TABLE OF CONTENTS... 1 CHAPTER 1 INTRODUCTION... 9 1.1 GOALS AND OBJECTIVES... 9 1.2 REQUIRED REVIEW... 9 1.3 APPLICABILITY... 9 CHAPTER 2 ACCOUNTABILITY AND MONITORING... 10 2.1 INTERNAL CONTROLS... 10 CHAPTER 3 STAFF AND TRAINING... 11 3.1 ONGOING TRAINING... 11 3.2 NEW HIRE TRAINING... 12 CHAPTER 4 GENERAL INFORMATION... 13 CHAPTER 5 GENERAL REQUIREMENTS... 14 5.1 REGULATORY REQUIREMENTS... 14 5.1.1 Construction-to-Permanent Disclosures... 14 5.1.2 Rural and Underserved Counties... 15 5.2 ELIGIBLE BORROWERS... 15 5.2.1 Borrower... 15 5.2.2 Co-Borrower... 15 5.2.3 Non-Occupant Co-Borrower... 16 5.2.4 Non-Borrowing Spouse/Non-Purchasing Spouse... 16 5.2.5 Separated Borrower... 16 5.2.6 First-Time Homebuyer... 16 5.2.7 Inter Vivos Revocable Trust... 16 5.2.8 Non-U.S. Citizen... 17 5.2.9 Non-Permanent Resident Alien (Non-Immigrant)... 17 5.2.10 Permanent Resident Alien (Immigrant)... 20 5.2.11 Power of Attorney... 20 5.3 INELIGIBLE BORROWERS... 20 5.3.1 Diplomatic Status... 20 5.3.2 Co-Signers... 20 5.3.3 Other Ineligible Borrowers... 20 5.4 OCCUPANCY... 21 5.4.1 Primary Residence... 21 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 1
5.4.2 Second Home... 21 5.4.3 Investment Property... 21 5.5 TRANSACTION TYPES... 22 5.5.1 Purchase... 22 5.5.2 Refinance... 22 5.5.3 Cash-out Refinance... 24 5.6 TEXAS OWNER-OCCUPIED HOMESTEAD PROPERTY... 25 5.6.1 General Requirements... 25 5.6.2 Purchase Transaction Requirements... 27 5.6.3 Refinance Requirements... 28 5.6.4 Agency Cash-Out Refinances... 31 5.6.5 Texas 50(a)(6) Fee Restrictions... 32 5.6.6 Texas 50 (a)(6) Appraisal Requirements... 33 5.6.7 Texas 50 (a)(6) Title Insurance... 33 5.6.8 Texas 50 (a)(6) Right to Rescind... 33 5.6.9 Texas 50 (a)(6) Closing Date Requirements... 34 5.6.10 Ineligible Loan Programs... 34 5.6.11 Required Documents... 34 5.7 TITLE VARIATIONS... 35 5.7.1 Fee Simple... 35 5.7.2 Leasehold Estate (Requires Prior Approval)... 35 CHAPTER 6 FANNIE MAE DESKTOP UNDERWRITER... 37 6.1 CONFORMING LOANS... 37 6.1.1 Loans with Approve/Eligible Recommendation... 37 6.1.2 Loans with a Refer to Lender s Underwriter Recommendation... 38 6.1.3 Loan Delivery Requirements... 38 6.2 NON-CONFORMING LOANS... 38 6.2.1 Basic Program Criteria... 38 6.2.2 Reserves... 39 CHAPTER 7 FREDDIE MAC LOAN PRODUCT ADVISOR... 40 7.1 CONFORMING LOANS... 40 7.1.1 Loans with an Accept Risk Class... 40 7.1.2 Loans with a Caution Risk Class... 40 7.1.3 Loan Delivery Requirements... 41 7.2 SUPER CONFORMING LOANS... 41 7.3 COLLATERAL REPRESENTATION AND WARRANT RELIEF... 42 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 2
CHAPTER 8 CONFORMING CONVENTIONAL LOANS... 43 8.1 GENERAL INFORMATION... 43 8.2 ABILITY TO REPAY (ATR) ELIGIBILITY... 43 8.2.1 ATR Covered Loan... 43 8.2.2 ATR Exempt Loan... 44 8.2.3 Prepayment Penalties... 45 8.2.4 Qualifying Interest Rates for ARMs... 45 8.2.5 Other Changes Relating to ATR... 45 8.3 QUALIFIED MORTGAGES (QM)... 45 8.3.1 Types of Qualified Mortgages... 45 8.3.2 Appendix Q... 46 8.4 LOAN-TO-VALUE RATIOS AND OCCUPANCY REQUIREMENTS... 46 8.5 AGE OF DOCUMENTS... 47 8.6 UNDERWRITING DOCUMENTATION... 48 8.6.1 Direct Written Verifications... 48 8.6.2 Additional Documentation... 48 8.7 ALTERNATIVE DOCUMENTATION... 48 8.7.1 Eligibility Criteria... 48 8.7.2 Fax Copies... 49 8.7.3 Internet Documentation... 49 8.7.4 Reverification Authorization... 49 8.8 CREDIT... 50 8.8.1 Credit History... 50 8.8.2 Credit Score Requirements... 50 8.8.3 Credit Score Selection... 50 8.8.4 Adverse Credit... 51 8.8.5 Delinquent Payments... 51 8.8.6 Limited or Non-Traditional Credit History... 52 8.8.7 Inaccurate Credit History... 52 8.8.8 Bankruptcy and Short Sale... 52 8.8.9 Foreclosure... 53 8.9 LONG TERM DEBT... 53 8.9.1 Pay Down of Debt... 53 8.9.2 Revolving Accounts... 53 8.9.3 Loans Secured by Retirement Accounts... 53 8.9.4 Home Equity Lines of Credit (HELOCs)... 53 8.9.5 Deferred Payment Accounts... 54 8.9.6 Student Loans... 54 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 3
8.9.7 Contingent Liabilities... 55 8.10 DOWN PAYMENT GUIDELINES... 56 8.10.1 Minimum Down Payment Requirements... 56 8.10.2 Cash Assets for Down Payment and Closing Costs... 56 8.11 SUBORDINATE FINANCING... 63 8.11.1 Terms... 63 8.11.2 Acceptable Documentation... 64 8.12 QUALIFYING RATIOS... 65 8.13 HOUSING-TO-INCOME RATIO... 65 8.14 DEBT-TO-INCOME RATIO... 66 8.15 NOTE: EFFECTIVE JANUARY 2018, FANNIE MAE ALLOWS AN IRS TAX REPAYMENT PLAN FOR DELINQUENT FEDERAL INCOME TAX TO BE INCLUDED IN THE DTI RATHER THAN REQUIRING IT TO BE PAID IN FULL PRIOR TO OR AT CLOSING. STANDARD QUALIFYING RATIOS FOR CONFORMING LOANS... 66 8.16 MINIMUM DOWN PAYMENT REQUIREMENTS... 67 8.17 REQUIRED RESERVES... 67 8.18 PREPAID COSTS... 68 8.19 TOTAL CONTRIBUTION LIMITS... 68 8.20 EVALUATING INCOME... 70 8.20.1 Stable Monthly Income... 70 8.20.2 Income Documentation... 70 8.20.3 Verification of Employment... 70 8.20.4 Income Analysis... 71 8.20.5 Self Employed Income... 74 8.20.6 Rental Income... 74 8.20.7 Unemployment Benefits Income... 74 CHAPTER 9 APPRAISAL STANDARDS... 76 9.1 LENDER STANDARDS... 76 9.2 AGENCY GUIDELINES... 76 9.2.1 Disclosure of Contract Amendments to Appraiser... 77 9.2.2 Supervisory Appraiser... 77 9.3 PROPERTY APPRAISAL REQUIREMENTS... 77 9.3.1 Conventional Purchase Transactions... 77 9.3.2 Conventional Refinance Transactions... 78 9.4 APPRAISAL DELIVERY REQUIREMENTS... 79 9.5 APPRAISAL REPORTING FORMS... 79 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 4
9.5.1 Fannie Mae Form 1004/Freddie Mac Form 70: Uniform Residential Appraisal Report... 79 9.5.2 Fannie Mae Form 1004C/ Freddie Mac Form 70B: Manufactured Home Appraisal Report... 79 9.5.3 Fannie Mae/Freddie Mac Form 2055: Exterior-Only Inspection Report... 80 9.5.4 Fannie Mae 1073/Freddie Mac Form 465: Individual Condominium Report80 9.5.5 Fannie Mae 1075/Freddie Mac Form 466: Exterior-Only Inspection, Individual Condominium Unit... 80 9.5.6 Fannie Mae 2090: Individual Cooperative Appraisal Report... 81 9.5.7 Fannie Mae 2095: Exterior-Only Inspection, Cooperative Appraisal Report81 9.5.8 Fannie Mae Form 1025/Freddie Mac Form 72: Small Residential Income Property Appraisal Report... 82 9.5.9 Fannie Mae Form 1004MC/Freddie Mac Form 72: Market Conditions Addendum to the Appraisal Report... 82 9.5.10 Fannie Mae Form 2075 / Freddie Mac Form 2070... 82 9.5.11 Appraisal Exhibits... 82 CHAPTER 10 SPECIFIC PROPERTY TYPES ELIGIBLE PRODUCTS... 84 10.1 COOPERATIVES... 84 10.1.1 Eligible Products... 84 10.1.2 General Eligibility Criteria... 84 10.1.3 Required Documentation for Cooperative Project Approval... 84 10.1.4 Ineligible Cooperative Projects... 85 10.1.5 Presale and Owner Occupancy Guidelines... 86 10.1.6 Commercial Use... 86 10.1.7 Insurance... 86 10.1.8 Insurance Coverage Requirements... 86 10.1.9 Recognition Agreement... 87 10.1.10 Transfer Fees (Flip Tax)... 87 10.1.11 Litigation... 88 10.1.12 Exposure... 88 10.1.13 Financial Stability... 89 10.1.14 Current Operating Budget... 89 10.1.15 Underlying Blanket Mortgage... 90 10.1.16 Pro Rata Share... 90 10.1.17 Subsidies/Tax Abatements... 90 10.2 DEGREE OF DEVELOPMENT... 90 10.3 PROPERTIES SUBJECT TO OCCUPANCY RESTRICTIONS... 90 10.4 PROPERTIES SUBJECT TO GEOGRAPHIC RESTRICTIONS... 91 10.5 PROPERTIES SUBJECT TO AGE RESTRICTIONS... 91 10.5.1 Government Housing Programs... 91 10.5.2 Age Restrictions - 62 Years of Age or Older... 91 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 5
10.5.3 Age Restrictions - Any Age Restriction... 91 10.6 CONDOMINIUM PROJECTS... 92 10.6.1 Site Condos... 92 10.6.2 General Condo Eligibility Requirements... 92 10.6.3 Ineligible Projects... 92 10.6.4 Completion... 93 10.6.5 Multiple Ownership... 94 10.6.6 Commercial Use... 94 10.6.7 Right of First Refusal... 94 10.6.8 Adverse Environmental Factors... 94 10.6.9 Litigation... 94 10.6.10 Delinquent HOA Dues... 95 10.6.11 Insurance Requirements... 95 10.6.12 Pooled Insurance... 96 10.7 PLANNED UNIT DEVELOPMENTS... 96 CHAPTER 11 NON-CONFORMING CONVENTIONAL LOANS... 97 11.1 GENERAL INFORMATION... 97 11.2 AGE OF DOCUMENTS... 97 11.3 INTERNET DOCUMENTATION... 97 11.4 ELIGIBLE TRANSACTIONS... 98 11.4.1 Rate-Term Refinance Transactions... 98 11.4.2 Cash-Out Refinance Transactions... 99 11.4.3 Payoff of Installment Land Contract or Contract for Deed... 99 11.4.4 Multiple Loans to One Borrower... 99 11.4.5 Property Ownership Limitations... 100 11.5 NON-U.S. CITIZEN BORROWERS... 100 11.5.1 Non-Permanent Resident Aliens... 100 11.6 LOAN-TO-VALUE RATIOS AND OCCUPANCY REQUIREMENTS... 101 11.7 QUALIFYING RATIOS... 102 11.8 INCOME ANALYSIS SELF EMPLOYED BORROWERS... 102 11.9 LIQUIDITY REQUIREMENTS... 102 11.10 CREDIT HISTORY... 103 11.11 DOWN PAYMENT REQUIREMENTS... 104 11.12 ACCEPTABLE PRODUCT TYPES... 104 11.13 SPECIFIC PROPERTY TYPES... 104 11.13.1 Unacceptable Property Types... 104 11.13.2 Condominiums... 105 11.13.3 Planned Unit Developments (PUDs)... 105 11.13.4 Factory Built Housing/Manufactured Housing... 105 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 6
11.13.5 Manufactured/Mobile Homes... 105 11.13.6 Cooperatives... 105 11.13.7 Property/Appraisal Requirements... 105 11.14 CONTRIBUTIONS LIMITS... 105 CHAPTER 12 GOVERNMENT LOANS... 107 12.1 ELIGIBLE TRANSACTIONS... 107 12.1.1 Credit Score Requirements... 107 12.1.2 VA Products... 107 12.1.3 FHA Products... 107 12.2 INELIGIBLE TRANSACTIONS... 109 12.3 FHA STREAMLINE REFINANCE AND VA IRRRL TRANSACTIONS... 109 12.4 UNDERWRITING DOCUMENTATION... 110 12.5 TEXAS REFINANCE TRANSACTIONS... 111 12.5.1 Basic Requirements... 111 12.5.2 Options When POCs Are Credited to Closing Costs... 111 12.6 CO-SIGNERS... 113 12.7 MANUFACTURED HOUSING... 113 12.8 MODULAR HOMES... 113 12.9 FANNIE MAE DU UNDERWRITTEN FHA LOANS... 114 12.10 FANNIE MAE DU UNDERWRITTEN VA LOANS... 114 12.11 FREDDIE MAC LPA UNDERWRITTEN FHA LOANS... 114 12.12 FREDDIE MAC LPA UNDERWRITTEN VA LOANS... 114 CHAPTER 13 INTEREST ONLY GUIDELINES... 115 13.1 CREDIT PROFILE... 115 13.1.1 Conforming... 115 13.1.2 Non-Conforming... 115 13.1.3 Ineligible Borrowers... 115 13.1.4 Qualifying... 115 13.1.5 Manual Underwriting... 115 13.1.6 Temporary Buydowns... 116 CHAPTER 14 NEW CONSTRUCTION... 117 14.1 CONSTRUCTION-TO-PERMANENT FINANCING... 117 14.2 CONSTRUCTION-TO-PERMANENT TREATED AS A PURCHASE TRANSACTION... 117 14.3 CONSTRUCTION-TO-PERMANENT TREATED AS A RATE-TERM REFINANCE... 118 14.4 CONSTRUCTION-TO-PERMANENT TREATED AS A CASH-OUT REFINANCE118 14.5 ACQUISITION COST DOCUMENTATION... 119 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 7
14.6 BORROWER ACTED AS CONTRACTOR... 119 CHAPTER 15 RELOCATION GUIDELINES... 15.1 CORPORATE SPONSORED RELOCATION... 15.1.1 Qualifications... 15.2 U.S. MILITARY PERSONNEL TRANSFER... 15.2.1 Qualifications... 15.3 TRANSACTION TYPE AND OCCUPANCY... 121 15.4 TRANSFER COMPENSATION... 121 15.5 LUMP SUM CASH PAYMENTS... 122 15.6 DEPARTURE RESIDENCE POLICY... 122 15.6.1 Conforming Loans... 122 15.6.2 Non-Conforming Loans... 122 CHAPTER 16 MONTHLY SAVINGS PLAN FEASIBILITY WORKSHEET... 123 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 8
Conforming Conventional Loans Credit 8.8 Credit 8.8.1 Credit History An individual s credit history is considered one of the strongest indicators of future credit performance. People who have maintained a long history of excellent credit can, and do, manage personal finances properly. Likewise, borrowers who have a history of slow payments or have defaulted in the repayment of debt generally do not change their credit habits. 8.8.2 Credit Score Requirements All conventional loans require a credit score to be established for each borrower. The three major credit repositories ( agencies ) offer a product that scores each consumer s credit history using the Fair Isaac model. Trademark names include the Experian Fair Isaac Credit Score (FICO ), TransUnion EMPIRICA Score, and Equifax BEACON Score. All are acceptable and are referred to as the credit score. All credit reports must contain information provided from each repository. Suppressed or locked results from any repository must be resolved and a credit score obtained. The term underwriting score refers to the overall credit score applicable to a specific mortgage loan transaction as determined using the agencies middle, lower, then lowest credit score selection methodology, which is equivalent to Fannie Mae s Representative Credit Score and Freddie Mac s Indicator Score. 8.8.3 Credit Score Selection All borrowers should have a credit score. For loan casefiles where no borrower has a credit score, Fannie Mae has provided the eligibility and documentation requirements that apply, and the risk factors DU will consider when evaluating the overall credit risk of the loan. The following criteria are used to determine each individual borrower s credit score: If there are three valid credit scores for a borrower, the middle score of the three scores is used. If there are three valid credit scores for a borrower but two of the scores are the same, the lower of the two scores is used. If there are two valid scores for a borrower, the lower of the two scores is used. If there is one valid score for a borrower, that score is used. After selecting the appropriate credit score for each borrower, the underwriting score must then be determined: If there is more than one borrower, the lowest selected credit score among all borrowers is the underwriting score. work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 50
Appraisal Standards Lender Standards Chapter 9 Appraisal Standards 9.1 Lender Standards All appraisals must comply with USPAP, and all applicable federal, state, or local requirements. In addition, and its appraisers must adhere to the regulations and requirements established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), and Appraiser Independence Requirements. ge s The appraiser must not have a direct or indirect interest, financial or otherwise, in the property or in the transaction. Selection criteria should ensure that the appraiser is independent of the transaction and is capable of rendering an unbiased opinion. Pa An appraisal prepared by an individual who was selected or engaged by a borrower, property seller, real estate agent, or other interested party is not acceptable. Re-addressed appraisals or appraisal reports that are altered by the appraiser to replace any references to the original client with [Sample Client] s name are not acceptable. Additionally, the borrower, property seller, real estate agent, or other interested party is not allowed to select an appraiser from an approved appraiser list. 9.2 Sa m pl e Effective internal controls require that only qualified and adequately trained underwriters, who are not involved in the loan production process, review appraisals. To maintain independence, the underwriter should not directly report to someone involved in loan production. expects the underwriting review to include confirming the independence of the appraiser in addition to a comprehensive technical review of the appraiser s analysis prior to making a final credit decision. Any exceptions or red flags must be escalated accordingly. Agency Guidelines Fannie Mae Desktop Underwriter (DU) may allow an alternative to a full URAR appraisal using either a DU Quantitative Analysis Appraisal Report (Form 2055) or a DU Property Inspection Report (Form 2075). For some lenders DU may allow use of a PIW (Property Inspection Waiver) for certain refinance and purchase transactions on eligible loan case files. A prior appraisal must exist in the Collateral Underwriter TM data, and must be associated with one of the borrowers on the file. Not all refinance transactions will qualify for the PIW. These options are acceptable provided a copy of the final DU Underwriting Findings report and Underwriting Analysis report allowing an appraisal alternative is included with the loan file and provided the applicable product guideline is not more restrictive. Note: Freddie Mac no longer offers their Property Inspection Alternative. work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 76
Non-Conforming Conventional Loans General Information Chapter 11 Non-Conforming Conventional Loans 11.1 General Information 11.2 ge s The information contained in this section represents general underwriting guidelines for non conforming loans. Non-conforming conventional loans sold to investors must be underwritten to the standards and guidelines stated in the specific investor guidelines, or the more restrictive of standard Fannie Mae/Freddie Mac guidelines. Age of Documents Pa Information used to make the credit decision must be current. The maximum age of documents at closing is as follows: Table 11-1 Existing Property New Construction Age as of Note Date Age as of Note Date Initial Application (1003) Credit Report Income Documentation Asset Documentation Appraisal Title Commitment 60* 60* *Must be dated within 30 days of initial application and no more than 60 days of the note date. Some documents, such as tax returns or divorce decrees, are not subject to these timeframes, as their validity does not change over time. Sa m pl e Item 11.3 Internet Documentation For non-conforming conventional loans, internet documents/downloads of income, employment, and asset verifications are acceptable. This allowance for internet documents does not change the required content or level of documentation needed. The information must be easy to read, understandable, and have no evidence of alterations, erasures, or white-outs, and must make sense based on the borrower profile and transaction terms. work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 97