FAQ: Top Trending Selling FAQs

Future increases in pay from the borrower’s current employer may be included as qualifying income when the following requirements are met:

• The income is fixed base only.
• The transaction is a purchase money or limited cash-out refinance transaction.
• The increase must take effect no later than 60 days after the note date.
• The increase is fully verified with the employer using Form 1005, Request for Verification of Employment or other documentation directly from the employer that provides the terms of the future pay increase.
• Borrower must not be employed by a family member or interested party.

When a borrower is working for more than one employer at the same time, the lender should confirm the borrower has a history of working more than one job at a time and that it is reasonable to believe the borrower will maintain the ability to earn from both employers for the foreseeable future. If the borrower does not have a history of working with these two employers for at least two years, the lender may consider the income from these two employers if the borrower has a history of at least 12 months simultaneously at these two jobs. If less than a two-year history is documented, the lender must confirm there are positive factors to reasonably offset the shorter income history and there is no employment gap greater than one month with either employer (unless the employment is considered seasonal).

When an income type requires a historical trending analysis as part of the income calculation, the trending analysis must be performed separately for each job, as applicable.

If the gap occurred within the most recent 12 months, it is acceptable for the timeframe of the gap to exceed 30 days. However, the lender must carefully analyze the borrower’s current employment to ensure that it is likely to continue.

Borrowers who are employed by a family member or interested party must meet the requirements for the specific income type(s) outlined in the respective sections throughout Chapter B3–3, Income Assessment, and the following:

• Borrower must have been employed by the business for at least the 12 months prior to the application date.
• The lender must obtain copies of the most recent year’s signed federal income tax returns that reflect borrower has less than 25% ownership in the business owned by the family member or interested party. If the borrower has 25% or more ownership, the borrower must be qualified as self-employed. 
• The borrower’s qualifying income must be consistent with the most recent year’s earnings, which must be documented with a W-2 or tax returns. 

If a borrower’s income is validated by the DU validation service, lenders are not required to determine if the borrower is employed by a family member or interested party to the property sale or purchase. 

Nontaxable income may be used to adjust (gross up) the borrower’s qualifying income when the lender verifies that the specific source of income is nontaxable and that the income and its nontaxable status are reasonably expected to continue.

The lender must verify the nontaxable status of the income using documentation such as award letters, policy agreements, account statements, tax returns, or any other document that address the nontaxable status of the income.

Nontaxable treatment is not limited to specific income types; however, several income types within B3-3.4, Other Sources of Income, explicitly reference nontaxable income within their individual requirements, including Child Support, Public Assistance, Section 8 Housing Choice Voucher Homeownership Program Payments, and Social Security. The requirements are included within each income source. For further information, refer to B3-3.3-01, Base Income.

If the lender uses a lease agreement for determining qualifying income, the following requirements must be met:

• The rental payment on the lease must be reflected in U.S. dollars and cannot be in virtual currency.
• For newly executed lease agreements (dated within two months of the loan application), properties not reported on the individual federal income tax return (IRS Form 1040) must contain a minimum term of at least six months, with the initial rental payment due on or before the first payment due date of the subject mortgage.

The lender must also confirm lease agreements for subject and non-subject properties not reported on the borrower's most recent individual federal income tax return (IRS Form 1040) satisfy the following requirements:

• The agreement(s) cannot be with an interested party or family member.
• The lender must obtain evidence that the terms of the lease have gone into effect by obtaining the most recent two consecutive months of bank statements or electronic transfers of rent payments showing an identifiable rental amount for the related property that aligns with the lease agreement; or
  • If the lease agreement is newly executed, in lieu of providing the most recent two consecutive months of bank statements or electronic transfer of rent payments, the lender may instead obtain copies of the security deposit and the first full month's rent check/money orders with proof of deposit, or electronic transfers showing identifiable deposit and rental amounts; or
  • Regardless of the age of the lease agreement, in lieu of providing the most recent two consecutive months of bank statements or electronic transfer of rent payments, the lender may instead obtain evidence of a property management agreement, not associated with the borrower or an interested party, along with proof of rents paid for the most recent two consecutive months.

The lender may only use a lease agreement to determine qualifying rental income from an investment property when one of the following scenarios applies:

• purchase transactions where there is an existing lease agreement(s) on the property that will be transferred to the borrower;
• the borrower purchased the rental property during or subsequent to the last tax return filing;
• the property experienced significant rental interruptions causing income to not be reported on the most recent tax return (for example, major renovation to a property occurred in the prior year that affected rental income);
• rental income is being used to qualify for any property placed in service in the current calendar year; or
• the lender determines that some other situation warrants the use of a lease agreement with appropriate explanation and justification in the loan file.

The lender is not permitted to use a lease agreement to determine qualifying rental income from an investment property in the following scenarios:

• the investment property is a departing residence, or 
• for investment properties purchased within 45 days of the subject property.

Overview

Interested party contributions (IPCs) are contributions made by third parties with a vested interest in the transaction. These funds are used to cover costs that are typically the buyer's responsibility. IPCs may include financing or sales concessions.  Fannie Mae does not permit IPCs to be used to make the borrower's down payment, meet financial reserve requirements, or meet minimum borrower contribution requirements.

Fannie Mae considers the following to be IPCs:

• funds paid directly by an interested party to the borrower;
• funds that flow through a third-party organization, including nonprofit entities, from an interested party to the borrower;
• funds provided to the transaction on the borrower's behalf by an interested party, including a third-party organization or nonprofit agency; and
• funds donated by an interested party to a third party, which then pays some or all of the closing costs for a specific transaction.

IPC Exclusions

The following are not considered to be IPCs and are not subject to the requirements described in this topic. 

• A lender credit derived from premium pricing, even if the lender is an interested party to the transaction; 
• Gift funds or gift of equity from a seller who is also an acceptable donor provided that: 
  • The donor is not a builder, or another interested party, and has no affiliation with any other interested party to the transaction, and 
  • All requirements pertaining to gift funds and gift of equity from an acceptable donor as stated in B3-4.3-04, Personal Gifts and B3-4.3-05, Gifts of Equity are met; 
• A legitimate prorated real estate tax credit in places where real estate taxes are paid in arrears; and 
• Fees for standby commitments (refer to Interest Rate Buydowns section below). 

Interest Rate Buydowns

If a temporary or permanent interest rate buydown is being offered to the borrower, and the subsidy is  funded by an interested party or a lender affiliated with one, the cost of that subsidy must be included in the IPC calculation.  The lender must ensure the subsidy cost meets Fannie Mae’s allowable maximum financing concessions. This can be accomplished by confirming the current market interest rate (that is, the rate without the payment of any discount points) and the discount points being charged to obtain the interest rate offered with the buydown. 

Documentation Requirements

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.

Retirement Accounts

Vested funds from individual retirement accounts (IRA/SEP/Keogh accounts) and tax-favored retirement savings accounts (401(k) accounts) are acceptable sources of funds for the down payment, closing costs, and reserves. The lender must verify the ownership of the account and confirm that the account is vested and allows withdrawals regardless of current employment status. 

If the retirement assets are in the form of stocks, bonds, or mutual funds, the account must meet the requirements of B3-4.3-01, Stocks, Stock Options, Bonds, and Mutual Funds (referenced below), for determining value and whether documentation of the borrower’s actual receipt of funds is required when used for the down payment and closing costs. When funds from retirement accounts are used for reserves, Fannie Mae does not require the funds to be withdrawn from the account(s).

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 the table below.

When used for the down payment or closing costs, if the value of the asset (as determined above) 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 (as determined above) may be considered, and liquidation is not required.

Borrowed Funds Secured by an Asset 

Borrowed funds secured by an asset are an acceptable source of funds for the down payment, closing costs, and reserves, since borrowed funds secured by an asset represent a return of equity.

Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, or financial assets, such as savings accounts, certificates of deposit, stocks, bonds, and 401(k) accounts.

When qualifying the borrower, the lender must consider monthly payments for secured loans as a debt. If a secured loan does not require monthly payments, the lender must calculate an equivalent amount and consider that amount as a recurring debt.

When loans are secured by the borrower’s financial assets, monthly payments for the loan do not have to be considered as long-term debt.

Reducing the Asset by the Amount Borrowed

If the borrower uses the same financial asset as part of their financial reserves, the lender must reduce the value of the asset by the amount of proceeds and related fees for the secured loan.

Documentation Requirements 

The lender must document the following:

• the terms of the secured loan,
• evidence that the party providing the secured loan is not a party to the sale, and
• evidence that the funds have been transferred to the borrower.

DU Documentation Requirements for Secured Borrowed Funds

Borrowers can borrow against an asset they own, such as a 401(k) account or real estate, according to the requirements of B3-6-05, Monthly Debt Obligations.

The amount of the secured loan should be entered as Secured Borrowed Funds in the asset section of the loan application. The secured loan amount should be subtracted from the market value of the actual asset, and the net asset value should be entered. For example, if the borrower has a vested value, less taxes and penalties, of $30,000 in a 401(k) account and borrows $10,000 against the 401(k), enter $10,000 as secured borrowed funds and enter $20,000 as retirement funds.

A loan that is secured against a liquid asset owned by the borrower (such as a 401(k) or mutual fund) does not have to be entered as a liability in the loan application if the appropriate documentation is provided.

Loans that are secured against real estate, or any other non-liquid asset, must be entered as the applicable liability (for example, as a mortgage).

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. 

Authorized user (AU) tradelines are not automatically included in the borrower's DTI ratio. DTI treatment depends on whether the borrower is obligated on the account. The lender is required to include the debts for which the borrower is financially obligated in the DTI ratio calculation, unless the exclusions described in Debts Paid by Others of B3-6-05, Monthly Debt Obligations apply.

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

The lender must review the borrower’s credit history to determine previous mortgage delinquency, severity (e.g., 30, 60, or 90 days), and recency of the delinquency. Loans with excessive prior mortgage delinquencies are not eligible for delivery to Fannie Mae. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more 60-, 90-, 120-, or 150-day delinquency reported within the 12 months prior to the credit report date. See B3-5.3-02, Payment History, and B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit for additional information.

Note: For purposes of complying with the guidelines in B3-5.3-03, Previous Mortgage Payment History, timeshare accounts identified as mortgage tradelines are not required to meet the requirements described above, and are considered to be installment accounts.

Frozen Credit Requirements

If the borrower’s credit information is frozen at one of the credit repositories for borrowers who have traditional credit, the credit report is still acceptable as long as

• credit data is available from two repositories, and
• the lender requested a three in-file merged report.

Loans for borrowers with credit data frozen at two or more of the credit repositories will not be eligible whether underwritten manually or in DU.

When at least one borrower has a minimum of one credit account or installment account reported on their credit report, DU will assess the risk using the borrower’s reported credit and the loan will be subject to standard eligibility guidelines.

When no borrower has at least one credit account or installment account reported on their credit report, DU will apply the following requirements:

• The property must be a one- to four-unit, principal residence, and all borrowers must occupy the property.
• The transaction must be a purchase or limited cash-out refinance.
• Reserves may be required as determined by DU.

In both cases, no verification of nontraditional credit references is required for any borrower when DU conducts a cash flow assessment and issues a message that the third-party asset verification report may be used to satisfy the requirements. Otherwise, a nontraditional credit history must be documented for each borrower as instructed by DU. See B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History, for additional information.

If a loan casefile does not receive an Approve/Eligible recommendation, it may receive a more favorable recommendation if a 12-month asset verification report is obtained (see B3-2-03, Risk Factors Evaluated by DU). In some cases the loan may still be eligible for manual underwriting. The lender must determine whether the loan meets the requirements for a manually underwritten loan that includes a borrower without a credit score.

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.

Manually Underwritten Loans

Non-medical collection accounts and charge-offs on non-mortgage accounts do not have to be paid off at or prior to closing if the balance of an individual account is less than $250 or the total balance of all accounts is $1,000 or less. Non-medical collection accounts and charge-offs on non-mortgage accounts that exceed these limits must be paid off at or prior to closing.

DU Underwritten Loans

Medical collection accounts are excluded from the limits below and are not required to be paid in full at or prior to closing.

• For one-unit, principal residence properties, borrowers are not required to pay off outstanding collections or non-mortgage charge-offs—regardless of the amount.

  Note: If the lender marks the collection account Paid By Close in the online loan application, DU will issue a message in the DU Underwriting Findings report stating that the collection must be paid.

• For two- to four-unit owner-occupied and second home properties, collections and non-mortgage charge-offs totaling more than $5,000 must be paid in full prior to or at closing.
• For investment properties, individual collection and non-mortgage charge-off accounts equal to or greater than $250 and accounts that total more than $1,000 must be paid in full prior to or at closing.

If a monthly student loan payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the credit report does not reflect the correct monthly payment, the lender may use the monthly payment that is on the student loan documentation (the most recent student loan statement) to qualify the borrower.  

If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the lender must determine the qualifying monthly payment using one of the options below. 

• If the borrower is on an income-driven payment plan, the lender may obtain student loan documentation to verify the actual monthly payment is $0. The lender may then qualify the borrower with a $0 payment.
• For deferred loans or 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.

Debts Paid by Others

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).

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. 

Coverage Sufficiency 

Coverage sufficiency for a property insurance policy for a one- to four-unit property is determined based on confirming the policy’s loss settlement terms. 

The property insurance policy must provide coverage on a replacement cost basis, with the exception of roofs; property insurance policies that provide such terms of coverage will be deemed to provide sufficient coverage.  

Roofs must be insured, but do not have to be insured on a replacement cost basis. 

Required Perils

Property insurance policies for one- to four-unit properties securing loans purchased by Fannie Mae should be written on a ""Special"" coverage form or equivalent. At a minimum, the coverage must include the perils listed in the following table.

If a property insurance policy excludes or limits coverage of any of the required perils, the borrower must obtain an acceptable policy (e.g., stand-alone policy) that provides adequate coverage for the limited or excluded peril (see B7-3-05, Additional Insurance Requirements, for additional information).

Delayed Financing Exception 

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. 

Non-Arm's Length Transactions

Non-arm's length (NAL) transactions are purchase transactions in which there is a relationship or business affiliation between the seller and the buyer of the property. Fannie Mae allows non-arm’s length transactions for the purchase of existing properties unless specifically forbidden for the particular scenario, such as delayed financing.

For the purchase of newly constructed properties, if the borrower has a relationship or business affiliation (any ownership interest, or employment) with the builder, developer, or seller of the property, Fannie Mae will only purchase mortgage loans secured by a principal residence. Fannie Mae will not purchase mortgage loans on newly constructed homes secured by a second home or investment property if the borrower has a relationship or business affiliation with the builder, developer, or seller of the property. 

Principal Residence Exceptions

The Selling Guide describes conditions under which Fannie Mae considers a residence to be a principal residence even though the borrower will not be occupying the property. Two of those conditions are when parents or legal guardian want to provide housing for their handicapped or disabled adult child, or children want to provide housing for parents. Lenders can inform DU when one of these conditions will be used on a loan casefile.

The lender can instruct DU to consider the transaction a principal residence transaction when the casefile meets one of the above conditions by entering “PrincipalResidenceException” in the DU Policy Feature Description field in Section 5. Declarations of the loan application. In this case, DU will no longer issue an Ineligible recommendation when it appears no borrowers are occupying the property as their primary residence on a principal residence transaction.

When this exception is used, a new verification message will be issued specifying that the lender must confirm that the exception does apply.

Submitting the Transaction to Desktop Underwriter (DU)

• The transaction is submitted to DU as a primary residence. 
• The borrower can answer “No” to the "Will you occupy the property as your primary residence" declaration question if the borrower will not be an occupant of the property.
• If no borrowers will occupy the property, enter “PrincipalResidenceException” in the DU Policy Feature Description field in Section 5. Declarations of the loan application. 

Principal Residence Properties

A principal residence is a property that the borrower occupies as their primary residence. The following table describes conditions under which Fannie Mae considers a residence to be a principal residence even though the borrower will not be occupying the property.

For additional information, see the Desktop Underwriter Job Aids.