No cash back to borrower with the exception for reimbursement of earnest money

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1 Mortgage Eligibility 3.2-A Purchase Transactions Purchase money transactions ( purchases ) are proceeds used to finance the acquisition of the subject property, as defined in a sale and purchase agreement executed by the borrower and property seller. Proceeds from the transaction may also include: Pay off an outstanding balance on an installment land contract or contract for deed including any documented costs the borrower incurred for rehabilitation, renovation, or energy conservation improvements provided the land contract was executed within 12 months of the application date for the new loan. Create a new mortgage by converting an interim construction loan or term note into permanent financing; as long as the borrower receives no cash back from the transaction. Refer to Section on Construction to Permanent Loans, for details. No cash back to borrower with the exception for reimbursement of earnest money Note: Lease options are considered purchase transactions as the borrower is not yet on title. Guidelines regarding Rapid Re-Sales (Flips)-see section 3.7-A25 Short Sale Borrower/buyers cannot pay any costs that are typically the seller s responsibility. This would most likely come up if the seller is executing a short sale. Any cost to acquire the property must be reflected in the original sales price and not as a separate cost to the borrower. 3.2-A1 Assignment of Sales Contract Transactions where the purchase contract has been assigned to the borrower are not allowed. 3.2-A2 LTV/CLTV Calculations Purchase The LTV/CLTV is based on the lesser of the sales price or appraised value 1. 1 If the property was acquired by the seller in the previous 12 months and shows a substantial increase in value from the original purchase price, the appraiser should ensure the increase in value is valid. (No appreciation + no improvements = no justification) SNMC Page 1 February 9, 2011

2 3.2-B Refinance Transactions A refinance transaction is defined as: Existing Debt (Outstanding Liens): The repayment of an existing debt from the proceeds of a new mortgage loan where the borrowers are the current legal owners of the property securing the loan Or No Outstanding Liens: A new mortgage obtained on a property that does not already have an existing mortgage lien against it or where the proceeds are used to: Pay off an outstanding balance on a land contract including any documented costs the borrower incurred for rehabilitation, renovation, or energy conservation improvements, or Create a new mortgage modifying an interim construction loan or term note into permanent financing. Refer to section 3.2-B5 Construction to Permanent-Conforming for details. Regardless of Automated Underwriting System (AUS) approval, a payoff demand statement is required in each loan file on all refinance transactions. The payoff demand statement is required in each loan file on all refinance transactions. The payoff demand statement must reflect the following about the loan being paid off: Is not more than 30 days delinquent Does not contain charges associated with default/forbearance Does not indicate a curtailment of principal/interest (for example, a short pay) Meets the mortgage derogatory requirements 3.2-B1 Continuity of Obligation- Conventional loans Continuity of obligation must be demonstrated on all refinances. Existing Debt (Outstanding Liens) An acceptable continuity of obligation exists with any one of the following situations: At least one borrower is obligated on the new loan who was also a borrower obligated on the existing loan being refinanced The borrower must have been on title and residing in the subject property for at least 12 months and has either paid the mortgage for the last 12 months or can demonstrate a relationship (for example, immediate relative or domestic partner) with the current obligor. o Note: An immediate relative is defined as the borrower s spouse, child, or other dependent, or any individual related by blood, marriage, adoption, or legal guardianship. o Cancelled checks are required for payment verification The existing loan being refinanced and the title have been held in the name of a natural person or LLC, as long as the borrower was a member of the LLC prior to transfer o Transfer of ownership from a corporation to a borrower does not meet the continuity of obligation requirements o LLCs are not acceptable forms of title for the new loan transaction The borrower recently inherited or was legally awarded the property (for example, divorce or separation) SNMC Page 2 February 9, 2011

3 3.2-B Refinance Transactions (cont d) 3.2-B1 Continuity of Obligation- Conventional loans (cont d) Loans with acceptable continuity of obligation may be underwritten and priced as rate-and-term or cash-out refinanced according to the standard definition as described in this chapter. 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 must be underwritten and priced as a cashout refinance transaction. The following restrictions also apply: LTV Calculation for loans with no outstanding liens: o o Use the lesser of the original sales price/acquisition cost (documented by the HUD-1 Settlement Statement) or the current appraised value for properties purchased within six to 12 months prior to the application date for the new loan transaction Use the current appraised value for properties purchased more than 12 months prior to the application date for the new loan transaction Loans with outstanding liens but with no continuity of obligation: o At least one borrower must have been on title for at least six months, and o The maximum loan-to-value (based on the current appraised value) is 50% o Note: The borrower must meet the standard 12 month verification of payment history requirement 3.2-B2 LTV/CLTV Calculations Rate and Term Refinance The LTV/CLTV is based on the current appraised value ¹ Conventional: To be eligible for a rate/term refinance when the most recent transaction on the subject property was a cash-out refinance within the last six months, the new mortgage must be treated as a cash-out refinance (note date to application date is used to calculate six months) FHLMC: Rate-term refinance: When a mortgage being refinanced is a purchase money transaction, the note date must be at least 120 days prior to the new note date. For Conforming Jumbo loans, six months seasoning is required since purchase or previous refinance Cash out Refinance Conforming: Confirm that the subject property has been owned by the borrower(s) for at least six months prior to the date of loan application or transaction is ineligible (six months seasoning is calculated from note date to application date). The LTV/CLTV is based on the current appraised value.¹ Loans with no outstanding liens: on properties owned between 6-12 months the LTV/CLTV is based on the lesser of the current appraised value or the original sales price/acquisition plus any documented home improvements SNMC Page 3 February 9, 2011

4 3.2-B Refinance Transactions (cont d) 3.2-B2 LTV/CLTV Calculations (cont d) FHA: See specific program requirements VA: See specific program requirements 1 If the property was acquired in the previous 12 months and shows a substantial increase in value from the original purchase price, the appraiser should ensure the increase in value is valid. (No appreciation + no improvements = no justification) Loans with No Outstanding Liens For refinances on properties with no outstanding liens, calculate the LTV based on the lesser of the original sales price or the current appraised value if the property was purchased within six to 12 months prior to the application date for the new loan transaction 3.2-B3 Rate/Term Refinance Rate-and-term refinance is a transaction used to pay off an existing mortgage by obtaining new mortgage on the same property. Delinquent property taxes or HOA dues cannot be included in the loan amount on a rate-and-term refinance. Non-purchase money second liens, including re-conveyance and similar fees, must be paid off prior to close for a transaction to be considered a rate & term refinance. If these liens and fees are not paid off prior to close, the transaction will be considered a cash-out refinance, even if the funds are provided from the borrower at closing. Loan Program Requirements Subject to the following loan program requirements: Conforming/Conforming High Balance Unpaid principal balance of an existing first lien and/or junior liens (closed-end seconds and HELOCS) that were used for the original purchase of the home.¹ If the junior lien is a home equity line of credit (HELOC), the current balance may not exceed the initial draw amount; otherwise, it is considered a cash out refinance.² Other than payment of the first and second liens and closing costs, incidental cash back may not exceed the lesser of 2% of the principal amount of the new mortgage or $2000. Restrictions apply for rate-and-term refinances originated in the state of Texas. DU refi plus loans incidental cash back to borrower may not exceed $ For Conforming Jumbo Fixed-rate loans, 6 months seasoning is required since purchase or previous refinance.¹ Must have written authorization from borrower to close HELOC s SNMC Page 4 February 9, 2011

5 3.2-B Refinance Transactions (cont d) 3.2-B3 Rate/Term Refinance (cont d) Non-Conforming Unpaid principal balance of an existing first lien. (If the borrower received cash proceeds from the existing first lien, the loan must be at least one year old.) Junior liens that are at least one year old or junior liens that are less than one year old that were used for the original purchase of the home or for completing home improvements. Other than payment of the first and second liens and closing costs, incidental cash back may not exceed the lesser of 2% of the principal amount of the new mortgage or $2000.³ If the junior lien is a home equity line of credit (HELOC), the one-year seasoning applies to the date of the most recent draw. Draws of a minimal amount, not exceeding an aggregate amount of $2,000, are exempt from this requirement. ² Restrictions apply for rate-and-term refinances originated in the state of Texas. Must have written authorization from borrower to close HELOC s FHA Unpaid principal balance of an existing first lien Any purchase money second mortgage or any junior liens over 12 months old.¹ If the junior lien is a home equity line of credit (HELOC), if any portion of the equity line was advanced in excess of $1,000 within the past 12 months and was for purposes other than repairs and rehabilitation of the property then the line of credit is not eligible for inclusion². Closing costs, pre-paid expenses, borrower paid repairs required by the appraisal, discount points. Incidental cash back may not exceed $ Restrictions apply for rate-and-term refinances originated in the state of Texas. See FHA refinance mortgage calculations worksheets located under the Forms heading in Credit Policy for more specific information. Must have written authorization from borrower to close HELOC s ¹ A copy of the title report or HUD-1 from the purchase must be provided. The file must contain a copy of the HUD-1 to verify the borrower received no cash back ²Documentation must be obtained from the borrower or equity line to determine the date and amount of the more recent draw against the equity line. ³Allowed if the proceeds were used in the original purchase of the property or for completing home improvements. Restrictions: o A final inspection is required if the appraisal is made subject to completion of the improvements o If already completed, the improvements must have been done within the 12 months before the loan application and the appraisal must note the improvements A copy of the HUD-1 reflecting the subordinate mortgage must be obtained. The file should also contain verification of improvements by means of receipts and cancelled checks and comments from the appraiser regarding the improvements. The appraisal should be based on the as completed value of the property SNMC Page 5 February 9, 2011

6 3.2-B Refinance Transactions (cont d) 3.2-B3 Rate/Term Refinance (cont d) Refinancing to Buyout interest When the purpose of the loan is to refinance an existing mortgage in order to buyout the interest of one owner or beneficiary, such as in a divorce or inheritance settlement, it is allowed under the following programs and restrictions: Conforming, Conforming Jumbo, Non-conforming, and FHA The borrower who will be acquiring sole ownership must receive no cash out from the transaction. A copy of the divorce decree, will, probate court approval, deed, or other documentation substantiating the transfer must be in the loan file. 3.2-B4 Cash-out Refinance Transactions A cash-out refinance involves a new mortgage loan in which the cash back to borrower or payoff of subordinate financing exceeds the program restrictions for a Rate/Term refinance. The borrower may also own the property free and clear. The following are acceptable uses for cash out refinance transactions: Paying off the unpaid principal balance of the existing mortgage, Financing the payment of closing costs, prepaid items, and points Paying off any outstanding subordinate mortgage liens of any age Taking equity out of the subject property that may be used for any purpose Conforming: If the borrower has owned the property for less than six months preceding the application date, the borrower is ineligible for a cash-out refinance transaction. FHA: Cash out transactions are permitted on owner occupied principal residences that either are one or two unit dwellings. See specific program requirements. VA: See specific program requirements Rate-and-term refinances are subject to more stringent criteria than are cash-out refinance transactions. To determine whether a refinance transaction qualifies as a rate-and-term transaction or must be considered a cash-out transaction, see the specific program guidelines for both transaction types. SNMC Page 6 February 9, 2011

7 3.2-B Refinance Transactions (cont d) 3.2-B5 Construction to Permanent-Conforming Construction-to-permanent financing involves the granting of long-term financing to a borrower to replace interim financing used for the construction of a new home. This conversion may be treated as either a purchase or a refinance (in which the borrower may or may not receive cash from the settlement. Only full appraisal allowed and certificate of occupancy is required. To be considered a construction-to-permanent financing transaction, one of the following must be met: The borrower is the primary obligor on the construction financing which is obtained through a legitimate financial institution; or the borrower is the owner of the lot on which the residence is constructed Eligible Properties Detached Single Family residences only Occupancy Owner occupied Primary residence Second Homes Purchase Transaction If the construction-to-permanent financing is treated as a purchase: The maximum LTV/CLTV is subject to purchase transaction LTV/CLTV limits The transaction must occur within 180 days after the completion of construction. If the purpose of the long-term mortgage is to allow the borrower to make a single disbursement to a builder/contractor for the purpose of a completed property, then the transaction must be considered a purchase. No loan proceeds may be disbursed to the borrower unless the proceeds are used to reimburse for documented costs paid outside of closing by the borrower. Minimum 5% down payment is required If the borrower acquired the lot greater than 12 months prior to the application date, or if the borrower acquired the lot through an inheritance or gift (regardless of the date of acquisition), the LTV is based on the lesser of: o The current appraised value of the lot plus documented construction costs, or o The current appraised value If the borrower acquired the lot less than 12 months prior to the date of the construction loan application, the LTV is based off the lesser of: o o The current appraised value, or The total acquisition costs (the cost of the improvements plus the cost of the lot) as documented by: Copy of the lot purchase agreement or contract for deed; or HUD-1 settlement statement SNMC Page 7 February 9, 2011

8 3.2-B Refinance Transactions (cont d) 3.2-B5 Construction to Permanent-Conforming Purchase Transaction Calculation of Acquisition Costs: o With a sales contract: Appraised value of the land, if not included in the contract price and Paid receipts and cancelled checks for costs that exceed the contract price o Without a sales contract: Current appraised value of the land, and Contractor s construction cost breakdown, and Paid receipts and cancelled checks for costs that exceed the interim financing. o Using a General Contractor would require the following documentation to verify the cost of construction: Signed construction contract Sealed copy of the improvements plans and complete breakdown of construction costs and specifications Copies of canceled checks and receipts of bills for payment of any supplied, materials, labor or funds paid directly to subcontractors by the borrower o General Contractor Is Not Used: If a general contractor is not used to construct the building, the construction costs must be documented with copies of receipts or invoices and cancelled checks for materials. Supplies and/or labor. NOTE: If the borrower is an employee, relative, domestic partner or fiancé/fiancée of the builder then builders profit is not considered an allowable cost. Refinance Transaction If the construction-to-permanent financing is treated as a refinance: The borrower must hold title to the land Cash proceeds may be disbursed within the cash-out limitations of the loan program The maximum LTV/CLTV is subject to refinance transaction LTV/CLTV limits If the borrower acquired the lot greater than 12 months prior to the application date, the LTV is based on lesser of the current appraised value, or The sum of the documented costs of construction and the appraised value of the lot. If the borrower acquired the lot less than 12 months prior to the application date, the LTV is based on the lesser of: SNMC Page 8 February 9, 2011

9 3.2-B Refinance Transactions (cont d) 3.2-B5 Construction to Permanent-Conforming (cont d) o Acquisition cost of the land plus documented construction costs, or o The current appraised value If the borrower acquired land as a gift, the LTV is based on the lesser of: o The current appraised value or the appraised value of the lot plus any documented improvement costs. o The underwriter should investigate any large difference between the current appraised value and the original purchase price of a lot that was acquired within the previous 12 months. FHA: See program guidelines VA: See program guidelines Ineligible Programs/Properties Conforming Interest Only Condominiums Investment Properties Attached PUDs/Townhomes 2-4 Unit Properties Properties in which the borrower has a development interest (for example, if the borrower is also the builder) 3.2-B6 Installment Land Contract Installment land contracts are eligible for rate-and-term or cash-out refinancing if the land contract was executed more than twelve months prior to the date of the loan application. The land contract does not have to be recorded, but a copy of the land contract is required with the loan file. Note: If the land contract is not recorded, use the date the contract was executed and notarized by all parties as the inception date. Land contracts that do not contain a notary date are ineligible for this exception Purchase Transactions When the proceeds of a mortgage loan are used to pay off the outstanding balance on an installment land contract (also known as contract or bond for deed) that was executed within the 12 months preceding the date of the loan application, the mortgage must be considered as a purchase money mortgage loan. Loans secured by the borrower s principal dwelling must be treated as a refinance for rescission purposes. The LTV/CLTV is based on the lesser of the current appraised value or the total acquisition costs. Total acquisition costs: Purchase price as indicated in the original land contract Plus, Any documented costs for rehabilitation, renovation, refurbishment, or energy conservation. SNMC Page 9 February 9, 2011

10 3.2-B Refinance Transactions (cont d) 3.2-B6 Installment Land Contract (cont d) Refinance The LTV ratio for the mortgage must be determined by dividing the unpaid balance of the mortgage by the lesser of the total acquisition cost (defined as the purchase price indicated in the land contract, plus any cost the purchaser incurs for rehabilitation, renovation, or energy conservation improvements) or the appraised value of the property at the time the new mortgage is closed. The expenditures included in the total acquisition cost must be fully documented by the borrower. When the installment land contract was executed more than 12 months before the date of the loan application, the mortgage must be considered either a rate or term refinance cash-out refinance. In this case, the LTV ratio for the mortgage must be determined by dividing the unpaid principal balance of the mortgage by the appraised value of the property at the time the new mortgage is closed. The loans secured by the borrower s principal dwelling are rescindable. Land Contract For the purpose of determining seasoning, if the land contract is not recorded, use the date the contract was executed and notarized by all parties as the inception date. Land Contracts that do not contain a notary date are ineligible. 3.2-B7 Seasoning and Properties Sold at Auction Refinances of properties that were purchased at auction may be acceptable after a careful review of the comparables and the present condition of the surrounding neighborhood. Generally this type of property would be acceptable only for rate-and-term refinances. Often a foreclosing lender will use the services of a Professional Auction Company to sell their foreclosed properties. The Auction Company will charge a fee for this service. The fee may be called a commission, a buyer s premium, a selling fee, or various other names. Whatever the fee may be called, it represents the cost the auction company charges to handle the transaction on behalf of the foreclosing lender. Regardless of what this fee is called, it must always be treated as commission and therefore considered as part of the 8% commission cap. This inclusion in the 8% commission cap applies regardless if this charge is included in the sales price or not. 3.2-C Temporary Buydowns NOT AVAILABLE AT THIS TIME 3.2-C1 Overview NOT AVAILABLE AT THIS TIME A buydown is an arrangement wherein the property seller, borrower, lender, builder, developer, or real estate agent deposits money to an account so that it can be released each month to reduce the borrower s monthly payment. During a specified period, the borrower s effective interest rate is bought down. The typical buydown periods are 1 year, 2-1, or The note rate remains constant; and the funds are received at closing to subsidize a lower payment. For example, a 2-1 buydown lowers the payment 2 percentage points the first year and 1 percentage point the second year. No negative amortization. This program offers borrowers more affordable payments with the stability of predictable payment increases over time. If the seller is paying for the buydown it is considered a financing concessions and is subject to the restrictions listed in section 3.5-B9 Interested Party Contributions. SNMC Page 10 February 9, 2011

11 3.2-C Temporary Buydowns (Cont d) NOT AVAILABLE AT THIS TIME 3.2-C2 Documentation Requirements NOT AVAILABLE AT THIS TIME To document the buydown, there must be an original, signed buydown agreement attached to the Note. Doc Prep: The doc set will include a buydown agreement and an addendum to the note. There is a yes or no buydown question in Doc Prep. 3.2-C3 Underwriting Notes NOT AVAILABLE AT THIS TIME Buydowns are allowed on purchase and rate/term refinance transactions only. Some of the programs have additional restrictions. Please review the specific product guidelines for eligibility. Conventional: The mortgage must be a fully amortizing fixed rate mortgage or an ARM that has an initial interest-rate adjustment period of three years or more. Interest only loans are not eligible. FHA: Temporary Buydowns not allowed on adjustable rate mortgages or streamline refinances regardless of LTV. Qualifying payment and ratios are determined by the particular product. Please review the specific product guidelines for eligibility. In the PPE screen, in the bottom left corner, there is a Buydown subscreen. Here you indicate the buydown type and use the initial note rate for calculation. In the GFC screen you will now be able to add HUD line 810 and indicate the source of these monies, i.e., borrower, seller, lender, third party, or broker. This will produce an AUS which shows this loan has a buydown feature. 3.2-C4 Source of Buydown Funds NOT AVAILABLE AT THIS TIME Loan Program Source of Funds Conforming Funds may come from any source (for instance, borrower, builder, or relatives) Non-Conforming The buydown account may be funded only by the: Property seller Builder Developer Real Estate Agent Lender Borrower The buydown funds are subject to interested party contribution limits. Exception: if the interested party is the lender, then the contributions limits do not apply unless the lender is affiliated with an interested party to the sale or purchase transaction. 3.2-C5 Ineligible Scenarios NOT AVAILABLE AT THIS TIME Payment Abatements the builder or seller pays 6 months worth of the borrowers interest payments SNMC Page 11 February 9, 2011

12 3.2-C Temporary Buydowns (Cont d) NOT AVAILABLE AT THIS TIME 3.5-C6 Calculating the Cost NOT AVAILABLE AT THIS TIME To help calculate the amount of funds needed to close, there is a temporary buydown worksheet in Section 12: Forms. To calculate the cost manually 3.2-C7 Lender Paid Buydown NOT AVAILABLE AT THIS TIME SecurityNational Mortgage offers one product code with the 2-1 buydown already taken out of the yield spread. That is the F-F30BD product. All other products use the standard product code and the cost of the buydown must be calculated independently from the rate sheet pricing. 3.2-C8 Pricing NOT AVAILABLE AT THIS TIME If someone other than the lender or the broker is going to pay the buydown on the FHA product, you can improve to the price listed for the F-F30BD code. For all other programs, there are no additional price adjustments to add a temporary buydown. Just be sure that the money for the buydown is calculated at closing and shown on the HUDs. The buydown cost cannot be financed into the loan amount. Send the lock in at the note rate (rate starting at year three on a 2-1 buydown). The buydown agreement will adjust the note rate for the first two years. SNMC Page 12 February 9, 2011

13 3.2-D Secondary/Subordinate Financing SNMC will allow mortgages that are subject to subordinate financing held by another investor, as long as the lien is recorded and clearly subordinate to the first mortgage lien. All loans with subordinate financing must meet the established LTV and CLTV program requirements. Texas Loans: For additional subordination guidelines, refer to Texas Refinance section below. 3.2-D1 Specific Loan Guidelines For information regarding secondary/subordinate financing for a specific loan program, please refer to the appropriate program guidelines within credit policy. 3.2-D2 Maximum CLTV The maximum combined loan-to-value ratio, including the first mortgage and all subordinate financing, is determined by the loan program. For HELOC s, use the maximum line amount to calculate the HCLTV. If an existing HELOC is reduced without a recorded modification, the original line limit must be used to calculate the combined LTV. Calculating the CLTV Principal balance of first lien + Current principal balance of subordinate closed-end second liens; or maximum available credit line of subordinate home equity line of credit (HELOC) Lesser of sales price of appraised value¹ = Combined loan to value (CLTV) ¹Use only the current appraised value for the following transactions: All rate and term refinances Conforming cash-out refinances 3.2-D3 Repayments for Home Equity Line of Credit When calculating the total housing expense ratio, the payment for the secondary financing must be included. For conforming HELOCs, the repayment term/payment must provide for regular monthly payments that require at a minimum, the monthly interest due paid so that negative amortization will not occur. SNMC Page 13 February 9, 2011

14 3.2-D Secondary/Subordinate Financing (cont d) 3.2-D4 Terms of Subordinate Financing Unless otherwise allowed under the specific program guidelines, the following are applicable repayment terms for subordinate financing: Conforming The term of the loan cannot be less than five years, unless the financing fully amortizes prior to that time. The loan term must provide for regular payments of principal and interest, or interest only. If the loan has a fixed rate, the terms may not be more than 2% below the market rate for Fannie Mae second mortgages at the time of origination. To locate the market rate, refer to the Historical Daily Yields under Reference Materials on efanniemae.com. If the loan has a variable rate, the monthly payment must remain constant for each 12-month period over the term of the loan. Exception for Texas Loans Closed-end variable rate subordinate secondary financing, with a payment that is not constant for each 12-month period, is allowed behind a conforming purchase or rate and term refinance. 3.2-D5 Ineligible Mortgages The following scenarios below are not eligible mortgages for subordinate financing if: The subordinate mortgage has wraparound terms, combining the indebtedness of the first mortgage with the subordinate mortgage. The subordinate mortgage does not provide for either regular monthly payments of principal and interest, or interest only. The subordinate mortgage allows negative amortization. 3.2-D6 Subordinate Loans When subordinate liens remain outstanding, they must be clearly subordinate to the new refinance loan. Additionally, the new refinance loan must meet the subordinate financing criteria. A loan s classification as a rate-and-term refinance transaction will not be affected when there is existing secondary financing that will be subordinated. 3.2-D7 Cash Out From Concurrent Secondary Financing The borrower may receive cash out from the proceeds of the concurrent secondary lien as long as the CLTV is within loan program guidelines and the first lien meets the seasoning requirements outlined in the rate-and-term refinance section. SNMC Page 14 February 9, 2011

15 3.2-D Secondary/Subordinate Financing (cont d) 3.2-D8 Seller Carry-Back Subordinate financing from the property seller (seller carry-back, including any property seller or other private party carried financing) Is allowed only after the borrower has made a 5% minimum down payment/cash investment Is allowed only when the maximum CLTV is the lesser of 95% or the published CLTV limits for the product/program Affects interested party contribution limits Should be a market rate. If the interest rate is more than 2% below Fannie Mae s posted net yield in effect for second mortgages at time of closing it must be treated as a sales concession and dollar for dollar reduction made to the sales price. 3.2-E Texas Refinance The constitution of the state of Texas provides explicit guidelines for refinance transactions. This section details the requirements for the following refinance transactions: Rate-and-term Cash out refinances of non-homestead second homes and investment properties Refinances involving the payoff of a home improvement loan secured by the borrower s homestead A cash out refinance transaction on a borrower s primary residence (homestead) in Texas is subject to the most restrictive guidelines. The standard product code for Texas (a)(6) refinances is C-F Please refer to each specific product guideline for additional geographic restrictions. Because of the state legal requirements of the Texas (a)(6) product, this information is provided as a guideline only. If any questions arise that are not addressed in this section, please contact Credit Policy. 3.2-E1 Rate/Term Refinance A rate-and-term refinance of a primary residence may include only the following costs: Payoff of the old loan plus points Prepaid items, such as escrow funds and interest Taxes due 3.2-E1 Rate/Term Refinance The closing costs, whose total may not exceed 5% of the loan amount, must be deemed necessary and reasonable. Closing costs that may be included are: Loan origination Tax service Recording Escrow waiver Underwriting Application Survey Title insurance premiums (lender s policy) Processing Appraisal Credit report Final inspection Commitment Express mail Flood certification Closing SNMC Page 15 February 9, 2011

16 3.2-E Texas Refinance ( cont d) 3.2-E1 Rate/Term Refinance (cont d) Subordination agreements are no longer required on Texas rate and term refinances (no cash-out) as long as the loan is property documented with a Renewal and Extension Exhibit and it is not required by the title company. Additional Requirements Other fees may be financed if necessarily incurred to remove any non-standard exceptions on the title policy The only cash proceeds the borrowers may receive are limited to: o o A refund of a previously paid application fee, or Existing escrow monies in excess of any amounts needed to fund any new escrow account If the new rate-and-term refinance contains financing of a prepayment penalty fee, the title company must without exception issue a new title policy for the full loan amount (including prepayment fees). Non-Conforming: The payoff of subordinate mortgage liens are subject to the regular rate-andterm refinance guidelines. Conforming Rate-and-Term: Eligible Proceeds from a Texas rate-and-term refinance originated under conforming program guidelines may pay off only the following: Purchase money liens Liens for property taxes on the subject property securing the new loan that are not delinquent Loans to buy out equity pursuant to court order or agreement of the parties; usually in a divorce proceeding or a lawsuit requesting partition of the property among the owners When a prepayment penalty fee is assessed on an existing non-(a)(6) loan and is included in the payoff amount, the new loan may be a rate-and-term if the title company agrees and issues a new title policy for the full loan amount (including the prepayment penalty fees) HOA dues may be paid off if the title company requires them to be paid. If the title company does not require them to be paid, the borrower must pay the dues outside of closing, and they must not be included in the loan amount. Conforming Rate-and-Term: Ineligible Proceeds from a Texas rate-and-term refinance originated under conforming program guidelines may not pay off the following: Loans to pay off home equity (a)(6) lien or home improvement loans unless the home improvement loan is a legitimate purchase money (a)(5) loan and the borrowers will receive no cash back. Federal tax debt liens Liens for delinquent property taxes on the property securing the new loan. Loans with any cash back to the borrower, even incidental cash. Guidelines for limited cash-out refinances permitting the lesser of 2% of the loan amount or $2,000 are not eligible under the rate-and-term refinance program in the state of Texas. SNMC Page 16 February 9, 2011

17 3.2-E Texas Refinance ( cont d) 3.2-E2 Cash Out Primary Residences (Homesteads): Transactions are defined by and subject to Article XVI Section 50 (a)(6) of the Texas Constitution, which permits homeowners to borrower against the equity on their primary residence. 2-4 unit residences and property with agricultural or open space zoning are not eligible. Once a loan is originated as a Texas (a)(6) cash-out loan, it is always classifies as a Texas (a)(6) loan, even if no cash is taken from the subsequent refinance transaction. Therefore, a no-cash-out refinance of a Texas (a)(6) loan is always considered a cash out refinance under Texas (a)(6) law and is not eligible for delivery under rate-and-term refinance guidelines. Non-Homestead Second Homes and Investment Properties: Cash out refinances are eligible under our regular refinance guidelines. Loan Program Maximum LTV Max Loan Amount Minimum FICO Conforming 80/80% Conforming loan limits apply 660 Loans must have AUS (LP approval only) Examples of (a)(6) Loans The following are considered (a)(6) loans Loans using proceeds to pay off an existing (a)(6) loans Loans using proceeds to pay off federal tax debts liens Loans using proceeds to pay property tax liens on the property securing the new loan Loans with any cash back to the borrowers The following are not considered (a)(6) loans Loans using proceeds to pay current taxes due on the property securing the loans Loans using proceeds to buy out equity pursuant to a court order or agreement of the parties (usually applies to a divorce settlement) Loan proceeds used to pay a prepayment penalty assessed on an existing non-(a)(6) loan, and the prepayment is included in the payoff amount. The new loan must have a new title policy issued without exception to the financing of the prepayment fee If the title company required them to be paid, loans that include the payment of HOA dues Note: Loan proceeds to pay off a legitimate purchase money (a)(5) home improvement loan are acceptable to originate as a rate/term refinance. SNMC Page 17 February 9, 2011

18 3.2-E Texas Refinance (Cont d) 3.2-E3 (a)(6) Requirements (a)(6) Restrictions Texas (a)(6) loans are subject to the following restrictions: An (a)(6) loan may not be closed sooner than 12 months after the closing of the previous (a)(6) loan There can only be one (a)(6) loan secured by the property at one time The (a)(6) loan may not be identified as a rate-and-term refinance The (a)(6) loan may not be used to acquire the property or to finance construction Refinances of (a)(6) Loans Even if no cash is taken from the transaction, a refinance of an (a)(6) loan may not be identified as a rate-and-term refinance. Any refinance of an (a)(6) loan must be classified as a distinct and new origination of an (a)(6) loan. The severe restrictions imposed by Section 50 (a)(6) require that the loan be originated and closed subject to all the requirements outlined within this section. Loans that do not adhere strictly to these requirements and program guidelines are subject to repurchase. Use of Proceeds and Payoff of Debts The Texas Constitution prohibits a lender from requiring that the proceeds from an (a)(6) loan be used to pay of any debts to that lender that are not secured by the homestead. If the payoff of debts to other lenders/creditors is required in order to qualify the borrower, those payoffs must be disbursed directly to the creditor by the title company Debts that are elected for pay off by the borrower, but are not required to be paid off in order to qualify the borrower, may be disbursed directly to the borrower A loan used for consolidating debt must be originated as an (a)(6) loan even if the proceeds at closing are paid directly to the creditors and the borrower personally receives no cash from the transaction. Occupancy Owner-occupied primary residence Property must be borrower s Texas homestead Homestead Texas (a)(6) loans require that the subject property must be verified as the borrower s urban homestead. SecurityNational Mortgage will not allow rural homesteads. If the borrower owns only one property in Texas, even if it is a second home or investment property, it may be considered a Texas homestead. In order to prove that the property is not the borrower s homestead: A copy of the borrower s most recently filed tax return must be provided showing that the property has been a second home or investment property for the most recent 12 months And The title company must verify that the property is not considered the borrower s homestead, and the borrower must submit an affidavit to that effect. SNMC Page 18 February 9, 2011

19 3.2-E Texas Refinance (Cont d) 3.2-E3 (a)(6) Requirements (cont d) Property Appraisal Requirements A new full appraisal is required, including both interior and exterior inspections, to determine current value on either Form 1004, Uniform Residential Appraisal Report or Form 1073, Individual Condominium Unit Appraisal Report, regardless of AUS recommendation. Ineligible Properties 2-4 Units Condotels Cooperatives Non-warrantable condos Log homes Manufactured homes Properties with open space zoning Agricultural properties used for farms, ranches, orchards, or on landdevelopment-type properties Properties with the infrastructure to support ranching and/or farming (for example, barns, silos, fencing, ect.) or that are already producing crops or supporting livestock Properties with an agricultural exemption for taxes Note: Properties zoned as agricultural that are not used for agricultural purposes may be eligible as long as all other eligibility requirements are met. Urban/Suburban Homestead Guidelines Acreage may not exceed 10 acres The property must be located within one of the following areas: Municipal boundaries Its extraterritorial jurisdiction A platted subdivision The property must be served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality: Electric Natural Gas Sewer Storm Sewer Water Agricultural or open space zoning is not allowed. Borrowers Eligible: U.S. Citizens, Permanent Resident Aliens, and Non-Permanent Resident Aliens allowed Ineligible: Non-occupant co-borrowers and foreign nationals SNMC Page 19 February 9, 2011

20 3.2-E Texas Refinance (Cont d) 3.2-E3 (a)(6) Requirements (cont d) Fee Restrictions Under Texas law, there is a 3% fee restriction on closing costs that a borrower must pay to obtain an (a)(6) loan. Included in this calculation are all closing costs, payable directly or indirectly by the borrower, that are imposed directly or indirectly by the lender. The branch should verify that fees are within this 3% restriction prior to closing an (a)(6) loan. Fees must be reasonable and not paid to an employee of the lender. Bona fide discount points collected by a Seller may be excluded from the 3% fee cap as long as they buy down the interest rate. If discount points were used to buy down the interest rate, a fully executed Discount Point Acknowledgement must be in the loan file for delivery. Only SNMC may charge discount points. Discount points may not be charged by a mortgage broker. Ownership Interest Ownership must be held as fee simple. The borrower s ownership interest may not be based on: Contract for deed Community property interest Homestead interest Leasehold Conveyed Property Any consumer initiated conveyances of the property adding new owners must be completed at least 12 days before closing. Additionally, the new owners must receive the Notice Concerning Extensions of Credit at least 12 days before closing. Individuals on Note Only individuals on title may be on the Note. Non-titled spouses may not be on the Note Declining Market If the property is in an area of declining property values, the new loan amount may not exceed the unpaid balance of the existing loan rounded to the next $100 Mortgage Insurance Not required (because max LTV is 80%) Temporary Buydowns Not allowed Assumability Not assumable Escrow Holdbacks Not allowed Condos Project must be warrantable. Non-warrantable condos are not eligible. SNMC Page 20 February 9, 2011

21 3.2-E Texas Refinance (Cont d) 3.2-E3 (a)(6) Requirements (cont d) Subordinate Financing First lien position only. New secondary financing on first-lien Texas (a)(6) loans is not allowed. Existing non-(a)(6) secondary financing is allowed if re-subordinated to the new (a)(6) mortgage. Additionally, the loan must meet the 80% CLTV requirement. Title Insurance The title insurance coverage and policy must adhere to the following requirements: Title insurance coverage must be the T-2 Mortgagee Policy of Title Insurance and include both of the following endorsements: T-42 Equity Loan Mortgage Endorsement T-42.1 Supplemental Coverage Equity Loan Mortgage Endorsement The HUD -1 must expressly show the T-42 and T-42.1 endorsements There may be not exceptions to or deletions from the coverage Paragraph 1(a) of the Supplemental Coverage Equity Loan Mortgage Endorsement must be part of the coverage, which means that the loan must be closed at an office of the title company issuing the policy Note: If the prior T-2 was issued within the last 7 years, verify that the title company charges the lower reissue rate for the T-2. Right to Rescind In addition to the federal right to rescind that may apply under Regulation Z, all (a)(6) loans are subject to a three-day right to rescind under Texas law. Sellers may rely on the federal Notice of Right to Cancel form to meet this requirement. However, to be eligible for purchase, loans must comply with Section 50(a)(6)(Q)(viii) of the Texas Constitution and Chapter 153, Home Equity Lending, Section of the Texas Home Equity Interpretive Authority. The Texas right to rescind requires signature by all spouses, even if the spouse is not on title; and the right cannot be waived, Documentation Requirements Full documentation is required Documents must be prepared by a licensed Texas attorney or law firm. The attorney who prepares the documents must execute a Texas Home Equity Certificate from Originating Lender s Attorney Regarding Compliance with Section 50(a)(6), Article XVI of the Texas Constitution. The signing party (borrower/owner/owner s spouse) must not sign any documents with blank spaces. All documents must be reviewed before being given to the borrower/owner/owner s spouse for signature to ensure there are no blanks. The closer must provide the appropriate closing instructions to the title agent to that effect. SNMC Page 21 February 9, 2011

22 3.2-E Texas Refinance (Cont d) 3.2-E3 (a)(6) Requirements (cont d) Program Texas (a)(6) refinances are available under the C-F30-06 product code Ineligible Interest only Expanded approvals Government loans Loans with land contracts High Balance loans DU Refi Plus SNMC Page 22 February 9, 2011

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