Announcement 20-0032: Carrington Government Loan Program Underwriting Guideline Updates

Overview

Carrington Mortgage Services, LLC (CMS) is pleased to announce the following recent Government loan product underwriting updates (highlighted in red). These updates are clarifications of existing guidance or were announced via previous Correspondent Announcements and are effective immediately.  Please note this is an abbreviated summary of the guideline changes.  All updates should be viewed within the context of the full FHA and VA guidelines available on www.carringtoncorrespondent.com.

FHA Underwriting Guidelines
Old RequirementsUpdated Requirements

Property Types

The following property characteristics represent ineligible collateral for CMS financing:

  • mobile homes
  • co-ops (cooperative homes or apartments)
  • houseboats
  • single wide manufactured homes
  • commercial or industrial zoned properties
  • properties not meeting the criteria as listed in these guidelines
  • properties containing more than one manufactured home unless specifically classified as an Accessory Dwelling Unit by the appraiser
  • properties located within designated Coastal Barrier Resource System (CBRS) areas
  • properties located on Tribal Lands or Reservations
  • properties with deed restrictions
  • shared lots (including condominiums) with undivided interests
  • time shares
  • unimproved land
  • working farm, ranch, or orchard

Property Types

The following property characteristics represent ineligible collateral for CMS financing:

  • mobile homes
  • co-ops (cooperative homes or apartments)
  • houseboats
  • single wide manufactured homes
  • commercial or industrial zoned properties
  • mixed-use with residential building use less than 51% or not meeting the criteria as listed in these guidelines
  • properties encumbered with Property Assessed Clean Energy (PACE) or Home Energy Renovation Opportunity (HERO) obligations,
  • State-approved medical marijuana producing properties,
  • construction to permanent,
  • properties located in the area of Wrightwood, CA,
  • properties containing more than one manufactured home unless specifically classified as an Accessory Dwelling Unit by the appraiser
  • properties located within designated Coastal Barrier Resource System (CBRS) areas
  • properties located on Tribal Lands or Reservations which include section 248
  • Hawaiian properties in Lava Zones 1 & 2
FHA Underwriting Guidelines (continued)
Old RequirementsUpdated Requirements
 

Property Types (continued)

  • Native Hawaiian Housing Loan Guarantee Program (Section 184A) properties with sink holes
  • properties with a wastewater stabilization pond/lagoon (aka sewage lagoon)
  • properties with individual water purification systems required to make the water safe for human consumption (does not include systems installed to improve the taste or softness of the water)
  • properties with deed restrictions
  • shared lots (including condominiums) with undivided interests
  • time shares
  • unimproved land
  • working farm, ranch, or orchard

Business Debt in Borrower’s Name

When business debt is reported on the Borrower’s personal credit report, the debt must be included in the DTI calculation, unless CMS can document that the debt has been paid by the Borrower’s business for at least 12 months, on time payments without delinquency are required, and the debt was considered in the cash flow analysis of the Borrower’s business. The debt is considered in the cash flow analysis where the Borrower’s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented as paid out of company funds. Where the Borrower’s business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis.

This guidance does not apply to Sole Proprietors/Schedule C self-employed borrowers.

Business Debt in Borrower’s Name

When business debt is reported on the Borrower’s personal credit report, the debt must be included in the DTI calculation, unless CMS can document that the debt has been paid by the Borrower’s business for at least 12 months, on time payments without delinquency are required, and the debt was considered in the cash flow analysis of the Borrower’s business. The debt is considered in the cash flow analysis where the Borrower’s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented as paid out of company funds. Where the Borrower’s business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis.

This guidance does not apply to Sole Proprietors/Schedule C self-employed borrowers, borrower debts paid by Sole Proprietors/Schedule C businesses may not be excluded.

Forbearance due to a Major Disaster

Consideration should be given to disaster impacted borrowers that entered into a Formal or Informal Forbearance loss mitigation plan due to a Presidentially Declared Major Disaster.

FHA will not consider mortgage payments as “late” because the payments were not “due” during the disaster relief period. Lenders must continue to analyze the borrower’s payment history for the period before and after (where applicable) the Forbearance period to determine if the borrower’s payment history meets FHA refinancing program requirements.

For Streamline Refinances, the new loan may include the unpaid principal balance, plus up to 60 days of interest and 2 months annual Mortgage Insurance Premium (MIP), less Up-Front MIP refund (if any) plus new Up-Front MIP. If the borrower’s forbearance results in greater than 60 days of interest due on the current loan, the borrower will need to pay the difference at closing.

FHA Underwriting Guidelines (continued)
Old RequirementsUpdated Requirements

Cash-Out Refinances > Occupancy Requirements

Cash-out refinance transactions are only permitted on owner-occupied Principal Residences.

The Property securing the cash-out refinance must have been owned and occupied by Borrower as their Principal Residence for the 12 months prior to the date of case number assignment. If the property was owned prior to closing by a limited liability corporation (LLC) that is 100% owned by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s 12 month ownership requirement.

Documentation – CMS must review the Borrower’s employment documentation or obtain utility bills to evidence the Borrower has occupied the subject Property as their Principal Residence for the 12 months prior to case number assignment.

Cash-Out Refinances > Occupancy Requirements

Cash-out refinance transactions are only permitted on owner-occupied Principal Residences.

The Property securing the cash-out refinance must have been owned and occupied by all Borrowers as their Principal Residence for the 12 months prior to the date of case number assignment. If the property was owned prior to closing by a limited liability corporation (LLC) that is 100% owned by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s 12 month ownership requirement.

Documentation – CMS must review the Borrower’s employment documentation or obtain utility bills to evidence that all Borrowers have occupied the subject Property as their Principal Residence for the 12 months prior to case number assignment.

Maximum Mortgage Calculation for Streamline Refinances

For owner-occupied Principal Residences the maximum Base Loan Amount for Streamline Refinances is:

  • the lesser of:
    • the outstanding principal balance of the existing Mortgage as of the month prior to mortgage Disbursement; plus:
      • interest due on the existing Mortgage; and
      • MIP due on existing Mortgage; or
    • the original principal balance of the existing Mortgage (including financed UFMIP);
  • less any refund of UFMIP

Maximum Mortgage Calculation for Streamline Refinances

For owner-occupied Principal Residences the maximum Base Loan Amount for Streamline Refinances is:

  • the lesser of:
    • the outstanding principal balance of the existing Mortgage as of the month prior to mortgage Disbursement; plus:
      • interest due on the existing Mortgage; and
      • MIP due on existing Mortgage; or
    • the original principal balance of the existing Mortgage (including financed UFMIP);
  • less any refund of UFMIP

Excess interest due to a disaster-related forbearance may not be included in the loan amount. See Forbearance due to a Major Disaster

FHA Underwriting Guidelines (continued)
Old RequirementsUpdated Requirements

Identifying an Accessory Dwelling Unit > Required Analysis and Reporting

As part of the highest and best use analysis, the Appraiser must make the determination to classify the Property as a Single Family dwelling with an ADU, or a two-family dwelling. The conclusion of the highest and best use analysis will then determine the classification of the Property and the analysis and reporting required.

An ADU is usually subordinate in size, location and appearance to the primary Dwelling Unit and may or may not have separately metered utilities or separate means of ingress or egress. The Appraiser must not include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling.

The Appraiser must notify CMS of the deficiency in MPR or MPS if more than one ADU is located on the subject Property.

If the ADU or living unit distinction is in question by the D.E. Underwriter, CMS will require a detailed explanation of the appraiser’s highest and best use analysis.

Identifying an Accessory Dwelling Unit > Required Analysis and Reporting

HUD permits ADUs as long as the total number of units is four (4) or less. The Appraiser must perform a full inspection, verify the construction is legal and complies with local zoning requirements and is marketable.

As part of the highest and best use analysis, the Appraiser must make the determination to classify the Property as a Single Family dwelling with an ADU, or a two-family dwelling. The conclusion of the highest and best use analysis will then determine the classification of the Property and the analysis and reporting required.

An ADU is usually subordinate in size, location and appearance to the primary Dwelling Unit and may or may not have separately metered utilities or separate means of ingress or egress. The Appraiser must not include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling.

The Appraiser must notify CMS of the deficiency in MPR or MPS if more than one ADU is located on the subject Property.

If the ADU or living unit distinction is in question by the D.E. Underwriter, CMS will require a detailed explanation of the appraiser’s highest and best use analysis.

203(k) Initial Draw at Closing

CMS must document the amount and purpose of an initial draw at closing on the form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary.

203(k) Initial Draw at Closing

CMS must document the amount and purpose of an initial draw at closing on the form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary.

The borrower and/or contractor must obtain all required permits prior to closing. If a required permit may not be obtained prior to closing, the contractor may not receive an initial draw at closing. Once the permit is obtained, the borrower and contractor may contact escrowaccountservicing@carringtonms.com to request and process the initial materials draw.

VA Underwriting Guidelines
Old RequirementsUpdated Requirements

Determining Amount of Entitlement

Entitlement is the amount available for use on a loan. The amount of available basic entitlement is $36,000. This may be reduced if a veteran has used entitlement before which has not been restored. The amount of basic entitlement will be displayed near the center of the COE. For example it may say:

“THIS VETERAN’S BASIC ENTITLEMENT IS $_____. TOTAL ENTITLEMENT CHARGED TO PREVIOUS VA LOANS IS $_____.”

For certain loans in excess of $144,000, additional entitlement may be available. For loans greater than $144,000, but less than $484,350, the maximum entitlement is 25 percent of $484,350, which equals $121,087.50. For loans greater than $484,350, the maximum entitlement is 25 percent of the appropriate “loan limit” which can vary by county. For a description of loan limits, as well as the limits for counties, visit the VA Loan Limits webpage. Please note county limits can change yearly. VA will post the limits for each year on our website as they change.

Even though the veteran may have entitlement for certain loans greater than $144,000, the COE will never reflect this potential “extra” entitlement. Instead, an asterisk by the word “available” refers to a note, which explains the possibility of additional entitlement.

If the veteran previously used entitlement, which has not been restored, available entitlement is reduced by the amount used on the prior loan(s). CMS requires the veteran to have combined entitlement and equity totaling 25% of the contract price for purchase transactions, or 25% of the appraised value for cash-out refinance transactions.

Determining Amount of Entitlement

Entitlement is the amount available for use on a loan. The amount of available basic entitlement is $36,000. This may be reduced if a veteran has used entitlement before which has not been restored. The amount of basic entitlement will be displayed near the center of the COE. For example it may say:

“THIS VETERAN’S BASIC ENTITLEMENT IS $_____. TOTAL ENTITLEMENT CHARGED TO PREVIOUS VA LOANS IS $_____.”

For certain loans in excess of $144,000, additional entitlement may be available. For veterans with full entitlement, VA will guaranty 25% of the loan amount on purchase or cash out refinance transactions, regardless of the Freddie Mac Conforming Loan Limit for the subject’s county.  For veterans with partial entitlement, the maximum entitlement is 25 percent of the CLL for the subject’s county.

Even though the veteran may have entitlement for certain loans greater than $144,000, the COE will never reflect this potential “extra” entitlement. Instead, an asterisk by the word “available” refers to a note, which explains the possibility of additional entitlement.

If the veteran previously used entitlement, which has not been restored, available entitlement is reduced by the amount used on the prior loan(s). CMS requires the veteran to have combined entitlement and equity totaling 25% of the lesser of the contract price or appraised value for purchase transactions, or 25% of the appraised value for cash-out refinance transactions.

Vet-Vet Joint Loans

For loans above $144,000 to two veterans who are not married to each other (Vet-Vet Joint Loans), and

  • all Veterans have full entitlement: The maximum guaranty is 25% of the loan amount without regard to the FHFA Loan Limit for the subject’s county.
  • one or more Veteran has partial entitlement: The maximum guaranty is 25% of the lesser of the loan amount or FHFA Loan Limit for the subject’s county.

Married Veterans using Dual Entitlement

For loans above $144,000 to two Veterans who are married to each other and using dual entitlement, the maximum guaranty is 25% of the loan amount so long as one of the Veterans has full entitlement. If both Veterans have partial entitlement, then the maximum guaranty is 25% of the lesser of the loan amount or FHFA Loan Limit for the subject’s county.

 

VA Underwriting Guidelines (continued)
Old RequirementsUpdated Requirements

VA Guaranty Examples

Refer to the CMS VA Underwriting Guidelines for updated examples of VA Guaranty for Veterans with full entitlement and Veterans with partial entitlement.

Maximum Loan Amount

Unlike other home loan programs, there are no maximum dollar amounts prescribed for VA-guaranteed loans. Limitations on VA loan size are primarily attributable to two factors:

1.     Lenders who sell their VA loans in the secondary market must limit the size of those loans to the maximums prescribed by Government National Mortgage Association (GNMA) or whatever conduit they use to sell the loans.

VA limits the amount of the loan to the reasonable value of the property shown on the NOV plus the VA funding fee, with the following exception for Regular refinancing loan (cash-out)

100 percent of the VA reasonable value plus the VA funding fee.

Maximum Loan Amount

The maximum loan amount for VA loans is dependent on the type of loan, the amount of available entitlement to meet the guaranty requirement, and the CMS maximum loan amounts as defined in the VA matrices.

VA limits the amount of the loan to the reasonable value of the property shown on the NOV plus the VA funding fee, with the following exception for Regular refinancing loan (cash-out):

90 percent of the VA reasonable value including the VA funding fee.

Refer to the CMS VA Underwriting Guidelines for additional exceptions.

Down Payment

Because VA loans can be for the full reasonable value of the property, no down payment is required by VA except in the following circumstances:

  • If the purchase price exceeds the reasonable value of the property, a down payment in the amount of the difference must be made in cash from the borrower’s own resources, and
  • VA requires a down payment on all GPMs.

If a veteran has less than full entitlement available, CMS may require a down payment in order to make the veteran a loan that meets GNMA or other secondary market requirements. The “rule of thumb” for GNMA is that the VA guaranty, or a combination of VA guaranty plus down payment and/or equity, must cover at least 25 percent of the loan.

Down Payment

Because VA loans can be for the full reasonable value of the property, no down payment is required by VA except in the following circumstances:

  • If the purchase price exceeds the reasonable value of the property, a down payment in the amount of the difference must be made in cash from the borrower’s own resources, and
  • VA requires a down payment on all GPMs.

If a veteran has less than full entitlement available, CMS may require a down payment in order to make the veteran a loan that meets GNMA or other secondary market requirements. The “rule of thumb” for GNMA is that the VA guaranty, or a combination of VA guaranty plus down payment and/or equity, must cover at least 25 percent of the purchase price or appraised value.

 

VA Underwriting Guidelines (continued)
Old RequirementsUpdated Requirements

Maximum Guaranty Table

Public Law 112-154, the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012, signed August 6, 2012, extended the temporary increase in the maximum guaranty. The increase expired December 31, 2011, but Public Law 112-154, extended it through December 31, 2014. The maximum guaranty varies depending on the location of the property. While VA does not have a maximum loan amount, there are effective “loan limits” for high-cost counties. The limits are derived by considering both the median home price for a county and the Freddie Mac conforming loan limit. To aid lenders in determining the maximum guaranty in high-cost counties, VA has created a Loan Limit chart, with instructions.

Refer to the CMS VA Underwriting Guidelines for the maximum guaranty table values.

Maximum Guaranty Table

Pursuant to the Blue Water Navy Vietnam Veteran’s Act of 2019, VA will guaranty 25% of the loan amount for Veterans with full entitlement seeking a purchase or cash out refinance loan in excess of $144,000, regardless of the FHFA Conforming Loan Limit. Veterans with full entitlement seeking a purchase or cash out refinance loan that exceeds the FHFA Conforming Loan Limit for the subject’s county will generally not require a down payment or equity to meet the 25% guaranty requirement, however CMS maximum loan amount and LTV limits apply.

Refer to the CMS VA Underwriting Guidelines for the maximum guaranty table values.

The VA Funding Fee > If Exempt Status Cannot Be Determined:

If the veteran’s exempt status cannot be verified prior to loan closing, the funding fee must be remitted as if the borrower was not exempt.

CMS must Indicate in the loan file that the veteran claims exempt status. VA will determine the borrower’s status and refund the funding fee if appropriate. If the veteran has a pending disability compensation claim at the time of loan closing, the funding fee must be remitted as if the borrower was not exempt. 

Advise the veteran to contact the VA RLC to request a refund if it is later determined that the veteran is entitled to compensation retroactively to a date prior to loan closing.

The VA Funding Fee > If Exempt Status Cannot Be Determined:

If the veteran is not already verified as exempt on the VA Form 26-8937 or Certificate of Eligibility, a fully completed and executed Disability Questionnaire is required, which asks the veteran several questions that may indicate a Funding Fee exemption is warranted.

If the Veteran has a claim for compensation pending with VA, an updated COE must be obtained within three (3) days of the note date using the COE “Correct” function in WebLGY.

If an Active Duty Servicemember has a pre-discharge claim pending, CMS must contact the Regional Loan Center (RLC) immediately to request assistance in obtaining a proposed or memorandum rating in the event the Servicemember may be exempt from paying the funding fee as noted above. If a proposed or memorandum rating is not obtained and loan closing takes place, the Servicemember is not eligible for funding fee exemption.

If an Active Duty Servicemember is a Purple Heart recipient and the Funding Fee exemption is not already reflected on the Certificate of Eligibility, a Copy of Purple Heart Certificate or DD214 reflecting Purple Heart award is required to be forwarded to the RLC of jurisdiction for updating.

 

VA Underwriting Guidelines (continued)
Old RequirementsUpdated Requirements
 

The VA Funding Fee > If Exempt Status Cannot Be Determined (continued):

If the veteran’s exempt status cannot be verified prior to loan closing, the funding fee must be remitted as if the borrower was not exempt.

CMS must Indicate in the loan file that the veteran claims exempt status. VA will determine the borrower’s status and refund the funding fee if appropriate. If the veteran has a pending disability compensation claim at the time of loan closing, the funding fee must be remitted as if the borrower was not exempt.

Advise the veteran to contact the VA RLC to request a refund if it is later determined that the veteran is entitled to compensation retroactively to a date prior to loan closing.

The VA Funding Fee

Refer to the CMS VA Underwriting Guidelines for updated loan rate fees which apply to Purchase and Cash-Out Refinance Loans closing on and after January 1, 2020 through December 31, 2021.

Cash Out Refinance Transactions > Loan-to-Value (LTV)

For Type I and Type II Cash Out Refinance Transactions, VA will not guaranty refinance loan transactions when the LTV exceeds 100 percent including the Funding Fee. CMS follows GNMA requirements and limits the maximum LTV for cash-out refinance transactions to 90%.

New LTV Calculation: Divide the total loan amount (including VA funding fee, if applicable) by the reasonable value on the Notice-of-Value (NOV) of the property determined by the appraiser.

Cash Out Refinance Transactions > Loan-to-Value (LTV)

For Type I and Type II Cash Out Refinance Transactions, VA will not guaranty refinance loan transactions when the LTV exceeds 100 percent including the Funding Fee. CMS follows GNMA requirements and limits the maximum LTV for all cash-out refinance transactions, including Type I and Type II, to 90% including the Funding Fee.

New LTV Calculation: Divide the total loan amount (including VA funding fee, if applicable) by the reasonable value on the Notice-of-Value (NOV) of the property determined by the appraiser.

Converting to VA Appraisal after Completion

Appraisals cannot be converted from Conventional, FHA, or UDSA to VA. Appraisals may be converted from FHA or USDA to VA if the appraiser is a VA approved appraiser.

Converting to VA Appraisal after Completion

Appraisals may not be converted from another agency (such as Conventional, FHA, or UDSA) to VA. All VA appraisal orders must be initiated through WebLGY where the VA will assign the eligible appraiser for the subject property’s case.

VA Underwriting Guidelines (continued)
Old RequirementsUpdated Requirements

Assisted Appraisal Processing Program (AAPP)

AAPP Process

VA does not require fee panel appraisers to participate in the AAPP process; however, if they do participate then both appraisers must enter into an agreement for such services. Under AAPP, the initial appraisal report may be completed by a non-VA panel appraiser. The AAPP appraiser is required to be knowledgeable of all VA requirements and minimum property standards. All VA fee panel appraisers participating in the AAPP process must continue to follow all applicable VA statutes, regulations, and policies, as well as the policies and procedures outlined in VA Circular 26-19-31.

Both appraisers’ names are entered on the appraisal. The assisting appraiser is entered on the left side of the report under the “Appraiser” section. The VA fee panel appraiser must sign as the “Supervisory Appraiser” as they are ultimately responsible for the appraisal. The appraisal must contain the following statement:

“I participated in VA’s Assisted Appraisal Processing Program to complete this appraisal report. The final opinion of value for the subject property is based upon my supervisory status and analysis of all available information. The person who provided information to me to assist in the opinion of value is: Full name (First/Middle/Last), license number, date of expiration, state of issuance of the person. I take full responsibility for any errors in and/or omissions from this appraisal report.”

Please note: AAPP may not be utilized for the following:

  • New Construction
  • Sales price or value above $1 Million
  • Complex appraisals
  • Tidewater Initiative (Value will come in lower than the sales price)

The veteran is not permitted to pay an additional fee for the VA fee panel appraiser’s use of an AAPP appraiser. The VA fee panel appraiser is responsible for paying any fees charged by the AAPP appraiser as per their agreement. As a reminder, VA fee panel appraisers must comply with all USPAP standards, VA regulations and policies and any other federal, state, or local requirements.

Underwriting Requirements

CMS SARs will continue to review all VA appraisals in detail in addition to completing the Notice of Value (NOV) on WebLGY. When an AAPP appraisal is received, Underwriters are responsible for verifying:

  • The VA fee panel appraiser’s and AAPP appraiser’s information and signatures are entered on the appraisal report form as required,
  • AAPP has not been utilized on an ineligible transaction,
  • The VA fee panel appraiser’s AAPP “final opinion of value” statement has been made,
  • The “Supervisory Appraiser” checkbox has been selected in Encompass and Assisting Appraiser’s name, company name (if different), and license number have been entered in the “2nd Appraiser” fields.

Contacts

Please contact CorrespondentRM@carringtonms.com with any questions.

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