Loan Guidelines
- Introduction
- Borrower Eligibility
- Occupancy
- Transactions
- Documentation
- Asset Analysis
- Credit Analysis
- Employment & Income
- Property Considerations
- Appraisals
- Approved Appraiser List
These Loan Guidelines apply to all conventional and alternative document Loan programs. Each loan product has a separate and specific product Matrix and Parameters which describes additional details about the program eligibility. Determining loan eligibility requires review of both the Loan Guidelines and the product Matrix and Parameters (see "Product Profiles").
The philosophy of Capital Alliance Funding Corporation ("CAFC") is to weigh all the risk factors inherent in each individual loan file with attention being paid to the applicant profile, level of documentation provided as well as the property to collateralize the mortgage obligation. Loan requests should be commensurate with the applicant's financial patterns and habits.
The risk involved with any loan decision must be kept in perspective. By clearly defining eligible borrowers, properties, transaction types and documentation types, CAFC will be able to maintain this perspective as well as mitigate risk. Such indicators of risk would be occupancy of subject property, loan amount, borrower's previous credit history and current debt load and LTV. Risk may be mitigated, for example, by requiring more income documentation or requiring a lower LOAN-TO-VALUE. Capital Alliance discourages extending credit which could put an undue strain on the borrower or could jeopardize the applicant's ownership in the property.
Our commitment to fairness and equal opportunity is clear and unequivocal. Discrimination based on race, color, sex, sexual orientation, disability, national or ethnic origin, marital or familial status, religion or age is against company policy and unlawful.
Eligible Borrowers
U.S. citizens and permanent resident aliens with an Alien Registration Card
(Green Card) are eligible for financing.
If the borrower is a permanent resident alien, the file must contain evidence of lawful permanent residency. Acceptable evidence consists of a of a completed Certificating of Residency, completed by the processor or underwriter certifying the borrower's Alien Registration information has been reviewed and is acceptable.
Non-Permanent Resident Aliens
A non-permanent resident alien is eligible for financing under the same terms and
conditions offered to U.S. citizens and permanent resident aliens. The borrower
must be employed in the U.S. In addition, income and residency in the U.S. must
be likely to continue for at least three years. Borrowers with diplomatic immunity
are not eligible.
Ineligible Borrowers
Due to the inability to compel payment or seek judgment, the following are not eligible for financing:
- Borrowers with diplomatic immunity or otherwise excluded from U.S. jurisdiction.
- Limited partnerships, general partnerships, corporations.
Trust Estates
Title taken in a revocable family trust may be eligible for financing under certain
products. A complete copy of the trust document must be included in the file.
The request must be approved by Secondary Marketing.
Co-Borrowers/Co-Signers/Guarantors
Generally, co-borrowers are applicants who will occupy the property, be obligated for
the debt and take title to the property. A non-occupying co-borrower will be permitted
by each loan product. Non-occupying co-borrowers may not be an interested party to the
transaction. The non-occupying co-borrower:
- Must sign the note; and
- May take title to the note.
All loan programs require the occupant borrower make a minimum contribution towards the transaction from their own resources. Provided the file contains evidence the borrower has saved the necessary amount, the downpayment and closing costs may be paid from a gift or from the non-occupying co-borrower's resources.
On all loans, including stated income loans, the borrower's income source must be sufficient to reasonably support the DTI requirements of the loan program.
If an occupant borrower cannot meet the income or asset requirements as required in the applicable product matrix, the loan will be treated as a non-owner occupied request.
Primary Occupancy
Primary occupancy is a one to four family dwelling that is occupied as the borrower's primary
residence for a major portion of the year. A typical primary residence will meet
the following criteria:
- Located within a reasonable distance to the borrower's place of employment;
- Subject is declared as the borrower's primary residence for purposes of tax reporting, voter registration, etc.;
- Borrowers declare their intention to occupy the subject property;
- Characteristics of the subject property should be sufficient to accommodate the owner's immediate family;
- In transactions where occupancy is questionable, the loan request will be treated as non-occupied.
Second Home Occupancy
Second home occupancy is a single family dwelling that the borrower occupies in
addition to his or her primary residence. A typical second home will meet the
following criteria:
- Located in a resort area or where the applicant regularly conducts business affairs.
- Should be a remote distance from the borrower's primary residence.
- The property must be suitable for year-round occupancy.
- Property must be available for borrower's exclusive use and enjoyment. May not be subject to any timesharing arrangements, rental pools or other agreements which require the borrower to rent the property or otherwise give control of the property to a management firm.
- Any rental income received will not be considered in the underwriting analysis.
- Non-arms length transactions are not eligible.
- For Sub-prime loans, the loan request will be treated as an investment property.
- The borrower will only have one second home.
- Transactions where occupancy is questionable will be treated as non-owner occupied.
Investment Property
Investment property is a dwelling occupied by someone other than the borrower.
This definition is used whether or not income is derived from the property.
Limitations regarding the number of properties a borrower may own will be outlined
in each appropriate product Parameter.
Financing for investment properties is available for those borrowers who have had experience as a landlord (reasonable exceptions may be considered).
Multiple Properties
There is no limit on the number of other financed properties a borrower may own.
Landlord Experience
Underwriting will take into consideration the number of properties owned and the length
of time the properties have been owned. Investors who demonstrate a rapid acquisition
(Acquired within the most recent 24 month period) of investment properties will be reviewed
cautiously. Capital Alliance reserves the right to request documentation to evidence the
borrower had the funds required to purchase any property acquired within the last 24 months
and/or sufficient verified assets to provide adequate reserves for the investment portfolio.
In addition, the file must contain evidence the borrower has sufficient experience to handle the entire investment portfolio. Loans made to borrowers owning multiple non-owner occupied properties must meet the following guidelines:
- File must contain documentation evidencing borrower's experience owning multiple investment properties (two years experience required); or,
- Borrower has acquired or is in the process of acquiring a maximum of (including
subject property, if applicable);
- Two financed investment properties within the last six months;
- Four financed investment properties within the last two years.
All financed 1-to-4-unit investment properties (count properties, not units), regardless of the source of financing, will be considered in the above eligibility determination.
Purchase Transactions
A purchase transaction is one which allows one person to acquire the property
from another person or entity. A copy of the fully executed purchase contract
and all attachments or addenda will be required for all purchase transactions.
Escrow instructions fully executed by all parties are acceptable as a substitute
for the purchase contract.
A preliminary title report or search should be provided with all loan submissions. See Title History Review Policy regarding required documentation and/or acceptable sources to satisfactorily verify property ownership and value increases for at least 24 months.
Refinance Transactions
A refinance transaction is one to replace an existing loan(s) with a new loan to
current owners or to place financing on property currently owned by the applicant
where no financing exists Refinance transactions will be classified as one of the following:
- A Rate/Term
- Expanded Rate/Term
- Debt Consolidation
- Cash out
In general, a refinance must put the borrower in a better position. This can be evidenced by one or more of the following:
- Lower payment
- Lower interest rate.
- Convert from Arm to fixed rate.
- Pay off a balloon payment.
- Convert from negative amortization loan to a fully-amortizing loan.
- Consolidate debt.
- Pay off tax lien(s).
Loans subject to multiple refinancing within the last 12 months may require a prepayment penalty. Underwriting reserves the right to limit the amount of yield spread premium paid on loans to borrowers who exhibit a history of repeat refinancing over a short period of time.
A preliminary title report should be provided with all loan submissions outlining property ownership/property transfers for at least 24 months.
Typically, properties listed for sale within the six months prior to underwriting review are not eligible for financing. The file must contain a copy of the canceled listing. Exceptions will be considered on a case by case basis.
Rate/Term Refinance
The mortgage amount is limited to the sum of the present first mortgage payoff,
any subordinate financing which was used to acquire the property and closing
costs. Cash to the borrower is limited to the greater of 2% of the loan amount or $2,000.
Expanded Rate/Term Refinance
Includes transactions where the proceeds of the new loan will be used to pay off
non-purchase money liens such as paying off an ex-spouse, subordinate liens used for
home improvements or any other non-purchase purpose.
Debt Consolidation
The mortgage amount includes paying off subordinate liens not meeting the definitions
in Expanded Rate/Term refinances, loans not secured by the subject property, and
closing costs. Debt Consolidation loans will be classified as cash out refinance
for pricing and eligibility purposes.
Cash-Out Refinance
The mortgage amount may include the present first mortgage payoff, subordinate liens,
closing costs and additional cash to the borrower. Amount of cash back may
vary by product type.
Recouping Out of Pocket Expenses for Home Improvement Loans
The borrower may also re-coup out of pocket expenses for newly renovated properties
if the cost of improvements can be documented. Renovations must be substantial
and completed prior to closing. LTV will be based on the lesser of current appraised
value or the original purchase price plus the cost of documented home improvements.
The appraisal must reflect the value of the improvement, not the cost of improvements.
Any cash back to the borrower may not exceed the amount of documented costs paid out
of pocket by the borrower.
Financing for Properties Recently Purchased For Cash
When providing financing for a property which was purchased using cash, the
transaction may be treated as an Expanded Rate/Term refinance if all of the
following are met:
- Application for the loan is made within 30 days from the date of purchase.
- The final closing statement from the purchase must reflect the cash purchase of the property.
- File must have evidence that the borrower had the funds to purchase the property.
- Value will be based on the appraised value or purchase price, whichever is less. Paying off a subordinate lien that meets one of the following criteria is not considered cash out.
- Documented equity interest of ex-spouse or ex-lien holder pursuant to a divorce decree. Proceeds of the subordinate lien were used for property improvements to the subject property within the most recent 12 months.
- Draws on equity line of credit in the past 12 months that do not exceed 2% of the maximum credit limit or $2,000.
- Any subordinate liens that are at least 12 months old.
Lease Option Transactions
When a borrower is purchasing a home under a lease-option agreement, they may receive
a rent credit from the seller for part of their downpayment and closing costs if:
- Amount of monthly rent paid by the borrower exceeds the market rent at the time the contract was signed. Credit may be the amount of the borrower-paid rent which exceeds the market rent. Appraiser must confirm the market rent as of the date the contract was signed.
- File must contain evidence all rent was paid. Canceled checks should be provided.
- Term of the lease must be at least 12 months.
- Rent credit may be used to satisfy the minimum contribution requirement.
- Rent credit must appear on the HUD-1.
- Expanded loan programs: The transaction will always be treated as a rate/term transaction.
Multiple Loans
Typically, financing is available for one primary residence and one second home to any
individual borrower. Non-owner occupied transactions are limited based up the program
selected. In the event the borrower utilizes several different programs for non-owner
occupied transactions, Capital Alliance will limit its exposure to 10 loans not to
exceed an aggregate amount of $1,000,000.
Non-Arms Length Transactions
A non arms length transaction exists whenever the applicant has a personal or business
relationship with the seller, builder, developer, real estate agent, appraiser, lender
providing the financing, title company or any other interested party. These
relationships may influence the transaction and generally not eligible for financing.
On a case by case basis however, Capital Alliance will consider non arms length transactions under the following conditions:
- Relationships are disclosed with the initial application.
- Full income and asset documentation is provided.
- Additional risk factors are not present (distress sale, seller contributions, etc.).
Non-arms length transactions include, but are not limited to affiliates of the applicant who are:
- Family members related by blood or marriage to the seller.
- Owners, employees or family members of the origination lender.
- Builder/developers-applies to non-owner/second home transactions.
- Renters buying from landlord.
- Trading properties with the seller.
- Employed by family members.
Inherited Property
If property was inherited less than 12 months prior to application, only rate/term refinances
will be permitted subject to the following:
- Proceeds will be used to buy-out the documented equity interest of others. The equity owners must be paid through escrow.
- The property has cleared probate and property is vested in the borrower's name.
- Current appraised value will be used for LTV/CLTV determination.
- Two appraisals supporting value will be required.
Ineligible Transactions
The following transactions are ineligible for financing:
- Property/Land flip transactions.
- Straw Borrowers/Straw Buyer.
- Builder/Seller Bailout plans.
- Multiple property payment skimming-typically involving investors who purchase investment properties with seller carry-back financing, collect rents but do not make the mortgage payments.
The goal of Capital Alliance is to make the underwriting as well as the processing of the documentation as simple as possible. However, prudent underwriting will not be abandoned. Although most of our loan products only require Reduced Documentation (Stated Income/Verified Assets ("SI/VA"), No Ratio, Stated Income/Stated Assets ("SI/SA") No Doc, and Limited programs), we still require that all information in the file be closely reviewed and evaluated to determine the reasonableness of the borrower's ability and willingness to repay the mortgage debt.
Reasonableness will be based on the borrower's employment history, income source, and past credit experience which must be commensurate with the loan request. For example, information on the credit report should match the information on the loan application. Borrower's income source must be from a source likely to generate sufficient income to repay the debt. Material inconsistencies must be investigated. Loan requests for an applicant with atypical characteristics should require full income and asset documentation. For example, presence of any of the following characteristics should indicate full documentation is required:
- Transactions resulting in significant payment shock (payment more than doubles).
- Loan request is significantly larger relative to previous mortgage.
- Excessive balances in checking, money market accounts with no stock ownership.
- Inconsistent borrower information between loan applications for current transaction and previous transactions.
Requests for additional information or documentation will be driven by common sense, sound credit judgment and loan characteristics. Underwriting must review all information provided. If information is inconsistent, i.e., occupancy, employment, income, etc., the underwriter may decline or require further income and asset documentation. Information disclosed in the file must be taken into consideration. For example, payroll deposits shown on bank statements, disclosed in a file will be used for calculating appropriate gross income.
All files must include the completed initial application. When the initial application is incomplete or missing from the Submission Package, the loan may not be processed using reduced documentation. All income sources must be itemized on the signed 1003. Documentation requirements vary depending on the product selected. Refer to the product Matrix and Parameters for specific documentation requirements.
| Definition of Documentation Types | |
| Full Doc |
|
| Stated Income/ Verified Assets ("SI/VA") Doc | Income/Employment:
|
| No Ratio | Income/Employment:
|
| Stated Income/Stated Assets ("SI/SA") |
|
| No Doc |
|
| Limited Doc (Self Employed Only) |
This program is available only for self employed borrowers and any borrower who
files Schedule C in their Form 1040 or is a Form 1099 employee. Borrower(s) will
be qualified on the monthly average of deposits reflected in the bank statements,
provided they are repetitive and reasonable. The following documents are required
on Limited Doc loans.
Other Conditions:
|
When the documentation type or program requires asset verification, the underwriting package must evidence sufficient funds for downpayment, closing costs and reserves (when applicable). The fiscal position of the applicant, including accumulation of verifiable assets, is a strong indication of creditworthiness. An established pattern of savings demonstrates skill in financial management. Evidence that the savings are liquid also strengthens the loan transaction as these funds are readily available to repay debt obligations, pay unexpected expenses and provide protection against short term interruption of income.
Asset Documentation
Assets may be verified using:
- Direct written verification, completed by the depository.
- Two consecutive account statements. The account statements must provide the following:
- Identifying the borrower as the account holder
- Identify the account number
- Display the time period covered
- Include current balance
- Include the date.
Age of Documentation
Asset documentation may be no older than 90 days at the time of closing.
Acceptable Funds
The following items are acceptable for downpayment and closing funds, including prepaids:
- Cash from an applicant's checking or savings account
- Gift or grant which does not have to be repaid may be permitted.
- Proceeds from the sale of the applicant's personal asset(s). Value of the asset must be verified, provide evidence of sale (bill of sale, copy of check, etc).
- Proceeds from a loan which is secured by an applicant's personal asset. For example, loans secured by other real estate are acceptable. Terms of the loan must be verified. Repayment of the loan must be included in the total expense ratio.
- Proceeds from a loan secured by a financial asset (401K, stocks, etc.) may be used. The net vested amount may be for reserves.
- Proceeds from liquidated stock, retirement accounts, certificates of deposit, pension or other savings plan.
- Proceeds from sale of other real estate. If part of the downpayment is expected to be paid from the sale of the applicant's current home, an executed closing statement verifying sufficient net proceeds must be received with the closing package.
- Net proceeds from the trade of the applicant's real property or an IRS 1031 exchange.
- Funds from a business account may be used for downpayment and reserves. The applicant must be a sole owner of the company and the company's CPA must provide a statement indicating withdrawal of the funds will not negatively impact the business). If the loan is greater than $1,000,000, funds from the business may be used for downpayment but not reserves.
- 10. Any payment received as a result of being a party to the sales transaction after the borrower has met the minimum downpayment requirement.
Unacceptable Funds
- Gift funds which must be repaid in full or in part.
- Cash on hand.
- Labor performed by the applicant or goods or materials provided by the applicant (sweat equity).
- Gifts from Seller-funded programs.
Cash Reserves
Exclusive of downpayment and closing costs, the applicant must have adequate
cash reserves available that are appropriate to the transaction. High LTV's,
second homes, investment properties and applicants with multiple investments in
real estate will be closely analyzed for remaining cash reserves. In some
instances, substantial liquid assets are considered to offset other risk factors.
Downpayment
On purchase transactions, applicants must make a minimum downpayment with funds from
their own resources. The amount of the minimum required downpayment depends upon the
occupancy of the property, documentation type and loan program.
All earnest money deposits must be fully documented. Acceptable documentation includes:
- Copy of canceled check.
- Evidence from the Real Estate Broker that the funds were deposited into broker's trust account.
- Escrow agent letter acknowledging receipt of funds.
Gift Funds
Gift funds are acceptable as outlined in each product Matrix and Parameters
The Gift letter must include:
- Donor's relationship to borrower.
- Donor's address
- Dollar amount of the gift.
- Certification it is an outright gift with no repayment required.
File must contain evidence of receipt of gift funds prior to closing.
Many programs require a minimum contribution be made from the borrower's own resources prior to gift funds being considered as an acceptable source of funds. In these cases, the file must contain evidence the borrower has sufficient funds in a personal account to make the necessary contribution. The borrower many not be required to use these funds to complete the transaction but the funds must be verified as available to the borrower and owned by the borrower.
Joint Accounts
Funds held jointly with a non-borrowing spouse will be considered the borrower's own funds.
Funds held jointly with any other non-borrowing person may be considered if joint account
holder is also a title holder on the property.
Secondary Financing
Secondary financing is permitted as outlined in each applicable Matrix and Parameters.
Financing Concessions
Financing concessions are considered to be funds originating from an interested party to
pay closing costs on a purchase or refinance transaction which is used to:
- Permanently reduce the interest rate on the mortgage.
- Fund a buy down plan to temporarily subsidize the applicant's monthly payment on the mortgage.
- Make contributions in any form related to the mortgage financing charges which traditionally would be paid by the applicant, including but not limited to the payment of discount points, loan fees, commitment fees and/or origination fees.
- Pay the cost of other items traditionally paid by the applicant such as application fees, homeowner association fees, appraisal fees, transfer taxes, tax stamps, attorney fees, surveys, closing costs and title insurance.
Financing concessions in excess of allowed limitations or which exceed the borrower's actual closing costs will be deducted from the purchase price prior to determining the loan to value.
Sales Concession or Property Inducements
Financing concessions not listed above or in an amount in excess of the allowed limitations
are considered to be sales concessions. The cost of any sales concessions must be deducted
from the purchase price prior to determining an adjusted loan to value.
In cases where the appraisal does not clearly and adequately reflect the presence and effect of any financing and/or sales concessions, the underwriter must make a downward adjustment to the appraised value of the mortgaged property to reflect the cost of the contribution. The revised LTV is based on the lesser of the appraised value or reduced sales price.
Trade Equity IRS 1031 Exchange
Documentation requirements depend upon the type of property exchange being utilized.
When the property trade is between the borrower and seller, the following
documentation must be provided:
- Current appraisal on the borrower's property which is being traded.
- Closing statement for borrower's property to evidence net proceeds available.
An IRS 1031 Exchange allows a borrower to place proceeds from the sale of a property into an escrow account until they are ready to purchase another like-kind property with the proceeds. The following documentation must be provided:
- Copy of closing statement
- Copy of exchange agreement.
- Statement from Accommodator verifying available funds.
Unsecured Loans
Funds from an unsecured loan via a family member, municipality, non-profit organization,
or borrower's employer may be used for additional downpayment (after borrower has made
the minimum required downpayment). Funds from unsecured loans may also cover closing
costs, including prepaids and discounts. All of the following must be met:
- Not eligible for Reduced Documentation processing
- Unsecured loan is disclosed on the 1003 and payments are included in the total debt ratio calculation.
- Lender of unsecured loan is not an interested party to the transaction.
- Terms must be documented with an award letter or legal agreement.
- 5. If employer is the lender, repayment terms may not require the borrower to pay in full in the event the borrower no longer works for the employer.
- Evidence of transfer of funds is required.
- Repayment terms must adhere to the following:
- Fixed Rate
- Note rate not to exceed 2% above first lien rate.
- No balloon payment within the first five years.
- Cash advances from credit cards are not acceptable source of funds.
Equal Credit Opportunity Act
The Federal Equal Credit Opportunity Act prohibits lenders from discriminating against
credit applicants on the basis of race, color, religion, national or ethnic origin,
sex, marital or familial status, age, disability, because all or part of the applicant's
income is derived from a public assistance program or because the applicant has, in
good faith, exercised any rights under the Consumer Credit Protection Act. It is
against are policy and values to consider any prohibited basis in underwriting any loans.
The underwriting process requires an analysis of the loan file to determine acceptability. Determination of an applicant's creditworthiness as demonstrated by a willingness to repay past and current debt obligations in a timely manner is a critical aspect of this analysis. Credit analysis varies depending upon the program selected. Unless otherwise addressed in the product matrix, credit will be analyzed in accordance with the following.
Credit Report
A credit report is required for each applicant executing the Note. The report should
provide merged credit information from at least three national credit repositories.
The credit report should include verification of all credit references provided on the
loan application and must certify the results of public record searches for each city
where the applicant has resided in the last two years. Accounts that are not verified
on the credit report must be verified with either a written direct verification or
acceptable FNMA/FHLMC alternative documentation.
Age of Credit Report and Credit Verifications
Unless otherwise stipulated, the credit report may be no older than 60 days at closing.
Credit Scoring
Credit scores analyze the applicant's credit use patterns, including any derogatory
credit, to predict the probability of default. The score assists in evaluating the
borrower's consumer credit.
Valid and usable credit scores are required on all files. A valid score is one that is:
Generated based on a minimum of three acceptable trades at least two or more years
old from traditional credit providers, and reflects the borrower's credit history and
credit patterns.
An acceptable tradeline is one from a traditional credit source. Alternative credit trades or such items as collections, charge-offs, "authorized user" accounts, deferred loans with no pay history, or transferred accounts are all considered unacceptable tradelines for determining a valid credit score.
To ensure the validity of the credit score, each tradeline should reflect all repositories that are reporting it. This will identify which tradelines were considered when generating each credit score. Underwriters will closely review the scores the credit score codes and borrower's credit history to ensure validity. Credit score codes must be consistent with tradeline information. For example, if credit score code identifies delinquent accounts, credit report must also contain delinquent tradelines. Scores that do not appear to represent an accurate picture of the borrower's credit risk will be not considered useable.
A minimum of two scores are required for each applicant. If all scores are valid, the lesser of two or middle of three will be the representative score of each applicant. The representative score used for underwriting purposes will depend upon the program selected. Some programs will use the lowest representative score for qualifying the file for loans with multiple borrowers. Other programs will use the representative score for the Primary Income Borrower-the borrower who earns >50% of the total qualifying income.
In the event the credit score is not reflective of the borrower's credit history or large variances (greater than 30 points) exist between scores, underwriting will determine the most appropriate score for underwriting purposes.
Scores obtained from Experian (FICO) Trans Union (Empirica) and Equifax (Beacon) will be the only scores acceptable.
Evaluation of Credit
The review of an applicant's credit history reveals a great deal in determining the
likelihood of debt repayment. Although credit reports may contain seven or more years
of credit history, the most recent credit use patterns are the most predictive of
repayment ability. Generally, an acceptable credit history will include at least
two or three years of credit use. A shorter credit history may indicate increased
risk, but all credit factors must be considered. The underwriter should also consider
the number of recently opened accounts. If there are a significant number of new
accounts, the reasons should be investigated.
There are several different credit factors considered in evaluating credit: number of accounts, outstanding debt, delinquency, derogatory credit and inquiries. It is generally not one credit usage factor, but the combination of factors that establish whether or not the overall pattern of credit use is acceptable.
Number of Accounts
In general, the greater the number of credit accounts, the higher the credit risks.
However, it is important to analyze the number of accounts within specific types of
credit (such as retail, installment, revolving and mortgage). The higher risk group
includes applicants with a large number of bank revolving accounts, and/or accounts
with outstanding balances. On the other hand, if there is no bank revolving accounts,
this could indicate an inability for the applicant to obtain credit.
Outstanding Debt
Two important indicators of repayment ability are the number of accounts with sizable
outstanding balances and high credit line utilization. The underwriter should consider
the number of tradelines with balancers reported in the last year. If all trade lines
have balances, there is a greater credit risk than if there is little or no outstanding
balance on tradelines. Underwriting should further analyze the relationship between
total balances and total credit limits on revolving lines. If the outstanding balance
is near, or above the credit limit on revolving lines, a greater risk is present.
Delinquency or Derogatory Credit
Underwriting should consider the type of accounts on which the delinquency occurred,
the reason for delinquency, the severity of the delinquency, the frequency of delinquent
accounts, and how recently the delinquency occurred. More weight is placed on installment
loan delinquency than on revolving debt delinquency, with the most weight placed on
mortgage payment history.
The most serious types of delinquency include foreclosures, bankruptcy, judgments, collection accounts and tax liens. Applicants must provide explanations and supporting documentation to show these events were an isolated occurrence.
As outlined in the product Matrix and Parameters, a sufficient time frame must have occurred after a foreclosure, NOD filing, bankruptcy, etc. When the bankruptcy has been discharged less than 7 years, a copy of all bankruptcy paperwork must be provided. Consumer Credit counseling debts are considered the same as chapter 13 bankruptcies..
Accounts which are currently delinquent will be closely reviewed and scrutinized. With the exception of the Expanded programs, all past due accounts must be brought current prior to closing.
Collections, charge-off's, tax liens, delinquent child support and judgments may remain open provided they do not affect our lien position. A copy of the subordination agreement must be included in the file. Any items secured against the subject will be included in the CLTV calculation. In the event there is a payment plan, the payment will be included in the debt ratio. In most instances, no repayment figures will be calculated for collections or charge-offs unless a repayment plan has already been established or the item has been secured by the subject property.
Delinquent credit which belongs to an ex-spouse may be excluded from the credit review if the file contains a copy of the divorce decree/separation agreement which shows the item(s) in question belonging solely to the ex-spouse and the lates occurred after the separation or divorce.
Delinquency that belongs to a co-signer will be considered in determining the borrower's credit acceptance. Exceptions for isolated delinquencies will be made on a case by case basis. However, the payment will be included in calculating the debt ratio.
Written Explanations
A satisfactory written explanation outlining the reason for the derogatory credit
should be included in the credit file. The explanation must satisfactorily identify
the reason for the delinquency and the timing of the events must be consistent with
other application information. Documentation supporting the applicant's explanation
may be required.
Ideally, the instances of delinquencies occurring should not be indicative of the applicant's negligence or unwillingness to repay obligations.
Inquiries
Recent inquiries indicate that the consumer has actively been seeking credit. If
there are a number of inquiries, they should be researched. It is especially
important to consider the number and type of inquiries in the last 90 days. An
applicant with minimal credit experience and a number of recent inquiries should
be more closely scrutinized than an applicant with the same number of inquiries
and a very long and stable credit history.
Limited/No Credit History
Applicants with limited or no credit experience may not be eligible for maximum financing
or reduced (stated, no doc, no ratio, etc.) documentation. Underwriting will consider
the following criteria when determining whether there is a pattern of limited or no
credit history: the number of accounts, the type of accounts and the length of time
the accounts have been open.
When limited traditional credit exists, alternative credit sources may be used to determine the creditworthiness of applicants with non-traditional credit histories. Satisfactory verifications should be reported on a non-traditional credit report prepared by a credit agency approved by an Agency approved credit agency. The trade reference may come from providers of services for which the applicant has had a regular financial obligation. These sources can include rental payments, car insurance or life insurance payments, etc. A non traditional credit report should consist of a minimum of four references.
Mortgage/Rental Payment History
Unless otherwise stipulated in the product Parameters, files must contain verification
of the borrower's 12 month payment history for all mortgages appearing on the credit
report and credit application (1003). Less than 12 month history permitted when
mortgage has been in place for less than 12 months. In addition, Underwriting reserves
the right to require an updated mortgage/rental history to ensure the loan is current
prior to closing.
Mortgage history may be verified in one of the following manners:
- VOM from the mortgage holder
- Mortgage rating from the credit report
- Mortgage computer generated payment history from the mortgagee outlining 12 month pay history
- Twelve months canceled checks (front and back)-if the mortgage holder is a private party.
Rental history may be verified by the following:
- Direct written verification of 12 month rental history from landlord may be provided if the management company is listed in the local telephone directory. The file must contain a copy of the listing. If the listing is not available, 12 months canceled checks must be provided.
- 12 months canceled checks (front and back).
When canceled checks are provided, the check must identify the servicer, landlord or management company. The check must also show the bank endorsement date on the back.
Mortgage histories through the date of payoffs will be considered in program eligibility. On Jumbo A and Alt. A products, the loan payoff should not include late fees or past months mortgage payments.
Note: Timeshare obligations are considered installment, not mortgages for credit review purposes.
Re-established Credit
For loans amounts<$1,000,000: credit has been re-established for the most recent two year
period meeting the following minimum requirements:
- Number and type of credit must meet the requirements as outlined in the Credit History.
- If tradelines were included in a BK, at least one trade must be part of the reestablished credit references.
- Three of the four references must be at least 24 months old.
- One reference must be housing related.
- No new public records, judgements, collections, etc., have been opened since the financial problems occurred.
- No more than 2x30 and No 60 day accounts on consumer debt.
- No housing payments past due. Housing must be verified for the last 24 months.
- All other accounts must be current.
On loans of $1,000,000 or more, credit should be re-established for a four year period.
The greater the job tenure and stability, the greater the borrower's ability to repay obligations in a timely manner. Employment must be stable with at least a two year history in the same job or jobs in the same or related field. Self-employed applicants must have been in business for at least two years.
An applicant who changes jobs frequently to advance within the same line of work should receive favorable treatment. Frequent job changes without advancement or in different fields of work should be reviewed carefully to ensure consistent income and the likelihood of continued employment.
Gaps in Employment
Applicants should explain, in writing, any job gaps that exceed one month.
This explanation will be reviewed for reasonableness.
Source of Income
Applicants will be qualified based on calculated Stable Monthly Income. Stable
Income consists of those amounts and sources which are reasonably expected to
continue. The questions should be asked: Has the applicant been receiving the
income in the past? Is the applicant receiving the income now? And is it likely
the applicant will receive the income in the future? If any of those questions
cannot be answered in the affirmative, then further review is required.
Qualifying income may be obtained from a variety of sources such as salary,
bonuses, commission, self employment, etc.
Each source of income must be reviewed with regard to the applicant's ability to service his obligations. Various types of income documentation may be necessary for different types of income.
Annuity Income maybe used for qualifying if properly documented and expected to continue for at least 3 years.
Automobile Allowance will be considered acceptable provided receipt of income has been documented for the previous 2 years and the income is likely to continue.
On Bonus income paid during the past 12 months, the basis upon which the bonus is computed and the employer's projection for future continuance of the bonus must be reviewed. . If the bonus is used for downpayment and is the only source of funds for the downpayment, it may not be used for qualifying income.
Capital gains earned from the sale of assets will be considered Stable Monthly Income if the borrower has a two year history of earning capital gains and sufficient assets to continue generating similar earnings. Federal tax returns for the past two years will be required. The income will be averaged for the past 24 months.
Child support and alimony may be used if the file contains evidence that the funds are received and will continue. Copies of divorce decrees/separation agreements, etc. will be required along with bank statements, canceled checks or court records showing payments being made for a minimum of the past six months. The payments should be expected to continue for the next three years.
Commission Income will be considered if it has been received for the previous two years and is likely to continue.
Disability may be used for qualifying income if a two year history of receipt has been documented. Benefits should be verified with a photocopy of the award letter supported by two years w-2's and current evidence of receipt. The award letter must indicate the benefit amount, length of time the benefits will be received and the conditions for receipt of benefits.
Dividend and Interest income may be used as stable monthly income if the file contains documentation that the income has been received for the past 24 months and that the year to date earnings are in line with past earnings. The borrower should have sufficient assets after loan closing to continue to generate acceptable monthly income. Documentation should be from federal tax returns, 1099's from the previous two years as well as current year-to-date statements.
Income for borrowers that are employed by a relative must be verified by using two years federal tax returns and a current pay stub. If the borrower owns 25% or more of the company, full self-employment income must be provided.
Income from a foreign country may be considered for qualifying if it can verified as stable and likely to continue. The income must be converted to US currency.
Income from foster care payments will be considered if it is regular, recurring and likely to continue. Generally, a two year history of past receipt is required. Income must be averaged over a two year period. Projected income will not be used.
Income received from mortgages, land contracts, installment sales etc., may be used provided the remaining term of such income is a minimum of 3 years.
Borrowers employed in the military receive additional compensation besides their base pay. Rations, base housing pay, flight pay, etc., may be used to qualify provided the income is typical for the position held and it is likely to continue. Non-taxable income may be grossed up 25%.
Non-taxable income may be grossed up 25% on most programs. Non taxable income includes:
- Child support
- Disability income
- Social Security income
- Worker's comp
- Welfare benefits
- VA benefits
- Military allotment
- Municipal bond interest.
Part time and overtime income will be considered as stable income if it has been received for the previous 12 months and has a likelihood of continuing.
Rental Income require the most recent year's tax returns, schedule E's or copies of executed current leases. If leases are provided, 25% of the rental income will be deducted for maintenance, repairs and vacancies. If tax returns are provided, the actual information from the tax return will generally be used.
Verification of rental income for reduced documentation loans will be required when the stated rental income seems not be reasonable. 25% of the stated income will be deducted from the stated rental income.
Net Income Calculations
One to four unit residential investment properties (subject or other real estate owned)
and commercial property: calculate the net cash flow by deducting the monthly vacancy
factor/maintenance expenses and mortgage payments for the property from the lower of
the actual or market rents. Positive cash flow will b added to the total monthly income.
Negative cash flow must be included in total monthly obligations.
Two-four unit owner occupied property: Calculate the monthly operating income by deducting the monthly vacancy factor/maintenance/ expenses from the rental income derived from the non-owner occupied units only. This figure should be added to the applicant's monthly income. The monthly housing expense to income ratio should be calculated by using the total PITI for the subject property.
Salaried income is verified using current paystub covering a 30 day period. W2's covering the most recent two year period or direct verification from the employer.
Some borrowers regularly work part-time jobs during certain times of the year-summertime or Christmas for example. Income from seasonal employment may be considered as stable income if the applicant has worked the same job "season" for the past two years and expects to return for the next season. Verification should include w2's and a VOE.
An applicant is considered self-employed when his/her income is derived from a business in which he/she maintains a majority owner interest or can otherwise exercise control over the business' activities. Generally, if an applicant owns 25% or more of a business, he/she will be considered self-employed.
In cases where the applicant is self employed, the applicant must submit his/her complete signed tax returns for the most recent two years plus a year to date profit and loss statement and balance sheet dated 90 days of underwriting.
Social security and retirement income can be verified with an award letter, tax returns or bank statements showing regular monthly deposits. Survivor benefits must continue for at least three years in order to be used as income. When the borrower is under retirement age and is using social security income to qualify, documentation of receipt is required.
Tips and gratuity income may be acceptable if receipt of such income is typical for borrower's occupation. Income should be received for at least 12 months and expected to continue. Income will be averaged over the time verified.
Trust income may be used if the trust is non-revocable and the income will continue for at least 3 years. A copy of the Trust agreement confirming the amount, frequency and duration of the payments should be obtained to verify the income and continuance of income.
Unemployment compensation is generally not considered stable due to the limited duration of its receipt. An exception to this would be an applicant employed in a line of work where weather affects the ability to work and where unemployment comp is often received-such as construction. The income may be used to qualify when there is a two year employment history in the same field of work and is verified along with a two year history of receipt of unemployment compensation. The verified income will be averaged over the time period verified.
Employment/Income documentation
Income and employment for non self employed borrowers may be obtained via direct
verification from the borrower's employer. The verification should be signed by a
member of the company's human resource department or one of the business owners.
The verification must include the following:
- Borrower's name
- Position
- Dates of employment
- Base salary.
Paystubs/W2's
When Pay stubs and w2's are provided for income and employment
verification, the documentation must meet the following criteria:
- Be type written or computer generated
- Contain the Borrower's full name, social security number
- Have the employer's name
- Show Year to date earnings.
Tax Returns
When tax returns are required, they must be signed by the borrower and contain
all schedules and attachments. Whenever tax returns are used to support income,
an IRS 4506 must be signed at closing.
Verbal Verification of Employment
Verbal VOE'S are required for all loans except NO Doc loans. VOE'S must be
completed prior to funding and must confirm that the borrower is employed at
the time of verification.
All income documentation should be completed within 30 days of funding.
Ratios and Qualifying
Sound underwriting judgment should be exercised when considering any ratio
calculations. Ratios are general benchmarks, not definitive guidelines. The
overall merits of the file will be considered when applying ratio guidelines.
As such, underwriters may approve loans with ratios exceeding guidelines and decline
loans that are within these Parameters.
Debt to Income Ratio
Debt to income ratio (DTI) is calculated by the sum of the following divided
by the applicant's stable monthly income:
- Monthly housing expense (PITI and any association, lease fee's etc.)
- Monthly payments on all existing installment debts with more than ten payments remaining. Debt that is paid off at closing may be excluded from the DTI provided the debt is a condition of underwriting approval.
- For revolving loans, the minimum required payment as stated on the credit report or current statement should be used. If the minimum required payment is unavailable, payments will be calculated at 4% of the outstanding balance. Revolving loans cannot be paid down or paid off to qualify except for expanded products.
- Monthly alimony, child support or separate maintenance fees with ten or more payments remaining.
- Any negative cash flow from rental properties.
- Business debts for which the applicant is personally liable. This includes business-paid personal debt, unless proof of payment by the business is established. These debts may be excluded if a minimum of six months of consecutive canceled checks from the business are provided, the account has a satisfactory pay history and review of the business financials indicate the expense has been included in the company's cash flow.
- Repayment for loans against a financial asset (retirement/savings plan) may be excluded from the total debt ratio provided the borrower can repay the debt by liquidating the asset.
- Lease obligations, regardless of time remaining on the lease.
- Deferred loans will be included as a long term obligation. Debts which have been
co-signed by the borrower may be excluded from the borrower's ratio calculations under
the following scenarios:
- Property buyout of former co-owner (i.e. divorce).
- Mortgage assumption by third party without a release of liability-provide evidence of assumption agreement and evidence of transfer of ownership.
- Court ordered debts- provide a copy of the court order assigning the debt to another party.
- Co-signed accounts-provide six months canceled checks showing the account has been paid timely and the account is being paid by someone other than the borrower.
Disposable Income
Disposable income is the amount of income remaining after the borrower has paid
all expenses including taxes, housing payments and all long-term liabilities.
Some products may require borrowers meet a disposable income level.
Compensating Factors
Judgment must always be used in determining whether to make exceptions for
deficiencies such as higher debt ratios on an individual transaction. The
following factors should be considered by the underwriter:
- Evidence of a large downpayment towards purchase of the property or evidence of a large equity position on a refinance.
- Demonstrated ability by the applicant to accumulate savings.
- Evidence of substantial liquid net worth or reserves before and after closing.
- Demonstrated ability by the applicant to devote a greater portion his/her income to basic needs like housing expenses. An applicant who has carried a similar mortgage payment, regardless of his/her debt ratios should be considered a better risk than an individual who is experiencing a substantial increase in his/her monthly housing expense (payment shock).
- Evidence of the applicant's ability to maintain an excellent credit history and demonstrate proper debt management.
- Evidence of substantial residual monthly income.
All loan products require an appraisal report prior to funding. The report must be from a state certified or licensed appraiser. Additional appraisal reviews may be required depending on loan size, property characteristics or transaction Parameters. When a review or second appraisal is required, the report must be completed by a CAFC approved appraiser.
Property Overview
Financing is available on most residential use properties. Specific risks,
however, will be factored into loan eligibility standards such as product types,
maximum Loan -To-Values and required documentation. Typical improvements will
be considered provided marketability has been demonstrated through the appraisal:
however, they may not be eligible for maximum financing. In addition, incremental
pricing may be used when higher levels of marginal risk are present.
All properties must be:
- Improved real property
- Designed and available for year round residential use.
- Complete with kitchen and bathroom facilities.
- Heated by a continuously fueled heat source which is permanently affixed to the real estate.
- Property must be in average or better condition.
- Use of property must represent the "highest and best use" of subject.
- Property must be free of all health and safety violations.
- If security bars are on windows, at least one window per room must have a release latch.
Homes Listed for Sale
Properties currently listed for sale, or listed for sale within the past 12 months are generally
not eligible for refinance transactions. Refer to product Parameters for exceptions.
Ineligible Properties
Ineligible properties include but are not limited to:
- Houseboat projects.
- Dwellings containing more than four units.
- Timeshares.
- Buildings or projects with non-conforming use of land where zoning prohibits rebuilding in the event of total or partial destruction.
- Vacant land.
- Property used primarily for agriculture, farming or commercial.
- Commercial properties.
- Properties located in a coastal barrier resource system, federally declared wetlands or other federally projected areas.
- Properties which represent an illegal use under zoning regulations.
- Properties that are subject to hazards, noxious odors, etc.
- Properties that is landlocked.
Land Value
Acreage and land value must be typical and common for the subject's market. Loan
amounts may be reduced on properties with land values that exceed 35%. To avoid a
reduction in loan amount, the appraisal report must provide data which indicates
like size properties with similar land values are typical and common in the subject's
market area. See individual product Parameters for any additional lot size restrictions.
Limited Marketability/Properties
Properties with demonstrated limited marketability, an unusual structure or unconventional
floor plan may be considered on an exception basis at reduced LTVs.
Marketability, conformity to the area and acceptable comparables are important considerations. Examples of properties with limited marketability or unique characteristics include, but are not limited to: geodesic dome homes, earthberm homes, properties located next to an airport or railroad, etc.
Properties with limited marketability may not be eligible for reduced documentation programs or certain programs.
Property Values
Maximum financing is acceptable when property values are stable or increasing. However,
maximum financing may not be provided in areas of declining values. Extreme caution must
be exercised when confronted with market declines. The appraisal must be closely reviewed
to insure that the appraiser is specific with regard to the impact the market decline has
upon the transaction being evaluated. Typically, appraisals should not contain comparables
greater than six months old at time of underwriting review.
Properties with values significantly in excess of the predominant value of the subject's market area may be ineligible. Typically, the subject value should not exceed 150% of the market area's predominant value.
CAFC reserves the right to establish guidelines based on current market conditions when conditions suggest an increased risk in property values.
Rural Properties
Any property indicated on the appraisal as rural or containing one or more of the following
characteristics will be considered as a rural property:
- Neighborhood is less than 25% built up.
- Area around the subject is zoned agricultural
- The photographs of the subject show a dirt road
- Comparables are more than five miles away from the subject.
- Subject is located in a community with a population of less than 25,000.
- Distance to schools and/or amenities are greater than 25 miles.
- Subject property and or comparables have lot sizes greater than 10 acres.
- Subject property and or comparables have outbuilding or large storage sheds.
Any property indicated on the appraisal as rural must comply with the following criteria:
- May not be listed as an ineligible property type in the applicable Profile.
- The primary use must be residential, not agricultural or otherwise providing a source of income.
- The site size must be typical for surrounding properties with similar uses. If the subject contains excess acreage, the loan amount may be adjusted.
- The subject property must be within reasonable commuting distance to a metropolitan area.
- The subject property must be accessible by public roads and highways.
- The present use must be the "highest and best use" for the property.
- The condition, quality and use of outbuildings may be considered in determining the market value of the property. If the subject property contains nonresidential out-buildings which are not typical amenities, the loan amount may be adjusted.
- Underwriting reserves the right to reduce the LTV.
- Rural properties may not be eligible for any reduced documentation programs.
Redlining Prohibition
An underwriter considers the property offered to secure an applicant's loan based on
property type, occupancy and the appraised fair market value. The fact that a
property is located in an area with a predominant racial or ethnic population is
irrelevant. Race or the racial composition of the neighborhood is not a consideration
when reviewing an appraisal and should not be included as an appraisal factor. As a
matter of policy, appraisal reports which make reference to race, national origin or
ethnic background are not acceptable.
Underwriters will be sensitive to the use of code phrases in the appraisal report as proxies for race. The use of such code phrases, which are not necessarily descriptive of value or risk, is a poor appraisal practice and is unacceptable. The information in the appraisal report must support in an objective manner any statement or conclusion contained in the report.
Title History Review Policy
The following information outlines required documentation and/or acceptable sources to
satisfactorily verify property ownership for at least 24 months. All files are to
contain a 24-month title history from an acceptable source.
Acceptable Sources for Title Transfer Verification
- Title commitments
- Copies of recorded title-transfer deed.
- Third-party database sources such as Data Quick, Real Quest, etc.
The appraisal is not an acceptable source to support transfer information
The transfer date, price, buyer and seller names on any title transfers that occurred within the previous 24 months are required.
Scenarios and Required Actions
- If the current owner has owned subject property for at least 24 months, as evidenced by the title work-either the mortgage date or title transfer information, nor further action is required.
- If, on refinances, the title work shows a mortgage less than 24 months old, obtain the settlement statement from the transaction evidencing the pay-off of the previous lien. No further action will be required if the credit report evidences the paid-off lien was opened for at least 24 months prior to the date of the new title work. If the paid off lien was opened less than 24 months prior to the date of the new title work, continue to provide copies of settlement statements until a full 24 month transfer history has been documented.
- If the current owner purchased the property within the past 24 months and
the value increase is minimal (15% or so), or the reason for value increase is
substantiated by documented improvements, no further action is required. If
the value increase is substantial or the reason for the value increase is not
supported by documented improvements, Underwriting may require:
- a satisfactory field review supporting current appraised value, completed by a CAFC approved appraiser; or
- the value may be based on the original transfer value.
Condominiums
A form of ownership in which the interior space is individually owned. The balance of
the property, both land and building is owned in common by the owners of the individual
units. Units may be attached or detached Building types may be low rise (four stories
or less) or high rise (5+ stories).
All Condominium projects must meet the following requirements:
- Project must be located in an area where condominium ownership is readily acceptable.
- FMNA insurance requirements must be met.
- Studio Apartments that are typical and common in the subject's market area are eligible.
- Ineligible projects include, but and not limited to projects with: time shares, manufactured homes, projects with multi-unit condominiums (properties where single ownership includes more than one unit).
- Subject unit must have at least 600 square feet of living space.
- Commercial use of project may not exceed 25%. (Exceptions considered when commercial units have their own separate HOA).
- Projects consisting of single family detached dwellings are acceptable provided the appraisal market acceptance of site-built condominium ownership in the subject's market area.
- Projects involved in litigation will be closely reviewed and may be ineligible for financing.
- Underwriting reserves the right to limit our exposure in any project (typically 20%).
- All projects must be in compliance with all applicable state or local laws. Homeowner's Association must be incorporated in the state in which it is located.
- An Earthquake Insurance Analysis form must be completed when property is located in California.
Non-Warrantable Condominiums with 10 or more units
- Common areas must be 100% complete prior to closing.
- Investor concentration in the project must not exceed 50%.
- 50% of the project is sold or under contract to be sold.
- Number of units sold is sufficient to support any common areas or recreation areas.
- No individual, other than the developer during the initial sales period, may own more than 10% of the project.
- Projects currently under conversion or ones which have been converted within the past
three years must meet the following additional requirements.
- All rehabilitation work required for conversion must be completed in a workmanlike manner and 100% complete. File should contain a copy of the engineer's or architects report which must comment favorably on the quality of construction; compliance with code requirements; adequacy of mechanical systems, condition of major project components (roof, elevators, heating systems, etc.).
- The occupancy ratio will be based on the total number of units sold or under contract to be sold.
- Pre-sale ratio will be based on the total number of units in the entire project or legal phase.
- Project must exhibit acceptable absorption rates. For example, marketing time for available units should not exceed six months.
- Marketing materials which also contain a detailed summary of developer/sponsor's condominium conversion experience.
- Parameters can be applied to the entire project or the subject's legal phase.
- A Condominium Questionnaire must be completed by the project management company.
Non-Warrantable Projects with Less than 10 units
- Legal documents must provide for Procedures for Arbitration in the event of a split vote and/or to facilitate disputes.
- CAFC will limit its exposure to one unit in projects with eight or fewer units; two units in projects with more than eight units; If project has less than five units, the subject property must be a primary residence or second home.
- The maximum investor concentration will be one unit per project with more than five units and none if the project has four or fewer units.
- The appraisal must address marketability of smaller size projects in the subject's market area. Comparables should be from like-size projects.
- Projects currently under construction, conversion or ones which have been converted within the
past three years must meet the following additional requirements:
- All rehabilitation work required for conversion must be completed in a workmanlike manner and 100% complete.
- Pre-sale ratio will be based on the total number of units in the entire project or legal phase. 100% of the project must be sold or under contract to be sold.
Cooperative
A structure of two or more units in which the right to occupy a unit is obtained by the
purchase of stock in the corporation which owns the building. Cooperatives are not
eligible for financing by CAFC.
Dampness
If the appraisal report notes evidence of dampness, the appraiser must clearly
define the effect on value and marketability of the subject property, as well as
comment regarding the probable cause of the dampness problem and if typically
incurable in the surrounding neighborhood. Generally, a structural engineer's
report will be required prior to making a loan decision. Should the dampness
problem indicate a structural deficiency and/or significant negative impact on
value and marketability, the cause of the dampness must be corrected prior to closing.
Deferred Maintenance
Property must be in average or better condition. Deferred maintenance may be
permissible provided the neglected item is not structural in nature. Deferred
item may be left "as is" if the cost to correct does not exceed the lesser of
$2,000 or 2% of the property's value.
Earthquake Area
Earthquake insurance may be required if the appraisal report or any other documents
indicates the subject is located on or in close proximity to a fault or seismic study
area. If no mention is made regarding earthquake exposure, insurance should not be required.
Electrical Systems
An electrical certification from a licensed electrician will be required whenever
the appraisal states a fair or poor rating concerning the adequacy or condition of
the system. Any inadequacies must be corrected prior to closing.
Environmental Hazards
The appraisal report should note the existence of known environmental hazards and
its affect on value and marketability of the property. Properties located adjacent
to or containing environmental hazards are ineligible for financing.
Factory Built Housing
Modular/Prefab homes which have been built to Council of American Building Officials
(CABO) standards are eligible for financing. Unless otherwise stipulated, manufactured
homes are ineligible. Mobile homes (properties without a permanent foundation or
properties which do not otherwise meet the requirements of a manufactured home are ineligible.
Flood Zone
Flood insurance is required for any property located within any area designated by
the Federal Emergency management Act (FEMA) as an Area of Special Flood Hazard.
This is denoted as Flood Zone A or flood Zone V-coastal areas.
Properties in Flood Zone A or V must be located in a community which participates in the FEMA program to be eligible for financing.
The flood insurance requirement may be waived if:
- the property improvements are not in the Area of "special Flood Hazard, even though part of the land is in Flood Zone A or V; or
- the applicants obtain a letter from FEMA stating that its maps have been amended so that the property is no longer in an Area of special Flood Hazard.
The insurance must be maintained throughout the duration of the loan. Generally, the amount of insurance should equal the lesser of the loan amount or the maximum amount coverage available for the property.
Foundation Settlement
If the appraisal report notes evidence of excessive settlement, the appraiser must
clearly define the effect on value and marketability of the subject property.
Settlement problems which denote structural deficiencies and/or significant negative
impact on value and marketability must be corrected prior to closing. Generally,
a structural engineer's report will be required prior to making a loan decision.
Heating Systems
A central heat source with ductwork or baseboard in all rooms is required on all
properties. A heating certification from a licensed heating contractor may be
required whenever the property has a gravity heating furnace or when the appraisal
states a fair or poor rating on the adequacy or condition of the system. Any
inadequacies must be corrected prior to closing. A solar or wood-burning heating
system must contain a central backup system to be acceptable.
Illegal addition/In-law Units
Properties with illegal accessory units may be acceptable if all of the following are met:
- One or two unit property.
- Subject is typical, common and readily acceptable in the subject's market area.
- Appraisal contains three comparables with similar additional accessory units.
- Rental income from the accessory unit may not be used for qualifying.
- Existence of the unit must not jeopardize any future hazard insurance claim.
- Properties must conform to all zoning laws and/or regulations.
- Legal non-conforming use may be acceptable provided its current use does not adversely affect its market value and marketability.
- Accessory unit is substantially smaller than the primary unit.
Insulation
The appraiser should indicate if the property contains adequate insulation.
Properties containing Urea Formaldehyde Foam Insulation will be handled on a
case-by case basis, but will always require the mortgagor's acknowledgment of condition.
Leasehold Properties
Leasehold properties are eligible provided the appraisal indicates leasehold property
is common for the subject's area. Leaseholds will be reviewed for compliance with
the following:
- Property is located in an area where leaseholds have received market acceptance.
- Mortgage must cover the borrower's leasehold interest in the land.
- Title policy may not issue an exception to the leasehold estate.
- The lease and any sublease are recorded in the appropriate public land records.
- The lease is in full force and effect.
- The lease is a lease of the fee or sublease executed by both the fee owner and the sublessor.
- The instrument creating the lease, sublease or conveyance reserving ground rents is in a form commonly accepted in the subject's market area by private institutional lenders.
- Lease may not prohibit the rebuilding of the subject in part or whole or for termination of the lease in the event of partial or full destruction of the premises.
- For subleaseholds, the amount of the sublease payments is at least equal to the amount of the lease payments. The sublease payments are due no less frequently than the lease payments.
- Term of the lease to extend at least beyond the term of the mortgage unless lease contains a provision for future vesting of the land to the borrower or homeowner's association.
- Must be fully assignable or transferable to any subsequent owner without the lessor's consent.
- Provide for release of an assigning lessee.
- May not contain default provisions that could give rise to forfeiture or termination the lease except in the event of non-payment. It must also guarantee the lender of notice of default as a condition of validity of the Notice of Default and allow the lender at least 30 days to cure and take over the borrower's rights. Provide for a new lease of the same priority to be given to the leasehold mortgagee if the lease terminates because of default not curable by the leasehold mortgagee if the lease terminates because of default as long as no default in rent exists.
- May include, but not required, a provision for the borrower to purchase the leasehold at a later date. Additional requirements may apply.
- Leases may be offered with or without limitation on increase and decrease on the monthly rent. If lease payment is tied to an outside index, the initial rent should be established as a percentage of the land's appraised value at the time the lease is executed.
- An increase in lease payments during the term of the loan and within five years after the maturity date of the loan must be for a specified amount at a specific date. During this period, increases based on the cost of living index or other indices or reappraisals are acceptable if the amount of such increases is subject to a max limitation.
- Lease may allow the lender to purchase the land and all of the other remaining interests of the lessor at the purchase price stipulated in the lease.
- If the option to purchase the lease is exercised, it must become a lien on the title in the same place as the leasehold.
- The lease must not contain a provision which prohibits the mortgaging of the premises.
- The lease must permit the leasehold mortgage security to the insured under a hazard insurance policy and provide for payment of hazard insurance proceeds to the leasehold mortgagee or insurance trustee.
- Lease must provide for payment to the leasehold mortgagee of a condemnation award to which the lessee is entitled. This payment must not be less than the total award minus the value of the land considered as unimproved
- Lease must provide that in the event of partial taking, the lessee will rebuild and restore the improvements on the mortgaged property unless the leasehold mortgagee consents to the distribution of the proceeds instead.
- Lease must provide for leasehold mortgagee's right to acquire the lease in its own name or in the name of a nominee upon foreclosure or assignment in lieu of foreclosure.
- Lease must provide for the leasehold mortgagee's right to exercise any renewal options that may exist.
Mixed Use Properties
Mixed use properties are defined as single family residential properties which are
also being used for commercial purposes. Examples of such properties include homes
with child care or beautician facilities. Unless otherwise prohibited in the product
Parameters, mixed-use properties will be considered for financing on owner occupied
transactions when all of the following conditions are met:
- Owner of the property is the operator of the business.
- Business use of the property and lot does not exceed 25% of the total square footage.
- Mixed use is legally permissible under local zoning codes.
- Property is residential in nature.
- Property is appraised as residential with acceptable comparables. Portions of the home used for business purposes cannot be included in value if they are specific use in nature-not useable as a typical room in the home. Conversion from commercial to residential use must be possible without any significant expenditure.
- In the event of partial or total destruction, the property can be rebuilt.
- Nature of business does not present any increased insurance or environmental hazard risks.
Multiple Dwelling on One Lot
Single family properties containing additional residential dwellings (guesthouses,
carriage house, etc.) must comply with local zoning regulations. They must be
typical and common within the subject's neighborhood. Typically, the additional
dwelling(s) will be common within the subject's neighborhood. Most likely, the
additional dwelling will be smaller than the main dwelling and will not be rented.
The property should be appraised as a single family residence. Any value for the
additional dwellings should be supported by comparable sales.
Properties with two or more detached single family homes on a single lot will generally be considered for financing on a case-by-case exception basis.
Pest Infestation
If the appraisal report or sales contract notes evidence of termites or other insect
infestation, a pest inspection report certifying treatment of the infestation prior
to closing will be required. Any significant structural damage due to pest infestation
must be corrected prior to closing.
Plumbing
A plumbing certification from a licensed plumber will be required whenever the
appraisal states a fair or poor rating concerning the adequacy or condition of
the system. Any inadequacies must be corrected prior to closing.
Private Roads
Properties on private roads are acceptable as long as the title company affirms
the accessibility to the property from a public street and the maintenance
costs(if any) are included in the borrower's housing ratio.
Planned Unit Developments (PUDS)
A parcel of the land that contains common elements and improvements thereon, owned
and maintained by a homeowner's association, corporation, or trust for the benefit
and use of individual units within the parcel of land. Such association, corp. or
trust requires automatic non-severable membership of each individual unit owner,
with mandatory assessments. A PUD classification will be utilized when the common
elements enhance the value of the property securing the mortgage. When the common
elements are of minimal value the property will be classified as a single family residence.
Repair Requirements
At the discretion of CAFC, underwriting may require any repairs considered necessary
to ensure a good and marketable property. Repairs may be ordered regardless of whether
the property is appraised as is or subject to repairs.
Sewage Disposal System
Sewage disposal systems may require certification if the appraiser or purchase contract
indicates the necessity. The report should be provided by a city, county or state official.
Unconventional Floor Plans
Properties with unusual floor plans or functional obsolescence will be considered,
if the appraisal demonstrates acceptability in the market place and includes
appropriate adjustments. A floor plan sketch must be submitted with the appraisal.
Water Supply
Water certification is required if the appraiser or purchase contract indicates
the necessity. The report should be provided by a city, county, or state official.
The water certification for existing properties may not be more than 120 days old on the date of closing. If new construction, the report may be up to one year old.
Zoning and Land-Use Regulations
The appraiser in his or her analysis of the property must compare the existing and
potential use of the subject property to the zoning regulations. In addition, the
appraiser must reflect any adverse effect that a non-conforming use has on the
value and marketability of the property that is being appraised.
Property improvements must constitute a legally permissible use of the land based on the zoning ordinance. If the improvements represent a legal, non-conforming use of land, a letter from the local building authority or appraiser must be obtained to certify the property can be rebuilt "as is" in the event of partial or total destruction.
Properties that are subject to other types of land-use regulations, such as coastal tideland or wetland laws, must be given special consideration during the underwriting process. This is especially true in situations in which the law creates setback lines or other provisions that would prevent reconstruction or maintenance of the property improvements in the event of damage or destruction.
The intent of some land use regulation is to remove existing land uses and to stop land development within specific setbacks. Except as stated above, properties with land-use restrictions which prohibit the reconstruction or maintenance of the dwelling are ineligible.
Appraisal Report Forms
All appraisers are required to use appraisal report forms that are acceptable
to FNMA/FHLMC. Unless otherwise stated elsewhere, the following appraisal
report forms should be used:
- Uniform residential Appraisal Form, FNMA 1004
- Small residential Income Property Appraisal Report, FNMA form 1025
- Individual Condominium Unit Appraisal Report, FNMA form 1073
The following items must be contained in the appraisal report:
- Certification and statement of Limiting conditions FNMA form 1004B.
- A street map showing the location of the subject property and all comparables used.
- An exterior building sketch of the improvements indicating dimensions. A floor plan sketch is not required unless the floor plan is functionally obsolete resulting in a limited market appeal for the property in comparison to competitive properties in the neighborhood. For units in condominium or cooperative projects, interior perimeter unit dimensions are required instead of exterior building dimensions.
- Original color photographs of the front, street and rear views of the subject property.
- Original color photographs of the front view of each property used as a comparable.
- Interior photos of the subject property when the following apply:
- Loan amount exceeds $650,000
- To support statements regarding recently completed repairs or improvements
- To identify conditions of deferred maintenance
- To identify items of significant added value.
- Single Family comparable Rent Schedule, FNMA 1007 for non-owner occupied SFR dwellings.
- Operating Income Statement, FNMA 216 for 1-4 unit properties.
- Any other data as an attachment or addendum to the appraisal report form necessary to provide an adequately supported estimate of market value.
- Appraisal report must contain an analysis of all agreements of sale, options or listings for the subject property current as of the effective date of the appraisal, and an analysis of all sales of the subject property that occurred within the past 3 years prior to the effective date of the appraisal.
- Appraisal report must contain an analysis of all sales of the comparable that occurred within the past one year period to the effective date of the appraisal.
Age of Appraisal
The appraisal report should not be more than 120 days old at the time of loan submission.
Over 120 days, the appraisal report must be recertified. However, in no event can the
appraisal report be over 6 months old. Any certifications or updates must be completed by
the original appraiser based on a drive-by inspection of the subject and a current search
on listing activity for the subject.
Review Appraisals
When a review or second appraisal is requested by the underwriter, the report must be
completed by a CAFC approved appraiser. The review appraisal may be no older than 120
days at time of funding.
Disaster Areas
For loans secured by properties appraised prior to the declaration of the property
being located in a disaster area, the following post disaster guidelines apply:
- An interior and exterior inspection of the property is required. The original appraiser should provide a certification stating that the property is free from damage and is in the same condition as previously appraised and the marketability and value remain the same.
- The borrower must sign a certification of acceptable property condition.
Neighborhood Analysis
The neighborhood section should contain an accurate description of the subject's neighborhood
and any factors about the neighborhood that may influence value. Specific neighborhood
characteristics include the following:
- Degree of development.
- Demand and supply.
- Present land use.
- Owner-occupancy.
- Price range and predominant value.
- Age of property.
- Appeal to market and marketing time.
Compatibility of subject Property and Neighborhood
The age and price of the subject should generally be within the age and price ranges of
properties in the subject neighborhood as reported on the appraisal report form. Neighborhood
factors indicating compatibility of the subject, such as present land use, predominant occupancy,
and anticipated change in present land use as reported on the appraisal form will be considered.
Residential properties in areas that are zoned as either agricultural or commercial may be considered acceptable risks so long as their location does not impact marketability.
Value Analysis - Cost Approach
The cost approach must clearly segregate value attributed to land, outbuildings, etc. If
the ratio of land value to total value exceeds 35, an explanation from the appraiser may
be required to demonstrate conformance with neighboring properties.
Value Analysis - Market Approach
Market value is defined as: the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the buyer and
seller each acting prudently and knowledgeably, and assuming the price is not affected by
undue stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions whereby:
- Buyer and seller are typically motivated.
- Both parties are well informed or well advised, and acting in what they consider their best interest.
- A reasonable time is allowed for exposure in the open market.
- Payment is made in terms of cash.
- The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
Comparable sales utilized in the market approach should:
- Generally be within one mile of the subject property
- Have been closed within the last six months.
- Indicate properties that are similar to the subject property with respect to age, size, features, amenities, etc.
- result in an overall net adjustment not exceeding 15% of the sales price of that comparable and a gross adjustment of 25% the sales price of that comparable
- Have a sales price that is within the general range of value as the subject.
- Include at least three closed sales.
In instances where comparables conforming to the criteria stated above cannot be used, the appraiser must clearly justify reasons for alternate comparables.
For properties located in a new or newly converted condominium project/PUD or sub-division at least one comparable sale that is both outside the development and from another builder must be provided.
Value Analysis - Income Approach
This approach to value will not be typically used in appraisals of single family
homes purchased for owner occupancy, but will be analyzed for single-family
investment transaction and for 2-4 family dwellings. It is expected that the
actual or forecasted rents will be documented in the appraisal of all 2-4 family
properties and single-family investment units.
Market Restrictions
CAFC will monitor changes in market conditions throughout its lending area. When market conditions suggest an increased risk in property values, CAFC reserves the right to establish Market Restrictions.
