If your Firm is involved with the origination of FHA loans, it is essential that you are aware of the more significant policy changes. These changes became effective for transactions that obtained their FHA case number on & after September 14, 2015.
Admittedly, lenders have been recently focused on implementing the new TRID rules & requirements and many mortgage lender executives attended the National MBA convention, held this past week, in San Diego, CA.
However, loan applications taken in mid-September should now be entering the underwriting phase so this is a good time for underwriters and Quality Control audit staff to be reminded of the more important policy and procedural FHA changes – when they review such transactions.
Outlined below is my “Top Ten” listing of these policy & procedural changes:
- Pre-Closing Reviews – FHA now mandates that lenders now process pre-closing reviews as part of their overall Quality Control (QC) Plan. Previously, FHA only recommended that such reviews be completed. Pre-closing QC reviews must be 10% or less of the FHA QC sample size.
- Deferred Obligations (i.e. student loans) – deferred obligations must now be included in a Borrower’s monthly liabilities when calculating their debt ratio. Previously, a student loan deferred more than 12 months was not counted when calculating a borrower’s debt ratio. If a monthly payment amount is not yet known on student loan debts, lenders should use 2% of the outstanding balance (5% on installment loans) to establish the monthly payment amount.
- “Sourcing” the EMD – FHA now requires evidence of the source of funds for an Earnest Money Deposit (or recent deposits & recently opened accounts) in excess of 1% of the Sales Price. Previously, this requirement was 2% of the Sales Price.
- Re-verifications of Rent/Mortgage – FHA now requires that lenders re-verify, in writing or electronically if available, mortgage payments or rental payments made by the Borrower as part of a Post-Closing QC review. Previously, FHA only recommended that a VOM/VOR was obtained.
- Appraisal Field Reviews – a lender’s QC Plan for Post-Closing reviews must stipulate that appraisal field reviews will be conducted on 10% of the mortgages selected for the QC sample PLUS a field review will be obtained on ALL Early Payment Default (EPDs) cases. Previously, EPDs could be included in the sample size when selecting cases for the 10% field review requirement.
- Operating Appliances & Sump Pumps – as part of the established appraisal protocol, FHA appraisers are now required to “operate & test” all conveyed appliances (i.e. a dishwasher) as well as any sump pump. The lender will be made aware of any deficiency if found to be inoperable. Previously, FHA did not specifically state that appraisers were required to operate appliances and sump pumps.
- “Rebuild Letters” – FHA appraisers are now required to indicate whether or not the subject property can be legally rebuilt if destroyed if the property has a legal non-conforming zoning designation. Previously, appraisers did not have this responsibility.
- Reporting of 3 Year Sales History on Comps – FHA appraisers must now report on the sales history of the comparable sales for at least the past three years. Previously, appraisers reported on the past 12 months sales history of the comps (which is the industry standard).
- Additional Photographs – FHA appraisers will now be required many more photographs as part of their appraisal report. Pictures of the kitchen, main living area, bathrooms, bedrooms, attic, crawl space, updates/renovations, repair items, etc. are some examples of these additional photo requirements.
- 203(k) Consultant Fees – FHA has posted a listing of fees that may be charged by a Section 203(k) Consultant in the 4000.1 Handbook. Unfortunately, these are the same Consultant fees that FHA established in 1995. For example, the Draw Inspection fee is only $100. In recent years, FHA would allow Consultants to charge fees that were deemed reasonable and customary for their services.
Obviously, there are many more FHA policy and procedural changes, that lenders need to be aware of, than those cited above. The intent of this Blog Post is to alert interested readers of at least 10 substantive changes that may pose difficulties in the processing, underwriting and review of an FHA loan application.
Keep in mind that FHA staff has indicated that they will immediately begin enforcement of these policies as part of their Post-Endorsement Technical Reviews (PETRs) as well as on-site lender monitoring reviews. To say that you were not aware of these changes, will not be an acceptable response to a HUD Auditor.
A word to the wise!
For a more complete listing of the 4000.1 Handbook policy & procedural changes go to the LoanLogics website at www.loanlogics.com.