FAQ: Top Trending Selling FAQs

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

When used for the down payment or closing costs: 

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

When used for reserves: 

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

Example #1 Scenario. Total borrower funds needed to close is $30,000. Borrower has $33,400 in verified assets ($25,000 in a checking account and $8,400 in a retirement account invested in mutual funds).

Policy Direction:

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

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

2. Compare the $8,400 in the retirement account to the additional $5,000 of funds needed to determine if evidence of liquidation is required.

$5,000 X 1.20% = $6,000.

Because the borrower has more than $6,000 in a retirement account, evidence of liquidation is NOT required.

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

Policy Direction:

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

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

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

$18,000 X 1.20% = $21,600.

Because the borrower has less than $21,600 in the stock account, evidence of liquidation IS required.

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.

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. 

The table below provides IPC limits for conventional mortgages.

For additional information, see B3-4.1-02, Interested Party Contributions (IPCs)

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?

Fannie Mae does not have a policy on remote employment or commuting distances from the principal residence to the borrower's place of employment. The lender must determine if the income is supported, stable, and likely to continue in accordance with Selling Guide, B3-3.1, Employment and Other Sources of Income.

Borrowers who purchased the subject property within the past six months (measured from the date on which the property was purchased to the disbursement date of the new mortgage loan) are eligible for a cash-out refinance if all of the following requirements are met.

Refer to B2-1.3-03, Cash-Out Refinance Transactions for documentation and other requirements regarding cash-out refinance transactions.

The table below provides the requirements for second home properties.

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 credit score requirements for a second home, see the Eligibility Matrix.

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

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. For income and employment documentation requirements for DU, see B3-3.5-01, Income and Employment Documentation for DU.

Fannie Mae's underwriting guidelines emphasize the continuity of a borrower’s stable income. The stable and reliable flow of income is a key consideration in mortgage loan underwriting. Individuals who change jobs frequently, but who are nevertheless able to earn consistent and predictable income, are also considered to have a reliable flow of income for qualifying purposes.   

To demonstrate the likelihood that a consistent level of income will continue to be received for borrowers with less predictable sources of income, the lender must obtain information about prior earnings. Examples of less predictable income sources include commissions, bonuses, substantial amounts of overtime pay, or employment that is subject to time limits, such as contract employees or tradesmen. 

For additional information on income and employment requirements, see B3-3.1-01, General Income Information and B3-3.1-03, Base Pay (Salary or Hourly), Bonus, and 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.

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

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

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

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

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

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

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

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 under Employment Offers or Contracts in B3-3.1-09, Other Sources of Income .

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.

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

While Fannie Mae does not have a stated age minimum for a borrower to use retirement income to qualify, a borrower must have unrestricted access without penalty to use income from certain types of retirement accounts, such as a 401(K), IRA or Keogh account (which may have a minimum age requirement to have "unrestricted access"). See B3-3.1-09, Other Sources of Income for additional information on using retirement income to qualify.

The lender must qualify the borrower on the lower of the two pay structures, which can be confirmed through the employer or the borrower's retirement election documentation.

For additional information, see B3-3.1-01, General Income Information and B3-3.1-09, Other Sources of Income.

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.

Document current receipt of the income, as verified by one or more of the following:

• 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.

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

In order for non-mortgage and mortgage debt to be excluded from the debt-to-income (DTI) ratio, the other party cannot be an interested party to the subject transaction and has to pay the complete monthly obligation every month for a minimum of 12 months.

 For mortgage debt, the following additional requirements must be met:

• 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.

 All other requirements of Debts Paid by Others in B3-6-05, Monthly Debt Obligations must be met.

When the debt is being paid by more than one party, lenders need to use prudent underwriting judgment to determine payments are consistently being made in accordance with Debts Paid by Others, B3-6-05, Monthly Debt Obligations in order to exclude the debt from the borrower’s DTI ratio.

If a borrower is only on title to a property (not the subject) and is not obligated on the note, then the expenses of that property are not required to be included in the DTI ratio calculation. 

In addition, a mortgage payment history is not required when the borrower is not obligated on the note of the property for either subject or non-subject properties.

For additional information, see B3-6-01, General Information on Liabilities and B3-6-02, Debt-to-Income Ratios.

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

When 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.

When a debt is paid by another party, it may be excluded from the DTI ratio with a demonstrated history of consistent payments over the most recent 12 months in accordance with the requirements outlined in Debts Paid by Others, B3-6-05, Monthly Debt Obligations. If there was an interruption in the payment history due to a loan refinance or trade-in, lenders must exercise their own judgment to determine whether the combined payment histories meet these requirements, including considering whether

• the documentation provided supports the concurrent transactions (prior account closed and new account open) with the same obligors and payor(s), and
• the new payment is substantially similar to the previous payment with minimal gap between the two loans.

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.

Example of Calculating an Amortizing Payment: 

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

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

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

• a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or
• a fully amortizing payment using the documented loan repayment terms.

If the documentation does not provide the new monthly payment, the lender may calculate the payment. See related FAQ: Are lenders allowed to manually calculate an estimated student loan payment when the repayment terms are unknown?

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

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

• a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or
• a fully amortizing payment using the documented loan repayment terms.

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

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