underwriting philosophy 6 transaction types 6€¦ · 08/03/2019 · note: asset depletion income...

Nexera Holding LLC PROPRIETARY AND CONFIDENTIAL

Updated: Friday March 08, 2019 1

UNDERWRITING PHILOSOPHY ___________________________________________________ 6

Transaction Types _____________________________________________________________ 6

PURCHASE ________________________________________________________________________ 6

RATE AND TERM REFINANCE _________________________________________________________ 6 Determination of Value – Rate and term refi ____________________________________________________ 7 Refinance Resulting from Divorce or ANother owner’s interest ______________________________________ 7

CASH-OUT REFINANCE ______________________________________________________________ 7 Determination of value - Cash out refinance _____________________________________________________ 7 Cash-out limits - Maximum Equity Withdrawal ___________________________________________________ 8

CONSTRUCTION TO PERM ___________________________________________________________ 8

DELAYED FINANCING _______________________________________________________________ 8

Borrower Eligibility ____________________________________________________________ 9 Citizenship Requirements ____________________________________________________________________ 9 Maximum number of Borrowers ______________________________________________________________ 9 First-Time Homebuyers (FTHB)_______________________________________________________________ 10 Non-Occupant Co-borrowers ________________________________________________________________ 10 VESTING AND OWNERSHIP __________________________________________________________________ 10 MAXIMUM NUMBER OF PROPERTIES OWNED __________________________________________________ 10

NON-ARM’s LENGTH TRANSACTION (NAL) & INTERESTED PARTIES _________________________ 11 Non-Arm’s Length Transaction (NAL) __________________________________________________________ 11 Interested Party Transaction ________________________________________________________________ 11 Eligible Non-Arm’s Length And Interested Party Transactions ______________________________________ 11 Non-Arm’s Length Restrictions _______________________________________________________________ 12

Qualifying Rates _____________________________________________________________ 12

Debt to Income (DTI) _________________________________________________________ 12

Payment Shock ______________________________________________________________ 13

Credit ______________________________________________________________________ 14

CREDIT SCORE DETERMINATION _____________________________________________________ 14

TRADELINE REQUIREMENTS – Methods for testing ______________________________________ 14 Method 1 Available for PORTFOLIO Plus, Expanded & INVESTOR Pro ________________________________ 14 Method 2 Available for PORTFOLIO Plus & Expanded only ________________________________________ 15 Method 3 AVAILaBLE for PORTFOLIO Plus & Expanded only _______________________________________ 15

COLLECTIONS, CHARGE-OFFS AND LIENS IMPACTING TITLE ________________________________ 15

Credit and Housing Events __________________________________________________________ 16



Program Specifics _________________________________________________________________________ 16 Housing Events ___________________________________________________________________________ 17

MODIFICATION ___________________________________________________________________ 17

MORTGAGE / RENTAL HISTORY ______________________________________________________ 17 Program Specifics _________________________________________________________________________ 17 Institutional Mortgage History _______________________________________________________________ 18 Non-Institutional Mortgage History ___________________________________________________________ 18 Rental History ____________________________________________________________________________ 18

LIABILITIES _________________________________________________________________ 18

Subordinate Financing _____________________________________________________________ 18 HOME EQUITY LINE OF CREDIT (HELOC) _______________________________________________________ 19

INSTALLMENT DEBT _______________________________________________________________ 19

REVOLVING DEBT _________________________________________________________________ 20

ALIMONY/CHILD SUPPORT/SEPARATE MAINTENANCE OBLIGATIONS _______________________ 20

CURRENT PRINCIPAL RESIDENCE – PENDING SALE _______________________________________ 20

UNREIMBURSED BUSINESS EXPENSES (2106) ___________________________________________ 20

RETIREMENT / SAVINGS PLAN LOANS _________________________________________________ 21

STUDENT LOANS __________________________________________________________________ 21

INCOME and EMPLOYMENT ___________________________________________________ 21

EMPLOYMENT REQUIREMENTS ______________________________________________________ 21

Self employment INCOME __________________________________________________________ 22 Maximum Number of business entities allowed _________________________________________________ 22

INCREASE IN INCOME ______________________________________________________________ 22

DECREASE IN INCOME _____________________________________________________________ 23

Required documentation for underwriting business income _______________________________ 23 Noncash expenses that may be added back to the net income/loss _________________________________ 23

TYPES OF BUSINESS STRUCTURES ____________________________________________________ 23

ALLOWABLE AGE OF FEDERAL INCOME TAX RETURNS ____________________________________ 25

AMENDED TAX RETURNS ___________________________________________________________ 25

Wage Earner Income ______________________________________________________________ 25

VARIABLE INCOME ________________________________________________________________ 25

OTHER INCOME ___________________________________________________________________ 26 Alimony & Child Support ___________________________________________________________________ 26



Annuity Income ___________________________________________________________________________ 26 Cannabis related Income ___________________________________________________________________ 26 Capital Gain Income _______________________________________________________________________ 26 Farm Income _____________________________________________________________________________ 27 Housing Allowance ________________________________________________________________________ 27 Inherited or Guaranteed Income _____________________________________________________________ 27 Interest and Dividend Income _______________________________________________________________ 27 Military Income ___________________________________________________________________________ 27 Note Income _____________________________________________________________________________ 27 Restricted Stock Units (RSU) _________________________________________________________________ 28 Retirement Income ________________________________________________________________________ 28 Seasonal Employment Income _______________________________________________________________ 29 Second Job Income ________________________________________________________________________ 29 Trust Income _____________________________________________________________________________ 29 Unemployment Income ____________________________________________________________________ 29 Ineligible Income __________________________________________________________________________ 29

Rental Income: long term lease ______________________________________________________ 30 Properties owned at least one tax year ________________________________________________________ 30 Properties owned less than one tax year _______________________________________________________ 30 Non-ARMs Length (NAL) and Rental Income ____________________________________________________ 30 expired leases ____________________________________________________________________________ 30

Rental Income: short term Rental ____________________________________________________ 31 Greater than a 2-year history ________________________________________________________________ 31 Greater than one year but less than two years __________________________________________________ 31 Less than 1 year ___________________________________________________________________________ 31

Conversion of Departing residence to investment property _______________________________ 31 Inexperienced Property Management _________________________________________________________ 31 Experienced Property management___________________________________________________________ 32

REAL ESTATE owned by corporations and Partnerships ___________________________________ 32

12 Month Income Documentation ____________________________________________________ 32

VARIABLE INCOME ________________________________________________________________ 33

Self-Employed ____________________________________________________________________ 33

Asset Depletion ______________________________________________________________ 33

PERSONAL BANK STATEMENT (12 & 24 mONTHS) __________________________________ 34

ELIGIBLE BORROWERS _____________________________________________________________ 34

INCOME DOCUMENTATION REQUIREMENTS ___________________________________________ 35

ELIGIBLE BANK ACCOUNTS __________________________________________________________ 35

INELIGIBLE BANK ACCOUNTS ________________________________________________________ 35



Calculating Income from Personal Bank Statements _____________________________________ 36

PERSONAL BANK STATEMENTS WITH RENTAL INCOME ___________________________________ 36

PERSONAL BANK STATEMENTS WITH RETIREMENT OR WAGE EARNER INCOME _ 36

Business Bank Statement - 12 and 24 mONTHS ____________________________________ 37

REQUIRED DOCUMENTATION _______________________________________________________ 37

PROGRAM REQUIREMENTS _________________________________________________________ 37

Determining qualifying Income on Method 1: P&L _______________________________________ 37

Determining qualifying Income on Method 2: Fixed Expense Ratio _________________________ 38

Documenting non-Business bank statement income _____________________________________ 39

TAX TRANSCRIPTS____________________________________________________________ 39

ASSETS _____________________________________________________________________ 39

MINIMUM BORROWER CONTRIBUTION _______________________________________________________ 40 Business Funds ___________________________________________________________________________ 40 Retirement Accounts ______________________________________________________________________ 41 Borrowed Funds Secured by Assets ___________________________________________________________ 41 Sale of Real Property _______________________________________________________________________ 41 Gift Funds _______________________________________________________________________________ 41 INELIGIBLE ASSETS AND SOURCES OF FUNDS ___________________________________________________ 42

RESERVE REQUIREMENTS _____________________________________________________ 42

Investor Pro ONLY _________________________________________________________________________ 43 Source of Reserves ________________________________________________________________________ 43 Transactions not requiring Reserves __________________________________________________________ 43

PROPERTY TYPES ____________________________________________________________ 43 Eligible property types _____________________________________________________________________ 43 Modular home ___________________________________________________________________________ 44 Planned Unit Development (PUD) ____________________________________________________________ 44 Rural Property ____________________________________________________________________________ 44 CONDOMINIUM __________________________________________________________________________ 44 Established Projects _______________________________________________________________________ 45 Condominium Project Review _______________________________________________________________ 45

INELIGIBLE PROPERTY TYPES ________________________________________________________ 46

APPRAISAL REQUIREMENTS ___________________________________________________ 47

DISASTER AREA REQUIREMENTS ________________________________________________ 48

Appraisal Completed Prior to Disaster _________________________________________________________ 48 Appraisal Completed After Disaster ___________________________________________________________ 48

INVESTOR PRO ______________________________________________________________ 48



PREPAYMENT PENALTIES, POINTS, AND FEES ___________________________________________________ 48 OCCUPANCY _____________________________________________________________________________ 49 DETERMINING LOAN-TO-VALUE ______________________________________________________________ 49 Cash Out Limitations _______________________________________________________________________ 49 CONTINUITY OF TITLE AND PROPERTY FLIPS ____________________________________________________ 50 Inherited and awarded (through dissolution of MarrIage or domestic partnership) Properties ____________ 50 FIRST-TIME INVESTOR ______________________________________________________________________ 50 VESTING IN THE NAME OF A BUSINESS ENTITY __________________________________________________ 50 DSCR (DEBT-SERVICE COVERAGE RATIO) _______________________________________________________ 51 NO RATIO ________________________________________________________________________________ 51



UNDERWRITING PHILOSOPHY

All loans must be prudently underwritten using the Newfi Program Guidelines and Matrices. All

loans require manual underwriting. Exceptions to the guidelines may be considered based on

documentable compensating factors

For scenarios and items not specifically addressed in the Newfi Program Guidelines and

Matrices, please refer to Appendix Q: if there is no reference in Appendix Q refer to Agency

Guidelines.

TRANSACTION TYPES

PURCHASE

The borrower may allow the seller to rent back the subject property for up to 60 days from the closing date. 1031 tax deferred exchanges are allowed on non-owner transactions.

RATE AND TERM REFINANCE

Cash removal or debt consolidation other than incidental cash (the lower of 2% of the loan amount or $3,000), is not allowed on a rate and term refinance

Proceeds can be used for:

• Payoff of the first mortgage and closing costs

• Payment of current real estate property taxes

• Payoff of subordinate mortgage(s) that:

• Are at least 12 months seasoned with an aggregate draw less than $3000 in

those 12 months OR

• Were used to purchase the subject property OR

• Were used for documented home improvements

Proceeds may not be used for:

• Real estate taxes delinquent by 60 days or more

• Paying off a HERO or PACE type loan



• Retiring a first that was cash out or that combined a first and non-seasoned 2nd in the

most recent 6 months

DETERMINATION OF VALUE – RATE AND TERM REFI

The current appraised value can be used for calculating the LTV/CLTV ratios

REFINANCE RESULTING FROM DIVORCE OR ANOTHER OWNER’S INTEREST

A refinance transaction resulting from a divorce settlement or partnership dissolution where the borrower is required to buy out the interest of another party in the subject property may be considered a rate and term refinance if:

• The borrower receives no cash-out from the proceeds of the subject transaction AND

• The borrower provides a copy of the divorce decree or the property settlement

agreement reflecting the required buy-out OR

• Written agreement or documentation confirming transfer terms of another owner’s

interest

CASH-OUT REFINANCE

All cash out transactions require a minimum of one borrower to be on title for at least 6 months. For LTV’s 20% below maximum, there is no title seasoning requirement, however, equity withdrawal may not exceed original down payment.

The loan proceeds may be used for:

• Debt consolidation

• Cash-in-hand

• Payoff of an unseasoned subordinate lien

• Payoff of a HELOC where more than $3000 cash has been drawn in the last 12 months

• Payoff of a first mortgage closed in the previous 6 months where cash-out was taken

• Payoff of a first mortgage closed in the previous 6 months where the previous first and a

non-seasoned 2nd were combined

• Payoff of property tax liens

• Paying delinquent property taxes

• Payoff of federal and state liens

Note: Asset depletion income not eligible on cash out transactions

DETERMINATION OF VALUE - CASH OUT REFINANCE

Properties owned less than 12 months must use the lesser of the purchase price plus the added value of any documented improvements or the appraised value for calculating the LTV/CLTV



CASH-OUT LIMITS - MAXIMUM EQUITY WITHDRAWAL

Equity withdrawal is the amount of proceeds net to the borrower after closing costs and payoff of the to be retired mortgage have been deducted from the loan amount. The dollar amount of equity withdrawn in a cash-out refinance is limited to the following as a percentage of the property value:

• Loan amounts < $1,000,000 subject to 70% max

• Loan amounts > $1,000,000 but < $1,500,000 subject to 60% max

• Loan amounts > $1,500,000 subject to 50% max

• Investor Pro is subject to a $500,000 max

CONSTRUCTION TO PERM

Construction loan refinances are eligible as rate & term, or cash-out refinances and must meet the following criteria:

• The borrower must have been on title to the lot for a minimum of 6 months prior to the closing of the permanent loan if the new transaction is cash out

• Base LTV on the current appraised value if the borrower has held title to the lot for 12 or more months prior to the closing date of the permanent loan

• If the lot was acquired less than 12 months before the closing date of the permanent loan, the LTV would be based on the lesser of the purchase price of the lot plus the total construction costs OR the current appraised value of the property (lot and improvements)

DELAYED FINANCING

• Borrowers who purchased the subject property within the past six months (measured from the date on which the property was purchased to the disbursement date of the new mortgage loan) are eligible for a cash-out refinance if all of the following requirements are met

• The original purchase transaction was an arms-length transaction

• The original purchase transaction is documented by a settlement statement, which confirms that no mortgage financing was used to obtain the subject property

• The sources of funds for the purchase transaction are documented (such as bank statements, personal loan documents, or a HELOC on another property)

• If the source of funds used to acquire the property was an unsecured loan or a loan secured by an asset other than the subject property (such as a HELOC secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property



• Note: Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan

• The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV,

CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value)

• All other cash-out refinance eligibility requirements are met. Cash-out pricing is applicable

BORROWER ELIGIBILITY

CITIZENSHIP REQUIREMENTS

• US Citizens

• Permanent Resident Aliens

• Non-Permanent Resident Aliens (VISA Holders)

Must be in the US legally with an acceptable visa type which is valid for a minimum of 60 days at the time of funding

• Owner-occupied properties only

• Acceptable Visa types

E Series (E-1, E-2, E-3)

G Series (G-1, G-2, G-3, G-4, G-5)

H Series (H-1B, H-1C, H-3, H-4)

L Series (L-1A, L-1B, L-2)

NATO Series (NATO 1 – 6)

O Series (O-1)

R Series (R-1)

TN-1 Canadian NAFTA Visa

TN-2 Mexican NAFTA Visa

MAXIMUM NUMBER OF BORROWERS

• The maximum number of borrowers is 4: the 4 max includes all borrowers and co-borrowers

• All co-borrowers must be on title



FIRST-TIME HOMEBUYERS (FTHB)

Defined as borrowers who have not owned residential property in the USA during the past three years.

• If one borrower is an FTHB, and the other borrower is not, then FTHB guidance does not apply

• Max loan of $2,000,000

• Max 50% DTI

• Doc type: 24 month income only: full doc or bank statement

• Asset depletion allowed

NON-OCCUPANT CO-BORROWERS

An individual who will not occupy the subject property, but whose income and/or assets will be used to qualify for the loan

• Not allowed on bank statement program

• The primary occupying borrower must have a DTI of no more than 60%

• A minimum of 5% of the down payment must come from the primary-occupant borrower’s own funds for LTV > 80%

• 100% gift down payment is allowed at LTVs less than 80%

• Must be an immediate family member such as a parent, child, grandparent, or sibling

VESTING AND OWNERSHIP

Ownership must be fee simple. Acceptable forms of vesting are:

• Individuals

• Joint tenants

• Tenants in Common

• Inter vivo or revocable trusts, also called a family trust, living trust, or revocable living trust are allowed:

• Certification of Trust (Trust Cert) • A certification of trust or a summary of trust is acceptable where allowed by state

law • If trust cert not allowed by state must provide a copy of complete executed trust

and attorney opinion letter

Investor Pro Transactions ONLY Business entity vesting allowed - See requirements in Investor Pro section

MAXIMUM NUMBER OF PROPERTIES OWNED

The maximum number of properties owned (financed or free and clear) is six.

The following are excluded:



• Joint or total ownership in property that is held in the name of a corporation, even if the borrower is the owner of the corporation, but If the borrower is individually obligated on the note, it must be included

• Multi-family property (5+ units)

• Commercial property

• Timeshares

• Undeveloped land

No limit on REO for Investor Pro

NON-ARM’S LENGTH TRANSACTION (NAL) & INTERESTED PARTIES

NON-ARM’S LENGTH TRANSACTION (NAL)

An NAL occurs when the borrower has a direct relationship or business affiliation with the seller

of the property. Examples of non-arm’s length transactions may include family sales, sale of real

property in an estate, employer/employee sales and flip transactions.

When the property seller is a business entity it must be ensured that the borrower is not an

owner of the business entity selling the property.

INTERESTED PARTY TRANSACTION

A conflict of interest may occur when the borrower has an affiliation or relationship with the

Mortgage Broker, Loan Officer, Real Estate Broker/Agent, Appraiser, Closing Agent or any other

party to the transaction.

When a relationship exits involving a mortgage broker, loan officer, or real estate broker/agent,

extra caution is required. For example, the seller’s real estate agent for the subject property

may not act as the loan officer for a borrower purchasing the subject property. An examination

of the relationship between the mortgage broker, title/escrow companies, appraiser and any

other party to the transaction must be performed. If applicable, a letter of explanation

regarding a relationship between the parties is required

ELIGIBLE NON-ARM’S LENGTH AND INTERESTED PARTY TRANSACTIONS

• Buyer(s)/Borrower(s) representing themselves as agent in real estate transaction

• Commission earned by buyer/borrower cannot be used for down payment,

closing costs, or monthly PITI reserves

• Seller(s) representing themselves as agent in real estate transaction

• Renter(s) purchasing from Landlord

• 24 months cancelled checks to prove timely payments required

• A VOR is not acceptable



• Purchase between family members

• Full Documentation only

• Gift of Equity requires a gift letter and the equity gift credit is to be shown on the

CD

• Must provide a 12-month mortgage history or other conclusive documentation

confirming the Family Sale is not a foreclosure bailout

NON-ARM’S LENGTH RESTRICTIONS

• Primary Residences only

• Cash-Out refinances not allowed

• Maximum LTV/CLTV: 80%

• For-Sale-By-Owner (FSBO) transactions must be arms-length

• Employer to employee sales or transfers not allowed

• Property trades between buyer and seller not allowed

Qualifying Rates

Fixed Rate Qualify using the fully amortized payment calculated at the note rate ARM Qualify using the higher of note rate or the fully indexed rate Interest Only ARM or Fixed Rate Qualify using the higher of fully indexed rate OR note rate amortized over the principal repayment period Interest only – Investor Pro Investor Pro interest-only products are 30-year terms. The 5/1 ARM has an interest only option with a 10-year interest-only period followed by a 20-year amortizing period. The 3/1 ARM is a 30-year term with a 5-year initial interest-only period followed by a 25-year fully amortizing period. The annual ARM adjustments occur after the initial fixed-rate period expires. Interest only – Expanded Expanded interest-only products are 30-year terms. The 5/1 and 7/1 ARMs have an interest-only option with a 10-year interest-only period followed by a 20-year amortizing period.

Debt to Income (DTI)

• Max 43% DTI for all 12 month Bank Statement and 24 month Bank Statement on



Portfolio Plus

• Max 50% DTI for FTHB with < 150% payment shock and an additional three months reserves, 24 month full doc or 24 month bank statement income only

• 50% DTI allowed with < 150% payment shock and an additional three months reserves. Portfolio Plus and Expanded with 12 & 24 month full doc and for Expanded 24 month bank statement

Expanded ONLY

• 55% DTI allowed on owner-occupied purchase or R&T when the following loan attributes are present: zero payment shock, 12 months reserves, 24-month full doc, 680 credit score, 80% LTV max, and $3,000 residual income

Payment Shock

Payment shock must be calculated to help measure transaction risk. Two examples would be FTHB purchase and transactions where DTI exceeds 43%. Payment shock might also be important criteria for a credit exception request involving other loan attributes.

Payment Shock is not explicitly calculated for Non-Owner-Occupied transactions. However, the borrower’s total debt service will be evaluated.

Example of Payment Shock calculation:

Current rent: $1500

Proposed PITI: $3000

Payment Shock is 100% (3000-1500/1500=1)

Pay-shock for FTHB

• May not exceed 200%

Pay-shock for interest only products

• Calculate using the I/O payment when the I/O terms are greater than five years. Less than five years calculate as note rate amortized over the principal repayment period

Pay-shock calculation for ARM products

• For ARMs with an initial period of fewer than five years, pay-shock is based on the greater of the actual payment or qualifying payment. Terms of 5 years or more use actual payment

Pay-shock for borrowers with no current housing expense

• Reviewed case by case



Credit

Age of Credit Docs

• All credit documents are valid for 90 days from Note date

• For allowable age of tax returns see the self-employment section Recent Credit Inquiries

• Recent inquiries indicate that the borrower has actively been seeking credit

• All inquiries within the last 120 days require a detailed borrower LOE – If new credit was granted/obtained a current account statement is required

Hawk / Fraud Alerts

• Alerts must be reviewed and resolved before underwriting the loan

OFAC Alerts

• Must comply with Section 326 of the USA Patriot Act and OFAC Section 326 of the USA PATRIOT Act - Treasury Department

Credit Security Freezes

• Credit Reports with security freeze cannot be used

• A security credit bureau freeze must be resolved prior to underwriting and a new credit report issued which shows complete and updated data

CREDIT SCORE DETERMINATION

• Must use the lowest middle credit score of all borrowers

• All borrowers must meet the minimum credit score requirements for the program

• For all transactions when only two scores are available, the lowest score will be used

TRADELINE REQUIREMENTS – METHODS FOR TESTING

The minimum tradeline requirement is applied to all borrowers contributing income and can be determined using one of the following three methods.

NOTE: The following are not acceptable to be counted as tradelines: “non-traditional” credit as defined by Fannie Mae, any liabilities in deferment status, accounts discharged through bankruptcy, authorized user accounts, charge-offs, collection accounts, foreclosures, deed in lieu of foreclosure, short sale, or pre-foreclosure sale.

METHOD 1 AVAILABLE FOR PORTFOLIO PLUS, EXPANDED & INVESTOR PRO

Three for 12 OR two for 24

• Three open and active trade lines with a 12-month history OR

• Two trade lines open 24 months both showing activity in the most recent 12 months

• Trade lines with recent serious adverse history are not acceptable

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• Rental verification can be included as a trade line

• Student loans can be counted in credit depth as long as they are in repayment and not being deferred

METHOD 2 AVAILABLE FOR PORTFOLIO PLUS & EXPANDED ONLY

Eight Year History

• A minimum of 8 trade lines are reporting

• One must be a mortgage or a rental history

• At least one trade line has been open, active for the most recent 12 months

• The borrower has an established credit history for at least eight years, showing a pattern of consistent credit usage over the eight-year period

METHOD 3 AVAILABLE FOR PORTFOLIO PLUS & EXPANDED ONLY

Three Credit Scores

• The borrower has three credit scores reporting

• Minimum of four tradelines reporting

• Max LTV/CLTV of 75% or 15 points under max allowed for loan amount and credit score

• A minimum 10% borrower contribution has been made by the borrower from their own funds on purchase transactions

• Primary residence only

• Allowed on 24-month income documentation only

• Must have a satisfactory 24-month history of current housing payments, borrowers with no current housing expense are not allowed

COLLECTIONS, CHARGE-OFFS AND LIENS IMPACTING TITLE

All delinquent credit that may or does impact title must be paid off prior to or at closing. Some examples of adverse credit impacting title are, but not limited to:

• Mechanics Liens

• Delinquent Property Taxes

• Real Estate Tax Liens

• IRS Tax Liens Accounts allowed to remain open, all products



• Charged-off accounts and collection accounts that do not potentially impact title do not need to be paid off if the balance of an individual account is less than $500 and if the total balance of all accounts is $2,500 or less

• Medical collections up to $10,000 cumulative

• Collections/Charge Offs that have passed the individual state statute of limitations

Investor Pro ONLY

• All past due consumer debts can be no more than 30 days past due at time of closing

• Delinquent credit which belongs to an ex-spouse may be excluded from the credit evaluation when all the following apply:

1. A copy of the filed/recorded divorce decree or recorded separation agreement which shows the derogatory accounts belong solely to the ex-spouse AND

2. Late payments that have occurred after the date of the divorce or separation AND

3. If debt is a mortgage, provide evidence of title transfer prior to any delinquency

Consumer Credit Counseling

• Portfolio Plus and Expanded: Borrowers currently participating in Fannie Mae approved credit counseling services are acceptable if the most recent 12 months are paid as agreed, and the CCCS administrator provides a letter allowing borrower to seek new mortgage financing

• Investor Pro: Consumer Credit Counseling must be completed for a minimum of 24 months from closing date.

CREDIT AND HOUSING EVENTS

Program Specifics

• Borrower must have reestablished credit and meet the minimum credit requirements

• Multiple events are allowed but must be isolated to a single life event or timeframe

• Timeshares are considered installment debt and not a mortgage, and as such are not considered in major event category

Portfolio Plus:

• Minimum of four years elapsed since bankruptcy discharge /dismissal, or housing event measured from the date of completion to the note date

Expanded:

• At least three years have elapsed from a chapter 7 bankruptcy or housing event measured from the date of event completion to the note date

• At least 2 years since discharge of a chapter 13 or 3 years from a chapter 13 dismissal



Investor Pro:

• At least 2 years have elapsed from a bankruptcy or housing event, measured from the date of event completion to the note date

HOUSING EVENTS

A Housing Event is any one of the following events listed below:

• Foreclosure

• Deed-in-Lieu

• Short Sale

• Short Refi (mortgage charge off)

• Modification

• 1x120 mortgage history

Seasoning of a foreclosure, deed-in-lieu, or short sale is measured from the date of completed sale or final property transfer. The Housing Event must be completed prior to loan closing with no outstanding deficiency balance remaining.

For a 120-day mortgage late, seasoning is from the date the mortgage was brought current. Seasoning for a modification is from the date the modification was executed. If the property was surrendered in a Chapter 7 bankruptcy, the bankruptcy discharge date is used for seasoning.

MODIFICATION

In general, simple interest rate reduction modifications or restructures are allowed providing payment history is acceptable. Standard credit evaluation rules apply. However, restructured loans where the terms of the original transaction have been changed resulting in a forgiveness of debt, or a restructuring of debt, are eligible but must follow the waiting period requirements for negotiated settlements found in Housing Events.

Some examples are:

• Forgiveness of principal or payment arrearages in either a first or the second mortgage

• Conversion of any portion of the original mortgage debt to a subordinate mortgage

• Conversion of any portion of the original mortgage debt from secured to unsecured

MORTGAGE / RENTAL HISTORY

A minimum 24 months verified housing history is required

PROGRAM SPECIFICS

Portfolio Plus:

• Mortgage/rental payment history must reflect 0 x 30 in most recent 12 months



• Any gaps in housing history, i.e. living with family, must be documented with an LOE and be reasonable

Expanded and Investor Pro:

• Mortgage/rental payment history must reflect no more than 1 x 30 in most recent 12 months

• Any gaps in housing history, i.e. living with family, must be documented with an LOE and be reasonable

INSTITUTIONAL MORTGAGE HISTORY

Mortgage history may be documented as follows:

• 24 months mortgage payment history on the credit report OR

• 24 months canceled checks OR

• Verification of Mortgage (VOM)

NON-INSTITUTIONAL MORTGAGE HISTORY

If a borrower has a privately held mortgage all the following documentation is required:

• Payments must be verified with either canceled checks or bank statements AND

• A copy of the note is required to verify payment amount and due date

RENTAL HISTORY

Rental history may be documented as follows:

• A standard VOR completed by a professional management company

• If the landlord is a private party the following documentation is required:

• 24 months bank statements or canceled checks are required AND

• Rental agreement to verify payment amount and due date

LIABILITIES

SUBORDINATE FINANCING

If the subordinate financing is a simultaneous close, the following is required:

• A copy of the loan approval and repayment terms

• A copy of the executed note

If the secondary financing is already in place the following is required:



• A copy of the executed note, recorded security instrument, and signed subordination

agreement must be provided to confirm the loan amount, terms, and lien status

• The remaining term of the subordinate lien must be less than or equal to the term of the

first mortgage

• The subordinate lien must have a minimum remaining term of no less than five years,

unless the financing fully amortizes prior to that time

• At the closing of subject transaction, secondary financing may not have a balloon

payment within the first five years

• The secondary financing must not have a negative amortization feature

• The terms of the note must provide for regular monthly payments of at least the

interest due with no provisions for future advances

• Employer-provided secondary financing, follow agency guidance

HOME EQUITY LINE OF CREDIT (HELOC)

For qualification purposes use the following:

• For an existing subordinate lien, use the payment on the credit report or monthly

statement

• If the payment cannot be verified use 1% of the maximum current available draw

• If there is no balance, then no payment will need to be used

• For a simultaneous close, use the amount to be disbursed at funding

• The ATR repayment calculation method for simultaneous loans must be used

INSTALLMENT DEBT

• The monthly payment may be excluded from the DTI calculation provided there are 10

or fewer payments remaining and the payment does not exceed 5% of the borrowers

qualifying income

• Paying down installment debt to 10 payments or less to qualify is not allowed, the debt

must be retired

• Business debt in borrower’s name may be excluded with documentation to verify that

the business has made 12 months of timely payments and the debt is accounted for as

an expense in the business tax returns

• Student loans, whether deferred, in forbearance, or in repayment, 1% of the unpaid

balance or the actual documented payment

• To exclude contingent liabilities, document that the individual making the payment is

also obligated on the debt and document most recent 12 months timely payments

made



• Timeshares are considered installment debt, not a mortgage

REVOLVING DEBT

The minimum payment on the credit report or current statement is used in the DTI calculation

• Revolving debt may not be paid down to qualify

• Revolving debt may be excluded if account is paid off, funds used to pay off account

must be verified

• If there is no minimum payment amount and no supplemental documentation to

support a payment of less than 5%, then use the greater of $10.00 or 5% of the

outstanding balance

• Monthly paid charge accounts, also called open accounts, such as an AMEX account,

payment will not be included but outstanding balance amount will be netted out of

available assets or cash-out proceeds

• Business debt in borrower’s name may be excluded with documentation to verify that

the business has made 12 months of timely payments and the debt is accounted for as

an expense in the business tax returns

ALIMONY/CHILD SUPPORT/SEPARATE MAINTENANCE OBLIGATIONS

• Monthly child support obligations with 10 or more payments remaining must be

included in the DTI

• Alimony can be subtracted from income instead of adding to liabilities

CURRENT PRINCIPAL RESIDENCE – PENDING SALE

• If the borrower's current principal residence is a pending sale, but the transaction will

not close prior to the subject transaction, the current PITI and the proposed PITI must

be used in qualifying

• The current principal residence's PITI can be excluded with the following documentation

• The non-contingent executed sales contract for the current residence AND

• Confirmation that any financing contingencies have been cleared

UNREIMBURSED BUSINESS EXPENSES (2106)

• When the borrower is using commission income in the amount of 25% or more of

qualifying income, unreimbursed employee expenses as shown on IRS Form 2106 must

be deducted

• When using actual expenses for a leased automobile, rather than the standard mileage

rate



• Analyze the “Actual Expenses” section of the 2106 to determine the amount of

the lease payments

• Ensure the lease expense is counted only once in the cash flow analysis, either as

an expense on the 2106 or as a monthly debt

• Overtime, RSU, bonus and other variable income types are excluded from this

requirement

RETIREMENT / SAVINGS PLAN LOANS

• Repayment for loans against a 401K, savings plan, or insurance policy may be excluded

from the liabilities provided the borrower can repay the debt by liquidating the assets

• The assets must be reduced by the amount of the debt when calculating total assets for

closing and reserves

STUDENT LOANS

• Deferred student loans are included in the DTI

• Student loans listed as delinquent must be brought current

• If no payment is shown on the credit report, then proof of the actual payment is

required

• If unable to determine a payment, use 1% of the unpaid balance

• If a student loan is charged off or in collection, the following must be provided:

• A copy of repayment agreement and six months canceled checks

• If not in repayment provide evidence that the charged off/collection will not

impact title

INCOME AND EMPLOYMENT

EMPLOYMENT REQUIREMENTS

• Two years stable income derived from employment or other acceptable and verifiable

sources is required

• A complete 2-year history of employment and/or source of income must be stated on

the 1003. If a borrower is a recent graduate or discharged military and does not meet

the minimum length of employment the following is required:

• Diploma and/or transcripts

• Discharge papers

• If the borrower has been at current job less than 2 years a VVOE for the previous

employment is required



• Employment gaps that are greater than 30 days require an explanation letter from the

borrower

• Job gaps of 6 months or more requires the borrower to be in the current job for at least

6 months when the loan is closed

• Paystubs must be computer-generated or typed, not handwritten

• Income derived from a family-owned business must be accompanied by the borrower’s

federal tax returns for the prior 2 years

SELF EMPLOYMENT INCOME

MAXIMUM NUMBER OF BUSINESS ENTITIES ALLOWED

• No limit on the number of Schedule C.

• A transaction may have up to two 1065 and/or 1120 entities between all the borrowers.

• REO held inside an entity is generally not considered an entity for this purpose provided

the entity’s sole purpose is to hold real estate.

• An entity with a percentage ownership that does not require business returns is not

considered in this calculation for max number of entities.

• Transactions that exceed the number of entities may be approved case by case via

exception.

LENGTH OF SELF EMPLOYMENT

A minimum of a two-year history of self-employment is considered stable and effective. Self-employment activity under 2 years may be acceptable if a strong justification can be provided, for example:

• The self-employment is only the result of a change in how the borrower is compensated by their employer, i.e. moving from W2 to 1099

• The borrower has specific education or training in the field for which they are now self-employed

• The borrower has plentiful work experience in the field for which they are now self-employed

• Self-employed income without a minimum of a full 12 months reported on either tax returns or on Personal/Business Bank Statements is not considered acceptable income

INCREASE IN INCOME

• When the borrower has experienced a significant increase in income, the higher income

may not be used unless there is sufficient documentation to determine that the increase

is stable and likely to continue at the amount used for qualifying



DECREASE IN INCOME

• When the borrower has experienced a significant decrease in income, the income

cannot be averaged using a previous higher amount. Any significant decrease in income

must be documented to show the negative trend has reversed or stopped.

• NOTE: A significant increase or decrease is generally considered to be 25%. If the

change in income is severe, it’s use will be subject to underwriter discretion.

REQUIRED DOCUMENTATION FOR UNDERWRITING BUSINESS INCOME

• Federal income tax returns (1040) for the most recent 2 years, including all schedules

• Business tax returns for the most recent 2 years appropriate to entity type

• Dated and signed year to date P&L

• Dated and signed Balance Sheet

• Gap year P&L is required when most recent tax year return has not been filed.

• I.e.: July 14, 2018 – Borrower has extended 2017. 2015 and 2016 return required + 2017 P&L + 2018 YTD P&L

NONCASH EXPENSES THAT MAY BE ADDED BACK TO THE NET INCOME/LOSS

Deductible expenses are depreciation, depletion, amortization, and in some cases a Net Operating Loss (NOL)

• Depreciation is a deduction for the decline in value of an asset such as real or personal

property

• Depletion is a deduction for the useful life of a natural resource

• Amortization of an asset spreads the cost over the asset’s useful life

• A net operating loss (NOL) is a business loss that occurred prior to the current tax year

and the full loss was not recognized in the year it occurred but is spread over future

years. An NOL can be deducted if it can be shown to have been a one-time event.

• Section 179 Expenses mat not be added back to income

TYPES OF BUSINESS STRUCTURES

Sole Proprietorship (Schedule C)

• A sole proprietorship is a business that is owned by an individual. Income is generally reported on the 1040, Schedule C

Partnership (1065)

• If a borrower has a 25% or more ownership in the partnership, they are considered to be self-employed.



• A partnership is formed when two or more individuals form a business and share profits, losses, and manage the business. The partnership does not pay the taxes. The income/loss is passed through to the partners based on the percentage of ownership and is reported to each partner on a K-1.

• Partnership cash flow is determined by analyzing the 1065 tax return

Single Owner LLC (Schedule C or 1065)

• These entities are not required by the IRS to prepare 1065 tax returns. If a borrower owns REO inside a Single Owner LLC and elects to report the REO on page 1 of Schedule E instead of preparing the 1065 then we can treat the REO in one of two ways:

• If property is residential, prepare the normal rental calculation and deduct current PITI from historic rents and obtain the lease to confirm current rents

• If property is commercial then treat like commercial prop inside a 1065: calculate normal add backs to net income, do not confirm current rents or PITI

Corporation (1120)

• A corporation (also known as a C-Corp) is a legal entity that is separate from its owners. If a borrower has 25% or more ownership in a corporation, they are considered to be self-employed

• Corporations file corporate tax returns (Form 1120). Officers who are principals of the corporation generally receive a paystub and a W-2. Use an average of the borrower’s earnings for the past two tax years. Current W2 wages do not enter into the income calculation. Additionally, business tax returns must be analyzed to assess the likelihood of continued personal income

• To calculate corporate income, total tax must be deducted from taxable income

• Retained earnings in the business are not recognized as cash flow to the borrower or to the company

• Income from the corporation is recognized as income to the borrower if he or she is the sole and full owner, and if the withdrawal of funds will have no effect on the corporation’s continued growth

S-Corporation (1120)

• An S-corporation is similar to a standard corporation, the difference is that any profit or loss is reported by the owners on Schedule E of the 1040s. Income for an owner that comes from wages is reported on the individual’s tax return (Form 1040). Current W2 wages not reported on a 1040 are not part of the income calculation

• S-corporation K-1 income represents any guaranteed payments or salary and property distributions including cash

• The borrower’s share is based on his or her percentage of ownership as reported on K-1. Depreciation, depletion, and amortization or casualty loss may be added back to income. Other non-recurring income/loss should be subtracted/added back.

• Retained earnings in the business are not recognized as personal cash flow to the borrower or to the company



ALLOWABLE AGE OF FEDERAL INCOME TAX RETURNS

The most recent year’s tax return is defined as the last return scheduled to have filed with the

IRS

If today’s date is: The most recent year’s tax return is:

February 15, 2019 2017

April 15, 2019 2018

December 15, 2019 2018

AMENDED TAX RETURNS

Tax returns that are amended and filed by the borrower with the IRS are acceptable in the following situations:

Amendment filed prior to the loan application date:

• The original filed return AND

• The amended return AND

• A letter of explanation from the borrower or borrower’s accountant AND

• If the file was amended 60 days or less prior to the loan application date,

evidence of payment must also be provided

Amendment filed after the loan application date

• A letter of explanation for the re-filing AND

• Evidence of filing AND

• Evidence of payment or the evidence of the ability to pay the tax AND

• Borrower may not use of amended income (if increased) for qualification

WAGE EARNER INCOME

• Pay stubs for the most recent 30-day period showing year-to-date income AND

• Two years W2s

• If commission income is 25% or more of the borrower’s qualifying income, two years of

personal tax returns are required

• If an hourly employee’s income does not appear to be stable, a WVOE may be required

to determine the average income

VARIABLE INCOME



Income that varies like commission, bonus, and overtime require a 2-year history and must be

averaged over 2 years. History of commission, overtime and bonus income less than 2 years

may be acceptable, provided justification and documentation are in the file that the income is

likely to continue. A WVOE must be provided in order to use variable income sources.

OTHER INCOME

The following income types will be considered provided that all of the specific stipulations

outlined below are met, and the income is fully documented.

ALIMONY & CHILD SUPPORT

• May be used provided that a three-year continuance is documented AND receipt of six months timely payments that match the court order are obtained.

• NOTE: Voluntary payments cannot be counted as durable income and are ineligible.

ANNUITY INCOME

Income from a retirement annuity is considered eligible income with the following:

• A statement from the financial institution managing the annuity is required to verify the balance in the annuity, the monthly payments and the term of the payments to be distributed

• Payments to the borrower must continue for a minimum of three years

CANNABIS RELATED INCOME

• Activity must be legal in the state where the income is being derived

• Self-employed cannabis activity is not allowed as an income source, for example:

dispensary owner or cannabis grower

• W2 employees are allowed

• Self-employed suppliers to the industry are allowed, for example: irrigation products

producer/distributor

CAPITAL GAIN INCOME

Capital gain or loss that is a one-time transaction will not be considered. If the borrower’s business has a constant turnover of assets that produce recurring gains or losses, the capital gain or loss may be considered in line with the following:

• An average of the gains or losses for the last two years as evidenced on the borrower’s Schedule D can be used

When the income represents a substantial portion of the borrower’s income, the tax returns for the past two years are required (regardless of documentation type) to determine a more



accurate estimate of average earnings. For example, an asset sold during the year might be an income-producing asset, which could result in a reduction in future income.

Borrowers must document an asset base in order to use capital gain or loss on an on-going basis.

FARM INCOME

Net farm income reported on the borrower’s Schedule F is considered eligible income. Depreciation, pension, amortization, and depletion can be added back.

HOUSING ALLOWANCE

Allowed for members of the military or clergy only and documentation to support a minimum of two years continuance. Borrower has a history of receiving the income for last 12 months

INHERITED OR GUARANTEED INCOME

Income received from inheritance, prize earnings, or lottery winnings are eligible with:

• Documentation that the income will continue for at least three years

INTEREST AND DIVIDEND INCOME

• Interest and dividend income may be used when verified with tax returns, the income must be stable for two years. Additional verification is required to evidence that the funds are still on deposit

• Income must be proportionately reduced if funds are used to close in a purchase money transaction

MILITARY INCOME

• Income for clothing allowance, quarters allowance, hardship or hazard pay may be included as stable income if there is a likelihood of continuance

• BAH and BAS allowances may be grossed up due to the nontaxable status

• Other allowances may be grossed up if documentation is provided evidencing it is nontaxable

NOTE INCOME

Note income is eligible with the following:

• A copy of the note outlining the amount and terms of repayment

• The repayment period must extend at least three years from the date of the new loan

• Document the regular receipt of the income for the most recent twelve months



• Payments on a note executed within the past twelve months, regardless of the duration, may not be used

RESTRICTED STOCK UNITS (RSU)

Companies use stock grants that vest over time as a way to award and retain employees. Typically, these grants are awarded yearly and vest in equal unit portions over a period of two to four years. RSU can be considered as qualifying income provided a minimum two-year history of receipt and proof of future awards can be documented. The following must be provided:

• Document awarding RSU

• Distribution schedule showing award date and vesting

• Evidence the stock is publicly traded

• Evidence of the payout of the awarded units (paystub and/or W2)

• Determine the average number of stock units vested over the most recent two year period

• Apply the vested unit average to the lower of the current stock price or the two year average of the stock price

• Current and future vesting schedule must support average units used in income calculation. The declining income rules apply to all facets of the RSU income calculation process

RETIREMENT INCOME

Retirement income can be documented with any of the following:

• Award letters

• 1099 forms

• tax returns

• proof of current receipt

• Documentation must be conclusive

• IRA distributions can be averaged from two years of 1040s or can be derived from a periodic withdrawal from borrower’s IRA funds. For IRA income to be acceptable, the borrower must have unrestricted access without penalty

• Recently commenced periodic withdrawals are acceptable provided they are monthly, the execution order for the withdrawals is required

• Multiple IRA accounts can be linked to meet the 36-month continuance. IRA balances must be discounted by 30% if held in stocks & bonds



SEASONAL EMPLOYMENT INCOME

• Considered if it is documented and consistent for a minimum of two years. Seasonal employment income and unemployment income must be combined in order to calculate income. Continuance for at least three years must be reasonably expected.

SECOND JOB INCOME

Considered if income is based on a two-year average. Continuance for at least three years must be reasonably expected.

TRUST INCOME

Trust income may only come from an irrevocable trust or a revocable trust where a borrower is the beneficiary and has also established the trust:

• A copy of the original Trust Agreement showing the length of time and amount of income that will be received.

• The income must continue for at least three years after closing

• Trust income may be taxed at a lower rate or it may be part of a partnership that writes off losses resulting in no tax liability

• A complete copy of trust agreement or certification letter from bank trust administrator outlining total income paid to the borrower, method of payment, duration of trust and any non-taxable portion is required

• Personal tax returns with all schedules, K-1s, or 1041s or other documentation are required

Lump sum distributions made before loan closing may be used for down payment or closing costs if they are verified by a copy of the check or the Trustee’s letter that shows the distribution amount. If a distribution was made that reduces the trust income, the reduction must be taken into consideration when calculating trust income

UNEMPLOYMENT INCOME

Documentation evidencing it has been received for a specified length of time during the previous two years. Continuance for at least 3 years must be reasonably expected and in line with borrower profession.

INELIGIBLE INCOME

• Foreign Income not reported on 1040

• Contributions or support from family members (other than alimony/child support)

• Deferred income

• Education benefits

• One-time capital gains



• Projected income

• Rental income on a second home, accessory unit or a non-conforming second unit

• Gambling winnings

• Automobile allowances

• Per diem income

RENTAL INCOME: LONG TERM LEASE

Rental income may be used and is calculated using the most recent federal tax return, Schedule E. All owner occupied 2-4 unit properties and all investment properties require a rental income analysis to determine positive or negative cash flow.

PROPERTIES OWNED AT LEAST ONE TAX YEAR

Subject investment property and 2-4 unit owner occupied purchase use lesser of:

• Use gross rental Income from Schedule E

• Use annualized current lease if less than gross rental income on Schedule E

• The current lease, if greater than schedule E rents may be used if supported by a 1007 and two months receipt of rents is documented

PROPERTIES OWNED LESS THAN ONE TAX YEAR

Use 75% of actual rents documented by a lease, a 1007 or 3 months proof of receipt of rent is required to support the lease

Subject investment property and 2-4 unit owner occupied purchase use lesser of:

• 75% of rent survey (1007) OR

• Actual rents if leases transferred with the purchase

• If using projected rents, three additional months reserves are required above program requirements. However, if the borrower has a 2-year history of managing rental property the additional 3-month reserve requirement is not required

NON-ARMS LENGTH (NAL) AND RENTAL INCOME

Rental income received from a family member may not be used as income without copies of the most recent four months cancelled rent checks provided by the tenant family member

EXPIRED LEASES

Properties with expired leases that have converted to month to month per the terms of the lease will require documentation of rents received for the lesser of 2 months or the period after the lease expired



RENTAL INCOME: SHORT TERM RENTAL

Qualifying Income can be used for property that is rented on a short-term basis though services like Airbnb and VRBO. Use of this income is not allowed when generated from the borrower’s primary residence. The borrower must docmuent a minimum of one tax year of income and expenses in order to use as a qualifying income source.

GREATER THAN A 2-YEAR HISTORY

In lieu of current leases, the borrower must document the property has been subject to short-term rental arraignments for a minimum of 2 tax years.

• Income of this type must be averaged over a 2-year period, unless the income trend is declining. A current YTD ledger of rental payments received must also be included and support the 2-year average.

• A host report or equivalent service provider pay history and proof of property listing on website

GREATER THAN ONE YEAR BUT LESS THAN TWO YEARS

For a rental property with less than a two tax year history but at least one tax year reporting. Short-term rental income may still be used provided the following requirements are met:

• A current YTD ledger of rental payments received must also be included to support the income reported on Schedule E.

• Airbnb host report or equivalent service provider pay history and proof of property listing on website

• Rental survey (1007) required, gross income limited to 125% of market rents

LESS THAN 1 YEAR

• Not eligible

CONVERSION OF DEPARTING RESIDENCE TO INVESTMENT PROPERTY

INEXPERIENCED PROPERTY MANAGEMENT

If the Borrower does not have two years of current investment property management experience, the rental income from the departing residence may still be used. Value of departing residence must be evidenced by one of the following:

• A current appraisal (no more than 12 months old from loan application date) OR

• An automated valuation model (AVM) OR

• A conclusive online valuation by a minimum of two providers

Departing Residence - LTV of 75% or less



• A copy of the signed lease and 1007 are required.

• 75% occupancy calculation is used to determine cash flow and four (4) months PITI departing residence required. In addition to the program requirements

If the conditions above cannot be met the following must be applied:

• Departing Residence - LTV of 75.01% to 90% is acceptable provided the borrower has an additional two (2) months of reserves covering the departing property PITI, in addition to program requirements and the conditions above

• Projected rents from the 1007 can be used, absent a signed lease, provided the borrower has an additional four (4) months of reserves covering the departing property PITI, in addition to program requirements and the conditions above

IMPORTANT: reserve requirements listed above are cumulative

EXPERIENCED PROPERTY MANAGEMENT

Borrower has two years of investment property management experience:

The rental income from the departing residence may be used with a copy of a signed lease. The 75% rule can be applied to determine the positive or negative cash flow on the property. Underwriter verification of market rents is required

Projected rents from a 1007 can be used, absent a signed lease, provided the borrower has an additional three months (total of six) of reserves covering the departing property PITI

REAL ESTATE OWNED BY CORPORATIONS AND PARTNERSHIPS

REO held in LLC or other corporate structure is treated in one of following ways:

• if property is residential, and the borrower is personally liable for the mortgage, prepare the normal rental calculation pitting current PITI against historic rents and obtain the lease to confirm current rents

• if property is residential, and borrower is not personally liable for the underlying lien, then treat like commercial prop inside a 1065: add back depreciation/depletion to net income, do not confirm current rents or PITI

if property is commercial then treat like commercial prop inside a 1065: calculate normal add backs to net income, do not confirm current rents or PITI

12 MONTH INCOME DOCUMENTATION

• Wage or Salaried Borrower(s)

• The borrower’s recent paystub (reflecting 30 days of pay and YTD earnings) and W-2 form for the most recent tax year

• Bonus, Commission, and OT are only permitted on Full Income Documentation 24 month



VARIABLE INCOME

Not allowed

SELF-EMPLOYED

• Most recent year of tax returns, personal and business, if applicable, signed and dated by each borrower

• A YTD P&L and balance sheet, both signed

• If a gap exists between the tax return ending date and start of the YTD P&L, a gap year P&L is required

• If a gap year exists, then the P&L for the gap year must support the 1040 provided

• Document a minimum of two years self-employment in the same business enterprise

• Underwriter must consider the financial strength of a self-employed borrower's business

ASSET DEPLETION

Borrowers are qualified on verified liquid assets. The following guides are for using asset depletion towards qualifying income:

• Any type of fully owned personal asset account may be used

• Six-month seasoning of all assets is required

• Accounts which include a non-borrowing spouse are acceptable with access letter

• Non-cash holdings must be discounted to 70%, or 60% if inside an IRA and borrower is under 59 ½ years old

• Six-month seasoning of all assets is required, large deposits must be excluded if not sourced from other assets, employment or sale proceeds. Recent transfers from a borrower-owned business must be consistent with income or they will be excluded

• Non-cash holdings cannot be moved to cash holdings post application

• Down payment, closing costs and reserves must be excluded from total available assets

• Minimum required assets must equal 1.5 times loan amount in order to use towards asset depletion income -Only required if asset depletion is 80% or more of total monthly income

• If asset depletion income represents less than 80% of total monthly income, minimum required assets is $100,000

• After the qualifying assets total is determined the total is divided by 120 to determine the amount of monthly qualifying income



• This income source can be used in conjunction with any other income source towards total qualifying income

• Cash out transactions are ineligible

• Non-Occupant co-borrowers not allowed

Asset Type Qualifying Percentage

Checking, Savings, Money Market Accounts 100%

Publicly traded Stocks, Bonds and Mutual Funds 70%

Restricted Stock Units (vested units at current price) 70%

Retirement Accounts (401K IRA, SEP, KEOUGH)

Borrower is < 591/2 years old

Borrower is > 591/2 years old

60%

70%

INELIGIBLE ASSETS FOR ASSET DEPLETION

• Stock options

• Privately held stock

• Unvested Restricted Stock Units

• Foreign funds

• Deferred compensation

• Non-liquid assets (automobiles, artwork, business net worth, etc.)

• Business funds

• HELOC draws

PERSONAL BANK STATEMENT (12 & 24 MONTHS)

The use of personal bank statements to document a self-employed borrower’s qualifying income is allowed. The intention of the program is to capture net income or profits pushed from the borrower’s business accounts. Personal bank accounts used for daily business activity are allowed but are subject to Business Bank Statement underwriting guidelines. The bank statements need to support that the income is stable and likely to continue. Income must be consistent with borrower’s profession.

Non-arm’s length transactions or income from foreign sources are ineligible.

ELIGIBLE BORROWERS



To be eligible for this program, the borrower must earn a significant portion of their income (greater than 50%) from self- employment OR other non-wage earner income.

Typically, these borrower (s) are:

• Borrowers who derive their primary income from commissions or consultation fees

• The borrower’s business may be a sole proprietorship, a partnership (general or limited), or a corporation

• Self- employed borrowers must be able to document, by a neutral third-party, that the business has been in operation for the previous two calendar years and that they have had ownership for that period of time. Less than 2 years self-employment may be acceptable, see LENGTH OF SELF-EMPLOYMENT section.

• Third-party verifications include but are not limited to:

• A CPA letter

• Documentation from a regulatory agency or professional organization

• A current valid business license

• Borrowers who receive passive income such as interest, dividends, capital gains

• Borrowers who receive real estate rents (see section specific to REO)

INCOME DOCUMENTATION REQUIREMENTS

The Borrower’s application must include all sources and amounts of income. The bank statements must support the income listed on the application. The lesser of the income listed on the 1003 or the calculated income from the bank statements will be used.

Bank statements reflecting the occurrence (one time or isolated incident) of NSF checks, wire transfers overdraft protection transfers, negative ending balances and transfers from other accounts must be satisfactorily explained and documented. Bank statements reflecting multiple NSF checks, overdraft protection transfers, negative ending balances, or lack a satisfactory explanation indicate cash flow problems and are not eligible.

ELIGIBLE BANK ACCOUNTS

The following outlines the types of bank statements that are eligible for the bank statement programs

• All personal accounts with a minimum 12-month history. Two or more bank accounts cannot be combined to meet the history requirement

• One bank account per borrower(s) is allowed, however, more than one account may be acceptable on an exception basis

INELIGIBLE BANK ACCOUNTS



The following outlines the types of bank statements that are ineligible for bank statement programs.

• Bank statements reflecting other individuals who are not applicants for the loan are not eligible. However, if the Borrower’s spouse is on the personal bank account and not on the loan, 50% of the total qualifying deposits may be used

• Non-institutional accounts like PayPal or Venmo are typically not allowed

CALCULATING INCOME FROM PERSONAL BANK STATEMENTS

100% of the qualified deposits from the borrower’s personal account can be used. The average deposits will be used to determine the borrower’s income for qualification purposes. Deposits must be typical and consistent for the borrower’s line of work. Deposits outside the trend or those which are obviously one-time events, like the sale of an asset, will be excluded. The underwriter will use discretion when determining which deposits to exclude.

PERSONAL BANK STATEMENTS WITH RENTAL INCOME

Borrowers with REO can use the income in one of two ways:

Method 1: Deduct 5% from the average monthly income for every REO and apply full PITI to the liabilities. For example, if the borrower has three REOs then only 85% of the average monthly deposits can be used for qualifying income and the full PITI for all 3 properties is applied to the liabilities. Borrower’s regular income must exceed 125% of REO income in order to use this method. The underwriter will utilize an online fair market rent provider based on the address of the REO to determine the rough percentage of income attributed to the REO.

Method 2: Remove the documented rent deposits from the bank statement calculation and apply the 75% rule to the rental amount, 75% of the monthly lease payment can be deducted from the PITI. A net positive is added to the income, a net negative is added to liabilities. In order to use this method a lease agreement must be provided which positively identifies the rent deposits on the personal bank statements. 1040s and tax transcripts are not required for Method 2

PERSONAL BANK STATEMENTS WITH RETIREMENT OR WAGE EARNER INCOME

Borrowers with W2 or retirement income can use that income in the following manner:

• W2: Wage income can be removed from the bank statements and derived via full documentation methods with paystubs, W2 and WVOE if needed. The deposits must be positively identified by the supporting full documentation provided. W2 tax transcripts will be required.

• Retirement: Pension, SSI, IRA, & Annuity income can be removed from the bank statements and documented with award letters, or 1099. The deposits must be positively identified with the supporting full documentation provided. For wage and



retirement income, either method can be used. The benefit of using full doc standard documentation is to be able to use the gross amounts as opposed to the net amounts that hit the borrower’s personal bank statement.

BUSINESS BANK STATEMENT - 12 AND 24 MONTHS

This documentation option allows for the use of business banks statements to support the income listed on the 1003. Two methods of supporting the income can be used, one must be selected. Method 1 uses a P&L to determine the borrower’s net income from the business, Method 2 uses a fixed expense ratio to determine net income. Less than 2 years self-employment may be acceptable, see LENGTH OF SELF-EMPLOYMENT section.

REQUIRED DOCUMENTATION

The following documentation is required:

• 12 or 24 months of business banks statements covering the same period as the P&L

• A maximum of two business checking, or savings accounts can be used

• Document that the business has been in existence for a minimum of two years

• Borrowers with less than 100% ownership in the business can use income commensurate with their documented percentage of ownership

• Borrowers with 50% ownership are acceptable provided the percentage of ownership can be documented with a partnership agreement or other conclusive documentation

• Borrowers with less than 50%, but not less than 20%, ownership are acceptable provided they can document percentage of ownership as per above AND can document active participation in the business. Less than 35% ownership requires the business has been in existence for 5 years or more

PROGRAM REQUIREMENTS

The following requirements apply when analyzing the business bank statements:

• Business bank accounts or personal bank accounts addressed to a DBA are allowed

• Wire transfers and transfers from other accounts must be documented as business income or they must be excluded

• Review of the statements must document a trend of ending balances that is stable or increasing

• A downward trend in ending balances inside the 12 or 24 months must be reviewed to determine the overall strength of the income stream. Some businesses are seasonal and short-term negative trends may be normal

DETERMINING QUALIFYING INCOME ON METHOD 1: P&L



The following P&L requirements apply

• P&L statement covering the same 1 or 2-year period as the bank statements

• YTD P&L is required if the P&L is greater than 120 days old at time of closing

The lesser of the following income figures will be used

• Monthly net income from the P&L

• Income indicated on the initial signed 1003

The monthly gross revenue (annual revenue divided by 12 or 24) from the P&L must be supported by the business bank statements. Total monthly average deposits per bank statements, net of any disallowed deposits, must be within 10% of monthly gross revenue reflected on P&L. Aligning the bank statements with the P&L provides the best opportunity stay within the 10% variance.

DETERMINING QUALIFYING INCOME ON METHOD 2: FIXED EXPENSE RATIO

In lieu of documenting expenses with a profit loss, a fixed expense ratio may be used. The

borrower must provide:

A brief, signed and dated, narrative describing the business activity containing the following

information:

1. Type of business

2. Number of full-time employees or contractors on average

3. Years in operation

4. Borrower’s role in the daily operation of the business

5. Business entity type

Fixed Expense Ratio

Number of Full Time Employees 0 1-5 >5

Service Business 20% 40% 60%

Product Business 40% 60% 80%

Service Business Examples – Consulting, Accounting, Legal, Counseling, Therapy, Financial Planning, Insurance, Information Technology, etc.

Product Business Examples – Retail, Food Services/Restaurant, Manufacturing, Contracting/Construction etc

The lesser of the following income figures will be used



• Monthly net income from the fixed ratio calculation, OR

• Income indicated on the initial signed 1003

DOCUMENTING NON-BUSINESS BANK STATEMENT INCOME

Use standard full doc methodology for documenting other income like a spouse W2 job. For any income that would normally require tax returns, use alternative methods to document the income, for example:

• For rental income provide the current lease and apply the 75% rule

• For a spouse with a commission income-producing job, provide a WVOE and use 85% of the commission income to account for 2106 expense

• Tax transcripts for income normally documented on the 1040 are not required but will be required for any income that can be verified with W2 transcripts, like W2 income

• For SSI provide award letter and two months proof of receipt, transcripts not required

TAX TRANSCRIPTS

Transcripts are required for all income used to qualify, however, transcripts are not required for asset depletion income, bank statement income or 1040 type income used in conjunction with the bank statement program, i.e. rental income. Business transcripts are not required provided all business income is reported on the 1040 and validated by 1040 transcripts, however signed 4506-Ts are required.

If the most recent year’s tax transcript is not available, the income may be used provided:

• Tax returns are officially stamped return by the IRS “as received” OR

• Evidence that the return was electronically received, must reflect refund or amount owed to IRS AND

• Evidence of a refund check or payment made AND

• Non-validated income must be in-line with prior year’s validated income. Non-validated income with significant increases may not be considered or averaged.

The above only applies to situations where 2 years of income docs have been provided, for programs only requiring only 1 year of income docs, they must be validated with transcripts

ASSETS

• Assets and reserves must be sourced and seasoned for at least 60 days

• All borrower assets need to be deposited in U.S. financial institutions



• If using company or employer-sponsored retirement plan for reserves, a Terms of Withdrawal (TOW) from the employer is required. TOW must provide for hardship withdrawal specific to the subject transaction

• Large deposits must be explained and sourced on all purchase transactions

• A large deposit is considered an amount that is greater than 50% of the borrower’s gross monthly income

• Documentation supporting the source of the funds may be required

• On refinance transactions, large deposits create less risk and underwriter discretion can be applied to each specific situation

MINIMUM BORROWER CONTRIBUTION

• The borrower must make a minimum down payment of 5% from own funds

• At 80% LTV/CLTV or less, the full down payment may come from a gift

• Closing costs may also be in the form of a gift

BUSINESS FUNDS

When using business funds its necessary to determine the borrower’s percentage of ownership

in the business and to validate the borrower’s ability to access business funds without any

negative impact to the business.

Sole Proprietor:

• Verify that the borrower has 100% ownership of the business

Partnership:

• Verification of the ability to withdraw funds based on the percentage of ownership and

approval of the general partner is required

Corporation:

• Verification of the ability to withdraw funds based on the percentage of ownership and

approval of the other stockholders is required

Self-employed borrowers using business funds:

• All funds must be seasoned with the source of funds for any large deposits fully

documented

• Evaluate the impact of using business funds:

• Develop a trend analysis using a minimum of 3 months business bank statements

• Determine the starting, ending, incoming and outgoing averages

• Evaluate the average ending balance against the average outgoing to determine

if using business funds for the purchase will have a negative impact on the

business



RETIREMENT ACCOUNTS

Vested funds from individual retirement accounts (IRA) and retirement savings accounts (401K) are acceptable sources of funds for down payment, closing costs and reserves.

Verify the borrower’s ownership of the accounts and the borrower’s receipt of the funds from the liquidation of the assets.

For any non-IRA retirement account, it is required to document that the borrower has access to these funds in a manner that is specific to the transaction. The Terms of Withdrawal (TOW) from the employer is required. The TOW must allow for withdrawals specific to transaction type.

NOTE: Many 401k accounts do not allow hardship withdrawals for investment property. Many state or municipal retirement plans do not allow any type of withdrawal.

When using retirement funds as reserves, any variable value assets including stocks, bonds and mutual funds must be discounted to 70% for borrowers 59½ and older. Discount to 60% when borrowers are younger than 59½

BORROWED FUNDS SECURED BY ASSETS

Proceeds from a loan that was fully secured by the borrower’s assets qualify as a source of funds to close, subject to the following requirements and guidelines:

• The loan must be secured by an asset owned by the borrower, such as a CD, stock,

bond, real estate (other than the subject property), life insurance policy, savings

account, or a bridge loan

• The loan must be from an institutional lender

• A copy of the executed note reflecting the terms and proof of the receipt of the funds

must be provided

SALE OF REAL PROPERTY

If the source of funds to close is proceeds from the sale of real estate owned by the borrower, the final settlement statement, final ALTA or final CD is required to evidence the amount of net proceeds as well as receipt of the proceeds by the borrower.

GIFT FUNDS

Gift funds may be used towards the down payment, prepaid items, closing costs and financing costs of a primary residence only. Gift funds must come from an immediate family member only. Immediate family members are defined as: Parents and Step Parents, siblings, children, aunt/uncle and grandparents. Cash gifts or equity gifts are allowed.



A down payment of 100% from gift funds is allowed for LTVs that are less than or equal to 80% or the program max (whichever is less) when no secondary financing exists. Closing costs may also be in the form of a gift. Reserve requirements must be met by the borrower’s own funds.

Gift funds must be verified by the following:

• Signed and dated gift letter by donor and borrower(s)

• Must indicate the donor’s relationship to the borrower

• Donor’s address and phone number

• Subject property address

• Dollar amount of the gift

• Certification that it is a gift with no repayment required

• Document receipt of funds into borrower’s bank account or directly into escrow

NOTE: Gift funds are not permitted from any donor that is a party to the transaction (except gifts of equity from the seller)

INELIGIBLE ASSETS AND SOURCES OF FUNDS

• Stocks held by privately held corporations

• Stock options (unless exercised)

• Non-vested restricted stock units

• Cash-Out refinance proceeds (allowed if from non-subject property)

• Non-financial assets (collectables, stamps, coins, artwork, etc.)

• Assets held in an irrevocable trust

• Custodial accounts

• Escrow accounts

• Accounts pledged as collateral on another loan

• Foreign assets

RESERVE REQUIREMENTS

For ARM loans and loans with Interest Only payments whose initial term is less than 5 years,

the reserves calculation is based on the qualifying payment, for terms of 5 years or more the

actual payment is used

• Loan amounts <= $1,500,000 require 6 months PITI

• Loan amounts > $1,500,000 require 12 months PITI

• Each additional property financed requires 2 months PITI

• DTI >50% at any loan amount requires 12 months PITI



• Departing residence converted to rental without landlord history with LTV of 75% or less requires 4 months PITI

• Departing residence converted to rental without landlord history and LTV 75.01 to 90% requires 6 months PITI

• Using 1007 projected rents requires an additional 4 months PITI

INVESTOR PRO ONLY

Verification of assets is required for purchase or refinance transactions to evidence sufficient funds to close only. There is no reserve requirement for the Investor Pro product

SOURCE OF RESERVES

• Reserves must be from the borrower’s own funds

• Reserves may come from non-subject refinance proceeds

• Reserves may come from a subject cash-out refinance, however, no more than 10% of the subject’s value in loan proceeds may be used for reserves

• Properly documented business funds can be used to meet reserve requirement

• The cash or surrender value of a life insurance policy is acceptable to use for reserves

• 529 accounts can be used for reserves provided the borrower is the owner of the

account, not the child who would typically supply the educational need where the

account would be used

TRANSACTIONS NOT REQUIRING RESERVES

• Rate & Term refinance with DTI of 43% or less and have a payment lower than current payment. All other non-subject reserve requirements remain

• Cash out refinance with DTI of 43% or less and either PITI is lower than current PITI OR

global debt payment is being reduced by a minimum of 10%. All other non-subject

reserve requirements remain

PROPERTY TYPES

ELIGIBLE PROPERTY TYPES

• Single-Family Residence & PUD - No LTV restrictions

• Warrantable Condo - MAX 85% LTV / CLTV

• Non-Warrantable Condo - MAX 80% LTV / CLTV - not eligible for cash out

• Multi-Family (2-4 units) - MAX 80% LTV / CLTV



MODULAR HOME

Modular homes are factory-built homes constructed to the state, local, or regional building codes Modular homes are multi-sectioned units that are transported to the site and installed. At least two comparables must be a modular/prefabricated home.

PLANNED UNIT DEVELOPMENT (PUD)

Attached PUDs must meet the following requirements:

• At least 90% of the total units in the project have been conveyed to the unit purchasers

• The project is 100% complete, including all units and common elements

• The project is not subject to additional phasing or annexation

RURAL PROPERTY

If the property has any of the following characteristics it is considered rural:

• Classified as rural by the appraiser

• Property located on a non-paved road

• The majority of the comparable properties are more than five miles from the subject

property

• Appraiser notes that less than 25% of the surrounding market area is developed

Rural properties are acceptable on primary residence, rate and term or purchase with a

maximum LTV of 80%

CONDOMINIUM

A warrantable condominium is a condominium project that meets agency-eligibility standards and insurance requirements.

• Only established projects are acceptable (see definition in next section)

• Projects that require a review must be have a full condo review performed, a limited review is not acceptable

• Projects not requiring a condo review are detached units and 2 to 4 unit projects. If the subject property condo is detached, the project can be either all detached or a mix of attached and detached units

Ineligible Condominium Project Types

Refer to Fannie Mae Seller Guide

Eligible Non-Warrantable Condo Projects



Investment Concentration Up to 60% allowed

Single Entity Ownership Allowed up to 20% allowed

Live / Work Space Allowed

Delinquent HOA Dues No more than 20% of units may be 60 days or more past due

Commercial Space Up to 35% allowed

HOA Reserves Minimum 8% reserve allocation required

Litigation Minor non-structural litigation may be allowed

ESTABLISHED PROJECTS

The project is 100% complete, and is not subject to additional phasing or annexation AND

90% or more of the total units have been sold to someone other than the developer AND

The control of the HOA has been turned over to the individual owners

CONDOMINIUM PROJECT REVIEW

The following documentation is required on all condo property transactions:

• Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073/465 or Form 1075/466

• HOA full questionnaire/certification

• Master Insurance

• Covers 100% of insurable replacement cost of project improvements, common areas and all units in the project

• Fidelity Bond

• Covers at least three months HOA dues

• Liability Insurance

• At least $1,000,000 coverage per occurrence

• HO6- (Walls-In) Insurance (if required)

• HOA provided flood insurance if required

• Current project budget

• At least 10% of the budget covers replacement reserves for capital expenditures and deferred maintenance

• Additional documents may be required, such as CC&Rs and bylaws, articles of incorporation, project legal documents, etc. These docs are typically not required but may be needed based on the review of the HOA Cert.



INELIGIBLE PROPERTY TYPES

The following property types are not acceptable:

• Mixed-use properties

• Properties that have been modified to accommodate home businesses

• Working farms or ranches

• Properties zoned agricultural, commercial, industrial, or business (where highest and best use is not residential

• Properties with more than 10 acres

• Properties that do not support year-round occupancy

• Condo-hotels or resort style condo projects

• Condo conversion with less than 3 years from completion date

• Motel conversions

• Property that does not have full utilities installed to meet all local health and safety requirements

• Unique housing types including but not limited to earth and geodesic

• Property condition ratings of C5 and C6

• Properties located in declining markets (as determined by the appraisal, CDA, Enhanced BPO) are subject to 10% reduction in max LTV

• Any property type less than 600 square feet without at least two similar comps

• Manufactured housing

Recently Listed Property - Portfolio Plus and Expanded

• Properties listed at the time of application are not eligible

• Properties listed in the 6 months prior to the application date are not eligible for cash out transactions

• Properties listed in the period between 3 months and 6 months from application date may be eligible for R&T refi case by case on exception basis

Properties listed for sale - Investor Pro

• To be eligible for either a rate/term or a cash-out refinance, the subject property must be taken off the market on or before application date. The borrower must also confirm in writing the reason for the prior listing.



• For cash-out transactions, if the subject property was listed for sale in the 6 months prior to application date, a 10% LTV reduction from the maximum available for the specific transaction is required.

• The lesser of the most recent list price or the current appraised value should be used to determine loan-to-value for both rate/term or cash-out transactions.

APPRAISAL REQUIREMENTS

Loan amounts up to and including $1,500,000 require one appraisal and a Clear Capital

Collateral Desktop Analysis (CDA)

• On the CDA a 10% tolerance is allowed. If the CDA value is more than 10% below the appraised value, the lower of the two values must be used

• If the tolerance exceeds 10% and the lower value is to be disputed, then a field review is required. If the field review value is within 10% of the original appraised value, then the original value may be used. If the variance between the original appraised value and the field review is greater than 10% a second full appraisal is required. The lesser of the two appraised values will be used.

• All appraisers must be state licensed, and a copy of the appraiser’s current license and current E&O insurance is required

• Appraisals must be dated within 120 days of the Note date

• Re-Certifications are required if appraisal is greater than 120 days

• Maximum appraisal age is 180 days

• Transferred appraisals are allowed on a case-by-case basis. If any corrections or comments to the appraisal are required, Broker is responsible for obtaining. If the necessary corrections / comments can't be obtained, the appraisal will not be acceptable.

• FHA/VA appraisals are not allowed

• When appraisal cites missing Smoke/CO detectors or unstrapped water heaters in locations where required by state or local ordinances, proof of installation can be provided by the borrower. The following items are required:

• Proof of purchase of device AND

• Photographic proof of installation OR

• A 1004D may be provided

Loan amounts > $1,500,000 require two appraisals, but do not require a CDA.

• When two full appraisals are provided, they must be completed by different independent appraisers and the lower of the two appraised values is used



DISASTER AREA REQUIREMENTS

If the subject property is located in an area that is declared a federal disaster area, a post-disaster inspection is required.

Refer to FEMA site: http://www.fema.gov/disasters.

APPRAISAL COMPLETED PRIOR TO DISASTER

An exterior inspection is required, if exterior damage identified then an interior inspection will be required

The original appraiser should perform the post-disaster inspection, if the original appraiser is not available the AMC may select a licensed appraiser to complete the inspection

The inspection report must state that the property is free from damaged and is in the same condition as previously appraised

Marketability and value remain the same

All repairs noted must be completed

APPRAISAL COMPLETED AFTER DISASTER

Appraiser should note any damage and its impact on

Appraiser must comment on any damage and its effect on marketability and value

INVESTOR PRO

Investor Pro is designed for investment or non-owner occupied loans that are designated for business purposes only. This section outlines requirements specific to the Investor Pro.

For the Investor Pro, the following forms and disclosures are required:

• Business Purpose & Occupancy Affidavit (all borrowers are required to sign prior to submission and at closing to declare that the property is, or will be, for commercial business or investment purpose only). This form includes a notary seal, the form submitted PTD with the application is not required to be notarized.

• 1-4 Family Rider/Assignment of Rents (FNMA Form 3170)

• Guaranty (if applicable)

PREPAYMENT PENALTIES, POINTS, AND FEES

Total points, fees, and APR may not exceed current state and federal high-cost thresholds.

Prepayment penalties are required on Investor Pro transactions except where prohibited by law. See the Investor Pro Matrix for details.

http://www.fema.gov/disasters



Note: States may impose different definitions of points and fees, rate/APR, or prepayment penalties that apply under HOEPA. States may also use different triggers in each category for determining whether a loan will be a "high-cost mortgage" (or equivalent terms) under state law. As a matter of policy, Newfi does not purchase loans defined as high-cost mortgages (or equivalent terms) under Federal or state law, regardless of the basis for the loan's treatment as such.

OCCUPANCY

The Investor Pro allows for financing of investment properties only.

All borrowers must presently maintain a primary residence. Evidence of primary occupancy is required.

Borrowers who own a primary residence must provide:

• Proof of ownership of a primary home superior in value and/or appeal to subject

Borrowers who rent a primary residence must provide:

• Evidence of an active lease in place

• Primary residence should be supported by one of the following characteristics:

o Geographically consistent with borrower’s place of employment; or

o General appeal and location of primary is superior to subject property

DETERMINING LOAN-TO-VALUE

If the property was acquired ˃ 12 months from application date, the appraised value must be used to determine loan-to-value.

For properties acquired between 6 and 12 months from application date, the maximum loan-to-value cannot exceed 65% based on the current appraised value.

If the property was acquired < 6 months from application date, the lesser of the current appraised value or the previous purchase price plus documented improvements (if any) must be used. The purchase settlement statement and any invoices for materials/labor will be required.

CASH OUT LIMITATIONS

A signed letter from the borrower disclosing the purpose of the cash-out must be obtained on all cash-out transactions.

Proceeds of the loan are limited to the purchase, improvement, or maintenance the subject property. Utilizing proceeds of the loan for personal, family, or household purposes is prohibited – except when paying off equity partners of a legally awarded property.

The purpose of the cash-out should also be reflected on the loan application.



Maximum cash-out amount is $500k

CONTINUITY OF TITLE AND PROPERTY FLIPS

Flips are not allowed - Seller must be in title for > 180 days

INHERITED AND AWARDED (THROUGH DISSOLUTION OF MARRIAGE OR DOMESTIC PARTNERSHIP)

PROPERTIES

Refinances of inherited properties and properties legally awarded to the borrower (divorce, separation, or dissolution of a domestic partnership) are allowed. If the subject property was acquired < 12 months prior to loan closing, the transaction is considered a cash-out.

These transactions are subject to the following:

• Written agreement signed by all parties stating the terms of the buyout and property transfer must be obtained

• Equity owners must be paid through settlement

• Subject property has cleared probate and property is vested in the borrower’s name

• Current appraised value is used to determine loan-to-value

FIRST-TIME INVESTOR

A First-Time Investor is a borrower who has not owned at least one investment property for at least 12 months anytime during the most recent 12-month period. See the Investor Pro matrix for restrictions for First-Time Investors.

VESTING IN THE NAME OF A BUSINESS ENTITY

Vesting in the name of an LLC, partnership, corporation, or S-corporation is acceptable on investment property transactions only. Vesting a loan in an Business Entity, the following requirements must be met:

• Business purpose and activities are limited to ownership and management of real estate

• Business Entity is limited to a maximum of 4 ‘owners’ (owners are members, partners, or shareholders, as the case may be)

• All Entity owners must provide a personal Guaranty for the loan

• Each Entity owner must complete a l003. The loan application, credit report, income and assets for each owner will be used to determine qualification and pricing.

• Each Entity owner must receive notice of the loan and its terms prior to closing

The following Entity documentation must be provided:

• Entity Articles of Organization, Partnership, and Operating Agreements (if applicable)

• Tax Identification Number



• Certificate of Good Standing

• Certificate of Authorization for the person executing all documents on behalf of the Entity

Documents must be completed and signed as follows:

• Business Purpose and Occupancy Affidavit – required at loan submission and signed by each owner

• Loan Application (1003)

o Completed and signed by each owner

o 1003 section labeled “Title will be held in what Name(s)” should be completed with only the Entity name

• Disclosures (GFE, TIL, Notice of Intent to Proceed, Servicing Disclosure, etc.) - completed and signed by each owner

• Guaranty - completed and signed by each owner (or ‘Guarantor’)

• HUD-1- completed and signed by each owner

• Other Closing Documents (Final TIL, Business Purpose and Occupancy Affidavit, etc.) Completed by the authorized owners(s) of the Entity that can legally sign and bind Entity

• Note, Deed of Trust/Mortgage, and all Riders - completed by the authorized owner(s) of the Entity who can legally sign and bind Entity

DSCR (DEBT-SERVICE COVERAGE RATIO)

A Debt-Service Coverage Ratio (DSCR) may be calculated for the subject property to take advantage of expanded LTVs.

See the INVESTOR PRO Matrix for available LTVs when the DSCR is ≥ 1.15%. The DSCR calculation is as follows:

• Debt-Service Coverage Ratio = Gross Income / Proposed PITIA

• To calculate gross income, use the lower of the (a) executed lease agreement or (b) market rent from appraisal form 1007. If the executed lease agreement reflects a higher monthly rent, it may be used in the calculation when evidence of receipt of the higher amount for the three most recent, consecutive months is provided.

NO RATIO

No additional documentation is required when qualifying under No Ratio. See the INVESTOR PRO Matrix for available LTVs. A 1007 and 216 are required for both the DCSR and No Ratio qualification methods.