Series O 5/1 and 7/1 ARM Jumbo Loan Program Guide

Transcription

1 Series O 5/1 and 7/1 ARM Jumbo Loan Program Guide Wholesale Lending November 16, 2015 Table of Contents Program Overview... 5 Credit Philosophy... 5 Ability to Repay and Qualified Mortgage... 5 Program Parameters... 5 Eligible Programs... 5 Program Details... 5 ARM Program Parameters... 6 ARM Closing Documents... 6 LTV/(H)CLTV and Loan Limits... 6 Minimum Loan Amount... 6 LTV/(H)CLTV Matrix... 6 Assets... 7 Sourcing and Seasoning of Down Payment... 7 Bridge Loans... 8 Business Accounts... 8 Cash Deposit on Sales Contract (Earnest Money)... 8 Cash Value of Life Insurance... 8 Credit Card Charges... 9 Disaster Relief Grant... 9 Foreign Accounts/Foreign Funds... 9 Gift Funds... 9 Large Deposits Loans Secured by the Borrower s Assets Marketable/Publicly Traded Securities (Stocks, Bonds and Mutual Funds) Retirement Accounts Sale of Personal Asset Sale of Real Estate Trust Accounts Tax Deferred Exchange Ineligible Source(s) of Funds Borrowers Age of Borrower Ineligible Borrowers Series O Jumbo Loan Program Guide - Wholesale Page 1 of 51 11/16/2015

2 Employee Loan Policy Inter-Vivos Revocable Trusts Non-Borrowing Spouse Non-Occupying Co-Borrowers Non U.S. Citizens Separated Borrowers Collateral Appraisal Requirements General Property Eligibility Requirements Eligible Properties Ineligible Properties Accessory Units Acreage Disaster Policy Escrow Holdbacks Flip Properties Inspections and Certification Requirements Land Value Leaseholds Oil/Gas Lease Private Roads Property Listed for Sale PUDs Sewage Systems Water Supply Condominiums Condominium Approval Methods Non-warrantable Condominiums Credit / Underwriting Age of Documents Authorized User Accounts Bankruptcy, Foreclosure and Preforeclosure/Short Sale Credit History Credit Report Credit Report Inquiries Credit Score Disputed Tradelines Mortgage/Rental History Other Significant Derogatory Credit Sale or Conversion of Primary Residence Debt to Income Ratios Maximum Debt to Income Ratio (DTI) Qualifying Rate Higher Priced Mortgage Loans Geographic Restrictions High Value Markets Income and Employment Ineligible Income Types Stable Monthly Income Series O Jumbo Loan Program Guide - Wholesale Page 2 of 51 11/16/2015

3 Verification of Employment Continuity of Income Employment Gaps Significant Increase or Decrease in Income Level IRS Form 4506-T Salaried Borrowers Annuity, 401(k) or IRA Income Automobile Allowance and Expense Account Payments Bonus or Overtime Income Borrower Employed by a Family Member Capital Gains Income Child Support, Alimony, Separate Maintenance Commission Income Employment Offers or Contracts (Projected Income) Employment-Related Assets as Qualifying Income Foreign Income Foster Care Income Government Assistance Programs Investment Income (Dividends and Interest) Long-term Disability Income Military Income Mortgage/Employer Differential Payments Non-Taxable Income Notes Receivable Part-time / Seasonal / Second Job Income Rental Income Rental Income from Primary Residence Converted to an Investment Property Retirement and Pension Income Royalty Income Seasonal Income Self-Employed Income Short-term Disability Income Social Security Income Trust Income Unreimbursed Employee Business Expenses VA Benefits Liabilities Obligations Not Considered as Debts Undisclosed Liabilities Alimony, Child Support or Separate Maintenance Payments Bridge Loans Business Debt in Borrower s Name Contingent Liabilities Debt Secured by Financial Assets Deferred Payments (includes Deferred Student Loans) Installment Debt Lease Payments Open-End (30 day) Accounts Revolving Debt Series O Jumbo Loan Program Guide - Wholesale Page 3 of 51 11/16/2015

4 Unreimbursed Employee Business Expenses Multiple Financed Properties Occupancy Primary Residence Second Home Investment Property Reserves Reserve Requirements Secondary / Subordinate Financing Seller/Interested Party Contributions Transactions Purchase Rate/Term ( No-Cash Out ) Refinance Cash-out Refinance Construction/Perm Continuity of Obligation Delayed Financing Land Contract or Contract for Deed Lease with Option to Purchase Net Tangible Benefit Non-Arm s Length Transactions Refinance to Buyout a Co-Owner Miscellaneous Policies Borrower Paid Fees Electronic Signatures Escrows Fees and Services Flood Insurance Interest Credit Power of Attorney Property Tax Calculation Program Codes al Series O Jumbo Loan Program Guide - Wholesale Page 4 of 51 11/16/2015

5 Program Overview Jumbo Series O Loan Program Guide This Program Guide provides an overview of the Series O Jumbo product and policies eligible for delivery to Pacific Union Financial for financing consideration. Topics not specifically addressed in this Program Guide will follow Appendix Q of the Ability-to-Repay and Qualified Mortgage (ATR/QM) rules, or if Appendix Q is silent, the Fannie Mae Seller Guide. This document also identifies overlay restrictions specific to Pacific Union Financial. Overlay restrictions are indicated by green shading. Credit Philosophy The Pacific Union Financial philosophy is to offer our products with minimal overlays to our clients. All loans will be evaluated loan in accordance with the following principles: Manual underwriting is required. Each loan is evaluated in accordance with: Investor requirements. Appendix Q of the Ability-to-Repay and Qualified Mortgage (ATR/QM) rules. Policies as outlined within this Program Guide. Fannie Mae guidelines when the Program Guide does not cover a specific topic. Each loan applicant is underwritten individually, and all credit standards are applied consistently to each borrower. All factors are weighed when evaluating a loan file. The underwriting decision is not based on any single item or factor. Loans will be underwritten by designated underwriters with Jumbo lending authority. Ability to Repay and Qualified Mortgage Pacific Union Financial is committed to complying with Ability-to-Repay and Qualified Mortgage rules (ATR/QM) by making a reasonable, good-faith determination that borrowers have a reasonable ability to repay the loan. Factors considered in making this determination are the borrower s income, assets and employment status (if relied on) against the mortgage loan payment, ongoing expenses related to the mortgage loan or the subject property, payments on simultaneous loans secured by the subject property, other debt obligations, and alimony and child-support payments. A borrower s credit history is also considered in the evaluation. Pacific Union will utilize reasonably reliable third party sources of information to aid in determining if the borrower is compliant with the ATR/QM rules. Under no circumstances may the borrower s total debt-to-income ratio exceed 43%. Program Parameters Eligible Programs 5/1 and 7/1 Fully Amortizing LIBOR ARMs Program Details 30 Year Term All programs are fully amortizing loans. Temporary Buydowns are not permitted Series O Jumbo Loan Program Guide - Wholesale Page 5 of 51 11/16/2015

6 ARM Program Parameters Jumbo Series O Loan Program Guide Index: The index is the average of interbank offered rates for one-year U.S. dollar denominated deposits in the London market ( LIBOR ), as published in the Wall Street Journal. Caps (5/1 ARM): 2/2/5 Caps (7/1 ARM): 5/2/5 Margin: 2.25% Floor: Margin Conversion Option: Not convertible Assumption: Loans are assumable Interest Rate and Payment Change Frequency: Rate adjusts annually after the initial fixed period. ARM Closing Documents Note: Fannie Mae Form 3528 or state specific version Rider: Fannie Mae Form 3187 Non-convertible Fully Amortizing 5/1 or 7/1 LIBOR Adjustable Rate Rider. Acceptable ARM disclosure. LTV/(H)CLTV and Loan Limits Minimum Loan Amount One unit: $417,001 Two unit: $533,851 LTV/(H)CLTV Matrix The loan to value (LTV) is the loan amount divided by the lesser of the appraised value or the purchase price. The combined loan to value (CLTV) is the combined loan amounts of any first and second liens divided by the lesser of the appraised value or the purchase price. If subordinate financing is in the form of a Home Equity Line of Credit (HELOC), the full credit line is used to determine the (H)CLTV. Note that all references to (H)CLTV within this Program Guide apply to CLTV/(H)CLTV. 5/1 and 7/1 ARM Geographic Market Standard Occupancy Purpose Loan Amount Units LTV/(H)CLTV 3 Credit Score Primary Residence Second Home Purchase and Rate/Term Purchase and Rate/Term $1,000,000 80% 700 $1,500,000 70% 720 $1,500,000 75% $2,000,000 65% 720 $2,000,000 70% 740 $2,000,000 80% 760 $1,000,000 70% 720 $1,000, % 740 $1,500,000 65% 740 Series O Jumbo Loan Program Guide - Wholesale Page 6 of 51 11/16/2015

7 Geographic Market High Value 2 All 5/1 and 7/1 ARM Occupancy Purpose Loan Amount Units LTV/(H)CLTV 3 Credit Score Primary Residence Second Home Primary Residence Second Home Purchase and Rate/Term Purchase and Rate/Term Cash-Out 1 Cash-Out 1 $1,500,000 70% 760 $2,000, % 700 $2,000,000 70% $2,000,000 75% 740 $1,000, % 740 $1,000,000 70% 700 $1,000, % 740 $1,500,000 65% 740 $1,000, % 740 Purchase and Investment $1,000, % 740 Rate/Term 1. Maximum cash out: $250,000 for loan amounts $750,000; $300,000 for loan amounts >$750, Refer to Geographic Restrictions. 3. New Subordinate Financing is not allowed. Refer to Secondary / Subordinate Financing. Assets The borrower must have sufficient assets to cover the minimum down payment, closing costs, and required reserves. Requirements for certain asset types are detailed below. Refer to the Fannie Mae Seller Guide(s) for additional information on eligible sources of borrower funds not addressed in this section. Sourcing and Seasoning of Down Payment Funds needed for closing must be verified with any of the following documents: Written Verification of Deposit (VOD) dated within 90 days of the Note Date. Copy of bank statements or investment portfolio statements for the most recent two months. Copy of the most recent (available) retirement account statement. Quarterly statements are acceptable. Note: Asset documentation must, at a minimum, cover account activity for the most recent two month period. If the most recent account statement is more than 45 days prior to the application date, the borrower must provide a more recent supplemental bank generated form reflecting the account number, balance and date. The statement may also be obtained through computer generated forms, including on-line account or portfolio statement(s) obtained by the borrower through the Internet. Computer generated or internet statements must include all of the following: Borrower name; Type of account; Account number; Daily transaction history; Time period covered by the statement; and Series O Jumbo Loan Program Guide - Wholesale Page 7 of 51 11/16/2015

8 Bridge Loans Jumbo Series O Loan Program Guide Clearly identify the institution name and source of information in the URL or fax banner of the document. A borrower may take out a second lien that is collateralized by the current primary residence home, which is usually pending sale. The proceeds derived from this bridge (or swing) loan are acceptable as a source of funds for down payment and/or closing costs, subject to the following: The bridge loan cannot be cross-collateralized against the subject property, and The payment on the bridge loan and the payment on the current primary residence must be considered in the borrower s monthly debt obligations. Business Accounts Business assets may be an acceptable source of funds for the down payment and closing costs when a borrower is self-employed and the individual federal income tax returns have been evaluated including, if applicable, the business federal income tax returns for that particular business (non-schedule C). Business accounts may not be used for reserves. The borrower must be listed as an owner of the account. A business cash flow analysis must be performed to confirm that the withdrawal of funds for this transaction will not have a negative impact on the business. Cash Deposit on Sales Contract (Earnest Money) If the deposit on the sales contract is used as source of funds for the down payment or closing costs the funds must be from an acceptable source. The source of funds for the deposit may be verified by providing the front and back of the canceled check or a bank statement or a Verification of Deposit (VOD) that indicates that the average balance for the past two months was large enough to include the amount of the deposit. If the deposit check has cleared the bank account, the bank statement should cover the period up to and including the date the check cleared the bank account. Cash Value of Life Insurance Net proceeds from the surrender of a life insurance policy or a loan against the cash value of the life insurance policy is acceptable, subject to the following: Obtain documentation from the insurance company that: Identifies the policy owner(s). Verifies the specific terms of the loan against the cash value or the net surrender value of the policy. Reflects the period covered and the cash value. Proof of receipt of funds is required. Receipt may be documented with a copy of the check or the payout statement issued by the insurer. Payments on a loan secured by the cash value of a borrower s life insurance policy do not have to be considered as long-term debt when qualifying the borrower if any penalty for failure to repay the loan is limited to the surrender of the policy. However, any additional obligation must be factored into the total debt-to-income (DTI) ratio or subtracted from the borrower s financial reserves. For example, if the loan document indicates that there is a penalty for non-repayment of the loan, that penalty must be either considered in the DTI ratio or deducted from available reserves. Series O Jumbo Loan Program Guide - Wholesale Page 8 of 51 11/16/2015

9 Credit Card Charges Jumbo Series O Loan Program Guide Borrowers may use a credit card to pay for: Lock-in fees. Float fees. Application fees. Credit reports; and Appraisals. When a credit card is used to pay any of the above fees, the loan must be documented with sufficient funds to cover these charges, in addition to closing costs, down payment and reserve requirements. Disaster Relief Grant Lump-sum disaster relief grants are acceptable to use for down payment, closing costs and reserves, subject to the following: Primary Residence only. The grant must be documented with either: A copy of the letter awarding the grant to the borrower, or A copy of the legal agreement that specifies the terms and conditions of the grant. The documentation must include language indicating that repayment of the disaster relief grant is not expected, and how the funds will be transferred to the borrower, lender, or closing agent. Evidence of the transfer of the grant must be included in the loan file, such as: Copy of the donor s cancelled check, or Copy of the Closing Disclosure showing receipt of the grant funds. Foreign Accounts/Foreign Funds Not allowed. Gift Funds Allowed on owner-occupied transactions only. Gift funds may not be used to satisfy reserve requirements. On purchase transactions, the borrower must contribute a minimum of 5% of the sale price from his/her own funds. Donor must be a relative, future spouse, or domestic partner. A relative is defined as the borrower s spouse, child, dependent or any other individual related to the borrower by blood, marriage, adoption, or legal guardianship. Donor must not have an affiliation with the builder, developer, real estate agent or any other interested party to the transaction. An executed gift letter with the gift amount, date of funds transfer, donor s name, address, telephone number and relationship to the borrower is required. The donor must confirm no repayment is expected. Brokers are encouraged, but not required, to use the Pacific Union Financial Gift Letter. Documentation of Gift Funds Evidence that sufficient funds to cover the gift are either in the donor s account or have been transferred to the borrower s account is required. Acceptable documentation includes any of the following: A copy of the donor s check and the borrower s deposit slip. Series O Jumbo Loan Program Guide - Wholesale Page 9 of 51 11/16/2015

10 A copy of the donor s withdrawal slip and the borrower s deposit slip. A copy of the donor s check to the closing agent. A Closing Disclosure showing the receipt of the donor s check. When the funds are not transferred prior to settlement, the loan file must include two months of current donor asset statements to source the donor funds and evidence that the donor gave the closing agent the gift funds in the form of a cashier s check, certified check or other official check for the amount of the gift. Gift of Equity Large Deposits Donor must be a relative, future spouse, or domestic partner. A relative is defined as the borrower s spouse, child, dependent or any other individual related to the borrower by blood, marriage, adoption, or legal guardianship. Donor must not have an affiliation with the builder, developer, real estate agent or any other interested party to the transaction. The Closing Disclosure must show a gift of equity credit to the borrower(s). The sales price of the property may not exceed fair market value. Indications of borrowed funds such as a recently opened account, a recently received large deposit, or an account balance that is considerably greater than the average balance over the previous few months must be investigated. Deposits greater than 25% of total monthly qualifying income that are not supported by regular recurring documented income sources must be documented. Loans Secured by the Borrower s Assets Funds that are obtained from a loan secured by a borrower owned asset may be used for down payment, closing costs and/or reserves. The loan file must include the following documentation to evidence that the loan is secured by a borrower owned asset: The terms of the secured loan. Evidence that the borrower is the owner of the asset. Evidence that the party providing the loan is not a party to the transaction. Evidence that the funds have been transferred to the borrower. Financial Assets Proceeds from a loan secured by financial assets such as savings accounts, stocks, bonds, Certificates of Deposits, and 401(k) accounts may be used. If the borrower is using the financial asset to satisfy reserve requirements, the asset must be reduced by the amount of the loan, as well as any taxes or penalties associated with early withdrawal of the funds (if applicable). An equity line of credit or equity in the subject property may not be used for reserves. Non-Financial Assets Proceeds from a loan secured by non-financial assets such as automobiles or real estate may be used. The monthly payment for loans secured by non-financial assets must be included in DTI ratios. Series O Jumbo Loan Program Guide - Wholesale Page 10 of 51 11/16/2015

11 Marketable/Publicly Traded Securities (Stocks, Bonds and Mutual Funds) Provide documentation to support the borrower s ownership and value of the asset at the time of sale or liquidation. When used for down payment or funds to close, the borrower s actual receipt of the funds realized from the liquidation of the assets must be verified. Non-vested restricted stock is not an acceptable source of reserves. When used for reserves, 70% of the value of stocks, mutual funds, and bonds must be used. Stocks and Mutual Funds Provide most recent monthly or quarterly stock/securities statement, or a copy of the stock certificate in the borrower s name, and A newspaper stock price list dated at or near the time of loan application. Bonds The value of government bonds must be based on the purchase price unless the redemption value can be documented. Evidence of liquidation of the securities is required if the funds are needed for down payment or closing costs. 100% of the liquidated value may be used for down payment or closing costs. Retirement Accounts Vested funds from individual retirement accounts (IRA/SEP/Keogh accounts) and taxdeferred retirement savings accounts (401(k) accounts) are acceptable sources of funds for down payment, closing costs, and reserves. When funds from retirement accounts are used for down payment or funds to close: The ownership of the account and the borrower's actual receipt of the funds realized from the liquidation of the assets must be verified. Only the amount of the net withdrawal (after taxes and/or penalties) may be considered. When funds from retirement accounts are used for reserves: Documentation of the withdrawal of the funds is not required. 60% of the vested balance must be used if the borrower is not of retirement age. 70% of the vested balance may be used if the borrower is of retirement age. Account must be vested and allow withdrawals regardless of the current employment status. The following documentation is required: Two most recent statements reflecting: Vested balance or percent of vesting, and Any outstanding loans, and Ending balance as of the end of the statement period Conditions under which the funds may be withdrawn. Sale of Personal Asset Proceeds from the sale of a borrower s personal asset is acceptable, subject to all of the following: Evidence of the borrower s ownership of the asset. Documentation to support the value of the asset. Bill of sale or statement from the purchaser to evidence the ownership transfer. Series O Jumbo Loan Program Guide - Wholesale Page 11 of 51 11/16/2015

12 Deposit slip or bank statement to document the borrower s receipt of the sale proceeds. Sale of Real Estate Provide final Closing Disclosure meeting all of the following criteria: Fully executed by the buyer and seller. Computer generated or typed. Reflects the borrower as the seller of the property. Identifies the property sold. Shows the proceeds paid to the borrower. Reflects satisfaction of all liens against the property. Trust Accounts Funds disbursed from a borrower s trust account are an acceptable source of the down payment, closing costs, and reserves if the borrower has immediate access to the funds. The trust manager or trustee must verify the value of the trust account and confirm the conditions under which the borrower has access to the funds. The effect (if any) that the withdrawal of funds from the account will have on any trust income that is used in qualifying must be documented. If the income is negatively affected by the withdrawal of funds from the account, the trust income must not be considered Tax Deferred Exchange Reverse 1031 Exchanges are not eligible. Determination of whether or not the transaction is a like kind exchange of properties that are at least equal in value is not required. Permitted as an acceptable source of funds, subject to all of the following required documentation: Copy of the executed exchange agreement between the borrower and the exchange service. Copy of Closing Disclosure and appraisal for the property being exchanged. Verification of Deposit (VOD) from the exchange service confirming the cash amount on deposit related to the exchange. The proceeds must be in the cash form and must be held in an escrow account at a lending institution. Copy of Closing Disclosure for the subject property purchase. Ineligible Source(s) of Funds Signature loan(s). Unsecured loans, including credit card advances. Unsecured loans from an Employer Assisted Homeownership Benefit. Cash for which the source cannot be verified (cash on hand). Commission from sale of subject property. Salary advances. Sweat equity (contribution to the construction or rehabilitation of a property in the form of labor or services rather than cash). Unverified sources of funds. Reverse mortgages. Payment abatements paid by an interested party to the transaction. Disaster relief loans. Employer assistance funds (unless part of a documented relocation package). Funds derived from or in a foreign account. Series O Jumbo Loan Program Guide - Wholesale Page 12 of 51 11/16/2015

13 Reverse 1031 exchanges. Deposits from an Individual Development Account (IDA). Funds on deposit in a Community Savings System. Borrowers Age of Borrower All borrowers must have reached the age at which the mortgage note can be legally enforced in the jurisdiction where the property is located. There is no maximum age limit for borrowers. All applicants are evaluated on their ability to meet underwriting guidelines. Ineligible Borrowers Pacific Union Financial makes mortgages to natural persons only. Borrowers are ineligible for a mortgage if they are a different type of legal entity or hold title as a different type of legal entity. These legal entities include, but are not limited to, the following: Corporations. S Corporations. Life estates. Trusts. Land trusts, including Illinois Land Trusts. General partnerships. Additionally, loans where a custodian, agent, conservator, or guardian is signing on behalf of the borrower, non-borrowing spouse, or a vested owner are not allowed. Employee Loan Policy Loans to the originating Broker and/or their employees are allowed subject to Second Level Review and approval by a Credit Risk Underwriter. Inter-Vivos Revocable Trusts Not allowed Non-Borrowing Spouse A married individual that holds title to a property in his/her own name may be an eligible borrower without involving his/her spouse as a co-borrower provided: The non-borrowing spouse must sign the security instrument or any other documentation required to evidence the spouse is relinquishing all rights to the property necessary to perfect the lien under the governing state law. Seller must be guaranteed the lien position is superior to that of the non-borrowing spouse. The borrower must qualify for the debt on the property plus all of his/her other debts. Income of the non-borrowing spouse is not considered. A credit report for the non-borrowing spouse is not required, and the liabilities of the nonborrowing spouse need not be considered regardless of the property location. Non-Occupying Co-Borrowers Not allowed Series O Jumbo Loan Program Guide - Wholesale Page 13 of 51 11/16/2015

14 Non U.S. Citizens Allowed on Primary Residence only. All non-u.s. citizen borrowers must have lawful residency status. A mortgage to a non-u.s. citizen who has no lawful residency status in the U.S. is not eligible. Foreign Nationals are eligible provided all requirements per this section are met. To ensure that the borrower or borrowers are legally able to reside and work in the U.S., a valid Social Security Number (SSN) is required for all borrowers whose income and/or assets are being used to qualify for the loan. A Taxpayer Identification Number (ITIN) is not eligible. Borrower must have an unexpired H1B or L1 Visa. Form I-797A may be provided to document the extension of an H1B or L1 Visa. The non U.S. Citizen borrower must have at least three active U.S. tradelines that are >24 months old. The borrower may not own any other properties that are financed in the U.S. Funds used for closing must be held in U.S. bank accounts for at least a 60 day period. If funds were transferred from a foreign depository, the borrower must provide evidence of ownership of funds prior to the transfer. Refer to Foreign Accounts/Foreign Funds. If income is in foreign currency, 75% of the currency exchange value may be used for qualifying the borrower. Refer to Foreign Income. Standard income documentation requirements, as applicable to the borrower s type of income, must be met. Separated Borrowers Collateral When the borrower indicates that he/she is separated, it must be determined whether it is a legal separation. If the borrower is legally separated, a copy of the recorded legal separation agreement must be provided to determine the division of assets, liabilities and potential obligations. See Court Ordered Assignment of Debt for requirements to exclude an assigned debt from the qualifying DTI. If there is no legal separation, a letter from the attorneys of both parties involved specifying the proposed settlement terms must be provided. The loan must be qualified as follows: All borrower debt must be included in the DTI; and All additional obligations disclosed in the proposed settlement (i.e. child support, alimony, debt payments, etc.) must be included in the DTI. If no documentation can be obtained to verify the division of assets and liabilities, the loan will generally be considered an unacceptable risk. If the borrower states there are no plans for a legal separation, no further documentation is necessary; he/she is legally married and must be qualified accordingly. Appraisal Requirements Age of Appraisal The date of the appraisal must not be more than 120 days prior to the Note Date. A recertification of value (appraisal update) is acceptable if the appraisal date is more than 120 days but less than one year from the Note Date. The appraisal update must be on Fannie Mae Form 1004D and is subject to all of the following: Series O Jumbo Loan Program Guide - Wholesale Page 14 of 51 11/16/2015

15 An exterior inspection of the property is required. Appraiser must review current market data to determine if the property value has remained stable or declined since the date of the original appraisal. The property re-inspection must occur within 120 days of the Note Date. If the appraisal update indicates a decline in value since the date of the original appraisal, a new appraisal is required. Appraisal Re-Use Use of an appraisal from a previously closed transaction is not allowed. Appraisal Requirements Purchase transactions require one full appraisal regardless of loan amount. Rate/Term and Cash-Out Refinance transactions require two full appraisals if: Loan amount >$1,000,000 in standard geographic markets, or Loan amount >$1,500,000 in high value geographic markets. All appraisals will be subject to a Desk Review by the Investor. Appraisals must be on Fannie Mae Uniform Residential Appraisal Report (URAR) Form 1004 or Appraisals for units in a condo project that consist solely of detached dwellings may be documented on Form Properties with a Condition Rating of C5 or C6 are not eligible. The property value must be on an as is basis, and may not be subject to future improvements unless the future improvements are completed and confirmed with an Appraisal Update and/or Completion Report (FNMA 1004D/FHLMC 442) dated prior to the Note Date. The appraisal must include clear interior photos of the kitchen, bathrooms, bedrooms and living/family room(s). All appraisals must conform to the current Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation. If the subject property transaction includes sales concessions, all comparable properties must also include sales concessions. Each appraisal should be reviewed in detail for completeness, accuracy and appraising logic in accordance with Fannie Mae guidelines. Schedules and addenda are mandatory, if applicable. Appraisal Review All appraisals are subject to a Comprehensive Enhanced Desk Review with MLS listings prior to closing. When two appraisals are required for the transaction, the desk review is to be ordered on the appraisal with the lower value. The desk review value must be within 10% (+/-) of the appraised value. The value variance is calculated as: (review value appraised value) / appraised value. If the desk review value exceeds 10% (+/-) of the appraised value, a field review is required. If the field review value exceeds 10% (+/-) of the appraised value, a new appraisal is required. Note: If the review appraiser recommends a second full appraisal, a Desk Review will also be required on the replacement appraisal and the review must meet the acceptable review value variance process noted above. Upon receipt of a satisfactory appraisal(s) and Desk Review, these documents are submitted to the Investor for review prior to closing. Series O Jumbo Loan Program Guide - Wholesale Page 15 of 51 11/16/2015

16 Appraisal Transfers Not allowed General Property Eligibility Requirements The mortgaged property must: Be residential based on the property characteristics, zoning and land use. Be safe, sound, habitable and undamaged by fire or windstorms or other perils. Meet all conditions of the appraisal if the appraisal was made subject to conditions. Represent the highest and best use of the property as improved and the use of the mortgages property must be a legal use. Have legal access (ingress and egress). Have year around access. Have utilities that meet community standards. Have a continuously fueled and permanently affixed heating source. Have mechanical systems that meet community standards. Have property insurance coverage that meets Pacific Union Financial requirements and coverage for any hazards specific to the location of the property. Not be subject to pending legal proceeding for condemnation in whole or in part. Eligible Properties The following property types are eligible; however, all are not eligible for maximum financing. Single family attached and detached Two unit (primary residence only) Fannie Mae warrantable condominiums Townhouses PUDs that meet Fannie Mae project eligibility requirements Ineligible Properties 3-4 unit dwellings Boarding houses Bed and breakfast Commercial properties, including those that are zoned commercial Condo hotel / Condotels Co-ops Kiddie condos Log, earth, geothermal or dome homes Manufactured Homes Mixed-use properties Mobile homes Model Home Leasebacks Modular homes Multi-Family dwellings containing more than four units Non-warrantable condominiums Projects with legal non-conforming use Properties subject to Limited Domain Properties where marijuana is grown and/or processed Properties with more than 12 acres Properties with less than 600 square feet Series O Jumbo Loan Program Guide - Wholesale Page 16 of 51 11/16/2015

17 Properties with more than 7,000 square feet in conforming loan limit areas (geographic areas with a one unit conforming loan limit $417,000) Properties with more than 10,000 square feet in high balance loan limit areas (geographic areas with a one unit conforming loan limit >$417,000) Ranches and orchards Residential properties with commercial or industrial zoning Resale Restricted properties Tax-sheltered syndications Timeshare units Unimproved land Working farms Accessory Units Acreage Disaster Policy Examples of such properties include a house with a unit above a detached garage or a house with a guest apartment or basement unit. A single-family property that includes an additional unit is acceptable provided it conforms to the subject neighborhood and to the market. Comparables must include second units. Second unit must be incidental to the overall value and to appearance of the property. No rental income may be used to qualify the borrower. Lot size may not exceed 12 acres and must be typical for the neighborhood and supported by comparable properties. Properties with agricultural use will not be allowed. If the Federal Emergency Management Agency (FEMA) declares a major disaster, or when the lender becomes aware of a major disaster, appropriate steps must be taken to determine the condition of a property located in the disaster area. If the property appraisal was completed on or before the incident period end date, an inspection of the property is required. Adhere to all requirements noted in this section, in addition to the following: Closing Policy. The inspection is required on properties affected by a disaster for up to 90 days after the disaster end date. The inspection must verify that the property is sound and habitable and in the same condition as when it was appraised. Inspection Requirements Any of the following are eligible inspection formats: A final inspection or appraisal update of the property signed by the original appraiser. The inspection must meet all of the following: Completed on Freddie Mac Form 442/Fannie Mae Form 1004D. Completed by the original appraiser. Include an exterior photo of the property, evidencing no damage. May not be performed by an unlicensed appraiser assistant. A certification executed by an employee of the lender who will not receive direct compensation from the subject transaction, stating that an acceptable inspection of the property was completed. Series O Jumbo Loan Program Guide - Wholesale Page 17 of 51 11/16/2015

18 Freddie Mac Form 2070 or Fannie Mae Form A certification executed by a person employed by the lender, if: The certifying party will not receive direct compensation from the sale of the subject property, and The certification confirms an acceptable inspection of the subject property was completed. Re-verification of Hazard Insurance Property insurance coverage should be re-verified to insure that the coverage is adequate to protect against future loss and it insure that it has been obtained or maintained adequately with respect to affected properties. Escrow Holdbacks Not allowed Flip Properties A property flip refers to a transaction in which a property is purchased and quickly resold for a significant profit. Properties targeted for flips generally include those that can be acquired at a low price and often include REOs, properties subject to a short sale, distressed properties or newly constructed properties where the builder or developer must liquidate housing inventory, transactions not involving a realtor, and transactions that include parties affiliated or related by birth or marriage. In some cases, the seller of a flipped property never holds title to the property, but instead sells or assigns their interest in a contract to purchase the property to a third party. Flip transactions require a higher level of review to ensure the property value and the transactions are valid. The following transactions are generally considered acceptable and additional review is not required: Property sales by: A Government Sponsored Enterprise, state or federally chartered financial institution, mortgage insurer, or federal, state or local government agency. Employers or relocation agencies related to employee relocations. The property seller through inheritance, divorce, or as a result of a legal settlement or proceeding. An administrator or executor of an estate. Property sales that have been substantially improved by bona fide and verified renovations since the property was acquired by the property seller in which any increase in sales price over the seller's acquisition costs is representative of the market given the improvements to the home. Sales of properties that the property seller acquired at below market value after purchasing as a result of a distress sale (i.e. REO sale, short sale, tax lien sale, bankruptcy trustee's sale, etc.), where any increase in the sales price over the property seller's acquisition cost can be clearly shown to be a result of the difference (if any) in the market's reaction to distress sales and typical arms-length market sales. Potential Property Flips/Red Flags Pacific Union Financial will thoroughly review all transactions for red flags that may indicate that the subject property is a Flip and to determine whether a transaction is acceptable. Any of the following characteristics/red flags may be indicative of a potentially ineligible flip transaction. Should any of these characteristics exist, additional research as outlined in the Best Practices section is required to determine acceptability. Series O Jumbo Loan Program Guide - Wholesale Page 18 of 51 11/16/2015

19 180 days of ownership by property seller from date of purchase contract. Title to the property has transferred more than two times in the last twelve months. The property seller or any other party claims that the property was significantly renovated since being acquired but the claimed renovations were not actually performed or cannot be sufficiently documented. The contract seller is not the current owner of record at the time of the purchase contract. The sales contract and/or other documentation identify terms that may indicate that there has been assignment or sale of the seller s interest in a contract or option to acquire the property. Double Escrows are discovered at the time of loan closing. Purchases with undisclosed secondary financing, in which part of the purchase price is refunded to the buyer, or is quickly followed by a cash-out refinance. Fraud Detection report indicates a Property Flipping Impact assessment identified. The appraisal: Lacks sufficient analysis of all pertinent offerings or listing for the property, the contract of sale, and the sales/transfer or listing history of the property and comparable sales. Increases in property value are not supported. See Best Practices/Appraisal topic below. Property seller is not shown as the owner of the subject property. Note: Underwriter discretion will be used, as the above list may not be all inclusive. Best Practices If the underwriter s analysis indicates the subject is a flip and the transaction is not an acceptable scenario, the following additional review is required: Increases in property value, in whole or part, must be supported by the appraisal, explained, documented, and analyzed as follows: The appraisal must identify, in detail, any changes made and include photographs of the rehabilitation or renovation. Improvements and renovations must be documented and substantiated with receipts, contractor invoices, and building permits. Regardless of length of ownership, Underwriter reserves the right to obtain a desk review if an unreasonable or unusually large increase in value has occurred within the context of the property s market. Documentation must indicate that improvements were completed after the property seller acquired the property. Confirm that the property seller is the owner of the subject property. Ensure that the appraisal sufficiently analyzes and provides detail on all pertinent offerings or listings, includes sufficient analysis of the contract of sale, and adequate justification of any significant increase in sales price/value over the seller s acquisition costs. The analysis must be detailed enough to clearly explain the methodology and rationale used to justify the appraiser s conclusions on this issue. Ensure all property flipping impacts as identified in the Fraud detection report are satisfactorily resolved. Inspections and Certification Requirements A property inspection is not required for termite, private well, septic system, or roof unless required in the purchase agreement or when the appraiser recommends an inspection in the appraisal report. Series O Jumbo Loan Program Guide - Wholesale Page 19 of 51 11/16/2015

20 Land Value Jumbo Series O Loan Program Guide The Investor does not have a maximum threshold for land to value; however, if the land value appears excessive, the appraiser must: Include the reasons for the excess value State whether the land value is consistent with other homes in the area; and Show evidence of such in the comparable properties. Leaseholds The Leasehold must meet Fannie Mae guidelines. Oil/Gas Lease Properties with an existing oil and/or gas lease are acceptable, subject to all of the following: Public water connection is required. Active drilling is not permitted. The appraiser must provide a comment or current survey to confirm no active drilling. Lease must be recorded prior to the construction of the subject property. Re-recording after the property construction is only permitted for a lease previously in place prior to the property construction. Title endorsements must provide coverage against damage to existing improvements resulting from the exercise of the right to use the surface of the land subject to the oil and/or gas lease. Private Roads Private roads require a permanent easement for ingress and egress with provisions for road maintenance. Property Listed for Sale PUDs Refinance transactions are not allowed if the subject property is currently listed for sale. Properties that were previously listed for sale must have been taken off the market more than 180 days prior to the disbursement date of the new loan and the borrower must confirm the intent to occupy the property as a primary residence (if applicable). Attached/Detached PUDs must meet Fannie Mae requirements. Sewage Systems Cesspools and septic tanks are acceptable provided the appraiser demonstrates that such systems are common and customary for the area. Water Supply Properties using alternative water supplies are acceptable provided the appraiser demonstrates that such water supply is typical and acceptable for the immediate area. Series O Jumbo Loan Program Guide - Wholesale Page 20 of 51 11/16/2015

21 Condominiums Condominium Approval Methods Fannie Mae approval methods only. Limited Reviews are not allowed. Full Review and CPM reviews must be submitted to the Pacific Union Condo Desk for approval. Condo conversions require approval by the Pacific Union Condo Desk. Refer to the Pacific Union Financial Condominium Approval Policy for details associated with each review type. Documentation Requirements Documentation Required for Review Type Condo Questionnaire 1 All Appraisal All Preliminary Title Report All Declaration Page for Master Insurance Policy 2 All Budget Lender Full Review, CPM CC&Rs and Bylaws Lender Full Review, CPM 1. It is recommended that the Pacific Union Financial Condo Certification Questionnaire be used. However, alternative versions are permitted provided the questionnaire covers sufficient information for the reviewer to determine project eligibility. 2. If the Declarations Page of the Master Insurance Policy does not provide sufficient details regarding the project s insurance coverage, a copy of the original insurance policy with all endorsements must be provided. Non-warrantable Condominiums Not allowed Credit / Underwriting Automated underwriting through Loan Prospector (LP) or Desktop Underwriter (DU) is NOT allowed. All loans must be manually underwritten based on Pacific Union Financial policies and this Program Guide. Age of Documents Credit reports/documents must be dated within 90 days of the Note Date. Asset documentation must be dated within 45 days of the application date. VODs must be dated within 90 days of the Note Date. All income documentation must be dated within 90 days of the Note Date. Authorized User Accounts When a credit account owner permits another person, typically a family member who is managing credit for the first time, to have access to and use an account, the user is referred to as an authorized user of the account. This practice is intended to assist related individuals in legitimately establishing a credit history and credit score based on the account Series O Jumbo Loan Program Guide - Wholesale Page 21 of 51 11/16/2015

22 and payment history of the account owner, even though the authorized user is not the account owner. Credit report tradelines that list a borrower as an authorized user cannot be considered in the underwriting decision. Bankruptcy, Foreclosure and Preforeclosure/Short Sale Credit History Bankruptcy: Chapter 7: Seven years seasoning from discharge or dismissal date. Chapter 13: Seven years seasoning from discharge or dismissal date. No foreclosure or deed in lieu of foreclosure within the last seven years. No preforeclosure/short sale within the last four years. The preforeclosure/short sale must be supported by a documented borrower hardship due to extenuating circumstances. Documentation should include tax returns showing a significant reduction in income near the time of the preforeclosure/short sale. The borrower must have reestablished a satisfactory credit history with a minimum of three tradelines and must show the ability to manage his/her financial affairs since the bankruptcy, foreclosure, and/or preforeclosure/short sale was completed. All major derogatory credit requires a letter of explanation from the borrower. Minimum of three tradelines. Three tradelines must be reported for a minimum of 24 months and one tradeline must have activity in the past 12 months. Non-traditional credit and authorized user accounts must not be counted to meet the tradeline requirement. The three open tradelines may not include significant derogatory credit items (chargeoffs, collections, repossessions, etc.). Less than three tradelines may be acceptable, subject to: 60% LTV/(H)CLTV One tradeline is a residential mortgage reported for a minimum of 24 months with no late payments reported in the most recent 24 months. Note: Borrowers with just one tradeline are eligible provided the tradeline is a residential mortgage meeting these requirements. See Other Significant Derogatory Credit. See Bankruptcy, Foreclosure and Preforeclosure/Short Sale. Borrowers currently participating in consumer credit counseling (CCCS) or a negotiated payment plan are not eligible. Credit Report A full RMCR or tri-merged credit report is required to establish a valid representative credit score. At least two of the three major repositories must be provide on the credit report. The credit report/documents must be dated within the prior 90 days from the Note Date. Any credit report security freeze must be lifted and the credit re-run prior to underwriting the loan in order to obtain accurate credit repository information. The loan will not be eligible if the borrower is not willing to lift the security freeze. Series O Jumbo Loan Program Guide - Wholesale Page 22 of 51 11/16/2015

23 Credit Report Inquiries Jumbo Series O Loan Program Guide All credit inquiries reported within the prior 120 days must be investigated. The borrower must provide a written explanation for the inquiries that includes a statement that no additional debt was obtained as a result of those inquires. Credit Score Refer to the LTV/(H)CLTV Matrix. Exceptions to the minimum credit score requirements are not allowed. Determining Representative Credit Score The representative score is defined as the borrower s lower of two or middle of three scores. If only one score is available, the borrower is not eligible. If three credit scores are obtained, the representative score will be the borrower s middle score. If two credit scores are obtained, the representative score will be the lower of the two scores. When there is more than one borrower, the representative score will be the lower of all the Borrower s representative scores. Disputed Tradelines If a credit reporting company confirms that disputed information is incorrect or incomplete, the disputes should be remedied prior to loan approval. Mortgage/Rental History If the borrower has existing mortgage(s), the payment history must be verified to reflect no delinquency of 30 or more days in the lesser of the most recent 24 months, or the repayment period of the mortgage if <24 months. The payment history must be verified via a valid credit report, a Verification of Mortgage (VOM) or the most recent 24 months of cancelled checks. For privately held mortgages, a copy of the mortgage note and security instrument should be provided. If the current residence has been owned free and clear for all or part of the last 24 months, the loan file must include documentation to support the free and clear status of the property. No payment history will be required for the period in which the property was owned free and clear. Rental payment history may be substituted for mortgage history when the borrower does not have mortgage history in the last 24 months. First Time Homebuyers must have must have minimum 24 months of 0 x 30 rental payment history. If the borrower lived rent and mortgage free in employer or family housing for all or part of the past 24 months, the housing payment history may be extended back as far as 48 months in the past in order to verify 24 months of housing payments with no delinquency of 30 days or more. Other Significant Derogatory Credit No significant derogatory credit items in the 24 months prior to application are allowed. The age of a derogatory credit event must be measured by the account default date and the default date(s) must be documented in the loan file. Series O Jumbo Loan Program Guide - Wholesale Page 23 of 51 11/16/2015

24 Other significant derogatory credit includes the following: Charge-offs Judgments Garnishments Liens Repossessions Settled for Less accounts The borrower must provide satisfactory explanation for any delinquent credit. All significant derogatory credit items must be paid in full prior to application date. The loan is not eligible if any of these items are paid on or after the application date. Collection accounts must be paid in full prior to or at closing, as follows: Collection accounts with an individual account balance $250. Collection accounts with a combined total balance $1,000. Collection accounts <$250 are not required to be paid off unless a combined total of all collection accounts $1,000. Borrowers with garnishments must provide evidence that the garnishment has been released and there is no additional payment due. Borrowers with judgments, federal tax liens and/or property tax liens must provide evidence that the item has been paid in full, regardless of any impact to title. Payment plans and subordination agreements are not allowed. Borrowers with current or previous past due child support must provide evidence that all past due payments are current unless the borrower is making the payments according to a court approved plan. In this case, the borrower must demonstrate that payments are current according to the plan. Sale or Conversion of Primary Residence Borrower s Primary Residence Pending Sale If the borrower s current primary residence is pending sale but will not close prior to or simultaneously with the new transaction, the borrower must qualify with both the current and proposed mortgage payments. See Reserves. Six months of reserves are required, in addition to the reserve requirements for the proposed mortgage. Borrower Converting Primary Residence to a Second Home The borrower must qualify with both the current and proposed mortgage payments. Six months of reserves must be documented for the converted property, in addition to the reserve requirement for the proposed mortgage. See Reserves. Borrower Converting Primary Residence to an Investment Property See Rental Income from Property Being Vacated by the Borrower. See Reserves. Series O Jumbo Loan Program Guide - Wholesale Page 24 of 51 11/16/2015

25 Debt to Income Ratios Maximum Debt to Income Ratio (DTI) Qualifying Rate 43% - no exceptions DTI ratio must include the monthly escrow payment. 5/1 ARM: Qualify at the greater of the note rate plus 2% or the fully indexed rate. 7/1 ARM: Qualify at the greater of the note rate or the fully indexed rate. Higher Priced Mortgage Loans Not allowed Geographic Restrictions Texas Home Equity: Not allowed. Refer to the Geographic Matrix for additional restrictions High Value Markets High Value Markets are geographic areas with a one unit conforming loan limit >$417,000. Refer to Maximum County Limits (select Fannie/Freddie in Limit Type field and CY2015 in Limit Year field). Income and Employment Full documentation of income and employment is required. Income sources and the calculation of income must meet Appendix Q guidelines. Refer to the Fannie Mae Seller Guide for income types not referenced in this section. Ineligible Income Types The following income types are not eligible: Expense account payments. GI benefits for education. Mortgage Credit Certificates (MCCs). Homeownership Subsidies. Income derived from activity prohibited by federal law, even if the activity is permitted by the applicable state law (i.e. marijuana related business). Boarder income from the borrower s single-family primary residence. Rental income from the borrower s second home. Retained earnings in a company. Stable Monthly Income Stable monthly income is the borrower s verified gross monthly income that can reasonably be expected to continue for at least the next three years. In most cases, a two year history of receiving income is required in order to use the income for qualifying. Series O Jumbo Loan Program Guide - Wholesale Page 25 of 51 11/16/2015

26 When analyzing the probability of continued employment, the following criteria should be considered: The borrower s past employment history. The borrower s qualifications for the current position. Previous training and education. The employer s confirmation of probability of continued employment with no indication the employment has been or is set to be terminated. A borrower s work history may be favorably considered if he/she changes jobs frequently within the same line of work, but continues to advance in income or benefits. Income stability should take precedence over job stability. Income may not be used in calculating the consumer s income ratios if it comes from any source that cannot be verified, is not stable, or will not continue. Verification of Employment Verification of employment for the most recent two years is required. Borrowers with less than two years of current employment history are not eligible. The borrower must be employed with the current employer for a minimum of six months. Allowances may be made for seasonal employment, typical for the building trades and agriculture, if documented. Note: The duration of employment must be measured from the application date. Verbal VOE Verbal VOE must be completed by Pacific Union Financial closer within five business days prior to closing. Verbal VOE for Self-Employed Income: The existence of the borrower s business must be verified through a third party or other independent resource within 30 calendar days prior to the Note Date. Verification should first be attempted through a third party, such as a CPA, regulatory agency, or the applicable licensing bureau. When third party verification is not possible, confirmation may be obtained by using a telephone book, the Internet, or directory assistance. The source of the information and the name and title of the person obtaining the verification must be documented. Continuity of Income If the income source does have a defined expiration date or is dependent on the depletion of an asset account or other limited benefit, documentation of the continuation of the income for at least three years is required. Employment Gaps The borrower must explain any gaps in employment of 30 days or more over the previous two years. The borrower must be employed with the current employer for a minimum of six months. Series O Jumbo Loan Program Guide - Wholesale Page 26 of 51 11/16/2015

27 Significant Increase or Decrease in Income Level Jumbo Series O Loan Program Guide When a borrower has a significant increase or decrease income, analysis of qualifying income must focus on the most recent earnings and the income that is most likely to be received at the level used for qualifying. IRS Form 4506-T A fully completed and signed 4506-T is required for all borrowers regardless of income type at application and at closing. Two years personal and business (if applicable) tax return transcripts must be provided for all borrowers. Income reported on the transcript must support the income used to underwrite the loan. Any major discrepancies between the income verified in the file and tax transcripts must be reasonable and supported by documentation in the file. Tax returns not yet filed: Between January 1 and tax filing date (April 15), borrowers must provide: W-2 and/or 1099 forms from the previous year. If the loan closing will occur prior to the receipt of the W-2s in January, the prior year-end paystub may be used. Between the tax filing date (April 15) and the expiration of the tax extension (October 15), borrowers must provide the following (as applicable): Copy of the filed extension. W-2 forms for corporations. Form 1099 for commission income. Current year Profit and Loss (P&L) signed by the borrower. Year-end Profit and Loss (P&L) for the prior year signed by the borrower. Balance sheet for the prior calendar year (sole proprietorship). Note: After the tax extension expiration date, the loan is not eligible without prior year tax returns. Salaried Borrowers The following documentation is required: W-2s from all employers for the past two years or two years signed personal tax returns, including all schedules. Most recent paystub(s) covering a 30 day period. Investor requires paystubs covering a full 30 day period. This may require multiple paystubs, depending on the borrower s pay schedule. One paystub with 30 days YTD income is not acceptable. A written verification of employment (VOE) is required if the paystub(s) do not reflect year to date income. Annuity, 401(k) or IRA Income The borrower(s) must have unrestricted access to the account without penalty. The borrower must have a minimum of six months documented disbursements from the account, which can be verified with either of the following: Brokerage statements showing regular distributions to the borrower. Bank statements showing regular amounts being transferred from the qualifying account to the borrower s checking account. The income must continue for at least three years. Series O Jumbo Loan Program Guide - Wholesale Page 27 of 51 11/16/2015

28 Use 70% of the account value to determine the remaining distributions of the asset is in the form of stocks, bonds or mutual funds. Automobile Allowance and Expense Account Payments The borrower must have a consecutive two-year history of receiving an automobile allowance and the income must be likely to continue. All associated business expenditures must be included in calculation of the borrower s total DTI ratio. Only the amount by which the borrower s auto allowance or expense account payments exceed actual expenditures may be considered in qualifying income. The file must include the IRS Form 2106, Employee Business Expenses, for the previous two years and the employer s verification that the payments will continue. If the borrower uses the standard per-mile rate in calculating automobile expenses, as opposed to the actual cost method, the portion that the IRS considers depreciation may be added back to qualifying income. The following must be counted as a recurring debt: The borrower s monthly car payment expense, if applicable, and Any loss resulting from the calculation of the difference between the actual expenditures and the auto or expense account allowance. Bonus or Overtime Income Bonus or overtime income may be used to qualify if the borrower has received the income for the past two years from the same employer, and it is likely to continue. If an applicant s current employer states a guaranteed bonus amount in writing, the guaranteed bonus amount may be used to qualify the applicant when there are less than two years of employment and compensation history in the current job. If the employment verification states that the bonus or overtime income is unlikely to continue, it may not be used in qualifying. An average of bonus or overtime income must be developed for the last two years. An earnings trend for bonus or overtime income must be established and documented. If either type of income shows a continual decline, compensating factors and a sound rationalization for including the income must be documented. A period of more than two years must be used in calculating the average bonus or overtime income if the income varies significantly from year to year. Borrower Employed by a Family Member In addition to normal employment verification, a borrower who is employed by a family owned business must provide evidence that he/she is not an owner of the business. Signed personal tax returns for the most recent two years must be provided. A copy of the corporate tax return is acceptable to document ownership but does not replace the requirement for personal tax returns. The borrower must have a minimum of two years of employment with the family owned business. Capital Gains Income One time capital gains may not be considered in qualifying income. Provide complete signed individual federal tax returns, including Schedule D, for the most recent two years reflecting capital gains income. The income must be based on a two year average of the capital gains. Series O Jumbo Loan Program Guide - Wholesale Page 28 of 51 11/16/2015

29 The borrower must provide evidence that he or she owns additional property or assets that can be sold if extra income is needed to make future payments. Child Support, Alimony, Separate Maintenance In order to be used as income, alimony, child support or separate maintenance payments the following must be obtained: Evidence the borrower has received the total court ordered amount for the most recent three months; if child support, proof of the ages of the children for which child support is received to prove three year continuance; and Copy of the signed court order, final divorce decree or legal separation agreement reflecting the payor s obligation for the previous 12 months, or Copy of the signed court order, final divorce decree or legal separation agreement reflecting the payor s obligation for the previous six to 12 months if the monthly income does not exceed 30% of the borrower s qualifying income. Income from alimony, child support or separate maintenance payments may be considered qualifying income if: The documentation shows that the payor was obligated to make payments to the borrower for the most recent 12 months and is obligated to make payment to the borrower for the next three years, or The payor was obligated for less than 12 months but not less than six months, the obligation to make the payment to the borrower continues for the next three years, and the amount of the monthly payment does not exceed 30% of the borrower s qualifying monthly income. Note: Income cannot be considered for qualifying if the payor has been obligated to make payments for less than six months, the payments are not for the full amount or the payments are not received on a consistent basis. Commission Income Commission income must be averaged over the previous two years. Commission income earned for more than one year but less than two years is acceptable only with significant compensating factors and written evidence that the income is likely to continue. Two years signed personal tax returns and the borrower s most recent paystub must be provided. Employee paid business expenses reflected on the borrower's tax returns must be deducted from the borrower's gross commission income when calculating income. Commission income is considered stable and acceptable if the trend is level or increasing year over year. However, a declining commission trend from one year to the next can only be considered acceptable with strong compensating factors. Employment Offers or Contracts (Projected Income) Not allowed Series O Jumbo Loan Program Guide - Wholesale Page 29 of 51 11/16/2015

30 Employment-Related Assets as Qualifying Income Employment-related assets may be used as qualifying income subject to the following: Assets used in calculating the monthly income stream must be owned individually by the borrower, or the co-owner of the asset must be a co-borrower on the loan. The asset(s) must be liquid and available to the borrower and must be sourced as one of the following: A non-self-employed severance package or non-self-employed lump sum retirement package (a lump sum distribution) documented with a distribution letter from the employer (Form 1099 R) and deposited to a verified asset account. For 401(k) or IRA, SEP, Keogh retirement accounts, the borrower must have unrestricted access to the funds in the accounts and can only use the accounts if distribution is not already set up or the distribution amount is not enough to qualify. The account and its asset composition must be documented with the most recent monthly, quarterly, or annual statement. A borrower is considered to have unrestricted access if he/she has, as of the time of calculation, the unqualified and unlimited right to request a distribution of all funds in the account (regardless of any possible tax withholding or applicable penalty applied to such distribution). Non-employment-related assets are not eligible. This includes, but is not limited to stock options, non-vested restricted stick, lawsuits, lottery winnings, sale of real estate, inherited funds, and divorce settlements. Checking and savings accounts are generally not eligible, unless the source of the balance in a checking or savings account was from an eligible employment-related asset (for example, a severance package or lump-sum retirement distribution. Documentation of the source of the funds must be included in the loan file. If a penalty would apply to the distribution of funds, the penalty amount based on a complete distribution from the account (after costs for the transaction) must be subtracted to determine the income stream from the asset(s). If the employment related assets are in the form of stocks, bonds, and mutual funds, 70% of the value (remaining after costs for the transaction and consideration of any penalty) must be used to determine the income stream to account for the volatile nature of these assets. Requirements for Use of Employment-Related Assets as Income Maximum LTV/CLTV/HCLTV 70% Loan Purpose Purchase and Rate/Term Refinance Occupancy Primary Residence or Second Home Note: If the loan does not meet the above parameters, employment-related assets may be eligible under other standard income guidelines, such as interest and dividend, retirement, government annuity or pension income. Series O Jumbo Loan Program Guide - Wholesale Page 30 of 51 11/16/2015

31 Calculation of Net Documented Assets Net Documented Assets are equal to the sum of the eligible asset(s) minus: The amount of the penalty that would apply if the account was fully distributed at the time of calculation; and The amount of any funds used for down payment, closing costs, and/or reserves; and 30% of the remaining value of any stocks, bonds, or mutual funds (after the above calculations). Foreign Income Example: Calculation of Net Documented Assets IRA (made up of stocks and mutual funds) $500,000 Minus 10% of $500,000 ($500,000 x.10) (Assumes the borrower is <59 1/2 years of age at the time this income is being calculated and subject to a 10% penalty for early distribution. This penalty must be -$ 50,000 levied against any cash being withdrawn for closing the transaction as well as the remaining funds used to calculate the income stream.) Total eligible documented assets $450,000 Less funds required for closing $100,000 Subtotal $350,000 Less 30% of $350,000 (assumes funds are in the form of stocks, bonds, and -$105,000 mutual funds) Net documented assets $245,000 Monthly income calculation $ monthly income $245,000/360 (or actual term of the loan in months) Borrowers who are employed by a foreign corporation or foreign government and are paid in foreign income or foreign currency are eligible subject to the following: The file must include signed copies of the borrower s federal tax returns for the most recent two years and the foreign income must be reflected on the returns. Income must be documented per standard income documentation requirements. All income must be translated into U.S. dollars. Foreign income is only acceptable if received in one of the following currencies: Euros. Japanese Yen. Great British Pounds. Swiss Francs. Canadian Dollars. Australian Dollars. Refer to Non U.S. Citizens, if applicable. Series O Jumbo Loan Program Guide - Wholesale Page 31 of 51 11/16/2015

32 Foster Care Income Jumbo Series O Loan Program Guide Borrowers who receive income from a state or county-sponsored organization for the temporary care of one or more children is acceptable if: The borrower has a two year history of providing foster care services under a recognized program, and The income is likely to continue, and The foster care income can be verified with any of the following: Letters from the organizations providing the income; Two years most recent signed tax returns; or Two years most recent borrower bank statements showing regular deposits of the payments. Government Assistance Programs Income received from government assistance programs, such as welfare or unemployment benefits, is not acceptable. Investment Income (Dividends and Interest) Verify the borrower s ownership of the assets on which the dividends and/or interest income was earned. The documentation of asset ownership must be in compliance with the Age of Documents policy. Dividend and Interest income may be considered as qualifying income provided all of the following are met: The borrower s signed tax returns and/or account statements support a two year history. The income is averaged over the two year period. The income is expected to continue for a minimum of three years. Income that is derived from funds that are withdrawn to be used for the mortgage transaction may not be included in qualifying income. Long-term Disability Income Social Security disability, VA disability compensation, worker s compensation, private disability insurance, and other types of long-term disability may be considered in qualifying income with a reasonable expectation of continuance unless there is a pre-determined expiration date that is less than three years or the policy specifically limits the stability of the benefit payments. Pending or current re-evaluation of medical eligibility for benefits is not considered an indication that the benefit payment will not continue. Obtain a copy of the borrower s disability policy or benefits statement to verify: Monthly payment amount, and The contractually established termination or modification date of the benefits is greater than three years. Obtain a statement from the payer of the disability benefits (insurance company, employer or other disinterested party) to confirm the borrower is currently eligible for the disability benefits. Series O Jumbo Loan Program Guide - Wholesale Page 32 of 51 11/16/2015

33 Military Income Jumbo Series O Loan Program Guide The following types of additional pay are acceptable when analyzing a borrower s income provided the probability of continuance is verified in writing: Income from variable housing allowances. Clothing allowances. Flight or hazard pay. Rations. Proficiency pay. The tax exempt nature of some of the above payments should also be considered. Note: A Leave-and-Earnings Statement (LES) is acceptable documentation for both written and verbal verification of employment. Mortgage/Employer Differential Payments A payment from the borrower's employer for all or part of the interest differential between the borrower's present and proposed mortgage payment may be considered qualifying income if the employer verifies the amount and duration of the payments in writing. The payment amount must be added to the borrower s gross income. It may not be used to offset the mortgage payment directly, even if the employer will pay the servicing creditor directly. The employer must not be an interested party to the transaction and the payment must be likely to continue for the next three years. For a purchase transaction, a history of receipt is not required for the income to be considered stable. Non-Taxable Income The loan file must include evidence that the source of income is nontaxable and that both the income and its tax-exempt status are likely to continue. The borrower must provide tax returns to evidence how much of the income is non-taxable. In addition, award letters, policy agreements and account statements may be used to document the amount of income and the likelihood of continuance for at least three years after the date of the mortgage application. Nontaxable income may be grossed up to a maximum of 25%. However, if the borrower is in a higher tax bracket, current Federal income tax tables may be used in order to give the borrower the maximum benefit, as follows: Annualize monthly non-taxable income. Find corresponding tax amount on current tax tables. Gross up by that amount. A rate of 25% may be used if the borrower is not required to file Federal income tax returns. To qualify the borrower(s), the loan file must include documentation to support the analysis for any loan in which this consideration is necessary. Notes Receivable Income from Notes Receivable may be considered in qualifying income subject to all of the following: Copy of Note to establish the amount and length of payment. Evidence that the payment will continue for three years. Two years most recent signed tax returns, deposit slips or cancelled checks showing receipt of the income. Income received for less than two years is not acceptable. Series O Jumbo Loan Program Guide - Wholesale Page 33 of 51 11/16/2015

34 If the borrower is not the original payee on the note, evidence that the borrower is now a holder in due course and legally able to enforce the note is required. Part-time / Seasonal / Second Job Income Part-time or second job income may be used to qualify if the loan file includes evidence that the borrower has worked the part-time job uninterrupted for the past two years, and that the income has a strong likelihood of continuance. Seasonal part-time or second job income, such as that received by a person who works part-time at a department store during the Christmas shopping period, can be considered as uninterrupted if the borrower has worked in the same job in season for the past two years and expects to be rehired for the next season. Verification of income must be performed in the same manner as full-time, salaried borrowers. Income not meeting these requirements may not be used in qualifying. Note: For qualifying purposes, part-time income refers to employment taken to supplement the borrower s income from regular employment. Primary employment that is worked less than 40 hours per week is not considered part-time and should be evaluated as regular, on-going primary employment. Rental Income When the rental income relates to rental property other than the subject property, rental income may be documented by obtaining copies of the borrower s most recent two years of signed federal income tax returns and the related Supplemental Income and Loss (Schedule E to IRS Form 1040). Leases may be used ONLY when the property is not listed on Schedule E due to being acquired subsequent to the filing of the tax return. When tax returns (including Schedule E) are used to calculate the net rental income (or loss), ensure that depreciation or any interest, taxes or insurance expenses were added back to the borrower s cash flow analysis. The amount of monthly net rental income (or loss) that is considered as part of the borrower s total monthly income (or expenses), and its treatment in the calculation of the borrower s total debt-to-income ratio, will vary depending on whether the borrower occupies the rental property as his or her principal residence. If current lease agreements are used, the net rental income will be 75% of the gross rent from the lease agreements with the remaining 25% being absorbed by vacancy losses and ongoing maintenance expenses. Rental income from an investment property that is not currently rented may not be used to qualify, regardless of the rental history. The borrower must demonstrate a minimum two year history of landlord experience, as evidenced by rental income on the most recent two years of tax returns. Documentation Required to Verify Rental Income IRS Form 1040 Schedule E, and Current rental/lease agreement(s) Series O Jumbo Loan Program Guide - Wholesale Page 34 of 51 11/16/2015

35 Analyzing the Stability of Rental Income Rent received for properties owned by the borrower is acceptable provided the stability of the rental income is documented through: A current rental/lease agreement, and An agreement to lease, or A rental history over the previous 24 months that is free of unexplained gaps greater than three months (such gaps could be explained by student, seasonal, or military renters, or property rehabilitation). A separate schedule of real estate is not required for rental properties as long as all properties are documented on the Uniform Residential Loan Application (1003). Rental income from an investment property owned by the borrower but is not currently rented cannot be used to qualify, regardless of the rental history. Analyzing IRS Form 1040 Schedule E IRS Form 1040 Schedule E is required to verify all rental income. Depreciation shown on Schedule E may be added back to the net income or loss. Positive rental income is considered gross income for qualifying purposes, while negative income must be treated as a recurring liability. Verify that the borrower still owns each property listed by comparing Schedule E with the real estate owned section of the Using Current Leases to Analyze Rental Income The borrower may provide a current signed lease or other rental agreement for a property that was acquired since the last income tax filing and is not shown on Schedule E. In order to calculate the rental income: Reduce the gross rental amount by 25% for vacancies and maintenance; Subtract PITI and any homeowners association dues; and Apply the resulting amount to income, if positive, or recurring debts, if negative. Rental Income from Primary Residence Converted to an Investment Property Both the current and proposed mortgage payments must be used to qualify the borrower. If the borrower has less than 30% equity in the current property, rental income may not be used to offset the mortgage payment. Six months of reserves must be documented for the converted property, in addition to the reserve requirement for the proposed mortgage. Sufficient Equity in Vacated Property Up to 75% of the documented gross monthly rental income may be used to offset the mortgage payments if the borrower has an LTV ratio of 70% or less, as determined by a residential appraisal that is no more than four months old, and adheres to Fannie Mae s appraisal and Appraiser Independence Requirements. Acceptable appraisal forms for determining equity are: Full appraisal (Form 1004) Form 2055 exterior only appraisal Form 1075/466 exterior only appraisal for condominium units. Series O Jumbo Loan Program Guide - Wholesale Page 35 of 51 11/16/2015

36 Rental income must be documented with: A copy of the fully executed lease agreement and Evidence of security deposit receipt from tenant with verification it was deposited into the borrower s account. Two years of landlord experience is NOT required. Retirement and Pension Income Retirement income may be verified with any of the following: Letter from the organization providing the income. Copy of the award letter. Signed individual tax returns. IRS W-2 or 1099 forms. Copy of the borrower s most recent bank statement supporting deposit of the retirement payment. If the borrower discloses the intent to retire within the first full three years of the loan, the expected retirement income must be documented and used for qualifying. If any retirement income, such as employer pensions, annuities or 401(k) s, will cease within the first full three years of the loan, the income may not be used to qualify. Royalty Income May be used to qualify if the income is regular and recurring. A minimum one year history of receipt of the income and proof of three years of continuance must be documented. Provide complete signed individual federal tax returns, including Schedule E, for the most recent two years reflecting royalty income. Seasonal Income Refer to Part-time/Seasonal/Second Job Income. Self-Employed Income Any borrower with 25% or greater ownership interest in a business is considered self-employed. Minimum Length of Self-Employment Income from self-employment is considered stable and effective if the borrower has been selfemployed for at least two years. General Documentation for Self-Employed Borrowers Two years most recent signed and dated personal tax returns, with all applicable schedules. Signed and dated year to date Profit and Loss (P&L) statement when >90 days has elapsed since the end of the tax year. Signed and dated balance sheet when >90 days has elapsed since the end of the tax year. Corporation, S Corporation, or Partnership: Two years most recent signed business tax returns, with all applicable schedules. Fannie Mae Form 1084 (Cash Flow Analysis) or Freddie Mac Form 90 (Income Analysis). Note: The balance sheet(s) and P&L statement(s) may be waived if the business income is not being used to qualify and the tax returns do not reflect any business losses. Series O Jumbo Loan Program Guide - Wholesale Page 36 of 51 11/16/2015

37 Income Calculation for Self-Employed Borrowers Jumbo Series O Loan Program Guide Establish the borrower s earnings trend from the previous two years using the borrower s tax returns. If quarterly tax returns are provided, the income analysis may include income through the period covered by the tax filings. If the borrower is not subject to quarterly tax returns, or does not file them, the income shown on the P&L statement may be included in the analysis, provided the income stream based on the P&L is consistent with the earnings for the previous year. Analyzing the Financial Strength of a Self-Employed Borrower To determine if the business is expected to generate sufficient income for the borrower s needs, the business s financial strength must be analyzed, including the: Source of the business s income; General economic outlook for similar businesses in the area. Annual earnings that are stable or increasing are acceptable, while businesses that reflect a significant decline in income over the analysis period are not acceptable. Income Analysis: Individual Tax Return (IRS Form 1040) The amount shown on the borrower s IRS Form 1040 as adjusted gross income must either be increased or decreased based on the analysis of the individual tax return and any related tax schedules. The following table reflects guidelines for analyzing IRS Form 1040: IRS Form 1040 Heading Wages, Salaries, Tips Business Income and Loss from Schedule C Rents, Royalties, Partnerships (from Schedule E) Capital Gains and Losses (from Schedule D) Description An amount shown under this heading may indicate that the individual: Is a salaried employee of a corporation, or Has other sources of income. This section may also indicate that the spouse is employed, in which case the spouse s income must be subtracted from the borrower s adjusted gross income. Sole proprietorship income calculated on Schedule C is business income. Depreciation or depletion may be added back to the adjusted gross income. Any income received from rental properties or royalties may be used as income after adding back any depreciation shown on Schedule E. Capital gains or losses generally occur only one time and should not be considered in determining effective income. However, if the borrower has a constant turnover of assets resulting in gains or losses, the capital gain or loss must be considered when determining the income. Three years tax returns are required to evaluate an earnings trend If the trend: Results in a gain, it may be added as effective income, or Consistently shows a loss, it must be deducted from the total income. Series O Jumbo Loan Program Guide - Wholesale Page 37 of 51 11/16/2015

38 IRS Form 1040 Heading Interest and Dividend Income (from Schedule B) Farm Income or Loss (from Schedule F) IRA Distributions, Pensions, Annuities, and Social Security Benefits Adjustments to Income Employee Business Expenses Description The anticipated continuation of income through verified assets must be documented. Example: The capital gains for an individual who purchases old houses, remodels them, and sells them for profit may be considered. This taxable income may be added back to the adjusted gross income only if it has been received for the past two years and is expected to continue. If the interest-bearing asset will be liquidated as a source of the cash investment in the subject property, the income amount must be adjusted to account for the amount withdrawn. Any depreciation shown on Schedule F may be added back to the adjusted gross income. The non-taxable portion of these items may be added back to the adjusted gross income if the income is expected to continue for the first three years of the loan. The following adjustments to income may be added back to the adjusted gross income: IRA and Keogh retirement deductions; Penalties on early withdrawal of savings; Health insurance deductions; and Alimony payments. Employee business expenses are actual cash expenses that must be deducted from the adjusted gross income. Income Analysis: Corporate Tax Return (IRS Form 1120) A corporation is a State-chartered business owned by its stockholders. The borrower s percentage of ownership must be determined as follows: Corporate compensation to the officers, generally in proportion to the percentage of ownership, is shown on the: Corporate tax return IRS Form 1120; and Individual tax returns. When a borrower s percentage of ownership does not appear on the tax returns, this information must be obtained from the corporation s accountant, along with evidence that the borrower has the right to any compensation. Analyzing Corporate Tax Returns: In order to determine the borrower s self-employed income from a corporation, the adjusted business income must be determined; and multiplied by the consumer s percentage of ownership in the business. The following table describes the items found on IRS Form 1120 for which an adjustment must be made in order to determine adjusted business income. Adjustment Item Depreciation and Depletion Taxable Income Description of Adjustment The corporation s depreciation and depletion is added back to the after-tax income. Taxable income is the corporation s net income before Federal taxes. The taxable income is to be reduced by the tax liability. Series O Jumbo Loan Program Guide - Wholesale Page 38 of 51 11/16/2015

39 Fiscal Year vs. Calendar Year Cash Withdrawals If the corporation operates on a fiscal year that is different from the calendar year, an adjustment must be made to relate corporate income to the individual tax return. The borrower s withdrawal of cash from the corporation may have a severe negative impact on the corporation s ability to continue operating. Income Analysis: S Corporate Tax Return (IRS Form 1120S) An S corporation is generally a small, start-up business, with gains and losses passed to stockholders in proportion to each stockholder s percentage of business ownership. Income for owners of S corporations comes from IRS Form W-2 wages, and is taxed at the individual rate. The IRS Form 1120S, Compensation of Officers line item is transferred to the consumer s individual IRS Form Analyzing S Corporation tax returns: S corporation depreciation and depletion may be added back to income in proportion to the consumer s share of the corporation s income. The income must also be reduced proportionately by the total obligations payable by the corporation in less than one year. Income Analysis: Partnership Tax Returns (IRS Form 1065/Schedule K-1) A partnership is formed when two or more individuals form a business, and share in profits, losses, and responsibility for running the company. Each partner pays taxes on his/her proportionate share of the partnership s net income. Analyzing Partnership tax returns: Both general and limited partnerships report income on IRS Form 1065, and the partner s share of income is carried over to Schedule E of IRS Form IRS Form 1065 must be reviewed to assess the viability of the business. Both depreciation and depletion may be added back to the income in proportion to the consumer s share of income. Income must also be reduced proportionately by the total obligations payable by the partnership in less than one year. Cash withdrawals from the partnership may have a severe negative impact on the partnership s ability to continue operating, and must be considered in the income analysis. Short-term Disability Income Income for borrowers who are currently on maternity or paternity leave is acceptable for qualifying. 100% of the borrower s income prior to the leave of absence may be used, subject to the following: The employer confirms the borrower is returning to work, and The borrower provides a signed letter confirming an intent to return to work. Social Security Income Social Security income must be verified with one of the following: Social Security Administration award letter. The borrower s signed tax returns filed with the IRS. IRS 1099 Forms. Series O Jumbo Loan Program Guide - Wholesale Page 39 of 51 11/16/2015

40 Copy of the borrower s most recent bank statement supporting deposit of the retirement payment. If any benefits expire within the first full three years of the loan, the income source may not be used in qualifying. Not all Social Security income is for retirement-aged recipients; therefore, documented continuation is required. Social Security income may be grossed up if considered non-taxable by the IRS. If the borrower discloses the intent to retire within the first full three years of the loan, the expected Social Security income must be documented and used for qualifying. Trust Income Income from trusts may be used if consistent payments will continue for at least the first three years of the loan. Required trust income documentation includes a copy of the Trust Agreement or other trustee statement, confirming all of the following: Amount of the trust. Frequency of distribution. Duration of payments. When using assets from the Trust for the subject transaction, trust income may not be used in qualifying if the trust documentation indicates that the withdrawal of funds from the account will negatively affect the income. Unreimbursed Employee Business Expenses VA Benefits Liabilities See Unreimbursed Employee Business Expenses. Direct compensation for service-related disabilities from the Department of Veterans Affairs (VA) is acceptable, provided documentation of the payment is acquired from the VA and the benefits will continue for at least three years. Education benefits used to offset education expenses are not acceptable. Refer to the Fannie Mae Seller Guide for topics not discussed in this section. Obligations Not Considered as Debts The following obligations are not required to be considered as monthly debts: Federal, State and local taxes. Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds). Commuting costs. Union dues. Open accounts with a zero balance. Automatic deductions to savings accounts. Child care expenses. Voluntary deductions. Series O Jumbo Loan Program Guide - Wholesale Page 40 of 51 11/16/2015

41 Undisclosed Liabilities Jumbo Series O Loan Program Guide If the borrower discloses additional debts, or additional debts are discovered after the underwriting decision has been made, the DTI ratios must be recalculated using the additional debts. Alimony, Child Support or Separate Maintenance Payments When the borrower is required to pay alimony, child support, or maintenance payments under a divorce decree, separation agreement, or any other written legal agreement, and the payments must continue to be made for more than ten months, the payments must be considered as part of the borrower s recurring monthly debt obligations. However, voluntary payments do not need to be taken into consideration. Reduction of Alimony Payment for Qualifying Ratio Calculation Since there are tax consequences of alimony payments, the monthly alimony obligation may be treated as a reduction from the borrower s gross income when calculating qualifying ratios, rather than treating it as a monthly obligation. Bridge Loans See Bridge Loans. Business Debt in Borrower s Name Debts paid by the borrower s business are not required to be included as a monthly debt provided the borrower can provide 12 consecutive months of cancelled checks from the business account showing that the business is making the payments. Contingent Liabilities A contingent liability exists when an individual is held responsible for payment of a debt if another obligated party defaults on the payment. The policies within this section apply unless the borrower can provide conclusive evidence from the debt holder that there is no possibility that the debt holder will pursue debt collection against him/her should the other party default. Co-Signed Loans When a borrower co-signs for a loan to enable another party (the primary obligor) to obtain credit but is not the party who is actually repaying the debt the borrower has a contingent liability. The liability does not need to be considered as part of the borrower s recurring monthly debt obligations if: The file includes documentation of a 12 month history of payments on the co-signed debt the primary obligor; and There is no history of delinquent payments for that debt. The liability must be considered as part of the borrower s recurring monthly debt obligations if any of the following apply: Payment by the primary obligor cannot be sufficiently documented. A sufficient 12 month payment history has not been established for the debt. The primary obligor has a history of being delinquent in making payments on the debt. The co-signed debt is a mortgage loan, unless a legal document (i.e. divorce decree) exists that assigns the debt responsibility to another party. Series O Jumbo Loan Program Guide - Wholesale Page 41 of 51 11/16/2015

42 Court Ordered Assignment of Debt Jumbo Series O Loan Program Guide When a borrower has an outstanding debt that was assigned to another party by court order and the creditor does not release the borrower from liability, the debt would not need to be included in the borrower s debt-to-income ratio. The borrower must provide evidence of the transfer of ownership (if applicable) and court order assigning the debt. The borrower s payment history prior to assignment of the debt should be evaluated as part of the credit risk assessment. Mortgage Assumptions When a borrower sells or is selling a mortgaged property and the property purchaser assumes the outstanding mortgage debt without a release of liability, the contingent liability does not need to be included in qualifying provided the property purchaser has a history of making regular, timely payments on the mortgage for the last 12 months. The loan file must include all of the following: Evidence of the transfer of ownership. A copy of the formal, executed assumption agreement. Credit report indicating that consistent and timely payments were made for the assumed mortgage. If the mortgage history shows delinquencies, the debt must be included in the borrower s debt-to-income ratio. Debt Secured by Financial Assets Payment on installment debt secured by financial assets (such as a 401(k), certificate of deposit, life insurance policy or IRA), in which repayment may be obtained by liquidating the asset, may be excluded from the monthly debt-to-income ratio for qualifying purposes. The borrower must provide a copy of the loan instrument to confirm that the financial asset is collateral for the loan. If the borrower intends to use the same asset to satisfy reserve requirements, the value of the asset must be reduced by the amount of the outstanding loan and any related fees. Deferred Payments (includes Deferred Student Loans) Deferred debt payments, such as student loans or a balloon-payment note, must be included as a monthly obligation regardless of the deferred status of the debt. If the credit report does not indicate the monthly payment amount, a payment equal to 2% of the outstanding balance must be used in calculating the borrower s total monthly obligations. Installment Debt Installment debts are included as monthly obligations if ten or more payments remain. Debts lasting less than ten months must be included if the amount of the debt will have a significant impact on the debt-to-income ratios. Installment debts may be paid down to less than ten months to qualify provided sufficient funds to pay down the debt has been documented. Lease Payments Automobile lease payments must always be included in qualifying ratios regardless of the number of months remaining on the lease contract. Series O Jumbo Loan Program Guide - Wholesale Page 42 of 51 11/16/2015

43 Open-End (30 day) Accounts Open 30 day charge accounts are not required to be included the debt-to-income ratio. Verify that the borrower has additional reserves to pay off the full balance. If the borrower paid off the account balance prior to closing, provide proof of payoff in lieu of verifying funds to cover the account balance. Revolving Debt Must be included as monthly debt obligation regardless of the number of payments remaining. The monthly payment verified on the credit report may be used as the payment in calculating the total debt ratio. If the payment amount is not verified on the credit report and there is no supplemental documentation to support the amount of the monthly payment, a payment equal to the greater of 5% of the outstanding balance or $10 must be used as the borrower s recurring monthly debt obligation. Revolving accounts may be paid off prior to or at closing to qualify, provided there is evidence the account has been closed. Extended credit on an overdraft account with an outstanding balance must be included in the borrower s monthly debt obligation. Unreimbursed Employee Business Expenses Employee paid business expenses reflected on the borrower s tax returns must be deducted from the borrower s gross qualifying income. Examples of such expenses include, but are not limited to: Supplies, Uniforms, Meals, Gasoline, Automobile insurance, and Automobile taxes. Calculate a two year average of the borrower s recurring monthly debt obligation for the expenses using information from: The borrower s personal tax returns (1040s Schedule A and IRS Form 2106), OR The borrower s tax transcripts. Evaluate IRS Form 2106: Unreimbursed business expenses must be deducted from the borrower s qualifying income; Depreciation should be added back, if applicable; If the expenses are automobile lease payments or automobile loan payments, ensure the payment amount is included in the qualifying DTI as a monthly debt obligation. Multiple Financed Properties Maximum of four financed 1-4 unit residential properties, including the borrower s current primary residence and the subject property. This limit includes any mortgage loan in which the borrower is obligated and is cumulative for all borrowers. Pacific Union reserves the right to limit the number of loans secured by properties purchased within one building, within one neighborhood and/or to one borrower. Series O Jumbo Loan Program Guide - Wholesale Page 43 of 51 11/16/2015

44 The borrower must reflect the ability to manage the properties owned. If a borrower has multiple financed properties, six months of reserves are required for each financed property owned. See Reserves. Occupancy Primary Residence Second Home Must be occupied by all borrowers as a Primary Residence. The borrower must occupy the property within 60 days of the note date, and intend to occupy the property for the next 12 months. Allowed on one unit properties only. The property must be: Owned by an individual and occupied for some portion of the year. In a location that will function reasonably as a Second Home (i.e. remote in distance from the borrower s Primary Residence). Suitable for year-round occupancy. Available for the borrower s exclusive use and enjoyment. The property may not be: Subject to timesharing or other shared ownership agreement. An ineligible property (such as a unit in a Condo Hotel). Subject to rental pools or agreements that require the borrower to rent the property, give management control over the occupancy of the property, or involve revenue sharing between the owners and the developer or another party. Note: Rental agreements from the previous property owner must be honored. Any previous rental agreement must not extend more than 12 months after the sale of the property, and the cumulative number of days rented under a pre-existing lease may not exceed 90 day. Investment Property The borrower must have at least two years of landlord experience, documented with the most recent two years of tax returns. Reserves Reserve Requirements One unit: Loan amount $1,000,000: 6 months PITIA Loan amount >$1,000,000 to $1,500,000: 9 months PITIA Loan amount >$1,500,000 to $2,000,000: 12 months PITIA Two unit Primary Residence: 12 months PITIA If a borrower has multiple financed properties, an additional six months of reserves is required for each additional financed property owned. Cash-out amount to be received at closing may not be used to satisfy reserve requirements. Series O Jumbo Loan Program Guide - Wholesale Page 44 of 51 11/16/2015

45 Determination of Monthly Housing Expense Jumbo Series O Loan Program Guide In addition to the monthly Principal, Interest, Taxes, Insurance and Assessments/Association Dues (PITIA), the following expenses must be included when calculating reserve requirements: Leasehold payments or ground rents. Special assessments. Homeowner s Association dues (including utility charges that are attributable to the common areas, but excluding any utility charges that apply to the individual unit). Any subordinate financing payments on mortgages secured by the subject property. Assets Considered in Reserves 70% of investments in publicly traded stocks, bonds, mutual funds, certificates of deposit, money market funds, and trust accounts. 60% of the vested amount of retirement accounts. If the borrower is of retirement age, 70% of the vested amount may be used. The terms and conditions under which funds may be withdrawn must be verified. Retirement accounts may not be used for reserves if withdrawals are permitted only in connection with the borrower s separation from the company. 100% of borrower s share of trust assets. Borrower must have full access to the funds and a copy of the complete trust or trustee letter is required. If review of the credit report or other information indicates that the borrower has a balloon payment due within the next 12 months, available assets must be reduced by the amount of the payment. Assets Not Considered in Reserves Funds in which the borrower is not vested. Funds that cannot be withdrawn under circumstances other than the account holder s retirement, employment termination, or death. Gift funds. Disaster relief grants or loans. Employer assistance funds (unless part of a documented relocation package). Payment abatements paid by an interested party to the transaction. Non-financial assets such as collectibles, coins, stamps, and art work that would require appraisal and/or liquidation. Business accounts / assets. Reverse 1031 exchanges. Stocks issued by, or notes/loans receivable from, a privately held company. Stock options and non-vested restricted stock. Personal unsecured loans. Interested Party Contributions. Secondary / Subordinate Financing No new subordinate financing is permitted for any transaction. Re-subordination of an existing second lien is permitted, subject to the (H)CLTV limits. If secondary financing is in the form of a Home Equity Line of Credit (HELOC), the full credit line must be used to determine the (H)CLTV. Series O Jumbo Loan Program Guide - Wholesale Page 45 of 51 11/16/2015

46 Seller/Interested Party Contributions Transactions Jumbo Series O Loan Program Guide For all loans, the total of all contributions as a percentage of sales price or appraised value, may not exceed 6%. Interested parties include, but are not limited to, the builder, developer, property seller, loan originator and real estate agent. Financing concessions are funds that originate from an interested party to the transaction. These funds include, but are not limited to, contributions in any way related to the mortgaged financing costs, closing costs, and/or prepaid items. Seller concessions are not allowed and must be deducted from the sales price. This includes vacations, furniture, personal property, automobiles, securities, other give-away items or interested party contributions in excess of 6%. If a seller concession is a required term of the transaction and it is clearly stated within the sales contract, the value of the concession must be verified and sales price must be reduced by that amount, the LTV/(H)CLTV must be calculated on the lesser of the reduced sales price or appraised value. Funds derived from Premium Pricing may be used by the lender to pay the borrower s closing costs, financing costs, and prepaids/escrows. Funds from Premium Pricing are not included in the Seller/Interested Party limits. The sales price may not be increased on a finalized purchase contract to cover closing costs. The LTV/(H)CLTV must be based on the lesser of the original sales price or appraised value if there is evidence in the loan file that the sales price was increased to include the borrower s closing costs. Purchase The loan proceeds are used to: Acquire the subject property, or Payoff the outstanding balance of an installment land contract or contract for deed. The borrower may not receive cash back, except for the following: Reimbursement of overpayment of fees. Costs paid by the borrower in advance (such as earnest money deposit, appraisal and credit report). Pro-rated real estate tax credit in locations where real estate taxes are paid in arrears. If the borrower receives cash back at closing, confirm that the minimum required borrower contribution has been met. Rate/Term ( No-Cash Out ) Refinance The principal balance of the new loan may include: Pay-off of the outstanding principal balance of an existing first mortgage loan, regardless of age. The pay-off may include any prepayment penalty. Pay-off of the outstanding principal balance of any existing closed-end subordinate mortgage loan seasoned for a minimum of 12 months. Pay-off the outstanding balance of any HELOC second lien seasoned for a minimum of 12 months and with cumulative draws $2,000 in the most recent 12 months. The financing of closing costs (including prepaid expenses). Cash back to the borrower not to exceed the lesser of 2% of the balance of the new loan or $2,000. Note: Cash back is not allowed in Texas. Series O Jumbo Loan Program Guide - Wholesale Page 46 of 51 11/16/2015

47 Determination of property value: Property purchased within six months of the application date: Property value is based on the appraised value. Property purchased more than six months prior to application date: Property value is based on the current appraised value. See Net Tangible Benefit. See Property Listed for Sale. See Continuity of Obligation. See Refinance to Buyout a Co-Owner. See Delayed Financing. Cash-out Refinance Cash-out refinance transactions on properties owned for less than six months prior to the application date are not allowed. The property value is based on the current appraisal value. Loans in which the property taxes are more than 60 days delinquent are not eligible. The principal balance of the new loan may include: The unpaid principal balance of the existing first lien. Closing costs including discount points. Pay-off of any outstanding subordinate financing regardless of age or purpose. Additional cash out to the borrower (subject to cash-out limits). Texas Home Equity is not eligible. See Net Tangible Benefit. See Property Listed for Sale. See Continuity of Obligation. See Delayed Financing. Construction/Perm Allowed as a rate/term refinance to pay off interim construction financing and allowable closing costs. The borrower must hold legal title to the lot and be named as the borrower on the construction loan. Acquisition cost must be documented with a copy of the purchase contract or construction statement signed by the borrower and builder. If the lot is acquired separately, the borrower must provide a copy of the recorded deed with the date of filing (if applicable) and one of the following: A copy of the lot purchase agreement or contract for deed. An owner s title policy. A Closing Disclosure. If the lot was acquired within 12 months of the application date for the subject loan, any large difference between the current appraisal value and the original purchase price of the lot must be documented and explained. The property must be fully constructed and inhabitable at the time of loan closing. A certificate of occupancy from the applicable government authority is required. If the government authority does not require a certificate of occupancy, the loan file must include evidence that the certificate is not required. Determination of property value: If the lot was acquired 12 months from the appraisal date for the subject loan, the LTV/(H)CLTV is based on the appraised value of the property at the time that the permanent loan is closed. Series O Jumbo Loan Program Guide - Wholesale Page 47 of 51 11/16/2015

48 If the lot was acquired <12 months from the appraisal date for the subject loan, the LTV/(H)CLTV is based on the lessor of: The current appraised value, or The total acquisition cost (sum of construction costs and the lower of the sales price or current appraised value of the lot). Continuity of Obligation Continuity of obligation is required on all refinance transactions. Continuity of obligation can be established by any of the following: At least one borrower who was obligated on the existing loan being refinanced will be obligated on the new loan. The borrower has been on title at the time of application, has been residing in the property for the most recent 12 months and has been making the mortgage payments for the most recent 12 months, as documented with 12 months of cancelled checks. The borrower recently inherited, or was legally awarded, the property (divorce, separation, or dissolution of a domestic partnership). If the existing loan being refinanced has title in the name of a limited liability company (LLC), continuity of obligation will exist as long as documentation is provided to verify the borrower(s) have 100% ownership of the LLC prior to the transfer. Transfer of ownership interest from a corporation (non-llc) to an individual does not meet the continuity of obligation requirement Delayed Financing Borrowers who acquired a property for cash within 12 months of the application date are eligible for a rate/term refinance, subject to the following requirements: Primary Residence only. The LTV/(H)CLTV must be based on the lesser of the original sales price or the current appraised value. The original sales contract and the executed Closing Disclosure from the purchase transaction must be provided and must reflect that no financing secured by the subject property was used to purchase the property. The preliminary title report for the refinance transaction must reflect the borrower as the owner and must reflect that there are no liens on the property. The source of funds used to purchase the property must be fully documented and must not have come from a gift, shared funds, borrowed funds, etc. All other rate/term refinance eligibility requirements must be met, with the exception of Continuity of Obligation, which does not apply to a Delayed Financing transaction. Land Contract or Contract for Deed A new mortgage loan that pays off a contract for deed is treated as a rate/term refinance or purchase transaction. If paying off a land contract executed within 12 months of the loan application, the loan must be treated as a purchase. The LTV/(H)CLTV is based on the lower of the original sales price or current appraised value. If paying off a land contract executed >12 months from the loan application date, the loan must be treated as a rate/term refinance. The LTV/(H)CLTV is based on the current appraised value. Cash-out refinance is not allowed. Refer to Mortgage/Rental History. Series O Jumbo Loan Program Guide - Wholesale Page 48 of 51 11/16/2015

49 Lease with Option to Purchase Not permitted. Net Tangible Benefit All refinance transactions must provide a net tangible benefit (NTB) to the borrower. These include but are not limited to: ARM: Reducing the interest rate by 0.25% based on the fully indexed rate. Providing cash in hand. Reducing overall monthly payments (paying off debt). Additionally, all state required NTB policies must be met. Brokers are responsible for being aware of and meeting the net tangible benefit requirements for their lending areas. Non-Arm s Length Transactions Non-arm s length transactions are not allowed. A non-arm s length transaction is one in which there is a direct relationship between the borrower and another interested party to the transaction. Interested parties may include the builder, developer, seller, mortgage broker, real estate agent or realtor, appraiser, closing or settlement agent, or employer. Non-arm s length sales between immediate family member are eligible, subject to the following requirements: Purchase of a primary residence only. Evidence the borrower is not now, or in the previous 24 months been in title to the subject property. Document the seller s mortgage payment history over the most recent 12 months. The transaction is not eligible if the seller has been 30 days delinquent in the past 12 months. The loan file must include documentation of the disposition of the borrower s current residence, such as evidence of sale or a signed lease and rental deposit. Refinance to Buyout a Co-Owner Defined as a rate/term cash-out refinance where the owner of a property uses the proceeds of a refinance transaction to buy out the equity of a co-owner. All Continuity of Obligation requirements must be met. In the case of divorce where the borrower is obligated to pay the ex-spouse a portion of the property equity, the loan file must include the legal agreement (divorce decree, property settlement) that outlines the terms of the separation/divorce and the property transfer, including the disposition of the proceeds from the refinance transaction. When the borrower is buying out a domestic partner or fiancée: All parties must provide documentation supporting they occupied the subject property as their primary residence. The loan file must include evidence that the subject property was jointly owned by all parties for the 12 months preceding the application date. All parties must sign a written agreement stating the terms of the property transfer and the disposition of the loan proceeds. The borrower who retains sole ownership of the property may not receive any proceeds from the refinance transaction. The party buying out the other party s interest must be able to qualify for the mortgage. Series O Jumbo Loan Program Guide - Wholesale Page 49 of 51 11/16/2015

50 Miscellaneous Policies Refer to the daily rate sheet for current pricing. Borrower Paid Fees The borrower may never pay any fee on behalf of the seller. These types of fees include, but are not limited to: Finder or consulting fees Payoffs amounts for second lien holders Agent commissions Delinquent taxes or HOA dues Moving expenses Electronic Signatures Allowed per Fannie Mae policies. Escrows Escrow waivers are allowed. Partial escrows are allowed; however, when flood insurance is required, the flood insurance premium must be escrowed. The monthly escrow deposits are recommended and must equal one twelfth (1/12th) of the annual real estate tax and insurance premiums due. Fees and Services Charges related to services performed by a third party, the amount paid by the borrower must be limited to the actual charge of that third party. Flood Insurance Interest Credit The original flood certificate must be included in the loan file. V flood zone (including VE and V1-V30) is eligible if the casefile includes a certification from a registered professional engineer or architect to confirm the property design and method of construction meet NFIP standards for V-Zones. The V-Zone Certificate is in addition to the required standard NFIP Elevation Certificate. Interest credit at closing may not exceed five days. Power of Attorney Not allowed Property Tax Calculation The calculation of real estate taxes for borrower qualification must be based on no less than the current assessed value. The taxes are listed on the title commitment. Real Estate taxes may (or must in some circumstances) be projected if one of the following can be documented: The amount of taxes will be reduced based on federal, state, or local jurisdictional requirements. However, the taxes may not be reduced if an appeal to reduce them is only pending and has not been approved. Series O Jumbo Loan Program Guide - Wholesale Page 50 of 51 11/16/2015

51 If the transaction is new construction, use a reasonable estimate of the real estate taxes based on the value of the land and completed improvements. There is a tax abatement on the subject property that will last for no less than five years from the note date. For example: For a municipality with a ten year abatement, the borrower may be qualified with the reduced tax amount; For a municipality with ten year abatement and with annual real estate tax increases in years 1 through 10, the borrower must qualify with the annual taxes that will be required at the end of the fifth year after the first mortgage payment date. Program Codes Product Code Master List Series O Jumbo Loan Program Guide - Wholesale Page 51 of 51 11/16/2015