100 - Conventional Lending Guide
Conventional Lending Guide 06/26/2015 Equal Housing Lender. © 2015 Homeward Residential, Inc 1525 S. Beltline Road | Coppell, TX 75019. (877) 937-4887. Homeward Residential NMLS # 3984, applicable for all states EXCEPT MA & VA. The trademarks HomewardSM, Homeward ResidentialSM and the Homeward logos are trademarks of Homeward Residential, Inc. Trade/service marks are the property of Homeward Residential. Some products may not be available in all states. Information, rates and pricing are subject to change without prior notice at the sole discretion of Homeward Residential, Inc. All loan programs subject to borrowers meeting appropriate underwriting conditions. Advertisement for Mortgage Professionals Only. This is not a commitment to lend. Other restrictions apply. All rights reserved. Conventional Lending Guide 100 - Table of Contents 100 - CONVENTIONAL GUIDE ................................................................................................................ 100-1 INTRODUCTION ................................................................................................................................................... 100-1 Purpose .......................................................................................................................................................... 100-1 Underwriting Guidelines ............................................................................................................................... 100-1 Application .................................................................................................................................................... 100-1 Electronic Signatures ..................................................................................................................................... 100-2 Underwriting Decision................................................................................................................................... 100-2 LOAN LIMITS ...................................................................................................................................................... 100-3 Loan Limits ................................................................................................................................................... 100-3 UNDERWRITING OPTIONS ................................................................................................................................... 100-4 Overview ....................................................................................................................................................... 100-4 Manual Underwriting..................................................................................................................................... 100-4 Acceptable DU Decisions .............................................................................................................................. 100-4 DU Decisions ................................................................................................................................................. 100-4 LP Decisions .................................................................................................................................................. 100-5 AUS Underwriting ......................................................................................................................................... 100-5 DU Tolerances ............................................................................................................................................... 100-6 LP Tolerances ................................................................................................................................................ 100-7 BORROWER ELIGIBILITY..................................................................................................................................... 100-8 Overview ....................................................................................................................................................... 100-8 Primary Borrower .......................................................................................................................................... 100-8 Purchasing Co-Borrower ............................................................................................................................... 100-8 Maximum Number of Borrowers .................................................................................................................. 100-8 First-Time Homebuyer .................................................................................................................................. 100-9 Non-Purchasing Co-Owner ......................................................................................................................... 100-10 Co-Signors ................................................................................................................................................... 100-10 Non-Occupant Co-Borrower ....................................................................................................................... 100-11 Remote Spouses ........................................................................................................................................... 100-12 Non-Arm’s Length Transaction - Borrower ................................................................................................ 100-13 Non-Arm’s Length Transaction – Other Parties .......................................................................................... 100-14 Realtor and Loan Officer ............................................................................................................................. 100-14 Purchasing from a Builder ........................................................................................................................... 100-14 Transactions with Non-Family Members .................................................................................................... 100-14 Transactions with Family Members ............................................................................................................ 100-15 Borrower is an Interested Party to the Transaction ...................................................................................... 100-16 Customer Loans ........................................................................................................................................... 100-16 Eligible Borrowers ....................................................................................................................................... 100-17 Ineligible Borrowers .................................................................................................................................... 100-17 U.S. Citizen ................................................................................................................................................. 100-17 Permanent Resident Alien ........................................................................................................................... 100-18 Non-Permanent Resident Alien ................................................................................................................... 100-19 Trailing Co-Borrower Income ..................................................................................................................... 100-19 Multiple Financed Properties for the Same Borrower ................................................................................. 100-20 Multiple Financed Properties for the Same Borrower- Multiple Properties Table ...................................... 100-21 Multiple Financed Properties for the Same Borrower (Cont’d) ................................................................... 100-22 Eligibility Requirements for Investor and Second Home Borrowers with Five to Ten Financed Properties100-23 Underwriting requirements for Multiple Financed Properties for the Same Borrower: .............................. 100-24 Inter Vivos Revocable Trust ........................................................................................................................ 100-25 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-i Conventional Lending Guide Trust Definitions .......................................................................................................................................... 100-26 Inter Vivos Trust – Compliance Requirements ........................................................................................... 100-26 Obtaining Copies of the Trust ...................................................................................................................... 100-27 Ineligible Trust Scenarios ............................................................................................................................ 100-27 Closing Documents...................................................................................................................................... 100-27 Trust Title Requirements ............................................................................................................................. 100-28 Executing the Loan Documents ................................................................................................................... 100-29 Executing the ............................................................................................................................................... 100-30 Loan Documents .......................................................................................................................................... 100-30 (Cont’d) ....................................................................................................................................................... 100-30 Inter Vivos Revocable Checklist ................................................................................................................. 100-31 Borrower Power of Attorney ....................................................................................................................... 100-32 Borrower Power of Attorney, (Cont’d) ........................................................................................................ 100-33 CREDIT ............................................................................................................................................................. 100-34 Overview ..................................................................................................................................................... 100-34 Age of Documents ....................................................................................................................................... 100-34 Electronic Credit Reports ............................................................................................................................ 100-35 Representative Credit Score ........................................................................................................................ 100-35 Tradelines .................................................................................................................................................... 100-36 Credit Report Inquiries ................................................................................................................................ 100-36 Residential Mortgage Credit Report ............................................................................................................ 100-37 In-File and Merged In-File Reports ............................................................................................................. 100-37 Non-Traditional Credit Report..................................................................................................................... 100-38 Delinquency and Derogatory Credit ............................................................................................................ 100-38 Bankruptcy .................................................................................................................................................. 100-39 Foreclosure .................................................................................................................................................. 100-40 Foreclosure, (Cont’d) ................................................................................................................................... 100-41 Foreclosure, (Cont’d) ................................................................................................................................... 100-42 Deed in Lieu, Pre-Foreclosure, Short Sale................................................................................................... 100-43 Restructured Loans ...................................................................................................................................... 100-44 Charge-Off of Mortgage Accounts .............................................................................................................. 100-45 Collections and Non-Mortgage Charge-offs ................................................................................................ 100-45 Past Due Accounts ....................................................................................................................................... 100-46 Judgments, Garnishments and Outstanding Liens ....................................................................................... 100-46 Nebraska Alimony / Child Support Liens .................................................................................................... 100-46 Disputed Credit Information ........................................................................................................................ 100-47 Consumer Credit Counseling ....................................................................................................................... 100-47 Housing History ........................................................................................................................................... 100-48 Commercial Property ................................................................................................................................... 100-48 First Time Homebuyers ............................................................................................................................... 100-48 Departing Property ...................................................................................................................................... 100-49 EMPLOYMENT AND INCOME ............................................................................................................................. 100-50 Overview ..................................................................................................................................................... 100-50 Tax Return Documentation.......................................................................................................................... 100-50 Amended Tax Returns ................................................................................................................................. 100-51 Taxpayer Identification Theft ...................................................................................................................... 100-52 Newly Employed ......................................................................................................................................... 100-53 Extended Employment Gaps ....................................................................................................................... 100-54 Temporary Leave of Absence – Returning Before First Payment ............................................................... 100-54 Temporary Leave of Absence – Returning After First Payment ................................................................. 100-55 Stability of Employment / Income – Standard ............................................................................................. 100-56 Stability of Employment / Income - Furlough ............................................................................................. 100-56 Allowable Age of Federal Tax Returns ....................................................................................................... 100-57 Self-Employed and Tax Extensions ............................................................................................................. 100-59 Conventional Lending Guide 100-ii Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrowers who have filed 2014 tax returns and the IRS transcript indicate “No Record of Return Filed”. 100-60 Tax Transcript Requirements using the 4506-T .......................................................................................... 100-61 Tax Transcript Requirements using the 4506-T (Cont’d) ............................................................................ 100-62 Alimony / Child Support / Separate Maintenance ....................................................................................... 100-63 Auto Allowance ........................................................................................................................................... 100-64 Calculating Auto Depreciation / Expenses .................................................................................................. 100-65 Boarder Income ........................................................................................................................................... 100-65 Bonus Income .............................................................................................................................................. 100-66 Overtime Income ......................................................................................................................................... 100-67 Capital Gains ............................................................................................................................................... 100-68 Housing (Non-Military) or Parsonage Allowance ....................................................................................... 100-68 Commission Income .................................................................................................................................... 100-69 Disability Benefits ....................................................................................................................................... 100-70 Dividends and Interest ................................................................................................................................. 100-71 Employed by Family Members.................................................................................................................... 100-71 Borrowers Not Required to File Tax Returns with the IRS ......................................................................... 100-72 Foreign Income ............................................................................................................................................ 100-72 Foster Care Income ...................................................................................................................................... 100-73 Gratuities and Tip Income ........................................................................................................................... 100-73 Military Income ........................................................................................................................................... 100-74 Non-reimbursed Business Expense ............................................................................................................. 100-75 Non-Taxable Income ................................................................................................................................... 100-76 Mortgage Credit Certificate ......................................................................................................................... 100-76 Mortgage Differential Payments .................................................................................................................. 100-77 Note Receivable Income .............................................................................................................................. 100-77 Part-Time, Second or Multiple Income ....................................................................................................... 100-78 Pension / Retirement with Actual Income Stream ....................................................................................... 100-79 Income Derived from the Asset ................................................................................................................... 100-80 Income derived from the Asset, (Cont’d) .................................................................................................... 100-81 Public Assistance ......................................................................................................................................... 100-82 Rental Income .............................................................................................................................................. 100-83 Rental Income Ineligible Properties ............................................................................................................ 100-83 DU Loans - General Requirements for Documenting Rental Income ......................................................... 100-84 DU Loans - Documenting Rental Income from Subject Property ............................................................... 100-85 DU Loans - Documenting Rental Income from Property OTHER than the Subject Property ..................... 100-86 DU Loans - Partial or No Rental History on Tax Returns ........................................................................... 100-86 DU Loans - Calculating Monthly Qualifying Rental Income (or Loss) ...................................................... 100-87 DU Loans - Treatment of Rental Income (or Loss) ..................................................................................... 100-88 DU Loans - Offset Monthly Obligations for Rental Property Reported through a Partnership or an S Corp .. 10089 DU Loans - Entering Net Rental Income ..................................................................................................... 100-90 DU Loans – Entering Net Rental Income for Special Situations ................................................................. 100-91 DU Loans - Subject Net Cash Flow Calculations ........................................................................................ 100-91 DU Loans - Entering Subject Net Cash Flow .............................................................................................. 100-91 LP Loans – Rental Income General ............................................................................................................. 100-92 LP Loans – Rental Income from the Subject property 2-4 Primary Residence ........................................... 100-92 LP Loans – Rental Income from the Subject Property 1-4 Investment ....................................................... 100-93 LP Loans – Rental Income from Investment Property Owned other than the Subject ................................ 100-94 Rental Income from Converted Property ..................................................................................................... 100-95 Royalty Payments ........................................................................................................................................ 100-97 Seasonal Income .......................................................................................................................................... 100-98 Social Security ............................................................................................................................................. 100-99 Trust Income .............................................................................................................................................. 100-100 Unemployment Benefits ............................................................................................................................ 100-100 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-iii Conventional Lending Guide Union Members ......................................................................................................................................... 100-101 VA Benefits ............................................................................................................................................... 100-102 Unacceptable Sources of Income ............................................................................................................... 100-102 Declining Income ...................................................................................................................................... 100-103 Salaried Borrower ...................................................................................................................................... 100-103 Salaried Income History ............................................................................................................................ 100-103 Salaried Documentation............................................................................................................................. 100-104 Salaried Documentation (Cont’d) .............................................................................................................. 100-105 Salaried Documentation (Cont’d) .............................................................................................................. 100-106 Non W-2 Income ....................................................................................................................................... 100-106 Self-Employed Borrowers ......................................................................................................................... 100-107 Self-Employed Income History ................................................................................................................. 100-107 Self-Employed Documentation ................................................................................................................. 100-108 Self-Employed Verification of Employment ............................................................................................. 100-109 Non-Purchasing Spouse Income ................................................................................................................ 100-110 Carry Over Losses ..................................................................................................................................... 100-110 Contracts for Employment ......................................................................................................................... 100-110 Partial Year income (i.e. Teacher Income) ................................................................................................ 100-111 Documentation Requirements ................................................................................................................... 100-111 ASSETS AND LIQUIDITY .................................................................................................................................. 100-112 Overview ................................................................................................................................................... 100-112 Eligible Assets ........................................................................................................................................... 100-112 Ineligible Assets ........................................................................................................................................ 100-113 Earnest Money ........................................................................................................................................... 100-114 Reserves ..................................................................................................................................................... 100-115 Reserves (Cont’d) ...................................................................................................................................... 100-116 Joint Assets ................................................................................................................................................ 100-117 Verification of Deposits ............................................................................................................................. 100-118 Verification of Deposit, (Cont’d) ............................................................................................................... 100-119 Gifts ........................................................................................................................................................... 100-120 Gift Documenta-tion .................................................................................................................................. 100-121 Gift of Equity ............................................................................................................................................. 100-122 Gifts from Weddings ................................................................................................................................. 100-123 Sources of Funds for Closing .................................................................................................................... 100-124 Deposit on Sales Contract .......................................................................................................................... 100-125 Depository Accounts ................................................................................................................................. 100-125 Donations from Entities ............................................................................................................................. 100-125 Disaster Relief Grant or Loan .................................................................................................................... 100-126 Borrowed Funds Secured by an Asset ....................................................................................................... 100-126 Cash Value of Life Insurance .................................................................................................................... 100-127 Trade Equity .............................................................................................................................................. 100-128 Loan Repayment Proceeds ........................................................................................................................ 100-129 Rent Credit for Options to Purchase .......................................................................................................... 100-129 Real Estate Proceeds .................................................................................................................................. 100-130 Bridge Loan ............................................................................................................................................... 100-131 Trust Account Funds ................................................................................................................................. 100-132 Sale of Stocks or Bonds ............................................................................................................................. 100-132 Stock Options ............................................................................................................................................ 100-132 Sale of Other Assets .................................................................................................................................. 100-133 Employer Assistance Programs ................................................................................................................. 100-134 Third Party Contributions .......................................................................................................................... 100-135 Third Party Contributions, (Cont’d) .......................................................................................................... 100-136 Payment Abatements ................................................................................................................................. 100-137 Undisclosed Seller Contributions .............................................................................................................. 100-137 Conventional Lending Guide 100-iv Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Allowable Uses of Interested Party Contributions ..................................................................................... 100-137 Appraisal Review with an Interested Party Contributions ......................................................................... 100-137 Document Reconciliation Involving Interested Party Contributions ......................................................... 100-138 Borrower Paid Seller Closing Cost ............................................................................................................ 100-139 Retirement ................................................................................................................................................. 100-139 Large Deposit ............................................................................................................................................ 100-140 Large Deposit (Cont’d) .............................................................................................................................. 100-141 1031 Exchange .......................................................................................................................................... 100-142 Foreign Assets ........................................................................................................................................... 100-143 Business Funds .......................................................................................................................................... 100-144 Pooled Funds ............................................................................................................................................. 100-145 Individual Development Accounts ............................................................................................................ 100-146 Credit Card for POC Items ........................................................................................................................ 100-147 PROPERTIES .................................................................................................................................................... 100-148 Eligible Property Types ............................................................................................................................. 100-148 Legal Non-Conforming ............................................................................................................................. 100-148 Agricultural Zoning ................................................................................................................................... 100-149 Uniquely Designed Homes ........................................................................................................................ 100-149 Hobby Farms ............................................................................................................................................. 100-150 Ineligible Property Types .......................................................................................................................... 100-151 Private Transfer Fees ................................................................................................................................. 100-152 Manufactured Homes on Site .................................................................................................................... 100-153 Borrower Acknowledgment for Value ...................................................................................................... 100-153 Well, Septic & Pest Inspection .................................................................................................................. 100-153 Age of Appraisals ...................................................................................................................................... 100-154 Age and Adjustments of Comparables ...................................................................................................... 100-155 Appraisal Validation .................................................................................................................................. 100-155 Reuse of Appraisals ................................................................................................................................... 100-156 Transferred Appraisals............................................................................................................................... 100-156 Address Validation .................................................................................................................................... 100-157 Distance of Comparables ........................................................................................................................... 100-157 Land to Value Ratios ................................................................................................................................. 100-157 Location Types .......................................................................................................................................... 100-158 Age Restricted Communities ..................................................................................................................... 100-159 Age Restricted Communities, (Cont’d) ..................................................................................................... 100-160 Multiple Parcels ......................................................................................................................................... 100-161 Land Contracts ........................................................................................................................................... 100-162 Short Sale................................................................................................................................................... 100-163 UAD Condition and Quality Ratings ......................................................................................................... 100-164 Condition and Quality Adjustments .......................................................................................................... 100-165 Property Conditions ................................................................................................................................... 100-165 Roof Life ................................................................................................................................................... 100-165 Non-Structural Hazards ............................................................................................................................. 100-167 Security Bars.............................................................................................................................................. 100-167 Swimming Pools ........................................................................................................................................ 100-168 Heating and Cooling Sources .................................................................................................................... 100-169 Utilities ...................................................................................................................................................... 100-169 Deferred Maintenance ............................................................................................................................... 100-170 Accessory Unit .......................................................................................................................................... 100-171 Non-Permitted Additions ........................................................................................................................... 100-172 Declining / Soft Markets ............................................................................................................................ 100-172 Declining / Soft Markets, (Cont’d) ............................................................................................................ 100-173 Supervisory Appraisers .............................................................................................................................. 100-174 Sales Contract to Appraiser ....................................................................................................................... 100-174 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-v Conventional Lending Guide Appraisal Forms ........................................................................................................................................ 100-174 Photo Requirements ................................................................................................................................... 100-175 Bedroom Count.......................................................................................................................................... 100-175 Investment Appraisal Forms ...................................................................................................................... 100-176 Streamline Appraisal Forms ...................................................................................................................... 100-176 Property Inspection Waivers ...................................................................................................................... 100-177 LP Home Value Explorer (HVE)............................................................................................................... 100-177 Appraisal Upgrades ................................................................................................................................... 100-178 Appraisal Requirements............................................................................................................................. 100-178 Private Road Maintenance ......................................................................................................................... 100-179 Mixed Use Properties ................................................................................................................................ 100-180 Carbon Monoxide Detectors ...................................................................................................................... 100-181 Mineral ...................................................................................................................................................... 100-181 Rights ......................................................................................................................................................... 100-181 LEASEHOLD ESTATES ..................................................................................................................................... 100-182 Overview ................................................................................................................................................... 100-182 Documenta-tion ......................................................................................................................................... 100-182 Term of ...................................................................................................................................................... 100-183 Lease .......................................................................................................................................................... 100-183 Ineligible Lease Terms .............................................................................................................................. 100-184 Default Provisions ..................................................................................................................................... 100-184 Leasehold Appraisal Requirements ........................................................................................................... 100-185 Purchase Price Calculation ........................................................................................................................ 100-186 Option to Purchase ..................................................................................................................................... 100-186 Lease Payments ......................................................................................................................................... 100-187 Sublease ..................................................................................................................................................... 100-187 INSURANCE..................................................................................................................................................... 100-188 Hazard Insurance Overview ...................................................................................................................... 100-188 Acceptable Insurance Ratings .................................................................................................................... 100-188 Evidence of Insurance................................................................................................................................ 100-188 Insurance Coverage Terms ........................................................................................................................ 100-189 Insurance Coverage Terms ........................................................................................................................ 100-190 (Cont’d) ..................................................................................................................................................... 100-190 Examples of Insurable Value ..................................................................................................................... 100-190 Evidence of Payment ................................................................................................................................. 100-190 Insurance Exclusions ................................................................................................................................. 100-190 Acceptable Flood Coverage ....................................................................................................................... 100-193 Evidence of Payment ................................................................................................................................. 100-193 Optional Insurance Coverage .................................................................................................................... 100-193 CONDO AND PUD PROJECTS .......................................................................................................................... 100-194 Project Documenta-tion ............................................................................................................................. 100-194 Project Documenta-tion ............................................................................................................................. 100-195 (Cont’d) ..................................................................................................................................................... 100-195 Project Review Methods ............................................................................................................................ 100-196 Ineligible Projects ...................................................................................................................................... 100-198 Ineligible Projects (Cont’d) ....................................................................................................................... 100-199 Projects that Operate as Hotels or Motels .................................................................................................. 100-202 Projects Subject to Split Ownership Arrangements ................................................................................... 100-203 Projects that Contain Multi-Dwelling Unit Condos ................................................................................... 100-204 Projects with Property that is not Real Estate ............................................................................................ 100-205 Projects that Operate as a Continuing Care Community or Facility .......................................................... 100-206 Non-Incidental Business Arrangements .................................................................................................... 100-207 Commercial Space and Mixed-Use Allocation .......................................................................................... 100-208 Live-Work Projects.................................................................................................................................... 100-210 Conventional Lending Guide 100-vi Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Litigation ................................................................................................................................................... 100-211 Priority of Common Expense Assessments ............................................................................................... 100-211 CONDO AND PUD PROJECTS, CONTINUED...................................................................................................... 100-215 Amount of Coverage ................................................................................................................................. 100-216 Maximum Deductible Amounts ................................................................................................................ 100-217 Special Endorsements ................................................................................................................................ 100-217 Special Requirements for Condo Projects ................................................................................................. 100-218 Fidelity / Crime Insurance ......................................................................................................................... 100-219 Requirements for Who Must Be Covered .................................................................................................. 100-220 Amount of Coverage ................................................................................................................................. 100-221 Cancellation / Modification Requirements ................................................................................................ 100-221 Limited / Streamline Review Process ........................................................................................................ 100-222 Unit and Project Types Eligible for Limited / Streamline Review ............................................................ 100-222 Eligible Transactions for Limited / Streamline Review of Attached Units in Established Condo Project 100-222 Full Review Process .................................................................................................................................. 100-224 Unit and Project Types Requiring Full Review ......................................................................................... 100-224 Condo Project Manager (CPM) ................................................................................................................. 100-225 Replacement Reserve Studies .................................................................................................................... 100-229 CONDO AND PUD PROJECTS, CONTINUEDCONTINUED .................................................................................. 100-234 FHA Approved Condo Review Edibility ................................................................................................... 100-235 Project Requirements ................................................................................................................................. 100-235 Document Retention .................................................................................................................................. 100-235 Delivering FHA Mortgage Loans Secured by Units in FHA-Approved Condo Projects .......................... 100-236 Project Eligibility Review Service (PERS) ................................................................................................ 100-236 Required Use of PERS............................................................................................................................... 100-236 Decision Expiration Dates ......................................................................................................................... 100-236 Newly Converted Non-Gut Rehabilitation Condo Projects ....................................................................... 100-237 Additional Requirements for Review of Condo and PUD Projects Comprised of Manufactured Homes (HARP) ................................................................................................................................................................... 100-237 Projects with Special Considerations and Project Eligibility Waivers ...................................................... 100-238 Environmental Hazard Assessments .......................................................................................................... 100-239 Types of Environmental Hazard Assessments ........................................................................................... 100-239 Acceptability of Consultants ...................................................................................................................... 100-239 Phase I Environmental Assessment ........................................................................................................... 100-240 Phase II Environmental Assessment Description ...................................................................................... 100-240 Who Should Complete the Phase II Environmental Assessment ............................................................... 100-240 Phase II Environmental Assessment Report Forms and Requirements ..................................................... 100-240 Types of Testing or Sampling Under Phase II Environmental Assessments ............................................. 100-241 Unacceptable Environmental Conditions .................................................................................................. 100-241 Remedial Actions for Environmental Assessments Below Standards ....................................................... 100-243 Eligibility Requirements for Units in PUD Projects .................................................................................. 100-244 Eligibility Requirements for Units in PUD Projects .................................................................................. 100-245 ESCROW (COMPLETION) HOLDBACK .............................................................................................................. 100-246 Overview ................................................................................................................................................... 100-246 NATURAL DISASTERS ..................................................................................................................................... 100-247 Overview ................................................................................................................................................... 100-247 Procedure ................................................................................................................................................... 100-247 Example ..................................................................................................................................................... 100-247 Requirements for Affected Areas .............................................................................................................. 100-248 LOAN PURPOSE............................................................................................................................................... 100-249 Overview ................................................................................................................................................... 100-249 Principal Reductions .................................................................................................................................. 100-249 Purchase Transactions ............................................................................................................................... 100-250 Purchase Agreements................................................................................................................................. 100-251 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-vii Conventional Lending Guide Limited Cash-Out Refinance ..................................................................................................................... 100-252 Buyout Refinance ...................................................................................................................................... 100-253 Cash-Out Refinance ................................................................................................................................... 100-254 Delayed Financing Cash-Out Refinance .................................................................................................... 100-255 Divestiture of Interest ................................................................................................................................ 100-256 Continuity of Ownership and Obligation ................................................................................................... 100-256 Continuity of Ownership and Obligation, (Cont’d) ................................................................................... 100-257 Continuity of Ownership and Obligation, (Cont’d) ................................................................................... 100-258 Listed for Sale ............................................................................................................................................ 100-259 Newly Constructed Properties ................................................................................................................... 100-260 New Construction – Purchase .................................................................................................................... 100-261 New Construction – Refinance .................................................................................................................. 100-261 General Contractor .................................................................................................................................... 100-262 MORTGAGE INSURANCE ................................................................................................................................. 100-263 Overview ................................................................................................................................................... 100-263 Approved MI Companies .......................................................................................................................... 100-263 SUBORDINATE FINANCING ............................................................................................................................. 100-264 Overview ................................................................................................................................................... 100-264 Requirements and Restrictions .................................................................................................................. 100-264 Required Documentation ........................................................................................................................... 100-266 Seller Carry Backs ..................................................................................................................................... 100-267 Modifying Existing Second Liens ............................................................................................................. 100-268 Municipal Betterment Assessments ........................................................................................................... 100-269 Community Seconds .................................................................................................................................. 100-270 Down Payment Assistance ........................................................................................................................ 100-270 Virginia Automatic Subordination............................................................................................................. 100-271 Maryland Automatic Subordination .......................................................................................................... 100-272 RATIO ............................................................................................................................................................. 100-273 Calculation ................................................................................................................................................. 100-273 Real Estate Tax Payment ........................................................................................................................... 100-274 Real Estate Debt ........................................................................................................................................ 100-275 Revolving Debt .......................................................................................................................................... 100-276 30-Day Charge Accounts ........................................................................................................................... 100-277 Installment Debt ........................................................................................................................................ 100-278 Lease Payments ......................................................................................................................................... 100-279 Paying Off / Paying Down Debt ................................................................................................................ 100-279 Authorized User Accounts – DU ............................................................................................................... 100-280 Authorized User Accounts – LP ................................................................................................................ 100-281 Monthly Payment Debts ............................................................................................................................ 100-282 Obligations Not Considered Debt .............................................................................................................. 100-282 Co-Signed Obligations............................................................................................................................... 100-283 Court Ordered Assignments of Debts ........................................................................................................ 100-283 Business Paid Debt .................................................................................................................................... 100-285 Undisclosed Debt ....................................................................................................................................... 100-286 PROPERTY FLIPPING ....................................................................................................................................... 100-287 Requirements ............................................................................................................................................. 100-288 Anti-Flipping and the Sales Contract ......................................................................................................... 100-289 Omitted Transactions ................................................................................................................................. 100-289 Checklist for Business Seller ..................................................................................................................... 100-289 Non-Individual Seller Evaluation & Validation Checklist ........................................................................ 100-290 Additional Evaluations .............................................................................................................................. 100-291 State Business Website Search .................................................................................................................. 100-292 Better Business Bureau .............................................................................................................................. 100-292 GENERAL COMPLIANCE POLICIES .................................................................................................................. 100-293 Conventional Lending Guide 100-viii Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Overview ................................................................................................................................................... 100-293 Predatory Lending ..................................................................................................................................... 100-293 Laws .......................................................................................................................................................... 100-294 Laws .......................................................................................................................................................... 100-295 (Cont’d) ..................................................................................................................................................... 100-295 Digital Signatures ...................................................................................................................................... 100-296 Compliance with Points & Fees................................................................................................................. 100-296 Points and Fees Calculation ....................................................................................................................... 100-297 High Cost Loans ........................................................................................................................................ 100-299 Higher Priced Mortgage Loans .................................................................................................................. 100-300 Higher Priced Covered Transactions ......................................................................................................... 100-300 Prepayment Fees or Penalties .................................................................................................................... 100-300 Net Tangible Benefit ................................................................................................................................. 100-301 Federal and State Regulations ................................................................................................................... 100-301 Repayment Ability ..................................................................................................................................... 100-301 Title Commitment...................................................................................................................................... 100-301 Code of Conduct ........................................................................................................................................ 100-302 Interest ....................................................................................................................................................... 100-303 Closing Protection Letters ......................................................................................................................... 100-303 CLOSING POLICIES & PROCEDURES ................................................................................................................ 100-304 Scheduling a Loan ..................................................................................................................................... 100-304 Closing Practices ....................................................................................................................................... 100-304 Verification of Employment ...................................................................................................................... 100-304 Closing Protection Letter ........................................................................................................................... 100-304 Taxes.......................................................................................................................................................... 100-304 Insurance .................................................................................................................................................... 100-304 Title Commitment...................................................................................................................................... 100-304 Escrow Accounts ....................................................................................................................................... 100-305 Seller Contributions ................................................................................................................................... 100-306 Premium Pricing Credits............................................................................................................................ 100-306 Principal Reductions .................................................................................................................................. 100-307 HUD Approval Process ............................................................................................................................. 100-308 Funding ...................................................................................................................................................... 100-308 Payoff Requests ......................................................................................................................................... 100-309 FNMA LOAN QUALITY INITIATIVE ................................................................................................................ 100-310 LQI Overview ............................................................................................................................................ 100-310 Undisclosed Liabilities .............................................................................................................................. 100-311 Confirmation of Borrower’s Identity ......................................................................................................... 100-312 Validation of Qualified Parties to the Transaction..................................................................................... 100-312 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-ix Conventional Lending Guide 100 - Conventional Guide Introduction Purpose The Lending Guide provides underwriting standards to assist in determining the types of loans eligible for approval; also outlines the level of acceptable risk and describes general and specific requirements regarding: Underwriting Guidelines Borrower Eligibility Credit Employment and Income Assets and Liquidity Property/Collateral Liabilities Although this guide covers most circumstances, it does NOT comprise all possible loan scenarios. Where a specific circumstance is not addressed, prudent underwriting principals prevail in determining loan eligibility. Two crucial requirements that apply are: Loan terms must relate the borrower’s ability to repay Value and marketability of the property is acceptable IMPORTANT: Underwriting review will consist of analyzing the loan parameter profile AND any associated layers of risk identified by the underwriter. The underwriter MAY suspend or decline the loan based on all associated risk regardless of loan parameters. Application Automated underwriting findings (recommendations) and Product Guidelines will take precedence over this guide. Guidelines must be interpreted and applied in a manner and that complies with all applicable laws and regulations, including consumer protection laws and regulations. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-1 Conventional Lending Guide Introduction, Electronic Signatures Loans may be submitted with electronic signatures on upfront disclosures, sales contracts and applications if completed in accordance with the below items: Must be documented with electronic signature(s) containing watermarks, serial numbers, and/or a transaction log. Electronic signature can be done by typed text, an image, a holographic signature or a digital signature. Must be carried out in manner that meets state and federal regulations. Each vendor must confirm adherence to Uniform Electronic Transaction Act (UETA) and the federal Electronic Signatures in Global and National Commerce Act (ESIGN) in order to be eligible for acceptance. An Approved Electronic Signature Vendor List is no longer maintained; however, all companies providing electronic signatures must confirm in writing or from their public website an adherence to all state and federal regulations (UETA and ESIGN). Original (live or wet) signatures continue to be required for the following documents: Underwriting Decision Continued IRS 4506-T Any Social Security Administration (SSA) form Borrower Power of Attorney or any documents being signed through a Power of Attorney Underwriting decisions are as follows: Approved Approved with Conditions Suspended Declined Counter Offered Conventional Lending Guide 100-2 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Loan Limits Loan Limits Maximum Loan Amount for Conforming FRM & ARM General Permanent High Balance1 1 Unit $417,000 $625,500 2 Units $533,850 $800,775 3 Units $645,300 $967,950 4 Units $801,950 $1,202,9252 Property Type NOTE: Loan amounts may not exceed the applicable maximum loan limits for the specific area in which the property is located. 1 Maximum loan amounts are limited by MSA/County. The loan limits by county can be located in the Federal Housing Finance Agency website: http://www.fhfa.gov/DataTools/Downloads/Documents/Conforming-LoanLimits/Counties_with_increases_cy2015.pdf OR Fannie Mae’s website: https://commlend.efanniemae.com/loanlimitgeocoder/pages/login.aspx OR Freddie Mac’s website: http://www.freddiemac.com/singlefamily/mortgages/super_conforming.html 2 Agencies permit a maximum $1,202,925 loan limit in certain locations for 4 unit properties; see specific product matrices for details. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-3 Conventional Lending Guide Underwriting Options Overview Subject to product limitations within the Product Guidelines, Homeward will accept mortgage loans that are submitted only to the following Automated Underwriting Systems (AUS): Fannie Mae Desktop Underwriter (DU) Freddie Mac Loan Prospector (LP) Manual Underwriting Manual Underwriting is not permitted under any circumstances for Conventional products. Acceptable DU Decisions Refer to individual product summaries. DU Decisions The following recommendations are results of utilizing Fannie Mae’s Desktop Underwriter: Approve/Eligible Approve/Ineligible Out of Scope EA Eligible NOTE: Refer to specific product summaries for details regarding specific acceptable DU decisions. Continued on next page Conventional Lending Guide 100-4 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Underwriting Options, LP Decisions Continued The following recommendations are results of utilizing Freddie Mac’s Loan Prospector: Accept Caution Caution/A-Minus Incomplete/Invalid NOTE: AUS Underwriting Refer to specific product summaries for details regarding specific acceptable LP decisions. The Underwriter must verify the accuracy of the data entered in the underwriting system by comparing the data to the documentation in the actual underwriting file. The final decision should ensure all data matches source documentation and that documentation exists to support all data used to underwrite the file. If this validation process reveals material discrepancies between the data in the underwriting system and the data from source documents, the mortgage must be re-underwritten and re-submitted using the correct data. The Underwriter must comply with the requirements of the Documentation Class (i.e. Approve/Eligible, etc.) resulting from the resubmission. Although the documentation requested on the findings report is sufficient for file delivery, additional documentation to substantiate an approval may be required at the underwriter’s discretion. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-5 Conventional Lending Guide DU Tolerances Minor adjustments will not require additional underwriting submissions as long as the requested income and asset documentation supports the information disclosed on the loan application within allowable tolerances. The following tolerances will be permitted for Desktop Underwriter (DU): Appraised Value: No variance permitted for appraised value. Assets: DU returns a message setting the minimum amount of assets to be verified which must be documented within the loan file. Funds Required to Close – when the actual amount of assets required to close the transaction exceeds the amount of “Funds Required to Close” per the DU Underwriting Findings report, the lender does NOT need to resubmit the case file if the lender has documented sufficient liquid assets to cover the actual amount of assets required to close the transaction. Otherwise, the loan must be resubmitted to DU. Reserves Required to be Verified – if the verified amount of reserves is less than the “Reserves Required to be Verified” per the DU Underwriting Findings report due to changes in actual amount of assets required to close the transaction, lender does NOT need to resubmit the case file if the lender has documented reserves that equal at least 90% of the Reserves Required to be Verified per the DU Underwriting Findings report. Otherwise the loan case file must be resubmitted to DU. Debts If DU detects undisclosed debts (debts on the credit report that are not on the loan application) or if it detects discrepancies between the credit report payments and balances and those on the loan application, a verification message may require that the data be reconciled. If upon reconciliation, it is determined that the debts on the loan application are inaccurate, which results in the DTI to exceed 45.00% or increases by more than 3%, resubmission to DU will be required. Also refer to the next section regarding changes to debt and its effect on DTI. Income, Debts and/or Interest Rate DU must reflect the same as the Note (Interest Rate) Rate signed at closing. The exact income used to qualify the borrower(s) must be entered into DU. The DTI must be reflective all monthly payments as recognized by DU. Loan amount: No variance permitted for loan amount (1008 and 1003 must match). Continued on next page Conventional Lending Guide 100-6 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Underwriting Options, LP Tolerances Continued Minor adjustments will not require additional underwriting submissions as long as the requested income and asset documentation supports the information disclosed on the loan application within allowable tolerances. The following tolerances will be permitted for Loan Prospector (LP): Appraised Value: No variance permitted for appraised value. Assets: If the verified assets increase, resubmission is NOT required. If the amount of verified reserves increases, resubmission is NOT required. If the amount of verified reserves decrease by no more than 10%, resubmission is not required Income, Debts and/or Interest Rate LP must reflect the same as the Note (Interest Rate) Rate signed at closing. The monthly debt payment (including monthly housing expense) decreases; the DTI must be reflective of all monthly payments as recognized by LP, the income for any Borrower increases, 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% Loan amount: No variance permitted for loan amount (1008 and 1003 must match). Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-7 Conventional Lending Guide Borrower Eligibility Overview Homeward Residential defines various borrower types within this section. Refer to specific product summaries for borrower eligibility. Primary Borrower In the case of a non-occupant co-borrower, the person who occupies the property must be the primary borrower. Purchasing Co-Borrower A purchasing co-borrower is a person who has applied with the applicant for joint credit and who takes title to the security property. A purchasing co-borrower must sign the Note. Maximum Number of Borrowers Each transaction is limited to a maximum of four (4) borrowers/applicants. Continued on next page Conventional Lending Guide 100-8 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, First-Time Homebuyer Continued A first time homebuyer1 (FTHB) is a borrower with the following characteristics: Borrower to acquire the subject property Borrower who will reside in the subject property as a principal residence Borrower has had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the subject property, unless: He/She is a displaced homemaker or single parent whose only ownership interest in a principal residence during the preceding three-year time period was a joint ownership with a spouse. A displaced homemaker or single parent who during the three-year period owned a principal residence alone or with anyone other than a spouse, or who owned a second home or investment property, cannot be considered a first-time homebuyer. IMPORTANT: 1 Refer to the Credit section within this Lending Guide for credit history requirements and to the summaries for possible product restrictions for FTHB. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-9 Conventional Lending Guide Borrower Eligibility, Continued NonPurchasing Co-Owner A non-purchasing co-owner (co-mortgagor) is a person who will take title to the security property without applying for joint credit. A nonpurchasing co-owner is not required to sign the Note; however, they will be required to sign the security instrument or any other documentation required to evidence that the co-owner is relinquishing all rights to the property in order to perfect the lien under governing state law. Co-Signors Not permitted. Conventional Lending Guide 100-10 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Non-Occupant Co-Borrower DU Will analyze the risk factors without the benefit of the non-occupant coborrower’s income or liabilities and will not require verification of employment or income for the non-occupant co-borrower. Owner-occupant(s) must be able to qualify for the mortgage based on his/her own financial capacity Ratios may not be manually calculated (outside of DU) to include nonoccupant co-borrower income. Newly added non-occupant co-borrowers are not permitted for cashout refinances. Assets that are owned by the non-occupant co-borrower can be included in the 5% minimum borrow contribution requirement (when applicable), and those funds must be entered in the on line loan application. Total liquid assets for the occupying borrower and non-occupant co-borrower are included in DU’s calculation of total available assets. NOTE: Non-occupant co-borrower may not be an interested party to the sales transaction, such as the property seller, property builder, and real estate broker. LP: The maximum LTV/(H)CLTV is 90% when non-occupying co-borrower income is used as qualifying income. The employment and income for the non-occupant co-borrower must be documented as stated within this lending guide. When a mortgage includes a non-occupying Borrower and the LTV is greater than 80.00%, the occupant Borrower must make the first 5% down payment from the occupant Borrower funds. Funds that are owned jointly by the occupant Borrower and the non-occupying Borrower are considered the funds of the occupant Borrower. Newly added non-occupant co-borrowers are not permitted for cashout refinances. NOTE: Non-occupant co-borrower may not be an interested party to the sales transaction, such as the property seller, property builder, and real estate broker. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-11 Conventional Lending Guide Borrower Eligibility, Remote Spouses Continued Spouses who reside remotely (not within daily commuting distance) must be treated as a non-occupant co-borrower; therefore, their income is not eligible for qualification purposes. See additional details above. Spouses who live remotely on a more permanent basis may not purchase multiple Primary Residences due to their living arrangements. Continued on next page Conventional Lending Guide 100-12 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Non-Arm’s Length Transaction Borrower Continued Seller is responsible to determine if the transaction is a Non-Arm’s length transaction. 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. Homeward allows NonArm’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, Homeward will only purchase mortgage loans secured by a principal residence. Homeward 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. NOTE: While Non-Arm lengths transactions are allowed as noted in the above specific characteristics, additional diligence should be performed to insure the guidelines are met. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-13 Conventional Lending Guide Borrower Eligibility, Non-Arm’s Length Transaction – Other Parties Continued For scenarios in which there is a family or business relationship between any parties of the transaction, the below documentation is required: Documented evidence from the borrower acknowledging the relationship between the parties (i.e. if the LO is related to the closing attorney). Parties of the transaction to confirm in writing that no compensation or benefit was exchanged from the referral of business. Provide evidence the company selected (i.e. closing attorney who is the brother of the LO) is part of the Broker/LO’s business referral list for all transactions. Realtor and Loan Officer It is acceptable for the loan officer/broker and realtor to be employed by the same company; however, they may NOT be one in the same persons. Purchasing from a Builder Transactions where the borrowers are purchasing a property from a builder who is purchasing the borrowers’ existing residence are not permitted. Transactions with NonFamily Members Non-Arm’s length transactions with non-family members will be considered only if they are bona fide sales transactions and the borrowers will occupy the property as their primary residence. NOTE: Standard Non-Arm’s length transactions guidelines stated on previous page continued to be required in addition to. Continued on next page Conventional Lending Guide 100-14 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Transactions with Family Members Continued Non-Arm’s length transactions with a family member are generally acceptable if: The family member or relative is the borrowers’ spouse, child, parent, or any other individual related to the borrowers by blood, adoption, or legal guardianship. An executed purchase or sales agreement between the purchaser and the family member is in the loan file. Refinance transactions must have at least one borrower from the loan being refinanced on the new loan. If no borrower from the existing loan will be a borrower on the new loan, the transaction must be underwritten as a purchase. The source and ownership of funds for the down payment, closing costs, and reserves are well documented in the loan file. The appraised value of the property is well supported, particularly for gifts of equity or gifts of more than 20% of the LTV. Gifts are not allowed investment properties. Gifts are allowed for owner-occupied and second home transactions if they meet the normal gifting guidelines as follows: The borrowers must have 5% of their own funds as a down payment; however, if the LTV/CLTV is less than or equal to 80% then the entire down payment may be a gift.* Gifts of equity are acceptable if verified by an appraisal and gift letter. A signed gift letter and verification of the receipt of the funds are provided. *Most conforming loan programs follow FNMA gift guidelines, but some individual loan programs may have stricter requirements. Always refer to the individual program guidelines for complete details. The more restrictive requirements apply. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-15 Conventional Lending Guide Borrower Eligibility, Borrower is an Interested Party to the Transaction Continued Certain transactions are not permitted if: A company involved in the transaction (construction, realtor’s office, etc.) is owned by the borrower A borrower who is professionally related to the builder, property seller, or any party currently on title as a (or in the role as a): o Registered agent o Sales agent o Partner o Employee A borrower may act as an interested party to a sales transaction for the subject property; however, the borrower may not use any payment for services rendered from the sales transaction of the subject property towards the down payment, closing cost, or reserve requirements. Payment for services rendered means payment for, but is not limited to: Customer Loans Realtor commissions Broker commissions Sales associate commissions Homeward Residential affiliated Mortgage Brokers, owners of mortgage firms, employees of affiliate mortgage brokers and/or mortgage firms are permitted; however, the borrower may not be the loan officer or processor nor may the loan officer or processor be employed by the same company (i.e. may not be an employee or co-worker of the borrower(s)). Continued on next page Conventional Lending Guide 100-16 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Eligible Borrowers Continued U.S. Citizen Permanent Resident Aliens Non-Permanent Resident Aliens Inter Vivos Revocable Trusts Borrowers party to a lawsuit may be eligible as long as the legal action does not have the potential to adversely impact the first lien are not permitted. NOTE: All borrowers must have a valid social security number. Ineligible Borrowers Corporations, General and Limited Partnerships. “Doing Business As” (DBAs). Religious/non-profit organizations. Borrowers with Diplomatic Immunity. Life Estates Foreign National defined as legal resident of another country that periodically visits the U.S. Borrower(s) party to a lawsuit with the potential to adversely impact the first lien is not permitted. Borrowers with a foreign address as their current, primary residence, including military personnel stationed overseas that do not occupy or have a current primary residence/address in the U.S. U.S. Citizen Note the above requirement is regardless of property tax (exemption) status. Scenarios are not permitted in which the borrower is not currently, physically occupying a residence with a U.S. address. Illinois or any Community Land Trust A United States Citizen is a native or naturalized person entitled to all rights and privileges of the United States. Unless otherwise noted, all loan program requirements are based on the assumption a borrower is a United States Citizen. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-17 Conventional Lending Guide Borrower Eligibility, Permanent Resident Alien Continued A permanent resident alien is an individual who is lawfully residing in the United States permanently. Homeward Residential will grant loans to permanent resident aliens under the same parameters extended to U.S. Citizens. Legal residency may be documented with one of the following: A valid and current Permanent Resident card “green card” (Form I551) is required. A passport stamped “processed for I-551, Temporary evidence of lawful admission for permanent residence. Valid until ______. Employment authorized”. This evidences that the holder has been approved for, but not issued, a Permanent Resident card. The “valid until” expiration date need not be taken into consideration. Continued on next page Conventional Lending Guide 100-18 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, NonPermanent Resident Alien Trailing CoBorrower Income Not Permitted. Continued If a Borrower is a non-permanent resident, Homeward will verify the following: A valid social security number Appropriate documentation that supports eligibility to work in the U.S. A copy of current work authorization documentation is needed. NOTE: If a borrower falls under the “Deferred Action for Childhood Arrivals (DACA) ruling” Homeward will require a copy of the unexpired DACA Employment Permit. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-19 Conventional Lending Guide Borrower Eligibility, Multiple Financed Properties for the Same Borrower Continued Loan and Borrower Requirements A borrower may finance multiple properties if he or she is qualified and if the following requirements are met: The loan must comply with Homeward’s limitations on the maximum number of financed properties, including ownership interests in financed properties, as well as eligibility, delivery, and reserve requirements. The borrower must have sufficient assets to close after calculating reserve requirements. Additional reserve requirements apply, based on the number of financed properties a borrower will own. Limits on the Number of Financed Properties Subject Property is a Primary Residence: If the subject property is a Primary Residence, there is no maximum numbers of financed properties. Subject property is a Second Home or Investment Property: The Borrower may own up to four (4) financed properties, including the subject property, except as noted below: NOTE: If the file is run via Fannie Mae’s Desktop Underwriter and the mortgage is secured by a second home or an investment property, the borrower(s) may own or be obligated on up to ten financed properties (including his or her principal residence). Standard eligibility and underwriting policies apply if the borrower is financing a second home or investment property and will have one to four financed properties; however, if the borrower will have five to ten financed properties, the mortgage loan must comply with the eligibility requirements described herein. The financed property limit applies to the borrower's ownership of one-to-four unit financed properties or mortgage obligations on such properties and is cumulative for all borrowers. These limitations apply to the total number of properties financed, not to the number of mortgages on the property or the number of mortgages sold to Homeward. Continued on next page Conventional Lending Guide 100-20 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Multiple Financed Properties for the Same BorrowerMultiple Properties Table Continued The Multiple Properties Table below describes how to apply the limitations based on the type of property ownership. Type of Property Ownership Joint ownership of residential real estate. (This is considered to be the same as total ownership of an individual property.) Property Included in Limitation? Property disclosed on list of REO? Yes Yes Ownership of commercial real estate No No Ownership of multifamily property consisting of more than four (4) dwelling units. No No Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation and the financing is in the name of the corporation or S-corp. No No Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation; however, the financing is in the name of the borrower. Yes Yes Ownership in a timeshare. No No Obligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property). Yes Yes Ownership of a vacant (residential) lot. No No Ownership of property that is held in the name of a limited liability company (LLC) or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of 25% or more, regardless of the entity (or borrower) that is the obligor on the mortgage. Yes Yes Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership. No No Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the borrower. Yes Yes Ownership of a manufactured home and the land on which it is situated that is titled as real property. Yes Yes Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home) No No NOTE: Other properties owned or financed jointly by the borrower and coborrower are only counted once. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-21 Conventional Lending Guide Borrower Eligibility, Multiple Financed Properties for the Same Borrower (Cont’d) Continued Examples: If the borrower owns two financed investment properties and the co-borrower owns three other financed investment properties, then jointly, the borrowers have five financed investment properties in addition to their principal residence(s), if applicable. If the borrower is obligated on a mortgage for a residential property (though is not on title) and the co-borrower owns a second home and an investment property (both of which are financed), then jointly, the borrowers have three financed properties that must be included in the count in addition to their principal residence(s), if applicable. If a borrower and a co-borrower are purchasing an investment property and they already own and/or are obligated on five other investment properties that they jointly own and/or are obligated on, the new property being purchased would be considered the borrowers' sixth investment property. If a borrower owns five properties individually and is 100% owner of a corporation that owns an additional five properties, of which two of those properties are secured by mortgages that are shown on the borrower’s credit report, the borrower would be considered to have seven financed properties. Applying the Multiple Financed Property Policy to DU Loan Casefiles DU is not able to determine the exact number of financed properties the borrower owns or is obligated on, but does issue a message on second home and investment property transactions when the borrower appears to have other financed properties. The lender must apply the eligibility requirements manually to investment property and second home transactions that are underwritten through DU, as applicable. Continued on next page Conventional Lending Guide 100-22 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Eligibility Requirements for Investor and Second Home Borrowers with Five to Ten Financed Properties Continued Investor and second home borrowers with Five to Ten financed properties must meet the following eligibility requirements: Number of Units Transaction Type Maximum LTV/CLTV/ HCLTV Ratio Minimum Credit Score Second Home or Investment Property Purchase Limited Cash-Out Refinance 1 unit Loans subject to general loan limits FRM: 75% ARM: 65% Loans subject to High Balance Limits 720 FRM/ARM: 65% Cash-Out Refinance (only if within 6 months of purchase and all Delayed Financing exception requirements are met) 1 unit Cash-Out Refinance (> 6 months since the purchase) 1 unit Purchase Limited Cash-Out Refinance Cash-Out Refinance (only if within 6 months of purchase and all Delayed Financing exception requirements are met) Cash-Out Refinance (> 6 months since the purchase) Loans subject to general loan limits 720 FRM: 70% ARM: 60% Ineligible Investment Property Loans subject to general loan limits FRM: 70% ARM: 60% 2-4 units Loans subject to High Balance limits FRM: 65% ARM: 60% N/A 720 2-4 units Loans subject to general loan limits FRM: 65% ARM: 60% 720 1 unit Ineligible N/A Exception for DU Refi Plus and LP Open Access DU Refi Plus and LP Open Access mortgage loans are exempt from these policies. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-23 Conventional Lending Guide Borrower Eligibility, Underwriting requirements for Multiple Financed Properties for the Same Borrower: Continued If there are multiple loans for the same borrower recurring simultaneously, loans need to be underwritten at the same time in order to measure the impact of each transaction upon the other. For loans serviced by Homeward Residential, the borrower may have a maximum exposure of four (4) loans or $2,500,000, whichever is less. Continued on next page Conventional Lending Guide 100-24 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Inter Vivos Revocable Trust Continued Inter Vivos Revocable Trust are permitted with the following: In compliance with federal, state and local law. Established by a natural person(s), solely or jointly; known as the Settlor, Trustor or Grantor. Effective during the Settlor’s lifetime. Individual established themselves the right to revoke the trust. Primary beneficiary of the trust must be the Settlor. If more than one individual establishes the trust jointly, there may be more than one primary beneficiary. The income or assets of at least one of the individuals must be used to qualify for the mortgage and sign the mortgage instruments. Trust must name one or more trustees to hold legal title to and manage the property that has been placed in the trust. The trustees must include the Settlor (or at least one of the individuals, if there is more than one). NOTE: A financial institution that is authorized to act as a trustee under the laws of that state is no longer eligible. Trustee must have the power to mortgage the security property Trustee is not required to obtain written consent from the beneficiaries to mortgage subject property if written consent has been provided. No unusual risk or impairment of lenders’ rights, such as distributions required to be made in specified amounts other than net income. If the trust agreement requires more than one trustee to borrower money or to purchase, construct or encumber realty, Underwriter must confirm that the requisite number of trustees has signed the loan documents. NOTE: If an existing loan was closed in the name of the individual borrowers, but has since been transferred to a trust, the loan continues to be eligible provided the borrowers on the existing mortgage are the only trustees to the trust and meet all other requirements. Eligibility Requirements for DU and LP: All units and All Occupancies are permitted as allowed within the summaries. Underwritten as if the individual(s) establishing the trust were the borrower(s) The “Inter Vivos Revocable Trust Checklist” must be completed and signed for the file by the Underwriter. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-25 Conventional Lending Guide Borrower Eligibility, Trust Definitions Beneficiary: The party with equitable ownership of the trust Grantor/Trustor/Settlor: The person(s) who established or created the living trust and donated the property and its obligations, directly to a trust. The use of terms grantor, trustor, or settlor depends on the state where the inter vivos trust was created or originated. Inter Vivos Revocable Trust: A trust that an individual creates and becomes effective during his or her lifetime, but may be changed or canceled at any time for any reason during the creator’s lifetime. Inter Vivos Trust – Compliance Requirements Continued Revocable: A living trust is referred to as “revocable” when the grantor/trustor/settlor can change or cancel it any time, for any reason, while he or she is living. The ability to revoke a living trust is important because it permits the grantor/trustor/settlor, who would otherwise own the property directly, to maintain control of the property. Trust: A fiduciary relationship whereby legal title to a property is transferred to the trustee with the intention that such property be administered by the trustee for the benefit of another, or beneficiary, who holds equitable title to such property. Trustee: A person who holds or controls property and manages it for the benefit of another (the beneficiary). Under an inter vivos trust, the people who, according to the properly executed trust documentation, has been granted the power to mortgage the subject property and administer the trust. The trustee(s) must be or must include the individual who established the trust, or an institutional trustee (i.e., attorney, bank, trust company) that customarily performs trust functions under the laws of the state. Although mortgages defined under the terms of Inter Vivos Revocable Trust may be exempt from Ability to Repay under the Truth-in-Lending Act and its implementing regulations, Homeward will require such mortgages to meet all requirements within the Lending Guide, including meeting the Qualified Mortgage and Ability to Repay (ATR covered loan) definitions. Continued on next page Conventional Lending Guide 100-26 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Obtaining Copies of the Trust Continued Loan file must contain either a complete copy of the trust agreement OR in (the below) states that require dependence on an abstract, summary or certification of the trust. NOTE: In the following states, due to privacy law restrictions, a Certification of Trust may be used in place of a certified copy of the living trust agreement. Ineligible Trust Scenarios Closing Documents Alabama, Arkansas, California, Delaware, District of Columbia, Idaho, Iowa, Kansas, Maine, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, and Wyoming. A trustee may not utilize a Power of Attorney (i.e. a power of attorney may not be utilized if the loan is closing in the name of a trust). Mixed vesting is not permitted. The subject property cannot be held in Multiple Trust Names (i.e. only one trust permitted per property). All fixed rate Mortgages sold to Homeward Residential must use the most current Fannie Mae uniform instruments for the fixed rate Note and for the Security Instrument. Document Type Form Addendum to the Note VMP Form 371N Rider to the Deed of Trust/Mortgage VMP Form 372R NOTES: Must use the most current agency uniform documents. State-specific documents as required for the jurisdiction in which the subject property is located. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-27 Conventional Lending Guide Borrower Eligibility, Trust Title Requirements Continued In the trustee of the inter vivos revocable trust. Jointly in the trustee of the inter vivos revocable trust and in the name of an individual borrower. If title will be vested in the trustees of more than one inter vivos revocable trust, the terms of the two revocable inter vivos trust documents must complement each other and may not be in conflict with one another. Title exceptions with respect to the trust are not permitted. Continued on next page Conventional Lending Guide 100-28 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Executing the Loan Documents Continued Each trustee of the inter vivos revocable trust must individually execute the Note, Mortgage/Deed of Trust, and any necessary addendums and/or riders. Each qualifying applicant must execute the Note and any necessary addendums. In addition, each qualifying applicant must acknowledge all of the terms and covenants in the Security Instrument and any applicable riders and agree to be bound thereby, by placing his or her signature after a statement of acknowledgement on such documents. Any other party that is required to sign either the Note or Mortgage/Deed of Trust must also execute the applicable document(s). Note Signature Requirements Form of Signature Required on Mortgage Note and Addendum to the Note for an Individual Trustee Who is Both a Settlor and a Credit Applicant: Each individual trustee of the living trust who is both a “settlor” and a credit applicant must sign the Note (and any necessary addendum). This may be accomplished by either one or two separate signatures (see below). Example 1: One signature presented - acceptable format Signature: David Jones Typed Name: David Jones, Trustee for the Jones Family Trust under trust instrument dated mo/day/year. Example 2: Two signatures presented - acceptable format Signature: David Jones Typed Name: David Jones AND Signature: David Jones OR David Jones, Trustee Typed Name: David Jones, as Trustee for the Jones Family Trust under trust instrument dated mo/day/year. Form of Signature Required on Mortgage Note for an Institutional Trustee and for an Individual Trustee Who is Not Both a Settlor and a Credit Applicant: Each institutional trustee of the living trust and each individual trustee of the living trust who is not both a “settlor” and a credit applicant must sign the Note (and any necessary addendum), using a signature block substantially similar to the following: Example: Signature: David Jones Typed Name: David Jones, as Trustee for the Jones Family Trust under trust instrument dated mo/day/year. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-29 Conventional Lending Guide Borrower Eligibility, Continued Executing the Loan Documents (Cont’d) Security Instrument Signature Requirements Form of Signature Required on Security Instrument and Riders for all Trustees: Each trustee of the living trust must sign the Security Instrument (any necessary Rider), using a signature block substantially similar to the following: Example: Signature: David Jones Typed Name: David Jones, individually and as Trustee for the Jones Family Trust under trust instrument dated mo/day/year. Form of Settlor/Credit Applicant's Signature Acknowledgment Required on Security Instrument and Riders: The following must be added to the Security Instrument (and any applicable Riders) following the Borrower's Signature lines (and then must be signed by each settlor of the living trust who is a credit applicant): Example: By SIGNING BELOW, the undersigned, Settlor(s) of the ___________________ Trust under trust instrument dated______________, ______________, acknowledges all of the terms and covenants contained in this Security Instrument and any Rider(s) thereto and agrees to be bound thereby. _________________________________(Seal) Trust Settlor Rider Signature Requirements The Revocable Trust Rider to the Security Instrument must be executed by the trustees on behalf of the trust. Each individual establishing the trust whose income and assets are used to qualify for the Loan must acknowledge all of the terms and covenants in the Security Instrument and any Riders and agree to be bound thereby by placing his or her signature after a statement of acknowledgment on the Security Instrument and Riders. See Security Instrument section, above. Continued on next page Conventional Lending Guide 100-30 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Inter Vivos Revocable Checklist Continued The following checklist is provided to assist in determining whether an Inter Vivos Revocable Trust complies with Homeward Residential’s guidelines. IMPORTANT: All topics must be Confirmed. Question Results An authorized person from Homeward Residentialhas approved the trust document. Confirmed __ The trust is signed, notarized, and dated by all applicable parties. Confirmed __ A complete copy of the trust including all referenced schedules and amendments except where an executed Certificate of Trust is acceptable. Confirmed __ The Settlor is alive at the time of application, and loan closing/funding. Confirmed __ The trust has been established in writing by a natural person and is to be effective during his/her lifetime. The trust is not created in a will or codicil. Confirmed __ The Settlor has the right to revoke or alter the trust. Confirmed __ The primary beneficiary of the trust is the Settlor (the interest and principal of the trust estate is applied for their benefit) and the mortgage has been underwritten as if the Grantor (or at least one of the Grantors) is the borrower (or the co-borrower, if there are additional individuals whose income or assets will be used to qualify for the mortgage). Confirmed __ The loan applicant(s) are both the Settlor and the Trustee. Confirmed __ The trustees must include at least one of the Settlors if there are two or more. Confirmed __ The trustee(s) has the power to mortgage the subject property and borrow money for the creator of the trust. Confirmed __ The trust does not contain an unusual risk or impairment of Homeward Residential’s rights (i.e., distributions required to be made in specified amounts from other than net income). Confirmed __ The subject property is a primary residence (1-4 unit), occupied by at least ONE of the Settlors (and whose income/ assets are used to qualify), 1-unit second home or Condo/ PUD. Confirmed __ Title must be vested in the name of one trust; jointly in the trustee(s) on the inter vivos revocable trust and in the name(s) of an individual borrower(s). Confirmed __ Title policy does not list any exceptions arising from the trust ownership of the property. Confirmed __ Full legal title to the property must be vested in the Trustee(s) on behalf of the Trust (there may be no other owners). Confirmed __ Loan will be underwritten as if the individual establishing the Trust (or at least one of the individuals) were the borrower (or the co-borrower, if there are additional individuals whose income or assets will be used to qualify for the loan). Confirmed __ Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-31 Conventional Lending Guide Borrower Eligibility, Borrower Power of Attorney Homeward will accept a Power of Attorney that: Continued Is used for purchase transactions as well as rate and term refinance transaction. Is signed and dated by the party (Borrower) granting the power of attorney; names on power of attorney must match the name(s) of the person on the affected loan documents. Is signed by an appropriate “witness” (if required by state law) Except as required by applicable law, all Powers of Attorney must be property–specific. Is in effect on the date of the closing transaction Is correctly notarized Is the borrower’s relative, domestic partner, fiancé or fiancée. Is not an interested party in the transaction such as: o The lender; o Any affiliate of the lender; o Any employee of the lender or any other affiliate of the lender; o The loan originator; o The employer of the loan originator, any employee of the loan originator; o The title insurance company providing the title policy or any affiliate of such title company or any employee such title insurance company or affiliate; o Any real estate agent with a financial interest in the transaction or any person affiliate with such real estate agent. If a Durable Power of Attorney is received and is not property specific, the Power of Attorney must be reviewed and approved by Homeward’s Legal Department. IMPORTANT: Borrower must sign the initial 1003 and all other ‘up-front’ documents, except for: A borrower on military service with the United States armed forces serving outside the United States or deployed aboard a United States vessel, as long as the power of attorney: o Expressly states an intention to secure a loan on a specific property, or o Complies with the requirements under the VA Lender’s Handbook relating to powers of attorney for VA-insured mortgage loans, or o Such use is required by applicable law. If there is only one borrower involved in the loan transaction utilizing a power of attorney, the attorney-in-fact must be the borrower’s attorney-at-law or the borrower’s relative. Continued on next page Conventional Lending Guide 100-32 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Borrower Eligibility, Borrower Power of Attorney, (Cont’d) Continued Restrictions on the Use of a Power of Attorney Except as required by applicable law, a power of attorney may not be utilized to sign a security instrument or note if either (or both) of the following applies: o No other borrower executes such loan document in person in the presence of a notary public. Exceptions: A power of attorney may be utilized to sign such loan document for each borrower: As permitted in connection with a refinance transaction conducted in a recorded, interactive session on the Internet as described above in Allowable Attorneys-in-Fact or Agents Under a Power of Attorney; or As long as the attorney-in-fact or agent under the power of attorney is either the borrower’s attorney-at-law or the borrower’s relative domestic partner, fiancé’ or fiancée. o The transaction is a cash-out refinance. Documents executed by the attorney in fact must be signed according to the following examples (the typed signature lien and actual signature must match exactly on all POA documents): State Requirements Acceptable Signatures All States Except California Any of the following examples are permitted: Mary Smith by John Smith as her Attorney-in-Fact Mary Smith by John Smith as Attorney-in-Fact Mary Smith by John Smith, Attorney-in-Fact Mary Smith by John Smith, her Attorney-in-Fact California Only the following signature is acceptable: Mary Smith by John Smith as Attorney-in-Fact NOTE: In all states, documents executed by the attorney in fact must include the principal’s name, the agent’s name, and the agent’s capacity in the signature. Additionally, the document should have the same information typed or written. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-33 Conventional Lending Guide Credit Overview Homeward Residential requires that a borrower’s current and past credit history be analyzed through the review of a credit bureau report prepared by an independent licensed credit reporting agency or credit reporting repository. Homeward Residential accepts the following four types of credit reports, depending on the circumstances of the mortgage request. Age of Documents Residential Mortgage Credit Report (RMCR) In-file and Merged In-file Report Electronic Credit Reports All standard income, asset and credit documentation used to determine the borrower’s eligibility must be no more than stated below unless otherwise required as applicable with this guideline and/or summaries: 4 months per DU (120 days per LP) at the time of note for all mortgage loans (existing properties and new construction) IMPORTANT: The age of the documents is measured from the date of the document to the date the note is signed, the date on the front page of the note. NOTE: Homeward defines the Note Date as the date on the front of the Note. This may or may not be the date the note is signed. Continued on next page Conventional Lending Guide 100-34 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Credit, Continued Electronic Credit Reports Electronically obtained credit bureau reports are permitted from an automated underwriting system (AUS) as follows: Must be ordered from one of the three credit agencies with the correct, acceptable version: o Equifax Beacon 5.0 o Experian FICO V2 o Trans Union FICO Risk Score Classic 04 Must be a Three Bureau In-file Merged Report Credit risk scores are made available to the AUS Two bureau merged in-file report must reflect that a three-bureau in-file report was initially ordered NOTE: A two-bureau merged in-file report is acceptable only if one of the approved credit repositories is unavailable. Representative Credit Score Obtain a minimum of one credit score for every borrower If two credit scores are obtained, use the lower score as the applicable borrower score If three credit scores are obtained, use the middle score as the applicable borrower score When more than one borrower is present on the loan, the lowest applicable score from all borrowers is the representative score. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-35 Conventional Lending Guide Credit, Continued Tradelines A tradeline reflects a history of open or paid credit obligations detailing borrower’s credit reputation. No minimum tradeline requirement with DU Approve/Eligible or LP Accept. Must include opening date, current balance and payment history. For DU/LP, trade lines designated as authorized user are taken into consideration as part of the risk assessment; however, the underwriter must review the credit report trade lines to determine if they are an accurate reflection of the borrower’s credit history. If the underwriter believes the authorized user trade lines are not an accurate reflection, then the borrower’s credit history should be evaluated without the benefit of these trade lines and prudent judgment when making a final underwriting decision. NOTE: For scenarios requirement mortgage insurance, confirm tradeline requirements with the specific MI company. The more restrictive of guidelines will be required. Credit Report Inquiries Homeward requires the following for all inquiries dated within 120 days of the credit report date: DU Loans – Homeward will confirm that the borrower has not obtained any additional credit that is not reflected in the credit report or the mortgage application. If additional credit was obtained, a verification of that debt must be provided and the borrower must be qualified with the monthly payment. LP Loans – Homeward must determine whether additional credit was granted. A letter from the creditor or, if such a letter is unobtainable, a signed statement from the Borrower may be used to determine whether additional credit was obtained. If additional credit was granted, the Homeward must obtain verification of the debt and must consider the debt when qualifying the Borrower. Continued on next page Conventional Lending Guide 100-36 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Credit, Continued Residential Mortgage Credit Report Residential Mortgage Credit Report (RMCR) provides current, verified and details borrower information. The report agency verifies: In-File and Merged In-File Reports Most recent 2-year employment history Residence history All debts, including terms, balances, and ratings. Past due payments Available legal information through public records, such as judgments, foreclosures, garnishments and bankruptcies. Joint or combined report for a married couple must contain all debts of both parties or separate reports must be provided. An individual “in-file” report provides a borrower’s credit and residence history that has been reported and is currently “on file” with a particular credit-reporting repository. There are presently three major credit reporting repositories: Equifax Information Svc. LLC, Experian Credit Data and Trans Union. Homeward Residential also allows the use of in-file reports that have been “merged” by a credit reporting company. In the merging process, the credit reporting company pulls two or three in-file reports from different credit reporting repositories and merges the information to provide one report that contains the most current reported information. Through the merge process, duplicate records are eliminated. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-37 Conventional Lending Guide Credit, Continued NonTraditional Credit Report Delinquency and Derogatory Credit Not permitted for agency products. More weight is placed on installment loan delinquency than on revolving debt delinquency, with the most weight placed on mortgage payment history. The most serious types of delinquency include foreclosures, bankruptcy, judgments, collection accounts and tax liens. Applicants must provide explanations and supporting documentation to show these events were an isolated occurrence and are unlikely to happen again. The following should be considered: The type of accounts on which the delinquency occurred. The reason for delinquency. The severity of the delinquency. The frequency of delinquent accounts. How recently the delinquency occurred. Continued on next page Conventional Lending Guide 100-38 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Credit, Bankruptcy Continued When an applicant has declared bankruptcy under the bankruptcy laws, it does not mean that the application for the mortgage loan must automatically be declined. Eligibility Discharged fully with re-established credit, as deemed acceptable by the underwriter, demonstrating the ability to manage his/her financial obligations. IMPORTANT: Mortgage Debt discharged through a bankruptcy, even if a foreclosure action is subsequently completed to reclaim the property in satisfaction of the debt, the borrower is held to the bankruptcy waiting periods and not the foreclosure waiting period. Lenders must obtain documentation to verify that the mortgage debt in question was in fact discharged as part of the bankruptcy. Application to Bankruptcy DU will Refer the following scenarios and therefore ineligible to Homeward: Chapter 13 discharged within the most recent 24 months, dismissed within the most recent 48 months or filed but neither discharged nor dismissed within the most recent 48months (measured to the Credit Report Date per DU; Application Date per LP). Non-chapter 13 bankruptcies filed, discharged or dismissed within the most recent 48 months (measured to the Credit Report Date per DU; Application Date per LP). DU/LP will not consider bankruptcies dated more than seven years prior to the date of the credit report in its analysis. If there is a trade line account reported with a bankruptcy status or manner of payment code of “7” and there is a bankruptcy reported in a public record within seven years of the credit report date, DU/LP will consider the public record information in its credit analysis. If there is a trade line account reported with a bankruptcy status code or manner of payment code of “7” but there is no bankruptcy reported in a public record within seven years of the credit report date, DU/LP will include the trade line in its credit analysis and the actual filed and discharged dates will be required to be verified to determine if the bankruptcy meets DU/LP guidelines. Borrowers whose credit history includes multiple previous bankruptcies: Borrowers having more than one bankruptcy reported on their credit are not permitted. Two or more borrowers with individual bankruptcies are not cumulative. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy, this is not considered a multiple bankruptcy. Note that any presence of bankruptcies or multiple bankruptcies will required additional due diligence by the Underwriter. Documentation Bankruptcy may be documented according to the DU/LP findings. Satisfactory letter of explanation from the Borrower is required. Continued on the next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-39 Conventional Lending Guide Credit, Foreclosure Continued When an applicant has a foreclosure listed on the credit report, it does not mean that the application for the mortgage loan must automatically be declined. Eligibility Completed with re-established credit, as deemed acceptable by the underwriter, demonstrating the ability to manage his/her financial obligation. Borrowers, whose credit history includes a previous foreclosure type tradeline, must have a re-established credit record for an elapsed time of: 7 years from completion date for foreclosures regardless of DU/LP (measured to the Credit Report Date per DU; Application Date per LP). Documentation Foreclosure may be documented according to the AUS findings. Satisfactory letter of explanation from the Borrower is required. IMPORTANT: Homeward will NOT refinance properties currently in foreclosure. Continued on next page Conventional Lending Guide 100-40 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Credit, Foreclosure, (Cont’d) Continued NOTE: When DU identifies a foreclosure on a credit report tradeline and that foreclosure was due to extenuating circumstances, the underwriter may instruct DU to disregard the foreclosure information on the credit report in the eligibility assessment. This is done by entering “Confirmed CR FC EC” in the Explanation field for question c. in the Declarations section of the online loan application and resubmitting the loan casefile to DU. When the loan casefile is resubmitted to DU, the foreclosure information on the credit report tradeline will not be used in the eligibility assessment. If the underwriter enters “Confirmed CR FC EC,” the underwriter must then document that the foreclosure was due to extenuating circumstances, the foreclosure was completed three or more years from the disbursement date of the new loan, and the loan complies with all other requirements specific to a foreclosure due to extenuating circumstances. Homeward will accept the following for underwriting when inaccurate foreclosure information exists on a DU loan: When DU identifies a foreclosure on a credit report tradeline and the foreclosure information on that tradeline is inaccurate, the underwriter may instruct DU to disregard the foreclosure information on the credit report in the eligibility assessment. This is done by entering “Confirmed CR FC Incorrect” in the Explanation field for question c. in the Declarations section of the online loan application and resubmitting the loan casefile to DU. When the loan casefile is resubmitted to DU, the foreclosure information on the credit report tradeline will not be used in the eligibility assessment. If the underwriter enters “Confirmed CR FC Incorrect,” the underwriter must then document the foreclosure was completed seven or more years from the disbursement date of the new loan, or that the account was not subject to foreclosure and the loan complies with all other applicable requirements. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-41 Conventional Lending Guide Credit, Foreclosure, (Cont’d) Continued Homeward will accept the following underwriting when conflicting or inaccurate foreclosure Information on a DIL or PFS Tradeline exists on a DU Loan: When DU identifies a foreclosure on a credit report tradeline that appears to be one that was subject to a DIL or PFS, the underwriter may instruct DU to disregard the foreclosure information on the credit report in the eligibility assessment. This is done by entering “Confirmed CR DIL” or “Confirmed CR PFS” in the Explanation field for question c. in the Declarations section of the online loan application and resubmitting the loan casefile to DU. When the loan casefile is resubmitted to DU, the foreclosure information on the credit report tradeline that also has a DIL or PFS Remarks Code will not be used in the eligibility assessment. If the underwriter enters “Confirmed CR DIL” or “Confirmed CR PFS,” the underwriter must then document that the account was subject to a DIL or PFS and the event was completed four or more years from the disbursement date of the new loan. Continued on next page Conventional Lending Guide 100-42 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Credit, Continued Deed in Lieu, PreForeclosure, Short Sale When an applicant has a deed in lieu of foreclosure, pre-foreclosure sale or short sale listed on the credit report, it does not mean that the application for the mortgage loan must automatically be declined. Eligibility Completed with re-established credit, as deemed acceptable by the underwriter, demonstrating the ability to manage his/her financial obligation. Borrowers, whose credit history includes a previous pre-foreclosure type tradeline, must have a re-established credit record for an elapsed time of (measured to the Credit Report Date per DU; Application Date per LP): 4 years: regardless of LTV (subject to MI Affiliate guidelines if mortgage insurance is required) 2 years: regardless of LTV if the event was due to extenuating circumstances. (subject to MI Affiliate guidelines if mortgage insurance is required) IMPORTANT: DU applies the following guidelines to prior DILs: DU will determine if a mortgage tradeline is a DIL by using specific Remarks Codes that are present in the credit report data and associated to the tradeline. When DU identifies a DIL, the underwriter must confirm the accuracy of the information. The underwriter must also document that the event was completed four or more years from the disbursement date of the new loan, or two or more years from the disbursement date of the new loan when the underwriter confirms that the mortgage loan meets the applicable timeframes and eligibility requirements for a deed-in-lieu of foreclosure due to extenuating circumstances. DU Applies the following guidelines to Preforeclosure Sales or Short Sales DU will determine if a mortgage tradeline is a PFS by using specific Remarks Codes that are present in the credit report data and associated to the tradeline. When DU identifies a PFS, the underwriter must confirm the accuracy of the information. The underwriter must also document that the event was completed four or more years from the disbursement date of the new loan, or two or more years from the disbursement date of the new loan when the underwriter confirms that the mortgage loan meets the applicable timeframes and eligibility requirements for a pre-foreclosure sale due to extenuating circumstances. Homeward will NOT refinance properties currently in foreclosure. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-43 Conventional Lending Guide Credit, Continued Restructured Loans Restructured or modified loans for non-subject properties may be acceptable if: At the time of underwrite, the borrower(s) has made a minimum of 24 consecutive months of timely mortgage payments (from the date of restructure). Subsequent refinance of a restructured loan (on the subject property) may be acceptable for a Limited Cash-Out Refinance transaction if: The borrower(s) made a minimum of 24 consecutive months of timely mortgage payments (from the date of restructure) on the restructured loan before closing on the refinance mortgage loan. Cash-Out refinance transactions are not permitted when the restructure or modification (as defined below) occurred on the subject property. Underwriter must review the loan and modification details and determine if it meets the definition of a Restructured Mortgage as defined next. A copy of the modification agreement must be in the file upon delivery to Homeward. If the end product of the modification is any one of the following bullets, it is considered a Restructured Mortgage and therefore must follow the 24 consecutive months of timely mortgage payments noted above. Restructured Mortgage A mortgage in which the original terms have been changed, including through the origination of a new mortgage, resulting in any of the following: Forgiveness of principal and/or interest on either the first or second mortgage. Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness. Conversion of any portion of the original mortgage debt to a mortgage that is fully forgiven over a period of time or due upon the sale of the subject property (a “soft” subordinate mortgage). Conversion of any portion of the original mortgage debt from secured to unsecured. Note a mortgage that meets the definition of a Restructured Mortgage continues to be a Restructured Mortgage, regardless of the seasoning. A Mortgage that is the result of any subsequent refinance of a Restructured Mortgage is also considered a Restructured Mortgage. Continued on next page Conventional Lending Guide 100-44 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Credit, Continued Charge-Off of Mortgage Accounts Collections and NonMortgage Charge-offs When a loan is run through Fannie Mae’s Desktop Underwriter (DU), Mortgage accounts, including first liens, second liens, home improvements loans, HELOCs, and manufactured home loans, will be identified as a charge-off if there is an MOP code of “9” (collection or charge-off) and there is no information indicating the account may also be subject to a foreclosure (MOP code “8” or foreclosure Remarks Code), a bankruptcy (MOP code “7”), a deed-in-lieu of foreclosure (DIL Remarks Code), or a pre-foreclosure sale (PFS Remarks Code). When DU identifies a charge-off on a mortgage tradeline, the lender must confirm the accuracy of the information. The lender must also document that the event was completed four or more years from the disbursement date of the new loan, or two or more years from the disbursement date of the new loan when the lender confirms that the mortgage loan meets the applicable timeframes and eligibility requirements for a charge-off due to extenuating circumstances. We generally require the borrower to pay off at (or prior to) closing; however, if the account meets the below thresholds, we will not require them to be paid off. One-unit, owner occupied properties –borrowers are not required to pay off outstanding collections or charge-offs—regardless of the amount. For 2-4 Unit Primary Residence or Second Homes, if the account is less than $5,000 per individual item or in aggregate, For investment properties, if account is less than $250 per individual account or $1,000 in aggregate, NOTE: Requirements above are mandated regardless of DU/LP recommendations, except for Same-Servicer HARP loans which may follow the AUS recommendations from the findings. If the collection account(s) total more than the above based on property type, it is NOT acceptable to pay the account(s) down to below the maximum amount in order to leave the account(s) open. If they exceed the above amounts, the accounts must be paid in full. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-45 Conventional Lending Guide Credit, Continued Past Due Accounts Accounts that reported as past due (not reported as collection accounts) must be brought current prior to or at closing. Judgments, Garnishments and Outstanding Liens The Borrower must pay off at or prior to closing any delinquent taxes, judgments, garnishments, tax liens, mechanics’ or materialmen’s liens or any other outstanding items regardless of DU recommendations. Documentation of the satisfaction of these liabilities, along with verification of funds sufficient to satisfy these obligations, is required. Nebraska Alimony / Child Support Liens Under the Uniform Interstate Family Support Act, orders for payment of alimony/child support in Nebraska automatically create liens and could impact a first lien position on a cash-out refinance transaction. Purchase and rate/term refinance transactions are not impacted as the lien automatically takes second position. For all products and all cash-out refinance transactions, if the credit or title commitment reflects an alimony/child support judgment/lien, the following is required: Subject property mortgage must be in first lien position and title commitment must clearly state that the alimony/child support lien is in subordinate position to the new mortgage. A copy of the subordination agreement or court order must be provided. Continued on next page Conventional Lending Guide 100-46 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Credit, Disputed Credit Information Continued If DU/LP does not issue the disputed tradeline message, the Underwriter is not required to further investigate the disputed tradeline on the credit report or obtain an updated credit report (with the tradeline no longer disputed. However, the Underwriter is required to ensure that the payment for the tradeline, if any, is included in the total expense ratio if the account does belong to the borrower. IMPORTANT: When DU does address the disputed tradeline, the finding will read as below and will be a condition of the loan file. Note, Homeward does not manually underwrite files; therefore, FNMA’s offering is not an available option. “DU identified the following tradeline(s) as disputed by the borrower and did not include the tradeline(s) in the credit risk assessment. The lender must verify the accuracy of the tradeline(s) by determining if it belongs to the borrower and by confirming the accuracy of the payment history. If the tradeline does not belong to the borrower, or the reported payment history is inaccurate, no further action is necessary. If the tradeline does belong to the borrower and the reported payment history is accurate, it must be taken into consideration in the credit risk assessment. To ensure it is considered, the lender may obtain a new credit report with the tradeline no longer reported as disputed and resubmit the loan casefile to DU, or the lender may manually underwrite the loan. If the tradeline is a mortgage that was past due by two or more payments in the last 12 months, or a foreclosure that has been filed within the last 5 years, the loan casefile is ineligible for delivery to Fannie Mae.” Consumer Credit Counseling The presence of consumer credit counseling service does not alter the underwriting recommendation. Whether the borrower has or has not completed his or her participation in the sessions before closing on the mortgage transaction is not of relevance since it is the borrower’s credit history that is of primary importance Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-47 Conventional Lending Guide Credit, Housing History Continued Evaluated per DU/LP system; however, a mortgage/rental payment history reflecting any 1x60 late within the most recent 12 months are not permitted regardless of the recommendations. NOTE: A VOM or cancelled checks are required if the history is not on any bureau. Cancelled checks are required if housing payments are made to or through a private party. Commercial Property Any property disclosed on Schedule E of the Borrower’s tax returns must include mortgage history verification regardless of whether the debt is in the borrower’s personal name or in the name of a business and regardless of whether the income is used to qualify the borrower. First Time Homebuyers In all circumstances, first time homebuyers should have an acceptable housing history. However, if a housing history does not exist (i.e. borrowers lived rent free with family), the underwriter may waive the housing history requirement for permitted programs based on: Established credit history with credit scores meeting all minimum requirements. As approved via DU/LP. Continued on next page Conventional Lending Guide 100-48 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Credit, Departing Property Continued When considering borrower(s) that are in any fashion retaining their current property, ALL ramifications must be consider prior to approval. Such topic include the below and can be found in their respective section within this guideline: Rental Income Reserves Real Estate Debt Equity of Retained/Converted Property Housing History Multiple Mortgages and Maximum Exposure Additionally: If the current/retained residence is secured by a mortgage that will be called due and payable should the borrower no longer reside there as their primary residence, then they are not eligible to purchase another primary residence. For example, retained properties secured by a Reverse Mortgage. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-49 Conventional Lending Guide Employment and Income Overview The underwriter must carefully evaluate the borrower’s employment and income history, stability and likelihood of continuance and must document the last two years of employment income history, using Verification of Employment forms or most recent pay-stubs dated no earlier than 30 days prior to the initial loan application date including any and all YTD earnings and W-2 forms for the past two years. Tax Return Documentation When required, personal federal income tax returns must be copies of the original returns that were filed with the IRS. All supporting schedules must be included. The information must be complete and legible. Each tax return must be signed by the borrower unless the lender has obtained one of the following signature alternatives: Documentation confirming that the tax returns were filed electronically, a completed IRS Form 4506–T (signed by the borrower) for the year in question, or IRS transcripts that validate the tax return. Alternatively, Homeward may use IRS-issued transcripts of the borrower’s individual and business federal income tax returns that were filed with the IRS for the most recent two years—as long as the information provided is complete and legible and the transcripts include the information from all of the applicable schedules. Continued on next page Conventional Lending Guide 100-50 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Amended Tax Returns Continued Homeward Residential does not permit amended tax returns for the purposes of qualification; however, in cases where the borrower has filed amended tax returns for other causes: Tax return amendment filed PRIOR to the Loan Application Date: Tax returns filed prior to application are acceptable for underwriting purposes. The original filed return, the amended return and a letter of explanation from the borrower (or borrower’s accountant) are required. If the file was amended 60 days or less prior to the application, evidence of payment must also be provided. Tax return amendment filed AFTER the Loan Application Date are acceptable when accompanied by ALL of the following: A letter of explanation regarding the reason for the re-file. Evidence of filing. Evidence of Payment or the evidence of the ability to pay the tax. Borrower does not require use of amended income (if increased) for qualification. If the amended returns supplied show a significant increase in income, additional conditions may apply. IMPORTANT: Under no circumstances are amended tax returns acceptable if the loan has already been reviewed and denied by Homeward Residential. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-51 Conventional Lending Guide Employment and Income, Taxpayer Identification Theft Continued Taxpayer identification theft occurs when a taxpayer’s stolen Social Security number is used to file a forged tax return and attempt to claim a fraudulent refund. If the borrower is claiming Taxpayer Identification Theft, the Underwriter will be required to obtain one of the following prior to the Note Date as validation for the identity theft: Proof identification theft was reported to and received by the IRS (IRS Form 14039) Copy of the notification from the IRS alerting the taxpayer to possible identification theft Policy report or proof of filing a complaint with the Federal Trade Commission The Underwriter will also be required to obtain the following secondary documents (all or some, as applicable to the borrower) to validate the reported income on the tax returns in question: W-2 or 1099 transcripts which match the W-2 or 1099 income shown on the 1040s 1099 Mortgage Interest should match reported interest on Schedule A or Schedule E 1099G Unemployment should match reported unemployment 1099 Interest/Dividend should match reported dividend and interest Verification of the prior tax year income, which must be in line with the current year. Business Returns (for self-employed borrowers) K-1s (For Self-employed borrowers) Year to Date Profit and Loss (P&L) Statements (for Schedule C Self-employed borrowers) to verify income is in line with the previous year. Continued on next page Conventional Lending Guide 100-52 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Newly Employed Continued For borrowers who have newly obtained employment without any employment history without a full 2 year history are considered on a case-by-case basis with all of the following: Previous education or military career covering a minimum 2 year period. All official school transcripts and/or discharge papers must be documented accordingly; diplomas alone are not acceptable documentation. Minimum of 6 months with current employer. Only W-2 wage earner income may be used to qualify; commission, bonuses, self-employed, tips, etc. may not be considered. Borrower must be employed in the same or similar line of work compared to their completed education. NOTE: The above scenarios are viable due to a 2 year history being documented in conjunction with an education/military history. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-53 Conventional Lending Guide Employment and Income, Extended Employment Gaps Continued For borrower(s) with an extended job gap/absence and re-entering the workforce with less than six (6) months current employment may have their income considered effective and stable if he/she: Is employed in the current job (no minimum timeframe required), and Can document a two year work history prior to an absence from employment using: Traditional employment verifications, and/or Copies of W-2 forms or pay stubs. NOTE: An acceptable employment situation includes individuals who took several years off from employment to raise children, then returned to the workforce. IMPORTANT: Situations not meeting the criteria listed above may only be considered as compensating factors; otherwise, the borrower must be on the current job for a minimum of six (6) months. Extended absence is defined as three to six months; gaps/absences extending more than six (6) months will be carefully reviewed and may require additional supporting documentation to support the job loss, prior employment in the same or related field, education or training supporting new job, etc. Temporary Leave of Absence – Returning Before First Payment Defined as being employed but taking time off; for example, under Family Medical Leave Act. The borrower’s regular pay may only be considered if the borrower will be returning to work before the first payment. Employment status confirming the return date and income must be verified prior to the loan closing. Following documentation is required if the borrower is using full income to qualify: Borrower’s letter of intent to return to work Employer letter or other communication of the borrower’s right to return to work, under what terms and the VOE/Verbal VOE return date to be reflected prior to the first mortgage payment due date. NOTE: All other standard employment and income eligibility requirements and documentation must be provided and satisfied (for the temporary leave income and regular income amounts). Continued on next page Conventional Lending Guide 100-54 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Temporary Leave of Absence – Returning After First Payment Continued If the borrower is not currently receiving income or receiving a lesser temporary leave amount, their regular full time pay may not be used to qualify, even if they plan on returning to work at some future specified time. If the borrower is receiving disability pay in an amount less than their regular/full time pay, only lesser income that is likely to continue may be used to qualify. Income from accumulated vacation and sick time may not be used to qualify because its continuance cannot be verified; however, the temporary leave income may be supplemented with available liquid financial reserves. Instructions/Examples for calculating the supplemental income from liquid assets: Supplemental income amount will equate to the available liquid reserves divided by the number of months of supplemental income. Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount. IMPORTANT: Available reserves entered into the AUS system must be reduced by the amount of liquid assets used as income. Number of months of supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her regular employment income, rounded up to the next whole number. After determining the supplemental income, the Underwriter must calculate the total qualifying income. Total qualifying income = supplemental income plus the temporary leave income. The total qualifying income that results may not exceed the borrower's regular employment income. Example Regular income amount: $6,000 per month Temporary leave income: $2,000 per month Total verified liquid assets: $30,000 Funds needed to complete the transaction: $18,000 Available liquid reserves: $12,000 First payment date: July 1 Date borrower will begin receiving regular employment income: November 1 Supplemental income: $12,000/4 = $3,000 Total qualifying income: $3,000 + $2,000 = $5,000 NOTE: These requirements apply if the Underwriter becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the Underwriter must not ask if he or she intends to take leave in the future. Following documentation is required if the borrower is using short term disability to qualify: Borrower’s letter of intent to return to work Employer letter or other communication of the borrower’s right to return to work and under what terms Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-55 Conventional Lending Guide Employment and Income, Stability of Employment / Income – Standard Continued If a borrower’s employment history includes unemployment gaps or job changes, the application must reflect at least two years of employment, therefore covering a longer period of time. If the borrower has less than a two year history of receiving income, a written analysis justifying the determination that the income being used for qualification is stable must be provided. Consider both the length of the borrower's employment with any one employer and the stable and reliable flow of income. When evaluating a borrower who has frequent job changes or unemployment, focus on whether the changes have affected the borrower’s ability to repay their obligations. If the borrower provides documentation of a consistent level and type of income and the ability to pay his or her obligations despite changes in the source of that income, it can be presumed that the borrower's income level is stable. Automated underwriting recommends acceptable levels of documentation, which may not be adequate for every borrower and every situation (such as long periods of unemployment). In these cases, additional documentation may be required. Stability of Employment / Income Furlough Known economic conditions, such as plant closings, furloughs, company bankruptcies, etc. that may affect the borrower's income, must be taken into consideration. Borrowers in a state or working for an employer with an active furlough policy must qualify with the reduced income. Payments from a third party (credit union or other source) to supplement unfunded budgets are not permitted, even if the source is approved by the employer. Full pay may be used if there is evidence from the employer or third party documentation that the furlough will end within the next 60 days and there is no discussion to extend the furlough. Continued on next page Conventional Lending Guide 100-56 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Allowable Age of Federal Tax Returns Continued For some types of sources of income, copies of federal income tax returns (personal and, if applicable, business returns) are required to be obtained. The “most recent year’s” tax return is defined as the last return scheduled to have been filed with the IRS. For example: If Today’s Date is… Then the Most Recent Year’s Tax Return would be… February 15, 2015 2013 April 15, 2015 2014 December 15, 2015 2014 Application Date Disbursement Date Documentation Required October 151, [current year minus 1] to April 142, current year October 151 [current year minus 1] to April 142, current year The most recent year’s tax return is required. The use of a Tax Extension (IRS Form 4868) is not permitted. April 151, current year to June 30, current year The previous year’s tax return (the return due in April of the current year) is recommended, but not required. The underwriter must ask the borrower whether he or she has completed and filed his or her return with the IRS for the previous year. If the answer is yes, the underwriter must obtain copies of that return. If the answer is no, copies of tax returns for prior two years must be obtained. Refer to “Tax Transcripts Requirements Using the 4506-T” below for Homeward’s Tax Transcript policy. July 1, current year to October 142, current year April 151, current year to October 142, current year April 151, current year to December 31, current year January 1, [current year plus 1] to April 142, [current year plus 1] Must obtain: The most recent year’s tax return OR all of the following: A copy of IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) file with the IRS, The total tax liability reported or IRS form 4868 must be reviewed and compare it with the borrower’s tax liability from the previous two years as a measure of income source stability and continuance. An estimated tax liability that is inconsistent with previous years may make it necessary for the lender to require the current returns in order to proceed. IRS From 4506-T transcripts confirming “No Record Found” for the applicable tax year, and Returns for the previous two years. The most recent year’s tax return is required. The use of a Tax Extension (IRS Form 4868) is not permitted. NOTE: For business tax returns, if the borrower’s business uses a fiscal year (a year ending on the last day of any month except December), the dates in the above chart may be adjusted to determine what year(s) of business tax returns are required in relation to the application date/disbursement date of the new mortgage loan. 1 Or the April/October filing dates for the year in question as published by the IRS. 2 Or the day prior to the April/October filing dates for the year in question as published by the IRS. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-57 Conventional Lending Guide Continued on next page Conventional Lending Guide 100-58 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Self-Employed and Tax Extensions Continued If the 2014 self-employed income has increased from 2013, is being used for qualifying purposes and the borrower has filed an extension for the 2014 tax returns: Obtain the 2013 and 2012 tax returns and an audited 2014 Profit and Loss statement. If the 2014 self-employed income has decreased from 2013, is being used for qualifying purposes and the borrower has filed an extension for the 2014 tax returns: Obtain the 2013 and 2012 tax returns and a 2014 Profit and Loss statement (unaudited). Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-59 Conventional Lending Guide Employment and Income, Borrowers who have filed 2014 tax returns and the IRS transcript indicate “No Record of Return Filed” Continued If tax returns are required for developing the qualified income (or provided in the loan file) and if the borrower has filed their 2014 tax returns, the IRS Transcripts indicate “No Record of Return Filed” AND the 2014 income is used in calculating qualifying income, the follow must be obtained: The lender must get a “Stamped” copy of the tax returns from the IRS, or; If the borrower E-filed the tax return, the lender can obtain evidence from the borrower that the return was “accepted” by the IRS. For loans underwritten (defined as the last run date in DU) before June 15, 2015, the following must be provided: 2014 Tax and/or W-2 (when applicable) Transcript showing “No record or return filed”; and, Copy of the 2013 Tax Return; and, For Salaried Borrowers: a 2013 tax transcript, current paystub and 2014 W-2; For Self-Employed Borrowers*: 2012 and 2013 tax transcript and a 2014 P&L. See below if borrower filed an extension. For loans underwritten (defined as the last run date in DU) on or after June 15, 2015, the 2014 Tax Return and/or W-2 (when applicable) Transcripts must be provided. NOTE: The underwriter must apply appropriate due diligence to determine the borrower’s income is acceptable for the transaction. Analyze the 2012 and 2013 transcripts and the 2014 tax returns, for consistent income trends. If the Underwriter determines any inconsistencies, they may require the 2014 Tax Transcripts to validate the 2014 Tax Returns. Continued on next page Conventional Lending Guide 100-60 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Tax Transcript Requirements using the 4506-T Continued Homeward requires each borrower (regardless of income source) to complete and sign a separate IRS Form 4506-T at or before closing. (As noted below, it may be necessary to have the borrower complete and sign multiple IRS 4506–T forms depending on the transcripts required to validate the information used in documenting income.) IRS Form 4506–T can be used to obtain transcripts for up to four years or tax periods but only one tax form number can be requested per each IRS Form 4506–T. For example, it is necessary to complete two IRS Form 4506–Ts for a self-employed borrower whose income documentation includes both two years of personal tax returns and two years of business tax returns. One IRS Form 4506–T will be required to obtain a transcript of the personal 1040 returns and another will be required for the business returns (Form 1065, Form 1120, Form 1120A, etc.). Use of IRS Form 4506-T has become the most efficient method for lenders to obtain electronic transcripts of the borrower's income tax information. It is also acceptable for lenders to use either IRS Request for Copy of Tax Return (IRS Form 4506) or IRS Tax Information Authorization (IRS Form 8821); however, these forms are not supported electronically by the IRS. In addition, IRS Short Form Request for Individual Tax Return Transcript (IRS Form 4506T-EZ) is also acceptable, although it may only be used to obtain transcripts of IRS Form 1040 (no other tax forms are supported using IRS Form 4506T-EZ). When federal income tax information is used to document income for qualifying purposes, Homeward may obtain transcripts of the applicable federal income tax documents directly from the IRS (or designee) by using IRS Form 4506–T. However, in certain instances, copies of the actual returns, schedules, or forms may be needed because the tax return transcripts will not provide the detail required to qualify the borrower. For example, the seller must obtain copies of Schedules B through F, Schedule K-1, Form 2106, or business returns. These schedules or forms are not required if: The income reflected on the applicable schedule transcripts is positive, and The income supported by that schedule or form is not being used for qualifying Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-61 Conventional Lending Guide Employment and Income, Tax Transcript Requirements using the 4506-T (Cont’d) Continued What to request from the IRS: Documentation required during Underwriting… The table below shows the documentation that Homeward will request when using IRS Form 4506-T based on income documentation used to determine qualifying income. The IRS Form 4506-T request must include most recent filing of … 1040 (4506T-EZ may also be used) 1120 or 1065 1099 W-2 YTD Paystub and One Year W-2 1 year YTD Paystub and Two Years W-2s 2 years YTD Income Information and Two years 1099s/1040s 2 years One Year Personal Returns 1 year Two Years Personal Returns 2 years Two Years Personal Returns and Two Years Business Returns 2 years 2 years Continued on next page Conventional Lending Guide 100-62 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Alimony / Child Support / Separate Maintenance Continued In order for alimony or child support to be considered as stable income, the borrower must have received income for at least 6 months and it must continue for at least three years after the date of the original mortgage loan application. Homeward will accept as verification of the award of alimony and/or child support one of the following documents: Copy of the divorce decree Formal separation agreement Court records; any other legal agreement or court decree that describes the payment terms, or a copy of any applicable state law that requires alimony, child support or maintenance payments and specifies the conditions under which the payments must be made. The document must specify the amount of the award and the period of time over which it will be received, including the age of the child(ren) for whom the support is being paid). Acceptable evidence would be deposit slips, canceled checks, bank statements or Federal income tax returns. Evidence must be provided to document that the funds have been received for the most recent 6 months: When a borrower has been receiving full, regular and timely payments for the most recent 6 months, the income may be considered stable. Less than 6 months may only be considered as a compensating factor. NOTE: Any partial, sporadic, inconsistent, proposed or voluntary payments may not be considered as stable income. Alimony is taxable and therefore should not be grossed up; however, child support is eligible. Documentation for alimony, child support income is not required if the borrower does not use the income to qualify or as a compensating factor. Loan Prospector (LP): if the loan is run via Freddie Mac’s Loan Prospector (LP) and the income is verified with signed federal income tax returns, the most recent two (2) years will need to be obtained. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-63 Conventional Lending Guide Employment and Income, Auto Allowance Continued Automobile allowances will be considered stable income for a Borrower who has been receiving the income for the past two years, provided all associated business expenditures are included in the calculation of the Borrower's total Debt-toIncome Ratio. Either an actual cash flow approach or an income and debt approach may be used to calculate the income. Actual Cash Flow Approach When the Borrower files an IRS form 2106, the actual cash flow approach should be used. Any funds in excess of the Borrower's monthly expenses are added to the Borrower's monthly income. Any expenses in excess of the monthly allowance must be included in the Borrower’s total monthly obligations. When the Borrower uses the form 2106 and recognized “actual expenses” instead of the standard mileage rate, look at the actual expenses section to identify the Borrower’s actual lease payments, and then make the appropriate adjustments. If a Borrower elected to use a standard mileage deduction instead of taking the actual cash expenditure for auto expenses when he or she completed their federal income tax return, (1) the unreimbursed expense is deducted from income. For (2) depreciation add-back, the business miles driven should be multiplied by the depreciation factor for the appropriate year. The applicable deprecation add-backs are as follows: Tax Year Depreciation Add-Back per Mile 2008 & 2009 $0.21 2010 $0.23 2011 $0.22 2012 $0.23 Income and Debt Approach When the Borrower does not report the allowance on form 2106, the income and debt approach should be used. The full amount of the allowance is added to the Borrower's monthly income. The full amount of the lease or financing expenditure for the automobile must be added to the Borrower's total monthly obligations. Continued on next page Conventional Lending Guide 100-64 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Calculating Auto Depreciation / Expenses Any automobile depreciation or lease payments claimed on IRS form 2106 should be netted out, and not included as a reduction to income. Boarder Income Continued If the borrower claims a “standard mileage” deduction, multiply the business miles driven by the depreciation factor for the appropriate year, as published by the IRS, and add that figure back to the calculation. If the borrower claims an “actual depreciation expense” deduction, the amount the borrower claimed should be added back. Rental income from boarders in a one-unit property that is also the borrower’s principal residence or second home is not generally considered acceptable stable income with the exception of the following: When a borrower with disabilities receives rental income from a live-in personal assistant, whether or not that individual is a relative of the borrower, the rental payments can be considered as acceptable stable income, in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage. Personal assistants typically are paid by Medicaid Waiver funds and include room and board, from which rental payments are made to the borrower. Evidence must be obtained of the boarder’s history of shared residency with a copy of the driver’s license, bills, bank statements, W-2 forms showing the boarder’s address as being the same as the borrowers address. Copies of cancelled checks documenting the boarder’s rental payments for the past 12 months must be obtained. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-65 Conventional Lending Guide Employment and Income, Bonus Income Continued In order to use bonus income for qualifying purposes, the Borrower must have a documented two year history of receiving this type of income and the bonus earnings must be likely to continue for the next three years. Projected bonus income is not an acceptable source of income. Bonus income may be paid monthly, quarterly or annually. If the earnings are consistent or increasing, an average of the past 24 months should be used. If earnings have decreased from year to year, a 12 month average should be used. DU A completed Request for Verification of Employment (Form 1005), or The most recent paystub and the most recent 2 years W-2 forms are required. LP Written VOE covering two full years and a verbal verification of employment or all of the following: o The most recent paystub o the most recent 2 years W-2 forms o A verbal verification of employment Continued on next page Conventional Lending Guide 100-66 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Overtime Income Continued In order to use overtime income for qualifying purposes, the Borrower must have a documented two year history of receiving this type of income and the overtime earnings must be likely to continue for the next three years. Year to date overtime earnings must be verified and compared to the two year average. Projected overtime income is not an acceptable source of income. Establish a two year average of overtime. If, however, the overtime earnings are declining, additional analysis must be conducted to determine if the income should be used. DU A completed Request for Verification of Employment (Form 1005), or The most recent paystub and the most recent 2 years W-2 forms are required. A verbal verification of employment. LP Written VOE covering two full years and a verbal verification of employment or all of the following: The most recent paystub The most recent 2 years W-2 forms A verbal verification of employment. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-67 Conventional Lending Guide Employment and Income, Capital Gains Continued Generally, Capital Gains are a one-time occurrence and would not be considered income. However, if there is a two year history of Capital Gains and there is verification that the Borrower has remaining assets that can be sold for future income, the income may be considered with: Copies of the borrowers filed individual federal tax returns signed, with all schedules, for the most recent two years. Schedule D reflects the Capital Gain income. A two year average must be completed when using Capital Gain income as qualifying income. NOTE: Housing (NonMilitary) or Parsonage Allowance If Capital Losses identified on IRS Form 1040, Schedule D, are recurring, they do not have to be considered when calculating income or liabilities. Due to the nature of this income, current receipt of the income is not required to comply with the Age of Credit Documents policy; however, documentation of the asset ownership must be in compliance. Ministers and other clergy members are typically paid a monthly base pay plus “other” income. The amount of “other” income may vary widely and may or may not be taxable income. Often, ministers are self-employed and/or have unreimbursed business expenses. Housing allowance is typical and may be considered with acceptable verification and documentation. If the income has been received for at least 12 months and has a three year continuance, this can be used as qualifying income. You may not offset the monthly PITI. A written VOE, a letter from the employer or paystubs reflecting the amount of the housing or parsonage allowance and the terms under which it is paid must be obtained along with proof of 12 months receipt of the housing allowance. Continued on next page Conventional Lending Guide 100-68 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Commission Income Continued In order to use commission income for qualifying purposes, the Borrower generally must have a documented two year history of receiving this type of income and the commission earnings must be likely to continue for the next three years. Commission income that has been received for 12 to 24 months may be considered as acceptable income, as long as the borrower’s loan application demonstrates that there are positive factors to reasonably offset the shorter income history and there is a likelihood that the borrower will continue to receive such income. The borrower must have a minimum of 1 year on the W2 and tax returns and supported by a Year to Date pay stub. Verification of year-to-date commission earnings is required. Commission earnings should be level or increasing from one year to the next. Projected commission income is not an acceptable source of income. DU If commission income is less than 25% of the borrower’s total annual employment income: o A completed Request for Verification of Employment (Form 1005) and a verbal verification of employment, or o The most recent paystub and the most recent 2 years W-2 forms are required. o A Verbal verification of employment. If commission income is equal to or greater than 25% of the borrower’s total annual employment income: o A completed Request for Verification of Employment (Form 1005) or the borrower's recent paystub and IRS W-2 forms covering the most recent two-year period; and o Copies of the borrower's signed federal income tax returns covering the most recent two-year period. o A verbal verification of employment. LP All of the following: o Written VOE covering the most recent two-year period, and o Complete individual federal tax returns covering the most recent twoyear period and reflecting at least 6 months of commission income, and o A verbal verification of employment. Or, All of the following: o The most recent paystub and copies of the borrowers filed federal tax returns signed, with all schedules, for the most recent two years. The tax returns must reflect at least 6 months of commission income. o A verbal verification of employment. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-69 Conventional Lending Guide Employment and Income, Disability Benefits Continued Disability benefit payment should be treated as acceptable stable income unless the terms of the disability policy specifically limit the stability or continuity of the benefit payments. Must not have an established termination or modification date within three (3) years. If long term disability is received from Social Security, there is no expiration date and it acceptable to expect it to continue (i.e. continuance is not required to be further documented). Generally, long term disability will not have a defined expiration date and, in these cases, it acceptable to expect it to continue (i.e. continuance is not required to be further documented). Requirements for re-evaluation of benefits are NOT considered a defined expiration date. Benefits that will decrease to a lesser amount within the next three years because of long-term conversion, the lesser amount should be utilized in qualifying the borrower. Copy of disability policy or statement is required from the insurance company, employer, or other qualified disinterested party. Disability Payments to be verified by obtaining a copy of the award letter, W-2 or other equivalent documentation showing the type, source and total amount of income. Two (2) months bank statement evidencing current receipt must be documented as well. May be grossed up 25% provided documentation verifies income as non-taxable. Continued on next page Conventional Lending Guide 100-70 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Dividends and Interest An average of interest and dividend income may be used to qualify if supported by the Borrower’s assets after settlement. The asset providing the interest and dividend income may not be liquidated for cash to close unless that portion used is deducted and the interest and/or dividend amount is recalculated based on the unused portion of the asset. Interest and dividend income is eligible only after deducting that portion, listed on Schedule B of IRS Form 1040, derived from a partnership or S Corporation. Employed by Family Members Continued Most recent two (2) years personal tax returns with all schedules AND Most recent asset account statement documenting ownership of the asset. If employed by a relative, the following documentation is required regardless of DU recommendations: The business accountant must verify that the Borrower is not selfemployed by indicating his or her percentage of interest in the business. The accountant must be a disinterested third party. Most recent, computer generated pay stub covering 30 days regardless of DU. Most recent two year’s tax returns Most recent two year’s W-2 form NOTE: The two (2) year income will be analyzed for increases that are significantly greater than cost of living raises. In such event, the underwriter may average the income over a 24 month period. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-71 Conventional Lending Guide Employment and Income, Borrowers Not Required to File Tax Returns with the IRS There are some instances where a borrower was not required to file a tax return for the prior year. Acceptable examples may include: Newly employed borrower who was a full-time student the most recent tax year. School transcripts are required for documentation. Borrower whose income level was below the minimum reporting standards as required by the IRS. Examples include borrowers who receive disability, Social Security, or pension income and indicate that they are not required to file tax returns. Active duty military that meet all the requirements to be granted an extension by IRS in accordance with IRS Publication 3 - Armed Forces' Tax Guide. In addition to the specific requirements noted above, the file must be satisfactorily documented to: Foreign Income Continued Support the income used for qualifying, Comply with any AUS documentation requirements, Document the reason a tax transcript is NOT available, and Include a tax transcript indication “No Record Found” or IRS Verification of Non-Filing Form Income that is earned by a U.S. citizen that is employed by a foreign corporation or a foreign government may use foreign income to qualify if the following requirements are met: Most recent paystub(s) and two (2) year’s W-2s Copies of his or her signed federal income tax returns filed with the IRS for the past two years that include foreign income. All income must be translated to U.S. dollars documented from a viable source. Borrowers must have a U.S. primary residence property address. Continued on next page Conventional Lending Guide 100-72 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Foster Care Income Continued Foster Care Income received from a state or county sponsored organization may be considered acceptable with a two year history and the likelihood of continuation. Documentation: Gratuities and Tip Income Letters from the organizations providing the income Two year tax returns Copies of deposit slips or bank statements confirming the regular deposits Income for children who will reach the age of 19 within three years will not be considered Permitted if they are included in two years of taxable income. Documentation: Most recent paystub, most recent two (2) years W-2s along with standard verbal VOE. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-73 Conventional Lending Guide Employment and Income, Military Income Continued Base military pay, in addition to the following with documentation verify a future three year window of receipt, are permitted: Flight or hazard pay Rations Clothing allowance Quarters’ allowance Proficiency Pay NOTE: Income paid to military reservists while they are fulfilling their reserve obligations is also acceptable if it satisfies the same stability and continuity tests applied to second-job income. DU YTD Leave and Earnings Statement (LES) documenting at least 30 days of income and the most recent W-2 are required. In lieu of a verbal VOE, a LES dated no more than 30 days prior to the Note date may be provided or a verification of employment through the Defense Manpower Data Center dated no more than 30 days prior to the Note Date. LP Streamlined Accept Documentation Written VOE covering one year and a verbal verification of employment or Year to date Leave and Earnings Statement (LES) documenting at least 30 days of income, the most recent W-2 are required. A verbal verification of employment. In lieu of a verbal VOE, an LES dated no more than 30 days prior to the Note date may be provided or a verification of employment through the Defense Manpower Data Center dated no more than 30 days prior to the Note date. Standard Documentation Written VOE covering two years and a verbal verification of employment or Year to date Leave and Earnings Statement (LES) documenting at least 30 days of income, the most recent 2 years W-2 forms are required. A verbal verification of employment. In lieu of a verbal VOE, an LES dated no more than 30 days prior to the Note date may be provided or a verification of employment through the Defense Manpower Data Center dated no more than 30 days prior to the Note date. Continued on next page Conventional Lending Guide 100-74 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Nonreimbursed Business Expense Continued If tax return are provided in the loan file and a borrower has nonreimbursed business expenses, such as classroom supplies, uniforms, meals, gasoline, automobile insurance, and/or automobile taxes, determine the recurring monthly debt obligation for such expenses by developing a 24-month average of the expenses. Review the Schedule A and/or IRS form 2106 from one of the following: Personal income tax returns including all schedules for the number of years required Tax transcripts for the number of years required When calculating the total debt-to-income ratio, the 24-month average for non-reimbursed expenses should be subtracted from the borrower’s stable monthly income. If there is not a full 24-month history, the underwriter should develop an annualized monthly average. Calculation + Total Expenses (form 2106, line 8, columns A & B) + Depreciation (line 28) Sub-total (divide) ÷ Sub-total by 24 (divide by 12 if using one year’s tax returns) Monthly Average Non-reimbursed Business Expense See Auto Allowances & Expense Account Payments in the Employment and Income section for treatment of these business expenses, as they may not be deducted from income; they must be included as recurring debts in the total debt ratio. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-75 Conventional Lending Guide Employment and Income, Non-Taxable Income Continued Generally, income is taxable unless it is specifically exempted by law. Nontaxable income may be shown on the borrower's tax return but is not taxed. Verify and document 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. If the income is verified as nontaxable, and the income and its taxexempt status are likely to continue, develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25 percent of the nontaxable income to the borrower’s income. All disclosed, nontaxable income must be grossed-up even if not being used for loan qualification. Filing requirements for most taxpayers can be found on the IRS website. NOTE: Loans approved via LP and income is verified through federal income tax returns, the most recent two (2) years must be obtained. Mortgage Credit Certificate Not Permitted. Continued on next page Conventional Lending Guide 100-76 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Mortgage Differential Payments Continued An employer may subsidize an employee’s mortgage payments by paying all or part of the interest differential between the employees’ present and proposed mortgage payments. When calculating the qualifying ratio, the differential payments should be added to the borrower’s gross income. The payments may not be used to directly offset the mortgage payment, even if the employer pays them to the mortgage lender rather than to the borrower. Obtain written verification from the borrower’s employer confirming the subsidy and stating the amount and duration of the payments. Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. NOTE: If this income is used on a purchase transaction, current receipt is not required to be documented except as verified in the employer letter. For refinance transactions where the income is continuing with the new loan, the recent receipt must be in compliance with the Age of Credit Documents. Note Receivable Income Must evidence continuance for at least 3 years Copy of the note to establish the amount and length of payment Must have been received for the last 12 months Acceptable evidence includes: Copies of signed federal income tax returns filed with IRS Copies of bank statements reflecting deposit of funds NOTE: Payments on a newly executed note that specifies a minimum duration of three years may not be used as stable income, but may be used to justify a higher qualifying ratio. Loans approved via LP and income is verified with signed federal income tax returns, the most recent two (2) years must be obtained. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-77 Conventional Lending Guide Employment and Income, Part-Time, Second or Multiple Income Continued Borrower must have a two year consecutive history of this type of income and this job must be likely to continue for the next three years. If the income is stable or increasing, a 2 year average of this income should be used for qualifying purposes. If the income is declining, additional analysis must be conducted to determine if the income should be used. DU The most recent paystub and the most recent 2 years W-2 forms are required. A verbal verification of employment. LP Written VOE covering two full years and a verbal verification of employment or The most recent paystub and the most recent 2 years W-2 forms are required. A verbal verification of employment. If the secondary income is sourced from self-employment, then the income must be included in the AUS evaluation when one of the following is present: Primary job is self-employed 2nd job and you are using the income to qualify & is included in the income used to score the loan 2nd job and there is any loss at all NOTE: Secondary, self-employed income does not need to be evaluated when there is positive income and it is not being used to qualify. Continued on next page Conventional Lending Guide 100-78 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Pension / Retirement with Actual Income Stream Continued Income from retirement accounts, such as 401(k), IRA or Keogh, must be received as monthly distributions and expected to continue for at least three years to be considered as qualifying income. If the assets are in the form of stocks, bonds or mutual funds, 70% of the value must be used to determine the number of distributions remaining. Document the regular continued receipt of the income using one of the following: Letters from the organizations providing the income Copies of retirement award letters Copies of signed federal income tax returns that were filed with the IRS IRS W-2 or 1099 forms; Copies of the borrower’s two most recent bank statements Documentation of asset ownership must be in compliance with the Age of Credit Documents. NOTE: Loans approved via LP and income is verified with signed federal income tax returns, the most recent two (2) years must be obtained. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-79 Conventional Lending Guide Employment and Income, Income Derived from the Asset Continued Three types of scenarios are eligible for Employment-Related Assets to be considered as a qualifying income stream: Retirement Assets: Must be verified by the most recent asset account statement and must document the borrower as the sole owner of the account. Borrower must be 100% full vested, have immediate access without penalty*(See Income Calculation Below) and the account must be an IRS recognized retirement account. Non-self-employed severance packages or non-self-employed lump sum retirement packages: Must be documented with the most recent three (3) month personal depository or brokerage account statements, an employer distribution letter and/or check stubs evidencing receipt, and the type of lump sum distribution funds. Note funds must not have been subject or currently subject to a penalty*(See Income Calculation Below). If the funds were deposited into a non-retirement account, it must be verified that all funds in that non-retirement account have been derived from eligible retirement assets. Proceeds from the sale of a business: must be documented with 3 months personal depository or brokerage account statements, fully executed closing documents evidencing final sale of business to include the sales price and net proceeds, contract for the sale of the business, most recent business tax return prior to the sale and If the funds were deposited into a nonretirement account, it must be verified that all funds in that non-retirement account have been derived from the sale of the borrower’s business or eligible retirement assets. IMPORTANT: Non-employment related assets (such as stock options, non-vested restricted stocks, lawsuits, lottery winnings, sale of real estate, inheritance, divorce proceeds, etc.) are not permitted to be utilized as a qualifying income stream. Checking and savings accounts are generally not eligible as employment-related assets, unless the source of the balance in a checking or savings account was from an eligible employment-related asset (for example, a severance package or lump sum retirement distribution). Documentation of asset ownership must be in compliance with the Age of Credit Document policy. Continued on next page Conventional Lending Guide 100-80 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Income derived from the Asset, (Cont’d) Continued All of the following loan parameters must be present in order to utilize employment related assets as a qualifying income stream: Maximum 70% LTV/(H)CLTV Minimum Credit Score of 620 Purchase and Limited Cash-Out Refinances only 1-4 Unit primary residence and second homes Net Value Determination Stocks, bonds, and mutual funds: 70% of the value (remaining after costs for the transaction) may be used to determine the income stream. Retirement accounts: 70% of the value (remaining after costs for the transaction) may be used to determine the income stream. Net Documented Assets The sum of eligible documented assets minus discount (if retirement, stocks, bonds, mutual funds) minus any funds that will be used for closing or required for reserves. Income Calculation DU: Income Calculation/Payout Stream = Divide “Net Documented Assets” by the amortization of the mortgage loan (in months). *If a penalty applies, to the asset, the asset must be reduced by the amount of any penalty that could apply upon distribution when determining this income stream. LP: Income Calculation/Payout Stream = Divide “Net Documented Assets” by 360 months (30 year term must be used regardless of borrower age or amortization term). *Account funds must not be subject to a penalty. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-81 Conventional Lending Guide Employment and Income, Public Assistance Continued Received for the past two years Likely to continue for the next three years, if documentation is available. Documented by letters or exhibits from the paying agency stating the amount, frequency and duration of the benefits payments. Section 8: The Housing Choice Voucher Program (more commonly known as Section 8) is also an acceptable source of qualifying income. There is no requirement for the Section 8 voucher payments to have been received for any period of time prior to the date of the mortgage application or for the payments to continue for any period of time from the date of the mortgage application. Determine from the public agency that issues the vouchers the monthly payment amount, that it is paid directly to the borrower and whether the income is nontaxable. If the income is nontaxable, an adjusted gross income for the borrower may be calculated and applied. Continued on next page Conventional Lending Guide 100-82 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Rental Income Rental income is an acceptable source of stable income if it can be established that the income is likely to continue. If the rental income is derived from the subject property, the property must be one of the following: Rental Income Ineligible Properties Continued Two to four unit principal residence property in which the borrower occupies one of the units, or A one to four unit investment property. If the income is derived from a property that is not the subject property, there are no restrictions on the property type. For example, rental income from a commercial property owned by the borrower is acceptable if the income otherwise meets all other requirements (it can be documented in accordance with the requirements below). Generally, rental income from the borrower’s principal residence (a one-unit principal residence or the unit the borrower occupies in a two- to four-unit property) and a Second home cannot be used to qualify the borrower. However, Homeward does allow an exception to this policy for boarder income. See Boarder Income section within this Lending Guide. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-83 Conventional Lending Guide Employment and Income, DU Loans General Requirements for Documenting Rental Income If a borrower has a history of renting the subject or another property, generally the rental income will be reported on Schedule E of the borrower’s personal tax returns or an S Corporation form (IRS Form 8825) of a business tax return. If the borrower does not have a history of renting the subject property, the lender may be justified in using a current lease agreement. Examples of scenarios that justify the use of a lease agreement are Continued Purchase transactions; Refinance transactions in which the borrower purchased the rental property during or subsequent to the last tax return filing; or Refinance transactions of a property that experienced significant rental interruptions such that income is not reported on the recent tax return. (For example, major renovation to a property occurred in the prior year that affected rental income.) When the subject property will generate rental income, one of the following forms must be used to support the income-earning potential of the property: For one unit properties: Single-Family Comparable Rent Schedule (Form 1007) (provided in conjunction with the applicable appraisal report), or For two to four unit properties: Small Residential Income Property Appraisal Report (Form 1025). Continued on next page Conventional Lending Guide 100-84 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, DU Loans Documenting Rental Income from Subject Property Continued Documentation must be obtained that is used to calculate the monthly rental income for qualifying purposes. The documentation may vary depending on whether the borrower has a history of renting the property, and whether the prior year tax return includes the income. NOTE: If the borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for lender reporting purposes. Borrower history of receiving rental income from Subject Property? Transaction Type Yes Refinance Required Documents Form 1007 (1 unit) or 1025 (2-4 Units), AND either No Purchase Form 1007 or Form 1025, as applicable, and Copies of the current lease agreement(s). If the property is not currently rented, lease agreements are not required. Lenders may use market rent supported by Form 1007 or Form 1025, as applicable. No Refinance The borrower’s most recent year of signed federal income tax returns, including Schedule E, or Copies of the current lease agreement(s) if the borrower can document a qualifying exception. (see Partial or No Rental History on Tax Returns below) If there is a lease on the property that is being transferred to the borrower, it must be verified that it does not contain any provisions that could affect the first lien position on the property. Form 1007 or Form 1025, as applicable, and copies of the current lease agreement(s). Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-85 Conventional Lending Guide Employment and Income, Continued DU Loans Documenting Rental Income from Property OTHER than the Subject Property When the borrower owns property, other than the subject property, that is rented, the lender must document the monthly gross (and net) rental income with the borrower’s most recent signed federal income tax return that includes Schedule E. Copies of the current lease agreement(s) may be substituted if the borrower can document a qualifying exception. See Partial or No Rental History on Tax Returns below. DU Loans Partial or No Rental History on Tax Returns In order to determine qualifying rental income, the underwriter must determine whether or not the rental property was in service for the entire tax year or only a portion of the year. In some situations, the underwriter’s analysis may determine that using alternative rental income calculations or using lease agreements to calculate income are more appropriate methods for calculating the qualifying income from rental properties. This policy may be applied to refinances of a subject rental property or to other rental properties owned by the borrower. If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the underwriter may determine qualifying rental income by using: Schedule E income and expenses, and annualizing the income (or loss) calculation; or Fully Executed lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation. IF THEN If the property was acquired during or subsequent to the most recent tax filing year, Confirm the purchase date using the HUD-1 or other documentation. If the rental property was out of service for an extended period, If acquired during the year, Schedule E (Fair Rental Days) must confirm a partial year rental income and expenses (depending on when the unit was in service as a rental). If acquired after the last tax filing year, Schedule E will not reflect rental income or expenses for this property. Schedule E will reflect the costs for renovation or rehabilitation as repair expenses. Additional documentation may be required to ensure that the expenses support a significant renovation that supports the amount of time that the rental property was out of service. Schedule E (Fair Rental Days) will confirm the number of days that the rental unit was in service, which must support the unit being out of service for all or a portion of the year. Continued on next page Conventional Lending Guide 100-86 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, DU Loans Calculating Monthly Qualifying Rental Income (or Loss) Continued Federal Income Tax Returns / Schedule E. When Schedule E is used to calculate qualifying rental income, the underwriter must add back any listed depreciation, interest, taxes, or insurance expenses to the borrower’s cash flow. If the property was in service: For the entire tax year, the rental income must be averaged over 12 months; or For less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit. See Treatment of the Income (or Loss) below for further instructions. Lease Agreements. When current lease agreements are used, the lender must calculate the rental income by multiplying the gross rent(s) by 75%. The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses. See Treatment of the Income (or Loss) below for further instructions. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-87 Conventional Lending Guide Employment and Income, DU Loans Treatment of Rental Income (or Loss) Continued The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss), and its treatment in the calculation of the borrower's total debt-to income ratio, varies depending on whether the borrower occupies the rental property as his or her principal residence. If the rental income relates to the borrower’s Primary Residence: The monthly qualifying rental income (as defined above) must be added to the borrower’s total monthly income. (The income is not netted against the PITI of the property.) The full amount of the mortgage payment (PITI) must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio. If the rental income (or loss) relates to a property other than the borrower's principal residence: If the monthly qualifying rental income (as defined above) minus the full PITI is positive, it must be added to the borrower’s total monthly income. If the monthly qualifying rental income minus PITI is negative, the monthly net rental loss must be added to the borrower’s total monthly obligations. The full PITI for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation. The full monthly payment for the borrower's principal residence (full PITI or monthly rent) must be counted as a monthly obligation. Continued on next page Conventional Lending Guide 100-88 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, DU Loans Offset Monthly Obligations for Rental Property Reported through a Partnership or an S Corp Continued If the borrower is personally obligated on the mortgage debt (as evidenced by inclusion of the related mortgage(s) on the credit report) and gross rents and related expenses are reported through a partnership or S corporation, the business tax returns may be used to offset the property’s PITIA. The steps described below should be followed: Obtain the borrower’s business tax returns, including IRS Form 8825 for the most recent year. Evaluate each property listed on Form 8825, as shown below: From total gross rents, subtract total expenses. Then add back insurance, mortgage interest, taxes, homeowners’ association dues (if applicable), depreciation, and non-recurring property expenses (if documented accordingly). Divide by the number of months the property was in service. Subtract the entire PITIA (proposed for subject property or actual for real estate owned) to determine the monthly property cash flow. If the resulting net cash flow is positive, the lender may exclude the property PITIA from the borrower’s monthly obligations when calculating the debt-to-income ratio. If the resulting net cash flow is negative (that is, the rental income derived from the investment property is not sufficient to fully offset the property PITIA), the calculated negative amount must be included in the borrower’s monthly obligations when calculating the debt-toincome ratio. In order to include a positive net rental income received through a partnership or an S corporation in the borrower’s monthly qualifying income, the seller must evaluate it according to Homeward’s guidelines for income received from a partnership or an S corporation. NOTE: For DU loan casefiles, the term “subject net cash flow” applies to net rental income from the subject property, and the term “net rental income” applies to rental income from properties other than the subject property. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-89 Conventional Lending Guide Employment and Income, DU Loans Entering Net Rental Income Continued “Net rental income” for DU loan case files does not include rental income from the subject property. It applies only to rental properties already owned by the borrower. For rental income on the subject property, refer to “Entering Subject Net Cash Flow in DU” below. To submit net rental income to DU, the underwriter can either: Calculate the total net rental income for all rental properties (except the subject property) and enter the amount (either positive or negative) in the Net Rental field in Section V. If REO data has been entered, DU will ignore a zero value in this field. Therefore, the Underwriter must enter either a positive or negative amount. In other words, if the net rental income is a “breakeven” amount, the user must enter either $0.01 or $−0.01; otherwise, DU will use the value from Section VI R. Complete the REO data entered in the Uniform Residential Loan Application (Form 1003) (or in a loan origination system) for each rental property (except the subject property). DU will preliminarily calculate the net rental income using the following formula: (gross rental income × 75%) – mortgage payment − insurance/maintenance/taxes/misc. = net rental income. The Underwriter should override DU’s preliminary calculation, if it is different from the Underwriter’s calculation, by entering the net rental income amount directly in the Net Rental field in the Full 1003, Section VI R. NOTE: If both methods are used, DU will use the net rental income from Section V (if it is a value other than zero) and issue a message when there is a conflict of data. If the combined total net rental income for all rental properties is positive, DU adds the net rental income to the qualifying income. If the total is negative, DU treats the loss as a liability and includes it in the total expense ratio. Continued on next page Conventional Lending Guide 100-90 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, DU Loans – Entering Net Rental Income for Special Situations DU Loans Subject Net Cash Flow Calculations Continued If the borrower is purchasing a principal residence and is retaining his or her current residence as a rental property, show the current principal residence as Rental in the Property Disposition field and complete the Net Rental field in the Full 1003, Section VI R. If the borrower’s principal residence is a two to four unit property, rental income from the principal residence can be used to qualify the borrower. With the exception of subtracting the borrower’s principal mortgage payment from the gross rental income, all other calculations and documentation requirements in this section apply. To use net rental income from a borrower’s owner occupied two to four unit property when the borrower is purchasing or refinancing a second home or investment property, enter the net rental income from the borrower’s principal residence as Net Rental in Section V. Two- to four-unit Primary Residence: Calculate the subject net cash flow, and enter this amount in Section V. It will be included in the total qualifying income. Do not subtract the PITI from the rental income, because the PITI is included in the total proposed mortgage payment and is considered in the qualifying ratio. Do not enter a negative subject net cash flow value, because the entire PITIA is already included in the qualifying ratio. Investment Properties: Calculate the subject net cash flow. If the subject net cash flow is positive, enter the amount in Section V. It will be included in the total qualifying income. If the cash flow is negative, enter the amount in Section V as a negative value. DU will include it in the total expense ratio calculation as a liability. If income from the subject property is not included in the qualifying ratios, the lender should enter the entire proposed PITI as a negative amount in the Subject Net Cash field in Section V. DU Loans Entering Subject Net Cash Flow Subject net cash flow applies to 1-4 unit Investment Properties and 2-4 unit Primary Residences secured by the subject property. DU does not calculate the subject net cash flow. The Underwriter must calculate and enter the income in Subject Net Cash in Section V of the online loan application. NOTE: Although negative subject net cash flow values appear to reduce the gross monthly income in Section V, DU actually treats the negative value as a liability and includes it in the total expense ratio. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-91 Conventional Lending Guide Employment and Income, LP Loans – Rental Income General LP Loans – Rental Income from the Subject property 2-4 Primary Residence Continued If the Borrower owned a rental property during the previous tax years, the Borrower's individual federal income tax returns for the most recent two (2) years must be obtained to determine the net rental income or loss for qualifying. In some instances, the income reported on the Borrower's individual federal tax returns may not reflect the property's current rental value (i.e., the tax returns show large one-time expenses or the property was under renovation). In these instances, individual federal tax returns for the most recent two (2) years must be obtained; however, Form 998, Operating Income Statement, may be used to determine rental income. The underwriter must explain the reasons for not using the income or loss from the individual federal tax returns to determine rental income, in the Mortgage file. Rental income from units in the Borrower's 2 to 4 unit Primary Residence that are not occupied by the Borrower may be used to qualify the Borrower. If rental income from the subject 2 to 4 unit Primary Residence is being used to qualify the Borrower, the following requirements apply: Must obtain and use Form 998 unless the subject property has been owned for at least one year and is reported on Schedule E of the Borrower's prior year individual federal tax return. If income from the subject property is reported on the Borrower's individual federal tax returns the Schedule E must be used to determine the net rental income. If Form 998 is used to determine rental income, it must be completed up to the Monthly Operating Income (MOI) reconciliation. Must substantiate the rental income using the income approach on the appraisal and copies of the present lease(s), if applicable, must support the rental income used to qualify the Borrower The Form 998 is not required if rental income from the subject property is not considered in qualifying the Borrower. If the borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for lender reporting purposes. Monthly Operating Income from the Form 998 or net rental income from Schedule E is entered under "Gross Monthly Income" in Section V of the Form 65, Uniform Residential Loan Application, and may be considered as stable monthly income in qualifying the Borrower, provided the Borrower meets the reserve requirement. If Monthly Operating Income or net rental income from Schedule E is a negative number, it must be included as a liability for qualification purposes. Continued on next page Conventional Lending Guide 100-92 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, LP Loans – Rental Income from the Subject Property 1-4 Investment Continued If the Borrower qualifies with the full PITI plus operating expenses for the subject Investment Property included in the Borrower's monthly debt-to-income ratio, no further evaluation or calculation of rental income from the subject property is required and Form 998 is not required. If the borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for lender reporting purposes. If rental income from the subject Investment Property is to be considered in qualifying the Borrower, the following requirements apply: Must obtain and use Form 998 unless the subject property has been owned for at least one year and is reported on the Schedule E of the Borrower's prior year individual federal tax return. If income from the subject property is reported on the Borrower's individual federal tax returns, must use Schedule E to determine the net rental income. If Form 998 is used, it must be completed up to the MOI reconciliation. The income approach on the appraisal and copies of the present leases, if applicable, must support the rental income used to qualify the Borrower The Borrower must have reserves that are equal to at least six (6) months payments of PITI Proof of six (6) months’ rent loss insurance. The Borrower must demonstrate at least a two (2) year history of managing 1-4 unit Investment Properties If the Net Cash Flow shown on the Form 998 or net rental income from Schedule E of the Borrower's tax returns is a positive number, that figure may be entered as rental income in the "Gross Monthly Income" section of Form 65 and may be considered stable monthly income. If the Net Cash Flow shown on the Form 998 or net rental income from Schedule E of the Borrower's tax returns is a negative number, it must be included as a liability for qualification purposes. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-93 Conventional Lending Guide Employment and Income, LP Loans – Rental Income from Investment Property Owned other than the Subject Continued Rental income from investment properties that are owned by the Borrower, other than the subject property, must be shown in the "Schedule of Real Estate Owned" in Section VI of Form 65. When rental income from other investment properties owned by the Borrower in the previous tax year is reported on the Borrower's individual federal tax returns, the underwriter must use Schedule E of the Borrower's tax returns to determine the net rental income. If the Borrower's federal income tax returns reflect a two (2) year history of managing investment properties, signed leases may be used to determine the net rental income for an investment property not owned during the previous tax year. Additionally, signed leases may be used to substantiate gross rents that are higher than the rental income documented on the tax returns; however, no more than 75% of the gross rental income from the signed leases may be used, unless the prior two (2) years' individual federal tax returns clearly support the use of a higher percentage. The aggregate net rental loss must be considered a liability for qualification purposes. Aggregate net rental income may be counted as stable monthly income, provided the reliability of receipt is clearly supported by the documentation in the file. Continued on next page Conventional Lending Guide 100-94 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Rental Income from Converted Property Continued Conversion of Current Principal Residence to Investment Property If the borrower is converting a current principal residence to an investment property, the underwriter must ensure the borrower has sufficient equity to support both the current PITIA and the new mortgage being originated. The percent of equity in the current principal residence must be documented in accordance with the Equity in the Current Principal Residence requirements. To confirm leasing of the newly converted property or unit (for a two- to four-unit property), the underwriter must obtain a copy of the: Fully executed lease agreement, Security deposit from the tenant, and Bank statement showing the deposited security funds. Equity in the Current Principal Residence: Borrower's equity in the existing principal residence must be documented with at least a Form 2055 appraisal. The underwriter must calculate net rental income and qualify the borrower according to the following requirements: 1-Unit property, if documented equity in the current principal residence is: Then: Greater than or equal to 30% 75% of gross rental income may be used as income Less than 30% No rental income will be allowed. 2-4 Unit property, if documented equity in the current principal residence is: Then, for the unit previously occupied by the borrower: And, for the remaining units, the Underwriter may either: Greater than or equal to 30% The underwriter may use 75% of the gross rental income from the newly executed lease agreement Less than 30% No rental income may be counted Calculate the net rental income (or loss) from the pages of the borrower's most recent 2 years of signed federal income tax returns and the related Schedule E. Leases are permitted only if the property is not listed on Schedule E because it was acquired subsequent to filing the tax return. If the percentage of equity in the current principal residence is... Then: Greater than or equal to 30% The borrower must be qualified with the new PITI and 75% of the gross rental income may be credited to offset the current principal residence’s PITI. Less than 30% The borrower must be qualified with the new PITI plus the full amount of the current principal residence’s PITI. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-95 Conventional Lending Guide Greater than or equal to 30% for a 2-4 unit residence The borrower must be qualified with the new PITI plus PITI on the current principal residence minus 75% of gross rental income from the newly leased unit, plus, if applicable, any credit from existing leased units. Less than 30% for a 2-4 unit residence The borrower must be qualified with the new PITI plus PITI on the current residence minus, if applicable, any credit from existing leased units only. Continued on next page Conventional Lending Guide 100-96 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Royalty Payments Continued Most recent two year tax returns, including Schedule E. Document minimum 12 month receipt of income Income to continue for the next three years Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-97 Conventional Lending Guide Employment and Income, Seasonal Income Continued The Borrower must have a two year history of receiving income from seasonal employment in the same line of work. Verification is required that the borrower will be rehired (in the same or similar position) for the next season and that employment is likely to continue. Seasonal Unemployment Compensation DU Unemployment Compensation clearly associated with seasonal layoffs can be used for qualifying purposes with a two year history of receipt (verified with two years 1040’s) if likely to continue for next three years. Most recent YTD pay stub with at least 30 days of income. Paystub should be dated no earlier than 30 days prior to the application date, reflecting year to date income. If the borrower is applying during an off month, the last paystub received should be obtained. The most recent 2 years W-2 forms, and Copies of the borrowers filed federal tax returns signed, with all schedules, for the most recent two years. A verbal verification of employment as required within this guide is required. (Verification is required that the borrower will be rehired, in the same or similar position, for the next season.) Evidence of current receipt and amount of unemployment compensation and evidence that it is associated with seasonal employment LP Written VOE covering two full years and a verbal verification of employment and proof of receipt of unemployment compensation for two years (if applicable) or all of the following: o Most recent YTD pay stub with at least 30 days of income. Paystub should be dated no earlier than 30 days prior to the application date, reflecting year to- date income. If the borrower is applying during an off month, the last paystub received should be obtained. o The most recent 2 years W-2 forms, and o Copies of the borrowers filed federal tax returns signed, with all schedules, for the most recent two years. o A verbal verification of employment. (Verification is required that the borrower will be rehired (in the same or similar position) for the next season) o Evidence of current receipt and amount of unemployment compensation and evidence that it is associated with seasonal employment Continued on next page Conventional Lending Guide 100-98 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Social Security Continued Benefits that have a defined expiration date must have a remaining term of at least three years to be considered. Acceptable verification for Social Security benefits includes: A copy of the Social Security Administration’s award letter; or Copies of the borrower’s two most recent bank statements to confirm regular deposit of the payment; or Signed tax returns with signed Social Security Benefit Statement (Form SSA-1099) or W-2’s for the most recent two years. However, if Social Security benefits are being paid as a benefit for a family member of the benefit owner, that income may be used in qualifying if documentation that confirms the remaining term is at least three years from the date of the mortgage application is obtained. Document regular receipt of payments, as verified by the following, depending on the type of benefit and the relationship of the beneficiary (self or other) as shown in the table below. NOTE: Loans approved via LP and income is verified with signed federal income tax returns, the most recent two (2) years must be obtained. DOCUMENTATION REQUIREMENTS Type of Social Security Benefit Retirement Disability Borrower is drawing Social Security benefits from own account/work record Survivor Benefits NA Supplement Security Income (SSI) Borrower is drawing Social Security benefits from another person’s account/work record Social Security Administrator’s (SSA) Award Letter, OR Proof of current receipt SSA Award Letter, AND Proof of current receipt NA SSA Award Letter, Proof of current receipt, AND 3 year future continuance (ie verification of beneficiary’s age) Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-99 Conventional Lending Guide Employment and Income, Trust Income Continued A copy of the Trust Agreement OR trustee’s statement confirming the amount, frequency, and duration of the payments should be provided. The income must continue at least 3 years to be considered for qualifying purposes. NOTE: Unless this income is received monthly, documentation of current receipt of the income is not required to comply with the Age of Credit Documents policy Unemployment Benefits Acceptable if common, customary and properly documented: Unemployment Compensation clearly associate with seasonal layoffs can be used for qualifying purposes with a two year history of receipt (verified with two years 1040’s) if likely to continue for next three years. NOTE: Unemployment compensation cannot be used to qualify the borrower unless it is clearly associated with seasonal employment that is reported on the borrower’s signed federal income tax returns. Most recent YTD pay stub with at least 30 days of income. Paystub should be dated no earlier than 30 days prior to the application date, reflecting year to date income. If the borrower is applying during an off month, the last paystub received should be obtained. The most recent 2 years W-2 forms, and Copies of the borrowers filed federal tax returns signed, with all schedules, for the most recent two years. A verbal verification of employment. (Verification is required that the borrower will be rehired (in the same or similar position) for the next season) Evidence of current receipt and amount of unemployment compensation and evidence that it is associated with seasonal employment. Continued on next page Conventional Lending Guide 100-100 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Union Members Continued Verbal Verification of Employment from Union confirming: Borrower is in good standing with Union Borrower is employed by same employer issuing pay stub and income used for qualification. If Union cannot provide confirmation, a Verbal Verification of Employment with present employer is required W-2 documentation is required. Union dues shown as an (unreimbursed) expense on the 2106 do need to be treated as a reduction to total income. Due to fluctuations in income, income will be averaged over the past 24 months, unless income has declined and then the most recent 12 months will be averaged. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-101 Conventional Lending Guide Employment and Income, VA Benefits Continued Must be documented by a letter or distribution form from the Department of Veterans Affairs NOTE: Education benefits are not acceptable. Unacceptable Sources of Income Income derived from any of the following may not be used in qualifying income. Income based on Future Earnings Draw Income Capital withdrawals Income from Mortgage Credit Certificates Expense/Auto Reimbursement VA Education Benefits Income not listed on Tax Returns Illegal Income Any income that cannot be documented and verified Tax returns that have been amended solely for the purposes of qualifying for the loan Derived from gambling Lump sum lottery earnings Income determined to be temporary or one-time in nature. Rental income from the borrower’s primary residence or second home. Retained earnings in a company Stock options Taxable forms of income that are not declared on personal tax returns Trailing co-borrower income Continued on next page Conventional Lending Guide 100-102 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Continued Declining Income Wage Earner: Averaged over the most recent 12 months. Commission/Self-Employed: Declining income sources should not be averaged, and an explanation for the decline should be obtained. The most recent lower income would be used for qualification purposes. NOTE: Strong, documented compensating factors must exist when declining income is present. Salaried Borrower A salaried borrower is defined as a wage earner that derives income through employment at a business where there is little or no ownership interest (<25%). Compensation may be based on an hourly, weekly, monthly or semi-monthly basis. NOTE: Wage earners employed by a family member, working at a family business or employed by an interested party to the subject transaction must provide the last 2 years tax returns with all schedules and most recent pay stub covering 30 days regardless of DU recommendations. Salaried Income History Homeward Residential requires salaried borrowers to exhibit the following employment standards: A minimum of two years employment history Within 5 business days prior to the note date for all borrowers using non self-employed income, Homeward Residential will independently verify borrower is still employed via a Verbal VOE. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-103 Conventional Lending Guide Employment and Income, Salaried Documentation Continued The pay-stub must be dated no earlier than 30 days prior to the initial loan application date and no more than 4 months (for DU submitted files) or 120 days (for LP submitted files) old on the date the note is signed. The Pay-stub must be computer generated (typed) and clearly identify the borrower as the employee, the employer’ name and all necessary information to calculate income, including gross year-to-date earnings, base salary with pay period specified, and must clearly specify the employer’s name. If the borrower receives “handwritten” pay stubs, Homeward will accept provided the lender obtains the following: Written Verification of Employment no more than 4 months (for DU submitted files) or 120 days (for LP submitted files) old on the date the note is signed. Most recent two years of computer generated W-2s Copies of the borrowers filed individual federal tax returns signed, with all schedules, for the most recent two years. IRS W-2 forms must be computer generated (typed) and clearly identify the Borrower, Borrower’s address, social security number and Employer’s Name. The “most recent” W-2 is defined as the W-2 for the calendar year prior to the current calendar year. NOTE: W2 transcripts received directly from the IRS can be accepted in lieu of the W2. All Information must be complete and legible. Continued on next page Conventional Lending Guide 100-104 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Salaried Documentation Continued Homeward will accept income calculations for Base Income as follows: (Cont’d) Frequency Calculation Hourly Multiply the hourly gross pay rate by the average number of hours worked per week then multiply by 52 weeks and divide by 12 months. Weekly Multiply the weekly gross income by 52 weeks and divide by 12 months. Every two weeks Multiply the two weeks gross income by 26 pay periods and divide by 12 months. Twice per month Multiply the semi-monthly income by 24 pay periods and divide by 12 months. Monthly Use the gross monthly income amount Borrowers who are paid less than 12 months per year. (i.e. Teachers who work and paid 10 months out of the year) The lender needs to document how often and for how long the borrower is paid and then determine the gross monthly income. (i.e. if a borrower is paid 10 months out of the year, multiply the monthly gross salary by 10 months and divide by 12. The above calculations must be compared with the documented year to date base earnings to determine if the income appears to be consistent. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-105 Conventional Lending Guide Employment and Income, Salaried Documentation DU (Cont’d) Continued a completed Request for Verification of Employment (Form 1005) and a verbal VOE, or The most recent paystub and the most recent 1 year W-2s. A verbal verification of employment. LP Streamlined Accept Documentation Written VOE covering the most recent 1 year and a verbal VOE, or all of the following: The most recent paystub and the most recent 1 year W-2. A verbal verification of employment. Standard Documentation Written VOE covering the most recent 2 years and a verbal VOE, or all of the following: The most recent paystub and the previous 2 years W-2s. A verbal verification of employment. Non W-2 Income An analysis form must be completed and retained in the permanent loan file, such as FNMA 1084 Cash Flow Analysis, income calculations on the 1008, etc. Continued on next page Conventional Lending Guide 100-106 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Self-Employed Borrowers Continued Self-employed borrowers add an additional layer of risk than salaried borrowers, since the main source of income for self-employed borrowers is their business. Individuals who own at least 25% of a business Individuals whose combined business interest comprise 25% or more of the total Borrower relies on investments for income (such as interests, dividends, capital gains or real estate). Contract or 1099 Income Self-employed borrowers income depends on the continuity of the business. Therefore, specific documentation relating to the business (such as P&L statements and federal business returns) is required for borrowers who are self-employed. Self-Employed Income History Self-employed borrowers must have a history of stable and durable income for the previous 2 years. A written income analysis should be prepared and included in the loan file. A shorter history of self-employment, 12 to 24 months, may be considered as long as the borrower’s most recent personal tax returns reflect at least one full year receipt of such income at the same or greater level in a similar field as the current business or in an occupation in which the borrower had similar responsibilities as those taken in connection with their business. Under no circumstances will a less than 12 month self-employment period (with the current/same business) be considered. Prior to closing, Homeward will independently verify the existence of the business via a verbal verification of employment through the CPA (letters must be dated within 30 days of loan closing), business license or telephone listing. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-107 Conventional Lending Guide Employment and Income, Self-Employed Documentation Continued Standard sources of proof of employment for a self-employed borrower are: IMPORTANT: Personal tax returns are required for all self-employed borrowers even if the income is not being used to qualify. If either the borrower or coborrower is self-employed, in addition to the required wage earner income documentation, the self-employed income/loss must be entered into DU; two (2) years personal and business* tax returns are required for DU and LP loans regardless of findings and must be documented in the loan file. When AUS specifically permits the below, the business tax returns may be waived if ALL of the below are present: Borrower is paying the down payment and closing costs with their own funds; Borrower has been self-employed in the same business with the same tax identification number for a minimum of five years; Borrower’s individual tax returns show an increase with positive income in self-employment income over the most recent two years. Sole Proprietorship Personal 1040s or Schedule “C” If tax filing deadline has passed, must obtain an executed extension. General and Limited Partnership, Limited Liability Corporations Personal 1040s, 1065s, K-1s, All associated schedules “S” Corporations and all other Corporations Personal 1040s, 1120s, All associated schedules NOTES: Handwritten paystubs will NOT be accepted unless supported by computer generated W-2’s and/or signed 1040’s and Form 4506-T from the IRS covering the appropriate period. Homeward must verbally verify the existence of the business prior to closing. If the most recent year’s tax returns have not yet been filed, an unaudited P&L is required. The unaudited P&L should be completed by accountant, tax preparer or the borrower. Documentation of filed extension or other reasoning for delaying filing will be required. Continued on next page Conventional Lending Guide 100-108 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Self-Employed Verification of Employment Continued Verification of employment or income must be provided by Mortgage Broker. Within 5 business days prior to the note date for all borrowers using self-employed income, Homeward Residential will independently verify employment via a verbal verification of employment. NOTE: On-line searches and just using tax returns as proof of self-employment is not sufficient. The existence of the borrower’s business must be validated through both: A third party, such as a CPA (letters must be dated within 30 days of loan closing), accountant, regulatory agency, or through business license verification And Verifying the phone number listing and address for the borrower’s business using a telephone book, the Internet (i.e yellowpages.com, etc.), or directory assistance If the contact is made verbally, the lender must document the source of the information obtained and the name and title of the lender’s employee who obtained the information. If the borrower is a sole proprietor and does not use a CPA or accountant and the file contains validation that no business license is required, verification of the business and source of income is still required. Alternative verification includes copies of current contracts, invoices or business references and all of the following: Verbal verification to confirm the validity of any documents received Independent validation of the phone number for the contract, invoice or business reference prior to confirmation of the validity of the documents provided; And Verification of a phone number listing and address for the borrower’s business using a telephone book, the Internet (i.e.yellowpages.com, etc.) or directory assistance, or by contacting the applicable licensing bureau. If the borrower is a sole proprietor and does not have a business phone number listing but uses a personal cell phone or home phone number, call the phone number to ensure it is in service and answered by the borrower or in the name of the business. Document the call in the loan file. NOTE: Internet sites such as 411.com, Chamber of Commerce sites and Manta.com, where they allow the business owner to add their own information, are NOT acceptable sources of verification. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-109 Conventional Lending Guide Employment and Income, Continued NonPurchasing Spouse Income If the non-borrowing spouse is self-employed, business losses reported on the tax return may not negate the entire annual income of the borrowing spouse. Carry Over Losses The determination to include or omit a borrower’s carried over net operation losses will be at the discretion of the underwriter based on the below findings: Contracts for Employment NOTE: i.e. Homeward will not consider scenarios if the non-purchasing spouse’s self-employed business losses negates any positive earnings and results in a negative adjusted gross income. Detailed description of the loss and the likelihood that a similar loss could reoccur. Date and amount of the initial loss. Breakdown of amount to be carried over year-to-year and length of time the carry over will be reflected on future tax returns. Permitted only if the borrower will be employed prior to the loan closing and all of the following are met: Copy of the borrower’s executed offer letter or contract for future employment. The borrower must have started employment at the new position as per the terms of the employee contract. A paystub must be obtained that includes sufficient information to support the income used for qualifying the borrower. NOTE: It is not required for the Contract for employment to be nonrevocable; however, it may not restrict the likelihood for a future 3 year continuous or have a specified contract term for under 3 years. Continued on next page Conventional Lending Guide 100-110 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Employment and Income, Partial Year income (i.e. Teacher Income) Continued Certain borrowers, such as teachers, may be paid for only part of the year. For example, teachers may be paid on a partial year - 9-month, 10-month, or 12-month basis (and should not be confused with seasonal workers). In such cases, a current year-to-date pay stub dated within 30 days of application may not be available. If the borrower is on a pay schedule of less than 12 months and applying during an off month, a copy of the borrower’s valid non-expired employment contract with the school district may be used in lieu of a current pay stub. However, every effort should be made to obtain a copy of the most recent pay stub. To determine a partial year paid teacher’s (or any partial year paid borrowers) qualifying income, multiply the monthly salary by the number of months the borrower is paid and divided by 12. Required Documentation: Documentation Requirements A completed request for Verification of Employment (Form 1005) and a verbal verification of employment, or Most recent YTD pay stub with at least 30 days of income. Paystub should be dated no earlier than 30 days prior to the application date, reflecting year to- date income. If the borrower is applying during an off month, the last paystub received should be obtained; and Copy of current, unexpired employment contract with the School District (if applying during an off month); and Number of years of the most recent W-2s based on the AUS requirement; and A verbal verification of employment. Income from the initial 1003 must be entered into DU/LP as provided. Income as provided on the initial 1003 must be reasonable and accurate. IMPORTANT: Homeward requires the applicant’s information to be entered into DU/LP exactly as provided on the initial 1003. Blank income and employment information on the initial 1003 is NOT permitted; however, assets only need to be completed on the initial 1003 as deemed necessary to receive a DU Approve/Eligible or LP Accept. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-111 Conventional Lending Guide Assets and Liquidity Overview Liquidity or cash reserves describe cash or the ability to convert assets to cash in a short time. Net worth without liquidity is not enough. A borrower’s balance sheet should reflect and validate the estimates concerning his or her prior and current income stream. Higher incomes should translate into liquidity found on the borrower’s balance sheet. Eligible Assets The following types of accounts may be considered eligible liquid assets: Stocks/Bonds Bridge Loan Certificate of Deposit, reduced by any applicable forfeiture fees. Checking Account Gift Gift of Equity Money Market Fund Mutual Fund Pooled Funds (with relatives, etc.) / Personal Gift Rent Credit with Option to Purchase Retirement Fund Savings Account Trust Funds Continued on next page Conventional Lending Guide 100-112 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Ineligible Assets Continued Cash on hand Sweat Equity, Trade Equity or Equity Swapping Pooled “Community” Funds (within a community in which “family” relationships are not required) Stock options (as Reserves) Realtor’s Commission received from subject property financial transaction. Credit card financing or advancements Unsecured borrowed funds Signature loans Custodial Accounts for Children or Others Salary / bonus advances received against future earnings Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-113 Conventional Lending Guide Assets and Liquidity, Earnest Money Continued The deposit on the sales contract (earnest money) for the purchase of the security property is an acceptable source of funds for both the down payment and the closing costs. If the deposit is being used as part of the borrower’s minimum contribution requirement, it must be verified that the funds are from an acceptable source Bank statements must evidence that the average balance for the past two months was large enough to support the amount of the deposit. If a copy of the cancelled deposit check is used to document the source of funds, the bank statements must cover the period up to (and including) the date the check cleared the bank account. If it cannot be determined that these funds were withdrawn from the borrower’s account, additional verification of the source and evidence that the funds have actually changed hands from the borrower to the seller, the realtor, the escrow agent, or the settlement attorney should be provided. Receipt of the deposit must be verified by either a copy of the borrower’s canceled check or a written statement from the holder of the deposit. NOTE: Large earnest money deposits and deposits that exceed the amount customary for the area should be closely evaluated. Continued on next page Conventional Lending Guide 100-114 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Reserves Continued Cash Proceeds Received from the Subject Property Transaction Cash proceeds from the subject property first and outside second lien transactions are not permitted for reserves. For additional Reserve requirement when the Borrower(s) current primary residence is pending sale or intended to be sold, refer to Real Estate Debt within the Ratio section of this guideline. NOTE: When a single borrower closes multiple, concurrent transactions through Homeward, reserve requirements must be met for each individual loan. Concurrent transactions reserve requirements are applicable to Agency products only. Concurrent is defined as closing within 180 calendar days of each other. For example, three investment properties for the same borrower closing concurrently will require 18 months of reserves (i.e. 6 months reserves for each investment property). Acceptable DU/LP scenarios may follow the reserve requirements recommended within the findings. IMPORTANT: All Assets as listed on the initial and final 1003 must be entered into the DU/LP system as provided and must be verified. Blank income and employment information on the initial 1003 is NOT permitted; however, assets only need to be completed on the initial 1003 as deemed necessary to receive a DU/LP Approve/Eligible. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-115 Conventional Lending Guide Assets and Liquidity, Continued Reserves (Cont’d) Reserve Requirements Primary Residence As permitted by the DU/LP findings (subject to MI Partner’s guidelines). NOTE: 6 months reserves required for 2-4 Unit Primary Residence. Second Home As permitted by the DU/LP findings (subject to MI Partner’s guidelines) Investment See Multiple Financed Properties and the subject property is a Second Home or Investment below. As permitted by the DU/LP findings (subject to MI Partner’s guidelines) See Multiple Financed Properties and the subject property is a Second Home or Investment below. If the borrower’s current primary residence is converted to a second home or investment property and the 30% equity cannot be documented, 6 months of PITI for both the retained and subject property is required to be in reserves in addition to DU/LP recommendations. If the borrower’s current primary residence is converted to a second home or investment property and the 30% equity can be documented, 2 months of PITI for both the retained and subject property is required to be in reserves regardless of DU/LP recommendations. Multiple Financed Properties and the subject property is a Second Home or Investment If the total number of financed properties is 1 to 4, then 2 months for each second home or investment property is required (in addition to those required by DU/LP) If the total number of financed properties is 5 to 10*, then 6 months for each second home or investment property is required (in addition to those required by DU) Florida Condos, Second Homes FL + Condo+ Second Home: 3 months PITI required regardless of DU/LP findings. Converted, Departing Property IMPORTANT: When a single borrower closes multiple, concurrent transactions through Homeward, reserve requirements must be met for each individual loan. Concurrent transaction reserve requirements are applicable to Agency products only. Concurrent is defined as closing within 180 calendar days of each other. 5 to 10 financed properties are only eligible when the file is run via Fannie Mae’s DU. Continued on next page Conventional Lending Guide 100-116 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Joint Assets Continued When a borrower has a joint account with another individual who is NOT a borrower on the transaction, the following must be documented: Relationship between borrower and individual on the account AND Confirmation that the borrower has full access to all funds in the account Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-117 Conventional Lending Guide Assets and Liquidity, Verification of Deposits Continued To substantiate that a borrower has sufficient cash deposits and other assets available to complete the mortgage transaction and retain adequate reserves after closing; loan file must verify the amount in the borrower's depository accounts (checking accounts, savings accounts, CDs, money markets and retirement accounts). When there is a recently opened account, a recently received large deposit, or an account balance considerably greater than the average balance the source of funds must be documented. The loan file must also verify the value of the borrower's other financial investments (stocks, bonds, mutual funds, etc.) as of the date of the loan application. Verification Requirements: If a Request for Verification of Deposit (VOD) is used to verify activity in the borrower's depository accounts: Desktop Underwriter Loans - a copy of the Borrower’s bank statement covering the most recent two month period, Loan Prospector Loans - a copy of the Borrower’s bank statement covering the most recent one or two month period base on the LP Findings. Or, a Written Verification of Deposit (for both DU and LP Loans), or Third Party Verification of Depository Accounts If the account was opened within 90 days of verification or account balances that are considerably greater than the average balance reflected on the VOD, refer to the Large Deposit section below for additional requirements. The Verification of Deposit must be requested directly from the depository institution, and the complete, signed, and dated document must be sent directly from the depository institution. Hand-carried VODs are not permitted. Homeward will accept Third-Party Verification of Depository Accounts: Direct verification by a third-party asset verification vendor is acceptable provided: o The borrower provide proper authorization for the lender to use the verification method, o The verified information provided must conform with the information that would be provided on Fannie Mae Form 1006 (VOD) and Freddie Mac Verification of Deposit (VOD) or on bank statements o The date of the complete verification is in compliance with the age of document requirements The client is responsible for ensuring the accuracy and integrity of the information provided by the third-party vendor. Continued on next page Conventional Lending Guide 100-118 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Verification of Deposit, (Cont’d) Continued Bank Statements Instead of sending a Request for Verification of Deposit to each of the borrower's depositories or account holders, verify available funds for closing by obtaining from the borrower a copy of the applicable bank or investment portfolio statements that cover the timeframe noted above (or, if account information is reported on a quarterly basis, for the most recent quarter). If the latest bank statement is more than 45 days earlier than the date of the loan application, a more recent supplemental bankgenerated form that shows the account number, balance and date is required. The statements may be computer-generated forms (e.g. on-line account or portfolio statements) downloaded through the Internet. Note that it is not acceptable to download statement information (cut and paste) into a Word or Excel type document. “FAXED” or documents downloaded from the Internet must clearly identify the name of the depository or investment institution and the source of the information (e.g. the information is contained in the banner that is at the top of the document). Bank or investment portfolio statements must clearly identify the borrower as the account holder and include: The account number; The time period covered by the statement; All deposits and withdrawal transactions (for a depository account) or all purchase and sale transactions (for a financial portfolio account); and The ending account balance. Retirement Accounts Retirement account statements must identify the borrower's vested amount and the terms and conditions for loans or the withdrawal of funds. Calculate at 60% of the vested amount to account for any applicable withdrawal penalties or income tax less any outstanding loans secured by the account. NOTE: When retirement accounts only allow for withdrawal in connection with the Borrower’s employment termination, retirement, or death, the vested funds cannot be considered as reserves. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-119 Conventional Lending Guide Assets and Liquidity, Gifts Continued Borrowers may use funds received as a personal gift for loans secured by a principal residence or a second home. Gift funds are not permitted on investment properties. A gift must be from an acceptable donor. Gift Donor: An acceptable donor is a relative, which is defined as borrower’s spouse, child or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption or legal guardianship; or a fiancé, fiancée or domestic partner. Donor may not be someone who is, or has any affiliation, with interested parties to the transaction, such as the builder, developer, or real estate agent. Minimum Borrower Contributions: For DU Submitted loans o o o o Primary & Second Homes, all units: If the entire down payment is a gift and the LTV/CLTV is 80% or less, there is no minimum down payment requirement. Primary Residence, 1 Unit (Except for High Balance Mortgage Loans): If the LTV/CLTV is greater than 80%, a minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction may come from a gift. Refer to your MI Partner for any applicable overlays. Primary Residence, 2-4 Units & Second Homes, and All High Balance Mortgage Loans: If the LVT/CLTV is greater than 80%, a minimum 5% borrower contribution from their own funds is required. NOTE: If the borrower receives a gift from a relative or domestic partner who has lived with the borrower for the last 12 months, or from a fiancé or fiancée, the gift is considered the borrower’s own funds and may be used to satisfy the minimum borrower contribution requirement as long as both individuals will use the home being purchased as their principal residence. After the minimum 5% borrower contribution has been met, gifts may be used to supplement the down payment, closing costs, and reserves. Refer to your MI Partner for any applicable overlays. For LP Submitted Loans: o Primary & Second Homes, all units: If the LTV/CLTV is greater than 80%, a minimum 5% borrower contribution from their own funds is required. After the minimum 5% borrower contribution has been met, gifts may be used to supplement the down payment, closing costs, and reserves. Refer to your MI Partner for any applicable overlays. Continued on next page Conventional Lending Guide 100-120 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Gift Documentation It is required that the file contains an acceptable Gift Letter with the following information: Donor’s name and relationship to Borrower Donor’s mailing address and telephone number Identify the transaction (property address, borrower’s name) State the amount of the gift Specifically state that the funds are a gift and it does not need to be repaid Letter must be signed by the Donor For DU Loans, when a gift from a relative or domestic partner is being pooled with the borrower’s funds to make up the required minimum cash down payment, the following items must also be included: Continued A certification from the donor stating that he or she has lived with the borrower for the past 12 months and will continue to do so in the new residence. Documents that demonstrate a history of borrower and donor shared residency. The donor’s address must be the same as the borrower’s address. Examples include but are not limited to a copy of a driver’s license, a bill, or a bank statement. Evidence of Receipt: Homeward must verify that sufficient funds to cover the gift are either in the donor’s account or have been transferred to the borrower’s account. Acceptable documentation includes the following: o A copy of the donor’s check and the borrower’s deposit slip o A copy of the donor’s withdrawal slip and the borrower’s deposit slip o A copy of the donor’s check to the closing agent, or o A settlement statement showing receipt of the donor’s check NOTE: When the funds are not transferred prior to settlement, the lender must document that the donor gave the closing agent the gift funds in the form of a certified check, a cashier’s check, or other official check. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-121 Conventional Lending Guide Assets and Liquidity, Gift of Equity Continued A gift of equity refers to a gift provided by the seller of a property to the buyer. The gift represents a portion of the seller’s equity in the property, and is transferred to the buyer as a credit in the transaction. A gift of equity is permitted for principal residence and second home purchase transactions. The acceptable donor and minimum borrower contribution requirements in the “Gift Funds” section above also apply to gifts of equity. A signed gift letter and the HUD-1 Settlement Statement listing the gift of equity is required. Continued on next page Conventional Lending Guide 100-122 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Gifts from Weddings Continued Cash received as wedding gifts is not usually an acceptable source of funds because it comes in small, varied sums and is difficult to document the source. However, funds may be used provided the borrower can provide proper documentation. (Wedding gifts cannot satisfy the minimum 5% down payment from the borrower's own funds.) The following documentation must be obtained to verify funds: A copy of a marriage license; Deposit slip showing the deposit of the gift funds; and An itemized list of the amount received along with the name of the donor and a signed statement from the borrower indicating the funds were a wedding gift and repayment is not required. Large financial gifts from close family members can be considered if properly documented. Substantial cash wedding gifts ($1000 or more) from one individual must comply with standard gift documentation. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-123 Conventional Lending Guide Assets and Liquidity, Sources of Funds for Closing Continued Generally, the borrower must have enough assets to cover the minimum required down payment that must come from his or her funds. However, funds received from other acceptable sources can be used to accompany the minimum down payment from the borrower’s funds to pay the borrower’s share of the closing costs and prepaid items and to satisfy the reserve requirement. Acceptable sources of down payment: Gift (or Grant) Rent Credit – lease-purchase funds Funds held in a checking or savings account Stocks o A photocopy of the stock certificate, accompanied by a current dated newspaper stock list. Government Bonds o The value of government bonds should be based on their purchase price unless the redemption value can be documented. Mutual Funds Trust Accounts o Funds disbursed from a borrower’s trust account are an acceptable source of the down payment and reserve requirement if the borrower has immediate access to them. Confirmation from the trust manager or trustee is to verify the value of the trust account and prove the conditions under which the borrower has access to funds. Retirement Accounts (IRA/Keogh Accounts, 401Ks) as discussed under the Assets and Liquidity/Verification of Deposit section. Continued on next page Conventional Lending Guide 100-124 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Deposit on Sales Contract Continued The deposit on the sales contract is an acceptable source for down payment and/or closing costs. When the deposit is used to make any portion of the borrower’s down payment it must come from his/her own funds. The source must be verified: Bank statements for most recent two months (If check has cleared account, the statement should cover the period up to and including the date the check cleared). Depository Accounts Checking and Savings Accounts Verification Requirements: Desktop Underwriter Loans - a copy of the Borrower’s bank statement covering the most recent two month period, Loan Prospector Loans - a copy of the Borrower’s bank statement covering the most recent one or two month period base on the LP Findings. Certificate of Deposit When CDs are used for assets/reserve, the above provided documentation (from Checking and Savings Accounts) must also include: Donations from Entities Maturity date Disclosure of any associated penalties for liquidating prior to maturity date. An owner-occupant borrower can use funds donated by a church, municipality, non-profit organization (excluding a credit union), or public agency as a gift (or grant) to pay part of the closing costs or supplement his or her financial reserves. NOTE: Cannot be used toward down payment requirements. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-125 Conventional Lending Guide Assets and Liquidity, Disaster Relief Grant or Loan Borrowed Funds Secured by an Asset Continued Borrower may use a lump-sum disaster relief grant or loan to satisfy down payment requirement Borrower does not have to make a minimum cash down payment for his/her own funds for grant or loan to be used May be used as a source of funds for down payment and closing costs; not permitted for cash/financial reserves. Document terms of the secured loan Calculate monthly payments and consider in debt ratio Must be from an Arms length individual (i.e. may not be from a source affiliated with the loan transaction). Funds from a loan secured by personal or real property owned by the borrower (other than the subject property) may be used as a source of the down payment. The debt must be included as a liability on the application. NOTE: Payments for loans secured by the borrower's personal financial assets (such as life insurance policies, 401(k) accounts, CDs, stocks, bonds, etc.), do not have to be included in the debt ratio calculations if the loan instrument shows the asset as collateral for the loan. The borrower may not use the same asset to satisfy cash reserve requirements. However, they may use the portion of the asset remaining after the value of the asset plus any related fees have been reduced by the amount of the secured loan. Continued on next page Conventional Lending Guide 100-126 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Cash Value of Life Insurance Continued Net proceeds from a loan against the cash value or surrender of a life insurance policy are acceptable source of funds for down payment, closing costs and reserves. Required documentation includes: Computer generated or typed letter from the insurance company Identify the insurance company and the policy holder Show the period covered and ending cash value Show any outstanding loans The Underwriter must assess repayment or additional obligation considerations to determine the impact on borrower qualification or reserves. If penalties for failure to repay the loan are limited to the surrender of the policy, payments on a loan secured by the cash value of a borrower’s life insurance policy do not have to be considered in the total debt-to-income ratio. If additional obligations are indicated, the obligation amount must be factored into the total debt- to income ratio, or subtracted from the borrower’s financial reserves. If the funds are needed for the down payment or closing costs, lenders must document the borrower’s receipt of the funds from the insurance company by obtaining either a copy of the check from the insurer or a copy of the payout statement issued by the insurer. If the cash-value of the life insurance is being used for reserves, the cashvalue must be documented but does not need to be liquidated and received by the borrower. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-127 Conventional Lending Guide Assets and Liquidity, Trade Equity DU Loans Continued Trade equity is an acceptable source of funds to supplement the borrower’s minimum borrower contribution provided the following requirements are met: o The seller’s equity contribution for the traded property must be a truevalue consideration supported by a current appraisal. o The borrower must make the minimum required contribution from his or her own funds unless: The LTV or CLTV ratio is less than or equal to 80%; or The borrower is purchasing a one-unit principal residence and meets the requirements to use gifts, donated grant funds, or funds received from an employer to pay for some or all of the borrower's minimum contribution. These requirements apply to all transactions that involve property trades, including those that are evidenced by two separate contracts that have the buyer and the seller on one contract reversing roles on the second contract. Calculating the Equity Contribution o The equity contribution is determined by subtracting the outstanding mortgage balance of the property being traded, plus any transfer costs, from the lesser of either the property’s appraised value or the trade-in value agreed to by both parties. Documentation Requirements o For real property, the transfer deed must be recorded. o In addition, lenders must obtain the following: A search of the land records to verify the ownership of the property and to determine whether there are any existing liens on the property. Proof of title transfer and satisfaction of any existing mortgage liens for which the borrower was liable. LP Loans The net proceeds of the trade-in of the Borrower's previously owned residence, documented by an appraisal of the Borrower's previously owned residence and a copy of the trade-in contract. The Borrower's equity in the previously owned residence is determined by subtracting any outstanding liens on the previously owned residence, plus any transfer costs, from the lesser of the appraised value of the previously owned residence or its trade-in price as shown in the trade-in contract Continued on next page Conventional Lending Guide 100-128 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Loan Repayment Proceeds Rent Credit for Options to Purchase Continued In order to be considered eligible as a cash asset, funds received by the borrower from the repayment of a personal loan extended, requires the following: A copy of the written agreement between the borrower and the recipient of the loan. Verification that the borrower had the ability to lend the funds (cancelled check or bank statement showing withdrawal of funds). Verification that repayment was made (evidence of funds withdrawn from the recipient’s account) and proceeds deposited into the borrower’s account prior to scheduling the closed. The property seller may give the purchaser/borrower credit toward the down payment for a portion of previous rent payments the purchaser made under a documented rental purchase agreement that had a minimum original term of at least 12 months – in an amount up to the difference between the market rent and the actual rent that was paid. (The property appraiser must determine “market” rent.) The purchaser does not have to make a minimum cash down payment from his or her own funds in order for the rental payments to be credited toward the down payment. A copy of the rental/purchase agreement, verifying monthly rent and the specific terms of the lease is required: Original term may not be less than 12 months and the total credit due to the borrower must not exceed the amount specified in the contract. The appraiser must develop the market rent; and Copies of canceled checks or money order receipts for the most recent 12 months are required to document rent payments. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-129 Conventional Lending Guide Assets and Liquidity, Real Estate Proceeds Continued In order to use proceeds from the sale of a currently owned other-realestate property for closing-fund requirements and post-closing liquidity/cash reserve ratio calculations, use the following guidelines: The closing of the other real estate transaction must take place prior to or simultaneous with the subject closing; and The net proceeds to the borrower must be verified via HUD-1 statement Closing statement Continued on next page Conventional Lending Guide 100-130 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Bridge Loan Continued Bridge (or swing) loans are a form of second trust that is collateralized by the borrower’s present home, which is usually for sale. By using funds from a bridge loan, the borrower can close on a new house before selling his/her existing house. This type of financing is acceptable if: The purchaser has the ability to carry the payment on: The The The The new home payment on the other obligations payment on the current home payment on the bridge loan Verification of the terms of the loan must be included in the credit package, including a copy of the executed note. The bridge loan must be included as a liability on the application. If the bridge loan calls for payments of principal and/or interest, the payment must be included in the long-term debt calculation. If the repayment schedule for the bridge loan is not monthly, it must be converted to a monthly amount for qualifying purposes based on the contractual interest rate. If a rate is not available, then use the 30-year, fixed market rate. The bridge loan cannot be cross-collateralized. May not be used for reserve requirements. Exclusion of a debt for the present home and for a bridge loan is allowed if: Copy of the executed sales contract for the present home. Copy of the lender’s commitment to the buyer of the present residence (if the contract contains a financing contingency). Evidence of 6 months reserves covering the PITI of the previous residence in addition to the first mortgage reserve requirements. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-131 Conventional Lending Guide Assets and Liquidity, Trust Account Funds Sale of Stocks or Bonds Continued In order to use trust account funds for closing funds and post-closing liquidity/cash reserve ratio calculations, the following is required: Borrower must have access to the trust account funds and be identified as the beneficiary Identify the trustee Trustee must verify the amount that the borrower can withdraw The existence and value of the stock or bonds must be verified. The value of stocks may be verified with a current statement from the stockbroker. A copy of the stock certificate and dated newspaper stock price list must verify the value and existence of stock not held by a financial institution. NOTE: Verification of sale is required only if the specific funds are needed for closing. Reserves to be calculated at 70% of the current market value unless the redeemable value can be determined and verified. Stock Options To use stock options (the right to purchase stock at a set price, the “strike price”) as closing funds: Options should be exercised and only the net proceeds should be used Verification of deposit Proof of options per brokerage statements NOTE: Not eligible for reserves or to for use as an income stream. Continued on next page Conventional Lending Guide 100-132 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Sale of Other Assets Continued If funds are derived from the sale of assets other than real estate, they must be verified by the following documentation: Proof of ownership Support for the value of the asset (appraisal) Evidence of the transfer of ownership (e.g., a copy of the bill of sale) Bill of sale must reflect the date of sale, asset to be sold, sales price and the buyer’s and seller’s signatures if the proceeds are to be used toward down payment, closing costs and/or reserves. Evidence of receipt of the purchase proceeds (e.g., deposit slip or bank statement) Evidence that a party to the property sale or the mortgage financing transaction did not purchase the asset Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-133 Conventional Lending Guide Assets and Liquidity, Employer Assistance Programs Continued An owner-occupant Borrower can use funds provided by his or her employer to pay part of the closing costs, however, the Borrower must use his or her own funds to meet the minimum required down payment and any necessary reserve requirement. Assistance from the Borrower's employer must come directly from the employer. NOTE: It cannot be provided by a company-affiliated credit union. The employer's financial assistance for either closing costs or the down payment may be in the form of a grant, a direct, fully repayable second mortgage or unsecured Loan, a forgivable second mortgage or unsecured Loan, a deferred payment second mortgage or unsecured Loan or mortgage payment assistance. When the assistance is a secured second mortgage, the transaction must satisfy standard Secondary Financing guidelines. The program must be an established company program, not just an accommodation developed for an individual employee. There must be documentation that describes the terms of any Loan agreement and other employee assistance being offered to the Borrower (such as relocation benefits), including the employer's written verification of the dollar amount of the assistance. When the assistance is funded before settlement, there must be confirmation of receipt of the funds. If the employer financing does not require regular payments of either principal and interest or interest only, the lender does not need to calculate an equivalent payment for consideration as part of the borrower's monthly debt. If payments are deferred until 5 years after the first mortgage note date, or repayment is only due upon sale or default the amount of the payment may be excluded from the debt ratio calculations; otherwise it must be included. If regular payments are required, the payments must be included in the debt ratios. If the borrower is responsible for repayment, the terms of the subordinate financing must permit the Borrower to continue making payments on the loan if the borrower no longer works for the employer. The subordinate financing may not require full repayment unless the borrower terminates his/her employment or the employer terminates the borrower's employment for any reason except disability, the elimination of the position or reduction in work force before the maturity date of the subordinate financing. Required Documentation Copy of the established and ongoing employer benefit program reflecting the amount of the benefit and the terms. Evidence that the employer is not an interested party and that the funds were not obtained from an interested party, directly or through a third party. Benefit program agreement from the employer showing the amount of the benefit and the terms. Proof of receipt of the benefit. Continued on next page Conventional Lending Guide 100-134 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Third Party Contributions Continued Certain parties (seller, builder, Realtor, etc.) may choose to pay a portion of the closing costs (which are normally paid by the borrower) on the borrower’s behalf. Any portion of the fees and services or any other items related to the transaction that are not paid by the borrowers are considered contributions. Because excessive contributions can negatively impact the transaction, the below maximum contributions are enforced based on the LTV/CLTV. These fees and services may include but are not limited to (follow FNMA guidelines): Appraisal and Survey fees Attorney fees Buydowns Commitment fees Discount fees Origination fees Pre-paid settlement costs Real Estate Tax Service Recording fees Stamps Lender Policy (Title Insurance) Transfer fees Once the contribution limits are exceeded, the amount that exceeds the limits must be deducted from the sales price, and the loan amount and LTV must be adjusted accordingly. Unless otherwise noted in a specific product summary, the maximum allowable contributions from interested parties, which depend on the loan-to-value ratio (or combined loan-to-value ratio, if subordinate financing is involved) and the occupancy type, are limited to: Third Party Contributions Occupancy LTV/CLTV Range Maximum Contribution Primary Residence Second Home >90.00 3% 75.01 – 90.00 6% ≤75.00 9% All 2% Investment Property NOTES: A downward adjustment to the sales price of the property to reflect the amount of any contributions that exceed our limitations is required. In addition, the cost/value of any contributions that are in the form of personal property (such as furniture, decorator items, automobiles, club memberships or other “giveaways”) always must be deducted from the sales price of the property. The maximum loan-to-value ratio (or combined loan-to-value ratio) must then be calculated based on the lesser of the reduced sales price or the appraised value. Independent, disinterested third party required to provide value estimates of applicable personal property. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-135 Conventional Lending Guide Assets and Liquidity, Third Party Contributions, (Cont’d) Continued IMPORTANT: Properties within declining markets and/or subject to mortgage insurance may be subject to MI Partner’s additional overlays. Contributions may only be applied to closing costs and prepaids. If the contribution exceeds actual cost, the remainder may not be applied to the principal balance (including unpaid principal balance). Reimbursement to the borrower for payment of short sale negotiation or processing fees (also known as short sale facilitation fees, buyer discount fees or short sale buyer fees) must be considered and treated as a sales concession. Continued on next page Conventional Lending Guide 100-136 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Payment Abatements Not Permitted. NOTE: Undisclosed Seller Contributions Continued Defined as an incentive provided to the borrower by an interested party, in which the interested party provides funds to pay (or reimburse) a certain number of monthly payments on the borrower’s behalf. The monthly payments may cover, in whole or in part, principal, interest, taxes and insurance (PITI) as well as the payment of condominium or PUD fees. Payment abatements are ineligible, regardless of whether they are disclosed on the HUD-1. The payment of up to 12 months of HOA fees are not considered an abatement, but HOA fees in excess of 12 months are considered an abatement. Undisclosed contributions tend to reduce the effective sales price of a property; therefore, they may compromise the LTV ratio for a mortgage and are not permitted. NOTE: Homeward Residential will provide a thorough review of all HUD-1 uniform settlement statements to detect undisclosed contributions. Allowable Uses of Interested Party Contributions Interested Parties, including third parties and non-profit organizations, may not contribute or supplement the borrower’s down payment, minimum contribution requirements or reserve requirements. Appraisal Review with an Interested Party Contributions Appraisers must be notified and comment on the effects of any transaction in which a financing and/or sales concessions by an interested party is in existence. NOTE: Positive adjustments for sales or financing concessions are not acceptable. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-137 Conventional Lending Guide Assets and Liquidity, Document Reconciliation Involving Interested Party Contributions Continued Homeward Residential will closely review all loan documents and sales contracts when an Interest Party Contribution (IPC) is involved with the transaction; subject, but not limited, to the following concerns: IPC must be detailed on the sales contract. Appraiser must be notified and comment on applicable IPCs. HUD-1 must reflect final fees and costs, and may not differ substantially from the sales contract, GFE and 1003 Application. If the above documents reveal inconsistencies in fees, the differences should be closely reviewed and explanations documented; subject, but not limited, to the following concerns: Interested Party Contributions greater than permitted and/or greater than specified on the sales contract. Unacceptable cash back on a purchase transaction. References to sales contract addendums that have not been made available. Appraiser makes no reference to IPCs. Payment of Condominium or PUD fees paid by an interested party. Undisclosed contributions or subordinate financing. Excessive marketing and/or commission fees. Commission fees that are not percentage based from the sales price. Guaranteed rental income. Below market interest rates when no buydown subsidy is reflected on the HUD-1. Continued on next page Conventional Lending Guide 100-138 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Borrower Paid Seller Closing Cost If the borrowers are paying any portion of the lien or typical seller closing costs, the following applies: Retirement Continued Transaction must be the result of a short sale, deed-in-lieu type transaction. Borrower’s funds must be verified to cover the additional costs, which must also be included in DU calculations. Current servicer must acknowledge and accept that additional payments are being covered by the purchaser (our borrower). Sales contract must clearly specify and identify this agreement. HUD-1 must include all fees and payments as outlined and agreed. Transaction may not be a Non-Arm’s length transaction. Retirement accounts (IRAs, Keogh accounts, 401(k) accounts, etc.) are subject to withdrawal penalties and tax surcharges if withdrawn prior to normal distributions. Because of these restrictions, the following guidelines apply to the use of retirement accounts for closing-fund requirements: Unless specified by an automated underwriting system, 60% of IRAs, Keogh Accounts, 401(k) Accounts, and the cash value of annuities can be used to determine funds available for withdrawal, less any loans. Borrower must provide evidence of the receipt of sufficient funds for closing. Documenting the asset may be done in accordance with DU/LP recommendations. NOTE: When retirement accounts only allow for withdrawal in connection with the Borrower’s employment termination, retirement or death, the vested funds should not be considered as reserves. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-139 Conventional Lending Guide Assets and Liquidity, Large Deposit When bank statements are used to verify assets, the lender must evaluate large deposits, which are defined as a single deposit that exceeds 50% of the total monthly qualifying income for the loan. Requirements for evaluating large deposits vary based on the transaction type, as shown in the table below. Transaction Type Refinance transactions Purchase transactions Continued Evaluation Requirements Documentation or explanation for large deposits is not required; however, the lender remains responsible for ensuring that any borrowed funds, including any related liability, are considered. If funds from a large deposit are needed to complete the purchase transaction (that is, are used for the down payment, closing costs, or financial reserves), the lender must document that those funds are from an acceptable source. Occasionally, a borrower may not have all of the documentation required to confirm the source of a deposit. In those instances, the lender must use reasonable judgment based on the available documentation as well as the borrower’s debt-to-income ratio and overall income and credit profile. Examples of acceptable documentation include the borrower’s written explanation, proof of ownership of an asset that was sold, or a copy of a wedding invitation to support receipt of gift funds. The lender must place in the loan file written documentation of the rationale for using the funds. Verified funds must be reduced by the amount (or portion) of the undocumented large deposit (as defined above), and the lender must confirm that the remaining funds are sufficient for the down payment, closing costs, and financial reserves. When the lender uses a reduced asset amount, net of the unsourced amount of a large deposit, that reduced amount must be used for underwriting purposes NOTE: When a deposit has both sourced and unsourced portions, only the unsourced portion must be used to calculate whether or not it must be considered a large deposit. Examples Scenario 1: Borrower has monthly income of $4,000 and an account at ABC Bank with a balance of $20,000. A deposit of $3,000 is identified, but $2,500 of that deposit is documented as coming from the borrower's federal income tax refund. Only the unsourced $500 [the deposit of $3,000 minus the documented $2,500] must be considered in calculating whether it meets the large deposit definition. The unsourced $500 is 12.5% of the borrower’s $4,000 monthly income, falling short of the 50% definition of a large deposit. Therefore, it is not considered a large deposit and the entire $20,000 balance in the ABC Bank account can be used for underwriting purposes. Scenario 2: Using the same borrower example, a deposit of $3,000 is identified, but only $500 is documented as coming from the borrower’s federal income tax refund, leaving $2,500 unsourced. In this instance, the unsourced $2,500 is 63% of the borrower’s $4,000 monthly income, which does meet the definition of a large deposit. Therefore, the unsourced $2,500 must be subtracted from the account balance of $20,000 and only the remaining $17,500 may be used for underwriting purposes. Continued on next page Conventional Lending Guide 100-140 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Large Deposit (Cont’d) Continued NOTE: If the source of a large deposit is readily identifiable on the account statement(s), such as a direct deposit from an employer (payroll), the Social Security Administration, or IRS or state income tax refund, or a transfer of funds between verified accounts, and the source of the deposit is printed on the statement, the lender does not need to obtain further explanation or documentation. However, if the source of the deposit is printed on the statement, but the lender still has questions as to whether the funds may have been borrowed, the lender should obtain additional documentation to validate the funds have not been borrowed. When a Verification of Deposit (VOD) is used and depository activity is not included, the lender must verify the source of funds for: Accounts opened within the last 90 days of the application date, and Account balances that are considerably greater than the average balance reflected on the VOD. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-141 Conventional Lending Guide Assets and Liquidity, 1031 Exchange Continued Definition: Proceeds from the sale of the borrower’s previously sold property (relinquished property) is transferred to an intermediary and held by the intermediary until the borrower finds a replacement property (i.e., the subject property). Subject property must be an investment property. Primary residences and second homes are not eligible. The relinquished property sale must close before or simultaneously with the replacement (subject) property acquired. Statement of borrower’s equity is calculated as the lower of: Sales price from the sales contract Gross trade value from the sales contract less the sum of the transfer fees and all lien balances on the currently owned property and transfer fees on the new property Appraised value of the borrower’s currently owned property plus any new transfer fees on the new property. The following documentation is required: Sales contract for both the sale of the previous property and the purchase of the subject property. 1031 Exchange Agreement identifying intermediary, all parties, conditions of transfer, require repairs if applicable, etc. and title transfer. HUD-1 settlement statement for both properties. Verification of receipt of funds from the intermediary/exchange holder. NOTE: The loan closing must be handled by a qualified intermediary (typically, an escrow company or licensed exchange company) who enters into a written agreement with the borrower. The qualified intermediary cannot be an agent, investment banker, broker, employee of the borrower, or related family member. Continued on next page Conventional Lending Guide 100-142 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Foreign Assets Continued If borrower’s source of funds for the down payment, reserves and/or closing costs are from accounts located in a foreign county, additional due diligence is required to ensure compliance with all related OFAC restrictions, confirmation of exchange rates, seasoning requirements, and any additional conditions deemed responsible by the Underwriter. Foreign assets being used for down payment, closing costs and reserves must be held in a U.S. account prior to closing. Proof the transferred funds belonged to the borrower(s) prior to transfer. Large deposits as defined within this lending guide must be documented accordingly. If the assets are derived from a sale of a foreign asset or from assets held in a foreign bank account, the assets must be converted into United States currency by an independent third party and placed in a United States banking institution. The sale of the foreign asset and conversion of foreign currency must be fully documented and verified. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-143 Conventional Lending Guide Assets and Liquidity, Business Funds Continued Business Assets may be acceptable for the down payment, closing costs, Prepaids/Escrow and financial reserves when a borrower is selfemployed and the individual federal income tax returns have been evaluated by the lender, including, if applicable, the business federal income tax returns for that particular business (non-Schedule C). Because the Borrower’s withdrawal of assets from a sole proprietorship, a partnership, or a corporation may have a negative impact on the business’ ability to continue operating, the impact of withdrawal must be considered in the underwriter’s analysis of the Borrower’s self-employed income and the file must contain the Underwriter’s written cash flow analysis and conclusion that withdrawal of the business funds will not affect the operation of the business. The borrower must be listed as an owner of the account and the account must be verified in accordance with the Verification of Deposits and Depository Accounts sections listed above. Continued on next page Conventional Lending Guide 100-144 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Pooled Funds Continued Funds from a community savings account or any other type of pooled savings may be used for the down payment if the borrower can document regular contributions to the fund. Acceptable documentation includes written confirmation from the party managing the pooled savings fund and documentation of regular borrower contributions. The borrower’s obligation to continue making contributions to the fund must be considered as part of the borrower’s debt when calculating the total debt-to-income ratio. Community savings systems account statements must: Identify the issuing institution or administrator Identify the account owner(s) Identify the account number Show all transactions Show the period covered and ending balance Show any outstanding loans If community funds are held in a securities account, then identify and document the stocks/securities and provide proof of liquidation. Pooled funds on deposits from related persons who reside with the borrower are acceptable if, in addition to the account documentation, the following is provided: Proof the Borrower and related person have resided together at least one year. Letter stating that they will continue to reside together in the new residence and are pooling their funds to buy the new residence. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-145 Conventional Lending Guide Assets and Liquidity, Individual Development Accounts Continued Funds that the borrower deposited into an IDA may be used for down payment, and depending on the repayment terms of the IDA program, the borrower may or may not be required to meet the minimum down payment requirements from his or her own funds: If the non-profit agency requires repayment of the “matching” funds, agrees to defer or forgive repayment provided certain conditions are met, or files a lien against the property, then the borrower may use the “matching” funds to supplement the down payment, provided the borrower has met the minimum down payment requirements from his or her own funds. Funds with recapture provisions are permitted up to a maximum of 3-to-1 match by an agency fund. If the non-profit agency does not require repayment of the “matching” funds and does not file a lien against the property, then the borrower may use the “matching” funds for some or all of the down payment without first being required to meet the minimum down payment requirement from his or her own funds. Funds with no recapture provision are permitted up to a maximum of 4-to-1 match by an agency fund. Documentation must be provided that describes the non-profit agency’s individual development account program in order to rate at which the agency “matches” the borrower’s deposits into the account and determine that the borrower has satisfied any vesting requirements. Appropriate documentation must reflect that the borrower made regular payments into the account and that the agency made regular deposits of the matching funds into the account. NOTE: The terms of an IDA program and any provisions related to second mortgages must be in compliance with Agency guidelines, then cross-referenced with Homeward parameters. May not be used as funds for debt payoff or to meet reserve requirements. IMPORTANT: May require prior approval by Credit Policy Manager (or designee). Continued on next page Conventional Lending Guide 100-146 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Assets and Liquidity, Credit Card for POC Items Continued The borrower’s credit card may be used to pay fees outside of closing. Credit card financing must not be used to meet minimum down payment requirements. Costs that can be financed are: Appraisal Lock-in fees Credit Report Requirements: The total charged amount may not exceed the lesser of $1,000 or 1% of the loan amount. HUD-1 must reflect a POC credit to the borrower for the amount charged. Verification of one of the following is required: The borrower has sufficient liquid funds to cover the entire cost of the fees plus any other fees required for closing costs and down payment, or Updated credit supplement from a credit reporting agency verifying the new balance and the required payments per the creditor. The new balance must be included in the qualifying ratio calculation, or 5% of the total balance (previous verified balance plus new charges) must be used as the new payment. The updated payment as recalculated must be included in the qualifying ratio calculation. EXAMPLE: The balance reported on the credit report is $1,000 and there is evidence to indicate the payment is $25 per month. After the credit report date, the borrower uses the credit card to pay for an appraisal, increasing the balance on the card to $1,350. The payment will be based on 5% of the entire new balance $1,350, for a new payment of $67.50. Collection of fees must be in compliance with all MDIA, RESPA, and TILA requirements. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-147 Conventional Lending Guide Properties Eligible Property Types Single Family Residences – Attached and Detached 2-4 Units Modular Homes/Factory Built (SFR, 1-unit only) Condominiums FNMA Type P, Q, S, T PUDs Mixed Use Properties “Live-work” type loft-style condominiums are those usually used for artist’ studio, workshops, factories or galleries – must meet mixed use property requirements Legal Non-Conforming use of land; see details below. Hobby Farms; see details below. NOTE: A critical analysis of properties with 400 to 800 square feet will be performed by the underwriter to determine value, including common and customary to the current market. Properties smaller than 400 square feet, including condos, are not permitted. Legal NonConforming All property types, including condos, are permitted with the below: Zoning must be legal permissible use of the land; and Proof of zoning regulations reflecting permission to rebuild the improvements to current density in the event of partial or full destruction; and Property must continue to represent the “highest and best use” for the site; and City zoning authority letter or an appraisers’ addendum with analysis reflecting any adverse effect that the non-conforming use has on the value and marketability of the property; and Appraiser must confirm property can be rebuilt “as is”. Continued on next page Conventional Lending Guide 100-148 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Agricultural Zoning Uniquely Designed Homes Continued If a property is zoned agricultural, it is only eligible when all of the following exist: Subject property must be used as a residence and is typical for the neighborhood or market area. The appraiser must adequately demonstrate that the subject neighborhood is residential in nature. Residential use is permissible under the zoning and land use regulations. Property must adhere to the maximum acreage standards by program. Property may not include agricultural property tax exemptions. When appraising unique properties, (dome home, earth berms, log cabins) if the appraiser cannot locate recent comparable sales of the same design and appeal, but is able to determine sound adjustments for the differences between the comparables that are available and the subject property and demonstrate the marketability of the property based on: Older comparable sales, Comparable sales in competing neighborhoods, The existence of similar properties in the market area, Any other reliable market data NOTE: Comparables should be of similar size to the subject property to support the general acceptability of a particular property type. Refer to specific product guidelines for further clarification. NOTE: If the appraiser is not able to find any evidence of market acceptance, and the characteristics of the property are so significantly different that he or she cannot establish a reliable opinion of market value, the property will not be acceptable. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-149 Conventional Lending Guide Properties, Hobby Farms Continued Defined as small farm characteristics and/or activities without the expectation or actual receipt of moderate income; Hobby Farms may be acceptable property types with the following: If applicable, Schedule F tax returns must be provided regardless of AUS recommendations to confirm incidental farm income. If there is any indication through tax returns, tax transcripts or other validation tools that the subject property is hobby farm, a full appraisal is required regardless of AUS recommendations. Subject property may not include a hobby farm in conjunction with any mixed-use business related to farming, agriculture, machinery type equipment, etc. Property must be residential in nature with acceptable comparables and typical for the area. Property may not be subject to agricultural tax exemptions. Outbuildings, barns and stables must adhere to agency requirements: Must be typical of other residential properties in the subject area, Appraiser must demonstrate such presence are typical of properties for which an active, viable residential market exists supported by comparable sales, Consist of little or no contributory value, and Any large or multiple buildings do not indicate that the property is agricultural in nature Continued on next page Conventional Lending Guide 100-150 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Continued Ineligible Property Types “To Be Determined” property addresses (i.e. all submissions must contain an actual property address) Manufactured Homes (refer to HARP product summaries for certain allowances) Timeshare/segmented ownership Houseboats Mobile Homes Working farms, ranches, orchards, commercial operations or those with agriculture tax exemptions regardless of income producing status. Unimproved Land CONDOS: Condo Project Manager (CPM) Review, Type R and U, Multi-dwelling condominiums, Condotels and Non-Warrantable condominiums. Properties with deed restrictions that limit transferability of title, re-sale restrictions or contain a “first right of refusal” provision. Subdivisions (PUDs) with any unacceptable deed restriction regardless of being applicable to the subject property Condo properties with Full Reviews may permit certain first right of refusal provisions; refer to Condo section for full requirements. Properties allowing for the Right of Redemption. Cooperatives Properties with assignments of purchase (assigning the purchase contract to another party) Condotels Subsidized Condos also known as Limited Equity Condos Properties permitting divestiture of interest Certain states have enacted legislation that makes private transfer fee covenants void and unenforceable. Properties with transfer fees that are identified as exceptions on the title commitment are not acceptable. Property with problem drywall (a.k.a. Chinese drywall), as noted by the appraiser. Chinese drywall is known to produce foul odors; causes metal to corrode more quickly than normal; leaves black corrosion on wiring or copper; and causes appliances and electronics with copper wiring to fail due to corroded copper wiring. Community Land Trust and Illinois Land Trust Properties located on land that does not allow access for mortgage servicing purposes such as foreclosure (i.e. Tribal Land). Boarded Up Properties Hawaii Lava Zone 1 or Lava Zone 2 Lease agreements that include a Tenant Lease Option to Purchase make the loan ineligible. Bed and Breakfast properties Boarding Houses Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-151 Conventional Lending Guide Properties, Private Transfer Fees Continued Mortgages on properties encumbered by private transfer fee covenants prohibited by C.F.R. Part 1228 in the Federal Register, are ineligible if those covenants were created on or after February 8, 2011. Fees that do not directly benefit the property are subject to C.F.R. Part 1228 and are therefore ineligible. Private transfer fees are eligible for loans in which the covenants were created prior to 2/8/2011. However, if the creation date is not known, the loan is not eligible. Private transfer fees paid to the following to benefit the property are eligible: Homeowner associations Condominium Certain tax-exempt organizations that use private transfer fee proceeds to benefit the property A private transfer is a transfer fee, including a charge or payment, imposed by a covenant, restriction, or other similar document and required to be paid in connection with or as a result of a transfer of title to real estate, and payable on a continuing basis each time a property is transferred (except for transfers specifically excepted) for a period of time or indefinitely. A private transfer fee does not include fees, charges, payments, or other obligations (1) imposed by or payable to the Federal government or a State or local government; or (2) that defray actual costs of the transfer of the property, including transfer of membership in the relevant covered association. Direct benefit means that the proceeds of a private transfer fee are used exclusively to support maintenance and improvements to encumbered properties, and acquisition, improvement, administration, and maintenance of property owned by the covered association of which the owners of the burdened property are members and used primarily for their benefit. Direct benefit also includes cultural, educational, charitable, recreational, environmental, conservation or other similar activities that (1) are conducted in or protect the burdened community or adjacent or contiguous property, or (2) are conducted on other property that is used primarily by residents of the burdened community. Transfer fees will appear on Schedule B of the title commitment (exceptions to coverage), which is the same place as HOA dues, etc. Continued on next page Conventional Lending Guide 100-152 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Manufactured Homes on Site Continued Habitable manufactured homes located on the subject property site are not permitted, regardless of omitting value. The restriction includes manufactured homes that are and are not permanently affixed to the property. NOTE: Habitable is defined as connected water, electricity, sewer, etc. Borrower Acknowledgment for Value When the subject property sales price is greater than the appraised value, a borrower(s) signed, written acknowledgment is required confirming their understanding that they are purchasing the property for an amount greater than the appraised value. Well, Septic & Pest Inspection Well, Septic and Termite Certifications are required as noted on the appraisal. If certain property inspections are only required per the Sales Contract, then Homeward Residential will require a letter from the Borrower(s) confirming such inspections were performed and no structural, health or habitable issues were reported. If the Borrower’s letter confirms no issues reported, then it is not necessary to provide copies of the actual inspection reports. Massachusetts: Title V Certification, Septic System Inspection Regulation, is required. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-153 Conventional Lending Guide Properties, Continued Age of Appraisals Properties must be appraised within the 12 months that precede the date of the note and mortgage. When an appraisal report will be more than four months old (for DU files) and 120 days (for LP submitted files) on the date of the note and mortgage, regardless of whether the property was appraised as proposed or existing construction, the appraiser must inspect the exterior of the property and review current market data to determine whether the property has declined in value since the date of the original appraisal. This inspection and results of the analysis must be reported on the Appraisal Update and/or Completion Report (Form 1004D for DU files) and 442 (for LP submitted files). When obtaining a 1004D for an appraisal update and/or completion, at a minimum, a photograph of the front of the subject property must be included. If the appraiser indicates on the Form 1004D (for DU files) and 442 (for LP submitted files) that the property value has declined, then the lender must obtain a new appraisal for the property. If the appraiser indicates on the Form 1004D (for DU files) and 442 (for LP submitted files) that the property value has not declined, then the lender may proceed with the loan in process without requiring any additional fieldwork. NOTE: The appraisal update must occur within the four months (for DU files) 120 days (for LP submitted files) that precede the date of the note and mortgage. NOTE: Homeward defines the Note Date as the date on the front of the Note. Which may or may not be the date the note is signed The original appraiser should complete the appraisal update; however, a substitute appraiser may be used. When updates are completed by substitute appraisers, the substitute appraiser must review the original appraisal and express an opinion about whether the original appraiser’s opinion of market value was reasonable on the date of the original appraisal report. The underwriter must note in the file why the original appraiser was not used. Continued on next page Conventional Lending Guide 100-154 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Continued Age and Adjustments of Comparables Comparable sales that have closed within the last 12 months should be used in the appraisal; however, the best and most appropriate comparable sales may not always be the most recent sales. For example, it may be appropriate for the appraiser to use a nine month old sale with a time adjustment rather than a one month old sale that requires multiple adjustments. An older sale may be more appropriate in situations when market conditions have impacted the availability of recent sales as long as the appraisal reflects the changing market conditions. Additionally, older comparable sales that are the best indicator of value for the subject property can be used if appropriate. For example, if the subject property is located in a rural area that has minimal sales activity, the appraiser may not be able to locate 3 truly comparable sales that sold in the last 12 months. In this case, the appraiser may use older comparable sales as long as he or she explains why they are being used. Appraisers are expected to analyze the market for competitive properties and demonstrate competence and accuracy in appropriate market based adjustments without regard to arbitrary limits on the size of the adjustment. The appraiser’s adjustments must reflect the market’s reactions (that is, market based adjustments) to the difference in the properties. It is required that the Seller review all adjustments on the grid, make certain there are no calculation errors, that each specific comp sale is a valid comp and that any substantial adjustments are addressed in the appraisal. Proximity of Comps to Subject Property Location: The description of the proximity of the comp sale to the subject property must be specific (for example “two blocks south”). Whenever possible, comp sales in the same neighborhood as the subject should be used. Sales prices of comp properties in the neighborhood should reflect the same positive and negative locational characteristics. Appraisal Validation Homeward Residential will assess all properties and appraisals to confirm values are well supported. It will be at the Underwriter’s discretion to utilize any additional validation tools at their disposal to escalate value concerns. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-155 Conventional Lending Guide Properties, Reuse of Appraisals Continued Homeward will allow the use of an origination appraisal for a subsequent transaction if the following requirements are met: The subsequent transaction may only be a Limited Cash-Out Refinance. The appraisal report must not be more than 12 months old on the note date of the subsequent transaction. If the appraisal report is greater than 4 months old on the date of the note and mortgage, then an appraisal update is required. See Age of Appraisal and Appraisal Update Requirements, for requirements for completing an appraisal update. The lender must ensure that the property has not undergone any significant remodeling, renovation, or deterioration to the extent that the improvement or deterioration of the property would materially affect the market value of the subject property. The borrower and the lender/client must be the same on the original and subsequent transaction. NOTE: The only exception is in the event of a divorce or legal separation. The Borrower for the new transaction must be one of the Borrowers on the prior transaction, and the file must document that the Borrower for the new transaction obtained the property through a divorce or legal separation. The appraisal must comply with all other requirements in the Underwriting Property section of the Selling Guide Transferred Appraisals Not permitted on ANY appraisal type. Continued on next page Conventional Lending Guide 100-156 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Address Validation Continued Property address validation requires the house number and street address to coincide with the title commitment and the zip code to coincide with www.USPS.com NOTE: If the title commitment address differs from the appraisal, the appraiser must comment on the addresses being one in the same. Distance of Comparables Urban area; typically comparables within 1 mile of the subject property are acceptable. Suburban area; a 1 to 2 mile radius is acceptable; however, in the case of a PUD, the subject must be compared to properties in the same subdivision as that of the subject. Rural properties often have large lot sizes and rural locations can be relatively undeveloped. For this reason, there may be a shortage or absence of recent truly comparable sales in the immediate vicinity of a subject property. Comparable sales located a considerable distance from the subject property can be used if they represent the best indicator of value for the subject property. Land to Value Ratios The property’s land to value ratio must be consistent with other properties in the area. The appraisal must include the actual size of the site and not a hypothetical portion of the site; the appraised value must reflect the entire parcel. The appraiser must consider all acres of the subject property and comparable must be of similar size to establish marketability. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-157 Conventional Lending Guide Properties, Location Types Continued Mortgages secured by residential properties in urban, suburban, or rural areas are eligible for financing within Homeward Residential’s and agency guidelines. An urban location relates to a city, A suburban location relates to the area adjacent to a city, and A rural location relates to the country or anything beyond the suburban area. NOTE: If a location is not designated in the appraisal as rural, Homeward Residential may deem the property as rural if the lot size exceeds typical urban or suburban lot size, or if the location is remote from a metropolitan area. If there is a shortage of recent comparable sales in the immediate vicinity of a suburban or urban area, the appraiser may extend the area with full documentation and justification for extending the immediate area. Continued on next page Conventional Lending Guide 100-158 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Age Restricted Communities Continued Properties that are subject to Deed Restrictions on the basis of Age are eligible. No other deed restrictions may be associated with the property. IMPORTANT: The Development/Association/Community must sign HomewardAffidavit for Age Restricted Communities to confirm the housing development complied with the Fair Housing Act. Reasonable local, state or federal restrictions on the maximum number of occupants permitted to occupy a dwelling unit are acceptable as long as such limitations are applied to all occupants and do not operate to discriminate on the basis of race, color, religion, sex, national origin, handicap or familial status. If any other restrictions are noted in the purchase contract, appraisal, and title commitment or in the project covenants/restrictions, the loan will not be eligible. If a housing development has an age restriction, it must comply with one of the following Fair Housing Act exemptions: Government Housing Programs: The prohibitions against discrimination on the basis of age of familial status do not apply with respect to dwellings provided under any State or Federal Program specifically designed and operated to assist the elderly or to house elderly persons. The Secretary of HUD must determine that the development meets this exemption Age Restrictions – 62 years of age or older: The prohibitions against discrimination on the basis of age or familial status do not apply with respect to dwellings intended for, and solely occupied by persons 62 years of age or older. Age Restrictions – Any age restriction: The prohibitions against discrimination on the basis of age or familial status do not apply with respect to dwellings intended and operated for occupancy by person 55 years of age or older provided that all of the following apply: At least 80% of the occupied units are occupied by persons 55 years of age or older. The housing facility or community publishes and adheres to policies and procedures that demonstrate the intent to provide housing to persons 55 years of age of older The housing facility or community can provide documentation for verification of occupancy, by means of: o Provide for verification by reliable surveys and affidavits; and o Include examples of published written policies and procedures for determination of compliance with Fair Housing Act. Age Restrictions that survive foreclosure: These restrictions may place restrictions on the borrower as to any future sales and these restrictions would also apply to the lender in the event of foreclosure. Age Restrictions that do not survive foreclosure: These restrictions may place restrictions on the borrower as to any future sales and these restrictions DO NOT apply to the lender in the event of foreclosure. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-159 Conventional Lending Guide Properties, Age Restricted Communities, (Cont’d) Continued Ineligible for: 3-4 Units Second Homes and Investment properties Additional Requirements: Lender may not be required to send notice of default or foreclosure to any third party. Copy of the Restrictive Covenant must be provided. ALTA-9 title endorsement is required. Appraisal Requirements: Age Restrictions that Survive Foreclosure: In cases where the resale restriction survives foreclosure or deed-in-lieu of foreclosure, the appraisal must reflect the impact the restriction has on the value and be supported by comparables with similar restrictions. The underwriter must ensure that the appraiser and the borrower are aware of the existence of the resale restrictions and comment on any impact the resale restrictions may have on the property’s value and marketability. The appraisal must include 3 comparable sales of units with similar deed restrictions. For new projects or subdivisions, at least 2 of the sales must be from outside the project or subdivision. Age Restrictions that Do NOT Survive Foreclosure: In cases where the resale restrictions terminate automatically upon foreclosure, the appraisal should reflect the market value of the property without resale restrictions and should advise the appraiser that he or she must include the following statement in the appraisal report: “This appraisal is made on the basis of a hypothetical condition that the property rights being appraised are without resale and other restrictions that are terminated automatically upon the latter of foreclosure or the expiration of any applicable redemption period, or upon recordation of a deed-in-lieu of foreclosure.” Continued on next page Conventional Lending Guide 100-160 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Continued Multiple Parcels Properties with multiple parcels are permitted subject to: Each parcel must be conveyed in its entirety. Parcels must be adjoined to the other, unless they comply with the following exception. Parcels that otherwise would be adjoined, but are divided by a road, are acceptable if the parcel without a residence is a non-buildable lot (for example, waterfront properties where the parcel without the residence provides access to the water). Evidence that the lot is non-buildable must be included in the loan file. Each parcel must have the same basic zoning (for example, residential, agricultural). The entire property may contain only one dwelling unit. Limited additional non-residential improvements, such as a garage, are acceptable. For example, the adjoining parcel may not have an additional dwelling unit. An improvement that has been built across lot lines is acceptable. For example, a home built across both parcels where the lot line runs under the home is acceptable. The mortgage must be a valid first lien that covers each parcel. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-161 Conventional Lending Guide Properties, Land Contracts Continued A land contract, also known as an installment land contract or a contract for deed, is a real estate agreement between a buyer and seller, whereby the buyer may use and occupy the property. However, the deed from the property seller to the buyer may not be recorded until all or a specified part of the sales price has been paid. The buyer does not obtain the transfer of title until the land contract is paid; however, if the land contract is recorded, it should be reflected in the chain of title in the title report. Purchase versus Refinance Credit LTV Purchase Refinance The lesser of current appraised value or total acquisition cost. For A Limited Cash-Out Refinance, the LTV is based on current appraised value. NOTE: If the land contract is not recorded, use the date signed by all parties as the executed/effective date. NOTE: If the land contract was executed less than 12 months prior to the date of the application, it must be considered a purchase. Acquisition Cost Total acquisition cost is calculated as: Purchase price as indicated in the original land contract plus, any fully documented costs for rehabilitation, renovation, refurbishment or energy conservation. No Cash-Out No loan proceeds may be disbursed to the borrower unless they are for documented costs for completed rehabilitation, renovation, refurbishment or energy conservation. Continued on next page Conventional Lending Guide 100-162 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Continued Land Contracts, Continued Criteria Purchase Land Contract A copy of the land contract is required. The land contract does not have to be recorded. Payment History Third party verification must show the borrower has been making the payments in accordance with the terms of the contract for the most recent 12 months. 12 month cancelled checks are required A VOM is acceptable with institutional lender. Non-Arm’s length requires cancelled checks Completion of Improvements Short Sale Refinance If the appraisal is made subject to the completion of any improvements, a 442 is required. When the subject property is the result of a Short Sale, Foreclosure, or Deed-in-Lieu of Foreclosure, the following terms are required: The transaction is Arm’s length involving a realtor and a formal sales contract. There is no relationship or identity of interest between the buyer and seller. Short sale approval letter from all existing mortgage lien holders accepting the discounted sales price on the subject property must be documented and retain in the loan file. All liens are extinguished with the sales proceeds. Bailouts and flips are not permitted Property value must be confirmed with a full interior/exterior appraisal regardless of AUS recommendations. The borrower(s) may not be involved in negotiations with the lien holders(s) to facilitate the short sale. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-163 Conventional Lending Guide Properties, UAD Condition and Quality Ratings Continued UAD compliant appraisal report forms must include a UAD Condition Rating (C1, C2, C3, C4, C5 or C6) that best describes the overall condition of the subject property and each comparable property AND a UAD Quality Rating (Q1, Q2, Q3, Q4, Q5 or Q6) that best describes the overall quality of the subject property and each comparable property Homeward will originate loans where the appraisal is completed “as is” with the property’s conditions rating C1 – C5 and the quality of construction rating Q1-Q5. If the appraiser has identified the Condition Rating as C6 and Quality of Construction rating as Q6, the property must be appraised subject to completion of the specific repairs or alterations. In these instances, the property condition and quality ratings must reflect the condition and quality of the property based on the hypothetical condition that the repairs or alterations have been completed. If the appraiser is not qualified to evaluate the alterations or repairs needed, the appraisal must identify and describe the deficiencies and the property must be appraised subject to a satisfactory inspection by a qualified professional. The appraisal may have to be revised based upon the results of the inspection. If so, the report must indicate the impact, if any, on the final opinion of value. The lender must review the revised appraisal report to confirm that no physical deficiencies or conditions that would affect the safety, soundness, or structural integrity of the property are indicated. A certification of completion is required to confirm the necessary alterations or repairs have been completed prior to delivery of the loan. A Mortgage secured by a property that had an original condition rating of C6 and quality of construction rating of Q6 is eligible only if all issues that caused the property to be rated C6 and/or Q6 are cured prior to closing. Continued on next page Conventional Lending Guide 100-164 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Continued Condition and Quality Adjustments The appraiser must make appropriate adjustments for differences in condition and quality between the subject property and each comparable property to reflect the value, if any, of the differences in the market place. If the appraiser makes an adjustment for differences in quality and condition between the subject property and a comparable property that have the same UAD quality or condition rating, or does not make an adjustment for properties that receive different quality and condition ratings, the appraiser is expected to provide a sufficient explanation for the basis and rationale for all adjustments. Property Conditions All subject properties must be habitable and all mechanicals (plumbing, electrical, etc.) must be functional and in good working condition. IMPORTANT: Any maintenance items which affect the safety, soundness, or structural integrity of the property must be corrected prior to closing or the subject will be deemed unacceptable. Roof Life Remaining Economic Life does not need to considered as related to the mortgage term, however, related property deficiencies must be discussed in the sections of the appraisal report that address the improvements analysis and comments on the condition of the property. If the appraiser classifies the roof to be at the end of or less than 2 years remains of its economic life, then a roof inspection/certification should be performed. If the roof inspector confirms the remaining economic life to be under 2 years, then a new roof should be installed. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-165 Conventional Lending Guide Properties, Environmental Hazards Continued Properties may not violate any environmental law, rule or regulation with respect to the subject property, and may not contain toxic materials or other environmental hazards on, in or that could affect the subject property. Appraiser must disclose any known or suspected environmental hazards on or near the subject property, e.g., land fills, toxic waste dumps, or junk yards; including any hazardous conditions observed during the inspection of the subject property or information that he or she became aware of through the normal research involved in performing an appraisal. If an environmental hazard is located on or near the subject property, the appraiser must comment on any influence that the hazard has on the property’s value and marketability and make appropriate adjustment in the overall analysis of the property’s value. If any environmental hazard is suspected, an environmental study of the subject property is required prior to loan approval. In such cases, a nationally recognized and reputable environmental engineering firm must perform the written report. The report must include an analysis and detailed list of clean-up costs, if any. Homeward Residential will not approve a loan without acceptable evidence confirming any known or suspected environmental hazards will not have an adverse effect upon the marketability, livability, or appraised value of the subject property. This confirmation must be evidenced by either acceptable or documented clean-up efforts or by verification of comparable market data confirming no buyer resistance to the hazard. Continued on next page Conventional Lending Guide 100-166 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Non-Structural Hazards Continued Non-structural Hazards The appraiser must adequately identify and describe the property in terms of conditions, features, and upgrades. The property improvements must be in at least average condition and the condition of the property must not negatively affect either the habitability or marketability of the property. Property should be free and clear of health and safety issues. Example of this would be a swimming pool that is not complete (should not be included in the value) or work in progress. A fence should be around the work area or the pool should be covered. If security bars are placed on the windows, at least one window per room must have a release latch. Non-structural hazards include (but are not limited to) airport noise, railroad tracks and other high noise sources, flood zones, lead base paint, radon, overhead high voltage transmission towers and lines, operating and abandoned oil and gas wells, tanks, and pressure lines, insulation materials, mold, lava zones, avalanche, decks or balconies that are not completed, buried oil tanks that are leaking, staircases without handrailing, excessive debris on the property, and electrical or plumbing that is outdated or incomplete. Security Bars The appraiser must comment and follow state and local requirements with respect to the use of security or “burglar” bars. There must be an emergency release latch for at least one window in each room where the security bars are located, unless local or municipal codes state otherwise. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-167 Conventional Lending Guide Properties, Continued Swimming Pools Empty swimming pools are not acceptable due to associated safety hazards. If pools are empty at time of appraisal, recertification with photos is required reflecting water-filled OR reflecting a correctly installed pool cover. Visible green or moss covered pool water is not acceptable. Non-operable swimming pool systems may be acceptable with: Correctly installed pool cover Value may not be assigned to the pool Comparables should not include properties with swimming pools Appraiser to provide estimate of damage and approximate repair cost. Extensive cost to repair will be at the Underwriter’s discretion for approval. Continued on next page Conventional Lending Guide 100-168 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Continued Heating and Cooling Sources All properties must have a permanent source of heat and, if typical for the area, cooling. Space heaters and similar sources are not considered permanent heat sources, even if affixed to a permanent wall. Utilities Utilities must meet community standards and be accepted in the market areas. If public sewer and/or water facilities, those that are supplied and regulated by the local government, are not available, community or private well and septic facilities must be available and utilized by the subject property. The owners of the subject property must have the right to access those facilities, which must be viable on an ongoing basis. Private well or septic facilities must be located on the subject site, unless the subject property has the right to access off-site private facilities and there is an adequate, legally binding agreement for access and maintenance. If there is market resistance to an area because of environmental hazards or any other conditions that affect well, septic, or public water facilities, the appraisal must address the effect of the hazards on the value and marketability of the subject property In addition, the comparable sales should have utilities similar to the subject property. When differences in utilities exist between the subject property and the comparable sales, any adjustments or lack of adjustments made to the comparable sales for significant differences must be explained in the comments area or on an attached addendum. In addition, the appraisal must evaluate the effect these differences have on the subject property's value or marketability NOTE: If the appraiser specifically comments to utilities being “off”, not in good working order, or requires the installation of any appliance as a condition of the appraised value, then a 1004D must be completed with utilities on, repaired or appliance installed prior to closing. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-169 Conventional Lending Guide Properties, Deferred Maintenance Continued If the appraiser reports the existence of minor conditions or deferred maintenance items that do not affect the safety, soundness, or structural integrity of the property, the appraiser may complete the appraisal “as is” and these items must be reflected in the appraiser’s opinion of value. Minor conditions and deferred maintenance items include, but are not limited to, worn floor finishes or carpet, minor plumbing leaks, holes in window screens, or cracked window glass and are typically due to normal wear and tear. It is not required to ensure that the borrower has had this work completed prior funding. Continued on next page Conventional Lending Guide 100-170 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Continued Accessory Unit An accessory dwelling unit is typically an additional living area independent of the primary dwelling unit, and includes a fully functioning kitchen and bathroom. Some examples may include a living area over a garage and basement units. Whether a property is a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utilities, a unique postal address, and whether the unit is rented. The appraiser is required to provide a description of the accessory unit, and analyze any effect it has on the value or marketability of the subject property. If the Single family residence contains an accessory unit, the property is eligible under the following conditions: If it is determined that the property contains an accessory dwelling unit that does not comply with zoning, the property is eligible under the following additional conditions: The property is one-unit. The appraisal report demonstrates that the improvements are typical for the market through an analysis of at least one comparable property with the same use. The borrower qualifies for the mortgage without considering any rental income from the accessory unit. It is confirmed that the existence will not jeopardize any future property insurance claim that might need to be filed for the property. The use conforms to the subject neighborhood and to the market. The property is appraised based upon its current use. The appraisal must report that the improvements represent a use that does not comply with zoning. The appraisal report must demonstrate that the improvements are typical for the market through an analysis of at least three comparable properties that have the same non-compliant zoning use. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-171 Conventional Lending Guide Properties, Continued Non-Permitted Additions If the appraiser identifies an addition(s) that does not have the required permit, the appraiser must comment on the quality and appearance of the work and its impact, if any, on the market value of the subject property. Declining / Soft Markets Declining/Soft Markets A Declining/Soft Market is designated by the following: An appraiser indicates “declining” on the appraisal report, aged comparables, etc. The transaction being evaluated must be closely reviewed within the appraisal to insure that the appraiser is specific with regard to the impact of the market decline. Treat any area considered a declining/soft market area conservatively with regards to the appraiser’s determination and/or comments. Continued on next page Conventional Lending Guide 100-172 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Declining / Soft Markets, (Cont’d) Continued The underwriter is responsible for the following verification: Ensure the appraiser analyzes listings and contract sales, if available, along with the most recent closed/settled sales. If the underwriter determines the appraisal does not accurately reflect the current market conditions, the underwriter is expected to request additional clarification or justification from the appraiser to make an informed decision about the property value. The underwriter must take appropriate steps to assess market conditions and determine if the appraisal accurately reflects current market conditions and value. The underwriter may rely on a market condition tracking service to assist in this analysis. If the underwriter determines that the property is located within a declining market, the underwriter must ensure the current market conditions are identified in the appraisal report and analyzed as part of their valuation process. When declining/soft market conditions are indicated through any methodology, the below restrictions apply: Maximum LTV/CLTV/HCLTV may be reduced at the discretion of the underwriter or as required by the MI Partner, if applicable. The appraiser must comment on the reason for the decline Appraisals should not contain comparables greater than six months old at time of underwriting review; if comparables do not have a closing date within the last six months, an additional listing or pending sale comparable must be included to reflect current market conditions. If two of the comparables sales are not within the most recent 90 days, a detailed explanation from the appraisal is required. Photocopy of the original appraisal must be included in the loan file Non-Arm’s length Transactions should be closely reviewed NOTE: Applies to ALL Agency Programs. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-173 Conventional Lending Guide Properties, Continued Supervisory Appraisers Appraiser must be qualified to perform appraisals without oversight or supervision by a “supervisory” or “review” appraiser. Sales Contract to Appraiser The appraiser must be provided with the sales contract and all addenda, therefore, ensuring that the appraiser has been given the opportunity to consider financing and sales concessions in the transaction and their effect on the subject property value. Appraisal Forms The following is a listing of appraisal forms to be utilized for all property types eligible for financing. The most recent revision of the listed appraisal form must be used. Appraisal Forms FNMA 1004/ FHLMC 70 Used for single-family properties, both attached & detached including PUD and site-detached condominiums. FNMA 1004MC / FHMLC 71 Market Conditions Addendum to the appraisal report. NOTE: When completing the “Total Number of Comparable Active Listings”, the appraiser should use the total listings as of the most recent applicable date, not a cumulative total for the entire period covered. FNMA 1073/FHLMC 465 Used for condominium properties. FNMA 1025/FHLMC 72 Used in the appraisal of two-to-four unit properties (A duplex, triplex or four-plex); interior and exterior report. FNMA 1004D Used for appraisal updates and/or completion reports for all 1-4 Unit appraisal reports. When obtaining a 1004D for an appraisal update and /or completion, at a minimum, a photograph of the front of the subject property must be included. FNMA 2000 Used for appraisal field reviews for one-unit properties. FNMA 2000A Used for appraisal field reviews for two-to-four unit properties. Continued on next page Conventional Lending Guide 100-174 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Photo Requirements Continued For Form 1004, 1073 and 1025, the following photos are required (clear and descriptive) showing: Bedroom Count Kitchen, All Bathrooms and the Main Living Area. Examples of physical deterioration, if present. Examples of recent updates, such as restoration, remodeling, renovation, if present. Bedroom count must be captured on all 1-4 unit investment properties and all owner occupied 2-4 unit properties regardless of the AUS, appraisal type, and regardless of whether the borrower uses rental income to qualify. Bedroom count information can be obtained from one or more of the following sources: Lease agreements Tax returns Operating income statement (Form 216) Single Family Comparable Rent Schedule (Form 1007) Appraisal Public record data that does not provide current property valuation. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-175 Conventional Lending Guide Properties, Investment Appraisal Forms Continued In addition to the appraisal forms specified, the following forms are required for investment properties: Investment Appraisal Forms FNMA 216/FHLMC 998 One-to-Four Unit Investment Property Operating Income Statement Form required for one-to-four owner occupied and non-owner occupied rental properties. FNMA 1007/FHLMC 1000 Single Family Comparable Rent Schedule Form required for non-owner single-family properties. NOTE: When rental income is not used to qualify, refer to the Qualifying without Rental Income section within this guide for additional details. Streamline Appraisal Forms No longer permitted. Continued on next page Conventional Lending Guide 100-176 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Property Inspection Waivers Continued The Desktop Underwriter (DU) Property Inspection Waiver Service (PIW) enables subscribers to exercise the option to waive the fieldwork and the property condition representations and warranties associated with certain DU Property Inspection Report recommendations. Waiver offer may not be more than 4 months old Not permitted if the purchase transaction is the result of the sale of a REO property, short sale or the last transaction on the subject property was a foreclosure. In such cases, a full interior/exterior appraisal is required. Year built must be listed on the 1003 application. If applicable, market rent must be listed on the 1008; ranges are not acceptable. NOTE: Utilization of appraisal waivers requires the borrower to sign an appropriate disclaimer/disclosure indicating their acknowledgment of waiving an appraisal (i.e. Notice About Appraisal of Your Property). The form must be signed by the borrower and included in the loan file. The Property Inspection Waiver (PIW) must be included on the DU findings report. The following transaction and property types are not eligible to receive a recommendation for a PIW: LP Home Value Explorer (HVE) High Balance Loan Amounts Construction-permanent Construction Homes requiring significant repair Non-Arm’s length transaction See additional comments on the next page. Not permitted on non-HARP transactions. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-177 Conventional Lending Guide Properties, Appraisal Upgrades Appraisal Requirements Continued A full appraisal must be obtained if any of the following conditions exists: The appraiser is unable to adequately view the subject property from the street, or The appraiser observes any factor that may have an adverse effect on the marketability of the subject property, or The quality or condition of the property appears unacceptable to the typical purchaser in the area in which the subject property is located, or The Condition and Marketability Factors section of the form indicates an upgrade is required, or Apparent adverse physical deficiencies or conditions, or Apparent adverse environmental conditions, or The subject property does not conform to the neighborhood. All appraisal practices utilized by Homeward Residential (a) conforms to the requirements of FNMA, (b) complies with Appraiser Independence Requirements (AIR) issued by the Federal Housing Finance Agency, and (c) meets the minimum standards established under FIRREA and the USPAP. More information may be obtained at the below links USPAP: FIRREA: http://uspap.org/#/28 http://www.fdic.gov/regulations/laws/rules/8000-3100.html FNMA Appraiser Independence: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/app code/pdf/air.pdf Continued on next page Conventional Lending Guide 100-178 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Private Road Maintenance Continued If the property is on a privately owned and maintained street, there should be an adequate, legally enforceable agreement for maintenance of the street. The agreement or covenant should include the following details and be properly recorded: Responsibility for payment of repairs, including each party’s representative share. Default remedies in the event a party to the agreement fails to comply with their obligations. The effective term of the agreement, which in more cases should be perpetual and binding on future owners. If the property is located within a state that has statutory provisions that define the responsibilities of property owners for the maintenance and repair of a private road, no separate agreement or covenant is required. NOTE: Not required on condominium property in which the HOA is responsible for street maintenance. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-179 Conventional Lending Guide Properties, Mixed Use Properties Continued Mixed Use property is defined as any commercial usage WITHIN the square footage and/or deed that secures the subject property. Examples of mixed use properties include a day care, beauty shop, specialty store, doctor’s office located WITHIN the square footage and/or deed of the subject property. Acceptability of mixed-use properties is limited as follows: Property must be a one-family property that the borrower occupies as his or her principal residence. Property must represent a legal, permissible use of the property under the local zoning requirements. Subject Property must not contain any environmental hazards (i.e. paint, oil, excess debris) and the business may not be industrial, manufacturing, or agricultural. Borrower must be both the owner and the operator of the business Property must be primarily residential in nature. Generally, commercial use should not exceed 33% of total gross living area. Market value of the property must be primarily a function of its residential characteristics rather than the business use or any special business-use modifications that were made. Full interior/exterior appraisal is required. If the property has been modified to accommodate a mixed-use, the appraiser should address whether the modifications affect the property’s marketability as a residence and whether the cost to restore the property to a solely residential use will affect its value. An appraisal must be obtained for the mixed-use property. Property inspections and waivers are not permitted. A home office in a condominium unit is acceptable, if there are no employees. The mixed use must not be restricted by the condominium project. NOTE: An unacceptable mixed use property would be a grocery store located within the square footage of the property or a Bed and Breakfast which is classified as commercial regardless of residential nature. Continued on next page Conventional Lending Guide 100-180 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Properties, Carbon Monoxide Detectors Continued For California properties, evidence that a carbon monoxide detector has been installed is required: Mineral Rights On purchase transactions when installation is required per sales contract or appraisal report or when the appraisal indicates detectors have not been installed. On refinance transactions when installation is required per the appraisal or when the appraisal indicates detectors have not been installed. Outstanding oil, water, gas or mineral (including, but not limited to, Coal) rights that are customarily waived are permitted, as long as they do not materially alter the contour of the property or impair its value or usefulness for its intended purposes. The file must include documentation that the exercise of such rights will not result in damage to the subject property or impair its use or marketability for residential purposes AND there is not right of surface or subsurface entry within 200 feet of the residential structure; OR Document comprehensive endorsement to the title insurance policy that affirmatively insures Homeward Residential against damage or loss due to the exercise of such rights. IMPORTANT: If there is an executed or active lease on the property, the appraiser must comment as to the impact of the lease (or sold rights) on the marketability of the subject property. If the lease or sold rights have any negative impact on the marketability of the subject property, the loan is not eligible. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-181 Conventional Lending Guide Leasehold Estates Overview Leasehold estates are acceptable in areas where they are common and customary. The lease must permit the following: Assignments of the leasehold estate without the lessor’s consent Release of an assigning lessee or sublessee Constitute real property, be subject to a mortgage lien, and be insurable by an acceptable lender’s title insurance policy. For condo or PUD projects, the homeowners association must be the lessee under the ground lease. The fee simple owner must not be the developer, an entity associated with the developer, or a hospitality entity. Must be assignable / transferable. All lease rents, other payments, or assessments must be current, and the borrower must not be in default under any other provision of the lease nor may the lessor have claimed such a default. NOTE: Leasehold agreements involving tribal counsels and/or native American Indian land typically do not meet assignment without prior consent requirements and therefore would not be eligible. Documentation Completed FNMA Ground Lease Analysis (Form 461) Copy of the lease documentation reflecting that it is recorded in the appropriate public land records and in full force and effect. May not be subject to any prior lien or encumbrance by which the leasehold could be terminated or subjected to any charge or penalty. Title insured by an ALTA Leasehold loan policy (ALTA 13.01-06) For California, a CLTA 107.5 endorsement, or its equivalent, is also required. The endorsement must state the property improvements are insured in the same manner as the land. Leasehold Rider to the Security Instrument Attorney Opinion Letter highlighting the details of the leasehold agreement thus providing the necessary reassurances that the leasehold meets Agency requirements. Continued on next page Conventional Lending Guide 100-182 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Leasehold Estates, Term of Lease Continued The term of the leasehold estate must run for at least five years beyond the maturity date of the mortgage, unless fee simple title will vest at an earlier date in the borrower. Contain a provision that interest can be transferred, mortgaged, and/or sublet an unlimited number of times by the lessee—either without restriction or with payment of a reasonable fee and delivery of reasonable documentation to the lessor (owner of the land). The lessor may not impose any credit qualifying criteria on an assignee, transferee, mortgagee or sub lessee. When applicable, the leasehold must provide for the lessee to retain voting rights in an HOA. Lease must provide for the borrower to pay all taxes, insurance and HOA dues related to the land. Lease must be valid, in good standing, and in full force and effect in all respects. Contain provisions to protect lender’s interest in the event of bankruptcy of any party to the lease, foreclosure, the property’s condemnation or destruction, such as the right to assume the lease and any renewal options, or acquire the lease in its own name or in the name of a nominee upon foreclosure or deed in lieu of foreclosure. The lease must provide for the leasehold mortgagee’s right to exercise any renewal options that may exist. If the lessor’s fee simple interest in the land is subject to any encumbrances or liens, or the lease requires the lessee to agree to the subordination of the lease to said liens or encumbrances, the fee simple lienholder has executed and recorded a Non-disturbance and Attornment Agreement that contains the provisions indicated below. Provide for the leasehold mortgagee to approve any amendments to the lease that relate to the provisions described herein, the modification of the leasehold estate, or the termination or cancellation of the lease. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-183 Conventional Lending Guide Leasehold Estates, Ineligible Lease Terms Default Provisions Continued The lease must NOT: Contain default provisions allowing forfeiture or termination of the lease except for non-payment of the lease rents. Prohibit the leasehold mortgagee from exercising renewal options. The lease documentation must contain the following default provisions: At least a 30 day written notice of default by the lessor to the leasehold mortgagee as a condition of the validity of the notice of default. The right of the leasehold mortgagee to cure a default for the lesee’s account within the time permitted to the lessee, plus reasonable additional time. A stipulation indicating a new lease of the same priority will be given to the leasehold mortgagee if the lease terminates because of default not curable by the leasehold mortgagee. No termination for non-durable default, as long as no default in rent exists. The lease provides for the leasehold mortgagee’s right to acquire the lease in their own name, or in the name of a nominee, upon foreclosure or assignment in lieu of foreclosure. NOTE: The borrower must not be in default under any other provision of the lease nor may such a default have been claimed by the lessor. Continued on next page Conventional Lending Guide 100-184 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Leasehold Estates, Leasehold Appraisal Requirements Continued Appraisers must develop a thorough, clear, and detailed narrative that identifies the terms, restrictions, and conditions regarding lease agreements or ground leases: Appraisers must include this information as an addendum to the appraisal report. If applicable, Appraisers must discuss the effect the lease agreement or ground lease has on the value and marketability of the subject property. The appraiser’s sales comparison approach to value must use comparable property sales that have similar leasehold interests. When there are sufficient numbers of closed comparable property sales with similar leasehold interests available, the appraiser should: Use the property sales in the analysis of market value of the leasehold estate for the subject property, and Report the property sales in the “sales comparison analysis” grid on the applicable appraisal report form. If comparable sales with the same lease terms and restrictions are not available, appraisers may use sales of similar properties with different lease terms or, if necessary, sales of similar properties that were appraised as fee simple estates. Appraisers must explain why the use of these sales is appropriate, and make appropriate adjustments on the “sales comparison analysis” grid to reflect the market reaction to the different lease terms or property rights appraised. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-185 Conventional Lending Guide Leasehold Estates, Purchase Price Calculation Continued The table below provides the requirements for establishing the purchase price of the land: Status of Property Improvements Purchase Price of Land Already constructed at the time the lease is executed. The initial purchase price should be established as the appraised value of the land on the date the lease is executed. Already constructed at the time the lease is executed, and the lease is tied to an external index such as the Consumer Price Index (CPI). The initial land rent should be established as a percentage of the appraised value of the land on the date that the lease is executed. The purchase price may be adjusted annually during the term of the lease to reflect the percentage increase or decrease in the index from the preceding year. Leases may be offered with or without a limitation on increases or decreases in the rent payments. Option to Purchase The lease may, but is not required to, include an option for the borrower to purchase the fee interest in the land. If the option is included, the purchase must be at the borrower’s sole option, and there can be no time limit within which the option must be exercised. If the option to purchase the fee title is exercised, the mortgage must become a lien on the fee title with the same degree of priority that it had on the leasehold. Both the lease and the option to purchase must be assignable. Continued on next page Conventional Lending Guide 100-186 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Leasehold Estates, Lease Payments Sublease Continued An increase in lease or sublease payments during the term of the mortgage, is permitted if the increase is a certain amount at a specific time period, or the increase is based on an index or reappraisal, and the increase has a stated limitation. Increases must be subject to maximum limitations, and the sublease payments cannot be due less frequently than the lease payments. Any potential increase in rent payments must be taken into consideration when calculating the borrower’s housing payments and debt ratios. If the leasehold is a sublease, it must provide for sublease payments at least equal to the lease payments (or proportionate share thereof) and due no less frequently than the lease payments. The lessor may not require a credit review or impose any other qualifying criteria on transference, mortgage, or sublease. The sublease must be signed by both the fee owner and the sublessor. The sublease must contain a Non-disturbance and Attornment Agreement, by which the fee simple lienholder or the lessor agrees to accept the terms of the lease or sublease and not to interfere with the lessee’s rights to use the leasehold estate. The leasehold estate and the mortgage must not be impaired by a title merger between the lessor and lessee, or by a sublessor’s default. In the event the mortgage is secured by a sublease of a leasehold estate, the documents must provide that a default under the leasehold estate will not by such default result in the termination of the sublease. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-187 Conventional Lending Guide Insurance Hazard Insurance Overview Hazard insurance to protect the property against loss or damage from fire and other hazards if required for all property types. Acceptable Insurance Ratings Each hazard insurance underwriter must have an acceptable rating as indicated below. Lloyd’s of London Insurance Group and various states’ Fair Access to Insurance Requirement Plans (FAIR Plans) are acceptable insurers, although they are not rated. NOTE: The information provided in this guide is subject to state law requirements. Rating Agent A.M. Best Co. (www.ambest.com) Demotech, Inc. (www.demotech.com) Rating B/III, A/III or better rating by A.M. Best Company, Inc. An “A” or better rating in Demotech’s P&C financial stability ratings. Standard & Poor’s, Inc. (www.standardandpoors.com) Evidence of Insurance A minimum rating of “BBB” as reported in Insurer Solvency Review – Property/Casualty Edition Evidence of insurance in the form of a Declarations page, Certificate of Insurance, Evidence of Insurance or Binder is acceptable as long as all of the following information is clearly stated: Underwriting company’s name Agent’s information (name, address & phone number) Signature of agent (if applicable) Loan number Mortgagor’s name(s) Property address Mailing address (if applicable) Amount of coverage Dates of coverage Deductible amount Premium amount with paid receipt or invoice Mortgagee Clause Continued on next page Conventional Lending Guide 100-188 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Insurance, Insurance Coverage Terms Continued Binders must be effective for at least 60 days and reference the annual renewal dates of the pending policy. Binders with an inception date and expiration date are acceptable as long as the actual policy effective dates are also provided. An Application for coverage is not acceptable unless the application explicitly states that coverage is bound under the terms of the policy if signed by the insurance agent and must meet all requirements listed above. NOTE: Non-critical Insurance Agent information – such as agent address, phone or fax number, may be handwritten onto the typed binder. The following information must be provided on the evidence of insurance: All borrower names that appear on the security instrument must appear as insured on policy. Complete and accurate property address: Property address (to include street address, unit number –if applicable, city, state, and zip code) must be consistent with file. NOTE: If file indicates a different mailing address (i.e. P.O. Box, RR Box #), both addresses should appear on the binder/policy. Policy number or binder number present (not applicable if application received). Agent’s name, address and phone number. Loan number Length of Coverage: The effective dates (beginning and expiration date) of the policy coverage must be clearly stated. Purchases: Must extend a minimum of 12 months from date of funding. Refinance: Existing coverage must extend a minimum of 60 days beyond the date of funding. Sufficient impounds must be collected to renew the coverage on the due date (if applicable). If the policy expires within 60 days of the date of funding, evidence of renewal for one year must be provided OR must be paid at closing and appear on HUD-1. Annual premium amount. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-189 Conventional Lending Guide Insurance, Continued Insurance Coverage Terms (Cont’d) Deductible amount must not exceed 5% of the policy amount (subject to applicable state law restrictions). Coverage Requirements: Subject to applicable state law requirements the amount of dwelling coverage must equal: Examples of Insurable Value 100% of the insurable value, which is the replacement value. (as established by the property insurer) or the unpaid principal balance of the mortgage as long as it equals the minimum amount (80% of the insurable value of the improvements) required to compensate for damage or loss on a replacement cost basis. If the amount of coverage is not sufficient, you must either increase the dwelling coverage or obtain one of the endorsements below: Guaranteed Replacement Cost endorsement OR Replacement Cost endorsement with a percentage exceeding 100% of the coverage amount NOTE: If the endorsement option is utilized, the insurance must reflect evidence of the additional endorsements. If the Replacement Cost is utilized, the evidence of insurance must indicate the percentage. Evidence of Payment Insurance Exclusions Declarations page or binder with a paid receipt with policy number. Declarations page or binder reflecting premium amount and the statement “Paid in Full” Declarations page or binder agent along with invoice for premium to be collected at closing and listed as paid on the final HUD-1 Statement. Coverage must not exclude or limit windstorm, hurricane, hail or other damages that are included in the standard extended coverage. If the policy contains such exclusions or limitations, a supplemental policy or endorsement must be provided. Continued on next page Conventional Lending Guide 100-190 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Insurance, Flood Insurance Continued If a loan is in an identified Special Flood Hazard Area (SFHA), Homeward requires flood insurance. If a property is located in a community that does not participate in the National Flood Insurance Program (NFIP), Homeward will not purchase the loan. Flood insurance is required if any part of the principal structure is located within an SFHA. If a non-residential detached structure attached to the land on a property securing the mortgage loan has any part located in a SFHA, then flood insurance is not required on the non-residential detached structure. If a residential detached structure on a property securing the mortgage loan has any part located in a SFHA, then flood insurance is required on the residential detached structure. Flood insurance policies should be in the form of a standard policy issued under the NFIP or by a private insurer. The terms and conditions of the flood insurance coverage must be at least equivalent to the terms and conditions of coverage provided under the standard policy of the NFIP for the appropriate property type. The Declaration page of the policy is acceptable evidence of coverage. The minimum amount of flood insurance for 1-4 unit properties, individual PUD units and certain condo units (Detached Condos) is the lower of: 100% of the replacement cost of the insurable value of the improvements; The maximum insurance available from the NFIP, which is currently $250,000 per dwelling; or The unpaid principal balance of the mortgage If a PUD Project maintains a Master Policy, the amount of flood insurance coverage for a PUD project should be at least equal to the lessor of 100% of the replacement cost of the facilities or the maximum coverage available under the NFIP. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-191 Conventional Lending Guide Attached Condo Projects Stand-alone flood insurance dwelling policies for an attached individual condo unit are not acceptable. A master condo flood insurance policy must be maintained by the homeowners’ association, subject to the coverage requirements below. The homeowners’ association must obtain a Residential Condominium Building Association Policy or equivalent private flood insurance coverage for each building that is located in an SFHA. The policy must cover all of the common elements and property (including machinery and equipment that are part of the building), as well as each of the individual units in the building. There must be a master flood insurance policy in effect that is at least equal to or lower of: 80% of the replacement cost, or The maximum insurance available from the National Flood Insurance Program (NFIP) per unit (which is currently $250,000). NOTE: If the condo project master policy meets the minimum coverage requirements above but does not meet the 1 – 4 unit coverage requirements described above, a supplemental policy may be maintained by the unit owner for the difference. The contents coverage should equal 100% of the insurable value of all contents (including machinery and equipment that are not part of the building), owned in common by association members. If the condo project has no master flood insurance policy or if the master flood insurance policy does not meet the requirements above, mortgages securing units in that project are not eligible for delivery to Homeward. Continued on next page Conventional Lending Guide 100-192 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Insurance, Acceptable Flood Coverage Continued Acceptable flood coverage for 1-4 unit properties; subject to applicable state law requirements, the amount of flood insurance coverage must be the lowest of the following: 100% of the replacement cost of the dwelling. NOTE: To validate this amount, review the Total Estimated Cost New on appraisal. If not available – subtract the site value from the appraised value; Evidence of Payment Optional Insurance Coverage Loan Amount or sum of combined liens (unpaid principal balance) regardless of lien holder – which must be equal to a minimum of 80% of the insurable value; OR Maximum amount of NFIP flood insurance coverage available – currently $250,000 Declarations page or binder and paid receipt with policy number. Declarations page or binder reflecting premium amount and the statement “Paid in Full” Declarations page or binder along with invoice for premium to be collected at closing and listed as paid on the final HUD-1 Statement. At the borrowers requests optional insurance coverage, such as Earthquake coverage, may be included in the impound account whether or not the account is a requirement of the loan. However, Homeward Residential will not set up an impound account for personal property, auto or any other type of insurance polices not directly associated with insuring the structure of the home. If the borrower chooses to waive the impound account, in accordance with the terms of the loan, all impound items must be waived. There may be additional fees for waiving the impound account. Refer to your local representation for full details. If an impound account is required as part of the loan, the borrower must impound for all impound items with the exception to the above optional insurance items. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-193 Conventional Lending Guide Condo and PUD Projects Project Documentation The documentation needed to complete a project review may differ depending on the project and review type. Clients are responsible for determining the documentation needed to ensure that the project meets all of Homeward’s eligibility requirements. Project documentation may include, but is not limited to, the following: Legal and recorded documents including the covenants, conditions and restrictions, declaration of condominium, or other similar documents that establish the legal structure of the project; Project budgets, financial statements, and reserve studies; Homeowners’ association (HOA) certification; Project construction plans; Architects’ or engineers’ reports; Completion reports; Project marketing plans; Environmental hazard reports; Attorney opinions; Appraisal reports; and Evidence of insurance policies and related documentation. Sources for project information include, but are not limited to, appraisers, HOA’s, management companies, real estate brokers, insurance professionals, and project developers. Clients are responsible for the accuracy of any information obtained from these sources. Continued on next page Conventional Lending Guide 100-194 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Project Documentation (Cont’d) The characteristics that define each project type are described in the following table. Project Type Established condo project Identification Criteria A project for which all of the following are true: At least 90% of the total units in the project have been conveyed to the unit purchasers; The project is 100% complete, including all units and common elements; The project is not subject to additional phasing or annexation; and Control of the HOA has been turned over to the unit owners. A project for which one or more of the following is true: Fewer than 90% of the total units in the project have been conveyed to the unit purchasers; The project is not fully completed, such as proposed construction, new construction, or the proposed or incomplete conversion of an existing building to a condo; The project is newly converted; or The project is subject to additional phasing or annexation. Two- to four-unit condo project Manufactured home project Planned unit development (PUD) project A project comprised of two, three, or four residential units in which each unit is evidenced by its own title and deed. A two- to four-unit condo project may be either a new or an established project and may be comprised of attached and/or detached units. A project consisting partially or solely of manufactured homes. Detached condominium project cannot include Manufactured homes (LP Scored Loans) A project or subdivision that consists of common property and improvements that are owned and maintained by an HOA for the benefit and use of the individual PUD unit owners. See Eligibility Requirements for Units in PUD Projects, for additional detail used in determining whether a project is subject to Fannie Mae’s PUD eligibility requirements. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-195 Conventional Lending Guide Condo and PUD Projects, Project Review Methods Continued Homeward securitizes mortgage loans secured by units in condo and PUD projects that meet Fannie Mae's or Freddie Mac’s eligibility requirements. To determine whether the project meets these requirements, a number of project review methods are available. Whether a project review method is allowable or required depends on: The The The The unit type (attached or detached); project type (Condo or PUD); project status (new or established); and mortgage transaction. The characteristics that dictate which method to use are shown in the following table: Unit and Project Type Project Review Methods Attached condo unit in a new or newly converted project, including an attached unit in a condo project that includes a mixture of attached and detached units Attached condo unit in an established project, including an attached unit in a condo project that includes a mixture of attached and detached units Full Review (completed with or without using Condo Project Manager™ (CPM™)), or Fannie Mae Review through the Project Eligibility Review Service (PERS) Limited/Streamline Review only for a unit that is a: - Principal residence with an LTV ratio < 80% not located in Florida. - Second home with an LTV ratio < 75%. Detached condo unit in a new or established project, including a detached unit in a condo project that includes a mixture of attached and detached units Conventional Lending Guide 100-196 Full Review (with or without CPM). Limited/Streamline Review NOTE: There are no LTV ratio or occupancy restrictions for Limited Review eligibility for detached condo units unless specified. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Attached or detached unit in a new or established two- to four-unit condo project Based on the mortgage transaction and project characteristics, two- to four-unit condo projects may be reviewed using either Limited Review/Streamline, or Full Review (with or without CPM). Condo project that contains manufactured homes PUD project that contains singlewide manufactured homes Newly-converted non-gut rehabilitation project (projects with attached units only) that certain more than four residential units New or newly converted condo project consisting of attached units located in Florida Fannie Mae Review through PERS FHA Project approval Unit in a condo project approved by the FHA and that secures an FHA mortgage A mortgage secured by a unit in a project that fails to meet any of the following requirements is not eligible for delivery to Homeward: Requirements specific to the project review method used to determine that project’s eligibility, Appraisal requirements (described in Condo Appraisal Requirements), or insurance requirements insurance requirements (described in Insurance, including all provisions applicable) Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-197 Conventional Lending Guide Condo and PUD Projects, Ineligible Projects Continued A mortgage secured by a unit in a project that fails to meet any of the following requirements is not eligible for delivery to Homeward Requirements specific to the project review method used to determine that project’s eligibility, Appraisal requirements (described in Condo Appraisal Requirements), or insurance requirements Continued on next page Conventional Lending Guide 100-198 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, Ineligible Projects (Cont’d) Continued Homeward will not securitize mortgage loans that are secured by units in certain condo or PUD projects if those projects have characteristics that make the project ineligible. Such characteristics are described in the table below, with additional details provided in the sections that follow. All eligible projects must be created and remain in full compliance with state law and all other applicable laws and regulations of the jurisdiction in which the project is located. NOTE: If a lender determines that a project does not meet all of Fannie Mae’s project eligibility requirements but believes that the project has merit and warrants additional consideration, the lender may request an exception (see Projects with Special Considerations and Project Eligibility Waivers, for additional information). Applicable Project Type Ineligible Project Characteristics Condo Attached Units in PUD Investment securities (i.e., projects that have documents on file with the Securities and Exchange Commission (SEC) or projects where unit ownership is characterized or promoted as an investment opportunity). ✓ ✓ Timeshare, fractional or segmented ownership projects. ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ New projects where the seller is offering sale or financing structures in excess of Fannie Mae’s eligibility policies for individual mortgage loans. These excessive structures include, but are not limited to, builder/developer contributions, sales concessions, HOA assessments, or principal and interest payment abatements, and/or contributions not disclosed on the HUD-1 Settlement Statement. Projects with mandatory upfront or periodic membership fees for the use of recreational amenities, such as country club facilities and golf courses, owned by an outside party (including the developer or builder). Membership fees paid for the use of recreational amenities owned exclusively by the HOA or master association are acceptable (For DU Loans) Projects that are managed and operated as a hotel or motel, even though the units are individually owned. (See section below for Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-199 Conventional Lending Guide additional detail.) Projects with covenants, conditions, and restrictions that split ownership of the property or curtail an individual borrower’s ability to utilize the property. (See section below for additional detail.) ✓ ✓ Projects with property that is not real estate, such as houseboat projects. (See section below for additional detail.) ✓ ✓ Any project that is owned or operated as a continuing care facility. (See section below for additional detail.) ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Projects with non-incidental business operations owned or operated by the HOA including, but not limited to, a restaurant, spa, or health club. (See section below for additional detail and exceptions to this policy.) Projects that do not meet the requirements for live-work projects. (See section below for additional detail.) Projects in which the HOA is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project. (See section below for additional detail.) Any project that permits a priority lien for unpaid common expenses in excess of Agency’s priority lien limitations. (See section below for additional detail.) NOTE: This restriction applies to all PUD projects, whether the units are attached or detached. Projects in which a single entity (the same individual, investor group, partnership, or corporation) owns more than the following total number of units in the project: Projects with 2 to 4 units – 1 unit Projects with 5 to 20 units – 2 units Projects with 21 or more units – 10% ✓ ✓ ✓ Units currently subject to any lease arrangement must be included in the calculation. This includes lease arrangements containing provisions for the future purchase of the units such as leasepurchase and lease-to-own arrangements. Units are not included in the calculation if they are owned by the developer/sponsor and are vacant and being actively marketed for sale. Multi-dwelling unit projects that permit an owner to hold title (or stock ownership and the accompanying occupancy rights) to more Conventional Lending Guide 100-200 ✓ Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide than one dwelling unit, with ownership of all of his or her owned units (or shares) evidenced by a single deed and financed by a single mortgage (or share loan). (See section below for additional detail.) ✓ The total space that is used for nonresidential or commercial purposes may not exceed: 25% for condo projects (See section below for additional detail.) Projects containing manufactured housing that has not been approved by Fannie Mae through the PERS process, as required. ✓ Newly converted non-gut rehabilitation projects with more than four attached units that have not been approved by Fannie Mae through the PERS process, as required. ✓ New or newly converted projects in Florida with attached units that have not been approved by Fannie Mae through the PERS process, as required. Projects that represent a legal, but non-conforming, use of the land, if zoning regulations prohibit rebuilding the improvements to current density in the event of their partial or full destruction. (See Site Section of the Appraisal Report.) ✓ ✓ ✓ Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-201 Conventional Lending Guide Condo and PUD Projects, Projects that Operate as Hotels or Motels Continued Projects with one or more of the following characteristics may be operating as a hotel or motel and are therefore ineligible: Hotel or motel conversions (or conversions of other similar transient properties), unless the project is an established project, meets all requirements for gut rehabilitation projects, and all units are residential dwelling units; Projects that include registration services and offer rentals of units on a daily basis; Projects that restrict the owner’s ability to occupy the unit; and Projects with mandatory rental pooling agreements that require unit owners to either rent their units or give a management firm control over the occupancy of the units. o These formal agreements between the developer, homeowners’ association, and/or the individual unit owners, obligate the unit owner to rent the property on a seasonal, monthly, weekly, or daily basis. In many cases, the agreements include blackout dates, continuous occupancy limitations, and other such use restrictions. In return, the unit owner receives a share of the revenue generated from the rental of the unit. Continued on next page Conventional Lending Guide 100-202 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Projects Subject to Split Ownership Arrangements Projects with covenants, conditions, and restrictions that split ownership of the property or curtail an individual borrower’s ability to utilize the property are not eligible for delivery to Homeward. These types of properties include, but are not limited to, the following: “Common interest” apartments or community apartment projects that are projects or buildings owned by several owners as tenantsin-common or by an association in which individuals have an undivided interest in a residential apartment building and land, and have the right of exclusive occupancy of a specific apartment in the building; Projects that restrict the owner’s ability to occupy the unit, even if the project is not being operated as a motel or hotel; and Projects with mandatory rental pooling agreements that require unit owners to either rent their units or give a management firm control over the occupancy of the units. o These are formal agreements between the developer, association, and/or the individual unit owners that obligate the unit owner to rent the property on a seasonal, monthly, weekly, or daily basis. In many cases, the agreements include blackout dates, continuous occupancy limitations, and other such use restrictions. In return, the unit owner receives a share of the revenue generated from the rental of the unit. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-203 Conventional Lending Guide Condo and PUD Projects, Projects that Contain MultiDwelling Unit Condos Continued Projects that contain multi-dwelling units are not permitted. These projects allow an owner to hold title (or share ownership and the accompanying occupancy rights) to a single legal unit that is sub-divided into multiple residential dwellings within the single legal unit, with ownership of the unit (or shares) evidenced by a single deed and financed by a single mortgage (or share loan). The sub-divided units are not separate legal units. This restriction applies regardless if the unit owner maintains one or more of the sub-divided units as rental units or uses one or more of the sub-divided units as accessory or lock-out units. This provision does not apply to condo projects that allow an individual to buy two or more individual legal units with the intent of structurally and legally combining the units for occupancy as a single-unit dwelling. Mortgages secured by units in these types of projects are eligible for purchase by Homeward provided all of the following requirements are met: The unit securing the mortgage represents a single legal unit under a single deed. Any construction or renovation to structurally combine units has no material impact on the structural or mechanical integrity of the project’s buildings or the subject property unit. The individual units must be fully described in the legal description in the mortgage and under a single deed. The project’s legal documents must have been amended to reclassify the combined units as a single unit in the project. All structural renovation to physically combine the units must be completed. A condo unit with an accessory unit may be eligible on a caseby-case basis with a Fannie Mae PERS Project Approval or a loan-level Project Eligibility Waiver. See Projects with Special Considerations and Project Eligibility Waivers, for additional information on submitting an exception request. Continued on next page Conventional Lending Guide 100-204 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, Projects with Property that is not Real Estate Continued Homeward acquires mortgage loans secured by real estate. Houseboats, boat slips, cabanas, timeshares, and other forms of property that are not real estate are not eligible to Homeward. The marketability and value of individual units in a project may be adversely impacted by the inclusion of non-real estate property such as houseboats, timeshares, and other forms and structures that are not real estate. As such, projects containing these other non-real estate forms of property are not eligible. Boat slips, cabanas, and other amenities are permitted when owned in common by the unit owners as part of the HOA. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-205 Conventional Lending Guide Condo and PUD Projects, Projects that Operate as a Continuing Care Community or Facility Continued Mortgages secured by units in a project that operates, either wholly or partially, as a continuing care community are ineligible to Homeward. These communities or facilities are residential projects designed to meet specialized health and housing needs and typically require residents to enter into a lifetime contract with the facility to meet all future health, housing, or care needs. These communities may also be known by other names such as life-care facilities. Projects that make continuing care services available to residents are eligible only if the continuing care facilities or services are not owned or operated by the HOA and residential unit owners are not obligated to purchase or utilize the services through a mandatory membership, contract, or other arrangement. Continuing care communities are not the same as age-restricted projects. Age-restricted projects that restrict the age of residents but do not require residents to enter into a long-term or lifetime contract for healthcare and housing as the resident’s age are eligible. Continued on next page Conventional Lending Guide 100-206 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, NonIncidental Business Arrangements Continued A project is ineligible if the HOA is receiving more than 10% of its budgeted income from non-incidental business arrangements related to the active ownership and/or operation of amenities or services available to unit owners and the general public. This includes, but is not limited to, businesses such as a restaurant or other food- and beverage-related services, health clubs, and spa services. Non-incidental income from the following sources is permitted provided the income does not exceed 15% of the project’s budgeted income: Income from the use of recreational amenities or services owned by the HOA for the exclusive use by unit owners in the project or leased to another project according to a shared amenities agreement (as noted below); Income from agreements between the HOA and telephone, cable, and Internet companies for the purpose of providing communication or media services (for example, income related to a cell tower located on the roof of the project); or Income from the leasing of units in the project acquired by the HOA through foreclosure. NOTE: The single-entity ownership limits (described in the Ineligible Project Characteristics table above) will apply to the number of units owned and rented by the HOA. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-207 Conventional Lending Guide Condo and PUD Projects, Commercial Space and Mixed-Use Allocation Continued Scored loans require that no more than 25% of a condo project or 25% of the building in which the condo project is located be commercial space or allocated to mixed-use. This includes commercial space that is above and below grade. Any commercial space in the project or in the building in which the residential project is located must be compatible with the overall residential nature of the project. NOTE: Rental apartments and hotels located within the project must be classified as commercial space even though these may be considered “residential” in nature. Calculation of Commercial Space. Commercial space allocation is calculated by dividing the total non-residential square footage by the total square footage of the project or building. Lenders are responsible for determining the total square footage of the project, the square footage of the non-residential space, and the residential space square footage. This calculation includes the total square footage of commercial space even if the residential and commercial owners are represented by separate associations. Non-residential square footage includes: Retail and commercial space, Parking space that is separate from parking allocated to residential unit owners, and Space that is non-residential in nature and owned by a private individual or entity outside of the HOA structure. Examples include, but are not limited to: Public parking facilities (fee-based or free), Rental apartments, Hotels, Restaurants, and Private membership-based fitness facilities. Non-residential square footage excludes amenities that are: Residential in nature; Designated for the exclusive use of the residential unit owners (such as, but not limited to, a fitness facility, pool, community room, and laundry facility); and Owned by the unit owners or the HOA. Continued on next page Conventional Lending Guide 100-208 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide The following table shows which commercial or mixed-use space must be included in the calculation of the percentage of commercial space. If the commercial or mixed-use space is: Then its square footage is included in the calculation of commercial space percentage Owned, controlled, or operated by the subject property’s HOA that is unrelated to the project-specific amenities offered for the exclusive use and enjoyment by the HOA members Yes Owned by the subject property’s HOA but controlled or operated by a separate private entity Example: Office space owned by the HOA but leased to a private business. Yes Owned and controlled by a project HOA other than the subject property’s HOA that shares the same master HOA with the subject property’s HOA AND the commercial space is co-located in the project’s building(s) that contain(s) the residential units Yes Owned, controlled, or operated by a private entity that is co-located in the building(s) that contain(s) the project’s residential units Example: Floors 1 to 4 consist of hotel and retail, Floors 5 to 7 consist of privately-owned and managed rental apartments, and The remaining floors consist of the condo project units. Yes Owned, controlled, or operated by a private entity that is NOT co-located in the building(s) or common elements as declared in the project legal documents that contain(s) the project’s residential units No Owned and controlled by a project HOA other than the subject property’s HOA that shares the same master HOA with the subject property’s HOA BUT the commercial space is located in a building that is separate from the building(s) containing the project’s residential units No Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-209 Conventional Lending Guide Condo and PUD Projects, Live-Work Projects Continued Live-work projects are projects that permit individual residential unit owners to operate and run a small business from their residential unit. Units in projects that permit live-work arrangements are eligible for sale to Homeward provided the following additional requirements are met: The loan is evaluated via Fannie Mae’s DU. The overall character of the project is residential. Live-work units must be limited to residential units that are occupied as primary residences in which the unit owner is the owner and operator of the small business. The live-work unit must be primarily residential in character with minimal space designated to or modifications made to accommodate the unit owner’s commercial activity. The commercial use must be consistent with the residential nature of the project. The project documents must permit commercial use and state what types of commercial use are acceptable. The project must conform to any applicable local ordinances governing the structure and operation of live-work projects including limitations on the number of live-work units or the percentage of live-work unit space permitted. The lender must confirm that the live-work component of the project is considered and adequately addressed in the appraiser’s assessment of the property. All of the following requirements must be met: The appraisal must include an adequate description of the live-work characteristics of the project and the unit. The market value of the unit is primarily a function of its residential characteristics, rather than of the business use or any special business-use modifications that were made. The future marketability of the unit will not be negatively impacted by the business use or any special business-use modifications that have been made. Continued on next page Conventional Lending Guide 100-210 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, Litigation Continued Projects in which the HOA is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project are ineligible for sale to Homeward. If the lender determines that pending litigation involves minor matters with no impact on the safety, structural soundness, habitability, or functional use of the project, the project is eligible provided the litigation is limited to one of the following categories: Non-monetary litigation involving neighbor disputes or rights of quiet enjoyment; Litigation for which the claimed amount is known, the insurance carrier has agreed to provide the defense, and the amount is covered by the HOA's or The HOA is named as the plaintiff in a foreclosure action, or as a plaintiff in an action for past due HOA assessments. The lender must obtain documentation to support its analysis that the litigation meets the criteria for minor litigation as described above. If the lender is aware of pending litigation and is unable to determine whether the litigation may be deemed a minor matter, the lender may contact Fannie Mae's Project Standards team to determine whether Fannie Mae will accept delivery of mortgages secured by units in the project. Priority of Common Expense Assessments For DU run loans, Fannie Mae allows a limited amount of regular common expense assessments (typically known as HOA fees) to have priority over Fannie Mae's mortgage lien for mortgage loans secured by units in a condo or PUD project. This applies if the condo or PUD project is located in a jurisdiction that has enacted The Uniform Condominium Act, The Uniform Common Interest Ownership Act, or A similar statute that provides for unpaid assessments to have priority over first mortgage liens. The table below describes the permitted priority of common expense assessments for purposes of determining the eligibility of a mortgage loan secured by a unit in a condo or PUD project for purchase by Fannie Mae Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-211 Conventional Lending Guide Condo and PUD Projects, If the Condo or PUD Project: Continued Then: Is located in a jurisdiction that enacted a law on or before January 14, 2014, that provides that regular common expense assessments will have priority over Fannie Mae's mortgage lien for a maximum amount greater than six months The maximum number of months of regular common expense assessments permitted under the applicable jurisdiction’s law as of January 14, 2014, may have priority over Fannie Mae’s mortgage lien, provided that if the applicable jurisdiction’s law as of that date referenced an exception for Fannie Mae’s requirements, then no more than six months of regular common expense assessments may have priority over Fannie Mae’s mortgage lien. Is located in any other jurisdiction No more than six months of regular common expense assessments may have priority over Fannie Mae’s mortgage lien, even if applicable law provides for a longer priority period. Continued on next page Conventional Lending Guide 100-212 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, Continued Notwithstanding any provisions to the contrary in the Guide, which does not require the client to represent or warrant compliance with Agency project legal document requirements, the condo or PUD project legal documents must evidence compliance with the above priority of common expense assessment requirements. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-213 Conventional Lending Guide Condo and PUD Projects, Required Property Insurance Coverage for Condo or PUD Projects Continued This section covers property insurance requirements for insurance policies covering the common elements of condo and PUD projects—the project’s blanket or master policy. Acceptable policies must provide coverage for either an individual project or multiple affiliated projects. The insurance policy must at a minimum protect against fire and all other hazards that are normally covered by the standard extended coverage endorsement, and all other perils customarily covered for similar types of projects, including those covered by the standard “all risk” or “special form” endorsement. If the policy does not include an “all risk” or “special form” endorsement, Fannie Mae will accept a policy that includes the “broad form” covered causes of loss. The applicable requirements are: PUD Requirements — the HOA must maintain a property insurance policy, with premiums being paid as a common expense. The policy must cover all of the common elements except for those that are normally excluded from coverage, such as land, foundation, and excavations. Fixtures and building service equipment that are considered part of the common elements, as well as common personal property and supplies, should be covered. o Individual insurance policies are also required for each unit mortgage that Ocwen purchases in a PUD project. If the project’s legal documents allow for blanket insurance policies to cover both the individual units and the common elements, Fannie Mae will accept the blanket policies in satisfaction of its insurance requirements for the units. Condo Requirements — the lender must review the entire condo project insurance policy to ensure the HOA maintains a master or blanket type of insurance policy, with premiums being paid as a common expense. The insurance requirements vary based on the type of HOA master or blanket insurance policy as follows: o “Single Entity” policy: The policy must cover all of the general and limited common elements that are normally included in coverage. These include fixtures, building service equipment, and common personal property and supplies belonging to the HOA. The policy also must cover fixtures, equipment, and replacement of improvements and betterments that have been made inside the individual unit being financed. The amount of coverage must be sufficient to restore the condo unit to its condition prior to a loss claim event. If the unit interior improvements are not included under the terms of this policy type, the borrower is required to have an HO-6 policy with coverage, as determined by the insurer, which is sufficient to repair the condo unit to its condition prior to a loss claim event. Continued on next page Conventional Lending Guide 100-214 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, Required Property Insurance Coverage for Condo or PUD Projects (Cont’d) Continued o “All-In” (sometimes known as an “all-inclusive”) policy: The policy must cover all of the general and limited common elements that are normally included in coverage. These include fixtures, building service equipment, and common personal property and supplies belonging to the HOA. The policy also must cover fixtures, equipment, and replacement of improvements and betterments that have been made inside the individual unit being financed. If the unit interior improvements are not included under the terms of this policy type, the borrower is required to have an HO-6 policy with coverage, as determined by the insurer, which is sufficient to repair the condo unit to its condition prior to a loss claim event. o “Bare Walls” policy: This policy typically provides no coverage for the unit interior, which includes fixtures, equipment, and replacement of interior improvements and betterments. As a result, the borrower must obtain an individual HO-6 policy that provides coverage sufficient to repair the condo unit to its condition prior to a loss claim event, as determined by the insurer. NOTE: If escrows are collected, full or partial; HO-6 must be escrowed also. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-215 Conventional Lending Guide Amount of Coverage Insurance must cover 100% of the insurable replacement cost of the project improvements, including the individual units in the project. An insurance policy that includes any of the following coverage, either in the policy language or in a specific endorsement to the policy, is acceptable: Guaranteed Replacement Cost–the insurer agrees to replace the insurable property regardless of the cost, Extended Replacement Cost–the insurer agrees to pay more than the property’s insurable replacement cost, or Replacement Cost–the insurer agrees to pay up to 100% of the property’s insurable replacement cost. Policies with Coinsurance Policies with coinsurance provisions can create additional risk for an HOA in the event of a loss if the amount of insurance coverage is less than the full insurable value. Master property policies that provide coverage at 100% of the insurable replacement cost of the project improvements, including the individual units, alleviate the risk of a coinsurance penalty being applied in the event of a loss. If the policy has a coinsurance clause, inclusion of an Agreed Amount Endorsement or selection of the Agreed Value Option (which waives the requirement for coinsurance) is considered acceptable evidence that the 100% insurable replacement cost requirement has been met. If an Agreed Amount/Agreed Value provision is used, the Agreed Amount must be no less than the estimated replacement cost. If the policy includes a coinsurance clause, but the coinsurance provision is not waived, the policy is still eligible if evidence acceptable to the lender confirms that the amount of coverage is at least equal to 100% of the insurable replacement cost of the project improvements. This evidence (documentation) must be maintained by the lender. Continued on next page Conventional Lending Guide 100-216 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Maximum Deductible Amounts For policies covering the common elements in a PUD project and for policies covering condo or co-op projects, the maximum deductible amount must be no greater than 5% of the face amount of the policy. For losses related to individual units in a co-op project or for individual PUD units that are covered by the blanket policy for the project, the maximum deductible amount related to the individual unit should be no greater than 5% of the replacement cost of the unit. If, however, the policy provides for a wind-loss deductible (either in the policy itself or in a separate endorsement), that deductible must be no greater than 5% of the face amount of the policy. For blanket insurance policies that cover both the individual units and the common elements, the maximum deductible amount related to the individual unit should be no greater than 5% of the replacement cost of the unit. Special Endorsements The requirements for endorsements for condo and PUD projects are as follows: Inflation Guard Endorsement, when it can be obtained; Building Ordinance or Law Endorsement, if the enforcement of any building, zoning, or land-use law would result in loss or damage, increased cost of repairs or reconstruction, or additional demolition and removal costs to rebuild after a covered loss event occurs. The endorsement must provide for contingent liability from the operation of building laws, demolition costs, and increased costs of reconstruction. The endorsement is not required if it is not applicable or the coverage is not obtainable in the insurance market available to the association; and Boiler and Machinery/Equipment Breakdown Endorsement, if the project has central heating or cooling. This endorsement should provide for the insurer’s minimum liability per accident to at least equal the lesser of $2 million or the insurable value of the building(s) housing the boiler or machinery. In lieu of obtaining this as an endorsement to the commercial package policy, the project may purchase separate standalone boiler and machinery coverage. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-217 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Special Requirements for Condo Projects Additional insurance policy requirements for condo projects are as follows: Any Insurance Trust Agreement is recognized. The right of subrogation against unit owners is waived. The insurance is not prejudiced by any acts or omissions of individual unit owners that are not under the control of HOA. The policy must be primary, even if a unit owner has other insurance that covers the same loss. Named Insured The table below provides the requirements regarding the name of the insured entity. Coverage Type Requirement for Names Insured Condo Projects The policy must show the HOA as the named insured. If the condo’s legal documents permit it, the policy can specify an authorized representative of the HOA, including its insurance trustee, as the named insured. The “loss payable” clause should show the HOA or the insurance trustee as a trustee for each unit owner and the holder of each unit’s mortgage loan PUD Common Areas The policy must show the HOA as the named insured Notices of Changes or Cancellation Project Type Condo Requirement The policy must require the insurer to notify in writing the HOA (or insurance trustee) and first mortgage loan holder named in the mortgagee clause at least 10 days before it cancels or substantially changes a condo project’s coverage. Continued on next page Conventional Lending Guide 100-218 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Fidelity / Crime Insurance Projects Requiring Fidelity/Crime Insurance Fidelity/crime insurance is required for all condo with the following exceptions that do not require fidelity/crime insurance: Condo project reviewed under the Limited Review method, Condo projects consisting of 20 units or less or, Condo project that would need fidelity/crime insurance coverage of $5,000 or less (for DU scored loans based on the calculation described in the Amount of Coverage below). Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-219 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Requirements for Who Must Be Covered The HOA must have blanket fidelity/crime insurance coverage for anyone who either handles or is responsible for funds that it holds or administers, whether or not that individual receives compensation for services, including coverage for a management agent. The insurance policy must name the HOA as the insured and the premiums should be paid as a common expense by the association. A management agent that handles funds for the HOA should additionally be covered by its own fidelity/crime insurance policy, which should provide the same coverage required of the HOA . Continued on next page Conventional Lending Guide 100-220 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Amount of Coverage The HOA policy must cover the maximum funds that are in the custody of the HOA or its management agent at any time while the policy is in force. Fidelity/Crime insurance is not required if the maximum estimated funds are less than or equal to $5,000. A lesser amount of coverage is acceptable if the project’s legal documents require, or another source acceptable to the lender verifies, that the HOA and any management company adheres to one or more of the following financial controls: Separate bank accounts are maintained for the working account and the reserve account, each with appropriate access controls, and the bank in which funds are deposited sends copies of the monthly bank statements directly to the HOA. The management company maintains separate records and bank accounts for each HOA that uses its services, and the management company does not have the authority to draw checks on, or transfer funds from, the reserve account of the HOA.. Two members of the Board of Directors must sign any checks written on the reserve account. Even then, the fidelity/crime insurance coverage must equal at least the sum of three months of assessments on all units in the project, unless this calculated amount is less than or equal to $5,000, in which case fidelity/crime insurance is not required. Cancellation / Modification Requirements The fidelity/crime insurance policy for a condo project must include a provision that calls for at least ten days’ written notice to the HOA or insurance trustee before the policy can be canceled or substantially modified for any reason. This same notice also must be given to each servicer that services Agency project. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-221 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Limited / Streamline Review Process Limited Review is for loans run via Fannie Mae’s DU, Streamline Review is for loans run via Freddie Mac’s LP Unit and Project Types Eligible for Limited / Streamline Review Lenders conduct the Limited/Streamline Review. To be eligible for a Limited/Streamline Review, the unit securing the mortgage must be located in one of the following project types and meet the other criteria described below: An attached unit in an established condo project, or A detached unit in a new or established condo project (including those projects with a mixture of attached and detached units). Eligible Transactions for Limited / Streamline Review of Attached Units in Established Condo Project An attached unit in an established condo project, including a two- to four-unit condo project, is eligible for a Limited Review if it meets the transaction requirements in the following table. Eligible Transactions For Limited Review / Streamline Attached Units in Established Condo Projects Including 2- to 4-unit Condo Projects NOT Located in Florida Occupancy Type Maximum LTV, CLTV, and HCLTV Ratios Principal Residence ≤ 80% Second Home ≤ 75% Investment Property Ineligible for Limited/Streamline Review Continued on next page Conventional Lending Guide 100-222 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Attached units in established projects located in Florida are subject to more restrictive LTV ratio requirements under the Limited Review process Eligible Transactions For Limited Review / Streamline Attached Units in Established Condo Projects Including 2- to 4-unit Condo Projects Located in Florida Occupancy Type Maximum LTV, CLTV, and HCLTV Ratios Principal Residence ≤ 75% for loans scored through DU and LP Second Home ≤ 65% Investment Property Ineligible for Limited/Streamline Review Limited / Streamline Review Eligibility Requirements In completing a Limited/Streamline Review, the client must ensure that the project and subject unit meet all of the eligibility requirements described in the following table. Limited Review / Streamline Review Eligibility Requirements The project is not an ineligible project. (See Ineligible Projects) The project does not consist of manufactured homes. NOTE: Manufactured housing projects require a Fannie Mae PERS review. If the subject unit is a detached unit, the unit securing the mortgage must be 100% complete. The appraisal of the subject unit meets all applicable appraisal requirements. The unit securing the mortgage satisfies all insurance requirements. Provided the project and loan transaction are eligible for and meet all of the eligibility requirements of the Limited Review process, the lender is not required to validate that the project also meets the eligibility requirements of another project review type. However, in the event the lender becomes aware of a circumstance that would cause the project or transaction to be ineligible under a Limited Review, the lender must use one of the other project review methods to determine project eligibility and the project must meet all of the eligibility requirements of that selected alternate project review type. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-223 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Full Review Process Overview Unit and Project Types Requiring Full Review The Full Review is required when the unit securing the mortgage is an attached unit located in one of the following project types: The Full Review process is another method for the review of new and established condo projects. Lenders performing a Full Review must ensure that the project meets all applicable eligibility requirements. An established condo project, or A new or newly converted condo project. Detached condo units located in projects containing a mixture of attached and detached units are eligible for review using the Limited Review process (see Limited/Streamline Review Process). Two- to four-unit condo projects reviewed using the Full Review process must comply with all requirements of the Full Review, unless specifically stated otherwise. Continued on next page Conventional Lending Guide 100-224 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Condo Project Manager (CPM) Lenders may use Condo Project Manager (CPM) to assist in their Full Review of a project. CPM is a web-based tool designed to help lenders determine if a project meets Fannie Mae’s eligibility requirements. When CPM is used as part of the project review, the lender must document the loan file with the CPM decision by including the unexpired CPM Certification in the file. CPM Certifications are based solely on the data that the lender enters into CPM. The lender is responsible for reviewing the applicable project documentation to obtain the information needed to complete the project review and enter the data into CPM. The lender is also responsible for ensuring that all data entered into CPM is correct and that the project meets all applicable Fannie Mae eligibility requirements. CPM is available on Fannie Mae's website. Full Review Eligibility Requirements for Attached Units in Condo Projects When determining the eligibility of a condo project on the basis of a Full Review, lenders must ensure the condo project meets the eligibility requirements described in the following table. Full Review Eligibility Requirements For Attached Units in New, Established, or Two- to Four-Unit Condo Projects The project must not be an ineligible project. (See Ineligible Projects) The project must not be a manufactured housing project. The unit securing the mortgage satisfies all insurance requirements including all provisions applicable to condo projects in Additional Project Insurance. The appraisal of the subject unit must meet all applicable appraisal requirements. No more than 15% of the total units in a project may be 60 days or more past due on their common expense assessments (also known as HOA dues). For example, a 100–unit project may not have more than 15 units that are 60 days or more past due. NOTE: Scored loans In a two- to four-unit project, no unit owners may be 60 or more days past due on their HOA common expense assessments. This ratio is calculated by dividing the number of units with common expense assessments that are past due by 60 or more days by the total number of units in the project. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-225 Conventional Lending Guide Lenders must review the HOA projected budget to determine that it Is adequate (i.e., it includes allocations for line items pertinent to the type of condo project), and Provides for the funding of replacement reserves for capital expenditures and deferred maintenance that is at least 10% of the budget. To determine whether the association has a minimum annual budgeted replacement reserve allocation of 10%, the lender must divide the annual budgeted replacement reserve allocation by the association’s annual budgeted assessment income (which includes regular common expense fees). The following types of income may be excluded from the reserve calculation: Incidental income on which the project does not rely for ongoing operations, maintenance, or capital improvements; Income collected for utilities that would typically be paid by individual unit owners, such as cable TV or Internet access; Income allocated to reserve accounts; and Special assessment income. The lender may use a reserve study in lieu of calculating the replacement reserve of 10% provided the following conditions are met: The lender obtains a copy of an acceptable reserve study and retains the study and the lender’s analysis of the study in the project approval file, The study demonstrates that the project has adequate funded reserves that provide financial protection for the project equivalent to Fannie Mae’s standard reserve requirements, The study demonstrates that the project’s funded reserves meet or exceed the recommendations included in the reserve study, and The study meets Fannie Mae’s requirements for replacement reserve studies listed at the end of this section. NOTE: These requirements for a budget review, replacement reserves, and reserve study are not applicable to two- to four-unit projects. For projects in which the units are not separately metered for utilities, the lender must Determine that having multiple units on a single meter is common and customary in the local market where the project is located, and Confirm that the project budget includes adequate funding for utility payments. NOTE: These requirements are not applicable to two- to four-unit projects The project must be located on contiguous parcels of land. It is acceptable for a project to be divided by public or private streets. The structures within the project must be within a reasonable distance from each other. Common elements and facilities, such as recreational facilities and parking, must be consistent with the nature of the project and competitive in the marketplace. Conventional Lending Guide 100-226 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Unit owners in the project must have the sole ownership interest in, and rights to the use of the project’s facilities, common elements, and limited common elements, except as noted below. Shared amenities are permitted only when two or more HOAs share amenities for the exclusive use of the unit owners. The associations must have an agreement in place governing the arrangement for shared amenities that includes the following: A description of the shared amenities subject to the arrangement; A description of the terms under which unit owners in the project may use the shared amenities; Provisions for the funding, management, and upkeep of the shared amenities; and Provisions to resolve conflicts between the associations over the amenities. Examples of shared amenities include, but are not limited to, clubhouses, recreational or fitness facilities, and swimming pools. The developer may not retain any ownership interest in any of the facilities related to the project. The amenities and facilities—including parking and recreational facilities—may not be subject to a lease between the unit owners or the HOA and another party. Parking amenities provided under commercial leases or parking permit arrangements with parties unrelated to the developer are acceptable Fannie Mae permits the financing of a single or multiple parking space(s) with the mortgage provided that the parking space(s) and residential unit are included on one deed as evidenced on the legal description in the mortgage. In such cases, the LTV, CLTV, and HCLTV ratios are based on the combined value of the residential unit and the parking space(s). Phase I and II environmental hazard assessments are not required for condo projects unless the lender identifies an environmental problem through the performance of its project underwriting or due diligence. In the event that environmental problems are identified, the problems must be acceptable, as described in Phase I Environmental Hazard Assessments For investment property transactions on attached units in established projects (including two- to four-unit projects), at least 50% of the total units in the project must be conveyed to principal residence or second home purchasers. This requirement does not apply if the subject mortgage is for a principal residence or second home. Financial institution-owned REO units that are for sale (not rented) are considered owneroccupied when calculating the 50% owner-occupancy ratio requirement. When the project does not meet the owner-occupied ratio of 50%, an investment property transaction will only be eligible if the lender submits the project to Fannie Mae For review under PERS and the project is approved (see Project Eligibility Review Service (PERS)), for additional information, or For a single-loan project eligibility waiver and the waiver is approved (see Projects with Special Considerations and Project Eligibility Waivers), for additional information. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-227 Conventional Lending Guide If the project was a gut rehabilitation project, all rehabilitation work involved in a condo conversion must have been completed in a professional manner. “Gut rehabilitation” refers to the renovation of a property down to the shell of the structure, including the replacement of all HVAC and electrical components (unless the HVAC and electrical components are up to current code). For a conversion that was legally created during the past three years, the architect’s or engineer’s report (or functional equivalent), that was originally obtained for the conversion must comment favorably on the structural integrity of the project and the condition and remaining useful life of the major project components, such as the heating and cooling systems, plumbing, electrical systems, elevators, boilers, roof, etc. NOTE: If the project is a newly converted non-gut rehabilitation project with more than four residential units, lenders must submit the project to Fannie Mae for review and approval. See Project Eligibility Review Service (PERS), for additional information. For newly converted two- to four-unit non-gut rehabilitation projects, the following requirements apply: All rehabilitation work involved in a condo conversion must have been completed in a professional manner. A current reserve study prepared by a qualified, independent professional company, accompanied by an engineer's report, or functional equivalent, must comment favorably on the structural integrity of the project and the remaining useful life of the major project components. The project budget must contain line items for the following: reserves that adequately support the costs identified in the reserve study, even if the study recommends budgeting reserves greater than 10% of the project’s income; funds to cover the total cost of any items identified in the reserve study or engineer's report that need to be replaced within 5 years from the date of the study must be deposited in the HOA's reserve account, in addition to the amount stated immediately above; and A utility contingency of at least 10% of the previous year's utility costs if the utilities are not separately metered. NOTE: Newly converted gut rehabilitation projects must follow the standard gut rehabilitation requirements listed under the eligibility requirements above. Continued on next page Conventional Lending Guide 100-228 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Replacement Reserve Studies Reserve studies may be used to determine the appropriate level of reserves the HOA must maintain to ensure the project’s long-term success. Reserve studies will also provide useful information regarding the adequacy of the HOA’s current reserve funds and offer recommendations to meet funding goals in the event the HOA has under-reserved for its needs in the past. The lender may review the most current reserve study or a reserve study update provided it has been completed within three years of the date on which the lender approves the project. Reserve studies must be prepared by an independent third party that has specific expertise in completing reserve studies. This expertise may include any of the following A reserve study professional with reserve study credentials, A construction engineer, A certified public accountant who specializes in reserve studies, or Any professional with demonstrated knowledge of and experience in completing reserve studies. While Fannie Mae does not require that a standard format be used for the reserve study, the following items must be addressed: All major components and elements of the project’s common areas for which repair, maintenance, or replacement is expected; The condition and remaining useful life of each major component; An estimate of the cost of repair, replacement, restoration, or maintenance of major components; An estimate of the total annual contributions required to defray costs (minus the existing reserves funded for this purpose), including inflation; An analysis of existing funded reserves; and A suggested reserve funding plan. NOTE: Individual states may have various statutes concerning the use and content of reserve studies. Fannie Mae requires that a reserve study used by the lender in its analysis meet or exceed requirements set forth in relevant state statutes. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-229 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Full Review: Additional Eligibility Requirements for Attached Units in New and Newly Converted Condo Projects Additional Requirements for Attached Units in New and Newly Converted Condo Projects When performing a Full Review of attached units in new or newly converted condo projects, lenders must ensure compliance with the following additional requirements. NOTE: These requirements are not applicable to attached units in new or newly converted projects in Florida, which must be reviewed by Fannie Mae through the PERS process. See Geographic-Specific Condo Project Considerations. Full Review Eligibility Requirements For Attached Units in New or Newly Converted Condo Projects The project, or the subject legal phase, must be “substantially complete” unless other completion arrangements have been approved by Fannie Mae through the PERS review process. There may not be more than one legal phase per building. “Substantially complete” means that: A certificate of occupancy or other substantially similar document has been issued by the applicable governmental agency for the project or subject phase; and All the units in the building in which the unit securing the mortgage is located are complete, subject to the installation of buyer selection items, such as appliances. NOTE: Fannie Mae does not require the installation of typical buyer selection items such as appliances, floor coverings, counter tops or light fixtures that are common and customary for the market, although buyer selections that involve the modification of a unit floor plan must be complete. Lenders are expected to obtain appropriate documentation to verify that all buyer selection items for the unit being financed are properly installed prior to closing. Two- to four-unit projects: All units, common elements, and facilities within the project must be 100% complete and not subject to additional phasing even when the project is a new or newly converted project. Conventional Lending Guide 100-230 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide At least 50% of the total units in the project or subject legal phase must have been conveyed or be under contract for sale to principal residence or second home purchasers for loans scored through DU. For a specific legal phase or phases in a new project, at least 50% of the total units in the subject legal phase(s), considered together with all prior legal phases, must have been conveyed or be under contract for sale to principal residence or second home purchasers. At least 70% of the total units in the project or subject legal phase must have been conveyed or be under contract for sale to principal residence or second home purchasers for loans scored through LP. For a specific legal phase or phases in a new project, at least 70% of the total units in the subject legal phase(s), considered together with all prior legal phases, must have been conveyed or be under contract for sale to principal residence or second home purchasers For the purposes of this review process, a project consisting of one building cannot have more than one legal phase. Two- to four-unit projects: All but one unit in the project must have been conveyed or be under contract for sale to a principal residence or second home purchaser. Individual units in new condo projects must be available for immediate occupancy at the time of loan closing. Not Applicable to Two- to Four-Unit Condo Projects If the project is part of a larger development, and the unit owners are required to pay monthly assessments of more than $50 to a separate master association for that development, lenders must review the overall development plan for the master association to evaluate the acceptability of the project. The overall development plan of the project must be reviewed and the following must be acceptable: Consistency of future and existing improvements, Time limitations for expansion, andReciprocal easements between legal phases. For projects (or the subject legal phase) that are only substantially complete rather than 100% complete, lenders must determine that acceptable completion assurance arrangements that guarantee the future completion of all project facilities, common elements, and limited common elements have been provided. These assurance arrangements may include: Cash deposits, Letters of credit, Assignments of certificates of deposit, or Assignments of other assets that can be easily converted to cash. Similar arrangements must be provided to support assurances against construction and structural defects. The assurances must protect each unit against defects that become apparent within one year from the date of its settlement, and cover all common facilities for one year from the date on which units that represent at least 60% of the votes in the HOA have been transferred. The developer or sponsor should provide for and promote the unit owners’ early participation in the management of the project. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-231 Conventional Lending Guide The project must meet the condo project legal document requirements in the following section. Condo Project Legal Document Review Requirements for Attached Units in Newly Converted Projects The table below provides Homewards requirements for the review for the review of the condo project's legal documents for attached units in new and newly converted condo projects. Condo Project Legal Document Review Requirements For Attached Units in New or Newly Converted Condo Projects Limitations on Ability to Sell / Right of First Refusal Any right of first refusal in the condo project documents will not adversely impact the rights of a mortgagee or its assignee to: Rights of Condo Mortgagees and Guarantors The project documents must give the mortgagee and guarantor of the mortgage on any unit in a condo project the right to timely written notice of: Foreclose or take title to a condo unit pursuant to the remedies in the mortgage, Accept a deed or assignment in lieu of foreclosure in the event of default by a mortgagor, or Sell or lease a unit acquired by the mortgagee or its assignee. First Mortgagee’s Rights Confirmed Conventional Lending Guide 100-232 Any condemnation or casualty loss that affects either a material portion of the project or the unit securing its mortgage; Any 60-day delinquency in the payment of assessments or charges owed by the owner of any unit on which it holds the mortgage; A lapse, cancellation, or material modification of any insurance policy maintained by the homeowners’ association; and Any proposed action that requires the consent of a specified percentage of mortgagees. No provision of the condo project documents gives a condo unit owner or any other party priority over any rights of the first mortgagee of the condo unit pursuant to its mortgage in the case of payment to the unit owner of insurance proceeds or condemnation awards for losses to or a taking of condo units and/or common elements. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Amendments to Documents Required provisions related to amendments to project documents are as follow: The project documents must provide that amendments of a material adverse nature to mortgagees be agreed to by mortgagees that represent at least 51% of the votes of unit estates that are subject to mortgages. The project documents must provide for any action to terminate the legal status of the project after substantial destruction or condemnation occurs or for other reasons to be agreed to by mortgagees that represent at least 51% of the votes of the unit estates that are subject to mortgages. The project documents may provide for implied approval to be assumed when a mortgagee fails to submit a response to any written proposal for an amendment within 60 days after it receives proper notice of the proposal, provided the notice was delivered by certified or registered mail, with a return receipt requested. Notwithstanding the foregoing, project documents that were recorded prior to August 23, 2007, may provide for implied approval to be assumed when a mortgagee fails to submit a response to any written proposal for an amendment within 30 days after it receives proper notice of the proposal, provided the notice was delivered by certified or registered mail, with a return receipt requested. Geographic – Specific Condo Project Considerations Florida – Attached Units in New and Newly Converted Condo Projects PERS is required for new and newly converted condo projects consisting of attached units located in Florida. See Project Eligibility Review Service (PERS). The following project review methods may not be used to review such projects in Florida: Limited/Streamline Review, or Full Review (with or without CPM). Florida — Project Review Maximum LTV Requirements for Attached Units in New, Newly Converted, and Established Projects The following table provides the project review requirements for loans secured by units in condo projects located in Florida. The required project review type depends on the LTV ratio of the mortgage loan. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-233 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Florida — Attached Units in New and Newly Converted Condo Projects Maximum LTV Ratios PERS Approved Principal Residence 75% Second Home 65% Investor Full Review (with or without CPM) Limited Review Not Eligible Not permitted Florida — Attached Units in Establish Condo Projects Maximum LTV Ratios PERS Approved Full Review (with or without CPM) Limited Review Principal Residence 75% 75% Second Home 65% 65% Not permitted Not Eligible Investor NOTE: Florida condominiums are not permitted for cash-out refinancing. Investment condominiums are not permitted in Florida. Continued on next page Conventional Lending Guide 100-234 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinuedContinued FHA Approved Condo Review Edibility Overview Homeward accepts FHA mortgage loans in FHA-approved condo projects that appear on the FHA-approved condo list. For conventional mortgage loans, the condo project must meet Fannie Mae's project eligibility requirements. FHA condo project approval alone is not acceptable for conventional mortgage loans. Search for FHA-approved condo projects by location, name, or project status online at HUD.gov or through CPM. Printed copies of the FHA approval documentation must be maintained in the loan file. Project Requirements Lenders must ensure that: Document Retention The FHA standard conditions have been met for presale, occupancy status, and completion; Any additional conditions noted by FHA have been met; The project is not an ineligible project as defined in Ineligible Projects; The project is covered by the required insurance Additional Project Insurance; and The project is not comprised of manufactured homes. Mortgage loans secured by condo units in an FHA-approved project, lenders must retain the documentation as set forth in Document Retention for Project Eligibility in General Information on Project Standards. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-235 Conventional Lending Guide Delivering FHA Mortgage Loans Secured by Units in FHA-Approved Condo Projects FHA mortgage loans secured by individual units in FHA-approved condo projects, the lender must report the Project Type Code U for an FHAapproved project as part of the delivery data. Continued on next page Project Eligibility Review Service (PERS) Overview The Project Eligibility Review Service (PERS) is an option available to submit new and newly converted condo projects to Fannie Mae to determine eligibility. Lenders must submit complete project packages to Fannie Mae via email to PERS Project Submission. Upon completion of its review, Fannie Mae will issue one of the following project eligibility determinations: Conditional Project Approval, Final Project Approval, Ineligible, or Suspension of the Application. Mortgages secured by units in projects must have a valid Fannie Mae Final Project Approval prior to approval. Mortgages may not be under the Conditional Project Approval, Ineligible, or Suspension of the Application designations. Required Use of PERS The following projects must be submitted to PERS to determine eligibility: Decision Expiration Dates New and newly converted condo projects consisting of attached units located in Florida; Newly converted non-gut rehabilitation attached units in condo projects that contain more than four residential units; and All attached and detached units in condo and PUD projects consisting of manufactured homes, with the exception of PUD projects that contain multi-width manufactured homes. (See Fannie Mae Additional Requirements for Review of Condo, and PUD Projects Comprised of Manufactured Homes, for additional information). Conditional Project Approval: expires 9 months from the date of issue. Final Project Approval: expires 18 months from the date of issue. Continued on next page Conventional Lending Guide 100-236 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinuedContinued Newly Converted Non-Gut Rehabilitation Condo Projects Non-gut rehabilitation refers to the renovation of a property that does not involve structural or functional changes, such as the replacement of all HVAC and electrical components. Rather, the rehabilitation might include, for example, the replacement of appliances and carpeting. Additional Requirements for Review of Condo and PUD Projects Comprised of Manufactured Homes (HARP) Submission to Fannie Mae PERS In order for Homeward to purchase a unit in a newly converted non-gut rehabilitation condo project, the lender must obtain project approval through PERS. All condo projects comprised of manufactured homes must be submitted to Fannie Mae for review and acceptance through the PERS submission process. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-237 Conventional Lending Guide Condo and PUD Projects, ContinuedContinued Continued Projects with Special Considerations and Project Eligibility Waivers Projects with Special Considerations Identify projects that merit special consideration even though the project characteristics do not meet all of the Fannie Mae eligibility requirements. In these instances, Homeward may contact the Fannie Mae Project Standards team to discuss the possibility of accepting such projects. Exceptions to Fannie Mae eligibility and underwriting requirements are considered on a project-by-project basis. Projects Eligibility Waivers If the Homeward believes that a specific eligibility requirement should be waived for a particular project with respect to a single loan, then the lender must: First enter the project into CPM before requesting a waiver through the Credit Variance Administration System (CVAS), and Request a waiver from Fannie Mae through CVAS. Fannie Mae’s Project Standards team (see Fannie Mae List of Contacts) will determine if a single loan project eligibility waiver is warranted. Fannie Mae charges a nonrefundable $200 review fee for each waiver request. A higher review fee may be charged based on the complexity of the waiver review. (Homeward will collect this fee from the broker prior to submitting the request to Fannie Mae’s CPM) NOTE: Project eligibility waivers are typically issued only for established projects, though Fannie Mae at its sole discretion reserves the right to allow this type of waiver for a unit in a new project on a case-by-case basis. New or newly converted projects must be reviewed for eligibility through an eligible lender review process or by Fannie Mae through the PERS submission process. Clients must not request a project eligibility waiver for a unit in a new project to circumvent the required review for new projects. Continued on next page Conventional Lending Guide 100-238 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinuedContinued Environmental Hazard Assessments Overview Types of Environmental Hazard Assessments The table below describes two types of environmental hazard assessments: An environmental hazard assessment is required for condo projects if an environmental problem is identified by the lender through performance of its project underwriting or due diligence. If environmental problems are identified, the problems must be determined to be acceptable. Lenders should keep a copy of this assessment in file. Type Performed by Description Phase I Assessment (see Phase I Environmental Hazard Assessments) The lender or by someone employed by the lender. Gathers information from various sources to evaluate the environmental soundness of the project. Phase II Assessment A qualified environmental consultant. When required: Phase I assessment identifies problems or Phase I assessment Inconclusive with regard to any particular hazard Acceptability of Consultants Fannie Mae reserves the right to notify lenders that a particular consultant is no longer acceptable. Fannie Mae also reserves the right to refuse to accept, at any time, any future environmental assessment, report, warranty, or certification from individual consultants, specific consulting firms, or specific branch offices of consulting firms. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-239 Conventional Lending Guide Condo and PUD Projects, ContinuedContinuedContinued Phase I Environmental Assessment A Phase I assessment enables lenders to quickly determine whether adequate information exists to evaluate the environmental status of a property. A Phase I assessment is principally a screening process that focuses on reviewing the available documentation, interviewing people who are knowledgeable about the site operations, and inspecting the site, the building, and adjoining properties. Fannie Mae does not require a specific form for a Phase I assessment. Any report that is thorough and professionally prepared will be acceptable. Phase II Environmental Assessment Description A Phase II assessment provides a more detailed review of the site. It includes specific physical sampling for each hazard that was not acceptable under the Phase I assessment, as well as a review of historical records. It determines the presence or absence of specific environmental liabilities (such as asbestos or leaking underground storage tanks) or quantifies the extent of an observed or suspected environmental liability (such as soil or groundwater contamination) Who Should Complete the Phase II Environmental Assessment The specialized nature of the investigations conducted under a Phase II assessment requires the knowledge and experience of a qualified consultant. Lenders must use care in choosing firms to perform environmental hazard assessments. Lenders should confirm that the consultant it plans to use is not affiliated with the buyer or seller of the property or a firm engaged in a business that might present a conflict of interest. Lenders should also evaluate whether the consulting firm’s personnel have adequate and appropriate education and training to carry out the required duties Phase II Environmental Assessment Report Forms and Requirements Fannie Mae does not specify an exact format for the consultant’s report. Any report that is thorough and professionally prepared will be acceptable. The table below provides the requirements for the Phase II Environmental Assessment Report: Continued on next page Conventional Lending Guide 100-240 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinuedContinued ✓ The Consultant’s Report for a Phase II Environment Assessment Report must: Include a full description of the sampling procedures. Include the laboratory results. Include the consultant’s recommendations. Follow all regulatory standards and good management practices at all times, especially when physical sampling and laboratory analysis are involved. Include a certification in the report that: The assessment was performed diligently and in accordance with all regulatory and good management standards; and To the best of the consultant’s knowledge, the results are complete and accurate. Include the signature of an officer of the consulting firm that conducted the work. Types of Testing or Sampling Under Phase II Environmental Assessments Examples of the kind of testing or sampling that occur under a Phase II assessment include but are not limited to the following: Investigating the status of any enforcement actions related to neighboring properties under the Superfund or Resource, Conservation, and Recovery Acts; Testing for underground storage leaks; Sampling and analyzing the soil; Sampling and analyzing the groundwater; Testing soil or facilities that are suspected as being contaminated by polychlorinated biphenyls; and Sampling and analyzing bulk asbestos and developing related abatement and maintenance programs, if necessary. Unacceptable Environmental Conditions Overview The existence of one or more unacceptable conditions generally will result in a project being ineligible. However, if the lender believes that the relative risk is minimal or can be managed, it may contact the Fannie Mae Project Standards team. The table below describes examples of unacceptable environmental conditions; however, this list is not exhaustive. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-241 Conventional Lending Guide Condo and PUD Projects, ContinuedContinuedContinued ✓ Examples of Unacceptable Environmental Conditions A property that is (or has been) used as a landfill or other solid, hazardous, or municipal waste disposal site. A property that is (or has been) used for activity related to the storage of oil, hazardous waste, or other toxic substances—except that the property may have been used for the storage of small quantities of hazardous substances that are generally recognized as appropriate for residential uses and maintenance of the property. A property that is the subject of outstanding environmental or public health litigation or administrative action from private parties or public officials. A high-risk neighboring property that has evidence of hazardous waste spills or soil or groundwater contamination on or around its site. A property that has documented soil or groundwater contamination and/or a documented tank leak that is leaking at more than 0.05 gallons per hour (which is the National Fire Protection Association’s standard). A property with soil sampling that has values for metal in excess of the following concentration limits in parts per million (ppm): Chromium: 100 ppm Arsenic: 20 ppm Zinc: 350 ppm Cadmium: 3 ppm Lead: 100 ppm Nickel: 100 ppm Copper: 170 ppm Selenium: 20 ppm A property that is contaminated from polychlorinated biphenyls (PCBs). A property with soil sampling that has values for other organic materials in excess of the following concentration limits in parts per million (ppm): Total volatile organics: 1 ppm Total hydrocarbons: 100 ppm Total petroleum hydrocarbons: 100 ppm A property with groundwater sampling that has values for other organic materials in excess of the following concentration limits in parts per million: Total organics (volatiles and base neutrals): 0.10 ppm Total petroleum hydrocarbons: 1.00 ppm Conventional Lending Guide 100-242 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide A property with groundwater sampling that has values for metals in excess of the following concentration limits in parts per million: Arsenic: 0.05 ppm Lead: 0.05 ppm Boron: 1.00 ppm Mercury: 0.002 ppm Cadmium: 0.01 ppm Selenium: 0.01 ppm Chromium: 0.05 ppm Silver: 0.05 ppm A property with high radon levels (e.g., above four picocuries per liter) that can be corrected only through large capital improvements or extensive ongoing maintenance programs that are beyond the financial or technical abilities of the HOA for the project. A property that has conditions representing material violations of applicable local, state, or federal environmental or public health statutes and laws. A property that is contaminated by friable asbestos-containing materials. Remedial Actions for Environmental Assessments Below Standards Properties that fail to meet a particular standard may be corrected through remedial actions and then retested. Remedial actions must be undertaken with the advice and written endorsement of a qualified environmental consultant. All remedial actions must be taken in accordance with all regulatory and good management standards. Typically, lenders must confirm the completion and effectiveness of remedial actions based on the following conditions: A qualified environmental consultant states in writing that remedial work needed to make the property eligible under the environmental standards can be completed within 90 days. The project’s developer or sponsor signs a contract with a qualified firm to perform the remedial work within 90 days. The lender must warrant that the job has been satisfactorily completed and the property meets Fannie Mae’s environmental eligibility standards. The project developer or sponsor must provide a performance escrow equal to 150% of the gross contract amount to ensure the completion of the remedial work. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-243 Conventional Lending Guide Condo and PUD Projects, ContinuedContinuedContinued Eligibility Requirements for Units in PUD Projects PUD Project Definition A PUD is a project or subdivision that consists of common property and improvements that are owned and maintained by an HOA for the benefit and use of the individual PUD units. For a project to qualify as a PUD for the purposes of this policy, all of the following requirements must be met: Each unit owner’s membership in the HOA must be automatic and nonseverable, The payment of assessments related to the unit must be mandatory, Common property and improvements must be owned and maintained by an HOA for the benefit and use of the unit owners, and The subject unit must not be part of a condo... Zoning is not a basis for classifying a project or subdivision as a PUD. Units in projects or subdivisions simply zoned as PUDs that include the following characteristics are not defined as PUD projects under Fannie Mae’s policies. These projects: Have no common property and improvements, Do not require the establishment of and membership in an HOA, and Do not require the payment of assessments. Fannie Mae classifies PUD projects as either: Type E—established PUD projects in which the developer has turned over voting control of the HOA to the unit purchasers. Type F—new PUD projects in which the developer has not turned over voting control of the HOA to the unit purchasers. PUD projects are not eligible for review using the PERS process, unless they contain single-wide manufactured housing, which does require a PERS submission. Continued on next page Conventional Lending Guide 100-244 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Condo and PUD Projects, ContinuedContinuedContinued Eligibility Requirements for Units in PUD Projects Lenders must determine that the subject unit meets the following requirements: Eligibility Requirements For Units in PUD Projects ✓ If the unit is an attached unit in a PUD project, then the project must not be in an ineligible project in accordance with the provisions applicable to attached units in PUDs in Ineligible Projects The appraisal of the unit meets all appraisal requirements. The individual unit securing the mortgage must be substantially complete. Any unfinished items must be in compliance with Agency or Homewards Postponed Improvements (see Requirements for Postponed Improvements). The unit securing the mortgage satisfies all Homewards’ insurance requirements. Insurance, including all provisions applicable to PUD projects in, Additional Project Insurance NOTE: Any unit located in a condo project within a larger PUD project or master association must meet the applicable requirements for condo projects. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-245 Conventional Lending Guide Escrow (Completion) Holdback Overview Not permitted. Conventional Lending Guide 100-246 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Natural Disasters Overview Homeward Residential continually monitors FEMA for updates in regards to federally declared disaster notifications. Once a location has been identified by FEMA, a Natural Disaster Notification (NDN) will be disseminated identifying the specific location, policies and procedures. Procedure Homeward Residential will require a re-inspection (DIR: Disaster Inspection Report) of the subject property prior to issuing closing documents. Example You will need to log into your account at http://www.homewardfunding.com and select the Tab ORDER APPRAISAL to order a re-inspection/DIR of the property. A fee is associated with the re-inspection/DIR of these properties. If you choose to charge the borrower for this fee, you will be required to complete a “Change of Circumstance Form” (located on our website under Forms) indicating the reason for the re-disclosure (Natural Disaster) and the increased fee. This completed form must be uploaded into Imageflow. Closely examine your rate lock expiration date. If a rate lock extension is needed (noting, any fee changes to the borrower will require a change of circumstance form as well), select the tab from our web site labeled “SELECT A RATE LOCK EXTENSION” and complete. All extension fees are listed on the website for your convenience. Below is an example of the declared location and effective dates that will be announced on the specific NDN. STATE Declared Areas Counties of _________________________ Effective Date Expiration/End Date 01/01/2010 01/02/2010 IMPORTANT: Appraisals performed BEFORE the Expiration/End Date will require documentation as indicated on page two (2) of this notification (referring to the NDN notification). Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-247 Conventional Lending Guide Natural Disasters, Requirements for Affected Areas Continued Underwriting/Closing Requirements: For loans secured by properties appraised and not closed/funded prior to the disaster declaration date, Homeward Residential will require the following additional documentation on all loans. REQUIREMENTS: Property appraised prior to the disaster THROUGH to FEMA’s Expiration/Safe Date: A thorough inspection/DIR (1004D permitted as well) of the property is required; it is important to note that the degree and nature of the inspection will vary depending on the nature of the disaster and property location: The original appraiser (if available) should perform the inspection to the extent he/she deems necessary so that a certification stating the below can be signed and warranted: Property is free from damage and is in the same condition as previously/originally appraised; Marketability and value remain the same. Re-inspections will always be required regardless of time frame if the appraisal was performed BEFORE the disaster date. NOTE: In order to comply with AIR regulations, the re-inspection must be ordered through Homeward Residential’s appraisal management company. Refer to the previous page for specific instructions. Reduced Appraisal Forms: Non-standard appraisals (such as PIWs) will NOT be permitted once a location has been declared by FEMA within a disaster area. A full appraisal will be required up to 90 calendar days after the Expiration/Safe Date. Borrower’s Certification and Affidavit for Weather Related Damage form In addition to the re-inspection/DIR, the borrower must sign a certification of acceptable property condition if their home is in one of the disaster areas. A copy of this form is located on Homeward Residential’s website. If the re-inspection/DIR, reports any damage or change in value to the property, then: Prior to closing, Homeward Residential will require the property to be repaired adequately and evidenced by the FNMA Form 1004D (appraisal update and/ or completion report). IMPORTANT if the property location is within a FEMA declared area AND a FLOOD ZONE: Loans in the NDN site AND in a FEMA Flood Zone will NOT be allowed to close until after the Expiration/Safe Date has been published AND the reinspection has been performed Property appraised AFTER FEMA’s Expiration/Safe Date for the disaster: For up to 90 calendar days after the Expiration/Safe Date is issued by FEMA, the appraisal must include written certification by the appraiser that “The property is free from damage and the disaster has had no affect on the subject property’s value or marketability”. Conventional Lending Guide 100-248 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Loan Purpose Overview The following guidelines should be used only to determine whether a transaction should be underwritten as a purchase or a refinance. Federal or State laws may categorize the transaction differently for disclosure purposes. Principal Reductions Lender Paid Transactions On transactions where the loan originator is paid by the lender, Homeward will permit a Principal Curtailment on rate term refinance loans unless noted below as a result of excess premium rate credit. The excess premium must be identified on the HUD-1 Settlement Statement and is limited to the amount of the excess premium rate credit below. The premium rate credit is the amount associated with the lowest pricing rate option that allows for some or all of the borrower's closing costs to be paid so the borrower does not have to pay those closing costs out of pocket. Principal curtailments are limited to the lesser of 2% or $2500. If the program permits, the borrower may also receive cash back within program guidelines in addition to the amount of the curtailment. Check your product summary for cash back eligibility criteria. Borrower Paid Transactions On transactions where the loan originator is paid by the consumer, principal curtailments are not permitted in any amount. The premium rate credit may not exceed the amount of third party costs. NOTE: After closing, borrower may enroll in weekly, bi-weekly and semimonthly principal reduction programs by visiting the servicing website at www.ocwen.mortgagebanksite.com Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-249 Conventional Lending Guide Loan Purpose, Purchase Transactions Continued A purchase transaction is one in which the proceeds are used to finance the purchase of a home. For underwriting of agency loans this also includes: A mortgage transaction in which the proceeds are used to retire an outstanding balance on an installment land contract within 12 months of the loan application, including costs incurred for rehabilitation, renovation or energy conservation improvements. A new mortgage created to pay off an interim construction loan within 180 days from completion as long as the borrower does not receive cash back at closing. If the conversion occurs more than 180 days after completion, the transaction must be treated as a refinance. The borrower may not be on title prior to the loan closing. The seller that is on title (the vested owner of record) must be the individual who executes the sales contract. Additionally, the seller must be on title prior to when the HUD1 and closing documents are executed. Seller must be the vested owner of record in all cases; exceptions are for relocation scenarios only. A fully executed and acceptable Relocation (Buyout) Agreement must be documented within the file. Credits back on purchase transactions or a HUD-1 showing cash back to the buyer is permissible if the reason for the cash back was due to one of the following: Crediting the borrower for accrued taxes that were the obligation of the seller, Crediting the borrower with rental income collected by the seller for a period after the sale, or Crediting the borrower with rental deposit funds being transferred from the seller to the borrower. Crediting the borrower for down payment funds placed into the transaction and the loan amount was more than sufficient to cover the costs. For example, the borrower deposited $10,000 for sales contract and the closing costs were only $7,000. NOTE: If the borrower receives an acceptable cash back amount, the Underwriter will confirm that the minimum borrower contribution and/or down payment have been met. Continued on next page Conventional Lending Guide 100-250 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Loan Purpose, Purchase Agreements Continued Purchase agreements renegotiated after the completion of the appraisal that increase the sales price are only acceptable under the following circumstances: The sales price adjustment is due to price overruns that impact the tangible value of the property on new construction. An updated appraisal must be obtained to verify the value of the modifications. A renegotiation of only seller paid closing costs and/or prepaids occurs where seller paid closing cost/prepaids are common and customary for the market and supported by comparables. Changes in the purchase contract resulting from renegotiating terms of sale will require additional review and consideration by the appraiser. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-251 Conventional Lending Guide Loan Purpose, Limited CashOut Refinance Continued Limited cash-out (also known as rate term) refinance transaction enables a borrower to pay off his or her existing mortgage by obtaining a new first mortgage that is secured by the same property. A loan classified as a Limited Cash-out Refinance is described as a loan where the proceeds of the new transaction are being used to pay off the outstanding first lien (including HELOC’s), customary costs associated with the new transaction, including prepayment penalties, loan costs, fees, prepaids, etc. Any draws taken on the first lien position HELOC, including those made after the initial acquisition of the property, are eligible to be included in the payoff amount of the limited cashout refinance transaction. Any secondary liens being paid off with the funds of the new transaction must have been liens that were used in whole to acquire the subject property. A limited cash-out refinance transaction may consist of the following components: The unpaid principal balance, including any associated payoff fees, of the existing first mortgage that was used in whole to acquire the subject property (purchase money only); note that HELOCs with any subsequent draws for any reason will be considered a cash-out transaction; Closing costs (including all prepaid items) and points; The payoff of the outstanding principal balance of any existing subordinate mortgage that was used in whole to acquire the subject property (purchase money only). Satisfactory documentation must be obtained and included within the loan package. Incidental cash to the borrower up to a maximum of the lesser of $2,000 or 2% of the amount of the new refinance mortgage. May be based on the current appraised value unless otherwise required by the Underwriter due to value concerns or by the MI Partner (if applicable). Non-purchase money second liens, including any associated fees to closing the account (even if currently at a zero balance), must be paid off outside of the transaction; otherwise, it will be considered a cash-out refinance. HUD-1 settlement statement(s) required from any transaction within the most recent 6 months. If previous transaction was a cash-out or if it combined a first and non-purchase money subordinate into a new first, the loan will be considered a cash-out refinance (seasoning measured from Note Date to Application Date). If the borrower has been on title less than 6 months AND purchased the property from a relative (or an individual with whom they have an established relationship), the payoff from the purchase transaction must be provided AND reflect the mortgage was current at the time the borrower purchased the property. Must continue to meet requirements within the Continuity of Obligation and Ownership. Continued on next page Conventional Lending Guide 100-252 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Loan Purpose, Buyout Refinance Continued Homeward will also treat an inheritance or divorce settlement in which one spouse is required to "buy-out" the interests of the other spouse or any other refinancing in which an owner "buys-out" the interests of another owner as a limited cash-out refinance—as long as the following conditions are satisfied: Security property must have been jointly owned and occupied as a primary residence by the borrower and the co-owner receiving the buy-out proceeds for at least 12 months before the date of the mortgage application. Seasoning and occupancy is not required for inherited property. All parties must be able to demonstrate that they occupied the security property as their principal residence, by providing an acceptable source of verification—such as a driver's license, bank statement, credit card bill, utility bill, etc. that was mailed to the individual at the address of the security property. Occupancy is not required for inherited properties. All parties must sign a written agreement that states the terms of the property transfer and the proposed disposition of the proceeds from the refinancing transaction. Borrower who acquires sole ownership of the property may not receive any of the proceeds of the refinancing. Party who is "buying out" the other party's interest must be able to qualify for the mortgage under our standard underwriting guidelines. Legal Separation or Divorce Decree. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-253 Conventional Lending Guide Loan Purpose, Cash-Out Refinance Continued The funds received by the borrower from the loan transaction can be used for any legitimate purpose. The purpose of the cash-out should be clearly stated on the loan application, and if necessary, further described in a separate document. If the purpose of the cash-out indicates potential additional debt or a change in financial condition, further clarification should be obtained. For example, if the borrower states that the cash-out is being used as a down payment for the purchase of another property, further details are required to understand additional debts that may be incurred. If the cash-out would cause any change in financial standing (i.e. funds are being used to start a new business may result in borrower leaving their current employment), it is necessary that the situation be explained and verified thoroughly to ascertain if there may be an impact to the borrower’s ability to repay the loan.. Condominiums in Florida are not permitted for cash-out refinancing. The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date (for Fannie Mae DU loans) or Note Date (for Freddie Mac LP Loans) of the new mortgage loan except for the following: There is no waiting period if it is documented that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership). The delayed financing requirements are met. See Delayed Financing Exception below. Continuity of obligation (see below) must be demonstrated unless one of the following conditions is met: the borrower was added to title 24 months or more prior to the disbursement date of the new loan, or there is no existing mortgage on the subject property as a result of the borrower(s) having purchased the subject property with cash or paid off any prior mortgage for which the borrower was an obligor. If the proceeds of the cash-out refinance are paying off a restructured loan (as defined in Restructured Loans section above) the new loan will be ineligible for sale to Homeward. If the loan being paid in full is noted as “modified” on the credit report (or information from another source is obtained indicating the loan has been modified) the Homeward must review the loan and modification details and determine if it meets the definition of a Restructured Mortgage. A copy of the modification agreement must be in the file. Continued on next page Conventional Lending Guide 100-254 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Loan Purpose, Delayed Financing Cash-Out Refinance Continued If the subject property was purchased in the last 6 months measured from the date of purchase to the disbursement date (for Fannie Mae DU loans) or NOTE date (for Freddie Mac LP Loans) of the new refinance, the loan will be eligible for a Cash-Out Refinance transaction provided the following requirements are met: The borrower(s) may have initially purchased the property as one of the following: o a natural person; o an eligible inter vivos revocable trust, when the borrower is both the individual establishing the trust and the beneficiary of the trust; or o an LLC or partnership in which the borrower(s) have an individual or joint ownership of 100%. The HUD-1Settlement Statement from the purchase transaction must reflect no financing secured by the subject property was used to purchase the subject property. The purchase transaction was an Arms-Length transaction. The source of funds used to purchase the subject property must be fully documented. If funds were borrowed (either unsecured or secured by an asset other than the subject property) to purchase the subject property, those funds must be paid with the cash-out proceeds and reflected on the HUD 1 Settlement Sheet for the refinance transaction. If the Cash-out proceeds do not pay off the borrowed funds, the payments on the balance remaining must be included in the debt to income ratio calculation. NOTE: Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan The amount of the cash-out refinance loan can be no more than the actual documented amount of the borrower’s initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV/CLTV/HCLTV rations for the transaction. The preliminary title report for the refinance must reflect the borrower(s) as the owner of the subject property and must reflect that there are no liens on the property. All other cash-out refinance eligibility requirement as noted above are met and cash-out pricing is applied. NOTE: For DU run loans, Investor and second home borrowers with five to ten financed properties are ineligible for cash-out refinance transactions unless all of the delayed financing exception requirements listed above are met. Additional restrictions apply, Number of Properties Owned / Financed Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-255 Conventional Lending Guide Loan Purpose, Divestiture of Interest Continued Permitted ONLY for equal 50/50% splits between TWO (2) borrowers that are both on the mortgage application. NOTE: Borrowers may take title to the property as joint tenants, tenants by the entirety, tenants in common (without a tenancy in common agreement), or as individuals. If the scenario has a tenancy in common agreement, it will not be permitted. Continuity of Ownership and Obligation For all properties, Homeward must establish/verify the time of transfer, obligor of the current mortgage and previous/current title holder(s) (i.e. other than inherited or legally awarded properties, there must be at least one borrower obligated on the new loan who was also a borrower obligated on the existing loan being refinanced within Homeward seasoning requirements). NOTE: Refer to the Mortgage History section within this Lending Guide for acceptable methods of mortgage verification. Continuity of obligation occurs on a refinance transaction when at least one of the borrower(s) on the existing mortgage is also a borrower on the new refinance transaction secured by the subject property. Requirements for Continuity of Obligation All refinance transactions must comply with the definition above, meet one of the permissible exceptions described below, or comply with the limited eligibility parameters described below. Note the following: Continuity of obligation requirements do not apply when there is no existing mortgage on the subject property as a result of the borrower either having purchased the subject property with cash or when any prior mortgage for which the borrower was an obligor was paid in full. All time period references in this section are measured from the date of the event (for example, transfer of title) and end with the disbursement date (For Fannie Mae DU Loans) or Note date (For Freddie Mac LP Loans) of the new refinance transaction. Continued on next page Conventional Lending Guide 100-256 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Loan Purpose, Continuity of Ownership and Obligation, (Cont’d) Continued Permissible Exceptions to Continuity of Obligation Although the following refinance transactions do not meet the definition of continuity of obligation, the new refinance transaction will be eligible and not bound by the limited eligibility parameters described below if any of the following are applicable: The borrower on the new refinance transaction was added to title 24 months or more prior to the disbursement date (For Fannie Mae DU Loans) or Note date (For Freddie Mac LP Loans) of the new refinance transaction. The file is documented that the borrower acquired the property through an inheritance or was legally awarded the property (for example, divorce, separation, or dissolution of a domestic partnership). There is no minimum waiting period with regard to when the borrower acquired the property before completing a new refinance transaction. The borrower on the new refinance transaction has been added to title through a transfer from a trust, or a limited liability company (LLC), or partnership. The following requirements apply: o the borrower must have been a beneficiary/creator (trust) or a 25% or more owner of the LLC or partnership prior to the transfer, and o the transferring entity and/or the borrower has had a consecutive ownership (on title) for at least the most recent 6 months prior to disbursement (For Fannie Mae DU Loans) or Note date (For Freddie Mac LP Loans) of the new loan. NOTE: Transfer of ownership from a corporation to an individual does not meet the continuity of obligation requirement. The borrower has been on title for at least 12 months but is not obligated on the existing mortgage(s) that is being refinanced and the borrower meets at least one of the following requirements: o Has been residing in the property for at least 12 months, o Has paid the mortgage for at least 12 months, or o May demonstrate a relationship with the current obligor (for example, relative or domestic partner). Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-257 Conventional Lending Guide Loan Purpose, Continuity of Ownership and Obligation, (Cont’d) Continued All Other Refinance Transactions — Limited Eligibility All other refinance transactions that do not meet either the continuity of obligation requirements or a permissible exception must comply with the following LTV, CLTV, HCLTV ratio restrictions (in the below table) regardless of the occupancy of the property. The LTV, CLTV, HCLTV ratios must be based on the current appraised value. Months on Title Eligibility Requirements < 6 months Ineligible ≥ 6 months < 24 months Limited to 50% LTV/CLTV/HCLTV ratios ≥24 months No additional restrictions Continued on next page Conventional Lending Guide 100-258 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Loan Purpose, Listed for Sale Cash-Out Refinance: Continued Properties listed for sale in the six months preceding the disbursement date of the new mortgage loan are limited to 70% LTV/CLTV/HCLTV ratios (or less if mandated by the specific product, occupancy, or property type – for example, 65% for manufactured homes). Borrowers must confirm their intent to occupy the subject property (for principal residence transactions) for Cash-Out refinance. NOTE: Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan. Limited Cash-Out (Rate/Term) Refinance Transactions: Properties listed for sale are not eligible for refinancing. The listing agreement must have been cancelled on or before the disbursement date of the new mortgage loan. Borrowers must confirm their intent to occupy the subject property (for principal residence transactions) for a Limited Cash-Out refinance. NOTE: Properties currently listed are not eligible for any refinance transactions. Borrower must provide documentation of cancelled MLS listing or similar documentation. Policy does not apply to scenarios without appraisals, such as property inspection waivers (PIWs). Refer to Homeward’s Early Payoff (EPO) policy for additional details. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-259 Conventional Lending Guide Loan Purpose, Newly Constructed Properties Continued Construction to permanent financing as defined for Homeward Residential involves two loans, a construction loan and a long-term refinance of the construction loan. The second transaction involves the use of standard loan documents; modification of the bank loan is not permitted. NOTE: Applies to end financing of the interim bank loan; Homeward Residential does not offer interim, construction financing. A construction to permanent loan not structured as a one-time close may be submitted as a purchase or refinance, subject to the below: Purchase: Transaction must have occurred within 180 days after completion of the home. The borrower may not receive cash-out and the acquisition cost is to be documents. If the purpose of the long-term mortgage is to allow the borrower to make a single disbursement to a builder/contractor for the purpose of a completed property, then the transaction must be considered a purchase. Refinance: The borrower may or may not receive cash-out. A refinance transaction has no time limitation. If the transaction occurs more than 180 days after the completion of the home, then it must be considered a refinance. Borrower must be the primary obligor on the construction financing obtained through a legitimate financial institution. Borrower must be the owner of the lot to be considered a refinance. Final Certificate of Completion, full appraisal with photos is required. Primary Residences, detached SFR only. Transaction must be Arms length (i.e. borrower may not be the builder). IMPORTANT: Construction loan modifications are not permitted; this is not the FNMA Home-style Renovation program nor is it available through Homeward Residential. Continued on next page Conventional Lending Guide 100-260 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Loan Purpose, New Construction – Purchase Continued On a purchase transaction, the borrower may hold title to the land as follows: Borrower may or may not own the land. Ownership is deeded to the builder/contractor in lieu of the down payment as reflected in the construction statement/agreement. NOTE: The borrower may use the cash investment in the land, provided it was acquired more than 12 months before the date of the application for construction financing. Acceptable documentation includes the final HUD-1, a copy of the warranty deed showing no liens or a copy of a release of the lien. Ownership of Land Determination of LTV Owned land <12 months Based on the lesser of the current appraised value OR sales price of the land plus any documented improvement costs. Owned land >=12 months OR received land as a gift Based on the lesser of the current appraised value OR appraised value of the land plus any documented improvement costs. New Construction – Refinance On a refinance transaction, the Borrower must own the land. Ownership of Land Determination of LTV Owned land <12 months DU Run Loans – Based on the current appraised value LP Run Loans - Based on the lesser of the current appraised value OR sales price of the land plus any documented improvement costs. Owned land >=12 months Based on the current appraised value Received land as a gift Based on the lesser of the current appraised value OR appraised value of the land plus any documented improvement costs. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-261 Conventional Lending Guide Loan Purpose, General Contractor Continued If the borrowers employ a general contractor, the following documentation is required to verify the cost of construction: Signed construction contract Sealed copy of the improvement plans and complete breakdown of construction costs and specifications. Copies of canceled checks and receipts of bills for payment of any supplied, materials, labor or funds paid directly to subcontractors by the borrower. NOTE: If a general contractor is not used to construct the home, the construction costs must be documented with copies of receipts or invoices and cancelled checks for materials, supplies and/or labor. Conventional Lending Guide 100-262 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Mortgage Insurance Overview Mortgage Insurance is required on loans with a loan to value (LTV) over 80.00% (Exception: HARP transactions for which MI was not required on the underlying loan). Unless otherwise restricted in the product guidelines, Homeward Residential will accept the private mortgage insurers noted in the “Approved Mortgage Insurance Companies” matrix below. Approved MI Companies The matrix below lists the mortgage insurance companies currently approved by Homeward Residential. Approved Mortgage Insurance Companies Arch MI National MI – National Mortgage Insurance Corporation Essent Guaranty, Inc. Radian GE – (Genworth) GE Capital Mortgage Insurance Corporation UG – United Guaranty MGIC - Mortgage Guaranty Insurance Company NOTES: Homeward reserves the right to add or remove companies to this list at their sole discretion. Homeward does not currently utilize its MI delegate status; therefore, all loans requiring mortgage insurance must also be underwritten by the MI Partner. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-263 Conventional Lending Guide Subordinate Financing Overview Second Trust Deeds, junior liens and subordinate liens (secondary financing) are defined as mortgages that have rights that are secondary to a first mortgage. These are encumbrances on real estate (for example, a second mortgage, a tax lien or mechanic’s lien) where the priority of the secondary financing is inferior to that of another recorded interest in the same property. Requirements and Restrictions Requirements and restrictions apply to new subordinate financing and existing financing: Maximum Combined Loan to Value (CLTV/HCLTV) ratio of the first and second must not exceed the limit outlined by these guidelines and by the Product matrix. Certified copy of the executed second Note and Subordination Agreement must be provided to confirm loan amount, payment terms, and lien status. Refer to Fannie Mae guidelines for exact definitions of CLTV and HCLTV; 2011 Selling Guide, Part B2-1.1-02 (3/31/2011). If the first mortgage lien loan is a rate term refinance in Texas and the first lien loan is being renewed and extended, a subordination agreement for a second lien on the property is not required unless the title company requires a subordination agreement in order to insure that the lien will remain in first lien position. Subordination agreement must be recorded concurrently with the first Mortgage/Deed of trust if an existing second will remain. If the note and terms of the second lien have been received and approved, the actual subordination agreement can be a Prior to Funding Condition. For financing other than HELOCs, Secondary financing must have a term of no less than five years, unless the financing fully amortizes prior to that time For financing other than HELOCs, Financing must not permit the Note holder to “call” the financing within the first five years following loan closing. Interest rate on the Note must be at market rates. Secondary financing must not have a negative amortization feature. Continued on next page Conventional Lending Guide 100-264 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Subordinate Financing, Requirements and Restrictions, (Cont’d) Continued Term of the Note must provide for regular monthly payments of at least interest only. Monthly payments on the secondary financing must be included in the borrower’s ratios. Payments may be graduated or variable, as long as the payment remains constant for at least 12 months and the annual payment adjustments of the second do not exceed a 2% interest rate increase. Exception for HELOCs in which the monthly payment does not have to remain constant. May not be subject to prepayment penalties; excludes HELOC products where borrowers may be required to pay third party closing costs incurred at time of closing, typically if the line is closed within the first 36 months (or contains an early termination fee not to exceed $500; note, early termination fees set as a percentage of the loan amount are not permitted). Subordinate liens may held be a private party including owner-carry second from the owner of the property, and other private party, or an institutional lender unless otherwise restricted within specific product guidelines. Privately held liens will require all formal documentation (including the Note) to confirm payments which must be included in DTI. The lien must be recorded and clearly subordinated to the Homeward Residential first lien and meet all other FNMA requirements. May not be held by the Broker, Developer or Realtor. If subordinate financing exists, the loan to value must be 5% lower than the maximum LTV allowed for that scenario. Second liens may not be a Small Business Administration (SBA) loan nor held in the name of a business. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-265 Conventional Lending Guide Subordinate Financing, Required Documentation Continued For Purchase transactions, the following subordinate financing documentation is now required and must be included in the loan file: Note Good Faith Estimate and Final TIL Statement HUD-1 Settlement Statement or other closing statement For HELOCs, the HELOC agreement indicating all fees and costs paid by the borrower at closing, and the maximum permitted credit advance. For Refinance transactions, the following subordinate financing documentation is now required and must be included in the loan file: Note Copy of the Subordination agreement NOTE: A copy of the recorded documents may be provided as a postfunding item. Continued on next page Conventional Lending Guide 100-266 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Subordinate Financing, Seller Carry Backs Continued Seller carry-backs are permitted on primary residences only provided the combined LTV does not exceed the maximum for the product, program and documentation process selected. Typically, the Purchase & Sale Agreement will state that the present owner is willing to provide secondary financing. All payments related to secondary financing must be included in the debt ratio. The lien must be recorded and clearly subordinated. A copy of the note must be obtained to verify the amount secured against the property. Regular payments must cover at least the principal and the interest at the market rate. If financing provided by the property seller is more than 2% below the current standard rates for second mortgages, it must be considered a sales concession and the subordinate financing amount must be deducted from the sale price or appraised value, whichever is lower. The subordinate loan cannot have a call option of less than 5 years. The subordinate loan must permit pre-payment at any time without a penalty. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-267 Conventional Lending Guide Subordinate Financing, Modifying Existing Second Liens Continued Subordinate lien holders may request modifications to the terms of the lien (typically a reduction for lien) in exchange for remaining in a subordinate position. Modifying the subordinate lien in this manner results in re-executing the lien at closing which is acceptable. In these scenarios, Homeward Residential does not consider the modified lien a new subordinate lien. NOTE: Use the existing definitions to determine the loan purpose of the first lien (i.e. rate term versus cash-out). If the modification is addressed AND recorded PRIOR to closing, a copy of the signed modification will be required AND a subordination agreement must be prepared. If the modification is addressed AT closing and subsequently recorded (recorded with the new refinance documents), the modification must be re-signed AND recorded in a subordinated position to the first lien. Second lien may be a closed end or line of credit; either will be acceptable. Partial pay downs of subordinate liens (i.e. not true re-executed, rerecorded modifications) are not permitted. Continued on next page Conventional Lending Guide 100-268 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Subordinate Financing, Municipal Betterment Assessments Continued When a limited area of a community benefits from a public improvement (e.g., water, sewer, sidewalks, etc.), special property taxes may be assessed to the property owners to reimburse the city or town for all, or part, of the costs incurred in completing the project. Each property parcel receiving a benefit from the improvements is assessed a proportionate share of the cost which may be paid in full, or apportioned over a period of up to approximately 20 years. If the homeowner elects not to pay the cost in full and/or if the title commitment references a municipal betterment lien, a copy of the tax bill reflecting the higher assessment will be required in order to correctly establish the borrower’s escrow account. If the borrower is not establishing an escrow account, the tax bill continues to be required or replaced with other supporting documentation to confirm the origin of the second lien (i.e. must confirm second lien is a forced, municipal betterment assessment). NOTE: File must confirm payment is through taxation or separate payment. If the city or township will not provide a subordination agreement to the mortgage lien, it is acceptable to waive a subordination agreement. Other types of acceptable betterment liens by a municipality include Utility Liens, Water Liens, Sewer Liens, Trash Liens and Municipal Light Liens. Betterment liens do not necessarily have to be paid off when a property is conveyed. It may remain with the property and the new owner can continue to pay it down. Unacceptable betterment liens, include community seconds in which only the specific subject property receives a grant or forgivable type lien for necessary repairs, such as energy efficient improvements, plumbing or electrical repairs needed to bring the property up to current code. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-269 Conventional Lending Guide Subordinate Financing, Community Seconds Not Permitted. Down Payment Assistance Not Permitted. Continued Continued on next page Conventional Lending Guide 100-270 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Subordinate Financing, Virginia Automatic Subordination Continued The automatic subordination of certain subordinate liens as provided in Virginia Code Ann. § 55- 58.3 is permitted with the below conditions: The original principal amount of the second lien may not exceed $150,000 (effective July 1, 2011) The real estate cannot contain more than one dwelling unit With respect to the refinance of the first mortgage: The security instrument must state on the first page in bold or capitalized letters: "THIS IS A REFINANCE OF A (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) RECORDED IN THE CLERK'S OFFICE, CIRCUIT COURT OF (NAME OF COUNTY OR CITY), VIRGINIA, IN DEED BOOK ________, PAGE ________, IN THE ORIGINAL PRINCIPAL AMOUNT OF ________, AND WITH THE OUTSTANDING PRINCIPAL BALANCE WHICH IS ________."; The principal amount secured by the refinance mortgage may not exceed the outstanding principal balance secured by the prior mortgage plus $5,000; and The interest rate stated in the refinance mortgage at the time it is recorded does not exceed the interest rate set forth in the prior mortgage. Key Definitions "Refinance mortgage" means the mortgage, deed of trust or other instrument creating a security interest in real estate given to secure a refinancing. "Refinancing" means the replacement of a loan secured by a prior mortgage with a new loan secured by a mortgage, deed of trust or other instrument and the payment in full of the debt owed under the original loan secured by the prior mortgage. "Subordinate mortgage" means a mortgage or deed of trust securing an original principal amount not exceeding $150,000, encumbering or conveying an interest in real estate containing not more than one dwelling unit that is subordinate in priority (i) under subdivision A 1 of Virginia Code § 55-96 to a mortgage, deed of trust or other security interest in real estate (otherwise known as the prior mortgage); or (ii) as a result of a previous refinancing. The following second liens are not eligible: A subordinate mortgage securing a promissory note payable to any county, city or town or any agency, authority or political subdivision of the Commonwealth if such subordinate mortgage is financed pursuant to an affordable dwelling unit ordinance adopted pursuant to § 15.2-2304 or § 15.2-2305, or pursuant to any program authorized by federal or state law or local ordinance or resolution, for (i) low- and moderate-income persons or households or (ii) improvements to residential potable water supplies and sanitary sewage disposal systems made to address an existing or potential public health hazard, and which mortgage, if recorded on or after July 1, 2003, states on the first page thereof in bold or capitalized letters: "THIS (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) SHALL NOT, WITHOUT THE CONSENT OF THE SECURED PARTY HEREUNDER, BE SUBORDINATED UPON THE REFINANCING OF ANY PRIOR MORTGAGE." Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-271 Conventional Lending Guide Subordinate Financing, Maryland Automatic Subordination Continued The automatic subordination of certain subordinate liens as provided in Maryland Senate Bill 199 is permitted with the below conditions: The original principal amount of the second lien may not exceed $150,000 With respect to the refinance of the first mortgage: The security instrument must state on the first page in bold or capitalized letters: “This is a refinance of a deed of trust/mortgage/other security interest instrument recorded among the land records of ............... County/City, Maryland in Liber no. ....... Folio ......., in the original principal amount of ............., and with the unpaid outstanding principal balance of ........... . The interest rate provided for in the evidence of indebtedness secured by this refinance mortgage is lower than the applicable interest rate provided for in the evidence of indebtedness secured by the deed of trust/mortgage/other security instrument being refinanced.” The principal amount secured by the refinance mortgage may not exceed the unpaid outstanding principal balance secured by the first mortgage or deed of trust plus an amount not exceeding $5,000 to pay closing costs and escrow costs. (“Escrow Costs” are defined as “Money to pay property taxes, hazard insurance, mortgage insurance, and similar costs associated with real property secured by a refinance mortgage that a lender requires to be collected at closing and held in escrow.”; and The interest rate stated in the refinance mortgage at the time it is recorded does not exceed the interest rate set forth in the prior mortgage. The following second liens are not eligible: (i) a judgment lien; or (ii) a lien filed under the Maryland contract lien act. Conventional Lending Guide 100-272 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Ratio Calculation A borrower’s housing ratio is a comparison of the borrower’s total housing obligations to the borrower’s stable monthly income. Total housing obligations are the sum of: P&I payments on the mortgage Hazard insurance premiums Real estate taxes. Taxes must be based on the reasonable estimate of the improvement value, not the existing tax based on the unimproved or land value. Any applicable charges for: Mortgage insurance premiums Homeowner’s association dues or condominium maintenance fees, excluding utility charges Payments on secondary financing The borrower’s ability to pay the monthly housing expense, in addition to other monthly obligations, must be carefully measured. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-273 Conventional Lending Guide Ratio, Continued Real Estate Tax Payment Calculation of real estate taxes for borrower qualification must be based on no less than the current assessed value. (The taxes are listed on the title commitment.) However, the real estate taxes may (or must in some cases) be projected if it can document one of the following: The amount of taxes will be reduced based on federal, state, or local jurisdictional requirements. However, the taxes may not be reduced if an appeal to reduce them is only pending and has not been approved. If the transaction is new construction, the lender must use a reasonable estimate of the real estate taxes based on the value of the land and completed improvements. There is a tax abatement on the subject property that will last for no less than 5 years from the note date. For example: for a municipality with a 10-year abatement, the lender may qualify the borrower with the reduced tax amount; for a municipality with a 10-year abatement and with annual real estate tax increases in years 1 through 10, the lender must qualify the borrower with the annual taxes that will be required at the end of the 5th year after the first mortgage payment date. NOTE: For purchase transactions, the state of California will base property taxes on 125% of purchase price. Continued on next page Conventional Lending Guide 100-274 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Ratio, Real Estate Debt Continued Mortgage obligations that do not meet the criteria for utilizing rental income must provide additional Reserves and the PITI included in the debt ratio for qualifying (PITI may be omitted under certain circumstances as stated below). Current Residence Not Pending Sale If the current principal residence is still owned by the borrower(s) at the time of closing on the new primary residence and there is NOT a pending sale, then: A minimum of 6 months PITI for BOTH the retained property and the new principal residence is required (2 months reserve is allowed if 30% equity in the existing principal residence is documented by a minimum Form 2055; AND BOTH the current and proposed PITI must be used in qualifying the borrower for the new loan. NOTE: If the borrower cannot meet both the reserve and qualifying requirements, then the scenario is not eligible. Current Residence Pending Sale If the current principal residence is still owned by the borrower(s) at the time of closing with a pending sale that will not close with title transfer to the new owner prior to the new purchase transaction, then: The current principal residence PITI may be omitted from the qualifying ratio calculation ONLY IF the borrower(s) document a minimum of 6 months PITI for BOTH the retained property and the new principal residence is required (2 months reserve is allowed if 30% equity in the existing principal residence is documented by a minimum Form 2055; AND Provide the following documentation (if the below documents cannot be provided, then refer to the “Not Pending Sale” requirements): o o The executed sales contract for the current residence; AND Confirmation that any financing contingencies have been cleared. This may be satisfied with documented proof of the buyer’s lender commitment letter. NOTE: If the borrower cannot meet both the reserves requirement and the pending sale documentation, then the scenario is not eligible under this definition. NOTE: Loans requiring mortgage insurance may require 6 months minimum reserves regardless of DU findings; refer to specific mortgage insurance partner guidelines for details. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-275 Conventional Lending Guide Ratio, Continued Revolving Debt Revolving debts should be included in the debt to income ratio based on the minimum payment from the statement or credit report or the greater of $10 or 5% of the current balance. If multiple account payments are not reported, the underwriter should obtain actual minimum payments from the borrower’s account statement. Continued on next page Conventional Lending Guide 100-276 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Ratio, Continued 30-Day Charge Accounts IMPORTANT: For Open 30-day Charge Accounts, such as American Express, that do not reflect a monthly payment on the credit report OR reflect a monthly payment that is identical to the account balance, borrower must verify funds sufficient to cover the account balance. The verified funds must be in addition to any funds required for closing costs and reserves. NOTE: DU will include the balance of the 30-day charge accounts on the loan application in the Reserves Required to be Verified amount shown on the DU Underwriting Findings report. For refinances where the borrower is receiving cash back and where there is not a minimum reserve requirement for the transaction, DU will subtract any cash back being received by the borrower from the amount of the 30-day account balance. (i) When the amount of cash back covers only a portion of the 30-day account balance, DU will only require the remaining amount to be documented, verified funds. (ii) When the amount of cash back covers the entire 30-day account balance, DU will not require any portion of the balance to be verified. If the borrower paid off the account balance prior to closing, borrower may provide proof of payoff in lieu of verifying funds to cover the account balance. Funds to be sourced to confirm borrower did not incur additional debt. Employer reimbursement is permitted to omit the payment from debt calculation with the following required documentation: Evidence in either the form of a letter on company letterhead or by evidence of monthly reimbursement for a minimum six (6) months. If the borrower is self-employed, and does not have sufficient personal assets to cover the account in full, it must be documented that the business pays the monthly account with cancelled checks for a minimum of six (6) months. At no time is it acceptable to include partial or full balances in the borrower’s qualifying debt ratio in order to address 30-day accounts. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-277 Conventional Lending Guide Ratio, Continued Installment Debt Installment debts with less than or equal to 10 monthly payments remaining do not need to be included in the total debt ratio. It is the underwriter’s discretion to include paid down installment debt within the debt to income ratio. Verification that the debt has been paid must be provided by one of the following: A copy of the HUD-1 A supplemental credit report Verification from the creditor Refer to Paying Off Debt section for additional details. Installment debts with 10 or fewer monthly payments should also be considered as a recurring monthly obligation if it significantly affects the borrower’s ability to meet his or her credit obligations. Continued on next page Conventional Lending Guide 100-278 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Ratio, Continued Lease Payments Lease payments must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease AND regardless of being paid off at or just prior to closing. NOTE: This is because the expiration of a lease agreement for rental housing or an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house. Paying Off / Paying Down Debt It is necessary to review Borrowers carefully when they are paying off (or paying down) debts in order to qualify. The credit history and the Borrower’s use of credit should be a factor in determining whether it is appropriate to exclude debts for qualification purposes. If it is determined that paying off (or paying down) a debt is appropriate, it is necessary to document as follows: o Installment loans being paid off or paid down to ten months, must be documented with cancelled checks, paid receipts and/or copy of the HUD-1 For DU scored loans: If a revolving account balance is to be paid off at or prior to closing, a monthly payment on the current outstanding balance does not need to be included in the borrowers long term debt, i.e., not included in the debt to income (DTI) ratio. Such accounts do not need to be closed as a condition of excluding the payment from the DTI ratio. Documentation that the account is paid in full is required. If a revolving account balance is to be paid down (not paid in full), documentation on the new balance and payment is required and must be included in the ratios. Note 1: As of May 26, 2015, Desktop Underwriter (DU) currently issues a message stating that revolving debts must be included in the total expense payment if the account is not being closed. Lenders may disregard this message until it is removed in a DU release later in 2015. Note 2: Loans with Mortgage Insurance may be subject to additional MI partner guidelines. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-279 Conventional Lending Guide Ratio, Continued Authorized User Accounts – DU For Desktop Underwriter (DU) loans: Trade lines designated as authorized user are taken into consideration as part of the risk assessment. However the credit report must be reviewed for trade lines in which the applicant has been designated as an authorized user in order to ensure the trade lines are an accurate reflection of the borrower's credit history. If it is believed the authorized user trade lines are not an accurate reflection of the borrower's credit history, the Underwriter should evaluate the borrower's credit history without the benefit of these trade lines and use prudent underwriting judgment when making its final underwriting decision. When ensuring trade lines are an accurate reflection of the borrower's credit history, as a general guide, if the borrower has several authorized user accounts but only has a few accounts of his/her own, the loan file should establish: the relationship of the borrower to the owner of the account, if the borrower uses the account, and if the borrower makes the payments on the account. If the authorized user trade line belongs to another borrower on the mortgage loan, no additional investigation is needed. However, if the borrower has several trade lines in good standing and only a minor number of authorized user accounts, the Underwriter could make the determination that: the authorized user accounts had minimal, if any, impact on the borrower's overall credit profile; and the information reported on the credit report is an accurate reflection of the borrower's credit history. NOTE: If the account belongs to the borrower’s spouse (whether on the loan or not) or the co-borrower OR if there is evidence in the file that the borrower has been making the payment, then the account payment must be included in the borrower qualifying debt to income ratio. Continued on next page Conventional Lending Guide 100-280 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Ratio, Continued Authorized User Accounts – LP For Loan Prospector (LP) loans, credit report trade lines that list a borrower as an authorized user cannot be considered in the underwriting decision, except as outlined below. An authorized user trade line may be considered if: Another borrower in the mortgage transaction is the owner of the trade line; or The borrower can provide written documentation (e.g., canceled checks, payment receipts, etc.) that he or she has been the actual and sole payer of the monthly payment on the account for at least 12 months preceding the date of the application. If written documentation of the borrower’s monthly payments on the authorized user trade line is provided, then the payment history — particularly any late payments that are indicated — must be considered in the credit analysis and the monthly payment obligation must be included in the debt-to income ratio. An authorized user trade line must be considered if the owner of the trade line is the borrower's spouse and the spouse is not a borrower in the mortgage transaction. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-281 Conventional Lending Guide Ratio, Monthly Payment Debts Obligations Not Considered Debt Continued The monthly debt payment is the sum of the following monthly obligations: Monthly housing expense Installment debts with 10 or fewer monthly payments should also be considered as a recurring monthly obligation if it significantly affects the borrower’s ability to meet his or her credit obligations. Exception: Payments on all automobile and non-automobile leases, regardless of the remaining number of payments and regardless if pay off at closing, must be included in the calculation of recurring monthly expenses. Monthly Payments on revolving accounts at the greater of $10 or 5% of the current balance. If the balance has recently or is to be paid off/down and the account remains open, the qualify terms continue to be required based on the most recent high balance. Aggregate negative net rental income from all investment properties owned. Monthly mortgage payment for second home. Payments on any Home Equity Line of Credit (HELOC) are calculated into the ratio based on the greater of the credit report amount or an interest only amount for the current balance; if the current balance is zero, then a payment amount is not required. Payments for loans secured by the borrower's personal financial assets (such as life insurance policies, 401(k) accounts, CDs, stocks, bonds, etc.), do not have to be included in the debt ratio calculations if the loan instrument shows the asset as collateral for the loan. The borrower may not use the same asset to satisfy cash reserve requirements. IMPORTANT: Appropriate documentation must be provided to confirm exclusion of debt. Continued on next page Conventional Lending Guide 100-282 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Ratio, Continued Co-Signed Obligations Co-signed obligations for installment, revolving and mortgage debt/loans can be excluded from recurring monthly expenses if all of the following documentation is provided: Twelve months of cancelled checks that show payments have been made by another party. If the account on the loan has been in existence for less than 12 months, the full payment of the co-signed account is considered a liability and must be used in calculating the debt ratio. Verification that there have been no delinquencies on the account during the most recent 12 months. Debt must be a co-signed obligation (i.e. the other party must also be legally on the debt). A copy of the note must also be provided to show that the person making the payments in indeed an obligor on the note. NOTE: Liabilities solely in the applicant’s name must always be considered in the debt ratio, regardless of who is making the monthly payment (as the legal obligation resides with the applicant). Court Ordered Assignments of Debts If the borrower is no longer responsible for a payment of a debt as a result of a divorce settlement, or buyout but has not been released of the obligation by the creditor, the debt does not need to be included in the DTI if the following is provided and specifically assigns the payment to another party: Applicable pages and signature page of the recorded divorce decree or legal separation agreement (must be finalized by the court and recorded); and Evidence of the transfer of title. IMPORTANT: The Borrower continues to be liable for any adverse payment history or outstanding debt associated with these joint accounts, including AUS recommendations that lowers credit scores, require accounts to be paid in full, etc. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-283 Conventional Lending Guide Ratio, Continued Deferred Debt Deferred debts (such as student loans) must be included in the recurring debt obligations. If the payment is not specified on the credit report, obtain copies of the payment letters or forbearance agreements and calculate a monthly payment to be used in the debt ratio. DU Loans: For all student loans, whether deferred, in forbearance, or in repayment (not deferred), the lender must use the greater of the following to determine the monthly payment to be used as the borrower’s recurring monthly debt obligation: 1% of the outstanding balance; or the actual documented payment (documented in the credit report, in documentation obtained from the student loan lender, or in documentation supplied by the borrower). If the actual documented payment is less than 1% of the outstanding balance and it will fully amortize the loan with no payment adjustments, the lender may use the lower, fully amortizing monthly payment to qualify the borrower. NOTE: If the payment currently being made cannot be documented or verified, 1% of the outstanding balance must be used. LP Loans: For a student loan, in lieu of obtaining copies of payment letters or forbearance agreements, Homeward will allow the lender to use 2% of the outstanding balance as the borrower’s recurring monthly debt obligation. However, if any documentation is provided by the borrower or obtained by the lender that indicates the actual monthly payment, that figure must be used in qualifying the borrower. Continued on next page Conventional Lending Guide 100-284 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Ratio, Continued Business Paid Debt Excluding the monthly debt obligation associated with a self-employed, sole proprietor, Corporations, Partnerships business requires a minimum of the most recent twelve (12) months cancelled checks from the business owned checking account. The account has no late payments in the last 12 months and no more than 1x30 in the last 24-month period, if applicable. Evidence such as canceled company checks that the debt has been paid out of company funds. The cash flow analysis of the company took the payment of the debt into consideration. The debt must demonstrate a company related business function, such as a credit card used for business related items, an automobile loan for commutes to and from work, or a mortgage loan for a home serving as temporary quarters for employees or relocation programs. NOTE: The debt must be considered as part of the borrower’s individual recurring monthly debt obligations if any one of these conditions cannot be met. Similar debt obligations may be combined to meet the 12 month minimum requirement. For example, the documented period a previous auto debt paid by the business can be used in conjunction with a new auto tradeline (i.e. the borrower sold the older car to purchase a newer model). The payment must be included in the borrower’s DTI, if the business does not provide sufficient evidence of the debt being paid out of company funds. If evidence of the business paying the debt is provided, but the cash flow analysis does not reflect any business expense related to the debt (such as an interest expense, taxes and insurance, if applicable, equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on the credit report and the age of the loan). It is then reasonable to assume that the debt has not been accounted for in the cash flow analysis. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-285 Conventional Lending Guide Ratio, Continued Undisclosed Debt ALL existing debt must be disclosed within the loan application. In addition, any pending transactions which may result in new debt must be disclosed on the 1003. Supporting documentation for pending transaction in which an application has been submitted in anticipation of new debt being extended to the borrower must be included in the loan package. Supporting documentation may include sales agreement, loan commitment, security agreement, etc. Examples of Pending Debt (but not limited to): Auto loan purchase or refinance in process Newly submitted Credit Card Applications Pending or Applied Credit Application for Refinance and/or Purchase of Real Estate Failure to disclose existing or pending debt is considered to be material misrepresentation and default in violation of the agreements set forth within the Loan Application. Non-disclosure of existing and/or pending debt will result in acceleration of the indebtedness in accordance with the terms of the Security Instrument. Conventional Lending Guide 100-286 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Property Flipping Overview Property flipping generally refers to the process of purchasing an existing property with the intention of immediately reselling it for a profit. Property flipping in itself is not illegal unless it includes an act of fraud or misrepresentation, which can result in a predatory transaction. The property is often a distressed property that was acquired at a discounted price that is being refinanced or resold at an inflated price within a short timeframe to an uninformed buyer. Due to the nature/history of these transactions and propensity for illegal or inappropriate activity, Homeward Residential will apply at minimum the below requirements; however, Homeward Residential reserves the right to scrutinize all loan transactions for possible property flipping and refuse to approve where inappropriate property flipping is indicated. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-287 Conventional Lending Guide Property Flipping, Requirements Continued Property seller must be owner of record and in title prior to the borrower’s application AND prior to date of the sales contract for the purchase transaction. Re-sales up to 90 days will be heavily scrutinized for value, acceptable comparables and characteristics of a bona fide transaction: If the Seller is a business, LLC or any other non-individual who owns multiple properties in the subject market area that is predominantly a foreclosure market and has flipped numerous properties in the subject’s market area, the subject’s appraised value will not be accepted and the loan will be declined. If the Seller is a business, LLC or any other non-individual, Homeward Residential will require the name of the Seller on all comparables used in the appraisal to confirm a false market value is not being created. If the Seller is a business, LLC or any other non-individual, the following checklist must be completed to confirm transaction is Arms length, legitimate and seller is affiliated with the business entity/LLC. (i.e. confirm individual is authorized to sell the property). Re-sales from 91 days up to 12 months will be reviewed for all the above concerns at the discretion of the underwriter. IMPORTANT: Homeward Residential will not allow for a borrower to purchase a property or multiple properties when the Seller is a LLC and the subject property was recently purchased by the Seller with rapid appreciation, which cannot be supported with documented home renovation/improvements. Continued on next page Conventional Lending Guide 100-288 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Property Flipping, Continued Anti-Flipping and the Sales Contract It is not acceptable practice for the sales contract to be re-signed for the sole purpose of circumventing Homeward Residential’s flip rules. Omitted Transactions Flip transactions that are not affected by the above: NOTE: This includes any evidence within the file, such as original sales contract date on the appraisal, indicating that the loan was re-structured for the sole purpose of circumventing Homeward Residential requirements. Checklist for Business Seller A builder selling a newly built home or building a home for a homebuyer. Transactions resulting from an inheritance, divorce or legal settlement. Sales by employers or relocation agencies related to employee relocations. If the seller is a non-individual AND the property is being re-sold within 90 days, the Non-Individual Seller Evaluation & Validation Checklist is available as a helpful tool but is not required. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-289 Conventional Lending Guide Property Flipping, Continued Non-Individual Seller Evaluation & Validation Checklist NOTE: This is a helpful tool, but not required) Date: __________________________ Reviewer: ______________________ Borrower Name: _________________ Loan Number: ___________________ Who is the seller in the contract? _____________________________________________ Is this an individual or a business entity? Who signed the contract on behalf of the seller? Who is listed as the current owner on title? Is the non-individual seller entity found on the state corporation’s website search? Who is listed as the Officer, Principal or Agent? Is the person who signed on behalf of the non-individual seller an officer, registered agent of principal of the business entity? If not, are you able to determine who the officers or owners of the business entity are? CONCLUSIONS / FINDINGS Non-individual seller entity is acceptable and _____________________ is authorized to sign on behalf of the non-individual seller. Non-individual seller entity is acceptable but we are conditioning for full disclosure of members and authorization for the signor, ______________________ to sign on behalf of the non-individual seller. Non-individual seller entity is deemed unacceptable for the following reason(s): ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Continued on next page Conventional Lending Guide 100-290 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Property Flipping, Additional Evaluations Continued Who is the non-individual business entity? Can we validate the existence of the non-individual business entity? Can we identify the members with ownership and interest in the business entity? Is the person who signed the sales agreement an identified member with ownership and interest in the business entity OR do we need to obtain specific written authorization from a member with ownership and interest in the business entity? Is there a potential or identified business or personal relationship between any or the other interested parties to the transaction and the selling business entity? YES o If so, is this relationship clearly disclosed? o If so, what is the relation? o What affect might this relationship have on the subject property value? o Are there unreasonable incentives? o Who if anyone is benefiting most from any potential relationship with the selling business entity? NO Do we have matching disclosure of the seller listed as the seller in the sales agreement, the seller listed as current owner on the appraisal and the current person or entity listed as holding current title? YES NO o Can you clearly see why the information differs between one disclosure versus the other or others? o Has there been a recent transfer of ownership? If so, why? o Have there been an unreasonable number of ownership transfers in the most recent 36 months? Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-291 Conventional Lending Guide Property Flipping, Continued State Business Website Search Better Business Bureau Website: http://welcome.bbb.org/ Massachusetts: http://corp.sec.state.ma.us/uccfiling/uccSearch/Default.aspx Conventional Lending Guide 100-292 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide General Compliance Policies Overview Homeward supports the expansion of fair and equitable home ownership opportunities and opposes predatory lending. We are committed to upholding the standards of fair and responsible lending in all aspects of our business practice. Our commitment emphasizes product choice, fair pricing and credit terms with clear disclosure. Homeward requires that all Borrowers be treated fairly and equitably through all channels. Homeward requires adherence to applicable federal state and local laws, statutes, regulations, commentary and principles, including but not limited to the items more fully described herein. Predatory Lending To assure a clear and unequivocal understanding of our commitment to a method of doing business that excludes predatory and abusive lending, Homeward has adopted an internal 5% policy limit on all total borrower charges and broker compensation (subject to lower state and municipal thresholds), including such broker fees as origination, processing fees, etc. Homeward will not fund any loan that is considered to be “high rate” or “high fee”, or any loan that is considered to be predatory in the jurisdiction where the property is located. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-293 Conventional Lending Guide General Compliance Policies, Laws Continued Homeward strictly complies will all applicable federal, state and local laws, ordinances, and regulations. This includes but not limited to: Equal Credit Opportunity Act (Regulation B) Consumer Credit Protection Act Fair Credit Reporting Act (FCRA) Truth-in-Lending Act (Regulation Z); Homeward will permit only Qualified Mortgages as defined within the Truth-in-Lending Act. Real Estate Settlement Disclosure Act (RESPA – Regulation X) Home Mortgage Disclosure Act (HMDA – Regulation C) Home Ownership and Equity Protection (HOEPA); note Homeward will not proceed with any loan scenario that exceeds HOEPA’s guidelines. SAFE Act Home Valuation Code of Conduct (HVCC) and subsequent regulations OFAC Customer Identification Program (CIP) under USA Patriot Act FHA (Fair Housing Act) CRA (Community Reinvestment Act) FTD Unfair and Deceptive Acts and Practices (UDAP) DFA (Dodd-Frank Wall Street Reform & Consumer Protection Act; and all implementing regulations thereto as regulations become effective) Continued on next page Conventional Lending Guide 100-294 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide General Compliance Policies, Laws (Cont’d) Continued Loan Originator Compensation; amendment to §1026.36(h). Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations under the Equal Credit Opportunity Act (Regulation B) o Form C-9, Disclosure of Right to Receive a Copy of Appraisal with language: "We may order an appraisal to determine the property's value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost." must be executed and in the file. o Must provide evidence that the applicants are provided a copy of all written appraisals and valuations promptly upon their completion or three business days before consummation, whichever is earlier. NOTE: The borrower may waive this 3-day requirement if such waiver (Waiver of Advance Delivery Appraisal Form) is obtained at least three (3) days prior to the closing of the mortgage. o The borrowers cannot be charged a fee for a copy of their appraisal. Adherence to the Ability to Repay and Qualified Mortgage Standards under the Truth-in-Lending Act (Regulation Z). Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act of Regulation X. Each file must contain: o The List of Homeowners Counseling Organizations provided to the borrower within three (3) business days of the application. This must be provided on all applications taken on or after July 10, 2014 The list must be obtained from either: The CFPB website created to assist lenders in complying with this section which can be found here: http://www.consumerfinance.gov/find-a-housing-counselor/; or Lenders may use their own system to generate the list using the same HUD data that the CFPB uses on HUD-approved counseling agencies, in accordance with the CFPB’s list requirements (See http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm). or o The interim homeowners counseling disclosure within three (3) business days of the application. This option is acceptable on loans with applications dated prior to July 10, 2014. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-295 Conventional Lending Guide General Compliance Policies, Continued Digital Signatures Permitted for appraisals only. Compliance with Points & Fees The maximum points and fees applicable to a Qualified Mortgage vary based upon the loan amount. In addition, all dollar amounts, including loan amounts, will be adjusted for inflation annually on January 1 by the CFPB. The applicable points and fees thresholds for 2015 are listed below: Points and Fees Thresholds Note Amount Points and Fees Threshold Greater than or equal to $101,953 3% of Total Loan Amount $61,172-$101,952 $3,059 $20,391-$61,171 5% of Total Loan Amount $12,744-$20,390 $1,020 <=$12,743 8% of Total Loan Amount Continued on next page Conventional Lending Guide 100-296 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide General Compliance Policies, Points and Fees Calculation Continued The points-and-fees calculation is the same as that used in the HOEPA points-and-fees calculation. To calculate the points-and-fees, a creditor will add together the amounts paid in connection with the transaction in six categories of charges: 1. Finance Charge – In general, all items included in the finance charge under 1026.5(a) and (b) will be included, except the following: a. Interest or the time-price differential b. Mortgage Insurance Premiums i. For federal or state government sponsored MIPs, exclude up-front and annual FHA premiums, VA funding fees, and USDA guarantee fees ii. For PMI, exclude monthly or annual PMI premiums. Also can exclude upfront PMI premium if it is refundable on a prorated basis and a refund is automatically issued upon loan satisfaction. However, if the premium can be excluded, you must still include any portion exceeding the up-front MIP for FHA loans. c. Bona Fide Third Party Charges - Cannot be retained by the creditor, loan originator, or an affiliate of either d. Bona Fide Discount Points i. Exclude up to 2 bona fide discount points if the interest rate before the discount doesn’t exceed the APOR by more than 1 percentage point; or ii. Exclude up to 1 bona fide discount point if the interest rate before the discount doesn’t exceed the APOR by more than 2 percentage points. 2. Loan Originator Compensation – Compensation paid directly or indirectly by a consumer or creditor to a loan originator that is not an employee of the creditor or mortgage broker must be included. a. Compensation paid by the creditor to its own employee loan originator on a transaction can be excluded; b. Compensation paid by a mortgage broker to its own employee loan originator on a transaction can be excluded; c. Compensation paid by a consumer directly to a mortgage broker can be excluded (so long as the amount has already been included in the points-andfees under the finance charge); d. Compensation paid by a creditor to a mortgage broker that is not its own employee is to be included 3. Real Estate-Related Fees – The following categories of charges are excluded if (i) the charge is reasonable; (ii) the creditor receives no direct or indirect compensation; and (iii) the charge is not paid to an affiliate of the creditor: a. Title related fees b. Loan-related documentation preparation fees c. Notary and credit-report fees d. Property appraisal or inspection fees e. Amounts paid into escrow or trustee accounts that are not otherwise included in the finance charge 4. Premiums for credit insurance; credit property insurance; other life, accident, health or loss-of-income insurance where the creditor is beneficiary; or debt cancellation or suspension coverage payments a. Do not include these charges if they are paid after consummation of the loan b. For purposes of this provision, credit property insurance is defined as insurance that protects the creditor’s interest in the property and does not include homeowner’s insurance that protects the consumer. 5. Maximum Prepayment Penalty – note Homeward does not offer prepayment penalty options. 6. Prepayment Penalty Paid in a Refinance – If a creditor is refinancing a loan that it or its affiliate currently holds or services, then any penalties charged for prepaying the previous loan must be included – note Homeward does not offer prepayment penalty options. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-297 Conventional Lending Guide Continued on next page Conventional Lending Guide 100-298 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide General Compliance Policies, High Cost Loans Continued Mortgage loans that are designated as “high-cost” or “high-risk” are not eligible for funding with Homeward. By definition, a high-cost mortgage is any consumer credit transaction, whether closed-end or open-end, that is secured by the consumer’s principal dwelling in which: The annual percentage rate applicable to the transaction will exceed the average prime offer rate (“APOR”), as defined in § 1026.35(a)(2), for a comparable transaction by more than: 6.5 percentage points for a first-lien transaction 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,000; or 8.5 percentage points for a subordinate-lien transaction; or The transaction’s total points and fees will exceed: 5 percent of the total loan amount for a transaction with a loan amount of $20,391 or more; the $20,391 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1; or The lesser of 8 percent of the total loan amount or $1,020 for a transaction with a loan amount of less than $20,391; the $1,020 and $20,391 figures shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-299 Conventional Lending Guide General Compliance Policies, Higher Priced Mortgage Loans Continued Homeward will not fund loans that are categorized or qualify as Higher Priced Mortgage Loans unless otherwise specified within the product summaries. By definition, a “Higher Priced Mortgage Loan” (HPML) is a first lien secured by a primary residence that has an annual percentage rate (APR) of 1.5% or more above the average prime offer rate (APOR) for comparable transaction as of the rate lock date. APR and APOR are both defined in Regulation Z. Requirements, as outlined in Regulation Z, must be followed. Loans that are not eligible include, but are not limited to, loans with prepayment penalties, ARMs with initial period less than 7 years and 5 year balloon reset mortgages. Higher Priced Covered Transactions A Higher Priced Covered Transaction is a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, other than a qualified mortgage under paragraph (e)(5) or (f) of § 1026.43; by 3.5 or more percentage points for a first-lien covered transaction that is a qualified mortgage under paragraph (e)(5) or (f) of § 1026.43; or by 3.5 or more percentage points for a subordinate-lien covered transaction. NOTE: Homeward does not purchase subordinate lien transactions. IMPORTANT: A Higher Priced Mortgage Loan (HPML) will always be considered a Higher Priced Covered Transaction; however, a Higher Priced Covered Transaction may not always be a Higher Priced Mortgage Loan. Prepayment Fees or Penalties Prepayment fees or penalties prohibited under any State, Local or Federal Laws or may create an oppressive financial condition are not permitted. Continued on next page Conventional Lending Guide 100-300 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide General Compliance Policies, Continued Net Tangible Benefit All loans are required to provide a net tangible benefit to the borrower; must use state specific forms where required. Federal and State Regulations Brokers represent and warrant to Homeward that all loans delivered to Homeward are originated in accordance with state and federal law. Repayment Ability Homeward Residential does not engage in the practice of making loans unless it is reasonably believed the borrower has the ability to repay the loan based on a consideration of current and expected income, current obligations, employment status, other financial resources or other compensating factors other than the borrower’s equity in the dwelling which will secure repayment of the loan as determined through reasonable means in accordance with the underwriting standards and procedures normally observed for the particular loan products. Title Commitment Title Commitment must include 24 month history of property ownership and is valid for 60 days. NOTE: Gap endorsements are acceptable. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-301 Conventional Lending Guide General Compliance Policies, Code of Conduct Continued Homeward Residential is committed to making loans to all applicants in a consistent, fair and reasonable basis, striving to conduct our business in an ethical manner with the utmost professionalism. Homeward Residential does not endorse, nor conduct business that may be perceived as “Predatory” in nature. For example, we will not conduct business with brokers who engage in equity stripping (serial re-financings that strip away borrower equity), churning (re-financing loans with little or no benefit to the borrower) and packing (including superfluous hidden expenses and fees in a loan). Homeward Residential conducts its business in an ethical, fair and reasonable manner, maintaining an environment that encourages fair and equitable treatment of all customers within the spirit of fair lending laws. All borrowers will be treated fairly with regard to loan pricing, underwriting and service of the loan request irrespective of race, color, age, gender, marital status, disability or national origin. Homeward Residential respects its borrower(s) privacy data and complied with all anti-dissemination laws and rules relating to such, including, but not limited to the provisions of the Gramm-Leach-Bliley Act. All products are offered to the largest spectrum of borrowers to avoid targeting minorities with specific loan programs. Homeward Residential underwrites all loan products in a sound and consistent manner, always considering foremost the customers’ ability to repay. Continued on next page Conventional Lending Guide 100-302 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide General Compliance Policies, Interest Closing Protection Letters Continued Interest Credits permitted up to the 10th day of the month. Maximum amount of prepaid interest on any transaction not to exceed 45 days. Specific closing protection letters are required; Homeward Residential will not accept E&O Insurance Policies. Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-303 Conventional Lending Guide Closing Policies & Procedures Scheduling a Loan Loan must be Cleared to Close in order to schedule for Closing. Request to Close (Broker Fee Sheet) and Preliminary HUD must be uploaded into Image Flow. To schedule the loan, the Broker will email [email protected] with the date and time of the closing: Allow a minimum of 48 hours from when loan is being scheduled to closing/signing date. A confirmation email will be sent to the Broker. Closing Practices The next sections reiterate and highlight best practices for Homeward Residential’s closing and funding process. Verification of Employment A verbal verification of employment must be completed within 5 days of the Note Date and must include: Independent Verification of Employer’s phone number. Borrower’s start date. Verification borrower is still employed. Closing Protection Letter Homeward Residential Funding will validate all Closing Protection Letters as well as Closing Agents wiring information prior to the loan funding. Taxes Any taxes that are due within 60 days of closing must be collected at closing and be reflected on the HUD-1 settlement statement regardless if loan is escrowing or not. Insurance Insurance must be paid through the first mortgage payment. Title Commitment Title Commitment must include 24 month history of property ownership and is valid for 60 days. Continued on next page Conventional Lending Guide 100-304 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Closing Policies & Procedures, Escrow Accounts Continued Escrow waiver permitted as indicated below for LTVs less than or equal to 80% (90% in California). Partial Escrow Accounts permitted under the following circumstances: Hazard & Wind Insurance(s) may be waived with taxes still escrowed. o Note in this scenario, the escrow wavier fee is not applied. o If HO-6 insurance is required, then it must be escrowed regardless of partial escrow request. Note if the loan requires flood insurance, then partial escrow waivers are not permitted; either a full escrow account or a full escrow wavier is required. Escrows may not be waived for any real estate taxes when delinquent taxes past due by more than 60 calendar days are being included in the new loan amount (for cash-out refinance transactions). Refer to the daily rate sheet for non-escrow account loan level price adjustments to be applied when full escrows are waived. Escrow accounts are required in the following circumstances: When the loan requires Mortgage Insurance of any type, including single premiums and LPMI. NOTE: In California, loans with LTVs between 80.01% - 90.00%, the borrower may elect to waive escrows for Taxes and Insurance (subject to the above requirements), but MUST escrow any Mortgage Insurance premiums that are to be paid by the Servicer. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-305 Conventional Lending Guide Closing Policies & Procedures, Seller Contributions Seller Contributions are limited to program maximums as identified on the Loan Approval. Allowable Seller Paid Fees on Lender Paid Transaction: Any or all 3rd Party Fees (Title, Appraisal, Credit, etc.) Allowable Seller Paid Fees on a Borrower Paid Transaction: Premium Pricing Credits Continued Any or all 3rd Party Fees (Title, Appraisal, Credit, etc.) Broker Compensation Allowable Fees Paid By Premium Credit: Any and all Third Party Fees (Title, Appraisal, Credit, etc.) Interest, Escrow Accounts, Taxes Due, HOA Dues, Oil Adjustments, etc. POC Items, such as appraisal and insurance on Purchase Transactions. Interest on loan being paid off as well as any fees associated with payoff. NOTE: Broker compensation of any kind may not be paid by the Premium Credit. Continued on next page Conventional Lending Guide 100-306 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Closing Policies & Procedures, Principal Reductions Continued Lender Paid Transactions On transactions where the loan originator is paid by the lender, Homeward Residential, Inc. will permit a Principal Curtailment on rate term refinance loans unless noted below as a result of excess premium rate credit. The excess premium must be identified on the HUD-1 Settlement Statement and is limited to the amount of the excess premium rate credit below. The premium rate credit is the amount associated with the lowest pricing rate option that allows for some or all of the borrower's closing costs to be paid so the borrower does not have to pay those closing costs out of pocket. Principal curtailments are limited to the lesser of 2% or $2000. If the program permits, the borrower may also receive cash back within program guidelines in addition to the amount of the curtailment. Check your product summary for cash back eligibility criteria. Borrower Paid Transactions On transactions where the loan originator is paid by the consumer, principal curtailments are not permitted in any amount. The premium rate credit may not exceed the amount of third party costs. NOTE: After closing, borrower may enroll in weekly, bi-weekly and semimonthly principal reduction programs by visiting the servicing website at www.ocwen.mortgagebanksite.com Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-307 Conventional Lending Guide Closing Policies & Procedures, HUD Approval Process Homeward Residential will approve all HUD-1 statements prior to the loan funding and wire being released. The HUD Approval Process ensures: Funding Continued Borrower has brought the minimum funds to closing as required per program. Borrower’s funds to close do not exceed assets verified per the loan approval. Borrower is not receiving more than the allowable cash at closing per program maximum. Premium Pricing Credit does not exceed allowable costs. Principal Reduction is within guideline. Wire cut off time is 3:30pm EST. Prior to ordering the wire, Homeward Residential will verify the following: VOE has been completed within 5 days of the Note HUD has been approved All Prior To Fund (PTF) conditions have been satisfied Fed Reference numbers are available upon request. Note, there may be a delay in retrieving once the wire has been ordered. Continued on next page Conventional Lending Guide 100-308 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide Closing Policies & Procedures, Payoff Requests Continued The following options are available to request a payoff on loans currently being serviced by Homeward Residential: Requests through Automated Voice Response Unit: 800-746-2936 Requests through phone agents: 800-746-2936 Online Requests: The borrower may login to their account at www.ocwen.mortgagebanksite.com to request a payoff. Written Request: Ocwen Loan Servicing ATTN: Cashiering - Payoffs 1661 Worthington Road, Suite 100 West Palm Beach, FL 33409 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-309 Conventional Lending Guide FNMA Loan Quality Initiative LQI Overview In response to Fannie Mae’s Loan Quality Initiative Homeward Residential will implement the following process changes to call out and address: Undisclosed Liabilities Confirmation of Borrower’s Identity Validation of Qualified Parties to the Transaction NOTE: The following process changes apply to loans applications taken on or after June 1, 2010. Continued on next page Conventional Lending Guide 100-310 Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide FNMA Loan Quality Initiative, Undisclosed Liabilities 1. 2. Continued At time of loan submission to Underwriting: Kroll’s Factual ID Report which will be pulled by the Submission team. Kroll’s Factual ID Report will be reviewed by the underwriter – heightening awareness of potential issues within the loan submission (i.e.: ssn, address discrepancies, etc) Upon issuance of Clear to Close: Underwriter will pull a Kroll Loan Review Report – Credit Refresh Report & MERS Report. (NOTE: This initiative requires the Loan Review Report to be pulled within 5 days of closing. If loan does not close within 5 days of date of report, closing coordinator will return file to underwriter and a new Loan Review Report must be pulled and analyzed. If the credit report used in underwriting the loan, as verified by the most recent AUS findings, is dated less than five (5) calendar days prior to the note date, then a credit refresh is not required.) Underwriter will review report for new debt and significant increases in liability. If the payments on any new and/or existing debt cause the DTI to increase, the underwriter must update monthly payments and balances on the 1003 in Avista and resubmit the loan through DU to assure recommendation remains A/E. (NOTE: If the monthly payments have decrease, the underwriter is not required to update the 1003 or resubmit the loan through DU). For Conventional loans Only, if any new derogatory credit is report, DU must be re-run with a new credit report. If there are any credit inquiries dated AFTER the DU/LP credit report on the LQI report: DU Loans – Homeward must confirm that the borrower has not obtained any additional credit that is not reflected in the credit report or the mortgage application. If additional credit was obtained, a verification of that debt must be provided and the borrower must be qualified with the monthly payment. LP Loans – Homeward must determine whether additional credit was granted. A letter from the creditor or, if such a letter is unobtainable, a signed statement from the Borrower may be used to determine whether additional credit was obtained. If additional credit was granted, the Seller must obtain verification of the debt and must consider the debt when qualifying the Borrower. The Loan Review Report does not contain fico scores. The only time the loan will be subject to re-pricing and re-verification of eligibility is when new debt has been incurred and/or monthly payments on existing debts have increased such that the DTI is outside the AUS total expense ratio tolerances or when new derogatory credit is reported requiring a new tri-merge Credit Report to be run with DU. The MERS section of the Loan Review Report must be reviewed by the underwriter to identify any undisclosed properties and mortgage liability. Continued on next page Homeward Residential Client Select REV 06/26/2015 Conventional Lending Guide 100-311 Conventional Lending Guide FNMA Loan Quality Initiative, Confirmation of Borrower’s Identity Validation of Qualified Parties to the Transaction Continued Homeward Residential requires that the Closing Agent/Attorney provided evidence in the file that the identification document included a photo and has been checked for each borrower This is not responsibility of the underwriter. 1. At time of loan submission to Underwriting: Kroll Full Facts Report will be pulled by the Submission team. Kroll’s Full Facts Report will check all parties to the transaction against HUD’s LDP/GSA lists. Any party to the transaction included on either list will result in the loan being ineligible for approval/funding Material parties include but are not limited to: o Borrower o Seller o Processor o Listing/Seller Realtor o Builder o Loan Officer o Broker o Title Company o Appraiser If party is not known at time of loan submission, underwriter will be required to add party to report and re-run to confirm they are not on either list. Until Full Facts report is implemented, underwriter will rely on LDP/GSA lists as validated thru Fraud Guard or as pulled directly thru the FHA Connection Conventional Lending Guide 100-312 Homeward Residential Client Select REV 06/26/2015
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