Freddie Mac Updates Underwriting Guidelines

Freddie Mac issued Bulletin 2011-20 on May perhaps 25, 2011, updating promoting needs pertaining to mortgage and home eligibility and credit underwriting, as effectively as promoting and servicing needs for mortgages registered with MERS. In this post, we will overview these updates.

Assets as a basis for mortgage qualification

Freddie Mac has updated their promoting guide to enable for the use of eligible borrower assets as a supply of earnings for qualifying. Eligible assets incorporate retirement, lump-sum distributions and proceeds from the sale of a business enterprise. Chapters 37.13, 37.22 and 37.23 of the Freddie Mac Seller Servicer Guide have been updated to reflect the following:

Retirement assets

  • The retirement funds need to be in an account recognized by the IRS (401k, IRA, and so on.)
  • The borrower(s) need to be the sole owner of the account
  • The account need to be instantly accessible in its entirety
  • The account funds may possibly not be topic to a penalty
  • The borrower’s proper to the funds need to be completely vested
  • Borrowers need to sign IRS kind 4506-T and give most current retirement asset statements

Lump-sum distribution of funds (not deposited to an eligible retirement asset)**

  • Funds need to be derived from a retirement account recognized by the IRS (401k, IRS, and so on.) and need to be deposited into a non-retirement brokerage or depository account
  • A borrower need to have been the recipient of the lump-sum distribution funds
  • Borrower(s) need to be the sole owner(s) of the account holding the funds from the lump-sum distribution (folks not obligated on the mortgage may possibly not have ownership in the account)
  • Proceeds from the lump-sum distribution need to be instantly accessible in their entirety
  • Borrowers need to sign IRS kind 4506-T, give most current three months private depository or brokerage account statements, employer distribution letter and/or verify stubs to proof receipt and kind of lump-sum distribution and IRS 1099-R, if received
  • Lump-sum distribution proceeds need to not have been or existing be topic to a penalty

Sale of borrower’s business enterprise

  • Borrower(s) need to be the sole owner(s) of the proceeds from the sale of the business enterprise that have been deposited
  • Proceeds need to be deposited into a non-retirement brokerage or depository account
  • Borrower(s) need to be the sole owner(s) of the account holding the proceeds from the sale of the business enterprise (folks not obligated on the mortgage may possibly not have ownership in the account)
  • Proceeds from the sale of the business enterprise need to be instantly accessible in their entirety

Borrowers need to sign IRS kind 4506-T, give most current three months private depository or brokerage account statements, completely executed closing documents evidencing final sale of business enterprise to show sale price tag and net proceeds, copy of contract for sale of business enterprise and most current business enterprise tax return prior to sale of the business enterprise

The sale of the business enterprise need to not have resulted in the following

  • Retention of business enterprise assets and/or current secured and unsecured debt
  • Ownership interest or seller held notes to the purchaser of the business enterprise

How to calculate the month-to-month qualifying earnings from eligible assets

Borrowers may possibly be certified for the mortgage utilizing 70% of the eligible asset balance divided by 360.

For instance: Asset balance = $100,000 x 70% = $70,000 / 360 = $194.44/mo.

Any funds that are to be utilized to full the mortgage transaction (down payment, closing fees, prepaids/escrows, and so on.) need to be subtracted from the asset balance prior to calculating 70% of the balance.

For instance: Asset balance = $100,000 Nevertheless, $20,000 will be utilized as down payment.

$100,000 – $20,000 = $80,000 x 70% = $56,000 / 360 = $155.56/mo.

Restrictions and eligibility needs

In order to use the eligible assets as a basis for mortgage qualification the borrowers need to meet all of the following:

  • The mortgage is secured by a 1 unit principal residence or 2nd property (two-four unit and investment properties are not eligible)
  • The mortgage transaction need to be either a obtain, no money out refinance or Relief Refinance (money out refinance transaction are not eligible)
  • The maximum LTV/TLTV/HTLTV is 70%

Payment of mortgage application charges with credit cards, money advances and unsecured lines of credit

Chapter 26.six.four of the Freddie Mac seller guide has been updated to reflect an boost in the maximum quantity that can be charged or sophisticated from a credit card, money advance or unsecured line of credit to spend for charges linked with the mortgage. As of May perhaps 25, borrowers may possibly charge/advance the higher of two% of the mortgage quantity or $1500. The earlier guideline restricted charges/advances to 1% of the mortgage quantity. The provision limiting the quantity that may possibly be charged/advance for appraisal and credit report charges has been deleted as effectively.

Earthquake insurance coverage needs for California condominium units

Freddie Mac needs earthquake insurance coverage for a condominium unit if the condominium complicated is situated in a “higher danger” zip code. The earthquake insurance coverage requirement may possibly also apply to units in condominium complexes in “moderate danger” zip codes primarily based on the Danger Management Options (RMS) Earthquake Insurance coverage Specifications Matrix. The Earthquake Insurance coverage Specifications Matrix requires into consideration qualities of a complicated such as year constructed, building class, parking kind and quantity of stories in the determination of earthquake insurance coverage needs for a unit in a condominium complicated in a “moderate danger” zip code. A lender may possibly make contact with Freddie Mac at 1-800-FREDDIE to confirm if earthquake insurance coverage will be needed by offering the zip code and needed characteristic facts. Freddie Mac will advise the seller of the needs and send a written confirmation of the classification. Copies of the RMS Earthquake Insurance coverage Specifications Matrix and zip code list will no longer be supplied to Sellers upon request.

Home description and evaluation

Freddie Mac has produced updates to Chapter 44 that come to be successful for mortgages with settlement dates on or following September 1, 2011. With the updates to Chapter 44, especially 44.two and 44.15, Freddie Mac is reminding Sellers that the adequacy of the topic home as collateral for the loan needs as a lot emphasis as the borrower’s creditworthiness. The updates to the Seller/Servicer Guide give further detail on Freddie Mac’s needs for overview of the information contained in appraisal reports as effectively as clarify needs for acceptability of residential properties and incomplete improvements.

Some highlights of the updates to Chapter 44.two incorporate the requirement of the collateral to represent the highest and finest use as enhanced or as proposed per plans and specs. With regards to incomplete improvements, clarification is supplied to reflect that the Seller or Servicer need to manage disbursements from accounts established for completion escrow, specifying completions inspections need to be completed by appraisers on Type 442 and the report need to be retained in the mortgage file. It is noted that the needs for incomplete improvements do not apply to incomplete power conservation improvements.

Chapter 44.15 delivers further detail and clarification concerning the overview of the information contained in the home description and evaluation sections of the appraisal report. Precise sections updated with addition detail of needed facts incorporate the Topic, Contract, Neighborhood, Website and Improvements sections. Some highlights of these modifications and updates incorporate putting the duty on the Seller to give the appraiser with a full contract for sale of the topic home regardless of regardless of whether the appraisal was ordered by the Seller or yet another lender. The Website section now needs that the appraisal report not only delivers the zoning classification but also a description of the classification as effectively. Chapter 44.15 addresses Freddie Mac’s needs for appraisal reports that are needed to be completed utilizing Uniform Appraisal Dataset (UAD) with respect the appraiser’s duty for reporting the situation and top quality of the home.

Manufactured property eligibility

Freddie Mac has added two further eligibility needs for manufacture properties.

  • If any portion of a 1 unit dwelling is a manufacture property, regardless of any structural modifications, the mortgage need to meet the needs of Chapter H33 (Manufactured Residences) and be delivered as a mortgage secured by a manufactured property
  • A mortgage secured by a manufactured property that was previously occupied or installed on a permanent foundation and later moved is ineligible for obtain by Freddie Mac

MERS needs

The Seller/Servicer guide has been updated to address responsibilities relating to mortgages registered with MERS. (Chapters four.14, six.11, 16.eight and 22.13 have all be revised to reflect these modifications.)

  • A Servicer need to promptly notify Freddie Mac upon any termination of its MERS membership, regardless of whether voluntary or involuntary. For every MERS-registered Mortgage becoming serviced for Freddie Mac, and promptly upon such termination, the Servicer need to prepare an assignment of the Mortgage from MERS to itself, have the assignment executed and, exactly where needed by law, record the executed assignment in the public land records.
  • A Seller/Servicer that chooses to register a Mortgage with MERS need to use affordable finest efforts to register such Mortgage prior to delivery to Freddie Mac.
  • A Servicer, upon the deactivation of a Mortgage from MERS, need to prepare an assignment of the deactivated Mortgage from MERS to itself, have the assignment executed and, exactly where needed by law, record the executed assignment in the public land records.
  • A Seller need to warrant that MERS is the mortgagee of record (either by becoming named in the Safety Instrument as nominee for the Seller or by becoming named as the assignee in a recorded assignment of the Safety Instrument) or, exactly where applicable, that MERS is not the mortgagee of record for purposes of iRegistration.
  • A Seller need to make sure that the MIN is delivered to Freddie Mac along with all Mortgage information and other facts needed by the Obtain Documents, and the MIN need to be additional indicated on the Safety Instrument and associated documents.
  • A Seller/Servicer need to give its Document Custodian with enough facts to allow a Transferor Servicer and Freddie Mac to identify regardless of whether a Mortgage that is incorporated in a Subsequent Transfer of Servicing is registered with MERS at the time of the Transfer of Servicing.

** If the lump-sum distribution funds have been deposited to an eligible retirement asset, the needs for retirement assets need to be followed.

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