FAQ: Top Trending Selling FAQs

Gifts must be evidenced by a letter signed by the donor, called a gift letter. When the gift is sourced by a trust established by an acceptable donor or an estate of an acceptable donor, the gift letter must be signed by the donor and list the name of the trust or the estate account.

The gift letter must:

• specify the actual or the maximum dollar amount of the gift;
• include the donor’s statement that no repayment is expected; and
• indicate the donor’s name, address, telephone number, and relationship to the borrower.

When a gift from an acceptable donor is being pooled with the borrower’s funds to make up the required minimum cash down payment, the following items must also be included:

• A certification from the donor stating that they have lived with the borrower for the past 12 months and will continue to do so in the new residence.
• Documents that demonstrate a history of borrower and donor shared residency. The donor’s address must be the same as the borrower’s address. Examples include but are not limited to a copy of a driver’s license, a bill, or a bank statement.

Verifying Donor Availability of Funds and Transfer of Gift Funds

The lender must verify that sufficient funds to cover the gift are either in the donor’s account (such as a checking, savings or investment account, or trust or estate account owned by the donor) or have been transferred to the borrower’s account. Acceptable documentation includes the following:

• a copy of the donor’s check and the borrower’s deposit slip,
• a copy of the donor’s withdrawal slip and the borrower’s deposit slip,
• evidence of the electronic transfer of funds from the donor’s account to the borrower’s account or to the closing agent,
• a copy of the donor’s check to the closing agent, or
• a settlement statement showing receipt of the donor’s check.

When the funds are not transferred prior to settlement, the lender must document that the donor gave the closing agent the gift funds in the form of an electronic transfer, certified check, a cashier’s check, or other official check.

Business assets may be an acceptable source of funds for the down payment, closing costs, and financial reserves. The borrower must be listed as an owner of the account and the account must be verified in accordance with B3-4.2-01, Verification of Deposits and Assets. If the borrower is also using self-employment income from this business to qualify, see Use of Business Assets below for additional information on the analysis of a self-employed borrower.

Use of Business Assets

When a borrower is using self-employment income to qualify for the loan and also intends to use assets from their business as funds for the down payment, closing costs, and/or financial reserves, the lender must perform a business cash flow analysis to confirm that the withdrawal of funds for this transaction will not have a negative impact on the business. To assess the impact, the lender may require a level of documentation greater than what is required to evaluate the borrower’s business income (for example, several months of recent business asset statements in order to see cash flow needs and trends over time, or a current balance sheet). This may be due to the amount of time that has elapsed since the most recent tax return filing, or the lender’s need for information to perform its analysis. 

Desktop Underwriter^®(DU^®) takes credit report tradelines designated as authorized user tradelines into consideration as part of the DU credit risk assessment. However, the lender must review credit report tradelines in which the applicant has been designated as an authorized user in order to ensure the tradelines are an accurate reflection of the borrower's credit history. In order to assist the lender in its review of authorized user tradelines, DU issues a message providing the name of the creditor and account number for each authorized user tradeline identified.

The lender is required to include the debts for which the borrower is financially obligated in the DTI ratio calculation. If the lender determines that the borrower has been making payments on the account, the debt should be included in the DTI ratio calculation. If not, then the authorized user account debt can be omitted from the DTI ratio calculation.

Note: The lender is not required to review an authorized user tradeline that belongs to the borrower's spouse when the spouse is not on the mortgage transaction.

For manual underwriting consideration of authorized users of credit, see B3-5.3-06, Authorized Users of Credit.

The number of nontraditional credit references that must be documented for a borrower without a credit score differs depending on the underwriting method and loan product, as described in the table below.

Fannie Mae allows the purchase and securitization of loans made to non-U.S. citizens, provided that they are lawful permanent or lawful non-permanent residents. These borrowers are subject to the same Fannie Mae mortgage eligibility and underwriting requirements as U.S. citizens. Lenders should verify the borrower’s residency status and ensure compliance with Fannie Mae requirements. We recommend lenders consult with their legal counsel if clarification is needed on a borrower’s eligibility for sale to Fannie Mae based on their residency status.

For additional information, see: 

• B2-2-01, General Borrower Eligibility Requirements
• B2-2-02, Non-U.S. Citizen Borrower Eligibility Requirements
• B3-3.1-01, General Income Information
• B3-4.2-05, Foreign Assets
• B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History

A borrower must establish ownership interest in the security property and become liable for the note (whether individually or jointly) by:

• signing the security instrument,
• signing the mortgage or deed of trust note, and
• taking title to the property in the name of the individual borrower(s).

If the security property is held in a life estate established under state property law, the following provisions apply: 

• The life tenant (the individual who has the right to possess and use the subject property during their lifetime) must be a borrower.
• One (or more) remaindermen (individuals who have an irrevocable, vested and alienable interest in the subject property and who will receive full ownership of the subject property upon the death of the life tenant) may also be co-borrowers.  
• Both the life tenant and all remaindermen must sign the security instrument to convey their respective interests in the property. 

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.

When rental income is being used to qualify for a property placed in service in the current calendar year, for example, when converting a principal residence to an investment property, the lender is justified in using a fully executed current lease agreement to document rental income. When using the lease agreement, the lease agreement amount must be supported by 

• Form 1007 or Form 1025, as applicable, or
• evidence the terms of the lease have gone into effect. Evidence may include:
  • two months consecutive bank statements or electronic transfers of rental payments for existing lease agreements, or
  • copies of the security deposit and first month's rent check with proof of deposit for newly executed
    agreements. 

Calculating Monthly Qualifying Rental Income (or Loss)

Scenario 1: If the borrower has at least a one-year history of receiving rental income or at least one year of documented property management experience, then there are no restrictions on the amount of rental income that can 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.

Scenario 2: If the borrower has less than one-year history of receiving rental income from the related property or documented property management experience, rental income can only be used to offset the PITIA of the related property (in other words, is limited to zero positive cash flow).

In addition, the borrower must be qualified in accordance with, but not limited to, the policies in topics B3-4.1-01, Minimum Reserve Requirements, and, if applicable B2-2-03, Multiple Financed Properties for the Same Borrower.

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. 

For loans with variable income validated by the DU validation service, the required history of receipt may differ from the requirements described above. DU will determine the history required to validate an income type.

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. 

The lender should give special consideration to regular sources of income that may be nontaxable, such as child support payments, Social Security benefits, workers’ compensation benefits, certain types of public assistance payments, and food stamps. 

The lender must verify that the particular source of income is nontaxable, unless the source of income meets one of the exceptions below. Documentation that can be used for this verification includes award letters, policy agreements, account statements, tax returns or any other documents that address the nontaxable status of the income.

If the income is verified to be nontaxable, and the income and its tax-exempt status are likely to continue, the lender should develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25% of the nontaxable income to the borrower’s income.

If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the borrower’s nontaxable income, the lender may use that amount to develop the adjusted gross income, which should be used in calculating the borrower’s qualifying ratio.

Exceptions:

The lender is not required to provide documentation to support that the income is nontaxable for the following:

• Child support income: The full amount of documented qualifying child support income is nontaxable.
• Section 8 Housing Choice Voucher Homeownership Program payments: The full amount of income from these payments is nontaxable.
• Social Security income: 15% of the income is nontaxable. 

Example for Social Security income
Benefit amount: $1,500
Nontaxable amount: $1,500 x 15% = $225
Gross-up amount: $225 x 25% = $56 (rounded to the nearest dollar)
Qualifying income: $1,556 (does not require additional documentation)

Note: If the lender opts to gross-up more than 15% of Social Security income, documentation to support that the additional income is nontaxable must be included in the loan file.

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.

When a self-employed borrower claims that a monthly obligation that appears on their 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. 

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 real estate agent). 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.

Insurance Training

These courses are designed to provide lenders and servicers an understanding of the key property and flood insurance requirements for one- to four-units, PUDs, condos, and co-ops.

Understanding replacement cost value, replacement cost coverage, and actual cash value

It is important to know the differences between these terms so you can understand Fannie Mae requirements relating to loss settlement and minimum required coverage amounts. 

Replacement cost value vs. replacement cost coverage

Replacement cost value and replacement cost coverage are two different things. Because both terms are commonly shorthanded to "replacement cost," the terms are often misunderstood to mean the same thing. Let's look at the differences. 

Actual Cash Value (ACV)

Actual cash value (ACV) is a provision in a policy that states losses will be adjusted with a deduction for depreciation. Due to depreciation, the ACV may be less than the original value of the property.

For a per occurrence, per unit deductible, each unit that experiences damage has a specified deductible that is applied to each covered loss.

Per Occurrence, Per Unit Deductible Calculation

1. Calculate the total deductible: deductible dollar amount per unit x total number of units = total deductible dollar amount
2. Calculate the deductible percentage:  total deductible dollar amount / total coverage dollar amount x 100% = deductible percentage

Example: Evidence of insurance shows building has 25 units, 10 million in coverage with a $250,000 property deductible and a $15,000 per unit deductible for ice damming.

Step 1: Since there are two separate deductibles, one that applies per occurrence (all other perils) and another that applies per building (ice damming), both deductibles must be separately calculated to determine if they meet Fannie Mae requirements.

Step 2: Start with all other perils deductible. Since it applies per occurrence:

• Divide $250,000 / $10,000,000
• Multiply by 100%
• The result is 2.5%

Step 3: Next, let's look at the ice damming deductible. This one is applied per unit so that calculation is more complex.

• Multiply $15,000 (per unit deductible) by 25 (number units) = $375,000. This gives us the total deductible.
• Divide $375,000 (the total deductible) by $10,000,000 (the total coverage amount).
• Multiply by 100%
• The result is 4%.

Since both deductibles (2.5% and 4%) are less than Fannie Mae’s maximum deductible of 5%, the deductibles are acceptable.

What if the per unit deductible exceeds 5%?

A per unit deductible that exceeds the maximum allowed in the Selling Guide is acceptable if: 

• The master property insurance policy has a per unit deductible for named perils specific to a geographic area where such coverage is common and customary; and
• The borrower’s individual property insurance policy includes:
  • Coverage for the applicable peril(s);
  • Coverage for master property insurance policy deductible assessments levied on the unit owner by the HOA or co-op corporation for the applicable peril(s); and
  • Loss assessment coverage in an amount sufficient to cover assessments in excess of 5% of the master property insurance policy coverage amount, divided by the number of units.

Example: Same as above (building has 25 units, 10 million in coverage with a $250,000 property deductible), except the per unit deductible has increased to $25,000 per unit for for ice damming in the Northeast where such coverage is common and customary due to winter temperatures. It’s common and customary for insurers in this area to offer separate deductibles for ice damming.

Ice Damming Deductible (Geographic Specific Peril) Calculation  

Step 1: First, we multiply $25,000 (per unit deductible) by 25 (number units) = $625,000. This gives us the total deductible.

Step 2: Now, we divide $625,000 (the total deductible) by $10,000,000 (the total coverage amount).

Step 3: Multiply by 100%.

Step 4: The result is 6%.

Since the deductible exceeds 5%, and the deductible applies to coverage for a localized peril that is common to this geographic area peril, the borrower is required to obtain an individual property insurance policy that includes coverage for loss assessment.

To determine the amount of loss assessment coverage that’s required:

• Calculate the difference between the total deductible ($625,000) and the maximum allowable deductible ($500,000).
• $625,000 - $500,000 = $125,000
• Divide the above result by the number of units (25)
• $125,000 / 25 units = $5,000
• Required amount of loss assessment coverage = $5,000

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. 

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.gov.  

Fannie Mae’s Selling Guide does not include a recency requirement in which a student loan tradeline must be updated for DU to evaluate the liability. If, during the processing of the loan, the lender becomes aware that the borrower has missed payments and those payments were not considered delinquent by the loan servicer due to the Department of Education’s on-ramp forbearance program the lender is not required, for DU purposes, to consider those payments past due either. The lender must include a qualifying payment in accordance with B3-6-05, Monthly Debt Obligations.

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.