conventional loan program guide - pacific union financial

Pacific Union Financial, LLC 2017

Conventional Loan Program Guide - Wholesale of 95 2/20/2017

For business and professional use only. Not for consumer distribution. This document is not an advertisement as defined in

12 CFR 226.2 (a) (2). All products are subject to credit and property approval. Other restrictions and limitations may apply. #NMLS-

2221, Pacific Union Financial, LLC. Subject to change without notice. All rights reserved. Equal Housing Lender.

Conventional Loan Program Guide Fixed Rate, 5/1 ARM and 7/1 ARM

Wholesale Lending February 20, 2017

Conventional Loan Program Guide ...................................................................................... 1 Fixed Rate, 5/1 ARM and 7/1 ARM ...................................................................................... 1

Program Overview ......................................................................................................... 6 Product Overlays ........................................................................................................ 6

Credit Philosophy .......................................................................................................... 6 Ability to Repay and Qualified Mortgage ........................................................................ 7

Program Parameters ...................................................................................................... 7 Eligible Programs ........................................................................................................ 7 Ineligible Programs/Options ......................................................................................... 7 Program Details ......................................................................................................... 7 ARM Program Information ........................................................................................... 7 ARM Closing Documents .............................................................................................. 8

Credit Score Requirements ............................................................................................. 8 Loan Limits ................................................................................................................... 8 Loan to Value (LTV) Matrices .......................................................................................... 9

Fixed Rate LTV Matrix ................................................................................................. 9 5/1 and 7/1 ARM LTV Matrix ...................................................................................... 10

LTV/(H)CLTV >95% to 97% - Fannie Mae only ................................................................ 10 Mortgage Insurance .................................................................................................. 11

Automated Underwriting Systems (AUS) ........................................................................ 11 Loan Product Advisor (LPA) – Fixed Rate only .............................................................. 11 Desktop Underwriter (DU) ......................................................................................... 13

Assets ........................................................................................................................ 18 Asset Documentation ................................................................................................ 18 Business Accounts .................................................................................................... 19 Borrower’s Commission on Subject Transaction ............................................................ 19 Cash Reserves ......................................................................................................... 20 Cash Deposit on Sales Contract (Earnest Money) .......................................................... 21 Credit Card Charges, Cash Advances and Unsecured Lines of Credit – Desktop Underwriter (DU) ....................................................................................................................... 22 Credit Card Charges, Cash Advances and Unsecured Lines of Credit – Loan Product Advisor (LPA) ...................................................................................................................... 22 Employer Assistance ................................................................................................. 22 Gift from a Related Person ......................................................................................... 23 Gift of Equity ........................................................................................................... 23 Gift or Grant from an Agency ..................................................................................... 24 Ineligible Source(s) of Funds ...................................................................................... 24 Large Deposits ......................................................................................................... 24 Life Insurance – Cash Value ....................................................................................... 26






Marketable/Publicly Traded Securities (Stocks, Bonds and Mutual Funds) ........................ 26 Pooled Funds ........................................................................................................... 27 Proceeds from the Sale of Real Property ...................................................................... 28 Rent Credit/Option to Purchase .................................................................................. 28 Retirement Accounts ................................................................................................. 28 Secured / Unsecured Loans........................................................................................ 29 1031 Tax Deferred Exchange ..................................................................................... 29 Trust Accounts ......................................................................................................... 29 Verification of Assets for Non-U.S. Citizens .................................................................. 30

Borrower Contribution from Own Funds .......................................................................... 30 Borrowers................................................................................................................... 31

Age of Borrower ....................................................................................................... 31 Borrower Eligibility.................................................................................................... 31 Borrower in the Construction Industry ......................................................................... 31 Non-Borrowing Spouse .............................................................................................. 32 Non-Occupying Co-Borrowers..................................................................................... 32 Non-U.S. Citizens ..................................................................................................... 32 Separated Borrowers ................................................................................................ 32 Social Security Number (SSN) Validation ..................................................................... 33

Credit / Underwriting ................................................................................................... 33 Age of Documents .................................................................................................... 33 Authorized User Accounts .......................................................................................... 33 Bankruptcy - Multiple Filings – Desktop Underwriter (DU) only ....................................... 34 Borrowers without a Usable Credit Score ..................................................................... 34 Collection, Past Due, and Charge-Off Accounts ............................................................. 35 Consumer Credit Counseling (CCCS) ........................................................................... 35 Disputed Tradelines .................................................................................................. 35 Judgments ............................................................................................................... 35 Mortgage Payment History ......................................................................................... 35 Modified Mortgages ................................................................................................... 36 Multiple Financed Properties – Desktop Underwriter (DU) only ....................................... 36 Multiple Financed Properties – Loan Product Advisor (LPA) only ...................................... 38 Restructured Mortgages ............................................................................................ 38 Foreclosure – Desktop Underwriter (DU) ..................................................................... 39 Mortgage Charge-Off - Desktop Underwriter (DU) ......................................................... 40 Short Sale/Preforeclosure Sale/Deed-in-Lieu of Foreclosure ........................................... 40 Significant Derogatory Credit ..................................................................................... 42 Tax Liens ................................................................................................................. 42

Collateral.................................................................................................................... 43 General Property Eligibility Requirements .................................................................... 43 Ineligible Properties .................................................................................................. 43 Appraisal Requirements ............................................................................................. 43 Re-use of an Appraisal for a Subsequent Transaction .................................................... 44 Appraisal Forms ....................................................................................................... 45 Appraisal Transfers ................................................................................................... 46 Accessory Units ........................................................................................................ 47 Borrower Acknowledgement ....................................................................................... 47 Disclosure of Information to Appraisers – Desktop Underwriter (DU) only ........................ 48 Escrow Holdback ...................................................................................................... 48






Flip Properties .......................................................................................................... 49 Inspections and Certification Requirements .................................................................. 50 Leaseholds .............................................................................................................. 50 Legal Non-Conforming Properties ............................................................................... 50 Mixed Use Properties................................................................................................. 51 Modular and Panelized Homes .................................................................................... 51 Property Affected by a Disaster .................................................................................. 51 Property Listed for Sale ............................................................................................. 51 Resale Restricted Properties – Loan Product Advisor (LPA) only ...................................... 52 Rural Properties – Loan Product Advisor (LPA) only ....................................................... 53 Solar Panels – Desktop Underwriter (DU) only.............................................................. 53 Solar Panels – Loan Product Advisor (LPA) only ............................................................ 53 Unique Property Types .............................................................................................. 54 Unpermitted Additions............................................................................................... 55

Condominiums ............................................................................................................ 55 Documentation Requirements .................................................................................... 55

Debt to Income Ratios/Qualifying .................................................................................. 55 Qualifying Rate ........................................................................................................ 55 Maximum Debt to Income Ratio (DTI) ......................................................................... 56 Higher-Priced Mortgage Loans (HPMLs) and HPML Qualified Mortgages ............................ 56

Geographic Restrictions ................................................................................................ 56 High Balance Loans in Alaska and Hawaii ..................................................................... 57

Income and Employment .............................................................................................. 57 Assets as a Basis for Mortgage Qualification – Loan Product Advisor (LPA) only ................ 57 Automobile Allowance ............................................................................................... 58 Bonus or Overtime Income ........................................................................................ 58 Borrower Employed by a Family Member or Party to the Transaction............................... 59 Capital Gains Income ................................................................................................ 59 Child Support, Alimony, Separate Maintenance............................................................. 60 Commission Income.................................................................................................. 60 Continuity of Income................................................................................................. 61 Employment Offers or Contracts - Desktop Underwriter (DU) only .................................. 61 Employment-Related Assets as Qualifying Income – Desktop Underwriter (DU) only ......... 62 Foreign Income – Desktop Underwriter (DU) only ......................................................... 63 Foster Care Income .................................................................................................. 63 Housing or Parsonage Allowance ................................................................................ 63 IRS Form 4506-T ...................................................................................................... 64 Use of IRS Tax Transcripts in Lieu of Income Documentation ......................................... 64 Long-term Disability Income ...................................................................................... 64 Mortgage Differential Payments .................................................................................. 65 Newly Employed Borrowers........................................................................................ 65 Non-Taxable Income ................................................................................................. 65 Notes Receivable ...................................................................................................... 65 Re-entering the Workforce – Loan Product Advisor (LPA) only ........................................ 65 Rental Income.......................................................................................................... 65 Retirement, Government Annuity and Pension Income – Desktop Underwriter (DU) only ... 68 Retirement, Government Annuity and Pension Income – Loan Product Advisor (LPA) only . 69 Royalty Income ........................................................................................................ 70 Seasonal Employment and Unemployment Compensation .............................................. 70






Secondary / Part-time Employment ............................................................................ 70 Self-Employed Borrowers .......................................................................................... 70 Significant Increase or Decrease in Income Level ......................................................... 73 Social Security Income .............................................................................................. 74 Stable Monthly Income .............................................................................................. 74 Temporary Leave Income .......................................................................................... 75 Tip Income .............................................................................................................. 76 Trust Income ........................................................................................................... 76 Unreimbursed Employee Business Expenses ................................................................ 77 Verification of Employment (VOE) ............................................................................... 77

Liabilities .................................................................................................................... 78 Alimony, Child Support or Separate Maintenance Payments ........................................... 78 Business Debt in Borrower’s Name.............................................................................. 78 Contingent Liability ................................................................................................... 78 Debt Secured by Financial Assets ............................................................................... 79 Deferred Payments (includes Deferred Student Loans) .................................................. 79 Garnishments .......................................................................................................... 80 Installment Debt ...................................................................................................... 80 Lease Payments ....................................................................................................... 80 Open-End (30-day) Accounts ..................................................................................... 80 Revolving Debt ......................................................................................................... 81 Sale or Conversion of Primary Residence – Desktop Underwriter (DU) only ...................... 81 Sale or Conversion of Primary Residence – Loan Product Advisor (LPA) only .................... 82 Student Loans .......................................................................................................... 82 Unreimbursed Employee Business Expenses ................................................................ 82

Mortgage Insurance (MI) .............................................................................................. 82 Mortgage Insurance Coverage Requirements ............................................................... 83 Mortgage Insurance Plans .......................................................................................... 83 Mortgage Insurance Providers .................................................................................... 84

Occupancy .................................................................................................................. 84 Primary Residence .................................................................................................... 84 Second Home........................................................................................................... 84 Investment Property ................................................................................................. 85

Property Insurance ...................................................................................................... 85 Secondary Financing .................................................................................................... 86

Ineligible Subordinate / Second Mortgages................................................................... 86 Purchase Transactions ............................................................................................... 86 Home Equity Line of Credit (HELOCs) .......................................................................... 87 Seller Carried Secondary Financing ............................................................................. 87 Refinance Transactions .............................................................................................. 87

Seller/Interested Party Contributions ............................................................................. 87 Transactions ............................................................................................................... 89

Purchase ................................................................................................................. 89 Rate/Term (“No Cash-out”) Refinance ......................................................................... 89 Cash-out Refinance ................................................................................................... 90 Continuity of Obligation ............................................................................................. 90 Delayed Financing .................................................................................................... 91 Land Contract or Contract for Deed ............................................................................. 92 Net Tangible Benefit ................................................................................................. 92






Non-Arm’s Length Transactions .................................................................................. 92 Purchase of Fannie Mae HomePath (REO) Properties – Fannie Mae Only .......................... 93 Refinance to Buyout a Co-Owner ................................................................................ 93 Refinance Transactions with a PACE Subordinate Lien ................................................... 94

Miscellaneous Policies .................................................................................................. 94 Borrower Paid Fees ................................................................................................... 94 Closing Policy ........................................................................................................... 95 Fees and Services ..................................................................................................... 95

Product Codes ............................................................................................................. 95

Conventional Loan Program Guide

Pacific Union Financial, LLC






Program Overview

This Program Guide provides an overview of the conventional products and policies eligible for delivery to Pacific Union Financial, LLC for financing consideration. The details are based on the policies outlined in the Freddie Mac Single Family Seller/Servicer Guide (“Freddie Mac Seller Guide”) and/or the Fannie Mae Single Family Selling Guide (“Fannie Mae Seller Guide”). The guidelines within this document apply to all loans evaluated using LPA (Fixed Rate only) or DU unless stated otherwise. For information regarding the following programs, refer to the applicable program guidelines:

Fannie Mae DU Refi Plus

Fannie Mae HomeReady Freddie Mac Home Possible Freddie Mac Relief Refinance

Product Overlays

Pacific Union Financial makes every effort to keep guideline overlays to a minimum. Existing overlays are detailed in the Overlay Matrices.

Overlay Matrix Several policies that were previously classified as overlays have been reviewed and

reclassified as not being overlays. Information regarding those items may be found in the Reclassified Overlay Matrices. Reclassified Overlay Matrix

Overlays that have been withdrawn or lifted are detailed in the Removed/Lifted Overlay Matrices. Withdrawn-Lifted Overlay Matrix

Credit Philosophy

The Pacific Union Financial philosophy is to offer our products with minimal overlays to our clients. All

loans are evaluated in accordance with the following principles:

All loans require an Automated Underwriting System (AUS) approval as follows: Conventional Fixed Rate products must be evaluated using DU. Fannie Mae Only products must be evaluated using DU. Freddie Mac Only Fixed Rate products must be evaluated using LPA.

An LPA Accept/Eligible or DU Approve/Eligible recommendation is required. Loans that receive the following recommendations are not eligible:

LPA Caution Risk Class with or without A-Minus eligibility DU Refer with Caution

Loans that are submitted to LPA or DU and do not receive credit approval may not be submitted to the other underwriting system.

Manual underwriting is not allowed. Each loan is evaluated in accordance with:

Freddie Mac or Fannie Mae policies as defined in the applicable Seller Guide.

Loan Product Advisor or Desktop Underwriter feedback/findings. Policies as outlined within this Program Guide.

Each loan applicant is underwritten individually, and all credit standards are applied consistently to each borrower.

All factors are weighed in when evaluating a loan file. The underwriting decision is not based on any single item or factor.

http://flow.pacificunionfinancial.com/docs/OverlayMatrixWLExt.pdf

http://flow.pacificunionfinancial.com/docs/ReclassifiedOverlayMatrixExt.pdf

http://flow.pacificunionfinancial.com/docs/WithdrawnLiftedOverlayMatrixExt.pdf








Ability to Repay and Qualified Mortgage

Pacific Union is committed to complying with Ability-to-Repay and Qualified Mortgage rules (ATR/QM) by making a reasonable, good-faith determination that borrowers have a reasonable ability to repay the loan in accordance with the policies set forth within Fannie Mae and Freddie Mac guidelines. Factors considered in making this determination include the borrower’s income, assets and

employment status (if relied on) against the mortgage loan payment, ongoing expenses related to the mortgage loan or the subject property, payments on simultaneous loans secured by the subject property, other debt obligations, and alimony and child-support payments as required by Fannie Mae and Freddie Mac. A borrower’s credit history is also considered in the evaluation and must comply

with Fannie Mae and Freddie Mac policies. Pacific Union will utilize reasonably reliable third party sources of information.

Program Parameters

Eligible Programs

Conforming Balance and High Balance loan amounts

10, 15, 20, 25 and 30 year Fully Amortizing Fixed Rate 5/1 and 7/1 Fully Amortized LIBOR ARMs (Fannie Mae/Desktop Underwriter only)

Ineligible Programs/Options

Interest Only Temporary Buydowns Energy Efficient Mortgages Community Land Trusts

Fannie Mae MyCommunityMortgage Fannie Mae HomeStyle Renovation Freddie Mac Renovation Mortgages

Program Details

All programs are fully amortizing. Temporary Buydowns are not permitted.

ARM Program Information

Index: The index is the average of interbank offered rates for one-year U.S. dollar denominated deposits in the London market (“LIBOR”), as published in the Wall Street

Journal. Margin: The base margin is 2.25%. Refer to the rate sheet for applicable margin add-ons. Floor: The margin is the floor. 5/1 ARM caps:

2% at first adjustment (Initial Periodic Cap) 2% at each subsequent adjustment (Subsequent Periodic Cap) 5% over initial note rate (Lifetime Cap)

7/1 ARM caps: 5% at first adjustment (Initial Periodic Cap)

2% at each subsequent adjustment (Subsequent Periodic Cap) 5% over initial note rate (Lifetime Cap)

Conversion Option: Not convertible Interest Rate / Payment Change Date:








The first interest rate and payment adjustment is at 60 months for the 5/1 ARM and 84

months for the 7/1 ARM. Subsequent adjustments occur every 12 months. The payment change date is the first day of the month following an interest rate change

date. It is the date in which a payment change due to an interest rate change becomes effective.

Fannie Mae ARM Plan Numbers: Fully Amortized 5/1 ARM with 2/2/5 caps: FM GENERIC, 5 YR Fully Amortized 7/1 ARM with 5/2/5 caps: FM GENERIC, 7 YR

ARM Closing Documents

Note: Fannie Mae Form 3528 or state specific version Rider: Fannie Mae Form 3187 – Non-convertible Fully Amortizing 5/1, 7/1 or 10/1 LIBOR

Adjustable Rate Rider.

Acceptable ARM disclosure.

Credit Score Requirements

Loan Product Advisor (LPA) Desktop Underwriter (DU) Determined by LPA, but not less than 620.

Refer to Borrowers without a Usable Credit

Score, if applicable. For LTV >80%, the minimum score required

by the MI provider must be met.

Determined by DU, but not less than 620. Conforming Balance: Refer to Borrowers

without a Usable Credit Score, if applicable. High Balance: All borrowers must have a

credit score.

For LTV >80%, the minimum score required by the MI provider must be met.

Loan Limits

Conforming Balance and High Balance loan amounts are available as shown below. Effective for loans submitted and/or resubmitted to DU/LPA as follows:

Desktop Underwriter (DU): On or after December 10, 2016 Loan Product Advisor (LPA): On or after December 2, 2016

2017 Maximum and Minimum Loan Amounts

Maximum Conforming Balance High Balance 1

Units Contiguous

States

Alaska and

Hawaii 3

Contiguous

States

Alaska and

Hawaii 3

1 $424,100 $636,150 $636,150 $954,225

2 $543,000 $814,500 $814,500 $1,221,750 2

3 $656,350 $984,525 $984,525 $1,476,775 2

4 $815,650 $1,223,475 2 $1,223,475 2 $1,835,200 2

Minimum-Conforming: None Minimum-High Balance: Conforming loan amount plus $1

1. High Balance: Refer to Maximum County Limits (select Fannie/Freddie in Limit Type field)

2. Conventional and Freddie Mac (Fixed Rate only): Maximum $1,000,000 loan amount. 3. Hawaii is not permitted. Alaska: Refer to Appraisal Forms for High Balance appraisal and field

review requirements.

https://entp.hud.gov/idapp/html/hicostlook.cfm








Effective for loans submitted and/or resubmitted to DU/LPA as follows: Desktop Underwriter (DU): Prior to December 10, 2016 Loan Product Advisor (LPA): Prior to December 2, 2016

2016 Maximum and Minimum Loan Amounts

Maximum Conforming Balance High Balance 1

Units Contiguous

States Alaska and

Hawaii 3 Contiguous

States Alaska and

Hawaii 3

1 $417,000 $625,500 $625,500 $938,250

2 $533,850 $800,775 $800,775 $1,201,150 2

3 $645,300 $967,950 $967,950 $1,451,925 2

4 $801,950 $1,202,925 2 $1,202,925 2 $1,804,375 2

Minimum-Conforming: None Minimum-High Balance: Conforming loan amount plus $1

1. High Balance: Refer to Maximum County Limits (select Fannie/Freddie in Limit Type field) 2. Conventional and Freddie Mac (Fixed Rate only): Maximum $1,000,000 loan amount.

3. Hawaii is not permitted. Alaska: Refer to Appraisal Forms for High Balance appraisal and field review requirements.

Loan to Value (LTV) Matrices

The loan to value is the base loan amount divided by the lesser of the appraised value or the purchase price. The combined loan to value (CLTV) is the combined loan amounts of any first and second liens

divided by the lesser of the appraised value or the purchase price. If subordinate financing is the form of a Home Equity Line of Credit (HELOC), the full credit line is used to determine the (H)CLTV, regardless if funds have been drawn. Note that all references to “(H)CLTV” within this Program Guide apply to CLTV/(H)CLTV.

Fixed Rate LTV Matrix

Fixed Rate Conforming and High Balance

Occupancy

Purpose

Units

Conventional

DU Only LTV/(H)CLTV

Freddie Mac

LPA Only LTV/(H)CLTV

Fannie Mae

DU Only LTV/(H)CLTV

Primary

Purchase and Rate/Term

1 95%/95% 95%/95% 97%/97% 1

95%/95%

2 80%/80% 80%/80% 85%/85%

3-4 75%/75% 80%/80% 75%/75%

Cash-Out 1 80%/80% 80%/80% 80%/80%

2-4 75%/75% 75%/75% 75%/75%

Second Home

Purchase and

Rate/Term 1 85%/85% 85%/85% 90%/90%

Cash-Out 1 75%/75% 75%/75% 75%/75%

Investment Property

Purchase 1 85%/85% 85%/85% 85%/85%

2-4 75%/75% 75%/75% 75%/75%

Rate/Term 1 75%/75% 85%/85% 75%/75%

https://entp.hud.gov/idapp/html/hicostlook.cfm








Fixed Rate

Conforming and High Balance

Occupancy

Purpose

Units

Conventional

DU Only LTV/(H)CLTV

Freddie Mac LPA Only

LTV/(H)CLTV

Fannie Mae DU Only

LTV/(H)CLTV

2-4 75%/75% 75%/75% 75%/75%

Cash-Out 1 75%/75% 75%/75% 75%/75%

2-4 70%/70% 70%/70% 70%/70%

1. Allowed on Conforming loan amounts only. See LTV/(H)CLTV >95 to 97% for eligibility requirements.

5/1 and 7/1 ARM LTV Matrix

5/1 and 7/1 ARM – Fannie Mae (DU) only

Occupancy

Purpose

Loan Amount

Units

DU Only LTV/(H)CLTV

Primary



1 90%/90%

2 75%/75%

3-4 65%/65%

Cash-Out Conforming and

High Balance

1 75%/75%

2-4 65%/65%

Second Home



1 80%/80%


High Balance 1 65%/65%

Investment Property

Purchase Conforming and

High Balance

1 75%/75%

2-4 65%/65%

Rate/Term Conforming and

High Balance 1-4 65%/65%


High Balance

1 65%/65%

2-4 60%/60%

LTV/(H)CLTV >95% to 97% - Fannie Mae only

Fannie Mae will allow up to 97% LTV/(H)CLTV on certain purchase and Rate/Term refinance transactions as described below.

Allowed on:

Fixed Rate Fannie Mae product only. One unit Primary Residence

Conforming loan amounts DU Approve/Eligible

Purchase transactions: Maximum 97% LTV/CLTV/(H)CLTV

At least one borrower must be a first time homebuyer, as indicated on the loan application (Form 1003) in Section VIII., when at least one borrower responds “No” to question M regarding ownership interest in a property in the last three years.

Rate/Term Refinance transactions: Maximum 97% LTV/CLTV/(H)CLTV








The existing loan must be owned by Fannie Mae. The Fannie Mae Loan Look-Up Table

may be used to determine if Fannie Mae owns the loan. A screen print of the results must be included in the loan file.

When submitting the loan to DU, “Fannie Mae” must be entered in the “Owner of Existing Mortgage” field in DU.

At least one borrower on the loan must have a qualifying credit score. See Credit Score Requirements.

Non-Occupying Co-Borrowers are not permitted.

Mortgage Insurance

35% MI coverage is required. LPMI is not allowed. Refer to the MI Matrix or MI provider website as some MI providers have credit score

overlays for 97% LTV loans. External MI Matrix

Automated Underwriting Systems (AUS)

Loan Product Advisor (LPA) – Fixed Rate only

Loans submitted to Loan Product Advisor (LPA) must receive an Accept/Eligible Risk Class. Loans that

receive a Risk Class of “Caution”, with or without A-Minus eligibility, are not eligible. Loans that do not receive credit approval through DU may not be resubmitted to LPA. Loans that are evaluated using LPA must be coded and priced as Freddie Mac Only.

“Loan Product Advisor” guidelines within this program guide apply to Fixed Rate loans only. ARM loans may not be underwritten through Loan Product Advisor.

Note: Loans may not be resubmitted to Loan Product Advisor after the loan has closed.

Disputed Tradelines

When LPA issues a message stating that multiple disputed tradelines have been identified on the borrower’s credit report, the accuracy of disputed tradelines must be confirmed.

If it is determined that the information is accurate, ensure that the disputed tradelines are considered in the credit risk assessment by obtaining a new credit report with the tradeline(s) no longer reported as disputed and resubmitting the loan casefile to LPA.

If LPA does not issue the disputed tradeline message, no further investigation is required.

However, if the account does belong to the borrower, ensure that the monthly payment, if any, has been included in the DTI ratios.

Documentation Levels

Loans may be documented in accordance with LPA Findings. Loans approved by LPA will receive either a “Streamlined Accept” or “Standard” documentation level and must be documented based on requirements indicated on the Feedback Certificate. Topic 5300 of the Freddie Mac Seller Guide provide more information regarding these documentation levels.

Invalid, Ineligible, or Incomplete Evaluation Status

Loans that receive an evaluation status of Invalid, Ineligible, or Incomplete are not eligible. If a loan receives one of these evaluation statuses, an attempt should be made to resubmit the loan

https://knowyouroptions.com/loanlookup

https://flow.pacificunionfinancial.com/docs/MI%20MatrixWLExt.pdf








with new and/or corrected information. If the loan continues to receive an Invalid, Ineligible, or

Incomplete evaluation status, it is not eligible.

Maximum Number of Borrowers

Loan Product Advisor cannot evaluate more than five borrowers on a single application.

Minimum Assessment Feedback (MAF)

The Minimum Assessment Feedback (MAF) shown in the LPA Feedback Certificate indicates

the least comprehensive appraisal or inspection report required for the submitted loan. A more comprehensive appraisal or inspection report may be obtained if desired.

The MAF is valid for 120 days. If the effective date of the Feedback Certificate is more than 120 days before the Note Date, the loan must be resubmitted to LPA.

Refer to the Collateral topic.

Resubmission Requirements

The final Risk Class and Documentation Level must be based on submission of accurate data to

LPA prior to the closing of the Mortgage. Resubmission to LPA prior to the closing of the Mortgage is required if:

Information on the previous submission was not true, complete or accurate. The most recent submission (including the date of the LPA credit report) will be more than

120 days prior to the Note Date. Any information used by LPA changes; however, a change from the previous submission

involving the following does not require resubmission.

Debts/Income: The monthly debt payment (including monthly housing expense) decreases. 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 3%,

and The total debt-to-income ratio on the previous submission did not exceed 45%.

Assets/Reserves: The amount of verified assets increases. The amount of verified reserves increases. The amount of verified reserves decreases to an amount that is no less than the reserves

required to be verified by LPA.

Loan Amount: The loan amount decreases by no more than 1% on a refinance transaction and at the time

of the most recent LPA submission mortgage insurance is not required on the Mortgage. The loan amount decreases by no more than 1% on a refinance transaction and at the time

of the most recent LPA submission mortgage insurance on the Mortgage is required, and The change does not impact the amount of the mortgage insurance coverage, and The amount of the mortgage insurance premium collected is based on the new loan

amount and a new mortgage insurance certificate is obtained. Any other changes in the information used by Loan Product Advisor require resubmission.

For example








The borrower's monthly debt payment (including the monthly housing expense) decreases,

the borrower's income decreases and the total debt-to-income ratio on the previous submission was 38%. Based on the revised monthly debt payment and income figures, the total debt-to-income ratio increased by 4%.

This Mortgage must be resubmitted to LPA because the borrower's income decreased and the change in the debt payment-to-income ratio was more than 3%. If the only change in the Mortgage had been a decrease in the monthly debt payment (including the monthly housing expense), resubmission would not have been required.

If a Mortgage is resubmitted to LPA, the Risk and/or Documentation Classes might change. However, LPA minimizes the number of times that the Documentation Class will change, even if the Risk Class changes. Documentation must comply with the requirements of the last Feedback Certificate.

Significant Inaccurate Information

If it is determined that the repository file used to create the borrower(s) credit report contains

significant inaccurate information, the LPA decision must be determined to be Invalid, and the loan will not be eligible.

Desktop Underwriter (DU)

Loans submitted to Desktop Underwriter (DU) must receive an Approve/Eligible recommendation. Loans that receive a Refer with Caution or Approve/Ineligible recommendation are not eligible. Loans that do not receive credit approval through LPA may not be resubmitted to DU. Fixed Rate loans evaluated using Desktop Underwriter (DU) may be coded and priced under the Conventional or Fannie

Mae program.

Note: Loans may not be resubmitted to Desktop Underwriter after the loan has closed.

Credit Report Requirements

A tri-merged credit report is required to establish a valid representative credit score. The borrower’s present address must be within the U.S. or U.S. territories, or an APO, FPO

or DPO military address located within the U.S.

Effective for loan submissions to DU 10.0 on or after September 24, 2016

Trended Credit Data DU 10.0 will use trended credit data in the risk assessment, which allows a more thorough

analysis of the borrower’s credit history and enhances the DU risk assessment to better support access to credit for creditworthy borrowers. Additional information is available on the Fannie Mae website: Desktop Underwriter web page

Desktop Underwriter V 10.0 Release - FAQs

Disputed Tradelines

DU will issue a disputed tradeline message only when the credit report reflects disputed tradelines with delinquencies that occurred within two years of the credit report date. Only the disputed tradelines listed in the DU message must be addressed.

If it is determined that the disputed tradeline information is accurate, ensure that the disputed tradelines are considered in the credit risk assessment by obtaining a new credit

hhttps://www.fanniemae.com/singlefamily/desktop-underwriter

https://www.fanniemae.com/content/faq/do-du-release-06252016-faqs.pdf








report with the tradeline no longer reported as disputed and resubmitting the loan casefile

to DU. If DU does not issue the disputed tradeline message, no further investigation is required.

However, if the account does belong to the borrower, ensure that the monthly payment, if any, has been included in the DTI ratios.

Documentation Requirements

Pacific Union Financial will accept loans documented as outlined in the DU Findings. DU indicates the minimum verification documentation requirements required. While DU may offer a reduced

level of documentation, a more comprehensive level of documentation is acceptable when circumstances in the loan file warrant it.

Errors in Credit Data

If the credit report contains derogatory information, and DU does not recognize or consider the derogatory information and does not reflect the derogatory information in the Underwriting Findings Report, the DU decision must be determined to be Invalid, and the loan will not be eligible.

High Balance Loan Requirements

Desktop Underwriter will attempt to standardize the subject address in order to determine the county to use when applying the loan limit. When DU is able to standardize the address, a message will be issued specifying the county used to determine the loan limit that was applied to the loan casefile.

When DU is not able to standardize the subject address, or the address standardization returns an

incorrect county, the lender may provide the Federal Information Processing Standard (FIPS) code on the online loan application and resubmit the loan to DU. The FIPS code is a unique code assigned to all geographic areas by the U.S. Census Bureau. The county can be identified by using the complete 11-digit FIPS code for the area in which the property is located, where the

first two digits are the state number, the next three are the county number, and the last six are the census tract number. The census tract is provided on the appraisal, and can also be found using other geocoding technology (i.e. the Census Geocoder on the U.S. Census Bureau website).

When the FIPS code entered on the loan application is used to derive the county and loan limit used to determine the loan’s eligibility, DU will issue a message requiring the lender to document the subject is located in the specified county.

When the FIPS code is provided and DU is not able to find a corresponding FIPS code in the loan limit file, a message will be issued indicating that the FIPS code provided on the loan application is invalid. DU will then attempt to standardize the address and use the county obtained. If DU is not able to standardize the address, DU will use the state loan limit and issue a message stating

that DU could not verify the submitted subject property address in order to determine the county in which the property is located so the state loan limit was used.

Maximum Number of Borrowers

Desktop Underwriter cannot evaluate more than four borrowers on a single application.

Multiple Financed Properties

Effective for loan submissions to DU 10.0 on or after September 24, 2016

http://geocoding.geo.census.gov/geocoder/geographies/address?form








DU 10.0 will determine the Number of Financed Properties, assess Eligibility and calculate

Reserve Requirements based on the number of financed properties when a borrower is financing a Second Home or Investment property.

See Multiple Financed Properties – Desktop Underwriter (DU) only.

Number of Financed Properties DU 10.0 will use the following waterfall approach to determine the number of financed 1-4

unit residential properties that will be used to assess eligibility and reserve requirements:

Process Action

When the Number of Financed Properties field is provided

DU will use that figure as the number of financed properties.

When the Number of Financed Properties field is not provided

DU will use the number of residential properties in the loan application Real Estate Owned (REO)

section that include a mortgage payment, or are associated to a mortgage or HELOC in the liabilities

section of the application, as the number of financed properties.

When the REO information has not been provided DU will use the number of mortgages and/or HELOCs disclosed in the liabilities section of the loan

application as the number of financed properties.

When none of the above information is provided on the loan application

DU will use the number of mortgages and HELOCs

disclosed on the credit report as the number of financed properties.

Note: DU will add “1” to the number of financed properties to account for the subject property on purchase and construction transactions when the REO section, number of mortgages on application, or number of

mortgages on credit report is used as the number of financed properties.

DU will issue a message indicating the number of financed 1-4 unit residential properties

and where the information was obtained. If DU used the information provided in the Number of Financed Properties field or in the

REO section as the number of financed properties, and that information is inaccurate,

the data must be updated and the loan casefile must be resubmitted to DU. If DU used the number of mortgages and HELOCs on the loan application or credit report

as the number of financed properties, and that number is inaccurate, the correct figure should be entered into the Number of Financed Properties field or the Real Estate Owned

section of the loan application should be completed, and the casefile must be resubmitted to DU. Note: If the only lien on a 1-4 unit property is a HELOC and no funds of the HELOC have been drawn (i.e. there is a zero balance), the property is considered to be financed and must be included in the number of financed properties.

The DU feedback must be reviewed to ensure that the number of financed properties evaluated by DU matches the number of financed properties per the loan application and/or credit report.

Eligibility DU 10.0 will use the number of financed properties, as determined above, to apply the

following eligibility guidelines: Minimum credit score of 720 for borrowers with 7-10 financed properties.

Maximum of 10 financed 1-4 unit residential properties.

Reserve Requirements DU 10.0 will calculate the reserve requirements based on the number of financed properties

and the feedback will include the required reserves for the subject property and other








financed properties, which includes those properties that are not the borrower’s Primary

Residence and not the subject property. The UPB for any open/active mortgage or HELOC on the credit report that is not

disclosed on the loan application will be included in the DU 10.0 reserves calculation. DU will issue an Ineligible recommendation and message if the loan casefile does not

meet the reserve requirements per the calculation. The reserves required by DU must be validated to ensure that the required

amount is based on an accurate number of financed properties. See Cash Reserves.

Non-Applicant Debts/Accounts

When DU encounters possible non-applicant accounts on the credit report, DU will include the accounts in the credit risk assessment, and will issue a message in the DU Underwriting Findings

report regarding the existence of the accounts. If the debts are on the loan application, DU will also include them in the DTI ratio. If documentation is provided to support that the debts do not belong to the borrower, the debt(s) may be removed from the loan application, and the loan may be resubmitted to DU in order for the DTI to be updated to exclude the non-applicant debts.

Out of Scope Recommendations

An Out of Scope recommendation indicates that DU is unable to underwrite the particular product, mortgage, or borrower submitted. Any mortgage that receives an Out of Scope recommendation

is not eligible.

Potential Red Flag Messages

DU provides a number of “potential red flag” messages designed to help detect inconsistencies in

the loan casefile. Neither the presence nor absence of these messages changes the responsibility to ensure accurate information in all areas of the loan process or otherwise comply with applicable law, including the Fair Credit Reporting Act.

The appearance of these messages does not affect the underwriting recommendation from DU. The messages are to be used as an aid in detecting inconsistencies. The absence of any of these messages does not indicate or imply Fannie Mae’s acceptance of the data submitted to DU.

Potential red flag messages include: Excessive Resubmissions: Alert provided when an unusually high number of loan

resubmissions may be the result of data manipulation. Manufactured Home Caution: Alert provided when a property type was not submitted as a

manufactured home, but Fannie Mae’s property database indicates that it may be a manufactured home. Note: Manufactured homes are not eligible, see Ineligible Properties.

Refer to DU Potential Red Flag Messages for additional information.

Property Fieldwork Recommendation

DU will recommend the use of one of three levels of property fieldwork: an appraisal based on an interior and exterior property inspection; an appraisal based on an exterior-only property inspection; or an exterior-only property inspection. Refer to the Collateral topic for Pacific Union Financial requirements.

https://www.fanniemae.com/content/tool/du-potential-red-flag-message-matrix.pdf








Resubmission Requirements

The final DU recommendation must reflect the loan as it was closed, including occupancy type, product type, amortization, loan term, property type, loan purpose, sales price, and appraised value. Verification documents must be reviewed and the verified values compared to the data submitted to DU. The terms of the closed loan must match the terms of the final loan casefile

submission to DU or fall within the following tolerances.

Data Attribute and Description

Trigger Action Required

Interest rate increase Discrepancies between the

credit report payments and

balances and those listed on the loan application, including

the presence of debt that is not on the credit report but is on the application

Additional debt(s) disclosed by the borrower or identified by the lender during the

mortgage process Verified income is less than

the income on the loan application submitted to DU

The changes cause the debt-to-income (DTI) ratio to: Exceed 45%, or

Increase by 3% or more (if the recalculated DTI ratio is less

than 45%)

Loan must be resubmitted to DU

Loan Amount increase or decrease

The loan amount may increase by the lesser of $500 or 1% of

the loan amount. The loan amount may decrease

by 5% of the loan amount. The above loan amount

tolerances are permitted provided the new LTV/CLTV does

not result in: Changes to the amount of

required MI coverage, or

Different loan-level price adjustments, or

Changes to the loan eligibility.


Interest rate on fixed-rate and

adjustable rate mortgages

Interest rate decreases, not as a

result of a permanent interest rate buydown

No resubmission required

Interest rate decreases as a result of a permanent interest

rate buydown


Assets – Funds required to close The actual amount of the assets

required to close the transaction exceeds the amount of “Funds

Required to Close” per the DU findings

If sufficient liquid assets to cover

the actual amount of assets required to close the transaction has been documented, no

resubmission required

Otherwise, loan casefile must be resubmitted to DU








Data Attribute and

Description Trigger Action Required

Assets – Reserves required to be

verified

Due to changes in the actual

amount of assets required to close the transaction, the verified amount of reserves is less than

the “Reserves Required to be Verified” per the DU Underwriting

Findings report

If the lender has documented reserves that equal at least 90%

of the Reserves Required to be Verified per the DU Underwriting

Findings report, no resubmission required

Otherwise, loan casefile must be resubmitted to DU

Social Security Validation

DU may identify data integrity issues pertaining to the borrower’s Social Security number, including numbers not issued, borrower age/issue date discrepancies, or Social Security numbers not associated with the borrower.

If the DU messaging is received and the Social Security issue is not resolved, the borrower

would not be eligible for financing with Pacific Union Financial. If Social Security number inconsistencies cannot be resolved:

Lenders must validate the Social Security number with the Social Security Administration (SSA). Direct validation with SSA by a third party is acceptable. SSA

Form 89 must be used for this purpose. Lenders must ensure that when utilizing third-party vendors, the vendors are going directly to the SSA to validate the Social Security numbers. It is important to note that most standard vendor reports are not direct SSA validations and do not satisfy Fannie Mae’s requirements.

If the Social Security number cannot be validated with the SSA, the loan is not eligible

for delivery to Fannie Mae.

Assets

The borrower must have sufficient cash assets to cover the minimum down payment, closing costs, and any required reserves. Requirements for certain asset types are detailed below. Refer to the Freddie Mac or Fannie Mae Seller Guide(s) for additional information on eligible sources of borrower funds guidelines not addressed in this section.

Asset Documentation

Assets must be documented in accordance with LPA or DU requirements. Loan Product Advisor:

Refer to the LPA Feedback Certificate and/or the Loan Product Advisor Documentation Matrix.

See Understanding Loan Product Advisor’s Determination of Total Funds to be Verified. Desktop Underwriter: The DU Findings will identify the funds that require verification.

DU requires, at a minimum, asset statements covering the most recent full two-month period of account activity (or, if account information is reported on a quarterly basis, the most recent quarter).

Verification of Deposit (VOD)

VODs must be on a standard verification form and must be sent directly from the loan originator to the financial institution and returned directly from that entity.

Faxed verification forms are acceptable if it is clear from the document that the information

was sent by fax transmission directly from the source to the originator.

http://www.freddiemac.com/learn/pdfs/uw/docmatrix.pdf


http://www.freddiemac.com/learn/pdfs/uw/cashtoclose.pdf








The original documents must not contain any alterations, erasures, correction fluid or

correction tape. The loan file must include legible copies of the originals. The VOD form must identify all of the following, when applicable:

The name of the financial institution

Account number Account owner(s) Type of account Account open date Current account balance

Average balance for the previous two months Outstanding loans If a securities account, the specific stocks/securities The title, signature, and phone number of the individual completing the VOD.

Funds must be properly sourced when an account is opened within 90 days of the VOD and/or when the current account balance is significantly greater than the average balance.

If a portion of the borrower's funds were to be saved by the borrower between the date of the loan application and the date of the loan closing, the loan file documents must show

that funds were accumulated and on deposit prior to closing.

Electronic Asset Verification

An electronic verification is a computer generated document, accessed and printed from an Intranet or Internet, and may include on-line bank statements or investment account statements.

Electronic verifications are acceptable provided the on-line statement reflects all of the following:

URL from which the statement was obtained Date obtained Financial institution Borrower’s name and account number

Account balance Last activity date

Business Accounts

When business assets are used for down payment, closing costs, financing costs, prepaids/ escrows, and/or reserves, the assets must be verified per LPA or DU documentation requirements and must be related to a documented borrower owned business.

The borrower must be listed as an owner of the business account. Because the withdrawal of assets from a sole proprietorship, partnership or corporation may

have a negative impact on the ability of the business to continue operating, the impact of the withdrawal must be considered in the analysis of the borrower’s self-employed income.

A cash flow analysis must be documented using individual and/or business tax returns, as applicable.

The cash flow analysis may be in any format that allows a determination that the withdrawal of the funds will not have a detrimental effect on the business.

The cash flow analysis must be included in the loan file.

Borrower’s Commission on Subject Transaction

The following guidelines apply when the borrower is a real estate agent and is earning a commission on the subject transaction:








Desktop Underwriter (DU) Loan Product Advisor (LPA) The funds may be used only to pay closing costs

and/or prepaids. The funds may not be used to meet any

applicable reserve requirements. Fannie Mae treats these funds as an Interested

Party Contribution (IPC); therefore, the funds

must be submitted to DU as such and must be considered when determining if the transaction

meets IPC guidelines. The funds must be shown as a credit on the

Closing Disclosure.

The funds may not be used to meet the assets

required for down payment, closing costs, prepaids, or reserves.

The funds must be shown as a credit on the Closing Disclosure, but only after the required funds have been submitted to LPA and

documented per LPA requirements.

Cash Reserves

See Sale or Conversion of Primary Residence - Loan Product Advisor (LPA) only. See Multiple Financed Properties – Desktop Underwriter (DU) only. See Multiple Financed Properties – Loan Product Advisor (LPA) only.

Minimum Reserve Requirements

Units/Occupancy Desktop Underwriter (DU) Loan Product Advisor (LPA) One unit Primary Residence Determined by DU None 1

2-4 unit Primary Residence Determined by DU Six months 1

Second Home Determined by DU Two months 1

Investment Property Determined by DU Six months 1

Reserve Requirements for Second Home or Investment Transactions with

Multiple Financed Properties

Desktop Underwriter (DU) 3, 4, 5

One to Four Financed

Properties

2% of the aggregate unpaid principal balance (UPB) for all

mortgages and HELOCs on each additional financed Second Home or Investment Property 2

Five to Six Financed Properties

4% of the aggregate unpaid principal balance (UPB) for all mortgages and HELOCs on each additional financed Second Home or Investment Property 2

Seven to Ten Financed

Properties

6% of the aggregate unpaid principal balance (UPB) for all

mortgages and HELOCs on each additional financed Second Home or Investment Property 2

Loan

Product Advisor

(LPA)

Two to Six Financed Properties

Two months for each additional financed Second Home or Investment Property 2

Seven to Ten Financed Properties

Not allowed

1. Represents the minimum reserve requirements; however, all reserves required by Loan Product Advisor must be verified and documented.

2. Effective for submissions/resubmissions to LPA or DU 9.3: In addition to reserves required for the subject transaction, as determined by the AUS.

3. The aggregate UPB calculation should not include mortgages and HELOCs on the following: The subject property, The borrower’s primary residence, Properties that are sold or pending sale, and Accounts that will be paid by closing (or omitted in DU on the online loan application).

4. Effective for loan submissions to DU 10.0 on or after September 24, 2016: DU will calculate reserve requirements based on the number of financed properties and the feedback will include the required reserves for the subject property and other financed properties. See Desktop Underwriter (DU) Multiple

Financed Properties.








Determination of Monthly Housing Expense (PITI)

The following expenses must be included when determining the monthly housing expense to be used in calculation of reserve requirements: Principal and interest (P&I) Hazard, flood, and mortgage insurance premiums (as applicable)

Real estate taxes Leasehold payment or ground rent Special assessments Homeowner’s association dues (including utility charges that are attributable to the

common areas, but excluding any utility charges that apply to the individual unit) Any subordinate financing payments on mortgages secured by the subject property.

Assets Considered in Cash Reserves

Checking or savings accounts. Vested portion of retirement accounts. Stocks, bonds, mutual funds, Certificates of Deposit, money market funds, U.S. Government

Securities and other securities that are traded on an exchange or marketplace generally

available to the public (NYSE, NASDAQ, etc.). The value of the funds or securities must be readily verified through financial publications, and documentation of the borrower’s ownership of the securities must be provided.

Cash Value of vested life insurance. The borrower must be the owner of the policy, and not

the beneficiary. Borrower’s portion of undistributed trust funds.

Assets Not Considered in Cash Reserves

Funds in which the borrower is not vested. Funds that cannot be withdrawn under circumstances other than the account holder’s

retirement, employment termination, or death. Non-financial assets such as collectibles, coins, stamps, and art work that would require

appraisal and/or liquidation. Stocks issued by, or notes/loans receivable from, a privately held company. Stock options (Loan Product Advisor) Non-vested restricted stock and non-vested stock options.

Proceeds from a cash-out refinance transaction on the subject property. Personal unsecured loans. Interested Party Contributions. Retirement accounts (subject to limitations). See Retirement Accounts.

Cash Deposit on Sales Contract (Earnest Money)

The funds for the earnest money deposit must be from an eligible source and must be documented per the topics within this section of the program guide or the applicable Seller

Guide. Ensure that the funds are not counted twice in the evaluation of the mortgage loan by

deducting the amount from funds to close and including the funds as an asset.

Desktop Underwriter (DU) When earnest money is entered in Section VI Assets, DU does not consider it liquid. Therefore, in order to give the borrower credit for earnest money that is not reflected in a liquid account, the earnest money must

be entered as follows: If the earnest money has not cleared the borrower’s bank account, the amount may be included in the

depository account balance.








Desktop Underwriter (DU) If the earnest money has cleared the borrower’s bank account and verification is included in the loan file,

the amount may be entered as Other Credit in Section VII.

Credit Card Charges, Cash Advances and Unsecured Lines of Credit – Desktop Underwriter (DU)

The amount charged by the borrower on a credit card, or a cash advance taken by the borrower on a revolving credit card account or unsecured line of credit, may be considered in borrower funds when the funds are used to pay fees related to the mortgage process. Use of these funds is subject to the

following: The amount charged may not exceed 2% of the loan amount. The amount charged or advanced must be included in the borrower’s total outstanding debt

and the repayment of such amount must be included when determining the borrower’s

monthly debt-to-income ratio. A payment of 5% of the new balance on the credit card or unsecured line of credit must be included in the borrower’s DTI ratios, unless direct verification of the new payment amount is obtained; or

The borrower must have sufficient verified liquid funds to pay these fees (in addition to the

funds needed for the down payment, prepaids, other closing costs, financing costs and reserves as required); however, the borrower is not required to pay off these charges at closing.

A copy of the credit card receipt must be included in the loan file. This policy must be applied manually, by either:

Including the fees charged to the borrower’s credit card on line f of the Details of Transaction and removing any “Borrower Paid Fees” entered in the Other Credits section of the Details of Transaction for the fees paid outside of closing; or

By increasing the monthly credit card payment in the liabilities section of the loan

casefile submitted to DU to include the charges if not reflected in the credit report. The Closing Disclosure must reflect a paid outside closing (POC) credit to the borrower for

the amount charged.

Credit Card Charges, Cash Advances and Unsecured Lines of Credit – Loan Product Advisor (LPA)

The amount charged by the borrower on a credit card, or a cash advance taken by the borrower on a revolving credit card account or unsecured line of credit, may be considered in borrower funds when the funds are used to pay fees related to the mortgage process. Use of these funds is subject to the following:

The amount charged may not exceed the higher of 2% of the loan amount or $1,500. The amount charged or advanced must be included in the borrower’s total outstanding debt

and the repayment of such amount must be included when determining the borrower’s monthly debt-to-income ratio. A payment of 5% of the new balance on the credit card or unsecured line of credit must be included in the borrower’s DTI ratios, unless direct verification of the new payment amount is obtained; or

The borrower must have sufficient verified liquid funds to pay these fees (in addition to the funds needed for the down payment, prepaids, other closing costs, financing costs and reserves as required); however, the borrower is not required to pay off these charges at closing.

A copy of the credit card receipt must be included in the loan file.

Employer Assistance

A borrower of a mortgage loan secured by a principal residence may use funds provided by

an employer to fund all or part of the down payment or closing costs subject to the








minimum borrower contribution requirements. Employer assistance can also be used for

financial reserves for all types of assistance with the exception of unsecured loans (which may only be used for the down payment and closing costs). Employer assistance funds are not allowed on a Second Home or an Investment Property.

Borrower must meet minimum contribution requirements from own funds. See Borrower

Contribution from Own Funds. The employer assistance may be in the form of:

A grant, A direct, fully repayable second mortgage or unsecured loan, A forgivable second mortgage or unsecured loan, or

A deferred-payment second mortgage or unsecured loan. Funds must come directly from the employer. This may include an employer-affiliated

credit union. If the assistance is in the form of a secured second mortgage or unsecured loan, the

transaction must meet the requirements for loans with subordinate financing. If the secured second mortgage or unsecured loan does not require regular payments of

either principal and interest or interest only, a payment does not need to be included in the monthly DTI ratios.

Gift from a Related Person

Allowed on Primary Residence and Second Home. If LTV is >80%, the borrower must make a minimum 5% down payment from own funds.

See Borrower Contribution from Own Funds for exceptions: Desktop Underwriter: One-unit Primary Residence only. Loan Product Advisor: One-unit Primary Residence only.

Gift funds may be provided only by an immediate family member, spouse, fiancé, fiancée,

or domestic partner of the borrower. A signed gift letter and documentation of the gift funds is required. Refer to the Pacific Union Financial Gift Letter for documentation requirements. Brokers are encouraged, but not required, to use the Pacific Union Financial Gift Letter.

Gift of Equity

A gift of equity is permitted for purchase of a Primary Residence or Second Home. With a gift of equity, no cash changes hands. Instead, the seller agrees to donate a portion of the equity in the subject property in lieu of all or a portion of the down payment.

The LTV should be calculated based on the purchase price or appraised value ‐ whichever is less. The gift of equity may not be deducted from the sales price before calculating LTV.

To be eligible as a source of funds for a down payment, the following requirements must be

met: The gift of equity must be provided by a relative (i.e., the borrower’s spouse, child, or

other dependent, or any other individual related to the borrower by blood, marriage, adoption, or legal guardianship), a fiancé, or a domestic partner.

The donor may not be or have any affiliation with the builder, developer, real estate agent or any other interested party to the transaction.

A gift letter explaining the type of gift is required. Refer to Borrower Contribution from Own Funds to determine the minimum required

borrower contribution. The gift of equity must be identified in the Sales Contract. The gift of equity must be transferred to the buyer as a credit in the transaction, and the

final equity exchange must be documented on the fully executed Closing Disclosure.

The gift of equity is not subject to interested party contribution requirements.

https://flow.pacificunionfinancial.com/docs/Gift%20Letter.docx








Gift or Grant from an Agency

Allowed on Primary Residence only. A gift or grant from an Agency is an eligible source of borrower funds, provided that:

The funds were provided by a municipality, non-profit religious organization, or non-

profit community organization. The funds do not have to be repaid. The gift or grant is given pursuant to an established program. The Agency is not an interested party to the transaction.

The funds were not obtained from an interested party to the transaction.

Loan Product Advisor (LPA) Desktop Underwriter (DU) Allowed on Primary Residence or Second Home. The loan file must include evidence that the funds

were received by the borrower or by the property seller in the borrower’s behalf.

Acceptable documentation includes:

Copy of grant program materials. Awards Letters.

Terms and conditions provided to the borrower. Documentation must provide the donor’s mailing

address.

Allowed on Primary Residence only. The donated gift or grant must be documented

with either: A copy of the letter awarding the gift or grant to

the borrower, or

A copy of the legal agreement that specifies the terms and conditions of the gift or grant.

The documentation must include language indicating that repayment of the gift or grant is not expected, and how the funds will be

transferred to the borrower, lender, or closing agent.

Evidence of the transfer of the gift or grant must

be included in the loan file, such as: Copy of the donor’s canceled check, or

Copy of the settlement statement showing receipt of the check.

Ineligible Source(s) of Funds

Signature loan(s). Gifts that must be repaid. Cash for which the source cannot be verified (cash on hand). Salary advances. Sweat equity (contribution to the construction or rehabilitation of a property in the form of

labor or services rather than cash). Unverified sources of funds. Reverse mortgages.

Large Deposits

Loan Product Advisor (LPA) Desktop Underwriter (DU) Except as stated below, documentation of the

sources of unverified deposits for purchase or refinance transactions is not required. However, when qualifying the borrower, any liabilities

resulting from borrowed funds must be considered.

For purchase transactions, document the source of funds for any single deposit exceeding 50% of the total monthly qualifying income for the

Refinance transactions:

Documentation or explanation for large deposits is not required.

However, if the funds were borrowed funds, any

related liability must be considered. When appropriate, evidence that no new liability has

been created may be required. Purchase transactions:








Loan Product Advisor (LPA) Desktop Underwriter (DU) mortgage if the deposit is needed to meet the

requirements for funds to close and/or reserves. When a deposit is not documented and is not

needed for funds to close and/or required reserves, reduce the funds used for qualifying purposes by the amount of the unverified deposit

and enter the reduced amount of the asset into Loan Product Advisor.

When a single deposit consists of both verified and unverified portions, the unverified portion may be used when determining whether the

deposit exceeds the 50% requirement. When the source of funds can be clearly identified

from the deposit information on the account

statement (e.g., direct payroll deposits) or other documented income or asset source in the loan

file (e.g. tax refund amounts appearing on the tax returns in the file), additional documentation is not required.

Document the source of a deposit of any amount regardless of the transaction type if there is any

indication that the funds are borrowed or are not from an eligible source.

When using direct account verification (VOD),

include documentation of the source of funds when an account is opened within 90 days of verification and/or when the current balance in an

account is significantly greater than the average balance.

If a portion of the borrower’s funds were to be saved by the borrower between the date of the loan application and the date of the loan closing,

the loan file must include documents showing that funds were accumulated and on deposit prior to

closing.

Single deposits exceeding 50% of the total

monthly qualifying income for the loan must be documented.

If the funds are to be used for down payment, closing costs, or reserves, document that the funds are from an acceptable source.

If the borrower does not have all of the documentation required to confirm the source

of a deposit, 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. Written documentation of the rationale for using

the funds must be included in the loan file.

Verified funds must be reduced by the amount (or portion) of any undocumented large deposit (as

defined above), and the remaining funds must be sufficient for the down payment, closing costs, and reserves. When a reduced amount (net of the

undocumented large deposit) is used, the reduced amount must be used for underwriting purposes. 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








Loan Product Advisor (LPA) Desktop Underwriter (DU) $17,500 may be used for underwriting

purposes.

Life Insurance – Cash Value

Net proceeds from a loan against the cash value or from the surrender of a life insurance policy are an acceptable source of funds for down payment, closing costs, and reserves.

If the funds are needed for down payment or closing costs, the cash value of the policy and the borrower’s receipt of the funds must be documented by obtaining either a copy of the

check from the insurer or a copy of the payout statement from the insurer. If used for reserves only, the cash value must be documented but evidence of liquidation is

not required.

Marketable/Publicly Traded Securities (Stocks, Bonds and Mutual Funds)

Provide documentation to support the borrower’s ownership and value of the asset at the time of sale or liquidation, if applicable.

Non-vested restricted stock and stock options are not an acceptable source of down payment, closing costs or reserves.


Asset Type Loan Product Advisor (LPA) Desktop Underwriter (DU)

Bonds A written statement from a financial

institution must include all of the

following:

Confirmation that a representative

of the financial institution has seen

the bond(s),

Borrower is owner of the bond(s),

Date of maturity, type and amount

of the bond(s), and

Lists all serial numbers of the

borrower’s bond(s).

The value of government bonds must be

based on the purchase price unless the

redemption value can be documented.

Stocks and

Mutual Funds

Provide most recent stock or

brokerage account statement

covering a one-month period or

direct account verification (i.e.,

VOD), or

If the borrower does not receive a

stock/security account statement:

Provide documentation verifying

the number of vested shares

owned by the borrower, and

Document the current stock price

from a published source to

determine the value.

Determine the value of the asset (net of

any margin accounts) with one of the

following:

The most recent monthly or quarterly

stock/securities statement, or

A copy of the stock certificate in the

borrower’s name, accompanied by a

newspaper stock list that is dated at or

near the time of loan application.

Vested Stock

Options

Provide most recent account

statement covering a one-month

period or direct account verification

(i.e., VOD) confirming the number of

vested shares and current value; or

If the borrower does not receive a

stock/security account statement for

the stock options:

Provide a recent statement that lists the

number of options and the option price,

and

Use the current stock price to determine

the net gain realized from the exercise of

the option and sale of the optioned stock.








Provide the employer generated

documentation showing the

number of shares granted and

vesting dates or a letter from the

employer verifying the number of

vested shares owned by the

borrower, and

Document the current stock price

from a published source to

determine the value.

Liquidation Requirements

Loan Product Advisor (LPA) Desktop Underwriter (DU) Down Payment and Closing Costs:

If the value of the asset (as determined above) is at least 20% more than the amount of funds needed for down payment and/or closing costs,

evidence of liquidation is not required. If the value of the asset (as determined above) is

less than 20% more than the amount of funds

needed for down payment and/or closing costs, evidence of liquidation is required.

Note: See Retirement Accounts for requirements to determine the qualifying asset value, if applicable.

Reserves: 100% of the value of the assets (as determined

above) may be considered for reserves. Note: See Retirement Accounts for

requirements to determine the qualifying asset value, if applicable.

Evidence of liquidation is not required.

Down Payment and Closing Costs:

If the value of the asset (as determined above) is at least 20% more than the amount of funds needed for down payment and/or closing costs,

evidence of liquidation is not required. If the value of the asset (as determined above) is

less than 20% more than the amount of funds

needed for down payment and/or closing costs, evidence of liquidation is required.

Note: See Retirement Accounts for requirements to determine the qualifying asset value, if applicable.

Reserves: 100% of the value of the assets (as determined

above) may be considered for reserves. Note: See Retirement Accounts for

requirements to determine the qualifying asset value, if applicable.

Evidence of liquidation is not required.

Pooled Funds

Pooled Funds are funds on deposit provided by the borrower and other member(s) of a group of related persons who have resided together for at least one year, and:

Will continue to reside together in the subject property, and Are “pooling” their funds to purchase the subject property.

Documentation must be provided to evidence that the borrower and the Related Person have resided together for at least one year.

In addition, the borrower must attest, by written statement executed at application, to the:

Source of the pooled funds, and The fact that the pooled funds are not borrowed, and The relationship between the borrower and the related person.

The borrower must also attest that the related person:

Has resided with the borrower for the past year, and Intends to continue to reside with the borrower in the subject property for the

foreseeable future. The written statement(s) are not required to be notarized or acknowledged, but must be

retained in the loan file. Pooled funds provided by related person who do not reside with the borrower are considered

gift funds.








Proceeds from the Sale of Real Property

Settlement statements or evidence of sale of assets (bill of sale or Closing Disclosure form) must: Be computer generated or typed Identify the Borrower as the seller of the property Identify the property sold

Show the proceeds to the property seller Show the disposition of all liens against the property Be signed by the buyer and the seller, or their authorized agents.

Desktop Underwriter (DU) The final Closing Disclosure is acceptable in lieu of the “fully executed” Closing Disclosure; however the file

must include evidence that the transaction has closed.

Rent Credit/Option to Purchase

Rent credit for an option to purchase is an acceptable source of funds toward the down payment or minimum borrower contribution.

Credit for the down payment is determined by calculating the difference between the

market rent and the actual rent paid for the last 12 months. The market rent is determined by the appraiser in the subject property appraisal. The file must include a copy of the rent/purchase agreement.

Loan Product Advisor (LPA) Desktop Underwriter (DU) Documentation must be provided to support the

applicant’s own 5% down payment, including any allowable credit for payments made above the fair market rent.

The loan file must include evidence of rent paid.

Borrowers are not required to make a minimum

borrower contribution from their own funds in order for the rental payments to be credited toward the down payment.

The loan file must include copies of the borrower’s cancelled checks or money order receipts for the

last 12 months evidencing the rental payments.

Retirement Accounts

Vested funds from individual retirement accounts (IRA/SEP/Keogh accounts) and tax-favored retirement savings accounts (401(k) accounts) are acceptable sources of funds for down payment, closing costs, and reserves.

In order to be used as reserves, retirement accounts must be vested and allow withdrawals regardless of the current employment status. The terms of withdrawal from the plan must be documented.

Loan Product Advisor (LPA) Desktop Underwriter (DU) If the retirement account is in the form of stocks,

bonds, or mutual funds, 100% of the vested value

of the account less the amount of all outstanding loans secured by the account funds (if applicable) may be used for down payment, closing costs and

reserves. Refer to Marketable/Publicly Traded Securities

(Stocks, Bonds and Mutual Funds) to determine

whether evidence of liquidation is required for down payment and/or closing costs.

If the retirement account is in the form of stocks, bonds, or mutual funds, 100% of the vested value

of the account less the amount of all outstanding loans secured by the account (if applicable) may be used for down payment, closing costs and

reserves. Refer to Marketable/Publicly Traded Securities

(Stocks, Bonds and Mutual Funds) to determine

whether evidence of liquidation is required for down payment and/or closing costs.








Secured / Unsecured Loans

Secured Loans

Proceeds from a loan secured by non-financial assets such as automobiles, artwork, collectibles, real estate, or financial assets such as savings account, stocks, bonds,

Certificates of Deposits, and 401(k) accounts may be used for down payment, closing costs, and reserves.

When a loan is secured by the borrower’s financial assets, a monthly payment is not required to be considered in the DTI ratios.

The monthly payment for loans secured by non-financial assets must be included in DTI ratios. If the loan does not require a monthly payment, an equivalent payment must be calculated and considered as a recurring debt.

If the borrower is using the financial asset to satisfy reserve requirements, the asset must be reduced by the amount of the loan.

The following documentation is required: The terms of the secured loan. Evidence that the party providing the loan is not a party to the transaction. Evidence that the funds have been transferred to the borrower.

Unsecured Loans

Personal unsecured loans may not be used for down payment, closing costs, or reserves. Examples of unsecured loans include signature loans, lines of credit on credit cards, and

overdraft protection on checking accounts. Refer to Credit Card Charges, Cash Advances and Unsecured Lines of Credit for use of

unsecured funds to pay for fees associated with the Mortgage (appraisal, etc.).

1031 Tax Deferred Exchange

Allowed on Investment Property purchase transactions only. The equity from the 1031 Exchange may be used for all or part of the down payment. Reverse exchanges are not allowed because the borrower is not on title to the property at

the time of closing. No seller provided secondary financing. The loan closing must be handled by a qualified intermediary. A qualified intermediary is an

entity (usually a subsidiary to a title company) who enters into a written agreement with the taxpayer. The intermediary may not be an agent, attorney, accountant, investment banker, or broker. The Exchange Agreement requires the intermediary to acquire and transfer the relinquished property and to acquire and transfer the replacement property. The relinquished property is the property “sold” and the replaced property is the property

“acquired”. Copies of all closing documents and the Purchase Agreement on the relinquished property

must be obtained. Required documentation includes: 1031 Exchange Agreement.

Settlement Statement (Closing Disclosure). Title Transfer.

The Purchase Agreement for both properties must contain appropriate language to identify the 1031 exchange.

Trust Accounts

Funds disbursed from a borrower’s trust account may be used for down payment, closing costs, and/or reserves provided the borrower has immediate access to the funds.








Loan Product Advisor (LPA) Desktop Underwriter (DU) Provide verification of the trust funds that includes

the following: Typed copy of the trust agreement or

Signed statement on letterhead from the trustee that: Identifies the Trustee including name,

address, telephone number and an individual contact. The trustee must be an independent

party that typically handles trust accounts (trust company, financial institution, CPA, lawyer).

Identifies the borrower as the beneficiary. Shows that the borrower has access to all or

a specific portion of the funds.

Shows that the trust has the assets to disburse funds to the borrower.

If the assets are needed for closing, proof of receipt is required.

The loan file must include the following:

Written documentation of the value of the trust account from either the trust manager or the

trustee. The conditions under which the borrower has

access to the funds and the effect, if any, that

the withdrawal of funds will have on trust income used in qualifying the borrower for the

mortgage.

Verification of Assets for Non-U.S. Citizens

Funds that a non-U.S. Citizen recently deposited in a U.S. depository institution are acceptable subject to the following:

Evidence of funds transfer from the country from which the borrower immigrated has been provided.

Documentation to evidence that the funds belonged to the borrower before the date of the transfer is provided.

The source(s) of all funds used for closing can be verified just as they would for a U.S. Citizen.

Borrower Contribution from Own Funds

Loan Product Advisor (LPA) and Desktop Underwriter (DU)

Units/Occupancy LTV/CLTV Minimum Borrower Contribution

1-4 unit Primary Residence

Second Home

80% or less 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.

Investment Property All Entire down payment must be from

borrower’s own funds. Gifts are not allowed.



1 unit Primary Residence

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.

2-4 unit Primary Residence

Second Home

Greater than 80% The borrower must make a minimum

5% borrower contribution from his or her own funds. After the minimum

borrower contribution has been met, gift funds may be used to supplement the








down payment, closing costs, and

reserves.

Loan Product Advisor (LPA)


1 unit Primary Residence

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 or an unsecured loan that is an Employer Assisted Homeownership Benefit (EAH).

2-4 unit Primary Residence Second Home

Greater than 80% The borrower must make a minimum 5% borrower contribution from his or

her own funds. After the minimum borrower contribution has been met, gift funds may be used to supplement the

down payment, closing costs, and reserves.

Borrowers

Age of Borrower

All borrowers must have reached the age at which the mortgage note can be legally enforced in the jurisdiction where the property is located. There is no maximum age limit for borrowers. All applicants are evaluated on their ability to meet underwriting guidelines.

Borrower Eligibility

Pacific Union Financial makes mortgages to natural persons only. Borrowers are ineligible for a mortgage if they are a different type of legal entity or hold title as a different type of legal entity. These legal entities include, but are not limited to, the following:

Corporations S corporations Borrowers with diplomatic immunity Inter-vivos trusts Life estates Land trusts General partnerships Real estate syndications

Additionally, loans where a custodian, agent, conservator, or guardian is signing on behalf of the borrower, non-borrowing spouse, or a vested owner are not allowed.

Borrower in the Construction Industry

If the borrower is acting as his/her own builder (general contractor or sub-contractor) and his/her primary occupation is in the construction industry, the following requirements must be met:

Allowed on Primary Residence only. The acquisition cost must be fully documented, regardless of the LTV/(H)CLTV. To document acquisition cost, the borrower must provide copies of receipts, bills, lien

waivers, lot purchase agreement, etc., in addition to the itemized cost breakdown. The LTV/(H)CLTV will be based on the lesser of the documented acquisition cost or

appraised value.








The borrower may not receive cash back at closing that is not a verifiable

reimbursement of expenses.

Non-Borrowing Spouse

To perfect a lien under governing state law when a married applicant purchases a

property without involving a spouse and when required by law, Pacific Union Financial requires the spouse to sign the security instrument and any other applicable documentation to confirm relinquishment of all rights to the property.

Non-Occupying Co-Borrowers

Applicable on Primary Residence transactions only. 95% LTV/(H)CLTV or the maximum reflected on the LTV Matrix, whichever is less.

The non-occupying borrower may not be an interested party to the transaction (such as the builder, seller or broker).

Non-occupying borrowers are subject to the same underwriting and documentation criteria as occupying borrowers.

Loan Product Advisor (LPA) Desktop Underwriter (DU)

LPA will consider the non-occupying co-borrower’s income, assets, liabilities and credit.

DU will consider the non-occupying co-borrower’s income, assets, liabilities and credit.

Non-U.S. Citizens

A non-U.S. citizen who is lawfully residing in the United States as a permanent or non-permanent resident alien is eligible for a Mortgage on the same terms as a U.S. Citizen.

A mortgage to a non-U.S. citizen who has no lawful residency status in the U.S. is not eligible.

To ensure that the borrower or borrowers are legally able to reside and work in the U.S., a valid Social Security Number (SSN) is required for all borrowers whose income and/or assets are being used to qualify for the loan.

Freddie Mac and Fannie Mae do not specify the documentation required to establish lawful U.S. residency.

Borrowers with Diplomatic Immunity

Not allowed.

North American Free Trade Agreement (NAFTA) Workers

Canadian and Mexican citizens who are working in the United States under the terms of NAFTA must be treated as Non-US Citizens when determining their eligibility. They must meet the standard requirements established for non-permanent resident aliens. NAFTA workers must provide a NAFTA Worker’s VISA.

Separated Borrowers

When the borrower indicates that he/she is separated, it must be determined whether it is a legal separation.

If the borrower is legally separated, a copy of the recorded legal separation agreement must be provided to determine the division of assets, liabilities and potential obligations. See Court Ordered Assignment of Debt for requirements to exclude an assigned debt from the qualifying DTI.








If there is no legal separation, a letter from the attorneys of both parties involved specifying

the proposed settlement terms must be provided. The loan must be qualified as follows: All borrower debt must be included in the DTI; and All additional obligations disclosed in the proposed settlement (i.e. child support,

alimony, debt payments, etc.) must be included in the DTI.

If no documentation can be obtained to verify the division of assets and liabilities, the loan will generally be considered an unacceptable risk.

If the borrower states there are no plans for a legal separation, no further documentation is necessary; he/she is legally married and must be qualified accordingly.

Social Security Number (SSN) Validation

All borrowers must have a valid Social Security number as evidenced by one of the following:

Pay stub W2 Validated tax returns

Credit / Underwriting

Manual Underwriting is not allowed. All loans must be submitted to Loan Product Advisor (LPA) (Fixed Rate only) or Desktop Underwriter (DU). Pacific Union Financial will accept only loans that receive an LPA Risk Class of Accept/Eligible or a DU recommendation of Approve/Eligible. Refer to the Loan Product Advisor or Desktop Underwriter topic(s) for additional information.

Age of Documents

All income documentation must be dated within 30 days of the loan application date. All asset documentation must be dated within 45 days of the loan application date. Verifications of employment, income, current receipt of income, source of funds, and

payment history must be made no more than 120 days prior to the Note Date.

Any information verified more than 120 days prior to the Note Date must be re-verified. When there are consecutive documents in the loan file, the most recent document is used to

determine the age. For example, when two consecutive monthly bank statements are provided, the most recent bank statement must be dated within 120 days of the Note Date.

Authorized User Accounts

When the repository file used to create the credit report contains any authorized user accounts, the Loan Product Advisor (LPA) or Desktop Underwriter (DU) decision is

considered valid if the loan file includes documentation to evidence that at least one of the following for each authorized user account: Another borrower on the loan owns the tradeline in question, The account belongs to the borrower’s spouse, or

The borrower has been making the payments on the account for the last 12 months. If at least one of the above requirements is not documented for each authorized user

account, the LPA or DU decision may be considered valid and the loan may be underwritten as an LPA or DU approved loan only if is determined that the authorized user accounts have an insignificant impact on the borrower's overall credit history and the information on

the credit report is representative of the borrower's own credit reputation. This determination must be based on the number of the borrower's own tradelines, as well

as their age, type, size and the payment history, as compared to the authorized user accounts.








The determination must be documented on the 1008, Uniform Underwriting and Transmittal

Summary, or another document in the loan file. If it is determined that the authorized user tradelines are not an accurate reflection of the

borrower's credit history and that the loan would not receive an LPA or DU approval without the authorized user accounts, the loan is not eligible.

Bankruptcy - Multiple Filings – Desktop Underwriter (DU) only

For borrowers with more than one bankruptcy filing in the last seven years, a five year waiting period is required, measured from the most recent dismissal or discharge date.

A three year waiting period is permitted if extenuating circumstances can be documented. The most recent bankruptcy filing must have been as a result of the extenuating circumstances. The waiting period is measured from the most recent discharge or dismissal date.

DU is not able to determine if multiple filings have occurred due to the manner in which bankruptcies are reported to the credit report.

DU will issue a message when it appears that there may have been multiple bankruptcy filings. This message will list each of the bankruptcies seen on the credit report, and will

instruct lenders to ensure the loan casefile meets the criteria for underwriting loan casefiles with multiple bankruptcies.

Note: A loan in which there are multiple borrowers with individual bankruptcy filings is not required to meet requirements for multiple bankruptcy filings, as the bankruptcies are not cumulative for all borrowers. Example: the borrower has one bankruptcy and the co-

borrower has one bankruptcy – Fannie Mae does not consider this multiple bankruptcy filings.

Borrowers without a Usable Credit Score

The following requirements apply when a loan receives an LPA Accept/Eligible or DU Approve/Eligible and not all borrowers have a usable credit score: At least one borrower on the transaction must have a usable credit score, as determined

by LPA or DU. See Credit Score Requirements. The transaction must be a Purchase or Rate/Term Refinance. Allowed only for one unit Primary Residence transactions. All borrowers must occupy the property as a Primary Residence. Borrower with a usable credit score must contribute more than 50% of the total monthly

qualifying income. For pricing purposes, the representative credit score will be based on the borrower(s)

with a credit score.

Loan Product Advisor (LPA) Desktop Underwriter (DU) Allowed on Fixed Rate Conforming and High

Balance. The borrower without a credit score may not be

using self-employment income to qualify. For all borrowers without a credit score, any debt

that is not reported must be verified to have a

satisfactory payment history and the payment must be included in the DTI ratio.

Conforming Balance only

For casefile submissions to DU 9.3:

The income used to qualify the Borrower(s) may not be from self-employment.

For casefile submissions to DU 10.0 on or after September 24, 2016: Self-employed income is permitted.

The borrower without a credit score must contribute 50% or less of the qualifying income.

Non-traditional credit is not allowed, regardless of DU messaging.

Reserves may be required, as determined by DU.








Collection, Past Due, and Charge-Off Accounts

Follow LPA or DU recommendation for treatment of these accounts.

Consumer Credit Counseling (CCCS)

Borrowers with a history of consumer credit counseling are allowed subject to DU or LPA approval. No additional review is required.

Disputed Tradelines

Loan Product Advisor: Refer to Disputed Tradelines topic. Desktop Underwriter: Refer to Disputed Tradelines topic.

Judgments

Open judgments must be addressed per the table below. Any judgment that is reflected on the title policy must be paid off or re-subordinated. If re-

subordinated, the subordination agreement must be included in the loan file. Judgments on the subject property must be included when determining the LTV/(H)CLTV of

the loan.

Loan Product Advisor (LPA) Desktop Underwriter (DU) As determined by LPA.

Open judgments that are in the Public Records section of the credit report must be paid off at or

prior to closing. The loan file must include all of the following:

Documentation of the satisfaction of the liabilities, and

Verification of funds sufficient to satisfy the

obligations.

Mortgage Payment History

Desktop Underwriter (DU):

Loans will receive an Ineligible recommendation due to excessive prior mortgage

delinquency if the borrower has a mortgage tradeline that has one or more 60, 90, 120, or 150-day delinquency reported within the 12 months prior to the credit report date.

If an account is reported on the credit report as a non-mortgage tradeline, but the account is listed on the loan application as a mortgage, DU will analyze the credit history of the

tradeline as a mortgage. For example, if the credit report identifies an account as a revolving account, and the account is listed as a HELOC on the loan application, DU will evaluate the credit history of the account as a mortgage. Any late payments in the credit report will be treated by DU as delinquent mortgage payments.

If there is a mortgage that is disclosed on the loan application but not reported on the credit report, DU will issue a message requiring confirmation that the account is not two or more payments past due as of the date of the application and that it has not been past due by two or more payments in the last 12 months. If it is determined that the borrower does

have a mortgage that is past due by two or more payments or has been past due by two or more payments in the last 12 months, the loan is not eligible. DU will also issue this confirmation message when the credit report reflects a mortgage

with an outstanding balance, but the payment history has not been reported in the last six months.








Loan Product Advisor (LPA) LPA applies the following guidelines to the processing of loans with mortgage history:

Loans will receive an Accept recommendation when LPA establishes the borrower credit reputation reflected on the credit report is acceptable. For Accept Mortgages where all borrowers have a usable credit score, direct verification of debts that are not listed on the

credit reports (including mortgages and rent) is not required.

Modified Mortgages

A modified mortgage is a one in which a permanent change has been made to the original loan terms without forgiveness of any principal or accrued interest. This may include, but is not limited to: A change in amortization term A reduction in interest rate

A reduction in the scheduled monthly payment amount. See Restructured Mortgages, if applicable.

Eligibility

Transactions in which a previously modified mortgage is being refinanced OR a modified mortgage is present in the borrower’s credit history are eligible subject to DU/LPA approval.

Multiple Financed Properties – Desktop Underwriter (DU) only

If the subject loan is for a Primary Residence, there is no limitation on the number of properties that the borrower can currently be financing.

The financed property limits apply to the borrower’s number of 1-4 unit financed residential properties where the borrower is personally obligated on the mortgage(s).

The limit includes the borrower’s primary residence if it is financed and is cumulative for all borrowers on the loan.

The limits apply to the number of properties financed, not the number of mortgages on the property or the number of loans sold to any one investor.

For casefile submissions to DU 9.3: DU is not able to determine the number of financed properties that the borrower 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 eligibility and reserves requirements must be applied manually to each loan and are

based on the number of the borrower’s financed properties, as follows: Seven to ten financed properties: Minimum 720 credit score is required. Note:

Standard credit score requirements apply if the borrower is obligated on one to six

properties. Additional reserves are required. See Cash Reserves.

For casefile submissions to DU 10.0 on or after September 24, 2016: DU will determine the number of financed 1-4 unit residential properties, assess eligibility and

calculate reserve requirements based on the number of financed properties. See Desktop Underwriter (DU) Multiple Financed Properties. See Cash Reserves.

If multiple second home or investment property applications are being processed simultaneously, the same assets may be used to satisfy the reserve requirements for all applications. Reserves are not cumulative for multiple applications. Example: Two refinance applications for two investment properties owned by the

borrower are simultaneously processed. The application for property A requires $5,000 in reserves and the application for property B requires $10,000 in reserves. Because the








reserves are covering the same financed properties, it is not necessary to verify $15,000

in reserves, but only the reserves required for each application ($5,000 and $10,000, respectively).

Conventional Fixed Rate

Loan must be evaluated using DU and must be coded and priced as Conventional Fixed Rate Only.

If the subject loan is for a Second Home or Investment Property, each borrower individually and all borrowers collectively may be obligated on up to six financed properties. Refer to

the Desktop Underwriter (DU) Limitations table below to determine the borrower’s number of financed properties.

Fannie Mae Only

Loan must be evaluated using DU and must be coded and priced as Fannie Mae Only.

If the subject loan is for a Second Home or Investment Property, each borrower individually and all borrowers collectively may be obligated on up to ten financed properties. Refer to

the Desktop Underwriter (DU) Limitations table below to determine the borrower’s number of financed properties.

Desktop Underwriter (DU) Limitations Based on Property Type

Type of Property Ownership and Financing Property Subject to Limitations?

Joint financing of residential Real Estate (considered to be the same as total

financing of an individual property).

Note: Properties financed jointly by the borrower and co-borrower are only counted once.

Yes

Ownership of commercial real estate and the financing is in the name of the borrower.

No

Ownership of multi-family property consisting of more than four dwellings and the financing is in the name of the borrower.

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.

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 borrower.

Yes

Ownership in a timeshare and the financing is in the name of the borrower. No

Obligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property).

Yes

Ownership of a vacant lot (residential or commercial) and the financing is in the name of the borrower.

No

Ownership of a property that is held in the name of an LLC or partnership and the

financing is in the name of the LLC or partnership. No

Ownership of a property that is held in the name of an LLC or partnership and the

financing is in the name of the borrower. Yes

Ownership of a manufactured home and the land on which it is situated is titled as real property and the financing is in the name of the borrower.

Yes

Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home) and the financing is in the name of the borrower.

No








Multiple Financed Properties – Loan Product Advisor (LPA) only

If the subject loan is for a Primary Residence, there is no limitation on the number of properties that the borrower can currently be financing.

If the subject loan is for a Second Home or Investment Property, each borrower individually and all borrowers collectively may own or be obligated on up to six financed properties,

subject to the restrictions noted in the table below. The financed property limits apply to the borrower’s ownership of 1-4 unit financed

properties or mortgage obligations on those properties and is cumulative for all borrowers on the loan.

The limits apply to the number of properties financed, not the number of mortgages on the property or the number of loans sold to any one investor.

Additional reserves are required. See Cash Reserves.

Loan Product Advisor (LPA) Limitations Based on Property Type

Type of Property Ownership Property Subject to Limitations?

Joint ownership of residential Real Estate (considered to be the same as total ownership of an individual property).

Note: Other properties owned or financed jointly by the borrower and co-

borrower are only counted once.

Yes

Ownership of commercial real estate. No

Ownership of multi-family property consisting of more than four dwellings. No

Joint or total ownership of a property that is held in the name of the borrower’s business, even if the borrower is an owner of the business and the financing is in

the name of the business.

No

Joint or total ownership of a property that is held in the name of the borrower’s

business, even if the borrower is an owner of the business; however the financing is in the name of the borrower.

Yes

Ownership in a timeshare. No

Obligation on a mortgage debt (including private party financing, land contracts and/or any other debt or obligation) for a residential property (regardless of

whether or not the borrower is an owner of the property).

Yes

Ownership of undeveloped land. No

Ownership of a manufactured home and the land on which it is situated is titled as real property.

Yes

Ownership of a manufactured home not titled as real property (chattel lien). No

Restructured Mortgages

A restructured mortgage is one 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. Additional definition for Loan Product Advisor (LPA) loans:

A mortgage that is the result of any subsequent refinance of a Restructured Mortgage is also considered a Restructured Mortgage.








A mortgage that is modified through a Freddie Mac modification is not considered to be a

Restructured Mortgage. A restructured mortgage is sometimes referred to as a “short pay loan”, a “short pay

refinance” or a “short refinance”. See Modified Mortgages, if applicable.

Identifying a Restructured Mortgage

A restructured mortgage may be identified by the following means: The borrower’s tax return (if obtained) reflects income from a 1099C from the mortgage

lender, mortgage insurance company or third party investor, or The payoff amount is significantly less than the credit report balance or the current

monthly payment disclosed on the 1003 varies from the payment reported on the credit report, or

The borrower’s credit report reflects verbiage such as “Settled for less than amount owed,” or “Paid in Full - not as agreed.”

Eligibility

Transactions in which a previously restructured mortgage is being refinanced OR a restructured mortgage is present in the borrower’s credit history are eligible subject to DU/LPA approval.

Foreclosure – Desktop Underwriter (DU)

Foreclosure Message Updates

To ensure that DU is using the most accurate information pertaining to foreclosures, DU will now allow users to instruct DU to disregard foreclosure information on the credit report in the following (additional) situations:

Inaccurate Foreclosure Information

When DU identifies a foreclosure on a tradeline and that information is inaccurate, the user may instruct DU to disregard the foreclosure information on the credit report. This can be done by entering “Confirmed CR FC Incorrect" in the Explanation field for question “C” in the Declarations section of the loan application and resubmitting the loan to DU. When DU sees this

indication, the foreclosure information on the tradeline will not be used in the eligibility assessment.

Foreclosures Due to Extenuating Circumstances

When DU identifies a foreclosure on a tradeline and the foreclosure was due to extenuating circumstances, the user may instruct DU to disregard the foreclosure information on the credit report when the user confirms that the mortgage loan meets the applicable timeframes and eligibility requirements for a foreclosure due to extenuating circumstances. This can be done by

entering “Confirmed CR FC EC" in the Explanation field for question “C” in the Declarations section of the loan application and resubmitting the loan to DU. When DU sees this indication, the foreclosure information on the credit report tradeline will not be used in the eligibility assessment.

DU Assessment/Messaging

In both situations, DU will issue a message stating that the foreclosure information included on the account was not used in the eligibility assessment because DU was instructed by the








user to underwrite the casefile without the reported foreclosure information.

The user must document that the foreclosure was either: Completed seven years or more from the disbursement date of the new loan, or Not subject to a foreclosure and the loan complies with all applicable Fannie Mae

requirements, or

Was due to extenuating circumstances, completed at least three years from the disbursement date of the new loan, and that the loan complies with all other Fannie Mae requirements for a foreclosure due to extenuating circumstances.

Note: When more than one item needs to be entered in the Explanation field, the items

must be separated by a comma as shown below. For example, when the borrower has conflicting foreclosure and preforeclosure sale information on one tradeline, and inaccurate foreclosure information on another tradeline, the user may instruct DU to disregard the foreclosure information on both tradelines by entering “Confirmed CR PFS, Confirmed CR FC

Incorrect”.

Mortgage Charge-Off - Desktop Underwriter (DU)

Mortgage accounts that have been subject to a charge-off will require a four year waiting period after the charge-off occurred.

DU will now issue a message on mortgage accounts with a manner of payment of “9” specifying that the account was identified as being subject to a charge-off and that the user must confirm the accuracy of the information.

If the mortgage account was subject to a charge-off, users must 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 if the charge-off was due to extenuating circumstances.

Short Sale/Preforeclosure Sale/Deed-in-Lieu of Foreclosure


DU will consider a mortgage or HELOC as one that was subject to a prior deed-in-lieu of foreclosure (DIL) or preforeclosure sale (PFS) when certain Remarks Codes associated with that tradeline appear on the credit report.

For DIL and PFS tradelines, there is not a date on the credit report specifically related to

those events; therefore DU is not able to determine when those events occurred. When DU identifies a DIL or PFS, a message will be issued stating that it was identified and

that the accuracy of the information must be verified. The loan file must include documentation showing that the event was completed at least four years prior to the

disbursement date of the new loan and that the loan complies with all Fannie Mae requirements for borrowers with a previous DIL or PFS.

Conflicting or Inaccurate Foreclosure Information: Because there are often inconsistencies in the credit report data when a DIL or PFS has

occurred, DU will disregard the foreclosure information on the credit report when instructed to do so on the on line application.

When DU identifies a foreclosure that appears to be one that was subject to a DIL or PFS, DU may be instructed to disregard the foreclosure information by entering “Confirmed CR DIL” or “Confirmed CR PFS” in the Explanation field for question C in the

Declarations section of the on line application and resubmitting the loan to DU. When DU recognizes this indication, the foreclosure information in the credit report will not be used.

DU will issue a message stating that the foreclosure information was not used in the

eligibility assessment because DU was instructed by the user to underwrite the loan








without the reported foreclosure information. The loan file must include documentation

to show that the account was subject to a DIL or PFS, that the event was completed more than four years prior to the disbursement date of the new loan, and that the loan meets all other requirements specific to a prior DIL or PFS.

Short Sales/Preforeclosure Sales/Deed-in-Lieu of Foreclosure – Waiting Periods

All references to LTV in the following table apply equally to CLTV and (H)CLTV.


Due to Financial

Mismanagement

Four year waiting period from

completion date to application date. If completed with the last 7 years,

eligible only for:

Primary Residence purchase transaction with maximum LTV of the lesser of 90% or the

maximum allowed per the LTV Matrix, or

Rate/Term Refinance

Four year waiting period from

completion date to the disbursement date of the new loan.

Standard LTV limits apply.

Additional requirements

if due to financial mismanagement

The file must contain all of the following:

The underwriter’s explanation of the rationale supporting the determination that the financial mismanagement is unlikely to recur and that the borrower’s credit reputation is acceptable.

Evidence that the borrower has reestablished an acceptable credit reputation.

Evidence on the credit report and other documentation of the length of time since completion of the short sale.

Requirements if due to extenuating

circumstances

Two year waiting period from completion date to application date.

If completed with the last 7 years, eligible only for: Primary Residence purchase

transaction with maximum LTV of the lesser of 90% or the maximum allowed per the LTV

Matrix, or Rate/Term Refinance

Two year waiting period from completion of the short sale to the

disbursement date of the new loan. Standard LTV/CLTV limits apply.

Documentation of extenuating

circumstances

The file must contain all of the following: A written statement form the borrower attributing the cause of the

financial difficulties to outside factors beyond the borrower’s control that are not likely to recur.

Third-party documentation confirming that the events related by the borrower were an isolated occurrence and significantly reduced the borrower’s income and/or increased expenses and rendered the borrower

unable to repay as agreed. The underwriter’s analysis relating the borrower’s explanation and leading

to a reasonable conclusion that the events were beyond the borrower’s

control and not likely to recur, and that the borrower has reestablished an acceptable credit reputation.

Evidence on the credit report and other documentation of the length of time since completion of the short sale.








Significant Derogatory Credit

LPA and DU determine if the applicable waiting period after a significant derogatory event has been met (Desktop Underwriter: excluding short sales and preforeclosure sales).

If LPA or DU determines that the waiting period has not been met based on the credit report used on the initial submission, an updated credit report must be obtained and the loan must

be resubmitted to LPA or DU after the required waiting period has elapsed. If a mortgage debt has been discharged through bankruptcy, even if the foreclosure action is

subsequently completed, the borrower is subject to the bankruptcy waiting period guidelines and not the foreclosure waiting period guidelines. Documentation must be provided to verify

that the mortgage debt in question was discharged as part of the bankruptcy.

Significant Derogatory Credit – Waiting Period – Desktop Underwriter (DU)

Derogatory Event Waiting Period

Requirements

Waiting Period with

Extenuating Circumstances Bankruptcy – Chapter 7 or 11 Four years Two years

Bankruptcy – Chapter 13 Two years from discharge date

Four years from dismissal date

Two years from discharge date

Two years from dismissal date

Multiple Bankruptcy Filings Five years if more than one filing

within the past seven years

Three years from the most recent

discharge or dismissal date.

Foreclosure 1 Seven years Three years

Additional requirements after three years and up to seven

years: Maximum LTV is the lesser of

90% or the maximum

allowed per the LTV Matrix. Purchase transactions

allowed on Primary Residence only.

Rate/Term refinance allowed

on all occupancy types.

1. When both a bankruptcy and foreclosure are disclosed on the loan application, or when both appear on

the credit report, the bankruptcy waiting period may be applied if the loan file includes documentation to verify that the mortgage was discharged in the bankruptcy. If this documentation is not provided, the

greater of the applicable bankruptcy or foreclosure waiting period must be used.

Measurement of Waiting Period - Desktop Underwriter (DU)

When DU identifies a bankruptcy, foreclosure, preforeclosure sale, deed-in-lieu of foreclosure, or mortgage charge-off, and the user is required to determine if the event meets applicable waiting period requirements, DU will instruct the user that the waiting period is measured from the disbursement date of the new loan, not the credit report date.

On loan casefiles where DU measures the waiting period and uses that information in the eligibility assessment, the credit report date will continue to be used as DU does not know the disbursement date of the new loan. For loan casefiles that will have met the waiting period requirement based on disbursement date, but not credit report date, a new credit report may be pulled after the waiting period has elapsed in order to receive an Eligible recommendation.

Tax Liens

Tax liens recorded in public records or on title must be paid off at or prior to closing, even if the borrower has a repayment agreement in place.








If the borrower owes delinquent taxes but no lien has been recorded in public records or on

title: Taxes may remain unpaid if the borrower has a repayment agreement in place and has

made a minimum of three payments as agreed. The regular payment must be included in qualifying ratios.

If there is no plan in place or the borrower has not made a minimum of three payments as agreed, the taxes must be paid in full.

Mortgage Insurance (MI) providers may require the payment of delinquent taxes. Refer to the MI provider website for guidelines.

Collateral

General Property Eligibility Requirements

The mortgaged property must: Be residential in nature based on the property and surrounding market area characteristics,

zoning and land use.

Be safe, sound, structurally secure, habitable and undamaged by fire or windstorms or other perils.

Meet all conditions of the appraisal if the appraisal was made subject to conditions. Represent the highest and best use of the property as improved and the use of the

mortgages property must be a legal or legal non-conforming use. Have legal access (ingress and egress). Have year around access. Have utilities that meet community standards. Have mechanical systems that meet community standards. Have property insurance coverage that meets Pacific Union Financial requirements and

coverage for any hazards specific to the location of the property. Not be subject to pending legal proceeding for condemnation in whole or in part.

Ineligible Properties

Manufactured homes Cooperatives Loan Product Advisor (LPA) – Effective for loans closed on or after November 1,

2016: Property that is subject to coastal tideland, wetland or setback laws and/or regulations that prevent the rebuilding or maintenance of the property improvements in the event of damage or destruction.

Appraisal Requirements

Age of Appraisal

Freddie Mac/Conventional Fixed Rate Fannie Mae If the effective date of the appraisal report is

more than 120 days before the Note Date, and not more than 12 months before the Note Date,

an Appraisal Update with at least an exterior-only inspection is required.

If the effective date of the appraisal report is

more than 12 months before the Note Date, a new appraisal with an interior and exterior inspection is required.

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 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








Freddie Mac/Conventional Fixed Rate Fannie Mae The Appraisal Update must be performed and

reported as follows: An Appraisal Update and/or Completion Report

(Form 1004D), A new appraisal based on an exterior-only

inspection and reported on the appropriate form

based on the property type, or A new appraisal based on an interior and

exterior inspection and reported on the appropriate form based on the property type.

The appraiser who provided the initial appraisal

should perform the Appraisal Update; however, another approved appraiser may perform the Appraisal Update.

If existing photographs accurately represent the subject property and comparable sales, new

photographs of the subject property and comparable sales are not required. Additional photographs of any factors that affect the

marketability or value of the subject property should be provided if not already part of the

appraisal report being updated. If an Appraisal Update indicates that the value of

the property has declined, the terms of the

mortgage must be adjusted and the loan must be resubmitted to the appropriate AUS.

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).

If the appraiser indicates on the Form 1004D that

the property value has declined, a new appraisal must be obtained.

The Appraisal Update must occur within the four months that precede the date of the note and mortgage.

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 loan file must include an explanation as to

why the original appraiser was not used.

Re-use of an Appraisal for a Subsequent Transaction

An origination appraisal may be used for a subsequent Rate/Term Refinance transaction subject to the following: The borrower(s) and lender on the new transaction must be the same as on the

origination transaction. See LPA exception below. The appraisal may not be more than 12 months old on the Note Date of the new

transaction. The subject property must not have undergone any significant remodeling, renovation,

or deterioration, or have been affected by a disaster to the extent that the improvement or deterioration would materially affect the market value of the subject property.

Loans locked under the Conventional Fixed Rate program must follow Freddie Mac guidelines.

Freddie Mac Fannie Mae Allows a borrower to be removed on the new

transaction in the case of a divorce or legal separation that has occurred since the initial

transaction. The loan file must include documentation of the divorce or legal separation.

The new refinance transaction may not be paying

of any subordinate financing. An Appraisal Update (Form 1004D) must be

provided regardless of the age of the initial appraisal.

An Appraisal Update (Form 1004D) must be

provided if the initial appraisal will be more than four months old on the Note Date of the new

transaction.








Appraisal Forms

Pacific Union Financial will accept appraisals or inspections that meet LPA or DU requirements, except as shown in the table below.

Product Type Appraisal Requirements


Conventional Conforming Fixed Rate product:

If DU allows a Property Inspection Waiver (PIW), a full appraisal (Form 1004) is required.

Fannie Mae Only product: A Property Inspection Waiver (PIW) is allowed on the following

transactions if eligible per DU findings:

One unit properties Conforming and High Balance loan amounts

Rate/Term Refinance transactions: Primary Residence and Second Home: Up to 90% LTV/(H)CLTV Investment Property: Up to 75% LTV/(H)CLTV

Cash-out Refinance transactions: Primary Residence: Up to 70% LTV/(H)CLTV

Second Home and Investment Property: Up to 60% LTV/(H)CLTV Loan casefiles that receive an Approve/Eligible recommendation Note: A PIW may NOT be used if a property appraisal has been

obtained. A full appraisal (Form 1004) is required for the following transactions,

regardless of DU recommendation:

Properties located in a disaster-impacted area Purchase, construction, and Construction/Permanent transactions

2-4 unit properties Loan casefiles where the value of the subject property submitted to DU

is ≥$1,000,000

Leasehold properties Higher Priced Mortgage Loans (HPMLs)

Texas 50(a)(6) transactions Note: For condo properties, all Fannie Mae project standards and condo

review requirements apply, regardless of a PIW offer.

If the Fannie Mae Property Inspection Waiver (PIW) will be exercised for an eligible transaction, the loan must be delivered with Special Feature Code (SFC) 801.

SFC 801 should only be used if the PIW option is exercised. The final DU submission must reflect PIW eligibility.

A fully executed PIW (“No Appraisal”) disclosure is required when submitting the loan for underwriting. The borrower must disclose how long the property has been owned and whether the property is currently

listed for sale. See Property Listed for Sale requirements, if applicable. A full appraisal fee should be disclosed on the initial Loan Estimate to

avoid re-disclosure in the event that the PIW eligibility is lost (and an appraisal is required) with a subsequent resubmission to DU.

Desktop Underwriter (DU) ≥$1,000,000 and LTV/(H)CLTV > 75%

Field review (One-Unit Form 2000/1032 or Two to Four-Unit Form 2000A/1072) is required when the appraised value is ≥ $1,000,000 and the LTV/(H)CLTV is > 75%.

The LTV/(H)CLTV must be based on the lesser of the original appraised value, field review value or sales price (if applicable).

Loan Product Advisor (LPA) Form 70/1004 – Uniform Residential Appraisal Report Form 465/1073 – Individual Condo Unit Appraisal Report








Product Type Appraisal Requirements

Loan Product Advisor (LPA) ≥$1,000,000 and

LTV/(H)CLTV > 75%

Field review (Form 1032/2000) is required when the appraised value is ≥ $1,000,000 and the LTV/(H)CLTV is > 75%.

The LTV/(H)CLTV must be based on the lesser of the original appraised value, field review value or sales price (if applicable).

Exterior-Only Upgrade Requirements

If LPA or DU allow for an Exterior-Only Inspection, the inspection must be upgraded to a full appraisal when any one or more of the following

conditions exist: The appraiser cannot adequately view the property from the street.

Apparent adverse deficiencies or environmental conditions are observed.

The appraiser cannot obtain sufficient information about both the

interior and exterior physical characteristics of the property from third-party data sources in order to develop an accurate and adequately supported appraisal.

The appraiser cannot reconcile all significant discrepancies (size, condition, etc.) among data sources.

The exterior-only inspection does not provide sufficient information to develop an accurate and adequately supported appraisal, including the inability to view the property from the street.

The property is new construction and has not yet been occupied. The property is undergoing renovation or rehabilitation.

The data sources used to develop the appraisal (such as the sales contract) indicate the presence of physical deficiencies or an adverse condition, or the appraiser observes apparent physical deficiencies or

adverse property conditions during the exterior property inspection. The condition rating is C5 or C6 and/or the quality rating is Q6 based on

the UAD and the data sources used to develop the appraisal or the

appraiser’s observations during the exterior-only property inspection.

Appraisal Transfers

Pacific Union Financial will allow transfer/re-assignment of appraisal reports for Conventional loans

provided all investor and appraisal independence policies have been met. Note: Pacific Union Financial reserves the right to accept or deny the appraisal, require a new, full appraisal, or require an AVM or other third party verification, and to complete an internal appraisal

review process including, but not limited to, a desk review to confirm consistency with regulatory requirements and Pacific Union Financial guidelines.

Appraisal Assignment Letter and Acknowledgement

Pacific Union Financial will require a letter from the lender transferring the appraisal (Transferring Lender) to certify that the appraisal was obtained in a manner consistent with regulatory requirements. The letter must be completed as follows:

Printed on the Transferring Lender’s letterhead. Completed and signed by an authorized officer of the Transferring Lender (i.e., Vice

President, Assistant Vice President, etc., but not the loan officer/originator). Provided to the Broker from the Transferring Lender with the appraisal. Include a certification from the Transferring Lender stating:

The Transferring Lender, appraisal management company (AMC), appraiser selection and appraisal ordering policy and process, and the appraiser comply with all Fannie Mae/Freddie Mac Appraiser Independence Requirements (AIRs) and the Dodd-Frank Wall Street Reform Act and Consumer Protection Act (collectively, “regulatory requirements”).








The appraiser was engaged directly by the Transferring Lender through its designated

authorized AMC. Neither the appraiser nor the AMC had direct, indirect or prospective interest, financial

or otherwise, in the property or credit transaction. Transferring Lender’s name appears on the appraisal as the Transferring Lender/Client.

The appraisal being transferred is the only appraisal ordered by the lender for this transaction.

Refer to Wholesale website for an approved sample transfer letter (Appraisal Assignment Letter and Acknowledgement) that may be used by the Transferring Lender. Transferring lenders are not

required to use this form, but the actual letter must include the statements listed above.

Appraisal Requirements

Appraisals must be transferred to the Broker In a suitable electronic format (first generation pdf). With the Submission Summary Report (SSR) for the applicable agency evidencing a

successful upload to UCDP, the appraisal submission details, “successful” status of the submission, and a Document File Identifier (Doc File ID).

Ownership of the appraisal must be assigned to Pacific Union Financial, LLC without recourse.

Note: The AMC and/or the appraiser must not be identified on the most recent Agency or other exclusionary list.

Accessory Units

A single-family property that includes an additional unit is acceptable provided it conforms

to the subject neighborhood and to the market. Only one accessory unit is allowed on the subject property; multiple accessory units are

not permitted. Examples of such properties include a house with a unit above a detached garage or a

house with a guest apartment or basement unit. The appraiser must provide a description of the accessory unit and analyze any effect it has

on the value and marketability of the subject property. The second unit must be incidental to the overall value and appearance of the property. No rental income may be used to qualify the borrower.

At least one comparable must include an accessory unit. If the accessory unit does not comply with zoning, the property is eligible, subject to all of

the following: It must be confirmed that the existence of the accessory unit will not jeopardize any

future property insurance claim that may need to be filed for the property. The property must be appraised based upon its current use and the use must conform to

the subject neighborhood and market. The appraisal must indicate the improvements represent a use that does not comply

with zoning. At least three comparable sales with the same non-compliant zoning use must be

provided in the appraisal to demonstrate the improvements are typical for the market.

Borrower Acknowledgement

All files that include an appraisal must include one of the following acknowledgements from the borrower: Receipt of the appraisal at least three days prior to closing.

Waiver of right to receive appraisal within three days prior to closing.








Disclosure of Information to Appraisers – Desktop Underwriter (DU) only

Information about the subject property must be disclosed to the appraiser, so that the appraiser can determine if the information affects the marketability or opinion of the market value of the property.

All financing data and sales concessions that will be or have been granted by anyone associated with the transaction, for the subject property, must be disclosed to the appraiser.

Required Information

The following financial information must be disclosed to the appraiser on purchase transactions, if applicable: Loan fees or charges,

Settlement charges, Discounts to the sales price, Interest rate buydowns, Below-market-rate financing,

Terms of any subordinate financing provided by interest parties, Credits or refunds of borrower expenses, Absorption of monthly payments, Assignment of rent payments, and

Any other information not listed above that impacts property value. The following property information must be disclosed, if applicable:

Condo or PUD fees; Non-realty items included in the transaction;

Any environmental hazard in or on the subject property or in the vicinity of the property that has been disclosed by the borrower or any other party to the transaction; and

Any other items that affect the safety, soundness, or structural integrity of the subject property.

Sales Contract

The appraiser must receive a copy of the complete, ratified sales contract and all addenda for the subject property.

If the contract is amended after the effective date of the appraisal in a way that does not affect the description of the property, the amended contract does not have to be provided to the appraiser, nor is a revised appraisal required. Examples of such amendments include: Sales price,

Transaction terms, Financing concessions, Seller-paid closing costs, Names or initials,

Closing date, and Correction of minor clerical errors such as misspellings.

Escrow Holdback

Allowed for repairs that do not affect the livability, safety or structural integrity of the property or affect the ability to obtain a Certificate of Occupancy on new or proposed construction.

Refer to the Escrow Holdback Policy for detailed guidelines.

https://flow.pacificunionfinancial.com/docs/EscrowHoldbackPolicyWLExt.pdf?1








Flip Properties

A property flip refers to a transaction in which a property is purchased and quickly resold for a significant profit. Properties targeted for flips generally include those that can be acquired at a low price and often include REOs, properties subject to a “short sale,” distressed properties or newly constructed properties where the builder or developer must liquidate housing inventory, transactions

not involving a realtor, and transactions that include parties affiliated or related by birth or marriage. In some cases, the seller of a flipped property never holds title to the property, but instead sells or assigns their interest in a contract to purchase the property to a third party. Flip transactions require a higher level of review to ensure the property value and the transactions are valid.

The following transactions are generally considered acceptable and additional review is not required:

Property sales by: A Government Sponsored Enterprise, state or federally chartered financial institution,

mortgage insurer, or federal, state or local government agency. Employers or relocation agencies related to employee relocations. The property seller through inheritance, divorce, or as a result of a legal settlement or

proceeding.

An administrator or executor of an estate. Property sales that have been substantially improved by bona fide and verified renovations

since the property was acquired by the property seller in which any increase in sales price over the seller's acquisition costs is representative of the market given the improvements to the home.

Sales of properties that the property seller acquired at below market value after purchasing as a result of a distress sale (i.e. REO sale, short sale, tax lien sale, bankruptcy trustee's sale, etc.), where any increase in the sales price over the property seller's acquisition cost can be clearly shown to be a result of the difference (if any) in the market's reaction to

distress sales and typical arms-length market sales.

Potential Property Flips/Red Flags

Pacific Union Financial (Pacific Union) will thoroughly review all transactions for red flags that may indicate that the subject property is a Flip and to determine whether a transaction is acceptable. Any of the following characteristics/red flags may be indicative of a potentially ineligible flip transaction. Should any of these characteristics exist, additional research as outlined in the Best Practices section is required to determine acceptability.

≤180 days of ownership by property seller from date of purchase contract. Title to the property has transferred more than two times in the last twelve months. The property seller or any other party claims that the property was significantly renovated

since being acquired but the claimed renovations were not actually performed or cannot be

sufficiently documented. The contract seller is not the current owner of record at the time of the purchase contract. The sales contract and/or other documentation identify terms that may indicate that there

has been assignment or sale of the seller’s interest in a contract or option to acquire the

property. “Double Escrows” are discovered at the time of loan closing. Purchases with undisclosed secondary financing, in which part of the purchase price is

refunded to the buyer, or is quickly followed by a cash-out refinance.

Fraud Detection report indicates a Property Flipping Impact assessment identified. The appraisal:

Lacks sufficient analysis of all pertinent offerings or listing for the property, the contract of sale, and the sales/transfer or listing history of the property and comparable sales.








Increases in property value are not supported. See Best Practices/Appraisal topic

below. Property seller is not shown as the owner of the subject property.

Note: Underwriter discretion will be used, as the above list may not be all inclusive.

Best Practices

If the underwriter’s analysis indicates the subject is a flip and the transaction is not an acceptable scenario, the following additional review is required:

A Desk Review/Collateral Desktop Analysis is required when the seller has owned the property for 180 days or less or when title to the property has transferred more than two times within the most recent 12-month period. The Desk Review/Collateral Desktop Analysis must represent the appraised value within a tolerance not to exceed 10%.

Increases in property value, in whole or part, must be supported by the appraisal, explained, documented, and analyzed as follows: The appraisal must identify, in detail, any changes made and include photographs of the

rehabilitation or renovation.

Improvements and renovations must be documented and substantiated with receipts, contractor invoices, and building permits.

Regardless of length of ownership, Underwriter reserves the right to obtain a desk review if an unreasonable or unusually large increase in value has occurred within the context of the property’s market.

Documentation must indicate that improvements were completed after the property seller acquired the property.

Confirm that the property seller is the owner of the subject property. Ensure that the appraisal sufficiently analyzes and provides detail on all pertinent offerings

or listings, includes sufficient analysis of the contract of sale, and adequate justification of any significant increase in sales price/value over the seller’s acquisition costs. The analysis must be detailed enough to clearly explain the methodology and rationale used to justify the appraiser’s conclusions on this issue.

Ensure all property flipping impacts as identified in the Fraud detection report are satisfactorily resolved.

Inspections and Certification Requirements

A property inspection is not required for termite, private well, septic system, or roof unless required in

the purchase agreement or when the appraiser recommends an inspection in the appraisal report.

Leaseholds

The Leasehold must meet applicable Fannie Mae or Freddie Mac guidelines.

Legal Non-Conforming Properties

Properties with legal non-conforming use of the land may be acceptable, subject to the following: The appraisal must reflect the adverse effect, if any, that the non-conforming use has on

the value and marketability of the property. If the subject is an attached condo, the property is eligible only if the improvements can be

rebuilt to the current density in the event of partial or full destruction. The file must include a copy of the applicable zoning regulations or a letter from the local zoning authority that authorizes reconstruction to current density.








Mixed Use Properties

Mixed Use properties have a business use in addition to the residential use. These properties are eligible subject to the following: The subject property must be a one unit dwelling that the borrower occupies or will

occupy as a Primary Residence.

The borrower must be both the owner and the operator of the business. No more than 20% of the total square footage is devoted to non-residential use. Commercial use should not result in significant alteration to the property or one which

could not be easily converted back to residential.

The commercial use should generate a minimal amount of traffic noise. Appraisal requirements:

Appraisers must provide an adequate description of the mixed-use characteristics of the subject property.

The room layout must be reasonable for a residential home. The mixed use of the property must represent a legal, permissible use of the property

under the local zoning requirements. The market value of the property is primarily a function of its residential characteristics,

rather than of the business use or any special business use modifications that were made.


Fannie Mae requires only that the property be primarily residential. There is no specific percentage of square footage that may be devoted to non-residential use.

Modular and Panelized Homes

Loan Product Advisor (LPA) Desktop Underwriter (DU) Does not include other types of factory-built

housing not subject to the National Manufactured Construction and Safety Standards Act, such as

modular or panelized housing, in the definition of Manufactured Homes.

These types of factory-built housing are eligible,

as long as all other property eligibility requirements are met.

Factory-built housing (not built on a permanent

chassis)—such as modular, prefabricated, panelized or sectional housing—is not considered

manufactured housing and mortgage loans secured by such housing are eligible.

Refer to the Fannie Mae Seller Guide for additional

restrictions.

Property Affected by a Disaster

If the Federal Emergency Management Agency (FEMA) declares a major disaster, or when the lender becomes aware of a major disaster, appropriate steps must be taken to

determine the condition of a property located in the disaster area. If the property appraisal was completed prior to the disaster, Pacific Union Financial will require an inspection of the property. Refer to the following for requirements: Disaster Area Policy.

Re-verification of Hazard Insurance

Property insurance coverage should be re-verified to insure that the coverage is adequate to

protect against future loss and it insures that it has been obtained or maintained adequately with respect to affected properties.

Property Listed for Sale

Properties listed for sale are eligible subject to the following:

hhttps://flow.pacificunionfinancial.com/docs/DisasterAreaPolicyWLExt.pdf








The listing must have been cancelled at least one day prior to the disbursement date of the

new loan. A copy of the MLS cancellation meeting this requirement must be included in the loan file.

A signed letter of explanation from the borrower explaining why property was listed for sale and removed, and if Primary Residence, statement of intent to continue to occupy the

property.

Additional Requirements for Cash-Out Refinance Transactions

A property that was listed for sale within the six months prior to the disbursement date of the

new loan is limited to the lower of 70% LTV/CLTV/H(CLTV) or the maximum allowed for the transaction.

Resale Restricted Properties – Loan Product Advisor (LPA) only

Freddie Mac will purchase Mortgages secured by properties subject to resale restrictions including, but not limited to, income-based restrictions and age-based restrictions, if the requirements of this section are met and the resale restrictions are in compliance with all federal, State and local laws, rules and regulations.

All applicable requirements, including but not limited to, condo and PUD guidelines must be met.

Any right of first refusal must run to the enabling authority or jurisdiction that imposed the resale restrictions, with a time period not exceeding 90 days from the date of written notice

to the authority or jurisdiction that the restricted property is being offered for sale. Agreements or requirements, i.e., enacted ordinances, statutes, published policies or

imposed restrictions, must appear in the public land records for the property in a manner that is discoverable by a routine title search.

Deed restrictions that require payments under certain circumstances or repayment of financial subsidies, must state that the payment obligation is subordinate to the first lien.

The appraiser must include at least two comparable sales with similar resale restrictions, an analysis of the comparable sales and the impact, if any, of the resale restrictions on the

property value and marketability.

Income-Based Restrictions

Income-based resale restrictions are typically imposed by State or local governments to

require a specified number or percentage or properties in a designated area to be dedicated as housing for low or moderate income individuals.

The restrictions are stated in an easement, covenant or condition in a deed or other instrument executed by or on behalf of the owner of the land, and may be in effect for a

certain number of years or continue in perpetuity. Resale restriction controls must be administered by a duly authorized authority of the State,

local or municipal government or an agent of the authority that has established mechanisms to provide applicant screening and processing on an ongoing basis. Resale controls may not

be administered by the developer. Properties subject to income-based resale restrictions are eligible, provided all of the

following are met: Primary residence only Purchase and Rate/Term refinance transactions only

1-unit attached or detached dwelling located on an individual lot or in a condominium project or Planned Unit Development (PUD).

Restrictions must terminate automatically upon foreclosure or completion of a deed-in-lieu of foreclosure.








Rural Properties – Loan Product Advisor (LPA) only

Properties located in rural areas may be eligible if it is determined the property is residential based on the characteristics and land use. Refer to the Freddie Mac Requirements for Rural Properties Q&A web page, which identifies Freddie Mac appraisal and underwriting requirements for rural properties.

Solar Panels – Desktop Underwriter (DU) only

Properties with solar panels that are leased from or owned by a third party under a Power Purchase Agreement or other similar arrangement may be eligible, subject to the following requirements

(whether to the original agreement or as subsequently amended): The solar panels must not be included in the appraised value of the property, as they are

considered to be personal property. The subject property must maintain access to an alternate source of electric power that

meets community standards.

The monthly lease payment must be included in the qualifying debt-to-income ratio unless the lease is structured to: Provide delivery of a specific amount of energy at a fixed payment during a given period,

and

Have a production guarantee that compensates the borrower on a prorated basis in the event the solar panels fail to meet the energy output required for in the lease for that period.

Note: Payments under Power Purchase Agreements where the payment calculation is

based solely on the energy produced may be excluded from the qualifying DTI. Any exceptions to coverage on the title insurance policy for recorded instruments related to

the solar panels must meet Fannie Mae requirements. The lease or Power Purchase Agreement must indicate that:

Any damage that occurs as a result of installation, malfunction, manufacturing defect, or removal of the solar panels is the responsibility of the equipment owner. The owner must be obligated to repair the damage and return the improvements to their original or prior condition (for example, sound and watertight conditions that are architecturally

consistent with the home); and The owner of the solar panels agrees to not be named as loss payee (or named insured)

on the property owner’s property insurance policy covering the residential structure the panels are attached to; and Note: As an alternative, it is acceptable to verify the owner of the solar panels is

not a named loss payee (or named insured) on the property owner’s property insurance policy.

In the event of foreclosure, the lender or assignee has the discretion to: Terminate the lease/agreement and require the third-party owner to remove the

equipment; Become the beneficiary of the borrower’s lease/agreement with the third party,

without payment of any transfer or similar fee; or Enter into a new lease/agreement with the third party, under terms no less favorable

than the prior owner.

Note: If the solar panels are owned by the property owner, standard eligibility requirements apply (for example, appraisal, insurance, and title).

Solar Panels – Loan Product Advisor (LPA) only

Properties with solar panels are eligible, subject to the requirements detailed below.

http://www.freddiemac.com/singlefamily/purchasemarket/sell/rural_properties_QA.html








Solar Panels Not Owned by the Borrower

If the subject property has solar panels that are owned by a third party and subject to a lease agreement, power purchase agreement or similar type of agreement:

A copy of the lease agreement, power purchase agreement or similar type of agreement must be included in the loan file.

The solar panels must not be included in the appraised value of the property. The subject property must maintain access to electrical utilities consistent with community

standards. The monthly lease payment must be included in the qualifying debt-to-income ratio unless

the lease: Provides for delivery of a specific amount of energy for an agreed upon payment during

a given period, and Includes a production guarantee under which the borrower is compensated on a

prorated basis when the energy produced by the solar panels is less than the level required in the lease agreement.

Note: Payments for solar panels subject to a power purchase agreement or similar type of agreement may be excluded from the qualifying DTI if the payment calculation is

based only on the generated energy. Any title insurance policy exceptions due to the existence of the lease agreement, power

purchase agreement or similar type of agreement must meet Freddie Mac requirements. The lease agreement, power purchase agreement or other similar agreement must provide

that:

The owner of the solar panels agrees to not be a loss payee (or named insured) on the property owner’s insurance policy, and

In the event of foreclosure, the lender may: Terminate the lease agreement or power purchase agreement and require the owner

of the equipment to remove the panels and supporting equipment; Become the beneficiary of the borrower’s lease agreement or power purchase

agreement without incurring a transfer fee; or Enter into a new lease agreement or power purchase agreement with the owner of

the equipment under terms no less favorable than the existing lease or power purchase agreement.

Solar Panels Owned by the Borrower

If the borrower owns the solar panels on the subject property, the following requirements apply: The appraiser must recognize the existence of the solar panels, The solar panels may be considered in the opinion of market value of the property, and The subject property must maintain access to electrical utilities consistent with community

standards.

Unique Property Types

Loans secured by properties that represent unique or non-traditional types of housing such as earth houses, geodesic domes, and log homes may be eligible provided the appraiser has adequate information to develop a reliable opinion of market value.

It is not necessary for one or more of the comparable sales to be of the same design and appeal as the subject property, although appraisal accuracy is enhanced by using

comparable sales that are the most similar to the subject property. It must be determined that there is sufficient information available to develop a reliable

opinion of market value. This will depend on the extent of the differences between the subject property and the more traditional types of properties in the neighborhood and the

number of similar properties that have been sold in the neighborhood.








If the appraiser cannot locate recent comparable sales of the same design and appeal, the

property may be acceptable if the appraiser: Is able to determine sound adjustments for the differences between the comparable

sales that are available and the subject property; and Is able to 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, and any other reliable market data.

The property is not acceptable 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.

Unpermitted Additions

If the appraiser identifies an addition that does not have the required permit(s), the property may be

eligible, subject to the following appraisal requirements: The quality and appearance of the work must be addressed, and The appraiser must comment on the impact, if any, the addition has on the market value of

the subject property.

Condominiums

Pacific Union allows Condominium Approval based upon the applicable GSE (Fannie Mae/Freddie Mac)

for the subject loan and Condominium Type.


Review Types Conventional Conforming and Freddie Mac Only

Fannie Only

Limited Review Not permitted Established projects if attached; New projects permitted if detached

Streamline Review Established projects only Not permitted

PERS

PERS Reciprocal is permitted Pacific

Union does not submit loans for PERS approval if already PERS approved;

new attached projects only

Permitted if already PERS approved;

Pacific Union does not submit loans for PERS approval; new attached projects

only

Lender Full Review Established attached projects only Not permitted

CPM CPM Reciprocal is permitted for

established attached projects

Permitted for established attached

projects

Project Exception Waivers Not permitted Permitted on a case-by-case basis

2-4 units Projects Streamline, CPM Reciprocal or Full Lender Reviews are permitted

Limited to CPM reviews permitted

Detached Projects Established projects only; streamline

review only Limited review permitted

Debt to Income Ratios/Qualifying

Qualifying Rate

Fixed Rate: Qualify at note rate.

5/1 ARM: Qualify at the greater of the note rate plus 2% or the fully indexed rate. 7/1 ARM: Qualify at the greater of the fully indexed rate or the note rate.

In order for the fully indexed rate to be determined, the index and margin must be entered in DU. If the index and margin are not entered, DU loans will receive an








Ineligible recommendation and a message will be issued advising the user that the index

and margin must be entered and the loan must be resubmitted to DU. Note: The following states require qualifying at the fully indexed rate on all ARM products.

For these states, the 7/1 ARM must be qualified at the greater of the note rate or the fully indexed rate in order to meet both agency and state requirements:

Illinois Maryland Minnesota New Mexico Pennsylvania

Vermont

Maximum Debt to Income Ratio (DTI)

Maximum DTI 1

Conventional Fannie Mae Freddie Mac 50% Determined by DU Determined by LPA

1. LTV >80%: Must meet MI provider DTI requirements.

Higher-Priced Mortgage Loans (HPMLs) and HPML Qualified Mortgages

HPMLs and HPML Qualified Mortgages (QM) are loans secured by the borrower’s primary

residence, second home or investment property that are priced at an Annual Percentage Rate (APR) that exceeds the Average Prime Offer Rate (APOR).

Based on the date the interest rate is set (locked or re-locked), the APR must be compared with the APOR index. The loan will be considered an HPML if the APR exceeds the index by

1.5% or more. HPMLs and HPML QMs may be eligible subject to the following:

Borrower’s ability to repay is established and income and assets have been fully documented;

The qualifying rate for an ARM loan with initial adjustment period within the first seven years of the mortgage are qualified at the higher of the fully indexed rate or the note rate; and

An escrow account for taxes and insurance is established. For projects such as

condominiums and PUDs where the property insurance is collected as part of the borrower’s HOA fee and remitted by the HOA to the insurance provider, the escrow account must be established for taxes and if applicable any mortgage insurance and any individual homeowner’s insurance policy.

Desktop Underwriter (DU): A Property Inspection Waiver (PIW) is not allowed, regardless

of DU recommendation. A full appraisal is required.

Geographic Restrictions

Texas Cash-Out: Refer to Texas Home Equity Program Guide if the transaction is a cash-out refinance on

the borrower’s current primary residence. Note: Transactions in which the subject property is non-owner occupied but was

previously the borrower’s primary residence and has an existing Texas Home Equity loan are not allowed under this product or the Texas Home Equity product.

Refer to the Geographic Matrix for additional restrictions.

http://flow.pacificunionfinancial.com/docs/GeoMatrixWLExt.pdf








High Balance Loans in Alaska and Hawaii

For properties located in Alaska refer to the following: Loan Limits, and Loan to Value (LTV) Matrices.

Income and Employment

Income and Employment must be documented in accordance with: Loan Product Advisor (LPA) Feedback Certificate and/or the Loan Product Advisor

Documentation Matrix. Desktop Underwriter (DU) Findings report. Freddie Mac or Fannie Mae Seller Guide(s). Evidence of how the income was calculated must be in the loan file, regardless of income

type.

Specific requirements for certain employment and income types are detailed below.

Assets as a Basis for Mortgage Qualification – Loan Product Advisor (LPA) only

For purchase and Rate/Term refinance transactions only, certain assets may be used to qualify the borrower subject to the following requirements:

Allowed on Fixed Rate only.

Allowed on 1 unit Primary Residence and Second Home. Maximum 70% LTV/(H)CLTV. Refer to the table below for eligible asset types and requirements. The borrower must not currently be using the assets as a source of income.

Use 70% of the balance of the eligible asset less any funds from the account that are being used for loan closing, divided by 360 (regardless of term of loan).

Asset Type Requirements

Retirement Accounts

The assets must be in a retirement account recognized by the IRS such as a 401(k) or IRA.

The borrower(s) must be the sole owner of the account. The account must be immediately accessible in its entirety. Account funds must not be subject to a penalty.

The borrower must be fully vested in the account funds.

Lump-sum

distribution funds not deposited to an

eligible retirement account

Lump-sum distribution funds must be derived from a retirement account recognized

by the IRS such as a 401(k) or IRA, and must be deposited to a non-retirement brokerage or depository account.

Borrower(s) must have been the recipient of the lump-sum distribution funds. Parties not obligated on the mortgage may not have an ownership interest in the

account that holds the funds from the lump-sum distribution.

The proceeds from the lump-sum distribution must be immediately accessible in their entirety.

The proceeds from the lump-sum distribution must not have been or currently be

subject to a penalty.

Assets from the sale

of the borrower’s business

The borrower(s) must be the sole owner of the proceeds from the sale of the business that were deposited to a non-retirement brokerage or depository account.

Parties not obligated on the mortgage may not have an ownership interest in the

account that holds the funds from the sale of the business. The sale of the business must not have resulted in the following: retention of

business assets, existing secured or unsecured debt, ownership interest or seller-held notes to the buyer of the business.










Automobile Allowance

Loan Product Advisor (LPA) Desktop Underwriter (DU) Must have a two year consecutive history of receipt

to use as qualifying income, and

The automobile allowance must be likely to continue for the next three years.

The full amount of the auto allowance may be added to the borrower’s qualifying income, and

The full amount of the monthly automobile

financing expense must be included in the calculation of the monthly DTI ratio.

Note: The auto allowance may not be deducted from the monthly automobile financing expense.

Must have a two year consecutive history of receipt to use as qualifying income.

Fannie Mae allows two methods of calculating the

income associated with an automobile allowance: Actual cash flow approach: If the borrower reports

auto allowances on Employee Business Expense (Form 2106), or IRS Form 1040, Schedule C:

Funds in excess of the borrower’s monthly expenditures are added to the borrower’s monthly income, or

Expenses in excess of the monthly allowance are included in the borrower’s total monthly obligations.

If the borrower used Form 2106 and recognized “actual expenses” instead of the “standard

mileage rate”, the “actual expenses” must be used to identify the borrower’s actual lease payments and make appropriate adjustments.

Income and debt approach: If the borrower does not report the allowance on either Form 2106 or Schedule C, the full amount of the allowance is

added to the borrower’s monthly income, and the full amount of the lease or loan payment for the

automobile is added to the borrower’s total monthly obligations.

See Unreimbursed Employee Business Expenses

Bonus or Overtime Income

Loan Product Advisor (LPA) Desktop Underwriter (DU) Bonus or overtime income may be used to qualify

if:

The borrower has a consecutive two-year history of receiving the income, and

The income is likely to continue for the next three years.

Bonus or overtime income must be documented

with the following: Most recent year-to-date paystub reflecting at

least 30 days of income, and

Two years most recent W-2s from all employers; OR

Fully completed written VOE with year-to-date and prior years’ earnings.

Note: Additional documentation may be

required to support the stability and amount of income used to qualify when the documentation

does not support the income calculation.

Bonus Income

Bonus or overtime income may be used to qualify if the borrower has received the income for the past

two years, and it is likely to continue. If the borrower has more than one year of bonus

or overtime income but less than two years, the income may be acceptable provided the loan file includes the rationale for allowing the income.

If the borrower has changed employers, bonus or overtime income may be acceptable provided the borrower has received bonus or overtime

income from the new employer. If the borrower recently changed positions with

his/her current employer, the effect of the change on the borrower’s eligibility and opportunity to receive bonus or overtime pay

must be determined. Bonus or overtime income received for less than

one year is not acceptable. If the employment verification states that the

bonus or overtime income is unlikely to continue, it

may not be used in qualifying.








Loan Product Advisor (LPA) Desktop Underwriter (DU) An earnings trend for the income must be established

and documented for the last two years. If the trend is stable or increasing, the income

must be averaged over 24 months. If the trend is decreasing:

It must be determined that the income is stable.

An explanation for the decreasing income is required.

The income must be averaged over the number of months included in the payment (such as 12 months for an annual bonus payment).

The income must be likely to continue at the level used to qualify.

Overtime Income An earnings trend for the income must be established

and documented for the last two years. The borrower’s hourly rate and number of hours

worked must be considered.

The amount of income used to qualify must be the amount most likely to continue for the next three

years.

An earnings trend for bonus or overtime income

must be established and documented for the last two years.

If the trend is stable or increasing, the income amount must be averaged.

If the trend was declining, but has since

stabilized and there is no indication that the borrower will not continue to be employed at the

current level, the current, lower amount of bonus or overtime income must be used.

If the trend is declining, the income may not be

stable and additional analysis must be conducted to determine if the bonus or overtime income should be used. The income may not be

averaged over the period when the declination occurred.

If the bonus or overtime income shows a continual decline with no valid explanation, the income may not be used to qualify.

Bonus or overtime income must be documented with the following:

Most recent paystub with year-to-date earnings, and

Two years most recent W-2s from all employers;

OR Fully completed written VOE with year-to-date

and prior years’ earnings.

Borrower Employed by a Family Member or Party to the Transaction

If the borrower is employed by a relative, a closely held family business, the property seller, or any party to the transaction, the following documentation is required: Borrower’s signed and completed personal federal tax returns for the most recent two

years, Written Verification of Employment, and W-2s for the most recent two years.

Current income reported on the VOE or paystub may be used if it is consistent with W-2

earnings reported on the tax returns. If the income is not reflected on the tax returns or the reported income is substantially lower than the income reflected on the VOE or paystubs, further investigation is needed to determine whether the income is stable.

Capital Gains Income

Loan Product Advisor (LPA) Desktop Underwriter (DU) Document a two-year history of capital gains

income by obtaining copies of the borrower’s signed federal income tax returns (including

Schedule D) for the most recent two years. Requires documentation of sufficient assets

remaining after closing to support continuance of

the capital gain income, at the level used for qualifying, for at least the next three years.

Document a two-year history of capital gains

income by obtaining copies of the borrower’s signed federal income tax returns (including

Schedule D) for the most recent two years. Develop an average income from the last two years

and use the averaged amount as part of the

borrower’s qualifying income as long as the borrower provides current evidence that he or she

owns additional property or assets that can be sold if extra income is needed to make future mortgage loan payments.








Loan Product Advisor (LPA) Desktop Underwriter (DU) Capital losses identified on IRS Form 1040,

Schedule D, do not have to be considered when calculating income or liabilities, even if the losses

are recurring. Due to the nature of this income, current receipt of

the income is not required to comply with Age of

Documents requirements; however, documentation of the asset ownership must meet Age of

Documents.

Child Support, Alimony, Separate Maintenance

May be considered in qualifying income if the income has been received for the most recent six months and the payor is obligated to make the payment for at least the next three years.

The income may not be used for qualifying if: Received for less than six months, or Payments have not been received on a consistent basis, Payments have been made in less than the full amount due.


Copy of divorce decree or separation agreement (if the divorce is not final) indicating

payment of alimony or child support and stating the amount of the award and the period of time over which it will be received, or

Other type of written legal agreement or court decree describing the payment terms for the income, or

Documentation verifying any applicable state law that mandates alimony, child support, or separate maintenance payments, and specifying the conditions under which the payments must be made.

Evidence payments have been received for at least 6 months.

If a borrower who is separated does not have a legal separation agreement that specifies alimony or child support payments, the income may not be used in qualifying.

Commission Income

The borrower should have a two-year consecutive history of receiving commission income and the commission income must be likely to continue for the next three years in order to consider the income for qualifying.

Employee paid business expenses reflected on the borrower's tax returns must be deducted

from the borrower's gross commission income when calculating income. The income must be averaged over the previous two years. See Unreimbursed Employee Business Expenses.

Loan Product Advisor (LPA) Desktop Underwriter (DU) Must have a two year consecutive history of

receipt to use as qualifying income. To document, obtain the following: Written VOE covering the most recent two

years, and Signed individual federal tax returns for the

most recent 2 years, OR Most recent YTD paystub documenting at least

30 days of income, and

A minimum history of two years of commission

income is recommended; however, commission income that has been received for 12 to 24 months may be considered as acceptable income,

as long as there are positive factors to reasonably offset the shorter income history.

If the commission income represents less than 25% of the total annual employment income, obtain the following documents:








Loan Product Advisor (LPA) Desktop Underwriter (DU) W-2s and/or 1099s covering the most recent

two years, and Complete signed individual federal tax returns

for the most recent two years. Commission income showing a decrease from one

year to the next requires significant compensating

factors in order to use the income and if used, must be averaged over the most recent 12 month

period.

Written Verification of Employment, or

Recent paystub and W2’s covering the most recent two years.

If the commission income represents more than 25% of the total annual employment income, obtain the following documents:

Personal tax returns for the last two years, and Written Verification of Employment, or

Recent paystub and W2’s covering the most recent two years.

Continuity of Income

Unless there is information to the contrary, if the income does not have a defined expiration

date and the history of receipt of the income is documented, it may be concluded that the income is stable, predictable, and likely to continue, and additional documentation to support continuity is not required.

If the income source does have a defined expiration date or is dependent on the depletion

of an asset account or other limited benefit, documentation of the continuation of the income for at least three years is required.

The following table will assist in determining whether additional income documentation may be required to support a three year continuance. However, refer to the specific topic within

this Program Guide for additional requirements.

Assume Continuation of Income Is Likely Provide Defined > 3 Year Expiration

Automobile allowance – DU only

Base salary

Bonus, overtime, commission, or tip income

Capital gains income – DU only

Corporate retirement or pension

Disability income (long term)

Foster care income

Interest and dividend income (unless provided

evidence of depletion)

Military income

Mortgage credit certificates

Part-time job, second job, or seasonal income

Rental income

Self-employment income

Social Security, VA, or other government

retirement (excluding SSI benefits paid from

another person’s account).

Alimony or child support

Automobile allowance – LPA only

Capital gains income – LPA only

Distributions from a retirement account – for

example, 401(k), IRA, SEP, Keogh

Mortgage differential payments

Notes receivable

Public assistance

Royalty payment income

Social Security (not including retirement or long

term disability)

SSI benefits paid from another parties account

Trust income

VA benefits (not including retirement or long term

disability

Employment Offers or Contracts - Desktop Underwriter (DU) only

If the borrower is scheduled to begin employment after the loan closes, the borrower’s offer letter or contract for employment may be used to underwrite and close the loan. The start

of employment and the receipt of the income must be documented prior to the delivery of the loan. The borrower’s employment and income history must be documented per the DU

Findings.








The file must include a copy of the signed offer or contract for future employment and

anticipated income.

Employment-Related Assets as Qualifying Income – Desktop Underwriter (DU) only

Employment-related assets may be used as qualifying income subject to the following:

Assets used in calculating the monthly income stream must be owned individually by the borrower, or the co-owner of the asset must be a co-borrower on the loan.

The asset(s) must be liquid and available to the borrower and must be sourced as one of the following:

A non-self-employed severance package or non-self-employed lump sum retirement package (a lump sum distribution) documented with a distribution letter from the employer (Form 1099–R) and deposited to a verified asset account.

For 401(k) or IRA, SEP, Keogh retirement accounts, the borrower must have

unrestricted access to the funds in the accounts and can only use the accounts if distribution is not already set up or the distribution amount is not enough to qualify. The account and its asset composition must be documented with the most recent monthly, quarterly, or annual statement.

A borrower is considered to have unrestricted access if he/she has, as of the time of calculation, the unqualified and unlimited right to request a distribution of all funds in the account (regardless of any possible tax withholding or applicable penalty applied to such distribution).

Non-employment-related assets are not eligible. This includes, but is not limited to stock

options, non-vested restricted stick, lawsuits, lottery winnings, sale of real estate, inherited funds, and divorce settlements.

Checking and savings accounts are generally not eligible, 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 the source of the funds must be included in the loan file.

If a penalty would apply to the distribution of funds, the penalty amount based on a complete distribution from the account (after costs for the transaction) must be subtracted

to determine the income stream from the asset(s). If the employment–related assets are in the form of stocks, bonds, and mutual funds, 70%

of the value (remaining after costs for the transaction and consideration of any penalty) must be used to determine the income stream to account for the volatile nature of these

assets.

Requirements for Use of Employment-Related Assets as Income

Maximum LTV/CLTV/HCLTV 70%

Minimum Credit Score 620

Loan Purpose Purchase and Rate/Term Refinance

Occupancy Primary Residence or Second Home

Number of Units 1-4 unit properties

Note: If the loan does not meet the above parameters, employment-related assets may be eligible under

other standard income guidelines, such as interest and dividend, retirement, government annuity or pension income.

Calculation of “Net Documented Assets”

“Net Documented Assets” are equal to the sum of the eligible asset(s) minus:








The amount of the penalty that would apply if the account was fully distributed at the time

of calculation; and The amount of any funds used for down payment, closing costs, and/or reserves; and 30% of the remaining value of any stocks, bonds, or mutual funds (after the above

calculations).

Example: Calculation of Net Documented Assets

IRA (made up of stocks and mutual funds) $500,000

Minus 10% of $500,000 ($500,000 x .10)

(assumes the borrower is <59 1/2 years of age at the time this income is being calculated and subject to a 10% penalty for early distribution. This penalty must

be levied against any cash being withdrawn for closing the transaction as well as the remaining funds used to calculate the income stream.)

-$ 50,000

Total eligible documented assets $450,000

Less funds required for closing -$100,000

Subtotal $350,000

Less 30% of $350,000 (assumes funds are in the form of stocks, bonds, and mutual funds)

-$105,000

Net documented assets $245,000

Monthly income calculation

$245,000/360 (or actual term of the loan in months) $680.56 monthly income

Foreign Income – Desktop Underwriter (DU) only

Borrowers who are employed by a foreign corporation or foreign government and are paid in foreign income or foreign currency are eligible subject to the following:

The file must include signed copies of the borrower’s federal tax returns for the most recent two years and the foreign income must be reflected on the returns.

Income must be documented per standard income documentation requirements. All income must be translated into U.S. dollars.

Foster Care Income

Loan Product Advisor (LPA) Desktop Underwriter (DU) Foster-care income may be considered qualifying

income if the income is received from a state- or

county-sponsored organization and the borrower has a two-year history of providing foster-care services. Foster care income must be likely to

continue for the next three years. Provide proof of receipt of the income for the most

recent two year period.

Income received from a state or county sponsored organization may be considered if the following

requirements are met: Document the income with letters of verification

from the organizations providing the income.

Document that the borrower has a two year history of receiving the income. If the borrower

has not been receiving the income for two full years, the income may still be used as stable income if:

The borrower has at least a 12 month history of providing foster care services, and

The income does not represent more than 30%

of the total gross income used to qualify for the loan.

Housing or Parsonage Allowance

Non-military housing or parsonage allowance may be considered in qualifying income if receipt of the income is documented for the most recent twelve months and the allowance is likely to continue for








the next three years. The housing allowance may not be used to offset the monthly housing

payment.

IRS Form 4506-T

Refer to the following for requirements:

Credit Policy

Use of IRS Tax Transcripts in Lieu of Income Documentation

Income information obtained directly from the IRS may be acceptable in lieu of tax returns and/or W2 forms that are required to document qualifying income.

Tax transcripts may only be used in place of the required tax forms if the transcripts provide all details required to qualify the borrower and calculate the income.

Complete personal tax returns with all schedules, forms and/or attachments (including, but not limited to, 1040 Schedules B through F, K-1, Form 2106) may be waived, subject to the following: The income on the applicable schedule transcripts is positive, and The income supported by that schedule or form is not being used to qualify.

Long-term Disability Income

Social Security disability, VA disability compensation, worker’s compensation, private disability

insurance, and other types of long-term disability may be considered in qualifying income with a reasonable expectation of continuance unless there is a pre-determined expiration that is less than three years.

Loan Product Advisor (LPA) Desktop Underwriter (DU) Evidence of the source, amount, insurance or

benefit type, and consistent receipt for the most recent two months is required.

For existing and established sources of Long-term

Disability Income, document all of the following:

Income source, type, frequency and payment amount with a benefit verification letter, award letter, 1099, or equivalent documentation.

Current receipt with a bank statement, benefit verification letter, notice of award letter, or

other equivalent documentation. Documentation must be dated no more than 120 days prior to the Note Date.

For newly established Long-term Disability Income, document all of the following:

Income source, type, effective date of income commencement, frequency and amount with a benefit verification letter, notice of award letter

or other equivalent documentation from the payor that establishes these terms.

The borrower may begin receiving the income

after the Note Date, but must begin receiving the income prior to or on the first Mortgage

payment due date. Note: Documentation must be dated no more

than 120 days prior to the Note Date and

verification of current receipt is not required.

Obtain a copy of the borrower’s disability policy or

benefits statement from the benefits payer (insurance company, employer, or other qualified

disinterested party to verify all of the following: The borrower’s current eligibility for the

disability benefits,

The amount and frequency of the disability payments, and

If there is a contractually established

termination or modification date. Document current receipt of the income.

Evidence of current receipt of the income must be dated no more than 120 days prior to the Note Date.

Note: If a borrower is currently receiving short-term disability payments that will decrease to a

lesser amount within the next three years due to a conversion to long-term disability benefits, the lesser amount of the long-term benefits must be

used to qualify.

https://flow.pacificunionfinancial.com/docs/CreditPolicyWLExt.pdf








Loan Product Advisor (LPA) Desktop Underwriter (DU) Pending or current re-evaluation of medical eligibility for benefits is not considered an indication that the

benefit payment will not continue.

Mortgage Differential Payments

A payment from the borrower's employer for all or part of the interest differential between the borrower's present and proposed mortgage payment may be considered qualifying income if the documentation shows that the payments are pursuant to an established, ongoing and documented employer program. The employer must not be an interested party to the transaction and the payment

must be likely to continue for the next three years. For a purchase transaction, a history of receipt is not required for the income to be considered stable.

Newly Employed Borrowers

If a borrower has less than a two year history of employment and income, the borrower’s income may be considered in qualifying income if the file includes documentation to support that the borrower was either attending school or in a training program immediately prior to the current employment history.

Non-Taxable Income

If a particular source of regular income is not subject to federal taxes, the amount of continuing tax savings attributable to the non-taxable income source may be added to the borrower's gross income.

The tax rate used to calculate last year's income tax for the borrower should be used. If the borrower is not required to file a federal income tax return, the tax rate to use is 25 percent.

Notes Receivable

Income from Notes Receivable may be considered in qualifying income subject to the following: Copy of Note to establish the amount and length of payment. Evidence that the payment will continue for three years. Documentation of receipt of the payment for the most recent twelve months. Note

receivable income received for less than twelve months is not eligible.

Re-entering the Workforce – Loan Product Advisor (LPA) only

Income from a borrower who is re-entering the workforce and has less than a two year history of

employment and income may be considered in qualifying income subject to the following: Allowed on Freddie Mac Fixed Rate program only, Borrower must have been with current employer for a minimum of six months, and The file must include documentation of previous employment prior to the borrower exiting

the workforce.

Rental Income

Rental income may be used to qualify the borrower, subject to the following and the requirements of the applicable Seller Guide.

Rental income may be generated from: A subject 1-unit Primary Residence. A subject 2- to 4-unit Primary Residence. A subject 1- to 4-unit Investment Property. Investment property owned by the borrower other than the subject property.

Refer to the Rental Income Matrix below for requirements when using rental income.








If the borrower owned a rental property during the previous tax year, the borrower's

individual federal income tax returns 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 must be obtained.

The file must include an explanation of the reasons for not using the income or loss from the individual federal tax returns to determine rental income.

Offsetting Rental Property Payment Reported Through a Partnership or S Corporation

If the borrower is personally obligated on the mortgage debt (as evidenced by 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 PITI for the property.

Obtain the business tax returns for the most recent year and evaluate each property listed on Form 8825.

If the resulting net cash flow is positive, the property PITI may be excluded from the monthly DTI ratio. In order to include a positive net rental income, the Partnership or S Corporation tax returns must be evaluated per agency guidelines for evaluation of a self-employed borrower.

If the resulting cash flow is negative, the negative amount must be included in the monthly DTI ratio.

Rental Income from a Subject 1- unit Primary Residence

Rental income generated from the borrower’s 1-unit Primary Residence may be used to qualify a borrower with a disability if the rental income is from a live-in aide. Typically, a live-in aide will receive room and board payments through Medicaid from which rental payments are made to the borrower.

This income may be considered as stable monthly income if: The borrower has received regular rental payments from a live-in aide for the past 12

months, and The live-in aide plans to continue to reside with the borrower for the foreseeable future.

The rental income may not exceed 30% of the total gross income used to qualify the borrower.

Rental income from a borrower’s 1-unit Primary Residence or Second Home may not be considered in qualifying income unless it meets the guidelines above.

Rental Income Matrix

Topic

Rental Income from:

Subject 2-4 Unit Primary Residence

Subject 1-4 unit Investment Property

Investment Property other than the Subject

Property

Rental Income used for Qualifying

Purposes

Use the following to determine and document income: Prior year tax return if reported on Schedule E and

borrower has owned the property for at least one year, and

Form 216/998, Operating Income Statement Fannie Mae also requires: Form 1007, Comparable

Rent Schedule

Use the following to determine and document

income: Schedule E of the tax

returns to determine the net rental income when rental income from other








Topic

Rental Income from:




Property Rental income must be substantiated with using:

Income approach on the appraisal, and Copy of the current lease(s) if applicable

Negative net rental income from Schedule E or

negative Net Cash Flow from Form 216/998 must be considered a liability for qualifying purposes.

properties owned by the

borrower in the previous tax year is reported on the borrower’s individual

federal tax returns, or Verified net rental income

from signed lease(s) may

be used to determine the net rental income for an

Investment Property not owned during the previous year.

The Closing Disclosure or other documentation must

be provided to document the acquisition date.

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.

Aggregate net rental loss from Investment Properties and 2- to 4-unit Primary

Residences must be considered a liability for

qualification purposes.

Positive net rental income

from Schedule E of the borrower’s tax returns or

positive Net Cash Flow from Form 216/998 may be considered stable

monthly income, provided the borrower meets reserve requirements and

the income approach on the appraisal and copies of

current leases substantiate the rental income used to qualify the borrower.

Positive net rental income

from Schedule E of the borrower’s tax returns or

positive Net Cash Flow from Form 216/998 may be considered stable

monthly income, provided the borrower meets reserve requirements and

the income approach on the appraisal and copies of

current leases substantiate the rental income used to qualify the borrower.

Form 216/998

Not required if:

Rental income from the subject property is not used in qualifying

(borrower qualifies with the full PITI), or

Borrower has owned the subject property for at least one year and

reports income on Schedule E.

Not required if:

Rental income from the subject property is not used in qualifying

(borrower qualifies with the full PITI plus

operating expenses), or Borrower has owned the

subject property for at

least one year and reports income on

Schedule E.

Not required

Required if:

Rental income is used to qualify, and The borrower has owned the subject property less

than one year, and/or does not report rental income

on Schedule E.

Federal Tax Return

If borrower owned rental property during the previous tax year, provide complete federal income tax returns to

determine the net rental income or loss for qualifying. The rental income or loss from the borrower’s individual

tax returns must be used unless there are reasons for not using the income or loss from the tax returns to determine rental income (e.g., tax returns show large

Federal Tax Return








Topic

Rental Income from:




Property one-time expenses, or the borrower documents and

explains that the property was under renovation).

Appraisal The income approach on the appraisal must substantiate the rental income used for qualifying.

Not applicable

Reserves See Cash Reserves.

Rent Loss

Insurance Not required Not required Not required

Signed Lease(s)

Current leases, by themselves, may not be used for

documenting stable monthly income for qualifying purposes; however, the leases must support the rental

income used to qualify.

May be used to document

stable monthly income if the borrower did not own the

property in the previous tax year. See Rental Income used for Qualifying Purposes

for specific requirements. Signed leases may also 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 years’

individual federal tax returns clearly support the use of a higher percentage.

Experience Managing

Rental Properties

Not required Not required Not required (see Note 4 below)

Additional Notes: 1. Rental income from the borrower’s 1-unit Primary Residence or Second Home is not considered stable

monthly income and may not be used to qualify the borrower. Exceptions permitted for the borrower’s 1-unit Primary Residence if the borrower is disabled and the rental income is from a live-in aide.

2. Positive net rental income may be entered in “Gross Monthly Income” in Section V of Form 65. Aggregate net rental loss must be included as a liability.

3. If borrower is converting a Primary Residence to an Investment Property, refer to topic in the program

guidelines for additional requirements.

4. 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, include Schedule E of the borrower's tax returns to determine the net rental income. Signed leases may be used to determine the net rental income for an Investment Property not owned during the previous tax year.

Retirement, Government Annuity and Pension Income – Desktop Underwriter (DU) only

May be considered in qualifying income if the file contains evidence of the type and source

of the retirement income. Loan file must be documented per DU requirements. Document regular and continued receipt of the income, as verified by one of the following:

Letter from the organization providing the income

Copy of retirement award letter(s)








Copy of signed federal tax returns

IRS W-2 or 1099 Proof of current receipt

If the retirement income is paid in the form of a distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three

years after the date of the mortgage application. In addition: The borrower must have unrestricted access without penalty to the accounts, and If the assets are in the form of stocks, bonds, or mutual funds, 70% of the value

(remaining after any applicable costs for the subject transaction) must be used to determine the number of distributions remaining.

Retirement, Government Annuity and Pension Income – Loan Product Advisor (LPA) only

May be considered in qualifying income if the file contains evidence of the type and source of the retirement income.

Loan file must be documented per LPA requirements. For existing and established sources of retirement income, document all of the following:

Income source, type, frequency and payment amount with a benefit verification letter, award letter, pay statement, 1099, or equivalent documentation; and

Current receipt with a bank statement, pay statement, benefit verification letter, award letter, or other equivalent documentation. Documentation must be dated no more than 120 days prior to the Note Date.

For newly established retirement income, document all of the following: Income source, type, effective date of income commencement, frequency and amount

with a benefit verification letter, notice of award letter or other equivalent documentation from the payor that establishes these terms.

The borrower may begin receiving the income after the Note Date, but must begin receiving the income prior to or on the first Mortgage payment due date.

Note: Documentation must be dated no more than 120 days prior to the Note Date and verification of current receipt is not required.

If the retirement income is paid in the form of a distribution from a 401(k), IRA or Keogh retirement account, document all of the following: Income source, type, frequency, amount(s), current receipt (if applicable) and history of

receipt (if applicable) with the most recent retirement account statement(s), 1099(s),

documentation from financial institution holding retirement account that verifies regularly scheduled distribution arrangements, and/or other equivalent documentation.

Current receipt with a bank statement or other equivalent documentation. If the distributions are not scheduled monthly payments (i.e. paid out annually,

semi-annually or quarterly), the most recent distribution verified through a retirement account statement, 1099 and/or other equivalent documentation is sufficient in lieu of current receipt.

History of receipt to support monthly income amount being used to qualify. If documentation supports a fixed distribution amount with regular frequency, a

lesser history of receipt may be acceptable. If documentation supports a fluctuating amount with or without regular frequency, a

longer history of receipt and verification of multiple distributions may be necessary to determine the frequency of distribution, history of receipt and amount of stable

qualifying income. If distributions are being taken in accordance with certain IRS rules (i.e. Required

Minimum Distributions) and evidence of current receipt of the required minimum distribution is in file, a history of receipt is not required.








Evidence of sufficient assets to support the qualifying income will continue for at least

three years. A written rationale explaining the analysis used to determine the qualifying income must

be provided.

Royalty Income

Loan Product Advisor (LPA) Desktop Underwriter (DU) May be considered qualifying income if the file

contains evidence that the borrower has received

payments on a regular basis for the most recent 12 months and the royalty payments are likely to

continue for the next three years. The file must include a copy of the borrower’s

most recent tax return, including Schedule E.

Provide copies of the royalty contract, agreement, or statement confirming amount, frequency, and

duration of the income, and Signed most recent signed tax return, including

Schedule E. Confirm that the royalty payments have been

received for at least 12 months and that the

payments will continue for a minimum of three years after the application date.

Seasonal Employment and Unemployment Compensation

Borrower must have a consecutive two year history of receiving income from seasonal employment. The two year history must be with the same employer or in the same line of work.

Income from the seasonal employment must be likely to continue for the next three years.

Unemployment Compensation from Seasonal Employment

Unemployment compensation associated with seasonal employment may be used in

qualifying income if the borrower has a two year history of receiving such income, and the income must be likely to continue for the next three years.

Income from seasonal employment may not be considered if it is not reported on the borrower’s federal tax return for the last two years.

Secondary / Part-time Employment

Borrower must have a consecutive two year history of receiving uninterrupted income from a second or additional job.

The income trend from a second or additional job must be evaluated. Only income that is likely to continue for the next three years may be used for qualifying.

A two year history that includes multiple employers is acceptable provided the secondary income has been stable and uninterrupted.

Self-Employed Borrowers

A borrower who owns 25% or more of a business is considered self-employed. Desktop Underwriter (DU): See Schedule K-1 requirements, which are applicable

regardless of the borrower’s business ownership percentage. May be considered if the borrower has been self-employed for two years or more. If self-employed more than 12 months but less than two years, the borrower must have a

minimum of two years of employment in the same line of work. A combination of one year

of work and formal education or training in the same line of work is also acceptable. Borrowers who have been self-employed for less than one year are not eligible. See Business Accounts for self-employed borrower using business assets for

closing/reserves.








Loan Product Advisor (LPA) Desktop Underwriter (DU) Borrowers who own 25% or more of a business

must be submitted to LPA as “self-employed”, regardless of whether income from self-

employment is used for qualifying, and the self-employed borrower’s individual tax returns must be provided. If the tax returns reflect a significant

business loss, the underwriter must evaluate the impact of the loss on borrower qualification.

If the Borrower is self-employed and the self-employment income is not used to qualify, the borrower's individual federal tax returns must be

obtained to determine if there is a business loss that may have an impact on the stable monthly income used for qualifying. If a business loss is

reported on the borrower's individual federal tax returns, the underwriter may need to obtain

additional documentation in order to fully evaluate the impact of a business loss on the income used for qualifying.

A written evaluation of self-employment income is

not required when a borrower is qualified using only salaried income (not derived from self-

employment) and self-employment is a secondary and separate source of income (or loss).

When co-borrower income that is derived from

self-employment is not being used to qualify, the following apply:

Documentation and evaluation of the co-borrower’s self-employment income (or loss) is not required; and

Any business debt for which the borrower is personally obligated must be included in the total monthly obligations when calculating the

qualifying debt-to-income ratio.


Refer to the Freddie Mac or Fannie Mae Seller Guide(s) for additional details.

Business Tax Returns

Desktop Underwriter (DU) DU will require two years of the most recent signed personal and two years of the most recent signed

business federal income tax returns. Business tax returns do not have to be provided unless the business is a corporation, an S corporation, a limited liability company, or a partnership.

The requirement for business tax returns may be waived if: The borrower is using their own personal funds to pay the down payment and closing costs, and satisfy

applicable reserve requirements, The borrower has been self-employed in the same business for at least five years, and The borrower’s individual tax returns show an increase in self-employment income over the past two

years. When business tax returns are required, a written cash flow analysis of the business income must be

included in the file. Note: For certain loan case files, DU may issue a message requiring only one year of personal and

business tax returns, which is acceptable provided the income is documented with all of the following:

One year of the most recent signed personal and business federal income tax returns, Confirmation the tax returns reflect at least 12 months of self-employment income, and A written cash flow analysis of the income.

Income Calculation

If a borrower provides quarterly tax returns, the income analysis may include income through the period covered by the tax filings.

If the borrower is not subject to quarterly tax returns, or does not file them, the income shown on the Profit and Loss (P&L) statement may be included in the analysis, provided the income stream based on the P&L is consistent with the previous years’ earnings.

If the P&L statement shows an income stream greater than what is supported by the tax returns, and the higher income is used in the income calculation, the borrower must provide an audited P&L statement.








If the earnings trend for the previous two years is declining and the most recent tax return

or P&L is less than the income from the previous year’s tax return, the borrower’s most recent year’s tax return or P&L must be used to calculate his/her income.

Desktop Underwriter (DU): Business income reported on the borrower’s personal tax returns from a partnership, S-

corporation or limited liability company (LLC) may not represent income actually distributed to the borrower. A self-employment income cash flow analysis is required to determine the amount of

income that may be relied on by the borrower for qualifying. Business income distributions that have been made or could be made to the

borrower while maintaining the viability of the underlying business must be reviewed. The analysis must include an assessment of the business income stability and the ability of the business to continue generating sufficient income to enable the borrower to meet their financial obligations. See Business Liquidity Calculations.

A cash flow analysis and evaluation of the overall financial position of the business is required to confirm that: The income is stable and consistent, and Sales and earnings trends are positive.

Note: If the business does not meet these standards, business income must not be used to qualify the borrower.

The borrower’s proportionate share of income or loss in a partnership, S-corporation or limited liability company (LLC) must be calculated per information reflected on the K-1,

as follows: IRS Form 1065: Borrower’s partnership percentage of Ending Capital in the

business. IRS Form 1120S: Borrower’s (shareholder) percentage of stock ownership in the

business. See Schedule K-1 Income – Desktop Underwriter (DU) only.

Schedule K-1 – Desktop Underwriter (DU) only

Ownership in a Partnership, S-Corporation, or Limited Liability Company (LLC)

Ordinary income, net rental real estate income, and other net rental income reported on IRS Form 1065 or

IRS Form 1120S, Schedule K-1 may be used in qualifying the borrower provided adequate business liquidity has been confirmed to support the withdrawal of earnings:

If the Schedule K-1 reflects a documented, stable history of the borrower receiving cash distributions of income from the business consistent with the level of business income being used to qualify:

Further documentation of access to the income or adequate business liquidity is not required, and The Schedule K-1 income may be included in the borrower’s qualifying income.

If the Schedule K-1 does not reflect a documented, stable history of the borrower receiving cash

distributions of income from the business consistent with the level of business income being used to qualify, the following must be documented in order to include the Schedule K-1 income in the borrower’s

qualifying income: Confirmation that the business has adequate liquidity to support the withdrawal of earnings, which may

be determined by one of the formulas below.

Note: If the Schedule K-1 provides this confirmation, further documentation of business liquidity is not required.

If the borrower has a two-year history of receiving “guaranteed payments to the partner” from a

partnership or LLC, the payments may be added to the borrower’s qualifying income.

Business Liquidity Calculations








Current Ratio 1

Current Ratio = current assets ÷ current liabilities

Appropriate for businesses that do not rely heavily on inventory to generate income (such as an

attorney or CPA). Also known as the Working Capital Ratio.

Quick Ratio 1

Quick Ratio = (current assets – inventory) ÷

current liabilities

Appropriate for businesses that rely heavily on inventory to generate income (such as auto or clothing sales). Also known as the Acid Test

Ratio. Note: The test excludes inventory from current

assets in calculating the proportion of current assets available to meet current liabilities.

1. A result of one or greater is sufficient to confirm adequate business liquidity to support the withdrawal

of earnings.


<25% Ownership ≥25% Ownership

The borrower must provide the following

documentation: Two years most recent signed personal tax

returns, and

Two years most recent IRS Schedule K-1. Note: A two-year history of “guaranteed

payments” receipt may be waived if a borrower recently received nominal ownership in a professional services partnership (for example, a

medical practice or law firm) after having an established employment history with the partnership. The borrower’s guaranteed

compensation may be used to qualify provided the borrower’s year-to-date income is documented

and the borrower’s partnership agreement supports the guaranteed compensation.

The borrower must provide the following

documentation: Two years most recent signed personal tax

returns,

Two years most recent IRS Schedule K-1, and Two years most recent business tax returns.

Note: Refer to Business Tax Returns for information on the following:

Waiver of business tax returns, or DU messaging requiring one year of personal and

business tax returns.

Significant Increase or Decrease in Income Level

When a borrower has a significant increase or decrease income, analysis of qualifying income must focus on the most recent earnings and the income that is most likely to be received at the level used for qualifying.

Decrease in Income

When the borrower has a significant decrease in income, the income may not be averaged using a previous higher level unless documentation supports a one-time occurrence (such as an injury)

that prevented the borrower from working or earning full income for a period of time. Evidence must be provided to show that the borrower has returned to the income amount that was previously earned.

Increase in Income

When the borrower has experienced a significant increase in income, the higher amount may be used in determining qualifying income only if documentation is provided to support use of the income. Documentation must reflect that the increase is stable and likely to continue, and is not

a one-time occurrence.








Social Security Income

Document as follows:



Type of Benefit Income is from borrower’s own account/work record 1,

2

Income is from another person’s account/work

record 3

Retirement Award Letter, or Proof of current receipt

Award Letter, Proof of current receipt, and

Three year continuance (e.g., verification of beneficiary’s age).

Disability 4

Survivor Benefits N/A

Supplemental Security Income

(SSI)

Award Letter, and

Proof of current receipt. N/A

1. Social Security Income for retirement or long-term disability that the borrower is drawing from his/her

own work record will not have a defined expiration date and must be expected to continue. 2. An Award Letter may be used to document income if the borrower is receiving Social Security payments

or will begin receiving payments on or before the first payment date of the subject mortgage as confirmed by a recently issued award letter.

3. If the benefits are being paid to the borrower as a benefit for a family member, evidence must be

provided to confirm that the income will continue for at least three years. Examples of how a borrower may draw Social Security benefits from another person’s account/work record and use the income to qualify:

Benefits from a spouse, ex-spouse, or dependent parents (benefit is paid to the borrower on behalf of the other party); or

Social Security income received by a dependent (minor or disabled dependent). 4. Any documentation reflecting the reason for disability should not be submitted.

Loan Product Advisor (LPA)

Type of Benefit 1 Required Documentation 2

Social Security, Disability,

Survivor or Supplemental Security Income (SSI) –

Existing and established

Income source, type, frequency and payment amount with a benefit

verification letter, award letter, 1099, or equivalent documentation; and Current receipt with a bank statement, benefit verification letter, notice

of award letter, or other equivalent documentation. Documentation

must be dated no more than 120 days prior to the Note Date.

Social Security, Disability, Survivor or Supplemental Security Income (SSI) –

Newly established

Income source, type, effective date of income commencement, frequency and amount with a benefit verification letter, notice of award letter or other equivalent documentation from the payor that establishes

these terms. The borrower may begin receiving the income after the Note Date, but

must begin receiving the income prior to or on the first Mortgage

payment due date. Note: Documentation must be dated no more than 120 days prior to

the Note Date and verification of current receipt is not required.

1. Pending or current re-evaluation of medical eligibility for insurance and/or benefit payments is not

considered an indication that the insurance and/or benefit payment will not continue. 2. Any documentation reflecting the reason for disability should not be submitted.

Stable Monthly Income

Stable monthly income is the borrower’s verified gross monthly income that can reasonably be expected to continue for at least the next three years. In most cases, a two year history of receiving income is required in order to use the income for qualifying. When the borrower has less than a two








year history of receiving income, the lender must provide a written analysis to justify the

determination that the income that is used to qualify the borrower is stable.

Temporary Leave Income

Temporary leave may include family and medical leave, short term disability, maternity leave, or

other forms of temporary leave, with or without pay. During a temporary leave, a borrower’s income may be reduced or completely interrupted. It must be determined that during and after the temporary leave, the borrower has the capacity to repay the mortgage and all other monthly obligations.

The following guidelines apply if the borrower will be on temporary leave at the time of the closing of the mortgage loan and the borrower’s income is needed to qualify: The borrower’s employment and income history must meet standard eligibility

requirements. The borrower must provide written confirmation of his/her intent to return to work and the

agreed upon date of return. The agreed upon date of return must be documented by the employer or a designee of the

employer (such as a third party used to administer employee leave). A verbal Verification of Employment must be obtained. If the employer confirms that the

borrower is currently on temporary leave, the borrower is considered to be employed. The borrower’s income must be verified in accordance with standard requirements. The following information must be obtained:

The amount and duration of the temporary leave income, which may require multiple documents or sources depending in the type and duration of the leave period, and

The amount of the “regular employment income” the borrower received prior to the temporary leave. This may include base pay, commissions, bonuses, overtime, etc.

Determining Qualifying Income and Borrower Capacity to Repay

For borrowers returning to their current employer as of the first payment due date for the

new mortgage, the regular gross monthly income amount that the borrower was receiving prior to the temporary leave may be used for qualifying.

For borrowers returning to their current employer after the first payment due date for the new mortgage, the amount of income that will be received when the borrower returns to work must be determined, taking into consideration any temporary reductions in income, as

follows: The borrower’s gross monthly income amount that is being received while the borrower

is on temporary leave. If the income has been reduced or interrupted, the borrower may be qualified with the

monthly reduced income (this may be zero) amount being received for the duration of the leave combined with the borrower’s available liquid assets, as necessary.

Available liquid assets may be used as a partial or complete income supplement up to the amount of the income reduction.

The total qualifying income may not exceed the gross monthly income that will be received when the borrower returns to the current employer.

Assets that are being used for Funds to Close may not be considered as available assets.


The following documentation is required for borrowers on temporary leave: Verification of the borrower’s pre-leave income and employment, regardless of leave

status.








Documentation from current employer confirming the borrower’s statutory right to

return to work (or the employer’s commitment to permit the borrower to return to work), the confirmed date of return, and the borrower’s post-leave employment and income.

Written statement signed by the borrower confirming that the borrower will return to work

for current employer and stating the confirmed date of return that has been agreed upon between the borrower and the employer.

In addition to the above, the following documentation is required when the borrower will return to work for the current employer after the first mortgage payment due date: Documentation evidencing the amount, duration and consistency of all temporary leave

income sources being used to qualify the borrower (such as short-term disability benefits or insurance, sick leave benefits, and temporarily reduced income from employer) that are being received during the temporary leave.

All available liquid assets used to supplement the reduced income for the duration of the

temporary leave must meet the requirements of and be verified in accordance with the LPA or DU requirements and the Seller Guide(s).

A written rationale explaining the analysis used to determine the qualifying income, regardless of the underwriting path.

Loan Product Advisor and Desktop Underwriter: Documentation concerning the timing of the borrower’s return to work may be provided directly by the borrower or by the employer. This documentation may include previous correspondence between the employer (or its designee, if applicable) and is not required to comply with Age of Docs requirements.

Tip Income

Borrower must have a consecutive two year history of receiving tips to consider in the qualifying income.

The income must be averaged over the previous two years and must be likely to continue at the same level for the next three years.


Obtain the following: Written VOE covering two full years of tip income;

OR

YTD paystub documenting at least 30 days of income AND W2s covering the most recent two years.

Obtain the following: Written VOE covering two full years of tip income;

OR

Recent paystub AND two years most recent W2s OR personal tax returns with IRS Form 4137.

Note: The full amount of tip income earned by

the borrower is not always reported by the employer on the Written VOE, paystub or W2

forms and the borrower may report additional tip income to the IRS using Form 4137 (Social Security and Medicare Tax on Unreported Tip

Income) when filing the tax returns. It is acceptable to use the tip income reported on IRS

Form 4137 when submitted with the most recent two years of personal tax returns.

Trust Income

Verify trust income by obtaining a copy of the Trust Agreement or the Trustee’s statement

confirming the amount, frequency, and duration of payments. Verify that the trust income will continue for at least three years from the date of the loan

application.








Loan Product Advisor (LPA) Desktop Underwriter (DU) A history of receipt is not required for the income to

be considered stable; however, the trust income must be likely to continue for the next three years.

Unless this income is received monthly,

documentation of current receipt of the income is not required.

Unreimbursed Employee Business Expenses

See Commission Income See Significant Increase or Decrease in Income Level

Loan Product Advisor (LPA) Desktop Underwriter (DU) Evaluate the borrower’s unreimbursed employee

business expenses if any of the following income sources are included in the qualifying income:

Commission income; OR Self-employed income. See Self-Employed

Borrowers.

Calculate a two year average of the borrower’s recurring monthly debt obligation for the expenses

using information from: The borrower’s personal tax returns (1040s

Schedule A and IRS Form 2106), OR The borrower’s tax transcripts.

Evaluate IRS Form 2106 for the income analysis:

Unreimbursed business expenses must be deducted from the borrower’s qualifying income;

Depreciation should be added back, if applicable.

Evaluate the borrower’s unreimbursed employee

business expenses if any of the following apply: 25% or more of the borrower’s total qualifying

monthly income is derived from commission income, OR

Automobile allowance is included in the borrower’s

qualifying income. See Automobile Allowance.

Calculate a two year average of the borrower’s

recurring monthly debt obligation for the expenses using information from:

The borrower’s personal tax returns (1040s Schedule A and IRS Form 2106), OR

The borrower’s tax transcripts.

Evaluate IRS Form 2106 for the cash flow analysis

for all of the following: Unreimbursed business expenses: Must be

deducted from the borrower’s qualifying income;

“Actual expenses” (instead of the “standard mileage rate”) section of Form 2106: Identify the borrower’s actual lease payments and ensure the

lease expense is counted only once in the cash flow analysis (as an expense on Form 2106 OR as

a monthly obligation); Automobile depreciation: Netted from (added

back to) the cash flow analysis of the Form 2106,

if applicable.

Verification of Employment (VOE)

VOEs must be on a standard verification form and must be sent directly from the loan

originator to the employer and returned directly from that entity. Faxed verification forms are acceptable if it is clear from the document that the information

was sent by fax transmission directly from the source to the originator. The original documents must not contain any alterations, erasures, correction fluid or

correction tape. The loan file must include legible copies of the originals.

Verbal VOE

Verbal VOE must be completed by Pacific Union Financial closer within five business days prior to closing.

Verbal VOE for Self-Employed Income: The existence of the borrower’s business must be verified within 30 calendar days prior

to the Note Date as follows:








From a third party, such as a CPA, regulatory agency, or the applicable licensing

bureau, or By verifying a phone number and address for the business using a telephone book,

the Internet, or directory assistance. The source of the information and the name and title of the person obtaining the

verification must be documented.

Desktop Underwriter (DU) Verbal VOE for military personnel

In lieu of a verbal VOE, the following documentation must be obtained:

A military Leave and Earnings Statement (LES) dated within 30 calendar days prior to the Note Date,

or A VOE through the Defense Manpower Data Center.

Liabilities

Alimony, Child Support or Separate Maintenance Payments

Must be included in the debt-to-income ratio if more than ten payments remain.

Business Debt in Borrower’s Name

A personal debt that appears on the borrower’s credit report but is paid by the borrower’s company may be excluded from DTI ratios subject to the following: The account does not have a history of delinquency, and The business provides acceptable evidence that the obligation was paid out of company

funds (such as 12 months canceled checks), and The cash flow analysis of the business took the payment into consideration.

The account payment does need to be considered as part of the borrower’s individual recurring monthly debt obligations in any of the following situations:

The business does not provide sufficient evidence that the obligation was paid out of company funds.

The cash flow analysis does not reflect any business expense related to the obligation (such as an interest expense—and 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 reasonable to assume that the obligation has not been accounted for in the cash flow analysis.

The account reflects a history of delinquency. If the debt is included in the DTI ratios, the net income of the business should be adjusted

by the amount of interest, taxes, or insurance expense, if any, that relates to the account in order to avoid counting the debt twice.

Contingent Liability

If the borrower is a Co-signor or Guarantor on any debt (including mortgage debt), the payment must be included in the monthly debt-to-income ratio, unless:

Documentation is provided to show that the other party is making timely payments on the debt. Twelve months cancelled checks or a statement from the creditor must be provided to show that the other party is making the payments.

Evidence of timely payments may be provided through verification on the credit report

or direct verification with the creditor.








If evidence of payments by another party obligated on the debt cannot be provided, or if

the payments have not been made in a timely manner over the most recent 12 months, the debt must be included.

Desktop Underwriter only: The underwriter may consider a payment history less than 12 months on a case by case basis.

If the borrower is listed as the borrower on a mortgage that has been assumed by another party, the file must include documents transferring the property and any assumption agreement by the transferee. As long as the borrower no longer owns the property, the contingent liability may be disregarded, without documenting the most recent 12 month payment history.

Court Ordered Assignment of Debt

The contingent liability on a secured debt or Mortgage may be disregarded and the

documentation of the most recent 12 months’ payment history is not required, if the obligation to make the payments on a debt of the borrower: Has been assigned to another party by court order, such as a divorce decree, and The assignment of debt is documented with applicable pages of the divorce decree or

legal separation agreement, and Loan Product Advisor only: The transfer of title is documented.

Debt Secured by Financial Assets

Payment on installment debt secured by financial assets, in which repayment may be obtained by liquidating the asset, may be excluded from the monthly debt-to-income ratio for qualifying purposes. The loan secured by the financial asset must have been made by a financial institution.

Deferred Payments (includes Deferred Student Loans)

Deferred installment debts, such as deferred student loans, must be included as part of the borrower’s monthly debt obligations.


For all student loans, whether deferred, in forbearance, or in repayment (not deferred), a monthly payment must be included in the borrower’s recurring monthly debt obligation for qualifying. One of the following options must be used to determine the repayment amount: 1% of the outstanding balance; The actual documented payment (documented in the credit report, or documentation

obtained from the student loan lender or borrower), provided it has been determined

that the documented payment will fully amortize the loan(s); A calculated payment that will fully amortize the loan(s) based on the documented loan

repayment terms; or If the repayment terms are unknown, a calculated payment that will fully amortize the

loan(s) based on the current prevailing student loan interest rate and the allowable repayment period reflected in the table below. Note: The “current prevailing student loan interest rate” may be found on a variety of websites, including the U.S. Department of Education Federal Student Aid.

The guidelines addressed above apply to all deferred student loans, including income based loans.

https://studentaid.ed.gov/sa/types/loans/interest-rates

https://studentaid.ed.gov/sa/types/loans/interest-rates








Calculating a Student Loan Repayment - DU

Total outstanding balance of all student loans

Repayment Period 1

$1 - $7,499 10 years

$7,500 - $9,999 12 years

$10,000 - $19,999 15 years

$20,000 - $39,999 20 years

$40,000 - $59,999 25 years

≥ $60,000 30 years

1. The repayment period that must be used when calculating a fully amortizing payment.

Loan Product Advisor (LPA):

For all student loans, whether deferred, in forbearance, or in repayment (not deferred), the monthly payment must be determined as follows: If the payment is not listed on the credit report or is listed as deferred, obtain

documentation to support the payment amount included in the monthly debt-to-income

ratio. If no payment is reported or documentation is not available, use a minimum of 1% of

the outstanding balance for qualifying.

Garnishments

All garnishments with more than ten months remaining must be included in the borrower’s recurring monthly debt obligations for qualifying purposes.

Installment Debt

Installment debt with less than ten payments remaining may be excluded from debt-to-income ratios. An installment debt with less than ten monthly payments remaining should be considered as a

recurring monthly debt if it significantly affects the borrower’s ability to meet credit obligations.

Lease Payments

All lease payments must always be included in qualifying ratios regardless of the number of

months remaining on the lease contract. Payments for solar panels subject to a lease agreement or power purchase agreement may

be excluded from the DTI provided the agreement meets all requirements noted in the following policy, as applicable: Solar Panels – Desktop Underwriter (DU), or Solar Panels – Loan Product Advisor (LPA).

Open-End (30-day) Accounts

Open 30-day charge accounts require the balance to be paid in full each month.

Loan Product Advisor (LPA) Desktop Underwriter (DU) Open-end accounts do not have to be included in

the monthly debt payment if the borrower has

sufficient funds to pay off the outstanding account balance. The verified funds must be in addition to any funds required for the transaction.

Will not require open 30-day accounts to be included in DTI ratios.

For open 30-day accounts that do not reflect a monthly payment on the credit report, or 30-day accounts that reflect a monthly payment that is

identical to the account balance, sufficient funds to cover the account balance must be verified.








Loan Product Advisor (LPA) Desktop Underwriter (DU) The verified funds must be in addition to any

required funds needed for the loan transaction. The DU findings will include the balance of the 30-

day account on the loan application in the Reserves Required to be Verified amount. However, for transactions that do not require the

verification of reserves, the balance of 30–day account(s) in the Reserves Required to be Verified

amount will be reduced by any cash out the borrower will receive through the transaction.

If the borrower paid off the account balance prior

to closing, proof of the pay-off may be provided in lieu of verifying sufficient funds to pay-off the account.

Revolving Debt

Loan Product Advisor (LPA) Desktop Underwriter (DU) If the credit report does not show a minimum

monthly payment and there is no documentation

to support the monthly payment amount, 5% of the outstanding balance must be used.

Revolving debt may be paid off in order to qualify. Evidence that the account has been closed is not required.

If the credit report does not show a minimum payment amount and there is no documentation

to support a lower payment, a minimum payment of 5% of the outstanding balance must be used.

If a revolving debt is provided on the loan application without a monthly payment amount, DU will use the greater of $10 or 5% of the

outstanding balance as the monthly payment when calculating the DTI ratios.

Revolving debt may be paid off in order to qualify. Evidence that the account has been closed is not required.

For casefile submissions to DU 10.0 on or after September 24, 2016: The minimum monthly payment on the credit

report may be used to qualify, even if the borrower pays more each month.

Verification and balance updates of revolving accounts is not required, even if the account is consistently paid off each month. The source of

funds used to pay off account balances reflected within the trended credit data does not have to

be verified. See Trended Credit Data.

Sale or Conversion of Primary Residence – Desktop Underwriter (DU) only

Borrower’s Primary Residence Pending Sale

If the borrower’s current Primary Residence is pending sale but will not close prior to the closing of the new loan, the monthly payment on both the property that is pending sale and the new property must be included in the monthly debt-to-income ratio.

The monthly payment for the property pending sale may be excluded from the monthly debt-to-income ratio if the following requirements are met: A fully executed sales contract for the current residence, and Confirmation that any financing contingencies have been cleared.








See Cash Reserves.

See Multiple Financed Properties - Desktop Underwriter (DU) only.

Borrower Converting Primary Residence to a Second Home

The borrower must qualify with both the current and proposed mortgage payments.

See Cash Reserves. See Multiple Financed Properties - Desktop Underwriter (DU) only.

Borrower Converting Primary Residence to an Investment Property

See Cash Reserves. See Multiple Financed Properties - Desktop Underwriter (DU) only. See Rental Income.

Sale or Conversion of Primary Residence – Loan Product Advisor (LPA) only

Borrower’s Primary Residence Pending Sale

If the borrower’s current Primary Residence is pending sale but will not close prior to the closing of the new loan, the monthly payment on both the property that is pending sale and the new property must be included in the monthly debt-to-income ratio.

See Cash Reserves. See Multiple Financed Properties - Loan Product Advisor (LPA) only.

Borrower Converting Primary Residence to a Second Home

The borrower must qualify with both the current and proposed mortgage payments. See Cash Reserves. See Multiple Financed Properties - Loan Product Advisor (LPA) only.

Borrower Converting Primary Residence to an Investment Property

See Cash Reserves. See Multiple Financed Properties - Loan Product Advisor (LPA) only. See Rental Income.

Student Loans

Refer to Deferred Payments (includes Student Loans)

Unreimbursed Employee Business Expenses

Refer to Unreimbursed Employee Business Expenses

Mortgage Insurance (MI)

Mortgage Insurance is required on all loans with LTV >80%. Standard coverage per the following chart must be obtained. Pacific Union Financial does not allow Custom or Reduced MI as may be available per the LPA Feedback Certificate or DU Findings. Loans with MI must meet the more restrictive of the Pacific

Union Financial guidelines or the requirements of the selected MI provider. An MI premium quote must be obtained by the broker or loan officer in order to accurately reflect the monthly MI payment on the initial LE. Include a copy of the quote in the submission file.








Mortgage Insurance Coverage Requirements

LTV 1 ≤20 Year Fixed Rate >20 Year Fixed Rate

All ARMs >95% to 97%

(Fannie Mae only) 35% 2 35% 3

>90% to 95% 25% 2 30% 3

>85% to 90% 12% 25%

>80% to 85% 6% 12%

1. See Loan to Value (LTV) Matrices for eligibility. 2. Standard coverage is required. Custom or Reduced coverage, as may be eligible per the LPA Feedback

Certificate or DU Findings, is not allowed. The highest level of coverage required must be obtained.

3. Eligible for Fixed Rate only.

Mortgage Insurance Plans

Available Mortgage Insurance options are described below. Refer to the MI Matrix or the MI provider website for additional details.

External MI Matrix

Borrower Paid Mortgage Insurance (BPMI)

The following BPMI products are eligible:

Monthly Premium Zero Up-Front Annual Premium Single Premium

Financed MI is NOT permitted.

Note: The Consumer Financial Protection Bureau (CFPB) requires the entire non-refundable upfront mortgage insurance premium and that portion of the refundable upfront mortgage

insurance that exceeds the current FHA upfront mortgage insurance premium be included as a fee within the 3% Qualified Mortgage calculation. Loans with fees that exceed 3% as defined by CFPB will not be eligible for financing through PacUnion. As a result, fewer loans may be eligible for upfront MI premiums.

Split Mortgage Insurance

Premium is paid in a combination of a single upfront premium and monthly premiums. The upfront portion may be paid in cash by the borrower or seller, but may not be financed.

Lender Paid Mortgage Insurance (LPMI)

Only single premium is permitted. The premium is paid to the Mortgage Insurance provider. Monthly LPMI is not allowed.

Allowed on: Purchase and rate/term refinance One and two unit primary residence Second home

Conforming and High Balance Underwriting transmittal (1008) must indicate SFC 019 if Fannie Only Program. Not allowed on Fannie Mae Fixed Rate >95% to 97% LTV/(H)CLTV. The premium is paid by Pacific Union through a pricing increase.

https://flow.pacificunionfinancial.com/docs/MI%20MatrixWLExt.pdf








Mortgage Insurance Providers

Radian Genworth United Guaranty Essent

National MGIC ARCH

Occupancy

Primary Residence

Must be occupied by the borrower for the majority of the year.

Per the security instrument, the borrower must occupy the property within 60 days of the Note Date, and intend to occupy the property for the next 12 months.

Desktop Underwriter (DU) The following scenarios may also be treated as a Primary Residence even though the borrower will not occupy the property:

Parents or legal guardian wanting to provide housing for their physically handicapped or developmentally

disabled adult child.

If the child is unable to work or does not have sufficient income to qualify for a mortgage on his or her own, the parent or legal guardian is considered the owner/occupant.

Children wanting to provide housing for elderly parents. If the parent is unable to work or does not have sufficient income to qualify for a mortgage on his or

her own, the child is considered the owner/occupant.

Second Home

Allowed on one unit properties only. See Multiple Financed Properties – Desktop Underwriter (DU) only and Multiple Financed

Properties – Loan Product Advisor (LPA) only. The property must be:

Owned by an individual and occupied for some portion of the year. Suitable for year-round occupancy. Available for the borrower’s exclusive use and enjoyment.

The property may not be: Subject to timesharing or other shared ownership agreement.

An ineligible property (such as a unit in a Condo Hotel). The property must be in a location that will function reasonably as a Second Home (i.e.

remote in distance from the borrower’s Primary Residence). Subject to rental pools or agreements that require the borrower to rent the property,

give management control over the occupancy of the property, or involve revenue sharing between the owners and the developer or another party.

A 2-4 unit property used as a Second Home is considered an Investment Property and must meet all requirements for Investment Properties.

Special Underwriting Considerations

In addition to meeting all Primary Residence requirements, a Second Home transaction must meet the following requirements:








For newly constructed homes that are purchase transactions, the borrower may not be

affiliated with or related to the builder, developer, or the property seller. The housing expenses related to the borrower’s current Primary Residence must be used in

computing the monthly housing expense-to-income ratio. The monthly housing expense for the Second Home must be used in computing the

borrower’s monthly debt-to-income ratio. See Cash Reserves.

Refinance of a Second Home with Rental Income

As a rule, if rental income from a Second Home is reported on the borrower’s tax return, the property must

be refinanced as an Investment Property. However, minimal rental income reported on the tax return may be acceptable subject to the following:


Schedule E requires the owner to complete the exact number of days that the property was used

for personal use and the number of fair rental days.

To be considered a Second Home, the property type must be “Vacation/Short-Term Rental”, and the number of personal use days must be more

than 14 or more than 10% of the number of days it is rented. Note: Rental income may never be

used to qualify on a Second Home. The loan must be evaluated using LPA and

must be coded and priced as Freddie Mac

Fixed Rate only.

Rental income for the subject property must not be used to qualify,

The borrower must continue to occupy the subject property as a Second Home, and

The property meets all Second Home requirements detailed above.

The loan must be evaluated using DU and

may be locked as a Fannie Mae Only or Conventional product.

Investment Property

All Investment Property mortgages must meet the following requirements: See Multiple Financed Properties – Desktop Underwriter (DU) only and Multiple Financed

Properties – Loan Product Advisor (LPA) only when borrower owns more than one 1-4 unit financed property.

For newly constructed homes that are purchase transactions, the borrower may not be affiliated with or related to the builder, developer, or the property seller.

The housing expenses related to the borrower’s current Primary Residence must be used in computing the monthly housing expense-to-income ratio.

The aggregate negative rental income from all rental properties must be treated as an obligation and considered in calculating the borrower’s monthly debt-to-income ratio.

Gift funds are not allowed. If rental income is used to qualify, the PITI plus operating expenses must be used in

calculating the monthly debt-to-income ratio. See Rental Income See Cash Reserves

Property Insurance

All loan files must contain evidence of appropriate hazard, title and flood insurance policies

in accordance with Freddie Mac and Fannie Mae policies. A life of loan flood policy is required on all loans.








Secondary Financing

Pacific Union Financial will close mortgages that are subject to subordinate financing held by another investor as long as the lien is recorded and clearly subordinate to the first mortgage lien. All loans with subordinate financing must meet the established LTV and (H)CLTV program requirements and the following: Include a copy of the note and fully executed subordination agreement. Provide information that the note’s regular monthly payment covers, at a minimum, the

monthly interest due. Provide information that no balloon payment will be due within the next 5 years.

All applicable agency (Fannie Mae or Freddie Mac) guidelines.

Ineligible Subordinate / Second Mortgages

Community or Affordable Seconds. Property Assessed Clean Energy (PACE) subordinate liens (applies to purchase and refinance

transactions). Home Energy Renovation Opportunity (HERO) subordinate liens (applies to purchase and

refinance transactions). Wraparound terms, combining the indebtedness of the first mortgage with the subordinate

mortgage. Subordinate mortgages that do not provide for either regular monthly payments of

principal and interest, or interest only (silent seconds, forgivable silent seconds). Negative amortization. Repayment term of fewer than five years. Subordinate liens that are cross-collateralized. Subordinate financing that permits the provider or another party to share in any appreciation

in the value of the subject property (equity sharing).

Purchase Transactions

Secondary financing is permitted subject to the limits shown in the LTV Matrix and the following requirements.

General Requirements

Terms of any secondary financing must be disclosed to the appraiser and to the MI provider, if applicable. The terms that must be disclosed include, but are not limited to, the Note Rate and the name of the institution or individual providing the financing.

The appraiser may not be provided with a value needed to support the transaction, or an

expected LTV/(H)CLTV ratio. Payments on the secondary financing must be included in the borrower’s monthly housing

expense. The file must include the following documentation:

The Note or other evidence of the subordinate lien terms Closing Disclosure or other equivalent settlement statement For HELOCs, the agreement indicating all fees and costs paid by the borrowers at

closing, and the maximum permitted credit advance.

Maturity Date

For non-HELOC second liens, the maturity date or amortization basis of the second lien may not be less than five years after the Note Date of the first lien, unless the second lien is fully








amortizing. Second liens with a balloon or call provision within the five-year period are not

allowed. If the secondary financing is an employer assisted or employer subordinated benefit, the

terms of the secondary financing must permit the borrower to continue making payments on the loan if the borrower no longer works for the employer, and may not require

repayment in full unless: The borrower terminates his or her employments for any reason, or The employer terminates the borrower’s employment for any reason other than long-

term disability, the elimination of the employee’s position, or a reduction in workforce.

Scheduled Payments

The terms of the secondary financing must provide for regular monthly payments sufficient to meet the interest due (interest may not accrue).

With the exception of HELOCs, when the repayment terms provide for a variable interest rate, the monthly payment must remain constant for each 12-month period over the term of the subordinate lien mortgage. (For HELOCs, the monthly payment does not have to remain constant.)

Home Equity Line of Credit (HELOCs)

The terms of the HELOC may allow a balloon or call option within the first five years of the Note Date of the first lien.

Both the full credit line and the drawn/disbursed must be included when submitting the loan to LPA or DU.

The full credit line of the HELOC must be used to determine the (H)CLTV (whether or not funds have been drawn).

Seller Carried Secondary Financing

Subordinate financing from the property seller (including any property seller or other private party carried financing):

Allowed only after the borrower has made a minimum 5% down payment from own funds. Only allowed when the CLTV is the lower of 95% or the maximum CLTV per the LTV Matrix. Affects interested party contributions. Must be at market rate. If the interest rate is more than 2% below the posted net yield in

effect for second mortgages at the time of closing it must be treated as a sales concession and a dollar for dollar reduction to the sales price is required.

Refinance Transactions

Existing subordinate financing may remain unpaid subject to the limits shown in the LTV Matrix and the following requirements:

The existing second lien is subordinated to the new first lien and evidence of the subordination is included in the loan file.

The second lien has scheduled payments sufficient to meet the interest due. If a new second lien is originated at the time of the refinance, the new lien and the

refinance transaction must meet the above requirements for Purchase transactions with secondary financing.

Seller/Interested Party Contributions

For all loans, the total of all contributions as a percentage of sales price or appraised value, whichever is

less, is limited to the values shown in the table below.








Occupancy LTV/CLTV Maximum Contribution

Primary Residence

and

Second Home

> 90% 3% 1

> 75% to ≤ 90% 6%

≤ 75% 9%

Investment Property All LTV/(H)CLTV 2%

1. Refer to Purchase of Fannie Mae HomePath (REO) Properties (if applicable) for possible exception to this limit for a Primary Residence transaction.

Interested parties include, but are not limited to, the builder, developer, property seller, and

real estate agent. Interested party contributions may include either financing and/or sales concessions. Financing concessions are funds that originate from an interested party to the transaction.

These funds include, but are not limited to, contributions in any way related to the mortgaged financing costs, closing costs, and/or prepaid items. Note: Typical fees and/or closing costs paid by a seller in accordance with local custom (known as common and customary fees or costs) are not subject to the IPC limits. Desktop Underwriter (DU): Financing concessions may include prepaid items, such as:

Interest charges ≤ 30 days of interest,

Property taxes if taxes are being escrowed, Insurance premiums ≤ 14 months, Homeowners Association (HOA) dues ≤ 12 months, Mortgage insurance premiums (initial and/or renewal), and Mortgage insurance escrow accruals for borrower-purchased MI.

Loan Product Advisor (LPA): Funds used to permanently reduce the interest rate, Contributions in any way related to financing costs, closing costs, prepaids or

escrows. Homeowners Association (HOA) dues ≤ 12 months are acceptable provided the fees

are collected at closing and are transferred directly to the HOA. A gift, or gift of equity, from a related person who is also the property seller is not subject

to Seller/Interested Party limits, provided that: The related person is not, or has no affiliation with, the builder, real estate agent, or any

other interested party to the transaction, and All requirements for gift funds are met.

Funds derived from Premium Pricing may be used by the lender to pay the borrower’s closing costs, financing costs, and prepaids/escrows. Funds from Premium Pricing are not included in the Seller/Interested Party limits.

The sales price may not be increased on a finalized purchase contract to cover closing costs. The LTV/CLTV must be based on the lesser of the original sales price or appraised

value if there is evidence in the loan file that the sales price was increased to include the borrowers closing costs.

Loans with payment abatements (an incentive provided by an interested party to provide funds to pay or reimburse a certain number of monthly payments on the borrower’s behalf)

are not eligible. Refer to applicable Seller Guide for additional information on financing and/or sales

concessions.








Transactions

Purchase

The borrower may not receive cash back, except for the following: Reimbursement of overpayment of fees. Costs paid by the borrower in advance (such as earnest money deposit, appraisal and

credit report). If the borrower receives cash back at closing, confirm that the minimum required borrower

contribution has been met.

Rate/Term (“No Cash-out”) Refinance

Continuity of Obligation requirements must be met, if applicable. Refer to Continuity of Obligation.

A Rate/Term Refinance is a mortgage for which the proceeds are used to: Pay off the current unpaid principal balance of an existing first mortgage (including an

existing HELOC in first lien position) plus accrued interest and any required prepayment penalty. Other costs such as late fees and past-due amounts may not be financed with

the new loan. Pay off any secondary liens secured by the subject property that were used entirely to

acquire the subject property. A Closing Disclosure from the purchase transaction must be provided and must reflect that the entire balance of the second lien was used to

acquire the property. If the current mortgage is a HELOC, the Closing Disclosure from the purchase of the

property must reflect that the entire balance was used to purchase the property. If any portion of the HELOC was not used to purchase the property, the loan must be

considered a cash-out refinance. Pay related closing costs, financing costs, and prepaids/escrows. Disburse cash-out to the borrower (or other payee) not to exceed the lower of $2,000 or

2% of the new loan amount.

Pay off the outstanding balance of a land contract or contract for deed if certain requirements are met. Refer to Land Contract and Contract for Deed.

The following transactions must be treated as a Cash-out refinance: Financing of real estate taxes into the new mortgage when no escrow account is being

established. Financing of real estate taxes that are more than 60 days delinquent.

Desktop Underwriter: The refinance of a loan that was closed as a short-term refinance within the last six months must be treated as a Cash-out refinance. Fannie Mae defines a short-term refinance as a refinance that combined a first mortgage

and non-purchase money subordinate lien into a new first mortgage, or any refinance of that loan within six months.

Use Note Date to Note Date to determine eligibility. If there are remaining proceeds after the funds are applied as described above:

The mortgage amount must be reduced, or The excess funds must be applied as a principal curtailment to the new loan at closing

and the curtailment must be clearly identified on the Closing Disclosure. Refer to the table below for the maximum curtailment permitted.

Existing secondary financing is not required to be paid off if: The second lien remains subordinate to the new first lien, and Evidence of the subordination is provided, and The remaining second lien meets requirements described in the Secondary Financing

topic.








See Property Listed for Sale.

See Refinance Transactions with a PACE Subordinate Lien.


There is no limit to the amount of the curtailment that may be applied.

The principal curtailment may not exceed the lesser of $2,500 or 2% of the loan amount.

Cash-out Refinance

A cash-out refinance is mortgage in which the use of the loan proceeds is not limited to

specific purposes. At least one borrower on the new mortgage must have been on title to the subject property

for at least six months prior to the Note Date (LPA) or disbursement date (DU). Desktop Underwriter (DU): A waiting period is not required if documentation supports

that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).

Refer to Continuity of Obligation and Delayed Financing topics for possible exceptions. The following transactions are always considered cash-out refinance:

A mortgage placed on a previously free and clear property. A refinance that pays off non-purchase money second lien. A refinance that pays off any portion of a HELOC that was not used to purchase the

property.

Desktop Underwriter (DU): The refinance of a loan that was closed as a short-term refinance within the last six months. Use Note Date to Note Date to determine eligibility.

Escrows are required when real estate taxes that are more than 60 days delinquent are being paid through loan proceeds, unless requiring an escrow account is not permitted by

state laws or regulations. See Property Listed for Sale. See Refinance Transactions with a PACE Subordinate Lien.

Continuity of Obligation


Continuity of Obligation is required on all

refinance transactions. This requirement is met if at least one borrower on the existing loan is also a

borrower on the new loan. 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 property with cash or when the

prior mortgage has been paid in full. When an existing Mortgage will be satisfied as a

result of a refinance transaction, one of the

following requirements must be met: At least one borrower on the new refinance loan

held title to and resided in the subject property

as a Primary Residence for the most recent 12 month period, and the loan file contains

documentation evidencing that the borrower, either: Has been making timely Mortgage payments,

including the payments for any secondary

Continuity of Obligation is not required for Fannie

Mae or Conventional Fixed Rate (CC) products.









financing, for the most recent 12-month period; or

Is a Related Person to a borrower on the Mortgage being refinanced; OR

At least one borrower on the refinance

Mortgage inherited or was legally awarded the Mortgaged Premises by a court in the case of 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 cash-out refinance transaction.

Delayed Financing

If none of the borrowers have been on title to the subject property for at least six months prior to the Note Date (LPA) or disbursement date (DU), the following requirements must be met in order to complete a cash-out refinance transaction:

The executed Closing Disclosure from the purchase transaction must reflect that no financing secured by the subject property was used to purchase the property. A Trustee’s Deed that confirms the amount paid by the grantee to the trustee may be used when a Closing Disclosure was not used for the purchase transaction.

The preliminary title report for the refinance transaction must reflect the borrower as the owner and must reflect that there are no liens on the property.

The source of funds used to purchase the property must be fully documented. If the source of funds to purchase the subject property was an unsecured loan or a loan

secured by an asset other than the subject property (such as a HELOC on another property), all cash-out proceeds from the refinance must be used to pay-off or pay down the original loan and must be reflected on the Closing Disclosure for the refinance transaction. Any payment on the balance remaining from the original loan must be included in the debt-to-income ratio calculation for the refinance transaction.

The amount of the cash-out refinance mortgage may not exceed the sum of the original purchase price (as evidenced by the Closing Disclosure) and related closing costs, financing costs, and prepaids/escrows subject to the maximum LTV/CLTV/(H)CLTV limits for a cash-out transaction based on the current appraised value. A recorded trustee’s deed (or similar

alternative) confirming the amount paid by the borrower(s) to the trustee may be substituted when a Closing Disclosure was not used for the purchase transaction. The cash-out refinance loan amount may not include any gift funds used to purchase the

subject property.

The loan amount must be calculated as the original purchase price and related closing costs, financing costs, and prepaids/escrows for the purchase transaction, less any gift funds used to purchase the subject property.

There must be no affiliation or relationship between the buyer and the original seller of the subject property.

All other cash-out refinance eligibility requirements must be met, with the exception of Continuity of Obligation, which does not apply to a Delayed Financing transaction. Refer to Continuity of Obligation.


The borrower may have initially purchased the property as one of the following:

A natural person, An eligible inter-vivos revocable trust, when the borrower is both the individual establishing the trust

and the beneficiary of the trust,









An eligible land trust when the borrower is the beneficiary of the trust, or An LLC or partnership in which the borrower(s) have an individual or joint ownership of 100% of the

property. Note: The new loan must be in the borrower’s name.

Land Contract or Contract for Deed

When the proceeds of a refinance mortgage are used to pay the outstanding balance under a Land Contract or Contract for Deed, the loan may be treated as either a purchase or a Rate/Term Refinance mortgage. A copy of the recorded Land Contract or Contract for Deed must be included in the loan file.

Purchase Transaction

The Land Contract or Contract for Deed must have been executed less than 12 months prior to the application date of the new loan.

All of the proceeds must be used to pay the outstanding balance under the Land Contract or

Contract for Deed and no loan proceeds may be disbursed to the borrower. The LTV must be calculated using the lesser of the following:

The current appraised value, or The total acquisition cost (the purchase price indicated in the original Land Contract or

Contract for Deed, plus any costs the borrower has expended for rehabilitation, renovation, refurbishment, or energy conservation improvements). The file must include sufficient documentation in which to calculate the total acquisition cost.

Rate/Term Refinance Transaction

The Land Contract or Contract for Deed must have been executed at least 12 months prior to the application date of the new loan.

The LTV must be calculated using the current appraised value.

The file must include third-party documentation evidencing payments in accordance with the Land Contract or Contract for Deed for the most recent 12 month period.

The loan must meet all other requirements for a Rate/Term Refinance transaction.

Net Tangible Benefit

All refinance transactions must contain a net tangible benefit (NTB) to the borrower. These include but are not limited to: Moving from an ARM loan to a fixed rate loan.

Shortening the term of a fixed rate loan (e.g., from 30 years to a 15 or 20 year fixed). Fixed Rate: Reducing the interest rate by 0.25% or more. ARM: Reducing the interest rate by .025% or more based on the fully indexed rate. Providing cash in hand.

Reducing overall monthly payments (paying off debt). Additionally, all state required NTB policies must be met. Brokers and Correspondents

are responsible for knowing the net tangible benefit requirements for their lending areas.

Non-Arm’s Length Transactions

A non-arm’s length transaction is one in which there is a direct relationship between the borrower and another interested party to the transaction. Interested parties may include the








builder, developer, seller, mortgage broker, real estate agent or realtor, appraiser, closing

or settlement agent, or an employee or employer of the seller. Not permitted on Delayed Financing.


For newly constructed properties, the borrower may not be affiliated with or related to the builder, developer, or property seller.

Fannie Mae will not purchase mortgage loans on newly constructed homes secured by a Second Home or Investment Property if the borrower has a

relationship or business affiliation with the builder, developer, or seller of the property.

Purchase of Fannie Mae HomePath (REO) Properties – Fannie Mae Only

Fannie Mae has eliminated the HomePath program previously used for borrowers purchasing a Fannie

Mae HomePath (REO) property. However, borrowers may continue to obtain financing for HomePath properties under Fannie Mae’s standard programs with some flexibilities previously allowed under the HomePath program.

Allowed on Primary Residence or Second Home transactions only. Due to the Resale Restrictions applied to all non-owner occupied properties, Investment

property transactions will not be allowed at this time. The property must be eligible per HomePath.com. A printout of the property eligibility page

must be included in the loan file. The purchase transaction must meet all standard Fannie Mae guidelines and DU messaging

with the exception of the following financing flexibility available only for Fannie Mae HomePath properties: Interested Party Contributions (IPCs): For primary residence with >90% LTV/CLTV, 6%

IPCs are allowed subject to Mortgage Insurance approval. Properties with resale restrictions imposed by Fannie Mae or any other entity are

NOT eligible. The contract and/or title work must be reviewed to confirm that resale restrictions do not exist.

Refinance to Buyout a Co-Owner

Defined as a cash-out refinance where the owner of a property uses the proceeds of a refinance transaction to buy out the equity of a co-owner.

Applicable Continuity of Obligation requirements must be met. Refer to Continuity of

Obligation. All parties must sign a written agreement stating the terms of the property transfer and the

disposition of the loan proceeds. The loan file must include evidence that the subject property was jointly owned by all

parties for the 12 months preceding the Note Date. Evidence of 12 months of joint ownership is not required if the parties recently inherited the

property. The borrower who retains sole ownership of the property may not receive any proceeds

from the refinance transaction. The party buying out the other party’s interest must be able to qualify for the mortgage.


Loan is treated as a Cash-out refinance and must meet the maximum LTV/(H)CLTV limits for cash-out transactions per the LTV Matrix.

The loan amount may not exceed the amount needed to buy out the equity of the co-owner,

which may include:

Loan is treated as a Rate/Term refinance and must meet all Fannie Mae requirements for Rate/Term refinances.

The borrower may not receive any of the proceeds from the refinance transaction.

http://www.homepath.com/









Paying off the first mortgage, regardless of age. Paying off any secondary financing secured by

the subject property (not required if the second lien is subordinated).

Payment of related closing costs, financing

costs, and prepaids.

Refinance Transactions with a PACE Subordinate Lien

Property Assessed Clean Energy (PACE) or PACE-like obligations (including HERO) are defined as energy retrofit loans that are used to finance energy conservation improvements, and are repaid through a property tax assessment.

PACE or PACE-like obligations (including HERO) that result in or provide for first lien priority

may be paid off with the proceeds of a refinance, subject to the requirements below.


Rate/Term Refinance

The mortgage being refinanced must

be owned (in whole or part) or securitized by Freddie Mac. The loan file must include documentation from

the Freddie Mac Look Up Table to evidence that the existing loan meets this requirement.

The PACE/HERO obligation must be paid in full. 1

The loan file must include documentation to support that the obligation being paid off is a

PACE/HERO obligation that results in or provides for First Lien priority.

The loan must meet all other Rate/Term (“No Cash-out”) Refinance requirements.

Investor Feature Identifier H61 is required.

Not allowed

Cash-out Refinance


The loan must meet all other Cash-out Refinance requirements.


The loan must meet all other Cash-out Refinance requirements.

1. Property Assessed Clean Energy (PACE) and Home Energy Renovation Opportunity (HERO) liens

are not eligible for subordination. See Ineligible Subordinate/Second Mortgages.

Miscellaneous Policies

Borrower Paid Fees

The borrower may never pay any fee on behalf of the seller. These types of fees include, but are not limited to:

Finder or consulting fees Payoffs amounts for second lien holders Agent commissions Delinquent taxes or HOA dues Moving expenses

https://ww3.freddiemac.com/loanlookup/








Closing Policy

All loans are subject to the Pacific Union Financial loan closing policy. Closing Policy.

Fees and Services

Charges related to services performed by a third party, the amount paid by the borrower must be limited to the actual charge of that third party.

Refer to the daily rate sheet for current pricing.

Product Codes

Product Code Master List

https://flow.pacificunionfinancial.com/docs/ClosingPolicyWLExt.pdf

http://flow.pacificunionfinancial.com/docs/product%20code%20master%20list%20wl.xlsx