www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 December 31, 1991 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 91-51 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production Underwriting Clarifications and Modifications The purpose of this Mortgagee Letter is to make certain modifications and clarifications to our underwriting policies, as follows: 1. HUD Handbook 4155.1 REV-3 A. Paragraph 3-23 D. Effective for cases involving sales contracts signed on or after January 1, 1992, lenders must consider and properly document the adequacy and stability of income regardless of the borrower's 25 percent cash investment. Although cash investment of 25 percent or more may be a very significant compensating factor justifying higher qualifying ratios, the borrower must now exhibit both adequate and stable income to make the mortgage payment and meet other debt obligations. B. Paragraph 1-6. Effective immediately, employment verification may be in the form of the past two years of original W-2s along with original pay stubs covering the most recent thirty day period. IRS W-2 forms must be complete and legible. The "original" of the W-2 form can be any of the copies of the form that the borrower did not have to attach to his or her income tax returns. Pay stubs must contain, at a minimum, the borrower's name and social security number. _____________________________________________________________________ 2 Direct Endorsement underwriters must analyze and compare the information on the W-2 forms with the information on the pay stubs. This analysis must include, but is not limited to, checking the FICA deduction on each document. If the FICA percentage is incorrect or if there are other inconsistencies, standard verification of employment must be obtained. Lenders must obtain a signed IRS Form 4506, Request for Copy of Tax Form, on all loans using borrower furnished employment verification documents. Tax returns are to be obtained from the Internal Revenue Service when any of these loans are reviewed by the lender during the quality control process. HUD is to be notified if there are differences between the documents furnished by the borrower and the documents received from the Internal Revenue Service. Asset (deposit) verification may be in the form of original bank statements for the most recent three month period. Lender quality control reverification procedures on any of these loans must include sending copies of the bank statements back to the bank for verification. Original documents are to be given to the lender for copying. The original may then be returned to the borrower. Lenders must not accept photocopies from the borrower. The lender is required to verify by telephone all employment for the last two years. The telephone interviewer must confirm the borrowers position and the salary range of the borrower. If the employer will not give telephone confirmation, standard employment documentation must be used. Loan files must include a lender certification that original documents were examined and the, name, title, and telephone number of the person with whom employment was verified. The Department believes that use of W-2s, original pay stubs with telephone verification of employment and original bank statements will actually provide better documentation than the standard verifications of employment and deposit. This change will also save time and reduce costs for the borrower since many banks are now charging fees to verify deposits. Lenders and borrowers should be aware that these procedures will be revised if patterns of abuse develop. _____________________________________________________________________ 3 2. Self-Employed Borrowers Effective for cases involving sales contracts signed on or after February 1, 1992, lenders must obtain a signed IRS Form 4506 from all self-employed borrowers. Tax returns are to be obtained from the Internal Revenue Service when any of these loans are reviewed by the lender during the quality control process. HUD is to be notified if there are differences between the documents furnished by the borrower and the documents received from the Internal Revenue Service 3. Direct Endorsement of VA-CRVs - HUD Handbook 4000.4 REV-1, Paragraph 1-2(A)3 Effectively immediately, a Department of Veterans Affairs Certificate of Reasonable Value (VA-CRV) on an existing property can be processed under Direct Endorsement. No special processing instructions are necessary since cases involving proposed construction using a VA-CRV have been allowed since the inception of the Direct Endorsement program. This change merely adds another category of loans that the Department now believes can be processed by Direct Endorsement lenders without posing undue risk to HUD and at the same time provide better service to homebuyers. 4. Credit Alert Interactive Voice Response System (CAIVRS) On July 15, 1991 the responsibility for answering lender inquiries about borrowers in CAIVRS was transferred to the local Field Offices. Lenders may contact any local Field Office when there is default or claim information that is disputed by the applicant, or when the lender needs to find out when the three-year waiting period for reestablishing eligibility expires. 5. Use of General Authorizations for Disclosure of Information We have received a number of requests for permission to use General Authorizations and self-adhesive signature labels signed by borrowers for use on laser-printed verifications. General Authorizations are acceptable provided the Privacy Act notification is included on the General Authorization form. Self-adhesive signature labels may also be used, provided the lender gives the borrower a written statement explaining clearly how the labels will be used prior to obtaining the borrower's signature on the labels. _____________________________________________________________________ 4 6. Temporary Interest Buydowns and Adjustable Rate Mortgages (ARM's) As stated in Mortgagee Letter 89-24, temporary interest buydowns are permitted with adjustable rate mortgages. However, the note rate must be used in underwriting and qualifying the borrower. If you have any questions, please contact your local HUD Office. Very sincerely yours, Arthur J. Hill Assistant Secretary for Housing-Federal Housing Commissioner