Manual 3a

American Southwest Mortgage - Correspondent Lending Manual

Processing and Underwriting Rules - Continued

| Previous | TOC | Next |

QUALIFYING RATIOS/ ADEQUACY OF INCOME/ LIST OF COMPENSATING FACTORS

FHA

All installment accounts that will pay-out in ten months or more must be used in calculating ratios;

Ratios are 29/41 or 31/43 with energy efficient properties as determined by HUD guidelines.

If the applicant(s)' ratios exceed the standards set by FHA, then the underwriter must state on the MCAW one or more of the compensating factors considered in loan approval. FHA lists the following compensating factors:

The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage. If the borrower over the past 12-24 month has met his or her housing obligations, as well as other debts - there should be little reason to doubt the borrower's ability to continue to do so, despite having ratios in excess of those prescribed;
The borrower makes a large downpayment toward the purchase of the property;
The borrower has demonstrated a conservative attitude toward the use of credit and an ability to accumulate savings;
Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses;
The borrower receives compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits;
There is only a minimal increase in the borrower's housing expense;
The borrower has substantial cash reserves after closing;
The borrower has substantial non-taxable income (if no adjustment has been made previously in the ratio computations);
The borrower has potential for increased earnings, as indicated by job training or education in the borrower's profession;
The home is being purchased as the result of relocation of the primary wage-earner - and the secondary wage-earner has an established history of employment, is expected to return to work, and there is reasonable prospects for securing employment in a similar occupation in the new area. The underwriter must address the availability of such possible employment.

VA:

All installment debts that pay out in more than ten months must be used in calculating ratios. All revolving debt should be included in qualifying analysis including those revolving debts paid off within the last 10 months. Minimum payment should be used in qualification;

VA applies one ratio to total housing expense and recurring obligations of 41%.

VA also applies a minimum residual guideline based on family size and income. The following guidelines apply for the South Region (Oklahoma) as of 11/97.

Family Size	$79,999 & Below	$80,000 & Above
1	$382	$441
2	$641	$738
3	$772	$889
4	$868	$1,003
5	$902	$1,039

If ratios exceed 41%, the residual must be 20% over the minimum required;

For loan applications in which either the borrower or the spouse is an active-duty service person, the residual income requirement will be reduced by a minimum of 5%.

VA lists the following as compensating factors:

Excellent long-term credit history;
Conservative use of consumer debt;
Minimal consumer debt;
Long-term employment;
Significant liquid assets;
Down payment or the existence of equity in refinancing loans;
Little or no increase in shelter expense;
Military benefits;
Satisfactory home ownership experience.
High residual income;
Low debt-to-income.

CONVENTIONAL CONFORMING:

All debts that will pay out in more than ten months must be used in calculating ratios.

Qualifying ratios are 28/36 or 30/38 with energy efficient properties as determined by appraiser.

FANNIE MAE lists the following as compensating factors:

FOR LTV'S - 90% OR LESS

Borrowers are making a large down payment toward the purchase of the property, or have a strong equity position that is being refinanced;
Borrowers have demonstrated ability to devote a greater portion of income to basic needs like housing;
Borrowers have a demonstrated the ability to accumulate savings and to maintain a good credit history or a debt-free position;
Borrowers have a potential for increased earnings and advancement because of their education or job training, even though they have just entered the job market;
Borrowers have net worth substantial enough to evidence their ability to repay the mortgage;
Borrowers have short-term income that could not be counted as "stable" income because it would not continue to be received for at least three years beyond the date of the mortgage application;
Borrowers purchasing their home as the result of a corporate relocation of the primary wage-earner and the secondary wage-earner, who has a history of employment in the previous location, is expected to return to work (even if he or she has not yet obtained employment in the new location;
Borrowers purchasing a home that qualifies as energy-efficient.

FOR LTV'S ABOVE 90% - Borrowers must fall into one of the above categories plus:

The borrowers have financial reserves that can be used to carry the mortgage debt. Part of the savings must be in the form of liquid assets that equal at least two month of PITI payments;
The borrowers have a demonstrated ability to devote a greater portion of their income to housing expenses (but the housing expense for the subject mortgage should not exceed the borrower's previous housing expenses), excellent payment histories on any prior mortgage obligations, and acceptable credit histories;
The borrowers have a total obligation to income ratio (at the time of the application) of 30% or less, excellent payment histories on any prior mortgage obligations, and acceptable credit histories.

The underwriter must support and document all decisions regarding the underwriting ratios.

FUNDS FOR CLOSING

FHA:

Funds for closing to cover the minimum down payment, pre-paids and closing costs required to be paid by borrower must be verified from an acceptable source per HUD guidelines.

The borrower must establish that after the mortgage offered for insurance has been recorded, the mortgaged property will be free and clear of all liens other than such mortgage, and there will not be any other outstanding unpaid obligation contracted in connection with the mortgage transaction or the purchase of the mortgage property.

VA:

A veteran may purchase a property with no downpayment. If the veteran is paying a down payment or closing costs, the funds must be verified from an acceptable source, per VA guidelines.

CONVENTIONAL:

Funds for closing from an acceptable source must be verified to cover the minimum down payment, pre-paids, closing costs and, in most cases, a two month PITI reserve.

NOTE: See Underwriting Guidelines section regarding earnest money deposits on "for sale by owner" transactions.

| Previous | Top | Next |