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FAQs updated June 22, 2020

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Asset Assessment > General

  • 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. 

Income Assessment > Employment

  • Q1.
    Can per diem earnings or expense stipends be used as income to qualify?

    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.

  • Q2.
    Does a verbal VOE need to be obtained for all employers covering the last two years or just the current employer?

    Lenders must obtain a verbal verification of employment (verbal VOE) for each borrower using employment or self-employment income to qualify. The requirement applies to the borrower's current employment (or self-employment) as disclosed on the loan application.

    For additional information, see B3-3.1-07, Verbal Verification of Employment.

  • Q3.
    If a borrower recently transitioned from full-time to part-time with the same employer, how is the income calculated?

    The lender must use the lower income pay structure for qualifying purposes, and must analyze and determine that the income is stable, predictable and likely to continue.

    For additional information, see B3-3.1-01, General Income Information.

  • Q4.
    How is three-year continuance of income measured?

    When three-year income continuance must be verified the general rule is to measure this from the date of mortgage application.

    For additional information, see B3-3.1-01, General Income Information.

  • Q5.
    When averaging income which box of the W-2 can be used to calculate income?

    Qualifying income (for non self-employment) is based on gross earnings (before tax); therefore, the gross pay reflected on the W-2 can be used when averaging income.

    For additional information, see B3-3.3-01, Employment and Other Sources of Income.

Income Assessment > Other Sources

  • Q1.
    When can adoption assistance be used as income?

    Adoption assistance may be considered an acceptable source of qualifying income provided that the borrower’s receipt of the income is documented with letters or exhibits from the paying agency that state the amount, frequency, and duration of benefit payment; and a minimum of three years continuance from the date of the mortgage application is verified.For additional information, see Public Assistance in B3-3.1-09, Other Sources of Income. Adoption assistance that is received in the form of a lump sum payment (from an employer for example) cannot be included as qualifying income, but is allowable as an asset if deposited into an account and sourced.

  • Q2.
    When using an employment offer or contract to qualify, can the loan be manually underwritten?

    Yes. The lender must follow all documentation requirements according to Employment Offers or Contracts in B3-3.1-09, Other Sources of Income. This includes those required for applicable reserves in Option 2.

Income Assessment > Self-Employment

  • Q1.
    Can a profit and loss statement be used to calculate the qualifying income for a self-employed borrower?

    A profit and loss statement may not be used as qualifying income but may be used to determine the stability or continuance of the borrower's income that is calculated by using the documentation requirements for the respective business structure.

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

  • Q2.
    Can inventory be used as a liquid asset to cover adjustments in the business cash flow analysis?

    Inventory cannot be used to cover the balances of mortgages, notes, or bonds payable in less than one year to support the exclusion of these adjustments in the business cash flow analysis.

    For additional information, see B3-3.4-01, Analyzing Partnership Returns for a Partnership or LLC and B3-3.4-02, Analyzing Returns for an S Corporation.

  • Q3.
    Can section 179 expenses be added back to business cash flow?

    A Section 179 deduction is not added back when evaluating business income. It is deducted from individual versus business tax returns, and the business tax returns are being used to evaluate income.

    For additional information, see:

    • B3-3.4-01, Analyzing Partnership Returns for a Partnership or LLC
    • B3-3.4-02, Analyzing Returns for an S Corporation
    • B3-3.4-03, Analyzing Returns for a Corporation
  • Q4.
    How can business liquidity be analyzed if Schedule L is blank?

    The lender may use discretion in selecting the method to confirm that the business has adequate liquidity to support the withdrawal of earnings. For example, if Schedule L of the business return is blank, a balance sheet may be used as an alternative method.

    For additional information, see B3-3.3-07, Income or Loss Reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1.

  • Q5.
    If Schedule K-1 is indicated as a final K-1 how is the business income (or loss) considered?

    When a Schedule K-1 is marked as final this is an indication that the business has closed and will not file any future tax returns or that the borrower no longer has an ownership interest in the business. Generally, business income would not be expected to continue and would not be used for qualifying purposes.

    For additional information, see B3-3.4-01, Analyzing Partnership Returns for a Partnership or LLC and B3-3.4-02, Analyzing Returns for an S Corporation.

  • Q6.
    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

  • Q7.
    If the borrower has secondary self-employment from farming on Schedule F can the income or loss be excluded?

    Income (or loss) from secondary self-employment can be excluded if the borrower is using non-self-employment income to qualify (for example, salary or retirement income).

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

  • Q8.
    If the borrower owns a foreign business can the income be used to qualify?

    Foreign self-employment income reported on U.S. tax returns may be considered for qualifying purposes.  Self-employment documentation requirements remain the same, including in some cases, the requirement for business tax returns.  When business tax returns are required, the lender remains responsible for evaluating and confirming the stability of the business, which may require foreign language translation to English and conversion of foreign currency to U.S. dollars. 

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

  • Q9.
    When business liquidity is required to support the qualifying income, can this be confirmed using the most recent year tax return?

    DU determines whether one or two years of tax returns are required to document self-employment income. In either case, only the most recent tax year must support liquidity in order to use the business income calculated using the number of years of tax returns required.

    For additional information, see B3-3.3-07, Income or Loss Reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1.

Liability Assessment > Monthly Debt Obligations

  • Q1.
    Are maintenance fees from a timeshare included in the DTI ratio?

    While the timeshare installment debt must be considered part of the borrower’s recurring monthly debt obligation if there are more than ten monthly payments remaining, the associated maintenance fees are considered a discretionary use of income and do not need to be included in the DTI ratio.

    For additional information, see B3-6-02, Debt-to-Income Ratios

  • Q2.
    How is the monthly payment for a HELOC calculated?

    The monthly payment amount is calculated on the outstanding balance of the HELOC (drawn funds) and not on the full amount of the HELOC (drawn and undrawn funds, or the full line of credit available). When a monthly payment of principal and interest or interest only is due, the payment on the HELOC must be considered as part of the borrower's recurring monthly debt obligations. If no payment is due, such as in instances where there are no drawn funds, no payment needs to be included. Additional investigation may be necessary to determine if there is a monthly payment amount due if the credit report reflects an outstanding balance (drawn funds), but there is no corresponding monthly payment.

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

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.  

  • 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. 

Mortgage Eligibility > Loan Purpose

  • Q1.
    What is the seasoning requirement for a limited cash-out refinance transaction?

    Unlike the requirements for a cash-out refinance, there is no seasoning requirement for a limited cash-out refinance.  

    For additional information, see B2-1.3-02, Limited Cash-Out Refinance Transactions.

  • Q2.
    When buying out the interest of another borrower how is the refinance of a first and non-purchase money second lien considered?

    This would be considered a cash-out refinance as the transaction is paying off a non-purchase money second lien and removing one of the parties responsible for the current mortgage debt.

    For additional information, see B2-1.3-03, Cash-Out Refinance Transactions.

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.