Announcement 21-0045: Updated FHA Product Underwriting Guidelines

A Property is not eligible for FHA insurance if:

·       a residential building and related improvements to the Property are located within SFHA Zone A, a Special Flood Zone Area, or Zone V, a Coastal Area, and insurance under the National Flood Insurance Program (NFIP) is not available in the community; or

·       the improvements are, or are proposed to be, located within a Coastal Barrier Resources System (CBRS).

A Property is not eligible for FHA insurance if:

·       a residential building and related improvements to the Property are located within any SFHA Zone beginning with the letter A, a Special Flood Zone Area, or any Zone beginning with the letter V, a Coastal Area, and insurance under the National Flood Insurance Program (NFIP) is not available in the community; or

·       the improvements are, or are proposed to be, located within a Coastal Barrier Resources System (CBRS).

The eligibility of a Property for a Mortgage insured by FHA is determined by the time that has elapsed between the date the seller has acquired title to the Property and the date of execution of the sales contract that will result in the FHA-insured Mortgage.

FHA defines the seller’s date of acquisition as the date the seller acquired legal ownership of that Property. FHA defines the resale date as the date of execution of the sales contract by all parties intending to finance the Property with an FHA-insured Mortgage.

The eligibility of a Property for a Mortgage insured by FHA is determined by the time that has elapsed between the date the seller has acquired title to the Property and the date of execution of the sales contract that will result in the FHA-insured Mortgage.

FHA defines the seller’s date of acquisition as the date the seller acquired legal ownership of that Property. FHA defines the resale date as the date of execution of the sales contract by all parties intending to finance the Property with an FHA-insured Mortgage.

If there is a partial continuity of ownership, a quit claim deed transaction is not a sale and is not subject to the rules prohibiting property flipping. The use of a quit claim will not be deemed a flip as long as at least one of the original owners retains an ownership interest in the property after the quitclaim is recorded.

An Accessory Dwelling Unit (ADU) refers to a habitable living unit added to, created within, or detached from a primary one-unit Single Family dwelling, which together constitute a single interest in real estate. It is a separate additional living unit, including kitchen, sleeping, and bathroom facilities.

A Single Family residential Property with an ADU remains a one-unit Property. For any Property with two or more units, a separate additional Dwelling Unit must be considered as an additional unit.

(a) Standard

A Condominium Unit is a Property contained in a multi-unit project that has individually-owned Dwelling units, which may be either attached in one or more Structures or detached from each other, and is primarily residential in use.

A condominium development is created by state or local law and is characterized by fee-simple ownership of a unit, which is defined in the condominium documents, together with common areas. The property interest in these areas is both common and undivided on the part of all unit owners, each of whom belongs to the HOA that typically maintains the Property and collects assessments or dues from each unit owner.

A Condominium Project must be FHA approved before a Mortgage on an individual condominium unit can be insured.

(a) Definitions

Condominium Unit (Unit) refers to real estate consisting of a one-family Dwelling Unit in a Condominium Project.

A Condominium Project refers to a project in which one-family Dwelling Units are attached, semi-detached, detached, or Manufactured Home units, and in which owners hold an undivided interest in Common Elements.

(b) Standard

A Condominium Unit must be either located within an FHA-approved Condominium Project, meet FHA’s definition of a Site Condominium, or have completed the FHA Single Unit Approval process before a Mortgage can be insured.

Site Condominiums are Single Family detached dwellings encumbered by a declaration of condominium covenants or condominium form of ownership and do not need to be FHA-approved.

Manufactured Housing condominium units may not be processed as Site Condominiums

(a) Definition

A Site Condominium refers to:

·       a Condominium Project that consists entirely of Single Family detached dwellings that have no shared garages, or any other attached buildings; or

·       a Condominium Project that:

o   consists of Single Family detached or horizontally attached (townhouse) dwellings where the Unit consists of the dwelling and land;

o   does not contain any Manufactured Housing Units; and

o   is encumbered by a declaration of condominium covenants or a condominium form of ownership.

Manufactured Housing condominium units may not be processed as Site Condominiums.

(b) Standard

The Unit owner must be responsible for all insurance and maintenance costs, excluding landscaping, of the Site Condominium.

Site Condominiums do not require Condominium Project Approval or Single-Unit Approval.

The Borrower’s total Mortgage Payment includes:

·       Principal and Interest (P&I);

·       real estate taxes;

·       hazard insurance;

·       flood insurance as applicable;

·       Mortgage Insurance Premium;

·       HOA or condominium association fees or expenses;

·       Ground Rent;

·       special assessments;

·       payments for any acceptable secondary financing; and

·       any other escrow payments.

The Borrower’s total Mortgage Payment includes:

·       Principal and Interest (P&I);

·       real estate taxes;

·       hazard insurance;

·       flood insurance as applicable;

·       Mortgage Insurance Premium;

·       HOA or condominium association fees or expenses;

·       Ground Rent;

·       special assessments;

·       payments for any acceptable secondary financing; and

·       any other escrow payments.

CMS may deduct the amount of the Section 8 Homeownership Voucher if it is paid directly to the Servicer. Where real estate taxes are abated, CMS may use the abated amount provided that (1) CMS can document the abated amount with the taxing authority and (2) the abatement will remain in place for at least the first three years of the Mortgage.

(C) Required Documentation

For all Employment related Income, CMS must verify the Borrower’s most recent two (2) years of employment and income, and document using one of the following methods.

(1) Traditional Current Employment Documentation

CMS must obtain one of the following to verify current employment:

·       the most recent pay stub and a written Verification of Employment (VOE) covering two (2) years; or

·       direct electronic verification of employment by a TPV vendor covering two years, subject to the following requirements:

o   the Borrower has authorized CMS to verify income and employment; and

o   the date of the data contained in the completed verification conforms with FHA requirements.

(C) Required Documentation

For all Employment related Income, CMS must verify the Borrower’s most recent two (2) years of employment and income, and document current employment using either the Traditional or Alternative method, and past employment as applicable.

(1) Traditional Current Employment Documentation

CMS must obtain one of the following to verify current employment and income:

·       the most recent pay stub and a written Verification of Employment (VOE) covering two (2) years; or

·       direct electronic verification of employment by a TPV vendor covering two years, subject to the following requirements:

o   the Borrower has authorized CMS to verify income and employment; and

o   the date of the data contained in the completed verification conforms with FHA requirements.

Direct verification of the Borrower’s employment history for the previous two (2) years is not required if all of the following conditions are met:

·       The current employer confirms a two year employment history, or a paystub reflects a hiring date.

·       Only base pay is used to qualify (no Overtime or Bonus Income).

·       The Borrower executes IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-C, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two (2) tax years.

If the applicant has not been employed with the same employer for the previous two (2) years and/or not all conditions immediately above can be met, then CMS must obtain one or a combination of the following for the most recent two (2) years to verify the applicant’s employment history:

·       W-2(s)

·       VOE(s)

·       direct electronic verification by a TPV vendor, subject to the following requirements:

o   the Borrower has authorized CMS to verify income and employment; and

o   the date of the data contained in the completed verification conforms with FHA requirements.

·       evidence supporting enrollment in school or the military during the most recent two (2) full years – Note: High School transcripts are not permitted to complete the two year work history

Direct verification of the Borrower’s employment and income history for the previous two (2) years is not required if all of the following conditions are met:

·       The current employer confirms a two year employment history, or a paystub reflects a hiring date.

·       Only base pay is used to qualify (no Overtime or Bonus Income).

·       The Borrower executes IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-C, IVES Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two (2) tax years.

If the applicant has not been employed with the same employer for the previous two (2) years and/or not all conditions immediately above can be met, then CMS must obtain one or a combination of the following for the most recent two (2) years to verify the applicant’s employment history:

·       W-2(s)

·       written VOE(s)

·       direct electronic verification by a TPV vendor, subject to the following requirements:

o   the Borrower has authorized CMS to verify income and employment; and

o   the date of the data contained in the completed verification conforms with FHA requirements.

·       evidence supporting enrollment in school or the military during the most recent two (2) full years – Note: High School transcripts are not permitted to complete the two year work history

Employment Related Income (Total)

Required Documentation

(1) Individual and Business Tax Returns

CMS must obtain complete individual federal income tax returns for the most recent two (2) years, including all schedules.

(2) Profit & Loss Statements and Balance Sheets

CMS must obtain a year-to-date Profit and Loss (P&L) statement and balance sheet if more than a calendar quarter has elapsed since date of most recent calendar or fiscal year-end tax. A balance sheet is not required for self-employed Borrowers filing Schedule C income.

If income used to qualify the Borrower exceeds the two year average of tax returns, an audited P&L or signed quarterly tax return must be obtained from the IRS.

Employment Related Income (Total)

Required Documentation

(1) Individual and Business Tax Returns

CMS must obtain complete individual federal income tax returns for the most recent two (2) years, including all schedules.

CMS must obtain the Borrower’s business tax returns for the most recent two years unless the following criteria are met:

·       individual federal income tax returns show increasing Self-Employment Income over the past two years;

·       funds to close are not coming from business accounts; and

·       the Mortgage to be insured is not a cash-out refinance.

In lieu of signed individual or business tax returns from the Borrower, CMS may obtain a signed IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-C, IVES Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, and tax transcripts directly from the IRS.

(2) Profit & Loss Statements and Balance Sheets

CMS must obtain a year-to-date Profit and Loss (P&L) statement and balance sheet if more than a calendar quarter has elapsed since the date of the most recent calendar or fiscal year-end tax period. A balance sheet is not required for self-employed Borrowers filing Schedule C income.

If income used to qualify the Borrower exceeds the two year average of tax returns, an audited P&L or signed quarterly tax return must be obtained from the IRS.

(1) Definition

Foster Care Payment refers to payment received from a state- or county-sponsored organization for providing temporary care for one or more individuals.

(2) Standard

Foster care payment may be considered acceptable and stable income if the Borrower has a two-year history of providing foster care services and receiving foster care payment and that the foster care payment is reasonably likely to continue.

(3) Required Documentation

The Mortgagee must obtain a written verification of foster care payment from the organization providing it, verify and document that the Borrower has a two-year history of providing foster care services and receiving foster care payment, and that the foster care payment is reasonably likely to continue.

(4) Calculation of Effective Income

The Mortgagee must calculate foster care payment by using the lesser of:

·       average foster care payment received over the previous two years; or

·       average foster care payment received over the previous year.

Where real estate taxes are paid in arrears, the seller’s real estate tax credit may be used to meet the Borrower’s Minimum Required Investment (MRI), if CMS documents that the Borrower had sufficient assets to meet the MRI and the Borrower paid closing costs and other prepaid items at the time of underwriting.

This permits the Borrower to bring a portion of their MRI to the closing and combine that portion with the real estate tax credit for their total MRI.

Where real estate taxes are paid in arrears, the seller’s real estate tax credit may be used to meet the Borrower’s Minimum Required Investment (MRI), if CMS documents that the Borrower had sufficient assets to meet the MRI and the Borrower paid closing costs and other prepaid items at the time of underwriting, without consideration of the real estate tax credit.

This permits the Borrower to bring a portion of their MRI to the closing and combine that portion with the real estate tax credit for their total MRI.

(C) Required Documentation

For all Employment related Income, CMS must verify the Borrower’s most recent two (2) years of employment and income, and document using one of the following methods.

(1) Traditional Current Employment Documentation

CMS must obtain one of the following to verify current employment:

·       the most recent pay stubs covering a minimum of 30 consecutive Days (if paid weekly or bi-weekly, pay stubs must cover a minimum of 28 consecutive Days) that show the Borrower’s year-to-date earnings, and a written Verification of Employment (VOE) covering two (2) years; or

·       direct verification by a TPV vendor covering two years, subject to the following requirements:

o   the Borrower has authorized CMS to verify income and employment; and

o   the date of the data contained in the completed verification conforms with FHA requirements

(4) Past Employment Documentation

Direct verification of the Borrower’s employment history for the previous two (2) years is not required if all of the following conditions are met:

·       The current employer confirms a two year employment history, or a paystub reflects a hiring date.

·       Only base pay is used to qualify (no Overtime or Bonus Income).

·       The Borrower executes IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-C, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two (2) tax years.

If the applicant has not been employed with the same employer for the previous two (2) years and/or not all conditions immediately above can be met, then CMS must obtain one or a combination of the following for the most recent two (2) years to verify the applicant’s employment history:

·       W-2(s)

·       VOE(s)

·       direct verification of employment by a TPV vendor, subject to the following requirements:

o   the Borrower has authorized CMS to verify income and employment; and

(C) Required Documentation

For all Employment related Income, CMS must verify the Borrower’s most recent two (2) years of employment and income, and document current employment using either the Traditional or Alternative method, and past employment as applicable.

(1) Traditional Current Employment Documentation

CMS must obtain one of the following to verify current employment and income:

·       the most recent pay stubs covering a minimum of 30 consecutive Days (if paid weekly or bi-weekly, pay stubs must cover a minimum of 28 consecutive Days) that show the Borrower’s year-to-date earnings, and a written Verification of Employment (VOE) covering two (2) years; or

·       direct electronic verification of employment by a TPV vendor covering two years, subject to the following requirements:

o   the Borrower has authorized CMS to verify income and employment; and

o   the date of the data contained in the completed verification conforms with FHA requirements

(4) Past Employment Documentation

Direct verification of the Borrower’s employment and income history for the previous two (2) years is not required if all of the following conditions are met:

·       The current employer confirms a two year employment history, or a paystub reflects a hiring date.

·       Only base pay is used to qualify (no Overtime or Bonus Income).

·       The Borrower executes IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-C, IVES Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two (2) tax years.

If the applicant has not been employed with the same employer for the previous two (2) years and/or not all conditions immediately above can be met, then CMS must obtain one or a combination of the following for the most recent two (2) years to verify the applicant’s employment history:

·       W-2(s)

·       written VOE(s)

·       direct verification of employment by a TPV vendor, subject to the following requirements:

o   the date of the data contained in the completed verification conforms with FHA requirements

·       evidence supporting enrollment in school or the military during the most recent two (2) full years – Note: High School transcripts are not permitted to complete the two year work history

o   the Borrower has authorized CMS to verify income and employment; and

o   the date of the data contained in the completed verification conforms with FHA requirements

·       evidence supporting enrollment in school or the military during the most recent two (2) full years – Note: High School transcripts are not permitted to complete the two year work history

(C) Required Documentation

(1) Individual and Business Tax Returns

CMS must obtain signed, completed individual and business federal income tax returns for the most recent two (2) years, including all schedules.

(2) Profit & Loss Statements and Balance Sheets

CMS must obtain a year-to-date Profit and Loss (P&L) statement and balance sheet if more than a calendar quarter has elapsed since date of most recent calendar or fiscal year-end tax return was filed by the Borrower. A balance sheet is not required for self-employed Borrowers filing Schedule C income.

If income used to qualify the Borrower exceeds the two year average of tax returns, an audited P&L or signed quarterly tax return obtained from the IRS is required.

(C) Required Documentation

(1) Individual and Business Tax Returns

CMS must obtain signed, completed individual and business federal income tax returns for the most recent two (2) years, including all schedules.

In lieu of signed individual or business tax returns from the Borrower, CMS may obtain a signed IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-C, IVES Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, and tax transcripts directly from the IRS.

(2) Profit & Loss Statements and Balance Sheets

CMS must obtain a year-to-date Profit and Loss (P&L) statement and balance sheet if more than a calendar quarter has elapsed since the date of the most recent calendar or fiscal year-end tax period. A balance sheet is not required for self-employed Borrowers filing Schedule C income.

If income used to qualify the Borrower exceeds the two year average of tax returns, an audited P&L or signed quarterly tax return obtained from the IRS is required.

ii. Standard

CMS must develop or obtain a separate Mortgage and Note that conforms generally to the Freddie Mac and Fannie Mae forms in both form and content, but that includes the specific modification required by FHA set forth in the applicable Model Note and Mortgage.

CMS must ensure that the Mortgage and Note comply with all applicable state and local requirements for creating a recordable and enforceable Mortgage, and an enforceable Note.

ii. Standard

CMS must develop or obtain a separate Mortgage and Note that conforms generally to the Freddie Mac and Fannie Mae forms in both form and content, but that includes the specific modification required by FHA set forth in the applicable Model Note and Mortgage.

CMS must ensure that the Mortgage and Note comply with all applicable state and local requirements for creating a recordable and enforceable Mortgage, and an enforceable Note.

At least one Borrower obligated on the Note must be on the title.

(h) Funds to Close

CMS must verify Borrower’s funds to close, in excess of the total Mortgage Payment of the new Mortgage, in accordance with Sources of Funds.

(b) Standard

CMS must verify that the Condominium Association has a master or blanket Hazard Insurance policy in place for the entire Approved Condominium Project in an amount equal to at least 100 percent of the insurable replacement cost of the Approved Condominium Project, including the individual Units in the Approved Condominium Project.

CMS must verify that any policy with a coinsurance clause includes an agreed amount endorsement or selection of the agreed value option.

(c) Required Documentation

CMS must submit the certificate of insurance or complete copy of the insurance policy that meets the requirements.

(b) Standard

CMS must verify that the Condominium Association has a master or blanket Hazard Insurance policy in place for the entire Approved Condominium Project in an amount equal to at least 100 percent of the insurable replacement cost of the Approved Condominium Project, including the individual Units in the Approved Condominium Project.

CMS must verify that any policy with a coinsurance clause includes an agreed amount endorsement or selection of the agreed value option, or an amount of coverage equal to at least 100 percent of the insurable replacement cost.

(c) Required Documentation

CMS must submit form HUD-9991, the certificate of insurance or complete copy of the insurance policy, and, if applicable, acceptable evidence of the replacement cost value.

(B) Borrower Eligibility

To be eligible for Single-Unit Approval, CMS must verify that the mortgage application receives an Accept from TOTAL Mortgage Scorecard or has a maximum Loan-to-Value (LTV) of 90 percent.

(B) Borrower Eligibility

To be eligible for Single-Unit Approval, CMS must verify that the mortgage application receives an Accept from TOTAL Mortgage Scorecard or if manually underwritten, has a maximum Loan-to-Value (LTV) of 90 percent.

(b) Hazard Insurance

(ii) Standard

CMS must verify that the Condominium Association has a master or blanket Hazard Insurance policy in place for the entire Condominium Project in an amount equal to at least 100 percent of the insurable replacement cost of the Condominium Project, including the individual Units in the Condominium Project.

CMS must verify that any policy with a coinsurance clause includes an agreed amount endorsement or selection of the agreed value option.

(b) Hazard Insurance

(ii) Standard

CMS must verify that the Condominium Association has a master or blanket Hazard Insurance policy in place for the entire Condominium Project in an amount equal to at least 100 percent of the insurable replacement cost of the Condominium Project, including the individual Units in the Condominium Project.

CMS must verify that any policy with a coinsurance clause includes an agreed amount endorsement or selection of the agreed value option, or an amount of coverage equal to at least 100 percent of the insurable replacement cost.

CMS must verify that any pooled insurance policy satisfies the insurance coverage standard for each Condominium Project insured under the policy.

(iii) Required Documentation

CMS must submit a certificate of insurance or complete copy of the insurance policy that meets the requirements.

CMS must verify that any pooled insurance policy satisfies the insurance coverage standard for each Condominium Project insured under the policy.

(iii) Required Documentation

CMS must submit form HUD-9991, a certificate of insurance or complete copy of the insurance policy, and if applicable, acceptable evidence of the replacement cost value.

(ii) Standard

CMS must verify that for all Condominium Projects with more than 20 Units, the Condominium Association maintains Fidelity Insurance for all officers, directors, and employees of the Condominium Association and all other persons handling or responsible for funds administered by the Condominium Association.

CMS must verify that the insurance coverage is the greater of:

·       three months of aggregate assessments on all Units plus reserve funds; or

·       the minimum amount required by state law.

If the Condominium Project engages a management company, the policy or policies must demonstrate that they specifically meet the standard for both the Condominium Association and the management company.

(ii) Standard

CMS must verify that for all Condominium Projects with more than 20 Units, the Condominium Association maintains Fidelity Insurance for all officers, directors, and employees of the Condominium Association and all other persons handling or responsible for funds administered by the Condominium Association.

CMS must verify that the insurance coverage is the greater of:

·       three months of aggregate (12-month) assessments on all Units plus reserve funds (up to the maximum permitted by state law); or

·       the minimum amount required by state law.

If the Condominium Project engages a management company, the policy or policies must demonstrate that they specifically meet the standard for both the Condominium Association and the management company.

(B) Standard

When an Individual Water Supply System is present, water quality must meet the requirements of the health authority with jurisdiction. If there are no local (or state) water quality standards, then must be potable, which may be demonstrated by compliance with the current EPA Manual of Individual and Non-Public Water Supply Systems.

(B) Standard

When an Individual Water Supply System is present, water quality must meet the requirements of the health authority with jurisdiction. If there are no local (or state) water quality standards, then water quality must meet the standards set by the EPA, as presented in the National Primary Drinking Water regulations in 40 CFR § 141 and 142.

When New Construction is less than 90 percent complete at the time of the appraisal, the Appraiser must document the floor plan, plot plan, and exhibits necessary to determine the size and level of finish.

When New Construction is 90 percent or more complete, the Appraiser must document a list of components to be installed or completed after the date of appraisal.