August 13, 2015| The AFR 411 2015-16
American Financial Resources, Inc.
Attention: All AFR Lending Partners
Topics in this edition of The AFR 411 include:
Conventional Updates
Fannie Mae
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SEL 2015-07
Freddie Mac
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Bulletin 2015-12
AFR will be following the guidelines outlined below in the Fannie Mae Selling Guide
Announcement SEL-2015-07 and the Freddie Mac Bulletin 2015-12.
Fannie Mae
All Fannie Mae updates are effective immediately; DU will be updated the weekend of August
15, 2015 to reflect these policy changes.
Conversion of Principal Residence Requirements No Longer Apply
Fannie Mae has eliminated the requirements specifically associated with the conversion of a
principal residence to a second home or investment property. UWs should follow the standard
rental income and financial reserve requirements when the borrower converts his or her
current principal residence to an investment property.
See B3-6-06 (Qualifying Impact of Other Real Estate Owned) and B3-4.1-01 (Minimum Reserve
Requirements)
Qualifying Considerations
When the borrower owns mortgaged real estates, the status of the property determines how
the existing property’s PITIA must be considered in qualifying for the new mortgage
transaction. If the mortgaged property owned by the borrower is:
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An existing investment property or a current principal residence converting to
investment use, the borrower must be qualified in accordance with, but not limited to,
the policies in topics B3-3.1-08 Rental Income, B3-4.1-01 Minimum Reserve
Requirements, and if applicable, B2-2-03 Multiple Financed Properties for the Same
Borrower;
An existing second home or a current principal residence converting to a second home,
the PITIA of the second home must also be counted as part of the borrower’s recurring
monthly debt obligations; or
The borrower’s current principal residence that is pending sale but will not close (with
title transfer to the new owner) prior to the subject transaction, the UW must comply
with the policies in this topic.
In conjunction with the policies of this topic, the UW must also comply with the policies in B2-203, B3-1.1-08 and B3-4.1-01, as applicable.
Stocks, Bonds and Mutual Funds
Fannie Mae updated the policy related to the use of vested stocks, bonds, and mutual funds
(including retirement accounts) when they are used for down payment, closing costs, and
reserves. Instead of requiring a standard reduction in value, the policy has been simplified as
follows:
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100% of the value of the asset is allowed when determining available reserves.
If the UW documents that the value of the asset is at least 20% more than the funds
needed for the borrower’s down payment and closing costs, no documentation of
liquidation is required. Otherwise, documentation of the borrower’s actual receipt of
funds realized from the sale or liquidation must be obtained.
Reminder: Non-vested assets are not eligible for down payment, closing costs, or reserves.
See B3-4.1-01 (Minimum Reserve Requirements), B3-4.3-01 (Stocks, Stock Options, Bonds, and
Mutual Funds) and B3-4.3-03 (Retirement Accounts).
Unreimbursed Employee Business Expenses
The following changes and clarifications have been made related to unreimbursed employee
business expenses.
For a borrower who is qualified using base pay, bonus, overtime, or commission income less
than 25% of the borrower’s annual employment income:
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•
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Unreimbursed employee business expenses are not required to be analyzed or
deducted from the borrower’s qualifying income, or added to monthly liabilities. This
applies regardless of whether the unreimbursed employee business expenses are
identified on tax returns (IRS Form 2106) or tax transcripts received from the IRS.
Union dues and other voluntary deductions identified on the borrower’s paystubs do
not need to be deduced from the borrower’s income or treated as a liability.
The FNMA Selling Guide now clearly states that tax returns are not required to
document these sources of income.
For borrowers earning commission income that is 25% or more of annual employment income,
unreimbursed employee business expenses must be deducted from gross commission income
regardless of the length of time that the borrower has filed that expense with the IRS.
•
The exception to this is if the expense is an actual automobile lease or loan payment. If
borrowers report an automobile allowance as part of their monthly qualifying income,
the UW must determine if the automobile expenses reported on IRS Form 2106 should
be deducted from income or treated as a liability. The FNMA Selling Guide describes
how the UW is to make this determination.
See B3-3.1-04 (Commission Income), B3-3.2.1-03 (Deductions Reported on IRS Form 2106), B36-01 (General Information on Liabilities) and B3-6-05 (Monthly Debt Obligations)
Tip Income
Tip income is permitted to be included in qualifying income if the UW can verify that the
borrower has received the income for the last two years. Tip income can be verified using a
WVOE (Form 1005) or recent paystubs and IRS W-2 forms.
In some cases, the full amount of the tip income earned by the borrower may not be reported
by the employer on the WVOE, paystub and W-2 form. However, the borrower may report
additional tip income to the IRS using Form 4137, when filing his/her tax returns. Fannie Mae
will allow this tip income to be used in qualifying if the UW obtains the most recent two years
of federal income tax returns with Form 4137.
Use of IRS W-2 Transcripts in Lieu of W-2s
When lenders verify employment income for borrowers whose income is used to qualify for the
mortgage loan, borrower-provided paystubs and IRS W-2 forms are one option that can be
utilized to document the income. In lieu of W-2 forms, other documentation options are a
Request for Verification of Employment (Form 1005) or the final year-to-date paystub. Fannie
Mae will also now permit an IRS Wage and Income Transcript (W-2 transcript) in lieu of the
actual W-2 forms.
See B3-3.1-06 (Requirements and Uses of IRS Form 4506-T)
Permit Prepayment Penalties on Subordinate Liens
Fannie Mae has removed the restriction of permitting a prepayment penalty on subordinate
financing.
See B2-1.1-04 (Subordinate Financing)
RD Section 502 Leveraged (Blended) Programs Allowed as Community Seconds
To further expand access to rural housing, Fannie Mae will now purchase conventional first
mortgage loans under the Rural Development (RD) 502 Leveraged (Blended) Loan Program that
are combined with a direct, low interest rate subordinate Section 502 lien from RD. The
subordinate lien will be considered eligible under the Community Seconds program. The
standard review of Community Seconds programs described in B5-5.1-01, Community Seconds
Mortgages, is not required; however, the subordinate lien must meet all RD guidelines. As with
any Community Seconds mortgage, Fannie Mae does not purchase the subordinate lien.
Optional Data Fields on Verification of Employment (Form 1005)
The Verification of Employment (Form 1005) may be used to document income for a salaried or
commissioned borrower in lieu of a paystub and W-2 forms. However, some of the date
requested by the form is not generally provided by employers, nor is it available on paystubs
and W-2s. As a result the FNMA Selling Guide now specifically lists which data fields on the
form are optional and need not be completed.
See B3-3-1-02 (Standards for Employment Documentation).
Miscellaneous Selling Guide Updates
B2-1.4-02, Mortgage Loan Eligibility (Ability to Repay Loan Eligibility Requirements). Pending
changes to the Official Commentary to 12 CFR 1026.03 will treat non-investment property loans
made to estate planning trusts (such as inter vivos trusts) as consumer credit, making these
trusts subject to the Truth in Lending Act. References to inter vivos trusts in this topic have been
modified accordingly. This will apply when the change to the Official Commentary goes into
effect.
Freddie Mac
All of the changes announced in the 2015-12 Bulletin are effective immediately unless
otherwise noted.
Loan Prospector is Free
As announced in Freddie Mac’s Single-Family News Center article on May 29, 2015, Loan
Prospector is free for all new submissions.
Section 2.2.1 and Guide Exhibits 15, 16 and 18 have been updated to reflect this change.
Credit and Underwriting
Interested party contributions – abatements
Currently, Mortgages with abatements (that are funds provided to a lender or third party by an
interested party to pay or reimburse in whole or in part a certain number of the Borrower’s
Mortgage payments in excess of the Prepaids/Escrows) are not eligible for sale to Freddie Mac.
Guidelines have been revised to state that the payment of up to 12 months of homeowner’s
association dues by an interested party is not considered an abatement but is considered an
interested party contribution and is subject to the requirements for interested party
contributions and other conditions.
Sections 25.3 and 42.3 have been updated to reflect these changes.
Multiple Financed Properties
Effective for Mortgages with Settlement Dates on or after October 26, 2015, Freddie Mac is
revising the multiple financed property requirements as follows:
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Increasing from four to six the maximum number of financed properties that the
Borrower may own or be obligated on when the transaction is a second home or an
Investment Property Mortgage,
Clarifying certain types of properties that should not be included in the count of
financed properties.
Sections 22.22 and 22.22.1 have been updated to reflect these changes. Cross-references in
Section B24.2 have also been updated as a result of these changes.
Rental Income
Effective for Mortgages with Settlement Dates on or after October 26, 2015, Freddie Mac is
removing the requirement that the Borrower must have a two-year history of managing
Investment Properties to use the income from a subject Investment Property or other
Investment Properties owned by the Borrower for qualifying purposes.
Sections 37.14 and 37.16.2 have been updated to reflect these changes.
Rent Loss Insurance
Effective for Mortgages with Settlement Dates on or after October 26, 2015, Freddie Mac is
removing the requirement that the Borrower must have six months of rent loss insurance to
use rental income from the subject Investment Property for qualifying purposes.
Sections 22.22.1, 37.14, and 58.3.2 and Exhibit 5 have been updated to reflect these changes.
Debt Payment-to-Income Ratio Calculation
Effective for Mortgages with Settlement Dates on or after August 1, 2015, Freddie Mac is
revising the minimum monthly payment amount that must be included in the debt payment-toincome ratio (“DTI”) calculation when a student loan is deferred or is in forbearance and no
monthly payment is verified from 2% to 1% of the outstanding balance of the student loan
Freddie Mac clarifies that UWs may calculate monthly payments for student loans, revolving
accounts and open-end accounts based on a specified percentage of the outstanding balance
only when there is no documentation in the Mortgage file indicating the actual monthly
payment amount.
Freddie mac is now permitting the exclusion of a monthly payment from the DTI calculation
when the Borrower is self-employed and the monthly payment is made by the Borrower’s
business, subject to certain conditions.
Sections 37.13, 37.16 and 37.17 have been updated to reflect these changes.
Gift Letters
A gift letter is required when gift funds are used as Borrower Funds or reserves. Effective for
Mortgages with Settlement Dates on or after August 1, 2015, Freddie Mac is removing the
requirement that the gift letter must identify the Mortgaged Premises.
Sections 37.22 and 37.23 have been updated to reflect these changes.
Verbal Verification of Employment
Freddie mac has updated the requirements to provide that when conducting verbal
verifications of employment, the lender/UW must verify the Borrower’s employment status,
and not whether the Borrower is employed or on leave.
Section 37.20 and Guide Form 90 have been updated to reflect this change.
Property Eligibility
Comparable sales selection
Effective for Mortgages with Application Received Dates on or after September 1, 2015
In Bulletin 2015-7, Freddie Mac revised the selection requirements for comparable sales for
properties located in new subdivisions, units located in new Planned Unit Developments (PUDs)
and units located in recently converted and New Condominium Projects. To provide additional
time for lenders to adjust their processes, if necessary, Freddie Mac has extending the effective
date for these changes from May 14, 2015 to Mortgages with Application Received Dates on or
after September 1, 2015. In the interim, lenders either may continue to use the requirements in
effect prior to Bulletin 2015-7, or may implement the changes sooner if they are able to do so.
Sections L33.6, 42.8 and 44.15 have been updated to reflect this change.
Delivery
Uniform Loan Delivery Dataset (ULDD)
In addition to adding new Section 17.43 to reflect the changes announced in the “Guarantor
program and loan-level buyup and buydown program” section of this Bulletin, Freddie Mac is
also making the ULDD-related updates indicated below.
Nationwide Mortgage Licensing System identifiers for Delaware, Maine and Missouri
In 2008, Freddie Mac was instructed by the Federal Housing Finance Agency to begin collecting
loan-level origination data, including unique identifiers assigned by the Nationwide Mortgage
Licensing System (NMLS) to identify loan origination companies for Mortgages with Application
Received Dates on or after July 1, 2010. Delaware, Maine and Missouri did not require nor
allow state loan origination companies to register and obtain NMLS identifiers. As announced in
Bulletin 2012-8, state-regulated loan origination companies that did not have an NMLS
identifier and operated solely in Delaware, Maine and Missouri were instructed to deliver
special codes that were created for Delaware (“1001”), Maine (“1002”) and Missouri (“1003”).
State law now requires Delaware, Maine and Missouri loan origination companies to obtain
NMLS identifiers. As a result, all lenders must now deliver the loan origination company NMLS
identifier instead of the special delivery codes. The Freddie Mac Selling System will be updated
on August 24, 2015 to prevent the submission of the special delivery codes.
Section 17.7 has been updated to remove the additional instructions for completion of ULDD
Data Point Party Role Identifier (Sort ID 627) for the special delivery codes.