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 2.2 BOARD/SENIOR MANAGEMENT OVERSIGHT (OPTIONAL)... 11 CHAPTER 3 STAFF AND TRAINING... 12 3.1 ONGOING TRAINING... 12 3.2 NEW HIRE TRAINING... 13 CHAPTER 4 GENERAL INFORMATION... 14 CHAPTER 5 GENERAL REQUIREMENTS... 15 5.1 REGULATORY REQUIREMENTS... 15 5.1.1 Construction-to-Permanent Disclosures... 15 5.1.2 Rural and Underserved Counties... 16 5.2 ELIGIBLE BORROWERS... 16 5.2.1 Borrower... 16 5.2.2 Co-Borrower... 17 5.2.3 Non-Occupant Co-Borrower... 17 5.2.4 Non-Borrowing Spouse/Non-Purchasing Spouse... 17 5.2.5 Separated Borrower... 17 5.2.6 First-Time Homebuyer... 17 5.2.7 Inter Vivos Revocable Trust... 17 5.2.8 Non-U.S. Citizen... 18 5.2.9 Non-Permanent Resident Alien... 18 5.2.10 Permanent Resident Alien... 21 5.2.11 Power of Attorney... 21 5.3 INELIGIBLE BORROWERS... 21 5.3.1 Diplomatic Status... 21 5.3.2 Co-Signers... 21 5.3.3 Other Ineligible Borrowers... 21 5.4 OCCUPANCY... 22 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 1
5.4.1 Primary Residence... 22 5.4.2 Second Home... 22 5.4.3 Investment Property... 23 5.5 TRANSACTION TYPES... 23 5.5.1 Purchase... 23 5.5.2 Refinance... 23 5.5.3 Cash-out Refinance... 25 5.6 TEXAS OWNER-OCCUPIED HOMESTEAD PROPERTY... 26 5.6.1 General Requirements... 26 5.6.2 Purchase Transaction Requirements... 28 5.6.3 Refinance Requirements... 29 5.6.4 Agency Cash-Out Refinances... 32 5.6.5 Texas 50(a)(6) Fee Restrictions... 33 5.6.6 Texas 50 (a)(6) Appraisal Requirements... 34 5.6.7 Texas 50 (a)(6) Title Insurance... 34 5.6.8 Texas 50 (a)(6) Right to Rescind... 34 5.6.9 Texas 50 (a)(6) Closing Date Requirements... 35 5.6.10 Ineligible Loan Programs... 35 5.6.11 Required Documents... 35 5.7 TITLE VARIATIONS... 36 5.7.1 Fee Simple... 36 5.7.2 Leasehold Estate... 37 CHAPTER 6 FANNIE MAE DESKTOP UNDERWRITER... 38 6.1 CONFORMING LOANS... 38 6.1.1 Loans with Approve/Eligible Recommendation... 38 6.1.2 Loans with a Refer to Lender s Underwriter Recommendation... 39 6.1.3 Loan Delivery Requirements... 39 6.2 NON-CONFORMING LOANS... 39 6.2.1 Basic Program Criteria... 39 6.2.2 Reserves... 40 CHAPTER 7 FREDDIE MAC LOAN PRODUCT ADVISOR... 41 7.1 CONFORMING LOANS... 41 7.1.1 Loans with an Accept Risk Class... 41 7.1.2 Loans with a Caution Risk Class... 41 7.1.3 Loan Delivery Requirements... 42 7.2 SUPER CONFORMING LOANS... 42 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 2
7.3 COLLATERAL REPRESENTATION AND WARRANT RELIEF... 43 CHAPTER 8 CONFORMING CONVENTIONAL LOANS... 44 8.1 GENERAL INFORMATION... 44 8.2 ABILITY TO REPAY ELIGIBILITY... 44 8.2.1 ATR Covered Loan... 45 8.2.2 ATR Exempt Loan... 45 8.2.3 Prepayment Penalties... 46 8.2.4 Qualifying Interest Rates for Adjustable Rate Mortgages... 46 8.2.5 Other Changes Relating to Ability to Repay... 46 8.3 QUALIFIED MORTGAGES... 46 8.3.1 Types of Qualified Mortgages... 46 8.3.2 Appendix Q... 47 8.4 LOAN-TO-VALUE RATIOS AND OCCUPANCY REQUIREMENTS... 48 8.5 AGE OF DOCUMENTS... 48 8.6 UNDERWRITING DOCUMENTATION... 49 8.6.1 Direct Written Verifications... 49 8.6.2 Additional Documentation... 49 8.7 ALTERNATIVE DOCUMENTATION... 49 8.7.1 Eligibility Criteria... 49 8.7.2 Fax Copies... 50 8.7.3 Internet Documentation... 50 8.7.4 Reverification Authorization... 51 8.8 CREDIT... 51 8.8.1 Credit History... 51 8.8.2 Credit Score Requirements... 51 8.8.3 Credit Score Selection... 51 8.8.4 Adverse Credit... 52 8.8.5 Delinquent Payments... 52 8.8.6 Limited or Non-Traditional Credit History... 53 8.8.7 Inaccurate Credit History... 53 8.8.8 Bankruptcy and Short Sale... 53 8.8.9 Foreclosure... 54 8.9 LONG TERM DEBT... 54 8.9.1 Pay Down of Debt... 54 8.9.2 Revolving Accounts... 54 8.9.3 Loans Secured by Retirement Accounts... 54 8.9.4 Home Equity Lines of Credit... 55 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 3
8.9.5 Deferred Payment Accounts... 55 8.9.6 Student Loans... 55 8.9.7 Contingent Liabilities... 56 8.10 DOWN PAYMENT GUIDELINES... 57 8.10.1 Minimum Down Payment Requirements... 57 8.10.2 Cash Assets for Down Payment and Closing Costs... 58 8.11 SUBORDINATE FINANCING... 64 8.11.1 Terms... 65 8.11.2 Acceptable Documentation... 66 8.12 QUALIFYING RATIOS... 66 8.13 HOUSING-TO-INCOME RATIO... 66 8.14 DEBT-TO-INCOME RATIO... 67 8.15 MINIMUM DOWN PAYMENT REQUIREMENTS... 68 8.16 REQUIRED RESERVES... 69 8.17 PREPAID COSTS... 69 8.18 TOTAL CONTRIBUTION LIMITS... 69 8.19 EVALUATING INCOME... 71 8.19.1 Stable Monthly Income... 71 8.19.2 Income Documentation... 71 8.19.3 Verification of Employment... 71 8.19.4 Income Analysis... 73 8.19.5 Self Employed Income... 75 8.19.6 Rental Income... 75 8.19.7 Unemployment Benefits Income... 76 CHAPTER 9 APPRAISAL STANDARDS... 77 9.1 LENDER STANDARDS... 77 9.2 AGENCY GUIDELINES... 77 9.2.1 Disclosure of Contract Amendments to Appraiser... 78 9.2.2 Supervisory Appraiser... 78 9.3 PROPERTY APPRAISAL REQUIREMENTS... 78 9.3.1 Conventional Purchase Transactions... 78 9.3.2 Conventional Refinance Transactions... 79 9.4 APPRAISAL DELIVERY REQUIREMENTS... 80 9.5 APPRAISAL REPORTING FORMS... 80 9.5.1 Fannie Mae Form 1004/Freddie Mac Form 70: Uniform Residential Appraisal Report... 80 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 4
9.5.2 Fannie Mae Form 1004C/ Freddie Mac Form 70B: Manufactured Home Appraisal Report... 80 9.5.3 Fannie Mae/Freddie Mac Form 2055: Exterior-Only Inspection Report... 81 9.5.4 Fannie Mae 1073/Freddie Mac Form 465: Individual Condominium Report81 9.5.5 Fannie Mae 1075/Freddie Mac Form 466: Exterior-Only Inspection, Individual Condominium Unit... 82 9.5.6 Fannie Mae 2090: Individual Cooperative Appraisal Report... 82 9.5.7 Fannie Mae 2095: Exterior-Only Inspection, Cooperative Appraisal Report82 9.5.8 Fannie Mae Form 1025/Freddie Mac Form 72: Small Residential Income Property Appraisal Report... 83 9.5.9 Fannie Mae Form 2075 / Freddie Mac Form 2070... 83 9.5.10 Appraisal Exhibits... 83 CHAPTER 10 SPECIFIC PROPERTY TYPES ELIGIBLE PRODUCTS... 85 10.1 COOPERATIVES... 85 10.1.1 Eligible Products... 85 10.1.2 General Eligibility Criteria... 85 10.1.3 Required Documentation for Cooperative Project Approval... 85 10.1.4 Ineligible Cooperative Projects... 86 10.1.5 Presale and Owner Occupancy Guidelines... 87 10.1.6 Commercial Use... 87 10.1.7 Insurance... 87 10.1.8 Insurance Coverage Requirements... 87 10.1.9 Recognition Agreement... 88 10.1.10 Transfer Fees... 89 10.1.11 Litigation... 89 10.1.12 Exposure... 90 10.1.13 Financial Stability... 90 10.1.14 Current Operating Budget... 90 10.1.15 Underlying Blanket Mortgage... 91 10.1.16 Pro Rata Share... 91 10.1.17 Subsidies/Tax Abatements... 91 10.2 DEGREE OF DEVELOPMENT... 91 10.3 PROPERTIES SUBJECT TO OCCUPANCY RESTRICTIONS... 92 10.4 PROPERTIES SUBJECT TO GEOGRAPHIC RESTRICTIONS... 92 10.5 PROPERTIES SUBJECT TO AGE RESTRICTIONS... 92 10.5.1 Government Housing Programs... 92 10.5.2 Age Restrictions - 62 Years of Age or Older... 92 10.5.3 Age Restrictions - Any Age Restriction... 92 10.6 CONDOMINIUM PROJECTS... 93 10.6.1 Site Condos... 93 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 5
10.6.2 General Condo Eligibility Requirements... 93 10.6.3 Ineligible Projects... 94 10.6.4 Completion... 95 10.6.5 Multiple Ownership... 95 10.6.6 Commercial Use... 95 10.6.7 Right of First Refusal... 95 10.6.8 Adverse Environmental Factors... 95 10.6.9 Litigation... 96 10.6.10 Delinquent HOA Dues... 96 10.6.11 Insurance Requirements... 96 10.6.12 Pooled Insurance... 97 10.7 PLANNED UNIT DEVELOPMENTS... 97 CHAPTER 11 NON-CONFORMING CONVENTIONAL LOANS... 98 11.1 GENERAL INFORMATION... 98 11.2 AGE OF DOCUMENTS... 98 11.3 INTERNET DOCUMENTATION... 98 11.4 ELIGIBLE TRANSACTIONS... 99 11.4.1 Rate and Term Refinance Transactions... 99 11.4.2 Cash-Out Refinance Transactions... 100 11.4.3 Payoff of Installment Land Contract or Contract for Deed... 100 11.4.4 Multiple Loans to One Borrower... 100 11.4.5 Property Ownership Limitations... 101 11.5 NON-U.S. CITIZEN BORROWERS... 101 11.5.1 Non-Permanent Resident Aliens... 101 11.6 LOAN-TO-VALUE RATIOS AND OCCUPANCY REQUIREMENTS... 102 11.7 QUALIFYING RATIOS... 103 11.8 INCOME ANALYSIS SELF EMPLOYED BORROWERS... 103 11.9 LIQUIDITY REQUIREMENTS... 103 11.10 CREDIT HISTORY... 104 11.11 DOWN PAYMENT REQUIREMENTS... 105 11.12 ACCEPTABLE PRODUCT TYPES... 105 11.13 SPECIFIC PROPERTY TYPES... 105 11.13.1 Unacceptable Property Types... 105 11.13.2 Condominiums... 106 11.13.3 Planned Unit Developments... 106 11.13.4 Factory Built Housing/Manufactured Housing... 106 11.13.5 Manufactured/Mobile Homes... 106 11.13.6 Cooperatives... 106 11.13.7 Property/Appraisal Requirements... 106 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 6
11.14 CONTRIBUTIONS LIMITS... 106 CHAPTER 12 GOVERNMENT LOANS... 108 12.1 ELIGIBLE TRANSACTIONS... 108 12.1.1 Credit Score Requirements... 108 12.1.2 VA Products... 108 12.1.3 FHA Products... 108 12.2 INELIGIBLE TRANSACTIONS... 110 12.3 FHA STREAMLINE REFINANCE AND VA IRRRL TRANSACTIONS... 110 12.4 UNDERWRITING DOCUMENTATION... 111 12.5 TEXAS REFINANCE TRANSACTIONS... 112 12.5.1 Basic Requirements... 112 12.5.2 Options When POCs Are Credited to Closing Costs... 112 12.6 CO-SIGNERS... 114 12.7 MANUFACTURED HOUSING... 114 12.8 MODULAR HOMES... 115 12.9 FANNIE MAE DU UNDERWRITTEN FHA LOANS... 115 12.10 FANNIE MAE DU UNDERWRITTEN VA LOANS... 115 12.11 FREDDIE MAC LPA UNDERWRITTEN FHA LOANS... 115 12.12 FREDDIE MAC LPA UNDERWRITTEN VA LOANS... 116 CHAPTER 13 INTEREST ONLY GUIDELINES... 117 13.1 CREDIT PROFILE... 117 13.1.1 Conforming... 117 13.1.2 Non-Conforming... 117 13.1.3 Ineligible Borrowers... 117 13.1.4 Qualifying... 117 13.1.5 Manual Underwriting... 117 13.1.6 Temporary Buydowns... 118 CHAPTER 14 NEW CONSTRUCTION... 119 14.1 CONSTRUCTION-TO-PERMANENT FINANCING... 119 14.2 CONSTRUCTION-TO-PERMANENT TREATED AS A PURCHASE TRANSACTION... 119 14.3 CONSTRUCTION-TO-PERMANENT TREATED AS A RATE AND TERM REFINANCE... 120 14.4 CONSTRUCTION-TO-PERMANENT TREATED AS A CASH-OUT REFINANCE120 14.5 ACQUISITION COST DOCUMENTATION... 121 14.6 BORROWER ACTED AS CONTRACTOR... 121 CHAPTER 15 RELOCATION GUIDELINES... 122 work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 7
15.1 CORPORATE SPONSORED RELOCATION... 122 15.1.1 Qualifications... 122 15.2 U.S. MILITARY PERSONNEL TRANSFER... 122 15.2.1 Qualifications... 122 15.3 TRANSACTION TYPE AND OCCUPANCY... 123 15.4 TRANSFER COMPENSATION... 123 15.5 LUMP SUM CASH PAYMENTS... 124 15.6 DEPARTURE RESIDENCE POLICY... 124 15.6.1 Conforming Loans... 124 15.6.2 Non-Conforming Loans... 124 CHAPTER 16 MONTHLY SAVINGS PLAN FEASIBILITY WORKSHEET... 125 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 Ability to Repay Eligibility 8.2.1 ATR Covered Loan An ATR Covered Loan is subject to the ability to repay requirements under Regulation Z, is not deemed an ATR Exempt Loan, and meets these requirements for qualified mortgages: Has a maximum loan term of 30 years Is fully amortizing Meets the points and fees 1 limitations for qualified mortgages based on total loan amount Effective January 1, 2019 through December 31, 2019 o 3% of the total loan amount for loans >$107,747 o $3,232 for loans with a total loan amount of >$64,648 but <$107,747 o 5% of the total loan amount for loans >$21,549 but <$64,648 o $1,077 for loans with a total loan amount of > $13,468 but <$21,549 o 8% of the total loan amount for loans <$13,468 Exceptions Agency assumptions or modifications A Fannie Mae single-closing construction-to-permanent loan exceeding 30 years including the construction period or a Freddie Mac interim construction financing 8.2.2 ATR Exempt Loan An ATR Exempt Loan is defined as either not subject to TILA or exempt from the Ability to Repay requirements as defined in 1026.43(a) or (d) of Regulation Z. These loans are eligible for sale as long as they meet the other eligibility and underwriting requirements of the agencies. For purposes of determining whether a loan is an ATR Exempt Loan, must follow the TILA and Regulation Z definitions. Loan types excluded from ATR include the following: HELOCs Time-share plans Reverse mortgages Bridge loans with terms 12 months or less Transactions secured by vacant land 1 Points and fees are adjusted annually by The Bureau of Consumer Financial Protection (CFPB) based on the annual percentage change in the Consumer Price Index (CPI). Points and fees reflect final rule effective January 1, 2019. work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 45
Conforming Conventional Loans Credit 8.7.4 Reverification Authorization A borrower s consent must be evidenced by their signature on the appropriate form in order to allow subsequent reverification as required by investors. 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. work may be used, reproduced, or transmitted in any form or by any means, by or to any party outside of. 51
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. 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. 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 [ 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. 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. 9.2 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 an Appraisal 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 Appraisal Waiver. 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. 77
Non-Conforming Conventional Loans General Information Chapter 11 Non-Conforming Conventional Loans 11.1 General Information The information contained in this section represents general underwriting guidelines for nonconforming 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 and Freddie Mac guidelines. 11.2 Age of Documents Information used to make the credit decision must be current. The maximum age of documents at closing is as follows: Item Table 11-1 Existing Property Age as of Note Date Initial Application (1003) 120 120 Credit Report 120 120 Income Documentation 120 120 Asset Documentation 120 120 Appraisal 120 120 New Construction Age as of Note Date 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. 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. 98