FAQ: Top Trending Selling FAQs

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These are the top trending underwriting and eligibility questions customers have asked us. Visit Ask Poli® to see trending content, find more answers, filter content by topic, and view recently added questions.

FAQs updated June 30, 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 credit card rewards points are converted to cash, is the cash an acceptable source of funds for closing, down payment, and financial reserves?

    Yes, as long as the credit card rewards points are converted to cash and deposited into the borrower’s depository account (e.g., checking, savings). If the deposit is considered a large deposit per the Selling Guide, the lender must follow B3-4.2-02, Depository Accounts, Evaluating Large Deposits. An example of acceptable documentation to source a large deposit from credit card rewards points is a copy of the rewards statement showing the cash value of the rewards points that were deposited into the borrower’s account.

  • Q3.
    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. 
  • Q4.
    When can gift funds be used?

    A borrower of a mortgage loan secured by a principal residence or second home may use funds received as a personal gift from an acceptable donor.  Gift funds may fund all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements.  Gifts are not allowed on an investment property.

    Note: A gift of equity may not be used for financial reserves. 

    For additional information, see B3-4.3-04, Personal Gifts.

Eligibility > Borrower Eligibility

  • Q1.
    Can a loan close in the name of an LLC?

    Fannie Mae purchases or securitizes mortgages made to borrowers who are natural persons and have reached the age at which the mortgage note can be enforced in the jurisdiction where the property is located. There is no maximum age limit for a borrower.

    Exceptions to the requirement that borrowers be natural persons are:

    • inter vivos revocable trusts,
    • HomeStyle Renovation mortgages, and
    • land trusts in those states where the beneficiary is an individual.

      Note: Fannie Mae permits land trusts on a negotiated basis for states where land trusts are widely accepted.

    See the following for additional information:

  • Q2.
    What are the eligibility requirements for non-U.S. citizen borrowers?

    We have a longstanding policy on eligibility for non-U.S. citizen borrowers. Fannie Mae purchases and securitizes mortgages to non-citizens who are lawful permanent or non-permanent residents of the United States under the same terms available to U.S. citizens. 

    Clarity & Certainty

    • In response to customer feedback, we’re providing examples of acceptable documentation to support that a borrower is “legally present.”
    • For loans that meet our documentation and eligibility requirements, we will not seek a loan repurchase solely based on a change in the borrower’s immigration status after closing.

    For complete details, see the  Non-Citizen Borrower Eligibility Fact Sheet.

  • Q3.
    What are the requirements for determining if a borrower is a displaced homemaker or single parent under the FTHB definition?

    A first-time homebuyer is an individual who (1) is purchasing the security property; (2) will reside in the security property as a principal residence; and (3) had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the security property. In addition, an individual who is a displaced homemaker or single parent also will be considered a first-time homebuyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period.

    If a borrower discloses on the loan application that they have had a joint ownership interest in a principal residence with their spouse in the last 3 years, the lender is not required to consider the borrower a first-time homebuyer unless the borrower has provided the information necessary for the lender to make that determination. Acceptable documentation includes a divorce decree or similar evidence that the borrower no longer has an interest in that property and is now purchasing a new principal residence as a displaced homemaker and/or single parent. Otherwise, no additional analysis is required by the lender to identify the borrower as a first-time homebuyer for purposes of determining if homebuyer education is required under B2-2-06, Homeownership Education and Counseling. If a borrower discloses they have had an ownership interest in a residential property during the three-year period, the lender remains responsible for determining whether the borrower meets the first-time homebuyer definition when required for eligibility, such as purchase transactions with LTV, CLTV or HCLTV ratios of 95.01% to 97% that are not HomeReady mortgage loans.

Eligibility > Occupancy Types

  • Q1.
    What are the requirements for a second home?

    The table below provides the requirements for second home properties.

    Second Home Requirements
      must be occupied by the borrower for some portion of the year
      is restricted to one-unit dwellings
      must be suitable for year-round occupancy
      the borrower must have exclusive control over the property
      must not be rental property or a timeshare arrangement1
      cannot be subject to any agreements that give a management firm control over the occupancy of the property
      must be underwritten in DU and receive an Approve/Eligible recommendation, with the exception of high LTV refinance loans required to be underwritten in accordance with the Alternative Qualification Path (see B5-7-03, High LTV Refinance Alternative Qualification Path).

    1. If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).

    An LLPA applies to certain loans secured by second homes. This LLPA is in addition to any other price adjustments that are otherwise applicable to the particular transaction. See the Loan-Level Price Adjustment (LLPA) Matrix.

    For more information related to occupancy types, refer to B2-1.1-01, Occupancy Types.  For maximum allowable LTV/CLTV/HCLTV ratios and representative credit score requirements for a second home, see the Eligibility Matrix

  • Q2.
    What are the requirements for owner-occupancy?

    A principal residence is a property that the borrower occupies as his or her primary residence. The following table describes conditions under which Fannie Mae considers a residence to be a principal residence even though the borrower will not be occupying the property.

    Borrower Types Requirements for Owner-Occupancy
    Multiple borrowers Only one borrower needs to occupy and take title to the property, except as otherwise required for mortgages that have guarantors or co-signers. (See B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction.)
    Parents or legal guardian wanting to provide housing for their handicapped or disabled adult child If the child is unable to work or does not have sufficient income to qualify for a mortgage on his or her own, the parent or legal guardian is considered the owner/occupant.
    Children wanting to provide housing for parents If the parent is unable to work or does not have sufficient income to qualify for a mortgage on his or her own, the child is considered the owner/occupant.

    Note: If a property is used as a group home, and a natural-person individual occupies the property as a principal residence or as a second home, Fannie Mae’s terms and conditions for such occupancy status as provided will be applicable.

    For additional information, see B2-1.1-01, Occupancy Types. For the maximum allowable LTV/CLTV/HCLTV ratios and representative credit score requirements for principal residence properties, see the Eligibility Matrix.

  • Q3.
    When does the borrower have to occupy a primary residence?

    This can vary by state. Typically, the borrower shall occupy, establish, and use the principal residence within 60 days after the execution of the security instrument.  Refer to the applicable state security instrument form for requirements.

    Visit Fannie Mae's Security Instrument page to locate the applicable form. 

Income Assessment > Base Pay/ Bonus/ Overtime

  • Q1.
    Is there a minimum length of employment history required for base pay?

    A minimum history of two years of employment income is recommended. However, income that has been received for a shorter period of time may be considered as acceptable income, as long as the borrower’s employment profile demonstrates that there are positive factors to reasonably offset the shorter income history.

    Borrowers relying on overtime or bonus income for qualifying purposes must have a history of no less than 12 months to be considered stable. For additional information, see B3-3.1-03, Base Pay (Salary or Hourly), Bonus, and Overtime Income.

  • Q2.
    What are the requirements for bonus or overtime income?

    A minimum history of two years of employment income is recommended. However, income that has been received for a shorter period of time may be considered as acceptable income, as long as the borrower’s employment profile demonstrates that there are positive factors to reasonably offset the shorter income history. 

    Borrowers relying on overtime or bonus income for qualifying purposes must have a history of no less than 12 months to be considered stable.

    Obtain the following documents:

    • a completed Form 1005 or Form 1005(S), or
    • the borrower’s recent paystub and IRS W-2 forms covering the most recent two-year period.

    See B3-3.1-01, General Income Information, for additional information on calculating variable income (applies to hourly paid employees with fluctuating hours and bonus and overtime).

    If the borrower has recently changed positions with his or her employer, determine the effect of the change on the borrower’s eligibility and opportunity to receive bonus or overtime pay in the future.

    See B3-3.1-02, Standards for Employment Documentation, for additional information.

Income Assessment > Rental Income

  • Q1.
    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.

  • Q2.
    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.

  • Q3.
    Where can I find training on rental income?

    A new interactive course was introduced that provides comprehensive training on how to evaluate a borrower’s rental income, including: 
    •    how to determine rental income eligibility
    •    key variables to determine the required documentation
    •    factors to determine if rental income can be used to qualify, treatment of income (or loss), and calculation methods
    •    entering rental income in DU
    •    clarifying explanations, helpful resources, and links to policies in the Selling Guide
    •    real scenario examples (story narratives and answers) to further support learning 

    Click here to launch the course on Evaluating Rental Income.

Income Assessment > Self-Employment Income

  • Q1.
    Am I required to consider self-employment income or a loss if another source of income is used?

    Analysis of a self-employed borrower’s personal income, including the business income or loss reported on the borrower's individual income tax returns, is not required when a borrower is qualified using only income that is not derived from self-employment and self-employment is a secondary and separate source of income (or loss). Examples of income not derived from self-employment include salary and retirement income.

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

  • Q2.
    Are borrowers who receive 1099 income considered self-employed?

    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.
  • Q3.
    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.

  • Q4.
    Is a two-year history of self-employment required?

    Fannie Mae generally requires lenders to obtain a two-year history of the borrower’s prior earnings as a means of demonstrating the likelihood that the income will continue to be received.

    However, a person who has a shorter history of self-employment — 12 to 24 months — may be considered, as long as the borrower’s most recent signed federal income tax returns reflect the receipt of such income as the same (or greater) level in a field that provides the same products or services as the current business or in an occupation in which he or she had similar responsibilities to those undertaken in connection with the current business. In such cases, the lender must give careful consideration to the nature of the borrower’s level of experience, and the amount of debt the business has acquired.

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

Liability Assessment > Monthly Debt Obligations

  • Q1.
    How are delinquent federal income taxes without a payment plan handled?

    Delinquent credit—including taxes, judgments, charge-offs of non-mortgage accounts (see below for exceptions), tax liens, mechanics’ or materialmen’s liens, and liens that have the potential to affect Fannie Mae’s lien position or diminish the borrower’s equity—must be paid off at or prior to closing. 

    Delinquent federal income taxes that are approved to be paid by a monthly installment agreement with the IRS must be paid in full at or prior to closing if there is any indication that a Notice of Federal Tax Lien has been recorded against the borrower in the county in which the subject property is located. For additional information about federal income tax installment agreements, see B3-6-05, Monthly Debt Obligations

    For details regarding delinquent federal income taxes that the IRS has approved to be paid through an installment agreement that can be included as a monthly debt obligation, rather than being paid in full, see also B3-6-05, Monthly Debt Obligations.

    For additional information, see B3-6-07, Debts Paid Off At or Prior to Closing.

  • Q2.
    When can debt paid by others be excluded from the DTI ratio?

    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.

  • Q3.
    Why does the policy on Federal Income Tax Installment Agreements exclude repayment of delinquent state and local taxes?

    We did not establish a policy for repayment of delinquent state or local taxes because taxing statutes vary by state and local jurisdiction.  By contrast, federal income tax installment agreements are consistent with their priority governed by federal law and regulation.

    For additional information on federal income tax installment agreements, 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. 

  • Q3.
    What is the allowable age of federal income tax returns?

    For some types of sources of income, Fannie Mae requires lenders to obtain copies of federal income tax returns (personal returns and, if applicable, business returns). The “most recent year’s” tax return is defined as the last return scheduled to have been filed with the IRS. For additional information, see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns in the Selling Guide.

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.