7 - Table of Contents - First State Mortgagemsiloans.biz/Seller Guide/Guidelines/700/07-WS-Underwriting.pdf · Mortgage Insurance ... Presentation..... 7-22. Continued on Next Page

Mod Corr Seller Guide Underwriting

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7 - Table of Contents

7 - UNDERWRITING ....................................................................................................... 7-1

OVERVIEW ........................................................................................................................... 7-1 Description .................................................................................................................... 7-1 Philosophy ..................................................................................................................... 7-1 Underwriting Options ....................................................................................................... 7-1 Underwriting Methods ..................................................................................................... 7-1 Important ...................................................................................................................... 7-2 Underwriting Help ........................................................................................................... 7-2 Loan Quality ................................................................................................................... 7-2

Validation of Social Security Number .............................................................................. 7-2 LQI-Undisclosed Debt Policy ............................................................................................. 7-4

REGULATORY COMPLIANCE......................................................................................................... 7-5 Overview ....................................................................................................................... 7-5 RESPA ........................................................................................................................... 7-5 S.A.F.E. Act and FHFA-Data Capture ................................................................................. 7-5

S.A.F.E. Act Instructions for the 1003 ............................................................................ 7-7 Delaware, Maine and Missouri-NMLS Company ID ............................................................ 7-7

Risk Based Pricing Rules .................................................................................................. 7-8 Financial Reform ............................................................................................................. 7-9

CFPB – Consumer Financial Protection Board ................................................................... 7-9 Residual Income and Reserves for QM Rebuttal Presumption ........................................... 7-12 CFPB – ATR Standards (QM Underwriting Requirements) ................................................ 7-13 QM – Points and Fees ................................................................................................. 7-14 Additional Notes to Points/Fees – Regarding Credits ....................................................... 7-15 CFPB - Additional Requirements................................................................................... 7-15

Lock Agreements .......................................................................................................... 7-16 MSI UNDERWRITING ............................................................................................................. 7-17

Flood Zone Determination - Life of Loan .......................................................................... 7-17 HMDA Data .................................................................................................................. 7-17

Purpose of Refinance .................................................................................................. 7-17 Mortgage Insurance ...................................................................................................... 7-17 Notice of Loan Decision ................................................................................................. 7-18 Conditions/ Stipulation .................................................................................................. 7-18

AUTOMATED UNDERWRITING .................................................................................................... 7-19 Overview ..................................................................................................................... 7-19 Acceptable AUS Decisions .............................................................................................. 7-19 AUS Assignment ........................................................................................................... 7-19 AUS Tolerances ............................................................................................................ 7-19 Maximum Number of Borrowers ...................................................................................... 7-20 Submission Requirements for AUS Loans ......................................................................... 7-20 MSI Underwriting Submission ......................................................................................... 7-20 AUS Data ..................................................................................................................... 7-20

Fannie Mae Casefile ID and Freddie Mac LP AUS Key Number .......................................... 7-20 Excessive Submissions .................................................................................................. 7-21

UNDERWRITING GUIDELINES .................................................................................................... 7-22 Overview – Conventional Guidelines ................................................................................ 7-22 Overview – Government Guidelines ................................................................................. 7-22 Product Summary Precedence ........................................................................................ 7-22 Presentation ................................................................................................................. 7-22

Continued on Next Page


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Table of Contents, Continued ASSETS AND LIQUIDITY .......................................................................................................... 7-23

Overview ..................................................................................................................... 7-23 AUS Supporting Documents ........................................................................................... 7-23 Borrower Funds Secured by an Asset............................................................................... 7-23 Bridge Loan.................................................................................................................. 7-23 Business Funds ............................................................................................................. 7-24 Cash Value of Life Insurance .......................................................................................... 7-25 Credit Card Financing .................................................................................................... 7-25 Checking and Savings Accounts ...................................................................................... 7-25 Departure from Principal Residence ................................................................................. 7-25 Deposit on Sales Contract .............................................................................................. 7-26 Eligible Assets .............................................................................................................. 7-26 Verification Requirements .............................................................................................. 7-26 Funds to Close .............................................................................................................. 7-27 Gift of Equity ................................................................................................................ 7-29 Ineligible Assets ........................................................................................................... 7-30 Large Deposit ............................................................................................................... 7-30 Real Estate Proceeds ..................................................................................................... 7-31 Rent Credit for Options to Purchase................................................................................. 7-31 Reserves ..................................................................................................................... 7-32 AUS Underwritten ......................................................................................................... 7-32

Principal Residence Pending Sale ................................................................................. 7-32 Acceptable funds for Reserves ..................................................................................... 7-33

Retirement ................................................................................................................... 7-33 Sale of Stocks or Bonds ................................................................................................. 7-33 Tax Deferred Exchange .................................................................................................. 7-34 Verification of Deposits .................................................................................................. 7-35 Sale of Personal Assets .................................................................................................. 7-36

BORROWERS ...................................................................................................................... 7-37 Overview ..................................................................................................................... 7-37 Borrowers .................................................................................................................... 7-37 ARMs Length Transactions ............................................................................................. 7-37 First Time Homebuyers .................................................................................................. 7-37 Illinois Land Trust ......................................................................................................... 7-38

Eligibility Requirements .............................................................................................. 7-38 Documentation Requirements...................................................................................... 7-39 Signature Requirements ............................................................................................. 7-40

Inter Vivos Revocable Trust (IVRT) ................................................................................. 7-41 Eligibility Requirements .............................................................................................. 7-42 Required Documentation ............................................................................................ 7-43

IVRT & Illinois Trust Checklists ....................................................................................... 7-45 Multiple Mortgages to the Same Borrower ........................................................................ 7-46

Property Limitations Matrix ......................................................................................... 7-48 Non-Arms Length or Identity of Interest Transaction ......................................................... 7-49

Credit and Underwriting Requirements for Non-ARMs Length/Identity of Interest Transactions. ... 7-51 Non-Occupant Co-Borrower ............................................................................................ 7-53 Non-Permanent Resident Alien ....................................................................................... 7-54

Underwriting Requirements ......................................................................................... 7-55 NAFTA ......................................................................................................................... 7-56



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Table of Contents, Continued

Non-Purchasing Spouse ................................................................................................. 7-57 Permanent Resident Alien .............................................................................................. 7-58 Power of Attorney ......................................................................................................... 7-59 Purchasing Co-Borrower ................................................................................................ 7-60 Owner Occupancy – Primary Residence ........................................................................... 7-61

MSI Definition of Primary Residence (Owner Occupancy) ................................................ 7-61 Spousal Property Rights ................................................................................................. 7-61 Trailing Borrower Income ............................................................................................... 7-61 U.S. Citizen .................................................................................................................. 7-61

CERTIFICATIONS .................................................................................................................. 7-62 Summary ..................................................................................................................... 7-62

CONSTRUCTION TO PERMANENT FINANCING ................................................................................... 7-63 Overview ..................................................................................................................... 7-63 Characteristics .............................................................................................................. 7-63 MSI Requirements ........................................................................................................ 7-64

MSI Construction-to-Perm Requirements Matrix............................................................. 7-65 Single Close/ Integrated Documentation .......................................................................... 7-66

CONTRIBUTIONS .................................................................................................................. 7-67 Interested Party Contributions ........................................................................................ 7-67

Seller Concessions ..................................................................................................... 7-68 Realtor Commissions Limitations ................................................................................. 7-68

Sales Abatement .......................................................................................................... 7-68 CREDIT............................................................................................................................. 7-69

Overview ..................................................................................................................... 7-69 MSI Approved Credit Reporting Vendors .......................................................................... 7-69 Age of Documents – Conventional Loans .......................................................................... 7-69 Authorized User Accounts .............................................................................................. 7-70 Bankruptcy/ Foreclosure ................................................................................................ 7-71 Bankruptcy Underwriting ............................................................................................... 7-72

Extenuating Circumstances for Bankruptcy Only ............................................................ 7-72 Re-established credit considerations ............................................................................. 7-73 Documentation Requirements...................................................................................... 7-74 Pre-Foreclosure, Short Sale or Deed-in Lieu Underwriting ............................................... 7-75 Short Sale – Additional Guidelines ............................................................................... 7-76 Additional Requirements – Purchase Transactions-Subject in Short Sale ........................... 7-76 Short Sale Fees – Purchase Transaction ........................................................................ 7-77

Collections, Charge-offs, Judgments, Garnishments, and Outstanding Liens ......................... 7-78 Consumer Credit Counseling .......................................................................................... 7-78 Credit Report Inquiries .................................................................................................. 7-79 Credit Score (FICO)....................................................................................................... 7-79 Disputed Credit Information ........................................................................................... 7-80

Conventional, FHA and VA Loans ................................................................................. 7-80 USDA loans ............................................................................................................... 7-80

Electronic Credit Reports................................................................................................ 7-81 Modified Mortgage-Credit History Consideration ................................................................ 7-81 Mortgage/ Rental Payment ............................................................................................. 7-81 Non-Traditional Credit ................................................................................................... 7-81 Frozen Credit ............................................................................................................... 7-81 Trade lines ................................................................................................................... 7-82



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Residential Mortgage Credit Report ................................................................................. 7-82

Summary Information ................................................................................................ 7-83 Single Payment Notes ................................................................................................... 7-83

DISASTER POLICY ................................................................................................................ 7-84 Overview ..................................................................................................................... 7-84 Timing ......................................................................................................................... 7-84 Definition ..................................................................................................................... 7-84 Areas subject to Disaster Policy ...................................................................................... 7-84 Appraisal Requirements ................................................................................................. 7-85

Appraisals Completed on or before the Incident Period End Date ..................................... 7-85 FHA Streamlines and USDA Streamlines ....................................................................... 7-85 Appraisals Completed up to 90-days after the Incident Period End Date ........................... 7-85

Minor Damage Requirements .......................................................................................... 7-86 Major Damage Requirements ......................................................................................... 7-86 Damage Inspection Requirements ................................................................................... 7-86

DOCUMENTATION REQUIREMENTS .............................................................................................. 7-87 Age of Documentation ................................................................................................... 7-87 General Requirements ................................................................................................... 7-87 Direct VOE Requirements ............................................................................................... 7-88 Tax Extensions ............................................................................................................. 7-88 IRS 4506 ..................................................................................................................... 7-89

Tax Transcripts Review ............................................................................................... 7-90 Amended Tax Returns ................................................................................................ 7-91

Tax Payer Identification Theft ......................................................................................... 7-92 Verbal Verification of Employment .................................................................................. 7-93

Verbal Verification Requirements ................................................................................. 7-93 ESCROW (COMPLETION) HOLDBACKS .......................................................................................... 7-95

Overview ..................................................................................................................... 7-95 Eligibility ...................................................................................................................... 7-95 Roof Repairs ................................................................................................................ 7-97

ESCROW WAIVER POLICY ........................................................................................................ 7-98 Overview ..................................................................................................................... 7-98 Underwriter Responsibility ............................................................................................. 7-98

GOVERNMENT UNDERWRITING .................................................................................................. 7-99 Overview ..................................................................................................................... 7-99 Underwriting Guidelines ................................................................................................. 7-99

INCOME AND EMPLOYMENT...................................................................................................... 7-100 Important ................................................................................................................... 7-100 Overview .................................................................................................................... 7-100

Recent Tax Returns and a clarification of Income and “additional income” ........................ 7-101 DU/LP ........................................................................................................................ 7-102 Alimony / Child Support / Separate Maintenance ............................................................. 7-103 Boarder Income ........................................................................................................... 7-104 Bonus and Overtime ..................................................................................................... 7-104 Capital Gains ............................................................................................................... 7-104 Commission Income ..................................................................................................... 7-105 Disability Benefits ........................................................................................................ 7-105 Dividends and Interest ................................................................................................. 7-106



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Employment by Relatives or Transaction Participants ....................................................... 7-107 Foster Care Income ...................................................................................................... 7-107 Foreign Income ........................................................................................................... 7-108 Military Income ........................................................................................................... 7-110 Non-Taxable Income .................................................................................................... 7-110 Mortgage Credit Certificate ........................................................................................... 7-110 Note Receivable Income ............................................................................................... 7-111 Part-Time, Second or Multiple Income ............................................................................ 7-111 Pension / Retirement .................................................................................................... 7-111

Individual Retirement Account (IRA) Income ................................................................ 7-112 Public Assistance ......................................................................................................... 7-112 Rental Income - Primary ............................................................................................... 7-113 Rental Income - Investment .......................................................................................... 7-114 Rental Income – Other Properties .................................................................................. 7-114

Rental Income- Special Circumstance – Rental Property is borrower’s former primary residence. .............................................................................................................................. 7-115

Rental Income Through S-Corp or Partnership ................................................................. 7-115 Qualifying Without Rental Income .................................................................................. 7-115 Royalty Payments ........................................................................................................ 7-116 Salaried Borrower ........................................................................................................ 7-116 Salaried Income History................................................................................................ 7-116 Salaried Documentation ................................................................................................ 7-116 Salaried Verification of Employment ............................................................................... 7-117 Seasonal Income ......................................................................................................... 7-117 Social Security – Retirement Benefits ............................................................................. 7-117 Self-Employed Borrowers .............................................................................................. 7-118 Self-Employed Documentation ....................................................................................... 7-118 Business Debt ............................................................................................................. 7-120 Use of Corporate Net Profit ........................................................................................... 7-121 Self-Employed Income History ....................................................................................... 7-121 Temporary Employment Income .................................................................................... 7-121 Temporary Leave-Short Term Disability Income............................................................... 7-122 Income Verification Requirements .................................................................................. 7-122 Calculation of Qualifying Income .................................................................................... 7-123 Trust Income............................................................................................................... 7-123 Unacceptable Sources of Income ................................................................................... 7-123 Unemployment Benefits ................................................................................................ 7-124 US Tax Returns ........................................................................................................... 7-124 VA Retirement Benefits ................................................................................................. 7-124

LIABILITIES AND DEBT .......................................................................................................... 7-125 Overview .................................................................................................................... 7-125 Debt-to-Income ........................................................................................................... 7-125 Conversion of (or departure from) Principal Residence ...................................................... 7-125

LOAN PURPOSE................................................................................................................... 7-127 Overview .................................................................................................................... 7-127 Purchase Transactions .................................................................................................. 7-127 Refinance Credit Rule ................................................................................................... 7-127 Refinance ................................................................................................................... 7-127



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Refinance Requirements ............................................................................................... 7-128

General Refinance Requirements ................................................................................ 7-128 Seasoning Requirements ........................................................................................... 7-128 Continuity of Obligation ............................................................................................. 7-130 No Continuity of Obligation ........................................................................................ 7-131 LLC ......................................................................................................................... 7-131 Rate/Term (R/T) or Limited Cash Out (LCO) Refinance .................................................. 7-132 Cash Out Refinance ................................................................................................... 7-132

Delayed Financing Exception ......................................................................................... 7-133 Investment (NOO) Cash Out ......................................................................................... 7-134 Delinquent Property Taxes ............................................................................................ 7-134 Listed for Sale ............................................................................................................. 7-135 Modified/ Restructured Loans ........................................................................................ 7-135 Special Purpose Refinance ............................................................................................ 7-136

MORTGAGE INSURANCE ......................................................................................................... 7-137 Overview .................................................................................................................... 7-137 Approved Mortgage Insurance Companies ....................................................................... 7-137 Standard MI Coverage Requirements ............................................................................. 7-137 MI Premium Options ..................................................................................................... 7-138

PROPERTY......................................................................................................................... 7-139 Appraisal Standards and Requirements ........................................................................... 7-139

Interior Photos ......................................................................................................... 7-140 Appraiser Independence Requirements (AIR) .................................................................. 7-141 AIR/CFPB Audit Guidelines Matrix .................................................................................. 7-142 New Appraisals ............................................................................................................ 7-143 MSI Appraiser List ........................................................................................................ 7-143 Limitations .................................................................................................................. 7-143 Market Conditions Addendum ........................................................................................ 7-143 Age of Appraisal .......................................................................................................... 7-144 Appraisal Forms ........................................................................................................... 7-144

AUS High Value Messages .......................................................................................... 7-145 Appraisal Photographs .................................................................................................. 7-146 UAD ........................................................................................................................... 7-146

MSI Appraisal Ratings Overlays .................................................................................. 7-146 UCDP ......................................................................................................................... 7-147 Uniform Loan Delivery Dataset ...................................................................................... 7-147 Adverse Marketing Conditions........................................................................................ 7-148

Special Appraisal Requirements for Adverse Market Conditions ....................................... 7-148 Agricultural Properties .................................................................................................. 7-149 Builder Bail Out Policy .................................................................................................. 7-149 Comparables ............................................................................................................... 7-149 New Projects and/or New Subdivisions Comparable Requirements ..................................... 7-149 Chinese Drywall ........................................................................................................... 7-150 Condominium Overview ................................................................................................ 7-150 Condominium Appraisal ................................................................................................ 7-151 Condominium Characteristics ........................................................................................ 7-151



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MSI Acceptable Condos ................................................................................................ 7-152

DU Limited Review .................................................................................................... 7-152 LP Streamline Review ................................................................................................ 7-152 2-4 Unit Condos ....................................................................................................... 7-153 Fannie Mae Approved Project ..................................................................................... 7-153 CPM ........................................................................................................................ 7-153 FHA-Approved Project ............................................................................................... 7-153 Non-Warrantable Condos ........................................................................................... 7-153 Freddie Mac (LP) ....................................................................................................... 7-153

MSI Ineligible Condos ................................................................................................... 7-154 General Condo Requirements ........................................................................................ 7-156 Degree of Development ................................................................................................ 7-159 Deed Restrictions ......................................................................................................... 7-159

Occupancy Restrictions .............................................................................................. 7-159 Property with Resale Deed Restrictions ........................................................................ 7-159 Age Restrictions........................................................................................................ 7-159 Documentation Requirements for Age-Restricted Properties ........................................... 7-160

Environmental Issues and Other Hazards ........................................................................ 7-160 Ineligible Property Types .............................................................................................. 7-161 Land Contracts ............................................................................................................ 7-162 Underwriting the Land Contract for Sale ......................................................................... 7-162 Leasehold Estate Overview............................................................................................ 7-163

Leasehold Requirements Matrix .................................................................................. 7-163 Legal Non-Conforming Use ............................................................................................ 7-163 Location ..................................................................................................................... 7-164 Log Homes .................................................................................................................. 7-164 Lot Size- Maximum Acreage .......................................................................................... 7-165 New Construction......................................................................................................... 7-165 Modular/ Factory Built Homes ........................................................................................ 7-166 Mixed Use Properties .................................................................................................... 7-167 Outbuildings ................................................................................................................ 7-168 Private Road Maintenance ............................................................................................. 7-168 Purchase Agreement (Contract) – Re-Negotiated ............................................................. 7-169 PUDS Overview ........................................................................................................... 7-170 Attached PUD Insurance ............................................................................................... 7-171 REO/Repo Properties .................................................................................................... 7-172 Right of Redemption..................................................................................................... 7-172 Rural Property ............................................................................................................. 7-173 Security Bars .............................................................................................................. 7-173 Subject Property Size ................................................................................................... 7-173

PROPERTY FLIPPING ............................................................................................................. 7-174 Overview .................................................................................................................... 7-174 Chain of Title ............................................................................................................... 7-174 Underwriting Requirements for Purchase Transactions ...................................................... 7-175 Red Flags .................................................................................................................... 7-175 Property Seller is LLC ................................................................................................... 7-175 Property Flopping......................................................................................................... 7-176



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Table of Contents, Continued QUALIFYING RATIOS AND LIABILITIES ......................................................................................... 7-177

Summary .................................................................................................................... 7-177 Product Suites ............................................................................................................. 7-177 Debt-To-Income Ratio .................................................................................................. 7-177 Calculation .................................................................................................................. 7-178 Alimony ...................................................................................................................... 7-178 Automobiles ................................................................................................................ 7-178 Paying off Debt ............................................................................................................ 7-178 Monthly Payments ....................................................................................................... 7-179 Co-Signed Obligations .................................................................................................. 7-179

Real Estate Obligation ............................................................................................... 7-180 HELOC ........................................................................................................................ 7-180

For qualifying purposes ............................................................................................. 7-180 Revolving Debt ............................................................................................................ 7-181 Student Loans ............................................................................................................. 7-181

SUBORDINATE FINANCING ...................................................................................................... 7-182 Overview .................................................................................................................... 7-182 Subordinate Financing Requirements Matrix .................................................................... 7-182 Documentation Requirements ........................................................................................ 7-184 Home Equity Line of Credit ............................................................................................ 7-184


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7 - Underwriting

Overview

Description The Underwriting Chapter outlines the types of underwriting offered by Mortgage Services III, LLC (MSI) as well as providing underwriting requirements for MSI loan products.

Philosophy MSI is committed to closing/purchasing investment quality loans that meet acceptable risk standards as defined by the mortgage industry. All loans closed/purchased by MSI must be underwritten according to the guidelines and requirements of MSI; Fannie Mae; Freddie Mac; End Investors; Ginnie Mae (GNMA); FHA, VA, or USDA as applicable. MSI must deliver loans in accordance with the standards and requirements stated in the MSI Mod Corr Selling Guide.

Underwriting Options

MSI offers the following underwriting options: MSI Prior Approval Underwriting • MSI does not offer “delegated underwriting” to our Sellers,

regardless whether or not the loan is closed in the Seller’s name. Notes: MSI requires Sellers to originate loans in full compliance with all

state/federal and local regulatory requirements. All loans must meet MSI guidelines.

Underwriting Methods

MSI purchases/funds loans that are: Submitted to Automated Underwriting System (AUS) Underwritten

– MSI accepts the Fannie Mae DU approve or Freddie Mac LP accept decision with loan product parameter over-lays.

• FHA Total Score Card. • VA – DU or LP. • USDA GUS.

Continued on next page



Overview, Continued

Important

Important reminder: All “prior to doc” (aka “prior to close”) conditions must be approved/accepted by the applicable underwriter prior to closing the loan. MSI must approve/clear the prior-to-doc conditions before

documents are drawn and the loan closed. Failure to have the conditions cleared/approved may result in

subsequent discovery of un-approved/cleared conditions in a post- funding audit.

Underwriting Help

Use the following email address to request underwriting assistance: [email protected] or any member of the underwriting staff.

Loan Quality

MSI complies fully with the Quality Mortgage and the Ability to Repay (QM/ATR) implemented by the Dodd-Frank CFPB requirements.

Loan Quality, Continued

Quality Topic MSI Requirement/Audit Point Validation of Social Security Number

MSI requires that the SSN is validated. • MSI uses a Fraudguard product for all loans underwritten by MSI.

Important Note: MSI will not close any loan for which the AUS has an outstanding Social Security Verification

(SSN) Message on the final AUS finding. • Follow the applicable agency guidelines for validating the SSN and resubmit the loan

according the AUS Guidelines. Remember, if the SSN verification message is not removed on the final AUS finding, the loan is not eligible for closing.

Borrower Occupancy MSI requires that the borrower occupancy to be validated. (MSI requires an executed Borrower Occupancy Certification on all owner occupied loans.)

• MSI uses a Data Verify/FraudGuard product for all loans underwritten by MSI.


mailto:[email protected]



Overview, Continued

Loan Quality, Continued

Quality Topic MSI Requirement/Audit Point Validation of Qualified Parties to the Transaction

MSI requires that each loan contain documentation (copy of screen print-outs) provided by the Seller that each party to the transaction has been checked/validated on the following Web Sites: GSA List: https://www.sam.gov/portal/public/SAM/ LDP List: https://www5.hud.gov/ecpcis/main/ECPCIS_List.jsp Qualified Parties to be checked: Borrowers, Property Sellers, Title Company, Appraiser; Attorney; Loan Originator. Processor,

Listing and Selling Agents, and Settlement Agent. You must check full and partial names (as applicable to the site).

Additional Lists to validate include, but are not limited to: Condo Exclusionary Lists TPO lists. Settlement Agent Lists. Appraiser Exclusionary Lists, including applicable MSI and Fannie and/or Freddie. GSE Exclusionary Lists.

Borrower Credit-Undisclosed Liabilities

Each loan file delivered to MSI for closing must be submitted through an appropriate Fraud/Quality System (e.g. Core Logic, etc.) to ensure that all debts have been disclosed. A copy of the system findings/report for each qualifying borrower must be included in the

loan file. MSI will perform this “test” for each conventional loan underwritten by MSI. • See LQI-Undisclosed Debt Policy

Note: If an investor subsequently determines that any debts were not adequately disclosed on the application, nor included in the debt-to-income ratio such that the loan would not have met MSI’s eligibility requirements, the mortgage loan will be subject to repurchase.

Property Unit Number Each loan is subject to a USPS review. Note: For any property that is identified by a “unit” or “suite” number, that number must be included as part of the property address and be present on all applicable loan file documents to including settlement documents.


https://www.sam.gov/portal/public/SAM/

https://www5.hud.gov/ecpcis/main/ECPCIS_List.jsp



Overview, Continued

LQI-Undisclosed Debt Policy

The following outlines the policy MSI follows to ensure compliance with the LQI-Undisclosed Debt Requirements: MSI underwrites the loan MSI underwriter must condition the conventional loan to “Pull LQI

Credit Report prior to issuing a Clear to Close”. (Important Note: MSI will clear this condition, the report is ordered by MSI.) • The underwriter must then review the LQI credit report for any

new undisclosed debts, increase in debts, or inquiries for new debt.

• New or increased debt must be addressed by re-entering new/increased debt amounts into DU or LP and if applicable, the borrowers must provide an explanation for inquiries.

Once reviewed and resolved, the Underwriter adds a new condition to the loan: “MSI LQI Credit Report is good through (date 10-calendar days from date of LQI credit report). If loan does not close/disburse by (date) the loan must be returned to Underwriting for a new LQI Credit Report.”

Important Notes: Review of previously undisclosed debt may result in the borrowers no

longer qualifying for the loan, those loans may not be closed. MSI requires third party validation or credit supplement to validate

new debt. New debt must be disclosed on the Income/Debt Worksheet, the 1003

and all applicable DataTrac entries.



Regulatory Compliance

Overview

Each mortgage loan must be originated and submitted in compliance with the applicable underwriting guidelines in this Selling Guide and all applicable governing statutes and regulations as amended including, but not limited to, the following: Equal Credit Opportunity Act (ECOA/Regulation B) Consumer Credit Protection Act Fair Credit Reporting Act Fair Housing Act Truth-in-Lending Act (TIL/Regulation Z) Real Estate Settlement Procedures Act (RESPA/Regulation X) Home Mortgage Disclosure Act (HMDA/Regulation C) Home Ownership and Equity Protection Act (HOEPA-Section 32) Agency, Federal, State and Municipal High-Cost and Anti-Predatory

Laws (the more restrictive guideline always applies) The USA Patriot Act and Economic Sanctions as applied by the

Office of Foreign Asset Control (OFAC) CFPB with QM/ATR.

MSI does not discriminate against applicants on the basis of race, religion, national origin, sex, marital status, age (provided the applicant has the ability to enter into a binding contract) or because all or part of the applicant’s income is derived from any public assistance program.

RESPA

RESPA is completed/reviewed by the MSI RESPA Team. • During the course of underwriting any changes that may require

re-disclosure must be noted as a condition on the NOLA for the Disclosure Division to re-disclose.

S.A.F.E. Act and FHFA-Data Capture

MSI requires that all loans meet applicable State, Federal and GSE requirements for the S.A.F.E. Act. MSI will validate the ID numbers provided on each Application and

Appraisal prior to funding. • Loans underwritten by MSI: MSI will validate the ID numbers

provided against the NMLS Web Site. License ID/Numbers that are incorrect or missing will result in MSI not

closing the loan until the issue is resolved.




Regulatory Compliance, Continued

S.A.F.E. Act and FHFA-Data Capture, Continued

MSI currently requires the following in compliance with the GSE(Federal Housing Finance Agency) data capture requirements and the S.A.F.E. Act:

The following data elements/information must be captured: For the S.A.F.E Act:

• Loan Originator ID – Provide on the 1003, initial and final. • Loan Originator Company ID – Provide on the 1003, initial and

final. For the GSE’s:

• Field Appraiser License Number – Provide on the Appraisal – No state exceptions

• Supervisory Appraiser License Number – Provide on the Appraisal – No state exceptions.

Notes: While FHA and VA have not yet enacted a requirement to disclose the

NMLS numbers; MSI does require the information for government loans delivered/sold to us.

Federally Insured Banks/Credit Unions: Effective for loan applications on/after 7/29/11, all federally regulated originators will be required to provide their NMLS identifiers and meet the requirements of the S.A.F.E. Act.

MSI uses the following web site to validate NMLS numbers (http://mortgage.nationwidelicensingsystem.org/Pages/default.aspx

NMLS Number Tips: The NMLS Number should not:

• Be the branch ID. GSE’s require the Loan Origination Company ID to be provided.

• Include letters or special characters or be shorter than four or longer than twelve digits.

• Consist of Social Security Numbers, phone numbers, state license numbers, or your client code.

• Include leading zeros at the beginning of a number that do not factor into the total number of digits.

• Be the same for both the Individual ID and the Company ID. The Loan Originator Company ID will always be different from the Loan Originator Individual ID.


http://mortgage.nationwidelicensingsystem.org/Pages/default.aspx




S.A.F.E. Act and FHFA-Data Capture, Continued

S.A.F.E. Act Instructions for the 1003

Field on the 1003 (Use the Current Version) Instructions Loan Originator Name Name of the LO originating the loan. Must match the exact name of the LO as

documented in NMLS. Loan Originator Identifier Unique NMLS LO Number. Loan Originator Company Name Name of the company originating the loan. Must match the exact name of the

company as documented in NMLS. Loan Originator Company Identifier Unique NMLS Number assigned to that company (the corporate ID).

Note: If the company has multiple locations, the ID number for the corporate office is required on the 1003

Loan Origination Company Address Branch address where the loan originated.

REV (8/24/15) Delaware, Maine and Missouri-NMLS Company ID These states must comply with the S.A.F.E. Act and originators and

loan officer NMLS ID numbers are required.





Risk Based Pricing Rules

All loans with an application date on/after 1/01/11 the new Risk-Based Pricing rules, issued by the Federal Reserve Board and Federal Trade Commission are effective. Risk-Based Pricing rules are an amendment to The Fair and Accurate

Credit Transactions Act of 2003 (FACT Act). The FACT Act amended the Fair Credit Reporting Act (FCRA). • The Risk Based Pricing notice replaces the Notice to Home Loan

Applicant Disclosure (FACTA credit score disclosure). The new federal law requires that all borrowers are provided with the

Risk-Based Pricing notice within 3 business days of having credit pulled. • The notice provides borrowers with information regarding their

credit, including how their credit score compares to the credit scores of other borrowers.

Lenders should consult with their legal counsel or credit reporting vendors to ensure that the Notice they intend to provide to their applicants, on/after January 1, 2011, meets the disclosure requirements detailed under FCRA.

MSI will accept the Risk Based Pricing Notice included on the Credit Report. • The notice provided must be in full compliance with the new Risk

Based Pricing Rules.





Financial Reform

(7/02/14)

CFPB – Consumer Financial Protection Board All loans closed by MSI must meet the Qualified Mortgage/Ability to Repay requirements in the HUD and CFPB Final Rule.

ATR/QM Requirements The following matrix outlines MSI’s interpretation of the ATR/QM requirements of the Dodd-Frank provisions of the financial reform regulations.

ATR/QM Requirements Matrix – All loans except FHA Category Eligible for

MSI ATR/QM Requirements (2) (3) (4) (5)

Safe Harbor QM (4)

Yes Term 30 years or less, no negative amortization, no interest only, no balloon payment; and adherence to the applicable points and fees thresholds; and

APR < APOR + 1.5% (first liens); and 43% DTI underwriting requirements (based on Appendix Q guidelines); OR Fannie/Freddie eligible or insured by VA, HUD or Rural Housing – in which case the

43% DTI may be increased [Temporary QM -until proposed rule is finalized. (1)]. Rebuttable Presumption QM (4)

Yes – But must be “tested” by a third party vendor and identified.

Term 30 years or less, no negative amortization, no interest only, no balloon payment; and adherence to the applicable points and fees thresholds; and

APR ≥ APOR + 1.5% (first liens); and 43% DTI underwriting requirements (based on Appendix Q guidelines); OR Fannie/Freddie eligible or insured by VA, HUD or Rural Housing – in which case the

43% DTI may be increased [Temporary QM -until proposed rule is finalized. (1)]. The loan must be qualified using Residual Income and Reserve Requirements. See

Residual Income and Reserves for QM Rebuttal Presumption. Note: If the loan is DU Refi Plus or LP Relief Refinance and identified as an HPML the

maximum DTI is 45% regardless of the AUS approve/accept. Notes: 1. “Temporary QM” defines that loans that receive an Approve/Eligible (or equivalent result) or are eligible for insuring by VA,

HUD or Rural Housing are considered to meet the requirements for QM. Note: VA & FHA require an AUS Approve/Accept and RD requires GUS approval. DTI, as “approved” by the AUS are permitted (MSI may have lower DTI requirements on a specific product.)

2. “General/Standard QM”: Loans that do not meet the underwriting requirements under Temporary QM must have a DTI ≤ 43% to meet the General/Standard QM underwriting requirement. The determination of DTI must be in accordance with Appendix Q as outlined in the ATR/QM rule.

3. Investment Properties/ Second Homes – MSI requires that Investment Properties and Second Homes adhere to our ATR/QM requirements.

4. “HPML” must be confirmed by a 3rd party vendor. 5. MSI requires evidence written evidence of compliance with the ART/QM rules in each loan file; review Income & Debt in the

context of “ability to repay”; MSI requires a written Income and Debt Worksheet is each loan file.





ATR/QM Requirements, Continued

ATR/QM Requirements Matrix – FHA Loans (HUD Final Rule) Category Eligible for MSI ATR/QM Requirements (2) (3) (4) (5)

HUD Safe Harbor QM (4)

Yes Term 30 years or less, no negative amortization, not interest only, no balloon payment; and adherence to the applicable points and fees thresholds (see “Points and Fees” below); and

Loan is insured by FHA. APR < APOR + 1.15% (115 bps) + annual MIP

Notes: MSI does not permit the downgrade of an FHA loan to a manual underwrite. Federal HPML prepayment and escrow requirements apply if APR ≥ APOR+1.5%

HUD Rebuttable Presumption QM (4)

Yes – But must be “tested” by a third party vendor and identified.

Term 30 years or less, no negative amortization, not interest only, no balloon payment; and adherence to the applicable points and fees thresholds (see “Points and Fees” below); and

Loan is insured by FHA. APR ≥ APOR + 1.15% (115 bps)+ annual MIP The loan must be qualified using Residual Income and Reserve Requirements. See

Residual Income and Reserves for QM Rebuttal Presumption.

Notes: MSI does not permit the downgrade of an FHA loan to a manual underwrite. Federal HPML prepayment and escrow requirements apply if APR ≥ APOR+1.5%

Notes: 1. “Temporary QM” defines that loans that receive an Approve/Eligible (or equivalent result) or are eligible for insuring by VA,

HUD or Rural Housing are considered to meet the requirements for QM. Note: VA & FHA require an AUS Approve/Accept and RD requires GUS approval. DTI, as “approved” by the AUS are permitted (MSI may have lower DTI requirements on a specific product.)

2. “General/Standard QM”: Loans that do not meet the underwriting requirements under Temporary QM must have a DTI ≤ 43% to meet the General/Standard QM underwriting requirement. The determination of DTI must be in accordance with Appendix Q as outlined in the ATR/QM rule.

3. Investment Properties/ Second Homes – MSI requires that Investment Properties and Second Homes adhere to our ATR/QM requirements.

4. “HPML” must be confirmed by a 3rd party vendor. 5. MSI requires evidence written evidence of compliance with the ART/QM rules in each loan file; review Income & Debt in the

context of “ability to repay”; MSI requires a written Income and Debt Worksheet is each loan file.





ATR/QM Requirements, Continued

ATR/QM Requirements Matrix – VA Loans (VA Interim Rule) Category Eligible for MSI ATR/QM Requirements

Safe Harbor QM

Yes All purchase money loans and credit-qualifying loans guaranteed/insured by the VA with the exception of certain IRRRLs. • Term 30 years or less, no negative amortization, not interest only, no balloon

payment; and adherence to the applicable points and fees thresholds IRRRL with Safe Harbor must meet the following to be eligible:

• Seasoning: The loan must be originated a minimum of 6 months from the prior loan closing date.

• The loan cannot be more than 30 days past due during the most recent 6 months. (MSI requires the loan to be current and does not accept any mortgage lates in the most current 12 month period.)

• Fees and charges may not exceed 3% (calculated from the amount financed less the funding fee) and the Borrower must recoup those fees within 36 months of loan closing.

• All VA requirements must be met. The loan must be guaranteed by VA. VA Rebuttable Presumption

No MSI will not purchase any VA loan that is Rebuttable Presumption.

Notes: Note: MSI requires an AUS Approve/Accept. DTI, as “approved” by the AUS are permitted (MSI may have lower DTI

requirements on a specific product.) “MSI requires evidence written evidence of compliance with the ART/QM rules in each loan file; review Income & Debt

in the context of “ability to repay”; MSI requires a written Income and Debt Worksheet is each loan file.





Financial Reform, Continued

Residual Income and Reserves for QM Rebuttal Presumption MSI requires specific Residual Income and Reserves on all QM Rebuttal Presumption loans. Residual Income is defined (and calculated) as Qualified Gross Monthly

Income less the Gross Monthly Debt. • Do not use the non-taxable “grossed-up” figure to calculate

residual income. MSI requires a Residual Income Evaluation (RIE) on each Qualified

Mortgage that tests as a Rebuttal Presumption loan. (Currently all products.) • MSI has placed the RIE on the Summary Page of the Income and

Debt Worksheet that must be included in each loan. • The REI must be performed prior to loan consummation and

document sufficient residual income to meet monthly living expenses after paying their mortgage and other debts.

If the monthly residual income is … Then, the minimum Reserve Requirements are … Primary Residence

≥ $2500 No Minimum Reserve Requirement ≥ $800 < $2500 The greater of:

3 month’s liquid(1) PITI OR Minimum reserves for the specific loan product.

< $800 Loan is not eligible. Second Home or Investment Property

≥ $2500 No Minimum Reserve Requirement < $2500 Loan is not eligible.

1) Apply the definition for “liquid” reserves as required by the specific product (e.g. use the FHA definition of “liquid reserves” for FHA loans, the conventional definition for conventional loans, etc.)






CFPB – ATR Standards (QM Underwriting Requirements) In addition to Points & Fees Restrictions (See QM – Points and Fees),

and No Negative Amortization, No Interest Only or Balloon Payments, No loan terms greater than 30 year, the Ability to Repay (ATR) is the backbone of a Qualified Mortgage.

ATR standards require that the Underwriter (even when an AUS is used) must consider the following 8 underwriting factors when considering the borrower’s ability to repay the loan: • Income and Assets • Employment status • Monthly payments on the mortgage loan. Look at guides for

qualifications on all ARMS loans • Monthly payments on simultaneous loans secured by the same

property • Monthly payments on mortgage related obligations • Current debt obligations/Alimony/Child Support • Monthly DTI or residual Income • Credit History

Note: All loans must meet the ATR standards.






QM – Points and Fees To be considered for as a Qualified Mortgage all loans must meet the QM Points and Fees test. The following matrix provides the guidelines for that Points/Fees test. MSI performs a “PredProtect” test on every loan submitted for

delivery and MSI reserves the right to refuse closing of the loan based on the results of the “PredProtect” test.

• There is no cure for loans that do not meet the ATR/QM and Points/Fees requirements for Financial Reform.

Qualified Mortgage – Points/Fees Cap (Maximum Points and Fees ) $100,000 and greater 3% $60,000 to $99,999 $3,000 $20,000 to $59,999 5% $12,500 to $19,999 $1,000

Points/Fees Included in 3% Cap –MSI Interpretation Points/Fees Excluded in 3% Cap – MSI Interpretation Finance charges that are not bona fide or reasonable Per Diem Interest Third Party fees paid to the Broker, an Affiliate of the Broker or Lender. This includes the MSI Admin Fee.

Escrows (Impounds for taxes and insurance)

Conventional Private Mortgage Insurance (PMI): • Borrower paid Single Premiums – refundable or

non-refundable. • The upfront portion of borrower paid Split

Premiums.

Any premium payable to FHA MIP; VAFF; USDA GFEE; PMI may be excluded as follows:

• Borrower paid monthly premiums (no upfront fee required).

• The monthly portion of borrower paid Split Premiums. • Lender Paid Single or Monthly Premiums.

Wholesale Transactions Only: Lender Paid or Borrower Paid Compensation.

Up to 2% Bona Fide Discount points charged to borrower

Correspondent Transactions Only: All Borrower Paid LO Comp.

Correspondent Transactions Only: Lender Paid LO Comp paid by the creditor to their loan originator.

Loan Level Price Adjustments (LLPA) charged to the borrower which are not risk based. Clarification to follow at a later date.

Bona Fide & Reasonable third party fees charged to the borrower (e.g. Escrow; Title; Settlement; Appraisal; Credit (but not, if they are charged by an Affiliate.)

Notes: MSI requires an Affiliated Business Certification (or notice of the use of business affiliates on the Doc Prep Form) and the

Business Affiliate Disclosure signed by Borrower’s at application. Applies to all consumer credit transactions that are secured by a dwelling and are subject to Reg Z. APOR (Average Prime Offer Rate): http://www.ffiec.gov/ratespread/aportables.htm MSI will require evidence that loans meet the QM Points/Fees Cap prior to close. MSI is not providing this information as legal advice; this is our interpretation for loan acceptability to MSI. See Additional Notes to Points/Fees – Regarding Credits for additional details.


http://www.ffiec.gov/ratespread/aportables.htm





Additional Notes to Points/Fees – Regarding Credits Any fees charged to the borrower, regardless who pays them,

must be included in the Points and Fees test. Seller/Lender Credits cannot reduce points or fees for the

purposes of the Points and Fees test.

CFPB - Additional Requirements The following additional disclosure or documentation requirements also apply for Financial Reform: Disclosures

• Initial Appraisal Disclosure: Upfront disclosure to borrowers regarding their right to receive copies of all property valuations obtained during the loan process. o The borrower must also sign an AIR Borrower

Acknowledgement that they did receive copies of their property valuations on/or 3-days before closing.

• Home Ownership Counseling Disclosure: Evidence in the loan file that the borrower was provided with a written list of Homeownership Counselor Resources in their area. Note: Effective for loans with a RESPA application date on/after 7/30/14, MSI requires that the disclosure be in full compliance with CFPB.

Completed Income and Debt Worksheet in each loan file. Copy of complete listing of all Points/Fees on the loan (Fee Details

Form). Complete and correct NMLS numbers on the Loan Application and the

Note and Security Instrument. • The numbers and full names of the loan originator and loan

company must be correct to the current NMLS register. Notes: Loans must be in full compliance with Loan Originator Compensation

Rules. MSI does not accept High Cost or Sub Prime loans.





Lock Agreements CLAR (8/21/15)

Required for all Sellers that close loans in their names (Correspondent Lending Transactions). MSI requires that a Lock In Agreement signed by each Borrower is

included in each loan file delivered for purchase. MSI does not require the that our form is used (see MSI Sample Lock

Agreement Form), however, the form used by the Seller must be equivalent in the basic information included in the Lock In Agreement.

Note: The form is required if/when the Borrower elects to “float” the loan and then each time a lock is made for the Borrower, a “new” Lock In Agreement must be prepared and executed. • Do not forget that the applicable revised GFE/TILs (issued within

regulatory timeframes) must also be included in the loan delivery file.

Loan files delivered without a Lock In Agreement may not be eligible for purchase.

http://cp.mcafee.com/d/FZsS939J5xyWbUVxx4TsSCqehPbxEVsudFCzAsOeKzsSCqehP8WWa9JZAQszCm4PhOrmmQJ3MkHihZtxjwErlF8-KMFMkdETtKegvvW_cf8CzBZ5zHTbECzB5XzhOUevohjWyaqRQRrEIYG7DR8OJMddECQjt-jhphho7fI8CXCM0iJ97RS5e2C2ZoGzQXxoe5Wo5qSazQXxI1WtN0z7_l-4-mgtdHrecHiRriQfFo54fffFlKpfwqrpsjhdCXCWE2pJvVf

http://cp.mcafee.com/d/FZsS939J5xyWbUVxx4TsSCqehPbxEVsudFCzAsOeKzsSCqehP8WWa9JZAQszCm4PhOrmmQJ3MkHihZtxjwErlF8-KMFMkdETtKegvvW_cf8CzBZ5zHTbECzB5XzhOUevohjWyaqRQRrEIYG7DR8OJMddECQjt-jhphho7fI8CXCM0iJ97RS5e2C2ZoGzQXxoe5Wo5qSazQXxI1WtN0z7_l-4-mgtdHrecHiRriQfFo54fffFlKpfwqrpsjhdCXCWE2pJvVf



MSI Underwriting

Flood Zone Determination - Life of Loan

MSI requires a Life of Loan Flood Zone Determination (LOL FZD Cert) in the loan file at time of underwriting. The LOL/FZD must be received in the Underwriting file from one of the

MSI-approved vendors. If the LOL/FZD is not included in the underwriting delivery file, MSI

will condition for it. • MSI is not responsible for ordering or obtaining the LOL/FZD under

any circumstances.

MSI-Approved Flood Vendors Contact CoreLogic (fka First American Flood Data Services, Inc. FDSI) 800.447.1772 Elite Lender Services (an FDSI affiliate) 800.636.2711 ServiceLink (fka FIS Flood Services /fka LSI Flood/fka LPS) 800.833.6347 Wells Fargo Flood Service 800.805.9423 AFR Services (fka American Flood Research, Inc) 800.995.8667 fka = formerly known as

HMDA Data

Note: MSI is responsible for reporting detailed HMDA information on loans we underwrite or submit for prior approval, MSI will perform an audit of certain loan information (e.g. the Government Monitoring section of the 1003, etc.).

Purpose of Refinance MSI does require that the “purpose of refinance” be completed on the 1003 to HMDA requirements for each refinance loan.

Mortgage Insurance

Loans Requiring Mortgage Insurance MSI will order MI unless the Seller indicates that they will order

the MI upon underwriting approval.




MSI Underwriting, Continued

Notice of Loan Decision

Notice of Loan Approval or Suspension • Via email. Notice of Loan Denial • Via Phone call and Email

Important Note: Once MSI declines a loan in underwriting, the lock is automatically cancelled. The loan is no longer locked.

Conditions/ Stipulation

MSI requires the following: All prior-to-doc conditions must be cleared/approved by the

underwriter prior to the loan being sent for closing/ disbursement. MSI requires that all prior-to-close (prior-to-doc) conditions be sent

to the underwriter at one time. Important Note: Conditions that are sent to MSI separately will not be reviewed until all conditions for the loan have been received.



Automated Underwriting

Overview

Subject to product limitations within the Retail Guide, MSI will accept loans that are submitted to the following Automated Underwriting Systems (AUS): Fannie Mae Desktop Underwriter® (DU) • FHA Total Score Card Freddie Mac Loan Prospector® (LP) • FHA Total Score Card USDA GUS

Notes: All loans submitted to AUS must be submitted to the most current

DU/LP version available.

Acceptable AUS Decisions

Varies per product, see product guidelines.

AUS Assignment

MSI requires all Sellers to be signed up and have direct access to Fannie DO/DU and Freddie LP. DO/DU:When working with MSI, choose to assign DO loans to First

State Bank dba Mortgage Services III, LLC. LP: When working with MSI, choose to assign LP loans to Mortgage

Services III, LLC, a subsidiary of First State Bank.

AUS Tolerances

Each loan file submitted to an AUS must have in the Delivery file, the final AUS report that reflects the loan information as approved and closed. The following information on the final AUS must meet the information included in the closed loan file:

Income Assets Liabilities Loan Amount Sales Price Appraised Value Property Type

Interest Rate Loan Type Loan Term Loan Purpose Property Taxes: Must use the higher of:

appraisal, title, tax certificate or appraiser’s estimate (land and improvements) for re-assessment.

Refi purpose Occupancy Subordinate Loan

Amount




Automated Underwriting, Continued

Maximum Number of Borrowers

MSI will not accept loans where there are more than 4 borrowers on a loan. The AUS will accept more than 4 borrowers; however MSI requires

no more than 4, and MSI does require an AUS approval.

Submission Requirements for AUS Loans

MSI Underwriting Submission MSI requires a copy of the complete AUS Findings from the applicable AUS as well as the AUS-ran credit report from Fannie DU or Freddie LP in the underwriting file.

See Excessive Submissions.

AUS Data

With the onset of the Uniform Data Collection initiative with Fannie and Freddie Mac, it is critical now that MSI ensures that accurate data is input into DU and LP and delivered to MSI to ensure salability of the loans. The Final Data must match the closed loan: Information in DU or LP must be updated to match the closed loan

prior to loan closing. The most current Findings Report must be included, and must match

the closed loan information. The final Findings report must reflect an Approve/Accept Eligible (unless an “ineligible” is permitted specifically by MSI). • Fannie Mae may permit the re-submission of data after the Note

Date to correct the data, but this practice is not recommended. • Freddie Mac does not permit re-submission of data after the Note

Date. In all cases, MSI must follow the applicable AUS (DU or LP)

guidelines regarding data input and/or correction.

Fannie Mae Casefile ID and Freddie Mac LP AUS Key Number Each AUS assigns a unique identifier for each case submitted to the

AUS. It is assigned to that specific loan and cannot be used for any other loan, even if the same borrower(s) is involved.

If at any time the Casefile ID or LP AUS Key Number is determined to be associated with a prior loan, that loan is ineligible for MSI since it is subject to refusal by the agency resulting in a re-purchase situation for MSI.




Automated Underwriting, Continued

Excessive Submissions

MSI will not close a loan with an “Excessive Submission” message in the DU or LP Findings.

Manipulation of the data to receive an acceptable decision in the AUS for a non-credit worthy borrower is not acceptable to MSI.



Underwriting Guidelines

Overview – Conventional Guidelines

MSI Conventional Underwriting Guidelines are based on the blended (fungible) guidelines.

MSI follows these guidelines unless otherwise noted in the specific product suites.

Overview – Government Guidelines

Government loans must be underwritten to the current FHA, VA or USDA guidelines (as applicable to the loan product) unless otherwise specifically indicated in the product guidelines.

Product Summary Precedence

In all cases, if the product suite specifically addresses an underwriting requirement, the guidelines in the product suite prevail over this Underwriting Chapter.

Presentation The subjects in the underwriting requirements section of this chapter are presented alphabetically to facilitate research.



Assets and Liquidity

Overview

Liquidity or cash reserve describes cash or the ability to convert assets to cash in a short time. Net worth without liquidity is not enough. A borrower’s balance sheet should reflect and validate the

estimates concerning his or her prior and current income stream. Higher incomes should translate into liquidity found on the

borrower’s balance sheet.

AUS Supporting Documents

Assets entered into the AUS, must include supporting documentation in the loan file.

Borrower Funds Secured by an Asset

A loan secured by an asset may be used as Assets as follows: May be used as a source of funds for down payment, closing costs,

and financial reserves. Document terms of the secured loan. Calculate monthly payments and consider in debt ratio.

Bridge Loan Bridge (or swing) loans are a form of second trust that is collateralized by the borrower’s present home, which is usually for sale. The debt payment must be included for qualification. By using funds from a bridge loan, the borrower can close on a new

house before selling his/her existing house. A specified limitation on the term of a bridge loan is not required. The bridge loan amount may not exceed 90.00% of the current

appraised value of the bridge property. This type of financing is acceptable if: • The purchaser has the ability to carry the payment on:

− The new home (PITI). − The payment on the other obligations. − The payment on the current home (PITI). − The payment on the bridge loan.

If the repayment schedule for the bridge loan is not monthly, it must be converted to a monthly amount for qualifying purposes.

The bridge loan is not cross-collateralized against the new property.




Assets and Liquidity, Continued

Business Funds

In some cases, business accounts are an acceptable source of down payment (they are never acceptable as reserves); however, they are not acceptable under all circumstances because these funds are typically required to meet current business overhead and future capital requirements and generally are not representative of the borrower’s savings history. Consideration for use of business accounts is an “exception” to

policy. The exception may be considered by the underwriter if the borrower can evidence that the withdrawal of the funds will not negatively impact the operation of the business.

Businesses other than the following types may require additional supportive documentation as deemed appropriate by the underwriter:

• Sole proprietor • Sub Chapter S • Individually owned Corporation

Notes: The borrower must be listed as an owner of the account and the

account must be verified. The borrower must document 100% ownership to use business funds,

as permitted. Documentation from a disinterested third party (CPA, Tax Attorney,

etc.) must confirm that the borrower has access to the funds. MSI requires a cash flow analysis/balance sheet to confirm/validate

that the use of business funds will not negatively impact the business. • A letter from a third party (including a CPA) is not sufficient

evidence alone.





Cash Value of Life Insurance

The surrender of life insurance is acceptable under the following parameters: Can be used as a source of funds for the down payment, closing

costs, and financial reserves. Document by providing a copy of the check from the insurer or a

copy of the payout statement issued by the insurer. If being used for financial reserves only, the cash-value does not

need to be liquidated but it must be fully documented.

Credit Card Financing

Charges to a personal credit card may be used as follows: The total borrowed may not exceed 1% of the loan amount, which

may only include the following costs incurred in the loan process: • Actual cost of appraisal – up to $550 – may be charged on a credit

card. • May be used for application fee process charges (i.e., lock-in fees,

credit report, appraisal)

Checking and Savings Accounts

Borrower’s bank statements for the most recent two months.

• The statement must be a copy of the original bank statement showing the borrower’s name, institution name, and account number.

o Underwriters reserve the right to request additional supporting documentation.

• If a direct Verification of Deposit is provided, it must be accompanied by a copy of the original bank statements.

Large deposits and recently opened accounts must be documented and explained. See Large Deposit for details.

Departure from Principal Residence

See the following for full details: Conversion of (or departure from) Principal Residence. Equity

position is no longer required to be verified. Rental Income- Special Circumstance – Rental Property is

borrower’s former primary residence.





Deposit on Sales Contract

The deposit on the sales contract is an acceptable source for down payment and/or closing costs. When the deposit is used to make any portion of the borrower’s down

payment it must come from his/her own funds. • Important Note: All funds used for the down payment or to close the

loan must be properly sourced. Verification that the deposit has cleared the bank must be

documented. The earnest money must be sourced as follows: • The source must be verified with either:

− Bank statements for most recent two months (If check has cleared account, the statement should cover the period up to and including the date the check cleared).

− Verification that the deposit has cleared the bank must be documented if it is ≥ 2% of the sales price.

Eligible Assets

The following types of accounts will be considered eligible liquid assets for closing costs and/or reserves: Stocks/Bonds (See Acceptable funds for Reserves) Bridge Loan (See Bridge Loan for details) Certificate of Deposit Checking Account Gifts (Personal Gift - See Gifts for details) Gift of Equity (See Gift of Equity for details.) Money Market Fund Mutual Fund (See Acceptable funds for Reserves) Rent Credit in Options to Purchase (See Rent Credit for Options to

Purchase for details.) Retirement Fund Savings Account Trust Funds The following types of accounts will be considered eligible assets for

reserves at 60.00% of documented vested value: • Individual Retirement (IRA) and Keogh Accounts • 401 (k) Plan Accounts

See Reserves for additional information. Verification Requirements

As determined by AUS and, if not required by AUS and assets were entered and submitted for AUS review, MSI requires supporting documentation (See AUS Supporting Documents).

Two consecutive monthly bank statements. Satisfactory explanation and documentation should be provided for

large deposits. See Large Deposit for details.





Funds to Close Sources of Funds for Closing The borrower must have sufficient cash deposits and other assets to close the loan and to confirm the level of reserves needed after closing. Generally, the borrower must have enough assets to cover the

minimum required down payment that must come from his or her personal funds.

However, funds received from other acceptable sources can be used to accompany the minimum down payment from the borrower’s funds to pay the borrower’s share of the closing costs and prepaid items and to satisfy the reserve requirement.

Acceptable sources of down payment: Gift from family member, as permitted by the product. Trade Equity – funds from their existing home in trade as part of

the down payment. Permitted only for primary residence. Rent Credit – lease-purchase funds. Funds held in a checking or savings account.

Stocks • A photocopy of the stock certificate, accompanied by a current

dated newspaper stock list. Government Bonds. • The value of government bonds should be based on their purchase

price unless the redemption value can be documented. Mutual Funds. Trust Accounts. • Funds disbursed from a borrower’s trust account are an acceptable

source of the down payment and reserve requirements if the borrower has immediate access to them.

• Confirmation from the trust manager or trustee is to verify the value of the trust account and prove the conditions under which the borrower has access to funds; receipt of funds must be documented.

Retirement Accounts (IRA/Keogh Accounts, 401Ks), see Retirement for requirements and limitations.





Gifts

Gifts are an eligible source of down payment and/or closing costs for primary and second residences only, provided they are donated by a related person (see below) and do not require repayment by the borrower. Gifts are not permitted for investment properties.

• Gifts must be from relatives, domestic partners, or fiancé/fiancée. • No portion of the down payment may be donated by interested parties

to the transaction including sellers, realtors, brokers, or sales associates.

The following conditions apply when a gift is being used for down payment, closing costs or prepaid items:

• The borrower must invest at least 5% of his/her own funds toward the down payment unless the gift is 20% of the lesser of the sales price or appraised value of the property. o If the gift towards down payment is 20% or more, the borrower is

not required to make an investment from his or her own funds. o Note: MSI offers a 100% Gift Product subset, The gift donor must

be a relative or someone who can demonstrate a history of shared financial relationship with the borrower.

• A relative is any person related by blood, legal proceedings, marriage or adoption (e.g. parent or step-parent, sibling, aunt/uncle, child (adoptive or natural), etc.

The gift must be verified and documented as follows: Donor’s gift letter stating: relationship to borrower, amount of the gift,

date the gift was/will be given, the donor’s name and address and that the gift does not need to be repaid.

• The gift letter must executed by the donor. It must be verified that sufficient funds to cover the gift are either in the

donor’s account or have been transferred to the borrower’s account. Acceptable donor documentation includes the following:

• A copy of the donor’s cancelled check and the borrower’s deposit slip, or

• A copy of the donor’s withdrawal slip and the borrower’s deposit slip, and copy of the donor’s certified or cashier’s check, or

• A settlement statement showing receipt of the donor’s certified or cashier’s check.

• When the funds are not transferred prior to settlement, the loan 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.

• If wire transfer: Wire Transfers must evidence originating source as donor of the gift and banking institution of the donor along with fully executed gift letter.

Notes: Specific product, program or agency minimum investment standards may

differ. Review product guidelines for specific products. Gifts may not be used to meet reserve requirements. Review product

summaries.





Gift of Equity

)

A gift of equity is treated as a liquid asset and must be documented with an executed gift letter. A gift of equity is considered a Non-ARMs length transaction ( Non-

Arms Length or Identity of Interest Transaction) and the following guidelines must be met:

• Sales contract must reference the amount of equity gift being transferred.

• Seller must be an immediate relative (Parent, grandparent, child, sibling, legally adopted or foster) o The relative providing the gift of equity may not be, or have

any affiliation with the builder, developer, real estate agent or any other interested party to the transaction.

• Single Family Primary Residence and single unit Second Home Only

• Appraiser to acknowledge the gift equity and state no effect on value.

• All limitations on gift funds apply. See Gifts for down payment guidelines.

• The Closing Disclosure/Settlement Statement for the subject must reflect the exact dollar amount of the gift equity.

• The borrower may not receive any liquid funds from the trade equity.

• When the borrower is using a Gift of Equity as a down payment, underwriter must verify that a minimum of 5% of the sales price has been paid by the borrower(s) from properly sourced personal funds. (The minimum down payment must be paid before the gift of equity is applied.) o Note: Gifts of Equity apply the same LTV rule as Gifts: If the

LTV of the loan is 80% or less, the borrower does not need to have 5% of their own funds in the transaction.

• MSI requires the following for the subject property (whose equity is being given as a gift): o A Desk Review of the appraisal for the subject property must

validate the value of the original appraisal. o A 24-month chain of title (“standard” is 12-month). o A 12-month review of the underlying mortgage to evidence the

mortgage is current and has a 0X30 payment history for the most recent 12 months.

Note: If the product specifically restricts Non-ARMS length transactions, a

gift of equity is not permitted.





Ineligible Assets

The following assets are ineligible for loans sold to MSI: Cash on hand Cash Out proceeds Stock options Realtor’s Commission received from subject property financial

transaction Pooled Funds Restricted Retirement Funds – those with prohibitive withdrawal

penalties or those that are not permitted to be withdrawn. The following are acceptable only if permitted specifically by the

product: • Down payment Assistance Programs, regardless who funds. • Grants, regardless of who funds.

Large Deposit )

• Since mortgage lenders are responsible for Anti-Money Laundering requirements, the funds in a borrower’s account, regardless whether required for closing or not, must be properly sourced.

• The underwriter must ensure that all deposits, for all loan types and products are properly sourced.

• If the source of any portion of the “large deposit” is not documented, MSI requires a Letter of Explanation (LOX) from the borrower, regardless whether or not the funds are used in the transaction.

Fannie Mae DU Freddie Mac LP Large Deposits are defined as any single deposit that exceeds 50% of the total monthly qualifying income for the loan. • If the “large deposit” is needed to complete the transaction (down payment, closing costs or financial reserves) the

source of the funds must be acceptably documented. • If any portion of that “large deposit” cannot be properly sourced and documented, that amount must be calculated to

determine if it meets the “large deposit” definition. o If it does, the “unsourced” amount must be deducted from the “verified” funds and may not be used for the loan

transaction. o If it does not, the “unsourced” amount may be included in the “verified” funds and may be used for the loan

transaction. Important Reminders: Regardless of transaction type, MSI requires the proper “sourcing” in accordance with Anti-Money Laundering requirements

for all funds including Earnest Money Deposits, Donor Funds for gifts etc. Note also that if the source of any of the funds are “borrowed funds” the applicable debt must be considered in the DTI

(unless secured by a liquid assets such as a Certificate of Deposit or 401K asset)..





Real Estate Proceeds

To use proceeds from the sale of a currently owned other-real-estate property for closing-fund requirements and post-closing liquidity/cash reserve ratio calculations, use the following guidelines: The closing of the other real estate transaction must take place

prior to or simultaneous with the subject closing; and The net proceeds to the borrower must be verified via either a: • Final Closing Disclosure/Settlement Statement , or • Buyer Seller Closing statement with copy of proceeds check or • Equity statement from the closing agent.

Rent Credit for Options to Purchase

Option to Buy – (aka Lease Option to Purchase) The property seller may give the purchaser/borrower credit toward the down payment for a portion of previous rent payments made by the purchaser under a documented rental purchase (Lease Option) agreement that had a minimum original term of at least 12-months. The purchaser/borrower is not required to make a minimum cash

down payment from personal funds for the rent credit to be applied toward the down payment.

Documentation Requirements A copy of the rental/purchase agreement must be provided to

verify the monthly payments and the specific terms of the lease with option to buy.

The appraiser must determine the “market” rent in the area. • The amount of the rent applied toward the down payment is the

difference between the market rent and the actual rent paid. Copies of the cancelled checks or money order receipts are required

to verify payments made.





Reserves

AUS Underwritten MSI requires that all conventional loans receive an Accept or Approve

decision from either DU or LP. MSI does require specific reserves regardless of the AUS.

Primary Residence Single Family Per the AUS Finding. Primary Residence – 2-4 Units Per the AUS findings. Second Home Borrowers must have 2 months PITI for the subject property and an

additional 2 months PITI for each second home or 1-4 investment property financed by the borrower.

Investment Property Borrowers must have 6-months PITI in reserve for the subject

property, regardless whether rental income is used to qualify or not. • Additionally, borrowers must have a minimum 2 months PITI for

each other financed second home or 1-4 unit investment property for which they are obligated.

Principal Residence Pending Sale If the borrower’s current principal residence is pending sale, and he/she is purchasing a new principal residence, both the current and proposed mortgage payments must be used in qualifying the borrower for the new mortgage loan. MSI requires minimum reserves of 6 months principal, interest, taxes,

and insurance (PITI) for each property. If 30% equity in the existing principal residence is documented with a

current full appraisal, MSI will accept a 2 month reserve for each property (PITI).

Exception: MSI will not require the current principal residence’s PITI to be used in qualifying as long as the following documents are provided: • 6-months payment Reserves after closing on the current subject

property and the current property held for sale, and. • The executed sales contract for the current residence, and • A Clear firm commitment to purchase from the lender with

confirmation that any financing contingencies are cleared, and • Documented (with a full appraisal) 30% equity in the existing

property pending sale.

See Conversion of (or departure from) Principal Residence for additional details and guidelines.





Reserves, Continued

REV (9/18/15) Acceptable funds for Reserves Assets on hand, documented by the Bank Statements. Net proceeds from the sale of a previous asset that is not for closing

the subject property. Retirement Accounts – When using retirement accounts as reserves,

only 60.00% of the vested value may be used. See Retirement for additional details. • Must document that the account funds can be liquidated if

required. This condition may be added at the underwriter’s discretion.

Stocks, bonds and mutual funds used as assets toward reserves, follow current Fannie Mae (DU) or Freddie Mac (LP) guidelines as applicable. • Stock options and non-vested restricted stock are not eligible for

use as reserves.

Retirement

Retirement accounts (IRAs, Keogh accounts, 401(k) accounts, etc.) are subject to withdrawal penalties and tax surcharges if withdrawn prior to normal distributions.

Because of these restrictions, the following guidelines apply to the use of retirement accounts for closing-fund requirements: Unless specified by an automated underwriting system, 60.00% of

IRAs, Keogh Accounts, 401(k) Accounts, and the cash value of annuities can be used to determine funds available for withdrawal.

Borrower must provide evidence of the receipt of the retirement withdrawal to provide the sufficient funds for closing.

Sale of Stocks or Bonds

CLAR (9/18/15)

Funds from the sale of stocks or bonds is acceptable as long as the following apply: The existence and value of the stock or bonds is verified. • The value of stocks are verified with a current statement from the

stockbroker. A copy of the stock certificate and dated newspaper stock price list

must verify the value and existence of stock not held by a financial institution.

Note: Verification of sale is required only if the specific funds are needed for closing. MSI requires documentation of liquidation and only the liquidated amount may be used for down payment.





Tax Deferred Exchange

A 1031 Tax Deferred Exchange is permitted as a source of funds for Investment properties under the following guidelines: The 1031 must be properly documented and in full compliance with

Internal Revenue Code Section 1031. Permitted only when the property sold (exchanged) and the subject

property are both investment properties. The sales contracts from both the sale of the previous property

(from which the 1031 assets are acquired) and the purchase of the subject property must state that a 1031 Deferred Tax Exchange is being utilized.

The loan closing for the property sold and the subject property purchased through the exchange must be handled by a qualified intermediary.

• The intermediary must be an independent third party such as a title company, escrow agent, or exchange company and not a real estate agent, broker, attorney, accountant, banker or investment advisor.

Reverse exchanges are not allowed because the borrower is not on title to the property at the time of closing.

Subordinate financing is not permitted. The following documentation is required in the loan file: • Copy of the sales contract from both the sale of the previous

property and the purchase of the subject property. • 1031 Exchange Agreement and title transfer. • Settlement Statement/Closing Disclosure from the sale of the

previous property and the purchase of the subject property. Verification of receipt of funds from the intermediary, including a trail on the wire required.





Verification of Deposits

To substantiate a borrower has sufficient cash deposits and other assets available to complete the mortgage transaction and retain adequate reserves after closing; the loan file must verify the amount in the borrower's depository accounts (checking accounts, savings accounts and retirement accounts) for the two-month period that precedes the date of the loan application. When there is a recently opened account, a recently received large

deposit, or an account balance considerably greater than the average balance the source of funds must be documented. See Large Deposit.

The loan file must also verify the value of the borrower's other financial investments (stocks, bonds, mutual funds, etc.) as of the date of the loan application.

See Acceptable funds for Reserves

Bank Statements Are required even if a VOD is received from each depository. Verify available funds for closing by obtaining from the borrower a

copy of the applicable bank or investment portfolio statements that cover activity in the accounts for the most recent two-month period (or, if account information is reported on a quarterly basis, for the most recent quarter).

If the latest bank statement is more than 45 days earlier than the date of the loan application, a more recent supplemental bank-generated form that shows the account number, balance and date is required

The statements must be a copy of the original bank statements: • “FAXED” or statements downloaded from the Internet must clearly

identify the name of the depository or investment institution and the source of the information (e.g. the information is contained in the banner that is at the top of the document).

Bank or investment portfolio statements must clearly identify the borrower as the account holder and include:

• The account number; • The time period covered by the statement; • All deposits and withdrawal transactions (for a depository account)

or all purchase and sale transactions (for a financial portfolio account); and

• The ending account balance.





Retirement Accounts

Retirement account statements must identify the borrower's vested amount and the terms and conditions for loans or the withdrawal of funds. • Calculate at 60% of the vested amount when using for reserves. • When using for down payment, the documented liquidated amount

may be used.

Sale of Personal Assets

To ensure compliance with Anti-Money Laundering, MSI is adding the following documentation requirements for the Sale of Personal Assets. (Personal assets are defined as something other than real estate property, stocks, bonds, etc. that all have separate documentation requirements; like a car, boat, equipment, etc.) Documentation that the borrower (seller) owned the asset prior to

sale. (E.g. title to the asset; original receipt or bill of sale for the asset).

Documentation to support the current value of the asset. Bill of Sale for the personal asset sold to complete this transaction:

• Date of Sale. • Description of Asset. • Sales Price. • Signature of Buyer and Seller.

Copy of the check from the purchase of the Asset or the borrower’s bank statement verifying the deposit of the proceeds from the sale.



Borrowers

Overview Eligible borrowers are noted in each separate product summary. In general, only natural persons are eligible for loans sold to MSI. The definitions provided below are for general terms used in the

Seller Guide.

Borrowers Unless otherwise noted in specific product, the following are MSI guidelines:

Eligible Ineligible Natural Person(s) Permanent Resident Aliens Non-Permanent Resident Aliens Inter Vivos Revocable Trusts (See Inter Vivos

Revocable Trust (IVRT)) Always allowed for primary residence transactions, call for exception on any other.

Illinois Land Trust ( See Illinois Land Trust requires a request for an exception. Primary residence transactions only. )

Note: All borrowers must have a valid social security number; a Tax Identification Number is not acceptable.

Conservatorships Corporations Borrowers with diplomatic immunity Co-Signers and Guarantors Guardianships S Corporations Life Estates Real Estate Syndication Partnerships Foreign Nationals Non-profit organizations Trusts, except those specifically permitted

ARMs Length Transactions

An ARMs length transaction occurs when the parties involved are entirely independent of one another. All parties deal with one another as strangers and have no reason to collude.

First Time Homebuyers

In all circumstances, first time homebuyers should have an acceptable housing history. However, if a housing history does not exist (e.g., borrowers lived rent free with family) the underwriter may waive the housing history requirement for permitted programs based on one of the following: Established credit history, as reflected in the AUS approval.

.




Borrowers, Continued

Illinois Land Trust

A property owner will transfer the property title to a corporation or financial institution that currently is in the business of acting as trustee under an “Illinois Land Trust”. Concurrently, the owner (beneficiary) retains the power to manage, sell and control the property.

• MSI requires a stamped/signed original Certified Copy of the Land Trust Agreement evidencing only our borrower(s) as the primary beneficiary.(secondary beneficiaries upon death are unlimited)

• MSI only allows a loan to close in an Illinois Land Trust on a primary residence transaction and must call and be granted an exception for the transaction.

Eligibility Requirements Illinois Land Trusts are acceptable under the following conditions: • Conforming conventional fixed rate and ARM’s. Other products

may permit; see the individual, products within the product suites for details.

• The subject property must be located in Illinois. • AUS underwriting only with Approve/Eligible or Accept. • Owner occupied. • All beneficiaries are individuals; • The borrower(s) must be the primary beneficiaries of the trust. • The trustee must be a corporation or financial institution (no

exceptions) currently in the business of acting as trustee under Illinois Land Trusts.

• The beneficiaries must have sole power of direction over the land trust and trustee.

• All beneficiaries are obligated as individuals under the terms of the Note.





Illinois Land Trust, Continued

Eligibility Requirements, Continued • The borrowers have been underwritten and are qualified borrowers

under the requirements of the product. • The term of the trust agreement is at least as long as the term of

the security instrument. • Legal title to the property must be held in the name of the trustee

on behalf of the land trust and there may not be other owners. • The title insurance policy must ensure full title protection, and

must indicate that title to the subject property is vested in the trustee of the trust.

• The policy may not list any exceptions with regard to the trust or the trustee. The title company must have received a copy of the trust.

Documentation Requirements In addition to the Note and Security Instrument, the following Trust documents must be included in the loan file: Trust Agreement– An original stamped (by the Trust Department)

and signed copy of the executed trust agreement Land Trust Rider to the Mortgage/Deed of Trust Land Trust Rider to the Note

Important: No additions, deletions or other riders are acceptable. MSI will not accept a Power of Attorney signature when closing in

the name of a Trust. Borrower(s) must execute the Note personally.





Illinois Land Trust, Continued

Signature Requirements

Document Signature Requirements Note The Beneficiary must execute the Note as an

individual. Land Trust Rider to the Note The Beneficiary must execute the Note as an

individual. The trustee must execute.

Security Instrument The number of the trust and the date the trust was created must be placed immediately after the name of the trustee.

The Trustee must execute. Land Trust Rider to the Mortgage/Deed of Trust The trustee must execute. Important: The Riders must be dated and executed the same day as the Mortgage and the Note.





Inter Vivos Revocable Trust (IVRT)

MSI will accept loans subject to an inter vivos (living) trust as permitted by the applicable product.

An Inter Vivos revocable trust is a trust that: An individual creates during their lifetime. Is effective during the creator’s life. Amendable by the creator at any time.

Note: Validate that the end investor will accept.

Inter Vivos Revocable Trust are permitted and accepted as “borrower and property owner” under the following requirements: In compliance and valid with state law. • An IVRT that is established and recorded in one state may not be

applicable under the laws of another state. • If the IVRT is not established in the same state as the subject

property, the Attorney’s Opinion Letter must state that, under the laws of the property state, the IVRT and the trust documents are valid and enforceable. If an institutional trustee has been appointed, that the Trustee is in fact authorized to act as Trustee.

Established by a natural person, as opposed to a legal entity. • It may be established by one individual or jointly by more than one

individual. Trustee must have the power to mortgage the security property. Each individual establishing a Trust is a

Trustor/Grantor/Settlor/Donor (the Settlor); the terminology used will depend upon the applicable state. Additionally, if no institutional trustee was appointed, this same individual/Settlor must be a Trustee.





Inter Vivos Revocable Trust (IVRT), Continued

Eligibility Requirements Single Family, Primary Residence or Second Homes only. At least one of the Settlors must be a borrower. At least one of the Primary Beneficiaries must be a borrower and a

Settlor. At least one of the Primary Beneficiaries who is a borrower and a

Settlor has reserved the right to Revoke, Alter, or Amend the Trust during his/her lifetime.

At least one of the individuals/Settlor must be the Primary Beneficiary and an occupying borrower whose income or assets were used to qualify for the loan.

At least one of the Trustees must be a Primary Beneficiary, borrower, and Settlor.

Full title must be vested in the trustee(s); no other owners. Title exceptions with respect to the trust are not permitted.

Underwritten as if the individual(s) establishing the trust were the borrower(s). There is no unusual risk of impairment of the lender’s rights

including the right to have full title to the property conveyed to the lender should foreclosure proceedings have to be initiated or a deed in lieu issued to cure a default under the terms of the mortgage.





Inter Vivos Revocable Trust (IVRT), Continued

Required Documentation An Attorney’s Opinion Letter is required, verifying the following:

• The Trust was validly created and duly exists under applicable law. • The Trust is revocable. • The borrower is the Settlor of the Trust and the Beneficiary of the

Trust. • The Trust assets may be used as collateral for a loan. • The Trustee is:

o Duly qualified under applicable law to serve as Trustee. o Is the Borrower. o Is the Settlor. o Is fully authorized under the Trust documents and applicable

law to pledge or otherwise encumber the Trust Assets. • Additionally, the Attorney’s Opinion Letter must clearly include

the following information: o Name of the Trust o Date Executed o That the trust is Revocable o Does the trust have multiple trustees; their names. o How the trust requires the vesting to be held. o The attorney needs to verify that the trust has not been

revoked, modified, or amended in any manner that would cause the representations to be incorrect.

o Verify that a Power of Attorney can execute closing documents on the trust.

Exception for Trust Certificate Authorized States: In lieu of the Attorney’s Opinion Letter and copies of trust documents the title company Trust Certification is acceptable in the following states:

AL AZ AR CA DE

DC ID IA KS ME

MI MN MO NE NV

NH NM NC OH OR

PA SC SD TN TX

UT VT VA WA WY

Trust Agreement • A complete copy of the Trust Agreement. • The Trust Agreement must show that the trust was created under

the laws of the state in which the property is located. (See Attorney’s Opinion Letter in Inter Vivos Revocable Trust (IVRT).)





Inter Vivos Revocable Trust/Required Documentation, Continued

Note • Each Trustee of the Trust must sign the Note as Trustee • Each Settlor who signed an application (1003) must sign the Note

as an individual • Each individual that is not a Trustee but signed an application

(1003) must sign the Note as an individual. Important: MSI cannot accept a Power of Attorney signature to close when closing in the name of a Trust.

Note Signature Requirements Single Line Signature Example

(signed as) John Smith

John Smith, Individually and as Trustee of the John Smith Trust, under Trust Instrument dated 1-1-07, for benefit of John Smith.

Dual Line Signature Example


John Smith, Individually


John Smith, Trustee of the John Smith Trust, under Trust Instrument dated 1-1-07, for benefit of John Smith.

Trust Addendum to the Note • Original signed document is required.

Addendum to the Note Signature Requirements Example 1



Example 2


John Smith, Revocable Trust Settlor





Inter Vivos Revocable Trust/Required Documentation, Continued

Security Instrument (SI) • The vesting on Page 1 of the SI should match the vesting on the

Title Commitment

Security Instrument Signature Requirements Vested as Individual and Trustee

Single Line Signature Example


John Smith, Individually and as Trustee of the John Smith Trust, under Trust Instrument dated 1-1-07, for benefit of John Smith.

Dual Line Signature Example


John Smith, Individually


John Smith, Trustee of the John Smith Trust, under Trust Instrument dated 1-1-07, for benefit of John Smith. Vested as Trustee Only

(signed as) John Smith John Smith, Trustee of the John Smith Trust, under Trust Instrument dated 1-1-07, for benefit of John Smith.

Revocable Trust Rider to the Security Instrument • Must be included in the loan file and be signed by the Trustee.

Revocable Trust Rider Signature Requirements Example 1



Example 2


John Smith, Revocable Trust Settlor

IVRT & Illinois Trust Checklists

For each loan sold to MSI where the property is held in the name of a trust, the applicable Checklist must be completed. See the applicable checklist on www.msicorr.com/forms.


http://www.msicorr.com/forms




Multiple Mortgages to the Same Borrower

For Primary Residence: MSI does not impose a limit on the number of properties owned by the borrower, financed or unfinanced. • • Security Instrument Violations (Occupancy Statement): MSI

will not close a loan for which the borrower claims 2 primary residences within a 12-month period, unless the borrowers can provide a written attestation from the existing servicer on the first primary property showing that the property has been changed to a 2nd home or investment property. o Note that MSI will not determine “extenuating circumstances”

to permit 2 primary residences closed within a 12-month period.

For Second Home and Investment Properties: • MSI permits a maximum of 4 financed residential properties to one

borrower unless otherwise noted in the Product Suite. • Each borrower individually and all borrowers collectively may not

have ownership in/or be obligated financially on more than four 1-4 unit financed properties including the subject.

• For Example: If borrower A has 1 financed property, and borrower B has 3 financed properties, the borrowers collectively have reached the 4- property limit and the subject loan is not eligible for MSI.

See the Property Limitations Matrix for details on ownership limitations.

The limits for maximum number of properties financed are determined at time of application. • Paying off mortgages on properties after the loan application date

or with the proceeds of the transaction in order to meet the requirements of this policy is not permitted.





Multiple Mortgages to the Same Borrower, Continued

For Conventional Loans - Other Real Estate Owned With the increased number of properties permitted when the subject is a Primary Residence, MSI must ensure proper calculation of income or loss on Other Real Estate Owned. When a borrower owns other real estate that is rental property, in

addition to providing tax returns, MSI must accurately calculate the income/loss for each owned property, whether the property is financed or owned free & clear.

To ensure accurate calculation, MSI requires the entire documented current payment (PITI and Association Dues) for each property financed.

Documentation should include: • Copy of 1003 with REO section representing all real estate owned

in its entirety. • Copy of current mortgage statements to support monthly

payments. • If escrows are waived, document taxes and insurance.

Note: MSI requires a “calculation” sheet for each “Real Estate Owned” that is a rental property on the 1003, as well as the Tax Returns. See the Intranet/Underwriting for the current active form.





Multiple Mortgages to the Same Borrower, Continued

Property Limitations Matrix The following matrix outlines how the type of property or property ownership applies to MSI’s Multiple Properties limitation guidelines. Please see the Fannie Mae Seller Guide/Multiple Financed Properties

for the Same Borrower topic for examples and additional clarification for MSI guidelines.

Type of Property Ownership Applies toward the Financed Property Limitations

Joint ownership of residential real estate. (This is considered the same as total ownership of an individual property.)

Note: Other properties owned or financed jointly by the borrower and co-borrower are only counted once.

Yes

Ownership of commercial real estate. No Ownership of a multifamily property consisting of more than four dwelling units. No Joint or total ownership of a property that is held in the name of a corporation or S-

corporation, even if the borrower is the owner of the corporation and the financing is in the name of the corporation or S-corporation.

No

Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation; however, the financing is in the name of the borrower.

Yes

Ownership in a timeshare. No Obligation on a mortgage debt for a residential property (regardless of whether or not

the borrower is an owner of the property). Yes

Ownership of a vacant (residential) lot. No Joint or total ownership of a property that is held in the name of a limited liability

company (LLC) or partnership. Yes

Ownership of a manufactured home and the land on which it is situated that is titled as real property.

Yes

Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).

No





Non-Arms Length or Identity of Interest Transaction

A non-arms length transaction is a transaction where there exists a personal or business relationship between the borrower and any party involved in the transaction. These types of transactions may also be known as, Identity of

Interest Transactions.

The following types of non-arms length transactions are permitted, as long as the underwriting (credit) requirements are met (See Credit and Underwriting Requirements for Non-ARMs Length/Identity of Interest Transactions.: Family sales or transfers (with/without consideration) – including the

estate of a deceased family member unless the transaction is a probate sale. • Often there is no real estate agent involved or the agent may be a

family member. • These types of transactions carry the potential for increased risk as

they may be a bailout situation (e.g. the selling party has financial problems and is unable to refinance). o The underwriter must carefully scrutinize the transaction and

ensure that all credit requirements are met; the underwriter must provide a detailed written explanation of the validity of the transaction.

Corporate sales or transfers (from a business to a personal owner). • The transfer (recordation of transfer of title) must have occurred

no earlier than 6 months (180 days) prior to the application date for the refinance. See Property Flipping for additional guidelines.

Employer/Employee Sales: • Borrower(s) who are employed in the Real Estate, Mortgage or

construction trade field that are participants and receive profit from the listing, selling, financing or are participants in the construction of the property.

• Borrower(s) may act as the Realtor of the subject property. o Important Note: In these transactions, the borrower(s) may

not apply the commission from the subject property toward their down payment, closing costs, or reserve requirements.

o Borrowers who are employed in the Real Estate, Mortgage or construction trade field that are participants in the construction or financing of the property.





Non-Arms Length or Identity of Interest Transaction, Continued

Employer/Employee Sales, Continued Relatives of Employees: The loan originator and processor

cannot be the relative of the borrower. A purchase and sale transaction between a property owner and tenant,

excluding a “lease purchase” transaction. • Tenant currently occupying property and purchasing from the

property seller. Title Changes – When the borrower has been transferred into title

and is attempting to refinance the previous owner’s mortgage to obtain financing in his/her own name. This type of transaction raises red (risk) flags similar to those of a flip transaction. • These types of Non-Arms Length transactions are acceptable as

either a Rate/Term or Cash Out Refinance only under one of the following scenarios and guidelines and must meet Continuity of Obligation (Continuity of Obligation).

Evidence that the recent title change is due to marriage, divorce or death, and

The borrower has been in title for a minimum of 6 months, and

The borrower qualifies according to the product guidelines, and

The borrower provides an explanation for the title transfer.

• The underwriter must ensure that this explanation meets the transaction requirements.

The transaction and borrower must meet all applicable Credit and Underwriting Requirements for Non-Arms Length Transactions, and

The borrower provides an explanation for the title transfer.

• The underwriter must ensure that this explanation meets the transaction requirements.






Credit and Underwriting Requirements for Non-ARMs Length/Identity of Interest Transactions. Identity of Interest (Non-Arms Length Transactions) are considered on a case-by-case basis and are subject to the additional requirements: If the sales transaction is a Non-Arms Length Transaction, the

seller must have been in title on the subject property for a minimum of 90-days, unless a specific type of Identity of Interest transaction requires a greater time frame.

Single Unit Primary Residence Only. • Not permitted for Second Homes and Investment properties.

Maximum 95.00% LTV/CLTV • Five percent of the sales price must be verified as being saved by

the borrower. (See Gift of Equity for additional requirements.) Borrower must provide a copy of the canceled earnest money check

to verify payment to the seller. Full documentation of the borrower’s Income and

employment. Document all assets needed to close loan, regardless of LTV.

• The accounts may not be co-mingled in joint accounts between the interested parties.

• The assets used to close the loan must be accessible to the borrower only (and not any of the other interested parties).






Credit and Underwriting Requirements, Continued Verification that the borrower is not now, nor has been in the

previous 24 months, in title to the property. • Exception to this is a “Title Changes” transaction where 6-months

title is required. Payment history for the existing mortgage (verification of the

seller’s mortgage) on the subject property to validate no pattern of delinquency within the past 12-months.

• This is used to confirm that the transaction is not a financial “bailout” situation and may not be required for all types of transactions.

Borrower must provide a written explanation stating the relationship to the seller and the reason for the purchase. (Not required for refinance transactions.)

The underwriter must be satisfied that the transaction makes sense and that the borrower will occupy the property as a primary residence.

• The underwriter must provide a detailed justification for approving the transaction.

Appraisal Requirements : Full appraisal (1004) required, regardless of AUS findings.

• The appraisal must acknowledge the non-arms length (identity of interest) transaction and any impact on value.

• The Appraiser must verify the last sale date and sales price of the subject property, and must provide recent listing and/or marketing materials.

In addition to the full appraisal (regardless of AUS); MSI also requires an Desk Review from RELS Valuation or CoreLogic.

Purchase and Sales Contract A fully executed, legally binding purchase and sales agreement is

required and the relationship between the parties must be disclosed.

Note: These relationships may influence the transaction and are generally not encouraged for financing.





Non-Occupant Co-Borrower

A non-occupant co-borrower is a borrower that does not occupy the subject property, but whose income has been used to qualify for the loan. Joint responsibility (with the primary borrower) for repaying the

loan requires that the non-occupant co-borrower sign the Note. • If they are also taking an ownership position, they must execute

the Mortgage/Deed of Trust. Additional Requirements: DU/LP findings must identify that a non-occupant co-borrower was

used to qualify the loan. Maximum LTV per AUS findings. Single Unit Only. Primary Residence Only

• In a refinance transaction, the occupying borrower must be on the Note and title for the subject property. See Continuity of Ownership/ Obligations.

Non-occupant co-borrower must be a family member as defined by MSI/Fannie/Freddie.

Non-occupant co-borrower may not be an interested party to the sales transaction, such as the property seller, property builder, and real estate broker.

Condos – See Conforming Product Suite/Special Considerations for restrictions.

Qualifying Ratios: • The Owner Occupant (occupying co-borrower) must qualify as

required by AUS Findings. Down Payment: If the LTV is greater than 80.00%, the owner-

occupant(s) must make the first 5% down payment from their own verified funds.





Non-Permanent Resident Alien

REV (9/18/15)

A non-permanent resident alien is an individual who seeks temporary entry to the United States for a specific purpose. DU messages refer to a Non-Permanent Resident Alien as “Non-

U.S. Citizen” MSI will grant loans to Non-Permanent Resident Aliens with

acceptable Visas under the same parameters extended to a U.S. Citizen, unless restricted in a specific product summary.

Visa Classifications

One of the following valid Visa Classifications are required. Acceptance of additional classifications must be approved by a MSI

underwriter.

Type Classification A Series (1-3) Officials of foreign governments, immediate family members and support staff.

ONLY those without diplomatic immunity as identified on the Visa. (Cannot accept with diplomatic immunity.)

E-1 ; E-2; E-3 Treaty Trader & Australian Nationals in Specialty Occupation G-1 through G-5 Representative, officer or employee of recognized and non-recognized foreign government

and members of their immediate family H-1B & C Temporary Worker

L-1 Intra-company transferee TN/NAFTA TC/NAFTA

Professionals from Canada or Mexico who enter the U.S. under the NAFTA agreements

Current Unexpired Employment Authorization

Document (EAD)

In lieu of an unexpired visa, the following is acceptable: A current unexpired EAD issued by the US Citizenship & Immigration Services

(USCIS). If the EAD expires within 1 year of the application date, the following must be

provided: • One previous EAD renewal must be documented OR • If there is no prior EAD renewal, the likelihood of renewal must be determined

based on supporting documentation from the USCIA. Supporting documentation must be provide a reasonable expectation that legal residence will continue. For example, an application for a green card or employer sponsored visa is in process.





Non-Permanent Resident Alien /Visa Classifications, Continued

Type Classification Expired Visa A Borrower whose eligible Visa (see above) is expired may be considered, subject to the

following: Confirmation that the Borrower has submitted an application for extension of the

Visa or an application for a Green Card. Documentation includes but is not limited to:

• USCIS Form I-797 (issued when an application or petition is approved) • USCIS Form I797-C or I-797E (must not state application has been denied) • Application for extension of current Visa (USCIS Form I-539 or equivalent) or copy

of application for Green Card (USCIS Form I-485) and electronic verification of receipt from the USCIS web site

• If the Borrower is sponsored by the employer, the employer may verify that they are sponsoring the Visa renewal.

Notes: The loan file must contain a copy of the front and back of the valid VISA. The approved application for one of the Visas

listed above is not acceptable and a copy of the actual Visa must be obtained. The borrower must have a social security number; a Tax Identification Number (TIN) is not acceptable.

Underwriting Requirements The following requirements apply to Non-Permanent Resident Aliens: Minimum 2-years residency, credit, employment in the U.S. and

must be currently residing in the U.S. Borrower must have a U.S. source of employment that is expected

to continue for 3 years. If any qualifying income is in foreign currency, 75% of the currency

exchange value may be used to qualify the borrower. Funds for closing must be in U.S. bank accounts. • If funds were transferred from a foreign depository, the borrower

must provide evidence that they owned the funds prior to the transfer.

Note: MSI requires 2-year’s tax transcripts to support income for each borrower with qualifying income.





NAFTA

The following additional documentation requirements apply for persons working in the USA under NAFTA:

NAFTA Canadian Citizen NAFTA Mexican Citizen Evidence of Canadian Citizenship Copy of college degree and employment records

qualifying the applicant for a job in the U.S. Letter from the U.S. employer acknowledging their job is

included on the NAFTA list of professional job series. Evidence of “TN” status with the INS must have been

granted at port of entry and is only granted for temporary stays.

Evidence of Mexican Citizenship Employer-filed labor condition application Employer-filed I-129 Petition for Non-Immigrant Workers

as filed with INS Department of Labor attestation Letter from employer acknowledging their job is included

on the NAFTA list of professional job series Application for non-immigrant visa from a U.S. Embassy

or Consulate in Mexico Note: If the Canadian or Mexican citizen is not NAFTA-eligible, they must meet the Non-Permanent Resident Alien guidelines.





Non-Purchasing Spouse

Closing Considerations For Primary Residence: MSI requires the non-purchasing spouse to

sign the Security Instrument (mortgage/deed of trust) and applicable Riders and Disclosures as identified on the specific Security Instrument(SI) as a non-purchasing spouse and not as a borrower. • The requirement for the non-purchasing spouse to sign the SI and

applicable Riders applies to all mortgage transactions (purchases and refinances) on the borrower’s primary residence.

• The non-purchasing spouse is not required to sign the Note and, will not be responsible for the mortgage debt.

• MSI requires that the Non-Purchasing spouse must be “aware of” the closing and actually sign the appropriate documents required in the jurisdiction to waive marital property rights. (Generally the SI and applicable Riders.)

• Signing the SI and other related documents does not make the non-purchasing spouse a co-borrower.

Notes: See Credit Considerations.

• The following are Community Property States: AZ; CA; ID; LA; NV; NM; TX; WA; WI

Credit Considerations In those states subject to community property, For FHA loans (only), the credit report for the non-borrowing

(purchasing) spouse must be pulled and reviewed (outside the AUS) so the underwriter can determine any adverse or additional liability for the borrowing spouse.

For conventional loans, pulling the non-purchasing spouse credit separately is not required; joint debts or debts appearing on the purchasing spouse’s credit report must be considered in qualification. • Business Loss: Losses from a Non-Purchasing (Borrowing)

Spouse will not be considered a deduction to the Borrowing Spouse’s income as long as it can be documented that the borrower has no ownership in the business.





Permanent Resident Alien

A permanent resident alien is an individual who is lawfully residing in the United States permanently. MSI will grant loans to permanent resident aliens under the same

parameters extended to U.S. Citizens. One of the following forms of documentation must be provided for a borrower to be considered eligible for a loan as a permanent resident alien: Alien Registration Receipt Card I-551 (Green Card) Alien Registration Card I-551 (Conditional Green Card) which must

have the expiration, date on the back and also must be accompanied by a copy of a filed INS Form I-751

Non-expired Foreign passport that contains a non-expired stamp, which states the following: “Processed for I-551 Temporary Evidence of Lawful Admission for Permanent Residency. Valid until (mm-dd-yy) Employment Authorized”

Notes: The borrower must have a social security number; a Tax

Identification Number is not acceptable. A copy, front and back, of the documentation must be included in

the loan file. Classifications are subject to change by the Government at any

time. • It is MSI’s responsibility to ensure that the Permanent Resident

Alien is lawfully permitted as a permanent resident in the United States.





Power of Attorney

MSI will accept a Limited (or Specific) Power of Attorney that references the property and authorizes the attorney in fact to enter into a real estate transaction and to mortgage the property. Power of Attorney (POA) must meet the following requirements: Transaction Type restriction: Cash Out Refinance Transactions

are not permitted to use a POA. The POA can be used for closing documents only, and is not

acceptable for application or credit verification documents. • The initial 1003 must be signed by the borrower(s), not the

attorney in fact – the final 1003 may be signed by the attorney in fact at closing. o If at least one the borrowers on the loan is not going to be

present at closing, and the initial 1003 was not taken face-to-face by the originator, MSI requires a “face-to-face” letter from either the Attorney who prepared the POA or the Notary, confirming the identity of the borrower. This is a protection for the borrower granting the POA.

o Exceptions are granted for borrowers who are physically incapacitated. For the safety of our borrower, a letter from the attorney or the doctor must certify that the borrower is incapacitated, (Copies of private medical records should never be provided.)

• For all Property Transactions: o An employee of MSI must physically see the borrower at some

point prior to loan closing. o A letter of certification, signed by MSI, certifying visual,

physical contact with the borrower must be included in the loan file.

The POA must be drafted in accordance with applicable state law and be acceptable to the recording agent in the local jurisdiction.

• It must be acceptable to the title insurance company issuing the title insurance (no title exception to the POA).

• If an attorney signed the loan documents in fact, the Power of Attorney must have been approved by the title company issuing the title policy.





Power of Attorney, Continued

Indicate clearly that the mortgagor is appointing an attorney in fact.

Precisely identify who is being appointed. Be signed and dated by the borrower. Be notarized. Be recorded prior to or concurrent with the security instrument. Contain the full subject property address with legal description. The use of a General Power of Attorney will only be considered in

cases where the borrower is currently serving on active military duty outside of the U.S. See specific requirements in the Government Product Suite.

• An “Alive and Well” certification is required. See Pre-Close for signature details. Notes: MSI will not permit a POA signature for the Security Instrument or

Note if there is no other “live signature” borrower on the loan. • Exceptions may be permitted if the Attorney-in-Fact is the

borrower’s attorney or relative. The typed signature line and actual signatures must match exactly on

all power of attorney documents. MSI cannot accept a Power of Attorney signature to close when

closing in the name of a Trust. Real Estate POA’s in the state of Illinois must be in full compliance

with IL Public Act 96-1195, effective July 1, 2011. • Please seek legal advice to ensure full compliance.

Purchasing Co-Borrower

A purchasing co-borrower is a person who has applied with the applicant for joint credit and who takes title to the security property. A purchasing co-borrower must sign the Note.





Owner Occupancy – Primary Residence

MSI requires that for primary residence transactions, each occupying borrower must certify the following: That they will occupy the subject property within 60-days of loan

closing and that they will continue to occupy the subject property for a minimum of 1-calendar year from the date of closing.

MSI always includes in the closing package, the Occupancy Statement which meets requirements.

MSI Definition of Primary Residence (Owner Occupancy) A primary residence is property that is physically occupied by the borrower as his/her principal residence. Residency is defined by the following criteria: Borrower occupies the property for the major part of the year. Property location is convenient to the borrower’s principal place of

employment. Property address is of record for one or more of the following:

Federal tax reporting, voter registration, driver’s license, occupational licensing, etc.

Spousal Property Rights

When a married applicant qualifies for a mortgage based on his or her own financial capacity (without the assets/income of their spouse), the spouse does not need to sign the Note, Mortgage or Deed of Trust. However, they will be required to sign the security instrument or

any other documentation required to evidence that the spouse is relinquishing all rights to the property in order to perfect the lien under current governing state law.

Trailing Borrower Income

Trailing borrower income is not permitted by MSI for either conventional or government loans.

U.S. Citizen A United States Citizen is a native or naturalized person entitled to all rights and privileges of the United States. Product requirements are based on the assumption that a borrower is a United States Citizen.



Certifications

Summary

Copies of certifications that include, but may not be limited to the following, must be provided if required in the Sales Agreement (it must reference a negative comment), or by the underwriter or the appraiser: Septic Termite Well Survey

Note: FHA/VA and/or USDA requirements for Certification must always be met.



Construction to Permanent Financing

Overview

Construction-to-Permanent financing involves the granting of a long-term mortgage to a borrower to replace the interim construction financing used for the construction of a new home. MSI does not provide nor participate in the construction financing

phase of the transaction. MSI permits only the Two Closing Construction-to Permanent

financing that is structured as a refinance transaction (the borrower may or may not receive cash back at settlement).

MSI does not permit Construction to Permanent loans to be structured as a Single Close/Integrated Documentation Transaction.

Characteristics To be considered a construction-to-permanent loan, the following characteristics must be met: The borrower must hold legal title to the lot before the interim

construction loan financing, and must be named as a borrower on the construction loan.

The builder/developer must not be obligated to repay the interim construction financing or any mortgage on the land or improvements.

Important: MSI considers long term financing to make a single disbursement to a builder/contractor or other party for the purchase of a completed newly constructed property to be a purchase transaction, not construction-to-perm, and subject to purchase transaction guidelines.




Construction to Permanent Financing, Continued

MSI Requirements

Unless otherwise referenced in the MSI Product suite or Underwriting Guidelines, construction to permanent loans must meet the guidelines applicable to DU/LP. All construction to permanent loans must adhere to these additional requirements: The property must be fully complete at the time of the permanent

financing funding. • If there are weather related completion items. See Escrow

(Completion) Holdbacks. A final Certificate of Occupancy (or equivalent for the jurisdiction)

must be obtained Appraiser must provide a final “certification of completion” showing

the property 100% complete (1004D/442). See Appraisal Forms for details.

Color Photographs of the completed property are preferred, MSI will accept either color or clear and sharp black and white photos.

Single Close/Integration Documentation transactions are not acceptable to MSI.

Follow the more restrictive of MSI specific product or underwriting guidelines or DU/LP for any topic not addressed herein.

See the MSI Construction-to-Perm Requirements Matrix for additional guidelines.

See New Construction for additional details.





MSI Requirements, Continued

MSI Construction-to-Perm Requirements Matrix Topic MSI Requirements

Age of Documents

Credit – 120-days prior to the Note Date Appraisal – 120 days prior to the Note Date • The appraiser must provide a 1004D/442 to document completion. If the update

indicates the property has declined in value, a new appraisal is required. See Appraisal Forms for requirements.

Data Input DU: All loans should be input into DO/DU as refinance. LP: All loans should be run as a “regular” refinance or purchase without utilizing the

“construction to permanent” Structuring the Transaction and General Requirements

CLAR (7/28/15)

Construction-to Permanent loans may be “structured” (fees charged and underwritten under those guidelines, LTV and CLTV/TLTV) as refinance transactions. • Limited (rate/term) or cash out.

The lot on which the improvements are built must have been owned/acquired prior to the date of the construction loan application

The construction financing must be in the borrower’s name. LTV/CLTV/TLTV is based on the current appraised value. For Cash Out transactions: At least 1 borrower must have held legal title to the lot for a

minimum 6 months prior to closing of the permanent loan. All other standard cash out refinance eligibility and underwriting guidelines apply.

Borrower in Construction Industry OR Non-Arms-Length Transaction

CLAR (7/28/15)

If the borrower is acting as his/her own builder/general contractor or sub-contractor and his/her primary occupation is in the construction industry, OR the transaction is Non-Arms-Length (borrower buying from a family member in the construction industry or the builder/developer is a family member) the following guidelines must be met: Property must be owner-occupied single family primary residence. Maximum 80% LTV.

Right of Rescission (ROR) If the borrowers are currently residing in the subject property (current residence on 1003 is subject property) a ROR is required.

TIP – Estimating Property Tax

For the “true” PITI payment: MSI uses a property tax estimate based on the completed value of the subject property (improvements and land) from the appraiser or the local taxing authority.





Single Close/ Integrated Documentation

MSI does not fund loans that have used the “single close” method for Construction-to-Permanent loans. The final permanent mortgage must be a separate closing.

• MSI will not accept any final loan documents that are modified in any way.

• The final Uniform instruments must be correct (and un-modified) for the type of final loan used.



Contributions

Interested Party Contributions

Certain interested parties (seller, builder, Realtor, etc.) may choose to pay a portion of the closing costs (which are normally paid by the borrower) on the borrower’s behalf. Any portion of the fees and services, or any other item related to the transaction, that would normally be paid by the borrower, but are paid by the interested party are considered contributions. Because excessive contributions can negatively impact the

transaction, maximum contributions are limited, see the Maximum Seller Contributions matrix.

The contribution amount that exceeds the limit are considered sales concessions. See Seller Concessions for details.)

Eligible Contributions The fees and services that are considered interested parted contributions include, but are not limited to (follow Fannie Mae Guidelines): Appraisal Fees Attorney Fees Commitment Fees Discount Fees Origination Fees

Pre-paid Settlement Costs Real Estate Tax Service Fees Recording fees Stamps Title Insurance Transfer Fees

Maximum Seller Contributions Occupancy LTV/CLTV Range Maximum Contribution

Primary Residence Second Home

>90.00 3%

75.01 – 90.00 6%

≤75.00 9% Investment Property All 2%

Note: The maximum LTV/CLTV must be calculated based on the lesser of the reduced sales price (reduced by the sales concession) or appraised value, whichever is lower.

Ineligible Contributions Generally, the cost of any contributions that are in the form of personal property or “give-always” (such as furniture, decorator items, automobiles, club membership, etc.) are not “eligible” contributions and must be considered Sales Concessions and deducted dollar-for-dollar from the lesser of the sales price or appraised value. (See Seller Concessions for details.)




Contributions, Continued

Interested Party Contributions, Continued

Seller Concessions “Give-always” or contributions that exceed the allowable limits are considered Sales or Seller Concessions. Sales/Seller Concessions must be deducted dollar-for-dollar from the lower of the sales price or appraised value, and the loan amount and LTV/CLTV must be adjusted accordingly.

Realtor Commissions Limitations MSI applies the following restriction in the Closing Disclosure (CD) Review: Real Estate Commissions include the commissions appearing in the CD

as well as any non-lien related disbursements such as marketing expenses, finder’s fee, consulting fees or assignments of sales fees. • Any combination of these disbursements that exceed 8% of the

sales price is considered a sales concession by MSI and must be deducted dollar-for-dollar from the sales price.

• The LTV must then be recalculated and meet all applicable guidelines.

Note: The Sales Commission restriction is separate from the contribution limitations and must be applied regardless of any interested party contributions on the loan.

Sales Abatement

Loans with any abatement (that is, funds provided to a lender or third party by an interested party to pay or reimburse in whole or in part a certain number of monthly mortgage payments of principal, interest, taxes, insurance and assessments on the borrower’s behalf in excess of Prepaids/Escrows associated with the Mortgage closing) are not acceptable. This means that they simply are not permitted; there is no calculation

of “sales concession” and reduction to the sales price or value of the property; MSI will not permit an interested third party to provide funds to make a borrower’s payment.



Credit

Overview MSI requires that a borrower’s current and past credit history be analyzed through the review of a credit bureau report prepared by an independent licensed credit reporting agency or credit reporting repository. MSI accepts the following types of credit reports, depending on the circumstances of the mortgage request. Residential Mortgage Credit Report (RMCR) AUS Credit Report -3 file merged report pulled into the AUS

Note: Non-Traditional Credit Reports are not permitted under any circumstances.

MSI Approved Credit Reporting Vendors

MSI has agreements with the following Credit Reporting Vendors: CBC Innovis Credco/Credstar Equifax Mortgage Solutions Kroll Factual Data Corp.

Age of Documents – Conventional Loans

All standard credit documentation used to determine the borrower’s eligibility must be no more than: Credit Documents (including income and assets) – 120-days prior

to the Note Date for existing properties. Credit Documents – 120-days prior to the Note Date for

Construction-To-Permanent. At time of Underwriting for all conventional loans: Pay Stubs must be dated within 30-days of application date. (The

Underwriter may need to condition for an updated Pay Stub.) Bank Statements must be dated within 45-days of underwriting.




Credit, Continued

Age of Documents – Conventional Loans, Continued

Notes: For the purpose of document aging (including appraisals), in Escrow

Closing States (dry closing states), MSI will use the “date of signing” and not the date on the face of the Note as the “Note Date”.

MSI reserves the right to request updated credit at our discretion.

Special Reminder: The age of documents must always be the more restrictive of MSI published guidelines or the message in the AUS findings.

Authorized User Accounts

The Underwriter must review the borrower’s credit to ensure that the borrower is the “owner” of the trade line and resulting credit history. If the borrower is only an “authorized user” on the credit, the AUS was unable to correctly validate the borrower’s credit history and the underwriter must review.

To establish Credit: Evaluate the credit history without the benefit of those trade lines and

use prudent underwriting judgment when making a final underwriting decision.

Documentation must be submitted from the borrower to establish use and/or payment of the account for the past most recent 12 months. (Include documentation and explanation in the loan file.) • Provide a statement from the account showing the name in which

the account is held. If the underwriter cannot document an acceptable credit/payment

history for the borrower, the loan is not eligible.

To exclude from DTI for the Borrower: Provide the most current 12-month’s documentation of who makes

the payments on the account. (Cancelled checks evidencing that either the borrower is making regular payments or the borrower is not making payments on the account, because it is not the borrower’s account.)

Spousal authorized user accounts must be included in the DTI.

Reminder – the loan must always meet the more restrictive of MSI or DU/LP guidelines.




Credit, Continued

Bankruptcy/ Foreclosure

REV (6/12/15)

MSI will accept loans where the borrower has a previous bankruptcy, deed-in-lieu or foreclosure as long as they meet the following guidelines. Applicable to the specific product, loans must receive a

DU/Approve/Eligible or LP/Accept/Eligible, and meet the guidelines in this section. MSI will not accept a loan where the borrower is currently

involved in a foreclosure or deed-in-lieu situation.

Topic DU and LP – Regardless of the findings: Bankruptcy - 7 or 11 Re-established Credit

4-Years Require a minimum 4-year period of re-established credit from the date of the

discharge of the bankruptcy. Bankruptcy – Chapter 13 Re-established Credit

2-Years from Discharge – Discharge is the successful completion of the Chapter 13 repayment plan. (Debts were repaid.)

4 Years from Dismissal- Dismissal is the “forgiving” of an unsuccessful Chapter 13 plan. (Debts were not repaid and the failed Chapter 13 is dismissed.)

Extenuating Circumstances All Bankruptcy

Minimum 2 years from discharge or dismissal. For all bankruptcy actions. Transaction may be purchase or refi. Primary Residence Only for Purchase. All occupancy types for Rate/Term (LCO) refinance.

Multiple Bankruptcy Filings

Minimum 5-years re-established credit for borrowers with more than 1 bankruptcy filing in the past 7 years. MSI may accept extenuating circumstances:

• Minimum 3 years from discharge/dismissal of latest bankruptcy. The most current bankruptcy filing must have been a result of extenuating circumstances.

• Approval for “extenuating circumstances” must be received from MSI Underwriting.

Foreclosure

7 Years No additional requirements/restrictions apply. MSI does not permit a waiver of the 7-years for extenuating circumstances. Measured from the completion date of the foreclosure action as report on the

credit report or other foreclosure documents. Notes: MSI will not refinance properties currently in foreclosure proceedings. MSI will not make a loan to a borrower involved in a “short-sale” situation within 4 years of the new application date. • See and/or Short Sale Guidelines for details. See credit requirements in Bankruptcy Underwriting. See Extenuating Circumstances for details. For credit-worthy borrowers, MSI Underwriting reserves the right to reduce the number of years of re-established

credit based on AUS and/or end investor guidelines. Credit re-establishment is considered from the date of completion (resolution) of the derogatory credit until the

application date of the subject loan.




Credit, Continued

Bankruptcy Underwriting

Extenuating Circumstances for Bankruptcy Only

Important Notes: Financial mismanagement is never an extenuating circumstance. Divorce (by itself) is never an extenuating circumstance.

Extenuating circumstances are life events that result in a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligation. Extenuating circumstances should not be judged solely by the event, they must take into consideration the actual event, the severity of the resulting hardship and the extent of the applicant's effort to resolve the situation.

For example: A job layoff (the event) in itself should not automatically be considered an extenuating circumstance (even if it is supported by documentation from a third party). If, however, the unemployment that results from a job layoff was prolonged and the loss of income was significant in relation to the applicant's obligations and available assets at the time of the layoff, then the layoff can be considered as an extenuating circumstance.

Illness or death of primary wage earner.




Credit, Continued

Bankruptcy Underwriting, Continued

Re-established credit considerations

When reviewing loans with bankruptcies, the underwriter must consider the following: Regardless of the reason for the bankruptcy, the underwriter must

determine if the applicant has an acceptable payment record under the re-established history.

The re-established history must reveal a payment record that illustrates the borrower now has the willingness and the ability to manage their finances.

When the applicant’s previous credit history includes a bankruptcy or foreclosure, their credit report must be current as of the date of the mortgage application. Additionally, the credit report under the re-established credit must include:

• A minimum of 4 credit references, active within the past 24-months, with at least 1 of the references being “traditional” (credit card, installment loan for a car, etc.) and 1 being housing related. o If the housing item is not listed, copies of cancelled checks are

required. • Housing: No payments past due since the discharge or completion

of the bankruptcy. • Installment and revolving: No more than 2 that were 30 days

past due in the most recent 24-months, and none 60 or more days past due since the discharge or completion of the bankruptcy. o No new public records for bankruptcies, foreclosures, deeds-in-

lieu, unpaid judgments or collections, garnishments, tax liens, and so forth since the discharge or completion of the bankruptcy.




Credit, Continued


Documentation Requirements The following supporting documentation must be included in the loan file: Copies of the bankruptcy petition, schedule of debts and the

discharge papers indicating which debts were discharged. Evidence that all debts not satisfied by the bankruptcy have been

paid or are being paid in a satisfactory manner. • Only those payments or delinquencies that occurred during the

bankruptcy are to be omitted from credit reporting. Those payments since discharge on reaffirmed debts must be verified and paid on time.

A written statement from the applicant satisfactorily explaining the causes of the bankruptcy.

Note: MSI reserves the right to request any additional documentation it may deem necessary to ensure the re-establishment and maintenance of satisfactory credit for the borrower.

Documentation Requirements, Continued Refinance Transactions: For all borrowers formerly involved in bankruptcy proceedings, MSI

must: • Confirm that the loan being refinanced was not a debt included in

the insolvency proceeding. • Provide evidence that the subject property was reaffirmed when

bankruptcy papers were filed, or that a separate reaffirmation agreement for that subject property debt was filed with the bankruptcy court.

Notes: A credit report is not a reliable method of confirming that a debt has

been reaffirmed. If it cannot be confirmed that the debt was not included in the

insolvency proceeding, the loan is not eligible for MSI.




Credit, Continued


(8/16/14) Pre-Foreclosure, Short Sale or Deed-in Lieu Underwriting If the borrower has avoided foreclosure through a Pre-Foreclosure

Sale (also identified as a Short Sale) or a Deed-In-Lieu the following waiting (credit re-establishment) periods apply:

Pre-Foreclosure Event (6/12/15)

Credit Re-Establishment Period From the date of the completion (resolution) of the event to the application

date of the subject loan. Pre-Foreclosure Sale (Also referred to as a Short Sale) Deed in Lieu of Foreclosure

Fannie Mae Freddie Mac 4 years from completion 4 years from completion

Notes: MSI follows the Fannie Mae definition that a “short sale” is a pre-foreclosure sale (sale of the property in lieu of foreclosure

resulting in the servicer accepting a payoff less than the total amount owed.) All LTV/CLTV maximums are based on the lesser of the LTV/CLTV in this matrix or the product maximum LTV/CLTV. Re-established credit must meet the more restrictive of MSI/Agency guidelines. MSI does not permit lesser waiting periods or LTV/CLTVs based on extenuating circumstances, unless specifically stated

above. See Short Sale – Additional Guidelines.




Credit, Continued

Credit, Continued

Short Sale – Additional Guidelines Refinance Transaction: A refinance on a write-down by the

Servicer is ineligible. • If any borrower on the refinance is currently or in the past

involved in a short-sale, deed-in-lieu situation on a property other than the subject property, they must meet our credit re-establishment guidelines. See Pre-Foreclosure, Short Sale or Deed-in Lieu Underwriting)

Purchase Transaction: • For borrowers purchasing a short sale, non-arms length

transactions are not eligible. See Non-Arms Length or Identity of Interest Transaction.

• For transactions that include the purchase of a property involved in a Short Sale situation, MSI will require evidence of the authorization of the short sale from the current servicer (lender).

• Important: MSI requires that the underwriter document the loan file so that it clearly indicates that no fraud or property flopping has occurred in the course of the short sale purchase transaction.

Additional Requirements – Purchase Transactions-Subject in Short Sale Only the current legal title holder of record may be reflected as seller

on the Settlement Statement/Closing Disclosure, purchase contract and appraisal for all transactions. • The only exception to this will be estate sales with a documented

inheritance to the new seller. MSI requires a full appraisal for loans when the subject property is a

Short Sale. Any deed transfers to a Trust or LLC will also require complete

consummation of the prior transaction including satisfaction of all of the seller’s current liens and the appraisal must also denote all transfers and dollar amounts and address any legitimate increases.

Relocation companies will be required to consummate their transaction and pay off the current liens of the seller and hold legal, free and clear title to be eligible as the seller. • Otherwise, the current seller of record must be reflected as the

seller on the purchase contract, the Closing Disclosure/Settlement Statement and the appraisal.

Under no circumstances will any double escrows be allowed nor will we allow for an interim purchaser to step into the transaction without a complete, identified transfer.




Credit, Continued

Credit, Continued

Short Sale Fees – Purchase Transaction In an increasing number of purchase transactions, the industry is seeing property sellers engaging the services of short sale “negotiators” who will then approach the underlying lien holders and negotiate payoff figures less than the outstanding balances owed. The short sale negotiator expects a fee for providing this service and those fees are paid by the seller and/or the buyer as part of the new purchase transaction. Property buyers are agreeing to pay fees in connection with the

purchase that have traditionally been considered the responsibility of the seller. Some examples include but are not limited to: • Short sale processing fees (also negotiation fees, buyer discount

fees, buyer short sale fees); • Payment(s) to subordinate lien holder(s); and • Payment of delinquent taxes or HOA dues

These expenses do not represent a common and customary charge and therefore must be treated as a sales concession if any portion is reimbursed (to the buyer) by an interested party to the transaction. • If a buyer agrees to pay any fees or sums due of this nature

and is further reimbursed by the seller or any other interested party to the transaction, MSI will consider the amount being reimbursed as a sales concession.

• The amount reimbursed will not be considered an allowable financing concession and will not be included in acceptable seller-paid closing costs.

• The amount of determined sales concession must reduce the sales price or value of the property from an underwriting standpoint and a reduction in the requested loan amount may be necessary.

• Further, the buyer’s payment of short sale fees and amounts traditionally associated with the seller may not be included as part of the buyer’s acquisition cost.

See Property Flopping for additional details.




Credit, Continued

Collections, Charge-offs, Judgments, Garnishments, and Outstanding Liens

(8/16/14)

MSI requires the borrower to pay off at (or prior to) closing any accounts where the AUS requires payment.

As a determination of risk, MSI reserves the right to require the pay-off of collections or charge-off over $1,000 based on the credit worthiness of the borrowers, determined by:

• A strong credit profile (FICO within limit, all other credit acceptable).

• Meaningful financial reserves (reserves in an amount to permit the accounts to be paid in full if necessary).

• Evidence that the account(s) pose no threat to our first mortgage lien.

Documentation must substantiate that the accounts pose no threat to our mortgage lien and are not likely to affect the borrower’s equity position.

MSI requires that all outstanding judgments and tax liens must be paid (satisfied), regardless of AUS findings.

Notes: All delinquent Federal Debt must be paid at or prior to closing.

Open delinquent Federal Debt may have a negative impact on a clear title.

If there is a charge-off on a mortgage account; MSI requires a full 4 years waiting period from the completion date of the event to the disbursement date of new loan.

Consumer Credit Counseling

The presence of consumer credit counseling service does not alter the underwriting recommendation. Whether the borrower has or has not completed his or her participation in the sessions before closing on the mortgage transaction is not relevant since it is the borrower’s credit history that is of primary importance.

If borrower is currently in CCC, borrower must provide a letter from the service stating that they can incur the new housing expense.

If the loan is approved through the AUS, the CCC has been considered and no further action is required.

Note: Underwriters must carefully review borrowers with CCC to determine over-all credit worthiness. MSI reserves the right to deny borrowers they deem, in their sole determination of risk, do not have a good credit profile.




Credit, Continued

Credit Report Inquiries

Recent Attempts to Obtain New Credit The presence of unrelated credit inquiries represents a higher credit risk.

When the borrower’s credit report indicates that a creditor has made an inquiry within the previous 120-day period, MSI must determine whether additional credit was granted. • If additional credit was granted, MSI must obtain verification of the

debt and must consider the debt when qualifying the borrower. A supplemental update to the Credit Report is acceptable documentation.

• If no new credit was granted, MSI requires a satisfactory Letter of Explanation (LOX) signed by the borrowers. Please note, additional documentation may be required to validate no new debt if the inquiry could have resulted in a significant debt/obligation for the borrower.

• LQI guidelines for undisclosed debt must also be met. See LQI-Undisclosed Debt Policy.

Important Note: MSI retains the right to pull a “soft” credit report during our pre-close or QC review to validate no new debts.

Credit Score (FICO)

Minimum Credit Score (FICO) must be met for each loan, regardless of AUS approval/acceptance. See the product matrices within the Product Suites for details.

A minimum of two credit scores are required on the credit reports for each borrower and co-borrower. Each borrower must have a Useable Borrower Score. Useable Borrower Scores are then used to determine the

Representative Score which is used to qualify the borrowers and to determine the salability of the loan.

It is the underwriter’s responsibility to ensure that the credit score for the loan is ≥ the MSI minimum required FICO for the product.

Calculating the Representative Score Step Action

1 Select the Useable Borrower Score for each borrower on the loan: When 2 scores are available, the Useable Borrower Score is the lowest of the 2. When 3 scores are available, the Useable Borrower Score is the middle of the 3.

2 When multiple borrowers are on the loan, select the lowest Useable Borrower Score as the Representative Score. (e.g. If the Useable Borrower Scores are 700, 650, and 820, the 650 score is the Representative Score.)

When only 1 borrower is on the loan, the single Useable Borrower score is the Representative Score (e.g. if 2 scores are available, it is the lowest; if 3 are available, it is the middle score.)




Credit, Continued

Disputed Credit Information

Disputed account cannot be ignored and all AUS conditions on the disputed account must be satisfied prior to loan closing.

MSI Disputed Credit Policy For loans with an Approve/Accept AUS credit decision: If the AUS findings report does not require any action, no action is

required on the part of the Underwriter. If the AUS Findings report requires action on a disputed account the

loan cannot close until the dispute has been resolved and an updated credit report, without the disputed account, is re-submitted to the AUS.

Note: An “Approve/Eligible/Accept” finding must be received from the AUS after the updated credit report has been submitted to be eligible. • If the FICO changes as a result of the re-submission, the current

pricing adjustment must be applied, regardless of lock.

Conventional, FHA and VA Loans If the trade line does not belong to the borrower, or a reported

payment history is inaccurate you must obtain written documentation and include it in the loan file submitted for undewriting. • You must ensure that all AUS conditions have been met. • The underwriter must carefully evaluate the borrower’s credit and

written explanation and supporting documentation for the dispute to ensure the credit-worthiness of the borrower and include any accurate payment information.

• The underwriter must provide a written explanation in the loan file.

If the trade line does belong to the borrower and the reported payment history is accurate, the disputed trade line(s) must be considered in the credit risk assessment. • To ensure the disputed trade line is considered, you must obtain a

new credit report with the trade line no longer reported as disputed and resubmit the loan casefile to the AUS.

Note: MSI will not accept an AUS loan that is “down-graded” and manually underwritten by anyone but MSI, regardless of delegated status. See the Government Product Suite for full details. USDA loans Loans must follow the current USDA Disputed Credit Policy.




Credit, Continued

Electronic Credit Reports

Electronically obtained credit bureau reports are permitted from an automated underwriting system (AUS) as follows: Must be ordered from one of the three credit agencies: • Equifax Information Svc. LLC • Experian Credit Data • Trans Union Must be a Three Bureau In-file Merged Report Credit risk scores are made available to the AUS The report must contain • OFAC alerts • Social Security number alerts

Modified Mortgage-Credit History Consideration

For all loans, all products: If the borrower’s credit history shows a mortgage loan that was

modified, MSI applies “short-sale/pre-foreclosure” guidelines to that history. See Pre-Foreclosure, Short Sale or Deed-in Lieu Underwriting.

Important Reminder: For refinance transactions, MSI will not accept a property that has a modified/restructured mortgage on the subject property.

Mortgage/ Rental Payment

Unless otherwise specifically noted in a product subset, MSI’s policy for Mortgage Payment/Rental Payment History is as follows: MSI requires that the mortgage payment history shows no more than

1X30 lates in the most current past 12-months, based on the application date.

Non-Traditional Credit

MSI does not permit the use of non-traditional credit (not presented by the credit reporting agency).

Frozen Credit

MSI will not accept loans with “frozen credit” The borrower must “unfreeze” the information so that a 3-bureau

report can be obtained showing no frozen accounts on the final iteration of the AUS.




Credit, Continued

Trade lines

A trade line reflects a history of open or paid credit obligations detailing borrower’s credit reputation.

• MSI requires the minimum valid trade lines as required by the more restrictive of the AUS findings.

To be a valid trade line, MSI requires: • The trade line may be open or closed, but it must be a reported

trade for which the borrower has made payments for a minimum of 12-months.

• The trade line must include opening date, current balance and payment history.

• The valid trade line cannot be a collection or charge-off or an authorized user account.

• Student loans that are in deferment and have no payment history are not considered a valid trade line.

Notes: If the loan requires Mortgage Insurance, the more restrictive of MSI

or the MI company applies. See the Government or USDA Product Suites for specific guidelines.

Residential Mortgage Credit Report

Residential Mortgage Credit Report (RMCR) provides current, verified and detailed borrower information. The report agency verifies: Most recent 2-year employment history Residence history All debts, including terms, balances, and ratings. Past due payments Available legal information through public records, such as

judgments, foreclosures, garnishments and bankruptcies. Joint or combined report for a married couple must contain all

debts of both parties or separate reports must be provided Individual separate reports must be run for un-married borrowers OFAC alerts FACTA Notice Social Security number alerts




Credit, Continued

Residential Mortgage Credit Report, Continued

Summary Information All Credit Reports for loans submitted to MSI on/after 4/01/12 must

include the following information in a Summary section: • Number of 30, 60 and 90 day mortgage delinquencies for Applicant • *Number of 30, 60 and 90 day mortgage delinquencies for Co-

Applicant • Number of credit inquires for Applicant • *Number of credit inquiries for Co Applicant • Trade Line Count for Applicant • *Trade Line Count for Co Applicant

Notes: *When the credit report ordered is a “joint” report, for Fair Lending reporting, the summary information will be referenced under the Applicant. Some credit reporting companies may not automatically provide

summary information. Please be sure the credit providers you use are able to provide summary details for all reports requested.

Single Payment Notes

If the borrower has a “single payment” debt, the following underwriting considerations apply: The borrower must provide a copy of the Note for the debt. A monthly payment of at least interest only must be included in the

DTI ratio. • Calculated: (outstanding debt X Note interest rate)/12.

If the single payment is due within 12 months of close, the borrower must source adequate assets to pay the debt in full.

Any assets needed to pay the debt may not be considered in Reserve amounts or as a compensating factor.



Disaster Policy

Overview

MSI will accept loans that are located in a declared disaster area (natural or man-made) provided the subject property has not been negatively affected by the disaster. Note: Prior to close, MSI always reviews the FEMA Web Site to ensure that the property is not located in a Federally Declared Disaster Area. Loans are suspended pending applicable appraisal documentation if

the property appraisal does not meet the MSI Disaster Policy.

Timing This disaster policy should be followed for a minimum of 120 days after the disaster incident period has ended, unless more restrictive guidelines are dictated by one or more of the agencies (Fannie Mae, Freddie Mac, FHA, VA or USDA.)

Definition A major disaster is defined as one that causes substantial damage to numerous homes and community infrastructure. Disasters include, but are not limited to, hurricanes, earthquakes,

floods, landslides, tornadoes, wildfires, volcanic eruptions, civil unrest or terrorist attacks.

When a major disaster occurs, the Federal Emergency Management Agency (FEMA) issues a Disaster Declaration identifying the specific areas impacted.

Incident Period is defined as the time that the disaster affects the area. For example, a tornado is generally 1 day, while flooding could last

a week or more.

Areas subject to Disaster Policy

MSI’s disaster policy applies to those areas identified by FEMA as disaster areas. MSI should contact the appropriate source e.g. state office, regional

Federal Emergency Management Agency (FEMA) offices, news agency, etc. to determine whether properties located in its origination regions are included in the disaster areas.




Disaster Policy, Continued

Appraisal Requirements

CLAR (10/14/15)

Appraisals Completed on or before the Incident Period End Date For all loans underwritten but not closed/disbursed by MSI:

• MSI requires a property inspection to verify the property is sound, marketable, and habitable and in the same condition as when it was originally appraised. The following are acceptable forms of damage inspection: o One of the following appraisal forms is acceptable. The report

must show no damage to the subject property. o 1004D/442, signed by the original appraiser. See Appraisal

Forms for requirements. o A Disaster Compliance Inspection Report (or equivalent),

completed/executed either by the original appraiser or by another certified appraiser.

• Clear sharp photos of the subject and street are required. • The appraiser must address if there is any negative impact to the

property as a result of the disaster incident. • The underwriter must review the property re-inspection and “sign-

off” on the re-inspection prior to closing. If the subject property is damaged, see Minor Damage Requirements

and Major Damage Requirements. FHA Streamlines and USDA Streamlines For any FHA /USDA Streamline Refinance Without an Appraisal

affected by a Declared Disaster, MSI requires a minimum 1004D to confirm/validate that the property has not been negatively affected by the disaster. • MSI will also accept the Disaster Compliance Inspection Report as

noted above.

Appraisals Completed up to 90-days after the Incident Period End Date A full appraisal (URAR/1004) with exterior and interior inspection with

clear sharp photos is required. The appraiser must address any lingering negative impact on value,

habitability or marketability of the Disaster occurrence.




Disaster Policy, Continued

Minor Damage Requirements

Minor Damage defined as damage to the property that does not affect health, safety, habitability, soundness, or structural integrity of the property. MSI does not require minor damage to be repaired prior to loan close;

however, professional estimates of the repair costs should be obtained and a repair escrow account established with sufficient funds to guarantee completion of repairs. This account must be documented in the loan file.

Escrow Holdback to guarantee completion of the minor repairs may be waived subject to: • Maximum LTV/CLTV 95.00% • A final inspection from the appraiser (1004D/442, with clear sharp

photos) outlining the specific items not completed and their impact on marketability, health and safety is provided to the loan underwriter.

• Cost to complete minor items is < 2% of the total value of the residence.

• The escrow-holdback-waiver request is approved by the underwriter.

• The property must be repaired and the final inspection (1004D/442) forwarded to MSI, as a final trailing document, no later than 180 days after the original loan closing/disbursement. See Appraisal Forms for requirements.

Major Damage Requirements

Major damage is defined as damage that affects the marketability, health, safety, habitability, soundness or structural integrity of the subject property and must be repaired before the loan is eligible for sale to MSI.

Damage Inspection Requirements

If the subject property suffered major damage, the damage must be repaired prior to close. The subject property must be re-inspected: The damage must be repaired prior to the close of the loan –

evidenced by a new 442/1004D with clear sharp photos. • The extent of the damage must be addressed with a statement

that the repairs have been completed and, o The interior and exterior of the property is free from damage

from the disaster and the disaster had no effect on value or marketability of the subject property.

• New Property clear sharp Photos –Exterior, Interior and Neighborhood – taken after the disaster Incidence Period.



Documentation Requirements

Age of Documentation

At the time of underwriting, the age of the documentation must meet the current MSI requirements for the type of transaction. See Age of Documents.

General Requirements

All income/asset documentation must meet the following “general” requirements: All documentation must follow the more restrictive of the applicable

AUS or MSI. All documentation must be original OR must be a certified exact true

copy • Certified true copies may be individually stamped certified true and

exact (the signature must contain at least the initial of the first name of the signer and the full surname) OR

• A “blanket” true and exact certification may be included; it must identify the loan and the name of the person certifying the documents.

Erasures and white-outs are not permitted. Fax Copies

• Documentation must be faxed directly to MSI from the employer (see Direct VOE Requirements), borrower and/or landlord.

• Copies or faxes from a builder, real estate agent, property seller or other third party are not acceptable.

Internet Documentation • All internet documentation must meet the general requirements as

well as: o Identify the source of the information. The headers/footers

and banner portion of the printout of the downloaded Web Site must reflect the appropriate source.

o Display the URL address and the date/time printed. (If faxing, ensure that the fax header does not cover the URL information.)

Paystubs • Must be computer generated or typewritten. • Clearly identify the borrower as the employee. • Show the gross earnings for both year-to-date and the pay period. • Show the pay period covered. • Show the employer’s name. • The paystub must be dated no earlier than 30-days prior to loan

underwriting submission and in accordance with “Age of Documents”; the paystub in the loan file may be aged no more than 120-calendar days from the Note Date.




Documentation Requirements, Continued

Direct VOE Requirements

When used, a “direct” Verification of Employment (VOE) must be returned to the originating lender directly from the source. There must be no evidence that the borrower(s) acted as intermediary.

• Verification of Employment Form (VOE) • Verification of Deposit form (VOD) • Verification of Mortgage (VOM) Copies, including facsimile copies, are acceptable provided that it is

clear from the document that the information was taken from the original document (No corrections or alterations); if faxed, that it was sent directly from source.

MSI always requires a copy of the most recent Pay stub with year-to-date information to support the direct VOE.

The Underwriter reserves the right to require that original documents be provided.

Tax Extensions

Tax Extensions: If the borrower has not yet filed the most recent year (MSI requires most recent year’s tax returns and transcripts for all loans closed on/after June 15; if not available-tax extension requirements apply), MSI requires the most current 2 years that have been filed AND documentation that the most current year has been extended. • MSI requires a copy of the 4868 (IRS request for Extension) and a

copy of the Account Transcript that documents the borrower has filed an extension with the IRS and provides the status of the borrower’s “account” (estimated taxes owed and payments received). Request 1040 AT/ on Line 6 of the 4506-T. o Order the Account Transcript on the 4506-T by checking Box

6b. o Note: MSI will accept in lieu of the Account Transcript, written

documentation of the Submission ID number proving that the returns were submitted electronically to the IRS (known as: Federal Extension Electronic Return Accepted-obtained by the borrower)

o Important: The last day to file tax returns that have been extended is October 15.

• Once the official IRS period for extensions has passed (October 15!), MSI requires the most current tax returns, stamped as received by the IRS (The applicable tax transcripts are required once available after the 10/15 deadline.)

One year of tax transcripts is never acceptable to MSI unless specifically permitted in a product sub-set.





IRS 4506

In keeping with current Risk trends:

Tax Transcripts/Record of Account must cover: • Salaried (W-2) Borrowers: The most current 2-years. • Self-Employed (Passive Income) Borrowers: The most recent 2-

years. o MSI requires tax transcripts for each business return used to

qualify the borrower. • For Jumbo loans: The most recent 2-years.

MSI Underwriting For every credit qualifying loan sent to MSI for underwriting, MSI requires a copy of the Tax Transcripts and Record of Account in the underwriting submission file. Loans submitted to underwriting without the tax transcript

documents will be conditioned for receipt of the transcript documentation.

MSI still requires, for post-purchase quality control that the borrowers sign a 4506-T at time of loan closing. This form must be included in the closed loan delivery file. • MSI requires a signed 4506-T for each personal and business

return used to qualify the borrower. Each return must be ordered separately on the 4506-T.

MSI 4506-T Completion Requirements MSI will require that all 4506-T forms:

• Be prepared on standard letter-sized paper, with legible fonts. • Be typed (printed in typed format from a computer; see the Adobe

information below). • Are fully completed with required information. • Include execution by each applicable party. • A separate 4506-T must be provided for each personal and

business return used to qualify the borrower.

• The 4506-T form may not be altered in any way. o For example: if one of the years requested has been typed and

then an additional year is added in handwriting, this is considered altered and will be rejected.

o If the year has been crossed-off and changed or otherwise altered in any way, the form will be rejected.

o Do not cross off any information on the form; that will be considered an alteration and the IRS will reject the form.

o If three years have been typed on the form, and only two years are requested, circle the years requested, do not cross off the unwanted year.





IRS 4506, Continued

Important Note: MSI will require “correction” of any 4506-T’s that do not meet the IRS

requirements for submission on/after 5/04/09. Funding will be delayed pending receipt of acceptable 4506-T forms. (Please remember that even if we receive tax transcripts, a completed 4506-T is required for quality control purposes.)

The IRS provides an Adobe version of the 4506-T form (with 2nd page completion instructions) that can be completed on-line (to insure legibility and completion of all applicable fields) and then printed at:

http://www.irs.gov/pub/irs-pdf/f4506t.pdf

Tax Transcripts Review

Tax Transcripts must be reviewed against the income stated on the 1003 and the validated income in the loan file. The purpose of obtaining tax transcripts directly from the IRS is to support that the income is valid, we assume that income reported to the IRS is the usable income for loan qualification. Therefore, good credit risk principles dictate: Tax returns provided must match the tax transcripts received. See our

guidelines for amended returns. See Amended Tax Returns. W-2 must be validated by the tax transcripts. Compare the IRS tax transcripts to the documentation provided to

validate income. • Transcripts that show lesser earnings than the income

documentation AND acceptable amended returns cannot be provided, do not validate income. The loan is ineligible for underwriting approval. See Amended Tax Returns.

• Transcripts with discrepancies must be addressed and adequately explained and documented by the borrower. Additional conditions may apply.

Tax Returns cannot be submitted just to qualify for a loan. (E.g. the tax transcripts document that the borrower just recently –within the past 60 to 90 days finally filed their last 2-years tax returns.)

MSI considers the tax transcripts critical documents for quality assurance to ensure that the income used to qualify is valid. To that extent the tax transcripts must be “underwritten/audited” using good credit principles. MSI reserves the right to refuse underwriting approval of any loan

that does not meet, in our sole estimation, valid quality assurance of the tax transcripts to the income documentation provided in the loan file.


http://www.irs.gov/pub/irs-pdf/f4506t.pdf




IRS 4506, Continued

Important Note: Amended Tax Returns The IRS permits tax returns to be amended up to 3-years after the initial tax-filing year. MSI does not accept tax returns that have been amended solely for

the purpose of qualifying.

If tax returns have been amended, the underwriter (and MSI) must be able to document the following, via the amended tax returns: Obtain the Record of Account using the 4506-T. The IRS has processed and accepted the amended tax returns;

evidence of IRS stamp receipt and/or contained in the Record of Account.

Evidence that all outstanding liabilities and/or tax penalties have been paid.

Additionally, the underwriter must carefully review any increased income to insure its validity, and the loan file should contain: • Wage earners must provide documentation to support receipt of

the income as well continuation of the income (reasonably for at least 3-years in the future).

• Important: The underwriter in these cases must make every effort to prudently document the added income and the reasonable expectation of continuation.

Amended tax returns for self-employed borrowers will be accepted only if: • It is clearly evident that the tax returns were not amended

solely to qualify for the loan. (E.g. application date 6/1, tax returns amended either 2 months before application or during the loan processing period.)

• The increase in the income is minimal and is clearly due to an error at the time the tax returns were originally filed.

Important Notes: MSI reserves the right to refuse to approve/close any loan for

which, in our sole opinion, an amended tax return does not appear to be valid.

MSI will not accept tax returns amended for the sole purpose of qualifying.





Tax Payer Identification Theft

Taxpayer identification theft occurs when a taxpayer’s stolen Social Security number is used to file a forged tax return and attempt to claim a fraudulent refund. The following documentation must be provided when the borrower is a victim of taxpayer identification theft:

Proof of the identification theft as evidenced by one of the following: • Proof that identification theft was reported to and received by the

IRS (IRS form 14039) • Copy of notification from the IRS alerting the taxpayer to possible

identification theft • Police report or proof of filing a complaint with the Federal Trade

Commission • Letter from the local IRS Advocacy Center.

MSI requires each of the following secondary documents (as applicable) to validate the reported income on the tax returns in question: • W2 or 1099 transcripts which match the W2 or 1099 income

shown on the 1040s • 1099 Mortgage Interest should match reported interest on

Schedule A or Schedule E • 1099G Unemployment should match reported unemployment • 1099 Interest/Dividend should match reported dividend and

interest • Validation of prior tax year(s) income (income for current year

must be in line with prior year(s)) Special Note: The IRS implemented a new reject code in April, 2015 and it has been

impacting 2% - 3% of tax transcript requests. The new rejection code is: “Due to limitations, the IRS is unable to process this request.” • This Reject Code is being used when there is possible Identity

Theft on the taxpayer’s account. • The taxpayer will then be contacted by mail, and referred to the

Identity Protection Security Unit at 800-829-1040. • The taxpayer might be able to receive their requested information

(transcripts). However, only consumers, not third parties, will receive the requested information.

When this reject type is received: • Request that the Borrower obtain the transcripts from the IRS.

(The applicable tax transcripts must be in the loan file.)





Verbal Verification of Employment

At time of underwriting and immediately prior to closing (no earlier than 5-calendar days prior to loan closing), MSI must verbally verify employment: Salaried: A verbal verification of employment Self-Employed: Verify the existence of the business through an

independent third party (CPA letter, or copy of the business license)-See Notes for Additional Requirements for Self-Employed Borrowers.

The V-VOE’s must be included in every loan file. MSI will not close a loan without an acceptable pre-closing Verbal

VOE. • If the borrower is no longer employed, MSI will not close the loan.

See Verbal Verification Requirements.

Verbal Verification Requirements

The Verbal Verification must be completed independently by the lender. See Notes for additional/special requirements for self-employed borrowers.

The following information must be written and signed. The written Verbal Verification of Employment must: • Verify the name, address and phone number of the company

contacted. o The company information should be obtained from a third party

source like the Yellow/White Pages, Directory Assistance, searchbug.com, or contacting the local licensing bureau. Print-outs from these sites should be attached to the VVOE.

• Verify the name and title of the person contacted. o For wage earners, this should be Human Resources or the

borrower’s supervisor/manager if applicable to the business. • The date of contact. • The information that was verified. • The name and title of the person completing the verification. • The signature of the person completing the verification.





Verbal Verification of Employment, Continued

Notes: MSI will accept Freddie Mac Form 90. For salaried or commissioned borrowers it is necessary to verbally

verify that the borrower is currently employed. For self-employed borrowers, it is necessary to independently

verify through 2-different sources that the business still exists (and is operating) through independent verification. • Examples of acceptable sources for self-employed Verbal VOE are:

Accountant [Accountant is defined as either a licensed or certified public accountant who must be a disinterested third party, may not be related to the borrower(s)], Department of Revenue Web Sites, Secretary of State Web Sites, Better Business Bureau, LexisNexis, Dunn & Bradstreet Report or copy of the current Business License together with verification of active status.

• If the borrower does not have an accountant they use on a regular basis, the borrower can procure the services of an Accountant on a one-time basis to verify the existence of the business.

Additional “written” “verbal verification” for self-employed borrowers: To properly verify the existence of the business, MSI requires the following written/printed documentation from two separate third-party sources. Letter from the CPA, or copy of current business license or

documentation from the regulatory agency that the business is viable (see examples above) AND

Separate documentation from yellowpages.com, the licensing regulator (if you have not used that as the first piece of documentation); supersearch.com, searchbug.com, etc. • Sources such as 411.com, Chamber of Commerce sites and

Manta.com where they allow the business owner to add their own information are not acceptable.



Escrow (Completion) Holdbacks

Overview

Escrow (completion holdbacks) may be permitted for weather related items only. Subject to end investor overlays.

Eligibility Permitted under the following requirements and restrictions.

Topic Requirements/Restrictions Eligible Mortgages A mortgage subject to the following are eligible for an escrow holdback (for completion):

Owner-occupied new construction Detached single-family residence or detached PUD • Modular (factory Built not eligible)

Title and Mortgage Insurance

The mortgage and title insurance may not be adversely affected during or after the time the holdback is in effect.

Marketability/Acceptability Repairs/completion items must meet the following restrictions: The repair/completion must be weather-related in nature and may not affect the livability

or safety of the dwelling. • The dwelling must be habitable, safe and structurally complete. For any item, there must be no adverse affect to marketability. The incomplete work cannot prevent the issuance of the Certificate of Occupancy (or

jurisdictional equivalent). The work must be completed within a specific time frame, and the notice of completion

forwarded to MSI as a “trailing document.” Ineligible Completion Items

The following repairs/completion items are not eligible for completion holdbacks: Structural Repairs Well/Septic Foundation Work

Roof Repairs-if they affect the habitability of the property– See Roof Repairs for additional details. Clean-up/correction of environmental hazards

Any items deemed inappropriate by MSI Underwriting

Important: When in doubt, contact MSI underwriting to confirm eligibility.




Escrow (Completion) Holdbacks, Continued

Eligibility, Continued

Topic Requirements/Restrictions Time and Escrow Limits Maximum combined repair items may not exceed 10% of the lesser of the appraised or

sales price. Minimum amount to complete the escrow will be 150% (1.5 times) of the estimated cost to

complete. Weather Related Items –Max completion period is 90 days. • For those states with extreme weather, contact MSI for approval to extend the period up

to a maximum of 180 days. Documentation Requirements

In the closed loan package: Appraiser’s cost breakdown (item by item) or contractor’s (not the builder) bid used to

determine the amount of escrow. • The maximum amount for completion escrow is 10% of the lesser of the property’s cost

or the appraised value. A copy of the signed escrow agreement must be included in the closed loan delivery

package. • The escrow agreement must include language that specifies that the lender may use the

funds to complete the repairs if not completed by the expiration date of the escrow account.

As final trailing documents, forwarded within the time limits noted above. A clear final inspection from the appraiser. (Fannie Mae 1004D/Freddie Mac 442). See

Appraisal Forms for requirements. FHA loans require a Mortgagee’s Assurance of Completion Form. MSI is responsible to ensure the repairs are complete within 90-days (periods up to 180-

days must be approved by Underwriting). The loan is subject to repurchase if the 1004D/442 is not provided to MSI within those time limits.

Evidence that the funds have all been paid in accordance with the escrow completion agreement.

A final title report showing no outstanding mechanics liens and no outstanding exceptions to the postponed improvements and or the completion escrow agreement; additionally, the lender of record must be in first lien position.

Swimming Pool Escrows Not Permitted.




Escrow (Completion) Holdbacks, Continued

Roof Repairs MSI will permit an Escrow Completion Holdback if a roof inspection

cannot be performed due to weather. Additionally, if the sales contract requires that funds are held pending possible roof repair or replacement, MSI will permit to our Escrow Completion Holdback policy. • However, if the roof visibly appears to be structurally unsound

which could render the property uninhabitable, the subject property is not eligible for approval and an Escrow Completion Holdback is not permitted.

The Roof Repair Escrow (Completion) Holdback must meet all MSI requirements stated herein.

Exception: MSI will accept, in lieu of the 1004D/442, a certification of completion and warranty for the roof work from a licensed roofer. • The certification and warranty must be on the roofer’s letter head

and the license number must be clearly evident. • MSI reserves the right to validate the license and to request a

1004D/442 if the certification is not acceptable to an end investor.



Escrow Waiver Policy

Overview MSI will permit escrow accounts to be waived on conventional loans

when the LTV is 80.00% and below (90.00% and below in certain states), unless prohibited by the product guidelines or state law. • Waiver of the escrow of MI premiums is never permitted, even if

the state permits the waiver of escrows for LTV’s greater than 80.00@ LTV.

Waiver of escrows is never permitted for Government or USDA loans. If the loan is HPML, the loan requires escrows, regardless of the LTV

and/or state laws.

Underwriter Responsibility

The Underwriter must review the request for Escrows (Impounds) to be waived; if the borrower does not demonstrate the ability to save money, Escrow Waiver should not be permitted.

If a borrower has previously been in default on a mortgage, escrows may not be waived.



Government Underwriting

Overview All government loans must meet the more restrictive of MSI Overlays, FHA, VA or USDA or end investor. Each government loan sold to MSI must be fully insured and/or guaranteed by the applicable government agency.

MSI does not intend to recreate or attempt to repeat the underwriting guidelines or requirements of any of the government agencies in this Seller Guide.

See the Government Loan Product Suite for product specific MSI overlays.

Underwriting Guidelines

Each loan must be underwritten in full compliance with MSI/applicable government agency guidelines. All additional restrictions or guidelines required by MSI and/or the

AUS must be applied to each loan. The loan must be closed exactly as approved by the AUS. Changes

prior to closing must resubmitted and/or duly approved by the DE underwriter or the agency (as applicable)



Income and Employment

Important

The Underwriter must provide a written explanation of the method for calculating income for qualification of the borrowers on each final 1008. Note: Always include the self-employed calculation worksheet and

the Income/Debt Worksheet. See the Intranet for active forms.

Overview

The underwriter must carefully evaluate the borrower’s employment and income history, stability and likelihood of continuance and must document the most current last two years of employment income history, using Verification of Employment forms and pay-stubs evidencing most current year-to-date paystub, must be within 30-days at the time of underwriting and W-2 forms for the past two years.

Notes: Stability: The income must be considered “stable” in accordance with

the applicable AUS used; in general Fannie and Freddie both use “likely to continue for 3-years” to determine income stability (note that unless there is evidence that the income will no longer be received, MSI should conclude that the income will continue.)

Significant Increases or Decreases in income level: The underwriter must closely review income when there is a significant increase or decrease in the income. • For significant decreases: The underwriter cannot simply

average using a previous higher income unless there is documentation of a one-time occurrence (such as injury) that prevented the borrower from working and earning full income for a period. If that is not the case, the underwriter must focus on the recent earnings and most likely continuance of earnings.

• For significant increases: The higher income may not be used unless the underwriter can document that the higher income is stable and likely to continue, otherwise, to be most conservative, the income should be averaged.

The Underwriter must include a written analysis of the income calculation and justification in the mortgage loan file, even when DU/LP is used.

Always review the applicable agency guidelines for consideration of income; MSI requires the most restrictive guidelines to be used between MSI, Fannie/ Freddie and the end investor.




Income and Employment, Continued

Overview, Continued

Recent Tax Returns and a clarification of Income and “additional income” See IRS 4506 for details. Income must be validated by tax transcripts.

• For any additional income over and above the W-2 income reflected as wages on Line 7, the tax transcripts must validate said income.

• Income which is increased by more than 10% over the prior year’s income may not be entered into, or used within the AUS without validation/confirmation from tax transcripts.

Additional Anomaly (1-time) Income: • In all prudent underwriting, in order for income to be used for

qualification purposes, there must be a history (generally 2-years) of the income and a reasonable expectation that the income will continue for a minimum of 2-years.

This requirement precludes the use of anomaly (1-time) type income, such as income from a boarder where there is no history of boarder income for the borrower (as permitted, see Boarder Income ); part-time jobs are generally precluded without a history or some type of expectation of continuance; sale of assets, while OK for down-payment cannot be used as income, etc.





DU/LP

Loans receiving an Approve/Accept through DU/LP may follow the AUS findings for acceptable documentation of income in lieu of the documentation stated within. Note: MSI always requires paystubs, W-2’s and/or tax returns. A Verbal Verification of Employment at time of underwriting and no

earlier 5 days prior to close. • See Verbal Verification Requirements for details. A fully executed 4506-T, regardless of the AUS findings and/or tax

transcripts in the loan file. See IRS 4506 for details.

Income Type Documentation Requirements Bonus, Overtime and Commission < 25% of total income

Borrower’s recent paystub + W-2s for most recent 2-year period.

Bonus, Overtime and Commission ≥ 25% of total income

Borrower’s recent paystub + W-2s for most recent 2-year period + personal tax returns for most recent 2-year period.

Self-Employed Personal + business tax returns for the most recent 2-year period. MSI provides greater detail in the Underwriting chapter.

Second Job – Not Self-Employed Borrower’s recent paystub + W-2s for most recent 2-year period. Second Job – Self Employed Personal + business tax returns for the most recent 2-year period. Reminder: When tax returns are required, the complete tax return including all schedules and attachments must be included.





Alimony / Child Support / Separate Maintenance

MSI guidelines for Alimony/Child Support or Separate Maintenance Income are required, regardless of the AUS Findings Message. The underwriter must manually apply the following guidelines.

If the Alimony/Child Support or Separate Maintenance Income

Then …

Is to be used as stable qualifying income The borrower must have received the full income for a minimum of 6 months prior to application. To consider the income: The payer must be legally obligated in writing to make payments:

• For a minimum of 6-months prior to loan application, and • For a minimum of 3-years after loan closing.

Evidence of the regular and stable receipt of the full amount of the income for most current 6-months is required.

Required Acceptable Documentation Verification of the award (“obligation in writing”) of alimony/child support /separate maintenance in one the following

documents: • Copy of the divorce decree or, Formal separation agreement or Court records or order.

o MSI will also accept any other legal agreement or court decree that describes the payment terms, or a copy of any applicable state law that requires alimony, child support or maintenance payments and specifies the conditions under which the payments must be made.

• The document must specify the amount of the award and the period of time over which it must be received. Evidence that the payments have been received in the full amount and consistently (deposit slips, canceled checks,

bank statements or Federal income tax returns, etc..) is required. Restrictions – Income may not be considered if:

• At any percentage of the total, the payer is obligated less than 3 years after loan closing. • The payments received (regardless of the court documents) are not for the full amount OR are not received on a

consistent basis. Important Notes: Alimony is taxable therefore do not gross-up; however, child support is not taxable and is eligible to be grossed-up. Documentation for alimony, child support income is not required if the borrower does not use the income to qualify.





Boarder Income

Rental income from boarders in a single-family primary residence or second home may not be considered as income. However, may be considered acceptable if received from a live-in

aide for a disabled borrower. The Aide must present documentation to demonstrate shared residency and payment of rent.

Bonus and Overtime

Bonus and Overtime may be included if the income has been: Consistently received for the most recent two years as evidenced

by the tax returns (2-years) and the most current 2-year’s W-2’s. Employer confirms its likelihood of likely continuance for the next

3-years. Stable Must be averaged. • Any year-to-date overtime or bonus amounts may be included in

the average if the year-to-date amount is consistent with the amounts received over the last 2 years.

Capital Gains

Capital gain income is generally a one-time transaction (sale of stocks or other one-time sale of assets); therefore, it is generally not considered stable monthly income. However it may be utilized as a compensating factor if: • Normal and recurring portion of the borrower’s income. When using capital gains as steady income from your profession,

the following requirements must be met: • 3 years tax returns – showing a consistent history of capital gains

being the borrower’s “salary.” Must include documentation of sufficient assets remaining after

closing to ensure the continuance of the income for at least 3-years.





Commission Income

Expenses reported on Form 2106 of the borrowers tax returns must be deducted from the income to arrive at the net commission income and the net income must be average over the most recent two years. To be considered stable income, it must appear to be likely to continue for a minimum of 3-years. Commission less than 25% of total income must be received for

24-months evidenced by a recent paystub and W-2’s for the most recent 2 years.

Declining income sources should not be averaged, and an explanation for the decline should be obtained. The most recent lower income would be used for qualification purposes. If a borrower earns 25% or greater of their income as commission,

then the last 2-year W-2’s and personal federal tax returns with all attachments are required, regardless of AUS.

Disability Benefits

Short Term Disability benefit payments should be treated as acceptable stable income unless the terms of the disability policy specifically limits the stability or continuity of the benefit payments. Must have a remaining term of three years Benefits that will decrease to a lesser amount within the next three

years because of long-term conversion, the lesser amount should be utilized in qualifying the borrower.

Copy of disability policy or statement is required Statement from benefits’ payer, such as insurance company,

employer, etc., is required. Important Note: MSI does not require any information pertaining to the borrower’s personal medical history.





Disability Benefits (Income), Continued

Long Term Disability When qualifying borrowers with long-term disability income; they

must always comply with the Fair Housing Act which prohibits discrimination on the basis of a handicap.

Additionally, MSI will clarify our guidelines regarding long term disability:

• When a borrower receives Social Security disability benefits (SSDI), the award letter only needs to indicate the benefit amount; verification of continuance is not required.

• Never request the following in addition to the award letter: o A letter from the borrower’s doctor detailing the nature of the

disability. o Extent of the disability (temporary or permanent). o Social Security Award 1099 (s). o Tax Returns to support SSDI.

Please follow Fannie Mae or Freddie Mac guidelines for “Other Sources of Income” as applicable for DU or LP.

Important Note: MSI does not require any information pertaining to the borrower’s personal medical history.

Dividends and Interest

Income from bank accounts, bonds, savings bonds, money market funds and cash dividends from stocks are acceptable if verified. Such income should be adjusted if the assets are liquidated. The previous 2 year tax returns, including applicable schedules, are required to verify the amount and stability of the income as well as develop a two-year average of the income.





Employment by Relatives or Transaction Participants

If the borrower is employed by a relative, a closely held family business, the property seller, real estate agent or any party to the real estate transaction, the following documentation must be obtained: Borrower’s signed and completed personal federal income tax

returns for the most recent 2-year period, and Direct VOE Form, and • The direct VOE cannot be completed by a relative or other

interested party; the CPA should complete and provide a letter stating (confirming) the borrower has no ownership interest in the company.

Current paystub, and • If the paystubs are handwritten, require 2 months bank

statements showing the net deposit. • If the paystubs do not reference year-to-date earnings, a copy of

the payroll ledger evidencing YTD earnings must be provided. W-2’s for the most recent 2 tax years. • Provide 4506-T for validation of W-2 income. Most current 2-years 1040’s (IRS tax transcripts to support)

Current income reported on the VOE or paystub may be used if it is consistent with the W-2 earnings reported on the tax returns. If the tax returns do not include W-2 earnings or if the income is substantially lower than the current VOE or paystub, further investigation is needed to determine whether income is stable.

Foster Care Income

Foster Income received from a state or county sponsored organization may be considered acceptable with a two-year history and the likelihood of continuation. Note: A 12 to 24 month history is permitted as long as the income does not represent more than 30% of the total gross income that is utilized in qualifying the borrower. Documentation: Require evidence of a 2-year history of receiving foster care

income, and Borrower must provide current copies of the contract or agreement

with the government agency showing foster care income, and Copies of deposit slips or bank statements confirming the regular

deposits consistently for 3 months.





Foreign Income

Foreign income can be used to qualify when: Borrower is a U.S. citizen or a permanent resident alien Income Requirements:

• Standard income stability and continuance requirements are met. • Standard documentation requirements based on the source and

type of income are met. • Verbal Verification of Employment from the employer for

employment and income no earlier than 5 days before close. • If not already verified in English and U.S. Dollars, all income is

translated/converted to U.S. dollars by a disinterested 3rd party (and certified true by that 3rd party).

• The foreign income is being consistently reported to the IRS as evidenced by obtaining copies of the last 2 years of U.S. Federal Income tax returns. o Note: If the income cannot be validated on US Tax Returns,

the income is not eligible. Asset Requirements:

• Assets required for closing and/or reserves must be properly sourced to MSI guidelines and must be documented in a U.S. financial institution.





Conventional Loans Only – LP Findings Only – must be locked with Series I ;N; or P loans Only; No Condos for Series I, but LP condos acceptable through Series N: Exception: MSI may consider Future Income for professionals

(doctors, lawyers, other professionals) that receive a “contract of employment” or the borrower must work for a Fortune 500 company (http://money.cnn.com/magazines/fortune/fortune500/2011/full_list/) that provides a written offer of employment under the following requirements: • MSI determines the viability of future income in its sole discretion. • For 1-Unit Primary Residence Only; Max LTV/CLTV/TLTV 95%, or

highest permitted by the product not to exceed 95%. • Borrower’s must contribute a minimum of 5% of personal verified

and sourced funds into the transaction. • Future income must be documented in the loan file with a formal

offer/contract from the new employer stating all pertinent information (start date/salary, etc.)

• The offer must be non-contingent (passing the bar exam would not be acceptable.)

• Documentation of the formal acceptance by the borrower, without contingencies, must be included.

• Borrower must start the new job within 60-days of loan closing. • Borrower must have documented reserves of 6-months PITI for

the new loan. Gift funds are acceptable as reserves. • New employment may not be with a family member. • MSI verbal verification of employment guidelines must be

met/included (document that the borrower is still scheduled to start on the contract date).

• MI carriers for this product are: Radian; GE; Essent and MGIC.


http://money.cnn.com/magazines/fortune/fortune500/2011/full_list/




Military Income

Base military pay, in addition to the following, are permitted: Flight or hazard pay Rations Clothing allowance Quarters’ allowance Proficiency Pay

Note: Income paid to military reservists while they are fulfilling their

reserve obligations is also acceptable if it satisfies the same stability and continuity tests applied to second-job income.

Military pay tables are accessible on the Web, www.dfas.mil Verbal VOE is not required for active duty; however, we do require

a current “LES” statement at time of closing.

Non-Taxable Income

The underwriter must verify that the particular source of income is nontaxable and both the income and its tax-exempt status are likely to continue for the next three years. If the income is nontaxable and the income and its tax-exempt

status are likely to continue, the underwriter may develop an “adjusted gross income” for the borrower by adding an amount equal 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 underwriter may use that amount to develop the “adjusted gross income”.

This adjusted gross income should be used in calculating the borrower’s qualifying ratio.

Mortgage Credit Certificate

Not permitted as an acceptable source of income. Loans with an MCC may be eligible for a specific product.


http://www.dfas.mil/




Note Receivable Income

To be considered as an acceptable source of income the following applies: Must evidence continuance for at least 3 years Copy of the note to establish the amount and length of payment Must have been received for the last 12 months Acceptable evidence includes: • Deposit slips • Copies of signed federal income tax returns filed with IRS • Copies of bank statements reflecting deposit of funds

Note: Payments on a newly executed Note that specifies a minimum duration of three years may not be used as stable income.

Part-Time, Second or Multiple Income

All types of supplemental income must be received, uninterrupted, for the most recent two years and supported by IRS W-2 forms. If the second job is by self-employment then personal and

applicable business tax returns for the most recent 2-years must be provided.

Pension / Retirement

Income from retirement accounts must be verified by the employer’s statement or benefit letter, tax returns or IRS W-2/1099-R forms. If bank statements are used as the primary verification source,

they must confirm regular deposits. If the income is received monthly, it must be determined that the

income is expected to continue for at least three years to be considered as qualifying income.

The borrower must provide documentation that they have unrestricted access without penalty to the accounts, and confirmation that the income is expected to continue for at least 3 years after loan closing.





Pension / Retirement, Continued

Individual Retirement Account (IRA) Income If the borrowers are 59.5 years old and using IRA distributions as income: The tax returns (or bank statements) must show a 24-month

history of receipt of distribution and asset documentation shows assets adequate for a minimum 3-years continuing distribution, MSI will average the distributions and use the average income to qualify.

If there is not a 24-month history of distributions from the IRA assets:

• MSI will require that the borrowers set up a guaranteed distribution amount to use as income. (Note the assets must be sufficient to continue the distribution for a minimum of 3-years.)

• If the assets are in the form of stocks, bonds or mutual funds, if the borrower is at least 59.50 years of age, 70% of the current value may be used as income (calculate after any withdrawal of funds to complete the loan transaction).

If the borrowers are 70.5 or older – the minimum withdrawal requirement age:

• MSI will use the mandatory minimum withdrawal requirement as based on assets, as income to qualify the borrower. Borrowers must provide sufficient supporting documentation.

Public Assistance

Public Assistance may be considered as an acceptable income source if the following apply: Received for the past two years Likely to continue for the next three years Documented by letters or exhibits from the paying agency stating

the amount, frequency and duration of the benefits payments. Note: Public Assistance income is not always acceptable in the Secondary

Market. Use of Public Assistance income to qualify is determined by the MSI underwriter.





Rental Income - Primary

When the subject property is a primary residence 2-4 unit: If the underwriter uses rental income from the subject property in qualifying the borrower, MSI requires the following: Small Residential Income Property Appraisal Report (1025) to

document comparable rents. Operating Income Statement (Freddie Mac 998), and one of the

following: • See Appraisal Forms for additional details. • Current Lease (if subject was acquired subsequent to filing

previous year’s tax return), or • Most recent federal income tax return (if subject was acquired

prior to filing previous year’s tax return). Net rental income will be obtained from Form 998 (if the

transaction is a purchase or if the subject was acquired subsequent to filing previous year’s tax return).

Net rental income will be obtained from Schedule E (if the subject was acquired prior to filing previous year’s tax return).

If rental income is used to qualify, MSI requires a minimum of 6-months’ rent loss insurance. Evidence of active coverage is required in the delivery file. • The rent loss insurance is not required if the rental income was not

used to qualify. Reserves – When rental income is used to qualify the borrower:

• MSI requires that the AUS findings for Reserves be followed. Important Notes:

If the borrower qualifies without the use of the rental income (with the full payment-which includes PITI and any operating expenses for the property), MSI does require that the Gross Monthly Rent for each of the non-occupied units is provided on the Underwriting Transmittal (1008). Gross Monthly rent may be obtained from one of the following:

• Copy of current leases or the Appraisal Report (1025), or • Schedule E of the Tax Return (if the property has been owned at

least one tax year). The Underwriter must use the applicable Fannie Mae Rental Income

Calculation Worksheet for Fannie & Freddie Mac loans. Note: If the property is a Single Family (1 Unit) Investment, MSI does require the Fannie 1007/Freddie 1000 (Single Family Comparable Rent Schedule) regardless whether rental income is used to qualify.





Rental Income - Investment

When the subject is an investment property: If the underwriter must use rental income from the subject property to qualify the borrower, MSI will require the following: See Appraisal Forms for additional details. Minimum 2 years landlord experience, and Evidence of 6-month rental loss insurance, and Current Lease (if subject was acquired subsequent to filing previous

year’s tax return), and Most recent year federal tax returns with all schedules (if subject

was acquired prior to filing previous year’s tax return). Net rental income/loss will be obtained from Form 998/1007/1025

as applicable (if the transaction is a purchase). Net rental income/loss is obtained from Form 998/1007/1025 as

applicable (for properties acquired subsequent to filing previous year’s tax return).

Net rental income/loss is obtained from Schedule E (for properties acquired prior to filing previous year’s tax return).

If the rental income is not being used to qualify the borrower, MSI requires that the operating expense is included in the borrower’s PITI to qualify.

Note: MSI requires that the appraisal form required by the applicable AUS to provide operating expense is included in the loan file.

Important Note: Reserve requirements: 6-months PITI in reserve is required for

each investment property. See Reserves for details.

Rental Income – Other Properties

When rental income applies to properties owned by the borrower other than the subject property. If the underwriter uses rental income to qualify the borrower, the following apply: Rental income must be shown in the “Schedule of Real Estate

Owned” on the 1003. MSI will require the following: • Rental Income used to qualify must be documented and calculated

as required by the most current applicable Fannie/Freddie guidelines in accordance with the AUS used. See the applicable Fannie Mae or Freddie Mac Seller Guide for details.

• The Underwriter must provide an explanation of the rental income calculation; use the Rental Income Worksheet. See the most current active forms on the Underwriting/Intranet.





Rental Income- Special Circumstance – Rental Property is borrower’s former primary residence. In order to use the rental income to qualify for the refinance when

the rental property was formerly the borrower’s primary residence, the following must apply:

• The borrower must document a minimum of 12-month’s rental history on the current tax returns. If the tax returns do not cover the full 12 months, the borrower must provide current/previous lease agreements for the months not covered by the tax returns, and

• The borrower must provide evidence of receipt of rent for a minimum of 12 months prior to the date of application for refinance.

If the borrower cannot meet the above requirements, the income from the rental may not be used to qualify the borrower.

See Conversion of (or departure from) Principal Residence for full details regarding using the former principal residence for rental income.

Rental Income Through S-Corp or Partnership

If borrower receives rental income through a partnership or S Corporation, the underwriter must follow Fannie Mae published guidelines. See the Fannie Mae Seller Guide for full details.

Qualifying Without Rental Income

Important Note – Delivery Requirement: If the borrower qualifies without the use of the rental income (with the full payment-which includes PITI and any operating expenses for the property), MSI does require that the Gross Monthly Rent for each of the non-occupied units be provided on the Underwriting Transmittal (1008). Gross Monthly rent may be obtained from one of the following: • Copy of current leases or the Appraisal Report (1025), or • Schedule E of the Tax Return (if the property has been owned at

least one tax year). Note: If the property is a Single Family (1 Unit) Investment, MSI does require the Fannie 1007/Freddie 1000 (Single Family Comparable Rent Schedule) regardless whether rental income is used to qualify.





Royalty Payments

To be considered as an acceptable income source, the following apply: Most recent 2 year tax returns, including Schedule E. Document minimum 12 month receipt of income Income to continue for the next three years

Salaried Borrower

A salaried borrower is defined as a wage earner that derives income through employment at a business where there is little or no ownership interest (less than 25%). Compensation may be based on an hourly, weekly, monthly or semi-

monthly basis. MSI requires that the underwriter provide a completed Income Debt

Calculation Worksheet to qualify the borrower(s).

Notes: Wage earners employed by a family member or working at a family

business must provide the last 2 years tax returns with all schedules Less than 2 years employment history may be considered at the

underwriter’s discretion for recent college graduates or military personnel

Salaried Income History

MSI requires salaried borrowers to exhibit the following employment standards: A minimum of two years employment history Prior-to-Docs, MSI independently verifies that the borrower is still

employed via a Verbal VOE. See Verbal Verification Requirements for details.

Salaried Documentation

Standard sources of proof of employment for a salary/wage-earning borrower are:

W-2 for the past 2 years Current pay-stub evidencing 30-day earnings and/or showing YTD

income Note: Handwritten pay-stubs will not be accepted unless supported by a

written VOE, W-2’s validated by the IRS and tax returns. See Employment by Relatives or Transaction Participants for additional guidelines.





Salaried Verification of Employment

“Stand alone” Verifications of Employment are not permitted for verification of employment or income. VOE’s must always be supported by a copy of the most recent

paystub validating the current “salary” and the current year-to-date, and

W-2’s for 2 years MSI must verbally verify the borrower(s) employment no earlier

than 5 calendar days prior to closing. See Verbal Verification Requirements for details.

Seasonal Income

Seasonal income can be considered as stable income if the borrower has worked in the same line of seasonal work for the past 2 years and the borrower’s employer indicates that there is a reasonable expectation that the borrower will be rehired for the next season. Notes: Borrower must be currently employed and not in the “seasonal lay-

off” period for the income to be used to qualify. Income must be calculated over the most recent 24 months, as

shown on the most recent tax returns, 2-years is required, regardless of AUS.

If income is declining, use the most recent year’s income under close underwriter review.

Social Security – Retirement Benefits

Benefits that have a defined expiration date must have a remaining term of at least three years to be considered. Acceptable verification for Social Security retirement benefits includes once of the following: A copy of the Social Security Administration’s award letter. Copies of the borrower’s two most recent bank statements to

confirm regular deposit of the payment. Signed tax returns or W-2’s for the most recent two years.





Self-Employed Borrowers

Self-employed borrowers add an additional layer of risk, since the main source of income for self-employed borrowers is their private business. Self-employed borrowers income depends on the continuity of the business. Therefore, specific documentation relating to the business (such as

P&L statements and federal business returns) is required for borrowers who are self-employed.

The following are considered to be “self-employed”: Individuals who own 25% or more of a business Individuals whose combined business interest comprise 25% or more

of the total Note:

If the borrower(s) is self-employed, but the income is not used to qualify, the underwriter must obtain the borrower’s individual income tax returns to determine if there is a business loss that may have an impact on the stable monthly income used for qualifying.

Self-Employed Documentation

Handwritten pay-stubs will not be accepted unless supported by W-2’s validated by the IRS and tax returns. Standard sources of proof of employment for a self-employed borrower are: On all self-employed borrowers an unaudited current Profit and Loss

Statement (P&L) and a current Balance Sheet is required. • If the borrower’s prepare his or her own taxes, and does not use an

accountant or CPA, MSI requires a documented independent third party verification that the business is currently operating. o This is an underwriting income requirement and is in addition to

our standard Verbal Verification of Employment requirements. • Important Reminder: Each loan must have a Verbal Verification of

Employment completed no earlier than 5 calendar days prior to loan closing/settlement.





Self-Employed Documentation, Continued

• An unaudited independent third party (tax preparer, accountant, business banker or attorney) prepared profit and loss statement is required on every self-employed borrower when it has been 6 months or more since the last calendar/fiscal year of the filing of their last tax return. (I.e. for loans submitted to underwriting in July with tax returns from prior year ending December). o The profit and loss figures will not be used for income calculation

but will be used for establishing stability of income.

Please Note: If the borrowers have completed and submitted the current year’s tax returns, but the tax transcripts are not yet available (due to IRS delay), the income from the current year may be used if: Documentation of filing is provided: “Electronic confirmation of filing” or

a stamped receipt from the IRS office, and If taxes are owed, a copy of the cancelled check showing taxes paid –

note that the Underwriter must document an acceptable source of funds for the payment.

If no taxes are owed, the borrower must provide evidence of the quarterly payments to the IRS to match (validate) payments reflected on the tax return. • Limitation: If the delta between the current income and the

previous year income is greater than 10%, then tax transcripts must be provided, no exceptions.

Important Notes: MSI requires 2-years most current tax returns, regardless of AUS. See IRS 4506 and Amended Tax Returns.





Self-Employed Documentation, Continued

Sole Proprietorship • Last two years personal 1040s • Schedule “C” • If tax filing deadline has passed, must obtain an executed

extension. General and Limited Partnership, Limited Liability

Corporations and “S” Corporations • Last two years personal 1040s • Last two years 1065s • Last two years K-1s • All associated schedules

Corporations • Last two years personal 1040s • Last two years 1120s • All associated schedules

Business Debt

To ensure the credit worthiness of a self-employed borrower and to ensure there is no negative impact to the income generated by the company, for any personal debts paid by the business, MSI requires the following: Documentation of the most recent 12-monthly payments through

cancelled checks, evidencing the payment is made through the business. • The 12-months will provide evidence that the business can support

the lien.





Use of Corporate Net Profit

Self-Employed Income Sources; Use of Net Profit from a Corporation (1120-type corporate filing): To use the “net” profit from an “1120”-corporation as income, the borrower must meet the following guidelines/requirements: The borrower(s) must have 100% ownership of the

corporation/business. The borrower(s) must have a legal right to any additional income.

• MSI requires a corporate resolution or other comparable document that establishes that right.

The borrower(s) must demonstrate a minimum 2-year history of receiving this income.

MSI requires verification from the accountant for the business/company indicating that the business can support the on-going distribution of the corporate profits at the same or an increasing level.

The Underwriter’s analysis of the business must also support that the business is capable of providing the borrower(s) with the additional income. • MSI requires that the Underwriter provide this justification in

writing in the loan file. Important Note: These guidelines refer to 1120 Corporations and not “S” Corporations.

Self-Employed Income History

Self-employed borrowers must have a history of stable and durable income for the previous 2 years. A written income analysis must be prepared and included in the

loan file. Prior to closing, MSI requires that the Seller independently verify

the existence of the business via a verbal verification of employment through the CPA, business license or telephone listing – this verbal verification should be included in the loan delivery file.

See Verbal Verification Requirements for details.

Temporary Employment Income

To use temporary income to qualify, the borrower must work through an agency (or agencies) and be able to document a steady work history as a temporary employee for a minimum of 24 months.





Temporary Leave-Short Term Disability Income

Temporary leave from work is generally short in duration for reasons of maternity/paternity leave or short-term medical disability or other types of temporary leave that are acceptable by law or the borrower’s employer. Borrowers on leave may or may not be paid during their absence. If MSI is aware that the borrower is on a temporary leave, and the borrower’s income is required for qualification, MSI requires the following: Written verification from the borrower confirming

• Intent to return to work upon completion of the leave of absence under the same terms as prior to leave, and

• Agreed upon date of the return to work. Full VOE from the borrower’s employer confirming

• Continued employment with the company, and • Return to work date, and • Post leave employment and income will be under the same terms

as prior to the leave. • Full VOE to provide salary and year to date earnings.

MSI requires a Verbal Verification of Employment to confirm the employer conditions are met.

Income Verification Requirements MSI requires standard documentation of the amount of regular

employment income the borrower received prior to the temporary leave, including but not limited to: base pay, overtime, commissions and bonus income.

Documentation evidencing the amount and duration of all income sources being used to qualify the borrower during the temporary leave of absence.

Important Note: MSI does not require that a borrower, currently not on leave of absence be questioned regarding their intent to take a future leave; nor does MSI require any information pertaining to the borrower’s personal medical history.





Temporary Leave-Short Term Disability Income, Continued

Calculation of Qualifying Income Use the matrix to determine the income calculation requirements for

the borrower on temporary leave of absence.

Income Calculation for Temporary Leave of Absence IF it is verified that the borrower will … THEN Use … return to work at their current employer as of the first mortgage payment,

the borrower’s regular employment income (i.e. gross monthly income) that will be received upon return to work for loan qualification purposes.

not return to work as of the first mortgage payment, the lesser of the borrower’s: Temporary leave income that will continue to be received

for the duration of the leave of absence (if any), or regular employment income.

Trust Income A copy of the Trust Agreement or the trustee’s statement confirming the amount, frequency, and duration of the payments should be provided. The income must continue at least 3 years to be considered as income. Validation of the asset and continuation of the trust income must

be documented. Borrowers completely relying upon trust income for the mortgage

repayment must provide copies of the trust agreement and the most recent 2 years signed, dated federal tax returns, with supporting schedules. The borrowers should have personal access to the trust assets.

Unacceptable Sources of Income

Income derived from any of the following may not be used in qualifying income. Income based on Future Earnings Draw Income Capital withdrawals Capital Gains unless the borrower is in a business that generates

capital gains income, see Capital Gains. VA Education Benefits Income not listed on Tax Returns Illegal Income Any income that cannot be documented and verified





Unemployment Benefits

Acceptable if properly documented: Received for the past two years Likely to continue for the next three years Copies of the past two year tax returns Borrower must be in a profession that is subject regular lay-offs.

US Tax Returns

US Tax Return Requirements for Citizens of US Possessions: Puerto Rico – If not a bona fide resident of Puerto Rico during the

tax year, the individual must file tax returns (reporting world wide and US or Puerto Rican income) on both US and Puerto Rico Tax Returns.

• MSI may require a copy of the tax returns to validate qualifying income.

Please see IRS Publication 570 (2013) for details and specific requirements for each US Possession.

Applicants who work abroad: Generally all US Citizens with income earned must file US Tax

Returns. • MSI may require a copy of the tax returns to validate qualifying

income. • For additional specific guidelines or rules (exclusions, etc.) see IRS

Publication 54 (2013) for details.

VA Retirement Benefits

To be considered as an acceptable source of income, the following apply to VA Benefits: Must be documented by a letter or distribution form from the

Department of Veterans Affairs Must continue for the next three years

Note: Education benefits are not acceptable.

http://www.irs.gov/publications/p570/index.html





Liabilities and Debt

Overview Borrower’s liabilities must be considered when underwriting the loan to arrive at the qualifying debt-to-income (DTI) ratio. Liabilities are any debt, lien, judgment or other consideration that impacts the borrower’s ability to repay the mortgage loan.

Debt-to-Income

See Qualifying Ratios and Liabilities for full details.

Conversion of (or departure from) Principal Residence

Borrowers who currently own their home typically have 3 options when they decide to purchase a new one: Sell the current home and pay-off the outstanding mortgage. See

Principal Residence Pending Sale for details when the current home does not sell prior to purchase of the new home.

Convert the current home to a second home. Convert the current home to an investment property.

The following matrix outlines the requirements for borrowers that convert their current residence.

Conversion of (Departure From) Current Property Relocation transaction where the departing residence is pending sale

If the mortgage file contains an executed buyout agreement that is part of an employer relocation plan and the employer/relocation company takes responsibility for the outstanding mortgage(s), the amount of the payment on the property pending sale does not need to be included in the monthly debt payment-to-income ratio and the reserve requirements do not apply.

If the mortgage file does not contain an executed buyout agreement but:

There is a documented minimum 30% equity in the existing property. The value of the current property must be documented by a full appraisal. The following is required:

There is not a documented minimum 30% equity in the existing property. The value of the current property must be documented by a full appraisal. The following is required:

The borrower’s executed non-contingent sales contract for the previous residence, and

A lender’s commitment to the buyer of the previous residence (if the executed sales contract includes a financing contingency), and

Evidence the borrower has reserves equal to the greater of 2-months PITI for each mortgage, or the AUS requirement.

The borrower’s executed non-contingent sales contract for the previous residence, and

A lender’s commitment to the buyer of the previous residence (if the executed sales contract includes a financing contingency), and

Evidence the borrower has reserves equal to the greater of 6-months PITI for each mortgage, or the AUS requirement.

Important Note: MSI will accept only a full Appraisal to document equity in the converting/departing residence. The appraisal form must be dated within 60-days of the Note date of the current transaction. See the applicable current agency Seller Guide (DU or LP) for additional information-more restrictive guidelines apply.




Liabilities and Debt, Continued

Conversion of (or departure from) Principal Residence, Continued

Conversion of (Departure From) Current Property Conversion to a Second Home

Both the current and the proposed mortgage payments (including all Taxes, Insurance, HOA dues) must be used to qualify the borrower for the new transaction.

Reserves must be the greater of 6-months PITI for each property or the AUS requirement. Exception: Reduced reserves (as determined by the AUS), but no less than 2-months for each property, may

be considered under the following circumstances: • There is a documented minimum 30% equity in the existing property. The value of the current

property must be documented by a full appraisal, see the Important Note. Conversion to an Investment

Both the current and the proposed mortgage payments (including all Taxes, Insurance, HOA dues) must be used to qualify the borrower for the new transaction.

Reserves must be the greater of 6-months PITI for each property or the AUS requirement. Exception: Borrowers may use up to 75% of the rental income from the existing property to be used to offset

the mortgage payment for qualification purposes if the following guidelines are met: • There is a documented minimum 30% equity in the existing property. The value of the current

property must be documented by a full appraisal, see the Important Note. • The rental income is documented as follows:

o Fannie Mae Form 1007, single Family Comparable Rent Schedule. o A copy of the fully executed lease agreement. o Documentation of the receipt of the security deposit from the tenant (deposited into the

borrower’s account). Reserves must be the greater of 2 months PITI for each property or the AUS requirement. If the 30% equity in the existing property cannot be documented, rental income may not be used

to offset the mortgage payment and the borrower must qualify with both payments and reserve requirements. Reserves are 6-months for each property. To use the income from the conversion of the primary to an investment: • LP and Series I (regardless of AUS): the borrower must provide a documented (supported by

filed tax returns) 2-year history of managing 1-4 investment property. • DU: Management experience not required. See Rental Income- Special Circumstance – Rental Property is borrower’s former primary

residence. for details to use as “Rental income.”

Important Note: MSI will accept only a full Appraisal to document equity in the converting/departing residence. The appraisal form must be dated within 60-days of the Note date of the current transaction.



Loan Purpose

Overview Note these guidelines should be used only to determine whether a transaction should be underwritten as a purchase or a refinance. Federal or State laws may categorize the transaction differently for disclosure purposes.

Purchase Transactions

A purchase transaction is one in which the proceeds are used to finance the purchase of a home. See Purchase Agreement (Contract) – Re-Negotiated for restrictions.

Refinance Credit Rule

MSI will not close any loan as a refinance transaction that is currently involved in foreclosure proceedings.

MSI will not close any loans participating in ‘churning”, where the borrower is getting a new refinance every 3-to-6 months.

MSI will not close any loan where the subject property has been subject to a loan modification.

See Bankruptcy/ Foreclosure.

Refinance A refinance transaction occurs when the borrower obtains a new loan on a currently owned residence. MSI identifies the following refinance transaction types. Seasoning and Continuity of Ownership requirements apply to all refinance transactions. Rate/Term • Follows the same guidelines as a Fannie Mae Limited Cash Out or

Freddie Mac Rate/Term Refinance. • The borrowers receive no equity cash from the refinance

transaction. Cash Out Refinance • The borrowers receive equity cash from the refinance transaction.




Loan Purpose, Continued

Refinance Requirements

The guidelines below must be followed, regardless of AUS Findings.

Refinance Requirements General Refinance Requirements Continuity of obligation requirements must be met. See Continuity of Ownership/ Obligations See Listed for Sale for details regarding refinance transactions. • Calculate the timing by using the verified date the subject was removed from the MLS to the actual date of loan

application. Seasoning Requirements

Topic Rate/Term or Limited Cash Out (LCO) Cash Out Transaction Eligibility

(8/16/14)

For Primary Residence and Second Homes: • When the mortgage being refinanced was a

purchase money transaction the mortgage must be seasoned a minimum of: o Freddie LP-120 days/Fannie DU- 90 days

from the “old” Note date to the refinance Note date. (Note: If the loan is locked with investor I, 120 days are required, regardless of AUS.)

For Investment Properties: • The borrower must have acquired the property a

minimum of 6-months prior to application date. • If the property has been owned less than 6-

months, it is not eligible for Rate/Term refinance.

For all loans, regardless of Occupancy: The same borrowers on the existing Note/Title

must be on the new application, if not, Continuity of Obligor Requirements must be met. See Continuity of Obligation for details.

If the property was subject to a cash-out refinance within the past 6 months (from Current Note Date to Application Date), the loan must be underwritten and priced to the more restrictive cash out guidelines.

A copy of the most previous Closing Disclosure/Settlement Statement must be provided to document whether or not cash was taken.

Short Term Refinance-not eligible as rate/term/ LCO – must be completed as a cash out refinance. (short term refinance defined as a refinance that combines the first mortgage and a non-purchase money subordinate mortgage into a first mortgage or any refinance of a prior cash out refinance within 6 months.)

The current loan must be a minimum of 6 months old from the Current Note Date to the new Note Date.

The same borrowers on the existing Note/Title must be the new application, if not; Continuity of Obligor Requirements must be met. See Continuity of Obligation for details.

If there is no existing lien on the property (e.g. purchased for cash or paid-in-full).

• The borrower must evidence “ownership” (title) for a minimum of 6 months; the transaction must be completed and priced as a cash out.

• Delayed Financing Exception–Defined as a purchase for cash where the borrower wants to do a cash out refinance within the first 6 months of acquisition to recoup their funds. o See Delayed Financing.







Refinance Requirements, Continued

Refinance Requirements Seasoning Requirements, Continued

Topic Rate/Term or Limited Cash Out (LCO) Cash Out

Seasoning for LTV/CLTV/TLTV Calculation

(8/16/14)

Use the Current Appraised Value unless there is “No Continuity of Obligation”. See No Continuity of Obligation.

Continuity of Obligation Continuity of Obligation must be established, appropriately addressed and satisfied for scenarios in which the vested title of the property is being amended through a refinance transaction. If any changes from the current Note or Title holder are being made, it is necessary to

establish who is obligated for the current mortgage and who holds title. If there is an outstanding lien on the property, the refinance transaction must meet the following: The loan being refinanced and the

title to the property are in the name of a natural person.

• See LLC for specific requirements if property is or was in the name of an LLC.

At least 1 borrower obligated on the new loan was a borrower obligated on the existing loan, or

At least 1 borrower has been on title and residing in the property for at least 12 months and can demonstrate a relationship (e.g. relative, domestic partner) with the obligor on the current mortgage, or

The borrower has recently inherited or was legally awarded the property through a supervised transfer process.

The refinance transaction must one meet the following: The loan being refinanced and the title

to the property are in the name of a natural person.

• See LLC for specific requirements if property is or was in the name of an LLC.

At least 1 borrower obligated on the new loan was a borrower obligated on the existing loan, or

At least 1 borrower has been on title and residing in the property as a primary resident for at least 12 months and can either:

• Demonstrate a relationship (e.g. relative, domestic partner) with the obligor on the current mortgage, or

• Demonstrate payment of timely mortgage payments, including any secondary financing for the most recent past 12 months.

The borrower has recently inherited or was legally awarded the property through a supervised transfer process; the 6-month seasoning does not apply to a primary residence.






Refinance Requirements Topic Requirements Continuity of Obligation, Continued

(8/16/14)

CLAR (9/25/15)

DU and Other Investors Only – LP and Series I do not permit these scenarios. If the borrower is currently on title but cannot demonstrate an acceptable Continuity of Obligation, or if there are no outstanding liens on the property, the loan must be underwritten and priced as a cash-out refinance and the following additional restrictions apply:

No Continuity of Obligation Property must be primary residence or second home. Investment properties with no

continuity of obligation are not eligible to MSI. Borrowers on title at least 6 months but less than 24 months are limited to a maximum 50%

LTV/CLTV/TLTV based on the current appraised value, OR If Borrower was added to title at least 24 months prior to the disbursement date of the new

loan. LLC Property in LLC or Previously in an LLC - Loans may be submitted to DU or LP for this scenario. Any property that was previously held in an LLC must have been transferred to the individual

borrower (making the application for refinance): • Primary Residence: For Rate/Term, a minimum of 120-days prior to the application date;

for Cash Out, a minimum of 180 days prior to the application date. • Investment Properties: For all refinance transactions, a minimum of 180 days prior to

the application date. Additionally, for Primary and Investment:

• The LLC must have been incorporated a minimum of 1-year prior to the property transfer date.

• The chain of title must document the date of transfer from the LLC to individual ownership (our borrower).

• The borrower must further document that: o He/she was a 100% owner of the LLC prior to transfer of the property; and that the LLC

meets the applicable seasoning requirements.






Refinance Requirements Rate/Term (R/T) or Limited Cash Out (LCO) Refinance Mortgage Amount: The mortgage amount is limited to: The sum of the unpaid balance of the existing first mortgage, closing costs, points, pre-paid items, and, if applicable, the

amount required to satisfy certain subordinate loans used for the original purchase of the property. • Any “cash” back to the borrower may not exceed the lesser of $2,000 or 2% of the loan amount.

Note: See the Product Suite for the applicable product, additional Rate/Term cash back restrictions may apply. Subordinated Second liens: There are no seasoning requirements for current secondary liens that are being

subordinated to the new loan. See Subordinate Financing. • It is critical that the existing secondary liens are subordinated at closing to the new mortgage. See Special Purpose Refinance for details on Buyout of Spouse, Inherited Property

Verification of Funds For all refinance transactions for all conventional loans (regardless of AUS); MSI will require verification of funds.

• The loan file must include a minimum of the most current month’s bank statement. The verified funds must cover any cash to close and required reserves.

• Neither LP nor DU will be updated to request this verification as a condition, the information and documentation must be provided “manually” to the loan file and AUS submission.

Note: Please see “Transaction Eligibility” for details on R/T refinance for loans where the most recent transaction within 6 months has been a cash-out refinance. Ineligible Transactions

When the following conditions exist, the transaction is ineligible as a limited cash-out refinance and must be treated as a cash-out refinance:

• no outstanding first lien on the subject property (except for single-closing construction-to-permanent transactions, which are eligible as a limited cash-out out refinance even though there is not an outstanding lien on the subject property);

• the proceeds are used to pay off a subordinate lien that was not used to purchase the property (other than the exceptions for paying off PACE loans and other debt used for energy-related improvements, described above);

• the borrower finances the payment of real estate taxes for the subject property in the loan amount, but does not establish an escrow account;

• the borrower finances the payment of real estate taxes that are more than 60 days delinquent for the subject property in the loan amount; and

• a short-term refinance mortgage loan that combines a first mortgage and a non-purchase-money subordinate mortgage into a new first mortgage or any refinance of that loan within six months.

Cash Out Refinance Mortgage Amount: The mortgage amount must be used to pay the current unpaid principal balance of the existing first mortgage; it may be

used to pay closing costs, points, pre-paid items, subordinate mortgage liens and additional cash to the borrower. Subordinate Liens: No seasoning requirement.





Delayed Financing Exception

Permitted for DU and must be locked with specific products only (Series U;R; N; P; C) – Underwriting to validate. Borrowers that purchased the subject property within the past 6 months (measured from the date the was purchased to the disbursement date of the new loan) are eligible for a cash out refinance if all the following guidelines are met: LTV is determined by the current appraised value. The original purchase transaction was an Arms Length transaction. The original purchase transaction is documented by a Closing

Disclosure (CD) or Settlement Statement that confirms that no mortgage financing was used to obtain the subject property and that the borrower was the original purchaser.

• A recorded trustee’s deed (or similar alternative) confirming the amount paid by the grantee to the trustee may be substituted for the CD/Settlement Statement if a CD/Settlement Statement was not provided to the purchaser at time of sale.

• The preliminary Title search/report must confirm that there are not existing liens on the property and that the borrower is owner of record.

The sources for funds for the purchase transaction must be documented (such as past bank statements, personal loan documents or 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 Closing Disclosure/Settlement Statement for the new refinance transaction must reflect that all cash out proceeds be used to pay off/down, if applicable, the loan used to purchase the property.

• Any payments on the balance remaining from the original loan must be included in the DTI calculation for the new refinance.

• Note: Funds from gifts used to purchase the property may not be reimbursed with the proceeds of the new refinance.

The new loan amount may not be greater than the actual documented amount of the borrower’s initial investment to purchase the subject property plus the financing of closing costs, prepaid fees and points on the new mortgage loan (subject to LTV/CLTV/HCLTV for the product).

• All other cash out refinance eligibility requirements must be met and cash out financing applies.





Investment (NOO) Cash Out

The following guidelines and restrictions are applied for Investment Cash Out Transactions: The loan must be submitted to DU and receive an

Approve/Eligible. Legal 1-4 unit investment properties only. Standard loan limits only. FRM, 5/1 and 7/1 ARMS only. Condos with CPM approval are eligible to a maximum 75.00% LTV. Property must be owned for a minimum of the past 6 months with

evidence of acceptable payment history. Operating Income Statement (Form 216) required, regardless whether

rental income is used to qualify or not. The borrower may have no more that 4 financed properties that are

individually, jointly or LLC-owned. All other MSI/Fannie Mae guidelines apply. Ineligible Transactions include:

• Temporary Buy downs (MSI does not accept for any loan product). • Properties where the existing mortgage is a “re-structured”

mortgage (see Fannie Mae Seller Guide B2-1 for details.) • Transactions in which any portion of the proceeds are used to pay

off an installment land contract, regardless of the date of the contract execution.

• The transfer of ownership from a Corporation or LLC does not meet MSI guidelines for continuity of obligation.

• The subject property has been listed for sale in the previous 6 months.

Delinquent Property Taxes

For all Refinance Transaction for ALL Products: If taxes are identified as delinquent, to be paid by the refinance, the

following apply: • The loan must be considered a Cash Out Transaction and meet the

applicable guidelines, and • The loan must have an escrow (impound) account established.





Listed for Sale

Homes listed for sale: Primary Residence –

• Rate/Term Refinance –may be off market for 6 months prior to application date. o See Conforming Product Suite/Special Considerations.

• Cash Out – Off the market 0-6 months, LTV is capped at 70.00%; off the market > 6 months, follow AUS guidelines.

2nd Home or Investment Refinance-Must be off market 6 months before eligible for refinance. • Borrower must provide documentation of cancelled MLS listing or

similar documentation to proceed with a refinance transaction. • Calculate the timing from the date the home is removed from the

MLS (or sale by owner) against the earlier of the application date or the earliest credit document in the loan file.

All refinances are acceptable at published parameters once the “full” timing off-the-market period has passed.

Modified/ Restructured Loans

Mortgage loans that have previously been restructured (or modified) are not eligible for delivery to MSI. (They are an ineligible transaction for refinance.)

Definition: A restructured loan is one in which the terms of the original transaction have been changed, resulting in absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan that results in one or all of the below: • Forgiveness of a portion of principal and/or interest on either the

first or the second mortgage. • Application of a principal curtailment by or on behalf of the

investor to simulate principal forgiveness. • Conversion of any portion of the original mortgage debt to a “soft”

subordinate mortgage. • Conversion of any portion of the original mortgage debt from

secured to unsecured. Important Note: Once a mortgage has been “modified” or “restructured”, the loan is

always considered a “modified”/”restructured” loan. • Refinancing does not remove any lending restriction MSI has

published for “modified” or “restructured loans.





Special Purpose Refinance

The following refinances are considered “Special Purpose Refinances” by Fannie Mae: Buyout Refinance – Divorce or inheritance where one party is buying

out the other parties. • MSI does not provide any special requirements for these types of

refinances. • They must be priced and underwritten a cash out refinances,

regardless of the AUS.



Mortgage Insurance

Overview Mortgage Insurance is required on loans with a loan-to-value (LTV) over 80.00%. MSI will accept the private mortgage insurers noted in the “Approved Mortgage Insurance Companies” matrix below. Important Note: If MI is required on a loan, and the insurer’s guidelines are more restrictive than MSI or DU/LP, the MI company guidelines prevail.

Approved Mortgage Insurance Companies

The matrix below lists the private mortgage insurance companies currently approved by MSI.

Approved Mortgage Insurance Companies

Essent Radian Guaranty, Inc.

GE – (Genworth) GE Capital Mortgage Insurance Corporation

UGI-United Guaranty

MGIC

Note: MSI reserves the right to add or remove companies to this list at their sole discretion.

Standard MI Coverage Requirements

The matrix below outlines the “standard” mortgage insurance coverage required by MSI. MSI will not accept financed, reduced or custom MI, regardless of

the AUS findings. MSI will accept Lender Paid Mortgage Insurance (LPMI). See the

Conforming Product Suite for details regarding the LPMI product.

LTV Ranges ≤ 20 Year Terms > 20 ≤40 Year Terms 90.01 – 95.00% 25% 30% 85.01 – 90.00% 12% 25% 80.01 – 85.00% 6% 12%




Mortgage Insurance, Continued

MI Premium Options

MSI will accept only the following Mortgage Insurance premium options as permitted by specific product guidelines: Monthly – must be deferred payment premium option (the premium

is due with the first mortgage loan payment) Single Premium, Borrower Paid • MSI will accept Single Premium Mortgage Insurance paid in full by

the borrower. • MSI will order the MI Certificate; payment for the Single Premium

MI will show on the Closing Disclosure. Split Premium - MSI will accept Split Mortgage Insurance

Premiums, under limited conditions, see the Conforming Product Suite for details.

Renewals must be constant and not declining.



Property

Appraisal Standards and Requirements

Each appraisal report must: Be provided by independent, disinterested appraisers. • Appraisers must be certified in accordance with Title XI of the

Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989.

• Any party having an interest in the transaction is prohibited from applying pressure or influence on the appraiser to encourage providing specific results or findings.

Develop the value of the property independently, without regard to race, color, religion, sex, handicap, familial status or national origin.

Meet the more restrictive applicable appraisal requirements for Fannie Mae, Freddie Mac, FHA, VA, USDA, MSI and any end investor.

Be computer generated (Adobe Format, .pdf) on the current form applicable to the product and property type.

Have all information complete without any blanks, alterations or omissions.

Include the appropriate attachments and addenda. • Clear sharp pictures of the subject and comparables are required. Present a complete and accurate evaluation of the property that

supports the appraised value. Be signed and dated by the appraiser that inspected the property.

(If the completing appraiser is provisional or licensed or a trainee, the certified appraiser must countersign.)

All appraisals must conform to and recognize the USPAP as the minimum appraisal standards

• Appraisers must be certified and state-licensed and strictly adhere to USPAP guidelines.

• Copy of Appraiser’s unexpired license or state mandated on-line verification is required and

• Must include, on the report, the appraiser’s certification and license number.




Property, Continued

Appraisal Standards and Requirements, Continued

Interior Photos

MSI requires the following for all conventional appraisals, regardless of AUS: • The appraisal must include interior photos whenever an interior

inspection is performed as part of the appraisal process. The minimum requirements for interior photos include the following areas: o Kitchen o All Bathrooms o Main Living Area o Examples of physical deterioration, if present, and o Examples of recent updates, such as restoration, remodeling

and renovation, if present o MSI defines “recent” as any improvement with material impact

to the market value within the lesser of 12 months prior to the effective date of the appraisal or after the transfer of the property from an unrelated party.




Property, Continued


Appraiser Independence Requirements (AIR) Each conventional appraisal must be performed in full compliance with the Fannie Mae/Freddie Mac Appraiser Independence Requirements.

• See the Fannie Mae and Freddie Mac Guide and their web sites for additional details.

For all loans, all product type appraisals (single family as well as 2-4 unit), MSI requires:

• That each loan sold to MSI must include a certification of AIR compliance – appraisal delivery: o The certification can be from either the Seller “Lender

Certification of Appraisal Delivery” or equivalent form if the Seller does not use an Appraisal Management Company (AMC);.or

o If an AMC is used, MSI requires an “Appraisal Transparency Report”.

o MSI provides a sample “Lender Certification of Appraisal Delivery” on our Web Site

o Important Notes: MSI will not close or accept any loan for funding that does

not include a certification of appraisal delivery. By sale of the loan to MSI, the Seller warrants that the

Lender Certification provided meets or exceeds our guidelines (outlined in the sample Certification).

Additionally, MSI requires that each loan with an appraisal, regardless of product type include the ECOA “Initial Disclosure/Right to Receive a Copy of the Appraisal/Valuations” and Borrower Acknowledgment of Appraisal and Valuations” fully executed by each borrower.

• MSI does not require that the Seller use the MSI form; however, the form(s) used must include as a minimum: o ECOA language o The Appraisal Valuation Borrower Acknowledgement language,

with the choices of receipt of Valuation Report 3 or more business days prior to your loan closing, and previously waiving right to receive Valuation Report

o Date, Borrower name, address and the initial disclosure was prepared

o Borrower’s signature and date

Quick Notes: See the Government Product Suite for details regarding compliance

with the HUD Appraiser Independence guidelines for FHA loans. See AIR/CFPB Audit Guidelines Matrix for an illustration.




Property, Continued


AIR/CFPB Audit Guidelines Matrix Wholesale Transaction –Loan closes in MSI’s Name Mod Corr Transaction Loan closes in Seller’s Name

Seller must order Appraisal from MSI AMC (see www.msiloans.biz )

Seller may order Appraisal from: • Seller’s AMC; or • Seller’s Appraisal system that meets AIR requirements

and with MSI prior approval. Initial Disclosure: ECOA Right to Receive a Copy of

Appraisal and Valuations • Issued by Seller no later than 3 days after application;

lender and borrower signature required. Note: See MSI sample Form.— Initial Disclosure -Right to Receive a Copy of Appraisal and Valuations

Initial Disclosure: ECOA Right to Receive a Copy of Appraisal and Valuations • Issued by Seller no later than 3 days after application;

lender and borrower signature required. Note: See MSI sample Form.— Initial Disclosure -Right to Receive a Copy of Appraisal and Valuations

Borrower Acknowledgment: Must acknowledge that the Borrower has received a copy of the appraisal no later than 3 business days before loan closing. The Acknowledgement form must be executed and dated by the Borrower after the date of the Appraisal, but no later than the closing date. • MSI requires:

o The Acknowledgment to be given directly to the Borrower at closing. The Acknowledgment must be fully executed by the Borrower(s).

• MSI will not close/fund a loan without fully executed/dated Borrower Acknowledgment

Note: See MSI sample Form.— Borrower Acknowledgment of Receipt of Appraisal/Valuations

Borrower Acknowledgment: Must acknowledge that the Borrower has received a copy of the appraisal no later than 3 business days before loan closing. The Acknowledgement form must be executed and dated by the Borrower after the date of the Appraisal, but no later than the closing date. • Issued by Seller: MSI will not fund a Mod Corr loan

without a fully executed/dated Borrower Acknowledgment that meets our “timing” requirements.

Note: See MSI sample Form.— Borrower Acknowledgment of Receipt of Appraisal/Valuations

Lender Certification of Appraisal Delivery – for all property evaluations that were part of the credit decision. • MSI AMC automatically displays this information. • Seller must pull from the AMC and submit to MSI with

each applicable property valuation. Note: Lender Certification of Appraisal Delivery (Sample attached as a second page to Borrower Acknowledgment)

Lender Certification of Appraisal Delivery– for all property evaluations that were part of the credit decision. • Issued by Seller or Seller’s AMC. • MSI requires evidence submitted at the same time as

the property evaluation in the underwriting file. Note: Lender Certification of Appraisal Delivery (Sample attached as a second page to Borrower Acknowledgment)

AIR Lender Appraisal Cert Form/AMC Transparency Form in Appraisal • No Seller Requirement – MSI AMC ensures this

information is included in the appraisal.

AIR Lender Appraisal Cert Form/Transparency Report in Appraisal • MSI requires evidence in the appraisal or in a separate

form at time of submission of the appraisal to underwriting.

Sellers are fully responsible to be in full compliance with AIR and CFPB requirements as they apply to Appraisals. MSI does not require that the Seller use MSI forms; however, when auditing, MSI does require that any form used be equivalent in

information to the MSI sample forms.


http://www.msiloans.biz/

http://www.msiloans.biz/Form%20PDFs/Appraisal-ECOA%20Initial%20and%20AIR%20Borrower%20Acknowledgment.pdf




http://www.msiloans.biz/Seller%20Guide/AIR/Borrower%20Acknowledgement-AIR.pdf








Property, Continued


Important Note: MSI will not accept the transfer of any conventional appraisal subject to AIR. • The appraisal should always be ordered in the name of the

“lender” (the lender is the entity providing funds for closing the loan).

New Appraisals

The Seller may not order a new appraisal unless the AMC has deemed that the current appraisal does not meet applicable standards. MSI requires written evidence from the AMC.

MSI Appraiser List

MSI provides an excluded Appraiser Lists on the Web Site. • Appraisers listed on MSI’s excluded Appraiser List or the excluded

lists provided by Fannie Mae or Freddie Mac are not acceptable to MSI.

Limitations MSI does not permit provisional appraisers or appraiser trainees to solely complete appraisals for loans sold to MSI due to the limited education, experience, and training of these appraiser classifications. A supervisory appraiser must countersign the report and perform an interior inspection of the subject property for each appraisal completed by a provisional or appraiser trainee.

Market Conditions Addendum

MSI requires the Market Conditions Addendum (Fannie Form 1004MC/Freddie Form 71) to be completed in full compliance with requirements outlined in Fannie Mae/Freddie Mac and/or FHA. Important: MSI requires that all applicable appraisals are completed

in full compliance with Fannie Mae/Freddie Mac/FHA guidelines as applicable). See the applicable Web Sites (Fannie Mae/Freddie Mac or HUD) for

full details.




Property, Continued

Age of Appraisal

All loans sold to MSI must meet the following requirements for the age of the appraisal:

Conforming Conventional Jumbo FHA & USDA (3) Existing New

Construction Existing New

Construction Existing New

Construction 120 Days (1) 120 Days (1) 120 Days (1) 120 Days (1) 120 Days (2) 120 Days (2)

Notes: (1) At the Note Date, if the appraisal date is greater than the stated number of days for the property type, a new appraisal is

required. • Note: For loans underwritten by MSI, an appraisal update may be permitted at the discretion of the underwriter.

(2) Government appraisals may not be recertified or updated. A new appraisal must be provided. (3) VA appraisals are good for 180 days. Note: For the purpose of document aging (including appraisals), in Escrow Closing States (dry closing states), MSI will use the “date of signing” and not the date on the face of the Note as the “Note Date”.

Appraisal Forms

The following is a listing of appraisal forms to be used for all property types eligible for financing. See UAD for Quality and Condition requirements. The most recent revision of the listed appraisal form must be used.

Appraisal Forms FNMA 1004/ FHLMC 70

Used for single-family properties, both attached & detached including PUD and site-detached condominiums (when permitted by the DU Finding). 9-01-11-Must be UAD compliant. Note: Required for any property that was a Deed-In-Lieu or a Foreclosure. No Streamlined

Appraisals accepted by MSI. LP-Home Value Explorer® (HVE): If the final LP Feedback Certificate includes the Home Value Explorer® (HVE):

• If the HVE indicates a variance greater than 20%, MSI requires (in addition to the applicable URAR) a Desk Review in full compliance with Freddie Mac requirements.

FNMA 1004D /FHLMC 442

Used for appraisal updates (if permitted) and/or completion reports for all 1-4 Unit appraisal reports. As a minimum, the 1004D/442 must always include clear sharp photos of the subject

property front exterior. In certain instances (such as when specific repairs were required or in the case of

disasters) MSI will require additional photos of the interior or exterior to show final completion of, or repaired damage to, the subject property.

FNMA 1073/FHLMC 465 Used for condominium properties (including 2-4 Unit Projects). Required by MSI in all cases. Must be UAD compliant.




Property, Continued

Appraisal Forms, Continued

Appraisal Forms FNMA 1025/FHLMC 72 Used in the appraisal of two-to-four unit properties (A duplex, triplex or fourplex). AUS High Value Messages

Whenever the AUS delivers a High Value in the AUS Finding, the Underwriter must always provide independent validation of the property value in accordance with the type of message provided by the AUS.

MSI requires one of the following forms of due diligence in the loan file: • LP- if the AUS returns an HVE® message with a variance greater than 20%, MSI always

requires an Independent Desk Review. • If DU returns an Excessive Value message, the Underwriter must order an Independent

Desk Review. o DU or LP – For any Rapid Appreciation Message or any other type of “red flag”

message discussing value, request a second review by the MSI appraisal specialist or by an MSI, senior underwriter. The Appraisal Specialist or Senior Underwriter will determine if an Independent Desk Review is required.

Notes—for additional details and direction: Freddie Mac details requirements for an LP Excessive Value message in their document

Understanding HVE Messages returned with Loan Prospector’s Results. Fannie Mae’s Desktop Underwriter Potential Red Flag Messages address their requirements

for Excessive Value and Rapid Appreciation. MSI reserves the right to request a Desk Review on a conventional appraisal at the discretion

of the Underwriter. Prior to ordering a Desk Review at the Underwriter’s discretion the MSI appraisal department

or senior underwriting management must complete a “second look”. Investment Appraisal Forms

In addition to the appraisal forms specified, the following forms are required as noted below for all 2-4 owner-occupied and all investment properties (regardless of AUS findings).

FHLMC 998 One-to-Four Unit Investment Property Operating Income Statement.

Form required for 1-4 unit owner occupied rental properties where the borrower is using rental income to qualify.

Form required on all 1-4 Unit Investment properties, regardless whether the borrower is using the income to qualify. The operating expense must be used as part of the PITI.

LP requires this form on a single family property if it is an investment property.

See the Important Delivery Requirement. FNMA 1007/FHLMC 1000 Single Family Comparable Rent Schedule

Form required for single-family properties (1-unit investment only) regardless of borrower using rental income to qualify and AUS findings.

Important Delivery Requirement: Regardless whether or not rental income is used to qualify the borrower, the Gross Monthly Rent for each single unit

Investment Property, and each non-owner-occupied unit in a 2-4 unit Primary Residence, must always be completed on the Underwriting Transmittal. These figures must be obtained/supported by documentation in the loan file. See Rental Income for additional information.




Property, Continued

Appraisal Photographs

Clear sharp photos of the subject and comparables are always required as applicable. Color photos are preferred, but as long as the photos are clear and sharp and show applicable details, they are acceptable. See Interior Photos.

UAD

Conventional Appraisals must comply with UAD requirements. The following appraisal forms must be completed in compliance

with UAD: • Uniform Residential Appraisal Report (Fannie 1004/Freddie 70) • Individual Condominium Unit Appraisal Report (Fannie

1073/Freddie465) • Exterior-Only Inspection Individual Condominium Unit Appraisal

Report (Fannie 1075) — NOTE-Not permitted for DU Version 9.0 or for LP loans locked on/after 10/15/12.

MSI Appraisal Ratings Overlays Condition Ratings – Regardless of AUS or current Fannie/Freddie

guidelines. • C1 to C-4- MSI will accept as eligible in “as is” condition. • C5 & C6 - MSI will not accept.

Quality Ratings – Regardless of AUS or current Fannie/Freddie guidelines. • Q1 to Q5- MSI will accept as eligible in “as is” condition. • Q6 - MSI will not accept.




Property, Continued

UCDP

Uniform Collateral Data Portal (UCDP) MSI requirements are: The Submission Summary Report (SSR) from the Uniform Collateral

Data Portal (UCDP) must state that the submission status was Successful.

The UAD Compliant Appraisal must be submitted to Fannie Mae and Freddie Mac and must be Successful for each agency, and

The Appraisal must clearly state on the bottom of the appraisal the following UAD “indicator”, UAD Version 9/2011—Appraisals submitted to MSI without the indicator are not eligible for funding/purchase.

Uniform Loan Delivery Dataset

Year Built for all conventional properties: The Year Built must be provided on the appraisal. If, for any reason, the product does not require a full appraisal (per

MSI guidelines); the Year Built must be noted on the Loan Application (1003).

See Condominium Overview for additional ULDD requirements.




Property, Continued

Adverse Marketing Conditions

The level of collateral risk associated with housing trends indicating values are unstable or declining combined with the risk of special loan products, purposes and/or occupancy, may require a reduction in the LTV/CLTV for a given loan.

Special Appraisal Requirements for Adverse Market Conditions Properties with adverse marketing conditions (i.e. declining values, over supply, or marketing times in excess of 6-months) require careful review and the following specific required support documentation: The maximum LTV/CLTV of any property located in a soft or declining

market is the lesser of 95.00% or the maximum LTV/CLTV for the specific product unless a lower LTV/CLTV is required by the product.

At least 2 of the 3 comparables must be dated within 90-days of the appraisal date.

• If the appraiser is unable to provide 2 comparables within 90 days and/or current listing(s), the appraiser must provide a detailed explanation and identify whether value adjustments resulted.

• The explanation from the appraiser must be consistent with other tools utilized to review the appraisal.

• When the appraiser is unable to provide this (or other) information, second level reviews through MSI escalation processes may be required on loans underwritten by MSI.

• Delegated or contract Underwriters are responsible for determining the value is supported using all supporting documentation and additional valuation tools.

A minimum of 1 listing or pending sale is required as a supporting document.

The appraiser must address the impact on marketability and value of both favorable and unfavorable factors.

• The appraiser must avoid using subjective, racial or stereotypical terms, phrases or comments within the appraisal report.

Days on the market must be reported for the subject property and each comparable sale and must support the Average Marketing Time listed on page 1 of the Appraisal Report.

Important Note: MSI will not fund/purchase any loan where the borrower pays over the list price in a declining or oversupply market (6 months or greater).




Property, Continued

Agricultural Properties

Properties zoned as agricultural is acceptable if the following apply: The property is not a working farm, ranch, orchard, or other

income-producing farm-type property. The land may not be undeveloped or land-development type

properties. The Highest and Best Use must show Residential on the Appraisal. Site value and acreage must be within MSI requirements. (30%) See Outbuildings for additional details.

Builder Bail Out Policy

MSI will not fund/purchase any loan where the subject property is a Builder Bail Out.

Effective for Conventional, FHA and USDA loans. • MSI defines a Builder Bail Out as any property (Condo, Attached

PUD, PUD, sub division or new construction single family—identified herein as “project”) where the Builder has failed to complete the project and it has been “taken over” by the bank or its agents to complete the sale of the project.

Comparables All current Fannie/Freddie appraisal guidelines must be followed when choosing comparables to support the value of any property. New projects (condos, condo conversions, new subdivisions and

PUD projects all require extra diligence to ensure the value is supported.)

New Projects and/or New Subdivisions Comparable Requirements One comparable from inside the subject development/project. A minimum of 1 comparable from outside the development/project

and/or from outside the influence of the developer. Additionally, if possible a minimum of 2 resale comps to verify that

current transactions have been exposed to the open market. • If resales cannot be obtained, the appraiser must address and

adequately support the final valuation of the property.




Property, Continued

Chinese Drywall

Chinese drywall is drywall that was imported from China from 2001 through 2007, which emits sulfur gases, which usually create a noxious odor, and corrodes copper and other metal surfaces, damaging air conditioning, electrical wiring, copper, plumbing, appliances and

electronics. Chinese drywall is an environmental issue and can also cause adverse

health effects. Properties with Chinese drywall must be identified and are

unacceptable and will not be purchased by MSI. • Mitigation: Should MSI and/or the Appraiser have knowledge the

subject property is or may be exposed to sulfur-containing (Chinese) drywall, the property inspection must confirm the property has been fully gutted down to the bare studs and all items installed are new. The only items that may be re-used are tile and some stone.

Condominium Overview

Unless excluded by specific product guidelines, MSI will fund/purchase loans that are secured by properties located in a condominium project (condos) as long as they meet the requirements outlined in this section. See the product guidelines for specific details on property type eligibility. Important: Effective for all loans delivered to MSI for Underwriting, MSI will validate all Condos against our Ineligible Project Lists; if the project is listed, the loan is not eligible for funding/purchase. See the Conforming Product Suite/Ineligible Condo List for details.




Property, Continued

Condominium Appraisal

REV (10/01/14)

A condo appraisal (Form 1073) is required on each condo. The appraisal facilitates the condo review.

Notes: When permitted by the AUS Finding, a detached condo project may

be permitted to use the 1004 Appraisal Form. See MSI Acceptable Condos.

The following information for all Condos must be part of the data passed from the UAD to the Uniform Loan Delivery Dataset (ULDD):

• Project Attachment Type • Project Design Type • Project Unit Dwelling Count • Project Dwelling Units Sold For all detached projects completed on Appraisal Form 1001/70,

the appraiser must specifically include the above information for inclusion in the ULDD. (This information is required on the 1073 but must be included on the 1004/70).

Condominium Characteristics

A condominium is a real estate project formed according to state condominium statutes, a recorded declaration, and other constituent documents. The structure is generally of two or more units. The interior space of the units is individually owned. There is no individual land ownership. The balance of the property (both land and building) is owned in common by the owners of the individual units. The common areas are administered and maintained by an owners’ association that levies monthly maintenance charges against each unit owner. Important Notes: Condominiums and/or PUD’s are not defined by “zoning”. In many

areas, properties may be “zoned” or titled as a Condo or PUD; however, if the properties do not meet the Condominium Characteristics herein they are not “practicing” condos. • If the properties are single family residences with no Home

Owner’s Association, no dues and no common areas, they are not Condos or PUD’s and must be treated as a single family property.

• If the property is titled as a “condo or PUD”, MSI requires a Condo/PUD Rider to the Security Instrument, regardless whether or not the property is a “practicing” condo or PUD.

If the is loan locked/priced as a single family dwelling and the property is subsequently determined to be a condominium, the loan is subject to re-lock and/or re-pricing as a condominium property.




Property, Continued

MSI Acceptable Condos

REV (10/01/14)

MSI will purchase condominium properties for certain products as long as they meet MSI-specific requirements. MSI does permit investment condos under specific conditions.

• See the specific product subsections in the Product Suites for eligibility for products.

Project Type Type of Analysis Required Condo Projects consisting of Single Family Detached Units New - CPM Type R Established – Type Q

Established Freddie Mac

The project type must be identified as a condo (subject to Home Owner Association with required HOA dues and common areas).

The project must be identified on the Fannie Mae 1008 as Condo in Section I, and The underwriter must identify whether the project is a New Project (Type R-Must meet CPM

Guidelines) or Type Q (established-eligible as a Limited Review) project. Detached Condos must meet the Fannie Mae insurance requirements. (See General Condo

Requirements.) If the condo project consists solely of detached dwellings, Appraisal Form 1004 may be used

as long as the AUS Finding states the 1004 may be used. (Form 1073 may always be used.). • The appraiser must include an adequate description of the project and information

about the HOA fees and quality of project maintenance. DU Limited Review LP Streamline Review Established - Type Q New - Type P

Detached and attached

condo units

The projects require minimal analysis. The loan must be submitted to the AUS and the property identified as a condo The loan must be Approve/Eligible, and The MSI Form, MSI Condo Questionnaire Limited Review must be completed and included

in the underwriting package, and . The AUS Finding must state “Limited or Streamline Review”; you will never receive a

“Limited Review” for an investment condo or any second home condo with an LTV/CLTV >75%.

For second home condos with an LTV less than 75%, you may see a Limited Review. The appraisal must support all information provided in the completion of the Limited Condo

Questionnaire. The project must be properly identified on the Fannie Mae 1008 to Fannie Mae or Freddie

Mac requirements.




Property, Continued

MSI Acceptable Condos, Continued

Project Type Type of Analysis Required 2-4 Unit Condos Established - Type Q New - Type P

The following additional guidelines apply for 2-4 Unit Projects: No single entity (the same individual, investor group, partnership, or corporation) may own

more than one unit within the project; All units, common elements, and facilities within the project—including those that are owned

by any master association—must be 100% complete; All but one unit in the project must have been conveyed to owner occupant principal

residence or second home purchasers; and The units in the project must be owned in fee simple or leasehold, and the unit owners must

be the sole owners of, and have rights to the use of, the project’s facilities, common elements, and limited common elements.

MSI requires the completion of the 2-4 Unit Condo Questionnaire. Type P Condos must be submitted for a CPM.

Fannie Mae Approved Project Type T

Freddie Mac

Approved Project

Projects with a Fannie Mae PERS approval must be submitted to MSI for underwriting. • Acceptance of the PERS approval is subject to MSI discretion and may be subject to a

change in pricing. • Note: MSI does not submit projects for PERS approval.

CPM

New - Type R Established - Type S

MSI will accept Fannie Mae and Freddie Mac (Condo Project Manager) CPM approvals for condos .

• Submit the CPM Request “Package” to MSI with the Underwriting Submission The CPM Request Package must include the following documents: Fully Completed MSI CPM Approval Questionnaire Appraisal Copy of Preliminary Title to evidence Condo Declarations are Recorded (Do not include the

Condo Declarations.) Copy of Master Policy Insurance Declaration Page Current Budget – Must reflect a minimum 10% line item collected for reserves. MSI Underwriting reserves the right to request additional information.

FHA-Approved Project MSI will not accept conventional condo projects with an FHA approval . Non-Warrantable Condos

Not Permitted for Mod Corr.

Freddie Mac (LP) Established

Streamline Review (reciprocal with Fannie Mae Limited Review) Freddie Mac established condos (presales must be ≥90%; LTV may not exceed 95%)

Fannie CPM (reciprocal with Fannie CPM) • See Product Suite/Special Considerations.




Property, Continued

MSI Ineligible Condos

Ineligible condo projects are defined by Fannie Mae, Correspondent should refer to those published guidelines for complete current details. In general, the following characteristics may be used to identify projects that are ineligible. New Condo Projects in Florida (When permitted by the product, only

established projects are permitted. See the product suite for full Florida state restriction details.).

Projects that restrict the owner’s ability to occupy the unit Project with excessive singe investor concentration. Continuing care Retirement Community. Projects with mandatory rental pooling agreements that require unit

owners to either rent their units or give a management firm control over the occupancy of the units. • These formal agreements between the developer, homeowners’

association, and/ or the individual unit owners, obligate the unit owner to rent the property on a seasonal, monthly, weekly, or daily basis.

• In many cases, the agreements include blackout dates, continuous occupancy limitations, and other such use restrictions.

• In return, the unit owner receives a share of the revenue generated from the rental of the unit.

Projects with non-incidental business operations owned or operated by the homeowners’ association such as, but not limited to, a restaurant, a spa, a health club, etc.

Investment securities (i.e., projects that have documents on file with the Securities and Exchange Commission, or projects where unit ownership is characterized or promoted as an investment opportunity).

Common interest apartments or community apartment projects are projects or buildings that are owned by several owners as tenants-in-common or by a homeowners’ association in which individuals have an undivided interest in a residential apartment building and land, and have the right of exclusive occupancy of a specific apartment in the building.

Timeshare or segmented ownership projects. Tenancy in common projects (e.g. co-ops) Houseboat projects. Projects sold with excessive seller contributions. (Special inducements

from the HOA to purchase the unit._




Property, Continued

MSI Ineligible Projects, Continued

Multi-dwelling unit condos—projects that permit an owner to hold title (or stock ownership and the accompanying occupancy rights) to more than one dwelling unit, with ownership of all of his or her owned units (or shares) evidenced by a single deed and financed by a single mortgage (or share loan).

Condo projects that represent a legal, but non-conforming, use of the land, if zoning regulations prohibit rebuilding the improvements to current density in the event of their partial or full destruction.

MSI considers any project for which the homeowners’ association or is named as a party to current litigation that relates to the project as ineligible.

Projects that include registration services and offer rentals of units on a daily basis.

Projects with names that include the words “hotel” or “motel”. Any project that is operated as a commercial hotel or motel. The

following characteristic are hotel-like and make the project ineligible: • Central Telephone system. • Room Service. • Units that do not contain full-sized kitchen appliances. • Daily cleaning service is provided. • Advertising of rental rates. • Registration Service. • Restrictions on interior decorating. • Franchise agreements. • Central key systems. • Location of property in a resort area (with these other contributing

factors.) • Owner occupancy density, the project may have few or no owner

occupants. • Any project that has been converted from a hotel/motel.




Property, Continued

General Condo Requirements

The following MSI overlays apply to condominium properties; always validate eligibility with specific product parameters in the applicable product suites: The project is not an ineligible condo to MSI or current Fannie Mae

guidelines. Project has demonstrated market acceptance. When applicable, validate with the mortgage insurer that the project is

acceptable for coverage. Guideline Matrix: The following matrix provides general guidelines

for warranting a new or established project. • The applicable Condo Questionnaire must be fully completed prior

to making a warranty. • The condo type must be clearly identified on the Fannie Mae 1008.

Topic Condo Guidelines Adverse Environmental Factors

Any adverse environmental factors affecting the condominium project must be addressed by the appraiser.

Any factors affecting safety, habitability or marketability of the unit or project will render the project ineligible.

See the current Fannie Mae Seller Guide for full details regarding Unacceptable Environmental Conditions.

Completion The project must be complete including all units and common elements. At least 90.00% of the total units in the project must have been conveyed to the unit purchasers.

Number of Units Rented

Maximum 49% (of total number of units sold) may be rental for projects subject to a Limited Review. (CPM guidelines may differ.) Fannie Mae Clarification, excerpted from Fannie Mae Announcement 08-34: Fannie Mae permits the inclusion of financial institution owned (REO) properties that are for

sale (not rented) as owner-occupied units for the purpose of calculating the owner-occupancy ratio.

Projects where the borrower is an investor must be counted as non-owner occupied for the purposes of determining the owner-occupancy ratio.

Delinquent HOA Dues If more than 15% of the units are delinquent 30-days or more on their HOA dues, this project is ineligible.

Commercial Use

Commercial use within the project may not exceed 20% of the total square footage for the project and should be compatible with residential use. Important Note: If the commercial space is located within the physical project space – it must be considered in the over-all percentage of the project, regardless whether it is separated from the HOA. (It is not an HOA issue, it is an issue of physical space within the project and the commercial space may not exceed 20% of the project.)




Property, Continued

General Condo Requirements, Continued

Topic Condo Guidelines Right of Refusal Any right of first refusal in the project’s constituent documents will not impair the rights of a first

mortgagee to: Foreclose or take title to a condominium unit pursuant to the remedies in the mortgage. Accept a deed in lieu of foreclosure in the event of default by a mortgagor. Sell or lease a unit acquired by the mortgagee. Age restriction that does not meet the requirements within the Fair Housing Act for age

discrimination. Special Assessments If there are pending assessments, consider the impact on all the units and the

marketability. Insurance

Condo insurance must meet the more restrictive of current

published Fannie Mae/Freddie Mac (as applicable) or MSI

Guidelines.

MSI requires $1 million liability insurance with acceptable building coverage and a deductible that is no greater than 5% of the face amount of the policy for the HOA on all condos.

Minimum requirements for hazard, general liability, employee dishonesty and flood insurance are as established by Fannie Mae and Correspondents should refer to those Agencies’ published guidelines for details.

Fidelity bond coverage is required on all projects with more than 20 units. (0r per state requirements.)

Pooled insurance is ineligible.

See www.efanniemae.com for details Fannie Mae: Lenders must review the entire condominium project insurance policy to ensure that the owners’ association maintains a master or blanket type of insurance policy for only the project in which the individual condominium unit will be financed. The following are not permitted: a blanket policy that covers multiple unaffiliated condominium associations or projects

(the Master hazard policy for Condo or PUD may not cover multiple unaffiliated projects in a single insurance policy), or

a self insurance arrangement whereby the owners’ association is self insured or has banded together with other unaffiliated associations to self insure all of the general and limited common elements of the various associations.

Fannie Mae permits the inclusion of financial institution owned (REO) properties that are for sale (not rented) as owner-occupied units for the purpose of calculating the owner-occupancy ratio.

Projects where the borrower is an investor must be counted as non-owner occupied for the purposes of determining the owner-occupancy ratio. Commercial use within the project may not exceed 20% of the total square footage

for the project and should be compatible with residential use.


http://www.efanniemae.com/



Property, Continued

General Condo Requirements, Continued

Topic Condo Guidelines Insurance (continued)

Any right of first refusal in the project’s constituent documents will not impair the rights of a first mortgagee to: Foreclose or take title to a condominium unit pursuant to the remedies in the mortgage. Accept a deed in lieu of foreclosure in the event of default by a mortgagor. Sell or lease a unit acquired by the mortgagee. Age restriction that does not meet the requirements within the Fair Housing Act for

age discrimination.

As a reminder, condominium association project insurance must cover 100.00% of the insurable replacement cost of the project improvements, including the individual units in the condominium project. The borrower must obtain a “walls-in” coverage policy (commonly known as HO-6

policy) unless the master policy clearly documents that the interior of each unit is covered for replacement of improvements and betterments that the borrower may have made. • The HO-6 insurance policy must provide coverage, as determined by the insurer,

which is sufficient to repair the condo unit to its condition prior to the loss claim event. The standard requirement for a 5 % deductible applies. Note: If the borrower has an impound/escrow account; the HO-6 premium must be included in the escrow account. See Fannie Mae guidelines for full details; condo/attached PUD insurance must meet current Fannie Mae guidelines.

Coverage does not need to include land, foundations, excavations, or other items that are usually excluded from insurance coverage.

Fannie Mae expects lenders to verify hazard insurance (including wind and flood insurance, if applicable) coverage at the project level as part of their review of a project. Lenders must verify that each condominium association is covered by an individual

policy before it delivers a mortgage loan on an individual unit in a condominium project.

Litigation Condos involved in current litigation may be eligible based on underwriting review and end investor acceptance.

Required Documentation In addition to all standard documentation, the following specific documentation must be delivered with the loan file when the subject property is a condo: Individual Condominium Appraisal Report Fully completed and executed applicable Condo Questionnaire

• The Questionnaire must be updated each 90-days Fannie Mae 1008 completed with the type of warranty the Correspondent is making for

the project. Condominium Rider to the Security Instrument must be attached to the uniform

instruments. Seller Concessions

Illegal seller concessions make the project ineligible. Includes sales contributions that exceed current limits for the applicable product.




Property, Continued

Degree of Development

Geographical areas less than 25% developed are generally not acceptable for maximum financing. Areas between 25% and 75% developed and showing steady

growth pattern are acceptable for maximum financing.

Deed Restrictions

Occupancy Restrictions Reasonable local, state or federal restrictions on the maximum

number of occupants permitted to occupy a dwelling unit are acceptable as long as such limitations are applied to all occupants and do not operate to discriminate on the basis of race, color, religion, sex, national origin, handicap or familial status.

If any restriction is noted in the purchase contract, appraisal, title commitment or in the project covenants/restrictions that appears not to apply to all occupants, contact MSI Underwriting to determine whether the loan is eligible for purchase.

Property with Resale Deed Restrictions Properties with Resale Deed Restrictions (AKA inclusionary zoning) are not eligible for sale to MSI.

Age Restrictions If a housing development has an age restriction, it must comply with one of the following Fair Housing Act exemptions: Government Housing Programs • The prohibitions against discrimination on the basis of age or

familial status do not apply with respect to dwellings provided under any State Or Federal Program specifically designed and operated to assist the elderly or to house elderly persons. The Secretary of HUD must determine that the development meets this exemption.

Age Restrictions – 62 years of age or older • The prohibitions against discrimination on the basis of age or

familial status do not apply with respect to dwellings intended for, and solely occupied, by persons 62 years of age or older.




Property, Continued

Deed Restrictions, Continued

Age Restrictions – Any Age Restriction • The prohibitions against discrimination on the basis of age or

familial status do not apply with respect to dwellings intended and operated for occupancy by person 55 years of age or older provided that all of the following apply: o At least 80% of the occupied units are occupied by persons 55

years of age or older, and o The housing facility or community publishes and adheres to

policies and procedures that demonstrate the intent to provide housing to persons 55 years of age or older, and

o The housing facility or community can provide documentation for verification of occupancy, by means of reliable surveys and affidavits; examples of published written policies and procedures for

determination of compliance with the Act. Documentation Requirements for Age-Restricted Properties

When it is determined that a housing development is subject to age restrictions, the Homeowners Association must complete and sign the form Housing Developments Subject to Age Restrictions.

By signing this form, the association certifies that the housing development is in compliance with the Fair Housing Act.

The fully executed form must be included in the underwriting package.

Environmental Issues and Other Hazards

MSI Represents, Warrants and Covenants the following to our end investors as to each loan: The subject property is not exposed to Environmental Hazards which

are not covered by fire and extended coverage insurance or other available insurance. • Environmental Hazards refer to any natural or man-made

characteristics that are present in, or affect, the subject property or neighborhood, including but not limited to, hazardous wastes, toxic substances, radon gas, asbestos-containing materials, urea-formaldehyde insulation, sulfur-containing drywall (also known as Chinese drywall – see Chinese Drywall).




Property, Continued

Ineligible Property Types

The following property types are ineligible for sale to MSI: Manufactured Housing

(all mobile homes) Dome Homes Earth Berm “Store Front” properties Unique (one-of-a-kind)

properties

Properties in “fair” condition Properties sold at auction(1) Properties without a clear title Properties with less than 600

square feet for single family detached.

Condos with less than 400 square feet.

(1) This does not include standard purchase transactions where the seller is a financial institution disposing of their REO properties. See Property Flipping and REO/Repo Properties for additional details.




Property, Continued

Land Contracts

A land contract, also known as an installment land contract or a contract for deed, is a real estate agreement between a buyer and seller, whereby the buyer makes installment payments to the seller and the buyer may then use and occupy the property.

Underwriting the Land Contract for Sale If the buyer is obtaining mortgage financing to pay-off the land contract, it may be underwritten as either a purchase or a refinance, under the following conditions:

If the land contract … Then … Within 12 months of the application date Treat the transaction as a purchase:

Underwrite and price the loan as a purchase Base the LTV on the lower of current appraised value or

acquisition cost. Acquisition Cost is equal to the sum of: • Original purchase price, and • Documented cost of renovations or improvements. The borrower must document the payment history for the

Contract of Deed. (Copies of cancelled checks will be required, the history must document 0X30.)

Greater than 12 months of the application date Treat the transaction as a refinance: Underwrite and price the loan as a Rate/Term (Limited

Cash Out) refinance Base the LTV on current appraised value. The borrower must document a minimum of a 12-month

payment history for the Contract of Deed. (Copies of cancelled checks will be required, the history must document 0X30.)

Notes: Regardless how the transaction is structured, if the borrower has occupied the property as a primary residence, the

Right of Rescission rules apply. The loan must meet all applicable guidelines for the type of transaction for which it is treated. A copy of the Land Contract must be included in the loan delivery file (or u/w file if submitted to MSI for underwriting).




Property, Continued

Leasehold Estate Overview

MSI will fund/purchase conventional loans secured by property held in a leasehold estate for certain specific products. See the specific product suite for more details. DU Only.

Leasehold Requirements Matrix

Topic Requirements Market Acceptance The property must be located in an area in which they are common and customary and receive market

acceptance. The appraiser must address this market acceptance.

Real Property The mortgage must cover the property improvements and the leasehold interest in the land. The leasehold and improvements must constitute real property, be subject to the mortgage lien,

and be insured by the lender’s title policy. Riders A Leasehold Rider to the Security Instrument is required on all leasehold estates.

It must incorporate a cross-default provision so that a default on the lease is a default on the mortgage.

Title The title may not make an exception to the leasehold, and It must be an ALTA Leasehold Policy.

Lease Term The term of the leasehold estate should run for at least 5-years beyond the maturity date of the mortgage loan. This requirement does not apply if fee simple title will vest in the borrower at an earlier date.

Fannie Mae Guidelines

The leasehold must meet the more restrictive of MSI/Fannie Mae requirements as outlined in the most current MSI Seller Guide or Fannie Mae Seller Guide (www.efanniemae.com)


Appraisal, Preliminary Title, Copy of Current Lease, Copy of Current Sublease and any other recorded documentation specific to the lease.

MSI Restrictions MSI will not fund/purchase any condo or PUD in a leasehold estate. Conventional FRM and ARM. Primary Residence and Second Home Only, no Investment.

Legal Non-Conforming Use

Clarification – Normally considered part of the implied reps/warrants for investors (acceptable collateral), MSI would like to clarify our guidelines for a Legal Non-Conforming Use of Property: MSI will purchase/fund a loan for which the property is a legal non-

conforming use of the subject property as long as: • The property can be rebuilt at 100% if destroyed. There must be

evidence in the loan file from the city/municipality or appraiser that the property can be rebuilt for the same use.

• If the documentation cannot be provided, the subject property is not acceptable collateral.





Property, Continued

Location MSI does fund/purchase properties in urban, suburban and rural areas to MSI/Fannie Mae guidelines. MSI reserves the right deem a property to be rural in nature (and

apply those restrictions) if the lot size exceeds typical urban or suburban lot size or if the location is remote from a metropolitan area.

Any time the appraiser extends the distance range or timing for comparables, full documentation and justification must be included in the appraisal.

See Lot Size- Maximum Acreage and Degree of Development for more details.

Log Homes MSI will accept “true” log homes under the following additional restrictions: Contact MSI pricing for special pricing for Log Homes. The log home must demonstrate market acceptance. The appraiser must provide a minimum of 2 true log homes as

comparables within 6-months marketing time.

Note: Homes with “log siding” are not considered “true” log homes and are not subject to these restrictions.




Property, Continued

Lot Size- Maximum Acreage

MSI will accept properties that are residential in nature up to 20 acres as long as they are common and customary to the area. The appraiser and the underwriter must address the acreage issue

and the residential nature must be the highest and best use of the subject.

The property must be zoned as residential and property may not be income-producing.

Similar comparable sales are required and the Appraiser must be able to state that the size of the property does not adversely affect marketability.

Site value cannot exceed 30% of the total property value.

Note: Value based on a lesser amount of acreage than the actual lot size

is not acceptable on any loan.

New Construction

Regardless of market conditions, appraisals for properties located in a new construction subdivision or development must include at least 1 current sale from the subject development/builder and either One closed sale from a competing development/builder, or One closed sale from the subject development that has closed

within 90-days from the date of the subject property appraisal.

Underwriting Tip: For new construction properties where taxes must be

estimated: To ensure that the borrowers qualify for the loan (and do not

experience credit issues after closing); the taxes must be estimated as accurately as possible based on the value of the land and completed improvements. • Underwriters should base tax estimates on the higher of the

appraised value (land and improvements) or the sales price.




Property, Continued

Modular/ Factory Built Homes

Factory-built housing must assume the characteristics of site-built housing and be legally classified as real property. The purchase, conveyance, and financing (or refinancing) of the property, which must be evidenced by a valid and enforceable first lien mortgage or deed of trust that is recorded in the land records, must represent a single real estate transaction under applicable state law. Prefabricated, panelized, or sectional housing units must conform

to all local building codes in the jurisdiction in which they are permanently located.

Modular homes must be built to the state building code requirements of the state in which they are to be installed.

• The Modular home must conform to all building codes, local zoning requirements and International Code Council (ICC) building codes.

• Modular homes are not the same as “manufactured homes” or “mobile homes.”

• They are neither built nor transported on a steel chassis (frame) with a “trailer hitch.” Modular homes are constructed in large sections (modules) which are then transported to the building site where they are constructed with a seal plate (just like “stick built”) on a basement, slab or footer (just like “stick built”).

• They do not display a “HUD Data Plate/Compliance Certificate”. MSI will not fund/purchase Modular/Factory Built homes that are

part of a PUD or condominium. MSI Appraisal Requirements: • Marketing time must not exceed 6 months • Appraiser must provide a minimum of 2 similar factory-built

comparables




Property, Continued

Mixed Use Properties

MSI will accept mixed use properties unless specifically restricted in a product suite. To be acceptable, it must be determined that the nature, intent, and primary purpose of the property is residential in use. The following should be considered in making this determination: The subject must be a single family primary residence. The room layout must be reasonable for a residential home. The property must be appraised as residential real estate, with

commercial value not included in the appraiser's market value. The appraiser must comment on any affect the commercial use has

on marketability and compatibility with the subject's neighborhood. The commercial use must be allowed by zoning and the subject

must conform to zoning. Agricultural usage is not permitted. Commercial use should not result in significant alteration to the

property or one that could not be easily converted back to residential.

• In general, the commercial use should not exceed 20% of total gross living area of the property.




Property, Continued

Outbuildings Underwriters must give properties with outbuildings special consideration in the appraisal review. Properties with minimal outbuildings, such as a small barn or

stable, that are relatively insignificant in value in relation to the total appraised value of the subject property are acceptable if they are typical to the subject area.

• For example, a property that has a small barn or stable is acceptable if the appraiser demonstrates they are typical for the area through the use of comparables with similar improvements. o If the appraiser cannot demonstrate that the outbuildings are

typical for the area, it demonstrates they are atypical for the area and the market would assign little or no contributory value for them.

o If the outbuildings are atypical for the area, they may still be eligible for funding/purchase as long as the appraiser’s analysis reflects little (or no) value for the outbuildings.

Properties with the presence of significant outbuildings, such as a large barn, storage areas for equipment or farm-type animals, or a silo, indicate that the property is agricultural in nature.

• Regardless whether the outbuildings are assigned value or not, MSI does not make residential property loans on agricultural property.

Private Road Maintenance

If the property is on a community-owned or privately owned and maintained street, there must be an adequate, recorded agreement for maintenance of the street, the agreement and terms must be referenced on the Title. The privately owned and maintained street should be common and

customary to the area. The appraiser must comment on the effect of that location on the marketability of the subject property.

Shared Roads/Septic/ Wells Shared Roads/Wells or Septic systems that are not publically governed

and/or maintained must have a recorded easement that runs with the land (i.e. is expressly stated to belong to the owner and successors or assigns), assures the mortgagor or owner and future owners of subject property the right to access and use of the road/well or septic system as long as the mortgagor or owner and future owners fulfill reasonable conditions. • The agreement must provide for the mutual upkeep of the

road/well or septic.




Property, Continued

Purchase Agreement (Contract) – Re-Negotiated

For all loan products, (Conventional and Government). See USDA for guidelines specific to that product. MSI will not accept re-negotiated purchase agreements (contracts) that increase the sales price after the original appraisal is completed if: The appraised value is higher than the contracted sales price provided

to the appraiser, and The new purchase agreement and/or addendum used to modify the

sales price is dated after the appraisal is received (completed), and The only change to the purchase agreement is the increase in sales

price. If the purchase agreement is re-negotiated subsequent to the completion of the appraisal, the loan-to value will be based on the lower of the original purchase price or the appraised value, unless: A re-negotiation of only seller paid closing costs and/or pre-paids

occurs where seller paid closing costs/pre-paids are common and customary for the market and supported by the comparables. Refer to Seller Guide for allowable contributions, or

An amended purchase agreement for a new construction property is obtained due to improvements that have been made that impact the tangible value of the property. • In the event of such changes, an updated appraisal must be

obtained to verify the value of the modifications. Notes: MSI will rely on the appraiser to certify that he/she has seen the

purchase agreement. MSI reserves the right to require supporting documentation if any type

of real estate scheme is suspected.




Property, Continued

PUDS Overview

Unless excluded by specific product guidelines, MSI will fund/purchase loans that are secured by properties located in a Planned Unit Development project (PUD) as long as they meet the requirements outlined in this section. A PUD is a project that consists of common property and improvements that are owned and maintained by the Homeowner’s Association (HOA) for the benefit and use of the individual PUD units. A PUD owner received title to a lot that includes the dwelling. Notes: In order for a project to qualify as a PUD, each unit owner’s membership

in the homeowners’ association must be automatic and nonseverable, and the payment of assessments related to the unit must be mandatory. Zoning is not a basis for classifying a project or subdivision as a PUD.

Subject Property in PUD Requirements Detached Singe Unit

Type E (established) or Type F (new) The property is treated the same as any other single family property. There are no special “PUD” requirements except for insurance. They must meet the

insurance requirements for single family as well as any applicable agency HOA/common area insurance requirements.

Attached PUD

Type E – DU Approve The control of the owner’s association has been turned over to the unit purchasers.

• If the project is part of a larger development (even though it is a sub-association of the master owner’s association for the overall development), the Correspondent may classify the project as Type E once the control of the project’s sub-owner’s association for the subject property has been turned over to the unit owners.

Once this criterion has been met, there are no other special “PUD” requirements; however, MSI requires that the MSI Attached PUD Certification be completed for all attached PUD

units and they must meet the insurance requirements for single family as well as any applicable agency HOA/common area insurance requirements.

If the control of the owner’s association is still with the developer, the Correspondent must perform a Lender-delegated Review of the PUD Project.

If the loan receives a DU Approve, the Lender-Delegated Review consists only of the following warranties: • The Project is not an ineligible project. See MSI Acceptable Condos. • The individual unit securing the mortgage is 100% complete. • The project is covered by the insurance required by Fannie Mae in the most recent

Seller Guide (See www.efanniemae.com ) • MSI requires that the MSI Attached PUD Certification be completed for all attached

PUD units. Notes: Regardless of the AUS used, the PUD must meet the more restrictive of MSI/Fannie Mae/Mortgage Insurance requirements for a PUD and/or attached PUD (attached PUDs require interior unit coverage (H06). See Fannie Mae/Freddie Mac Guidelines for full details.





Property, Continued

Attached PUD Insurance

Attached PUD’s must meet the more restrictive guidelines (MSI/ Agency) for the applicable AUS used. Attached PUD insurance requirements are very similar to condo properties in that the PUD HOA must insure the common areas and properties. • If Fannie DU, all Fannie Mae attached PUD insurance guidelines

must be met, including H06 on the individual unit. • If Freddie LP, all Freddie Mac attached PUD insurance guidelines

must be met, including H06 on the individual unit. Notes: For both Agencies, MSI requires that on Attached PUD common

properties and amenities the insurance policies must meet these requirements: • One hundred percent (100%) of their replacement cost under a

commercial package policy. The policy must be in the name of the HOA and must provide for loss or damage settlement at replacement cost. Acceptable coverage terms are 100% Replacement Cost (RC), Guaranteed Replacement Cost (GRC), or Actual Loss Sustained (ALS).

• The HOA must maintain a commercial general liability insurance policy for the entire project, including all common areas and elements, public ways, commercial spaces and any other areas that are under its supervision. The policy must provide coverage for bodily injury and property damage that result from the operation, maintenance, or use of the project’s common areas and elements. Amount of Coverage must be at least $1 million (per occurrence) for bodily injury and property damage.

Please see the respective Agency Seller Guides for full guidelines.




Property, Continued

REO/Repo Properties

For conventional and government loans: MSI will not purchase any “reo or repo” properties that require repairs (regardless whether the appraiser is valued “as is” or not). Loans secured by “repo” properties will be subject to the following: MSI requires a full appraisal; AIR compliant for conventional loans;

government loans must meet current FHA appraisal guidelines. The LTV is based on the lesser of the appraised value, sales price or

auction/foreclosure bid value or auction/foreclosure sales price. There must be no restrictions on the purchase contract. Below market rate is not permitted. The property must be habitable. All local jurisdictional requirements must be met. All utilities must be operational at the time of the appraiser’s property

inspection. All deferred maintenance or repairs must be completed prior to or by

time of closing. Escrow holdbacks are not allowed. For all conventional loans locked with Series C: Prior to Doc MSI

requires a Field Review (Fannie 2000 or Freddie 1032, as applicable). • The field review must validate the value of the REO property prior

to funding/purchase. • MSI orders the Field Review. The Seller is charged a $350.00 fee.

Note: If the original appraisal notes deferred maintenance or no operational utilities, a final inspection report must be completed showing all utilities are satisfactorily operational and there are not deferred maintenance items that affect the safety or habitability of the subject property.

Right of Redemption

For all Products: MSI will not close any loan with a current/active Right of Redemption listed on the Title. If the Title references that a property is within a Right of Redemption

period and the expiration date has not passed prior to the loan closing date, the loan is ineligible for funding/purchase.

MSI will consider funding/purchase if the Right of Redemption on the Title is expired before the date of loan closing.




Property, Continued

Rural Property

Rural properties may be acceptable for close unless otherwise limited by the parameters of the particular loan product. Rural properties must meet the following requirements: Owner occupied primary residence, second home or investment.

• Investment properties must meet the more restrictive of Agency/MSI/MI guidelines for investment properties. See Rental Income - Investment and Investment Property Restriction.

Marketing time must be 6 months or less and values must be stable or appreciating.

The area must generally be a minimum of 25% developed. All comparable sales must generally be located within 5 miles of the

subject property. Be accessible by roads that meet local standards. Have adequate sewage, water, and utilities available and in service. Land value generally may not exceed 30%. Property may not be agricultural.

See Lot Size- Maximum Acreage

Security Bars

The appraisal must comment and follow state and local requirements with respect to properties using security or “burglar” bars, The appraiser must specifically comment and follow state and local

requirements with respect to properties using security or “burglar” bars.

There must be an emergency release latch for at least one window in each room where the security bars are located, unless local or municipal code states otherwise.

Important Notes/MSI Restriction If there is no alternative escape route for those rooms with security

bars, MSI will require a release latch for one window in the room, regardless of local/municipal code or requirements. The appraiser must specifically address, in the case where there is

no emergency release latch and the property meets code, that there is a safe, alternative escape route for the room in case of fire or that an emergency release latch is provided for at least one window.

Subject Property Size

Single Family Detached Properties less than 600 sq ft. are not eligible for funding/purchase.

Condo properties less than 400 sq ft. are not eligible for funding/purchase.



Property Flipping

Overview

A “flip” or “property flipping” is generally defined as a purchase transaction for a property that has recently been acquired by the property seller and is being sold for a quick profit. A flip transaction is evident if the title reveals several changes in

ownership in the course of a few months. Flip transactions are ineligible for funding/purchase by MSI. When calculating timing for Property Flipping, the period to

consider is from the date of the Sales Contract to the date the seller took title.

Chain of Title

For all loans, MSI requires at time of funding/purchase, evidence in the loan file of a minimum 12-month chain of title. If the preliminary title or title binder evidence that chain with no indication of flipping, no further documentation is required.

If the Title … Then … Evidence that the seller or the property owner has owned the subject property 3-months or less. - (0-90 Days)

MSI considers this property ineligible.

Evidences that the seller or the property owner has owned the subject property more than 90 days but less than 180 days. (91-180 days)

If the resale price is 20% greater than the original acquisition cost, MSI requires a Desk Review to support the value.

If the resale price is less than 20% greater than the original acquisition cost, MSI requires a reasonable explanation for the property turn-over.

Evidences that the seller or the property owner has owned the subject property more than 180 days but less than 12 months, (181 days to 364 days in title)

MSI requires a reasonable explanation for the property turn-over.

Evidences that the seller has owned the property a minimum of 12 months. - (≥ 365 Days)

MSI does not require additional documentation

Notes: Property Flopping – Involving a short sale with an interim buyer – MSI requires that the seller own the subject

property a minimum of 120 days (4-months) prior to re-sale. See Property Flopping for details. Calculate timing from the date of deed recordation in the title to the date of the Sales Contract. When the seller is a Corporation or LLC (or other business entity), the seller must have held the property a

minimum of 90 days. When the transaction is a Non-Arms Length Transaction (See Non-Arms Length or Identity of Interest Transaction),

the seller must have been on title for a minimum of 6 months, unless a greater time is required by the transaction details.

If, in MSI’s opinion, the property value is artificially inflated, MSI reserves the right to refuse approval of the loan.




Property Flipping, Continued

Underwriting Requirements for Purchase Transactions

FHA Loans: Follow FHA guidelines for “property flipping.” Conventional and VA loans: MSI requires a 12-month chain of title, showing the property

seller’s name on the current title. MSI does not allow double escrows.

Red Flags MSI has identified the following as “red flags” that may indicate a property flip: Subject property is being re-sold at large increase after being

recently renovated. Property seller is LLC (Limited Liability Company). • Check preliminary Closing Disclosure to verify seller on sales

contract is listed as the seller on Closing Disclosure. Inconsistencies exist between the owner as listed on the appraisal,

the vested owner as listed in the title commitment, and the seller as listed in the sales contract.

Comparables in the appraisal report do not appear to be the best available comps, comps have transferred multiple times within 12 months, or the appraisal reflects excessive adjustments.

Title commitment reflects multiple deeds necessary to effect transfer of title.

Title commitment, sales contract, or appraisal lists the owner as "owner of record."

Seller held seconds.

Note: MSI will review loans prior to close for the indicated red flags.

Property Seller is LLC

For Conventional loans: MSI requires the LLC (or Corporation) must have held title to the

property for a minimum of 90 days prior to the date of the Sales Agreement; documented by the chain of title on the Title Report (or Preliminary Title Report). See Property Flipping for additional guidelines.




Property Flipping, Continued

Property Flopping

For Conventional loans involved in any short sale negotiation and resale with an interim purchaser/seller to our applicant, MSI requires: A copy of the Settlement Statement/Closing Disclosure from the

purchase showing it was a legitimate non-arms length transaction and The loan must include the contact information to the short sale lender,

and Evidence/verification from the title company that all terms and

requirements of the short sale/lender seller have been met, and MSI requires that the “interim” short-sale purchase occur a minimum

of 120-days prior to the “final” sale to our borrower. Note: If the short sale is purchased directly from a Bank or Agency

(Fannie or Freddie), with no “interim buyer”, MSI will waive the 120-day requirement.



Qualifying Ratios and Liabilities

Summary Each product has specific qualifying ratio requirements published in the product summary.

Product Suites Each product subset within the product suite notes the maximum qualifying ratios for that particular product. If a ratio restriction is noted in a specific product subset, those ratios must be met regardless of the AUS finding.

Debt-To-Income Ratio

The debt-to-income (DTI) ratio compares the borrower’s total monthly obligations with their qualified monthly gross earnings. A favorable comparison validates the ability of the borrower to

repay the loan based on his financial strength The Debt to Income ratio (DTI) is calculated by the sum of the

following divided by the borrower’s stable monthly income: • Monthly housing expense to include taxes and insurance and any

Home Owner Dues on the Primary • All installment debt regardless of the number of payments

remaining • All revolving debt. See Paying off Debt for additional details.) • Alimony, child support or maintenance payments. • Real estate net rental losses from all investment properties owned • Second Home total housing debt, if applicable • Any other obligation where a monthly payment or annual payment

is required • Any new LQI debt that is discovered prior to close Any Asset-secured loan, including 401-K: • The payment does not need to be included in the DTI if the vested

value of the remaining asset is equal to or greater than outstanding balance of the loan.




Qualifying Ratios and Liabilities, Continued

Calculation Depending upon the specific product, loan qualification may be based on either: Housing and Debt per AUS findings • Qualifying calculation for this method requires the housing ratio to

be noted separately with a minimum qualification for housing. Total DTI, generally listed as “DTI” in a product matrix or in

guidelines. • Qualifying calculation for this method requires the total DTI to be

the determining factor with little to no consideration placed on the housing ratio.

Alimony If a borrower is paying alimony, the payment must be considered a debt.

Automobiles

Payments on all automobile leases, regardless of the remaining number of payments, must be included in the calculation of recurring monthly expenses. Note: To use a “car allowance” as income, follow Fannie Mae guidelines, see the Fannie Mae Seller Guide at AllRegs. The underwriter must justify the use in writing.

Paying off Debt

REV (9/18/15)

Follow current Fannie Mae/Freddie Mac requirements (as applicable to DU or LP) when paying off revolving debt to qualify a borrower. Closure of the accounts is not required.

Paying off installment debt to qualify is acceptable; however, paying down installment debt to 10 or less , monthly payments is not permitted.





Monthly Payments

The monthly debt payment is the sum of the following monthly obligations: Monthly housing expense • Monthly housing expense includes principal & interest, taxes &

insurance (regardless whether they are in escrow or not & including flood and MI as applicable), HOA dues/fees, leasehold fees as applicable.

Automobile installment or lease payments Installment debts with 10 or fewer monthly payments should also

be considered as a recurring monthly obligation if it significantly affects the borrower’s ability to meet his or her credit obligations.

Revolving Debts, use the greater of the minimum payment reflected on the credit report, 5% of the balance or $10.00, in the debt to income ratio.

Aggregate negative net rental income from all investment properties owned.

Monthly mortgage payment for second home. Payments on all deferred loans (i.e., student loans and loans in

forbearance).

Co-Signed Obligations

MSI policy, for all loans/all products: Co-signed obligations can be excluded from recurring monthly expenses if all of the following documentation is provided: The debt must be a contingent liability (our borrower listed on the

credit report/Note as co-signer or joint.) Most recent consecutive 12-months of cancelled checks that show

payments have been made by the other party contingent on the debt.

• Liabilities being paid by a non-interested third party may not be excluded as the debt remains the responsibility of our borrower.

• If the co-signer is one of our borrowers or if the debt is that of a spouse, the debt may not be excluded.

If the account on loan has been in existence for less than 12 months, the full payment of the co-signed account is considered a liability and must be used in calculating the debt ratio.

Verification that there have been no delinquencies on the account during the most recent 12 months.





Co-Signed Obligations, Continued

Real Estate Obligation MSI will permit a real-estate related obligation to be excluded from

the DTI as long as the borrower provides acceptable documentation that the borrower does not make the payment. • Acceptable Documentation is:

o Minimum 12 months most recent consecutive cancelled checks showing payment by another person from a non-joint account.

o Copy of court order, divorce decree, or separation agreement evidencing assignment of the obligation to another party, and

o Evidencing that the borrower has been removed from title (for real estate secured obligation), and

o The prior payment history prior to the assignment must meet MSI guidelines (0X30).

HELOC

For CLTV/TLTV Calculation Purposes: For CLTV, use the current outstanding balance. For the TLTV, Use the entire line of credit and not just the

outstanding balance. For qualifying purposes Borrower's housing-expense to income ratio is based on the required

payment shown on the credit report. The payment must be “reasonable” (i.e. a $20 payment on a $200 K line of credit is not reasonable.) • If the credit report payment is not reasonable or • If the payment is not shown on the credit report, calculate the

payment on the outstanding balance as shown under the terms of the HELOC Note.

If the borrower cannot qualify with the payment, the credit line may be reduced or closed to permit qualification for the loan. • If the HELOC credit line has been reduced or closed, MSI requires

evidence (copy of loan modification or lower amount recorded on the title or lien removed from the title) to validate reduced payments.

See Home Equity Line of Credit for additional details.





Revolving Debt

REV (9/18/15)

Monthly Payments (or 5% of the outstanding balance if a monthly payment is not provided) on revolving accounts, regardless of the balance, must be included in the total debt to income calculation. See Paying off Debt for details if revolving debt is being paid off to

qualify.

Student Loans

REV (8/21/15)

(To meet current agency/ AUS guidelines)

Student loans must be included in debt ratio calculation regardless of deferred status.

For all student loans, whether deferred, in forbearance, or in repayment (not deferred), the lender must:

• Use the greater of the following to determine the monthly payment to be used as the borrower’s recurring monthly debt obligation: o 1% of the outstanding balance (If the payment currently being

made cannot be documented or verified, 1% of the outstanding balance must be used.); or

o The actual documented payment (documented in the credit report, in documentation obtained from the student loan lender, or in documentation supplied by the borrower).

o Exception: If the actual documented payment is less than 1% of the outstanding balance and it will fully amortize the loan with no payment adjustments, the lender may use the lower, fully-amortizing monthly payment to qualify the borrower.

Transferred Loans or Loans in Transfer: Regardless whether the student loan has been recently transferred, or

is in the process of being transferred to a new servicer; MSI requires that the loan must be reported current. • The underwriter must require documentation for the payment

history and actual payments for student loans.



Subordinate Financing

Overview

Second Trust Deeds, junior liens and subordinate liens (secondary financing) are defined as mortgages (encumbrances on real estate) that have rights that are secondary (inferior) to that of another recorded interest (mortgage) in the same property. MSI will accept loans with subordinate financing as long as the Combined Loan-to-Value (CLTV) ratio of the first and second do not exceed the limits outlined by these guidelines and by the product guidelines. See the loan parameters in the product suite for eligibility and

maximum limits. See HELOC and Home Equity Line of Credit for additional

guidelines. MSI will accept a second mortgage from an institutional lender,

including HELOCs (as long as it meets the more restrictive of MSI/Fannie/Freddie guidelines).

MSI will accept a “Seller Carry Back (private) Second”, as long as it meets the more restrictive of MSI/Fannie/Freddie guidelines.

Subordinate Financing Requirements Matrix Institutional Second Seller Carry Back Second

General Guidelines The secondary financing must meet the more restrictive of MSI or current Fannie Mae/Freddie Mac guidelines (applicable to the AUS used). A certified copy of the executed second Note and Subordination Agreement (when applicable) must be provided to

confirm loan amount, payment terms and lien status. The subordination agreement must be recorded concurrently (and clearly in second position) with the first

Mortgage/Deed of trust, as applicable. “Piggy Back” or simultaneous seconds must be recorded in clear second position, evidenced by the closing instructions

and the final title policy when issued. The subordinate financing may not be a “wrap-around” type transaction. Monthly payments on the secondary financing must be included in the borrowers housing and debt ratios.

Private second mortgages may be held by the property seller (aka seller carry-back) as long as they meet all Subordinate Financing guidelines as outlined by MSI/Fannie Mae/Freddie Mac.

• Employer Seconds are not permitted. • Community Seconds are not permitted. • A “private” second may not be provided by a private party that

is a real estate broker, real estate agent, builder, developer, or any other entity except the property seller.




Subordinate Financing, Continued

Subordinate Financing Requirements Matrix, Continued Institutional Second Seller Carry Back Second

LTV/CLTV The maximum Combined Loan to Value

(CLTV/HCLTV) ratio of the first and second must not exceed the limits outlined by these guidelines and by the product loan parameter matrix

CLTV/TLTV is limited to a maximum 90.00%, unless a lower CLTV/TLTV is required by the product.

MSI does not permit MI (First Mortgage (LTV) must be ≤ 80.00%) when seller carry-back subordinate financing is included in a transaction.

Terms and Payment The secondary financing must have a term of no less than five years, unless the financing fully amortizes prior to that

time. The financing must not permit the Note holder to “call” the financing within the first five years following loan closing. (No

balloon within five years.) The secondary financing must not have a negative amortization feature.

Payments may be variable, as long as: • The annual payment adjustments of the secondary remain constant for 12-months over the life of the loan and the rate

cannot increase more than 1% each 12-month time period. The term of the Note must fully amortize and provide for regular monthly payments with no provisions for future

advances Unless the subordinate mortgage is an

Institutional HELOC which meets the more restrictive of MSI/Fannie/Freddie guidelines.

Seller Carry Back mortgages must not include any provisions for future advances.

The payments may be Interest Only. The payments may not be Interest Only. Interest Rate The interest rate of the subordinate financing should be at "market rate", no more than 2% below Fannie Mae's posted

net yield for second mortgages. If the interest rate for a Seller Carry Back is more than 2.00%

below Fannie Mae’s posted net yield in effect for second mortgages at the time of closing/disbursement, the amount of the seller second must be treated as a sales concession and will require a dollar-for-dollar reduction in the sales price.




Subordinate Financing, Continued

Subordinate Financing Requirements Matrix, Continued Institutional Second Seller Carry Back Second

Restrictions Permitted for owner-occupied principal residences only.

The first mortgage must be a Fixed Rate Mortgage. Permitted only after the borrower has made a 5.00% minimum

down payment (from verified personal funds). The appraiser must note that the secondary financing is being

provided by the seller and address any negative impact on value or marketability.

Notes The existing subordinate lien holder may be an owner-carry second from the owner of the property, or an institutional

lender. • The existing subordinate financing must meet MSI/Fannie/Freddie guidelines.


For Underwriting (to be reviewed by the Underwriter, included in the Underwriting File): Existing: A copy of the executed Note, Trust Deed and

Subordination Agreement. New: A copy of the commitment letter from the lender providing

the terms of the new subordinate financing.

Home Equity Line of Credit

Home Equity Lines of Credit (HELOC) are permitted to the more restrictive of Fannie Mae/MSI guidelines.

Note: The Delivery File must include the appropriate documentation to

confirm the HELOC loan terms (e.g., Note, etc.) See HELOC for additional details.