2015 Updates to Requirements of Conventional Loans

Conversion of Principal Residence Requirements No Longer Apply

Associates should follow the standard rental income and financial reserve requirements when the borrower converts his or her current principal residence to an investment property.

 

Stocks, Bonds, and Mutual Funds

FNMA is updating the policies related to the use of vested stocks, bonds, and mutual funds (including retirement accounts) when they are used for down payment, closing costs, and reserves. Instead of requiring a standard reduction in value, the policies have been simplified as follows:

  • One hundred percent (100%) of the value of the asset is allowed when determining available reserves.
  • If the lender documents that the value of the asset is at least 20% more than the funds needed for the borrower’s down payment and closing costs, no documentation of liquidation is required. Otherwise, documentation of the borrower’s actual receipt of funds realized from the sale or liquidation must be obtained.

 

Unreimbursed Employee Business Expenses

For a borrower who is qualified using base pay, bonus, overtime, or commission income less than 25% of the borrower’s annual employment income:

  • Unreimbursed employee business expenses are not required to be analyzed or deducted from the borrower’s qualifying income, or added to monthly liabilities. This applies regardless of whether unreimbursed employee business expenses are identified on tax returns (IRS Form 2106) or tax transcripts received from the IRS.
  • Union dues and other voluntary deductions identified on the borrower’s paystub do not need to be deducted from the borrower’s income or treated as a liability.
  • The Guide now clearly states that tax returns are not required to document these sources of income.

 

Tip Income

FNMA allows tip income to be included in qualifying income if the lender can verify that the borrower has received the income for the last two years. Tip income can be verified using a Request for Verification of Employment (Form 1005 or Form 1005 (S)), or recent paystubs and IRS W-2 forms.

 

Use of IRS W-2 Transcripts in Lieu of W-2s

When lenders verify employment income for borrowers whose income is used to qualify for the mortgage loan, borrower-provided paystubs and IRS W-2 forms are one option that can be utilized to document the income. In lieu of W-2 forms, other documentation options are a Request for Verification of Employment (Form 1005 or Form 1005 (S)) or the final year-to-date paystub. FNMA will also now permit an IRS “Wage and Income Transcript” (W-2 transcript) in lieu of the actual W-2 forms.

 

New Closing Disclosure and Loan Estimate Forms

The Dodd-Frank Act authorizes the Consumer Financial Protection Bureau (CFPB) to ensure that the markets for consumer financial services are fair and transparent. To that end, the CFPB published new Closing Disclosure and Loan Estimate forms replacing the HUD-1 Settlement Statement, Good Faith Estimate, and Truth in Lending Act disclosures, with the goal of making these forms more consumer friendly and easier to understand.

 

Permit Prepayment Penalties on Subordinate Liens

When FNMA purchases or securitizes a first-lien mortgage that is subject to subordinate financing, the subordinate financing must meet certain requirements. One such requirement is that the subordinate financing not include any prepayment penalties or other prepayment restrictions. This restriction is no longer considered necessary and is being removed.

 

The updated topics are dated June 30, 2015. DU will be updated the weekend of August 15, 2015, to reflect any applicable policy changes. Refer to the DU Version 9.2 August Update Release Notes.

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