4155.1 REV-5

1-1 WHAT FHA INSURES.................................................................................................................. 6

1-2 PRINCIPAL RESIDENCES........................................................................................................... 6

1-3 SECONDARY RESIDENCES....................................................................................................... 7

1-4 INVESTMENT PROPERTIES ...................................................................................................... 8

1-5 NONPROFIT ORGANIZATIONS AND STATE AND LOCAL GOVERNMENT AGENCIES.. 8

1-6 MAXIMUM MORTGAGE AMOUNT........................................................................................ 10

1-7 MAXIMUM MORTGAGES/CASH INVESTMENT REQUIREMENTS FOR PURCHASE

TRANSACTIONS................................................................................................................................... 11

1-8 TRANSACTIONS THAT AFFECT MAXIMUM MORTGAGE CALCULATIONS................. 14

1-9 SETTLEMENT REQUIREMENTS............................................................................................. 17

1-10 REFINANCING...................................................................................................................... 19

1-11 MORTGAGE AMOUNTS ON REFINANCES ....................................................................... 20

1-12 STREAMLINE REFINANCES................................................................................................ 21

1-13 SECONDARY FINANCING................................................................................................... 26

2-1 OVERVIEW................................................................................................................................ 29

2-2 MORTGAGE ELIGIBILITY (BORROWERS) ........................................................................... 30

2-3 ANALYZING THE BORROWER’S CREDIT ............................................................................ 32

2-4 CREDIT REPORT REQUIREMENTS........................................................................................ 34

2-5 ELIGIBILITY FOR FEDERALLY-RELATED CREDIT............................................................ 36

2-6 STABILITY OF INCOME........................................................................................................... 38

2-7 SALARIES, WAGES, AND OTHER FORMS OF EFFECTIVE INCOME ................................ 38

2-8 EMPLOYMENT BY FAMILY-OWNED BUSINESSES............................................................ 43

2-9 SELF-EMPLOYED BORROWERS ............................................................................................ 43

2-10 FUNDS TO CLOSE.................................................................................................................. 46

2-11 TYPES OF LIABILITIES ........................................................................................................ 51

2-12 DEBT-TO-INCOME RATIOS................................................................................................. 53

2-13 COMPENSATING FACTORS ................................................................................................ 53

2-16 CONDOMINIUM UNITS–UTILITY EXPENSES.................................................................. 56

2-17 CONSTRUCTION–PERMANENT MORTGAGE PROGRAM ............................................. 56

2-19 ENERGY-EFFICIENT HOMES (EEH)................................................................................... 59

2-20 ENERGY EFFICIENT MORTGAGE (EEM) PROGRAM...................................................... 60

3-1 APPLICATION PACKAGE ........................................................................................................ 63

3-2 DOCUMENTATION STANDARDS .......................................................................................... 65

3-3 REAL ESTATE CERTIFICATION............................................................................................. 65

3-4 AMENDATORY CLAUSE ......................................................................................................... 66

SECTION 2: PROCESSING REQUIREMENTS..................................................................................... 66

3-5 POWER OF ATTORNEY............................................................................................................ 66

3-6 LOAN APPLICATION DOCUMENT PROCESSING................................................................ 67

3-7 SEVEN-UNIT LIMITATION ...................................................................................................... 68

3-8 HOTEL AND TRANSIENT USE ................................................................................................ 68

3-9 SALES CONTRACTS AND LOAN CLOSING .......................................................................... 68

3-10 LENDER RESPONSIBILITY AT CLOSING.......................................................................... 68

3-11 FEDERAL STATUTES AND REGULATIONS...................................................................... 69

3-12 FHA-INSURED MORTGAGES FOR HUD EMPLOYEES.................................................... 72

4-1 GENERAL .................................................................................................................................. 72

4-2 RESTRICTIONS OF THE HUD REFORM ACT OF 1989.......................................................... 72

4-3 RELEASE FROM LIABILITY.................................................................................................... 72

4-4 CREDITWORTHINESS REVIEW PROCESSING..................................................................... 73

4-5 LTV REDUCTION REQUIREMENTS....................................................................................... 73

APPENDIX I ........................................................................................................................................... 74

APPENDIX II.......................................................................................................................................... 75

FOREWORD

This Handbook describes the basic mortgage credit underwriting requirements for

single-family (one to four units) mortgage loans insured under the National Housing

Act. For each loan FHA insures, the lender must establish that the borrower has the

ability and willingness to repay the mortgage debt. This decision must be predicated

on sound underwriting principles consistent with the guidelines, rules, and

regulations described throughout this Handbook and must be supported by sufficient

documentation.

These underwriting guidelines discuss the types of transactions and properties

eligible for mortgage insurance, and FHA's requirements for determining the

borrower's ability and willingness to repay the debt. Information regarding valuation

4155.1 REV-5

and architectural requirements can be found in HUD Handbooks 4150.1 REV-1 and

4145.1 REV-2,

CHG-1, respectively. These underwriting guidelines apply to mortgages insured

under Sections 203(b) and 234(c) of the National Housing Act, and are also generally

applicable to other single-family mortgage insurance programs (except where

inconsistent with special features of those programs). Other single-family mortgage

insurance programs are described in HUD Handbook 4000.2 REV-2.

This Handbook provides direction to lenders and FHA staff and is based on FHA 's

experience in insuring single-family mortgages. While it is not FHA's intent to insure

mortgages that are likely to result in default, regardless of the borrower's equity,

lenders may exercise some discretion in the underwriting of home mortgages where

the borrower's financial and other circumstances are not specifically addressed by

this Handbook. However, lenders are expected to exercise both sound judgment and

due diligence in the underwriting of loans to be insured by FHA. For ease of reading,

we have chosen to use “lender” in lieu of “mortgagee” throughout this user guide.

However, “lender” is to be interpreted as a FHA-approved mortgagee as described in

24 CFR § 202.10. Similarly, “loan” is to be interpreted as “mortgage” as also

described in 24 CFR § 202.10

Questions not addressed in the text should be directed to the appropriate Home

Ownership Center (HOC) or the Director, Office of Single Family Program

Development, HUD Headquarters, Robert Weaver Building, 451 Seventh St., SW,

Washington, DC 20410-8000.

References:

1) 4000.2 REV-2 Mortgagees' Handbook, Application through Insurance

2) 4145.1 REV-2, CHG-1, Architectural Processing and Inspections

3) 4150.1 REV-1 Valuation Analysis for Home Mortgage Insurance

4) 4330.1 REV-5 Administration of Insured Home Mortgages

5) Code of Federal Regulations, Title 24 (24 CFR). Codifies the general and

permanent rules of the Department.

TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION

1-1 WHAT FHA INSURES 1-1

SECTION 1: OCCUPANCY STATUS

1-2 PRINCIPAL RESIDENCES 1-1

1-3 SECONDARY RESIDENCES 1-1

1-4 INVESTMENT PROPERTIES 1-1

1-5 NONPROFIT ORGANIZATIONS AND GOVERNMENT AGENCIES

1-1

SECTION 2: MAXIMUM MORTGAGE AMOUNTS

1-6 MAXIMUM MORTGAGE AMOUNT 1-1

1-7 MAXIMUM MORTGAGES FOR PURCHASE TRANSACTIONS 1-1

1-8 TRANSACTIONS THAT AFFECT MAXIMUM MORTGAGE CALCULATIONS

1-1

SECTION 3: SETTLEMENT REQUIREMENTS

1-9 SETTLEMENT REQUIREMENTS 1-1

SECTION 4: REFINANCE TRANSACTIONS

1-10 REFINANCING 1-1

1-11 CALCULATING THE MORTGAGE AMOUNT ON REFINANCES

1-1

1-12 STREAMLINE REFINANCES 1-1

SECTION 5: SECONDARY FINANCING

1-13 SECONDARY FINANCING 1-1

CHAPTER 2 MORTGAGE CREDIT ANALYSIS

2-1 OVERVIEW 2-1

2-2 MORTGAGE ELIGIBILITY (BORROWERS) 2-1

2-3 ANALYZING THE BORROWER’S CREDIT 2-1

2-4 CREDIT REPORT REQUIREMENTS 2-1

2-5 CREDIT ELIGIBILITY REQUIREMENTS 2-1

SECTION 2: EFFECTIVE INCOME

2-6 STABILITY OF INCOME 2-1

2-7 SALARIES, WAGES, AND OTHER FORMS OF INCOME 2-1

2-8 EMPLOYMENT BY FAMILY-OWNED BUSINESS 2-1

2-9 SELF-EMPLOYED BORROWERS 2-1

SECTION 3: BORROWER’S CASH INVESTMENT IN THE PROPERTY

2-10 FUNDS TO CLOSE 2-1

SECTION 4: TYPES OF LIABILITIES

2-11 LIABILITIES 2-1

SECTION 5: BORROWER QUALIFYING

2-12 DEBT TO INCOME RATIOS 2-1

2-13 COMPENSATING FACTORS 2-1

SECTION 6: SPECIAL UNDERWRITING INSTRUCTIONS

2-14 TEMPORARY INTEREST RATE BUYDOWNS 2-1

2-15 ADJUSTABLE RATE MORTGAGES 2-1

2-16 CONDOMINIUM UNITS: UTILITY EXPENSES 2-1

2-17 CONSTRUCTION- PERMANENT MORTGAGE PROGRAM 2-1

2-18 MORTGAGE ASSISTANCE FOR DISASTER VICTIMS [Section 203(h)]

2-1

2-19 ENERGY EFFICIENT HOMES (EEH) 2-1

2-20 ENERGY EFFICIENT MORTGAGE (EEM) PROGRAM 2-1

CHAPTER 3 DOCUMENTATION AND OTHER PROCESSING REQUIREMENTS

SECTION 1: UNDERWRITING DOCUMENTATION

3-1 APPLICATION PACKAGE 3-1

3-2 DOCUMENTATION STANDARDS 3-1

4155.1 REV-5

3-3 REAL ESTATE CERTIFICATION 3-1

3-4 AMENDATORY CLAUSE 3-1

SECTION 2: PROCESSING REQUIREMENTS

3-5 POWER OF ATTORNEY 3-1

3-6 LOAN APPLICATION DOCUMENT PROCESSING 3-1

3-7 SEVEN-UNIT DOCUMENTATION 3-1

3-8 HOTEL AND TRANSIENT USE 3-1

3-9 SALES CONTRACT AND LOAN CLOSING 3-1

3-10 LENDER RESPONSIBILITY AT CLOSING 3-1

SECTION 3: FAIR HOUSING AND OTHER FEDERAL REQUIREMENTS

3-11 FEDERAL STATUTES AND REGULATIONS 3-1

3-12 FHA-PROCESSED HUD EMPLOYEE LOANS 3-1

CHAPTER 4 ASSUMPTIONS

4-1 GENERAL 4-1

4-2 RESTRICTIONS OF THE HUD REFORM ACT OF 1989 4-1

4-3 RELEASE FROM LIABILITY 4-1

4-4 CREDIT-WORTHINESS REVIEW PROCESSING 4-1

4-5 LTV REDUCTION REQUIREMENTS 4-1

APPENDICES

I. SINGLE FAMILY HOC JURISDICTIONS

II. CLOSING COSTS AVERAGES FOR STATES FORMS RELEVANT TO

HANDBOOK 4155.1

Form # Form Name

OMB Approval

Number

HUD 92564-VC Valuation Condition-Notice to Lender 2502-0538

HUD 92564-HS Homebuyers Summary 2502-0538

HUD 92900-A Addendum to URLA 2502-0059

URLA (FNMA 1003

/ FHLMC 65)

Uniform Residential Loan Application N/A

HUD 92900-PUR

Mortgage Credit Analysis Worksheet

Purchase Money Mortgage

2502-0059

HUD 92900-WS Mortgage Credit Analysis Worksheet 2502-0059

HUD-1 Settlement Statement 2502-0265

GFE Good Faith Estimate

HUD 92300 Mortgagee Assurance of Completion 2502-0189

URAR (FNMA 1004

/ FHLMC 70)

Uniform Residential Appraisal Report N/A

HUD 92800.5B

Conditional Commitment-DE Statement of

Appraised Value

2502-0494

VA-CRV VA-Certificate of Reasonable Value 2900-0045

HUD 92210

Request for Credit Approval of Substitute

Mortgagor

2502-0036

HUD 92210.1 Approval of Purchaser and Release of Seller 2502-0036

HUD 92561

Borrower’s Contract with Respect to Hotel

and Transient Use of Property

2502-0059

consist of detached or semi-detached dwellings, townhouses or row houses, and

individual units within FHA-approved condominium projects. Except as otherwise

stated in this Handbook, FHA's single-family programs are limited to owner-occupied

principal residences only. FHA will not insure mortgages on commercial enterprises,

boarding houses, hotels and motels, tourist houses, private clubs, bed and breakfast

establishments, and fraternity or sorority houses.

will be occupied by the borrower for the majority of the calendar year. At least one

borrower must occupy the property and sign the security instrument and the

mortgage note for the property to be considered owner-occupied. Our security

instruments require a borrower to establish bona fide occupancy in the home as the

borrower's principal residence within 60 days after signing the security instrument

with continued occupancy for at least one year.

To prevent circumvention of the restrictions on FHA-insured mortgages to investors,

we 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

mortgage insurance except under the situations described below. Properties

previously acquired as investment properties are not subject to these restrictions.

We will not insure a mortgage if we conclude that the transaction was designed to

use FHA mortgage insurance as a vehicle for obtaining investment properties, even if

the property to be encumbered will be the only one owned using FHA mortgage

insurance. We do not object to homebuyers using FHA mortgage insurance more

than once if compatible with the homebuyer’s needs and resources as follows:

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 FHAinsured

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 property’s

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.

4155.1 REV-5

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 FHA-insured mortgage. Acceptable situations include instances of divorce,

after which the vacating ex-spouse will purchase a new home, or one of the coborrowers

will vacate the existing property.

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. (See paragraph 1-8 B for

additional information).

Under no circumstances may investors use the exceptions described above to

circumvent FHA’s 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 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.

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. HOC

jurisdictions are listed in Appendix I. 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:

1. 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.

Written evidence from local real estate professionals who verify a lack of acceptable

rental housing in the area.

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 not meeting the criteria described in paragraph 1-5 A, 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. See paragraph 1-12 for additional

qualifying information.

C. Underwriting Considerations:

Individual investors who credit qualify may assume mortgages made on investment

properties. This applies to the transactions described in paragraphs 1-4 A and B, as

well as to investment properties purchased before the 1989 ban on investors that

have been subsequently streamline refinanced.

Qualifying ratios, the treatment of projected rental income, etc., are described in

Chapter 2, paragraph 2-7 M.

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).

agencies are permitted to purchase properties with FHA-insured mortgages, subject

to the conditions listed below. These government and nonprofit organizations are

eligible for the same percentage of financing available on owner-occupied principal

residences. Nonprofit agencies may only obtain FHA-insured fixed rate mortgages,

and only an existing FHA-insured mortgage is eligible for refinancing and may never

result in equity withdrawal.

A. Nonprofit Organizations. Nonprofit organizations that intend to sell or lease

the property to low- or moderate-income individuals (generally defined as income

not exceeding 115 percent of the applicable median income) may obtain FHA-insured

financing on rental property. The appropriate HOC is responsible for determining the

nonprofit agency's eligibility to participate in FHA programs; the DE lender is

responsible for determining the agency’s financial capacity for repayment. Lenders

also must verify that the agency is approved as a participating nonprofit agency as of

the date of underwriting. Lenders can verify nonprofit approval status by visiting the

4155.1 REV-5

B. Nonprofit Approval. In order to qualify to purchase properties with FHAinsured

mortgages and to obtain the same percentage of financing available to

owner-occupants, HUD must approve the nonprofit agency. The nonprofit must:

1. Be of the type described in Section 501(c)(3) as exempt from taxation under

Section 501(a) of the Internal Revenue Code of 1986; and

Have a voluntary board, and no part of the net earnings of the organization or funds

from the transaction may benefit any board member, founder, contributor, or

individual.

Have two years’ experience as a provider of housing for low- and moderate- income

persons.

A nonprofit agency not meeting the above requirements, including religious and

charitable organizations, may only purchase properties backed by FHA mortgage

insurance under the conditions described for other investors in paragraph 1-4A.

Detailed instructions on qualifying nonprofit organizations as mortgagors, including

documentation requirements, are contained in Mortgagee Letter 2002-01. Questions

concerning a nonprofit agency’s approval should be directed to the appropriate HOC.

C. State and Local Government Agencies. State and local government agencies

involved in the provision of housing may obtain FHA-insured financing provided the

agency meets the criteria described below. Loan applications from these entities

may be processed under the DE program without prior approval from the appropriate

HOC.

The agency must provide evidence from its legal counsel that the agency has the

legal authority and capacity to become the borrower, that the state or local

government is not in bankruptcy, and that there is no legal prohibition that would

prevent the lender from obtaining a deficiency judgment (if permitted by state law

for other types of borrowers) on FHA's behalf in the event of foreclosure or deed-inlieu

of foreclosure. Credit reports, financial statements, bank statements,

CAIVRS/LDP/GSA checks are not required.

mortgage is the lesser of: (1) the statutory loan limit for the area (typically a county

or metropolitan statistical area (MSA)) or (2) the applicable loan-to-value (LTV) limit.

Most FHA mortgages require payment of an upfront mortgage insurance premium

(UFMIP). The statutory loan amount and loan-to-value limits described in this

Handbook do not include the UFMIP. All descriptions of maximum insurable

mortgages throughout this Handbook, unless otherwise stated, exclude UFMIP.

A. Statutory Loan Amount Limits. The statutory loan amount limits vary by

program and the number of family units within the dwelling, and apply to both

purchases and refinances. For most programs, they may be increased when housing

costs for the area support higher limits. The National Housing Act specifies the

maximum loan amount for each program.

In high-cost areas, the maximum 203(b) mortgage amount (for a one-unit property)

can be increased by the appropriate HOC to 95 percent of the median one-family

house price in the area or 87 percent of the Federal Home Loan Mortgage

Corporation (Freddie Mac) limit, whichever is less. Higher limits are available in

Hawaii, Alaska, Guam, and Virgin Islands but must be justified by local house prices.

The current FHA standard and high-cost area mortgage limits can be accessed from

the lender Web page on HUD’s Web site at www.hud.gov or on FHA Connection at

the new mortgage limits.

The standard area-wide mortgage limits and the maximum high-cost limits are

indexed to the Freddie Mac conforming loan limit. Therefore, as the conventional

conforming loan limits increase, the FHA loan limits also increase.

B. Loan-to-Value Limitations.

The mortgage insurance program, whether the loan is for the purchase of a property

or for the refinance of an existing debt, the age of the property, and several

additional criteria (as per paragraph 1-8) are used to determine the maximum LTV

percentage available to the borrower. This LTV percentage is then applied to the

lesser of the sales price or the appraised value, as described in paragraph 1-7.

4155.1 REV-5

required adjustments as described in A-C below, or the appraised value, if less, is

multiplied by a loan-to-value ratio. The resulting amount is the maximum mortgage

that FHA will insure. The borrower must make a cash investment at least equal to

the difference between the sales price and the resulting maximum mortgage

amount.

Except for certain property and transaction types as described in 1-8 below, the

lower of the adjusted sales price or the appraised value is multiplied by the factor

shown in the chart below. The resulting amount is the maximum loan that FHA will

insure provided that the mortgagor has made a cash investment of at least three

percent 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.

The maximum LTV limits shown below are functions of the property’s appraised

value or the adjusted sales price (whichever is less) and the State in which the

property is located. (A list of states and their closing costs averages may be found in

Appendix II.) The maximum LTVs for most purchase transactions are as follows:

Maximum Loan-to-Value Percentages

(Purchase Transactions Only on Proposed and Existing Construction)

States with Average Closings Costs At or Below 2.1 Percent of Sales Price

98.75 percent: For properties with values/sales prices equal to or less than $50,000.

97.65 percent: For properties with values/sales prices in excess of $50,000 up to

$125,000

97.15 percent: For properties with values/sales prices in excess of $125,000.

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.

Our 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; see paragraph 1-9 A for additional information including a description

of closing costs eligible for meeting the minimum cash investment requirement.

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, we are 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 six percent of the property's sales price toward the buyer's actual closing costs,

prepaid expenses, discount points, and other financing concessions. Contributions

exceeding six percent 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. Closing

costs normally paid by the borrower are considered contributions if paid by the

seller. Inducements to purchase are described in paragraph B, below.

The six percent 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. The dollar limit for seller

contributions is calculated by using Attachment A on the HUD-92900-PUR/HUD-

92900WS. Each dollar exceeding FHA's six percent limit must be subtracted from

the property's sales price before applying the appropriate LTV ratio.

B. Inducements to Purchase. Certain expenses (beyond those described above)

paid on behalf of the borrower, as well as other inducements to purchase, result in a

dollar-for-dollar reduction to the sales price before applying the appropriate LTV

ratio. These inducements include decorating allowances, repair allowances, moving

costs, and other costs as determined by the appropriate HOC. We also require

dollar-for-dollar reductions to the sales price for excess rent credit (see 2-10 N), as

well as for gift funds not meeting the requirements stated in Chapter 2.

Personal property items such as cars, boats, riding lawn mowers, furniture,

televisions, etc., given by the seller to consummate the sale result in a reduction to

the mortgage. The value of the item(s) must be deducted from the sales price and

the appraised value of the property (if not already done so by the appraiser) before

applying the LTV ratio. However, certain items, depending upon local custom or law,

may be considered as part of the real estate transaction with no adjustment to the

sales price or appraised value necessary. These items include ranges, refrigerators,

dishwashers, washers, dryers, carpeting, window treatments, and other items as

determined by the jurisdictional HOC. That office determines if these items affect

value and are considered customary. Replacement of existing equipment or other

realty items by the seller before closing, such as carpeting or air conditioners, does

not require a value adjustment provided no cash allowance is given to the borrower.

In addition, if the seller or builder of the property agrees to pay any portion of the

borrower's sales commission on the sale of the borrower’s present residence, the

amount paid by the seller or builder is an inducement to purchase and must be

subtracted dollar for dollar from the sales price before the LTV ratio is applied.

Similarly, a borrower not paying real estate commission on the sale of a present

4155.1 REV-5

home constitutes a sales concession, if the real estate broker or agent is involved in

both transactions and the seller of the property purchased by the borrower pays a

real estate commission exceeding that typical for the area. In these situations, the

amount paid by the seller above the normal real estate commission is considered an

inducement to purchase and must be subtracted from the sales price of the property

being purchased before applying the LTV ratio.

C. Additions to the Mortgage Amount. In some cases, the maximum mortgage

amount may be increased. Except for solar energy systems discussed below, an

increase generally is permitted only when the appraised value exceeds the sales

price. Only the amount by which the value exceeds the sales price may be added;

any remaining costs become part of the borrower's settlement requirements. The

following may result in an increase to the mortgage amount:

1. Repairs and Improvements. Repairs and improvements required by the

appraiser as essential for property eligibility and to be paid by the borrower may be

added to the sales price before calculating the mortgage amount. (The appraised

value will reflect these requirements.) For the cost of repairs and improvements to

be eligible for inclusion in the mortgage amount, the sales contract or addendum

must identify the borrower as responsible for paying for or otherwise completing the

repairs or improvements.

The amount that may be added to the sales price before calculating the maximum

mortgage amount is the lowest of:

a. The amount the value of the property exceeds the sales price; or

b. The appraiser's estimate of repairs and improvements; or

c. The amount of the contractor's bid, if available.

Only repairs and improvements required by the appraiser may be included. Any

repairs completed by the borrower on the property before the appraisal is made are

not eligible for inclusion in calculating the maximum mortgage. The amount that

cannot be financed into the mortgage will become part of the borrower's required

cash investment.

If repairs cannot be completed before loan closing due to weather-related delays, the

lender must establish an escrow account to ensure eventual completion of all

required repairs. See HUD Handbook 4145.1 REV-2 for details.

2. Energy-Related Weatherization Items. If weatherization items are to be

added to the property and paid for by the borrower, the mortgage amount may be

increased by the cost of those items as described below. Weatherization items

include thermostats, insulation, storm windows and doors, weather stripping and

caulking, etc. These items may be added to both the sales price and the appraised

value before determining the maximum mortgage amount. (A contractor's

statement of cost of work completed or a buyer's estimate of the cost of materials

must be submitted. See HUD Handbook 4150.1 REV-1 for details.) If the

weatherization items cannot be completed before loan closing due to weather-related

delays, the lender must establish an escrow account to ensure eventual completion

of all items. See HUD Handbook 4145.1 REV-2 for details.

The amount that may be added in calculating the maximum mortgage is:

$2000 without a separate value determination; or

Up to $3500 if supported by a value determination by an approved or FHA roster

appraiser or DE underwriter; or

c. More than $3500 subject to a value determination by an approved or FHA

roster appraiser or DE underwriter and a separate on-site inspection made by a FHAapproved

fee inspector or DE staff appraiser.

3. Solar Energy Systems. The cost of solar energy systems may be added

directly to the mortgage amount (before adding the UFMIP) after applying the LTV

ratio limits. The statutory mortgage limit for the area also may be exceeded by 20

percent to accommodate the cost of the system.

The amount that may be added to the mortgage is limited to the lesser of the solar

energy system's replacement cost or its effect on the property's market value. Both

active and passive solar systems are acceptable, as are wind-driven systems. See

HUD Handbooks 4150.1 REV-1 and 4930.2 for details.

1-8 TRANSACTIONS THAT AFFECT MAXIMUM MORTGAGE CALCULATIONS.

and the calculation of the maximum mortgage. These transactions include identityof-

interest, properties with non-occupying co-borrowers, three- and four-unit

properties, properties for which a house will be constructed by the borrower on his or

her own land or as a general contractor, payoffs of land contracts, and transactions

involving properties under construction or less than a year old. Unless otherwise

stated in this Handbook, the mortgage calculation procedures described in paragraph

1-6 also apply.

A. Identity-of-Interest Transactions. Identity-of-interest transactions on

principal residences are restricted to a maximum LTV ratio of 85 percent. Identityof-

interest is defined as a sales transaction between parties with family relationships

or business relationships. However, maximum financing above 85 percent LTV is

permissible under the following circumstances:

1. A family member purchases another family member's home as a principal

residence.

If a property is sold from one family member to another and is the seller's

investment property, the maximum mortgage is the lesser of either:

a. 85 percent of the appraised value, or

b. The appropriate LTV ratio percentage applied to the sales price, plus or minus

required adjustments.

The 85 percent limit may be waived if the family member has been a tenant in the

property for at least six months immediately predating the sales contract. A lease or

other written evidence must be submitted to verify occupancy.

2. An employee of a builder purchases one of the builder's new homes or models

as a principal residence.

3. A current tenant purchases the property that he or she has rented for at least

six months immediately predating the sales contract. (A lease or other written

evidence must be submitted to verify occupancy.)

4155.1 REV-5

4. A corporation transfers an employee to another location, purchases that

employee’s home, and then sells the home to another employee.

B. Non-Occupying Borrowers. When there are two or more borrowers, but one

or more will not occupy the property as a principal residence, the maximum

mortgage is limited to a 75 percent LTV. However, maximum financing, as described

in paragraph 1-7, is available for borrowers related by blood, marriage or law

(spouses, parent-child, siblings, stepchildren, aunts-uncles/nieces-nephews, etc.), or

for unrelated individuals that can document evidence of a family-type, longstanding,

and substantial relationship not arising out of the loan transaction. All borrowers,

regardless of occupancy status, must sign the security instrument and mortgage

note. If a parent is selling to a child, the parent cannot be the co-borrower with the

child on the new mortgage unless the loan-to-value is 75 percent or less.

To reduce risk exposure, mortgages with non-occupying co-borrowers are limited to

one-unit properties if the LTV will exceed 75 percent. While we do not object to

legitimate transactions in which non-occupant borrowers assist in the financing of the

property–such as when parents help their children buy a first home–this

arrangement may not be used by non-occupant borrowers to develop a portfolio of

rental properties. The degree of financial contribution by the non-occupant

borrower, and the number of properties similarly owned, may indicate that an

investor loan has become the practical reality and that, in effect, family members are

acting as "strawbuyers." FHA does not impose additional underwriting criteria on

such transactions, such as specific qualifying ratios the occupying-borrower must

meet individually. Lenders must judge each transaction on its merits.

C. Three- and Four-Unit Properties. Regardless of occupancy status, the

property must be self-sufficient (i.e., the maximum mortgage is limited so that the

ratio of the monthly mortgage payment, divided by the monthly net rental income,

does not exceed 100 percent). The mortgage calculations described below are in

addition to the calculations detailed in paragraphs 1-6 and 1-7.

1. The monthly payment is the principal, interest, taxes, and insurance (PITI),

including mortgage insurance, plus any homeowners' association dues, computed at

the note rate (no consideration for buydowns may be given).

2. Net rental income is the appraiser’s estimate of fair market rent from all

units, including the unit chosen by the borrower for occupancy, less the appraiser’s

estimate for vacancies or the vacancy factor used by the jurisdictional HOC,

whichever is greater.

This calculation is used only to determine the maximum loan amount. Borrowers

must still qualify for the mortgage based on income, credit, cash to close, and the

projected rents received from the remaining units. The projected rent may only be

considered as gross income for qualifying purposes; it may not be used to offset the

monthly mortgage payment.

3. The borrower must have reserves equivalent to three months' PITI after

closing on purchase transactions. Reserves cannot be derived from a gift.

D. Building on Own Land. If the borrower acts as a general contractor, and

builds a house on land that the borrower already owns, or acquires land separately,

maximum financing is available if the borrower receives no cash from the settlement.

The appropriate LTV limits are applied to the lesser of:

1. The appraised value; or

2. The documented acquisition cost of the property, which includes: (a) the

builder's price, or the sum of all subcontractor bids, materials, etc.; (b) cost of the

land (if the land has been owned more than six months or was received as an

acceptable gift, the value of the land may be used instead of its cost); (c) interest

and other costs associated with any construction loan obtained by the borrower to

fund construction of the property; (d) the closing costs to be paid by the borrower;

and (e) reasonable discount points.

Equity in the land (value or cost, as appropriate, minus the amount owed) may be

used for the borrower's entire cash investment. However, if the borrower receives

more than $250 cash at closing, the loan is limited to 85 percent of the sum of the

appraised value and allowable closing costs. Replenishment of the borrower's own

cash expended during construction is not considered as "cash back," provided the

borrower can substantiate with cancelled checks and paid receipts all out-of-pocket

funds used for construction.

E. Paying Off Land Contracts. If the borrower will use the loan to complete

payment on a land contract, contract for deed, or other similar type financing

arrangement in which the borrower does not have title to the property, the new

mortgage may be processed as either a purchase or a refinance transaction with

maximum FHA-insured financing if the borrower receives no cash at closing. If all

loan proceeds are used to pay the outstanding balance on the land contract and

eligible repairs, renovations, etc., the appropriate LTV ratio is applied to the lesser

of:

The appraised value; or

2. The total cost to acquire the property (the original purchase price, plus any

documented costs the purchaser incurs for rehabilitation, repairs, renovation, or

weatherization), plus allowable closing costs and, if treated as a refinance,

reasonable discount points.

Equity in the property (original sales price minus the amount owed) may be used for

the borrower's entire cash investment. However, if the borrower receives more than

$250 cash at closing, the loan is limited to 85 percent of the sum of the appraised

value and allowable closing costs. Replenishment of the borrower's own cash

expended for repairs, improvements, renovation, etc., is not considered as "cash

back," provided the borrower can substantiate with cancelled checks and paid

receipts all out-of-pocket funds spent for those purposes.

F. Properties Under Construction or Existing Construction Less than One Year

Old

Properties not meeting the criteria shown below are considered as under construction

or existing construction-less than one year old and are limited to 90 percent

financing, i.e., 90 percent of the lesser of the appraiser’s estimate of value or sales

price, plus or minus the adjustments required by paragraph 1-7, A-C. For a property

to be eligible for greater than 90 percent financing, whether or not it has been

previously occupied, it must meet one of the criteria described below. Otherwise,

4155.1 REV-5

the property is classified as "under construction" or "less than one year old" and is

limited to 90 percent financing.

Construction was completed more than one year preceding the borrower's signature

on the Addendum to Uniform Residential Loan Application (form HUD-92900-A, page

2); or

The dwelling's site plans and materials were approved by the Department of

Veterans Affairs (VA), an eligible DE underwriter, or a builder under FHA's builder

certification procedures, (see HUD Handbook 4145.1 REV-2) before construction

began; or

The local jurisdiction has issued both a building permit (prior to construction) and a

Certificate of Occupancy or equivalent. (NOTE: This paragraph does not apply to

condominiums or manufactured housing because of the special circumstances

regarding their approval.); or

The dwelling is covered by a builder's ten-year insured warranty plan that is

acceptable to HUD; or

The dwelling will be moved to a new location and the property is eligible for an

insured mortgage at the new location by one of the methods described in 2 above.

must estimate the settlement requirements to determine the cash required to close

the mortgage transaction. In addition to the minimum cash investment described in

paragraph 1-7, additional borrower expenses, including those described in A-I below,

must be included in the total amount of cash the borrower must provide at mortgage

settlement. The difference between the amount of the FHA-insured mortgage,

excluding any UFMIP, and the total cost to acquire the property, including these

expenses, determines the cash needed for closing a loan eligible for FHA mortgage

insurance.

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 thirdparty

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 floodzone

determination fees, water tests, and other costs as determined by the

appropriate HOC.

B. 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.

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.

C. 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.

D. 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.

E. 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.

F. 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.

G. 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

borrower’s total cash requirements.

H. 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 percent 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.

I. 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.)

J. 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 downpayment.

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

4155.1 REV-5

ndicating 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.

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.

May not be used for payment of debts, collection accounts, escrow shortages or

missed mortgage payments, or judgments.

K. 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.

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.

The following must be considered when processing a refinance transaction:

A. Maximum Percentage of Financing: The maximum percentage of financing is

governed by the occupancy status of the property, the use of the loan proceeds, and

how and when the property was purchased. FHA will insure several different types of

refinance transactions including streamline refinances of existing FHA-insured

mortgages made with and without appraisals, "no cash-out" refinances of

conventional and FHA-insured mortgages where all proceeds are used to pay existing

liens and costs associated with the transaction, and "cash-out" refinances.

Maximum Term. The maximum term of any refinance with an appraisal is 30 years.

A streamline refinance (see Section 1-12) without an appraisal is limited to the

remaining term of the existing mortgage plus 12 years (not to exceed 30 years).

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.

Refinance Authorization. A lender must obtain a Refinance Authorization Number

from the FHA Connection or functional equivalent for all FHA-to-FHA refinances.

“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 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.

A. "No Cash-Out" Refinances with Appraisals (Credit Qualifying). The maximum

mortgage is the lower of the loan-to-value or the existing debt calculation described

below, and may never exceed the statutory limit except by the amount of any new

upfront MIP:

1. LTV Ratio Applied to Appraised Value: Multiply the appraised value of the

property by the appropriate factor, as shown in the chart below, for the property’s

value and the state where it is located. (A list of states and their closing costs

averages may be found in Appendix II.) Any appraisal requirements, including

repairs, must be complied with before the mortgage is eligible for insurance

endorsement.

Maximum Loan-to-Value Percentages

States with Average Closings Costs At or Below 2.1 Percent of Sales Price

98.75 percent: For properties with appraised values equal to or less than $50,000.

97.65 percent: For properties with appraised values in excess of $50,000 up to

$125,000

97.15 percent: For properties with appraised values in excess of $125,000.

States with Average Closings Costs Above 2.1 Percent of Sales Price

98.75 percent: For properties with appraised values equal to or less than $50,000.

97.75 percent: For properties with appraised values in excess of $50,000.

Existing Debt. Add together the amount of the existing first lien, any purchase

money second mortgage, any junior liens over 12 months old, closing costs, prepaid

expenses, borrower paid repairs required by the appraisal, discount points, and other

fees as determined acceptable by the appropriate HOC and then subtract any refund

of UFMIP. (If any portion of the funds of an equity line of credit in excess of $1000

was advanced within the past twelve months and was for purposes other than

repairs and rehabilitation of the property, the line of credit is not eligible for inclusion

in the new mortgage.)

The amount of the existing first mortgage may include the interest charged by the

servicing lender when the payoff will not likely be received on the first day of the

month (as is typically assessed on FHA-insured mortgages). The amount also may

include any prepayment penalties assessed on a conventional mortgage or FHA Title

I loan. The amount of the existing first mortgage may not include delinquent

interest, late charges, or escrow shortages. Prepaid expenses may include the per

diem interest to the end of the month on the new loan, hazard insurance premium

deposits, mortgage insurance premium, and any real estate tax deposits needed to

establish the escrow account.

4155.1 REV-5

Subordinate liens, including credit lines, regardless of when taken, may remain

outstanding, provided the FHA-insured mortgage meets our eligibility criteria for

mortgages with secondary financing as described in Section 5 of this chapter.

If the purpose of the new loan is to refinance an existing mortgage to buy out an exspouse's

or other co-borrower's equity, the specified equity to be paid is considered

property-related indebtedness and is eligible for inclusion in calculating the new

mortgage. The divorce decree, settlement agreement, or other bona fide equity

agreement must be provided to document the equity awarded to the ex-spouse or

co-borrower.

If the property was acquired less than one year before the loan application and is not

already FHA-insured, in addition to the calculations described above, the original

sales price of the property also must be considered in determining the maximum

mortgage. With conclusive documentation, expenditures for repairs and

rehabilitation incurred after the purchase of the property may be added to the

original sales price in calculating the mortgage amount.

B. "Cash-Out" Refinances. “Cash-out” refinances are only permitted on owneroccupied

principal residences and are limited to a combined LTV (FHA-insured first

and any subordinate liens) of 85 percent of the appraised value, provided the

property has been owned by the borrower for at least one year. If the property was

purchased less than one year preceding the loan application, the mortgage amount

must be calculated using the lesser of the appraised value or the original sales price

of the property multiplied by 85 percent. Properties owned free and clear may be

refinanced as cash-out transactions.

“Cash-out” refinances for debt consolidation represent considerable risk, especially if

the borrowers have not had an attendant increase in income. Such transactions

must be carefully evaluated.

lower the monthly principal and interest payments on a current FHA-insured

mortgage and must involve no cash back to the borrower, except for minor

adjustments at closing not to exceed $250. Streamline refinances can be made with

or without an appraisal. On streamline refinances with an appraisal, Form HUD

92564-VC is required, but the Homebuyer Summary is not required. FHA does not

require repairs to be completed (except for lead-based paint repairs) on streamline

refinances with appraisals; however, the lender may require completion of repairs as

a condition of the loan.

HUD's Credit Alert Interactive Voice Response System (CAIVRS) need not be

checked, but HUD’s Limited Denial of Participation (LDP) and General Services

Administration (GSA) exclusion lists are still required checks for all borrowers. 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.

Lenders may use an abbreviated version of the Uniform Residential Loan Application

(URLA) that omits sections IV, V, VI, and a-k of VIII, provided all other required

information is captured. Furthermore, while the lender must assure itself that it is in

compliance with Equal Credit Opportunity Act (ECOA) and all other regulations, the

loan application need not be signed by the borrower(s) until loan closing.

Streamline refinance processing and underwriting instructions are described below.

The mortgage amount limits may never exceed the statutory limits except by the

amount of any new upfront MIP.

A. 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.

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. The new security instruments will

contain FHA's standard provision permitting acceleration of the mortgage upon

assumption by an investor or as a secondary residence; however, FHA does not

intend to authorize the lender to exercise the acceleration provision if the investor

assumptor is found to be creditworthy.

Although a property purchased as a principal residence, under certain circumstances

as described in the security instruments, may be rented, a streamline refinance

without an appraisal does not "convert" the mortgage to one eligible for assumption

by an investor.

B. Streamline Refinance WITH an Appraisal (No Credit Qualifying). The

maximum insurable mortgage is the lower of the appropriate loan-to-value ratio

applied to the appraiser’s estimate of value or the sum of the existing indebtedness

and related closing costs and prepaid expenses for the refinance; both are described

below.

1. LTV Ratio Applied to Appraised Value: Multiply the appraised value of the

property by the appropriate factor as shown in the chart below for the property’s

value and the State where it the property is located. (A list of states and their

closing costs averages may be found in Appendix II.)

Maximum Loan-to-Value Percentages

4155.1 REV-5

States with Average Closings Costs At or Below 2.1 Percent of Sales Price

98.75 percent: For properties with appraised values equal to or less than $50,000.

97.65 percent: For properties with appraised values in excess of $50,000 up to

$125,000

97.15 percent: For properties with appraised values in excess of $125,000.

States with Average Closings Costs Above 2.1 Percent of Sales Price

98.75 percent: For properties with appraised values equal to or less than $50,000.

97.75 percent: For properties with appraised values in excess of $50,000.

2. 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) as described below. 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.

C. "Credit-Qualifying" Streamline Refinances. “Credit-qualifying” streamline

refinances contain all the normal features of a streamline refinance, but provide a

level of assurance of continued performance on the mortgage. The lender must

provide evidence that the remaining borrowers have an acceptable credit history and

ability to make payments.

The following must be considered when processing a credit-qualifying transaction:

1. Mortgage Amount. The maximum loan amount is the same as in A (without

appraisal) or B (with appraisal) above, as appropriate.

2. Credit Documentation/Qualifying. The lender must provide a verification of

income, a credit report, compute the debt-to-income ratios and determine that the

borrower will continue to make mortgage payments.

3. Purposes. Credit-qualifying streamline refinances may be used for the

following:

a. When a change in the mortgage term will result in an increase in the

mortgage payment. (This is only permitted for owner-occupied principal residences,

secondary residences meeting the requirements of paragraph 1-3, and those

investment properties purchased by governmental agencies and eligible nonprofit

organizations described in paragraph 1-5.)

b. When deletion of a borrower or borrowers will trigger the due-on-sale clause.

c. Following an assumption of a mortgage that does not contain restrictions

(e.g., due-on-sale clause) limiting assumptions only to creditworthy borrowers and

the assumption occurred less than six months previously.

d. Following an assumption of a mortgage in which the transferability restriction

(i.e., due-on-sale clause) was not triggered, such as in a property transfer resulting

from a divorce decree or by devise or descent and the assumption occurred less than

six months previously.

D. Additional Information on Streamline Refinances.

1. Appraisal, Termite Inspection, and Credit Report Fees. We do not require an

appraisal, termite inspection, or credit report on streamline refinances (except credit

qualifying streamline refinances). However, the associated fees may be paid by the

borrower out-of-pocket (i.e., not financed) if law, banking regulations, or its

secondary market investors require the lender to obtain these services on a

streamline refinance made without a FHA appraisal.

2. Cash-to-Close. Borrowers are not required to provide evidence of cash-toclose.

.

3. Withdrawn Condominium Approvals. If approval of a condominium project

has been withdrawn, FHA will insure only streamline refinances without appraisals for

that condominium project.

4. Underwriting. Mortgage credit underwriting is not required except for credit

qualifying streamline refinance. The loan application and form HUD 92900-WS must

be submitted; however, the sections regarding income, assets, and debts and

obligations need not be completed (unless the borrowers are credit qualified).

5. Shortening the Term of Mortgage. A mortgage on a principal residence may

be refinanced to a shorter-term mortgage, provided the new monthly principal and

interest payment increases no more than $50. (The $50 latitude is not available for

mortgages on investment properties or secondary residences, unless the borrower

qualifies under the provisions described in paragraphs 1-3 and 1-4.) Since

streamline refinances are designed to reduce the borrower's principal and interest

payments on a current FHA-insured mortgage, that portion of the borrower's

payment for escrowed items need not be considered.

6. Delinquent Mortgages. Delinquent mortgages are not eligible for streamline

refinancing 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

borrower's mortgage to bring the payments current provided no obligation is placed

on the borrower to repay the funds used to bring the mortgage current.

7. "No-Cost" Refinances. “No-cost” refinances, in which the lender charges a

premium interest rate to defray the borrower's closing costs and/or prepaid items,

are permitted. The lender may also offer an interest-free advance of amounts equal

to the present escrow balances on the existing mortgage to establish a new escrow

account.

8. Holding Period before Eligibility. A borrower who assumed or took title

subject to an FHA-insured mortgage, without being credit qualified and with the

previous mortgagors receiving a release of liability, must have owned the property

for at least six months before being eligible for the streamline refinance program

without credit qualifying. This rule applies to mortgages that do not contain

4155.1 REV-5

restrictions limiting the assumption only to creditworthy assumptors. Typically those

mortgages were made prior to December 1989.

9. Adding or Deleting Individuals on Title. Individuals may be added to the title

on a streamline refinance without credit worthiness review and without triggering

due-on-sale clauses. Individuals can be deleted from the title on a streamline

refinance only under the circumstances described in paragraph 1-12 C, above or:

When an assumption of a mortgage not containing a due-on-sale clause occurred

more than six months previously and the assumptor can document that he or she

has made the mortgage payments during this interim period; or

b. Following an assumption of a mortgage in which the transferability restriction

(due-on-sale clause) was not triggered, such as in a property transfer resulting from

a divorce decree or by devise or descent, and the assumption or quit-claim of

interest occurred more than six months previously and the remaining owneroccupant

can demonstrate that he or she has made the mortgage payments during

this time.

10. Seven-Unit Exemptions. An eligible investor that has a financial interest in

more than seven rental units, as described in 24 CFR 203.42, may only refinance

without appraisals.

11. Subordinate Financing. Subordinate financing may remain in place,

regardless of the total indebtedness against the property on streamline refinances,

with or without appraisals. The borrower is not required to satisfy any outstanding

subordinate liens, as long as they will clearly be subordinate to the new FHA-insured

refinance mortgage.

12. Proceeding as if No Appraisal was Completed. If the appraised value is such

that the borrower would be better advised to proceed as if no appraisal had been

made, the appraisal may be ignored and not used. A notation of this decision must

be made in the "remarks" section of form HUD-92900-WS.

13. Geographic Areas. Lenders may solicit and process streamline refinances

applications from any area of the country, provided the lender is approved for DE by

at least one HOC.

14. ARM to ARM. An ARM may be refinanced to another ARM, provided that an

immediate payment reduction occurs and that the maximum interest rate of the new

mortgage does not exceed the maximum interest rate of the old mortgage being

refinanced. These refinances may be transacted with or without an appraisal.

15. ARM to Fixed Rate. An ARM may be refinanced to a fixed rate mortgage, with

or without an appraisal, provided the interest rate on the new fixed-rate mortgage

will be no greater than 2 percentage points above the current rate of the ARM. In

addition, 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. If the new

fixed rate mortgage will be at a rate lower than the existing rate of the ARM thus

reducing the homeowner’s monthly mortgage payment, the “within the month due,”

(i.e., not more than 30 days late), rule is not applicable.

Fixed-Rate to ARM. Fixed-rate mortgages may be refinanced to a one-year ARM,

with or without an appraisal, provided the interest rate of the new mortgage is at

least 2 percentage points below the interest rate of the current mortgage.

An ARM may be used for refinancing only on principal residences.

17. Graduated Payment Mortgages (GPM) to Fixed-Rate. Section 245 GPMs may

be refinanced, with or without an appraisal, to a fixed-rate mortgage provided the

new mortgage payment will not exceed the current mortgage payment. (If the

streamline refinance is completed without an appraisal, the new mortgage amount

may exceed the statutory limit by the accrued negative amortization and the new

UFMIP.)

18. GPM to ARM. A GPM may be refinanced to an ARM, provided the note rate

results in a reduction to the current principal and interest payments. (If the

streamline refinance is completed without an appraisal, the new mortgage amount

may exceed the statutory limit by the accrued negative amortization and the new

UFMIP.)

19. Section 203(k) to Section 203(b). Section 203(k) Rehabilitation mortgages

may be refinanced into a Section 203(b) mortgage after all work is complete. The

rehabilitation work is considered complete by a fully executed certificate of

completion, the rehabilitation escrow account has been closed with a final release,

and the lender has entered the required close out information into the FHA

Connection or its functional equivalent. The new mortgage will be subject to the

appropriate insurance premium applicable to a new Section 203(b) mortgage.

20. Section 235 to Section 203(b). Lenders may refinance Section 235

mortgages to Section 203(b) mortgages using the streamline underwriting

procedures described in paragraph 1-12. Any overpaid subsidy that has been paid

by the lender to HUD and is part of the borrowers' mortgage account can be included

in the Section 203(b) mortgage amount, provided the mortgage amount does not

exceed the maximum mortgage permitted under paragraphs 1-12 A or 1-12 B as

appropriate.

Furthermore, if HUD has a junior lien that was part of the original Section 235

financing, HUD will subordinate the junior lien to the Section 203(b) mortgage that

refinances the Section 235 mortgage.

Any financing (other than the FHA-insured first mortgage) that creates a lien against

the property is considered secondary financing and not a gift, even if it is a “soft” or

“silent” second (i.e., has no monthly repayment provisions) or has other features

forgiving the debt.

Documentation from the provider of the secondary financing must show the amount

of funds provided to the borrower in each transaction and copies of the loan

instruments are to be included in the endorsement binder. Costs incurred for

participating in a down payment assistance secondary financing program may only

be included in the amount of the second lien. FHA reserves the right to reject any

4155.1 REV-5

secondary financing that does not serve the needs of the intended borrower or where

it believes the costs to the participants outweigh the benefits derived by the

homebuyer. Permissible secondary financing arrangements include:

A. Government Agencies. Federal, state, and local government agencies, as well

as nonprofit agencies considered instrumentalities of government (see B, below),

may provide secondary financing for the borrower's entire cash investment. The

second lien itself must be made or held by the eligible governmental body or

instrumentality. Neither governmental units nor their established nonprofit

instrumentalities may use “agents,” including other nonprofits or for-profit

enterprises to make the second lien regardless of the source of those funds. In other

words, even if the funds used for the secondary financing were derived from an

acceptable source such as HUD HOME funds or from a unit of government or the

eligible nonprofit instrumentality, the subordinate lien must be in the name of the

eligible entity, i.e., the state, county, city or eligible nonprofit instrumentality must

be the lien holder. This authority cannot be delegated to another party that is not

itself permitted to provide this level of secondary financing. These other entities,

however, may be used to service the subordinate lien if regularly scheduled

payments are to be made by the mortgagor. Loans secured by secondary mortgages

are subject to the conditions described below.

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. The required monthly payment under both the insured mortgage and the

second mortgage or lien, plus other housing expenses and all recurring charges,

cannot exceed the borrower's reasonable ability to pay.

3. The source, amount, and repayment terms must be disclosed in the mortgage

application, and the borrower must acknowledge that he or she understands and

agrees to the terms.

Nonprofit Agencies. Nonprofit agencies that meet the criteria described in paragraph

1-5 B and are considered instrumentalities of government may provide secondary

financing under the terms outlined in A, above. The appropriate HOC is responsible

for approving the nonprofit agency, as well as determining if it can be considered an

instrumentality of government. To obtain this status the nonprofit must be an entity

“established by a governmental body or with governmental approval or under special

law to serve a particular public purpose or designated by law (statute or court

opinion).” FHA also requires that the unit of government that established the

nonprofit also must either exercise organizational control, operational control, or

financial control of the nonprofit in its entirety or, at minimum, the specific

homebuyer assistance program that is using FHA’s credit enhancement. The HOCs

review applications from nonprofits that purport to be instrumentalities of

government and make approval decisions based on information submitted by the

nonprofit.

Nonprofit agencies not considered instrumentalities of government that otherwise

meet the criteria described in paragraph 1-5 B may provide secondary financing

under the same conditions as described in A, above, provided the borrower makes a

cash investment of at least 3 percent of the acquisition cost and the combined

amount of the first and second mortgages do not exceed the statutory loan limit for

the area where the property is located. The jurisdictional HOC is responsible for

approving the nonprofit agency.

C. Other Organizations and Private Individuals. Other organizations and private

individuals may provide secondary financing under the following conditions:

1. The combined amount of the first and second mortgages do not exceed the

applicable LTV ratio and the maximum mortgage limit for the area.

2. The repayment terms of the second mortgage must not provide for a balloon

payment before ten years (or other such term acceptable to FHA), unless the

property is sold or refinanced, and must permit prepayment by the borrower, without

penalty, after giving the lender 30 days advance notice.

3. The required monthly payment under both the insured mortgage and the

second mortgage or lien, plus other housing expenses and all recurring charges,

cannot exceed the borrower's reasonable ability to pay. Any periodic payments due

on the second mortgage are due monthly and are essentially the same in dollar

amount.

D. Borrowers 60 Years of Age or Older. Borrowers 60 years of age or older may

borrow the required cash investment for purchasing a principal residence, provided:

1. The donor or lender is a relative of the borrower, a close friend with clearly

defined interest in the borrower, the borrower's employer, or an institution

established for humanitarian or welfare purposes.

2. The donor or lender’s interest is not solely in the sale of the property, such as

a builder or seller, or any person or organization associated with builders or sellers.

3. The principal amount of the insured mortgage loan, plus the note or other

evidence of indebtedness in connection with the property, may not exceed 100

percent of the value, plus prepaid expenses.

4. The note or other evidence of indebtedness may not bear an interest rate

exceeding the interest rate of the insured mortgage.

E. Family Member Lending. Family members (defined below) may help with the

costs of acquiring a home in the form of a gift or a loan. All such gifts must also

meet the requirements of paragraph 2-10(C). FHA permits family member to lend

on a secured or unsecured basis, up to 100 percent of the homebuyer's required

cash investment. This lending may include the downpayment, closing costs, prepaid

expenses and discount points. If the money lent by the family member is secured

against the subject property, whether borrowed from an acceptable source or from

the family member's own savings, only the family member provider(s) may be the

note holder. FHA will not approve any form of securitization of the note that results

4155.1 REV-5

in any entity other than the family member being the note holder, whether at loan

settlement or at any time during the mortgage life cycle.

Further, if the funds that are lent by the family member are borrowed from an

acceptable source, the homebuyer may not be a co-obligor on that note (e.g., the

son and daughter-in-law may not be co-obligors on the note used to secure money

borrowed by the parents that in turn was lent for the down payment).

The following financing terms and conditions also apply:

1. The maximum insurable mortgage is not affected by gifts or loans from family

members.

2. The combined amount of financing may not exceed 100 percent of the lesser

of the property's value or sales price, plus normal closing costs, prepaid expenses,

and discount points. While the family member may lend 100 percent of the cash

investment requirements, cash back to the homebuyer (beyond refund of any

earnest money deposit) at closing is not acceptable.

3. If periodic payments of the secondary financing are required, the combined

payments may not exceed the borrower's reasonable ability to pay. The secondary

financing payments are to be included in the total debt-payment-to-income ratio

(i.e., the "back-end" ratio) for qualifying purposes.

4. The second lien may not provide for a balloon payment within five years from

the date of execution.

5. If the family member providing the secondary financing borrows those funds,

the source may not be any entity with an identity-of-interest in the sale of the

property, including the seller, builder, loan officer, real estate agent, etc. Mortgage

companies that have retail banking affiliates may have that entity make a loan to the

family member, providing the secondary financing for the home purchase. However,

the lending institution may not make such financing available under terms and

conditions more favorable than to other borrowers (i.e., there may not be any

special considerations provided in connection between making the mortgage and

lending funds to family members to be used as secondary financing for the purchase

of the home).

6. An executed copy of the document outlining the terms of the secondary

financing must be maintained in the lender’s file. An executed copy of this

agreement also must be provided in the endorsement binder.

For the purposes of this paragraph, a “family member” is defined as a child, parent,

or grandparent of the borrower or borrower’s spouse. Included in this definition are

legally adopted sons or daughters (and a child who is a member of an individual's

household, if placed with such individual by an authorized agency for legal adoption

by that individual), and foster children. The term "child" means a son, stepson,

daughter, or stepdaughter.

borrower’s ability and willingness to repay the mortgage debt, thus limiting the

probability of default and collection difficulties, and to examine the property offered

as security for the loan to determine if it is sufficient collateral. The “Four C’s of

Credit” (Credit history, Capacity to repay, Cash to close, and the Collateral) are

evaluated during the underwriting process.

This chapter on mortgage credit analysis describes procedures for evaluating the

credit history, the borrower’s capacity to make payments, and whether sufficient

cash assets are available to close the mortgage. It provides the requirements on the

types of income that may be considered in qualifying the borrower, the liabilities that

must be included in the determining creditworthiness, and the debt-to-income ratios

and compensating factors used in the underwriting process. These underwriting

instructions are FHA’s “base-line” credit policies. For those lenders using FHAapproved

automated underwriting systems (AUS) or those employing FHA’s TOTAL

mortgage scorecard, there will be a considerable number of revisions to these

policies, including documentation requirements, as described in other FHA issuances.

insure mortgages made to individuals only. Under the conditions described in

Chapter 1, we will also insure mortgages made to state and local government

agencies and approved nonprofit organizations.

A. Borrowers, Co-Borrowers and Co-Signers. Borrowers and Co-borrowers take

title to the property and are obligated on the mortgage note and must also sign the

security instrument. The co-borrower’s income, assets, liabilities, and credit history

are considered in determining creditworthiness.

Co-signers do not hold ownership interest in a property, but are liable for repaying

the obligation and must sign all documents with the exception of the security

instruments. The co-signer's income, assets, liabilities, and credit history are

considered in determining creditworthiness for the mortgage and the co-signer must

complete and sign the loan application.

We do not permit an individual to take an ownership interest in the property at

settlement without signing the mortgage note and all security instruments.

The following conditions also apply to co-borrower and co-signer eligibility:

1. A co-borrower or a co-signer may not be a party that has a financial interest

in the transaction, such as the seller, builder, real estate agent, etc. Exceptions may

be granted if the seller and co-borrower/co-signer is related to the owner by blood,

marriage or law.

2. An individual signing the loan application must not be otherwise ineligible for

participation. (See paragraph 2-5).

3. Unless otherwise exempted (e.g., military service with overseas assignments,

U.S. citizens living abroad), any non-occupying co-borrowers or co-signers must

have a principal residence in the United States.

All references to co-borrowers – including the 75 percent LTV limits (paragraph 1-

8(B)), etc. – apply equally to co-signers (except co-signers do not take title to the

property or sign the security instruments).

4155.1 REV-5

B. Citizenship and Immigration Status. Citizenship of the United States is not

required for eligibility. When a mortgage loan applicant indicates on the loan

application that he or she holds something other than U.S. citizenship, the lender

must determine residency status from the documentation provided by the borrower.

Lawful Permanent Resident Aliens: For those borrowers with lawful permanent

resident alien status, FHA will insure the mortgage under the same terms and

conditions as U.S. citizens. The lender must document the mortgage file with

evidence of permanent residency and indicate on the Uniform Residential Loan

Application (URLA) that the borrower is a lawful permanent resident alien. Evidence

of lawful permanent residency is issued by the Bureau of Citizenship and

Immigration Services (BCIS) (formerly the Immigration and Naturalization Service)

within the Department of Homeland Security.

Non-Permanent Resident Aliens: FHA will also insure a mortgage made to a nonpermanent

resident alien provided that the property will be the borrower's principal

residence, the borrower has a valid SSN, and the borrower is eligible to work in the

U.S. as evidenced by an Employment Authorization Document (EAD) issued by BCIS.

If the authorization for temporary residency status will expire within one year and a

prior history of residency status renewals exists, the lender may assume continuation

will be granted. If there are no prior renewals, the lender must determine the

likelihood of renewal, based on information from the BCIS.

Although social security cards may indicate work status, such as “not valid for work

purposes,” an individual’s work status may change without the change being

reflected on the actual social security card. Therefore, the social security card is not

to be used as evidence of work status for non-permanent resident aliens; the BCIS

employment authorization document is to be used instead.

Non-U.S. Citizens with no lawful residency in the U.S. are not eligible for FHA-insured

mortgages.

C. Borrower's Age. There is no maximum age limit for a borrower. The

minimum age is the age at which the mortgage note can be enforced legally in the

state or other jurisdiction in which the property is located.

D. Non-Purchasing Spouses. If required by state law in order to perfect a valid

and enforceable first lien, the non-purchasing spouse may be required to sign either

the security instrument or documentation evidencing that he or she is relinquishing

all rights to the property. If the non-purchasing spouse executes the security

instrument for such reasons, he or she is not considered a borrower for our purposes

and need not sign the loan application. In all other cases, the non-purchasing