FAQ: Top Trending Selling FAQs

Stocks, Stock Options, Bonds, and Mutual Funds

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 held within multiple brokerage accounts consisting of stocks and mutual funds).

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 from the various brokerage accounts to the additional $5,000 of funds needed to determine if evidence of liquidation is required.

   • $5,000 X 20% = $1,000.
   • $5,000 + $1,000 = $6,000 needed to be verified in various brokerage accounts avoid liquidation requirements

   Because the borrower has more than $6,000 in multiple brokerage accounts, evidence of liquidation for the $5,000 needed to support funds to close 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).

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 20% = $3,600.
   • $18,000 + $3,600 = $21,600 needed to avoid liquidation requirements

Because the borrower has less than $21,600 in the stock account, evidence of liquidation for the additional funds to close IS required.

Example #3 Scenario. Borrower funds needed to close is $100,000. The borrower is also required to maintain an additional $25,000 in reserves. Borrower has $135,000 invested in a stock account that they wish to use for both purposes.

Direction:

1. Subtract the $25,000 from the available funds in the stock account as they are needed for reserves and proof of liquidation for reserves does not apply.

   $135,000 - $25,000 = $110,000 available funds in the stock account.

2. Compare available funds of $110,000 to funds required to close to determine if liquidation is needed.
   • $100,000 x 20% = $20,000
   • $100,000 +$20,000 = $120,000 needed to avoid liquidation requirements.

Because the borrower has less than $120,000 in a stock account, evidence of liquidation for the required funds to close not including reserves IS required. "

Funds from a non-borrower purchaser, i.e., an individual who is purchasing the property with the borrower but is not themselves a borrower on the mortgage loan, may not be considered borrower funds unless they are from an acceptable source as outlined in the Selling Guide. Eligible sources include personal gifts provided the non-borrower purchaser is an eligible donor and the transaction complies with B3-4.3-04, Personal Gifts.

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.

If there are two borrowers with a joint credit report, they will be on the same loan application and DU will only use the mortgage payment and taxes, insurance, etc. payment (if applicable) associated to the primary borrower. Therefore, there are two scenarios that would require individual credit reports for the two borrowers. 

1. A primary residence transaction when one borrower is a non-occupant borrower.
2. A second home or investment transaction when the borrowers do not share a primary residence (have separate housing expenses).

For additional information, see Navigating Loan Application Fields  - Present Housing Expenses in the DU Job Aid.

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.

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. 

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 employment is initially validated using an asset verification report and the loan will not close by the ""Close by Date"" stated in the DU employment validation message, the lender may obtain a supplemental asset report from an asset verification report vendor and either submit it to DU or perform a manual review of the report to satisfy the verbal verification of employment described in B3-3.1-07, Verbal Verification of Employment.

When used to reverify employment (whether through an automated or a manual review), the supplemental asset report must contain

• the account numbers and the account holder name for each account included in the report,
• the date of the report, and 
• the date and deposit details of the deposits reflected on the report.

The lender must review the report to confirm the borrower is listed as an account holder. The lender must not have any information indicating the borrower may no longer be employed and must investigate and resolve any contradictory or conflicting information.

When a manual review is performed, the lender must obtain the report within the same timeframe required for a verbal verification of employment and additionally, review the report to confirm

• the deposit details of the direct deposits that are being used to reverify employment 
  • match the ACH details identified in the DU findings messages for the direct deposit streams used by DU to validate employment, and 
  • are consistent with the income source provided in DU;
• the pattern of receipt of the identified direct deposits used to reverify employment does not reflect missed payments, and the latest expected payment prior to the date of the report is present.

Note: When a lender performs a manual review of the supplemental asset report to reverify employment, the enforcement relief of representations and warranties related to the employment validation through the DU validation service described in A2-2-04, Limited Waiver and Enforcement Relief of Representations and Warranties, does not apply.

All supplemental asset reports must be retained in the loan file.

Validate assets, income, and employment with a single source of data. Transform your workflow with one asset report. Lenders using Desktop Underwriter® (DU®) can now validate income and employment in addition to assets using a borrower’s asset account information, satisfying Fannie Mae’s documentation requirements for income, employment, and assets using a single source of data.

For more information, visit the Validation Using a Single Data Source page.

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

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). For the loan to be eligible for delivery to Fannie Mae, the holders of both interests must grant their interests in the property by signing the security instrument for the loan, and the holder of the life estate, the life tenant, must be a borrower on the mortgage note. The remainder holder may be a borrower on the mortgage note but is not required.

Property Expenses

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. 

Mortgage Payment History

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, refer to these topics:

• B3-6-01, General Information on Liabilities
• B3-6-02, Debt-to-Income Ratios
• B3-5.3-03, Previous Mortgage Payment History

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 additional information, see Property Insurance Training Modules and Chapter B7-3.

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

For additional information, see:

• Property Insurance Training Modules
• B7-3-03, Master Property Insurance Requirements for Project Developments

A loan submitted to DU will retain its Fannie Mae project approval status through the credit report expiration date specified on the DU Underwriting Findings report, provided it receives both:

• an Approve/Eligible recommendation, and
• a message indicating the project has an Approved by Fannie Mae status in CPM. 

When any of the following are changed by the lender when the loan casefile is resubmitted to DU, the project eligibility status may change and result in the loss of the CPM Approved by Fannie Mae message:  

• CPM ID,
• project name,
• property address (state or zip code), or
• credit report.

As with any other projects with an Approved by Fannie Mae status in CPM, lenders are required to validate compliance with all applicable insurance requirements outlined in Selling Guide Chapter B7-3, Property and Flood Insurance and Chapter B7-4, Liability and Fidelity/Crime Insurance Requirements. Also, see Additional Obligations of the Lender for Projects Approved by Fannie Mae in B4-2.2-02, Full Review Process, for additional requirements.  

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.