2-1 OVERVIEW. The purpose of underwriting is to determine a borrower’s ability and willingness to repay the mortgage debt, thus limiting the probability of default and collection difficulties, and to examine the property offered as security for the loan to determine if it is sufficient collateral. The “Four C’s of Credit” (Credit history, Capacity to repay, Cash to close, and the Collateral) are evaluated during theunderwriting process.
This chapter on mortgage credit analysis describes procedures for evaluating the credit history, the borrower’s capacity to make payments, and whether sufficient cash assets are available to close the mortgage. It provides the requirements on the types of income that may be considered in qualifying the borrower, the liabilities that must be included in the determining creditworthiness, and the debt-to-income ratios and compensating factors used in the underwriting process. These underwriting instructions are FHA’s “base-line” credit policies. For those lenders using FHA-approved automated underwriting systems (AUS) or those employing FHA’s TOTAL mortgage scorecard, there will be a considerable number of revisions to these policies, including documentation requirements, as described in other FHA issuances.
2-2 MORTGAGE ELIGIBILITY (BORROWERS). Generally, we will insure mortgages made to individuals only. Under the conditions described in Chapter 1, we will also insure mortgages made to state and local government agencies and approved nonprofit organizations.
A. Borrowers, Co-Borrowers and Co-Signers. Borrowers and Co-borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower’s income, assets, liabilities, and credit history are considered in determining creditworthiness.
Co-signers do not hold ownership interest in a property, but are liable for repaying the obligation and must sign all documents with the exception of the security instruments. The co-signer's income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the co-signer must complete and sign the loan application.
We do not permit an individual to take an ownership interest in the property at settlement without signing the mortgage note and all security instruments.
The following conditions also apply to co-borrower and co-signer eligibility:
1. A co-borrower or a co-signer may not be a party that has a financial interest in the transaction, such as the seller, builder, real estate agent, etc. Exceptions may be granted if the seller and co-borrower/co-signer is related to the owner by blood, marriage or law.
2. An individual signing the loan application must not be otherwise ineligible for participation. (See paragraph 2-5).
3. Unless otherwise exempted (e.g., military service with overseas assignments, U.S. citizens living abroad), any non-occupying co-borrowers or co-signers must have a principal residence in the United States.
All references to co-borrowers – including the 75 percent LTV limits (paragraph 1-8(B)), etc. – apply equally to co-signers (except co-signers do not take title to the property or sign the security instruments).
B. Citizenship and Immigration Status. Citizenship of the United States is not required for eligibility. When a mortgage loan applicant indicates on the loan application that he or she holds something other than U.S. citizenship, the lender must determine residency status from the documentation provided by the borrower.
Lawful Permanent Resident Aliens: For those borrowers with lawful permanent resident alien status, FHA will insure the mortgage under the same terms and conditions as U.S. citizens. The lender must document the mortgage file with evidence of permanent residency and indicate on the Uniform Residential Loan Application (URLA) that the borrower is a lawful permanent resident alien. Evidence of lawful permanent residency is issued by the Bureau of Citizenship and Immigration Services (BCIS) (formerly the Immigration and Naturalization Service) within the Department of Homeland Security.
Non-Permanent Resident Aliens: FHA will also insure a mortgage made to a non-permanent resident alien provided that the property will be the borrower's principal residence, the borrower has a valid SSN, and the borrower is eligible to work in the U.S. as evidenced by an Employment Authorization Document (EAD) issued by BCIS. If the authorization for temporary residency status will expire within one year and a prior history of residency status renewals exists, the lender may assume continuation will be granted. If there are no prior renewals, the lender must determine the likelihood of renewal, based on information from the BCIS.
Although social security cards may indicate work status, such as “not valid for work purposes,” an individual’s work status may change without the change being reflected on the actual social security card. Therefore, the social security card is not to be used as evidence of work status for non-permanent resident aliens; the BCIS employment authorization document is to be used instead.
Non-U.S. Citizens with no lawful residency in the U.S. are not eligible for FHA-insured mortgages.
C. Borrower's Age. There is no maximum age limit for a borrower. The minimum age is the age at which the mortgage note can be enforced legally in the state or other jurisdiction in which the property is located.
D. Non-Purchasing Spouses. If required by state law in order to perfect a valid and enforceable first lien, the non-purchasing spouse may be required to sign either the security instrument or documentation evidencing that he or she is relinquishing all rights to the property. If the non-purchasing spouse executes the security instrument for such reasons, he or she is not considered a borrower for our purposes and need not sign the loan application. In all other cases, the non-purchasing spouse is not to appear on the security instrument or otherwise take title to the property at loan settlement.
Where there are non-purchasing spouses who sign security instruments relinquishing their rights to the property pursuant to applicable state laws, these non-purchasing spouses do not have to sign the mortgage note. Signing the security instrument for such purposes does not make the non-purchasing spouse a co-borrower.
Except for the obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios if the borrower resides in a community property state or the property to be insured is located in a community property state. Although the non-purchasing spouse's credit history is not to be considered a reason for credit denial, a credit report that complies with the requirements of paragraph 2-4 must be obtained for the non-purchasing spouse in order to determine the debt-to-income ratio.
E. Military Personnel. Military personnel are considered occupant-owners and are eligible for maximum financing if a member of the immediate family will occupy the property as a principal residence, even if the service person is stationed elsewhere.
F. Living Trusts. Property held in a living trust is eligible for FHA mortgage insurance for owner-occupied property, as long as an individual borrower remains the beneficiary and occupies the property as a principal residence. The lender must be satisfied that the trust provides reasonable means to assure that the lender will be notified of any subsequent change of occupancy (for owner-occupant loans only) or transfer of beneficial interest. The trust must appear on the security instrument (i.e., mortgage, deed of trust, security deed). The individual borrower must appear on the security instrument when required to create a valid lien under state law; otherwise, the individual borrower is not required to appear. The owner-occupant, if any, and other borrower(s), if any, must appear on the note with the trust. The individual borrower(s) is not required to appear on the property deed or title.
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