Written By: Glenn Michaels, Op-Ed Writer
Over four weeks I gave everyone the FHA changes effective September 14, 2015 unless HUD delays the implementation of the changes again. These changes were originally set to take place on June 15, 2015 but HUD issued a delay to September 14, 2015.
HUD has taken away the discretionary methodology in calculating a borrower’s income for a wage earner and/or hourly wage earner. Under the new guidelines an wage earner that is earning a specific income consistently that is the borrower’s income. The underwriter must use the actual income. Borrowers being paid an hourly wage underwriters can use the income shown as long as it is being is being paid consistently. If not consistent then the income must be averaged over a twenty four month (24) month period.
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In my forty three (43) years of underwriting no one has ever defined what is a large deposit. Now the new rules state a large deposit is greater than one (1% percent of the bank balance. This takes away a lot of underwriter discretion. When reviewing a bank statement or bank book any deposit equal to or greater than one percent (1%) must be question or further reviewed. In some cases there will be more inquiries regarding the deposits.
Nontaxable income or tax free income under the present rules the income can be grossed up 25%. Now the income can be grossed up the greater of the tax bracket or 15%. In some cases this can work out better for the borrower than the old method.
Mixed use property calculations now are easier to utilize. Under the current guidelines the square feet commercial versus the square feet depended on the number of stories not the number of units, The new rules now state the property must be fifty one percent (51%) residential regardless of the number of stories. The one spot that could be problematic is the “health and safety” issues for the residents.
Low down payment calculation and the verification rules. The current rules state if a down payment is two percent (2%) or less the down payment does not have to verify if the bank balances are indicative. The new rules reduce the calculation to one percent (1% or less. More down payments must be verified than before.
FHA for years has had a Stacking Order for the files being delivered in a Case binder. Now FHA is requiring a review of the Case Binder Stacking Order and a review of the forms in the case binder. The FHA is now requiring all lenders prior to insuring their FHA case file to review it and to put the review in the case binder. The FHA does not state what penalty a lender will incur for not having the review in a case binder. Usually when a loan defaults the FHA will review a loan file and if the lender did not follow all of the rules the lender will be asked to indemnify against loss. More than likely files with case numbers issued September 14, 2015 and after if the case binder is missing this review the lender runs the risk of indemnification. I have set up a review form for my company to use on all files beginning September 14, 2015.
Underwriters and FHA lenders must be aware of these underwriting changes, or possible face indemnification.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.