Product Description 4

Product Description 4

Program Codes 4

Eligible Programs: 4

Loan Purpose 4

Ineligible Programs: 4

Minimum and Maximum Loan Amounts 5

Maximum LTV and CLTV 5

Transaction Requirements 6

Age of Credit Documents 6

Mortgage Insurance 6

Automated Underwriting 6

Rapid Appreciation 6

Repair Escrow Account 10

Eligible Occupancy 10

Renovation Term 10

Eligible Repair Types 11

Contingency Reserve 11

Eligible Expenses 11

Property and Appraisal Requirements 12

Contractor/Builder Requirements 15

Recently Listed Refinance 15

Secondary Financing/ Down payment Assistance 15

Eligible Improvements 16

Ineligible Improvements 16

Disaster Areas 18

Credit and Debt to Income Requirements 18

Income Requirements 26

Asset Requirements 31

Contingent Liabilities 34

Title Requirements 34

Sales Contract 35

Allowable Borrower Paid Fees 36

Higher Priced Mortgage Loans 36

High cost –Section 32 37

Hazard Insurance Coverage Requirements 37

Escrow Netting/Transfers 38

Non-Purchasing Spouse in a Community Property State 38

Product Description

The FHA Section 203(k) insurance program enables borrowers to finance the purchase or refinance of a home and the cost of its rehabilitation through a single mortgage. PRMI requires all 203K Loan files to be processed and underwritten through the Baltimore Loan Center.

Please note: Items specifically addressed in this manual are PRMI Overlays and commonly missed practices. “Renovation Ready ®” maintains policies that must be adhered to; anything not covered below or within “Renovation Ready ®” reverts to agency guidelines.

Program Codes

The following program codes should be used in conjunction with FHA loan programs offered by PRMI:

·  203K FHA 30

·  203K FHA HB 30

·  203KS FHA 30

·  203KS FHA HB 30

4

Eligible Programs:

·  FHA 203K Full

·  FHA 203K Streamlined

·  30 Year Fixed Rate Mortgages

Loan Purpose

·  Rehabilitate existing structure completed for more than one year

·  Purchase and rehabilitate an existing structure completed for more than one year

·  Rehabilitate a structure completed for more than one year and refinance the outstanding deftness

·  Rehabilitate a dwelling after it is moved from a site to a new foundation

Ineligible Programs:

·  Mortgage Credit Certificate (MCC)

·  Energy Efficient Mortgages (EEM)

·  Texas Cash Out

·  New Construction/never occupied

·  Cash Out Refinance

·  Good Neighbor Next Door

Minimum and Maximum Loan Amounts

Minimum Loan Amount

There is no minimum loan amount requirement.

Maximum Loan Amount

Maximum loan limits are determined by geographic areas. A complete schedule of FHA mortgage limits for all areas is available at: https://entp.hud.gov/idapp/html/

Maximum LTV and CLTV

Maximum Loan-to-Value (LTV) restrictions are as follows:

Loan purchase based on amounts shown on the 203(k) Maximum Mortgage Worksheet (HUD 92700)

Rehabilitation Amount:

Standard FHA 203(k)

·  Maximum: No maximum provided the total base loan amount does not exceed HUD’s statutory maximums. Up to 100% of the loan amount may be allocated to rehabilitation

Property Type / Purchase / Rate and Term Refinance
Max LTV / Max CLTV / Max
LTV / Max
CLTV
1-4 Unit Primary / 96.50% / 96.50% / 110.00% / 110.00%

Streamlined FHA 203(k):

·  Maximum: $35,000 Minimum removed per Greg and Dean on 11/7

Mortgage Calculations

For PURCHASES, the base mortgage amount is calculated by multiplying 96.50% times the LESSER of:

·  The sum of the Sales Price plus the Total Rehabilitation Cost; OR

·  110% of After-Improved Value.

·  Total rehabilitation cost = line B14 on the Maximum Mortgage Worksheet

For REFINANCES, the base mortgage amount is calculated by the LESSER of:

·  Sum of existing liens, the total rehabilitation cost, borrower-paid closing costs, prepaids, the discount points of the prepaid costs minus any MIP refund; OR

·  The lesser of the sum of the as-is value plus total rehabilitation cost or 110% of After-improved value multiplied by the 97.75% LTV factor.

·  Total rehabilitation cost = line B14 on the Maximum Mortgage Worksheet

Note: LTV is calculated by dividing the base loan amount by line D2 on the Maximum Mortgage Worksheet, the Mortgage Insurance Premium should be calculated based on this number. In addition, the appraisal logging needs to reflect the value on line D2 as the appraised value or the loan will be insured incorrectly and will incur significant costs.

Margie verified with HOC on these details on 11.14.13

Transaction Requirements

·  All borrowers must have a valid Social Security Number (SSN)

·  All borrowers must pass LDP/GSA and CAIVRS

Age of Credit Documents

·  The credit report must be dated no more than 120 days prior to the Note date

·  Credit report must include a current mortgage rating for all mortgages including the subject when applicable

·  Title updates are required with each draw, with the exception of 203K Streamline deposit draw.

Mortgage Insurance

Refer to standard FHA product guidelines for MI requirements

Automated Underwriting

·  DU and LP are permitted and must be run under “Wells Fargo”

·  AUS approval is required, with the exception of loans manually underwritten

Rapid Appreciation

Note: For purchase contracts executed less than 90 days after the seller’s acquisition of the property refer to section below titled “Property Flipping Less Than 90 Days after Seller’s Acquisition”

Rapid Appreciation is defined as property values increasing 20% or more within the last 12 months. These loans are allowed however, the underwriter will perform a detailed review of the appraisal and the documentation (below) to validate the increase in the property value.

All transactions in which a property is purchased and resold quickly for a significant profit must be scrutinized closely for misrepresentation – which usually includes property value, property information, down payment, hidden transaction terms or borrower qualifications. Chain of title history must be reviewed and title commitment ownership compared against the seller on the purchase agreement, owner and occupant information listed on the appraisal, and the HUD-1. Parties in a trust or LLC must be identified to ensure there is an arms-length transaction between buyer and seller.

Loans identified with 20% or greater appreciation in the last 12 months reflecting an LLC or corporation as the seller must be sent to Quality Control for review; refer to the “Underwriting Policies and Procedures” Quality Control section for additional information.

With acceptable documentation, an improved property’s acceptable value can be calculated by adding the acquisition cost + improvements made X 120%. (Example: previous sale price was $100,000 + improvements made of $20,000 = $120,000 X 120% = acceptable value of $144,000.)

Documentation needed for Properties which have “rapid appreciation”:

The property value must be supported by improvements made to the property, through the following documentation:

·  Verification of improvements, which can include contracts and receipts or, at a minimum, a listing of improvements by appraiser with interior photos documenting the improvements and their estimated cost.

·  Costs must be credible based on the appraiser’s description and interior photographs.

·  Cosmetic improvement, remedial repair or clean-up expenses do not justify substantial appreciation in value.

·  Two sold comps within the last 90 days that support the value, and Two pending sales or active listings within the last 90 days that support the value, and

·  Rapid appreciation may also be supported by a second appraisal. The requirement for the need of an additional appraisal will be determined by the underwriter on a case-by-case basis. The cost of the second appraisal cannot be charged to the borrower.

Best Practices

In addition to providing the documentation above, PRMI recommend that you follow the best practices below when submitting loan files on properties with rapid appreciation:

·  Verbiage on an appraisal such as ‘below market transaction’ or ‘distressed sale’ is inadequate to substantiate rapid appreciation.

·  Thoroughly explain the factors surrounding the rapid appreciation on the dwelling and provide concise documentation to support the value. Do not rely upon a statement that the appraiser has made on the appraisal; rather, take the time to explain the situation.

·  Provide before and after photos of the property improvements

Exempt Properties:

Certain property sales are exempt from rapid appreciation review. These exemptions are:

·  Sales of properties by a Government Sponsored Enterprise (GSE) state or federally chartered financial institution, mortgage insurer, or federal state or local government agency.

·  Property sales by employers or relocation agencies related to employee relocations.

·  Sales of properties that are acquired by the sellers by inheritance.

Property Flipping Less Than 90 Days after Sellers Acquisition

FHA has granted a waiver for properties acquired by the seller within 0 to 90 days after the seller’s acquisition of the property. This waiver shall expire on December 31, 2013, unless otherwise extended or withdrawn by the Federal Housing Commissioner.

Properties with appreciation equal to or greater than 20%

The following requirements must be met:

·  Second Appraisal: A second full appraisal is required and must comply with ALL the following:

·  Ordered through a PRMI approved AMC

·  Completed by an FHA roster appraiser and performed in compliance with all FHA appraisal standards

·  The lower of the two appraised values must be used to qualify

·  All health and safety items noted in the appraisal and/or inspection must be completed within the rehabilitation process.

·  Final inspection of repairs is required

Note: The second appraisal CANNOT be charged to the borrower.

Property Inspection:

The lender must order a property inspection and provide the inspection report to the borrower before closing. The use of FHA-approved inspectors is not required. The inspector must have no interest in the property or relationship with the seller, and must not receive compensation for the inspection from any party other than the lender. Also, the inspector may not compensate anyone for the referral of the inspection. Additionally, the inspector may not receive any compensation for referring or recommending contractors to perform any repairs recommended by the inspection, and may not be involved with performing any repairs recommended by the inspection. At a minimum, the inspection must include:

·  The property structure, including the foundation, floor, ceiling, walls and roof;

·  The exterior, including siding, doors, windows, appurtenant structures such as decks and balconies, walkways and driveways;

·  The roofing, plumbing systems, electrical systems, heating and air conditioning systems; All interiors, and

·  All insulation and ventilation systems, as well as fireplaces and sold-fuel-burning appliances.

·  FHA Identity of Interest disclosure signed by all applicable parties. All transactions must be arms-length with no identity of interest between the buyer, property seller or third parties.

Specific ways to ensure an arms-length transaction include:

·  Property seller currently holds title to the property

·  LLC’s, corporations or trusts serving as property sellers must meet all applicable state and federal law.

·  No pattern or previous flipping activity exists on the property (as evidenced by multiple title transfers within 12 months.

·  The property was marketed openly and fairly (Any sales contracts with “assignment of contract of sale” may be a red flag).

·  All loans will require a Corporate Executive Review.

Exemptions to the 90-day restriction as follows:

·  Sales by HUD of REO and single family assets in revitalization areas;

·  Sales by another agency of the United States Government of REO single family properties pursuant to programs operated by these agencies;

·  Sales by nonprofit organizations approved to purchase HUD REO at a discount with resale restrictions;

·  Sales of properties that were acquired by the sellers through inheritance

·  Sales of properties purchased by an employer or relocation agency in connections with the relocation of an employee

·  Sales of properties by state and federally chartered financial institutions and any other Government Sponsored Enterprise (GSE)

·  Sales of properties by local and state government agencies; and

·  Sales of properties located in Presidentially Declared Disaster Areas, but only upon announcement by HUD through the issuance of a Mortgagee Letter

Properties with appreciation equal to or less than 19%

The following requirements must be met:

·  FHA Identity of Interest disclosure signed by all applicable parties. All transactions must be arms-length with no identity of interest between the buyer, property seller or third parties.

Specific ways to ensure an arms-length transaction include:

o  Property seller currently holds title to the property.

o  LLC’s, corporations or trusts serving as property sellers must meet all applicable state and federal law.

o  No pattern or previous flipping activity exists on the property (as evidenced by multiple title transfers within 12 months.

o  The property was marketed openly and fairly (Any sales contracts with “assignment of contract of sale” may be a red flag).

Value Examples:

Acceptable Value: Previous sales price was $100,000. Current sales price within 90 days is $119,000. Appreciation is less than 20% and this value would be acceptable.

Unacceptable Value: Previous sales price was $100,000. Current sales price within 90 days is $120,000. Appreciation is equal to 20% and this value would be unacceptable, as would any higher property value.

Please Note: The acceptable value DOES NOT include any improvements, regardless of whether or not the improvements can be validated with documentation or appraiser comments.

Repair Escrow Account

Ready Renovation handles all rehabilitation disbursements and project inspections. The amounts designated for repair and improvement, including the contingency reserve, holdback, and up to 6 months’ PITI, if applicable, are deposited into an interest-bearing repair escrow account, insured by the Federal Deposit Insurance Corporation (FDIC). Questions regarding repair escrow accounts should be directed to the Baltimore 203K Center.

Note:

Pursuant to HUD’s Mortgage Letter 1995-40, the HUD Consultant must be able to prepare the Work Write-Up and cost estimate independently of the contractor’s bid. If the bid comes in lower than the Work Write Up, the loan will be underwritten and the repair escrow account will be established using the amount as depicted within the Work Write Up. If the bid and Work Write Up share the same grand total, there is no question of the amount needed to establish the repair escrow account. If the contractor’s bid comes in higher than the Work Write Up, the HUD “Consultant will need to discuss this situation with the borrower and lender to reconcile the differences and determine if the proposed repair escrow account may be too low to complete the job. At that point, if the Consultant agrees with the higher costs, an adjusted Work Write-up with supporting documentation is required to be submitted to the lender for consideration.