What's Your Mortgage IQ?, Jan 2011 Issue

What's Your Mortgage IQ?, Jan 2011 Issue

Maybe you know the answer—or maybe not!  Some of the answers may even help you put together deals that you never thought had a snowball’s chance…


(The answers are extracted from the guidelines and do not cover lender overlays.)



FHA:  Does FHA require 30 percent equity like FNMA to count 75 percent of the rental income received when a current residence is converted to a rental property?


FHA does have a 25 percent equity rule (instead of 30 percent) but they also have the following exception to that rule:


The borrower is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally-recognized commuting distance.

A properly executed lease agreement (that is, a lease signed by the borrower and the lessee) of at least one year's duration after the loan is closed is required.

Note: FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month's rent was paid to the homeowner.

Some investors do not embrace this exception, so double check before you make a commitment to your borrower.


Marketing Tip:  Let your agents know that FHA waives the 25 percent equity requirement when employer relocates borrowers to an area outside reasonable commuting distance and they want to use rental income from their current house to qualify for new FHA financing. 



FHA:   What are FHA’s Rules for a borrower to qualify on a “rent-to-own” option agreement?


Rent-to-own agreements and / or sales transactions between tenant and landlord are affected if any family or business relationship exists between the two.  There are also specific restrictions on allowable ‘rent credit’ that a landlord can apply towards down payment on the property. 


On a side note: VA has absolutely no rules or guidance on the subject of rent-to-own or identity of interest issues.  Those situations are up to investor and underwriter interpretation. 




Marketing Tip:  Rent-to-own is a big deal these days—so why not hold a sales meeting using these two Mortgage Talking Points™ as your guide:


“Getting it Right The First Time: FHA Rent-To-Own Underwriting Rules”


“Offering Rent-to-Own Option? The Road to a Conventional Mortgage Loan!”



VA    I have a client who is moving 100 miles away and has a VA loan on his current home. They want to use FHA financing and qualify for both payments. The underwriter says that we cannot do ANY loan for them as VA requires the current home to be owner occupied at all times? Is this true?


Absolutely not!!!   (Okay...I will admit that there could be ONE instance where this could be true and that is when a State Housing Agency First Time Homebuyer Program was used in conjunction with the VA guaranteed loan.  Those programs have mandatory occupancy rules and can call the loan due if they find out the owner is renting the home out.)


VA does require, on a purchase transaction, that the home be occupied by the Veteran or spouse in order for the transaction to be eligible.  (In other words, a single Veteran could not be deployed overseas and purchase a home without being able to occupy it for the next year.)


Once a Veteran buys a home and has used it for his/her primary residence he/she is free to retain that home WITH VA financing, even if they turn the home into a rental. 


Fannie : What is the max LTV for cash out Refi--- on a 1-4 family investment property and how many properties will Fannie allow?

Fannie will purchase loans for borrowers with up to 10 financed properties.
Cash out for investment is 75 percent and is limited to 4 properties.  Properties 5-10 are not allowed to be cash-out transactions. 

Marketing Tip:  Let your agents know that working with investors    can recession-proof your business because these are the people who are buying properties these days.


Mortga Talking Points™ “Working with Investors?  Know the Rules!” 



Compliance:  I am trying to find out how to comply with LQI if new inquiry?   Is the borrower’s statement enough? Or do you have to check with Creditor or credit bureau? 


Fannie is allowing each lender to set its own policy, but here is an example:


  •         MERS check
  •         Inquiry Status update – borrower explanation for all inquiries
  •         New Report – soft report, full report, or other monitoring service
  •        State new inquiries or none
  •       State new trade lines or none
  •      Update existing balances for consideration
  •      Update MERS
  •       Update original inquiries
  •      New Inquiry Status update – for borrower explanation
  •      Underwriter is responsible to reconcile with original report.


Fannie requires this reconciliation to be complete – all trades and inquiries fully updated and a determination made as to how they affect qualifying.  Yes, this may cause a number of delays and/or issues that can lead to the declination of the loan.  The set up is for an endless loop for inquiries – if any borrower just doesn’t get the message to stop opening credit during the process…but the reality is for only one shot – if underwriter is not comfortable with the reconciliation, the loan will be denied.


Freddie: Thanks for the clarification on Short Sales and Deed-in-Lieu for Fannie.  I would like to know if Freddie’s rules are different? 



Freddie's approach is a bit different...


Foreclosure, bankruptcy, short payoff, or deed-in-lieu within past  seven years is considered significant adverse or derogatory info.


Two categories -- Extenuating Circumstance or Financial Mismanagement


  •          Extenuating Circumstance
  •        Written explanation
  •         Third-party documentation
  •         No prior credit issues
  •        3yrs from foreclosure or multiple bankruptcy
  •         2yrs from deed-in-lieu, short payoff, significant credit lates or single bankruptcy
    •         Financial Mismanagement
    •         680 credit score
    •         5yrs from foreclosure, multiple bankruptcy
    •         4yrs for bankruptcy, deed-in-lieu, or significant credit lates
    •         2yrs for Ch 13 bankruptcy
    •         Must re-establish credit 24 months – must have housing payment history
    •         Must be current on all credit (12 months)
      •          No new derogatory public record
      •          No 60 day lates
      •          No more than 2 30 day lates
      •          No housing lates
      •          Limited revolving debt utilization
      •         Borrower Explanation leading to reasonable conclusion that borrower has re-established an acceptable credit reputation


We have created a comparison chart:  “Fannie Vs Freddie: Waiting Periods for Derogatory Credit” for loan officers, processors & real estate agents. 


Written and contributed by Karen Deis of Mortgagecurrentcy.com.  Provided monthly by www.MortgageCurrentcy.com – Interpreting the Rules and Regulation Changes for loan officers, processors, underwriters, and owners/managers.  Mortgage Talking Points TM, charts and checklists included.