FHA Underwriting Guideline Updates

CMS must obtain a completed Uniform Residential Loan Application (URLA) from the Borrower and provide all required federal and state disclosures in order to begin the origination process. CMS is responsible for using the most recent version of all forms as of the date of completion of the form.

CMS must obtain a completed Fannie Mae Form 1003/Freddie Mac Form 65, Uniform Residential Loan Application (URLA), from the Borrower and provide all required federal and state disclosures in order to begin the origination process. URLA also includes the Fannie Mae/Freddie Mac Form 1103, Supplemental Consumer Information Form (SCIF), CMS is responsible for using the most recent version of all forms as of the date of completion of the form.

CMS must make all determinations with respect to the adequacy of the Borrower’s income in a uniform manner without regard to race, color, religion, sex, national origin, familial status, handicap, marital status, actual or perceived sexual orientation, gender identity, source of income of the Borrower, or location of the Property.

CMS must make all determinations with respect to the adequacy of the Borrower’s income in a uniform manner without regard to race, color, religion, sex (including sexual orientation or gender identity), age, national origin, familial status, disability, marital status, receipt of public assistance, location of the Property, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act.

CMS may request cancellation of a case number by submitting a request to HUD. A case number will be cancelled only if:

·         an appraisal has not been completed and the Borrower will not close the Mortgage as an FHA-insured Mortgage;

·         the FHA mortgage insurance will not be sought; or

·         the appraisal has already expired.

CMS must submit a request for cancellation to the FHA Resource Center at answers@hud.gov using the Case Cancellation Request Template.

CMS may request cancellation of a case number by submitting a request to FHAC.

CMS may request reinstatement of cancelled case numbers by submitting a request to the FHA Resource Center using the Case Reinstatement Request Template.

Case numbers that were automatically cancelled will be reinstated only if CMS provides evidence that the subject Mortgage closed prior to cancellation of the case number, such as a Settlement Statement or Closing Disclosure, as applicable or similar legal document.

CMS must verify the validity of the case number, by completing Case Queries in FHAC at the time of Clear to Close (CTC).

CMS may request reinstatement of cancelled case numbers by submitting a request to FHA Connection.

Case numbers that were automatically cancelled will be reinstated only if CMS provides evidence that the subject Mortgage closed prior to cancellation of the case number, such as a Settlement Statement or Closing Disclosure, as applicable or similar legal document.

CMS must verify the validity of the case number, by completing Case Queries in FHAC at the time of Clear to Close (CTC).

Where a Mortgagee uses an existing appraisal for a different Borrower, CMS must enter the new Borrower’s information in FHAC. CMS must collect an appraisal fee from the new Borrower and refund the fee to the original Borrower.

Where a Mortgagee uses an existing appraisal for a different Borrower, CMS must enter the new Borrower’s information in FHAC prior to being scored by the TOTAL scorecard. CMS must collect an appraisal fee from the new Borrower and refund the fee to the original Borrower.

If property improvements (dwelling and related structures/equipment essential to the value of the Property and subject to flood damage) are located in an area designated by FEMA as an SFHA and NFIP insurance is available in that community, the Mortgagee must ensure the Borrower obtains and maintains Flood Insurance.

If any portion of the dwelling and related structures or equipment essential to the Property Value is located in an SFHA and NFIP insurance is available in that community, the Mortgagee must ensure the Borrower obtains and maintains Flood Insurance.

If any portion of the dwelling, related Structures or equipment essential to the value of the Property and subject to flood damage is located within an SFHA, the Property is not eligible for FHA mortgage insurance unless CMS:

·         obtains from FEMA a final LOMA or LOMR that removes the Property from the SFHA; or

·         obtains a FEMA NFIP Elevation Certificate (FEMA Form 086-0-33). The Elevation Certificate must document that the lowest floor including the basement of the residential building, and all related improvements/equipment essential to the value of the Property, is built at or above the 100-year flood elevation in compliance with the NFIP criteria; and

·         ensures that Flood Insurance is obtained.

If any portion of the dwelling and related Structures or equipment essential to the Property Value is located in an SFHA, the Property is not eligible for FHA mortgage insurance, unless CMS:

·         obtains a FEMA-issued final LOMA or LOMR that removes the Property from the SFHA; or

·         obtains a FEMA NFIP Elevation Certificate (FEMA Form 086-0-33). The Elevation Certificate must document that the lowest floor of the residential building, including the basement, and all related Structures or equipment essential to the Property Value are built at or above the 100-year flood elevation in compliance with the NFIP criteria; and

·         ensures the Borrower obtains Flood Insurance.

The finished grade level beneath the Manufactured Home must be at or above the 100-year return frequency flood elevation. If any portion of the dwelling related Structures, or equipment essential to the Property Value and subject to flood damage for both new and existing Manufactured Homes are located within an SFHA, the Property is not eligible for FHA mortgage insurance unless CMS:

·         obtains a FEMA issued LOMA or LOMR that removes the Property from the SFHA; or

·         obtains a FEMA NFIP Elevation Certificate (FEMA Form 086-0-33) showing that the finished grade beneath the Manufactured Home is at or above the 100-year return frequency flood elevation; and

·         ensures that Flood Insurance is obtained.

The finished grade level beneath the Manufactured Home must be at or above the 100-year return frequency flood elevation. If any portion of the dwelling and related Structures or equipment essential to the Property Value for both new and existing Manufactured Homes is located in an SFHA, the Property is not eligible for FHA mortgage insurance, unless CMS:

·         obtains a FEMA-issued LOMA or LOMR that removes the Property from the SFHA; or

·         obtains a FEMA NFIP Elevation Certificate (FEMA Form 086-0-33) showing that the finished grade beneath the Manufactured Home is at or above the 100-year return frequency flood elevation; and

·         ensures the Borrower obtains Flood Insurance.

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) Definition

An Accessory Dwelling Unit (ADU) refers to a single habitable living unit with means of separate ingress and egress that meets the minimum requirements for a living unit. An ADU is a private space that is subordinate in size and can be added to, created within, or detached from a primary one-unit Single Family dwelling, which together constitute a single interest in real estate.

(b) Standard

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

(a) Standard

CMS may consider Rental Income from existing and prospective tenants if documented in accordance with the following requirements.

Rental Income from the subject Property may be considered Effective Income when the Property is a two- to four-unit dwelling, or an acceptable one- to four-unit Investment Property.

(b) Required Documentation

Documentation varies depending upon the length of time the Borrower has owned the Property.

(a) Standard

CMS may consider Rental Income from existing and prospective renters if documented in accordance with the following requirements.

Rental Income from the subject Property may be considered Effective Income when the Property is or will be a one-unit dwelling with an ADU, a two- to four-unit dwelling, or an acceptable one- to four-unit Investment Property.

No income from commercial space may be included in Rental Income calculations.

(b) Required Documentation

Documentation varies depending upon the length of time the Borrower has owned the Property and must meet one of the applicable documentation requirements below.

CMS must verify and document the proposed Rental Income from the ADU by obtaining a Fannie Mae Form 1004/Freddie Mac Form 70, URAR, and a Fannie Mae Form 1007/Freddie Mac Form 1000, Single Family Comparable Rent Schedule, showing fair market rent and, if available, the prospective leases.

Where the Borrower has a history of Rental Income from the subject since the previous tax filing, CMS must verify and document the existing Rental Income by obtaining the Borrower’s most recent tax returns, including Schedule E, from the previous two (2) years.

For Properties with less than two (2) years of Rental Income history, CMS must document the date of acquisition by providing the deed, Settlement Statement or Closing Disclosure, as applicable or similar legal document.

Where the Borrower has a history of Rental Income from the subject Property since the previous tax filing, CMS must verify and document the existing Rental Income by obtaining the Borrower’s most recent tax returns, including Schedule E, from the previous two (2) years.

For Properties owned less than two years, CMS must document the date of acquisition by providing a copy of the deed, Closing Disclosure, or other legal document.

The amount of the Rental Income from an ADU used as Effective Income must not exceed 30 percent of the total monthly Effective Income used to qualify the Borrower.

To calculate the effective net Rental Income from other real estate holdings where the Borrower does not have a history of Rental Income since the previous tax filing, CMS must deduct the Principal, Interest, Taxes, and Insurance (PITI) from the lesser of:

·         the monthly operating income reported on Freddie Mac Form 998; or

·         75 percent (75%) of the lesser of:

o   fair market rent reported by the Appraiser; or

o   the rent reflected in the lease or other rental agreement.

Where the Borrower has no history of receiving Rental Income, CMS requires an appraisal with 25% equity.

To calculate the effective net Rental Income from other real estate holdings where the Borrower does not have a history of Rental Income since the previous tax filing, CMS must deduct the Principal, Interest, Taxes, and Insurance (PITI) from 75 percent (75%) of the lesser of:

·         fair market rent reported by the Appraiser; or

·         the rent reflected in the lease or other rental agreement.

Where the Borrower has no history of receiving Rental Income, CMS requires an appraisal with 25% equity.

History of Net Rental Income

CMS must calculate the net Rental Income by averaging the amount shown on the Schedule E provided the Borrower continues to own all Properties included on the Schedule E.

Depreciation shown on Schedule E may be added back to the net income or loss.

·         If the Property has been owned for less than two (2) years, CMS must annualize the Rental Income for the length of time the Property has been owned.

·         For Properties with less than two (2) years of Rental Income history, CMS must document the date of acquisition by providing the deed, Settlement Statement or Closing Disclosure, as applicable or similar legal document.

Positive net Rental Income must be added to the Borrower’s Effective Income. Negative net Rental Income must be included as a debt/liability.

History of Net Rental Income

CMS must calculate the net Rental Income by averaging the amount shown on the Schedule E provided the Borrower continues to own all Properties included on the Schedule E.

Depreciation shown on Schedule E may be added back to the net income or loss.

Positive net Rental Income must be added to the Borrower’s Effective Income. Negative net Rental Income must be included as a debt/liability.

If the Property has been owned for less than two (2) years, CMS must:

·         annualize the Rental Income for the length of time the Property has been owned; and

·         document the date of acquisition by providing the deed, Closing Disclosure, or other legal document.

Positive net Rental Income must be added to the Borrower’s Effective Income. Negative net Rental Income must be included as a debt/liability.

Boarder refers to an individual renting space inside the Borrower’s Dwelling Unit.

Boarder refers to an individual renting space inside the Borrower’s Dwelling Unit. A renter of an ADU is not a Boarder.

(1) Definition

Foreign Income refers to income received by a Borrower from sources located outside of the United States by a foreign corporation or a foreign government and is paid in foreign currency.

(2) Standard

CMS may use Foreign Income as Effective Income if the Borrower has received this income for the previous two years and it is reasonably likely to continue.

(3) Required Documentation

CMS must obtain complete individual federal income tax returns showing Foreign Income for the most recent two years, including all schedules.

For all Foreign Income, CMS must satisfy Standard Documentation Requirements in accordance with the requirements listed based on source and type of income as outlined in Income Requirements (TOTAL).

If the Foreign Income documents are not received in English, CMS must provide a complete and accurate translation for each document and convert foreign currency to U.S. dollars.

(4) Calculation of Effective Income

CMS must analyze the Borrower’s tax returns to determine gross Foreign Income. CMS must average the Foreign Income over the previous two years to calculate Effective Income.

If Rental Income is being used as Effective Income to qualify the Borrower, CMS must verify and document Reserves equivalent to two months’ PITI after closing for one-unit with an ADU Properties.

If the cosigned liability is not included in the monthly obligation, CMS must obtain documentation to evidence that the other party to the debt has been making regular on-time payments during the previous 12 months and does not have a history of delinquent payments on the loan.

If the cosigned liability is not included in the monthly obligation, CMS must obtain documentation to evidence that the other party to the debt has been making regular on-time payments during the previous 12 months.

CMS may consider Rental Income from existing and prospective tenants if documented in accordance with the following requirements.

Rental Income from the subject Property may be considered Effective Income when the Property is a two- to four-unit dwelling, or an acceptable one- to four-unit Investment Property.

CMS may consider Rental Income from existing and prospective renters if documented in accordance with the following requirements.

Rental Income from the subject Property may be considered Effective Income when the Property is or will be a one-unit dwelling with an ADU, a two- to four-unit dwelling, or an acceptable one- to four-unit Investment Property.

No income from commercial space may be included in Rental Income calculations.

CMS must verify and document the proposed Rental Income from the ADU by obtaining a Fannie Mae Form 1004/Freddie Mac Form 70, URAR, and a Fannie Mae Form 1007/Freddie Mac Form 1000, Single Family Comparable Rent Schedule, showing fair market rent and, if available, the prospective leases.

CMS must verify and document the actual sale and the net sale proceeds by obtaining a fully executed Settlement Statement or Closing Disclosure, as applicable or similar legal document.

CMS must also verify and document that the transaction was arms-length, and that the Borrower is entitled to the net sale proceeds.

CMS must verify and document the actual sale and the net sale proceeds by obtaining a fully executed Settlement Statement or Closing Disclosure, as applicable or similar legal document.

CMS must also verify and document that it is an Arm’s Length Transaction, and that the Borrower is entitled to the Net Sale Proceeds.

Nonprofit agencies, state and local government agencies and Instrumentalities of Government are not eligible for cash-out refinances. Income from a non-occupant co-Borrower may not be used to qualify for a cash-out refinance.

Nonprofit agencies, state and local government agencies and Instrumentalities of Government are not eligible for cash-out refinances. Income from a non-occupant co-Borrower may not be used to qualify for a cash-out refinance.

If the subject Property is a one-unit with an Accessory Dwelling Unit (ADU), rental income from the ADU cannot be used as Effective Income to qualify for a cash-out refinance.

CMS must apply this requirement for both Mortgages underwritten through TOTAL Scorecard and manual underwriting.

New Construction > Eligible Property Types

The following property types are eligible for New Construction financing:

·         Site Built Housing (one- to four-units)

·         Condominium units in Approved Projects or Legal Phases

·         Manufactured Housing

New Construction > Eligible Property Types

The following property types are eligible for New Construction financing:

·         Site Built Housing (one-unit, one-unit with an Accessory Dwelling Unit (ADU), or two- to four-units)

·         Condominium units in Approved Projects or Legal Phases

·         Manufactured Housing (one-unit or one-unit with an ADU)

If any portion of the dwelling and related Structures or equipment essential to the value of the Property is located within a Special Flood Hazard Area (SFHA) and subject to flood damage, CMS must reject the Property, unless:

·         a final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removes the Property from the SFHA is obtained from the Federal Emergency Management Agency (FEMA); or

·         CMS obtains a FEMA National Flood Insurance Program (NFIP) Elevation Certificate (FEMA Form 086-0-33), that documents that the lowest floor (including the basement) of the residential building and all related improvements/equipment essential to the value of the Property are built at or above the 100-year flood elevation in compliance with the NFIP criteria.

·         CMS must ensure that the Elevation Certificate is completed based on finished construction.

If any portion of the dwelling and related Structures or equipment essential to the Property Value is located in a Special Flood Hazard Area (SFHA), CMS must reject the Property, unless CMS:

·         obtains a Federal Emergency Management Agency (FEMA)-issued final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removes the Property from the SFHA; or

·         obtains a FEMA National Flood Insurance Program (NFIP) Elevation Certificate (FEMA Form 086-0-33) that documents that the lowest floor of the residential building, including the basement, and all related Structures or equipment essential to the Property Value are built at or above the 100-year flood elevation in compliance with the NFIP criteria; and

·         ensures that the Elevation Certificate is completed based on finished construction.

A well water test is required for, but not limited to, Properties:

·         that are newly constructed;

·         where an Appraiser has reported deficiencies with a well or the well water;

·         where water is reported to be unsafe or known to be unsafe;

·         located in close proximity to dumps, landfills, industrial sites, farms (pesticides) or other sites that could contain hazardous wastes; or

·         where the distance between the well and septic system is less than 100 feet.

A well water test is required for, but not limited to, Properties:

·         that are newly constructed;

·         where an Appraiser has reported deficiencies with a well or the well water;

·         where water is reported to be unsafe or known to be unsafe; or

·         located in close proximity to dumps, landfills, industrial sites, farms (pesticides) or other sites that could contain hazardous wastes.

A Shared Well is permitted only if CMS obtains evidence that:

·         it is not feasible to serve the housing by an acceptable public or Community Water System; and

·         the housing is located in an area other than in an area where local officials have certified that installation of public or adequate Community Water Systems and sewer systems are economically feasible.

A Shared Well is permitted if the requirements in Shared Wells are met.

No part of the appraisal analysis or reporting may be based on the race, color, religion, sex (including sexual orientation or gender identity), age, actual or perceived marital status, disability, familial status, national origin of either the prospective owners or occupants of the Property, present owners or occupants of the Property, or the present owners or occupants of the properties in the vicinity of the Property, or on any other basis prohibited by federal, state, or local law.

No part of the appraisal analysis or reporting may be based on the race, color, religion, sex (including sexual orientation or gender identity), age, national origin, familial status, disability, marital status, or because an applicant has in good faith exercised any right under the Consumer Credit Protection Act of either the prospective owners or occupants of the Property, present owners or occupants of the Property, or the present owners or occupants of the properties in the vicinity of the Property, or on any other basis prohibited by federal, state, or local law.

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.

An Accessory Dwelling Unit (ADU) is subordinate in size, location, and appearance to the primary Dwelling Unit and may or may not have separately metered utilities. The ADU must comport with zoning requirements, which may include a legal nonconforming use.

An ADU is usually subordinate in size, location and appearance to the primary Dwelling Unit and may or may not have separately metered utilities or separate means of ingress or egress. The Appraiser must not include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling.

The Appraiser must notify CMS of the deficiency in MPR or MPS if more than one ADU is located on the subject Property.

The Appraiser must measure the Contributory Value of the ADU by applying techniques based on one or more of the recognized three approaches to value: cost approach, income approach, and sales comparison approach.

If the ADU or living unit distinction is in question by the D.E. Underwriter, CMS will require a detailed explanation of the appraiser’s highest and best use analysis.

(a) One-Unit Single Family Dwelling with an Accessory Dwelling Unit

When the highest and best use analysis determines the Property to be a Single Family dwelling with an ADU, the Appraiser must:

·         provide a description of the ADU characteristics;

·         summarize the ADU’s market acceptance;

·         report the Gross Living Area of the ADU separate from the primary dwelling;

·         state whether the ADU can be legally rented without restrictions; and

·         report the current ADU occupancy and the relevant details of any known lease agreements.

(b) Optional Accessory Dwelling Unit Market Rent Analysis

CMS may request an opinion of the ADU market rent in the scope of work. The Appraiser may provide the ADU market rent only if:

·         the highest and best use is determined to be a one-unit Single Family dwelling with an ADU;

·         the ADU is legally rentable without restrictions; and

·         the Appraiser determines that a non-transient (see Restriction on Investment Properties for Hotel and Transient Use) monthly market rent can be credibly developed.

The analysis of the rental data must include support for the ADU comparable rental selections, the adjustments applied, and the opinion of the ADU market rent. The Appraiser must include the ADU opinion of market rent on Fannie Mae Form 1007/Freddie Mac Form 1000, Single Family Comparable Rent Schedule, as an attachment to the appraisal and include the following supplemental statement:

“This form is completed to provide FHA an opinion of the market rent of the subject’s legally rentable Accessory Dwelling Unit (ADU). Sufficient competitive market data exists to develop credible results.”

Appraisers completing the optional ADU market rent analysis must comply with FHA’s Appraiser Competency Requirement (I.B.1.e.ii).

The Appraiser must contact the Mortgagee if unable to fulfill a request for ADU market rent analysis.

(c) Comparable Selection for Optional Accessory Dwelling Unit Market Rent Analysis

The Appraiser must include a sufficient number of comparable rents to produce a credible ADU market rent estimate. The comparables used to develop the ADU market rent must not include properties rented for hotel or transient purposes, or for periods less than 30 Days. The Appraiser must include at least one comparable rental that is a Single Family dwelling with a rented ADU. If a Single Family dwelling with a rented ADU is not available, the Appraiser must supplement with the most appropriate rental available and summarize the reason for the selection and how the marketability of the ADU was determined.