers mortgage to bring the payments current provided no obligation is placed on the borrower to repay the funds. In any case where the streamline refinance will delete a borrower on the current note, the remaining borrower must provide evidence that they have made the mortgage payment themselves for the past 6 months to be eligible for streamline refinancing. If the property was not quit-claimed to the proposed remaining borrower at least 6 months prior to refinancing, then the remaining borrower must credit qualify.

Subordinate financing may remain in place without regard to the total indebtedness against the property, only on streamline refis (with or without appraisals). Available loan types allowed for streamline refinancing: 30 year to 30 year loan new P&I must be lower than old. 30 year to 15 year loan new P&I must not exceed $50 over old P&I. Fixed rate to ARM loan first year rate on new ARM must be at least 2% below current fixed rate on existing loan. ARMs are for owner occupied properties only. ARM to fixed rate loan rate on the new fixed-rate mortgage may be no greater than 2% above current ARM rate. GPM to fixed rate loan new P&I may not exceed the current P&I.

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CREDIT QUALIFYING REFINANCE

The maximum mortgage calculation is the same as for a non credit qualifying streamline refinance, with or without an appraisal. A credit qualifying streamline refinance may be used:
o When a reduction in the mortgage term will result in an increase (over 20%)

in the payment to principal and interest; o If a borrower will be deleted from or added to the title. The deletion or addition of a borrower on a leasehold mortgage must comply with all tribal and federal leasing requirements for the deletion or addition of another party; or o Following an assumption of a mortgage that did not trigger a due-on-sale clause such as a divorce where the property transfer results from the divorce decree or by devise or descent and the assumption occurred less than six months previously.

The credit processing includes verification of the payment record on the existing mortgage; verification of income (adequacy and stability); a credit report; CAIVRS; and computation of the total debt-to-income ratio on the MCAW.

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CASH-OUT FHA REFINANCE

The following are basic requirements of a cash-out FHA refinance home loan:

The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application. o If title has been held for 1 or more yrs, the maximum mortgage amount is 95% of the APPRAISED value. o If title has been held for less than 1 yr, the maximum mortgage amount is 85% of the LESSER OF 1) appraised value 2) Original sales price If said property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and is current for the month due. Applies to owner occupied properties only The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling. loan amounts may not exceed the maximum loan limits for the area. 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. All borrowers must credit qualify. Any co-borrower or co-signer being added to the note must be an occupant of the property. Non-occupant owners may not be added in order to meet FHA's credit underwriting guidelines for the mortgage. Full document (property and credit) underwriting Borrowers letter with an acceptable reason for the cash-out. The interest rate, discount points or fees cannot be increased to try to offset an increased risk. Either the borrower qualifies for the loan (credit, income/ratios, stability, reason, and general eligibility requirements) or they dont meet the required qualifications Current loan does not have to be FHA insured

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FHA loans and Automated Underwriting In the last decade there have been significant changes in the loan approval process. With the introduction of credit scoring, implementation of automated underwriting systems (DO/LP) it has shifted the philosophy away from rules-based (traditional manual) approach in an effort to accommodate higher risk loans so that more people can become home owners. Since Fannie Mae uses as a first line of defense, the AUS system, we will go over basic requirements and how they are affected by the AUS findings. The FHA TOTAL mortgage scorecard: the FHA TOTAL Mortgage scorecard was developed by HUD to evaluate the credit risk of FHA loans submitted to AUS system such as DO. TOTAL stands for Technology Open to Approved Lenders. It was designed process FHA single-family loan applications and provide underwriting recommendations to help determine a loans eligibility for insurance by FHA. The FHA TOTAL mortgage scorecard determines whether the borrowers credit and capacity for repayment of the mortgage appear to meet FHA guidelines, in which case the loan would receive an Approve recommendation, or whether the loan should be referred to a DE underwriter for further consideration and review. NOTE: regardless of the underwriting recommendation, the DE underwriter will review the appraisal outside of DO in accordance with standard FHA guidelines. FHA loans underwritten through DO receive the benefits of reduced documentation, if they generate an approve/eligible decision by the AUS. The documentation requirements are based on the risk analysis of the loan file. These requirements are displayed on the findings report generated by DO. The age of documents processed through DO should follow FHA guidelines. Credit documents may be up to 120 days old at the time the loan closes (180 days for proposed construction) Here is an example of underwriting flexibility given to FHA loans by DO. Most verification and documentation waivers are only available on loans that receive an Approve/eligible recommendation: Credit related waivers No verification of current and/or previous rent required No explanations for most credit inquiries required Self-employed borrowers may not need to
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Income/employment related

waivers

produce a profit and loss statement or a balance sheet for a business Employment may be verified with one paystub and telephone confirmation No explanation is necessary for gaps in employment of less than 60 days within the last 2 years Receipt of alimony or child support may be verified by 3 months bank statements or cancelled checks. No explanation for qualifying housing or debt ratios exceeding FHA benchmark guidelines. No evidence of assets liquidation required for stocks, bonds, retirement accounts, or sale of assets. Verification of assets by most recent monthly statement with previous months balance. No verification of receipt of gift funds is required if sufficient funds are verified on deposit.

Ratio-related waivers

Assets-related waivers

Secondary Financing Can the sum of all financing exceed 100 percent LTV? Answer: 1. The FHA-insured first mortgage, when combined with any second mortgage or other junior liens from government agencies may not result in cash back to the borrower. The sum of all liens cannot exceed 100 percent of the cost to acquire the property. The cost to acquire is the sales price plus allowable borrower-paid closing costs, discount points, repair and rehabilitation expenses, and prepaid expenses. The cost to acquire may exceed the appraised value of the property under these types of government assistance programs. The FHA insured first mortgage cannot exceed the FHA statutory limit for the area where the property is located. The combined indebtedness, however, may exceed the FHA statutory limit. 2. If provided by other organizations and private individuals, the combined amounts of the first and second mortgages cannot exceed the applicable loan-to-value (LTV) ratio. (Maximum LTV for the state and property value)
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Mortgage Insurance Premiums (MIP) What is MIP? Answer: Through its FHA Single Family Insurance Programs, HUD provides insurance for mortgages placed by private lenders and is designed to encourage lenders to make credit available in areas and to borrowers who may not otherwise qualify for conventional loans on affordable terms. FHA's role is essentially that of an insurance company. All borrowers must pay a mortgage insurance premium (MIP) to offset the insurance risk involved. How long will the borrower be expected to pay this premium? Answer: The borrower is required to pay an upfront MIP and a monthly MIP, for a specific number of years, based on the LTV calculated at time of underwriting. Borrowers are now required to pay an upfront MIP and monthly MIP on all condominiums and 203(k) loans.

At what point, or LTV percentage, can the MIP be terminated? Answer: On loans closed on or after January 1, 2001, MIP will be terminated for mortgages with a term more than 15 years, provided the MIP has been paid for at least 5 years and have an LTV less than or equal to 78%; or for mortgages with a term 15 years and less serviced, in which the LTV ratios are 90% and greater and the LTV ratio is less than or equal to 78% and the MIP has been paid for at least 5 years. Mortgages with a term 15 years and less serviced and with a LTV ratio of 89.99% and less will not be charged annual MIP.

MIP REFUNDS If a borrower refinances their property (with a current FHA loan) to another FHA loan, a MIP refund credit will be applied to the balance you owe against the home at the time of closing. This amount is calculated as a percentage based on the number of years the original first mortgage has been in place and the month the new loan is to close. Upfront Mortgage Insurance Premium Refund Percentages
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Year 1 2 3

1 80 56 32

2 78 54 30

3 76 52 28

4 74 50 26

5 72 48 24

Month of Year 6 7 8 9 70 68 66 64 46 44 42 40 22 20 18 16

10 62 38 14

11 60 36 12

12 58 34 10

Assumptions: When an FHA-insured loan is assumed, the insurance remains in force (the seller receives no refund). The owner(s) of the property at the time the insurance is terminated is entitled to any refund. FHA to FHA Refinances: When an FHA loan is refinanced, the refund from the old premium may be applied toward the up-front premium required for the new loan. Claims: When a mortgage company submits a claim to HUD for insurance benefits, no refund is due the homeowner. Statute of Limitations: HUD is not liable for a distributive share that remains unclaimed 6 years from the date notification was first sent to the last known address of the mortgagor.

Glossary 203(b): FHA program which provides mortgage insurance to protect lenders from default; used to finance the purchase of new or existing one- to four family housing; characterized by low down payment, flexible qualifying guidelines, limited fees, and a limit on maximum loan amount. 203(k): this FHA mortgage insurance program enables homebuyers to finance both the purchase of a house and the cost of its rehabilitation through a single mortgage loan.

A
Amenity: a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, Woods, water) or man-made (like a swimming pool or garden). Amortization: repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years) Annual Percentage Rate (APR): calculated by using a standard formula, the APR shows the
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cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan. Application: the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process. Appraisal: a document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. Appraiser: a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate. ARM: Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the Change in monthly -payment amount, however, is usually subject to a Cap. Assessor: a government official who is responsible for determining the value of a property for the purpose of taxation. Assumable mortgage: a mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.

B
Balloon Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower. Bankruptcy: a federal law Whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay. Borrower: a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms. Building code: based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.

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Budget: a detailed record of all income earned and spent during a specific period of time.

C
Cap: a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease. Cash reserves: a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender. Certificate of title: a document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims. Closing: also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller. Closing costs: customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application. Commission: an amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction.. Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas. Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government. Cooperative (Co-op): residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.

Credit history: history of an individual's debt payment; lenders use this information to gauge a potential borrower's ability to repay a loan. Credit report: a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.
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Credit bureau score: a number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.

D
Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses; With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income. Deed: the document that transfers ownership of a property. Deed-in-lieu: to avoid foreclosure ("in lieu" of foreclosure), a deed is given to the lender to fulfill the obligation to repay the debt; this process doesn't allow the borrower to remain in the house but helps avoid the costs, time, and effort associated with foreclosure. Default: the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms. Delinquency: failure of a borrower to make timely mortgage payments under a loan agreement. Discount point: normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan. Down payment: the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.

E
Earnest money: money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal. EEM: Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase Equity: an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.

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Escrow account: a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

F
Fair Housing Act: a law that prohibits discrimination in all facets of the homebuying process on the basis of race, color, national origin, religion, sex, familial status, or disability. Fair market value: the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation. Fannie Mae: Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential homebuyers. FHA: Federal Housing Administration; established in 1934 to advance homeownership opportunities for all Americans; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages. Fixed-rate mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change. Flood insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan. Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower. Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders With funds for new homebuyers.

G
Ginnie Mae: Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as With Fannie Mae and Freddie Mac, the investment income provides funding that may
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then be lent to eligible borrowers by lenders. Good faith estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

H
HELP: Homebuyer Education Learning Program; an educational program from the FHA that counsels people about the homebuying process; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the homebuyer to a reduced initial FHA mortgage insurance premium-from 2.25% to 1.75% of the home purchase price. Home inspection: an examination of the structure and mechanical systems to determine a home's safety; makes the potential homebuyer aware of any repairs that may be needed. Home warranty: offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; ,overage extends over a specific time period and does not cover the home's structure. Homeowner's insurance: an insurance policy that combines protection against damage to a dwelling and Is contents with protection against claims of negligence )r inappropriate action that result in someone's injury or )property damage. Housing counseling agency- provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and homebuying. HUD: the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws. HUD1 Statement: also known as the "settlement sheet," it itemizes all closing costs; must be given to the borrower at or before closing. HVAC: Heating, Ventilation and Air Conditioning; a home's heating and cooling system.

I
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Index. a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage. Inflation: the number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar's value. Interest: a fee charged for the use of money . Interest rate: the amount of interest charged on a monthly loan payment; usually expressed as a percentage. Insurance: protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.

J
Judgment: a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.

L
Lease purchase: assists low- to moderate-income homebuyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment. Lien: a legal claim against property that must be satisfied When the property is sold Loan: money borrowed that is usually repaid with interest. Loan fraud: purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties. Loan-to-value (LTV) ratio.- a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment. Lock-in: since interest rates can change frequently, many lenders offer an interest rate lockin that guarantees a specific interest rate if the loan is closed within a specific time. Loss mitigation: a process to avoid foreclosure; the lender tries to help a borrower who has
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been unable to make loan payments and is in danger of defaulting on his or her loan

M
Margin: an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage. Mortgage: a lien on the property that secures the Promise to repay a loan. Mortgage banker: a company that originates loans and resells them to secondary mortgage lenders like :Fannie Mae or Freddie Mac. Mortgage broker: a firm that originates and processes loans for a number of lenders. Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. Mortgage insurance premium (MIP): a monthly payment -usually part of the mortgage payment - paid by a borrower for mortgage insurance.

Mortgage Modification: a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and thus reduce the monthly payments.

O
Offer: indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing. Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal. Origination fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing.

P
Partial Claim: a loss mitigation option offered by the FHA that allows a borrower, with help from a lender, to get an interest-free loan from HUD to bring their mortgage payments up to date.
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PITI: Principal, Interest, Taxes, and Insurance - the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due. PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price. Pre-approve: lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase. Pre-foreclosure sale: allows a defaulting borrower to sell the mortgaged property to satisfy the loan and avoid foreclosure. Pre-qualify: a lender informally determines the maximum amount an individual is eligible to borrow. Premium: an amount paid on a regular schedule by a policyholder that maintains insurance coverage. Prepayment: payment of the mortgage loan before the scheduled due date; may be Subject to a prepayment penalty. Principal: the amount borrowed from a lender; doesn't include interest or additional fees.

R
Radon: a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.

Real estate agent: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker. REALTOR: a real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and its local and state associations. Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate). Rehabilitation mortgage: a mortgage that covers the costs of rehabilitating (repairing or Improving) a property; some rehabilitation mortgages - like the FHA's 203(k) - allow a
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borrower to roll the costs of rehabilitation and home purchase into one mortgage loan. RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships

S
Settlement: another name for closing . Special Forbearance: a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments. Subordinate: to place in a rank of lesser importance or to make one claim secondary to another. Survey: a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc. Sweat equity: using labor to build or improve a property as part of the down payment

T
Title 1: an FHA-insured loan that allows a borrower to make non-luxury improvements (like renovations or repairs) to their home; Title I loans less than $7,500 don't require a property lien. Title insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers. Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property. Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan. Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value. VA: Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that
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may result from a borrower default.

HUD Web Sites: Maximum Mortgage Worksheets for calculating refinances on FHA loans: http://www.hud.gov/offices/hsg/sfh/circ/den/denhrefi.cfm FHA Connection: https://entp.hud.gov/clas FHA Maximum Mortgage Amounts by County: https://entp.hud.gov/idapp/html/hicostlook.cfm FHA Mortgagee Letters: http://www.hud.gov/offices/hsg/mltrmenu.cfm Washington DC Reference Guide: http://www.hud.gov/offices/hsg/sfh/ref/chap1.cfm http://www.hud.gov/offices/hsg/sfh/ref/chap2.cfm HUD Clips-To view HUD Handbooks and mortgagee letters: http://www.hudclips.org/cgi/index.cgi HUD Training Opportunities: http://www.hud.gov/offices/hsg/sfh/events/events.cfm

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