FHA Single Family Housing Policy Handbook 4000.1, II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT > A. Title II Insured Housing Programs Forward Mortgages > 5. Manual Underwriting of the Borrower — d. Final Underwriting Decision (Manual)

vii. Calculating Qualifying Ratios (Manual)

(A) General Information about Qualifying Ratios For all transactions, except non-credit qualifying Streamline Refinances, the underwriter must calculate the Borrower’s Total Mortgage Payment to Effective Income Ratio (PTI) and the Total Fixed Payment to Effective Income ratio, or DTI, and verify compliance with the ratio requirements listed in the Approvable Ratio Requirements (Manual) chart. The Mortgagee must exclude any obligation that is wholly secured by existing assets of the Borrower from the calculation of the Borrower’s debts, provided the assets securing the debt are also not considered in qualifying the Borrower.

(B) Calculating Total Mortgage Payment The total Mortgage Payment includes: • P&I; • real estate taxes; • Hazard Insurance; • Flood Insurance as applicable; • MIP; • HOA or condominium association fees or expenses; • Ground Rent; • special assessments; • payments for any acceptable secondary financing; and • any other escrow payments. The Mortgagee may deduct the amount of the Section 8 Housing Choice Voucher if it is paid directly to the Servicer. (1) Estimating Real Estate Taxes The Mortgagee must use accurate estimates of monthly tax escrows when calculating the total Mortgage Payment. In New Construction cases and Manufactured Homes converting to real estate, property tax estimates must be based on the land and improvements. Where real estate taxes are abated, Mortgagees may use the abated amount provided that (1) the Mortgagee can document the abated amount with the taxing authority and (2) the abatement will remain in place for at least the first three years of the Mortgage. (2) Condominium Utility Expenses The portion of a condominium fee that is clearly attributable to utilities may be subtracted from the HOA fees before computing qualifying ratios, provided the Borrower provides proper documentation, such as statements from the utility company. (3) Temporary Interest Rate Buydowns The Mortgagee must use the Note rate when calculating principal and interest for Mortgages that involve a temporary interest rate buydown.

(C) Calculating Total Fixed Payment The total fixed payment includes: • the total Mortgage Payment; and • monthly obligations on all debts and liabilities.

ix. Documenting Acceptable Compensating Factors (Manual) The following describes the compensating factors and required documentation that may be used to justify approval of manually underwritten Mortgages with qualifying ratios as described above.

(A) Energy Efficient Homes (1) Standard For Mortgages on New Construction, the Borrower is eligible for the EEH stretch ratios when the Property meets or exceeds the higher of: • the latest energy code standard that has been adopted by HUD through a Federal Register notice; • the applicable International Energy Conservation Code (IECC) year used by the state or local building code; or • a Manufactured Home that is certified as ENERGY STAR to their Quality Assurance Provider and ensure that an ENERGY STAR label is affixed, commonly found near the HUD Data Plate or inside the electric panel cover of the home. For Mortgages on Existing Construction, the Borrower is eligible for the EEH stretch ratios when the property meets either of the following conditions: • homes that currently score a “6” or higher on the Home Energy Score scale; • homes where documented cost-effective energy improvements, as identified in the Home Energy Score Report, would increase a home’s score to a “6” or higher are completed prior to closing, or in association with FHA’s 203(k), Weatherization, EEM or Solar and Wind programs; or • a Manufactured Home that is certified as ENERGY STAR to their Quality Assurance Provider and ensure that an ENERGY STAR label is affixed, commonly found near the HUD Data Plate or inside the electric panel cover of the home. (2) Required Documentation The following documents must be included in the case binder submitted for endorsement: • For Mortgages on Existing Construction, a copy of the Home Energy Score Report, or a photo of the ENERGY STAR label on a Manufactured Home. • For Mortgages on New Construction, a copy of form HUD-92541, Builder's Certification of Plans, Specifications, and Site, to evidence the IECC code, successor code, or local/state building code used; or the manufacturer’s invoice of the Manufactured Home indicating that the unit is ENERGY STAR qualified.

(B) Verified and Documented Cash Reserves Verified and documented cash Reserves may be cited as a compensating factor subject to the following requirements. • Reserves are equal to or exceed three total monthly Mortgage Payments (one and two units); or • Reserves are equal to or exceed six total monthly Mortgage Payments (three and four units). Reserves are calculated as the Borrower’s total assets as described in Asset Requirements (Manual) less: • the total funds required to close the Mortgage; • Gifts; • borrowed funds; and • cash received at closing in a cash-out refinance transaction or incidental cash received at closing in the mortgage transaction.

(C) Minimal Increase in Housing Payment A minimal increase in housing payment may be cited as a compensating factor subject to the following requirements: • the new total monthly Mortgage Payment does not exceed the current total monthly housing payment by more than $100 or 5 percent, whichever is less; and • there is a documented 12 month housing payment history with no more than one 30 Day late payment. In cash-out transactions all payments on the Mortgage being refinanced must have been made within the month due for the previous 12 months. • If the Borrower has no current housing payment Mortgagees may not cite this compensating factor. The Current Total Monthly Housing Payment refers to the Borrower’s current total Mortgage Payment or current total monthly rent obligation.

(D) No Discretionary Debt No discretionary debt may be cited as a compensating factor subject to the following requirements: • the Borrower’s housing payment is the only open account with an outstanding balance that is not paid off monthly; • the credit report shows established credit lines in the Borrower’s name open for at least six months; and • the Borrower can document that these accounts have been paid off in full monthly for at least the past six months. Borrowers who have no established credit other than their housing payment, no other credit lines in their own name open for at least six months, or who cannot document that all other accounts are paid off in full monthly for at least the past six months, do not qualify under this criterion. Credit lines not in the Borrower’s name but for which they are an authorized user do not qualify under this criterion.

(E) Significant Additional Income Not Reflected in Effective Income Additional income from Overtime, Bonuses, Part-Time or Seasonal Employment that is not reflected in Effective Income can be cited as a compensating factor subject to the following requirements: • the Mortgagee must verify and document that the Borrower has received this income for at least one year, and it will likely continue; and • the income, if it were included in gross Effective Income, is sufficient to reduce the qualifying ratios to not more than 37/47. Income from non-borrowing spouses or other parties not obligated for the Mortgage may not be counted under this criterion. This compensating factor may be cited only in conjunction with another compensating factor when qualifying ratios exceed 37/47 but are not more than 40/50.

x. Borrower Approval or Denial (Manual)

(A) Re-underwriting The Mortgagee must re-underwrite a Mortgage when any data element of the Mortgage changes and/or new Borrower information becomes available.

(B) Documentation of Final Underwriting Review Decision The underwriter must complete the following documents to evidence their final underwriting decision. For cases involving Mortgages to HUD employees, the Mortgagee completes the following and then submits the complete underwritten mortgage application to FHA for review and issuance of a Firm Commitment or Rejection Notice prior to closing. For cases involving Mortgagees that receive a Direct Endorsement Program Test Case Phase approval letter from FHA, the Mortgagee completes the following and then submits the complete underwritten mortgage application post-closing to FHA for review and issuance of a Firm Commitment or Rejection Notice. (1) Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary The underwriter must record the following items on form HUD-92900-LT: • their decision; • any compensating factors; • any modification of the mortgage amount and approval conditions under “Underwriter Comments”; and • their Direct Endorsement Identification Number and signature. (2) Form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value The underwriter must confirm that form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value, is completed as directed in the form instructions. (3) Form HUD-92900-A, HUD Addendum to Uniform Residential Loan Application The underwriter must complete form HUD-92900-A, HUD Addendum to Uniform Residential Loan Application, as directed in the form instructions. An authorized officer of the Mortgagee, the Borrower, and the underwriter must execute form HUD-92900-A, as indicated in the instructions.

(C) Conditional Approval The underwriter must condition the approval of the Borrower on the completion of the final URLA (Fannie Mae Form 1003/Freddie Mac Form 65) and form HUD- 92900-A at or before closing if the underwriter relied on an initial URLA and form HUD-92900-A in underwriting the Mortgage.

(D) HUD Employee Mortgages If the Mortgage involves a HUD employee, the Mortgagee must condition the loan on the approval of the Mortgage by HUD. The Mortgagee must submit the case binder to FHA for final underwriting approval.

(E) Notification of Borrower of Approval and Term of the Approval The Mortgagee must timely notify the Borrower of their approval. The underwriter’s approval or the Firm Commitment is valid for the greater of 90 Days or the remaining life of the: • Conditional Commitment issued by HUD; or • the underwriter’s approval date of the Property, indicated as Action Date on form HUD-92800.5B.

(F) Responsibilities upon Denial When a Mortgage is denied, the Mortgagee must comply with all requirements of the FCRA, and the Equal Credit Opportunity Act (ECOA), as implemented by Regulation B (12 CFR Part 1002).

xii. Underwriting Nonprofit Borrowers (Manual)

(A) General Eligibility Nonprofit agencies must be HUD-approved as a Borrower prior to case number assignment. FHA approves or denies the nonprofit agency’s participation in FHA activities. The approval is valid for a two-year period.

(B) Borrower Eligibility The Mortgagee must review the Nonprofit List in FHAC, and ensure the maximum case load limitation is not exceeded for nonprofit Borrowers. The Mortgagee must ensure that Additional Eligibility Requirements for Nonprofit Organizations and State and Local Government Agencies are met. The Mortgagee must verify that the nonprofit organization remains eligible under Section 501(c)(3) as exempt from taxation under Section 501(a) of the Internal Revenue Code of 1986, as amended. (1) Employer Identification Number The Mortgagee must obtain the Employer Identification Number (EIN) of the nonprofit Borrower and enter it into the SSN field in FHAC. (2) Credit Alert and Limited Denial of Participation Screening The Mortgagee must screen nonprofit Borrowers through the Credit Alert Verification Reporting System (CAIVRS) and the Limited Denial of Participation List using the nonprofit Borrower’s EIN.

(C) Program and Product Limitations Nonprofit Borrowers are eligible only for fixed rate Mortgages. Nonprofit Borrowers are eligible only for FHA-to-FHA refinances. Nonprofit Borrowers are not eligible for cash-out refinances.

(D) Maximum Loan-to-Value Limits Mortgages for nonprofit Borrowers are subject to the same LTV limitations as Mortgages secured by a Principal Residence.

(F) Final Underwriting Decision for Nonprofit Borrowers The Mortgagee must analyze the nonprofit Borrower’s financial capacity for each Mortgage being considered in accordance with the standards above. If the nonprofit Borrower does not meet all of the standards above, the Mortgagee must document acceptable compensating factors. The Mortgagee must describe how it arrived at the conclusion that the nonprofit Borrower was an acceptable mortgage risk and met FHA’s eligibility criteria. The analysis must consider the effect of the proposed mortgage debt(s) on the nonprofit agency's financial condition.