Download 203k select - Primary Residential Mortgage

2013
203K SELECT
UNDERWRITING GUIDELINES
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PRIMARY RESIDENTIAL MORTAGE
11.18.13
Product Description ..................................................................................................................... 4
Program Codes ............................................................................................................................ 4
Eligible Programs: ........................................................................................................................ 4
Loan Purpose ............................................................................................................................... 4
Ineligible Programs: ..................................................................................................................... 4
Minimum and Maximum Loan Amounts..................................................................................... 5
Maximum LTV and CLTV .............................................................................................................. 5
Transaction Requirements .......................................................................................................... 6
Age of Credit Documents ............................................................................................................ 6
Mortgage Insurance .................................................................................................................... 6
Automated Underwriting ............................................................................................................ 6
Rapid Appreciation ...................................................................................................................... 6
Repair Escrow Account .............................................................................................................. 10
Eligible Occupancy ..................................................................................................................... 10
Renovation Term ....................................................................................................................... 10
Eligible Repair Types .................................................................................................................. 11
Contingency Reserve ................................................................................................................. 11
Eligible Expenses........................................................................................................................ 11
Property and Appraisal Requirements ...................................................................................... 12
Contractor/Builder Requirements............................................................................................. 15
Recently Listed Refinance.......................................................................................................... 15
Secondary Financing/ Down payment Assistance..................................................................... 15
Eligible Improvements ............................................................................................................... 16
Ineligible Improvements............................................................................................................ 16
Disaster Areas ............................................................................................................................ 18
Credit and Debt to Income Requirements ................................................................................ 18
Income Requirements ............................................................................................................... 26
Asset Requirements .................................................................................................................. 31
Contingent Liabilities ................................................................................................................. 34
Title Requirements .................................................................................................................... 34
Sales Contract ............................................................................................................................ 35
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Allowable Borrower Paid Fees................................................................................................... 36
Higher Priced Mortgage Loans .................................................................................................. 36
High cost –Section 32 ................................................................................................................ 37
Hazard Insurance Coverage Requirements ............................................................................... 37
Escrow Netting/Transfers .......................................................................................................... 38
Non-Purchasing Spouse in a Community Property State .......................................................... 38
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Product Description
The FHA Section 203(k) insurance program enables borrowers to finance the purchase or refinance
of a home and the cost of its rehabilitation through a single mortgage. PRMI requires all 203K Loan
files to be processed and underwritten through the Baltimore Loan Center.
Please note: Items specifically addressed in this manual are PRMI Overlays and commonly missed
practices. “Renovation Ready ®” maintains policies that must be adhered to; anything not covered
below or within “Renovation Ready ®” reverts to agency guidelines.
Program Codes
The following program codes should be used in conjunction with FHA loan programs offered by
PRMI:
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203K FHA 30
203K FHA HB 30
203KS FHA 30
203KS FHA HB 30
Eligible Programs:
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FHA 203K Full
FHA 203K Streamlined
30 Year Fixed Rate Mortgages
Loan Purpose
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Rehabilitate existing structure completed for more than one year
Purchase and rehabilitate an existing structure completed for more than one year
Rehabilitate a structure completed for more than one year and refinance the outstanding deftness
Rehabilitate a dwelling after it is moved from a site to a new foundation
Ineligible Programs:
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Mortgage Credit Certificate (MCC)
Energy Efficient Mortgages (EEM)
Texas Cash Out
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New Construction/never occupied
Cash Out Refinance
Good Neighbor Next Door
Minimum and Maximum Loan Amounts
Minimum Loan Amount
There is no minimum loan amount requirement.
Maximum Loan Amount
Maximum loan limits are determined by geographic areas. A complete schedule of FHA mortgage limits for all
areas is available at: https://entp.hud.gov/idapp/html/
Maximum LTV and CLTV
Maximum Loan-to-Value (LTV) restrictions are as follows:
Loan purchase based on amounts shown on the 203(k) Maximum Mortgage Worksheet (HUD 92700)
Rehabilitation Amount:
Standard FHA 203(k)
 Maximum: No maximum provided the total base loan amount does not exceed HUD’s statutory
maximums. Up to 100% of the loan amount may be allocated to rehabilitation
Property Type
Purchase
Max LTV
1-4 Unit Primary
Rate and Term Refinance
Max
Max
LTV
CLTV
110.00%
110.00%
Max CLTV
96.50%
96.50%
Streamlined FHA 203(k):
 Maximum: $35,000
Mortgage Calculations
For PURCHASES, the base mortgage amount is calculated by multiplying 96.50% times the LESSER of:
 The sum of the Sales Price plus the Total Rehabilitation Cost; OR
 110% of After-Improved Value.
 Total rehabilitation cost = line B14 on the Maximum Mortgage Worksheet
For REFINANCES, the base mortgage amount is calculated by the LESSER of:
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Sum of existing liens, the total rehabilitation cost, borrower-paid closing costs, prepaids, the
discount points of the prepaid costs minus any MIP refund; OR
The lesser of the sum of the as-is value plus total rehabilitation cost or 110% of After-improved
value multiplied by the 97.75% LTV factor.
Total rehabilitation cost = line B14 on the Maximum Mortgage Worksheet
Note: LTV is calculated by dividing the base loan amount by line D2 on the Maximum Mortgage
Worksheet, the Mortgage Insurance Premium should be calculated based on this number. In addition,
the appraisal logging needs to reflect the value on line D2 as the appraised value or the loan will be
insured incorrectly and will incur significant costs.
Transaction Requirements
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All borrowers must have a valid Social Security Number (SSN)
All borrowers must pass LDP/GSA and CAIVRS
Age of Credit Documents
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The credit report must be dated no more than 120 days prior to the Note date
Credit report must include a current mortgage rating for all mortgages including the subject when
applicable
Title updates are required with each draw, with the exception of 203K Streamline deposit draw.
Mortgage Insurance
Refer to standard FHA product guidelines for MI requirements
Automated Underwriting
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DU and LP are permitted and must be run under “Wells Fargo”
AUS approval is required, with the exception of loans manually underwritten
Rapid Appreciation
Note: For purchase contracts executed less than 90 days after the seller’s acquisition of the property refer to
section below titled “Property Flipping Less Than 90 Days after Seller’s Acquisition”
Rapid Appreciation is defined as property values increasing 20% or more within the last 12 months. These loans
are allowed however, the underwriter will perform a detailed review of the appraisal and the documentation
(below) to validate the increase in the property value.
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All transactions in which a property is purchased and resold quickly for a significant profit must be scrutinized
closely for misrepresentation – which usually includes property value, property information, down payment,
hidden transaction terms or borrower qualifications. Chain of title history must be reviewed and title
commitment ownership compared against the seller on the purchase agreement, owner and occupant
information listed on the appraisal, and the HUD-1. Parties in a trust or LLC must be identified to ensure there is
an arms-length transaction between buyer and seller.
Loans identified with 20% or greater appreciation in the last 12 months reflecting an LLC or corporation as the
seller must be sent to Quality Control for review; refer to the “Underwriting Policies and Procedures” Quality
Control section for additional information.
With acceptable documentation, an improved property’s acceptable value can be calculated by adding the
acquisition cost + improvements made X 120%. (Example: previous sale price was $100,000 + improvements
made of $20,000 = $120,000 X 120% = acceptable value of $144,000.)
Documentation needed for Properties which have “rapid appreciation”:
The property value must be supported by improvements made to the property, through the following
documentation:
 Verification of improvements, which can include contracts and receipts or, at a minimum, a listing of
improvements by appraiser with interior photos documenting the improvements and their estimated
cost.
 Costs must be credible based on the appraiser’s description and interior photographs.
 Cosmetic improvement, remedial repair or clean-up expenses do not justify substantial appreciation in
value.
 Two sold comps within the last 90 days that support the value, and Two pending sales or active listings
within the last 90 days that support the value, and
 Rapid appreciation may also be supported by a second appraisal. The requirement for the need of an
additional appraisal will be determined by the underwriter on a case-by-case basis. The cost of the
second appraisal cannot be charged to the borrower.
Best Practices
In addition to providing the documentation above, PRMI recommend that you follow the best practices below
when submitting loan files on properties with rapid appreciation:
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Verbiage on an appraisal such as ‘below market transaction’ or ‘distressed sale’ is inadequate to
substantiate rapid appreciation.
Thoroughly explain the factors surrounding the rapid appreciation on the dwelling and provide
concise documentation to support the value. Do not rely upon a statement that the appraiser has
made on the appraisal; rather, take the time to explain the situation.
Provide before and after photos of the property improvements
Exempt Properties:
Certain property sales are exempt from rapid appreciation review. These exemptions are:
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Sales of properties by a Government Sponsored Enterprise (GSE) state or federally chartered financial
institution, mortgage insurer, or federal state or local government agency.
Property sales by employers or relocation agencies related to employee relocations.
Sales of properties that are acquired by the sellers by inheritance.
Property Flipping Less Than 90 Days after Sellers Acquisition
FHA has granted a waiver for properties acquired by the seller within 0 to 90 days after the seller’s acquisition of
the property. This waiver shall expire on December 31, 2013, unless otherwise extended or withdrawn by the
Federal Housing Commissioner.
Properties with appreciation equal to or greater than 20%
The following requirements must be met:
 Second Appraisal: A second full appraisal is required and must comply with ALL the following:
 Ordered through a PRMI approved AMC
 Completed by an FHA roster appraiser and performed in compliance with all FHA appraisal standards
 The lower of the two appraised values must be used to qualify
 All health and safety items noted in the appraisal and/or inspection must be completed within the
rehabilitation process.
 Final inspection of repairs is required
Note: The second appraisal CANNOT be charged to the borrower.
Property Inspection:
The lender must order a property inspection and provide the inspection report to the borrower before closing.
The use of FHA-approved inspectors is not required. The inspector must have no interest in the property or
relationship with the seller, and must not receive compensation for the inspection from any party other than the
lender. Also, the inspector may not compensate anyone for the referral of the inspection. Additionally, the
inspector may not receive any compensation for referring or recommending contractors to perform any repairs
recommended by the inspection, and may not be involved with performing any repairs recommended by the
inspection. At a minimum, the inspection must include:
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The property structure, including the foundation, floor, ceiling, walls and roof;
The exterior, including siding, doors, windows, appurtenant structures such as decks and
balconies, walkways and driveways;
The roofing, plumbing systems, electrical systems, heating and air conditioning systems; All
interiors, and
All insulation and ventilation systems, as well as fireplaces and sold-fuel-burning appliances.
FHA Identity of Interest disclosure signed by all applicable parties. All transactions must be armslength with no identity of interest between the buyer, property seller or third parties.
Specific ways to ensure an arms-length transaction include:
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Property seller currently holds title to the property
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LLC’s, corporations or trusts serving as property sellers must meet all applicable state and
federal law.
No pattern or previous flipping activity exists on the property (as evidenced by multiple title
transfers within 12 months.
The property was marketed openly and fairly (Any sales contracts with “assignment of contract
of sale” may be a red flag).
All loans will require a Corporate Executive Review.
Exemptions to the 90-day restriction as follows:
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Sales by HUD of REO and single family assets in revitalization areas;
Sales by another agency of the United States Government of REO single family properties
pursuant to programs operated by these agencies;
Sales by nonprofit organizations approved to purchase HUD REO at a discount with resale
restrictions;
Sales of properties that were acquired by the sellers through inheritance
Sales of properties purchased by an employer or relocation agency in connections with the
relocation of an employee
Sales of properties by state and federally chartered financial institutions and any other
Government Sponsored Enterprise (GSE)
Sales of properties by local and state government agencies; and
Sales of properties located in Presidentially Declared Disaster Areas, but only upon
announcement by HUD through the issuance of a Mortgagee Letter
Properties with appreciation equal to or less than 19%
The following requirements must be met:
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FHA Identity of Interest disclosure signed by all applicable parties. All transactions must be
arms-length with no identity of interest between the buyer, property seller or third parties.
Specific ways to ensure an arms-length transaction include:
o
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o
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Property seller currently holds title to the property.
LLC’s, corporations or trusts serving as property sellers must meet all
applicable state and federal law.
No pattern or previous flipping activity exists on the property (as evidenced by
multiple title transfers within 12 months.
The property was marketed openly and fairly (Any sales contracts with
“assignment of contract of sale” may be a red flag).
Value Examples:
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Acceptable Value: Previous sales price was $100,000. Current sales price within 90 days is $119,000.
Appreciation is less than 20% and this value would be acceptable.
Unacceptable Value: Previous sales price was $100,000. Current sales price within 90 days is $120,000.
Appreciation is equal to 20% and this value would be unacceptable, as would any higher property value.
Please Note: The acceptable value DOES NOT include any improvements, regardless of whether or not the
improvements can be validated with documentation or appraiser comments.
Repair Escrow Account
Ready Renovation handles all rehabilitation disbursements and project inspections. The amounts designated for
repair and improvement, including the contingency reserve, holdback, and up to 6 months’ PITI, if applicable,
are deposited into an interest-bearing repair escrow account, insured by the Federal Deposit Insurance
Corporation (FDIC). Questions regarding repair escrow accounts should be directed to the Baltimore 203K
Center.
Note:
Pursuant to HUD’s Mortgage Letter 1995-40, the HUD Consultant must be able to prepare the Work Write-Up
and cost estimate independently of the contractor’s bid. If the bid comes in lower than the Work Write Up, the
loan will be underwritten and the repair escrow account will be established using the amount as depicted within
the Work Write Up. If the bid and Work Write Up share the same grand total, there is no question of the amount
needed to establish the repair escrow account. If the contractor’s bid comes in higher than the Work Write Up,
the HUD “Consultant will need to discuss this situation with the borrower and lender to reconcile the differences
and determine if the proposed repair escrow account may be too low to complete the job. At that point, if the
Consultant agrees with the higher costs, an adjusted Work Write-up with supporting documentation is required
to be submitted to the lender for consideration.
Eligible Occupancy
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203(K) Standard: Owner-Occupied only
203(K) Streamline: Owner Occupied only
Renovation Term
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Must begin within 30 days of closing and is limited to a maximum of 6 months from the date of
closing. Extensions are permitted on a Standard 203K in rare circumstances and must be
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approved by the Baltimore 203K Loan Center and Renovation Ready. Note: Extensions are not
permitted on Streamline 203K loan files.
Eligible Repair Types
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203(K) Standard
o
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Structural and non-structural
Landscaping or site amenities
No outbuildings- detached garages are permitted with applicable zoning and commentary from
the appraiser. Removal of outbuildings is permitted only if they pose a health or safety issue.
Pool repairs are permitted only when they pose a Health and Safety issue an may not be
in excess of $1500.00
203(K) Streamline
o
o
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Non-structural only
No landscaping or site amenities for cosmetic purposes or pool repairs, landscaping is permitted
for safety purposes and to preserve the integrity of the property.
No outbuildings including detached garage
Contingency Reserve
A minimum of 10% of the total repairs cost will be required to cover unforeseen cost overruns during the
renovation phase held in a contingency reserve. If utilities are not on and/or if the property is vacant during the
HUD consultant and appraisal inspections a minimum 15% contingency reserve will be required.
Note: Appraiser or HUD Consultant must state utilities are on to maintain a 10% contingency reserve.
Eligible Expenses
Expenses eligible to be included in the cost of rehabilitation are materials, labor, contingency reserve, overhead
and construction profit and supervision(noted in each work item), up to six months of mortgage payments, plus
expenses related to the rehabilitation such as permits, fees, inspection fees by a qualified home inspector (for
example, a member of the American Society of Home Inspectors), licenses, inspection fees during construction
by a HUD accepted inspector, lien protection fees for title updates and architectural/engineering fees. The cost
of rehabilitation may also include discount points if applicable which the borrower will pay on that portion of the
mortgage proceeds allocated to the rehabilitation.
Please note:
 Labor and material breakdown’s are required on a Standard and Streamline 203K
 All be must be specific
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Property and Appraisal Requirements
Property Eligibility
Eligible Property Types:
 Single Family Residence
 1-4 Family
 HUD REO Properties
 *FHA Approved Condominiums
 Mixed Use (only permitted on Standard 203(K) loan files with specific guideline requirements)
**FHA approved condominiums are acceptable subject to following:
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Owner/occupant and qualified non-profit borrowers only; no investors;
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Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the
rehabilitation of exteriors or other areas which are the responsibility of the condominium association,
except for the installation of firewalls in the attic for the unit;
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Only the lesser of five units per condominium association, or 25 percent of the total number of units,
can be undergoing rehabilitation at any one time;
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The maximum mortgage amount cannot exceed 100 percent of after-improved value.
By law, Section 203(k) can only be used to rehabilitate units in one-to-four unit structures. However, this does
not mean that the condominium project, as a whole, can only have four units or that all individual structures
must be detached.
Ineligible Property Types:
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Manufactured Homes
Co-op Units
New construction properties occupied less than 1 year
Log homes
Condotels
Cooperatives
Homes that have never been completed
Homes that have been completely demolished, including the foundation
General Appraisal Requirements
All appraisals must be completed by a HUD-approved appraiser and ordered through a PRMI approved AMC,
appraisals should not be ordered until the “Appraisal Order Package” is received from Renovation Ready.
Properties considered in less than “average” condition by the appraiser are ineligible.
The company or individual used to prepare the appraisal cannot be used as the consultant or the inspector.
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Loan-to-Value
Refinance:
Based on the lesser of:
1) 97.75
2) The existing debt on the property before rehabilitation, plus the estimated cost of rehabilitation and
allowable closing costs or
3) The lesser of the As-Is value plus rehabilitation costs or 110 percent of the After-Improved value
multiplied by the appropriate LTV factor.
NOTE: If the property was owned less than one year, the acquisition cost plus the documented rehabilitation
costs must be documented. The lesser of the As is value or acquisition cost must be used for line A2 of the
Maximum Mortgage Worksheet.
Purchase:
The maximum mortgage amount is based on the lesser of 1) or 2) of the below multiplied by the appropriate LTV
factor.
1) The purchase price of the property before rehabilitation, plus the estimated cost of rehabilitation or
2) 110 percent of the after-improved value of the property.
For purchases with 203(k) financing: the maximum mortgage amount is to be based upon the HUD estimate of
value in 1) or 2) above, less the statutory investment requirement. For refinances under the 203(k) program: the
maximum mortgage amount is to be based upon 97/95/90 percent of the HUD estimate of value in 1) or 2)
above
The appraisal report must provide an "as completed" appraised value that estimates the value of the property
after completion of the rehabilitation work. The cost consultant's work write-up must be available for the
appraiser to use in order to determine the "as completed" value.
In order to determine the maximum mortgage amount, the FHA 203(k) valuation analysis consists of two
separate determinations of value as noted below.
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As-Is Value
As improved value
o A separate appraisal may be required to determine the "as improved value " such as in the case
of a HUD REO . The underwriter may determine that an "as is" appraisal is not feasible or
necessary. In this instance, the lender may use the contract sales price on a purchase
transaction.
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On a refinance transaction, when a large amount of existing debt is present, for instance, first and second
mortgages, suggests that the borrower has little or no equity in the property, the loan file must obtain a current
"as is" statement on which to base the estimated "as is" value.
On a refinance, the borrower may have substantial equity in the property to assure that no further down
payment is required on the new loan amount. In some cases, the borrower will not have an existing mortgage
on the property.
For a HUD-owned property, the “as is" appraisal provided by HUD will be considered acceptable if:
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It is not over one year old prior to bid acceptance from HUD, and
The sales contract price plus the cost of rehabilitation does not exceed 110% of the "as repaired value"
shown on the HUD appraisal
If the HUD appraisal is insufficient, the originator may order another appraisal to assure the market value of the
property will be adequate to make the purchase of the property feasible. For a HUD-property, the down
payment is 3.5% of the accepted bid price of the property and 100% financing on all other costs.
As Completed/After Rehabilitation Value
The expected market value of the property based on the proposed rehabilitation and/or improvements.
Property Requirements:
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Lead based paint- Homes built prior to 1978 will be required to be inspected by a certified lead base
paint inspector if any of the following are evident:
o Peeling Paint
o Painting is involved in the rehab
o The Field administrator or appraiser has identified an issue
Non- Toxic Mold Requirements- Contractors are to identify the source of the mold creation, cure the
issue and then treat and/or remove the mold, based on strain of mold. At the underwriters discretion
the underwriter may recommend a mold remediation specialist company to complete if she feels it is in
the borrowers best interest due to the severity or amount
Appraisal Transfer
(Case number Assignment after Completion of Appraisal)
PRMI accepts transferred appraisals on government loans. The FHA Case Number must be transferred to PRMI
by the previous lender. If an appraisal is transferred the appraisal does not need to show PRMI as the
lender/client. Transferred appraisals are not required to show as completed through one of the PRMI’S
approved AMC’S. The following documentation and requirements must be met:
 A copy of the FHA Connection Case Transfer Screen showing that the lender has successfully transferred
the case number and assigned the appraisal electronically must be in the file.
 An FHA approved appraiser must complete the appraisal. A copy of the FHA Connection Screen
confirming the FHA appraiser's approval status must be in the file
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Place the copy of the Case Transfer screen (see below) directly on top of the appraisal report. The lender
on the appraisal report will reflect the transferring lender's name. The appraisal does not need to be
retyped to reflect the client as the lender.
Assigned purchase contracts are not permitted
Note: A new appraisal may be required if repair items change or the provided appraisal is an “as-is
appraisal”
Contractor/Builder Requirements
Contractors must meet all of PRMI and Renovation Ready’s specific requirements; refer to RenovationReady
Policies for details. In addition the following guidelines must be adhered to:
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Self Help is not permitted
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The Borrower may not be related to any of the parties associated with this transaction, including the
contractor, loan officer, and consultant.
A completed “Renovation Contractor Questionnaire” is required along with certain other
documents. RRL is responsible for contractor review and will determine acceptance.
E&O and licenses must be included in the file for General Contractors
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Recently Listed Refinance
Refinances on properties listed for sale are not permitted. To be eligible for a refinance the following
requirements must be met:
 Rate/Term Refinance: A property that was previously listed must have listing withdrawn/canceled a
minimum of 1 day prior to the loan application date in order to be eligible
A copy of the canceled listing must be included in the file and a current search of the Multiple Listing Service
(MLS) system performed to verify that the property is not currently listed by a different real estate agency.
Secondary Financing/ Down payment Assistance
PRMI will accept first mortgage Loans originated in conjunction with Down Payment Assistance Programs in
accordance with FHA requirements.
NOTE: Secondary financing includes any financing that creates a subordinate lien against the subject property,
even if it is a “soft”, “silent”, or “forgivable” second. For the use of this document “HUD-approved” is defined as
meeting HUD and FHA guidelines.
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Eligible Improvements
Per PRMI the Standard k program requires that at least $5,000 in “required improvements”—those that
eliminate health or safety hazards—be included in the renovation budget. Beyond that minimum, repairs or
improvements may include but are not limited to the following:
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Modernization and improvements to the home's function (kitchens, baths, etc.)
Changes that improve appearance and eliminate obsolescence
Reconditioning or replacing plumbing; installing a well and/or septic system
Adding or replacing roofing, gutters, and downspouts
Adding or replacing floors and/or floor treatments
Major landscape work and site improvements
Enhancing accessibility for a disabled person
Structural alterations and reconstruction (e.g., additions to the structure, finished attics, repair of
termite damage and the treatment against termite infestation, etc. (Termite damage in the foundation
may only be repaired, removal of any portion of the foundation is not permitted)
Changes for improved functions and modernization (e.g., remodeled kitchens and bathrooms).
Elimination of health and safety hazards (including the resolution of defective paint surfaces and/or
lead-based paint problems on homes built prior to 1978).
Changes for aesthetic appeal and elimination of obsolescence (e.g., new exterior siding).
Reconditioning or replacement of plumbing (including connecting to public water and/or sewer system),
heating, air conditioning and electrical systems. Roofing, gutters and downspouts.
Flooring, tiling and carpeting.
Energy conservation improvements (e.g., new double pane windows, insulation, solar domestic hot
water systems, etc.).
Major landscape work and site improvement, patios and terraces that improve the value of the property
equal to the dollar amount spent on the improvements or required to preserve the property from
erosion.
Improvements for accessibility to the Handicapped.
Pool repairs are permitted only when they pose a Health and Safety issue an may not be in excess of
$1500.00
Ineligible Improvements
Properties that require the following work items are not eligible for financing under the Streamline 203k include
but are not limited to:
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Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
New construction (including room additions);
Repair of structural damage;
Repairs requiring detailed drawings or architectural exhibits;
Pool repairs or landscaping improvements that are solely for cosmetic purposes
Exterior improvements to condo units
Any repair or improvement requiring a work schedule longer than six (6) months; or
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Rehabilitation activities that require more than two (2) payments per specialized contractor.
Mortgagors may not use the Streamline 203k program to finance any required repairs arising from the appraisal
that do not appear on the list of Streamline 203k eligible work Items or that would:
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Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”;
Require plans or architectural exhibits;
Require a plan reviewer;
Require more than six months to complete;
Result in work not starting within 30 days after loan closing; or Cause the homeowner to be displaced
from the property for more than 30 days during the time the rehabilitation work is being conducted.
(FHA anticipates that, in a typical case, the homeowner would be able to occupy the property after
mortgage loan closing).
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Disaster Areas
Properties located in Federally Declared Major Disaster Areas eligible for Individual Assistance. Refer to
www.fema.gov for confirmation of declared disasters.
Appraisal completed on or Before the incident period end date:
A re-inspection is required and the appraiser must provide the following commentary/evidence:
 Property is free from damage and the disaster had no effect on value or marketability.
 Photos including the interior and exterior of the property
Any one of the following is an eligible inspection format:
Note: Property must be re-inspected by the original appraiser or, if not available, another licensed appraiser.
 Appraisal update and/or completion report with interior and exterior photos (Fannie Mae form
1004d/Freddie Mac form 442)
 Uniform residential appraisal reports (Fannie Mae form 1004. Freddie Mac form 70)
 Individual Condominium or PUD Unit Appraisal Report (Fannie Mae for 1073/Freddie Mac form 465)
Appraisal completed After the incident period end date:
A full appraisal with exterior and interior inspection is required. The appraisal must include written certification
by the appraiser stating:


Property is free from damage and disaster had no effect on value or marketability
Preferably, all comparable should be post-disaster or the appraiser must provide current/postdisaster photos for all comps
If the inspection indicates damage:

The extent of the damage must be addressed and completion of repairs must be included with
other repair items
Executive Review by corporate Underwriting Management is required on all properties located in a disaster area
for a period of 30 days after disaster end date. An email should be sent to Kathy Meadows, Debra Starke and
Stacy Staley. Refer to “Executive Review” requirements within the PRMI “Underwriting Policies and Procedures”
for additional information regarding submission, service levels etc.
Credit and Debt to Income Requirements
18
Regardless of the AUS findings the following DTI restrictions must be adhered to and all compensating factors
must be listed on the 92900 Loan Transmittal. Note loan files in Georgia and New Mexico have specific
restrictions detailed below.
AUS Approved FHA Loans, scores > 660 and < 680:
Loan files with scores greater than or equal to 660 and less than 680 require a maximum DTI of 55%. DTI greater
than 55% may be permitted with at least one compensating factor as defined by PRMI and a summary from the
DE Underwriter explaining their rational for credit approval and borrower’s ability to repay at the higher DTI.
AUS Approved FHA Loans, scores > 640 and < 660:
Loan files with scores greater than or equal to 640 and less than 660 require a maximum DTI of 50%. DTI greater
than 50% may be permitted with at least one compensating factor as defined by PRMI and a summary from the
DE Underwriter explaining their rational for credit approval and borrower’s ability to repay at the higher DTI.
AUS Refer/Manually Underwritten Loans:
All FHA AUS approved, refer or manually downgraded loans, regardless of the score are restricted to a maximum
debt to income ratio of 31/ 43%, per FHA guidelines. DTI exceeding 31/43% must be submitted to the PRMI
Credit Committee with at least one compensating factor and a summary from the underwriter explaining their
rational for credit approval and borrower’s ability to repay at the higher (DTI).
The underwriting summary template may be located on MyPRMI – Loan Flow – Underwriting – Underwriting
Forms – Underwriting Worksheets>DTI Credit Approval Summary.
The chart below identifies the required review based on DTI, FICO and AUS decision for all states with the
exception of Georgia and New Mexico:
Credit Score and AUS
approval Type
DTI >660 - < 680
Max DTI without
compensating factors
Max DTI with (1)
compensating factor
& underwriter
summary
Credit Committee Review
required
55%
Per AUS
No
50%
Per AUS
No
AUS Approved
DTI > 640 - < 660
AUS Approved
Manually Downgraded and AUS Refer loans have the following restrictions:
 31/43
Loans exceeding 31/43 require one month PITIA and the following:
 35/45 with one compensating factor (DTI exceeding 43% must be submitted to the PRMI Credit
Committee for approval )
19

37/47 is permitted with two compensating factors (DTI exceeding 43% must be submitted to the PRMI
Credit Committee)
Note: Ratio restrictions do not apply to streamlines
Georgia State DTI Resections:
Credit Score and AUS Max DTI without
approval Type
compensating factors
DTI >660 - < 680
Max DTI with (2)
compensating factor
& underwriter
summary
Corporate Underwriting
Management second
signature required
50%
55%
Yes if DTI exceeds 50%
45%
50%
Yes if DTI exceeds 50% or if
gift funds or down
payment assistance will be
used for minimum
investment
43%
Per Executive Review
Yes if DTI exceeds 43%
AUS Approved
DTI > 640 - < 660
AUS Approved
AUS Refer/Manually
underwritten
Refer to Gift Funds and Geographic restrictions for additional requirement for Georgia loan files.
New Mexico State DTI Resections:
Credit Score and AUS Max DTI without
approval Type
compensating factors
≥ 650 - < 680
Max DTI with
compensating factor
& underwriter
summary
Credit Committee Review
required
55%
Per AUS
No
32/45
Per AUS
No
AUS Approved
< 650
AUS Approved
AUS Refer/Manually
underwritten
All loan files with a fico score < 650 are required to have (2) months sourced
PITI at the time of approval. Gift funds are not permitted.
43%
Per Credit Committee
20
Yes if DTI exceeds 43%
Loan files may be permitted to exceed the maximum Housing or DTI threshold only if they have an acceptable
compensating factor.
NOTE: only one of the two ratios may be exceeded, not both.
Acceptable Compensating Factors for High Housing or DTI:





Decrease to Housing Expense Payments
The borrower has successfully demonstrated the ability to pay housing expenses greater than or equal
to the proposed monthly housing expenses for the new mortgage over the past 12-24 months.
Verification of rent can be obtained from the credit agency or with cancelled checks if a private party or
relative is the landlord.
Down Payment
The borrower makes a large down payment of 10% or higher toward the purchase of the property. Gift
funds are an acceptable source. * Gift funds used as a compensating factor are not an acceptable
source for compensating factors in the state of Georgia or New Mexico.
Compensation or other income not used for qualifying
The borrower receives documented compensation or income that is not reflected in effective income,
but directly affects his/her ability to pay the mortgage. Such as food stamps or similar public benefits.
Income used must come from a borrower who is obligated on the note.
Substantial Cash Reserves
The borrower has substantial documented cash reserves (at least three months PITI) after closing. The
lender must document the substantial cash reserve asset is liquid or readily convertible to cash and
documentation verifying the funds may be withdrawn or accessed prior to retirement or job
termination to be used for cash reserves or cash to close.
Primary Wage- Earner Relocation
The subject home is being purchased because the primary wage-earner is relocating, and the secondary
wage-earner demonstrates all of the following:
o Established employment history and Expected to return to work and
o Reasonable prospects for securing employment in a similar occupation in the new area
Note: The underwriter must document the availability of the potential employment (help wanted ads in local
paper or internet search)
Loan files requiring Credit Committee approval are to be submitted to the Credit Committee by the underwriter
once all conditions have been met with the DTI Credit Approval Summary completed. The underwriting
summary template may be located on MyPRMI – Loan Flow – Underwriting – Underwriting Forms –
Underwriting Worksheets>DTI Credit Approval Summary

Underwriters must select “DTI Exception” within Sub Screen 5 in Data Trac to submit file for review.
Please allow three business days for loan files submitted to Credit committee.
The following is a list of items to be considered when calculating the borrower(s) debt ratios:
21





Installment debt obligations which extend ten (10) or more months must be included in the borrower’s
debt-to income ratio debts lasting less than ten (10) months must be counted if the amount of the debt
affects the borrower’s ability to make the mortgage payment during the months immediately after the
loan closing.
Childcare expense does not need to be included as a recurring debt.
Student loans deferred less than 12 months must be included as a recurring debt; obtain scheduled
payment amount from the creditor
Child support payments must be counted in the total debt to income ratios.
Debts not counted in ratios: Funds to cover the required investment may be obtained from certain types
of loans secured against deposited funds, (such as signature loans, cash value of life insurance policies,
loans secured by 401ks, etc.), in which repayment may be obtained through extinguishing the asset, do
not have to be included in the qualifying ratios. However, these assets securing the loan may not be
included as assets available to the borrower.
Derogatory Credit
Short Sale
A borrower is not eligible for a new FHA-insured mortgage if he/she pursued a short sale agreement on his/her
principal residence simply to take advantage of declining market conditions, and purchase a similar or superior
property within a reasonable commuting distance at a reduced price as compared to current market value.
Borrower Current at time of short sale

A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application
for the new mortgage, all mortgage payments on the prior mortgage were made within the month due
for the 12-month period preceding the short sale, and installment debt payments for the same time
period were also made within the month due.
Borrower in default at the time of the short sale

A borrower in default on his/her mortgage at the time of the short sale (or pre-foreclosure sale) is not
eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.
Note: A borrower who sold his/her property under FHA’s pre-foreclosure sale program is not eligible for a new
FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.
Exception: A lender may make an exception to this rule for a borrower in default on his/her mortgage at the
time of the short sale if the default was due to circumstances beyond the borrower’s control, such as death of
primary wage earner or long-term uninsured illness, and a review of the credit report indicates satisfactory
credit prior to the circumstances beyond the borrower’s control that caused the default.
Collections and Judgments
Collection and judgment requirements are based on the AUS approval as described below.
For case numbers assigned on or after October 15, 2013, ML 2013-24 applies.
22
Manually Underwritten Loans (AUS refer and approve/eligible manual downgrade)
Medical collections and charge off accounts are excluded.
PRMI underwriter must document on the 92900-LT the reasons for approving a mortgage when the borrower
has collection accounts or judgments.
Regardless of the amount of outstanding collection accounts or judgments, we must determine if the collection
account or judgment was a result of:
o
o
o
The borrower’s disregard for financial obligation
The borrower’s inability to manage debt; or
Extenuating circumstances.
The borrower MUST provide a letter of explanation with supporting documentation for each outstanding
collection account and judgment. The explanation and supporting documentation must be consistent with
other credit information in the file.
If the underwriter determines the credit profile is acceptable, FHA does not require the collection accounts to be
paid off as a condition of mortgage approval. However, FHA does recognize that collection efforts by the
creditor for unpaid collections could affect the borrower’s ability to repay the mortgage. To mitigate this risk,
FHA is requiring a capacity analysis of collection accounts with an aggregate balance equal to or greater than
$2,000.
If the total outstanding balance of all collection accounts for all borrowers is equal to or greater than $2,000, we
must follow the actions below. Unless excluded under state law, collection accounts of a non-purchasing spouse
in a community property state are included in the cumulative balance. All medical collection and charge off
accounts are excluded from this guidance and do not require resolution.

At the time of or prior to closing, payment in full of the collection account (verification of acceptable
source of funds required).
 The borrower makes payment arrangements with the creditor. If the borrower has entered into a
payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly
payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio.
 If evidence of a payment arrangement is not available, the lender must calculate the monthly payment
using 5% of the outstanding balance of each collection, and include the monthly payment in in the
borrower’s debt-to-income ratio.
Judgments – FHA requires judgments to be paid off before the loan is eligible for insurance. An exception may
be made if the borrower has an agreement with the creditor to make regular and timely payments. The
borrower must provide a copy of the agreement and evidence that payments were made on time in accordance
with the agreement and a minimum of three months of scheduled payments have been made prior to credit
approval. Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of
three months of payments. The payment must be included in the calculation of the debt-to-income ratio. FHA
23
requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the
exception guidance for judgments above, unless excluded by state law.
TOTAL Mortgage Scorecard Accept/Approve
Medical collections and charge off accounts are excluded.
There is no documentation or letter of explanation requirements for loans with collection accounts or
judgments run through TOTAL Mortgage Scorecard receiving an “Accept/Approve” despite the presence of
collection accounts or judgments. These accounts have already been taken into consideration in the borrower’s
credit score. If TOTAL Mortgage Scorecard generates a “Refer,” or if the loan is manually downgraded, we must
manually underwrite the loan in accordance with the policy above.
However, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the
borrower’s ability to repay the mortgage. To mitigate this risk, FHA is requiring a capacity analysis of collection
accounts with an aggregate balance equal to or greater than $2,000. If the total outstanding balance of all
collection accounts for all borrowers is equal to or greater than $2,000, we must follow the actions below.
Unless excluded under state law, collection accounts of a non-purchasing spouse in a community property state
are included in the cumulative balance. All medical collection and charge off accounts are excluded from this
guidance and do not require resolution.



At the time of or prior to closing, payment in full of the collection account (verification of acceptable
source of funds required).
The borrower makes payment arrangements with the creditor. If the borrower has entered into a
payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly
payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio.
If evidence of a payment arrangement is not available, the lender must calculate the monthly payment
using 5% of the outstanding balance of each collection, and include the monthly payment in in the
borrower’s debt-to-income ratio.
Judgments – FHA requires judgments to be paid off before the loan is eligible for insurance. An exception may
be made if the borrower has an agreement with the creditor to make regular and timely payments. The
borrower must provide a copy of the agreement and evidence that payments were made on time in accordance
with the agreement and a minimum of three months of scheduled payments have been made prior to credit
approval. Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of
three months of payments. The payment must be included in the calculation of the debt-to-income ratio. FHA
requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the
exception guidance for judgments above, unless excluded by state law.
The above guidance does not apply to Non-Credit Qualify Streamline refinance transactions.
24
Tax Lien
Regardless of the automated underwriting recommendation, all tax liens and court ordered judgments must be
satisfied prior to closing. However, if the borrower has been making regular and timely payments on the
judgment or tax lien and the creditor is willing to subordinate to our loan, the judgment or tax lien can remain
open. A subordination agreement must be provided. The loan should be processed with the monthly payment
included in the borrower's debt-to-income ratio. When the credit report shows federal or state tax liens, a letter
of explanation is required.
Chapter 7 Bankruptcy


Minimum time from discharge to application date is two years.
During this time, the borrower must have Re-established good credit
An elapsed period of less than two years but not less than 12 months may be acceptable if the borrower can
show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and has since
exhibited a documented ability to manage his/her financial affairs in a responsible manner.
Loan files underwritten to the above “extenuating circumstances” are highly scrutinized and must be submitted
for an Executive Review and approval by PRMI Corporate Underwriting Management.
Note: The lender must document that the borrower’s current situation indicates that the events which led to
the bankruptcy are not likely to recur.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that
the lender documents that:
 Permitted only with an AUS Approval
 One year of the pay-out period under the bankruptcy has elapsed
 Borrower’s payment performance has been satisfactory and all required payments have been made on
time, and
 Borrower has received written permission from bankruptcy court to enter into the mortgage
transaction.
TOTAL Scorecard Accept/Approve Recommendation
Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy. If the Chapter
13 bankruptcy has not been discharged for a minimum period of two years, the loan must be downgraded to a
Refer making it ineligible for 203K financing per PRMI.
Consumer Credit Counseling
Borrower’s participating in a consumer credit counseling program may be eligible for financing provided the
following can be documented:




The AUS provides an Approve or Accept Recommendation
one year of the pay-out period has elapsed under the plan
Borrower’s payment performance has been satisfactory and all required payments have been made on
time, and
Borrower has received written permission from the counseling agency to enter into the mortgage
transaction.
25
Foreclosure
Prior FHA insured loan:



Borrower is not eligible for an FHA loan until 3 years have elapsed since the date of claim payment.
Prior Non-FHA insured loan
Borrower is not eligible for FHA loan until 3 years have elapsed since the date of completion.
Income Requirements
Stable monthly income is the borrower’s verified gross monthly income from all verifiable sources, which can
reasonably be expected to continue.
Salaried Borrowers:





Evidence of a two-year history of employment is required.
Documentation required:
Written VOE with most recent paystub OR paystubs for the most recent 30 day period showing yearto-date income (same employer); and
W-2 forms for the past 2 years; and
Verbal VOE
Sources of other income may be used to qualify the borrower, provided it has been received for the past two
years and there are reasonable prospects of its continuance. A 12 to 24 month history may be considered if
there are compensating factors that reasonably offset the shorter income history.
Commission Income:


24 month average is required

If commission income represents 25% or more of the borrower’s income the most recent two years
personal tax returns must be provided and all non-reimbursed business expenses must be averaged
over the two years and accounted for.
Schedule A of the borrower’s tax returns must be obtained to document un-reimbursed business
expenses.
Bonus and Overtime:
24 month average is required. If received less than two years may be considered on a case-by-case basis. The
earnings trend over that period of time of receipt must be established and analyzed; adequate documentation
must be provided; the employer must state the bonus or overtime is likely to continue; and the reasoning for
using this income must be justified.
Part-time Income/ Second Job
26
Defined as jobs taken in addition to the normal regular employment to supplement the borrower’s income. If a
borrower’s regular employment is less than a typical 40 hour work week, the stability of that income should be
evaluated as any other regular on-going primary employment; (i.e. a registered nurse that has been working 24
hours per week for the last year). This would be considered the borrowers primary job, even though less than 40
hours, and it should be included as effective income.
Second job income may be used as qualifying income if a two year uninterrupted history and a strong likelihood
of continuance can be documented. Income received less than two years may be considered on a case- by- case
basis. Otherwise the income may only be used as a compensating factor.
Self-Employed Borrowers
A borrower who has an ownership interest of 25% or more in a business is considered to be self-employed.






Must have been established for a minimum of 2 years. A 12-24 months history will be considered
provided the borrower has at least 2 years previous successful employment (or a combination of 1
year employment and 1 year formal education or training) in that occupation, or a related
occupation.
Must have a signed 4506T
Copies of the past two years’ signed individual federal income tax returns.
Copies of the past two years’ signed business income tax returns if the business is a corporation or
an “S” corporation, or partnership. Must be complete with all schedules including attached
statements including K-1’s
A balance sheet and Profit and Loss statement are required if more than a calendar quarter have
elapsed since the date of the most recent calendar or fiscal-year end tax return was field by the
borrower with no exceptions.
Additionally, if income used to qualify the borrower exceeds the two year average of tax returns an
audited P&L or signed quarterly tax returns obtained from the IRS are required.
Alimony, Child Support and Separate Maintenance Payments
If an applicant chooses to disclose the aforementioned items, proof evidencing the continuance of such
payments for the next three (3) years is required.




The borrower must provide a copy of the recorded divorce decree, legal separation agreement or
voluntary payment agreement, and
Evidence that payments have been received during the last twelve months. Acceptable evidence
includes cancelled checks, deposit slips, tax returns, court records, etc (FHA Requires 12 months
receipt)
Periods of less than 12 months may be acceptable provided the payer’s ability and willingness to
make timely payments is adequately documented and AUS findings are documented
Child support income may be grossed up
27
Non-Employment Income
This category includes many sources of passive income such as: social security, pension income, interest income,
etc.
The underwriter must be confident this income will continue for the next 3 years.
 Documents provided can be any of the following as applicable: award letter, pension statement, IRS
1099, the most recent 2years signed individual income tax returns, or other documents.
 For all tax-exempt income, the income may be grossed up once its continuance for three years has
been established.
Temporary Leave/Short Term Disability
PRMI permits temporary leave if the requirements outlined below can be met. Temporary leave from work is
generally defined as maternity or parental leave, short-term medical disability or other temporary leave types
that are acceptable by law or the borrower’s employer. All loan files must comply with the Fair Housing Act,
which prohibits lenders from discriminating on the basis of a handicap.
Documentation Requirements:
If borrower will be on temporary leave at the time of closing the mortgage and the borrowers income is needed
for qualifying purposes the underwriter must determine if the income is allowable and confirm employment
with the following supporting documentation:





The borrower must provide written confirmation of his or her intent to return to work and the agreed
upon date of return as evidenced by documentation provided by the employer or a designee of the
employer. (For example, an employer may use the services of a third party to administer employee
leave.)
The originator and or underwriter must receive no evidence or information from the borrower's
employer indicating that the borrower does not have the right to return to work after the leave period.
A verbal verification of employment is required in accordance with PRMI Verbal Verification of
Employment guidelines. If the employer confirms the borrower is currently on temporary leave, the
lender must consider the borrower employed.
The loan file must contain documentation supporting the amount and duration of the temporary leave
income which may require multiple sources or documents depending on the type and duration of the
leave period; and
The amount of the borrowers typical or “regular employment income” in which the borrower received
prior to the temporary leave. Regular employment income includes but is not limited to the income the
borrower receives from employment on a regular basis that is eligible for qualifying purposes.
The underwriter must include a written rationale explaining the analysis used to determine the qualifying
income regardless of the underwriting path.
Calculating Income:
If the borrower will return to work as of the first mortgage payment date, the lender can consider the
borrower’s regular employment income in qualifying.
28
If the borrower will not return to work as of the first mortgage payment date, the lender must use the lesser of
the borrower’s temporary leave income (if any) or regular employment income. If the borrowers temporary
leave income is less than his or her regular employment, the lender may supplement the temporary leave
income with available liquid reserves. Supplemental Income calculation:
Supplemental income amount = available liquid reserves divided by the number of months of supplemental
income.

Available liquid reserves: subtract any funds needed to complete the transaction (down payment,
closing costs, other required debt payoff, escrows, and minimum required reserves) from the total
verified liquid asset amount.
 Number of months of supplemental income: the number of months from the first mortgage payment
date to the date the borrower will begin receiving his or her regular employment income, rounded up to
the next whole number.
Once the supplemental income has been determined the lender must calculate the total qualifying income.
Total qualifying income = supplemental income plus the temporary leave income.
Note: The total qualifying income that results may not exceed the borrower's regular employment income.
Long-Term Disability
Disability benefit payments (Social Security disability insurance benefits, Veterans disability compensation
benefits, etc.) may be treated as acceptable, stable income, unless the terms of the disability policy specifically
limit the stability or continuity of the benefit payments. A review date on a Social Security award letter for
disability is not considered a defined expiration date. Confirm the borrower's current eligibility for the disability
benefits by obtaining a statement from the benefit's payer (insurance company, employer, or other qualified
and disinterested party).
PRMI prohibits inquiring about the Borrower’s condition/disability when long term disability income is used to
qualify. All loan files must comply with the Fair Housing Act, which prohibits lenders from discriminating on the
basis of a handicap.
Acceptable Documentation:

Social Security Disability Income (SSDI) award letter is sufficient evidence to support a Borrower’s
monthly disability income and reasonable expectation of continuance; therefore, underwriters or
originators should not request the following in addition to the award letter:


A letter from the borrower’s doctor detailing the nature of the disability
Extent of the disability (permanent or temporary)
29
Note: In cases where the income does not have a defined expiration date, the income may be considered stable,
predictable, and likely to continue. The borrower will not be required to provide additional documentation
evidencing continuance of the income.
Rental Income
Subject - 2 Unit Primary Residences:
The rent received from the additional units not occupied by the borrower may be used for qualifying purposes.
The rent (after subtracting the local FHA offices estimate for vacancies and maintenance, or 15% if the local FHA
has not established a separate allowance) may be added to the borrower’s gross income in calculating the
qualifying ratios; it may not be used to off-set the monthly mortgage payment.
Investment Properties and 2-4 units Primary Residences other than the subject property:




Signed leases may be used to calculate gross rents only if the property was acquired since the last
income tax filing and is not shown on the Schedule E. However, no more than 85% of the gross rental
income can be used
For properties listed on the Schedule E from the borrower’s 1040’s, depreciation may be added back to
the net income or loss shown. Lender must make certain the borrower still owns each property listed on
the Schedule E
If six or more units are owned by the borrower in the same general area, a map disclosing the locations
must be submitted evidencing compliance with HUD’s seven unit limitation
Operating income statement/comparable rent schedule will be required when using rental income from
subject property
Tax Transcripts
Two Years Tax transcripts are required to validate the income requirements regardless of the AUS decision. Tax
transcripts must be obtained through a third-party vendor. This excludes non-credit qualifying FHA Streamline
transactions. If current year transcripts are not available or not on record provide prior year(s) transcripts and
IRS print out showing current year is not available. Additional documentation maybe required by the
underwriter upon review of income and corrected input into the AUS.
Note: Any difference between income documented in the tax transcript and income used to qualify must be
reasonable and supporting documentation must be provided.
Verbal Verification of Employment (VVOE)
A verbal verification is required on all loans. PRMI requires verbal confirmation of current employment or selfemployment within 3 business days of closing. The verbal verification must be completed on PRMI’s required
form located on MyPRMI.com>Loan Flow>Underwriting> Underwriting Forms> Underwriting Worksheets>
Income Verbal VOE.
If the borrower’s employment is verified through a 3rd party service such as “The Work Number” the information
must be transferred to PRMI’s required form.
30
Note- Self-employment may be verified through a CPA only if the CPA can be verified at a business location.
Employment by a Relative
If the borrower is employed by a relative, a closely held family business, the property seller, real estate agent, or
any party to the real estate transaction, the following documentation must be obtained in addition to the
standard employment documentation:



Two years most recent tax transcripts
evidence that he/she is not an owner of the business
(signed copy of the corporate tax return showing ownership percentage)
Asset Requirements
The following is acceptable documentation for assets when required:


Two months original bank statements covering the most recent two-month period including all pages.
All non-payroll deposits equal to 10% of monthly income or 25% cumulative must be documented and
explained
Bank Statements must clearly identify the following:





Name and address of the depository or investment institution
Name of account holders
Account number
Time period covered by the statement
All deposit and withdrawal transactions
Asset statements from an online account obtained by the borrower may be acceptable if the following
information is included:






Internet Uniform Resource Locator (URL) address identifying the source of the information
Name of the depository or investment institution
Account number
Time period covered by the statement
All deposit and withdrawal transactions
Ending account balance
All unusual or large deposits inconsistent with the borrower’s payroll deposits must be explained, sourced and
documented. PRMI prohibits “backing out funds” even if the funds are not being used to qualify they must be
explained, sourced and documented.
Unacceptable Sources of Down Payment
 Proceeds of a personal or unsecured loan.
 A gift that must be repaid in full or in part.
 Cash advance on a revolving charge account or unsecured line of credit.
31

Down payment assistance programs in which have not yet been approved by the PRMI Programs
Committee
Cash Saved at Home
Borrowers who have saved cash at home and are able to adequately demonstrate the ability to do so, are
permitted to use this money as an acceptable source of funds to close if the following requirements are met:


Funds must be verified either on deposit in a financial institution or held by the escrow/title company.
Additional documentation must include evidence provided from the borrower showing ability to
accumulate such a savings and written explanation from the borrower on how such funds were
accumulated and the amount of time taken to do so.
Special consideration and underwriter discretion will focus on the amount of the borrower’s income, the time
period the funds were saved, spending habits, and the borrower’s history of using financial institutions in order
to determine the reasonableness of the accumulation of the funds.
Gift Funds
Gift funds are acceptable provided all of the required documentation is retained in the loan file. In order for
funds to be considered a gift, there must be no expected or implied repayment of the funds to the donor by the
borrower.
Eligible donor:
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An outright gift of the cash investment is acceptable if the donor is:
the borrower’s relative
the borrower’s employer or labor union
a close friend with a clearly defined and documented interest in the borrower
a charitable organization
a governmental agency or public entity that has a program providing home ownership assistance to-lowand moderate-income families for first-time homebuyers
Ineligible Donor:
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the seller
the real estate agent or broker
the builder, or
an associated entity
Gifts from these sources are considered inducements to purchase, and must be subtracted from the
sales price.
Gift Letter and Source of Funds:
The following documentation is required regardless of when the gift is provided:
Gift Letter
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Gift letter containing donor’s name, address, phone, and relationship to borrower; matching the exact amount
of gift, stating that gift is not repayable, and signed by donor and borrower.
NOTE: If sufficient funds to close (including the gift funds) are already verified in the borrower’s account at the
time of initial underwriting submission, the gift details may be listed on the loan application in lieu of a gift letter
however, documenting the transfer of the gift funds is required. (See HUD 4155.1, 5.B.5.b).
Regardless of when gift funds are made available to a borrower, the lender must be able to determine that the
gift funds were not provided by an unacceptable source and were the donor’s own funds. (See HUD 4155.1,
5.B.4.d.).
At the underwriter’s discretion, additional documentation may be required to substantiate that the gift was
derived from an acceptable source by the donor including but not limited to a sourced and seasoned bank
statement.
NOTE: Donor’s cash-on-hand is not an acceptable source.
If the gift funds..
Are in the borrowers account
Are to be provided at closing and
Are in the form of a certified check from the donors
account
Are to be provided at closing, and are in the form of a
cashier’s check, money order, official check, or other
type of bank check
Are to be provided at closing and are in the form of an
electronic wire transfer to the closing agent (typically
these are gifts from governmental or charitable
entities)
Then…
Obtain:
 A copy of the withdrawal document showing
that the withdrawal is from the donor’s
account and
 The borrowers deposit slip and bank
statement showing the deposit
 Evidence of donors account ownership is
required
Obtain:
 Bank statement showing the withdrawal from
the donor’s account (any large deposits must
be sourced) and
 Copy of the certified check
 Note: To avoid funding delays, copies of these
documents must be provided and cleared prior
to docs.
The donor must provide:
 Withdrawal document or cancelled check for
the amount of the gift, showing that the funds
came from the donor’s personal account.
 Evidence of donor’s account ownership is
required.
Note: To avoid funding delays, copies of these
documents must be provided and cleared prior to
docs.
Obtain:
 Copy of the incoming wire evidencing deposit
into settlement agent’s account on or before
the of closing and identifying the gifting entity
as listed on in the underwriting conditions
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
If gift was deposited into settlement agent’s
account after closing docs were signed, PRMI
will proceed with loan funding upon receipt of
copies of settlement agents dated
disbursement checks verifying the loan
proceeds were not disbursed until after gift
funds were received
 PRMI will not allow gifts wired from private
gift donors unless the wire can be conclusively
identified with an account that has been fully
documented and sourced.
Note: To avoid funding delays copies of these
documents must be provided and cleared prior to
docs.
Gifts as Cash Reserves
DEPOSITED PRIOR TO CLOSING:
 Excess gift funds in the borrower’s account may be used as cash reserves (1-2 unit properties only) and
may be included in the borrower’s account balance when submitting to TOTAL. The gift should be
identified separately as gift on the FHA Transmittal and 1003
Provided AT CLOSING:
 Excess funds from gifts remaining after closing may not be used as cash reserves. Gift must be submitted
to TOTAL as “gift funds: and not included in borrowers account balance
Contingent Liabilities
A contingent liability exists when an individual will be held responsible for payment of a debt, should another
party, jointly or severally obligated, default on that payment. Unless the borrower can provide conclusive
evidence from the debt holder that there is no possibility the debt holder will pursue debt collection against him
or her should the other party default, the following rules apply to contingent liabilities:


Mortgage Assumptions: If the borrower is listed as an obligor on a mortgage that has been assumed by
another, a copy of the documents transferring the property and the Assumption Agreement executed by
the transferee are required. The debt must be counted against the borrower unless the assumption
released the borrower from liability, or:
The orientating lender of the mortgage being underwritten obtains from the servicer of the assumed
loan, a payment history
Title Requirements


Title must be held as individuals.
Lien waivers are required for each draw. A final title update assuring first lien position through the
completion date is required.
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Chain of Title
24 month chain of title provided by the title company is required, indicating buyers, sellers, price and date. Any
increases in value/price must be justified. The appraisal is not an acceptable source for chain of title
information.
Leasehold Estates Requirements
Properties that are secured by Leasehold Estates are acceptable provided they meet FHA guidelines and
conform to all of the following:
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
The lease is for the rental of a property with a fee ownership interest
Residential properties in the area consisting of leasehold or ground rent estates are readily marketable
and acceptable in the subject area
The leasehold is in full force and effect and is not subject to any prior lien or encumbrance by which the
leasehold could be terminated or subjected to any charge or penalty
The remaining term or exercised renewal of the lease with any renewals enforceable by the mortgage
do not terminate earlier than ten years after the maturity date of the loan
The lease must comply with the following:

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The lease (including all amendments) is recorded and no party is in any way in breach of any provision of
the lease or amendment
Leases may not contain restrictions of assignability
In most cases, the lease must allow for an option to purchase. For exceptions see HUD Handbook 4150.1
Ground Rent Parameters:
Ground rent is established in the local market place, but in no case may the annual rental exceed the lesser of:


12 percent of the site value or
The mortgage interest rate at the time of underwriting, less two percent, times the site value
Ground rent may increase periodically, subject to the following:

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Rent may not be increased for the first three years of the lease term. Subsequent rent increases may
occur no more than once every 12 months
Increases must be stated in the lease document in exact dollar amounts
Establishment of future rentals by negotiation or by formula is not permitted
Increases in any 12-month period may equal no more than 2 percent of HUD's original site valuation, but
at no time may annual ground rental exceed 12 percent of HUD's original site valuation
Sales Contract
PRMI does not permit re-negotiated purchase agreements that increase the sales price after the original
appraisal has been completed if:
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The appraised value is higher than the contracted sales price provided to the appraiser, and
The new purchase agreement and/or addendum used to modify the sales price is dated after the
appraisal is received, and
The only change to the purchase agreement is an increase in sales price.
If the purchase agreement is re-negotiated subsequent to the completion of the appraisal, the loan-to
value will be based on the lower of the original purchase price or the appraised value, unless:
Re-negotiation of only seller paid closing costs and/or pre-paids when seller paid closing costs/pre-paids
are common and customary for the market and supported by the comparables, OR
An amended purchase agreement for new construction property is obtained due to improvements that
have been made that impact the tangible value of the property. In the event of such changes, an
updated appraisal must be obtained to verify the value of the modifications/changes.
Assigned or transferred sales contracts are not permitted
Allowable Borrower Paid Fees
The borrower may pay reasonable and customary fees. Due to existing requirements, borrowers may not pay a
tax service fee. The borrower may never pay more than the actual cost of a third party fee. Discount points,
prepaid charges and any other closing cost paid by the borrower cannot be counted toward the borrower’s
minimum investment.
On a streamline 203K, if line B14 is greater than $35,000 the borrower can bring up to $5000.00 of to the table
to keep the loan as a streamline 203K, provided they already have their 3.5% into the deal and all funds are
sourced and verified according to PRMI requirements.
Note: Interim Interest Credits are permitted. Loan closing must be within the first seven- (7) days of the month to
receive the credit.
Higher Priced Mortgage Loans
A Higher Priced Mortgage Loan (HPML) is a loan secured by a borrower’s principal residence that exceeds the
Annual Percentage Rate (APR) thresholds, as defined in Regulation Z, thereby triggering additional qualification
requirements and consumer protections provisions. Higher Priced Mortgage Loans (HPML) can be defined as a
first lien mortgage on a principal dwelling with an Annual Percentage Rate (APR) that is 1.5% or more above the
“average prime offer rate” as of the date the rate is locked, or a second lien mortgage on a principal dwelling
with an Annual Percentage Rate (APR) that is 3.5% or more above the “Average Prime Offer Rate” (APOR) as of
the date the rate is locked.
HPML loans are eligible for delivery but require the following documentation:
 Loan must be a fixed rate
 Borrower’s income and assets must be fully verified
 Evidence the borrower’s ability to repay the debt has been tested using the full PITI (including
hazard and flood insurance) and other housing related assessments, such as HOA dues.
 Loan may not have a prepayment penalty
 Loan must be escrowed for property taxes and insurance (including PMI, if required by creditor)
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
Loan must be run through the Vendor Services in Data Trac at the time of underwrite.
High cost –Section 32
PRMI does not allow any loans, which are defined, as “high-cost” under Section 32 or any State or locally
governed legislation.
Please Note: PRMI does allow HPML loans, refer to above HPML section eligibility for details.
Hazard Insurance Coverage Requirements
For first lien home mortgages on 1-4 unit properties, the hazard insurance coverage must be equal to the lesser
of:
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
100% of the insurable value of the improvements—as established by the property insurer or
Guaranteed Replacement Cost Endorsement, which provides that the insurer agrees to replace the
insurable property, regardless of the cost or the Replacement Cost Endorsement or;
The unpaid principal balance of the mortgage, as long as it equals the minimum amount (80%) of the
insurable value (total appraised value minus the estimated site value) required to compensate for
damage or loss calculated on a replacement cost basis.
Note: Due to the revised agency appraisal form, which eliminated the site value box, the estimated site
value can be submitted with a notation in the Comments section of the appraisal or an appraisal
addendum signed by the appraiser.
If the hazard insurance is not equal to at least one of the above minimum coverage amounts, then additional
hazard coverage that meets the minimum coverage amounts must be obtained before the loan can be
purchased.
If the estimated site value, opinion site value, or an appraisal addendum signed by the appraiser is not available
on the appraisal, the documents below are acceptable in the following order:
1. Insurance value from the insurance agency
2. Third party vendor (Marshall and Swift [example: Data Quick] may have been used by the vendor.)
3. If the site value is not noted, the tax assessor value from the title policy/commitment or tax assessment
form may be used for the calculation.
Condominium- Attached PUD
The condominium association must maintain a master of blanket type of insurance policy, with premiums that
are paid as a common expense. The policy must cover all general and limited common elements normally
included, such as fixtures, building service equipment, and common personal property and supplies belonging to
the homeowners’ association. The policy also must cover fixtures and other personal property inside individual
units (e.g., stoves, refrigerators), whether or not the property is part of the common elements.
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If the master or blanket policy does not provide interior unit coverage (replacement of improvements and
betterment coverage to cover any improvements that the borrower may have made), the borrower must obtain
an HO-6 Policy or “walls-in” coverage. HO-6 (walls-in) insurance coverage must be obtained by the borrower
when the master policy does not include interior unit coverage (including 100% replacement of interior
improvements and betterment coverage).

Minimum of $1 million coverage on master polices for condos:
o If the “master” or “blanket” policy does not provide full coverage of the interior or is a “bare walls”
policy, then an individual HO-6 (“walls-in”) policy must be obtained to reach the full 100% coverage

HO-6 (“walls-in”) policies must be sufficient to repair the interior of the unit, including but not limited to
any additions, improvements, and betterments to its current condition in the event of a loss. The HO-6
policy is required to cover 100% of the insurable replacement cost of the unit’s interior improvements
and current betterments including kitchen cabinets, lighting, flooring, and plumbing fixtures
Deductible
The maximum allowable deductible for all property types is 5% of the face amount of the insurance policy unless
a higher maximum is required by state law. When a policy provides for a separate wind-loss deductible (either in
the policy itself or in a separate endorsement), that deductible must be no greater than 5% of the face amount
of the policy.
Escrow Netting/Transfers
PRMI prohibits the use of escrow funds for any purpose other than that for which they were received, such as
ground rents, taxes, assessments, and insurance charges or premiums. Therefore, reduction of loan principal is
NOT an eligible purpose for the use of escrow funds. In determining the maximum loan amount escrow funds
may not be used to reduce the outstanding loan balance in the payoff amount.
Non-Purchasing Spouse in a Community Property State
If the subject property is located in or the borrower resides in a community property state, the following
requirements apply:
 A credit report for the non-purchasing spouse is required to determine any joint or individual debts. The
spouses’ authorization to pull a credit report must be obtained. If the spouse refuses to provide
authorization for the credit report, the loan must be rejected.
 Even if the non-purchasing spouse does not have a social security number, the credit reporting company
should verify that the non-purchasing spouse has no credit history and no public records recorded
against him/her.
 The credit reporting company should be given non-purchasing spouse information (name, address, birth
date and any other significant information requested).
 The greater of the monthly payment amount or 5% of the outstanding balance of all debts of the nonpurchasing spouse must be included in the qualifying ratios.
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
Disputed debts of the non-purchasing spouse are in accordance with FHA and state law
List of Known Community Property States
 Arizona
 Louisiana
 Texas
 California
 Nevada
 Washington
 Idaho
 New Mexico
 Wisconsin
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Baltimore 203K Loan Center Contact Information:
203k Center Contact Information:
Phone: 855-361-2035
Email: [email protected]
Gregory Hall – 203k Center Operations Manager
Escalation Process
Loan file specific:
All loan level items relating to guidelines must be discussed with the loan file
underwriter, if there is disagreement on a guideline or its interpretation the loan file will
then be escalated to Greg Hall who will involve the Underwriters Regional Underwriting
Manager, via the executive review screen in Data Trac as “UW Support” service levels
are dependent on volume but are generally reviewed within 72. Regional Underwriting
Managers are to send an email to [email protected] if they feel there is a
discrepancy or area of improvement in the 203K guidelines.
Process Flow:
All process or loan flow discrepancies, concerns or request should be escalated to Greg
Hall @ 855-361-2035. If Greg is unable to solve or feels a process change or
improvement is warranted he will email [email protected] for a change request.
Renovation Ready may email [email protected] if they feel an operational issue
needs immediate attention from the PRMI Corporate Office.
Guideline and Process Flow Changes will be updated within 20 days of request, with the
exception of urgent matters which will be updated within 72 hours.
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