Carrington Mortgage Services, LLC Wholesale Lending Division

CMS FAQs for FHA 4000.1 HUD Handbook Updates

This document highlights some of the most common questions that Carrington Mortgage Services (CMS) receives from brokers regarding FHA 4000.1 Updates. The responses are CMS’s interpretations of what is expected and describe what CMS will look for when reviewing loan packages from its approved brokers. This material is for informational purposes only as a service to brokers who do business with Carrington Mortgage Services, and it should not be relied upon as legal or compliance advice.

This material is for informational purposes only as a service to brokers who do business with Carrington Mortgage Services, and it should not be relied upon as legal or compliance advice. The information represents the best practices for doing business with Carrington Mortgage Services at the time of presentation, and it is subject to change without notice.

©Carrington Mortgage Services, LLC Mortgage Lending
All rights reserved. Reproduction or distribution prohibited.

Q:  Lease options for purchase.  Is the new max LTV 85% unless the owner is a relative?

A:  Yes.  If the landlord is a family member, AND the borrower has occupied the subject property for 6 months predating the contract, they are eligible for maximum financing.  If unrelated owner, it is considered an identify of interest transaction.  In that case the max LTV is 85% regardless of the length of time the borrower has lived in the property. We will also require 6 months cancelled rent checks.

Q:  Any material change in credit requires a NEW credit report to be pulled & run through Total Scorecard. Does this include debts that have been paid off recently, but show a balance on the credit report? Currently, I request a credit supplement or creditor statement to show zero balance.

A:  The credit supplement will be sufficient since TOTAL has already evaluated the debts. Although cash used to pay off debts would need to be sourced.

Q:  2106 expenses.  I currently include 2106 expenses as negative income. Jen Rocha said during training that these should be subtracted from the commissions. If the borrower has hourly earnings only (no commissions), are we still supposed to subtract from base, or keep as negative income?

A: 2106 expenses should be subtracted from the borrower’s base income if there are no commissions. Using negative “other” income creates a finding on your DU to document the “other income”, even though this is not a separate source. Since the expenses are directly related to the employment, you would want to subtract it directly from the source. It is imperative that the calculation is shown on the income calculation worksheet.

Q:  The guideline for Rate/Term Refi’s- Non Owner Occupied LTV cap at 85%.  Does this apply to streamlines also? 

A:  No – the restriction is not applicable to streamlines.  The 85% restriction is for properties that are currently owner occupied, but not for a complete 12 months and for HUD approved secondary residences (which CMS does not allow).

Q:  Is it still a manual downgrade for a tax lien?

A:  Yes – tax liens that DO NOT report on credit will always require a manual downgrade since they are not considered in the TOTAL Scorecard evaluation.   We will not need to downgrade for tax liens if they DO appear on the credit report AND are in a repayment plan for a minimum of 3 months.  Monthly payment will be included in DTI ratio.

Q:  What is the allowable variance of hours worked when using current hourly pay rate?

A:  There can’t be any variance. If the borrowers hours are consistent (the same every week) we would use the hourly rate multiplied by the number of hours worked. If the hours vary, we must use a two year average in determining the borrowers qualifying income (see page 18 of the presentation).

Q:   Does the rule about jobs having changed 3 times or more in 12 months apply when a borrower is in a union? 

A:   There is no exception in the handbook for unique situations. We would still need to document stability. Typically, evidence from the borrower’s union regarding continued membership, along with a documented history of consistent employment (with no large gaps) would be sufficient. Each situation would be addressed based on the individual merits of the loan, and strength of the documentation provided.

Q:  Charge offs for manual UW.  Is there a time limit for any still showing?  We have a lot of these – i.e. charged off in 2011 but still reports and shows balance.  Another example is it was charged off over 2 years ago and shows no balance.  Please give more clarification on how this will affect us as we see many charge offs.

A:  The handbook does not provide a time limitation on charge offs. We would follow current practice in the 2 year review period. Regardless of the balance of the charge off, we need to document extenuating circumstances if there were any charge offs in the most recent 2 years. Even if the charge off is subsequently paid by the borrower, the existence of the derog cannot be ignored.

Q:  Seller concession of 6%.  It now shows it includes origination fee – so does that mean on a borrower paid transaction that the seller concession can now pay broker fee?  (I don’t think we allow that now ) 

A:   We will check on compliance interpretation and review.  Keep this business as usual for now.  We may need to add a disclaimer regarding broker comp.

Q:  Manual UW definition of satisfactory credit.  How will that affect our LOES?  Assume we still need?  or no since some 30 days would now be considered satisfactory credit?

A:  We still want an explanation for any late payments in the last 2 years; but we would not be required to document extenuating circumstances if those late payments fall under the definition of satisfactory credit.

Q:  VOR if not buying property they are living in (so no identity of interest).  Is a private party VOR acceptable? Are cancelled checks needed?  

A:   The way the handbook reads, it appears that a VOR from private party is now acceptable to HUD.  However, CMS is electing to keep the current requirement for 12 months canceled checks for private party landlords to minimize risk.

Q:  Please clarify the effective date of 9/14/15 for guideline changes.  What exactly is that referring to?   

 A:   The effective date of the new handbook guidelines is based on case number assignment date. If the case number is assigned prior to 9/14/15, current guidelines would apply. Regardless of contract, application, closing or any other date.

Q:  Funds to close on Streamlines.  Do we only need to verify funds if funds required to close are in EXCESS of the total Mortgage Payment?

A:  This is the way the guideline is written, however we are reviewing to determine what CMS policy will be.

Q:  Documentation is now required for a charge off, besides an LOE what kind of documentation would be acceptable? For instance if the borrower was unemployed and couldn’t make his payment?

A:   The supporting documentation would depend on each individual circumstance. The documentation must support the borrower’s explanation. In the case mentioned, we could obtain evidence of the borrower’s unemployment via employment verifications (VOE), or a letter from the employer.

Q:  What is the max LTV for streamlines? Is it now @ 97.75% instead of the 125% it used to be?

A:   There is no maximum LTV for streamline refinances. The maximum mortgage calculation restricts the loan amount calculation so that it may never exceed the original principal balance. The 125% limitation was only for combined loan to value (CLTV) when secondary financing exists, and is now lifted.

Q:  If the borrower has a foreclosure on a property that had FHA Financing, is the 3 year waiting period from the date of the recorded foreclosure to the date of the new FHA CASE #?  Or is the 3 year waiting period from the date that the FHA Claim was made to the date of the new FHA CASE #?  Did this change?

A:   The new handbook no longer speaks of the waiting period from the date the claim was paid, however it does state that a borrower cannot have an active CAIVRS hit. If a claim was paid on an FHA insured mortgage, the CAIVRS hit would not fall off for three years from the date of the claim. So in essence nothing has changed, they just permit the lenders to rely on verified CAIVRs information for eligibility.

Q:  Tax liens in a current payment plan.  I understand that we cannot prepay the payment, but if the payment is due on 08/20 and they pay on 08/01 – will this be acceptable?

A:  CMS will use the case number assignment date to determine 3 months payment verification. The 3rd payment must be made prior to case number assignment AND the payment must be made for the month due. Examples:

Acceptable: Payment made 8/1 for a payment due date in August and case number assigned on or after August 2nd..

Not Acceptable:  Payment made 7/1, but wasn’t due until August and case number assigned on August 1st.

Q: Business income decline >20%.  Is this decline from the YTD P&L or is it a decline from tax returns only?

A: The Handbook states a decline “over the analysis period”, so if a P&L is required (after the first quarter of each new tax year), then it would include the P&L as well since that is included in our analysis.

Q:  Military income – Intent to re-enlist.  Do we also have to get something from the employer that states that they are eligible to re-enlist or will the statement from the borrower be sufficient?

A:  HUD only references that the borrower must “represent their intent to continue military service”. There is no additional requirement.  However, CMS is reviewing to determine what our policy will be.

Q: Paystubs where they require 30 days worth of paystubs.  If the borrower only receives 1 paystub per month, like a Teacher, will 1 paystub be acceptable?

A: Yes – this will be covered in the complete guidelines when they are published. As long as the paystub covers the complete 30 day period, one will be enough.

Q: Deposits that cannot be sourced and need to be backed out of funds.  Is it sufficient to get a letter from the borrower saying they are unable to document the deposit, and are not using it for this transaction and to remove from the funds available?   We see inconsistency among UWs for this and want to have it clarified for everyone.

A: For an FHA transaction, we must always obtain an LOE regarding large (or inconsistent) deposits.  However, if the deposits cannot be properly sourced or paper trailed, then it is acceptable for the amount to be backed out of the most recent balance.

Q:  What are the CLTV limits on rate and term refinance?

A:  The maximum CLTV for a rate and term refinance is 97.75%

Q:  Rental Income.  Are we using the vacancy factor when calculating the rental income on a recently acquired property or conversion of primary residence?

A: Yes – Vacancy factor is now 75% regardless of the HOC

Q: Subordinate Financing.  Please clarify if the borrower can have subordinate financing to exceed the Max County Loan Limit. OR is the combined Loan Amount of the 1st and 2nd not to exceed the Max County Limit?

A:  We are seeking further clarification on this point.  In the meantime we interpret this to mean that for:

  • A Purchase transaction – secondary financing from government entities only may exceed the county loan limits. However secondary financing from private individuals or organizations cannot.  The combined loan amounts would need to be under the county loan limit.
  • A Cash out Refinance – the combined mortgage amount of the first, and any secondary financing, cannot exceed the county limit
  • A Streamline refinance – is not subject to county loan limits so it would not apply.

Q:  Does FHA still require 2 month reserves PIT&I?

A: The reserve requirements have not changed for manual underwriting.  It is still 1 month PITI for 1-2 unit properties, and 3 months PITI for 3-4 units.

Q: FHA has a guideline that allowed a new FHA loan and maintain an existing FHA loan if the Borrower can show that the number of legal dependents increase to the point that the house no longer meets the family’s needs  The borrower must also pay down the outstanding FHA mortgage on the present property to 75% or less.  Is this still true with 4000.1 and can the new property be a 203k full purchase loan?

A:  This exception has remained unchanged, and is still permissible.  It would be allowable for 203K.

Q: Is there going to be an enhancement in encompass to allow us to put this information in to pull joint credit without adding the spouse to the full application?

A: Assuming you are asking about the NBS credit – There is no change to the current process for ordering credit on the NBS, we simply have to ensure that the SSN is validated. You would continue with ordering credit for a NBS as you currently do.

Q: Has FHA gone back to an aggregate of $1000? (per Mortgagee LTR 2013-24 the aggregate is $2000) or is this a CMS overlay?

A: The aggregate for disputed accounts is $1000, while the aggregate for collections is $2000. Both topics are covered in that ML.

Q: Installment debts if the payment is not shown on the credit report.  Are we using 2% (same as student loans) or 5% same as revolving?  New guidance speaks to using the loan agreement or payment statement, if it is not in file at time of initial review are we approving it subject to or suspending it?

 A: There is no calculation for a standard installment debt. An installment debt will always have a defined payment other than in student loan situations. It is rare that the credit report wouldn’t reflect a payment, but if not we’d condition for the acceptable loan agreement or recent statement. The decision to suspend should only be made if the UW determines the payment (based on the original loan amount) would impact qualification, and should be reviewed with an UW manager.

Q:  A part time job uninterrupted for the past two years.  How are we addressing seasoning employment?  Would we need to obtain a VVOE & PVOE to validate it has been uninterrupted?

A: There is no change in the process for verifying employment history. A written verification of employment would provide the necessary information to make this determination.

Q:  Has it been determined how CMS would like underwriting to document change in job no more than 3 times in previous 12mos?  VVOE & PVOE? Or are we only documenting this if we see a discrepancy with the documentation provided?

A: There is no change in the process of verifying employment. Through our standard 2 year employment verification we would be able to determine if the borrower has changed jobs more than 3 times in the most recent 12 months (or changed line of work). If so, we are required to obtain education transcripts demonstrating the borrower’s qualification for the new job, or employment documentation evidencing continual increases in income or benefits. This can be done through multiple different ways including WVOE’s, letters from previous employers, or other evidence. It is up to the underwriter to determine that the documentation provided sufficiently meets the standards to document stability of employment.

Q:  IRA/401k income.  Do we require a formal agreement, or voluntary agreement as it relates to the monthly distribution that we will be using for qualifying purposes?

A: FHA only requires a copy of the recent statement, and evidence of receipt. It is left to the discretion of the underwriter to determine if the documentation received is acceptable, or if it raises red flags which should then be addressed accordingly.

Q:  Family loan vs. privately held mortgage.  On page 17 it appears that CMS will not allow private secondary financing. Wouldn’t a family loan truly be a privately held mortgage?

A: Yes, however family member loans are specifically addressed as a separate guideline by HUD so we’d follow that guidance in those cases that are applicable.  The relationship of the note holder must be fully documented.

Q:  Is it possible to remove a borrower from a non-credit qualifying streamline without an appraisal?  The previous credit qualifying streamline without an appraisal allowed for this.

A: Yes – the circumstances under which a borrower can be removed from a Streamline have not changed, they’ve simply clarified the verbiage. Appraisals are never required on a streamline refinance.

Q:  New net tangible benefit, combined reduction.  Can it just be a reduction of MIP? Or does both the rate and the MIP need to be reduced when the term is not being reduced?

A: The reduction of payment calculation (without a reduction in term) has not changed. There still must be a reduction of the combined P&I + MIP. If the reduction in the MIP is significant enough to cover the 5% reduction requirement itself, then that would still be sufficient, but we do need to look at the combined number to make that determination.

Q: Is the $50.00 payment reduction only for the benefit of term reduction? Or also for net tangible when there is no term reduction?

A: There is no requirement for a $50 payment reduction; the requirement is that the combined P&I + MIP does not exceed the current P&I + MIP when the term is being reduced. So FHA is allowing for a small increase in the monthly combined payment (excluding T&I) by no more than $50 to allow for a reduction in term.

Q:   Rental properties that need to have a 1004, 1007, and such from an appraiser.   Is this to be a current appraisal that will be ordered by a processor in addition to the appraisal on the subject property?  Or the one done when they bought the rental properties?

A: The appraisals required for rental properties (that are recently acquired/not on tax returns), must be new appraisals however are not required to be completed by an FHA Roster Appraiser.

Q:  There was a lot of discussion about documentation for derogatory credit.  Is that just for major derogs like BK?

A: Supporting documentation is required for any derogatory item that requires extenuating circumstances be documented. That would apply to major derogs, as well as minor derogs that fall outside of the new definition of satisfactory credit that is referenced on the job aid.

Q:  How are scattered 30s and 60s handled?  Will we still be able to use simple LOX?

A: If the late payments fall within the definition of satisfactory credit, a letter of explanation will be sufficient, however if the late payments do not fit within the scope of what FHA defines as satisfactory credit, the borrower would need to document extenuating circumstances, and have supporting documentation.

Q:  If a borrower removes ex-spouse and adds a new spouse, can we streamline without credit qualification?

A: It could be possible, but is not necessarily true in every case. If the removal of the borrower meets the requirements for non-credit qualifying (divorce occurred more than 6 months ago, and the remaining borrower can demonstrate that they have made all mortgage payments during that time) then credit qualification would not be required. If the mortgage payments are being made out of a joint account with the new spouse, the borrower wouldn’t meet the criteria for removal of a borrower without credit qualification so they would need to credit qualify.

This material is for informational purposes only as a service to brokers who do business with Carrington Mortgage Services, and it should not be relied upon as legal or compliance advice. The information represents the best practices for doing business with Carrington Mortgage Services at the time of presentation, and it is subject to change without notice.

©Carrington Mortgage Services, LLC Mortgage Lending
All rights reserved. Reproduction or distribution prohibited.

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