1. Underwriting/Ability to Repay QM
2. Eligible Products
3. Ineligible Products
4. Employee Loans
5. Qualifying Rate
6. Debt to Income Ratio
7. Exceptions
8. LTV/CLTV/HCLTV Calculations
9. Mortgage Insurance
10. Impounds
11. Occupancy Types
12. Borrower Eligibility
13. Non-Occupant Borrowers
14. Ownership Interest
15. Transactions
16. Subordinate Financing
17. Multiple Financed Properties
18. Non-Arm’s Length Transactions
19. Interested Party Contributions
20. Seller Concessions
21. Personal Property
22. Documentation
23. Age of Documentation
24. Credit/Liabilities
25. Reserves
26. Assets
27. Gift Funds
28. Income/Employment
29. Other Sources of Income
30. Rental Income
31. Unacceptable Income Sources
32. IRS Form 4506-C / Tax Transcripts
33. Property
34. Appraisal Requirements
35. Properties Affected by a Disaster
36. HERO/PACE
37. Solar Panels
38. Title and Closing
39. Power of Attorney Requirements
40. Recasting Policy

This guide describes Provident Bank program eligibility and underwriting requirements. In addition to the program eligibility and prudent underwriting, Provident Bank requires all loans to meet the Ability to Repay (ATR) rules established by the Consumer Financial Protection Bureau (CFPB).

The ATR rule requires the originator to make a reasonable, good faith determination before or when the loan is consummated and that the consumer has a reasonable ability to repay the loan. The origination lender must consider the 8 underwriting factors established by the CFPB and the loan file must be documented accordingly.

1. The borrower’s current or reasonably expected income or assets;
2. The borrower’s current employment status;
3. The borrower’s monthly payment on the covered transaction;
4. The borrower’s monthly payment on any simultaneous loan;
5. The borrower’s monthly payment for mortgage related obligations;
6. The borrower’s current debt obligations, alimony, and child support;
7. he borrower’s monthly debt to income ratio or residual income; and
8. The borrower’s credit history.

• All loans must meet the QM Price-Based limit.
• Credit documentation is based on these guidelines, Ability to Repay and the underwriter’s discretion based on the risk factors of the loan file.
• Unless otherwise addressed in these guidelines, Fannie Mae underwriting guidelines should be followed.
• In some cases, exceptions to underwriting guidelines or product eligibility may be acceptable when strong compensating factors exist to directly address the issue and offset the risk.
• All portfolio loans require a MANUAL UNDERWRITE.
• All loans must be run through Fannie Mae Desktop Underwriter (DU). DU conditions may not be utilized for loan documentation except for loans on the CF30FN product. See the Eligible Products section for CF30FN requirements.


• Applying Re-Underwriting Criteria
• The following steps are required if the borrower discloses or Provident Bank discovers additional debt(s) or reduced income after the underwriting decision was made, up to and concurrent with loan closing:
• Underwriter must document the additional debt(s) or reduced income, and apply those changes to the loan to confirm loan eligibility.
• If there is a new subordinate debt on the subject property, the mortgage loan must be re-underwritten.
• The final loan application signed by the borrower must include all income and debts verified, disclosed, or identified during the mortgage process.

Portfolio Products

• Fixed Rate: 15-year and 30-year term (Riverside & San Bernardino Counties Only)
• Conforming: PF30, PF15
• Jumbo: PF30J, PF15J
• SOFR ARM: 5/6, 7/6 and 10/6, Fully Amortizing 30-year term (All of California)
• Conforming: PASO56, PASO76, PASO106
• Jumbo: PASO56J, PASO76J, PASO106J

CF30FN Product Only - (May be able to use DU findings at underwriter’s discretion if the loan meets the following requirements):

• Fixed Rate: 30-year term (Riverside & San Bernardino Counties Only)
• Must have a valid DU Approve Eligible response

Follow DU findings for:

• Documentation
• Tradlines, credit history
• Borrower contribution, including gift funds
• Reserves
• DTI

Note: CF30FN product - for items not addressed on the DU findings, follow FNMA selling guide

Note: All appraisals must follow these Provident Bank Portfolio Conforming & Jumbo Guidelines. Appraisal waivers and desktop appraisals are not eligible.

• Interest Only
• Negative Amortization
• Graduated Payments
• Temporary Buydowns
• Balloon Payments
• Loans with Prepayment Penalties

• Not Allowed

• Fixed Rate – Note Rate
• 5/6 SOFR ARM – Greater of the fully indexed rate* or the Note Rate + 2%
  *Fully indexed rate = Index + Margin
• 7/6 SOFR ARM – Note Rate + 1%
• 7/6 ARM may qualify at the Note Rate with the following requirements
• Minimum 730 Credit Score
• Maximum LTV of 70%
• No Exceptions
• 10/6 SOFR ARM – Note Rate

The Debt-to-Income (DTI) ratio is based on the total of all existing monthly liabilities plus any planned future liabilities based on credit inquiries or otherwise disclosed by the borrower, and then divided by the calculated gross monthly income. Liabilities include all housing expenses, revolving debt, installment debts, real estate loans, rent, alimony, child support, and other consistent and recurring expenses.

For other properties owned, documentation to confirm the P & I, taxes, insurance, HOA dues, lease payments or other property related expenses must be provided.

Maximum DTI allowed is 43.00%.

Exceptions to these written guidelines may be made by Provident Bank on a case-by-case basis.

• NO Exceptions will be granted for DTI exceeding guideline requirements.
• Exceptions to any of the guidelines must be approved by Provident Bank Corporate Office.
• Exceptions on loans requiring MI must be prior approved with the Mortgage Insurance Company.
• Approved Exceptions may have a Loan Level Price Adjustment (LLPA).

Purchases Money Transactions

• The LTV/CLTV/HCLTV is calculated based on the lesser of the sales price or the current appraised value.

Refinances Transactions

• The LTV/CLTV/HCLTV is calculated based on the current appraised value for properties owned a minimum of 12 months.
• If the subject property is owned less than 12 months, the LTV/CLTV/HCLTV is calculated based on the lesser of the original purchase price of the property or the current appraised value.

Delayed Financing Exception

• The LTV/CLTV/HCLTV is calculated based on the lesser of the purchase price or the current appraised value of the subject property.

Mortgage Insurance – Borrower Paid Monthly
LTV > 80% - Mortgage insurance will be ordered through MGIC, ARCH, Enact or Essent.
Coverage amount required:
80.01% - 85.00% = 12% coverage
85.01% - 90.00% = 25% coverage

Impound accounts may be established for funds collected that are required to be paid under the Security Instrument. These funds include, but are not limited to, taxes, insurance premiums (hazard, flood, and mortgage), special assessments, ground rents, water, sewer, and other governmental impositions.

• Impounds are required for loans with LTV/CLTV/HCLTV greater than 89.99%.
• Impounds required for a loan that is HPML, regardless of LTV.

Eligible occupancy types include:

• Primary residences for 1–2-unit properties
• Second Homes
• Must be a reasonable distance away from borrower’s primary residence.
• Must be occupied by the borrower for some portion of the year.
• Restricted to 1-unit dwellings.
• Must be suitable for year-round occupancy.
• Must not be subject to a rental agreement and the borrower must have exclusive control over the property.

Ineligible occupancy types include:

• Primary residences for 3–4-unit properties
• Investment properties

Eligible Borrowers

• U.S. Citizens
• Permanent Resident Aliens/Non-Permanent Resident Aliens
• Must have a valid Social Security Number. No Exceptions
• Must be employed in the U.S. for a minimum of 24 months. Up to a 2-month gap may be acceptable at underwriter discretion.
• Income used for qualifying purposes must be from acceptable income sources generated from within the U.S.
• Must have a 2-year credit history in the U.S. and meet credit tradeline requirements.
• Foreign assets may be used for down payment and closing costs. The funds must be deposited into a U.S. bank. Foreign assets cannot be used for reserves. Reserves must be seasoned U.S. funds.
• Permanent Resident Aliens must provide evidence of lawful residency in the U.S. as documented by:
• A valid and current Permanent Resident Alien card (form I-551) also known as a Green Card; or
• An unexpired foreign passport stamped “Processed for I-551. Temporary Evidence of Lawful Admission for Permanent Residence. Valid until (mmdd- yy). Employment authorized.”
• Any other evidence of permanent residency issued by the INS would need to be reviewed by underwriter to determine eligibility.
• Non-Permanent Resident Aliens must provide evidence of lawful residency in the U.S. as documented by:
• Valid and current eligible visa that allows the non-permanent resident alien the right to work and live in the U.S. issued by the USCIS.
• Eligible visa types: A Series and G Series (Must not allow diplomatic immunity), E-1, H1B and L1.
• Any visas not listed above must be reviewed by underwriter to determine eligibility.
• First-Time Homebuyers (FTHB): A first-time homebuyer is defined as anyone who has not owned a home in the last 3 years. The following requirements apply to first-time homebuyers:
• All borrowers must have a valid Social Security number
• 720 Minimum Fico Score
• 12 months reserves required

Note: For loans with more than one borrower where at least one borrower has owned a home in the last 3 years, first-time homebuyer requirements do not apply.
• Inter Vivos Revocable Trust
• The inter vivos revocable trust must be established by one or more natural persons, solely or jointly.
• The primary beneficiary of the trust must be the individual establishing the trust.
• The trustee(s) must have the power to mortgage the security property for the purpose of securing a loan to the individual (or individuals) who are the borrower(s) under the mortgage or deed of trust.If the trust is established jointly, there may be more than one primary beneficiary as long as the income or assets of at least one of the individuals establishing the trust will be used to qualify for the mortgage.
• Power of Attorney’s are not allowed when a property will be vested in a Trust.
• Eligibility requirements for taking title in a trust:
• At least one individual establishing the trust must be a borrower on the loan.
• Occupancy must be as a primary residence or second home.
• The title insurance policy must ensure full title protection to Provident Bank.
• The title insurance policy states that title to the security property is vested in the trustee(s) of the inter vivos revocable trust.
• The title policy does not list any exceptions with respect to the trustee(s) holding title to the security property or to the trust.
• Title to the security property is vested solely in the trustee(s) or jointly in the trustee(s) and in the name of the individual borrower(s).

Ineligible Borrowers

• Irrevocable Trusts
• Land Trusts
• Limited Partnerships, General Partners, Corporations and Limited Liability Companies
• Foreign Nationals
• Borrowers with diplomatic status
• Co-Signor/Guarantor (Does not have an ownership in the property. They sign the note, but not the deed)

Non-Occupant Borrowers are credit applicants on a principal residence transaction who:

• do not occupy the subject property,
• may or may not have an ownership interest in the subject property as indicated on the title,
• sign the deed of trust and note,
• have joint liability for the note with the borrower(s), and
• do not have an interest in the property sales transaction, such as the property seller, the builder, or the real estate broker.

Eligible Transactions

• Purchase
• Rate and Term Refinance

Maximum LTV/CLTV/HCLTV

• The maximum LTV/CLTV/HCLTV ratio may not exceed 75%

Maximum Loan Amount

• 1–2-unit primary residences: $1,000,000

Down Payment and Reserve Requirements

• The occupying borrower(s) must make the first 5% of the down payment from their own funds; and
• The occupying borrower(s) must document sufficient assets from their own funds to cover half of the required reserves or 2 months PITIA, whichever is greater.

Note: Occupant borrower must contribute income to the transaction.

Title must be held in the borrower’s name at time of application for refinance transactions and at time of closing for all transactions.

Borrower(s) may hold title as follows:

• Individual: Individual vesting is an individual borrower taking sole ownership to a property.
• Joint Tenants: Joint tenancy is a form of co-ownership giving each tenant equal interest and equal rights in a property, including the right of survivorship.
• Inter vivos revocable trust

Titled Spouse
A spouse who is not going on the loan but wants to be on title. Spouse must sign the Deed, Riders, CD, Rescission, Signature Affidavit, Compliance Agreement and Borrower Consent to the Use of Tax Return Information.

Non-Purchasing Spouse
A non-purchasing spouse has no ownership interest in the property. They will not be on the loan, will not execute the note or deed, and will not be on title.

Leasehold Estates:

• In areas where leasehold estates are commonly accepted, loans secured by properties on leasehold estates are eligible for purchase. The mortgage must be secured by the property improvements and the borrower’s leasehold interest in the land. The leasehold estate and improvements must:
• constitute real property,
• be subject to the mortgage lien, and
• be insured by the title policy.
• The following requirements must be met:
• An Attorney Opinion Letter to verify the lease meets FNMA guidelines, and
• The term of the lease must run at least 5 years beyond the maturity date of the loan.
• Title Endorsement ALTA 13.1 (CLTA 119.6) is required.

Purchase Transactions
A purchase money transaction is one in which the proceeds are used to finance the acquisition of a property.

• The minimum borrower contribution requirements must be met.
• Proceeds from the transaction must be used to:
• Finance the acquisition of the subject property,
• Convert an interim construction loan or term note into permanent financing, or
• Pay off the outstanding balance on the installment land contract or contract for deed.
• Proceeds from the transaction may not be used to give the borrower cash back other than the following:
• An amount representing reimbursement for the borrower’s overpayment of fees and charges, including refunds that may be required in accordance with certain federal laws or regulations. The settlement statement must clearly indicate the refund, and the loan file must include documentation to support the amount and reason for the refund; and
• A legitimate pro-rated real estate tax credit in locales where real estate taxes are paid in arrears.

Note: If the borrower receives cash back for a permissible purpose as listed above, the underwriter must confirm that the minimum borrower contribution requirement has been met.

Limited Cash-Out Refinance Transactions
Limited cash-out refinance transactions must meet the following requirements:

• Title must be held in the borrower’s name at time of initial application.
• The subject property must not be currently listed for sale. It must be taken off the market on or before the disbursement date of the new mortgage loan, and the borrowers must confirm their intent to occupy the subject property (for principal residence transactions).

Acceptable uses for limited cash-out refinance transactions:

• Paying off an existing first mortgage loan (including an existing HELOC in first-lien position).
• Payoff of an existing construction loan and documented construction cost overruns that were incurred outside of the interim construction financing for two-closing construction-to permanent loans. (These construction cost overruns must be paid directly to the builder at closing.)
• Modifying the interest rate and/or term for existing mortgages.
• Financing the payment of closing costs, points, and prepaid items. With the exception of real estate taxes that are more than 60 days delinquent, the borrower can include real estate taxes in the new loan amount provided:
• the real estate taxes must be paid in full through the transaction, and
• the payment for the taxes must be disbursed to the taxing authority through the closing transaction, with no funds used for the taxes disbursed to the borrower.
• Receiving cash back in an amount that is not more than the lesser of 2% of the new refinance loan amount or $2,000.
• Buying out a co-owner pursuant to an agreement is allowed provided:
• It is the result of a divorce, separation, or dissolution of domestic partnership,
• The subject property was jointly owned for at least 12 months preceding the new loan (except for recent inheritance),
• All parties must sign a written agreement that states the terms of the property transfer and the proposed disposition of the refinance proceeds, and
• Borrowers who acquire sole ownership of the property may not receive any of the proceeds.
• Paying off a subordinate mortgage lien (including prepayment penalties) used to purchase the subject property. Documentation must be provided to verify that the entire amount of the subordinate financing was used to acquire the property.
• Paying off a non-purchase money second that has been seasoned for at least 12 months and has had no draws in the last 12 months.
• Paying off an unseasoned subordinate lien provided the entire proceeds of the subordinate lien were used for significant home improvements (documentation must be provided).

The following transaction type is not eligible as a limited cash-out refinance:

• Financing a short-term refinance mortgage loan that combines a first mortgage and a nonpurchase- money subordinate mortgage into a new first mortgage or any refinance of that loan within 6 months.

Net Tangible Benefit to Borrower

• Underwriter to review and complete the “Borrower(s) Benefit Worksheet.”
• Underwriter to condition for the Borrower(s) “Certificate of Reasonable Tangible Net Benefit for Refinance Loans” Disclosure prior to funding.
• Disclosure is generated with closing package and must be fully completed and executed by the borrower and returned with loan documents.
• Copy of both executed forms to be placed in the LOS 1008 place holder.

Cash-Out Refinance Transactions
Cash-out refinance transactions must meet the following requirements:

• The transaction must be used to pay off existing mortgages by obtaining a new first mortgage secured by the same property or be a new mortgage on a property that does not have a mortgage lien against it.
• The subject property cannot be listed for sale within the last 6 months prior to application date.
• The property must have been purchased (or acquired) by the borrower at least 6 months prior to the disbursement date of the new mortgage loan except for the following:
• There is no waiting period if the underwriter documents that the borrower acquired the property through an inheritance or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).
• If the property was owned prior to closing by a Limited Liability Corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s 6-month ownership requirement. In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s).
• If the property was owned prior to closing by an inter vivos revocable trust, the time held by the trust may be counted towards meeting the borrower’s 6-month ownership requirement if the borrower is the primary beneficiary of the trust.
• Delayed financing exception (see requirements below).

Delayed Financing Requirements

• Original transaction must have closed within the last 6 months (measured from the date on which the property was purchased to the disbursement date of the new mortgage loan) are eligible for a cash-out refinance if all of the following are met:
• The new loan amount can be no more than the actual documented amount of the borrower’s initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV/CLTV/HCLTV ratios for the transaction based on the lesser of the purchase price or current appraised value).
• All other cash out refinance eligibility and cash out limits are met, and cash out pricing is applied.
• The purchase transaction was an arms-length transaction.
• The original purchase transaction documented by a settlement statement, which confirms that no mortgage financing was used to obtain the subject property.
• The sources of funds for the purchase transaction are documented (such as bank statements, personal loan documents, HELOC on another property).
• Funds received as gifts and used to purchase the property may not be reimbursed with proceeds of the new mortgage loan.
• The preliminary title search or report must confirm that there are no existing liens on the subject property.
• If the source of funds used to acquire the property was an unsecured loan or a HELOC (secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property. Any payments on the balance remaining from the original loan must be included in the DTI.

The following are acceptable uses for cash-out refinance transactions:

• Paying off the unpaid principal balance of the existing first mortgage.
• Financing the payment of closing costs, points, and prepaid items. The borrower can include real estate taxes in the new loan amount. Delinquent real estate taxes (taxes past due by more than 60 days) can also be included in the new loan amount, but if they are, an escrow account must be established subject to California law or regulation.
• Paying off an outstanding subordinate mortgage lien of any age.
• Taking equity out of the subject property that may be used for any purpose.
• Financing a short-term refinance mortgage loan that combines a first mortgage and a nonpurchase- money mortgage into a new first mortgage or a refinance of the short-term refinance loan within 6 months.
• Paying off a HERO/PACE loan.

The following transaction types are not eligible as cash-out refinances:

• The subject property was purchased by the borrower within the 6 months preceding the disbursement date of the new mortgage loan except if a qualifying exception above exists.
• Transactions in which a portion of the proceeds of the refinance is used to pay off the outstanding balance on an installment land contract, regardless of the date the installment land contract was executed.
• The new loan amount includes the financing of the real estate taxes that are more than 60 days delinquent and an escrow account is not established, unless requiring an escrow account is not permitted by the applicable law or regulation.
• The transaction is not eligible if the subject property is listed for sale at the time of funding of the new mortgage loan.

Subordinate liens must be recorded and clearly subordinate to Provident Bank’s first mortgage lien. The existence of subordinate financing and the subordinate financing repayment terms must be disclosed to the underwriter, the appraiser, and the mortgage insurer.

If a first mortgage is subject to subordinate financing, the underwriter must calculate the LTV/CLTV, and HCLTV ratios.

The underwriter must consider any subordinate liens secured by the subject property, regardless of the obligated party, when calculating CLTV and HCLTV ratios. This includes business loans, such as those provided by the Small Business Administration.

Acceptable Subordinate Financing Types

• Variable payment mortgages that comply with the details below.
• Mortgages with regular payments that cover at least the interest due so that negative amortization does not occur.
• Mortgage terms that require interest at a market rate.

Unacceptable Subordinate Financing Terms

• Mortgages with negative amortization.
• Subordinate financing that does not fully amortize under a level monthly payment plan where the maturity or balloon payment date is less than 5 years after the note date of the new first mortgage.

Eligible Variable Payment Terms for Subordinate Financing

• With the exception of HELOCs, when the repayment terms provide for a variable interest rate, the monthly payment must remain constant for each 12-month period over the term of the subordinate lien mortgage. (For HELOCs, the monthly payment does not have to remain constant).
• The monthly payment for all subordinate liens must cover at least the interest due so that negative amortization does not occur.

Subordination of Existing Secondary Financing

• If subordinate financing is left in place in connection with a first mortgage loan refinance transaction, Provident Bank requires execution and recordation of a subordination agreement and a copy of the note and deed for the second lien.

The borrower(s) may own a total of 10 financed, 1–4-unit residential properties, including the subject property.

The number of financed properties includes the number of 1-4-unit financed properties where the borrower is personally obligated on the mortgage(s), even if the monthly housing expense is excluded from the borrower’s DTI.

1-4-unit financed properties held in the name of an LLC or other corporation can be excluded from the calculation of number of financed properties only in cases where the borrower is not personally obligated for the mortgage.

All financed 1–4-unit residential properties, other than the subject property, require an additional 4 months reserves for each property (based on the PITIA of the additional property).

Non-arm’s length transactions are purchase transactions in which there is a relationship or business affiliation between the seller and the buyer of the property. Provident Bank allows non-arm’s length transactions for the purchase of existing properties, unless specifically forbidden for the particular transaction, such as delayed financing.

Interested party contributions include funds contributed by the property seller, builder, real estate agent/broker, mortgage lender, or their affiliates, or any other party with an interest in the real estate transaction.

Interested party contributions may only be used for closing costs and prepaid expenses, and may never be applied to any portion of the down payment or contributed to the borrower’s financial reserve requirements.

Interested party contributions are limited according to the CLTV:

• CLTV ≤ 75% is limited to 9%
• CLTV > 75% is limited to 6%

All seller concessions must be addressed in the sales contract, appraisal, and Closing Disclosure. A seller concession is defined as any interested party contribution beyond the stated limits, in the above section, or any amounts not being used for closing costs or prepaid expenses (i.e., funds for repairs not completed prior to closing is a seller concession). If a seller concession is present, both the appraised value and sales price must be reduced by the concession amount for purposes of calculating the LTV/CLTV.

Any personal property transferred with a property sale must be deemed to have zero transfer value, as indicated by the sales contract and the appraisal. If any value is associated with the personal property, the sales price and appraised value must be reduced by the personal property value for purposes of calculating the LTV/CLTV.

Full income and asset verification is required. In an effort to fully document the borrower’s ability to meet their obligations, borrowers should disclose and verify all liquid assets (in addition to minimums required).

• Credit reports, employment, income, and asset documentation must be no more than 120 days old on the note date.
• Preliminary Title Report must be no more than 120 days old on the note date.
• Appraisal Report must be no more than 120 days old on the note date.

Unless otherwise noted below, Fannie Mae underwriting guidelines should be followed for evaluating the borrower(s) credit history.

Age of Credit Report

• If credit report is greater than 45 days at funding, Provident Bank will pull a soft pull credit report.

Representative FICO Score

• An individual borrower’s representative credit score is determined by the following:
• If 3 credit bureau scores are reported, the representative credit score will be the middle of the 3.
• If 2 credit bureau scores are reported, the representative credit score will be the lower of the 2.
• When there is more than 1 borrower, the representative credit score will be the lowest middle score of all borrowers.

Required Tradelines

• Minimum of 3 tradelines are required. The following requirements apply:
• 1 tradeline must be open for 24 months and active within the last 6 months; and
• The 2 remaining tradelines must be rated for 12 months and may be open or closed.
-OR-
• Minimum of 2 tradelines are acceptable when the following requirements are met:
• 1 revolving or installment tradeline paid as agreed for 24 months and is open and active in the last 6 months; and
• 1 installment tradeline open or closed and paid as agreed for 24 months within the past 5 years.
• An exception to the minimum tradeline requirement is not required if the borrower’s credit history meets the following:
• No less than 10 tradelines are reporting.
• At least 1 tradeline is open and reporting for a minimum 12 months.
• Credit history established for at least 10 years.

Note: Borrowers not contributing income for qualifying purposes are not subject to the minimum tradeline requirement.

Disputed Credit Report Tradelines
If there are multiple disputed tradelines or a dispute on a mortgage tradeline, the underwriter should obtain an explanation from the borrower indicating the reason for the dispute. The aspect of the tradeline (such as balance and payment history) that is being disputed is of particular interest when considering the impact of the borrower’s overall credit profile.

The underwriter is responsible for determining whether the borrower’s explanation is reasonable and/or whether additional documentation (such as cancelled checks) is necessary to disprove the adverse information. Underwriters are not required to investigate disputed medical tradelines.

If a disputed account has no late payments, it can be disregarded.

Authorized User Accounts
Credit report tradelines that list a borrower as an authorized user cannot be considered in the underwriting decision, except as outlined below.

An authorized user tradeline may be considered if:

• Another borrower in the mortgage transaction is the owner of the tradeline; or
• The borrower can provide written documentation (e.g., canceled checks, payment receipts, etc.) that he or she has been the actual and sole payer of the monthly payment on the account for at least 12 months preceding the date of the application.

Frozen Credit Reports
Credit reports with bureaus identified as “frozen” are required to be unfrozen and a current credit report with all bureaus is required.

Non-Traditional Credit
Non-traditional credit is not allowed.

Revolving

• Monthly payments on revolving accounts with a balance must be included in the DTI. If the credit report does not reflect a payment, use the greater of 5% of the balance or $10.
• If a revolving account balance is to be paid off at or prior to closing, a monthly payment on the current outstanding balance does not need to be included in the DTI. These accounts do not need to be closed.
• No revolving account can currently be in forbearance.
• Borrowers must be out of forbearance for 12 months with the most recent 12 months payments paid on time.

Installment

• Installment debts being paid off do not need to be included in the DTI.
• Installment debts that have 10 payments or less remaining do not need to be included in the DTI ratio, unless the obligation significantly affects the borrower’s ability to meet their credit obligations.
• Lease payments, regardless of the number of payments remaining, must be included in the DTI.
• No installment tradeline can currently be in forbearance.
• Borrower must be out of forbearance for 12 months with the most recent 12 months payments paid on time.

Deferred Installment Debt
Deferred installment debts must be included in borrower’s recurring monthly debt obligations. For deferred installment debts other than student loans, if the borrower’s credit report does not show the payment payable at the end of the deferment period, a payment letter or other acceptable documentation must be provided so that a monthly payment can be determined and used in calculating the borrower’s total monthly obligations.

Note: Borrower cannot have been in forbearance in the past 12 months.

Mortgage/Rent
Mortgage – 0x30 late payments in the past 12 months as evidenced by:

• Credit Report;
• Standard Mortgage Verification;
• Loan Payment history from the servicer; or
• The borrowers cancelled checks or bank statements for the last 12 months.

Rent – 0x30 late payments in the past 12 months as evidenced by:

• The borrowers cancelled checks or bank statements for the last 12 months; or
• Credit supplement or Direct Verification of Rent from the landlord.
• If the landlord is a private party or if there is a relationship between borrower(s) and landlord 12 months cancelled checks will also be required.
• If the borrower is living rent free with family, provide a detailed Letter of Explanation (LOE) signed/dated by the borrower(s).

Note: Borrower may not have had any forbearance on mortgage or rent in the past twelve months. They must be out of forbearance and in good standing (no lates) in the past 12 months.

Debts Paid by Others
Certain debts can be excluded from the borrower’s recurring monthly obligations and the DTI ratio:

• Non-mortgage debt – may be excluded from the borrower’s recurring monthly obligations if another party is making the payments. To exclude the debt, the following requirements must be met:
• 12 months cancelled checks or bank statements showing the other party is making the payments,
• There are no delinquencies in the most recent 12 months, and
• The party making the payments is obligated on the debt.
• Mortgage debt – may be excluded from the borrower’s recurring monthly obligations if another party is making the payments. To exclude the debt, the following requirements must be met:
• 12 months cancelled checks or bank statements to verify the other party is making the payments,
• The party making the payments is obligated on the mortgage debt,
• There are no delinquencies in the most recent 12 months, and
• The borrower is not using rental income from the applicable property to qualify.

Loans Secured by Financial Assets

• When a borrower uses their financial assets (401k’s, life insurance, CD’s, etc.) as security for a loan, the borrower has a contingent liability. A payment does not have to be included in the borrower’s recurring obligations if we obtain a copy of the applicable loan instrument or other documentation to show the borrower’s financial asset is collateral for the loan.

Student Loans
For all student loans, whether deferred, in forbearance, or in repayment, a monthly payment must be included in the borrower’s monthly debt obligation.

• If a monthly payment is provided on the credit report, that amount indicated for the monthly payment may be used for qualifying.
• If the credit report does not provide a monthly payment or if it shows $0 as the monthly payment, the monthly payment may be one of the options below:
• If the borrower is on an income-driven payment plan, the lender may obtain student loan documentation to verify the actual monthly payment is $0. The lender may then qualify the borrower with a $0 payment.
• For deferred loans or loans in forbearance:
• 1% of the outstanding loan balance (even if this amount is lower than the actual fully amortizing payment) or
• A fully amortizing payment using the documented loan repayment terms.

Significant Derogatory Credit Events – Waiting Periods

• Bankruptcy Chapter 7, 11, 13 – None allowed in the last 7 years.
• Foreclosure – None allowed in the last 7 years.
• Pre-foreclosure Sale (Short Sale) / Deed-in-lieu / Charge-Off of a Mortgage Account – None allowed in the last 7 years.
• Loan Modification – None allowed in the last 7 years, unless the modification was lender initiated and documented proof that it was not a distressed situation, and no principal balance was forgiven.

See Standard Underwriting Guidelines for additional information.

Requirements for Re-establishing Credit
After a bankruptcy, foreclosure, deed-in-lieu of foreclosure, pre-foreclosure sale or charge off of a mortgage account, the borrower’s credit will be considered re-established if all of the following are met:

• The waiting period is met,
• Meets the minimum credit score requirements based on the parameters of the loan,
• Has re-established an acceptable credit history,
• Meets our minimum tradeline requirements, and
• The borrower(s) must have traditional credit. Non-traditional credit is not acceptable.

Past-Due, Collections, Charge-offs of Non-Mortgage Accounts, Judgments, and Liens
Accounts reported as past due (not reported as collection accounts) must be brought current.

Delinquent credit – including taxes, judgments, charge-offs of non-mortgage accounts, tax liens, mechanics or materialmen’s liens, and liens that have the potential to affect lien position or diminish the borrower’s equity must be paid off prior to closing. Non-medical collection accounts and non-medical charge-offs on non-mortgage accounts that exceed $250 individually or $1000 in total must be paid in full at or prior to closing.

Medical collection accounts are not required to be paid off.

Federal/State Tax Installment Agreements
When a borrower has entered into an installment agreement to repay delinquent federal and/or state income taxes, the underwriter may include the monthly payment amount as part of the borrower’s monthly debt obligations (in lieu of a payoff requirement) if:

• There is no indication that a Notice of Federal or State Tax Lien has been filed against the borrower in the county in which the subject property is located; and
• The underwriter obtains the following documentation:
• An approved installment agreement with the terms of repayment, including the monthly payment amount and the total amount due; and
• Evidence the borrower is current on the payments associated with the tax installment plan. Acceptable evidence includes the most recent payment reminder reflecting the last payment amount and date and the next payment amount owed and due date. At least one payment must be made prior to closing.
• If any of the above conditions are not met, the borrower must pay off the outstanding balance due under the installment agreement.

Note: Payment plans must not exceed 1 year of taxes and are only acceptable as long as the borrower does not have any other active tax payment plans.

Credit Inquiries
When the credit report indicates that recent inquiries took place within the last 120 days, a letter of explanation from borrowers will be required. The underwriter must confirm that the borrower has not obtained any additional credit that is not reflected in the credit report or the mortgage application. If additional credit was obtained, a verification of that debt must be provided and the borrower must be qualified with the monthly payment.

Reserve Requirements

• Beyond the minimum reserve requirements and in an effort to fully document the borrowers’ ability to meet their obligations, borrowers should disclose and verify all other liquid assets.
• First time homebuyers (borrowers who have not owned a property in the last 3 years) require reserves of 12 months PITIA.
• All financed 1–4-unit properties, other than the subject property, require an additional 4 months reserves for each property, based on the PITIA of the additional property.

Asset Documentation
Monthly bank statements must be dated within 45 days of the initial loan application date.

Quarterly bank statements must be dated within 90 days of the initial loan application date. The underwriter must confirm that the funds in the account have not been transferred to another asset account that is verified with more current documentation.

Checking and Savings Accounts

• The 2 most recent, consecutive months statements for each account are required or 1-month Bank Statement and a VOD covering 60-day average balance.
• Statements must be reviewed for recurring payments of possible additional debt that would need to be explained and/or included in qualifying.

Marketable Securities

• The 2 most recent, consecutive months stock/securities account statements are required.
• 70% of value of accounts can be considered in the calculation of assets available for closing cost and reserves.
• Non-vested accounts are not eligible for use as down payment or reserves.
• Margin account loans and/or pledged asset balances must be deducted.

Retirement Accounts

• Most recent retirement account statement covering a minimum 2-month period.
• Evidence of liquidation is required when funds are used for down payment or closing costs.
• 70% of vested value of retirement accounts, after reduction of any outstanding loans, may be considered toward the required reserves if the borrower is of retirement age (over 59.5 years old).
• 60% of vested value of retirement accounts, after reduction of any outstanding loans, may be considered toward the required reserves if the borrower is not of retirement age (less than 59.5 years old).
• Terms of Withdrawal are required to use for reserves. Retirement accounts that do not allow any type of withdrawal are ineligible for use as reserves.

Large Deposits

• When depository assets are used to support required funds, document that any deposits exceeding 50% of the total monthly qualifying income are from an acceptable source.
• A letter of explanation will be required if funds are not readily identifiable.
• At underwriter discretion, verified funds may be reduced by the amount of any undocumented large deposit with an acceptable letter of explanation and determination that the deposit is not from additional debt. Remaining verified funds must be sufficient for required funds to close and reserves..

Borrowed Funds Secured by an Asset
Borrowed funds that are secured by an asset represent a return of equity. Because of this, they may be used for down payment, closing costs and reserves. Assets that may be used to secure funds include certificates of deposit, stocks, bonds, 401K accounts, real estate and insurance policies.

Business Funds

• Business funds may be used for down payment and/or closing costs, not for purposes of calculating reserves. The following will be required:
• CPA letter to confirm withdrawal will have no impact on business or underwriter to perform a business cash flow analysis to confirm that the withdrawal of funds for the transaction will not have a negative impact on the business.
• Borrower must have 100% access to the funds.
• The borrower must be the sole proprietor or 100% owner of the business (or all borrowers combined own 100%).

Restricted Stock
Unvested restricted stock may not be used.

Stock Options
Stock options may be used for down payment, closing costs and reserves. The following requirements must be met:

• Stock options must be vested, exercisable and publicly traded.
• Provide account statements covering a 2-month period, that verify the borrower’s ownership, and the value of the assets.
• If the borrower does not receive stock/security account statements:
• Provide evidence the security is owned by the borrower, and
• Verify value using current stock prices from a financial publication or website.
• Evidence of liquidation and receipt will be required if using for funds to close.
• When using for reserves only 70% of the value may be used.

Foreign Assets

• Foreign assets may be used for down payment.
• All documents of a foreign origin must be completed in English or the document originator must provide a translation, attached to each document, and ensure the translation is complete and accurate.
• All foreign currency amounts must be converted to U.S. dollars and deposited into a U.S. bank account.
• Foreign assets cannot be used for reserves. Reserves must be seasoned U.S. funds.

Sale of Personal Assets

• Proceeds from the sale of personal assets are an acceptable source of funds provided the individual purchasing the asset is not a party to the transaction.
• Documentation requirements:
• Verification of the borrower’s ownership of the asset,
• The value of the asset as determined by an independent and reputable source,
• Document the transfer of ownership of the asset by either a bill of sale or a statement from the purchaser, and
• The borrower’s receipt of the sale proceeds from documents such as deposit slips, bank statements, or copies of the purchaser’s cancelled check or an equivalent source.

Sale Proceeds from Real Estate Owned
If the proceeds from pending sale of the borrower’s departing residence or other owned property are needed for the down payment and closing costs, the underwriter must verify the source of funds by obtaining a copy of the Final Settlement Statement or Final Closing Disclosure verifying sufficient net cash proceeds to consummate the purchase of the subject property.

Bridge Loans
Bridge (or swing) loans are a form of second trust deed secured by the borrower’s present home, which is usually for sale. By using funds from a bridge loan, the borrower can close on a new house before selling his or her existing house. This type of financing is acceptable if the purchaser has the ability to carry the payment on the new home, payment on other obligation and the payment for the bridge loan. The bridge loan cannot cross collateralize the new property (subject).

Note: If the repayment schedule for the bridge loan is not monthly, it must be converted to a monthly amount for qualifying purposes. Finally, the new home or transaction cannot be used as additional collateral for the bridge loan.

Trust Accounts
Funds disbursed from a borrower’s trust account are an acceptable source for down payment, closing costs and reserves provided the borrower has immediate access to the funds. To document trust account funds, the underwriter must:

• obtain written documentation of the value of the trust account from either the trust manager or the trustee, and
• document the conditions under which the borrower has access to the funds and the effect, if any, that the withdrawal of the funds will have on trust income used in qualifying the borrower for the mortgage loan.

Rent Credit with Option to Purchase
Rent credit for option to purchase is an acceptable source of funds toward the down payment or minimum borrower contribution. Borrowers are not required to make a minimum borrower contribution from their own funds in order for the rental payments to be credited towards the down payment.

Credit for the down payment is determined by calculating the difference between the market rent and the actual rent paid for the last 12 months. The market rent is determined by the appraiser in the appraisal for the subject property. The underwriter must obtain the following documentation:

• A copy of the rental/purchase agreement evidencing a minimum original term of at least 12 months must clearly state the monthly rental amount and specify the terms of the lease.
• Copies of the borrower’s canceled checks or money order receipts for the last 12 months evidencing the rental payments.
• Market rent as determined by the subject property appraisal form 1007 (Rental Survey).

Virtual Currency

• Virtual currency may not be used for reserves or for the deposit on the sales contract (EMD).
• Virtual currency may only be used for down payment, closing costs and reserves if the funds have been properly documented, exchanged into U.S. dollars, and deposited into a U.S. depository account.
• Must be acceptably documented with the 2 most recent, consecutive months statements reflecting seasoned funds and transaction history of buying and selling. Any large deposits must be sourced and documented. The statements must identify the borrower, account number and institution that holds the virtual currency.

Unacceptable Funds

• Cash-on-hand
• 1031 Exchange
• Sweat Equity
• Unsecured loans (i.e., signature loans, lines of credit, credit cards and overdraft protection on checking accounts)
• Cash-out proceeds from subject property cannot be used for reserves

Gift Funds – (PRIMARY RESIDENCE 1 & 2-UNIT PROPERTIES ONLY)
A borrower of a mortgage loan secured by a principal residence may use funds received as a personal gift from an acceptable donor. Gift funds may be used to fund all or part of the down payment and closing costs subject to minimum borrower contribution requirements.

Acceptable Transactions

• Purchase
• Rate and Term Refinance.

Acceptable Donors

• A relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or
• A person that shares a familial relationship with the borrower defined as a fiancée, fiancé, domestic partner or relative of the domestic partner.

Note: The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.

Minimum Borrower Contribution Requirement from Borrower’s Own Funds

• LTV, CLTV, or HCLTV Ratio less than 70% for loan amounts less than or equal to $766,550: A minimum borrower contribution from the borrower’s own funds is not required. All funds needed to complete the transaction can come from a gift.
• LTV, CLTV, or HCLTV Ratio 70% - 90%: The borrower must make a 5% minimum contribution from their own funds.
• Loan amounts greater than $766,550: The borrower must make a 5% minimum contribution from their own funds.
• Gift Funds may not be used to meet reserve requirements.

Documentation Requirements

• Gifts must be evidenced by a signed gift letter.
• The gift letter must:
• specify the dollar amount of the gift,
• specify the date the funds were transferred,
• include the donor’s statement that no repayment is expected, and
• include the subject property address, the donor’s name, address, telephone number and relationship to the borrower.

Verifying Donor Availability of Funds and Transfer of Gift Funds
The underwriter must verify that sufficient funds to cover the gift are either in the donor’s account or have been transferred to the borrower’s account. Acceptable documentation includes the following:

• A copy of the donor’s check and the borrower’s deposit slip,
• A copy of the donor’s withdrawal slip and the borrower’s deposit slip,
• Evidence of the electronic transfer of funds from the donor’s account to the borrower’s account or to the closing agent,
• A copy of the donor’s check to the closing agent, or
• A settlement statement showing receipt of the donor’s check.

When the funds are not transferred prior to settlement, the underwriter must document that the donor gave the closing agent the gift funds in the form of an electronic transfer, certified check, a cashier’s check, or other official check.

Gift of Equity
A gift of equity is acceptable for principal residence purchase transactions. The acceptable donor and minimum borrower contribution requirements apply.

Documentation Requirements

• Acceptable gift letter; and
• The settlement statement listing the gift of equity.

Stability of Employment and Income
The following is required to establish stability of employment and income for borrowers whose income is used to qualify:

• A minimum of 2 years employment and income history.
• Stable monthly income is the borrower’s verified gross monthly income from all acceptable and verifiable sources that can reasonably be expected to continue for at least the next 3 years. For each income source used to qualify the borrowers, the underwriter must determine that both the source and the amount of the income are stable.
• A 2-year history of receiving income is required in order for the income to be considered stable and used for qualifying. When the borrower has less than a 2-year history of receiving income, the underwriter must provide a written analysis to justify the determination that the income that is used to qualify the borrower is stable. While the sources of income may vary, the borrower should have a consistent level of income despite changes in the sources of income.
• For borrowers who have less than a 2-year employment and income history, the income may be used for qualifying income if the mortgage file contains documentation to support that the borrower was either attending school, in a training program or the military immediately prior to their current employment history. School transcripts or discharge papers must be provided to document.
• Income may not be used for qualification purposes if it comes from any source that cannot be verified, is not stable, or will not continue.

Declining Income

• When the borrower has declining income, the most recent 12 months should be used.
• In certain cases, an average of income for a longer period may be used when the decline is related to a one-time capital expenditure and proper documentation is provided.
• In all cases, the decline in income must be analyzed to determine if the rate of decline would have a negative impact on the continuance of income and the borrower’s ability to repay.
• The employer or the borrower should provide an explanation for the decline.
• The underwriter will determine if the income can be used and should provide a written justification for including the declining income in qualifying.

Gaps in Employment:

• Gaps in employment in excess of 30 days during the past 2 years require a satisfactory letter of explanation.
• Gaps in employment in excess of 1 year require the following:
• A satisfactory letter of explanation,
• Borrower to be on current job for a minimum of 6 months, and
• Borrower to have a 2-year work history prior to the gap which must be documented with employment verification(s), W-2’s or year-end paystubs.

Verbal Verification of Employment Requirements

• A verbal verification of employment (VVOE) confirming the borrower’s employment status is required for all wage income borrowers whose income is used for qualification purposes.
• The VVOE must be completed prior to funding.
• Verify borrower has not received notice of termination by employer.
• The VVOE must contain the following information:
• Date of contact,,
• Borrower’s date of employment,.
• Borrower’s employment status and job title,
• Name, phone number, and title of contact person at employer,
• Name of employer,
• Name and title of person contacting the employer,
• Method and source used to obtain the phone number, and
• Must ask if borrower has received any notice of future termination.

Note: Third-party vendor verification must evidence that the information in the vendor’s database was no more than 35 days old as of the note date.


• Self-Employed confirmation must include:
• Verification of self-employed businesses by a third-party source is required prior to funding.
• Verification of the existence of the borrower’s business from a third party, such as a CPA, regulatory agency, or applicable licensing bureau. A borrower’s website is not acceptable as third-party verification.
• Listing and address of the borrower’s business using a telephone book, internet, or directory assistance.
• Name and title of the person completing the verification.
• Borrower may be asked to explain the details of their business and how income is derived.

General Income Documentation Requirements:

Paystubs
Paystubs must meet the following requirements:

• Clearly identify the borrower as the employee.
• Show the borrower’s current pay period and year-to-date earnings.
• If the borrower is paid hourly, the number of hours must be shown on the paystub.
• Paystubs must be computer generated or additional conditions may apply.
• Paystubs issued electronically via email or downloaded from the internet must show the URL address, date, and time printed, and identifying information on place of origin and/or author of the documentation.
• Paystubs must be dated no earlier than 30 days prior to the initial loan application date.

W-2 Forms

• W-2 forms must be complete and be a copy provided by the employer.

Written Verification of Employment

• A written Verification of Employment (VOE) may be required for a borrower’s income sourced from commissions, bonus, overtime, or other income when the income detail is not clearly documented on W-2 Forms or paystubs. The Written VOE must include the following:
• Borrower’s date of employment,
• Borrower’s employment status and job title,
• Name, phone number and title of person completing the VOE,
• Name of employer,
• Base pay amount and frequency,
• Additional salary information, which itemizes bonus, commission, overtime, or other variable income, if applicable,
• The WVOE must be sent directly to the employer to the attention of the personnel department/HR, and
• The WVOE must be returned directly from the employer to the brokers / lender’s address, fax, or email.

Note: Written VOEs cannot be used as a sole source for verification of employment, paystubs and W-2s are still required.

Tax Returns
See Specific Income Documentation section for requirements.

Specific Income Documentation Requirements:

Salaried
An earnings trend must be established and documented. Large increases in salary over the previous 2 years must be explained and documented.

• Year-to-date paystubs covering a 30-day period and dated within 30 days of the application date
• W-2s for prior 2 years

Variable Income
An earnings trend must be established and documented. Stable to increasing income should be averaged over a minimum 2-year period. Declining income must be explained by the employer/borrower and a written determination by the underwriter must be provided if the declining income is used for qualifying.

• Year-to-date paystubs covering a 30-day period and dated within 30 days of the application date
• W-2s for prior 2 years
• Written verification of employment may be required at underwriter discretion

Hourly and Part-Time Income
Borrower must have worked the part time job uninterrupted for the past 2 years and plans to continue. If part-time income shows a continual decline, written sound rationalization for using the income to qualify must be provided or the income should not be used.

• Year-to-date paystubs covering a 30-day period and dated within 30 days of the application date
• W-2s for prior 2 years
• Written verification of employment may be required at underwriter discretion

Commission
Commission income should be averaged over the previous 2 years. If the commission income shows a continual decline, written sound rationalization for using the income to qualify must be provided or the income should not be used.

• Year-to-date paystubs covering a 30-day period and dated within 30 days of the application date
• W-2s for prior 2 years
• Written verification of employment may be required at underwriter discretion

See Standard Underwriting Guidelines for additional information.

Overtime & Bonus
An earnings trend for overtime and bonus must be established and documented. The income should be averaged over the previous 2 years, but a period of more than 2 years may need to be used in calculating the average overtime and bonus income if the income varies significantly from year to year. If either type of income shows a continual decline, written sound rationalization for using the income to qualify must be provided or the income should not be used.

• Year-to-date paystubs covering a 30-day period and dated within 30 days of the application date
• W-2s for prior 2 years
• Written verification of employment may be required at underwriter discretion

See Standard Underwriting Guidelines for additional information.

Seasonal Employment

• Seasonal income may be used to qualify the borrower, if the underwriter documents that the borrower:
  • Has at least a 2-year history of seasonal employment and income.
  • Expects to be rehired the next season.
• Seasonal employment includes, but is not limited to:
• Umpiring baseball games in the summer; or
• Working at a department store during the holiday shopping season.

Required Documentation:

• Year-to-date paystubs covering a 30-day period and dated within 30 days of the application date if applicable
• W-2s for prior 2 years
• Written verification of employment

Employment Offers or Contracts
If the borrower is scheduled to begin employment under the terms of an employment offer or contract, the underwriter may use one of the options outlined below:

• Option 1 - Loan is Funded After the Borrower Starts Employment:
• The underwriter must obtain an executed copy of the borrower’s non-contingent offer or contract for future employment and anticipated income.
• Verbal verification of employment that confirms active employment status.
• The underwriter must obtain a paystub from the borrower that includes sufficient information to support the income used to qualify the borrower based on the offer or contract. (The paystub may be obtained post-closing if it is not received by the borrower prior to funding).

Note: The borrower cannot be employed by a family member or by an interested party to the transaction.


• Option 2 - Loan is Funded Prior to Borrower Starting Employment
This option is limited to loans that meet the criteria below:

• Purchase transaction
• Principal residence
• 1-unit property
• The borrower is not employed by a family member or by an interested party to the transaction, and
• The borrower is qualified using only fixed base income.
• The underwriter must obtain and review the borrower’s offer or contract for future employment. The employment offer or contract must:
• Clearly identify the employer and the borrower, be signed by the employer, and be accepted and signed by the borrower,
• Clearly identify the terms of employment, including position, type, and rate of pay, and start date, and
• Be non-contingent. If conditions of employment exist, the underwriter must confirm prior to closing that all conditions of employment are satisfied either by verbal verification or written documentation. This confirmation must be noted in the mortgage loan file.
• The employment start date as shown on the employment offer or contract must be within 90 days of the note date.
• The underwriter must document, in addition to the amount of reserves required by the transaction, one of the following:
• Financial reserves sufficient to cover principal, interest, taxes, insurance, and association dues (PITIA) for the subject property for 6 months; or
• Financial reserves sufficient to cover the monthly liabilities included in the debt-to-income ratio, including the PITIA for the subject property, for the number of months between the note date and the employment start date, plus 1.

Note: A union member who works in an occupation that results in a series of short-term job assignments (such as a skilled construction worker, longshoreman, or stagehand), the union may provide the executed employment offer or contract for future employment.

Temporary Leave
Temporary leave from work is generally short in duration and for reasons of maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or the borrower’s employer. Borrowers on temporary leave may or may not be paid during their absence from work.

If the underwriter is made aware that a borrower will be on temporary leave at the time of closing of the mortgage loan and that borrower’s income is needed to qualify for the loan, the underwriter must determine allowable income and confirm employment per requirements below:

• The borrower’s employment and income history must meet standard eligibility requirements.
• The borrower must provide written confirmation of his or her intent to return to work.
• The underwriter must document the borrower’s agreed upon date of return by obtaining, either from the borrower or directly from the employer (or a designee of the employer when the employer is using the services of third party to administer employee leave), documentation evidencing such date that has been produced by the employer or by a designee of the employer.
• Example of the documentation may include, but are not limited to, previous correspondence from the employer or designee that specifies the duration of leave or expected return date or a computer printout from an employer or designee’s system of record. (This documentation does not have to comply with the Allowable Age of Credit Document guideline).
• The underwriter must receive no evidence or information from the borrower’s employer indicating that the borrower does not have the right to return to work after the leave period.
• The underwriter must obtain a verbal verification of employment. If the employer confirms the borrower is currently on temporary leave, the underwriter must consider the borrower employed.
• The underwriter must verify the borrower’s income as per requirements below:
• The amount and duration of the borrower’s “temporary leave income,” which may require multiple documents or sources depending on the type and duration of the leave period; and
• The amount of the “regular employment income” the borrower received prior to the temporary leave. Regular employment income includes, but is not limited to, the income the borrower receives from employment on a regular basis that is eligible for qualifying purposes (for example, base pay, commission, and bonus).
• Income verification may be provided by the borrower, by the borrower’s employer, or by a third-party employment verification vendor.
• Requirements for Calculating Income Used for Qualifying:
• If the borrower will return to work as of the first mortgage payment date, the underwriter can consider the borrower’s regular employment income for qualifying.
• If the borrower will not return to work as of the first mortgage payment date, the underwriter must use the lesser of the borrower’s temporary leave income (if any) or regular employment income. If the borrower’s temporary leave income is less than his or her regular employment income, the underwriter may supplement the temporary leave income with available liquid financial reserves.
• Supplemental Income Calculation:
• Supplemental income amount = available liquid reserves divided by the number of months of supplemental income.
• Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing cost, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount.
• Number of months of supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her employment income, rounded up to the next whole number.
• After determining the supplemental income, the underwriter must calculate the total qualifying income.
• Total qualifying income = supplemental income plus the temporary leave income.
• The total qualifying income that results may not exceed the borrower’s regular employment income.
Example:

Regular income amount: $6000 per month
Temporary leave income: $2000 per month
Total verified liquid assets: $30,000
Funds needed to complete the transaction: $18,000
Available liquid reserves: $12,000
First payment date: July 1
Date borrower will begin receiving regular employment income: Nov. 1
Supplemental income: $12,000/4 = $3000
Total qualifying income: $3000 + $2000 = $5000

Note: These requirements apply if the underwriter becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the underwriter must not ask if they intend to take leave in the future.

Borrowers Employed by Family

• Year-to-date paystubs covering a 30-day period and dated within 30 days of the application date
• W-2s for prior 2 years
• Personal tax returns for prior 2 years
• Borrower’s potential ownership in the business must be addressed

Self-Employed
Self-employed borrowers are defined as those individuals who have 25% or greater ownership interest or receive a 1099 statement to document income.

Sole Proprietorship (Schedule C & Schedule F)

• Most recent 2 years personal tax returns including all schedules and statements
• Most recent 2 years 1099s (if applicable)
• 2 years IRS tax transcripts
• Current Year-to-date P & L no older than 90 days from Note date
• Most recent 3 months business bank statements covering the latest 3 months on the P & L, to verify a deposit (income) trend that supports the P & L and income used to qualify
• See the IRS Form 4506-C / Tax Transcripts section for additional requirements for unfiled prior year returns

Partnership and S-Corporations

• Most recent 2 years personal tax returns including all schedules and statements
• Most recent 2 years K-1s showing ownership percentage
• Most recent 2 years business tax returns (1065/1120S) including all schedules are required if the borrower has an ownership percentage ≥ 25%
• Most recent 2 years W-2s (if applicable)
• YTD Paystubs (if applicable)
• 2 years IRS tax transcripts for personal and business tax returns
• Current Year-to-date P & L no older than 90 days from Note date
• Most recent 3 months business bank statements covering the latest 3 months on the P & L, to verify a deposit (income) trend that supports the P & L and income used to qualify
• See the IRS Form 4506-C / Tax Transcripts section for additional requirements for unfiled prior year returns

Corporations

• Earnings may not be used unless the borrower owns 100% of the business
• Most recent 2 years personal tax returns including all schedules and statements
• Most recent 2 years business tax returns (1120) including all schedules are required if the borrower has an ownership percentage ≥ 25%
• Most recent 2 years W-2s
• YTD Paystubs (if applicable)
• 2 years IRS tax transcripts for personal and business tax returns
• Current Year-to-date P & L no older than 90 days from Note date
• Most recent 3 months business bank statements covering the latest 3 months on the P & L, to verify a deposit (income) trend that supports the P & L and income used to qualify
• See the IRS Form 4506-C / Tax Transcripts section for additional requirements for unfiled prior year returns

Schedule K-1
For borrowers who have less than 25% ownership of a partnership, S corporation, or limited liability company (LLC), ordinary income, net rental real estate income, and other net rental income reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1 may be used in qualifying the borrower provided the underwriter can confirm the business has adequate liquidity to support the withdrawal of earnings. If the Schedule K-1 provides this confirmation, no further documentation of business liquidity is required.

The following provides verification of income requirements for Schedule K-1 borrowers with less than 25% ownership of a partnership, an S corporation, or an LLC.

• If the Schedule K-1 reflects a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify, then no further documentation of access to the income or adequate business liquidity is required. The Schedule K-1 income may then be included in the borrower’s cash flow.
• If the Schedule K-1 does not reflect a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify, then the underwriter must confirm the business has adequate liquidity to support the withdrawal of earnings. The underwriter may use discretion in the method used to confirm the business has adequate liquidity.
• If the borrower has a 2-year history of receiving “guaranteed payments to the partner” from a partnership or an LLC, these payments can be added to the borrower’s cash flow.
• An exception to the 2-year requirement of receiving “guaranteed payments to the partner” is if a borrower has recently acquired nominal ownership in a professional services partnership (for example, a medical practice or a law firm) after having an established employment history with the partnership. In this situation, the underwriter may rely on the borrower’s guaranteed compensation. This must be evidenced by the borrower’s partnership agreement and further supported by evidence of current year-to-date income.

Documentation Requirements

• Most recent 2 years signed personal tax returns
• Most recent 2 years K-1s

Alimony, Child Support and Separate Maintenance Payments
The following are verification requirements:

• Document that the alimony, child support and/or separate maintenance payments will continue for a minimum of 3 years after the date of funding with the following:
• A copy of final divorce decree, signed court order or legally binding separation agreement that verifies the monthly amount and duration of the award.
• Document no less than 6 months of the borrower’s most recent regular receipt of the full payments.

Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid.

Review the payment history to determine its suitability as stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for 6 months or longer. Income received for less than 6 months is considered unstable and may not be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.

Note: If a borrower who is separated does not have a separation agreement that specifies alimony or child support payments, the underwriter should not consider any proposed or voluntary payments as income.

Auto Allowance

• For an automobile allowance to be considered as acceptable stable income, the borrower must have received payments for at least 2 years. The underwriter must add the full amount of the allowance to the borrower’s monthly income, and the full amount of the lease or financing expenditure to the borrower’s monthly debt obligations.

Boarder Income

• Income from a boarder in the borrower’s principal residence or second home is not considered acceptable stable income with the exception of the following:
• When a borrower with disabilities receives rental income from a live-in personal assistant, whether or not the individual is a relative of the borrower, the rental payments can be considered as acceptable stable income in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage loan.
• Personal assistants typically are paid by the Medicaid Waiver funds and include room and board, from which rental payments are made to the borrower.
• The following are verifications requirements for income from boarders:
• Obtain documentation of the boarder’s history of shared residency (such as a copy of a driver’s license, bills, bank statements, or W-2 forms) that shows the boarder’s address as being the same as the borrower’s address.
• Obtain documentation of the boarder’s rental payments for the most recent 12 months.

Capital Gains Income

• Income received from capital gains is generally a one-time transaction; therefore, it should not be considered as part of the borrower’s stable monthly income. However, if the borrower needs to rely on income from capital gains to qualify, the income must be verified as stated below:
• Document a 2-year history of capital gains income by obtaining copies of the borrower’s federal income tax returns for the most recent 2 years, including IRS Form 1040, Schedule D.
• Develop an average income from the last 2 years, and use the averaged amount as part of the borrower’s qualifying income as long as the borrower provides current evidence that he or she owns additional property or assets that can be sold if extra income is needed to make future mortgage loan payments.
• Due to the nature of this income, current receipt of the income is not required to comply with the Allowable Age of Credit Documents policy. However, documentation of the asset ownership must be in compliance with the Allowable Age of Credit Documents policy.

Note: Capital losses identified on IRS Form 1040, Schedule D, do not have to be considered when calculating income or liabilities, even if the losses are recurring.

Disability Income - Long Term
The following are verification requirements for long-term disability income. This does not apply to disability income that is received from the Social Security Administration.

• Obtain a copy of the borrower’s disability policy or benefits statement from the benefits payer (insurance company, employer, or other qualified disinterested party) to determine:
• The borrower’s current eligibility for the disability benefits,
• The amount and frequency of the disability payments, and
• If there is a contractually established termination or modification date.
• Generally, long-term disability will not have a defined expiration date and must be expected to continue. The requirement for re-evaluation of benefits is not considered a defined expiration date.
• If a borrower is currently receiving short-term disability payments that will decrease to a lesser amount within the next 3 years because they are being converted to longterm benefits, the lower amount must be used to qualify.

Foreign Income
Foreign Income is income that is earned by a borrower who is employed by a foreign corporation or a foreign government and is paid in foreign currency. Borrowers may use foreign income to qualify if the following requirements are met:

• Standard documentation requirements based on the source and type of income.
• Most recent 2 years U.S. federal income tax returns that include foreign income.
• All documents of a foreign origin must be completed in English or the document originator must provide a translation, attached to each document, and ensure the translation is complete and accurate.

Foster Care Income
Income received from a state or county sponsored organization for providing temporary care for one or more children may be considered acceptable stable income if the following requirements are met:

• Verify the foster-care income with letters of verification from the organizations providing the income.
• Document that the borrower has a 2-year history of providing foster-care services. If the borrower has not been receiving this type of income for 2 full years, the income may still be counted as stable if:
• The borrower has at least 12-month history of providing foster-care services, and
• The income does not represent more than 30% of the total gross income that is used to qualify for the mortgage loan.

Housing or Parsonage Allowance

• Housing or parsonage allowance may be considered qualifying income if there is documentation that the income has been received for the most recent 12 months and the allowance is likely to continue for a minimum of 3 years after the date of funding.
• The housing allowance may be added to income but may not be used to offset the monthly housing payment.

Interest/Dividend Income
The following are verification requirements for interest and dividends income.

• Verify the borrower’s ownership of the assets on which the interest and dividend income was earned. Documentation of asset ownership must be in compliance with the Allowable Age of Credit Documents.
• Document a 2-year history of the income, as verified by:
• Copies of the borrower’s federal income tax returns, or
• Copies of account statements.
• Develop an average of the income received for the most recent 2 years.
• Subtract any assets used for down payment or closing costs from the borrower’s total assets before calculating expected future interest or dividend income.
• Verify the income is likely to continue for a minimum of 3 years after the date of funding.

Non-Taxable Income

• The underwriter should give special consideration to regular sources of income that may be non-taxable, such as child support payments and Social Security benefits.
• Tax returns must be provided to confirm income is non-taxable.
• If the income is verified to be non-taxable and the income and its tax-exempt status are likely to continue, the underwriter may gross up the non-taxable portion by 25%.

Note: If the borrower is not required to file a Federal Tax Return, tax transcripts will be required to verify no record and the full income may be grossed-up 25%.

Note Income
The following are verification requirements for notes receivable income.

• Verify the income is expected to continue for a minimum of 3 years after the date of funding.
• Obtain a copy of the note to establish the amount and length of payments.
• Document regular receipt of income for the most recent 12 months.
• Payments on a note executed within the past 12 months, regardless of the duration, may not be used as stable income.

Retirement Income (Pension, Annuity, and IRA Distributions)
Document regular and continued receipt of the income, as verified by:

• Letters from the organization providing the income,
• Copies of retirement award letters,
• Copies of federal income tax returns,
• IRS W-2 or 1099 forms, or
• Proof of current receipt.

Note: Proof of 3 years continuance may be required at underwriter discretion.

If retirement income is paid in the form of a distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for a minimum of 10 years after the date of funding. In addition:

• The borrower must have unrestricted access to the accounts without penalty.
• If the assets are in the form of stocks, bonds, or mutual funds, 70% of the value (remaining after any applicable costs for the subject transaction) must be used to determine the number of distributions remaining to account for the volatile nature of these assets.
• Documentation of asset ownership must be in compliance with the Age of Documentation policy.
• If income is from a new distribution, provide documentation to verify a monthly distribution has been set up and the amount of the distribution.
• Evidence of receipt and deposit of the distribution.

Eligible retirement account balances (from 401k, IRA, or Keogh) may be combined for the purpose of determining whether the 10-year continuance requirement is met.
Note: Borrowers on retirement income are considered W-2 borrowers.

Royalty Payment Income
The following are verification requirements for royalty income:

• Royalty contract, agreement, or statement confirming amount, frequency, and duration of the income; and
• Borrower(s) most recent federal income tax return, including the related IRS Form 1040, Schedule E.
• Confirm that the borrower has received royalty payments for at least 12 months and the payments will continue for a minimum of 3 years after date of funding.

Social Security Income
Social Security income from retirement or long-term disability that the borrower is drawing from his or her own account/work record will not have a defined expiration date and must be expected to continue.

Social Security income based on another person's account/work record or from the borrower's own work record, but for the benefit of another (such as a dependent) may also be used in qualifying, provided the underwriter documents payments will continue for a minimum of 3 years after the date of funding.

Document regular receipt of payments, as verified by the following, depending on the type of benefit and the relationship of the beneficiary (self or other) as shown in the table below.

• An SSA Award letter may be used to document the income if the borrower is receiving Social Security payments or if the borrower will begin receiving payments on or before the first payment date of the subject mortgage as confirmed by a recently issued award letter.
• Examples of how a borrower might draw Social Security benefits from another persons’ account/work record and use the income for qualifying.
• A borrower may be eligible for benefits from a spouse, ex-spouse, or dependent parents (the benefit is paid to the borrower on behalf of the spouse, etc.); or
• A borrower may use Social Security income received by a dependent (minor or disabled dependent).

Note: Non-taxable social security income may be grossed up by 125%.

Note: If joint tax returns include income that is not associated with a borrower on the loan transaction, the underwriter must obtain additional documentation supporting the amount of income from the SSA being used in qualifying.

Trust Income
Obtain a copy of the trust agreement, the trustee’s statement, or the trust’s federal income tax returns confirming the amount, frequency, and type of income being received.

Note: A borrower who is also a trustee may not supply the trustee’s statement.

Requirements for Trust with Fixed Payments

• Use the fixed payment amount from the trust agreement as the borrower’s qualifying income, converting it to a monthly amount, as applicable.
• Document current receipt of trust income with 1 month’s bank statement or other equivalent documentation.
• Payments must have been received for 12 months or longer to be considered stable monthly income, unless the following requirements are met:
• the trust documentation reflects fixed payments,
• the borrower is not the grantor, and
• at least 1 payment is received prior to closing.

Requirements for Trust with Variable Payments

• Stable to increasing income should be averaged over a minimum of 24 months. Declining income must be explained by the borrower and a written determination by the underwriter must be provided if the declining income is used for qualifying.
• Document the following:
• A minimum 24-month history of trust income by obtaining copies of the borrower’s federal income tax returns for the most recent 2 years, and
• Current receipt of trust income with one month’s bank statement or other equivalent documentation.

Confirmation of continuance of income for both fixed and variable trust payments must be verified. This confirmation must be based on the type of income received through the trust. For example, if the income from the trust is derived from rental income, then 10-year continuance is not required. However, if the income is a fixed payment derived from a depleting asset, then 10-year continuance after date of funding must be determined.

If any assets of the trust are being used for down payment, closing costs or reserves, those assets must be subtracted from the total amount before determining if the income meets the continuance of income requirements.

If eligible employment-related assets have been liquidated and placed into a trust within 12 months of the loan’s application date, the income calculation requirements in Employment-Related Assets as Qualifying Income apply.

Note: Because some of these income sources have a defined expiration date or allow the depletion of an asset, care must be taken when this is the sole source or the majority of qualifying income. Underwriters must consider the borrower’s continued capacity to repay the loan when the income source expires or the distributions will deplete the asset prior to maturation of the loan. Use of the income will be at underwriter discretion.

Rental Income
Follow Fannie Mae Rental Income Guidelines for all rental properties.

In addition to Fannie Mae guidelines, the following will be required:

• The most recent 2 years federal tax returns including all schedules and statements
• The current lease agreement
• See IRS Form 4506-C / Tax Transcripts section for additional requirements for unfiled prior year returns
• Evidence most recent month’s rent has been received and proof of deposit by the borrower for properties not claimed on the tax returns.

Additional Requirements for Departing Residence

• Underwriters may not consider rental income from a borrower’s principal residence that is being vacated or was vacated in the last 6 months in favor of another principal residence, except under the conditions described below:
• Relocations:
• The borrower is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance.
• A properly executed lease agreement (signed by the borrower and the lessee) of at least one year’s duration after the loan is closed is required.
• Evidence security deposit and first month’s rent has been received and proof of deposit by the borrower.
• Sufficient Equity in Vacated Property:
• The borrower has a loan-to-value ratio of 75 percent or less as determined by comparing the unpaid principal balance to the original sales price of the property, or providing a current residential appraisal (no more than 6 months old).
• A properly executed lease agreement (signed by the borrower and the lessee) of at least one year’s duration after the loan is closed is required.
• Evidence security deposit and first month’s rent has been received and proof of deposit by the borrower.

Note: The appraisal for departing residence may be a Fannie Mae 1004 or exterior-only Fannie Mae 2055; Fannie Mae 1073 or exterior-only Fannie Mae 1075 for condominium units; or Fannie Mae 1025 for multi-family units.

Short Term Rentals

• Short Term rentals are acceptable if there is a full 2-year history reported on the 1040’s.
• Short Term rental income is not allowed when it is on the subject property.

Unacceptable income sources include, but are not limited to, the following:

• Any unverified source
• Income that is temporary or a one-time occurrence
• Rental income received from the borrower’s single-family primary residence or second home
• Retained earnings
• Education benefits
• Allowance income
• Trailing co-borrower income
• Asset Dissipation income
• Employment-Related Assets as Qualifying Income

IRS Form 4506-C Requirements:

• A signed and dated IRS form 4506-C must be completed and processed for all borrowers whose income is used to qualify for the mortgage including retired borrowers and borrowers not required to file tax returns. (W-2s, 1099’s, personal and/or business tax returns as applicable).
• The 4506-C must be processed and tax transcripts obtained to validate against all income documentation in file and the income used for qualifying.
• Tax transcripts must match documentation in the file.
• In cases where the borrower is self-employed an IRS 4506-C must be completely filled out, signed, and processed for each business tax return used in the loan decision and/or included in the loan file.

If the prior year’s Transcripts are unavailable, the following will be required:

For W-2 Borrower(s):

• Written VOE from the employer; and/or
• Previous year, year-end paystub reflecting YTD earnings (at underwriters’ discretion); and
• 2 months cancelled checks/bank statements showing consistent payroll deposits; and
• An additional prior year’s W-2 transcript to validate a minimum of 2 years of income.

For Self Employed Borrower(s) or Income Sources that Require Tax Returns:

• If the most recent year’s tax returns are filed but transcripts are not yet available, the following additional documentation will be required as applicable:
• IRS transcripts showing no record found (personal and business)
• An additional prior year’s tax return must be obtained (personal and business)
• Validated IRS tax transcripts for 2 years (personal and business)
• Proof tax returns have been filed (personal and business)
• Proof taxes have been paid or evidence of receipt of refund
• Non-validated tax returns must be signed & dated (personal and business)
• Prior year business bank statements July – December to support income on most recent filed return.
• For loans closed between the tax filing deadline and the extension expiration date - (Personal & Corporation – typically April 15 to Oct 15), (Partnership & S-Corporation – typically Mar 15 to Sept 15), the following additional documentation will be required as applicable:
• Copy of the filed extensions (personal and business)
• Proof taxes due have been paid
• Validated IRS tax transcripts for the prior 2 years (personal and business)
• Signed Year-end P&L for prior year
• Prior year business bank statements July – December to support income on P & L

Note: Qualifying income must be based on 2 years validated tax returns.

Note: Large increases in income or income that cannot be validated with a tax transcript will be considered on a case-by-case basis only. To consider, receipt of 12 months consecutive business bank statements for January – December to support gross receipts on tax returns and income used to qualify will be required.

Note: After the extension expiration date, the loan is not eligible without prior year returns and validated tax transcripts.

Note: For self-employed W-2 or 1099 income that cannot be verified by transcripts, 2 months cancelled checks or the borrower’s personal bank statements verifying receipt of the income will be required.

Eligible Property Types

• 1-2 Unit Owner Occupied Properties
• Second Homes
• Low/Mid/High-Rise Condos, Fannie Mae Warrantable
• Warrantable types: Q, S, T, U and V
• Site/Detached Condos
• Planned Unit Developments (PUDs)
• Properties with ≤ 10 Acres
• No Income producing attributes
• If land value > 35% it must be typical for the area and the appraiser should comment.

Ineligible Property Types

• 3-4 Unit Owner Occupied Properties
• Unwarrantable Condos
• New Attached Condo Projects
• Manufactured/Mobile Homes/Modular Homes
• Condo-hotel units
• Cooperatives (CO-OPs)
• Unique properties
• Log homes
• Working farms, ranches, or orchards
• Mixed Use Properties
• Properties subject to oil or gas leases
• Properties with > 10 acres. If property has acreage, appraiser must indicate total acreage. It is not acceptable to have property appraised with only 10 acres in order to meet eligibility.

• Field, Desk or CDA Review (type of review at underwriter discretion) is also required for the following:
• Appraisals showing property values declining
• Transferred Appraisals
• If appraisal review value comes in lower than the full appraisal, the lowest value will be used to determine LTV.
• For properties purchased by the seller of the property within 90 days of the fully executed purchase contract (flips), the following additional requirements apply:
• Second appraisal is required.
• Property seller on the purchase contract is the owner of record.
• Increases in value should be documented with commentary from the appraiser recent paired sales.
• When 2 appraisals are required, the following apply:
• Appraisals must be completed by 2 independent companies.
• The LTV will be determined by the lower of the 2 appraised values as long as the lower appraisal supports the value conclusion. The final inspection and/or recertification of value must be for the appraisal with the lower value.
• The underwriter must review both appraisal reports and address any inconsistencies between the 2 reports and all discrepancies must be reconciled.
• In addition to the following, refer to Fannie Mae guidelines for appraisal requirements:
• Appraisals should not include comparable sales greater than 6 months old at the time of underwriting review.
• Properties with values significantly in excess of the predominant value of the subject property’s market area may be ineligible.
• Fannie Mae/Freddie Mac Forms 1004/70, 1025/72, or 1073/465 must be used.
• Appraisals must be dated within 120 days of the Note date. After a 120-day period, a new appraisal is required (re-certification of value is not acceptable).
• Appraisal(s) require evidence subject property is equipped with working smoke and carbon monoxide detectors.
• Escrow holdbacks are acceptable on a case-by-case basis when escrow will be disbursing the funds.

The FEMA Declared Disaster Area Policy applies to all areas eligible for Individual and/or Public Assistance due to a federal government disaster declaration.

• Effective Date of Disaster Policy
• The disaster-area policy becomes effective as of the incident period end date for the disaster/event. FEMA publishes the incident period along with the declaration date once the area is presidentially declared.
• For example, refer to the following dates to understand when property re-inspection requirements apply:
• Disaster Incident Period:
• Begin Date: January 15
• End Date: January 17
• Disaster Declaration Date: February 2
• Effective Date for Disaster Procedures: January 17
• Based on the dates noted in the above example, all appraisals performed on or before January 17 would require the appropriate re-inspection or review. Appraisals performed after January 17 would continue to require written certification by the appraiser that indicated whether the property was free from damage and whether the disaster had any effect on value or marketability. If there was damage, the extent of that damage needs to be addressed.
• Appraisal and Re-Inspection Requirements:
• To ensure the property value has not been impacted by the disaster, a post disaster property re-inspection is required.
• Property is free from damage and the disaster had no effect on value or marketability.
• If the re-inspection indicates damage, the extent of the damage must be addressed.
• Completion of repairs is required as evidenced by Form 1004D with photos of interior, exterior, and neighborhood.
• If a standard appraisal is performed after incident period end date for disaster, appraisal must include written certification by the appraiser that:
• Property is free from damage and the disaster had no effect on value or marketability.
• If the appraisal indicates damage, the extent of the damage must be addressed.
• Completion of repairs is required as evidenced by Form 1004D with photos of interior and exterior.
• Loan Committee Review will be required.

Note: FEMA makes updates to their state lists, so the underwriter should closely monitor FEMA’s online reference at https://www.fema.gov

HERO/PACE loans must be paid off prior to or at closing.

• Loan proceeds used to pay off a HERO/PACE loan is considered cash out.

Properties with Solar Panels
The ownership and debt financing structures commonly found with solar panels are key to determining whether the panels are third-party owned, personal property of the homeowner, or a fixture to the real estate. Common ownership or financing structures include:

• borrower-owned panels,
• leasing agreements,
• separately financed solar panels (where the panels serve as collateral for debt distinct from any existing mortgage); or
• power purchase agreements.

Provident Bank will lend on a property with solar panels. If the borrower is, or will be, the owner of the solar panels (meaning the panels were a cash purchase, were included in the home purchase price, were otherwise financed, and repaid in full, or are secured by the existing first mortgage), our standard requirements apply (for example, appraisal, insurance, and title).

Properties with solar panels and other energy efficient items financed with a PACE loan are not eligible if the PACE loan is not paid in full prior to or at closing.

Underwriters are responsible for determining the ownership and any financing structure of the subject property’s solar panels in order to properly underwrite the loan and maintain first lien position of the mortgage. When financing is involved, underwriters may be able to make this determination by evaluating the borrower’s credit report for solar-related debt and by asking the borrower for a copy of all related documentation for the loan. The underwriter must also review the title report to determine if the related debt is reflected in the land records associated with the subject property. If insufficient documentation is available and the ownership status of the panels is unclear, no value for the panels may be attributed to the property value on the appraisal unless the underwriter obtains a UCC “personal property” search that confirms the solar panels are not claimed as collateral by any non-mortgage lender.

Note: A Uniform Commercial Code (UCC) financing statement that covers personal property and is not intended as a “fixture filing” must be filed in the office identified in the relevant state’s adopted version of the UCC.

Underwriters are responsible for ensuring the appraiser has accurate information about the ownership structure of the solar panels and that the appraisal appropriately addresses any impact to the property’s value. Separately financed solar panels must not contribute to the value of the property unless the related documents indicate the panels cannot be repossessed in the event of default on the associated financing. Any contributory value for owned or financed solar panels must comply with Energy Efficiency Improvements.

The following table summarizes some of the specific underwriting criteria that must be applied depending on the details of any non-mortgage financing for the solar panels.

*A fixture filing is a UCC-1 financing statement authorized and made in accordance with the UCC adopted in the state in which the related real property is located. It covers property that is, or will be, affixed to improvements to such real property. It contains both a description of the collateral that is, or is to be, affixed to that such property, and a description of such real property. It is filed in the same office that mortgages are recorded under the law of the state in which the real property is located. Filing in the land records provides notice to third parties, including title insurance companies, of the existence and perfection of a security interest in the fixture. If properly filed, the security interest in the described fixture has priority over the lien of a subsequently recorded mortgage.

If the solar panels are leased from or owned by a third party under a power purchase agreement or other similar lease arrangement, the following requirements apply (whether to the original agreement or as subsequently amended).

Lender requirements for properties with solar panels that are leased or covered by a Power Purchase Agreement:

• The underwriter must obtain and review copies of the lease or power purchase agreement.
• The monthly lease payment must be included in the DTI ratio calculation unless the lease is structured to:
• provide delivery of a specific amount of energy at a fixed payment during a given period, and
• have a production guarantee that compensates the borrower on a prorated basis in the event the solar panels fail to meet the energy output required for in the lease for that period.
• Payments under power purchase agreements where the payment is calculated solely based on the energy produced may be excluded from the DTI ratio.
• The value of the solar panels cannot be included in the appraised value of the property.
• The value of the solar panels must not be included in the LTV ratio calculation, even if a precautionary UCC filing is recorded because the documented lease or power purchase agreement status takes priority.
  Note: A “precautionary” UCC filing is one that lessors often file to put third parties on notice of their claimed ownership interest in the property described in it. When the only property described in the UCC filing as collateral is the solar equipment covered by the lease or power purchase agreement, and not the home or underlying land, such a precautionary UCC filing is acceptable (and a minor impediment to title), as long as the loan is underwritten in accordance with this topic.
• The value of the solar panels must not be included in other debt secured by real estate in the CLTV ratio calculation because the documented lease or power purchase agreement status takes priority.
• The property must maintain access to an alternate source of electric power that meets community standards.
• The lease or power purchase agreement must indicate that:
• any damage that occurs as a result of installation, malfunction, manufacturing defect, or the removal of the solar panels is the responsibility of the owner of the equipment and the owner must be obligated to repair the damage and return the improvements to their original or prior condition (for example, sound and watertight conditions that are architecturally consistent with the home);
• the owner of the solar panels agrees not to be named loss payee (or named insured) on the property owner’s property insurance policy covering the residential structure on which the panels are attached. As an alternative to this requirement, the lender may verify that the owner of the solar panels is not a named loss payee (or named insured) on the property owner’s property insurance policy; and
• in the event of foreclosure, the lender or assignee has the discretion to:
• terminate the lease/agreement and require the third-party owner to remove the equipment;
• become, without payment of any transfer or similar fee, the beneficiary of the borrower’s lease/agreement with the third party; or
• enter into a new lease/agreement with the third party, under terms no less favorable than the prior owner.
• Any exceptions to coverage on the title insurance policy for recorded instruments relating to the solar panels must comply with Title Exceptions and Impediments.
• A Solar Endorsement will also be required for any solar items remaining on title.

• Title Requirements:
• • The title policy must be written on the following form:
  • • The 2021 American Land Title Association (ALTA) Loan Policy.
  • The title insurance coverage must include an environmental protection lien endorsement ALTA Endorsement 8.1-06 (or equivalent state form CLTA 110.9) that provides the required coverage.
  • Applicable Endorsements for different property types (i.e., condos, PUDs) as well as different mortgage types (i.e., lease-holds) or properties with solar may require additional title policy endorsements.
• Title Exceptions:
• Provident Bank will not accept a mortgage secured by property that has an unacceptable title impediment, including unpaid real estate taxes and survey exceptions.
• If surveys are not commonly required in particular jurisdictions, provide an ALTA 9 Endorsement (or equivalent state form CLTA 100).
• If it is not customary in a particular area to supply either the survey or an endorsement, the title policy must not have a survey exception.

Overview

A power of attorney (POA) is a legal document giving one person (described below as the “agent”) the power to legally bind another person. Loans with documentation executed by an agent on behalf of the borrower under a POA are eligible if all requirements referenced in these guidelines are met.

Only relatives as defined in this guide, a fiancé, fiancée or domestic partners of the borrower may be named to act as an attorney-in-fact.

Eligibility Requirements for Using a Power of Attorney

*A borrower’s relative includes any person defined as a relative in these guidelines, or a person who is an individual engaged to marry the borrower, or is in a legally recognized mutual relationship with the borrower (however denominated under applicable local law).

If the agent is an employee of the title insurer or is an employee of the policy-issuing agent of the title insurer, then unless unavailable under applicable law, such title insurer must issue a closing protection letter (or similar contractual protection) for the transaction for the policy-issuing agent

Additional Requirements:

• Fully executed loan application with live signatures from borrower(s).
• Borrower LOE explaining the need for using a POA and stating family member relationship.
• Fully executed Special/Specific Power of Attorney.
• Evidence Special/Specific Power of Attorney has been reviewed and approved by Title.

Note: Power of Attorneys are not allowed when a property will be vested in a Trust.

• Once recorded and the first payment has been made, the loan may be eligible for recasting (re-amortizing) based on the loan specific scenario, including but not limited to the following characteristics:
• Additional principal amount of $20,000 or more
• Primary Residence and Second Homes only
• Provident Bank must be the current mortgage servicer and owner of the loan
• Loan cannot have Mortgage Insurance
• The mortgage must be current with no outstanding past-due payments
• Borrower must submit request in writing to Loan Servicing Department
• Provident Bank Servicing Department will charge a fee.