II.A.5.d. Final Underwriting Decision (Manual) (03/14/16)

© HUD Single Family Housing Policy Handbook 4000.1

The Direct Endorsement (DE) underwriter is ultimately responsible for making an underwriting decision on behalf of their DE Mortgagee in compliance with HUD requirements.

Included in this section are:

i. Duty of Care/Due Diligence (Manual)
ii. Specific Underwriter Responsibilities (Manual)
iii. Underwriting of Credit and Debt (Manual)
iv. Underwriting of Income (Manual)
v. Underwriting of Assets (Manual)
vi. Verifying Mortgage Insurance Premium and Mortgage Amount (Manual)
vii. Calculating Qualifying Ratios (Manual)
viii. Approvable Ratio Requirements (Manual)
ix. Documenting Acceptable Compensating Factors (Manual)
x. Borrower Approval or Denial (Manual)
xi. Back to Work - Extenuating Circumstances (Manual)
xii. Underwriting Nonprofit Borrowers (Manual)

i. Duty of Care/Due Diligence (Manual)

The underwriter must exercise the same level of care that would be used in underwriting a Mortgage entirely dependent on the Property as security. Compliance with FHA requirements is deemed to be the minimum standard of due diligence required in originating and underwriting an FHA-insured Mortgage.

ii. Specific Underwriter Responsibilities (Manual)

The underwriter must review each Mortgage as a separate and unique transaction, recognizing that there may be multiple factors that demonstrate a Borrower’s ability and willingness to make timely Mortgage Payments to make an underwriting decision on behalf of their DE Mortgagee in compliance with HUD requirements. The underwriter must evaluate the totality of the Borrower’s circumstances and the impact of layering risks on the probability that a Borrower will be able to repay the mortgage obligation according to the terms of the Mortgage.

As the responsible party, the underwriter must:

• review appraisal reports, compliance inspections, and credit analyses to ensure reasonable conclusions, sound reports, and compliance with HUD requirements regardless of who prepared the documentation;
• determine the acceptability of the appraisal, the inspections, the Borrower’s capacity to repay the Mortgage, and the overall acceptability of the Mortgage for FHA insurance;
• identify any inconsistencies in information obtained by the Mortgagee in the course of reviewing the Borrower’s application regardless of the materiality of such information to the origination and underwriting of a Mortgage; and
• resolve all inconsistencies identified before approving the Borrower’s application, and document the inconsistencies and their resolutions of the inconsistencies in the file.

The underwriter must identify and report any misrepresentations, violations of HUD requirements, and fraud to the appropriate party within their organization.

iii. Underwriting of Credit and Debt (Manual)

The underwriter must determine the creditworthiness of the Borrower, which includes analyzing the Borrower’s overall pattern of credit behavior and the credit report (see Credit Requirements).

The lack of traditional credit history or the Borrower’s decision to not use credit may not be used as the sole basis for rejecting the mortgage application.

Compensating factors cannot be used to compensate for any derogatory credit.

The underwriter must ensure that there are no other unpaid obligations incurred in connection with the mortgage transaction or the purchase of the Property.

iv. Underwriting of Income (Manual)

The underwriter must review the income of a Borrower and verify that it has been supported with the proper documentation (see Income Requirements).

v. Underwriting of Assets (Manual)

The underwriter must review the assets of a Borrower and verify that they have been supported with the proper documentation (see Asset Requirements).

vi. Verifying Mortgage Insurance Premium and Mortgage Amount (Manual)

The underwriter must review the MIP and mortgage amount and verify that they have been supported with the proper documentation (see Underwriting).

vii. Calculating Qualifying Ratios (Manual)

(A) General Information about Qualifying RatiosFor 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 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 PaymentThe 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, including any assessments related to a PACE obligation;
• payments for any acceptable secondary financing; and
• any other escrow payments.

The Mortgagee may deduct the amount of the Mortgage Credit Certificate or Section 8 Homeownership Voucher if it is paid directly to the Servicer.

(1) Estimating Real Estate TaxesThe 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 ExpensesThe 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 BuydownsThe Mortgagee must use the Note rate when calculating principle and interest for Mortgages that involve a temporary interest rate buydown.

(C) Calculating Total Fixed PaymentThe total fixed payment includes:

• the total Mortgage Payment; and
• monthly obligations on all debts and liabilities.

viii. Approvable Ratio Requirements (Manual)

The maximum Total Mortgage Payment to Effective Income Ratio (PTI) and Total Fixed Payments to Effective Income Ratio, or DTI, applicable to manually underwritten Mortgages are summarized in the matrix below.

The qualifying ratios for Borrowers with no credit score are computed using income only from Borrowers occupying the Property and obligated on the Mortgage. Non-occupant co-Borrower income may not be included.

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) StandardFor Mortgages on New Construction, the Borrower is eligible for the EEH stretch ratios when the property meets or exceeds the higher of:

• the 2006 International Energy Conservation Code (IECC);
• any successor energy code standard that has been adopted by HUD for its Minimum Property Standard (MPS); or
• the applicable IECC year used by the state or local building code.

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 currentlyscore a “6” or higher on the Home Energy Score scale; or
• 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 higherare completed prior to closing, or in association with FHA’s 203(k), Weatherization, EEM or Solar and Wind programs.

(2) Required DocumentationThe 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.
• For Mortgages on New Construction, a copy of the Builder’s Certification, form HUD-92541, to evidence the IECC code, successor code or local/state building code used.

(B) Verified and Documented Cash ReservesVerified 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 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 PaymentA 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 DebtNo 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 IncomeAdditional 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.

(F) Residual IncomeResidual income may be cited as a compensating factor provided it can be documented and it is at least equal to the applicable amounts for household size and geographic region found on the Table of Residual Incomes By Region found in the Department of Veterans Affairs (VA) Lenders Handbook - VA Pamphlet 26-7, Chapter 4.9 b and e.

(1) Calculating Residual IncomeResidual income is calculated as total Effective Income of all occupying Borrowers less:

• state income taxes;
• federal income taxes;
• municipal or other income taxes;
• retirement or Social Security;
• total fixed payment;
• estimated maintenance and utilities;
• job related expenses (e.g., child care); and
• the amount of the Gross Up of any Non-Taxable Income.

If available, Mortgagees must use federal and state tax returns from the most recent tax year to document state and local taxes, retirement, Social Security and Medicare. If tax returns are not available, Mortgagees may rely upon current pay stubs.

For estimated maintenance and utilities, Mortgagees must multiply the Gross Living Area of the Property by the maintenance and utility factor found in the Lenders Handbook - VA Pamphlet 26-7.

(2) Using Residual Income as a Compensating FactorTo use residual income as a compensating factor, the Mortgagee must count all members of the household of the occupying Borrower without regard to the nature of their relationship and without regard to whether they are joining on title or the Note to determine “family size.”ExceptionThe Mortgagee may omit any individuals from “family size” who are fully supported from a source of verified income which is not included in Effective Income in the mortgage analysis. These individuals must voluntarily provide sufficient documentation to verify their income to qualify for this exception.From the table provided in Lenders Handbook - VA Pamphlet 26-7, select the applicable mortgage amount, region and household size. If residual income equals or exceeds the corresponding amount on the table, it may be cited as a compensating factor.

x. Borrower Approval or Denial (Manual)

(A) Re-UnderwritingThe 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 DecisionThe underwriter must complete the following documents to evidence their final underwriting decision. For cases involving Mortgages to HUD employees and Test Cases, 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.

(1) Form HUD-92900-LT, FHA Loan Underwriting and Transmittal SummaryThe 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 DE Identification Number and signature.

(2) Form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised ValueThe underwriter must confirm that form HUD-92800.5B is completed as directed in the form instructions.

(3) Form HUD-92900-A, HUD/VA Addendum to Uniform Residential Loan ApplicationThe underwriter must complete form HUD-92900-A 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 ApprovalThe 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 MortgagesIf 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 the Processing and Underwriting Division Director at the Jurisdictional HOCfor final underwriting approval.

(E) Notification of Borrower of Approval and Term of the ApprovalThe 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 DenialWhen a Mortgage is denied, the Mortgagee must comply with all requirements of the Fair Credit Reporting Act (FCRA), and the Equal Credit Opportunity Act (ECOA), as implemented by Regulation B (12 CFR Part 1002). The Mortgagee must complete the Mortgage Credit Reject in FHAC.

xi. Back to Work - Extenuating Circumstances (Manual) [Expired for case numbers assigned on or after October 1, 2016]

The Back to Work – Extenuating Circumstances Policy guidance allows Borrowers who have experienced an Economic Event resulting in loss of employment and household income to use an alternative manner for credit qualification for purchase money Mortgages.

(A) DefinitionsFor the purpose of the Back to Work – Extenuating Circumstances Policy only:Economic Event refers to any occurrence beyond the Borrower’s control that results in loss of employment, loss of income, or a combination of both, which causes a reduction in the Borrower’s household income of 20 percent or more for a period of at least six months.Onset of an Economic Event refers to the month of loss of employment/income.Recovery from an Economic Event refers to the re-establishment of Satisfactory Credit.Satisfactory Credit refers to when a Borrower’s credit history is clear of late housing payments, installment debt payments, and major derogatory credit issues on revolving accounts for a period of 12 months. Any open Mortgages must be current with a 12 month satisfactory payment history. Mortgages may have been brought current through a Loan Modification, “temporary” or “permanent,” as long as all payments are documented as being received in accordance with the modification agreement.Borrower Household Income refers to the gross income of the Borrower and all household members.Household Member refers to the Borrower and any individual residing at the Borrower’s Principal Residence at the time of the Economic Event, and who was a co-Borrower on the Borrower’s previous Mortgage.

(B) General EligibilityMortgagees must use the Back to Work – Extenuating Circumstances guidance when manually underwriting a purchase money mortgage application from a Borrower who has experienced an Economic Event resulting in a foreclosure, Short Sale/Pre-Foreclosure Sale, bankruptcy, or other negative impact on credit.The Mortgagee must verify and document the existence of an Economic Event that reduced household income by 20 percent or more for a period of at least six months.The Mortgagee must obtain the necessary authorization to verify the loss of income of the household member that experienced the Economic Event, even if the household member is not an applicant on the current Mortgage.

(C) Underwriting and Documentation Requirements

(1) Consideration of Derogatory Credit

(a) StandardThe Mortgagee must determine that the Borrower exhibited satisfactory credit prior to the Onset of an Economic Event, the Borrower’s derogatory credit occurred after the Onset of an Economic Event, and the Borrower has re-established satisfactory credit for a minimum of 12 months as of the date of case number assignment.The Mortgagee must analyze and document all delinquent accounts and all derogatory credit, including collections and Judgments, bankruptcies, foreclosures, deeds-in-lieu, and Short Sales/Pre-Foreclosure Sales, to determine whether credit deficiencies were the result of an Economic Event.

(b) Required DocumentationThe Borrower’s credit must be documented with their credit report per standard FHA requirements.The Borrower’s income must be documented in accordance with the general FHA requirements for household members.The Mortgagee must verify and document event-related collections and Judgments that were the result of the Economic Event. For Borrowers with open collection accounts or Judgments, the Mortgagee must also meet the requirements for Evaluating Liabilities and Debt and Evaluating Credit History.

(c) Economic Event-Related Chapter 7 BankruptcyThe Mortgagee must verify and document that the bankruptcy was the result of an Economic Event and a minimum of 12 months have elapsed since the date of discharge of the bankruptcy.

(d) Economic Event-Related Chapter 13 BankruptcyThe Mortgagee must verify and document that the bankruptcy was the result of an Economic Event and all required bankruptcy payments were made on time, or a minimum of 12 months of the pay-out period under the bankruptcy has elapsed at the time of case number assignment and all required bankruptcy payments were made on time.If the Chapter 13 Bankruptcy was not discharged prior to mortgage application, the Mortgagee must also verify and document that the Borrower has received written permission from the Bankruptcy Court to enter into the subject mortgage transaction.

(e) Economic Event-Related Mortgage ForeclosureThe Mortgagee must verify and document that the foreclosure or DIL was the result of the Economic Event and a minimum of 12 months have elapsed since the date of foreclosure or DIL.

(f) Economic Event-Related Pre-foreclosure Sale (Short Sale)The Mortgagee must verify and document that the Short Sale was the result of the Economic Event and a minimum of 12 months have elapsed since the date of sale.

(g) Evaluating Non-Traditional CreditThe Mortgagee may deem a Borrower to have satisfactory credit if the Borrower’s non-traditional credit history covering at least 12 months in duration has no history of delinquency on rental housing payments, no more than one 30-Day delinquency on payments due to other creditors, and no collection accounts/court records reporting (other than medical and/or identity theft).

(2) Loss of EmploymentThe Mortgagee must verify and document the loss of employment by obtaining a written Verification of Employment (VOE) evidencing the termination date. In cases where the prior employer is no longer in business, the Mortgagee must obtain a written termination notice or other publicly available documentation of the business closure. They must also document receipt of unemployment income.

(3) Loss of IncomeThe Mortgagee must verify and document the Borrower’s household income prior to loss of income by obtaining a written VOE evidencing prior income, or tax transcripts, or W-2s.For a loss of income based on Seasonal Employment, the Mortgagee must verify and document a two-year history of Seasonal Employment in the same field immediately prior to the loss of income, in addition to meeting the documentation requirement above.For a loss of income based on Part-Time Employment, the Mortgagee must verify and document a two-year history of continuous Part-Time Employment immediately prior to the loss of income in addition to meeting the documentation requirements above.

(4) Post Economic Event IncomeOnly the income of Borrowers who were household members at the time of the Economic Event may be used as Effective Income for the purpose of establishing a 20 percent reduction in income.

(D) Housing CounselingTo qualify for purposes of establishing satisfactory credit following the Economic Event, the Borrower must receive homeownership counseling or a combination of homeownership education and counseling.Housing counseling may be conducted in person, via telephone, via Internet, or other methods approved by HUD, and mutually agreed upon by the Borrower and housing counseling agency as provided for in the Housing Counseling Program Handbook.A list of HUD-approved housing counseling agencies can be obtained online at http://www.hud.gov/ or by calling 1-(800)-569-4287.All housing counseling and education must be completed a minimum of 30 Days but no more than six months prior to the Borrower submitting a mortgage application to a Mortgagee.

(1) One-on-One CounselingEach Borrower must receive one hour of one-on-one counseling from a HUD-approved counseling agency. The counseling must address the cause of the Economic Event and the actions taken to overcome the Economic Event to reduce the likelihood of reoccurrence.

(2) Housing EducationThe housing education may be provided by HUD-approved housing counseling agencies, state housing finance agencies, approved intermediaries or their sub-grantees, or through an online course.

(3) Required DocumentationThe Mortgagee must obtain a copy of the Borrower’s letter from the housing counseling agency evidencing completion of the required pre-purchase counseling. The letter must be on the housing counseling agency’s letterhead, must display the agency’s Tax Identification Number (TIN), must state that counseling was delivered in accordance with Back to Work requirements, verify the date counseling was completed, and signed by the Borrower and authorized official of the agency.The Mortgagee must also obtain copies of all required housing counseling disclosures as follows:

• an explicit description of any financial relationships between the agency and the Mortgagee;
• a statement that the Borrower is not obligated to pursue a Mortgage with a Mortgagee; and
• a statement that “Completion of this housing counseling program and receipt of a letter of completion of counseling do not qualify you (the borrower) for an FHA-insured mortgage. A mortgagee will have to determine if you (the borrower) qualify for a mortgage. You understand that you may not be approved for a mortgage.”

The Mortgagee must place the documentation of the pre-purchase housing counseling and housing counseling agency disclosures in the FHA case binder immediately after the Borrower’s credit report.

(E) Insurance Application ProcessingThe Mortgagee must indicate the application has been underwritten in accordance with Back to Work – Extenuating Circumstances in the insurance application screen on FHA Connection (FHAC).The Mortgagee must also complete the housing counseling information in the insurance application screen on FHAC.

(F) Expiration of GuidanceThis guidance expires on September 30, 2016.

xii. Underwriting Nonprofit Borrowers (Manual)

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

(B) Borrower EligibilityThe 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 (EIN)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 ScreeningThe 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 LimitationsNonprofit Borrowers are eligible only for fixed rate Mortgages.Nonprofit Borrowers are eligible only for FHA-to-FHA refinances.

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

(E) UnderwritingThe Mortgagee must underwrite nonprofit Borrowers in accordance with the guidance provided in this section. The Underwriting the Borrower Using the TOTAL Mortgage Scorecard and Manual Underwriting of the Borrower sections are not applicable to nonprofit Borrowers.The Mortgagee must obtain documentation to determine the nonprofit Borrower’s actual financial capacity and demonstrate that it has stability and proper cash management.

(1) Standard

(a) Funding Stream AnalysisThe Mortgagee must consider the reliability and duration of the funding stream, and whether the primary sources of funding are competitive, whether the nonprofit Borrower’s funding stream is from a mix of private and public sources, or only from public funds, and if other sources of funding are available should one or more be curtailed.The Mortgagee must also consider whether those funding sources permit overhead and administrative allowances as well as the amount of the nonprofit Borrower’s assets that will be encumbered by the downpayments on the Mortgages.

(b) Financial Capacity AnalysisThe Mortgagee must analyze the year-to-date and previous two years’ financial statements, balance sheets, statements of activity and statements of cash flow to determine the financial stability and capacity of the nonprofit Borrower, including all mortgage applications in process.

(i) Unrestricted Cash BalanceThe Mortgagee must determine if the nonprofit Borrower has an unrestricted cash balance exclusive of lines of credit and Rental Income from the financed Properties that is stable or increasing and supports a six month reserve meeting the greater of:

• 10 percent of the total Mortgage Payments due each month on all Mortgages; or
• total Mortgage Payments for the single largest Mortgage.

(ii) Liquidity RatioThe Mortgagee must determine if the nonprofit Borrower has a liquidity ratio (current assets divided by current liabilities) of 2.00 or greater. Lines of credit are not to be considered in this ratio.

(iii) Total Net Assets (Equity)The Mortgagee must determine that the total net assets are:

• stable or increasing; and
• equal to or greater than 25 percent of the proposed mortgage debt.

(iv) Unrestricted Net AssetsThe Mortgagee must determine that the unrestricted net assets are stable or increasing.

(v) Total Assets and LiabilitiesThe Mortgagee must determine that:

• the total assets are stable or increasing; and
• the trend of liabilities is stable or increasing at the same rate as the total assets.

(vi) Support and Revenue AccountsDefinitionSupport and Revenue Accounts refer to operating income and other non-debt income sources.StandardThe Mortgagee must determine that:

• the support and revenue accounts are stable or increasing; and
• the trend of operating expenses is stable or increasing at the same rate as the support and revenue accounts.

(vii) Cash FlowThe Mortgagee must determine that the trend of cash flow from operating activities is positive.

(viii) Working CapitalDefinitionWorking Capital refers to the liquid assets less short-term liabilities.StandardThe Mortgagee must determine that the trend of working capital is stable or increasing.

(2) Required DocumentationThe Mortgagee must obtain:

• the two most recent years’:
  • audited financial statements (balance sheet, statement of activity, statement of cash flow); and
  • Form IRS 990, Return of Organization Exempt from Income Tax;
• most recent audited 90-Day year-to-date financial statement;
• credit reports on the nonprofit agency; and
• corporate resolution delegating signatory authority.

(F) Final Underwriting DecisionThe 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.