FHA Loans

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Introduction - High Priced Mortgage Loans

HPMLs are loans secured by consumer's principal dwelling with an annual percentage rate (APR) exceeding the average prime offer rate (APOR)¹ by:
- 1.5% or more on first lien mortgage which is a non-jumbo, non-FHA loan
- 2.5% or more on first lien mortgage which is a jumbo loan
- 3.5% on loans secured by second lien

¹APOR are rates published by Federal Reserve Board which are a survey-based estimate of APRs currently offered on prime mortgage loans of a comparable type. APOR rates can be found on FFIEC website at http://www.ffiec.gov/ratespread/newcalc.aspx

Introduction - Rebuttable Presumption Loans

On Dec 11, 2013, HUD published its Final Rule on Qualified Mortgage for FHA loans.
HUD Qualified Mortgages (QM) fall into two categories, Rebuttable Presumption and Safe Harbor:
- Safe Harbor: Qualified mortgage with APR that is equal to or less than APOR plus 115 basis points plus Annual MIP.
- Rebuttable Presumption: Qualified mortgage with APR that exceeds APOR plus than APOR plus 115 basis points plus Annual MIP.
Lenders are presumed to have determined borrowers ability to repay when providing rebuttable presumption loans. However, consumers can rebut the presumption, by proving that they did not, in fact, have sufficient income to pay the mortgage and their other living expenses.

Requirements - HPML Loans

If a mortgage loan is an HPML loan, following requirements need to be met:

Escrow Accounts: Creditors must establish an escrow account before consummation for payment of property taxes, homeowners' insurance, and mortgage insurance, if loan is secured by a first lien on borrower's principal dwelling.
Credit should be extended considering borrower's repayment ability, including borrower's current and reasonably expected income, employment, assets other than security property, and mortgage-related obligations along with value of security property.
Credit should not be extended without obtaining a written appraisal of the property to be mortgaged. The appraisal must be performed by a certified or licensed appraiser. (Not applicable in streamline refinance transactions)
A loan may not include a prepayment penalty unless:
1. Penalty is otherwise permitted by law.
2. The terms of the loan ensure that:
  - The penalty will not apply after the two-year period following consummation;
  - The penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor; and
  - The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation.

Requirements - Rebuttable Presumption Loans

If a mortgage loan is rebuttable presumption loan, following residual income requirements need to be met:

Occupancy Type	Monthly Residual Income	Guideline
Primary Residence	$2500 or greater	Lenders must simply comply with the minimum reserve requirements for the loan program
	Greater than $800 and less than $2500	Greater of: Three (3) months liquid* PITI reserves are required, or Minimum reserve requirements for the base loan program. Note: Lenders should consider requiring additional reserves for loans with higher layered risks
	Less than $800	The loan is not eligible for purchase.
Second Homes and Investment Properties	$2500 or greater	Eligible for purchase with acceptable residual income evaluation in file.
Second Homes and Investment Properties	Less than $2500	The loan is not eligible for purchase.

HPML and Rebuttable Presumption - Scenario

Consider a first lien loan with APOR of 4% and Annual MIP of 1.25%

	HPML Loans (APR ≥ 5.5%)	Non-HPML Loans (APR < 5.5%)
Rebuttable Presumption Loans (APR > 6.4%)	Credit Qualify and Residual Income Verification*	Not Applicable (A rebuttable presumption loan will always be HPML)
Safe Harbor (APR ≤ 6.4%)	Credit Qualify	No Special Requirements

*Residual income verification is not required for FHA loans.

References