Crescent Mortgage Underwriting Guidelines

Transcription

1 Crescent Mortgage Underwriting Guidelines 8/10/2018 Underwriting guidelines are subject to change without notice. While every attempt has been made to make this document as complete as possible all loans must also meet requirements as described in the individual program guides and product profiles. All loans are subject to review and acceptance by Crescent s Underwriting Staff. Crescent Mortgage Company Conventional Guidelines 8/10/2018 1

2 SECTION 1: GENERAL REQUIREMENTS General Requirements Risk Factors Evaluated by DU/LP Documentation Requirements Eligible Recommendations Erroneous Credit Report Data Accuracy of Data, Tolerances, and Errors in the Credit Report Validation of Qualified Parties SECTION 2: CREDIT REQUIREMENTS Allowable Age of Credit Documents Number and Age of Accounts Payment History Previous Mortgage Payment History Credit Utilization Significant Derogatory Credit Events Waiting Periods and Re-establishing Credit Authorized User, Disputed Accts, Public Records and Collections SECTION 3: EMPLOYMENT INCOME AND INCOME VERIFICATION Requirements and Uses of IRS Form 4506-T Verbal Verification of Employment Non-U.S. Citizen Borrowers Using Nontaxable Income to Adjust the Borrower s Gross Income Salary and Commission Income Verification of Salary and Commission Income Commission Income Bonus and Overtime Income Part-Time, Second-Job, Multiple-Job, and Seasonal Military Income Rental Income Other Sources of Income Underwriting Factors and Documentation for a Self-Employed Borrower Employment Offers and Contracts SECTION 4: ASSETS Minimum Reserve Requirements Interested Party Contributions (IPCs) Asset Verification Gifts Verification of Assets for Non-U.S. Citizen Borrowers Stocks, Stock Options, Bonds, and Mutual Funds Trust Accounts Retirement Accounts Personal Gifts Gifts of Equity Sales Contract Deposit Anticipated Sales Proceeds Trade Equity Rent Credit for Option to Purchase Sweat Equity Borrowed Funds Secured by an Asset Personal Unsecured Loans Crescent Mortgage Company Conventional Guidelines 8/10/2018 2

3 4.17 Sale of Personal Assets Cash Value of Life Insurance Anticipated Savings and Cash-on-Hand Like Kind Exchange Business Accounts. 64 SECTION 5: LIABILITIES AND DEBT OBLIGATION Borrower s Monthly Housing Expense for Qualifying Purposes Monthly Debt Obligations Qualifying Impact of Other Real Estate Owned Debts Paid Off At/Prior to Closing SECTION 6: APPRAISAL/COLLATERAL REQUIREMENTS Introduction Age of Appraisal and Age of Property Inspection Report Appraiser Engagement Appraisal Format Requirement FMV Approach Requirements Appraisal Reporting Requirements Property Requirements Pre-Funding Review Requirements Crescent Appraisal Quality Control Testing Referrals of Appraisal Misconduct Reports Condominium Policy SECTION 7: LOAN PURPOSE Purchase Transactions Limited Cash-Out Refinance Transactions Cash-Out Refinance Transactions (Deleted) 7.5 General Mortgage Terms and Conditions Prohibited Refinancing Practices Multiple Financed Properties for the Same Borrower Construction-to-Permanent SECTION 8: HOMEOWNERS INSURANCE REQUIREMENTS Introduction Insurance Coverage Requirements Amount of Coverage Flood Insurance Loss Payable Clause Crescent Mortgage Company Conventional Guidelines 8/10/2018 3

4 SECTION 1: GENERAL REQUIREMENTS 1.0 General Requirements When underwriting loans with DU or LP, the Customer must do all of the following: Apply due diligence when reviewing the documentation in the loan file. Confirm the accuracy and completeness of the data, making sure that it did not fail to submit any data that might have affected the DU/LP recommendation. Determine if there is any potentially derogatory or contradictory information that is not part of the data analyzed by DU/LP. Employ prudent underwriting judgment in assessing whether a loan case file should be delivered to Crescent Mortgage. Ensure that the loan complies with all of the verification messages and approval conditions specified in the Underwriting Findings report. Review the credit report to confirm that the data that DU/LP evaluated with respect to the borrower s credit history was accurate and complete. Take action when erroneous data in the credit report or contradictory or derogatory information in the loan file would justify additional investigation or would provide grounds for a decision that is different from the recommendation that DU/LP delivered. For example, if a foreclosure was reported in the credit report but was not detected by DU/LP (i.e., was not referenced in any verification messages), the lender must determine if the loan complies with the applicable guidelines. It is critical to remember that the AUS is only a recommendation for the loan not a final approval. All loans will be carefully reviewed and prudently underwritten to determine acceptability. 1.1 Risk Factors Evaluated by DU/LP Credit History A relatively new credit history (a few recently opened accounts) MAY still be considered an acceptable credit risk. Making payments as agreed on newly established accounts signifies lower risk than not making payments as agreed. Delinquent Accounts Payment history is a significant factor in the evaluation of the borrower s credit. DU/LP considers the severity of the delinquencies, the length of time since the delinquencies, the number of accounts that were not paid as agreed, and the type of accounts with delinquencies. A history of payments that includes delinquent accounts of 30 days or more past-due, or a history of paying bills late as evidenced by a number of accounts with late payments, will have a negative impact on the borrower s credit profile. Crescent Mortgage Company Conventional Guidelines 8/10/2018 4

5 Mortgage Accounts A history of paying a mortgage loan late will have an even more negative impact on the credit profile. The amount of time that has elapsed since an account was delinquent is included in the evaluation of the payment history. The length of time since a delinquency (if any) has occurred, the severity of delinquency, and the age of the mortgage accounts are also factored into the credit analysis. Borrowers may not bring past-due mortgage accounts current prior to closing in order to circumvent policy regarding past-due mortgages. Omitted Accounts Supporting documentation is required when a credit report liability with a balance greater than zero is omitted from the loan application. Inquiries DU/LP evaluates inquiries made within the most recent six months of the credit report date. Historically, a high number of inquiries can indicate a higher degree of risk. Borrowers who have frequently applied for, or obtained, new or additional credit represent a higher risk. All inquiries within 120 days must be documented with a statement from the borrower addressing whether the inquiries resulted in new tradelines. Any new debt must be documented, and the debt considered in the final AUS resulted. Liquid Reserves Liquid reserves are those financial assets that are available to a borrower after a loan closes. Reserves are calculated as the total amount of liquid assets remaining after the loan transaction closes divided by the proposed monthly housing expense. DU/LP considers higher amounts of liquid reserves as more favorable than lower amounts or no reserves. Mortgages to borrowers with higher amounts of liquid reserves tend to have lower default rates. As with a low LTV ratio, DU/LP may consider high amounts of reserves as an offset for other risks. Loan Type/Amortization Type The level of risk associated with each amortization type is as follows, listed from least amount of risk to greatest: Fully amortizing fixed-rate mortgages Fully amortizing five-year, seven-year, and 10-year ARMs Crescent Mortgage Company Conventional Guidelines 8/10/2018 5

6 Occupancy Type The level of risk associated with occupancy type is as follows, listed from least amount to greatest: Owner-occupied low LTV Owner-occupied high LTV Second home low LTV Second home high LTV Investment low LTV Investment high LTV Total Expense Ratio As the expense ratio increases, the level of risk also tends to increase. A high ratio will have the greatest adverse impact on the recommendation when there are also other high-risk factors present. Property Type DU/LP differentiates the risk based on the number of units, and in some cases the property type (e.g., manufactured home and cooperative properties). The level of risk associated with each property type is as follows, starting with those property types representing the least amount of risk: One-unit properties that are not in a co-op project and are not attached condos Attached condos, units in cooperative projects, and two-unit properties Three- and four-unit properties Manufactured homes, including those in a condo or cooperative project Crescent does not allow the following property types: Co-op projects Manufactured homes with condominiums or co-ops 1.2 Documentation Requirements DU/LP indicates the minimum verification documentation requirements necessary for the Customer to process the loan application. Documentation requirements are based on the specific risk factors present in each loan file. The requirements appear in the Underwriting Findings report. Crescent Mortgage Company Conventional Guidelines 8/10/2018 6

7 1.3 Eligible Recommendations Result Approve/Eligible Accept/Eligible Eligible for delivery to Crescent? Yes, if all approval conditions have been met. To determine whether the loan represents an acceptable credit risk, and is deliverable to Crescent Mortgage, the Customer must do all of the following: Review the approval conditions. Determine whether the mortgage meets the credit risk requirements Crescent Mortgage applies to mortgage loans. Evaluate the accuracy of the data submitted. Evaluate any factors outside of the data considered by DU/LP when determining whether to submit the loan to Crescent. Evaluate the risk factors in a comprehensive manner. Document the loan file with the rationale that was applied for the underwriter to make the final loan decision. Request additional verifications or documentation, as appropriate, and include this information in the loan file if the factors supporting the final decision cannot be delivered from the verifications listed in the Underwriting Findings report. Comply with all of the verification messages and conditions specified in the Underwriting Findings report. Crescent Mortgage Company Conventional Guidelines 8/10/2018 7

8 1.4 Erroneous Credit Report Data The Customer must ensure that credit report data used in the underwriting analysis is accurate. Significant, material credit errors in a borrower s credit report require additional documentation. Customer Action Regarding Derogatory Credit Reported in Error The following types of written documentation to support erroneous information must be provided: A supplement to the credit report A new mortgage credit report Documentation from the credit provider that reported the error When a loan is resubmitted to DU/LP with a credit report that has been corrected, copies of all credit reports must be delivered in the final package. Other Errors in the Credit Data If the credit report contains derogatory information, and DU/LP does not recognize or consider the derogatory information (as evidenced by the fact that the Underwriting Findings do not reflect the derogatory information in the report), the Customer must determine if these factors would result in a different recommendation being returned. For example, the credit report indicates that the borrower had a previous foreclosure, but the findings report does not reference the foreclosure, a reporting or data transfer error may have occurred, thus preventing DU from considering the foreclosure in its analysis of the loan. The Customer must take action to ensure that the information is considered in the risk analysis. Crescent Mortgage Company Conventional Guidelines 8/10/2018 8

9 1.5 Accuracy of Data, Tolerances, and Errors in the Credit Report The terms of the closed loan must match the terms of the final loan casefile submission or fall within the tolerances listed in the following table. Data Attribute and Description Trigger Action Required Interest rate increase. Discrepancies between the credit report payments and balances and those listed on the online loan application, including the presence of debt that is on the credit report but not on the application. Additional debt(s) disclosed by the borrower or identified by the Customer during the mortgage process. Verified income is less than the income on the loan application submitted to DU. The result of these changes cause the DTI ratio to: Exceed 45% or Increase by 3 percentage points or more (if the recalculated DTI ratio is less than 45%) Resubmit the loan casefile to DU/LP before loan closing. Interest rate on fixed-rate and adjustable-rate mortgages. Interest rate decreases, not as the result of a permanent interest rate buydown. Interest rate decreases as the result of a permanent interest rate buydown. No resubmission required. Resubmit the loan casefile to DU before loan closing. Verified income used to qualify the borrower for loans subject to HUD median income limits; for example, as with community lending mortgages. Income is greater than the loan application indicates. Resubmit the loan casefile to DU before loan closing. Assets. DU returns a message that a specific amount of assets must be verified. The Customer must verify, at a minimum, the specified amount for DU as well as any additional resources required to be considered by product. LP findings will allow a variance of 10% in reserves only. Crescent Mortgage Company Conventional Guidelines 8/10/2018 9

10 Refinance Transactions-DU The loan amount may increase $500 or up to 1% of the loan amount, whichever is less. The loan amount may decrease 5% of the loan amount. The loan amount tolerances are permitted provided the new LTV/CLTV does not result in: Changes to the amount of required mortgage insurance coverage. Different loan-level price adjustments. or Changes to loan eligibility. Refinance Transactions-LP The loan amount decreases by no more than 1%. The loan amount tolerances are permitted provided the new LTV/CLTV does not result in: or Changes to the amount of required mortgage insurance coverage. Different loan-level price adjustments. Changes to loan eligibility. Non-Applicant Debts/Accounts In cases where a credit report indicates possible non-applicant accounts it must be determined whether or not the accounts belong to the borrower. The Customer must determine if the recommendation is accurate based on the severity of the information. The Typical non-applicant accounts include: Applicants who are Juniors/Seniors. Variances in addresses reflected in the credit report (potential fraud red flag). Non-related individuals who have identical names. Debts applied for under a different Social Security number (potential fraud red flag). Potential non-applicant accounts are included in the risk analysis and must be included in the debt ratio. If the debts do not belong to the borrower, supporting documentation must be placed in the file. The Customer must investigate whether the non-applicant accounts belong to the borrower and document the file accordingly. Crescent Mortgage Company Conventional Guidelines 8/10/

11 Potential Red Flag Messages DU provides a number of potential red flag messages indicating inconsistencies in the loan casefile and these are a strong indication of potentially fraudulent transactions. These messages do not affect the recommendation but must be documented fully. Regardless of the presence of these messages, it is the Customer s responsibility to ensure accurate information in all areas of the loan process and comply with applicable law, including the Fair Credit Reporting Act. The following is a list of potential red flag messages. Rapid appreciation: Messages help identify purchase and refinance transactions with subject property values that, according to a recent prior sale, appear to have an excessive rate of appreciation. Quality control: Messages identify transactions that have risk characteristics that historically have been found to contribute to inflated property valuation. Excessive resubmissions: A message alerts Customers when an unusually high number of loan resubmissions may be the result of data manipulation. Excessive value: A message helps identify refinance transactions submitted to the system where the Customer s initial value estimate appears to be excessive. Manufactured home caution: A message alerts users when a property type was not submitted as a manufactured home, but Crescent Mortgage s property database indicates that it may be a manufactured home. The Customer should document the file with independent research from a reliable source. 1.6 Validation of Qualified Parties The agencies require confirmation on all loans that companies or individuals involved in the origination, underwriting, or servicing of the mortgage transaction are not on the General Services Administration (GSA) Excluded Party List or the HUD Limited Denial of Participation (LDP) List Crescent must meet this requirement on all loans. Crescent will check all interested parties in the appropriate lists. Verification Requirements Each loan file must contain verification that the following individuals and/or entities are not on the GSA or HUD list. If there is a match on the list(s) for any of the individuals/entities in the table below, perform an advanced search with the name and Social Security number. FNMA and Freddie Mac Loans Borrowers, including also Known As (AKAs) where the borrower s name varies significantly Appraiser Closing agent/title company Realtor(s) Property Seller(s) Customer s originating loan officer (wholesale and correspondent) All loans delivered to Crescent mortgage for Freddie Mac products must contain proof that no parties to the transaction are listed on the Freddie Mac Exclusionary list. Crescent Mortgage Company Conventional Guidelines 8/10/

12 SECTION 2: CREDIT REQUIREMENTS 2.0 Allowable Age of Credit Documents Allowable Age of Credit Documents Credit documents include credit reports and employment, income, and asset documentation. The credit documents must be no more than 120 days old on the date the note is signed. 2.1 Number and Age of Accounts Number and Age of Accounts Crescent must review the borrower s credit report to determine whether he or she has an older established credit history or a newly established credit history, and whether there are a significant number of recently opened accounts or a mix of new accounts and older accounts. A newly established credit history does not automatically represent a higher credit risk, since making payments as agreed on newly opened accounts represents less of a risk than not making payments as agreed on older, established accounts. Credit histories that include older, established accounts represent lower credit risk. An older, established credit history that includes a significant number of recently opened accounts m ay indicate that the borrower is overextended, and thus will represent a higher credit risk. 2.2 Payment History Payment History Crescent must review the borrower s credit report to determine the current status of each credit account (including mortgage accounts), the timeliness of payments, and the frequency and severity of any delinquent payments. Credit histories that include recent late payments (within the last 24 months) present a higher credit risk. When there are late payments and derogatory accounts within the last 24 months, Crescent must determine whether the late payments represent isolated incidences or frequent occurrences. Delinquent payments must be evaluated in the context of the borrower s overall credit history, including the number and age of accounts, credit utilization, and recent attempts to obtain new credit. Credit histories that include foreclosures, deeds-in-lieu, and public records information (such as bankruptcies, judgments, and liens) represent a higher credit risk and are subject to waiting periods before the borrower is eligible for mortgage financing. Crescent Mortgage Company Conventional Guidelines 8/10/

13 2.3 Previous Mortgage Payment History Documenting Previous Mortgage History The Customer must review the borrower's credit report to determine the status of all mortgage accounts. Previous mortgages do not require independent verification provided the credit report reflects 12 months of the most recent payment activity. If adequate mortgage history is not available on the credit bureau, one of the following methods must be used to document an acceptable payment history for previous mortgage(s): A standard mortgage verification Loan payment history from the servicer The borrower s canceled checks for the last 12 months or The borrower s year-end mortgage account statement, provided the statement includes a payment receipt history, and, if applicable, canceled checks for the months elapsed since the year-end mortgage account statement was issued Standard Mortgage Verifications from Servicers A standard mortgage verification from the servicer/holder is acceptable provided it includes the following information: Unpaid principal balance and monthly payment amount Present status of the mortgage, such as current, 30 days delinquent, etc. and Borrower s payment history When a servicer/holder fails to provide all of the requested information, the borrower must provide canceled checks. The checks must: Be legible Identify the mortgage servicer/holder as the payee Indicate the date the check was deposited in the servicer/holder s account Existing Mortgage Payment Requirements On the date of the loan application, the borrower s existing mortgage must be current.. Crescent Mortgage Company Conventional Guidelines 8/10/

14 Excessive Mortgage Delinquency Loans with excessive prior mortgage delinquencies are not eligible for delivery to Crescent Mortgage. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more delinquencies over 30 days (60, 90, 120 days) within the 12 months. One 30 day late within the past 12 months may be considered depending upon the overall strength of the file and the reason for the late payment. Crescent Mortgage Company Conventional Guidelines 8/10/

15 2.4 Credit Utilization The borrower s credit report must be evaluated by reviewing use of revolving credit and comparing the current balance on each open account to the amount of credit that is available to determine whether the borrower has a pattern of using revolving credit. Credit histories that include revolving accounts with a low balances-to-limits ratio generally represent a lower credit risk, while those that include accounts with a high balances-to-limits ratio represent a higher credit risk. A credit history that includes recently opened accounts that are at or near their limits may indicate that the borrower is overextended and should be carefully evaluated to determine additional risk. When combined with a delinquent payment history, it is an indication that the borrower has not managed his or her credit successfully. 2.5 Significant Derogatory Credit Events Waiting Periods and Re-establishing Credit General Information The presence of significant derogatory credit events dramatically increases the likelihood of a future default and represents a significantly higher level of default risk. Examples of significant derogatory credit events include bankruptcies, foreclosures, deeds-in-lieu of foreclosure, preforeclosure sales, and short sales. Pre-foreclosures and short sales are considered the same risk. The Customer must determine the cause and significance of the derogatory information. Sufficient time must have passed since the date of the derogatory event to demonstrate that the borrower has re-established an acceptable credit history. Crescent Mortgage will make the final decision about the acceptability of a borrower s credit history when significant derogatory credit information exists. Copies of appropriate documentation must be obtained for the significant derogatory credit event. The documentation must: Effective date of a previous foreclosure, deed-in-lieu or pre-foreclosure sale as established by a trustee s deed or other conclusive documentation. Proof of bankruptcy discharge or dismissal date through credit report listing of public records or court documentation. And Identify debts that were not satisfied by the bankruptcy. Debts that were not satisfied by a bankruptcy must be paid off or have an acceptable, established repayment schedule with no delinquencies after the date of the bankruptcy. Crescent Mortgage Company Conventional Guidelines 8/10/

16 Bankruptcy, Foreclosure, Deed in Lieu, Short Sales Crescent will consider loan requests from borrowers with prior foreclosures, bankruptcies, short sale transactions or deeds in lieu of foreclosure subject to the following guidance. In all cases approve/eligible findings are required. Foreclosures require 7 year waiting period Bankruptcy Ch 7 or 11, require 4 years Bankruptcy Ch 13-2 years if discharged, 4 years if dismissed. Mortgage debts discharged through bankruptcy are held to the bankruptcy waiting periods and not the foreclosure waiting period. This applies even if a foreclosure action is subsequently completed. Pre-foreclosure sales, short sales and deeds in lieu of foreclosure require a 4 year waiting period calculated from the date of the prior sale or deed in lieu to the disbursement date on the new loan. Charge offs of mortgage debt require a 4 year waiting period. Crescent Mortgage Company Conventional Guidelines 8/10/

17 Summary of all Waiting Period Requirements Derogatory Event Waiting Period Requirements Bankruptcy Chapter 7 or 11 Bankruptcy Chapter 13 Foreclosure Four years Two years from discharge date Four years from dismissal date Seven years Deed-in-Lieu of Foreclosure, Preforeclosure Sale, Short Sale AND Charge offs of mortgage debts 4 years NOTE: Crescent mortgage requires an AU approval for all proposed mortgages. Crescent will not allow a manual underwrite. Crescent Mortgage Company Conventional Guidelines 8/10/

18 Requirements for Re-establishing Credit After a bankruptcy, foreclosure, deed-in-lieu of foreclosure, or preforeclosure sale, the borrower s credit will be considered re-established if all of the following are met: The waiting period and the related additional requirements are met. The loan receives a recommendation from DU/LP that is acceptable. The borrower has traditional credit established after the derogatory event. Nontraditional credit or thin files are not acceptable. 2.6 Authorized User Tradelines Authorized User tradelines should be evaluated in order to ensure that they are an accurate reflection of the borrower's credit history. If Crescent believes the authorized user tradelines are not an accurate reflection of the borrower's credit history, Crescent should evaluate the borrower's credit history without the benefit of these tradelines and use prudent underwriting judgment when making its final underwriting decision. In order to assist Crescent in its review of authorized user tradelines, if the borrower has several authorized user accounts but only has a few accounts of his/her own, the Customer should establish: The relationship of the borrower to the owner of the account. If the borrower uses the account. And If the borrower makes the payments on the account. If the authorized user tradeline belongs to another borrower on the mortgage loan, no additional investigation is needed. Crescent Mortgage Company Conventional Guidelines 8/10/

19 If the borrower has several tradelines in good standing and only a minor number of authorized user accounts, determination that: The authorized user accounts had minimal, if any, impact on the borrower's overall credit profile. And The information reported on the credit report is an accurate reflection of the borrower's credit history. Authorized user tradelines that belong to a non-purchasing spouse when need not be considered in the analysis. Disputed Credit Report Tradelines Confirm the accuracy of disputed tradelines reported on the borrower's credit report. If it is determined that the disputed tradeline information is accurate, the disputed tradelines must be considered in the credit risk assessment. Fannie Mae will provide an appropriate message on the DU findings what must be met when there are disputed tradelines. Duplicate Public Records Items that typically appear in the Public Records section of the credit report (judgments, bankruptcies, foreclosures, and tax liens) are often duplicated because the credit agencies may not attempt to merge items of this severe nature. As a result, these items may also appear in more than one verification message in the Underwriting Findings report. If it is clear from the credit report data that the items are duplicates (account numbers, date filed, and dollar amounts), the Customer can disregard the duplicates and document the item once. However, if it is unclear from the credit report whether any of the items are duplicated, the Customer should treat each item individually and obtain the required documentation for each item, as indicated in the verification messages. Judgments, Garnishments, and Liens Open judgments, garnishments, and all outstanding liens that are in the Public Records section of the credit report must be paid off at or prior to closing. Documentation of the satisfaction of these liabilities, along with verification of funds sufficient to satisfy these obligations, must also be maintained in the permanent loan file. Past-Due, Collections, and Charge-Off Accounts Accounts that are reported as past due (not reported as collection accounts) must be brought current. For one-unit, owner-occupied properties, borrowers are not required to pay off outstanding collections or charge-offs provided the collection will not threaten Crescent s first-lien position. For two- to four-unit owner-occupied and second homes, collections and charge-offs totaling more than $5,000 must be paid in full prior to or at closing. For investment properties, individual accounts equal to or greater than $250, and accounts that total more than $1,000 must be paid in full prior to or at closing. Crescent Mortgage Company Conventional Guidelines 8/10/

20 (This page intentionally left blank) Crescent Mortgage Company Conventional Guidelines 8/10/

21 SECTION 3: EMPLOYMENT INCOME AND INCOME VERIFICATION 3.0 Requirements and Uses of IRS Form 4506-T Required Transcripts All loans require the borrowers to sign the 4506-T form at the time of application, and at the time of closing. Transcripts are ordered on all self-employed borrowers, when income is obtained by using tax returns. Required Transcripts The following transcripts must be obtained from the IRS, based on the automated underwriting system (AUS) documentation requirements, as follows: If AUS Income Documentation Requirement is: YTD Paystub and/or one year W-2 YTD paystub and two years W-2s YTD income information - one year 1040/1099 YTD income information - two years 1040/1099 Business Returns - one or two years IRS Transcript required is: None None One year 1040 tax transcript* Two years 1040 tax transcripts* One or two years 1120 or 1065 tax transcripts* W2-only transcripts are not acceptable. A full transcript(s) is required and must be reviewed for variances to the findings, or for additional information not disclosed on the 1003 including, but not limited to: Unreimbursed business expenses Businesses owned Other income or losses Variances in address Ownership of rental properties Marital status Dependents Borrowers names Variances must be clarified and corrected if necessary. Crescent Mortgage Company Conventional Guidelines 8/10/

22 Unreimbursed business expenses showing (2106) on the tax transcripts must be deducted from income only if the borrower earns commissions that are 25% or more of the total income (this includes truck drivers). Other income losses reporting on the tax transcripts must be disclosed on the 1003 unless proof a business has been closed and liabilities paid or the loss will not be recurring in the current or future years. *Note: Borrowers that have filed an extension must provide the most recent years signed extension form and obtain the prior year s tax transcript. If a borrower has not filed tax returns, or the extension for the most current year has exceeded the 10/15 extension cutoff period, the borrower will not qualify until the required 4506-T tax year transcripts are received. Income Documentation and 4506-T Transcript: Same Year If the documentation used to calculate the borrower's income (such as W-2 from employer) is the same year as the information obtained from the IRS, the information must match exactly (differences for rounding purposes are acceptable). There are some instances, however, when a variation between the income documentation and the IRS transcript is acceptable. The following questions may assist in determining whether the differences between the income documentation used for qualifying and IRS transcripts are reasonable, or if additional documentation is needed: Did the borrower file a joint return but is on the loan application alone? Did the borrower change jobs? Is he/she in the same line of work but with a different company? Did the borrower receive a promotion or merit increase? Did the borrower s compensation structure change (base to commission, salary versus hourly)? In the previous year(s), did the borrower receive bonus or overtime compensation that is no longer offered? Is the borrower now receiving bonus or overtime compensation that was not offered previously? Crescent Mortgage Company Conventional Guidelines 8/10/

23 3.1 Verbal Verification of Employment In addition to standard documentation required to verify adequacy and stability of income, a verbal or written Verification of Employment (VOE) form is required within 10 days of closing for all loans except self-employed borrowers. A pre-closing employment re-verification will be done no earlier than 72 hours prior to closing. Written VOE in Lieu of Verbal VOE If the employer will not provide a verbal VOE, then a written VOE must be sent to the employer to be completed, signed, and dated within 10 days of closing. When the VVOE is obtained from a third-party verification source such as The Work Number, the 10-day timeframe is measured from the date of the vendor s report, not the date the information was updated in the vendor s database. The information must have been updated within the past 35 days. Salaried, Hourly, and Commission Income Borrowers Prior to performing the verbal VOE, the address and phone number for each borrower s current employer must be independently verified using directory assistance, Internet sites, telephone directories, or by contacting the applicable licensing bureau. A print-out of the evidence received must be placed on top of the income documentation in the file. Crescent Mortgage Company Conventional Guidelines 8/10/

24 Self-Employed Borrowers For self-employed borrowers, acceptable third-party confirmation of the existence of the borrower s business is required. This confirmation must be obtained within 30 days of closing. Verification from a third party such as a CPA, regulatory agency, department of corporations, or the applicable licensing bureau is acceptable. Documentation from one of these sources must be printed and placed on top of the income documentation in the loan file. 3.2 Non-U.S. Citizen Borrowers Verification of Income for Non-U.S. Citizen Borrowers Crescent will consider non-u.s. citizen borrowers for financing with a legal status of Permanent Resident Alien or Non-Permanent Resident Alien.. Ineligible Borrowers The following borrowers are ineligible for financing from Crescent: Non-Resident Aliens (Foreign Nationals) Borrowers without a valid Social Security number (SSN) Individuals with diplomatic immunity Requirements for Non-Permanent Resident Aliens A Non-Permanent Resident Alien (NPRA) is an individual who is granted the right to live and work in the U.S. for a fixed period of time, and for a specific purpose. An NPRA borrower whose income is used to qualify may be eligible for financing provided they meet all of the following guidelines: Must have lawful residency and evidence of appropriate work authorization in the United States: o Passport and appropriate VISA or o Employment Authorization Document (EAD) issued by the Department of Homeland Security (DHS) Must have a valid SSN. Note: Individual Taxpayer Identification Number (ITIN) is not a valid SSN. Must be currently employed in the U.S., with income paid in U.S. currency. Income must be expected to continue for at least three years. Must have a two-year work history in the U.S. Crescent Mortgage Company Conventional Guidelines 8/10/

25 Must satisfy basic underwriting requirements with respect to income stability, credit history, assets, and reserves. Work visa expiration date must be > 12 months, or proof that visa has been renewed at least once is required. Documentation of Legal Status Non-US Citizens must provide evidence of their legal right to live and work in the US prior to underwriting: Permanent Resident Alien: is an individual who a lawful permanent resident of the United States. Non-Permanent Resident Alien: Is an individual who seeks temporary entry into the United States for a specific purpose. Non-Resident Aliens (Foreign Nationals): This term applies to any person other than a U. S. Citizen, a permanent resident, or a non-permanent resident. Non-resident aliens are ineligible borrowers. 3.3 Using Nontaxable Income to Adjust the Borrower s Gross Income The Customer may gross up all tax-exempt income once it has been established and documented that such income is likely to continue (and remain untaxed) into the foreseeable future. The Customer must provide documentation, such as but not limited to tax returns, in the Mortgage file to verify that the income is not taxable in order to "gross up" the tax-exempt income for qualifying. If the Seller is not able to provide documentation to evidence that the income is not taxable, the Seller cannot "gross up" the tax-exempt income for qualifying. Crescent Mortgage Company Conventional Guidelines 9/29/

26 3.4 Salary and Commission Income Length of Employment Crescent generally requires at least a two-year history of the receipt of stable income. When a borrower has been generating income for two or more years from either part-time or fulltime work with any number of employers, the Customer may generally base its underwriting decision on the borrower s current income. A borrower who has an income history of less than 24 months may be considered if the Customer is able to document the borrower s income as being stable, predictable, and likely to continue. Stable and Predictable Income Crescent underwriting guidelines emphasize the continuity of a borrower s stable income. Borrowers who change jobs frequently, but continue to earn consistent and predictable income, are an acceptable credit risk. The Customer must demonstrate the likelihood of consistent income through verification of previous and current employment and income. Less stable types of income that must be closely analyzed include commissions, bonuses, substantial amounts of overtime pay, or employment that is subject to time limits, such as contract employees or tradespersons. Adequacy of Income The Customer must document and assess the borrower s ability to repay the mortgage. Continuity of Income The Customer must document the likelihood of continued receipt of income for at least three years. Unless there is evidence that the income will no longer be received, the Customer should conclude that the income will continue. Income from sources such as alimony and child support must be evidenced to be likely to continue for three years. Adequate documentation, such as divorce decree and birth certificates must be delivered in the file. For income types with no defined expiration date such as Social Security Disability Insurance benefits or Veterans Disability Compensation benefits the income is considered stable, predictable, and likely to continue unless other evidence exists to the contrary. Documenting Employment and Income The Customer must substantiate employment and income by documenting all of the following: The source of income The stability of income for the previous two years, or the length of time the borrower has been employed. The most recent paystub or payroll earnings statement including earnings for the most recent period and year-to-date earnings. The likelihood of continued income over a three-year period. Crescent Mortgage Company Conventional Guidelines 9/29/

27 Determining the Need for Federal Income Tax Returns The Customer must obtain copies of the individual signed federal income tax returns, along with copies of tax transcripts for the following types of borrowers. Tax returns provided to validate borrower s income should be signed by the borrower with a current date. 25% or more of earnings are derived from commissions. Employed by family members. Employed by interested parties to the transaction. Rental income Unreimbursed business expenses. Income from periodic employment or employment that is subject to time limits, such as a contract employee. Income from partnerships or corporations in which they have a 25% or greater ownership interest. Income from capital gains, royalties, real estate, or other non-employment earnings reported on IRS Form Crescent Mortgage Company Conventional Guidelines 9/29/

28 3.5 Verification of Salary and Commission Income Standards for Verification of Employment and Income The Customer must verify employment and income for salaried and commissioned borrowers. Documentation Provided by the Borrower Requirements Obtain a paystub that is dated no earlier than 30 days prior to the initial loan application date. The paystub must include year-to-date earnings. Additional paystubs may be required if the most recent does not include sufficient information to calculate income. Obtain W-2 forms covering the most recent two-year period. All documentation must either be computer-generated or typed by the borrower s employer, or downloaded from the Internet. Documents must clearly identify the employer s name and source of information. The documents must clearly identify the borrower as the employee and show the employee s gross year-to-date earnings. The information must be complete and legible. The original source of the information must be a third party, such as the borrower s human resources department, personnel office, payroll department, company s payroll vendor, or supervisor. Documentation Provided by the Borrower s Employer The Customer may be able to use the Request for Verification of Employment (Form 1005 or Form 1005(S)) to determine the adequacy and continuation of income for a salaried or commissioned borrower. From 1005 may also be used to document stability of bonus and overtime income. Documentation Provided by a Third-Party Employment Verification Vendor The Customer may receive employment and income verification directly from a third-party employment verification vendor (such as the Work Number). These verifications are acceptable as long as: The Customer has determined that the vendor has provided reliable and accurate information and The Customer understands it will be held accountable for the integrity of the information obtained from this source. If necessary, the Customer must supplement these verifications by obtaining any missing information from the borrower or his/her employer. Crescent Mortgage Company Conventional Guidelines 9/29/

29 3.6 Commission Income Verification of Commission Income Commission income must be averaged for a 24 month period to establish reliable income. Commission income that has been received for 12 to 24 months may be considered subject to additional documentation that exhibits positive factors to reasonably offset the shorter income history. Verification of a likelihood of continuance must be included. Commission income that represents 25% or more of the borrower s total annual income requires copies of the borrower s signed federal income tax returns that were filed with the IRS for the past two years, as well as confirmation of the borrower s current employment and year-to-date earnings. In order for the commission income to be used in qualifying, the commission income reported on the tax returns must cover at least a 12-month period. Annual earnings must be level or increasing from one year to the next. Declining income may not be considered as stable income for qualifying. Any non-reimbursed business expenses must be subtracted from the gross commission income. 3.7 Bonus and Overtime Income Verification of Bonus and/or Overtime Income Bonus and/or overtime income must have a documented history for the last two years. Projected bonus and/or overtime pay is not an acceptable source of income. The employer must confirm that the bonus and/or overtime income is likely to continue. A two years average of bonus and/or overtime income must be used to determine the amount of income that may be considered. Annual earnings must be level or increasing from one year to the next. Declining income may not be considered as stable income. Bonus income received annually, quarterly, or monthly is acceptable, even if the amount of the bonus fluctuates, providing that the trend is not decreasing. If the borrower has recently changed positions (but not employers), determine the effect of the change on the borrower s eligibility and opportunity to receive bonus and/or overtime pay. Crescent Mortgage Company Conventional Guidelines 9/29/

30 3.8 Part-Time, Second-Job, Multiple-Job, and Seasonal Verification of Part-Time Income Verify the stability of income for the previous two years with no gaps of employment. Occasionally a Customer can accept less than a two-year history, but no less than a 12-mo history, if there is a strong likelihood that the borrower will continue to receive the income, and the Customer develops an average monthly income for the part-time job. Verify the income with W-2 forms. Verify that the income has a strong likelihood of continuation. If a borrower who has historically been employed on a part-time basis indicates that he or she will now be working full-time, obtain written confirmation from the borrower s employer. Verification of Second-Job Income Verify the stability of income for the previous two years with no gaps of employment. Occasionally a Customer can accept less than a two-year history, but no less than a 12-mo history, if there is a strong likelihood that the borrower will continue to receive the income, and the Customer develops an average monthly income for the second job. Verify the income with W-2 forms. Verify that the income has a strong likelihood of continuation. Determine if there has been any change in the borrower s overall employment status that might jeopardize the continuance of income from the second job. Verification of Multiple-Job Income Verify the stability of income for the previous two years with no gaps of employment. Occasionally a Customer can accept less than a two-year history, but no less than a 12-mo history, if there is a strong likelihood that the borrower will continue to receive the income, and the Customer develops an average monthly income for the multiple jobs. Verify the income with W-2 forms. Verify that the income has a strong likelihood of continuation. Verification of Seasonal Income Verify that the borrower has worked in the same job (or the same line of seasonal work) for the past two years. Confirm with the borrower s employer that there is a reasonable expectation that the borrower will be rehired for the next season. For seasonal unemployment compensation, a two year history of receipt must be document with federal income tax returns. Otherwise, unemployment compensation cannot be used to qualify the borrower. Crescent Mortgage Company Conventional Guidelines 9/29/

31 3.9 Military Income Military Income Flight or hazard pay, rations, clothing allowance, quarters allowance, and proficiency pay are acceptable sources of stable income, as long as the Customer can establish that the particular source of income will continue to be received in the future. Generally, this must be documented by providing an LES statement reflecting an acceptable remaining term of enlistment and/or a statement from the veteran s commanding officer. Income paid to military reservists is acceptable if the Customer can exhibit the same stability and continuity as that of a second job income Rental Income Eligible Properties Rental income from the following property types is acceptable if it can be determined that the income is likely to continue: One-unit investment properties. Two- to four-unit properties, even when the borrower occupies one of the units. Ineligible Properties Rental income from a second home cannot be used to qualify. Calculating Monthly Net Rental Income (or Loss) When the security property for the mortgage being delivered to Crescent Mortgage will be rented, the Customer must: Determine the cash flow and operating income derived from the rental property. The appraiser should complete an Operating Income Statement (Form 216). Determine the gross income to be used in determining the income-producing ability of the subject property using the appropriate form: o Single-Family Comparable Rent Schedule (Form 1007) or o Small Residential Income Property Appraisal Report (Form 1025) Crescent Mortgage Company Conventional Guidelines 9/29/

32 The Customer then calculates the monthly net rental income (or loss) as described in the following tables. Rental Income From the Subject Property Does Borrower Have History of Receiving Rental Income From Property? Yes. No. Documentation Requirements Document the cash by analyzing Schedule E of the most recent two years income tax returns. Document the rental income by obtaining an appraiser s opinion of market rent and, copies of the current lease agreement. Must make sense why no rental income appears on most recent tax return. Calculate Monthly Net Rental Income (or Loss) Analyze the borrower s cash and calculate the net rental income (or loss), The market rent established by the appraiser or the current rent based on the existing lease agreement. Multiply the gross rent times 75% to calculate net rental income. When the borrower owns additional property that is rented, the Customer must calculate the monthly net rental income (or loss) in accordance with the following table. Rental Income From Property Other Than the Subject Property Does Borrower Have History of Receiving Rental Income From Property? Yes. No. Documentation Requirements Document the cash by analyzing Schedule E of the most recent two years income tax returns..a copy of the current lease agreement may be used only if a property is not listed on Schedule E because it was acquired subsequent to filing the tax return, Obtain copies of current lease agreements. When a property has been previously owned, but no history of receipt of rental income is available, Crescent will determine whether it is appropriate to consider income for this property. Calculating Monthly Net Rental Income (or Loss) If using the lease agreement multiply the gross rent times 75% to calculate net rental income. Multiply the gross rent times 75% to calculate net rental income. Crescent Mortgage Company Conventional Guidelines 9/29/

33 Treatment of the Income (or Expense) If the net rental income (or loss) relates to Then The borrower s principal residence. The monthly net rental income must be added to the borrower s total monthly income. Any net rental loss must be added to the borrower s total monthly obligations. 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. A property other than the borrower's principal residence. The monthly net rental income (excluding the full amount of the related mortgage payment) must be added to the borrower s total monthly income. Any 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 PITIA for the borrower's principal residence must be counted as a monthly obligation. Crescent Mortgage Company Conventional Guidelines 9/29/

34 3.11 Other Sources of Income Alimony or Child Support Verification of Income From Alimony or Child Support Document that alimony or child support will continue for at least three years: Divorce decree, separation agreement, or any other type of written legal agreement or court decree that indicates payment of alimony or child support and states the amount of and period of time over which it will be received. In the absence of a separation agreement that specifies alimony or child support payments, the Customer should not consider any proposed or voluntary payments as income. Any other type of written legal agreement or court decree describing the payment terms for the alimony or child support. or Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid. Document the borrower s regular receipt of the full payment, as verified by: Deposit slips Court records Copies of signed federal income tax returns that were filed with the IRS Copies of the borrower s bank statements showing the regular deposit of these funds Review the payment history to determine its suitability as qualifying income. Full, regular, and timely payments must be made. If full or partial payments are made on an inconsistent or sporadic basis, the income is considered unsuitable for qualifying or justifying higher qualifying ratios. Crescent Mortgage Company Conventional Guidelines 9/29/

35 Automobile Allowance For an automobile allowance to be considered as acceptable stable income, a borrower must have received payments for at least two years. The Customer must include all associated business expenditures in its calculation of the borrower s total debt-to-income ratio. Automobile allowances received for less than two years should not be used when calculating the borrower s total debt-to-income ratio. Boarder Income Rental income from boarders in a one-unit property that is also the borrower s principal residence or second home is not considered acceptable stable income. Crescent Mortgage Company Conventional Guidelines 9/29/

36 Capital Gains Income Income received from capital gains is generally a one-time transaction; therefore, it should not be considered as part of the borrower s stable monthly income. However, if the borrower needs to rely on income from capital gains to qualify, the income must be verified in accordance with the following requirements. Verification of Capital Gains Income Document a two-year history of capital gains income by obtaining copies of the borrower s signed federal income tax returns that were filed with the IRS for the past two years. Develop and use an average income from the last two years. Evidence that borrower owns additional property or assets that can be sold if extra income is needed to make future mortgage payments. Capital gains income should be fairly consistent from the 2 years tax returns to be considered. Verification of Disability Income Verify the amount of disability payments and verify continuance by obtaining a copy of the borrower s disability policy or benefits statement. Confirm the borrower s current eligibility for the disability benefits by obtaining a statement from the benefit s payer (insurance company, employer, or other qualified and disinterested party). If the benefits have a defined expiration date, verify that the remaining term is at least three years from the date of the mortgage application. If a borrower is currently receiving short-term disability payments that will decrease to a lesser amount within the next three years because they are being converted to long-term benefits, the long-term benefits must be used as income to qualify the borrower. Crescent Mortgage Company Conventional Guidelines 9/29/

37 Employment-Related Assets as Qualifying Income The following table provides the requirements for employment-related assets that may be used as qualifying income: Asset Requirement - Fannie Mae Assets used for monthly income stream must be owned individually, or the co-owner of the asset must be a co-borrower of the subject property. Assets must be liquid and sourced as one of the following: Non-self-employed severance package or non-self-employed lump sum retirement package (i.e., a lump sum distribution) must be documented with a distribution letter from the employer (1099R) and deposited to a verified asset account. 401(k) or IRA, SEP, KEOGH retirement accounts: The borrower must have unrestricted access to the accounts, and can only use if distribution is not already set up or the distribution amount is not enough to qualify. The account must be documented with the most recent monthly, quarterly, or annual statement. If a penalty would apply to a distribution of funds from the account made at the time of calculation, then the amount of such penalty applicable to a complete distribution from the account (after costs for the transaction) must be subtracted to determine the income stream from these assets. If the employment-related assets are in the form of stocks, bonds, and mutual funds, 70% of the value (remaining after costs for the transaction and consideration of any penalty) may be used to determine the income stream to account for the volatile nature of these assets. A borrower shall only be considered to have unrestricted access to a 401(k), IRA, SEP, Keogh retirement account if the borrower has, as of the time of calculation, the unqualified and unlimited right to request a distribution of all funds in the account (regardless of any possible tax withholding or applicable penalty applied to such distribution). Net documented assets are equal to the sum of eligible documented assets minus: a) The amount of penalty that would apply if the account was completely distributed at the time of calculation; b) The amount of funds used for down payment, closing costs, any required reserves; c) 30% of the remaining value of any stocks, bonds, or mutual fund assets (after the calculation in b)). Ineligible assets: Non-employment related assets (e.g., stock options, non-vested restricted stock, lawsuits, lottery winnings, sale of real estate, inheritance, divorce proceeds, etc.). Checking and Savings accounts are generally not eligible as employment-related assets, unless the source of the balance was from an eligible employment-related asset (for example a severance package or lump sum retirement distribution. Crescent Mortgage Company Conventional Guidelines 9/29/

38 All of the following loan parameters must be met in order for employment-related assets to be used as qualifying income: Parameter Crescent Requirement Maximum LTV/CLTV/HCLTV 70% Minimum Credit Score 620 Standard: Per Eligibility Matrices Loan Purpose Occupancy Number of units Income Calculation/Payout Stream Purchase and limited cash-out refinance only Principal residence and second home only One- to four-units Divide Net Documented Assets by the amortization term of the mortgage loan. Note: If the mortgage loan does not meet the above parameters, employment-related assets may still be eligible under other standard income guidelines, such as Interest and Dividends Income, or Retirement, Government Annuity, and Pension Income. Assets as a Basis for Repayment of Obligations Freddie Mac Assets described in this section may only be used as a basis for repayment income for qualifying the borrower if the mortgage meets all the following requirements: Mortgage is secured by a 1 or 2-unit primary residence or a second home Mortgage is either a purchase transaction or a no cash-out refinance Mortgage has a maximum LTV/TLTV/HTLTV ratio of 80% To determine the amount used to establish the debt payment-to-income ratio, you must use the net eligible assets (as described below), divided by 360 months, regardless of loan term. The amount of net eligible assets is calculated by subtracting the following from the total eligible assets: Any funds required to be paid by the Borrower to complete the transaction (down payment and closing costs, for example). Any gift funds and borrowed funds, and Any portion of the assets pledged as collateral for a loan or otherwise encumbered. Asset Eligibility The assets described below may be used to qualify the Borrower for the Mortgage, provided that the assets meet the following requirements: Retirement Assets The retirement assets must be in a retirement account recognized by the IRS (401(K), IRA, etc.) Borrower must be the sole owner The asset must not currently be used as a source of income for the borrower Crescent Mortgage Company Conventional Guidelines 9/29/

39 Lump-Sum distribution funds not deposited into an eligible retirement asset Depository accounts and securities Assets from the sale of the Borrower s business As of the Note Date, the Borrower must have access to withdraw the funds in their entirety, less any portion pledged as collateral for a loan or otherwise encumbered, without being subject to a penalty or an additional early distribution tax. The borrower s rights to the funds in the account must be fully vested. If the lump-sum distribution funds have been deposited to an eligible retirement asset, follow the requirements for retirement assets described above. Lump-Sum distribution funds must be derived from a retirement account recognized by the IRS (401(K), IRA, etc.) and must be deposited to a depository or non-retirement securities account. A borrower must have been the recipient of the lump-sum distribution funds. Parties not obligated on the Mortgage may not have an ownership interest in the account that holds funds from the lump-sum distribution. The proceeds from the lump-sum distribution must be immediately accessible in their entirety. The proceeds from the lump-sum distribution must not have been or currently be subject to a penalty or early distribution tax. The borrower must solely own assets or, if asset is owned jointly, each asset owner must be a Borrower on the Mortgage and/or on the title to the subject property. At least one Borrower who is an account owner must be at least 62 years of age. As of the Note Date, the Borrower must have access to withdraw the funds in their entirety, less any portion pledged as collateral for a loan or otherwise encumbered, without being subject to a penalty. Account funds must be located in a United States- or State -regulated financial institution and verified in U. S. Dollars. The Borrower(s) must be the sole owner(s) of the proceeds from the sale of the business that were deposited to the depository or non-retirement securities account. Parties not obligated on the Mortgage may not have an ownership interest in the account that holds the proceeds from the sale of the Borrower s business. The proceeds from the sale of the business must be immediately accessible in their entirety. The sale of the business must not have resulted in the following: retention of business assets, existing secured or unsecured debt, ownership interest or seller-held notes to buyer of business. All assets must be documented in accordance with Freddie Mac standard documentation requirements. Crescent Mortgage Company Conventional Guidelines 9/29/

40 Foster-Care Income Income received from a state- or county-sponsored organization for providing temporary care for one or more children may be considered as acceptable stable income if the following requirements are met. Verification of Foster-Care Income Verify the foster-care income with one of the following: Letters of verification from the organizations providing the income. Copies of the borrower s signed federal income tax returns that were filed with the IRS Copies of the borrower s deposit slips or bank statements confirming regular deposit of the payments. Document that the borrower has a two-year history of providing foster-care services. If the borrower has not been receiving this type of income for two full years, the income may still be counted as stable income if: The borrower has at least a 12-month history of providing foster-care services. And The income does not represent more than 30% of the total gross income that is used to qualify the borrower for the mortgage. Verify that the borrower is likely to continue to provide such services at a level that supports the amount of income needed to qualify for the mortgage. Verification of Income From Interest and Dividends Verify the borrower s ownership of the assets on which the interest and/or dividend income was earned. Document a two-year history of the income, as verified by: Copies of signed federal income tax returns that were filed with the IRS or Copies of account statements. Develop an average of the income received for the past two years. Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. Subtract any assets used for down payment or closing costs from the borrower s total assets before calculating expected future interest or dividend income. Crescent Mortgage Company Conventional Guidelines 9/29/

41 Non-Occupying Co-Borrower Income LP and DU will consider income from non-occupant co-borrowers for primary residences only. For Approve/Accept Mortgages with a non-occupying Borrower, the Seller is not required to calculate or evaluate the occupant borrower's monthly housing or debt ratio. Verification of Income From Notes Receivable Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. Obtain a copy of the note to establish the amount and length of payment. Document regular receipt of income for the past 12 months, as verified by: Deposit slips Copies of signed federal income tax returns that were filed with the IRS (or Copies of the borrower s bank statements showing consistent deposits of the funds. Payments on a note with less than a twelve month history may not be used as stable income. Crescent Mortgage Company Conventional Guidelines 9/29/

42 Verification of Public Assistance Income Document the borrower s receipt of public assistance income with letters or exhibits from the paying agency that state the amount, frequency, and duration of the benefit payments. Document a two-year history of income from public assistance. Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. The Housing Choice Voucher Program (more commonly known as Section 8) is an acceptable source of income. There is no requirement for the Section 8 voucher payments to have been received for any period of time prior to the date of the mortgage application or for the payments to continue for any period of time from the date of the mortgage application. Verification of Retirement and Pension Income Document regular and continued receipt of the income, as verified by: Letters from the organizations providing the income Copies of retirement award letters Copies of signed federal income tax returns that were filed with the IRS IRS W-2 or 1099 forms OR Copies of the borrower s 1 month most recent bank statement Borrower must have unrestricted access without penalty to the accounts; and If the assets are in the form of stocks, bonds, or mutual funds, 70% of the value (remaining after any applicable costs for the subject transaction) must be used to determine the number of distributions remaining to account for the volatile nature of these assets. If retirement income is paid in the form of a monthly distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three years after the date of the mortgage application. Verification of Income From Royalty Payments Obtain copies of the borrower s complete signed federal income tax returns that were filed with the IRS for the past two years, including the related IRS Form 1040, Schedule E. Document that the borrower has received royalty payments for at least 12 months, and that payments will continue for a minimum of three years. Crescent Mortgage Company Conventional Guidelines 9/29/

43 Verification of Social Security Income Document regular receipt of payments, as verified by: A copy of the Social Security Administration s award letter Copies of signed federal income tax returns that were filed with the IRS (IRS W-2 forms or Copies of the borrower s recent bank statements. If the Social Security benefits have a defined expiration date, confirm that the remaining term is at least three years. Tip Income Tip income may be used to qualify with verification that the borrower has received it for the last two years and the employer indicates that the tip income will in all probability continue. An average of the past two years tip income to determine the amount of income that may be considered in qualifying the borrower. Trust Income Lump-sum distributions made before closing may be used for the down payment or closing costs. The funds must be verified by a copy of the check and a trustee s letter that shows the distribution amount. Verification of Trust Income Obtain a copy of the trust agreement or the trustee s statement confirming the amount, frequency, and duration of payments. If the trust documentation does not include information about the historical level of distributions from the trust, copies of the borrower s signed federal income tax returns that were filed with the IRS for the past two years, including the related IRS Form 1040, Schedule E must be provided. Verify that the trust income will continue for at least three years. Verification of Income From Unemployment Benefits Document the borrower has received the payments predictably for at least two years by obtaining copies of signed federal income tax returns that were filed with the IRS Verify that the income is likely to continue. Income must be associated with seasonal employment Crescent Mortgage Company Conventional Guidelines 9/29/

44 Temporary Leave Income Temporary leave from work is generally short in duration and for reasons of maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or the borrower's employer. Borrowers on temporary leave may or may not be paid during their absence from work. If Crescent Mortgage is made aware that a borrower will be on temporary leave at the time of closing of the mortgage loan and that borrower's income is needed to qualify for the loan, the lender must determine allowable income and confirm employment as described below. These requirements apply if Crescent Mortgage becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, Crescent Mortgage must not ask if he or she intends to take leave in the future. Verification of Temporary Leave Income Documentation Requirements: The borrower's employment and income history must meet standard eligibility. The borrower must provide written documentation from the employer or employers designee (i.e. third party administering employee leave) of his or her intent to return to work and the agreed upon date of return. The borrower must provide written statement of his or her intent to return to work and the agreed upon date of return as evidenced by written verification of employment. A verbal verification of employment is required as described in section 3.1, Verbal Verification of Employment. If the employer confirms the borrower is currently on temporary leave, the lender must consider the borrower employed. Verify the borrower's income in accordance with Section 3: Employment and Income verification. Crescent Mortgage must obtain: The amount and duration of the borrower's temporary leave income which may require multiple documents or sources depending on the type and duration of the leave period, and The amount of the regular employment income the borrower received prior to the temporary leave. Regular employment income includes, but is not limited to, the income the borrower receives from employment on a regular basis that is eligible for qualifying purposes (for example, base pay, commissions, and bonus). Income verification may be provided by the borrower, by the borrower's employer, or by a thirdparty employment verification vendor. Crescent Mortgage Company Conventional Guidelines 9/29/

45 Requirements for Calculating Income Used for Qualifying If the borrower will return to work as of the first mortgage payment date, Crescent Mortgage can consider the borrower's regular employment income in qualifying. If the borrower will not return to work as of the first mortgage payment date, the lender must use the lesser of the borrower's temporary leave income (if any) or regular employment income. If the borrower's temporary leave income is less than his or her regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves (see Section 4: Minimum Reserve Requirements). Following are instructions on how to calculate supplemental income. Supplemental income amount = available liquid reserves divided by the number of months of supplemental income Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount. Number of months of supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her regular employment income, rounded up to the next whole number. After determining the supplemental income, the lender must calculate the total qualifying income. Total qualifying income = supplemental income plus the temporary leave income The total qualifying income that results may not exceed the borrower's regular employment income. Example: Regular income amount: $6,000 per month Temporary leave income: $2,000 per month Total verified liquid assets: $30,000 Funds needed to complete the transaction: $18,000 Available liquid reserves: $12,000 First payment date: July 1 Date borrower will begin receiving regular employment income: November 1 Supplemental income: $12,000/4 = $3,000 Total qualifying income: $3,000 + $2,000 = $5,000 Verification of VA Benefits Income Document the borrower s receipt of VA benefits with a letter or distribution form from the VA. Education benefits are not acceptable income because they are offset by education expenses Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. Crescent Mortgage Company Conventional Guidelines 9/29/

46 3.12 Underwriting Factors and Documentation for a Self- Employed Borrower Factors to Consider for a Self-Employed Borrower Any individual who has a 25% or greater ownership interest in a business is considered to be self-employed. The following factors must be analyzed before approving a mortgage for a self-employed borrower: Stability of the borrower s income. Financial strength of the business. Demand for the product or service offered by the business. Location and nature of the borrower s business. Ability of the business to continue generating sufficient income to enable the borrower to make the payments on the requested mortgage. Marketability of the property that is security for the mortgage as a private residence (rather than as the location of a business), since the property could be the source of repayment for the mortgage should the borrower s business fail. Length of Self-Employment Crescent Mortgage generally requires Customers to obtain a two-year history of the borrower s prior earnings. Borrower s who have shorter history of self-employment 12 to 24 months may be considered, as long as the borrower s most recent signed federal income tax returns reflect the receipt of such income as the same (or greater) level in a field that provides the types of services as the current business or in an occupation in which the borrower had similar responsibilities to those undertaken in connection with the current business. In such cases, the Customer must give careful consideration to the nature of the borrower s level of experience, and the amount of debt the business has. Verification of Income Verification of a self-employed borrower s employment and income must be obtained from the borrower copies of his or her signed federal income tax returns (both individual returns and business returns) that were filed with the IRS for the past two years (with all applicable schedules attached). Analysis of Borrower s Personal Income Cash Flow Analysis should be used to calculate the borrower s adjusted income. Analysis of Borrower s Business Income A written evaluation of the analysis of the borrower s business income must be provided. The purpose of this analysis is to: Measure year-to-year trends for gross income, expenses, and taxable income for the Crescent Mortgage Company Conventional Guidelines 9/29/

47 business. Determine (on a yearly or interim basis) the percentage of gross income attributed to expenses and taxable income. and Determine a trend for the business based on the change in these percentages over time. The Customer may use Fannie Mae s Comparative Income Analysis (Form 1088) or any other method of trend analysis that enables it to determine a business s viability Employment Offers or Contracts LP: Purchase single family, primary residence, for future employment to use as effective income, you must provide a signed offer letter by all parties. This offer letter must be noncontingent. The time frame between the Mortgage Note date and the start of employment must not exceed 90 days. Borrower must have adequate cash reserves after the Note date to pay the monthly principal & interest, taxes & insurance during the 3-mo. employment gap plus 3 additional mos (6 mos). A verbal VOE for the current employment within 10 business days of the Note date must be obtained by Crescent. LTV s > 80% are subject to MI Guides. DU: Loans can close using accepted offer for employment of contract for employment if: o Subject transaction is a purchase of a single-family principal residence. o Borrower is not employed by family member or an interested party to the transaction o Qualify using fixed base income only o Start date is within 90 days of note date. o Employment offer must: -Clearly identify the employer and borrower, be signed by the employer and accepted and signed by the borrower. -Clearly identify the terms of employment, including position, type and rate of pay, start date; AND -Be noncontingent. If any conditions of employment exist the lender must confirm prior to closing that all conditions of employment are satisfied. o Borrower must have, in addition to the amount of reserves required by DU or for the transaction, financial reserves sufficient to cover the principal, interest, taxes, insurance, and association dues (PITIA) for the subject property for 6 months. o Loan must be delivered with Special Feature Code 707. Crescent Mortgage Company Conventional Guidelines 9/29/

48 SECTION 4: ASSETS 4.0 Minimum Reserve Requirements Earnest Money Deposit The Customer must verify that earnest money deposit funds are from an acceptable source and the borrower has sufficient assets remaining to complete the mortgage transaction (down payment, closing costs, and pre-paids) and to provide reserves, if required. Liquid Financial Reserves Liquid financial reserves include assets that are easily converted to cash by the borrower: Acceptable Sources of Reserves Checking or savings accounts Investments in publicly traded stocks, bonds, mutual funds, certificates of deposit, money market funds (reduced by the applicable percentage) The amount vested in a retirement savings account (reduced by the applicable percentage) The cash value of a vested life insurance policy Unacceptable Sources of Reserves Funds that have not been vested Funds that cannot be withdrawn under circumstances other retirement, employment termination, or death Stock held in an unlisted corporation Stock options and non-vested restricted stock Personal unsecured loans Interested party contributions Cash proceeds from a cash-out refinance transaction Crescent Mortgage Company Conventional Guidelines 9/29/

49 Determining Required Minimum Reserves Minimum required reserves vary depending on the transaction, occupancy status, number of units in the subject property, and the number of other financed properties the borrower currently owns. DU will determine the reserve requirements based on the overall risk assessment for the loan, the minimum reserve requirement that may be required for the transaction, and whether the borrower has multiple financed properties. If a borrower has multiple financed properties and is financing a second home or investment property, DU will base the reserve calculations for the other financed properties on the number of financed properties determined by DU. Refer to the Calculation of Reserves for Multiple Financed Properties below for additional details. Calculation of Reserves for Multiple Financed Properties If the borrower owns other financed properties, additional reserves must be calculated and documented for financed properties other than the subject property and the borrower s principal residence. The other financed properties reserves amount must be determined by applying a specific percentage to the aggregate of the outstanding unpaid principal balance (UPB) for mortgage and HELOCs on these other financed properties. The percentages are based on the number of financed properties: 2% of the aggregate UPB if the borrower has one to four financed properties, 4% of the aggregate UPB if the borrower has five to six financed properties, or 6% of the aggregate UPB if the borrower has seven to ten financed properties The aggregate UPB calculation does not include the mortgages and HELOCs that are on The subject property, The borrower s principal residence, Properties that are sold or pending sale, and Accounts that will be paid by closing Simultaneous Second Home or Investment Property Transactions If a lender is processing multiple second home or investment property applications simultaneously, the same assets may be used to satisfy the reserve requirements for both mortgage applications. Reserves are not cumulative for multiple applications. Crescent Mortgage Company-Conventional Guidelines 9/29/

50 4.1 Interested Party Contributions (IPCs) Overview Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid by another party who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property. Interested parties to a transaction include, but are not limited to: Property seller Builder/developer Real estate agent or Broker An affiliate who may benefit from the sale of the property and/or the sale of the property at the highest price possible Crescent does not permit IPCs to be used to make the borrower s down payment, meet financial reserve requirements, or meet minimum contribution requirements. Interested Party Contributions Limits Occupancy Type LTV/CLTV Ratio Maximum IPC Principal residence or second home Greater than 90% 3% 75.01% 90% 6% 75% or less 9% Investment property All CLTV ratios 2% Crescent Mortgage Company-Conventional Guidelines 9/29/

51 Undisclosed Interested Parties Contributions Mortgages with undisclosed IPCs are not eligible. Examples of these types of contributions include, but are not limited to: Moving expenses Payment of various fees on the borrower s behalf Silent second mortgages held by the property seller Other contributions that are given to the borrower outside of closing and are not disclosed on the HUD-1 Settlement Statement Financing Concessions Financing concessions that are paid on the borrower s behalf are subject to Crescent s IPC limits. Financing concessions are: Financial contributions from interested parties that provide a benefit to the borrower in the financing transaction Payments or credits related to acquiring the property Payments or credits for financing terms, including pre-paids Typical fees and/or closing costs paid by a seller in accordance with local custom, known as common and customary fees or costs, are not subject to IPC limits. Financing concessions can also include prepaid items, such as: Interest charges (limited to no more than 30 days of interest) Real estate taxes covering any period after the settlement date (only if the taxes are being impounded by the servicer for future payment) Hazard insurance premiums (limited to no more than 14 months) Homeowner association (HOA) dues covering any period after the settlement date (limited to no more than 12 months) Initial and/or renewal mortgage insurance premiums Escrow accruals required for renewal of borrower-purchased mortgage insurance coverage Sales Concessions Sales concessions are IPCs that take the form of non-realty items. They include cash, furniture, automobiles, decorator allowances, moving costs, and other giveaways, as well as financing concessions that exceed limits. The value of sales concessions must be deducted from the sales price when calculating the LTV and CLTV. Crescent Mortgage Company-Conventional Guidelines 9/29/

52 Interest Rate Buydowns If a temporary or permanent interest rate buydown is being offered to the borrower, the cost of the subsidy to fund that buydown must be included in the IPC calculation, if received from an interested party or a Customer affiliated with an interested party. The Customer must determine if the cost of the subsidy meets allowable IPC limits. This can be accomplished by confirming the current market interest rate (in other words, the rate that is offered without the payment of any discount points) and the discount points being charged to obtain the interest rate being offered with the buydown. Payment Abatements A payment abatement is considered to be a financing concession since it is an incentive provided to the borrower by an interested party, in which the interested party provides funds to pay or reimburse a certain number of monthly payments on the borrower s behalf. Loans with payment abatements of any type are not eligible. 4.2 Asset Verification Depository Assets Depository assets (checking and savings accounts, money market funds, and certificates of deposit), must be documented per DU/LP findings: One monthly bank statement Two consecutive monthly bank statements Large Deposits When verifying assets and reserves the underwriter must investigate any indications of borrowed funds including recently opened accounts, recent large deposits, or account balances that are considerably greater than the average balance over the previous few months. A written explanation of the source of funds must be obtained from the borrower, and verification of the source of funds must be obtained. Large deposits are generally defined as any deposit that exceeds 50% of the borrowers total monthly qualifying income. When a deposit includes both sourced and unsourced portions, only the unsourced portion is used in calculating whether the deposit meets the 50% definition. If a reduced asset amount is used, net of the unsourced amount of a large deposit, that reduced amount is used for underwriting purposes. Underwriters reserve the right to request documentation supporting source of funds, if asset statements show a history of frequent non- payroll deposits. Documentation Requirements Request for Verification of Deposit (Form 1006 or Form 1006S). Copies of bank statements or investment portfolio statements. The statements must cover account activity for the most recent two-month period (or, if account information is reported on a quarterly basis, for the most recent quarter). Copies of most recent retirement account statements reflecting the borrowers vested amount and any loans or withdrawals of funds. Crescent Mortgage Company-Conventional Guidelines 9/29/

53 Documents that are faxed or downloaded from the Internet must clearly identify the name of the depository or investment institution and the source of information. Bank statements must be dated within 45 days of the initial loan application. 4.3 Gifts When a gift is entered In Section VI Assets as a gift. Then The funds are included in available funds. It is important that the gift amount is identified separately as a gift even if the funds have already been deposited in a liquid asset account owned by the borrower. The balance of the liquid asset account entered in the loan application must be adjusted accordingly to prevent duplicate entry of funds. Funds that have already been deposited must be deducted from the available balance to prevent duplication. In Section II as a source of down payment. The funds are not included in the available funds. Other Liquid Asset Enter the value of personal assets (including net cash value of life insurance, automobiles, or other personal assets that will be sold) that will be converted to a liquid asset (or sold) prior to closing. Crescent Mortgage Company-Conventional Guidelines 9/29/

54 4.4 Verification of Assets for Non-U.S. Citizen Borrowers The following documentation must be obtained to verify funds that a non-u.s. citizen borrower recently deposited in a U.S. depository institution: Documented evidence of funds transfer from the country from which the borrower immigrated. Establishes that the funds belonged to the borrower prior to the date of the transfer. The sources of all funds can be verified just as they would for a borrower who is a U.S. citizen. 4.5 Stocks, Stock Options, Bonds, and Mutual Funds Verification of all of the following is required: Ownership of the account or asset. Value of the asset at the time of sale or liquidation Receipt of funds realized from the sale or liquidation Crescent Mortgage Company-Conventional Guidelines 9/29/

55 Asset Type Stocks and mutual funds Stock options (Publicly Traded Corporations ONLY) Government bonds Determining the Value of the Asset Determine the value of the asset at the time of sale or liquidation (net of any margin accounts) with either: The most recent monthly or quarterly statement from the depository or investment firm. Or A copy of the stock certificate, accompanied by a newspaper stock list that is dated as of or near the date of the loan application. When used for reserves, the value of stocks and mutual funds must be discounted by 30%. Non-vested restricted stock is not an acceptable source of reserves. Value of vested stock options can be documented by: A statement that lists the number of options and the option price. And The current stock price documenting the gain that is realized from sale of the optioned stock. Evidence of receipt of the net proceeds will be required Vested stock options are not an acceptable source for reserves. Non-vested stock options are not an acceptable source of funds. The value of government bonds must be based on their purchase price unless the redemption value can be documented. When used for reserves, the value of bonds must be discounted by 30%. 4.6 Trust Accounts Trust account funds must be documented with: Written documentation of the value of the trust account from either the trust manager or the trustee. And Documentation supporting the conditions under which the borrower has access to the funds. This documentation must reflect that the impact that withdrawal of funds will have on trust income used for qualifying. Crescent Mortgage Company-Conventional Guidelines 9/29/

56 4.7 Retirement Accounts Verify the ownership of the accounts and the borrower's actual receipt of the funds realized from the liquidation of the asset. When funds from retirement accounts are used for reserves, documentation must include the ability to withdraw funds. If the retirement account only allows withdrawals in connection with the borrower s employment termination, retirement, or death, the account must not be considered as reserves. Retirement accounts that do not allow any type of withdrawal may not be considered. To account for withdrawal penalties and estimated taxes, the reserve amount must be reduced to 60% of the vested amount (less any outstanding loans). 4.8 Personal Gifts Gifts A borrower of a mortgage loan secured by a principal residence or second home may use funds received as a personal gift from an acceptable donor. Gift funds may fund all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements below. Gifts are not allowed on an investment property. Acceptable Donors A gift can be provided by: A relative, defined as the borrower s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship or A fiancé, fiancée, or domestic partner If the borrower receives a gift from a relative or domestic partner who has lived with the borrower for the last 12 months, or from a fiancé or fiancée, the gift is considered the borrower s own funds The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction. Crescent Mortgage Company-Conventional Guidelines 9/29/

57 Minimum Borrower Contribution Requirements The following table describes the minimum borrower contribution requirements for transactions that contain gifts. LTV, CLTV, or HCLTV Ratio Minimum Borrower Contribution Requirement from Borrower s Own Funds 80% or less One- to four-unit principal residence Second home A minimum borrower contribution from the borrower s own funds is not required. Greater than 80% One-unit principal residence (Except for high-balance mortgage loans) Two- to four-unit principal residence Second home High-balance mortgage loans A minimum borrower contribution from the borrower's own funds is not required provided that Mortgage Insurance guidelines are met The borrower must make a 5% minimum borrower contribution from his or her own funds. Documentation Requirements The gift letter must: Specify the dollar amount of the gift. Specify the date the funds were transferred. Include the donor s statement that no repayment is expected. and Indicate the donor s name, address, telephone number, and relationship to the borrower. When a gift from a relative or domestic partner is being pooled with the borrower s funds to make up the required minimum cash down payment, the following items must also be included: A certification from the donor stating that he or she has lived with the borrower for the past 12 months and will continue to do so in the new residence. Documents that demonstrate a history of borrower and donor shared residency. The donor s address must be the same as the borrower s address. Crescent Mortgage Company-Conventional Guidelines 9/29/

58 Verifying Donor Availability of Funds and Transfer of Gift Funds The Customer must verify that sufficient funds to cover the gift are either in the donor s account or have been transferred to the borrower s account. Acceptable documentation includes the following: A copy of the donor s check with the borrower s deposit slip and the resulting balance A copy of the donor s withdrawal slip with the borrower s deposit slip and the resulting balance A copy of the donor s check to the closing agent OR A settlement statement showing receipt of the donor s check When the funds are not transferred prior to settlement, document that the donor gave the closing agent the gift funds in the form of a certified check, a cashier s check, or other official check. 4.9 Gifts of Equity Gifts of Equity Enter a gift of equity in Section VI A. Documentation Requirements A signed gift letter and The HUD-1 Settlement Statement listing the gift of equity Crescent Mortgage Company-Conventional Guidelines 9/29/

59 4.10 Sales Contract Deposit Cash Deposit on Sales Contract (Earnest Money) In order to give the borrower credit for earnest money that is not already reflected in a liquid account, the Customer must enter the earnest money amount as follows. If the earnest money check Has cleared the borrower s bank account. Has not cleared the borrower s bank account. Then The amount can be entered as Other Credit in Section VII, where it is assumed to be verified. The amount can be included in a depository account, such as a checking or savings account. Do not enter the amount in both places. Verification of Source of Funds A Request for Verification of Deposit (Form 1006 or Form 1006S) or bank statements must indicate that the average balance for the past two months was large enough to support the amount of the deposit. The documentation must cover the period up to (and including) the date the check cleared the bank account. If it cannot be determined that these funds were withdrawn from the borrower s account, additional verification of the source and evidence that the funds have actually changed hands from the borrower should be provided. Large earnest money deposits and deposits that exceed the amount customary for the area should be closely evaluated. Documentation for Receipt of the Deposit Receipt of the deposit must be verified by either a copy of the borrower s canceled check or a written statement from the holder of the deposit-such as receipt from the title company. Crescent Mortgage Company-Conventional Guidelines 9/29/

60 4.11 Anticipated Sales Proceeds Net Equity (From Properties Pending Sale) If net equity is calculated from data in Section VI R and is also entered in Section VI A, DU will use the amount from Section VI A. When the net equity is Positive. Negative. Then the DU/LP finding must reflect Equity added the amount to the funds available for closing. Equity subtracted the amount from the funds available for closing. Determining the Amount of Net Proceeds The following table describes how to do a preliminary determination of the amount of net proceeds based on a borrower s anticipated equity. Sales Price Established? Yes. No. Net Proceeds Calculation Sales Price (Sales Costs + All Liens) = Estimated Proceeds 90% of Listing Price All Liens = Estimated Proceeds Note: The 10% adjustment factor that is applied to the listing price must be changed depending on market conditions. Proceeds from Sold Properties Proceeds from properties that have already been sold should be included in a depository account, such as a checking or savings account. Sales Proceeds Needed for Down Payment and Closing Costs A copy of the final Closing Statement on the existing home must be provided. Corporate Relocation Plans Obtain a copy of the executed buyout agreement to document the source of funds. The sales contract or a listing agreement is not considered an acceptable source. Crescent Mortgage Company-Conventional Guidelines 9/29/

61 4.12 Trade Equity The seller s equity contribution for the traded property must be a true-value consideration supported by a current appraisal. The borrower must make the minimum required contribution from his or her own funds unless the LTV or CLTV ratio is less than or equal to 80%. The trade should be evidenced by two separate contracts that have the buyer and the seller on one contract reversing roles on the second contract. Calculating the Equity Contribution The equity contribution is determined by subtracting the outstanding mortgage balance of the property being traded, plus any transfer costs, from the lesser of either the property s appraised value or the trade-in value agreed to by both parties. Documentation Requirements The transfer deed must be recorded, and the following documentation supplied: A search of the land records to verify the ownership of the property and to determine whether there are any existing liens on the property. Proof of title transfer and satisfaction of any existing mortgage liens for which the borrower was liable Rent Credit for Option to Purchase Credit for the down payment is determined by calculating the difference between the market rent and the actual rent paid for the last 12 months. The market rent is determined by the appraiser in the appraisal for the subject property. Documentation Requirements Obtain the following documentation: A copy of the rental/purchase agreement evidencing a minimum original term of at least 12 months which states the monthly rental amount and the terms of the lease. Copies of the borrower s rent canceled checks or money order receipts for the last 12 months. Market rent as determined by the subject property appraisal. Crescent Mortgage Company-Conventional Guidelines 9/29/

62 4.14 Sweat Equity Sweat equity is not an acceptable source of funds, 4.15 Borrowed Funds Secured by an Asset Secured Borrowed Funds Borrowers can borrow against an asset they own, such as a 401(k) account or other real estate. The amount of the secured loan should be entered as Secured Borrowed Funds in Section VI A. The secured loan amount should be subtracted from the market value of the actual asset, and the net asset value should be entered in the appropriate field in Section VI A. Loans that are secured against a liquid asset owned by the borrower (such as a 401(k) or mutual fund) do not have to be entered as liabilities. Loans that are secured against real estate, or any other non-liquid asset, must be entered as liabilities in Section VI Liabilities. Assets that may be used to secure funds include: Automobiles Artwork Collectibles Real estate Financial assets, such as: o Savings accounts o Certificates of deposit o Stocks o Bonds o 401(k) accounts Crescent Mortgage Company-Conventional Guidelines 9/29/

63 Secured Loans as Debt Debts secured by non-liquid assets must be considered as a debt. If the secured loan does not require monthly payments, an equivalent amount must be calculated and considered as a recurring debt. Loans are secured by the borrower s financial assets. Monthly payments for the loan do not have to be considered as long-term debt. Reducing the Asset by the Amount Borrowed If the borrower uses the same financial asset as part of his or her financial reserves, the Customer must reduce the value of the asset by the amount of proceeds and related fees for the secured loan. Documentation Requirements The terms of the secured loan. Evidence that the party providing the secured loan is not a party to the sale. Evidence that the funds have been transferred to the borrower Personal Unsecured Loans Personal unsecured loans are not an acceptable source of funds for the down payment, closing costs, or financial reserves Sale of Personal Assets Documentation Requirements The borrower s ownership of the asset The value of the asset, as determined by an independent and reputable source The transfer of ownership of the asset, as documented by either a bill of sale or a statement from the purchaser The borrower s receipt of the funds documented with deposit slips, bank statements, or copies of the purchaser s canceled check Crescent Mortgage Company-Conventional Guidelines 9/29/

64 4.18 Cash Value of Life Insurance If If penalties for failure to repay the loan are limited to the surrender of the policy. If additional obligations are indicated. Then Payments on a loan secured by the cash value of a borrower s life insurance policy do not have to be considered qualification. The obligation amount must be factored into the total qualification, or subtracted from the borrower s financial reserves. Documenting Borrower Receipt of Funds Obtain either a copy of the check from the insurer or copy of the payout statement issued by the insurer Anticipated Savings and Cash-on-Hand Anticipated Savings Anticipated savings is not an acceptable source of funds. Cash-on-Hand Cash-on-hand is not an acceptable source of funds Like-Kind Exchange Assets for the down payment from a like-kind exchange, also known as a 1031 exchange, are eligible if properly documented and in compliance with IRS Code Section Business Assets The use of business assets for a self-employed borrower as funds for closing and reserves must meet the following requirement. The borrower must be listed as an owner of the account and the account must be verified in accordance with the standard asset verification requirements. In addition, the lender must perform a business cash flow analysis to confirm that the withdrawal of funds for this transaction will not have a negative impact on the business. Crescent Mortgage Company-Conventional Guidelines 9/29/

65 SECTION 5: LIABILITIES AND DEBT OBLIGATIONS 5.0 Borrower s Monthly Housing Expense for Qualifying Purposes Monthly housing expense is the sum of the following and is referred to as PITIA: Principal and interest Hazard, flood and mortgage insurance premiums (as applicable) Real estate taxes Special assessments Any owners association dues Any subordinate financing payments on mortgages secured by the subject property. 5.1 Monthly Debt Obligations Alimony/Child Support/Separate Maintenance Payments Alimony, child support, or maintenance payments that must continue to be made for more than 10 months must be considered as part of the borrower s recurring monthly obligations. Voluntary payments do not need to be taken into consideration. DU: Fannie Mae allows lenders the option of reducing the borrower s monthly qualifying income by the amount of the monthly alimony payment in lieu of including it as a monthly payment in calculation of the debt ratio. THIS IS FOR ALIMONY PAYMENTS ONLY AND DOES NOT APPLY TO CHILD SUPPORT. Business Debt in Borrower s Name In order to exclude a monthly obligation that appears on the borrower s personal credit report that the borrower states is being paid by the borrower s business, all of the following conditions must be met: The account in question does not have a history of delinquency. The business provides acceptable evidence that the obligation was paid out of company funds (such as 12 months of canceled company checks). And The cash flow analysis of the business took payment of the obligation into consideration. The payment may not be excluded if: If the business does not provide sufficient evidence that the obligation was paid out of company funds. If the business provides acceptable evidence of its payment of the obligation, but the Customer s cash flow analysis of the business does not reflect any business expense related to the obligation (such as an interest expense and taxes and insurance, if applicable equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on the credit report and the age of the loan). It is reasonable to assume that the obligation has not been accounted for in the cash flow analysis. Crescent Mortgage Company-Conventional Guidelines 9/29/

66 If the account in question has a history of delinquency. To ensure that the obligation is counted only once, the net income should be adjusted by the amount of interest, taxes, or insurance expense, if any, that relates to the account in question. Court-Ordered Assignment of Debt When a borrower has outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the borrower does not receive a release of liability from the creditor, the borrower has a contingent liability the debt may be excluded from the monthly obligations. The Customer is not required to evaluate the payment history for the assigned debt after the effective date of the assignment. The Customer cannot disregard the borrower s payment history for the debt before its assignment. Mortgages Paid by Others When a borrower is obligated on a mortgage debt, but is not the party who is actually repaying the debt the monthly mortgage payment may be excluded from the calculation of the debt ratio if the party making the payments is obligated on the mortgage and can document the most recent 12 months payment history with no delinquencies with no assistance from the borrower. Crescent Mortgage Company-Conventional Guidelines 9/29/

67 Co-Signed Loans Documentation requirements to exclude a NON-MORTGAGE debt from qualifying ratios have been simplified. Non-mortgage debts included installment loans, student loans, and other monthly debts as defined in the Fannie Mae Guide. When documentation is provided to show the debt has been satisfactorily paid by another party for the past 12 months, then the debt can be excluded from the debt-to-income ratio calculation. This applies regardless of whether the other party is obligated on the loan. NOTE: This does not apply if the other party is an interested party to the subject transaction such as the seller or realtor. Home Equity Lines of Credit When the mortgage also has a HELOC that provides for a monthly payment of principal and interest, or interest only, the payment on the HELOC must be considered as part of the borrower s recurring monthly debt obligations. Deferred Installment Debt Deferred installment debts must be included as part of the borrower s recurring monthly debt obligations. For deferred installment debts other than student loans, if the borrower s credit report does not indicate the monthly amount that will be payable at the dent of the deferment period, the lender must obtain copies of the borrower s payment letters for forbearance agreements so that a monthly payment amount can be determined and used in calculating the borrower s total monthly obligations. Student Loans Fannie Mae If a payment is provided on the credit report, that amount can be used for qualifying purposes. If the credit report does not identify a payment amount (or reflects $0), the lender may use either 1% of the outstanding balance, or a calculated payment that will fully amortize the loan based on documented loan repayment terms. If the lender obtains documentation to evidence that the actual monthly payment is $0, the lender may qualify the borrower with the $0 payment as long as the $0 payment is associated with an income-driven repayment plan. Freddie Mac When a monthly payment is not reported on the credit report or is listed as deferred documentation must be provided to verify the monthly payment and the obligation must be included in the debt ratio calculation. If no monthly payment is reported and there is no documentation to show the proposed monthly payment, 1% of the outstanding balance will be considered. Installment Debt All installment debt that is not secured by a financial asset must be considered part of the borrower s monthly obligations if there are more than 10 monthly payments remaining. An installment debt with fewer monthly payments remaining must still be considered if it significantly affects the borrower s ability to repay. Lease Payments Lease payments must be considered as recurring debt regardless of the number of months remaining on the lease. Crescent Mortgage Company-Conventional Guidelines 9/29/

68 Loans Secured by Financial Assets Financial assets (life insurance policies, 401(k) accounts, individual retirement accounts, certificates of deposit, stocks, bonds, etc.) used as security for a loan do not have to be included in the borrower s obligations. Documentation must be provided such as a copy of the loan instrument that shows the borrower s financial asset as collateral for the loan. The value of the asset must be reduced by the amount of the secured loan (and any related fees) when calculating required cash to close and reserves. Unreimbursed Employee Expenses The lender must determine whether the borrower has unreimbursed employee business expenses for the following scenarios: When a borrower has commission income that represents 25% or more of the borrower s total annual employment income, or When an automobile allowance is included in the borrower s monthly qualifying income. The lender must determine the borrower s recurring monthly debt obligation for such expenses by developing a 24 month average of the expenses, using information from the borrower s IRS Form 1040 including all schedules (Schedule A and IRS Form 2106). Automobile depreciation claimed on IRS form 2106 should be netted out of this calculation. For both of the above scenarios when calculating the total debt-to-income ratio, the monthly average for unreimbursed expenses should be subtracted from the borrower s stable monthly income. Automobile lease or loan payments are not subtracted from the borrower s income; they are always considered part of the borrower s recurring monthly debt obligations. Revolving Charge/Lines of Credit Revolving charge accounts and unsecured lines of credit should be treated as long-term debts, If the credit report does not show a required minimum payment amount and there is no supplemental documentation to support a payment of less than 5%. The greater of 5% or $10 of the outstanding balance must be used as the monthly debt. Time Share Accounts Fannie Mae: Timeshare accounts are to be treated as installment loans rather than mortgage debt, even if they are identified as mortgage debt on the credit report or other documentation in the file. 5.2 Qualifying Impact of Other Real Estate Owned Mortgage Assumption When a borrower sells a mortgaged property and the property purchaser assumes the outstanding mortgage debt without a release of liability, the borrower has a contingent liability. The payment does not have to be considered as a part of the borrower s recurring debt if the property purchaser has at least a 12-month history of making regular, timely payments for the mortgage. Document this by obtaining: Evidence of the transfer of ownership. A copy of the formal, executed assumption agreement and proof the property purchaser has made the payments for the previous 12 months. And Crescent Mortgage Company-Conventional Guidelines 9/29/

69 A credit report indicating that consistent and timely payments were made for the assumed mortgage. If documentation of timely payments during the most recent 12-month period cannot be obtained, the applicable mortgage payment must be counted as part of the borrower s monthly debt. Current Principal Residence Pending Sale If the borrower's current principal residence is pending sale, but the transaction will not close with title transfer to the new owner prior to the new transaction, the current PITIA and the proposed PITIA must be used in qualifying the borrower for the new mortgage loan. Documentation of minimum reserves of six months PITIA for both properties is required. Conversion of Current Principal Residence Requirements Conversion of Current Principal Residence to a Second Home If the borrower is converting a current principal residence to a second home, both the current and proposed mortgage payments (PITIA) must be used to qualify, the borrower for the new transaction. In addition, the minimum reserve requirements must be met. Crescent Mortgage Company-Conventional Guidelines 9/29/

70 5.3 Debts Paid Off At/Prior to Closing Payoff or Paydown of Debt for Qualification Payoff or paydown of debt solely to qualify must be carefully evaluated and considered in the overall underwriting decision. The borrower s history of credit use should be a factor in determining whether the appropriate approach is to include or exclude debt for qualification. Installment loans that are being paid off or paid down to 10 or fewer remaining monthly payments should generally not be included in the borrower s debt. If a revolving account is to be paid off, a monthly payment on the current outstanding balance does not need to be included in the borrower's debt. Open 30-Day Charge Accounts For open 30-day charge accounts that do not reflect a monthly payment on the credit report, or 30-day accounts that reflect a monthly payment that is identical to the account balance, lenders must verify borrower funds to cover the account balance. The verified funds must be in addition to any funds required for closing costs and reserves. Note: DU will include the balance of the 30-day charge accounts on the loan application in the Reserves Required to be Verified amount shown on the DU Underwriting Findings Report. However, for transactions that do not required the verification of reserves, the balance of 30-day charge account sin the Reserves Required to be Verified amount will be reduced by any cash out the borrower will received through the transaction. If the borrower paid off the account balance prior to closing, the lender may provide proof of payoff in lieu of verifying funds to cover the account balance. Collections, Charge-Offs, Judgments, Garnishments, and Liens Delinquent credit including taxes, judgments, charged-off accounts tax liens, mechanics or materialmen s liens, and liens that have the potential to affect first lien position or diminish the borrower s equity must be paid off at or prior to closing. Crescent Mortgage Company-Conventional Guidelines 9/29/

71 SECTION 6: APPRAISAL/COLLATERAL REQUIREMENTS 6.0 Introduction Crescent will comply with Appraiser Independence Requirements (AIR) guidelines, described below. Appraisal reports must meet USPAP appraisal standards. An appraiser must be, at a minimum, certified by the state in which the property to be appraised is located, in accordance with the provisions of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of Age of Appraisal and Age of Property Inspection Report When Appraisal reports are more than four months old on the date of the note and mortgage regardless of whether the property was appraised as proposed or existing construction. Then Appraisers must perform an update which includes both of the following: Inspect the interior of the property. Review current market data to determine whether the property has declined in value since the date of the original appraisal. If The appraiser indicates the property value has declined. Then The lender must obtain a new appraisal for the property. Crescent Mortgage Company-Conventional Guidelines 9/29/

72 6.2 Appraiser Engagement All appraisals shall be ordered in accordance with appraisal independence guidelines and Crescent Policy. Appraiser Independence Requirements (AIR) Safeguards In compliance with AIR, no employee, director, or agent of the Customer, or any other third party acting as joint venture partner, independent contractor, appraisal company, appraisal management company, or partner on behalf of Customer, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or in any other manner including but not limited to: 1. Withholding or threatening to withhold timely payment or partial payment for an appraisal report. 2. Withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser. 3. Expressly or impliedly promising future business, promotions, or increased compensation for an appraiser. 4. Conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary value estimate requested from an appraiser. 5. Requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser s completion of an appraisal report. 6. Providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided. 7. Providing to an appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or appraisal management company, stock or other financial or non-financial benefits. 8. Removing an appraiser from a list of qualified appraisers, or adding an appraiser to an exclusionary list of disapproved appraisers, in connection with the influencing or attempt to influence an appraisal as described above (this prohibition does not preclude the management of appraisers lists for bona fide administrative or quality-control reasons based on written policy) and 9. Any other act or practice that impairs or attempts to impair an appraiser s independence, objectivity, or impartiality, or violates law or regulation, including, but not limited to, the Truth in Lending Act (TILA) and Regulation Z, or the Uniform Standards of Professional Appraisal Practice (USPAP). Crescent Mortgage Company-Conventional Guidelines 9/29/

73 Loan Production Staff Loan production staff, as well as any employee who is 1) compensated on a commission basis upon the successful completion of a loan or 2) reports, ultimately, to any officer not independent of the loan production staff and process, shall be forbidden from: Selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment, or for inclusion on a list or panel of appraisers approved to perform appraisals for the Customer or forbidden from performing such work. and Having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment. Borrower Receipt of Appraisal The borrower shall be provided a copy of any appraisal report concerning the borrower s subject property, promptly upon completion, at no additional cost to the borrower, and in any event no less than three days prior to the closing of the loan. The borrower may waive this three-day requirement by signing a waiver. Crescent or any third party specifically authorized by Crescent (including, but not limited to, appraisal companies, appraisal management companies, and Customer lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. Crescent Mortgage Company-Conventional Guidelines 9/29/

74 Loan Closing Requirement The Borrower is required to receive a copy of their appraisal no less than three days prior to closing unless a signed waiver of the three-day requirement is received from the borrower(s) before closing. The rescission period in a refinance transaction does not constitute a valid threeday period. 6.3 Appraisal Format Requirement Required Forms All appraisals must be completed on the most recent revision of the appropriate Fannie Mae/Freddie Mac form with all appropriate addenda. Required Photos Original 35mm or similar quality laser/digital color photos showing: Front, rear, and street scene of subject. Front of all comparable sales. Outbuildings, pools, and special features. Interior photos, including kitchen. Any homes in process of repair, recently rehabbed, or deferred maintenance require photos of such deferred or repair. Crescent Mortgage Company-Conventional Guidelines 9/29/

75 Required Exhibits Detailed location map showing location of subject and all comparable sales. Building sketch showing exterior dimensions. Floor plan sketch is required for unique or functionally obsolete properties. Report pages with original or protected laser/digital signature(s) of appraiser(s). Form 439 (Statement of Limiting Conditions). Supplemental Addendum. 6.4 FMV Approach Requirements The appraiser must consider the three traditional approaches in estimating the value of the property, i.e., cost, sales comparison, and income. If the subject property is a multi-unit rental property, the appraiser must complete the income approach. The appraiser must make both an exterior and interior inspection of the property. All rooms of the subject must be inspected. 6.5 Appraisal Reporting Requirements Site Value When the estimated site value exceeds 30% of the estimated market value of the subject, comment by the appraiser is required on the impact to marketability and whether it is common to the area. Crescent Mortgage Company-Conventional Guidelines 9/29/

76 Age of Sales Comparable sales should be dated within six months of the date of the appraisal. If no recent comparable sales are available, older sales (up to one year) must be carefully explained. Sale number four and greater may be over one year when used to support major areas of concern. Distance All comparable sales should be within one mile or 10 city blocks of the subject property. Urban properties should have some sales located on the same street or within three city blocks. Sales should not be located across major natural or man-made boundaries, such as rivers, lakes, interstate highways, and county or state lines, without extensive explanation and support by the appraiser. At least one sale should always be in the same subdivision, condo project, or HOA. If it is necessary to go further than five miles for any comparable sale, the property should be classified as rural and appraisal review by management may be required. Property Type The appraiser should make an attempt to provide comparable sales that are the same age, design, appeal, and quality as the subject property. If the subject is a 2 unit property, all comparable sales in the sales comparison approach must be 2 unit properties. Condominiums also require all condominium comparables. If the subject property is new construction located in a tract development, at least one comparable sale should be a resale, or located outside the specific housing tract or development in which the subject property is located, to support marketability. 6.6 Property Requirements Obsolescence and Repairs The appraiser must comment on all forms of physical, functional, and economic obsolescence, and specify the cause of each. If repairs are needed, the appraiser must list and estimate the cost of the repairs. Repairs exceeding 10% of the property value are excessive and require repairs to be completed prior to final approval. Appraisal reports Subject to completion per plans and specs are then conditioned upon the receipt of an Appraisal Update and Completion Report 1004D. Properties determined to be unique in design/functionally, or economically obsolete or physically unacceptable as collateral will be elevated to an Underwriting Manager. Crescent Mortgage Company-Conventional Guidelines 9/29/

77 Fair Property Condition Properties rated in C-5 condition are not eligible for financing. The Appraiser must comment on the impact to the subject s marketability and cost to cure of the condition. Properties rated C-5 must be repaired, and the appraiser must perform a re-inspection, with photos, upgrading the condition of the property. Square Footage Subject properties with living areas of less than 800 square feet are generally not acceptable as collateral. However, exceptions may be made by an Underwriting Manager provided that the comparables are of the approximate same size as the subject, and are common to the area. Acreage The property site should be of a size, shape, and topography that is generally conforming and acceptable in the market area. The appraisal must include the actual size of the site and not a hypothetical portion of the site. For example, the appraiser may not appraise only five acres of an un-subdivided 40-acre parcel. The appraised value must reflect the entire 40-acre parcel. Multiple Lots/Parcels Each appraisal report should represent the value of only one parcel of land and improvements thereon. On occasion, reports are received which include more than one lot or Assessor s Parcel Number (APN). In the case of multiple lots with separate APNs, the determination of acceptability is whether the extra lot(s) are vacant, attached, and valued as excess land, and not as separate buildable parcels. It may be necessary to obtain a survey showing location of improvements and rights to ingress and egress. Structural Any recommendation by the appraiser regarding structural issues or settlement must be addressed in a licensed engineer s report. The report must reflect that no corrective action is required and the structure is sound. If repairs are required, repairs must be completed prior to closing with a paid receipt from the contractor and a 1004D, with photos, from the appraiser. No escrows are allowed. Pest Inspections A notation by the appraiser referencing pest infestation will require an inspection by a licensed pest control specialist. All recommended treatment must be performed prior to closing. Verification will be a completion certificate and paid receipt from the pest company performing the work. Crescent Mortgage Company-Conventional Guidelines 9/29/

78 Required Statements and Addendum If any guidelines are exceeded, an addendum explaining the impact on marketability and whether it is common and customary for the area is required. All properties classified as Legal-Nonconforming use must include a statement from the appraiser as to whether the property can be rebuilt in its existing design, use, and utility, and any impact on marketability. Significant increases in value, such as market conditions, home improvements, or additions, over the last 24 months must be addressed by the appraiser. 6.7 Pre-Funding Review Requirements All appraisals are run through agency appraisal review systems such as Fannie Mae s Collateral Underwriter. Appraisals that have a high risk score for over-valuation or data integrity will require a second review by Crescent s Underwriting Management Team. This review may result in additional information being required from the original appraiser, additional documentation from a third party such as a local inspector, a desk review of the appraisal, or in rare cases a complete second appraisal. The final decision for property and appraisal acceptability lies with Crescent s underwriting department. 6.8 Crescent Appraisal Quality Control Testing The Crescent Quality Control department will comply with existing Fannie Mae appraisal review guidelines (Selling Guide, Part I, Section ), as well as Freddie Mac guidelines (Guide Chapter 48). Specifically, Crescent will randomly select 10% (or other bona fide statistically significant percentage) of the appraisals or valuations, including the results of automated valuation models, Customer s price opinions, or desktop evaluations. Crescent will provide to Fannie Mae or Freddie Mac a report of any adverse, negative, or irregular findings of such quality control testing, and any findings indicating non-compliance with any provision of this Code of Conduct, with respect to loans sold to Crescent Mortgage and Freddie Mac respectively. 6.9 Referrals of Appraisal Misconduct Reports Subsequent to a documented review of the facts by Crescent Quality Control, if there exists a reasonable basis to believe an appraiser or appraisal Management Company is violating applicable laws, or is otherwise engaging in unethical conduct, Crescent QC shall promptly refer the matter to the applicable State appraiser certifying and licensing agency or other relevant regulatory bodies. Crescent Mortgage Company-Conventional Guidelines 9/29/

79 6.10 Condominium Policy Overview Crescent will only approve condominiums when the project meets Crescent s Limited Condo Review policy as published by CMC underwriting department. Ineligible Project Types The following types of projects are ineligible for FNMA purchase: Projects that are managed and operated as a hotel or motel. Projects that include registration services, or offer unit rentals on a daily basis. Hotel or motel conversions (or conversions of other similar transient properties) Any project that includes the word hotel or motel in its name. Any project that restricts the owner s ability to occupy the unit. Projects with mandatory pooling agreements which require unit owners to rent their units, or gives a management firm control over the occupancy of the units. Projects with non-incidental business operations which are owned or operated by the homeowner s association, such as a restaurant, spa, or health club. Projects characterized as investment opportunities or listed as investment securities (with documents filed with the Securities and Exchange Commission). Timeshares. Houseboat projects. Common interest apartments or community apartment projects, where several owners as tenants-in-common or an HOA have an undivided interest in a residential apartment building and land, and have exclusive rights of occupancy to specific apartments in the building. Projects with 20% or more total space used for non-residential purposes. New projects where the builder/seller is offering financing structures or interested party contributions beyond the max allowed by FNMA. Projects where a single entity owns more than 10% of the total units in the project. Multi-dwelling unit condos or co-ops projects that permit ownership of more than one unit, but are secured by only one deed, and financed by a single mortgage. Projects with a legal but non-conforming use of the land, if they cannot be rebuilt to the same usage and/or density if 100% destroyed. Projects that involve the leasing of the land and the improvements to a co-op corporation, even if that corporations owns part of the building. Projects with any environmental hazards noted. Projects for which the homeowners association, or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project. o Projects for which the lender determines that pending litigation involves minor Crescent Mortgage Company-Conventional Guidelines 9/29/

80 matters are not considered ineligible projects, provided the lender concludes that the pending litigation has no impact on the safety, structural soundness, habitability, or functional use of the project. The following are defined as minor matters: Non-monetary litigation involving neighbor disputes or rights of quiet enjoyment. Litigation for which the claimed amount is known, the insurance carrier has agreed to provide the defense, and the amount is covered by the association or co-op corporations insurance. The homeowners association or co-op corporation is named as the plaintiff in a foreclosure action, or as a plaintiff in an action for past due homeowners association dues. If the lender is aware of pending litigation and is unable to determine whether the litigation may be deemed a minor matter, the lender may contact Fannie Mae s Project Standards team to determine whether Fannie Mae will accept delivery of mortgages secured by units in the project. Crescent Mortgage Company-Conventional Guidelines 9/29/

81 Project Insurance Requirements Hazard Insurance Crescent must review the entire condo project insurance policy to ensure the owners association maintains a master or blanket type of insurance policy, with premiums being paid as a common expense. The policy must cover all of the general and limited common elements that are normally included in coverage. These include fixtures, building service equipment, and common personal property and supplies belonging to the homeowners association. The policy also must cover fixtures, equipment, and replacement of improvements, and betterment coverage to cover any improvements that the borrower may have made. If the master or blanket policy does not cover the unit's interior, then the borrower must obtain a walls-in policy, commonly known as an HO-6 policy. The HO-6 insurance policy must provide coverage in an amount that is no less than 20% of the condo unit s appraised value. The standard requirement for a 5% deductible applies. Flood Insurance For projects located in a Special Flood Hazard Area (SFHA), the following insurance requirements apply: The policy must cover common element buildings and any other common property. When the project consists of high-rise or other vertical buildings, the homeowners association must obtain a Residential Condominium Building Association Policy for each building that is located in an SFHA. The policy must cover all of the common elements and property, as well as each of the individual units in the building. A separate policy is required for each dwelling unit that secures a mortgage that is delivered when an HOA refuses to obtain a Residential Condominium Building Association Policy, or when the Residential Condominium Building Association Policy does not comply with Fannie Mae s insurance requirements. The coverage required for the individual unit should be based on the coverage requirement for first mortgages secured by one- to four-unit properties, as specified above. Owners of co-op units are not generally required to obtain individual flood insurance policies. Liability Insurance Crescent must verify liability insurance coverage as part of its review of a project. The homeowners association must maintain a commercial general liability insurance policy for the entire project, including all common areas and elements, public ways, and any other areas that are under its supervision. The insurance must also cover commercial spaces that are owned by the homeowners association, even if those spaces are leased to others. The commercial general liability insurance policy must provide coverage for bodily injury and property damage that result from the operation, maintenance, or use of the project s common areas and elements. The amount of coverage must be at least $1 million for bodily injury and property damage for any single occurrence. For co-op projects that consist of elevator buildings, the minimum coverage is $3 million. Higher amounts of coverage may be required if similar amounts are usually required by mortgage investors in other projects in the area. Crescent Mortgage Company-Conventional Guidelines 9/29/

82 If the policy does not include severability of interest in its terms, Crescent requires a specific endorsement to preclude the insurer s denial of a unit owner s claim because of negligent acts of the homeowners association (or co-op corporation), or of other unit owners. The policy should provide for at least 10 days written notice to the HOA (or Co-op Corporation) before the insurer can cancel or substantially modify it. For condo and co-op projects, similar notice also must be given to each holder of a first mortgage or share loan on an individual unit in the project. Fidelity Insurance Projects Requiring Fidelity Insurance Fidelity insurance is required for condo projects consisting of more than 20 units. This requirement applies to all condo review processes. In states that have statutory fidelity insurance requirements, Crescent will accept those requirements in place of its own. Crescent must verify coverage as part of its review of the project. Who Should Be Covered The HOA must have blanket fidelity insurance coverage for anyone who either handles or is responsible for funds that it holds or administers, whether or not that individual receives compensation for services. The insurance policy should name the homeowners association as the insured, and the premiums should be paid as a common expense by the association. A management agent that handles funds for the HOA should be covered by its own fidelity insurance policy, which must provide the same coverage required of the homeowners association. Amount of Coverage The policy must cover the maximum funds that are in the custody of the HOA or its management agent at any time while the policy is in force. A lesser amount of coverage is acceptable if the project s legal documents require the HOA and any management company to adhere to one or more of the following financial controls. Note: Even with the following financial controls, the fidelity insurance coverage must equal at least the sum of three months of assessments on all units in the project. Separate bank accounts are maintained for the working account and the reserve account, each with appropriate access controls, and the bank in which funds are deposited sends copies of the monthly bank statements directly to the HOA. The management company maintains separate records and bank accounts for each HOA that uses its services, and the management company does not have the authority to draw checks on, or transfer funds from, the HOA s reserve account. Two members of the Board of Directors must sign any checks written on the reserve account. Cancellation/Modification Requirements The policy for a condo project must include a provision that calls for ten days written notice to the HOA (or insurance trustee) before the policy can be canceled or substantially modified for any reason. Crescent Mortgage Company-Conventional Guidelines 9/29/

83 Title Insurance The title insurance policy for a condo or PUD unit mortgage must describe all components of the unit estate. For condo unit mortgages, an ALTA 4-06 or endorsement or its equivalent is required. For PUD unit mortgages, an ALTA 5-06 or endorsement or its equivalent is required. These endorsements must be attached to each policy or incorporated in the text of the policy. If the unit owners own the common areas of the project as tenants in common, the policy for each unit mortgage must reflect that ownership. If the HOA owns the common elements, areas, or facilities of the project separately (or holds them in a leasehold estate), the title insurance on those areas must insure that ownership. This title policy must show that title to the common elements, areas, or facilities is free and clear of any objectionable liens and encumbrances, including any statutory or mechanic s liens for labor or materials related to improvements on the common areas that began before the title policy was issued. The title policy must protect Crescent by insuring all of the following: The mortgage is superior to any lien for unpaid common expense assessments. (In jurisdictions that give these assessments a limited priority over a first or second mortgage lien, the policy must provide assurance that those assessments have been paid through the effective date of the policy.) Insured against any impairment or loss of title of Fannie Mae s first or second lien caused by any past, present, or future violations of any covenants, conditions, or restrictions of the master deed for the project. (It must specifically insure against any loss that results from a violation that existed as of the date of the policy.) The unit does not encroach on another unit or on any of the common elements, areas, or facilities. (The policy also must insure that there is no encroachment on the unit by another unit or by any of the common elements, areas, or facilities.) The mortgage loan is secured by a unit in a condo project that has been created in compliance with the applicable enabling statutes. Real estate taxes are assessable and lienable only against the individual condo unit and its undivided interest in the common elements, rather than against the project as a whole. The owner of a PUD unit is a member of the HOA and the membership is transferable if the unit is sold. Crescent Mortgage Company-Conventional Guidelines 9/29/

84 Eligibility Requirements Any project reviewed using the Limited Review process must meet all of the following criteria: The project is not an ineligible project. The project is not comprised of manufactured homes. The project must be an established project. No more than 20% of the total square footage of the project can be used for commercial purposes. All units in the project must be owned in fee simple. No more than 15% of the total units in the project may be 30 days past due on their HOA dues. Crescent cannot be a preferred lender of the HOA or the developer, targeting the project with specific marketing efforts. Additional Requirements for Detached Condo Units The mortgage is secured by a single detached unit in the condo project. The mortgage is not secured by a manufactured home. The appraiser has commented on any effect of buyer resistance of the condo form of ownership on the market value of the subject, and has reflected this in the appraisal report. If the project is new, the appraiser must use at least one detached condominium comp, either within the project or from a competing project, if the condo unit is offered by a builder other than the one that built the subject unit. All required title, hazard, and flood insurance requirements for condominiums are met. Project Eligibility Waiver for Fannie Mae to Fannie Mae Limited Cash-out Refinances Condominium project eligibility is amended for certain Fannie Mae loans that are being refinanced as a limited cash-out refinance. The lender must confirm the following: The LTV ratio is no higher than 80% (CLTV and HCLTV ratios may be higher); AND The project has the required project-related property and flood insurance coverage; AND The project is not a condo hotel, houseboat project, or a timeshare/segmented ownership project. The loan must be delivered with Project Type Code V and any applicable SFCs that apply. Crescent Mortgage Company-Conventional Guidelines 9/29/

85 SECTION 7: LOAN PURPOSE 7.0 Purchase Transactions General Purchase Transaction Eligibility Requirements General Requirements The minimum borrower contribution requirements for the selected mortgage loan type must be met. Proceeds from the transaction must be used to: Finance the acquisition of the subject property. Finance the acquisition and rehabilitation of the subject property. Convert an interim construction loan or term note into permanent financing. Or Pay off the outstanding balance on the installment land contract or contract for deed. Proceeds from the transaction may not be used to give the borrower cash back other than an amount representing reimbursement for the borrower s overpayment of fees and/or a legitimate pro-rated real estate tax credit in locales where real estate taxes are paid in arrears. Non-Arm's Length Transactions Crescent will consider purchase mortgage loans if the borrower has a relationship or business affiliation (any ownership or employment) with the builder, developer, or seller of the property for primary residences and second homes only. Transactions for investment properties must be at arms length. 7.1 Limited Cash-Out Refinance Transactions Eligibility Requirements Limited cash-out refinance transactions must meet the following requirements: The transaction is being used to pay off an existing first mortgage by obtaining a new first mortgage secured by the same property. A subordinate lien used to purchase the property may also be paid off and included in the new mortgage. The subject property must not be currently listed for sale. It must be taken off the market prior to underwriting approval. If property was taken off the market within 30 days of loan application, up until the time of underwriting approval, an acceptable letter of explanation from the borrower is required as well as a statement that they do no intend to relist the property after closing. The borrowers must confirm their intent to occupy the subject property. Crescent Mortgage Company-Conventional Guidelines 9/29/

86 Ineligible Transactions No outstanding first lien on the subject property. The proceeds are used to pay off a subordinate lien that was not used to purchase the property. A short-term refinance mortgage loan that combines a first mortgage and a non-purchase money subordinate mortgage into a new first mortgage or any refinance of that loan within six months. The subject property is currently listed for sale. The existing mortgage is a restructured mortgage Eligible Transactions Modifying the interest rate and/or term for existing mortgages. Paying off the unpaid principal balance of the existing first mortgage (including prepayment penalties). Financing the payment of closing costs, prepaid items, and points. With the exception of real estate taxes that are more than 60 days delinquent, the borrower can include real estate taxes in the new loan amount as long as an escrow account is established, subject to applicable law or regulation. (For example, if a particular state law does not allow a lender to require an escrow account under certain circumstances, the loan would be eligible as a limited cash-out refinance without an escrow account.) Cash back does not exceed the lesser of 2% of the balance of the new refinance mortgage or $2000 (Texas loans restricted to no cash back). $250 for HARP loans. Buying out a co-owner pursuant to court order. Paying off a subordinate mortgage lien (including prepayment penalties) used to purchase the subject property. Documentation must be provided to show that the entire amount of the subordinate financing was used to acquire the property. The following are acceptable forms of documentation: A copy of the HUD-1 Settlement Statement for the purchase of the property. A copy of the title policy from the purchase transaction that identifies the subordinate financing. Other documentation from the purchase transaction that indicates that a subordinate lien was used to purchase the subject property. Existing Subordinate Liens That Will Not Be Paid Off The existing liens must be clearly subordinate to the new refinance mortgage. The refinance mortgage must meet eligibility criteria for mortgages that are subject to subordinate financing. Crescent Mortgage Company-Conventional Guidelines 9/29/

87 New Subordinate Financing When a borrower obtains new subordinate financing with the refinancing of a first mortgage loan the transaction is still considered as a limited cash-out refinance provided the first mortgage loan meets the eligibility criteria for a limited cash-out refinance. It is acceptable for borrowers to obtain cash from the proceeds of the new subordinate mortgage. Refinances to Buy Out an Owner s Interest A transaction that requires one owner to buy out the interest of another owner (e.g., as a result of a divorce settlement or dissolution of a domestic partnership) is acceptable as a limited cash-out refinance provided that the secured property was jointly owned for at least 12 months preceding the date of the mortgage application. All parties must sign a written agreement that states the terms of the property transfer and the proposed disposition of the proceeds from the refinance transaction. Refinances of a property which was recently inherited require documentation that the security property was jointly owned by all parties for at least 12 months preceding the date of application. Borrowers who acquire sole ownership of the property may not receive any of the proceeds from the refinancing. Exceptions to Limited Cash-Out Refinance Requirements for DU Refi Plus and LP Open Access Certain exceptions to the standard limited cash-out refinance requirements exist for DU Refi Plus and LP Open Access loans. The borrower is not permitted to pay off any existing subordinate liens with the proceeds of a new DU Refi Plus or LP Open Access. The borrower may only receive up to $250 cash back at closing. Refer to the Crescent FNMA DU Refi Plus and Crescent LP Open Access guidelines for additional information. Crescent Mortgage Company-Conventional Guidelines 9/29/

88 7.2 Cash-Out Refinance Transactions Eligibility Requirements Cash-out refinance transactions must meet the following requirements: The transaction must be used to pay off existing mortgages, or be a new mortgage on a property that does not have a mortgage lien against it. All properties that have been listed must be taken off the market prior to underwriting approval. Properties listed for sale within 3 months of application date will need a letter signed by the borrower(s) explaining the listing and the reason removed. The letter must also certify that they plan to maintain the subject property as their primary residence for 12 months following closing. The letter of explanation will require second review by an underwriting manager. The property must have been purchased by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following: There is no waiting period if the lender documents that the borrower acquired the property through inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership. The delayed financing requirements are met. Ineligible Transactions The mortgage is subject to a temporary interest rate buydown. The subject property was purchased by the borrower within the six months preceding the disbursement date of the new mortgage, except if delayed financing guidelines are met. The subject property is listed for sale at the time of disbursement of the new mortgage loan. The existing mortgage is a restructured mortgage. Transactions in which a portion of the proceeds of the refinance is used to pay off the outstanding balance on an installment land contract, regardless of the sate the installment land contract was executed. The new loan amount includes the financing of real estate taxes that re more than 60 days delinquent and an escrow account is not established, unless requiring an escrow account is not permitted by applicable law or regulation. For example, if a particular state law does not allow a lender to require an escrow account under certain circumstances, the loan would be eligible for sale for Fannie Mae without an escrow account. Eligible Transactions Paying off the unpaid principal balance of the existing first mortgage. Financing the payment of closing costs, prepaid items, and points. Paying off any outstanding subordinate mortgage liens of any age. Taking equity out of the subject property that may be used for any purpose. Financing a short-term refinance mortgage loan that combines a first mortgage and a non-purchase-money subordinate mortgage into a new first mortgage or a refinance of the short term refinance loan within six months. Crescent Mortgage Company-Conventional Guidelines 9/29/

89 Acceptable Uses The following are acceptable uses for cash-out refinance transactions: Paying off the unpaid principal balance of the existing first mortgage; Financing the payment of closing cost, points, and prepaid items. The borrower can include real estate taxes in the new loan amount. Delinquent real estate taxes (taxes past due by more than 60 days) can also be included in the new loan amount, but if they are, an escrow account must be established, subject to applicable law or regulation; Paying off any outstanding subordinate mortgage liens of any age; Financing short-term refinance mortgage loan that combines a first mortgage and no non-purchase-money sub ordinate mortgage into a new first mortgage or a refinance of the short-term refinance loan within six months. Student Loan Cash-Out Refinance Provides the ability to pay off one or more student loans through the refinance transaction. The loan level price adjustment that applies to cash-out refinance transactions is waived when all requirements for this feature have been met. The Student Loan Cash-Out Refinance feature contains elements of both a cash-out refinance and a limited cash-out refinance transaction as described in the table below. The Special Feature Code (SFC) of 841 must be used to identify a Student Loan Cash-Out Refinance transaction. Crescent Mortgage Company-Conventional Guidelines 9/29/