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The lender must verify that sufficient funds to cover the gift are either in the donor’s account or have been transferred to the borrower’s account. Acceptable documentation includes the following:
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 a certified check, a cashier’s check, or other official check.
For more information, see B3-4.3-04, Personal Gifts.
Gifts must be evidenced by a letter signed by the donor, called a gift letter. The gift letter must:
When a gift from a relative or domestic partner is being pooled with the borrower’s funds to make up the required minimum cash down payment, the following items must also be included:
For additional information, see B3-4.3-04, Personal Gifts.
A borrower of a mortgage loan secured by a principal residence or second home may use funds received as a personal gift from an acceptable donor. Gift funds may fund all or part of the down payment, closing costs, or financial reserves subject to the minimum borrower contribution requirements. Gifts are not allowed on an investment property.
For additional information, see B3-4.3-04, Personal Gifts.
A gift can be provided by:
The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction. For additional information, see B3-4.3-04, Personal Gifts.
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:
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).
For additional information, see B3-3.1-01, General Income Information.
The lender must obtain copies of the borrower’s signed federal income tax returns filed with the IRS for the past two years for borrowers who are employed by family.
Additionally, income documentation requirements outlined in B3-3.1-03, Base Pay (Salary or Hourly), Bonus, and Overtime Income or per the Desktop Underwriter (DU) findings report must be met.
For more information, see B3-3.1-01, General Income Information.
A year-to-date profit and loss statement is not required for most businesses, but if the borrower’s loan application is dated more than 120 days after the end of the business’s tax year, the lender may choose to require this document if it believes that it is needed to support its determination of the stability or continuance of the borrower’s income.
For additional information, see B3-3.4-04, Analyzing Profit and Loss Statements.
Non-recurring income must be deducted in the cash flow analysis, including any exclusion for meals and entertainment expenses reported by the borrower on Schedule C.
The following recurring items claimed by the borrower on Schedule C must be added back to the cash flow analysis: depreciation, depletion, business use of a home, amortization, and casualty losses.
For additional information, see B3-3.3-03, Income or Loss Reported on IRS Form 1040, Schedule C and Fannie Mae’s Cash Flow Analysis (Form 1084)*.
*For a complete list of forms used in fulfilling requirements contained in the Selling and Servicing Guides, see the Guide Forms page.
Items that can be added back to the business cash flow include depreciation, depletion, amortization, casualty losses, and other losses that are not consistent and recurring.
The following items should be subtracted from the business cash flow for a Partnership, LLC or S Corporation:
Items that can be added back to the business cash flow include depreciation, depletion, amortization, casualty losses, net operating losses, and other special deductions that are not consistent and recurring.
The following items should be subtracted from the business cash flow for a Corporation:
For additional information, see B3-3.4-03, Analyzing Returns for a Corporation.
The lender may use discretion in selecting the method to confirm that the business has adequate liquidity to support the withdrawal of earnings. When business tax returns are provided, for example, the lender may calculate a ratio using a generally accepted formula that measures business liquidity by deriving the proportion of current assets available to meet current liabilities.
It is important that the lender select a business liquidity formula based on how the business operates. For example:
For either ratio, a result of one or greater is generally sufficient to confirm adequate business liquidity to support the withdrawal of earnings.
For additional information, see:
The version of Schedule K-1 that is utilized to report a borrower’s share of income (or loss) is based on how the business reports earnings for tax purposes:
The lender must use caution when including income that the borrower draws from the borrower’s partnership or S corporation as qualifying income. Ordinary income, net rental real estate income, and other net rental income reported on Schedule K-1 may be included in the borrower’s cash flow provided the lender can confirm that the business has adequate liquidity to support the withdrawal of earnings, as described below:
If business tax returns are required, then the lender must consider the type of business structure and analyze the business returns, according to the requirements described in B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower.
See also, B3-3.3-07, Income or Loss Reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1.
Limited Cash-Out Refinance Transactions. The continuity of obligation policy that required lenders to confirm at least one of the borrowers on a refinance transaction was also a borrower on the prior mortgage, specified a minimum number of months a borrower needed to be on title, and indicated LTV, CLTV, HCLTV ratio restrictions for limited eligibility, was eliminated in its entirety as of February 2016.
Cash-Out Refinance Transactions. For cash-out refinance transactions, the property must have been purchased (or acquired) by the borrower at least six months prior to the disbursement date of the new mortgage loan except for the following:
Cash-out refinance transactions must meet the following requirements:
For the maximum allowable LTV, CLTV, and HCLTV ratios and credit score requirements for cash-out refinances, see the Eligibility Matrix. For additional information, see B2-1.2-03, Cash-Out Refinance Transactions.
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 B2-1.2-03, Cash-Out Refinance Transactions for documentation and other requirements regarding cash-out refinance transactions.
|?||Requirements for a Delayed Financing Exception|
|The original purchase transaction was an arms-length transaction.|
|For this refinance transaction, the borrower(s) must meet Fannie Mae’s borrower eligibility requirements as described in B2-2-01, General Borrower Eligibility Requirements. The borrower(s) may have initially purchased the property as one of the following:
|The original purchase transaction is documented by a settlement statement, which confirms that no mortgage financing was used to obtain the subject property. A recorded trustee's deed (or similar alternative) confirming the amount paid by the grantee to trustee may be substituted for a settlement statement if a settlement statement was not provided to the purchaser at time of sale.
The preliminary title search or report must confirm that there are no existing liens on the subject property.
The sources of funds for the purchase transaction are documented (such as bank statements, personal loan documents, or a HELOC on another property).
|If the source of funds used to acquire the property was an unsecured loan or a loan secured by an asset other than the subject property (such as a HELOC secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property. Any payments on the balance remaining from the original loan must be included in the debt-to-income ratio calculation for the refinance transaction.|
The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value).
|All other cash-out refinance eligibility requirements are met. Cash-out pricing is applicable.|
For additional information, see B2-1.2-03, Cash-Out Refinance 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.
For additional information, see B2-1.2-01, Purchase Transactions.
Lenders must be in compliance with the Selling Guide regarding other parameters applicable to the subject loan, as well as, other guidelines pertaining to interested parties to the transaction, such as, but not limited to, interested party contributions (IPCs).
The requirements for second home properties are provided below:
*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)
For maximum allowable LTV/CLTV/HCLTV ratios and representative credit score requirements for a second home, see the Eligibility Matrix.
Additional guidance on entering housing expenses in DU for second home properties, see the related DU Job Aid.
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 B2-1-01, Occupancy Types.
Note: Our Selling and Servicing Guides and their updates, including Guide announcements and release notes, are the official statements of our policies and procedures and control in the event of discrepancies between the information provided here and the Guides.