100 CONVENTIONAL UNDERWRITING GUIDELINES

Transcription

1 E MORTGAGE MANAGEMENT, LLC 100 CONVENTIONAL UNDERWRITING GUIDELINES 5/29/2015 Lender NMLS This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of Last Updated 05/29/2015 Page 1

2 TABLE OF CONTENTS 101 Eligible Transactions Occupancy Types Purchase Transactions Refinance Requirements Purchase or Refinance of Inherited Property Contributions Subordinate Financing Prepaid Charges Tax and Insurance Escrows Mortgage Insurance Higher-priced Mortgage Loans (new) Mortgage Credit Certificates Relocation Loans Permanent Financing for New Construction REO Contracts Documentation Requirements Age of Documents Borrower Guidelines Inter Vivos Revocable Trust Permanent Resident Aliens Non-permanent Resident Aliens Foreign Nationals Diplomatic Immunity Non-occupant Co-borrower Non-borrower Spouse or Domestic Partner Separated Borrowers Adding/Removing Borrowers on the Application Lender NMLS This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of Last Updated 05/29/2015 Page 1

3 Social Security Number Credit Report and Credit Score Merged Credit Reports Residential Mortgage Credit Report (RMCR) Credit Report Alerts Credit Report Standards Non-Traditional Credit Report International Credit Report Credit Scores Bureaus Reporting Selection and Validation of Credit Score Credit History Inquiries and Undisclosed Liabilities Credit History Review Payment History Housing Payment History Adverse Credit Requirements for Reestablishing Credit Significant Inaccurate Credit Disputed Credit Obligations Debt Ratios and Tradelines Housing-To-Income Ratio Debt Ratio Calculations Maximum Debt Ratio Tradeline Requirements Pay Off and Pay Down of Accounts Payments Not Shown Day Charge Accounts Lease Payments (auto, equipment rental, etc.) Loans Secured by Financial Assets Lender NMLS This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of Last Updated 05/29/2015 Page 2

4 Contingent Liabilities Authorized User Accounts Past Due Accounts Incorrect Information Employment and Income Employment Documentation Types Income Types Rental Income Departure Residence Non-employment Income and Other Income Types Assets, Reserves, and Funds to Close Minimum Down Payment Assets for Down Payment and Closing Costs Reserves Gifts Other Asset Types Real Estate Owned Unacceptable Sources of Assets Property and Appraisal Appraiser Requirements Appraisal Document Standards Appraisal Evaluation Additional Review Considerations by Property Type Non-permitted Additions Zoning Condominium and PUD Warranties Ineligible Property Types Lender NMLS This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of Last Updated 05/29/2015 Page 3

5 Section 102 Documentation Requirements 101 ELIGIBLE TRANSACTIONS Occupancy Types The feasibility of a borrower occupying the subject property must be examined when the borrower indicates the property will be his or her primary residence. On refinance transactions, compare the current address reported on the loan application to the addresses listed on the credit report. A full explanation is required for any red flags or inconsistencies noted in the last 24 months Primary Residence A primary residence is a one- to four-unit property that at least one borrower occupies as his or her primary residence. Residency is defined by the following criteria: Borrower occupies the property as his or her primary residence Borrower occupies the property for the majority of the year Property location is convenient to the borrower's principal place of employment Property address of record can be documented by, but is not limited to, one of the following: Personal income tax returns Voter registration Driver's license Occupational licensing At least one borrower must occupy the property within 60 days of closing and continue to occupy the subject property for at least one year. An Occupancy Certification is required when the AUS issues an Occupancy Finding or at the underwriter s discretion. Borrowers may be required to certify occupancy for second homes at the underwriter s discretion. In addition, loan documents must provide that the loan may be declared in default if the borrower makes misrepresentations for any provision of the application, including occupancy. The following restrictions apply to primary residence transactions: Multiple primary residence purchases within the past 12 months will be considered on a case-by-case basis when the borrower has satisfactorily explained and documented the following: - The reason the current home is no longer owner occupied - The motivation to occupy the subject property - The elapsed time between transactions was reasonable Primary residence refinance transactions will not be considered unless the borrower resides in and holds title to the subject property at the time of application. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 4

6 Section 102 Documentation Requirements Second Home A second home is a one-unit property that the borrower occupies for some portion of the year in addition to his or her primary residence. Often located in a vacation/resort area, the property must be suitable for year-round occupancy and must not be located in the same market area as the borrower's primary residence. Second homes may be located in a major metropolitan area that the borrower visits on a regular basis. Obtain a letter of explanation from the borrower stating the reason that the home is not located in a vacation/resort area. Transactions where the property is being purchased for occupancy by someone other than the borrower will be treated as an investment property. The borrower must have exclusive control over the property and the property may not be subject to any kind of time sharing agreement, rental pools, or agreements that require the borrower to rent, share or give a management firm control over occupancy. Rental income may not be used to qualify the borrower. The loan is not eligible if borrower s tax returns reflect occasional seasonal rental income, even if the income is not used to qualify the borrower and the rental period is for a negligible amount of time. The hazard insurance policy may not contain rent loss coverage Investment Property An investment property is a one- to four-unit property owned but not occupied by the borrower, regardless of revenue generation. The property must be suitable for year-round rental and occupancy. Refer to Employment and Income Rental Income in this guideline section for additional requirements Product Restrictions for Multiple Financed Investment Properties The subject investment property must be secured by one of the following mortgage products when the borrower owns more than one financed one- to- four-unit investment property. 15-year, 20-year or 30-year fixed rate mortgage, or 7/1 or 10/1 ARM Reserve Requirements Refer to Assets, Reserves, and Funds to Close Reserves Multiple Financed Properties in this guideline section for requirements. Documentation Requirements An Operating Income Statement (Form 998/Form 216) is required at underwriting whether or not rental income is used for qualifying. The gross monthly rent per unit is mandatory with two- to four-unit primary residences and all investment properties on conventional loans. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 5

7 Section 102 Documentation Requirements Purchase Transactions A purchase money transaction is one in which the proceeds are used to finance the acquisition of a property. The proceeds from the transaction must be used to: Finance the acquisition of the subject property Convert an interim construction loan or term note into permanent financing Pay off the outstanding balance on the installment land contract or contract for deed Purchase transactions do not allow for cash back to the borrower at closing. If the borrower receives a refund of the original cash deposit at closing, evidence of payment of the deposit is required (e.g., cancelled check). Unless restricted by the loan program, the borrower may receive cash back for prorated taxes at closing. Within limitations imposed by applicable state laws, closing costs may not be financed as part of a purchase transaction (with the exception of mortgage insurance). Complete purchase agreements, including all addenda, are required for all purchase transactions. Purchase agreement terms must be considered in the underwriting decision and any evidence of undisclosed conditions of the transaction must be investigated. Examples of undisclosed conditions are evidence of straw buyers (changes in purchaser on the purchase agreement) or possible undisclosed seller concessions, such as making mortgage payments on behalf of the borrower for the first few months of the loan. Loans where the purchase agreement has been assigned are not eligible Owner of Record and Chain of Title The seller must be the owner of record. Proof the property seller has owned the property for 24 months or a chain of title for the last 24 months is required. Acceptable sources for the chain of title include copies of recorded deeds, tax statements, or a 24-month chain of title on the title commitment. - A transaction where the property has been sold within the last 12 months requires scrutiny to ensure the transaction is legitimate. Some characteristics of fraudulent transactions include but are not limited to foreclosure bailouts, distressed sales, and inflated values due to stated improvements that are unsupported. Where the seller is not the current owner, all intervening purchase agreements must be submitted and carefully reviewed to ensure any price increases are supported by data. Where the seller is the current owner, ensure the sales history of the subject is adequately disclosed on the appraisal and any price increases are supported. If the seller is a corporation, partnership, or any other business entity, ensure the borrower is not an owner of the business entity selling the subject property. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 6

8 Section 102 Documentation Requirements Non-Arm's Length Transactions A non-arm's length transaction exists when the borrower has a direct relationship or business affiliation with the builder, developer or property seller. Extra diligence should be exercised when there are interested parties to the transaction, other than the builder, developer, or property seller (e.g., broker, loan officer, client, etc.). These transactions are not intended to bail out a family member or the current owner from an existing delinquent mortgage. When individuals wish to purchase or refinance property currently or recently owned by an individual with whom they have an established relationship the Title Commitment may not evidence foreclosure proceedings or Notice of Default/Notice of Intent to Foreclose. - A 12-month mortgage history from the property seller is required to confirm the subject transaction is not a bailout or partial bailout. - A field review will be ordered by EMM. When the seller is a corporation, partnership, or any other business entity, the borrower may not have an ownership interest in the business entity selling the subject property. Second homes and investment properties are not eligible Property Resales Properties being resold with 180 days of the previous sale are subject to the following restrictions: Non-arm s length transactions are not eligible. In addition to a standard appraisal, a 2055 exterior-only (drive-by) appraisal is also required if the current sales price is more than 20 percent greater than the previous sales price Title Restrictions Loans with the following title restrictions are not eligible for financing at EMM: Private Transfer Fee Covenants Title encumbrances preventing EMM from taking first position Sales Contract Changes EMM does not accept re-negotiated purchase agreements that increase the sales price after the original appraisal has been completed if: The appraised value is higher than the contracted sales price provided to the appraiser, and The new purchase agreement and/or addendum used to modify the sales price is dated after the appraisal is received, and The only change to the purchase agreement is an increase in sales price. If the purchase agreement is re-negotiated subsequent to the completion of the appraisal, then the LTV calculation is based on the lesser of the original purchase price or the appraised value, unless: Re-negotiation of only seller paid closing costs and/or pre-paid costs where seller paid closing costs/pre-paid costs are common and customary for the market and supported by the comparables, or An amended purchase agreement for new construction property is obtained due to improvements that have been made that impact the tangible value of the property. In the event of such changes, an updated appraisal must be obtained to confirm the value of the modifications. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 7

9 Section 102 Documentation Requirements Refinance Requirements Less Than One Year of Seasoning The underwriter should analyze transactions involving the payoff of a first lien that has been seasoned for less than one year. If the first lien being paid off was a purchase transaction, and the original purchase price, as stated on the application, is less than the new appraised value the file should contain documentation supporting the increase in value (e.g. appraisal indicates increasing values for the market, appraisal comparable support increasing values, documented home improvements, or a copy of the original appraisal showing the original appraised value higher than the original sales price). If the increase in value is unsupported, the underwriter should use the lower of the original purchase price or the new appraised value to determine LTV/TLTV/CLTV. If the underwriter has knowledge that the first lien being paid off was a cash-out refinance transaction with an LTV greater than 80%, the new loan will not be eligible for rate/term refinance parameters. Provide the HUD- 1 from the previous loan Rate/Term Refinance EMM will consider transactions meeting the following criteria to be rate/term (i.e., limited cash-out) refinances: If the last transaction on the property was a cash-out refinance within the last six months, the new mortgage must be treated as a cash-out refinance. Use Note date to Note date to calculate the six months. Pay off existing first lien - Principal balance plus accrued interest, and any required prepayment penalty, only; other costs such as late fees and past-due amounts may not be paid with the new loan - Seasoning requiremento DU loans- no seasoning requirement o LP loans- minimum 120 days (Note date to Note date) - If the first mortgage is a Home Equity Line of Credit (HELOC), then a copy of the HUD-1 Settlement Statement from the borrower s purchase of the subject property must be provided evidencing the proceeds were used in their entirety to acquire the subject property Pay off any subordinate mortgage lien that was used in its entirety to acquire the subject property- - Principal balance plus accrued interest, and any required prepayment penalty, only; other costs such as late fees and past-due amounts may not be paid with the new loan - No seasoning requirement - A copy of the HUD-1 Settlement Statement from the borrower s purchase of the subject property must be provided evidencing that any subordinate financing was used in its entirety to acquire the subject property Pay off and extinguish a HELOC provided it was used in its entirety to acquire the subject property and there have been no subsequent draws against it since the purchase transaction. Pay standard loan fees (e.g., closing costs on the new mortgage; pre-paid costs, and points) Pay outstanding property taxes provided they are not more than 60 days delinquent - Escrow account must be established in order to qualify as a rate/term refinance, subject to applicable law or regulation. 1 Interested party buyout 2 Cash out is limited to lesser of 2% of the loan amount or $ This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 8

10 Section 102 Documentation Requirements Continuity of obligation must be established. 4 Loan meets requirements for properties listed for sale If a particular state law does not allow a lender to require an escrow account under certain circumstances, loan proceeds may be used to pay property taxes more than 60 days delinquent without establishing an escrow account. Refer to Eligible Transactions Tax and Insurance Escrows in this guideline section. Refer to Eligible Transactions Refinance Requirements Buyout of a Co-owner below for requirements. Refer to section 303 DU Refi Plus and 306 Open Access for product-specific cash out restrictions. Refer to Eligible Transactions Refinance Requirements Continuity of Obligation in this guideline section for requirements. Refer to Eligible Transactions Properties Recently Listed for Sale in this guideline section for requirements. Refer to Fannie Mae Seller Guide B Limited Cash-Out Refinance Transactions for information regarding ineligible limited cash-out refinance transaction types. Short Term Refinance A short-term refinance mortgage is a loan that combines an existing first mortgage and a non-purchase money subordinate mortgage into a new first mortgage within six months of closing the prior transaction or a previous transaction was a cash-out refinance transaction. A short-term refinance is ineligible for a no cashout refinance transaction and must be considered a cash-out refinance. A HUD-1 Settlement Statement is required for any transaction within the previous six months to determine eligibility. Buyout of a Co-owner A refinance transaction that results in a buyout of the other party's interest in his or her primary residence is considered a no cash-out refinance, e.g., divorce settlement, or buyout of a sibling, etc. Refinance to buyout a co-owner or ex-spouse is permitted provided: Maximum LTV is 90% All parties have jointly owned the subject property for 12 months preceding the application date. Parties who inherit an interest in the property do not have to satisfy this requirement. All parties are able to demonstrate they occupied the subject property as their primary residence (e.g., driver's license, bank statement, credit card bill, utility bill, etc. mailed to the individual at the subject property). Parties who inherit an interest in the property do not have to satisfy this requirement. All parties provide a signed, written agreement (divorce decree, separation agreement or buy-out agreement) outlining the terms of the property transfer and disposition of proceeds. The owner-occupant borrower who acquires sole ownership of the property receives no cash proceeds from the transaction. The party who is buying out the other party's interest qualifies using only his/her own income Cash-out Refinance Any refinance transaction not meeting the requirements for a rate/term refinance is treated as cash-out. Cashout refinances are eligible provided: At least one borrower on the current transaction has owned the property for a minimum of six months. Use Note date to Note date for the calculation and refer to Delayed Financing below for additional information. A borrower that inherits or was legally awarded (by divorce, separation, or dissolution of This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 9

11 Section 102 Documentation Requirements a domestic partnership) a property is exempt from the 6-month waiting period requirement that applies to cash-out refinances. Mortgage payment history is 0 x 30 for the lesser of the last 12 months or the life of the loan. The new loan amount cannot include financing of real estate taxes that are more than 60 days delinquent, unless an escrow account is established (except if establishing an escrow account is not permitted by applicable law). Refer to Eligible Transactions Tax and Insurance Escrows in this guideline section. No limit on cash out (refer to 304 Fannie Mae High Balance for separate product-specific guideline) Pay off a non-purchase second lien Pay off tax liens, judgments, borrower liabilities, etc. LP loans- borrowers must have owned the property a minimum of six months (unless the transaction meets requirements for delayed financing. Use settlement date on HUD-1 for the purchase transaction to application date for subject transaction. Delayed financing (see below) Texas Cash-out Refinance Texas cash-out and (a)(6) refinance transactions are eligible. Refer to product guidelines for requirements. Delayed Financing Borrowers who purchased the subject property less than six months prior to the application date are eligible for a cash-out refinance provided- New loan amount is not greater than the borrower s documented initial investment in purchasing the property plus any financed closing costs, prepaid costs, and points. Cash out does not exceed borrower s initial investment Original purchase transaction was an arm's length transaction. If the seller is an LLC, documentation reflecting the names of the LLC s principals is included in the loan file. HUD-1 in file confirms the purchase was an all-cash transaction. LTV/CLTV/HCLTV is based on the lesser of the original sales price or the current appraised value. Source of funds for the purchase transaction is documented in the loan file. The preliminary title search or report does not reflect any existing liens on the subject property. If the source of funds to acquire the subject property was an unsecured loan or HELOC secured by another property, the new HUD-1 Settlement Statement must reflect that source* being paid off with the proceeds of the new refinance transaction. *Note- Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan. LP loans- If funds were borrowed to purchase the subject property, those funds must be repaid and reflected on the HUD-1 Settlement Statement for the subject transaction. All other cash-out refinance eligibility requirements are met and cash-out pricing is applied Properties Recently Listed for Sale Rate/Term Refinance EMM will not close loan transactions where the subject property was listed for sale at the time of application. The property listing must be cancelled or expired a minimum of one day prior to the application date. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 10

12 Section 102 Documentation Requirements EMM will close loans if the subject property was listed for sale within the last six months but was taken off the market prior to the application date. Cash-Out Refinance EMM will not close a loan transaction where the subject property was listed for sale at the time of application. EMM will close conforming cash-out refinance transactions where the subject property was listed for sale within the last six months prior to the loan application date provided- - The property was taken off the market prior to the application date; and - The maximum LTV/TLTV/CLTV is the lesser of 70 percent or the maximum for product/occupancy/property type. Note- A cash-out refinance transaction without an appraisal is not eligible when the property is listed for sale Short Refinance Short refinances or restructured mortgage loans are not eligible for subject property currently owned by borrower Continuity of Obligation There must be continuity of obligation if there is currently an outstanding lien that will be satisfied with the refinance transaction. Loans with an acceptable continuity of obligation may be underwritten as either a rate/term or a cash-out refinance transaction. Continuity of obligation is now measured from date of the original event (for example, transfer of title) and ends with the disbursement date of the new refinance transaction. Acceptable Continuity of Obligation Continuity of obligation is met when any one of the following exists: At least one borrower obligated on the new loan was also a borrower obligated on the existing loan being refinanced. The borrower has been on title and residing in the property for at least 12 months and has either paid the mortgage for the last 12 months or can demonstrate a relationship (relative, domestic partner, etc.) with the current obligor. The loan being refinanced and the title to the property are in the name of a natural person or limited liability company (LLC) as long as the borrower was a member of the LLC prior to transfer. Title should not be transferred back to the LLC after closing. Transfer of ownership from a corporation to an individual does not meet the continuity of obligation requirement. The borrower has recently inherited or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership). Not Acceptable Continuity of Obligation If the borrower is currently on title but is unable to demonstrate an acceptable continuity of obligation, or there is no outstanding lien against the property, the loan is still eligible as a cash-out refinance transaction with these additional limits: No outstanding liens (i.e., purchased for cash or previous mortgage loans that have been paid off) - If the property was purchased within the 6 to 12 month period prior to the application date, the LTV/CLTV/HCLTV ratios will be based on the lesser of the original sales price/acquisition cost (documented by the HUD-1 Settlement Statement) or the current appraised value. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 11

13 Section 102 Documentation Requirements If the property was purchased more than 12 months prior to the application date, the current appraised value will be used to calculate the LTV/CLTV/HCLTV ratios. Outstanding liens with no continuity of obligation - If the borrower has been on title for at least 6 months but continuity of obligation does not exist, the maximum LTV/CLTV/HCLTV ratios will be limited to 50 percent based on the current appraised value. Purchase or Refinance of Inherited Property Inherited properties are eligible for all occupancy types. The following limitations apply if the subject property was inherited within the prior 12 months: Must have clear title or copy of probate showing that the borrower was awarded the property. The transaction may be considered a no cash-out refinance when buying out additional heirs identified in the will or probate document. A copy of the will or probate document must be provided, along with the buy-out agreement signed by all beneficiaries Contributions Interested Party Contributions Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else (e.g. the seller) who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property. Because the interested party has a financial interest in or can influence the terms and the sale or transfer of the subject property, interested party contributions are limited. Refer to the table below for limits. Interested parties to a transaction include the property seller, the builder/developer, the real estate agent or broker, or an affiliate who may benefit from the sale of the property and/or the sale of the property at the highest price possible. A lender or employer is not considered an interested party to a sales transaction unless it is the property seller or is affiliated with the property seller or another interested party to the transaction. IPCs are either financing concessions or sales concessions. The following are considered to be IPCs: funds that are paid directly from the interested party to the borrower; funds that flow from an interested party through a third-party organization, including nonprofit entities, to the borrower; funds that flow to the transaction on the borrower s behalf from an interested party, including a third-party organization or nonprofit agency; and funds that are donated to a third party, which then provides the money to pay some or all of the closing costs for a specific transaction Interested Party Contribution Limits IPCs exceeding these limits are considered sales concessions. The property s sales price must be adjusted downward to reflect the amount of contribution that exceeds the maximum, and the maximum LTV/CLTV ratios must be recalculated using the lesser of reduced sales price or appraised value. Occupancy Type LTV/CLTV Maximum IPC Primary residence or second home > 90 3% > % 75 9% Investment Property Any 2% This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 12

14 Section 102 Documentation Requirements HUD-1 Review To ensure that all fees, disbursements and charges reflected on the settlement statement were fully disclosed in the purchase agreement and available to the appraiser for consideration in determination of the property s market value, review of both the borrower s and seller s side of the HUD-1 is required. Disbursements on the seller side of the HUD-1 to the borrower or an entity controlled by the borrower, or to a company owned by the seller require additional consideration. EMM considers real estate commissions to include the commissions appearing in on page two of the HUD-1 (700 series section), as well as any non-lien related disbursements such as marketing expenses, finder s fees, referral fees, consulting fees or assignment of sale fees. Any combination of these disbursements to exceeding 8% of the sales price must be treated as a sales concession and deducted dollar-for-dollar from the sales price for calculation of the LTV Subordinate Financing Subordinate financing is permitted on most EMM loan programs. There are two types of subordinate financing: Home Equity Line of Credit (HELOC): a mortgage loan that allows the borrower to obtain multiple advances from a line of credit at his/her discretion and that is typically in a subordinate position. Closed End Loan: a mortgage providing a single advance of funds at the time of loan closing and that is not eligible for additional draws Subordinate Financing Terms For transactions including subordinate financing, the following requirements apply for both HELOC and closed end loans: The maximum LTV/CLTV may not exceed the guideline limits for the product and occupancy type shown in the product guidelines. If there is/will be an outstanding balance at the time of closing, the payment on the subordinate financing must be included in the calculation of the borrower's debt-to-income ratio(s). Negative amortization is not permitted; scheduled payments must be sufficient to cover at least the interest due. Equity share or shared appreciation is not eligible. Subordinate financing from the borrower's employer may not include a provision requiring repayment upon termination. Must also be part of the benefits package and available to all employees. A copy of the benefits package from the HR department should be obtained. Subordinate financing from the property seller (seller carry-back, including any property seller or other private party-carried financing) is not permitted. Note- CLTV ratio for conforming loans is equal to the HCLTV ratio. It is calculated by adding the HELOC credit line limit (rather than the amount of the HELOC in use) to the first mortgage amount, plus any other subordinate financing, and dividing that sum by the value of the mortgaged premises. Closed End Second Terms For new closed end subordinate financing the following also apply: Maturity date or amortization basis of the junior lien must not be less than five years after the Note date of the first lien mortgage, unless the junior lien is fully amortizing The loan may not have a balloon or call option within five years of the date of the Note for the subject transaction. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 13

15 Section 102 Documentation Requirements HELOC Terms The terms of a HELOC may not provide for a balloon or call option within the first five years after the Note date of the subject transaction first mortgage. DU loans- refer to Fannie Mae Seller Guide Subordinate Financing for additional requirements. LP loans- refer to Freddie Mac Seller Guide Secondary Financing and Other Financing Agreements for additional requirements Acceptable Documentation The terms of any subordinate financing must be verified. The following sources of verification are acceptable: Existing subordinate loans (loans that will be re-subordinated): - Copy of the mortgage Note (the Note is required for all transactions) and - Copy of the credit report, or - Direct verification from the lender, or - Copy of the loan statement Note- If an existing HELOC is reduced without modifying the original Note, the original line limit must be used to calculate the Combined-Loan-to-Value ratio. New Loans New subordinate loans obtained prior to or at closing: Copy of the Note (required for all transactions) and Direct verification from the lender, or Copy of the commitment letter from the lender, or Copy of the HUD-1 evidencing proceeds Note- Whether subordinate financing is existing or new, a full underwrite of the documentation provided is required to ensure the subordinate financing meets the requirements identified in this section. If the subordinate lien s terms cannot be verified in their entirety with a single source of verification, the use of a combination of the above documentation options is acceptable. If the subordinate financing is a community second or affordable second, it must comply with Fannie Mae and Freddie Mac requirements. DU loans- refer to Fannie Mae Seller Guide Subordinate Financing for requirements. LP loans- refer to Freddie Mac Seller Guide Secondary Financing and Other Financing Agreements for requirements. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 14

16 Section 102 Documentation Requirements Prepaid Charges Prepaid settlement costs, normally paid by the borrower, are: Interest charges covering any period after the settlement date Real estate taxes covering any period after the settlement date Hazard insurance premiums The escrow accruals required for the renewal of the MI premium Any amount that the property seller pays towards prepaid costs is included in the seller contribution limitations. Any amount that the borrower's employer pays towards prepaid costs is not included in the seller contribution limitations. The property seller (or the borrower's employer) may pay the following prepaid costs: Interest charges covering any period after the settlement date Real estate taxes covering any period after the settlement date Hazard insurance premiums Escrow accruals required for renewal of the MI premium HOA dues paid directly to the homeowners association for future dues* * LP loans- Property seller may not pay future HOA dues. Any amount that EMM or the property seller pays towards these prepaid items is included in the seller contribution limitations. Any amount funded by the borrower's employer is excluded from the seller contribution limitations. Lender Contributions Any amount that EMM pays towards prepaid costs must be included in the seller contribution limits. Any amount that EMM pays towards closing costs or buydown funds is not included in the seller contribution limitations Tax and Insurance Escrows Escrows are required for loans with an LTV greater than 80% (89.99% in California); a 25 basis point (0.250%) price adjustment will be added to the Note rate if the new loan does not include escrow account for property taxes. If the borrower finances the payment of real estate taxes for the subject property in the loan amount, but does not establish an escrow account, the loan is not eligible to be closed as a rate/term refinance transaction and must be closed as a cash-out refinance. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 15

17 Section 102 Documentation Requirements Mortgage Insurance EMM will permit transferred mortgage insurance on DU Refi Plus and Open Access programs. Please see section 303 (DU Refi Plus) and section 306 (Freddie Mac Open Access) product matrices for allowable MI Companies Eligible Mortgage Insurance Providers Eligible mortgage insurance providers for new policies are- Genworth Essent Guaranty Radian United Guaranty (UGIC) National MI Refer to product guidelines for eligible mortgage insurance programs and mortgage insurance requirements. Mortgage insurance providers provide access to guidelines, rates, training and other services on their websites without requiring a user ID or password. Note- Essent is not eligible MI provider s for DU Refi Plus and Open Access loans Types of Mortgage Insurance Four standard types of mortgage insurance (MI) are offered. Refer to product guidelines for MI requirements. Alternative mortgage insurance products not named in EMM product guidelines are not eligible. Borrower Paid Monthly Mortgage Insurance This is standard monthly mortgage insurance the borrower pays every month in the escrow account required for taxes and insurance. Investors require this to be a zero-option or end-of-month premium, which begins coverage at closing, but does not require the first payment until the first mortgage payment is due. Borrower Paid Single Premium Mortgage Insurance Single premium MI is a onetime premium that is listed as a standard closing cost on the GFE and HUD-1. This may be included in the loan as a standard closing cost, paid outside of closing, or covered by a credit from the builder, seller, lender or other interested party. Borrower Paid Single Premium Financed Mortgage Insurance Borrower Paid Single Premium Financed MI (Financed MI) is a single premium that is added to the mortgage amount and included in the monthly principal and interest payment. Unlike Lender Paid MI (see below), financed MI may be cancelled provided certain requirements are met, typically when the loan balance reaches 78% LTV. Financed MI is available for certain loan programs. Refer to product guidelines for eligibility and requirements. Lender Paid Mortgage Insurance (LPMI) LPMI is be paid by the lender out of the margin built into the loan, instead of the closing proceeds of the loan. It is not reflected on the HUD-1 provided to the borrower or any other party to the transaction. The only reflection on any document provided to the borrower is the increase in interest rate. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 16

18 Section 102 Documentation Requirements Higher-priced Mortgage Loans (new) Regulation Z defines a higher-priced mortgage loan (HPML) as a consumer credit transaction secured by the borrower s primary residence with an APR that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set, by 1.5 or more percentage points for loans secured by a first lien, or by 3.5 or more percentage points for loans secured by a subordinate lien. APOR, defined by a provision of Regulation Z, is an APR that is calculated and published by the Federal Reserve Board for a number of different mortgage products. APORs are derived from interest rates, points and fees, and other pricing terms obtained from a survey of prime mortgage lenders. Refer to specific product guidelines for additional HPML requirements Mortgage Credit Certificates Mortgage Credit Certificates (MCCs) are payment subsidies issued by a government entity to eligible first time homebuyers. MCCs may be in the form of direct payments or tax rebates/credits. MCCs may be used with conforming conventional products (unless specified otherwise within a specific product description). The following guidelines apply: Sources of MCC The MCC must be from an authorized state or local housing finance agency. Total monthly housing expense may be reduced by the amount of the borrower's mortgage interest tax credit. This applies to fixed and adjustable rate mortgages subject to the following: Underwrite ARMs at the maximum second year rate. Underwrite fixed rate mortgages with a buydown at the full Note rate Documentation If the borrower obtaining the MCC needs the monthly subsidy to qualify, the mortgage file must contain the following: Copy of the MCC, and Copy of the W-4 and worksheet, and MCC worksheet Example The subsidy established in the MCC is calculated on a monthly basis and then deducted from the actual monthly housing payment. Example: - MCC of 20% times total annual mortgage interest of $9,600 = $1,920 annual MCC credit. - The total MCC credit of $1,920 divided by 12 months = $160 per month MCC credit. o Actual monthly housing expense $975 o Less monthly MCC credit - $160 o Monthly housing expense to be used in qualifying = $815 Note- The amount included in qualifying income may not exceed the maximum mortgage interest credit permitted by the IRS. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 17

19 Section 102 Documentation Requirements Relocation Loans General Requirements To qualify for the relocation program, the borrower must meet all of the following requirements: Borrower's new principal place of work is at least 35 miles farther from his/her former residence than was his/her former principal place of work (borrower's commute to work increases at least 35 miles). Employer must provide significant financial assistance with the relocation, such as paying to move the employee to a new location or contributing to the employee's mortgage costs. The financial assistance should equal, at minimum, 3% of the mortgage amount. Seller must provide written verification of the transfer and financial assistance U.S. Military Personnel The U.S. military services are known for frequently transferring personnel to various parts of the country and the world. Most members of the Armed Services do not fit the profile of a corporate sponsored relocating employee and do not usually receive substantial amounts of financial assistance from the U.S. government to assist in this move. However, there are occasions when the U.S. government, like corporations, is willing to invest money into certain employees to assist in relocating them. In general, those military individuals hold ranks or jobs that are comparable to middle and upper management jobs in the private sector. Qualification for Military Personnel Relocation Program Characteristics of these individuals include: Commissioned and/or career officers Professional jobs (e.g. doctor, lawyer, dentist) or management jobs (e.g. Lieutenant, Commander, Captain, Major, Colonel, Admiral, General, etc.) The relocation package offered by the government resembles that of a private corporation. Significant financial assistance is given to the military person to compensate for and assist with the relocation. Examples of this assistance include: - Additional housing allowance to offset a higher cost of living area; - Additional monthly supplemental pay for the duration of the time living in the relocated area; - Lump sum moving bonus; - Financial assistance in selling the current home and/or buying a new home The amount of the financial assistance required is the same as would be acceptable for a corporate sponsored relocation. Note- Written verification of benefits is required Transaction Type and Occupancy Due to the nature of relocation transactions, e.g., an employee relocating to accommodate a business requirement, only the following are eligible for the relocation guidelines: Primary residence Purchase transaction Transfer Compensation Many corporate sponsors relocating employees grant special concessions as moving incentives. Examples of this type of income include, but are not limited to, Mortgage Interest Differential (MID), Cost of Living Allowance (COLA), Tax Differential, and Housing Allowance. When transfer compensation income is used to qualify, the employer generally must provide written verification of the dollar amount of the allowance (annual This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 18

20 Section 102 Documentation Requirements or monthly) and the duration of the income. To be considered as stable monthly income, the compensation should continue for a minimum of three years Trailing Co-Borrower Income Trailing co-borrower income may not be used to qualify. This does not prohibit the trailing co-borrower from being a party to the transaction Lump Sum Cash Payments Transferring borrowers often receive a substantial lump sum cash payment from their employer as an incentive to move to a new location. The lump sum payment may be used as a source of funds for the initial down payment provided: Lump sum cash payment is non-revocable; Down payment must be made in after-tax dollars Departure Residence Policy Standard Agency guidelines apply with the following exception: EMM does not allow the use of a Brokers Price Opinion (BPO) or AVM to determine the value of the departing residence. EMM accepts only a full appraisal or Employer Financing Financing provided by the employer, whether secured by the property or unsecured, is treated as secondary financing and is subject to requirements in- Eligible Transactions Subordinate Financing in this guideline section; and Assets, Reserves, and Funds to Close Other Asset Types Employer Assistance Programs in this guideline section; and LTV//CLTV limits in product guidelines Permanent Financing for New Construction Conversion of construction-to-permanent financing involves the granting of a long-term mortgage to pay off an interim construction loan that the borrower obtained to fund construction of a new residence. A single disbursement to a builder for the purchase of a completed property is not considered a conversion of construction-to-permanent financing transaction. This would be considered a standard purchase transaction. Conversion of interim financing can occur in the following manner: Upon completion of the home construction and just prior to occupancy of the property After completion of the home construction when the borrower has already taken residency Borrower must hold title to the lot, which may have been previously acquired or purchased as part of the current transaction. The borrower must be the primary obligor on the mortgage or deed of trust for the permanent financing. When paying off an interim construction loan, administer the loan using one of the following three methods Purchase Arm's Length Transactions The transaction is treated as a purchase if the funds from the permanent loan proceeds will be used to pay off an interim construction loan (which may or may not include repayment of lot financing) and/or to reimburse the borrower for documented acquisition or construction costs. Refer to Construction Costs below. This document is intended for use only by and its business partners. It may not be distributed without express, written consent of. EMM Wholesale Lending is a division of. Last Updated: 05/29/ Page 19