Conventional Lending Guide 11/18/2014
Conventional Lending Guide 11/18/2014 Equal Housing Lender. © 2014 Homeward Residential, Inc 1525 S. Beltline Road | Coppell, TX 75019. (877) 937-4887. Homeward Residential NMLS # 3984, applicable for all states EXCEPT MA & VA. The trademarks HomewardSM, Homeward ResidentialSM and the Homeward logos are trademarks of Homeward Residential, Inc. Trade/service marks are the property of Homeward Residential. Some products may not be available in all states. Information, rates and pricing are subject to change without prior notice at the sole discretion of Homeward Residential, Inc. All loan programs subject to borrowers meeting appropriate underwriting conditions. Advertisement for Mortgage Professionals Only. This is not a commitment to lend. Other restrictions apply. All rights reserved. Conventional Lending Guide 100 - Table of Contents 100 - CONVENTIONAL GUIDE ........................................................................ 100-1 INTRODUCTION ................................................................................................ 100-1 Purpose ........................................................................................................ 100-1 Underwriting Guidelines.................................................................................. 100-1 Application .................................................................................................... 100-1 Electronic Signatures...................................................................................... 100-2 Underwriting Decision .................................................................................... 100-2 LOAN LIMITS ................................................................................................... 100-3 Loan Limits ................................................................................................... 100-3 UNDERWRITING OPTIONS ................................................................................... 100-4 Overview ...................................................................................................... 100-4 Manual Underwriting ...................................................................................... 100-4 Acceptable DU Decisions................................................................................. 100-4 DU Decisions ................................................................................................. 100-4 LP Decisions.................................................................................................. 100-5 AUS Underwriting .......................................................................................... 100-5 DU Tolerances ............................................................................................... 100-6 LP Tolerances ................................................................................................ 100-7 BORROWER ELIGIBILITY ..................................................................................... 100-8 Overview ...................................................................................................... 100-8 Primary Borrower .......................................................................................... 100-8 Purchasing Co-Borrower ................................................................................. 100-8 Maximum Number of Borrowers....................................................................... 100-8 First-Time Homebuyer .................................................................................... 100-9 Non-Purchasing Co-Owner ............................................................................ 100-10 Co-Signors.................................................................................................. 100-10 Non-Occupant Co-Borrower........................................................................... 100-10 Remote Spouses .......................................................................................... 100-11 Non-Arms Length Transaction - Borrower ....................................................... 100-12 Non-Arms Length Transaction – Other Parties ................................................. 100-13 Realtor and Loan Officer ............................................................................... 100-13 Purchasing from a Builder ............................................................................. 100-13 Transactions with Non-Family Members .......................................................... 100-13 Transactions with Family Members ................................................................. 100-14 Borrower is an Interested Party to the Transaction ........................................... 100-15 Customer Loans .......................................................................................... 100-15 Eligible Borrowers ........................................................................................ 100-16 Ineligible Borrowers ..................................................................................... 100-16 U.S. Citizen ................................................................................................. 100-16 Permanent Resident Alien ............................................................................. 100-17 Non-Permanent Resident Alien ...................................................................... 100-18 Visa Classifications....................................................................................... 100-19 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-i Conventional Lending Guide Trailing Co-Borrower Income ......................................................................... 100-19 Multiple Mortgages and Maximum Exposure .................................................... 100-20 Multiple Mortgages and Maximum Exposure - Multiple Properties Table .............. 100-21 Multiple Mortgages and Maximum Exposure (Con’t) ......................................... 100-22 Eligibility Requirements for Borrowers with Five to Ten Financed Properties ........ 100-23 Underwriting requirements for borrowers with five to ten financed properties: .... 100-24 Inter Vivos Revocable Trust .......................................................................... 100-25 Trust Definitions .......................................................................................... 100-26 Inter Vivos Trust – Compliance Requirements ................................................. 100-26 Obtaining Copies of the Trust ........................................................................ 100-27 Ineligible Trust Scenarios.............................................................................. 100-27 Closing Documents ...................................................................................... 100-27 Trust Title Requirements............................................................................... 100-28 Executing the Loan Documents...................................................................... 100-29 Executing the Loan Documents, (Con’t) .......................................................... 100-30 Inter Vivos Revocable Checklist ..................................................................... 100-31 Borrower Power of Attorney .......................................................................... 100-32 Borrower Power of Attorney, (Con’t) .............................................................. 100-33 CREDIT ......................................................................................................... 100-34 Overview .................................................................................................... 100-34 Age of Documents ....................................................................................... 100-34 Electronic Credit Reports .............................................................................. 100-35 Representative Credit Score .......................................................................... 100-35 Tradelines ................................................................................................... 100-36 Credit Report Inquiries ................................................................................. 100-36 Residential Mortgage Credit Report ................................................................ 100-37 In-File and Merged In-File Reports ................................................................. 100-37 Non-Traditional Credit Report ........................................................................ 100-38 Delinquency and Derogatory Credit ................................................................ 100-38 Bankruptcy ................................................................................................. 100-39 Foreclosure ................................................................................................. 100-40 Foreclosure, (Con’t) ..................................................................................... 100-41 Foreclosure, (Con’t) ..................................................................................... 100-42 Deed in Lieu, Pre-Foreclosure, Short Sale ....................................................... 100-43 Restructured Loans ...................................................................................... 100-44 Charge-Off of Mortgage Accounts .................................................................. 100-45 Collections and Non-Mortgage Charge-offs ...................................................... 100-45 Past Due Accounts ....................................................................................... 100-46 Judgments, Garnishments and Outstanding Liens ............................................ 100-46 Nebraska Alimony / Child Support Liens ......................................................... 100-46 Disputed Credit Information .......................................................................... 100-47 Consumer Credit Counseling ......................................................................... 100-47 Housing History ........................................................................................... 100-48 Commercial Property.................................................................................... 100-48 First Time Homebuyers................................................................................. 100-48 Departing Property ...................................................................................... 100-49 Conventional Lending Guide 100-ii Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide EMPLOYMENT AND INCOME ................................................................................ 100-50 Overview .................................................................................................... 100-50 Tax Return Documentation ........................................................................... 100-50 Amended Tax Returns .................................................................................. 100-51 Taxpayer Identification Theft......................................................................... 100-52 Newly Employed .......................................................................................... 100-53 Extended Employment Gaps.......................................................................... 100-54 Temporary Leave of Absence – Returning Before First Payment ......................... 100-54 Temporary Leave of Absence – Returning After First Payment ........................... 100-55 Stability of Employment / Income – Standard ................................................. 100-56 Stability of Employment / Income - Furlough .................................................. 100-56 Allowable Age of Federal Tax Returns ............................................................. 100-57 Self-Employed and Tax Extensions................................................................. 100-58 Borrowers who have filed 2013 tax returns and the IRS transcript indicate “No Record of Return Filed” ............................................................................................... 100-59 IRS Form 4506-T Not Required to File ............................................................ 100-59 Multiple IRS Form 4506-T ............................................................................. 100-60 Alternatives to the IRS Form 4506-T .............................................................. 100-60 Alimony / Child Support / Separate Maintenance ............................................. 100-61 Auto Allowance ............................................................................................ 100-62 Calculating Auto Depreciation / Expenses ....................................................... 100-63 Boarder Income........................................................................................... 100-63 Bonus and Overtime .................................................................................... 100-64 Capital Gains............................................................................................... 100-65 Housing (Non-Military) or Parsonage Allowance ............................................... 100-65 Commission Income ..................................................................................... 100-66 Disability Benefits ........................................................................................ 100-67 Dividends and Interest ................................................................................. 100-68 Employed by Family Members ....................................................................... 100-68 Employees not required to file US Income Tax Returns ..................................... 100-69 Foreign Income ........................................................................................... 100-69 Foster Care Income...................................................................................... 100-70 Gratuities and Tip Income ............................................................................. 100-70 Military Income ........................................................................................... 100-71 Non-reimbursed Business Expense................................................................. 100-72 Non-Taxable Income .................................................................................... 100-73 Mortgage Credit Certificate ........................................................................... 100-73 Mortgage Differential Payments ..................................................................... 100-74 Note Receivable Income ............................................................................... 100-74 Part-Time, Second or Multiple Income ............................................................ 100-75 Pension / Retirement with Actual Income Stream ............................................ 100-76 Income derived from the Asset ...................................................................... 100-77 Income derived from the Asset, (Con’t) .......................................................... 100-78 Public Assistance ......................................................................................... 100-79 Rental Income – General Requirements .......................................................... 100-80 Rental Income – Appraisal Forms................................................................... 100-80 Rental Income – Required Documentation ...................................................... 100-81 Rent Loss Insurance..................................................................................... 100-81 Qualifying without Rental Income .................................................................. 100-82 Partial or No Rental History on Tax Returns..................................................... 100-83 Rental Income Calculations ........................................................................... 100-84 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-iii Conventional Lending Guide Treatment of Rental Income / Loss ................................................................ 100-85 DU Entry -Net Rental Income ........................................................................ 100-86 DU Entry -Net Rental Income for Special Situations.......................................... 100-87 Subject Net Cash Flow Calculations ................................................................ 100-87 DU Entry – Net Cash Flow ............................................................................. 100-88 Rental Income from Second Home ................................................................. 100-88 Rental Income from Converted Property ......................................................... 100-89 LP Loans – Rental Income General ................................................................. 100-90 LP Loans – Rental Income from 2-4 Primary Residence..................................... 100-91 LP Loans – Rental Income from 1-4 Investment .............................................. 100-92 LP Loans – Rental Income from Investment, not the Subject ............................. 100-93 Royalty Payments ........................................................................................ 100-94 Seasonal Income ......................................................................................... 100-94 Social Security ............................................................................................ 100-95 Trust Income .............................................................................................. 100-96 Unemployment Benefits................................................................................ 100-96 Union Members ........................................................................................... 100-97 VA Benefits ................................................................................................. 100-98 Unacceptable Sources of Income ................................................................... 100-98 Declining Income ......................................................................................... 100-99 Salaried Borrower ........................................................................................ 100-99 Salaried Income History ............................................................................... 100-99 Salaried Documentation ..............................................................................100-100 Non W-2 Income ........................................................................................100-100 Self-Employed Borrowers.............................................................................100-101 Self-Employed Income History......................................................................100-101 Self-Employed Documentation......................................................................100-102 Self-Employed Verification of Employment .....................................................100-103 Non-Purchasing Spouse Income ...................................................................100-104 Carry Over Losses.......................................................................................100-104 Contracts for Employment ...........................................................................100-104 Teacher Income..........................................................................................100-105 Documentation Requirements ......................................................................100-105 ASSETS AND LIQUIDITY .................................................................................. 100-106 Overview ...................................................................................................100-106 Eligible Assets ............................................................................................100-106 Ineligible Assets .........................................................................................100-107 Earnest Money ...........................................................................................100-108 Reserves ...................................................................................................100-109 Reserves (Con’t).........................................................................................100-110 Joint Assets ...............................................................................................100-111 Verification of Deposits ................................................................................100-112 Verification of Deposit, (Con’t) .....................................................................100-113 Gifts..........................................................................................................100-114 Gifts..........................................................................................................100-115 Gift of Equity..............................................................................................100-115 Gifts from Weddings....................................................................................100-116 Sources of Funds for Closing ........................................................................100-117 Deposit on Sales Contract ............................................................................100-118 Depository Accounts ...................................................................................100-118 Conventional Lending Guide 100-iv Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Donations from Entities ...............................................................................100-119 Disaster Relief Grant or Loan........................................................................100-119 Borrowed Funds Secured by an Asset ............................................................100-119 Cash Value of Life Insurance ........................................................................100-120 Loan Repayment Proceeds ...........................................................................100-121 Rent Credit for Options to Purchase ..............................................................100-121 Real Estate Proceeds ...................................................................................100-122 Bridge Loan ...............................................................................................100-123 Trust Account Funds ...................................................................................100-124 Sale of Stocks or Bonds ...............................................................................100-124 Stock Options.............................................................................................100-124 Sale of Other Assets....................................................................................100-125 Employer Assistance Programs .....................................................................100-126 Third Party Contributions .............................................................................100-127 Third Party Contributions, (Con’t) .................................................................100-128 Payment Abatements ..................................................................................100-129 Undisclosed Seller Contributions ...................................................................100-129 Allowable Uses of Interested Party Contributions ............................................100-129 Appraisal Review with an Interested Party Contributions..................................100-129 Document Reconciliation Involving Interested Party Contributions ....................100-130 Borrower Paid Seller Closing Cost .................................................................100-131 Retirement.................................................................................................100-131 Large Deposit .............................................................................................100-132 Large Deposit- (Con’t) .................................................................................100-133 1031 Exchange...........................................................................................100-134 Foreign Assets ............................................................................................100-135 Business Funds...........................................................................................100-136 Pooled Funds..............................................................................................100-137 Individual Development Accounts .................................................................100-138 Credit Card for POC Items ...........................................................................100-139 PROPERTIES ................................................................................................ 100-140 Eligible Property Types ................................................................................100-140 Legal Non-Conforming.................................................................................100-140 Agricultural Zoning .....................................................................................100-141 Uniquely Designed Homes ...........................................................................100-141 Hobby Farms..............................................................................................100-142 Ineligible Property Types .............................................................................100-143 Private Transfer Fees ..................................................................................100-144 Manufactured Homes on Site........................................................................100-145 Borrower Acknowledgment for Value .............................................................100-145 Well, Septic & Pest Inspection ......................................................................100-145 Age of Appraisals ........................................................................................100-146 Age and Adjustments of Comparables ...........................................................100-147 Appraisal Validation ....................................................................................100-147 Reuse of Appraisals.....................................................................................100-148 Transferred Appraisals.................................................................................100-148 Address Validation ......................................................................................100-148 Distance of Comparables .............................................................................100-148 Land to Value Ratios ...................................................................................100-148 Location Types ...........................................................................................100-149 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-v Conventional Lending Guide Age Restricted Communities.........................................................................100-150 Age Restricted Communities, (Con’t) .............................................................100-151 Multiple Parcels ..........................................................................................100-152 Land Contracts ...........................................................................................100-153 Short Sale .................................................................................................100-154 UAD Condition Ratings ................................................................................100-155 UAD Quality Ratings ....................................................................................100-155 Condition and Quality Adjustments ...............................................................100-156 Property Conditions.....................................................................................100-156 Roof Life ....................................................................................................100-156 Non-Structural Hazards ...............................................................................100-158 Security Bars .............................................................................................100-158 Swimming Pools .........................................................................................100-159 Heating and Cooling Sources ........................................................................100-160 Utilities......................................................................................................100-160 Deferred Maintenance .................................................................................100-161 Accessory Unit............................................................................................100-162 Non-Permitted Additions ..............................................................................100-163 Declining / Soft Markets ..............................................................................100-163 Declining / Soft Markets, (Con’t)...................................................................100-164 Supervisory Appraisers ................................................................................100-165 Sales Contract to Appraiser ..........................................................................100-165 Appraisal Forms..........................................................................................100-165 Photo Requirements ....................................................................................100-166 Bedroom Count ..........................................................................................100-166 Investment Appraisal Forms.........................................................................100-167 Streamline Appraisal Forms .........................................................................100-167 Property Inspection Waivers.........................................................................100-168 LP Home Value Explorer (HVE) .....................................................................100-168 Appraisal Upgrades .....................................................................................100-169 Appraisal Requirements ...............................................................................100-169 Private Road Maintenance ............................................................................100-170 Mixed Use Properties ...................................................................................100-171 Carbon Monoxide Detectors .........................................................................100-172 Mineral Rights ............................................................................................100-173 LEASEHOLD ESTATES...................................................................................... 100-174 Overview ...................................................................................................100-174 Documentation ...........................................................................................100-174 Term of Lease ............................................................................................100-175 Ineligible Lease Terms.................................................................................100-176 Default Provisions .......................................................................................100-176 Leasehold Appraisal Requirements ................................................................100-177 Purchase Price Calculation ...........................................................................100-178 Option to Purchase .....................................................................................100-178 Lease Payments .........................................................................................100-179 Sublease ...................................................................................................100-179 Conventional Lending Guide 100-vi Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide INSURANCE ................................................................................................. 100-180 Hazard Insurance Overview .........................................................................100-180 Acceptable Insurance Ratings .......................................................................100-180 Evidence of Insurance .................................................................................100-180 Insurance Coverage Terms ..........................................................................100-181 Insurance Coverage Terms, (Con’t)...............................................................100-182 Examples of Insurable Value ........................................................................100-182 Evidence of Payment ...................................................................................100-182 Insurance Exclusions ...................................................................................100-182 Flood Insurance Overview ............................................................................100-183 Rebuttal ....................................................................................................100-183 Evidence of Flood Insurance .........................................................................100-184 Flood Insurance Requirements .....................................................................100-185 Transferred Policies.....................................................................................100-185 Acceptable Flood Coverage ..........................................................................100-186 Evidence of Payment ...................................................................................100-186 Optional Insurance Coverage .......................................................................100-186 CONDO AND PUD PROJECTS ............................................................................ 100-187 Types of Insurance .....................................................................................100-187 Master Association Policy .............................................................................100-187 Certificate of Insurance ...............................................................................100-188 Unaffiliated Condo Insurance........................................................................100-188 Liability Insurance ......................................................................................100-189 Fidelity Bond ..............................................................................................100-190 Flood Coverage Amount...............................................................................100-191 Condos ......................................................................................................100-192 Condo Overview .........................................................................................100-192 Ineligible Condo Projects .............................................................................100-193 Ineligible Condo Projects, (Con’t)..................................................................100-194 Projects in Litigation....................................................................................100-195 Condo Recreational Lease ............................................................................100-195 Limited Project Review ................................................................................100-196 Lender Full Delegated Review; Type S Established Project ...............................100-201 Lender Full Delegated Review, (Con’t) ...........................................................100-202 Fannie Mae Projects - Type R .......................................................................100-203 Fannie Mae Projects – Type V .......................................................................100-203 Fannie Mae Projects – Type T .......................................................................100-203 Fannie Mae Projects – Type U.......................................................................100-203 Florida Projects ..........................................................................................100-203 PUD Projects – FNMA ..................................................................................100-204 Type E and F Attached PUDs – Eligibility Requirements....................................100-204 ESCROW (COMPLETION) HOLDBACK .................................................................. 100-205 Overview ...................................................................................................100-205 NATURAL DISASTERS ..................................................................................... 100-206 Overview ...................................................................................................100-206 Procedure ..................................................................................................100-206 Example ....................................................................................................100-206 Requirements for Affected Areas...................................................................100-207 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-vii Conventional Lending Guide LOAN PURPOSE ............................................................................................. 100-208 Overview ...................................................................................................100-208 Principal Reductions ....................................................................................100-208 Purchase Transactions .................................................................................100-209 Purchase Agreements..................................................................................100-210 Limited Cash Out Refinance .........................................................................100-211 Buyout Refinance........................................................................................100-212 Cash Out Refinance.....................................................................................100-213 Delayed Financing Cash Out Refinance ..........................................................100-214 Divestiture of Interest .................................................................................100-215 Continuity of Ownership and Obligation .........................................................100-215 Continuity of Ownership and Obligation, (Con’t) .............................................100-216 Continuity of Ownership and Obligation, (Con’t) .............................................100-217 Listed for Sale ............................................................................................100-218 Newly Constructed Properties .......................................................................100-219 New Construction – Purchase .......................................................................100-220 New Construction – Refinance ......................................................................100-220 General Contractor .....................................................................................100-221 MORTGAGE INSURANCE .................................................................................. 100-222 Overview ...................................................................................................100-222 Approved MI Companies ..............................................................................100-222 SUBORDINATE FINANCING .............................................................................. 100-223 Overview ...................................................................................................100-223 Requirements and Restrictions .....................................................................100-223 Required Documentation .............................................................................100-225 Seller Carry Backs ......................................................................................100-226 Modifying Existing Second Liens ...................................................................100-227 Municipal Betterment Assessments ...............................................................100-228 Community Seconds ...................................................................................100-229 Down Payment Assistance ...........................................................................100-229 Virginia Automatic Subordination ..................................................................100-230 Maryland Automatic Subordination ................................................................100-231 RATIO ........................................................................................................ 100-232 Calculation .................................................................................................100-232 Real Estate Tax Payment .............................................................................100-233 Real Estate Debt .........................................................................................100-234 Revolving Debt ...........................................................................................100-235 30-Day Charge Accounts .............................................................................100-236 Installment Debt.........................................................................................100-237 Lease Payments .........................................................................................100-238 Paying off Installment Debt ..........................................................................100-238 Paying Down Installment Debt .....................................................................100-238 Paying off Revolving Debt ............................................................................100-239 Paying Down Revolving Debt ........................................................................100-239 Authorized User Accounts – DU ....................................................................100-240 Authorized User Accounts – LP .....................................................................100-241 Monthly Payment Debts ...............................................................................100-242 Obligations Not Considered Debt ..................................................................100-242 Conventional Lending Guide 100-viii Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Co-Signed Obligations .................................................................................100-243 Court Ordered Assignments of Debts.............................................................100-243 Student Loans ............................................................................................100-244 Business Paid Debt .....................................................................................100-245 Undisclosed Debt ........................................................................................100-246 PROPERTY FLIPPING ...................................................................................... 100-247 Requirements .............................................................................................100-248 Anti-Flipping and the Sales Contract..............................................................100-249 Omitted Transactions ..................................................................................100-249 Checklist for Business Seller.........................................................................100-249 Non-Individual Seller Evaluation & Validation Checklist ....................................100-250 Additional Evaluations .................................................................................100-251 State Business Website Search .....................................................................100-252 Better Business Bureau ...............................................................................100-252 GENERAL COMPLIANCE POLICIES ...................................................................... 100-253 Overview ...................................................................................................100-253 Predatory Lending.......................................................................................100-253 Laws .........................................................................................................100-254 Laws, continued .........................................................................................100-255 Digital Signatures .......................................................................................100-256 Compliance with Points & Fees .....................................................................100-256 Points and Fees Calculation ..........................................................................100-257 High Cost Loans .........................................................................................100-258 Higher Priced Mortgage Loans ......................................................................100-259 Higher Priced Covered Transactions ..............................................................100-259 Prepayment Fees or Penalties.......................................................................100-259 Net Tangible Benefit ....................................................................................100-260 Federal and State Regulations ......................................................................100-260 Repayment Ability.......................................................................................100-260 Title Commitment .......................................................................................100-260 Code of Conduct .........................................................................................100-261 Interest .....................................................................................................100-262 Closing Protection Letters ............................................................................100-262 CLOSING POLICIES & PROCEDURES................................................................... 100-263 Scheduling a Loan ......................................................................................100-263 Closing Practices.........................................................................................100-263 Verification of Employment ..........................................................................100-263 Closing Protection Letter ..............................................................................100-263 Taxes ........................................................................................................100-263 Insurance ..................................................................................................100-263 Title Commitment .......................................................................................100-263 Escrow Accounts.........................................................................................100-264 Seller Contributions ....................................................................................100-265 Premium Pricing Credits ..............................................................................100-265 Principal Reductions ....................................................................................100-266 HUD Approval Process .................................................................................100-267 Funding .....................................................................................................100-267 Payoff Requests..........................................................................................100-268 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-ix Conventional Lending Guide FNMA LOAN QUALITY INITIATIVE .................................................................... 100-269 LQI Overview .............................................................................................100-269 Undisclosed Liabilities..................................................................................100-270 Confirmation of Borrower’s Identity...............................................................100-271 Validation of Qualified Parties to the Transaction ............................................100-271 Conventional Lending Guide 100-x Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100 - Conventional Guide Introduction Purpose The Lending Guide provides underwriting standards to assist in determining the types of loans eligible for approval; also outlines the level of acceptable risk and describes general and specific requirements regarding: ü Borrower Eligibility ü Credit ü Employment and Income ü Assets and Liquidity ü Property/Collateral ü Liabilities Underwriting Guidelines Although this guide covers most circumstances, it does NOT comprise all possible loan scenarios. Where a specific circumstance is not addressed, prudent underwriting principals prevail in determining loan eligibility. Two crucial requirements that apply are: · Loan terms must relate the borrower’s ability to repay · Value and marketability of the property is acceptable IMPORTANT: Underwriting review will consist of analyzing the loan parameter profile AND any associated layers of risk identified by the underwriter. The underwriter MAY suspend or decline the loan based on all associated risk regardless of loan parameters. Application Automated underwriting findings (recommendations) and Product Guidelines will take precedence over this guide. ü Guidelines must be interpreted and applied in a manner and that complies with all applicable laws and regulations, including consumer protection laws and regulations. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-1 Conventional Lending Guide Introduction, Electronic Signatures ü Loans may be submitted with electronic signatures on upfront disclosures, sales contracts and applications if completed in accordance with the below items: ü Must be documented with electronic signature(s) containing watermarks, serial numbers, and/or a transaction log. ü Electronic signature can be done by typed text, an image, a holographic signature or a digital signature. ü Must be carried out in manner that meets state and federal regulations. · · ü Each vendor must confirm adherence to Uniform Electronic Transaction Act (UETA) and the federal Electronic Signatures in Global and National Commerce Act (ESIGN) in order to be eligible for acceptance. An Approved Electronic Signature Vendor List is no longer maintained; however, all companies providing electronic signatures must confirm in writing or from their public website an adherence to all state and federal regulations (UETA and ESIGN). Original (live or wet) signatures continue to be required for the following documents: · · · Underwriting Decision Continued IRS 4506-T Any Social Security Administration (SSA) form Borrower Power of Attorney or any documents being signed through a Power of Attorney Underwriting decisions are as follows: ü Approved ü Approved with Conditions ü Suspended ü Declined ü Counter Offered Conventional Lending Guide 100-2 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Loan Limits Loan Limits Maximum Loan Amount for Conforming FRM & ARM General Permanent High Balance1 1 Unit $417,000 $625,500 2 Units $533,850 $800,775 3 Units $645,300 $967,950 4 Units $801,950 $1,000,0002 Property Type NOTE: ü Loan amounts may not exceed the applicable maximum loan limits for the specific area in which the property is located. 1 Maximum loan amounts are limited by MSA/County. The loan limits by county can be located in the Federal Housing Finance Agency website at www.fhfa.gov/default.aspx?Page=185 OR Fannie Mae’s website at https://commlend.efanniemae.com/loanlimitgeocoder/pages/login.aspx OR Freddie Mac’s website at http://www.freddiemac.com/singlefamily/mortgages/super_conforming.html 2 Agencies permit a maximum $1,202,925 loan limit in certain locations for 4-unit properties; however, the Homeward Residential overlay limit is $1,000,000 regardless of FNMA. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-3 Conventional Lending Guide Underwriting Options Overview Subject to product limitations within the Product Guidelines, Homeward Residential will accept mortgage loans that are submitted only to the following Automated Underwriting Systems (AUS): ü Fannie Mae Desktop Underwriter (DU) ü Freddie Mac Loan Prospector (LP) Manual Underwriting Manual Underwriting is not permitted under any circumstances for Conventional products. Acceptable DU Decisions Refer to individual product summaries. DU Decisions The following recommendations are results of utilizing Fannie Mae’s Desktop Underwriter: ü Approve/Eligible ü Approve/Ineligible ü Out of Scope ü EA Eligible NOTE: ü Refer to specific product summaries for details regarding specific acceptable DU decisions. Continued on next page Conventional Lending Guide 100-4 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Underwriting Options, LP Decisions Continued The following recommendations are results of utilizing Freddie Mac’s Loan Prospector: ü Accept ü Caution ü Caution/A-Minus ü Incomplete/Invalid NOTE: ü AUS Underwriting Refer to specific product summaries for details regarding specific acceptable LP decisions. The Underwriter must verify the accuracy of the data entered in the underwriting system by comparing the data to the documentation in the actual underwriting file. The final decision should ensure all data matches source documentation and that documentation exists to support all data used to underwrite the file. If this validation process reveals material discrepancies between the data in the underwriting system and the data from source documents, the mortgage must be re-underwritten and re-submitted using the correct data. The Underwriter must comply with the requirements of the Documentation Class (i.e. Approve/Eligible, etc.) resulting from the resubmission. Although the documentation requested on the findings report is sufficient for file delivery, additional documentation to substantiate an approval may be required at the underwriter’s discretion. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-5 Conventional Lending Guide DU Tolerances Minor adjustments will not require additional underwriting submissions as long as the requested income and asset documentation supports the information disclosed on the loan application within allowable tolerances. The following tolerances will be permitted for Desktop Underwriter (DU): Appraised Value: No variance permitted for appraised value. Assets: DU returns a message setting the minimum amount of assets to be verified which must be documented within the loan file. · Funds Required to Close – when the actual amount of assets required to close the transaction exceeds the amount of “Funds Required to Close” per the DU Underwriting Findings report, the lender does NOT need to resubmit the case file if the lender has documented sufficient liquid assets to cover the actual amount of assets required to close the transaction. Otherwise, the loan must be resubmitted to DU. · Reserves Required to be Verified – if the verified amount of reserves is less than the “Reserves Required to be Verified” per the DU Underwriting Findings report due to changes in actual amount of assets required to close the transaction, lender does NOT need to resubmit the case file if the lender has documented reserves that equal at least 90% of the Reserves Required to be Verified per the DU Underwriting Findings report. Otherwise the loan case file must be resubmitted to DU. Debts ü If DU detects undisclosed debts (debts on the credit report that are not on the loan application) or if it detects discrepancies between the credit report payments and balances and those on the loan application, a verification message may require that the data be reconciled. ü If upon reconciliation, it is determined that the debts on the loan application are inaccurate, which results in the DTI to exceed 45.00% or increases by more than 3%, resubmission to DU will be required. Also refer to the next section regarding changes to debt and its effect on DTI. Income, Debts and/or Interest Rate · DU must reflect the same as the Note (Interest Rate) Rate signed at closing. · The exact income used to qualify the borrower(s) must be entered into DU. · The DTI must be reflective all monthly payments as recognized by DU. Loan amount: No variance permitted for loan amount (1008 and 1003 must match). ü Continued on next page Conventional Lending Guide 100-6 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Underwriting Options, LP Tolerances Continued Minor adjustments will not require additional underwriting submissions as long as the requested income and asset documentation supports the information disclosed on the loan application within allowable tolerances. The following tolerances will be permitted for Loan Prospector (LP): Appraised Value: No variance permitted for appraised value. Assets: ü If the verified assets increase, resubmission is NOT required. ü If the amount of verified reserves increases, resubmission is NOT required. If the amount of verified reserves decrease by no more than 10%, resubmission is not required Income, Debts and/or Interest Rate ü LP must reflect the same as the Note (Interest Rate) Rate signed at closing. ü The monthly debt payment (including monthly housing expense) decreases; the DTI must be reflective of all monthly payments as recognized by LP, the income for any Borrower increases, the income for any Borrower decreases and/or the monthly debt payment (including monthly housing expense) increases, and · The total difference does not change the total debt-to-income ratio by more than three percentage points, and · The total debt-to-income ratio on the previous submission did not exceed 45% Loan amount: No variance permitted for loan amount (1008 and 1003 must match). ü Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-7 Conventional Lending Guide Borrower Eligibility Overview Homeward Residential defines various borrower types within this section. Refer to specific product summaries for borrower eligibility. Primary Borrower In the case of a non-occupant co-borrower, the person who occupies the property must be the primary borrower. Purchasing Co-Borrower A purchasing co-borrower is a person who has applied with the applicant for joint credit and who takes title to the security property. A purchasing co-borrower must sign the Note. Maximum Number of Borrowers Each transaction is limited to a maximum of four (4) borrowers/applicants. Continued on next page Conventional Lending Guide 100-8 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, First-Time Homebuyer Continued A first time homebuyer1 (FTHB) is a borrower with the following characteristics: ü Borrower to acquire the subject property ü Borrower who will reside in the subject property as a principal residence ü Borrower has had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the subject property, unless: Ø He/She is a displaced homemaker or single parent whose only ownership interest in a principal residence during the preceding three-year time period was a joint ownership with a spouse. A displaced homemaker or single parent who during the three-year period owned a principal residence alone or with anyone other than a spouse, or who owned a second home or investment property, cannot be considered a first-time homebuyer. IMPORTANT: 1 Refer to the Credit section within this Lending Guide for credit history requirements and to the summaries for possible product restrictions for FTHB. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-9 Conventional Lending Guide Borrower Eligibility, Continued NonPurchasing Co-Owner A non-purchasing co-owner (co-mortgagor) is a person who will take title to the security property without applying for joint credit. A nonpurchasing co-owner is not required to sign the Note; however, they will be required to sign the security instrument or any other documentation required to evidence that the co-owner is relinquishing all rights to the property in order to perfect the lien under governing state law. Co-Signors Not permitted. Non-Occupant Co-Borrower DU Will analyze the risk factors without the benefit of the non-occupant coborrower’s income or liabilities and will not require verification of employment or income for the non-occupant co-borrower. · · · Owner-occupant(s) must be able to qualify for the mortgage based on his/her own financial capacity Ratios may not be manually calculated (outside of DU) to include nonoccupant co-borrower income. Newly added non-occupant co-borrowers are not permitted for cash out refinances. NOTE: Non-occupant co-borrower may not be an interested party to the sales transaction, such as the property seller, property builder, and real estate broker. LP: The maximum LTV/(H)CLTV is 90% when non-occupying co-borrower income is used as qualifying income. The employment and income for the non-occupant co-borrower must be documented as stated within this lending guide. · · When a mortgage includes a non-occupying Borrower and the LTV is greater than 80.00%, the occupant Borrower must make the first 5% down payment from the occupant Borrower funds. Funds that are owned jointly by the occupant Borrower and the non-occupying Borrower are considered the funds of the occupant Borrower. Newly added non-occupant co-borrowers are not permitted for cash out refinances. NOTE: Non-occupant co-borrower may not be an interested party to the sales transaction, such as the property seller, property builder, and real estate broker. Continued on next page Conventional Lending Guide 100-10 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Remote Spouses Continued ü Spouses who reside remotely (not within daily commuting distance) must be treated as a non-occupant co-borrower; therefore, their income is not eligible for qualification purposes. See additional details above. ü Spouses who live remotely on a more permanent basis may not purchase multiple Primary Residences due to their living arrangements. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-11 Conventional Lending Guide Borrower Eligibility, Non-Arms Length Transaction Borrower Continued A non-arms length transaction is a transaction where there exists a personal or business relationship between the borrower and any party involved in the transaction. The following types of non-arms length transactions are permitted within the guidelines detailed within: ü Family sales or transfers (with or without consideration), including the estate of a deceased family member unless the transaction is a probate sale. ü Corporate sales or transfers (from a business to a personal owner) ü Borrower(s) who are employed in the Real Estate, Mortgage or construction trade field that are participants in the construction or financing of the property. ü Purchasing from a builder ü Tenant purchasing home where they currently rent (tenant/landlord relationships) as a primary residence. NOTE: It is acceptable for the loan officer/broker and realtor to be employed by the same company; however, they may NOT be one in the same persons. For ANY non-arms length transaction, regardless of the type, the following restrictions apply: · · Second Homes and Investment Properties not permitted Borrower may not be an owner of any business entity selling the property or involved in the transaction. · Property may not be subject to foreclosure proceedings or default (may not be for bail out purposes). · Not permitted for flips under 90 days, short sale properties or the delayed financing option. · Follow standard gift (gift of equity) guidelines when applicable. · Full appraisal is required. IMPORTANT: Loans involving Non-Arms Length Transactions present additional layering of risk that will be reviewed at the discretion of the Underwriter. Continued on next page Conventional Lending Guide 100-12 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Non-Arms Length Transaction – Other Parties Continued For scenarios in which there is a family or business relationship between any parties of the transaction, the below documentation is required: ü Documented evidence from the borrower acknowledging the relationship between the parties (i.e. if the LO is related to the closing attorney). ü Parties of the transaction to confirm in writing that no compensation or benefit was exchanged from the referral of business. ü Provide evidence the company selected (i.e. closing attorney who is the brother of the LO) is part of the Broker/LO’s business referral list for all transactions. Realtor and Loan Officer It is acceptable for the loan officer/broker and realtor to be employed by the same company; however, they may NOT be one in the same persons. Purchasing from a Builder Transactions where the borrowers are purchasing a property from a builder who is purchasing the borrowers’ existing residence are not permitted. Transactions with NonFamily Members Non-arm length transactions with non-family members will be considered only if they are bona fide sales transactions and the borrowers will occupy the property as their primary residence. NOTE: Standard non-arm length transactions guidelines stated on previous page continued to be required in addition to. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-13 Conventional Lending Guide Borrower Eligibility, Transactions with Family Members Continued Non-arm length transactions with a family member are generally acceptable if: ü The family member or relative is the borrowers’ spouse, child, parent, or any other individual related to the borrowers by blood, adoption, or legal guardianship. ü An executed purchase or sales agreement between the purchaser and the family member is in the loan file. ü Refinance transactions must have at least one borrower from the loan being refinanced on the new loan. If no borrower from the existing loan will be a borrower on the new loan, the transaction must be underwritten as a purchase. ü The source and ownership of funds for the down payment, closing costs, and reserves are well documented in the loan file. ü The appraised value of the property is well supported, particularly for gifts of equity or gifts of more than 20% of the LTV. ü Gifts are not allowed for second home and investment properties. Gifts are allowed for owner-occupied transactions if they meet the normal gifting guidelines as follows: · The borrowers must have 5% of their own funds as a down payment; however, if the LTV/CLTV is less than or equal to 80% then the entire down payment may be a gift.* · Gifts of equity are acceptable if verified by an appraisal and gift letter. · A signed gift letter and verification of the receipt of the funds are provided. *Most conforming loan programs follow FNMA gift guidelines, but some individual loan programs may have stricter requirements. Always refer to the individual program guidelines for complete details. The more restrictive requirements apply. ü Continued on next page Conventional Lending Guide 100-14 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Borrower is an Interested Party to the Transaction Continued Certain transactions are not permitted if: ü A company involved in the transaction (construction, realtor’s office, etc.) is owned by the borrower A borrower who is professionally related to the builder, property seller, or any party currently on title as a (or in the role as a): · Registered agent · Sales agent · Partner · Employee A borrower may act as an interested party to a sales transaction for the subject property; however, the borrower may not use any payment for services rendered from the sales transaction of the subject property towards the down payment, closing cost, or reserve requirements. ü Payment for services rendered means payment for, but is not limited to: · Realtor commissions · Broker commissions · Sales associate commissions Customer Loans Homeward Residential affiliated Mortgage Brokers, owners of mortgage firms, employees of affiliate mortgage brokers and/or mortgage firms are permitted; however, the borrower may not be the loan officer or processor nor may the loan officer or processor be employed by the same company (i.e. may not be an employee or co-worker of the borrower(s)). Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-15 Conventional Lending Guide Borrower Eligibility, Eligible Borrowers Continued ü U.S. Citizen ü Permanent Resident Aliens ü Non-Permanent Resident Aliens ü Inter Vivos Revocable Trusts ü Borrowers party to a lawsuit may be eligible as long as the legal action does not have the potential to adversely impact the first lien are not permitted. NOTE: All borrowers must have a valid social security number. Ineligible Borrowers ü Corporations, General and Limited Partnerships. ü “Doing Business As” (DBAs). ü Religious/non-profit organizations. ü Borrowers with Diplomatic Immunity. ü Life Estates ü Foreign National defined as legal resident of another country that periodically visits the U.S. ü Borrower(s) party to a lawsuit with the potential to adversely impact the first lien is not permitted. ü Borrowers with a foreign address as their current, primary residence, including military personnel stationed overseas that do not occupy or have a current primary residence/address in the U.S. · ü U.S. Citizen Note the above requirement is regardless of property tax (exemption) status. Scenarios are not permitted in which the borrower is not currently, physically occupying a residence with a U.S. address. Illinois or any Community Land Trust A United States Citizen is a native or naturalized person entitled to all rights and privileges of the United States. Unless otherwise noted, all loan program requirements are based on the assumption a borrower is a United States Citizen. Continued on next page Conventional Lending Guide 100-16 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Permanent Resident Alien Continued A permanent resident alien is an individual who is lawfully residing in the United States permanently. Homeward Residential will grant loans to permanent resident aliens under the same parameters extended to U.S. Citizens. Legal residency may be documented with one of the following: ü A valid and current Permanent Resident card “green card” (Form I551) is required. ü A passport stamped “processed for I-551, Temporary evidence of lawful admission for permanent residence. Valid until ______. Employment authorized”. This evidences that the holder has been approved for, but not issued, a Permanent Resident card. ü The “valid until” expiration date need not be taken into consideration. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-17 Conventional Lending Guide Borrower Eligibility, NonPermanent Resident Alien Continued A non-permanent resident is a non-U.S. citizen who lawfully enters the United States for specific time periods under the terms of a Visa. A nonpermanent resident status may or may not permit employment. Verification that the borrower has all of the following is required: ü A valid copy of the borrower(s) Visa. NOTE: If a borrower falls under the “Deferred Action for Childhood Arrivals (DACA) ruling” Homeward will require a copy of the unexpired DACA Employment Permit. ü A valid social security number. Tax Identification Numbers (TIN) are not sufficient or acceptable. ü Documentation to support that the borrower is eligible to work in the U.S. as evidenced by an unexpired work authorization document issued by the United States Citizenship and Immigration Services (USCIS). ü Borrowers sponsored by a specific employer do not need an EAD. A valid passport, a letter from the employer/sponsor, a valid Visa and an I-94 form proving they may work in the U.S. is acceptable. ü A social security card may NOT be used as evidence of eligibility of employment. Homeward Residential will grant loans to Non-Permanent Resident Aliens with acceptable Visas under the same parameters extended to a U.S. Citizen. IMPORTANT: Individuals classified under Diplomatic Immunity, Temporary Protected Status, Deferred Enforced Departure or Humanitarian Parole is not eligible. Continued on next page Conventional Lending Guide 100-18 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Visa Classifications Continued The following Visa Classifications are usual and customary for Permanent and Non-Permanent Resident Aliens. Homeward will review and determine acceptance of any other Visa types on a case by case basis. Type Classification E-1 Treaty Trader G-1 through G-4 Representative, officer or employee of recognized and non-recognized foreign government and members of their immediate family H-1 Specialty Occupations, DOD workers, fashion models L-1 Executive, Managerial, Specialized Knowledge TN/NAFTA Professionals from Canada or Mexico who enter the U.S. under the NAFTA agreements. For more information about visas, visit the USCIS website at http://www.uscis.gov/portal/site/uscis Trailing CoBorrower Income Not Permitted. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-19 Conventional Lending Guide Borrower Eligibility, Multiple Mortgages and Maximum Exposure Continued ü For loans serviced by Ocwen Loan Servicing, LLC, the borrower may have a maximum exposure of four (4) loans or $2,500,000, whichever is less. ü NOTE: If there are multiple loans for the same borrower recurring simultaneously, loans need to be underwritten at the same time in order to measure the impact of each transaction upon the other. ü The number of properties owned / financed limit applies to the borrower's ownership of 1-4 unit financed properties or mortgage obligations on such properties and is cumulative for all borrowers. These limitations apply to the total number of properties financed, not to the number of mortgages on the property. ü Examples: · If the borrower owns two financed investment properties and the co-borrower owns three other financed investment properties, then jointly, the borrowers have five financed investment properties in addition to their principal residence(s), if applicable. · If the borrower is obligated on a mortgage for a residential property (though is not on title) and the co-borrower owns a second home and an investment property (both of which are financed), then jointly, the borrowers have three financed properties that must be included in the count in addition to their principal residence(s), if applicable. · If a borrower and a co-borrower are purchasing an investment property and they already own and/or are obligated on five other investment properties that they jointly own and/or are obligated on, the new property being purchased would be considered the borrowers' sixth investment property. · If a borrower owns five properties individually and is 100% owner of a corporation that owns an additional five properties, of which two of those properties are secured by mortgages that are shown on the borrower’s credit report, the borrower would be considered to have seven financed properties. The Multiple Properties Table below describes how to apply the limitations based on the type of property ownership: ü Continued on next page Conventional Lending Guide 100-20 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Continued Multiple Mortgages and Maximum Exposure - Multiple Properties Table Type of Property Ownership Joint ownership of residential real estate. (This is considered to be the same as total ownership of an individual property.) Property Included in Limitation? Property disclosed on list of REO? Yes Yes Ownership of commercial real estate No No Ownership of multifamily property consisting of more than four (4) dwelling units. No No Joint or total ownership of a property that is held in the name of a corporation or Scorporation, even if the borrower is the owner of the corporation and the financing is in the name of the corporation or S-corp. No No Joint or total ownership of a property that is held in the name of a corporation or Scorporation, even if the borrower is the owner of the corporation; however, the financing is in the name of the borrower. Yes Yes Ownership in a timeshare. No No Obligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property). Yes Yes Ownership of a vacant (residential) lot. No No Ownership of property that is held in the name of a limited liability company (LLC) or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of 25% or more, regardless of the entity (or borrower) that is the obligor on the mortgage. Yes Yes Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership. No No Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the borrower. Yes Yes Ownership of a manufactured home and the land on which it is situated that is titled as real property. Yes Yes Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home) No No Note: Other properties owned or financed jointly by the borrower and co-borrower are only counted once. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-21 Conventional Lending Guide Borrower Eligibility, Multiple Mortgages and Maximum Exposure (Con’t) Continued ü Subject Property is a Primary Residence: · If the subject property is a Primary Residence, there is no maximum numbers of financed properties. ü Subject property is a Second Home or Investment Property, · the Borrower may own up to four (4) financed properties, including the subject property, except as noted below: NOTE: If the file is run via Desktop Underwriter and the mortgage is secured by a second home or an investment property, the borrower(s) may own or be obligated on up to ten financed properties (including his or her principal residence). Reminder that DU is not able to determine the exact number of financed properties the borrower owns or is obligated on, but does issue a message on second home and investment property transactions when the borrower appears to have other financed properties. The lender must apply the eligibility and underwriting requirements manually to investment property and second home transactions that are underwritten through DU, as applicable. Reminder: Loans underwritten with the use of LP, the Borrower may own up to four (4) financed properties, including the subject property when the subject is a Second home or Investment. IMPORTANT: · Borrower is not permitted to purchase or refinance more than one primary residence within a 12 month period. Continued on next page Conventional Lending Guide 100-22 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Eligibility Requirements for Borrowers with Five to Ten Financed Properties ü Continued Investor and second home borrowers with Five to Ten financed properties must meet the following eligibility requirements: Transaction Type Purchase Limited Cash-Out Refinance Number of Maximum LTV/CLTV/ Units HCLTV Ratio Second Home or Investment Property Loans subject to general loan limits FRM: 75% ARM: 65% 1 unit Loans subject to High Balance Limits Minimum Credit Score 720 FRM/ARM: 65% Cash-Out Refinance (only if within 6 months of purchase and all Delayed Financing* exception requirements are met) 1 unit Cash Out Refinance (> 6 months since the purchase) 1 unit Purchase Limited Cash-Out Refinance Cash-Out Refinance (only if within 6 months of purchase and all Delayed Financing* exception requirements are met) Cash Out Refinance (> 6 months since the purchase) Loans subject to general loan limits FRM: 70% ARM: 60% Ineligible Investment Property Loans subject to general loan limits FRM: 70% ARM: 60% 2-4 units Loans subject to High Balance limits FRM: 65% ARM: 60% 720 N/A 720 2-4 units Loans subject to general loan limits FRM: 65% ARM: 60% 720 1 unit Ineligible N/A *See Delayed Financing Cash Out Refinance Section below Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-23 Conventional Lending Guide Borrower Eligibility, Underwriting requirements for borrowers with five to ten financed properties: ü Continued The following underwriting requirements must be met for investor and second home borrowers with five to ten financed properties: Underwriting Characteristic Policy Bankruptcy or Foreclosure The borrower cannot have any history of bankruptcy or foreclosure within the past seven years. Mortgage Delinquencies The borrower cannot have any delinquencies (30-day or greater) within the past 12 months on any mortgage loans. Rental Income Rental income on the subject investment property must be fully documented in accordance with Sellers Guide. Rental income from other properties owned by the borrower must be supported by the most recent signed federal income tax return. If rental income has not yet been reported on tax returns because the properties were acquired subsequent to the last tax filing, leases may be used to document rental income. Minimum Reserve The borrower must have reserves for the subject property and for other Requirements properties in accordance with the Reserves section of this Lending Guide IRS Form 4506-T (or 4506/8821) The borrower must complete and sign IRS Request for Copy of Tax Return (IRS Form 4506), or IRS Request for Transcript of Tax Return (IRS Form 4506-T), granting the lender permission to request copies of federal income tax returns directly from the IRS. If the rental income has been reported on the tax returns, the lender must obtain the IRS copies of the returns or the transcript and validate the accuracy of the tax returns provided by the borrower prior to the loan closing. If rental income has not been reported on tax returns because the property was acquired subsequent to the last tax filing, the lender is not required to obtain an executed IRS Form 4506 or IRS Form 4506–T. Continued on next page Conventional Lending Guide 100-24 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Inter Vivos Revocable Trust Continued Inter Vivos Revocable Trust are permitted with the following: ü In compliance with federal, state and local law. ü Established by a natural person(s), solely or jointly; known as the Settlor, Trustor or Grantor. ü Effective during the Settlor’s lifetime. ü Individual established themselves the right to revoke the trust. ü Primary beneficiary of the trust must be the Settlor. If more than one individual establishes the trust jointly, there may be more than one primary beneficiary. The income or assets of at least one of the individuals must be used to qualify for the mortgage and sign the mortgage instruments. ü Trust must name one or more trustees to hold legal title to and manage the property that has been placed in the trust. The trustees must include the Settlor (or at least one of the individuals, if there is more than one). NOTE: A financial institution that is authorized to act as a trustee under the laws of that state is no longer eligible. ü Trustee must have the power to mortgage the security property ü Trustee is not required to obtain written consent from the beneficiaries to mortgage subject property if written consent has been provided. ü No unusual risk or impairment of lenders’ rights, such as distributions required to be made in specified amounts other than net income. ü If the trust agreement requires more than one trustee to borrower money or to purchase, construct or encumber realty, Underwriter must confirm that the requisite number of trustees has signed the loan documents. NOTE: If an existing loan was closed in the name of the individual borrowers, but has since been transferred to a trust, the loan continues to be eligible provided the borrowers on the existing mortgage are the only trustees to the trust and meet all other requirements. Eligibility Requirements for DU and LP: ü All units and All Occupancies are permitted as allowed within the summaries. ü ü Underwritten as if the individual(s) establishing the trust were the borrower(s) ü The “Inter Vivos Revocable Trust Checklist” must be completed and signed for the file by the Underwriter. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-25 Conventional Lending Guide Borrower Eligibility, Trust Definitions ü Beneficiary: The party with equitable ownership of the trust ü Grantor/Trustor/Settlor: The person(s) who established or created the living trust and donated the property and its obligations, directly to a trust. The use of terms grantor, trustor, or settlor depends on the state where the inter vivos trust was created or originated. ü Inter Vivos Revocable Trust: A trust that an individual creates and becomes effective during his or her lifetime, but may be changed or canceled at any time for any reason during the creator’s lifetime. · Revocable: A living trust is referred to as “revocable” when the grantor/trustor/settlor can change or cancel it any time, for any reason, while he or she is living. The ability to revoke a living trust is important because it permits the grantor/trustor/settlor, who would otherwise own the property directly, to maintain control of the property. · Trust: A fiduciary relationship whereby legal title to a property is transferred to the trustee with the intention that such property be administered by the trustee for the benefit of another, or beneficiary, who holds equitable title to such property. Trustee: A person who holds or controls property and manages it for the benefit of another (the beneficiary). Under an inter vivos trust, the people who, according to the properly executed trust documentation, has been granted the power to mortgage the subject property and administer the trust. The trustee(s) must be or must include the individual who established the trust, or an institutional trustee (i.e., attorney, bank, trust company) that customarily performs trust functions under the laws of the state. ü Inter Vivos Trust – Compliance Requirements Continued Although mortgages defined under the terms of Inter Vivos Revocable Trust may be exempt from Ability to Repay under the Truth-in-Lending Act and its implementing regulations, Homeward Residential will require such mortgages to meet all requirements within the Lending Guide, including meeting the Qualified Mortgage and Ability to Repay (ATR covered loan) definitions. Continued on next page Conventional Lending Guide 100-26 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Obtaining Copies of the Trust Continued Loan file must contain either a complete copy of the trust agreement OR in (the below) states that require dependence on an abstract, summary or certification of the trust. NOTE: In the following states, due to privacy law restrictions, a Certification of Trust may be used in place of a certified copy of the living trust agreement. · Alabama, Arkansas, California, Delaware, District of Columbia, Idaho, Iowa, Kansas, Maine, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, and Wyoming. Ineligible Trust Scenarios Closing Documents ü A trustee may not utilize a Power of Attorney (i.e. a power of attorney may not be utilized if the loan is closing in the name of a trust). ü Mixed vesting is not permitted. ü The subject property cannot be held in Multiple Trust Names (i.e. only one trust permitted per property). All fixed rate Mortgages sold to Homeward Residential must use the most current Fannie Mae uniform instruments for the fixed rate Note and for the Security Instrument. Document Type Form Addendum to the Note VMP Form 371N Rider to the Deed of Trust/Mortgage VMP Form 372R NOTES: ü Must use the most current agency uniform documents. ü State-specific documents as required for the jurisdiction in which the subject property is located. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-27 Conventional Lending Guide Borrower Eligibility, Trust Title Requirements Continued ü In the trustee of the inter vivos revocable trust. ü Jointly in the trustee of the inter vivos revocable trust and in the name of an individual borrower. ü If title will be vested in the trustees of more than one inter vivos revocable trust, the terms of the two revocable inter vivos trust documents must complement each other and may not be in conflict with one another. ü Title exceptions with respect to the trust are not permitted. Continued on next page Conventional Lending Guide 100-28 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Executing the Loan Documents Continued Each trustee of the inter vivos revocable trust must individually execute the Note, Mortgage/Deed of Trust, and any necessary addendums and/or riders. Each qualifying applicant must execute the Note and any necessary addendums. In addition, each qualifying applicant must acknowledge all of the terms and covenants in the Security Instrument and any applicable riders and agree to be bound thereby, by placing his or her signature after a statement of acknowledgement on such documents. Any other party that is required to sign either the Note or Mortgage/Deed of Trust must also execute the applicable document(s). Note Signature Requirements Form of Signature Required on Mortgage Note and Addendum to the Note for an Individual Trustee Who is Both a Settlor and a Credit Applicant: ü Each individual trustee of the living trust who is both a “settlor” and a credit applicant must sign the Note (and any necessary addendum). This may be accomplished by either one or two separate signatures (see below). Example 1: One signature presented - acceptable format Signature: David Jones Typed Name: David Jones, Trustee for the Jones Family Trust under trust instrument dated mo/day/year. Example 2: Two signatures presented - acceptable format Signature: David Jones Typed Name: David Jones AND Signature: David Jones OR David Jones, Trustee Typed Name: David Jones, as Trustee for the Jones Family Trust under trust instrument dated mo/day/year. Form of Signature Required on Mortgage Note for an Institutional Trustee and for an Individual Trustee Who is Not Both a Settlor and a Credit Applicant: ü Each institutional trustee of the living trust and each individual trustee of the living trust who is not both a “settlor” and a credit applicant must sign the Note (and any necessary addendum), using a signature block substantially similar to the following: Example: Signature: David Jones Typed Name: David Jones, as Trustee for the Jones Family Trust under trust instrument dated mo/day/year. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-29 Conventional Lending Guide Borrower Eligibility, Continued Executing the Loan Documents, (Con’t) Security Instrument Signature Requirements Form of Signature Required on Security Instrument and Riders for all Trustees: Each trustee of the living trust must sign the Security Instrument (any necessary Rider), using a signature block substantially similar to the following: Example: Signature: David Jones Typed Name: David Jones, individually and as Trustee for the Jones Family Trust under trust instrument dated mo/day/year. Form of Settlor/Credit Applicant's Signature Acknowledgment Required on Security Instrument and Riders: The following must be added to the Security Instrument (and any applicable Riders) following the Borrower's Signature lines (and then must be signed by each settlor of the living trust who is a credit applicant): Example: By SIGNING BELOW, the undersigned, Settlor(s) of the ___________________ Trust under trust instrument dated______________, ______________, acknowledges all of the terms and covenants contained in this Security Instrument and any Rider(s) thereto and agrees to be bound thereby. _________________________________(Seal) Trust Settlor Rider Signature Requirements The Revocable Trust Rider to the Security Instrument must be executed by the trustees on behalf of the trust. Each individual establishing the trust whose income and assets are used to qualify for the Loan must acknowledge all of the terms and covenants in the Security Instrument and any Riders and agree to be bound thereby by placing his or her signature after a statement of acknowledgment on the Security Instrument and Riders. See Security Instrument section, above. Continued on next page Conventional Lending Guide 100-30 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Inter Vivos Revocable Checklist Continued The following checklist is provided to assist in determining whether an Inter Vivos Revocable Trust complies with Homeward Residential’s guidelines. IMPORTANT: All topics must be Confirmed. Question Results An authorized person from Homeward Residential has approved the trust document. Confirmed __ The trust is signed, notarized, and dated by all applicable parties. Confirmed __ A complete copy of the trust including all referenced schedules and amendments except where an executed Certificate of Trust is acceptable. Confirmed __ The Settlor is alive at the time of application, and loan closing/funding. Confirmed __ The trust has been established in writing by a natural person and is to be effective during his/her lifetime. The trust is not created in a will or codicil. Confirmed __ The Settlor has the right to revoke or alter the trust. Confirmed __ The primary beneficiary of the trust is the Settlor (the interest and principal of the trust estate is applied for their benefit) and the mortgage has been underwritten as if the Grantor (or at least one of the Grantors) is the borrower (or the co-borrower, if there are additional individuals whose income or assets will be used to qualify for the mortgage). Confirmed __ The loan applicant(s) are both the Settlor and the Trustee. Confirmed __ The trustees must include at least one of the Settlors if there are two or more. Confirmed __ The trustee(s) has the power to mortgage the subject property and borrow money for the creator of the trust. Confirmed __ The trust does not contain an unusual risk or impairment of Homeward Residential’s rights (i.e., distributions required to be made in specified amounts from other than net income). Confirmed __ The subject property is a primary residence (1-4 unit), occupied by at least ONE of the Settlors (and whose income/ assets are used to qualify), 1-unit second home or an Investment property (1-4 unit). Confirmed __ Title must be vested in the name of one trust; jointly in the trustee(s) on the inter vivos revocable trust and in the name(s) of an individual borrower(s). Confirmed __ Title policy does not list any exceptions arising from the trust ownership of the property. Confirmed __ Full legal title to the property must be vested in the Trustee(s) on behalf of the Trust (there may be no other owners). Confirmed __ Loan will be underwritten as if the individual establishing the Trust (or at least one of the individuals) were the borrower (or the co-borrower, if there are additional individuals whose income or assets will be used to qualify for the loan). Confirmed __ Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-31 Conventional Lending Guide Borrower Eligibility, Borrower Power of Attorney Continued Homeward Residential will accept a Power of Attorney that: · · · · · · · ü References the specific transaction Is signed and dated by the party (Borrower) granting the power of attorney; names on power of attorney must match the name(s) of the person on the affected loan documents. Is signed by an appropriate “witness” (if required by state law) Specifically identifies the subject property address Is in effect on the date of the closing transaction Is correctly notarized Is not an interested party in the transaction, such as the real estate agent, seller, HWC employee, title company employee or closing agent, unless they are the borrower’s relatives A Durable Power of Attorney is acceptable. A durable power of attorney allows a mentally competent person, called the "Principal", to authorize a second party, called the "Agent or Attorney in Fact", to act on his or her behalf, even if the Principal later becomes incapacitated. This particular form becomes effective upon disability or incapacity of the Principal. A durable power of attorney should always be notarized, especially if the Agent will be dealing with real property. Notarization allows the Durable Power of Attorney to be recorded as a public record, if necessary. Power of Attorney must contain the following: ü May not contain any blank fields. ü Notary must be complete, contain a valid date and may not contain blank fields. ü Be recorded prior to or concurrent with the security instrument and dated such that it is valid at the time the loan document(s) was executed. ü Subject property may not be the result of a short sale, foreclosure, REO, etc. ü Borrower must provide a letter of explanation in regards to the need of a Power of Attorney. IMPORTANT: ü Borrower must sign the initial 1003 and all other ‘up-front’ documents, except for: · · A borrower on military service with the United States armed forces serving outside the United States or deployed aboard a United States vessel, as long as the power of attorney: o Expressly states an intention to secure a loan on a specific property, or o Complies with the requirements under the VA Lender’s Handbook relating to powers of attorney for VA-insured mortgage loans, or Such use is required by applicable law. ü If there is only one borrower involved in the loan transaction utilizing a power of attorney, the attorney-in-fact must be the borrower’s attorney-at-law or the borrower’s relative. ü Not permissible on Cash Out Refinance Transactions. Continued on next page Conventional Lending Guide 100-32 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Borrower Eligibility, Continued Borrower Power of Attorney, (Con’t) Documents executed by the attorney in fact must be signed according to the following examples (the typed signature lien and actual signature must match exactly on all POA documents): State Requirements Acceptable Signatures All States Except California Any of the following examples are permitted: ü Mary Smith by John Smith as her Attorney-in-Fact ü Mary Smith by John Smith as Attorney-in-Fact ü Mary Smith by John Smith, Attorney-in-Fact ü Mary Smith by John Smith, her Attorney-in-Fact California Only the following signature is acceptable: ü Mary Smith by John Smith as Attorney-in-Fact NOTE: In all states, documents executed by the attorney in fact must include the principal’s name, the agent’s name, and the agent’s capacity in the signature. Additionally, the document should have the same information typed or written. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-33 Conventional Lending Guide Credit Overview Homeward Residential requires that a borrower’s current and past credit history be analyzed through the review of a credit bureau report prepared by an independent licensed credit reporting agency or credit reporting repository. Homeward Residential accepts the following four types of credit reports, depending on the circumstances of the mortgage request. Age of Documents ü Residential Mortgage Credit Report (RMCR) ü In-file and Merged In-file Report ü Electronic Credit Reports All standard income, asset and credit documentation used to determine the borrower’s eligibility must be no more than stated below unless otherwise required as applicable with this guideline and/or summaries: ü 4 months per DU (120 days per LP) at the time of note for all mortgage loans (existing properties and new construction) IMPORTANT: · The age of the documents is measured from the date of the document to the date the note is signed. · For properties located in an “escrow state” only, the printed note date and the actual closing/signing date may differ. In these instances, the HUD-1 should be used to determine the actual closing date for determining the age of credit documents. Continued on next page Conventional Lending Guide 100-34 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Credit, Continued Electronic Credit Reports Electronically obtained credit bureau reports are permitted from an automated underwriting system (AUS) as follows: · Must be ordered from one of the three credit agencies with the correct, acceptable version: · · · o Equifax Beacon 5.0 o Experian FICO V2 o Trans Union FICO Risk Score Classic 04 Must be a Three Bureau In-file Merged Report Credit risk scores are made available to the AUS Two bureau merged in-file report must reflect that a three-bureau in-file report was initially ordered NOTE: A two-bureau merged in-file report is acceptable only if one of the approved credit repositories is unavailable. Representative Credit Score ü Obtain a minimum of one credit score for every borrower ü If two credit scores are obtained, use the lower score as the applicable borrower score ü If three credit scores are obtained, use the middle score as the applicable borrower score ü When more than one borrower is present on the loan, the lowest applicable score from all borrowers is the representative score. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-35 Conventional Lending Guide Credit, Continued Tradelines A tradeline reflects a history of open or paid credit obligations detailing borrower’s credit reputation. · No minimum tradeline requirement with DU Approve/Eligible or LP Accept. · Must include opening date, current balance and payment history. · For DU/LP, trade lines designated as authorized user are taken into consideration as part of the risk assessment; however, the underwriter must review the credit report trade lines to determine if they are an accurate reflection of the borrower’s credit history. If the underwriter believes the authorized user trade lines are not an accurate reflection, then the borrower’s credit history should be evaluated without the benefit of these trade lines and prudent judgment when making a final underwriting decision. NOTE: For scenarios requirement mortgage insurance, confirm tradeline requirements with the specific MI company. The more restrictive of guidelines will be required. Credit Report Inquiries Homeward requires determination if new credit was obtained by the borrower for all inquiries dated within 120 days of the credit report date. This may be determined by: · Obtaining a signed letter of explanation from the borrower, · A letter from the creditor indicating if new credit was obtained, or · A credit supplement confirming directly with the creditor if new debt was established. NOTE: If credit resulted from any inquiry, it must be verified and the obligation included in the qualifying debt ratio calculation. Continued on next page Conventional Lending Guide 100-36 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Credit, Continued Residential Mortgage Credit Report In-File and Merged In-File Reports Residential Mortgage Credit Report (RMCR) provides current, verified and details borrower information. The report agency verifies: ü Most recent 2-year employment history ü Residence history ü All debts, including terms, balances, and ratings. ü Past due payments ü Available legal information through public records, such as judgments, foreclosures, garnishments and bankruptcies. ü Joint or combined report for a married couple must contain all debts of both parties or separate reports must be provided An individual “in-file” report provides a borrower’s credit and residence history that has been reported and is currently “on file” with a particular credit-reporting repository. There are presently three major credit reporting repositories: Equifax Information Svc. LLC, Experian Credit Data and Trans Union. Homeward Residential also allows the use of in-file reports that have been “merged” by a credit reporting company. In the merging process, the credit reporting company pulls two or three in-file reports from different credit reporting repositories and merges the information to provide one report that contains the most current reported information. Through the merge process, duplicate records are eliminated. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-37 Conventional Lending Guide Credit, Continued NonTraditional Credit Report Delinquency and Derogatory Credit Not permitted for agency products. More weight is placed on installment loan delinquency than on revolving debt delinquency, with the most weight placed on mortgage payment history. The most serious types of delinquency include foreclosures, bankruptcy, judgments, collection accounts and tax liens. Applicants must provide explanations and supporting documentation to show these events were an isolated occurrence and are unlikely to happen again. The following should be considered: · The type of accounts on which the delinquency occurred. · The reason for delinquency. · The severity of the delinquency. · The frequency of delinquent accounts. · How recently the delinquency occurred. Continued on next page Conventional Lending Guide 100-38 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Credit, Bankruptcy Continued When an applicant has declared bankruptcy under the bankruptcy laws, it does not mean that the application for the mortgage loan must automatically be declined. Eligibility ü Discharged fully with re-established credit, as deemed acceptable by the underwriter, demonstrating the ability to manage his/her financial obligations. ü IMPORTANT: Mortgage Debt discharged through a bankruptcy, even if a foreclosure action is subsequently completed to reclaim the property in satisfaction of the debt, the borrower is held to the bankruptcy waiting periods and not the foreclosure waiting period. Lenders must obtain documentation to verify that the mortgage debt in question was in fact discharged as part of the bankruptcy. Application to Bankruptcy ü DU will Refer the following scenarios and therefore ineligible to Homeward Residential: · · · · · Chapter 13 discharged within the most recent 24 months, dismissed within the most recent 48 months or filed but neither discharged nor dismissed within the most recent 48months (measured to the Credit Report Date per DU; Application Date per LP). Non-chapter 13 bankruptcies filed, discharged or dismissed within the most recent 48 months (measured to the Credit Report Date per DU; Application Date per LP). DU/LP will not consider bankruptcies dated more than seven years prior to the date of the credit report in its analysis. If there is a trade line account reported with a bankruptcy status or manner of payment code of “7” and there is a bankruptcy reported in a public record within seven years of the credit report date, DU/LP will consider the public record information in its credit analysis. If there is a trade line account reported with a bankruptcy status code or manner of payment code of “7” but there is no bankruptcy reported in a public record within seven years of the credit report date, DU/LP will include the trade line in its credit analysis and the actual filed and discharged dates will be required to be verified to determine if the bankruptcy meets DU/LP guidelines. Borrowers whose credit history includes multiple previous bankruptcies: · · Borrowers having more than one bankruptcy reported on their credit are not permitted. Two or more borrowers with individual bankruptcies are not cumulative. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy, this is not considered a multiple bankruptcy. Note that any presence of bankruptcies or multiple bankruptcies will required additional due diligence by the Underwriter. Documentation ü Bankruptcy may be documented according to the DU/LP findings. ü Satisfactory letter of explanation from the Borrower is required. Continued on the next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-39 Conventional Lending Guide Credit, Foreclosure Continued When an applicant has a foreclosure listed on the credit report, it does not mean that the application for the mortgage loan must automatically be declined. Eligibility ü Completed with re-established credit, as deemed acceptable by the underwriter, demonstrating the ability to manage his/her financial obligation. ü Borrowers, whose credit history includes a previous foreclosure type tradeline, must have a re-established credit record for an elapsed time of: · 7 years from completion date for foreclosures regardless of DU/LP (measured to the Credit Report Date per DU; Application Date per LP). Documentation Foreclosure may be documented according to the AUS findings. Satisfactory letter of explanation from the Borrower is required. IMPORTANT: ü Homeward Residential will NOT refinance properties currently in foreclosure. Continued on next page Conventional Lending Guide 100-40 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Credit, Foreclosure, (Con’t) Continued ü NOTE: When DU identifies a foreclosure on a credit report tradeline and that foreclosure was due to extenuating circumstances, the underwriter may instruct DU to disregard the foreclosure information on the credit report in the eligibility assessment. This is done by entering “Confirmed CR FC EC” in the Explanation field for question c. in the Declarations section of the online loan application and resubmitting the loan casefile to DU. When the loan casefile is resubmitted to DU, the foreclosure information on the credit report tradeline will not be used in the eligibility assessment. ü If the underwriter enters “Confirmed CR FC EC,” the underwriter must then document that the foreclosure was due to extenuating circumstances, the foreclosure was completed three or more years from the disbursement date of the new loan, and the loan complies with all other requirements specific to a foreclosure due to extenuating circumstances. Homeward will accept the following for underwriting when inaccurate foreclosure information exists on a DU loan: ü When DU identifies a foreclosure on a credit report tradeline and the foreclosure information on that tradeline is inaccurate, the underwriter may instruct DU to disregard the foreclosure information on the credit report in the eligibility assessment. This is done by entering “Confirmed CR FC Incorrect” in the Explanation field for question c. in the Declarations section of the online loan application and resubmitting the loan casefile to DU. When the loan casefile is resubmitted to DU, the foreclosure information on the credit report tradeline will not be used in the eligibility assessment. ü If the underwriter enters “Confirmed CR FC Incorrect,” the underwriter must then document the foreclosure was completed seven or more years from the disbursement date of the new loan, or that the account was not subject to foreclosure and the loan complies with all other applicable requirements. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-41 Conventional Lending Guide Credit, Foreclosure, (Con’t) Continued Homeward will accept the following underwriting when conflicting or inaccurate foreclosure Information on a DIL or PFS Tradeline exists on a DU Loan: ü When DU identifies a foreclosure on a credit report tradeline that appears to be one that was subject to a DIL or PFS, the underwriter may instruct DU to disregard the foreclosure information on the credit report in the eligibility assessment. This is done by entering “Confirmed CR DIL” or “Confirmed CR PFS” in the Explanation field for question c. in the Declarations section of the online loan application and resubmitting the loan casefile to DU. When the loan casefile is resubmitted to DU, the foreclosure information on the credit report tradeline that also has a DIL or PFS Remarks Code will not be used in the eligibility assessment. ü If the underwriter enters “Confirmed CR DIL” or “Confirmed CR PFS,” the underwriter must then document that the account was subject to a DIL or PFS and the event was completed four or more years from the disbursement date of the new loan. Continued on next page Conventional Lending Guide 100-42 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Credit, Continued Deed in Lieu, PreForeclosure, Short Sale When an applicant has a deed in lieu of foreclosure, pre-foreclosure sale or short sale listed on the credit report, it does not mean that the application for the mortgage loan must automatically be declined. Eligibility ü Completed with re-established credit, as deemed acceptable by the underwriter, demonstrating the ability to manage his/her financial obligation. ü Borrowers, whose credit history includes a previous pre-foreclosure type tradeline, must have a re-established credit record for an elapsed time of (measured to the Credit Report Date per DU; Application Date per LP): · · 4 years: regardless of LTV (subject to MI Affiliate guidelines if mortgage insurance is required) 2 years: regardless of LTV if the event was due to extenuating circumstances. (subject to MI Affiliate guidelines if mortgage insurance is required) IMPORTANT: ü ü DU applies the following guidelines to prior DILs: · DU will determine if a mortgage tradeline is a DIL by using specific Remarks Codes that are present in the credit report data and associated to the tradeline. · When DU identifies a DIL, the underwriter must confirm the accuracy of the information. The underwriter must also document that the event was completed four or more years from the disbursement date of the new loan, or two or more years from the disbursement date of the new loan when the underwriter confirms that the mortgage loan meets the applicable timeframes and eligibility requirements for a deed-in-lieu of foreclosure due to extenuating circumstances. DU Applies the following guidelines to Preforeclosure Sales or Short Sales · · ü DU will determine if a mortgage tradeline is a PFS by using specific Remarks Codes that are present in the credit report data and associated to the tradeline. When DU identifies a PFS, the underwriter must confirm the accuracy of the information. The underwriter must also document that the event was completed four or more years from the disbursement date of the new loan, or two or more years from the disbursement date of the new loan when the underwriter confirms that the mortgage loan meets the applicable timeframes and eligibility requirements for a preforeclosure sale due to extenuating circumstances. Homeward Residential will NOT refinance properties currently in foreclosure. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-43 Conventional Lending Guide Credit, Continued Restructured Loans Restructured or modified loans for non-subject properties may be acceptable if: ü At the time of underwrite, the borrower(s) has made a minimum of 24 consecutive months of timely mortgage payments (from the date of restructure). Subsequent refinance of a restructured loan (on the subject property) may be acceptable for a Limited Cash Out Refinance transaction if: ü The borrower(s) made a minimum of 24 consecutive months of timely mortgage payments (from the date of restructure) on the restructured loan before closing on the refinance mortgage loan. ü Cash out refinance transactions are not permitted when the restructure or modification (as defined below) occurred on the subject property. ü Underwriter must review the loan and modification details and determine if it meets the definition of a Restructured Mortgage as defined next. A copy of the modification agreement must be in the file upon delivery to Homeward. If the end product of the modification is any one of the following bullets, it is considered a Restructured Mortgage and therefore must follow the 24 consecutive months of timely mortgage payments noted above. Restructured Mortgage A mortgage in which the original terms have been changed, including through the origination of a new mortgage, resulting in any of the following: · Forgiveness of principal and/or interest on either the first or second mortgage. · Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness. · Conversion of any portion of the original mortgage debt to a mortgage that is fully forgiven over a period of time or due upon the sale of the subject property (a “soft” subordinate mortgage). · Conversion of any portion of the original mortgage debt from secured to unsecured. · Note a mortgage that meets the definition of a Restructured Mortgage continues to be a Restructured Mortgage, regardless of the seasoning. A Mortgage that is the result of any subsequent refinance of a Restructured Mortgage is also considered a Restructured Mortgage. Continued on next page Conventional Lending Guide 100-44 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Credit, Continued Charge-Off of Mortgage Accounts Collections and NonMortgage Charge-offs ü When a loan is run through Fannie Mae’s Desktop Underwriter (DU), Mortgage accounts, including first liens, second liens, home improvements loans, HELOCs, and manufactured home loans, will be identified as a charge-off if there is an MOP code of “9” (collection or charge-off) and there is no information indicating the account may also be subject to a foreclosure (MOP code “8” or foreclosure Remarks Code), a bankruptcy (MOP code “7”), a deed-in-lieu of foreclosure (DIL Remarks Code), or a preforeclosure sale (PFS Remarks Code). ü When DU identifies a charge-off on a mortgage tradeline, the lender must confirm the accuracy of the information. The lender must also document that the event was completed four or more years from the disbursement date of the new loan, or two or more years from the disbursement date of the new loan when the lender confirms that the mortgage loan meets the applicable timeframes and eligibility requirements for a charge-off due to extenuating circumstances. We generally require the borrower to pay off at (or prior to) closing; however, if the account meets the below thresholds, we will not require them to be paid off. · One-unit, owner occupied properties –borrowers are not required to pay off outstanding collections or charge-offs—regardless of the amount. · For 2-4 Unit Primary Residence or Second Homes, if the account is less than $5,000 per individual item or in aggregate, · For investment properties, if account is less than $250 per individual account or $1,000 in aggregate. NOTE: ü If the collection account(s) total more than the above based on property type, it is NOT acceptable to pay the account(s) down to below the maximum amount in order to leave the account(s) open. If they exceed the above amounts, the accounts must be paid in full. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-45 Conventional Lending Guide Credit, Continued Past Due Accounts Accounts that reported as past due (not reported as collection accounts) must be brought current prior to or at closing. Judgments, Garnishments and Outstanding Liens ü The Borrower must pay off at or prior to closing any delinquent taxes, judgments, garnishments, tax liens, mechanics’ or materialmen’s liens or any other outstanding items regardless of DU recommendations. ü Documentation of the satisfaction of these liabilities, along with verification of funds sufficient to satisfy these obligations, is required. Nebraska Alimony / Child Support Liens Under the Uniform Interstate Family Support Act, orders for payment of alimony/child support in Nebraska automatically create liens and could impact a first lien position on a cash-out refinance transaction. Purchase and rate/term refinance transactions are not impacted as the lien automatically takes second position. For all products and all cash out refinance transactions, if the credit or title commitment reflects an alimony/child support judgment/lien, the following is required: · Subject property mortgage must be in first lien position and title commitment must clearly state that the alimony/child support lien is in subordinate position to the new mortgage. · A copy of the subordination agreement or court order must be provided. Continued on next page Conventional Lending Guide 100-46 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Credit, Disputed Credit Information Continued If DU/LP does not issue the disputed tradeline message, the Underwriter is not required to further investigate the disputed tradeline on the credit report or obtain an updated credit report (with the tradeline no longer disputed. However, the Underwriter is required to ensure that the payment for the tradeline, if any, is included in the total expense ratio if the account does belong to the borrower. IMPORTANT: When DU does address the disputed tradeline, the finding will read as below and will be a condition of the loan file. Note, Homeward Residential does not manually underwrite files; therefore, FNMA’s offering is not an available option. “DU identified the following tradeline(s) as disputed by the borrower and did not include the tradeline(s) in the credit risk assessment. The lender must verify the accuracy of the tradeline(s) by determining if it belongs to the borrower and by confirming the accuracy of the payment history. If the tradeline does not belong to the borrower, or the reported payment history is inaccurate, no further action is necessary. If the tradeline does belong to the borrower and the reported payment history is accurate, it must be taken into consideration in the credit risk assessment. To ensure it is considered, the lender may obtain a new credit report with the tradeline no longer reported as disputed and resubmit the loan casefile to DU, or the lender may manually underwrite the loan. If the tradeline is a mortgage that was past due by two or more payments in the last 12 months, or a foreclosure that has been filed within the last 5 years, the loan casefile is ineligible for delivery to Fannie Mae.” Consumer Credit Counseling The presence of consumer credit counseling service does not alter the underwriting recommendation. Whether the borrower has or has not completed his or her participation in the sessions before closing on the mortgage transaction is not of relevance since it is the borrower’s credit history that is of primary importance Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-47 Conventional Lending Guide Credit, Housing History Continued Evaluated per DU/LP system; however, a mortgage/rental payment history reflecting any 1x60 late within the most recent 12 months are not permitted regardless of the recommendations. NOTE: A VOM or cancelled checks are required if the history is not on any bureau. Cancelled checks are required if housing payments are made to or through a private party. Commercial Property Any property disclosed on Schedule E of the Borrower’s tax returns must include a mortgage history verification regardless of whether the debt is in the borrower’s personal name or in the name of a business and regardless of whether the income is used to qualify the borrower. First Time Homebuyers In all circumstances, first time homebuyers should have an acceptable housing history. However, if a housing history does not exist (i.e. borrowers lived rent free with family), the underwriter may waive the housing history requirement for permitted programs based on: ü Established credit history with credit scores meeting all minimum requirements. ü As approved via DU/LP. Continued on next page Conventional Lending Guide 100-48 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Credit, Departing Property Continued When considering borrower(s) that are in any fashion retaining their current property, ALL ramifications must be consider prior to approval. Such topic include the below and can be found in their respective section within this guideline: · · · · · · Rental Income Reserves Real Estate Debt Equity of Retained/Converted Property Housing History Multiple Mortgages and Maximum Exposure Additionally: ü If the current/retained residence is secured by a mortgage that will be called due and payable should the borrower no longer reside there as their primary residence, then they are not eligible to purchase another primary residence. For example, retained properties secured by a Reverse Mortgage. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-49 Conventional Lending Guide Employment and Income Overview The underwriter must carefully evaluate the borrower’s employment and income history, stability and likelihood of continuance and must document the last two years of employment income history, using Verification of Employment forms or most recent pay-stubs dated no earlier than 30 days prior to the initial loan application date including any and all YTD earnings and W-2 forms for the past two years. Tax Return Documentation ü Each tax return must be signed by the borrower unless one of the below have been obtained (as signature alternatives): · Documentation confirming that the tax returns were filed electronically, · A completed IRS From 4506-T (signed by the borrower) for the year in question, or · IRS transcripts that validate the tax return. Continued on next page Conventional Lending Guide 100-50 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Amended Tax Returns Continued Homeward Residential does not permit amended tax returns for the purposes of qualification; however, in cases where the borrower has filed amended tax returns for other causes: ü Tax return amendment filed PRIOR to the Loan Application Date: · Tax returns filed prior to application are acceptable for underwriting purposes. The original filed return, the amended return and a letter of explanation from the borrower (or borrower’s accountant) are required. If the file was amended 60 days or less prior to the application, evidence of payment must also be provided. Tax return amendment filed AFTER the Loan Application Date are acceptable when accompanied by ALL of the following: · A letter of explanation regarding the reason for the re-file. · Evidence of filing. · Evidence of Payment or the evidence of the ability to pay the tax. · Borrower does not require use of amended income (if increased) for qualification. · If the amended returns supplied show a significant increase in income, additional conditions may apply. IMPORTANT: Under no circumstances are amended tax returns acceptable if the loan has already been reviewed and denied by Homeward Residential. ü Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-51 Conventional Lending Guide Employment and Income, Taxpayer Identification Theft Continued Taxpayer identification theft occurs when a taxpayer’s stolen Social Security number is used to file a forged tax return and attempt to claim a fraudulent refund. If the borrower is claiming Taxpayer Identification Theft, the Underwriter will be required to obtain one of the following prior to the Note Date as validation for the identity theft: ü Proof identification theft was reported to and received by the IRS (IRS Form 14039) ü Copy of the notification from the IRS alerting the taxpayer to possible identification theft ü Policy report or proof of filing a complaint with the Federal Trade Commission The Underwriter will also be required to obtain the following secondary documents (all or some, as applicable to the borrower) to validate the reported income on the tax returns in question: · W-2 or 1099 transcripts which match the W-2 or 1099 income shown on the 1040s · 1099 Mortgage Interest should match reported interest on Schedule A or Schedule E · 1099G Unemployment should match reported unemployment · 1099 Interest/Dividend should match reported dividend and interest · Verification of the prior tax year income, which must be in line with the current year. · Business Returns (for self-employed borrowers) · K-1s (For Self-employed borrowers) · Year to Date Profit and Loss (P&L) Statements (for Schedule C Self-employed borrowers) to verify income is in line with the previous year. Continued on next page Conventional Lending Guide 100-52 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Newly Employed Continued For borrowers who have newly obtained employment without any employment history without a full 2 year history are considered on a case-by-case basis with all of the following: ü Previous education or military career covering a minimum 2 year period. ü All official school transcripts and/or discharge papers must be documented accordingly; diplomas alone are not acceptable documentation. ü Minimum of 6 months with current employer. ü Only W-2 wage earner income may be used to qualify; commission, bonuses, self-employed, tips, etc. may not be considered. ü Borrower must be employed in the same or similar line of work compared to their completed education. ü NOTE: The above scenarios are viable due to a 2 year history being documented in conjunction with an education/military history. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-53 Conventional Lending Guide Employment and Income, Extended Employment Gaps Continued For borrower(s) with an extended job gap/absence and re-entering the workforce with less than six (6) months current employment may have their income considered effective and stable if he/she: is employed in the current job (no minimum timeframe required), and can document a two year work history prior to an absence from employment using: · traditional employment verifications, and/or · copies of W-2 forms or pay stubs. NOTE: An acceptable employment situation includes individuals who took several years off from employment to raise children, then returned to the workforce. ü ü IMPORTANT: Situations not meeting the criteria listed above may only be considered as compensating factors; otherwise, the borrower must be on the current job for a minimum of six (6) months. Extended absence is defined as three to six months; gaps/absences extending more than six (6) months will be carefully reviewed and may require additional supporting documentation to support the job loss, prior employment in the same or related field, education or training supporting new job, etc. Temporary Leave of Absence – Returning Before First Payment Defined as being employed but taking time off; for example, under Family Medical Leave Act. The borrower’s regular pay may only be considered if the borrower will be returning to work before the first payment. Employment status confirming the return date and income must be verified prior to the loan closing. Following documentation is required if the borrower is using full income to qualify: · Borrower’s letter of intent to return to work · Employer letter or other communication of the borrower’s right to return to work, under what terms and the VOE/Verbal VOE return date to be reflected prior to the first mortgage payment due date. · NOTE: All other standard employment and income eligibility requirements and documentation must be provided and satisfied (for the temporary leave income and regular income amounts). Continued on next page Conventional Lending Guide 100-54 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Temporary Leave of Absence – Returning After First Payment Continued If the borrower is not currently receiving income or receiving a lesser temporary leave amount, their regular full time pay may not be used to qualify, even if they plan on returning to work at some future specified time. If the borrower is receiving disability pay in an amount less than their regular/full time pay, only lesser income that is likely to continue may be used to qualify. Income from accumulated vacation and sick time may not be used to qualify because its continuance cannot be verified; however, the temporary leave income may be supplemented with available liquid financial reserves. Instructions/Examples for calculating the supplemental income from liquid assets: ü Supplemental income amount will equate to the available liquid reserves divided by the number of months of supplemental income. ü Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount. · IMPORTANT: Available reserves entered into the AUS system must be reduced by the amount of liquid assets used as income. ü Number of months of supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her regular employment income, rounded up to the next whole number. After determining the supplemental income, the Underwriter must calculate the total qualifying income. ü Total qualifying income = supplemental income plus the temporary leave income. The total qualifying income that results may not exceed the borrower's regular employment income. Example · Regular income amount: $6,000 per month · Temporary leave income: $2,000 per month · Total verified liquid assets: $30,000 · Funds needed to complete the transaction: $18,000 · Available liquid reserves: $12,000 · First payment date: July 1 · Date borrower will begin receiving regular employment income: November 1 · Supplemental income: $12,000/4 = $3,000 · Total qualifying income: $3,000 + $2,000 = $5,000 Note: These requirements apply if the Underwriter becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the Underwriter must not ask if he or she intends to take leave in the future. Following documentation is required if the borrower is using short term disability to qualify: ü · · Borrower’s letter of intent to return to work Employer letter or other communication of the borrower’s right to return to work and under what terms Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-55 Conventional Lending Guide Employment and Income, Stability of Employment / Income – Standard Continued If a borrower’s employment history includes unemployment gaps or job changes, the application must reflect at least two years of employment, therefore covering a longer period of time. If the borrower has less than a two year history of receiving income, a written analysis justifying the determination that the income being used for qualification is stable must be provided. Consider both the length of the borrower's employment with any one employer and the stable and reliable flow of income. When evaluating a borrower who has frequent job changes or unemployment, focus on whether the changes have affected the borrower’s ability to repay their obligations. If the borrower provides documentation of a consistent level and type of income and the ability to pay his or her obligations despite changes in the source of that income, it can be presumed that the borrower's income level is stable. Automated underwriting recommends acceptable levels of documentation, which may not be adequate for every borrower and every situation (such as long periods of unemployment). In these cases, additional documentation may be required. Stability of Employment / Income Furlough Known economic conditions, such as plant closings, furloughs, company bankruptcies, etc. that may affect the borrower's income, must be taken into consideration. Borrowers in a state or working for an employer with an active furlough policy must qualify with the reduced income. Payments from a third party (credit union or other source) to supplement unfunded budgets are not permitted, even if the source is approved by the employer. Full pay may be used if there is evidence from the employer or third party documentation that the furlough will end within the next 60 days and there is no discussion to extend the furlough. Continued on next page Conventional Lending Guide 100-56 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Allowable Age of Federal Tax Returns Continued For some types of sources of income, copies of federal income tax returns (personal and, if applicable, business returns) are required to be obtained. The “most recent year’s” tax return is defined as the last return scheduled to have been filed with the IRS. For example: If Today’s Date is… Then the Most Recent Year’s Tax Return would be… February 15, 2014 2012 April 15, 2014 2013 December 15, 2014 2013 Application Date October 151, [current year minus 1] to April 142, current year Disbursement Date Documentation Required October 151 [current year minus 1] to April 142, current year The most recent year’s tax return is required. The use of a Tax Extension (IRS Form 4868) is not permitted. April 151, current year to June 30, current year The previous year’s tax return (the return due in April of the current year) is recommended, but not required. The underwriter must ask the borrower whether he or she has completed and filed his or her return with the IRS for the previous year. If the answer is yes, the underwriter must obtain copies of that return. If the answer is no, copies of tax returns for prior two years must be obtained. Homeward requires Tax Transcripts on all borrowers for the number of years required to verify income. July 1, current year to October 142, current year April 151, current year to October 142, current year April 151, current year to December 31, current year January 1, [current year plus 1] to April 142, [current year plus 1] Must obtain: · The most recent year’s tax return OR all of the following: · A copy of IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) file with the IRS, · The total tax liability reported or IRS form 4868 must be reviewed and compare it with the borrower’s tax liability from the previous two years as a measure of income source stability and continuance. An estimated tax liability that is inconsistent with previous years may make it necessary for the lender to require the current returns in order to proceed. · IRS From 4506-T transcripts confirming “No Record Found” for the applicable tax year, and · Returns for the previous two years. The most recent year’s tax return is required. The use of a Tax Extension (IRS Form 4868) is not permitted. NOTE: For business tax returns, if the borrower’s business uses a fiscal year (a year ending on the last day of any month except December), the dates in the above chart may be adjusted to determine what year(s) of business tax returns are required in relation to the application date/disbursement date of the new mortgage loan. 1 Or the April/October filing dates for the year in question as published by the IRS. 2 Or the day prior to the April/October filing dates for the year in question as published by the IRS. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-57 Conventional Lending Guide Employment and Income, Self-Employed and Tax Extensions Continued If the 2013 self-employed income has increased from 2012, is being used for qualifying purposes and the borrower has filed an extension for the 2013 tax returns: ü Obtain the 2012 and 2011 tax returns and an audited 2013 Profit and Loss statement If the 2013 self-employed income has decreased from 2012, is being used for qualifying purposes and the borrower has filed an extension for the 2013 tax returns: ü Obtain the 2012 and 2011 tax returns and a 2013 Profit and Loss statement (unaudited). Continued on next page Conventional Lending Guide 100-58 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Borrowers who have filed 2013 tax returns and the IRS transcript indicate “No Record of Return Filed” Continued Continued on next page If the borrower has filed their 2013 tax returns, the IRS Transcripts indicate “No Record of Return Filed” AND the 2013 income is used in calculating qualifying income, the follow must be obtained: ü The lender must get a “Stamped” copy of the tax returns from the IRS, or; ü If the borrower E-filed the tax return, the lender can obtain evidence from the borrower that the return was “accepted” by the IRS. ü For loans underwritten (defined as the last run date in DU) before June 15, 2014, the following must be provided: · 2013 Tax Transcript showing “No record or return filed”; and, · Copy of the 2012 Tax Return; and, · For Salaried Borrowers: a 2012 tax transcript, current paystub and 2013 W-2; · For Self-Employed Borrowers*: 2011 and 2012 tax transcript and a 2013 P&L. · See below if borrower filed an extension. For loans underwritten (defined as the last run date in DU) on or after June 15, 2014, the 2013 Tax Return Transcripts must be provided. ü · *NOTE: The underwriter must apply appropriate due diligence to determine the borrower’s income is acceptable for the transaction. IRS Form 4506-T Not Required to File · Analyze the 2011 and 2012 transcripts and the 2013 tax returns, for consistent income trends. · If the Underwriter determines any inconsistencies, they may require the 2013 Tax Transcripts to validate the 2013 Tax Returns. Borrowers Not Required to File a 2013 Tax Return If a borrower is not required to file a 2013 tax return and the source of income cannot be validated through the 4506-T process, alternative documentation must be obtained. Examples of documentation include 1099 transcripts or an award letter with a bank statement. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-59 Conventional Lending Guide Employment and Income, Continued Multiple IRS Form 4506-T IRS Form 4506–T can be used to obtain transcripts for up to four years or tax periods but only one tax form number can be requested per each IRS Form 4506–T. For example, it is necessary to complete two IRS Form 4506–Ts for a self-employed borrower whose income documentation includes both two years of personal tax returns and two years of business tax returns. One IRS Form 4506–T will be required to obtain a transcript of the personal 1040 returns and another will be required for the business returns (Form 1065, Form 1120, Form 1120A, etc.). Alternatives to the IRS Form 4506-T Use of IRS Form 4506-T has become the most efficient method for electronic transcripts of the borrower's income tax information to be obtained. It is also acceptable for either an IRS Request for Copy of Tax Return (IRS Form 4506) or IRS Tax Information Authorization (IRS Form 8821) to be utilized; however, these forms are not supported electronically by the IRS. In addition, IRS Short Form Request for Individual Tax Return Transcript (IRS Form 4506T-EZ) is also acceptable, although it may only be used to obtain transcripts of IRS Form 1040 (no other tax forms are supported using IRS Form 4506T-EZ). Continued on next page Conventional Lending Guide 100-60 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Alimony / Child Support / Separate Maintenance Continued In order for alimony or child support to be considered as stable income, the borrower must have received income for at least 6 months and it must continue for at least three years after the date of the original mortgage loan application. Homeward Residential will accept as verification of the award of alimony and/or child support one of the following documents: ü Copy of the divorce decree ü Formal separation agreement ü Court records; any other legal agreement or court decree that describes the payment terms, or a copy of any applicable state law that requires alimony, child support or maintenance payments and specifies the conditions under which the payments must be made. The document must specify the amount of the award and the period of time over which it will be received, including the age of the child(ren) for whom the support is being paid). Acceptable evidence would be deposit slips, canceled checks, bank statements or Federal income tax returns. Evidence must be provided to document that the funds have been received for the most recent 6 months: ü When a borrower has been receiving full, regular and timely payments for the most recent 6 months, the income may be considered stable. ü Less than 6 months may only be considered as a compensating factor. ü NOTE: Any partial, sporadic, inconsistent, proposed or voluntary payments may not be considered as stable income. Alimony is taxable and therefore should not be grossed up; however, child support is eligible. Documentation for alimony, child support income is not required if the borrower does not use the income to qualify or as a compensating factor. Loan Prospector (LP): if the loan is run via Freddie Mac’s Loan Prospector (LP) and the income is verified with signed federal income tax returns, the most recent two (2) years will need to be obtained. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-61 Conventional Lending Guide Employment and Income, Auto Allowance Continued Automobile allowances will be considered stable income for a Borrower who has been receiving the income for the past two years, provided all associated business expenditures are included in the calculation of the Borrower's total Debt-to-Income Ratio. Either an actual cash flow approach or an income and debt approach may be used to calculate the income. ü Actual Cash Flow Approach · · · When the Borrower files an IRS form 2106, the actual cash flow approach should be used. Any funds in excess of the Borrower's monthly expenses are added to the Borrower's monthly income. Any expenses in excess of the monthly allowance must be included in the Borrower’s total monthly obligations. When the Borrower uses the form 2106 and recognized “actual expenses” instead of the standard mileage rate, look at the actual expenses section to identify the Borrower’s actual lease payments, and then make the appropriate adjustments. If a Borrower elected to use a standard mileage deduction instead of taking the actual cash expenditure for auto expenses when he or she completed their federal income tax return, (1) the unreimbursed expense is deducted from income. For (2) depreciation add-back, the business miles driven should be multiplied by the depreciation factor for the appropriate year. The applicable deprecation add-backs are as follows: Tax Year Depreciation Add-Back per Mile ü 2008 & 2009 $0.21 2010 $0.23 2011 $0.22 2012 $0.23 Income and Debt Approach · When the Borrower does not report the allowance on form 2106, the income and debt approach should be used. The full amount of the allowance is added to the Borrower's monthly income. The full amount of the lease or financing expenditure for the automobile must be added to the Borrower's total monthly obligations. Continued on next page Conventional Lending Guide 100-62 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Calculating Auto Depreciation / Expenses Boarder Income Continued Any automobile depreciation or lease payments claimed on IRS form 2106 should be netted out, and not included as a reduction to income. ü If the borrower claims a “standard mileage” deduction, multiply the business miles driven by the depreciation factor for the appropriate year, as published by the IRS, and add that figure back to the calculation. ü If the borrower claims an “actual depreciation expense” deduction, the amount the borrower claimed should be added back Rental income from boarders in a one-unit property that is also the borrower’s principal residence or second home is not generally considered acceptable stable income with the exception of the following: ü When a borrower with disabilities receives rental income from a live-in personal assistant, whether or not that individual is a relative of the borrower, the rental payments can be considered as acceptable stable income, in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage. Personal assistants typically are paid by Medicaid Waiver funds and include room and board, from which rental payments are made to the borrower. ü Evidence must be obtained of the boarder’s history of shared residency with a copy of the driver’s license, bills, bank statements, W-2 forms showing the boarder’s address as being the same as the borrowers address. ü Copies of cancelled checks documenting the boarder’s rental payments for the past 12 months must be obtained. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-63 Conventional Lending Guide Employment and Income, Bonus and Overtime Continued May be included if the income has been: ü Consistently received for the most recent two years. ü Employer confirms its likelihood of continuance ü If stable or increasing, the income may be averaged over the two (2) year period. · Significant increases in recent bonus or overtime income must include sufficient documentation to support the higher amount. The employer’s VOE must verify that income is likely to continue for the next three years at the higher amount used to qualify. If declining, the income should not be averaged over the two (2) year period; however, the lower current amount must be used if there is confirmation that the decline has at least stabilized. ü ü VOE is required and must reflect the breakdown of the supplemental income from the base pay; the supplemental income will be averaged and likelihood of continuance must be confirmed. ü Most recent paystub, plus W-2s covering the most recent 2 year period. Continued on next page Conventional Lending Guide 100-64 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Capital Gains Continued Generally, Capital Gains are a one-time occurrence and would not be considered income. However, if there is a two year history of Capital Gains and there is verification that the Borrower has remaining assets that can be sold for future income, the income may be considered with: ü Copies of the borrowers filed individual federal tax returns signed, with all schedules, for the most recent two years. ü Schedule D reflects the Capital Gain income. ü A two year average must be completed when using Capital Gain income as qualifying income. NOTE: · If Capital Losses identified on IRS Form 1040, Schedule D, are recurring, they do not have to be considered when calculating income or liabilities. · Due to the nature of this income, current receipt of the income is not required to comply with the Age of Credit Documents policy; however, documentation of the asset ownership must be in compliance. Housing (NonMilitary) or Parsonage Allowance Ministers and other clergy members are typically paid a monthly base pay plus “other” income. The amount of “other” income may vary widely and may or may not be taxable income. Often, ministers are self-employed and/or have unreimbursed business expenses. Housing allowance is typical and may be considered with acceptable verification and documentation. · If the income has been received for at least 12 months, this can be used as qualifying income. You may not offset the monthly PITI. · A written VOE, a letter from the employer or paystubs reflecting the amount of the housing or parsonage allowance and the terms under which it is paid must be obtained along with proof of 12 months receipt of the housing allowance. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-65 Conventional Lending Guide Employment and Income, Commission Income Continued ü Expenses reported on Form 2106 of the borrowers tax returns must be deducted from the income to arrive at the net commission income and the net income must be average over the most recent two years. ü Commission received 12 to 24-months may be considered if 12 months are reflected on W-2 and tax returns. Continuance from the employer MUST be confirmed. ü Declining income sources should not be averaged, and an explanation for the decline should be obtained. The most recent lower income would be used for qualification purposes. NOTE: Strong, documented compensating factors must exist when declining income is present. ü Verification of year-to-date commission earnings is required. DU If commission income is less than 25% of the borrower’s total annual employment income: · The most recent paystub and most recent two (2) years W-2 forms are required. If commission income is equal to or greater than 25% of the borrower’s total annual employment income: · The most recent paystub and copies of the most recent 2-year federal tax returns with all attachments are required. LP · · The most recent paystub and copies of the borrowers filed federal tax returns signed, with all schedules, for the most recent two years. The tax returns must reflect at least six (6) months of commission income. A verbal verification of employment as stated within the lending guide. Continued on next page Conventional Lending Guide 100-66 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Disability Benefits Continued Disability benefit payment should be treated as acceptable stable income unless the terms of the disability policy specifically limit the stability or continuity of the benefit payments. ü Must not have an established termination or modification date within three (3) years. · If long term disability is received from Social Security, there is no expiration date and it acceptable to expect it to continue (i.e. continuance is not required to be further documented). · Generally, long term disability will not have a defined expiration date and, in these cases, it is acceptable to expect it to continue (i.e. continuance is not required to be further documented). Requirements for re-evaluation of benefits are NOT considered a defined expiration date. ü Benefits that will decrease to a lesser amount within the next three years because of long-term conversion, the lesser amount should be utilized in qualifying the borrower. ü Copy of disability policy or statement is required from the insurance company, employer, or other qualified disinterested party. ü Disability Payments to be verified by obtaining a copy of the award letter, W-2 or other equivalent documentation showing the type, source and total amount of income. · Two (2) months bank statement evidencing current receipt must be documented as well. ü May be grossed up 25% provided documentation verifies income as non-taxable. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-67 Conventional Lending Guide Employment and Income, Dividends and Interest Employed by Family Members Continued An average of interest and dividend income may be used to qualify if supported by the Borrower’s assets after settlement. The asset providing the interest and dividend income may not be liquidated for cash to close unless that portion used is deducted and the interest and/or dividend amount is recalculated based on the unused portion of the asset. Interest and dividend income is eligible only after deducting that portion, listed on Schedule B of IRS Form 1040, derived from a partnership or S Corporation. ü Most recent two (2) years personal tax returns with all schedules AND ü Most recent asset account statement documenting ownership of the asset. If employed by a relative, the following documentation is required regardless of DU/LP recommendations: ü The business accountant must verify that the Borrower is not selfemployed by indicating his or her percentage of interest in the business. The accountant must be a disinterested third party. ü Most recent, computer generated pay stub covering 30 days regardless of DU. ü Most recent two year’s tax returns ü Most recent two year’s W-2 form NOTE: The two (2) year income will be analyzed for increases that are significantly greater than cost of living raises. In such event, the underwriter may average the income over a 24 month period. Continued on next page Conventional Lending Guide 100-68 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Employees not required to file US Income Tax Returns Foreign Income Continued Added guidelines when companies, such as World Bank, do not require employees to file United States income tax returns; therefore, tax transcripts cannot be verified. In these circumstances, the following is required: ü 4506-T must contain a response of “no record of return filed.” ü All documentation must meet AUS guidelines. ü The employer must be identified as being located in the United States. ü The written VOE must cite the: · Authority for not filing tax returns, and · Technical/full name of the employer Income that is earned by a U.S. citizen that is employed by a foreign corporation or a foreign government may use foreign income to qualify if the following requirements are met: ü Most recent paystub(s) and two (2) year’s W-2s ü Copies of his or her signed federal income tax returns filed with the IRS for the past two years that include foreign income. ü All income must be translated to U.S. dollars documented from a viable source. ü Borrowers must have a U.S. primary residence property address. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-69 Conventional Lending Guide Employment and Income, Foster Care Income Continued Foster Care Income received from a state or county sponsored organization may be considered acceptable with a two year history and the likelihood of continuation. Documentation: Gratuities and Tip Income ü Letters from the organizations providing the income ü Two year tax returns ü Copies of deposit slips or bank statements confirming the regular deposits ü Income for children who will reach the age of 19 within three years will not be considered ü Permitted if they are included in two years of taxable income. Documentation: Most recent paystub, most recent two (2) years W-2s along with standard verbal VOE. Continued on next page Conventional Lending Guide 100-70 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Military Income Continued Base military pay, in addition to the following, are permitted: ü Flight or hazard pay ü Rations ü Clothing allowance ü Quarters’ allowance ü Proficiency Pay NOTE: Income paid to military reservists while they are fulfilling their reserve obligations is also acceptable if it satisfies the same stability and continuity tests applied to second-job income. DU YTD Leave and Earnings Statement (LES) documenting at least 30 days of income and the most recent W-2 are required. In lieu of a verbal VOE, a LES dated no more than 30 days prior to the Note date may be provided or a verification of employment through the Defense Manpower Data Center dated no more than 30 days prior to the Note Date. LP Streamlined Accept Documentation ü Year to date Leave and Earnings Statement (LES) documenting at least 30 days of income, the most recent W-2 are required. A verbal verification of employment. In lieu of a verbal VOE, an LES dated no more than 30 days prior to the Note date may be provided or a verification of employment through the Defense Manpower Data Center dated no more than 30 days prior to the Note date. Standard Documentation ü Year to date Leave and Earnings Statement (LES) documenting at least 30 days of income, the most recent 2 years W-2 forms are required. ü ü A verbal verification of employment. In lieu of a verbal VOE, an LES dated no more than 30 days prior to the Note date may be provided or a verification of employment through the Defense Manpower Data Center dated no more than 30 days prior to the Note date. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-71 Conventional Lending Guide Employment and Income, Nonreimbursed Business Expense Continued When a borrower has non-reimbursed business expenses, such as classroom supplies, uniforms, meals, gasoline, automobile insurance, and/or automobile taxes, determine the recurring monthly debt obligation for such expenses by developing a 24-month average of the expenses. Review the Schedule A and/or IRS form 2106 from one of the following: · · Personal income tax returns including all schedules for the number of years required Tax transcripts for the number of years required When calculating the total debt-to-income ratio, the 24-month average for nonreimbursed expenses should be subtracted from the borrower’s stable monthly income. If there is not a full 24-month history, the underwriter should develop an annualized monthly average. Calculation + Total Expenses (form 2106, line 8, columns A & B) + Depreciation (line 28) Sub-total (divide) ÷ Sub-total by 24 (divide by 12 if using one year’s tax returns) Monthly Average Non-reimbursed Business Expense See Auto Allowances & Expense Account Payments in the Employment and Income section for treatment of these business expenses, as they may not be deducted from income; they must be included as recurring debts in the total debt ratio. Continued on next page Conventional Lending Guide 100-72 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Non-Taxable Income Continued Generally, income is taxable unless it is specifically exempted by law. Nontaxable income may be shown on the borrower's tax return but is not taxed. Verify and document that the particular source of income is nontaxable. Documentation that can be used for this verification includes award letters, policy agreements, account statements, or any other documents that address the nontaxable status of the income. ü If the income is verified as nontaxable, and the income and its taxexempt status are likely to continue, develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25 percent of the nontaxable income to the borrower’s income. ü All disclosed, nontaxable income must be grossed-up even if not being used for loan qualification. ü Filing requirements for most taxpayers can be found on the IRS website. NOTE: Loans approved via LP and income is verified through federal income tax returns, the most recent two (2) years must be obtained. Mortgage Credit Certificate Not Permitted. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-73 Conventional Lending Guide Employment and Income, Mortgage Differential Payments Continued An employer may subsidize an employee’s mortgage payments by paying all or part of the interest differential between the employees’ present and proposed mortgage payments. When calculating the qualifying ratio, the differential payments should be added to the borrower’s gross income. The payments may not be used to directly offset the mortgage payment, even if the employer pays them to the mortgage lender rather than to the borrower. Obtain written verification from the borrower’s employer confirming the subsidy and stating the amount and duration of the payments. Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. NOTE: If this income is used on a purchase transaction, current receipt is not required to be documented except as verified in the employer letter. For refinance transactions where the income is continuing with the new loan, the recent receipt must be in compliance with the Age of Credit Documents. Note Receivable Income ü Must evidence continuance for at least 3 years ü Copy of the note to establish the amount and length of payment ü Must have been received for the last 12 months ü Acceptable evidence includes: · Copies of signed federal income tax returns filed with IRS · Copies of bank statements reflecting deposit of funds NOTE: ü Payments on a newly executed note that specifies a minimum duration of three years may not be used as stable income, but may be used to justify a higher qualifying ratio. ü Loans approved via LP and income is verified with signed federal income tax returns, the most recent two (2) years must be obtained. Continued on next page Conventional Lending Guide 100-74 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Part-Time, Second or Multiple Income Continued All types of supplemental income must be received, uninterrupted, for the most recent two years and supported by IRS W-2 forms. ü Income to be averaged over the most recent 24 month period unless declining. ü If declining, the lowest amount will be used for qualifying provided there is a reasonable explanation of the decline and no indication of further declines. If the secondary income is sourced from self-employment, then the income must be included in the AUS evaluation when one of the following is present: ü Primary job is self-employed ü 2nd job and you are using the income to qualify & is included in the income used to score the loan ü 2nd job and there is any loss at all ü NOTE: Secondary, self-employed income does not need to be evaluated when there is positive income and it is not being used to qualify. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-75 Conventional Lending Guide Employment and Income, Pension / Retirement with Actual Income Stream Continued Income from retirement accounts, such as 401(k), IRA or Keogh, must be received as monthly distributions and expected to continue for at least three years to be considered as qualifying income. If the assets are in the form of stocks, bonds or mutual funds, 70% of the value must be used to determine the number of distributions remaining. Document the regular continued receipt of the income using one of the following: ü Letters from the organizations providing the income ü Copies of retirement award letters ü Copies of signed federal income tax returns that were filed with the IRS ü IRS W-2 or 1099 forms; ü Copies of the borrower’s two most recent bank statements ü Documentation of asset ownership must be in compliance with the Age of Credit Documents. NOTE: Loans approved via LP and income is verified with signed federal income tax returns, the most recent two (2) years must be obtained. Continued on next page Conventional Lending Guide 100-76 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Income derived from the Asset Continued Three types of scenarios are eligible for Employment-Related Assets to be considered as a qualifying income stream: ü Retirement Assets: Must be verified by the most recent asset account statement and must document the borrower as the sole owner of the account. Borrower must be 100% full vested, have immediate access without penalty*(See Income Calculation Below) and the account must be an IRS recognized retirement account. ü Non-self employed severance packages or non-self employed lump sum retirement packages: Must be documented with the most recent three (3) month personal depository or brokerage account statements, an employer distribution letter and/or check stubs evidencing receipt, and the type of lump sum distribution funds. Note funds must not have been subject or currently subject to a penalty*(See Income Calculation Below). If the funds were deposited into a non-retirement account, it must be verified that all funds in that non-retirement account have been derived from eligible retirement assets. ü Proceeds from the sale of a business: must be documented with 3 months personal depository or brokerage account statements, fully executed closing documents evidencing final sale of business to include the sales price and net proceeds, contract for the sale of the business, most recent business tax return prior to the sale and If the funds were deposited into a nonretirement account, it must be verified that all funds in that non-retirement account have been derived from the sale of the borrower’s business or eligible retirement assets. IMPORTANT: ü Non-employment related assets (such as stock options, non-vested restricted stocks, lawsuits, lottery winnings, sale of real estate, inheritance, divorce proceeds, etc.) are not permitted to be utilized as a qualifying income stream. Checking and savings accounts are generally not eligible as employment-related assets, unless the source of the balance in a checking or savings account was from an eligible employment-related asset (for example, a severance package or lump sum retirement distribution). ü Documentation of asset ownership must be in compliance with the Age of Credit Document policy. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-77 Conventional Lending Guide Employment and Income, Income derived from the Asset, (Con’t) Continued All of the following loan parameters must be present in order to utilize employment related assets as a qualifying income stream: ü Maximum 70% LTV/(H)CLTV ü Minimum Credit Score of 620 ü Purchase and Limited Cash-Out Refinances only ü 1-4 Unit primary residence and second homes Net Value Determination · Stocks, bonds, and mutual funds: 70% of the value (remaining after costs for the transaction) may be used to determine the income stream. · Retirement accounts: 70% of the value (remaining after costs for the transaction) may be used to determine the income stream. Net Documented Assets ü The sum of eligible documented assets minus discount (if retirement, stocks, bonds, mutual funds) minus any funds that will be used for closing or required for reserves. Income Calculation ü DU: · Income Calculation/Payout Stream = Divide “Net Documented Assets” by the amortization of the mortgage loan (in months). · *If a penalty applies, to the asset, the asset must be reduced by the amount of any penalty that could apply upon distribution when determining this income stream. ü LP: · Income Calculation/Payout Stream = Divide “Net Documented Assets” by 360 months (30 year term must be used regardless of borrower age or amortization term). · *Account funds must not be subject to a penalty. Continued on next page Conventional Lending Guide 100-78 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Public Assistance Continued ü Received for the past two years ü Likely to continue for the next three years, if documentation is available. ü Documented by letters or exhibits from the paying agency stating the amount, frequency and duration of the benefits payments. Section 8: The Housing Choice Voucher Program (more commonly known as Section 8) is also an acceptable source of qualifying income. There is no requirement for the Section 8 voucher payments to have been received for any period of time prior to the date of the mortgage application or for the payments to continue for any period of time from the date of the mortgage application. Determine from the public agency that issues the vouchers the monthly payment amount, that it is paid directly to the borrower and whether the income is nontaxable. If the income is nontaxable, an adjusted gross income for the borrower may be calculated and applied. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-79 Conventional Lending Guide Employment and Income, Rental Income – General Requirements Continued Generally rental income will be reported on Schedule E of the borrower’s tax returns; however, if the borrower does not have a history of renting the subject property, rental income may be calculated from current lease agreements in scenarios of: Qualifying Scenarios/Exceptions for Calculating Rental Income from Lease Agreements ü Purchase Transactions ü Refinance Transactions in which the borrower purchased the rental property during or after the most recent tax return filing ü Refinance transactions where the subject rental property experienced significant rental interruptions in so the income was not reported of the most recent tax returns (such as major renovation to the property). NOTE: · Leases must be fully completed and signed by all parties. · In all cases when utilizing rental income, the lease agreement must involve parties at an arms length relationship (i.e. property may not be leased to a family member, employee, etc. when using rental income not yet reflected on tax returns). · If there is a lease on the property being transferred to the borrower, it must be confirmed that the lease does not contain any provisions that could affect the first lien position of the property. · Lease agreements that include a Tenant Lease Option to Purchase make the loan ineligible. Rental Income – Appraisal Forms When the subject property will generate rental income, one of the following forms must be used to support the income-earning potential of the property: · One unit properties: Single-Family Comparable Rent Schedule (Form 1007) provided in conjunction with the applicable appraisal report, or · Two to four unit properties: Small Residential Income Property Appraisal Report (Form 1025). Continued on next page Conventional Lending Guide 100-80 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Rental Income – Required Documentation In order to calculate the monthly rental income, the below documentation must first be obtained. Required documentation will vary based upon the borrower’s history of renting the property and whether the income was reported on the most recent tax returns. Use the below table to determine the require documentation that must be obtained. Borrower history of receiving rental income from Subject Property? Transaction Type Yes Refinance No Purchase No Rent Loss Insurance Continued Refinance Required Documents ü Form 1007 (1 unit) or 1025 (2-4 Units), AND ü Most recent tax return, Schedule E, OR ü Lease Agreement if eligible for a qualifying exception; refer to Rental Income – General for details). ü Form 1007 (1 unit) or 1025 (2-4 Units), AND ü Lease Agreement. If property is not currently rented, it is acceptable to use the market rents supported by Form 1007 or 1025, as applicable. ü Form 1007 (1 unit) or 1025 (2-4 Units), AND ü Lease Agreement. ü For DU Run Loans – Rent Loss Insurance is not required. ü For LP Run Loans – Six (6) month’s rent loss insurance is required if: · The Subject Property is a 1-4 Unit Investment property, AND; · Rental Income from the subject property is used to qualify the borrower Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-81 Conventional Lending Guide Employment and Income, Qualifying without Rental Income Continued When rental income is not used to qualify, the gross monthly rental income for each unit and number of bedroom data must continue to be documented for all Primary Residence 2-4 Units and Investment Properties 1-4 Units. The documents are acceptable sources: ü Operating Income Statement (Fannie Mae Form 216) ü Comparable Rent Schedule (Fannie Mae Form 1007) ü Fair Market Rent letter from Realtor ü Lease Agreement · IMPORTANT: Lease agreements are required for Investment Properties in order to comply with Agency requirements to confirm lease does not contain any provisions that could affect the first lien position of the property. · Leases must be fully completed and signed by all parties. · In all cases when utilizing rental income, the lease agreement must involve parties at an arms length relationship (i.e. property may not be leased to a family member, employee, etc. when using rental income not yet reflected on tax returns). · Lease agreements that include a Tenant Lease Option to Purchase make the loan ineligible. ü Rental Income as noted on the Application or 1008 ü The monthly rental income and number of bedrooms is required regardless of appraisal type (i.e. PIW option). Continued on next page Conventional Lending Guide 100-82 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Partial or No Rental History on Tax Returns Continued In refinance circumstances in which the subject property or other rental properties owned were not in service for the entire tax year, alternative rental income calculations or utilizing lease agreements may be more appropriate for calculate an accurate monthly rental income amount. If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the underwriter may determine qualifying rental income by using: · Schedule E income and expenses, and annualizing the income (or loss) calculation; or · Lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation. IF THEN If the property was acquired during or subsequent to the most recent tax filing year, Confirm the purchase date using the HUD-1 or other documentation. If the rental property was out of service for an extended period, ü If acquired during the year, Schedule E (Fair Rental Days) must confirm a partial year rental income and expenses (depending on when the unit was in service as a rental). ü If acquired after the last tax filing year, Schedule E will not reflect rental income or expenses for this property. ü Schedule E will reflect the costs for renovation or rehabilitation as repair expenses. Additional documentation may be required to ensure that the expenses support a significant renovation that supports the amount of time that the rental property was out of service. ü Schedule E (Fair Rental Days) will confirm the number of days that the rental unit was in service, which must support the unit being out of service for all or a portion of the year. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-83 Conventional Lending Guide Employment and Income, Rental Income Calculations Continued Federal Income Tax Returns / Schedule E. When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, taxes, or insurance expenses to the borrower’s cash flow. If the property was in service: · For the entire tax year, the rental income must be averaged over 12 months; or · For less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit. Lease Agreements. When current lease agreements are used, the lender must calculate the rental income by multiplying the gross rent(s) by 75%. The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses. Continued on next page Conventional Lending Guide 100-84 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Treatment of Rental Income / Loss Continued The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss), and its treatment in the calculation of the borrower's total debt-to income ratio, varies depending on whether the borrower occupies the rental property as his or her principal residence. If the rental income relates to the borrower’s Primary Residence 2-4 Units: ü The monthly qualifying rental income (as defined above) must be added to the borrower’s total monthly income. (The income is not netted against the PITI of the property.) ü The full amount of the mortgage payment (PITI) must be included in the borrower’s total monthly obligations when calculating the debt-toincome ratio. If the rental income (or loss) relates to a property other than the borrower's principal residence: ü If the monthly qualifying rental income (as defined above) minus the full PITI is positive, it must be added to the borrower’s total monthly income. ü If the monthly qualifying rental income minus PITI is negative, the monthly net rental loss must be added to the borrower’s total monthly obligations. ü The full PITI for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation. ü The full monthly payment for the borrower's principal residence (full PITI or monthly rent) must be counted as a monthly obligation. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-85 Conventional Lending Guide Employment and Income, DU Entry -Net Rental Income Continued NOTE: For DU loan case files, the term “subject net cash flow” applies to net rental income from the subject property, and the term “net rental income” applies to rental income from properties other than the security property. “Net rental income” for DU loan case files does not include rental income from the subject property. It applies only to rental properties already owned by the borrower. For rental income on the subject property, refer to “Entering Subject Net Cash Flow in DU” below. To submit net rental income to DU, the underwriter can either: ü Calculate the total net rental income for all rental properties (except the subject property) and enter the amount (either positive or negative) in the Net Rental field in Section V. If REO data has been entered, DU will ignore a zero value in this field. Therefore, the Underwriter must enter either a positive or negative amount. In other words, if the net rental income is a “breakeven” amount, the user must enter either $0.01 or $−0.01; otherwise, DU will use the value from Section VI R. ü Complete the REO data entered in the Uniform Residential Loan Application (Form 1003) (or in a loan origination system) for each rental property (except the subject property). DU will preliminarily calculate the net rental income using the following formula: (gross rental income × 75%) – mortgage payment − insurance/maintenance/taxes/misc. = net rental income. The Underwriter should override DU’s preliminary calculation, if it is different from the Underwriter’s calculation, by entering the net rental income amount directly in the Net Rental field in the Full 1003, Section VI R. NOTE: If both methods are used, DU will use the net rental income from Section V (if it is a value other than zero) and issue a message when there is a conflict of data. If the combined total net rental income for all rental properties is positive, DU adds the net rental income to the qualifying income. If the total is negative, DU treats the loss as a liability and includes it in the total expense ratio. Continued on next page Conventional Lending Guide 100-86 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, DU Entry -Net Rental Income for Special Situations Continued If the borrower is purchasing a principal residence and is retaining his or her current residence as a rental property, show the current principal residence as Rental in the Property Disposition field and complete the Net Rental field in the Full 1003, Section VI R. If the borrower’s principal residence is a two to four unit property, rental income from the principal residence can be used to qualify the borrower. With the exception of subtracting the borrower’s principal mortgage payment from the gross rental income, all other calculations and documentation requirements in this section apply. To use net rental income from a borrower’s owner occupied two to four unit property when the borrower is purchasing or refinancing a second home or investment property, enter the net rental income from the borrower’s principal residence as Net Rental in Section V. Subject Net Cash Flow Calculations Two- to four-unit Primary Residence: Calculate the subject net cash flow, and enter this amount in Section V. It will be included in the total qualifying income. Do not subtract the PITI from the rental income, because the PITI is included in the total proposed mortgage payment and is considered in the qualifying ratio. Do not enter a negative subject net cash flow value, because the entire PITIA is already included in the qualifying ratio. Investment Properties: Calculate the subject net cash flow. If the subject net cash flow is positive, enter the amount in Section V. It will be included in the total qualifying income. If the cash flow is negative, enter the amount in Section V as a negative value. DU will include it in the total expense ratio calculation as a liability. If income from the subject property is not included in the qualifying ratios, the lender should enter the entire proposed PITI as a negative amount in the Subject Net Cash field in Section V. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-87 Conventional Lending Guide Employment and Income, DU Entry – Net Cash Flow Continued Subject net cash flow applies to 1-4 unit Investment Properties and 2-4 unit Primary Residences secured by the subject property. DU does not calculate the subject net cash flow. The Underwriter must calculate and enter the income in Subject Net Cash in Section V of the online loan application. Note: Although negative subject net cash flow values appear to reduce the gross monthly income in Section V, DU actually treats the negative value as a liability and includes it in the total expense ratio. Rental Income from Second Home Any amount of income reported on the borrower’s tax returns when the subject property is a second home is not Permitted. NOTE: A second home must be available for the Borrower's sole use and enjoyment; any rental income reported on the tax returns derived from a second home property will disqualify it from being a subject property designated as a second home and will only be considered as investment property. Continued on next page Conventional Lending Guide 100-88 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Rental Income from Converted Property Continued Conversion of Current Principal Residence to Investment Property If the borrower is converting a current principal residence to an investment property, the underwriter must ensure the borrower has sufficient equity to support both the current PITIA and the new mortgage being originated. The percent of equity in the current principal residence must be documented in accordance with the Equity in the Current Principal Residence requirements. To confirm leasing of the newly converted property or unit (for a two- to four-unit property), the underwriter must obtain a copy of the: Fully executed lease agreement, Security deposit from the tenant, and Bank statement showing the deposited security funds. Equity in the Current Principal Residence: Borrower's equity in the existing principal residence must be documented with at least a Form 2055 appraisal. The underwriter must calculate net rental income and qualify the borrower according to the following requirements: ü 1-Unit property, if documented equity in the current principal residence is: Then: Greater than or equal to 30% 75% of gross rental income may be used as income Less than 30% No rental income will be allowed. 2-4 Unit property, if documented equity in the current principal residence is: Then, for the unit previously occupied by the borrower: And, for the remaining units, the Underwriter may either: greater than or equal to 30% The underwriter may use 75% of the gross rental income from the newly executed lease agreement Calculate the net rental income (or loss) from the pages of the borrower's most recent 2 years of signed federal income tax returns and the related Schedule E. Leases are permitted only if the property is not listed on Schedule E because it was acquired subsequent to filing the tax return. No rental income may be counted If the percentage of equity in the current Then: principal residence is... less than 30% greater than or equal to 30% The borrower must be qualified with the new PITI and 75% of the gross rental income may be credited to offset the current principal residence’s PITI. less than 30% The borrower must be qualified with the new PITI plus the full amount of the current principal residence’s PITI. Greater than or equal to 30% for a 2-4 unit residence The borrower must be qualified with the new PITI plus PITI on the current principal residence minus 75% of gross rental income from the newly leased unit, plus, if applicable, any credit from existing leased units. Less than 30% for a 2-4 unit residence The borrower must be qualified with the new PITI plus PITI on the current residence minus, if applicable, any credit from existing leased units only. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-89 Conventional Lending Guide Employment and Income, LP Loans – Rental Income General Continued If the Borrower owned a rental property during the previous tax years, the Borrower's individual federal income tax returns for the most recent two (2) years must be obtained to determine the net rental income or loss for qualifying. In some instances, the income reported on the Borrower's individual federal tax returns may not reflect the property's current rental value (i.e., the tax returns show large one-time expenses or the property was under renovation). In these instances, individual federal tax returns for the most recent two (2) years must be obtained; however, Form 998, Operating Income Statement, may be used to determine rental income. The underwriter must explain the reasons for not using the income or loss from the individual federal tax returns to determine rental income, in the Mortgage file. Continued on next page Conventional Lending Guide 100-90 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, LP Loans – Rental Income from 2-4 Primary Residence Continued Rental income from units in the Borrower's 2 to 4 unit Primary Residence that are not occupied by the Borrower may be used to qualify the Borrower. If rental income from the subject 2 to 4 unit Primary Residence is being used to qualify the Borrower, the following requirements apply: · · Must obtain and use Form 998 unless the subject property has been owned for at least one year and is reported on Schedule E of the Borrower's prior year individual federal tax return. If income from the subject property is reported on the Borrower's individual federal tax returns the Schedule E must be used to determine the net rental income. If Form 998 is used to determine rental income, it must be completed up to the Monthly Operating Income (MOI) reconciliation. Must substantiate the rental income using the income approach on the appraisal and copies of the present lease(s), if applicable, must support the rental income used to qualify the Borrower ü Regardless of whether rental income is used in qualifying, the Borrower must have reserves equal to six (6) monthly payments of principal, interest, taxes and insurance (PITI). ü The Form 998 is not required if rental income from the subject property is not considered in qualifying the Borrower. If the borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for lender reporting purposes. ü Monthly Operating Income from the Form 998 or net rental income from Schedule E is entered under "Gross Monthly Income" in Section V of the Form 65, Uniform Residential Loan Application, and may be considered as stable monthly income in qualifying the Borrower, provided the Borrower meets the reserve requirement. ü If Monthly Operating Income or net rental income from Schedule E is a negative number, it must be included as a liability for qualification purposes. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-91 Conventional Lending Guide Employment and Income, LP Loans – Rental Income from 1-4 Investment Continued If the Borrower qualifies with the full PITI plus operating expenses for the subject Investment Property included in the Borrower's monthly debt-to-income ratio, no further evaluation or calculation of rental income from the subject property is required and Form 998 is not required. If the borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for lender reporting purposes. Regardless of whether rental income from the Mortgaged Premises is used in qualifying, the Borrower must have: ü Reserves equal to six (6) monthly payments of PITI that could be used to supplement payments during vacancies and make regular and emergency repairs to the property as necessary, and ü Reserves equal to two (2) monthly payments of PITI for each other financed second home and 1-4 unit Investment Property in which the Borrower has an ownership interest or on which the Borrower is obligated. If rental income from the subject Investment Property is to be considered in qualifying the Borrower, the following requirements apply: · · · · · · Must obtain and use Form 998 unless the subject property has been owned for at least one year and is reported on the Schedule E of the Borrower's prior year individual federal tax return. If income from the subject property is reported on the Borrower's individual federal tax returns, must use Schedule E to determine the net rental income. If Form 998 is used, it must be completed up to the MOI reconciliation. The income approach on the appraisal and copies of the present leases, if applicable, must support the rental income used to qualify the Borrower The Borrower must have reserves that are equal to at least six (6) months payments of PITI Proof of six (6) months’ rent loss insurance. The Borrower must demonstrate at least a two (2) year history of managing 1-4 unit Investment Properties ü If the Net Cash Flow shown on the Form 998 or net rental income from Schedule E of the Borrower's tax returns is a positive number, that figure may be entered as rental income in the "Gross Monthly Income" section of Form 65 and may be considered stable monthly income. ü If the Net Cash Flow shown on the Form 998 or net rental income from Schedule E of the Borrower's tax returns is a negative number, it must be included as a liability for qualification purposes. Continued on next page Conventional Lending Guide 100-92 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, LP Loans – Rental Income from Investment, not the Subject Continued Rental income from investment properties that are owned by the Borrower, other than the subject property, must be shown in the "Schedule of Real Estate Owned" in Section VI of Form 65. When rental income from other investment properties owned by the Borrower in the previous tax year is reported on the Borrower's individual federal tax returns, the underwriter must use Schedule E of the Borrower's tax returns to determine the net rental income. If the Borrower's federal income tax returns reflect a two (2) year history of managing investment properties, signed leases may be used to determine the net rental income for an investment property not owned during the previous tax year. Additionally, signed leases may be used to substantiate gross rents that are higher than the rental income documented on the tax returns; however, no more than 75% of the gross rental income from the signed leases may be used, unless the prior two (2) years' individual federal tax returns clearly support the use of a higher percentage. The aggregate net rental loss must be considered a liability for qualification purposes. Aggregate net rental income may be counted as stable monthly income, provided the reliability of receipt is clearly supported by the documentation in the file. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-93 Conventional Lending Guide Employment and Income, Royalty Payments Seasonal Income Continued ü Most recent two year tax returns, including Schedule E. ü Document minimum 12 month receipt of income ü Income to continue for the next three years The Borrower must have a two year history of receiving income from seasonal employment in the same line of work. Verification is required that the borrower will be rehired (in the same or similar position) for the next season and that employment is likely to continue. ü Seasonal Unemployment Compensation Unemployment Compensation clearly associated with seasonal layoffs can be used for qualifying purposes with a two year history of receipt (verified with two years 1040’s) if likely to continue for next three years. DU/LP · Most recent YTD pay stub with at least 30 days of income. Paystub should be dated no earlier than 30 days prior to the application date, reflecting year to date income. If the borrower is applying during an off month, the last paystub received should be obtained. · The most recent 2 years W-2 forms, and · Copies of the borrowers filed federal tax returns signed, with all schedules, for the most recent two years. · A verbal verification of employment as required within this guide is required. (Verification is required that the borrower will be rehired, in the same or similar position, for the next season.) · Evidence of current receipt and amount of unemployment compensation and evidence that it is associated with seasonal employment Continued on next page Conventional Lending Guide 100-94 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Social Security Continued Benefits that have a defined expiration date must have a remaining term of at least three years to be considered. Acceptable verification for Social Security benefits includes: ü A copy of the Social Security Administration’s award letter; or ü Copies of the borrower’s two most recent bank statements to confirm regular deposit of the payment; or Signed tax returns with signed Social Security Benefit Statement (Form SSA-1099) or W-2’s for the most recent two years. However, if Social Security benefits are being paid as a benefit for a family member of the benefit owner, that income may be used in qualifying if documentation that confirms the remaining term is at least three years from the date of the mortgage application is obtained. Document regular receipt of payments, as verified by the following, depending on the type of benefit and the relationship of the beneficiary (self or other) as shown in the table below. ü NOTE: Loans approved via LP and income is verified with signed federal income tax returns, the most recent two (2) years must be obtained. DOCUMENTATION REQUIREMENTS Type of Social Security Benefit Retirement Disability Borrower is drawing Social Security benefits from own account/work record · · Survivor Benefits NA Supplement Security Income (SSI) · · Borrower is drawing Social Security benefits from another person’s account/work record Social Security Administrator’s (SSA) Award Letter, OR Proof of current receipt · · · SSA Award Letter, AND Proof of current receipt NA SSA Award Letter, Proof of current receipt, AND 3 year future continuance (ie verification of beneficiary’s age) Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-95 Conventional Lending Guide Employment and Income, Trust Income Continued A copy of the Trust Agreement OR trustee’s statement confirming the amount, frequency, and duration of the payments should be provided. The income must continue at least 3 years to be considered for qualifying purposes. NOTE: Unless this income is received monthly, documentation of current receipt of the income is not required to comply with the Age of Credit Documents policy. Unemployment Benefits Acceptable if common, customary and properly documented: ü Unemployment Compensation clearly associate with seasonal layoffs can be used for qualifying purposes with a two year history of receipt (verified with two years 1040’s) if likely to continue for next three years. NOTE: Unemployment compensation cannot be used to qualify the borrower unless it is clearly associated with seasonal employment that is reported on the borrower’s signed federal income tax returns. ü Most recent YTD pay stub with at least 30 days of income. Paystub should be dated no earlier than 30 days prior to the application date, reflecting year to date income. If the borrower is applying during an off month, the last paystub received should be obtained. ü The most recent 2 years W-2 forms, and ü Copies of the borrowers filed federal tax returns signed, with all schedules, for the most recent two years. ü A verbal verification of employment. (Verification is required that the borrower will be rehired (in the same or similar position) for the next season) ü Evidence of current receipt and amount of unemployment compensation and evidence that it is associated with seasonal employment. Continued on next page Conventional Lending Guide 100-96 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Union Members Continued Verbal Verification of Employment from Union confirming: ü Borrower is in good standing with Union ü Borrower is employed by same employer issuing pay stub and income used for qualification. If Union cannot provide confirmation, a Verbal Verification of Employment with present employer is required ü W-2 documentation is required. ü Union dues shown as an (unreimbursed) expense on the 2106 do need to be treated as a reduction to total income. Due to fluctuations in income, income will be averaged over the past 24 months, unless income has declined and then the most recent 12 months will be averaged. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-97 Conventional Lending Guide Employment and Income, VA Benefits ü Continued Must be documented by a letter or distribution form from the Department of Veterans Affairs NOTE: Education benefits are not acceptable. Unacceptable Sources of Income Income derived from any of the following may not be used in qualifying income. · Income based on Future Earnings · Draw Income · Capital withdrawals · Income from Mortgage Credit Certificates · Expense/Auto Reimbursement · VA Education Benefits · Income not listed on Tax Returns · Illegal Income · Any income that cannot be documented and verified · Tax returns that have been amended solely for the purposes of qualifying for the loan · Derived from gambling · Lump sum lottery earnings · Income determined to be temporary or one-time in nature. · Rental income from the borrower’s primary residence or second home. · Retained earnings in a company · Stock options · Taxable forms of income that are not declared on personal tax returns · Trailing co-borrower income Continued on next page Conventional Lending Guide 100-98 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Continued Declining Income Wage Earner: Averaged over the most recent 12 months. Commission/Self-Employed: Declining income sources should not be averaged, and an explanation for the decline should be obtained. The most recent lower income would be used for qualification purposes. NOTE: Strong, documented compensating factors must exist when declining income is present. Salaried Borrower A salaried borrower is defined as a wage earner that derives income through employment at a business where there is little or no ownership interest (<25%). Compensation may be based on an hourly, weekly, monthly or semi-monthly basis. NOTE: Wage earners employed by a family member, working at a family business or employed by an interested party to the subject transaction must provide the last 2 years tax returns with all schedules and most recent pay stub covering 30 days regardless of DU recommendations. Salaried Income History Homeward Residential requires salaried borrowers to exhibit the following employment standards: · A minimum of two years employment history · Within 5 business days prior to the note date for all borrowers using non self-employed income, Homeward Residential will independently verify borrower is still employed via a Verbal VOE. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-99 Conventional Lending Guide Employment and Income, Salaried Documentation Continued Proof of employment for a salary/wage-earning borrower are: ü Income verification may be documented in accordance with DU recommendations for base wages, bonus, commission, overtime and teachers. All other forms of income must be documented in accordance to the requirements provided within this guideline. Current pay-stubs evidencing 30 day earnings and most recent W-2 are always required to be included within the file regardless DU. If the AUS recommendation requires greater documentation, then the findings should be followed as the greater of. (For example, LP Standard Documentation requires current pay-stubs with 30 days earnings and the most recent two (2) years W-2s). ü Paystubs must include all year-to-date earnings; additionally, the paystub must include sufficient information to appropriately calculate income; otherwise, additional documentation must be obtained. Note VOEs must include year-to-date earnings as well. NOTE: ü Non W-2 Income · Handwritten pay-stubs will NOT be accepted unless supported by a written VOE, most recent two (2) years of computer generated W-2 and copies of the borrower’s filed individual federal tax returns signed, with all schedules, for the most recent two (2) years. Any dollar amount discrepancies noted between the paystub versus bank account deposits may warrant additional documentation. o Hand written/completed W-2s are not acceptable and must always be computer generated/typed clearly identifying the Borrower with address, social security number and Employer’s Name. · Income calculations should not be documented on the borrower’s paystubs; details of calculation are more appropriate on the 1008 or separate document. An analysis form must be completed and retained in the permanent loan file, such as FNMA 1084 Cash Flow Analysis, income calculations on the 1008, etc. Continued on next page Conventional Lending Guide 100-100 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Self-Employed Borrowers Continued Self-employed borrowers add an additional layer of risk than salaried borrowers, since the main source of income for self-employed borrowers is their business. ü Individuals who own at least 25% of a business ü Individuals whose combined business interest comprise 25% or more of the total ü Borrower relies on investments for income (such as interests, dividends, capital gains or real estate). ü Contract or 1099 Income Self-employed borrowers income depends on the continuity of the business. Therefore, specific documentation relating to the business (such as P&L statements and federal business returns) is required for borrowers who are self-employed. Self-Employed Income History Self-employed borrowers must have a history of stable and durable income for the previous 2 years. A written income analysis should be prepared and included in the loan file. · A shorter history of self-employment, 12 to 24 months, may be considered as long as the borrower’s most recent personal tax returns reflect at least one full year receipt of such income at the same or greater level in a similar field as the current business or in an occupation in which the borrower had similar responsibilities as those taken in connection with their business. · Under no circumstances will a less than 12 month self-employment period (with the current/same business) be considered. · Prior to closing, Homeward Residential will independently verify the existence of the business via a verbal verification of employment through the CPA (letters must be dated within 30 days of loan closing), business license or telephone listing. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-101 Conventional Lending Guide Employment and Income, Self-Employed Documentation Continued Standard sources of proof of employment for a self-employed borrower are: IMPORTANT: Personal tax returns are required for all self-employed borrowers even if the income is not being used to qualify. If either the borrower or coborrower is self-employed, in addition to the required wage earner income documentation, the self-employed income/loss must be entered into DU; two (2) years personal and business* tax returns are required for DU and LP loans regardless of findings and must be documented in the loan file. When AUS specifically permits the below, the business tax returns may be waived if ALL of the below are present: · Borrower is paying the down payment and closing costs with their own funds; · Borrower has been self-employed in the same business with the same tax identification number for a minimum of five years; · Borrower’s individual tax returns show an increase with positive income in self-employment income over the most recent two years. Sole Proprietorship ü Personal 1040s or Schedule “C” ü If tax filing deadline has passed, must obtain an executed extension. General and Limited Partnership, Limited Liability Corporations ü Personal 1040s, 1065s, K-1s, All associated schedules “S” Corporations and all other Corporations · Personal 1040s, 1120s, All associated schedules NOTES: ü Handwritten paystubs will NOT be accepted unless supported by computer generated W-2’s and/or signed 1040’s and Form 4506-T from the IRS covering the appropriate period. ü Homeward Residential must verbally verify the existence of the business prior to closing. ü If the most recent year’s tax returns have not yet been filed, an unaudited P&L is required. The unaudited P&L should be completed by accountant, tax preparer or the borrower. Documentation of filed extension or other reasoning for delaying filing will be required. ü Tax transcripts may not be used in lieu of tax returns. Continued on next page Conventional Lending Guide 100-102 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Self-Employed Verification of Employment Continued Verification of employment or income must be provided by Mortgage Broker. · · Within 5 business days prior to the note date for all borrowers using selfemployed income, Homeward Residential will independently verify employment via a verbal verification of employment. NOTE: On-line searches and just using tax returns as proof of selfemployment is not sufficient. The existence of the borrower’s business must be validated through both: ü A third party, such as a CPA (letters must be dated within 30 days of loan closing), accountant, regulatory agency, or through business license verification And ü Verifying the phone number listing and address for the borrower’s business using a telephone book, the Internet (i.e yellowpages.com, etc.), or directory assistance If the contact is made verbally, the lender must document the source of the information obtained and the name and title of the lender’s employee who obtained the information. If the borrower is a sole proprietor and does not use a CPA or accountant and the file contains validation that no business license is required, verification of the business and source of income is still required. Alternative verification includes copies of current contracts, invoices or business references and all of the following: ü Verbal verification to confirm the validity of any documents received ü Independent validation of the phone number for the contract, invoice or business reference prior to confirmation of the validity of the documents provided; And ü Verification of a phone number listing and address for the borrower’s business using a telephone book, the Internet (i.e.yellowpages.com, etc.) or directory assistance, or by contacting the applicable licensing bureau. If the borrower is a sole proprietor and does not have a business phone number listing but uses a personal cell phone or home phone number, call the phone number to ensure it is in service and answered by the borrower or in the name of the business. Document the call in the loan file. NOTE: Internet sites such as 411.com, Chamber of Commerce sites and Manta.com, where they allow the business owner to add their own information, are NOT acceptable sources of verification. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-103 Conventional Lending Guide Employment and Income, Continued NonPurchasing Spouse Income If the non-borrowing spouse is self-employed, business losses reported on the tax return may not negate the entire annual income of the borrowing spouse. Carry Over Losses The determination to include or omit a borrower’s carried over net operation losses will be at the discretion of the underwriter based on the below findings: Contracts for Employment NOTE: i.e. Homeward Financial will not consider scenarios if the nonpurchasing spouse’s self-employed business losses negates any positive earnings and results in a negative adjusted gross income. ü Detailed description of the loss and the likelihood that a similar loss could reoccur. ü Date and amount of the initial loss. ü Breakdown of amount to be carried over year-to-year and length of time the carryover will be reflected on future tax returns. Permitted only if the borrower will be employed prior to the loan closing and all of the following are met: ü Copy of the borrower’s executed offer letter or contract for future employment. ü The borrower must have started employment at the new position as per the terms of the employee contract. ü A paystub must be obtained that includes sufficient information to support the income used for qualifying the borrower. NOTE: It is not required for the Contract for employment to be nonrevocable; however, it may not restrict the likelihood for a future 3 year continuous or have a specified contract term for under 3 years. Continued on next page Conventional Lending Guide 100-104 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Employment and Income, Teacher Income Continued Certain borrowers, such as teachers, may be paid for only part of the year. For example, teachers may be paid on a partial year - 9-month, 10-month, or 12-month basis (and should not be confused with seasonal workers). In such cases, a current year-to-date pay stub dated within 30 days of application may not be available. If the borrower is on a pay schedule of less than 12 months and applying during an off month, a copy of the borrower’s valid non-expired employment contract with the school district may be used in lieu of a current pay stub. However, every effort should be made to obtain a copy of the most recent pay stub. To determine a partial year paid teacher’s (or any partial year paid borrowers) qualifying income, multiply the monthly salary by the number of months the borrower is paid and divided by 12. Required Documentation: · Most recent YTD pay stub with at least 30 days of income. Paystub should be dated no earlier than 30 days prior to the application date, reflecting year to- date income. If the borrower is applying during an off month, the last paystub received should be obtained. · Copy of current, unexpired employment contract with the School District (if applying during an off month); and · Number of years of the most recent W-2s based on the AUS requirement; and · A verbal verification of employment. Documentation Requirements Income from the initial 1003 must be entered into DU/LP as provided. Income as provided on the initial 1003 must be reasonable and accurate. IMPORTANT: Homeward Residential requires the applicant’s information to be entered into DU/LP exactly as provided on the initial 1003. Blank income and employment information on the initial 1003 is NOT permitted; however, assets only need to be completed on the initial 1003 as deemed necessary to receive a DU Approve/Eligible or LP Accept. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-105 Conventional Lending Guide Assets and Liquidity Overview Liquidity or cash reserves describe cash or the ability to convert assets to cash in a short time. Net worth without liquidity is not enough. A borrower’s balance sheet should reflect and validate the estimates concerning his or her prior and current income stream. Higher incomes should translate into liquidity found on the borrower’s balance sheet. Eligible Assets The following types of accounts may be considered eligible liquid assets: ü Stocks/Bonds ü Bridge Loan ü Certificate of Deposit, reduced by any applicable forfeiture fees. ü Checking Account ü Gift ü Gift of Equity ü Money Market Fund ü Mutual Fund ü Pooled Funds (with relatives, etc.) / Personal Gift ü Rent Credit with Option to Purchase ü Retirement Fund ü Savings Account ü Trust Funds Continued on next page Conventional Lending Guide 100-106 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Ineligible Assets Continued ü Cash on hand ü Sweat Equity, Trade Equity or Equity Swapping ü Pooled “Community” Funds (within a community in which “family” relationships are not required) ü Stock options (as Reserves) ü Realtor’s Commission received from subject property financial transaction. ü Credit card financing or advancements ü Unsecured borrowed funds ü Signature loans ü Custodial Accounts for Children or Others ü Salary / bonus advances received against future earnings Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-107 Conventional Lending Guide Assets and Liquidity, Earnest Money Continued ü The deposit on the sales contract (earnest money) for the purchase of the security property is an acceptable source of funds for both the down payment and the closing costs. ü If the deposit is being used as part of the borrower’s minimum contribution requirement, it must be verified that the funds are from an acceptable source ü Bank statements must evidence that the average balance for the past two months was large enough to support the amount of the deposit. If a copy of the cancelled deposit check is used to document the source of funds, the bank statements must cover the period up to (and including) the date the check cleared the bank account. ü If it cannot be determined that these funds were withdrawn from the borrower’s account, additional verification of the source and evidence that the funds have actually changed hands from the borrower to the seller, the realtor, the escrow agent, or the settlement attorney should be provided. ü Receipt of the deposit must be verified by either a copy of the borrower’s canceled check or a written statement from the holder of the deposit. ü NOTE: Large earnest money deposits and deposits that exceed the amount customary for the area should be closely evaluated. Continued on next page Conventional Lending Guide 100-108 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Reserves Continued Cash Proceeds Received from the Subject Property Transaction ü Cash proceeds from the subject property first and outside second lien transactions are not permitted for reserves. For additional Reserve requirement when the Borrower(s) current primary residence is pending sale or intended to be sold, refer to Real Estate Debt within the Ratio section of this guideline. NOTE: · When a single borrower closes multiple, concurrent transactions through Homeward Residential, reserve requirements must be met for each individual loan. Concurrent transactions reserve requirements are applicable to Agency products only. Concurrent is defined as closing within 180 calendar days of each other. For example, three investment properties for the same borrower closing concurrently will require 18 months of reserves (i.e. 6 months reserves for each investment property). Acceptable DU/LP scenarios may follow the reserve requirements recommended within the findings. IMPORTANT: All Assets as listed on the initial and final 1003 must be entered into the DU/LP system as provided and must be verified. Blank income and employment information on the initial 1003 is NOT permitted; however, assets only need to be completed on the initial 1003 as deemed necessary to receive a DU/LP Approve/Eligible. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-109 Conventional Lending Guide Assets and Liquidity, Continued Reserves (Con’t) Reserve Requirements Primary Residence As permitted by the DU/LP findings (subject to MI Partner’s guidelines) ü Second Home As permitted by the DU/LP findings (subject to MI Partner’s guidelines) ü Investment NOTE: 6 months reserves required for 2-4 Unit Primary Residence. See Multiple Financed Properties and the subject property is a Second Home or Investment below. As permitted by the DU/LP findings (subject to MI Partner’s guidelines) ü See Multiple Financed Properties and the subject property is a Second Home or Investment below. ü If the borrower’s current primary residence is converted to a second home or investment property and the 30% equity cannot be documented, 6 months of PITI for both the retained and subject property is required to be in reserves regardless of DU/LP recommendations. ü If the borrower’s current primary residence is converted to a second home or investment property and the 30% equity can be documented, 2 months of PITI for both the retained and subject property is required to be in reserves regardless of DU/LP recommendations. Multiple Financed Properties and the subject property is a Second Home or Investment ü If the total number of financed properties is 1 to 4, then 2 months for each second home or investment property is required (in addition to those required by DU/LP) ü If the total number of financed properties is 5 to 10*, then 6 months for each second home or investment property is required (in addition to those required by DU) Florida Condos, Second Homes ü FL + Condo+ Second Home: 3 months PITI required regardless of DU/LP findings. Converted, Departing Property ü ü IMPORTANT: When a single borrower closes multiple, concurrent transactions through Homeward Residential, reserve requirements must be met for each individual loan. Concurrent transaction reserve requirements are applicable to Agency products only. Concurrent is defined as closing within 180 calendar days of each other. 5 to 10 financed properties are only eligible when the file is run via Fannie Mae’s DU. Continued on next page Assets and Liquidity, Conventional Lending Guide 100-110 Continued Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Joint Assets When a borrower has a joint account with another individual who is NOT a borrower on the transaction, the following must be documented: ü Relationship between borrower and individual on the account AND ü Confirmation that the borrower has full access to all funds in the account Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-111 Conventional Lending Guide Assets and Liquidity, Verification of Deposits Continued To substantiate that a borrower has sufficient cash deposits and other assets available to complete the mortgage transaction and retain adequate reserves after closing; loan file must verify the amount in the borrower's depository accounts (checking accounts, savings accounts, CDs, money markets and retirement accounts). When there is a recently opened account, a recently received large deposit, or an account balance considerably greater than the average balance the source of funds must be documented. The loan file must also verify the value of the borrower's other financial investments (stocks, bonds, mutual funds, etc.) as of the date of the loan application. ü Verification Requirements: · · · · ü If a Request for Verification of Deposit (VOD) is used to verify activity in the borrower's depository accounts: · · · ü Desktop Underwriter Loans - a copy of the Borrower’s bank statement covering the most recent two month period, Loan Prospector Loans - a copy of the Borrower’s bank statement covering the most recent one or two month period base on the LP Findings. Or, a Written Verification of Deposit (for both DU and LP Loans), or Third Party Verification of Depository Accounts If the account was opened within 90 days of verification or account balances that are considerably greater than the average balance reflected on the VOD, refer to the Large Deposit section below for additional requirements. The Verification of Deposit must be requested directly from the depository institution, and the complete, signed, and dated document must be sent directly from the depository institution. Hand-carried VODs are not permitted. Homeward will accept Third-Party Verification of Depository Accounts: · Direct verification by a third-party asset verification vendor is acceptable provided: o the borrower provide proper authorization for the lender to use the verification method, o the verified information provided must conform with the information that would be provided on Fannie Mae Form 1006 (VOD) and Freddie Mac Verification of Deposit (VOD) or on bank statements o the date of the complete verification is in compliance with the age of document requirements o the client is responsible for ensuring the accuracy and integrity of the information provided by the third-party vendor. Continued on next page Conventional Lending Guide 100-112 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Verification of Deposit, (Con’t) Continued Bank Statements ü Instead of sending a Request for Verification of Deposit to each of the borrower's depositories or account holders, verify available funds for closing by obtaining from the borrower a copy of the applicable bank or investment portfolio statements that cover the timeframe noted above (or, if account information is reported on a quarterly basis, for the most recent quarter). ü If the latest bank statement is more than 45 days earlier than the date of the loan application, a more recent supplemental bank-generated form that shows the account number, balance and date is required. ü The statements may be computer-generated forms (e.g. on-line account or portfolio statements) downloaded through the Internet. Note that it is not acceptable to download statement information (cut and paste) into a Word or Excel type document. ü “FAXED” or documents downloaded from the Internet must clearly identify the name of the depository or investment institution and the source of the information (e.g. the information is contained in the banner that is at the top of the document). ü Bank or investment portfolio statements must clearly identify the borrower as the account holder and include: · The account number; · The time period covered by the statement; · All deposits and withdrawal transactions (for a depository account) or all purchase and sale transactions (for a financial portfolio account); and · The ending account balance. Retirement Accounts ü Retirement account statements must identify the borrower's vested amount and the terms and conditions for loans or the withdrawal of funds. ü Calculate at 60% of the vested amount to account for any applicable withdrawal penalties or income tax less any outstanding loans secured by the account. ü NOTE: When retirement accounts only allow for withdrawal in connection with the Borrower’s employment termination, retirement, or death, the vested funds cannot be considered as reserves. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-113 Conventional Lending Guide Assets and Liquidity, Gifts Continued Gifts are permitted for down payment and reserves in connection with a purchase or refinance of a primary residence or a second home. Gift funds are not permitted on investment property transactions. Down Payment (with DU Approval) ü Primary & Second Homes, all units: If the entire down payment is a gift and the LTV/CLTV is 80% or less, there is no minimum down payment requirement. ü Primary Residence, 1 Unit: If the LTV/CLTV is greater than 80%, a minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction may come from a gift. Refer to selected MI Partner for any applicable overlays. ü Primary Residence, 2-4 Units & Second Homes: If the LVT/CLTV is greater than 80%, a minimum 5% borrower contribution from their own funds is required. After the minimum 5% borrower contribution has been met, gifts may be used to supplement the down payment, closing costs, and reserves. Refer to selected MI Partner for any applicable overlays. Down Payment (with LP Approval) ü Primary & Second Homes, all units: If the LTV/CLTV is greater than 80%, a minimum 5% borrower contribution from their own funds is required. After the minimum 5% borrower contribution has been met, gifts may be used to supplement the down payment, closing costs, and reserves. Refer to selected MI Partner for any applicable overlays. Donors The gift donor must be a relative, a domestic partner, or fiancée. A relative is any person related by blood, marriage, legal proceedings, or adoption. NOTE: Gifts are allowed only from relatives on second homes. Gift Letters The following information must be completed on a fully executed gift letter: ü The dollar amount of the gift, the donor's name, address, telephone number, his/her relationship to the borrower and property address that is being purchased. ü Indicate that funds are a gift that does not have to be repaid. ü If the donor is a fiancé or fiancée s/he is not required to have lived with the borrower for the past 12 months, but both must use the home that is being purchased as their principal residence. Continued on next page Conventional Lending Guide 100-114 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Gifts Continued Verification of Funds The transfer of the gift funds to the borrower must be documented in one of the following ways: ü ü Gift of Equity Funds Received prior to closing: · Copy of the donor’s check and the borrower’s deposit receipt or bank statement; or Copy of the donor’s withdrawal slip and the borrower’s deposit receipt or bank statement. ü Funds Received at Closing: If the donor does not intend to provide gift funds until closing, the following documentation must be obtained at the closing table: · Copy of the certified check or cashier’s that was given to the closing agent (check must be payable to the title company and show the donor as the remitter); or · Copy of the settlement statement showing receipt of the check from donor. ü A gift of equity refers to a gift provided by the seller of a property to the buyer. ü The gift represents a portion of the seller’s equity in the property, and is transferred to the buyer as a credit in the transaction. ü A gift of equity is permitted for principal residence and second home purchase transactions. ü The acceptable donor and minimum borrower contribution requirements in the “Gift Funds” section above also apply to gifts of equity. ü A signed gift letter and the HUD-1 Settlement Statement listing the gift of equity is required. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-115 Conventional Lending Guide Assets and Liquidity, Gifts from Weddings Continued Cash received as wedding gifts is not usually an acceptable source of funds because it comes in small, varied sums and is difficult to document the source. However, funds may be used provided the borrower can provide proper documentation. (Wedding gifts cannot satisfy the minimum 5% down payment from the borrower's own funds.) The following documentation must be obtained to verify funds: ü A copy of a marriage license; ü Deposit slip showing the deposit of the gift funds; and ü An itemized list of the amount received along with the name of the donor and a signed statement from the borrower indicating the funds were a wedding gift and repayment is not required. ü Large financial gifts from close family members can be considered if properly documented. Substantial cash wedding gifts ($1000 or more) from one individual must comply with standard gift documentation. Continued on next page Conventional Lending Guide 100-116 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Sources of Funds for Closing Continued Generally, the borrower must have enough assets to cover the minimum required down payment that must come from his or her funds. However, funds received from other acceptable sources can be used to accompany the minimum down payment from the borrower’s funds to pay the borrower’s share of the closing costs and prepaid items and to satisfy the reserve requirement. Acceptable sources of down payment: ü Gift (or Grant) ü Rent Credit – lease-purchase funds ü Funds held in a checking or savings account ü Stocks · A photocopy of the stock certificate, accompanied by a current dated newspaper stock list. ü Government Bonds · The value of government bonds should be based on their purchase price unless the redemption value can be documented. ü Mutual Funds ü Trust Accounts · Funds disbursed from a borrower’s trust account are an acceptable source of the down payment and reserve requirement if the borrower has immediate access to them. Confirmation from the trust manager or trustee is to verify the value of the trust account and prove the conditions under which the borrower has access to funds. Retirement Accounts (IRA/Keogh Accounts, 401Ks) as discussed under the Assets and Liquidity/Verification of Deposit section. ü Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-117 Conventional Lending Guide Assets and Liquidity, Deposit on Sales Contract Continued The deposit on the sales contract is an acceptable source for down payment and/or closing costs. When the deposit is used to make any portion of the borrower’s down payment it must come from his/her own funds. The source must be verified: ü Bank statements for most recent two months (If check has cleared account, the statement should cover the period up to and including the date the check cleared). Depository Accounts Checking and Savings Accounts ü Verification Requirements: · Desktop Underwriter Loans - a copy of the Borrower’s bank statement covering the most recent two month period, · Loan Prospector Loans - a copy of the Borrower’s bank statement covering the most recent one or two month period base on the LP Findings. Certificate of Deposit When CDs are used for assets/reserve, the above provided documentation (from Checking and Savings Accounts) must also include: ü Maturity date ü Disclosure of any associated penalties for liquidating prior to maturity date. Continued on next page Conventional Lending Guide 100-118 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Continued Donations from Entities An owner-occupant borrower can use funds donated by a church, municipality, non-profit organization (excluding a credit union), or public agency as a gift (or grant) to pay part of the closing costs or supplement his or her financial reserves. NOTE: Cannot be used toward down payment requirements. Disaster Relief Grant or Loan ü Borrower may use a lump-sum disaster relief grant or loan to satisfy down payment requirement ü Borrower does not have to make a minimum cash down payment for his/her own funds for grant or loan to be used ü May be used as a source of funds for down payment and closing costs; not permitted for cash/financial reserves. ü Document terms of the secured loan ü Calculate monthly payments and consider in debt ratio ü Must be from an arms length individual (i.e. may not be from a source affiliated with the loan transaction). ü Funds from a loan secured by personal or real property owned by the borrower (other than the subject property) may be used as a source of the down payment. The debt must be included as a liability on the application. Borrowed Funds Secured by an Asset NOTE: Payments for loans secured by the borrower's personal financial assets (such as life insurance policies, 401(k) accounts, CDs, stocks, bonds, etc.), do not have to be included in the debt ratio calculations if the loan instrument shows the asset as collateral for the loan. The borrower may not use the same asset to satisfy cash reserve requirements. However, they may use the portion of the asset remaining after the value of the asset plus any related fees have been reduced by the amount of the secured loan. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-119 Conventional Lending Guide Assets and Liquidity, Cash Value of Life Insurance Continued Net proceeds from a loan against the cash value or surrender of a life insurance policy are acceptable source of funds for down payment, closing costs and reserves. Required documentation includes: · Computer generated or typed letter from the insurance company · Identify the insurance company and the policy holder · Show the period covered and ending cash value · Show any outstanding loans ü The Underwriter must assess repayment or additional obligation considerations to determine the impact on borrower qualification or reserves. ü If penalties for failure to repay the loan are limited to the surrender of the policy, payments on a loan secured by the cash value of a borrower’s life insurance policy do not have to be considered in the total debt-to-income ratio. ü If additional obligations are indicated, the obligation amount must be factored into the total debt- to income ratio, or subtracted from the borrower’s financial reserves. ü If the funds are needed for the down payment or closing costs, lenders must document the borrower’s receipt of the funds from the insurance company by obtaining either a copy of the check from the insurer or a copy of the payout statement issued by the insurer. If the cash-value of the life insurance is being used for reserves, the cashvalue must be documented but does not need to be liquidated and received by the borrower. Continued on next page Conventional Lending Guide 100-120 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Loan Repayment Proceeds Rent Credit for Options to Purchase Continued In order to be considered eligible as a cash asset, funds received by the borrower from the repayment of a personal loan extended, requires the following: ü A copy of the written agreement between the borrower and the recipient of the loan. ü Verification that the borrower had the ability to lend the funds (cancelled check or bank statement showing withdrawal of funds). ü Verification that repayment was made (evidence of funds withdrawn from the recipient’s account) and proceeds deposited into the borrower’s account prior to scheduling the closed. The property seller may give the purchaser/borrower credit toward the down payment for a portion of previous rent payments the purchaser made under a documented rental purchase agreement that had a minimum original term of at least 12 months – in an amount up to the difference between the market rent and the actual rent that was paid. (The property appraiser must determine “market” rent.) The purchaser does not have to make a minimum cash down payment from his or her own funds in order for the rental payments to be credited toward the down payment. ü A copy of the rental/purchase agreement, verifying monthly rent and the specific terms of the lease is required: ü Original term may not be less than 12 months and the total credit due to the borrower must not exceed the amount specified in the contract. ü The appraiser must develop the market rent; and ü Copies of canceled checks or money order receipts for the most recent 12 months are required to document rent payments. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-121 Conventional Lending Guide Assets and Liquidity, Real Estate Proceeds Continued In order to use proceeds from the sale of a currently owned other-realestate property for closing-fund requirements and post-closing liquidity/cash reserve ratio calculations, use the following guidelines: ü The closing of the other real estate transaction must take place prior to or simultaneous with the subject closing; and ü The net proceeds to the borrower must be verified via · HUD-1 statement · Closing statement Continued on next page Conventional Lending Guide 100-122 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Bridge Loan Continued Bridge (or swing) loans are a form of second trust that is collateralized by the borrower’s present home, which is usually for sale. By using funds from a bridge loan, the borrower can close on a new house before selling his/her existing house. This type of financing is acceptable if: ü The purchaser has the ability to carry the payment on: · The new home · The payment on the other obligations · The payment on the current home · The payment on the bridge loan ü Verification of the terms of the loan must be included in the credit package, including a copy of the executed note. ü The bridge loan must be included as a liability on the application. ü If the bridge loan calls for payments of principal and/or interest, the payment must be included in the long-term debt calculation. ü If the repayment schedule for the bridge loan is not monthly, it must be converted to a monthly amount for qualifying purposes based on the contractual interest rate. If a rate is not available, then use the 30-year, fixed market rate. ü The bridge loan cannot be cross-collateralized. ü May not be used for reserve requirements. Exclusion of a debt for the present home and for a bridge loan is allowed if: ü Copy of the executed sales contract for the present home. ü Copy of the lender’s commitment to the buyer of the present residence (if the contract contains a financing contingency). ü Evidence of 6 months reserves covering the PITI of the previous residence in addition to the first mortgage reserve requirements. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-123 Conventional Lending Guide Assets and Liquidity, Trust Account Funds Sale of Stocks or Bonds Continued In order to use trust account funds for closing funds and post-closing liquidity/cash reserve ratio calculations, the following is required: ü Borrower must have access to the trust account funds and be identified as the beneficiary ü Identify the trustee ü Trustee must verify the amount that the borrower can withdraw The existence and value of the stock or bonds must be verified. The value of stocks may be verified with a current statement from the stockbroker. A copy of the stock certificate and dated newspaper stock price list must verify the value and existence of stock not held by a financial institution. NOTE: · Verification of sale is required only if the specific funds are needed for closing. · Reserves to be calculated at 70% of the current market value unless the redeemable value can be determined and verified. Stock Options To use stock options (the right to purchase stock at a set price, the “strike price”) as closing funds: ü Options should be exercised and only the net proceeds should be used ü Verification of deposit ü Proof of options per brokerage statements NOTE: Not eligible for reserves or to for use as an income stream. Continued on next page Conventional Lending Guide 100-124 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Sale of Other Assets Continued If funds are derived from the sale of assets other than real estate, they must be verified by the following documentation: ü Proof of ownership ü Support for the value of the asset (appraisal) ü Evidence of the transfer of ownership (e.g., a copy of the bill of sale) · Bill of sale must reflect the date of sale, asset to be sold, sales price and the buyer’s and seller’s signatures if the proceeds are to be used toward down payment, closing costs and/or reserves. Evidence of receipt of the purchase proceeds (e.g., deposit slip or bank statement) ü ü Evidence that a party to the property sale or the mortgage financing transaction did not purchase the asset Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-125 Conventional Lending Guide Assets and Liquidity, Employer Assistance Programs Continued An owner-occupant Borrower can use funds provided by his or her employer to pay part of the closing costs, however, the Borrower must use his or her own funds to meet the minimum required down payment and any necessary reserve requirement. Assistance from the Borrower's employer must come directly from the employer. NOTE: It cannot be provided by a company-affiliated credit union. The employer's financial assistance for either closing costs or the down payment may be in the form of a grant, a direct, fully repayable second mortgage or unsecured Loan, a forgivable second mortgage or unsecured Loan, a deferred payment second mortgage or unsecured Loan or mortgage payment assistance. When the assistance is a secured second mortgage, the transaction must satisfy standard Secondary Financing guidelines. The program must be an established company program, not just an accommodation developed for an individual employee. There must be documentation that describes the terms of any Loan agreement and other employee assistance being offered to the Borrower (such as relocation benefits), including the employer's written verification of the dollar amount of the assistance. When the assistance is funded before settlement, there must be confirmation of receipt of the funds. If the employer financing does not require regular payments of either principal and interest or interest only, the lender does not need to calculate an equivalent payment for consideration as part of the borrower's monthly debt. If payments are deferred until 5 years after the first mortgage note date, or repayment is only due upon sale or default the amount of the payment may be excluded from the debt ratio calculations; otherwise it must be included. If regular payments are required, the payments must be included in the debt ratios. If the borrower is responsible for repayment, the terms of the subordinate financing must permit the Borrower to continue making payments on the loan if the borrower no longer works for the employer. The subordinate financing may not require full repayment unless the borrower terminates his/her employment or the employer terminates the borrower's employment for any reason except disability, the elimination of the position or reduction in work force before the maturity date of the subordinate financing. Required Documentation ü Copy of the established and ongoing employer benefit program reflecting the amount of the benefit and the terms. ü Evidence that the employer is not an interested party and that the funds were not obtained from an interested party, directly or through a third party. ü Benefit program agreement from the employer showing the amount of the benefit and the terms. ü Proof of receipt of the benefit. Continued on next page Conventional Lending Guide 100-126 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Third Party Contributions Continued Certain parties (seller, builder, Realtor, etc.) may choose to pay a portion of the closing costs (which are normally paid by the borrower) on the borrower’s behalf. Any portion of the fees and services or any other items related to the transaction that are not paid by the borrowers are considered contributions. Because excessive contributions can negatively impact the transaction, the below maximum contributions are enforced based on the LTV/CLTV. These fees and services may include but are not limited to (follow FNMA guidelines): Appraisal and Survey fees Attorney fees Buydowns Commitment fees Discount fees Origination fees Pre-paid settlement costs Real Estate Tax Service Recording fees Stamps Lender Policy (Title Insurance) Transfer fees Once the contribution limits are exceeded, the amount that exceeds the limits must be deducted from the sales price, and the loan amount and LTV must be adjusted accordingly. Unless otherwise noted in a specific product summary, the maximum allowable contributions from interested parties, which depend on the loan-to-value ratio (or combined loan-to-value ratio, if subordinate financing is involved) and the occupancy type, are limited to: Third Party Contributions Occupancy LTV/CLTV Range Maximum Contribution based on Sales Price Primary Residence Second Home >90.00 3% 75.01 – 90.00 6% ≤75.00 9% All 2% Investment Property NOTES: A downward adjustment to the sales price of the property to reflect the amount of any contributions that exceed our limitations is required. In addition, the cost/value of any contributions that are in the form of personal property (such as furniture, decorator items, automobiles, club memberships or other “giveaways”) always must be deducted from the sales price of the property. The maximum loan-to-value ratio (or combined loan-to-value ratio) must then be calculated based on the lesser of the reduced sales price or the appraised value. · Independent, disinterested third party required to provide value estimates of applicable personal property. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-127 Conventional Lending Guide Assets and Liquidity, Third Party Contributions, (Con’t) Continued IMPORTANT: ü Properties within declining markets and/or subject to mortgage insurance may be subject to MI Partner’s additional overlays. ü Contributions may only be applied to closing costs and prepaids. If the contribution exceeds actual cost, the remainder may not be applied to the principal balance (including unpaid principal balance). ü Reimbursement to the borrower for payment of short sale negotiation or processing fees (also known as short sale facilitation fees, buyer discount fees or short sale buyer fees) must be considered and treated as a sales concession. Continued on next page Conventional Lending Guide 100-128 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Payment Abatements Undisclosed Seller Contributions Continued Not Permitted. NOTE: ü Defined as an incentive provided to the borrower by an interested party, in which the interested party provides funds to pay (or reimburse) a certain number of monthly payments on the borrower’s behalf. The monthly payments may cover, in whole or in part, principal, interest, taxes and insurance (PITI) as well as the payment of condominium or PUD fees. Payment abatements are ineligible, regardless of whether they are disclosed on the HUD-1. ü The payment of up to 12 months of HOA fees are not considered an abatement, but HOA fees in excess of 12 months are considered an abatement. Undisclosed contributions tend to reduce the effective sales price of a property; therefore, they may compromise the LTV ratio for a mortgage and are not permitted. NOTE: Homeward Residential will provide a thorough review of all HUD-1 uniform settlement statements to detect undisclosed contributions. Allowable Uses of Interested Party Contributions Interested Parties, including third parties and non-profit organizations, may not contribute or supplement the borrower’s down payment, minimum contribution requirements or reserve requirements. Appraisal Review with an Interested Party Contributions Appraisers must be notified and comment on the effects of any transaction in which a financing and/or sales concessions by an interested party is in existence. NOTE: Positive adjustments for sales or financing concessions are not acceptable. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-129 Conventional Lending Guide Assets and Liquidity, Document Reconciliation Involving Interested Party Contributions Continued Homeward Residential will closely review all loan documents and sales contracts when an Interest Party Contribution (IPC) is involved with the transaction; subject, but not limited, to the following concerns: ü IPC must be detailed on the sales contract. ü Appraiser must be notified and comment on applicable IPCs. ü HUD-1 must reflect final fees and costs, and may not differ substantially from the sales contract, GFE and 1003 Application. If the above documents reveal inconsistencies in fees, the differences should be closely reviewed and explanations documented; subject, but not limited, to the following concerns: · Interested Party Contributions greater than permitted and/or greater than specified on the sales contract. · Unacceptable cash back on a purchase transaction. · References to sales contract addendums that have not been made available. · Appraiser makes no reference to IPCs. · Payment of Condominium or PUD fees paid by an interested party. · Undisclosed contributions or subordinate financing. · Excessive marketing and/or commission fees. · Commission fees that are not percentage based from the sales price. · Guaranteed rental income. · Below market interest rates when no buydown subsidy is reflected on the HUD-1. Continued on next page Conventional Lending Guide 100-130 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Borrower Paid Seller Closing Cost If the borrowers are paying any portion of the lien or typical seller closing costs, the following applies: ü ü ü ü ü ü Retirement Continued Transaction must be the result of a short sale, deed-in-lieu type transaction. Borrower’s funds must be verified to cover the additional costs, which must also be included in DU calculations. Current servicer must acknowledge and accept that additional payments are being covered by the purchaser (our borrower). Sales contract must clearly specify and identify this agreement. HUD-1 must include all fees and payments as outlined and agreed. Transaction may not be a non-arms length transaction. Retirement accounts (IRAs, Keogh accounts, 401(k) accounts, etc.) are subject to withdrawal penalties and tax surcharges if withdrawn prior to normal distributions. Because of these restrictions, the following guidelines apply to the use of retirement accounts for closing-fund requirements: ü Unless specified by an automated underwriting system, 60% of IRAs, Keogh Accounts, 401(k) Accounts, and the cash value of annuities can be used to determine funds available for withdrawal, less any loans. ü Borrower must provide evidence of the receipt of sufficient funds for closing. ü Documenting the asset may be done in accordance with DU/LP recommendations. ü NOTE: When retirement accounts only allow for withdrawal in connection with the Borrower’s employment termination, retirement or death, the vested funds should not be considered as reserves. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-131 Conventional Lending Guide Assets and Liquidity, Large Deposit ü When bank statements are used to verify assets, the lender must evaluate large deposits, which are defined as a single deposit that exceeds 50% of the total monthly qualifying income for the loan. Requirements for evaluating large deposits vary based on the transaction type, as shown in the table below. Transaction Type Refinance transactions Purchase transactions Continued Evaluation Requirements ü Documentation or explanation for large deposits is not required; however, the lender remains responsible for ensuring that any borrowed funds, including any related liability, are considered. ü If funds from a large deposit are needed to complete the purchase transaction (that is, are used for the down payment, closing costs, or financial reserves), the lender must document that those funds are from an acceptable source. Occasionally, a borrower may not have all of the documentation required to confirm the source of a deposit. In those instances, the lender must use reasonable judgment based on the available documentation as well as the borrower’s debt-to-income ratio and overall income and credit profile. Examples of acceptable documentation include the borrower’s written explanation, proof of ownership of an asset that was sold, or a copy of a wedding invitation to support receipt of gift funds. The lender must place in the loan file written documentation of the rationale for using the funds. ü Verified funds must be reduced by the amount (or portion) of the undocumented large deposit (as defined above), and the lender must confirm that the remaining funds are sufficient for the down payment, closing costs, and financial reserves. When the lender uses a reduced asset amount, net of the unsourced amount of a large deposit, that reduced amount must be used for underwriting purposes ü Note: When a deposit has both sourced and unsourced portions, only the unsourced portion must be used to calculate whether or not it must be considered a large deposit. Examples · · Scenario 1: Borrower has monthly income of $4,000 and an account at ABC Bank with a balance of $20,000. A deposit of $3,000 is identified, but $2,500 of that deposit is documented as coming from the borrower's federal income tax refund. Only the unsourced $500 [the deposit of $3,000 minus the documented $2,500] must be considered in calculating whether it meets the large deposit definition. The unsourced $500 is 12.5% of the borrower’s $4,000 monthly income, falling short of the 50% definition of a large deposit. Therefore, it is not considered a large deposit and the entire $20,000 balance in the ABC Bank account can be used for underwriting purposes. Scenario 2: Using the same borrower example, a deposit of $3,000 is identified, but only $500 is documented as coming from the borrower’s federal income tax refund, leaving $2,500 unsourced. In this instance, the unsourced $2,500 is 63% of the borrower’s $4,000 monthly income, which does meet the definition of a large deposit. Therefore, the unsourced $2,500 must be subtracted from the account balance of $20,000 and only the remaining $17,500 may be used for underwriting purposes. Continued on next page Conventional Lending Guide 100-132 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Large Deposit(Con’t) Continued ü Note: If the source of a large deposit is readily identifiable on the account statement(s), such as a direct deposit from an employer (payroll), the Social Security Administration, or IRS or state income tax refund, or a transfer of funds between verified accounts, and the source of the deposit is printed on the statement, the lender does not need to obtain further explanation or documentation. However, if the source of the deposit is printed on the statement, but the lender still has questions as to whether the funds may have been borrowed, the lender should obtain additional documentation to validate the funds have not been borrowed. ü When a Verification of Deposit (VOD) is used and depository activity is not included, the lender must verify the source of funds for: · accounts opened within the last 90 days of the application date, and · account balances that are considerably greater than the average balance reflected on the VOD. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-133 Conventional Lending Guide Assets and Liquidity, 1031 Exchange Continued ü Definition: Proceeds from the sale of the borrower’s previously sold property (relinquished property) is transferred to an intermediary and held by the intermediary until the borrower finds a replacement property (i.e., the subject property). ü Subject property must be an investment property. Primary residences and second homes are not eligible. ü The relinquished property sale must close before or simultaneously with the replacement (subject) property acquired. Statement of borrower’s equity is calculated as the lower of: · Sales price from the sales contract · Gross trade value from the sales contract less the sum of the transfer fees and all lien balances on the currently owned property and transfer fees on the new property · Appraised value of the borrower’s currently owned property plus any new transfer fees on the new property. The following documentation is required: ü Sales contract for both the sale of the previous property and the purchase of the subject property. ü 1031 Exchange Agreement identifying intermediary, all parties, conditions of transfer, require repairs if applicable, etc. and title transfer. ü HUD-1 settlement statement for both properties. ü Verification of receipt of funds from the intermediary/exchange holder. NOTE: The loan closing must be handled by a qualified intermediary (typically, an escrow company or licensed exchange company) who enters into a written agreement with the borrower. The qualified intermediary cannot be an agent, investment banker, broker, employee of the borrower, or related family member. Continued on next page Conventional Lending Guide 100-134 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Foreign Assets Continued If borrower’s source of funds for the down payment, reserves and/or closing costs are from accounts located in a foreign county, additional due diligence is required to ensure compliance with all related OFAC restrictions, confirmation of exchange rates, seasoning requirements, and any additional conditions deemed responsible by the Underwriter. ü Foreign assets being used for down payment, closing costs and reserves must be held in a U.S. account prior to closing. ü Proof the transferred funds belonged to the borrower(s) prior to transfer. ü Large deposits as defined within this lending guide must be documented accordingly. ü If the assets are derived from a sale of a foreign asset or from assets held in a foreign bank account, the assets must be converted into United States currency by an independent third party and placed in a United States banking institution. The sale of the foreign asset and conversion of foreign currency must be fully documented and verified. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-135 Conventional Lending Guide Assets and Liquidity, Business Funds Continued ü Business Assets may be acceptable for the down payment, closing costs, Prepaids/Escrow and financial reserves when a borrower is self employed and the individual federal income tax returns have been evaluated by the lender, including, if applicable, the business federal income tax returns for that particular business (non-Schedule C). Because the Borrower’s withdrawal of assets from a sole proprietorship, a partnership, or a corporation may have a negative impact on the business’ ability to continue operating, the impact of withdrawal must be considered in the underwriter’s analysis of the Borrower’s self-employed income and the file must contain the Underwriter’s written cash flow analysis and conclusion that withdrawal of the business funds will not affect the operation of the business. ü The borrower must be listed as an owner of the account and the account must be verified in accordance with the Verification of Deposits and Depository Accounts sections listed above. Continued on next page Conventional Lending Guide 100-136 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Pooled Funds Continued ü Funds from a community savings account or any other type of pooled savings may be used for the down payment if the borrower can document regular contributions to the fund. ü Acceptable documentation includes written confirmation from the party managing the pooled savings fund and documentation of regular borrower contributions. ü The borrower’s obligation to continue making contributions to the fund must be considered as part of the borrower’s debt when calculating the total debt-to-income ratio. Community savings systems account statements must: · Identify the issuing institution or administrator · Identify the account owner(s) · Identify the account number · Show all transactions · Show the period covered and ending balance · Show any outstanding loans · If community funds are held in a securities account, then identify and document the stocks/securities and provide proof of liquidation. Pooled funds on deposits from related persons who reside with the borrower are acceptable if, in addition to the account documentation, the following is provided: · Proof the Borrower and related person have resided together at least one year. · Letter stating that they will continue to reside together in the new residence and are pooling their funds to buy the new residence. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-137 Conventional Lending Guide Assets and Liquidity, Individual Development Accounts Continued Funds that the borrower deposited into an IDA may be used for down payment, and depending on the repayment terms of the IDA program, the borrower may or may not be required to meet the minimum down payment requirements from his or her own funds: ü ü If the non-profit agency requires repayment of the “matching” funds, agrees to defer or forgive repayment provided certain conditions are met, or files a lien against the property, then the borrower may use the “matching” funds to supplement the down payment, provided the borrower has met the minimum down payment requirements from his or her own funds. · Funds with recapture provisions are permitted up to a maximum of 3-to-1 match by an agency fund. If the non-profit agency does not require repayment of the “matching” funds and does not file a lien against the property, then the borrower may use the “matching” funds for some or all of the down payment without first being required to meet the minimum down payment requirement from his or her own funds. · Funds with no recapture provision are permitted up to a maximum of 4-to-1 match by an agency fund. Documentation must be provided that describes the non-profit agency’s individual development account program in order to rate at which the agency “matches” the borrower’s deposits into the account and determine that the borrower has satisfied any vesting requirements. Appropriate documentation must reflect that the borrower made regular payments into the account and that the agency made regular deposits of the matching funds into the account. NOTE: · The terms of an IDA program and any provisions related to second mortgages must be in compliance with Agency guidelines, then cross-referenced with Homeward Residential parameters. · May not be used as funds for debt payoff or to meet reserve requirements. IMPORTANT: May require prior approval by Credit Policy Manager (or designee). Continued on next page Conventional Lending Guide 100-138 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Assets and Liquidity, Credit Card for POC Items Continued The borrower’s credit card may be used to pay fees outside of closing. Credit card financing must not be used to meet minimum down payment requirements. Costs that can be financed are: ü Appraisal ü Lock-in fees ü Credit Report Requirements: ü The total charged amount may not exceed the lesser of $1,000 or 1% of the loan amount. ü HUD-1 must reflect a POC credit to the borrower for the amount charged. ü Verification of one of the following is required: · The borrower has sufficient liquid funds to cover the entire cost of the fees plus any other fees required for closing costs and down payment, or · Updated credit supplement from a credit reporting agency verifying the new balance and the required payments per the creditor. The new balance must be included in the qualifying ratio calculation, or · 5% of the total balance (previous verified balance plus new charges) must be used as the new payment. The updated payment as recalculated must be included in the qualifying ratio calculation. o EXAMPLE: The balance reported on the credit report is $1,000 and there is evidence to indicate the payment is $25 per month. After the credit report date, the borrower uses the credit card to pay for an appraisal, increasing the balance on the card to $1,350. The payment will be based on 5% of the entire new balance $1,350, for a new payment of $67.50. Collection of fees must be in compliance with all MDIA, RESPA, and TILA requirements. ü Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-139 Conventional Lending Guide Properties Eligible Property Types ü Single Family Residences – Attached and Detached ü 2-4 Units ü Modular Homes/Factory Built (SFR, 1-unit only) ü Condominiums FNMA Type P, Q, S, T ü PUDs ü Mixed Use Properties ü “Live-work” type loft-style condominiums are those usually used for artist’ studio, workshops, factories or galleries – must meet mixed use property requirements ü Legal Non-Conforming use of land; see details below. ü Hobby Farms; see details below. NOTE: A critical analysis of properties with 400 to 800 square feet will be performed by the underwriter to determine value, including common and customary to the current market. Properties smaller than 400 square feet, including condos, are not permitted. Legal NonConforming All property types, including condos, are permitted with the below: ü Zoning must be legal permissible use of the land; and ü Proof of zoning regulations reflecting permission to rebuild the improvements to current density in the event of partial or full destruction; and ü Property must continue to represent the “highest and best use” for the site; and ü City zoning authority letter or an appraisers’ addendum with analysis reflecting any adverse effect that the non-conforming use has on the value and marketability of the property; and ü Appraiser must confirm property can be rebuilt “as is”. Continued on next page Conventional Lending Guide 100-140 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Agricultural Zoning Uniquely Designed Homes Continued If a property is zoned agricultural, it is only eligible when all of the following exist: ü Subject property must be used as a residence and is typical for the neighborhood or market area. ü The appraiser must adequately demonstrate that the subject neighborhood is residential in nature. ü Residential use is permissible under the zoning and land use regulations. ü Property must adhere to the maximum acreage standards by program. ü Property may not include agricultural property tax exemptions. ü When appraising unique properties, (dome home, earth berms, log cabins) if the appraiser cannot locate recent comparable sales of the same design and appeal, but is able to determine sound adjustments for the differences between the comparables that are available and the subject property and demonstrate the marketability of the property based on: · · · · older comparable sales, comparable sales in competing neighborhoods, the existence of similar properties in the market area, any other reliable market data ü Note: Comparables should be of similar size to the subject property to support the general acceptability of a particular property type. Refer to specific product guidelines for further clarification. ü Note: if the appraiser is not able to find any evidence of market acceptance, and the characteristics of the property are so significantly different that he or she cannot establish a reliable opinion of market value, the property will not be acceptable. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-141 Conventional Lending Guide Properties, Hobby Farms Continued Defined as small farm characteristics and/or activities without the expectation or actual receipt of moderate income; Hobby Farms may be acceptable property types with the following: ü If applicable, Schedule F tax returns must be provided regardless of AUS recommendations to confirm incidental farm income. ü If there is any indication through tax returns, tax transcripts or other validation tools that the subject property is hobby farm, a full appraisal is required regardless of AUS recommendations. ü Subject property may not include a hobby farm in conjunction with any mixed-use business related to farming, agriculture, machinery type equipment, etc. ü Property must be residential in nature with acceptable comparables and typical for the area. ü Property may not be subject to agricultural tax exemptions. ü Outbuildings, barns and stables must adhere to agency requirements: · Must be typical of other residential properties in the subject area, · Appraiser must demonstrate such presence are typical of properties for which an active, viable residential market exists supported by comparable sales, · Consist of little or no contributory value, and · Any large or multiple buildings do not indicate that the property is agricultural in nature Continued on next page Conventional Lending Guide 100-142 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Ineligible Property Types Continued ü “To Be Determined” property addresses (i.e. all submissions must contain an actual property address) ü Manufactured Homes (refer to HARP product summaries for certain allowances) ü Timeshare/segmented ownership ü Houseboats ü Mobile Homes ü Working farms, ranches, orchards, commercial operations or those with agriculture tax exemptions regardless of income producing status; hobby farms may be eligible, see below for details. ü Unimproved Land ü CONDOS: Condo Project Manager (CPM) Review, Type R and U, Multi-dwelling condominiums, Condotels and Non-Warrantable condominiums. ü Properties with deed restrictions that limit transferability of title, re-sale restrictions or contain a “first right of refusal” provision. · · Subdivisions (PUDs) with any unacceptable deed restriction regardless of being applicable to the subject property Condo properties with Full Reviews may permit certain first right of refusal provisions; refer to Condo section for full requirements. ü Properties allowing for the Right of Redemption. ü Cooperatives ü Properties with assignments of purchase (assigning the purchase contract to another party) ü Condotels ü Subsidized Condos also known as Limited Equity Condos ü Properties permitting divestiture of interest ü Certain states have enacted legislation that makes private transfer fee covenants void and unenforceable. Properties with transfer fees that are identified as exceptions on the title commitment are not acceptable. ü Property with problem drywall (a.k.a. Chinese drywall), as noted by the appraiser. Chinese drywall is known to produce foul odors; causes metal to corrode more quickly than normal; leaves black corrosion on wiring or copper; and causes appliances and electronics with copper wiring to fail due to corroded copper wiring. ü Community Land Trust and Illinois Land Trust ü Properties located on land that does not allow access for mortgage servicing purposes such as foreclosure (i.e. Tribal Land). ü Boarded Up Properties ü Hawaii Lava Zone 1 or Lava Zone 2 ü Lease agreements that include a Tenant Lease Option to Purchase make the loan ineligible. ü Bed and Breakfast properties ü Boarding Houses Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-143 Conventional Lending Guide Properties, Private Transfer Fees Continued Mortgages on properties encumbered by private transfer fee covenants prohibited by C.F.R. Part 1228 in the Federal Register, are ineligible if those covenants were created on or after February 8, 2011. Fees that do not directly benefit the property are subject to C.F.R. Part 1228 and are therefore ineligible. Private transfer fees are eligible for loans in which the covenants were created prior to 2/8/2011. However, if the creation date is not known, the loan is not eligible. Private transfer fees paid to the following to benefit the property are eligible: · · · Homeowner associations Condominium Certain tax-exempt organizations that use private transfer fee proceeds to benefit the property A private transfer is a transfer fee, including a charge or payment, imposed by a covenant, restriction, or other similar document and required to be paid in connection with or as a result of a transfer of title to real estate, and payable on a continuing basis each time a property is transferred (except for transfers specifically excepted) for a period of time or indefinitely. A private transfer fee does not include fees, charges, payments, or other obligations (1) imposed by or payable to the Federal government or a State or local government; or (2) that defray actual costs of the transfer of the property, including transfer of membership in the relevant covered association. Direct benefit means that the proceeds of a private transfer fee are used exclusively to support maintenance and improvements to encumbered properties, and acquisition, improvement, administration, and maintenance of property owned by the covered association of which the owners of the burdened property are members and used primarily for their benefit. Direct benefit also includes cultural, educational, charitable, recreational, environmental, conservation or other similar activities that (1) are conducted in or protect the burdened community or adjacent or contiguous property, or (2) are conducted on other property that is used primarily by residents of the burdened community. Transfer fees will appear on Schedule B of the title commitment (exceptions to coverage), which is the same place as HOA dues, etc. Continued on next page Conventional Lending Guide 100-144 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Manufactured Homes on Site Continued Habitable manufactured homes located on the subject property site are not permitted, regardless of omitting value. The restriction includes manufactured homes that are and are not permanently affixed to the property. NOTE: Habitable is defined as connected water, electricity, sewer, etc. Borrower Acknowledgment for Value When the subject property sales price is greater than the appraised value, a borrower(s) signed, written acknowledgment is required confirming their understanding that they are purchasing the property for an amount greater than the appraised value. Well, Septic & Pest Inspection Well, Septic and Termite Certifications are required as noted on the appraisal. · If certain property inspections are only required per the Sales Contract, then Homeward Residential will require a letter from the Borrower(s) confirming such inspections were performed and no structural, health or habitable issues were reported. If the Borrower’s letter confirms no issues reported, then it is not necessary to provide copies of the actual inspection reports. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-145 Conventional Lending Guide Properties, Continued Age of Appraisals ü Properties must be appraised within the 12 months that precede the date of the note and mortgage. ü When an appraisal report will be more than four months old (for DU files) and 120 days (for LP submitted files) on the date of the note and mortgage, regardless of whether the property was appraised as proposed or existing construction, the appraiser must inspect the exterior of the property and review current market data to determine whether the property has declined in value since the date of the original appraisal. This inspection and results of the analysis must be reported on the Appraisal Update and/or Completion Report (Form 1004D for DU files) and 442 (for LP submitted files). When obtaining a 1004D for an appraisal update and/or completion, at a minimum, a photograph of the front of the subject property must be included. · · ü If the appraiser indicates on the Form 1004D (for DU files) and 442 (for LP submitted files) that the property value has declined, then the lender must obtain a new appraisal for the property. If the appraiser indicates on the Form 1004D (for DU files) and 442 (for LP submitted files) that the property value has not declined, then the lender may proceed with the loan in process without requiring any additional fieldwork. Note: The appraisal update must occur within the four months (for DU files) 120 days (for LP submitted files) that precede the date of the note and mortgage. ü The original appraiser should complete the appraisal update; however, a substitute appraiser may be used. When updates are completed by substitute appraisers, the substitute appraiser must review the original appraisal and express an opinion about whether the original appraiser’s opinion of market value was reasonable on the date of the original appraisal report. The underwriter must note in the file why the original appraiser was not used. ü For properties located in an “escrow state” only, the printed note date and the actual closing/signing date may differ. In these instances, the HUD-1 should be used to determine the actual closing date for determining the age of credit documents. Continued on next page Conventional Lending Guide 100-146 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Continued Age and Adjustments of Comparables ü Comparable sales that have closed within the last 12 months should be used in the appraisal; however, the best and most appropriate comparable sales may not always be the most recent sales. For example, it may be appropriate for the appraiser to use a nine month old sale with a time adjustment rather than a one month old sale that requires multiple adjustments. An older sale may be more appropriate in situations when market conditions have impacted the availability of recent sales as long as the appraisal reflects the changing market conditions. ü Additionally, older comparable sales that are the best indicator of value for the subject property can be used if appropriate. For example, if the subject property is located in a rural area that has minimal sales activity, the appraiser may not be able to locate 3 truly comparable sales that sold in the last 12 months. In this case, the appraiser may use older comparable sales as long as he or she explains why they are being used. The following are guidelines for net and gross percentage adjustments that may be used as a general indicator of whether a property should be used as a comp sale. Appraisal Validation ü The dollar amount of the net adjustments for each comp sale should not exceed 15% of the sales price of the comp. Comments are required from the appraiser if the adjustments exceed 15%. ü The dollar amount of the gross adjustments for each comp sale should not exceed 25% of the sales price of the comp. Comments are required from the appraiser if the adjustments exceed 25% ü Individual adjustments that are higher than normal (generally over 10%) should be explained by the appraiser. Homeward Residential will assess all properties and appraisals to confirm values are well supported. It will be at the Underwriter’s discretion to utilize any additional validation tools at their disposal to escalate value concerns. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-147 Conventional Lending Guide Properties, Continued Reuse of Appraisals Appraisals from previous transactions may not be reused for current transactions. Each purchase and subsequent refinances will require a new appraisal to be performed. Transferred Appraisals Not permitted on ANY appraisal type. Address Validation Property address validation requires the house number and street address to coincide with the title commitment and the zip code to coincide with www.USPS.com NOTE: If the title commitment address differs from the appraisal, the appraiser must comment on the addresses being one in the same. Distance of Comparables Urban area; typically comparables within 1 mile of the subject property are acceptable. Suburban area; a 1 to 2 mile radius is acceptable; however, in the case of a PUD, the subject must be compared to properties in the same subdivision as that of the subject. Rural properties often have large lot sizes and rural locations can be relatively undeveloped. For this reason, there may a shortage or absence of recent truly comparable sales in the immediate vicinity of a subject property. Comparable sales located a considerable distance from the subject property can be used if they represent the best indicator of value for the subject property. Land to Value Ratios ü The property’s land to value ratio must be consistent with other properties in the area. ü The appraisal must include the actual size of the site and not a hypothetical portion of the site; the appraised value must reflect the entire parcel. The appraiser must consider all acres of the subject property and comparable must be of similar size to establish marketability. Continued on next page Conventional Lending Guide 100-148 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Location Types Continued Mortgages secured by residential properties in urban, suburban, or rural areas are eligible for financing within Homeward Residential’s and agency guidelines. ü An urban location relates to a city, ü A suburban location relates to the area adjacent to a city, and ü A rural location relates to the country or anything beyond the suburban area. NOTE: · If a location is not designated in the appraisal as rural, Homeward Residential may deem the property as rural if the lot size exceeds typical urban or suburban lot size, or if the location is remote from a metropolitan area. · If there is a shortage of recent comparable sales in the immediate vicinity of a suburban or urban area, the appraiser may extend the area with full documentation and justification for extending the immediate area. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-149 Conventional Lending Guide Properties, Age Restricted Communities Continued Properties that are subject to Deed Restrictions on the basis of Age are eligible. No other deed restrictions may be associated with the property. IMPORTANT: The Development/Association/Community must sign Homeward-Affidavit for Age Restricted Communities to confirm the housing development complied with the Fair Housing Act. Reasonable local, state or federal restrictions on the maximum number of occupants permitted to occupy a dwelling unit are acceptable as long as such limitations are applied to all occupants and do not operate to discriminate on the basis of race, color, religion, sex, national origin, handicap or familial status. If any other restrictions are noted in the purchase contract, appraisal, and title commitment or in the project covenants/restrictions, the loan will not be eligible. If a housing development has an age restriction, it must comply with one of the following Fair Housing Act exemptions: ü Government Housing Programs: The prohibitions against discrimination on the basis of age of familial status do not apply with respect to dwellings provided under any State or Federal Program specifically designed and operated to assist the elderly or to house elderly persons. The Secretary of HUD must determine that the development meets this exemption ü Age Restrictions – 62 years of age or older: The prohibitions against discrimination on the basis of age or familial status do not apply with respect to dwellings intended for, and solely occupied by persons 62 years of age or older. ü Age Restrictions – Any age restriction: The prohibitions against discrimination on the basis of age or familial status do not apply with respect to dwellings intended and operated for occupancy by person 55 years of age or older provided that all of the following apply: · · · At least 80% of the occupied units are occupied by persons 55 years of age or older. The housing facility or community publishes and adheres to policies and procedures that demonstrate the intent to provide housing to persons 55 years of age of older The housing facility or community can provide documentation for verification of occupancy, by means of: Ø Provide for verification by reliable surveys and affidavits; and Ø Include examples of published written policies and procedures for determination of compliance with Fair Housing Act. Age Restrictions that survive foreclosure: These restrictions may place restrictions on the borrower as to any future sales and these restrictions would also apply to the lender in the event of foreclosure. Age Restrictions that do not survive foreclosure: These restrictions may place restrictions on the borrower as to any future sales and these restrictions DO NOT apply to the lender in the event of foreclosure. Continued on next page Conventional Lending Guide 100-150 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Age Restricted Communities, (Con’t) Continued Ineligible for: · 3-4 Units · Second Homes and Investment properties Additional Requirements: ü Lender may not be required to send notice of default or foreclosure to any third party. ü Copy of the Restrictive Covenant must be provided. ü ALTA-9 title endorsement is required. Appraisal Requirements: Age Restrictions that Survive Foreclosure: In cases where the resale restriction survives foreclosure or deed-in-lieu of foreclosure, the appraisal must reflect the impact the restriction has on the value and be supported by comparables with similar restrictions. The underwriter must ensure that the appraiser and the borrower are aware of the existence of the resale restrictions and comment on any impact the resale restrictions may have on the property’s value and marketability. The appraisal must include 3 comparable sales of units with similar deed restrictions. For new projects or subdivisions, at least 2 of the sales must be from outside the project or subdivision. Age Restrictions that Do NOT Survive Foreclosure: In cases where the resale restrictions terminate automatically upon foreclosure, the appraisal should reflect the market value of the property without resale restrictions and should advise the appraiser that he or she must include the following statement in the appraisal report: “This appraisal is made on the basis of a hypothetical condition that the property rights being appraised are without resale and other restrictions that are terminated automatically upon the latter of foreclosure or the expiration of any applicable redemption period, or upon recordation of a deed-in-lieu of foreclosure.” Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-151 Conventional Lending Guide Properties, Continued Multiple Parcels Properties with multiple parcels are permitted subject to: · Each parcel must be conveyed in its entirety. · Parcels must be adjoined to the other, unless they comply with the following exception. Parcels that otherwise would be adjoined, but are divided by a road, are acceptable if the parcel without a residence is a non-buildable lot (for example, waterfront properties where the parcel without the residence provides access to the water). Evidence that the lot is non-buildable must be included in the loan file. · Each parcel must have the same basic zoning (for example, residential, agricultural). · The entire property may contain only one dwelling unit. Limited additional non-residential improvements, such as a garage, are acceptable. For example, the adjoining parcel may not have an additional dwelling unit. An improvement that has been built across lot lines is acceptable. For example, a home built across both parcels where the lot line runs under the home is acceptable. · The mortgage must be a valid first lien that covers each parcel. ü Continued on next page Conventional Lending Guide 100-152 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Land Contracts Continued A land contract, also known as an installment land contract or a contract for deed, is a real estate agreement between a buyer and seller, whereby the buyer may use and occupy the property. However, the deed from the property seller to the buyer may not be recorded until all or a specified part of the sales price has been paid. The buyer does not obtain the transfer of title until the land contract is paid; however, if the land contract is recorded, it should be reflected in the chain of title in the title report. Purchase versus Refinance Credit Purchase Refinance LTV The lesser of current appraised value or total acquisition cost. For A Limited Cash Out Refinance, the LTV is based on current appraised value. NOTE: If the land contract is not recorded, use the date signed by all parties as the executed/effective date. NOTE: If the land contract was executed less than 12 months prior to the date of the application, it must be considered a purchase. Acquisition Cost Total acquisition cost is calculated as: Purchase price as indicated in the original land contract plus, any fully documented costs for rehabilitation, renovation, refurbishment or energy conservation. No Cash Out No loan proceeds may be disbursed to the borrower unless they are for documented costs for completed rehabilitation, renovation, refurbishment or energy conservation. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-153 Conventional Lending Guide Properties, Continued Land Contracts, Continued Criteria Purchase Land Contract A copy of the land contract is required. The land contract does not have to be recorded. Payment History ü Third party verification must show the borrower has been making the payments in accordance with the terms of the contract for the most recent 12 months. ü 12 month cancelled checks are required ü A VOM is acceptable with institutional lender. ü Non-Arms length requires cancelled checks Completion of Improvements Short Sale Refinance If the appraisal is made subject to the completion of any improvements, a 442 is required. When the subject property is the result of a Short Sale, Foreclosure, or Deed-in-Lieu of Foreclosure, the following terms are required: ü The transaction is arms length involving a realtor and a formal sales contract. ü There is no relationship or identity of interest between the buyer and seller. ü Short sale approval letter from all existing mortgage lien holders accepting the discounted sales price on the subject property must be documented and retain in the loan file. ü All liens are extinguished with the sales proceeds. ü Bailouts and flips are not permitted ü Property value must be confirmed with a full interior/exterior appraisal regardless of AUS recommendations. ü The borrower(s) may not be involved in negotiations with the lien holders(s) to facilitate the short sale. Continued on next page Conventional Lending Guide 100-154 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, UAD Condition Ratings Continued UAD compliant appraisal report forms must include a UAD Condition Rating (C1, C2, C3, C4, C5 or C6) that best describes the overall condition of the subject property and each comparable property. ü UAD Condition Ratings C5 or C6 are not acceptable. · All issues that caused the C5 or C6 rating must be cured. Once cured, the condition rating on the appraisal report must be updated to reflect a C4 or better rating. If a property has deficiencies or defects that are severe enough to affect the safety, soundness or structural integrity of the improvements, then the property’s condition must be rated as a C6. ü UAD Condition Ratings C1, C2, C3 or C4 may be subject to completion or repairs; however, the repairs must be addressed and completed. NOTE: The appraisal report must contain additional commentary, descriptions, and explanations to enable the appraisal reviewer to understand the property condition and quality. UAD Quality Ratings UAD compliant appraisal report forms must incorporate a UAD Quality Ration (Q1, Q2, Q3, Q4, Q5 or Q6) that best describes the overall quality of the subject property and each comparable property. ü ü UAD Quality Ratings Q6 is not acceptable. · All issues that caused the Q6 rating must be cured including modifying the property to make it habitable as a year-round residence; upgrading the electrical, plumbing, and other mechanical systems and equipment to meet community standards; correcting any substandard or non-conforming additions to the original structure; and curing any other quality related items needed to make the property acceptable to typical purchasers in the market in which the property is located. Once items are cured, the quality rating on the appraisal report must be updated to reflect a Q5 or better rating. UAD Quality Ratings Q1, Q2, Q3, Q4 or Q5 may be subject to completion or repairs; however, the repairs must be addressed and completed. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-155 Conventional Lending Guide Properties, Continued Condition and Quality Adjustments The appraiser must make appropriate adjustments for differences in condition and quality between the subject property and each comparable property to reflect the value, if any, of the differences in the market place. If the appraiser makes an adjustment for differences in quality and condition between the subject property and a comparable property that have the same UAD quality or condition rating, or does not make an adjustment for properties that receive different quality and condition ratings, the appraiser is expected to provide a sufficient explanation for the basis and rationale for all adjustments. Property Conditions All subject properties must be habitable and all mechanicals (plumbing, electrical, etc.) must be functional and in good working condition. IMPORTANT: Any maintenance items which affect the safety, soundness, or structural integrity of the property must be corrected prior to closing or the subject will be deemed unacceptable. Roof Life Remaining Economic Life does not need to considered as related to the mortgage term, however, related property deficiencies must be discussed in the sections of the appraisal report that address the improvements analysis and comments on the condition of the property. If the appraiser classifies the roof to be at the end of or less than 2 years remains of its economic life, then a roof inspection/certification should be performed. · If the roof inspector confirms the remaining economic life to be under 2 years, then a new roof should be installed. Continued on next page Conventional Lending Guide 100-156 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Environmental Hazards Continued Properties may not violate any environmental law, rule or regulation with respect to the subject property, and may not contain toxic materials or other environmental hazards on, in or that could affect the subject property. ü Appraiser must disclose any known or suspected environmental hazards on or near the subject property, e.g., land fills, toxic waste dumps, or junk yards; including any hazardous conditions observed during the inspection of the subject property or information that he or she became aware of through the normal research involved in performing an appraisal. ü If an environmental hazard is located on or near the subject property, the appraiser must comment on any influence that the hazard has on the property’s value and marketability and make appropriate adjustment in the overall analysis of the property’s value. ü If any environmental hazard is suspected, an environmental study of the subject property is required prior to loan approval. In such cases, a nationally recognized and reputable environmental engineering firm must perform the written report. The report must include an analysis and detailed list of clean up costs, if any. ü Homeward Residential will not approve a loan without acceptable evidence confirming any known or suspected environmental hazards will not have an adverse affect upon the marketability, livability, or appraised value of the subject property. This confirmation must be evidenced by either acceptable or documented clean-up efforts or by verification of comparable market data confirming no buyer resistance to the hazard. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-157 Conventional Lending Guide Properties, Non-Structural Hazards Continued Non-structural Hazards The appraiser must adequately identify and describe the property in terms of conditions, features, and upgrades. The property improvements must be in at least average condition and the condition of the property must not negatively affect either the habitability or marketability of the property. Property should be free and clear of health and safety issues. ü Example of this would be a swimming pool that is not complete (should not be included in the value) or work in progress. A fence should be around the work area or the pool should be covered. ü If security bars are placed on the windows, at least one window per room must have a release latch. Non-structural hazards include (but are not limited to) airport noise, railroad tracks and other high noise sources, flood zones, lead base paint, radon, overhead high voltage transmission towers and lines, operating and abandoned oil and gas wells, tanks, and pressure lines, insulation materials, mold, lava zones, avalanche, decks or balconies that are not completed, buried oil tanks that are leaking, staircases without handrailing, excessive debris on the property, and electrical or plumbing that is outdated or incomplete. Security Bars ü The appraiser must comment and follow state and local requirements with respect to the use of security or “burglar” bars. ü There must be an emergency release latch for at least one window in each room where the security bars are located, unless local or municipal codes state otherwise. Continued on next page Conventional Lending Guide 100-158 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Continued Swimming Pools ü Empty swimming pools are not acceptable due to associated safety hazards. If pools are empty at time of appraisal, recertification with photos is required reflecting water-filled OR reflecting a correctly installed pool cover. ü Visible green or moss covered pool water is not acceptable. ü Non-operable swimming pool systems may be acceptable with: · Correctly installed pool cover · Value may not be assigned to the pool · Comparables should not include properties with swimming pools Appraiser to provide estimate of damage and approximate repair cost. Extensive cost to repair will be at the Underwriter’s discretion for approval. ü Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-159 Conventional Lending Guide Properties, Continued Heating and Cooling Sources ü All properties must have a permanent source of heat and, if typical for the area, cooling. Space heaters and similar sources are not considered permanent heat sources, even if affixed to a permanent wall. Utilities ü Utilities must meet community standards and be accepted in the market areas. ü If public sewer and/or water facilities, those that are supplied and regulated by the local government, are not available, community or private well and septic facilities must be available and utilized by the subject property. The owners of the subject property must have the right to access those facilities, which must be viable on an ongoing basis. Private well or septic facilities must be located on the subject site, unless the subject property has the right to access off-site private facilities and there is an adequate, legally binding agreement for access and maintenance. ü If there is market resistance to an area because of environmental hazards or any other conditions that affect well, septic, or public water facilities, the appraisal must address the effect of the hazards on the value and marketability of the subject property ü In addition, the comparable sales should have utilities similar to the subject property. When differences in utilities exist between the subject property and the comparable sales, any adjustments or lack of adjustments made to the comparable sales for significant differences must be explained in the comments area or on an attached addendum. In addition, the appraisal must evaluate the effect these differences have on the subject property's value or marketability ü NOTE: If the appraiser specifically comments to utilities being “off”, not in good working order, or requires the installation of any appliance as a condition of the appraised value, then a 1004D must be completed with utilities on, repaired or appliance installed prior to closing. Continued on next page Conventional Lending Guide 100-160 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Deferred Maintenance Continued If the appraiser reports the existence of minor conditions or deferred maintenance items that do not affect the safety, soundness, or structural integrity of the property, the appraiser may complete the appraisal “as is” and these items must be reflected in the appraiser’s opinion of value. Minor conditions and deferred maintenance items include, but are not limited to, worn floor finishes or carpet, minor plumbing leaks, holes in window screens, or cracked window glass and are typically due to normal wear and tear. It is not required to ensure that the borrower has had this work completed prior funding. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-161 Conventional Lending Guide Properties, Continued Accessory Unit ü An accessory dwelling unit is typically an additional living area independent of the primary dwelling unit, and includes a fully functioning kitchen and bathroom. Some examples may include a living area over a garage and basement units. Whether a property is a one-unit property with an accessory unit or a two-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utilities, a unique postal address, and whether the unit is rented. The appraiser is required to provide a description of the accessory unit, and analyze any effect it has on the value or marketability of the subject property. ü If is · · ü If it is determined that the property contains an accessory dwelling unit that does not comply with zoning, the property is eligible under the following additional conditions: · It is confirmed that the existence will not jeopardize any future property insurance claim that might need to be filed for the property. · The use conforms to the subject neighborhood and to the market. · The property is appraised based upon its current use. · The appraisal must report that the improvements represent a use that does not comply with zoning. · The appraisal report must demonstrate that the improvements are typical for the market through an analysis of at least three comparable properties that have the same non-compliant zoning use. the Single family residence contains an accessory unit, the property eligible under the following conditions: The property is one-unit. The appraisal report demonstrates that the improvements are typical for the market through an analysis of at least one comparable property with the same use. · The borrower qualifies for the mortgage without considering any rental income from the accessory unit. Continued on next page Conventional Lending Guide 100-162 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Continued Non-Permitted Additions ü If the appraiser identifies an addition(s) that does not have the required permit, the appraiser must comment on the quality and appearance of the work and its impact, if any, on the market value of the subject property. Declining / Soft Markets Declining/Soft Markets A Declining/Soft Market is designated by the following: ü An appraiser indicates “declining” on the appraisal report, aged comparables, etc. · The transaction being evaluated must be closely reviewed within the appraisal to insure that the appraiser is specific with regard to the impact of the market decline. · Treat any area considered a declining/soft market area conservatively with regards to the appraiser’s determination and/or comments. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-163 Conventional Lending Guide Properties, Declining / Soft Markets, (Con’t) Continued The underwriter is responsible for the following verification: ü Ensure the appraiser analyzes listings and contract sales, if available, along with the most recent closed/settled sales. ü If the underwriter determines the appraisal does not accurately reflect the current market conditions, the underwriter is expected to request additional clarification or justification from the appraiser to make an informed decision about the property value. The underwriter must take appropriate steps to assess market conditions and determine if the appraisal accurately reflects current market conditions and value. · The underwriter may rely on a market condition tracking service to assist in this analysis. · If the underwriter determines that the property is located within a declining market, the underwriter must ensure the current market conditions are identified in the appraisal report and analyzed as part of their valuation process. When declining/soft market conditions are indicated through any methodology, the below restrictions apply: ü ü Maximum LTV/CLTV/HCLTV may be reduced at the discretion of the underwriter or as required by the MI Partner, if applicable. ü The appraiser must comment on the reason for the decline ü Appraisals should not contain comparables greater than six months old at time of underwriting review; if comparables do not have a closing date within the last six months, an additional listing or pending sale comparable must be included to reflect current market conditions. · If two of the comparables sales are not within the most recent 90 days, a detailed explanation from the appraisal is required. ü Photocopy of the original appraisal must be included in the loan file ü Non Arms length Transactions should be closely reviewed NOTE: Applies to ALL Agency Programs. Continued on next page Conventional Lending Guide 100-164 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Continued Supervisory Appraisers Appraiser must be qualified to perform appraisals without oversight or supervision by a “supervisory” or “review” appraiser. Sales Contract to Appraiser The appraiser must be provided with the sales contract and all addenda, therefore, ensuring that the appraiser has been given the opportunity to consider financing and sales concessions in the transaction and their effect on the subject property value. Appraisal Forms The following is a listing of appraisal forms to be utilized for all property types eligible for financing. The most recent revision of the listed appraisal form must be used. Appraisal Forms FNMA 1004/ FHLMC 70 Used for single-family properties, both attached & detached including PUD and site-detached condominiums. FNMA 1004MC / FHMLC 71 Market Conditions Addendum to the appraisal report. NOTE: When completing the “Total Number of Comparable Active Listings”, the appraiser should use the total listings as of the most recent applicable date, not a cumulative total for the entire period covered. FNMA 1073/FHLMC 465 Used for condominium properties. FNMA 1025/FHLMC 72 Used in the appraisal of two-to-four unit properties (A duplex, triplex or four-plex); interior and exterior report. FNMA 1004D Used for appraisal updates and/or completion reports for all 1-4 Unit appraisal reports. When obtaining a 1004D for an appraisal update and /or completion, at a minimum, a photograph of the front of the subject property must be included. FNMA 2000 Used for appraisal field reviews for one-unit properties. FNMA 2000A Used for appraisal field reviews for two-to-four unit properties. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-165 Conventional Lending Guide Properties, Continued Photo Requirements For Form 1004, 1073 and 1025, the following photos are required (clear and descriptive) showing: · Kitchen, All Bathrooms and the Main Living Area. · Examples of physical deterioration, if present. · Examples of recent updates, such as restoration, remodeling, renovation, if present. Bedroom Count Bedroom count must be captured on all 1-4 unit investment properties and all owner occupied 2-4 unit properties regardless of the AUS, appraisal type, and regardless of whether the borrower uses rental income to qualify. ü Bedroom count information can be obtained from one or more of the following sources: · Lease agreements · Tax returns · Operating income statement (Form 216) · Single Family Comparable Rent Schedule (Form 1007) · Appraisal · Public record data that does not provide current property valuation. Continued on next page Conventional Lending Guide 100-166 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Investment Appraisal Forms Continued In addition to the appraisal forms specified, the following forms are required for investment properties: Investment Appraisal Forms FNMA 216/FHLMC 998 One-to-Four Unit Investment Property Operating Income Statement Form required for one-to-four owner occupied and non-owner occupied rental properties. FNMA 1007/FHLMC 1000 Single Family Comparable Rent Schedule Form required for non-owner single-family properties. NOTE: When rental income is not used to qualify, refer to the Qualifying without Rental Income section within this guide for additional details. Streamline Appraisal Forms No longer permitted. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-167 Conventional Lending Guide Properties, Property Inspection Waivers Continued The Desktop Underwriter (DU) Property Inspection Waiver Service (PIW) enables subscribers to exercise the option to waive the fieldwork and the property condition representations and warranties associated with certain DU Property Inspection Report recommendations. ü Waiver offer may not be more than 4 months old ü Not permitted if the purchase transaction is the result of the sale of a REO property, short sale or the last transaction on the subject property was a foreclosure. In such cases, a full interior/exterior appraisal is required. ü Year built must be listed on the 1003 application. ü If applicable, market rent must be listed on the 1008; ranges are not acceptable. NOTE: Utilization of appraisal waivers requires the borrower to be provided and sign the Notice About Appraisal of Your Property disclosure. The following transaction and property types are not eligible to receive a recommendation for a PIW: · High Balance Loan Amounts · Construction-permanent · Construction · Homes requiring significant repair · Non-arms length transaction · See additional comments on the next page. LP Home Value Explorer (HVE) Not permitted for non-HARP LP approved transactions. Continued on next page Conventional Lending Guide 100-168 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Appraisal Upgrades Appraisal Requirements Continued A full appraisal must be obtained if any of the following conditions exists: ü The appraiser is unable to adequately view the subject property from the street, or ü The appraiser observes any factor that may have an adverse effect on the marketability of the subject property, or ü The quality or condition of the property appears unacceptable to the typical purchaser in the area in which the subject property is located, or ü The Condition and Marketability Factors section of the form indicates an upgrade is required, or ü Apparent adverse physical deficiencies or conditions, or ü Apparent adverse environmental conditions, or ü The subject property does not conform to the neighborhood. All appraisal practices utilized by Homeward Residential (a) conforms to the requirements of FNMA, (b) complies with Appraiser Independence Requirements (AIR) issued by the Federal Housing Finance Agency, and (c) meets the minimum standards established under FIRREA and the USPAP. More information may be obtained at the below links ü USPAP: · http://uspap.org/#/28 ü FIRREA: · http://www.fdic.gov/regulations/laws/rules/8000-3100.html ü FNMA Appraiser Independence: · https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/app code/pdf/air.pdf Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-169 Conventional Lending Guide Properties, Private Road Maintenance Continued If the property is on a privately owned and maintained street, there should be an adequate, legally enforceable agreement for maintenance of the street. The agreement or covenant should include the following details and be properly recorded: ü Responsibility for payment of repairs, including each party’s representative share. ü Default remedies in the event a party to the agreement fails to comply with their obligations. ü The effective term of the agreement, which in more cases should be perpetual and binding on future owners. ü If the property is located within a state that has statutory provisions that define the responsibilities of property owners for the maintenance and repair of a private road, no separate agreement or covenant is required. NOTE: Not required on condominium property in which the HOA is responsible for street maintenance. Continued on next page Conventional Lending Guide 100-170 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Mixed Use Properties Continued Mixed Use property is defined as any commercial usage WITHIN the square footage and/or deed that secures the subject property. Examples of mixed use properties include a day care, beauty shop, specialty store, doctor’s office located WITHIN the square footage and/or deed of the subject property. Acceptability of mixed-use properties is limited as follows: ü Property must be a one-family property that the borrower occupies as his or her principal residence. ü Property must represent a legal, permissible use of the property under the local zoning requirements. ü Subject Property must not contain any environmental hazards (i.e. paint, oil, excess debris) and the business may not be industrial, manufacturing, or agricultural. ü Borrower must be both the owner and the operator of the business ü Property must be primarily residential in nature. Generally, commercial use should not exceed 33% of total gross living area. ü Market value of the property must be primarily a function of its residential characteristics rather than the business use or any special business-use modifications that were made. ü Full interior/exterior appraisal is required. If the property has been modified to accommodate a mixed-use, the appraiser should address whether the modifications affect the property’s marketability as a residence and whether the cost to restore the property to a solely residential use will affect its value. An appraisal must be obtained for the mixed-use property. Property inspections and waivers are not permitted. A home office in a condominium unit is acceptable, if there are no employees. The mixed use must not be restricted by the condominium project. NOTE: An unacceptable mixed use property would be a grocery store located within the square footage of the property or a Bed and Breakfast which is classified as commercial regardless of residential nature. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-171 Conventional Lending Guide Properties, Carbon Monoxide Detectors Continued For California properties, evidence that a carbon monoxide detector has been installed is required: · On purchase transactions when installation is required per sales contract or appraisal report or when the appraisal indicates detectors have not been installed. · On refinance transactions when installation is required per the appraisal or when the appraisal indicates detectors have not been installed. For Connecticut properties effective January 1, 2014, evidence certain properties adhere to Act PA 13-272-sHB 6160: (http://cga.ct.gov/2013/sum/pdf/2013SUM00272-R02HB-06160-SUM.pdf) ü Requires seller before transferring title to a 1 or 2 unit (family dwelling for which a new occupancy building permit was issued before 10/1/2005) to provide: · · · · · ü Affidavit certifying the occupancy building permit was issued on or after October 1, 1985; OR Affidavit certifying the dwelling is equipped with smoke detection and warning equipment (smoke detectors) complying with the act. Affidavit must also certify that the building is equipped with carbon monoxide (CO) detection and warning equipment (CO detector) complying with the act; OR Property does not pose a risk of CO poisoning because it does not have a fuel-burning appliance, fireplace or attached garage. A transferor who fails to provide the affidavit must credit the transferee with $250 at the closing. The act exempts from the affidavit requirement transfers: · · from one co-owner to another; to the transferor’s spouse, parent, sibling, child, grandparent, or grandchild where no consideration is paid; · under a court order; · by the federal government or any of its political subdivisions; · by deed in lieu of foreclosure; · involving refinancing of an existing mortgage debt; · by mortgage deed or other instrument to secure a debt where the transferor’s title to the property is subject to a preexisting mortgage debt; or · by executors, administrators, trustees, or conservators. NOTE: The act also specifies the standards for Smoke and CO detector equipment. Continued on next page Conventional Lending Guide 100-172 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Properties, Mineral Rights Continued Outstanding oil, water, gas or mineral (including, but not limited to, Coal) rights that are customarily waived are permitted, as long as they do not materially alter the contour of the property or impair its value or usefulness for its intended purposes. ü The file must include documentation that the exercise of such rights will not result in damage to the subject property or impair its use or marketability for residential purposes AND there is not right of surface or subsurface entry within 200 feet of the residential structure; OR ü Document comprehensive endorsement to the title insurance policy that affirmatively insures Homeward Residential against damage or loss due to the exercise of such rights. IMPORTANT: If there is an executed or active lease on the property, the appraiser must comment as to the impact of the lease (or sold rights) on the marketability of the subject property. If the lease or sold rights have any negative impact on the marketability of the subject property, the loan is not eligible. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-173 Conventional Lending Guide Leasehold Estates Overview Leasehold estates are acceptable in areas where they are common and customary. The lease must permit the following: · Assignments of the leasehold estate without the lessor’s consent · Release of an assigning lessee or sublessee · Constitute real property, be subject to a mortgage lien, and be insurable by an acceptable lender’s title insurance policy. · For condo or PUD projects, the homeowners association must be the lessee under the ground lease. The fee simple owner must not be the developer, an entity associated with the developer, or a hospitality entity. · Must be assignable / transferable. · All lease rents, other payments, or assessments must be current, and the borrower must not be in default under any other provision of the lease nor may the lessor have claimed such a default. NOTE: Leasehold agreements involving tribal counsels and/or native American Indian land typically do not meet assignment without prior consent requirements and therefore would not be eligible. Documentation ü Completed FNMA Ground Lease Analysis (Form 461) ü Copy of the lease documentation reflecting that it is recorded in the appropriate public land records and in full force and effect. · May not be subject to any prior lien or encumbrance by which the leasehold could be terminated or subjected to any charge or penalty. ü Title insured by an ALTA Leasehold loan policy (ALTA 13.01-06) · For California, a CLTA 107.5 endorsement, or its equivalent, is also required. The endorsement must state the property improvements are insured in the same manner as the land. ü Leasehold Rider to the Security Instrument ü Attorney Opinion Letter highlighting the details of the leasehold agreement thus providing the necessary reassurances that the leasehold meets Agency requirements. Continued on next page Conventional Lending Guide 100-174 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Leasehold Estates, Term of Lease Continued ü Must have a remaining term five years past the maturity date of the loan. NOTE: This requirement does not apply if fee simple title will vest in the borrower or owners’ association at an earlier date. ü Contain a provision that interest can be transferred, mortgaged, and/or sublet an unlimited number of times by the lessee—either without restriction or with payment of a reasonable fee and delivery of reasonable documentation to the lessor (owner of the land). The lessor may not impose any credit qualifying criteria on an assignee, transferee, mortgagee or sub lessee. ü When applicable, the leasehold must provide for the lessee to retain voting rights in an HOA. ü Lease must provide for the borrower to pay all taxes, insurance and HOA dues related to the land. ü Lease must be valid, in good standing, and in full force and effect in all respects. ü Contain provisions to protect lender’s interest in the event of bankruptcy of any party to the lease, foreclosure, the property’s condemnation or destruction, such as the right to assume the lease and any renewal options, or acquire the lease in its own name or in the name of a nominee upon foreclosure or deed in lieu of foreclosure. ü The lease must provide for the leasehold mortgagee’s right to exercise any renewal options that may exist. ü If the lessor’s fee simple interest in the land is subject to any encumbrances or liens, or the lease requires the lessee to agree to the subordination of the lease to said liens or encumbrances, the fee simple lienholder has executed and recorded a Nondisturbance and Attornment Agreement that contains the provisions indicated below. ü Provide for the leasehold mortgagee to approve any amendments to the lease that relate to the provisions described herein, the modification of the leasehold estate, or the termination or cancellation of the lease. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-175 Conventional Lending Guide Leasehold Estates, Ineligible Lease Terms Default Provisions Continued The lease must NOT: ü Contain default provisions allowing forfeiture or termination of the lease except for non-payment of the lease rents. ü Prohibit the leasehold mortgagee from exercising renewal options. The lease documentation must contain the following default provisions: ü At least a 30 day written notice of default by the lessor to the leasehold mortgagee as a condition of the validity of the notice of default. ü The right of the leasehold mortgagee to cure a default for the lesee’s account within the time permitted to the lessee, plus reasonable additional time. ü A stipulation indicating a new lease of the same priority will be given to the leasehold mortgagee if the lease terminates because of default not curable by the leasehold mortgagee. ü No termination for non-durable default, as long as no default in rent exists. ü The lease provides for the leasehold mortgagee’s right to acquire the lease in their own name, or in the name of a nominee, upon foreclosure or assignment in lieu of foreclosure. NOTE: The borrower must not be in default under any other provision of the lease nor may such a default have been claimed by the lessor. Continued on next page Conventional Lending Guide 100-176 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Leasehold Estates, Leasehold Appraisal Requirements Continued Appraisers must develop a thorough, clear, and detailed narrative that identifies the terms, restrictions, and conditions regarding lease agreements or ground leases: ü Appraisers must include this information as an addendum to the appraisal report. ü If applicable, Appraisers must discuss the effect the lease agreement or ground lease has on the value and marketability of the subject property. ü The appraiser’s sales comparison approach to value must use comparable property sales that have similar leasehold interests. ü When there are sufficient numbers of closed comparable property sales with similar leasehold interests available, the appraiser should: · Use the property sales in the analysis of market value of the leasehold estate for the subject property, and · Report the property sales in the “sales comparison analysis” grid on the applicable appraisal report form. If comparable sales with the same lease terms and restrictions are not available, appraisers may use sales of similar properties with different lease terms or, if necessary, sales of similar properties that were appraised as fee simple estates. ü ü Appraisers must explain why the use of these sales is appropriate, and make appropriate adjustments on the “sales comparison analysis” grid to reflect the market reaction to the different lease terms or property rights appraised. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-177 Conventional Lending Guide Leasehold Estates, Purchase Price Calculation Continued The table below provides the requirements for establishing the purchase price of the land: Status of Property Improvements Purchase Price of Land Already constructed at the time the lease is executed. The initial purchase price should be established as the appraised value of the land on the date the lease is executed. Already constructed at the time the lease is executed, and the lease is tied to an external index such as the Consumer Price Index (CPI). The initial land rent should be established as a percentage of the appraised value of the land on the date that the lease is executed. The purchase price may be adjusted annually during the term of the lease to reflect the percentage increase or decrease in the index from the preceding year. Leases may be offered with or without a limitation on increases or decreases in the rent payments. Option to Purchase The lease may, but is not required to, include an option for the borrower to purchase the fee interest in the land. ü If the option is included, the purchase must be at the borrower’s sole option, and there can be no time limit within which the option must be exercised. ü If the option to purchase the fee title is exercised, the mortgage must become a lien on the fee title with the same degree of priority that it had on the leasehold. ü Both the lease and the option to purchase must be assignable. Continued on next page Conventional Lending Guide 100-178 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Leasehold Estates, Lease Payments Sublease Continued ü An increase in lease or sublease payments during the term of the mortgage, is permitted if the increase is a certain amount at a specific time period, or the increase is based on an index or reappraisal, and the increase has a stated limitation. ü Increases must be subject to maximum limitations, and the sublease payments cannot be due less frequently than the lease payments. ü Any potential increase in rent payments must be taken into consideration when calculating the borrower’s housing payments and debt ratios. ü If the leasehold is a sublease, it must provide for sublease payments at least equal to the lease payments (or proportionate share thereof) and due no less frequently than the lease payments. ü The lessor may not require a credit review or impose any other qualifying criteria on transference, mortgage, or sublease. ü The sublease must be signed by both the fee owner and the sublessor. ü The sublease must contain a Nondisturbance and Attornment Agreement, by which the fee simple lienholder or the lessor agrees to accept the terms of the lease or sublease and not to interfere with the lessee’s rights to use the leasehold estate. ü The leasehold estate and the mortgage must not be impaired by a title merger between the lessor and lessee, or by a sublessor’s default. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-179 Conventional Lending Guide Insurance Hazard Insurance Overview Hazard insurance to protect the property against loss or damage from fire and other hazards if required for all property types. Acceptable Insurance Ratings Each hazard insurance underwriter must have an acceptable rating as indicated below. Lloyd’s of London Insurance Group and various states’ Fair Access to Insurance Requirement Plans (FAIR Plans) are acceptable insurers, although they are not rated. NOTE: The information provided in this guide is subject to state law requirements. Rating Agent A.M. Best Co. (www.ambest.com) Demotech, Inc. (www.demotech.com) Standard & Poor’s, Inc. (www.standardandpoors.com) Evidence of Insurance Rating B/III, A/III or better rating by A.M. Best Company, Inc. An “A” or better rating in Demotech’s P&C financial stability ratings. A minimum rating of “BBB” as reported in Insurer Solvency Review – Property/Casualty Edition Evidence of insurance in the form of a Declarations page, Certificate of Insurance, Evidence of Insurance or Binder is acceptable as long as all of the following information is clearly stated: ü Underwriting company’s name ü Mailing address (if applicable) ü Agent’s information (name, address & phone number) ü Amount of coverage Signature of agent (if applicable) ü Dates of coverage ü ü Deductible amount ü Loan number ü ü Mortgagor’s name(s) Premium amount with paid receipt or invoice Property address ü Mortgagee Clause ü Continued on next page Conventional Lending Guide 100-180 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Insurance, Insurance Coverage Terms Continued Binders must be effective for at least 60 days and reference the annual renewal dates of the pending policy. Binders with an inception date and expiration date are acceptable as long as the actual policy effective dates are also provided. An Application for coverage is not acceptable unless the application explicitly states that coverage is bound under the terms of the policy if signed by the insurance agent and must meet all requirements listed above. NOTE: Non-critical Insurance Agent information – such as agent address, phone or fax number, may be handwritten onto the typed binder. The following information must be provided on the evidence of insurance: ü All borrower names that appear on the security instrument must appear as insured on policy. ü Complete and accurate property address: · Property address (to include street address, unit number –if applicable, city, state, and zip code) must be consistent with file. · NOTE: If file indicates a different mailing address (i.e. P.O. Box, RR Box #), both addresses should appear on the binder/policy. Policy number or binder number present (not applicable if application received). ü ü Agent’s name, address and phone number. ü Loan number ü Length of Coverage: · The effective dates (beginning and expiration date) of the policy coverage must be clearly stated. · Purchases: Must extend a minimum of 12 months from date of funding. · Refinance: Existing coverage must extend a minimum of 60 days beyond the date of funding. Sufficient impounds must be collected to renew the coverage on the due date (if applicable). If the policy expires within 60 days of the date of funding, evidence of renewal for one year must be provided OR must be paid at closing and appear on HUD-1. ü Annual premium amount. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-181 Conventional Lending Guide Insurance, Continued Insurance Coverage Terms, (Con’t) ü Deductible amount must not exceed 5% of the policy amount (subject to applicable state law restrictions). ü Coverage Requirements: Subject to applicable state law requirements the amount of dwelling coverage must equal: · 100% of the insurable value, which is the replacement value. (as established by the property insurer) or the unpaid principal balance of the mortgage as long as it equals the minimum amount (80% of the insurable value of the improvements) required to compensate for damage or loss on a replacement cost basis. Examples of Insurable Value If the amount of coverage is not sufficient, you must either increase the dwelling coverage or obtain one of the endorsements below: ü Guaranteed Replacement Cost endorsement OR ü Replacement Cost endorsement with a percentage exceeding 100% of the coverage amount NOTE: If the endorsement option is utilized, the insurance must reflect evidence of the additional endorsements. If the Replacement Cost is utilized, the evidence of insurance must indicate the percentage. Evidence of Payment Insurance Exclusions ü Declarations page or binder with a paid receipt with policy number. ü Declarations page or binder reflecting premium amount and the statement “Paid in Full” ü Declarations page or binder agent along with invoice for premium to be collected at closing and listed as paid on the final HUD-1 Statement. Coverage must not exclude or limit windstorm, hurricane, hail or other damages that are included in the standard extended coverage. If the policy contains such exclusions or limitations, a supplemental policy or endorsement must be provided. Continued on next page Conventional Lending Guide 100-182 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Insurance, Flood Insurance Overview Continued The information provided in this guide is subject to state law requirements. Valid and reliable documentation from state authority should be forwarded to Closing Support for review. Acceptable form of documentation would include actual copy of state statute or regulation. Sample of unacceptable documentation would include: print out from insurance agent manual, generic article from informational source, letter from agent, etc. Evidence of sufficient Flood Insurance coverage must be provided for properties located in flood hazard area as determined by the Federal Emergency Management Agency (FEMA) in the form of a Life of Loan Flood Determination Report. The Flood Insurance Rate Maps (FIRM) identifies the Special Flood Hazard Area (SFHA) as beginning with an “A” or “V”. If the property is located in a non-participating community and is located in a flood zone, we will not be able to close this loan. Rebuttal If the mortgagor refuses to purchase flood insurance coverage on a property located in a special flood hazard area because the structure is above the Base Flood Elevation (BFE – i.e. on a knoll or bluff), the mortgagor may request a “Letter of Map Amendment” or “Letter of Map Revision” from FEMA as appropriate. If FEMA issues such a letter, it must be faxed to your Flood Certification Company for additional evaluation. Only once a revised Flood Determination Report is received may the flood insurance be cancelled or no longer required. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-183 Conventional Lending Guide Insurance, Evidence of Flood Insurance Continued Flood insurance policies should be in the form of a standard policy issued under the NFIP or by a private insurer. The terms and conditions of the flood insurance coverage must be at least equivalent to the terms and conditions of coverage provided under the standard policy of the NFIP for the appropriate property type. Evidence of insurance in the form of a Declarations page, Certificate of Insurance, Evidence of Insurance, Binder is acceptable as long as the following information is clearly stated: · Underwriting company’s name · Agent’s information (name, address & phone number) · Signature of agent (if applicable) · Loan number · Mortgagor’s name(s) · Property address · Mailing address (if applicable) · Amount of coverage · Dates of coverage · Deductible amount · Premium amount with paid receipt or invoice · Mortg agee Clause In the event that a policy has not yet been issued, a copy of the Application for Flood Insurance signed by an authorized representative of the insurer will be accepted. Although there is a 30 day waiting period before coverage takes effect under the National Flood Insurance Program (NFIP), this waiting period is waived if the initial purchase of flood insurance is in connection with making, increasing, extending or renewing of the loan. Continued on next page Conventional Lending Guide 100-184 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Insurance, Continued Flood Insurance Requirements ü All borrower names that appear on the security instrument must appear as insured on policy. ü Complete and accurate property address: · Property address (to include street address, unit number –if applicable, city, state, and zip code) must be consistent with file. · Note: If file indicates a different mailing address (i.e. P.O. Box, RR Box #), both addresses should appear on the binder/policy. Policy number or binder number present (not applicable if application received). ü ü Agent’s name, address and phone number. ü Loan number ü Length of Coverage: · The effective dates (beginning and expiration date) of the policy coverage must be clearly stated. · Purchases: Must extend a minimum of 12 months from the date of funding. · Refinance: Existing coverage must extend a minimum of 60 days beyond the date of funding. Sufficient impounds must be collected to renew the coverage on the due date (if applicable). If the policy expires within 60 days of the date of funding, evidence of renewal for one year must be provided OR must be paid at closing and appear on HUD-1. Annual premium amount. ü ü Transferred Policies Deducti ble Amount: · Unless a higher maximum deductible amount is required by state law, the maximum allowable deductible is: · Individual policies: $5000 · Condo/PUD project policies: $25,000 Flood insurance may be transferred from the seller to the buyer; however, it must be in effect for a full 12 months from the closing date. The original seller’s expiration date may not stand. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-185 Conventional Lending Guide Insurance, Acceptable Flood Coverage Evidence of Payment Optional Insurance Coverage Continued Acceptable flood coverage for 1-4 unit properties; subject to applicable state law requirements, the amount of flood insurance coverage must be the lowest of the following: ü 100% of the replacement cost of the dwelling. NOTE: To validate this amount, review the Total Estimated Cost New on appraisal. If not available – subtract the site value from the appraised value; ü Loan Amount or sum of combined liens (unpaid principal balance) regardless of lien holder – which must be equal to a minimum of 80% of the insurable value; OR ü Maximum amount of NFIP flood insurance coverage available – currently $250,000 ü Declarations page or binder and paid receipt with policy number. ü Declarations page or binder reflecting premium amount and the statement “Paid in Full” ü Declarations page or binder along with invoice for premium to be collected at closing and listed as paid on the final HUD-1 Statement. At the borrowers requests optional insurance coverage, such as Earthquake coverage, may be included in the impound account whether or not the account is a requirement of the loan. However, Homeward Residential will not set up an impound account for personal property, auto or any other type of insurance polices not directly associated with insuring the structure of the home. If the borrower chooses to waive the impound account, in accordance with the terms of the loan, all impound items must be waived. There may be additional fees for waiving the impound account. Refer to your local representation for full details. If an impound account is required as part of the loan, the borrower must impound for all impound items with the exception to the above optional insurance items. Conventional Lending Guide 100-186 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects Types of Insurance All Condominium and PUD projects must have acceptable Hazard, Flood, Liability and Fidelity Insurance as required by the specific warranty type. Master Association Policy ü The Association has a “master” or “blanket” policy that addresses the insurance requirements of the Association. Each loan file must contain a Certificate of Insurance. ü In most cases the responsibility for insurance on the individual dwelling units in a detached condo or site condominium falls to the unit owner, not the Association. This can vary according to state statue and ultimately is determined by the actual verbiage in the Declaration or Master Deed. ü Most units in PUD projects are insured as individual residences; therefore, their insurance requirements are similar to those for single family residences (for 100% detached projects). However, if the Association covers the individual units with a master hazard policy, the master policy coverage is acceptable. ü HO-6 Coverage for Attached Condos and Attached PUDs: In cases where the master policy does not include interior unit coverage, including replacement of interior improvements and betterment coverage to insure improvements that the borrower may have made to the unit, the borrower must obtain a HO-6 policy. If required, the HO-6 insurance policy must provide minimum coverage sufficient to repair the condo unit to its condition prior to a loss claim event as determined by the insurer AND if escrows are collected, full or partial, HO-6 must be escrowed also. NOTE: Although the responsibility for insuring the dwelling unit falls to the unit owner, the Association must carry hazard and liability insurance on any Association-owned property. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-187 Conventional Lending Guide Condo and PUD Projects, Certificate of Insurance Unaffiliated Condo Insurance Continued ü The master policy must cover all common elements/buildings, amenities and the residential buildings. ü Must include the subject property address and unit number on the proof of master insurance. ü The named insured on the policy must match the exact name of the Association as found on purchase contract, title, or recorded association documentation. ü Coverage must include a Guaranteed Replacement Cost Endorsement or 100% Replacement Cost Endorsement. ü Deductible may be up to 5% of the face amount of the insurance policy. ü Evidence of general liability coverage equal to $1 million for any specific occurrence. ü Evidence of Fidelity Bond/Employee Dishonesty coverage for attached projects that consist of 21 or more units. Notification requirements for notices of policy changes or cancellations are as follows: The policy must require the insurer to notify in writing the homeowners’ association (or insurance trustee) and each first mortgage loan holder named in the mortgagee clause at least 10 days before it cancels or substantially changes a condo project’s coverage. Continued on next page Conventional Lending Guide 100-188 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects, Liability Insurance Continued The Underwriter must verify liability insurance coverage as part of its review of a project. However, liability insurance coverage for Type E PUD projects or PUD and condo projects processed under the Limited Project Review procedures does not need to be verified. ü The homeowners’ association must maintain a commercial general liability insurance policy for the entire project, including all common areas and elements, public ways, and any other areas that are under its supervision. The insurance must also cover commercial spaces that are owned by the homeowners’ association, even if they are leased to others. The commercial general liability insurance policy must provide coverage for bodily injury and property damage that result from the operation, maintenance, or use of the project’s common areas and elements. ü The amount of coverage must be at least $1 million for bodily injury and property damage for any single occurrence. ü If the policy does not include “severability of interest” in its terms, Fannie Mae requires a specific endorsement to preclude the insurer’s denial of a unit owner’s claim because of negligent acts of the homeowners’ association or of other unit owners. ü The policy should provide for at least ten days’ written notice to the homeowners’ association before the insurer can cancel or substantially modify it. For condo projects, similar notice also must be given to each holder of a first mortgage on an individual unit in the project. ü Verification of liability insurance is not required for PUDs (attached and detached) or for Limited Review Condo projects. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-189 Conventional Lending Guide Condo and PUD Projects, Fidelity Bond Continued Fidelity insurance is required for condo projects consisting of more than 20 units. This requirement applies to all condo review processes. In states that have statutory fidelity insurance requirements, Fannie Mae accepts those requirements in place of its own. The lender must verify coverage as part of its review of the project. The homeowners’ association must have blanket fidelity insurance coverage for anyone who either handles or is responsible for funds that it holds or administers, whether or not that individual receives compensation for services. The insurance policy should name the homeowners’ association as the insured and the premiums should be paid as a common expense by the association. A management agent that handles funds for the homeowners’ association should be covered by its own fidelity insurance policy, which must provide the same coverage required of the homeowners’ association. The policy must cover the maximum funds that are in the custody of the homeowners’ association or its management agent at any time while the policy is in force. A lesser amount of coverage is acceptable if the project’s legal documents require the homeowners’ association and any management company to adhere to one or more of the following financial controls: · · · Separate bank accounts are maintained for the working account and the reserve account, each with appropriate access controls, and the bank in which funds are deposited sends copies of the monthly bank statements directly to the homeowners’ association. The management company maintains separate records and bank accounts for each homeowners association that uses its services, and the management company does not have the authority to draw checks on, or transfer funds from, the homeowners’ association’s reserve account. Two members of the Board of Directors must sign any checks written on the reserve account. Even then, the fidelity insurance coverage must equal at least the sum of three months of assessments on all units in the project. The policy for a condo project must include a provision that calls for ten days’ written notice to the homeowners’ association (or insurance trustee) before the policy can be canceled or substantially modified for any reason. This same notice also must be given to each servicer that services a Fannie Mae-owned or Fannie Mae-securitized mortgage in the condo project. Continued on next page Conventional Lending Guide 100-190 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects, Flood Coverage Amount Continued The minimum amount of flood insurance for individual PUD units and certain condo units (detached condos) is the lower of: · 100% of the replacement cost of the insurable value of the improvements; · The maximum insurance available from the NFIP, which is currently $250,000 per dwelling; or · The unpaid principal balance of the mortgage If a PUD Project maintains a Master Policy, the amount of flood insurance coverage for a PUD project should be at least equal to the lesser of 100% of the insurable value of the facilities or the maximum coverage available under the NFIP. Attached Condo Projects: Stand-alone flood insurance dwelling policies for an attached individual condo unit are not acceptable. A master condo flood insurance policy must be maintained by the homeowners’ association, subject to the coverage requirements below. The homeowners’ association must obtain a Residential Condominium Building Association Policy or equivalent private flood insurance coverage for each building that is located in an SFHA. The policy must cover all of the common elements and property (including machinery and equipment that are part of the building), as well as each of the individual units in the building. There must be a master flood insurance policy in effect that is at least equal to or lower of: · 80% of the replacement cost, or · The maximum insurance available from the National Flood Insurance Program (NFIP) per unit (which is currently $250,000). NOTE: · · · If the condo project master policy meets the minimum coverage requirements (just) above but does not meet the coverage requirements described above (very top of this section), a supplemental policy may be maintained by the unit owner for the difference. The contents coverage should equal 100% of the insurable value of all contents (including machinery and equipment that are not part of the building), owned in common by association members. If the condo project has no master flood insurance policy or if the master flood insurance policy does not meet the requirements above, mortgages securing units in that project are not eligible. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-191 Conventional Lending Guide Condo and PUD Projects, Condos Continued Definition A condominium is a real estate project formed according to state condominium statutes, a recorded declaration, and other constituent documents. The structure is generally of two or more units. The interior space of the units is individually owned. The balance of the property (both land and building) is owned in common by the owners of the individual units. The common areas are administered and maintained by an owners’ association that levies monthly maintenance charges against each unit owner. Condo Overview All condominiums and PUDs require the Underwriter to determine the classification type (i.e. P, Q, S, T, E PUD or F PUD, etc.), and clearly mark this on the 1008. Underwriter is responsible to determine if the project is warrantable within one of the acceptable designations. Continued on next page Conventional Lending Guide 100-192 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects, Ineligible Condo Projects Continued Ineligible condo and attached PUD projects with the any of the following characteristics: ü Projects publicly advertised as a condominium hotel or resort (for example, the project advertises on travel or hotel websites, or has a website on the internet and presents itself as a condominium hotel) or websites are available to determine room availability and reservations can be made online. ü Projects with hotel like amenities (front desk, maid service, concierge service, on site recreational activities; lifeguard on duty, towel or linen service) ü The project shares facilities, common elements, or amenities with a hotel, resort, and/or lodge that is owned and managed by the developer or another third-party entity (pool, spa, fitness center, parking, business center, conference facility, etc.) ü Projects allowing short-term and seasonal rentals (CC&Rs allowing rental periods of less than one month) ü HOA budget red flags such as housekeeping costs, business income, membership fee income, personnel costs (lifeguard, maid, concierge, front desk, shuttle service, internet service fees, etc.) ü Projects with units that do not have full size kitchen appliances, or have efficiency kitchens ü Projects with names including “hotel,” “resort,” “motel,” “inn,” or “lodge,” has an affiliation with, and/or is managed by an entity, usually a hotel chain or hospitality entity. ü Projects located at the same address as a hotel or resort, or within a hotel or resort, or has a hotel or hospitality identity ü Projects with non-incidental businesses operated or owned by the homeowner’s association (for example, restaurant, health club, spa, etc.). ü Projects with revenue sharing arrangement between a rental management firm and the HOA ü Projects with mandatory memberships (tennis, golf, health club, etc.) ü Projects with mandatory rental pooling agreements or blackout ü Manufactured housing projects ü Timeshare or segmented ownership ü Project with Fractured Interest: A project comprised of unit owners as well as unit renters who rent or lease units from the developer or a third party. Does not apply to a converted project in which unsold units are rented or leased by tenants under tenant-protection laws, and the developer or the developer’s successor will sell the unit once they are vacated. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-193 Conventional Lending Guide Condo and PUD Projects, Ineligible Condo Projects, (Con’t) Continued Ineligible condo and attached PUD projects with the any of the following characteristics: ü Houseboat project ü “Live-work” type condominiums; usually used for artist’s studio, workshops, factories, or galleries ü Multi-dwelling unit condominium: A condominium project that permits an individual to hold title to more than one dwelling unit with ownership of all units evidenced by a single deed of trust or mortgage. ü Own Your Own property: This type of property can be identified by the legal description. Generally an ‘Own Your Own’ legal description will give the borrower the right to occupy a given unit, instead of actual ownership of the unit. ü Projects in litigation unless otherwise referenced as acceptable. ü Projects with non-incidental businesses operated or owned by the homeowner’s association (for example, restaurant, health club, spa, etc.). ü Any project or building owned by several owners as tenants-in-common or by a HOA in which the individuals have an unidentified interest in a residential apartment building and have the right of exclusive occupancy of a specific unit in the building. ü Projects characterized as or promoted as an investment opportunity or have documents on file with the SEC. ü Projects with commercial space used for non-residential purposes that exceeds 20% of the total space. ü No single entity (the same individual, investor group, partnership or corporation) other than the developer during the initial marketing period, may own more than 10% of the total units in the project. In the case of a project that has fewer than ten (10) units, no single entity may own more than one (1) unit. · Units owned by the developer/sponsor that are currently subject to any lease arrangements, which may or may not contain a provision allowing for the future purchase of the unit (including but not limited to lease purchase or lease to own agreements) must be included in the calculation. Units owned by the developer/sponsor that are vacant and are being actively marketed for sale are not included in the calculation. ü New projects in which the property seller offers sales/financing structures in excess of the maximum allowable contributions for individual loans. ü Non-warrantable condominium projects ü Condos with pending special assessments ü If the condo or PUD project is located in a jurisdiction that allows for more than 6 months or regular common expense assessments to have priority, unless the assessments are subordinated to the first mortgage, the project is not acceptable. ü Projects with any unacceptable deed restriction that are applicable to the subject unit. Continued on next page Conventional Lending Guide 100-194 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects, Projects in Litigation Continued Any project (condo or PUD) for which the homeowners’ association is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability or functional use of the project. Projects for which the pending litigation involves minor matters are not considered ineligible projects, provided acceptable documentation concludes that the pending litigation has no impact on the safety, structural soundness, habitability or function of the project. The following are defined to be minor matters: Condo Recreational Lease ü Non-monetary litigation involving neighbor disputes or rights of quiet enjoyment; ü Litigation for which the claimed amount is known, the insurance carrier has agreed to provide ü the defense and the amount is covered by the association’s or co-op corporation’s insurance; or ü The homeowners’ association or co-op corporation is named as the plaintiff in a foreclosure action, or as a plaintiff in an action for past due homeowners’ association dues. Not Permitted. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-195 Conventional Lending Guide Condo and PUD Projects, Limited Project Review Continued A Limited Project Review is described as: ü A Warranty Type that provides for acceptance of a project with a reduced amount of documentation generally driven by physical/structural completion on the project side and occupancy type, LTV/CLTV and DU approval status on the loan transaction side. Both the project and the loan transaction must meet the criteria for a Limited Review. Type P – a new, detached project which is less than 90% conveyed, the developer is in control or may have additional phases which are not yet complete. Type Q – an established or 2-4 unit project that have all of the characteristics described within; at least 90% of the units have been conveyed, the unit owners have assumed voting control of the Association from the developer and all aspects of the project are 100% complete. Continued on next page Conventional Lending Guide 100-196 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects, Continued Limited Review Type P: New or Proposed projects – Detached/Site Condominium Units Guideline Type Requirements LTV/CLTV Subject to program guidelines for Primary Residence and Second Homes. IMPORTANT: Type P limited reviews are not permitted for Investment properties. Ineligible ü ü ü ü Attached projects. Newly converted, non-gut rehabilitation projects. May not be located in the state of Florida. Investment Properties Investor (Occupancy) Concentration ü No investor concentration limit. ü On 5+ units, REO units listed for sale may be included when calculating the owner occupancy ratio. Maximum Exposure Project Completion Homeward Residential will fund no more than the greater of five units or 10% within a project. ü The subject unit must be complete. Control of HOA Pre-Sale Minimum specifications not required. Single Entity Ownership Percentage of Commercial Use ü No more than 20% of the project can be commercial space. Condo Questionnaire ü If the appraisal is provided, a Site Condo Review Certification is required. If the loan is eligible for a PIW, then a Limited Review Questionnaire is required. Comparables ü If the project is new, the appraiser must have at least 1 comparable sale that is a detached Condominium unit. The unit may be located in a competing project or in the same project as the subject. However, if unit is in the same project, the same builder as the subject may not have built it. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-197 Conventional Lending Guide Condo and PUD Projects, Continued Limited Review Type Q: Established projects – Attached Condominium Units Guideline Type Requirements LTV/CLTV Principal Residence 80.00% LTV/CLTV Second Home 75.00% LTV/CLTV Investment Property Not Permitted Ineligible ü ü ü ü New projects. Detached projects. Newly converted, non-gut rehabilitation projects. May not be located in the state of Florida. Investor (Occupancy) Concentration ü 5+ Units: No investor concentration limit. REO units listed for sale may be included when calculating the owner occupancy ratio. ü 2 – 4 Units: All but one unit in the project must be conveyed to owner occupied principal residence or second home purchasers. Maximum Exposure Project Completion Control of HOA Pre-Sale Single Entity Ownership Homeward Residential will fund no more than the greater of five units or 10% within a project. ü All units, common areas, and facilities are 100% complete. ü Project cannot be subject to additional phasing or annexation. ü HOA must be the sole owner of and have rights to the use of the projects facilities, common elements, and limited common areas. The unit owners must be in control of the HOA. ü 5+ Units: Project must have at least 90% of the units sold and closed. ü 2 – 4 Units: Projects must be 100% sold and closed. The subject unit must be a resale or refinance. ü 5+ units: No single entity may own more than 10% of the total units in the project. NOTE: Refer to the Ineligible Condo section for full details. Continued on next page Conventional Lending Guide 100-198 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects, Continued Limited Review Type Q: Established projects – Attached Condominium Units Guideline Type Percentage of Commercial Use Hazard Insurance Condo Questionnaire Requirements ü No more than 20% of the project can be commercial space. Additional hazard insurance, HO-6 walls-in coverage, is required if the master policy does not include replacement cost of the interior of the unit. ü Limited Review Questionnaire is required (valid for 120 days). IMPORTANT: Questionnaire is required regardless of appraisal types, including PIW recommendations. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-199 Conventional Lending Guide Condo and PUD Projects, Continued Limited Review Type Q: Established projects – Detached/Site Condominium Units Guideline Type LTV/CLTV Requirements Subject to program guidelines. Investor (Occupancy) Concentration ü No investor concentration limit. ü On 5+ units, REO units listed for sale may be included when calculating the owner occupancy ratio. Ineligible ü ü ü Attached projects. Newly converted, non-gut rehabilitation projects. Investment Properties ü May not be located in the state of Florida. Maximum Exposure Project Completion Homeward Residential will fund no more than the greater of five units or 10% within a project. ü The subject unit must be complete. Control of HOA Pre-Sale Minimum specifications not required. Single Entity Ownership Percentage of Commercial Use ü No more than 20% of the project can be commercial space. Condo Questionnaire ü A Site Condo Review Certification is required (valid for 120 days). If the loan is eligible for a PIW, then a Limited Review Questionnaire is required. Continued on next page Conventional Lending Guide 100-200 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects, Continued Lender Full Delegated Review; Type S Established Project Type S: Established Projects – Attached & Detached Condominium Units Guideline Type Requirements LTV/CLTV Subject to program guidelines. Ineligible ü ü New projects. Newly converted, non-gut rehabilitation projects. Investor (Occupancy) Concentration ü 5+ Units: 51% of project occupied as primary residence or second home if subject is investment property ü 2 – 4 Units: All but one unit in the project must be conveyed to owner occupied principal residence or second home purchasers. Maximum Exposure Project Completion Control of HOA Pre-Sale Single Entity Ownership Homeward Residential will fund no more than the greater of five units or 10% within a project. ü All units, common areas, and facilities are 100% complete. ü Project cannot be subject to additional phasing or annexation. ü HOA must be the sole owner of and have rights to the use of the projects facilities, common elements, and limited common areas. ü Established conversions must show all rehabilitation work completed in a professional manner. ü Project must be owned fee simple. The unit owners must be in control of the HOA (for 2-4 unit projects, Unit owners must be the sole owners of and have rights to the use of, the project’s facilities, common elements and limited common elements). ü 5+ Units: Project must have at least 90% of the units sold and closed. ü 2 – 4 Units: Projects must be 100% sold and closed. The subject unit must be a resale or refinance. ü 5+ units: No single entity may own more than 10% of the total units in the project. NOTE: Refer to the Ineligible Condo section for full details. Commercial Use Right of First Refusal ü No more than 20% of the project can be commercial space. Any right of first refusal in the condo project documents must not adversely impact the rights of a mortgagee or its assignee to: ü Foreclose or take title to a condo unit pursuant to the remedies in the mortgage; ü Accept a deed or assignment in lieu of foreclosure in the event of default by a mortgagor; ü Sell or lease a unit acquired by the mortgagee or its assignee. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-201 Conventional Lending Guide Condo and PUD Projects, Continued Lender Full Delegated Review, (Con’t) Type S: Established projects – Attached and Detached Condominium Units Guideline Type Required Documents Budget Reviews Requirements ü Full Condo Appraisal Report (Form 1073) ü Condo Certification AND Questionnaire are required (valid for 120 days) ü Copy of the Condo Declarations/By-Laws of HOA and any amendments ü Master insurance policy declaration page, plus fidelity, liability, flood, etc.; Minimum $1 million liability coverage per occurrence required. ü HO-6 policy required if master policy does not reflect walls-in coverage. ü Current budget (not required on 2-4 unit projects) ü Engineer’s report for conversions created in the most recent 3 years ü Management Contract ü Agreement of Sale (Sales Contract) ü Balance Sheet HOA budget must be reviewed to determine: ü ü ü HOA Dues ü It is consistent with the nature of the project. It is adequate and allocates a portion of the income (at least 10%) for replacement reserves, capital expenditures, and deferred maintenance. It adequately funds insurance deductible amounts. No more than 15% of the total units within the project can be more than one month delinquent on HOA fees, dues or assessments. Legal Review No requirements Utility Meters The individual units should be separately metered; if not, the project’s plans should provide for the adoption of unit metering. Hazard Insurance Additional hazard insurance, HO-6 walls-in coverage, is required if the master policy does not include replacement cost of the interior of the unit. Fidelity Bond Age of Approval Fidelity bond insurance is required for established condominium projects with 20 or more units. Lender Full Reviews are valid for six (6) months. Continued on next page Conventional Lending Guide 100-202 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Condo and PUD Projects, Continued Fannie Mae Projects Type R Type R – New or Newly Converted Projects Fannie Mae Projects – Type V Type V – DU Refi Plus (no review required) Fannie Mae Projects – Type T Type T – FNMA Review/PERS ü ü ü ü ü Not permitted as an acceptable project type for conventional loans. Permitted; refer to DU Refi Plus product summary for complete details. Projects that are currently in Final Acceptance through PERS may be considered if the loan can fund and be purchased prior to the PERS expiration date. Search for FNMA approved condominium projects at https://www.fanniemae.com/singlefamily/project-eligibility Note, Homeward Residential will not submit projects that need FNMA PERS to be initiated, processed or updated. Fannie Mae Projects – Type U Type U – FHA-Approved Project ü Not permitted as an acceptable project type for conventional loans. Florida Projects ü Refer to the specific product summary for specific LTV/(H)CLTV and Occupancy restrictions for Florida Condo projects. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-203 Conventional Lending Guide Condo and PUD Projects, PUD Projects – FNMA Continued A Planned Unit Development (PUD) is a project that consists of common property and improvements that are owned and maintained by the homeowner’s association for the benefit and use of the individual PUD units. A PUD owner receives title to a lot which includes the dwelling. Type E projects are an established PUD in which control of the homeowners’ association has been turned over to the unit purchasers. Type F projects are new or existing PUD projects in which control of the homeowners’ association has not been turned over to the unit purchasers and the detached or attached PUD is still under control of the developer, regardless of construction status (proposed construction, under construction, or completed construction). IMPORTANT: Type E and F Attached PUDs – Eligibility Requirements ü If a condominium is located in a PUD project, both condominium and PUD requirements and warranties are required. Loan to be priced as a condo. ü Properties must be 1-unit; multiple unit PUDs are not permitted. When reviewing a PUD project with attached units, (whether New or Established) the underwriter must determine that the project meets the following requirements: ü Project satisfies the warranty requirements of the FNMA Selling Guide Part XII, Chapter 1, Section 103, General Warranty of Project Eligibility. ü Project is not an ineligible project, in accordance with the FNMA Selling Guide Part XII, Chapter 1, Section 102, Ineligible Projects. ü Project does not consist of manufactured housing units. ü The individual unit securing the mortgage satisfies FNMA insurance requirements for PUD projects, in accordance with the FNMA Selling Guide Part XII Chapter 5, Insurance Requirements. ü PUD Warranty Form and, if the appraisal is provided, a PUD Review Certification are required (valid for 120 days). If the loan is eligible for a PIW, then a Limited Review Questionnaire is required along with the PUD Warranty Form. ü Type F; the project must not include any multi-dwelling units that represent the security for a single mortgage. NOTE: PUDs comprised of 100% detached, SFR properties do not require review, including liability insurance requirements. Conventional Lending Guide 100-204 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Escrow (Completion) Holdback Overview Not permitted. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-205 Conventional Lending Guide Natural Disasters Overview Homeward Residential continually monitors FEMA for updates in regards to federally declared disaster notifications. Once a location has been identified by FEMA, a Natural Disaster Notification (NDN) will be disseminated identifying the specific location, policies and procedures. Procedure ü Homeward Residential will require a re-inspection (DIR: Disaster Inspection Report) of the subject property prior to issuing closing documents. · You will need to log into your account at http://www.homewardfunding.com and select the Tab ORDER APPRAISAL to order a re-inspection/DIR of the property. ü A fee is associated with the re-inspection/DIR of these properties. If you choose to charge the borrower for this fee, you will be required to complete a “Change of Circumstance Form” (located on our website under Forms) indicating the reason for the re-disclosure (Natural Disaster) and the increased fee. This completed form must be uploaded into Imageflow. Closely examine your rate lock expiration date. If a rate lock extension is needed (noting, any fee changes to the borrower will require a change of circumstance form as well), select the tab from our web site labeled “SELECT A RATE LOCK EXTENSION” and complete. All extension fees are listed on the website for your convenience. ü Example Below is an example of the declared location and effective dates that will be announced on the specific NDN. STATE Declared Areas Counties of _________________________ Effective Date Expiration/End Date 01/01/2010 01/02/2010 IMPORTANT: Appraisals performed BEFORE the Expiration/End Date will require documentation as indicated on page two (2) of this notification (referring to the NDN notification). Continued on next page Conventional Lending Guide 100-206 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Natural Disasters, Requirements for Affected Areas Continued Underwriting/Closing Requirements: For loans secured by properties appraised and not closed/funded prior to the disaster declaration date, Homeward Residential will require the following additional documentation on all loans. REQUIREMENTS: Property appraised prior to the disaster THROUGH to FEMA’s Expiration/Safe Date: A thorough inspection/DIR (1004D permitted as well) of the property is required; it is important to note that the degree and nature of the inspection will vary depending on the nature of the disaster and property location: The original appraiser (if available) should perform the inspection to the extent he/she deems necessary so that a certification stating the below can be signed and warranted: · Property is free from damage and is in the same condition as previously/originally appraised; · Marketability and value remain the same. · Re-inspections will always be required regardless of time frame if the appraisal was performed BEFORE the disaster date. NOTE: In order to comply with AIR regulations, the re-inspection must be ordered through Homeward Residential’s appraisal management company. Refer to the previous page for specific instructions. ü Reduced Appraisal Forms: Non-standard appraisals (such as PIWs) will NOT be permitted once a location has been declared by FEMA within a disaster area. A full appraisal will be required up to 90 calendar days after the Expiration/Safe Date. Borrower’s Certification and Affidavit for Weather Related Damage form In addition to the re-inspection/DIR, the borrower must sign a certification of acceptable property condition if their home is in one of the disaster areas. A copy of this form is located on Homeward Residential’s website. If the re-inspection/DIR, reports any damage or change in value to the property, then: Prior to closing, Homeward Residential will require the property to be repaired adequately and evidenced by the FNMA Form 1004D (appraisal update and/ or completion report). IMPORTANT if the property location is within a FEMA declared area AND a FLOOD ZONE: Loans in the NDN site AND in a FEMA Flood Zone will NOT be allowed to close until after the Expiration/Safe Date has been published AND the reinspection has been performed Property appraised AFTER FEMA’s Expiration/Safe Date for the disaster: For up to 90 calendar days after the Expiration/Safe Date is issued by FEMA, the appraisal must include written certification by the appraiser that “The property is free from damage and the disaster has had no affect on the subject property’s value or marketability”. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-207 Conventional Lending Guide Loan Purpose Overview The following guidelines should be used only to determine whether a transaction should be underwritten as a purchase or a refinance. Federal or State laws may categorize the transaction differently for disclosure purposes. Principal Reductions Lender Paid Transactions On transactions where the loan originator is paid by the lender, Homeward will permit a Principal Curtailment on rate term refinance loans unless noted below as a result of excess premium rate credit. The excess premium must be identified on the HUD-1 Settlement Statement and is limited to the amount of the excess premium rate credit below. The premium rate credit is the amount associated with the lowest pricing rate option that allows for some or all of the borrower's closing costs to be paid so the borrower does not have to pay those closing costs out of pocket. · Principal curtailments are limited to the lesser of 2% or $2000. If the program permits, the borrower may also receive cash back within program guidelines in addition to the amount of the curtailment. Check your product summary for cash back eligibility criteria. Borrower Paid Transactions On transactions where the loan originator is paid by the consumer, principal curtailments are not permitted in any amount. The premium rate credit may not exceed the amount of third party costs. NOTE: After closing, borrower may enroll in weekly, bi-weekly and semimonthly principal reduction programs by visiting the servicing website at www.ocwen.com. Continued on next page Conventional Lending Guide 100-208 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Loan Purpose, Purchase Transactions Continued A purchase transaction is one in which the proceeds are used to finance the purchase of a home. For underwriting of agency loans this also includes: ü A mortgage transaction in which the proceeds are used to retire an outstanding balance on an installment land contract within 12 months of the loan application, including costs incurred for rehabilitation, renovation or energy conservation improvements. ü A new mortgage created to pay off an interim construction loan within 180 days from completion as long as the borrower does not receive cash back at closing. ü If the conversion occurs more than 180 days after completion, the transaction must be treated as a refinance. ü The borrower may not be on title prior to the loan closing. The seller that is on title (the vested owner of record) must be the individual who executes the sales contract. Additionally, the seller must be on title prior to when the HUD1 and closing documents are executed. · ü Seller must be the vested owner of record in all cases; exceptions are for relocation scenarios only. A fully executed and acceptable Relocation (Buyout) Agreement must be documented within the file. Credits back on purchase transactions or a HUD-1 showing cash back to the buyer is permissible if the reason for the cash back was due to one of the following: · · · · · Crediting the borrower for accrued taxes that were the obligation of the seller, Crediting the borrower with rental income collected by the seller for a period after the sale, or Crediting the borrower with rental deposit funds being transferred from the seller to the borrower. Crediting the borrower for down payment funds placed into the transaction and the loan amount was more than sufficient to cover the costs. For example, the borrower deposited $10,000 for sales contract and the closing costs were only $7,000. NOTE: If the borrower receives an acceptable cash back amount, the Underwriter will confirm that the minimum borrower contribution and/or down payment have been met. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-209 Conventional Lending Guide Loan Purpose, Purchase Agreements Continued Purchase agreements renegotiated after the completion of the appraisal that increase the sales price are only acceptable under the following circumstances: ü The sales price adjustment is due to price overruns that impact the tangible value of the property on new construction. An updated appraisal must be obtained to verify the value of the modifications. ü A renegotiation of only seller paid closing costs and/or prepaids occurs where seller paid closing cost/prepaids are common and customary for the market and supported by comparables. ü Changes in the purchase contract resulting from renegotiating terms of sale will require additional review and consideration by the appraiser. Continued on next page Conventional Lending Guide 100-210 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Loan Purpose, Limited Cash Out Refinance Continued Limited cash out (also known as rate term) refinance transaction enables a borrower to pay off his or her existing mortgage by obtaining a new first mortgage that is secured by the same property. A loan classified as a Limited Cash Out Refinance is described as a loan where the proceeds of the new transaction are being used to pay off the outstanding first lien, customary costs associated with the new transaction, including prepayment penalties, loan costs, fees, prepaids, etc. Any secondary liens being paid off with the funds of the new transaction must have been liens that were used in whole to acquire the subject property. A limited cash-out refinance transaction may consist of the following components: ü The unpaid principal balance, including any associated payoff fees, of the existing first mortgage that was used in whole to acquire the subject property (purchase money only); note that HELOCs with any subsequent draws for any reason will be considered a cash out transaction; ü Closing costs (including all prepaid items) and points; ü The pay off of the outstanding principal balance of any existing subordinate mortgage that was used in whole to acquire the subject property (purchase money only). Satisfactory documentation must be obtained and included within the loan package. ü Incidental cash to the borrower up to a maximum of the lesser of $2,000 or 2% of the amount of the new refinance mortgage. ü May be based on the current appraised value unless otherwise required by the Underwriter due to value concerns or by the MI Partner (if applicable). NOTE: · · · · · 90-day seasoning required to utilize appraised value. o Less than 90 days will require a field review to confirm value. o If less than 90 days and the value has increase by more than 20% in comparison to the original sales price, the documented repairs, improvements, etc. must be provided to use the appraisal value. o Scenario must not evidence any non-arms length transaction characteristics. Non-purchase money second liens, including any associated fees to closing the account (even if currently at a zero balance), must be paid off outside of the transaction; otherwise, it will be considered a cash out refinance. HUD-1 settlement statement(s) required from any transaction within the most recent 6 months. If previous transaction was a cash out or if it combined a first and non-purchase money subordinate into a new first, the loan will be considered a cash out refinance (seasoning measured from Note Date to Application Date). If the borrower has been on title less than 6 months AND purchased the property from a relative (or an individual with whom they have an established relationship), the payoff from the purchase transaction must be provided AND reflect the mortgage was current at the time the borrower purchased the property. Must continue to meet requirements within the Continuity of Obligation and Ownership. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-211 Conventional Lending Guide Loan Purpose, Buyout Refinance Continued Homeward Residential will also treat an inheritance or divorce settlement in which one spouse is required to "buy-out" the interests of the other spouse or any other refinancing in which an owner "buys-out" the interests of another owner as a limited cash out refinance—as long as the following conditions are satisfied: ü Security property must have been jointly owned and occupied as a primary residence by the borrower and the co-owner receiving the buy-out proceeds for at least 12 months before the date of the mortgage application. Seasoning and occupancy is not required for inherited property. ü All parties (borrower and co-owner receiving the buyout proceeds) must be able to demonstrate that they occupied the security property as their principal residence, by providing an acceptable source of verification—such as a driver's license, bank statement, credit card bill, utility bill, etc. that was mailed to the individual at the address of the security property. Occupancy is not required for inherited properties. ü All parties must sign a written agreement that states the terms of the property transfer and the proposed disposition of the proceeds from the refinancing transaction. ü Borrower who acquires sole ownership of the property may not receive any of the proceeds of the refinancing. ü Party who is "buying out" the other party's interest must be able to qualify for the mortgage under our standard underwriting guidelines. ü Legal Separation or Divorce Decree. Continued on next page Conventional Lending Guide 100-212 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Loan Purpose, Cash Out Refinance Continued The funds received by the borrower from the loan transaction can be used for any legitimate purpose. The purpose of the cash out should be clearly stated on the loan application, and if necessary, further described in a separate document. If the purpose of the cash out indicates potential additional debt or a change in financial condition, further clarification should be obtained. For example, if the borrower states that the cash out is being used as a down payment for the purchase of another property, further details are required to understand additional debts that may be incurred. If the cash out would cause any change in financial standing (i.e. funds are being used to start a new business may result in borrower leaving their current employment), it is necessary that the situation be explained and verified thoroughly to ascertain if there may be an impact to the borrower’s ability to repay the loan.. ü Condominiums in Florida are not permitted for cash out refinancing. ü The property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date (for Fannie Mae DU loans) or Note Date (for Freddie Mac LP Loans) of the new mortgage loan except for the following: ü · There is no waiting period if it is documented that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership). · The delayed financing requirements are met. See Delayed Financing Exception below. Continuity of obligation (see below) must be demonstrated unless one of the following conditions is met: · · ü the borrower was added to title 24 months or more prior to the disbursement date of the new loan, or there is no existing mortgage on the subject property as a result of the borrower(s) having purchased the subject property with cash or paid off any prior mortgage for which the borrower was an obligor. If the proceeds of the cash out refinance are paying off a restructured loan (as defined in Restructured Loans section above) the new loan will be ineligible for sale to Homeward. · If the loan being paid in full is noted as “modified” on the credit report (or information from another source is obtained indicating the loan has been modified) the Homeward must review the loan and modification details and determine if it meets the definition of a Restructured Mortgage. A copy of the modification agreement must be in the file. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-213 Conventional Lending Guide Loan Purpose, Delayed Financing Cash Out Refinance ü If the subject property was purchased in the last 6 months measured from the date of purchase to the disbursement date (for Fannie Mae DU loans) or NOTE date (for Freddie Mac LP Loans) of the new refinance, the loan will be eligible for a Cash Out Refinance transaction provided the following requirements are met: · · · · · · · · ü Continued The borrower(s) may have initially purchased the property as one of the following: o a natural person; o an eligible inter vivos revocable trust, when the borrower is both the individual establishing the trust and the beneficiary of the trust; or o an LLC or partnership in which the borrower(s) have an individual or joint ownership of 100%. The HUD-1Settlement Statement from the purchase transaction must reflect no financing secured by the subject property was used to purchase the subject property. The purchase transaction was an Arms-Length transaction. The source of funds used to purchase the subject property must be fully documented. If funds were borrowed (either unsecured or secured by an asset other than the subject property) to purchase the subject property, those funds must be paid with the cash out proceeds and reflected on the HUD 1 Settlement Sheet for the refinance transaction. If the Cash out proceeds do not pay off the borrowed funds, the payments on the balance remaining must be included in the debt to income ratio calculation. NOTE: Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan The amount of the cash out refinance loan can be no more than the actual documented amount of the borrower’s initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV/CLTV/HCLTV rations for the transaction. The preliminary title report for the refinance must reflect the borrower(s) as the owner of the subject property and must reflect that there are no liens on the property. All other cash-out refinance eligibility requirement as noted above are met and cash out pricing is applied. Note: For DU run loans, Investor and second home borrowers with five to ten financed properties are ineligible for cash-out refinance transactions unless all of the delayed financing exception requirements listed above are met. Additional restrictions apply, Number of Properties Owned / Financed Continued on next page Conventional Lending Guide 100-214 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Loan Purpose, Divestiture of Interest Continued Permitted ONLY for equal 50/50% splits between TWO (2) borrowers that are both on the mortgage application. NOTE: Borrowers may take title to the property as joint tenants, tenants by the entirety, tenants in common (without a tenancy in common agreement), or as individuals. If the scenario has a tenancy in common agreement, it will not be permitted. Continuity of Ownership and Obligation For all properties, Homeward Residential must establish/verify the time of transfer, obligor of the current mortgage and previous/current title holder(s) (i.e. other than inherited or legally awarded properties, there must be at least one borrower obligated on the new loan who was also a borrower obligated on the existing loan being refinanced within Homeward Residential’s seasoning requirements). NOTE: Refer to the Mortgage History section within this Lending Guide for acceptable methods of mortgage verification. ü Continuity of obligation occurs on a refinance transaction when at least one of the borrower(s) on the existing mortgage is also a borrower on the new refinance transaction secured by the subject property. ü Requirements for Continuity of Obligation All refinance transactions must · · · comply with the definition above, meet one of the permissible exceptions described below, or comply with the limited eligibility parameters described below. Note the following: · ü Continuity of obligation requirements do not apply when there is no existing mortgage on the subject property as a result of the borrower either having purchased the subject property with cash or when any prior mortgage for which the borrower was an obligor was paid in full. All time period references in this section are measured from the date of the event (for example, transfer of title) and end with the disbursement date (For Fannie Mae DU Loans) or Note date (For Freddie Mac LP Loans) of the new refinance transaction. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-215 Conventional Lending Guide Loan Purpose, Continuity of Ownership and Obligation, (Con’t) ü Continued Permissible Exceptions to Continuity of Obligation Although the following refinance transactions do not meet the definition of continuity of obligation, the new refinance transaction will be eligible and not bound by the limited eligibility parameters described below if any of the following are applicable: · The borrower on the new refinance transaction was added to title 24 months or more prior to the disbursement date (For Fannie Mae DU Loans) or Note date (For Freddie Mac LP Loans) of the new refinance transaction. · The file is documented that the borrower acquired the property through an inheritance or was legally awarded the property (for example, divorce, separation, or dissolution of a domestic partnership). There is no minimum waiting period with regard to when the borrower acquired the property before completing a new refinance transaction. · The borrower on the new refinance transaction has been added to title through a transfer from a trust, or a limited liability company (LLC), or partnership. The following requirements apply: o the borrower must have been a beneficiary/creator (trust) or a 25% or more owner of the LLC or partnership prior to the transfer, and o the transferring entity and/or the borrower has had a consecutive ownership (on title) for at least the most recent 6 months prior to disbursement (For Fannie Mae DU Loans) or Note date (For Freddie Mac LP Loans) of the new loan. · Note: Transfer of ownership from a corporation to an individual does not meet the continuity of obligation requirement. · The borrower has been on title for at least 12 months but is not obligated on the existing mortgage(s) that is being refinanced and the borrower meets at least one of the following requirements: o has been residing in the property for at least 12 months, o has paid the mortgage for at least 12 months, or o can demonstrate a relationship with the current obligor (for example, relative or domestic partner). Continued on next page Conventional Lending Guide 100-216 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Loan Purpose, Continuity of Ownership and Obligation, (Con’t) ü Continued All Other Refinance Transactions — Limited Eligibility · All other refinance transactions that do not meet either the continuity of obligation requirements or a permissible exception must comply with the following LTV, CLTV, HCLTV ratio restrictions (in the below table) regardless of the occupancy of the property. The LTV, CLTV, HCLTV ratios must be based on the current appraised value. Months on Title Eligibility Requirements < 6 months Ineligible ≥ 6 months < 24 months Limited to 50% LTV/CLTV/HCLTV ratios ≥24 months No additional restrictions Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-217 Conventional Lending Guide Loan Purpose, Listed for Sale ü Continued Cash Out Refinance: · Properties listed for sale in the six months preceding the disbursement date of the new mortgage loan are limited to 70% LTV/CLTV/HCLTV ratios (or less if mandated by the specific product, occupancy, or property type – for example, 65% for manufactured homes). · Borrowers must confirm their intent to occupy the subject property (for principal residence transactions) for Cash-Out refinance. · Note: Properties that were listed for sale must have been taken off the market on or before the disbursement date of the new mortgage loan. Limited Cash Out (Rate/Term) Refinance Transactions: · Properties listed for sale are not eligible for refinancing. The listing agreement must have been cancelled on or before the disbursement date of the new mortgage loan. · Borrowers must confirm their intent to occupy the subject property (for principal residence transactions) for a Limited Cash-Out refinance. NOTE: ü ü Properties currently listed are not eligible for any refinance transactions. Borrower must provide documentation of cancelled MLS listing or similar documentation. ü Policy does not apply to scenarios without appraisals, such as property inspection waivers (PIWs). ü Refer to Homeward Residential’s Early Payoff (EPO) policy for additional details. Continued on next page Conventional Lending Guide 100-218 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Loan Purpose, Newly Constructed Properties Continued Construction to permanent financing as defined for Homeward Residential involves two loans, a construction loan and a long-term refinance of the construction loan. The second transaction involves the use of standard loan documents; modification of the bank loan is not permitted. NOTE: Applies to end financing of the interim bank loan; Homeward Residential does not offer interim, construction financing. A construction to permanent loan not structured as a one-time close may be submitted as a purchase or refinance, subject to the below: · Purchase: Transaction must have occurred within 180 days after completion of the home. The borrower may not receive cash out and the acquisition cost is to be documents. If the purpose of the long-term mortgage is to allow the borrower to make a single disbursement to a builder/contractor for the purpose of a completed property, then the transaction must be considered a purchase. · Refinance: The borrower may or may not receive cash out. A refinance transaction has no time limitation. If the transaction occurs more than 180 days after the completion of the home, then it must be considered a refinance. ü Borrower must be the primary obligor on the construction financing obtained through a legitimate financial institution. ü Borrower must be the owner of the lot to be considered a refinance. ü Final Certificate of Completion, full appraisal with photos is required. ü Primary Residences, detached SFR only. ü Transaction must be arms length (i.e. borrower may not be the builder). IMPORTANT: Construction loan modifications are not permitted; this is not the FNMA Home-style Renovation program nor is it available through Homeward Residential. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-219 Conventional Lending Guide Loan Purpose, New Construction – Purchase Continued On a purchase transaction, the borrower may hold title to the land as follows: ü Borrower may or may not own the land. ü Ownership is deeded to the builder/contractor in lieu of the down payment as reflected in the construction statement/agreement. NOTE: The borrower may use the cash investment in the land, provided it was acquired more than 12 months before the date of the application for construction financing. Acceptable documentation includes the final HUD-1, a copy of the warranty deed showing no liens or a copy of a release of the lien. Ownership of Land Determination of LTV Owned land <12 months Based on the lesser of the current appraised value OR sales price of the land plus any documented improvement costs. Owned land >=12 months OR received land as a gift Based on the lesser of the current appraised value OR appraised value of the land plus any documented improvement costs. New Construction – Refinance On a refinance transaction, the Borrower must own the land. Ownership of Land Determination of LTV Owned land <12 months DU Run Loans – Based on the current appraised value LP Run Loans - Based on the lesser of the current appraised value OR sales price of the land plus any documented improvement costs. Owned land >=12 months All Loans - Based on the current appraised value Received land as a gift All Loans - Based on the lesser of the current appraised value OR appraised value of the land plus any documented improvement costs. Continued on next page Conventional Lending Guide 100-220 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Loan Purpose, General Contractor Continued If the borrowers employ a general contractor, the following documentation is required to verify the cost of construction: Signed construction contract ü Sealed copy of the improvement plans and complete breakdown of construction costs and specifications. ü Copies of canceled checks and receipts of bills for payment of any supplied, materials, labor or funds paid directly to subcontractors by the borrower. NOTE: If a general contractor is not used to construct the home, the construction costs must be documented with copies of receipts or invoices and cancelled checks for materials, supplies and/or labor. Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-221 Conventional Lending Guide Mortgage Insurance Overview Mortgage Insurance is required on loans with a loan to value (LTV) over 80.00% (Exception: HARP transactions for which MI was not required on the underlying loan). Unless otherwise restricted in the product guidelines, Homeward Residential will accept the private mortgage insurers noted in the “Approved Mortgage Insurance Companies” matrix below. Approved MI Companies The matrix below lists the mortgage insurance companies currently approved by Homeward Residential. Approved Mortgage Insurance Companies ü Arch MI ü National MI – National Mortgage Insurance Corporation ü Essent Guaranty, Inc. ü Radian ü GE – (Genworth) GE Capital Mortgage Insurance Corporation ü UG – United Guaranty ü MGIC - Mortgage Guaranty Insurance Company NOTES: ü Homeward Residential reserves the right to add or remove companies to this list at their sole discretion. ü Homeward Residential does not currently utilize its MI delegate status; therefore, all loans requiring mortgage insurance must also be underwritten by the MI Partner. Conventional Lending Guide 100-222 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Subordinate Financing Overview Second Trust Deeds, junior liens and subordinate liens (secondary financing) are defined as mortgages that have rights that are secondary to a first mortgage. These are encumbrances on real estate (for example, a second mortgage, a tax lien or mechanic’s lien) where the priority of the secondary financing is inferior to that of another recorded interest in the same property. Requirements and Restrictions Requirements and restrictions apply to new subordinate financing and existing financing: ü ü ü ü Maximum Combined Loan to Value (CLTV/HCLTV) ratio of the first and second must not exceed the limit outlined by these guidelines and by the Product matrix. · Refer to Fannie Mae guidelines for exact definitions of CLTV and HCLTV; 2011 Selling Guide, Part B2-1.1-02 (3/31/2011). Certified copy of the executed second Note and Subordination Agreement must be provided to confirm loan amount, payment terms, and lien status. · If the first mortgage lien loan is a rate term refinance in Texas and the first lien loan is being renewed and extended, a subordination agreement for a second lien on the property is not required unless the title company requires a subordination agreement in order to insure that the lien will remain in first lien position. Subordination agreement must be recorded concurrently with the first Mortgage/Deed of trust if an existing second will remain. · If the note and terms of the second lien have been received and approved, the actual subordination agreement can be a Prior to Funding Condition. For financing other than HELOCs, Secondary financing must have a term of no less than five years, unless the financing fully amortizes prior to that time ü For financing other than HELOCs, Financing must not permit the Note holder to “call” the financing within the first five years following loan closing. ü Interest rate on the Note must be at market rates. ü Secondary financing must not have a negative amortization feature. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-223 Conventional Lending Guide Subordinate Financing, Requirements and Restrictions, continued Continued ü Term of the Note must provide for regular monthly payments of at least interest only. ü Monthly payments on the secondary financing must be included in the borrower’s ratios. ü Payments may be graduated or variable, as long as the payment remains constant for at least 12 months and the annual payment adjustments of the second do not exceed a 2% interest rate increase. Exception for HELOCs in which the monthly payment does not have to remain constant. ü May not be subject to prepayment penalties; excludes HELOC products where borrowers may be required to pay third party closing costs incurred at time of closing, typically if the line is closed within the first 36 months (or contains an early termination fee not to exceed $500; note, early termination fees set as a percentage of the loan amount are not permitted). ü Subordinate liens may held be a private party including owner-carry second from the owner of the property, and other private party, or an institutional lender unless otherwise restricted within specific product guidelines. · Privately held liens will require all formal documentation (including the Note) to confirm payments which must be included in DTI. The lien must be recorded and clearly subordinated to the Homeward Residential first lien and meet all other FNMA requirements. ü May not be held by the Broker, Developer or Realtor. ü If subordinate financing exists, the loan to value must be 5% lower than the maximum LTV allowed for that scenario. ü Second liens may not be a Small Business Administration (SBA) loan nor held in the name of a business. Continued on next page Conventional Lending Guide 100-224 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Subordinate Financing, Required Documentation Continued For Purchase transactions, the following subordinate financing documentation is now required and must be included in the loan file: · Note · Good Faith Estimate and Final TIL Statement · HUD-1 Settlement Statement or other closing statement · For HELOCs, the HELOC agreement indicating all fees and costs paid by the borrower at closing, and the maximum permitted credit advance. For Refinance transactions, the following subordinate financing documentation is now required and must be included in the loan file: · Note · Copy of the Subordination agreement NOTE: A copy of the recorded documents may be provided as a postfunding item. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-225 Conventional Lending Guide Subordinate Financing, Seller Carry Backs Continued Seller carry-backs are permitted on primary residences only provided the combined LTV does not exceed the maximum for the product, program and documentation process selected. Typically, the Purchase & Sale Agreement will state that the present owner is willing to provide secondary financing. ü All payments related to secondary financing must be included in the debt ratio. ü The lien must be recorded and clearly subordinated. ü A copy of the note must be obtained to verify the amount secured against the property. ü Regular payments must cover at least the principal and the interest at the market rate. If financing provided by the property seller is more than 2% below the current standard rates for second mortgages, it must be considered a sales concession and the subordinate financing amount must be deducted from the sale price or appraised value, whichever is lower. ü The subordinate loan cannot have a call option of less than 5 years. ü The subordinate loan must permit pre-payment at any time without a penalty. Continued on next page Conventional Lending Guide 100-226 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Subordinate Financing, Modifying Existing Second Liens Continued Subordinate lien holders may request modifications to the terms of the lien (typically a reduction for lien) in exchange for remaining in a subordinate position. Modifying the subordinate lien in this manner results in re-executing the lien at closing which is acceptable. In these scenarios, Homeward Residential does not consider the modified lien a new subordinate lien. NOTE: ü ü ü ü ü Use the existing definitions to determine the loan purpose of the first lien (i.e. rate term versus cash out). If the modification is addressed AND recorded PRIOR to closing, a copy of the signed modification will be required AND a subordination agreement must be prepared. If the modification is addressed AT closing and subsequently recorded (recorded with the new refinance documents), the modification must be re-signed AND recorded in a subordinated position to the first lien. Second lien may be a closed end or line of credit; either will be acceptable. Partial pay downs of subordinate liens (i.e. not true re-executed, rerecorded modifications) are not permitted. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-227 Conventional Lending Guide Subordinate Financing, Municipal Betterment Assessments Continued ü When a limited area of a community benefits from a public improvement (e.g., water, sewer, sidewalks, etc.), special property taxes may be assessed to the property owners to reimburse the city or town for all, or part, of the costs incurred in completing the project. ü Each property parcel receiving a benefit from the improvements is assessed a proportionate share of the cost which may be paid in full, or apportioned over a period of up to approximately 20 years. ü If the homeowner elects not to pay the cost in full and/or if the title commitment references a municipal betterment lien, a copy of the tax bill reflecting the higher assessment will be required in order to correctly establish the borrower’s escrow account. ü If the borrower is not establishing an escrow account, the tax bill continues to be required or replaced with other supporting documentation to confirm the origin of the second lien (i.e. must confirm second lien is a forced, municipal betterment assessment). NOTE: · File must confirm payment is through taxation or separate payment. · If the city or township will not provide a subordination agreement to the mortgage lien, it is acceptable to waive a subordination agreement. · Other types of acceptable betterment liens by a municipality include Utility Liens, Water Liens, Sewer Liens, Trash Liens and Municipal Light Liens. · Betterment liens do not necessarily have to be paid off when a property is conveyed. It may remain with the property and the new owner can continue to pay it down. · Unacceptable betterment liens, include community seconds in which only the specific subject property receives a grant or forgivable type lien for necessary repairs, such as energy efficient improvements, plumbing or electrical repairs needed to bring the property up to current code. Continued on next page Conventional Lending Guide 100-228 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Subordinate Financing, Community Seconds Not Permitted. Down Payment Assistance Not Permitted. Continued Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-229 Conventional Lending Guide Subordinate Financing, Virginia Automatic Subordination Continued The automatic subordination of certain subordinate liens as provided in Virginia Code Ann. § 55- 58.3 is permitted with the below conditions: ü The original principal amount of the second lien may not exceed $150,000 (effective July 1, 2011) ü The real estate cannot contain more than one dwelling unit ü With respect to the refinance of the first mortgage: · ü The security instrument must state on the first page in bold or capitalized letters: "THIS IS A REFINANCE OF A (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) RECORDED IN THE CLERK'S OFFICE, CIRCUIT COURT OF (NAME OF COUNTY OR CITY), VIRGINIA, IN DEED BOOK ________, PAGE ________, IN THE ORIGINAL PRINCIPAL AMOUNT OF ________, AND WITH THE OUTSTANDING PRINCIPAL BALANCE WHICH IS ________."; The principal amount secured by the refinance mortgage may not exceed the outstanding principal balance secured by the prior mortgage plus $5,000; and The interest rate stated in the refinance mortgage at the time it is recorded does not exceed the interest rate set forth in the prior mortgage. Key Definitions · "Refinance mortgage" means the mortgage, deed of trust or other instrument creating a security interest in real estate given to secure a refinancing. · "Refinancing" means the replacement of a loan secured by a prior mortgage with a new loan secured by a mortgage, deed of trust or other instrument and the payment in full of the debt owed under the original loan secured by the prior mortgage. · "Subordinate mortgage" means a mortgage or deed of trust securing an original principal amount not exceeding $150,000, encumbering or conveying an interest in real estate containing not more than one dwelling unit that is subordinate in priority (i) under subdivision A 1 of Virginia Code § 55-96 to a mortgage, deed of trust or other security interest in real estate (otherwise known as the prior mortgage); or (ii) as a result of a previous refinancing. The following second liens are not eligible: A subordinate mortgage securing a promissory note payable to any county, city or town or any agency, authority or political subdivision of the Commonwealth if such subordinate mortgage is financed pursuant to an affordable dwelling unit ordinance adopted pursuant to § 15.2-2304 or § 15.2-2305, or pursuant to any program authorized by federal or state law or local ordinance or resolution, for (i) low- and moderate-income persons or households or (ii) improvements to residential potable water supplies and sanitary sewage disposal systems made to address an existing or potential public health hazard, and which mortgage, if recorded on or after July 1, 2003, states on the first page thereof in bold or capitalized letters: "THIS (DEED OF TRUST, MORTGAGE OR OTHER SECURITY INTEREST) SHALL NOT, WITHOUT THE CONSENT OF THE SECURED PARTY HEREUNDER, BE SUBORDINATED UPON THE REFINANCING OF ANY PRIOR MORTGAGE." ü Continued on next page Conventional Lending Guide 100-230 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Subordinate Financing, Maryland Automatic Subordination Continued The automatic subordination of certain subordinate liens as provided in Maryland Senate Bill 199 is permitted with the below conditions: ü The original principal amount of the second lien may not exceed $150,000 ü With respect to the refinance of the first mortgage: · The security instrument must state on the first page in bold or capitalized letters: “This is a refinance of a deed of trust/mortgage/other security interest instrument recorded among the land records of ............... County/City, Maryland in Liber no. ....... Folio ......., in the original principal amount of ............., and with the unpaid outstanding principal balance of ........... . The interest rate provided for in the evidence of indebtedness secured by this refinance mortgage is lower than the applicable interest rate provided for in the evidence of indebtedness secured by the deed of trust/mortgage/other security instrument being refinanced.” The principal amount secured by the refinance mortgage may not exceed the unpaid outstanding principal balance secured by the first mortgage or deed of trust plus an amount not exceeding $5,000 to pay closing costs and escrow costs. (“Escrow Costs” are defined as “Money to pay property taxes, hazard insurance, mortgage insurance, and similar costs associated with real property secured by a refinance mortgage that a lender requires to be collected at closing and held in escrow.”; and ü The interest rate stated in the refinance mortgage at the time it is recorded does not exceed the interest rate set forth in the prior mortgage. The following second liens are not eligible: (i) a judgment lien; or (ii) a lien filed under the Maryland contract lien act. ü Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-231 Conventional Lending Guide Ratio Calculation A borrower’s housing ratio is a comparison of the borrower’s total housing obligations to the borrower’s stable monthly income. Total housing obligations are the sum of: ü P&I payments on the mortgage ü Hazard insurance premiums ü Real estate taxes. Taxes must be based on the reasonable estimate of the improvement value, not the existing tax based on the unimproved or land value. Any applicable charges for: ü Mortgage insurance premiums ü Homeowner’s association dues or condominium maintenance fees, excluding utility charges ü Payments on secondary financing The borrower’s ability to pay the monthly housing expense, in addition to other monthly obligations, must be carefully measured. Continued on next page Conventional Lending Guide 100-232 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Ratio, Continued Real Estate Tax Payment Calculation of real estate taxes for borrower qualification must be based on no less than the current assessed value. (The taxes are listed on the title commitment.) However, the real estate taxes may (or must in some cases) be projected if it can document one of the following: ü The amount of taxes will be reduced based on federal, state, or local jurisdictional requirements. However, the taxes may not be reduced if an appeal to reduce them is only pending and has not been approved. ü If the transaction is new construction, the lender must use a reasonable estimate of the real estate taxes based on the value of the land and completed improvements. ü There is a tax abatement on the subject property that will last for no less than 5 years from the note date. For example: · for a municipality with a 10-year abatement, the lender may qualify the borrower with the reduced tax amount; · for a municipality with a 10-year abatement and with annual real estate tax increases in years 1 through 10, the lender must qualify the borrower with the annual taxes that will be required at the end of the 5th year after the first mortgage payment date. NOTE: For purchase transactions, the state of California will base property taxes on 125% of purchase price. ü Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-233 Conventional Lending Guide Ratio, Real Estate Debt Continued Mortgage obligations that do not meet the criteria for utilizing rental income must provide additional Reserves and the PITI included in the debt ratio for qualifying (PITI may be omitted under certain circumstances as stated below). Current Residence Not Pending Sale If the current principal residence is still owned by the borrower(s) at the time of closing on the new primary residence and there is NOT a pending sale, then: ü A minimum of 6 months PITI for BOTH the retained property and the new principal residence is required (2 months reserve is allowed if 30% equity in the existing principal residence is documented by a minimum Form 2055; AND ü BOTH the current and proposed PITI must be used in qualifying the borrower for the new loan. · NOTE: If the borrower cannot meet both the reserve and qualifying requirements, then the scenario is not eligible. Current Residence Pending Sale If the current principal residence is still owned by the borrower(s) at the time of closing with a pending sale that will not close with title transfer to the new owner prior to the new purchase transaction, then: ü The current principal residence PITI may be omitted from the qualifying ratio calculation ONLY IF the borrower(s) document a minimum of 6 months PITI for BOTH the retained property and the new principal residence is required (2 months reserve is allowed if 30% equity in the existing principal residence is documented by a minimum Form 2055; AND ü Provide the following documentation (if the below documents cannot be provided, then refer to the “Not Pending Sale” requirements): The executed sales contract for the current residence; AND Confirmation that any financing contingencies have been cleared. This may be satisfied with documented proof of the buyer’s lender commitment letter. NOTE: If the borrower cannot meet both the reserves requirement and the pending sale documentation, then the scenario is not eligible under this definition. o o · NOTE: ü Loans requiring mortgage insurance may require 6 months minimum reserves regardless of DU findings; refer to specific mortgage insurance partner guidelines for details. Continued on next page Conventional Lending Guide 100-234 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Ratio, Continued Revolving Debt ü Revolving debts should be included in the debt to income ratio based on the minimum payment from the statement or credit report or the greater of $10 or 5% of the current balance. If multiple account payments are not reported, the underwriter should obtain actual minimum payments from the borrower’s account statement. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-235 Conventional Lending Guide Ratio, Continued 30-Day Charge Accounts IMPORTANT: For Open 30-day Charge Accounts, such as American Express, that do not reflect a monthly payment on the credit report OR reflect a monthly payment this is identical to the account balance, borrower must verify funds sufficient to cover the account balance. The verified funds must be in addition to any funds required for closing costs and reserves. NOTE: ü ü DU will include the balance of the 30-day charge accounts on the loan application in the Reserves Required to be Verified amount shown on the DU Underwriting Findings report. · For refinances where the borrower is receiving cash back and where there is not a minimum reserve requirement for the transaction, DU will subtract any cash back being received by the borrower from the amount of the 30-day account balance. (i) When the amount of cash back covers only a portion of the 30-day account balance, DU will only require the remaining amount to be documented, verified funds. (ii) When the amount of cash back covers the entire 30-day account balance, DU will not require any portion of the balance to be verified. If the borrower paid off the account balance prior to closing, borrower may provide proof of payoff in lieu of verifying funds to cover the account balance. Funds to be sourced to confirm borrower did not incur additional debt. Employer reimbursement is permitted to omit the payment from debt calculation with the following required documentation: · Evidence in either the form of a letter on company letterhead or by evidence of monthly reimbursement for a minimum six (6) months. · If the borrower is self-employed, and does not have sufficient personal assets to cover the account in full, it must be documented that the business pays the monthly account with cancelled checks for a minimum of six (6) months. At no time is it acceptable to include partial or full balances in the borrower’s qualifying debt ratio in order to address 30-day accounts. ü Continued on next page Conventional Lending Guide 100-236 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Ratio, Continued Installment Debt Installment debts with less than or equal to 10 monthly payments remaining do not need to be included in the total debt ratio. It is the underwriter’s discretion to include paid down installment debt within the debt to income ratio. Verification that the debt has been paid must be provided by one of the following: ü A copy of the HUD-1 ü A supplemental credit report ü Verification from the creditor ü Refer to Paying Off Debt section for additional details. ü Installment debts with 10 or fewer monthly payments should also be considered as a recurring monthly obligation if it significantly affects the borrower’s ability to meet his or her credit obligations. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-237 Conventional Lending Guide Ratio, Continued Lease Payments Lease payments must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease AND regardless of being paid off at or just prior to closing. NOTE: This is because the expiration of a lease agreement for rental housing or an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house. Paying off Installment Debt Paying off accounts for installment debt to qualify for a mortgage is discouraged; however, may be permitted at the discretion of the underwriter. ü If the account is paid off, the debt may be omitted from the DTI ratio calculation. ü If the debt is paid with loan proceeds (cash out refinance), the HUD-1 must reflect the payoff of the required account. ü Not permitted for lease agreements/payments. NOTE: In all cases, the file will be reviewed to determine if the borrower has a history of accumulating debt, then refinancing to manage the debt. If such history exists and there is no history of savings, then the borrower must qualify with all payments. Paying Down Installment Debt Paying down installment loans to ten months is permitted and must be documented with cancelled checks, paid receipts and/or copy of the HUD1. Continued on next page Conventional Lending Guide 100-238 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Ratio, Continued Paying off Revolving Debt Paying off accounts for revolving debt to qualify for a mortgage is discouraged; however, may be permitted at the discretion of the underwriter. ü If the account is paid off AND closed, the debt may be omitted from the DTI ratio calculation. The following documentation must be provided: · The source of funds to pay off the account. · Confirmation and documentation that the account has been closed prior to closing. · Confirmation and documentation that the account has been paid off, either prior to closing or on the HUD-1, if paid at closing. · If paid off at closing, the creditor must provide an “account closed” letter and a pay off statement in which the balance must reflect the same as the pay off amount on the HUD-1. If the debt is paid with loan proceeds (cash out refinance), the HUD-1 must reflect the payoff of the required account. · If the account is not closed, then the required minimum payment must be included in the borrower’s ratios (refer to Revolving Debt for details) NOTE: In all cases, the file will be reviewed to determine if the borrower has a history of accumulating debt, then refinancing to the manage debt. If such history exists and there is no history of savings, then the borrower must qualify with all payments. Paying Down Revolving Debt Paying down revolving debt to qualify for a mortgage is not permitted. If the account remains open or continues to carry a balance, the borrower must qualify with the payment and account balance currently reported with the credit bureaus. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-239 Conventional Lending Guide Ratio, Continued Authorized User Accounts – DU For Desktop Underwriter (DU) loans: Trade lines designated as authorized user are taken into consideration as part of the risk assessment. However the credit report must be reviewed for trade lines in which the applicant has been designated as an authorized user in order to ensure the trade lines are an accurate reflection of the borrower's credit history. If it is believed the authorized user trade lines are not an accurate reflection of the borrower's credit history, the Underwriter should evaluate the borrower's credit history without the benefit of these trade lines and use prudent underwriting judgment when making its final underwriting decision. When ensuring trade lines are an accurate reflection of the borrower's credit history, as a general guide, if the borrower has several authorized user accounts but only has a few accounts of his/her own, the loan file should establish: · the relationship of the borrower to the owner of the account, · if the borrower uses the account, and · if the borrower makes the payments on the account. If the authorized user trade line belongs to another borrower on the mortgage loan, no additional investigation is needed. However, if the borrower has several trade lines in good standing and only a minor number of authorized user accounts, the Underwriter could make the determination that: · the authorized user accounts had minimal, if any, impact on the borrower's overall credit profile; and · the information reported on the credit report is an accurate reflection of the borrower's credit history. NOTE: · If the account belongs to the borrower’s spouse (whether on the loan or not) or the co-borrower OR if there is evidence in the file that the borrower has been making the payment, then the account payment must be included in the borrower qualifying debt to income ratio. Continued on next page Conventional Lending Guide 100-240 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Ratio, Continued Authorized User Accounts – LP For Loan Prospector (LP) loans, credit report trade lines that list a borrower as an authorized user cannot be considered in the underwriting decision, except as outlined below. An authorized user trade line may be considered if: · Another borrower in the mortgage transaction is the owner of the trade line; or · The borrower can provide written documentation (e.g., canceled checks, payment receipts, etc.) that he or she has been the actual and sole payer of the monthly payment on the account for at least 12 months preceding the date of the application. If written documentation of the borrower’s monthly payments on the authorized user trade line is provided, then the payment history — particularly any late payments that are indicated — must be considered in the credit analysis and the monthly payment obligation must be included in the debt-to income ratio. An authorized user trade line must be considered if the owner of the trade line is the borrower's spouse and the spouse is not a borrower in the mortgage transaction. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-241 Conventional Lending Guide Ratio, Monthly Payment Debts Continued The monthly debt payment is the sum of the following monthly obligations: ü Monthly housing expense ü Installment debts with 10 or fewer monthly payments should also be considered as a recurring monthly obligation if it significantly affects the borrower’s ability to meet his or her credit obligations. ü Exception: Payments on all automobile and non-automobile leases, regardless of the remaining number of payments and regardless if pay off at closing, must be included in the calculation of recurring monthly expenses. ü Monthly Payments on revolving accounts at the greater of $10 or 5% of the current balance. If the balance has recently or is to be paid off/down and the account remains open, the qualify terms continue to be required based on the most recent high balance. ü Aggregate negative net rental income from all investment properties owned. ü Monthly mortgage payment for second home. ü Payments on all deferred loans (i.e., loans in forbearance). If a payment is not indicated on the credit report, a copy of the borrower’s payment letter or forbearance agreement is required to determine the payment amount to use in calculating the borrower’s total monthly obligations. · ü Obligations Not Considered Debt For deferred student loans only, if the credit report does not indicate the monthly amount that will be payable at the end of the deferment period, 2% of the original principal balance of the student loan may be used to determine the monthly payment used for loan qualification. Payments on any Home Equity Line of Credit (HELOC) are calculated into the ratio based on the greater of the credit report amount or an interest only amount for the current balance; if the current balance is zero, then a payment amount is not required. Payments for loans secured by the borrower's personal financial assets (such as life insurance policies, 401(k) accounts, CDs, stocks, bonds, etc.), do not have to be included in the debt ratio calculations if the loan instrument shows the asset as collateral for the loan. The borrower may not use the same asset to satisfy cash reserve requirements. IMPORTANT: Appropriate documentation must be provided to confirm exclusion of debt. Continued on next page Conventional Lending Guide 100-242 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Ratio, Continued Co-Signed Obligations Co-signed obligations for installment, revolving and mortgage debt/loans can be excluded from recurring monthly expenses if all of the following documentation is provided: ü Twelve months of cancelled checks that show payments have been made by another party. ü If the account on the loan has been in existence for less than 12 months, the full payment of the co-signed account is considered a liability and must be used in calculating the debt ratio. ü Verification that there have been no delinquencies on the account during the most recent 12 months. ü Debt must be a co-signed obligation (i.e. the other party must also be legally on the debt). ü A copy of the note must also be provided to show that the person making the payments in indeed an obligor on the note. NOTE: Liabilities solely in the applicant’s name must always be considered in the debt ratio, regardless of who is making the monthly payment (as the legal obligation resides with the applicant). Court Ordered Assignments of Debts If the borrower is no longer responsible for a payment of a debt as a result of a divorce settlement, or buyout but has not been released of the obligation by the creditor, the debt does not need to be included in the DTI if the following is provided and specifically assigns the payment to another party: · Applicable pages and signature page of the recorded divorce decree or legal separation agreement (must be finalized by the court and recorded); and · Evidence of the transfer of title. IMPORTANT: The Borrower continues to be liable for any adverse payment history or outstanding debt associated with these joint accounts, including AUS recommendations that lowers credit scores, require accounts to be paid in full, etc. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-243 Conventional Lending Guide Ratio, Continued Student Loans Student loans must be included in debt ratio calculation regardless of deferred status. Examples of documentation of the payment include but are not limited to: ü Credit Report or Direct verification from the creditor. ü Copy of the installment loan agreement. ü Student loan certification from the financial institution. ü For deferred student loans, if the credit report does not indicate the monthly amount that will be payable at the end of the deferment period, 2% of the original principal balance of the student loan may be used to determine the monthly payment used for loan qualification. Continued on next page Conventional Lending Guide 100-244 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Ratio, Continued Business Paid Debt Excluding the monthly debt obligation associated with a self-employed, sole proprietor, Corporations, Partnerships business requires a minimum of the most recent twelve (12) months cancelled checks from the business owned checking account. · · · · The account has no late payments in the last 12 months and no more than 1x30 in the last 24-month period, if applicable. Evidence such as canceled company checks that the debt has been paid out of company funds. The cash flow analysis of the company took the payment of the debt into consideration. The debt must demonstrate a company related business function, such as a credit card used for business related items, an automobile loan for commutes to and from work, or a mortgage loan for a home serving as temporary quarters for employees or relocation programs. NOTE: ü The debt must be considered as part of the borrower’s individual recurring monthly debt obligations if any one of these conditions cannot be met. ü Similar debt obligations may be combined to meet the 12 month minimum requirement. For example, the documented period a previous auto debt paid by the business can be used in conjunction with a new auto tradeline (i.e. the borrower sold the older car to purchase a newer model). ü The payment must be included in the borrower’s DTI, if the business does not provide sufficient evidence of the debt being paid out of company funds. If evidence of the business paying the debt is provided, but the cash flow analysis does not reflect any business expense related to the debt (such as an interest expense, taxes and insurance, if applicable, equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on the credit report and the age of the loan). It is then reasonable to assume that the debt has not been accounted for in the cash flow analysis. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-245 Conventional Lending Guide Ratio, Continued Undisclosed Debt ALL existing debt must be disclosed within the loan application. In addition, any pending transactions which may result in new debt must be disclosed on the 1003. Supporting documentation for pending transaction in which an application has been submitted in anticipation of new debt being extended to the borrower must be included in the loan package. Supporting documentation may include sales agreement, loan commitment, security agreement, etc. Examples of Pending Debt (but not limited to): · Auto loan purchase or refinance in process · Newly submitted Credit Card Applications · Pending or Applied Credit Application for Refinance and/or Purchase of Real Estate Failure to disclose existing or pending debt is considered to be material misrepresentation and default in violation of the agreements set forth within the Loan Application. Non-disclosure of existing and/or pending debt will result in acceleration of the indebtedness in accordance with the terms of the Security Instrument. Conventional Lending Guide 100-246 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Property Flipping Overview Property flipping generally refers to the process of purchasing an existing property with the intention of immediately reselling it for a profit. Property flipping in itself is not illegal unless it includes an act of fraud or misrepresentation, which can result in a predatory transaction. The property is often a distressed property that was acquired at a discounted price that is being refinanced or resold at an inflated price within a short timeframe to an uninformed buyer. Due to the nature/history of these transactions and propensity for illegal or inappropriate activity, Homeward Residential will apply at minimum the below requirements; however, Homeward Residential reserves the right to scrutinize all loan transactions for possible property flipping and refuse to approve where inappropriate property flipping is indicated. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-247 Conventional Lending Guide Property Flipping, Requirements Continued ü Property seller must be owner of record and in title prior to the borrower’s application AND prior to date of the sales contract for the purchase transaction. ü Re-sales up to 90 days will be heavily scrutinized for value, acceptable comparables and characteristics of a bona fide transaction: · ALL characteristics and parties of the loan transaction must represent an arms length transaction. · If the Seller is a business, LLC or any other non-individual who owns multiple properties in the subject market area that is predominantly a foreclosure market and has flipped numerous properties in the subject’s market area, the subject’s appraised value will not be accepted and the loan will be declined. · If the Seller is a business, LLC or any other non-individual, Homeward Residential will require the name of the Seller on all comparables used in the appraisal to confirm a false market value is not being created. · If the Seller is a business, LLC or any other non-individual, the following checklist must be completed to confirm transaction is arms length, legitimate and seller is affiliated with the business entity/LLC. (i.e. confirm individual is authorized to sell the property). · For properties owned less than 90 days by the Seller, a Field Review will be required if the value increases by more than 20% from the original purchase price and must be supported by documented improvements, which are commented on by the appraiser. Re-sales from 91 days up to 12 months will be reviewed for all the above concerns at the discretion of the underwriter. ü IMPORTANT: Homeward Residential will not allow for a borrower to purchase a property or multiple properties when the Seller is a LLC and the subject property was recently purchased by the Seller with rapid appreciation, which cannot be supported with documented home renovation/improvements. Continued on next page Conventional Lending Guide 100-248 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Property Flipping, Continued Anti-Flipping and the Sales Contract It is not acceptable practice for the sales contract to be re-signed for the sole purpose of circumventing Homeward Residential’s flip rules. NOTE: This includes any evidence within the file, such as original sales contract date on the appraisal, indicating that the loan was re-structured for the sole purpose of circumventing Homeward Residential requirements. Omitted Transactions Flip transactions that are not affected by the above: · A builder selling a newly built home or building a home for a homebuyer. · Transactions resulting from an inheritance, divorce or legal settlement. · Sales by employers or relocation agencies related to employee relocations. Checklist for Business Seller If the seller is a non-individual AND the property is being re-sold within 90 days, the Non-Individual Seller Evaluation & Validation Checklist is available as a helpful tool but is not required. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-249 Conventional Lending Guide Property Flipping, Continued Non-Individual Seller Evaluation & Validation Checklist NOTE: (This is a helpful tool, but not required) Date: __________________________ Reviewer: ______________________ Borrower Name: _________________ Loan Number: ___________________ ü Who is the seller in the contract? _____________________________________________ ü Is this an individual or a business entity? · Who signed the contract on behalf of the seller? · Who is listed as the current owner on title? ü Is the non-individual seller entity found on the state corporation’s website search? · Who is listed as the Officer, Principal or Agent? · Is the person who signed on behalf of the non-individual seller an officer, registered agent of principal of the business entity? · If not, are you able to determine who the officers or owners of the business entity are? CONCLUSIONS / FINDINGS · Non-individual seller entity is acceptable and _____________________ is authorized to sign on behalf of the non-individual seller. · Non-individual seller entity is acceptable but we are conditioning for full disclosure of members and authorization for the signor, ______________________ to sign on behalf of the non-individual seller. · Non-individual seller entity is deemed unacceptable for the following reason(s): ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Continued on next page Conventional Lending Guide 100-250 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Property Flipping, Additional Evaluations Continued ü Who is the non-individual business entity? ü Can we validate the existence of the non-individual business entity? ü Can we identify the members with ownership and interest in the business entity? ü Is the person who signed the sales agreement an identified member with ownership and interest in the business entity OR do we need to obtain specific written authorization from a member with ownership and interest in the business entity? ü Is there a potential or identified business or personal relationship between any or the other interested parties to the transaction and the selling business entity? · YES ü o If so, is this relationship clearly disclosed? o If so, what is the relation? o What affect might this relationship have on the subject property value? o Are there unreasonable incentives? o Who if anyone is benefiting most from any potential relationship with the selling business entity? · NO Do we have matching disclosure of the seller listed as the seller in the sales agreement, the seller listed as current owner on the appraisal and the current person or entity listed as holding current title? · YES · NO o Can you clearly see why the information differs between one disclosure versus the other or others? o Has there been a recent transfer of ownership? If so, why? o Have there been an unreasonable number of ownership transfers in the most recent 36 months? Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-251 Conventional Lending Guide Property Flipping, State Business Website Search Better Business Bureau Continued ü California: http://kepler.sos.ca.gov/list.html ü Connecticut: http://www.concordsots.ct.gov/CONCORD/online?sn=InquiryServlet&eid=99 ü Delaware: https://sos-res.state.de.us/tin/GINameSearch.jsp ü DC: http://mblr.dc.gov/corp/lookup/index.asp ü Florida: http://www.sunbiz.org/search.html ü Georgia: http://corp.sos.state.ga.us/corp/soskb/CSearch.asp?dtm=680543981 481481 ü Illinois: http://www.cyberdriveillinois.com/departments/business_services/ho me.html ü Maine: http://icrs.infome.org/nei-sosicrs/ICRS;jsessionid=CC7397A5B6804CAAA2C38F47A250122A?MainP age=x ü Maryland: http://sdatcert3.resiusa.org/ucc-charter/ ü Massachusetts: http://corp.sec.state.ma.us/uccfiling/uccSearch/Default.aspx ü Minnesota: http://da.sos.state.mn.us/minnesota/corp_inquiryfind.asp?:Norder_item_type_id=10&sm=7 ü New Hampshire: https://www.sos.nh.gov/corporate/soskb/csearch.asp ü Rhode Island: http://ucc.state.ri.us/CorpSearch/CorpSearchInput.asp ü Texas: https://direct.sos.state.tx.us/acct/acct-login.asp · Cost is $1 per search and must register to use SOS for Texas Website: http://welcome.bbb.org/ Conventional Lending Guide 100-252 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide General Compliance Policies Overview Homeward supports the expansion of fair and equitable home ownership opportunities and opposes predatory lending. We are committed to upholding the standards of fair and responsible lending in all aspects of our business practice. Our commitment emphasizes product choice, fair pricing and credit terms with clear disclosure. Homeward requires that all Borrowers be treated fairly and equitably through all channels. Homeward requires adherence to applicable federal state and local laws, statutes, regulations, commentary and principles, including but not limited to the items more fully described herein. Predatory Lending To assure a clear and unequivocal understanding of our commitment to a method of doing business that excludes predatory and abusive lending, Homeward Residential has adopted an internal 5% policy limit on all total borrower charges and broker compensation (subject to lower state and municipal thresholds), including such broker fees as origination, processing fees, etc. Homeward will not fund any loan that is considered to be “high rate” or “high fee”, or any loan that is considered to be predatory in the jurisdiction where the property is located. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-253 Conventional Lending Guide General Compliance Policies, Laws Continued Homeward Residential strictly complies will all applicable federal, state and local laws, ordinances, and regulations. This includes but not limited to: · Equal Credit Opportunity Act (Regulation B) · Consumer Credit Protection Act · Fair Credit Reporting Act (FCRA) · Truth-in-Lending Act (Regulation Z); Homeward will permit only Qualified Mortgages as defined within the Truth-in-Lending Act. · Real Estate Settlement Disclosure Act (RESPA – Regulation X) · Home Mortgage Disclosure Act (HMDA – Regulation C) · Home Ownership and Equity Protection (HOEPA); note Homeward Residential will not proceed with any loan scenario that exceeds HOEPA’s guidelines. · SAFE Act · Home Valuation Code of Conduct (HVCC) and subsequent regulations · OFAC · Customer Identification Program (CIP) under USA Patriot Act · FHA (Fair Housing Act) · CRA (Community Reinvestment Act) · FTD Unfair and Deceptive Acts and Practices (UDAP) · DFA (Dodd-Frank Wall Street Reform & Consumer Protection Act; and all implementing regulations thereto as regulations become effective) Continued on next page Conventional Lending Guide 100-254 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide General Compliance Policies, Laws, continued · · · · Continued Loan Originator Compensation; amendment to §1026.36(h). Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations under the Equal Credit Opportunity Act (Regulation B) o Form C-9, Disclosure of Right to Receive a Copy of Appraisal with language: "We may order an appraisal to determine the property's value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost." must be executed and in the file. o Must provide evidence that the applicants are provided a copy of all written appraisals and valuations promptly upon their completion or three business days before consummation, whichever is earlier. o NOTE: The borrower may waive this 3-day requirement if such waiver (Waiver of Advance Delivery Appraisal Form) is obtained at least three (3) days prior to the closing of the mortgage. o The borrowers cannot be charged a fee for a copy of their appraisal. Adherence to the Ability to Repay and Qualified Mortgage Standards under the Truth-in-Lending Act (Regulation Z). Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act of Regulation X. Each file must contain: o The List of Homeowners Counseling Organizations provided to the borrower within three (3) business days of the application. This must be provided on all applications taken on or after July 10, 2014 The list must be obtained from either: · The CFPB website created to assist lenders in complying with this section which can be found here: http://www.consumerfinance.gov/find-a-housingcounselor/; or · Lenders may use their own system to generate the list using the same HUD data that the CFPB uses on HUDapproved counseling agencies, in accordance with the CFPB’s list requirements (See http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm). or · The interim homeowners counseling disclosure within three (3) business days of the application. This option is acceptable on loans with applications dated prior to July 10, 2014. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-255 Conventional Lending Guide General Compliance Policies, Continued Digital Signatures Permitted for appraisals only. Compliance with Points & Fees The maximum points and fees applicable to a Qualified Mortgage vary based upon the loan amount. In addition, all dollar amounts, including loan amounts, will be adjusted for inflation annually on January 1 by the CFPB. The applicable points and fees thresholds for 2014 are listed below: Points and Fees Thresholds Note Amount Points and Fees Threshold Greater than or equal to $100,000 3% of Total Loan Amount $60,000-$99,999 $3,000 $20,000-$59,999 5% of Total Loan Amount $12,500-$19,999 $1,000 <=$12,499 8% of Total Loan Amount Continued on next page Conventional Lending Guide 100-256 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide General Compliance Policies, Points and Fees Calculation · · Continued The points-and-fees calculation is the same as that used in the HOEPA points-and-fees calculation. To calculate the points-and-fees, a creditor will add together the amounts paid in connection with the transaction in six categories of charges: 1. Finance Charge – In general, all items included in the finance charge under 1026.5(a) and (b) will be included, except the following: a. Interest or the time-price differential b. Mortgage Insurance Premiums i. For federal or state government sponsored MIPs, exclude up-front and annual FHA premiums, VA funding fees, and USDA guarantee fees ii. For PMI, exclude monthly or annual PMI premiums. Also can exclude up-front PMI premium if it is refundable on a prorated basis and a refund is automatically issued upon loan satisfaction. However, if the premium can be excluded, you must still include any portion exceeding the up-front MIP for FHA loans. c. Bona Fide Third Party Charges - Cannot be retained by the creditor, loan originator, or an affiliate of either d. Bona Fide Discount Points i. Exclude up to 2 bona fide discount points if the interest rate before the discount doesn’t exceed the APOR by more than 1 percentage point; or ii. Exclude up to 1 bona fide discount point if the interest rate before the discount doesn’t exceed the APOR by more than 2 percentage points. 2. Loan Originator Compensation – Compensation paid directly or indirectly by a consumer or creditor to a loan originator that is not an employee of the creditor or mortgage broker must be included. a. Compensation paid by the creditor to its own employee loan originator on a transaction can be excluded; b. Compensation paid by a mortgage broker to its own employee loan originator on a transaction can be excluded; c. Compensation paid by a consumer directly to a mortgage broker can be excluded (so long as the amount has already been included in the points-and-fees under the finance charge); d. Compensation paid by a creditor to a mortgage broker that is not its own employee is to be included 3. Real Estate-Related Fees – The following categories of charges are excluded if (i) the charge is reasonable; (ii) the creditor receives no direct or indirect compensation; and (iii) the charge is not paid to an affiliate of the creditor: a. Title related fees b. Loan-related documentation preparation fees c. Notary and credit-report fees d. Property appraisal or inspection fees e. Amounts paid into escrow or trustee accounts that are not otherwise included in the finance charge 4. Premiums for credit insurance; credit property insurance; other life, accident, health or loss-ofincome insurance where the creditor is beneficiary; or debt cancellation or suspension coverage payments a. Do not include these charges if they are paid after consummation of the loan b. For purposes of this provision, credit property insurance is defined as insurance that protects the creditor’s interest in the property and does not include homeowner’s insurance that protects the consumer. 5. Maximum Prepayment Penalty – note HWC does not offer prepayment penalty options. 6. Prepayment Penalty Paid in a Refinance – If a creditor is refinancing a loan that it or its affiliate currently holds or services, then any penalties charged for prepaying the previous loan must be included – note HWC does not offer prepayment penalty options. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-257 Conventional Lending Guide General Compliance Policies, High Cost Loans Continued Mortgage loans that are designated as “high-cost” or “high-risk” are not eligible for funding with Homeward Residential. By definition, a high-cost mortgage is any consumer credit transaction, whether closed-end or open-end, that is secured by the consumer’s principal dwelling in which: ü The annual percentage rate applicable to the transaction will exceed the average prime offer rate (“APOR”), as defined in § 1026.35(a)(2), for a comparable transaction by more than: · 6.5 percentage points for a first-lien transaction · 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,000; or · 8.5 percentage points for a subordinate-lien transaction; or ü The transaction’s total points and fees will exceed: · 5 percent of the total loan amount for a transaction with a loan amount of $20,000 or more; the $20,000 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1; or · The lesser of 8 percent of the total loan amount or $1,000 for a transaction with a loan amount of less than $20,000; the $1,000 and $20,000 figures shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1. Continued on next page Conventional Lending Guide 100-258 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide General Compliance Policies, Higher Priced Mortgage Loans Continued Homeward Residential will not fund loans that are categorized or qualify as Higher Priced Mortgage Loans unless otherwise specified within the product summaries. By definition, a “Higher Priced Mortgage Loan” (HPML) is a first lien secured by a primary residence that has an annual percentage rate (APR) of 1.5% or more above the average prime offer rate (APOR) for comparable transaction as of the rate lock date. APR and APOR are both defined in Regulation Z. Requirements, as outlined in Regulation Z, must be followed. Loans that are not eligible include, but are not limited to, loans with prepayment penalties, ARMs with initial period less than 7 years and 5 year balloon reset mortgages. Higher Priced Covered Transactions A Higher Priced Covered Transaction is a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, other than a qualified mortgage under paragraph (e)(5) or (f) of § 1026.43; by 3.5 or more percentage points for a first-lien covered transaction that is a qualified mortgage under paragraph (e)(5) or (f) of § 1026.43; or by 3.5 or more percentage points for a subordinate-lien covered transaction. NOTE: Homeward does not purchase subordinate lien transactions. IMPORTANT: A Higher Priced Mortgage Loan (HPML) will always be considered a Higher Priced Covered Transaction; however, a Higher Priced Covered Transaction may not always be a Higher Priced Mortgage Loan. Prepayment Fees or Penalties Prepayment fees or penalties prohibited under any State, Local or Federal Laws or may create an oppressive financial condition are not permitted. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-259 Conventional Lending Guide General Compliance Policies, Continued Net Tangible Benefit All loans are required to provide a net tangible benefit to the borrower; must use state specific forms where required. Federal and State Regulations Brokers represent and warrant to Homeward Residential that all loans delivered to Homeward Residential are originated in accordance with state and federal law. Repayment Ability Homeward Residential does not engage in the practice of making loans unless it is reasonably believed the borrower has the ability to repay the loan based on a consideration of current and expected income, current obligations, employment status, other financial resources or other compensating factors other than the borrower’s equity in the dwelling which will secure repayment of the loan as determined through reasonable means in accordance with the underwriting standards and procedures normally observed for the particular loan products. Title Commitment Title Commitment must include 24 month history of property ownership and is valid for 60 days. NOTE: Gap endorsements are acceptable. Continued on next page Conventional Lending Guide 100-260 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide General Compliance Policies, Code of Conduct Continued Homeward Residential is committed to making loans to all applicants in a consistent, fair and reasonable basis, striving to conduct our business in an ethical manner with the utmost professionalism. Homeward Residential does not endorse, nor conduct business that may be perceived as “Predatory” in nature. For example, we will not conduct business with brokers who engage in equity stripping (serial re-financings that strip away borrower equity), churning (re-financing loans with little or no benefit to the borrower) and packing (including superfluous hidden expenses and fees in a loan). Homeward Residential conducts its business in an ethical, fair and reasonable manner, maintaining an environment that encourages fair and equitable treatment of all customers within the spirit of fair lending laws. All borrowers will be treated fairly with regard to loan pricing, underwriting and service of the loan request irrespective of race, color, age, gender, marital status, disability or national origin. Homeward Residential respects its borrower(s) privacy data and complied with all anti-dissemination laws and rules relating to such, including, but not limited to the provisions of the Gramm-Leach-Bliley Act. All products are offered to the largest spectrum of borrowers to avoid targeting minorities with specific loan programs. Homeward Residential underwrites all loan products in a sound and consistent manner, always considering foremost the customers’ ability to repay. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-261 Conventional Lending Guide General Compliance Policies, Interest Closing Protection Letters Continued ü Interest Credits permitted up to the 10th day of the month. ü Maximum amount of prepaid interest on any transaction not to exceed 45 days. Specific closing protection letters are required; Homeward Residential will not accept E&O Insurance Policies. Conventional Lending Guide 100-262 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Closing Policies & Procedures Scheduling a Loan ü Loan must be Cleared to Close in order to schedule for Closing. ü Request to Close (Broker Fee Sheet) and Preliminary HUD must be uploaded into Image Flow. ü To schedule the loan, the Broker will email closer@homewardfunding.com with the date and time of the closing: · Allow a minimum of 48 hours from when loan is being scheduled to closing/signing date. · A confirmation email will be sent to the Broker. Closing Practices The next sections reiterate and highlight best practices for Homeward Residential’s closing and funding process. Verification of Employment ü Closing Protection Letter Homeward Residential Funding will validate all Closing Protection Letters as well as Closing Agents wiring information prior to the loan funding. Taxes Any taxes that are due within 60 days of closing must be collected at closing and be reflected on the HUD-1 settlement statement regardless if loan is escrowing or not. Insurance Insurance must be paid through the first mortgage payment. Title Commitment Title Commitment must include 24 month history of property ownership and is valid for 60 days. A verbal verification of employment must be completed within 5 days of the Note Date and must include: · Independent Verification of Employer’s phone number. · Borrower’s start date. · Verification borrower is still employed. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-263 Conventional Lending Guide Closing Policies & Procedures, Escrow Accounts Continued ü Escrow waiver permitted as indicated below for LTVs less than or equal to 80% (90% in California). ü Partial Escrow Accounts permitted under the following circumstances: · Hazard & Wind Insurance(s) may be waived with taxes still escrowed. o Note in this scenario, the escrow wavier fee is not applied. o If HO-6 insurance is required, then it must be escrowed regardless of partial escrow request. · Note if the loan requires flood insurance, then partial escrow waivers are not permitted; either a full escrow account or a full escrow wavier is required. Escrows may not be waived for any real estate taxes when delinquent taxes past due by more than 60 calendar days are being included in the new loan amount (for cash out refinance transactions). ü ü Refer to the daily rate sheet for non-escrow account loan level price adjustments to be applied when full escrows are waived. Escrow accounts are required in the following circumstances: ü When the loan requires Mortgage Insurance of any type, including single premiums and LPMI. ü NOTE: In California, loans with LTVs between 80.01% - 90.00%, the borrower may elect to waive escrows for Taxes and Insurance (subject to the above requirements), but MUST escrow any Mortgage Insurance premiums that are to be paid by the Servicer. Continued on next page Conventional Lending Guide 100-264 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Closing Policies & Procedures, Seller Contributions Premium Pricing Credits Continued ü Seller Contributions are limited to program maximums as identified on the Loan Approval. ü Allowable Seller Paid Fees on Lender Paid Transaction: · Any or all 3rd Party Fees (Title, Appraisal, Credit, etc.) ü Allowable Seller Paid Fees on a Borrower Paid Transaction: · Any or all 3rd Party Fees (Title, Appraisal, Credit, etc.) · Broker Compensation Allowable Fees Paid By Premium Credit: · Any and all Third Party Fees (Title, Appraisal, Credit, etc.) · Interest, Escrow Accounts, Taxes Due, HOA Dues, Oil Adjustments, etc. · POC Items, such as appraisal and insurance on Purchase Transactions. · Interest on loan being paid off as well as any fees associated with payoff. NOTE: Broker compensation of any kind may not be paid by the Premium Credit. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-265 Conventional Lending Guide Closing Policies & Procedures, Principal Reductions Continued Lender Paid Transactions On transactions where the loan originator is paid by the lender, CPF will permit a Principal Curtailment on rate term refinance loans unless noted below as a result of excess premium rate credit. The excess premium must be identified on the HUD-1 Settlement Statement and is limited to the amount of the excess premium rate credit below. The premium rate credit is the amount associated with the lowest pricing rate option that allows for some or all of the borrower's closing costs to be paid so the borrower does not have to pay those closing costs out of pocket. · Principal curtailments are limited to the lesser of 2% or $2000. If the program permits, the borrower may also receive cash back within program guidelines in addition to the amount of the curtailment. Check your product summary for cash back eligibility criteria. Borrower Paid Transactions On transactions where the loan originator is paid by the consumer, principal curtailments are not permitted in any amount. The premium rate credit may not exceed the amount of third party costs. NOTE: After closing, borrower may enroll in weekly, bi-weekly and semimonthly principal reduction programs by visiting the servicing website at www.ocwen.mortgagebanksite.com Continued on next page Conventional Lending Guide 100-266 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide Closing Policies & Procedures, HUD Approval Process Funding Continued Homeward Residential will approve all HUD-1 statements prior to the loan funding and wire being released. ü The HUD Approval Process ensures: · Borrower has brought the minimum funds to closing as required per program. · Borrower’s funds to close do not exceed assets verified per the loan approval. · Borrower is not receiving more than the allowable cash at closing per program maximum. · Premium Pricing Credit does not exceed allowable costs. · Principal Reduction is within guideline. ü Wire cut off time is 3:30pm EST. Prior to ordering the wire, Homeward Residential will verify the following: · VOE has been completed within 5 days of the Note · HUD has been approved · All Prior To Fund (PTF) conditions have been satisfied ü Fed Reference numbers are available upon request. Note, there may be a delay in retrieving once the wire has been ordered. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-267 Conventional Lending Guide Closing Policies & Procedures, Payoff Requests Continued The following options are available to request a payoff on loans currently being serviced by Homeward Residential: · Requests through Automated Voice Response Unit: 800-746-2936 · Requests through phone agents: 800-746-2936 · Online Requests: The borrower may login to their account at www.ocwen.mortgagebanksite.com to request a payoff. · Written Request: Ocwen Loan Servicing ATTN: Cashiering - Payoffs 1661 Worthington Road, Suite 100 West Palm Beach, FL 33409 Conventional Lending Guide 100-268 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide FNMA Loan Quality Initiative LQI Overview In response to Fannie Mae’s Loan Quality Initiative Homeward Residential will implement the following process changes to call out and address: · Undisclosed Liabilities · Confirmation of Borrower’s Identity · Validation of Qualified Parties to the Transaction NOTE: The following process changes apply to loans applications taken on or after June 1, 2010. Continued on next page Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-269 Conventional Lending Guide FNMA Loan Quality Initiative, Undisclosed Liabilities 1. 2. Continued At time of loan submission to Underwriting: · Kroll’s Factual ID Report which will be pulled by the Submission team. Kroll’s Factual ID Report will be reviewed by the underwriter – heightening awareness of potential issues within the loan submission (i.e.: ssn, address discrepancies, etc) Upon issuance of Clear to Close: · Underwriter will pull a Kroll Loan Review Report – Credit Refresh Report & MERS Report. (Note: This initiative requires the Loan Review Report to be pulled within 5 days of closing. If loan does not close within 5 days of date of report, closing coordinator will return file to underwriter and a new Loan Review Report must be pulled and analyzed. If the credit report used in underwriting the loan, as verified by the most recent AUS findings, is dated less than five (5) calendar days prior to the note date, then a credit refresh is not required.) · Underwriter will review report for new debt and significant increases in liability. · If the payments on any new and/or existing debt cause the DTI to increase, the underwriter must update monthly payments and balances on the 1003 in Avista and resubmit the loan through DU to assure recommendation remains A/E. (NOTE: If the monthly payments have decrease, the underwriter is not required to update the 1003 or resubmit the loan through DU). · For Conventional loans Only, if any new derogatory credit is report, DU must be re-run with a new credit report. · If there are any credit inquiries dated AFTER the DU credit report on the LQI report, the borrower must address each inquiry on a new inquiry letter and state specifically if any resulted in new credit/debt obligations. o If new obligations are confirmed, then the terms and condition of the new debt must be verified and accounted for in the qualifying ratios. · The Loan Review Report does not contain fico scores. The only time the loan will be subject to re-pricing and re-verification of eligibility is when new debt has been incurred and/or monthly payments on existing debts have increased such that the DTI is outside the AUS total expense ratio tolerances or when new derogatory credit is reported requiring a new tri-merge Credit Report to be run with DU. · The MERS section of the Loan Review Report must be reviewed by the underwriter to identify any undisclosed properties and mortgage liability. Continued on next page Conventional Lending Guide 100-270 Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide FNMA Loan Quality Initiative, Confirmation of Borrower’s Identity ü ü Validation of Qualified Parties to the Transaction Continued Homeward Residential requires that the Closing Agent/Attorney provided evidence in the file that the identification document included a photo and has been checked for each borrower This is not responsibility of the underwriter. 1. At time of loan submission to Underwriting: · Kroll Full Facts Report will be pulled by the Submission team. Kroll’s Full Facts Report will check all parties to the transaction against HUD’s LDP/GSA lists. · Any party to the transaction included on either list will result in the loan being ineligible for approval/funding · Material parties include but are not limited to: o Borrower o Seller o Processor o Listing/Seller Realtor o Builder o Loan Officer o Broker o Title Company o Appraiser · If party is not known at time of loan submission, underwriter will be required to add party to report and re-run to confirm they are not on either list. · Until Full Facts report is implemented, underwriter will rely on LDP/GSA lists as validated thru Fraud Guard or as pulled directly thru the FHA Connection Homeward Residential Client Select REV 11/18/2014 Conventional Lending Guide 100-271
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