Table of Contents 1. Product Codes... 3 2. Category... 3 3. Subcategory... 3 4. Purchase and/or Sales Contract... 3 5. HERO/PACE Loans Rate/Term Refinance... 4 6. LTV/Other Restrictions... 4 7. 97% LTV... 10 8. Continuity of Obligation. 12 9. State Restrictions.... 12 10. Underwriting Method - ARMS... 12 11. Qualifying Ratios... 13 12. Qualifying Rate... 14 13. ARM Information Interest Only... 15 14. Documentation Requirements... 15 15. Credit Score Requirements... 15 16. Borrower Eligibility... 19 17. Power of Attorney... 21 18. Occupancy... 22 19. Property Types... 25 20. Rental Properties and Rental Income.26 21. Properties with Solar Panels... 33 22. Property Restrictions..... 34 23. Reserves... 35 24. Subordinate and Secondary Financing... 38 25. IPCs - Interested Party Contributions... 45 26. Mortgage Insurance Requirements... 50 27. Temporary Buydowns... 52 28. Escrow Waiver 52 29. Principal Curtailment... 52 30. Down Payment Criteria... 53 31. Other Real Estate... 72 32. Miscellaneous Criteria... 73 1 05-18-2018
33. Appraisal Requirements... 73 34. Overall Credit... 78 35. Business Debt in Borrower's Name.82 36. Contingent Liability... 83 37. Installment/Revolving Credit... 85 38. Mortgage/Rental Credit... 89 39. Accuracy of Credit Data... 91 40. Rolling Lates.....93 41. Federal IncomeTax Installment Agreements... 93 42. Significant Derogatory Credit Events....94 43. Summary of all Waiting Periods.... 95 44. Measurement of Waiting Periods... 96 45. Bankruptcy... 97 46. Foreclosure/Deeds in Lieu/Pre-Foreclosure Sales and Charge Off of Mortgage Account... 99 47. Foreclosure and Bankruptcy on the Same Mortgage... 101 48. Past Due/Collections/Chargeoffs/Judgments/Garnishments & Liens...101 49. Tax Transcripts and 4506T... 102 50. Income Documentation and Description... 103 51. Unreimbursed Employee Business Expenses (2106)..... 165 52. Loans with resale restrictions: Loan and borrower eligibility 165 2 05-18-2018
PRODUCT CODES Purchase, Rate/Term and Cash Out Conventional Conforming Fixed Conventional Conforming LIBOR ARM High Balance/Super Conforming Fixed Empower Encompass Empower Encompass Empower Encompass PF10 DU CF30FN CM50 CA51FNFR PF58 - DU CF30HBFN PF11 CF20FNFR CM53 LP N/A PF57 - DU CF15HBFN PF20 DU CF15FN CM70 CA71FNFR CM52 CA51HBFNFR 5/1 ARM PF06 CF10FNFR CM10 CA10FNFR CM72 CA71HBFNFR 7/1 ARM P13F LP CF30FR N/A CF15HBFR LP P23F - LP CF15FR N/A CF30HBFR LP CF25 CF25FNFR Empower Codes for LPMI: PF06LPMI Conforming 10 years fixed w/lpmi PF23FLPMI Conforming 15 year fixed w/lpmi PF20LPMI Conforming 15 year fixed w/lpmi PF57LPMI High Balance 15 year fixed w/lpmi PF11LPMI Conforming 20 year fixed w/lpmi PF10LPMI Conforming 30 year fixed w/lpmi PF13FLPMI Conforming 30 year fixed w/lpmi PF58LPMI High Balance 30 year fixed w/lpmi CATEGORY Conventional Conforming Fixed Conventional Conforming ARMS High Balance/Super Conforming check County Loan Limits: https://onlinegeocoder.fanniemae.com/loanlimitgeocoder/pages/homepage.aspx http://www.fhfa.gov/datatools/downloads/pages/conforming-loan-limits.aspx SUBCATEGORY PURCHASE AND/OR SALES CONTRACT Standard ALL Purchase Transactions require a copy of the fully executed sales contract and all addenda which must be reviewed by the Underwriter and included in the Mortgage file. Non-Arm s Length Transactions Non-arm s length transactions are purchase transactions in which there is a relationship or business affiliation between the seller and the buyer of the property. Fannie Mae allows non-arm s length transactions for the purchase of existing properties unless specifically forbidden for the particular scenario, such as delayed financing. For the purchase of newly constructed properties, if the borrower has a relationship or business affiliation (any ownership interest, or employment) with the builder, developer, or seller of the property, Fannie Mae will only purchase mortgage loans secured by a principal residence. Fannie Mae will not purchase mortgage loans on newly constructed homes secured by a second home or investment property if the borrower has a relationship or business affiliation with the builder, developer, or seller of the property. 3 05-18-2018
HERO/PACE LOANS REFINANCE TRANSACTIONS LTV OTHER RESTRICTIONS REFINANCE TRANSACTIONS FANNIE MAE Fannie Mae and Freddie Mac: Refer to the PBM Manual for HomeStyle Energy and Property Assessed Clean Energy Loans guidelines (Fannie Mae) and LP Open Access guidelines (Freddie Mac) for refinance of loans with an existing HERO/PACE assessment. Eligibility Requirements Limited cash-out refinance transactions must meet the following requirements: The transaction is being used to pay off an existing first mortgage loan (including an existing HELOC in first-lien position) by obtaining a new first mortgage loan secured by the same property; or for single-closing construction-to-permanent loans to pay for construction costs to build the home, which may include paying off an existing lot lien. Only subordinate liens used to purchase the property may be paid off and included in the new mortgage. Exceptions are allowed for paying off a Property Assessed Clean Energy (PACE) loan or other debt (secured or unsecured) that was used solely for energy-related improvements. See HomeStyle Energy Guidelines for additional information. The subject property must not be currently listed for sale. It must be taken off the market on or before the disbursement date of the new mortgage loan, and the borrowers must confirm their intent to occupy the subject property (for principal residence transactions). o Copy of canceled listing is required to confirm no longer listed for sale. Acceptable Uses The following are acceptable in conjunction with a limited cash-out transaction: Modifying the interest rate and/or term for existing mortgages; Paying off the unpaid principal balance of the existing first mortgage (including prepayment penalties) For single-closing construction-to-permanent transactions; paying for construction costs to build a home, which may include paying off an existing lot lien; Financing the payment of closing costs, points, and prepaid items. 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 Receiving cash back in an amount that is not more than the lesser of 2% of the new refinance loan amount or $2000; Buying out a co-owner pursuant to an agreement; Paying off a subordinate mortgage lien (including prepayment penalties) used to purchase the subject property. The underwriter must document that the entire amount of the subordinate financing was used to acquire the property; or Paying off the unpaid principal balance of PACE loans and other debt used for energy-related improvements, described above. Cash Back to the Borrower As noted above, the borrower may receive a small amount of cash back in a limited cash-out refinance transaction. The underwriter may also refund the borrower for the overpayment of fees and charges due to federal or state laws and regulations. Refunds such as these are not included in the maximum cash back limitation, provided that: The settlement statement clearly identifies the refund, and The loan file includes documentation to support the amount and reason for the refund. This applies to standard limited cash-out refinance transactions and DU Refi Plus transactions. Note: These refunds may also be applied as a principal balance curtailment (see Principal Curtailments in these guidelines) 4 05-18-2018
LTV OTHER RESTRICTIONS REFINANCE TRANSACTIONS FANNIE MAE, Documentation Requirements To treat a transaction as a limited cash-out refinance transaction, the Underwriter must document that all proceeds of the existing subordinate lien were used to fund part of the subject property purchase price or pay for permissible energy-related expenses. Written confirmation must be maintained in the mortgage file. The following are acceptable forms of documentation: A copy of the 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; or For energy-related expenses, copies of invoices or receipts to evidence funds were used for energy improvements. A copy of an energy report is required in many cases. See HomeStyle Energy guidelines for additional information. Refinances to Buy Out An Owner s Interest A transaction that requires one owner to buy out the interest of another owner (for example, as a result of a divorce settlement or dissolution of a domestic partnership) is considered a limited cash-out refinance if the secured property was jointly owned for at least 12 months preceding the disbursement date of the new mortgage loan. 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. Except in the case of recent inheritance of the subject property, documentation must be provided to indicate that the security property was jointly owned by all parties for at least 12 months preceding the disbursement date of the new mortgage loan. Borrowers who acquire sole ownership of the property may not receive any of the proceeds from the refinancing. The party buying out the other party s interest must be able to qualify for the mortgage pursuant to Fannie Mae s underwriting guidelines. Ineligible Transactions When the following conditions exist, the transaction is ineligible as a limited cash-out refinance and must be treated as cash-out refinance. No outstanding first lien on the subject property (except for single-closing construction-to-permanent transactions, which are eligible as a limited cash-out refinance even though there is not an outstanding lien on the subject property); The proceeds are used to pay off a subordinate lien that was not used to purchase the property (other than the exceptions for paying off PACE loans and other debt used for energy-related improvements, described above); The borrower finances the payment of real estate taxes for the subject property in the loan amount, but does not establish an escrow account; The borrower finances the payment of real estate taxes that are more than 60 days delinquent for the subject property in the loan amount; and A short-term refinance mortgage that combines a first mortgage and a non-purchase-money subordinate mortgage into a new first mortgage on any refinance of that loan within six months. The transaction is not eligible when the subject property is listed for sale at the time of disbursement of the new mortgage loan. 5 05-18-2018
LTV OTHER RESTRICTIONS REFINANCE TRANSACTIONS FANNIE MAE, 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 by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it. Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan. The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage except for the following: o There is no waiting period if the underwriter documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership). o The delayed financing requirements are met. See PBM Delayed Financing guidelines o If the property was owned prior to closing by a limited liability corporation (LLC) that is majorityowned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower s six month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See General Borrower Eligibility Requirements for additional details.) o If the property was owned prior to closing by an inter vivos revocable trust, the time held by the trust may be counted towards meeting the borrower s six month ownership requirement if the borrower is the primary beneficiary of the trust. For the maximum allowable LTV, CLTV and HCLTV ratios and credit score requirements for cash-out refinances, see the matrix. Ineligible Transactions The following transaction types are not eligible as cash-out refinances: 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 loan except if delayed financing guidelines are met. See PBM Delayed Financing Guidelines for details. For certain transactions on properties that have a Property Assessed Clean Energy (PACE) loan, borrowers who refinance the first mortgage loan and have sufficient equity to pay off the PACE loan but choose not to do so will be ineligible for a cash-out refinance. Refer to PBM Manual, HomeStyle Energy Mortgages & Property Assessed Clean Energy Loans guidelines. 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 date the installment land contract was executed. The new loan amount includes the financing of real estate taxes that are more than 60 days delinquent and an escrow account is not established. The transaction is not eligible for delivery to Fannie Mae when the subject property is listed for sale at the time of disbursement of the new mortgage loan. 6 05-18-2018
LTV OTHER RESTRICTIONS REFINANCE TRANSACTIONS FANNIE MAE, 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 costs, 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 amount, but if they are, an escrow account must be established; 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 that combines a first mortgage and a non-purchasemoney subordinate mortgage into a new first mortgage or a refinance of the short-term refinance loan within six months. Student Loan Cash-Out Refinances The student loan cash-out refinance feature allows for the payoff of student loan debt through the refinance transaction with a waiver of the cash-out refinance LLPA if all of the following requirements are met: Requirements for Student Loan Cash-Out Refinances The loan must be underwritten in DU. DU cannot specifically identify these transactions, but will issue a message when it appears that only subject property liens and student loans are marked paid by closing. The message will remind underwriters about certain requirements below; however, the underwriter must confirm the loan meets all of the requirements outside of DU. The standard cash-out refinance LTV/CLTV, and HCLTV ratios apply At least one student loan must be paid off with proceeds from the subject transaction with the following criteria: Proceeds must be paid directly to the student loan servicer at closing; At least one borrower must be obligated on the student loan(s) being paid off, and The student loan must be paid in full partial payments are not permitted. The transaction may also be used to pay off one of the following: An existing first mortgage (including an existing HELOC in first-lien position); or A single-closing construction-to-permanent loan to pay for construction costs to build the home, which may include paying off an existing lot lien. Only subordinate liens used to purchase the property may be paid off and included in the new mortgage. Exceptions are allowed for paying off a PACE loan or other debt (secured or unsecured) that was used solely for energy improvements. See HomeStyle Energy guidelines The transaction may be used to finance the payment of closing costs, points, and prepaid items. 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. The borrower may receive cash back in the amount that is not more than the lesser of 2% of the new refinance loan amount of $2,000. PBM may also refund the borrower for the overpayment of fees and charges due to federal or state laws or regulations, or apply a principal curtailment. Unless otherwise stated, all other standard cash-out refinance requirements apply. 7 05-18-2018
LTV OTHER RESTRICTIONS REFINANCE TRANSACTIONS FANNIE MAE, Delivery Requirements for Student Loan Refinance Loans qualified as student loan cash-out refinances must be delivered to Fannie Mae with Special Feature Code (SFC) 003 and SFC 841. Loan-Level Price Adjustments for Student Loan Refinance As noted above, the LLPA is waived for loans that meet the student loan cash-out refinance requirements. Note: Student Loan Cash-Out Refinance loans require Corporate Approval. Submit the following documentation for review: 1008 1003 DU with SFC 841 Credit Report Tangible Net Benefit Underwriter to condition UTR the Borrower(s) Certificate of Reasonable Tangible Net Benefit for Refinance Loans Disclosure prior to funding. Required on ALL R/T refinance transactions. Borrower(s) Certificate of Reasonable Tangible Net Benefit for Refinance Loans Disclosure is generated with closing package and must be fully completed and executed by the borrower and returned with loan documents. Borrower(s) Net Benefit Worksheet o Underwriter to review the completed/executed Borrower(s) Certificate of Reasonable Tangible Net Benefit Disclosure and complete the Borrower(s) Benefit Worksheet based on the information provided by the borrower. o To be completed by the Underwriter prior to funding. o Copy of both executed forms to be placed in loan file behind the 1008. Forms are located in the PBM Manual under Policy and Procedures in the Forms Folder. LTV OTHER RESTRICTIONS REFINANCE TRANSACTIONS FREDDIE MAC No cash-out Refinance Mortgages Pay off the first mortgage, regardless of its age Payoff any junior liens secured by the mortgaged premises, that were used in their entirety to acquire the subject property Pay related closing costs Disburse cash out to the borrower (or any other payee) not to exceed 2% of the new refinance mortgage or $2000, whichever is less Pay off the outstanding balance of a land contract or contract for deed In the event there are remaining proceeds from the no cash-out refinance mortgage after the proceeds are applied as described above: The mortgage amount must be reduced, or The excess amount must be applied as a principal curtailment to the new refinance mortgage at closing and must be clearly reflected on the Settlement/Closing Disclosure Statement. Under no circumstances may cash disbursed to the Borrower (or any other payee) exceed the maximum permitted for no cash-out refinance mortgages. (a) Secondary financing the borrower is not required to satisfy outstanding junior liens secured by the Mortgaged Premises, provided that the junior lien meets the requirements of Secondary Financing section (b) Special documentation requirements If a junior lien was paid off as part of the no-cash-out refinance transaction, the underwriter must maintain documentation in the Mortgage file demonstrating that the full amount of the lien was used for the purchase of the subject property. 8 05-18-2018
LTV OTHER RESTRICTIONS REFINANCE TRANSACTIONS FREDDIE MAC, (c) Special requirements for Freddie Mac owned no cash-out refinance Mortgages if the Mortgage being refinanced is a First Lien, conventional Mortgage currently owned by Freddie Mac in whole or in part or securitized by Freddie Mac, the no cash-out refinance Mortgage may be eligible for higher LTV/TLTV/HTLTV ratios provided that: o The proceeds of the new refinance Mortgage may not pay off a junior lien secured by the Mortgaged premises, and o Proof of the Freddie Mac loan number of the existing Mortgage is provided in the Mortgage file. Cash-out refinance mortgages A cash-out refinance mortgage is a mortgage in which the use of the loan amount is not limited to specific purposes A mortgage placed on a property previously owned free and clear by the borrower is always considered a cash-out refinance mortgage. At least one borrower must have been on the title to the subject property for at least six months prior to the note date, except as specified below If none of the borrowers have been on the title to the subject property for at least six months prior to the note date of the cash-out refinance mortgage, the following requirement(s) must be met: At least one borrower on the refinance mortgage inherited or was legally awarded the subject property (for example, in the case of divorce, separation or dissolution of a domestic partnership) OR, all of the following: The Settlement/Closing Disclosure Statement from the purchase transaction must reflect that no financing secured by the subject property was used to purchase the subject property. If the mortgage has an Application Received Date prior to October 3, 2015, the Settlement/Closing Disclosure Statement must be an executed version. A recorded trustee s deed or equivalent documentation may be used when a Settlement/Closing Disclosure Statement was not used for the purchase transaction. The preliminary title report for the refinance transaction must reflect the borrower as the owner of the subject property and must reflect that there are no liens on the property The source of funds used to purchase the subject property must be fully documented If funds were borrowed to purchase the subject property, those funds must be repaid and reflected on the Settlement/Closing Disclosure Statement for the refinance transaction The amount of the cash-out refinance mortgage must not exceed the sum of the original purchase price and related closing costs, financing costs and prepaids/escrows as documented by the CD for the purchase transaction, less any gift funds used to purchase the subject property. A recorded trustee s deed or equivalent documentation may be used when a CD was not used for the purchase transaction. There must have been no affiliation or relationship between the buyer and seller of the purchase transaction. Note: See PBM Delayed Financing Guidelines for details Special purpose cash-out refinance Mortgages A cash-out refinance Mortgage where the owner of a property uses the proceeds of the refinance transaction to buy out the equity of a co-owner is a special purpose cash-out refinance Mortgage. A special purpose cash-out refinance must meet applicable LTV/TLTV/HTLTV requirements for cash-out refinance mortgages and receive Accept LP Risk Class. 9 05-18-2018
LTV OTHER RESTRICTIONS REFINANCE TRANSACTIONS FREDDIE MAC, The loan amount of a special purpose cash-out refinance Mortgage is limited to amounts used to buy out the equity of the co-owner, which may include: Paying off the first Mortgage, regardless of age Paying off junior liens secured by the Mortgaged Premises Paying related Closing Costs, Financing Costs and Prepaids In addition, the following conditions must be met: The borrower and the co-owner receiving the buy-out proceeds must have jointly owned the property for a minimum of 12 months prior to the initial loan applications (parties who inherited an interest in the property are exempt from this requirement) The borrower and the co-owner receiving the buy-out proceeds must provide evidence that they occupied the subject property as their Primary Residence (parties who inherited an interest in the property are exempt from this requirement) The borrower and the co-owner receiving the buy-out proceeds must provide a written agreement, signed by all parties, stating the terms of the property transfer and the disposition of the proceeds from the refinancing transaction The borrower who retains sole ownership of the property may not receive any of the proceeds from the refinance transaction (a) Secondary Financing the borrower is not required to satisfy outstanding junior liens secured by the Mortgaged Premises provided that the junior lien meets program requirements (b) Special documentation requirements the underwriter must retain the following in the Mortgage file: o Documentation evidencing that the Borrower and the co-owner jointly occupied the Mortgaged Premises as their Primary Residence, if applicable o A copy of the written agreement stating the terms of property transfer and the disposition of the refinance proceeds Restructured Mortgages Previously, restructured mortgages were not eligible for purchase. Due to changing market conditions, they have removed this restriction. There are no longer any requirements specific to Restructured Mortgages, and as a result have deleted all references to this topic. Tangible Net Benefit All documents necessary to evidence compliance with all applicable anti-predatory lending laws and regulations including, for example, any required reasonable tangible net benefit analysis, borrower disclosures or disclosures related to affiliated business or service providers must be in the loan file. 97% LTV FANNIE MAE Requirements for Purchase Transactions with 95.01 97% LTV Ratios Fannie Mae permits LTV, CLTV, and HCLTV ratios to exceed 95% if certain requirements are met. The table below describes requirements for non-homeready mortgage loan transactions with LTV ratios of 95.01 97%. Criteria Requirements CLTV Ratio 95.01 to 97% if the subordinate lien is not a Community Seconds loan 105% if the subordinate lien is a Community Seconds loan HCLTV Ratio 95.01 to 97% Loan Type Fixed-rate loans with terms up to 30 years. Note: High-balance, adjustable-rate, and HomeStyle Renovation loans are NOT permitted 10 05-18-2018
97% LTV FANNIE MAE, CONTINED Property One-unit principal residence; manufactured housing is NOT permitted Borrower Eligibility At least one borrower must be a first-time home buyer, as indicated on the 1003 in Section VIII, when at least one borrower responds No to Declaration M: Have you had an ownership interest in a property in the last three years? Underwriting Method DU Only Reserves Reserve requirements will be determined by DU Home-buyer Education and Counseling o Not Required Minimum Borrower Contribution o Standard Fannie Mae Contribution requirements apply Mortgage insurance o 35% Note: The above requirements do not apply to HomeReady mortgage loans. See HomeReady Guidelines for specific requirements. Requirements for Limited Cash-Out Refinance Transactions with 95.01 97% LTV Ratios If the LTV, CLTV, or HCLTV ratio exceeds 95% for a limited cash-out transaction, the following requirements apply. Criteria Requirements Existing Loan The underwriter must document that the existing loan being refinanced is owned (or securitized) by Fannie Mae. Documentation may come from The lender s servicing system, The current servicer (if the lender is not the servicer), LTV, CLTV or HCLTV Ratio Loan Type Property and Occupancy Fannie Mae s Loan Lookup tool, or Any other source as confirmed by the underwriter.. The underwriter must inform DU that Fannie Mae owns the existing mortgage using the Owner of Existing Mortgage field in the online loan application before submitting the loan to DU. Note: This requirement does not apply if the CLTV exceeds 95% only due to a community Seconds loan. 95.01 to 97% Note: The CLTV ratio can be up to 105% if the subordinate lien is a Community Seconds loan Fixed-rate loans with terms up to 30 years Note: High-balance and ARM loans are not permitted. One-unit principal residence. All borrowers must occupy the property. Manufactured housing is NOT permitted. Credit Score Requirements At least one borrower on the loan must have a credit score Underwriting DU only Method Other All other standard limited cash-out refinance policies apply Note: the above requirements do not apply to DU Refi Plus or HomeReady loans. MI coverage is 35% 11 05-18-2018
CONTINUITY OF OBLIGATION FANNIE MAE CONTINUITY OF OBLIGATION FREDDIE MAC STATE RESTRICTIONS UNDERWRITING METHODS ARMS Continuity of obligation policy has been eliminated in its entirety. This policy was introduced during the financial crisis, to ensure borrowers who recently acquired ownership of a new property in the absence of a recorded sale of the previous property were properly qualified and it applied to all limited cash-out and cash-out refinance transactions. Since this policy was introduced, Fannie Mae has implemented a number of policy updates to improve the reliability of borrower qualification, broadened the collection of appraisal date, and developed collateral underwriter, an appraisal assessment tool. These actions collectively provide adequate controls to ensure borrower eligibility requirements and maximum LTV ratio limits are met. As a result, the continuity of obligation policy is no longer required. The elimination of this policy will simplify refinance transactions. For all refinance Mortgages: When an existing Mortgage will be satisfied as a result of a refinance transaction, one of the following requirements must be met: At least one Borrower on the refinance Mortgage was a Borrower on the Mortgage being refinanced; or At least one Borrower on the refinance Mortgage held title to and resided in the Mortgaged Premises as a Primary Residence for the most recent 12-month period and the Mortgage file contains documentation evidencing that the borrower either: o Has been making timely Mortgage payments, including the payments for any secondary financing, for the most recent 12-month period; or o Is a Related Person to a Borrower on the Mortgage being refinanced; or At least one Borrower on the refinance Mortgage inherited or was legally awarded the Mortgaged Premises (for example, in the case of divorce, separation, or dissolution of a domestic partnership). N/A Calculating the Fully Indexed Rate The fully indexed rate is the sum of the value of the applicable index and the mortgage margin, which is then rounded to the nearest one-eighth percent. Note: unless specific product terms provide otherwise, if the index plus gross margin equals a number that is equidistant between the higher and lower one-eighth percent, Fannie Mae rounds down to the nearest one-eighth percent. The applicable index value that determines the fully indexed rate is the lowest value in effect during the 90 days that precede the date of the mortgage or deed of trust note. Follow findings/additional documentation may be required by the underwriter above DU/LP findings based on the merits of the individual file. Correct ARM product must be input into AUS so that the loan will process correctly. Fannie Mae ARM Plan Provident Programs Empower Encompass FM-GENERIC 2725- Conforming 5/1 ARM CM50 CA51FNFR Conforming 5/1 ARM LP ONLY CM53 No Encompass code FM-GEN 2727 Conforming 7/1 ARM DU/LP CM70 CA71FNFR FM-GEN 2729 Conforming 10/1 ARM DU/LP CM10 CA101FNFR FM-GENERIC Conforming 5/5 ARM DU ONLY N/A N/A Plan 3846 (not available at this time) FM-GEN 2725 High Balance 5/1 ARM DU/LP CM52 CA51HBFNFR FM-GEN 2727 High Balance 7/1 ARM DU/LP CM72 CA71HBFNFR 12 05-18-2018
QUALIFYING RATIOS FREDDIE MAC Evaluating Debt Ratios Loan Product Advisor calculates and evaluates the Borrower s qualifying ratios. For Accept Mortgage, Loan Product Advisor has determined that the Borrower s qualifying ratios are acceptable. Manually Underwritten Mortgages (Corporate 2nd Signature required) For Manually underwritten Mortgages, the Underwriter must evaluate the Borrower s ability to pay the monthly housing expense and other obligations. When the borrower s monthly debt payment to income ratio exceeds 45%, the loan is ineligible for sale to Freddie Mac. As a guideline, the monthly debt payment-to-income ratio should not be greater than 33% to 36% of the Borrower s stable monthly income. When the Borrower s monthly debt payment-to-income ratio exceeds 36%, the Underwriter must document in the file the justification for the higher qualifying ratio. Except in rare circumstances, the Borrower s debt-to-income ratio should not exceed 36% for the following mortgages: o Cash-out refinance mortgages o Investment Property mortgages o Mortgages secured by second homes o Mortgages secured by 2- to 4-unit properties o Mortgages where there is evidence that the Borrower increases debt and then periodically uses refinance or debt consolidation loans to reduce payments to a manageable level. The following factors may be considered in justifying a debt payment-to-income ratio that exceeds 36% but is not greater than 45%: o The Mortgage is secured by an energy efficient property o The borrower s probability for increased earnings based on education, job training or time employed or practiced in a profession o Documented rent paid by Related Persons living in the house o The Borrower demonstrated ability to carry a higher housing expense or higher debt level while maintaining a good credit history for at least 12 months o The existence of verified income that is not included within the definition of stable monthly income when there is an expectation that future expenses will be lower (such as child-support income that is scheduled to cease in one year when a child becomes an adult. In this case, the expectation would be that either future household expenses will be lower or that additional income will be provided by the new adult.) In addition, the examples listed below may be used to justify higher qualifying ratios for Non-Loan Product Advisor Mortgages. These examples may not be used to justify higher qualifying ratios for Caution Mortgages because they have already been considered by Loan Product Advisor. 1. The borrower s verified liquid assets are substantial enough to evidence an ability to repay the Mortgage regardless of income 2. A down payment on the purchase of the property of at least 25% 3. The Borrower s strong Credit Score (for example, a 740 or higher FICO score) and the Underwriter s confirmation that the Borrower s credit reputation is excellent. For any Manually Underwritten Mortgage for which either of the ratio guidelines is exceeded, the Underwriter must prepare and retain in the Mortgage file a written explanation justifying his/her underwriting decision. 13 05-18-2018
QUALIFYING RATIOS FREDDIE MAC QUALIFYING RATIOS FANNIE MAE Resubmission to Loan Product Advisor Resubmission not required if: o The monthly debt payment decreases o The income for any borrower increases o The income for any Borrower decreases and/or the monthly debt payment (including monthly housing expense) increases, and The total difference does not change the total debt-to-income ratio by more than three percentage points, and The total debt-to-income ratio on the previous submission did not exceed 45% Maximum DTI Ratios For loan casefiles underwritten through DU, the maximum allowable DTI ratio is 50%. If the DTI on a loan casefile exceeds 50%, the loan casefile will receive an Ineligible recommendation For manually underwritten loans, Fannie Mae s maximum total DTI ratio is 36% of the borrower s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix. DTI Ratio Tolerance and Re-Underwriting Criteria If the borrower discloses or the underwriter discovers additional debt(s) (i.e. on the Soft Pull) or reduced income after the underwriting decision was made up to and concurrent with loan closing, the loan must be re-underwritten if the new information causes the DTI ratio to increase by 3 or more percentage points up to the maximum allowed. In all cases, if the underwriter determines that there is new subordinate financing on the subject property during the loan process, the mortgage loan must be re-underwritten. Note: Re-underwriting means that loan casefiles must be resubmitted to DU with updated information, and for manually underwritten loans, a comprehensive risk and eligibility assessment must be performed. Note: Manually underwritten loans require Corporate 2 nd signature. QUALIFYING RATE Qualifying Interest Rate Requirements Transaction Type DU and Manual Underwriting Fixed-Rate mortgages Note Rate ARMs with initial fixed-rate period of 5 Greater of the note rate plus 2% or the years or less fully indexed rate ARMs with an initial fixed-rate period Greater of the note rate or the fully of greater than 5 years. indexed rate Mortgage Margin The mortgage margin is the spread that is added to the index value to develop the interest accrual rate for the mortgage. The maximum mortgage margin may be no more than 300 basis points. Additional Information about ARM Qualifying for DU Loan Casefiles: For DU loan casefiles, the fully indexed rate is defined as the index plus the margin as entered in the online loan application. The index and margin are required for all ARM loans submitted to DU. If Lender ARM Plan is used in DU, DU uses the interest rate entered in the ARM Qualifying Rate Field. If no interest rate is entered in that field, DU uses the note rate plus 2% to qualify the borrower. Note: DU/LP both are allowed for ARM loans Note: Manually underwritten loans require Corporate 2 nd signature 14 05-18-2018
ARM INFORMATION INTEREST ONLY DOCUMENTATION REQUIREMENTS Interest Only ARM loans are not available. PBM General Requirements AUS findings: o Fannie Mae Desktop Underwriter (DU) o Freddie Mac Loan Product Advisor (LP) Data Verify An audit tool to be run on all loans prior to closing. The ID Verify, AppVerify and Property Verify scores must be equal to or greater than 700. All findings in the High Caution range must be cleared by the underwriter with appropriate documentation or comments placed in the loan file. All findings in the Medium and Low Caution ranges must be reviewed for red flags and possible clearance. NOTE: Medium and Low range findings deemed insignificant may have to be cleared to bring the score to 700+. CREDIT SCORE REQUIREMENTS FANNIE MAE Allowable Age of Credit Documents (FANNIE MAE) Credit documents include credit reports and employment, income, and asset documentation. For all mortgage loans (existing and new construction), the credit documents must be no more than four months old on the note date. When consecutive credit documents are in the loan file, the most recent document is used to determine whether it meets the age requirements. For example, when two consecutive monthly bank statements are used to verify a depository asset the date of the most recent statement must be no more than four months old on the note date. If the credit documents are older than allowed, the underwriter must condition for updates. Credit Score Versions Credit scores are required. The classic FICO credit score is produced from software developed by the Fair Isaac Corporation and is available from the three major credit repositories. PBM requires the following versions of the Classic FICO score for both DU and manually underwritten mortgage loans: Equifax Beacon 5.0: Experian /Fair Isaac Risk Model V2SM; and TransUnion FICO Risk Score, Classic 04 PBM must request these FICO credit scores for each borrower from each of the three major credit repositories when they order the three in-file merged credit report. If the borrower s credit file includes complete and accurate information to ensure the validity of the credit score, the underwriter does not need to further evaluate the borrower s creditworthiness. Note: The credit report will indicate if a credit score could not be produced due to insufficient credit. The credit report must be maintained in the mortgage loan file, whether the report includes traditional credit and a credit score or indicates that a credit score could not be produced due to insufficient or frozen credit. Minimum Credit Score Requirements Minimum credit score requirements are based on the representative credit score for the transaction and the highest of the LTV, CLTV, or HCLTV ratios, as applicable. Transaction Type Manually underwritten mortgage loans Minimum Representative Credit Score Per the Eligibility Matrix, but in no case will credit scores be lower than 620 for fixed-rate loans and 640 for ARMs DU performs its own analysis of the credit report DU loan casefiles data, but in no case will credit scores be lower than 620- fixed-rate loans and ARMs Note: Manually underwritten loans require Corporate 2 nd signature. 15 05-18-2018
CREDIT SCORE REQUIREMENTS FANNIE MAE DU Credit Score Requirements Credit scores are not an integral part of DU s risk assessment because DU performs its own analysis of the credit report data. However, PBM must request credit scores for each borrower from each of the three repositories when ordering the three in-file merged credit report. If one or two of the credit repositories do not contain any credit information for the borrowers who have traditional credit, the credit report is still acceptable as long as Credit data is available from one repository A credit score is obtained from that repository, and PBM has requested a three in-file merged report Frozen Credit Requirements If the borrower s credit information is frozen at one of the credit repositories for borrowers who have traditional credit, the credit report is still acceptable as long as Credit data is available from two repositories, A credit score is obtained from at least one of those two repositories, and PBM requested a three in-file merged report. Loans for borrowers with credit data frozen at two or more of the credit repositories will not be eligible whether underwritten manually or in DU. Representative Credit Score The representative credit score for the mortgage loan is determined based on the credit scores of each borrower and is used to determine loan eligibility and for pricing purposes (i.e., assessing LLPAs). Follow these steps to calculate the representative credit score for a mortgage: Step Description 1 Fannie Mae recommends obtaining at least two credit scores for each borrower 2 Select a single applicable score for underwriting each borrower o When two credit scores are obtained, choose the lower score o When three credit scores are obtained, chose the middle score. (If two of the three scores are the same, choose the middle of the three scores) 3 If there is only one borrower, the single applicable score used to underwrite that borrower is the representative credit score for the mortgage. If there are multiple borrowers, determine the applicable credit score for each individual borrower and select the lowest applicable sore from the group as the representative credit score for the mortgage. If there is a borrower on the loan who does not have a credit score, determine the representative credit score for the mortgage based on the credit scores of the other borrowers on the mortgage. Minimum FICOs Determined by DU Findings If credit report reflects all correct credit data then follow DU. If Underwriter is aware of other credit data not reflected on the report then apply as OVERLAY to DU Findings. o Credit reports must be within 90 days of Note date. o Explanation letter required for all inquiries within last 120 days Provident Savings Bank Inquiry may be noted on the credit report by the Processor or Underwriter. HIGH BALANCE Minimum FICOs Determined by DU/LP Findings (Refer to Matrix for LTV) 16 05-18-2018
CREDIT SCORE REQUIREMENTS FREDDIE MAC Credit assessment with Loan Product Advisor For Accept Mortgages, Loan Product Advisor has evaluated the Borrower s credit reputation, and determined that the credit reputation is acceptable For non-loan Product Advisor Mortgages, an Indicator Score is required. Special Requirements for Borrowers who do not have a usable Credit Score Mortgages where not all Borrowers have a usable Credit Score Mortgages originally submitted to Loan Product Advisor prior to May 14, 2017 AND re-submitted to Loan Product Advisor prior to May 19, 2018 For Mortgages where not all Borrowers have a usable Credit Score, the following requirements apply. All of the following requirements must be met in order for Loan Product Advisor to assess a transaction where not all borrowers have a usable credit score o At least one borrower on the transaction has a usable credit score, as determined by Loan Product Advisor o The transaction must be a purchase or no cash-out refinance o The mortgage must be secured by a 1-unit property and all borrowers must occupy the property as their primary residence o Borrowers with a usable credit score must contribute more than 50% of the total monthly income o Borrowers without a usable Credit Score must not be self-employed For all borrowers without usable credit scores, any debt that is not reported to the credit repositories must be verified to have satisfactory payment history and the payment must be included in the monthly debt payment-to-income ratio. Mortgages originally submitted to Loan Product Advisor on and after May 14, 2017 or Mortgages originally submitted to Loan Product Advisor prior to May 14, 2017 AND re-submitted to Loan Product Advisor on and after May 19, 2018: For Mortgages where not all Borrowers have a usable Credit Score, Loan Product Advisor will apply the following requirements: At least one Borrower on the transaction must have a usable Credit Score, as determined by Loan Product Advisor The transaction must be a purchase or no cash-out refinance Mortgage The Mortgage must be secured by a 1-unit property and all Borrowers must occupy the property as their Primary Residence In addition, if the Borrower(s) without a usable Credit Score contributes 50% or more of the total monthly income, the Underwriter must determine that the Mortgage meets the following requirements: Each Borrower without a usable Credit Score must have at least two payment references in the United States comprised of Noncredit Payment References and/or Tradelines not appearing on the credit report. If two or more Borrowers without a usable Credit Score have the same payment reference, then the payment reference may count for each of those Borrowers. Additionally: Each payment reference must have existed for at least the most recent 12 months At least one Borrower without a usable Credit Score must have a housing payment history as one of the payment references; and: In the event more than one Borrower without a usable Credit Score has a housing payment history, then all such housing payment histories for the most recent 12 months (or length of housing payment history if less than 12 months) must be verified All housing payment histories must have no 30-day or greater Delinquencies in the most recent 12 months 17 05-18-2018
CREDIT SCORE REQUIREMENTS FREDDIE MAC For all payment references other than housing: Only one payment reference may have one 30-day Delinquency in the most recent 12 months; and All payment references must have no 60-day or greater Delinquencies in the most recent 12 months Each payment reference must: Meet the requirements for written verifications Meet the age of documentation requirements Be documented according to guidelines Each Borrower without a usable Credit Score must have no collections (other than medical) judgments or tax liens filed in the most recent 24 months. Mortgages where no Borrower has a Credit Score For Mortgages where no Borrower has a Credit Score, Loan Product Advisor will apply the following requirements: The transaction must be a purchase or no cash-out refinance Mortgage The Mortgage must be secured by a 1-unit property and all Borrowers must occupy the property as their Primary Residence The LTV/TLTV/HTLTV ratios must not exceed 95% The Mortgage must be a fixed-rate Mortgage Manufactured homes and Super Conforming Mortgages not permitted In addition, the Underwriter must determine that the Mortgage meets the following requirements: Each borrower must have at least two payment references in the United States comprised of Noncredit Payment References and/or Tradelines not appearing on the credit report. If two or more Borrowers have the same payment reference, then the payment reference may count for each of those Borrowers. Additionally: Each payment reference must have existed for at least the most recent 12 months At least one Borrower must have a housing payment history as one of the payment references; and o In the event more than one Borrower has a housing payment history, then all such housing payment histories for the most recent 12 months (or length of housing payment history if less than 12 months) must be verified o All housing payment histories must have no 30-day or greater Delinquencies in the most recent 12 months For all payment references other than housing: o Only one payment reference may have one 30-day Delinquency in the most recent 12 months; and o All payment references must have no 60-day or greater Delinquencies in the most recent 12 months Each payment reference must: o Meet the requirements for written verifications o Meet the age of documentation requirements o Be documented in accordance with Freddie Mac guidelines Each Borrower must have no collections (other than medical), judgments or tax liens filed in the most recent 24 months When the credit reputation for all Borrowers is established using only Noncredit Payment References, then at least one Borrower must participate in a homeownership education program before the Note Date. Refer to the Homeownership Education section for requirements. 18 05-18-2018