Announcement 19-0063: CMS FHA Underwriting Guideline Updates

FHA Guidelines

Old Requirements

Updated Requirements

Added Property Assessed Clean Energy

Where the subject Property is encumbered with a Property Assessed Clean Energy (PACE) obligation, the sales contract must include a clause specifying that the PACE obligation will be satisfied by the seller at, or prior to, closing.

Delinquent Federal Tax Debt

Borrowers with delinquent Federal Tax Debt are ineligible.

Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three (3) months of payments. CMS must include the payment amount in the agreement in the calculation of the Borrower’s Debt-to-Income (DTI) ratio.

Delinquent Federal Tax Debt

Borrowers with delinquent Federal Tax Debt are ineligible.

Federal tax debt that has not been converted to lien may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments, and the monthly payment is included in the Borrower’s Debt-to-Income (DTI) ratio.

Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three (3) months of payments. CMS must include the payment amount in the agreement in the calculation of the Borrower’s Debt-to-Income (DTI) ratio.

Old Requirements

Updated Requirements

Tax Liens

Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the lien holder to make regular payments on the debt and the Borrower has made timely payments for at least three (3) months of scheduled payments prior to closing. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three (3) months of payments. Except for federal tax liens, the lien holder must subordinate the tax lien to the FHA-insured Mortgage.

IRS Lien Subordination: for CMS to CMS FHA Streamline loan refinance transactions CMS will not require an IRS Lien Subordination subject to the following requirements:

·       Borrower(s) must have a payment plan in place with the IRS,

·       The payment plan will be paid off within 12 months,

·       The payment plan must show at least three (3) consecutive monthly payments have been made for the month due; prepayments are not acceptable, and

·       The borrower(s) must be current on their payments.

Please note: These requirements apply to CMS to CMS FHA Streamlines only and no exceptions are permitted. If the borrower(s) cannot meet the requirements as outlined above an IRS lien subordination agreement will be required.

Tax Liens

Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the lien holder to make regular payments on the debt and the Borrower has made timely payments for at least three (3) months of scheduled payments prior to closing. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three (3) months of payments. Except for federal tax liens, the lien holder must subordinate the tax lien to the FHA-insured Mortgage.

Legal Restrictions on Conveyance (Free Assumability)

CMS must determine if there are any legal restrictions on conveyance in accordance with 24 CFR § 203.41.

Property Assessed Clean Energy (PACE) Program financing is eligible.

Legal Restrictions on Conveyance (Free Assumability)

CMS must determine if there are any legal restrictions on conveyance in accordance with 24 CFR § 203.41.

Properties which will remain encumbered with a Property Assessed Clean Energy (PACE) obligation are not eligible for FHA mortgage insurance. Borrowers may use a Cash-Out Refinance or a No Cash-Out Refinance (Rate and Term, or Simple Refinance) to pay off the existing balance on any PACE obligation.

Old Requirements

Updated Requirements

Property Assessed Clean Energy (PACE) Assessments

PACE loans are used to finance energy improvements and are secured by the property with payments collected through the borrower’s property taxes.

In order for a property to be eligible for FHA financing with a PACE loan remaining secured against the property, the following must be met:

·       Under the laws of the state where the property is located, the PACE loan must be collected and secured by CMS in the same manner as special assessment taxes against the property;

·       The property may only become subject to an enforceable claim (i.e., lien) that is superior to the FHA-insured mortgage for delinquent regularly scheduled PACE special assessment payments. The property shall not be subject to an enforceable claim (i.e., lien) superior to the FHA-insured mortgage for the full outstanding PACE loan at any time (i.e., through acceleration of the full obligation). However, a notice of the lien for the full PACE loan may be recorded in the land records;

·       There are no terms or conditions that limit the transfer of the property to a new homeowner. Legal restrictions on conveyance arising from a PACE loan that could require consent of a third party before the owner can convey the real property are prohibited, unless such provisions may be terminated at the option of, and with no cost to, the homeowner;

·       The existence of a PACE loan on a property is readily apparent to mortgagees, appraisers, borrowers and other parties to an FHA-insured mortgage transaction in the public records. Information on the PACE obligation must be readily available for review in public records;  

Property Assessed Clean Energy (PACE) Assessments

PACE refers to an alternative means of financing energy and other PACE-allowed improvements for residential properties using financing provided by private enterprises in conjunction with state and local governments. Generally, the repayment of the PACE obligation is collected in the same manner as a special assessment tax; it is collected by the local government rather than paid directly by the Borrower to the party providing the PACE financing.

Generally, the PACE obligation is also secured in the same manner as a special assessment tax against the Property. In the event of a sale, including a foreclosure sale, of the Property with outstanding PACE financing, the obligation will continue with the Property causing the new homeowner to be responsible for the payments on the outstanding PACE amount. In cases of foreclosure, priority collection of delinquent payments for the PACE assessment may be waived or relinquished.

Properties which will remain encumbered with a PACE obligation are not eligible for FHA mortgage insurance. Borrowers may use a Cash-Out Refinance or a No Cash-Out Refinance (Rate and Term, or Simple Refinance) to pay off the existing balance on any PACE obligation.

Old Requirements

Updated Requirements

·       In the event of a sale, including a foreclosure sale, of the property with outstanding PACE financing, the obligation will continue with the property causing the new homeowner to be responsible for the payments on the outstanding PACE amount;

·       All terms and conditions of the PACE loan must be fully disclosed to the borrower and made part of the sales contract between the seller and the borrower;

·       Lenders must notify the appraiser of all terms and conditions of the PACE loan; The appraiser must (if applicable):

o   review the sales contract and property tax records for the Property to determine the amount outstanding and the terms of the PACE obligation:

§  if the mortgagee notifies the Appraiser that the subject Property will remain subject to a PACE obligation,

§  when the appraiser observes that the property taxes for the subject Property are higher than average for the neighborhood and type of dwelling, or

§  when the appraiser observes energy-related building components or equipment or is aware of other PACE-allowed improvements during the inspection process.

o   report the outstanding amount of the PACE obligation for the subject property and provide a brief explanation of the terms

o   analyze and report the impact on value of the property, whether positive or negative, of the PACE-related improvements and any additional obligation (i.e., the PACE special assessment). Specific language must be included in the appraisal report providing this information.

See above

Old Requirements

Updated Requirements

General Credit Review Requirements

CMS must obtain a credit report for each Borrower who will be obligated on the mortgage Note. CMS may obtain a joint report for individuals with joint accounts.

CMS must obtain a credit report for a non-borrowing spouse or registered domestic partner who resides in a community property state, or if the subject Property is located in a community property state. 
 

The credit report must indicate the non-borrowing spouse’s SSN, where an SSN exists, was matched with the SSA, or CMS must either provide separate documentation indicating that the SSN was matched with the SSA or provide a statement that the non-borrowing spouse does not have an SSN. Where an SSN does not exist for a non-borrowing spouse, the credit report must contain, at a minimum, the non-borrowing spouse’s full name, date of birth, and previous addresses for the last two (2) years.

General Credit Review Requirements

CMS must obtain a credit report for each Borrower who will be obligated on the mortgage Note. CMS may obtain a joint report for individuals with joint accounts.

CMS must obtain a credit report for a non-borrowing spouse or registered domestic partner who resides in a community property state, or if the subject Property is located in a community property state. 
For a non-borrowing spouse with a Social Security Number (SSN), provide:

·       A credit report containing the spouse’s SSN, full name, date of birth, and previous addresses for the last two (2) years, and

·       Evidence the non-borrowing spouse’s SSN is a match with the Social Security Administration (SSA) using the SSA-89 validation or the credit report provided the credit report indicates a match with the SSA.

For a non-borrowing spouse without a Social Security Number (SSN), provide:

·       A statement signed by the non-borrowing spouse that the non-borrowing spouse does not have an SSN, and

·       A credit report containing the non-borrowing spouse’s full name, date of birth, and previous addresses for the last two (2) years, with the SSN field left blank. The SSN field must not be populated with an Individual Taxpayer Identification Number (ITIN), zeros, or other data that is not a Social Security Number.

Employed by Family-Owned Business

CMS may consider Family-Owned Business Income as Effective Income if the Borrower is not an owner in the family-owned business and the borrower has a two year history of receiving the income from this source.

Employed by Family-Owned Business

CMS may consider Family-Owned Business Income as Effective Income if the Borrower is not an owner in the family-owned business.

Calculation of Effective Income > Salary

For employees who are salaried and whose income has been and will likely continue to be consistently earned, CMS must use the current salary to calculate Effective Income, as long as it is supported by the prior year’s earnings.

Calculation of Effective Income > Salary

For employees who are salaried and whose income has been and will likely continue to be consistently earned, CMS must use the current salary to calculate Effective Income. Management approval is required when the Borrower has not been employed by the family owned business for at least 12 months, or when the Borrower’s current salary is not supported by the last 12 months of earnings.

Old Requirements

Updated Requirements

Disputed Derogatory Credit Accounts > Definition

Disputed Derogatory Credit Account refers to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.

Disputed Derogatory Credit Accounts > Definition

Disputed Derogatory Credit Account refers to disputed accounts with late payments in the last 24 months, disputed Charge Off Accounts, and disputed collection accounts. Disputed Accounts include accounts reported as dispute resolved where the consumer disagrees or disputes after resolution.

Cash-Out Refinances > Borrower Eligibility > Occupancy Requirements

Cash-out refinance transactions are only permitted on owner-occupied Principal Residences.

The Property securing the cash-out refinance must have been owned and occupied by the Borrower as their Principal Residence for the 12 months prior to the date of case number assignment.

Cash-Out Refinances > Borrower Eligibility > Occupancy Requirements

Cash-out refinance transactions are only permitted on owner-occupied Principal Residences.

The Property securing the cash-out refinance must have been owned and occupied by the Borrower as their Principal Residence for the 12 months prior to the date of case number assignment. If the property was owned prior to closing by a limited liability corporation (LLC) that is 100% owned by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s 12 month ownership requirement.