TABLE OF CONTENTS 1. Table Of Contents... 1 2. Conforming Matrix/ Super Conforming Matrix... 3 3. Retail/Wholesale... 4 4 Product Codes... 4 5. Transaction Types... 4 6. Overview... 4 7. Underwriting AU Submission... 4 8. Underwriting And Documentation Requirements... 4 9. Underwriting And Income Documentation... 5 10. Self Employment Income and Documentation... 25 11. Assets... 39 12 Subordinate Financing... 50 13. Reserves... 53 14. Calculation Of Borrower Debt Ratio/Exclusion Of Certain Student Loan Payments... 55 15. Income Received From Salary Increase... 55 16. Income Received From Future Primary Employment... 55 17. Allowable Age of Documentation... 56 18. Escrow Accounts... 56 19. Escrow HoldBacks... 57 20. Hazard Insurance... 57 21. Flood Insurance... 60 22. Principal Curtailments... 61 23. Power of Attorney... 61 24. Military Power of Attorney... 61 25. Geographic Restrictions... 62 26. HPML... 63 27. Borrower s Eligibility... 64 28. Ineligible Borrowers... 64 29. Tax Transcripts... 65 30. General Types Of Income-When applicable; See Salary Increase And Future Income... 65 31. General Types of Assets: Follow Loan Product Advisor Findings (AUS LP)... 66 32. Maximum Cash-Out... 68 33. Maximum Loan Amount... 68 CF30HBMD 09-14-2017 1
34. Minimum Loan Amount... 68 35. Interested Party Contributions(IPC)... 68 36. Private Mortgage Insurance (PMI)... 68 37. Mortgage Insurance Coverage... 69 38. Eligible Property Types... 69 39. Disaster Policy... 69 40. Ineligible Property Types... 71 41. Multiple Financed Properties... 72 42. Additional Property Considerations... 72 43. Construction to Perm... 73 CF30HBMD 09-14-2017 2
CONFORMING MATRIX PRIMARY RESIDENCE Property Type Transaction Type #Units Max LTV/CLTV Maximum LTV TLTV Loan Amount Minimum Credit Score # Months Reserves Max DTI Primary Residence, SFR, Warrantable Condo & PUDS Purchase and No Cash Out Refinance *** 1 95% Conforming Loan Limits 680** Follow Loan Product Advisor Guidelines 1 (LP) Follow Loan Product Advisor Findings (LP) SUPER CONFORMING MATRIX PRIMARY RESIDENCE Property Type Transaction Type #Units Max LTV/CLTV Maximum Loan Amount Minimum Credit Score # Months Reserves Property Type Primary Residence, SFR, Warrantable Condo & PUDS Purchase and No Cash Out Refinance*** 1 95% $636,150 680** Follow Loan Product Advisor Guidelines 1 (LP) Follow Loan Product Advisor Findings (LP) 1. In addition to the required reserves determined by LPA, must document adequate income and/or assets to pay the monthly housing expense and other monthly liabilities between the note date and the employment start date, AND Document an additional 6 months reserves. **720 Minimum Credit Score when using the Deferment of Student Loan Debt Feature ***Purchase only if using the income commencing after Note Date Feature CF30HBMD 09-14-2017 3
RETAIL/WHOLESALE CONFORMING AND SUPER CONFORMING PRODUCT CODES CF30HBMD TRANSACTION TYPES Purchase No Cash-Out Refinances o Cash Out NOT ALLOWED Product Overview and General Information OVERVIEW The following is the general guideline requirements and summary for the Medical Doctor Loan Conventional Product. Where the guidelines are silent please follow the conventional underwriting guidelines. Corporate 2 nd Signature is required UNDERWRITING AU SUBMISSION The Medical Doctor Loan must be submitted through LP and receive a Risk Classification of Accept. Submission of closed approved loans must contain the appropriate findings from Loan Product Advisor (LPA) Manual Underwriting on the Medical Doctor Conforming and Super Conforming program is NOT allowed. Fannie Mae Desktop Underwriting (DU) and Desktop Originator (DO) are not allowed. UNDERWRITING AND DOCUMENTATION REQUIREMENTS Non-Traditional Credit Significant Derogatory Credit events DTI Verification of income Verification of Assets Ineligible Products: Temporary buydown mortgages Community Land Trusts Not Allowed Follow Loan Product Advisor (LPA=LP) Findings Follow Loan Product Advisor (LPA=LP) Findings If the income is received from a salary increase or future primary income, it must be verified in accordance with the Income Documentation Requirements Table below, regardless of the documentation level returned by LPA. Assets must be verified in accordance with the Asset Documentation Requirements Table below. HFA Preferred mortgages Energy Efficient Mortgages (EEM) CF30HBMD 09-14-2017 4
UNDERWRITING AND INCOME DOCUMENTATION Wage Earner The paystub must be dated no earlier than 30 days prior to the initial loan application date and it must include all year-to-date earnings. Additionally, the paystub must include sufficient information to appropriately calculate income; otherwise, additional documentation must be obtained. IRS W-2 forms must cover the most recent one- or two-year period based on the documentation requirements determined by the applicable AUS. The W-2 must meet the following requirements: The W-2 must be the most recent year(s) available o The prior year W-2 is required for applications dated after January 31 The W-2 forms must clearly identify the borrower as the employee The most recent W-2 is defined as the W-2 for the calendar year prior to the current calendar year. The W-2 should indicate it is the Employee Copy. Other documents must meet the following requirements: Documents must be computer-generated or typed by the borrower s employers, although paystubs that the borrower downloads from the Internet are also acceptable NOTE: Freddie Mac (LPA) allows paystubs that are handwritten or typed by the employer that do not contain YTD Earnings; however, the required information must be verified by obtaining additional documentation (e.g. written VOE, a review of payroll deposits on bank statements) Documents must clearly identify the employer s name and source of information The documents must clearly identify the borrower as the employee 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. In lieu of W-2 forms, another documentation option is the final yearend paystub. An IRS Wage and Income Transcript (W-2 transcript in lieu of the actual W-2 is also permitted. Written Verification of Employment (WVOE) Form 1005 Verification of Employment Form 1064 must contain the following: Date of contact Name and address of employer and employee Dates of employment Position held by the borrower Base pay amount and frequency, and if the borrower is paid hourly wages, the number of hours worked each week CF30HBMD 09-14-2017 5
UNDERWRITING AND INCOME DOCUMENTATION All written VOEs must contain the following information: Signature, printed name, title and contact information (e.g., phone number) of the authorized employer representative who verified the information and the date completed Borrower s name and employer s name and address If the employer provides additional information, such as the probability of continued employment and/or income, or comments, the Underwriter must consider the information with the income and employment analysis. Subject Current employment and income Requirements Date employment began Current position Gross base non-fluctuating earnings per pay period (e.g., monthly, bi-weekly) Fluctuating hourly earnings and rate of hourly pay Year-to-date earnings with paid through date Earnings from either the most recent one or two-year calendar period Earnings (e.g., base non-fluctuating, fluctuating hourly, bonus, overtime, tips, commissions) must be split into separate categories for both YTD and prior year(s) earnings. Current military active-duty employment base (basic) pay and entitlement income Current military Reserve or National Guard income Previous employment and income Date employment began Current position Base (basic) monthly pay Current monthly entitlement income (e.g., rations, clothing, quarters) Year-to-date earnings with paid through date Earnings from most recent one-year calendar period Date employment began Current position Year-to-date earnings with paid through date Earnings from most recent one-year calendar period Date employment began Date employment ended Position held Gross earnings amount Additional salary information which itemizes bonus, overtime, tip, gratuity, or commission income, if applicable. CF30HBMD 09-14-2017 6
UNDERWRITING AND INCOME DOCUMENTATION 10-day pre-closing verification (10-day PCV) Verbal verification of employment (VVOE) must contain the following: Last date of contact, dated within 10 business days of note date Borrower s date of employment Borrower s employment status (not whether the borrower is on leave or employed) Borrower s job title Name, phone number, and title of individual contacted at entity, which must be someone in HR, payroll, a supervisor, etc. Name of the entity contacted Name and title of individual contacting employer Method and source used to obtain the phone number (i.e., whitepages.com, 411.com, yellowpages.com) A copy of this documentation must be present in the loan file. Third-Party Verification of Employment It is acceptable to use a third party (i.e., The Work Number) to verify employment in lieu of a VVOE. The verification from the third party must be requested within 10 business days prior to the note date. The information provided by the third party must indicate that it has been updated within the past 35 days. Employment verifications must be obtained directly from The Work Number by facsimile or electronic link and must include the following information: Information current as of date Employer name Employee s social security number Employee s status Employee s most recent start date and termination date (if applicable) Employee s job title Base pay and frequency of paychecks Year-to-date base pay Past year s base pay TALX reference number A verification of employment (WVOE, VVOE, third-party provider) must be performed within 10 business days of the note date. Employment Gaps The stability of income and its likelihood of continuance should be factored into the underwriting decision when there are gaps in employment. CF30HBMD 09-14-2017 7
UNDERWRITING AND INCOME DOCUMENTATION Re-Entering the Workforce Income from a borrower who is reentering the workforce and has less than a two-year history of employment and income may be considered in qualifying income subject to the following: Borrower must have been with current employer for a minimum of six months The file must include documentation of previous employment prior to the borrower exiting the workforce Example A borrower who took time off to raise children from 2012 to 2015 would need to provide documentation of the borrower s employment from 2011. Automobile Allowance For an automobile allowance to be considered as acceptable stable income, the borrower must have received payments for at least two years. All associated business expenditures must be included in the calculation of the borrower s total DTI. The full amount of the auto allowance may be added to the borrower s qualifying income. When calculating the DTI ratio, the full amount of the monthly automobile financing expense must be included in the calculation of the monthly DTI ratio. The auto allowance may not be deducted from the monthly automobile financing expense. Borrower Employed by Family Member, Property Seller, or Real Estate Agent If the borrower is employed by a relative, a closely held family business, the property seller, or any party to the transaction, the following documentation is required: Written verification of employment One year tax returns If the borrower is employed by a relative, the business accountant must verify that the borrower is not self-employed by indicating his or her percentage of interest in the business. The accountant must be a disinterested third party. If the family business does not have an accountant, a signed copy of the most recent corporate returns must be obtained. If the income is not reflected on the tax returns or the reported income is substantially lower than the income reflected on the VOE or paystubs, further investigation is needed to determine whether the income is stable. If the borrower is a new hire, documentation of previous employment in the same line of work is required. CF30HBMD 09-14-2017 8
UNDERWRITING AND INCOME DOCUMENTATION Capital Gains 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 the income to qualify, the income must be verified in accordance with the following requirements. Document most recent two-years of realized capital gains, along with documentation that sufficient assets remain after closing to support continuance of the capital gain income, at the level used for qualifying, for at least the next three years. Obtain a copy of the complete federal individual income tax returns for the most recent two year period reflecting capital gain income and evidence of sufficient assets to support the qualifying income. Child Support, Alimony, or Spousal Maintenance Alimony, child support, and maintenance income may be considered in qualifying income if the income has been received for the most recent six months and the payer is obligated to make the payment for at least the next three years. The following validation steps are completed for Child Support, Alimony or Spousal Maintenance: 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 no less than six months of the borrower s most recent regular receipt of the full payment Review the payment history to determine its suitability as stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer. Income received for less than six months is considered unstable and may not be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower. The following documentation is required: Copy of divorce decree, separation agreement (if the divorce is not final), or other written legal agreement indicating payment of alimony or child support, and stating the amount of the award and the period of time over which it will be received. Note: if a borrower who is separated does not have a separation agreement that specifies alimony or child support payments, the underwriter should not consider any proposed or voluntary payments as income. Documentation that verifies any applicable state law that mandates alimony, child support, or separate maintenance payments, specifying the conditions under which the payments must be made CF30HBMD 09-14-2017 9
UNDERWRITING AND INCOME DOCUMENTATION Evidence payments have been received for at least six months Documentation to support that the payments will continue for the next three years Follow the AUS findings The income may not be used for qualifying if the payments Have been received for less than six months; Have not been received on a consistent basis; or Have been made for less than the full amount due. Variable Income All income that is calculated by an averaging method must be reviewed to assess the borrower's history of receipt, the frequency of payment, and the trending of the amount of income being received. Examples of variable income include hourly workers with fluctuating hours, bonus, overtime, commissions, and piece work income. History of Receipt: Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 24 months may be considered as acceptable income, as long as the borrower's loan application demonstrates that there are positive factors that reasonably offset the shorter income history. Frequency of Payment: The frequency of the payment (weekly, biweekly, semimonthly, monthly, quarterly, or annually) must be determined to arrive at an accurate calculation of the monthly income to be used in the trending analysis. Examples 1. If a borrower is paid an annual bonus on May 31 of each year, the amount of the May bonus should be divided by 12 to obtain an accurate calculation of the current monthly bonus amount. Note that dividing the bonus received on May 31 by five months produces a much higher, inaccurate monthly average. 2. If a borrower is paid overtime on a biweekly basis, the most recent paystub must be analyzed to determine that both the current overtime earnings for the period and the year-to-date overtime earnings are consistent and, if not, why. There are legitimate reasons why these amounts may be inconsistent yet still eligible for use as qualifying income. The difference between the current period overtime and year-to-date earnings must be analyzed before using the income to qualify. Income Trending After the monthly year-to-date income amount is calculated, it must be compared to prior years' earnings using the borrower's W-2s or signed federal income tax returns, or a standard verification of employment completed by the Seller or third-party employment verification vendor. CF30HBMD 09-14-2017 10
UNDERWRITING AND INCOME DOCUMENTATION If the trend in the amount of income is stable or increasing, the income amount should be averaged. While a fluctuation in income from variable sources is expected, if there is a significant increase or decrease in income, the file must contain the following: A reason for the increase or decrease from the borrower or employer Supporting rationale for the inclusion of such income The calculation method used Significant Decrease If the trend was declining, but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used. The analysis and rationale must be present in the loan file. One-Time Occurrence If the borrower's income shows a significant decrease related to a one-time occurrence (i.e., leave of absence to care for a family member, injury, etc.) that prevented the borrower from working or earning full income for a period of time, the variable income can be averaged using the previous higher level provided there is proof that the income has returned to the level previously earned; and documentation to support the one-time occurrence. If the trend is declining and not attributable to a one-time occurrence, the income may not be stable. Additional analysis must be conducted to determine if any variable income can be used. Significant Increase If the income trend reflects a significant increase, the higher income amount may not be used unless there is sufficient documentation to determine the increase is stable and likely to continue at the level used for qualifying. The analysis and rationale must be present in the loan file. Commission Income The borrower should have a two-year consecutive history of receiving commission income and the commission income must be likely to continue for the next three years in order to consider the income for qualifying. Any Non- reimbursed Business Expense (2106) reflected on the borrower's tax returns must be deducted from the borrower's gross commission income when calculating income. The income must be averaged over the previous two years. CF30HBMD 09-14-2017 11
UNDERWRITING AND INCOME DOCUMENTATION If the income analysis reflects a Significant Increase or Significant Decrease, additional analysis must be conducted. Must have a two-year consecutive history of receipt to use as qualifying income. To document, obtain the following: Written VOE covering the most recent two years, and Signed individual federal tax returns for the most recent two years, or Most recent YTD paystub documenting at least 30 days of income. W-2s and/or 1099s covering the most recent two years. Complete signed individual federal tax returns for the most recent two years. Commission income showing a decrease from one year to the next requires significant compensating factors in order to use the income and if used, must be averaged over the most recent 12-month period. Change of Employer in the Prior Two Years If a borrower has changed jobs within the same line of work within the last two years, the loan file must contain documentation from the current and all previous employers that evidence history of receipt. In order to consider the income for qualification, if the borrower has yet to receive any commission income from the new employer, it must be deemed reasonable based on the time period with the new employer. Documentation that specifies the amount and terms of the borrower's commission income is required. Bonus or Overtime Income The borrower should have a two-year consecutive history of receiving bonus or overtime income. The income must be averaged over the previous two years. If the income analysis reflects a Significant Increase or Significant Decrease, additional analysis must be conducted. A one-time signing bonus cannot be considered as recurring income. Must have a two-year consecutive history of receipt to use as qualifying income. To document, obtain the following: Written VOE covering the most recent two years, and Most recent YTD paystub documenting at least 30 days of income. W-2s and/or 1099s covering the most recent two years. Income showing a decrease from one year to the next requires significant compensating factors in order to use the income and if used, must be averaged over the most recent 12- month period. CF30HBMD 09-14-2017 12
UNDERWRITING AND INCOME DOCUMENTATION Change of Employer in the Prior Two Years If a borrower has changed jobs within the same line of work within the last two years, the loan file must contain documentation from the current and all previous employers that evidence history of receipt. In order to consider the income for qualification, if the borrower has yet to receive any bonus or overtime income from the new employer, it must be deemed reasonable based on the time period with the new employer. Documentation that specifies the amount and terms of the borrower's bonus or overtime income is required. Foster Care Income Foster-care income may be considered qualifying income if the income is received from a state- or county-sponsored organization and the borrower has a two-year history of providing foster-care services. Foster care income must be likely to continue for the next three years. Provide proof of receipt of the income for the most recent two-year period. Housing or Parsonage Allowance Housing or parsonage income may be considered qualifying income if there is documentation that the income has been received for the most recent 12 months and the allowance is likely to continue for the next three years. The housing allowance may be added to income but may not be used to offset the monthly housing payment. All of the following documentation is required: Written verification of employment, letter from the employer, or paystubs evidencing the amount of the housing or parsonage allowance Terms under which the housing allowance is paid Proof of receipt of the housing allowance for the most recent 12 months Long-Term Disability Existing and established long term disability benefits Evidence of the source, insurance and/or benefit type, pre-determined payment amount, payment frequency and current receipt must be obtained for existing and established long-term disability income. A history of receipt is not required for the income to be considered stable. Long-term disability income may be considered to have a reasonable expectation of continuance without obtaining any additional documentation unless there is a predetermined insurance and/or benefit expiration date that is less than three years (e.g., stated termination of a private disability insurance policy). Pending or current reevaluation of medical eligibility for insurance and/or benefit payments is not considered an indication that the insurance and/or benefit payment will not continue. CF30HBMD 09-14-2017 13
UNDERWRITING AND INCOME DOCUMENTATION A copy of the benefit verification letter, award letter, pay statement, 1099, W-2 or other equivalent documentation is used to document the following: Source, Payment frequency, Pre-determined payment Document current receipt with a copy of the bank statement, pay statement, benefit verification letter, notice of award letter or other equivalent documentation. Age of documentation requirements must be met. Newly established long term disability benefits Verification of current receipt is not required; however, the finalized terms of the new income must be documented. The income must commence prior to or on the first Mortgage payment due date. The terms that must be verified and documented include, but are not limited to, the following: Source, Type, Effective date of income commencement, Payment frequency and Pre-determined payment amount that will commence prior to or on the first Mortgage payment due date. The documentation must be dated no more than 120 days prior to the Note Date. Mortgage Credit Certificate (MCC) States and municipalities can issue mortgage credit certificates (MCCs) in place of, or as part of, their authority to issue mortgage revenue bonds. MCCs enable an eligible firsttime homebuyer to obtain a mortgage secured by his or her principal residence and to claim a federal tax credit for a specified percentage (usually 20% to 25%) of the mortgage interest payments, with a maximum deduction of $2,000. When calculating the borrower's DTI ratio, the maximum possible MCC income must be treated as an addition to the borrower's income, rather than as a reduction to the amount of the borrower's mortgage payment. The following calculation should be used when determining the available income: [(Mortgage Amount) x (Note Rate) x (MCC %)] 12 = Amount added to borrower's monthly income. CF30HBMD 09-14-2017 14
UNDERWRITING AND INCOME DOCUMENTATION Example If a borrower obtains a $100,000 mortgage that has a note rate of 7.5% and is eligible for a 20% credit under the MCC program, the amount that should be added to his monthly income would be $125 ($100,000 x 7.5% x 20% = $1,500 12 = $125). The underwriter must obtain a copy of the MCC and the underwriter s documented calculation of the adjustment to the borrower's income and include them in the mortgage loan file. For refinance transactions, the underwriter may allow the MCC to remain in place as long as it obtains confirmation prior to loan closing from the MCC provider that the MCC remains in effect for the new mortgage loan. Mortgage Credit Certificate Documentation The following documentation is required: A letter from the government entity providing the mortgage credit, documenting the length and amount of the subsidy Evidence the MCC issuer approved the borrower's eligibility for the MCC The percentage used to calculate the tax credit If the subject transaction involves a refinance of a loan with MCC, the reissued MCC and/or evidence of the MCC issuer approved the borrower's eligibility for the MCC Calculation of how the MCC income was determined along with the applicable analysis. Newly Employed Borrowers If a borrower has less than a two-year history of employment and income, the borrower's income may be considered in qualifying income if the file includes documentation to support that the borrower was either attending school or in a training program (i.e., school transcripts or diploma) immediately prior to the current employment history. Nontaxable Income If income is not subject to federal taxes, the amount of continuing tax savings attributable to the nontaxable income source may be added to the borrower's gross income. The following are examples of possible sources of income that may be nontaxable: Child support payments Social Security benefits Workers' compensation benefits Food stamps The underwriter must verify that the particular source of income is nontaxable. Documentation that can be used for this verification includes award letters, policy agreements, account statements, or any other documents that address the nontaxable status of the income. CF30HBMD 09-14-2017 15
UNDERWRITING AND INCOME DOCUMENTATION If the income is verified to be nontaxable, and the income and its tax-exempt status are likely to continue, the underwriter may develop an adjusted gross income for the borrower by adding an amount equivalent to 25% of the nontaxable income to the borrower s income. If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the borrower s nontaxable income, the underwriter may use that amount to develop the adjusted gross income, which should be used in calculating the borrower s qualifying ratio. If a portion of the income is taxable and a portion is nontaxable, only the untaxable amount may be grossed up. Notes Receivable, Installment Sales, and Land Contracts Income from notes receivable may be considered in qualifying income subject to the following: Copy of note to establish the amount and length of payment is required. Document regular receipt of the income over the past 12 months Evidence that the payment will continue for three years is required. Note receivable income received for less than 12 months is not eligible. Documentation Requirements for Notes Receivable, Installment Sales, and Land Contracts Documentation of receipt of the payment for the most recent 12 months. Any of the following can be utilized: Bank statements for 12 consecutive months reflecting the deposit of the income Complete signed individual tax returns for the most recent year showing a minimum 12 months' receipt Deposit slips for the past 12 months Canceled checks for the past 12 months Rental Income The file must include an explanation of the reasons for not using the income or loss from the individual federal tax returns to determine rental income. All regular and ongoing expenses for the properties, such as maintenance, management fees, utilities, HOA dues, and supply costs, should be subtracted from the borrower's cash flow. Refer to Rental Income Documentation Requirements. Underwriter must provide a copy of their rental income calculator with the loan file. Retirement, Government Annuity, and Pension Income Retirement income, including pension income that is currently generating regular distribution payments, may be used as qualifying income. CF30HBMD 09-14-2017 16
UNDERWRITING AND INCOME DOCUMENTATION For existing and established sources of retirement income obtain all of the following: For newly established sources of retirement income: Copy of the award letter, 1099, or equivalent documentation showing income type, source, payment frequency, and pre-determined payment amount Document current receipt with a copy of a bank statement, pay statement, benefit verification letter, award letter or other equivalent documentation. Document the finalized terms of the newly established income including, but not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount with a copy of the benefit verification letter, notice of award letter or other equivalent documentation from the payer that provides and establishes these terms. The income must commence prior to or on the first Mortgage payment due date The documentation must be dated no more than 120 days prior to the Note Date. Verification of current receipt is not required. Royalty Income For borrowers who have less than a two year history: Royalty income may be considered as qualifying income if the file contains evidence that the borrower has received payments on a regular basis for the most recent 12 months and the royalty payments are likely to continue for the next three years. The file must include a copy of the borrower s most recent one-year federal tax return indicating royalty income, and a copy of the royalty contract or lease agreement evidencing the terms but not limited to the duration of payment eligibility. CF30HBMD 09-14-2017 17
UNDERWRITING AND INCOME DOCUMENTATION Borrowers who have a history of two years or more: Provide the most recent 2 year history of payments on a regular basis, and the royalty payments must be likely to continue for at least the next three years. The file must include a copy of the completed federal individual income tax returns for the most recent two-year period. Seasonal Employment The borrower must have a consecutive two-year history of receiving income from seasonal employment. The two-year history must be with the same employer or in the same line of work. It must be confirmed with the borrower's employer that there is a reasonable expectation that the borrower will be rehired for the next season. Unemployment Compensation from Seasonal Employment Unemployment compensation associated with seasonal employment may be used in qualifying income if the borrower has a two-year history of receiving such income, and the income must be likely to continue for the next three years. Income from seasonal employment may not be considered if it is not reported on the borrower's federal tax return for the last two years. Secondary or Part-Time Income Secondary employment income is income that is derived from a second job or multiple jobs the borrower may have. The following must be verified: A minimum history of two years of uninterrupted secondary employment income in conjunction with the borrower's primary employment is recommended. A borrower may have a history that includes different employers, which is acceptable as long as the income has been consistently received. The premise of this guideline is to verify that the borrower has the capacity to work two jobs simultaneously on a regular basis over a two-year period. Secondary or Part-Time Income Documentation Follow AUS. Shift Differential Income Some employment fields, such as health care professionals, do not work a 40-hour workweek, but continue to be paid overtime or other fluctuating income. Calculating the income for such employment may require a written verification of employment (WVOE), in addition to a paystub and W-2s, to provide an explanation of earnings pattern. The shift differential pay should be averaged over the previous two years or at a minimum 12 months if the shift differential pay has been received for less than two years. CF30HBMD 09-14-2017 18
UNDERWRITING AND INCOME DOCUMENTATION Social Security Income Benefit Type Retirement Disability Survivor Benefits Social Security Income Income from the borrower's own work Provide one of the following: Benefits award letter, a current printout from the SSA, most recent years 1099, and The most recent two months' bank statements or equivalent documentation showing consistent receipt of the SSI for at least 60 days. See Survivor and Dependent Benefit Income for Freddie Mac (LPA) Income from another person's work Provide the following: Award letter and the most recent two months' bank statements or equivalent documentation showing consistent receipt of the SSI for at least 60 days. Documentation to support evidence of three years continuance. Supplemental Social Security Income (SSI) Award letter, and the most recent two months' bank statements or equivalent documentation showing consistent receipt of the SSI for at least 60 days. If the documentation provided states that reevaluation of medical eligibility for insurance and/or benefit payments is required, this is not considered an indication that the insurance and/or benefit payment will not continue. Survivor and Dependent Benefit Income Survivor and dependent benefit income may be considered qualifying income if the mortgage file contains evidence of the type of survivor and/or dependent benefit income (e.g., Social Security Survivor benefits, Survivors Department of Veterans Affairs (VA) benefits, other similar benefits), source, pre-determined payment amount, payment frequency and current receipt. A history of receipt is not required for the income to be considered stable. If the survivor and/or dependent benefit income is newly established, verification of current receipt is not required; however, the finalized terms of the new income must be documented with the benefit verification letter, notice of award letter or other equivalent documentation from the payer than provides and establishes these terms. CF30HBMD 09-14-2017 19
UNDERWRITING AND INCOME DOCUMENTATION The terms that must be verified include, but are not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount that will commence prior to or on the first Mortgage payment due date. The documentation must be dated no more than 120 days prior to the Note Date. All survivor and dependent benefit income must be likely to continue for at least the next three years. The following are required to validate survivor and dependent benefit income: For existing and established sources of survivor and/or dependent benefit income: o Document income type, source, payment frequency and pre-determined payment amount with a benefit verification letter, award letter, 1099 or other equivalent documentation. Age of documentation requirements do not have to be met. o Document current receipt with a bank statement, benefit verification letter, notice of award letter or other equivalent documentation. Age of documentation requirements must be met. For newly established sources of survivor and/or dependent benefit income: Document the finalized terms of the newly established income including, but not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount with the benefit verification letter, notice of award letter or other equivalent documentation from the payor that provides and establishes these terms. The income must commence prior to or on the first Mortgage payment due date. The documentation must be dated no more than 120 days prior to the Note Date. Verification of current receipt is not required. Teacher Income When a borrower is employed as a teacher, the annual salary must be verified. If monthly or weekly pay is provided, the employer must verify the number of pay periods per year if the payout is not clear, or average the income based on the most recent W-2s over the past 12 months. For teacher income paid over a 10-month period and the borrower is obtaining financing during the summer months when income is not being received, the following documentation is required: o Verbal verification of employment o Copy of a fully executed, guaranteed contract with no contingencies, indicating that the borrower is paid over a 10-month period o Final year-end paystub from the employer o Qualify the borrower based on the income received on the final year-end paystub. CF30HBMD 09-14-2017 20
UNDERWRITING AND INCOME DOCUMENTATION Temporary Income Temporary employment may be considered when the borrower works through an agency (or agencies) and has demonstrated this to be a stable form of income. The borrower's work history must be verified for two years and the borrower must have worked steadily as a temporary employee for a minimum of 18 months. Income must be averaged over the two-year period, but not less than 18 months. Obtain W-2s for the most recent two years plus a current paystub documenting at least 30 days of income. No consideration will be given to temporary income of a borrower who is not employed through a temporary agency and whose sole employer states the borrower's employment is temporary Temporary Leave Income Temporary leave may include family and medical leave, short term disability, maternity leave, or other forms of temporary leave, with or without pay. During a temporary leave, a borrower's income may be reduced or completely interrupted. It must be determined that during and after the temporary leave, the borrower has the capacity to repay the mortgage and all other monthly obligations. The following guidelines apply if the borrower will be on temporary leave at the time of the closing of the mortgage loan and if the borrower's income is needed to qualify: o The borrower's employment and income history must meet standard eligibility requirements. o The borrower must provide written confirmation of his/her intent to return to work and the agreed upon date of return. o The agreed upon date of return must be documented by the employer or a designee of the employer (such as a third party used to administer employee leave). o A verbal verification of employment must be obtained. If the employer confirms that the borrower is currently on temporary leave, the borrower is considered to be employed. o The borrower's income must be verified in accordance with standard requirements. o The following information must be obtained: The amount and duration of the temporary leave income, which may require multiple documents or sources depending in the type and duration of the leave period. The amount of the regular employment income the borrower received prior to the temporary leave. This may include base pay, commissions, bonuses, overtime, etc. CF30HBMD 09-14-2017 21
UNDERWRITING AND INCOME DOCUMENTATION Requirements for Calculating Income Used for Qualifying If the borrower will return to work as of the first mortgage payment date, the borrower's regular employment income can be considered in qualifying. If the borrower will not return to work as of the first mortgage payment date, the lesser of the borrower's temporary leave income or regular employment income must be used. If the borrower's temporary leave income is less than his or her regular employment income, the supplemental temporary leave income may be used with available liquid financial reserves. Following are instructions on how to calculate the 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. Supplemental income amount = available liquid reserves / number of months of supplemental income. Number of months of supplemental income o 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, calculate the total qualifying income. Total qualifying income = Supplemental income + temporary leave income The total qualifying income that results may not exceed the borrower's regular employment income. Documentation Requirements The following documentation is required for borrowers on temporary leave: Verification of the borrower's pre-leave income and employment, regardless of leave status. Documentation from current employer confirming the borrower's statutory right to return to work (or the employer's commitment to permit the borrower to return to work), the confirmed date of return, and the borrower's postleave employment and income. Written statement signed by the borrower confirming that the borrower will return to work for current employer and stating the confirmed date of return that has been agreed upon between the borrower and the employer. In addition to the above, the following documentation is required when the borrower will return to work for the current employer after the first mortgage payment due date: o Documentation evidencing the amount, duration, and consistency of all temporary leave income sources being used to qualify the borrower (such as short-term disability benefits or insurance, sick leave benefits, and temporarily reduced income from employer) that are being received during the temporary leave. CF30HBMD 09-14-2017 22
UNDERWRITING AND INCOME DOCUMENTATION o All available liquid assets used to supplement the reduced income for the duration of the temporary leave must meet the requirements of and be verified in accordance with the LPA requirements. o A written rationale explaining the analysis used to determine the qualifying income, regardless of the underwriting path. Documentation concerning the timing of the borrower's return to work may be provided directly by the borrower or by the employer. This documentation may include previous correspondence between the employer (or its designee, if applicable) and is not required to comply with Age of Documents requirements. Tip Income Tip income may be used to qualify the borrower if it is verified that the borrower has received it for the last two years. Refer to the Variable Income for additional details on how to calculate the qualifying income. All of the following documentation is required: WVOE The borrower's recent paystub IRS W-2 forms covering the most recent two-year period. Trust Income Funds disbursed from a trust account where the borrower is the beneficiary are acceptable if the borrower has immediate access to them. The trust manager or trustee must verify the value of the trust account and confirm the following: Verification that the trust income will continue for at least three years from the date of the loan application and the additional requirements in this table: For trust income based on historical fluctuating payments from a trust asset: For trust income based on a predetermined fixed payment amount: A copy of the fully executed trust agreement or the trustee's statement outlining the payment terms, a copy of the complete federal income tax returns for the most recent two year period, and evidence of sufficient qualifying income (e.g., letter from trustee, bank statements). Verify that the trust income will continue for at least three years from the date of the loan application. Verify that the trust income will continue for at least three years from the date of the loan application. A copy of the fully executed trust agreement specifying fixed payment amount occurring at set intervals (e.g., monthly, quarterly), and duration of payments. Document current receipts with a copy of a bank statement or other equivalent documentation and evidence of sufficient qualifying income (e.g., letter from trustee, bank statements). A history of receipt is not required if the trust specifies predetermined fixed payment amounts occurring at regular intervals for a duration of at least three years; however the trust income must be likely to continue for the next three years. CF30HBMD 09-14-2017 23
UNDERWRITING AND INCOME DOCUMENTATION Unacceptable Types of Income The following types of income are not permitted to be used for qualification purposes, except in cases where the specific product under which the loan is submitted allows for it: Asset dissipation Educational benefits, such as VA benefits or scholarships Gifts, regardless of amount or duration Lump sum payments, such as lawsuit settlements or inheritance Retained earnings Reverse mortgage loan proceeds Secondary income that will continue for less than three years Lump sum payments of lottery winnings that are not ongoing One-time signing bonus Non-borrower spousal income Student loans Allowance income Stock options Room and board received for the borrower's primary residence from anyone except a blood relative Severance pay Any income from a business activity that may be allowed by state law but is against federal law Wage Earner Transcripts IRS transcripts will be required for all loans based on the documentation used to verify income for each borrower. These transcripts must be reviewed to confirm consistency between the documentation provided and the IRS transcripts. Refer to Reviewing the Results for additional questions. Wage Earner Transcripts Request one year IRS W-2 transcripts when the Automated Underwriting feedback requires the following income documentation: YTD paystub One W-2 Request two years' IRS W-2 transcripts when the Automated Underwriting feedback requires the following income documentation: YTD paystub Two W-2s CF30HBMD 09-14-2017 24
UNDERWRITING AND INCOME DOCUMENTATION In lieu of W-2 forms an IRS Wage and Income Transcript (W-2 transcript) in lieu of the actual W-2 forms is also permitted. Tax transcripts and Identity Theft An exception to the transcript policy is not required if evidence that the IRS has rejected the 4506-T as not able to process or limitation or with another similar code and not a no record found or data mismatch response, provided the following documentation is included in the file: Proof identification theft was reported to and received by the IRS (form 14039), if available; or Copy of the notification from the IRS notifying the taxpayer of possible identity theft; or A copy of a police report or proof that the borrower filed a complaint regarding the identity theft with the Federal Trade Commission. Bank statement or copy of check evidencing tax payment made or refund received for that year matches the 1040 amount (required unless the borrower is waiting on their refund due to the fraud issue), and Signed 4506-T. SELF EMPLOYMENT INCOME AND EMPLOYMENT Self-Employment Income and Employment A borrower who owns 25% or more of a business is considered self-employed. If income from the self-employed borrower's business is not being used for qualification purposes, the business must still be analyzed to ensure that it will not negatively affect the borrower's ability to repay. The borrower's signed federal tax returns must be obtained for the prior two years in order to determine if there is a business loss. Generally, a two-year history of the borrower's prior earnings is required as a means of demonstrating the likelihood that the income will continue to be received. However, a person who has a shorter history of self-employment 12 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 same products or services as the current business, or in an occupation in which he had similar responsibilities to those undertaken in connection with the current business. In such cases, the Seller must give careful consideration to the nature of the borrower's level of experience, and the amount of debt the business has acquired. CF30HBMD 09-14-2017 25