Land Home Financial Services Wholesale Division (LHFS)

Land Home Financial Services Wholesale Division (LHFS) SUBJECT: Conforming Loan Products (Fixed Rate) SECTION: 1 PAGE: 1 of 25 EFFECTIVE DATE: J...
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Land Home Financial Services Wholesale Division (LHFS) SUBJECT:

Conforming Loan Products (Fixed Rate)

SECTION:

1

PAGE: 1 of 25

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

October 15, 2014

1.00

Fixed Program Codes: ....................................................................................................................... 3

1.01

Summary – Conforming Fixed Rate Products .................................................................................. 3

1.02

Fannie Mae or Freddie Mac .............................................................................................................. 3

1.03

Loan Amount/Loan to Value (LTV) Parameters – FNMA DU Only ............................................... 4

1.04

Minimum Down Payment Requirements FNMA DU Only .............................................................. 4

1.05

Loan Amount/Loan to Value (LTV) Parameters – FHLMC LP Only .............................................. 5

1.06

Minimum Credit Scores .................................................................................................................... 6

1.07

Geographic Lending Area ................................................................................................................. 6

1.08

Eligible Properties ............................................................................................................................. 6

1.09

Ineligible Loan Transactions ............................................................................................................. 6

1.10

Non-Arm’s Length Transactions ....................................................................................................... 7

1.11

Cash-Out Eligibility Requirements – FNMA DU Only .................................................................... 7

1.12

Eligible Borrower Types ................................................................................................................... 7

1.13

Continuity of Obligation ................................................................................................................... 8

1.14

Non Occupant Co-Borrowers (Blended Ratios – LP Only) .............................................................. 8

1.15

Refinance and Seasoning – FHLMC/FNMA Definitions ................................................................. 9

1.16

Subordinate Financing ...................................................................................................................... 9

2.00

Credit History .................................................................................................................................. 10

2.01

Payoff or Pay Down of Debt for Qualification ............................................................................... 10

2.02

Contingent Liabilities - Co-Signed Loans ....................................................................................... 10

2.03

Waiting Period Requirements for Derogatory Events .................................................................... 13

2.04

Current Principal Residence Pending Sale ..................................................................................... 13

2.05

Conversion of Current Principal Residence to a Second Home ...................................................... 13

2.06

Equity in the Current Principal Residence (FHLMC ONLY) ......................................................... 14

2.07

Conversion of Current Principal Residence to Investment Property............................................... 14

3.00

Employment/Income ...................................................................................................................... 15

3.01

Foreign Income/Working for Family Owned Business .................................................................. 16

3.02

Asset Depletion for Income Qualification (Employment Related Assets Only) ............................. 16

3.03

Income from Alimony or Child Support ......................................................................................... 17

3.04

Boarder Income .............................................................................................................................. 17

3.05

Departing Residence ....................................................................................................................... 18

3.06

4506T/Amended 1040’s .................................................................................................................. 18

4.00

Assets .............................................................................................................................................. 18

4.01

Gift Funds........................................................................................................................................ 18

4.02

Gift of Equity .................................................................................................................................. 19

Land Home Financial Services Wholesale Division (LHFS) SUBJECT:

Conforming Loan Products (Fixed Rate)

SECTION:

1

PAGE: 2 of 25

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

October 15, 2014

4.03

Business Funds for Down Payment ................................................................................................ 19

4.04

Interested Party Contributions (IPCs) Limits .................................................................................. 19

4.05

Cash Reserve Requirements ............................................................................................................ 20

4.06

Principal Reductions ....................................................................................................................... 20

5.00

Property/Appraisal .......................................................................................................................... 21

5.01

Recently Listed Property ................................................................................................................. 21

5.02

Property FLIPS (up to 12 months) .................................................................................................. 21

5.03

Unpermitted Room Additions/Conversions .................................................................................... 22

5.04

Condominium – Limited Project Review........................................................................................ 23

5.05

Properties with Solar Panels (FNMA only) .................................................................................... 23

5.06

Zoning ............................................................................................................................................. 24

5.07

For Sale by Owner (FSBO) Restrictions ......................................................................................... 25

5.08

Multiple Owned Properties ............................................................................................................. 25

6.00

Mortgage Insurance Requirements.................................................................................................. 25

6.01

Additional Underwriting Guidelines ............................................................................................... 25

Land Home Financial Services Wholesale Division (LHFS)

SECTION:

PAGE: 3 of 25

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

SUBJECT:

October 15, 2014

Conforming Loan Products (Fixed Rate) 1.00

1

Fixed Program Codes: WC30-000, WC25-000, WC20-000, WC15-000, WC10-000*, WC30LPMI85000, WC20LPMI85-000, WC15LPMI85-000, WC30LPMI90-000, WC20LPMI90-000, WC15LPMI90-000, WC30LPMI95-000, WC20LPMI95-000, WC15LPMI95-000, (Remaining Terms also Available) Automated Underwriting: Loan Prospector (LP) Accept or Desktop Underwriter (DU) Approve/Eligible* *WC10-000 – DU Approve/Eligible only. LP not accepted.

Loan Limits 1 unit 2 units 3 units 4 units

Continental US $417,000 $533,850 $645,300 $801,950

Alaska & Hawaii $625,500 $800,775 $967,950 $1,202,925*

*Loan Prospector is limited to $1,000,000 1.01

Summary – Conforming Fixed Rate Products All loans in this category are underwritten to the secondary market using automated underwriting systems (AUS) provided by Fannie Mae (DU) and Freddie Mac (LP). Manual underwriting is accepted under this series of product codes. Due to investor restrictions and Mortgage Insurance guidelines there are some features of this product that while the agency will allow may be limited by availability of Mortgage Insurance or other underwriting overlays from the standard applicable agency guidelines.

1.02

Fannie Mae or Freddie Mac LHFS will accept both Fannie Mae (FNMA) and Freddie Mac (FHLMC) loans under the standard conforming loan program. All loans will be specific to the required guidelines, loan to value limits, soft underwriting guidelines and other requirements dictated by which AUS is utilized. Under this program LHFS will not accept a loan file that has been determined to be ineligible for one system, and then run through the other system for approval. A circumstance where that is acceptable would be due to ineligible due to disputed accounts, loan to value parameters or ineligibility due to specific agency guidelines. Refer or caution findings due to layered credit risk or ratios would require agency direct program and pricing.

SECTION:

Land Home Financial Services Wholesale Division (LHFS)

PAGE: 4 of 25

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

SUBJECT:

October 15, 2014

Conforming Loan Products (Fixed Rate) 1.03

1

Loan Amount/Loan to Value (LTV) Parameters – FNMA DU Only Type

Occupancy

Primary Residence Purchase / Limited Cash-Out Refinance (LCOR)

Second Home Investment Purchase Investment LCOR

Cash Out Refinance

Units

Amortization

LTV/CLTV/HCLTV1

1

Fully Amortized

97%/97%97%

2

Fully Amortized

85%/85%/85%

3-4

Fully Amortized

75%/75%/75%

1

Fully Amortized

90%/90%/90%

1

Fully Amortized

85%/85%/85%

2-4

Fully Amortized

75%/75%/75%

1-4

Fully Amortized

75%/75%/75%

Primary Residence

1

Fully Amortized

80%/80%/80%

2-4

Fully Amortized

75%/75%/75%

Second Home

1

Fully Amortized

75%/75%/75%

Investment

1

Fully Amortized

75%/75%/75%

2-4

Fully Amortized

70%/70%/70%

1

The CLTV ratio may be up to 105% only if the mortgage is part of a Community Seconds ® transaction. LTV, CLTV, and HCLTV Ratios greater than 95%: For purchases transaction, at least one borrower must be a first-time homebuyer. Note: FNMA guide updates: Conversion of Principal Residence Requirements No longer Apply. B3-6-06 Qualifying impact of Other Real Estate Owned (Qualifying Considerations, Current Principal Residence Pending Sale) and B3-4, 1-01. Minimum Reserve Requirements (Determining Required Minimum Reserves, Principal Residence) 100% of the value is allowed on Stock, Bonds, and Mutual Funds for Reserves (B3-4, 3-01) Minimum Reserve Requirements (Acceptable and Unacceptable sources of Reserves) B3-4,3-03 Retirement Accounts. Unreimbursed Employee Business Expenses are not required to be analyzed – B3-3,1-04 Commission Income,B3-3,2,1-03 Deductions Reported on IRS Form 2106; B3-6-01, General Information on Liabilities(Monthly Obligations Not included in Liabilities) Tip Income is allowed to be included in qualifying income if verified. B3-3, 1-09 Other Sources of Income; B3-3, 1-01. General Income Information (Determining the Need for Fed. Income Tax Returns) Use of IRS W-2 Transcripts In Lieu of W-2s. B3-3, 1-06. Requirements and Uses of IRS Form 4506-T

1.04

Minimum Down Payment Requirements FNMA DU Only Please see chart for minimum down payment requirements and source. This is a FNMA DU guideline. If the borrower receives a gift from a relative or domestic partner who has lived with the borrower for the last 12 months, or from a fiancé the gift is considered the borrower’s own funds an may be used to satisfy the minimum borrower contribution requirement if all individuals occupy the subject property. If borrower and seller are related, proof is required that seller is current on the underlying mortgage (i.e. not a bail out). Furthermore, for agency loans borrower must make minimum 5% down payment from his own funds. Please note: Community Seconds and employer assistance in the form of an unsecured loan cannot be applied and used for the reserve requirement. Personal gifts, gifts or grants from an entity, employer assistance, and Community Seconds will be permitted as minimum borrower contribution.

SECTION:

Land Home Financial Services Wholesale Division (LHFS)

1

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

SUBJECT:

October 15, 2014

Conforming Loan Products (Fixed Rate)

LTV/CLTV/ HCLTV Ratios

Source of Funds Gift of grant from entity employer Personal Gifts assistance community seconds

1-4 Unit Primary Residence or Second Home

80% or less

1-4 Unit Primary Residence

1 unit Primary Residence Greater than 80% 2-4 Unit Primary Residence or Second Home

1) 2)

3)

1.05

PAGE: 5 of 25

Minimum Borrower Contribution Requirement from Borrower’s OWN funds

None Funds needed to complete the transaction can come from the source of funds noted here None Funds needed to complete the transaction can come from the source of funds noted here 5% Standard Eligibility After the minimum borrower contribution has been met from the borrower’s own funds, the remaining source of funds can be used to supplement the down payment, closing costs and reserve requirements.

Unsecured loans from a relative (including a spouse), domestic partner, or fiancé are no longer an acceptable source of funds for the borrower’s minimum contribution for any transaction. When employer assistance is in the form of a second mortgage, the transaction may be structured as a Community Seconds or it must satisfy Fannie Mae’s standard eligibility criteria for mortgages that are subject to subordinate financing. Secured Community Seconds can be used on most transactions, subject to guidelines. Please be sure to allow for any differences in Mortgage Insurance guidelines when structuring your transaction.

Loan Amount/Loan to Value (LTV) Parameters – FHLMC LP Only

Type

Purchase Limited Cash-Out Refinance (LCOR)

Cash Out Refinance

Occupancy

Transaction Type – Fully Amortized

LTV w/ sec. fin1

TLTV w/ sec. fin*

HTLTV w/ sec. fin*

Primary Residence

1

Purchase/LCOR

95%

90%

95%

95%

2-4

Purchase/LCOR

80%

75%

80%

80%

Second Home

1

Purchase/LCOR

85%

80%

85%

85%

1

Purchase

85%

80%

85%

85%

1

LCOR

75%

70%

75%

75%

2-4

Purchase/LCOR

75%

70%

75%

75%

Investment

Primary Residence

1

Fully Amortized

80%

75%

80%

80%

2-4

Fully Amortized

75%

70%

75%

75%

Second Home

1

Fully Amortized

75%

70%

75%

75%

1

Fully Amortized

75%

70%

75%

75%

2-4

Fully Amortized

70%

65%

70%

70%

Investment 1On

Units

LTV w/o sec. fin.

or after September 1, 2015, FHLMC is eliminating the separate lower LTV ratio requirements for Mortgages with secondary financing.

Land Home Financial Services Wholesale Division (LHFS) SUBJECT:

SECTION:

1

PAGE: 6 of 25

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

Conforming Loan Products (Fixed Rate)

October 15, 2014

1.06

Minimum Credit Scores Minimum Credit for all transaction is 620. Decision credit score and pricing credit score is the lowest middle score of all borrowers on transaction. We are unable to use alternative credit and all borrowers must have credit scores (minimum of one score with DU/LP eligibility). Disputed accounts: May require manual downgrade; please review your DU/LP findings.

1.07

Geographic Lending Area LHFS is currently approved to lend in 47 states & District of Columbia. Excluding: Kansas, Missouri and New Jersey. Please refer to https://wholesale.lhfs.com/approved_states.html for current licensing information. TX (a)(6) loans are not allowed. Hawaii: Properties in Lava Flow Zones 1 or 2 are not allowed.

1.08

Eligible Properties Single family residences, warrantable condos and PUDs, and 1-4 family dwellings. Leasehold properties are eligible, provided lease meets FNMA requirements and AUS system is Desktop Underwriter. Ineligible Properties: Non-warrantable condos, non-warrantable PUDs, manufactured homes, condotels & any property that is considered unique including but not limited to working ranches, board and care homes, commercial property, live/work lofts with deed restrictions. Properties with less than 600 square feet - please see agency direct guidelines.

1.09

Ineligible Loan Transactions a) Investment property and second home non-arm’s length/at-interest transactions are ineligible under this program. Please refer to agency direct guidelines for eligibility requirements. b) Investment property and second home transactions where broker or broker employee is the borrower and the loan has been processed by the broker are ineligible. c) Restructured loans are ineligible. A restructured loan is a mortgage loan in which the terms of the original transaction have changed resulting in the forgiveness of the mortgage or a restructure of the mortgage either through a modification or the origination of a new loan that results in any of the following: • Forgiveness of a portion of the principal and/or interest on either the first or second lien. • Application of a principal curtailment by or on behalf of the investor to simulate forgiveness. • Conversion of any portion of the original mortgage debt to a soft subordinate mortgage • Conversion of any portion of the original mortgage debt from secured to unsecured. • Second home and investment properties that are non-arm’s length transactions are ineligible. • Purchase transactions where the Seller wants to lease back the subject property is not allowed. d) Any transaction where subordinate financing that is being paid off has identity of interest to the broker of record or any employees of the broker.

Land Home Financial Services Wholesale Division (LHFS)

SECTION:

1

PAGE: 7 of 25

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

SUBJECT:

Conforming Loan Products (Fixed Rate)

October 15, 2014

1.10

Non-Arm’s Length Transactions The following restrictions apply when there is a direct relationship between any of the parties to the transaction (borrower, seller, builder, broker, employer and appraiser): • Investment property loans not allowed • If borrower and seller are related, proof is required that seller is current on the underlying mortgage (i.e. not a bail out). Furthermore, for agency loans borrower must make minimum 5% down payment from his own funds. • If borrower is refinancing a property that was bought less than 1 year ago from a party with whom he has an established relationship (i.e. non-arm’s length), proof is required that seller was current on the underlying mortgage at the time of sale. • In purchase transactions where the seller is a corporation, partnership or any other business entity, proof may be required that the borrower is not an owner of the business entity selling the property. • Delayed financing not allowed • Newly construction on second home and investment not allowed

1.11

Cash-Out Eligibility Requirements – FNMA DU Only Cash-out refinance transactions must be used to pay off existing mortgages by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it. The following additional requirements apply: • Continuity of obligation must be demonstrated. • Properties listed for sale in the 6 months preceding the application date for new financing are limited to 70% LTV/CLTV/HCLTV ratios (or less if mandated by the specific product, occupancy, or property type) Note: Properties that were listed for sale must have been taken off the market on or before the application date evidenced by a MLS listing cancellation. • The property must have been purchased by the borrower at least 6 months prior to the loan application for new financing. Ineligible Cash-Out Transactions: The following transaction types are not eligible as cash-out refinances: • The mortgage is subject to a temporary interest rate buy-down. • The subject property was purchased by the borrower within the 6 months preceding the application for new financing (unless the subject property qualifies for delayed financing) • The subject property is currently listed for sale. • The existing mortgage is a “restructured mortgage.” • For certain transactions on properties that have a Property Assessed Clean Energy (PACE) loan, borrowers who refinance the first mortgage loan and have sufficient equity to pay off the PACE loan but choose not to do so will be ineligible for a cash-out refinance. • Transactions in which a portion of the proceeds of the refinance is used to pay off the outstanding balance on an installment land contract, regardless of the date the installment land contract was executed. •

1.12

The new loan amount includes the financing of real estate taxes that are more than 60 days delinquent and an escrow account is not established, unless requiring an escrow account is not permitted by applicable law or regulation.

Eligible Borrower Types U.S. citizens. Non-U.S. citizens who are lawful permanent or non-permanent residents of the United States who are legally present in the United States with unexpired passport with valid SSN. NonPermanent Resident Aliens must have valid work authorization evidenced by an Employment Authorization Document (EAD) issued by BCIS, Form I-797A issued by USCIS. Acceptable visa types are H-1, H-2A, H-2B, H-3, L-1, E-1 and G series. World Bank employees with a G series visa are ineligible. Revocable Inter Vivos trusts are eligible.

Land Home Financial Services Wholesale Division (LHFS) SUBJECT:

Conforming Loan Products (Fixed Rate) 1.13

SECTION:

1

PAGE: 8 of 25

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

October 15, 2014

Continuity of Obligation  Continuity of obligation occurs on a refinance transaction when at least one of the borrower(s) on the existing mortgage is also a borrower on the new refinance transaction secured by the subject property.  The borrower has been on title for at least 12 months but is not obligated on the existing mortgage(s) that is being refinanced and the borrower meets at least one of the following requirements: o has been residing in the property for at least 12 months, o has paid the mortgage for at least 12 months, or o can demonstrate a relationship with the current obligor (for example, relative or domestic partner).  The borrower acquired the property through an inheritance or was legally awarded the property (for example, divorce, separation, or dissolution of a domestic partnership). There is no minimum waiting period with regard to when the borrower acquired the property before completing a new refinance transaction.  The borrower on the new refinance transaction has been added to title through a transfer from a trust, or a limited liability company (LLC), or partnership. The following requirements apply:  the borrower must have been a beneficiary/creator (trust) or a 25% or more owner of the LLC or partnership prior to the transfer, and  the transferring entity and/or the borrower has had a consecutive ownership (on title) for at least the most recent 6 months prior to disbursement of the new loan. Note: Transfer of ownership from a corporation to an individual does not meet the continuity of obligation requirement. Limited Eligibility: If the borrower is on title (minimum 6 months) but there is no continuity of obligation, as detailed above, the loan will be treated as a cash-out refinance. The following applies: • If the property is owned free & clear and was purchased within 6 - 12 months prior to the application date, the LTV is based on the lower of the sales price/acquisition price, documented by the HUD-1, or the current appraised value. • If the property is owned free & clear and was purchased more than 12 months from the date of application, the LTV is based on the current appraised value. • If the property has an existing lien and the borrower has been on title for a minimum of 6 months the maximum LTV is 50%, based on the current appraised value.

1.14

Non Occupant Co-Borrowers (Blended Ratios – LP Only) Mortgages with an occupant Borrower that has a non-occupant co-borrower underwritten with LP do not have specific requirements for the occupant Borrower's monthly housing expense-to-income ratio or total debt-to income ratio. Non-occupant is not required to be a relative, but must demonstrate a relationship to the borrower, which must be documented in the loan file. When a Mortgage includes a non-occupying Borrower, and the LTV ratio is greater than 80%, the occupant Borrower must make the first 5% down payment from the occupant Borrower Funds. Please refer to Mortgage Insurance requirements to determine restrictions on occupant borrower ratios.

Land Home Financial Services Wholesale Division (LHFS) SUBJECT:

Conforming Loan Products (Fixed Rate) 1.15

SECTION:

1

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EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

October 15, 2014

Refinance and Seasoning – FHLMC/FNMA Definitions FHLMC rate/term conventional fixed rate loan the seasoning for a refinance transaction is 120 days after acquisition.

Delayed Financing Exception Borrowers who purchased the subject property within the past six months (measured from the date on which the property was purchased to the disbursement date of the new mortgage loan) are eligible for a cash-out refinance if all of the following requirements are met :  The new loan amount is not more than the actual documented amount of the borrower’s initial investment in purchasing the property, plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV, CLTV, and HCLTV ratios for the transaction).  The original purchase transaction was an arms-length transaction.  The purchase transaction is documented by the HUD-1, which confirms that no mortgage financing was used to obtain the subject property. The preliminary title search or report must also confirm no liens on the subject property. The source of funds for the purchase transaction can be documented (bank statements, personal loan documents, HELOC on another property). Any loans used as the source for the purchase transaction will be required to be repaid on the new HUD-1.  If the source of funds used to acquire the property was an unsecured loan or a loan secured by an asset other than the subject property (such as a HELOC secured by another property), the HUD-1 for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property. Any payments on the balance remaining from the original loan must be included in the debt-to-income ratio calculation for the refinance transaction. Note: Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan.  All other cash-out refinance eligibility requirements are met and cash-out pricing is applied.  In addition, the multiple financed property policy is being updated to allow cash-out refinances that meet the delayed financing exception. Additional restrictions apply, refer to Multiple Financed Properties for the Same Borrower.  The borrower(s) may have initially purchased the property as one of the following: o a natural person; o an eligible inter vivos revocable trust, when the borrower is both the individual establishing the trust and the beneficiary of the trust; o an eligible land trust when the borrower is the beneficiary of the land trust; or o an LLC or partnership in which the borrower(s) have an individual or joint ownership of 100%. 

1.16

Subordinate Financing Minimum term for secondary financing is 5 years, with no balloon or call provision allowed during the first five years. The term on the second mortgage may not exceed the term on the first mortgage. Institutional financing must provide for minimum of interest only payments, with no negative amortization, deferred interest or prepayment penalty. Seller financing must provide for regular scheduled principal and interest repayment. Allowable sources of Secondary Financing: Seller carry financing or institutional financing is allowable. Private seconds, identity of interest or other parties related to the transaction other than seller ineligible, along with hard money financing or other private money financing. Please see second on Community Seconds for other sources of acceptable secondary financing.

Land Home Financial Services Wholesale Division (LHFS) SUBJECT:

Conforming Loan Products (Fixed Rate)

SECTION:

1

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October 15, 2014

2.00

Credit History Trade line requirements are determined by DU/LP Findings. Mortgage payment history requirements are determined by DU/LP Findings. Mortgage rating cannot have any 60 day or greater lates in the previous 12 months. Borrower must have re-established good credit since bankruptcy and/or foreclosure. Foreclosures require a 7 year waiting period from the completion of the foreclosure action and must receive an Approve/Eligible or Accept Finding. Refer to FNMA’s Bulletin for detailed information regarding bankruptcy/foreclosure/deed-in-lieu of foreclosure and short sale requirements. This requires a downgrade to manual underwriting which is not accepted under this program. Please refer to agency direct guidelines.

2.01

Payoff or Pay Down of Debt for Qualification Payoff or pay down of debt solely to qualify must be carefully evaluated and considered in the overall loan analysis. The borrower’s history of credit use should be a factor in determining whether the appropriate approach is to include or exclude debt for qualification. Installment loans: Paid off or paid down to 10 or fewer remaining monthly payments should generally not be included in the borrower’s long-term debt. However, an installment debt with fewer monthly payments remaining also should be considered as a recurring monthly debt obligation if it significantly affects the borrower’s ability to meet his or her credit obligations. Lease: Cannot be paid off or paid down to qualify regardless of number of remaining payments/months. This is because the expiration of a lease agreement for rental housing or a car typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house. Exception: If the borrower can demonstrate closed lease with replacement vehicle (and any new obligation incurred) or satisfy underwriting that sufficient vehicles are currently owned and a future replacement vehicle is not required the obligation may be excluded at underwriter discretion. Payoff or Paydown of Debt for Qualification: The borrower’s history of credit use should be a factor in determining whether the appropriate approach is to include or exclude debt for qualification. Generally: • If a revolving account is to be paid off and closed, a monthly payment on the current outstanding balance does not need to be included in the borrower's debt-to-income ratio. • Installment loans that are being paid off or paid down to 10 or fewer remaining monthly payments do not need to be included in the borrower’s long-term debt. A Borrower who increases debt and then periodically uses refinance or debt consolidation to reduce payments to a manageable level is not eligible. Open 30-day Charge Accounts: Must be paid off at or prior to closing if the borrower is unable to document sufficient assets to cover the unpaid balance, or the borrower is unable to document that the charges will be reimbursed by his or her employer.

2.02

Contingent Liabilities - Co-Signed Loans When a borrower co-signs 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. The liability does not need to be considered as part of the borrower’s recurring monthly debt obligations if the borrower can verify a history of documented payments on the co-signed 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 co-signer 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).

Land Home Financial Services Wholesale Division (LHFS) SUBJECT:

Conforming Loan Products (Fixed Rate)

SECTION:

1

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EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

October 15, 2014

The liability does need to be considered as part of the borrower’s recurring monthly debt obligations if: • The person paying the debt is not obligated on the note (obtain copy of note to document) • The payment by the primary obligor cannot be sufficiently documented, • A sufficient payment history has not been established for the debt, • The payment has adjusted upward and a sufficient history is not established for the new payment amount, or • The primary obligor has a history of being delinquent in making payments on the debt. 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, it requires the obligation was actually paid out of company funds and that this was considered in its cash flow analysis of the borrower’s business. The account payment does not need to be considered as part of the borrower’s individual recurring monthly debt obligations if 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 cash flow analysis of the business took payment of the obligation into consideration. (Cannot be also counted as income, and exclude the obligation). The account payment does need to be considered 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. If the business provides acceptable evidence of its payment of the obligation, but the 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. If the account in question has a history of delinquency it cannot be excluded from the borrower’s debt analysis. Court-Ordered Assignment of Debt: When a borrower has 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. It is not counted as part of the borrower’s recurring monthly debt obligations. If the payment is delinquent it is not evaluated as part of the borrower’s credit profile, however, it may require a manual downgrade if it affects the AUS finding. Any payment history prior to the debt assignment by the court will be considered in evaluation of the borrower’s credit history. Home Equity Lines of Credit: When the subject mortgage also has a home equity line of credit (HELOC) that provides for a monthly payment of principal and interest or interest only, the payment on the HELOC must be on the credit report or currently monthly HELOC payment coupon. If the HELOC does not require a payment, there is no recurring monthly debt obligation so the lender does not need to develop an equivalent payment amount. If the HELOC will be accessed as part of the transaction, with a new monthly obligation, a payment amount of 1% of the total credit line amount will be used, if a copy of the credit line note is not included for payment calculation. Deferred Installment Debt: Deferred installment debts must be included as part of the borrower’s recurring monthly debt obligations. If the borrower’s credit report does not indicate the monthly amount that will be payable at the end of the deferment period, the lender must obtain copies of the borrower’s payment letters or forbearance agreements so that a monthly payment amount can be determined and used in calculating the borrower’s total monthly obligations. Student Loans (DU ONLY): If a payment amount is not shown on the credit report, we will calculate the deferred monthly payment based on 2% of the balance of the student loan. If the payment is less, we would require the payment letter’s in order to use the lesser amount for qualification purposes.

Land Home Financial Services Wholesale Division (LHFS) SUBJECT:

SECTION:

1

PAGE: 12 of 25

EFFECTIVE DATE:

July 28, 2015 SUPERCEDES:

Conforming Loan Products (Fixed Rate)

October 15, 2014

Student Loans – (FHLMC LP ONLY): The credit report may show that an installment debt is in a period of deferment or forbearance. Examples of installment debts with deferred payments include: • Student loans on which the repayment period has not yet started because the Borrower is still in school or payment has been suspended for a period of time with the approval of the creditor. • When payments on an installment debt are not given on the credit report or are listed as deferred, the Seller must obtain documentation to support the payment amount included in the monthly debt payment. Examples of documentation of the required payment amount include: • A direct verification obtained from the creditor; • A copy of the installment loan agreement obtained from the Borrower, or • If payments are currently deferred, the payment amount that will be required once the deferment or forbearance period has ended, as stated in a copy of a financial institution's student loan certification or the installment loan agreement Note: Effective 8/1/2015 (FHLMC Only)- DTI – Deferred student loan with no monthly payment is verified from 2% to 1% Non-reimbursed Employee Expenses (FNMA ONLY): • For a borrower who is qualified using base pay, bonus, overtime, or commission income (