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CMS ConventionalGuidelines—FNMA

CMS Conventional Guidelines—FNMAMortgage Lending DepartmentVersion 3.9 – 12/01/21DOCUMENT OVERVIEWPurposeThe following document describes the responsibilities and requirements of theCarrington Mortgage Services, LLC (CMS) Mortgage Lending Division Underwriter(Underwriter) when reviewing and underwriting mortgage loan applications. Thepurpose of credit and property underwriting is to ensure that each loan meets highquality standards that make the loans acceptable to CMS and Fannie Mae.Table ofContentsEligibility . 24Purpose . 24Loan Application . 24Requirements . 24Requirements for the Loan Application Package . 25Document Images . 25Limited Denial of Participation (LDP)/General Services Administration (GSA) Lists. 25Requirements . 25Preliminary Review of Borrower’s Application . 25Requirements . 25Blanket Authorization Form . 26Requirements . 26Identity Verification . 26Requirements . 26Social Security Number Validation . 26Acceptable Documentation . 26Allowable Age of Credit Documents . 28Requirements . 28Soft Pull Credit Reports . 28Occupancy Types. 28Principal Residence Properties . 28Second Home . 30Investment Properties . 30Borrower Types . 31Borrowers . 31U.S. Citizen . 31Non-U.S. Citizen . 31Guarantors, Co-Signers, or Non-Occupant Borrowers . 33Requirements . 33Homeownership Education and Housing Counseling . 33Overview . 33Compliance with Law . 33Definitions . 34Transactions that Require Homeownership Education . 34Meeting the Homeownership Education Requirements . 34CMS Policies & ProceduresProprietary and confidential. For Internal use only. Do not distribute externally.Page 2 of 425

CMS Conventional Guidelines—FNMAMortgage Lending DepartmentVersion 3.9 – 12/01/21Housing Counseling . 35Additional Resources . 35Summary of Homeownership Education and Housing Counseling Options 35Ineligible Borrower and Vesting Types . 36Ineligible Borrowers. 36Ineligible Vesting Types . 36Previous Financial Crimes . 36Policy. 36Transactions . 37Multiple Properties Financed . 37Multiple Properties . 37Properties Financed . 37Simultaneous Submissions . 38Examples - Counting Financed Properties . 39Determining Value . 40First Mortgage Transaction Value . 40Loan-to-Value (LTV) Ratios . 40Calculation of the LTV Ratio . 40Sales Price and Appraised Value Used by DU . 41Calculation of the CLTV Ratio . 42Calculation of the HCLTV Ratio . 42Permanently Modified HELOCs . 43Subordinate Financing Requirements . 43Acceptable Subordinate Financing Types. 43Unacceptable Subordinate Financing Terms . 44Eligible Variable Payment Terms for Subordinate Financing . 44Eligible Repayment Terms for Employer Subordinate Financing . 44Re-Subordination Requirements for Refinance Transactions . 45Defining Refinance Transactions Based on Subordinate Lien Payoff . 45General Purchase Transaction Eligibility Requirements . 46Owner of Record and Chain of Title. 47Non-Arm's Length Transactions . 47Auctioneer's Fees . 48Redemption Periods . 48Private Transfer Fee . 48Private Transfer Fee Covenant . 48Purchase of Pre-foreclosure or Short Sale Properties — Allowable Fees,Assessments, and Payments. 49Payoff of Installment Land Contract Requirements . 50Short Payoffs . 50Definition . 50Eligibility Requirements . 50No Cash-Out Refinance . 51Definition . 51Eligibility Requirements . 51Texas Conversion (Refinance) Transactions . 51CMS Policies & ProceduresProprietary and confidential. For Internal use only. Do not distribute externally.Page 3 of 425

CMS Conventional Guidelines—FNMAMortgage Lending DepartmentVersion 3.9 – 12/01/21High Balance Loans . 52Property Settlement Buyout . 52Ineligible Transactions . 53Acceptable Uses . 54Cash Back to the Borrower . 54Documentation Requirements . 55Existing Subordinate Liens That Will Not Be Paid Off . 55New Subordinate Financing . 55Refinances to Buy-Out An Owner’s Interest . 55Cash-Out Refinance Transactions . 56Definition . 56Eligibility Requirements . 56Ineligible Transactions . 57Acceptable Uses . 57Delayed Financing Exception. 57Student Loan Cash-out Refinance . 59Overview . 59Student Loans Eligible for Payoff . 59Eligibility . 59Underwriting Method . 59Maximum Cash Back . 59Mortgage Payoff . 59Other Requirements. 59Purchase or Refinance of Inherited Property . 60Limitation . 60Fixed-Rate Mortgage Eligibility . 60Temporary Interest Rate Buydowns . 61Provisions for Temporary Interest Rate Buydown Plans . 61Buydown Funds Provided by Interested Parties to the Transaction . 61CMS-Funded Buydowns . 61Buydown Agreements . 61Eligible Transaction Types . 62Qualifying the Borrower . 62Terms of the Buydown . 62Buydown Funds. 63Disposing of Buydown Funds . 63Mortgage Loan Limits . 64Mortgage Loan Limits Overview . 64First Mortgage Loan Limits. 64Second Mortgage Loan Limits . 64Loan Limits and Modified Mortgages . 64Mortgage Loan Eligibility . 65Ability to Repay Loan Eligibility Requirements . 65ATR Covered Loans . 65ATR Exempt Loans . 66Points and Fees Limitations . 66HOEPA and State Higher-Priced Mortgage Loans . 67CMS Policies & ProceduresProprietary and confidential. For Internal use only. Do not distribute externally.Page 4 of 425

CMS Conventional Guidelines—FNMAMortgage Lending DepartmentVersion 3.9 – 12/01/21Acceptable Mortgage Loan Terms . 67Impact of Special Assessments on Maximum Mortgage Loan Amount . 67Property Value for Loans Sold More than Four Months from Note Date . 67Seasoned Mortgages . 68Nonstandard Payment Collection Options . 69Legal Requirements . 69First Mortgage Lien Position . 69Personal Property . 69Rental Property Leases. 69Escrow Accounts . 70Escrow Waivers . 70Waiver Eligibility . 71Principal Curtailment . 71Overview . 71Acceptable Curtailments . 71Documentation . 72Establishing Borrower Ownership Interest . 72Life Estate . 72Leasehold Estate . 72Reserve Requirements . 72LTV Ratio Requirements for Loan Casefiles Underwritten through DU . 72Eligible Property and Occupancy Types . 72General Property Eligibility . 73Overview . 73Number of Units . 73Property Requirements . 73Acceptable Forms of Property Ownership . 73Acceptable Dwelling Types . 74Ineligible Properties. 74Loan Eligibility and Occupancy Types. 75Special Property Eligibility and Underwriting Considerations: Factory-Built Housing. 76Modular, Prefabricated, Panelized, or Sectional Housing Eligibility . 76Modular, Prefabricated, Panelized, or Sectional Housing Requirements . 76Special Property Eligibility and Underwriting Considerations: Leasehold Estates76Leasehold Estates . 76Lease Requirements . 77Additional Eligibility Requirements . 78Option to Purchase Fee Interest . 78Special Property Eligibility Considerations . 80Multiple Parcels . 80Mixed-Use Properties . 80Hawaiian Lava Zones. 80Properties with Solar Panels . 81Properties Affected by a Disaster . 82CMS Policies & ProceduresOverview . 82Eligibility Requirements . 82Proprietary and confidential. For Internal use only. Do not distribute externally.Page 5 of 425

CMS Conventional Guidelines—FNMAMortgage Lending DepartmentVersion 3.9 – 12/01/21Underwriting Borrowers . 84General Information on DU - Overview . 84Underwriting with DU . 84DU Underwriting Reports . 85Loan Casefile Archival Policy . 86Loan Application Sections . 86Loan Application-Additional Borrower Sections . 87General CMS Requirements . 88Risk Factors Evaluated by DU . 88Overview . 88Credit History . 89Delinquent Accounts . 89Installment Loans . 89Revolving Credit Utilization . 89Public Records, Foreclosures, and Collection Accounts . 89Inquiries. 90Borrower’s Equity and LTV . 90Liquid Reserves . 90Loan Purpose . 91Loan Term . 91Occupancy Type . 91Debt-to-Income Ratio . 91Property Type . 92Co-borrowers . 92Self-Employment . 92Allowable Age of Federal Income Tax Returns. 93Amended Tax Returns . 94DU Documentation Requirements . 95Required Documentation for the Permanent Loan File . 95DU Documentation Requirements . 95Approve/Eligible Recommendation . 95Unacceptable Findings Not Eligible for CMS Financing . 95Erroneous Credit Report Data . 96Merged Credit Reports and the Impact on DU’s Evaluation . 97CMS Action Regarding Derogatory Credit Reported in Error. 97Frozen Credit Report. 97Ensuring DU Data and Delivery Information Accuracy . 98DU Tolerances for Refinance Transaction Loan Amount Changes . 100Other Errors in the Credit Data . 100Non-Applicant Debts/Accounts . 101DU Underwriting Findings Report . 102Overview . 102Potential Red Flag Messages . 102Income Assessment . 103Introduction . 103Unacceptable Income Sources . 103Stable and Predictable Income . 103CMS Policies & ProceduresProprietary and confidential. For Internal use only. Do not distribute externally.Page 6 of 425

CMS Conventional Guidelines—FNMAMortgage Lending DepartmentVersion 3.9 – 12/01/21Variable Income . 103Continuity of Income . 104Income from Gambling . 106Determining the Need for Federal Income Tax Returns . 106Verification of Income for Non-U.S. Citizen Borrowers . 107Using Nontaxable Income to Adjust the Borrower’s Gross Income . 107Standards for Employment Documentation . 108General Documentation Requirements . 108Employment Documentation Provided by the Borrower . 108Employment Documentation Provided by the Borrower’s Employer. 109Employment Documentation Provided by a Third-Party EmploymentVerification Vendor . 110Base Pay (Salary or Hourly), Bonus, and Overtime Income . 111Verification of Base Pay, Bonus, and Overtime Income . 111Base Income Calculation Guidelines . 112Military Income . 112Verification of Commission Income . 113Secondary Employment Income (Second Job and Multiple Jobs) and SeasonalIncome . 114Documentation Requirements . 114Income from Secondary Sources . 114Verification of Secondary Employment Income . 115Verification of Seasonal Income . 115Use of IRS Form 4506-C to Validate Borrower Income Documentation. 116Use of IRS Forms to Obtain Federal Income Tax Information . 116Alternatives to the IRS Form 4506-C . 116Completing and Submitting the IRS Authorization Form . 117Retaining the Tax Documents. 117Verbal Verification of Employment . 117Rental Income . 120Eligible Properties . 120Ineligible Properties. 120General Requirements for Documenting Rental Income . 120Documenting Rental Income from Vacation Rentals by Owner . 121Documenting Rental Income from Subject Property. 121Documenting Rental Income From Property Other Than the Subject Property. 122Partial or No Rental History on Tax Returns . 122Income from Departure Residence . 123Calculating Monthly Qualifying Rental Income (or Loss) . 124Treatment of the Income (or Loss) . 125Offsetting Monthly Obligations for Rental Property Reported through aPartnership or an S Corporation . 126Other Sources of Income . 126Documentation Requirements for Current Receipt of Income . 126Automobile Allowance . 128Boarder Income . 128Capital Gains Income . 129CMS Policies & ProceduresProprietary and confidential. For Internal use only. Do not distribute externally.Page 7 of 425

CMS Conventional Guidelines—FNMAMortgage Lending DepartmentVersion 3.9 – 12/01/21Disability Income — Long-Term . 129Employment Offers or Contracts . 130Employment-Related Assets as Qualifying Income . 131Foreign Income . 133Foster-Care Income . 134Housing or Parsonage Income . 134Interest and Dividends Income . 134Mortgage Differential Payments Income . 135Non-Occupant Borrower Income . 135Notes Receivable Income . 135Public Assistance Income .

transactions to rate/term refinance transactions under Tex. Const. Art. 16 §50(f)(2). Refer to Refinancing an Existing Home Equity Loan - Texas Conversion Transactions for detailed requirements to convert (refinance) a Texas 50(a)(6) loan to a non-home equity rate/term loan.