Comprehensive Mortgage-Regulatory Study Notes

HUD: Structure, Mission, Authority

• Cabinet-level department (est. 1968; Housing & Urban Development Act)
• Mission: “create strong, sustainable, inclusive communities and quality affordable homes for all.”
• Retains sole rule-writing authority for Fair Housing Act (coordinates w/ CFPB for enforcement)
• Office of Fair Housing & Equal Opportunity prosecutes discrimination (race, color, religion, sex, national origin, disability, familial status); unresolved cases referred to DOJ.

HUD – Key Agencies & Offices

• FHA – Federal Housing Administration
• Ginnie Mae – Government National Mortgage Association
• Federal Housing Finance Agency (oversight of GSEs)
• Departmental Enforcement Center; Office of Community Planning & Development; Faith-Based & Neighborhood Partnerships; Field Policy & Management; General Counsel; Healthy Homes & Lead Hazard Control; Hearings & Appeals; Labor Relations; Policy Development & Research; Public & Indian Housing; Public Affairs; Congressional & Intergovernmental Relations; Small & Disadvantaged Business Utilization.

FHA-Insured Loan Programs (examples & section numbers)

• Single-Family Insurance (203(b))
• Rehab (Full 203(k))
• HECM (reverse)
• ARMs (251)
• Energy-Efficient
• Graduated Payment (245)
• Growing Equity (245(a))
• Condominiums
• Manufactured Homes

Home-Ownership Counseling Requirements (RESPA/Reg. X; TRID)

• Written list of at least 10 local HUD-approved non-profit counseling agencies → due ext{≤ 3 business days} after completed application; list ≤ 30 days old.
• Mandatory counseling before:
– HOEPA high-cost mortgage acceptance (12 ext{ C.F.R. }§1026.32(a)(5))
– Negative-amortization loans for first-time borrowers (§1026.36(k))
– FHA HECM.
• Model language referencing HUD & CFPB resources must appear on list.

Anne & Masatoshi TRID Scenario (key takeaways)

• “Application” under Reg. Z = name, SSN, income, loan amount, address & prop. value → Anne had it on Nov 30 ⇒ LE due Dec ext{ 4} (4th business day).
• Other same-time disclosures: Your Home Loan Toolkit (RESPA/TILA) + AfBA because title co. is affiliate + Provider List.
• Pre-LE fee restriction: only
35 credit report fee collectable.
• Interest-rate lock 12/19 triggered revised LE (must deliver ≤ 3 biz days of lock, and before CD).
• TRID rule: Revised LE cannot follow CD; Anne e-delivered revised LE 12/22 then CD 12/23; closing 12/29 (meets 3/7/3 timing).

Qualified Mortgage (QM) Rule (Reg. Z §1026.43)

• Product prerequisites:
– Fully-amortizing P&I (no neg-am, no deferment, no balloon*), term ≤ 30 yrs.
– Points & fees ≤ 3\% of total loan \ge annual threshold (134{,}841 for 2025); tiered caps for smaller loans.
– APR ≤ APOR thresholds (general QM limits below).
• Underwriting: verify income/assets (third-party docs), calculate payment at highest rate in first 5 yrs, determine DTI & residual.
• Presumptions of compliance:
– Conclusive (safe harbor) for non-HPML QMs.
– Rebuttable for HPML QMs.

General QM APOR Thresholds (first-lien)

• >134{,}841 → APR ≤ APOR +2.25\%
• 80{,}905–134{,}841 → +3.5\%
• <80{,}905 → +6.5\%
(Subordinate: +3.5\% / +6.5\% tiers).

Seasoned QM

• Fixed-rate 1st-lien, fully-amortizing, no neg-am/balloon, term ≤ 30 yrs, not HOEPA high-cost; points & fees within caps.
• Seasoning period 36 mo. (pauses for 30-day delinquency or disaster accommodation) → ≤2 delinq. \le30 days & none ≥60 days.
• Portfolio hold until seasoning ends (1 transfer allowed; no securitization).

Small-Creditor QM

• Assets <2 billion & ≤2{,}000 first-lien covered loans prior year; portfolio hold ≥3 yrs.
• May originate balloon-payment QMs in rural/underserved counties (term ≥5 yrs, fixed rate, points/fees cap, etc.).

Non-Conventional QM Definitions

• FHA QM: APR ≤ APOR + MIP +1.15\%; points/fees within QM cap (upfront MIP excluded).
• VA QM: all VA-insured or guaranteed loans are safe-harbor QMs; IRRRLs have additional recoup tests.

Non-Qualified Mortgages (Non-QMs)

• Fail QM product or underwriting tests; borrowers may be:
– >43\% DTI or exceed APR limits.
– Self-employed w/ irregular docs.
– Need nontraditional terms (IO, balloon, etc.).
• Still subject to ATR Rule (8 underwriting factors, fully-indexed rate, fully-amortizing, special calc rules for IO/neg-am, simultaneous loans, etc.).

Conventional Mortgage Landscape

• Conventional = not FHA/VA/USDA.
• Conforming: meets GSE limits & guidelines; nonconforming = jumbo, Alt-A, subprime, niche, payment-option ARMs.
• 2025 baseline conforming limits (1-4 units): \$806{,}500 / 1{,}032{,}650 / 1{,}248{,}150 / 1{,}551{,}250; high-cost up to 150\% (e.g., 1{,}209{,}750 for 1-unit).
• Down payment possible as low as 3\% (97% LTV) w/ MI; PMI cancellable at 80\% LTV by request or 78\% automatic (Homeowners Protection Act).
• LLPAs: risk-based price hits for credit score, LTV, product type; cumulative; expressed as % of loan (e.g., .5\% vs 3\%).
• Credit overlays: lender-specific stricter terms (higher FICO, cash reserves, etc.).
• Repurchase risk: GSE remedies framework ⇒ findings (no repurchase), PALs (pay missed LLPA), significant defects (repurchase).

FHA Loans – Core Facts

• FHA insures (doesn’t lend); funded via MMIF, statutorily required \ge 2\% capital ratio.
• Loan limits = lesser of 115\% of area median price OR 150\% of conforming limit (806{,}500) → floors 524{,}225; ceilings 1{,}209{,}750; special exception areas higher.
• Down payment: 3.5\% if FICO ≥580; 10\% if FICO 500–579; <500 ineligible.

Mortgage Insurance Premiums

• UFMIP = 1.75\% of base loan (can finance).
• Annual MIP (paid monthly) based on LTV, term, base amount (see HUD chart) e.g., ≤726{,}200, >95\% LTV, term>15 yrs → 55 bps.
• Duration:
– LTV ≤90\% → 11 yrs.
– >90\% → life of loan.
• Cancel rules differ for pre-6/3/13 case #s.

FHA Programs

• Cash-out refinance (max 80\% LTV, 12-mo payment history).
• Streamline refinance (existing FHA only, no appraisal, net tangible benefit test, 210-day seasoning + 6 payments).
• HECM reverse mortgage: age ≥62, counseling required, fixed or adj. rate, principal limit capped by maximum claim (1{,}209{,}750).

VA Loans

• Govt guaranty (basic \$36{,}000; bonus \$68{,}250) ⇒ lenders can lend 4\times entitlement.
• Max guaranty = 25\% of loan (if full entitlement).
• Funding fee (loans closing 4/7/23–11/14/31):
– First-use, <5\% down → 2.15\%.
– Subsequent, <5\% down → 3.3\%.
– IRRRL 0.5\%; cash-out 2.15/3.3\%.
– Exemptions: disabled vets, Purple Heart active duty, surviving spouses.
• 0% down, no monthly MI, lenient DTI (41\%) but residual income test mandatory.

USDA/RHS Section 502 Loans

• Direct (USDA-funded) vs Guaranteed (private lender, 90\% guaranty).
• Rural area eligibility (population, MSA exclusion, credit shortage).
• Income limits: Direct – ≤low-income; Guaranteed – ≤115\% of area median.
• Upfront guarantee fee 1\% (can finance); annual fee 0.35\% for life.
• 100\% LTV financing, fixed 30-yr (direct may be 33/38 yrs + subsidies to 1\%).

Federal Guidances (historical → basis for Dodd-Frank)

• 2006 Interagency Guidance on Nontraditional Mortgage Product Risks (CSBS/AARMR parallel): cautioned IO & payment-option ARMs, risk layering, collateral-dependent loans.
• 2007 Statement on Subprime Mortgage Lending: defined subprime borrower characteristics, warned against teaser-rate ARMs w/ high resets, promoted ATR & consumer disclosure.
• Concepts later codified: ATR Rule, prepayment penalty restrictions, neg-am counseling, credit-insurance ban.

Mortgage Product Overviews

Fixed-Rate Loans

• Interest constant, term 10–30 yrs; prepayment penalties prohibited except limited to non-HPML QMs, max 2\% Yr 1–2, 1\% Yr 3.

Adjustable-Rate Mortgages (ARMs)

• Rate = index + margin; adjustment freq.; caps: initial/periodic/lifetime/payment.
• TILA rules: CHARM booklet, program disclosures, 60–120-day rate-change notice, ATR qualification at fully-indexed rate & fully-amortizing payment.
• Hybrid 3/1, 5/1, 7/1, 10/1; FHA ARM caps (1/1/5 or 2/2/6) depending on term; VA hybrid ARMs (fixed 3–5 yrs then 1% per-year cap, 5% life).

Balloon Mortgages

• Large final payment; not allowed in HOEPA high-cost or most QMs (except small-creditor rural balloon QMs). Conditional refinance options 5/25, 7/23.

High-Cost Mortgage Loans (HOEPA)

• Triggers:
– APR ≥ APOR +6.5\% (1st) / +8.5\% (subordinate).
– Points & fees >{} 5\% (>(26{,}968) or 8\%/\$1{,}348 smaller).
– Prepayment penalty >2\% or >36 mo.
• Prohibited terms: balloon, neg-am, advance payments, increasing default rates, prepayment penalties, financing points/fees.
• Counseling mandatory; ATR/verification required (open-end & closed-end); assignee notice.

Higher-Priced Mortgage Loans (HPMLs)

• APR > APOR +1.5\% (first-lien), +2.5\% (jumbo), +3.5\% (subordinate).
• Requirements:
– Mandatory tax/insurance escrow ≥5 yrs (small-creditor rural exemption).
– Appraisal w/ interior inspection; two appraisals if property flip (10\%/20\% tests).
– ATR Rule applies; prepayment penalties forbidden.

Second Mortgages & HELOCs

• Junior liens paid after 1st lien in foreclosure; piggy-back (80-10-10) used to avoid PMI.
• HELOC = open-end credit; subject to Reg. Z (not TRID).

Construction & Bridge Financing

• Construction-to-permanent (single-close) vs stand-alone; TRID disclosures can be combined or separate; Appendix D calc.
• Bridge loans: temporary (≤12 mo) exempt from TRID & escrow HPML rule.

Reverse Mortgages (HECM focus)

• Borrower ≥62, principal residence, no required monthly P&I; accrues interest.
• Counseling certificate mandatory.
• Payment options: tenure, term, line of credit, lump sum (fixed rate).
• Principal limit based on age, interest rate, appraised value or \$1{,}209{,}750 max claim (2025).
• UFMIP 2\% of MCA; annual MIP 0.5\% on outstanding balance.

Interest-Only & Low-Doc Loans

• IO, option-ARM, NINA/SISA/NIVA/SIVA/No-Doc largely extinct; ATR requires fully-indexed, fully-amortizing qualification and doc verification.

Key Loan & Disclosure Vocabulary (selected)

• \text{APR} = uniform cost of credit (rate + financed fees).
• \text{Finance Charge} = dollar-cost of credit.
• \text{DTI} = monthly debt ÷ gross income.
• \text{LTV} = \frac{\text{loan}}{\text{value}}\times100\%.
• LE (Loan Estimate) – due \le3 biz days after application; CD – \ge3 biz days pre-consummation.
• SRP = service-release premium (fee for selling servicing).
• Adverse action notice (ECOA) – within 30 days.
• Rescission right: 3 biz days on owner-occupied refi/HELOC; 3 yrs if no notice.

HUD: Structure, Mission, Authority

• Cabinet-level department, established in \text{1968} by the Housing and Urban Development Act as a response to civil rights movements and housing shortages.

• Mission: To foster a strong, sustainable, and inclusive community environment, ensuring access to quality, affordable housing for all Americans.

• Retains sole rule-writing authority for the Fair Housing Act, working in coordination with the Consumer Financial Protection Bureau (CFPB) for effective enforcement to prevent housing discrimination.

• The Office of Fair Housing & Equal Opportunity (FHEO) is responsible for investigating and prosecuting cases of discrimination based on protected characteristics like race, color, religion, sex, national origin, disability, and familial status. Unresolved or severe cases are escalated and referred to the Department of Justice (DOJ) for further legal action.

HUD – Key Agencies & Offices

• FHA – Federal Housing Administration: Insures mortgages made by approved lenders nationwide.

• Ginnie Mae – Government National Mortgage Association: Provides liquidity to the secondary mortgage market by guaranteeing mortgage-backed securities (MBS) composed of FHA, VA, and USDA loans.

• Federal Housing Finance Agency (FHFA): Provides oversight for government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, ensuring their stability and compliance.

• Departmental Enforcement Center: Manages corrective actions for non-compliant HUD recipients.

• Office of Community Planning & Development: Supports community development and affordable housing activities.

• Faith-Based & Neighborhood Partnerships: Engages religious and community organizations in HUD programs.

• Field Policy & Management: Oversees HUD's regional and field offices, aligning policies with local needs.

• General Counsel: Provides legal advice and representation for HUD.

• Healthy Homes & Lead Hazard Control: Addresses health and safety hazards in housing, particularly lead-based paint.

• Hearings & Appeals: Conducts administrative hearings on various HUD program issues.

• Labor Relations: Addresses labor standards and employment practices within HUD and its programs.

• Policy Development & Research: Conducts research on housing needs, market conditions, and program effectiveness.

• Public & Indian Housing: Provides housing assistance to low-income families and addresses housing needs in Native American communities.

• Public Affairs: Manages HUD's communications with the public and media.

• Congressional & Intergovernmental Relations: Serves as the liaison between HUD and Congress, as well as state and local governments.

• Small & Disadvantaged Business Utilization: Promotes opportunities for small and disadvantaged businesses in HUD contracting.

FHA-Insured Loan Programs (examples & section numbers)

• Single-Family Mortgage Insurance (203(b): The most common FHA loan, used for purchasing or refinancing 1-4 unit principal residences.

• Rehab Mortgage Insurance (Full \text{203(k))}: Allows homebuyers and homeowners to finance both the purchase or refinance of a house and the cost of its rehabilitation through a single mortgage.

• HECM (Home Equity Conversion Mortgage - reverse mortgage): Specifically designed for senior homeowners aged \ge 62 to convert a portion of their home equity into cash.

• Adjustable-Rate Mortgages (ARMs) (251): FHA-insured ARMs with specific cap structures.

• Energy-Efficient Mortgage (EEM): Helps families save money on utility bills by allowing them to finance energy-efficient improvements into their FHA mortgage.

• Graduated Payment Mortgage (245): Features lower initial monthly payments that gradually increase over a specified period.

• Growing Equity Mortgage (245(a)): Similar to a graduated payment mortgage but with scheduled payment increases applied directly to the principal to accelerate equity buildup.

• Condominium Mortgages: FHA provides mortgage insurance for eligible condominium units in FHA-approved projects.

• Manufactured Homes: FHA offers financing options for manufactured homes on permanent foundations.

Home-Ownership Counseling Requirements (RESPA/Reg. X; TRID)

• Borrowers must receive a written list of at least \text{10} local HUD-approved non-profit counseling agencies. This list is due \text{≤ 3 business days} after a completed loan application is received and must be no more than \text{30} days old at the time of delivery.

• Mandatory counseling is required before:

• Acceptance of a HOEPA high-cost mortgage (\text{12 C.F.R. }§1026.32(a)(5): Ensures borrowers understand the risks and terms associated with high-cost loans.

• Taking out negative-amortization loans for first-time borrowers (§1026.36(k)): Helps first-time borrowers comprehend the implications of their loan balance increasing over time.

• Accepting an FHA HECM (reverse mortgage): A critical step to ensure seniors understand the complexities, benefits, and obligations of a reverse mortgage.

• Model language referencing HUD and CFPB resources must be prominently displayed on the provided list of counseling agencies.

Anne & Masatoshi TRID Scenario (key takeaways)

• “Application” under Regulation Z (TILA) is defined by six pieces of information: consumer’s name, Social Security Number for credit pull, income, requested loan amount, property address, and estimated property value. In this scenario, Anne had all six on November \text{30}, which means the Loan Estimate (LE) was due by December \text{4} (the \text{4^{th}} business day).

• Other same-time disclosures required include the Your Home Loan Toolkit (a RESPA/TILA booklet for purchase transactions), Affiliated Business Arrangement (AfBA) disclosure if the title company is an affiliate, and a Provider List for services where the borrower can shop.

• Pre-LE fee restriction: Prior to delivering the LE, the only fee a lender can collect from the consumer is a bona fide and reasonable fee for a credit report, typically around $35$.

• An interest-rate lock on December \text{19} triggered a revised LE. A revised LE must be delivered to the borrower \text{≤ 3 business days} after the rate lock occurs, and always before the Closing Disclosure (CD) is issued.

• TRID rule specifies that a revised LE cannot follow a CD, meaning any triggering event for an LE revision must occur and be disclosed before the CD is sent. Anne e-delivered the revised LE on December \text{22} and then the CD on December \text{23}. The scheduled closing on December \text{29} met the \text{3/7/3} timing requirements: \text{3} business days for LE delivery, \text{7} business days waiting period before consummation after LE delivery, and \text{3} business days waiting period after CD delivery before consummation.

Qualified Mortgage (QM) Rule (Reg. Z §1026.43)

• The QM Rule provides certain protections from liability for lenders. To be a QM, a loan must meet specific product prerequisites and underwriting standards:

• Product prerequisites:

• Fully-amortizing principal and interest (no negative amortization, no deferred principal payments, no balloon payments, except for specific exceptions like Small-Creditor QMs). The loan term must be \text{≤ 30} years.

• Points & fees must not exceed \text{3\%} of the total loan amount for loans \ge an annual threshold (for \text{2025}, this threshold is \text{134,841}). Tiered caps apply for smaller loan amounts (e.g., \text{5\%} for loans \text{< 60,000}).

• The Annual Percentage Rate (APR) must not exceed the Average Prime Offer Rate (APOR) thresholds, which vary based on loan amount and lien position (general QM limits are detailed below).

• Underwriting requirements:

• Lenders must verify the consumer’s income and assets using reasonably reliable third-party documentation.

• The payment calculation must be based on the highest interest rate that can apply in the first \text{5} years of the loan term.

• Lenders must consider the consumer’s debt-to-income (DTI) ratio, typically \le 43\% but not strictly capped for all QMs, and residual income after all obligations.

• Presumptions of compliance:

• Conclusive presumption (safe harbor) for non-Higher-Priced Mortgage Loan (HPML) QMs: Provides complete protection from liability under the Ability-to-Repay (ATR) rule.

• Rebuttable presumption for HPML QMs: Lenders are presumed to have complied with the ATR rule, but this can be challenged by a consumer if they can prove that the lender did not make a reasonable and good faith determination of their repayment ability.

General QM APOR Thresholds (first-lien)

• For first-lien loans greater than \text{134,841}: APR must be \text{≤ APOR + 2.25\%}.

• For first-lien loans between \text{80,905} and \text{134,841}: APR must be \text{≤ APOR + 3.5\%}.

• For first-lien loans less than \text{80,905}: APR must be \text{≤ APOR + 6.5\%}.

• (For subordinate liens, the thresholds are generally \text{+3.5\%} and \text{+6.5\%} respectively, aligned with the tiers for first liens but starting from different loan amount cutoffs).

Seasoned QM

• A specialized QM category for fixed-rate, first-lien, fully-amortizing loans that do not feature negative amortization or balloon payments, have a term \text{≤ 30} years, and are not HOEPA high-cost mortgages. Points and fees must remain within the standard QM caps.

• Subject to a seasoning period of \text{36} months (3 years) after consummation. This period pauses if the loan becomes \text{30} days or more delinquent and resumes when the delinquency is resolved or a permanent loan modification is made. It also pauses during any disaster forbearance/accommodation.

• To qualify as a Seasoned QM, the loan must have had no more than \text{2} delinquencies of less than \text{30} days and no delinquencies of \text{60} days or more during the \text{36}-month seasoning period.

• Loans must be held in the lender's portfolio until seasoning ends, with only one transfer permitted before the seasoning period concludes. Securitization of the loan is generally not allowed until it is seasoned.

Small-Creditor QM

• A special type of QM for smaller lending institutions. To qualify, creditors must have assets less than \text{2} billion and originate \text{≤ 2,000} first-lien covered loans in the preceding calendar year.

• These loans must be held in the creditor's portfolio for at least \text{3} years, similar to seasoned QMs.

• Small-creditors may originate balloon-payment QMs if the loan meets specific criteria, including a term of at least \text{5} years, a fixed interest rate, and adherence to the points/fees cap. This exception applies only to loans made in rural or underserved counties, as defined by the CFPB.

Non-Conventional QM Definitions

• FHA QM: An FHA-insured loan is considered a QM if its APR does not exceed the APOR plus the FHA Mortgage Insurance Premium (MIP) and \text{1.15\%}. The standard QM points and fees cap applies, but the upfront MIP (UFMIP) is excluded from this calculation.

• VA QM: All VA-insured or guaranteed loans are automatically considered safe-harbor QMs, offering strong protection to lenders, provided they meet VA's underwriting standards. Interest Rate Reduction Refinancing Loans (IRRRLs) have additional recoupment tests to ensure borrower benefit.

Non-Qualified Mortgages (Non-QMs)

• Non-QMs are loans that fail to meet one or more of the QM product or underwriting tests. This category might include loans where borrowers have:

• A Debt-to-Income (DTI) ratio greater than \text{43\%} or where the APR exceeds the specified QM limits.

• Non-traditional or irregular income sources, such as self-employed individuals with less standard documentation.

• A need for non-traditional loan terms like interest-only payments or balloon features.

• While not QMs, these loans are still subject to the Ability-to-Repay (ATR) Rule. This rule mandates lenders to make a reasonable and good-faith determination that the consumer has a reasonable ability to repay the loan according to its terms. The ATR rule requires consideration of eight underwriting factors: current or reasonably expected income or assets, employment status, monthly payment for the mortgage, monthly payments for simultaneous loans, monthly payments for other mortgage-related obligations (e.g., property taxes, insurance), current debt obligations, DTI ratio or residual income, and credit history. Special calculation rules apply for interest-only and negative-amortization loans, requiring the ATR analysis to be based on the fully-indexed rate and fully-amortizing payment.

Conventional Mortgage Landscape

• Conventional mortgages are those not insured or guaranteed by government agencies like the FHA, VA, or USDA. They include conforming and nonconforming loans.

• Conforming loans: These loans meet the specific loan limits and underwriting guidelines set by Government-Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac, making them eligible for purchase by these entities in the secondary market.

• Nonconforming loans: Loans that do not meet GSE guidelines. This category includes:

• Jumbo loans: Loans that exceed the conforming loan limits.

• Alt-A (Alternative-A) loans: Loans made to borrowers with good credit but non-traditional documentation or other risk factors.

• Subprime loans: Loans made to borrowers with lower credit scores or other higher-risk characteristics.

• Niche loans: Specialized loan products catering to specific borrower needs or property types.

• Payment-option ARMs: Loans that offer borrowers flexibility in their monthly payments, sometimes allowing for negative amortization.

• \text{2025} baseline conforming limits (for 1-4 units): Single-unit \text{806,500}; Two-unit \text{1,032,650}; Three-unit \text{1,248,150}; Four-unit \text{1,551,250}. In high-cost areas, these limits can be up to \text{150\%} of the baseline (e.g., \text{1,209,750} for a 1-unit property).

• Down payment for conventional loans can be as low as \text{3\%} (\text{97\%} Loan-to-Value - LTV) for eligible borrowers, typically requiring Private Mortgage Insurance (PMI).

• PMI is required for conventional loans with LTVs above \text{80\%}. Borrowers can request cancellation of PMI once their LTV reaches \text{80\%} (based on original value or current appraised value) or it is automatically cancelled once the LTV reaches \text{78\%} according to the Homeowners Protection Act (HPA).

• Loan-Level Price Adjustments (LLPAs): These are risk-based fees charged by Fannie Mae and Freddie Mac to compensate for credit risk. They are applied based on factors such as credit score, LTV ratio, and loan product type. LLPAs are cumulative and are expressed as a percentage of the loan amount (e.g., \text{0.5\%} to \text{3\%} of the loan value), increasing the overall cost for riskier borrowers.

• Credit Overlays: Lender-specific stricter underwriting terms that go beyond what GSEs require. Examples include higher FICO score requirements, larger cash reserve requirements, or more restrictive DTI ratios.

• Repurchase risk: This refers to the risk that a lender may be forced by a GSE to repurchase a loan due to significant defects or breaches of representations and warranties. GSEs have remedies frameworks, including findings (no repurchase deemed necessary), Pay for Performance or Adjusted Loss (PALs) where lenders may pay a fee for missed LLPAs or minor defects, and significant defects which can lead to a full repurchase demand from the GSE.

FHA Loans – Core Facts

• FHA insures mortgages rather than lending money directly. Its insurance operations are funded through the Mutual Mortgage Insurance Fund (MMIF), which is statutorily required to maintain at least a \text{2\%} capital ratio.

• FHA loan limits are set annually for each county. They are the lesser of \text{115\%} of the area median housing price OR \text{150\%} of the conforming loan limit (\text{806,500} for single units in \text{2025}).

• There are also national FHA floor limits (\text{524,225} for single units) and ceiling limits (\text{1,209,750} for single units).

• Special exception areas, such as Alaska, Hawaii, Guam, and the U.S. Virgin Islands, may have even higher loan limits due to higher construction costs.

• Down payment requirements: \text{3.5\%} of the purchase price if the borrower's FICO score is \text{≥ 580}. If the FICO score is between \text{500} and \text{579}, a \text{10\%} down payment is required. Borrowers with FICO scores below \text{500} are generally ineligible for FHA loans.

Mortgage Insurance Premiums

• Upfront Mortgage Insurance Premium (UFMIP): A one-time fee of \text{1.75\%} of the base loan amount. This premium can typically be financed into the loan amount.

• Annual MIP (paid monthly): Calculated based on the loan's Loan-to-Value (LTV), term (e.g., \text{15} years or less, or longer than \text{15} years), and base loan amount. For example, for loans \text{≤ 726,200}, with LTV \text{> 95\%} and a term longer than \text{15} years, the annual MIP is \text{55} basis points (\text{0.55\%}).

• Duration of Annual MIP:

• If the original LTV was \text{≤ 90\%}, the annual MIP is collected for \text{11} years.

• If the original LTV was \text{> 90\%}, the annual MIP is collected for the life of the loan.

• Cancellation rules for FHA case numbers assigned before June \text{3, 2013}, differ, often allowing for earlier cancellation.

FHA Programs

• Cash-out refinance: Allows homeowners to refinance their existing mortgage for more than they currently owe and take the difference in cash. The maximum LTV is \text{80\%}, and borrowers must have a \text{12}-month payment history.

• Streamline refinance: Available for existing FHA loans only, this program offers a simpler refinancing process with no appraisal or extensive underwriting required. It requires a