This entire Mortgagee Letter dated June 11, 2008 is available at:  http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/

The changes on the MIP and UFMIP will be effective July 14, 2008.

      You should check with your Investors to determine when they will begin implementing the changes. If you have a loan in process, please prepare your Borrowers.

      Please note that FHA has now established a Credit Score floor of 500 for LTV’s 90.01 and above.

      FHA will require at minimum a 10% down payment when the credit score is 499-300.

      Another item to keep in mind, when you have multiple Borrowers, the UFMIP and MIP will be determined based off the LOWEST score of all the Borrowers.

      For those Borrowers who have not established credit and do not reflect a credit score, they will fall under the Non-Traditional category.

Loan to Value

      The LTV ratio, computed to two decimals (e.g., 95.65) is calculated by dividing the mortgage amount prior to adding on any upfront mortgage insurance premium by the property’s sale price or appraised value, whichever is lower.

“Decision Credit Score” Defined

      Eligibility for the mortgage insurance premiums listed in the chart above is based on an applicant’s decision credit score.

      A “decision credit score” is determined for each applicant according to the following guidelines:

      When three scores are available the middle value is used

      When only two are available, the lesser of the two is chosen

      When only one is available, then that score is used.

      If the mortgage applicant(s) disputes the accuracy of the credit report and, thus, the credit scores:

      The borrower may delay the transaction and work to repair his/her credit, or

      The borrower may pay the mortgage insurance premium based on the credit score generated (and LTV)

      Multiple Borrowers

      If more than one individual is applying for the same mortgage, the lender must determine the decision credit score for each individual borrower and then select the lower (or lowest if more than two borrowers).

      That "decision" credit score is then used to determine the appropriate insurance premium in conjunction with the LTV ratio.  

      Multiple Borrowers/One Without Credit Score(s)

      The borrower representing the greatest risk to the Department will determine the premium charged. 

      For example, if the decision credit score for one borrower is between 559-500 and the other borrower is in the non-traditional credit category, the decision credit score between 559-500 is used to determine the premium. 

      However, if the decision credit score for one borrower is between 639-600, and the other borrower is in the non-traditional credit category, the non-traditional credit category is used to determine the premium.

      Multiple Borrowers/Ineligible Score

      Borrowers who fall into a category with no premium price shown are not eligible for FHA-insured financing. 

      Lenders may consider reducing the loan-to-value ratio to 90 percent or removing the borrower from the loan to proceed with the application.

Non-Traditional Credit

      For underwriting purposes, borrowers with non-traditional credit (or insufficient credit) must qualify based on the underwriting guidance described in Mortgagee Letter 2008-11. (Covered in the credit section of this manual)

      To clarify the guidance in Mortgagee Letter 2008-11 regarding ‘thin-file’ credit reports, the intention was to give lenders the option to also use non-traditional credit sources should they have a minimum trade line requirement to use a credit bureau score. 

      While the premium charged is based on the borrower representing the greatest risk to the Department, for underwriting purposes lenders may use non-traditional credit methodology to make their determination on the borrower’s willingness to repay the new FHA-insured mortgage.

Underwriting Rules When Using FHA’s TOTAL Mortgage Scorecard

      Except as provided below, eligibility for these insurance premiums is dependent upon borrower acceptance by TOTAL through LP or DO/DU.

      Therefore, all borrowers with valid credit scores must be scored by TOTAL.

      Sent through DO/DU or LP Internet Underwriting

      Borrowers not scored by TOTAL or with insufficient trade lines to generate credit bureau scores will fall in the “non-traditional” column in the premium chart and are priced accordingly.

      Borrowers falling into categories with no premium price shown are not eligible for FHA-insured financing (where it shows n/a).

      Note that a minimum decision credit score of 500 will be required for FHA-insured mortgages with an LTV ratio in excess of 90 percent.

      If TOTAL refers a loan for manual underwriting and the underwriter deems that there are sufficient compensating factors to create an acceptable risk to FHA, then the upfront insurance premium charge will be as shown on the premium chart.

      These premiums apply to all purchase loans and to fully underwritten (non-streamline) refinance loans.

      Cash-out refinance loans must meet a minimum 5 percent equity requirement, based on the appraised value of the property.

      Streamline refinance of an existing FHA loan for which a case number was assigned prior to July 14, 2008, will have an upfront premium of 100 basis points and an annual premium of 50 basis points.

      If TOTAL renders a Refer underwriter must determine whether the borrower qualifies based on basic underwriting and eligibility requirements per FHA guidelines.

      Once determined as eligible for a FHA-insured mortgage, the insurance premium charged is as shown in the matrix above.      
 

First-Time Homebuyer with HUD-Approved Pre-Purchase Counseling

      First-time homebuyers (as defined below) who will be obtaining a mortgage with an LTV greater than 95 percent and whose decision credit score is in the 559-500 range are entitled to a reduction of their upfront mortgage insurance premium from 2.25 percent to 2.00 percent provided the homebuyer completes HUD-approved pre-purchase counseling. 

      A first-time homebuyer is an individual who has had no ownership in a principal residence during the 3-year period ending on the closing date of the property. 

      A first-time homebuyer includes any individual that has only owned with a former spouse while married.

      Includes an individual who has only owned a principal residence not permanently affixed to a permanent foundation, such as a mobile home.

      If any of the occupant-owners on the mortgage meet this definition, then the mortgage is considered as having been made to a first-time homebuyer.

      Pre-purchase counseling

      Pre-purchase counseling must be obtained from a HUD-approved housing counseling agency, a participating agency of a HUD-approved housing counseling intermediary or a state Housing Finance Agency receiving HUD housing counseling grant funds, and the counseling must occur prior to execution of the sales agreement. 

      With this requirement, it is FHA’s intent to encourage borrowers to participate in meaningful counseling prior to the decision to purchase a home, not to create an incentive or burden for lenders to have borrowers re-execute the sales contract in order to receive a reduced premium.

      The counseling may be completed up to one year before the homebuyer signs a purchase agreement for the subject property.

      It must be one-on-one, face-to-face counseling unless a hardship can be demonstrated, and then the counseling may be conducted one-on-one over the telephone.  The counseling must consist of, but is not limited to: 

      Budgeting and credit, including an analysis of the household’s unique financial/credit situation

      Assessing homeownership readiness, including an evaluation of home and monthly payment affordability

      Development of a written action plan outlining the steps the household and the counselor will take to help the household meet their goals

      Financing a home, including a discussion of alternative types of mortgage loans/features and special financing products, common lending documents, and steps in the loan application, approval, and closing processes

      Shopping for a home, including understanding the professionals involved in the process

      Maintaining a home, including preventive maintenance, taxes, and insurance

      Even if group sessions or homebuyer education classes cover the topics above, they do not meet the level of one-on-one counseling needed to receive the reduced mortgage insurance premium. 

      To find a list of housing counseling agencies, please visit the Department’s website at http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
 

Refinance Transactions

      The mortgage insurance premium for refinance transactions will depend on several variables. 

      These include:

      Whether the refinance is of a FHA-insured mortgage to another FHA-insured mortgage, as under FHA’s streamlined refinance options

      A rate-and-term refinance

      A refinance under the FHASecure initiative.

      Except for streamlined refinances and mortgage refinancing under the FHASecure initiative, the new LTV and new decision credit score determine the mortgage insurance premiums.

      Full Qualifying Refinances

      Would consist of the following:

      Rate-and-term

      FHASecure refinance of a conventional mortgage not presently delinquent

      Cash-out refinances

      Or any that require complete underwriting

      These refinances are subject to the mortgage insurance premiums based on the LTV and decision credit score for the refinance application.

      Streamline Refinances

      The mortgage insurance premiums charged are subject to whether the existing FHA-insured loan being streamline refinanced was charged premiums based on:

      The pre-July 14, 2008 premium structure of 1.50 UFMIP / .50 monthly or

      The post July 14, 2008  LTV/decision credit score premium schedule. 

      The following examples illustrate the appropriate premiums that will be charged for streamline refinances.

      FHA-insured loans pre-July 14, 2008/Borrower paid 150/50 basis points

      Borrowers with an existing FHA-insured loan where the case number for the streamline refinance transaction was assigned before July 14, 2008, will be charged 1.50 UFMIP .50 monthly. 

      On subsequent streamline refinances where the case number is assigned on or after July 14, 2008 borrowers will be charged 1.00 UFMIP and .50 monthly. 

      Borrowers with an existing FHA-insured mortgage where the case number for the streamline refinance transaction was assigned on or after July 14, 2008, will be charged 1.00 UFMIP and .50 monthly. 

      On subsequent streamline refinances borrowers will be charged 100 basis points upfront and 50 basis points annually.

      Borrowers who refinanced their delinquent non-FHA ARM into an FHASecure mortgage are not eligible to streamline refinance their FHASecure mortgage. 

      The refinance transaction subsequent to the FHASecure mortgage must be a full qualifying refinance.

      Previous Case Number

      To determine the case number of the loan being refinanced, lenders may use the Case Query screen in FHA Connection using the borrower’s name, address and/or social security number. 

      Premium Feedback

      The Case Number Assignment screen in FHA Connection will provide a feedback message with the appropriate premium to be charged for refinance transactions.
 

      Refund of Upfront Premiums

      Refunds of upfront premiums are available to borrowers refinancing to another FHA-insured mortgage within a three-year time period, as shown below. 

      On any refinance where the MIP refund exceeds the Upfront MIP required on the new loan, the overage will be refunded directly to the borrower from HUD. 

      The lesser of the MIP refund or the new upfront MIP should be subtracted from the unpaid principal balance before calculating the new mortgage amount.

Type of Refinance	Risk-Based Premium Information
Cash-Out Refinances	Premiums based on new LTV and credit bureau score/see premium matrix
Rate-and-Term Refinance (no cash out)	Premiums based on new LTV and credit bureau score/see premium matrix
FHA Secure/Not Delinquent	Premiums based on new LTV and credit bureau score/see premium matrix
FHA Secure/Delinquent	Premium is 2.25% upfront.  Annual premium is 55 basis points if LTV > 95%; otherwise, 50 basis points