Conventional Loans and Guidelines
- Conventional Loans:
-
Conventional loans are mortgage loans offered by non-government sponsored lenders. These loan types include:
- Fixed Rate Loans
- Adjustable Rate Loans (ARMs)
- Combination (Hybrid) Loans
- Balloon Mortgages and Pledge Asset Loans
- Jumbo / Construction Loans
- Reverse Mortgage
NOTES:
Note: Please note that Mortgage Insurance may not be available for properties located in a
declining/ distressed market. Please check with your MI provider for eligibility on
properties located in Stable and/ or distressed/ declining markets.
SECTION 1: CODING
PROGRAM CODES: AUS PROGRAM CODES:
30 & 25 Year term 2000-00
15 year term 2100-00
20 Year term 2032-00
10 Year term 2131-00
30 Year Term with Property Inspection Waiver 2072-00 – code no longer needed
15 Year Term with Property Inspection Waiver 2172-00 – code no longer needed
SPECIAL PROGRAM CODES FOR HOBBY FARM PROPERTIES:
20, 25, & 30 Year term 2025-00
10 & 15 year term 2125-00
Temporary Buydown codes:
Buydown Term Lender Paid Seller Paid
2/1 Buydown 2019L-00 2019S-00
1/0 Buydown 2020L-00 2020S-00
Second Lien Program
Codes:
Not applicable
SECTION 2: LTV/CLTV/LOAN AMOUNTS BY DOC TYPE
FULL DOCUMENTATION:
Purchase & Rate/Term
Refinance:
LTV CLTV/HCLTV OCC. PROPERTY COMMMENT
95% 95% Owner 1 Unit DU only
80% 80% Owner 2 Units DU only
75% 75% Owner 3-4 Units DU only
95% N/A Owner 1 Unit LP only
90% 95% Owner 1 Unit LP with secondary financing
80% N/A Owner 2-4 Units LP only
75% 80% Owner 2-4 Units LP with secondary financing
90% 90% 2nd Home 1 Unit DU only
85% N/A 2nd Home 1 Unit LP only
80% 85% 2nd Home 1 Unit LP with secondary financing
80% 80% Non-Owner 1 Unit DU purchase only
75% 75% Non-Owner 1 Unit DU rate/term refinance only
75% 75% Non-Owner 2-4 Units DU only
80% N/A Non-Owner 1 Unit LP purchase only
75% 80% Non-Owner 1 Unit LP purchase with secondary financing
75% N/A Non-Owner 1 Unit LP rate/term refinance only
70% 75% Non-Owner 1 Unit LP rate/term refi w/ secondary financing
75% N/A Non-Owner 2-4 Units LP only
70% 75% Non-Owner 2-4 Units LP with secondary financing
CONFORMING FIXED RATE
2000-00 Page 2 of 24 11/3/11
This information is subject to change at any time without notice. Please contact your account manager for current information.
PURCHASE & RATE/TERM
REFINANCE:
(cont’d)
Condo projects are permitted in Florida with the following restrictions:
• Owner occupied purchase & rate/term refinance only. 2nd home & investment properties
are not permitted.
• Maximum 75% LTV/CLTV/HCLTV permitted
• Borrowers must contribute 5% of their own funds on purchase transactions regardless of
AUS if gift funds are being used.
• Established projects only, Lender Full Review or CPM required (Type S)
• New projects and newly converted projects are NOT permitted.
• Limited Review is not permitted regardless of AUS findings.
• A field review is required on all loans.
• Pre-funding QC is required on all loans
Cash-out Refinance: LTV CLTV/HCLTV OCC. PROPERTY COMMMENT
85% 85% Owner 1 Unit DU only
75% 75% Owner 2-4 Units DU only
80% N/A Owner 1 Unit LP only
75% 80% Owner 1 Unit LP with secondary financing
75% N/A Owner 2-4 Units LP only
70% 75% Owner 2-4 Units LP with secondary financing
75% 75% 2nd Home 1 Unit DU only
75% N/A 2nd Home 1 Unit LP only
70% 75% 2nd Home 1 Unit LP with secondary financing
75% 75% Non-Owner 1 Unit DU only
70% 70% Non-Owner 2-4 Units DU only
75% N/A Non-Owner 1 Unit LP only
70% 75% Non-Owner 1 Unit LP with secondary financing
70% N/A Non-Owner 2-4 Units LP only
65% 70% Non-Owner 2-4 Units LP with secondary financing
Note: Condos in Florida are not permitted.
CONFORMING LOAN LIMITS:
# of Units Continental US Hawaii
1 Unit $417,000 $625,500
2 Units $533,850 $800,775
3 Units $645,300 $967,950
4 Units $801,950 $1,202,925
SECTION 3: PROGRAM PARAMETERS
MINIMUM LOAN AMT: $40,000
ALLOWABLE TERMS: 10, 15, 20, 25 & 30 year fixed rate terms permitted.
CASH PROCEEDS: No restrictions
• A field review is required if cash proceeds (including cash in hand or payoff of non-mortgage
debt, but not including payoff of subordinate liens on the subject property) exceed $100,000.
• The field review can be waived with if the following requirements are met:
• The LTV/CLTV must be 10% or more below the cash out maximum LTV/CLTV
• UW should pull comps to verify that the value is supported.
• A 2nd signature from a branch manager, operations manager, or underwriting manager is
required.
SPECIAL PROGRAM
REQUIREMENTS:
Not applicable
CONFORMING FIXED RATE
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This information is subject to change at any time without notice. Please contact your account manager for current information.
ARM ADJUSTMENTS: Not applicable
INTEREST ONLY OPTION: Not applicable
TEMPORARY
BUYDOWNS:
• NOTE: BUYDOWNS ARE CURRENTLY SUSPENDED UNTIL FURTHER NOTICE
• Lender and seller paid buydowns are permitted with the 30-year fixed rate term.
• Allowed on purchases and rate/term refinances on owner occupied properties and second
homes.
• Not allowed on non-owner occupied properties or on cash out refinances.
• Maximum buydown term is 2 years.
• Increases cannot exceed 1% per year.
• See coding section above for program codes.
• Qualify at the note rate, regardless of AUS.
PREPAYMENT PENALTY: Not applicable.
SECTION 4: BORROWER ELIGIBILITY
FIRST TIME HOMEBUYER: Allowed, no restrictions.
NON-OCCUPANT COBORROWER:
• Only allowed on full doc primary residences.
• Non-occupant co-borrower income may be used for qualifying to 90% LTV.
• Non-occupant co-borrowers may be family members or someone who has an established
relationship to the occupant borrower.
• The occupying borrower must contribute 5% from their own funds, unless the LTV/CLTV is
≤80%, then the entire down payment may come from a gift.
• The owner occupant must qualify at 35%/43% ratios unless higher ratios are approved by
AUS.
• The non-occupant borrower should not be a party to the transaction such as the seller, builder
or real estate broker.
PERMANENT RESIDENT
ALIEN:
• Allowed under the same terms as US citizens.
• Permanent resident aliens must provide proof of their residency (i.e. green card).
• The Permanent Resident Alien certification must be completed and included in the loan file.
NON-PERMANENT
RESIDENT ALIEN:
• Borrowers are eligible for financing under the same terms as a US citizen.
• Borrowers must provide proof they can legally live and work in the US.
• A legible copy of one of the following acceptable visa types must be submitted in the file: E-1,
H-1B, H-2A, H-2B, H-3, L-1, G series, and NAFTA workers (TN or TC).
• The following are not acceptable visa types: A-1, A-2, A-3, E-2, F-1, F-2, M-1, O-1.
• For visa types not listed or for situations that are unable to be documented as required in
guidelines, please contact Corporate Support or ProdComm for details on whether an
exception can be submitted.
• A legible copy of the unexpired passport with I-94 is also required.
• Borrowers with diplomatic immunity are not permitted.
FOREIGN NATIONAL: Not eligible
NON-ARMS LENGTH
TRANSACTIONS:
• A non-arms length transaction is defined as a direct relationship between any of the parties to
the transaction including, buyer, seller, employer, lender, originator, appraiser, etc.
• Non-arms length transactions may be acceptable provided there is adequate verification the
borrower is making the required minimum down payment from their own funds, there is an
executed sales contract, and the appraisal supports the value and the appraiser comments on
whether the market value is affected by the relationship of the parties.
• Non-arms length transactions that are specifically “at-interest transactions” involve persons
who are not closely tied or related but may have a greater vested interest in the transaction,
such as a party who plays more than one role in the same transaction (selling/listing agent and
mortgage originator, for example). At-interest transactions carry increased risk due to the
greater vested interest in the transaction by one of the parties.
CONFORMING FIXED RATE
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This information is subject to change at any time without notice. Please contact your account manager for current information.
NON ARMS LENGTH
TRANSACTIONS:
(cont’d)
• Second home and investment property transactions are not permitted for non arms length or at
interest transactions.
• A non arms length transaction may not be used to bail out a family member or any other owner
with an established relationship to the borrower from a delinquent mortgage.
• The title commitment may not show any evidence of foreclosure proceedings or NOD.
• If the seller is a corporation, partnership or any other business entity, there must be proof
that the borrower is not an owner of the business entity selling the subject property.
NUMBER OF OTHER
PROPERTIES:
Number of financed properties:
• For Owner Occupied properties, there is no limit to the number of financed properties that the
borrower may own.
• For second homes, the borrower may not own more than four 1 to 4 unit properties that are
financed, including the subject property.
• For non-owner occupied properties, a borrower who owns more than one financed non-owner
occupied property, may not own more than four 1 to 4 unit properties that are financed,
including the subject property.
• Partial or joint ownership is considered the same as total ownership.
• A borrower who holds a Limited Partnership interest that has been formed for the purpose of
real estate investment or development OR a General Partner who has personal liability and
whose primary income is derived through the partnership’s long term investments MUST
include all properties owned by that partnership.
Note: Exceptions are not permitted.
• If the transaction is the purchase of a principal residence, but a previous mortgage transaction
within the past 12 months was also the purchase of a principal residence, the borrower must
provide reasonable documentation to justify the new transaction (e.g. a letter of explanation, or
other acceptable documentation). Any address discrepancies or "red flags" must be fully
addressed.
• A borrower purchasing a new primary that is of lesser size or value should be carefully
analyzed by the underwriter
• Relocation and/or extenuating circumstances must be documented and verified
• Non occupant coborrower/co-signer situations (where the previous owner occ purchase
was a cosigned loan) must also be verified and fully documented.
• Stearns has the right to refuse the occupancy type if it cannot be adequately established.
Number of properties Stearns will finance:
• Stearns Lending will finance up to 3 properties per borrower regardless of occupancy.
• Stearns will make loans totaling $4,000,000 on primary residences and second homes. The
maximum total amount for non-owner occupied loans is $2,000,000.
SECTION 5: CREDIT CRITERIA
UNDERWRITING: Automated Underwriting:
• All loans must be underwritten through Freddie Mac’s Loan Prospector (LP) or Fannie Mae’s
Desktop Underwriter (DU) and receive an Accept or Approve/Eligible recommendation.
• Reminder, Agency submission date requirements to AUS are as follows:
o DU: Loans may be submitted to DU before or after the closing of the
mortgage loan; however, the first submission to DU for underwriting
purposes must occur before closing of the mortgage loan.
o LP: last submission to LP may be no more than 120 days before and no
later than the Note Date.
• If a borrower has a current physical address that is not in the US, the loan can not be
underwritten through AUS (DU or LP) and is ineligible under this program.
• Loans may be documented per the DU/LP findings report with the exception of the
appraisal.
• Cash out refinance > 80% LTV will require non-delegated MI submission – see MI
matrix for minimum credit score and other restrictions.
• A verbal VOE must be completed by the underwriter, the funder, or the QC department for all
borrowers including self employed. The business phone number must be retrieved from 411
(directory assistance) or similar directory. The business phone number MUST be listed.
CONFORMING FIXED RATE
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This information is subject to change at any time without notice. Please contact your account manager for current information.
UNDERWRITING:
(cont’d)
• Ratios are determined by DU or LP, however, the maximum DTI is 50% regardless of
DU or LP approval. Note: running LP simply due to ratios being high is not
acceptable.
• Reminder, per FNMA Announcement SEL 2010-11, loans must be reunderwritten
(resubmitted to DU) if additional debts and/or reduced income
cause the DTI ratio to exceed 45%, or that cause the DTI ratio to increase by
3% or more.
Manual Underwriting is not permitted.
CREDIT SCORES:
• A 3 bureau merged in-file report must be obtained that contains at least 2, preferably 3 credit
scores for each borrower.
• A “representative score” (lower of 2, middle of 3) will be chosen for each borrower on the loan.
Then, the lowest of all the borrower’s “representative scores” will be the score used for
qualifying.
• The minimum credit score for DU/LP loans is 620 regardless of the AUS recommendation.
Please note that loans requiring MI may require higher credit scores depending on market
restrictions.
• Credit scores < 680 & LTV > 90% will require non-delegated MI submission – see MI matrix
for details.
• All borrowers must have credit scores. Co-borrowers with no scores are not permitted
regardless of AUS.
CREDIT REQUIREMENTS: Per DU/LP except as noted
• Mortgage history must be 0x60 in the last 12 months, regardless of AUS. Rental history only
needs to be documented if required by AUS findings.
• Inquiries: A detailed explanation letter that specifically addresses both the purpose and
outcome of each inquiry in the last 90 days is required. If additional credit was obtained, a
verification of that debt must be obtained with a new credit report, and the DU findings must
be updated to include the debt. If LP is used, per Freddie Mac guidelines, credit reports and
inquiry explanation must be for 120 day credit inquiry history.
• Foreclosures: Waiting period after foreclosure completion is 7 years. This guideline must be
manually applied until the DU update on 12/11/10 and is effective 11/16/10. Pipeline loans
affected by this guideline must fund by 12/7/10
• Bankruptcy: Chapter 13 discharged in the last 24 months, dismissed within the last 48
months, or filed but neither discharged nor dismissed within the last 48 months are ineligible.
Non-chapter 13 bankruptcies that were filed, discharged or dismissed within the last 48
months are ineligible.
• Prior preforeclosure sale/short sale waiting periods:
o 2 years: Maximum 75% LTV/CLTV/HCLTV allowed, limited to 1 unit owner occupied
only.
o 4 years: Maximum 90% LTV/CLTV/HCLTV allowed, limited to 1 unit owner occupied
only.
o 7 years: standard eligibility applies.
o Purchase transactions may not include gift funds.
o Cash out refinances are not permitted.
o Documentation of extenuating circumstances (job loss, reduction of income, medical,
divorce) leading to the event required, as well as documentation that the borrower's
situation has improved. A LOE from the borrower describing these events is also
required.
o Please note that this must be manually applied, as DU does not recognize
preforeclosue sales/short sales
• Prior deed in lieu of foreclosure waiting period:
o 2 years: Maximum 75% LTV/CLTV/HCLTV allowed, limited to 1 unit owner occupied
only.
o 4 years: Maximum 90% LTV/CLTV/HCLTV allowed, limited to 1 unit owner occupied
only.
o 7 years: standard eligibility applies.
o Purchase transactions may not include gift funds.
o Cash out refinances are not permitted.
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CREDIT REQUIREMENTS:
(cont’d)
o Documentation of extenuating circumstances (job loss, reduction of income, medical,
divorce) leading to the event required, as well as documentation that the borrower's
situation has improved. A LOE from the borrower describing these events is also
required.
o Please note that this guideline must be followed regardless of DU findings.
• If AUS findings reference a disputed account, the following requirements apply:
o Disputed accounts must be cleared by the creditor and the AUS findings must be
reissued referencing a new credit report.
o A credit supplement is not acceptable; a new credit report is required.
o Note: Contact Corporate Support for exceptions to this process.
Authorized User Accounts:
o An authorized user account may only be considered part of the credit profile if another
borrower in the mortgage transaction is the owner of the tradeline.
o If the non-borrower spouse is the owner of the account, the tradeline must be considered.
o If any of the following apply:
• The primary credit lines show both high utilization and excessive late payments when
compared to the authorized user accounts OR
• The primary credit lines show both high utilization and significantly lower credit limits
when compared to the authorized user accounts OR
• The primary credit lines show both significantly lower credit limits and excessive late
payments when compared to the authorized user accounts OR
• The primary credit lines show both high utilization, excessive late payments and
significantly lower credit limits when compared to the authorized user accounts
o The borrower must provide
• a letter of explanation that identifies the primary account holder and the relationship and
• 6 months cancelled checks along with account statements to document that the
borrower has been making the payment on the account
o If the borrower only has 1 tradeline, and it is an authorized user account, it would not be
considered valid credit and would not be eligible.
Loan modifications:
o Refinance transactions on previously modified loans are not permitted.
o New purchase transactions where the borrower’s previous loan was modified and the
property is being retained as a 2nd home or investment property are not permitted.
o New purchase transactions where the borrower’s previous loan was modified and the
property is being sold should be treated with caution and reviewed for delinquencies and
short payoffs.
o New purchases of 2nd home or investment properties where the borrower’s current owner
occupied property has a loan modification are not permitted.
o Refinances where another property (not the subject property) has a loan modification should
be reviewed with caution to ensure that there was no short refinance (treated as a short
sale).
RATIOS: • Ratios are determined by DU or LP, however, the maximum DTI is 50% regardless of AUS.
• For loans with buy downs, ratios can be determined by DU/LP
• Reminder: For loans requiring MI, please see MI matrix for max DTI.
QUALIFYING: • Buydowns: Qualify at the note rate, regardless of AUS.
• Child support/alimony payments with ≤10 payments remaining are not included in the DTI.
• Installment debt with ≤10 payments remaining is not included in the DTI. Installment debt
may not be paid down to less than 10 payments for qualifying, may only be paid off to qualify.
• Loans secured by a liquid asset (i.e. 401K) are not included in the debt calculation.
• Deferred student loans will be included in the DTI regardless of the length of the deferment.
• For revolving debt payment, use the minimum payment from statement or credit report; or
$10 or 5% of the current balance, whichever is greater, if no payment is stated on the credit
report.
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This information is subject to change at any time without notice. Please contact your account manager for current information.
QUALIFYING:
(cont’d)
• Paying revolving debt off to qualify is permitted provided it is allowed on the automated
findings report, the borrower has the funds in verified assets to pay the account(s) and the
payoff is documented (HUD-1). If the debt account is not closed, the credit report payment (or
the greater of $10 or 5% of the outstanding balance if there is no payment) must be included in
the qualifying ratio. Verification that the debt has been paid off must be provided by one of the
following:
• A copy of the HUD-1
• A supplemental credit report
• Verification from the creditor
• In order to not count the payment, the account must be closed - a letter (signed by
the borrower) must be sent from escrow to the creditor that the account is to be
closed with the payoff.
• Lease payments will be included in the DTI regardless of the number of payments remaining
in the lease.
• Co-signed obligations will not be included in the DTI if there is evidence the primary borrower
has made payments as agreed for the last 12 months (copies of canceled checks, front and
back). A copy of the note must also be provided to show that the person making the payments
is an obligor on the note. Being placed on title only is not sufficient.
• Contingent liabilities (i.e. property settlement “buy-outs” or court-ordered assignment of debt)
will not be included in the DTI if there is proof the debt belongs to another person. A copy of a
court order, divorce decree or property settlement may provide proof of the contingent debt.
• Loans with HELOC as subordinate financing: To Qualify a borrower for a new piggyback
HELOC use 1% of the total proposed line amount. To debt service an existing HELOC on
either the subject property or any other existing property, use the payment amount shown on
the credit bureau. If there is no payment shown, provide a copy of the payment coupon
and a copy of the note to establish the qualifying payment.
• Payments on bridge loans will not be included in the debt ratio only if the following
documentation is provided:
• A copy of the executed purchase contract for the property that is the security for the bridge
loan, and
• If a financing contingency is included in the sales contract, a copy of the mortgage
commitment must be provided, and
• The borrower must have 6 months PITI payments covering any liens on the property being
used as the security for the bridge loan in addition to standard reserve requirements for
the subject property.
• Existing negative amortization loans (on other properties held by the borrower) should be
qualified at the fully indexed rate, fully amortized payment at the current loan balance.
• If rental income is used to qualify, 6 months rent loss insurance coverage is required
regardless of AUS findings. This includes rental income on 2-4 unit owner occupied properties.
• New purchase transactions where the borrower’s previous loan was modified and the property
is being retained as a 2nd home or investment property are not permitted.
• Mortgage Credit Certificates may not be used as income or to offset housing payment.
Stearns is not participating in any MCC programs at this time.
Primary Residence that has not been sold or is being converted to a second home or nonowner
property:
Scenario Required Action
Current primary residence is
pending sale, but will not close
prior to the new transaction.
Both the current and proposed mortgage payments must be
used to qualify the borrower for the new transaction AND 6
months PITI required for reserves on both the new & current
properties.
Reserves of 2 months PITI for the retained property and the
required reserves for the program for the subject property
may be considered if there is documented equity of at least
30% in the existing property as determined by a 2055
appraisal minus outstanding liens. Note: Appraisal must
comply with AIR.
CONFORMING FIXED RATE
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This information is subject to change at any time without notice. Please contact your account manager for current information.
QUALIFYING:
(cont’d)
Conversion to second home
Both the current and proposed mortgage payments must be
used to qualify the borrower for the new transaction AND 6
months PITI required for reserves on the current property
AND the greater of 6 months PITI or the maximum required
for the program is required on the new property.
OR
Reserves of 2 months PITI for the retained property and the
required reserves for the program for the subject property
may be considered if there is documented equity of at least
30% in the existing property as determined by a 2055
appraisal minus outstanding liens. Note: Appraisal must
comply with AIR.
Conversion to Non-owner
occupied property
Up to 75% of the rental income may be used to offset the
mortgage payment in qualifying if there is documented
equity of at least 30% in the existing property as determined
by a 2055 appraisal minus outstanding liens. Note:
Appraisal must comply with AIR.
The rental income must be documented with a copy of a
signed lease agreement AND the receipt of a security
deposit from the tenant and deposit into the borrowers
account. A family member, individual with an established
relationship with those involved in the transaction or an
interested party may not sign the lease agreement as the
renter.
At the discretion of the underwriter, a “fair market rent” letter
may also be required.
If the borrower does not have at least 30% equity in the
property both the current and proposed payments must be
used to qualify for the current transaction AND 6 months
PITI is required for reserves on both properties.
**Note: A 2055 Appraisal must be obtained for the property to determine the equity.
Appraisal must comply with AIR.
If the property is free & clear, an appraisal is not required. Provide evidence that there is no lien
on the departure residence to waive the appraisal.
CALCULATING
LTV/CLTV/VALUE:
• For purchase transactions, the lesser of the purchase price or appraised value will be used
to determine the LTV/value.
• For refinance transactions, the current appraisal is used to calculate LTV/value, regardless
of the purchase date.
• With HELOC subordinate financing, the CLTV should be calculated from the unpaid principal
balance, and the HCLTV should be calculated from the full amount of the HELOC (whether
or not funds have been drawn).
• For loans with a HELOC 2nd that is being modified or reduced from the original line amount:
o If the line amount on the HELOC is being reduced, a recorded modification agreement
and a subordination agreement with the new line amount is required in order to calculate
the CLTV/HCLTV on the modified line amount. A non-recorded letter from the 2nd lender
DOES NOT satisfy the requirement.
o If there is no recorded modification agreement for the new line amount, the original line
amount of the HELOC MUST BE used to calculate the CLTV/HCLTV.
Re-negotiated purchase agreement policy:
• Stearns will not accept re-negotiated purchase agreements that increase the sales price
after the appraisal has been completed if:
The appraised value is higher than the contracted sales price provided to the
appraiser, and
The new purchase agreement and/or addendum used to modify the sales price is
dated after the appraisal is received, and
The only change to the purchase agreement is an increase in sales price.
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CALCULATING
LTV/CLTV/VALUE:
(cont’d)
• If the purchase agreement is re-negotiated after the completion of the appraisal, the loan
to value will be based on the lower of the original purchase price or the appraised value,
unless:
A re-negotiation of seller paid closing costs and/or pre-paids occurs if customary for
the market and supported by comparables, not to exceed standard seller
contributions, or
An amended purchase agreement for a new construction property is obtained due to
improvements that impact the value. In the event of such changes, an updated
appraisal must be obtained to verify the value of the modifications.
SEASONING: • For a cash-out refinance the borrower must own the property for at least six months.
Measured from HUD-1 date to application date.
• Hud-1 settlement statement(s) are required from any transaction within past 6 months. If the
previous transaction was a cash-out or if it combined a first and non-purchase money
subordinate into a new first, the new loan will be considered cash out. If the new transaction
combines a first and non-purchase money subordinate into a new first loan, it is considered
cash out.
• For no cash out (rate/term) refinances underwritten through LP, the mortgage being
refinanced must have a Note date at least 120 days prior to the Note date of the new no cash
out (rate/term) refinance transaction.
REFINANCES: Continuity of Obligation:
• An acceptable continuity of obligation exists when one of the following exists:
At least one borrower obligated on the new loan was also a borrower obligated on the
existing loan being refinanced.
The borrower has been on title and living in the property at least 12 months and has
either paid the mortgage for the last 12 months or can demonstrate a relationship
(relative, domestic partner, etc.) with the current obligor.
The existing loan being refinanced and the title have been held in the name of a natural
person or LLC (Limited Liability Company) as long as the borrower was a member of the
LLC prior to transfer.
o The applicant(s) must be 100% owners of the LLC, otherwise the property must be
considered investment property.
o If the transaction is owner occupied, at least 6 months of occupancy prior to the
transaction must be established.
o Cash out is not permitted.
o Payoff of joint owners of the LLC is not permitted.
o Caution should be used when there are several members of an LLC with small
percentages of ownership, especially when the borrower owns a smaller overall
percentage than the majority of the owners.
o Transfer of ownership from a corporation (such as an S corporation or a C
corporation to an individual does not meet the continuity of obligation
requirement.
The borrower has recently inherited or was legally awarded the property. (divorce,
separation)
• Loans with an acceptable continuity of obligation are considered either a rate/term or cash-out
refinance based on the criteria below.
• “Buy outs” from a divorce settlement or property inheritance will be considered rate/term
refinances if the criteria below is met.
• If the borrower is currently on title, but is unable to demonstrate an acceptable continuity of
obligation, or there is no outstanding lien against the property, the loan is eligible for financing
as a cash-out refinance with the following additional restrictions:
If the property has no outstanding liens (e.g. was purchased for cash or prior loans have
been paid off): If the property was purchased within 6-12 months prior to the application
for new financing, the LTV will be based on the lesser of the sales price/acquisition
(documented on the HUD-1) or the current appraised value. If the property was
purchased >12 months prior to the application date for new financing, the current
appraised value may be used to calculated the LTV.
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This information is subject to change at any time without notice. Please contact your account manager for current information.
REFINANCES:
(cont’d)
If there is an outstanding lien and the borrower has been on title at least 6 months but
continuity of obligation does not exist, the maximum LTV will be limited to 50% based on
the current appraised value.
A rate/term refinance may include:
• Paying off the outstanding balance of the existing first mortgage, including any prepayment
penalty.
• Paying off any subordinate lien used solely for the acquisition (purchase) of the property.
• Financing of closing costs, including pre-paid items.
• Cash back to the borrower not to exceed the lesser of 2% of the balance of the new loan
amount or $2,000. Any amount in excess of this amount is considered a cash-out refinance
and may not be applied as a principal curtailment to “cure” the cash out.
• The payoff of any subordinate lien that doesn’t meet the definition above will be considered a
cash-out refinance, regardless of seasoning.
• When a subordinate lien is being paid off, there must be evidence the lien was used to
purchase the property (HUD-1) or the loan will be classified as a cash-out refinance.
• Hud-1 settlement statement(s) are required from any transaction within past 6 months. If the
previous transaction was a cash-out or if it combined a first and non-purchase money
subordinate into a new first, the new loan will be considered cash out. If the new transaction
combines a first and non-purchase money subordinate into a new first loan, it is considered
cash out.
• A rate/term refinance must provide some benefit to the borrower, including but not limited to
the following:
• Decreased PITIA payments or overall monthly obligations
• Shorter term , fixed rate from balloon, ARM, neg am or interest only
• Payoff of purchase money 2nd lien
• Some states require Net Tangible Benefit or Benefit to Borrower calculation – please see
State Guidelines. For other states, there is a Statement of Borrower Benefit in J:\Operational
Tools\Underwriting\Net Tangible Benefit Worksheet that may be used as a tool.
• Caution should be used when borrowers refinance in a very short time, to avoid “churning” of
loans for the benefit of the originator rather than the borrower.
Buyouts of an ex-spouse or joint owner may be treated as a rate/term refinance if the following
conditions are met:
• The property has been owned and occupied for the previous 12 months by the borrower and
joint owner, except in the case of an inheritance.
• The borrower’s income, assets and debts are fully verified.
• The file contains documentation of the divorce property settlement or estate disposition.
• The loan proceeds must be disbursed directly to the ex-spouse or joint owner (or his/her
authorized agent) and not to the borrower.
Cash-out Refinance:
• A cash-out refinance is any refinance transaction that does not meet the requirements above.
• A short term refinance that combines an existing first mortgage and non-purchase money
subordinate lien into a new first mortgage is considered a cash-out refinance. In addition a
refinance of this loan within 6 months will also be considered a cash-out refinance.
• A cash out refinance on an inherited property requires that the borrower be on title for at least
6 months after inheriting. Payoff of other inheritors is considered a rate/term refinance and
does not require the 6 months on title.
Payoff of subordinate financing:
• Reminder, if open ended subordinate financing such as a HELOC is being paid off and closed
through escrow, documentation of such must be provided as follows:
o The borrower must request that the account be frozen (the payoff statement should
be marked to have the account blocked to further advances and close the
account).
o Obtain a statement from the lender that no advances have been made after the
issuance of the payoff demand.
o Obtain copy of request from borrower (usually held by the closing agent) of their
request to pay off and close the account.
CONFORMING FIXED RATE
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This information is subject to change at any time without notice. Please contact your account manager for current information.
SUBORDINATE
FINANCING:
• Allowed per the LTV/CLTV limits stated above.
• With HELOC subordinate financing, the CLTV should be calculated from the unpaid
principal balance, and the HCLTV should be calculated from the full amount of the HELOC
(whether or not funds have been drawn).
• The junior lien cannot have a maturity date or a call option date of less than five years from
the Note date of the new mortgage, unless it is fully amortizing.
• The subordinate financing may not come from the originator, developer or realtor.
• Seller subordinate financing is permitted as long as agency requirements below for
subordinate liens are met. A review appraisal, or AVM is required to confirm the property
value.
• Builder subordinate financing is permitted if the builder is the seller of the property. Note that
extra diligence should be used when reviewing the seller concessions and the value of the
property should be well supported.
• If the subordinate lien has a variable payment, other than a HELOC, the monthly payment
must remain constant for at least 12 months and cannot have more than a 1% increase in the
interest rate.
• The payments must cover at least interest only and cannot provide for neg am.
• The subordinate lien must allow for repayment at any time (prepayment penalties are not
permitted).
• HELOCs with “early termination fees” as a flat fee not to exceed $500 (fee as a percentage of
loan amount is not permitted) allowed per FNMA announcement 09-19: HELOCs or closedend
second mortgages that pay for some or all of the borrower’s closing costs with terms that
allow the lender to recoup the closing costs paid on behalf of the borrower if the borrower
pays the HELOC or second mortgage off early. This cost is not considered a prepay penalty,
although it may be called a prepayment fee in the verbiage. However, state guidelines must
be adhered to.
• If the first lien has a buydown feature, the subordinate lien must have fixed payments.
• A copy of the subordinate lien note AND subordination agreement must be obtained for the
loan file.
• Secondary financing provided by any type of DAP/Community 2nd program, regardless of its
source, is unacceptable at this time.
• Multiple subordinate liens permitted. Contact branch manager for restrictions. Reminder,
deed restrictions and resale restrictions are not permitted.
EMPLOYMENT/INCOME: Income/employment may be documented per DU/LP unless otherwise specified.
• Reminder: Income for each borrower to be obligated for the mortgage debt must be analyzed
whether it can reasonably be expected to continue through at least the first 3 years of the
mortgage loan.
• A verbal verification of employment is required for salaried and self-employed borrowers. The
business phone number must be retrieved from 411 (directory assistance) or similar directory.
The business phone number MUST be listed. A printout of the information should be provided
in the file.
• A written VOE or pay stub may not replace a verbal VOE. In addition, a year to date paystub
and W2 is required regardless of AUS findings.
• A Verbal Verification of Employment will be performed (for salaried / W2 borrowers)
a maximum of 3 days prior to the NOTE date, and will expire after 10 days (from the date on
the VOE) if the loan is not funded.
• A salaried borrower’s employment/income is verified with their current employer. A selfemployed
borrower’s employment/income is verified by obtaining the business number through
directory assistance and through the borrower’s CPA, business license or professional
organization. A printout of the information should be provided in the file.
• Self employed borrowers: Provide documentation per AUS findings. Fannie Mae’s Cash
Flow Analysis (Form 1084) or any other type of cash flow analysis that applies the same
principals as this form is required in file. Exceptions to following the DU Findings:
• If business funds are used as the down payment, the borrower must also provide the most
recent business returns.(in addition to the CPA letter stating that use of business funds
will not have a material affect on the cash flow of the business).
CONFORMING FIXED RATE
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This information is subject to change at any time without notice. Please contact your account manager for current information.
EMPLOYMENT/INCOME:
(cont’d)
• If the borrower is not using the most recent year’s tax returns you must also obtain and
analyze their business tax returns if it’s a S-Corporation, Corporation or Partnership along
with the appropriate K1’s. Example: Today you receive a file with an extension for 2009
tax returns and the borrower is self-employed through his corporation. DU findings are
asking for one year most recent 1040’s. Since the qualifying income we are looking at is
from 2008, we would also require their business returns from 2008, a copy of their
extension for 2009 and a P & L for 2009 along with YTD P & L for 2010.
• Tip income can only be used in qualifying income if they are included in 2 years taxable
income. UW should develop an average income trend over the past 2 years, and the
employer must indicate that the tip income will in all likelihood continue.
• 4506T / Tax transcripts: Follow AUS findings for the level of income documentation
required. A signed 4506-T will be processed for at least 1 year regardless of AUS findings
except as noted. The most recent year’s tax transcript is required if income information was
used in the underwriting decision regardless of AUS results. If the most current year’s tax
transcripts are not available the following must be provided:
• the previous year’s transcripts
• evidence that the extension was filed & IRS payment made / or refund received for the
most current year
• most recent 30 days paystubs & most current W2s
• For self employed borrowers, a P&L for the most current tax year is also
required. 1040s that can not be validated, along with payment, can be used in lieu of
this P&L.
• Please note that if income for more than the most current year is used, tax returns
and 4506Ts must still be obtained for all years of income used.
• 4506T must be processed for most current year and show “no record"
• If rental income is used to qualify, 6 months rent loss insurance coverage is required
regardless of AUS findings. This includes rental income on 2-4 unit owner occupied
properties.
• If rental income from the subject property is used to qualify:
• Net cash flow must be calculated by the amount established by the appraiser in the
Operating Income Statement (FNMA 216/FHLMC 998)
• 2 year rental property management history only needs to be evidenced if required by AUS
findings.
• Income from accessory or “in-law/granny” units is not permitted. Income may only be used if
the property is taxed as a 2 unit property, and is not permitted if classified as an SFR with
accessory unit.
• Trailing co-borrower income is not permitted.
• Foreign income earned by US Citizens is permitted with the following documentation:
• Most recent 2 years personal income tax returns that include the foreign income.
• YTD paystub and 2 years W2 statements
• All income must be translated to US dollars.
• Retirement Income: Per FNMA guidelines, retirement and/or pension income must be
verified by one of the following: letters from the organizations providing the income, copies of
retirement award letters, copies of signed tax returns, W-2 or 1099 forms, or copies of the
borrowers’ 2 most recent bank statements and retirement account statements showing regular
distributions. If retirement income is paid in the form of a monthly distribution from a 401(k),
IRA, or Keogh retirement account, determine whether the income is expected to continue for at
least 3 years after the application date.
• Mortgage Credit Certificates may not be used as income or to offset housing payment.
Stearns is not participating in any MCC programs at this time.
ASSETS: Assets may be documented per DU/LP unless otherwise specified.
• Borrowers must have sufficient verified liquid assets for the down payment, closing costs
and reserves.
• Liquid assets include checking accounts, savings accounts, CD’s, gifts, money market,
mutual funds, stock, trust funds, net equity, bridge loans, bonds, secured borrowed funds,
etc.
• Stocks, bonds and mutual funds: 70% of the value may be used as reserves
CONFORMING FIXED RATE
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This information is subject to change at any time without notice. Please contact your account manager for current information.
ASSETS:
(cont’d)
• Retirement accounts (IRA, 401K, etc): 60% of the vested value may be used as reserves
• Stock options and non-vested restricted stock are not eligible for use as reserves.
• Funds from personal assets that are sold prior to closing are acceptable as long as the
individual purchasing the asset is not a party to either the property sale transaction or the
mortgage financing transaction. The borrower must document ownership of the asset, the
value of the asset, provide a bill of sale and proof of receipt of funds.
• Assets may be documented as required by DU/LP findings. A written verification of deposit
(VOD) alone is not acceptable in documenting the borrower's assets. At least one month's
most current previous bank statement is required to cross-validate the information if a
verification of deposit is used.
• Business assets may be used for down payment and closing costs as follows:
o The borrower must be the sole proprietor or 100% owner of the business or provide
verification from the other owners that the borrower has access to the funds.
o The accountant must comment on what impact the withdrawal of the funds will have
on the business. If the accountant states that there will be a negative impact, the use
of the funds will not be permitted.
o Business funds are not an eligible source of funds for cash reserves.
o All loans underwritten through LP MUST include a cash flow analysis to evidence the
use of funds will not have a negative impact on the business; an impact letter from
the accountant is no longer acceptable.
CASH RESERVES: Reserves required per DU/LP unless otherwise specified.
Gift funds may not be used for reserves.
• Investment property transactions require 6 months’ reserves, regardless of AUS.
• Second home transactions require 2 months’ reserves, regardless of AUS.
• When the subject property is an investment property or second home, and the borrower
owns one to four financed properties, 2 months reserves are required on each additional
financed second home or investment property.
• Reserve calculation must include all of the components of the monthly housing expense
(PITIA): principal and interest; hazard, flood and MI premiums (as applicable); real estate
taxes; ground rent; special assessments; any HOA dues (excluding any individual unit
utility charges); and any subordinate financing payments on mortgages secured by the
subject property.
• Business funds are not an eligible source of funds for cash reserves.
GIFTS/ DOWN PAYMENT: Down Payment:
• On an owner occupied property or 2nd home borrowers must make a minimum 5% down
payment from their own funds. If the LTV is ≤80% and there is no subordinate financing,
the entire down payment may come from a gift.
• For non-owner occupied properties, the initial down payment must come from the
borrowers own funds.
Gifts may be documented per DU/LP unless otherwise specified:
• Gifts are permitted on primary residence and 2nd home purchase transactions after the
borrower has made the initial down payment from their own funds. (see down payment
requirements above)
• Gifts are not permitted on non-owner occupied properties.
• Gifts must come from a relative, domestic partner or fiancé.
• A gift letter must include the name, address and telephone number of the donor, the
relationship to the borrower, state the dollar amount of the gift and that no repayment is
expected or required.
• If the gift funds are not already in the borrowers account, transfer of the gift funds to the
borrowers account or to escrow (or the closing agent) must be documented.
Gifts of Equity:
• A gift of equity is permitted for a primary residence purchase. The seller agrees to donate
a portion of the equity in the subject property in lieu of all or a portion of the down payment.
No cash changes hands. Gifts of equity must meet the following requirements:
• The gift must be provided by a relative or any other person related by blood, marriage,
adoption or legal guardianship, fiancé or domestic partner.
CONFORMING FIXED RATE
2000-00 Page 14 of 24 11/3/11
This information is subject to change at any time without notice. Please contact your account manager for current information.
GIFTS/DOWN PAYMENT:
(cont’d)
• The donor may not have any affiliation with the builder, developer, real estate agent or
any other interested party to the transaction.
• If the LTV is >80% at least 5% of the down payment must come from the borrowers
own funds
• Gift letter is required.
• The gift of equity must be identified on the sales contract and the sales price of the
property must be at current market rate.
• The gift of equity must be transferred to the borrower as a credit in the transaction and
must be documented on the HUD-1.
1031 Exchange:
• Permitted on investment properties only.
• Escrow instructions required on both the relinquished and acquired properties.
• Closing must be handled by a qualified intermediary. (Accommodator)
• 1031 exchange agreement required.
• HUD-1 required for both properties.
• Verification of receipt of funds by the accommodator or exchange holder from the property
being relinquished and credit of those funds to subject property.
• Exchange must be in individual’s name
• Relinquished property must close before or at same time. Reverse exchanges are not
permitted.
• Appraisal required
• Statement of borrowers equity required: Calculated at lower of sales price from sales
contract OR gross trade value from sales contract less sum of transfer fees and all lien
balances on currently owned property and transfer fees on new property OR appraised
value of borrowers currently owned property plus any new transfer fees on new property.
DOCUMENTATION TYPES: Loan applications on this program must be fully documented. Income, employment and assets
are fully verified.
For all transactions:
• A verbal VOE is required for all types of borrowers prior to closing, including self employed
borrowers.
• Regardless of AUS findings, a year to date paystub and W2 is required, a written VOE may
not replace a paystub and W2
• The salaried borrower’s employment/income is verified with their current employer.
• A Verbal Verification of Employment will be performed (for salaried / W2 borrowers)
a maximum of 3 days prior to the NOTE date, and will expire after 10 days (from the date
on the VOE) if the loan is not funded.
• The self-employed borrower’s employment/income is verified by obtaining the business
number through directory assistance and through the borrower’s CPA, business license or
professional organization. A printout of the information should be provided in the file.
• 4506T / Tax transcripts: Follow AUS findings for the level of income documentation
required. A signed 4506-T will be processed for at least 1 year regardless of AUS findings
except as noted. The most recent year’s tax transcript is required if income information
was used in the underwriting decision regardless of AUS results. If the most current
year’s tax transcripts are not available the following must be provided:
• the previous year’s transcripts
• evidence that the extension was filed & IRS payment made / or refund received for the
most current year
• most recent 30 days paystubs & most current W2s
• For self employed borrowers, a P&L for the most current tax year is also
required. 1040s that can not be validated, along with payment, can be used in lieu of
this P&L.
• Please note that if income for more than the most current year is used, tax
returns and 4506Ts must still be obtained for all years of income used.
• 4506T must be processed for most current year and show “no record"
CONFORMING FIXED RATE
2000-00 Page 15 of 24 11/3/11
This information is subject to change at any time without notice. Please contact your account manager for current information.
DOCUMENTATION TYPES:
(cont’d)
• Age of credit documentation: The maximum age of all credit documents
(including prelim, credit report, employment, income and asset documents) is 60
days at the time of underwriting, 90 days at the time of funding, regardless of
AUS requirements. No exceptions will be permitted.
SECTION 6: PROPERTY/APPRAISALS
ELIGIBLE PROPERTIES: Eligible Properties are attached & detached SFR, 2-4 units, warrantable condo and PUD
units, rural properties and modular homes.
Condition of Property: For all real estate transfers (purchase transactions). All properties
must be habitable and all appliances, plumbing, electrical, etc. must be functional and in good
working condition. A stove is not required in the case where a stand-alone appliance can be
placed. If the kitchen has built in appliances, a stove/oven must be installed. The lack of a
stove or oven can not pose any health or safety hazard, otherwise installation is required prior
to closing. Properties must be in marketable condition at the time of closing. “Marketable”
means the property could be sold in its current condition if necessary. Properties with
kitchen/bath that are currently being remodeled, or properties missing flooring (bare, unfinished
cement floor) are not considered in marketable condition and are not acceptable. These
deficiencies must be completed prior to closing.
Agency Warrantable condo projects allowed. See condo section for more info.
2nd Homes must be suitable for year round occupancy. Timeshares, condotels, mandatory
rental pools and properties with recreational leases are not allowed. Multi-units and mixed-use
properties are not eligible for second homes.
Modular Housing is acceptable. Modular housing is prefabricated, panelized or sectional
housing that assumes the characteristics of a site built home, meets all local and state building
codes, is permanently affixed to the land and is legally classified as real estate. At least one
comparable sale must be of a modular home.
Leaseholds permitted. The term of the lease must extend at least 5 years beyond the term of
the loan. All other FNMA requirements must be met.
Listed Properties/Refinance Transactions: Properties may not be currently listed at the time
of application.
• The property listing agreement must be cancelled a minimum of 1 day prior to the
application date.
• A copy of the cancelled/expired listing must be included in the file.
• Appraiser must note that the property is not currently listed.
• For owner occupied transactions, the borrower must confirm the intent to occupy the
property.
• For cash out refinances where property has been previously listed within the last 6 months,
the maximum LTV/CLTV/HCLTV is 70% (or the maximum per the program guidelines if
lower than 70%).
Property Flipping: If the owner (individual or entity other than the Mortgage holder) sells a
property within 90 days after the date of acquisition, the underwriter should ensure that value is
supported. Please note that MI companies have flipping policies in place: <90 day property
flips with LTV > 80% must be submitted to Radian MI for non-delegated underwriting. Please
see MI matrix for additional information regarding property flipping policies.
Note the following additional guidance regarding property flips:
• Maximum 2 title transfers in last 90 days, 2nd signature at the branch level (u/w manager,
ops manager, branch manager) may approve exceptions for more than 2 transfers.
• Non arms length transactions not permitted on flips
• No double escrows or assignment of sales contract
• Seller of record must own the property at the time of the purchase contract
Rural Properties:
• No maximum acreage, but must have a size that is common & customary for the
market, that can be supported by the appraisal and comparables.
• Land value should typically not exceed 30% of the total property value
• Property and subject neighborhood must be residential in nature
CONFORMING FIXED RATE
2000-00 Page 16 of 24 11/3/11
This information is subject to change at any time without notice. Please contact your account manager for current information.
ELIGIBLE PROPERTIES:
(cont’d)
• Conform to the existing zoning with any residential use permissible under zoning and
land use regulations, and be typical to the market area
• Properties must be readily accessible by roads that meet local standards, and must
have adequate utilities.
• The maximum acreage for properties in Idaho, Montana and South Dakota is 40 acres.
Hobby Farms: Stearns Lending will accept properties that may have an additional use as a
“hobby farm”. Examples of this would be a semi-rural or rural property, residential in nature,
where some of the acreage is used to grow grapes, have a small orchard, or a small barn and
riding rings, etc. The requirements for the property to be considered are:
• Property must be residential in nature, and an SFR only
• Primary residence only
• Appraiser must state property’s highest and best use is as Residential
• Appraiser must supply photos of the non-residential use
• Property must be appraised as residential real estate, with commercial/agricultural value
no
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