Written By: Glenn Michaels, Op-Ed Writer
Over the previous three weeks I have written about the numerous changes coming to FHA with the new Single Family Handbook (SFH) 4000.1. Some changes are minimal and some are not. Some changes enhance the program.
Employment and Income Documentation: The SFH – 4000.1 makes numerous changes to this area. The changes are with the documentation, how to handle gaps in employment, frequent job changes, part – time employment, declining income of self – employed borrowers, salaried and hourly workers, bonus, overtime and commission income, alimony and child support, social security income and pensions, and 401(k)s. The most significant changes are regarding the gaps in employment, the calculation of non – taxable income and the calculation of salaried and hourly income.
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Gaps in employment: The current rule states that a borrower must explain any gaps in employment. The new Single Family Handbook is more lenient. The new handbook requires an explanation only if the employment gap is 6 months or more.
Calculating Non – taxable income: The Single Family Handbook changes the calculation from grossing up the income from 25% to 15%. The new handbook requires lenders to use the greatest of 15% or the tax rate the borrower used when filing their tax return. If the borrower did not file a tax return for the prior year then you must use 15%.
Calculating Salary and hourly income: Under the old rule the calculation of income was always the underwriters discretion. If more than one underwriter looked at the income there could easily be different calculations. The new handbook makes it very clear how to calculate salary and hourly income. Under the new handbook underwriters must use the current salary if the salary is consistently earned. If the borrower is an hourly wage earner and the hours do not vary underwriters must use the hourly income. If the hours vary then underwriters must use a 24 month average. If the hours vary and there was a pay increase during the time period underwriters must use a 12 month average.
Earnest Money and cash to close: The new handbook alters earnest money and cash to close requirements in the area areas of earnest money deposits, tax service fees, origination fees, prepaid items, reserves, checking and savings accounts, retirement accounts stocks and bonds, gifts and premium pricing.
Earnest Money Deposits: Under the current rules underwriters must document source of an earnest money deposit exceeding 2% of the sales price. The new handbook will now be 1%.
Reserves: Under the current rules gift funds including surplus gift funds. The new handbook does not include in the reserves gift funds. The new handbook defines reserves as follows: “the sum of the borrowers documented liquid assets minus the amount the borrower is required to pay at closing”.
Checking and Savings accounts: The new handbook defines what constitutes a large deposit and provides greater clarity to the treatment of checking and savings accounts. The new handbook if an account was recently opened, or there is a deposit greater than 1% of the value, the underwriter must obtain documentation of the deposits and verify that no debts were incurred to obtain part or all of the required minimum required investment. In addition is an account is jointly owned the underwriter must receive a written statement from the other parties that the borrower has full access to the funds.
Next week should be the last article regarding the FHA changes.
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.