HUD Mortgagee Letter 2014-02, issued January 21, 2014, detailed HUD’s new requirements for manually underwritten FHA loans. REMN Wholesale overlays to HUD guidelines continue to apply.
Reserve Requirements – All Manually Underwritten Loans
All manually underwritten loans, regardless of DTI, are now subject to the following reserve requirements:
- 1-2 units: A minimum of 1 month of the total monthly mortgage payment (PITI + MIP). Previously FHA did not have a reserve requirement on 1-2 unit properties.
NOTE: FHA continues to require 3-4 units to require 3 months (PITI + MIP in reserves).
The new reserve requirement for 1-2 units applies to all manually underwritten loans with a case number assigned on or after April 21, 2014 (including case numbers re-issued when previous case number expired).
Exceeding 31%/43% DTI and Required Compensating Factors
The new manual underwriting requirements regarding maximum DTI and the applicable compensating factor requirement apply as follows:
- Case numbers assigned on or after April 21, 2014 (including case numbers re-issued when previous case number expired), and
- The DTI exceeds 31%/43% (if either ratio exceeds its maximum, e.g. 34%/41%, the new guidelines apply).
These new requirements do not apply if the DTI does not exceed 31%/43% or to non-credit qualifying Streamline refinance transactions.
REMN Wholesale limits manual underwriting to the following:
- The loan received an “Approve/Eligible” Finding but requires a downgrade to manual underwriting due to additional information not considered in the DU decision that affects the overall insurability or eligibility of the loan, or
- The loan received a “Refer/Eligible” Finding from DU. The loan cannot have layered risk and must have compensating factors (applicable to loans with a DTI ≤ 31%/43%) to be eligible for a manual underwrite; eligible on an exception basis.
NOTE: The compensating factor requirements for exceeding the maximum DTI in this Bulletin do not apply to loans where the borrower’s credit score is 580-619, borrowers with insufficient credit or none of the borrowers have a credit score as the maximum DTI for both is 31%/43%. The new reserve requirements do apply to all manual underwrites regardless of DTI.
Minimum Decision Credit Score
As a reminder, when determining the minimum decision credit score for the loan and there are multiple borrowers, the lowest minimum decision credit score of all borrowers is used. The minimum decision credit score for the loan is used to determine the maximum DTI.
Eligibility to Exceed 31% / 43% DTI
The table below identifies the maximum eligible DTI as determined by the applicable compensating factor.
REMN Wholesale does not allow the DTI to exceed 31%/43% with < 620 credit score regardless of HUD guidelines
Credit Score/ Compensating Factor(s)* |
Maximum DTI |
Requirements |
620+ and No Compensating Factor |
31% / 43% |
– 1-2 units: Minimum 1 month reserves (new FHA requirement) – 3-4 units: Minimum 3 months reserves (previously required) |
620+ and One Compensating Factor |
37% / 47% |
Compensating factor must be one of the following:
– 1-2 units: Minimum 3 months additional reserves – 3-4 units: Minimum 6 months additional reserves
|
620+ and Two Compensating Factors
|
40% / 50% |
Compensating factors must be two of the following:
– 1-2 units: Minimum 3 months additional reserves – 3-4 units: Minimum 6 months additional reserves
|
620+ and No Discretionary Debt |
40% / 40% |
– 1-2 units: Minimum 1 month reserves – 3-4 units: Minimum 3 months reserves |
*Refer to page 3 for detailed compensating factor requirements
Compensating Factors
The table below details eligible compensating factors and the applicable requirements.
Eligible Compensating Factors for Manually Underwritten Loans with DTI > 31%/43% |
||
|
Compensating Factor |
Requirements |
1. | Additional Cash Reserves |
Retirement accounts (IRA, 401K, Keogh, etc.) are eligible to satisfy reserve requirements subject to:
The following are ineligible to meet reserve requirements:
|
2. | Minimal Housing Increase | Minimal housing increase defined as:
– $100, or – 5% of the current housing payment, and
– Maximum 1×30 in previous12 months – Cash-out transactions: 0x30 in previous 12 months Refer to the REMN Wholesale FHA matrix for documentation requirements |
3. | No Discretionary Debt | May be considered a compensating factor when:
Refer to the REMN Wholesale FHA matrix for documentation requirements |
4. | Additional Income (income that was not used to qualify for the loan) | The following additional income is eligible, if not used for qualification:
The borrower must be able to document receipt of the income for a minimum of 1 year but < 2 years and is likely to continue AND if the income had been used for qualifying the DTI would not be more than 37%/47%. Only eligible when used with another compensating factor when DTI exceeds 37%/47% but are not more than 40%/50%. NOTE: Income from anyone not a borrower on the loan may not be used (non-borrowing spouse, domestic partner, etc.) |
5. | Residual Income* | Eligible subject to VA residual income guidelines.
– Federal and state taxes, social security, retirement (use figures from current paystub) – Proposed housing payment (PITI + HOA, assessments, if applicable) – Fixed monthly debt/obligations, and – Expected home maintenance/utility costs (calculated at 14¢ per square foot). NOTE: Non-taxable income cannot be grossed-up to meet residual income requirements. |
* Refer to page 4 for residual income charts
VA Residual Income Requirements
Loan Amounts ≤ 79,999 |
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Family Size |
Northeast |
Midwest |
South |
West |
1 |
$390 |
$382 |
$382 |
$425 |
2 |
$654 |
$641 |
$641 |
$713 |
3 |
$788 |
$772 |
$772 |
$859 |
4 |
$888 |
$868 |
$868 |
$967 |
5 |
$921 |
$902 |
$902 |
$1,004 |
Over 5 |
Add $75.00 for each additional family member up to 7. |
Loan Amounts ≥ 80,000 |
||||
Family Size |
Northeast |
Midwest |
South |
West |
1 |
$450 |
$441 |
$441 |
$491 |
2 |
$755 |
$738 |
$738 |
$823 |
3 |
$909 |
$889 |
$889 |
$990 |
4 |
$1,025 |
$1,003 |
$1003 |
$1,117 |
5 |
$1,062 |
$1,039 |
$1,039 |
$1,158 |
Over 5 |
Add $80.00 for each additional family member up to 7 |
Geographic Regions as Identified by VA |
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Northeast | ConnecticutMaineMassachusetts | New HampshireNew JerseyNew York | PennsylvaniaRhode IslandVermont |
Midwest | IllinoisIndianaIowaKansas | MichiganMinnesotaMissouriNebraska | North DakotaOhioSouth DakotaWisconsin |
South | AlabamaArkansasDelawareDistrict of ColumbiaFlorida
Georgia |
KentuckyLouisianaMarylandMississippiNorth Carolina
Oklahoma |
Puerto RicoSouth CarolinaTennesseeTexasVirginia
West Virginia |
West | AlaskaArizonaCaliforniaColorado | HawaiiIdahoMontanaNevada | New MexicoOregonUtahWashingtonWyoming |
The FHA and FHA Streamline matrices will be updated with this information and posted on the REMN Wholesale website at www.remnwholesale.com in the near future.
If you have any questions, please contact your Account Executive.