Origination, Underwriting, and Servicing Practices
This domain follows the loan from counseling through claim: what must happen before application, how the lender judges whether the borrower can keep the home, and what servicing requires afterward.
Counseling first
Independent counseling by a HUD-approved agency must occur before the borrower signs the application, and a signed certificate must be in the file. The counselor may charge a disclosed fee but cannot be tied to the lender, and the lender may not require the borrower to use a particular counselor. Counseling may be in person or by telephone.
Financial assessment
Under the Financial Assessment rule, the lender reviews credit history, income, assets, living expenses, and property-charge history, then applies a residual income test. A borrower who fails must either have a Life Expectancy Set-Aside (LESA) funded from the principal limit for taxes and insurance, or be declined. Extenuating circumstances must be documented.
Disclosures and closing
Required items include the TALC, a loan amortization or projection, and the counseling certificate, followed by a three-business-day right of rescission. No annuity, insurance, or investment product may be required as a condition of the loan.
Servicing
The servicer monitors occupancy and property charges, issues required statements and default notices, offers loss mitigation before foreclosure, and may assign the loan to HUD once the balance reaches 98% of the MCA.
Worked example
An applicant's residual income fails by $80 per month. The underwriter funds a $28,000 LESA from the principal limit, which reduces the available line of credit, and the loan closes. Declining the file is correct only when no compliant option exists.
Traps
- Ordering counseling after the application is signed.
- Treating a LESA as a penalty rather than a condition of approval.
- Referring a file to foreclosure over a tax default without documented loss mitigation.