UNDERWRITING GUIDELINES - FHA
MAXIMUM MORTGAGE AMOUNT (Based on loan
program and cost area)
$78,660 or up to $155,250 in designated high-cost areas.
QUALIFICATION RATIOS
Total Housing Expense Ratio 29%.
Total Debt Expense Ratio 41%.
UNDERWRITING RATIOS BASED ON
Gross monthly income. The following income can be considered to the extend such payments
are likely to continue into the foreseeable future (minimum of 3 years): Social Security
income, alimony, public assistance payments, child support or maintenance payments.
COMPENSATING FACTORS (That can justify higher underwriting ratios; these
lists are not all-inclusive or in order of priority.)
The borrower has successfully demonstrated the ability to pay housing expenses equal to or
greater than the proposed monthly housing expense for the new mortgage. If the borrower
over the past 12-24 months has met his or her housing obligation as well as other debts,
there should be little reason to doubt the borrower's ability to continue to do so despite
having ratios in excess of those prescribed.
Large downpayment toward the purchase of the property;
Demonstrated a conservative attitude toward the use of credit and an ability to accumulate
savings;
Previous credit history shows that the borrower has the ability to devote a greater
portion of income to housing expenses;
Receives compensation or income not reflected in effective income, but directly affecting
the ability to pay the mortgage, including food stamps and similar public benefits;
Minimal increase in the borrower's housing expense;
Substantial cash reserves after closing;
Substantial non-taxable income (if no adjustment made previously in the ratio
computations);
Potential for increased earnings, as indicated by job training or education in the
borrower's profession.
Home is being purchased as the result of relocation of the primary wage-earner and the
secondary wage-earner has an established history of employment, is expected to return to
work, and there is reasonable prospects for securing employment in a similar occupation in
the new area. The underwriter must address the availability of such possible employment.
BANKRUPTCY POLICIES
Single incident acceptable if:
Bankruptcy (Chapter 7 liquidation) will not disqualify the borrower if at least two years
have passed since the bankruptcy was discharged and the borrower has re-established good
credit (or has chosen not to incur new credit obligations), and has demonstrated an
ability to manage financial affairs.
Elapsed period of less than two years (but not less than twelve months) may be acceptable
if the borrower can show that the bankruptcy was caused by extenuating circumstances
beyond his or her control and has since exhibited an ability to manage financial affairs
and the borrower's current situation is such that the events leading to the bankruptcy are
not likely to recur.
A borrower paying off debts under Chapter 13 of the Bankruptcy Act may also qualify if one
year of the pay-out period has elapsed and performance has been satisfactory, and the
borrower also receives court approval to enter into the mortgage transaction.
INVESTOR LOANS
Except in limited instances available only to state and local government agencies or
non-profit organizations.
May not have financial interest in more than 7 rental units in one subdivision or
contiguous area.
LTV ratio up to amount available to owner-occupant.
Ban on private investors does not apply to mortgages insured under Section 203(k) with a
maximum LTV ratio of 85%.
Does not apply to HUD-owned properties being sold with a maximum LTV ratio of 75% for a
1-family unit.
85% for 2- to 4-family units.
REFINANCES (A brief outline is provided here, see Handbook 4155.1 REV-4,
CHG 1, for complete requirements)
Maximum mortgage amount governed by the occupancy status of the property and proposed use
of loan proceeds, and how and when the property was purchased.
Occupancy borrower may refinance to cover existing indebtedness, refinancing costs, the
cost of repairs or alterations, and additions to the property.
If the property was acquired less than one year before the loan application and is not
already FHA-insured, 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.
Cash Back:
Occupant borrower intending to use cash proceeds for purposes unrelated to the property is
limited to 85% of value or the statutory loan limit. Investors ineligible.
Second Home:
Streamline only. Must result in lower monthly payment. No cash back permitted.
Difference between maximum allowable mortgage amount and acquisition cost.
May be a gift from relative or close friend.
Dollar-for-dollar reduction in sales price for known incentives such as trips, non-realty
items, etc., awarded as incentives to purchase.
6% of sales price allowed for payment of discount points, any type of interest, or closing
costs normally paid by the buyer.
Sales price reduced on a dollar-for-dollar basis when 6% limit is exceeded.
MINIMUM DOWNPAYMENT
Difference between maximum allowable mortgage amount and acquisition cost.
May be a gift from relative or close friend.
SELLER CONTRIBUTION LIMITS
Dollar-for-dollar reduction in sales price for known
incentives such as trips, non-realty items, etc., awarded as incentives to purchase.
6% of sales price allowed for payment of discount points, any type of interest, or closing
costs normally paid by the buyer.
Sales price reduced on a dollar-for-dollar basis when 6% limit is exceeded.
ANNUAL PAYMENT INCREASE LIMITS
Scheduled (GPMs)
Three plans increasing for 5 years at 2.5%, 5%, and 7.5% annually.
Two plans increasing for 10 years at 2% and 3% annually.
Scheduled (Buydowns)
Borrower to qualify at two percent (2%) below the note rate (but in no event to exceed the
first year rate).
Increases may not exceed one percent (1%) per year.
Buydowns permissible on level payment, fixed rate mortgages only.
Unscheduled (Capped 1-year ARMs)
1% change per year.
5% life cap.
Owner-occupants only.
Borrower eligibility based on first year scheduled payments.
Buydowns permitted.
FHA CALCULATOR
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