Underwriting Guidelines Part 1

As of 04/23/04

For FNMA Underwriting Guidelines concerning Asset Requirements, Transaction Types or Property Eligibility, click HERE.

For FNMA Underwriting Guidelines concerning Manufactured Homes, click HERE.

These underwriting guidelines describe FNMA underwriting guidelines for one to four family conventional mortgages.  This set of underwriting guidelines does not represent the entire FNMA underwriting manual.  Refer to FNMA on-line manual for additional details.

Borrower Eligibility

title requirements

• Generally, FNMA will purchase or securitize mortgages that have been made to natural persons only.
• It is required that title to the property be in the name of the individual borrower(s).
• In most cases, the borrower must hold title to the property as a fee simple estate; however, FNMA may accept mortgages secured by leasehold estates in areas in which they have received market acceptance.
• Refer to Leasehold Estates under Property Type.

Inter Vivos Trust

Inter Vivos Revocable Trusts are acceptable as eligible borrowers under certain conditions.  An Inter Vivos Revocable Trust is a trust that:

(1) an individual creates during his or her lifetime,

(2) becomes effective during its creator's lifetime, and .

(3) can be changed or canceled by its creator at any time, for any reason, during that individual's lifetime.

• We will accept an Inter Vivos Revocable Trust as an eligible borrower for a conventional first mortgage that is secured by a one-family principal residence or a second home, as long as the eligibility criteria are satisfied and our documentation requirements for mortgages to Inter Vivos revocable trust borrowers are met.
• We are  revising our policy to also permit the property to be a one-family investment property.
• A lender is responsible for determining whether, under the laws of the states in which it does business, it can originate mortgages to validly created Inter Vivos Revocable Trusts that meet the terms and conditions we specify.
• Although there may be differences from one state to another in laws governing or affecting Inter Vivos Revocable Trusts, including the rights of beneficiaries under the trust, we expect a lender that chooses to originate mortgages to Inter Vivos Revocable Trust borrowers to meet the requirements we have established.
• Minor variances based on individual state law will be acceptable as long as, under relevant state law, our rights (as the creditor) are fully protected (thus assuring that full title to the property would be vested in us should we ever have to initiate foreclosure proceedings) and title insurers are willing to provide full title insurance coverage (without exceptions for the trust or the trustees) for Inter Vivos Revocable Trusts in that state.
• By delivering a mortgage that has an Inter Vivos Revocable Trust as the borrower, a lender warrants that both the trust and the mortgage satisfy our eligibility criteria and documentation requirements.
• A lender must review the mortgage documentation, applicable state law, and the trust documents that the title insurance company required to make its determination on the title insurance coverage (or must have taken such other steps as it deems necessary) to assure that it can make the warranties we require.
• If the security property is located in California, we believe that our rights as a creditor will be fully protected under California law if the trust and the mortgage satisfy our eligibility criteria and documentation requirements.
• Because of possible variations in state law, we require a lender to make an additional warranty if the security property is located elsewhere.
• If the security property is located in a state other than California, a lender also warrants that holding title to the property in the trust does not in any way diminish our rights as a creditor, including the right to have full title to the property vested in us should foreclosure proceedings have to be initiated to cure a default under the terms of the mortgage. The lender must retain in the individual mortgage file a copy of any trust documents that the title insurance company required in making its determination on the title insurance coverage.

A. Eligibility Criteria for the Trust

• We require that the Inter Vivos Revocable Trust be established by a natural person. It may be established solely by one individual or jointly by more than one individual.
• An Inter Vivos Revocable Trust will be considered an eligible borrower if it meets the following eligibility requirements:

• The trust must be established by a written document during the lifetime of the individual establishing the trust, to be effective during his or her lifetime.
• The trust must be one in which the individual establishing the trust has reserved to himself or herself the right to revoke the trust during his or her lifetime.
• The primary beneficiary of the trust must be the individual establishing the trust. If the trust is established jointly by more than one individual, there may be more than one primary beneficiary -- as long as the income or assets of at least one of the individuals establishing the trust will be used to qualify for the mortgage and that individual will occupy the security property and sign the mortgage instruments.
• The trust document 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 either the individual establishing the trust (or at least one of the individuals, if there are two or more) or an institutional trustee that customarily performs trust functions in (and is authorized to act as trustee under the laws of) the relevant state.

• The trustee(s) must have the power to mortgage the security property for the purpose of securing a loan to the party (or parties) who are the "borrower(s)" under the mortgage or deed of trust note.

B. Eligibility Criteria for the Mortgage

A conventional first mortgage that has an Inter Vivos Revocable Trust as the borrower must satisfy the following eligibility criteria:

• The security property must be a one-family principal residence that is occupied by at least one of the individuals establishing the trust (and whose income or assets are used to qualify for the mortgage) or a one-family second home;
• Full title to the security property must be vested in the trustee(s) of the Inter Vivos Revocable Trust. There may be no other owners;
• Fannie Mae is revising this policy to also allow title to be vested jointly in the trustee(s) of the inter vivos revocable trust and in the names(s) of an individual borrower (s) or in the trustee(s) of more than one inter vivos revocable trust
• The title insurance policy must assure full title protection to us and must state that title to the security property is vested in the trustee(s) of the Inter Vivos Revocable Trust. It must not list any exceptions with respect to the trustee(s) holding title to the security property or to the trust; and
• The mortgage must be underwritten as if the individual establishing the trust (or at least one of the individuals, if there are two or more) were the borrower (or a co-borrower, if there are additional individuals whose income or assets will be used to qualify for the mortgage).

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residency

We will purchase or securitize mortgages made to aliens who are lawful permanent or nonpermanent residents of the United States under the same terms -- mortgage product, transaction type, occupancy status, and loan-to-value ratios that are available to United States citizens.  We do not specify the precise documentation that a lender must obtain to verify that a permanent or nonpermanent resident alien borrower is a legal resident of the United States. Rather, a lender should make a determination of the alien's residency status based on the circumstances of the individual case, using whatever documentation it deems appropriate.

Permanent Resident Aliens

• A permanent resident alien is an individual who is lawfully accorded the privilege of residing permanently in the United States. The Immigration and Naturalization Service (INS) uses the word "immigrant" to describe these individuals.
• We also consider another group of individuals such as refugees and others seeking political asylum who are immigrating to, and seeking permanent residency, in the United States to be permanent resident aliens.
• The INS has special immigration programs that enable these individuals to seek (and accept) employment while they are in the process of obtaining their permanent resident alien status (which generally will take from two to three years).

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Non-Permanent Resident Aliens

• A nonpermanent resident alien is an individual who seeks temporary entry to the United States for a specific purpose.
• The Immigration and Naturalization Service (INS) uses the word "non-immigrant" to describe these individuals.
  • The INS has several classifications for "non-immigrants" -- foreign government officials, visitors for business or pleasure, aliens in transit through the United States, treaty traders and investors, students, international representatives, temporary workers and trainees, representatives of foreign information media, exchange visitors, fiances or fiancees of U.S. citizens, intra-company transferees, and NATO officials.
  • For most classifications, the "nonimmigrant" must have a permanent residence abroad and must qualify for the admission classification being sought.

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Land Trust

• The lender must review the borrower's credit report to evaluate his or her use of revolving credit by comparing the current balance on each open account to the amount of credit that is available to determine whether the borrower has a pattern of using revolving accounts up to (or approaching) the credit limit.
• Credit histories that include revolving accounts with a low balances-to-limits ratio generally represent a lower credit risk, while those that include accounts with a high balances-to-limits ratio represent a higher credit risk.
• A credit history that includes recently opened accounts that are at or near their limits may indicate that the borrower is overextended or overly reliant on the use of revolving credit -- and, when this is combined with a delinquent payment history, it is generally an indication that the borrower has not managed his or her credit successfully.

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Native America Housing

• Under HUD's section 184 program, HUD guarantees loans made to Native American Families and Indian Housing Authorities. Previously, HUD would guarantee only loans for the purchase, construction, or rehabilitation of one-to four-family dwellings on trust lands and lands located in Native American areas.
• Recently, the Section 184 program was modified to permit the refinance of a mortgage that was made to a Native American family or Indian Housing Authority to lower the interest rate and/or reduce the mortgage term.
• Our current policy requires the mortgage transaction to be a purchase money transaction, with the proceeds used solely to acquire the property or to acquire and rehabilitate the property.
• Because of the program change, we will now permit eligible mortgage transactions to include refinances of mortgages as long as they comply with HUD's criteria for Section 184 mortgages.

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ineligible borrowers

• Corporations
• General Partnerships
• Limited Partnerships
• Real Estate Syndicates
• However, if the borrower is another type of entity, we do make an exception for some of our HomeStyle mortgage products, for Community Lending mortgages that utilize the Lease-Purchase product option and for Community Living group home mortgages.

multiple loans to one borrower

• When the mortgage that is being delivered to FNMA is secured by a one- to four-family property that is the borrower's principal residence, we do not impose any limitations on the number of mortgages that the borrower can currently be financing.
• But, if the mortgage is secured by a second home or an investment property, the borrower may not own more than ten properties that are currently being financed. In these cases, the borrower's principal residence must be counted toward the limitation.

• Our limitation on the number of mortgages currently being financed applies to the total number of properties financed, not just the number of mortgages sold to us. Joint ownership in residential real estate is considered the same as total ownership of an individual property.

• However, ownership in commercial or multifamily (more than four dwelling units) real estate is not included in the limitation.

• The ten-property limit applies to any combination of ownership in one- to four-family properties.

• For example, a borrower may  own ten single-family properties; three two-family properties and seven single-family properties; ten four-family properties; etc.

• In addition, one co-borrower may own one single-family property and the other co-borrower may own nine two-family properties; one co-borrower may own six three-family properties and the other co-borrower, four two-family properties; etc.

• We do have concerns about how ownership of multiple investment properties can affect a borrower's ability to repay the total mortgage debt if he or she is unable to rent some of the properties for extended periods.
• To address these concerns, we require a borrower who has multiple mortgages that are secured by investment properties to have a financial reserve equal to at least six payments (of principal, interest, and escrows) for all of the mortgages that it delivers to us. (A lower cash reserve requirement may apply if the mortgages are evaluated by Desktop Underwriter.)

number of properties owned

FNMA does not impose any limitations on the number of properties owned by the borrower, but does have restrictions on the number of mortgages that the borrower can currently be financing.  Refer to the section above - Multiple Loans to One Borrower.

non-occupant co-borrowers, Guarantors or Co-signers

• FNMA will consider a mortgage that has a guarantor or co-signer as long as the guarantor's or co-signers liability is not qualified or limited in any manner.
• However, a party who had an interest in the property sales transaction, such as the property seller , the builder, the real estate broker, etc., is not an eligible co-signer or guarantor.
• When a co-borrower's, guarantor's or co-signors income is used for qualifying purposes, he or she must occupy the property only if the mortgage is a first mortgage that has a loan-to-value ratio over 90%.
• If the mortgage is a first mortgage that has a loan-to-value of 90% or less or a second mortgage, the co-borrower's, guarantor's or co-signers income may be used for qualifying purposes even though he or she does not occupy the property.
• In those instances in which a non-occupant co-borrower, guarantor or co-signer's income is used for qualifying purposes, we require the owner-occupant borrower to:
  • Be able to qualify for the mortgage based on his or her own financial capacity, but a total debt-to-income ratio of no more than 43%. (This is true even if the combined qualifying ratios for the borrower and the co-borrower, guarantor or co-signer are well below our standard qualifying ratio benchmark).
  • We also require that the owner-occupant borrower make the first 5% of the down payment from his or her own funds if the loan-to-value ratio (or, if applicable, the combined loan-to-value ratio) for the mortgage is greater than 80%.

non-arm's length transaction

• When the property purchaser receives financial assistance from a relative, domestic partner, fiance, fiancee, municipality, nonprofit organization, or employer, we do not consider the provider of the assistance to be an interested party to the sales transaction unless the person or entity is the property seller (or is affiliated with the property seller).
• Furthermore, a lender is not considered as an interested party to a sales transaction unless it is the property seller or is affiliated with the property seller or another interested party to the sales transaction. (For our purposes, an affiliation exists when there is direct common ownership or control by the lender over the interested party or vice versa or when there is direct common ownership or control by a third party over both the lender and the interested party.
• A typical ongoing business relationship -- for example, the relationship between a builder and a lender that serves as its financial institution -- does not constitute an affiliation.)

occupancy

Primary Residence

• A one- to four-family property that is the borrower's primary residence.
• At least one of the borrowers must occupy and take title to the property and execute the note and mortgage.
• FNMA will consider a residence that parents purchase or refinance for such children to be a principal residence for purposes of satisfying our mortgage eligibility requirements even though the parent-borrower will not be the occupant of the property. ie: Parents who want to provide housing for their physically handicapped or developmentally disabled adult children, who are unable to work or who have income that is not sufficient for them to qualify for a mortgage on their own have special home financing needs.
• We will extend this same flexibility to children who want to provide housing for elderly parents who are unable to work or who have insufficient income to qualify for a mortgage of their own.
• Conventional fixed-rate first mortgages may be secured by properties that are owner-occupied principal residences, second homes, or investment properties.
• However, adjustable-rate first mortgages must be secured by owner-occupied principal residences or second homes.

Second Home

• A second home is a property that is located within a reasonable distance from the borrower's principal residence and which the borrower occupies for some portion of the year.
• We limit our purchase of mortgages that are secured by second homes to those properties that have one dwelling unit.
• The property must be suitable for year-round occupancy (and can, in fact, be occupied by someone other than the borrower -- as long as the occupancy is not under a timeshare arrangement).
• The borrower must have exclusive control over the property; therefore, he or she must not enter into any rental agreements that require the property to be rented or give a management firm control over the occupancy of the property.

Investment Property

• A one- to four-family property that the borrower does not occupy. This definition is used whether or not the property produces revenue.
• Generally, any mortgage may be secured by an investment property, although we may sometimes limit the number of dwelling units that the security property may have.
• Refer to specific mortgage product for any restrictions.

non-purchasing spouse

• When a married applicant qualifies for a mortgage based on his or her own financial capacity (without any assets or income of his or her spouse being taken into consideration), the spouse does not need to sign the mortgage or deed of trust note.
• However, we require the spouse to sign the security instrument or any other documentation required to evidence that the spouse is relinquishing all rights to the property, if the spouse's signature is necessary (under applicable state law) to waive any marital property right he or she has by virtue of being the applicant's spouse.

Credit Requirements

Credit Reports

• We require the lender to obtain a written credit report for each borrower on the loan application who has an individual credit record.
• The credit report must be based on data provided by the following national credit repositories -- Equifax, Experian, or TransUnion.
• The credit report may be prepared by an independent consumer credit reporting agency or one of the national credit repositories.
• Acceptable formats for these traditional credit reports include an "in-file" credit report, an automated "merged" credit report, and a residential mortgage credit report.
• The lender may substitute three "in-file" credit reports or a "merged" report that electronically combines the information from three "in-file" reports, if the mortgage has a loan-to-value ratio of 70% or less and is not subject to subordinate financing and the property is an owner-occupied principal residence or second home.
• When a borrower does not have the type of credit that is traditionally reported to a credit repository, we will accept a nontraditional mortgage credit report (or, in some instances, a combination of written credit references or bank account statements).
• A traditional credit report must include both credit and public record information for each locality in which the borrower has resided during the most recent two-year period. (If the lender relies on a credit report from a foreign country to document a borrower's credit history, the credit report either must be completed in English or include an English translation, and must satisfy the same basic standards for authenticity, accuracy, and completeness that we apply to other credit reports.)
• The credit report must include all discovered credit and legal information that is not considered obsolete under the Fair Credit Reporting Act. Although the Fair Credit Reporting Act currently specifies that credit information is not considered obsolete until after seven years and bankruptcy information, after ten years, we require only a seven-year history to be reviewed for all credit and public record information.

• When co-borrowers have individually obtained credit, separate repository inquiries are necessary.
• The results of both reports may be combined in one residential mortgage credit report if the report clearly indicates that this has been done.
• Refer to online manual for complete eligibility criteria.

credit history

Determining an Established Credit History

• Because borrower credit histories are presented in a relatively complex way -- the number of accounts; the different types of accounts; variations in the use of credit; the incidence, seriousness, and age of delinquencies, etc. -- it is sometimes difficult to determine whether a given credit history is acceptable or unacceptable, a strength or a weakness.
• It is the borrower's overall credit management skill -- including repayment patterns, credit utilization, and level of experience in using credit, not solely the existence of delinquent credit accounts -- that has an effect on the eventual default risk of a mortgage.
• Therefore, the lender needs to understand the complete credit history for each borrower listed on the mortgage application, which can only be accomplished through an analysis of the borrower's established credit history.
• The extent of this analysis can vary based on whether the lender uses credit scores, a traditional credit history, or a nontraditional credit history to assess credit risk.
• When a lender uses credit scores to assess credit risk, the borrower's established credit history needs to consist only of the amount of credit that is sufficient to produce a credit score.
• As long as the borrower's credit file includes complete and accurate information to assure the validity of the credit score, the lender does not need to further evaluate the borrower creditworthiness..
• When a lender uses a traditional credit history to assess credit risk, the borrower's established credit history needs to consist of a minimum of three accounts that have been in existence for at least 12 months.
• The borrower's credit history may be documented by any of the types of traditional credit reports that we consider acceptable.
• When a lender uses a nontraditional credit history to assess credit risk, the borrower's established credit history needs to consist of a minimum of four different reference sources (or three sources, if the borrower's rent covers utility payments) that have at least a 12-month history.
• The borrower's credit history may be documented by a nontraditional mortgage credit report or one of the other acceptable alternative credit verifications.
• A borrower who has experienced credit or financial management problems in the past may have elected to participate in consumer counseling sessions to learn how to correct or avoid such problems in the future.
• Whether the borrower has or has not completed his or her participation in the sessions before closing on the mortgage transaction is not relevant since it is the borrower's credit history that is of primary importance.
• If the lender is able to obtain a credit score for the borrower, it does not have to evaluate the borrower's credit any further. However, if the lender is not able to obtain a credit score, it must evaluate the borrower's credit in accordance using Traditional Credit History to Categorize Risk (see below).

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Explanation of Credit Scores

• Credit scores, which are developed by using statistical methods to evaluate information that has proven to be predictive of loan performance, are numerical values that rank individuals according to their credit risk at a given point in time.
• Although many types of credit scoring models exist, we recommend that a lender use the classic FICO credit score developed by Fair, Isaac and Company, Inc. to manually underwrite a mortgage since it is not only the one most commonly used in the industry, but also is the one on which our comprehensive risk assessment approach to manual underwriting is based. (NOTE: A lender that is interested in using an alternative credit scoring model should contact its lead Fannie Mae regional office.)
• Fannie Mae is recommending that lenders contact their sources for classic FICO scores and make arrangements to underwrite mortgages using, and to report, only FICO scores derived from the most current version of each credit repository's classic FICO score. Doing so, we believe, improves the integrity of credit risk assessment and management.
• A classic FICO credit score can be obtained from the three major credit repositories -- Equifax, Experian, and TransUnion.
• The credit score "rank-orders" applicants according to the likelihood that they will default in the future, with higher scores being indicative of a lower default risk and lower scores being indicative of a greater default risk
• Although a credit score cannot predict which individuals will default or what percentage of borrowers will ultimately default, this "rank-ordering" of the relative risk of default holds true -- that is, after a sufficient period of time, borrowers who have higher credit scores will as a group have fewer defaults than those who have lower credit scores.
• As a quantitative measurement of risk, credit scores enable an underwriter to process mortgage applications more accurately and quickly, and with a greater degree of confidence.
• Not only can the use of credit scores speed up the approval process for a borrower who represents a low credit risk, but it can also benefit a higher-risk borrower by giving the underwriter more time to focus on, and better analyze, the totality of the borrower's creditworthiness.
• This improves the underwriter's ability to make a final decision on whether to approve or disapprove an application based on the proper combination of judgment and quantifiable data.

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Use of Credit Scores in Categorizing Risk

Credit scores can assist in quantifying the strength or weakness of a borrower's credit risk in an empirically sound way, thus enabling an underwriter to base his or her subjective decision about a borrower's credit-worthiness on more quantifiable measures.

• This leads to a better assessment of the unique aspects of each borrower since the underwriter will be able to offset weaknesses identified in a given mortgage application by the borrower's quantifiable strengths.

• For this reason, FNMA expects a lender that manually underwrites the mortgages it delivers to FNMA to attempt to obtain a credit score for each borrower applying for credit.
• However, the lender may use other methods of assessing the borrower's credit history if it is unable to obtain a credit score because the borrower does not have sufficient credit to enable the development of a credit score or does not use the type of credit that is reported to credit repositories -- or if it obtains a credit score that is invalid because of erroneous information in the borrower's credit records. (The lender must obtain a credit score when it wants to offer a borrower financing using some of our mortgage products or when it wants to use our Enhanced Eligibility Criteria for approving a mortgage.)

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minimum credit score

• We expect a lender that manually underwrites the mortgages it delivers to us to attempt to obtain a credit score for each borrower applying for credit.
• The lender must obtain a credit score when it wants to offer a borrower financing using some of our mortgage products or when it wants to use our Enhanced Eligibility Criteria for approving a mortgage.
• FNMA does not state any specific minimum requirements for Standard Eligibility.
• Refer to Enhanced Eligibility criteria for additional credit score requirements.
• Refer to Specific Product programs for credit score requirements and,
• Refer to Trailing Spouse Income, Rental Income, Subordinate Financing and Temporary interest rate buydown sections in each specific product description for  credit score requirements.
• However, the lender may use other methods of assessing the borrower's credit history:
  • if it is unable to obtain a credit score because the borrower does not have sufficient credit to enable the development of a credit score or
  • if it is unable to obtain credit score because the borrower  does not use the type of credit that is reported to credit repositories- or,
  • if it obtains a credit score that is invalid because of erroneous information in the borrower's credit records.

Approximation of Credit Score

To assist lenders in reaching its credit score approximation, we have developed the following credit profile that a lender can consider as being comparable to the credit score in the mid-600 range for underwriting purposes:

• A minimum of four trade lines comprised of both installment and revolving accounts that have been active for at least 24 months-but no more than nine tradelines,
• No history of major delinquency (such as delinquencies of 60,90 or more days);
• No public records information (including bankruptcies, judgments or liens that could affect the priority of the mortgage lien), foreclosures or collections and charged-off accounts,
• No history of delinquency on mortgage payments or rental housing payments,
• No delinquency on revolving debt in the past 12 months, and no more that one revolving account that was 30 days past due in the last 24 months,
• No delinquency on installment debt in the last 24 months and,
• A total balance-to-limit ratio of 50% or less.

Note: A lender should use this approach to evaluating a borrowers credit history only when it is unable to obtain a valid credit score because of erroneous credit data )including instances in which it is still unable to obtain a valid score after correction of the erroneous data) or because of the presence of extenuating circumstance.

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Representative credit score

• Credit scores are based on a single credit file for the borrower that is obtained from one of the three major credit repositories:
  • Equifax
  • Experian
  • Transunion
• The lower of two scores to be used.
• Middle score of three is to be used.
• When there are multiple borrowers, the lenders should determine the single applicable credit score for each individual borrower and then select the lowest applicable score from the group as the "representative "credit score for the mortgage.

 

Minimum Credit Scores - Cash-Out Refinances

Property Type	LTV's	Minimum Credit Score
1-2 Units Primary or Second Home	< 70% LTV 70.01 - 75% 75.01 - 80% 80.01 - 85%	none 720 720 720
3-4 Units Primary	< 70% LTV 70.01 - 75%	none 720
1-2 Units Investment	< 70% 70.01 - 75% 75.01 - 80% 80.01 - 85%	none 720 720 720
3-4 Units Investment	< 70%	none

Using Traditional Credit History to Categorize Risk

• When a lender is unable to obtain a credit score for all of the borrowers on the mortgage application -- or obtains an invalid credit score (as the result of missing or inaccurate information) and needs to make a final underwriting decision before a corrected credit score can be obtained -- it must evaluate the information in the borrowers' credit reports and categorize the results of its evaluation by assigning an approximate credit score range to the mortgage application.
• The lender's evaluation must assess the risk of the following key credit history characteristics that the credit scoring models use in assigning a credit score -- number and age of accounts, payment history, credit utilization, and recent attempts to obtain new credit. The lender must evaluate the characteristics in combination with one another, not in isolation.
• Guidance on evaluating each of the characteristics is included in the following:

Number and Age of Accounts

• The lender must review the borrower's credit report to determine whether he or she has an older established credit history or a newly established credit history, and whether there are a significant number of recently opened accounts or a mix of new accounts and older accounts.
• Credit histories that include older, established accounts generally represent lower credit risk. However, an older, established credit history that includes a significant number of recently opened accounts may indicate that the borrower is overextended, and thus will represent a higher credit risk.
• A newly established credit history does not automatically represent a higher credit risk, since making payments as agreed on newly opened accounts represents less of a risk than not making payments as agreed on older, established accounts.

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Credit Utilization

• FNMA will accept a Land Trust as the Borrower in some states if the Beneficiary is an individual.
• Lender should contact our regional office to determine the acceptability of a Land Trust as a borrower.

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Recent Attempts to Obtain New Credit

• The lender must review the section of the borrower's credit report that indicates the presence of creditor inquiries to determine the number and the recentcy of the inquiries.
• Recent inquiries may indicate that the borrower has been actively seeking new credit accounts.
• The presence of a large number of unrelated inquiries represents higher credit risk (whether or not the borrower actually obtained credit as a result of the inquiry).
• The presence of many recent inquiries in combination with a significant number of recently opened accounts or delinquent accounts represents a high credit risk.
• When the credit report indicates that recent inquiries took place, the lender must confirm that the borrower has not obtained any additional credit that is not reflected in the credit report or the mortgage application.

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Payment History

• The lender must review the borrower's credit report to determine the current status of each credit account (including mortgage accounts), the timeliness of payments, and the frequency, recentcy, and the severity of any delinquent payments.
• On the date of the loan application, the borrower's existing mortgage must be current (which means that no more than 45 days may have elapsed since the last paid installment date). (If the credit report does not include the mortgage payment history for the previous 12 months or longer, the lender should also review the previous mortgage payment history that was provided by mortgage servicer.)
• Credit histories that include no late payments, collection or charged-off accounts, foreclosures, deeds-in-lieu, bankruptcies, or other public records information represent a lower credit risk.
• Credit histories that include recent late payments represent a higher credit risk than those with late payments that occurred more than 24 months ago. When there are payments that were 30-, 60-, or 90-days (or longer) past due, the lender must determine whether the late payments represent isolated incidences or frequent occurrences.
• Delinquent payments must be evaluated in the context of the borrower's overall credit history, including the number and age of accounts, credit utilization, and recent attempts to obtain new credit. For example, a credit history that includes delinquent payments along with recent inquiries and a high balances-to-limits ratio indicates a high credit risk.
• The lender generally does not need to include in the individual underwriting file any other documentation that it obtains to explain derogatory information in the borrower's credit file.
• However, if the borrower claims that the derogatory information is the result of extenuating circumstances, the lender should retain not only the documentation that supports the borrower's claim, but also a letter from the borrower explaining the relevance of the documentation.

Extenuating Circumstances

• Extenuating circumstances are nonrecurring events that are beyond the borrower's control, and result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
• Documentation provided to support claims of extenuating circumstances should confirm the nature of the event that led to the bankruptcy or foreclosure-related action and illustrate that the borrower had no reasonable options other than to default on his or her financial obligations.
• Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower's inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.
• When the borrower's credit history includes significant derogatory information, the lender must confirm that the borrower has reestablished an acceptable credit history and that sufficient time has elapsed since the date of the last derogatory information.

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Mortgage History

• To substantiate the borrower's payment history on previous mortgages, the lender may accept any of the following:
  • the borrower's canceled checks for the last 12 months;
  • a credit report reference covering at least the previous 12 months' activity;
  • a standard mortgage verification or loan payment history from the mortgage servicer;
  • or the borrower's year-end mortgage account statement (provided it includes a payment receipt history), supplemented by the borrower's canceled checks for the months that have elapsed since the statement was issued.
  • The borrower's canceled checks must be legible, identify the mortgage servicer (or mortgage holder) as the payee, and indicate that the mortgage servicer or holder endorsed the check for deposit and the date of that endorsement.

• If the lender uses a credit report reference, the report must cover at least the previous 12 months' activity. If it does not, the lender must use one of the other sources to substantiate the borrower's payment history.

Alternative credit

• Lenders must develop a credit history for borrowers who normally do not use credit or do not have the type of credit history that will appear on a credit report.
• Credit histories can be developed from rent verifications from the current and previous landlords, verifications of utility payments and telephone bills, verifications of personal property tax payments, or verifications from other sources of credit or services for which the borrower has (or had) a regular financial obligation.

• Although we prefer that a lender use the nontraditional mortgage credit report for a borrower who does not have the types of credit that would appear on a traditional credit report (or who has an insufficient number of credit references to develop a traditional credit report), we will permit the lender to develop a nontraditional credit history by using a combination of individual written credit references provided directly by the creditors and the borrower's bank statements.
  • The lender can request individual written credit references directly from the borrower's creditors.
  • The references must include the creditor's name, the name of the individual providing the reference, the date the account was opened, the amount of highest credit, the current status of the account, the required payment amount, the unpaid balance, and the payment history.
  • The historical status of the account must be stated in a "number of times past due" format -- using "0 X 30, 0 X 60, 0 X 90" days late. Vague statements such as "current," "satisfactory," or "pays as agreed" are not acceptable by themselves. As long as there is supporting documentation that describes the terms of the debt repayment or contract, the lender can use 12 consecutive months of the borrower's canceled checks or copies of bills marked "paid" to reflect the timeliness of the borrower's payment history.
  • The withdrawals and debits on the borrower's bank statements can provide a secondary confirmation of a borrower's payment of obligations. Although bank statements do not provide sufficient information to be used as a primary verification of a borrower's payment of his or her debts, they can be used to validate information reported by other sources.

Non-Traditional Mortgage Credit Report

• If a borrower does not have the types of credit that would appear on a traditional credit report (or if the borrower has an insufficient number of credit references to develop a traditional credit report), the lender may use a nontraditional mortgage credit report that is developed by a consumer reporting agency according to the requirements in Part X, Section 103.04 of the Selling Guide.
• We also permit the lender to develop a nontraditional credit history by using a combination of individual written credit references provided directly by the creditors per the requirements in Part X, Section 103.05 of the Selling Guide.
• We understand that some people with disabilities may have a court-appointed guardian or Social Security Administration (SSA) representative payee who manages their financial transactions and maintains records on their behalf, and that some credit accounts may be held jointly in the name of the person with disabilities and the court-appointed guardian or SSA representative  payee.
• When that is the case for a borrower with disabilities and that borrower does not use the type of credit that would appear in a traditional credit report, it is acceptable for the lender to use the documentation presented by the court-appointed guardian of SSA representative payee to either request from a consumer reporting agency a nontraditional credit report or to establish a nontraditional credit history for the borrower in accordance with the criteria presented in Part X, Section 103.05 of the Selling Guide.
• The lender must evaluate the credit history it  obtains from the credit reporting agency or that it develops using alternative credit verifications under the same standards it used to evaluate a traditional credit history.
• Furthermore, a lender must not use a nontraditional mortgage credit report as a means for offsetting derogatory references (such as late payments, collection accounts, or judgments) found in a borrower's traditional credit history; for enhancing the credit of a borrower who has a poor credit history with the traditional providers of credit; or for artificially creating a credit report for a borrower who has no credit history.
• When taking a mortgage application, the lender should inform the borrower that a nontraditional mortgage credit report may be developed if the information obtained through the standard credit report is not sufficient for the lender to make its underwriting decision.
• The lender must use its own judgment in determining whether the references on the standard credit report are sufficient for it to make an underwriting decision without ordering a nontraditional mortgage credit report.
• When a lender requests a consumer reporting agency to develop a nontraditional mortgage credit report, the agency should first verify that all three of the major credit repositories were checked in the initial attempt to verify the borrower's credit history -- and, if they were -- the consumer reporting agency should conduct an informational interview with the borrower to identify all of the different sources from which he or she obtained credit in one form or another over the most recent past.
• If the lender obtained a listing of the borrower's different nontraditional credit sources when the mortgage application was completed, the consumer reporting agency does not need to conduct this interview, rather it should immediately contact the individual credit providers to independently verify the borrower's payment histories.
• In developing a nontraditional mortgage credit report, the consumer reporting agency should consider only the types of credit that require the borrower to make periodic payments on a regular basis. The payment schedule must call for payments at intervals that are no longer than every three months. The types of credit that can be used to develop a nontraditional mortgage credit report can be categorized into three different tiers, which are ranked numerically by their order of importance:
  • Tier I credit includes payments for rental housing, payments for utilities (if they are not included in the rental housing payment) -- electricity, gas, and water; payments for telephone service; and payments for cable television service. (If the credit reporting agency is able to verify the borrower's payment history for rental housing, it should specify in the report whether the verification was obtained from a professional management company or an individual landlord.)
  • Tier II credit includes payments for medical insurance coverage (excluding payroll deductions), payments for automobile insurance, payments for life insurance policies (excluding payroll deductions), and payments for household (or renter's) insurance.
  • Tier III credit includes payments to local stores -- department stores, furniture stores, appliance stores, specialty stores, etc.; rental payments related to durable goods (including automobiles); payments for medical bills; payments for school tuition; payments for child care; and payments on a loan obtained from an individual (if the repayment terms are documented in a written agreement and the borrower can provide copies of canceled checks to indicate that the payments are of a continuing nature).
• The consumer reporting agency must verify the information provided by the borrower with each of the credit providers and make a determination of whether the information is sufficient to justify its inclusion in a nontraditional mortgage credit report.
• In doing this, the consumer reporting agency should first contact any sources provided for the Tier I credit. If the consumer reporting agency is able to obtain a 12-month payment history for enough of the Tier I credit to develop a credit report that covers at least four sources of credit -- either from the Tier I credit providers by themselves or from a combination of the Tier I credit providers and the sources identified in the borrower's traditional credit report -- the agency does not need to verify the Tier II and Tier III credit before developing a nontraditional mortgage credit report. (All credit references must be included, not just those that reflect acceptable performance.) However, if fewer than four sources of credit have been identified at this point, the consumer reporting agency should contact the sources for the Tier II credit (and, if necessary, for the Tier III credit) until it is able to prepare a nontraditional mortgage credit report that includes a credit history that is developed by using from four to six sources of credit (regardless of whether the comments are positive or derogatory).
• The consumer reporting agency should pass on to the lender all of the information that it was able to collect after it contacted all of the credit references the borrower provided, specifying in the report whether or not it meets the criteria for a nontraditional mortgage credit report (which is generally a credit history from at least four sources, although three sources will be acceptable if the borrower's rent includes utility payments).
• If a nonpermanent resident alien borrower does not have enough tradeline references in the United States to satisfy our requirements, the lender may use credit references from a foreign country to achieve the required number of seasoned credit references.
• Information on a nontraditional mortgage credit report should be formatted similarly to the way information is presented on a traditional credit report.
  • For each debt, the report should include the creditor's name, the date the account was opened, the amount of the highest credit, the current status of the account, the required payment amount, the unpaid balance, and a payment history.
  • The report should list the historical status of the account in a "number of payments past due" format, reporting on three separate delinquency categories (30 days, 60 days, and 90+ days) by indicating "0 X 30," "0 X 60," etc.
• A mortgaged obtained by a borrower who does not have traditional credit record tends to perform similarly to a mortgage made to a borrower who has a credit score in the low 600 range.
• To assist lenders in reaching a credit score approximation, we have developed the following a credit profile of a mortgage that has a "representative "credit score in the lower 600 range for underwriting purpose:
  • a minimum of four sources of nontraditional credit that have been active for at least 12 months-or,Rental Housing payment that includes utilities, a minimum of three sources of nontraditional credit
  • Two of the sources must represent the providers of Tier I credit with one source being party to whom the borrowers makes payments for rental housing. The remainder source)s) may represent the providers of either Tier II or Tier III credit.
  • No history of delinquency on rental housing payments and,
  • No more that one 30-day delinquency on the payments due to one of the other sources.
  • Note: A lender should use this approach to evaluating a borrowers credit history only when it is unable to obtain a valid credit score because the borrower does not have the type or number of credit references needed to develop a traditional credit report.

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age of report

• Credit documents must be no more than 120 days old on the date the note is signed.
• However, if the property is new construction, the documents may be up to 180 days old. When the age of the documents is greater than that we allow, the lender must obtain updated written verifications.

business credit reports

As per the Underwriters discretion.

Qualifying Information

• Our emphasis is on the total debt-to-income ratio (which consists of two components-monthly housing expense and the total of the other monthly obligations).

• Although, we have established a benchmark qualifying debt-to-income ratio, we recognize that often there are legitimate reasons for exceeding this guideline.
• Therefore, a lender may use a ratio that is higher than our benchmark guideline, as long as its assessment of the comprehensive risk for the mortgage identifies and documents factors that justify the higher ratio.
• Our benchmark debt-to-income ratio is 36% of the borrower's stable monthly income.
• However, we may occasionally specify a maximum allowable debt-to-income ratio for a particular mortgage product.
• In addition, when the income from more than one borrower is used to qualify for a mortgage (and not all of the borrowers will occupy the property), we require:
  • the owner-occupant borrower(s) to satisfy an additional debt-to-income ratio -- even if the combined incomes and debts of all of the borrowers result in a debt-to-income ratio of 36% or less. In this case, the owner-occupant borrower(s) should have a debt-to-income ratio of 43% or less, after excluding the income(s) and debt(s) for the non-occupying borrower(s).

bankruptcy

• Credit histories that include bankruptcies represent a higher credit risk. The greater the number of such incidences and the more recently they occurred, the higher the credit risk.
• However, this does not mean that the borrower's credit will not be acceptable, rather it is an indication that -- before making a final decision about the acceptability of the borrower's credit history -- the lender needs to determine the cause and significance of the derogatory information, verify that sufficient time has elapsed (based on the type of derogatory information), and confirm that the borrower has since reestablished an acceptable credit history.
• The lender should request the borrower to provide a copy of the applicable bankruptcy documents (to confirm the bankruptcy discharge date and identify any debts that are not satisfied by the bankruptcy).
• The borrower must have paid off any debts that are not satisfied by the bankruptcy, or must have an acceptable repayment schedule established for them.
• We generally require four years to elapse before we will consider the borrower to have a reestablished credit history.
• We will, however, consider two years as an acceptable interval for reestablishing a credit history when the derogatory information in the borrower's credit record resulted from documented extenuating circumstances or when the derogatory information relates to a Chapter 13 bankruptcy (regardless of the reasons that contributed to the bankruptcy).
• Elapsed time is measured by comparing the date of a new mortgage application to the date that (1) a Chapter 7 or 11 bankruptcy was discharged, (2) a Chapter 13 bankruptcy repayment plan was successfully completed and the bankruptcy discharged, (3) a foreclosure sale was held, (4) a deed-in-lieu was executed, or (5) an issue related to any other significant derogatory information was resolved.
• When a borrower's previous credit history included a bankruptcy all of the accounts in the borrower's credit report must be current as of the date of the mortgage application.
• In addition, the borrower's credit record under the reestablished credit history must include:
  • a minimum of four credit references, with at least one of the references being a traditional credit reference and one of the references being housing-related. (Housing-related references should cover the period following the bankruptcy discharge, foreclosure, or deed-in-lieu and can be in the form of mortgage payments or rental payments. If rental payments were not reported to the credit repositories, the borrower must provide copies of bank statements, money orders, or canceled checks for the most recent 12-month period as a supplement to the rent verification.) Three of the four credit references (including any rental housing reference) must have been active in the 24 months preceding the date of the mortgage application;
  • no more than two installments or revolving debt payments that were 30 days past due in the last 24 months;
  • no installment or revolving debt payments 60 or more days past due since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action;
  • no housing debt payments past due since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action; and
  • no new public records for bankruptcies, foreclosures, deeds-in-lieu, pre-foreclosure sales, unpaid judgments or collections, garnishments, liens, etc., since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action.

• A shorter elapsed time -- but not less than 12 months -- is justified if the lender is able to document that extraordinary circumstances caused the bankruptcy (such as an extended illness that was not covered by health insurance) and that the borrower's current situation is such that the events that led to the bankruptcy are not likely to recur.
• In all cases, the lender must have sufficient documentation to support its decision that the borrower is creditworthy.

foreclosure

• Credit histories that include foreclosures, deeds-in-lieu represent a higher credit risk. The greater the number of such incidences and the more recently they occurred, the higher the credit risk.
• However, this does not mean that the borrower's credit will not be acceptable, rather it is an indication that -- before making a final decision about the acceptability of the borrower's credit history -- the lender needs to determine the cause and significance of the derogatory information, verify that sufficient time has elapsed (based on the type of derogatory information), and confirm that the borrower has since reestablished an acceptable credit history.
• The lender should request the borrower to provide a copy of appropriate documentation to establish the date of a previous foreclosure or deed-in-lieu

• Generally, FNMA will not purchase or securitize a mortgage if the borrower(s) has been a defendant in mortgage foreclosure proceedings that were completed in the past three years.
• We generally require four years to elapse before we will consider the borrower to have a reestablished credit history.
• We will, however, consider two years as an acceptable interval for reestablishing a credit history when the derogatory information in the borrower's credit record resulted from documented extenuating circumstances that were beyond the control of an owner-occupant borrower -- such as a serious, long-term illness; death of the principal wage-earner; or loss of employment because of factory slowdowns or shutdowns, reductions-in-force, etc. -- we will purchase or securitize the mortgage as long as the lender's underwriting confirms that the borrower has reestablished good credit and has demonstrated an ability to manage financial affairs.
• Elapsed time is measured by comparing the date of a new mortgage application to the date that  a foreclosure sale was held,or a deed-in-lieu was executed.
• When a borrower's previous credit history included a  foreclosure-related action, all of the accounts in the borrower's credit report must be current as of the date of the mortgage application.
• In addition, the borrower's credit record under the reestablished credit history must include:
  • a minimum of four credit references, with at least one of the references being a traditional credit reference and one of the references being housing-related. (Housing-related references should cover the period following the bankruptcy discharge, foreclosure, or deed-in-lieu and can be in the form of mortgage payments or rental payments. If rental payments were not reported to the credit repositories, the borrower must provide copies of bank statements, money orders, or canceled checks for the most recent 12-month period as a supplement to the rent verification.) Three of the four credit references (including any rental housing reference) must have been active in the 24 months preceding the date of the mortgage application;
  • no more than two installments or revolving debt payments that were 30 days past due in the last 24 months;
  • no installment or revolving debt payments 60 or more days past due since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action;
  • no housing debt payments past due since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action; and
  • ) no new public records for bankruptcies, foreclosures, deeds-in-lieu, pre-foreclosure sales, unpaid judgments or collections, garnishments, liens, etc., since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action.
• A shorter elapsed time -- but not less than 12 months -- may be justified if extraordinary circumstances (such as death or long-term illness) led to the foreclosure. This exception for previous mortgage foreclosures does not apply if the borrower used the property that was foreclosed on as a second home or for investment purposes.

judgments/collection/tax liens/adverse credit

• Credit histories that include public records information (such as judgments, and liens) represent a higher credit risk. The greater the number of such incidences and the more recently they occurred, the higher the credit risk.
• However, this does not mean that the borrower's credit will not be acceptable, rather it is an indication that -- before making a final decision about the acceptability of the borrower's credit history -- the lender needs to determine the cause and significance of the derogatory information, verify that sufficient time has elapsed (based on the type of derogatory information), and confirm that the borrower has since reestablished an acceptable credit history.
• Refer to online manual for complete eligibility criteria.

LIABILITIES

• A borrower may have several types of liabilities-some involving debts that  need to be paid off at) (or prior to ) loan closing, some that are contingent on the occurrence (or non-occurrence) of a particular event or action and others that represent either short-term or long-tern recurring monthly obligations. liabilities include all installment loans, revolving charge accounts, real estate loans, stock pledges, alimony, child support, and all other debts of a continuing nature.
• For each liability, the lender must determine the unpaid balance, terms, and the borrower's payment history. Generally, credit reports that provide this information meet our requirements.

Non-reimbursed employee expenses

• When a borrower has non-reimbursed business expenses such as classroom supplies, uniforms, meals, gasoline, automobile insurance and/or automobile taxes, the lender must determine the borrower's recurring monthly obligation for such expenses by developing a 24-month average of the expenses, using information from the borrower's U.S. Income Tax Return (IRS Form 1040) including all schedules (Schedule A (Itemized Deductions) and IRS Form 2106 (Employee Business Expenses)) and net out any automobile depreciation claimed on IRS Form 2106.
• Consequently, 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, unless such expenses are automobile lease payments or automobile loan payments, in which case they are to be considered part of the borrower's recurring monthly debt obligations.

payoff debt to qualify

• Generally, we believe the borrower should make the decision on whether or not to pay off or pay down debt in connection with a loan application.
• However, we discourage the pay off or pay down of debt for the sole purpose of improving a borrower's qualifying ratio.
• On the other hand, there are a few liabilities that we expect the borrower to pay off at (or prior to) closing.

Revolving Debt

• We generally do not require that open 30-day charge accounts that are listed with unpaid balances on the borrower's loan application be paid off at (or prior to) closing.
• However, if a borrower is unable to demonstrate that he or she either has sufficient assets to cover the unpaid balance or will receive reimbursement of the charges from his or her employer, the account must be paid-off at (or prior to) closing.

Collections, charge offs, judgments, garnishments, and liens.

• We generally require that the borrower pay off at (or prior to) closing all delinquent credit -- including delinquent taxes, judgments, charged-off accounts, tax liens, and mechanics' or materialmen's liens -- that has the potential to affect our lien position or diminish the borrower's equity.
• However, we do not require that a collection account or a charged-off account be paid off at (or prior to) closing if the balance of an individual account is less than $250 or if the total balance of such accounts is $1,000 or less.
• Furthermore, when a borrower who has a strong credit profile and meaningful financial reserves has collection accounts or charged-off accounts with balances that exceed these limits, we will not require the accounts to be paid off at (or prior to) closing if the lender is able to substantiate that the accounts pose no threat to our first mortgage lien and are not likely to affect the borrower's equity position.

Contingent Liabilities

A contingent liability is one that may or may not have to be paid. Not all contingent liabilities will have to be taken into consideration when determining the amount of a borrower's recurring monthly debt obligations.

Guidance on the most common types of contingent liabilities is provided below.

Cosigned Loan

• When a borrower cosigns for a loan to enable another party (the primary obligor) to obtain credit -- but is not the party who is actually repaying the debt -- the borrower has a contingent liability.
• We will not require that this contingent liability be considered as part of the borrower's recurring monthly debt obligations -- as long as the lender can verify a history of documented payments on the cosigned debt by the primary obligor and ascertain that there is not a history of delinquent payments for that debt (since this could be an indication that the cosigner might have to assume the obligation at some point in the future).
• Generally, the primary obligor should have been making payments on the debt for at least 12 months (although shorter payment histories may be considered on a case-by-case basis).
• If payment by the primary obligor cannot be sufficiently documented, a sufficient payment history has not been established for the debt, or the primary obligor has a history of being delinquent in making payments on the debt, we expect the lender to count the contingent liability as part of the borrower's recurring monthly debt obligations.

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Property Settlement "Buyout"

• When a borrower's interest in a property is "bought-out" by another co-owner of the property (as often happens in a divorce settlement), but the lender does not release the borrower from liability under the mortgage, the borrower has a contingent liability.
• We will not require that this contingent liability be considered as part of the borrower's recurring monthly debt obligations -- as long as the lender obtains documentation to confirm the transfer of title to the property

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Mortgage Assumption

• When a borrower sells a mortgage property that he or she owns and the property purchaser assumes the outstanding mortgage debt without a release of liability, the borrower has a contingent liability.
• We will not require that this contingent liability be considered as part of the borrower's recurring monthly debt obligations.
• However, we do require the lender to verify that the property purchaser has at least a 12-month history of making regular, timely payments for the mortgage. (The lender can document this by obtaining evidence of the transfer of ownership; a copy of the formal, executed assumption agreement; and a credit report indicating that consistent and timely payments were made for the assumed mortgage.)
• If the lender is unable to document timely payments during the most recent 12-month period, it must count the applicable mortgage payment as part of the borrower's recurring monthly debt obligations

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Court-Ordered Assignment of Debt

• When a borrower has an outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. (The lender can confirm this information by obtaining evidence of the transfer of ownership, if applicable and a copy of the applicable pages from the court order.)
• We will not require that this contingent liability be considered as part of the borrower's recurring monthly debt obligations.
• Although we do not require the lender to evaluate the payment history for the assigned debt after the effective date of the assignment, the lender should not disregard the borrower's payment history for the debt before its assignment

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Bridge (or Swing) Loan

• When a borrower obtains a bridge (or swing) loan that is collateralized by his or her present home so that the funds from that loan can be used for closing on a new home before the present home is sold, the borrower has a contingent liability.
• We will not require that this contingent liability -- or the payments on the borrower's existing home -- be considered as part of the borrower's recurring monthly debt obligations -- as long as:
  • the lender obtains a copy of the executed sales contract for the property that is security for the bridge loan and
  • the borrower has financial reserves equal to six months of payments for any outstanding liens against the property, in addition to any other reserves that are otherwise required in connection with the borrower's purchase of the new home.
• If the executed sales contract includes a "financing contingency," the lender must also obtain a copy of the commitment the property purchaser received (and accepted) from the lender that will be providing the financing for that property.

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Loan Secured by Financial Assets

• When a borrower uses his or her financial assets -- life insurance policies, 401(k) accounts, individual retirement accounts, certificates of deposit, stocks, bonds, etc. -- as security for a loan, the borrower has a contingent liability.
• We will not require that this contingent liability be considered as part of the borrower's recurring monthly debt obligations -- as long as the lender obtains a copy of the applicable loan instrument that shows the borrower's financial asset as collateral for the loan.
• If the borrower intends to use the same asset to satisfy a financial reserve requirement, the lender must reduce the value of the asset (the account balance, in most cases) by the proceeds from the secured loan and any related fees to determine whether the borrower has sufficient reserves.

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Other Liabilities

Revolving Charge Accounts

• When the borrower's credit report includes any revolving charge account with an outstanding balance that suggests that ten or more payments remain to be paid, the lender must always consider the payment on the account as part of the borrower's recurring monthly debt obligations, even if the loan application indicates that the debt will be paid off at (or prior to) loan closing.
• Revolving debt with ten or fewer monthly payments remaining may also be considered as a recurring debt obligation if it significantly affects the borrower's ability to meet his or her credit obligations. If the credit report does not show a required minimum payment amount, the lender should use an amount equal to 5% of the outstanding balance.

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Installment Debt

• Generally, all installment debt that is not secured by a financial asset -- including student loans, automobile loans, and home equity loans -- should be considered as part of the borrower's recurring monthly debt obligations only if there are more than ten monthly payments remaining to be paid on the account.
• However, an installment debt with ten or fewer monthly payments remaining should also be considered as a recurring monthly debt obligation if it significantly affects the borrower's ability to meet his or her credit obligations.

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Deferred Installment Debt

• Such as student loans and loans in forbearance -- must also be included as part of the borrower's recurring monthly debt obligations.
• If the borrower's credit report does not indicate the monthly payment that will be payable at the end of the deferment period, the lender should request a copy of the borrower's payment letter or forbearance agreement so that it can determine what payment amount to use in calculating the borrower's total monthly obligations.

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Undisclosed Debt

If the credit report reveals significant debt that the borrower did not disclose on the application, he or she may have been attempting to conceal liabilities in order to qualify for the mortgage. The borrower must provide a written explanation for the omission.

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Lease Payments

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, we require that lease payments always be considered a recurring monthly debt obligation, regardless of the number of months remaining on the lease.

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Payments on Real Estate Mortgages

• When the borrower owns mortgaged real estate (other than investment properties), the full mortgage payment (principal, interest, taxes, and insurance) that the borrower is obligated to pay is considered as part of the borrower's recurring monthly debt obligations.
• There is no need to add the full mortgage payment for an investment property to the borrower's monthly obligations since it is already factored into the net monthly rental income (or loss) amount.

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Home Equity Lines of Credit

• When the mortgage that is being delivered to us also has a home equity line of credit that provides for a monthly payment of principal and interest or interest only, the payment on the home equity line of credit must be considered as part of the borrower's recurring monthly debt obligations.
• If the home equity line of credit does not require a payment, there is no recurring monthly debt obligation so the lender does not need to develop an equivalent payment amount.

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Non-Reimbursed Employee Expenses

• When a borrower has nonreimbursed business expenses, the lender must determine the borrower's recurring monthly debt obligation for such expenses by developing a 24-month average of the expenses, using information from Schedule A (Itemized Deductions) of the borrower's U. S. Income Tax Return (IRS Form 1040) and netting out any automobile depreciation claimed on the Employee Business Expenses (IRS Form 2106).
• If there is not a 24-month history of such expenses, the lender should develop an  annualized monthly average for the expenses and add this calculated amount to the borrower's monthly debt obligations.

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Alimony, Child Support, or Maintenance Payments

• When the borrower is required to pay alimony, child support, or maintenance payments under a divorce decree, separation agreement, or any other written legal agreement -- and those payments must continue to be made for more than ten months -- the lender must consider the payments as part of the borrower's recurring monthly debt obligations.
• However, voluntary payments do not need to be taken into consideration.

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Business Debt in Borrower's Name

• When a self-employed borrower claims that a monthly obligation that appears on his or her personal credit report is being paid by the borrower's business, the lender needs to confirm that it verified that the obligation was actually paid out of company funds and that this was considered in its cash flow analysis of the borrower's business.
• When the account in question does not have a history of delinquency, the business provides acceptable evidence that the obligation was paid out of company funds (such as 12 months of canceled company checks), and the lender's cash flow analysis of the business took payment of the obligation into consideration, the lender does not need to consider the account payment as part of the borrower's individual recurring monthly debt obligations.
• If the business does not provide sufficient evidence that the obligation was paid out of company funds, the lender must consider the account payment as part of the borrower's individual recurring monthly debt obligations.
• If the business provides acceptable evidence of its payment of the obligation, but the lender's cash flow analysis of the business does not reflect any business expense related to the obligation (such as an interest expense -- and taxes and insurance, if applicable -- equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on the credit report and the age of the loan), it is reasonable to assume that the obligation has not been accounted for in the cash flow analysis. When that is the case, the lender must consider the account payment as part of the borrower's individual recurring monthly debt obligations.
• When the account in question has a history of delinquency, the lender must consider the full monthly obligation as part of the borrower's individual recurring monthly debt obligations. (To assure that the obligation is counted only once, the lender should adjust the net income of the business by the amount of interest, taxes, or insurance expense, if any, that relates to the account in question.)

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Income Requirements

acceptable income

• Salaried
• Commission
• Over Time
• Bonus
• Part-Time,Second-Job or Multiple-Jobs
• Seasonal Job
• Military Income
• Retirement or Pension Income
• Social Security Income
• Alimony or Child Support
• Notes Receivable
• Mortgage Differential Payments
• Trust Income
• Capital gains
• Royalty Payments
• VA Benefits
• Disability Benefits
• Unemployment Benefits
• Public Assistance Income
• Automobile Allowance
• Foster-Care Income
• Boarder Income
• Non-Occupying Co-Borrower's Income
• Mortgage Credit Certificates
• Rental income
• Trailing Secondary Wage Earner's Anticipated Income

unacceptable income

Income received from any source that is not verifiable, stable, predictable or likely to continue in the foreseeable future, is not acceptable.

employment history

• A borrower must have a history of receiving stable income from employment or other sources and a reasonable expectation that the income will continue to be received in the foreseeable future (usually for three years).
• We have no minimum history for a borrower's receipt of income -- as long as the lender can determine that the borrower's income is stable, predictable, and likely to continue. Typically, when a borrower has been generating income for two or more years from either part-time or full-time work with any number of employers, the lender does not need to look at an extended income history for the borrower.
• Rather, the lender may base its underwriting decision on the borrower's current income.
• However, information that will help the lender better understand the nature of the borrower's income, its stability, and likelihood of continuing is not always available from the current paystub alone. That is why we require the lender to obtain two years of documentation for a borrower's employment and income history.
• A lender will need more information about prior earnings for a borrower who has a less predictable source of income-such as commissions, bonuses, substantial amounts of overtime pay, or employment that is subject to time limits (such as a contract employee or a tradesperson) -- to demonstrate the likelihood that at least the same level of income will continue to be received.
• This is also true for a salaried or commissioned borrower who is employed by a family member or by an interested party to the property sale, purchase, or financing transaction. In such cases, we generally require that the borrower have at least a two-year history of the receipt of stable income. (Our requirement for two years of documentation for a borrower's employment and income history assures that the lender will have access to the additional information it needs.)
• A lender may also consider a borrower who has an income history of less than 24 months -- as long as the lender is able to define and document the borrower's income as stable, predictable, and likely to continue.
• Unless there is evidence that the income will no longer be received, the lender should assume that it will continue.

documentation type

Effective on January 01, 2004, the revised Uniform Residential Loan Application will be required for applications

Full/Alt Doc

• To substantiate employment and income for a salaried or commissioned borrower, the lender must obtain confirmation of the borrower's earnings for the current year (including the most recent 30-day period) and, if applicable, earnings over the past two years.
• Although several methods can be used to obtain this information, the source of the original information must be the borrower's employer(s), either through the human resources, personnel, or payroll department, the company's payroll vendor, or the employee's supervisor.
• A lender may verify a salaried borrower's employment and income by any of the following methods (as long as the information provided is complete and legible):
  • A Request for Verification of Employment ( Form 1005 or  1005(S)) that is sent directly to the borrower's employer.
  • Paystubs or payroll earnings statements that cover the borrower's earnings for the most recent 30-day period and, if applicable, W-2 forms for the most recent two-year period, either of which may be obtained directly from the borrower however, paystubs or payroll earnings statements that the borrower downloads from the Internet are also acceptable. Paystubs or payroll earnings statements must show the borrower's gross earnings for both the most recent 30-day period and year-to-date.
• If these documents are "faxed" to the lender or the borrower downloaded them from the Internet, the documents must clearly identify the employer's name and source of information -- for example, by including that information in the Internet or "fax" banner that is at the top of the document.); or
• Request for verification of employment and income that is sent to a third-party employment verification vendor (either in hard copy or electronic format) -- as long as the borrower has provided proper authorization for the lender to use this verification method, the lender has determined that the vendor has made provisions to comply with reasonable quality control requests from both the lender and any subsequent mortgagee, and the lender understands that it will be held accountable for the integrity of the information obtained from this source.
• We also require the lender to obtain two years copies of individual tax returns for the following types of salaried or commissioned borrowers
  • borrowers who earn 25% or more of his or her income from commissions,
  • borrower who is employed by family members or an interested party to the property sale,purchase or financing transaction,
  • borrower who receives rental income from an investment property,
  • borrower who has unreimbursed business expense,
  • borrower who receives income from periodic employment or employment that is subject to time limits (such as a contract employee or tradesperson).

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The TimeSaver Documentation

• TimeSaver documentation alternative allows lenders to obtain alternative documentation related to a borrower's income, employment, funds for closing, and mortgage payment history directly from the borrower, rather than from the borrower's employer, bank, or mortgage servicer.
• TimeSaver documentation may not meet the needs of every borrower and every lender. For example, the different formats and information provided by the various types of substitute documents may require more analysis and judgment on the part of the lender's processors and underwriters, even though the overall processing time is reduced. We rely on lenders to use their good judgment in determining when this substitute documentation alternative would be appropriate for their customers and internal operations.
• Our basic underwriting guidelines apply to mortgages delivered under TimeSaver documentation. Lenders that rely on the accuracy of substitute documentation must warrant that the mortgages they close under this documentation alternative comply with those guidelines.
• Lenders may use TimeSaver documentation for conventional mortgages if:
  • the property is a single-family dwelling or a unit in a condominium, PUD, or cooperative project;
  • the property is an owner-occupied principal residence or a second home if it secures a first mortgage, or
  • an owner-occupied principal residence if it secures a second mortgage.

• Under TimeSaver documentation, the  Verification of Employment (Form 1005) and the  Verification of Deposit (Form 1006) are not required documents. All other standard documentation -- such as the appraisal, the application, residential mortgage credit reports, etc. -- is normally required. However, lenders may accept three "in-file" credit reports or a "merged" report that electronically combines the information from three "in-file" reports (in lieu of the more comprehensive residential mortgage credit report) for mortgages that have loan-to-value ratios of 70% or less, if they are not subject to subordinate financing.

• All substitute documentation that the borrower provides must be legible originals that do not contain any alterations, erasures, or "white-outs." Lenders generally should retain the original documents.
• However, if the borrower wishes to have the original documents returned, the lender must retain photocopies of the originals that it has signed or stamped to certify that they are true copies of the originals. (Both the front and the back of canceled checks must be copied.) The documentation may not be handwritten, except for the record of telephone contact with the borrower's employer.   

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Streamlined Documentation

• We offer two Streamlined Purchase Money Mortgage options, which are designed to make it easier for a borrower to obtain financing for the purchase of a new home and to enable the lender that is servicing the borrower's existing mortgage to retain its relationship with the borrower by continuing to service the borrower's new mortgage.
• Generally, the borrower(s) for the new transaction must be the same person(s) who obtained the existing mortgage. However, if one of the borrowers has died or the borrowers have divorced, the remaining borrower may be eligible for the Streamlined Purchase Money Mortgage, as long as he or she has been responsible for making the payments on the existing mortgage for at least 12 months
• A lender that has serviced a borrower's existing mortgage for at least 12 months may offer the borrower one of these Streamlined Purchase Money Mortgage options, if the borrower's credit history does not include any previous bankruptcy or foreclosure-related action and the existing mortgage satisfies the following eligibility criteria: .
  • The existing mortgage is a fully amortizing, fixed-rate conventional mortgage; a conventional balloon mortgage; or an adjustable-rate conventional mortgage that does not provide for negative amortization.
  • The existing mortgage is secured by a one-family principal residence (including a unit in a PUD, condominium, or cooperative project).
  • The existing mortgage is at least 12 months old. If the mortgage has fewer than 12 months of seasoning, and the lender also serviced the mortgage that the borrower had immediately before the existing mortgage was originated, the lender may count the seasoning of that mortgage in determining whether our full 12-month seasoning requirement has been met.
  • The payment history for the existing mortgage does not include any 30-day (or greater) delinquency in the most recent 12-month period that precedes the date of the borrower's application for the new mortgage.
• The individual mortgage file that is created for the new mortgage not only must include
  • the loan application, but also must include documentation showing that the current residence was sold on or before the closing date for the new mortgage. (Acceptable documentation includes a signed HUD-1 uniform settlement statement or an equivalent document.)
  • The file must also include a notation of the lender's loan number for the existing mortgage (and for any prior mortgage that is used to supplement our full 12-month seasoning requirement).
  • In addition, the file must include a copy of a new automated "merged" credit report for the borrower and a print-out from the lender's servicing system (printed after the date of the borrower's application and prior to the date of the new mortgage note) to provide evidence that all mortgage payments due in the 12 months preceding the closing date of the new mortgage were made no later than 30 days after their due date.

• Although refinance mortgage transactions can be processed under the TimeSaver documentation alternative, the Streamlined documentation alternative  is specifically designed for "limited cash-out" and "no cash-out" rate/term refinance transactions.

• Lenders may use Streamlined Refinancing documentation for conventional refinance mortgages if the property is:
  • a one- or two-family principal residence or a single-family second home when the refinance involves a "limited cash-out" rate/term transaction or
  • a one-family principal residence when the refinance involves a "no cash-out" rate/term transaction  the new mortgage is a fixed-rate, level-payment conventional first mortgage,
  • the loan-to-value ratio for the mortgage (or combined loan-to-value ratio if there are subordinate liens that are not satisfied) is 95% or less for a "no cash-out" rate/term transaction involving a Fannie Mae-owned or -securitized mortgage.
  • 90% or less for a "limited cash-out" rate/term transaction when the property is an owner-occupied principal residence, or 70% or less or a "limited cash-out" rate/term transaction when the property is a second home.
• Required documentation:
  • a new  Residential Loan Application (Form 1003),
  • a mortgage payment history for the existing first mortgage,
  • a new "in-file" credit report,
  • a salaried borrower's current pay statement or a self-employed borrower's tax returns for the last year,
  • an appraisal report, either the original report or a new report depending on the circumstances ( the original appraisal report is acceptable for "limited cash-out" rate/term transactions, if the existing first mortgage is a conventional mortgage and the refinance mortgage is being originated by the current mortgage servicer who has the original underwriting file; a new appraisal report is required for "limited cash-out" rate/term transactions, if the existing first mortgage is an FHA or VA mortgage or if the existing first mortgage is a conventional first mortgage and the refinance mortgage is being originated by anyone other than the current mortgage servicer who has the original underwriting file; and a new appraisal report is required for all "no cash-out" rate/term transactions.
  • The mortgage payment history must show that the borrower did not have any payments that were 30 days or more late during the most recent 12-month period (or for the elapsed term of the mortgage, if the mortgage is less than 12 months old) and must indicate that the borrower had a good payment record -- no pattern of late charges paid -- during that period.
  • The lender must warrant that the value of the property has not declined if it uses the original appraisal report to document the transaction.
  • If the lender is concerned about its ability to make this warranty because there has been a decline in market values in a particular area over the past few years, the lender should obtain a new appraisal.
  • The appraisal (either the original or a new one) must also confirm that the property meets our property eligibility standards.

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self employed

We consider any individual who has a 25% or greater ownership interest in a business to be self-employed. A number of factors need to be considered in underwriting a self-employed borrower, some of which may be beyond the borrower's control (although they still have a significant effect on the borrower's business).

• The lender should analyze each of the following factors before approving a mortgage for a self-employed borrower:
  • The stability of the borrower's income;
  • The location and nature of the borrower's business, the demand for the product or service offered by the business, the financial strength of the business, and the ability of the business to continue generating sufficient income to enable the borrower to make the payments on the requested mortgage; and
  • The marketability of the property that is security for the mortgage as a private residence (rather than as the location of a business), since the property could be the source of repayment for the mortgage should the borrower's business fail.
• Because income from self-employment may be unpredictable and the business owner is often personally liable for the business debt, self-employed borrowers tend to default at a much higher rate than other borrowers.
• For this reason, we usually require the lender to obtain a two-year history of the borrower's prior earnings as a means of demonstrating the likelihood that the income will continue to be received.
• However, a person who has a shorter history of self-employment -- 12 to 24 months -- may be considered, as long as the borrower's latest federal income tax returns reflect the receipt of such income for a 12-month period and he or she has a history of receiving income at the same (or a greater) level in a field that provides the same products or services as the current business or in an occupation in which the he or she had similar responsibilities to those undertaken in connection with the current business.
• Generally, the lender should not approve the use of maximum financing terms if the borrower has been self-employed for less than two years.
• In such cases, the lender must give careful consideration to the nature of the borrower's business, the demand for the service or product, the borrower's level of experience, and the amount of debt the business has.

• The legal structure of a business determines the way business income or loss is reported to the IRS, the taxes that are paid, the ability of the business to accumulate capital, and the extent of the owner's liability.
• There are five principal business structures
  • Sole Proprietorships,
  • Partnerships,
  • Limited Liability Corporations,
  • S Corporations, and
  • Corporations.
• Knowledge of the structure of a self-employed borrower's business will assist the lender in evaluating the stability of the business and the degree of the borrower's involvement.

• In analyzing a self-employed borrower's personal income, the lender should focus on earnings trends and the actual sources of the income, not just on the total amount of the income. The lender must confirm the stability and likelihood of continuance for each.

• Federal income tax returns (both individual returns and business returns) for the past two years, with all applicable schedules attached,
  • Instead of obtaining a copy of a self-employed borrower's applicable tax returns directly from the borrower, the lender may use IRS-issued transcripts of the borrower's individual and business federal income tax returns that were filed with the IRS for the most recent two years -- as long as the information provided is complete and legible and the transcripts include the information from all of the applicable schedules.
• The lender may waive the requirement for business tax returns if
  • (1) the borrower is paying the downpayment and closing costs with his or her own funds, and is not using any funds from the business account,
  • (2) the borrower has been self-employed in the same business for at least five years, and
  • (3) the borrower's individual tax returns show an increase in self-employment income over the past two years.
• A year-to-date profit and loss statement for borrower's business:
  • A lender does not need to require a year-to-date profit and loss statement for most businesses, but if the borrower's loan application is dated more than 120 days after the end of the business' tax year, the lender may choose to require this document if it believes that it is needed to support its determination of the stability or continuance of the borrower's income.  
• A balance sheet for the previous two fiscal years
  • A lender does not need to require a balance sheet for most businesses, but it may choose to require a balance sheet if it believes that these documents are needed to support its determination of the stability or continuance of a self-employed borrower's income from a sole proprietorship business that has significant business assets, employees other than the owner and his or her spouse, and regularly prepared business financial balance sheets.
• Self-Employed Income Analysis ( Form 1084A or  1084B),
• Comparative Income Analysis (Form 1088) for the business  or, if the lender uses alternative documentation for this purpose, a written analysis that includes the underwriter's conclusions.

• When a salaried (or commissioned) borrower and a self-employed co-borrower are jointly applying for a mortgage -- and the self-employed co-borrower's income will not be used for qualifying purposes -- we generally will not require the self-employed co-borrower to provide a copy of his or her complete individual and business tax returns for the last two years (or other financial information related to the business).
  • Instead, the self-employed co-borrower may provide a copy of the first page of his or her latest individual federal income tax return, which will enable the lender to determine whether there was a meaningful business loss.
  • When that is the case, the lender may decide that it needs to request additional information about the self-employed co-borrower's business income in order to reach a final underwriting decision.
• Refer to online manual for complete eligibility criteria.

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tax returns

We require the lender to obtain copies of signed individual federal income tax returns that were filed with the IRS for the past two years (or IRS transcripts of such returns, if they include the information from all applicable schedules) for the following types of salaried or commissioned borrowers:

• A borrower who receives income from partnerships or corporations in which he or she has less than a 25% ownership interest (Note: If a salaried or commissioned employee has a 25% or more ownership interest in a business entity other than the one for which he or she is primarily employed, the lender should document and underwrite the loan application using our requirements for self-employed borrowers)  and
• A borrower who receives income from capital gains, royalties, real estate or other miscellaneous nonemployment earnings that are reported on IRS Form 1099, or who receives income that cannot otherwise be verified by an independent and knowledgeable source.

irs form 4506

When a lender uses copies of federal income tax returns to document a borrowers employment and income and obtains them directly from the borrower , the lender must also obtain the borrowers permission to request copies of the applicable federal income tax returns directly from the IRS if they are  needed for quality control purposes. Permission may be in any form that is acceptable to the IRS, including the Request for Copy of Tax Form (IRS Form 4506) or Tax Information Authorization (IRS Form 8821)

fixed income

Grossing Up

• If the income is nontaxable and the income and its tax-exempt status are likely to continue, the lender may develop an "adjusted gross income" for the borrower by adding an amount equal to 25% of the nontaxable income to the borrower's income.
• If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the borrower's nontaxable income, the lender may use that amount to develop the "adjusted gross income." This adjusted gross income should be used in calculating the borrower's qualifying ratio.

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Commission & Overtime Income

• Lenders may use commission & overtime  income to qualify an applicant.
• Lender must develop an average of the last 2 years of income to use in qualifying the borrower.
• If commission income represent 25% or more of the borrower's total income, federal tax returns for 2 years are required.
• Commission income that has been received for 12 to 24 months may be considered as acceptable income -- as long as the borrower's loan application demonstrates that there are positive factors to reasonably offset the shorter income history and there is a likelihood that the borrower will continue to receive such income.
• When calculating the borrowers income any nonreimbursed business expense must be subtracted from the gross commission income.
• If the borrower has recently changed positions ( but not employer), the lender will need to determine the effect of the change on borrowers ability and opportunity to receive overtime income.
• Lender must verify that any bonus income will in all probability continue to be used in borrowers income  qualifications.
• Projected overtime pay or bonus income that has no historical basis is not an acceptable source of income.
• If the trend for commission, overtime and bonus  earnings shows a decline, they should not be considered as stable income.

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Rental Income

• As part of our efforts to provide increased homeownership opportunities for people with disabilities, we are expanding our underwriting guidelines as they relate to establishing a credit history and the acceptance of rental income from boarders as an eligible source of stable income.
• Lenders are reminded that, when delivering a mortgage to us that involves a borrower or family member with a disability, they must include Special Feature Code 325 on the Loan Schedule ( Form 1068 or 1069) or Schedule of Mortgages (Form 2005).
• Rental income received for a one-family investment property or a two- to four-family property is acceptable stable income, even when the borrower occupies one of the units of a multiple-unit property, as long as the likelihood of the continuance of the income can be established.
• Proposed rent -- such as the proposed rent for the borrower's current residence -- is not acceptable unless it is supported by an appraiser's opinion of market rent for that particular property.
• When the security property for the mortgage that is being underwritten will be rented, either the borrower or the appraiser should:
  • Complete an Operating Income Statement (Form 216) -- or a similar form that has the same type of information -- to provide the information the lender needs to determine the cash flow and operating income derived from the rental property.
  • Additionally, the lender may rely on either a Single-Family Comparable Rent Schedule (Form 1007) or a Small Residential Income Property Appraisal Report (Form 1025) to obtain the gross income that should be used in determining the income-producing ability of the property.
  • The documentation that is used to support a borrower's continued receipt of rental income and the calculation of such income depends on whether the rental income is received in connection with the security property for the mortgage being underwritten or in connection with other properties the borrower owns.

• When the rental income relates to the security property and the borrower has no history of receiving rental income from the property:
  • The lender must document the rental income by obtaining an appraiser's opinion of market rent and, if applicable, copies of the current lease agreement(s).
  • The gross rental income from the property will be equal to the lesser of the market rent established by the appraiser or the current rent based on the existing lease agreement(s).
  • Net rental income will equal 75% of the gross rent; the remaining 25% of the gross rent is absorbed by vacancy losses and ongoing maintenance expenses.
  • However, when the borrower has a history of receiving rental income for the security property, the lender must document the rental cash flow by obtaining copies of pages from the borrower's most recent two years of signed federal income tax returns and the related Supplemental Income and Loss (Schedule E to IRS Form 1040).
  • The lender should then analyze the borrower's rental cash flow and calculate the net rental income (or loss), making sure that depreciation or any interest, taxes, or insurance expenses were added back in the borrower's cash flow analysis.

• When the rental income relates to rental property other than the security property:
  • the lender may document the rental income by obtaining copies of either the current lease agreements(s) or the pages from the borrower's most recent two years of signed federal income tax returns and the related Supplemental Income and Loss (Schedule E to IRS Form 1040).
  • If the lender uses current lease agreements, the net rental income will be 75% of the gross rent from the lease agreements, with the remaining 25% being absorbed by vacancy losses and ongoing maintenance expenses. When the lender uses the signed federal tax returns (including Schedule E) to calculate the net rental income (or loss), it should make sure that depreciation or any interest, taxes, or insurance expenses were added back in the borrower's cash flow analysis. Since Schedule E does not account for the full amount of the mortgage payment for the rental property, the lender should make sure   that any portion of the payment (interest, taxes, and insurance) that needs to be added back in the cash flow analysis to avoid a double counting of the expenses was, in fact, added back.

• The amount of monthly net rental income (or loss) that is considered as part of the borrower's total monthly income (or expenses) -- and its treatment in the calculation of the borrower's total debt-to-income ratio -- will vary depending on whether the borrower occupies the rental property as his or her principal residence.
• If the net rental income relates to the borrower's principal residence,
  • The monthly net rental income (as defined above) should be added to the borrower's total monthly income.
  • Any net rental loss should be added to the borrower's total monthly obligations.
  • The full amount of the mortgage payment (principal, interest, taxes, and insurance) must be included in the borrower's total monthly obligations when calculating the debt-to-income ratio.

• If the net rental income relates to a property other than the borrower's principal residence,
  • The monthly net rental income (as defined above, but excluding the full amount of the related mortgage payment) should be added to the borrower's total monthly income, while any monthly net rental loss should be added to the borrower's total monthly obligations.
  • The full amount of the mortgage payment for the rental property (principal, interest, taxes, and insurance) is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.
  • However, the full amount of the mortgage payment for the borrower's principal residence must be counted as a monthly obligation.

Note:  When a property is classified as a second home, rental income may not be used to qualify the borrower.

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Trailing Spouse Income

• It is not unusual for a household that consists of two wage earners to relocate to another area because one of the wage earners is transferred by his or her employer or finds another job in a new location. Often these individuals will find a home in the new location that they want to purchase before the other wage earner finds a new job.
• When the relocation takes place in connection with a documented corporate relocation offered by the primary wage earner's employer, some (or all) of the "anticipated" income from the job that the trailing secondary wage earner expects to obtain in the new area may be considered as acceptable stable income, if the following conditions are satisfied:
  • The secondary wage earner is a spouse, relative*, domestic partner*, fiancee, or fiance of the primary wage earner.
  • A secondary wage earner who is the fiancee or fiance of the primary wage earner does not have to currently reside in the same household with the primary wage earner, although a secondary wage earner who is a spouse, relative, or domestic partner does.
  • The secondary wage earner has been employed as a salaried employee or as an hourly wage or commissioned employee in the same profession for the past two years and must provide a written statement indicating his or her intention to obtain employment in the new location. If the lender is able to document a reasonable employment market for positions that are the same as (or similar to) the secondary wage earner's previous position(s), the lender may consider either 100% of the secondary wage earner's documented income from his or her previous employment (if the secondary wage earner's income does not exceed 30% of the total qualifying income) or 50% of the secondary wage earner's documented income from his or her previous employment (if the secondary wage earner's income exceeds 30% of the total qualifying income). The income from the secondary wage earner's previous employment must be verified and documented in accordance with our standard guidelines. The lender may use the latest salary for a salaried or hourly wage earner as the documented income, but should use an average of a commissioned wage earner's income for the past two years.
  • The combined incomes -- actual income for the primary wage earner and "anticipated" income for the secondary wage earner -- and the combined expenses of the two wage earners result in a total debt-to-income ratio of 36% or less. However, higher qualifying ratios may be used when strong offsetting factors exist.
  • The borrowers have financial reserves (cash or other liquid assets that are easily converted to cash) at closing equal to at least six months of payments for the mortgage and all other recurring debt obligations.
  • The mortgage has a "representative" credit score of 680 or higher. (The "representative" credit score for the mortgage is the applicable individual credit score for the borrower who had the lower applicable individual credit score.)

• If these criteria are not satisfied, the lender may use the trailing secondary wage earner's intent to obtain employment at the new location to justify the use of a higher qualifying ratio.

Note: *FNMA defines a *Relative.as the borrower's spouse, child, or other dependent or any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship. and defines,

*Domestic Partner as an unrelated individual who shares a committed relationship with the primary wage earner, currently resides in the same household as the primary wage earner, and intends to occupy the security property with the primary wage earner.

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Alimony/Child Support

• In order for alimony or child support to be considered as income, it must continue for at least three years from the date of the mortgage application.
• We will accept as verification that alimony and child support will continue:
  • a photocopy of the divorce decree or separation agreement (if the divorce is not final) that provides for the payment of alimony or child support and states the amount of the award and the period of time over which it will be receive;
  • any other type of written legal agreement or court decree that describes the payment terms for the alimony or child support; or
  • any applicable state law that requires alimony, child support, or maintenance payments and specifies the conditions under which the payments must be made.

• When determining the acceptability of this type of income, the lender should take into consideration the borrower's regular receipt of the full payment due (stability) and any limitations on the continuance of the payments (the age of the children for whom the support is being paid or the duration over which alimony is required to be paid).
• If a borrower who is separated does not have a separation agreement that specifies alimony or child support payments, the lender should not consider any proposed or voluntary payments as income when qualifying the borrower.
• The borrower must provide acceptable evidence of his or her receipt of funds for alimony or child support or maintenance payments -- such as deposit slips, court records, copies of signed federal income tax returns that were filed with the IRS, or copies of the borrower's bank statements that show the regular deposit of these funds.
• A lender's underwriting analysis should take into consideration the regularity and timeliness of the payments, as well as whether the borrower received all or only part of the full amount that was due.
• When a borrower has been receiving full, regular, and timely payments for alimony or child support or maintenance for 12 months, the income is considered as stable income.
• When a borrower has been receiving full, regular, and timely payments for alimony or child support or maintenance for between 6 and 12 months, the income may be considered as stable income as long as it does not represent more than 30% of the total gross income that is used to qualify the borrower for the mortgage
• When a borrower has been receiving full, regular, and timely payments for alimony or child support or maintenance for fewer than 6 months, the income may not be considered as stable income -- although, if the income is adequately documented, the lender may use it to justify a higher qualifying ratio.
• When a borrower has been receiving full or partial payments for alimony or child support or maintenance on an inconsistent or sporadic basis, the income may not be considered as stable income or be used to justify a higher qualifying ratio.

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Non-Traditional Income

• Special consideration may need to be given to income from sources other than wages and salaries.
• Specific treatment for the other types of income is discussed in more detail below:

Military Income

• Military personnel may be entitled to different types of pay in addition to their base pay. Flight or hazard pay, rations, clothing allowance, quarters' allowance, and proficiency pay are acceptable sources of stable income, as long as the lender can establish that the particular source of income will continue to be received in the future.
• Income paid to military reservists while they are fulfilling their reserve obligations is also acceptable if it satisfies the same stability and continuity tests that we apply to other types of second-job income.

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Military Indulgence

• For American military personnel, deployment assignments can create challenges, particularly for the families left behind. One such challenge is the ability to meet financial obligations, including monthly mortgage payments
• The Soldiers' and Sailors' Civil Relief Act (SSCRA) does provide some financial relief and protection to active duty military personnel.
• However, a reduction of income during a period of military service may warrant additional relief for some military personnel beyond what is provided under the SSCRA.
• To help military personnel overcome the financial challenges they may face, Fannie Mae will implement an enhanced special forbearance that extends beyond the SSCRA requirements and provides greater flexibility to servicers in helping military personnel whose activation has affected their ability to meet their mortgage obligations. Specifically, the enhanced special forbearance 1) streamlines the process for requesting forbearance and 2) provides protection of the borrower's credit history.
• The enhanced special forbearance constitutes a temporary change to Investors policy for military indulgence and may be requested by borrowers through December 31, 2003, unless otherwise extended.
• After the expiration date, servicers are required to comply with Investors guidelines for granting military indulgence as stated in Part III, Chapter 1, Exhibit 1 of our Servicing Guide.

Eligibility for Enhanced Special Forbearance

• The enhanced special forbearance is available to all SSCRA-eligible borrowers.
• To be eligible under SSCRA, the borrower must 1) be currently on active duty with the U.S. military and 2) have a mortgage that was obtained before the date active duty service began
• The enhanced special forbearance is also available to former SSCRA-eligible borrowers who experienced financial hardship while on active duty so long as they request the benefit  within three months following their release from active duty.
• The enhanced special forbearance is not granted automatically to all eligible borrowers.
• The eligible borrower or co-borrower must contact the servicer to request such relief, if and when needed, and servicers are still required to have discussions with the borrower or co-borrower to determine the appropriate forbearance terms.

Documentation for Proof of Hardship

• Under our current guidelines for granting military indulgence, servicers must request from military personnel a copy of their active duty orders.
• In addition, servicers normally require the borrower to complete our Request for Military Indulgence (Form 180) if he or she requests forbearance.
• Under the enhanced special forbearance, the borrower's active duty orders will constitute the only needed proof of financial hardship, and the borrower is not required to submit Form 180, thus streamlining the process for requesting forbearance.
• The servicer is required to have discussions with the borrower or co-borrower to obtain sufficient information to determine eligibility (i.e., that the borrower is currently on active duty or had completed active duty within three months prior to applying for relief), the appropriate forbearance period, repayment plan, and payment reduction.

Credit Reporting

• In an effort to protect the borrower's credit history during the forbearance period, the servicer should report to the credit repositories that military indulgence, rather than forbearance, was granted.
  If the loan was delinquent before the start of active duty, or the loan was delinquent after the start of active duty but before the enhanced special forbearance was granted, the servicer will continue to report that delinquency.
• During the forbearance period, the servicer should report that military indulgence was granted.

Forbearance Period, Repayment Plan, and Payment Reduction

• Servicers will maintain discretion in determining the appropriate forbearance period, repayment plan, and payment reduction based on the borrower's financial situation, and are referred to Part VII, Section 302 of the Fannie Mae Servicing Guide for guidance. During the forbearance period, the servicer will comply with the standard remittance requirements for the applicable remittance types.

Reporting to Fannie Mae

Servicers are required to submit a Special Information Worksheet describing the terms of the forbearance agreement. This form should be sent to the Manager, Portfolio Processing Management Unit in our Herndon, VA location. During the forbearance period, servicers must report the Electronic Data Interchange (EDI) Delinquency Status Code 32 (Military Indulgence) rather than Status Code 09 (Forbearance). The Servicer should also report EDI Delinquency Reason Code 14 (Military Service). Servicers should report using one of the following methods: HomeSaver Solutions" Network transmission; a CPU-to-CPU transmission using Advantis; or CPU-to-CPU transmission using a service bureau.

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Automobile Allowances and Expense Account Payments

• We will consider automobile allowances as acceptable stable income for a borrower who has been receiving the payments for at least two years, provided the lender includes all associated business expenditures in its calculation of the borrower's total debt-to-income ratio.
• The lender should not include automobile allowances that have been received for less than two years when it calculates the borrower's debt-to-income ratio, but may use them to justify a higher qualifying ratio.
• The lender should use either an actual cash flow approach or an income and debt approach to calculate the income associated with automobile allowances, depending on whether or not the borrower accounts for the allowance on the Employee Business Expenses (IRS Form 2106) or the Profit or Loss from Business (Schedule C) to the U. S. Income Tax Return (IRS Form 1040).
• When the borrower reports the allowance on the Employee Business Expenses (IRS Form 2106) or the Profit or Loss from Business (Schedule C), the lender should use the actual cash flow approach to determine whether the payments exceed or fall short of the borrower's actual expenditures.
  • Any funds in excess of the borrower's monthly expenditures 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 used IRS Form 2106 and recognized "actual expenses" instead of the "standard mileage rate," the lender must look at the "actual expenses" section to identify the borrower's actual lease payments, and then make appropriate adjustments.

• When the borrower does not report the allowance on either Form 2106 or Schedule C, the lender should use the income and debt approach.
  • In this case, the full amount of the allowance is added to the borrower's monthly income.
  • However, the full amount of the lease or financing expenditure for the automobile must be added to the borrower's total monthly obligations.

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Foster-Care Income

• Income received from a state- or county-sponsored organization for the temporary care of one or more children may be considered as acceptable income as long as the borrower has a two-year history of providing foster-care services under a recognized program and is likely, in the foreseeable future, to continue to provide such services at a level that supports the amount of income needed for qualifying for the mortgage.
• If a borrower has not been receiving this type of income for two full years, a lender may nevertheless count the income as stable income -- as long as the borrower has at least a 12-month history of providing foster care services and this income does not represent more than 30% of the total gross income that is used to qualify the borrower for the mortgage.
• Foster-care income may be verified by letters from the organizations providing the income, tax returns, or copies of the borrower's deposit slips or bank statements that confirm the regular deposit of the payments.

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Seasonal Income

• Seasonal part-time or second job income (including seasonal unemployment compensation) can be considered as stable income if the borrower has worked in the same job (or line of seasonal work) for the past two years and the borrower's employer indicates that there is a reasonable expectation that the borrower will be rehired for the next season.
• Examples of borrowers who have seasonal jobs include outdoor laborers (landscapers, construction workers, etc.), income tax preparers, supplemental department store personnel who work during the Christmas shopping period or another holiday period, etc.
• The lender should not use seasonal unemployment compensation to qualify the borrower unless it is appropriately documented, clearly associated with seasonal layoffs, expected to recur, and reported on the borrower's federal income tax returns.

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Part Time and Second Job

• Part-time or second-job income may be used if it can be verified as having been uninterrupted for the previous two years and if it has a strong likelihood of continuation.
• Occasionally, an applicant who has less than a two-year history of receiving income from part-time employment may need that income to qualify for the mortgage.
• Lenders have the flexibility of accepting less than a two-year history -- but no less than a 12-month history -- for a borrower if there is a strong likelihood that the borrower will continue to receive that income, and the lender develops an average monthly income for the part-time or multiple jobs..
• Situations in which the acceptance of a shorter history of receiving income from a part-time job include those in which there are two borrowers, one who has always been a full-time employee and one who had dedicated a period of time to parenting and homemaking activities but has returned to work on a part-time basis; those in which a full-time employee took on a second, part-time job to offset the loss of income from overtime pay that was no longer available from his or her primary source of employment; etc.
• Verification of part-time or second-job income should be on a Verification of Employment (Form 1005) must be supported by IRS W-2 forms.
• Because low- and moderate-income families tend to rely on secondary income, lenders should be sure that their treatment of such income does not artificially restrict the home financing opportunities for members of those groups.
• When a borrower relies on the income from a second job to qualify for a mortgage, the lender should determine if there has been any change in the borrower's overall employment status that might jeopardize the continuance of income from the second job.
  • For example, if a borrower recently accepted a new primary job, but arranged to continue working at his or her old job as a second job, the borrower would have a history of receiving income from what is now considered a second-job -- but there would be no history of his or her ability to handle two jobs on a continuing basis.
  • For that reason, the income from this second job would not be acceptable to use in qualifying the borrower.

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Retirement or Pension Income

• Retirement or pension income is an acceptable source of stable income as long as the borrower's regular receipt of the payments is confirmed.
• Retirement income may be verified by letters from the organizations providing the income, copies of retirement award letters, copies of signed federal income tax returns that were filed with the IRS, IRS W-2 forms, or copies of the borrower's two most recent bank statements.
• When the retirement income is received in the form of a monthly annuity payment or a monthly distribution from a 401(k), IRA, or Keogh retirement account, the lender must determine that the income is expected to continue to be received for at least three years after the date of the mortgage application.

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Social Security Income

• Social security benefits that have defined expiration dates must have a remaining term of at least three years from the date of the mortgage application to be considered as acceptable stable income.
• Acceptable verification of social security income includes a photocopy of the Social Security Administration's award letter, copies of signed federal income tax returns that were filed with the IRS, IRS W-2 forms, or copies of the borrower's recent bank statements

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Notes Receivable

• We require a copy of the note to establish the amount and length of payment.
• Payments must continue for at least three years from the date of the mortgage application.
• Borrowers must provide evidence that they have received the funds for the last 12 months. Acceptable evidence includes deposit slips, tax returns, or copies of the borrower's bank statements.

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Interest and Dividends

• Interest and dividend income may be used if it is properly documented and has been received for the past two years and is expected to continue to be received for a minimum of three years from the date of the mortgage application.
• The lender must develop an average of the income for the last two years to use in evaluating the borrower's income qualifications.
• Photocopies of tax returns or account statements may be used to verify this income.
• The lender must verify the borrower's ownership of the assets on which the interest and/or dividend income was earned.
• Any assets used for down payment or closing costs must be subtracted from the borrower's total assets before calculating expected future interest or dividend income.

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Mortgage Differential Payments

• An employer may subsidize an employee's mortgage payments by paying all or part of the interest differential between the employee's present and proposed mortgage payments.
• These payments can be considered as acceptable income if the Borrower's employer verifies its subsidy, stating the amount and duration of the payments.
• The payments must continue for at least three years from the date of the mortgage application.
• The differential payments should be added to gross income when income ratios are calculated. They cannot be used to offset directly the mortgage payment, even if the employer pays them directly to the mortgage lender (rather than to the borrower).

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Trust Income

• Trust income may be used if it is properly documented.
• We will accept as verification of trust income a photocopy of the Trust Agreement or the trustee's statement confirming the amount, frequency, and duration of payments.
• if this documentation does not include information about the historical level of distributions from the trust, the lender may also need to obtain copies of the borrower's signed federal income tax returns that were filed with the IRS for the past two years --including the related Supplemental Income and Loss (Schedule E to IRS Form 1040) -- to address this.
• The trust income must continue for at least three years from the date of the mortgage application in order for it to be considered as income.
• Lump-sum distributions made before the loan closing may be used for down payment or closing costs if they are verified by a photocopy of the check or the trustee's letter that shows the distribution amount.

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Capital Gains

• Income received from a capital gain is generally a one-time transaction; therefore, it should not usually be considered as part of the borrower's stable monthly income.
• However, if the borrower needs to rely on the income from capital gains to qualify for the mortgage, the lender must obtain copies of the borrower's signed federal income tax returns that were filed with the IRS for the past two years -- including the related Capital Gains and Losses (Schedule D to IRS Form 1040).
• When the borrower's tax returns show that he or she has realized capital gains for the last two years, the lender may develop an average income from capital gains and use that amount as part of the borrower's qualifying income -- as long as the  borrower provides evidence that he or she owns additional property or assets that can be sold if extra income is needed to make future mortgage payments.

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Royalty Payments

• If the borrower needs to rely on income from royalty payments to qualify for the mortgage, the lender must obtain copies of the borrower's signed federal income tax returns that were filed with the IRS for the past two years -- including the related Supplemental Income and Loss (Schedule E to IRS Form 1040).
• The lender must have documented evidence showing that the borrower has received royalty payments for at least 12 months and will continue to receive them for at least three years after the date of the mortgage application in order to use the payments as qualifying income.

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VA Benefits

• Most VA benefits are acceptable income if they are documented by a letter or distribution forms from the Department of Veterans Affairs and will continue for at least three years from the date of the mortgage application.
• Education benefits are not acceptable income because they are offset by education expenses.

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Disability Benefits

• Disability benefit payments should be treated as acceptable stable income -- unless the terms of the disability policy specifically limit the stability or continuity of the benefit payments.
• Benefits that have a defined expiration date must have a remaining term of at least three years from the date of the mortgage application in order to be used for qualifying the borrower.
  • For example, if a borrower is receiving disability benefits that are scheduled to be discontinued when he or she reaches a certain age and the borrower will reach that age within three years of loan closing, the lender should not count the disability benefit as stable income.

• When a borrower is currently receiving short-term disability payments that will decrease to a lesser amount within the next three years because they are being converted to long-term benefits, the lender must use the amount of the long-term payments in determining the borrower's stable income.
• The lender should obtain a copy of the borrower's disability policy or benefits statement to verify the amount of disability payments and to determine whether there is a contractually established termination or modification date.
• In addition, the lender should obtain a statement from the benefits' payer (insurance company, employer, or other qualified and disinterested party) to confirm the borrower's current eligibility for the disability benefits.

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Unemployment Benefits

• Unemployment benefits -- such as those received by seasonal workers -- may be considered as acceptable stable income if the income is properly documented, has been received for the past two years, and is predictable and likely to continue (see seasonal employment section).
• Copies of the borrower's signed federal income tax returns that were filed with the IRS for the past two years should be used to establish a history of the receipt of these benefits.

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Public Assistance Income

• Income from public assistance may be considered as acceptable stable income if it is properly documented, has been received for the past two years, and is expected to continue to be received for at least three years from the date of the mortgage application.
• Public assistance income should be documented by letters or exhibits from the paying agency that state the amount, frequency, and duration of the benefit payments.

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Boarder Income

• We are expanding our guidelines as they relate to the acceptance of rental payments from boarders to include rental payments from a live-in-aide, whether or not the individual is a relative of the borrower.
• This income source is acceptable for a borrower with disabilities who may be qualifying for a mortgage under either our community lending mortgage or our standard mortgage eligibility criteria and underwriting guidelines.
• Live-in aides typically receive room and board payments through Medicaid Waiver Funds, from which rental payments are made to the borrower.
• When that is the case, a lender may consider these payments 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.
• The live-in aide must present appropriate documentation to demonstrate shared residency and the payment of rental payments.
• Rental income from boarders in a one-family property that is also the borrower's primary residence or second home generally may not be considered as acceptable stable income.
• However, for a community lending mortgage, the rental payments that a borrower receives from a relative who resides with the borrower (but who is not obligated on the mortgage debt) may 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 -- if the relative has lived with (and paid rent to) the borrower for the last 12 months.

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Non-Occupying Co-Borrowers Income

• The income of a co-borrower who will not be occupying the security property may be considered as acceptable qualifying income if the loan-to-value ratio for the mortgage is 90% or less.
• However, the occupant-borrower must still reasonably demonstrate an ability and willingness to make the mortgage payment and maintain homeownership. The income from the non-occupying co-borrower can offset certain weaknesses that may be in the occupant-borrower's loan application -- such as limited financial reserves, limited credit history, or a higher-than-normal qualifying ratio.
• However, the income from a non-occupying co-borrower cannot be used to offset significant or recent instances of major derogatory credit in the occupant-borrower's credit history or an occupant-borrower's inability to make the mortgage payment without regular and significant assistance from the non-occupying co-borrower.

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Mortgage Credit Certificates

• States and other political subdivisions can issue mortgage credit certificates (MCCs) in place of, or as part of, their authority to issue mortgage revenue bonds.
• Mortgage credit certificates enable an eligible first-time homebuyer to obtain from a lender a market-rate mortgage that will be secured by his or her principal residence and to claim a federal tax credit for a specified percentage (usually 20% to 25%) of the mortgage interest payments.
• The borrower is permitted to reduce the withholding on his or her wages by the full amount of the tax credit to ensure that he or she will have an adequate cash flow and the ability to make the periodic mortgage payments.
• When calculating the borrower's debt-to-income ratio, a lender should treat the maximum possible mortgage credit certificate income available to the borrower as an addition to the borrower's income, rather than as a reduction to the amount of the borrower's mortgage payment.
  • The amount that is added to the borrower's monthly income would be calculated as follows: (Mortgage Amount) X (Note Rate) X (MCC %) divided by 12
  • For example, if a borrower obtains a $100,000 mortgage that has a note rate of 7.5% and he or she is eligible for a 20% credit under the mortgage credit certificate program, the amount that should be added to his or her monthly income would be $125 ($100,000 X 7.5% X 20% = $1500/12 = $125).

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For FNMA Underwriting Guidelines concerning Asset Requirements, Transaction Types or Property Eligibility, click HERE.