Chapter 4 - Processing for Automated/ Non- Traditional Underwriting ............................ 3
General Guidelines ...................................................................................................... 3
Automated Underwriting Findings ................................................................................ 3
Employment Stability ................................................................................................... 4
Employment Verifications for the Non-Self Employed Borrower ..................................... 4
Additional Sources of Income ...................................................................................... 5
Overtime and Bonus ................................................................................................ 5
Commission ............................................................................................................. 5
Non-Taxable Income ................................................................................................ 6
Child Support, Alimony, Worker’s Compensation..................................................... 6
Military Income ......................................................................................................... 6
Notes Receivable ..................................................................................................... 6
Interest and Dividend Income .................................................................................. 7
Unemployment Income ............................................................................................ 7
Borrower working for relative ................................................................................... 7
Rental Income .......................................................................................................... 7
Employment Verifications for the Self Employed Borrower .......................................... 8
Documentation Requirements ..................................................................................... 8
Business Types ........................................................................................................... 8
Sole Proprietor ......................................................................................................... 8
Partnership ............................................................................................................... 9
Corporation or S Corporation ................................................................................... 9
Analyzing Self-Employed Income ................................................................................ 9
Asset Verification ............................................................................................................ 9
Documenting New Accounts or Large Increases ....................................................... 10
Other Asset Sources.................................................................................................. 10
Bridge/Swing Loan ................................................................................................. 10
Earnest Money ....................................................................................................... 11
Gift Funds for Approve/Eligible Loans .................................................................... 11
Retirement Accounts .............................................................................................. 11
Sale Proceeds from Current Home ........................................................................ 12
Sale of Asset other than Real Estate ..................................................................... 12
Secured Borrowed Funds ...................................................................................... 12
Stocks, Bonds and Mutual Funds........................................................................... 12
Trust Accounts ....................................................................................................... 13
Unacceptable Asset Sources ..................................................................................... 13
Liability Verification........................................................................................................ 13
General Guidelines for Liability Types ....................................................................... 14
Debt Owed by Ex-Spouse ...................................................................................... 14
Single Pay Loans/Installment Debts with No Stated Payment ............................... 14
Revolving Accounts………………………………………………………………………14
Guaranteed Student Loans .................................................................................... 14
Unreported Debt..................................................................................................... 14
Co-Signed Loans ................................................................................................... 15
Omitted Accounts ................................................................................................... 15
Home Equity Lines of Credit (HELOC) ................................................................... 15
Undisclosed Debt ................................................................................................... 15
Credit History ................................................................................................................ 16
General Overview ...................................................................................................... 16
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Past Due Credits .................................................................................................... 16
Disputed Tradelines…………………….………………………………………………..16
Judgments, Garnishments and Liens …………………..……………….…………… 16
Collections, Non-mortgage Charge-offs…………………………………………...…..16
Bankruptcy ............................................................................................................. 17
Foreclosures .......................................................................................................... 17
Deed-in-lieu of Foreclosure, Pre-Foreclosure Sale, Charge-off of a Mortgage…..17
Credit Report Format..................................................................................................... 17
Traditional Credit Reports .......................................................................................... 18
Non-Traditional Credit Reports .................................................................................. 18
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Chapter 4 - Processing for Automated Underwriting
General Guidelines
Verifications of employment and income, sources of funds and payment histories need
to be dated within 120 days (4 months) of the Note date. These items must be used in
evaluating the creditworthiness of the borrower.
Documents used for verification must meet the following standards:
1. The original document must not contain any alterations, erasures, correction
fluid.
2. The original document must not be completed in 2 different colors of ink or have
2 different individuals completing the document.
3. Faxed verifications are permitted if the company’s tag line appears somewhere
on the faxed copy.
4. Verifications must be sent directly from the lending institution to the employer or
depository and then returned directly from the employer or depository to the
lending institution. The borrower is not permitted to deliver the verification to
either party.
5. Internet printouts must contain all the pertinent information, such as borrower
name, institution identification, account number, 60 day transaction history and
balance.
Documentation of each mortgage file must also verify the borrower has sufficient cash
or other equity to apply toward the following items:
1. Down payment (including earned money deposit)& any POC’s on HUD;
2. Prepaid items (including interest, real estate taxes, initial mortgage insurance
premium, hazard insurance premium and all applicable escrows);
3. Borrower paid closing costs;
4. Cash reserves if required on the feedback certificate or per additional
requirements (primary residence conversion, other financed properties where the
subject is a second home or investment property). This would be principal,
interest, taxes and insurance and association dues (if applicable).
Automated Underwriting Findings
You should always be processing off your most recent underwriting findings. Your
underwriting package should be submitted with the most recent underwriting findings
and application.
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Employment Stability
The lender should evaluate the stability of the borrower’s income before deciding to use
it to qualify. If income is not going to continue for a minimum of 3 years, it is ineligible
income.
Variable income is all income that is calculated by an averaging method. The history of
receipt, the frequency of payment and the trending amount of the income being
received must be evaluated to determine that is likely to continue at the current rate to
be considered stable. Examples of this type of income are hourly workers with
fluctuating hours, or income that includes commission/bonus/overtime. Two or more
years of history of receipt is recommended however variable income that has been
received for 12-24 months may be acceptable as long as there are positive offsetting
factors that support the shorter history.
Seasonal part-time or second job income (including seasonal unemployment
compensation) may be considered as stable income if the borrower has worked in the
same job (or line of seasonal work) for the past two years and the borrower’s employer
indicates that there is a reasonable expectation that the borrower will be rehired for the
next season. Examples of borrowers who have season jobs include outdoor laborers
(landscapers, construction workers, etc), income tax preparers, supplemental
department store personnel who work during the holiday season.
The lender should not use seasonal employment compensation to qualify the borrower
unless it is appropriately documented, clearly associated with seasonal layoffs,
expected to recur, and reported on the borrower’s federal income tax returns.
Part-time/ 2nd Job employment income may be used if the borrower has a 2 year history.
Employment Verifications for the Non-Self Employed Borrower
A borrower’s current employment and income will need to be documented according to
one of the following guidelines:
1.
2.
3.
4.
Verbal verification of employment;
One pay stub and a verbal verification of employment.
One pay stub, verbal verification of employment, and previous year’s W2;
Written verification of employment.
Income should be calculated at least 2 of the following ways with the most conservative
figure being used in qualifying:
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1. Hourly wages
Hourly base pay x average # of hours worked x # of weeks worked per year / 12
2. YTD Income
YTD base income / # of months worked YTD
3. Annual salary
Annual salary / 12
4. Base per pay period
Base pay per pay stub x pay periods in year / 12
When calculating income from YTD earnings, use base pay, holiday pay,
personal/vacation pay, and sick pay. If bonus and/or overtime income is being used to
qualify, it needs to be listed separately on the application and a VOE would be required.
The following guidelines are required when using a borrower’s pay stub:
1. Pay stubs must be typed or computer generated and identify the borrower and
employer. No handwritten pay stubs are permitted.
2. Pay stubs the borrower downloads from the internet are acceptable, but must
clearly identify the name of the employer and name of the borrower.
3. Pay stubs must be dated within 30 days of the application and must include YTD
gross earnings.
Overtime and Bonus
1. 2 Year history needed
2. If using the income, it must be entered on the appropriate line of the application.
Overtime should be entered on the overtime line and Bonus should be entered
on the bonus line.
3. Provide Verification of Employment.
4. OT/Bonus must be likely to continue.
Commission
1. In order to use commission income in qualification, your borrower will need to
have at least 12 months of commission income reported on filed federal tax
returns. Two years is recommended however commission income that has been
received for 12 – 24 months may be acceptable as long as there are positive
factors to reasonably offset the shorter income history.
2. Commission income must be entered on the appropriate line of the application.
Enter it on the Commission line.
3. The level of documentation required for commission income will vary based on its
percentage of the overall income amount.
 < 25% = Findings will require the income be documented just as ordinary
wage/salary income.
 > 25% = Findings will require the income be documented according to one
of the following options:
o one year’s personal federal income tax returns;
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o two year’s personal federal income tax returns.
When tax returns are required, review the Schedule A of the returns for unreimbursed
expenses on Form 2106. If there are any expenses listed, they need to be deducted
from the borrower’s base/commission pay.
Non-Taxable Income
Child Support, Alimony, Worker’s Compensation
1. Non-taxable income includes, but is not limited to, Child Support, Alimony and
Worker’s Compensation.
2. In order to use non-taxable income in qualification, the income must have a
history of being received for 6 months and continue for a minimum of 3 years
from the Note date.
3. The non-taxable portion of these types of income, as evidenced by their tax
returns, can be grossed up by 25%.
4. Written verification of non-taxable income describing the payment terms will be
required.
5. Tax returns and transcripts will be required if non-taxable is being grossed up.
Military Income
Military personnel may be entitled to different types of pay in addition to their base pay.
We will accept flight or hazard pay, rations, clothing allowance, and proficiency pay as
long as its future continuance can be established.
Notes Receivable
1. Payments on Notes Receivable must continue for at least 3 years from the date
of the mortgage application in order to be considered as acceptable stable
income.
2. A copy of the note will be required in order to establish the amount and length of
payment.
3. The borrower must provide evidence that he/she has received the funds for the
past 12 months. Acceptable evidence would include:
 deposit slips;
 copies of signed federal tax returns;
 borrower’s bank statements showing consistent deposit of these funds.
Payments received on a note executed within the past 12 months, regardless of
the duration, may not be used as stable income.
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Interest and Dividend Income
1. Interest and dividend income is considered stable income if it is properly
documented and has been received for the past 2 years and must continue 3
years from the date of the mortgage application.
2. The qualifying income must be the average of the past 2 year’s income.
3. Copies of signed federal income tax returns or account statements may be
used to verify income.
4. The lender must verify the borrower’s ownership of the assets on which the
interest and/or dividend income is earned.
5. Any assets used for down payment or closing costs must be subtracted from
the borrower’s total assets before calculating expected future interest and/or
dividend income.
Unemployment Income
1. Unemployment income must be properly documented and has been received
for the past 2 years. It must be predictable and likely to continue.
2. Copies of the borrower’s signed federal income tax returns for the past 2
years should be used to establish a history of the receipt of these benefits.
Borrower working for relative
1. 2 years tax returns required.
2. If using a written verification of employment to verify income, the verification
should be completed by a non-related party.
3. The lender will need to prove that the borrower is not an owner of the
company. This should be done using one of the following options:
letter from the company’s accountant stating the borrower does not
have any ownership in the company; or
 most recent personal federal tax returns.
4. If it is determined that the borrower does have ownership in the company, and
that ownership portion is 25% or more, the borrower will need to be treated as
self-employed.

Rental Income
1. If the rental income is derived from the subject property, the property must be
a two to four unit principal residence property in which the borrower occupies
one of the units or a one to four unit investment property.
2. If rental income from the subject property will be used to qualify the borrower,
Form 1007 (along with the appraisal Form 1004) will be required for single
family properties. The appraisal form for 2-4 unit properties (Form 1025)
includes the rental analysis, so no separate form is required.
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3. Net rental income or loss should be verified using the borrower’s most recent
signed federal tax returns (pages 1 and 2 and Schedule E), or signed lease
and HUD from the purchase of the property if the borrower acquired the
property after the most recent tax returns were filed. The lender should
analyze and calculate the net rental income or loss making sure that
depreciation, interest, taxes and insurance expenses are added back to the
borrower’s cash flow.
4. The rental worksheets located in the documents section on Merchants Bank’s
landing page should be used to calculate the rental income and the
worksheets should be provided with your underwriting package.
5. Rental income from a primary residence conversion can only be used if 30%
equity is documented in the property with an appraisal dated 60 days of note
date. Can use 75% of lease, document of receipt and deposit of security
funds required.
Employment Verifications for the Self Employed Borrower
Anyone who owns 25% or more of a business is considered to be self-employed, even if
they receive W2 income.
If a borrower listed on the application owns 25% or more of a business but you are not
using that income to qualify, the lender still must disclose that they are self-employed
and complete the self-employed analysis to insure there is no net loss to consider.
Please provide page 1 and 2 of the 1040’s and K1’s.
Documentation Requirements
A self-employed borrower could be involved in 3 different kinds of businesses. The
documentation requirements will depend on the type of business. Regardless of the
type, the borrower will need to furnish copies of signed federal tax returns.
Business Types
Sole Proprietor
1. The borrower will file a Schedule C with his/her personal tax returns.
2. Automated underwriting findings will require either 1 or 2 years of signed
federal personal tax returns, to include all schedules.
3. An IRS 4506-T will need to be signed and dated by the borrower at closing
and forwarded with the closing package.
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Partnership
1. The borrower will file a Schedule E with his/her personal tax returns with
income from Schedule K-1. Business returns will be filed of Form 1065.
2. Automated underwriting findings will require either 1 or 2 years of signed
federal personal tax returns, to include all schedules.
3. Schedule K-1s from the partnership returns are required regardless of
whether or not the business tax returns are required.
4. If the percent of ownership is not indicated on the Schedule K-1, a letter from
the accountant stating the ownership percentage will be required.
5. An IRS 4506-T will need to be signed and dated by the borrower at closing
and forwarded with the closing package.
Corporation or S Corporation
1. The borrower will file a Form 1120s (S Corp) or 1120.
2. Automated underwriting findings will require either 1 or 2 years of signed
federal personal tax returns, to include all schedules.
3. Automated underwriting findings will require either 1 or 2 years of signed
federal corporate tax returns, to include all schedules.
4. Schedule K-1s for an S Corporation are required regardless of whether or not
the business tax returns are required.
5. If the percent of ownership is not indicated on the Schedule K-1, a letter from
the accountant stating the ownership percentage will be required.
6. An IRS 4506-T will need to be signed and dated by the borrower at closing
and forwarded with the closing package.
Analyzing Self-Employed Income
Merchants Bank prefers to use the Schedule Analysis Method (SAM) to calculate selfemployed income. Please utilize the SAM worksheet located in the documents tab on
Merchants Bank’s landing page.
Asset Verification
The borrower’s asset information will need to be documented according the
requirements as indicated on the automated underwriting findings.
The lender must verify cash to close based on Line P of the Details of Transaction
section of the application. The Fannie Mae automated underwriting findings may ask
for verification of additional assets in addition to cash needed to close. Freddie Mac
requires that all assets input into the automated system be verified; any additional
reserves required also need to be verified.
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Depository statements or a written Verification of Deposit (VOD) are acceptable forms
of verification of assets
If using a depository statement, following these guidelines:
1. Depository statements must be computer generated.
2. Statements the borrower downloads from the internet are acceptable, but
must clearly identify the borrower, the name of the depository and the URL
address to show the statement was obtained via the internet.
3. Statement must be dated within 45 days of the application and must include a
60 day history.
4. The statement must identify the borrower as the account holder and must
include the account number.
5. The statement must show all transactions on the account, deposits and
withdrawals, and include and ending balance.
6. The current balance should be used. Large or significant increase in deposits
or a significant in balance if VOD used, you will need to provide supporting
documentation to support the increase.
 Large deposits are defined as any deposit that exceeds 50% of qualifying
income.
7. All pages of the depository statement need to be provided by the borrower.
Documenting New Accounts or Large Increases
If the deposit account has been opened within 120 days of application or has a large
deposit (> 50% of qualifying income) made into the account, the source of funds must
be verified.
Other Asset Sources
Bridge/Swing Loan
Bridge or swing loans must be secured by the borrower’s current home and not the
home being purchased. The borrower must be able to carry the bridge loan monthly
payment, or a monthly payment equivalent if there are no monthly payments, in his/her
debt ratio.
In order to not include the bridge or swing loan in the borrower’s debt ratios, the
following documentation will need to be provided:
1. signed purchase agreement on the borrower’s current home with no financing
contingencies listed;
2. letter from the financial institution representing the buyer of the borrower’s
current home stating that they have been approved for financing;
3. 6 months reserves of PITIA for the bridge loan and the first mortgage.
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Earnest Money
If earnest money is being used in cash to close, the following documentation will
be needed:



copy of the purchase agreement signed by both borrower and seller;
copy of the cancelled check written for the earnest money;
bank statement showing the check has cleared the borrower’s account.
Gift Funds for Approve/Eligible Loans
1. Gift funds must come from eligible sources such as a blood relative, domestic
partner, fiancé, fiancée, church, municipality, or non-profit organization. Gift
funds from an ex-spouse are considered an acceptable source of funds if the
circumstances indicate a continuing relationship between the parties.
2. A gift letter will be required documenting the following information:
 name, address, and telephone number of donor;
 amount of the gift;
 relationship of donor to borrower;
 no repayment is expected;
 letter is signed by the donor;
 identifies the subject property being purchased.
3. The receipt of funds can be verified by providing a copy of the canceled gift
check, and a copy of the deposit ticket or bank statement showing the funds
going into the borrower’s account.
4. When the funds are not transferred prior to settlement, the lender must
document that the donor gave the closing agent the gift funds in the form of a
certified check or a cashier check and the gift funds should be shown on the
HUD.
Retirement Accounts
When using retirement funds in qualification, the lender can use 60% of the borrower’s
vested balance. If these funds are needed as cash to close or reserves, the lender
must document the terms and conditions under which these funds can be withdrawn
and document liquidation of these funds. The borrower must have access to the funds
regardless of employment status (if they do not – then the funds should not be used).
The lender must verify the borrower’s receipt of the funds realized from the liquidation of
the assets if needed to complete the transaction.
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Sale Proceeds from Current Home
Pending sale - A signed HUD will be needed to verify these funds at closing. The
Settlement Statement must show sufficient net proceeds to cover the funds needed.
Sold property – A signed HUD from the sale and a bank statement showing the
proceeds have been deposited into the borrower’s account will be required prior to
closing.
Sale of Asset other than Real Estate
The sale of an asset other than real estate is an acceptable source of funds to close if
the following is documented:
1. The borrower’s ownership of the asset.
2. There is verification of the transfer of ownership (bill of sale, or statement
from purchaser).
3. The value of asset, as determined by an independent and reputable source.
4. A copy of the check from the sale of the asset and proof of deposit into the
borrower’s account.
Secured Borrowed Funds
Borrowed funds secured by an asset can be used for cash to close. The loan terms and
asset securing the loan must be verified and the debt must be included in the liabilities.
1. The loan must be 100% secured. A copy of the note and security agreement
will be required.
2. The borrower must be the owner of the asset.
3. The receipt of loan proceeds must be verified.
Unsecured loans are not acceptable funds for closing.
Stocks, Bonds, and Mutual Funds
1. Statements from these accounts must be computer generated. Internet
statements are acceptable providing it identifies the borrower’s name,
account number, and gives a complete history for that period.
2. Monthly statements must be within 45 days of the application date.
3. The statement must identify the borrower as the account holder.
4. The statement must identify the stocks and/or securities, and the dates they
were acquired or sold.
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5. The statement must show the period covered with an ending balance or cash
value.
6. 70% of the value can be used for Stocks, Bonds, or Mutual Funds.
7. If the funds are used for down payment or closing costs, receipt of funds from
the sale of liquidation of the assets must be verified. Stock options or nonvested restricted stock may not be used for reserves.
Trust Accounts
If trust account funds can be verified and proven that the borrower has access to those
funds, they can be counted as funds to close.
Unacceptable Asset Sources
The following items are unacceptable asset sources:
1. Cash on hand that can not be verified;
2. Sweat equity unless the borrower is a contractor.
3. Unsecured loans
Liability Verification
All debts for all borrowers will need to be documented according to one of the following
guidelines:
1. Verification of Loan (completed on Verification of Deposit Form 1006).
2. Child Support, Alimony or Separate Maintenance verification. This must be
verified with a copy of a court decree that contains the dollar amount. If no
decree is available, the lender must obtain verification from the child support
agency stating the monthly payment amount and any unpaid balance.
3. Cancelled Checks (12 months)
 must be legible;
 must show the bank’s endorsement for deposit;
 must show the date of the bank’s endorsement;
 must have a copy of the front and back of the check.
All liabilities listed on the tri-merge credit report or Verification of Deposit must match
the loan application. If there is an old loan that is still being reported on the credit
report, the lender will need to provide an updated credit report or recent statement from
the creditor to verify accurate terms or to document the loan is paid off.
Any installment account with less than 10 payments remaining does not need to be
counted in the borrower’s debt ratio. The debt still needs to be listed on the loan
application. Lease payments and revolving accounts must be included in the debt ratio
regardless of the number of months remaining.
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General Guidelines for Liability Types
Debt Owed by Ex-Spouse
If a debt has been awarded to an ex-spouse, the lender can omit the liability if a copy of
the court decree awarding the liability and the asset, and documentation of the title
being transferred to the ex-spouse is provided.
Single Pay Loans/Installment Debts
A payment must be figured for all single pay notes or any other loan that does not have
a payment listed on the credit report. Appropriate documentation must be obtained
from the creditor to determine what expected monthly payments will be.
Revolving Accounts
When the credit report does not show a required minimum payment amount and there is
no supplemental documentation to support a payment less than 5%, an amount equal to
5% of the outstanding balance must be used.
Guaranteed Student Loans
Guaranteed student loans that are in a deferred status must still be included in the
borrower’s debt ratio. If the credit bureau does not indicate the minimum monthly
payment, monthly payment of 1% of the balance can be used. The greater of 1% of the
balance or the payment shown on the credit report is required to be used for Fannie.
Freddie allows the use of 1.5% of the outstanding balance if no payment is shown on
the credit report. You also have the option to verify the payment amount directly with
the creditor. If the credit report shows a payment that is interest only, verification of
what the principal and interest payment will be when the loan is out of deferment is
required.
Unreported Debt
If a borrower lists a debt on his application but it is not listed on the credit report, this
debt must be added to the borrower’s liabilities and included in the debt ratio.
Verification of the debt should be provided (terms, balance, payment history).
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Co-Signed Loans
If the borrower is a cosigner on a loan, the lender can omit the debt from the ratios
providing it can be documented that the primary obligor has been making payments on
time for the previous 12 months. The lender will need to obtain cancelled checks from
the primary obligor’s account for the previous 12 months. If payment by the primary
obligor cannot be sufficiently documented, a sufficient payment history has not been
established for the debt, or the primary obligor has a history of being delinquent in
making payments on the debt, the lender must count the contingent liability as part of
the borrower’s recurring monthly debt obligations.
Omitted Accounts
Any account that is being omitted that has an account balance of greater than zero must
have documentation provided giving the reason for the omission. This could be in the
form of an updated credit report or a statement verifying the account is paid. Lenders
should not omit loans if they have less than 10 months of repayment. The automated
underwriting system will omit the debt from the debt ratio calculation.
Home Equity Lines of Credit (HELOC) on the Subject Property
If the HELOC is an existing line of credit on the subject property, the current payment
should be included in the proposed housing payment (other financing section) and the
current balance should be reflected in the CLTV. The total available line (maximum
amount) should be included in the HCLTV.
If the HELOC is a new line which will be tied to the subject property, the lender will need
to enter the total amount available to draw on in the Details of Transaction screen under
Subordinate Financing. The monthly payment amount is entered in the Proposed
Housing section of the application in Other Financing.
Undisclosed Debt
Undisclosed debt is defined as debt that is on the credit report but was not included on
the loan application. Lenders are required to either add the debt to the loan application
and resubmit the loan or provide documentation that supports the omission.
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Credit History
General Overview
Merchants Bank looks at the borrower’s credit history for the previous 2 years to
determine if there are any major indications of derogatory credit, such as judgments,
bankruptcies, collections, etc.
Please review your credit report to make sure the social security numbers are accurate
(bureaus all reporting correct numbers, not zero’s)
Past Due Credits
If there are any past due amounts listed on the credit report, those items will need to be
brought current prior to close. If these are going to be paid off prior to close, an updated
credit report will be needed to show the past due balances are paid or a statement from
the credit vendor will be needed verifying the past due amount has been satisfied. If the
item(s) will be paid at close, sufficient funds to pay off the past due item(s) will need to
be verified.
Disputed Tradelines
Fannie – if DO does not issue a disputed message, the lender is not required to obtain
additional documentation. If the disputed item is a mortgage or other significant item,
the underwriter may ask for additional documentation at their discretion. If the findings
contain a disputed item message, the disputed needs to be resolved, new credit needs
to be pulled and associated with DO.
Freddie - If the disputed item is a mortgage or other significant item, the underwriter
may ask for additional documentation at their discretion. New credit would need to be
pulled and associated with LP once the dispute was resolved.
Judgments, Garnishments, and Liens
Open judgments, garnishments and all outstanding liens that in the Public Records
section of the credit report must be paid off at or prior to closing. Documentation of the
satisfaction of these liabilities, along with verification of funds sufficient to satisfy these
obligations must be provided.
Collections, Non-mortgage Charge-offs
For one-unit, principal residence properties, borrowers are not required to pay off
outstanding collections or non-mortgage charge-offs – regardless of the amount.
For two- to four-unit owner occupied and second home properties, collections and nonmortgage charge-offs totaling more than $5000 must be paid in full prior to or at closing.
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For investment properties, individual collection and non-mortgage charge-off accounts
equal to or greater than $250 and accounts that total more than $1000 must be paid in
full prior to or at closing.
Bankruptcy
Chapter 7 - a four-year waiting period is required, measured from the discharge or
dismissal date of the bankruptcy action.
Chapter 13 – a two-year waiting period is required from the discharge date, or four
years from the dismissal date.
Multiple filings – a borrower with more than one bankruptcy filing within the past seven
years, a five-year waiting period is required, measured from the most recent dismissal
or discharge date.
Foreclosures
There is a 7-year waiting period for borrowers with foreclosures.
When both a bankruptcy and a foreclosure are disclosed on the application or when
both appear on the credit report, the bankruptcy timeline will apply as long as
documentation is provided to show the foreclosure was included in the bankruptcy,
otherwise the foreclosure timeframe would apply.
Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale, or Charge-off of a Mortgage
There is a 4-year waiting period required.
Credit Report Format
A tri-merge credit report from an independent consumer agency is required for all loan
files. This report must include:
1. The report must include both credit and public record information for each
locality in which the borrower has resided during the most recent two-year
period.
2. The report must include all discovered credit and legal information that is not
considered obsolete under the Fair Credit Reporting Act.
3. The report must be an original report (automated or faxed reports are
considered “original”).
4. The report must include the full name, address, and telephone number of the
credit reporting agency, as well as the names of the national repositories that
the agency used to provide information for the report.
5. The credit reporting agency must make responsive statements about all items
on the credit report – indicating “unable to verify” or “employer refused to
verify” when appropriate.
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6. For each debt listed, the report must provide the creditor’s name, the date the
account was opened, the high credit, the current status of the account, the
required payment amount, the unpaid balance, the payment history and the
date the account was last updated.
7. Inquiries made in the previous 90 days must be reported.
Traditional Credit Reports
Lenders are required to request a tri-merge credit report from a credit vendor of their
choice. A tri-merge credit report contains the credit information that resides at each
repository (Equifax, Trans Union, and Experian) for each borrower. If one or two of the
credit repositories do not contain any credit information for the borrower(s), the credit
report is still acceptable provided credit data is available from one repository, a credit
score is obtained from the repository, and the lender requested a tri-merge report.
Non-Traditional Credit Reports
If, after submitted your borrower(s) through the automated underwriting system, you find
he/she has no credit score and you have received an Out of Scope recommendation,
you will need to obtain a non-traditional credit report through your credit vendor. The
report will need to contact at least 4 current trade lines that have been open/active for at
least 12 months. Some alternative sources of credit are basically anything that the
borrower makes monthly payments on. Some examples are:
1.
2.
3.
4.
house or rent payment;
utilities
insurance
daycare
The past 12 months are reviewed to determine if there are a sufficient number of
accounts without adverse ratings to support acceptable credit. Unless there is a major
derogatory credit event within the past four 4 years (7 years for foreclosure) or minimal
acceptable credit ratings within the past 12 months, the borrower’s credit will be
considered acceptable if, over the past 12 months the borrower has had:
1. no payments 60 days or more past due on revolving lines of credit and/or
installment loans;
2. no more than 2 payments 30 days past due on all revolving lines of credit;
3. no more than 1 payment 30 days past due on all installment accounts;
4. no payment past due on housing or rent
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