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 March 28, 2022

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Borrower Eligibility

  • Q1.
    If the property is held in a life estate, what is required for the loan to be eligible for delivery to Fannie Mae?

    When title to the subject property is held as a life estate with a remainder interest, this is a form of joint ownership where both parties have an interest in the property (the holder of the life estate has the right of current possession of the property, while the remainder holder has the right of future possession of the property upon death of the holder of the life estate). The holders of both interests must grant their interests in the property by signing the security instrument for the loan to be eligible for delivery to Fannie Mae. At least one of these persons must be the borrower on the mortgage note.

  • Q2.
    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.

Condos & Project Standards

  • Q1.
    What form can I use to determine condo project eligibility?

    The Condominium Project Questionnaire (Form 1076) helps lenders collect data to determine condo project eligibility. This form is optional; however, lenders are encouraged to use and retain the form in the loan file. A substantially similar form may also be used in its place. For additional information, see B4-2.1-01, General Information on Project Standards.

  • Q2.
    What is required for the HOA budget under the Full Review process?

    When determining the eligibility of a condo project on the basis of a Full Review, lenders must review the HOA projected budget to determine that it

    • is adequate (i.e., it includes allocations for line items pertinent to the type of condo project), and
    • provides for the funding of replacement reserves for capital expenditures and deferred maintenance that is at least 10% of the budget.

    To determine whether the association has a minimum annual budgeted replacement reserve allocation of 10%, the lender must divide the annual budgeted replacement reserve allocation by the association’s annual budgeted assessment income (which includes regular common expense fees).

    The following types of income may be excluded from the reserve calculation:

    • incidental income on which the project does not rely for ongoing operations, maintenance, or capital improvements;
    • income collected for utilities that would typically be paid by individual unit owners, such as cable TV or Internet access;
    • income allocated to reserve accounts; and
    • special assessment income.

    The lender may use a reserve study in lieu of calculating the replacement reserve of 10% provided the following conditions are met:

    • the lender obtains a copy of an acceptable reserve study and retains the study and the lender’s analysis of the study in the project approval file,
    • the study demonstrates that the project has adequate funded reserves that provide financial protection for the project equivalent to Fannie Mae’s standard reserve requirements,
    • the study demonstrates that the project’s funded reserves meet or exceed the recommendations included in the reserve study, and
    • the study meets Fannie Mae’s requirements for replacement reserve studies listed in B4-2.2-02, Full Review Process.

    For projects in which the units are not separately metered for utilities, the lender must

    • determine that having multiple units on a single meter is common and customary in the local market where the project is located, and
    • confirm that the project budget includes adequate funding for utility payments.

    For additional information, see B4-2.2-02, Full Review Process.

  • Q3.
    What is the maximum investment concentration for a condo project?

    Full Review Eligibility Requirements - Established Projects: For investment property transactions in established projects at least 50% of the total units in the project must be conveyed to principal residence or second home purchasers. This requirement does not apply if the subject mortgage is for a principal residence or second home. Financial institution-owned REO units that are for sale (not rented) are considered owner-occupied when calculating the 50% owner-occupancy ratio requirement.

    Full Review Eligibility Requirements - Units in New or Newly Converted Condo Projects: At least 50% of the total units in the project or subject legal phase must have been conveyed or be under contract for sale to principal residence or second home purchasers.

    • For a specific legal phase or phases in a new project, at least 50% of the total units in the subject legal phase(s), considered together with all prior legal phases, must have been conveyed or be under contract for sale to principal residence or second home purchasers.
    • For the purposes of this review process, a project consisting of one building cannot have more than one legal phase.

    For additional information, see B4-2.2-02, Full Review Process and B4-2.2-03, Full Review: Additional Eligibility Requirements for Units in New and Newly Converted Condo Projects.

  • Q4.
    What options are there if the association or property manager is not willing to provide information to confirm there is no significant deferred maintenance or information on special assessments?

    The lender may be able to obtain the information from parties that have an interest in the transaction: buyer, seller, real estate agent, or unit owner for a refinance. If the lender is unable to obtain the information to make the determination, loans on units in the project are not eligible for delivery to Fannie Mae.

  • Q5.
    Where can I learn more about Condo Project Manager (CPM)? 

    To learn more about Condo Project Manager (CPM) click here to get access to FAQs, job aids, and other helpful resources.

  • Q6.
    Where can I learn more about Project Standards?

    To learn more about Project Standards click here to see FAQs, training videos, and other helpful resources.

Loan Application

  • 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 related Top Trending FAQ: 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. 

Rental Income

  • Q1.
    How do I calculate rental income?

    Method for Calculating the Income: If the property was in service

    • for the entire tax year, the rental income must be averaged over 12 months; or
    • for less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit.

    Lease Agreements or Form 1007 or Form 1025: When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the lender must calculate the rental income by multiplying the gross monthly rent(s) by 75%. (This is referred to as “Monthly Market Rent” on the Form 1007.) The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.

    Treatment of the Income (or Loss): The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss) — and its treatment in the calculation of the borrower's total debt-to-income ratio — varies depending on whether the borrower occupies the rental property as his or her principal residence.

    If the rental income relates to the borrower's principal residence:

    • The monthly qualifying rental income (as defined above) must be added to the borrower’s total monthly income. (The income is not netted against the PITIA of the property.)
    • The full amount of the mortgage payment (PITIA) must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio.

    If the rental income (or loss) relates to a property other than the borrower's principal residence:

    • If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the borrower’s total monthly income.

    • If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrower’s total monthly obligations.

    • The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.

    • The full monthly payment for the borrower's principal residence (full PITIA or monthly rent) must be counted as a monthly obligation.

    For additional information, see B3-3.1-08, Rental Income and Fannie Mae's eLearning course Evaluating Rental Income.  

  • Q2.
    How do I determine the amount of rental income that can be used from the subject property?

    To determine the amount of rental income from the subject property that can be used for qualifying purposes when the borrower is purchasing or refinancing a two- to four-unit principal residence or one- to four-unit investment property, the lender must consider the following: 

    If the borrower... Then for qualifying purposes...
    • currently owns a principal residence (or has a current housing expense), and

    • has at least a one-year history of receiving rental income or documented property management experience

    there is no restriction on the amount of rental income that can be used.
    • currently owns a principal residence (or has a current housing expense), and

    • has less than one-year history of receiving rental income or documented property management experience

    • for a principal residence, rental income in an amount not exceeding PITIA of the subject property can be added to the borrower’s gross income, or

    • for an investment property, rental income can only be used to offset the PITIA of the subject property.

    • does not own a principal residence, and

    • does not have a current housing expense

    rental income from the subject property cannot 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.

    The lender must document the borrower has at least a one-year history of receiving rental income in accordance with Documenting Rental Income From Property Other Than the Subject Property.

    Note: This policy does not apply to HomeReady loans with rental income from an accessory unit.

     

    For additional information, see B3-3.1-08, Rental Income and Fannie Mae's eLearning course Evaluating Rental Income.  

  • Q3.
    How is rental income determined if there is partial or no rental history on the tax return?

    In order for the lender to determine qualifying rental income, the lender must determine whether or not the rental property was in service for the entire tax year or only a portion of the year. In some situations, the lender’s analysis may determine that using alternative rental income calculations or using lease agreements to calculate income are more appropriate methods for calculating the qualifying income from rental properties. This policy may be applied to refinances of a subject rental property or to other rental properties owned by the borrower.

    If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the lender may determine qualifying rental income by using

    • Schedule E income and expenses, and annualizing the income (or loss) calculation; or
    • fully executed lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation.
    If ... Then ...
    the property was acquired during or subsequent to the most recent tax filing year,

    the lender must confirm the purchase date using the settlement statement or other documentation.

    • If acquired during the year, Schedule E (Fair Rental Days) must confirm a partial year rental income and expenses (depending on when the unit was in service as a rental).
    • If acquired after the last tax filing year, Schedule E will not reflect rental income or expenses for this property.
    the rental property was out of service for an extended period,
    • Schedule E will reflect the costs for renovation or rehabilitation as repair expenses. Additional documentation may be required to ensure that the expenses support a significant renovation that supports the amount of time that the rental property was out of service.

    • Schedule E (Fair Rental Days) will confirm the number of days that the rental unit was in service, which must support the unit being out of service for all or a portion of the year.

    the lender determines that some other situation warrants an exception to use a lease agreement, the lender must provide an explanation and justification in the loan file.

    If the borrower is converting a principal residence to an investment property, see B3-6-06, Qualifying Impact of Other Real Estate Owned, for guidance on using that rental income to qualify the borrower.

    For additional information, see B3-3.1-08, Rental Income and Fannie Mae's eLearning course Evaluating Rental Income.

  • Q4.
    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.

Schedule K-1 Income

  • Q1.
    What documentation must the borrower provide to use Schedule K-1 income to qualify? 

    The borrower must provide the most recent two years of signed individual federal income tax returns and the most recent two years of IRS Schedule K-1.

  • Q2.
    What is required if the borrower has less than 25% business ownership and the Schedule K-1 reflects a loss?

    For borrowers who have less than 25% business ownership, and the Schedule K-1 reflects a loss, the lender is not required to reduce the qualifying income amount by the amount of the Schedule K-1 business loss.

  • Q3.
    When a borrower has less than 25% business ownership, and provides business tax returns, can depreciation be added back when calculating income?

    No, self-employment income policy provisions, such as adjustments to the business cash flow analysis, are not intended to extend beyond the scope of self-employment income. The provisions should not be applied as a means to calculate a higher income amount for qualifying purposes, unless the income meets the definition of self-employment as stated in B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower.

  • Q4.
    When a borrower has less than 25% business ownership, can business debt in the borrower’s name be excluded if payments are made by the business?

    In this case, the lender can follow the requirements in B3-6-05, Monthly Debt Obligations, under Debts Paid by Others which does not specifically require business tax returns although the lender may find such documentation helpful.

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.
    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.

  • Q3.
    Is a profit and loss statement required to document self-employment income?

    A year-to-date profit and loss statement is not required for most businesses, but if the borrower’s loan application is dated more than 120 days after the end of the business’s tax year, the lender may choose to require this document if it believes that it is needed to support its determination of the stability or continuance of the borrower’s income. For additional information, see B3-3.4-04, Analyzing Profit and Loss Statements.

  • Q4.
    When is a liquidity test required to use self-employment income?

    The version of Schedule K-1 that is utilized to report a borrower’s share of income (or loss) is based on how the business reports earnings for tax purposes:

    • partnership — reported on IRS Form 1065, Schedule K-1;
    • S corporation — reported on IRS Form 1120S, Schedule K-1; and
    • LLC — reported on either IRS Form 1065 or IRS Form 1120S, Schedule K-1, depending on how the federal income tax returns are filed for the LLC.

    The lender must use caution when including income that the borrower draws from the borrower’s partnership or S corporation as qualifying income. Ordinary income, net rental real estate income, and other net rental income reported on Schedule K-1 may be included in the borrower’s cash flow provided the lender can confirm that the business has adequate liquidity to support the withdrawal of earnings, as described below:

    • If the borrower has a two-year history of receiving “guaranteed payments to the partner” from a partnership or an LLC, these payments can be added to the borrower’s cash flow.
    • If the Schedule K-1 reflects a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify, then no further documentation of access to the income or adequate business liquidity is required. But if the Schedule K-1 does not reflect a documented, stable history, then the lender must confirm adequate business liquidity.

    If business tax returns are required, then the lender must consider the type of business structure and analyze the business returns, according to the requirements described in B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower.

    See also, B3-3.3-07, Income or Loss Reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1.

Student Loan Payments

  • Q1.
    Are lenders allowed to manually calculate an estimated student loan payment when the repayment terms are unknown?

    Yes. If the repayment terms are unknown, lenders have the option to either estimate a 1% (of unpaid principal balance) payment or, calculate a fully amortizing payment based on the current prevailing student loan interest rate and the allowable repayment period shown in the table below.

    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.

    The “current prevailing student loan interest rate” can be found on a variety of websites. For example, see the U.S. Department of Education Federal Student Aid website. The table below specifies the repayment period to be used when calculating a fully amortizing payment.

    Calculating a Student Loan Repayment
    Total outstanding balance of all student loans Repayment period
    $1 — $7,499 10 years
    $7,500 — $9,999 12 years
    $10,000 — $19,999 15 years
    $20,000 — $39,999 20 years
    $40,000 — $59,999 25 years
    $60,000 30 years

    Example of Calculating an Amortizing Payment: 

    Balance: $17,500; Repayment period: 15 years; Interest rate: 4.29%; Monthly Amortizing Payment: $132.00

  • Q2.
    Are there separate requirements for student loans that are in collection or garnishment, versus other debt types?

    No. Student loans follow the same guidance as other non-mortgage debt when in collection or garnishment.  Lenders must comply with B3-6-07, Debts Paid Off At or Prior to Closing and B3-6-05, Monthly Debt Obligations. If the borrower discloses he/she is making monthly payments on a collection account (student loan or otherwise), the lender should include the monthly payment in the debt-to-income ratio.

  • Q3.
    If a borrower has multiple student loans in deferment or forbearance, should these payments be calculated separately or combined?

    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. 

  • Q4.
    If a student loan is in deferment or forbearance, can the payment amount be excluded for qualifying?

    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.ed.gov/sa/repay-loans.  

  • Q5.
    What is the policy on income-driven repayment plans for student loans?

    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.

Verification of Non-Depository Assets

  • 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. 

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.