TABLE OF CONTENTS General... 2 Borrower... 6 Credit... 8 Income... 21 Assets... 29 Collateral... 34 FHA Streamline... 40 FHA $100 Down Program... 44 Mortgage Insurance... 47 Closing... 50
GENERAL Underwriting Method All loans must be submitted through AUS (Automated Underwriting Systems) Underwriting Method Eligible Acceptable AUS Result Manual Yes Refer DU 1 Yes 1 Approve/Eligible 1 1 Automated underwriting of FHA government loans through Desktop Underwriter (DU) may be accessed through the STAR 1.5 link or through DO on the web. Eligible Programs Eligible Terms 203 (b) 30 Year Fixed 234 (c) 15 Year Fixed Maximum Loan Amount The maximum insurable is the lesser of: The statutory loan limit for the area, typically a county or metropolitan statistical area (MSA). For eligibility visit https://entp.hud.gov/idapp/html/hicostlook.cfm; OR The applicable Loan-To-Value limit. The maximum mortgage amount is determined by a fixed percentage of the lesser of the sales price or appraised value. Polaris will not allow loan amounts exceeding $417,000.00 Occupancy The following occupancy types are not allowed: Second Homes Investment Properties 2 P age
Rate and Term Refinance The maximum LTV for a rate and term refinance is o 97.75% for a subject property that has been owner occupied for the previous 12 months or since acquisition if acquired within 12 months, at the time of the FHA Case Number assignment. o 85% for a borrower who has occupied the subject as their principal residence for fewer than 12 months prior to the FHA Case Number assignment date; or if owned less than 12 months, has not occupied the property for that entire period of ownership. A second mortgage must be seasoned a minimum of 12 months in order to be paid off through a rate and term refinance transaction. If the second mortgage is a HELOC, documentation evidencing there have been no draws on the line of credit within past 12 months exceeding $1000 in aggregate must be provided. If the second mortgage is not seasoned a full 12 months or the second mortgage is a HELOC with draws on the line of credit exceeding $1000 in aggregate, the loan must be treated as a cash-out refinance limited to an 85% maximum LTV/CLTV. The buy out of existing title-holders equity may be done through a rate and term refinance transaction provided a divorce decree, settlement agreement, or other legally enforceable equity agreement is provided documenting the equity awarded to the title-holder. Cash-Out Refinance Maximum LTV/CLTV is 85% Borrowers must have owned and occupied the property as their primary residence for the 12 months prior to the date of the case number assignment in order to be eligible for a cash-out refinance. The borrowers payment history must be current and all payments on the mortgage being refinanced must have been made within the month due for the previous 12 months. If a borrower has recently inherited the subject property, the borrower is not required to occupy the subject for a minimum period of time before applying for a cash-out refinance, provided the borrower has not treated the subject as an investment property at any point since inheriting the property. If the borrower rents the subject property following inheritance, the borrower is not eligible for a cash-out refinance until the borrower has occupied the property as their principal residence for at least 12 months. Income from a non-occupying co-borrower cannot be used to qualify. Cash-out exceeding $125,000 is subject to management approval 3 P age
Seasoning Requirements If the property was acquired less than 12 months before the FHA Case Number Assignment, the lesser of the original purchase price/acquisition cost (or) appraised value will be used to determine the LTV. If the property was acquired 12 months or more before the FHA Case Number Assignment, the appraised value will be used to determine the LTV. Length of ownership for determining seasoning is determined from the date of closing on the purchase, as evidenced by the HUD (or) the date the borrower was added to title if the home was acquired outside of a purchase transaction. The end date to determine 12 months ownership will be the date of the new FHA Case Number Assignment. Subordinate Financing If a borrower has an existing subordinate lien on the property such as a Home Equity Line of Credit (HELOC) that will not be paid off in the loan transaction, the entire lien must be subordinated to the new 1 st mortgage. To calculate the Combined Loan to Value ratio (CLTV) you would use the total maximum accessible credit limit of the existing lien. Land Contracts All land contracts must be 12 months or more seasoned. The date of application for the new transaction must be a minimum of 12 months from the date the land contract was executed (signed and dated by all parties as well as notarized). Land contracts executed less than 12 months prior to the application date will not be considered for financing. The land contract must be recorded to be considered for a refinance transaction. Properties acquired through an un-recorded land contract must be treated as a purchase transaction. Maximum Number of Properties Owned The maximum number of properties with liens that a borrower can own is capped at four. This includes the primary residence plus three additional properties with liens. 4 P age
Identity of Interest Identity-of-interest transactions on principal residences are restricted to a maximum LTV ratio of 85%. Maximum financing above 85% LTV is allowed under the following circumstances: A family member purchasing another family member s principal residence. An employee of a builder purchasing one of the builder s new homes or models as a principal residence; A current tenant purchasing the property that the tenant has rented for at least six months predating the sales contract. A lease or other written evidence must be submitted verifying occupancy; Sales by corporations that transfer employees out of an area, purchase the transferred employee s home, and then resell to another employee. Note: A family member is defined as a child, parent, or grandparent; spouse or domestic partner; legally adopted son or daughter, including a child who is placed with the borrower by an authorized agency for legal adoption; foster child; brother, stepbrother; sister, stepsister; uncle; aunt; or son-in-law, daughter-in-law, father-in-law; mother-in-law, brother-in-law, or sister-in-law of the borrower. Restricted Family Member Transactions: If the property being sold from one family member to another is the property seller s investment property, the maximum mortgage is the lesser of either: 85% of the lesser of the sales price or appraised value; or The current maximum mortgage calculation formula (per ML 98-29) The 85% limit may be waived if the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy. Additional Restrictions If there is an identity-of-interest between the buyer and the property seller, commission from the sale or listing of the property cannot be used for the down payment. An as-is appraisal of the Subject property will be required. 5 P age
BORROWER Eligible Borrowers Eligible borrowers include individuals only. Trusts, Business or an L.L.C are not permitted to act as borrowers for an FHA transaction. HUD employees are subject to additional requirements. See HUD handbook 4000.1. All mortgage loan applications must be executed in the legal names of all parties. To validate the borrower s identity a valid government-issued photo id will be required. Evidence of a social security number is required on all FHA loans. Acceptable evidence can be: A copy of the borrower s social security card; OR A copy of a paystub, W-2 or other government-issued card that includes the borrower s social security number. In addition, FHA requires validation of social security numbers for consistency with the borrower s name and date of birth through FHA Connections and ECHO systems, or its equivalent. Ineligible Borrowers Charitable organizations or non-profit agencies Individuals who hold any of the following Visa types: INS Visa Numbers INS Visa Names Descriptions A-1, A-2, A-3 Diplomatic Full or Partial Diplomatic Immunity F-1 Temporary Visitor Academic Students F-2 Temporary Visitor Spouse or Child of F-1 M-1 Vocational Students Academic Students Non-occupant Co-borrowers A blood relative can act as a non-occupant co-borrower for a single unit primary residence to the maximum allowable LTV for FHA purchases in certain cases. Nonblood related, non-occupant co-borrowers may be allowed on an exception basis only, maximum LTV is 75%. 2-4 unit transactions involving a non-occupying co-borrower are limited to a maximum LTV of 75%. Non-occupant co-borrowers may not be added to a cash-out refinance transaction. Note: Any non-occupant co-borrower or co-signer appearing on the current existing mortgage may remain on the new refinance. 6 P age
Military Personnel Military personnel are considered occupant owners and are eligible for maximum financing if a member of the immediate family will occupy the property as a principal residence within 30 days of close, even if the borrower in the military is stationed elsewhere. Citizenship U.S. citizenship is not required Permanent resident aliens are eligible under the same terms and conditions as U.S. citizens Non-permanent resident aliens are eligible provided: o The borrower occupies the property as a principal residence o Has a valid social security number o The borrower is eligible to reside and work in the United States for at least 36 month after closing Employee, Interested Party Loans, or At-Interest In any of the cases below, a full Quality Control Audit will be completed prior to a clear to close being issued. A pricing adjustment may apply. Employee being defined as: Any Employee, Officer, Owner of a third-party originator, its affiliates or subsidiaries Loan Officers as originator of record for a family transaction (i.e.: Loan Officer doing a loan for their parent). Business Partner is an interested party to the transaction Family sales Employer/employee sales Non-Arms length Transactions Builder acting as realtor/broker Realtor/broker selling own property Realtor/broker acting as listing/selling agent as well as the mortgage broker. (not allowed on FHA transactions) Excluded Parties The following participants to the transaction cannot be on the Excluded Parties lists: Borrower (s) Seller (s) Listing and selling real estate agents Loan originator Loan Processor; and Appraiser 7 P age
8 P age CREDIT Decision Credit Score Defined A full tri-merge credit report is required for all transactions. At least two scores are required for each borrower. A decision credit score is determined for each applicant according to the following rule: when three scores are available (one for each repository), the median (middle) value is used; when only two are available, the lesser of the two is used. If more than one individual is applying for the mortgage, the credit score for each individual borrower is determined and then compared to all borrowers. The lower score for all borrowers will be used as the decision credit score. AUS Approve/Eligible Credit Requirements A minimum credit score of 640 is required for all borrowers, regardless of AUS approval. Non-traditional credit reports are ineligible. Liabilities solely in the applicant s name must always be considered in the debt ratio; regardless of who is making the monthly payments as the legal obligations resides with the applicant. Debt Ratios AUS findings are followed Reviewing the Borrower s Credit History The borrower s credit history reflects the manner in which a borrower manages their financial responsibility, current obligations, and monthly payments. Good credit must not be considered a compensating factor. It must be expected of each borrower applying for a mortgage. Derogatory Credit Judgments All judgments must be paid in full prior to the loan closing. An exception to the payoff of a judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments. The borrower must provide a copy of the agreement and evidence that the payment was made on time in accordance with the agreement, and a minimum of three months of schedule payments have been made prior to credit approval. Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months of payments. The monthly payment must be included in the borrowers DTI ratios. Judgments of a non-purchasing spouse in a community property state must be paid in full or meet exception guidance for judgments above, unless excluded by state law.
Disputed Derogatory Credit Accounts Disputed derogatory credit accounts are defined as: Disputed charge off accounts, Disputed collection accounts (excluding medical), and Disputed accounts with late payments in the last 24 months Disputed derogatory accounts that have an outstanding cumulative balance of less than $1000 are required to provide a letter of explanation and documentation supporting the basis of the dispute. Disputed derogatory credit accounts that have an outstanding cumulative balance equal to or in excess of $1000 are required to be downgraded to a manual underwrite. If the borrower does not qualify for a manual underwrite, the disputed account(s) must be resolved, a new credit report will be required evidencing the dispute has been removed, and the AUS findings must be ran using the new credit report. If the dispute has been resolved, we recommend having the credit report updated prior to submission. A new credit report supplied during the underwriting process will require a pricing adjustment. Collections If the cumulative outstanding balance of all collections of all borrowers is equal to or greater than $2000, one of the following is required: Pay off all the outstanding collections in full prior to or at closing (source of funds must be documented); Document the borrower has a payment arrangement in with the creditor(s) by obtaining a credit supplement or a letter from the creditor(s) verifying the monthly payment and proof of the payment history for a minimum of three months is provided. The payment must be included in the borrowers DTI ratios; OR A minimum monthly payment of 5% of the outstanding balance of all collections will be assigned and included in the borrowers DTI ratios. Collection accounts cannot be paid down to less than $2000. Collection accounts of a non-purchasing spouse in a community property state are included into the cumulative balance. Note: Medical collections and charge offs are excluded from this guideline. Chapter 7 Bankruptcies Must be discharged for at least two years from the date of the case number assignment. 9 P age
Chapter 13 Bankruptcies Must be discharge for at least two years from the date of the case number assignment Exceptions to Chapter 13 two year waiting period If the Chapter 13 bankruptcy has not been discharged for at least two years from the date of the case number assignment, the loan must be downgraded to a Refer and underwritten as a manual underwrite. The borrower may still be in the Chapter 13 bankruptcy and be eligible for a manual underwrite provided the borrower: Has been in the Chapter 13 bankruptcy for a period of one year Has made all payments to the trustee on time Has incurred no further derogatory debt Has received written authorization from the trustee to enter into a new financial transaction Meets all other posted manual underwriting guidelines Chapter 13 must be completed or paid off as part of a cash-out FHA refinance. Note: If a home was included in the Chapter 7 or Chapter 13 bankruptcy, the three year seasoning rule for foreclosures apply. Consumer Credit Counseling (CCC) Participation in a consumer credit counseling program does not require a downgrade to a manual underwrite. No explanation or other documentation is required provided there is an AUS Approve/Eligible. Foreclosure Three year minimum time period from completion date. If the foreclosure was greater than three years prior to the date of the case number assignment, and the risk decision received is an Accept, the loan does not need manual downgrading and foreclosure documentation is not required. The START date of the three year period for FHA loans is the LATTER of discharge of bankruptcy, if applicable OR the date the property is transferred to the lender. A copy of the transfer deed from the borrower to their prior creditor is always required to be received and reviewed. Deed-in-lieu of Foreclosure Three year time period from completion date required. Short Sales If a short sale has occurred on the borrower s prior mortgage, that borrower is not eligible for a new mortgage for at least three years following the payoff date of the prior mortgage. 10 P age
Short Payoff/Restructured or Modified Mortgages The subsequent refinance of a restructured or modified loan is allowed on a rate and term refinance transaction if: The borrower has made a minimum of 24 consecutive months of on time mortgage payments from the date the modification took place to the date of the FHA Case Number assignment. A restructured or short payoff loan is a mortgage in which the terms of the original transaction have been changed, resulting in either the absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan. Restructured loans result in: Forgiveness of a portion of principal and/or interest on either the first or second mortgage; or Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness; or Conversion of any portion of the original mortgage debt to a soft subordinate mortgage; or Conversion of any portion of the original mortgage debt from secured to unsecured. Note: Additional documentation to identify a restructured or short payoff loan may be required such as, but not limited to, HUD-1s payoff demand, and/or evidence of source of funds of principal balance pay-downs to substantiate principal reduction transactions. Allowable Date of FHA Case Number Assignment In the event that any documents are dated prior to the earliest allowable date, the file will fall under the recommendation for denial process. Example: If CH 7 BK discharged 5/1/2013 the earliest date for the case number to be assigned and submission to Polaris would be 5/2/2015. Normal rules for foreclosure apply as well if the home was included in the BK, three years apply for FHA. Liabilities and Debts Authorized User Accounts Authorized users are individuals given permission by the credit account owner to have access to and use of an account. Typically, an authorized user is a relative who is helping the borrower manage credit for the first time. Monthly payments on authorized user accounts are required to be included in the borrower s ratios unless evidence is provided verifying the primary account holder has made all required payments on the account for the previous 12 months. Credit reports containing authorized user accounts require additional evaluation and documentation regardless of any AUS recommendation. If the primary account holder is another borrower on the transaction 11 P age
no further action is required. If the primary account holder, including non-borrower spouses, is not another borrower on the transaction and the credit report shows any of the following characteristics, it may indicate the report is not an accurate reflection of the borrower s credit profile: There is a significant difference in credit utilization between the authorized user accounts and primary credit lines; OR There is a significant difference when comparing the late payments of the authorized user accounts to the primary credit lines; OR The credit limits on authorized user accounts are significantly higher when compared to the primary credit lines. The following table provides the documentation requirements that must be obtained when the above apply: Documentation Requirements A letter of explanation from the borrower that identifies the relationship of the primary account holder to be that of a relative (the borrower s spouse, parent, or an individual related to the borrower by blood, marriage, adoption, or legal guardianship), AND Evidence of six months of canceled checks along with the account statements to document that the borrower(s) has been making payments on the account(s). If either of these two requirements cannot be met, the loan is ineligible. Revolving Debt Payoff: Excluding debt from DTI If the revolving account will be paid off and closed during the origination process, the payment does not have to be included in the DTI ratio provided the following documentation is obtained confirming that the account has been paid off and closed: A letter from the creditor on their letterhead, evidencing that the account was closed and has a zero balance; or A credit report supplement evidencing that the account was closed and has a zero balance If account was paid off at closing, the payment does not have to be included in the DTI ratio provided the following documentation is obtained: A letter from the creditor on their letterhead, evidencing that the account was closed; or A credit report supplement evidencing that the account was closed; and The account payoff must be reflected on the HUD-1 Settlement Statement.. 12 P age
Short Term Debt Non-Revolving Installment credit accounts (I.e. personal loan, student loan, boat loan) with less than ten payments remaining may be removed from the debt ratio if the cumulative payments of all such debts are less than or equal to five percent of the borrower s gross monthly income. The borrower may not pay down the balance in order to meet the 10-month requirement. Revolving credit accounts and auto Leases do not apply to this exemption and will be included in the Debt to Income ratio. Contingent Liabilities A contingent liability is a liability that may result in the obligation to repay only when a specific event occurs such as a co-signed obligation. If the cosigned liability is not included in the borrowers liabilities, documentation must be provided evidencing that the other party to the debt has been making regular on-time payments during the previous 12 months, and does not have a history of delinquent payments on the loan. In the case of a divorce, the divorce decree ordering the spouse to make payments would be required to exclude the debt from the borrowers liabilities. 30-Day Accounts A 30-Day account refers to a credit arrangement that requires the borrower to payoff the outstanding balance on the account every month. 30-Day accounts that are paid monthly are not included in the borrowers DTI. If the credit report reflects any late payments on the account in the previous 12 months, five percent of the outstanding balance must be included in the borrowers DTI. The credit report is used to document the borrower has paid the balance on the account monthly for the previous 12 months. Funds must be documented as available to pay off the balance of the 30-Day account. These funds are in excess of any down payment or reserve requirements. Deferred Obligations Deferred obligations are liabilities such as student loans that have been incurred but a payment is deferred or has not yet started, this includes accounts in forbearance. All deferred obligations must be included in the borrower s liabilities. Written documentation of the liability from the creditor and evidence of the outstanding balance and terms must be provided. Evidence of the anticipated monthly payment obligation must be provided if it is available. If the actual monthly payment is not available for an installment loan, five percent of the outstanding balance must be used to establish the monthly payment. For a student loan, if the actual monthly payment is zero or is not available, two percent of the outstanding balance must be used to establish the monthly payment to be used for qualifying. 13 P age
Student Loans in Income Based Repayment Plans (IBR s) Student loans in an IBR are considered an installment debt. The IBR student loan payment must be the greater of two percent of the outstanding balance or the verified monthly payment. Self-Employed Borrower Business Debt When business debt is reported on the borrower s personal credit report, the debt must be included in the DTI calculation, unless the following is documented: The borrower provides 12 months canceled checks drawn against the business account; The account in question does not have a history of delinquency; The business account statements must show that the business is not experiencing financial difficulty; AND The debt is considered in the cash flow analysis where the borrower s business tax returns reflect a business expense related to the obligation, equal or greater than the amount of payments documented as paid out of company funds. Where the borrowers business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis. Undisclosed Mortgage Debt When a debt or obligation that is secured by a mortgage not listed on the mortgage application and/or credit report and not considered by the AUS is revealed during the application process, the file must be downgraded to a refer and be manually underwritten Marital Debt When a married borrower is seeking to purchase a home without their spouse, and they are not listed on a mortgage or on title as a vested party to the present marital home which is in their spouse s name only, the following will apply: The mortgage for the present residence must be current for the month due. When current, the spouse may seek to purchase another home, but the mortgage for the borrower s existing primary residence and marital home must be included in the debt ratio for qualifying. If the primary residence and marital home is in default or foreclosure, the borrower may NOT qualify for a new home purchase because the home in default was not in their name or they were not on title to the property. The foreclosure guidelines for the purchase of a new home following that foreclosure will apply. 14 P age
Manual Refer/Eligible In addition to meeting HUD Handbook 4000.1 on manual underwrites including all credit history, income, and asset requirements, the following requirements must be met: Minimum FICO Manually underwritten FHA loans must have a minimum middle credit score of 680 Reserve Requirements Manually underwritten loans must meet or exceed the following minimum reserve requirements. Gift funds cannot be used as reserves. 1-2 Unit Properties Reserves must equal or exceed one month PITI reserve 3-4 Unit Properties Reserves must equal or exceed three months PITI reserves Credit Requirements The borrower must have at least three open and active trade lines reporting on credit for the previous 12 months. If the borrower does not have the three open and active trade lines reporting on credit over the previous 12 months, non-traditional credit must be obtained in accordance with HUD Handbook 4000.1. All collections and charge-offs must be paid in full. Satisfactory Credit The borrower is considered to have an acceptable payment history if all housing and installment debts have been paid on time for the previous 12 months and has had no more than two 30 day late mortgage payments or installment payments in the previous 24 months. The borrower must have had no major derogatory credit on revolving accounts in the previous 12 months. Major derogatory credit on revolving accounts includes any payments made more than 90 days after the due date or three or more payments made more than 60 days after the due date. Housing Obligations Verification of the borrower s current housing must be documented through: The credit report; A verification of rent received directly from the landlord (only allowed if the landlord has no identity of interest with the borrower); A verification of mortgage received directly from the mortgage servicer; or The most recent 12 months canceled rent checks 15 P age
If the borrower is living rent free, a signed letter must be provided from the property owner where they are residing verifying that the borrower has been living rent-free and the amount of time that the borrower has been living rent free. Maximum DTI Ratios 31/43% - No compensating factors are required 37/47% - Borrower must have one of the following acceptable compensating factors documented: o Verified and documented cash reserves equal to at least three months PITI reserves for a 1-2 unit property or six months PITI reserves for a 3-4 unit property o New total PITI is not more than $100 or 5% higher than the previous monthly housing payment, whichever is lesser; and there is a documented 12 month housing payment history with no late payments o Residual Income 40/40% - Borrower has established credit lines in his/her own name open for at least six months but carries no discretionary debt (i.e. monthly PITI is the only open installment account and the borrower is able to document that revolving credit has been paid in full monthly for at least the previous six months. 40/50% - Borrower must have two of the following acceptable compensating factors documented: o Verified and documented cash reserves equal to at least three months PITI reserves for a 1-2 unit property or six months PITI reserves for a 3-4 unit property o New total PITI is not more than $100 or 5% higher than the previous monthly housing payment, whichever is lesser; and there is a documented 12 month housing payment history with no late payments o Verified and documented significant additional income that is not considered effective income (i.e. part-time or seasonal income verified for more than one year but less than two years) The income if included in gross effective income must be sufficient to reduce the qualifying ratios to not more than 37/47%. o Residual Income 16 P age
Layered Risks In today s ever changing market it is imperative that we continue to make solid, prudent underwriting decisions. The following is a list of items to consider when determining the layers of risk present within a loan file. Significant recent increase in qualifying income Recent job change/time on job/job stability Gifts versus borrower s own funds in transaction Housing payment history/payment shock Thin Credit Credit inquiries for most recent six months Mortgage term/amortization Presence of non-occupant co-borrowers Retaining current home as investment Income stability High DTI Lack of reserves Property type Prior BK or foreclosure Loan Purpose Occupancy type High LTV Cash out refinance Compensating Factors Compensating factors may be used to justify the approval of mortgage loans with multiple layers of risk. Any compensating factor used to justify mortgage approval must be supported by documentation. Verified and Documented Cash Reserves Minimal Increase in Housing Payment No Discretionary Debt Verified and documented cash reserves may be cited as a compensating factor subject to the following requirements: Reserves are equal to or exceed three total monthly mortgage payments (1-2 Units); or Reserves are equal to or exceed six total monthly mortgage payments (3-4 Units). A minimal increase in housing payment may be cited as a compensating factor subject to the following requirements: The new PITI does not exceed the current total monthly housing payment by more than $100 or 5%, whichever is less; and There is a documented twelve month housing payment history with no late payments. No discretionary debt may be cited as a compensating factor subject to the following requirements: The borrower s housing payment is the only open account with an outstanding balance that is not paid off monthly; The credit report shows established credit lines in the borrower s name that have been open for at 17 P age
least six months; and The borrower can document that these accounts have been paid off in full monthly for at least the past six months. Significant Additional Income Not Reflected in Gross Effective Income Residual Income Borrowers who have no established credit other than their housing payment, no other credit lines in their own name open for at least six months, or who cannot document that all other accounts are paid off in full monthly for at least the past six months, do not qualify under this criterion. Credit lines not in the borrower s name but for which he or she is an authorized user do not qualify under this criterion. Additional income from bonuses, overtime, part-time or seasonal employment that is not reflected in qualifying income can be cited as a compensating factor subject to the following requirements: The mortgagee must verify and document that the borrower has received this income for at least one year, and it will likely continue; and The income, if it were included in the qualifying income, is sufficient to reduce the qualifying ratios to not more than 37/47%. Income from a non-borrowing spouse or other parties not obligated for the mortgage may not be counted under this compensating factor. This compensating factor may be cited only in conjunction with another compensating factor when qualifying ratios exceed 37/47% but are not more than 40/50%. Residual income may be cited as a compensating factor. Please reference HUD Handbook 4000.1 for information on how to calculate residual income. 18 P age
Downgrade Policy A file that receives an Accept recommendation must be downgraded to Refer decision and be manually underwritten in the following circumstances: The mortgage loan file contains information or documentation that cannot be entered into or evaluated by TOTAL scorecard. Disputed derogatory accounts with a cumulative balance equal to or greater than $1000, significant inaccuracy or undisclosed debt. The date of the case number assignment is within two years of the borrowers bankruptcy discharge. The date of the case number assignment is within three years of a preforeclosure, foreclosure, short sale and/or a deed in lieu of foreclosure Collection accounts, tax liens, charge-offs, judgments Delinquent payments on any mortgage trade line, including mortgage line-ofcredit payments, during the most recent 12 months consisting of any of the following: o Three or more late payments greater than 30 days o One or more late payments of 60 days plus one or more 30-day late payments o One payment greater than 90 days late o For a cash-out refinance a current delinquency or any delinquency within 12 months of the case number assignment date will require a manual downgrade. o In these situations the loan will be downgraded to a manual and declined as manual requirements do not allow for any mortgage late payments or installment late payments in the previous 12 months. Bank statement that indicates multiple non-sufficient funds (NSF) charges. Example: More than one or two isolated incidents over a 60 day period. An explanation for such NSF s will be required and additional asset statement may be required to decision the loan. Failure to meet the specific conditions of an AUS approval. Undisclosed Mortgage Debt Self employed borrowers whose income has declined more than 20 percent over the previous two years TOTAL scorecard AUS approvals must be downgraded for any derogatory debt, including, but not limited to, collection accounts, tax liens, charges-offs or judgments discovered during processing but not showing on the credit report 19 P age
Community Property States In Community Property states, a non-purchasing spouse s debts must be included in the borrower s qualifying ratios. Therefore, a separate (full tri-merged) credit report must be run for the non-purchasing spouse (with spouse s signed/dated authorization) and all spouses debts must be listed on the 1003. The following are community property states: Wisconsin. Separated Borrowers If the borrower is presently separated from a spouse and/or undergoing a present divorce proceeding, a legal Separation Agreement or a final Divorce Decree will be required prior to close by underwriting. This is to determine legal property division, the release of obligation from the marital residence, and orders of alimony and child support where such compensation/liability exists. Credit Inquiries A Letter of Explanation (LOX) prepared by the borrower explaining the purpose and outcome of each credit inquiry in the last 90 days is required. Documentation verifying the new debts will be required and it must be documented that any new debts obtained were not incurred to obtain any part of the borrower s minimum down payment requirement. 20 P age
21 P age INCOME Documentation Requirements Documentation transmitted from or through the equipment of unknown parties or interested parties will not be accepted. Polaris will authenticate documentation received electronically by examining the source identifiers or contacting the source of the document by telephone to verify the documents validity. Employment/Income Written Verification of Employment Polaris requires a written Verification of Employment covering each borrower s employers for the previous 24 months in the following situations: o Borrowers that have not been at their current employer for over 12 months. o Bonus, overtime, commission, part-time, secondary, or seasonal earnings are being used for qualifying o Borrowers with declining wages A telephone verification of employment verifying the borrower is currently active at their current employer is allowed for borrowers who have been at their current employer for over 12 months and are strictly using base earnings for qualification. Length of Employment Each borrower must be on the current job a minimum of 30 days and provide earnings for at least that time frame. If the borrower is a recent graduate and has completed 30 days on the job, educational transcripts are required to document two year history. FHA does not specify length of job seasoning provided only base income is used and it make sense at the underwriter s discretion. Please also refer to the AUS findings. A second job, overtime/bonus income, commission or Self-Employed all require a minimum of two consecutive years at the same employer to be considered. Exceptions may be granted if borrower has been on the current job a minimum of 12 months and overtime/bonus is consistent with prior employer in same line of work. Exception cannot be granted for Self-Employed borrowers a minimum of two consecutive years for their employment is required. Changes to Employment during the Loan Process If a borrower(s) change their place of employment after the loan process has begun, that loan submission will not be cleared to close until the following is provided to underwriting: A new 1003 application signed by the borrower(s) reflecting the new employment information
AUS must be re-run and any new employment/income related conditions must be met The borrower must be at the new position for a period of no less than 30 days and show a pay history for the period. The borrower cannot be on a probationary period for any length of time. Stability of Employment Employment Gaps Borrowers with a gap of employment of six months or more must be employed at their current position for at least six months at the time of the case number assignment and document a two year work history prior to the gap of employment. Newly Employed Borrower A newly employed borrower with less than a two-year employment history must provide documentation showing that immediately prior to the current job, the borrower was attending school or in a training program directly related to the borrowers new position. If the borrower does not have prior employment or does not have proof they were attending school or in training program, the employment history is ineligible and the loan will be declined. Frequent Changes in Employment A borrower who has changed jobs more than three times in the previous 12 month period or has changed lines of work will required one of the following in order to be eligible for financing: Transcripts verifying the borrower has received training and education to demonstrate the qualification for a new position; or Documentation from prior employers evidencing continual increases in income and/or benefits. Temporary Reduction in Income If a borrower has a temporary reduction in income due to a short-term disability or a temporary leave, their income can be used as effective income, if the following can be provided and/or documented: A signed letter from the borrower with their intent to return to work and the date they intend to return; A letter from the employer stating that the borrower has the right to return to work, the expected return date, and at what rate of pay. Must be signed and dated by the employer on company letterhead; AND Qualify for financing taking into account any reduction of income due to their leave or if a borrower is returning to work before or at the time of the first mortgage payment due date, the borrowers pre-leave income may be used. 22 P age
Overtime, Bonus and Commission Income Borrower must have received any overtime, bonus or commission income for a minimum of 24 months, for it to be used as effective income for the purpose of qualifying. Borrowers who receive commission income will be treated as self-employed if they receive a 1099. Part-Time and Secondary Employment Part-time and secondary employment income will only be considered effective income if the borrower has had the position for a minimum of 24 months prior to closing. Employed by Family Owned Business Borrowers who are employed by a family member must have documentation verifying that they are not an owner in the family-owned business by official business documentation such as corporate resolutions or other business organizational documents, business tax returns or Schedule K-1 s, or an official letter from a certified public accountant on their business letterhead. In addition to this, the borrower must also provide copies of their signed personal tax returns. Seasonal Employment Seasonal income maybe used for qualifying purposes if the borrower has worked the same line of work for the past two years and is reasonably likely to be rehired for the next season. For seasonal employees with unemployment income, the unemployment income for the two full years must be documented and there must be reasonable assurance that this income will continue. Staffing company/temp Agency employment Borrower must have a documented current, consecutive two year history of this type of employment in order to be used for qualifying purposes. Non-Taxable Income Non-taxable income refers to types of income that is not subject to federal taxes, which includes, but is not limited to child support and Social Security Income. The amount of continuing tax savings attributed to non-taxable income may be added to the borrower s gross income. The percentage of non-taxable income that may be added cannot exceed the greater of 15% or the appropriate tax rate for the income amount, based on the borrower s tax rate for the previous year. If the borrower was not required to file a federal tax return for the previous tax reporting period, the income may be grossed up by 15%. 23 P age
Child Support/Alimony Income Borrower must provide a copy of the final divorce decree, legal separation agreement, or court order verifying a three year continuance and evidence of receipt, using deposits on bank statements or cancelled checks for the most recent three months. AUS requirements must be met. Social Security Income Social Security income must be verified by the Social Security Administration (SSA). If any benefits expire within the first full three years of the loan, the income may only be considered as a compensating factor. The most recent complete copy of the awards letter and at least one of the following is required: Past two years 1099 s, Proof of current receipt, or Copies of the past two years signed federal tax returns If the Social Security awards letter does not have a defined expiration date, Polaris will consider the income effective and likely to continue. Borrowers receiving Social Security benefits from another persons account must document a three year continuance (example of a borrower receiving SSI from another persons account is if the borrower is receiving SSI for their dependent). VA Disability Income VA Form 26-8937, Verification of VA Benefits, showing the amount of the assistance and the expiration date of the benefits, if any must be provided along with one of the following documents: Federal tax returns; or The most recent bank statement verifying receipt of the income from VA. Retirement Income Retirement income must be verified by obtaining the most recent awards letter verifying a three year continuance of the earnings and at least one of the following: Copies of the past two years signed federal tax returns Past two years 1099 s, or Proof of current receipt Individual Retirement Account Recurring monthly income from an individual retirement account may be used for qualifying if it is determined to continue for three years. The most recent IRA/401K statement and one of the following will be required: Copies of the past two years signed federal tax returns; or Proof of current receipt 24 P age
Expected Income Expected income refers to income from a new job that has not started yet but will within 60 days of the loan closing. Expected income may not be derived from a family-owned business. The existence and amount of expected income must be verified and documented in writing from the new employer and it must be verified that it is GUARANTEED to begin within 60 days of the mortgage closing. Borrowers will have to document that they have sufficient income or cash reserves to support the mortgage payment and any other obligations between the date of the closing and the beginning of the receipt of the new income. Foreign Income Documentation Foreign income is income that is earned by borrowers employed by a foreign corporation or a foreign government and is paid in foreign currency. Borrowers may use foreign income to qualify with all of the following documentation: Most recent paystub(s) and two years W-2 s or Written Verification; Most recent two years personal income tax returns that include the foreign income, with all Schedules. All income must be translated into U.S. currency; Polaris must be able to verify the stability and continuance of the income; If the income is paid in foreign currency the file must contain a printout evidencing the source used for the conversion of the foreign currency into U.S. dollars Determining the Need for Federal Income Tax Returns Individual signed federal income tax returns filed with the IRS for the past two years are required for the following types of salaried or commissioned borrowers: Borrowers earning 25% or more of their income from commissions Borrowers employed by family members, or interested parties to the property sale, purchase, or financing transaction Borrowers receiving rental income from an investment property Borrowers claiming unreimbursed business expenses Borrowers receiving income from periodic employment or employment that is subject to time limits, such as a contract employee or a tradesperson Borrowers who receive income from partnerships or corporations in which they have a 25% or greater ownership interest. (Such a borrower is considered selfemployed. The lender must document and underwrite the loan application using the requirements for self-employed borrowers, as described in Section B3-3.3, Self-Employment Income.) Borrowers receiving income from capital gains, royalties, real estate, or other miscellaneous non-employment earnings reported on IRS Form 1099 Borrowers receiving income that cannot otherwise be verified by an independent an knowledgeable source 25 P age
Self-Employed to Wage Earner in same 24 month period Borrowers who have ended self-employment for a wage earner position within the previous 24 months will be reviewed based on the last 24 months income and loss averaged, unless: They can provide documented evidence that the self-employed business was dissolved within the prior tax year. If this can be documented, we will consider the new hourly base wage only as income and will not factor in prior selfemployed loss. If a self-employed business was dissolved within the present tax year, the full 24 month income and loss must be calculated. Self-Employed Borrowers Minimum Income Documentation Requirements Borrowers must have been self-employed for at least 24 months in order to be able to use self-employment income to qualify. Borrowers who own 25% or more of a business are considered Self-employed. The following income documentation is required: Prior two years individual tax returns with all applicable disclosures and schedules; Prior two years individual tax transcripts (October 1, the immediately preceding year s tax transcripts will be required for a clear to close); If the business is a Partnership, S-corporation or C-corporation, the prior two year s business tax returns with all applicable schedules are also required; A Profit & Loss (P&L) and Balance Sheet is required if more than a calendar quarter has elapsed since the date the borrower last filed a tax return. If the income from the business shows a greater than 20% decline in effective income over the two year period, the file must be downgraded to a refer and be manually underwritten. 3 rd Party Verification for Self-Employed Borrowers In all cases, 3 rd party verification of self-employment must be provided. All 3 rd party verification must be dated within 30 days of closing. This is to include the one of the following: Verification of the business existence from a CPA, regulatory agency, or licensing bureau, Letter of existing business relationship from a contractor or disinterested 3 rd party, Verification of phone number and address of borrower s business from telephone book or online directory; OR Copy of phone bill in the name of the company, showing the company s phone number and address. Internet sites such as 411.com, Chamber of Commerce sites and Manta.com, where they allow the business owner to add their own information, are not acceptable. 26 P age