Underwriting Guidelines Part 2

As of 04/23/04

For FNMA Underwriting Guidelines concerning Borrower Eligibility, Credit Requirements or Income Requirements, 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.

Asset Requirements

Verification of Deposits and Assets

• The verification of funds for closing involves documenting the amount in the borrower's depository accounts (checking accounts, savings accounts, and retirements accounts) for the two-month period that precedes the date of the loan application and the value of other financial investments (stocks, bonds, mutual funds, etc.) as of the date of the loan application.
  • Lender may use a "request for Verification of depsoit(Form1006 or1006(s)),
  • Lender may verify funds available for closing by obtaining from the borrower a copy of applicable bank statements or investment portfolio statements covering activity in the accounts for the most recent two month period.
• Refer to the online FNMA  manual for complete eligibility criteria.

Acceptable Assets

• The borrower must have enough liquid assets to cover the amount of the down payment that must come from his or her own funds.
• Generally, the lender must verify that the borrower has sufficient cash deposits and other assets to complete the mortgage transaction, as well as adequate reserves after closing.

Deposit on Sales Contract

• When the deposit is used to make any portion of the borrower's down payment that must come from his or her own funds, the source of the funds for the deposit must be verified.
• The receipt of the deposit generally should be verified by a photocopy of the borrower's cancelled check, although a written statement from the holder of the deposit is acceptable.
• Verification includes either a bank statement or a  Verification of Deposit (Form 1006) that indicates that the average balance for the past two months was large enough to include the deposit.

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Checking and Savings Accounts

• The Verification of Deposit (Form 1006)or bank statements for the most recent 2 months, should be used to verify these accounts.
• If there is a recently opened account or a large increase in an existing account, the source of funds must be explained by the borrower and verified by the lender.
• Unverified funds are not acceptable for down payment or closing costs unless they meet our requirements for borrowed funds.

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Nonpermanent Resident Alien Funds

Lender may consider funds that a nonpermanent resident alien borrower recently deposited in a U.S depository institution as an acceptable source of funds

• as long as that the funds were transferred from the country from which the borrower immigrated and,
• it can be established that the funds were the borrower's before the date of transfer and,
• all funds used for closing should be verified just as they would for a borrower who is a U.S. citizen.

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Gifts

• An owner occupant borrower can use funds obtained as a personal gift from a relative*, domestic partner *, fiance, or fiancee to pay part of the closing costs or to supplement his or her financial reserves. The borrower generally must use his or her own funds to cover the required minimum cash down payment.
  • 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 and,
  • 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.
• If the relative or domestic partner providing the gift has lived with the borrower for the last 12 months and will continue to do so, we will allow the gift to be pooled with the borrower's funds to satisfy the minimum cash down payment requirement. Subject property to be primary residence.
• When the loan-to-value ratio for the mortgage (or CLTV for a mortgage that has subordinate financing) is 80% or less, the full down payment may come from gift funds.
• A gift must be evidenced by a letter that is signed by the donor.
  • The letter must specify the dollar amount of the gift,
  • the date the funds were transferred indicate the donor's name, address, telephone number, and relationship to the borrower and
  • include the donor's statement that no repayment is expected.

• The lender must verify that sufficient funds to cover a gift from a relative are either in the donor's account or have been transferred to the borrower's account.
• The lender must obtain documentation to show the transfer of the gift funds from the donor's account -- for example, by obtaining a copy of the donor's withdrawal slip and the borrower's deposit slip, a copy of the donor's canceled check, etc.
• When the funds are not transferred prior to settlement, the donor may give the closing agent a certified check for the amount of the gift.
• A copy of that check or a settlement statement showing receipt of that check will be sufficient documentation for the lender's records.

Refer to the online FNMA manual for complete eligibility criteria.

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Donations from Entities

• A borrower can use funds obtained from a church, municipality, or nonprofit organization as a gift (or grant) to satisfy part of the cash requirement for closing -- although the borrower generally must use his or her own funds to cover the required minimum cash down payment (which is at least 5% of the sales price).
• However, if the loan-to-value ratio for the mortgage is 80% or less, we will waive this requirement and allow the full down payment to come from a gift (or grant).
•  A gift (or grant) from a church, municipality, or nonprofit organization must be evidenced by either a copy of the letter awarding the gift or grant to the borrower or a copy of the legal agreement that specifies the terms and conditions of the gift or grant.
• This supporting document must include language indicating that no repayment of the gift or grant is expected and an indication of how the funds will be transferred (to the borrower, the lender, or the closing agent).
• The lender must include in the individual mortgage file evidence of the transfer of the funds -- such as a copy of the donor's canceled check or a settlement statement showing receipt of the check.

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Disaster Relief

• We will permit a borrower to use a lump-sum disaster relief grant or loan to satisfy our down payment requirement.
• Borrower does not have to make minimum cash down payment from his or her own funds for grant or relief to be credited toward down payment.

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Employer Assistance

• Borrowers can use funds provide by his or her employer to pay part of the closing costs or to supplement his or her financial reserves.
• Borrower generally must use his or her own funds to make the required minimum cash down payment.
• Employer assistance may be in the form of a grant, direct, fully repayable second mortgage or unsecured loan, a forgivable second mortgage, and or deferred payment second.
• All seconds must satisfy program eligibility requirements.

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Sales Proceeds

• The proceeds from the sale of a currently owned home are a common and acceptable source for the down payment and closing costs on a new house.
• A photocopy of the fully executed settlement statement on the sale of the home, which shows sufficient net cash proceeds to consummate the purchase of the new home, must be used to verify the source of these funds.
• The settlement statement on the existing home should be obtained before, or simultaneously with, the settlement on the new home.
• Photocopies of sales contracts or listing agreements may not be used as verification.

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Anticipated Sales Proceeds

• If the borrower's currently owned home is listed for sale -- but has not been sold -- the lender may preliminarily qualify the borrower on the basis of his or her anticipated sales proceeds.
• Use of "anticipated equity" does not relieve the lender of the responsibility for verifying the actual proceeds received by the borrower.
• To determine the amount of net proceeds , use to following formula
  • Sales Price -(Sale Prices + All liens)= Estimated Proceeds.
  • If sales price has not been established : 90% of Listing Price - Al Liens + Estimated Proceeds.

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Bridge Loans

• A bridge (or swing) loan is a form of second trust that is collaterized by the borrower's present home, which is usually for sale.
• By using funds from the bridge loan, the borrower can close on a new home before selling his or her existing home.
• This type of financing is acceptable if the bridge loan is not cross-collateralized against the new property and borrower has the ability to carry payments on both the new home and bridge  loan.

Refer to the online FNMA  manual for complete eligibility criteria.

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Retirement Accounts

• Funds from individual retirement accounts (IRA/Keogh accounts) and tax-favored retirement savings accounts (401k accounts) may be used as the source of funds for the down payment, closing costs, or cash reserves.
• When funds from these sources are used for the down payment or closing costs, any applicable withdrawal penalties or income tax must be subtracted so that only the "net" withdrawal is counted.
• When funds from these sources are used to support our cash reserve requirement, we do not require that the funds actually be withdrawn from the account (s).
• However, the lender should exercise caution when considering  IRA and Keogh accounts as effective reserves due to penalties for  early withdrawal  or "vesting requirements.
• A 401k account can be used to the extent the borrower is "vested" in the account and the lender is able to adequately verify the account and the amount of the borrower's "vesting".

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Government Bonds

Government bonds should be valued at their purchase price unless the redemption value can be determined and verified. The actual receipt of funds must be verified.

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Stocks

The value of stocks may be verified by a current statement from the stockbroker or a photocopy of the stock certificate, accompanied by a dated newspaper stock list.  Actual receipt of funds must be verified.

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Stock Options

• The value of stock options may be verified by referencing a statement that lists the number of the options and the option prices and using the current stock prices to determine the gain that would be realized from exercise of an option and the sale of the optioned stock
• The lender must discount the calculated value by at least 50% to account for the estimated taxes and market uncertainty.

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Trust Account

• Trust account funds may be used if the borrower has access to them and they can be verified.
• Lender should request the trust manager or trustee to verify the value of the trust account and to confirm the conditions under which the borrower has access to the funds.

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Cash-on-Hand

Cash-on-hand is not an acceptable source of funds for the down payment or closing costs.

Refer to the online FNMA  manual for complete eligibility criteria.

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Trade Equity

• The property seller may take a borrower's existing property in trade as part of the down payment, as long as the borrower has made a 5% cash down payment and his or her equity contribution is a true-value consideration, supported by an appraisal.
• This is determined by subtracting the outstanding loan balance of the property that is being traded, plus any transfer costs, from the lesser of its appraised value or trade-in value (as agreed to by both parties).
• We require a separate written appraisal for the property that is being taken in trade.
• For real property, we require a search of the land records to verify the ownership of the property and to determine if there are any existing liens on the property.

Refer to the online FNMA manual for complete eligibility criteria with reference to Manufactured Homes.

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Credit for Value of Lot

The value of a lot may be credited towards the down payment for the mortgage.  Refer to construction to perm section of Transaction Type for additional requirements.

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Rent with Option to Purchase

• The portion of a rental payment that exceeds the market rent can be applied to the down payment if there is a valid rental/purchase agreement in effect.
• The application file must contain a photocopy of the rental/purchase agreement to assure that the lender will be able to verify the monthly rental and the specific terms of the lease. (The original term of the lease must have been at least 12 months).
• The appraiser must develop the market rent figure in these cases, and the lender must obtain copies of canceled checks or money order receipts to document the rental payments for the last 12 months.

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Borrowed Funds

• A borrower may use 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.
• Generally, the lender must consider the monthly payments for the loan as debt when qualifying the borrower.
• However, the contingent liability for the payments on such loans does not have to counted as part of the long-term debt that is used in determining the borrower's total obligations-to-income ratio -- 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 our cash 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 in order to determine that the borrower has sufficient reserves.

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Credit Card Financing

• We will permit the cost for application"lock-in" fees, appraisal and credit reports  as long as the total amount of such charges does not exceed 1% of the mortgage amount.
• The Lender does not have to require the borrower to actually pay off these charges at closing.

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Sale of Personal Assets

• Proceeds received from the sale of the borrower's personal assets may be considered as long as the borrower can provide evidence that he or she owned the asset, documentation to support the value of the asset, evidence of the transfer of ownership (a copy of a bill of sale or a statement from the purchaser), and evidence of the receipt of the purchase proceeds (deposit slip or bank statement).

• The individual purchasing the asset can not be a party to either the property sale transaction or the mortgage financing transaction.

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Anticipated Savings

• The lender may preliminarily qualify the borrower on the basis that his or her anticipated savings will be sufficient to meet the funds needed for closing.
• This does not relieve the lender of the responsibility for verifying that the savings actually accumulated.

Refer to the online FNMA manual for complete eligibility criteria.

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Additional Assets

The additional assets listed below are allowed.

• Individual Development Accounts
• Pooled Savings
• Mortgage Revenue Bond Premium Proceeds
• Personal Unsecured Loans
• Sweat Equity

Refer to the online FNMA manual for complete eligibility criteria.

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Unacceptable Assets

• Any assets that are not verifiable, stable, are not acceptable sources for the down payment or closing cost, unless they satisfy our requirements for borrowed funds.
• Refer to the online FNMA manual for complete eligibility criteria.

Down Payment Requirements

• Generally, FNMA requires the borrower to use his or her savings or other liquid assets to make a minimum cash down payment of 5%.
• However, there are some mortgage products for which we require the borrower to pay a lesser amount from his or her own funds.
• Once our minimum down payment from the borrower's own funds requirement has been satisfied, the remainder of a larger down payment may come from other acceptable sources -- such as a gift (or grant), trade equity, rent credit, a disaster relief grant or loan, an individual development account, an employer, premium proceeds from a mortgage revenue bond, etc.

• However, funds received from other acceptable sources can be used to pay the borrower's share of the closing costs, prepaid items that have to  be paid by the property purchaser and to satisfy any financial reserve requirement.
• In some instances, we permit a borrower to obtain the entire down payment from these sources. Refer to the mortgage products  for any exceptions to our requirement for the borrower to make at least 5% of the down payment from his or her own funds.

Subordinate Financing

• Generally, we will purchase or securitize first mortgages that are subject to subordinate financing held by another investor as long as the subordinate lien is recorded and clearly subordinate to our mortgage lien. (For an exception to this policy, refer to cooperative share loans).
• When subordinate financing is left in place in connection with a first mortgage refinance transaction, we usually require the execution and recordation of a re-subordination agreement.
  • However, if the security property is located in a jurisdiction that has statutes providing for any subordinate financing that meets specified conditions to retain the same subordinated lien position it had with the prior mortgage that is being refinanced, we will not require the lender to obtain a re-subordination agreement -- as long as the lender agrees to represent and warrant that it has complied with the provisions of the applicable statutes (and the mortgage satisfies the specified criteria).

• The repayment terms for most types of subordinate financing must provide for regular payments that cover at least the interest due so that negative amortization will not occur, and must permit prepayment at any time without penalty.
• The terms of the subordinate financing should require interest at a market rate, although financing by the property seller may be at a below-market rate (and will be considered as a sales concession).
• For subordinate financing that does not involve a home equity line of credit, a market rate is one that is no more than 2% below the posted net yield we have in effect for second mortgages at the time the subordinate financing is closed.
• We will not purchase or securitize mortgages that are subject to a subordinate mortgage that has wrap-around terms that combine the indebtedness of the first mortgage with that of the subordinate mortgage.
• A lender must disclose subordinate financing repayment terms to us, the appraiser, and the mortgage insurer.
• Generally, the repayment terms for subordinate financing must provide for a fixed payment amount.
• However, we permit variable payment terms for most subordinate financing that involves a home equity line-of-credit loan and for some types of mortgage products.
• Circumstances under which we will permit variable payments for subordinate financing are:
  • If the subordinate financing will not fully amortize under a level monthly payment plan,
  • it may not have a maturity or balloon payment date of less than five years (although we will not require this when the amount of the subordinate debt is minimal relative to the borrower's financial assets and/or credit profile).
• When the subordinate financing is obtained from the borrower's employer, the financing may be either an unsecured loan or a mortgage, and does not have to require regular payments of either principal and interest or interest only.
• Instead, the financing may be structured in any of the following ways:
  • fully amortizing level monthly payments;
  • deferred payments for some period before changing to fully amortizing level payments;
  • deferred payments over the entire term; or forgiveness of the debt over time.
  • The financing terms may provide for the employer to require full repayment of the debt should an employee terminate his or her employment (for reasons other than those related to disability) before the maturity date of the subordinate financing.

• When the repayment terms for other types of subordinate financing -- other than subordinate financing that relates to home equity lines of credit -- provide for a variable interest rate:
  • the monthly payment must remain constant for each 12-month period over the term of the mortgage.
  • Then, the change in the monthly payment at the end of each 12-month period cannot represent more than a 1% increase in the interest rate.
• Refer to the online FNMA manual for complete eligibility criteria.

First Mortgage Transactions that include Concurrent Subordinate Financing.

• Effective immediately, Investor will no longer restrict the annual interest rate change to a 1% increase; however the monthly mortgage payment must cover at least the interest due so that negative amortization will not occur.
• Investor will permit an adjustable interest rate payment structure on closed-end subordinate financing behind an ARM first mortgage regardless of the initial fixed interest rate period.
• Adjustable interest rate and payment structures will be permitted for closed-end subordinate financing even though the first mortgage may be subject to a buydown plan.

Existing Subordinate Financing

• For a number of years, Fannie Mae has purchased first mortgages that were originated concurrently with subordinate financing, initially under negotiated contracts, but more recently as part of standard transactions as well.
• These subordinate financing structures may take the form of a first and a second mortgage used in combination for purchase-money or refinance purposes where the second mortgage is simultaneously funded closed-end second, a home equity line of credit partially drawn down at the time of closing,a new first mortgage.
• Our research indicates that the presence of subordinate financing increases the risk profile of the first mortgage transaction.
• Accordingly, our automated underwriting  tool, Desktop Underwriter, factors in the existence of subordinate financing in its risk assessment of loans.
• Last year, we announced enhancements to our guidelines relating to manually underwritten loans that, among other things, included guidance regarding factoring the existence of subordinate financing into the comprehensive risk assessment of the transaction. Our ongoing risk analysis of such loans demonstrates that continued close scrutiny is appropriate and that further underwriting eligibility, and/or pricing changes may be warranted in connection with such transactions in the future.
• Recently, our analysis of this loan type also revealed that many lenders are not consistently or properly coding first mortgages that were originated in transactions that include subordinate financing when they deliver the first mortgages to us.
• Proper coding is critical to our risk review and analysis.
• The chart presented below contains our current special feature code requirements as well as our loan-level price adjustments associated with first mortgages that were originated in transactions that include subordinate financing.  We want to remind lenders to include the appropriate special feature code with all deliveries.
• Failure to properly deliver special feature codes can result in post-closing loan-level price adjustment reconciliation issues.

 

Special Feature Code (SFC)	LTV Range	CLTV Range	Loan Level Price Adjustment	Examples of Typical Financing
339	65.01% -75%	90.01%-95%	.25%	75/20/5
338	75.01%- 95%	90.01%-95%	.25%	90/5/5,80/15/5,85/10/5
187	75.01%- 90%	76.01%- 90%	0	80/10/10

• Note: These price adjustments are not applicable for Community Lending mortgages with a Community Second Loans.
• Lenders are further reminded that the loan-level price adjustment for first mortgages that were originated in transactions that include subordinate financing are in addition to any other loan-level price adjustment that may apply.
• When delivering a mortgage that has a subordinate financing structure indicated on the chart, the lender must report the applicable special feature code on the Loan Schedule (Form 1068 or 1069) or Schedule of Mortgages (form 2005) as well as the applicable combined loan-to-value ratio.  Any loan-level price adjustment will be deducted from the purchase proceeds (if the mortgage is submitted as a cash delivery) or drafted from the lender's designated custodial account ( if the mortgage is submitted as part of an MBS pool delivery).

Reserve Requirements

Reserves must be comprised of those liquid or near liquid financial assets that a borrower can readily access, such as funds in the borrower's checking or savings accounts; investments in stocks, bonds, mutual funds, certificates of deposit, and money market funds; the amount vested in a retirement savings account; the cash value of a vested life insurance policy; etc.

• We do not require the lender to verify that a borrower has sufficient financial reserves for limited cash out refinance transactions related to a mortgage secured by a principal residence or second home,
  • Unless the borrower will need reserved assets to qualify for the mortgage.
• We do not specify a minimum reserve requirement that a borrower must satisfy, although we currently do so for certain types of manually underwritten mortgages.
• We require a reserve equal to at least six months of principal, interest, and escrow deposits for the following mortgages:
  • For the new mortgage obligations when a secondary wage-earner's "anticipated" income is used to qualify for a mortgage obtained following the prime wage earner's relocation to a new area as part of his or her employer's corporate relocation program.
  • For a mortgage that is secured by an investment property. When multiple mortgages secured by investment properties made to the same borrower are delivered to us, we require the borrower to satisfy this reserve requirement for all of the mortgages.
  • For any outstanding liens against a property that is security for a bridge (or swing) loan that is obtained to enable a borrower to close on a new home before selling his or her present home. The borrower must also have any other reserves that are otherwise required in connection with the purchase of the new home.

• Cash and other liquid assets that are easily converted to cash may be considered as financial reserves.
• However, when a lender manually underwrites a mortgage that is a cash-out refinance transaction, it must determine the adequacy of the borrower's financial reserves based on the amount of liquid assets he or she had before the refinance transaction (and should not consider any of the cash proceeds from the transaction).

Investment properties

• For one-unit properties, the borrower must have at least two payments (of principal, interest, and escrows) available in reserves.
• For two- to four-unit properties, the borrower must have at least six payments (of principal, interest, and escrows) available in reserves.
• When multiple mortgages made to the same borrower are delivered to FNMA, the borrower's total liquid assets must be sufficient to satisfy the reserve requirement for all of the mortgages.

Contributions

• Any closing costs that are normally paid by the property purchaser are paid (indirectly or directly) by someone else, they are considered contributions.
• Contributions may be paid by any interested party to the property sale or purchase transaction.
  • Although we may impose limitation on the amount of the contributions.
• We do not restrict the specific closing costs that can or cannot be paid by an interested party
  • Although , we do not permit an interested party contributions to be used to make borrowers downpayment or to meet any financial reserve requirements
• The following limitations on contributions made by interested parties will apply:
  • 9% of the lesser of the property's sales price or appraised value, if the loan-to-ratio (or, if applicable CLTV) for a mortgage secured by a principal residence or second home is less than 75%.
  • 6% of the lesser of the property's sales price or appraised value, if the loan-to-ratio  (or, if applicable CLTV) for a mortgage secured by a principal residence or second home is in the range from 76% through 90%;
  • 3% of the lesser of the property's sales price or appraised value, if the loan-to-ratio (or, if applicable CLTV) for a mortgage secured by a principal residence or second home is over 90% and
  • 2% of the lesser of the property's sales price or appraised value, regardless of the loan-to-value ratio (or, if applicable CLTV), for a mortgage secured by an investment property.

Refer to the online FNMA manual for complete eligibility criteria.

Transaction Type

Mortgages may be determined to be eligible under the Standard Eligibility Criteria or the Enhanced Eligibility Criteria.

Standard Eligibility Criteria

• Those basic mortgage eligibility requirements that can be applied to any borrower, based on the type of mortgage and security property.

Enhanced Eligibility Criteria (Click here for the Enhanced Eligibility criteria within the FNMA online manual).

• Those specified mortgage eligibility requirements that can be applied only to certain eligible borrowers who obtain a mortgage that is secured by a one- or two-family principal residence, a one-family second home, or a one- to two-family investment property.

• To take advantage of Enhanced Eligibility Criteria:
  • a borrower must have no previous bankruptcy or foreclosure-related action in his or her credit history,
  • have no mortgage delinquency in the past 12 months of his or her credit history, and
  • have a minimum cash reserve of at least two months (or six months, if the mortgage is secured by an investment property).
• The mortgage must have a minimum "representative" credit score of:
  • at least 680 (or 700, if the borrower is self-employed) for a purchase money transaction or a limited cash-out refinance transaction involving a fully amortizing fixed-rate mortgage that is secured by a two-family principal residence;
  • at least 700 (or 720, if the borrower is self-employed) for a purchase money transaction or a limited cash-out refinance transaction involving a balloon mortgage or an adjustable-rate mortgage that is secured by a one- or two-family principal residence or any type of mortgage that is secured by a one-family second home;
  • at least 720 (or 740, if the borrower is self-employed) for a cash-out refinance transaction involving any type of mortgage that is secured by a one- or two-family principal residence or a one-family second home or for any type of transaction involving any type of mortgage that is secured by a one- to two-family investment property.

Mortgage limits

We have no minimum unpaid principal balance requirement.

Mortgage Amounts

• A modification of a mortgage that Fannie Mae has not purchased for cash or MBS that is executed as an alternative to requiring the mortgage to be refinanced does not result in the creation of a new loan.
• Therefore, lenders are reminded that a modified mortgage that had an original unpaid principal balance that exceeded our current applicable limit (the limit in effect at the time of a proposed sale of the mortgage to us), even though the balance may have been paid down at the time of the modification to or below our current applicable limit, is not eligible for purchase by us.

The maximum original principal balance that we will purchase or securitize for a regularly amortizing first mortgage is shown below:

First Mortgages

No. of Units	Contiguous United States, District of Columbia and Puerto Rico	Alaska, Guam, Hawaii and Virgin Islands Only
1 Unit	$322,700	$484,050
2 Units	$413,100	$619,650
3 Units	$499,300	$748,950
4 Units	$620,500	$930,750

Mortgage Term

• The term of a first mortgage may not extend more than 30 years beyond the date of the first payment.
• We have no minimum remaining term requirements for most mortgages.
• For exceptions to this policy, refer to the Specific Mortgage loan programs.

Interest Rate Buydowns

• We purchase or securitize many first mortgages that are subject to temporary interest rate buydown plans, if the security property will be occupied as a principal residence or second home.
• However, temporary interest rate buydowns are not allowed for all products or for some products under certain conditions. Refer to Temporary buydown sections in each specific product description for  additional requirements.
• Generally,an interest rate buydown plan must provide for a buydown period that is not greater than 36 months
• The increases of not more than 1% in the portion of the interest rate paid by the borrower in each 12 month interval (although more frequent changes are permitted as long as the total annual increase does not exceed 1%).
• Refer to Trailing Spouse Income, Rental Income, Subordinate Financing and Temporary interest rate buydown sections in each specific product description for  additional requirements.

Source of Buydown Funds.

• Funds for most temporary buydown plans may be provided by any source or combination of sources -- such as the property seller, the borrower, a relative of the borrower, the borrower's employer, the lender, etc.
• If the contributor of the buydown funds is an interested party to the property sale or purchase transaction, refer to "Interested party contribution limit" section for additional requirements.
• Refer to the  online manual for complete eligibility criteria.

Purchase

• A purchase money transaction is one in which the proceeds are used to finance the purchase of a property or to finance the purchase and rehabilitation of a property.
• Under certain circumstances, we consider as a purchase money transaction a mortgage transaction that represents the conversion of an interim construction loan or term note into permanent financing  or a mortgage transaction in which all of the proceeds are used to pay off the outstanding balance on an installment land contract or contract for deed.
• In addition to the standard purchase money mortgage that a borrower obtains to purchase a property (or to purchase and rehabilitate a property), we have a special purchase money mortgage product that a servicer can offer to a borrower who wants to pay off his or her existing mortgage in order to purchase a new property. See Streamlined Purchase Money Mortgage for Eligibility criteria.
• Refer to the  online manual for complete eligibility criteria.

Rate and Term

• A limited cash-out refinance transaction enables a borrower to pay off his or her existing mortgage by obtaining a new first mortgage that is secured by the same property.
• We will also treat as a limited cash-out refinance a refinancing that results from a divorce settlement in which one spouse is required to "buyout" the interests of the other spouse or any other refinancing in which an owner "buys-out" the interests of another owner -- as long as the following conditions are satisfied:
  • The security property must have been jointly owned by all parties for at least the 12 months preceding the date of the mortgage application. (Parties who inherit an interest in the property do not have to satisfy this requirement.);
  • All parties must be able to demonstrate that they occupied the security property as their principal residence, by providing an acceptable source of verification -- such as a driver's license, bank statement, credit card bill, utility bill, etc. that was mailed to the individual at the address of the security property. (Parties who inherit an interest in the property do not have to satisfy this requirement.);
  • All parties must sign a written agreement that states the terms of the property transfer and the proposed disposition of the proceeds from the refinancing transaction. (The borrower who acquires sole ownership of the property may not receive any of the proceeds of the refinancing.); and
  • The party who is "buying out" the other party's interest must be able to qualify for the mortgage under our standard underwriting guidelines.
• Refer to Buy-out section of Contingent Liability section for any additional requirements.

• Generally, a limited cash-out refinance transaction can be used to enable the borrower to modify the interest rate and/or term for his or her existing mortgage, to finance the payment of closing costs (including prepaid items), to pay off some subordinate liens, and to receive a small amount of additional funds from the transaction.
• Refer to Declining Value section for any additional requirements.

• In other instances, a limited cash-out refinance transaction may consist of the following components -- although there are some differences for a Texas Section 50(a)(6) mortgage, a Streamlined Refinance Mortgage, and a HomeStyle Renovation Mortgage:
  • the unpaid principal balance of the existing first mortgage;
  • closing costs (including all prepaid items) and points;
  • the amount required to satisfy any subordinate mortgage liens that are more than one year old as of the date of the new refinance mortgage. (When the borrower does not satisfy outstanding subordinate liens, those liens must be clearly subordinate to our new refinance mortgage and the refinance mortgage must meet our eligibility criteria for mortgages that are subject to subordinate financing.)

• Subordinate liens that involve an equity line of credit may be satisfied by the proceeds of a limited cash-out refinance transaction --
  • as long as the one-year seasoning requirement is measured from the date of the most recent draw against the equity line.
  • we will exempt draws of a minimal amount (as long as the aggregate amount withdrawn within the past 12 months does not exceed $2,000) from being a measurement for this seasoning requirement, if the lender obtains documentation from the borrower or the equity line lender to support the date and amount of the last larger draw against the equity line.
• Subordinate liens that have been in existence for one year or less may be satisfied by the proceeds of a limited cash-out refinance transaction when all of the proceeds of the subordinate lien can be documented as being used to acquire the property or to make home improvements.
  • In this case, the lender must obtain either a HUD-1 uniform settlement statement to document the acquisition of the property or receipts to document the borrower's actual costs for the home improvements.
  • The property appraiser must certify that any improvements were completed and that no dollar-for-dollar adjustments were applied to the value of the renovations; and
  • other funds for the borrower's use (as long as the amount does not represent more than the lesser of $2,000 or 2% of the amount of the new refinance mortgage).

Refer to the  FNMA online manual for complete eligibility criteria.

Cash Out

• A cash-out refinance transaction enables a borrower to pay off his or her existing mortgage by obtaining a new first mortgage that is secured by the same property (or enables the property owner to obtain a mortgage on a property that does not already have a mortgage lien against it).
• The borrower is able to take out much of the equity he or she has in the property and to use the proceeds for any purpose.
• We do not permit cash-out refinance transactions for mortgages that are subject to temporary interest rate buydown plans.
• Before using a cash-out refinance transaction for an existing Texas Section 50(a)(6) mortgage, the lender should review information about the special treatment that may be needed to assure that the transaction will comply with applicable Texas law.]

• The mortgage amount for cash-out refinance transactions may include the unpaid principal balance of the existing first mortgage, closing costs, points, the amount required to satisfy any outstanding subordinate mortgage liens of any age, and additional cash that the borrower may use for any purpose.

Effective for loans delivered on and after February 1, 2003

• The definition of Limited cash-out" and "cash-out" refinance categories have been revised. The limited cash-out refinance category will include only those loans that involve:
  • the pay off of the outstanding principal balance of an existing first mortgage,
  • the pay off of the outstanding principal balance of any existing subordinate mortgage that was used in whole to acquire the subject property,
  • the financing of closing costs (including prepaid expenses), and
  • cash back to the borrower in an amount no more than the lesser of 2% of the balance of the new refinance mortgage or $2,000.
• The refinance of subordinate liens that were not used in whole to purchase the subject property (including home improvement, HELOC and second mortgages obtained for the purpose of taking equity out of the property, even if a portion of the subordinate lien was used to purchase the property) will be considered cash-out refinance mortgages.
• Lenders must obtain written confirmation (and maintain such confirmation in the mortgage file) that all the proceeds of an existing subordinate lien were used to fund part of the purchase price of the subject property in order to treat the transaction as a "limited cash-out" refinance.
  • A copy of the HUD-1 Settlement Statement or other documentation, may be obtained and retained for this purpose.
• Lender must ensure that any refinance mortgage loan submitted to Desktop Underwriter that it expects to deliver to us on and After February 1, 2003 is entered in Desktop Underwriter as the appropriate refinance type, based on the definitional changes set forth above.
• Cash-out refinance mortgages with loan-to-value ratios in excess of 70% (rather than 75%) that do not receive an "Approve", "Refer" or "Expanded Approval" recommendation from Desktop Underwriter will be subject to our "Enhanced Eligibility" requirements.
  • "Enhanced Eligibility" requirements require, among other things, a minimum "representative" credit  score of 720.
• Refer to the  online manual for complete eligibility criteria.

lease option

• Allowed under FNMA Lease Purchase product.
• The Lease-Purchase product option is designed to help low- and moderate-income families overcome the difficult obstacle of accumulating savings for the downpayment.
• Nonprofit organizations often purchase (and sometimes rehabilitate) homes that they then lease to lower-income families, giving the families an option to purchase the property at a later date.

• We will purchase a first mortgage originated as one of our community lending products that has a qualified nonprofit organization as the original borrower, and will permit a one-time assumption of the mortgage by a tenant who satisfies our community lending eligibility criteria (including any applicable income limits) and underwriting guidelines.
• The mortgage must satisfy our other community lending mortgage eligibility criteria
• Refer to the  online manual for complete eligibility criteria.

land contract

• When the proceeds of a mortgage transaction are used to pay off the outstanding balance on an installment land contract (or contract or bond for deed) that was executed within the 12 months preceding the date of the loan application, we will consider the transaction to be a purchase money transaction.
• The loan-to-value ratio for the mortgage should be determined by dividing the unpaid balance of the mortgage by the lesser of the total acquisition cost (defined as the purchase price indicated in the original land contract or contract or bond for deed, plus any cost the purchaser incurs for rehabilitation, renovation, or energy conservation improvements) or the appraised value of the property at the time the new mortgage is closed.
• The expenditures included in the total acquisition cost must be fully documented by the borrower.
• When the installment land contract (or contract or bond for deed) was executed more than 12 months before the date of the loan application, we will consider the transaction to be a limited cash-out refinance transaction.
• In this case, the loan-to-value ratio for the mortgage should be determined by dividing the unpaid principal balance of the mortgage by the appraised value of the property at the time the new mortgage is closed.

construction to perm

FNMA will purchase a type of transaction -- called the conversion of construction-to-permanent financing -- that serves a dual purpose, which is combining the terms of construction financing with the terms for the permanent mortgage financing.

• The conversion of construction-to-permanent financing involves the granting of a long-term mortgage to a borrower for the purpose of replacing interim construction financing that the borrower has obtained to fund the construction of a new residence.
• The borrower must hold title to the lot, which can have been previously acquired or be purchased as part of the transaction.
• All construction work (including any work that could entitle a party to file a mechanics' or materialmen's lien) must be completed and paid for -- and all mechanics' liens, materialmen's liens, and any other liens and claims that could become liens relating to the construction must be satisfied -- before the mortgage is delivered to us.
• The amortization period for the permanent financing must be 360 months or less (and the date the amortization begins, as well as the due date of the first scheduled payment, must be specified in the mortgage note).
• The borrower must be the primary obligor on the mortgage or deed of trust note for the permanent financing.
• A construction-to-permanent financing mortgage can be closed as a single transaction or as two separate closing transactions. (We do not, however, consider the granting of a long-term mortgage to a borrower to enable him or her to make a single disbursement to a builder/contractor for the purchase of a completed property to be the conversion of construction-to-permanent financing.)
  • A single closing transaction for both the construction loan and the permanent financing may be used if the borrower wants to close on both the construction loan and the permanent financing at the same time. When a single closing transaction is used, the lender will be responsible for managing the disbursement of the loan proceeds to the builder, contractor, or other authorized suppliers. Because the loan documents specify the terms of the permanent financing, the construction loan will automatically convert to a permanent long-term mortgage on completion of the construction. As long as the lender qualifies the borrower based on the terms of the permanent financing -- and those terms do not change -- the lender will not need to reunderwrite the borrower at the time of conversion. (Our HomeStyle Construction-to-Permanent Mortgage is a variation of a single closing transaction.
  • Two separate closing transactions -- one closing for the construction phase and another closing for the permanent financing -- may be used when an individual borrower obtained interim construction financing to finance the construction of a residence (and, perhaps, to finance the purchase of the lot as well) and needs to obtain permanent financing on completion of the construction. The lender that provides the long-term permanent mortgage may be a different lender than the one that provided the interim financing. The lender must underwrite the borrower based on the terms of the permanent mortgage.

• A construction-to-permanent financing mortgage may be closed as either a purchase money transaction, a limited cash-out refinance transaction, or a cash-out refinance transaction. When a refinance transaction is used, the borrower must have held legal title to the lot before he or she applied for the construction financing and must be named as the borrower for the construction loan.
• The same loan-to-value ratio requirements that apply for other purchase money and refinance transactions (as set out above and in Exhibits 1 and 2) apply to a construction-to-permanent financing mortgage. However, the method for determining the loan-to-value ratio will vary based on the type of transaction and the length of time the borrower has held legal title to the lot (and, in some instances, how title was acquired).
  • When a purchase money transaction is used in connection with a lot that the borrower acquired 12 or more months before applying for the construction financing -- or if the borrower acquired the lot through an inheritance or gift (regardless of the date of acquisition) -- the loan-to-value ratio is determined by dividing the unpaid principal balance of the construction-to-permanent mortgage by the lesser of (1) the current appraised value for the property (both the lot and the improvements) or (2) the sum of the documented costs of the construction and the current appraised value of the lot.
  • If the borrower acquired the lot within the 12 months preceding the date of the application for the construction financing, the loan-to-value ratio is determined by dividing the unpaid principal balance of the construction-to-permanent mortgage by the lesser of (1) the current appraised value for the property (both the lot and the improvements) or (2) the total acquisition costs (which are the sum of the documented costs of the construction and the sales price of the lot). (The sales price of the lot must be documented by a copy of either the purchase contract or the related HUD-1 uniform settlement statement.)
  • When a limited cash-out refinance transaction or a cash-out refinance transaction is used in connection with a lot that the borrower acquired 12 or more months before applying for the construction financing, the loan-to-value ratio is determined by dividing the unpaid principal balance of the construction-to-permanent mortgage by the current appraised value for the property (both the lot and the improvements).
  • If the borrower acquired the lot within the 12 months preceding the date of the application for the construction financing, the loan-to-value ratio is determined by dividing the unpaid principal balance of the construction-to-permanent mortgage by the lesser of (1) the current appraised value for the property (both the lot and the improvements) or (2) the total acquisition costs (which are the sum of the costs of the improvements and the sales price of the lot).
• We require the borrower to use his or her savings or other liquid assets to make a minimum required downpayment of 5% -- and permit the remainder of the downpayment to come from other sources (such as trade equity or a gift). The lender must document the borrower's cash investment, unless the borrower uses as his or her minimum cash investment a building lot or land that was acquired 12 or months before the date of the application for construction financing. Acceptable documentation includes a HUD-1 uniform settlement statement (or some other form of settlement statement), a copy of the warranty deed showing no liens, or a copy of a release of lien.
• The lender must retain in its individual loan file the appraiser's certificate of completion and a photograph of the completed property. In addition, if the proceeds of the construction loan were used to build a new residence, the lender must retain a certificate of occupancy (or an equivalent form) from the applicable government authority.
• The lender must use our uniform mortgage instruments to document the permanent mortgage. These documents may not be altered to include any reference to construction of the property (other than any alteration that we specifically require). The construction loan may be converted into a permanent mortgage in either of the following ways:
  • Using a construction loan rider to modify our uniform instruments that will be used for the permanent mortgage. The rider must state the construction loan terms, and the construction-related provisions of the rider must become null and void at the end of the construction period and before the permanent mortgage is sold to us.
  • Because the permanent mortgage cannot be sold to us before it is scheduled to begin amortizing, a lender will need to amend the construction loan rider (and the accompanying uniform instruments) if the construction is completed sooner or later than originally anticipated.
  • The amendment(s) should provide the new dates on which amortization for the permanent mortgage will begin and end. The lender will also need to record the amended documents before the permanent mortgage is sold to us.
  • Using a separate modification agreement to convert the construction loan into permanent financing. This agreement must be executed and recorded in the applicable jurisdiction before the permanent mortgage is delivered to us.
• The lender must include the applicable conversion document in its loan submission package. When amended documents are recorded in connection with a construction loan rider, the lender must also include a copy of the original documentation that the borrower signed.

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Home Improvement Transactions

• A home improvement transaction is one in which some or all of the loan proceeds are used to repair, remodel, renovate, rehabilitate, or otherwise improve the borrower's home.
• When the financing for such improvements is a first mortgage, the transaction is treated as either a purchase money  transaction or a limited cash-out refinance transaction.
• When the financing for the home improvements is a second mortgage, the transaction may be treated as a purchase money transaction, a refinance transaction, or a standalone transaction (if the borrower is neither acquiring the property nor refinancing an existing debt in connection with the home improvement).
• The originator of a second mortgage that is a home improvement loan should be a firm that has the origination and servicing of second mortgages as one of its principal business purposes.
• Generally, we will not purchase or securitize a home improvement loan that was originated by a home improvement contractor incidental to the sale of the materials and the handling of the improvement work.

Rental Property Leases

• When the property that secures a first mortgage is rented, the rental agreement or lease may not include any provision that could affect significantly our position as mortgagee.
• In some jurisdictions, leases that predate the mortgage have a superior claim to the mortgage even if they have not been recorded.
• Normally, a tenant's rights under a preexisting lease remain intact on the sale of the leased premises.
• Accordingly, if the lease is not subordinate to the mortgage, the lender must review each lease to ensure that any tenant's rights to purchase the property -- and any other rights that could affect adversely the mortgagee's interest -- have been waived formally by the tenant or tenants

Property Eligibility

allowable states

All Contiguous United States including Alaska, Hawaii, and Guam, Puerto Rico and the Virgin Islands.

geographic restrictions

Link to Geographic Restrictions

Acceptable properties

• Single Family Dwellings

• Condominiums
• PUD projects
• Cooperative projects
• Manufactured Homes
• Modular Homes
• Prefabricated Housing.

• 2-4 Units

Refer to online manual for complete eligibility criteria.

unacceptable properties

• Working farms
• Ranches
• Orchards
• Commercial operations
• Undeveloped land
• Land development-type properties

Refer to online manual for complete eligibility criteria.

appraiser requirements

• We do not approve appraisers. Therefore, when selecting an appraiser, a lender must not give any consideration to an appraiser's representation that he or she is approved or qualified by Fannie Mae.
• We require a lender to use appraisers that are state-licensed or -certified (in accordance with the provisions of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989) to appraise the properties that secure mortgages it intends to deliver to us. The lender (and any third-party originators it uses) must be aware of, and in full compliance with, state laws for licensing and certification of real estate appraisers.
• From time to time, we may refuse to accept appraisals prepared by specific appraisers or we may notify a lender that we will no longer accept appraisals prepared by a given appraiser.
  • When we notify a lender that we will no longer accept appraisals from a particular appraiser, we will allow the lender a certain amount of time to clear its mortgage pipeline.
  • After that, it must not submit to us any mortgages secured by properties appraised by that individual

appraisal requirements

• Uniform Residential Appraisal Report (Form 1004), for one-family properties and units in planned unit developments (including those that have an illegal second unit or accessory apartment that we will consider as acceptable security) that secure either first or second mortgages.
• Small Residential Income Property Appraisal Report (Form 1025), for two- to four-family properties (including those that are located in PUD projects).
• Individual Condominium Unit Appraisal Report (Form 1073), for single-family properties that are units in condominium projects or
• Individual Cooperative Interest Appraisal Report (Form 1075), for single-family properties that are units in cooperative projects.
• Refer to online manual for complete eligibility criteria.

Age of Appraisal

• The property must have been appraised within the 12 months that precede the date of the note and mortgage.
• When the appraisal report will be more than four months old on the date of the note and mortgage -- regardless of whether the property was appraised as proposed or existing construction -- the appraiser must inspect the exterior of the property and review current market data to determine whether the property has declined in value since the date of the original appraisal.
• If the appraiser indicates that he or she believes that the property has declined in value, the lender must obtain a new appraisal for the property.
• If the appraiser indicates that he or she believes that the property has not declined in value, the lender should request the appraiser to provide a certification to that effect, based on his or her exterior inspection of the property and knowledge of current market conditions. The inspection and the certification must occur within the four months that precede the date of the note and mortgage.

Field Reviews

The One Unit Residential Appraisal Field Review Report (form 2000, dated December 2002) is now in effect.

condo requirements

All Condominium projects must meet FNMA eligibility criteria.

• Refer to online manual for complete eligibility criteria.

Required Documentation

• Most appraisals for condominium units must be documented on the Individual Condominium Unit Appraisal Report (Form 1073).
• However, we will accept appraisals of detached condominium units on the Uniform Residential Appraisal Report (Form 1004) if the condominium project does not include any common area improvements (other than greenbelts, private streets, and parking areas), and the appraiser includes on  Form 1004 an adequate description of the project and information about the owners' association fees and the quality of the project maintenance.

PUD REQUIREMENTS

• A planned unit development (PUD) is a project or subdivision that consists of common property and improvements that are owned and maintained by an owners' association for the benefit and use of the individual units within the project.
• For a project to qualify as a PUD, the owners' association must require automatic, non-severable membership for each individual unit owner, and provide for mandatory assessments. All PUD projects must meet FNMA eligibility criteria.
• Zoning should not be the basis for classifying a project as a PUD.
• Appraisals for PUD units that secure manually underwritten mortgages are generally documented on the Uniform Residential Appraisal Report (Form 1004).
• Refer to online manual for complete eligibility criteria.

Cooperative Units

• The property that secures our first lien may be a cooperative unit that is represented by shares, stock, a membership certificate, or other contractual agreement in a cooperative housing corporation.
• A cooperative share loan finances the purchase (or refinancing) of the borrower's ownership interest and the accompanying occupancy rights in a cooperative housing corporation. It is secured by an assignment of an occupancy agreement and a pledge of cooperative shares.
• A cooperative share loan must be a lien that has priority over all other liens against the borrower's interest in the property, except that the lien may be subordinated to:
  • that portion of the cooperative corporation's lien against the tenant-stockholder's shares for unpaid assessments that represents the pro rata share of the cooperative corporation's payments for the blanket mortgage, the current year's real estate taxes, and any special assessments. (The pro rata share of the project debt that is related to the cooperative share loan cannot exceed 30% of the sum of the related pro rata share of the project debt and the appraised equity interest value of the shares.); or
  • any assignment of rents or maintenance expenses in any mortgage or deed of trust that is secured by the cooperative project or in any Regulatory Agreement entered into by the cooperative corporation and the Secretary of HUD as a condition for obtaining HUD mortgage insurance.
• Refer to online manual for complete eligibility criteria.

Eligible Cooperative Projects

• All Cooperative projects must meet FNMA eligibility criteria.

• In order for a cooperative share loan to be eligible for delivery to us, the cooperative project in which the secured unit is located must qualify as a "cooperative housing corporation" under Section 216 of the Internal Revenue Service Code. The cooperative corporation must provide the lender with a statement about the project's compliance with Section 216 of the Code.
  • If the cooperative project does not meet Section 216 requirements, we will not purchase a cooperative share loan from within the project.
  • A cooperative housing project must be designed principally for residential use and must consist of five or more units.
  • It must be located in an area that has a demonstrated market acceptance for the cooperative form of ownership.
  • The project may be owned in fee simple.
  • The blanket project mortgage may be a market-rate FHA-insured mortgage or a conventional mortgage.
  • We purchase or securitize cooperative share loans regardless of whether we own the blanket mortgage.
  • However, if we own an interest in the blanket cooperative project mortgage, the maximum mortgage amount that would otherwise be available for a cooperative share loan from that project must be reduced by the portion of the unpaid principal balance of the blanket mortgage that is attributable to the share loan.
• A conventional cooperative project must meet the project requirements.
  • We will not purchase or securitize a cooperative share loan if the cooperative project is one of the types of ineligible projects, regardless of the characteristics of the share loan (unless the lender's lead Fannie Mae regional office agrees in advance to accept share loans from the project on a case-by-case basis).
  • The project may be newly constructed or the conversion of an existing building to a cooperative project.
  • In addition, all construction and rehabilitation for the project must be completed before we purchase or securitize the share loan, unless the lender's lead Fannie Mae regional office approves delivery at an earlier date.

Refer to online manual for complete eligibility criteria.

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Share Loan Eligibility

The cooperative share loan must be secured by stock or shares in the cooperative corporation (or by a membership certificate or other contractual agreement evidencing ownership) and the accompanying exclusive occupancy rights related to a single-family dwelling in the project, which the borrower must occupy as an owner-occupied principal residence.

Refer to online manual for complete eligibility criteria.

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Manufactured home

For FNMA Underwriting Guidelines concerning Manufactured Homes, clickHERE.

Other Factory Built Housing

• Other factory-built housing must assume the characteristics of site-built housing and be legally classified as real property.
• The purchase, conveyance, and financing (or refinancing) of the property, which must be evidenced by a valid and enforceable first lien mortgage or deed of trust that is recorded in the land records, must represent a single real estate transaction under applicable state law.

Prefabricated, Panelized, or Sectional Housing Units

• A factory-built home that is any other type of prefabricated, panelized, or sectional housing does not have to satisfy either HUD's Federal Manufactured Home Construction and Safety Standards or the Uniform Building Codes that are adopted and administered by the state in which the home is installed.
• The home must conform with local building codes in the area in which it will be permanently located

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Modular Homes

A modular home must be built under the Uniform Building Code that is administered by the state agency that is responsible for adopting and administering building code requirements for the state in which the modular home is installed.

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LEASEHOLDS

• We will purchase or securitize conventional fixed-rate and adjustable-rate first mortgages and second mortgages that are secured by leasehold estates in areas in which they have received market acceptance, as long as the mortgage not only covers the property improvements, but also the mortgagor's leasehold interest in the land.
• The leasehold estate and the improvements must constitute real property, be subject to the mortgage lien, and be insured by the lender's title policy.
• The term of the estate should run for at least five years beyond the maturity date of the mortgage. This requirement does not apply if fee simple title will vest in the borrower, an owners' association, or a cooperative corporation at an earlier date.
• FNMA may reserve the right to approve leases when the property is part of a condominium or PUD project.
  • A lender should contact its lead Fannie Mae regional office to determine whether we will delegate the responsibility for approving leases to it.
  • If we do not delegate this responsibility to the lender, the lender must submit all leases for our prior approval.

• The lease must give the lender the right to receive at least 30 days' notice of any default by the borrower, and give it the option to either cure the default or take over the borrower's rights under the lease.
• The lender who delivers the mortgage to FNMA, or the servicer it designates to service the mortgage, must also service the lease.

Lease Requirements

• The lease must provide that the leasehold can be assigned, transferred, mortgaged, and sublet an unlimited number of times either without restriction or on payment of a reasonable fee and delivery of reasonable documentation to the lessor.

• The lease must provide that the borrower will pay taxes, insurance, and owners' association dues related to the land -- in addition to those he or she is paying on the improvements.
• The lease must also provide for the borrower to retain voting rights in any owners' association.
• The lease must provide that the leasehold can be transferred, mortgaged, and sublet an unlimited number of times either without restriction or on payment of a reasonable fee and delivery of reasonable documentation to the lessor.
• The lessor may not require a credit review or impose other qualifying criteria on any transferee, mortgagee, or sublessee.
• The leasehold estate and the mortgage must not be impaired by any merger of title between the lessor and lessee or by any default of a sublessor.
• The lease may, but is not required to, include an option for the borrower to purchase the fee interest in the land.
  • If the option is included, the purchase must be at the borrower's sole option and there can be no time limit within which the option must be exercised.
  • Both the lease and the option to purchase must be assignable.
  • The purchase price must be the lower of the current appraised value of the land; or the amount that results when the percentage of the total original appraised value that represented the land alone is applied to the current appraised value of the land and improvements.
  • If any option to purchase the fee title is exercised, the mortgage must become a lien on the fee title with the same degree of priority that it had on the leasehold.
• For leases that have property improvements already constructed when the lease is executed, the initial purchase price should be established as the land's appraised value on the date the lease is executed.
  • Under a lease that is tied to an external index -- such as the Consumer Price Index (CPI) -- the initial land rent should be established as a percentage of the land's appraised value on the date that the lease is executed.
  • The purchase price may be adjusted annually during the term of the lease to reflect the percentage increase or decrease in the index from the preceding year.
  • Leases may be offered with or without a limitation on increases or decreases in the rent payments.
• For leases that the  improvements to the property will be constructed after the lease is executed, the purchase price of the land should be the lower of the current appraised value of the land, or the amount that results when the percentage of the total original appraised value that represented the land alone is applied to the current appraised value of the land and improvements. Initial land value may not exceed 40% of the combined appraised value of the land and improvements.  For example, assume that the total original appraised value for a property was $80,000, and the land alone was valued at $20,000 (thus representing 25% of the total appraised value). If the current appraised value is $100,000 -- $30,000 for land and $70,000 for improvements -- the purchase price would be $25,000 (25% of $100,000).

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rural property

• Rural dwellings may not acceptable under all programs.
• To be eligible the property must be residential in nature based on the characteristics of the subject property, zoning, and the present land use.

• When the security property consists of more than one parcel of real estate, the parcels must be adjoining and zoned as "residential"; only one parcel may have a dwelling unit; and the mortgage must be a valid first lien on each parcel.
• For example, the mortgage may be secured by two parcels -- one parcel on which the borrower's residence is located and another adjoining parcel that can have either no improvements or limited nonresidential improvements (such as a garage).
• The lender may amend the security instrument to include the conditions under which the adjoining lot subsequently may be released as security for the mortgage.
• One such condition is that the outstanding unpaid principal balance of the mortgage must have the same (or a better) relationship to the current appraised value of the property after release of the adjoining lot that the original mortgage amount had to the original value of the property at the time we purchased or securitized the mortgage.
• This can be the result of property appreciation or the borrower's making an additional principal payment to reduce the mortgage balance to the required level.
• Example: If the value of the property at the time we purchased a $90,000 mortgage was $100,000, the loan-to-value ratio was 90%. This means that at the time the adjoining lot is released, the loan-to- value ratio must be no more than 90% (as calculated based on the then current unpaid principal balance and the current appraised value of the property after the release). If the loan-to-value ratio is higher than 90%, the borrower must make an additional principal payment that is sufficient to reduce the loan-to-value ratio to 90%.

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acreage/square footage

The Loan Program under which the Loan is submitted determines acceptable acreage limitations.

Multiple Parcels

When the security property consists of more than one parcel of real estate:

• The parcels must be adjoining,
• Zoned residential,
• Only one parcel may have a dwelling unit and,
• The mortgage must be a valid first lien on each parcel.

Pledged Personal Property

Restrictions

When the borrower has pledged personal property together with real property to secure the loan the following applies:

• Its allowable on two, three & four-unit properties ONLY.
• Personal property may NOT be included as additional security for any mortgage on a one-unit property, unless Fannie Mae has specified otherwise.

unique properties

Community Living Group Homes

• The group home that secures a Community Living mortgage must maintain its residential nature and have no modifications that would make it unacceptable as a one- or two-family residence.
• The property appraisal for a one-family property should be documented on the Uniform Residential Appraisal Report (Form 1004), while the appraisal for a two-family property should be documented on the Small Residential Income Property Appraisal Report (Form 1025).

Refer to online manual for complete eligibility criteria.

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Urban Properties

The valuation of properties in urban locations that are undergoing rehabilitation may also present some unique property valuation and underwriting issues.

• For example, some lenders underwrite mortgages in urban areas on a block-by-block basis.
  • Block-by-block underwriting and appraisal analysis is acceptable in cases in which rehabilitation has started in the block in which the subject property is located (or in facing blocks that are visible to the property), but has not yet spread to the rest of the neighborhood.
  • This enables the appraiser and the lender's underwriter to place weight on the positive influences of the rehabilitation efforts.
  • To a large extent, a block-by-block analysis simply focuses on the appraiser's definition of the neighborhood.
•  Urban locations that are undergoing rehabilitation may involve relatively small neighborhoods (perhaps limited to a block or just a few blocks) because of the level of rehabilitation and buyer demand for properties that are being improved.
• In such cases, it is appropriate for the appraiser to emphasize the sales of properties that are undergoing rehabilitation (or that have been rehabilitated) in the immediate neighborhood (which is the block in which the property is located or facing blocks that are visible to the property).
• We expect the appraiser to demonstrate that local market conditions make block-by-block analysis appropriate, by illustrating that market evidence indicates that the rehabilitation of the properties in the neighborhood (or the general revitalization of the neighborhood) is a trend, not an isolated occurrence.
• If there is a lack of truly comparable sales in the neighborhood -- either because of the level of rehabilitation or the relatively low number of sales transactions -- the appraiser may need to analyze and use as comparable sales not only less similar properties from the subject neighborhood, but also properties from competing neighborhoods.

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Properties Affected by Environmental Hazards

• We will purchase or securitize a mortgage secured by a property that is affected by an environmental hazard if the effect of the hazard is measurable through an analysis of comparable market data as of the effective date of the appraisal and the appraiser reflects in the appraisal report any adverse effect that the hazard has on the value and marketability of the subject property or indicates that the comparable market data reveals no buyer resistance to the hazard.
• To illustrate: We are frequently asked to address the eligibility of mortgages secured by properties that are located in neighborhoods affected by radon gas or the presence of hazardous wastes. In such situations, we expect the appraiser to reflect any adverse effect or buyer resistance that is demonstrated and measurable through the available comparable market data. Therefore, when a property is located in a neighborhood that has a relatively high level of radon gas or is near a hazardous waste site, we expect the appraiser to consider and use comparable market data from the same affected area because the sales prices of settled sales, the contract sales prices of pending sales, and the current asking prices for active listings will reflect any negative effect on the value and marketability of the subject property.
• Although our guidelines expressly require the appraiser to include in the appraisal report comments about any influence that an environmental hazard has on the value and marketability of the property and to make appropriate adjustments to the overall analysis of the value of the property, we expect the lender to oversee the performance of the appraisers it employs.
• The lender must make the final decision about the need for inspections and the adequacy of the property as security for the mortgage requested. We expect the lender to exercise sound judgment in determining the acceptability of the property.
• For example, since we require the appraiser to comment on the effect of a hazard on the marketability and value of the subject property, the appraiser would have to note when there is market resistance to an area because of environmental hazards or any other conditions that affect well, septic, or public water facilities.
• When the lender has reason to believe that private well water that is on or available to a property might be contaminated as the result of the proximity of the well to hazardous waste sites, the lender is exercising sound judgment if it obtains a "well certification" to determine whether the water meets community standards.

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Inspection reports

An inspection report is not required unless an inspection is typical and normally required in that area, indicated by the appraiser, the sales contract or the condition of the property.

National Flood Insurance Program

Effective after December 31, 2002

Lapse of National Flood Insurance Program Authority: Loans secured by uninsured properties in Special Flood Hazard Areas will be temporarily eligible for purchase.

• This policy will apply to loans originated during the hiatus period and delivered until the earlier to occur of January 15, 2003 or the re-authorization of the NFIP, retroactive to January 01, 2003.
• Eligibility for purchase is conditioned upon lenders taking all steps necessary to obtain the insurance in order to facilitate the issuance of coverage once the NFIP insurance authority is renewed, and retaining evidence that these steps have been taken:
  • Including obtaining evidence of the submission of a completed application for flood insurance and
  • Acceptable evidence of payment of the initial premium.

mixed use properties

• Although FNMA will purchase or securitize mortgages that are secured by properties that have a business use in addition to their residential use -- such as a property with space set aside for a day care facility, a beauty or barber shop, a doctor's office, a small neighborhood grocery or specialty store, etc., FNMA has special eligibility criteria for them.
• Therefore, the appraiser must provide an adequate description of the mixed-use characteristics of the subject property in the appraisal report and the lender must make sure that it considers these criteria and adequately addresses them.
• Specifically, for a mixed-use property to be acceptable, the following criteria must be met:
  • The property must be a one-family dwelling that the borrower occupies as a principal residence.
  • The mixed use of the property must represent a legal, permissible use of the property under the local zoning requirements.
  • The borrower must be both the owner and the operator of the business.
  • The property must be primarily residential in nature.
  • The market value of the property must be primarily a function of its residential characteristics, rather than of the business use or any special business-use modifications that were made.

zoning

Agricultural/commercial zoning

Not available

Inclusionary Zoning Restrictions

Any resale controls that affect the restricted units must be for a fixed period of any term up to 30 years.

Because many jurisdictions may have resale controls that are greater than 30 years, we are modifying this policy to eliminate our limitations on the maximum periods for such resale controls.

Inclusionary Zoning Restrictions

• To provide affordable housing for low- and moderate-income persons, some state and local governments have introduced the concept of "inclusionary zoning." We purchase and securitize mortgages that are subject to inclusionary zoning restrictions under the terms and conditions set forth in this section.
• Under our existing policy, any resale controls that affect the restricted units must be for a fixed period of any term up to 30 years.
• Because many jurisdictions may have resale controls that are greater than 30 years, we are modifying this policy to eliminate our limitations on the maximum period for such resale controls.;
• In such cases, the deed restrictions must be subordinate to our mortgage and we must have the first claim to any hazard insurance settlement or condemnation award.
• In addition, the restrictions cannot impair our legal rights to remedy a default under the mortgage terms, nor should they require us to send a notice of default or foreclosure to any third party.
• The source of the deed restrictions must be included in the public land records so that it is readily identifiable in a routine title search.
• The zoning authority or local jurisdiction may retain the "right of first refusal" to purchase a restricted unit that is being resold. This right must be exercised within 90 days after the property is listed for sale; however, the deed restrictions cannot obligate us to notify the zoning authority or local jurisdiction separately about a pending foreclosure sale of the restricted unit.
• When we acquire a restricted unit through foreclosure or acceptance of a deed-in-lieu of foreclosure, future sales of the unit must not be subject to any resale restrictions.

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declining values

• The lender must generally not offer maximum financing in any instance in which property values are declining.
• Limited cash out refi for property "buy-outs" is eligible for maximum financing only if Fannie Mae owned or securitized the mortgage is being refinanced limited to the unpaid principal balance of the existing first mortgage and the borrower may not receive no additional funds from the transaction, any subordinate financing must be either paid or re-subordinated to the  new refinance mortgage.

Rental Property Leases

• When the property that secures a first mortgage is rented, the rental agreement or lease may not include any provision that could affect significantly our position as mortgagee.
• In some jurisdictions, leases that predate the mortgage have a superior claim to the mortgage even if they have not been recorded.
• Normally, a tenant's rights under a preexisting lease remain intact on the sale of the leased premises.
• Accordingly, if the lease is not subordinate to the mortgage, the lender must review each lease to ensure that any tenant's rights to purchase the property -- and any other rights that could affect adversely the mortgagee's interest -- have been waived formally by the tenant or tenants