FAQ: Top Trending Selling FAQs

Stocks, Stock Options, Bonds, and Mutual Funds

Vested assets in the form of stocks, government bonds, and mutual funds are acceptable sources of funds for the down payment, closing costs, and reserves provided their value can be verified. The lender must verify the borrower’s ownership of the account or asset. The value of the asset and any related documentation must meet the requirements outlined in B3-4.3-01, Stocks, Stock Options, Bonds, and Mutual Funds.

When used for the down payment or closing costs: 

• if the value of the asset is at least 20% more than the amount of funds needed for the down payment and closing costs, no documentation of the borrower’s actual receipt of funds realized from the sale or liquidation is required. Otherwise, evidence of the borrower’s actual receipt of funds realized from the sale or liquidation must be documented.

When used for reserves: 

• 100% of the value of the assets may be considered, and liquidation is not required. 

Example #1 Scenario. Total borrower funds needed to close is $30,000. Borrower has $33,400 in verified assets ($25,000 in a checking account and $8,400 held within multiple brokerage accounts consisting of stocks and mutual funds).

Direction:

1. Subtract the checking account assets of $25,000 from the total funds required to close. Evidence of liquidation is not required for these types of accounts. 

$30,000 - $25,000 = $5,000 additional funds needed.

1. Compare the $8,400 from the various brokerage accounts to the additional $5,000 of funds needed to determine if evidence of liquidation is required.

• • $5,000 X 20% = $1,000.
  • $5,000 + $1,000 = $6,000 needed to be verified in various brokerage accounts avoid liquidation requirements

Because the borrower has more than $6,000 in multiple brokerage accounts, evidence of liquidation for the $5,000 needed to support funds to close is NOT required.

Example #2 Scenario. Total borrower funds needed to close is $20,000. Borrower has $22,000 in verified assets ($2,000 in a checking account and $20,000 invested in a stock account).

Direction:

1. Subtract the checking account assets of $2,000 from the total funds required to close. Evidence of liquidation is not required for these types of accounts. 

$20,000 - $2,000 = $18,000 additional funds needed.

1. Compare the $20,000 in the stock account to the additional $18,000 of funds needed to determine if evidence of liquidation is required.

• • $18,000 X 20% = $3,600.
  • $18,000 + $3,600 = $21,600 needed to avoid liquidation requirements

Because the borrower has less than $21,600 in the stock account, evidence of liquidation for the additional funds to close IS required.

Example #3 Scenario. Borrower funds needed to close is $100,000. The borrower is also required to maintain an additional $25,000 in reserves. Borrower has $135,000 invested in a stock account that they wish to use for both purposes.

Direction:

1. Subtract the $25,000 from the available funds in the stock account as they are needed for reserves and proof of liquidation for reserves does not apply. 

            $135,000 - $25,000 = $110,000 available funds in the stock account.

1. Compare available funds of $110,000 to funds required to close to determine if liquidation is needed.

• • $100,000 x 20% = $20,000
  • $100,000 +$20,000 = $120,000 needed to avoid liquidation requirements.

 Because the borrower has less than $120,000 in a stock account, evidence of liquidation for the required funds to close not including reserves IS required. "

Business Assets

Business assets may be an acceptable source of funds for the down payment, closing costs, and  financial reserves. The borrower must be listed as an owner of the account and the account must be verified in accordance with B3-4.2-01, Verification of Deposits and Assets.  If the borrower is also using self-employment income from this business to qualify, see Use of Business Assets below for additional information on the analysis of a self-employed borrower.

Use of Business Assets

When a borrower is using self-employment income to qualify for the loan and also intends to use assets from their business as funds for the down payment, closing costs, and/or financial reserves, the lender must perform a business cash flow analysis to confirm that the withdrawal of funds for this transaction will not have a negative impact on the business. To assess the impact, the lender may require a level of documentation greater than what is required to evaluate the borrower’s business income (for example, several months of recent business asset statements in order to see cash flow needs and trends over time, or a current balance sheet). This may be due to the amount of time that has elapsed since the most recent tax return filing, or the lender’s need for information to perform its analysis. 

If the lender relies on credit reports from foreign countries to document borrower credit histories, the credit report must meet the requirements and standards for domestic reports, and must be completed in English or include an English translation.

Foreign Credit Reports and Credit Scores

With the exception of loan casefiles underwritten through DU, Fannie Mae permits the lender to use a credit report from a foreign country to document a borrower's credit history. If a credit score is provided with the foreign credit report it cannot be used to establish eligibility, or be delivered to Fannie Mae unless the credit score is the classic FICO, as required by B3-5.1-01, General Requirements for Credit Scores. See Section B3-5.4, Nontraditional Credit History, for requirements that apply when a loan includes a borrower without an acceptable credit score.

If at least one borrower on the loan can document a housing payment as a nontraditional credit reference, the loan has met the housing payment history requirement. The lender is not required to obtain documentation of a housing payment history for other nontraditional credit borrowers on the loan. However, the lender must still document the minimum number of nontraditional credit references required for each nontraditional credit borrower.

If two or more borrowers on a loan share the housing-related reference (for example, they are both named on the lease for the property in which they are living), that documentation counts as one nontraditional credit reference for each borrower, even if only one borrower has been making the payments.

Note: If the credit report contains a housing payment reference and it includes the required information, including payment history, then the lender may use that housing payment reference as an acceptable nontraditional credit reference.

For examples of acceptable housing payments to fulfill this housing payment history requirement, see B3-5.4-02, Number and Types of Nontraditional Credit References.

Loans underwritten through DU where a nontraditional credit history is required must include housing payments as one reference of nontraditional credit.

Loans underwritten manually are not required to have a housing payment as one reference of nontraditional credit. However, if no borrower on the loan has a housing history, a minimum of 12 months’ reserves must be documented.

Desktop Underwriter (DU) takes credit report tradelines designated as authorized user tradelines into consideration as part of the DU credit risk assessment. However, the lender must review credit report tradelines in which the applicant has been designated as an authorized user in order to ensure the tradelines are an accurate reflection of the borrower's credit history. In order to assist the lender in its review of authorized user tradelines, DU issues a message providing the name of the creditor and account number for each authorized user tradeline identified.

The lender is required to include the debts for which the borrower is financially obligated in the DTI ratio calculation. If the lender determines that the borrower has been making payments on the account, the debt should be included in the DTI ratio calculation. If not, then the authorized user account debt can be omitted from the DTI ratio calculation.

Note: The lender is not required to review an authorized user tradeline that belongs to the borrower's spouse when the spouse is not on the mortgage transaction.

For manual underwriting consideration of authorized users of credit, see B3-5.3-06, Authorized Users of Credit.

When employment is initially validated using an asset verification report and the loan will not close by the ""Close by Date"" stated in the DU employment validation message, the lender may obtain a supplemental asset report from an asset verification report vendor and either submit it to DU or perform a manual review of the report to satisfy the verbal verification of employment described in B3-3.1-07, Verbal Verification of Employment.

When used to reverify employment (whether through an automated or a manual review), the supplemental asset report must contain

• the account numbers and the account holder name for each account included in the report,
• the date of the report, and 
• the date and deposit details of the deposits reflected on the report.

The lender must review the report to confirm the borrower is listed as an account holder. The lender must not have any information indicating the borrower may no longer be employed and must investigate and resolve any contradictory or conflicting information.

When a manual review is performed, the lender must obtain the report within the same timeframe required for a verbal verification of employment and additionally, review the report to confirm

• the deposit details of the direct deposits that are being used to reverify employment 
  • match the ACH details identified in the DU findings messages for the direct deposit streams used by DU to validate employment, and 
  • are consistent with the income source provided in DU;
• the pattern of receipt of the identified direct deposits used to reverify employment does not reflect missed payments, and the latest expected payment prior to the date of the report is present.

Note: When a lender performs a manual review of the supplemental asset report to reverify employment, the enforcement relief of representations and warranties related to the employment validation through the DU validation service described in A2-2-04, Limited Waiver and Enforcement Relief of Representations and Warranties, does not apply.

All supplemental asset reports must be retained in the loan file.

Validate assets, income, and employment with a single source of data. Transform your workflow with one asset report. Lenders using Desktop Underwriter® (DU®) can now validate income and employment in addition to assets using a borrower’s asset account information, satisfying Fannie Mae’s documentation requirements for income, employment, and assets using a single source of data.

For more information, visit the Validation Using a Single Data Source page.

Fannie Mae allows the purchase and securitization of loans made to non-U.S. citizens, provided that they are lawful permanent or lawful non-permanent residents. These borrowers are subject to the same Fannie Mae mortgage eligibility and underwriting requirements as U.S. citizens. Lenders should verify the borrower’s residency status and ensure compliance with Fannie Mae requirements. We recommend lenders consult with their legal counsel if clarification is needed on a borrower’s eligibility for sale to Fannie Mae based on their residency status.

For additional information, see: 

• B2-2-01, General Borrower Eligibility Requirements
• B2-2-02, Non-U.S. Citizen Borrower Eligibility Requirements
• B3-3.1-01, General Income Information
• B3-4.2-05, Foreign Assets
• B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History

The Eligibility Matrix provides the comprehensive LTV, CLTV, and HCLTV ratio requirements for conventional first mortgage loans eligible for delivery to Fannie Mae. The Eligibility Matrix also includes credit score, minimum reserve requirements (in months), and maximum debt-to-income ratio requirements for manually underwritten loans. Other eligibility criteria that are not covered in the Eligibility Matrix may be applicable for loans to be eligible for delivery to Fannie Mae, e.g., allowable ARM plans. See the Selling Guide for details.

No, the GSEs do not require a Loan Originator signature in “Section 9: Loan Originator Information” of the URLA. The Loan Originator Information was added to the URLA to assist lenders with their regulatory reporting requirements. Lenders should review any applicable state or federal legal requirements regarding a Loan Originator’s signature on the URLA.

Increase certainty of loan quality for homebuyers with income from self-employment, business ownership, or rental properties. Calculating income for borrowers with self-employment, business ownership or rental properties is not easy and can be time consuming and complicated for even the most seasoned originators. With a growing workforce of self-employed borrowers, increased awareness of using rental poperty to build generational wealth, and multiple options available, originators need a clear way to calculate income that’s both accurate and efficient. With Fannie Mae’s latest solution, we offer a new way to calculate income that increases the certainty of the calculation and helps reduce cycle time.

To learn more about Income Calculator, view these helpful resources:

For more information, visit the the Income Calculator web page.

• Tips & Tricks
• FAQs
• Selling Guide B3-3.1-10, Income Calculator

The following table provides verification of income requirements for borrowers who have less than 25% ownership of a partnership, S corporation, or limited liability company (LLC). For borrowers who have more than 25% ownership, lenders must follow the verification of income requirements for self-employed borrowers. See B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower for additional information.

When rental income is being used to qualify for a property placed in service in the current calendar year, for example, when converting a principal residence to an investment property, the lender is justified in using a fully executed current lease agreement to document rental income. When using the lease agreement, the lease agreement amount must be supported by 

• Form 1007 or Form 1025, as applicable, or
• evidence the terms of the lease have gone into effect. Evidence may include:
  • two months consecutive bank statements or electronic transfers of rental payments for existing lease agreements, or
  • copies of the security deposit and first month's rent check with proof of deposit for newly executed
    agreements. 

Calculating Monthly Qualifying Rental Income (or Loss)

Scenario 1: If the borrower has at least a one-year history of receiving rental income or at least one year of documented property management experience, then there are no restrictions on the amount of rental income that can be used. The lender must establish a history of property management experience by obtaining one of the following:

• The borrower’s most recent signed federal income tax return, including Schedules 1 and E. Schedule E should reflect rental income received for any property and Fair Rental Days of 365;
• If the property has been owned for at least one year, but there are less than 365 Fair Rental Days on Schedule E, a current signed lease agreement may be used to supplement the federal income tax return; or
• A current signed lease may be used to supplement a federal income tax return if the property was out of service for any time period in the prior year. Schedule E must support this by reflecting a reduced number of days in use and related repair costs. Form 1007 or Form 1025 must support the income reflected on the lease.

Scenario 2: If the borrower has less than one-year history of receiving rental income from the related property or documented property management experience, rental income can only be used to offset the PITIA of the related property (in other words, is limited to zero positive cash flow).

In addition, the borrower must be qualified in accordance with, but not limited to, the policies in topics B3-4.1-01, Minimum Reserve Requirements, and, if applicable B2-2-03, Multiple Financed Properties for the Same Borrower.

While every effort is made to include requirements for employment that generates income, some sources of income exist that may be variable in nature (such as per diem earnings or expense stipends) and are not specifically addressed in the Selling Guide.  As a result, the lender must evaluate and document the income in accordance with the policies in B3-3.1-01, General Income Information.  The documentation must support the income as stable, predictable and likely to continue. 

Reimbursements for expenses (e.g., work-related supplies, travel, meals, and entertainment), are not considered wages as they are provided to the borrower for the purpose of offsetting a specific expense incurred while performing a service for the employer. When income is provided for discretionary use, not for the purpose of offsetting a specific expense, the lender can evaluate the income according to B3-3.1-01, General Income Information.

We treat borrowers who receive income via Form 1099 according to how it is reported on their federal income tax returns. If the borrower reports income

• as other income on Form 1040, treat accordingly per requirements in Selling Guide Section B3-3.1, Employment and Other Sources of Income.
• under a business structure, treat as self-employment income and follow requirements in Selling Guide Section B3-3.2, Self-Employment Income.

All income that is calculated by an averaging method must be reviewed to assess the borrower’s history of receipt, the frequency of payment, and the trending of the amount of income being received. Examples of income of this type include income from hourly workers with fluctuating hours, or income that includes commissions, bonuses, or overtime. 

History of Receipt: Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 to 24 months may be considered as acceptable income, as long as the borrower’s loan application demonstrates that there are positive factors that reasonably offset the shorter income history. 

For loans with variable income validated by the DU validation service, the required history of receipt may differ from the requirements described above. DU will determine the history required to validate an income type.

Frequency of Payment: The lender must determine the frequency of the payment (weekly, biweekly, monthly, quarterly, or annually) to arrive at an accurate calculation of the monthly income to be used in the trending analysis (see below). Examples: 

• If a borrower is paid an annual bonus on March 31st of each year, the amount of the March bonus should be divided by 12 to obtain an accurate calculation of the current monthly bonus amount. Note that dividing the bonus received on March 31st by three months produces a much higher, inaccurate monthly average. 
• If a borrower is paid overtime on a biweekly basis, the most recent paystub must be analyzed to determine that both the current overtime earnings for the period and the year-to-date overtime earnings are consistent and, if not, why. There are legitimate reasons why these amounts may be inconsistent yet still eligible for use as qualifying income. For example, borrowers may have overtime income that is cyclical (transportation employees who operate snow plows in winter, package delivery service workers who work longer hours through the holidays). The lender must investigate the difference between current period overtime and year-to-date earnings and document the analysis before using the income amount in the trending analysis. 

Income Trending: After the monthly year-to-date income amount is calculated, it must be compared to prior years’ earnings using the borrower’s W-2’s or signed federal income tax returns (or a standard Verification of Employment completed by the employer or third-party employment verification vendor). 

• If the trend in the amount of income is stable or increasing, the income amount should be averaged. 
• If the trend was declining, but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used. 
• If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the declination occurred. 

Current receipt is not meant to imply that only monthly distributions are acceptable. Lenders must document retirement income using the requirements in B3-3.1-09, Other Sources of Income. In addition, income may be verified by proof of current receipt; e.g., asset statement, IRS W-2, or 1099 form. 

The lender may use discretion in the documentation obtained to support that the business debt is paid out of company funds. An example of acceptable documentation used in the Selling Guide is 12 months of canceled company checks. For complete policy requirements, refer to Business Debt in Borrower's Name in B3-6-05, Monthly Debt Obligations.

When a self-employed borrower claims that a monthly obligation that appears on their personal credit report (such as a Small Business Administration loan) is being paid by the borrower’s business, the lender must confirm that it verified that the obligation was actually paid out of company funds and that this was considered in its cash flow analysis of the borrower’s business.

The account payment does not need to be considered as part of the borrower’s DTI ratio if:

• the account in question does not have a history of delinquency,
• the business provides acceptable evidence that the obligation was paid out of company funds (such as 12 months of canceled company checks), and
• the lender’s cash flow analysis of the business took payment of the obligation into consideration.

The account payment must be considered as part of the borrower’s DTI ratio in any of the following situations:

• If the business does not provide sufficient evidence that the obligation was paid out of company funds.
• If the business provides acceptable evidence of its payment of the obligation, but the lender’s cash flow analysis of the business does not reflect any business expense related to the obligation (such as an interest expense—and taxes and insurance, if applicable—equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on the credit report and the age of the loan). It is reasonable to assume that the obligation has not been accounted for in the cash flow analysis.
• If the account in question has a history of delinquency. To ensure that the obligation is counted only once, the lender should adjust the net income of the business by the amount of interest, taxes, or insurance expense, if any, that relates to the account in question. 

Insurance Training

These courses are designed to provide lenders and servicers an understanding of the key property and flood insurance requirements for one- to four-units, PUDs, condos, and co-ops.

The improvements should conform to the neighborhood in terms of age, type, design, and materials used for their construction. If there is market resistance to a property because its improvements are not compatible with the neighborhood or with the requirements of the competitive market because of adequacy of plumbing, heating, or electrical services; design; quality; size; condition; or any other reason directly related to market demand, the appraiser must address the impact to the value and marketability of the subject property. However, the lender should be aware that many older neighborhoods have favorable heterogeneity in architectural styles, land use, and age of housing. For example, older neighborhoods are especially likely to have been developed through custom building. This variety may be a positive marketing factor.

For mortgage loans to be eligible for purchase or securitization, the utilities of the property must meet community standards. If public sewer and/or water facilities, those that are supplied and regulated by the local government, are not available, community or private well and septic facilities must be available and utilized by the subject property. The owners of the subject property must have the right to access those facilities, which must be viable on an ongoing basis. Private well or septic facilities must be located on the subject site, unless the subject property has the right to access off-site private facilities and there is an adequate, legally binding agreement for access and maintenance.

If there is market resistance to an area because of environmental hazards or any other conditions that affect well, septic, or public water facilities, the appraisal must address the effect of the hazards on the value and marketability of the subject property (see B4-1.4-08, Environmental Hazards Appraisal Requirements.

If the debt has been fully forgiven, cancelled, or discharged as of the closing date of the mortgage loan, the lender must provide documentation to show the loan was forgiven in full and no payments are owed from the borrower.

If the debt has been partially forgiven, cancelled, or discharged as of the closing date of the mortgage loan, the lender must provide documentation confirming the new loan balance and may calculate the monthly payment based on: 

• a payment equal to 1% of the outstanding student 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.

If the documentation does not provide the new monthly payment, the lender may calculate the payment. 

Please click here for additional information regarding the Student Debt Relief Plan and its potential impact on borrowers with federal student loan debt.

For deferred student loans or student loans in forbearance, the lender may calculate

• a payment equal to 1% of the outstanding student 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.

Additionally, if a borrower has more than one student loan, the lender may combine the unpaid principal balances of all student loans to estimate or calculate the total qualifying payment. 

No, payments in deferment or forbearance may not be excluded for qualifying. If the student loan is in deferment or forbearance and the credit report payment amount is missing (or $0), lenders must calculate a qualifying payment by either using 1% of the outstanding student loan balance or a fully amortizing payment using the documented loan repayment terms. Additionally, if the student loan is in deferment or forbearance and the credit report reflects a monthly payment (even if this payment is an estimated payment amount), lenders may use this payment to qualify the borrower.  For details on the various repayment options for federal student loans, including definitions of deferment and forbearance, see https://studentaid.gov.  

Fannie Mae’s Selling Guide does not include a recency requirement in which a student loan tradeline must be updated for DU to evaluate the liability. If, during the processing of the loan, the lender becomes aware that the borrower has missed payments and those payments were not considered delinquent by the loan servicer due to the Department of Education’s on-ramp forbearance program the lender is not required, for DU purposes, to consider those payments past due either. The lender must include a qualifying payment in accordance with B3-6-05, Monthly Debt Obligations.

For student loans associated with an income-driven repayment (IDR) plan, the student loan payment, as listed on the credit report, is the actual payment the borrower is making and that payment should be used in qualifying. Any future increases in the IDR payment will be tied to similar increases in the student’s income, mitigating concerns that IDR payments may create payment shock.