Agency Income Guideline Revisions Note: SunTrust Mortgage specific overlays are underlined.

Transcription

1 Rental Income Correspondent Section 2.01 Agency Loan Programs- Guideline Standard Agency (non- AUS, DU & LPA) Agency Plus (DU & LPA) Texas Cash- Out Refi (DU) Income / Rental Income Non-AUS Eligible Properties Rental income is an acceptable source of stable income if it can be established that the income is likely to continue. If the rental income is derived from the subject property, the property must be one of the following: a two- to four-unit principal residence property in which the borrower occupies one of the units, or a one- to four-unit investment property. If the income is derived from a property that is not the subject property, there are no restrictions on the property type. For example, rental income from a commercial property owned by the borrower is acceptable if the income otherwise meets all other requirements (it can be documented in accordance with the requirements below). Income / Rental Income Non-AUS Eligible Properties Rental income is an acceptable source of stable income if it can be established that the income is likely to continue. If the rental income is derived from the subject property, the property must be one of the following: a two to four unit primary residence property in which the borrower occupies one of the units, or a one to four unit investment property. If the income is derived from a property that is not the subject property, there are no restrictions on the property type. For example, rental income from a commercial property owned by the borrower is acceptable if the income otherwise meets all other requirements (it can be documented in accordance with the requirements below). Ineligible Properties Generally, rental income from the borrower s principal residence (a one-unit principal residence or the unit the borrower occupies in a two- to four-unit property) or a second home cannot be used to qualify the borrower. However, an exception is permitted for boarder income. Note: See the Boarder Income topic for guidance. General Requirements for ing Rental Income If a borrower has a history of renting the subject or another property, generally the rental income will be reported on IRS Form 1040, Schedule E of the borrower s personal tax returns or on Rental Real Estate Income and Expenses of a Partnership or an S Corporation form (IRS Form 8825) of a business tax return. If the borrower does not have a history of renting the subject property or if, in certain cases, the tax returns do not accurately reflect the ongoing income and expenses of the property, the lender may be justified in using a fully executed current lease agreement. Examples of scenarios that justify the use of a lease agreement are: purchase transactions, refinance transactions in which the borrower purchased the rental property during or subsequent to the last tax return filing, or refinance transactions of a property that experienced significant rental interruptions such that income is not reported on the recent tax return (for example, major renovation to a property occurred in the prior year that affected rental income). When the subject property will generate rental income, one of the following Fannie Mae forms must be used to support the income-earning potential of the property: For one-unit properties: Single-Family Comparable Rent Schedule (Form 1007) (provided in conjunction with the applicable appraisal report), or For two- to four-unit properties: Small Residential Income Property Appraisal Report (Form 1025). ing Rental Income From the Subject Property The lender must obtain documentation that is used to calculate the monthly rental income for qualifying purposes. The documentation may vary depending on whether the borrower has a history of renting the property, and whether the prior year tax return includes the income. Ineligible Properties Generally, rental income from the borrower s primary residence (a one unit primary residence or the unit the borrower occupies in a two to four unit property) or a second home cannot be used to qualify the borrower. However, Fannie Mae does allow certain exceptions to this requirement for boarder income. Reference: See the Boarder Income subtopic previously presented in this topic for boarder income requirements. General Requirements for ing Rental Income If a borrower has a history of renting the subject or another property, generally the rental income will be reported on IRS Form 1040, Schedule E of the borrower s personal tax returns or on Rental Real Estate Income and Expenses of a Partnership or an S Corporation form (IRS Form 8825) of a business tax return. If the borrower does not have a history of renting the subject property or if, in certain cases, the tax returns do not accurately reflect the ongoing income and expenses of the property, the lender may be justified in using a fully executed current lease agreement. Examples of scenarios that justify the use of a lease agreement are: purchase transactions, refinance transactions in which the borrower purchased the rental property during or subsequent to the last tax return filing, or refinance transactions of a property that experienced significant rental interruptions such that income is not reported on the recent tax return (for example, major renovation to a property occurred in the prior year that affected rental income). When the subject property will generate rental income, one of the following Fannie Mae forms must be used to support the income earning potential of the property: For one unit properties: Single Family Comparable Rent Schedule (Form 1007) (provided in conjunction with the applicable appraisal report), or For two to four unit properties: Small Residential Income Property Appraisal Report (Form 1025). ing Rental Income From the Subject Property The lender must obtain documentation that is used to calculate the monthly rental income for qualifying purposes. The documentation may vary depending on whether the borrower has a history Page 1 of 9

2 Does the Borrower Have Transaction Type ation Requirements a History of Receiving Rental Income from the Subject Property? Yes Refinance A Single-Family Comparable Rent Schedule (form 1007) or a Small Residential Income Property Appraisal Report (Form 1025), as applicable, and either: The borrower s most recent year of signed federal tax returns, including Schedule E, or Copies of the current lease agreement(s) if the borrower can document a qualifying exception (see Partial or No Rental History on Tax Returns below) No Purchase A Single-Family Comparable Rent Schedule (Form 1007) or a Small Residential Income Property Appraisal Report (Form 1025), as applicable, and copies of the current lease agreement(s). If the property is not currently rented, lease agreements are not required. Lenders may use market rent supported by the Single- Fmaily Comparable Rent Schedule (Form 1007) or a Small Residential Income Property Appraisal Report (form 1025), as applicable. If there is a lease on the property that is being transferred to the borrower, the lender must verify that it does not contain any provisions that could affect the lender s first lien position on the property. No Refinance A Single-Family Comparable Rent Schedule (Form 1007) or a Small Residential Income Property Report (Form 1025), as applicable, and copies of the current lease agreement(s). ing Rental Income Received From Properties other than the Subject Property When the borrower owns property other than the subject property that is rented, the lender must document the monthly gross (and net) rental income with the borrower s most recent signed federal income tax returns that includes Schedule E. Copies of the current lease agreement(s) may be substituted if the borrower can document a qualifying exception. See Partial or No Rental History on Tax Returns below. Partial or No Rental History on Tax Returns In order for the lender to determine qualifying rental income, the lender must determine whether or not the rental property was in service for the entire tax year or only a portion of the year. In some situations, the lender s analysis may determine that using alternative rental income calculations or of renting the property, and whether the prior year tax return includes the income. Does the Borrower Have a History of Receiving Rental Income from the Subject Property? Transaction Type ation Requirements Yes Refinance Form 1007 or Form 1025, as applicable, and either: The borrower s most recent year of signed federal income tax returns, including Schedule E, or Copies of the current lease agreement(s) if the borrower can document a qualifying exception (see Partial or No Rental History on Tax Returns below) No Purchase Form 1007 or Form 1025, as applicable, and copies of the current lease agreement(s). If the property is not currently rented, lease agreements are not required and Form 1007 or Form 1025 may be used. If there is a lease on the property that is being transferred to the borrower, the lender must verify that it does not contain any provisions that could affect Fannie Mae s first lien position on the property. No Refinance Form 1007 or Form 1025, as applicable, and copies of the current lease agreement(s). Note: If the borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for lender reporting purposes. See the Primary Residences and Investment Properties subtopics in the Occupancy/Property Types topic previously outlined in this document for guidance. ing Rental Income From Property other than the Subject Property When the borrower owns property other than the subject property that is rented, the lender must document the monthly gross (and net) rental income with the borrower s most recent signed federal income tax return that includes Schedule E. Copies of the current lease agreement(s) may be substituted if the borrower can document a qualifying exception. See Partial or No Rental History on Tax Returns below. Partial or No Rental History on Tax Returns In order for the lender to determine qualifying rental income, the lender must determine whether or not the rental property was in service for the entire tax year or only a portion of the year. In some situations, the lender s analysis may determine that using alternative rental income calculations or using lease agreements to calculate income are more appropriate methods for calculating the qualifying income from rental properties, This guidance may be applied to refinances of a subject Page 2 of 9

3 using lease agreements to calculate income are more appropriate methods for calculating the qualifying income from rental properties. This guidance may be applied to refinances of a subject rental property or to other rental properties owned by the borrower. If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the lender may determine qualifying rental income by using: Schedule E income and expenses, and annualizing the income (or loss) calculation, or Fully executed lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation. If the property was acquired during or subsequent to the most recent tax filing year, the rental property was out of service for an extended period, the lender determines that some other situation warrants an exception to use a lease agreement, Then the lender must confirm the purchase date using the Settlement Statement or other documentation. If acquired during the year, Schedule E (Fair Rental Days) must confirm a partial year rental income and expenses (depending on when the unit was in service as a rental. If acquired after the last year filing year, Schedule E will not reflect rental income or expenses for this property. Schedule E will reflected the costs for renovation or rehabilitation as repair expenses. Additional documentation may be required to ensure that the expenses support a significant renovation that supports the amount of time that the rental property was out of service. Schedule E (Fair Rental Days) will confirm the number of days that the rental unit was in service, which must support the unit being out of service for all or a portion of the year. the lender must provide an explanation and justification in the loan file. property or to other rental properties owned by the borrower. If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the lender may determine qualifying rental income by using: Schedule E income and expenses, and annualizing the income (or loss) calculation, or Fully executed lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation. If... Then... the property was acquired during or the lender must confirm the purchase date using subsequent to the most recent tax the settlement statement or other filing year, documentation. If acquired during the year, Schedule E (Fair Rental Days) must confirm a partial year rental income and expenses (depending on when the unit was in service as a rental). If acquired after the last tax filing year, Schedule E will not reflect rental income or expenses for this property. the rental property was out of service for an extended period, The lender determines that some other situation warrants an exception to use a lease agreement, Schedule E will reflect the costs for renovation or rehabilitation as repair expenses. Additional documentation may be required to ensure that the expenses support a significant renovation that supports the amount of time that the rental property was out of service. Schedule E (Fair Rental Days) will confirm the number of days that the rental unit was in service, which must support the unit being out of service for all or a portion of the year. The lender must provide an explanation and justification in the loan file. Calculating Monthly Qualifying Rental Income (or Loss) When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, homeowners association dues, taxes, or insurance expenses to the borrower s cash flow. Non-recurring property expenses may be added back, if documented accordingly. If the property was in service for the entire tax year, the rental income must be averaged over 12 months. If the property was in service for less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit. When current lease agreements are used, the lender must calculate the rental income by multiplying the gross rent(s) by 75%. The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses. Reference: See Treatment of the Income (or Loss) below for additional guidance. Calculating Monthly Qualifying Rental Income (or Loss) The method for calculating rental income (or loss) for qualifying purposes is dependent upon the documentation that is being used. Federal Income Tax Returns, Schedule E. When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, homeowners association dues, taxes, or insurance expenses to the borrower s cash flow. Non-recurring property expenses may be added back, if documented accordingly. If the property was in service for the entire tax year, the rental income must be averaged over 12 months. If the property was in service for less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit. Lease Agreements or Form 1007 or Form When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the lender must calculate the rental income by multiplying the gross monthly rent(s) by 75%. (This is referred to as Monthly Market Rent on the Form 1007.) The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing Page 3 of 9

4 Treatment of the Income (or Loss) The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss) and its treatment in the calculation of the borrower's total debt-toincome ratio varies depending on whether the borrower occupies the rental property as his or her principal residence. If the rental income relates to the borrower s principal residence: The monthly qualifying rental income (as defined above) must be added to the borrower s total monthly income. (The income is not netted against the PITIA of the property.) The full amount of the mortgage payment (PITIA) must be included in the borrower s total monthly obligations when calculating the debt-to-income ratio. If the rental income (or loss) relates to a property other than the borrower's principal residence: If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the borrower s total monthly income. If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrower s total monthly obligations. The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation. The full monthly payment for the borrower's principal residence (full PITIA or monthly rent) must be counted as a monthly obligation. Offsetting Monthly Obligations for Rental Income Property Reported through a Partnership or an S Corporation If the borrower is personally obligated on the mortgage debt (as evidenced by inclusion of the related mortgage(s) on the credit report) and gross rents and related expenses are reported through a partnership or S corporation, the business tax returns may be used to offset the property s PITIA. In order to include a positive net rental income received through a partnership or an S corporation in the borrower s monthly qualifying income, the lender must evaluate it according to the guidelines for income received from a partnership or an S corporation. Fannie Mae DU Follow DU requirements, which are the same as non-aus guidelines. Freddie Mac LP Follow LP requirements, which are noted below: Rental income may be used to qualify the borrower, provided the requirements of this section are met. Rental income may be generated from: a subject 1-unit primary residence, a subject 2- to 4-unit primary residence, a subject 1- to 4-unit investment property, investment property owned by the borrower other than the subject property. Whenever rental income is to be used, reasonable adjustments to gross rental income must be made to compensate for vacancies, operating, and maintenance expenses and rental income received for furniture. If the borrower owned a rental property during the previous tax year, the Borrower s individual federal income tax returns must be obtained to determine the net rental income or loss for qualifying. In some instances, the income reported on the borrower's individual federal tax returns may not reflect the property's current rental value (i.e., the tax returns show large one-time expenses or the property was under renovation). In these instances, individual federal tax returns must be obtained; however, Form 998, Operating Income Statement, may be used to determine rental income. The lender must explain the reasons for not using the income or loss from the individual federal tax returns to determine rental maintenance expenses. Note: SunTrust Mortgage provides the following GSE clarification: Guidelines do not allow a lender to discount a mortgage obligation based on the borrower's percentage of ownership. However, rental income guidelines do allow the lender to use a lease agreement when the lender is justified in doing so. In the event the borrower only claims a portion of the rental income, this would be a case for using a lease agreement. The use of a lease agreement allows the lender to consider the full amount of the rental income at 75% when calculating the cash flow of the investment property for qualifying purposes because the full mortgage obligation must be considered. Reference: See Treatment of the Income (or Loss) below for additional guidance. Treatment of the Income (or Loss) The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss) and its treatment in the calculation of the borrower's total debt-toincome ratio varies depending on whether the borrower occupies the rental property as his or her primary residence. If the rental income relates to the borrower s primary residence: The monthly qualifying rental income (as defined above) must be added to the borrower s total monthly income. (The income is not netted against the PITIA of the property.) The full amount of the mortgage payment (PITIA) must be included in the borrower s total monthly obligations when calculating the debt-to-income ratio. If the rental income (or loss) relates to a property other than the borrower's primary residence: If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the borrower s total monthly income. If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrower s total monthly obligations. The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation. The full monthly payment for the borrower's primary residence (full PITIA or monthly rent) must be counted as a monthly obligation. Offsetting Monthly Obligations for Rental Income Property Reported through a Partnership or an S Corporation If the borrower is personally obligated on the mortgage debt (as evidenced by inclusion of the related mortgage(s) on the credit report) and gross rents and related expenses are reported through a partnership or S corporation, the business tax returns may be used to offset the property s PITIA. The steps described below should be followed: 1. Obtain the borrower s business tax returns, including IRS Form 8825 for the most recent year. 2. Evaluate each property listed on Form 8825, as shown below: From total gross rents, subtract total expenses. Then add back insurance, mortgage interest, taxes, homeowners association dues (if applicable), depreciation, and nonrecurring property expenses (if documented accordingly). Divide by the number of months the property was in service. Subtract the entire PITIA (proposed for subject property or actual for real estate owned) to determine the monthly property cash flow. 3. If the resulting net cash flow is positive, the lender may exclude the property PITIA from the borrower s monthly obligations when calculating the debt-to-income ratio. Page 4 of 9

5 income, in the mortgage file. Rental income from the subject 1-unit Primary Residence See the Boarder Income topic for guidance. Rental income from the subject 2- to 4-unit Primary Residence Rental income from unit(s) in the borrower's 2- to 4-unit primary residence that are not occupied by the borrower may be used to qualify the borrower. If rental income from the subject 2- to 4-unit primary residence is being used to qualify the borrower, the following requirements apply: The lender must obtain and use Form 998 unless the subject property has been owned for at least one year and is reported on Schedule E of the borrower's prior year individual federal tax return. If income from the subject property is reported on the borrower's individual federal tax returns the lender must use Schedule E to determine the net rental income. If Form 998 is used to determine rental income, it must be completed up to the Monthly Operating Income (MOI) reconciliation. The lender must substantiate the rental income using the income approach on the appraisal and copies of the present lease(s), if applicable, must support the rental income used to qualify the borrower. The Form 998 is not required if rental income from the subject property is not considered in qualifying the borrower. Regardless of whether rental income is used in qualifying the borrower, the ULDD Data Point Property Dwelling Unit Eligible Rent Amount for each non-owner occupied unit in a 2- to 4-unit primary residence must be delivered. Monthly Operating Income from the Form 998 or net rental income from Schedule E is entered under "Gross Monthly Income" in Section V of the Form 65, Uniform Residential Loan Application, and may be considered as stable monthly income in qualifying the borrower, provided the borrower meets the reserve requirement. If Monthly Operating Income or net rental income from Schedule E is a negative number, it must be included as a liability for qualification purposes. Rental income from the subject 1- to 4-unit Investment Property If the borrower qualifies with the full monthly payment amount plus operating expenses for the subject investment property included in the borrower's monthly debt payment-to-income ratio, no further evaluation or calculation of rental income from the subject property is required and Form 998 is not required. The lender must deliver the ULDD Data Point Property Dwelling Unit Eligible Rent Amount for each 1- unit investment property and each unit in a 2- to 4-unit investment property regardless of whether rental income from the subject investment property is being used to qualify the borrower. If rental income from the subject investment property is to be considered in qualifying the borrower, the following requirements apply: The lender must obtain and use Form 998 unless the subject property has been owned for at least one year and is reported on the Schedule E of the borrower's prior year individual federal tax return. If income from the subject property is reported on the borrower's individual federal tax returns, the lender must use Schedule E to determine the net rental income. If Form 998 is used, it must be completed up to the MOI reconciliation. The income approach on the appraisal and copies of the present leases, if applicable, must support the rental income used to qualify the borrower. 4. If the resulting net cash flow is negative (that is, the rental income derived from the investment property is not sufficient to fully offset the property PITIA), the calculated negative amount must be included in the borrower s monthly obligations when calculating the debt-to-income ratio. In order to include a positive net rental income received through a partnership or an S corporation in the borrower s monthly qualifying income, the lender must evaluate it according to the guidelines for income received from a partnership or an S corporation. Fannie Mae DU Follow DU requirements, which are the same as non-aus guidelines, except as follows: For DU loan casefiles, the term subject net cash flow applies to net rental income from the subject property, and the term net rental income applies to rental income from properties other than the subject property. Entering Net Rental Income in DU Net rental income for DU loan casefiles does not include rental income from the subject property. It applies only to rental properties already owned by the borrower. For rental income on the subject property, see Subject Net Cash Flow below. To submit net rental income to DU, the lender can either Calculate the total net rental income for all rental properties (except the subject property) and enter the amount (either positive or negative) in the Net Rental field in Section V. If Real Estate Owned (REO) data is entered, DU will ignore a zero value in this Net Rental field. Therefore, the lender must enter either a positive or negative amount. In other words, if the net rental income is a breakeven amount, the user must enter either $0.01 or $ Otherwise, DU will use the value from Section VI R. Complete the REO data entered in the Uniform Residential Loan Application (Form 1003) (or in a loan origination system) for each rental property (except the subject property). DU will preliminarily calculate the net rental income using the following formula: (gross rental income 75%) property PITIA expense = net rental income The lender should override DU s preliminary calculation, if it is different from the lender s calculation, by entering the net rental income amount directly in the Net Rental field in the Full 1003, Section VI R. If both methods are used, DU will use the net rental income from Section V (if it is a value other than zero) and issue a message when there is a conflict of data. If the combined total net rental income for all rental properties is positive, DU adds the net rental income to the qualifying income. If the total is negative, DU treats the loss as a liability and includes it in the debt-to-income ratio. Special Situations If the borrower is purchasing a primary residence and is retaining his or her current residence as a rental property, show the current primary residence as Rental in the Property Disposition field and complete the Net Rental field in the Full 1003, Section VI R. If the borrower s primary residence is a two- to four-unit property, rental income from the primary residence can be used to qualify the borrower. With the exception of subtracting the borrower s primary residence mortgage payment from the gross rental income, all other calculations and documentation requirements in this section apply. To use net rental income from a borrower s owner-occupied two- to four-unit property when the Page 5 of 9

6 If the Net Cash Flow shown on the Form 998 or net rental income from Schedule E of the borrower's tax returns is a positive number, that figure may be entered as rental income in the "Gross Monthly Income" section of Form 65 and may be considered stable monthly income. If the Net Cash Flow shown on the Form 998 or net rental income from Schedule E of the borrower's tax returns is a negative number, it must be included as a liability for qualification purposes. Rental Income from Investment Property Owned by the Borrower Other than the Subject Property Rental income from investment properties that are owned by the borrower, other than the subject property, must be shown in the "Schedule of Real Estate Owned" in Section VI of Form 65. When rental income from other investment properties owned by the borrower in the previous tax year is reported on the borrower's individual federal tax returns, the lender must use Schedule E of the borrower's tax returns to determine the net rental income. Signed leases may be used to determine the net rental income for an investment property not owned during the previous tax year. Additionally, signed leases may be used to substantiate gross rents that are higher than the rental income documented on the tax returns; however, no more than 75% of the gross rental income from the signed leases may be used, unless the prior two years' individual federal tax returns clearly support the use of a higher percentage. The aggregate net rental loss must be considered a liability for qualification purposes. Aggregate net rental income may be counted as stable monthly income, provided the reliability of receipt is clearly supported by the documentation in the file. References: See the Mortgage Payments on Previous Home and Mortgage Payments on Previous Home Relocation Borrowers subtopics subsequently presented in the Liabilities and Qualifying Ratios topic for additional LP requirements that apply if rental income used for qualification is being generated as a result of a conversion of an existing primary residence to an investment property. See the Primary Residences and Investment Properties subtopics previously presented in the Occupancy/Property Types topic for additional information regarding gross monthly rent documentation requirements when rental income is NOT being used for qualification. borrower is purchasing or refinancing a second home or investment property, enter the net rental income from the borrower s primary residence as Net Rental in Section V. ation of Net Rental Income The requirements for documenting net rental income are the same for loans underwritten through DU as they are for manually underwritten loans. If the debt-to-income ratio already includes the entire rental property payment (that is, income from the property is not considered), rental income documentation is not required. Calculation of Net Rental Income The calculation of net rental income is the same for loans underwritten through DU as it is for manually underwritten loans. Entering Subject Net Cash Flow in DU Subject net cash flow applies to one- to four-unit investment properties and two- to four-unit primary residences secured by the subject property. DU does not calculate the subject net cash flow. The lender must calculate and enter the income in Subject Net Cash in Section V of the online loan application. Note: Although negative subject net cash flow values appear to reduce the gross monthly income in Section V, DU actually treats the negative value as a liability and includes it in the debt-to-income ratio. ation of Subject Net Cash Flow The documentation of subject net cash flow is the same for loans underwritten through DU as it is for manually underwritten loans. If the borrower is being qualified with the entire payment, without benefit of rental income, documentation of gross monthly rent for the subject property is only required for lender reporting purposes. See the Primary Residences and Investment Properties subtopics in the Occupancy/Property Types topic previously outlined in this document for additional information. Calculation of Subject Net Cash Flow The calculation of subject net cash flow for the security property is the same for loans underwritten through DU as it is for manually underwritten loans. Two- to four-unit primary residence. Calculate the subject net cash flow, and enter this amount in Section V. It will be included in the total qualifying income. Do not subtract the PITIA from the rental income, because the PITIA is included in the total proposed mortgage payment and is considered in the qualifying ratio. Do not enter a negative subject net cash flow value, because the entire PITIA is already included in the qualifying ratio. Investment properties. Calculate the subject net cash flow. If the subject net cash flow is positive, enter the amount in Section V. It will be included in the total qualifying income. If the cash flow is negative, enter the amount in Section V as a negative value. DU will include it in the debt-to-income ratio calculation as a liability. If income from the subject property is not included in the qualifying ratios, the lender should enter the entire proposed PITIA as a negative amount in the Subject Net Cash field in Section V. Freddie Mac LPA Follow LPA requirements, which are as follows: Rental income may be used to qualify the borrower, provided the requirements of this section and the Page 6 of 9

7 general income documentation requirements previously outlined in this topic are met. Rental income may be generated from: a subject 1 unit primary residence, a subject 2 to 4 unit primary residence, a subject 1 to 4 unit investment property, investment property owned by the borrower other than the subject property. Whenever rental income is to be used, reasonable adjustments to gross rental income must be made to compensate for vacancies, operating, and maintenance expenses and rental income received for furniture. If the borrower owned a rental property during the previous tax year, the borrower's federal individual income tax returns must be obtained to determine the net rental income or loss for qualifying. In some instances, the income reported on the borrower s federal individual income tax returns may not reflect the property s current rental value (i.e., tax returns show large one-time expenses or the property was under renovation). In these instances, federal individual income tax returns must be obtained; however, Form 998, Operating Income Statement may be used to determine rental income. The lender must explain the reasons for not using the income or loss from the federal individual income tax returns to determine rental income, in the mortgage file. Rental Income From the Subject 1-unit Primary Residence Rental Income From the Subject 2- to 4- unit Primary Residence Eligibility and ation Requirements See the Boarder Income subtopic for guidance Rental income from unit(s) in the borrower's 2 to 4 unit primary residence that are not occupied by the borrower may be used to qualify the borrower. If rental income from the subject 2 to 4 unit primary residence is being used to qualify the borrower, the following requirements apply: The lender must obtain and use Form 998 unless the subject property has been owned for at least one year and is reported on Schedule E of the borrower's prior year federal individual income tax return. If income from the subject property is reported on the borrower's federal individual income tax returns the lender must use Schedule E to determine the net rental income. If Form 998 is used to determine rental income, it must be completed up to the Monthly Operating Income (MOI) reconciliation. The lender must substantiate the rental income using the income approach on the appraisal and copies of the present lease(s), if applicable, must support the rental income used to qualify the borrower. The Form 998 is not required if rental income from the subject property is not considered in qualifying the borrower. Regardless of whether rental income is used in qualifying the borrower, the ULDD Data Point Property Dwelling Unit Eligible Rent Amount for each nonowner occupied unit in a 2 to 4 unit primary residence must be delivered. See the Primary Residences subtopic in the Occupancy/Property Types topic previously outlined in this document for additional guidance. MOI from the Form 998 or net rental income from Schedule E is entered under "Gross Monthly Income" in Section V of the Form 65, Uniform Residential Loan Application, and may be considered as stable monthly income in qualifying the borrower, provided the borrower meets the reserve requirement. Page 7 of 9

8 If MOI or net rental income from Schedule E is a negative number, it must be included as a liability for qualification purposes. Rental income from the subject 1 to 4 unit Investment Property If the borrower qualifies with the full monthly payment amount (as described in the Qualifying Ratios subtopic subsequently presented in this document) plus operating expenses for the subject investment property included in the borrower's monthly debt payment to income ratio, no further evaluation or calculation of rental income from the subject property is required and Form 998 is not required. The lender must deliver the ULDD Data Point Property Dwelling Unit Eligible Rent Amount for each 1-unit investment property and each unit in a 2 to 4 unit investment property regardless of whether rental income from the subject investment property is being used to qualify the borrower. See the Investment Properties subtopic in the Occupancy/Property Types topic previously outlined in this document for additional guidance. If rental income from the subject investment property is to be considered in qualifying the borrower, the following requirements apply: The lender must obtain and use Form 998 unless the subject property has been owned for at least one year and is reported on the Schedule E of the borrower's prior year federal individual income tax return. If income from the subject property is reported on the borrower's federal individual income tax returns, the lender must use Schedule E to determine the net rental income. If Form 998 is used, it must be completed up to the MOI reconciliation. The income approach on the appraisal and copies of the present leases, if applicable, must support the rental income used to qualify the borrower. If the Net Cash Flow shown on the Form 998 or net rental income from Schedule E of the borrower's tax returns is a positive number, that figure may be entered as rental income in the "Gross Monthly Income" section of Form 65 and may be considered stable monthly income. If the Net Cash Flow shown on the Form 998 or net rental income from Schedule E of the borrower's tax returns is a negative number, it must be included as a liability for qualification purposes. Rental Income from Investment Property Owned by the Borrower Other than the Subject Property Rental income from investment properties that are owned by the borrower, other than the subject property, must be shown in the "Schedule of Real Estate Owned" in Section VI of Form 65. When rental income from other investment properties owned by the borrower in the previous tax year is reported on the borrower's federal individual income tax returns, the lender must use Schedule E of the borrower's tax returns to determine the net rental income. Signed leases may be used to determine the net rental income for an investment property not owned during the previous tax year. Additionally, signed leases may be used to substantiate gross rents that are higher than the rental income documented on the tax returns; however, no more than 75% of the gross rental income from the signed leases may be used, unless the prior two years federal individual income tax returns clearly support the use of a higher percentage. The aggregate net rental loss must be considered a liability for qualification purposes. Page 8 of 9

9 Aggregate net rental income may be counted as stable monthly income, provided the reliability of receipt is clearly supported by the documentation in the loan file. Page 9 of 9