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Manual Underwriting

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  1. Manual Underwriting

  2. Manual Underwriting • For loans receiving a Refer score from an AUS or where borrower has no credit score (required to score through AUS). • In Fiscal Year 2008 in the Philadelphia HOC 24% of endorsed purchase loans and 39% of endorsed credit-qualifying refinance loans were manually underwritten.

  3. Manual Underwriting Credit • No minimum credit score. • If credit score is below 500, a 10% down payment is required. • Past credit performance is the key to evaluating future performance.

  4. Manual Underwriting Credit Credit pattern more important than single incidents. Payment history for previous mortgage or rent most important. Explanations required for significant credit problems, late payments, recent inquiries.

  5. Manual Underwriting Chapter 7 Bankruptcy • Borrower has reestablished good credit, or chosen not to incur new credit obligations. • 2 years have passed since discharge, 1 year if bankruptcy due to circumstances beyond borrower’s control. •

  6. Manual Underwriting Chapter 13 Bankruptcy 1 year successful payments under plan. Permission of court is required.

  7. Manual Underwriting Let’s have another little quiz.

  8. Manual Underwriting • Must collections be paid off? Collections need not be paid off, but borrower must provide a written explanation for them. • How about judgments? Judgments must be repaid in full or be under an approved repayment plan. •

  9. Manual Underwriting Collections and Judgments The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments. The borrower must explain, in writing, all collections and judgments.

  10. Manual Underwriting Employment/Income • Must verify employment, income for 2 full years. Allowances for school, maternity. • Overtime, bonus can be used if documented for 2 years and likely to continue.

  11. Manual Underwriting Employment/Income Income must reasonably be expected to continue for 3 years.

  12. Manual Underwriting Self-Employment Borrower must have been successfully self-employed for at least 2 years, or Self-employed at least 1 year and self-employment is in the same field as previous employment. No credit if less than 1 year.

  13. Manual Underwriting Other Income Can Be Used As Well • Retirement. • Social Security. • Alimony, child support.

  14. Manual Underwriting Non-Taxable Income May Be “Grossed Up.” Percentage of gross-up may not exceed borrower’s actual tax rate. No additional allowances for dependents. Lender must document the percentage used. If the borrower is not required to file a tax return, use a 25% tax rate.

  15. Manual Underwriting How about another test?

  16. Manual Underwriting “Off the books” or “under the counter” income can be used… For self-employed borrowers only. Only as a compensating factor. Never.

  17. Manual Underwriting The answer is C. Never.

  18. Manual Underwriting Rental Income Income from rental properties the borrowers already owns. Income from a 2-4 unit property the borrower is purchasing and in which he/she will reside. Income from a principal residence that borrower will vacate and rent out.

  19. Manual Underwriting Income from investment properties must be documented through… A current lease or an agreement to lease. A rental history over the previous 24 months that is free of unexplained gaps greater that three months.

  20. Manual Underwriting Projected income from multi-unit property the borrower will occupy Gross income can be used after deducting the HOC's vacancy and maintenance factor (15%). It may not be used as a direct offset to the mortgage payment.

  21. Manual Underwriting Vacating and Renting A Current Residence • Concerns have arisen about borrowers seeking FHA loans to purchase a home when they already own another home. • Borrower claims that current home will be rented. Counts rent as income to qualify for new loan. • Borrower closes on new loan and abandons former property.

  22. Manual Underwriting Vacating and Renting A Current Residence FHA does not want to encourage this practice. Income from the rental of the borrower’s current principal residence may not be counted. Except for situations where…

  23. Manual Underwriting Vacating and Renting A Current Residence • Borrower is relocating to an area not within commuting distance and there is an executed lease of at least one year; or • LTV on current home does not exceed 75%.

  24. Manual Underwriting Vacating and Renting A Current Residence Philadelphia HOC vacancy factor of 15% must be applied to rental income. Determination of 75% LTV must be based on appraisal or on a comparison of principal balance to the original sales price.

  25. Manual Underwriting Just a reminder… Self Sufficiency test for 3 and 4 unit properties. Monthly PITI / Net Monthly Income < 100%. Net Monthly Income = market rent for all units (including unit occupied by borrower) less the greater of appraiser’s vacancy allowance , or HOC vacancy allowance (15%).

  26. Manual Underwriting Employment/Income Documentation • Verification of Employment (VOE) from current employer and most recent pay stub. • Or, pay stubs covering most recent 30 day period, W-2s from the previous two years, and an oral VOE.

  27. Manual Underwriting Employment/Income Documentation • To document self-employment, borrower must submit tax returns for last two years. • YTD income must be verified through profit & Loss Statements. •

  28. Manual Underwriting Qualifying Ratios • “Front” ratio = Housing payment (PITI) / monthly income. • Standard is 31%. • May be exceeded with compensating factors. •

  29. Manual Underwriting Qualifying Ratios “Back” ratio – Housing payment plus other installment debt /monthly income. Standard is 43%. May be exceeded with compensating factors.

  30. Manual Underwriting Qualifying Ratios • Where exceeded, underwriter must cite at least one compensating factor. • Compensating factors include reserves, large down payment, minimal increase and others.

  31. Manual Underwriting Reserves Reserves are not required except for … 3-4 unit properties Insufficient credit borrowers.

  32. Manual Underwriting What Is Non-Traditional Credit? • Refers to borrowers with a credit history insufficient to generate a credit score through Equifax, Experian or TransUnion. • New policy establishes two categories of non-traditional credit references, and two categories of borrowers. •

  33. Manual Underwriting Group 1 Non-Traditional Credit References • Rental housing payments. • Utility payments (gas, electric, water). • Land-line telephone. • Cable TV.

  34. Manual Underwriting What do these Group 1 references have in common? They can all be tracked to a particular property address.

  35. Manual Underwriting Group 2 Non-Traditional Credit References • Insurance (medical, auto, life, renter’s). • Child care. • Retail stores, including rent-to-own. • Internet/cell phone. • Personal loans/auto leases. • History of savings.

  36. Manual Underwriting What do these Group 2 references have in common? They track to a person, not a property.

  37. Manual Underwriting • Non-Traditional Credit Borrowers Borrowers withat least three credit references, including at least one Group 1 reference. • “Insufficient Credit” BorrowersBorrowers who lack at least one Group 1 credit reference or at least three credit references.

  38. Manual Underwriting Non-Traditional Credit Underwriting • No history of delinquency on rental payments. • No more than one 30 day delinquency on other payments. • No collection accounts/court records within last twelve months. •

  39. Manual Underwriting Insufficient Credit Underwriting • Insufficient credit borrowers must meet those standards plus... • Qualifying ratios based on occupant borrowers only, 31/43 ratios are hard and fast and two months reserves required. •

  40. Manual Underwriting Insufficient Credit Underwriting Can you think of a loan that you used to do but maybe you can’t under this policy? +

  41. Manual Underwriting Insufficient Credit Underwriting Lenders talk about FHA’s “kiddie condo” program. As an alternative to paying for a dorm or renting, parents buy a condo for their child to live in while at college. The child is the occupant borrower, and they co-sign.

  42. Manual Underwriting Insufficient Credit Underwriting Some of those deals may not work anymore. If the occupying borrower is an Insufficient Credit borrower, you can’t use the income or credit of non-occupying co-borrowers.

  43. Manual Underwriting Documentation Requirements • Non-Traditional Mortgage Credit Report (NTMCR) is preferred. • Independent verification of credit references where NTMCR not available. • Borrower-supplied references unacceptable. •

  44. Property Eligibility Most kinds of homes qualify.

  45. Property Eligibility • Property must consist of 1-4 units. • Detached, semi-detached, attached, condo are eligible. • Existing and new construction (stick-built and modular) are eligible. • Manufactured homes are eligible. • Co-ops restricted to developments where HUD insures master mortgage.

  46. Property Eligibility Question: Are mixed-use properties acceptable?

  47. Property Eligibility Yes they are. So long as the commercial space does not exceed 25% of the gross square footage.

  48. Property Eligibility Condominiums • Generally, the condo project must be pre-approved by FHA. • Lender can use “spot” loan procedure for units in non-approved projects.

  49. Property Eligibility Condominiums Effective 10/01/09, condo projects may be approved by DE lenders or FHA. Spot loan process terminated effective 10/01/09. ML 09-19.

  50. Property Eligibility Condominiums Direct Endorsement Lender Review and Approval Process (DELRAP). First 5 approvals under DELRAP must be submitted to applicable HOC for review. HUD Review and Approval Process (HRAP). Condo projects consisting of manufactured homes must go through HRAP.