9 TOPICS = 60 UPDATES

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2 9 TOPICS = 60 UPDATES

3 Manually Underwriting VS. DU Findings

4 EFFECTIVE MAY 15, 2012

5 Check Lender Overlays Underwriters Can Use New Rules NOW Make notes on 1008

6 STABLE & PREDICTABLE INCOME Must indicate continuity Must be stable and reliable Income typically received less than 12 months may not be considered as stable income such as overtime, bonus, or commission earnings The length an income source has been received plays a big part in developing confidence that it is likely to continue when dealing with variable income sources

7 VARIABLE INCOME SOURCE EXAMPLES Commissions Bonuses Overtime Tip Income 1099 Earnings

8 VARIABLE INCOME Standard timelines for variable income.. 24-Month Average Acceptable Non-standard timelines are Months Compensating Factors that are well documented along with underwriter rationale on the 1008 is highly recommended

9 INCOME TRENDING The underwriter should identify how often the borrower is paid when considering income trending Compare Prior Years income to Current Income

10 INCOME TRENDING 1. Determine monthly YTD income 2. Compare to prior years earnings with W2 s and / or signed tax returns (documentation requirements defined by DU) 3. If the trend is stable or increasing an average of the variable income should be used 4. If the trend indicates a decline but now shows signs of stabilizing and there is sufficient belief that the borrower will continue to be employed at current levels, the lower amount of variable income must be used 5. When the trend is declining with no evidence of stabilizing it is likely the income is not stable or predictable and if the income is used the underwriter must support their reasoning and provide their analysis and supporting documentation in the loan file

11 CONTINUITY OF INCOME The underwriter should only consider those sources of income that are likely to continue for at least 3 years from date of loan application, a good example of income that is generally considered to have continuity is wage and salary income when a sufficient work history is documented in the loan file There are other sources of income that are not wage or salary driven that may or may not have a defined expiration date and for those income sources that do have a defined expiration date the underwriter is required to document that the income will have a minimum 3 year continuance FNMA has now provided a list of those income sources that they have recognized and defined as either having an expiration date that is not defined and the underwriter is not obligated to document a 3 year continuance from income sources that do have a defined expiration date and the underwriter is obligated to document a minimum 3 year continuance. I have broken down these income sources for this class.

12 E X P I R A T I O N D A T E N O T D E F I N E D Automobile Allowance Base Salary Bonus, overtime or commission income Corporate retirement or pension income Disability income Long term (not short term) Foster Care Income Interest / Dividend Income (unless depleted) Military Income Mortgage Credit Certificates Part-time job, 2 nd job, or seasonal income Rental Income Self Employment Income Social Security, VA, or other government retirement or annuity CONTINUITY OF INCOME D E F I N E D E X P I R A T I O N D A T E Alimony or child support income Distributions from a retirement account like a 401(k), IRA, SEP, Keogh Mortgage Differential Payments Notes Receivables Public Assistance Royalty Payment Income Social Security Income (not including retirement or long-term disability income). VA Benefits (not including retirement or long-term disability)

13 SIGN ONLY ONCE DU UPDATE OCTOBER 2012

14 WHEN ARE TAX RETURNS REQUIRED FNMA now clearly defines when tax returns are required to verify income and which income and employment types will drive the requirement. You will need 2 years of tax returns for: 1. When a borrower earns 25% or more of their income is derived from commissions 2. Is employed by family members 3. Is employed by interested parties to the sale or purchase of the property 4. Receives rental income (DU will only require 1 year) 5. Receives income from temporary or periodic employment, or unemployment, or when the borrower has employment that is subject to time limits like a contract employee or tradesman 6. Capital gains, royalties, real estate or miscellaneous non employment income reported on 1099 forms 7. When income is received that cannot otherwise be verified through an independent and reliable or knowledgeable source 8. When foreign income is used to qualify 9. When interest and dividend income is used to qualify 10. Income that is received from self employment of any type or when the borrower has 25% or greater ownership interest in a business structure. Reminder: Any borrower that has a 25% or greater ownership interest are considered as self-employed and the loan must be underwritten and documented using the requirements for selfemployed borrowers.

15 HOW TO READ TAX RETURNS AND CLOSE MORE LOANS Review of "self-employment" underwriting rules Overview of ALL tax forms: Sole proprietorship, Partnerships, Sub-S & Corporations, Real Estate Investors How to count every penny of income: Line-by-line review Improve your working relationships with processors/underwriters How to prepare a "cash-flow" analysis" worksheet Review of profit & loss statements Tips on how to market yourself as a "self-employed borrower" expert Download ALL blank IRS forms

16 EMPLOYMENT/INCOME DOCUMENTATION What is new is that FNMA no longer defines or absolutely requires that a borrower must have a 2 year employment history. For base pay - 2 years of employment history is recommended however a 12-month History or shorter if borrower s employment profile is positive to offset the shorter income history may be used what establishes a positive profile: employment in a field related to their schooling such as a trade school or a 2 or 4 year college, or employment in a field that typically has a specialized training course prior to employment like truck driving. Must have a minimum 12 months history of receipt to be considered stable for bonus and overtime to be used in the income analysis

17 COMMISSION INCOME 2 years recommended Less than 12 months not allowed months allowed when positive factors are outlined in the borrowers overall profile and documented by the underwriter 2106 Tax Schedule not required but if tax returns are received and reviewed for another employment or income source, the 2106 must be analyzed and accounted for in the income calculations When commission income represents 25% or more of the borrowers total qualifying income you must require 2 years of most recent income tax returns and either a written VOE or the most recent paystub and W2 forms from most recent 2 years

18 DU 9.0 SEVEN INCOME SOURCES 1. Capital Gains 2. Employment-related Assets 3. Foreign Income 4. Royalty Income 5. Seasonal Income 6. Temporary Leave Income 7. Tip Income

19 ALIMONY/CHILD SUPPORT Prove receipt for 6 months This used to be 3 months Must be proved it will be received for up to 3 years from date of mortgage application

20 ALIMONY/CHILD SUPPORT Documentation necessary for 3 year continuance would include: a divorce decree or if separated, a separation agreement signed by the judge Required to identify the limitations on continuance, which would include the age of the children and any terms subject to the age of the children outlined in the divorce decree Document regular receipt of the full payment required by legal documents Examples would be: deposit slips, court records, copies of signed tax returns, or copies of the borrowers bank statements showing regular deposits Important note: if a borrower who is separated does not have a formal separation agreement that requires alimony or child support and the amount to be received, the underwriter may not consider any voluntary payments as income.

21 AUTOMOBILE ALLOWANCE 24-Month History Required When borrower reports this income on schedule C or on the 2106 the amount of funds that exceeds the monthly expenditures may be added to income or if the expenses exceed the monthly allowance, then the excess must be included in the borrowers total monthly obligations If the borrower does not report on either a schedule c or on their 2106 then add the full amount of the allowance to the income analysis and the full amount of the monthly lease or automobile loan against the total monthly obligations Does not require evidence of a 3 year continuance

22 DISABILITY INCOME LONG TERM This does not apply to income received from the Social Security Administration This income has to do with employment related long term disability pay How to document: Obtain a copy of the policy or benefit statement from the payer, such as the: Insurance company Employer 3 rd party The documents must indicate amount and frequency, current eligibility for the benefits and if a termination or modification date has been established Evidence of 3 year continuance is not required and a requirement for re-evaluation by the payer is not considered a defined expiration date Requiring the borrower to provide personal medical information or doctors letters about their disability could make a lender liable for discrimination lawsuits and privacy issue lawsuits

23 Short-Term Disability Potential to Long Term Disability If currently receiving short term benefits that may decrease to a lesser amount within the next 3 years because the benefits will be converted to long term, the current long term benefits must be used to qualify the borrower.

24 SOCIAL SECURITY INCOME This income source and topic would cover Social Security retirement benefits and disability benefits paid by the Social Security Administration Documents required to be obtained would be: 1. SSA award letter 2. Signed copies of tax returns 3. SSA-1099 form, or 4. Copies of the borrowers most recent bank statements as defined by DU 3-year continuance is not required when the benefits are for retirement or long term disability, if the income from the SSA is for any other reason, the income must be documented that it will continue for a minimum of 3 years from the date of the mortgage application.

25 EMPLOYMENT OFFERS OR CONTRACTS What is new: FNMA now allows the use of income for borrowers whose employment will begin after the loan closes Requirements: 1. Run DU with the new income and employment information 2. Document the file with appropriate comments on 1008 to indicate employment contract and employment and income was used to underwrite the file 3. A paystub and verification borrower has started employment must be in the file at the time the file is delivered to FNMA to be eligible and the income documentation must support the income used to qualify 4. Obtain the contract or offer of employment and retain in the loan file and the lender must determine whether to close the loan prior to the borrower employment start date. A good rule to follow would be if the borrower will not start employment until after the first mortgage payment is due, to not allow the income or employment to be used.

26 FOSTER CARE INCOME Verification Options Verify Income from foster care agency Tax returns Deposit slips/bank statements showing regular deposits 2-year history is recommended 12-month history is allowed if not more than 30% of total gross income used to qualify

27 INTEREST/DIVIDEND INCOME 3-year continuance eliminated 2-year history of receipt required via 2 years signed tax returns or copies of account statements covering a 2 year period Develop an average over the past 2 years Deduct down payment and closing costs from total assets to determine impact on future interest/dividend income

28 NON-OCCUPYING CO-BORROWER INCOME Freddie allows Non occupying co-borrower Income and Liabilities in the assessment for automated underwriting Fannie does NOT allow non occupying co-borrower Income or liabilities in the automated underwriting assessment and does not require the verification of employment or income from the non-occupying co-borrower

29 NOTES RECEIVABLE/LAND CONTRACTS Must provide evidence the income will continue for 3 years Copy of note with terms indicating the amount and length of payment Receipt of income for 12 months verification options Deposit slips Tax Returns, or Bank Statements showing consistent deposits Less than 12 months CANNOT COUNT INCOME even if length of term extends 36 months or more

30 RETIREMENT/PENSION INCOME 3-year continuance ELIMINATED Verification options Retirement Award Letters Tax returns W-2 or 1099 form Copies of 2-months bank statements

31 RETIREMENT INCOME/401K DISTRIBUTION Must verify 3-year continuance Verification options Must have unrestricted access No penalties Copy of statements 70% of Value

32 SOCIAL SECURITY INCOME 3-year continuance not required for Retirement Long term disability 3-year continuance REQUIRED for Survivor Benefits

33 TEMPORARY LEAVE Maternity/Paternity Leave Short-term medical leave Temporary leave other reasons

34 TEMPORARY LEAVE Verification Options Letter of intent to return to work Agreed-upon date with employer/3 rd party If the employer confirms that the borrower is on temporary leave, lender must consider the borrower to be employed. Discrimination Factors

35 TEMPORARY LEAVE 1. If will return to work prior to 1 st payment, use regular employment income 2. If will NOT return to work prior to 1 st payment, use temporary leave income 3. Can use cash reserves to supplement lower income amount

36 TEMPORARY LEAVE/CASH RESERVES Scenario New PITI = $1500 month TOTAL cash in bank $25,000 Less Down Payment (10,000) Closing Costs ( 5,000) 2 Mos. Cash Reserves ( 3,000) Balance Remaining $ 7,000 Going back to work in 3 months 3 mos./$7000 = $2333 month which is enough to covers monthly payment of $1500 for the next 3 months.

37 PART TIME INCOME 2-year employment history Treat as primary employment Verify All Employers Income averaging

38 SEASONAL/SECONDARY INCOME Verification options 2-year history same job OR same line of work Average in unemployment income Employer likelihood of rehire Expected dates to re-occur Income tax returns

39 MULTIPLE JOBS Seasonal Income Secondary Income 2-Year History

40 VA BENEFITS Verification options Letter from VA Type of benefit Continue for 3 years

41 SEL Fannie Mae DU 9.0 October 20, 2012

42 SEL ASK THE EXPERTS TAB

43 WHY READ MORTGAGECURRENTCY.COM? because getting a loan approved AND CLOSED these days IS ROCKET SCIENCE!