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Included in this section are:

i. Mortgage Purpose

ii. Borrower Eligibility

iii. Occupancy Types

iv. Property Eligibility and Acceptability Criteria

v. Legal Restrictions on Conveyance (Free Assumability)

FHA offers various mortgage insurance programs which insure approved Mortgagees against losses on Mortgages. FHA-insured Mortgages may be used to purchase housing, improve housing, or refinance existing Mortgages.

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The Section 203(k) Rehabilitation Mortgage Insurance is used to:

• rehabilitate an existing one- to four-unit Structure, which will be used primarily for residential purposes;
• rehabilitate such a Structure and refinance the outstanding indebtedness on the Structure and the Real Property on which the Structure is located; or
• purchase and rehabilitate the Structure and purchase the Real Property on which the Structure is located.

(2)  203(h) and 203(k) for Disaster Victims

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1. Cash-out refinances are designed to pull equity out of the Property.
2. No cash-out refinances of FHA-insured and non FHA-insured Mortgages are designed to pay existing liens. These include: Rate and Term refinance, Simple Refinance, and Streamline Refinance.
3. Refinances of non FHA-insured Mortgages are available for qualified Borrowers in negative equity positions (Short Refi).
4. Refinances for rehabilitation or repair (Section 203(k)).

(A)  General Borrower Eligibility Requirements

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validate and document an SSN for each Borrower, co-Borrower, or Cosigner on the Mortgage by:

• entering the Borrower’s name, date of birth, and SSN in the Borrower/address validation screen through FHAC; and
• examining the Borrower’s original pay stubs, W-2 forms, valid tax returns obtained directly from the IRS, or other document relied upon to underwrite the Mortgage; and
• resolve any inconsistencies or multiple SSNs for individual Borrowers that are revealed during Mortgage processing and underwriting using a service provider to verify the SSN with the SSA.

(2)  Borrower Age Limits

The Borrower must be old enough to enter into a mortgage Note that can be legally enforced in the state, or other jurisdiction, where the Property is located (“State Law”). There is no maximum age limit for a Borrower.

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A Borrower who is a non-permanent resident alien may be eligible for FHA-insured financing provided:

• the Property will be the Borrower’s Principal Residence;
• the Borrower has a valid SSN, except for those employed by the World Bank, a foreign embassy, or equivalent employer identified by HUD;
• the Borrower is eligible to work in the United States, as evidenced by the Employment Authorization Document issued by the USCIS; and
• the Borrower satisfies the same requirements, terms and conditions as those for U.S. citizens.

The Employment Authorization Document is required to substantiate work status. If the Employment Authorization Document will expire within one year and a prior history of residency status renewals exists, the Mortgagee may assume that continuation will be granted. If there are no prior renewals, the Mortgagee must determine the likelihood of renewal based on information from the USCIS.

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State and local government agencies and instrumentalities of government may obtain FHA-insured financing provided:

• the agency has the legal authority to become the Borrower;
• the particular state or local government is not in bankruptcy; and
• there is no legal prohibition on obtaining a deficiency Judgment based solely on its status as a state and local government.

State and local government agencies are eligible for the same percentage of financing that is available to an owner-occupant on their Principal Residence. State and local government agencies are not eligible for cash-out refinances.

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A Mortgage is not eligible for FHA insurance if anyone participating in the mortgage transaction is listed on HUD’s LDP list or in SAM as being excluded from participation in HUD transactions. This may include but is not limited to:

• seller (except where selling the Principal Residence)
• listing and selling real estate agent
• loan originator
• loan processor
• underwriter
• Appraiser
• 203(k) Consultant
• Closing Agent
• title company

(b)  Required Documentation

The Mortgagee must check the HUD LDP list and SAM and follow appropriate procedures defined by that system to confirm eligibility for all participants involved in the transaction.

(A)  Principal Residence

(1)  Definition

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The table below describes the only circumstances in which a Borrower with an existing FHA-insured Mortgage for a Principal Residence may obtain an additional FHA-insured Mortgage on a new Principal Residence.

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(3)  Required Documentation

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Secondary Residences are only permitted with written approval from the Jurisdictional HOC after a determination that:

• the Borrower has no other Secondary Residence;
• the Secondary Residence will not be a Vacation Home or be otherwise used primarily for recreational purposes;
• the commuting distance to the Borrower’s workplace creates an undue hardship on the Borrower and there is no affordable rental housing meeting the Borrower’s needs within 100 miles of the Borrower’s workplace; and
• the maximum mortgage amount is 85 percent of the lesser of the appraised value or sales price.

(3)  Required Documentation

The Mortgagee must demonstrate the lack of affordable rental housing, and include:

• a satisfactory explanation of the need for a Secondary Residence and the lack of available rental housing; and
• written evidence from local real estate professionals who verify a lack of acceptable housing in the area.

(C)  Investment Property

(1)  Definition

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Investment Properties are eligible for insurance under the HUD Real Estate Owned (REO) Purchasing product, except under the 203(k) program.

(A)  General Property Eligibility

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A Property is not eligible for FHA insurance if:

• a residential building and related improvements to the Property are located within SFHA Zone A, a Special Flood Zone Area, or Zone V, a Coastal Area, and insurance under the National Flood Insurance Program (NFIP) is not available in the community; or
• the improvements are, or are proposed to be, located within a Coastal Barrier Resource System (CBRS).

(a)  Eligibility for Proposed or New Construction in SFHAs

If any portion of the dwelling, related Structures or equipment essential to the value of the Property and subject to flood damage is located within an SFHA, the Property is not eligible for FHA mortgage insurance unless the Mortgagee:

• obtains from FEMA a final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removes the Property from the SFHA; or
• obtains a FEMA National Flood Insurance Program Elevation Certificate (FEMA Form 81-31) prepared by a licensed engineer or surveyor. The elevation certificate must document that the lowest floor including the basement of the residential building, and all related improvements/equipment essential to the value of the Property, is built at or above the 100-year flood elevation in compliance with the NFIP criteria, and insurance under the NFIP is obtained.

(b)  Eligibility for Existing Construction in SFHAs

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The finished grade level beneath the Manufactured Home must be at or above the 100-year return frequency flood elevation. If any portion of the dwelling, related Structures or equipment essential to the Property Value and subject to flood damage for both new and existing Manufactured Homes are located within an SFHA, the Property is not eligible for FHA mortgage insurance unless the Mortgagee obtains:

• a FEMA issued LOMA or LOMR that removes the Property from the SFHA; or
• a FEMA National Flood Insurance Program (NFIP) Elevation Certificate (FEMA Form 81-31) prepared by a licensed engineer or surveyor stating that the finished grade beneath the Manufactured Home is at or above the 100-year return frequency flood elevation, and insurance under the NFIP is obtained.

(e)  Required Flood Insurance Amount

For Properties located within an SFHA, flood insurance must be maintained for the life of the Mortgage in an amount at least equal to the lesser of:

• the outstanding balance of the Mortgage, less estimated land costs; or
• the maximum amount of the NFIP insurance available with respect to the property improvements.

(f)  Required Documentation

The Mortgagee must obtain a Life of Loan Flood Certification for all Properties. If applicable, the Mortgagee must also obtain a:

• FEMA Letter of Map Amendment;
• FEMA Letter of Map Revision; or
• FEMA National Flood Insurance Program Elevation Certificate (FEMA 81-31).

(g)  Restrictions on Property Locations within Coastal Barrier Resources System

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Such documentation may include, but is not limited to:

• a property sales history report;
• a copy of the recorded deed from the seller; or
• other documentation, such as a copy of a property tax bill, title commitment, or binder, demonstrating the seller’s ownership of the Property and the date it was acquired.

This requirement applies to all FHA purchase money Mortgages, regardless of the time between resales.

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A Mortgagee must obtain a second appraisal by another Appraiser if:

• the resale date of a Property is between 91 and 180 Days following the acquisition of the Property by the seller; and
• the resale price is 100 percent or more over the price paid by the seller to acquire the Property.

If the second appraisal supports a value of the Property that is more than 5 percent lower than the value of the first appraisal, the lower value must be used as the Property Value in determining the Adjusted Value.

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Exceptions to time restrictions on resale are:

• Properties acquired by an employer or relocation agency in connection with the relocation of an employee;
• resales by HUD under its REO program;
• sales by other U.S. government agencies of Single Family Properties pursuant to programs operated by these agencies;
• sales of Properties by nonprofits approved to purchase HUD owned Single Family Properties at a discount with resale restrictions;
• sales of Properties that are acquired by the seller by inheritance;
• sales of Properties by state and federally-chartered financial institutions and Government-Sponsored Enterprises (GSE);
• sales of Properties by local and state government agencies; and
• sales of Properties within PDMDAs, only upon issuance of a notice of an exception from HUD.

The restrictions listed above and those in 24 CFR § 203.37a do not apply to a builder selling a newly built house or building a house for a Borrower planning to use FHA-insured financing.

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Mixed Use refers to a Property suitable for a combination of uses including any of the following: commercial, residential, retail, office or parking space. Mixed Use one- to four-unit Single Family Properties are eligible for FHA insurance, provided:

• a minimum of 51 percent of the entire building square footage is for residential use; and
• the commercial use will not affect the health and safety of the occupants of the residential Property.

(6)  Property Assessed Clean Energy

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Properties which will remain encumbered with a PACE obligation are eligible for FHA-insured financing provided that the Mortgagee determines that the following requirements have been met:

• under the laws of the state where the Property is located, the PACE obligation is collected and secured by the creditor in the same manner as special assessment taxes against the Property;
• the Property may only become subject to an enforceable claim (i.e., lien) that is superior to the FHA-insured Mortgage for delinquent regularly scheduled PACE special assessment payments. The Property shall not be subject to an enforceable claim (i.e., lien) superior to the FHA-insured Mortgage for the full outstanding PACE obligation at any time (i.e., through acceleration of the full obligation). However, a notice of the lien for the full PACE obligation may be recorded in the land records;
• there are no terms or conditions that limit the transfer of the Property to a new homeowner. Legal restrictions on conveyance arising from a PACE obligation that could require consent of a third party before the owner can convey the Real Property are prohibited, unless such provisions may be terminated at the option of, and with no cost to, the homeowner;
• the existence of a PACE obligation on a Property is readily apparent to Mortgagees, Appraisers, Borrowers and other parties to an FHA-insured Mortgage transaction in the public records and must show the obligation amount, the expiration date and cause of the expiration of the assessment. In no case may default accelerate the expiration date; and
• in the event of a sale, including a foreclosure sale, of the Property with outstanding PACE financing, the obligation will continue with the Property causing the new homeowner to be responsible for the payments on the outstanding PACE amount.

(7)  Dwelling Unit Limitation

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FHA’s programs differ from one another primarily in terms of what types of Properties and financing are eligible. Except as otherwise stated in this SF Handbook, FHA’s Single Family programs are limited to one- to four-family Properties that are owner-occupied Principal Residences. FHA insures Mortgages on Real Property secured by:

• detached or semi-detached dwellings
• Manufactured Housing
• townhouses or row houses
• individual units within FHA-approved Condominium Projects

FHA will not insure Single Family Mortgages secured by:

• commercial enterprises
• boarding houses
• hotels, motels and condotels
• tourist houses
• private clubs
• bed and breakfast establishments
• other transient housing
• Vacation Homes
• fraternity and sorority houses
• (1)  One Unit
  • A one-unit Property is a one-family dwelling.
• (2)  Two Unit
  • A two-unit Property is a Single Family residential Property with two individual dwellings.

The Mortgagee must obtain a completed form HUD-92561, Borrower’s Contract with Respect to Hotel and Transient Use of Property.

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To be eligible for FHA mortgage insurance as a Single Family Title II Mortgage, all Manufactured Housing must:

• be designed as a one-family dwelling;
• have a floor area of not less than 400 square feet;
• have the HUD Certification Label affixed or have obtained a letter of label verification issued on behalf of HUD, evidencing the house was constructed on or after June 15, 1976, in compliance with the Federal Manufactured Home Construction and Safety Standards;
• be classified as real estate (but need not be treated as real estate for purposes of state taxation);
• be built and remain on a permanent chassis;
• be designed to be used as a dwelling with a permanent foundation built in accordance with the Permanent Foundations Guide for Manufactured Housing (PFGMH); and
• have been directly transported from the manufacturer or the dealership to the site.

(c)  Required Documentation

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If the additions or alterations were not addressed in the foundation certification, the Mortgagee must obtain:

• an inspection by the state administrative agency that inspects Manufactured Housing for compliance; or
• certification of the structural integrity from a licensed structural engineer if the state does not employ inspectors.

(C)  Property Valuation

The Mortgagee is responsible for obtaining an appraisal to verify the value of the Property and the Property’s compliance with HUD’s Minimum Property Standards (MPS).

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When examination of a Property reveals noncompliance with the Property Acceptability Criteria, the Appraiser must note all repairs necessary to make the Property comply with HUD’s Property Acceptability Criteria, together with the estimated cost to cure.

The Mortgagee must determine if there are any legal restrictions on conveyance in accordance with 24 CFR § 203.41.

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Such agreements are acceptable, provided they do not cause a conveyance (ownership transfer) of the insured Property by the Borrower to:

• be void, or voidable by a third party;
• be the basis of contractual liability of the Borrower (including rights of first refusal, pre-emptive rights or options related to a Borrower’s efforts to convey);
• terminate or be subject to termination all or part of the interest held by the Borrower;
• be subject to the consent of a third party;
• be subject to limits on the amount of sales proceeds a Borrower can retain (e.g., due to a lien, “due on sale” clause, etc.);
• be grounds for accelerating the insured Mortgage; or
• be grounds for increasing the interest rate of the insured Mortgage.

Any restrictions resulting from provisions of the lease or PPA do not conflict with FHA regulations unless they include provisions encumbering the Real Property or restricting the transfer of the Real Property.

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