CMG MORTGAGE INSURANCE COMPANY
UNDERWRITING GUIDELINES MANUAL
CMG MI. More than MI.
CMG MI Underwriting Guidelines Manual
August 1, 2010 | CMG MI
Page 1
Table of Contents 1 CMG Mortgage Insurance Company Underwriting Policy ....................................... 7 1.1
Overview (7/2010) ................................................................................................................................................................. 7
1.2
Underwriting Standards ........................................................................................................................................................ 7
1.3
Underwriting Policy ................................................................................................................................................................ 7
2 Delivery, Application, and Coverage .............................................................................. 8 2.1
Delivery Methods ................................................................................................................................................................... 8
2.2
Application Types .................................................................................................................................................................. 8
2.2.1
Delegated Submissions .................................................................................................................................................... 8
2.2.2
Standard/Full Doc .............................................................................................................................................................. 8
2.2.3
EZ-REFI Program .............................................................................................................................................................. 9
2.2.4
EZ Application .................................................................................................................................................................... 9
2.3
Pre-Qualification Underwriting ............................................................................................................................................. 9
2.4
Insurance Coverage and Premium Plans ........................................................................................................................ 10
2.4.1
Standard Coverage ......................................................................................................................................................... 10
2.4.2
Monthly / EZ Monthly
2.4.3
CMG Single Premium ..................................................................................................................................................... 10
2.4.4
Super Split
2.4.5
Refund Options ................................................................................................................................................................ 10
SM
SM
................................................................................................................................................... 10
(7/2010) .................................................................................................................................................... 10
3. Loan Matrices, Products and Programs ..................................................................... 11 3.1
Owner-Occupied Loans Conforming Market (7/2010) ................................................................................................... 11
3.2
Second Home Loans (7/2010) .......................................................................................................................................... 13
3.3
A-Minus Loans (3/2008) ..................................................................................................................................................... 13
3.4
Limited Documentation Loans (6/2008) ........................................................................................................................... 13
3.5
Loan Products ...................................................................................................................................................................... 13
3.5.1
Fixed-rate/Fixed Payment Loans ................................................................................................................................. 13
3.5.2
Growing Equity Mortgage (GEM) ................................................................................................................................. 13
3.5.3
Graduated Payment Mortgage (GPM)......................................................................................................................... 14
3.5.4
Combined Asset Mortgages (CAM) ............................................................................................................................. 14
3.5.5
Fixed-Rate Annuity, Life Insurance Policy & Financial Guarantee Pledged CAMs .............................................. 15
3.5.6
Balloon Payment Mortgages ......................................................................................................................................... 15
3.5.7
Interest Only Loans (IO) ................................................................................................................................................ 16
3.5.8
Option Payment Mortgage (4/2008)............................................................................................................................. 16
3.5.9
Adjustable Rate Mortgages (ARMs) ............................................................................................................................ 16
3.5.10 Negative Amortization – Potential and Scheduled .................................................................................................... 17 3.6
Loan Programs..................................................................................................................................................................... 17
3.6.1
EZ Refinance Program .................................................................................................................................................. 17
3.6.2
Home Affordable Refinance Program (HARP) ........................................................................................................... 19
3.6.3
Seasoned Loan Program ............................................................................................................................................... 19
CMG MI Underwriting Guidelines Manual
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3.6.4
Instant Modification Program ........................................................................................................................................ 21
3.6.5
Loan Modification Program ........................................................................................................................................... 21
3.7
Assumptions ......................................................................................................................................................................... 22
3.8
Partial Release of Collateral ............................................................................................................................................... 23
4 Automated Underwriting Systems ................................................................................ 24 4.1
®
Desktop Underwriter Version 7.0 and higher (12/2008)............................................................................................... 24
4.1.1
Resubmission Requirements (8/2008) ........................................................................................................................ 25
4.1.2
Validation and Data Integrity Requirements (12/2006) ............................................................................................ 25
4.1.3
DU Recommendation (3/2008) .................................................................................................................................. 26
4.2
®
®
Loan Prospector (12/2008) ............................................................................................................................................... 26
4.2.1
Resubmission Requirements (12/2006) ...................................................................................................................... 27
4.2.2
Validation and Data Integrity Requirements (12/2006) ............................................................................................. 27
4.2.3
LP Recommendations (3/2008) .................................................................................................................................... 28
5 Eligibility............................................................................................................................... 29 5.1
Overview .............................................................................................................................................................................. 29
5.2
Member Eligibility................................................................................................................................................................ 29
5.2.1
Member ............................................................................................................................................................................ 29
5.2.2
Permanent Resident Alien ............................................................................................................................................. 29
5.2.3
Non-Permanent Resident Aliens .................................................................................................................................. 30
5.3
Occupancy ........................................................................................................................................................................... 32
5.3.1
Owner-Occupied Primary Residence .......................................................................................................................... 32
5.3.2
Second Home.................................................................................................................................................................. 32
5.3.3
Investment Property ....................................................................................................................................................... 32
5.4
Inter Vivos Revocable (“Living”) Trust and Land Trusts ............................................................................................... 33
5.5
Bridge (Swing) Loans ......................................................................................................................................................... 33
5.6
Co-signers / Guarantors .................................................................................................................................................... 33
5.7
Non-Occupant Co-Borrowers ........................................................................................................................................... 33
5.8
Non-Borrowing Spouse ...................................................................................................................................................... 34
5.9
Adding/Removing Members on Application .................................................................................................................... 34
5.10
Non Arm‟s Length Transactions ....................................................................................................................................... 34
5.11
Maximum CMG MI Insured Loans Per Member ............................................................................................................ 34
5.12
Maximum Loan Term ......................................................................................................................................................... 34
5.13
Minimum Loan Amount ...................................................................................................................................................... 35
5.14
Financed Premium ............................................................................................................................................................. 35
5.15
Interested Party/Seller Contributions/Third-Party Contributions (IPCs) ..................................................................... 35
5.16
Maximum Allowable Contributions ................................................................................................................................... 35
5.17
Other Third-Party Contributions........................................................................................................................................ 36
5.18
Sales Concessions ............................................................................................................................................................. 36
5.19
Allowance for Improvements and Rehabilitation ............................................................................................................ 37
5.20
Primary Residence Conversion Transaction Types ...................................................................................................... 37
5.20.1 Purchase .......................................................................................................................................................................... 37
CMG MI Underwriting Guidelines Manual
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5.20.2 Refinance transactions .................................................................................................................................................. 38 5.20.3 Home Improvement and Rehabilitation Loans ........................................................................................................... 39 5.20.4 Construction to Permanent Financing ......................................................................................................................... 40 5.20.5 Relocation Loans (6/2010) ............................................................................................................................................ 42 5.20.6 Land Contract/Contract of Sale .................................................................................................................................... 42 5.21
Temporary Buydowns ......................................................................................................................................................... 42
5.22
Secondary Financing .......................................................................................................................................................... 43
5.23
Seasoning of Existing Liens ............................................................................................................................................... 44
5.24
Documentation Levels ....................................................................................................................................................... 44
5.24.1 Overview .......................................................................................................................................................................... 44 5.24.2 Limited Documentation .................................................................................................................................................. 44
6
Underwriting the Member ............................................................................................... 45 6.1
Underwriting Overview ....................................................................................................................................................... 45
6.2
Loan Application Analysis ................................................................................................................................................. 45
6.3
Age of Documents .............................................................................................................................................................. 45
6.4
Credit Documentation and Evaluation ............................................................................................................................. 45
6.4.1
Credit Report .................................................................................................................................................................... 45
6.4.2
Nontraditional Credit....................................................................................................................................................... 46
6.4.3
Credit Evaluation ............................................................................................................................................................ 47
6.4.4
Excessive Use of Credit ................................................................................................................................................. 50
6.4.5
“No Credit� Guidelines ................................................................................................................................................... 50
6.4.6
Credit Scoring.................................................................................................................................................................. 51
6.4.7
Valid Credit Score ........................................................................................................................................................... 51
6.4.8
Qualifying Credit Score .................................................................................................................................................. 51
6.4.9
Methods for Determining Credit Score ........................................................................................................................ 52
6.4.10 Credit Bureau Alerts ....................................................................................................................................................... 52 6.4.11 Two Social Security Numbers ....................................................................................................................................... 53 6.5
Liabilities and Long-term Debt .......................................................................................................................................... 53
6.5.1
Liabilities .......................................................................................................................................................................... 53
6.5.2
Payoff or Paydown of Debt for Qualification ............................................................................................................... 53
6.5.3
Other Obligations (Long-Term Debt) ............................................................................................................................ 54
6.5.4
Contingent Liabilities ...................................................................................................................................................... 56
6.5.5
Debt-to-Income Ratios ................................................................................................................................................... 56
6.5.6
Compensating Factors ................................................................................................................................................... 57
6.6
CMG MI Qualifying Rate/payment ................................................................................................................................... 58
6.7
Income Overview ................................................................................................................................................................ 58
6.7.1
Stability and Continuance of Income ........................................................................................................................... 58
6.7.2
Income Analysis .............................................................................................................................................................. 59
6.7.3
Income Calculation ......................................................................................................................................................... 59
6.8 6.8.1
Sources of Income ............................................................................................................................................................... 60 Salary and Wages .......................................................................................................................................................... 60
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6.8.2
Alimony, Child Support, and Separate Maintenance ................................................................................................ 60
6.8.3
Annuity ............................................................................................................................................................................. 60
6.8.4
Auto Allowance ............................................................................................................................................................... 60
6.8.5
Boarder Income .............................................................................................................................................................. 61
6.8.6
Bonus Income ................................................................................................................................................................. 61
6.8.7
Capital Gains ................................................................................................................................................................... 61
6.8.8
Commissions ................................................................................................................................................................... 61
6.8.9
Disability ........................................................................................................................................................................... 62
6.8.10 Dividends and Interest ................................................................................................................................................... 62 6.8.11 Family Business/Interested Party ................................................................................................................................. 62 6.8.12 Family Medical Leave-of-Absence (FMLA) ................................................................................................................. 62 6.8.13 Foster Care ...................................................................................................................................................................... 62 6.8.14 Gift Income ...................................................................................................................................................................... 63 6.8.15 Inheritance and Other Guaranteed Income ................................................................................................................ 63 6.8.16 Gambling Winnings ........................................................................................................................................................ 63 6.8.17 Military Income ................................................................................................................................................................ 63 6.8.18 Mortgage Credit Certificates ......................................................................................................................................... 63 6.8.19 Mortgage Interest Differential........................................................................................................................................ 63 6.8.20 Non Occupying Co-borrower Income .......................................................................................................................... 64 6.8.21 Non Taxable Income ...................................................................................................................................................... 64 6.8.22 Notes Receivable ............................................................................................................................................................ 64 6.8.23 Overtime........................................................................................................................................................................... 65 6.8.24 Part-Time and Second Jobs.......................................................................................................................................... 65 6.8.25 Rental Income ................................................................................................................................................................. 65 6.8.26 Retirement ....................................................................................................................................................................... 66 6.8.27 Royalty Payments ........................................................................................................................................................... 66 6.8.28 Social Security ................................................................................................................................................................ 66 6.8.29 Trailing Co-Borrower Income ........................................................................................................................................ 66 6.8.30 Trust Income.................................................................................................................................................................... 67 6.8.31 Unemployment Benefits ................................................................................................................................................. 67 6.8.32 Veteranâ€&#x;s Administration Benefits ................................................................................................................................ 67 6.8.33 Welfare and Public Assistance ..................................................................................................................................... 67 6.8.34 Unacceptable Income .................................................................................................................................................... 67 6.9
Self-Employed Borrower ..................................................................................................................................................... 68
6.9.1
Form 1040 U. S. Individual Income Tax Returns ....................................................................................................... 68
6.9.2
Form 1065 U.S. Partnership Return of Income .......................................................................................................... 70
6.9.3
Form 1120S U.S. Income Tax Return for an S-Corporation .................................................................................... 71
6.9.4
Form 1120 U.S. Corporation Income Tax Return ...................................................................................................... 72
6.9.5
Analysis of Financial Statements ................................................................................................................................. 73
6.9.6
Unaudited Financial Statements .................................................................................................................................. 75
6.9.7
Red Flags for Tax Returns ............................................................................................................................................ 75
6.10
Memberâ€&#x;s Assets ................................................................................................................................................................. 75
CMG MI Underwriting Guidelines Manual
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6.10.1 Funds to Close ................................................................................................................................................................ 76 6.10.2 Down Payment Requirements ...................................................................................................................................... 76 6.10.3 Deposit on Sales Contract/Earnest Money Deposit .................................................................................................. 76 6.10.4 Closing Costs .................................................................................................................................................................. 76 6.10.5
Prepaid Items ................................................................................................................................................................. 76
6.10.6 Reserves .......................................................................................................................................................................... 76 6.10.7 Source of Funds .............................................................................................................................................................. 77 6.10.8 Verifying Assets ............................................................................................................................................................... 82 6.10.9 Ineligible Source of Funds .............................................................................................................................................. 82
7
Underwriting the Property.............................................................................................. 83 7.1
Property Evaluation ............................................................................................................................................................ 83
7.2
Property Definitions ............................................................................................................................................................ 83
7.2.1
Single-Family Detached, Attached, Townhouse, Row House ................................................................................. 83
7.2.2
Planned Unit Developments ......................................................................................................................................... 83
7.2.3
Condominium Properties ............................................................................................................................................... 84
7.3
Appraisal Requirements .................................................................................................................................................... 84
7.4
Property Flipping (1/2010) ................................................................................................................................................. 84
7.5
Property Standards ............................................................................................................................................................ 85
7.6
Condominium Project Eligibility ........................................................................................................................................ 87
7.7
Condominium Conversions ............................................................................................................................................... 88
7.8
Two-to-Four Units Appraisal Review ............................................................................................................................... 89
7.9
Distressed and Declining Markets Appraisal Review .................................................................................................... 90
7.10
Manufactured Housing ........................................................................................................................................................ 93
7.10.1 Property Eligibility ........................................................................................................................................................... 94 7.10.2 Underwriting Requirements ........................................................................................................................................... 94 7.10.3 Manufactured Housing Appraisal Review ................................................................................................................... 96 7.11
Cooperative Housing Units ............................................................................................................................................... 96
7.11.1 Cooperative to Condominium Comparison ................................................................................................................. 97 7.11.2 Cooperative Housing Unit Appraisal Review .............................................................................................................. 98 7.12
Leasehold Properties .......................................................................................................................................................... 99
7.13
Rural Properties ................................................................................................................................................................... 99
7.13.1 General Property Conditions ......................................................................................................................................... 99 7.13.2 Rural Property Appraisal Review ................................................................................................................................. 99 7.14
Distressed Markets Policy (11/2009) .............................................................................................................................. 100
7.15
Ineligible Properties .......................................................................................................................................................... 101
7.15.1 Vacant Land.................................................................................................................................................................... 101 7.15.2 Condotels ........................................................................................................................................................................ 101 7.15.3 “Kiddy Condos� .............................................................................................................................................................. 101 7.15.4 Time-Share or Incremental Ownership ....................................................................................................................... 102 7.15.5 Pioneering designs ........................................................................................................................................................ 102
CMG MI Underwriting Guidelines Manual
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1
CMG Mortgage Insurance Company Underwriting Policy
1.1
Overview (7/2010)
CMG Mortgage Insurance Company (CMG MI) was established in 1994 to serve the needs of credit unions and to facilitate homeownership. CMG MI‟s insurance programs and services help credit unions expand their lending opportunities to serve more homebuyers through the sharing of default risk. Ultimately, this risk-sharing partnership enables both credit unions and investors to profit from the increased availability of capital, as well as, to generate a larger volume of business. This, in turn, creates more opportunities for potential homebuyers. The CMG MI Underwriting Guidelines Manual provides comprehensive information on CMG MI‟s loan documentation requirements; loan, borrower, and property eligibility; CMG MI programs and products; CMG MI‟s risk philosophy; and other general underwriting issues. Loans generated for credit union members (borrowers) will be underwritten for mortgage insurance coverage under the terms of CMG MI‟s Underwriting Policy. Underwriting mortgage loans requires a sensitive analysis of the many elements necessary to finance a home. This manual describes CMG MI‟s general underwriting approach; it does not set forth all-inclusive underwriting standards. In discussing this general approach, minimum guidelines considered necessary for prudent mortgage insurance underwriting are identified; the most essential requirement is that the terms of the loan, property value, creditworthiness of the member(s), and the appropriate documentation to support the underwriter‟s judgment that it is probable the member will repay the mortgage debt. Each loan should be individually evaluated with emphasis placed on the overall quality of the loan. Although multiple risk factors are assessed, the underwriter must attempt to balance the evaluation between the member and the property.
1.2
Underwriting Standards
CMG MI provides products and programs to the mortgage lending industry which assist potential members in realizing their goal for homeownership. Our objective is to help credit unions expand their lending programs to meet the needs of as many qualified members as possible. This “partnership” allows credit unions, investors, and CMG MI to profit from increased availability of capital as well as to generate a larger volume of business; and members benefit from the creation of more opportunities for homeownership. The principal responsibility of underwriters, in support of the CMG MI Group‟s mission, is to build and maintain a quality book of business. This is achieved by balancing goals for growth with long-term profitability, and is achieved with (1) an understanding of past performance, (2) evaluation of present conditions, and (3) anticipation of future developments. CMG MI Underwriters are committed to superior customer service, a display of professionalism, and the maintenance of operational excellence.
1.3
Underwriting Policy
CMG MI‟s underwriting policy is developed in support of corporate Risk Management objectives and for compliance with laws and regulations, including those of state Insurance Commissions, Fannie Mae and Freddie Mac mortgage insurer eligibility criteria, Fair Lending, and the Equal Credit Opportunities Act.
CMG MI Underwriting Guidelines Manual
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2
Delivery, Application, and Coverage
2.1
Delivery Methods
There are several methods to apply for mortgage insurance: you can submit a traditional paper application or use our electronic delivery method.
e-cmgmi is CMG MI‟s online channel for products and services on the Internet. It provides fast access to MI origination and policy servicing and works with a variety of loan origination systems and requires no special training. This system is used by credit unions to: Originate delegated and non-delegated MI certificates Update information on existing MI certificates Upload document images for non-delegated transactions View and/or print existing MI certificates
A dedicated, secure fax line used to submit loans for non-delegated MI transactions.
Traditional loan submission; insurance package which includes a completed and signed CMG MI Application for Insurance and supporting documentation, delivered by mail or fax
2.2
Application Types
CMG MI offers two application types for submitting loans for Mortgage Insurance. Different versions of the CMG MI application may apply for certain states due to regulatory requirements for form contents. The appropriate application for the location of the Subject Property (for BPMI) or the Credit Union (LPMI) must be submitted. The following documentation is required based on the submission type.
2.2.1
Delegated Submissions
Fully completed CMG MI Application for Insurance, signed and dated by an authorized representative of the Master Policyholder
Uniform Underwriting and Transmittal Summary (Fannie Mae 1008/Freddie Mac 1077 ). The Program requires approval; please contact your Account Executive
2.2.2
Standard/Full Doc
Fully completed CMG MI Application for Insurance, signed and dated by an authorized representative of the Master Policyholder
Uniform Residential Loan Application (Fannie Mae 1003/Freddie Mac 65).
Uniform Underwriting and Transmittal Summary (Fannie Mae 1008/Freddie Mac 1077)
Residential Mortgage Credit Report (RMCR) or a one repository in-file, credit report
Residential Appraisal Report (and Market Conditions Addendum to the Appraisal Report – Uniform Residential Appraisal form (Fannie Mae Form 1004MC/Freddie Mac Form 71, dated March 2009) (refer to CMG MI Program guidelines for appraisal requirements)
Sales Contract
Verification of Employment, if applicable
Verification of Income, if applicable
Verification of cash needed to close, plus reserves, if applicable
Loan payment history, if not included in credit report (for refinance and seasoned loans)
CMG MI Underwriting Guidelines Manual
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Mortgage payment history, if not included in credit report
Installment debt payment history, if not included in credit report
Fannie Mae DU Findings/Freddie Mac LP Feedback (if DU /LP approved)
2.2.3
®
EZ-REFI Program
Fully completed CMGMI EZ-REFI Program Application, signed and dated by an authorized representative of the Master Policyholder
Uniform Residential Loan Application (Fannie Mae1003/Freddie Mac 65)
Uniform Underwriting Transmittal Summary (Fannie Mae 1008/Freddie Mac 1077) with income and assets.
Miscellaneous Documentation Additional documentation relating to the member or the property may be required to further substantiate the application. This documentation includes, but is not limited to:
Gift letters and source of gift funds
Divorce decrees
Lease agreements
Member‟s explanation of derogatory credit
Verification of source of funds deposited into the member‟s account within the past 60-90 days
Occupancy statements
Details of member‟s employment history
Form 4506 – Member‟s written authorization to obtain copies of the past two years‟ federal income tax returns from the Internal Revenue Service
All CMG MI First Lien Master Policy policyholders are eligible for this program.
2.2.4
EZ Application
Loans submitted on a non-delegated basis, the application and loan file package will be submitted to our CMG MI underwriting office and reviewed by the CMG MI underwriter for compliance with CMG MI‟s program guidelines.
2.3
Fully completed CMG MI application for Insurance, signed and dated by authorized representative of the Master Policyholder
Uniform Residential Loan Application (Fannie Mae 1003/Freddie Mac 65)
Uniform Underwriting and Transmittal Summary (Fannie Mae 1008/Freddie Mac 1077)
Residential Mortgage Credit Report (RMCR) or a one-repository, in-file credit report
Residential Appraisal Report ( refer to CMG MI Program guidelines for Appraisal requirements)
Fannie Mae DU Findings/Freddie Mac LP Feedback (if DU /LP approved)
®
Pre-Qualification Underwriting
CMG MI‟s Pre-Qualification program is designed to help both credit unions and their members determine creditworthiness and the maximum eligible mortgage amount before selecting a home. The risk associated with a pre-qualification is no different from a standard submission; CMG MI‟s standard underwriting guidelines apply.
CMG MI Underwriting Guidelines Manual
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2.4
Insurance Coverage and Premium Plans 2.4.1
Standard Coverage
Standard coverage, the basic mortgage insurance coverage plan limits the credit unionâ€&#x;s initial exposure on a mortgage loan. Standard Coverage is available for all loan types that CMG MI insures. Under Standard Coverage, a credit union selects a specific percentage of coverage (i.e., 20%, 25%, etc.), called the optional settlement percentage. Should a claim occur under Standard Coverage, CMGMI will apply the optional settlement percentage to the sum of the outstanding loan balance, delinquent interest, and other claimable expenses. CMG MI also has the right to acquire the property by paying the total claimable expense rather than the optional settlement percentage. Although the actual rates may differ, the products listed below are available on all of the insurable loan types. The types of premium payment plans offered by CMG MI are as follows:
2.4.2
Monthly / EZ MonthlySM
These plan rates are annualized and are for first year and renewals through year ten. The MONTHLY plan allows the MI premium to be remitted to CMG MI on a monthly basis instead of an annual premium amount up-front. Premium is due at closing. EZ Monthly plan allows the monthly premium payments to be made in arrears. No monies due at closing. This assists in reducing the initial closing costs for the loan. The actual premium amount due is calculated by multiplying the annualized premium by the loan amount and dividing the result by 12. Please note that because the EZ monthly premium payments are made in arrears, additional premium will likely be due at policy termination.
2.4.3
CMG Single Premium
This plan allows greater flexibility for both credit unions and members. The CMG Single premium plan offers members the option to pay the premium in full or to finance their mortgage insurance into the loan amount at closing.
2.4.4
Super Split SM (7/2010)
The Super Split premium plan allows a portion of the insurance premium to be paid upfront at coverage inception, followed by a lower cost monthly premium payment obligation. This plan offers greater flexibility for both lenders and borrowers. It offers homebuyers the option to finance their initial MI premium payment into their loan amount, while decreasing their monthly payments. The upfront premium can also be paid at closing or financed into the loan amount.
2.4.5
Refund Options
Monthly refunds are based on unearned premium. Annual plan refunds are pro rata. CMG Single and Super Split refunds are calculated using a schedule available at cmgmi.com. For information regarding HPA termination refunds, see our schedule at cmgmi.com.
CMG MI Underwriting Guidelines Manual
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3.
Loan Matrices, Products and Programs
3.1
Owner-Occupied Loans Conforming Market (7/2010)
Purchase or Rate/Term Refinance
1 Unit SFD (attached detached & PUD‟s)
Full Doc LTV/CLTV
Loan Amount
Min Credit Score
Max DTI
95/95
$417,000
660
41
680
45
660
41
680
45
90/90
85/85
Condos
Manufactured Homes
Co-ops
2 Units
Full Doc Conforming Jumbo
$417,000
$417,000
660
41
680
45
LTV/CLTV
Loan Amount
Min Credit Score
Max DTI
CMG Single Premium Payment Plan
Not Eligible
90/90
$417,001$625,500
720
45
680
90/90
$625,501$729,750
720
45
700
85/85
$625,501$729,750
700
45
680
95/95
$417,000
680
45
Not Eligible
90/90
$417,000
680
45
Not Eligible
85/85
$417,000
680
45
90/90
$417,000
680
45
Not Eligible
85/85
$417,000
680
45
Not Eligible
90/90
$417,000
680
45
Not Eligible
85/85
$417,000
680
45
Not Eligible
95/95
$417,000
680
45
95/95
$417,001$533,850
680
45
90/90
$417,000
680
45
90/90
$417,001$533,850
680
45
85/85
$417,000
680
45
85/85
$417,001$533,850
680
45
85/85
$417,001$625,500
700
45
3-4 Units
Not Eligible
Not Eligible
Cash Out Refinance
Full Doc
Full Doc Conforming Jumbo
1 Unit SFD (attached detached, mfg home, 2 unit & PUD‟s)
90/90*
$417,000
740
45
Not Eligible
85/85**
$417,000
700
45
Not Eligible
*M AXIMUM $50,000 CASH BACK TO THE MEMBER AT CLOSE. **M AXIMUM $75,000 CASH BACK TO THE MEMBER AT CLOSE.
CMG MI Underwriting Guidelines Manual
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Owner-Occupied Loans Distressed Market (7/2010) Purchase or Rate/Term Refinance
Full Doc
Full Doc Conforming Jumbo
LTV/CLTV
Loan Amount
Min Credit Score
Max DTI
LTV/CLTV
Loan Amount
Min Credit Score
Max DTI
1 Unit SFD (attached detached & PUD‟s) Properties located in all other states
90/90
$417,000
680
41
90/90
$417,001$625,500
740
41
85/85
$417,000
680
41
85/85
$417,001$625,500
740
41
1 Unit SFD (attached detached & PUD‟s) Properties located in Arizona, California, Florida, Michigan, Nevada, Puerto Rico
90/90
$417,000
680
41
90/90
$417,001$625,500
760
41
85/85
$417,000
680
41
85/85
$417,001$625,500
760
41
Condos
90/90
$417,000
680
41
Not Eligible
Co-ops
90/90
$417,000
700
41
Not Eligible
For Jumbo loan amounts: Properties located in MSA/MSAD on our distressed markets list and in the states of Arizona, California, Florida and Michigan must have minimum 760 loan representative credit score regardless of property type Properties located in Nevada must have minimum 760 loan representative credit score regardless of property type Properties located in Puerto Rico and in all other MSA/MSADs on our distressed markets list must have minimum 740 loan representative credit score regardless of property type
OWNER-OCCUPIED CONSTRUCTION TO PERMANENT LOANS CONFORMING MARKET (7/2010) Full Doc
Construction Purchase or Construction Refinance*
Full Doc Conforming Jumbo
LTV/CLTV
Loan Amount
Min Credit Score
Max DTI
95/95
$417,000
680
45
90/90
$417,000
680
45
LTV/CLTV
Loan Amount
Min Credit Score
Max DTI
Not Eligible 90/90
$417,001$625,500
700
45
90/90
625,501729750
720
45
*NOT ELIGIBLE FOR PROPERTIES SUBJECT TO CMG MI’S DISTRESSED MARKETS POLICY.
CMG MI Underwriting Guidelines Manual
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3.2
Second Home Loans (7/2010) Purchase or Rate/Term Refinance
Full Doc
LTV / CLTV Loan Amount 1 Unit SFD (attached, detached, condos, PUD's)
Co-ops
Not Eligible
95/95 90/90
$417,000
700
85/85
$417,000
700
Not Eligible
95/95
417,000
90/90
700
Not Eligible
2-4 Units, mfg home CASH OUT REFINANCE
Min Credit Score
LTV / CLTV Loan Amount
Min Credit Score
Not Eligible
*NOT ELIGIBLE FOR PROPERTIES SUBJECT TO CMG MI’S DISTRESSED MARKETS POLICY.
3.3
A-Minus Loans (3/2008)
Not eligible for mortgage insurance.
3.4
Limited Documentation Loans (6/2008)
Not eligible for mortgage insurance.
3.5
Loan Products 3.5.1
Fixed-rate/Fixed Payment Loans
Fixed-rate/fixed payment loans are fully amortizing and do not contain any provisions for rate or payment adjustments.
3.5.2
Growing Equity Mortgage (GEM)
GEMs are fixed-rate, adjustable payment loans which allow low beginning payments that increase on a predetermined schedule over time. As payments increase, equity build-up is accelerated; hence, the amortization term is reduced.
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3.5.3
Graduated Payment Mortgage (GPM)
A Graduated Payment Mortgage (GPM) is typically a 30-year, fixed-rate mortgage aimed at increasing affordability by offering lower initial payments. The first year's payments are interest-only. Payments increase by 1-2% annually for a specified period of time (generally 4 to 8 years). On the last change date, the new monthly payment will be sufficient to fully amortize the outstanding principal balance over the remaining term of the loan. An acceptable GPM may begin with interest-only payments; payments increase by 1-2% annually for a specified period of time. Once the payment becomes sufficient to fully amortize the loan, the monthly payment is fixed for the remaining term of the loan. GPMs that include scheduled negative amortization (where monthly P&I payments in the initial years are insufficient to fully amortize the loan) are not eligible for mortgage insurance. Following are eligibility criteria for the GPM mortgage:
Because certain interest rates will never become fully amortizing based on a 2% annual payment increase, the minimum interest rate on a GPM loan is 5.50%.
GPM loans are available for both purchase and refinance transactions.
Secondary financing is permitted with GPM loans as long as combined loan-to-value ratios do not exceed 95%.
Members may be qualified at the initial, lower "interest only" payment using qualifying ratios of 28/36% (or 33/36% for loans under Affordable Housing programs).
A minimum of one month's reserves are required for all GPM loans.
The member profile should represent average or better risk and his or her financial condition should demonstrate the ability to manage increasing payments.
Property must be member‟s owner-occupied, primary residence.
3.5.4
Combined Asset Mortgages (CAM)
The Combined Asset Mortgage (CAM) involves a secured asset in addition to the real estate collateral, hence reducing the member's cash down payment. The pledge can be a savings Certificate of Deposit, annuity, or other "non-real estate" collateral and can be provided by the member or a third-party. Following are eligibility criteria for the CAM mortgage:
The property must be an owner-occupied, primary residence.
Cash out transactions are not permitted.
Subordinate financing is not permitted.
Maximum gross LTV (real estate collateral only) to 100%.
Maximum net LTV (real estate value less pledged CD) to 95%.
Minimum pledge amount is 5% (or a combination of pledged funds and cash down payment).
For New York, the maximum gross LTV is 97% with a minimum of 3% cash down payment.
Minimum Funds required from the member – no cash from the member‟s own funds, if there is a first-party pledge; 3% cash from the member‟s own funds, if there is a third-party pledge. Member‟s funds can be applied to down payment or closing costs.
New York requires a minimum of 3% cash down payment.
Seller contributions: Up to 3% for LTVs from 90.01% to 95%; up to 6% for LTVs from 85.01% to 90%; may cover non-recurring closing costs only.
Eligible loan programs are the fixed-rate/fixed payment, fixed-rate with temporary buydown and positively amortizing ARMs. The maximum term is 25 to 30 years.
Eligible property types are 1 unit single-family attached, detached, condominiums, PUDs, and manufactured homes.
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The pledge may be first-party (pledged by member) or third-party (pledged by immediate family member, nonprofit organization, or by employer in the context of a relocating member).
The pledge is held by the originating credit union or, at the credit unions discretion, may be transferred to another institution.
The pledge account secures the loan by means of a Pledge Agreement, a security agreement that secures the credit union‟s interest in the non-real estate collateral.
The pledged account must remain as collateral for ten years; however, it may be eligible for release after seven years if CMG MI requirements to release the secured collateral have been met:
May be considered after seven years for a 30-year mortgage and after five years for a 25-year mortgage.
Loan must be current.
No 60-day delinquencies in the last 12 months.
The current LTV must be at or below the original net loan ratio.
For consideration, submit the letter of request, current appraisal (within 6 months), and loan history showing the current principal balance and activity for the last 12 months to the Customer Service Department.
Earned interest can be withdrawn or reinvested.
Under the Pledge Agreement, the pledgor agrees that the original principal amount of the pledge can be used to pay down the loan if the member defaults on the mortgage.
The Underwriting criteria and premium rates are based on the net loan-to-value ratio. The premium calculation is based on the gross loan amount.
CMG MI will provide a maximum of 30% coverage.
CMG MI‟s standard insurance application package plus Pledge Agreement or CAM (Combined Asset Mortgage) worksheet is required.
Except as specified above, CMG MI's standard underwriting guidelines will apply.
3.5.5
Fixed-Rate Annuity, Life Insurance Policy & Financial Guarantee Pledged CAMs
These products are available on a negotiated basis. The customer is responsible for ascertaining the applicability of tax codes as it relates to the deduction of interest for members.
3.5.6
Balloon Payment Mortgages
Balloon payment loans have periodic, level installments of principal and interest that do not fully amortize the loan over the loan term. The balance of the mortgage is due in lump sum at the end of the term. CMG MI will insure loans with balloon payments based on the following:
Balloon loans with terms of five years or more are priced using the fixed-rate category.
Unless the credit union offers either a new loan or modification of the existing loan, mortgage insurance coverage will terminate at the end of the loan term.
CMG MI will not cover default of the balloon payment unless the credit union offers to renew the loan or offers new financing. At the end of the loan term, coverage may only be renewed if the loan has been modified or extended. Unless prior-approved under Fannie Mae or Freddie Mac‟s Balloon Reset Eligibility Criteria, CMG MI reserves the right to approve any extension or modification of the loan terms. Notification, which includes the terms of the extension or modification, must be sent to the local CMG MI Underwriting Network for approval. If the loan is not modified or extended, and coverage is terminated, coverage will be offered only if a new loan is written for the member(s) and a new insurance application package is approved.
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CMG MI is not liable for failure of the member to pay any “balloon” or non-level payment. CMG MI does not insure against the inability to refinance the balloon, but only against the inability of the member to make the installment payments.
3.5.7
Interest Only Loans (IO)
Not eligible for mortgage insurance. Interest Only loans can be a fixed payment/fixed-rate or ARM and feature an initial period where the member is paying interest, but no principal, resulting in a monthly mortgage payment that is below a normally amortizing loan. Interest Only (IO) loans represent an increased risk due to:
Lack of equity build-up in the early years of the loan
Payments when they become fully amortizing will be higher than those of a standard amortizing loan and may result in payment shock to the member
3.5.8
Option Payment Mortgage (4/2008)
Not eligible for mortgage insurance.
3.5.9
Adjustable Rate Mortgages (ARMs)
ARMs provide for a variable interest rate which is tied to an index and will adjust at specified periods of time and in an amount which is based on movement of the index. Payments adjust either concurrent with the interest rate adjustments or at other intervals, as specified in the Note. Credit unions frequently offer initial interest rate discounts (“teaser rates”) in order to attract members. A discount or teaser rate exists when the initial rate is less than the program rate, which is determined by the current index value plus the margin (i.e., the Fully Indexed Accrual Rate/FIAR). Following is a description of features and an overview of CMG MI‟s philosophy for ARM loans:
The ARM index used must be beyond the control of the credit union, easily verifiable by the member, and published on a regular basis. The most common indices are treasury-related indexes, which include indexes based on 1 year Constant Maturity Treasury (CMT) securities and the 12 Month Treasury Average (MTA); the 11th District Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR) index.
The Fully Indexed Accrual Rate (FIAR) is the index value plus maximum margin applied during the life of the loan.
Annual payment increases are limited to 15% or a 2% interest rate change, whichever is greater. 3- and 5year ARMS are limited to an aggregate interest adjustment equivalent to 1% per year. A maximum six percentage point (6%) increase over the initial payment rate (or 5% over the FIAR) during the life of the loan is allowed. If the initial payment rate is less than the FIAR on an ARM, the maximum allowable discount, or rate concession is as outlined in the following table.
Positively Amortizing ARM
300 bp below FIAR
Potential Negative Amortizing ARM
200 bp below FIAR
Short Term ARMs are defined as loans with a one to three year fixed-rate period.
The Hybrid ARM starts with an initial fixed-rate period; commonly 5, 7 or 10 years -- before they turn into a traditional one-year ARM for the remainder of a 30-year term.
Qualifying Rates
Short Term ARM – qualify using the greater of the initial rate or the Fully Indexed Accrual Rate (FIAR).
Hybrid ARM – qualify using the start rate.
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3.5.10
Negative Amortization – Potential and Scheduled
Potential and scheduled negative amortization ARMs are not eligible for mortgage insurance. Negative amortization occurs when the payment rate is less than the interest rate and; therefore, the payment is not sufficient to pay the interest due on the loan and the shortfall is added to the total principal outstanding. This event could be driven by several different situations, such as:
An increase in the interest rate occurs without a corresponding increase in the payment rate; or
An increase in the interest rate occurs and the payment cap restricts the payment from increasing to an amount sufficient to pay the interest due; or
The member has the option to pay an amount less than the amount required to pay the interest due.
Negative amortization can be classified into two types, scheduled and potential. Scheduled Negative Amortization occurs when the underlying structure of the transaction provides for a pre-defined payment amount and repayment schedule where the payment is not sufficient to cover the interest due at some time during the term. Potential Negative Amortization occurs when the underlying structure of the transaction provides, at some time in the future, the opportunity for one of the situations listed above to occur. Typically these situations are associated with adjustable rate mortgages. Since we do not know what the exact interest rate will be (at the change date) when the transaction is initiated, we must define the event as on that may potentially occur. If potential negative amortization exists, the amortized loan balance may not exceed 115% of the original loan balance. Scheduled negative amortization is not eligible for mortgage insurance.
3.6
Loan Programs 3.6.1
EZ Refinance Program
The CMG MI‟s EZ Refinance program makes refinancing certain loans fast, easy, and convenient. An instant approval may be provided with a minimum of documentation from the original loan file Only loans currently insured by CMG MI may be considered for eligibility under the program, which is designed to take advantage of the favorable risk characteristics of the loan being refinanced. Loans meeting all of the following program criteria are eligible for coverage without CMG MI‟s prior underwriting approval:
The CMG MI certificate extending coverage to the loan being refinanced is in-force and the loan is current.
The property type is the same as the original insured loan.
The occupancy is the same as the original insured loan. If the occupancy was originally insured as a second home or investment property, the occupancy type can be changed to primary if the property is the borrower‟s primary residence.
The new refinance is to the original member(s); no assumptions.
The new loan must be a fixed-rate/fixed-payment or positively amortizing ARM.
No more than 2% cash back to the member.
If the payment is increasing due to a refinance from an ARM to a fixed, a maximum 25% increase in the P&I is permitted.
The maximum LTV/CLTV for the new loan is 103%, subject to state restrictions.
Junior liens must be either paid off with member‟s own funds or may be re-subordinated, provided the maximum CLTV requirements are met.
For loan amounts less than or equal to $417,000 - 4% of the existing loan‟s unpaid principal balance plus accrued interest, or $5000, whichever is less.
For loan amounts greater than $417,000 – 4% of the existing loan‟s unpaid principal balance plus accrued interest or $10,000, whichever is less.
Minimum 580 credit score.
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The lender must determine that the member has a reasonable ability to repay his/her total debt obligations. New 1003 and 1008 o Income and assets will be used as stated on 1003 Verbal verification of employment A new credit report with a current credit score is required. If the existing principal and interest payment increases by more than 20% of the principal and interest payment that was most frequently made by the borrower during the most recent 12 months (or since the Note Date of the loan being refinanced if the Note Deed is less than 12 months prior to the application date of the refinanced loan), income and employment must be verified and the maximum DTI is limited to 55%. Required income documentation verification: o Salaried borrowers – minimum of one paystub indicating the most recent 30 days‟ earnings and year-to-date earnings and a verbal VOE o Self-employed and other non-salaried borrowers – minimum of one year‟s tax return and a verbal VOE.
The appraised value of the new loan must be indicated on the application. If the value is based on the original appraisal, the Credit Union must represent and warrant that the value has not declined since the original appraisal date. This can be evidenced by providing a recertification of value, AVM or BPO. If the Credit Union is not able to provide the representation and warranty, a new appraisal is required.
CMG MI will consider insuring the new loan without implementing the Distressed Markets Policy or other underwriting guideline changes, if the loan being refinanced is currently insured with CMG MI and the refinance improves the member‟s and CMG MI‟s position. The loan must be submitted to the Underwriting Network for review and approval if current guidelines are not met.
Exceptions If any exceptions to current guidelines or eligibility are required, the loan must be submitted to the Underwriting Network for review and approval. Documentation Requirements CMG MI EZ_REFI Program Application fully completed, signed and dated by an authorized representative of the Master Policyholder. Uniform Residential Loan Application and Uniform Underwriting Transmittal Summary with income and assets. The original appraised value must be provided. The credit union is warranting that the property value has not declined since the appraisal date or a new appraisal and the credit union represents that the value is appropriately supported by the appraisal.
Current Certificate To determine if the member‟s loan is currently insured by CMG MI check via e-servicing at www.e-cmgmi.com or call CMG MI Customer Service at 415.369.8804.
Trailing Co-Borrower Income Trailing Co-Borrower Income is not an acceptable form of income but could be a compensating factor that might be considered. The amount of the trailing co-borrower income used does not exceed 33% of the total qualifying income. The income is not from self-employment. The trailing co-borrower was continuously employed in the same occupation for two years immediately preceding the relocation. The trailing co-borrower provides a statement of intent to work in the new location and describes the occupation for which he or she intends to seek employment.
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It is reasonably determined that the employment opportunities and earning potential for the trailing co-borrower are comparable or better than the opportunities in the former location. Debt-to-income ratios are 33/38%. The property is an owner-occupied, primary residence.
3.6.2
Home Affordable Refinance Program (HARP)
The CMG MI CU Home Preservation Refinance “HARP Same Lender/Servicer Program” is available to assist our Credit Union servicers with eligible refinances under Fannie Mae‟s Home Affordable Refinance Program and Freddie Mac‟s Relief Refinance Program (together referred to as “HARP”). Under this program, the submitting lender must also be the current servicer of the existing mortgage and that mortgage must be currently insured by CMG MI. The Refinanced Loan that falls within the eligibility guidelines of the CMG MI‟s HARP Same Lender/Servicer Program is provided mortgage insurance coverage through a modification to the certificate of insurance for the existing loan, and a new certificate number will not be issued. The premium rate on the modified certificate is not changed. Because this Program provides modification to existing insurance coverage, CMG MI‟s current Program Guidelines and Distressed Markets Policy do not apply to the Refinanced Loan. To be eligible for coverage modification, the Refinanced Loan must improve the Member‟s financial position by reducing the mortgage payment, interest rate or principal balance, replacing an ARM with a fixed rate, or providing a more stable payment product to the Member. The CMG MI CU Home Preservation Refinance “HARP New Lender/Servicer Program” is available to assist our Credit Union servicers with eligible refinances under Fannie Mae‟s Home Affordable Refinance Program and Freddie Mac‟s Relief Refinance Program (together referred to as “HARP”). Under this program, the submitting lender must also be the new servicer of the existing mortgage and that mortgage must be currently insured by CMG MI. The Refinanced Loan that falls within the eligibility guidelines of the CMG MI‟s HARP New Lender/Servicer Program is provided mortgage insurance coverage through a modification to the certificate of insurance for the existing loan, and a new certificate number will not be issued. The premium rate on the modified certificate is not changed. Because this Program provides modification to existing insurance coverage, CMG MI‟s current Program Guidelines and Distressed Markets Policy do not apply to the Refinanced Loan. To be eligible for coverage modification, the Refinanced Loan must improve the Member‟s financial position by reducing the mortgage payment, interest rate or principal balance, replacing an ARM with a fixed rate, or providing a more stable payment product to the Member. Please reference guidelines to determine which program your loan meets at cmgmi.com.
3.6.3
Seasoned Loan Program
CMG MI‟s Seasoned Loan program was designed to provide mortgage insurance coverage on loans that were not insured at the time of origination and when a subsequent need has been identified by the credit union (i.e., discovery of an oversight or a secondary market requirement). A seasoned loan must be equal to or greater than twelve months old. A seasoned loan is charged a standard premium rate. Discount premium rates or underwriting fees will not be considered. A loan less than twelve months old is not considered “seasoned” and requires current loan documentation (updated documents or recertification of the original package) together with a current loan payment history from the date of loan origination. Standard premium rates are charged. Discount premium rates or underwriting fees will not be considered. When underwriting a seasoned loan, the following documentation is required:
CMG MI Application-for-Insurance that is signed and dated by the credit union.
Copy of the original loan application.
Copy of the original credit report.
Copy of the original appraisal and subject property photographs.
A minimum 12-month payment history; there should be no more than one 30-day late payment in the last 12 months (a payment is only considered late if it is over 30 days late). If there has been a late payment, the loan must have been current for the most recent six months.
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If the property is located in a state with a declining market, or at the underwriter‟s discretion, a current appraisal may be required.
Seasoned Renewals are treated the same way as seasoned loan requests. Bulk Mortgage Insurance Seasoned loans can be reviewed as a bulk transaction; however, these must be submitted to the corporate CMG MI office for approval. First Time Homebuyers Must meet CMG MI Conforming & Non-Conforming program Guidelines. Please refer to CMG MI‟s Distressed Markets Policy to determine if the property is subject to further guideline restriction. Guidelines are located at http://www.cmgmi.com/guidelines Resources: Pre-Purchase Homebuyer Education Pre-purchase homebuyer education teaches members the benefits and responsibilities of homeownership. The member is required to complete training in an acceptable pre-purchase education program which addresses the following topics:
Preparing for homeownership: Determining when the right time to buy is; determining housing needs (size, features, etc.), and selecting a home
Benefits and risks of homeownership
Budgeting and determining homeownership affordability
Understanding credit
Types of mortgages and financing available
Home warranty programs
Fees, expenses, and costs of mortgage financing
Property appraisal
Property inspections
Understanding the underwriting and closing processes
Settling in: maintenance and home repairs
Financial difficulties and counseling
Effective 3/15/2010, CMG MI no longer provides this service. Many community-based organizations, including housing finance agencies, offer home buyer education services directly to members. Please check with local offices of housing and community development for a list of education providers. Early Delinquency Intervention and Counseling Early delinquency intervention and counseling are keys to the successful servicing of 97% LTV loans. In many instances, first-time homebuyers need help adjusting to the financial responsibility of homeownership. Through participation with CCCS, who‟s network of counselors serve as confidential, third-party financial counseling agents; CMG MI ensures that members make a smooth transition to homeownership. CCCS offers budget counseling, debt management, credit counseling, and default counseling in an effort to provide guidance and alternatives to foreclosure. These services are available at no cost to the member or credit union. Through a “welcome” letter, CMG MI invites new homebuyers to avail themselves of this free counseling service. They are encouraged to seek consumer credit and financial counseling at any time. Their loan need not be delinquent in order to receive this service. When a 97% LTV loan payment becomes 16 days past due, the credit union is required to report the delinquency to CMG MI (this is referred to as “Enhanced Servicing” and not a substitute for a CMG MI Notice of Delinquency). CMG MI notifies CCCS who contacts the member, first by letter and then by telephone. CCCS seeks to identify specific financial issues and help the member develop an action plan for resolution. CCCS will also contact the credit union to discuss possible alternative actions.
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CMG MI‟s goal is to keep members in their homes. We believe that delinquent loans have a much greater chance of occurring when early delinquency measures, including CCCS counseling services, are employed. The credit union is responsible for obtaining the member‟s signed consent which allows them to release credit information to a third party. This allows CMG MI to release the member‟s credit information to CCCS in the event of a late payment.
3.6.4
Instant Modification Program
CMG MI‟s Instant Modification program offers our customers an easy and efficient way to modify CMG MI insured loans. The CMG MI Instant Modification Program is for loan instruments that contain a reset or conversion clause, such as a balloon reset or an ARM loan with a conversion to fixed rate. Certain loans contain a conversion option clause which allows the loan to convert from a potentially negative amortizing ARM to a positively amortizing ARM; or from an ARM to a fixed-rate/fixed-payment loan. Some credit unions have programs that allow for a modification of the note on certain ARM products to change the interest rate for the remaining term of the loan, locking that rate for a specified timeframe. If a loan is currently insured by CMG MI and the credit union wishes to continue coverage, CMG MI will agree to modify the terms of the loan without further underwriting consideration, if the following criteria are met:
The existing Note is being modified and no new Deed of Trust will be executed by the member(s).
The loan is not being assumed by a new member(s).
The modification is to either a fixed-rate/fixed payment loan or a positively amortizing ARM with maximum interest rate changes of 2% per year
Monthly payment increase does not exceed 25%.
No other changes in the loan have been made within the past 12 months (unless the previous change resulted from an ARM with convertible features).
No "new money" is being advanced.
Loan payments are current.
The mortgage insurance premium payment is current and coverage is in full force.
Any loans that do not meet the above modification criteria must be prior approved by CMG MI. To obtain a review, complete the modification form and submit the documentation to the CMG MI Underwriting Network for prior approval. For loans that meet the modification criteria, the credit union must submit the completed Instant Modification Form to the CMG MI Underwriting Network. CMG MI will provide an amendment to the policy or a signed copy of the Modification Form as verification that the modification has been processed and approved. In instances where the loan modification results in a premium rate change, the new renewal rate will be applied at the next renewal period. The following transactions are NOT considered modifications:
Removing the name of an existing member.
Adding a new member.
Increasing the loan amount (unless the loan was negatively amortizing and the conversion option is being exercised), which may result in an increased premium.
Property address change, i.e. releasing a portion of the property (this is considered a partial release/reconveyance).
All modifications that do not conform to the eligibility criteria shown above require updated loan documents that must be submitted for underwriting and approval by CMG MI.
3.6.5
Loan Modification Program
The CMG MI CU Home Preservation Loan Modification Program offers Credit Unions a loss mitigation intervention on imminent risk of default and delinquent loans that are CMG MI insured to provide relief to their
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member(s) who are in imminent risk of becoming delinquent or are delinquent. A member is in imminent risk of default if he/she is likely to become delinquent on a loan due to a hardship such as, but not limited to, illness, job loss, or rate increase on an existing loan, making the member unlikely to continue making timely payments. CMG MI-insured Fannie Mae, Freddie Mac, other investors, and portfolio loans are eligible under this program. This modification program does not replace the CMG MI Instant Modification Program which is available for modification of terms specified in the loan instrument, such as balloon resets and ARM conversions, or the CMG MI EZ-Refinance Program. A CMG MI-insured loan can be modified by the lender or servicer under the CMG MI CU Home Preservation Loan Modification Program to allow the lender or servicer to provide relief to a member at risk of becoming delinquent or is delinquent. The loan that falls within CMG MI‟s Home Preservation Loan Modification Program is treated as a modification to an existing certificate and a new certificate number will not be issued. The premium rate on the modified certificate is not changed. Since CMG MI is insuring the existing loan, loans that fall under this program are not subject to CMG MI‟s current Program Guidelines and Distressed Markets Policy, provided that the modification improves the member‟s financial position. Detailed information regarding all loan modifications offered by CMG MI is available at cmgmi.com. Please reference requirements to determine which program your loan meets.
3.7
Assumptions CMG MI will continue to insure a mortgage assumption, provided that the assuming member meets current CMG MI underwriting criteria. CMG MI must approve the assumption in writing. Under the terms of the CMG MI First Lien Master Policy, CMG MI reserves the right to re-underwrite the risk whenever there is a change in members. The credit union must submit the following:
Notice of Assumption Form
Completed and signed Residential Application Form
Credit Report
Income and Employment Verification
Verification of Funds for Closing
Signed Property Purchase/Sale Agreement
ASSUMPTION TYPES Release of Financial Liability The assuming member must qualify for mortgage insurance using the current pricing and guidelines. CMG MIapproval must be granted prior to transfer of title or addition of member to promissory note. Exempt Transactions Certain notes/mortgages contain a due-on-sale clause which does not allow assumption. Certain transactions are exempt from enforcement of the due-on-sale clause. They are as follows:
Assumption without release of financial liability of current member.
Surviving party on the death of a joint tenant.
Transfer to a junior lien holder as the result of foreclosure or deed-in-lieu of foreclosure of a subordinate lien.
Transfer of the property (or beneficial interest in a trust) to the relative of a deceased member, as long as the transferee will occupy the property.
Transfer of the property (or beneficial interest in a trust) to an immediate family member, as long as the transferee will occupy the property.
Transfer of the property (or beneficial interest in a trust) to the spouse of the member under a divorce decree, legal separation agreement or incidental property settlement, as long as the transferee will occupy the property.
Transfer to an unrelated co-member who has owned the property under joint tenancy or tenancy in common, as long as the transfer occurs more than 12 months after the mortgage closed and transferee will occupy the property.
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Transfer of the property (or beneficial interest in a trust) into an Intervivos Revocable Trust, so long as the member is the individual who established the trust, will be the beneficiary of the trust and will occupy the property.
If the assumption is the result of a due-on-sale clause and complies with the requirements listed above, the credit union is required to only submit a completed and signed CMG MI Notice of Assumption (Form CMG 2203 (7/2008)). Declined Transactions The credit union must be made aware that if the property transfers without CMG MI approval, coverage will be terminated on the date of transfer. In the event of termination, a short rate or prorated cancellation (depending on product type) and a refund of appropriate premium are coordinated with the Policy Servicing Department.
3.8
Partial Release of Collateral CMG MI requires that credit unions have a valid first lien on each secured property. The CMG MI Commitment and Certificate of Insurance may be invalidated if CMG MI has not been notified and approved an easement or encroachment on the property or if a partial release of collateral has been granted without CMG MI‟s prior written approval. All Partial Release requests will be completed by the Credit Risk Management (Quality Control) Department. A partial release may be requested due to division of the property (a lot split) or condemnation of a portion of the property through eminent domain. Subject to receipt and satisfactory review of all of the following documentation, CMG MI may approve a partial release and process the transaction as a request for a modification.
New appraisal report showing value of the property before and after the release.
The appraiser‟s statement that the remaining secured property is suitable for residential occupancy.
Copy of the survey of the land.
Contract of Sale of the released portion of the land.
A detail of the distribution of any cash consideration paid for the release, including the amount that will be applied to the outstanding balance of the loan (or that will be applied to cure any delinquency).
Mortgage payment history.
Re-calculation of the loan-to-value ratio to determine that, after release of the property and any pay down of the outstanding debt, the new LTV does not exceed the original insured loan-to-value ratio.
When the loan amount is reduced as a result of a pay down and a premium adjustment is required, the credit union will be notified. At that time CMG MI will provide a new Certificate of Insurance and bill or refund for the adjusted premium amount.
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4
Automated Underwriting Systems
Automated Underwriting Systems combine an objective assessment of key mortgage characteristics with streamlined processing requirements to provide fast, accurate and consistent recommendations, thus enabling credit unions to underwrite a mortgage faster and more accurately. This consistency and objectivity allows the credit union to expand its capacity to accurately evaluate and underwrite mortgage applications that have varying degrees of risk – and will enable the credit union to approve more mortgages without increasing its risk. ®
®
®
Fannie Mae‟s Desktop Underwriter (DU ) and Freddie Mac‟s Loan Prospector (LP) automated underwriting systems require submission of specific data to return an underwriting and/or documentation recommendation. Details for ® submission of required data elements can be found in the DU and LP User Guides. As information is verified, certain data elements must be resubmitted to the AUS system. ®
Note: CMG MI‟s eligibility, guidelines and Distressed Markets Policy supersede DU /LP decisions/findings.
CMG MI’S POSITION (12/2008) CMG MI does not automatically approve loans for mortgage insurance based solely on decisions obtained from Agency systems. ®
®
®
Loans submitted and approved by Fannie Mae‟s Desktop Underwriter (DU ) and Freddie Mac‟s Loan Prospector (LP) must meet CMG MI‟s Construction-To-Permanent Program Guidelines. The loan must meet CMG Mortgage Insurance Company‟s (“CMG MI”) Conforming and Non-Conforming Program ® ® Guidelines, regardless of all Fannie Mae‟s Desktop Underwriter (“DU”) and Freddie Mac‟s Loan Prospector (“LP”) recommendations. ®
®
The DU Findings and LP Feedback Certificate must display the trademarked two-word response and the DU /LP case ® number. The DU /LP decision must be provided when submitting the loan for mortgage insurance. All loans are subject to ® the CMG MI Distressed Markets Policy; DU EAIII/Eligible is not allowed. ®
Document Efficiencies (DU /LP only) One of the following documentation sets will be required (employment gaps explained when required by the findings): A verbal Verification of Employment (completed prior to closing); and Verification of Employment, or One month's paystubs, which contains at least 30 days of year-to-date earnings, and a verbal Verification of Employment; or One paystub and the most recent year's W-2s and a verbal Verification of Employment, or One year's personal federal tax returns, or Two years' personal federal tax returns, or Two years' personal and two years' business federal tax returns (if self-employed)
A document efficiency of only a verbal Verification of Employment is not acceptable; at a minimum a paystub containing 30 days‟ earnings is required. All other document efficiencies are acceptable
Assets for down payment, closing costs and reserves must meet CMG MI requirements; however, they may be ® documented using the documentation permitted by DU /LP All other automated underwriting system decisions (proprietary or custom) must meet CMG MI‟s eligibility and guidelines.
4.1
Desktop Underwriter® Version 7.0 and higher (12/2008) ®
CMG MI does not automatically approve loans for mortgage insurance based solely on decisions obtained from DU . ® Loans submitted and approved by DU must meet CMG MI‟s current eligibility and guidelines
All loans are subject to the CMG MI Distressed Markets Policy; DU EAIII/Eligible is not allowed
A document efficiency of only a verbal Verification of Employment is not acceptable; at a minimum a paystub containing 30 days‟ earnings is required. All other document efficiencies are acceptable
®
Ineligible:
®
DU Refer, Refer with Caution IV, out of Score, and EA I, II, and III- Version 5.7 or earlier
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4.1.1
Resubmission Requirements (8/2008)
Some loans will not require additional underwriting submissions as long as the requested documentation supports ® the information submitted to DU . Only one tolerance may be used on any loan case file. If the loan contains more than one of the tolerances listed below, all of the items in the case file must be updated and resubmitted to ® DU . FRM -- Interest Rate
For an approved fixed-rate loan, if the actual interest rate ® decreases from that used by DU to underwrite the loan, no resubmission is required. Cannot exceed the maximum interest rate detailed on the findings.
ARM – Interest Rate
The interest rate change cannot result in a total debt ratio increase of more than 2%.
Total Income
If the verified income is less than the income submitted to DU by more than 5% of the member‟s total income the income must ® be resubmitted to DU .
®
®
If the income is higher, the date must be updated in DU and resubmitted. ®
Salaried versus Self-Employed
DU findings must accurately reflect the member‟s status. If ® self-employed, DU findings must also state self-employed.
Undisclosed Debts & Discrepancies with Payment Amounts
Must be reconciled to the loan application and DU findings.
Debt
Undisclosed debts on the CBR that are not on the 1003 or discrepancies must be reconciled. After reconciliation the file must be resubmitted if the difference affects the total expense ratio by more than 2%.
Assets
The specific amount of assets required by DU must be verified at the specified amount.
®
®
For Refinance Transactions:
4.1.2
Increase
The loan amount cannot increase more than $500 or 1% of the loan amount, whichever is less.
Decrease
The loan amount may decrease 5% of the loan amount.
Validation and Data Integrity Requirements (12/2006) ®
If the DU findings are not followed, limited representations and warranties may be lost. That is why the accuracy ® of the data submitted to DU must be reviewed carefully to ensure there was nothing missed that might impact the ® DU underwriting recommendation. ®
The credit report must be reviewed to make certain that the data used by DU to evaluate the loan was complete ® and accurate since information not considered by DU may result in a different recommendation. Any liabilities disclosed by the member that do not appear on the credit report must be included in the final submission for underwriting. Documentation must be reviewed for potentially derogatory, contradictory, or erroneous information that was not ® ® part of the data submitted for DU . For example, if the credit report reflects a previous foreclosure but the DU Credit Summary does not, the information must be taken into consideration before making a final underwriting decision.
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Credit unions should also examine the inquiries to determine whether they represent potential sources of undisclosed credit. The loan application must accurately reflect the member‟s financial obligations. If new debt was obtained, the credit union may need to correct the loan application and resubmit the loan.
DU® Recommendation (3/2008)
4.1.3 ®
The DU recommendation, which generally includes both a specific risk recommendation and a descriptive eligibility status, indicates if the mortgage is recommended for approval or if it should be referred to an underwriter for further review. The Underwriting Findings will provide one of the following recommendations: APPROVE/ELIGIBLE – the loan appears to meet both Fannie Mae‟s credit risk and eligibility requirements. APPROVE/INELIGIBLE – the loan appears to meet Fannie Mae‟s credit risk requirements; however, the loan does not appear to meet Fannie Mae‟s eligibility requirements. REFER/ELIGIBLE – the loan does not appear to meet Fannie Mae‟s credit risk requirements; however, does meet eligibility requirements. REFER/INELIGIBLE – the loan does not meet Fannie Mae‟s credit risk and eligibility requirements. ®
REFER WITH CAUTION – DU has evaluated a combination of risk factors, including the LTV, housing and expense ratio, available assets, each member‟s credit history, employment status, product type, property type, and ® purpose of the loan. The loan does not appear to meet the credit risk requirements in DU . The layering and degree of risk factors represents a greater risk of default. ®
OUT OF SCOPE – DU does not contain the rules or models that are necessary to make an informed credit decision on the loan product, member, or type of loan submitted. EA-I, EA-II, EA-III/ELIGIBLE – The loan appears to meet Fannie Mae‟s expanded range of credit risk subject to appropriate EA price adjustments; the loan appears to meet Fannie Mae‟s eligibility requirements. EA-I, EA-II, EA-III/INELIGIBLE – the loan appears to meet Fannie Mae‟s expanded range of credit risk subject to appropriate EA price adjustments; however, the loan does not appear to meet Fannie Mae‟s eligibility requirements. REFER WITH CAUTION-IV/INELIGIBLE – the loan does not appear to meet the expanded credit risk requirements in ® DU and is not eligible for delivery. CMG MI no longer insures loans that receive the following decisions Refer Refer with Caution IV Out of Scope EA I, II, and III- Version 5.7 or earlier
4.2
Loan Prospector® (12/2008)
Loan Prospector requires submission of specific data elements in order to process the information and return a complete decision with a Risk Class and Documentation Level. The Seller must insure that the identifying information for any Member and property are true, complete and accurate and that they are properly input into Loan Prospector. All data that was submitted to Loan Prospector for the Last Feedback Certificate must be true, complete and accurate. Some loans will not require additional underwriting submissions as long as the requested documentation supports the information submitted to LP within the allowable tolerances listed in Resubmission Requirements section. CMG MI does not automatically approve loans for mortgage insurance based solely on decisions obtained from LP. Loans submitted and approved by LP must meet CMG MI‟s current eligibility and guidelines. A document efficiency of only a verbal Verification of Employment is not acceptable; at a minimum a paystub containing 30 days‟ earnings is required. All other document efficiencies are acceptable. Ineligible: LP Caution or Caution A-Minus
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4.2.1
Resubmission Requirements (12/2006)
For an approved loan: Interest Rate Decrease
Resubmit if the loan amount decreases by more than:
Purchase – 1%
Refinance – 5%
Interest Rate Increase
Resubmit if the loan amount increases
Debt
The monthly debt payment (including monthly housing expense) increases
Income
The income for any borrower decreases
Total Income
If the income for any borrower decreases, and/or monthly total debt payment increase, and
Assets
Total debt ratio increases by more than 3%, and
Total debt ratio on the last submission was greater than 45%
The amount of verified assets decreases The amount of verified reserves decreases The amount of verified reserves decreases by no more than 10%
Loan Amount
The loan amount decreases by more than 1% on a refinance and mortgage insurance was not required
Loan Amount
The loan amount decreases by more than 1% on a refinance and mortgage insurance is required, and
The change impacts the amount of the mortgage insurance coverage, and
The amount of the MI premium is changed
Any other changes in the information used by Loan Prospector require submission.
4.2.2
Validation and Data Integrity Requirements (12/2006)
Loan Prospector uses statistical models and judgmental rules to analyze the data received and then return a Feedback Certificate. Because this is an automated system, it relies heavily on information from other sources. Consequently, accurate data and accurate entry are critical. Loan Prospector assumes that the last information submitted to LP is the same as the information for the Mortgage that is delivered to Freddie Mac. If the information changes or an error is identified in the prior submission, the Mortgage must be resubmitted to Loan Prospector with the new data no more than 120 days before the Note Date and no later than the Note Date for reassessment. Each new Feedback Certificate prior to closing of the Mortgage invalidates the prior Feedback Certificate. The last Feedback Certificate indicating the Loan Prospector Risk Class and Documentation Level must be retained in the Mortgage file.
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4.2.3
LP Recommendations (3/2008)
ACCEPT MORTGAGE – An Accept risk class confirms that LP has determined that the Member‟s credit worthiness is acceptable. CAUTION MORTGAGE – A Caution risk class may be eligible for A-minus. The feedback certificate will specify if the mortgage is eligible for A-Minus consideration. For a caution mortgage that is not eligible for A-minus, the Caution Risk Class indicates that the Mortgage is unlikely to comply with eligibility and underwriting requirements because there is a strong indication of excessive layering of risk. DOCUMENTATION LEVELS – The documentation level will be identified in a feedback message under the documentation guidelines section of the Feedback Certificate and indicate the minimum level of documentation that will be accepted. STREAMLINED ACCEPT – requires more documentation than an Accept Plus but significantly less than Standard Documentation. STANDARD DOCUMENTATION – this is the most comprehensive level of documentation, required for Accept Mortgages, A-minus and Caution Mortgages. CMG MI will no longer insure loans that receive Caution and Caution A-Minus recommendations.
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5
Eligibility
5.1
Overview
CMG MI is limited by regulation to insuring indebtedness secured by first mortgage liens or Deeds of Trust on residential one- to four unit properties. Loan eligibility requirements are maintained that are in compliance with Fannie Mae and Freddie Mac mortgage insurer eligibility criteria, Fair Lending, the Equal Credit Opportunity Act, and the State Insurance Departments‟ laws and regulations. Due to our mortgage insurance charter, licensing, and state insurance department regulatory requirements, loans with the following characteristics, or secured by properties with these characteristics, will not be insured by CMG MI.
New mortgage insurance on loans with a loan to value over 103%
Property which includes more than 4 residential units
Property that is not located in the 50 United States, District of Columbia, or Puerto Rico
Non-residential use of property, including vacant land, commercial or business activity on premises (except for incidental business use)
Manufactured housing unit that is less than 22 feet wide
Loan instruments which include scheduled negative amortization
Property is located in New York and the loan includes negative amortization
Property is located in New York or Washington state and loan-to-value ratio is less than or equal to 80%
Property is located in New Jersey or Puerto Rico and loan-to-value ratio exceeds 100%
Property located in Illinois, not a fixed-rate-fixed payment mortgage, secured by an owner-occupied, primary residence, and the loan to value exceeds 100%
Loans with a credit grade lower than “B”
5.2
Member Eligibility
For the purposes of CMG MI‟s underwriting eligibility criteria, the Member is defined as the legal obligor under a Mortgage Note. (In the First Lien Master Policy, the term "Borrower" is used).
5.2.1
Member
CMG MI will only insure loans made to natural persons. Loans to members that are other types of legal entities, such as corporations, general or limited partnerships, real estate syndications, or a trust (other than an Inter Vivos Revocable Trust) are not eligible for insurance.
5.2.2
Permanent Resident Alien
A permanent resident alien has the right to live and work permanently in the United States. Evidence of occupancy status for a permanent resident alien will be validated by one of the following documents: U.S. Department of Immigration and Naturalization Services (INS) Alien Registration Receipt Card (I-151 or I551, commonly referred to as a “Green Card”) issued no earlier than 1979. INS Alien Registration Receipt Card (I-551) that has an expiration date; this card with an expiration date is issued to aliens granted residency as a result of marriage. INS Alien Registration Receipt Card (I-551) that has no expiration date on the back, if accompanied by a filed INS Form I-751. Un-expired foreign Passport with an un-expired stamp reading “Processed for I-551. Temporary evidence of lawful admission for permanent residence. Valid until (MM/DD/YY). Employment authorized”.
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Determining Eligibility – Permanent Resident Alien
5.2.3
CMG MI GUIDELINES
ELIGIBILITY
Standard Mortgage Insurance
Eligible
A-Minus
Ineligible
Cash-out Refinance
Eligible
Second Home
Eligible
Investment Property
Ineligible
Limited Doc
Ineligible
Non-Permanent Resident Aliens
A non-permanent resident alien has the right to live and work in the United States on a temporary basis. INS approval will include valid dates of the stay. The employer or alien must petition the INS for an extension. Evidence of occupancy status for a non-permanent resident alien will be validated by one of the following documents: Unexpired foreign passport containing INS form I-94 stamped “Employment Authorized” Temporary Resident Card form I-688 Employment Authorization Card form I-688 A or O containing applicant‟s photograph Temporary Work Visas Evidence of residence status will be validated by a copy of the current INS Temporary Work Visa (Form I-94) which could include one of the following classifications: E, as a treaty trader or treaty investor, may only work for the company which is conducting international trade or the company that the member or his/her employer have invested in; spouse and dependents may not work within the United States F or M, as a student. After one year, the member may be granted authorization to work on a part-time basis during the school year and full-time during school vacation periods or for practical training (if permission has first been granted by the INS). M classification requires the school to issue a student eligibility form I-20MN. Spouse and dependents may not work within the United States. G, as a representative of an international organization, may only work for that organization; spouse and dependents may be granted permission to work in the United States. H non-immigrants, with Petition for Non-immigrant Worker (INS Form I-129H) filed by the company or person offering employment or training to the member, may be approved by the INS for temporary work authority in the United States. H-2A, H-1B, and H-2B petitions require certification by the U.S. Department of Labor to verify that the member‟s skill is in short supply within the United States. H-1 (alien with distinguished merit or ability entering temporarily to perform services in a specialty occupation; i.e., artist, entertainer, cooperative researcher), H-2A or H-2B (temporary services for general labor such as seasonal agricultural employment), H-1B (coming to the United States in a specialty occupation), and H-3 (trainee) non-immigrants are authorized to work only for the person or company that filed the petition. Employment may not commence until H-1, H-2, or H-3 status is received and the non-immigrant must leave the United States when the work is complete. Spouse and dependents will be granted H-4 visa status and may not work in the United States. The initial duration of H class visa is three years and may be extended for up to a maximum of six years. I, as a representative of a foreign information media, may be employed only by the foreign-based employer. Spouse and dependents may not work within the United States. K classification non-immigrants are the fiancé or fiancé of a United States citizen. The Petition for Alien Fiancé
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(INS Form I-129F), including a photograph of the non-immigrant, must be filed by the United States citizen; both the U.S. citizen and the fiancé fiancée must file Form G-325A. Work eligibility is granted when admitted to the United States. Unmarried, minor children of K classification non-immigrants may also be granted permission to work. L-1 may be granted to an intra-company transferee, entering the United States to perform services in a managerial or executive capacity or to perform services requiring specialized knowledge. The company must have a U.S. branch, affiliate, or subsidiary with at least 50% common ownership interest and the U.S. entity must own or lease its physical premises. INS approval of the company is evidenced by INS form I-129L. Spouse and dependents may not work within the United States. The initial duration is for one to three years and may be renewed for up to five to seven years (depending on the occupation). O status aliens have extraordinary ability in the sciences, education, or business. Subject to INS approval of an I-129 petition from the employer, he or she may work temporarily in the United States. P classification allows temporary work status to perform as an artist or entertainer (individually or as a group, with accompanying support personnel) under a reciprocal exchange program. Q status non-immigrants are allowed temporary work status in an international cultural exchange program approved by the Attorney General of the United States. R has, for at least two years prior to petition, been a member of a religious denomination which has a bona fide nonprofit, religious organization in the United States. Temporary work status may be granted as a minister or in another professional capacity for the religious organization. TN is a Canadian or Mexican citizen coming temporarily to the United States under the provisions of the North American Free-Trade Agreement (NAFTA). A work permit allows the non-immigrant alien to work in a temporary position in one of the professions listed in the NAFTA agreement. The duration and maximum stay is one year; TN status may be renewed with no maximum limit. This list may not be all inclusive, please refer to the INS website at www.usdoj.gov/ins for up to date information. Additional Underwriting Consideration for Non-Permanent Resident Alien Members The following consideration should be given when underwriting loans to non-permanent resident alien members: Employee information on the Petition for Non-Immigrant Worker (form I-140) must correspond to the member‟s Residential Loan Application. Loans to non-permanent resident aliens will be considered for coverage subject to the following criteria. (Territorial Underwriting Guidelines, where more restrictive, may supersede these guidelines.) Member must evidence a two-year history of residency, employment, and established credit within the U.S. Funds for down payment, closing costs, and reserves should be verified on deposit in a U.S. financial institution for at least six months. Property is an owner-occupied, single-family detached residence The visa status should provide for a remaining duration of at least three years. Heavy emphasis will be placed on employment history and its likelihood of continuation. Determining Eligibility – Non-Permanent Resident Alien CMG MI GUIDELINES
ELIGIBILITY
Standard Mortgage Insurance
Eligible
A-Minus
Ineligible
Cash-out Refinance
Ineligible
Second/Investment Property
Ineligible
Limited Doc
Ineligible
Non Resident Aliens do not reside continuously in the United States and do not have authorization to work here. Loans to non resident aliens are not eligible for insurance with CMG MI.
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5.3
Occupancy 5.3.1
Owner-Occupied Primary Residence
A primary residence is defined as single family property which is the member‟s main residence, where they live a majority of the year. A 2-unit property is considered owner occupied when at least one of the units is occupied as the member‟s primary residence. A property is considered a primary residence if it is occupied by the member for at least six months during the year. CMG MI may require verification of intent to occupy. CMG MI will consider a 1- to 2-unit property to be the member‟s primary residence, provided: The property will be physically occupied by the member(s) within 60 days of closing or completion, AND The property is within reasonable commuting distance to the member‟s place of employment. 3-4 unit properties are not eligible for insurance.
5.3.2
Second Home
A second home is a single-family property which generates no rental income and is occupied by the member in addition to his or her primary residence. A 2-4 unit property is not eligible for second home status. Often located in a vacation/resort area, the property must be suitable for year round occupancy. A second home should not be in the same market as the member‟s primary residence. Agreements that require the property to be rented are prohibited. The member may not use a management firm to control the occupancy of the property.
5.3.3
Investment Property
Not eligible for mortgage insurance. An investment property is generally purchased for the purpose of profit, either from rental income or resale. This definition is used whether or not the property produces revenue. A 1031 Tax Exchange is an exchange of real property in which no taxable gain or loss is recognized at the time of sale. Section 1031 of the Internal Revenue Code allows investors to defer the payment of state and federal capital gains taxes by exchanging one investment property with another, rather than selling it. A 1031 exchange is an investment property exchange therefore primary residences and second home transactions are not permitted. A 1031 tax deferred exchange can be used as the down payment for the purchase of an investment property with the following requirements: The program or product allows investment properties. There is no subordinate financing A qualified intermediary must handle the loan closing. A qualified intermediary is an entity (usually a subsidiary of a title company) who enters into a written agreement with the taxpayer. The qualified intermediary cannot be an agent, attorney, accountant, investment banker, or broker. This exchange agreement requires the qualified intermediary to acquire and transfer the relinquished property and to acquire and transfer the replacement property. The relinquished property is the property „sold‟ and the replacement property is the property „acquired”. Copies of all closing documents – including the 1031 exchange agreement, settlement statement, and title transfer – and the purchase agreement on the relinquished property must be obtained. Both purchase agreements on the relinquished and replacement properties must contain appropriate language to identify the 1031 exchange.
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Inter Vivos Revocable (“Living”) Trust and Land Trusts
5.4
Inter Vivos and Land Trusts are eligible provided that all of the following conditions are met:
They are customary for the area
The member (beneficiary of the trust) is a natural person
Income and assets of the member (beneficiary) are used to qualify for the loan
Both the member (beneficiary) and trustee, on behalf of the trust, execute the Note, and the member (beneficiary) is personally liable for the obligation
The trustee has legal right to grant a mortgage on the subject property
The credit union will be conveyed clear title in the event of default by the member (beneficiary)
5.5
Bridge (Swing) Loans
Interim financing, such as bridge or swing loans, are not eligible for insurance.
5.6
Co-signers / Guarantors
A guarantor or co-signer is an applicant who will not have an ownership in the mortgaged property, but will sign the Note and Deed of Trust/Mortgage. A party who has an interest in the property sales transaction – such as the property seller, the builder, the real estate broker, etc – is not eligible to be a co-signed/guarantor. CMG MI will insure a loan with a Cosigner/Guarantor; however, their income and assets cannot be used for qualifying purposes.
5.7
Non-Occupant Co-Borrowers
Non-occupant co-borrowers will be considered if:
Non-occupant co-borrower is an immediate family member and not a party to the transaction (i.e., builder/developer, seller, Realtor , escrow agent, etc.).
Non-occupant co-borrower adds strength to the transaction by contributing stability, good credit standing, and a savings history.
Non-occupant co-borrower allowed only for owner occupied, 1 unit property if non-conforming loan amount
Occupant borrower must qualify on their own.
Occupant borrower contributes a minimum 5% cash down payment to the transaction.
Occupant borrower has 2-3 months verified reserves and a demonstrated ability to save.
Occupant borrower exhibits characteristics associated with potential for growth in employment, income, credit standing, and asset accumulation.
The property is Owner-occupied to a maximum LTV of 95%.
Loan instrument is fixed-rate or positively amortizing ARM.
The loan is fully documented or stated income; No Ratio, NINA and No Doc are not eligible.
Occupying borrower‟s ratios, without consideration of non-occupying co-borrower‟s income and obligations, should generally not exceed 45%.
Debt-to-income ratios which include the non-occupant co-borrower‟s income and obligations should not exceed normally accepted ratios for the loan program being offered (i.e., 45% DTI for CMG MI‟s standard underwriting programs). The current housing expense for the non-occupant co-borrower must be included in long-term debt when calculating the qualifying ratios.
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5.8
Non-Borrowing Spouse
When a married applicant applies for a mortgage in their name alone, without involving the applicant‟s spouse, the spouse is referred to as a non-borrower spouse. A non-borrower spouse may have rights in the property, either as a co-owner of the property or because of state community property or martial rights laws.
If the non-borrower spouse is to be listed on the title as a co-owner, the non-borrower spouse must sign the security instrument.
If the non-borrower spouse is not listed on the title, they are not required to sign the security interest. A quitclaim deed may be required to ensure a valid security interest is established for the member.
Pursuant to the California Domestic Partner Rights and Responsibilities Act of 2003, a domestic partner may have community property and homestead rights in property owned by their partner. In Vermont, a party to a civil union may have homestead rights in property owned by their partner. In New Jersey, civil union couples shall have all the same benefits, protections, and responsibilities under the law. Non-borrower spouse signature requirements will apply to non-borrower domestic and civil union partners on loans secured by California, Vermont and New Jersey property.
Debts and income from the non-borrower spouse cannot be considered in qualifying the loan.
5.9
Adding/Removing Members on Application
To remove a member from a transaction, a new application and credit report must be provided for the remaining member only. Additional members may be added during the application process without the need to resubmit as a new transaction.
5.10 Non Arm’s Length Transactions A non arm‟s length transaction is one in which the parties involved are not entirely independent of each other (i.e., family sales between parent and child, property in an estate, employee and employer, direct sale without a third party, renter and landlord, or flip transactions). These loans require close examination to ensure the equity position is not compromised. Common risks associated with this type of loan include: absence of equity or down payment; a purchase price that does not represent the actual property value; financial bailouts or attempts to hide poor credit; occupancy concerns; and financing of unsold builders‟ inventory, especially in soft real estate markets. The appraiser must be informed of the non arm‟s length transactions and discuss whether or not the market value has been affected by the relationship of the parties.
5.11 Maximum CMG MI Insured Loans Per Member CMG MI will insure up to 3 loans to a member or borrowing entity or $300,000 in risk exposure (aggregate of original loan amount x percent of MI coverage) to a member or borrowing entity. Within the 3 loans to a member, CMG MI limits the loans by product/program as follows:
Primary Residence - 1 loan maximum
Second Home – 1 loan maximum
Investment Property – 1 loan maximum (currently insured with CMG MI)
5.12 Maximum Loan Term The term of the insured loan cannot exceed 40 years. There is no minimum loan term.
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5.13 Minimum Loan Amount There is no minimum loan amount.
5.14 Financed Premium Loans which include financed mortgage insurance premium will be underwritten, and premium will be determined, using the net (before premium added) loan amount. The premium to be financed is not considered in the net LTV.
5.15 Interested Party/Seller Contributions/Third-Party Contributions (IPCs) Third-party contributions/IPCs are either a financing concession or a sales concession. IPCs are limited to interest rate buydowns, reasonable and customary closing costs that are normally paid by the member but which, in the subject transaction, are paid by the seller or other interested party such as the builder, developer, or real estate agent and any other payments or credits related to acquiring the property. Financing Concessions include, but are not limited to, the following:
Any third-party funds that are contributed to an interest rate buydown plan for the purpose of temporarily or permanently lowering the member‟s payment and/or interest rate on the mortgage
Contributions and payments in any form, such as Discount points; Commitment fees; Origination fees; Appraisal costs; Transfer taxes, stamps or attorneys fees; Interest rate shortfalls; Title insurance; Survey charges; Prepaid items such as hazard insurance premiums, interest charges, real estate taxes.
Donations by interested parties to a non-profit organization when the recipient of the funds entitles the member to a grant or down payment assistance will be considered a third-party contribution.
NOTE: Cash deposited by the member at closing to fund future payment of taxes, insurance, or other recurring expenses (generally referred to as impounds or escrow funds) must be paid from the member‟s own funds. If these items are paid by the seller or other third-party related to the transaction, they should be considered a sales concession.
5.16 Maximum Allowable Contributions Owner-Occupied
Maximum 3% based upon the lesser of the property's sales price or appraised value for LTVs 90.01% - 95%
Maximum 6% based upon the lesser of the property's sales price or appraised value for LTVs up to 90%
CMG Single Premium Payment Plan
Maximum of 6% based upon the lesser of the property's sales price or appraised value for LTVs up to 95%
Second Homes
Maximum 6% based upon the lesser of the property's sales price or appraised value for LTVs up to 90%
Note: Third party contributions are not allowed on Second homes, and Cash-out Refinances.
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5.17 Other Third-Party Contributions Contributions made by the memberâ€&#x;s employer or a family member are not included in the Maximum Allowable Contributions limitation. A family memberâ€&#x;s contribution is considered a gift and must comply with requirements for gift funds. Employer contributions are permissible if verified under the terms and conditions of an employee relocation agreement. Credit union contributions for temporary interest rate buydowns and closing costs are subject to the same limitations as builder/seller contributions.
5.18 Sales Concessions Sales concessions are interested party contributions (IPCs) that take the form of non-realty items, such as furniture, decorator allowance, giveaways (vacations, cars) and excess financing concessions. The terms of the sale as detailed in the purchase contract must be closely evaluated to determine the effect of any sales concessions. Sales concessions must be deducted from the lower of the purchase price or appraised value. For example: $ 101,000
Sales Price
$ 100,000
Appraised Value
$
Concession Amount
2,000
Calculation: $ 100,000
Appraised Value (lower of Sales Price/Appraised Value)
$-
Concession Amount
2,000
$ 98,000
Adjusted Value
The Loan amount would be calculated using the adjusted value and the maximum LTV for the product or program. Decorator Allowances A decorator allowance may be included in seller-paid closing costs rather than considered a sales concession if there is an offsetting upgrade to the improvements (i.e., ceramic tile instead of linoleum, thermal pane windows, upgraded insulation, etc.). The sales contract must describe the upgrades. The Maximum Allowable Contributions limitations for third-party contributions, including these decorator allowances, will apply. If the amount is a direct cash credit to the member on the HUD-1, it must always be treated as a sales concession and deducted from value. Excess Contributions Financing contributions in excess of the limits should be considered sales concessions. In these instances, the amount of the concession must be subtracted from the lesser of the sales price or appraised value in order to determine LTV. For example: $
7,840
$
88,200
Loan amount
$
98,000
Sales price
$ 100,000
Actual seller contributions
Appraised value
On a 90% LTV fixed-rate mortgage, the maximum allowable contribution is 6% or $5,880. The LTV ratio should be calculated on the reduced sales price (Adjusted Value) as follows: $
98,000
Sales price (lesser of the sales price or appraised value)
$
- 1,960
Excess contribution which is considered a sales concession ($7,840 - $5,880)
=
96,040
Adjusted Value
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As a result, the adjusted LTV becomes: $
88,200
Original Loan Amount
÷
96,040
Adjusted Value
=
91.8%
LTV
This example illustrates the effect of excess seller contributions. In order for this loan to be considered a true 90% LTV, the loan amount must be reduced to $86,400. $
86,400
Adjusted Loan Amount
÷
96,040
Adjusted Value
=
90.0%
LTV
If the loan amount is reduced to an adjusted LTV of 90%, the credit union must verify sufficient funds to close. Otherwise, the loan should be underwritten and insured as a 91.8% LTV using 95% LTV loan eligibility criteria and premium rates.
5.19 Allowance for Improvements and Rehabilitation In the event an allowance is made by the seller for the repair or replacement of items that contribute to structural integrity and livability of the property by way of a credit on the HUD-1 Settlement Statement, the underwriter must ascertain the following:
The appraisal reflects the property‟s value upon completion of the repair.
Because the HUD-1 credit will be applied as an off-set to down payment rather than as a deposit to an escrow account, the member has sufficient and available funds after closing to complete the repairs.
The credit union will require evidence of completion.
Any concessions, credits, allowances or rebates, applied at or subsequent to loan closing which result in less than the down payment originally represented in the insurance application package could invalidate the CMG MI Commitment and Certificate of Insurance.
5.20 Primary Residence Conversion Transaction Types 5.20.1
Purchase
Also known as a purchase money transaction, the funds are used to finance the purchase of the subject property. The proceeds may be used for the following: Finance the purchase of a property – both the land and improvements. Payoff an installment land contract, including documented costs to improve the property. If the new loan exceeds the liens, this transaction must be considered a refinance. Payoff interim financing from the construction credit union, as long as no cash is paid to the member. If the new loan exceeds the recorded liens, this transaction must be considered a refinance. See the Construction to Perm section. Convert a lease option to purchase into permanent financing, as long as the member receives no cash from the new loan. Payoff the purchase of a manufactured home and land. It is required to confirm and document that the property seller in a purchase transaction is the Owner of Record for the subject property.
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5.20.2
Refinance transactions
A refinance transaction is defined as repayment of a debt from the proceeds of a new mortgage to the same member and that uses the same property as security. In some instances refinance transactions may have cash out. If a subordinate lien to be paid off was not used for purchase of the subject property the loan will be considered a cash-out refinance transaction. If the member has taken equity from the property (not a loan for home improvements) within the past 12 months through a new first deed of trust (cash-out refinance) the loan will be considered a cash-out refinance transaction. If the member has taken equity from the property through a second lien, the loan will be considered a cash-out refinance transaction. If the subordinate lien is not being repaid but will re-subordinate and there is no cash extracted from the transaction, the loan will be considered a rate/term refinance despite the age of the subordinate lien. If the member has completed multiple transactions in the past 12 months, the value used to calculate the LTV must be the lowest appraised value determined during the 12 month period. The value can be increased based on documented improvements.
5.20.2.1
Rate/Term Refinance Transactions
The proceeds may be used for the following: Payoff of the existing lien, including the related closing costs and prepaid items; (there must be a continuity of obligation for an existing lien, i.e., there must be at least one member on the new loan who was also obligated on the loan being refinanced) Payoff of a subordinate lien that is seasoned at least 12 months, (including prepayment penalty), provided a copy of the HUD1 from the original sale is obtained to verify the entire amount being paid off was used to purchase the property. Subordinate liens that involve an equity line of credit may be satisfied by the proceeds as long as the lien has been seasoned for one year measured from the date of the most recent draw against the equity line. As long as the aggregate amount withdrawn within the past 12 months does not exceed $2000 this will be exempt as a minimal amount. However documentation will be required for the past 12 months to determine the draws meet this requirement. Other funds for the members use as long as it does not exceed 2% of the loan amount or $2000, whichever is less. It is required to confirm and document that the property owner is the Owner of Record for the subject property.
5.20.2.2
Cash-Out Refinance
Cash-out refinance transaction is defined as repayment of a debt from the proceeds for a new mortgage to the same member that uses the same property as security, providing cash to the member. The property should not have been listed for sale in the last 90 days and the proceeds may be used for: Payoff of existing mortgage(s) and closing costs, greater than 2% of the loan proceeds will be distributed to the member Payoff obligations of the member that are not secured by the subject property (i.e., a debt consolidation loan) Place a new loan on a property that is owned by the member free and clear of any mortgage Payoff or re-subordinate a junior lien which is seasoned less than 12 months whether or not the member received any cash from the transaction. It is required to confirm and document that the property owner is the Owner of Record for the subject property for all transactions.
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5.20.2.3
Special Purpose Cash-Out Refinance
A loan being refinanced as part of a divorce settlement in which one spouse is required to “buyout” the interests of the other spouse or any other refinancing in which an owner “buys-out” the interests of another owner is considered a limited cash-out refinance – as long as the following conditions are satisfied: The property must have been jointly owned by all parties for at least 12 months preceding the date of the loan application. (Parties who inherit an interest in the property do not have to satisfy this requirement). All parties must be able to demonstrate that they occupied the subject property as their principal residence, by providing an acceptable source of verification – drivers‟ license, bank statement, credit card bill, etc., that was mailed to the individual at the address of the security property. (Parties who inherit an interest in the property do not have to satisfy this requirement). All parties must sign a written agreement that states the terms of the property transfer and the proposed disposition of the proceeds from the refinancing transaction. (The member who acquires sole ownership of the property may not receive any of the proceeds of the refinancing).
The party who is “buying out” the other party‟s interest must be able to qualify for the mortgage under our standard underwriting guidelines.
5.20.3
Home Improvement and Rehabilitation Loans
The cost of home improvement, upgrade, or property rehabilitation may be added to funds required to acquire a property (purchase transaction) or may be advanced through a refinance. Maximum financing is allowed if:
In a purchase transaction, all funds are used to acquire the property and complete improvements. The loanto-value ratio is determined by using the lesser of the “as completed” appraised value or acquisition cost plus value of documented cost for improvements and allowable construction-related costs.
In a refinance transaction, funds will be used to satisfy the outstanding lien(s), pay closing costs, and complete improvements; there is no cash back to the member. The loan-to-value ratio is determined by using the “as completed” appraised value. The following requirements must be met:
All rehabilitation work must be performed by a licensed contractor. The member may not act as general contractor unless that is his or her full-time occupation.
Funds must be controlled by the credit union or its agent and distributed to the contractor upon inspection for every phase of work completed.
Cost of the improvements or rehabilitation will be based on the plans and specifications and the contractor‟s bids for all of the work to be done.
Allowable construction-related costs that can be included in the total financing include: Contingency reserve of not more than 10% of total construction costs to cover unforeseen repairs or deficiencies that are discovered during the rehabilitation. All unused contingency reserves must be used to reduce the outstanding loan balance after all work is completed, a title update has been provided, and the Certificate of Occupancy is issued. Escrow for mortgage payments that will become due during the construction period may be included for an owner-occupied primary residence if the property cannot be occupied during rehabilitation. Other documented construction-related costs, including property inspection fees, title updates, architectural and engineering fees, independent consulting fees, required permits, and other documented fees directly associated with the improvements to the property
An amount allocated for “sweat equity” cannot be factored into the rehabilitation costs.
Members should have a minimum of two months‟ cash reserves at closing.
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5.20.4
Construction to Permanent Financing
A construction-to-permanent loan can be structured as a one- or two-time close may be considered a purchase or refinance loan. The following definitions will be used:
Construction to Perm – the loan which finances the interim construction phase and converts to the permanent financing. Typically a one-time close transaction.
Construction Loan – the loan that finances the construction costs, the permanent loan is a separate loan. Typically a two-close transaction.
Construction to Perm and Construction loans are subject to the standard underwriting guidelines and the following additional criteria:
Maximum 95% LTV.
Maximum term is 40 years.
Standard loan amount and credit scores guidelines apply as detailed in the Chapter 3. Matrices section.
The member for the permanent financing must be the same as the member for the construction loan.
Acquisition costs must be determined for each home. Acquisition cost includes the cost of construction plus land value. Construction costs may include, but are not limited to, building permits and architectural, survey, and loan fees in addition to the cost of labor and material required to complete the improvements. To establish the value of the land review the length of time the lot has been owned. If the lot has been owned for 12 months or more the value of the lot is the determined from the appraised value. If the lot has been owned for less than 12 months, the value is the lesser of the purchase price or appraised value. Determine the value of the lot as described above and add the costs of the improvements (the construction loan and any other documented costs paid for by the member) to determine the acquisition cost. All acquisition costs must be verified either via the construction credit union, or if paid by the member with receipts, invoices and a HUD1 for the purchase of the land.
If the land is acquired by gift or inheritance, use the appraised value of the land. Document the acquisition and transfer of the land.
The loan may be treated as a purchase or refinance transaction. The LTV is based on the appraised value or total acquisition cost, whichever is less, as determined by the length of time the lot has been owned as described above.
The loan is a refinance if: The member holds title to the lot The member is receiving cash out from the transaction.
The loan is a purchase if: The acquisition of the lot occurs at the same time as the construction to perm or construction loan. The members‟ investment in the transaction is not clear.
The loan must be fully documented
The permanent loan can be a Fixed-rate Mortgage, Positively Amortizing ARM, or Interest Only Mortgage.
Potential Negatively Amortizing ARMs and Option Payment Mortgages are not allowed.
The property must be one unit single family -- owner occupied or a second home
Temporary buydowns are not permitted
Credit Documents are valid for 180 days, and must be updated thereafter
CMG MI will insure loans originated using Fannie Mae and Freddie Mac published programs
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The following property types are ineligible for construction-to-perm loans: Condominiums Cooperative Housing 2-to-4 Unit Properties Manufactured Housing Investment properties
When underwriting a construction-to-permanent loan, the member‟s current housing expense will need to be considered. The underwriter must evaluate the member ability to sustain payments on both the current residence and the new home during the construction period, and in some circumstances, after completion.
If documentation in the loan indicates that the member‟s current residence will be sold upon completion of construction but is not under a non-contingent sales agreement, the underwriter must ascertain that there is a ready market for properties in the area. The following market conditions must be present: Marketing times are no greater than 6 months Property values are stable or increasing The member equity in the current residence is sufficient to cover sales and closing costs.
If the member‟s current residence is not under a binding sales agreement, calculate the current housing debt by subtracting 75% of the potential rental income from the PITI (documentation to support the fair market rent is required). If the result is positive, add it to income; if it is negative, add it to debt.
If a ready market for the property cannot be verified, the full payment on both the member‟s current residence and the new home should be considered.
Qualifying Ratios
45%
PITI for the new home will be determine using the interest rate established for the permanent housing.
Mortgage Insurance Not all credit unions require insurance coverage for the construction phase but do want the assurance that the credit worthiness of the member is acceptable when the construction phase is complete and the permanent loan begins without the need to submit additional paperwork. The construction-to-permanent commitment meets both these requirements. For coverage during the construction phase:
The credit union must select the effective date of the loan as “the date the loan was closed”.
Maintain the premium payment through the construction period.
The property must be complete per the specs and plans to obtain a claim payment as indicated in the Construction Loan Endorsement. Losses are not covered for the member‟s inability to obtain a permanent loan or the credit unions‟ failure to roll over or cover the construction loan to a permanent loan. For approval of the member without coverage during the construction phase: The credit union can select the effective date of the loan as “the date the member accepted the property as complete” or “the date a Certificate of Occupancy was issued of the property or the property became habitable under the applicable law”. Make payment of the premium within 45 days of the effective date selected. The property must be complete per the specs and plans to obtain a claim payment as indicated in the Construction Loan Endorsement. Losses are not covered for the member‟s inability to obtain a permanent loan or the credit unions‟ failure to roll over or cover the construction loan to a permanent loan.
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CMG MI‟s commitment/certificate will be issued for a period of 12 months (extensions are available for an additional 6 months) in the construction credit unions name. Upon completion of the construction the mortgage insurance can be assigned to the end credit union. CMG MI does not consider the purchase and affixation of a Mobile Home to be a construction-to-perm loan but will insure Manufactured Home Loans originated using Freddie Mac‟s construction-to-perm program. In order for a claim to be paid for a construction to perm or construction loan, construction must be completed according to the construction plans and specifications on which the appraisal was based.
5.20.5
Relocation Loans (6/2010)
Relocation loans should generally conform to the following criteria: The mortgage loan is made to a transferred employee of a corporation to finance the purchase of his or her primary residence at a new job location. The employer normally transfers employees in the course of business; the relocation is not part of a plant closing or office relocation. The loan has been originated pursuant to a corporate employee relocation program administered by the corporate employer or its agent. Mortgage financing may involve an employer contribution of the original principal balance of the new mortgage loan. Employer contributions may be applied toward any one or more of the following:
Closing costs
Buydowns or interest rate subsidies
Bridge loans
Payment differential
5.20.6
Land Contract/Contract of Sale
If the land contract or contract for deed was executed more than 12 months preceding the mortgage application date, the transaction is considered a rate/term refinance transaction. Proceeds from the refinance transaction may include the sum of the outstanding balance of the installment sales contract and the costs incurred for rehabilitation, renovation, or energy improvements. A new appraisal is required and the LTV must be calculated using the appraised value of the new first mortgage transaction.
5.21 Temporary Buydowns Loans with temporary buydowns feature money advanced to the credit union (often by the builder or seller) to reduce the monthly payments for the initial years of the loan (i.e., temporary interest rate discount). The following table shows maximum acceptable temporary annual buydown plans:
2, 1 on Fixed Rate Mortgages (FRM) and >=5/1 ARM up to 95% LTV
3, 2, 1 on FRM and >=5/1 ARMs up to 95% LTV
The source of buydown funds is a critical factor in the evaluation of risk. For example, member funds derived from savings should be given more favorable consideration than seller-funded buydowns, which pose potential payment shock and generally impact property value. Member- or credit union-funded buydown loans can be underwritten at the bought-down rate. Seller-funded buydowns should be underwritten at the contract note rate.
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Compressed buydowns provide for payment adjustments more frequent than annually. Member- or credit union-funded compressed temporary buydowns are eligible subject to the following:
Fixed-rate mortgage
Maximum 1% interest rate increase every six months
Owner-occupied, primary residence
Maximum 2-1 interest rate adjustments on 95% LTVs and 3-2-1 interest rate adjustments on 90% LTVs
Temporary buydowns are not eligible for the following:
Cash-out refinances
Second home properties
Investment properties
Limited Documentation mortgages
Interest Only mortgages
Option Payment mortgages
Potential Negative Amortization mortgages
Scheduled Negative Amortization mortgages
Any portion of the buydown paid by the builder/seller must be included in the maximum allowable third-party contribution.
5.22 Secondary Financing Secondary financing may be accepted provided that it is fully disclosed in the mortgage insurance application and the maximum combined loan-to-value for the subject property (“CLTV”) does not exceed the CLTV criteria for the member‟s occupancy, loan type, and property type. The loan will be underwritten using the eligibility criteria applicable to the LTV; territorial underwriting guidelines will apply. For example: Total financing which includes an 85% LTV first mortgage and a 10% second (95% CLTV) on a 4 unit property will be ineligible for coverage since 3-4 unit properties are limited to 90% LTV. Underwriting Criteria for loans with Subordinate Financing The mortgage insurance premium rate and premium amount will be will be determined by the insured first lien amount. The underwriter should confirm that the terms of the subordinate financing meet the following minimum requirements:
The second mortgage is recorded and subordinate to the insured first lien.
The second mortgage is either fully amortizing or interest only and payments are no less frequent than annual.
If the second lien calls for a balloon payment, the term of the second lien is no less than five years.
The second lien will not negatively amortize.
Payment for the second lien is added to the monthly housing expense and included in the member‟s housing-toincome ratio. If payments are made quarterly, semi-annually, or annually, the monthly equivalent payment should be used.
If the secondary financing is an Equity Line of Credit, the following criteria apply:
Terms of the equity line of credit are disclosed in the mortgage insurance application package.
The equity line of credit will be recorded and subordinate to the insured first mortgage.
The property is an owner-occupied, primary residence.
The CLTV ratio is calculated using the maximum amount of the equity line of credit.
Repayment terms will include regular payments that cover, at minimum, interest due on the outstanding balance. (Negative amortization is not allowed.)
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5.23 Seasoning of Existing Liens A first lien need not be seasoned to be eligible for a rate/term refinance. If, however, the property was purchased within the past 12 months, the loan-to-value ratio will be determined using the lesser of the purchase price plus value of documented improvements or current appraised value. If the member has taken equity from the property within the past 12 months, whether through a new first deed of trust (cash-out refinance) or second lien, the loan will be considered a cash-out refinance transaction. If a subordinate lien to be paid off, not used for purchase of the subject property, is seasoned less than 12 months, the loan will be considered a cash-out refinance transaction. If a subordinate lien which is seasoned less than 12 months was used for purchase of the subject property (i.e., 80/10/10 financing) and will be repaid through proceeds of a new refinance loan, the loan will be underwritten and priced as a rate/term refinance (no cash to the member). A HUD-1 or settlement statement must be provided showing the original purchase money second. If the proceeds of a new refinance mortgage will be used to payoff a subordinate lien that is seasoned 12 months or more, the new refinance mortgage may be considered a rate/term refinance. When the subordinate lien is an equity line of credit, the 12-monthsâ€&#x;seasoning is determined by the date of the most recent draw against the line. (Draws totaling less than $2,000 within the most recent 12 months will not be considered if documented by copies of monthly statements or a letter from the credit union indicating no draws have occurred.) If the subordinate lien is not being repaid and there is no cash extracted from the transaction, the loan will be considered a rate/term refinance despite the age of the subordinate lien. If, however, proceeds of the subordinate lien were used to extract equity from the property within the past 12 months, the transaction is qualified as cash-out refinance.
5.24 Documentation Levels 5.24.1
Overview
The loan application package must contain sufficient information for the underwriter to reach an informed decision and will need to include all information necessary to verify, clarify, or substantiate the memberâ€&#x;s application. Documentation that supports the request for approval will generally be on uniform Fannie Mae/Freddie Mac forms. Alternative property and credit documents may be used if they include all of the essential information that is normally contained on the Fannie Mae/Freddie Mac forms. Documents should be no more than 120 days old on the date that CMG MI approves the loan. Underwriter discretion will be exercised for determining whether re-certification of any document is necessary.
5.24.2
Limited Documentation
Limited documentation loans are not eligible for mortgage insurance
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6 6.1
Underwriting the Member Underwriting Overview
CMG MI assesses the characteristics indicative of the member‟s willingness and ability to repay the debt in a timely manner and ensures that the property securing the loan provides sufficient value for recovery if a mortgage default should occur. These guidelines should not restrict underwriters from making good common-sense decisions. The underwriting process must continue to support viable business opportunities while also maintaining a quality book of business. To meet the needs of as many qualified members as possible, CMG MI has developed a prudent, but more flexible underwriting approach for underserved low- and moderate-income members.
6.2
Loan Application Analysis
The mortgage application is the primary document that is used to establish the initial profile of the member. The member‟s application for a mortgage loan must be documented on the most current version of the FNMA/FHLMC Uniform Residential Loan Application. The loan application must contain sufficient information for the underwriter to reach an informed decision about whether to approve the loan for mortgage insurance. Additionally, a FNMA/FHLMC Uniform Underwriting and Transmittal Summary should be provided to summarize the key data from the loan application. The initial loan application should be signed and dated by the member. A copy of the Agreement of Sale, Sales Contract, Purchase and Sales Agreement, and/or Escrow Instructions should be provided to verify, clarify, and substantiate the loan application. Information given by the members on the original application, whether handwritten or typed, must be consistent with both the identifying information in the credit report as well as the other verifications provided. All the subsequent documentation provided should support the information contained in the application. Many credit unions use loan origination software to prepare the final 1003; certain fields default to the most common response. To be sure that the “no” answers in the declarations is not just a typographical error; it is recommended that the underwriter review the member‟s handwritten loan application to verify consistency.
6.3
Age of Documents
Documents should be no more than 120 days old on the date that CMG MI approves the loan. Underwriter discretion will be exercised for determining whether re-certification of any document is necessary. For loans secured by newly-completed properties, the credit report and verification of income, employment and assets may be greater than 120 days, but no more than 180 days.
6.4
Credit Documentation and Evaluation 6.4.1
Credit Report
Loans with nontraditional credit are not eligible for mortgage insurance. The credit report must be no more than 90 days old on the date the mortgage note is signed. A Residential Mortgage Credit Report or tri-merged credit report (additional credit requirements may be applicable based on ® DU /LP findings) from an independent credit reporting agency is required. Individual credit reports verifications for all members are required. Joint credit reports on married couples will be acceptable if the report clearly indicates a search of individual credit. The credit report should reflect the member‟s overall debt payment history and a public record search for each locality in which the member has lived during the past two years. The legal search must disclose whether any judgments, foreclosures, litigation, collections, garnishments, bankruptcies, or divorce actions were filed. The credit report should provide the terms, balances, and ratings for all debts listed on the loan application.
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If the credit report does not contain a reference for each significant open debt on the loan application, including an outstanding mortgage loan, the credit union should provide separate, direct credit verification. A business credit report to supplement the individual credit report for a self-employed member may be requested at the underwriter‟s discretion.
6.4.2
Nontraditional Credit
Not eligible for mortgage insurance. When the member has established little or no traditional credit, nontraditional credit sources must be verified to evaluate the member‟s history of making regular payments to a third party and to establish his/her paying habits on those obligations. Members with nontraditional credit are not eligible for mortgage insurance. An independent credit reporting agency should verify that all three of the major credit repositories were checked in the initial attempt to verify the member‟s credit history and then conduct an informational interview with the member to identify sources from which he/she obtained credit. Favorable as well as unfavorable credit references should be provided by the credit union. A sufficient number of sources and period of time must be verified in order to make an informed underwriting decision. A minimum of 4 open accounts with a 12-month history of payments (requiring at least quarterly installment payments) should generally be provided. The credit report should indicate if the member does not have a credit score due to a lack of credit records or if the credit information is too limited to develop a credit score. A credit score based on fewer than three trade lines will be considered unusable. If the loan application contains adequate information for the member‟s nontraditional credit sources, then the credit agency should contact the individual credit providers to independently verify the member payment histories. Many credit unions have a tiered methodology to develop alternate credit histories which is acceptable to CMG MI. Tier 1 consists of rental housing, payment of utilities, etc.; Tier 2 is insurance payments, i.e., medical, care, life, or household; and Tier 3 is payments to department stores that do not report to the credit bureaus, payment for medical bills, child care, and school tuition. Verified sources of nontraditional credit should include housingrelated creditors which should be augmented with verification of non-housing credit. Sources for verifying nontraditional credit may include, but are not limited to: Rent payments of current and previous residences Utility payments (gas, electricity, water, trash collection) Telephone bills Television cable service Medical bills paid in installments Auto/life/renter‟s insurance premiums Child care (baby sitter, pre-school) payments Alimony or child support Local store payments (department, furniture, appliance) School tuition Medical bills paid in installments Non-credit payment accounts Sources for verifying non-credit payment references may include regular payments of a voluntary nature, such as: To a savings account, Christmas club or down payment account. Contributions to a stock purchase plan or payroll savings plan (this does not include payroll deductions for a mandatory retirement program or benefits) When non-credit payment references are used, the files must contain documentation, preferably bank statements showing at least a 12-month pattern of periodic deposits with a growing balance.
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The information on the credit report should be formatted similarly to a traditional credit report. Each debt should include the creditor‟s name, the account number, the date the account was opened, the amount of the highest credit, the current status of the account, the required payment amount, the current unpaid balance, and a payment history. It is preferred that each account have a minimum of 12-months payment history; however, only 4 accounts must have a minimum of 12-months history, accounts with less than a 12-months history may be provided as additional support for the member payment history. CMG MI prefers that each nontraditional credit report have a 12-months rental or mortgage payment history, however, some member starting out may not have met this requirement. It is up to the underwriter to establish a comfort level with the member‟s willingness to repay debt by reviewing all aspects of the member payment history which may include non-credit payment sources. For example, a new couple starting out may have lived with a relative rent free to save money for a down payment. In this situation, the underwriter could review the savings history for the member and develop other no credit payment histories from bank statements. The above resources can be used to develop nontraditional credit; however, this does not limit the credit references to the ones listed. When a case can be made for other reference types the underwriter should do so.
6.4.3
Credit Evaluation
The member‟s credit history must be carefully evaluated to determine the member‟s credit reputation (i.e., his or her willingness to meet financial obligations under the agreed-upon terms). While credit reputation is a significant factor of risk, it is weighed against the member‟s capacity (financial ability) to meet the mortgage obligation, and compensating factors, such as the loan terms and down payment, when rendering an underwriting decision. Generally, a loan will not be declined for mortgage insurance based on only one component of risk. When evaluating the credit report or verification of nontraditional credit, the underwriter should always consider the member‟s entire credit history. However, more weight should be given to the member‟s paying habits within the most recent two years. The following factors should be considered: The type and amount of outstanding credit How long the member has had credit How the member uses available credit Recent changes in the number of open accounts or overall amount of credit outstanding The payment history and status of all open accounts Any recent inquiries shown on the credit report All public record or collection items Close attention should be given to the following: Balance-to-Credit Limit The underwriter should evaluate the member‟s ability to manage credit. A pattern of revolving accounts at or near their limits, especially when combined with newly opened accounts, may indicate that the member is at risk of becoming overextended. A pattern of high balance-to-limits may also indicate the following risk characteristics: The member is making minimum payments on revolving accounts rather than reducing the debt and, therefore, may be near his or her credit capacity. The member relies on credit to meet day-to-day living expenses. The member will have no “cushion” for short term interruptions of income or emergencies such as a costly auto repair or replacing a hot water heater. Any such event could trigger a financial set-back and, possibly, mortgage delinquency. The member lacks the financial experience to manage credit.
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Recent Inquiries If the credit report shows recent inquiries, the underwriter must determine if credit has been granted as a result of the member‟s request. A letter from the credit provider or an update to the credit report may be accepted as verification of the disposition of the credit requests. Recent inquiries may simply mean that the member is searching for the most favorable mortgage terms. It may, however, indicate increased credit risk, such as the following: The member intends to member funds for the earnest money deposit, down payment, or closing costs. The member is marginally qualified and has been rejected by other mortgage credit unions; the loan is being “shopped.” The member is attempting to “leverage” his or her financial position. The member is in danger of over-extending their credit. Age of Accounts Recently opened accounts or recent, significant increases in account balances may indicate that the member is using credit for the earnest money deposit, down payment, or closing costs for the mortgage, is in danger of overextension of credit, or lacks sufficient financial experience to manage credit. Derogatory Credit If derogatory credit appears on the credit report or through direct verification of credit, the underwriter must determine if late payments were related to an isolated event which is not likely to recur or represent a pattern of disregard for obligations. Slow Payment Patterns on Revolving and Installment Accounts If deemed relevant to the underwriting decision, the member must provide a written explanation of recent slow payments or an excessive number of slow payments. All accounts should be current at or before closing. Mortgage Payment History Delinquent mortgage credit must be closely analyzed. A pattern of 15-day lates on a mortgage may indicate that the member has difficulty making payments. Delinquencies over 30 days reflect the member‟s inability to pay or disregard for credit obligations. Any late payments on mortgages should be fully explained by the member. A member who has recent late payments over 30 days will generally be ineligible for mortgage insurance approval. Collections The member should fully explain the reason an account was placed for collection. Favorable consideration may be given, based on “reasonableness” of the explanation and if all other credit is paid “as agreed.” Collections should be paid in full at or prior to loan closing. Judgments, Lawsuits, Litigation, Garnishments, and Repossessions These items must generally be paid in full or satisfied at or prior to closing. The member must furnish a satisfactory letter of explanation and must have established other good credit to be eligible for mortgage insurance approval. Tax Liens State and federal tax liens should be paid in full at or prior to closing. The member must furnish a satisfactory letter of explanation and have established other good credit. Bankruptcy The following discussion about bankruptcy matters is general in nature and intended to provide a high-level overview. CMG MI Underwriters are not authorized to provide legal advice to any credit union, member or other third party. Applicability and enforcement of bankruptcy laws depend on the unique facts of each case. Therefore, CMG MI Underwriters who have bankruptcy questions should first raise those questions with their immediate line manager and the line manager should contact the CMG MI Legal department if specific guidance is needed. To be considered for mortgage insurance approval, a bankruptcy must be fully discharged for at least four years (with documented extenuating circumstances a bankruptcy discharged for two years will be considered). The member must also re-establish good credit, demonstrating the ability to manage financial affairs. The credit report
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should not reflect any serious derogatory credit since the date of discharge (i.e., no mortgage or housing-related late payments, no collections, judgments, liens, or garnishments, no revolving or installment accounts 60 or more days late and only isolated incidents of 30-day late payments on revolving accounts). A loan to a member, whose Chapter 7 bankruptcy was discharged within the past two years, or a Chapter 13 bankruptcy discharged within one year, is generally not considered eligible for insurance. A bankruptcy beyond the member‟s control, such as one resulting from extended family illness, should receive more favorable consideration than one that has occurred because of poor financial management. In all cases, the member should furnish satisfactory written explanation, copies of documentation supporting the event and illustrating factors that contributed to the inability to resolve the problems that occurred from the event have been resolved, copies of the bankruptcy petition, schedule of debts, and evidence of discharge. Definitions of bankruptcy types (under the Bankruptcy Reform Act of 1978) are provided for informational purposes. Chapter 7 (Individual Liquidation of Debt) Under a Chapter 7 filing, an individual files a bankruptcy petition with the court seeking to discharge his or her debts. After the petition and various financial information forms are filed (such as a schedule of assets and liabilities, list of creditors, and statement of affairs), the court appoints a trustee with the power to administer the debtor‟s property. The filing of the petition results in an automatic stay, which prevents any further legal action by creditors against the debtor. A meeting with creditors is held to determine the assets of the debtor which can be liquidated and distributed to the creditors. A debtor must consider the loss of assets before filing a petition for liquidation since, once the petition has been filed, all of the debtor‟s property (except certain property exempted by federal or state law) becomes part of the debtor‟s estate to be liquidated for distribution to creditors. Certain debts are non-dischargeable in bankruptcy such as taxes, debts incurred by fraud, alimony, child support and separate maintenance, fines, student loans, and certain judgments. There are grounds for denial of discharge in a Chapter 7 proceeding including fraudulent transfers or concealment of property, failure to keep books and records, prior discharge within six years, or failure to explain loss of assets. Chapter 11 (Business Reorganization) A Chapter 11 filing is a remedy for a financially distressed business, enabling it to restructure its finances and continue operating. As in the case of Chapter 7 filings, the debtor (a partnership or corporation) is obligated to file certain financial documents with the court including lists of creditors and schedules of assets and liabilities. In a Chapter 11 proceeding, the debtor may remain in control of its business after reorganization is commenced and is referred to as a “debtor in possession.” In essence, the debtor in a Chapter 11 assumes the role of the trustee in a Chapter 7. The debtor in possession continues to operate the business with the protections of the automatic stay, which creates an environment for rehabilitation. Throughout the reorganization case, the debtor in possession (or a court-appointed trustee, if the court lacks confidence in the debtor) is required to file written reports with the court concerning the financial condition of the business and its continued operations. These reports provide both the court and the creditors with a close view of the debtor‟s ongoing financial condition. Chapter 13 (Individual Debt Adjustment or “Wage Earner’s Plan”) This plan enables individual debtors, under Court protection and supervision, to apply a portion of their future earnings to the payment of all or a portion of their debts over an extended period of time. The debtor is protected from creditors by the automatic stay while a repayment plan is developed and carried out by the Court. The underlying premises in a Chapter 13 proceeding is to encourage debtors to pay their debts instead of seeking discharge under Chapter 7. Similar in theory to a Chapter 11, the purpose of a Chapter 13 debt adjustment is rehabilitation, preservation, and continued use of a debtor‟s property, as opposed to disposition of assets through liquidation. There are several advantages for a debtor in filing a Chapter 13 over a Chapter 7. In a Chapter 13 case, the debtor‟s non-exempt assets are protected; they would be forfeited in liquidation. Also, if a debtor has nondischargeable debts, a Chapter 13 enables the debtor to reduce the balance or pay them back over an extended period of time (an opportunity which a liquidation case does not provide). Chapter 13 filings may also be available to debtors who are not eligible for a Chapter 7 discharge (i.e., a debtor who received a Chapter 7 discharge within the last 6 years can only file for a Chapter 13). There is also one significant difference between a Chapter 13 case and liquidation or reorganization cases: A Chapter 7 or 11 may be voluntary (initiated by the debtor) or involuntary (initiated by the creditors); a Chapter 13 case may only be initiated by the debtor.
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Foreclosure/Deed-in-Lieu of Foreclosure/Short Sale A member who has been foreclosed upon or given a deed-in-lieu of foreclosure or short sale should generally be considered an unacceptable risk and will generally not be eligible for coverage. The loan to members who was foreclosed or who gave a deed-in-lieu/short sale more than two years prior to the new loan application date may be considered as an exception and on a case-by-case basis only. The member‟s written explanation must be carefully evaluated and the circumstances surrounding the foreclosure/deed-inlieu/short sale should validate the alleged event. An exception should generally be granted only if the foreclosure or deed-in-lieu/short sale resulted from a regional catastrophe beyond the control of the member. For example: There was an economic downturn that caused wide-spread unemployment and resulted in the loss of property value. The member (1) lost his/her job; (2) he/she accepting a lower paying job and depleted all savings while attempting to maintain timely debt repayment; (3) due to the out-migration of population, there was no market for the property (hence, values declined); (4) the member had to relocate to find employment in his/her field; and (5) the remaining principal balance on the mortgage exceeded the depreciated market value of the home. If the member has successfully regained financial strength and demonstrates favorable regard for obligations, positive consideration may be given. Conversely, if the member has derogatory credit since the foreclosure (even though it might be considered minor), has incurred excessive obligations, or has not demonstrated an ability to save, he/she has not proven to be a favorable risk and should not be considered eligible for coverage. If the foreclosed loan was CMG MI-insured, the prior loan must be evaluated and must support the member‟s explanation of financial hardship. The underwriter should evaluate the member‟s credit profile as shown on the previously-insured loan to further support the member‟s overall history of favorable regard for credit obligations.
6.4.4
Excessive Use of Credit
Caution must be exercised if the member is carrying a significant amount of consumer debt. Numerous revolving accounts which are at or near their limit may indicate that the member is living beyond his/her income level. The underwriter should review the spread between the mortgage- and total debt-to-income ratios. An excessive spread is generally considered to be an amount greater than 10 points. Particular attention should be given to the member‟s credit pattern when underwriting refinance transactions to ascertain that the member does not have a history of debt consolidation through refinancing.
6.4.5
“No Credit” Guidelines
Not eligible for mortgage insurance. Loans for members with no credit are not eligible for mortgage insurance. CMG MI‟s statistical data has shown that a member with no demonstrated history of making regular payments to a third party is 2 to 3 times more likely to default than the average member. Loans to a member with no credit history must, therefore, be underwritten with the utmost diligence. “No Credit” is defined as: A member who has little or no established credit history through either traditional credit sources (Visa, Master Card, bank loan, etc.) or nontraditional means (utility company payments, child care, insurance premiums paid at least quarterly, etc.); OR A member who has not used credit within the last 12 months. An explanation for not having established credit is an essential underwriting consideration. The member characteristics and financial condition should correlate with the explanation given by the member. For example:
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The member may be a recent graduate, newly established in the workforce, living with his or her parents, and has not yet financed a new auto or established credit card accounts. Despite the lack of established credit, this member may be considered favorably based on current employment and a strong potential for future income growth, a demonstrated savings pattern, cash reserves, and an acceptable debt-to-income ratio. Members with a lack of traditional or nontraditional credit histories should generally be considered for more conservative loan terms.
6.4.6
Credit Scoring
Credit scores are available from each of the three major national credit providers: SM
Equifax - Beacon
TransUnion – Empirica score
Experian - TRW/FICO score
score ®
Credit scores range from low to high with the lower scores representing poorer credit. When the member has too few trade lines or has been in the credit system for too little time, a credit score will not be provided. Loans with nontraditional credit are not eligible for mortgage insurance. In addition to the use of credit scores, or comparable risk representative credit criteria, where required, the underwriter must evaluate the credit report and other sources of credit information to determine the member‟s credit history.
6.4.7
Valid Credit Score
For a credit score to be accepted by CMG MI in the underwriting process, the member must have an established credit history verified through traditional credit repositories. The score must be based on sufficient, accurate information. Too little information or information that is significantly inaccurate makes the credit score unusable. Although a credit score can be generated with one trade line, CMG MI does not consider the credit score valid unless at least three trade lines are evaluated for at least 12 months, regardless of AUS decision. The validity of the credit score and the number of trade lines is of importance if the credit history is “thin” or limited. Trade lines may be open or closed. A trade line is defined as a revolving or installment payment account. The trade line must not be in dispute and must clearly belong to the borrower in order to be eligible for consideration. Authorized user accounts cannot be considered as established credit. Collections, judgments, charge-offs, repossessions, foreclosures, bankruptcy repayment plans and credit counseling are not eligible trade lines. Thin credit refers to a file of credit information that contains very little data about the borrower‟s use of credit, most likely because there isn‟t a long history of credit use upon which to judge repayment ability. The valid credit score policy does not apply to all members who have a lengthy and in-depth credit history (multiple years and multiple active, inactive and closed accounts) do not have a credit score validity issue, although the minimum loan representative credit scores specified in these guidelines nonetheless apply.
6.4.8
Qualifying Credit Score
CMG MI requires a minimum of two credit scores when credit scores are required. To determine the appropriate score to use, the following guidelines will apply: For a single member with two credit scores, use the lowest score. For a single member with three credit scores, use the middle score. For more than one member, select the appropriate score for each member using the above criteria, and then the member with the lowest score should be used.
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For example: Member #1 has credit scores of 680, 685, and 690; Member #2 has scores of 690 and 695. The middle score for Member #1 (685) and the lowest score for Member #2 (690) should be considered. The member with the lowest scores will be used. In this case, the credit score of 685 will be used to determine the CMG MI credit rating of “fair.” ®
When the loan is approved through DU or LP one credit score is acceptable.
6.4.9
Methods for Determining Credit Score
CMG MI‟s Origination System and loan quality targets will apply CMG MI‟s standard credit scoring methodology of the Lower/Middle Method. CMG MI may accept any of the other following methods for selecting the representative credit score with prior credit union approval. Lower/Middle Method This is CMG MI‟s method for entering and scoring credit. Two or three scores are obtained for each member. If two are obtained, the lower score is the individual member‟s representative score; if three, the middle score is the member‟s representative score. The lowest individual member‟s representative score is considered the Indicator Score for the loan. Middle/then Average Method The Indicator score would be the average value of all the scores. Highest Wage Earner Income Method Two or three scores are obtained for the member with the highest stable monthly income. The individual member‟s representative score can be determined by using the Middle/Lower or Averaging Method. That score is considered the Indicator Score for the loan. Average/Average Method Two or three scores are obtained for each member. The Score for each qualifying member is the average value calculated from all usable credit scores received for the member. The Indicator Score is the average value of all underwriting scores.
6.4.10
Credit Bureau Alerts
All three credit reporting bureaus now offer fraud detection which alerts creditors to possible discrepancies. Called Hawk Alert, Safescan, and FACS, they identify possible inconsistencies between the loan application and the credit report. These inconsistencies can identify issues with the members surname, current residence, invalid addresses or telephone numbers, employment, and Social Security Number. It is important that the underwriter review these notifications/alerts, confirming all information matches the information provided on the loan application, resolving any discrepancies. Below are some examples of actions that should be taken for the various alert messages: “…high probability Social Security number belongs to another.” If this statement appears, it may not be a misrepresentation. For instance, if a middle name or middle initial is not disclosed on the application, this may generate an alert. However, another name associated with the members‟ name, address, or social security number would warrant further investigation. “…SS reported deceased” or “SS # not issued by the Social Security Administration.” There is a high probability of misrepresentation with these alerts. The underwriter must determine if there was an error in reporting. “ID Mismatch Alert” – Previous input address does not match file address. This could be an input error, or may indicate the member‟s primary address was misrepresented. “Telephone number inconsistent with address.” This alert would require further investigation of the member‟s current address versus the correct phone number. “Employer is shown as self-employed.” This alert would require further investigation to determine if the member‟s stated employer is actually a self-employed business.
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“OFAC Name Screen.” Designed to screen an applicant‟s name against an enhanced U.S. Treasury Department‟s Office of Foreign Assets Control (OFAC) database of specially designated nationals, drug traffickers, and money launderers. Members who are confirmed on this list are not eligible for mortgage insurance. “Member is a victim of fraud – contact Member prior to issuing new credit.” This alert would require the members be contacted to confirm they are pursuing new credit.
6.4.11
Two Social Security Numbers
Under extremely rare circumstances, members will have two social security numbers, generally due to a Social Security Administration error or if they are part of an INS amnesty program. Such situations are acceptable if the member provides an acceptable letter of explanation and the credit history has been checked and no derogatory credit is reported under both numbers.
6.5
Liabilities and Long-term Debt
The member‟s liabilities include all debts of a continuing nature, including:
Housing expense on the member‟s primary residence
Installment loan debts with a remaining payment term greater than 10 months
Revolving or open credit
All lease payments
Mortgage and other related expenses on any non-income producing real estate or net operating losses on investment properties
Alimony, child support, and separate maintenance payments
Taxes and insurance on any properties owned free and clear
6.5.1
Liabilities
For each liability, the underwriter must determine the unpaid balance, repayment terms, and the member‟s payment history. The credit report should be used as a resource for obtaining this information. If the credit report does not contain a reference for each significant open debt shown on the Loan Application, including outstanding mortgage debt, bank, student, or credit union loans; the credit union must provide separate credit verification. If a current liability appears on the credit report that is not shown on the loan application, the member should provide a reasonable explanation for the undisclosed debt. Documentation may be required to support the member‟s explanation. For example: The member explains that he/she forgot about the loan because he/she co-signed for a relative and the relative is making all of the payments. Copies of 12-months canceled checks from the relative may be required to support the explanation.
6.5.2
Payoff or Paydown of Debt for Qualification
Payoff or paydown of debt solely to qualify must be carefully evaluated and considered in the overall loan analysis. The member‟s history of credit use should be a factor in determining whether the appropriate approach is to include or exclude debt for qualification. As a rule-of-thumb: Installment Loans -- that are being paid off or paid down to 10 or fewer remaining monthly payments, should generally not be included in the member‟s long-term debt. Revolving Accounts -- if a revolving or open account is to be paid off or paid down but not closed, a monthly payment on the current outstanding balance should generally be considered as long-term debt. If debts are paid off and the account closed after the application date, the payment at the time of application must be considered in qualifying.
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6.5.3
Other Obligations (Long-Term Debt)
The following obligations should be considered in underwriting the loan: Installment Debt Generally, all installment debt that is not secured by a financial asset – including student loans, automobile loans, and home equity loans – should be considered as part of the members monthly debt obligations only if there are more than ten monthly payments remaining to be paid on the account. Deferred installment debt – such as student loans and loans in forbearance – must also be included as part of the member‟s recurring monthly debt obligations. If the credit report does not indicate a payment amount a copy of the member‟s payment letter or forbearance agreement should be obtained so the payment amount can be determined. Revolving Charge/Open Accounts/Lines of Credit Revolving charge accounts, open accounts, and unsecured lines of credit are open-ended and should be treated as long-term debts. These trades include credit cards, department store charge cards, and personal lines of credit. (Equity Lines of Credit secured by real estate should be included in the housing expense.) The minimum payment should be calculated as 5% of the outstanding balance unless otherwise indicated on the credit report or alternative verification form. Flexible Spending Cards, not to be confused with Flexible Benefits Credit Cards, is a type of revolving credit account. Also known as World Cards, Signature Cards, and/or No Preset Spending Limit Cards are a typical credit card with the exception that the card has both a revolving component and an open end component. Auto Lease Payments Because the expiration of a lease agreement for an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle; auto lease payments should always be included in long-term debt regardless of the number of remaining months on the lease. Loans Secured By Financial Assets Loans secured by the member‟s savings account, Certificate of Deposit, or other investment account (including a margin account against the member‟s stock portfolio) need not be considered long-term debt. The security instrument allows the credit union the right to access the asset to fulfill the obligation; payment is generally not required. Loans against tax-favored retirement accounts (i.e., IRAs, Keoghs, Elective Deferral - Section 401(K), and TaxSheltered Annuity - Section 403(B) plans) are generally considered to be a withdrawal from the plan. If funds are not repaid within a specified period of time, generally 60 days, the Internal Revenue Service is notified of the distribution and the member is subject to tax and penalty on the amount withdrawn. Loans against IRAs, Keoghs, 401(K)s and 403(B)s should not be considered long-term debt. Depending upon the structure and terms of a Defined Benefit Pension Plan, a member may be entitled to a loan against his or her invested funds. Again, depending upon the structure and terms of the plan, repayment on a periodic basis may or may not be required. A copy of the pension plan agreement and statement from the plan administrator should be requested to verify the member‟s repayment obligation and treatment for long-term debt. If there is a loan against any of the member‟s assets, only the amount net of the outstanding loan balance should be considered in determining the member‟s assets. Alimony/Child Support/Separate Maintenance Payments Alimony, child support, and separate maintenance payments with duration greater than 10 months should be treated as long-term debt. The debt should generally be documented with court records (i.e., the member‟s Divorce Decree or Legal Separation Agreement). Members, in many cases, feel that it is an invasion of their privacy and prefer not to provide these documents. The credit union is, none-the-less, expected to verify the member‟s long-term debt by whatever means possible. Copies of 12-months canceled checks or a statement from the court custodian verifying receipt of payments may be accepted as verification of the payment amount.
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Despite a Petition for Divorce appearing on the credit report, if there is nothing in the file that would cause the underwriter to believe that there is an obligation, a copy of the legal document is not required if: The member answers “no” to question “g.”, “Are you obligated to pay alimony, child support, or separate maintenance?” on the Uniform Residential Loan Application, Section VIII., Declarations; or The member provides a letter stating that he/she has no obligation for alimony, child support, or separate maintenance payments. Many credit unions use loan origination software to prepare the final 1003; certain fields default to the most common response. To be sure that the “no” is not just a typographical error, it is recommended that the underwriter review the member‟s handwritten loan application to verify consistency. Payments on Other Real Estate Owned When the member owns mortgaged real estate (other than investment property), the monthly payments of principal, interest, taxes, insurance, and other associated costs for real estate owned (other than the subject property) should be included in long-term debt. This will include second homes, vacant land, and other nonincome producing property. Home Equity Lines of Credit When the loan also has a home equity line of credit that provides for a monthly payment of principal and interest or interest only, the payment on the home equity line of credit must be considered as part of the member‟s recurring monthly debt. If the home equity line of credit does not require a payment due to no balance, there is no recurring monthly debt obligation so the credit union does not need to develop an equivalent payment amount. Calculating payments, when none is stated on the Credit Report or HELOC documents: If the equity line of credit is one year old or less, the full line amount should be used to determine the required repayment. For existing lines more than one year old at the date of loan application (to be re-subordinated to a new refinance mortgage), the current outstanding balance should be used to determine repayment. The payment calculation should be an amount that will amortize the balance of the equity line of credit over the remaining term at the interest rate currently in effect for the equity line on the date of the new loan application. If the remaining term is not specified, a repayment term of five years should be used. Non-reimbursed Employee Expenses When the member has non-reimbursed business expenses, such as classroom supplies, uniforms, meals, gasoline, automobile insurance and/or automobile taxes, the recurring monthly debt obligation for such expenses must be determined by developing a 24-month average using information from the IRS 1040, Schedule A and net out any automobile depreciation claimed on the Employee Business Expense Form 2106. If there is not a 24month history of these expenses an annualized monthly average should be developed and added to the member‟s recurring monthly expenses. Business Debt in Members Name When a self-employed member claims an obligation on the personal credit report is being paid by the member‟s business the underwriter must confirm that the obligation is paid out of the company funds and was considered in the cash flow analysis of the business. When the account in question does not have a history of delinquency, the business provides acceptable documentation the business paid the debt (12 months‟ cancelled company checks) and the underwriter‟s cash flow analysis of the business took the payment into consideration, then the payment need not be counted as a monthly recurring debt. If the business does not provide sufficient evidence that the obligation was paid out of company funds, the payment must be considered part of the member‟s individual monthly recurring debt. If the business does provide acceptable evidence of payment of the debt, but the cash flow analysis does not reflect any business expenses that related to the obligation, it is reasonable to assume the obligation has not been considered in the cash flow of the business. When this is the case, the debt must be considered part of the member‟s individual monthly recurring debt.
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When the account in question does have delinquency, the full monthly obligation must be considered as part of the member‟s individual monthly recurring debt. (To ensure the debt is only counted once, the net income of the business may need to be adjusted for any expenses related, if any, to the obligation.) Student Loans Deferred installment debt – such as student loans – must be included as part of the member‟s recurring monthly debt obligations. If the members credit report does not indicate the monthly payment that will be payable at the end of the deferment period, the credit union should request a copy of the member‟s payment letter or forbearance agreement so that it can be determined what payment amount to use in calculating the member‟s total monthly obligations.
6.5.4
Contingent Liabilities
The member may have a contingent liability as the result of co-signing a loan to enable another party to obtain credit. Not all contingent liabilities will need to be counted as part of the member‟s recurring monthly debt obligation. The contingent liability will not be considered a debt of the member if all of the following criteria are met: The loan is at least 12 months‟ old and the primary obligor has made all payments on the loan. The history of payments by the primary obligor is documented. The loan is current and there have been no delinquent payments since origination of the loan. If payment by the primary obligor cannot be verified, or if a sufficient or acceptable payment history has not been established, the loan should be included in the member‟s monthly recurring debt. Payments assigned to another party through a Court Order can, in some cases, become the responsibility of the original obligor in the event of default. If the obligation is not to be considered a long-term debt of the member, both evidence of the Court Order and timely repayment by another party should be provided. For example: The member‟s credit report shows a delinquent obligation. They have provided a divorce decree and settlement statement showing that the debt was assigned to the ex-spouse. Despite the agreement between the parties, if the ex-spouse defaults on this debt, our member may still be held liable. Unless we are provided with a written release of liability from the credit union, we should include this obligation in our member‟s long-term debt. If, however, the obligation is current, does not have a history of delinquencies, and is assigned to the ex-spouse through the court-ordered property settlement, we need not consider this debt when qualifying our member. Because a mortgage loan assumption may or may not include release of liability of the original obligor, the decision to include the debt as the member‟s liability should be determined using the above criteria unless satisfactory evidence of release of liability of the member is provided.
6.5.5
Debt-to-Income Ratios
Debt-to-income ratios are used to compare the member‟s anticipated monthly housing expense and total monthly obligations to his or her stable monthly gross income. Historically, credit unions have used two different qualifying ratios – a monthly housing expense-to-income ratio and a total monthly obligations-to-income ratio – to assess whether a member is able to meet the expenses involved in home ownership. However, since research has not demonstrated that there is a significant relationship between the incidence of mortgage default and the members‟ monthly housing expense to income ratios, our emphasis is on the total debt to income ratio (which consists of two components – monthly housing expense and the total of other monthly obligations).
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Housing Payment The Monthly Housing Payment includes the following: Principal and interest for the mortgage that is secured by the member‟s principal residence; Monthly costs for:
Hazard insurance,
Real estate taxes,
Mortgage insurance premium; and when applicable . . . Home owner association dues Leasehold payments Ground Rent Special assessments
Payments required to be made for subordinate financing. Total Debt Ratio Total monthly obligations are the sum of the following: Monthly Housing Payment - as described above Installment debts extending beyond ten months. Monthly PITI for second homes and other non-investment property that are non-income producing Lease payments - regardless of remaining lease term Revolving charge, open accounts, and lines of credit - calculated at 5% of the outstanding balance unless otherwise documented Alimony, child support, or separate maintenance payments - with more than 10 remaining payments Negative net rental income - from investment properties owned by the member Current real estate taxes and hazard insurance premiums for real estate owned free and clear. As a guideline, the proposed total monthly debt should be no greater than 45 percent of member‟s stable monthly income. In addition, when the income from more than one member is used and not all the members will occupy the property, the owner occupant member should have a debt to income ratio of 45% or less, excluding the income and debt from the non-occupant co-member.
6.5.6
Compensating Factors
Compensating factors are positive loan characteristics that add strength to a loan profile. Strong compensating factors may allow a member to receive an approval for the loan, even though the total debt ratio exceeds the recommended parameters. Favorable consideration may be given to loans with higher ratios if the following conditions exist: The member has excellent credit history, represented by a 720 or better credit score based on multiple high credit accounts from major creditors The member applies a large cash down payment to the purchase of the property or has a strong equity position in a property that is being refinanced. The member has demonstrated the ability to devote a greater portion of income to housing expense as evidenced by the member‟s current housing expense and total debt ratios. The residual income is equal to or greater than the PITI for the subject property There is less than a ten-point spread between the new housing debt and the total debt ratio The new mortgage payment does not exceed 110% of the prior/existing mortgage or rental payment
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The member has excellent liquid assets, represented by CDs, savings accounts, stocks and bonds (not retirement accounts) that are equal to at least 12 months‟ PITI The member demonstrates the ability to maintain a good credit history, accumulate savings, and maintain a debt-free position. The member exhibits the potential for increased earnings based on education, job training, or time employed or practiced in a profession. The member has a substantial net worth evidencing the ability to repay the mortgage regardless of income. The member has additional short-term income (such as social security income, alimony, child support, note receivables, mortgage differential payments, trust income, VA benefits) that could not be counted as „stable” income because the income stream will not continue for at least three years beyond the date of the loan application. The member has significant equity in other real estate owned, generally 30% or higher Energy efficient dwelling The member has sufficient financial reserves (at least six months) – of which a minimum of two months‟ PITI is liquid – to cover the mortgage debt in the event of an unforeseen circumstance. The member is purchasing a home as a result of a corporate relocation and there is a trailing co-member who, although has not yet obtained employment, has a history of employment in the previous location and is expected to return to work in the new location. If these or any other conditions are considered, adequate documentation should be included in the insurance application package and the compensating factors detailed on the 1008.
6.6
CMG MI Qualifying Rate/payment Fixed-rate, fixed payment mortgages will be qualified at the contract Note Rate. Fixed-rate mortgages with temporary buydowns will be underwritten at the initial, bought-down rate. Adjustable Rate Mortgages (ARMs) should be underwritten at a rate which anticipates “payment shock” to the member, based on the discount (or “spread”) between the initial payment rate and the fully indexed accrual rate (FIAR), member occupancy, and the possibility for negative amortization.
6.7
Short term ARMs (1 to 3 years fixed rate period) qualify using the greater of the initial rate or the Fully Indexed Accrual Rate (FIAR).
Hybrid ARMs (fixed rate periods of 5 years or greater) qualify at the start rate
Income Overview 6.7.1
Stability and Continuance of Income
A qualified member should have long-term, stable income from employment or other acceptable sources. Members who are in a line of work in which advancement is possible because of a continuing demand, who have demonstrated the ability to maintain full employment, and have advanced in standing should receive favorable consideration despite occasional job changes. Employment should be verified for two full consecutive years. If the member has an employment history of less than two years and was previously in school, the credit union should provide a copy of the diploma. Special consideration should be given to the upward mobility of a new college or trade school graduate. These members will be considered favorably if they have secured gainful employment and adequate future income and job opportunities can be anticipated because of their education and training. A member who has changed jobs to advance within the same line of work, which maintains income continuity, and is successful in that work, will also receive favorable consideration. The member should explain any employment gaps that extend beyond one month.
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When a member is employed by a relative, closely-held family business, the seller, real estate agent, Title Company, mortgage broker, or any other interested third party; the VOE cannot be the sole source of Income verification. Signed federal income tax returns for two years or W2‟s and pay stubs are required. The member‟s probability for continued employment should be evidenced in the file. In the case of negative comments received from the employer, the credit union must perform a detailed investigation. A summary of their findings should be provided in the insurance application package and the underwriting decision should be supported by system comments to the file.
6.7.2
Income Analysis
Stable monthly income considered for qualification is the member‟s verified gross monthly earnings from primary employment plus stable acceptable secondary income such as bonuses, part-time employment, commissions, or overtime. Income should be verified in writing by a reliable source. Verified secondary income may be considered for qualification if it has been received by the member for at least the past two consecutive years and continuation is probable based on foreseeable circumstances.
6.7.3
Income Calculation
Individuals generally receive income in fixed regular increments, usually paid monthly, semi-monthly, bi-weekly, or weekly. Some individuals are paid hourly based on a fixed or fluctuating set of hours per week. Each income is calculated differently as follows: Hourly: Hourly rate x number of hours x 52 weeks divided by 12 = Monthly Base Income. Weekly: Weekly base salary x 52 weeks divided by 12 = Monthly Base Income. Biweekly: Biweekly base salary x 26 weeks divided by 12 = Monthly Base Income. Semi-Monthly: Semi-monthly base salary x 24 weeks divided by 12 = Monthly Base Income Monthly: Monthly base pay as shown. (For some professions, i.e., teachers, monthly pay may not be based on a 12-month basis. The term for monthly pay increments should be confirmed as annualized over 12 months) Annually: Annual Base Rate of Pay (without overtime, bonus, or commissions) divided by 12 = Monthly Base Income. The Year-to-Date earnings for each payment type should be reviewed to ensure its consistency with the calculated monthly base income. In order to use other income to qualify (overtime, bonus, commissions, etc) there must be a minimum 2-year history of receipt and it must be expected to continue. This type of income should be calculated as follows: YTD earnings from the paycheck stub or VOE Plus
Wages earned from the W-2 for the previous year
Divided
Number of months
Equals
Average Monthly Income
Minus
Monthly Base Income
Equals
Average Other Earnings per Month.
It is important to see an earnings trend that is level or increasing from year to year. When earnings show a decline, there must be strong compensating factors to support using the income.
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6.8 Sources of Income 6.8.1
Salary and Wages
All base income from employment is considered for qualification provided proper verification is received and the income can be deemed likely to continue. Verification can be in the form of any or a combination of the following: Request for Verification of Employment form (VOE) Letter from the employer setting forth all of the employment/income information normally provided on the verification form Most recent 30 days‟ pay stubs which reflects year-to-date gross earnings, past two years‟ W-2 Wage and Tax Statements, and Verbal verification of employment by the credit union
6.8.2
Alimony, Child Support, and Separate Maintenance
For child support, alimony, and separate maintenance payments to be considered as income, it must continue for at least three years beyond the loan approval date. A complete copy of the divorce decree or legal separation agreement will be accepted as verification of income; the document must specify the amount of the award and the period of time over which it will be paid. The member must provide acceptable evidence of his or her receipt of funds for alimony or child support or maintenance payments – such as deposit slips, court records, copies of signed federal incomes tax returns, copies of member‟s bank statements showing regular deposits, copies of the canceled checks or court confirmation reports. Underwriter discretion is warranted.
6.8.3
Annuity
Annuity income is similar to pension and social security income except that it may not be payable for life. A copy of the most recent updated annuity renewal statement showing the effective date, amount, frequency, and duration of the benefit payments showing the income will continue for at least 3 years must be obtained.
6.8.4
Auto Allowance
Auto allowances are considered as acceptable stable income for a member, who has been receiving the payments for at least two years, provided all associated business expenses are also included. Auto allowances received for less than two years can be considered a compensating factor for slightly higher ratios. Use either an actual cash flow approach or an income and debt approach to calculate the income associated with automobile allowances, depending on whether or not the member accounts for the allowance on the Employee Business Expenses (Form 2106) or the Profit or Loss from Business (Schedule C) to the Form 1040. When the member reports the allowance on the Form 2106 or the Schedule C, the Cash Flow approach should be used to see whether the payments exceed or fall short of the member‟s actual expenditures. Any funds in excess of the member‟s monthly expenses are to be included as income. Any expenses in excess of the monthly allowance must be included as a debt. When the member does not report the allowance on either Form 2106 or Schedule C, the Income and Debt approach should be used. In this case, the full amount of the allowance is added to the member monthly income. However, the full amount of the lease or financing expenditure for the auto must be added to the member‟s total monthly debts.
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6.8.5
Boarder Income
This income is not eligible for consideration. Rental income from a boarder in the subject single-family property generally may not be considered as qualifying income. However, for community lending programs, Boarder Income up to 30% of the total gross income, can be utilized if the following conditions are met: The boarder (who may or may not be related to the borrower) has resided with the borrower and paid rent on a regular basis for at least 12 months. After loan closing, the boarder will continue to reside with the borrower in the new residence (or in the same home for a refinance transaction). The boarder must 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 boarders address as being the same as the borrowers address. The boarder must provide appropriate documentation of payment of the rental payments for the last 12 months, such as a copy of canceled checks. If these conditions cannot be met, the boarder income will not be considered qualifying income, but may be treated as a compensating factor to offset higher than normally accepted debt-to-income ratios.
6.8.6
Bonus Income
Bonus income can be paid in many different instances, on a monthly, quarterly, or annual basis; or as part of an incentive plan. It is important to determine the nature and consistency of the bonus to use it as qualifying income. Bonuses received annually, or on another periodic basis, are acceptable even if the amount fluctuates. However, an average for two years must be developed to determine what amount of bonus can be used to qualify. Projected bonus that has no historical basis is not an acceptable source of income. To be considered for qualification, the VOE and/or tax returns must clearly document receipt of bonus income for a period of at least two years and should establish the likelihood for continuation.
6.8.7
Capital Gains
Income received from a capital gain is generally a one-time transaction; therefore, it should not be considered as stable monthly income. However, if the member needs to rely on the income from capital gains to qualify, copies of two years of the member‟s tax returns which include the Schedule D must be provided. When the tax returns show that he or she has realized capital gains for the last two years, the credit union may develop an average income from the capital gains and use that amount as part of the income -- as long as the member provides evidence that there is additional property or assets that can be sold to generate additional capital gains.
6.8.8
Commissions
Commission income may fluctuate from year-to-year. It is, therefore, important to establish an earnings trend for at least two years. Commission income that is stable or increasing is allowable if substantiated through: A VOE and Signed federal income tax returns for the past two years, with Form 2106 attached. The calculation of commission income should generally be based on a two year average. All unreimbursed Employee Business Expenses on Form 2106 (reported on Schedule A of the Form 1040 of the U.S. Individual Income Tax Return) must be subtracted from the adjusted gross income. Commission income received for less than two years, or when earnings show a decline in the current year, should only be considered if: There is reasonable explanation for the change in earnings Likelihood of future commission income at a consistent level has been established
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There are compensating factors such as a low loan-to-value ratio or substantial cash reserves Members who receive 25% or more of their monthly income from commission must be qualified using the selfemployed guidelines. Two years tax returns plus a VOE containing YTD earnings is necessary to determine the qualifying income.
6.8.9
Disability
Disability benefit payments should be treated as stable income – unless the terms of the disability policy specifically limit the stability or continuity of the benefit payments. Benefits that have a defined expiration date must have a remaining term of at least three years from the date of the loan application to be used for qualifying the member. When a member is currently receiving short-term disability payments that will decrease to a lesser amount within the next three years because they are being converted to long-term benefits, you must use the amount of the long-term payments in determining the member‟s stable income. The credit union should obtain a copy of the member‟s disability policy or benefits statement to verify the amount of disability payments and to determine whether there is a contractually established termination or modification date. In addition, the credit union should obtain a statement from the benefits‟ payer (insurance company, employer, or other qualified disinterested party) to confirm the member‟s current eligibility for the disability benefits.
6.8.10
Dividends and Interest
Dividend and interest income may be used if properly documented, has been received for the past two years, and the same amount of interest/dividend income is likely to continue for at least three years. Verification should be in the form of two years tax returns, account statements, or the past two years‟ IRS Dividend Income Form 1099DIV or Interest Income Form 1099-INT. The assets must be verified as owned by the member. Any assets used for the down payment and closing costs must be subtracted from the total assets before calculating future interest or dividend income.
6.8.11
Family Business/Interested Party
When a member is employed by a relative, closely-held family business, the seller, real estate agent, Title Company, mortgage broker, or any other interested third-party, the VOE cannot be the sole source of income verification. Signed federal income tax returns for two years or W2‟s and pay stubs are required.
6.8.12
Family Medical Leave-of-Absence (FMLA)
If the member is on FMLA and is not expected to return to work before the loan closes, only the income the member is currently receiving may be used to qualify. This income must be verified and expected to continue. Regular/full-time pay may only be considered if the member has actually returned to work by the time the loan closes. Employment status and income must be verified prior to the loan closing. If the member is not currently receiving income, their regular full-time pay may not be used to qualify – even if they plan on returning to work at some future specified time. If they are receiving disability pay in an amount less than their regular full-time pay, only the income that is likely to continue may be used to qualify. Income from accumulated vacation and sick time may not be used to qualify because its continuance cannot be verified.
6.8.13
Foster Care
Income received from a state- or county-sponsored organization for the temporary care of one or more children may be considered as acceptable income if the member has a minimum two-year history of providing foster care services under a recognized program and is likely, in the foreseeable future, to continue to provide such services. Consideration should be given to the functionality and location of the new property (if a purchase transaction) in determining the possibility for continuation of foster care income.
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6.8.14
Gift Income
Gift income can only be considered if the member has a 2-year history of receiving it and the donor will verify the likelihood of its continuance. Tax-free gift income is not permitted. Tax returns are required to verify that the member pays tax on any gift income used to qualify.
6.8.15
Inheritance and Other Guaranteed Income
Ongoing income received from inheritance or other guaranteed sources – such as prize earnings, or lottery winnings may be used to qualify provided it can be verified that the income is regular and recurring. Typically, the member should have a documented history of receiving it for at least 2 years and verify that it will continue for at least 3 more years. A copy of the inheritance or award letter confirming the amount, frequency, duration of payments, and evidence of receipt for the previous 2 years is required. Members who do not have a 2-year history of receiving the income may still be considered contingent upon the terms of the pay-out. For example, the income is guaranteed to continue for the next 20 years but the member has only received one payment/installment.
6.8.16
Gambling Winnings
These funds are usually considered as a lump sum distribution and therefore not considered income unless the member is a professional gambler and there is evidence via their tax returns that the income has been received consistently for at least 2 years. (Expenses listed on Schedule A must be deducted from the qualifying income.)
6.8.17
Military Income
Military personnel may be entitled to various types of compensation in addition to base pay. Flight or hazard pay, rations, clothing allowance, quarters allowance and proficiency pay may be treated as part of stable income as long as future continuation can be established through verification.
6.8.18
Mortgage Credit Certificates
Mortgage Credit Certificates (MCCs) were authorized by Congress under the 1984 Tax Reform Act to reduce the amount of federal income tax paid by qualified homebuyers. Twenty five percent (25%) of the mortgage interest (up to a maximum of $2,000) is allowed as a credit against, or reduction of, a homeowner's tax liability. The MCC credit is effective as long as the property remains the member's principal residence.
A copy of the MCC should be included in the mortgage insurance application package.
The member's monthly housing expense may be reduced by subtracting the monthly amount of allowable tax credit from the monthly payment before calculating the debt-to-income ratios.
6.8.19
Mortgage Interest Differential
An employer may subsidize an employee‟s mortgage payments by paying all or part of the interest differential between the employee‟s present and proposed mortgage payments. These payments may be considered as acceptable income for qualification provided they are verified in writing by the member‟s employer stating the amount and duration of the payments. Acceptable forms of documentation include any of the following:
Request for Verification of Employment form
An executed copy of the employer‟s relocation agreement
A letter from the employer detailing the terms of the employer-paid interest rate subsidy
To be considered for qualification, the remaining duration should be at least three years. The differential payments should be added to gross income when calculating debt ratios; they cannot be used to offset the mortgage payment even if the employer remits directly to the mortgage credit union.
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If the mortgage interest differential arrangement provides for a step-down feature, the average monthly amount of the differential should be added to the member‟s income for qualification. For example: $100/month in the first year $ 75/month in the second year $ 50/month in the third year $
0 after 3 years
The average of $75 per month can be added to the member‟s income for qualification.
6.8.20
Non Occupying Co-borrower Income
The income of a co-borrower who will not be occupying the property may be considered as acceptable qualifying income if the LTV is 95% or less. However, the occupant member must still reasonably demonstrate an ability and willingness to make the mortgage payment and maintain homeownership. The income from the non-occupying co-borrower can offset certain weaknesses that may be in the occupant member‟s loan application – such as limited financial reserves, limited credit history, or a higher than normal qualifying ratio. However, the income from the non-occupying co-borrower cannot be used to offset significant or recent instances of major derogatory credit in the occupants-members credit history or an occupant member‟s inability to make the mortgage payment without regular and significant assistance from the non-occupying co-borrower.
6.8.21
Non Taxable Income
Nontaxable income provides more disposable cash to the member and may be increased (“grossed up”) by the amount that has been saved by the member in state and/or federal taxes, generally 25%, once it has been established that the income is likely to continue and remain untaxed. Examples of such income include:
Child support payments
Social Security benefits
Disability retirement benefits
Worker‟s compensation benefits
Clergy housing allowances
Foster Care incomes
Certain types of public assistance payments such as food stamps.
Certain investments (i.e., municipal bonds)
If the income is nontaxable and the income and its tax-exempt status are likely to continue, you may develop an “adjusted gross income” for the member by adding an amount equal to 25% of the nontaxable income to the member‟s income. Documentation that can be used for this verification includes award letters, policy agreements, account statement, or any other documents that address the amount of the income and the likelihood of it continuance for at least three years.
6.8.22
Notes Receivable
Stable income from notes receivable, including installment sales and land contracts, may be considered for qualification if the payments will continue for at least three years beyond the date of loan approval. A copy of the executed Note should be provided to establish the duration and amount of the payment. Documentation should also be provided to verify that the funds have been received for the last 12 months. Acceptable evidence includes copies of signed/filed tax returns or copies of the bank statements that show consistent deposits of these funds. Payments on a newly executed note that specifies a minimum duration of three years may not be used as stable income, but may be used to justify a higher qualifying ratio.
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6.8.23
Overtime
Overtime may be used to qualify the member if the employer verifies that the member has been receiving the overtime income for the last two years and indicates that it is likely to continue. Overtime earnings should be averaged over at least two years. It is important to establish a long-term earnings trend for overtime. Overtime earnings that are level or increasing from one year to the next are generally acceptable. If, however, the earnings show a decline in the current year, there should be viable extenuating factors for the overtime to be considered for qualification.
6.8.24
Part-Time and Second Jobs
Income from part-time and second jobs may be used to qualify if it can be verified as having been uninterrupted for the previous two years and if it has a strong likelihood of continuation. Consideration should be given to whether the part-time or second job is compatible with the member‟s primary employment with regard to number of hours worked, work schedule, and type of work. Verification of part-time or second job income must be supported by IRS W-2 forms, as well as a current VOE or paycheck stub.
6.8.25
Rental Income
Rental income received for a one-family investment property or a two-to-four unit property is acceptable stable income, even when the member occupies one of the units of a multiple-unit property, as long as the likelihood of the continuance of the income can be established. Proposed rent – such as the proposed rent for the member‟s current residence – is not acceptable unless it is supported by an appraiser‟s opinion of market rent for that particular property. If the property is a multi-unit residence or in a soft rental market, a higher vacancy and expense factor may be appropriate. If the subject property will be rented or is currently rented, the member or appraiser must complete the Operating Income Statement (Form 216) or a similar form to detail the information needed to determine cash flow and/or operating income for the property. For a property that is not rented, The Single-Family Comparable Rent Schedule (Form 1007) or a Small Residential Income Property Appraisal (Form 1025) can be provided to verify the gross income to be used in determining the income producing ability of the property. For a purchase transaction of a single-family or 2-4 unit property, the appraiser‟s opinion of fair market rent, the signed Operating Income Statement, and if applicable, copies of the current lease agreements should be provided. The gross rental would be the lesser of the appraiser‟s fair market rent or the lease agreement. Net cash flow will be determined by subtracting the proposed PITI from no more than 75% of the gross monthly rent. For a refinance transaction on a single-family or 2-4 unit property, complete federal income tax returns, including copies of Schedule E, and copies of current lease agreements are generally required to substantiate rental income. The net cash flow will be determined by using the net rental income/loss from the IRS form 1040, Schedule E, plus depreciation expense. When the rental income is from other investment property owned, rental income can be documented by obtaining copies of two years tax returns including the schedule E, or copies of the current lease agreements. If the member has owned the properties for more than 12 months, the tax returns are required to determine the property cash flow. If the net cash flow calculation result is a positive amount, that amount will be added to the member‟s income. If the net cash flow amount is negative, that amount will be added to the member‟s long-term debt.
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6.8.26
Retirement
Retirement or pension income is an acceptable source of stable income as long as the regular receipt of the payments is confirmed. Retirement income should be verified by letters from the organization providing the income, copies of retirement award letters, copies of filed tax returns, Form 1099-R, or copies of the member‟s two most recent bank statements reflecting the amounts deposited. If using tax returns to determine qualifying retirement income, the full amount of income (not the “taxable” amount reported on Form 1040) may be included. If the retirement income is from a monthly annuity payment or monthly distribution from a 401K, IRA, or Keogh retirement account; documentation must be provided to determine that the payments will continue for at least three years after the date of the loan application.
6.8.27
Royalty Payments
There must be documented evidence that the member has received the royalty payments for at least 12 months and will continue to receive them for at least three years after the date of the loan application. Copies of two years tax returns including the supplemental Schedule E will be required to verify the income.
6.8.28
Social Security
Social Security benefits that have defined expiration dates must have a remaining term of at least three years from the date of the loan application; this includes Disability Payments, to be considered as acceptable stable income. Acceptable verification includes a copy of the Social Security Administration‟s award letter, copies of the member‟s filed tax returns, and IRS W2‟s or copies of the member‟s most recent two months‟ bank statements to confirm regular deposit of payments. If using tax returns to determine qualifying social security income, the full amount of income (not the “taxable” amount reported on Form 1040) may be included.
6.8.29
Trailing Co-Borrower Income
When the relocation takes place in connection with a documented corporate relocation offered by the primary wage earners employer, some (or all) of the “anticipated” income from the job of the trailing co-borrower expects to obtain in the new area, may be considered as acceptable income. Anticipated income from the job the coborrower expects to obtain in the new area can be considered as stable if the following conditions are satisfied: The amount of the trailing co-borrower income used does not exceed 33% of the total qualifying income The income is not from self-employment The trailing co-borrower was continuously employed in the same occupation for two years immediately preceding the relocation The trailing co-borrower provides a statement of intent to work in the new location and describes the occupation for which he or she intends to seek employment Written documentation detailing how the employment opportunities and earning potential for the Trailing coborrower were determined. It is reasonably determined that the employment opportunities and earning potential for the Trailing co-borrower are comparable or better than the opportunities in the former location. Debt-to-income ratios do not exceed 45% The property is an owner-occupied, primary residence
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6.8.30
Trust Income
Trust income may be considered for qualification if it will continue for at least three years from the date of loan approval. Trust income should be documented by a copy of the trust agreement or the trustee‟s statement confirming the amount, frequency, and duration of payments. However, if this documentation does not include information about the historical level of distributions from the trust, two years complete, signed individual income tax returns may be required. Lump sum distributions made before the loan closing may be used for the down payment or closing costs, if they are verified by a copy of the check or the trustee‟s letter that shows the distribution amount.
6.8.31
Unemployment Benefits
Unemployment benefits are generally not considered an acceptable form of income because it is a short-term benefit. An exception may be warranted if the member is employed in a seasonal industry or in an occupation that is typically “jobbed out” by a union or other organization and unemployment benefits are verified as a typical and continuing source of income. In such instances, two years tax returns will be required to establish a long-term history of receipt will be required. If unemployment benefits are considered as qualifying income, the financing terms must be closely evaluated to ensure that payment increases or balloon features of a first or second lien will not impair the member‟s repayment ability. Additionally, the member must exhibit a positive credit and savings pattern.
6.8.32
Veteran’s Administration Benefits
Most VA benefits are considered acceptable forms of income if documented by a letter or compensation distribution from the Veterans‟ Administration and if such benefits will continue for at least three years from the date of loan approval. Verification of receipt must be provided. VA Education benefits will not be considered for qualification.
6.8.33
Welfare and Public Assistance
Income from welfare and public assistance programs may be considered, subject to the same guidelines used to qualify other types of income; duration and the likelihood for continuation must be considered. The underwriter should verify that geographic restrictions of the program or that a change in assets resulting from the home purchase will not disqualify the member from continued receipt of public assistance. The member must have documentation verifying the income has been received for at least 2 years and evidence that it will continue for three years.
6.8.34
Unacceptable Income
The following types of income or compensation are generally considered unacceptable for the purpose of qualifying members. (Exceptions, at underwriter discretion in the application of good, common-sense underwriting, will be considered.) Expense account reimbursements VA education benefits Retained earnings from business Any source of income that cannot be verified by the credit union Income that is not likely to continue more than three years beyond the date of loan approval
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6.9 Self-Employed Borrower The income of self-employed borrowers must be analyzed differently due to the nature of self-employment. The growth of the business is crucial. The viability, and therefore stability, of the business field is critical to the ability of the borrower to meet ongoing obligations. The length of time self-employed and overall experience in the field must be considered. Comparison of financial documents and tax returns must be completed. A borrower with a 25% or more ownership interest in a business is considered self-employed. If a borrower is self-employed, the stability of the business concern and the borrower‟s income pattern must be established. Consideration must be given to the following: The borrower should have been self-employed for at least two years prior to the loan application. Personal and business tax returns should reflect increases in income and assets with likelihood for continued growth. A borrower who has been self-employed between one and two years must have at least two years of previous successful employment in the same occupation in order to be considered favorably. A borrower who has been self-employed for less than one year has not established a history of stable self-employment earnings and is generally not eligible for coverage. Documentation The following documentation should be provided for all self-employed borrowers: Signed individual federal income tax returns (1040‟s) including all schedules for the previous two years. If the CMG MI approval date is more than 120 days after the business year-end, a current financial statement including a balance sheet and year-to-date profit/loss statement should be provided. Audited statements are preferred, but if not audited, must be signed by the preparer and borrower. If the business is a Corporation, S-Corporation, or a Partnership, copies of signed federal business tax returns for the last two years, complete with all schedules and current financial statements, should be provided. A business credit report may be required at the underwriter‟s discretion. CMG MI‟s Income Analysis - Cash Flow Method uses a “top down” method to determine average income for selfemployed borrowers based upon recent past performance. The form lists sources of allowable income and encourages a close examination and evaluation of the tax returns and financial statements.
6.9.1
Form 1040 U. S. Individual Income Tax Returns
Wages, Salaries, Tips, etc. An entry here does not require a supporting schedule. However, the taxpayer must attach all W-2statements issued by all employers. The underwriter should consider several points if this line reflects income. If the applicant operates as a sole proprietorship, he cannot pay himself a salary. However, if he is the owner of a corporation, he could be an employee and pay himself a salary. A partner could be an employee of the partnership, and therefore receive compensation in the form of “Salary” or “Guaranteed Payments;” however, this would be reflected on the borrowers Schedule K-1 (1065), issued by the partnership - not the W-2 line. (It may also indicate that a self-employed borrower's spouse is employed, in which case that employment should be verified independently with the employer.) Interest Income If interest income declared will be continuous at the same level and the asset will not be liquidated for the down payment and/or closing costs, it may be used for qualification. Tax-exempt interest, if continuous, should be added to interest income. Review of Form 1040, Schedule B, will disclose interest received from a Personal Note. To be considered as qualifying income, a copy of the Note should be provided which verifies that this income will continue for at least three years after the date of loan approval.
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Dividends If dividend income will be continuous and the stocks will not be liquidated for the down payment and/or closing costs, it may be used for qualification. The nontaxable distribution (shown on Form 1040, Schedule B) represents a return on investment to the shareholder and should not be considered as income. Alimony Alimony received as the result of a divorce or legal separation, and that will continue for at least three years beyond the loan approval date, may be used for qualification. Business Income Income and expenses for a sole proprietorship are reported on Form 1040, Schedule C. Depreciation may be added to net profit of the business to determine qualifying income. While depreciation is a non-cash item and, therefore, excluded from actual expenses, underwriting consideration should be given to the financial condition of the business and its ability to withstand additional liability or cash expenditure for replacement of fixed assets. Capital Gain or Loss Capital gains and losses will generally not be considered in determining qualifying income. An average net capital gain may be considered as income on an exception basis if:
There is a verified three year history of receiving such gains, and
The nature of the business involves the constant turnover of assets (i.e., a person who buys older homes, renovates them, and then sells them at a profit), and
Based on economic conditions and the borrower‟s past performance, there is reasonable expectation for continuation of income from capital gains.
If, however, the borrower is selling income-producing assets such as a stock portfolio, the income from both capital gains and dividends will eventually be reduced or eliminated. Neither the capital gain nor dividend should be considered as qualifying income. Other Gain or Loss Sale of business property, involuntary conversions, and recaptures (i.e., a gain resulting from recapture of depreciation) will be included on Form 4797 and will be reported as taxable income on Form 1040. Income that is adequately documented to show its continuance for at least three years from the date of loan approval (i.e., an installment sale) may be considered stable income for qualification. One-time gains and non-income items such as recaptured depreciation will not be considered income. Individual Retirement Accounts, Pensions, and Annuities The amount of IRAs, pensions, and annuities distributed to the borrower (including any nontaxable amount) may be considered for qualification if it will be continuously received by the borrower. Roll-overs of pensions and IRAs are nontaxable transfers that must be reported on the Form 1040. They are not, however, a distribution to the borrower and will not be considered as income. Lump-sum distributions (withdrawals) from an IRA, pension plan, or annuity are not considered continuous and recurring and may not be considered as income. Rent, Royalties, Partnerships, S-Corporations, Trusts, etc. Depreciation and depletion may be added to net income. Depreciation of investment property or depletion of an income producing asset (i.e., mineral or geothermal unit) will be shown on Form 1040, Schedule E. Analysis of the Partnership or S-Corporation tax returns and K-1s, Partner‟s/ Shareholder‟s Share of Income, Credits, Deductions, etc., will be needed to determine the borrower‟s pro-rata share of depreciation and depletion on Partnership or S-Corporation assets. Only the partner‟s share of depreciation or depletion may be added to net income for qualification. The durability and continuation of royalty and trust income must be verified if it is to be considered for qualification.
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Farm Income Depreciation may be added to income. The portion of an amortized expense allowed under IRS Code 179, however, is considered an actual expense and may not be added to income for qualification. Unemployment Compensation Unemployment benefits are generally not considered as an acceptable form of income because it is a short-term benefit. An exception may be warranted when the borrower is employed in a seasonal industry or is in an occupation that is typically “jobbed out” by a union or other trade organization and unemployment benefits are verified as a typical and continuing source of income. If allowed, unemployment compensation may be included as “Other Income” on the Income Analysis - Cash Flow Method worksheet. Social Security Benefits All social security benefits paid to the borrower (including any non-taxed amount) may be considered for qualification if they are continuous. Caution must be exercised to determine if social security benefits are paid to the borrower on behalf of a dependent and are subject to discontinuation based on a trigger event (i.e., dependent‟s age or status of residence with borrower). Other Income Careful examination is warranted to determine the nature and durability of this income. Extraordinary and non-recurring income (i.e., gambling winnings or a relocation bonus) should not be considered for qualification.
6.9.2
Form 1065 U.S. Partnership Return of Income
Total Income and Loss A partnership may be a partner in another business enterprise. Total Income may include income from that entity. Diligence must be exercised to determine that all relevant information has been provided to allow the underwriter to determine the viability of income from all sources. Other Income may include sources that are extraordinary and non-recurring. Unless verified to be continuous, other income should be subtracted from Ordinary Income of the partnership. Adjustments to reduce qualifying partnership income should be multiplied by the borrower‟s percentage of ownership in the partnership and subtracted from his or her qualifying income on the Income Analysis - Cash Flow Method worksheet before calculating income. Depreciation and Depletion Depreciation and depletion are considered non-cash items and may be excluded from the partnership‟s expenses. The amount of depreciation and depletion deducted on Form 1065, Page 1, should be multiplied by the borrower‟s percentage of ownership in the partnership and added to qualifying income on the Income Analysis - Cash Flow Method worksheet. Ordinary Income and Loss Ordinary income or losses are divided among the partners based on their percentage of ownership interest. The borrower‟s share will be reflected on the Individual Income Tax Return, Form 1040, Schedule E. No adjustment is required on the Income Analysis - Cash Flow Method worksheet. Balance Sheet The Balance Sheet, Form 1065, Schedule L, provides an overview of the partnership‟s financial position and the change in financial condition from the beginning to end of the tax year. Key solvency, efficiency, and profitability ratios (definitions discussed later in this chapter) should be calculated from the information on this schedule which will help to determine the viability of the partnership, and hence, the ability of the borrower to rely on this income for loan repayment.
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Form 1065 Schedule K-1 Partner’s Share of Income, Credits, Deductions
6.9.2a
Partner Information The borrower‟s ownership interest in the partnership will determine his/her liability for debts of the partnership.
A limited partner is liable only for his/her initial investment and any subsequent contributions made or to be made under the terms of the partnership agreement.
A general partner has unlimited liability (personal and business) for the debts incurred by the partnership.
The borrower‟s ownership percentage and any change in ownership interest during the tax year are indicated on this form. Analysis of Partner’s Capital Account The reconciliation of the borrower‟s capital position in the partnership will show if he/she contributed or withdrew capital during the year. Capital withdrawal or distribution of assets (other than earnings) are generally considered a return of investment to the borrower and are not taxed. Withdrawals and distributions are generally not considered income for qualification. At underwriter‟s discretion, and on an exception basis, withdrawals and distributions may be treated as income. A letter from the borrower‟s accountant or tax advisor is required to determine the business strategy and long-term impact on the partnership if withdrawals or distributions are granted to the partner on an on-going basis. If the capital account at year-end has decreased from the prior year or shows a negative balance, the borrower may be required to make an additional capital contribution. It may be necessary to review the partnership agreement or obtain a statement from the managing partner to determine if this is required. If capital contribution will be required, the underwriter must evaluate the potential impact on the borrower‟s personal assets and financial condition. Ordinary Income or Loss from Trade or Business Activities The amount of distribution to the borrower from partnership earnings is shown as Ordinary Income on the K-1 and is reported on the U.S. Individual Income Tax Return, Form 1040, Schedule E. Under IRS rule, the borrower is required to report partnership income only as of the last day of the partnership tax year. This may not correspond to the calendar year. The borrower may receive income from the partnership throughout the calendar year, however; if the partnership tax year-end falls after December 31st, the income may not be reported on Schedule E until the end of the next calendar year. Careful consideration is warranted to determine the borrower‟s actual cash-flow for debt repayment. Guaranteed Payments to Partners Guaranteed payments are made to partners for services rendered (i.e., a general/managing partner) or for use of capital. Guaranteed payments are considered income and subject to self-employment tax.
6.9.3
Form 1120S U.S. Income Tax Return for an S-Corporation
S-Corporations are typically small, new business ventures with very few shareholders (75 or fewer). The profits and losses, often involving start-up costs, are passed through to the individual shareholders who then report their share of profit or loss on their Individual Income Tax Returns. Ordinary Income Ordinary income includes operating profits and income from all sources. Other Income may include extraordinary and non-recurring income. If “Other Income” cannot be verified as stable and recurring, it must be subtracted from Ordinary Income for the S-Corporation, and the borrower‟s pro-rata portion must be excluded from qualifying income on the Income Analysis - Cash Flow Method worksheet.
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Compensation to Officers Salary paid to the borrower as an officer of an S-Corporation will be reflected on his/her W-2 Wage and Tax Statement and reported by the borrower as wages/salary on the U.S. Individual Income Tax Return, Form 1040. W-2 income will be reported by the borrower at the end of the calendar year in which the business tax year ends. The borrower may, therefore, have received income from the S-Corporation periodically throughout the calendar year, but may not have reported personal income on the Individual Income Tax Return, Form 1040, if the business year ends after December 31st. Special consideration must be given to the borrower‟s actual income and cash flow for qualifying purposes. Depreciation and Depletion Depreciation and depletion are considered non-cash items and should be excluded from the S-Corporation‟s expenses. The amount of depreciation or depletion deducted on Form 1120S, Page 1, should be multiplied by the borrower‟s percentage of ownership of the S-Corporation and added to qualifying income on the Income Analysis - Cash Flow Method Worksheet. Ordinary Income and Loss Ordinary income and loss is divided among the S-Corporation owners based on their percentage of ownership interest. The borrower‟s share is reflected on his/her U.S. Individual Income Tax Return, Form 1040, Schedule E. Balance Sheet The balance sheet, Schedule L, provides an overview of the S-Corporation‟s financial position and the change in financial condition from the beginning to end of the tax year. Key solvency, efficiency, and profitability ratios should be calculated from the information on this schedule and will help to determine the viability of the SCorporation, hence, the ability of the borrower to rely on this income for loan repayment.
6.9.3.a
Form 1120S Schedule K Shareholder’s Share of Income, Credits, Deductions, etc.
Shareholder Information The borrower‟s percentage of stock ownership is shown on this form. Ordinary Income or Loss from Trade or Business Activities The amount of distribution to the borrower from S-Corporation earnings is shown as Ordinary Income on the K-1 and is reported by the borrower on his/her Individual Tax Return, Form 1040, Schedule E.
6.9.4
Form 1120 U.S. Corporation Income Tax Return
Total Income Total income may include non-recurring income such as capital gains and “other” extraordinary, one-time distributions. If these sources of income cannot be determined to be durable, the borrower‟s pro-rata share (based on his/her percentage of ownership) should be subtracted from qualifying income on the Income Analysis Cash Flow Method Worksheet. Compensation to Officers The salary paid to the borrower as an officer or employee of the Corporation will be reflected on his/her W-2 Wages and Tax Statement and reported by the borrower as wages/salary on the Individual Income Tax Return, Form 1040. W-2 income will be reported by the borrower at the end of the calendar year in which the business tax year ends. The borrower may, therefore, receive income from the Corporation periodically throughout the calendar year but not report personal income if the business year ends after December 31st. Special consideration should be given to the borrower‟s actual income and cash-flow for qualifying purposes.
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Depreciation and Depletion Depreciation and depletion are considered non-cash items and should be excluded from the Corporation‟s expenses. The amount of depreciation or depletion deducted on Form 1120, Page 1, should be multiplied by the borrower‟s percentage of ownership of the Corporation and added to qualifying income on the Income Analysis Cash Flow Method worksheet. Net Operating Loss A net operating loss carried over from a prior tax year may be added to Taxable Income when determining the actual net income amount. This amount should be multiplied by the borrower‟s percentage of ownership of the Corporation and added to qualifying income on the Income Analysis - Cash Flow Method worksheet. Net Income The Total Tax amount should be subtracted from the Taxable Income before determining the amount of net earnings of the Corporation. The Corporation‟s net income is used to fund future business operations. Therefore, underwriter discretion regarding the use of net corporate income for qualifying purposes will be required. In this determination, the following factors should be considered:
The number of years the business has been in operation
The nature of the business and capital requirements (i.e., a small service-oriented business vs. a manufacturing firm requiring purchase of materials)
Economic factors influencing the success or failure of the business
Borrower‟s percentage of ownership interest
Overall borrower profile
6.9.5
Analysis of Financial Statements
Using the Balance Sheet, an effective way to examine earnings and the financial strength of a business is through key ratio analysis. While this type of analysis is secondary in importance to evaluating the tax return, it helps the underwriter determine the strength of the business and also to identify trends. It is especially useful when underwriting a borrower who is dependent upon income from a relatively new business. Ratio analysis should be considered a tool and not used as the sole determination of a borrower‟s capacity. Projected income should not be considered in the analysis of financial statements. The relationships between key financial measures can be categorized into three major groups: solvency, efficiency, and profitability. Solvency ratios Solvency ratios are used to evaluate a company‟s ability to meet short- and long-term obligations. When underwriting a self-employed borrower, most emphasis should be placed on the following measurements of solvency: Current Ratio, Quick Asset Ratio, and Debt-to-Equity Ratio. Efficiency ratios Efficiency ratios indicate management effectiveness in the control and use of assets. To be an effective evaluation tool, efficiency ratios must be compared to industry norms. Profitability ratios Profitability ratios show whether the business is earning a return for its owners.
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Key ratios The current ratio measures the business‟ ability to meet current obligations as well as provide a margin of safety to cover any possible decline in the value of current assets. A 2:1 ratio is considered standard.
CURRENT ASSETS Current ratio
=
------------------------------CURRENT LIABILITIES
The quick asset ratio is a measurement of immediate solvency. This ratio shows the amount of liquid assets available to cover each dollar of current debt. The “rule of thumb” standard is 1:1: the larger the ratio, the greater the liquidity. CURRENT ASSETS - INVESTOR EQUITY Quick Asset Ratio =
------------------------------------------------------CURRENT LIABILITIES
While not a ratio, net working capital is a measurement of the company‟s ability to expand, exploit market opportunities, and meet obligations. It is used in many of the efficiency ratio calculations. The nature of the business must be considered to determine the appropriate level of net working capital.
Net Working Capital = CURRENT ASSETS - CURRENT LIABILITIES Debt-to-equity is a measurement of the company‟s disposable capital. It also indicates whether long-term debt will burden the company with interest charges. A 2:1 ratio is desirable, though rarely attained. This ratio should generally not exceed 4:1.
TOTAL LIABILITY Debt-to-Equity =
------------------------OWNER‟S EQUITY
The net income-to-sales ratio is a measurement of profitability as well as an indication of the business‟ ability to withstand falling prices, rising costs, and/or declining sales. (The net income-to-sales ratio is often referred to as the “profit margin”.) Evaluation of adequacy depends on the nature of the industry. NET INCOME AFTER TAX Net Income-to-Sales =
-----------------------------------NET SALES
Ratios should be compared year-over-year to evaluate trends.
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6.9.6
Unaudited Financial Statements
Unaudited financial statements should be reviewed carefully to ascertain that the financial position of the business is accurately represented. Areas of focus should include: Balance Sheet - Assets Cash accounts - are any balances restricted? Are the “accounts receivable” current and collectible? What is the method of valuing inventory (cost, market, etc.)? Are buildings, machinery, equipment, and other fixed assets shown at historical cost or re-appraised at current value? Balance Sheet - Liabilities Trades payable could lead to a source of information concerning the bill-paying ability of the business. Is a business credit report necessary? Notes payables are another source of information in the area of creditworthiness. Balance Sheet - Owner’s Equity Was the owner‟s investment in cash or other property? Are the owners taking all of the earnings out of the business? Income Statement - Revenue Has cash been received for sales or are they sales “on account”? A comparison of the Balance Sheet Cash Account and Accounts Receivable should help answer this. The amount of sale proceeds which have not been collected will impact the cash flow of the business. Income Statement - Expenses The amount of ending inventory directly affects net income (e.g., the lower the ending inventory, the lower the net income; the higher the ending inventory, the higher the net income). Financial statements that are unaudited may artificially inflate the ending inventory to make net income “look good”. Are the expenses paid or “to be paid” in the future? Omitting expenses which have not yet been paid improves the net income amount shown on the income statement. By review of the Balance Sheet, the underwriter should determine if there are accounts payable. To check for consistency, compare the Income Statement to the tax returns. Divide total expenses by revenue (total income) to develop an expense ratio. If a significant difference exists, some expenses may not be listed on the Income Statement.
6.9.7
Red Flags for Tax Returns
Is the method of accounting (cash or accrual) shown on the financial statement? Is it consistently applied? If the preparer is a Certified Public Accountant, is there a cover letter describing the type of report being presented (compilation, review, or audit)? This is required of a CPA. Is the financial statement signed by the borrower and the preparer?
6.10
Member’s Assets
Assets are an important factor when determining a member‟s creditworthiness and financial strength. The member must have sufficient liquid assets for the down payment, closing costs, prepaid expenses, and reserves. Assets should be reviewed in conjunction with income and credit to determine the reasonableness of the transaction. A pattern of savings and an ability to manage assets should be demonstrated as well as confirmation that the funds are from an acceptable legal source.
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6.10.1
Funds to Close
The underwriter must verify that the member has adequate cash to cover closing costs, and reserves, if required.
6.10.2
Down Payment Requirements
Generally, we require the member to use his or her savings or other liquid assets to make a minimum cash down payment of 5%. However, there are some loan products that require the member to pay a different amount of down payment funds. Once the minimum down payment for the program has been met, the remainder of the funds can come from other acceptable sources, such as gift funds, grants, etc.
6.10.3
Deposit on Sales Contract/Earnest Money Deposit
The source of funds from the deposit on the sales contract must be verified if the funds are needed to qualify. The assets should reflect that the earnest money deposited with the purchase contract is from the member‟s own funds. If it cannot be determined that these funds were withdrawn from the member‟s account, additional verification of the source and evidence that funds have actually changed hands from the member to the seller, Realtor , escrow agent, or settlement attorney should be provided. Large earnest money deposits and deposits that exceed the amount customary for the area should be closely evaluated.
6.10.4
Closing Costs
Closing costs are expenses that are incidental to the sale of real estate, such as loan fees, title fees, appraisal fees, etc. In most instances the closing costs are paid by the member, however, others may pay these costs, when it is customary for the area. For refinance transactions, the closing costs may be included in the loan amount.
6.10.5
Prepaid Items
Prepaid items such as taxes, hazard insurance, ground rent, etc. are expenses that are paid in advance and usually prorated upon the sale. Typically, the following prepaid settlement costs are paid by the member, but can be paid by other parties (if paid by other parties the Interested Party/Seller Contributions maximums apply):
Interest charges covering any period after the settlement date;
Real estate taxes covering any period after the settlement date;
Hazard insurance premiums; and
Escrow accruals required for renewal of the mortgage insurance premium (unless the premium is being financed as part of the mortgage amount).
Gift funds can be used to pay the remainder of the closing costs and prepaid items.
6.10.6
Reserves
The member should generally have 2 to 6 months mortgage payments in the form of liquid assets remaining as reserve funds after closing. Cash reserves are of particular importance to loans with high loan-to-value ratios, properties in need of repair, and two- to four- family properties. The underwriter should not deny an application solely because the member‟s remaining liquid assets are less than 2 to 3 months mortgage payments. Assets are only one of the underwriting factors considered in the overall evaluation of the loan.
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6.10.7
Source of Funds
Various types of assets and the appropriate treatment for loan qualification are detailed below. The insurance application package must verify the availability and source of these funds. Borrowed Funds Borrowed funds that are secured by an asset other than the subject property may be used for the down payment and closing costs. These assets include savings certificates of deposit, stocks, bonds, other real property, personal property, and life insurance policies. The underwriter should verify the terms of the loan and confirm that the loan is secured. The monthly payments for the loan are considered long-term debt. If the loan does not require monthly payments, the underwriter should calculate a payment amount based on the loan amount, interest rate, and loan term. This amount should be considered as monthly debt. If the loan requires a balloon payment at maturity, the underwriter should evaluate the member‟s financial condition to determine the likelihood that cash will be available to satisfy this obligation when it becomes due. This does not apply to borrowed funds secured by 401K or retirement accounts (see Retirement Accounts). Proceeds from swing or bridge loans secured by other real estate owned by the member and not crosscollateralized by the subject property are permitted, provided that sufficient equity exists and the terms and conditions of the loan are included in the insurance application package. Positive marketing conditions for the secured property should exist. The member must qualify for payments on the new residence, the existing property, and an imputed monthly payment on the bridge loan. Ratios exceeding normally-accepted guidelines may be considered if there are strong compensating factors such as significant cash reserves and substantial equity in the secured property. Unsecured loans are unacceptable sources of funds for the down payment and closing costs. Checking and Savings Accounts/Certificates of Deposit The Verification of Deposit form or bank statements for the most recent two months should be provided as verification of funds on deposit in savings and CD‟s. Current balances should be supported by a two-month average balance. A recently opened account or large increase in an account balance must be investigated, the source of funds should be explained by the member and verification of the source should be provided. Bank statements should clearly identify the member as the account holder and include the account number, the time period covered by the statement and all deposits and withdrawals made during the period covered. If the member has taken a loan against his or her savings, the asset may be accessed for fulfillment of the obligation. Only the amount net of the outstanding loan balance should be considered in determining the member‟s assets. Cash-on-Hand Generally, cash-on-hand is not an acceptable source of funds for the down payment or closing costs. However, for a Community Lending mortgage, cash-on hand may be considered an acceptable source of funds for down payment and closing costs if the member typically uses cash for expenses. The following criteria apply: The credit report reflects little or no use of credit and a banking relationship has not been established. Residual income which is sufficient to have accumulated savings is evidenced by review of the member‟s income and obligations. The member provides an explanation of his/her savings habits. The credit union, escrow agent, or settlement attorney verifies receipt of funds prior to closing. Verification that funds has been deposited into a bank account and an updated credit report to confirm that funds were not borrowed may be required. Underwriter discretion is warranted.
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Collateral Pledge Account Several Combined Asset Mortgage (CAM) programs include a pledged collateral account as additional security for the mortgage loan. The type of pledged asset (Certificate of Deposit, Life Insurance, Annuity, etc.) and minimum cash equity will vary by CAM program. Prior program approval by CMG MI is required. The member‟s ability to fund the collateral account should be verified in the same manner as funds for down payment and closing costs. Collateral pledge funds cannot be used to make the monthly payments nor can they be released without CMG MI‟s prior approval. Gifts After contribution of the minimum required down payment of member‟s own funds (generally 3-5% based on the loan program), a portion of the member‟s down payment or closing costs can be provided by gift. Receipt of gift funds should be disclosed in the insurance application package. Gifts from individuals are acceptable, subject to the following criteria: A gift letter is provided that specifies the amount of the gift, the date funds were transferred (or will be transferred), and the donor‟s relationship to the member. The Donor of the gift should be a relative. A “relative” is defined as the member‟s spouse, sibling, child, grandparent, aunt, uncle, cousin, step-parent or step-child, or any other individual related by blood, marriage, adoption, or legal guardianship. Eligible gift donors may also include the domestic partner, fiancé, or fiancée of the member. If other than a relative, the motivation of the donor must be carefully evaluated. The gift letter must state that repayment is not required or expected. Verification of the donor‟s capacity to provide gift funds may be required. Additionally, if the member‟s domestic partner, fiancé, or fiancée has resided with the member for at least 12 months prior to the new loan application and will continue to reside with the member after loan closing, his or her funds may be pooled with those of the member and need not be treated as a gift. The use of gift funds is not eligible for second home and non owner-occupant members. The gift donor may not be a party to the transaction (i.e., seller, builder/developer, Realtor , mortgage broker). Gifts of Equity A gift of equity from an immediate family member may be treated as a cash gift (i.e., it need not be deducted from the purchase price of the subject property), if the following conditions are met: There is an executed Purchase Contract between the buyer and seller. The purchase price is a gross amount which includes the gift equity. The Purchase Contract details the gift of equity. The insurance application package clearly shows the amount of gifted equity, relationship of the donor, and states that the amount is, in fact, a gift and repayment is neither required nor expected. The member has contributed a minimum down payment of his or her own saved funds based on the gross purchase price of the property. Because the transaction is not arm‟s-length, settlement is completed by an independent third party (i.e., Escrow Company or real estate attorney) who can confirm the final equity exchange and ensure the HUD1 is documented as such. If the gift of equity is from someone other than an immediate family member (i.e., the builder/developer) it will be considered a sales concession and must always be deducted from the lesser of purchase price or appraised value before calculating the loan-to-value ratio. The underwriter should beware of cash-out refinances being disguised as sales/gift transfers. This technique is often used to “bail out” a delinquent homeowner. While we cannot require verification of the seller‟s paying habits, clues may be taken from a Preliminary Title Report that shows delinquent property taxes, a recorded notice of default, and/or other liens and attachments to the property.
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Gifts (or Grants) from a Public or Non-Profit Organization A gift or grant from a public or non-profit organization, church, or municipality is acceptable for a portion of the down payment or closing costs after minimum down payment requirements have been satisfied through use of the member‟s own funds. The gift must be documented by a copy of the award letter which includes all of the following: The amount of the gift or grant Acknowledgment that repayment is not required or expected Disclosure of how funds will be transferred (i.e., to the member, the credit union, or closing agent) Land Equity For a construction-permanent loan, the member‟s equity in the land may be recognized as down payment. If the land was purchased within the last 12 months, the purchase price less any existing liens will establish the member‟s equity. If the land was purchased over 12 months ago, the equity may be based on the current appraised value of the land less any liens. Lease with Option to Buy Only that portion of monthly lease payments that exceed fair market rent may be credited toward the down payment or closing costs. The insurance application package must contain a copy of the Lease/Option Agreement. Evidence of regular monthly payments is required. Fair market rent should be determined by the appraiser and included in the appraisal report. The member must contribute a minimum 5% cash down payment in addition to rent credits. Proceeds from Sale of Assets Cash from the sale of the member‟s personal or real property may be used for the down payment and closing costs as long as the member can provide evidence that she/he:
Owned the asset;
Has documentation to support the value of the asset;
Can prove the Transfer of Ownership (a copy of a bill or sale or statement from the purchaser); and
Provides the receipt of the purchase proceeds (deposit slips or bank statement).
Proceeds from Sale of Real Estate Proceeds from real property being sold prior to, or concurrent with, closing of the subject transaction may be considered a qualifying asset. A copy of the HUD-1 Settlement Statement to verify sales expense, payoff of liens, and net proceeds to the member may be required or may be a credit union‟s closing condition. Property under Contract for Sale When property is under contract, but has not yet closed, an estimated Settlement Statement (or other breakdown of costs and verification of lien payoff amounts) and a statement regarding the anticipated settlement date prepared by the escrow officer, attorney, or other settling agent may be accepted to verify and document down payment funds. Property Listed for Sale When the property is listed for sale, but has not sold, the member can be qualified on the basis of the anticipated equity. If the sales price has not been established, calculate the anticipated equity as follows: Listing Price – (10% of listing price + All liens) = Equity When the sales price has been established, calculate the anticipated equity as follows: Sales Price – (Sales Cost + All Liens) = Equity Sales costs are typically 8 to 10%, which includes sales commission and closing costs paid by seller. If the underwriter relies upon the credit union‟s closing condition requiring sale and evidence of minimum net proceeds, the approval should represent this reliance.
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1031 Property Exchange A 1031 Exchange – Tax Deferred or Like Property Exchange – is an exchange of real property in which no taxable gain or loss is recognized at the time of sale. Section 1031 of the Internal Revenue Code allows investors to defer the payment of state and federal capital gains taxes by exchanging one investment property with another, rather than selling it. A 1031 Exchange is an investment property exchange; therefore, primary residences and second home transactions are not permitted. A 1031 Tax Deferred Exchange can be used as the down payment for the purchase of an investment property with the following requirements: Product/program does not exclude investment property. There is no subordinate financing. A qualified intermediary must handle the loan closing. A qualified intermediary is an entity (usually a subsidiary of a title company) who enters into a written agreement with the taxpayer. The qualified intermediary cannot be an agent, attorney, accountant, investment banker, or broker. This exchange agreement requires the qualified intermediary to acquire and transfer the relinquished property and to acquire and transfer the replacement property. The relinquished property is the property „sold‟ and the replacement property is the property „acquired”. Copies of all closing documents – including the 1031 Exchange Agreement, Settlement Statement and Title Transfer – and the Purchase Agreement on the relinquished property must be obtained. Both Purchase Agreements on the relinquished and replacement properties must contain appropriate language to identify the 1031 exchange. Trade Equity on Manufactured Housing Trade equity will be considered only if: The member has contributed the minimum cash down payment prior to the consideration of the trade equity; and The maximum permitted equity is calculated based on the length of ownership. If the unit has been owned for more than 12 months, use 90% of the retail value as listed in the N.A.D.A. (National Automobile Dealers Association) ( Copy of the valuation report must be provided.) If the unit has been owned for less than 12 months, use the lesser of 90% of the retail value as listed in the N.A.D.A., or the lowest sales price in the last 12 months. Stocks and Bonds Only stocks of publicly-traded companies may be considered as liquid assets. The stocks of small, privately-held companies may have limited marketability and, therefore, will only be considered if liquidated and receipt of funds is verified. The value of stocks may be verified by copies of current statements from a brokerage firm. If, however, stocks are held by the member and not “on account” with a brokerage, value should be determined by receipt of certified true copies of original stock certificates and current statements of value from the newspaper or other independent and reliable source. (Date of the credit union‟s certification is recommended to ascertain that the stocks are currently owned by the member.) Bonds should be valued at their purchase price unless the redemption value can be determined and verified. Bonds may be verified by receipt of recent brokerage statements or certified copies of the bonds together with a recently dated newspaper quote. If proceeds from sale of stocks or bonds are used for the down payment or closing costs, confirmation of the sale or redemption and receipt of funds should be verified. Sweat Equity Not eligible for mortgage insurance. Generally, sweat equity is not an acceptable source of funds for the down payment, closing costs or financial reserves because it is often difficult to accurately assess the contributory value of the work. However, for some community lending programs, sweat equity may be considered on a case by case basis. Sweat equity may include materials furnished by the member or credit for labor performed, assuming that the member is suited to this line of work and he/she can verify the ability to perform the work in a satisfactory fashion. Itemized receipts for
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materials and/or an appraiser‟s statement of value for labor are required. The appraisal should certify completion in a workmanlike manner and compliance to building codes. Retirement Accounts Vested funds from Individual Retirement Accounts (IRAs), Keogh Accounts, Elective Deferral - Section 401(K), Tax-Sheltered Annuity - Section 403(B), and Defined Benefit Pension Plans may be used as a source of the down payment, closing costs, and financial reserves. A statement from the plan administrator is generally required to determine the percentage vested (and available for withdrawal) and the anticipated net amount of the distribution detailing any penalties and income tax payments. Only the net withdrawal (vested balance less estimated tax and penalty) may be considered as funds for down payment or closing costs. If the plan administrator does not provide the estimated tax and penalty amounts, the underwriter may determine this amount by considering the member‟s current state and federal income tax rate (either from state and federal income tax withholding tables or the member‟s prior year‟s individual income tax return) plus a 10% penalty for early withdrawal. While the tax and penalty may not be deducted from the distributed amount, it will become due at the end of the tax year and must, therefore, be considered. Funds in IRAs, Keoghs, 401(K), 403(B), and Pension Plans may be considered as cash reserves. Funds need not be withdrawn in order to be considered an asset. For these funds to be liquidated to meet any future short term cash requirement of the member, they will be subject to vesting, tax, and penalty as described above. When calculating the member‟s assets, only 70% of tax-favored retirement plans should be considered. If the member has taken a loan against their tax-favored retirement savings account, only the amount net of the outstanding loan balance should be considered in determining the member‟s assets. Trust Accounts Trust account funds may be used for the down payment and closing costs if the member is a beneficiary of the trust and has access to the assets. A statement from the trustee should be provided to verify the liquidity and availability of funds to the member. Unsecured Loans Unsecured loans are generally considered an unacceptable source of funds for down payment and closing. Examples of unacceptable borrowed funds include signature loans, lines of credit, cash advances on credit cards, and overdraft protection on checking accounts. Unverified Funds Unverified funds are not acceptable for down payment or closing costs unless they meet requirements for borrowed funds or cash-on-hand (above) or reflect monies to be saved from the member‟s monthly income prior to loan closing. If the down payment and/or closing costs are to be saved prior to closing, the required amount should be realistic in relationship to the member‟s current income, outstanding obligations, and the loan closing date. A statement from the member together with a proposed budget is recommended. Prior to loan closing, the credit union should verify that sufficient funds are available and obtain an updated credit report to ensure that funds were not borrowed. Wedding Gifts Cash received as wedding gifts is not usually an acceptable source of funds because it comes in small, varied sums and is difficult to document the source. However, funds may be used provided the member can provide proper documentation. (Wedding gifts cannot satisfy the minimum 5% down payment from the member‟s own funds.) The following documentation must be obtained to verify funds: A copy of a marriage license. Deposit slip showing the deposit of the gift funds, and An itemized list of the amount received along with the name of the donor and a signed statement from the member indicating the funds were a wedding gift and repayment is not required. Large financial gifts from close family members can be considered if properly documented. Substantial cash wedding gifts ($1,000 or more) from one individual must comply with standard gift documentation.
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6.10.8 Verifying Assets Assets must be verified to ensure the member has sufficient funds to complete the mortgage transaction, and if required, adequate reserves after closing. Assets may be verified with copies of bank statements or investment portfolio statements that cover activity in the member‟s account(s) and, if applicable, copies of the most recent retirement account statement that is available, which may be obtained directly from the member. Internet Downloads: For documents that are downloaded from the Internet, existence of the website from which the documents were derived should be verified. Documents that are downloaded from the Internet by the member must clearly identify the institution and the source of the information must be included in the Internet or “fax” banner that is at the top of the document. Printed web pages must show the Uniform Resource Locator (URL) address and the date and time printed.
6.10.9 Ineligible Source of Funds The following sources of funds may not be used in the calculation of assets: Proceeds from unsecured loans or person loans Gifts which must be repaid in full or partially Sweat Equity (except as permitted with community lending programs) Cash on Hand (except as permitted with community lending programs) Cash advances from a credit card or other revolving account Salary/bonus advances received against future earnings 1031 Tax Deferred Exchange proceeds on owner-occupied property or second home.
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7
Underwriting the Property
7.1
Property Evaluation
Adequacy of the collateral is a critical element of risk in the mortgage loan. CMG MI maintains standards for residential properties that are considered sound, reasonable, and necessary to ensure quality. These standards are consistent with Fannie Mae and Freddie Mac property eligibility criteria, support CMG MI‟s corporate objectives, and provide for compliance with state insurance laws, Fair Lending and Equal Credit Opportunities laws. The value of the property represents the ultimate security for the mortgage loan. Value may be described as the present worth of future benefits arising from the ownership of real property. The market value of real estate is the most probable selling price in terms of money which a property should bring in a competitive and open market under all conditions requisite to a fair sale, i.e. the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Each appraisal must be reviewed in detail to evaluate the following:
Adequate support for the value of the property by the appraiser
Present and future marketability of the property
Completeness and correctness of the appraisal forms and exhibits
Applicability and timeliness of the data use to determine marketability
Consistency, logic and accuracy of the appraisal.
All property evaluations must be made in relation to the marketing conditions of each respective property territory. Real estate factors which affect property valuation include:
Inventory/Housing supply levels
Demand
Appreciation/depreciation rates
Type and availability of financing
All appraisal reports must be carefully analyzed to ensure that they do not contain comments which can make loans uninsurable by CMG MI. CMG MI‟s claim settlement position could be seriously affected in the case of foreclosure if comments in the appraisal report are inconsistent with underwriting policy and are overlooked when the certificate is issued. For example: If comments regarding the improvements or comparative market data indicate that the property is in poor condition, the extent of repairs to be made should be documented in order to preserve the ability to enforce “restoration of damages.”
7.2
Property Definitions 7.2.1
Single-Family Detached, Attached, Townhouse, Row House
In detached properties, the homeowner is deeded the land on which the improvements lie which includes landscaping. In attached, semi-detached, and townhouse properties, the homeowner is deeded a specific portion of land on which the improvements lie. Minimal common elements may include landscaping, sidewalks, and common walls. Any Homeowners‟ Association dues or monthly maintenance fees (or the monthly equivalent of quarterly or annual fees) should be included in the monthly housing expense when calculating the debt-to-income ratios.
7.2.2
Planned Unit Developments
A Planned Unit Development (PUD) is a comprehensive development plan for a large land area. It usually includes residences, roads, schools, recreational facilities, and service areas in addition to commercial, office, and industrial areas. A subdivision having lots or areas owned in common and reserved for the use of some or all of the owners of the separately-owned lots may also be considered a PUD.
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To be considered a PUD, membership in a Homeowners‟ Association is required and there must be mandatory assessments for the use and enjoyment of the common areas. Zoning is not the basis for classifying a project as a PUD. Any Homeowners‟ Association dues or monthly maintenance fees (or the monthly equivalent of quarterly or annual fees) should be included in the monthly housing expense when calculating debt-to-income ratios.
7.2.3
Condominium Properties
Condominium projects may be designed and built for use as condominiums or converted to condominiums through filing of a legal Declaration of Condominium or Master Deed from properties designed and built as apartments or other improvements. Condominium conversion projects generally represent a higher risk so unique property standards are outlined for properties built as condominium projects and for those converted to condominiums.
7.3
Appraisal Requirements
All appraisals must be in writing. Electronic appraisals are acceptable but must be in a standard format as detailed below.
Single-family and Detached PUDs -- Uniform Residential Appraisal Form (Fannie Mae Form 1004/Freddie Mac Form 70, dated 2005) and Market Conditions Addendum to the Appraisal Report – Uniform Residential Appraisal form (Fannie Mae Form 1004MC/Freddie Mac Form 71, dated March 2009)
Condominiums -- Individual Condominium or PUD Unit Form (Fannie Mae Form 1073/Freddie Mac Form 465 dated March 2005) and Market Conditions Addendum to the Appraisal Report – Uniform Residential Appraisal form (Fannie Mae Form 1004MC/Freddie Mac Form 71, dated March 2009)
2 Unit Properties – The Small Residential Income Property Appraisal Report (Fannie Mae Form 1025/Freddie Mac Form 1072 dated March 2005) and The Operating Income Statement (Fannie Mae Form 216)
Manufactured Homes – Manufactured Home Appraisal Report, Form 1004C/70B
Cooperative Housing Units -- Individual Cooperative Interest Appraisal Report - Fannie Mae Form 2090 and the Exterior-Only Individual Cooperative Interest Appraisal Report - Fannie Mae Form 2095 and Market Conditions Addendum to the Appraisal Report – Uniform Residential Appraisal form (Fannie Mae Form 1004MC/Freddie Mac Form 71, dated March 2009)
The appraisal report should be prepared by a state-certified or state-licensed appraiser in accordance with Uniform Standards of Professional Appraisal Practices (USPAP).
7.4
Property Flipping (1/2010)
If the seller acquired the subject property less than 90 days from the date of the purchase contract, the loan is not eligible for mortgage insurance. But there are exceptions, which are noted below. It is critical for all transactions that the property seller be the owner of record for the subject property on publically available documents. The lender should confirm that the seller on a purchase or the member on a refinance show as the owner of record when a new appraisal is required. Examples of acceptable documentation include:
The appraiser‟s analysis and conclusions in the appraisal report
A copy of a recorded deed or mortgage
A recent property tax bill or tax assessment notice
A title report
A title commitment or binder
A property sale history report
This documentation is especially important for transactions involving a purchase contract that has an assignment (or sale) and /or “back‐to‐back”, “simultaneous”, or double escrows to support the property acquisition, financing and closing.
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It is critical for the lender to analyze and review the sales of the subject property and the sales price trend in relation to the appraiser‟s opinion of value to confirm that they are reasonable and representative of the market. The following property sales/transfers are not required to meet this policy. The seller is:
A lender, mortgage investor, or a mortgage insurance company that acquired the property as a result of a foreclosure, or a deed in lieu of foreclosure
A spouse who acquired the property through a divorce settlement
An employer that acquired the property through its relocation program
An administrator, executor, or personal representative selling property of an estate
The underwriter must analyze the appraisal to determine:
7.5
What has been improved, and if the improvements have been completed in a professional and workmanlike level
If the appraiser indicates the improvements meet local codes
If the neighborhood supports the improvements (could be over‐improved); and
That the appraiser did not give dollar‐for‐dollar value increases in the value for the improvements but justified any adjustments with comparables
Property Standards
CMG MI‟s property standards vary by market acceptance for each property type. Following are general parameters under which property is considered acceptable collateral for loans insured by CMG MI. Minor deviations to these property standards may be considered in relation to the overall evaluation of the property and should not be used as the only reason for rejection of a loan. General Property Conditions
The appraisal should contain sufficient information so that the reader is able to understand the report and will not be misled or confused.
The neighborhood is one of the most important considerations in evaluating the property as security for the loan because it outlines the general marketability of the property. If the appraiser has noted any of the following items in the Neighborhood section of the appraisal report, careful consideration should be given to insuring loans in the neighborhood.
Growth Rate – Slow
Property Values – Declining
Demand/Supply – Oversupply
Marketing Time - Over 6 months
Change in Present Land Use - Likely or In Process from single-family use
Any comment that indicates adverse influences affecting marketability or market conditions in the neighborhood. For example: Factors that may influence marketability include proximity to employment and support services (i.e., grocery stores, dry cleaners), adequacy of transportation, ingress and egress to/from the neighborhood, presence of environmental hazards, airport or traffic noise, or buffers protecting properties from adverse influences. Factors that may affect market conditions include the inventory of competing properties, overbuilding, sales and financing concessions (i.e., marketing programs offering loan discounts, interest rate buydowns, and other give-a ways) and availability of financing.
Vacancy rate of neighborhood is low and stable.
Neighborhood is “built-up” over 25% and is showing steady growth.
Marketing time is less than 6 months.
Design and material usage should be typical of the neighborhood. Pioneering designs such as underground
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improvements, irregular floor plans, log cabins, and geodesic domes which lack a ready resale market are generally not acceptable.
The site of the subject property should be typical of the neighborhood and sufficient in size to adequately support all improvements. The following conditions should be evident in the Site section of the appraisal report and any deviations should be adequately explained in the Comments section.
Size and shape of the lot adequately support all improvements.
Site characteristics are typical of the area.
Maximum lot size is 10 acres (unless otherwise typical in the market) if the property is residential in nature. Agricultural-type properties are not eligible for mortgage insurance.
The Highest and Best Use as improved should be the present use an expected to be a residential use.
There should be no easements or encroachments which could adversely affect the market value.
Any adverse site conditions (i.e., special assessments, slide areas, illegal or legal non-conforming zoning use) or superior site conditions (i.e., view) that would affect value or marketability should be discussed in the appraiser‟s comments and have corresponding and appropriate adjustments made to Land Value in the Cost Approach and Site/View in the Sales Comparison Analysis, if applicable.
Site does not have soil conditions designated as “dangerous to health” or “unsupportive of improvements.” Note: If the appraisal report notes that the subject property is negatively affected by environmental hazards, the appraisal should be carefully evaluated to ensure that the appraiser has made appropriate depreciating adjustments, if warranted. If the appraisal report states negative environmental hazards may be present but the appraiser makes no additional comments or depreciating adjustments, the underwriter should make further inquiries of the credit union, a spot check appraiser, or the local governing agency to determine if further analysis by the appraiser is warranted. If inquiry by the underwriter substantiates that environmental hazards exist and may have a negative impact on marketability of the property, the appraisal report must reflect the proper depreciating adjustments. If the appraiser states that the negative impact is not measurable due to insufficient data in the marketplace, the loan should generally not be insured by CMG MI.
The Improvements section of the appraisal report should be fully developed so that the underwriter is able to determine that the improvements are typical for the neighborhood. Any items not typical of the area which could cause loss of marketability must be explained in the Comments section. The following conditions should be present:
The improvements should be in a livable state and not in need of any major repairs or remodeling in order to be marketable.
Additional features (such as energy efficient items), condition of the improvements (i.e., physical or functional depreciation, repairs needed, and quality of construction) and adverse environmental conditions (such as toxic substances) must be addressed by the appraiser‟s comments and have appropriate, corresponding adjustments made to the Cost Approach or Sales Comparison Analysis, if applicable.
When the Cost Approach is provided, it is based on the principle of substitution which estimates maximum value of the property by the cost of acquiring an equally desirable and valuable substitute property, assuming that no delay is encountered in making the substitution. This value is determined by utilizing a reproduction cost which anticipates construction of an exact duplicate of the subject building at current prices, or a replacement cost which involves construction of a property of equal utility using current design and materials. When reviewing the Cost Approach, consideration should be given to the following factors:
Estimated land value should generally not exceed 40% of the total indicated value. Higher land value may occur in exclusive neighborhoods, waterfront properties, and properties with special views. To be acceptable, land value must be considered typical for the area.
No personal property should be included in the indicated value.
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In the Sales Comparison Analysis (also known as the Market Data Approach), an estimate of value is determined by comparing the subject property with recently-sold properties similar to the subject. Since no two properties are exactly alike, each comparable is compared to the subject property, and the sales price of the comparable property is adjusted for any dissimilar feature. This analysis should consider property marketability, comparability, conformity and typicality for the area in which the subject property is located. The following considerations should be given to review of the Sales Comparison Analysis.
Market appeal should be demonstrated by comparable sales having similar size, layout, and characteristics to the subject.
Three comparable sales from the subject‟s marketing area should be used. In new subdivisions, the appraisal should have at least one sale within the general market area and one sale within the subject subdivision or project. Preferably the third sale should also be from within the same subdivision or project as the subject as long as it is an arms length sale and the builder/ developer is not involved with the sale.
Comparable sales should be no more than six months old unless the reason is satisfactorily addressed by the appraiser. Shorter marketing times are necessary for property in either declining or increasing value markets.
Sales concessions and financing concessions must be consistent with information provided in the Neighborhood analysis section. The appraiser should make appropriate adjustments to the comparable sales to reflect the value of these concessions. Additional explanation may be required to support the adjustments.
Builder/seller contributions are limited to interest rate buydowns and reasonable and customary closing costs which would normally be paid by the member and subject to program limitations.
Total net adjustment of each comparable sale should generally be within 15% of its sales price; line item adjustments should not exceed 10%; gross adjustments should be within 25%.
The Income Approach is only required when the subject property is located in a neighborhood where rental properties are prevalent and economic market rents and gross rent multipliers can be substantiated for development of an indication of value. If this situation does not exist, the appraiser should indicate that the Income Approach is “not applicable”.
Condition comments should not reflect any items that may detrimentally affect the market value or marketability of the property. All new construction or major remodeling should be completed prior to the insuring the loan.
The final estimate of value should fall within the range of indicated values shown by the final adjusted sales prices of the comparable sales.
7.6
Condominium Project Eligibility
The following are additional considerations in review of the Individual Condominium appraisal report:
No sales concessions (i.e., give-away, free trips, decorator allowances, rebates, etc.) are offered.
The price range is 80% or less than the price range of single-family detached properties in adjacent neighborhoods.
The project has or will have less than 40% investor ownership when sold out.
There is less than one year‟s supply of condominium inventory in the subject‟s area.
The apartment occupancy rate for the area is at least 90%.
The amenities (i.e., recreational facilities, parking, etc.) are not leased back to the developer.
Land is vested in fee-simple estate.
The floor plan and unit sizes are functional and marketable.
Parking is easily accessible from owners‟ units.
Unit type and size provide typical utility for the area.
Market appeal is demonstrated by comparable sales having similar size, layout, and characteristics to the subject.
The site of the subject condominium project should be sufficient in size to adequately support all improvements. The following conditions should be evident in the Site section of the appraisal report and any deviations should be adequately explained by the appraiser in the Comments section.
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The project density should be typical of the area.
Present improvements should conform to zoning regulations.
The ingress and egress to/from the project should support the density of the condominium and typical of the area.
The Project Improvements section of the appraisal report should be fully developed in order for the underwriter to determine if the improvements are typical of the neighborhood. Any items not typical of the area which could cause loss of marketability should be explained in the Comments section. The following conditions should apply:
There should be no comments in the Project Improvements section that indicate slow absorption or lack of appeal due to condition of the project, quality of construction, unit mix, or other factors.
There should not be a large percentage of units on the market (generally not more than 20% of the units in project).
The member‟s intended use (i.e., primary residence or second home) should be consistent with predominant occupancy of the project.
There should be no comments regarding functional or physical inadequacies noted in the Subject Unit section.
The Project Analysis section should demonstrate the adequacy of the Homeowners‟ Association dues, quality of management, and enforcement of by-laws by the condominium association. Through review of the Project Analysis Addendum (Analysis of Annual Income and Expense - Operating Budget, FNMA Form 1073A/ FHLMC Form 465B) or appraiser‟s comments, the underwriter should ascertain that the following characteristics are present: Homeowners‟ Association fees are adequate to support the amenities offered. Fees compete with other projects in the marketing area. Note: In new projects, it is common for the first year‟s assessment to be artificially low for marketing purposes. The underwriter should give careful consideration to the adequacy of fees in relation to current maintenance and reserves as well as the impact of increases in dues on the member‟s debt-to-income ratios. Also, careful analysis should be given to the budget of a small project to determine if project maintenance is realistic and in balance with the price of the unit.
The project should be managed by a knowledgeable, professional group or management agent outside of the developer‟s control.
The Cost Approach is seldom used in the evaluation of individual condominium units due to the difficulty in estimating the apportioned value of the common elements. The Cost Approach is not required in the appraisal of a condominium unit.
Three comparable sales within subject‟s marketing area should be used. If resales have occurred in the subject project, two comparable sales should be from within the project and one comparable sale should be from a competing project. In a new development, two comparable sales should be from outside the subject project.
Comments regarding the condition of the unit should not reflect any items which would detrimentally affect the market value or marketability of the property being insured.
7.7
Condominium Conversions
Condominium conversions include apartments or improvements built for other uses and converted to condominium projects through legal filing of a Declaration of Condominium or Master Deed. Rehabilitation of the property may or may not have taken place at the time of conversion. It should be noted that condominium conversion projects are higher-risk properties. Additional considerations for Conversion projects are as follows:
If converted from apartments, the project was desirable and successful as a rental property with a high level of occupancy.
If converted from improvements other than apartments, marketability of units has been firmly established.
There are be no competing “built as condominium” projects within the same price range in the immediate area.
If improvements are over five years old, major mechanical systems and equipment have been replaced or refurbished, including roof, heat and air conditioning systems, kitchen appliances, bathroom fixtures, electrical and plumbing systems, floor coverings, and so forth.
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The operating budget must adequately support the maintenance of structural and mechanical components. An engineer‟s report may be required to verify adequacy of reserves.
Quality of construction and utility should be comparable to new condominiums.
Amenities should successfully compete with those of surrounding projects.
The project should be well located, with convenient access to major thoroughfares.
7.8
Two-to-Four Units Appraisal Review
Small residential income properties (2-4 units) should be considered favorably as security. The following are additional considerations in review of the 2-4 units property appraisal:
There is less than a one year supply of 2-4 units in the subject‟s immediate area.
Maximum marketing time is less than nine months.
The vacancy rate of the neighborhood is low and stable.
The apartment occupancy rate in the area is at least 90%.
The neighborhood is at least 50% built-up or is showing steady growth.
No sales or rental concessions (i.e., give-a-ways, free trips, decorator allowances, rebates, etc.) are being offered.
Land is owned in fee-simple estate.
Floor plan and unit sizes are functional.
Size and shape of the lot adequately support all improvements.
Site is typical of competing 2-4 units and the market area.
Design and material usage are typical of the neighborhood. No pioneering designs should be accepted.
Generally, the livable square footage is not less than 550 square feet per unit.
The improvements section should indicate that features of the property, including modernization, on-site parking facilities, appliances, and insulation are typical for the market area.
The Small Residential Income Property Analysis Report must provide comparable rental data from which the potential economic rents of the subject property can be accurately projected. The comparable rental data should include the following:
Three comparable rental properties within subjects marketing area whose characteristics are similar to the subject.
Adequate information on the comparable rental properties should be provided to enable an informed evaluation of actual and forecasted rents.
Analysis of monthly rent per square foot of living area and monthly rent by room count comparing the subject to the comparable rental properties.
The major difference between the Sales Comparison Analysis of a single-family property and that of a 2-4 unit property is the consideration of units of value. The appraiser calculates units of value to determine the most common price 2-4 unit buyers and sellers of residential income properties will use to make their purchase decision.
Units of value in the Sales Comparison Analysis of 2-4 unit properties include:
Sales Price per square foot of Gross Building Area
Gross Monthly Rent Multiplier
Sales Price per Unit
Sales Price per Room
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When reviewing the Sales Comparison Analysis of a 2-4 unit property, additional consideration should be given to the following:
Financing or other sales concessions must be considered in relation to typical market acceptance and appropriate adjustments should be made to the comparable sales to reflect the value of these concessions.
The final reconciliation of value should consider any unadjusted units of value reported in the Sales Comparison Analysis.
Total expenses and replacement reserves should be typical to those of competing properties.
The appraiser‟s comments should indicate that there are no conditions which could detrimentally affect the market value or marketability of the property.
All new construction or major remodeling should be completed prior to insuring the loan.
7.9
Distressed and Declining Markets Appraisal Review
It is critical to review and analyze the appraisal for every loan to ensure that the property value is supported. This review should be completed regardless of any AUS, collateral assessment model, or other messaging received. A poor, inaccurate, or incorrect appraisal report is not corrected by a reduction in the LTV. This information is provided to give guidance on how to identify distressed/declining markets in the event such information may not be indicated on the appraisal report or when the AUS messaging does indicate distressed/declining market. It is important to recognize that the AUS messaging and the information provided in the appraisal can be helpful in determining when a more careful review of the appraised value is required. Although, there is no standard industry definition of what constitutes a distressed/declining market, generally this is a specific geographic area with property values that have been influenced by foreclosure, unemployment, and other factors affecting the property values in those areas or specific geographic areas with property values that have been declining or are likely to decline. From a lending perspective, the greatest credit risk occurs when a property is overvalued. The overvaluing of a property results in the understatement of the (LTV) ratio and/or insufficient collateral. The possibility of overvaluation increases in a distressed/declining market. With recent trends indicating that home prices are falling in many areas across the country, it is important to thoroughly review the appraisal report to ensure that it accurately reflects the current market value of the subject property. There are a number of factors found on the appraisal report that can be used to determine if a property is located in an area where prices are falling. These factors include the property‟s location, comparable sales, neighborhood characteristics, and current market trends. The degree to which these factors influence the subject property‟s value should be fully disclosed and supported by the appraiser on the appraisal report. APPRAISER’S RESPONSIBILITIES It is the responsibility of the appraiser to use industry data and market trend information to determine if property values are declining in a particular area. The appraiser‟s analysis should demonstrate an understanding of the subject property‟s location, neighborhood characteristics, and current market conditions in order to accurately access the value of the subject property in a specific geographic area. In short, the appraisal needs to support the value given by the appraiser. UNDERWRITER’S RESPONSIBILITIES It is the underwriter‟s responsibility to complete a thorough evaluation of the appraisal to ensure that the report is complete, accurate, and consistent with appraisal and investor standards, and that it provides a reasonable determination of the property value. The underwriter should be able to determine from the information provided on the appraisal report whether or not the property value constitutes sufficient security for the mortgage. Identifying inconsistencies within the appraisal report as they relate to the property value is a critical part of the appraisal review. Underwriters are required to review the appraisal in its entirety for completeness, accuracy, and consistency to ensure that it provides an adequate determination of property value, regardless of what message is received from any Automated Underwriting Systems (AUS) or other collateral assessment models.
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AUS MESSAGES When loans are reviewed by an AUS, the underwriter is expected to:
Review the appraisal to ensure consistency with appraisal standards and evaluate the properties acceptability as security for the loan as it relates to its value and marketability.
Ensure that the appraiser analyzes current listings and contract sales along with the most recent closed sales. If the appraisal report does not accurately reflect the current market conditions, additional clarification, justification, and comparables should be requested from the appraiser.
APPRAISAL REVIEW PROCESS Property Location – A good starting point is to determine where the subject property is located by referring to the location map.
Determine if the location map has been reduced in size or “zoomed-out” in order to fit all of the comparables and the subject property on the same map; check to see if the street names are visible. The location map should clearly identify the location of the subject property. Cross-check the property location through mapping websites. Compare streets on the location map to the neighborhood boundaries provided on page one of the appraisals.
The neighborhood description should be compared to the location map to determine if there are any barriers, such as a freeway, major thoroughfare, creek/river, hills/mountains, park/golf course or large designated open space that determines the subject property‟s neighborhood boundaries.
Refer to the location map to determine if the same types of barriers separate the subject property from the comparable sales. This could indicate that the comparable sales are in a different neighborhood from the subject property. In such instances, additional comparables should be requested.
Comparable Sales - The comparable sales should be as similar as possible to the subject property. Inconsistencies among the comparables decrease the accuracy of the appraised value. In using the sales comparison approach, the following guidelines will help ensure that the comparables support the value of the subject property.
Number of comparables – A minimum of three closed comparables should be provided that are similar to the subject property in location, age, condition, room count, lot size, and square footage, etc.
Proximity to subject - As a general rule, the comparables should be within one mile of the subject property. The appraiser should provided an explanation for any sale that is considered to be outside the neighborhood boundaries (i.e., separated from the subject property by a barrier or boundary referenced by the appraiser on page one.)
Date of Sale/Time – The marketing time of the subject property and the comparables do not have to be the same, but there should be a correlation between the two. Although the comparables‟ date of sale is required to have closed within the last 12 months of the effective appraisal date, using the most recent comparables available helps ensure that current market conditions are reflected.
Comparable sales over 6 months old should be explained by the appraiser. For example, if the comparables are not recent (i.e., 6-12 months old) they may not reflect the most current price trends in the area. The comparables‟ sales prices may in fact be inflated, if prices have declined in the area.
If the appraisal indicates that the subject property has a marketing time of less than 3 months in the Neighborhood section, but the comparables are 12 months old, the appraiser should provide a detailed explanation as to why there is such a large difference in the marketing times of “similar” properties. For example, the appraiser‟s explanation might be “the neighborhood is very stable, limited sales have occurred, and they sell quickly when they come on the market.” An unacceptable response would be “comparables less than 12 months old are not available.” While this may be a true statement, it does not explain why the appraiser indicates the marketing time as less than 3 months.
Similar Unit Structures - Compare the photographs of the comparable sales to determine if the subject property is the same type of unit structure. For example, if the subject property is a ranch-style home, but the comparables are twostory homes, then the comparables and subject property are not similar properties. Additional comparables should be requested to reflect the same type of unit structure.
Functionality – The comparable sales should have the same functionality as the subject property. For example, if the subject property has a 4 bedroom/2 bath room count, then a similar property should generally have an equal room count, not a smaller one of 3 bedroom/2 baths. A value adjustment may not adequately address the differences in functionality between 3/2 and 4/2 room counts; even if they have the same or similar square footage, because room count is driven by a different market influence. The appraiser must address significant differences between the subject
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property and the comparable sales if they raise doubts about the validity of the comparable sales as good indicators of value.
In established subdivisions, Planned Unit Developments (PUD), or condominiums (condos), the comparables should be from the same subdivision or PUD. An explanation is required from the appraiser as to why comparables are located outside the boundaries of the subdivision/PUD.
In new subdivisions and condo projects, the appraisal should have at least one sale within the general market area and one sale with the subject subdivision or project. The third comparable sale should also be from within the same subdivision or project, as long as it is an arm‟s length sale and the builder/developer is not involved with the sale.
In rural areas, the value of the property should be fully supported by the appraisal. The appraisal report should provide a thorough analysis of the subject‟s property value, if it is located in a rural area, as the comparable sales may well be located a considerable distance from the subject property. When assessing the value of a rural property, it is crucial that the appraiser is familiar with rural lending practices, as they differ greatly from suburban or urban markets.
NEIGHBORHOOD SECTION The Neighborhood section of the appraisal report identifies several factors which may provide insight as to whether a property is located in a distressed/declining market. These factors include the property‟s general location, the built-up and growth rates in the area, the trend in property values, the demand for housing versus supply, and marketing time. The neighborhood boundaries, as well as, a description of the neighborhood itself should be described in this section. Generally, a detailed explanation from the appraiser is required when the following Neighborhood and/or Unit Housing Trends characteristics are indicated on the appraisal report.
Location - Rural
Built-Up - Under 25%
Growth Rate - Slow
Property Values - Declining
Demand/Supply - Oversupply
Marketing Time - Over 6 months
If the appraisal reflects an over supply of properties, the marketing time exceeds six months, or the other comments within the appraisal report indicate that the values are declining, the appraiser must supply comments supporting the increasing or stable selection. It would be highly unlikely that all of the above mentioned “red flags” would be marked on the same appraisal. However, the following combination of Neighborhood Characteristics and Housing Unit Trends, although not comprehensive, may point to a distressed/declining market which should prompt further investigation:
Built-Up Under 25% / Market Time Under 3 months
Growth Slow / Marketing Time Under 3 months
Growth Slow / Demand/Supply Shortage
Property Values Stable / Marketing Time Over 6 months
NEIGHBORHOOD CHARACTERISTICS Location – In general, rural properties are more difficult to value than Urban or Suburban areas due to their mixed characteristics; such as, large lots, varying house designs and styles, and the agricultural influence of the surrounding area. Rural areas are typically less than 25% developed and exhibit slower growth and longer marketing times than urban or suburban neighborhoods. Built-Up – This rate (expressed as a percentage) indicates the extent to which the neighborhood has been developed. If the neighborhood is under 25% developed, the development progress and its impact on property values should be addressed in detail by the appraiser, as this may indicate weak price appreciation. Rural areas zoned residential or with a Built-Up rate of over 75% indicates an inconsistency that warrants further investigation to ensure that the comparables and the subject property are located in the same market area. Confirmation that the property is actually located in a rural area, as opposed to a suburban or urban area where the Built-Up rates are typically higher, should be obtained from the appraiser.
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Growth - This helps determine the current stage in the life cycle of the subject property as well as the neighborhood. Growth in new and developing areas is generally “Rapid.” Once all of the land is developed, growth becomes more balanced and is considered “Stable.” Growth continues in older and established neighborhoods due to changes in land use or redevelopment. If growth is indicated as “Slow”, a detailed explanation should be provided as to why; since this may indicate that prices are weakening and that the subject property is located in a distressed/declining market. UNIT HOUSING TRENDS Property Values - The appraiser must identify whether the property values in the neighborhood are “Increasing,” “Stable,” or “Declining.” Maximum financing is only appropriate when property values are stable or increasing. Demand/Supply – If an “Oversupply” of housing inventory is indicated, then an adequate explanation of its impact on the value as well as the marketability of the subject property should be addressed. An oversupply of housing may result in a softening of house prices. In general, when there is more than a six-month supply of housing inventory, the market is considered to be a “buyer‟s market.” Typically, in a buyer‟s market, the supply of houses exceeds the demand, which tends to drive prices down and can lead to increased sales incentives. Marketing Time – If a marketing time of “over 6 months” is indicated, then the appraiser should provide an adequate description of the property‟s marketability. Longer marketing times are often an indication of declining home prices. Price Range – The sales price of the comparable sales and the price of the appraised value of the subject property should be close to the predominate value in the neighborhood. Otherwise, the appraiser may have used overpriced comparables to determine the value of the subject property. Neighborhood Boundaries - The comments made in the Neighborhood Boundaries section should clearly outline the neighborhood in which the subject property is located. Generally, neighborhoods do not encompass an entire city, town, township, borough, etc. Specific boundaries, natural or otherwise, such as a freeway, a major thoroughfare, creek/river, large open space, railroad tracks, hill/mountain range, park/golf course, etc., typically mark the borders of a neighborhood. The identification of boundaries ensures that the comparables are located in the same neighborhood as the subject property. Comparable sales located outside the neighborhood boundaries are not acceptable. Neighborhood Description - Comments in this section provide information regarding neighborhood characteristics, identification, and marketability. This may include comments on the proximity to employment centers, amenities, and adverse environmental influences. Market Conditions – This section is where the appraiser provides adequate support for the neighborhood characteristics. Comments regarding the trend in property values, demand and supply, marketing times, and data on comparable properties in the neighborhood should be supported in detail. Any indication of weak or falling home prices warrant further investigation, as this may indicate the subject property is located in a distressed/declining market. INCONSISTENT/QUESTIONABLE INFORMATION If inconsistent or questionable data appears on the appraisal report, or if such information points toward distressed/declining home prices, the underwriter should: Request written explanations from the appraiser regarding inconsistencies and/or questionable data.
Require detailed explanations to support the use of questionable data/information, such as, large price adjustments, marketing times over 6 months, and comparable sales older than 6 months, etc.
Request additional comparables or listings to confirm the value of the subject property, if those provided appear to be located outside the subject property‟s neighborhood, far exceed the predominate price in the area, or are a different unit structure, etc.
7.10 Manufactured Housing The following types of manufactured housing are eligible for mortgage insurance. Modular, panelized and pre-cut homes are subject to standard underwriting criteria. Chassis-built manufactured homes (or “double wides”) must conform to CMG MI‟s underwriting eligibility criteria for Manufactured Housing. Single-Wide Manufactured Homes are not eligible for mortgage insurance. Chassis-Type Mftd Housing (Manufactured Home) - A factory-built home built on a permanent frame (chassis) with a removable transportation system; delivered and permanently attached to a site-built foundation. Manufactured homes are subject to federal standards established by the Department of Housing and Urban Development (HUD).
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Modular Housing (Modular Home) - A home constructed in a factory assembly line, but with conventional home floor joists and delivered to the site on a trailer. Fully constructed modules are transported to the permanent site on a trailer and anchored to the foundation. Modular homes are not subject to HUD codes, but must adhere to local and regional building codes. Panel/Pre-Fab Housing (Panelized Home) – These factory assembly-line homes constructed with walls, floors, and (often) roof in a small panel form, and then assembled at the site and attached to the foundation. Panelized homes are not subject to federal standards, but must adhere to local and regional building codes. Pre-cut Home – Lumber is cut to specific lengths at the factory and then the home is constructed by workmen at the permanent site. Electrical, plumbing and other components are added at the site. Pre-cut homes are not subject to federal standards, but must adhere to local building codes.
7.10.1
Property Eligibility
Manufactured housing should be considered favorably if the following general property conditions exist: Double-wide manufactured homes must be a minimum of 22 feet wide. The land and improvements are included under one Mortgage or Deed of Trust. The property (land and structure) is legally classified as real property by the local jurisdiction, taxing authority, and Title Company. The home is permanently affixed to a foundation which adheres to local building codes and wheel axles and trailer hitches have been removed. Homes on piers must satisfy manufacturer‟s recommendation. Anchors must be provided when required by state law. The manufactured house must have been built under the Federal Home Construction and Safety Standards that were established by HUD in June 1976 and after. The label to confirm this is located on the exterior of the manufactured home. The land must be owned in fee-simple by the member. A minimum of two manufactured home comparable sales must be used by the appraiser to demonstrate conformity within the market and to establish market appeal.
7.10.2
Underwriting Requirements
For a manufactured home to be considered for approval, the following underwriting guidelines apply:
Owner-Occupied properties are eligible. Second Home and Investment properties are not eligible for mortgage insurance.
Fixed-rate, fixed payment, fully amortizing loans and positively amortizing loans are eligible.
The following loan types are not eligible for mortgage insurance. Interest Only Potential Negative Amortization Loans Options Payment Mortgages Balloon Mortgages
Buydowns are eligible for owner-occupied primary residences as follows:
3, 2, 1 on a 95% LTV FRM and 5/1 ARM
2, 1 on a 95% LTV FRM, 3/1ARM and 5/1 ARM
1, 0 on a 95% LTV 1 year ARM
Second homes are not eligible. ®
The loan must meet CMG MI‟s guidelines regardless of all DU or LP recommendations.
The minimum credit score is 680, regardless of LTV or AUS decision.
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Loan must be fully documented, limited documentation is not eligible for mortgage insurance.
A-Minus programs are not eligible for mortgage insurance.
Positively amortizing secondary financing is permitted, the maximum CLTV is equal to the maximum LTV detailed in the CMG MI matrices.
A minimum down payment of 5% is required, regardless of the LTV.
Trade equity will be considered only if: The member has contributed a minimum cash down payment prior to consideration of the trade equity; and The maximum permitted equity is calculated based on the length of ownership. If the unit has been owned for 12 or more months, use 90% of the retail value as listed in N.A.D.A. (A copy of the valuation report must be provided.) If the unit has been owned for less than 12 months, use the lesser of 90% of the retail value as listed in the N.A.D.A., or the lowest sales price within the last 12 months.
Generally, the purchase price for a new manufactured home (delivered to the site) should not exceed the state average sales price for a new manufactured home by more than 10% unless upgrades can be documented to support a higher value.
For a purchase transaction (newly built, not affixed to the foundation as of the application), the LTV will be determined using the following: Purchase price of the unit (as evidenced by the dealers invoice) plus the land OR the current appraised value, whichever is less: If the land was purchased less than 12 months prior to the application, use the lowest price at which the land was sold during that 12 month period. If the land was purchased 12 or months prior to the application, use the current appraised value of the land. If the land was acquired through gift or inheritance, use the appraised value of the land. Document the acquisition and transfer of the land.
For a purchase transaction (unit affixed to the foundation as of the application date), the LTV will be determined using the following: Purchase price of the unit (as evidenced by the dealers invoice) plus the land OR The current appraised value of the unit and the land, or If the unit was affixed to the foundation less than 12 months prior to the application date, the lowest price the home was previously sold unit that 12 month period and the lower of the Current appraised value of the land, or Lowest price the land was sold during that 12 month period.
For the refinance of an existing unit already permanently affixed to the land, the LTV will be based on the following: If the unit has been permanently affixed for more than 12 months prior to the application date, use the lesser of the purchase price of the unit and land or the current appraised value. If the unit has been permanently affixed less than 12 months prior to the application date and the land and unit are secured by two liens, use the lowest price of the unit within the past 12 months plus the lowest price the land has sold within the past 12 months or the current appraised value, whichever is less. If the unit and land are secured by a single lien, use the lowest price at which the unit and land were sold in the past 12 months. If the land was acquired through gift of inheritance, use the appraised value of the land. Document the acquisition and transfer of the land.
All loans must have an ALTA 7, 7.1 or 7.2 Title Endorsement.
The property must be taxed as real property in accordance with the state where the property is located.
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7.10.3
Manufactured Housing Appraisal Review
The following are additional considerations in review of the manufactured home:
Unit square footage should be standard for the community and acceptable to typical purchasers.
The site is typical of the marketing area; size and shape adequately supports all improvements.
Paved on-site parking is provided.
The property has proven marketability. Marketing time should be less than six months and value should be supported by similar manufactured housing sales in the subject‟s neighborhood.
Utilities are standard for the community, acceptable to typical purchasers, and support year-round usage.
The property is in a predominantly owner-occupied neighborhood over 25% built-up or showing stable growth. Declining property values and property oversupply should not be present.
The major consideration in determining insurability of manufactured homes is marketability. Manufactured housing has the greatest marketability when located in subdivisions specifically designed for the product. These manufactured housing subdivisions often present greater affordability than competing site-built subdivisions. Manufactured housing in rural areas typically does not maintain as high a degree of marketability as stickbuilt homes. Appraisal reports of rural manufactured homes should be carefully analyzed to insure that a market demand exists. If the appraiser is forced to use stick-built homes as comparables or if the comparables are more than two to three miles from the subject, a high degree of marketability is not reasonably supported. A careful evaluation should be given to the market acceptance of manufactured homes.
7.11 Cooperative Housing Units Cooperative housing (co-ops) is a form of multiple ownership of real estate in which a corporation, trust, or business entity holds title to a property and grants occupancy rights through purchase of stock representing the value of a particular apartment or unit. Title to the apartment or unit is evidenced through issuance of a Proprietary Lease. Co-ops cannot be insured under CMG MI‟s First Lien Master Policy. Before a co-op loan can be considered, a special master policy is required and must be filed with the state insurance department. CMG MI is currently approved to insure co-ops in Connecticut, Massachusetts, New Hampshire, New Jersey, and New York. Credit unions must be prior approved to submit co-op loans to CMG MI. The following is provided for informational purposes only. Co-op credit unions must obtain relevant documentation to ascertain that the cooperative corporation is a validly-formed entity authorized to carry out its independent purposes in compliance with all applicable state and local laws. The cooperative documents must provide:
Terms that sufficiently explain the manner in which the corporation is managed and controlled.
A legally permissible procedure for handling any losses or proceeds from condemnation, destruction, or liquidation of all or part of the project, or from termination of the project.
Coverage requirements for hazard, flood, liability, and fidelity insurance.
Cooperative Loan Agreement
Recognition Agreement
Proprietary Lease and Security Agreement
Assignment of the Proprietary Lease
Membership certificate, stock, or shares
UCC Financing Statement Evidence of Stock Power
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7.11.1
Cooperative to Condominium Comparison
GENERAL CHARACTERISTICS
COOPERATIVES
CONDOMINIUMS
LIVING SPACE
Owned by Cooperative Corporation and leased to member/ tenant/stockholder
Separate title; owned by individual
FINANCING
Blanket mortgage and unit share loan
Unit mortgage
COLLATERAL
Blanket mortgage on real estate; unit share loan on pledge of stock/proprietary lease
Condominium unit and undivided interest in common elements
MORTGAGOR
Cooperative Corporation on blanket mortgage; Cooperative member pledging shares on unit mortgage (junior to blanket mortgage)
Unit owner
COMMON AREAS AND FACILITIES
Owned by Cooperative Corporation
Owned collectively by unit owners as tenants-in-common, each having an undivided interest
REAL ESTATE TAXES
Paid by Cooperative Corporation
Tax on each unit and its undivided interest paid by unit owner
HOMEOWNERS’ ASSOCIATION DUES
Monthly Maintenance Fee
Monthly Maintenance Fee
BASIC PROJECT DOCUMENTS
Articles of Incorporation
Declaration
By-Laws
By-Laws
Proprietary Lease
Rules & Regulations
Stock/Membership - Certificates
Unit Deed
Share Loan Agreement
Mortgage/Deed of Trust
Recognition Agreement Security Agreement UCC Financial Statement
INCOME TAX DEDUCTIONS
Proportionate pass-through of blanket mortgage interest and R.E. taxes to members
Direct deduction of unit mortgage and R.E. taxes
under Section 216; direct deduction of unit share loan interest
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For a co-op to be considered for approval the following underwriting guidelines must apply and consideration will be given to the following co-op project characteristics:
Owner-occupied
Fixed-rate/positively amortizing, positively amortizing ARM loans, Balloon Mortgages (minimum term of 5 years) and Interest only loans are not eligible for mortgage insurance
Subordinate financing is not eligible
Projects should have a minimum of five units
Projects situated on leased land are not eligible
Projects with over 20% investor ownership are not eligible
Commercial space should not exceed 20% of the total building space
Buildings that were originally built for purposes other than residential use are generally not eligible
7.11.2
Cooperative Housing Unit Appraisal Review
Additional appraisal considerations are as follows:
The unit should be appraised using the Fannie Mae/Freddie Mac Individual Cooperative Interest Appraisal Report or the Individual Condominium Unit Appraisal Report with addendums to address the market value of the cooperative shares over and above the pro rata share of the blanket mortgage(s). Alternative appraisal forms must be prior-approved by CMG MI‟s National Real Estate Analyst/Appraiser.
The appraiser must utilize only cooperative units as comparable sales. CMG MI will not insure cooperative housing in pioneering areas. If cooperative comparable sales are not available, the cooperative loan is not eligible for mortgage insurance.
The appraiser should compare the subject unit to the general marketing area as well as to other units in the subject co-op.
Design of competing co-ops used as comparables should be the same as the subject (i.e., townhouses, midrise, high-rise, etc.) and should have similar common amenities and recreational facilities.
Estimated market values for in-house purchased units must be appraised as if purchased by outside purchasers. The appraisal should also state “inside purchase”.
The expiration of the shareholder‟s Proprietary Lease must occur after the expiration of the blanket mortgage term.
Blanket Mortgage
The terms of the blanket mortgage must be disclosed at the time of application.
If the project‟s blanket mortgage involves a balloon payment, the loan must have a minimum term of three years remaining after the CMG MI Commitment and Certificate of Insurance effective date.
The blanket mortgage must be current at the time of commitment.
If Fannie Mae owns the blanket mortgage, the value of the Proprietary Lease should be calculated by subtracting the member‟s portion of the blanket mortgage from the purchase price. The blanket mortgage is not to be included in the insured loan amount. For example: Purchase Price
$100,000
Member‟s Portion of the Blanket Mortgage
- 10,000
Adjusted Price
90,000
10% Down
-
Insured Loan Amount
$ 81,000
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The appraiser must provide the pro rata share of the blanket mortgage payments that are attributable to the unit, as determined by dividing the number of shares attributable to the unit by the total number of project shares. The appraiser certifies in the appraisal report that the pro rata share of the blanket mortgage on the real estate has not been included in the opinion of market value. The pro rata share should generally not exceed 30%.
The appraiser should complete the section regarding the unit being subject to a stock transfer fee (flip tax). When there is a fee the value of the unit must be reduced by the amount of this fee.
7.12 Leasehold Properties A leasehold estate grants the lessee (member) the right to use and occupy real estate for a stated term and under certain conditions. This right is granted through execution of a Lease or subsequent Assignment of Lease. Due to the lease term and restrictions and additional expense of leasehold payments, leasehold estates have generally not been as widely accepted or marketable as fee simple estates. To consider properties on leased land, the following conditions must apply: Comparable sales of leasehold estates must be readily available as an indication of marketability. Term of the land lease must exceed the term of the insured loan. Land lease payments must not increase the total monthly housing payment by more than 1%. If the insured loan has provisions for term extensions, the land lease must also have the same provisions. Monthly lease payments (or the monthly equivalent of quarterly or annual lease payments) must be added to the member‟s monthly housing expense when calculating debt-to-income ratios.
7.13 Rural Properties Rural neighborhoods are typically less than 25% developed and exhibit slow growth. When evaluating rural property, just as with urban or suburban properties, the underwriter must ascertain that the property is readily marketable and constitutes sufficient security for the mortgage loan in the event of default.
7.13.1
General Property Conditions
Rural properties should be considered favorably as collateral if the following general property conditions exist:
The nature of the property is primarily residential and the member does not intend to use the property for operation of a non-residential purpose such as a farm, orchard, or ranch. Agricultural-type properties are not eligible for mortgage insurance.
Manufactured housing is acceptable in rural areas. The appraiser should use similar factory-built housing as comparables if they are available.
7.13.2
Rural Property Appraisal Review
The following are major considerations to be reviewed in the rural property appraisal report:
The neighborhood growth rate should be rapid or stable.
Property values should be stable or increasing.
Demand/supply should be in shortage or balanced.
Marketing time for rural properties should be less than twelve months.
In general, the land should not exceed ten acres or land value exceeds 50% of total estimated value. It is not an acceptable practice for the appraiser to provide a value based on a portion of the land, i.e., instead of the entire parcel to meet the maximum site requirements. Agricultural-type properties are not eligible for mortgage insurance.
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Location adjustments exceeding 15% should be satisfactorily explained by the appraiser.
The property should be connected to at least one public utility. Utilities to the site should be standard for the community, accepted by the residents of the property, and support year-round use.
On-site and off-site improvements should include all-weather public roads, paved or graveled driveways, and paved parking.
Estimated value of all building structures (excluding house and garage) such as barns, sheds, corrals, tack rooms, etc. should not exceed 20% of the total estimated value.
The appraiser should provide a satisfactory explanation if all comparable sales are located more than five miles from the subject property.
The site size should be typical for the area.
The site should be marketable for residential use.
The size of the comparable sales‟ sites should be similar to the subject. If the size of all comparables differs from the subject by more than +/-50%, the appraiser must provide a satisfactory explanation.
Any adjustments to value for mineral rights must be fully explained by the appraiser.
7.14 Distressed Markets Policy (11/2009) It is critical to review and analyze the appraisal to ensure that the property value is supported before implementing the Distressed Markets Policy. A poor, inaccurate, or incorrect appraisal is not corrected by a reduction in the loan-to value (LTV). When one of the following indicators is present The subject property is located in a MSA/MSAD on the CMG MI Distressed Markets List. When one of the following indicators is present, it is recommended that the appraisal is thoroughly reviewed: The declining property value box is checked on the appraisal report; or A lender‟s independent research reveals that the subject property is located in a declining market The value of the subject property must be well supported; therefore, we recommend obtaining the following with the origination appraisal report: Two comparables sales that have closed within the last 90 days of the appraisal date. If recent (within 90 days) comparables are not available, the appraiser may be required to explain the reason(s) for the lack of recent sales and/or provide comparable listings to support the value; and A detailed explanation from the appraiser as to why property values are declining in the area and what effect falling home prices have had on the value and marketability of the subject property. Once the above criteria have been considered and a valid and accurate appraised value is established: For those states, MSA/MSADs, and non-MSA areas that are projected to continue to experience more significant economic and/or housing downturns and are expected to take longer to improve. To determine the maximum allowed LTV for the property, identify the property‟s location from the CMG MI Distressed Markets List;
The LTV ratio must be reduced five percentage points (5%) below the maximum financing allowed for the selected program or product, not to exceed 90% LTV.
Additionally, the following are not eligible for mortgage insurance: Loans with an EA III/Eligible recommendation from Desktop Underwriter
®
Cash-out refinances Limited Documentation Investment properties Loans with credit scores less than 680
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Scheduled or Potential negative amortization mortgages Option Payment mortgages Second Homes 3-4 Unit Properties Single Wide Manufactured Homes Short-Term ARMs (1-3 years fixed period) Interest Only Construction-to-Perm Nontraditional Credit Third Party Originations Single Family attached or Condominiums in the state of Florida 2 unit properties Manufactured Homes Note: CMG MI will consider insuring the new loan without implementing the Distressed Markets Policy or other underwriting guideline changes, if the loan being refinanced is currently insured with CMG MI and the refinance improves the member‟s and CMG MI‟s position. The loan must be submitted to the CMG MI Underwriting Network For review and approval if current guidelines are not met. Please visit cmgmi.com for Distressed Markets List
7.15 Ineligible Properties The following properties are ineligible for mortgage insurance coverage by CMG MI:
7.15.1 Vacant Land Is a parcel that has not been developed or improved with amenities or buildings?
7.15.2 Condotels Any project that is operated as a hotel, even though the units are owned individually is ineligible. While there is no single factor that can be used to determine whether a project should be classified as a hotel, a credit union should consider, among other things, the existence of hotel-type services – such as the presence of a registration desk, the use of daily occupancy rates, the availability of food and telephone services, and provisions for daily cleaning services. If the units are subject to rental pooling agreements that require the unit owners to either rent their units or give a management firm control over the occupancy of the units, the project is most likely operating as a hotel or motel. (Typical “second home” projects in which units may be rented on a short-term basis are not necessarily hotels).
7.15.3 “Kiddy Condos” This is a condominium that is used to house a college student, “Earn Equity through Education.” These units are sold to parents who wish to offset college costs by earning equity in the condo until graduation. In some instances the parents act as a co-signor for the student.
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7.15.4 Time-Share or Incremental Ownership An arrangement under which a purchaser receives an interest in real estate and the right to use an accommodation or amenities, or both for a specified period and on a recurring based. This property type is used primarily for selling vacation properties.
7.15.5 Pioneering designs Such as underground improvements, irregular floor plans, log cabins, and geodesic domes which lack a ready resale market are generally not acceptable.
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