NON-CONFORMING (Jumbo) PRODUCT GUIDELINES (501 Product Code)

Transcription

1 NON-CONFORMING (Jumbo) PRODUCT GUIDELINES (501 Product Code)

2 Table of Contents PROGRAM MATRICES... 1 Primary Residence - Purchase and Rate/Term Refinance... 1 Primary Residence Cash Out Refinance Second Home - Purchase and Rate/Term Refinance... 2 Second Home Cash-Out Refinance... 3 Investment Property Purchase, Rate/Term and Cash Out Refinance... 3 ASSETS... 4 Asset Documentation... 4 Reserve (Post-Closing Liquidity) Requirements... 4 ASSET/DOWNPAYMENT SOURCES... 5 Business Assets... 5 Cash Assets for Down Payment and Closing Costs... 5 Cash Assets Requiring Liquidation... 5 Checking & Savings... 5 Credit Card Financing... 6 Depository Accounts... 6 Earnest Money Deposit... 6 Employer Financing... 6 Gifts... 6 Individual Development Account (IDA)... 7 Ineligible Assets... 7 Lump-Sum Cash Payments... 7 Publicly Traded Stocks, Bonds, Mutual Funds, U.S. Government Securities... 7 Retirement Accounts... 7 Restricted Stock Subject to U.S. Securities and Exchange Commission (SEC) Rule Savings Bond... 8 Seller Concessions (Limits)... 8 Subordinating Financing... 8 Acceptable Documentation... 9 Trades... 9 Use of Premium Pricing BORROWER ELIGIBILITY Borrower Eligibility Identity of Interest Guiding Principles Definitions Additional Risk Red Flags Identity of Interest Transactions i

3 Scenarios Documentation Requirements Citizenship Diplomatic Immunity Foreign Nationals Non-Permanent Resident Permanent Resident Social Security Number U.S. Citizens and Non-U.S. Citizens Occupancy Power of Attorney Trusts Illinois Land Trusts Living "Inter Vivos" Trusts Life Estates COLLATERAL Number of Appraisals Required Appraisal Management Companies (AMC) Condominiums ) Acceptable Condominium Project Reviews ) Ineligible Condominium Project Reviews ) General Condominium Project Eligibility Requirements ) Homeowners Association Certification Review ) Fidelity insurance is required Eligible Properties Geographic Restrictions Ineligible Properties Mixed Use Properties Properties with Solar Panel System Planned Unit Developments (PUDs) Properties Previously Listed for Sale Renegotiated/Amended Purchase Contracts CREDIT Minimum Credit Score Insufficient credit Housing Verification Individual Credit Reports Business Credit Reports Bankruptcy, Foreclosure, Deed-In-Lieu, Short Sale, Repossession Requirements and Loan Modifications Collections, Judgments, and Judgment Liens Payoff vs. Paydown Ratios Analysis Score Selection Housing Expense Ratio ii

4 Total Debt Ratio (DTI) Liabilities Analysis Assumptions Bankruptcy Bridge Loans Business Debt Contingent Liabilities Cosigned Loans Child Support Court Ordered Debt Deferred Payments, Balloon Payments, and Single Note Payments Group Savings Installment Accounts Lease Payments Loans Secured by a Financial Asset Loans from 401(k), 403(b), and KEOGH Plans Margin Accounts Net Rental Loss Pending Lawsuits Previously Paid In Full Ready Reserve Accounts Rental of Previous Residence Listed for Sale Revolving Accounts Revolving HELOC s HELOCs on Real Estate Owned Other than the Subject Property Calculating CLTV on Helocs Sale of Prior Home Subordinate Financing Unsecured Loans from an Employer Qualifying Ratios (DTI) Departure Residence Policy Existing Principal Residence Property Converting to Second Home Existing Principal Residence Property Converting to Investment Property Departure Residence Appraisal Hierarchy DISASTER POLICY Disaster Areas Requirements EMPLOYMENT Evaluating Employment History Employment Gaps Employment Beginning After Subject Loan Closing Employment Less Than Two Years Job Changes Relocation Stability Salaried Income Verification of Employment iii

5 INCOME Income Analysis Annuity and Pension Income Automobile Allowance Bonus Income Capital Gain Income Child Support, Alimony, or Maintenance Income Commissioned Borrower Continuance of Income Declining Income Policy (Self-Employment, Bonus, Overtime, Commission) Disability Income Long-Term Temporary Leave/Short-Term Disability/Family Leave Income Calculation Requirements Documentation Requirements Employment by Relatives or Transaction Participants Foreign Income Foreign Source Employment Income: Foreign Source Interest/Dividend Income: Foster Care Income Interest or dividend income Military Income Mortgage Differential Income Non-Taxable Income Notes Receivable, Installment Sales and Land Contracts Overtime Income Per Job/Contract Basis Income Public Assistance/Government Assistance Income Retirement Income Royalty Payments Restricted Stock Seasonal Income Seasonal Employment with Associated Unemployment Compensation Second jobs/part-time Income Section 8 Homeownership Assistance/Homeownership Subsidies Social Security Income Tip Income Trust Income Unacceptable Sources of Income Unemployment Compensation PROGRAM DETAILS Age of Documentation Escrow Holdbacks Escrow Waivers Excluded Parties Lists Flood Insurance Hazard Insurance Project Insurance Requirements: Required Coverage for PUD s and Condos Multiple Mortgages to the Same Borrower Properties Subject to Localized Perils iv

6 Preferred Payment Plan Prepayment Penalty Title Insurance Survey Requirements PROGRAM SUMMARY Cash Out Ability to Repay and Qualified Mortgage Rule Underwriting RENTAL INCOME Eligible Rental Income Ineligible Rental Income SELF EMPLOYED INCOME Self-Employed Borrowers Income Analysis Increased Risk Consideration Two-year history Less than one-year history Self Employed Business Classifications Sole proprietorship Partnership General Partnership Limited Partnership Limited partnership liability Corporation Subchapter S Corporation Self Employed Required Documentation Tax returns Corporations, S-corporations, partnerships Sole proprietorship Income Calculation Methods Evaluating Self Employed Tax Returns Averaging Earnings trend Income source Schedule C Schedule D Schedule E Schedule F - Farm Income or Loss Evaluating Corporate Tax Returns (IRS Form 1120) Evaluating S Corporation Tax Returns (IRS Form 1120s) and Schedules K Evaluating Partnership Tax Returns (IRS Form 1065) and Schedule K Re-Evaluation of Business Income Self Employed Assets Current assets v

7 Fixed assets Other assets Self Employed Liabilities Self Employed Stockholder s Equity Self Employed Income Statement Matching concept Organization Self Employed Income Definition Cost of goods sold Gross profit on sales Sales Self Employed Expenses General and administrative expenses Federal income tax Selling expenses Other expenses TRANSACTION DETAILS Construction to Permanent Financing Rate/Term Refinance Acquisition Cost Documentation Single Close Construction Borrower in Construction Industry Eligible Terms & Programs Ineligible Transactions & Programs Interest Only Feature Investment Properties Property Listed for Sale Market Classification Energy Market Classification Maximum Loan Amount Maximum Number of Financed Properties Median Home Price Minimum Loan Amount Private Transfer Fee Policy Rate/Term Refinances Refinance of Loans with Less than One Year Seasoning REO Contracts Title Changes Less than 12 Months VERIFICATION of INCOME T vi

8 PROGRAM MATRICES Correspondent loans are ineligible For Any Guidelines Not Specifically Addressed, Please Refer To MSF Conventional Guidelines Primary Residence - Purchase and Rate/Term Refinance The LTV/CLTV matrix below is allowed with the following products: Fixed rate (15- to 30-year) ARMs (5/1, 7/1, and 10/1 LIBOR ARMs) Single Family Detached / Attached, PUD, Attached Detached Condo with Condo, Credit Score Attached with <720 Credit Score 720 Loan Amount / Combined Loan Amount 1 >$417,000 - $750,000 2 > $750,000 $1 million > $1 million $1.5 million > $1.5 million $2 million > $2 million $2.5 million > $2.5 million $3 million Market Class Max LTV Max CLTV Max LTV Max CLTV Max LTV 2 Unit 3 to 4 Unit Max CLTV Max LTV Max CLTV N/A N/A Not Listed Minimum Loan Score 700 Fixed Rate 720 ARMs 1. Combined loan amount (total of all loans/lines against the subject property) applies when secondary financing exists 2. Non-Conforming first Loan amounts must be greater than $417, Additional restrictions when CLTV exceeds 80% Primary Residence Cash Out Refinance 1 The LTV/CLTV matrix below is allowed with the following products: Fixed rate (15- to 30-year) ARMs (5/1, 7/1, and 10/1 LIBOR ARMs) PAGE 1 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

9 Loan Amount / Combined Loan Amount 1 >$417,000 - $750,000 2 > $750,000 $1.5 million > $1.5 million $2 million Single Family Detached / Attached, PUD, Condo Market Class Max LTV Max CLTV Minimum Loan Score 1. Combined loan amount (total of all loans/lines against the subject property) applies when secondary financing exists 2. Non-Conforming first Loan amounts must be greater than $417,000 Primary Residence Cash Out Limits LTV/CLTV Maximum Amount of Cash Out >65% $400,000 65% $500,000 Primary Residence Reserve / PCL Requirements Loan Amount/Adjusted Combined Loan Amount 1 Single Family Detached / Attached, PUD, Co-op Condo 2 Unit 3 to 4 Unit Up to $1 million 12 months PITI 2 12 months PITI 2 >$1 million $2 million 12 months PITI 2 18 months PITI 2 36 months PITI 2 >$2 million $4 million 24 months PITI 2 1. Adjusted combined loan amount (total of all loans/outstanding line balances against the subject property) applies when secondary financing exists (i.e., when subordinate financing is a line of credit, the outstanding balance is used) 2. See Also Reserve (Post-Closing Liquidity) Requirements 720 Second Home - Purchase and Rate/Term Refinance The LTV/CLTV matrix below is allowed with the following products: Fixed rate (15- to 30-year) ARMs (5/1, 7/1, and 10/1 LIBOR ARMs) Single Family Detached / Attached, PUD, Co-op, Detached Condo, Attached with Credit Score 720 Loan Amount/ Market Combined Loan Amount 3 Class >$417,000 - $650,000 2 > $650,000 $1 million Max LTV Max CLTV Max LTV Attached Condo with Credit Score <720 Max CLTV Minimum Loan Score 700 Fixed Rate 720 ARMs PAGE 2 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

10 > $1 million $1.5 million > $1.5 million $2 million Combined loan amount (total of all loans/lines against the subject property) applies when secondary financing exists 2. Non-Conforming first Loan amounts must be greater than $417,000 Second Home Cash-Out Refinance The LTV/CLTV matrix below is allowed with the following products: Fixed rate (15- to 30-year) ARMs (5/1, 7/1, and 10/1 LIBOR ARMs) Loan Amount / Combined Loan Amount 1 >$417,000 - $650,000 2 > $650,000 $1.5 million > $1.5 million $2 million Single Family Detached / Attached, PUD, Condo Market Class Max LTV Max CLTV Minimum Loan Score 1. Combined loan amount (total of all loans/lines against the subject property) applies when secondary financing exists 2. Non-Conforming first Loan amounts must be greater than $417,000 Second Home Cash Out Limits LTV/CLTV Maximum Amount of Cash Out ALL $350,000 Second Home Reserve / PCL Requirements Loan Amount / Adjusted Combined Loan Amount 1 Single Family Detached / Attached, PUD, Condo Up to $1 million 18 months PITI 2 >$1 million $2 million 24 months PITI 2 >$2 million $4 million 36 months PITI 2 1. Adjusted combined loan amount (total of all loans/outstanding line balances against the subject property) applies when secondary financing exists (i.e., when subordinate financing is a line of credit, the outstanding balance is used) 2. See Also Reserve (Post-Closing Liquidity) Requirements Investment Property Purchase, Rate/Term and Cash Out Refinance The LTV/CLTV matrix below is allowed with the following products: 720 PAGE 3 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

11 Fixed rate (15- to 30-year) ARMs (7/1, and 10/1 ARMs) Loan Amount / Combined Loan Amount 1 Market Class Single Family Detached / Attached, PUD, Condo Max LTV Max CLTV Reserve / PCL Requirements Minimum Loan Score Loan Amount/Adjusted Combined >$417,000 - $2 million 4 1 or Loan Amount 2 up to $1,000,000: 24 months PITI 3 Loan Amount/Adjusted Combined Loan Amount 2 >$1,000,000 to $2,000,000: 30 months PITI Combined loan amount (total of all loans/lines against the subject property) applies when secondary financing exists 2. Adjusted combined loan amount (total of all loans/outstanding line balances against the subject property) applies when secondary financing exists (i.e., when subordinate financing is a line of credit, the outstanding balance is used) 3. See Also Reserve (Post-Closing Liquidity) Requirements 4. Non-Conforming first Loan amounts must be greater than $417,000 Investment Property Cash Out Limits LTV/CLTV Maximum Amount of Cash Out ALL $400,000 ASSETS Asset Documentation Assets must be sourced/seasoned and may be verified using: Direct written verification, completed by the depository; or Account statements must provide all of the following information: o Clearly identify the borrower as an account holder o Include the account number o Include the time period covered by the statement o Include all deposits and withdrawal transactions o Include all purchase and sale transactions o Include the ending balance in U.S. Dollars Copies of retirement account statements must be the most recent statements and they must identify the borrowers vested amount and terms Large disparities between the current balance and the opening balances may require additional verification or documentation Large or irregular deposits must be explained and documented; for W2 employees large deposits are deposits greater than 25% of the loans qualifying income Reserve (Post-Closing Liquidity) Requirements See Program Matrices for MSF reserve (post-closing liquidity) requirements Liquid assets verified to meet the reserve (post-closing liquidity) requirements may be in the form of: Cash equivalents (checking, savings, or money market accounts) 100% of the vested value of publicly traded stocks, mutual funds, and government securities Cash surrender value of life insurance o Less outstanding loans, if repayment not included in debt ratio calculation Retirement funds may be used to meet up to 50 percent of the minimum reserve requirements o Gross retirement funds must be discounted by 30 percent to account for tax consequences (less any outstanding loan balances) to determine the actual funds available for reserve requirements o There must be an additional 10% reduction if an early withdrawal penalty exists PAGE 4 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

12 o 100% of Roth IRA (less outstanding loans) Equity proceeds from the sale of a residence Funds held in business accounts may be eligible for use o See Also Business Assets The following assets are ineligible for purposes of meeting the minimum reserve (post-closing liquidity) requirement: Gift funds Borrowed funds Stock in a closely held corporation Proceeds from the sale of assets other than the sale of a residence Proceeds from a cash out refinance transaction ASSET/DOWNPAYMENT SOURCES Business Assets If business funds are used for down payment, closing costs and/or reserves, the borrower must be the sole proprietor or 100% owner of the business Both of the following conditions must be met: Business average annual cash flow is greater than the amount to be withdrawn/reserves Cash on company year-end balance sheet for each of the previous three years is greater than the amount to be withdrawn/reserves o This information is found on line 1 of the schedule L for the Partnership, S-Corporation and the Corporation o A three-year history of a balance greater than or equal to the amount being considered for reserves (postclosing liquidity) or down payment is required o Two years of the schedule L will show three years of cash on hand for the company Full analysis of the business must consider the effect of the withdrawal of the assets and how it will impact the strength and viability of the business in the future The following questions need to be considered: What is the pattern of company cash flows? Do we have declining gross or net income? Do we have concerns about the type of business? Is the business experiencing a downturn? Extreme care needs to be taken when considering business use of funds and in some cases even though a business is profitable, it may not be prudent to use the business assets in our transaction Cash Assets for Down Payment and Closing Costs Bonus Income Used for Cash to Close A borrower s recent bonus may be used for cash to close when the impact to borrower s qualifying income is analyzed It may be required to deduct the bonus from qualifying income when it is used as cash to close if the Underwriter determines that the borrower is unable to meet all financial obligations and living expenses until the next bonus payout. Considerations may include, but are not limited to: How often the bonus is paid (i.e. quarterly, semi-annual, annual) and what is the date of the last bonus payout? What is the amount of the bonus used for cash to close? Are base income and liquid reserves sufficient to allow borrower to meet all obligations and living expenses until the next bonus is received? Are liquid reserves sufficient to ensure the borrower has the ability to repay obligations in a timely fashion and to support the borrower s overall income profile for acceptable risk? Cash Assets Requiring Liquidation The following may be counted as cash assets at 100 percent of the verified liquidated amounts: Cash value of life insurance Savings Bonds Checking & Savings The borrower s bank or brokerage statements must be computer-generated or typed and identify clearly: Depository institution PAGE 5 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

13 Account holder(s) Account number o must include at least the last four digits Time period covered by the statement Deposit and withdrawal transactions Ending account balance Documentation for a Verification of Deposit (VOD) consists of account statements for the most recent two months or quarterly statement Credit Card Financing A credit card may be used to pay fees associated with the Mortgage as follows: Acceptable fees are: Appraisal Credit Report Origination fee Commitment fee Lock-in fee Extended lock fee Acceptable credit cards are: Visa MasterCard Discover The Loan must meet all of the following requirements: Borrower must have sufficient liquid assets to pay the amount charged (in addition to all other closing costs) The maximum amount charged or advanced may not exceed 2 percent of the Mortgage amount Under no circumstances may credit card financing be used for the down payment. The amount charged or advanced must be included in the borrower s total outstanding debt and the repayment of that amount must be included when determining qualifying ratios (greater of $10 or 5 percent of the outstanding balance). A copy of the charge receipt must be included in the file HUD-1 must reflect a paid outside of closing (POC) credit to the borrower for the amount charged Depository Accounts For all transactions, generally, single deposits that are greater than 50 percent of the borrower's monthly qualifying income should be explained and documented. Consideration will also be given to total monthly income, type of employment, total amount of all assets and reasonableness based on borrower s overall credit and transaction profile. Earnest Money Deposit If the canceled check does not appear on the bank statement, the earnest money should be deducted from the account balance Employer Financing Financing provided by the employer, whether secured by the property or unsecured must be treated as secondary financing and meet Subordinate financing and LTV/TLTV/CLTV Matrices Gifts For Loans with a LTV less than or equal to 80%, the full down payment may be gifted Gift Of Equity Gift equity in the subject property is an acceptable source of down payment, as long as the amount of equity has been verified The donor must provide a gift letter Equity gifts are only allowed after the required minimum down payment has been made from the borrower s own funds PAGE 6 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

14 Individual Development Account (IDA) An IDA is a savings account designated by the borrower for the purpose of purchasing a residence and into which the borrower has regularly deposited funds that are matched by funds from a municipality, non-profit or religious organization, the borrower's employer, or a regional Federal Home Loan Bank. Depending on whether the IDA had a provision that requires repayment of the matched funds, the requirements of either Option A or Option B must be met. Option A (no repayment provisions) o Matching funds may be counted as cash for the full or partial down payment, closing costs, financing costs and prepaids/escrows; o Document the savings plan and regular payments made by the borrower and the matching organization; o Allow for up to a 4 to 1 match by the matching organization; o Borrower must comply with any vesting requirements of the IDA program. Option B (repayment provisions) o All matching funds may be included as a gift or grant after the borrower has made the initial down payment from his own funds as required by the specific program; o Document the savings plan and regular payments made by the borrower and the matching organization; o Allow for up to a 3 to 1 match; o Borrower must comply with any vesting requirements of the IDA program. Ineligible Assets Group savings Pooled funds Saving cash to close Sweat Equity Stock options in a qualified plan but not fully vested Stock options in a non-qualified plan Assets held in a UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfers to Minors Act) Lump-Sum Cash Payments Transferring borrowers often receive a substantial lump-sum cash payment from their employer as an incentive to move to a new location. When this occurs and the two following criteria are satisfied, the lump-sum payment may be used as a source of funds for the initial down payment: The lump-sum cash payment is non-revocable The down payment is made in after-tax dollars Publicly Traded Stocks, Bonds, Mutual Funds, U.S. Government Securities A copy of the account statement for the most recent month/quarter is required; proof of liquidation is required provided that the existence of these accounts is fully documented When the asset is needed to complete the transaction verify: The borrower s ownership of the asset, The value of the asset at the time of sale or liquidation, and The borrower s actual receipt of funds realized from the sale or liquidation Retirement Accounts IRA, SEP IRA, 401(k), SEP, KEOGH, 403(b) and other IRS qualified employer plans may be used for down payment and closing costs, up to the post-tax and post-penalty amount available to the borrower for distribution A copy of the plan statements for the most recent two months is required The statement should be reviewed to determine the borrower s vested amount in the plan If there is a penalty for withdrawal, discount the asset by the applicable amount Verification of liquidation is required Restricted Stock Subject to U.S. Securities and Exchange Commission (SEC) Rule 144 When using vested company stock that is subject to SEC Rule 144 the following documentation is required: When stock is used for down payment provide proof of liquidation PAGE 7 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

15 When stock used for reserves provide: o Evidence that stock is eligible for resale as defined by the SEC Rule 144 o A letter from the company which includes: Vesting statement Eligibility to liquidate stock Current stock price Addresses any additional restrictions on liquidating stock other than those imposed under SEC Rule 144 o Discount the value by 40% (to account for taxes) Refer to SEC website for the current Trading Volume Formula for calculating eligible value. Savings Bond A copy of the bond certificate(s) must be provided evidencing the Borrower is the owner and the current value of the bonds, OR Include a statement from the Seller or a financial institution attesting that it has seen the bonds and listing the serial numbers of the bonds, dates of maturity, type and amount, and stating that the borrower is the owner A copy of the appropriate U.S. Treasury Table evidencing the current values of the bonds should also be provided When the asset is needed to complete the transaction verify: The borrower s ownership of the asset, The value of the asset at the time of sale or liquidation, and The borrower s actual receipt of funds realized from the sale or liquidation Seller Concessions (Limits) Maximum 3 rd party concessions are based on a percentage of the lesser of the purchase price or appraised value Prior to March 28, 2017 Property type LTV/CLTV Contribution 1 Primary Residence 80% 6% Second Home >75% 6% 75% 9% Investment Any 2% 1. HOA fees/dues prepaid by any party other than the borrower are not allowed On and after March 28, 2017 Property type LTV/CLTV Contribution 1 Primary Residence >80% 3% Second Home 80% 6% 80% 6% Investment Any 2% 1. HOA fees/dues prepaid by any party other than the borrower are not allowed Subordinating Financing There are two types of subordinate financing: Home Equity Line of Credit (HELOC): a mortgage loan that allows the borrower to obtain multiple advances from a line of credit at his/her discretion and that is typically in a subordinate position Closed End Loan: a mortgage providing a single advance of funds at the time of loan closing and that is not eligible for additional draws Terms For transactions including subordinate financing, the following requirements apply for both HELOC and Closed End Loans: The subordinate financing must be recorded and clearly subordinate to MSF s first mortgage The maximum LTV/TLTV*/CLTV** may not exceed the guideline limits for the product and occupancy type shown in the Program Matrices PAGE 8 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

16 If there is/will be an outstanding balance at the time of closing, the payment on the subordinate financing must be included in the calculation of the borrower's debt-to-income ratio(s) Negative amortization is not allowed; scheduled payments must be sufficient to cover at least the interest due Equity share or shared appreciation is not allowed Subordinate financing from the borrower's employer may not include a provision requiring repayment upon termination Subordinate financing from the property seller (seller carry-back, including any property seller or other private party carried financing) o Is allowed only after the borrower has made a 5% minimum down payment / cash investment o Is allowed only when the maximum CLTV is the lesser of 95% or the published CLTV limits for the product/program o Affects interested party Contribution Limits o Should be at market rate If the interest rate is more than 2% below Fannie Mae s posted net yield in effect for second mortgages at time of closing it must be treated as a sales concession and a dollar for dollar reduction made to the sales price For new Closed End subordinate financing the following also apply: Maturity date or amortization basis of the junior lien must not be less than five years after the Note date of the first lien Mortgage, unless the junior lien is fully amortizing The loan cannot have a balloon or call option within five years of the date of the Note The terms of a HELOC may provide for a balloon or call option within the first five years after the Note date of the first Mortgage Acceptable Documentation The terms of any subordinate financing must be verified The following sources of verification are acceptable*: Existing subordinate loans (loans that will be re-subordinated): o A copy of the credit report, or o A copy of the mortgage note, or o A direct verification from the lender, or o A copy of the loan statement For home equity lines of credit (HELOC): If an existing HELOC is reduced without modifying the original Note, the original line limit must be used to calculate the Combined-Loan-to-Value ratio New subordinate Loans obtained prior to or at Closing: A copy of the mortgage note, or A direct verification from the lender, or A copy of the commitment letter from the lender or A copy of the HUD-1 evidencing proceeds Notes: Whether the subordinate financing is existing or new, a full underwrite of the documentation provided is required to ensure the subordinate financing meets the requirements If the subordinate lien s terms cannot be verified in their entirety with a single source of verification, the use of a combination of the above documentation options is acceptable If the subordinate financing is a community second or affordable second, it must comply with Fannie Mae and Freddie Mac requirements Trades Equity from trading a borrower's existing property is acceptable after the borrower has made a five percent (5%) cash down payment The amount of equity is determined by subtracting the outstanding Loan balance of the property that is being traded, plus any transfer costs, from the lesser of that property's appraised value or its trade-in value, as agreed to by both parties A separate written appraisal for the property that is being taken in trade is required A search of the land records to verify ownership of the property and to document if there are any existing liens on the property is also required PAGE 9 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

17 Use of Premium Pricing For all transactions, the funds derived from premium pricing (Credit for Interest Rate Chosen, CFIRC), are only allowed to be used to pay the borrower's typical Closing costs and/or prepaid expenses. Typical prepaid items paid by the borrower: o Interest charges covering any period after the settlement date o Real estate taxes covering any period after the settlement date o Hazard insurance premiums o HOA dues Typical Closing costs paid by the borrower: o origination fee o discount points o appraisal fees o title searches and surveys o title insurance o taxes o deed-recording fees o credit report charges CFIRC may not be used to pay any portion of the borrower s down payment, personal debts (ex: revolving debt), collection accounts, judgments, escrow shortages or any other item that is not considered a typical prepaid item or typical Closing cost paid by the borrower as listed above. Other property improvement expenses not related to the transaction or not required by the purchase contract are not allowed. For transactions where CFIRC exists, cash back to the borrower as a result of the premium pricing is restricted to the lesser of 1% of the Loan amount or $2500 BORROWER ELIGIBILITY Borrower Eligibility Borrowers must be either U.S. Citizens or lawful permanent or non-permanent residents of the United States have reached the age at which the mortgage note can be enforced in the jurisdiction where the property is located Also See Citizenship Identity of Interest Guiding Principles i.e. non-arm s length transaction Certain transactions pose an increased risk and additional precautions must be taken to evaluate and prudently underwrite for that risk In-depth analysis of transactions between parties with family or business relationships may reveal unsupported values, straw borrowers, non-arm's length or at-interest influences, inflated sales prices, or excessive fees or disbursements Definitions A non-arm's length transaction is one where the parties to the transaction are related such as family members, employer/employee, or principal/agent This relationship may influence the transaction Common types of non-arm s length transactions include: o Family sales o Property in an estate o Employer/employee sales o Flip transactions An at-interest transaction involves persons who are not closely tied or related but may have a greater vested interest in the transaction, such as a party who plays more than one role in the same transaction (selling/listing agent and mortgage broker, for example) At-interest transactions carry increased risk due to the greater vested interest in the transaction by one of the parties Examples of at-interest transactions include: o Builder also acting as Realtor/broker o Realtor/broker selling own property o Realtor/broker acting as listing/selling agent as well the mortgage broker PAGE 10 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

18 All non-arm s length transactions are considered at-interest transactions; however, at-interest transactions are not always non-arm s length Primary residence, second home, and investment property transactions are eligible for consideration subject to additional scrutiny as part of the Seller s underwriting, closing and quality control functions Additional Risk Additional risks that may be posed by an Identity of Interest Transaction include: o Absence of equity or down payment o Purchase price may not represent actual consideration given o Financial bailouts or attempts to hide poor credit o Occupancy concerns o Financing of unsold builder inventory, especially in soft real estate markets o Inflated appraised value Red Flags Transactions which include any of the following characteristics should be given additional scrutiny as part of the Seller s underwriting, closing and quality control functions: o Selling price exceeds listing price o Seller on Closing Disclosure does not match the title work or appraisal o Disbursements on the seller side of the Closing Disclosure to the borrower or an entity controlled by the borrower, or to a company owned by the property seller o Closing Disclosure shows a payoff in excess of $5000 but no corresponding lien reflected on the preliminary title policy o Large payments to a homeowners association (over and above what is allowed per the guidelines) o Lien amount verified on the title work or credit report is not consistent with the payoff shown on the Closing Disclosure o Excessive closing costs, i.e., beyond reasonable and customary settlement charges o Questionable sources of funds to close, including DAPs and other assistance programs not in compliance with Freddie Mac or Fannie Mae published requirements o Borrower, Subject Property and originating Client are located in three different states Identity of Interest Transactions Identity of Interest Transactions include both non-arm s length and at-interest transactions Loans for second home or investment properties are not eligible for purchase by MSF if the transaction includes non-arm s length and/or at-interest characteristics. On a case-by-case basis, non-arm s length and/or at-interest transactions may be considered if the borrower is purchasing the property as a primary residence For newly constructed properties, the loan is not an eligible transaction if the borrower has a relationship or business affiliation (any ownership interest or employment) with the builder, developer, or seller of the property. Scenarios Flip Transactions A flip transaction is generally defined as a purchase transaction for a property that has recently been acquired by the seller and is being sold for a quick profit A flip transaction is evident if the title reveals several changes in ownership in the course of a few months Flip transactions are ineligible for purchase Family Sales This is a transaction where one family member is selling to another Often there is no real estate agent involved or the agent may also be a family member These transactions carry the potential for increased risk as they may be bailout situations (e.g. the selling party has financial problems and is unable to refinance) Gift Of Equity Gift equity in the subject property is an acceptable source of down payment, as long as the amount of equity has been verified The donor must provide a gift letter Equity gifts are only allowed after the required minimum down payment has been made from the borrower s own funds Employer/Employee Sales PAGE 11 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

19 This is a transaction in which a builder or developer is selling a property to one of its employees who does not hold a principal ownership interest Title Changes Title changes from LLC or partnership to an individual are not allowed on Freddie Mac LP Loans or Prior Approval manually underwritten Loans Assignment Of Sales Contract Transactions where the purchase contract has been assigned to the borrower are generally not acceptable but may be eligible for consideration provided there was no increase in sales price and the explanation for the assignment seems reasonable If the earnest money is being transferred it is treated as a sales concession and deducted from the sales price Documentation Requirements Full/Alt documentation of the borrower s income, employment, and assets Verification that the borrower is not now, nor has been in the previous 24 months, in title to the property A payment history for the existing mortgage (verification of seller s mortgage) on the subject property must be obtained and show no pattern of delinquency within the past 12 months Borrower must provide a written explanation stating the relationship to the seller and the reason for purchase The underwriter must be satisfied that the transaction makes sense and that the borrower will occupy the property as a primary residence Appraisal Considerations: o A Generic VECTOR Automated Valuation Model (AVM) from CoreLogic Valuation Solutions (Formerly known as Rels Valuation) is required to validate the first full appraisal. If no AVM is allowable, available, or AVM value is more than 10% less than the full appraisal, then MSF s Investor will determine if a field review (Fannie Mae Form 2000/2000A or Freddie Mac Form 1032/1072) or a second full appraisal is required o If an additional product is required, this supplemental report must be obtained from CoreLogic Valuation Solutions (Formerly known as Rels Valuation) for the Loan type Citizenship Diplomatic Immunity Due to the inability to compel payment or seek judgment, transactions with individuals who are not subject to United States jurisdiction are not eligible o This includes embassy personnel with diplomatic immunity Verification the borrower does not have diplomatic immunity can be determined by reviewing the visa, passport or the U.S. Department of State's Diplomatic List at Foreign Nationals Not allowed Non-Permanent Resident All non-permanent resident aliens must provide evidence of a valid, acceptable visa evidencing one of the following visa classes: o A Series (A-1, A-2, A-3): these visas are given to officials of foreign governments, immediate family members and support staff. Only those without diplomatic immunity, as verified on the visa, are allowed o E-1 Treaty Trader and E-2 Treaty Investor: this visa is essentially the same as an H-1 or L-1; the title refers to the foreign country's status with the United States o E-3: Given to Australian nationals employed in a specialty occupation o G series (G-1, G-2, G-3, G-4, G-5): these visas are given to employees of international organizations that are located in the United States Some examples include the United Nations, Red Cross, World Bank, UNICEF and the International Monetary Fund Verification that the applicant does not have diplomatic immunity must be obtained from the applicant's employer and/or by the viewing the applicant's passport o H-1 (includes H-1B and H-1C), Temporary Worker: this is the most common visa given to foreign citizens who are temporarily working in the United States o H-4: These visas are given to dependents (spouse and unmarried children under 21 years of age) of a qualified H-1 visa holder. When income is being used to qualify, a current (unexpired) Employment Authorization Document (EAD) issued by United States Citizenship and Immigration Services (USCIS) is also required PAGE 12 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

20 o L-1, Intra-Company Transferee: an L-1 visa is given to professional employees whose company's main office is in a foreign country o L-2: These visas are given to dependents (spouse and unmarried children under 21 years of age) of a qualified L-1 visa holder. When income is being used to qualify, a current (unexpired) EAD issued USCIS is also required o O-1A: individuals with an extraordinary ability in the sciences, education, business, or athletics (not including the arts, motion pictures or television industry) o O-1B: individuals with an extraordinary ability in the arts or extraordinary achievement in motion picture or television industry o O-2: individuals who will accompany an O-1, artist or athlete, to assist in a specific event or performance o TN, NAFTA visa: used by Canadian or Mexican citizens for professional or business purposes o TC, NAFTA visa: used by Canadian citizens for professional or business purposes A Borrower with an expired visa may be considered, subject to each of the following: o Visa classification is one of the eligible visas listed above. o Confirmation that the Borrower has submitted an application for extension of the visa or an application for a green card. Documentation includes, but is not limited to: USCIS Form I-797 (Issued when an application or petition is approved) USCIS Form I-797C or I-797E (must not state that the application has been declined) application for extension of current visa (USCIS Form I-539 or equivalent) or copy of application for green card (USCIS Form I-485 or equivalent) and electronic verification of receipt from the USCIS web site If the borrower is sponsored by the employer, the employer may verify that they are sponsoring the visa renewal. All standards for determining stable monthly income, adequate credit history and sufficient liquid assets must be applied in the same manner to each borrower including borrowers who are non-permanent resident aliens. All non-permanent resident aliens must have a minimum two-year history of credit and employment in the U.S. or another country In addition, non-permanent resident aliens who meet at least one of the following requirements are generally eligible for the same financing terms as U.S. citizen: o Minimum two-year history of residence, employment and credit in the U.S., or o Borrowing with a U.S. citizen or permanent resident alien Permanent Resident A front and back copy of the Green Card is required for all permanent resident aliens whose income and/or assets are being used to qualify for a loan While the Green Card itself states "Do Not Duplicate" for the purpose of replacing the original card, U.S. Citizenship and Immigration Services (USCIS) allows photocopying of the Green Card o Making an enlarged copy or copying on colored paper may alleviate any concerns the borrower may have with photocopying Social Security Number U.S. Citizens and Non-U.S. Citizens Each borrower on the Loan transaction must have a valid Social Security number Occupancy Primary, Second and Investment Properties See also, Program Matrices Power of Attorney A Limited Power of Attorney, subject to MSF approval, may be acceptable when it meets all of the following criteria: Initial loan application must be signed by the borrower, although the final application may be signed via a power of attorney in the presence of a Notary Public Initial loan application may be signed by a Power of Attorney if: o the borrower is in the military and deployed (Power of Attorney must comply with VA requirements), or o a relative or lawyer was granted attorney in fact prior to the borrower becoming incapacitated Parties that are connected to the transaction (at interest) may not act as Power of Attorney, at interest parties include: PAGE 13 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

21 o Realtors o Settlement Agents o Lender, affiliates of lender or employees of lender o Loan originator or employer or employee of loan originator Power of Attorney must be transaction specific except when the Power of Attorney is due to military duty or when the Power of Attorney was drafted prior to the borrower becoming incapacitated A Power of Attorney may not be used for cash-out transactions. Trusts Illinois Land Trusts Illinois land trusts are allowed subject to the following: All beneficiaries are individuals; The Mortgage applicant(s) must be one of the beneficiaries of the trust; The trustee must be a corporation or financial institution customarily engaged in the business of acting as trustee under Illinois land trusts; The beneficiaries have sole power of direction over the land trust and trustee; All beneficiaries are obligated as individuals under the terms of the note; The Mortgage applicants have been underwritten and are qualified Borrowers under the requirements of the product; All such Land Trust Mortgages are secured by owner-occupied, 1-4 family properties; and The term of the trust agreement is at least as long as the term of the security instrument. The subject property must be the only asset of the Illinois Land Trust Documentation Where the property is to be held in a land trust, all of the following additional documentation must be provided: Land Trust Rider to the Mortgage/Deed of Trust Land Trust Rider to the Note Documentation evidencing the beneficiaries of the Land Trust holding the power of direction as provided in the trust documents have authorized and directed the trustee of the trust to execute the Mortgage documents. If the trust documents require more than one beneficiary holding the power of direction to so authorize and direct the trustee, then the documentation must evidence that the requisite number of beneficiaries have so directed the trustee Certified copy of the Collateral Assignment of Beneficiary Interest, or similar form, that grants the lender a security interest in the beneficiary s rights The trust agreement must be reviewed by the underwriter. No additions, deletions, or other riders to the standard forms are permitted. The Trust Agreement must indicate that no other assets are held by the Land Trust. The Note, Mortgage and documents required above must be completed and executed as follows: The Note and Mortgage must include the number of the trust and the date on which the trust was created. This information should follow the name of the trustee on these documents The beneficiary must execute the Note and land trust rider to that Note The trustee must execute the Mortgage, the Note, and the land trust rider to each The beneficiary must assign his/her beneficial interest in the Note and trust agreement to the Seller The riders must be dated and executed the same day as the Mortgage and Note Living "Inter Vivos" Trusts Living ("inter vivos") trusts must comply with local state regulations and the following requirements to be eligible for financing. To be eligible the borrower must be: o The settlor, or the person who created the trust, and o The beneficiary, or the person who is designated to benefit from the trust, and o The trustee or the person who will administer the trust for the benefit of the beneficiary, the borrower o One or more borrowers with one living trust, or o Two or more borrowers with separate living trusts, or o Multiple borrowers with one or more holding title as an individual and one or more holding title as a living trust The following documentation is required: Trust Certification, where allowable under state law in the state where the property is located Where state law does not allow for a Trust Certification, the following requirements must be met: PAGE 14 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17

22 o o Attorney's Opinion letter from the borrower's attorney verifying all of the following: The trust was validly created and is duly existing under applicable law, The trust is revocable, The borrower is the settlor of the trust and the beneficiary of the trust, The trust assets may be used as collateral for a loan, The trustee is: Duly qualified under applicable law to serve as trustee, Is the borrower, Is the settlor, Is fully authorized under the trust documents and applicable law to pledge or otherwise encumber the trust assets Complete copy of the trust documents certified by the borrower to be accurate, OR a copy of the abstract or summary for jurisdictions that require a lender to review and rely on an abstract or summary of trust documents instead of the trust agreements Exception for Trust Certificate Authorized States o In lieu of the Attorney's Opinion letter and copies of trust documents the Trust Certification is acceptable for the following states: Alabama Kansas New Mexico Texas Arizona Maine North Carolina Utah Arkansas Michigan Ohio Vermont California Minnesota Oregon Virginia Delaware Missouri Pennsylvania Washington District of Nebraska South Carolina Wyoming Columbia Idaho Nevada South Dakota Iowa New Hampshire Tennessee See also Geographic Restrictions for states that MSF is licensed to lend in o The same terms and conditions apply as shown above for the Attorney's Opinion Other title and closing requirements: o The title to the property is vested in the trustee on behalf of the trust (or such other customary practices), o Title binder may not contain any exceptions to coverage based on the mortgaged property being held by the living trust, o The Note must be executed individually by the settlor and by the trustee on behalf of the trust, o The Mortgage or Deed of Trust is executed by the trustee on behalf of the trust. The Revocable Trust Rider must be used with the mortgage or Deed of Trust. o The date of the Trust must be reflected on the note as part of the description below the Trustee's signature, e.g. Jane Doe, Trustee of the Jane Doe Trust dated April 1, 2000 Life Estates Life estates are not eligible for financing A life estate is an estate whose duration is limited to the life of the party holding it, or some other person, upon whose death the right reverts to the grantor or his heirs COLLATERAL Number of Appraisals Required Appraisal requirements are determined by the total Loan amount provided by MSF Appraisal and review products must be ordered through the correct vendor and completed by an AMC authorized to provide valuation products RESdirect and obtained from Rels Valuation Only Rels Valuation products will be permitted Uniform Appraisal Dataset (UAD) compliant appraisals are required for appraisal report forms 1004/70 and 1073/465 PAGE 15 of 70 MORTGAGE SOLUTIONS FINANCIAL REV: 16OCTOBER17