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FAQs updated March 23, 2021

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Asset Assessment > Verification of Non-Depository

  • Q1.
    How is a rent back credit treated for qualifying purposes?

    A rent back credit may appear on the Closing Disclosure as a credit to the borrower.  In all cases, the lender must underwrite the loan without any consideration of the rent back credit and must document the borrower has sufficient funds for the transaction from eligible sources.

  • Q2.
    If the borrower is also the realtor, can they use commission earned on the sale for funds to close?

    A borrower, who is also the realtor on the subject property, may use commission earned towards the funds to close requirement, as long as

    • the lender verifies that the borrower has sufficient funds for the transaction without the commission, and
    • funds for closing are validated prior to closing. 

Credit Assessment > Mortgage Payment History

  • Q1.
    Can I exclude the credit report mortgage payment history if my borrower is separated but not yet divorced?

    It depends on the date of the court-ordered assignment of debt. Prior to that date, the borrower would have liability to the creditor. After that date, the lender can disregard the borrower's payment history for that debt. 

    For additional information, see B3-6-05, Monthly Debt Obligations.

  • Q2.
    Can you have late payments on a prior mortgage in the last twelve months?

    Excessive Mortgage Delinquency

    The lender must review the borrower’s credit history to determine previous mortgage delinquency, severity (e.g., 30, 60, or 90 days), and recency of the delinquency. Loans with excessive prior mortgage delinquencies are not eligible for delivery to Fannie Mae. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more 60-, 90-, 120-, or 150-day delinquency reported within the 12 months prior to the credit report date.

    Note: For purposes of complying with the guidelines in this topic, timeshare accounts identified as mortgage tradelines are not required to meet the requirements described above, and are considered to be installment accounts.

    For additional information, see B3-5.3-02, Payment History, B3-5.3-03, Previous Mortgage Payment History, and B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit.

  • Q3.
    What is required to document previous mortgage history?

    Documenting Previous Mortgage History

    The lender must review the borrower's credit report to determine the status of all mortgage accounts. If a borrower had previous mortgages, the lender does not have to independently verify the mortgage’s payment history provided the credit report includes a reference to the mortgage (or mortgages) and reflects 12 months of the most recent payment activity. 

    If adequate mortgage payment history is not included in the borrower’s credit report, the lender must use the following to verify the borrower’s payment history on a previous mortgage(s): 

    • a standard mortgage verification;
    • loan payment history from the servicer;
    • the borrower’s canceled checks for the last 12 months; or 
    • the borrower’s year-end mortgage account statement, provided the statement includes a payment receipt history, and, if applicable, canceled checks for the months elapsed since the year-end mortgage account statement was issued. 

    Standard Mortgage Verifications from Servicers

    When a lender relies on standard mortgage verifications from servicers or holders, it must ensure that the verifications include:

    • the unpaid principal balance of the mortgage and monthly payment amount;
    • the present status of the mortgage, such as current, 30 days’ delinquent, etc.; and
    • the borrower’s payment history.

    When a servicer fails to provide all of the requested information, the lender must rely on information provided through the borrower’s canceled checks. The checks must:

    • be legible,
    • identify the mortgage servicer or mortgage holder as the payee,
    • indicate that the servicer or holder endorsed the check for deposit, and
    • indicate the date the servicer or holder deposited the check.

    For additional information, see B3-5.3-03, Previous Mortgage Payment History.

Income Assessment > Other Sources

  • Q1.
    What are the loan parameters to use employment-related assets as qualifying income?

    Employment-Related Assets as Qualifying Income

    All of the following loan parameters must be met in order for employment-related assets to be used as qualifying income:

    Loan Parameter Requirement
    Maximum LTV, CLTV, and HCLTV Ratio

    70%

    80% if the owner of the asset(s) being used to qualify is at least 62 years old at the time of closing. If the asset(s) is jointly owned, all owners must be borrowers on the loan and the borrower whose employment-related asset is being used as income must be at least 62 years old at the time of closing. 

    Minimum Credit Score

    DU: 620

    Manual: Higher of 620 or minimum Credit Score per the Eligibility Matrix

    Loan Purpose Purchase and limited cash-out refinance only
    Occupancy Principal residence and second home only
    Number of Units As permitted by occupancy type
    Income Calculation/Payout Stream                      Divide “Net Documented Assets” by the amortization term of the mortgage loan (in months).                         

    Note: If the mortgage loan does not meet the above parameters, employment-related assets may still be eligible under other standard income guidelines, such as “Interest and Dividends Income,” or “Retirement, Government Annuity, and Pension Income.”

    For additional information, see B3-3.1-09, Other Sources of Income.

  • Q2.
    What are the requirements for retirement income paid in the form of a distribution?

    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 at least three years after the date of the mortgage application. Eligible retirement account balances (from a 401(k), IRA, or Keogh) may be combined for the purpose of determining whether the three-year continuance requirement is met.

    Note: The borrower must have unrestricted access to the accounts without penalty.

    For additional information, see B3-3.1-09, Other Sources of Income.

  • Q3.
    What are the requirements for retirement, pension, and government annuity income?

    Retirement, Government Annuity, and Pension Income

    The following table provides verification requirements for retirement, government annuity, and pension income.

    Verification of Retirement, Government Annuity, and Pension Income
     

    Document current receipt of the income, as verified by

    • a statement from the organization providing the income,
    • a copy of retirement award letter or benefit statement,
    • a copy of financial or bank account statement,
    • a copy of signed federal income tax return,
    • an IRS W-2 form, or 
    • an IRS 1099 form.
      If income from a government annuity or pension account will begin on or before the first payment date, document the income with a benefit statement from the organization providing the income. The statement must specify the income type, amount and frequency of the payment, and include confirmation of the initial start date. 
     

    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 at least three years after the date of the mortgage application. Eligible retirement account balances (from a 401(k), IRA, or Keogh) may be combined for the purpose of determining whether the three-year continuance requirement is met.

    Note: The borrower must have unrestricted access to the accounts without penalty.

    If a borrower’s retirement, annuity, or pension income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See B3-2-02, DU Validation Service.

    For additional information, see B3-3.1-09, Other Sources of Income.

     

  • Q4.
    What is required when employment is scheduled to begin after the loan closes?
     

    Employment Offers or Contracts

    If the borrower is scheduled to begin employment under the terms of an employment offer or contract, the lender may deliver the loan in accordance with one of the options outlined below.

    Option 1 -- Paystub Obtained Before Loan Delivery
      The lender must obtain an executed copy of the borrower's offer or contract for future employment and anticipated income.
      Prior to delivering the loan, the lender 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 must be retained in the mortgage loan file.
    Option 2 -- Paystub Not Obtained Before Loan Delivery
     

    This option is limited to loans that meet the following criteria:

    • purchase transaction,
    • principal residence,
    • one-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 lender 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. Note: If conditions of employment exist, the lender 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.

    Also note that for 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.

      The borrower’s start date must be no earlier than 30 days prior to the note date or no later than 90 days after the note date.

    Prior to delivery, the lender must obtain the following documentation depending on the borrower’s employment start date:

    If the borrower’s start date is... Documentation Required
    The note date or no more than 30 days prior to the note date
    • Employment offer or contract; and
    • Verbal verification of employment that confirms active employment status
    No more than 90 days after the note date Employment offer or contract
     

    The lender must document, in addition to the amount of reserves required by DU or for the transaction, one of the following:

    • Financial reserves sufficient to cover principal, interest, taxes, insurance, and association dues (PITIA) for the subject property for six months; or
    • Financial resources 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 one. For calculation purposes, consider any portion of a month as a full month.

      Financial resources may include:

      • financial reserves, and

      • current income.

    Current income refers to net income that is currently being received by the borrower (or coborrower), may or may not be used for qualifying, and may or may not continue after the borrower starts employment under the offer or contract. For this purpose, the lender may use the amount of income the borrower is expected to receive between the note date and the employment start date. If the current income is not being used for qualifying purposes, it can be documented by the lender using income documentation, such as a paystub, but a verification of employment is not required.

      The lender must deliver the loan with Special Feature Code 707.

    Note: DU will issue a verification message related to employment offers and contracts if the borrower’s current employment start date is blank or after the date the loan casefile was created.

    For additional information, see B3-3.1-09, Other Sources of Income.

     

Income Assessment > Rental Income

  • Q1.
    Are there any restrictions on using rental income if renting to a family member?

    Fannie Mae does not have restrictions on using rental income on a property that is being rented to a family member.  For additional information, see B3-3.1-08, Rental Income.

  • Q2.
    Can rental income that is generated from short-term rentals be used to qualify?

    Rental income derived from the subject property is acceptable on a two- to four-unit principal residence in which the borrower occupies one of the units, or a one- to four-unit investment property.  If the transaction is a purchase money transaction, information on Forms 1007/1025 may be used to derive rental income (including short-term rental income) for qualifying purposes.  If the transaction is a refinance, rental income may be used when reported on the borrower’s individual tax returns (Schedule E).  The alternative to the tax returns is a lease agreement; however, since short-term rental occupants usually execute a terms and conditions agreement (not a lease agreement), this alternative would not meet our requirements and therefore the income would not be eligible.

    Rental income derived from other property (not the subject property) must be documented either by a lease agreement or the most recent years tax returns.  A lease agreement is usually not an option in the case of short-term rentals since the occupants do not execute a lease agreement.  However, if the borrower is reporting rental income (including short-term rental income) on the most recent year's tax returns, then rental income may be considered as qualifying income. 

    See B3-3.1-08, Rental Income for complete documentation requirements and B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements, for information regarding rental income on a one-unit principal residence.

  • Q3.
    How is rental income calculated when the borrower is a joint owner of rental property?

    Fannie Mae does not allow a mortgage obligation to be discounted based on the borrower's percentage of ownership. In the event the borrower only claims a portion of the rental income due to partial ownership of the rental property, the lender may use a current lease agreement. Note that the other owner(s) of the property cannot be borrowers on the subject loan.

    For additional information, see General Requirements for Documenting Rental Income, in B3-3.1-08, Rental Income.

  • Q4.
    If rental income is reported on a joint Schedule E , but only one spouse is on the loan, can the full rental income be used?

    The full rental income reported on Schedule E can be used as qualifying income provided the borrower owns the rental property.  For additional information, see B3-3.1-08, Rental Income.

  • Q5.
    What is required when converting a primary residence to an investment property?

    If the mortgaged property owned by the borrower is a current principal residence converting to investment use, the borrower must be qualified in accordance with, but not limited to, the policies in topics B3-3.1-08, Rental Income, B3-4.1-01,Minimum Reserve Requirements, and, if applicable B2-2-03, Multiple Financed Properties for the Same Borrower.

    For additional information, see B3-6-06, Qualifying Impact of Other Real Estate Owned.

     

  • Q6.
    When can rental income be used?

    Eligible Properties

    Rental income is an acceptable source of stable income if it can be established that the income is likely to continue. If the rental income is derived from the subject property, the property must be one of the following: 

    • a two- to four-unit principal residence property in which the borrower occupies one of the units, or
    • a one- to four-unit investment property.

    If the income is derived from a property that is not the subject property, there are no restrictions on the property type. For example, rental income from a commercial property owned by the borrower is acceptable if the income otherwise meets all other requirements.

    Ineligible Properties

    Generally, rental income from the borrower’s principal residence (a one-unit principal residence or the unit the borrower occupies in a two- to four-unit property) or a second home cannot be used to qualify the borrower. However, Fannie Mae does allow certain exceptions to this policy for boarder income and properties with accessory units. See B3-3.1-09, Other Sources of Income for boarder income requirements, and B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements for accessory unit income requirements.

    For additional information, see B3-3.1-08, Rental Income.

     

Income Assessment > Self-Employment Income

  • Q1.
    Can business loss or income from self-employment income that is secondary and separate be disregarded?

    Fannie Mae does not require lenders to review or document income from secondary sources when that income is not needed to qualify. Business-related debt for which the borrower or co-borrower is personally obligated would likely be on their credit report and therefore already included in the debt-to-income (DTI) ratio.

    As a practical consideration, borrowers with a primary source of income that is not derived from self-employment and is sufficient to cover the obligation have more flexibility and could discontinue a secondary self-employment activity should it prove unprofitable. Consequently, it is our view that if the income not derived from self-employment is sufficient to qualify the borrower, no further inquiry regarding any secondary business losses is required.

    The provisions of the Truth in Lending Act’s Ability to Repay (ATR) provisions require verification of the amounts of income, assets, or debt obligations that the creditor relies on to determine a borrower's ability to repay using third-party records that provide reasonably reliable evidence of the borrower’s income or assets. As a general rule, there is no ATR requirement for creditors to identify and examine losses or expenses related to income that the borrower does not declare as income for the purposes of obtaining a mortgage loan.

  • Q2.
    If self-employment income has declined, how is this evaluated?

    There may be factors that influence the stability and continuity of the self-employment income used to qualify. We require the lender to prepare a written evaluation of the self-employed borrower's personal income, including the business income or loss, to determine the amount of stable and continuous income that will be available to the borrower. If the self-employment income has declined from the prior year, the lender must determine that the income has since stabilized at its current level. If the current level of income is stable, self-employment income may be used to qualify based on the most recent year average (i.e., the year of the decline).

    For additional information, see B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower.

Liability Assessment > Monthly Debt Obligations

  • Q1.
    How is a contingent liability considered for court-ordered assignment of debt?

    Court-Ordered Assignment of Debt

    When a borrower has outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. The lender is not required to count this contingent liability as part of the borrower’s recurring monthly debt obligations. 

    The lender is not required to evaluate the payment history for the assigned debt after the effective date of the assignment. The lender cannot disregard the borrower’s payment history for the debt before its assignment.

    For additional information, see B3-6-05, Monthly Debt Obligations.

  • Q2.
    What is required for a student loan monthly debt obligation?

    Student Loans

    If a monthly student loan payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the credit report does not reflect the correct monthly payment, the lender may use the monthly payment that is on the student loan documentation (the most recent student loan statement) to qualify the borrower.  

    If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the lender must determine the qualifying monthly payment using 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, 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.

    For additional information, see B3-6-05, Monthly Debt Obligations.

  • Q3.
    What is required for child support or alimony obligations?

    Alimony, Child Support, and Separate Maintenance Payments 

    When the borrower is required to pay alimony, child support, or separate maintenance payments under a divorce decree, separation agreement, or any other written legal agreement—and those payments must continue to be made for more than ten months—the payments must be considered as part of the borrower’s recurring monthly debt obligations. However, voluntary payments do not need to be taken into consideration and an exception is allowed for alimony. A copy of the divorce decree, separation agreement, court order, or equivalent documentation confirming the amount of the obligation must be obtained and retained in the loan file.

    For alimony and separate maintenance obligations, the lender has the option to reduce the qualifying income by the amount of the obligation in lieu of including it as a monthly payment in the calculation of the DTI ratio.

    Note: For loan casefiles underwritten through DU, when using the option of reducing the borrower’s monthly qualifying income by the alimony or separate maintenance payment, the lender must enter the amount of the monthly obligation as a negative alimony or separate maintenance income amount. (If the borrower also receives alimony or separate maintenance income, the amounts should be combined and entered as a net amount.)

    For additional information, see B3-6-05, Monthly Debt Obligations.

  • Q4.
    When can business debt be excluded from the DTI ratio?

    Business Debt in Borrower’s Name

    When a self-employed borrower claims that a monthly obligation that appears on his or her 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. 

    For additional information, see B3-6-05, Monthly Debt Obligations.

  • Q5.
    When can debt paid by others be excluded from the DTI ratio?

    Debts Paid by Others

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

    • When a borrower is obligated on a non-mortgage debt - but is not the party who is actually repaying the debt - the lender may exclude the monthly payment from the borrower's recurring monthly obligations. This policy applies whether or not the other party is obligated on the debt, but is not applicable if the other party is an interested party to the subject transaction (such as the seller or realtor). Non-mortgage debts include installment loans, student loans, revolving accounts, lease payments, alimony, child support, and separate maintenance. 
    • When a borrower is obligated on a mortgage debt - but is not the party who is actually repaying the debt - the lender may exclude the full monthly housing expense (PITIA) from the borrower’s recurring monthly obligations if
      • 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.

    In order to exclude non-mortgage or mortgage debts from the borrower’s DTI ratio, the lender must obtain the most recent 12 months' cancelled checks (or bank statements) from the other party making the payments that document a 12-month payment history with no delinquent payments.

    When a borrower is obligated on a mortgage debt, regardless of whether or not the other party is making the monthly mortgage payments, the referenced property must be included in the count of financed properties (if applicable per B2-2-03, Multiple Financed Properties for the Same Borrower).

    For additional information, see B3-6-05, Monthly Debt Obligations.

Loan Application > Documentation

  • Q1.
    Can the sales contract include a rent back agreement in a purchase money transaction?

    The sales contract may include a rent back agreement in a purchase money transaction, however, if the loan is owner-occupied, the borrower must occupy the property within 60 days of closing as noted in the security instrument.  

    See also related Top Trending FAQ above: How is a rent back credit treated for qualifying purposes?

  • Q2.
    What is required if the borrower declares he or she is party to a pending lawsuit?

    Fannie Mae does not have a policy regarding a borrower who is a party to a lawsuit.  However, a lender should factor this in the underwriting of the loan (and ability to repay) as part of their overall loan decision, especially if the lawsuit has the potential for personal liability.  

    Having the box checked on the loan application would not make the loan ineligible on its own. 

Our Selling and Servicing Guides and their updates, including Guide announcements and release notes, are the official statements of our policies and procedures and control in the event of discrepancies between the information provided here and the Guides.