B5-6-03: HomeReady Mortgage Underwriting Methods and Requirements (07/25/2017)

© Fannie Mae Single Family Selling Guide

Underwriting Options

HomeReady mortgage loans can be underwritten with DU or may be manually underwritten. The maximum LTV ratio is lower for manually underwritten transactions versus those underwritten in DU (95% versus 97% for one-unit principal residences). As a reminder, the limited waiver of representations and warranties typically granted for loans underwritten with DU does not apply to manually underwritten loans.

For HomeReady mortgage loans that are underwritten through DU, the lender must enter data in the online loan application, identify the loan as a community lending mortgage, and select the HomeReady product.

If the lender does not select HomeReady as the community lending product, DU will provide a message when the total qualifying income entered in DU appears to be within the applicable AMI limits and/or the property is located within the defined geographic areas indicating that the loan may be eligible as a HomeReady mortgage loan. The lender must then select the HomeReady product and resubmit the loan casefile to help determine if the loan meets all of the HomeReady requirements (assuming the lender wants to sell the loan to Fannie Mae as a HomeReady mortgage).

Minimum Borrower Contribution for Purchase Transactions

Fannie Mae does not require a minimum borrower contribution from the borrower’s own funds for any mortgage loan if the loan has an LTV, CLTV, or HCLTV ratio of 80% or less.

If the LTV, CLTV, or HCLTV ratio is greater than 80%, the minimum required borrower contribution from the borrower’s own funds is dependent on the number of units, as noted in the table below.

See B3-4, Asset Assessment, and B5-5.1-02, Community Seconds Loan Eligibility, for information about allowable sources of funds for completing the transaction.

No minimum contribution is required in connection with a limited cash-out refinance transaction.

Non-Occupant Borrowers

Non-occupant borrowers are permitted on HomeReady mortgages. See B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction, for the eligibility requirements that apply.

Homeownership Education and Housing Counseling

For HomeReady purchase transactions, at least one borrower on the loan must complete the homeownership education or housing counseling requirements described in B2-2-06, Homeownership Education and Housing Counseling, Loans where at least one borrower completed housing counseling are eligible for an LLPA credit. See B5-6-04, HomeReady Mortgage Loan Pricing, Mortgage Insurance, and Special Feature Codes for details.

Rental Income from the Subject Property

Rental income is an acceptable source of qualifying income in the following instances:

• one-unit principal residence with an accessory unit. See B4-1.3-05, Improvements Section of the Appraisal Report, for additional details related to acceptable accessory units;

• two- to four-unit principal residence properties.

See B3-3.1-08, Rental Income, for calculation and documentation of rental income used for qualifying purposes.

Boarder Income

The rental payments that any borrower receives from one or more individuals who reside with the borrower (but who are not obligated on the mortgage debt and may or may not be related to the borrower) may be considered as acceptable stable income. This applies for a one-unit property in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage if

• The individual(s) has lived with (and paid rent to) the borrower for the last 12 months.

• The boarder can provide appropriate documentation to demonstrate a history of shared residency (such as a copy of a driver’s license, bill, or bank statement that shows the boarder’s address as being the same as the borrower’s address).

• The boarder can demonstrate (such as copies of canceled checks) the payment of rental payments to the borrower for

  • the last 12 months, or

  • at least 9 of the most recent 12 months provided the rental income is averaged over a 12–month period.

Payment of rent by the boarder directly to a third party is not acceptable.

Cash-on-Hand

Lenders may deliver purchase money mortgages for one-unit properties with cash-on-hand as an acceptable source of funds for the borrower’s down payment, funds for closing costs, and prepaid items.

            Note: Cash-on-hand may not be used to fund the borrower’s reserve requirement, if applicable.

The lender must verify and document the following with respect to the cash-on-hand funds:

• The borrower customarily uses cash for expenses, and the amount of funds saved is consistent with the borrower’s previous payment practices.

• The lender must verify that funds for the down payment and closing costs exist in a financial institution account or an acceptable escrow account. Funds must be on deposit at the time of application, or no less than 30 days prior to closing.

• The lender must obtain a written statement from the borrower that discloses the source of funds and states that the funds have not been borrowed.

• The borrower’s credit report and other verifications should indicate limited or no use of credit and limited or no depository relationship between the borrower and a financial institution.

Sweat Equity

Fannie Mae considers sweat equity an acceptable source of funds for HomeReady mortgage loans provided lenders document that

• The mortgage is originated under a specific lending program.

• The lending program is managed by a strong, experienced nonprofit organization.

These factors enable Fannie Mae to work with lenders that have the proven ability to properly evaluate the contributory value of sweat equity work.

When sweat equity is accepted toward the down payment, the borrower must contribute at least 3% from his or her own funds. For one-unit properties, a minimum down payment of 5% is required – 2% sweat equity and maximum LTV ratio of 95%. For two- to four-unit properties, refer to the Eligibility Matrix for maximum LTV ratios.

Minimum Reserve Requirements

For manually underwritten loans, the reserve requirements are documented in the Eligibility Matrix. For DU loan casefiles, DU will determine the reserve requirement.

Borrowers with Low Credit Scores: Manual Underwriting Only

For HomeReady mortgage loans secured by one-unit properties, when the lender obtains a representative credit score for the borrower, but the score is less than the minimum score required for a HomeReady mortgage, the borrower may still be eligible if the following requirements are met:

• The credit report indicates that the borrower’s credit score is low due to an insufficient traditional credit history (as documented by reason codes on the credit report that indicate a lack of credit accounts, accounts not opened long enough, lack of usage, etc., as reasons for the low credit score). If the borrower’s credit score is low due to derogatory credit or if none of the reason codes noted above appear on the credit report, then the minimum credit score for the transaction must be met (per the Eligibility Matrix).

• The lender must supplement the traditional credit file (referred to as a “thin file”) with the development of an acceptable nontraditional credit profile in accordance with Section B3–5.4, Nontraditional Credit History.

• The lender must deliver the borrower’s credit score (even if below the minimum required) along with SFC 818 at loan delivery to identify HomeReady mortgage loans that have borrowers with thin files.

              Note: Special Feature Code 818 should only be used to indicate a “thin file” HomeReady mortgage loan.