correspondent lending product quick reference non … · product quick reference - non-agency...

CORRESPONDENT LENDING

Product Quick Reference

Information is subject to change without notice. Refer to the Online Guide at chaseb2b.com >> ChaseLoanManager for detailed information on Chase product parameters and requirements.

Product Quick Reference - Non-Agency (05-14-18) of 5

Non-Agency – Amortizing Fixed

Product Name Market Type Minimum Loan Amount Maximum Debt-to-

Income (DTI) Products and Features that are: Minimum Loan Amount is:

20, 25 and 30 years

603 Available under the Chase Agency High Balance programs

HERA Agency High Balance loans limits as specified for the county, state and number of units, plus $1

43%

10 and 15 years 623 Not available under the Chase Agency High Balance programs

Conforming loan limit as specified for the state and number of units, plus $1

Transaction Type Property Type

Primary Residence Maximum Loan Amount $3,000,000 (except for LTV/CLTV/HCLTV > 85%)

Maximum LTV/CLTV/HCLTV Minimum Credit Score Maximum DTI

Purchase and No Cash Out Refinance

1 Unit/PUD/ Condo/ Co-op*

85/85/85%

80/80/80%

700

680

43%

2 Units

80/80/80%

Cannot use rental income from subject

to qualify for LTV/CLTV/HCLTVs > 75%

700

43%

3-4 Units 75/75/75% 700 43%

Cash Out Refinance

1 Unit/ Condo/PUD/

Co-op*

80/80/80%

75/75/75%

700

680 43%

2-4 Units Not Eligible


Second Home Maximum Loan Amount $3,000,000



1 Unit/PUD/ Condo / Co-op*

80/80/80% 680 43%


Cash Out Refinance

1-4 Unit/ Condo/PUD/

Co-op Not Eligible


Investment Maximum Loan Amount $1,000,000



1 Unit/PUD 75/75/75% 700 43%

Condo/Co-op Not Eligible


Cash Out Refinance

1-4 Unit/PUD/ Condo/Co-op

Not Eligible

*Co-op eligible in NY only

Note: Maximum LTV/CLTV for condominiums in Miami-Dade County, Florida is 80/80%

Non-Agency – Amortizing Fixed





Non-Agency – Amortizing ARM

Product Name Market Type Minimum Loan Amount Maximum

Debt-to-Income (DTI) Products and Features that are: Minimum Loan Amount is:

5/1 LIBOR ARM 755 10, 15, 20, 25

and 30 years

Available under the Chase Agency High Balance programs


43%

7/1 LIBOR ARM 517 10, 15, 20, 25

and 30 years Not available under the Chase Agency

High Balance programs


10/1 LIBOR ARM 510 15, 20, 25 and

30 years






85/85/85%

80/80/80%

700

680

43%

2 Units

80/80/80%

Cannot use rental income from subject

to qualify for LTV/CLTV/HCLTVs > 75%

700

43%

3-4 Units 75/75/75% 700 43%

Cash Out Refinance

1 Unit/ Condo/PUD/

Co-op*

80/80/80%

75/75/75%

700

680 43%







80/80/80% 680 43%


Cash Out Refinance


Co-op Not Eligible


Investment Maximum Loan Amount $1,000,000



1 Unit/PUD 75/75/75% 700 43%

Condo/Co-op Not Eligible


Cash Out Refinance

1-4 Unit/PUD/ Condo/Co-op

Not Eligible



Non-Agency – Amortizing ARM





Non-Agency – Interest Only ARM


Debt-to-Income (DTI) Loan Terms Minimum Loan Amount is:

5/1 LIBOR ARM 752

30 years (10/20) Conforming limit, plus $1

43%

7/1 LIBOR ARM 487

10/1 LIBOR ARM 549






75/75/75% 700 43%


Not Eligible






65/65/65% 740 43%


Cash Out Refinance


Co-op Not Eligible

Note: Investment transactions not eligible on Interest Only transactions

Non-Agency – Interest Only ARM





Non-Agency – High LTV Primary Residence Only


Debt-to-Income (DTI) Loan Terms Products and Features that are: Minimum Loan Amount is:

Amortizing Fixed

603 20, 25 and 30 years

Available under the Chase Agency High Balance programs


35%

623 10 and 15 years Not available under the Chase Agency High Balance programs


Amortizing ARMs

Amortizing ARM 5/1 755 10, 15, 20, 25 and

30 years Available under the Chase Agency High Balance programs

HERA Agency High Balance loans limits as specified for the county, state and number of units, plus $1 Amortizing ARM 7/1

517 10, 15, 20, 25 and 30 years

Amortizing ARM 10/1 510 15, 20, 25 and

30 years Not available under the Chase Agency High Balance programs


Interest Only ARMs

Interest Only ARM 5/1 755

30 years (10/20) Conforming limit, plus $1 Interest Only ARM 5/1 517

Interest Only ARM 5/1 510

Transaction Type Property Type Primary Residence


Non-Agency Amortizing Fixed and ARMs

Purchase and No Cash Out Refinance (Chase-

to-Chase only)


89.99/89.99/89.99% (see additional requirements below)

740 35%

Non-Agency Interest Only ARMs

Purchase and No Cash Out Refinance (Chase-

to-Chase only)


80/80/80% (see additional requirements below)

740 35%


High LTV – Maximum Loan Amounts State/MSA Counties Maximum Loan Amount

Counties with standard loan limits* $750,000

Counties that allow high balance loan limits* $1,000,000

*Refer to Fannie Mae and Freddie Mac Maximum Loan Limits

California/ Los Angeles-Long Beach-Anaheim

Los Angeles

Orange

$2,000,000

California/ San Francisco-Oakland-Hayward

Alameda

Contra Costa

Marin

San Francisco

San Mateo

California/ San Jose-Sunnyvale-Santa Clara

San Benito

Santa Clara

Connecticut/ Bridgeport-Stamford-Norwalk

Fairfield

New York, New Jersey, Pennsylvania/ New York-Newark-Jersey City, NY-NJ-PA

New York counties: Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, and Westchester

New Jersey counties: Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, and Union

Pennsylvania county: Pike

Non-Agency – High LTV

https://www.fhfa.gov/DataTools/Downloads/Documents/Conforming-Loan-Limits/FullCountyLoanLimitList2018_HERA-BASED_FINAL_FLAT.PDF





Non-Agency – High LTV Primary Residence Only Ineligible MSAs

State/MSA Counties

Arizona/Phoenix-Mesa-Scottsdale Maricopa

Pinal

California/Riverside-San Bernardino - Ontario Riverside

San Bernardino

California/Sacramento-Roseville-Arden-Arcade El Dorado

Placer

Sacramento

Yolo

Florida/Miami-Fort Lauderdale-West Palm Beach Broward

Miami-Dade

Palm Beach

Additional High LTV Requirements

The following additional requirements apply for high LTV Non-Agency transactions (LTV/CLTV/HCLTVs greater than 85% for Non-Agency Amortizing Fixed/ARMs or greater than 75% for Non-Agency Interest Only ARMs):

Maximum 89.99% unrounded LTV/CLTV/HCLTV for Non-Agency Amortizing Fixed and ARMs

Refinances must be Chase-to-Chase No Cash Out transactions

When transaction involves subordinate financing and the CLTV exceeds 89.00%, ChaseLoanManager will return a message instructing the Correspondent to submit an Assistance Request through ChaseLoanManager to lock the loan

A loan with unrounded LTV of 90.00% is not eligible for purchase by Chase; a principal curtailment to bring to the LTV to 89.99% is not allowed

Minimum of 30 months of reserves

Correspondent Lending Library/Products/Non-Agency (Jumbo) Amortizing ARMs (05/14/18)

Non-Agency (Jumbo) Amortizing ARMs (05/14/18)

Table of Contents

Included in this document are:

Product Specifications

• Chase Overlays

• Market Types & Loan Terms

• Special Features

• Amortization Type

• Delegated Correspondent Eligibility

• Non-Delegated Correspondent Eligibility

• Minimum Loan Amount

• Maximum LTV/CLTV/HCLTV & Minimum Credit Score

• High LTV Transactions

Underwriting Specifications

• Annuitization of Assets • Eligible Borrowers • Programs Permitted

• ARM Features • Eligible Funds • Property Type

• Appraisals • Escrow Waivers • Purchase Transaction Definition

• Assumability • Geographic Restrictions • Qualifying Ratios

• Bankruptcy & Foreclosure • Interested Party Contributions • Redemption Rights

• Buydown (Temporary) • Legal Documents • Recast Option

• Completion Escrows • Live Free Mortgages • Refinance (Cash-Out)

• Construction to Perm Financing Requirements

• Multiple Property Ownership • Refinance (No Cash-Out)

• Continuity of Obligation • Non-Occupant Co-Borrower • Relocating Trailing Co-Borrower

• Conversion of Primary Residence • Non-U.S. Citizen • Reserves

• Conversion Option • Predatory or High Cost Loan • Subordinate Financing

• Credit History • Occupancy • Title/Deed Restrictions

• Credit Only Applications • Prepayment Options • Uniform Appraisal Dataset (UAD) Requirements

• Deed Restricted Properties • Principal Curtailments (also known as principal reduction)

• Underwriting Method

• Disputed Derogatory Credit • Private Mortgage Insurance • Appendix A

• Documentation

PRODUCT SPECIFICATIONS

Chase Overlays

Not applicable. Non-Agency loans must be underwritten in accordance with Chase guidelines

Market Types & Loan Terms

Amortizing LIBOR ARM Products Market Type Loan Term

5/1 LIBOR ARM 755 10,15,20,25, or 30 Years

7/1 LIBOR ARM 517 10,15,20,25, or 30 Years

10/1 LIBOR ARM 510 15,20,25, or 30 Years

Special Features

Eligible features: Texas 50(a)(6) Allowed on 5/1, 7/1 and 10/1 ARM transactions (market types 755, 517, and 510).

Amortization Type

Fully Amortizing

Delegated Correspondent Eligibility

To be eligible to underwrite Non-Agency loans under Delegated Non-Agency authority, Correspondents must meet all of the following criteria:

• Must be in “Good Standing” as defined in the Correspondent Seller Eligibility Standards

• Must receive written approval from Chase prior to participating

• Must have been previously approved for Conventional Delegated Authority and Non-Delegated, Non-Agency authority

• Minimum HUD adjusted net worth of $10 million

• Must maintain a minimum of 20% of HUD adjusted net worth in liquid assets

• Must execute the Delegated Non-Agency Underwriting Addendum to the Correspondent Origination and Sales Agreement prior to delivering Delegated Non-Agency loans for purchase

In addition, Correspondents must successfully complete an underwriting test case process.

Non-Delegated Correspondent Eligibility

To be eligible to deliver Non-Agency loans to Chase, Correspondents must meet all of the following criteria:


• Minimum HUD adjusted net worth of $2.5 million

• Overall satisfactory performance with no billings > 90 days and delinquency below standard compare ratio requirements

Minimum Loan Amount

Minimum Loan amounts apply as follows:

For products and features that are: The minimum loan amount is:

Available under the Chase Agency High Balance programs The HERA Agency High Balance loans limits as specified for the county, state and number of units, plus $1

Not available under the Chase Agency High Balance programs The conforming loan limit as specified for the state and number of units, plus $1

Refer to Appendix A for detailed requirements.

Maximum LTV/CLTV/HCLTV & Minimum Credit Score

Primary Residence

Primary Residence – All States Maximum Loan Amount $3,000,000 (except for LTV/CLTV/HCLTV > 85%)

Transaction Type Property Type MaximumLTV/CLTV/HCLTV

MinimumCredit Score

Maximum DTI

Purchase and No Cash-Out Refinance

1 Unit / PUD / Condo* / Co-op

85/85/85%80/80/80%

700680

43%

2 Units 80/80/80%Cannot use rental income from

subject to qualify for LTV/CLTV/HCLTVs > 75%

700 43%

3-4 Units 75/75/75% 700 43%

Cash Out Refinance 1 Unit / PUD / Condo / Co-op

80/80/80%75/75/75%

700680

43%

2-4 Units Not eligible


**More restrictive LTV/CLTV may apply if Condo Project Review Type is Limited Review. Refer to Chase Limited Review for Established Condo Project topic for additional information.

Second Home

Second/Vacation Home – All States Maximum Loan Amount $3,000,000

Transaction Type Property Type MaximumLTV/CLTV/HCLTVMinimum

Credit ScoreMaximum

DTI


1 Unit / PUD / Condo / Co-op

80/80/80% 680 43%

Cash-out Refinance Not eligible


Investment

Investment – All States Maximum Loan Amount $1,000,000

Transaction Type Property TypeMaximum

LTV/CLTV/HCLTVMinimum

Credit ScoreMaximum

DTI


1 Unit / PUD 75/75/75% 700 43%

Condo / Co-op Not eligible


Cash-Out Refinance Not eligible

*Co-op eligible in NY only. Condos may have LTV restrictions based on review type. See Geographic Restrictions and Property Type section in this topic

Eligible counties based on property type.

***Non-QM, and Non-Occupant Co-borrower transactions are not permitted on loans with LTVs >80%

Correspondents can deliver cooperative share loans secured by second homes in New York City when:

• Second home is the only cooperative unit owned by the borrower, and

• Borrower's primary residence is not located in New York City

Additional Criteria for Correspondents with Delegated Non-Agency Authority:

• Maximum Loan Amount: $2MM for Primary and Second Home transactions and $1,000,000 for Investment transactions

• Minimum Credit Score: More restrictive of the credit score outlined above for transaction type or 680

• QM Designation: Must be QM-Safe Harbor or QM-Rebuttable presumption. Delegated Non-Agency amortizing transactions with a Non-QM designation are not eligible.

Notes:

• Loans with loan amounts >$2MM (Primary and Second Home) that otherwise meet the Non-Agency eligibility requirements, must be submitted to Chase Underwriting prior to closing.

• Transactions secured by a co-op must be underwritten by Chase and must continue to be submitted to Chase for review, however, Correspondents with existing Delegated Co-op and Delegated Non-Agency authority must underwrite Non-Agency Primary and Second Home co-op transactions with loan amounts ≤ $2MM

High LTV Transactions

High LTV Maximum LTV/CLTV/HCLTV and Minimum Credit Score

The following LTV/CLTV/HCLTV limits and credit scores apply for High LTV Non-Agency transactions (LTV/CLTV/HCLTVs greater than 85%):

High LTV – Primary Residence Only

Non-Agency Amortizing ARMs


MinimumCredit Score

Maximum DTI

Purchase and No Cash-Out Refinance (Chase-to-Chase only)


89.99/89.99/89.99%(see additional requirements

below)

740 35%

High LTV Maximum Loan Amounts

The following maximum loan amounts apply for High LTV Non-Agency transactions (LTV/CLTV/HCLTVs greater than 85%):

State/MSA Counties MaximumLoan Amount




California/Los Angeles-Long Beach-Anaheim

• Los Angeles

• Orange

$2,000,000

California/San Francisco-Oakland-Hayward

• Alameda

• Contra Costa

• Marin

• San Francisco

• San Mateo

California/San Jose-Sunnyvale-Santa Clara

• San Benito

• Santa Clara

ConnecticutBridgeport-Stamford-Norwalk

• Fairfield

New York, New Jersey, Pennsylvania/New York-Newark-Jersey City, NY-NJ-PA

• New York counties: Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, and Westchester

• New Jersey counties: Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, and Union

• Pennsylvania county: Pike

Ineligible MSAs – High LTV

The following Metropolitan Statistical Areas (MSAs) are not eligible for the High LTV Non-Agency product:

State/MSA Counties

Arizona/Phoenix-Mesa-Scottsdale • Maricopa

• Pinal

California/Riverside-San Bernardino – Ontario • Riverside

• San Bernardino

California/Sacramento-Roseville-Arden-Arcade • El Dorado

• Placer

• Sacramento

• Yolo

Florida/Miami-Fort Lauderdale-West Palm Beach • Broward

• Miami-Dade

• Palm Beach

Additional Requirements for LTV/CLTV/ HCLTVs greater than 85%

The following additional requirements apply for high LTV Non-Agency transactions (LTV/CLTV/HCLTVs greater than 85%:

• Maximum 89.99% unrounded LTV/CLTV/HCLTV

• Refinance transactions are limited to Chase-to-Chase

• When transaction involves subordinate financing and the CLTV exceeds 89.00%, ChaseLoanManager will return a message instructing the Correspondent to submit an Assistance Request through ChaseLoanManager to lock the loan

• A loan with unrounded LTV of 90.00% is not eligible for purchase by Chase; a principal curtailment to bring to the LTV to 89.99% is not allowed

• Minimum of 30 months of reserves

UNDERWRITING SPECIFICATIONS

Annuitization of Assets

Refer to Credit Guide – Non-Agency > Income – Non-Agency > Other Income – Non-Agency > Annuitization of Employment-Related Assets for requirements.

ARM Features

• Index:

◦ 1 Year LIBOR ARM

• Rate Adjustments:

◦ Interest rate can be adjusted up or down at each rate change date, based on the movements in the index

◦ The interest rate will be adjusted to equal the sum of the index plus the required margin, rounded to the nearest .125% subject to the interest rate caps

◦ The monthly payment will be adjusted in accordance with the change in the interest rate

• Interest Rate Change Dates:

◦ The interest rate at lock-in will remain constant until the first rate change date. Subsequent rate change dates will occur on the 1st day of every 12th calendar month thereafter

◦ The first change date is the month prior to the first payment date plus the number of years (5, 7 or 10) based on the ARM program type. For Example: 5/1 ARM with a First Payment date of 4/01/2013 would have an Interest Rate change date of 3/01/2018

• Caps:

◦ 5/1: 2/2/5 %

◦ 7/1 & 10/1 LIBOR ARM: 5/2/5%

• Margin:

◦ 5/1, 7/1,10/1 LIBOR ARM: 2.25%

◦ The Floor is the margin

• ARM Change Look Back Period:

◦ 45 days

Note: For assistance identifying the ARM index, margin and caps, refer to the ARM Job Aid in ChaseLoanManager > Resource Center > Topics > Products

Appraisals

Follow requirements noted in Chase Credit Guide, plus

• An interior inspection is required.

• Two appraisals are required for loan amounts >$2 million <= $3 million

Assumability

• Loans are assumable after the initial fixed rate period under certain conditions described in the Security Instrument

• Co-ops are not assumable

Bankruptcy & Foreclosure

Refer to Credit Guide – Non-Agency >Credit History – Non-Agency >Credit Requirements and Analysis for detailed requirements

Buydown (Temporary)

• Not available

Completion Escrows

Eligible on Purchase transactions only (all occupancy types). Refer to Escrow Holdback/Completion Escrow Requirements for detailed requirements

Construction to Perm Financing Requirements

Two Time Close Requirements:

A Two Time Close transaction involves two separate closing transactions, one for the construction phase and another closing for the permanent financing

• Limited Cash Out (NCO) or Cash Out Refinance

• Use the maximum refinance LTV/CLTV/HCLTV

• The LTV is calculated by dividing the loan amount of the construction-to-permanent financing by the as-completed appraised value of the property (lot and improvements)

• See Refinance Cash Out and Refinance No Cash Out sections for additional requirements on refinance transactions

Continuity of Obligation

Refer to Correspondent Lending Guide > Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract, Construction to Perm

Conversion of Primary Residence

See Credit Guide – Non-Agency > Occupancy – Non-Agency > Conversion of Primary Residence – Non-Agency.

Conversion Option

None

Credit History

Follow Chase Credit Guide, plus:

• Minimum two years established credit history is required.

• A minimum credit risk score is required. See the Maximum LTV/CLTV/HCLTV & Minimum Credit Score topic for minimum score requirements.

Credit Only Applications

Not eligible

Deed Restricted Properties

• Deed Restrictions that negatively impact marketability or are considered prejudicial (i.e. restrictions based on buyers marital status, race, religion, etc.) are not eligible.

• Code, Covenant and Restrictions (including, but not limited to, restrictions requiring home must be maintained or HOA must approve addition, colors, etc.) are permitted and do not require Chase approval

• See Appraisal and Property Requirements > Property General Requirements > Deed Restricted Properties section for detailed requirements.

Disputed Derogatory Credit

• Refer to Credit Guide – Non-Agency > Credit History – Non-Agency > Derogatory Credit – Non-Agency > Disputed Derogatory Credit.

Documentation

• Full/Alt Doc. Refer to Chase Credit Guide, plus

• Fully processed 4506T with transcripts required for all borrowers

Eligible Borrowers

• U.S. Citizens

• Permanent Resident Aliens*

• Non-Permanent Resident Aliens*

Note: LTVs > 80-89.99% are permitted on U.S. Citizen and Permanent Resident Alien transactions only.

*Refer to Foreign Borrowers, Income, Assets, and Documentation Considerations for detailed requirements

Eligible Funds

• Refer to Credit Guide>Assets>Asset Types section of the Correspondent Lending Guide for eligible funds for down payment, closing costs and prepaid items

Escrow Waivers

• Eligible, see Closed Loan Documentation > Closed Loan Documentation Requirements > Escrow Waivers for funding requirements

• See Registration and Pricing > Best Efforts > Service Release Premium for information on applicable service release premiums

• Underwriter approval required for LTV >80%

Geographic Restrictions

Texas 50(a)(6) Homestead Properties:

• Limited to a maximum LTV/CLTV/HCLTV of 80/80%. See Texas Refinance Product Guide under products>Texas Refinance Transactions

• Limited to 5/1, 7/1 and 10/1 ARM transactions only.

Co-ops:

• Eligible in NY only

• Refer to Co-op Guide > Cooperative Share Lending Overview > Chase Cooperative Lending Areas

Miscellaneous State Legislation Requirements:

Follow your state-specific guidelines, plus

• Massachusetts: First time homebuyers not eligible on Non-Agency ARM transactions

Interested Party Contributions

Occupancy Type LTV/CLTV/HCLTV Maximum IPC

Primary Residence and Second Homes

>75% 6%

<= 75% 9%

Investment All LTVs 2%

NOTE: May include seller paid prepaid items and other costs (may not exceed the allowed percentage as dictated by the LTV/CLTV/HCLTV. The CLTV limitations include secondary financing from all sources

Legal Documents

5/1, 7/1, and 10/1 LIBOR ARM

• Note: #3528

• Rider: #3187

ARM Notes must always include the following Limits on Interest Rate Changes language:The interest rate I am required to pay at the first Change Date will not be greater than ____% or less than ____%. Thereafter, my adjustable interest rate will never be increased or decreased on any single Change Date by more than two percentage points from the rate of interest I have been paying for the preceding 12 months. My interest rate will never be greater than ____% or less than the Margin%.

Live Free Mortgages

Not eligible

Note: These loans are originated by lenders at relatively “high rates” and sold with the intent of specifically targeting these same borrowers with a low/no cost refinance in the near future. Thus the originating lender would quickly generate an additional service release premium. This unethical practice often includes an arrangement whereby the originating lender agrees to pay a number of installments on the loan (“live free”). Chase will not purchase any loan made under these circumstances or any seasoned loan that the lender has agreed to refinance or that is in the process of refinancing.

Multiple Property Ownership

If the subject property is:

• Primary Residence: Unlimited

• Second Home/Investment: 4

Refer to Correspondent Lending Guide>Credit Guide>Occupancy>Multiple Property Ownership for specific guidelines.

Non-Occupant Co-Borrower

Refer to Non-Occupant Co-Borrower – Non-Agency for requirements.

Non-U.S. Citizen

Non-Permanent Resident Borrower:

• Eligible with proof of valid Visa

• Must be occupying borrower

• Primary Residence only

• Maximum LTV/CLTV/HCLTV is lesser of:

◦ LTV/CLTV/HCLTV stated in product guide, or

◦ 80%

• If LTV > 70%, borrower must be established in U.S. with two year’s residence and employment history

• When a temporary (non-permanent) resident’s visa will expire within 12 months of application date, a letter from the employer indicating intent to sponsor the employee’s visa renewal is required.

• If Non-U.S. citizen signing with a U.S. Citizen, and is not a major contributor to qualifying income, cash reserves or other credit aspects of the loan, underwrite as U.S. Citizen. Must have valid Visa.

• Refer to Foreign Borrowers, Income, Assets, and Documentation Considerations for acceptable Visa types and classifications

Non-Resident Borrower:

• Not eligible

Permanent Resident Borrower:

• Eligible with proof of lawful permanent residency

• Underwritten the same as U.S. citizen

Occupancy

Primary, Second Homes and Investment

Predatory or High Cost Loan

Chase Correspondent will not purchase loans defined as a high cost or predatory mortgage loan. Refer to Compliance-Related Topics > High Cost.

Prepayment Options

None

Principal Curtailments (also known as principal reduction)

All loans must comply with current guidelines and program requirements regarding cash-back to the borrower. Refer to TILA-RESPA Integrated Disclosure (TRID) topic for information.

Private Mortgage Insurance

Not applicable

Programs Permitted

Full/Alt

Property Type

Primary Residence:

• 1-4 Unit, Condo/PUD/Co-op* (Attached/Detached)

Second Homes:

• 1 Unit, Condo/PUD/Co-op* (Attached/Detached)

Investment:

• 1 Unit/PUD (Attached/Detached)

Notes:

• Co-ops eligible in New York

• Condotel/lodging units properties are not eligible

• Detached PUDs are considered Single Family Residential

• Correspondents with Delegated Non-Agency Authority may rep and warrant that the condominium or Attached PUD meets Chase and Agency condominium project approval guidelines as evidenced by including a completed Delegated Correspondent Certification of Eligibility for Condominiums and Attached PUDs, 1008 or Condo/PUD Warranty Form (Correspondent’s own form)in the closed loan file. Otherwise, condominium projects and attached PUDs must be submitted to Chase Project Approval Group for consideration under the Chase Project Review for Established Projects, Chase Project Review of New Projects and Conversions, or Chase Limited Review of Established Attached Condo Projects

Purchase Transaction Definition

A “purchase-money” transaction is defined as one in which the proceeds are used to finance the purchase of a home. This includes:

• A mortgage transaction, in which all of the proceeds are used to retire an outstanding balance on an installment land contract, including costs incurred for rehabilitation, renovation, or energy conservation improvements.

• A new mortgage created by modifying an interim construction loan within 180 days from completion as long as the borrower does not receive cash back at closing. Note: If the conversion occurs more than 180 days after completion, the transaction must be treated as a refinance.

• Additionally, an option is available in which the transactions can be considered a purchase used to finance the purchase of the home. Refer to Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract,Construction to Perm – Non-Agencyfor Delayed Financing/Technical Refinance requirements.

Qualifying Ratios

DTI

Refer to maximum LTV/CLTV and Minimum Credit Score section of this guide for maximum DTI based on LTV/CLTV, credit score, transaction, and property type.

Non-Occupant Co-Borrowers


• Qualify Occupant Borrower at lower of max DTI permitted based on credit score or 35/43%

• Qualify combined Incomes lower of max DTI permitted based on credit score or 28/36%

• Sum of all borrowers’ Income & Debt must qualify within Program Parameters

Note: Refer to Non-U.S. Citizens in this topic for additional requirements.

Qualifying Rate:

• 5/1 LIBOR ARM: Qualify at the higher of Note rate plus 2% or fully indexed rate

• 7/1, and 10/1 LIBOR ARM: Qualify at the higher of the Note rate or the fully indexed rate

Note: For detailed requirements on Pay off of Debt Reduction or Debt Balance, please refer to Credit Guide>Debt/Liabilities>Debt Analysis Guidelines.

Recast Option

A recast option allows the principal and interest payment amount to be recalculated when an additional principal reduction is applied to the loan (also known as reamortization or re-amortization).

• The calculation is based on the remaining principal balance after the curtailment (amount in excess of the minimum required principal) is made.

• The interest rate and term of the loan remain unchanged.

• Amount of escrow payment is reviewed and calculated on an annual basis.

• All recast requests must be made after the loan is purchased by Chase and set up for Servicing.

• The request should be directed to the Servicing Department at 800-848-9136 or faxed to 855-373-6794, Attention: Recasts Department.

Typical recast guidelines are listed below:

• Recast requests are considered on a case-by-case basis.

• All Agency and Non-Agency product requests are contingent upon investor requirements.

• Minimum curtailment amount is generally $5,000, but may vary by product.

• A processing fee (generally $150-$300) may be charged.

Redemption Rights

Chase will not purchase loans with an unexpired redemption period regardless if the risk is covered by an insurance policy, redemption policy, redemption bond, or other risk mitigant. Loans sold to Chase must have clear, marketable title.

Refinance (Cash Out)

• Maximum cash-out: $250,000

• Refer to Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract, Construction to Perm >Cash-Out Refinance Definition for detailed requirements for Cash-Out Refinance transactions.

Refinance (No Cash Out)

• Limited to Chase-to-Chase when LTV/CLTV/HCLTV greater than 85%,

• Refer to Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract, Construction to Perm > No Cash-Out Refinance Definition for detailed requirements for No Cash-Out Refinance transactions.

Relocating Trailing Co-Borrower

Corporate Relocation

• Permitted. Refer to Credit Guide > Employment > Corporate Relocation for detail requirements

Trailing Co-Borrower

• Not permitted

Reserves

LTV/CLTV/HCLTV Reserve Requirements

≤ 80% 6*

> 80 to ≤ 85% 18 months

> 85% 30 months

*12 months reserves required when any retirement account is used as a qualifying asset

Note: For Second Home and Investment Property transactions, 2 months additional reserves required for each additional financed Second/Vacation or Investment Property owned.

Refer to Assets > Asset Types – Non-Agency > Reserves for additional requirements.

Additional requirements may apply based on the transaction. Refer to the following topics for details:

• Conversion of Primary Residence – Non-Agency

• Employment Income – Salaried Sources – Non-Agency

• Rental or Investment Property Income – Non-Agency

Subordinate Financing

Refer to Credit Guide > Debt/Liabilities > Subordinate Financing for detailed requirements

Title/Deed Restrictions

The following are ineligible for delivery to Chase:

• Life Estates

• Blind Trusts

• Irrevocable Trusts

• Community Land Trusts

• Non-Permitted Additions outside of Chase published guidelines

Uniform Appraisal Dataset (UAD) Requirements

Non-Agency loans must comply with the UAD requirements.

Note: Refer to Appraisal and Property Requirements >Appraisals for an outline of UAD requirements.

Underwriting Method

Eligible Underwriting Methods:

• Chase Underwriting

• Delegated Underwriting

• Manual Underwrite only

• Contract Underwriting are not permitted

Appendix A

Note: Minimum Loan Amounts apply to Non-Agency Amortizing ARM loans as outlined below:

Primary Residence, Second/Vacation Homes, and Investment*

Non-Agency Product/Market

Type Loan Term Transaction Type Property Type

Minimum Loan amounts

48 Contiguous States AK/HI

• 5/1 Amortizing ARM

• 30-Year Term Purchase/No Cash-Out Refinance

1 Unit/PUD(Attached/Detached) HERA + $1 HERA + $1

Condo*(Attached/Detached) HERA + $1 HERA + $1

Co-op*(Attached/Detached) HERA + $1 HERA + $1

2 Unit HERA + $1 HERA + $1



Cash-Out Refinance 1 Unit/PUD(Attached/Detached) HERA + $1 HERA + $1

Condo*(Attached/Detached) HERA + $1 HERA + $1

Co-op*(Attached/Detached) HERA + $1 HERA + $1

2 Unit NA NA

3 Unit NA NA

4 Unit NA NA

• 5/1 LIBOR ARM

• 7/1 LIBOR ARM

• 10/1 LIBOR ARM

• 7/1, and 10/1 ARMs – All available terms

• 5/1 ARM – 10, 15, 20, and 25 year terms

Purchase/No Cash-Out Refinance

1 Unit/PUD(Attached/Detached) $453,100 $679,650

Condo*(Attached/Detached) $453,100 $679,650

Co-op*(Attached/Detached) $453,100 $679,650

2 Unit $580,150 $870,225

3 Unit $701,250 $1,051,875

4 Unit $871,450 $1,307,175

Cash-Out Refinance 1 Unit/PUD(Attached/Detached) $453,100 $679,650



2 Unit NA NA

3 Unit NA NA

4 Unit NA NA

*Condo and co-ops are allowed for Primary and Second Home transactions only and are not permitted on Investment Property transactions.

Correspondent Lending Library/Products/Non-Agency (Jumbo) Amortizing Fixed (05/14/18)

Non-Agency (Jumbo) Amortizing Fixed (05/14/18)

Table of Contents



• Chase Overlays


• Special Features





• Maximum LTV/CLTV/HCLTV and Minimum Credit Score



• Annuitization of Assets • Eligible Borrowers • Principal Curtailments (also known as principal reduction)

• Appraisals • Eligible Funds • Private Mortgage Insurance

• Assumability • Escrow Waivers • Property Type

• Bankruptcy & Foreclosure • Geographic Restrictions • Purchase Transaction Definition

• Buydown (Temporary) • Interested Party Contributions • Qualifying Ratios

• Completion Escrows • Legal Documents • Recast Option


• Live Free Mortgages • Redemption Rights

• Continuity of Obligation • Multiple Property Ownership • Refinance (Cash-Out)

• Conversion of Primary Residence • Non-Occupant Co-Borrower • Refinance (No Cash-Out)

• Conversion Option • Non-U.S. Citizen • Relocation or Trailing Co-Borrower

• Credit History • Predatory or High Cost Loan • Reserves

• Credit Only Applications • Occupancy • Subordinate Financing

• Deed Restricted Properties • Prepayment Option • Title/Deed Restrictions

• Disputed Derogatory Credit • Uniform Appraisal Dataset /(UAD) Requirements

• Documentation • Underwriting Method

• Appendix A


Chase Overlays



Product Market Type

25-30-Year Fixed Rate 603

20 Year Fixed Rate 603

10- and 15-Year Fixed Rate 623

Special Features

Eligible features:

• Texas 50(a)(6)

Amortization Type

Fully Amortizing









In addition, Correspondents must successfully complete an underwriting test case process






Minimum Loan Amount

Minimum Loan amounts apply as follows:

For products and features that are: The minimum loan amount is:

Available under the Chase Agency High Balance programs The HERA Agency High Balance loans limits as specified for the county, state and number of units, plus $1

Not available under the Chase Agency High Balance programs The conforming loan limit as specified for the state and number of units, plus $1


Maximum LTV/CLTV/HCLTV and Minimum Credit Score

Primary Residence



MinimumCredit Score

Maximum DTI


1 Unit / PUD / Condo* / Co-op

85/85/85%80/80/80%

700680

43%

2 Units 80/80/80%Cannot use rental income from

subject to qualify for LTV/CLTV/HCLTVs > 75%

700 43%

3-4 Units 75/75/75% 700 43%

Cash Out Refinance 1 Unit / PUD / Condo / Co-op

80/80/80%75/75/75%

700680

43%




Second Home




Credit ScoreMaximum

DTI



80/80/80% 680 43%


Investment

Investment – All States Maximum Loan Amount $1,000,000



Credit ScoreMaximum

DTI


1 Unit / PUD 75/75/75% 700 43%

Condo / Co-op Not eligible


Cash-Out Refinance Not eligible

*Co-op eligible in NY only. Condos may have LTV restrictions based on review type. See Geographic Restrictions and Property Type sections in this topic


*** Non-QM, and Non-Occupant Co-borrower transactions are not permitted on loans with LTVs >80%





• Maximum Loan Amount: $2MM for Primary and Second Home transactions and $1,000,000 for Investment transactions

• Minimum Credit Score: More restrictive of the credit score outlined above for transaction type or 680.

• QM Designation: Must be QM-Safe Harbor or QM-Rebuttable presumption. Delegated Non-Agency amortizing transactions with a Non-QM designation are not eligible.

Notes:

• Loans with loan amounts >$2MM (Primary and Second Home) that otherwise meet the Non-Agency eligibility requirements, must be submitted to Chase Underwriting prior to closing.

• Transactions secured by a co-op must be underwritten by Chase and must continue to be submitted to Chase for review; however, Correspondents with existing Delegated Co-op and Delegated Non-Agency authority must underwrite Non-Agency Primary and Second Home co-op transactions with loan amounts ≤ $2MM





Non-Agency Amortizing Fixed


MinimumCredit Score

Maximum DTI



89.99/89.99/89.99%(see additional requirements

below)

740 35%



State/MSA Counties MaximumLoan Amount





• Los Angeles

• Orange

$2,000,000

California/San Francisco-Oakland-Hayward

• Alameda

• Contra Costa

• Marin

• San Francisco

• San Mateo


• San Benito

• Santa Clara


• Fairfield







State/MSA Counties


• Pinal


• San Bernardino


• Placer

• Sacramento

• Yolo


• Miami-Dade

• Palm Beach



• Maximum 89.99% unrounded LTV/CLTV/HCLTV


• When transaction involves subordinate financing and the CLTV exceeds 89.00%, ChaseLoanManager will return a message instructing the Correspondent to submit an Assistance Request through ChaseLoanManager to lock the loan

• A loan with unrounded LTV of 90.00% is not eligible for purchase by Chase; a principal curtailment to bring to the LTV to 89.99% is not allowed





Appraisals




Assumability

Loans are not assumable


Refer to Credit Guide>Credit History>Credit Requirements and Analysis for detailed requirements

Buydown (Temporary)

• Not available

Completion Escrows

• Eligible on Purchase transactions only (all occupancy types). Refer to Escrow Holdback/Completion Escrow Requirements for detailed requirements




• Limited Cash Out (NCO) or Cash Out Refinance)



• See Refinance Cash Out and Refinance No Cash Out sections for additional requirements on refinance transactions


Refer to Correspondent Lending Guide > Credit Guide > Definition – Purchase, Refinance, Land Contract, Construction to Perm



Conversion Option

None

Credit History



• A minimum credit risk score is required. See the Maximum LTV/CLTV/HCLTV & Minimum Credit Score topic for minimum score requirements.


Not eligible




• See Appraisal and Property Requirements > General Requirements > Deed Restricted Properties section for detailed requirements.


• Refer to Credit Guide – Non-Agency > Credit History – Non-Agency > Derogatory Credit – Non-Agency > Disputed Derogatory Credit.

Documentation

• Full Doc Only


NOTE: Refer to the Underwriting > Credit Documents and Appraisal Expiration and Underwriting > Chase Underwriting topics for additional guidance on successfully documenting and underwriting loan files

Eligible Borrowers

• U.S. Citizens



Note: LTVs > 80-89.99% are permitted on U.S. Citizen and Permanent Resident Alien transactions only.

*Refer to Foreign Borrowers, Income, Assets, and Documentation Considerations for detailed requirements

Eligible Funds

• Refer to Credit Guide>Assets>Asset Types section of the Correspondent Lending Guide for eligible funds for down payment, closing costs and prepaid items

Escrow Waivers



• Underwriter approval required for LTV >80%


Texas 50(a)(6) Homestead Properties:

• Limited to a maximum LTV/CLTV/HCLTV of 80/80%. See Texas Refinance Product Guide under products>Texas Refinance Transactions

Co-ops:

• Eligible in NY only



• Follow your state-specific guidelines



Primary Residence and Second Homes

>75% 6%

<= 75% 9%

Investment All LTVs 2%

NOTE: May include seller paid prepaid items and other costs (may not exceed the allowed percentage as dictated by the LTV/CLTV/HCLTV. The CLTV limitations include secondary financing from all sources

Legal Documents

Standard documentation applies

Live Free Mortgages

Not eligible





• Second Home/Investment: 4




Non-U.S. Citizen







◦ 80%

• If LTV > 70%, borrower must be established in U.S. with two years residence and employment history



• Refer to Foreign Borrowers, Income, Assets, and Documentation Considerations for acceptable Visa types


Not eligible




Occupancy

Primary Only, Second Homes and Investment



Prepayment Option

None




Not applicable

Property Type

Primary Residence:

• 1-4 Unit, Condo/PUD/Co-op* (Attached/Detached)

Second Homes:


Investment:

• 1 Unit PUD (Attached/Detached)

Notes:

• Co-ops eligible in New York



• Correspondents with Delegated Non-Agency Authority may rep and warrant that the condominium or Attached PUD meets Chase and Agency condominium project approval guidelines as evidenced by including a completed Delegated Correspondent Certification of Eligibility for Condominiums and Attached PUDs, 1008 or Condo/PUD Warranty Form (Correspondent’s own form)in the closed loan file, Otherwise, condominium projects and attached PUDs must be submitted to Chase Project Approval Group for consideration under the Chase Project Review for Established Projects, Chase Project Review of New Projects and Conversions, or Chase Limited Review of Established Attached Condo Projects





• Additionally, an option is available in which the transaction can be considered a purchase used to finance the purchase of the home. Refer to Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract,Construction to Perm – Non-Agencyfor Delayed Financing/Technical Refinance requirements.

Qualifying Ratios

Refer to maximum LTV/CLTV/HCLTV and Minimum Credit Score section of this guide for maximum DTI based on LTV/CLTV/HCLTV, credit score, transaction and property type.

• Qualify at the Note Rate

Non-Occupant Co-Borrowers

• Qualify Occupant Borrower at lower of max DTI permitted based on credit score or 35/43%

• Qualify combined Incomes lower of max DTI permitted based on credit score or 28/36%

• Sum of all borrowers’ Income & Debt must qualify within Program Parameters

Refer to Non-U.S. Citizens in this topic for additional requirements.

Recast Option

A recast option allows the principal and interest payment amount to be recalculated when an additional principal reduction is applied to the loan (also known as reamortization or re-amortization).

• The calculation is based on the remaining principal balance after the curtailment (amount is excess of the minimum required principal) is made.

• The interest rate and term of the loan remain unchanged.

• Amount of escrow payment is reviewed and calculated on an annual basis.

• All recast requests must be made after the loan is purchased by Chase and set up for Servicing.

• The request should be direct to the Servicing Department at 800-848-9136 or faxed to 855-373-6794, Attention: Recasts Department.

Typical recast guidelines are listed below:

• Recast request are considered on a case-by-case basis.

• All Agency and Non-Agency product request are contingent upon investor requirements.

• Minimum curtailment amount if generally $5,000, but may vary by product.

• A processing fee (generally $150-$300) may be charged.

Redemption Rights



• Maximum cash-out $250,000

• Refer to Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract, Construction to Perm >Cash-Out Refinance Definition for detailed requirements for Cash-Out Refinance transactions.


• Limited to Chase-to-Chase when LTV/CLTV/HCLTV greater than 85%.

• Refer to Credit Guide > Definition – Purchase, Refinance, Land Contract, Construction to Perm >No Cash-Out Refinance Definition for detailed requirements for No Cash-Out Refinance transactions.

Relocating Trailing Co-Borrower




• Not permitted

Reserves

LTV/CLTV/HCLTV Reserve Requirements

≤ 80% 6*

> 80 to ≤ 85% 18 months

> 85% 30 months

*12 months reserves required when any retirement account is used as a qualifying asset

Note: For Second Home and Investment Property transactions, two months additional reserves required for each additional financed Second/Vacation or Investment Property owned.







Refer to Credit Guide > Debt/Liabilities > Sub Financing for detailed requirements



• Life Estates

• Blind Trusts






Note: Refer to Appraisal and Property Requirements > Appraisals for an outline of UAD requirements.

Underwriting Method





Choice MI Underwriting are not permitted

Appendix A

NOTE: Minimum Loan Amounts apply to Non-Agency Amortizing Fixed Rate loans as outlined below:

Primary Residence, Second/Vacation Homes and Investment*


Type

Loan Term Transaction Type Property Type Minimum Loan amounts

47 Contiguous AK/HI

• Non- Agency Amortizing Fixed

• 15 Year Term

• 30-Year Term


1 Unit/PUD(Attached/Detached)

HERA + $1 HERA + $1

Condo*(Attached/Detached)

HERA + $1 HERA + $1

Co-op*(Attached/Detached)

HERA + $1 HERA + $1




Cash-Out Refinance 1 Unit/PUD(Attached/Detached)

HERA + $1 HERA + $1

Condo*(Attached/Detached)

HERA + $1 HERA + $1

Co-op*(Attached/Detached)

HERA + $1 HERA + $1

2 Unit NA NA

3 Unit NA NA

4 Unit NA NA

• 10 Year Term

• 20 Year Term

• 25 Year Term


1 Unit/PUD(Attached/Detached) $453,100 $679,650



2 Unit $580,150 $870,225

3 Unit $701,250 $1,051,875

4 Unit $871,450 $1,307,175

Cash-Out Refinance 1 Unit/PUD(Attached/Detached) $453,100 $679,650

Condo(Attached/Detached) $453,100 $679,650

Co-op(Attached/Detached) $453,100 $679,650

2 Unit NA NA

3 Unit NA NA

4 Unit NA NA

*Condo and co-ops are allowed for Primary and Second Home transactions only and are not permitted on Investment Property transactions.

Correspondent Lending Library/Products/Non-Agency (Jumbo) Interest Only ARMs (05/14/18)

Non-Agency (Jumbo) Interest Only ARMs (05/14/18)

Table of Contents



• Chase Overlays






• Maximum LTV/CLTV/HCLTV & Minimum Credit Scores



• Annuitization of Assets

• ARM Features

• Appraisals

• Assumability

• Bankruptcy & Foreclosure

• Buydown (Temporary)

• Completion Escrows


• Continuity of Obligation

• Conversion of Primary Residence

• Conversion Option

• Credit History

• Credit Only Application

• Deed Restricted Properties

• Disputed Derogatory Credit

• Documentation

• Eligible Borrowers

• Eligible Funds

• Escrow Waivers

• Geographic Restrictions

• Interested Party Contributions

• Legal Documents – ARM Caps

• Live Free Mortgages

• Multiple Property Ownership

• Non-Occupant Co-Borrower

• Non-Owner Occupied Property

• Non-U.S. Citizen

• Occupancy

• Predatory or High Cost Loan

• Prepayment Option

• Principal Curtailments (also known as principal reduction)

• Private Mortgage Insurance

• Programs Permitted

• Property Type

• Purchase Transaction Definition

• Qualifying Ratios

• Recast Option

• Redemption Rights

• Refinance (Cash-Out)

• Refinance (No Cash-Out)

• Relocation or Trailing Co-Borrower

• Reserves

• Subordinate Financing

• Title/Deed Restrictions

• Uniform appraisal Dataset (UAD) Requirements

• Underwriting Method

• Appendix A


Chase Overlays



Non-Agency ARM:

Amortizing Fixed Product Market Type Loan Term

5/1 LIBOR ARM 752 30 Years (10/20)

7/1 LIBOR ARM 487

10/1 LIBOR ARM 549

Amortization Type

10 Years interest only payments, followed by 20 Years fully amortizing payments









In addition, Correspondents must successfully complete an underwriting test case process






Minimum Loan Amount

The minimum loan amount is the conforming loan limit, plus $1.


Maximum LTV/CLTV/HCLTV & Minimum Credit Score

Primary Residence




Credit ScoreMaximum

DTI



75/75/75% 700 43%


Cash Out Refinance Not eligible

Second Home




Credit Score Max DTI

Purchase & No Cash-Out Refinance

1 Unit / PUD / Condo** / Co-op*

65/65/65% 740 43%


*Co-op eligible in NY only. Condos may have LTV restrictions based on review type. See Geographic Restrictions and Property Type sections in this topic.






• Maximum Loan Amount: $2MM

• QM Designation: Loans with a Non-QM designation for reason other than loan containing an interest only feature are not eligible

Notes:

• Loans with loan amounts >$2MM, that otherwise meet the Non-Agency eligibility requirements, must be submitted to Chase Underwriting prior to closing.

• Transactions secured by a co-op must be underwritten by Chase and must continue to be submitted to Chase for review. However, Correspondents with existing Delegated Co-op and Delegated Non-Agency authority must underwrite Non-Agency co-op transactions with loan amounts ≤ $2MM

• Non-Owner Occupied – Not Eligible





Non-Agency Interest Only ARMs


MinimumCredit Score

Maximum DTI



80/80/80%(see additional requirements

below)

740 35%



State/MSA Counties Maximum Loan Amount





• Los Angeles

• Orange$2,000,000

California/San Francisco-Oakland-Hayward • Alameda

• Contra Costa

• Marin

• San Francisco

• San Mateo


• San Benito

• Santa Clara


• Fairfield







State/MSA Counties


• Pinal


• San Bernardino


• Placer

• Sacramento

• Yolo


• Miami-Dade

• Palm Beach








ARM Features

• Index:

◦ 1 Year LIBOR ARM

• Rate Adjustments:

◦ Interest rate can be adjusted up or down at each rate change date, based on the movements in the index

◦ The interest rate will be adjusted to equal the sum of the index plus the required margin, rounded to the nearest .125% subject to the interest rate caps

◦ The monthly payment will be adjusted in accordance with the change in the interest rate

• Interest Rate Change Dates:

◦ The interest rate at lock-in will remain constant until the first rate change date. Subsequent rate change dates will occur on the 1st day of every 12th calendar month thereafter

◦ The first change date is the month prior to the first payment date plus the number of years (5, 7 or 10) based on the ARM program type. For Example: 5/1 ARM with a First Payment date of 4/01/2013 would have an Interest Rate change date of 3/01/2018

• Interest Only Period:

◦ During the first 10 years of the payment will be interest only for Non-Agency ARM loans based on the amount of outstanding principal balance.

◦ For the remaining 20 years for Non-Agency ARM loans the payment will be calculated at principal and interest and will amortize over the remaining term.

• Caps:

◦ 5/1 LIBOR ARM: 2/2/5%

◦ 7/1 & 10/1 LIBOR ARM: 5/2/5%

• Margin:

◦ 5/1, 7/1,10/1 LIBOR ARM: 2.25%

◦ The Floor is the margin

• ARM Change Look Back Period:

◦ 45 days

Note: For assistance identifying the ARM index, margin and caps, refer to the ARM Job Aid in ChaseLoanManager > Resource Center > Topics > Products

Appraisals




Assumability

• Loans are assumable after the initial fixed rate period under certain conditions described in the Security Instrument

• Co-ops are not assumable


Refer to Correspondent Lending Guide>Credit Guide>Credit History>Credit Requirements and Analysis for detailed requirements

Buydown (Temporary)

• Not available

Completion Escrows

Eligible on Purchase transactions only (all occupancy types). Refer to Escrow Holdback/Completion Escrow Requirements for detailed requirements




• Limited Cash Out (NCO)



See Refinance Cash Out and Refinance No Cash Out sections for additional requirements on refinance transactions


Refer to Correspondent Lending Guide > Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract, Construction to Perm



Conversion Option

None

Credit History



• A minimum credit risk score is required. See the Maximum LTV/CLTV/HCLTV & Minimum Credit Scores topic of this guide for minimum score requirements.


Not eligible




See Appraisal/Property Requirements > Property General Requirements > Deed Restricted Properties section for detailed requirements.


Refer to Credit Guide – Non-Agency > Credit History – Non-Agency > Derogatory Credit – Non-Agency > Disputed Derogatory Credit.

Documentation

• Full/Alt Doc. Refer to Chase Credit Guide, plus


Eligible Borrowers

• U.S. Citizens



*Refer to Correspondent Lending Guide > Foreign Borrowers, Income, Assets, and Documentation Considerations for detailed requirements

Eligible Funds

Refer to Credit Guide>Assets>Asset Types section of the Correspondent Lending Guide for eligible funds for down payment, closing costs and prepaid items

Escrow Waivers




Co-ops:

• Eligible in NY only and must meet Fannie Mae criteria



• Follow your state-specific guidelines, plus

• Georgia: Non-Agency interest only transactions are limited to 1 unit transactions only. Multi units are not eligible

• Massachusetts: First time homebuyers are not eligible on Non-Agency interest only ARM transactions

• West Virginia: Interest Only transactions not permitted



Primary Residence <= 75% 9%

Second Homes <=65% 9%

Note: May include seller paid prepaid items and other costs (may not exceed the allowed percentage as dictated by the LTV/CLTV/HCLTV. The CLTV limitations include secondary financing from all sources

Legal Documents – ARM Caps

ARM Notes must always include the following Limits on Interest Rate Changes language:

The interest rate I am required to pay at the first Change Date will not be greater than ____% or less than ____%. Thereafter, my adjustable interest rate will never be increased or decreased on any single Change Date by more than two percentage points from

the rate of interest I have been paying for the preceding 12 months. My interest rate will never be greater than ____% or less than the Margin%.

Live Free Mortgages

Not eligible





• Second Home: 4




Non-Owner Occupied Property

Not eligible

Non-US Citizen




• Primary Residence



◦ 80%

• If LTV > 70%, borrower must be established in U.S. with two year’s residence and employment history



• Refer to Foreign Borrowers, Income, Assets, and Documentation Considerations for acceptable Visa types and classifications


• Not eligible




Occupancy

Primary and Second Homes



Prepayment Options

None


• Principal curtailments may be made during the interest only period (first 10 years). The next scheduled monthly interest payment will be calculated on the adjusted outstanding principal balance.

• Principal curtailments may also be made after the interest only period. However, the payment will be recalculated only at the interest rate change date based on the reduced principal balance and new interest rate.



Not applicable

Programs Permitted

Full/Alt

Property Type

Primary Residence:


Second Homes:


Notes:

• Co-ops eligible in New York and must meet Fannie Mae criteria



• Correspondents with Delegated Non-Agency Authority may rep and warrant that the condominium or Attached PUD meets Chase and Agency condominium project approval guidelines as evidenced by including a completed Delegated Correspondent Certification of Eligibility for Condominiums and, Attached PUDs 1008 or Condo/PUD Warranty Form (Correspondent’s own form)

in the closed loan file. Otherwise, condominium projects and attached PUD’s must be submitted to Chase Project Approval Group for consideration under the Chase Project Review for Established Projects, Chase Project Review of New Projects and Conversions, or Chase Limited Review of Established Attached Condo Projects





• Additionally, an option is available in which the transaction can be considered a purchase used to finance the purchase of the home. Refer to Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract,Construction to Perm – Non-Agencyfor Delayed Financing/Technical Refinance requirements.

Qualifying Ratios

Refer to maximum LTV/CLTV and Minimum Credit Score section of this guide for maximum DTI based on LTV/CLTV, credit score, transaction, and property type.

5/1 ARMs:

• Will qualify at the fully amortizing (PITI) based on 20 year amortizing term at the higher of the Note Rate plus 2% or fully indexed rate.

7/1 and 10/1 ARMs:

• Will qualify at the fully amortizing (PITI) based on 20 year amortizing term at the higher of the fully indexed rate or note rate.

Note: For detailed requirements on Pay off of Debt Reduction or Debt Balance, please refer to Credit Guide>Debt/Liabilities>Debt Analysis Guidelines.

Recast Option

• Not Applicable (also known as reamortization or re-amortization)

Redemption Rights



Not eligible

Note: Non-Agency Products allow the payoff of Chase/WaMu serviced junior lien(s), regardless of age, seasoning or date of pervious draws, to be treated as No Cash-out.


Limited to Chase-to-Chase when LTV/CLTV/HCLTV greater than 85%.

Refer to Credit Guide – Non-Agency > Definition – Purchase, Refinance, Land Contract, Construction to Perm > No Cash-Out Refinance Definition for detailed requirements for No Cash-Out Refinance transactions.

Relocating or Trailing Co-Borrower




• Not permitted

Reserves

Interest Only Reserves

LTV/CLTV/HCLTV Reserves Needed

<= 75% 24 Months

>75% 30 Months

Note: Fully amortizing PITIA based on a 20-year amortizing payment required.

Note: For Second Home transactions, two months additional reserves required for each additional financed Second/Vacation or Investment Property owned.







Refer to Credit Guide > Debt/Liabilities > Sub Financing for detailed requirements



• Life Estates

• Blind Trusts






Note: Refer to Appraisal/Property Requirements >Appraisals for an outline of UAD requirements.

Underwriting Method





Appendix A

NOTE: Minimum Loan Amounts apply to Non-Agency Amortizing ARM loans as outlined below:

Primary Residence and Second/Vacation Homes


Type Loan Term Transaction Type Property Type

Minimum Loan amounts

48 Contiguous States AK/HI

5/1 Interest Only ARM

30-Year Purchase/No Cash-Out Refinance


Conforming + $1 Conforming + $1

Condo(Attached/Detached)


Co-op(Attached/Detached)

Conforming + $1 NA

2 Unit NA NA

3 Unit NA NA

4 Unit NA NA

Cash-Out Refinance 1 Unit/PUD(Attached/Detached)

NA NA



2 Unit

3 Unit

4 Unit



30 Year Purchase/No Cash-Out Refinance






Conforming + $1 NA

2 Unit NA NA

3 Unit NA NA

4 Unit NA NA

Cash-Out Refinance 1 Unit/PUD

NA NA

(Attached/Detached)



2 Unit

3 Unit

4 Unit

Correspondent Lending Library/Credit Guide - Non-Agency/Philosophy and Principles/Credit Philosophy and Introduction - Non-Agency (08/04/15)

Credit Philosophy and Introduction - Non-Agency (08/04/15)

This section includes the following topics:

Overview

Credit Guide versus Product and Program Guides

Credit Guide – Non-Agency

Agency Loans Submitted to DU or LP

FHA and VA Guidelines

Remainder of Online Guide

Overview

The Chase Credit Guide folders provide the basic constitution for underwriting and risk management of Chase’s mortgage products. In addition to using automation and technology to augment risk management, lenders should rely upon sound and mature judgment to interpret system messages and requirements to maintain high standards and credit quality.

Chase Credit Guide and product and program guides provide the thresholds and guidance for the predominant number of transactions and situations. However, specific situations or conditions may require additional clarification or more specific operational or underwriting direction.

Credit Guides versus Product and Program Guides

Each product and program guide details minimum and maximum thresholds to be applied specifically to each applicant, and to the applicant's unique financial profile. The thresholds include:

• Maximum loan-to-value (LTV) and combined-loan-to-value (CLTV)

• Qualifying ratios

• Required documentation

Some of the determining factors for these thresholds include, but are not limited to:

• Investor requirements

• Changing market dynamics

• Competitive responses

Credit Guides additionally provide the operating principles to manage risk within those thresholds. Therefore, a specific program may assert a more relaxed or more restrictive threshold than described in Credit Guides. In such cases, that particular area in the product or program guide would prevail.

Credit Guide – Non-Agency

Topics outlined in the Credit Guide-Non-Agency folder of the Online Guides apply to all Non-Agency transactions.

Note: Chase Credit Guide topics that include DU and LP in the topic name do not apply to Non-Agency transactions.

Agency Loans Submitted to DU or LP

Refer to Credit Guide - DU and LP > Philosophy and Principles > Credit Philosophy and Introduction chapter for information on Chase Credit requirements applicable to Agency loans submitted to DU or LP.

FHA and VA Guidelines

FHA and VA Guidelines are outlined in the applicable Guideline Reference Tool located in the Products folder. Any FHA/VA guideline not addressed in the applicable FHA/VA Guideline Reference Tool should comply with specific FHA/VA guidelines and requirements.

Remainder of Online Guide

Requirements outlined in the remainder of Online Guides apply to all Non-Agency loan transactions, regardless of underwriting method unless specifically indicated.

Correspondent Lending Library/Credit Guide - Non-Agency/Philosophy and Principles/JPMorgan Chase and Co. Credit Quality Principles (10/18/16)

JPMorgan Chase and Co. Credit Quality Principles (10/18/16)

Requirements

Chase will conduct business only with individuals and companies that demonstrate a track record of incurring debt prudently, servicing it diligently, and maintaining a responsibility for debt obligations.

Chase will not compromise credit quality for the sake of volume or short-term profits.

• Chase portfolio must reflect a prudent diversification of risk.

• Credit quality is the joint responsibility of all business managers in conjunction with their credit officers.

Chase will only commit our corporation's capital following thorough professional research and analysis and utilizing all expertise residing anywhere in the organization which may contribute to our risk management.

The integrity of our portfolio management process is dependent upon timely and accurate risk ratings. Deterioration in credit risk, existing or potential, must be quickly and completely communicated.

Credit and management audits are an important line of defense against possible weakness in originated loans. Deficiencies cited in audits of these loans must receive prompt remedial action.

Chase’s intent is to only originate loans for which we believe that the borrower(s) have the ability to repay the mortgage obligation according to its terms.

A reasonable and good faith determination of Ability to Repay is made on each loan. Some ways in which Chase may make this determination is by considering multiple factors, including:

• Income and/or assets

• Employment

• Credit history

• Current debt obligations (including alimony and child support, if applicable)

• Total mortgage obligations and payments

• Qualification using a fully-amortizing monthly payment on the subject transaction, along with any simultaneous loan payments on the subject property

• Calculation of a monthly DTI Ratio

Correspondent Lending Library/Credit Guide - Non-Agency/Philosophy and Principles/Fair Lending Statement (01/12/16)

Fair Lending Statement (01/12/16)

Statement

JPMorgan Chase & Co. (JPMC or firm) is committed to treating all individuals fairly and equitably in the conduct of its lending businesses in all jurisdictions where it conducts its business. This commitment is part of JPMC’s fundamental mission of providing quality financial services to existing and prospective customers in accordance with all applicable laws. In the United States, this principle is embodied in fair lending laws such as the Equal Credit Opportunity Act and the Fair Housing Act, as well as applicable state laws. These laws require the equitable treatment of all credit applicants, without regard to race, sex, sexual orientation, color, national origin, religion, age, marital status, disability, familial status, the fact that all or part of the applicant's income derives from a public assistance program, or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Denying any person equal access to basic economic opportunities, such as home ownership or credit, is morally repugnant, has no place in our company and will not be tolerated.

Only through the efforts of all of us at JPMC can we ensure that every applicant for credit receives fair and equitable treatment and that we have helped each member of the communities we serve reach his or her fullest potential.

Correspondent Lending Library/Credit Guide - Non-Agency/Philosophy and Principles/Know Your Customer Requirements (09/25/17)

Know Your Customer Requirements (09/25/17)

Table of Contents


Introduction

Identify Your Customer

Understand Your Customer’s Product Needs

Question Unusual or Suspicious Behavior

Elderly Customers and Vulnerable Adults

Managed Third Party Relationships

Introduction

Chase and all Correspondents doing business with Chase should have a good understanding of who they are conducting business with, be aware of the services used by their customers, and follow account documentation, credit review, and other established requirements to properly identify customers and help deter customers from using Chase products and services in violation of the law or to cause damage to the Chase reputation.

Identify Your Customer

Chase requires controls to verify the identity of the customer. In addition to any verification procedures performed at the time of application and during underwriting, an independent form of personal identification must be requested at closing to confirm the customer’s identity. Examples include, but are not limited to:

• Driver's license or government issued photo ID

• Passport

• Photo ID

Understand Your Customer’s Product Needs

It can be challenging to identify a potential customer’s misuse of Chase products and services. A customer who requests a mortgage simply states the loan purpose as "purchase" or "refinance." However, as a customer begins to use a more complicated mix of products, more sophisticated products, or products that pose a greater risk to Chase (for example, use of cash out proceeds), it is important to understand how the customer intends to use these products and services.

Underwriter judgment must not have an impact on how a customer conducts his personal business, which does and should remain the customer’s responsibility. However, understanding the use is important so that any products and services the customer uses, which significantly and inexplicably deviate from the explained purpose, raise questions; particularly where suspicions are aroused in regards to the source of customer’s funds.

Question Unusual or Suspicious Behavior

All Chase customers, and people seeking to become Chase customers, are presumed to be law-abiding. Unusual or suspicious behavior warrants closer scrutiny to enable Chase to determine whether to continue to justify this presumption. Suspicious behavior is cumulative; where a single unusual occurrence might not cause any special notice, the repeated occurrence of events that are inconsistent with the customer's stated personal business, or the occurrence of several types of unusual behavior, becomes increasingly suspicious.

Refer unusual or suspicious behavior to Chase. Chase will conduct a thorough investigation of any unusual or potentially suspicious activity and provide feedback on the loan decision. When warranted, Chase may take additional action.

Elderly Customers and Vulnerable Adults

Vulnerable customers are individuals, regardless of age, whose ability to care for or protect themselves may be impaired due to mental, emotional, physical, or developmental disability or dysfunction or the infirmities of aging. Chronic alcohol/drug abuse and persons with a full time caregiver (including those living in a care facility) may be considered impaired under the applicable state’s “vulnerable person” definition.

Elderly and/or vulnerable customers are at risk of financial abuse or exploitation, which is any action involving the potential misuse of a vulnerable customer’s funds, property, or financial resources for another individual’s benefit.

Chase is committed to help prevent financial abuse of elderly or vulnerable customers, a customer population that is particularly susceptible to financial fraud and abuse, by reporting suspected cases in accordance with applicable laws. This commitment is part of our fundamental mission of providing quality financial services to existing and prospective customers in accordance with all applicable laws.

Several states have passed laws requiring financial institutions to report suspected abuse, neglect or financial exploitation. Correspondents are expected to investigate and report suspected abuse or exploitation in accordance with applicable laws.

Managed Third Party Relationships

Correspondents doing business with Chase must understand Chase's commitment to these requirements and act in partnership with Chase to comply with them. Chase’s approved Correspondents go through a formal approval process with periodic monitoring and must meet criteria that Chase has established to ensure that Chase is dealing with financially fit and reputable lenders. If a Correspondent suspects a third party is not acting in the best interests of Chase or the customer, the value of the relationship should be questioned and acted upon accordingly.

Correspondent Lending Library/Credit Guide - Non-Agency/Purchase, Refinance, Land Contract, Construction to Perm/Purchase, Refinance, Land Contract, Construction to Perm (05/01/18)

Purchase, Refinance, Land Contract, Construction to Perm (05/01/18)

Table of Contents


• Overview

• Purchase Definition

• Loan Churning

• Refinance Definition

• Continuity of Obligation

• Loan Seasoning

• No Cash-Out Refinance – Non-Agency Transactions

• Construction Financing

• Short Term Loan Seasoning

• Equity Buy Out

• Cash-Out Refinance Definition

• Seasoning Requirements - Cash-Out Refinance

• Delayed Financing (Technical Refinance)

• Additional Reference - Texas Loans

• Construction Loan to Permanent Loan (Construction to Perm)

• Land Contract/Contract for Deed Loans

Overview

Whether a transaction is underwritten as a “purchase” or a “refinance” has implications with regard to the allowable maximum LTV and other product specific criteria and parameters.

These guidelines determine whether a transaction should be underwritten as a purchase or a refinance. Federal law may categorize the transaction differently for disclosure purposes.

Contact your Legal Counsel, Compliance Department, or Operations Manager for specific guidance on disclosure requirements.

Purchase Definition

A “Purchase-money” transaction is one in which the proceeds are used to finance the acquisition of a property. Proceeds from the transaction must be used to:

• Finance the acquisition of the subject property, or

• Pay off the outstanding balance on an installment land contract (or contract for deed)(executed within the last 12 months). See the Land Contract (Contract for Deed) Definition in this topic for details.

Loan Churning

Loan “churning”, identified by the rapid refinance or transfer of a property, is prohibited. Churning is often done to:

• Defer loan payments

• Skim equity

• Avoid foreclosure

• Inflate income and fees paid to the third party participants (such as, broker, settlement agent, appraiser, etc.).

Churned loans are not eligible for sale to most investors or the Agencies. Any third refinance within the last consecutive 12-month period requires documentation of the financial benefit to the borrower.

Financial benefit to the borrower can include:

• Reduction of monthly payment

• Reduction of term

• Reduction of interest rate

• Cash-out for debt consolidation (over and above closing costs)

Note: When in a flat or rising rate environment, the Underwriter must understand the motivation and benefit to the borrower of any refinance.

Refinance Definition

The following types of refinance transactions are described below:

• No cash-out (rate and term)

• Cash-out

Specific requirements apply to Texas refinance transactions.


These requirements apply to cash-out and no cash-out refinance transactions.

Continuity of obligation requirements do not apply where there is no existing mortgage on the subject property as a result of the borrower either having purchased the subject property with cash or when any prior mortgage for which the borrower was an obligor was paid in full.

All time-period references in this section are measured from the date of the event (for example, transfer of title) with the application date of the new refinance transaction.

For cash-out or no cash-out refinances of existing liens, continuity of obligation must be present from the existing lien to the new lien.

Acceptable continuity of obligation exists when any of the following conditions are met:

• There is at least one borrower obligated on the new loan who was also a borrower (as evidenced by the Note) on the existing loan being refinanced.

• Borrower on the new refinanced transaction has been added to title through a transfer from a Limited Liability Company (LLC) or partnership under the following circumstances:

◦ Borrower must have owned 25% or more of the LLC or partnership prior to the transfer, and

◦ Transferring LLC and/or the borrower had a collective consecutive ownership (on title) for at least the most recent six months prior to the application date of the new loan

• Borrower recently inherited or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership). See Equity Buy-out for additional information and requirements.

Note: Transfer of ownership from a corporation to an individual does not meet the definition of acceptable continuity of obligation.

Chase-Serviced Loan

For a no-cash out refinance of a Chase-serviced loan, continuity of obligation is also met when at least one borrower has been on title and residing in the property as a primary residence for at least 12 months and either:

• Has been making timely mortgage payments, including the payments for any secondary financing, for the most recent 12-month period; or

• Can demonstrate a relationship (relative, domestic partner, etc.) with the current borrower.

Note: Seasoning requirements must be met in addition to the continuity of obligation.

Loan Seasoning

Loan seasoning is measured from the account open date on the credit report or Note to the initial application date and is defined as follows:

IF loan has been open for… THEN loan is…

12 months or more, seasoned.

fewer than 12 months, unseasoned.

See Seasoning Requirements - Cash Out Refinance and Short Term Loan Seasoning in this topic for additional details.

No Cash-Out Refinance – Non-Agency Transactions

The Closing Disclosure (CD), title report, or other documentation from the purchase transaction that indicates that a subordinate lien (and amount of lien) was used to purchase the subject property can be used to confirm whether or not the subordinate lien is a purchase money mortgage. The closing date of the subordinate lien must not be after the closing date on the property.

A standard rate or term refinance transaction is a payoff of one or more of the following:

• An existing first mortgage which includes a first lien home equity loan or Home Equity Line of Credit (HELOC).

If the first mortgage was originated within the past six months of the application date and was a cash-out transaction (or if there have been draws on the first lien non-Chase HELOC in the past six months), the loan must be considered cash out and is not eligible for a no cash-out refinance. Refer to Short Term Loan Seasoning for requirements.

• Any seasoned or unseasoned junior lien(s) related to the purchase of the property, including an equity line of credit without any draws within the last 12 months

• Any seasoned junior lien(s) that is non-purchase related, including an equity line of credit without any draw within the last 12 months

Up to 5% of the loan amount may be used for closing costs, financing costs, and prepaid items. The lesser of 1% or $5,000 incidental cash can be received back by the borrower but is included as part of the total 5% limit for closing costs, etc.

Notes:

• Refer to Property General Requirements > Subject Property for Sale/Was for Sale for additional requirements if subject property was listed for sale within the past 12 months

• There is no requirement for length of subject property ownership.

• All junior liens must be mortgage related to be considered a no cash-out refinance. Payoff of a non-mortgaged related junior lien is considered a cash-out refinance.

• Detailed draw history documentation from the borrower or lender is required; a credit supplement is not allowed.

• Paying down a seasoned or unseasoned HELOC in lieu of paying off and closing a HELOC is considered a cash-out refinance transaction and subject to cash back limitations ($250,000); regardless if the HELOC was used as purchase money.

• On new HELOCs, the initial draw at closing is not considered in draw history when determining if there have been any draws in the past 12 months.

Construction Financing

Refer to the table below for interim construction financing requirements:

IF… THEN…

first lien construction financing (two-time close),• payoff of the interim construction financing secured by the subject

property is acceptable as a No Cash Out or Cash Out transaction

• no additional construction cost documentation is required.

Refer to specific Product Guide > Construction to Perm Financing for additional information.

first lien home equity loan or Home Equity Line of Credit (HELOC) was used entirely for construction and/or renovation of the subject property,

payoff of the interim construction financing secured by the subject property is allowed as a no cash-out transaction.

Note: There is no seasoning or draw history requirement when paying off interim construction financing meeting these requirements.

Documentation verifying costs for construction and/or renovation paid to the contractors or vendors must be provided and must support the entire amount of interim financing was used for that purpose.

junior lien secured by the subject property was used entirely for construction and/or renovation of the subject property,

paying off construction costs paid by the borrower outside of the secured interim construction financing or junior lien used for the cost of construction that exceeds the lessor of $5,000 or 1% of the loan,

transaction is considered cash-out to the borrower.

Short Term Loan Seasoning

A short term loan is one where the loan was originated within the last six months of the application date and was a cash-out transaction. Refinances of short term loans are considered cash-out refinances. A No Cash-Out Refinance of a short term loan is not eligible for purchase by Chase unless the transaction meets all No Cash-Out Refinance requirements. Refer to the table below for specific requirements:

A Closing Disclosure (CD) is required to establish that the previous transaction was not a cash-out refinance if six months have not elapsed since the previous loan closed.

IF the Closing Disclosure shows… THEN the previous transaction is considered…

cash to the borrower in excess of incidental amounts, cash out. Refer to Cash Out requirements.

loan proceeds paid off a subordinate lien that was not a purchase money transaction,

loan proceeds were to purchase property or paid off a subordinate lien that was purchase money transaction,

no cash out. Refer to No Cash Out requirements.

Equity Buy Out

A no cash-out refinance transaction may include the buy out of a co-owner’s interest in a subject property due to divorce, separation, dissolution of domestic partnership, or inheritance provided the following conditions are met:

• Property must have been jointly owned by all parties for at least the 12 months preceding the dates of the mortgage application. (Not applicable for parties who have inherited an interest in the property.)

• Property must be the primary residence. (Not applicable for parties who have inherited an interest in the property.)

• A written agreement signed by all parties is required stating:

◦ Terms of the property transfer, and

◦ Disposition of the proceeds from the refinance.

The borrower who retains sole ownership of the property may not receive any proceeds from the refinance.

Cash-Out Refinance Definition

A refinance transaction where the loan pay-off of the existing mortgage(s), any related closing costs, financing costs, and/or prepaid items is considered a Cash-Out" transaction when any one or more of the following are also included:

• Existing first mortgage was originated within 6 months of the application date and was a cash out transaction

• Proceeds issued to the borrower or any other payee at closing,

• Payoff of a Leasehold on the property

• Payoff or paydown of unseasoned subordinate financing

• Payoff of seasoned or unseasoned Home Equity Lines of Credit (HELOCs) that have had draws within 12 months of the application date

◦ Paying down a seasoned/unseasoned HELOC in lieu of paying off and closing a HELOC is considered a cash-out refinance transaction and subject to cash back limitations ($250,000); regardless if the HELOC was used as purchase money.

◦ When paying off an unseasoned HELOC and accessing additional cash back. The balance of the HELOC being paid off is subject to the $250,000 cash-back limitations.

Notes:

• Refer to Property General Requirements > Subject Property for Sale/Was for Sale for additional requirements if subject property was listed for sale within the past 12 months

• A mortgage placed on a property previously owned free and clear may be governed by the non-agency guidelines referenced under the purchase definition above. See the section dealing with the purchase definition for non-agency loans.

Seasoning Requirements - Cash-Out Refinances

The seasoning requirement applies to the length of ownership for the property. The applicant must have owned the property for a minimum of six months prior to the date of application and there is no restriction related to previous financing.

If it is not evident from the credit report that the applicant has owned the property for at least six months, other documentation such as a copy of the Closing Disclosure (CD) must be in the loan file.

Note: Requirement does not apply when documented that borrower recently inherited or was legally awarded the property (divorce, separation, or dissolution of a domestic partnership).

Delayed Financing (also known as Technical Refinance)

When the applicant purchased the property with cash or unsecured financing within 90 days from date of the application, and the borrower now prefers to encumber the property with secured financing:

• Transaction is underwritten and priced as a purchase transaction

◦ Texas 50(a)(6) transaction is locked and underwritten as a refinance, priced as a purchase and must meet all other Texas 50(a)(6) requirement

• Cash-back to the borrower in excess of the original purchase price or appraised fair market value (whichever is lower) is not allowed

• Right of Rescission is required (see Compliance Related Topics > Right of Rescission for additional information)

In addition, the loan must meet the following requirements to be considered delayed financing:

Subject Requirement

Transaction Type Transaction must be an arm's-length transaction (refer to Arm's Length and Non-Arm's Length Transactions for more information)

Source of Funds Source of funds (from eligible sources as reflected in the Online Guide) for the purchase transaction must be documented with, but not limited to:• Bank statements

• Personal loan documents

• HELOC documentation on another property (such as copy of statement evidencing a draw for the initial purchase of the subject property)

Note: Gift funds used to purchase the property are not an eligible source of funds that can be reimbursed through delayed financing.

Documentation Closing Disclosure (CD) must confirm that no mortgage financing that resulted in a lien against the subject property was used to acquire or complete the subject property.• Preliminary title search or report must also confirm no liens on the subject property

• Repayment of unsecured or personal loans used as the source of funds for the purchase transaction must be documented on the new Closing Disclosure (CD)

Additional Reference - Texas Loans

Specific requirements and procedures apply to:

• Texas Homestead Cash-out transactions, and

• Texas Homestead Rate and Term refinance transactions of current 50 (a)(6) liens

Texas homestead properties are governed by very specific requirements and procedures that must be strictly adhered to, since non-compliance can result in severe penalties, including loss of lien position and forfeiture of all principal and interest.

Refer to the applicable Product and Program Guide for further details.

Construction Loan to Permanent Loan (Construction to Perm)

The conversion of a construction loan to a permanent loan involves the extension of a long-term mortgage that will replace a short-term loan used to fund the construction of a new residence.

• The “construction” loan that will be replaced by the permanent loan is structured as a new long-term mortgage that will replace interim construction financing used by the borrower to construct the residence.

Note: If updates of the application, credit bureau, or other credit documentation reveal any significant deterioration in the borrower’s financial position that would alter the original loan decision or modify the conditions for the approval, the loan must be re-underwritten and re-approved.

Non-agency Loans

• The maximum loan-to-value ratio is calculated by dividing the loan amount by the as-completed appraised value of the property (lot and improvements).

• Cash at risk should receive a careful evaluation if the borrower is to receive cash back, regardless of the LTV.

• If the acquisition/completion was within the last 90 days, it may be considered as a purchase.

Land Contract/Contract for Deed Loans

Land contracts (Contracts for Deed) are installment purchases of land and any dwellings or other structures on the land. The buyer:

• Executes a land contract that calls for the remittance of monthly payments to the seller, and frequently, a balloon payment.

• Takes possession of the land.

• In many instances, the buyer moves into the dwelling and occupies it as a primary residence.

Upon payment in full of the land contract legal title to the property (land and dwelling) is conveyed to the buyer from the seller. If the buyer is obtaining mortgage financing to pay-off the land contract, it can be underwritten as either a purchase or refinance, under the following conditions:

IF the new mortgage is used to pay off the contract that was executed...

THEN include a copy of the executed land contract or contract for deed in the loan file and...

within the last 12 months prior to application date,

• Treat the transaction as a Purchase

• Include and document in the acquisition cost:

◦ Original purchase price

◦ Rehab or renovation costs

◦ Energy Conservation improvements

• Document the expenditures for rehab/renovation/conservation

• Use the lesser of the documented acquisition cost or the current appraised value to calculate the LTV

All of the loan proceeds must be used to pay the outstanding balance under the land contract or contract for deed, and no loan proceeds can be disbursed to the borrower.

Note: If the borrower occupied the property as a primary residence, the Right of Rescission applies..

more than 12 months prior to application,

• Treat the transaction as a no cash-out refinance

• Provide evidence verifying payment history in accordance with land contract or contract for deed for the most recent 12-month period

• Must meet continuity of obligation requirements

• Calculate the LTV from the appraised value

Note: Payment history can be verified by a third party or with copies of 12 months of cancelled checks (front and back).

Note: Cash-out refinance transactions involving installment land contracts are not allowed.

Correspondent Lending Library/Credit Guide - Non-Agency/Borrower/Eligible Borrowers – Non-Agency (03/08/16)

Eligible Borrowers – Non-Agency (03/08/16)

Table of Contents


Overview

Legal Age

Maximum Number of Borrowers

Removing a Borrower

Overview

Chase only purchases mortgage loans made to individuals (natural persons).

Legal Age

Individuals must have reached the age of majority in the jurisdiction where the property is located.

There is no maximum age limit for a borrower.


Chase limits the number of credit applicants to four per loan transaction.

Removing a Borrower

To protect your lock and ensure compliance with Fair Lending and ECOA regulatory requirements, Chase must issue a new loan number when a borrower or co-borrower is removed from a non-delegated transaction.

Refer to Registration and Pricing – Best Efforts > Removing a Borrower for requirements.

Correspondent Lending Library/Credit Guide - Non-Agency/Borrower/First Time Homebuyer – Non-Agency (09/20/17)

First Time Homebuyer – Non-Agency (09/20/17)

Table of Contents


• Overview

• Definition

• Displaced Homemaker or Single Parent

Overview

Certain programs make specific eligibility reference to a first time home buyer.

Definition

A transaction is considered to be a first time homebuyer transaction if all of the individual applicants:

• Are purchasing the security property, and,

• Will reside in the security property, and

• Had no ownership interest (sole or joint) in a residential property during the three-year period preceding application date, as verified by:

◦ Declarations section of the Uniform Residential Loan Application (URLA – Fannie Mae 1003/Freddie Mac 65), or

◦ Credit report indicating no reported mortgage tradeline (as defined by Chase) within the last 36 months

All occupying borrowers/applicants must meet this definition for eligibility of a first time homebuyer program.

Note: First time homebuyers are eligible only under full documentation programs.

Displaced Homemaker or Single Parent

An individual who is a displaced homemaker or a single parent may be considered a first time homebuyer if she or he had no ownership interest in a principal residence other than a joint ownership interest with a spouse during the preceding three-year period. If a displaced homemaker or a single parent solely owned the marital residence, or solely or jointly owned a second home or investment property, the individual may not be considered a first time homebuyer.

Other restrictions or conditions may apply. Refer to the product guides for specific details.

Correspondent Lending Library/Credit Guide - Non-Agency/Borrower/Arm’s Length Transactions/Non-Arm’s Length Transactions (09/03/13)

Arm’s Length Transactions/Non-Arm’s Length Transactions (09/03/13)

Table of Contents


• Overview

• Requirements

• Factors that may be Indicative of a Non Arm’s Length Transaction

• Examples that may be Indicative of a Non-Arm’s Length Transaction

• Transactions Exempt from Non-Arms Length Requirements

Overview

An “Arm’s Length Transaction” is one in which the parties are dealing from equal bargaining positions with neither party being subject to the control or dominant influence of the other. The transaction must be treated with fairness, integrity, and legality. As such, “arm’s length transactions” are generally considered to establish “fair market values” for sales transactions.

A non-arm’s length transaction is one in which there is a direct personal or financial relationship among any of the parties to the transaction including, but not limited to:

• buyer,

• seller,

• broker,

• appraiser,

• realtor,

• closing agent,

• employer, or

• employee.

This relationship may add additional risk by:

• masking of insufficient cash equity or down payment,

• promoting a sales price that is not indicative of actual market conditions,

• disposing of unsold builder inventory in unfavorable market conditions,

• misrepresenting a financial condition or reorganization,

• hiding a less than satisfactory credit history, or

• masking occupancy fraud.

Requirements

Loans must be carefully reviewed to ensure an “arm’s length” position exists. Should any of the factors listed below indicate a potential non-arm’s length transaction, the following conditions should apply:

• An executed IRS Form 4506-T with IRS transcripts is required for the most recent two years.

• A minimum of 5% of the borrower’s own funds must be into the transaction (unless there is a gift of equity and the LTV is less than or equal to 80%) (refer to Gift of Equity in the Asset Types for additional information).

• Full documentation programs only.

• Assets required by the transaction must be completely documented regardless of LTV.

• One full appraisal and one “field review” from a certified appraiser meeting Chase’s minimum requirements as stated in Appraiser Requirements.

• Appraiser must verify the purchase price and last sale date of the subject property.

• No subordinate financing.

• Seller concessions are not allowed.

• If the property is newly constructed, the occupancy must be a primary residence.

A Borrower Employed By a Family Member:

• Is eligible under Full Documentation only and

• An executed 4506-T is required with IRS transcripts received for two years.

Factors that may be Indicative of a Non Arm’s Length Transaction

Certain factors are generally indicative of a non arm’s length transaction. These factors include (but are not limited to):

• The transaction is not voluntary on the part of one of the parties.

• The parties are related to each other by blood, marriage, or close social or business relationship.

• The negotiated sales price is not comparable to fair market value paid for similar properties.

Examples that may be Indicative of a Non-Arm’s Length Transaction

Examples of non-arm’s length include (but are not limited to):

• Employees purchasing a property from their employer.

• Employees of the lender who are the seller of the property, such as loan officer, processor, or underwriter,

• Subcontractors purchasing a home from a builder or developer.

• Builder/developer or spouse deeding a property to/from self or from the corporation/partnership to/from self.

• Builder “model homes” purchased for the intent of lease back to the builder/developer.

◦ When a buyer intends to lease a property, the occupancy must be classified as Non-Owner Occupied/Investment. Due to the fact that model homes are classified as new construction, builder model home leasebacks are prohibited transactions. The Non-Arms Length Requirements above requires that all newly constructed homes be Primary Occupancy.

• Broker/Realtor (or any employee of broker or realtor) is seller or borrower,

• Broker is mortgage holder.

• Broker is providing second mortgage financing.

• Any other transaction where there is a relationship that might influence the final sales price.

• New construction or renovation/flip where the purchaser is in the building trades or real estate.

Transactions Exempt from Non-Arms Length Requirements

Although the following transactions are between family members, Chase considers them to be arm's length and does not apply the non-arm's length transaction requirements:

• Spousal buyouts due to divorce

• Interest buyouts of inherited property

Correspondent Lending Library/Credit Guide - Non-Agency/Borrower/Conservatorship/Guardianship – Non-Agency (03/11/14)

Conservatorship/Guardianship – Non-Agency (03/11/14)

Conservatorship/Guardianship

If an adult becomes unable to handle day-to-day financial or medical affairs, family members may request that a court appoint a conservator or guardian. This person will have the court-ordered authority and responsibility to manage their ward’s personal affairs.

Conservators are subject to court supervision, which provides a safeguard for the ward. To prevent a conservator from mismanaging the ward’s property and assets, most courts require the conservator to provide periodic reports detailing their actions. Many courts also require the conservator to seek permission before making major decisions involving real estate.

Chase allows conservatorships for persons of legal age and of diminished capacity provided court documents or state law allow the conservator to borrow money and encumber the ward’s assets.

All conservatorship/guardianships must be reviewed and approved by the Correspondent’s legal counsel.

Note: The term “guardianship” may be used interchangeably with conservatorship; although a guardian is usually appointed for the care and management of a child.

Correspondent Lending Library/Credit Guide - Non-Agency/Borrower/Examiners and External Auditors – Non-Agency (08/08/17)

Examiners and External Auditors – Non-Agency (08/08/17)

Table of Contents


• Overview

• Bank Examiners

• Independent Auditing Firms Authorized to Audit Chase

• Underwriting Impacts

• Sample Letter

Overview

Federal banking law makes it a crime for a bank to make a loan to any examiner who examines or has authority to examine the bank. In addition, loans to bank examiners and to employees of independent auditors may give rise to a conflict of interests and the appearance of impropriety.

The rules differ for examiners and auditors because different laws and regulations apply.

Bank Examiners

This applies to any bank examiner or assistant bank examiner in the United States, who examines or has authority to examine Chase (including but not limited to, those employed by the Federal Reserve System (Fed), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), Consumer Finance Protection Bureau (CFPB), the state of Michigan, and in any country where Chase does business.

• Chase will only purchase loans secured by principal residences and made on the terms and conditions generally prevailing at the time when the borrower is a bank examiner who works for an agency that has the authority to examine Chase.

Note: This definition covers any bank examiner or assistant bank examiner employed by these agencies that have the authority to examine Chase, even if that particular employee is not involved with projects specific to Chase. No other loans may be made to these bank examiners.

• There are no restrictions on loans made to bank examiners who work for other agencies that do not have the authority to examine Chase.

Independent Auditing Firms Authorized to Audit Chase

• JP Morgan Chase prohibits making a loan to any employee who conducts or is responsible in any way for audits of, or provides any kind of professional services to JP Morgan Chase, including his/her immediate family members, and any partner located in the firm's engagement office (currently, certain employees of (i) PricewaterhouseCoopers, (ii) Faw, Casson & Co., and (iii) Meaden & Moore).

• Loans can be made to employees or immediate family members of employees of one of the named Independent Auditing Firms only if the employee:

◦ Is not responsible in any way for audits of Chase; and

◦ Does not provide professional services to Chase; and

◦ Is not a partner in the engagement office.

If all the above conditions are met, then the Correspondent should obtain a letter from the auditing firm that complies with all of the following:

• Letter is concurrent with the transaction; and

• The letter is signed by a senior manager of the Accounting Firm's ethics, legal or human resources department; and

• The letter specifically states:

◦ The borrower's loan would not be in violation of AICPA or SEC independence requirements; and

◦ Appropriate action will be taken to ensure that independence is not impaired if the borrower becomes involved with an audit of JPMorgan Chase.

Underwriting Impacts

Due to the importance of these requirements, Chase underwritten loans require a second review by a Chase supervisor.

Correspondents exercising their delegated authority to underwrite loans are encouraged to use a second review process as well if the borrower meets the definition of a Chase external auditor or bank examiner.

Sample Letter

Click here for a sample of the No Conflict Letter for loans to independent auditors.

Correspondent Lending Library/Credit Guide - Non-Agency/Borrower/Foreign Borrowers (01/10/17)

Foreign Borrowers (01/10/17)

Click here for Foreign Borrowers, Income, Assets, and Documentation

Correspondent Lending Library/Credit Guide - Non-Agency/Borrower/Non-occupant Co-borrower – Non-Agency (04/03/18)

Non-occupant Co-borrower – Non-Agency (04/03/18)

Table of Contents


• Overview

• Requirements

• Maximum Number of Borrowers

Overview

Non-occupant co-borrowers are credit applicants who:

• Do not occupy the subject property as a primary residence

• May or may not have an ownership interest in the subject property (as indicated on the title)

• Sign the Note and 1003, and

• Have joint liability for the note with the borrower(s)

Note: Non-Occupant borrowers are only permitted in arm’s length transactions.

Requirements

When using a non-occupant co-borrower, the following requirements must be met:


• Qualify Occupant Borrower at lower of maximum debt-to-income (DTI) ratio allowed based on credit score or 35/43%

• Combined ratios of all borrowers cannot exceed lower of maximum DTI allowed based on credit score or 28/36%

• Maximum LTV is more restrictive of 80% or LTV permitted in the product guide based on occupancy, transaction type and property type

See Max LTV/CLTV/HCLTV and Minimum Credit Score sections of the applicable product guide for DTI limits by credit score and transaction type.


Chase limits the number of credit applicants to four per loan transaction.

Correspondent Lending Library/Credit Guide - Non-Agency/Assets/Asset Types – Non-Agency (05/01/18)

FUTURE REVISION 06/26/18 [SHOW]

Asset Types – Non-Agency (05/01/18)

Table of Contents


• Requirements

• Bank Statement Requirements

• Third Party Asset Verification

• Reserves

• Source of Funds for Large Deposits

• Asset Types – Eligibility

• Annuities - Non Retirement

• Bonuses

• Borrowed Funds – Secured

• Borrowed Funds – Unsecured

• Bridge Loan Proceeds

• Business Assets

• Checking, Savings, or Share Accounts

• Cash on Hand

• Cash-out Proceeds from a Cash-out Refinance

• Cash Surrender Value of Life Insurance

• Certificates of Deposit (CD)

• College Accounts

• Conversion of Primary Residence – Rental Deposits

• Cryptocurrency

• Custodial Accounts for Children or Others

• Earnest-Money Deposit

• Employer Gifts and Grants

• Foreign Deposit

• G’Mach (Group Savings Non-profit Organization)

• Gambling

• Gift Funds

• Gift/Grants (donations from entities)

• Gift of Equity

• Housing Assistance Program

• Interested Third Party Contributions

• Lot Equity

• Marketable Securities – Stocks, Bonds, Mutual Funds, and Securities

• Non-marketable Securities – Stocks and Bonds

• Proceeds from Sale of Personal Assets

• Proceeds from sale of Real Estate

• Profit Sharing Plans

• Relocation Benefits

• Rental or Lease Credits

• Repayment of a Loan

• Restricted Securities

• Retirement Accounts

• Stock Options – if Exercisable

• Sweat Equity (Work Equity)

• 1031 (Tax Deferred) Exchanges

• Trust Account Funds

• U.S. Savings Bonds

Requirements

Chase requires assets for a variety of reasons, including funds needed to:

• Close for the purchase of a property to cover down payment and other closing costs

• Payoff other debt that is required as part of the loan approval

• Meet reserve requirements per Product Guide (refer to Non-Agency Amortizing Fixed, Non-AgencyAmortizing ARM, and Non-Agency Interest Only ARM Product Guides for details)

Not all funds are eligible for all purposes. The Asset Types – Eligibility table below identifies asset types, eligibility, and links to additional details for each asset type.

Notes:

• Assets used for income qualification cannot be used for closing costs or reserve requirements.

• Unverified funds are not acceptable for the down payment, closing costs, or reserves

Use the Asset Types table and guidelines below to identify asset types, eligibility, and links to additional details for each asset type.

Bank Statement Requirements

For Non-Agency loans, a minimum of the most recent consecutive two months bank statements must be included in the Loan File.

Statements must cover account activity for the most recent two months, or, when account information is reported on a quarterly basis, for the most recent quarter.

Notes:

• Bank statements may be accepted when there is a missing page if there is no evidence that the missing page contains transaction history

• Verification of Deposit is not allowed for Non-Agency transactions

Third Party Asset Verification

Chase allows the use of third-party electronic asset verification as an alternative to bank statements when obtained from a supplier that has been fully approved by Fannie Mae for participation in the DU validation service (see Asset Validation Reportsfor report suppliers).

Third-party asset verification must:

• Include all the information contained on standard bank statements

• Meet all the eligibility requirements for Fannie Mae standard electronic documentation requirements

• Be received by the Correspondent directly from the Fannie Mae-approved asset verification report supplier

Reserves

Reserves are based on all recurring housing expenses for the subject property and in some cases for other property owned by the borrower. Housing expenses, also known as principal, interest, taxes, insurance, and assessments (PITIA), include but are not limited to:

• Principal and Interest (as used in the qualifying payment amount)

• Insurances (hazard, flood, and/or mortgage)

• Real Estate Taxes

• Ground rent/leasehold

• Special Assessments

• Homeowners’ association fees

• Monthly co-op fees

• Any home equity loan or HELOC payment, if applicable

Reserve requirements may vary depending on:

• Product

• Type of transaction

• Loan amount

• Multiple financed properties

• Conversion of a primary residence

When reserves are required for other properties owned in addition to the subject property, the calculation of reserves is based on the specific housing expense associated with each of the individual properties (as applicable).

Note: Reserves required for each property must be separately calculated and verified

Source of Funds for Large Deposits

Refer to Assets – Non-Agency > Source of Funds for Large Deposit

Asset Types – Eligibility

The Asset Types table below identifies asset types and eligibility.

Asset Type Funds to Close for Purchase

Funds to Close for Debt Payoff

Reserves Requirement

Compensating Factor

Not Eligible

Annuities – Non-Retirement

X X X X

Bonuses X X X

Borrowed Funds – Secured

X X

Borrowed-Funds – Unsecured

X

Bridge Loan Proceeds X X

Business Assets X X X

Checking, Savings, or Share Accounts

X X X X

Cash on Hand X

Cash Out Proceeds from a Refinance

X X

Cash Surrender Value of Life Insurance

X X X X

Certificates of Deposit X X X X

College Accounts X X

Conversion of Primary Residence – Rental Deposit

X

Cryptocurrency (when comply with requirements below)

X X X X

Custodial Accounts for Children or Others

X

Earnest Money Deposit

X

Employer Gifts and Grants *

X

Foreign Deposit X X X X

G’Mach X

Gambling (not including internet gambling)

X X X X

Gift Funds X

Gifts/Grants (donations from entities

X

Gift of Equity X

Interested Third Party Contribution

X

Housing Assistance Program

X

Lot Equity X

Marketable Securities – Stocks, Bonds, Mutual Funds, and Securities

X X X X

Non-marketable Securities

X

Proceeds from Sale of Personal Assets

X X X X

Proceeds from Sale of Real Estate

X X X X

Profit Sharing Plan * X

Relocation Benefits X

Rental or Lease Credit X

Repayment of a Loan X X X X

Restricted Securities *

X

Retirement Accounts *

X X X X

Stock Options - if Exercisable

X X

Sweat (Work) Equity X

Tax Deferred/1031 Exchanges

X

Trust Account Funds X X X X

U.S. Savings Bonds X X X X

* See detail below for eligibility

Annuities - Non Retirement

• Chase counts annuities at a lower percentage because of access restrictions and potential tax ramifications.

• Cash value of non-retirement annuities is an eligible source for funds needed to close or for reserve requirements at 70% of stated value, net of any loans.

• If funds are needed for closing, evidence of liquidation is required.

For additional information and requirements on retirement-based annuity accounts, see Retirement Accounts in this topic.

Bonuses

Funds received by a mortgage loan customer as a sign-on bonus or other one-time payout can be used as funds to close and down payment.

Borrowed Funds - Secured

The following is required to use borrowed funds as a source of closing funds:

• Loan or line of credit must be secured by an asset the borrower already owns, for example

◦ Certificate of Deposit (CD)

◦ Marketable securities

◦ Life insurance policies

◦ Retirement accounts

◦ Other real estate owned

• Obtain a copy of the Note or line agreement to verify the terms of repayment and secured nature of the loan or line

• Verify that the party providing the secured loan is not a party to the sale

• Verify that the funds have been transferred to the borrower

• Use the following table to determine the value of the remaining asset:

FOR borrowed fund secured by a… THEN reduce the value of the remaining asset by the amount of the secured…

loan, outstanding loan balance.

line of credit, line’s total limit.

Borrowed funds cannot be used to calculate reserve requirements.

For requirements on how to treat this asset type from a debt/liability perspective, see Debt/Liabilities > Debt Analysis Guidelines > Asset Secured Loans and Lines of Credit topic in this guide.

Borrowed Funds - Unsecured

The following are not eligible sources for funds needed to close or for reserve requirements:

• Unsecured loans

• Unsecured credit lines

• Advances against overdraft protection

• Advances against credit cards or lines

Note: Bonus income structured as a forgivable loan is not considered unsecured for purposes of asset verification and is an acceptable source of borrowed funds (refer to Other Income – Non-Agency for treatment of income).

Bridge Loan Proceeds

Bridge loans secured by other real estate owned by the borrower will be acceptable in meeting required closing-fund requirements. Chase requires:

• Copy of the bridge loan Note or a commitment letter from the bridge loan lender that reflects all of:

◦ Amount of bridge loan (amount cannot exceed the equity in the bridge loan property)

◦ Term, maturity date, and renewal provisions,

◦ Required payments on the bridge loan,

◦ Description of the bridge loan security (property address)

◦ Bridge loan cannot be cross-collateralized against the new property

• Documentation of the borrower's ability to successfully carry the payments for the new home, the current home, the bridge loan, and other obligations

• Documentation of receipt of the funds

Note: The bridge loan must be recorded on the bridge-loan security and the security instrument must be provided whether recorded or not. If not recorded, at minimum, the bridge loan must be in recordable form.

If Bridge Loan proceeds are reported as assets, a corresponding liability must be included in the debt-to-income ratio. See Debt Analysis Guidelines – Non-Agency for additional information.

Business Assets

Although business assets are generally not an eligible source of funds because these funds are typically needed to meet current overhead and future capital requirements, Chase will consider the use of business assets for down payment, closing costs, and reserves when all of the following requirements are met:

Subject Requirement

Ownership The amount of business assets that can be used corresponds to the customer’s percentage of ownership in the business. For example, a customer who owns 75% of a business is limited to use of 75% of the business assets.

Customer must:• Meet all standard requirements for self-employed income (see General Income Verification

Requirements – Non-Agency and Employment Income – Self-Employed Sources – Non-Agency for details)

• Provide verification of the percent ownership of the business from which the assets are derived

• Be an owner on the account and have authority to withdraw fund from the account, as reflected on the business account statement or on documentation provided by the financial institution at which the funds are held

Note: This evidence is required even when the funds have already been withdrawn from the business account.

Reserves Borrower must demonstrate the business account includes a minimum of six months reserves for net operating expenses:• Calculate the annualized net operating expenses for the business (total deductions and total

expenses reflected on business tax returns) divided by 12 months

Note: Net operating expenses should not include depreciation and depletion expenses.

Refer to Employment Income – Self Employed – Non-Agency for additional information on how to calculate.

Deductions and expenses can be identified on the following forms:

Form Line Field

Form 1120 Line 27 Total deductions

Form 1120S Line 20 Total deductions

Form 1065 Line 21 Total deductions

Schedule C Line 28 Total expenses

• Verify expenses are not increasing on the P&L (if provided; refer to P&L and Balance Sheet requirements). If expenses are increasing:

◦ Use the increased expenses to calculate the net operating expense reserve requirement

◦ Confirm the stability of the business based on the new information

• From business funds, calculate six months reserves equal to the net operating expenses

• Determine the borrower's portion of the business assets based on the percent of ownership

Example:

Borrower is 75% owner of a company. 2014 total expenses equal $40,000. 2015 total expenses were $50,000. Borrower supplied P&L and balance sheet through 3/31 with total of $10,500 operating expenses:

Step Action

1 Determine net operating expenses for the business:• 2015: $50,000 total expenses - $4,000 depreciation = $46,000

• 2014: $40,000 total expenses - $4,000 depreciation = $36,000

Result: Expenses are increasing from 2014 to 2015. Increased expenses from 2015 are used to determine net operating expenses. $46,000 / 12 = $3833.33 (net operating expenses per month).

2 Review P&L expenses (if applicable) to determine if expenses are increasing:• $10,500 / three months (P&L period ending 3/31) = $3,500 per month

Expenses are decreasing as of YTD $3,500 compared to annualized expenses of $3833.33. The amount of $3833.33 is used.

3 Subtract six months net operating expense reserves from eligible most recent business asset account:• $140,000 - $23,000 ($3833.33 x 6 = reserves) = $117,000 (eligible

business assets)

4 Reduce eligible business assets by the percentage of ownership:• $117,000 x .75 = $87,750

Result: $87,750 is the net eligible business asset which can be considered in qualifying.

Analysis The impact of withdrawal must be considered in the underwriting analysis of the borrower's self-employed income:• Underwriter must document and include in the loan file a cash flow analysis for the borrower's

business using the individual and/or business tax returns, as applicable

◦ A minimum of two most recent months of business asset statements is required. Underwriter can request additional business asset statements (or a current balance sheet) to analyze cash flow needs and trends based on risk profile of transaction

Note: Cash flow analysis includes but is not limited to the evaluation of income using tax returns and bank statements to assess stability and overall viability of the business to meet obligations and support cash can be withdrawn without negatively impacting the business.

• Required analysis must determine that withdrawal of funds for down payment and source of funds to close or reserves will not have a detrimental effect on the business

◦ Loan file must contain the 1084 (or equivalent) and the Underwriter's written Comparative Income Analysis and conclusions

Checking, Savings, or Share Accounts

• Cash on deposit in checking, savings or share account (credit unions) is an eligible source of funds.

• Deposits must be in U.S. currency and held in institutions located in the U.S.

Cash on Hand

Cash on hand is not an acceptable source of funds.

Cash-out Proceeds from a Cash-out Refinance

Cash-out proceeds from a cash-out refinance are an eligible source for funds needed to close, provided the funds are verified with a Closing Disclosure (CD) or equivalent settlement statement.

Cash Surrender Value of Life Insurance

Cash Surrender Value of Life Insurance (CSVLI) is an eligible source of funds.

Verification of the cash value of the life insurance must:

• Be a computer-generated or typed statement from the insurance company

• Identify the life insurance company

• Identify the policy owner(s)

• Show the period covered and ending cash value

• Show any outstanding loans

• Reflect the borrower as the owner of the policy and not the beneficiary

Receipt of Funds

IF assets are needed for… THEN…

down payment or closing costs, document the borrower’s receipt of the funds from the insurance company by obtaining either a copy of:• check from the insurer, or

• payout statement issued by the insurer

reserves, proof of receipt of the funds is not required

Additional Obligations

The Underwriter must assess repayment or additional obligation considerations to determine the impact on borrower qualification or reserves.

IF… THEN…

penalties for failure to repay the loan are limited to the surrender of the policy,

payments on a loan secured by the cash value of a borrower’s life insurance policy do not have to be considered in the total debt-to-income ratio

additional obligations are indicated, the obligation amount must be:• factored into the total debt-to-income ratio, or

• subtracted from the borrower’s financial reserves

Certificates of Deposit (CD)

Certificates of deposit must be in U.S. currency and held in institutions located in the U.S.

Type Guidelines

Funds to Close • 100% of the value is eligible, and

• Borrower must provide evidence of liquidation

Assets for Reserves • 100% of the value is eligible, and

• Liquidation is not required

College Accounts

College accounts, such as 529c, are an eligible source of funds for down payment and closing costs provided the Account Owner is a borrower on the mortgage loan.

Conversion of Primary Residence – Rental Deposits

When a primary residence is being converted to an investment property, funds being held by a borrower as a security deposit from the tenants cannot be used as a source of closing funds or reserves for the loan transaction.

Refer to Conversion of Primary Residence – Non-Agency for complete requirements.

Cryptocurrency

Cryptocurrencies (such as Bitcoin) are decentralized digital currencies that work without a central bank or single administrator. Chase does not allow cryptocurrency as an eligible asset; however, proceeds from the liquidation of cryptocurrency can be accepted for down payment, closing costs, or reserves when the following requirements are met:

• Confirm cryptocurrency purchases were made using eligible funds,

• Document trail of the cryptocurrency converted into U.S. dollars and transferred to the customer’s bank account, and

• Apply existing Large Deposit policies.

Provide statements that show:

• Original purchase of the cryptocurrency (dollar value)

• Sale of the cryptocurrency

• How long the investment was held, and

• Value of the cryptocurrency that was deposited into the borrower’s account

Custodial Accounts for Children or Others

Custodial accounts established for children or other individuals are not an eligible sources of funds.

Note: A custodial account set up for a borrower who was a minor at the time the account was established is eligible for closing costs or reserves provided the borrower has reached the legal age, has full unrestricted access to the funds, and can provide evidence of same from the financial institution holding the funds.

Earnest-Money Deposit

The deposit on the sales contract is an acceptable source for down payment and closing costs.

• When included as part of the borrower’s down payment, it must come from an eligible source of funds (asset types)

• The borrower is required to meet the minimum contribution requirements

Employer Gifts and Grants

Employer gifts and grants are eligible to be used as funds to close when approved by Chase.

Note: Employer gifts and grants must be approved by Chase, even when Correspondent has Delegated Authority. The Customer Support Group will facilitate the review. When using an Employer gift or grant, forward the following to [email protected]:

• Registration Confirmation or Chase loan number

• Program parameters

• Sample Mortgage/Note

Foreign Deposit

Foreign Deposits are deposit accounts in either of these:

• Deposit institutions located outside of the U.S.

• Non-U.S. denominated currencies in a deposit institution located in the U.S.

These deposits can be subject to exchange-rate risk and country risk.

Refer to Foreign Borrowers, Income, Assets, and Documentation Considerations topic for additional requirements.

G’Mach (Group Savings Non-profit Organization)

Funds in a G’Mach account, pooled savings, or community savings account are not an eligible source of funds.

Gambling

Assets derived from federally legalized gambling sources are acceptable if properly sourced and documented (for example, on form W-2G).

Note: Assets derived from internet gambling are not an eligible source of funds.

Gift Funds

Gifts are an eligible source of down payment and closing costs for Purchase and No Cash-out Refinance transactions on a primary residence or second home when the following guidelines are met:

LTV or CLTV Primary Single Family

Primary 2- to 4-Unit Second Home

80% or less Minimum borrower contribution from borrower’s own funds is not required. All funds needed to complete the transaction can come from a gift .

Greater than 80% Borrower must make 5% minimum borrower contribution from his or her own funds . After the minimum borrower contribution has been met, gifts can be used to supplement the down payment and closing costs .

For Interest Only transactions, gift funds are acceptable for Primary Residence transactions only.

Excludes reserves; reserves must come from borrowers own funds and cannot be satisfied by gifts

If the borrower receives a gift from a relative or domestic partner who has lived with the borrower for the last 12 months, the gift can be pooled with the borrower’s own funds and used to satisfy the 5% minimum borrower contribution requirement when both individuals will use the subject property as their primary residence.

--------------------------

• Gift donor must be a relative. For purposes of this requirement, a relative is any person related by blood, legal proceedings, marriage, or adoption and also includes a fiancé, fiancée or domestic partner

1

2

3

2

1

2

3

• Gift donor cannot be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction

Note: Gift Funds are not permitted for use on:

• Cash-out Refinance transactions

• Investment properties

Documentation Requirements

Borrower provides an executed gift letter from the donor that specifies all of the following:

• Name and address of receiving party.

• Name, address, and phone number of the donor party,

• Donor's relationship to borrower or receiving party

• Dollar amount of the gift

• Statement from donor that no repayment is expected

• Property being financed

• Date the funds were (or will be) transferred

When a gift from a relative or domestic partner is pooled with the borrower’s funds to make up the required minimum cash down payment, the following items must also be included:

• Written certification from the borrower and the gift donor stating they have lived together for the past 12 months and will continue to do so in the new residence

• Documents (examples include but not limited to copy of a driver’s license, utility bill, or bank statement) that demonstrate a history of borrower and donor shared residency (donor address the same as borrower’s address)

Availability of Funds and Transfer of Gift Funds

Borrower must provide evidence of the transfer of gift funds from the donor’s account to the borrower, such as one of these:

• Copy of donor's check and borrower's deposit slip

• Copy of donor's withdrawal slip and borrower's deposit slip

• Copy of donor's check to closing agent

• Settlement statement showing receipt of donor's check

Note: When the funds transfer did not occur prior to settlement, document that donor gave the closing agent the gift funds in the form of a certified check, a cashier’s check, or wire transfer.

Gifts/Grants (Donations from Entities)

Donated gift or grant funds from acceptable entities/agencies can be used to fund all or part of the down payment or closing costs provided:

• Gift or grant is from an organization that has an established gift or grant program

◦ Acceptable entities include churches, municipalities, nonprofit organizations (excluding credit unions), a regional Federal Home Loan Bank under one of its affordable housing programs, and public agencies

• Entity is not an interested party to the transaction

• Funds were not obtained from an interested party either directly or through a third party

See Product Guides for minimum borrower contribution requirements.

Eligibility

Available for 1- to 4-unit primary residence

Note: Second homes and investment properties are ineligible.


The donated gift or grant must be documented with either a copy of letter awarding the gift or grant to the borrower, or legal agreement that specifies the terms and conditions of the gift or grant. The document must:

• Clearly identify the donor’s mailing address

• State that repayment of the gift or grant is not expected, and

• Indicate how the funds will be transferred to the borrower, lender, or closing agent

The transfer of gifts or grants must be documented with one of the following:

• Copy of the donor’s canceled check

• Copy of the settlement statement showing receipt of the check, or

• Similar evidence evidencing that the funds were received by the Borrower (or by the Seller on the Borrower’s behalf)

Gift of Equity

Gifts of equity are an eligible source of down payment and closing costs for a primary residence or second home provided all of these are true:

• Gift from relative, domestic partner, fiancé, or fiancée must be evidenced by a letter that is signed by the donor. The letter must include:

◦ Specific property being purchased

◦ Donor’s statement that no repayment is expected

◦ Donor’s name, address, phone number, and relationship to borrower

• Executed application (FNMA 1003/FHLMC 65) must reflect the following donor and gift information:

◦ Source of down payment and Assets sections reflect gift is a source

◦ Donor’s name, address, phone number, relationship, and amount

• Gift of equity must appear on the Closing Disclosure (CD)

• Gift of equity must show transfer of ownership to the borrower

• Verification that borrower received gift of equity at closing

Product and program requirements and restrictions may exist; see specific product guidelines for minimum borrower contribution.

Housing Assistance Program

Refer to Housing Assistance Programs topic for detailed requirements

Interested Third Party Contribution

Interested third party contributions may only be used to cover actual closing costs and pre-paid items. Refer to Appraisal and Property Requirements > Interested Third Party Contributions for additional information.

Lot Equity

The value of the lot/land equity may be credited toward the borrower's minimum down payment when:

• Borrower holds title to the lot on which a property is being constructed (and financed with a construction-to-permanent mortgage), and

• Borrower's equity contribution will be the difference between any outstanding liens against the land and market value of the land.

• Land value is determined when the borrower acquired the land:

IF borrower acquired the land... THEN value of the land will be...

◦ more than 12 months preceding the loan application, or

◦ at any time as a gift, inheritance, or other non-purchase transaction

its current appraised value.

◦ 12 or fewer months preceding the date of the loan application

the lesser of its sales price or its current appraised value

The borrower's cash investment must be documented with a certified copy of the Closing Disclosure (CD) (or similar settlement statement), a copy of a warranty deed that shows there are no outstanding liens against the property, or a copy of a release of any prior lien(s). If the borrower acquired the land as a gift, inheritance, or other non-purchase transaction 12 or fewer months preceding the date of the loan application, obtain documentation to verify acquisition and transfer of the ownership of the land for the loan file.

NOTE: Specific product, program, or Agency minimum investment standards may differ. See Product Guides for eligibility.

Marketable Securities– Stocks, Bonds, Mutual Funds, and Securities

Marketable securities, including stocks, bonds, mutual funds, and securities including United States government securities (and retirement accounts in the form of stocks, bonds, mutual funds, and securities) are an eligible source of funds. Marketable securities must be traded on a major market (e.g., NYSE, AMEX, and NASDAQ) where market activity and valuation can be readily determined. Marketable securities are subject to large swings in value.

Marketable securities are subject to large swings in value.

If a borrower is using marketable securities as the source of funds for closing or to offset 30-day account balances, the terms of the account must be verified, including balance, account number, etc.

Funds to Close or to Offset a 30-Day Account Balance

• 100% of the value that can be liquidated is eligible

• Evidence of liquidation is required as follows:

IF the combined value of the marketable securities is …

THEN…

at least 20% more than the amount needed from these assets for down payment and closing costs or to offset 30-day account balance,

no documentation of the customer’s actual receipt of funds realized from the sale or liquidation is required.

not at least 20% more than the amount of funds needed from these assets for the down payment and closing costs or to offset 30-day account balance,

evidence of the customer’s actual receipt of funds realized from the sale or liquidation must be documented and included in the Loan File delivered to Chase.

Asset for Reserves

• Use 100% of the value of the assets when calculating reserves

• Liquidation of funds not required

• When used for reserves, full line amount of margin accounts must be deducted from the asset, even when the margin account balance is $0

• Additional reserve requirements apply for Second Home and Investment Property transactions, Conversion of Primary, and to offset Rental Management history

Non-marketable Securities - Stocks and Bonds

• Non-marketable securities (stocks and bonds) are not eligible as cash reserves. They are not traded on a major stock exchange, and their valuation and market value cannot readily be obtained.

Proceeds from Sale of Personal Assets

Proceeds from the sale of personal assets are an acceptable source of funds for the down payment, closing costs, and reserves when the individual purchasing the asset is not a party to the property sale or mortgage financing transaction.

The following documentation must be provided:

• Proof of the borrower’s ownership of the asset

• Value of the asset, as determined by an independent and reputable source

• Transfer of ownership of the asset, as documented by a bill of sale

• Borrower’s receipt of the sale proceeds from documents such as deposit slips, bank statements, or copies of the purchaser’s canceled check

Note: At the discretion of the Underwriter, alternate documentation may be considered; however, at a minimum, a bill of sale and evidence of receipt of the sale proceeds is required.

Proceeds from sale of Real Estate

Proceeds from the sale of real estate are an eligible source of funds. To use proceeds from the sale of another currently owned real-estate property for closing-fund requirements and cash reserve, both of these must be true:

• Closing of the other real estate transaction must take place prior to or simultaneously with the subject closing

• Fully-executed Closing Disclosure (CD) or equivalent settlement statement verifies the net proceeds to borrower

Profit Sharing Plans

• Employer profit sharing plans are not eligible as reserves due to potentially severe and complex access restrictions. When using as a compensating factor, these funds must be readily accessible.

Relocation Benefits

All of the following are required to use employer-paid relocation benefits for closing funds:

• Copy of the executed buy-out agreement to purchase the existing residence must be provided.

• Any closing costs and points that may be included in the relocation package can be used; however, borrower must provide funds for prepaid items unless specifically stated in the relocation package

• Copy of fully-executed settlement statement must be provided at closing as evidence of sale and release from liability

If the conditions above are met, eliminate PITIA on the existing residence from the debt-to-income ratio analysis.

See Corporate Relocation for additional requirements.

Rental or Lease Credits

To use credits granted to a borrower from a rent paid toward an option to buy lease arrangement as closing funds, Chase requires all of these:

• Lease agreement must state how credit will accrue

• Borrower must provide both:

◦ Copies of canceled checks or money orders to evidence a history for the most recent 12 months

◦ Copy of rental or purchase agreement evidencing a minimum original term of 12 months that clearly states the monthly rental amount and specifies the terms of the lease

• Appraiser must provide either:

◦ Statement of fair-market rent, or

◦ FNMA 1007 single-family comparable rent schedule for the property

Notes:

• Only apply the portion of the rental payment that exceeds fair-market rent for the most recent 12 months to down payment or closing costs

• Rental or lease credits are not eligible as reserves

Repayment of a Loan

Lump sum repayment of a loan is eligible as an asset provided lump sum repayment can be evidenced as outlined below:

• Paper trail that borrower provided funds to party repaying the loan, and

• Proof of recent lump-sum repayment

Restricted Securities

Restricted securities are not an eligible source of funds due to the fact that they cannot be readily traded. Refer to Rule 144 and Securities and Exchange Commission (SEC) regulations for additional details.

Note: Refer to applicable asset guidelines for securities that are vested (unrestricted).

Retirement Accounts

Retirement accounts are eligible to be included in the reserves or funds to close as indicated below. To use the vested amount of an IRS-qualified employer retirement account as reserves, documentation of the terms of the retirement plan showing that borrower is permitted to make withdrawals, regardless of current employment status, is required.

Note: Refer to Marketable Securities in this topic for requirements when using retirement funds in the form of stocks, bonds, mutual funds, and securities, to pay off debt or offset 30-day charge account balances.

Eligible Accounts

These retirement accounts are eligible for use as closing funds or reserves:

• Annuities

• IRAs

• Keoghs

• 401(k) accounts

• 403(b) accounts

• 457 accounts

Retirement Accounts as… Requirements

Source of funds to close Eligible retirement accounts can be used for closing funds under these guidelines:• Use 100% of the value of the assets

• Less any loans

• With proof of distribution (refer to Marketable Securities – Stocks, Bonds, Mutual Funds, and Securities in this topic for scenario when proof of liquidation is not required)

Reserves Eligible retirement accounts can be used as reserves under these guidelines:• Use 100% of the value of the assets when calculating reserves

• Less any loans

• Additional reserve requirements apply for Second Home and Investment Property transactions, Conversion of Primary, and to offset Rental Management history

Note: Retirement funds cannot be used to meet reserve requirements if withdrawals are only allowed upon the borrower’s:• Employment termination,

• Retirement (unless borrower is of retirement age), or

• Death

When using the vested amount of an IRS-qualified employer retirement account as reserves, evidence of the terms of the retirement plan (such as a plan document) showing the Borrower is allowed to make withdrawals regardless of current employment status is required.• For 401(k), 403(b), and IRA accounts, information found on the most

recent account statement(s) obtained from the borrower or the financial institution can serve as confirmation of the accessibility of the funds. The statement(s) must not suggest that there are restrictions on the accessibility of the funds, based on the account type or investment vehicle.

Stock Options - if Exercisable

Stock Options as Closing Funds

Stock Options are subject to market risk, and may:

• Trigger significant tax ramifications

• Have an execution cost

• Be restricted

To use stock options, including unrestricted stock units, as closing funds, options must be exercised and only the net proceeds used.

Evidence and documentation of liquidation and transfer of funds to the borrower’s account is required.

Stock Options as Reserves

Stock Options are not eligible as reserves.

Sweat Equity (Work Equity)

Sweat equity is not an eligible source of funds.

1031 (Tax Deferred) Exchanges

Tax Deferred Exchanges are an eligible source of funds for the purchase of an investment property (primary residence and second homes are not eligible).

A 1031 exchange is a tax deferred (not tax neutral) transaction that allows a borrower to exchange like properties through the use of a qualified intermediary and defer any tax from gains in the transaction. Borrowers can use funds from this type of transaction towards the purchase of their new property.

A 1031 exchange is acceptable when the following requirements are met:

• A qualified intermediary who enters into a written agreement with the borrower must facilitate the transaction. The qualified intermediary cannot be a relative or agent of the exchanging party

• For Delegated transactions, Chase’s prior approval is not required. If not submitted to Chase for approval, the Delegated Correspondent rep and warrants to Chase that loan meets Agency requirements. A copy of the executed Exchange Agreementmust be included in the closed loan package delivered to Chase.

• For Non-Delegated transactions, Chase must approve the 1031 exchange and the Correspondent should include the approval email in the file submitted to Chase. Submit the following documents to Chase Customer Support at [email protected]:

◦ 1003 with borrower name(s), Social Security number, assets, and loan amount

◦ Chase loan number

◦ Executed Exchange Agreement. Replacement property can be identified within this document or in a separate document known as Replacement Property Identification Notice

◦ Preliminary Title Commitment or Escrow Instructions

◦ Closing Disclosure (CD) from the sale of the relinquished property

◦ Transaction must be fully compliant with all other requirements of the Agencies and the IRS Tax Code

Notes:

• Chase approval is not required for Delegated transactions.

• Reverse 1031 exchanges (when the replacement property is already purchased before the relinquished (old) property is sold) are not allowed.

Trust Account Funds

Trust Account Funds are an eligible source of funds when all of these are true:

• Trust manager or trustee provides written documentation confirming value of the trust account

• Effect (if any) that the withdrawal of funds will have on trust income used in qualifying is documented

• Borrower has immediate access to trust account funds as documented by any one of the following:

◦ Written confirmation from the trust manager or trustee

◦ Evidence of transfer of the funds and receipt by the borrower

◦ Trust is structured where the borrower is the Grantor, Trustee, and Beneficiary of the trust

U.S. Savings Bonds

U.S. Savings Bonds are an eligible source of funds. To use U.S. Savings Bonds for closing funds and cash reserves:

• Borrower must provide a list of amounts, serial numbers, and maturity dates of the bonds

• Base the value of the bonds on their purchase price unless borrower can document a higher redemption value

Do not make photocopies of the bonds or deliver imaged bonds to Chase.

Correspondent Lending Library/Credit Guide - Non-Agency/Assets/Source of Funds for Large Deposits (04/11/17)

Source of Funds for Large Deposits (04/11/17)

This topic includes the following sections:

• Overview

• Definition

• Deposit from Multiple Sources

• Funds from Borrowed or Ineligible Source

• Determination Requirements

• Additional Documentation Requirements

• Accounts Opened within 90 Days

• Business Accounts

• Anti-Money Laundering (AML) and Know Your Customer (KYC) Requirements

Overview

The existence of large deposits on account statements may be indicative of undisclosed debts recently opened by the borrower and/or unusual or potentially suspicious activity that should be reviewed pursuant to Anti-Money Laundering guidelines.

Definition

"Large" is defined as any single deposit that exceeds 50% of the total monthly qualifying income for the loan. See Deposit from Multiple Sources in this topic for additional guidance.

Deposit from Multiple Sources

When one line item on the account statement is representative of deposits from multiple sources, obtain documentation to clearly indicate the breakdown of the funds. Each individual source must be measured against the 50% threshold.

Example: A single deposit of $4,000 is shown on the account statement.

The 50% threshold for this loan request is $3,000.

During the process of sourcing the $4,000 deposit, the underwriter discovers the $4,000 is a combination of two sources:

• $2,000 insurance claim payment, and

• $2,000 cash

If the underwriter adequately documents that there are two separate $2,000 components of the $4,000 deposit, neither of the two $2,000 deposits is defined as “large” and therefore does not require source documentation.

Funds from Borrowed or Ineligible Source

Underwriters have authority to require at their discretion the source of deposit for any amount (including those less than or equal to 50% of total qualifying income) as needed if there is any indication funds may be from a borrowed or ineligible source.

Determination Requirements

Use the following table to determine whether large deposits discovered through the course of reviewing statements for the borrower's personal accounts must be documented and sourced:

IF large deposit is…

and the loan purpose is…

THEN…

needed for closing funds, reserves, or to pay off or pay down debts prior to closing,

any, all large deposits reflected on the two most recent months of bank statements used for verification of assets must be fully documented and sourced regardless of AUS decision or type of account (see Additional Documentation Information in this topic).

Note: Deposits identified as sign-on bonuses or similar one-time payout bonuses (such as spot awards) are not eligible for use as a source of income.

not needed for closing funds, reserves, or to pay off or pay down debts prior to closing,

No Cash Out Refinance,

documentation and sourcing is not required.

Cash Out Refinance, Use the table below to determine whether documentation and sourcing is required:

IF the large deposit identified is… THEN documentation and sourcing is…

≤ $25,000 not required.

> $25,000 and• Transfer between the borrower’s

Chase accounts, or

• Deposit or transfer to the borrower’s Chase account, or

• Transfer from the borrower’s Chase account,

not required.

> $25,000 and was not a transfer from, to, or between the borrower’s Chase account,

required (see Additional Documentation Requirements in this topic).

Alternately, the borrower can provide a written explanation (such as email or letter of explanation) or processor certification, including:• Source of the funds, and

• Reason why the funds cannot be documented

Note: Amount of unsourced large deposit is not required to be subtracted from the verified funds used to qualify when underwriting the loan.

not needed for closing funds, reserves, or to pay off or pay down debts prior to closing,

Purchase, Use the table below to determine whether documentation and sourcing is required:

IF the large deposit identified is… THEN documentation and sourcing is…

≤ $25,000 not required.

> $25,000 and• Transfer between the borrower’s

Chase accounts, or

• Deposit or transfer to the borrower’s Chase account, or

• Transfer from the borrower’s Chase account,

not required.

> $25,000 and was not a transfer from, to, or between the borrower’s Chase account,

required (see Additional Documentation Requirements in this topic).

Alternately, the borrower can provide a written explanation (such as email or letter of explanation) or processor certification, including:• Source of the funds, and

• Reason why the funds cannot be documented

Note: Unsourced large deposits cannot be used in qualifying and the amount of undocumented large deposits must be subtracted from the verified funds used to qualify and removed from AUS when underwriting the loan.

Additional Documentation Requirements

Refer to the following additional information when a large deposit must be documented and sourced as defined in Determination Requirements in this topic.

Fully documented and sourced includes:

• Written explanation from the borrower (such as letter of explanation or email) and documentation verifying the source of the funds, or

• Verbal sourcing and documenting the file by the Correspondent with a processor certification

Refer to the table below for additional information regarding readily identifiable deposits:

IF the source of a large deposit is… THEN…

readily identifiable on the account statement, such as a direct deposit from an employer (payroll), Social Security Administration, or IRS or state income tax refund and the source is printed on the statement,

Note: Transfers between bank accounts must be fully documented and sourced even though they may be readily identifiable (refer to Determination Requirements in the Online Guide in this topic for applicability).

no additional documentation or written explanation is required.

Note: If the source of the deposit is printed on the statement, but the Underwriter still has questions regarding whether the funds were borrowed, the Underwriter should obtain additional documentation.

readily identifiable as a rollover from an IRA or qualified retirement plan per IRS guidelines into another IRA or qualified plan,

not readily identifiable on the account statement, fully document and source the funds as defined in the Determination Requirements table.

Accounts Opened within 90 Days

If the available documentation indicates an account was opened within 90 days of the loan application, Correspondent must provide the source of initial funds used to open the account (as well as any other large deposits as outlined in this topic).

Business Accounts

The 50% threshold does not apply to deposits made into the borrower's business accounts.

Anti-Money Laundering (AML) and Know Your Customer (KYC) Requirements

Correspondents remain responsible for adhering to standard Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements when there are questionable deposits. See Compliance – Related Topics - Anti-Money Laundering Program (AML) and Suspicious Activity Report Filing (SAR).

Correspondent Lending Library/Credit Guide - Non-Agency/Credit History - Non-Agency/Credit Requirements and Analysis - Non-Agency (04/03/18)

Credit Requirements and Analysis - Non-Agency (04/03/18)

Table of Contents


• Overview

• Credit History Basic Requirements

• Minimum Trade Line Requirements

• Credit Bureau Analysis for All Loans

• Credit Bureau Analysis for Non-Agency Loans

• Other Credit Review Considerations

Overview

Reported credit bureau information is the primary measurement of the borrower's credit history; underwriter must analyze it carefully to determine if the borrower demonstrates reliability and responsibility in the repayment of obligations.

Credit History Basic Requirements

Each borrower individually, and all borrowers collectively, should have acceptable credit profiles. A satisfactory repayment history is not considered a compensating factor that offsets weaknesses in other areas of the borrower’s credit profile.

The borrower's credit history should reflect the following:

• A history of meeting payments according to terms and conditions of the credit obligation

• Frequency, recency, and severity of any delinquent payments

• Sufficient history to establish a favorable repayment pattern

• Minimum tradeline requirements, as outlined below

Note: Chase does not consider this a compensating factor that offsets weaknesses in other areas of the borrower's credit profile.

Minimum Trade Line Requirements

The borrower’s credit report should include a credit history that meets the following minimum trade line requirements.

Each borrower whose income or assets are used to qualify must meet the requirements for one of the options below:

Option Requirement

1 The credit file must have both of these for each customer:• Minimum three active trade lines with 12 months satisfactory history, on each

trade line, and

• Minimum 24 month credit file history

2 The credit file must have all of these for each customer:• Credit reporting history five years or longer

• Acceptable credit score, and

• History of four or more trade lines with a minimum 12 month review period

◦ At least one trade line was last active within the past 24 months, and

◦ All trade lines paid as agreed in the last 48 months

Note: This option does not require the trade lines to be active at time of review

The credit history of a co-borrower who does not meet the minimum trade line requirements can be accepted when:

1

• Co-borrower has no history of significant derogatory credit as defined in the Derogatory Credit – Non-Agency topic and confirmed by Underwriter

• Co-borrower’s income and assets (excluding those owned jointly with another borrower on the mortgage loan) are not used to qualify

Active is defined as last activity date less than or equal to 12 months from the current date.

NOTES:

• Loans for borrowers who do not meet the minimum trade line requirements must be underwritten by Chase (refer to Delegated Non-Agency Authority > Access to Chase Underwriting for additional information.

• All borrowers must have sufficient credit to generate a usable credit score, which must meet the minimum requirement published in the applicable product guide.

Credit Bureau Analysis for All Loans

For all loans, Chase requires review of the following aspects of the credit bureau report:

Item Requirement

Bankruptcy or Foreclosure • Determine whether the credit bureau report, application, or other documentation in the file discloses or reports bankruptcy or foreclosure.

• Refer to Derogatory Credit for additional guidance.

Credit Risk Score • The selected credit risk score must be accurate.

• See Credit Bureau Risk Scores for additional guidance.

Fraud Alert • The credit bureau report must contain evidence of a fraud alert program.

• An in-file credit report must supplement a credit report received from a Correspondent when the credit report does not include a Fraud Alert.

Identity Theft Red Flags • To combat fraud and identity theft, underwriter must recognize potential red flags during review of the credit bureau report and know what to do when a potential red flag exists.

• Red flags include, but are not limited to:

◦ Fraud or active duty alert

◦ Credit freeze

◦ Report of address discrepancy

◦ Recent and significant increase in the volume of inquiries

◦ Unusual number of recently established credit relationships

◦ Material change in the use of credit, especially with respect to recently established credit relationships

◦ Account a financial institution or creditor closed for cause or identified for abuse of account privileges

Note: Due to rising occurrences of identity theft and fraud, Chase does not allow waivers of loan conditions related to identification documentation.

Inquiries Determine whether inquiries reported on the credit bureau report require an explanation from the borrower and/or an investigation to discover if any new credit obligations resulted from the inquiries.

IF… THEN…

credit report or mortgage application does not reflect a corresponding tradeline*,

borrower must provide a letter of explanation for inquiries less than 120 days old.

inquiry has a corresponding trade line on the credit report or mortgage application,

a letter of explanation is not required.

credit resulted from the inquiry, verify it and include the obligation in the qualifying debt ratio calculation.

* When Correspondent determines inquiry is the result of the subject mortgage application, no letter of explanation is required.

Loan Modification When a Credit Report reflects a loan modification but does not address the terms (loan term, rate, or principal reduction amount) of the modification the terms of the modification must be provided on a copy of the loan modification agreement or a signed letter from the lender.

When the modification involves principal forgiveness or a principal reduction, review the modification to ensure it complies with all seasoning requirements.

Undisclosed Debt • Debts that are not disclosed by the borrower on the application must be explained by the borrower and reported on the approval document.

• Undisclosed debt may cause the debt ratio to exceed guidelines and could result in loan denial.

Unstated Derogatory/Delinquent Credit Bureau Amounts

If the credit bureau report does not state a balance for charge-offs, judgments, or collection accounts, obtain and document the balance.

Credit Bureau Analysis for Non-Agency Loans

Underwriter must carefully analyze the credit bureau report for the following information:

Item Requirement

Adverse Trends • Require and review a letter of explanation from the borrower to support the reason(s) behind any adverse trends. Consider and weigh the reasons provided by the borrower.

• Document any offsetting compensating factors to negative trends including, but not limited to:

◦ Delinquency

◦ Significant new liabilities

◦ Judgments

◦ Collections

See Derogatory Credit for additional guidance.

1

Borrower Profile To identify potential risk, carefully analyze the full borrower profile including, but not limited to:• The type (installment or revolving) and amount of outstanding credit

• Age of accounts

• Balance to account limit ratios

• Recent changes in the number of open accounts or overall amount of credit outstanding

• Recent inquires shown on credit report

• Payment history of all accounts

• Credit Risk Score Reason Factors

• Transaction characteristics

• Collateral aspects

Lines of Credit If the credit report reflects a revolving line or unsecured line and the type of trade line is not clear, additional research is required. If documentation indicates the line is:• HELOC, follow all HELOC requirements and include in DTI and CLTV calculations

• Not a HELOC, follow requirements for Credit Cards (Revolving Charge/Unsecured Lines of Credit) in the Debt Analysis Guidelines – Non-Agency topic

Payment History • Determine the borrower's willingness to repay. Review of payment history as well as other items on the credit bureau report for indications of the borrower's willingness to repay (collection accounts, charge-offs, judgments, liens, tax liens, bankruptcy, foreclosure, forgiveness of debt).

• If the borrower's credit history includes housing obligations, place more weight on how the borrower made housing payments as opposed to non-housing payments, but do not ignore any derogatory information in the credit history.

• Weigh any derogatory information against the rest of the credit history to decide whether it is significant. In making the determination, do not ignore any derogatory credit; however, give more weight to late housing payments and to derogatory information or late payments occurring within the past two (2) years. Generally, the more recent the adverse or derogatory credit information, the more likely it is significant. These are some aspects to consider:

◦ The number, timing and extent of the adverse or derogatory credit information

◦ The number, type and size of accounts with adverse or derogatory credit information

◦ Public record information, such as judgments and collection accounts

Score Less Than Minimum Required

Credit risk scores lower than product or program minimum requirements are not permitted.

Security Freeze (Frozen Credit) Many states have enacted legislation that allows consumers who are victims of identity theft to place a security freeze on their credit report accounts. A consumer can elect to place a security freeze on his credit report by notifying a consumer-reporting agency and requesting a security freeze on their credit record. If the consumer has requested a freeze, the bureaus cannot release the consumer's credit report or any information from it without the consumer's express consent.

Although Chase respects the consumer's right to place a security freeze on their credit information, a credit decision cannot be rendered without receipt of the consumer's credit information. Frozen credit information must be unblocked by the borrower for full disclosure to the underwriter.

Suppressed Credit Credit suppression occurs when either a credit repository or an individual creditor suppresses certain information on an individual’s credit report. Credit suppression can exist due to:• Unusual activity or requests submitted to the credit repository

• Request for items to be suppressed in conjunction with an active dispute or credit freeze

• Erroneous information reporting from a creditor

Credit reports must be free of suppressed information. Suppressed credit information must be resolved prior to underwriting the loan. If a full credit report is not available, the loan is ineligible.

Other Credit Review Considerations

Also Known As (AKA)

Request credit bureau reports when the applicant discloses, or the file otherwise notes AKAs (Also Known As). Review them appropriately according to the assigned credit risk score and review level.

Authorized User

• When a creditor allows an "Authorized User," they give permission to the obligor on the account to allow a spouse or other designated person to make charges to the account. Generally, the authorized user is not under contractual obligation to repay, unless the creditor or state law requires repayment under specific terms.

• When evaluating credit worthiness, underwriter must consider accounts that the borrower (either individually or jointly with another party) is obligated to pay by contractual arrangement with a creditor.

• Additionally, consider other accounts where the borrower is a permitted user or non-obligor on a spousal or ex-spousal account when evaluating the borrower(s)' creditworthiness under the specific circumstances outlined below.

• In some circumstances, a borrower may be an authorized user only on a revolving account. If the authorized user is not a spouse or former spouse, at the borrower's request, underwriter must consider the account in the evaluation, provided the borrower can provide evidence that he or she has been paying the debt.

IF the authorized borrower is a...

AND... AND... THEN...

• spouse, or

• former spouse

the Underwriter considers an account in the name of the borrower's spouse or former spouse when evaluating their loan,

the credit report or direct verification has verified the account,

• include the payment in the debt-to-income ratio

• consider the account in the minimum trade line requirementNote: Limited to one authorized user account

• consider the payment history in the loan analysis

non-spouse the Underwriter considers an account in the name of another party when evaluating their loan,

the borrower can evidence that they have been paying the debt for the preceding 12 months,

include the payment in the debt ratio

• spouse,

• former spouse, or

• non-spouse

the borrower indicates they are not responsible for the payment,

the credit report verifies that the borrower is an "authorized user" only,

• exclude the payment from the debt-to-income ratio. and

• do not consider the account in the minimum trade line requirement

• do not consider the payment history in the loan analysis.

Note: Obligation must be included in the debt-to-income (DTI) calculation.

Defendant in a Lawsuit

Borrowers involved as defendants in a lawsuit with pending litigation may not be eligible for extension of credit. To determine the borrower's eligibility, the borrower's attorney must provide a letter explaining the lawsuit with supporting documentation. Give careful consideration to these factors:

• Determine the impact of the lawsuit on the borrower's ability to repay the mortgage if it levies additional financial obligations against the borrower.

• Analyze supporting documentation to determine the extent of potential income or asset interruption.

• Determine whether an insurance policy or established escrow fund will cover the potential obligation.

• Determine whether the title company will take exception to the pending litigation and decline to insure our first lien position.

• When the amount of the potential obligation is minimal (less than $10,000), determine whether the borrower has sufficient assets to establish an escrow account for 1.5 times the amount of the proposed damages. The attorney representing the borrower in the litigation must hold the assets.

Title and Lien Position

Regardless of the level of review indicated, the borrower must pay in full and clear any item that may impact either of these:

• Title of the subject property

• Lien position of the MB extended first or second mortgage

Sufficient funds to pay any such amounts must be available to the borrower from cash, cash-like assets, or loan proceeds. Account for such funds in reserve calculations and requirements.

Treatment of Medical Information

Medical information can be in any form or medium (paper, electronic, spoken, etc.) and can be provided directly or indirectly. Never solicit information regarding the nature of illness or disability, course of treatment, or the future health expectations of the individual related to incursion of the debt. Any medical information, even if unsolicited, should not result in any less favorable treatment than any other credit information.

Correspondent Lending Library/Credit Guide - Non-Agency/Credit History - Non-Agency/Credit Bureau Report (09/29/15)

Credit Bureau Report (09/29/15)

Table of Contents


• Overview

• Credit Reporting Repositories

• Credit Bureau Report Requirements

• Traditional Credit Bureau Report Formats

• Required Information

• In-File Credit Reports

• Merged Credit Reports

• Residential Mortgage Credit Report (RMCR)

• Non-Traditional Credit Reports

• Fraud Detection Report

• Credit Bureau Report Requirements for Community Property States

• Credit Bureau Report Requirements for Foreign Credit Reports

Overview

To assess a borrower's credit history, Correspondent must obtain a credit report from a credit-reporting agency or by direct verification with a creditor. The credit report provides evidence of a borrower's payment history, as well as historical information about the borrower's use of credit.

Information on the credit bureau report is the primary measurement of the borrower's creditworthiness. Chase requires analysis of the borrower's current and past credit history through the review of a credit bureau report prepared by an independent credit-reporting agency or credit-reporting repository.

Credit Reporting Repositories

There are three major credit-reporting repositories:

• Equifax

• Experian

• TransUnion

Credit Bureau Report Requirements

Chase requires a credit report for each borrower on the loan application with an individual credit record. One of the three major credit-reporting repositories must provide the data for the credit report.

Traditional Credit Bureau Report Formats

Chase accepts the following traditional credit report formats, which vary based on the mortgage request:

• In-file Credit Reports

• Automated Merged Credit Reports

• Residential Mortgage Credit Report (RMCR)

The credit report must be an original report, with no erasures, white-outs, or alterations. An automated credit report or one that is transmitted by fax is considered to be an original report.

Required Information

Traditional credit bureau reports must include credit and public record information for each locality in which a borrower has resided for a minimum of the previous two years, and must include all discovered credit and legal information that the Fair Credit

Reporting Act does not consider obsolete. Separate credit repository inquiries are necessary when multiple borrowers have maintained credit individually.

Credit reports must reveal payment history indicating any 30-, 60-, or 90-day past-due payments. If any of the information on a report is conflicting, use the most recent "date reported" information.

The credit report must include, but is not limited to, this information:

• Borrower full name

• Borrower address

• Telephone number of the reporting agency

• Names, addresses, and telephone numbers of the repositories the agency used to provide information for the report

• List of, at minimum, all inquiries made within the previous 90 days

• For each debt listed, the credit report must provide:

◦ Creditor’s name

◦ Date account opened

◦ Amount of highest credit

◦ Current status of account

◦ Required payment amount

◦ Unpaid balance

◦ Payment history

• Dates that accounts were last updated with creditors. Each account with a balance must have been checked with the creditor within 90 days of the date of the credit report

◦ If the report lists open accounts with balances that were not checked with the creditor within 90 days of the date of the in-file report, obtain updated information (for example, credit supplement or separate written verification) for those accounts

• All credit and legal activity that has occurred within a minimum of the past seven years

• Responsive statements about all items on the credit report when appropriate (such as, “unable to verify,” or “employer refused to verify”)

• All available public records information. Legal search must disclose whether any judgments, foreclosures, tax liens, or bankruptcies were discovered in the public records. Adverse items must be reported as required under the Fair Credit Reporting Act

In-File Credit Reports

Chase accepts in-file credit reports from three major credit-reporting repositories when they can report credit and public record information for each locality in which the borrower has lived during the last two years. Chase also accepts in-file reports from two credit-reporting repositories if that is the extent of the data available for the borrower. If only one in-file credit report is available for a borrower, obtain a residential mortgage credit report.

If the report does not include a reference for each significant debt reported by the borrower on the loan application, obtain a separate written verification for each unreported (or unrated) debt. Accounts listed on the credit report as “will rate by mail only” or “need written authorization” also require separate verification.

In-file credit reports must identify the dates the accounts were last updated with the creditors and the repository's source for each specific trade line.

Note: A joint or combined report for a married couple must contain all debts of both parties. Otherwise, obtain separate reports.

Merged Credit Reports

Chase accepts an automated merged credit report that electronically combines the information from the in-file credit reports from three different repositories into a single report, as long as an independent reporting agency provides the merged report. Chase only accepts a merged report that combines the in-file credit reports from two different repositories if that is the extent of the data available for the borrower.

An automated merged credit report must clearly reflect all this information:

• All of the information from the three (or two, if applicable) in-file credit reports, (a two-bureau merged in-file report must reflect that a three bureau in-file report was initially ordered)

• The names of the repositories the agency used to provide the information for the report

• All duplicate information (that which is not exactly the same on each report), or the most derogatory of the duplicate information that pertains to payment history and/or current payment status

Note: A joint or combined report for a married couple must contain all debts of both parties. Otherwise, obtain separate reports.

Residential Mortgage Credit Report (RMCR)

A consumer-reporting agency prepares a Residential Mortgage Credit Report (RMCR) for an individual borrower or for two borrowers who are married to each other. The agency merges and verifies credit information from a minimum of two major repositories before sending it to the user. The report provides current, verified, detailed information on the borrower's credit, employment, residence, and public record history.

The reporting agency verifies and reports all this borrower information:

• Current employment and income

◦ Report should show a positive statement that the consumer reporting agency attempted to verify the borrower's current employment and, if obtainable, income. The report must show the date of verification, which can be made by telephone

• Employment history for a minimum of two previous years

◦ When the borrower has had a change in employment in the past two years, the report must also state the borrower's previous employment and income. If the employment was not verified, the report must indicate why

• Residence history

• All debts listed on the application (including terms, balances, payment history, and ratings)

• All available legal information discovered by a search of public records (including lawsuits, judgments, foreclosures, garnishments, bankruptcies, and divorces)

The RMCR must meet the following requirements:

• All information must be obtained from or verified by sources other than the borrower

• When co-borrowers have individually obtained credit, separate repository inquiries are required, although the results of both reports can be combined in one report as long as the report clearly indicates that it is combined

• Name of the party that ordered the report must be included. If another party paid for the report, the credit report must provide that party’s name

• Original report must be delivered to the office of the party that requested it, using any means acceptable under the Fair Credit Reporting Act (such as, sending it through the U.S. Postal Service; by messenger; by fax; or through other automated means)

• Report must contain certification that it meets the standards for a residential mortgage credit report

When the credit reporting agency has incomplete information, discovers that the borrower might not have disclosed all information that should be found in the public records, or obtains other information that indicates the possible existence of undisclosed credit

records, the credit reporting agency must interview the borrower(s) to obtain additional information that is needed to provide an accurate report or perform additional research to verify whether the purported undisclosed records actually exist.

Note: A joint or combined report for a married couple must contain all debts of both parties (joint and individual) as well as separate repository inquiries if necessary; otherwise, obtain separate reports.

Non-Traditional Credit Reports

Non-traditional credit is not allowed in the Correspondent Channel.

Fraud Detection Report

Chase requires a Fraud Detection Report be run on every loan submitted for purchase as outlined below.

Minimum Required Content

A Fraud Detection Report must be ordered on all borrowers. A joint or combined report for a married couple must contain the debts of all parties or separate reports must be provided. The report must include, at minimum:

• Alerts to suspicious addresses, telephone numbers and social security numbers,

• Inconsistencies between the application data and the applicant’s credit history, and

• Unusually frequent requests for credit over the past 30 days

Note: Social Security number and Office of Foreign Asset Control (OFAC) checks alone, do not meet the minimum content requirement.

Report Types Available

Correspondents may order the fraud detection report in conjunction with the credit report to meet the minimum requirements of this policy. The three major credit-reporting repositories offer fraud detection tools. These include:

• Safescan (Equifax)

• Fraud Shield (Experian)

• High Risk Fraud Alert (TransUnion)

Correspondents may also order complete fraud reports separate from the credit report provided they contain the minimum required content. Examples of these reports include but are not limited to:

• DataVerify DRIVE

• CoreLogic CREDCO

• Kroll Factual Data TruAlert FactualID

• Lexis Nexis

• Interthinx FraudGUARD

Credit Bureau Report Requirements for Community Property States

In community property states, the credit history review can be complicated when a married individual applies for credit using sole and separate property.

Except when state law permits, do not run credit on the non-applicant spouse. Exclude the sole and separate income, assets, liabilities, and debts of the non-applicant spouse from consideration when qualifying the applicant spouse.

Refer to your Legal or Compliance Departments for additional guidance in community property states.

Credit Bureau Report Requirements for Foreign Credit Reports

Credit reports received from foreign countries must meet the requirements and standards for domestic reports, including the requirement for information for an RMCR as described above and the requirement to contact two national repositories for each area in which the borrower has resided during the most recent two years. Any credit report that does not meet these standards is not acceptable as documentation for a mortgage transaction.

• All foreign credit reports must be completed in English, or translated into English. Translations must warrant that the translation is complete and accurate

• If a credit score is provided with the foreign credit report, it cannot be used to establish eligibility unless the credit score type used meets requirements described in the Credit Bureau Risk Scores – Non-Agency topic

Correspondent Lending Library/Credit Guide - Non-Agency/Credit History - Non-Agency/Credit Bureau Risk Scores - Non-Agency (12/19/17)

Credit Bureau Risk Scores - Non-Agency (12/19/17)

Table of Contents


• Overview

• Repositories and Scores

• Obtaining a Credit Risk Score

• Credit Risk Score Selection

Overview

Credit risk scores provide Chase with the relative probability of borrower default on a loan request. The mortgage industry uses the industry-standard credit risk scores (aka FICO scores) developed by the Fair Isaac Corporation (FICO), which have proven statistically to be valuable tools in predicting relative loan performance over time.

• Credit risk scores used by the three major credit-reporting repositories (Equifax, TransUnion, and Experian) produce a numeric value that represents the relative odds that an extended loan will go into default.

• The higher the credit risk score, the less likely it is that the borrower will default.

Repositories and Scores

• The three major credit-reporting repositories work with FICO to develop a FICO score specific to the repository.

• Due to variances in how and when the credit-reporting repositories receive creditor information, and differences in creditors that report to the repositories (i.e., not all creditors report to all three bureaus), the repositories and FICO build, monitor, maintain, and update specific credit risk scorecards.

• The repositories and their associated credit risk score trade names are as follows:

Repository Risk Score Trade Name

Equifax Beacon

TransUnion Classic 04

Experian FICO

Obtaining a Credit Risk Score

When obtaining a credit risk score:

• Request a score for each borrower, regardless of the borrower's employment status.

• Obtain a score from each repository used in the compilation of the credit report data, regardless of the type of credit report obtained.

The credit report documentation requirement may vary based on the loan product, documentation program, and LTV.

Credit Risk Score Selection

• After ordering and receiving a credit report, select a single "representative" credit risk score from the scores on the report (or reports, if more than one).

• This score is used to determine the product/program parameters for the loan.

• Refer to the tables below to determine the representative FICO score used to underwrite and price the loan.

IF... THEN use...

three credit risk scores are reported,

the middle score for each borrower (even when two of the three scores are the same (see Example 2).

two credit risk scores are reported, the lower score for each borrower.

only one score is available, that score.

multiple borrowers are applying, the lowest score after determining the scores for all borrowers based on the above.

a single repository reports more than one credit risk score,

the first score listed of the multiple scores as "the score" for that repository only.

Examples

1. Credit score is determined when the credit repositories report three different scores for the borrower:

Borrower FICO Score

Primary Borrower 780756745

Representative Credit Score 756

2. Credit score is determined when two of the three credit repositories report the same credit score for the borrower:

Topic FICO Score

Primary Borrower 725725718

Representative Credit Score 725

Correspondent Lending Library/Credit Guide - Non-Agency/Credit History - Non-Agency/Derogatory Credit – Non-Agency (04/03/18)

Derogatory Credit – Non-Agency (04/03/18)

Table of Contents


• Overview

• Requirements

• Serious Derogatory Items (disclosed or reported)

• Mortgage/Housing Payment History

• Consumer Credit Counseling/Debt Management

• Disputed Derogatory Credit

• Serious Derogatory Event Seasoning Requirements

• Completion Date Definition

• Extenuating Circumstances

• Financial Mismanagement

• Requirements for Re-establishing Credit

• Payoff of Liens and Delinquent Credit Accounts

Overview

Derogatory credit is an obligation(s) that has not been repaid according to original terms. It may be reflected in the delinquent manner in which a borrower repays the obligation or in how the borrower is relieved of the debt through legal recourse by the creditor.

The manner in which the borrower(s) have managed their previous credit is a strong indicator of future performance. A history of derogatory credit and/or an instance of a major derogatory credit item increases the risk associated with the loan request.

For these reasons, all derogatory credit occurrences, including more recent occurrences not listed on a credit report must be carefully considered in the analysis of the loan request.

All reported delinquent Chase accounts must be brought current prior to or at closing.

• Chase Underwriters will condition for any delinquent Chase accounts to be brought current at or prior to closing.

• Delegated Underwriters must adhere to this requirement as well.

• Verification of sufficient funds to pay the derogatory items is required, and use of such funds must be accounted for in reserve calculations and requirements.

This topic helps the underwriter identify derogatory credit and the associated actions to take in specific situations.

Requirements

The following list of occurrences indicates areas of a borrower(s)’ credit history that are defined as serious derogatory credit, regardless of the credit risk score, and requires a thorough review.

For consideration, a loan request from borrowers with serious derogatory credit history must meet all the guidelines detailed below and provide:

• Satisfactory written explanation accompanied by supporting documentation, and

• Compensating factors to offset the layers of risk.

Serious Derogatory Items (disclosed or reported):

Derogatory Item Description

Bankruptcy• Chapter 7

• Chapter 11

• Chapter 12

• Chapter 13

Foreclosure Any foreclosure

Deed-in-Lieu of Foreclosure Any Deed-in-Lieu of foreclosure

Mortgage Delinquency / Housing Debt

Any payment 30 days or more past due for any housing debt within the last 12 months

Forgiveness of Debt• Short Sale (also known as preforeclosure sale)

• Short Payoff

• Modification (with principal forgiveness)

Collection account Collection of non-mortgage accounts in excess of $1,000 within the last 24 months

Charge-off Charge-off of non-mortgage accounts in excess of $1,000 within the last 24 months

Judgment Any Judgment in excess of $1,000 within the last 24 months

Tax lien Any tax lien in excess of $1,000 within the last 24 months

Repossession Any repossession within the last 24 months

Consumer Credit Counseling Consumer Credit Counseling

NOTES:

• For additional information regarding the requirements for payoffs of delinquent credit accounts, refer to the Payoff of Delinquent Credit Accounts section below.

• Refer to the Mortgage/Housing Payment History section for additional requirements.

• The borrower must pay in full and clear ANY derogatory item that may impact either the title of the subject property or the lien position of the Chase first or second mortgage.

• In such cases the borrower must have sufficient funds to pay any such amounts from cash/cash-like liquid assets or loan proceeds, and the use of such funds must be accounted for in reserve calculations and requirements.

Mortgage/Housing Payment History

It is generally necessary to verify the applicant's primary housing payment history, if the applicant has rented or owned a primary residence in the most recent 24 months.

The borrower's payment history is considered to be unacceptable if, on any mortgage or rental history, any of the following apply:

• One or more 30-day delinquencies in the past 6 months

• Two or more 30-day delinquencies in the past 24 months

• One or more 60-day delinquencies in the past 24 months

Consumer Credit Counseling/Debt Management

A borrower who experiences credit or financial management problems may elect to participate in consumer counseling sessions to learn how to correct or avoid such credit problems in the future. However, regardless of participation in the program, it is the borrower's current credit history that is of primary importance in the overall evaluation. Additionally, all re-established credit must be current.

While credit approvals are partly based on credit scoring and/or scoring models, these score(s) should be compared to the credit history details in the borrowers' credit bureau report. The borrowers' score(s) should be reflective of the following key credit history characteristics that the credit scoring models use in assigning a credit score:

• Number and age of accounts,

• Payment history,

• Credit utilization, and

• Recent attempts to obtain new credit.

Even when an acceptable credit score is obtained, the underwriter is accountable for performing an appropriate level of due diligence and should evaluate the borrowers' cumulative credit characteristics.

There are two types of consumer credit counseling:

• Homebuyer Education - designed to help first time homebuyers prepare for the financial responsibilities of homeownership.

◦ If the borrower has an acceptable history of managing credit and has participated in counseling to prepare for homeownership, this should be considered a positive risk factor.

• Credit Mismanagement – designed to assist borrowers who have had problems managing their debts. If the credit report shows the borrower:

◦ Has completed the counseling and has re-established acceptable credit by repaying the creditors directly, the loan may be considered a positive risk factor.

◦ Is currently in credit counseling due to debt mismanagement and has not re-established acceptable credit, the loan is not an acceptable risk.


In some circumstances, the borrower may be disputing the reported derogatory credit occurrence with the creditor. In those cases, to verify there is a dispute, the borrower must provide documentation such as:

• Legal documents,

• Contractual documents,

• Insurance papers, or

• Correspondence between the parties.

IF Chase underwriter … THEN…

provides an approval with the inclusion of the disputed derogatory credit item(s),

underwriter/findings will indicate if further action is necessary.

approval is not received and/or the approval terms were affected by the disputed credit,

• The loan must be manually reviewed, taking the disputed derogatory item(s) into consideration, or

• resolution to the disputed item is required and a new credit report confirming the resolution must be obtained.

The underwriter must:

• Evaluate the impact the disputed derogatory credit item may have on the borrower(s)’ ability to manage the mortgage debt and how other debts have been managed in the past.

• Take into consideration the equity investment in the property, amount of the disputed credit item, the borrower's asset position, credit risk score, and repayment history with respect to other debts.

Note: If these areas are acceptable, the serious or major derogatory credit may be considered an isolated incident, with no material impact in the underwriting analysis.

Serious Derogatory Event Seasoning Requirements

Select credit events that generate severe negative impact to a borrower's credit history are defined as serious derogatory credit, and these events must reach minimum seasoning requirements (waiting period) since completion as illustrated in the following table.

Serious Derogatory Event Seasoning Requirement - Months from Event Completion to Loan Application Date

If Due to Extenuating Circumstances If Due to Financial Mismanagement

Single Bankruptcy• Chapter 7

• Chapter 11

• Chapter 12

• Chapter 13

84 months 84 months

Multiple Bankruptcy Filings(among all borrowers)• Chapter 7

• Chapter 11

• Chapter 12

• Chapter 13

Not eligible Not eligible

Foreclosure 84 Months 84 months

Deed-in-Lieu of Foreclosure, Short Sale (also known as preforeclosure sale) , Short Payoff , and Charge-off of a Mortgage Debt

24 Months:• Purchase of Primary Residence with

maximum 85% LTV/CLTV or

• No Cash-out Refinance (all occupancy types)

84 Months if:• Purchase of Second Home or Non

Owner Occupied Property or

• Cash-out Refinance (all occupancy types)

48 Months:• Purchase of Primary Residence with

maximum 85% LTV/CLTV or

• No Cash-out Refinance (all occupancy types)

84 Months if:• Purchase of Second Home or Non

Owner Occupied Property or

• Cash-out Refinance (all occupancy types)

Modification (with principal forgiveness)

36 48

LTV/CLTV limits in the above chart are for Derogatory Credit purposes only and are not reflective of actual allowable limits of any specific product or program. Please see applicable Product Guide for maximum allowable LTV/CLTV limits.

The new loan must not be contingent on a concurrent Forgiveness of Debt transaction

Note: In addition to the above seasoning requirements, the borrower is also subject to the Requirements for Re-establishing Credit as reflected below within this topic.

Completion Date Definition

The definition of completion date varies based on the event type. Please refer to the table below for completion dates.

Event Completion Date

Bankruptcy Discharge or Dismissal Date

Foreclosure, Deed-in-Lieu of Foreclosure, Charge off of a Mortgage Debt

Transaction completion date

2 2

1

2

Forgiveness of Debt (Short Sale/preforeclosure sale)

Sale Date

Forgiveness of Debt (Short Payoff or Modification)

Transaction Completion Date

Extenuating Circumstances

Extenuating circumstances are isolated nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations which rendered the Borrower unable to repay as agreed. Examples include, but are not limited to:

• death of the primary wage earner,

• prolonged loss of employment for reasons beyond the borrower’s control such as site closings, mergers, or reductions-in-workforce, or

• long-term illness or disability not covered by insurance

NOTE: In no event should there be any request for any medical documentation or make any inquiry regarding the nature of the illness or disability. If borrower discloses this information, one must be careful to protect the confidentiality of the information.

Follow the guidelines below when any of the following events were a result of extenuating circumstances:

• Chapter 13 Bankruptcy (regardless of the reason for the filing);

• Chapter 7, 11, or 12 Bankruptcy,

• Foreclosure,

• Deed-in-Lieu of Foreclosure, Charge off of a Mortgage Debt, or

• Forgiveness of Debt: Short Sale/preforeclosure sale, Short-Payoff, or Modification of a mortgage

The guidelines below must be met for the circumstances outlined above:

• The borrower must provide a letter of explanation and documentation evidencing the derogatory credit incident was not due to financial mismanagement, but was the result of extenuating circumstances beyond their control.

• The borrower must provide copies of full documentation verifying completion (e.g., bankruptcy petition and discharge papers and list of creditors) when the underwriter is unable to determine the completion date on the credit bureau or when required by specific guidelines.

• The underwriter must review all aspects of the file that evidence the borrower's recovery from the circumstance to determine that the circumstances and events leading to the incident are not likely to recur.

• The file must be documented with evidence that the borrower had an acceptable credit history prior to the extenuating circumstances, and

• The underwriter must have sufficient documentation to support their conclusion that:

◦ The borrower is now creditworthy,

◦ The borrower has the capacity to repay the obligation, and

◦ There is no additional or potential overlaying of risks.

The borrower must meet the criteria contained within the Requirements for Re-establishing Credit Section of this topic.

Financial Mismanagement

Guidelines are provided below for extenuating circumstances that cannot be documented or supported, including any of the following that were a result of financial mismanagement (rather than extenuating circumstances):

• Chapter 13 Bankruptcy (regardless of the reason for the filing),

• Chapter 7, 11, or 12 Bankruptcy,

• Foreclosure,

• Deed-in-Lieu of Foreclosure, Charge off of a Mortgage Debt, or

• Forgiveness of Debt: Short Sale/preforeclosure sale, Short-Payoff, or Modification of a mortgage

The guidelines below must be met for the circumstances outlined above:

• The borrower must provide a letter of explanation.

• The borrower must provide copies of full documentation verifying completion (e.g., bankruptcy petition and discharge papers and list of creditors) when the underwriter is unable to determine the completion date on the credit bureau or when required by specific guidelines.

• The underwriter must review all aspects of the file that evidence the borrower's recovery from the circumstance to determine that the circumstances and events leading to the event are not likely to recur.

• The underwriter must review all aspects of the file paying particular attention to risk score factor reason codes that accompany the credit risk score, notably:

◦ Inquiries,

◦ Age of accounts,

◦ Balance-to-limits, and

◦ Any adverse or derogatory information.

The underwriter must have sufficient documentation to support their conclusion that:

• The borrower is now creditworthy,

• The borrower has the capacity to repay the obligation, and

• There is no additional or potential overlaying of risks.

The borrower must meet the criteria contained within the Requirements for Re-establishing Credit Section of this topic.

Requirements for Re-establishing Credit

Borrower(s) must have re-established credit for a minimum length of time equivalent to at least the Serious Derogatory Credit Event’s Seasoning Requirements (Waiting Period) as reflected in this topic. Re-established credit includes both new accounts opened after the event and existing accounts that the borrower maintained prior to the serious derogatory event which meet all the above requirements. The following additional requirements must be met:

• All re-established credit must be current;

• A minimum of four tradelines are required

◦ Authorized user account cannot be considered in trade line requirement when re-establishing credit

◦ One tradeline must be housing related unless borrower has been living rent free, in which case four tradelines are still required

◦ When housing payment is reported on the credit report, no late payments on housing since the date of event completion;

◦ If housing related debt is not reported on the credit report, refer to Housing Payment History – Non-Agency topic for requirements

• No new public records (such as, foreclosures, judgments (paid or unpaid), collections, liens, garnishments) since date of event completion

• No more than two 30-day past due notices in the last two years on installment or revolving lines

• No 60-day past due notices since the date of event completion

• The borrower(s)’ credit history should reflect evidence of stability and control in the use, management, and repayment of credit obligations

Payoff of Liens and Delinquent Credit Accounts

All Chase accounts must be paid off or brought current. Other accounts that reflect past due balances or reported as delinquent credit may be required to be paid off or brought current as follows:

Type/Amount Subject Property Type/Occupancy Must be Paid Off or Brought Current?

Non-Mortgage Charge Offs and Collections

Any amount 1-Unit Primary Residence No

Individual balance or total balance of all accounts is less than or equal to $5,000

2- to 4-Unit Primary Residence and Second Home

No

Individual balance or total balance of all accounts is more than $5,000

2- to 4-Unit Primary Residence and Second Home

Yes

Individual account less than $250 or total balance of all accounts is less than or equal to $1,000

Investment No

Individual account greater than or equal to $250 ortotal balance of all accounts is greater than $1,000

Investment Yes

Other

• Garnishments – Regardless of amount

• Tax Liens - IRS, Federal, State, Local (city/county), or property (regardless of occupancy or amount)

• Judgments – Regardless of amount

• Accounts reported on credit report as Past Due (not collection or charge off)

All Yes

These accounts only require payoff if the title company will not insure Chase’s first lien position on the subject property.

If either individual or total limits are exceeded, all collection and non-mortgage charge-off accounts must be paid in full at or prior to closing.

To protect the Chase first lien position against current or future claims, these liens are required to be paid off. Chase must receive acceptable documentation from (as issued by) the creditor, federal, state, or local municipality to confirm lien satisfaction; or, if the lien will be paid off at closing, the lien payoff must be reflected on the Closing Disclosure (CD).

In addition to the requirements reflected in the above chart:

• The borrower must pay in full and clear any derogatory item as outlined in this topic and any derogatory item that is revealed as an exception on the title commitment.

• When an account is required to be brought current or paid in full, the borrower must have sufficient funds to pay any such amounts from cash/cash like assets, or loan proceeds, and the use of those funds must be deducted from reserve calculations and requirements.

Correspondent Lending Library/Credit Guide - Non-Agency/Credit History - Non-Agency/Housing Payment History - Non-Agency (02/27/18)

Housing Payment History - Non-Agency (02/27/18)

Table of Contents


• General Information

• Mortgage Reference

• Rental Reference

General Information

Borrower(s) must list all residences for the last two years, for all transactions. The most recent 12 month history with related housing payments must be verified.

When borrower is living rent free, or when there is less than 12 months housing payment history, the mortgage application must document the residence history including the lack of monthly housing expense and the Underwriter’s review of the Loan File (including but not limited to the credit report and asset account statements) must support the borrower’s indication of not having any housing (mortgage or rent) expense (refer to Recurring Obligations Considered in Debt-to-Income Calculations in the Debt Analysis Guidelines – Non-Agency topic for details).

Note: Specific mortgage products, programs, or processing methods may require the use of a specific Residence Reference verification method.

Mortgage Reference

Verification of satisfactory mortgage payment history is required for all mortgages secured by real estate owned by the borrower(s) during the past 12 months regardless of the borrower(s)’ credit score.

Payment history is verified by one of the following methods:

When... Acceptable Method...

the mortgage Note is held by a lender or mortgage servicer,

• Direct written VOM from the mortgagee or servicer, or

• Review of the last 12 months payment history on the current credit bureau report (or the entire mortgage history when open for < 12 months), or

• Review evidence of timely payments (for example, copies of canceled checks (front and back), money orders, or bank statements) for the most recent 12 month period prior to the application date.

1

1

2

21

2

3

1

2

3

the mortgage Note is held by a private individual,

• Review evidence of timely payments (for example, copies of canceled checks (front and back), money orders, or bank statements) for the most recent 12 month period prior to the application date (or the entire mortgage history when open for fewer than 12 months), and

• Copy of the Note

Rental Reference

Verification of satisfactory rental payment history for the past 12 months is required for all renters regardless of the borrower's credit score.

• Payment history may be verified with copies of canceled checks (front and back), money orders, or bank statements evidencing timely payments for the most recent 12 month period prior to the application date.

• For borrowers renting through a professional property management company, the following additional methods of verification may be used:

◦ Direct written (VOR) from the management company that includes:

◾ Rental amount

◾ Payment history

◾ Length of payment history

◾ Landlord's contact information (name, address, and phone number)

◦ Verification on a Residential Mortgage Credit Report (RMCR); the credit-reporting agency must verify rental history directly with the landlord's management agency

Lease Term and Treatment of Remaining Liability

When the borrower is renting, the potential remaining liability from the lease must be considered in qualification whether renting from a professional management company or an individual. Refer to Debt Analysis Guidelines – Non-Agency > Recurring Obligations Considered in Debt-to-Income Calculations for details.

Use the following table to determine requirements:

IF borrower... THEN...

qualifies with rental payment included in debt-to-income (DTI) ratio,

it is not necessary to determine the remaining rental term and a copy of the lease is not required.

has liquid assets totaling 12 months of rental payment (in addition to funds needed for closing and reserves),

does not qualify with rental payment included in debt-to-income (DTI) ratio,

• document remaining rental term by obtaining a copy of the fully executed lease agreement (or VOR or similar supporting documentation reflecting remaining obligation when renting from a professional management company), and

• verify remaining obligation will be satisfied by the first payment date or that the borrower has sufficient reserves (in addition to funds for closing and reserves) to cover the remaining obligation under the lease

does not have assets to cover 12 months of rental payments (in addition to funds needed for closing and reserves),

Note: Refer to Debt Analysis Guidelines – Non-Agency > Recurring Obligations for exclusion of installment debt when debt will be eliminated by the first payment date of the mortgage.

Correspondent Lending Library/Credit Guide - Non-Agency/Debt / Liabilities - Non-Agency/Debt Analysis Guidelines – Non-Agency (03/20/18)

Debt Analysis Guidelines – Non-Agency (06/19/18)

This topic applies to Non-Agency loans.

Table of Contents

This topic includes the following information:

Debt to Income (DTI) Ratio Overview

Recurring Obligations

Monthly Housing Expense (PITIA)

Alimony, Child Support and Separate Maintenance Payments

Asset Secured Loans and Lines of Credit

Bridge Loans

Business Debt in Borrower’s Name

Contractual Payments

Co-Signed Loan

Contingent Liabilities

Court Ordered Assignment of Debt

Credit Cards (Revolving Charge/Unsecured Lines of Credit)

Deferred Installment Debt

Home Equity Lines of Credit (HELOC)

Home Equity Loans

Installment Debt

Investment Gains and Losses

Lease Payments

Margin Debt

Mortgage Debt

Balloon Loans, and Interest-Only Loans

Payoff of Debt for Qualification

Previously Assumed Mortgage Obligations

Reduction of Debt Balance (Paying Down a Balance)

Relocation Benefits

Rent – Housing Lease Term and Treatment of Remaining Liability

Student Loans

Taxes and Insurance

Tax Abatements

Unreimbursed Employee Business Expenses

Debt to Income (DTI) Ratio Overview

The debt-to-income (DTI) ratio, which establishes a borrower's capacity to service all monthly obligations based on representations and/or documentation, is required for all requests unless exempted by a specific program.

These guidelines provide standards, ensure uniform treatment of other debt instruments, and help the Underwriter determine the borrower's recurring debt total.

Obligations to be considered as possible recurring debts may be identified on sources including but not limited to:

• Credit report

• Account statements

• Application

• Pay stubs

• Divorce decree (or separation agreement)

The Underwriter may request additional documentation verification, beyond the designated minimums, when the situation warrants it.

Debts for which the borrower is not the primary obligor but is instead an authorized user on another obligor's account may or may not be included in the borrower's recurring debt total. See the Authorized User section of the Credit Requirements and Analysis topic for additional information.

Note: Specific product or program standards may differ; see the Product Guides in this manual for specific guidelines.

Recurring Obligations

Recurring obligations include:

• All installment loans

• Revolving charge accounts

• Real estate loans and lines

• Child Support or Separate Maintenance payments

• Any net loss from a rental property

• Other continuing obligations as described within Debt Analysis Guidelines

Recurring Obligations Considered in Debt-to-Income Calculations

Recurring obligations considered in the DTI Calculation, include but are not limited to:

• Monthly housing expense; and

• Additional recurring charges, such as

◦ Payments on installment accounts*

◦ Payments on revolving accounts

◦ Child support or Separate Maintenance payments*

◦ Any net loss from a rental property

◦ Monthly payment amounts for other properties including principal and interest on the first lien and any secondary financing; taxes and insurance; and, when applicable, mortgage insurance premiums; leasehold payments, and homeowners association dues (excluding unit utility charges)

* Installment debt, and child support or separate maintenance payments with fewer than 10 monthly payments remaining may be excluded from the DTI when borrower has liquid reserves sufficient to cover the total of the remaining payments (the account balance).

This reserve requirement can be waived if the installment debt will be paid in full prior to the date the first payment is due on the new mortgage (such as, when only one or two payments remain).

When recurring obligations are discovered through review of Loan File documentation, including but not limited to asset statement, Underwriter must perform a thorough review of documentation to ensure all recurring obligations are considered when calculating DTI ratios.

Obligations not Considered in Debt-to-Income Calculations

Obligations not considered debt, and therefore not included in the DTI Calculation, include but are not limited to:

• Federal, State, and local tax deductions

• Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts

• Commuting costs

• Union dues

• Open revolving accounts with zero balances (excluding HELOCs)

• Automatic deductions to savings accounts

• Collection accounts reflected on the credit report without a payment, which indicates no if no repayment plan has been established

• Child care, and

• Voluntary deductions

Monthly Housing Expense (PITIA)

Determining the borrowers' debt-to-income ratio begins with calculating the proposed monthly housing expense (also known as principal, interest, taxes, insurance, and assessments or PITIA) which includes:

• Proposed mortgage payment

• Real estate taxes not included in the mortgage payment

• Any insurance premiums (hazard, flood, and/or mortgage) not included in the mortgage payment

• Homeowner association fees

• Ground rent/leasehold and co-op corporation fees

• Any home equity loan or HELOC payment(s), if applicable

• Any other special housing assessment fees

Note: If the subject mortgage is secured by a second home or an investment property, the qualifying payment amount is considered one of the borrower’s monthly debt obligations when calculating the DTI ratio. The monthly housing expense in these cases represents the PITIA associated with the borrower’s principal residence.

Alimony, Child Support, and Separate Maintenance Payments

Deduct alimony payments from qualifying monthly income.

• When there are fewer than 10 alimony payments remaining, it is not necessary to reduce the qualifying monthly income if the borrower has sufficient liquid reserves to cover the remaining payments

◦ This reserve requirement can be waived if the alimony owed will be paid in full prior to the date the first payment is due on the new mortgage (such as, when only one or two payments remain)

Include child support and separate maintenance payments in the recurring debt total.

• Child support and separate maintenance obligations with fewer than 10 payments remaining may be excluded when the borrower has sufficient liquid reserves to cover the remaining payments.

◦ This reserve requirement can be waived if the debt will be paid in full prior to the date the first payment is due on the new mortgage (such as, when only one or two payments remain).

Documentation

Obtain and document file with verification that clearly defines the borrower's payment responsibility.

Acceptable sources of documentation include:

• Finalized divorce decree

• Signed separation agreement

• Notarized agreement signed by all parties and their respective attorney

• Court order

• Other legally accepted evidence dictated by local custom

The Underwriter can request additional documentation verification when needed.

Asset Secured Loans and Lines of Credit

Refer to the table below to determine requirements for asset-secured loans and lines:

IF… THEN…

it is evident from the paystub or other documentation (such as an asset statement) that the loan is a 401(k), 403(b), 457(b), or TSP loan,

do not include the payment in DTI calculations and no additional 401(k) loan documentation is required.

loan is secured by another liquid financial asset (such as Life insurance policy, CD, stock, bond, or marketable security),

exclude payments from the DTI when:• Repayment of the loan or line rebuilds the financial asset, and

• Current verified balance in the account (or value of the financial asset) is sufficient to pay off the loan

Obtain a copy of documentation showing all of the following:• Asset used as collateral for the loan or line

• Interest rate and payment

• Loan amount or full line amount

• Loan or line secured by the financial asset was made by a financial institution

All debts must be considered in the overall underwriting process and in evaluating the general creditworthiness of the mortgage loan customer (refer to debt-to-income (DTI) ratio Overview for additional information).

Notes:

• If the type of loan is not evident from the paystub, documentation must be provided to support the type of loan.

• Loans and lines secured by real estate or other personal property must be included in the DTI.

• For requirements on how to treat from an asset perspective, see Credit Guide – Non-Agency > Asset Types – Non-Agency >Borrowed Funds - Secured.

Bridge Loans

Include bridge loan payments in the borrower's DTI. If payments are not scheduled on a monthly basis, at a minimum, use monthly interest payments.

Note: The bridge loan cannot be cross-collateralized on the Chase-financed subject property.

See Credit Guide – Non-Agency>Assets – Non-Agency > Asset Types>Bridge Loans Proceeds for requirements.

Business Debt in Borrower’s Name

Monthly obligations that appear on a self-employed borrower’s personal credit report are generally included in the debt-to-income (DTI) ratio.

In order to exclude the debt, documentation must be provided to verify:

• Obligation is paid out of company funds

• Debt is considered in the cash flow analysis of the borrower’s business

The borrower's personal financial statement or Mortgage Application (1003) should reflect the outstanding balance(s) of the business debts. Address the business debt payments (principal and interest) as follows:

IF... THEN...

borrower has not provided proof the business is paying the debt by meeting the requirements below,

include the debt in the borrower’s recurring monthly debt obligation.

file includes all of the following to document the business is paying the debt:• Evidence that the obligation is paid out of company funds (such as a

minimum of the most recent 12 months of cancelled checks from the business checking account)

• No history of delinquency on the account in question

exclude the debt from the borrower's recurring monthly debt obligation.

• Underwriter’s business cash flow analysis reflect payment of the obligation

Refer to Rental and Investment Property Income > Rental Property Reported through a Partnership or S-Corporation when business debt is a mortgage reported through partnership or S-Corporation.

Contractual Payments

The Underwriter must consider contractual obligations on certain investments or other business ventures (such as partnerships) that could impact the borrower's cash flow and debt service. Examples of obligations to consider that the credit bureau may not reflect include, but are not limited to:

• Required capital distributions

• Negative capital account

• Loans to an owner or stockholder

Co-Signed Loans

Include the outstanding balance of a co-signed loan as a contingent liability. Exclude the monthly payment on a non-mortgage related obligation from the qualifying DTI calculation if all of these conditions are met:

• Borrower is not the primary obligor on the co-signed loan

• Primary obligor on the co-signed loan has a history of making payments and provides 12 months' canceled checks evidencing payment

• Co-signed loan reflects a timely payment history

Note: Mortgage- or real estate-secured obligations must be included in the DTI calculation unless creditor has released borrower from liability or loan has been assigned by court order. See Court-Ordered Assignment of Debt for additional information.

Contingent Liabilities

A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment.

Note: The requirements contained in the Non-Agency Credit Guide apply to a contingent liability unless there is conclusive evidence from the debt holder that there is no possibility that the debt holder will pursue debt collection against him/her should the other party default.

Court Ordered Assignment of Debt

Exclude an obligation (including mortgage or real estate secured loan) assigned by court order from the qualifying debt-to-income ratio when all the following conditions are met:

• Borrower provides a copy of the court order, divorce decree, or separation agreement evidencing the assignment of the obligation to another party

• Documentation is provided evidencing that the borrower has been removed from title (for a real estate secured obligation)

• Payment history prior to the date of the assignment is considered

Credit Cards (Revolving Charge/Unsecured Lines of Credit)

Revolving charge accounts and unsecured lines of credit are open-ended and should be treated as long-term debts and must be considered part of the borrower’s recurring monthly debt obligations. These tradelines include:

• Credit cards

• Department store charge cards

• Personal lines of credit

Calculate debt-to-income (DTI) ratios using payments and balances reflected on the credit report for credit card and revolving account payments.

If no payment amount appears on the credit report, include an estimated payment of based on the greater of $10 or 5% of the outstanding balance in the DTI.

30-Day Charge Accounts

A 30-day charge account is defined as an account where the borrower must pay off the total outstanding balance each month. There are no alternative monthly payment options.

For open 30-day charge accounts (for example, AmEx), the borrower must have sufficient verified liquid assets to pay off the balance and meet the reserve requirements for the loan program to exclude the payment from the qualifying DTI.

Refer to Asset Types – Non-Agency > Marketable Securities for liquidation requirements for assets used to support sufficient funds.

IF sufficient liquid assets are... THEN...

verified, exclude the reported monthly payment from the DTI.

not verified, obtain evidence that the account has been paid in full and exclude the reported monthly payment from the DTI, or include the monthly payment (equal to the outstanding account balance) in the calculation of the qualifying DTI.

Note: If the account provides for a monthly payment option other than the total outstanding balance, the account is not considered a 30-day charge account and these requirements do not apply.

Accounts with Variable Payment Options

Some accounts provide flexible payment options where a portion of the balance is required to be paid in full and the other portion is treated as a revolving balance with a minimum due requirement.

IF… THEN...

a statement has already been included or provided detailing flexible payment options,

review the statement to establish the proper treatment of each option.

credit bureau report is unclear as to the type of account that is being reported (such as, account reports as both revolving and open),

supporting documentation must be provided in order to establish how the account should be treated.

Borrower’s Business Expense Account/Travel and Entertainment Cards

If the credit report includes a borrower's business expense account or travel and entertainment card, one of these is required:

IF business… THEN…

makes all payments, • Obtain:

◦ Statement from the employer that the company pays all business expenses, and

◦ Most recent two months of billing statements showing prior balances paid in full

• Exclude the monthly payment from the DTI

does not make all payments, include the monthly payment amount in the DTI.

Note: Include revolving accounts listed on the application that are not on the credit report in the calculation.

Deferred Installment Debt (other than Student Loans)

Include all deferred installment loans in the DTI regardless of deferment status or number of monthly payments remaining.

For deferred installment debt other than Student Loans, if the credit bureau report does not indicate a monthly payment that will be payable at the end of the deferment period, obtain documentation in the form of the borrower’s payment letters or forbearance agreements to determine the required qualifying payment amount.

See Student Loans in this topic for detailed information regarding the treatment and required payment calculation for student loans.

Home Equity Lines of Credit (HELOC)

Use the following to determine the HELOC monthly payment amount when calculating debt-to-income ratios (even when secured by a property other than the subject property):

IF a HELOC… THEN calculate the minimum payment amount using…

• can still be drawn upon (open end), and

• is new or unseasoned (< 12 months)*,

(Includes HELOCS that are frozen, since the freeze could be lifted by the creditor)

higher of:• Payment shown on credit report (or obtained from

documentation from the creditor, or

• 1% of the full line amount

• can still be drawn upon (open end), and

• is seasoned (open date ≥ 12 months)*,

higher of:• Payment shown on credit report (or obtained from

documentation from the creditor), or

• 1% of the current HELOC balance based on verified information in the loan file

Seasoned HELOCS with a zero balance have no payment amount for the purpose of calculating the DTI.

is in the repayment period only and cannot be drawn upon (closed end),

payment shown on credit report (or obtained from documentation from the creditor), even when that amount is less than 1% of the full line amount.

*Credit report or alternative documentation must reflect the month/year that the HELOC was opened for purposes of defining seasoning.

See Subordinate Financing for additional requirements.

Home Equity Loans

Include the actual loan payment for all second mortgages in the DTI.

See Subordinate Financing – Non-Agency for additional requirements.

Installment Debt

Include installment debt in the DTI calculation when there are 10 or more monthly payments remaining.

Installment debt with fewer than 10 monthly payments remaining may be excluded from the DTI when borrower has liquid reserves sufficient to cover the total of the remaining payments (the account balance).

• This reserve requirement can be waived if the installment debt will be paid in full prior to the first mortgage loan due date (such as, when only one or two payments remain)

Note: It is not acceptable to pay down the obligation to less than 10 payments in order to exclude the payment from the DTI calculation.

Investment Gains and Losses

Average and include any net recurring loss on a cash investment or an investment property as an expense in the DTI.

Note: Include any net recurring cash gain as qualifying income, as appropriate.

Lease Payments

Include lease payments regardless of the remaining term as borrower will typically be subject to either of these at the end of the lease term:

• Buyout of the lease (such as, purchase of the vehicle)

• New lease obligation

Margin Debt

Borrowers who have stock portfolios often have margin accounts by the marketable securities in their brokerage accounts. Exclude the margin account from the DTI when:

• Assets within the brokerage account securing the margin account are clearly identified

• Margin account balance is deducted from borrower’s marketable security total

Note: To properly reflect the borrower's net worth, use the adjusted balance of the asset excluding the margin debt as a liquid asset to the Mortgage Application.

For requirements on how to treat the account from an asset perspective, see Credit Guide – Non-Agency > Asset Types – Non-Agency > Marketable Securities

Mortgage Debt

Exercise prudent judgment in evaluating the debt service (such as, principal, interest, taxes, insurance, including mortgage insurance and association fees, when applicable) of first and second mortgage payments on all real estate holdings.

When a payment appears to be for interest-only or a below-market ARM, obtain a verification of mortgage or comparable alternate documentation to confirm whether the DTI calculation includes adequate debt service.

Monthly payment amounts for other properties that the borrower owns must be verified and must include principal and interest on the first lien and any secondary financing, taxes and insurance and, when applicable, mortgage insurance premiums, leasehold payments, ground rent, co-op maintenance, and homeowners association dues (excluding unit utility charges).

Note: It is important to include all documentation used to determine mortgage debt, including tax and insurance payment amounts.

Balloon Loans, and Interest Only Loans

Include verified monthly balloon loan and interest only loan payments in the DTI calculation, regardless of the number of payments remaining.

Payoff of Debt for Qualification

A borrower may wish to pay in full a debt reported on the application or on the credit report, and have the payment excluded from the qualifying parameters.

Do not include revolving account balances paid off at or prior to loan closing in the borrower’s long-term debt and debt-to-income (DTI) ratio.

To pay off debt at or prior to closing, and not have the payment included, verify:

• Borrower has the assets or sufficient equity to pay off the debt; and

• Debt has been paid at or prior to closing

Note: If the debt being paid off is a HELOC, verify that the account is closed.

Previously Assumed Mortgage Obligations

When a borrower has a mortgage that was previously assumed by another party without a release of liability, the borrower has a contingent liability.

Generally, the payment on the obligation must be included in the borrower’s recurring monthly debt obligations if the property:

• Was sold or traded within the last 12 months without a liability for the mortgage obligations, or

• Is to be sold on assumption without a release of liability being obtained

Payment on the obligation can be excluded from the borrower’s recurring monthly debt obligations if there is verification that there is a 12-month history of the assuming party making regular timely payments on the mortgage. Documentation requirements are as follows:

• Evidence of the transfer of ownership from the property

• Copy of the formal, executed assumption agreement, and

• Credit report indicating that a minimum of 12 consistent and timely payments (defined as no 30+ day late payments) were made for the assumed mortgage since the date of transfer

Reduction of Debt Balance (Paying Down a Balance)

Paying down debt to qualify is not acceptable; however, a borrower may choose to reduce the balance on a debt by paying a principal sum towards the balance. Consider the monthly payment a recurring obligation and include the original monthly payment regardless of the amount paid down or the number of monthly payments remaining in the qualifying DTI calculation.

Relocation Benefits

Eliminate the PITIA on an existing residence from the debt-to-income ratio analysis when a borrower is relocating, and the loan file includes both of these:

• Copy of the executed buy-out agreement for the existing residence

• At loan closing, a copy of the equity advance or a settlement statement evidences the sale and release from liability

Note: Any closing costs and points included in the relocation package are eligible for use as closing funds; however, the borrower must provide funds for prepaid items unless the relocation package specifically includes them.

See Corporate Relocation for additional requirements.

Rent – Housing Lease Term and Treatment of Remaining Liability

For purchase transactions where borrower(s) indicate that they are currently renting, the potential remaining liability of the lease must be considered in the underwriting analysis (whether renting from an individual owner or a property management company).

See Housing Payment History – Non-Agency for requirements.

Student Loans

Include all student loans in the debt-to-income (DTI) ratio regardless of deferment or forbearance status.

Use the following table to calculate the qualifying monthly payment for all student loans:

IF student loan is in... THEN...

repayment, greater of the following (as reported on the credit report):• 0.5% of the outstanding balance, or

• Actual payment amount

deferment or forbearance, greater of the following (as reported on the credit report):• 1% of the outstanding balance, or

• Actual payment amount

forgiveness program or cancellation, exclude the student loan payment from the monthly DTI when borrower meets requirements for loan forgiveness and the loan file contains documentation supporting:• there are fewer than 10 monthly payments remaining until the full balance of the

loan is forgiven or canceled, or

• monthly payment is deferred or is in forbearance and the full balance will be forgiven or canceled at the end of the deferment or forbearance period

employment-contingent repayment program

exclude the student loan payment from the monthly DTI when borrower meets requirements of the program and the loan file contains documentation supporting:

• there are fewer than 10 monthly payments remaining until the full balance of the loan is paid , or

• monthly payment is deferred or is in forbearance and the full balance will be paid by the program at the end of the deferment or forbearance period

Taxes and Insurance

The actual monthly amount of taxes*, insurance, homeowners association (HOA) fees, and special assessment fees should be included in the DTI.

New Construction:*

In most cases, a comprehensive and accurate property assessment will not yet be done on new or newly completed construction; therefore, Underwriter must qualify the borrower using the estimate of the property taxes reflected on the appraisal. Refer to Appraisal and Property Requirements > Appraisals > New and Newly Completed Construction for additional information regarding estimated tax calculations.

California*

• All purchase or new construction transactions are assessed as of the 1 of the month following the date of transfer.

• Actual taxes on purchase or new construction transactions must be based on this projected assessment.

◦ In purchase money transactions where we lack definite indicators of taxes, use 1.25% of the purchase price as the total annual tax estimate and pro-rate this on a monthly basis

*See Tax Abatements topic below for additional information

Homestead Tax Exemptions

The following table provides requirements for applying tax exemptions:

IF the transaction is a… THEN…

refinance, the amount of taxes after the exemptions have been deducted may be used to qualify.

purchase, the reduced Homestead Exemption (or state equivalent language) tax amount can be used only when:• Subject property is not new construction and the current reported tax amount represents the

amount on the land plus improvements.

• Loan is for an owner-occupied primary residence

◦ Any current primary residence must be sold and documented with a Closing Disclosure(CD) to meet this requirement

◦ Conversion of Primary Residence does not apply

• Loan file must contain a breakdown showing how the tax amount used to qualify was calculated

Note: Only applies for the Homestead Exemption. Other exemptions are reviewed and considered on a case-by-case basis.

Tax Abatements

Tax abatements are a temporary reduction in the actual amount of taxes that the owner(s) of a property must pay. Use the abated (reduced) amount of taxes in the qualifying DTI, when all of these requirements are met:

• Government municipality offers the abatement

• Neither the seller, nor any other interested party pays the abatement to the borrower

• Documentation supporting the amount and term of the abatement is in loan file

• Full amount of the abatement is in effect for minimum of 5 years from loan closing date and cannot terminate partially or fully within that period of time

Examples:

◦ Municipality with a 10-year abatement – qualify the borrower using reduced tax amount

◦ Municipality with a 10-year abatement with annual real estate tax increases in years 1 through 10 – qualify borrower with the annual taxes that will be required at the end of the fifth year after the first mortgage payment date

Note: Never use tax abatements as a source qualifying income.

See Property and Appraisal Requirements > Appraisals for tax abatement requirements.

Unreimbursed Employee Business Expenses

Unreimbursed Employee Business Expenses are commonly found on the following forms:

• Schedule A (Form 1040 or Form 1040NR)

• Form 2106

• Form 2555 (Foreign Earned Income)

• Schedule E, or

• Other comparable Federal Tax form of the borrower’s personal tax returns

Use the table below to determine requirements for unreimbursed employee business expenses:

IF borrower… THEN...

has commission income that represents 25% or more of that borrower’s total annual employment income,

develop a 24-month average of the borrower’s monthly recurring unreimbursed employee business expenses and subtract the amount from that borrower’s monthly qualifying income.

has commission income that represents less than 25% of that borrower’s total annual employment income, and expenses do not exceed 10% of the borrower’s total income from the commissioned employment,

unreimbursed employee business expenses are not considered in calculating qualifying income when underwriter determines expenses appear reasonable and do not affect the borrower’s ability to repay.

has commission income that represents less than 25% of that borrower’s total annual employment income and the expenses exceed 10% of that borrower’s total income from the commissioned employment*,

unreimbursed employee business expenses are not considered in calculating qualifying income when the underwriter determines the expenses to be reasonable, they do not materially affect the borrower’s ability to repay, and any compensating factors (including but not limited to, high disposable income or higher than minimum reserves) are considered.

develop a 24-month average of the borrower’s monthly recurring unreimbursed employee business expenses and

st

• is salaried and does not receive commission income, and expenses exceed 10% of that borrower’s gross qualifying income*, or

• is self-employed,

subtract the amount from that borrower’s monthly qualifying income.

has an automobile allowance included in that borrower’s monthly qualifying income,

the automobile loan or lease expenses are included as an obligation in the debt-to-income (DTI) calculation and are not deducted from qualifying income.

*Applies only when tax returns are required.

Correspondent Lending Library/Credit Guide - Non-Agency/Debt / Liabilities - Non-Agency/Subordinate Financing – Non-Agency (02/27/18)

Subordinate Financing – Non-Agency (02/27/18)


Table of Contents

This topic includes the following information:

Introduction

Eligibility Requirements

Reduced or Frozen Home Equity Line of Credit (HELOC) – Definitions

Reduced or Frozen Home Equity Line of Credit (HELOC) – Documentation and HCLTV Calculations

Resubordination

Small Business Administration (SBA) Liens

Introduction

Subordinate financing is any mortgage that is in a secondary or "junior lien" position on title. Recorded subordinate financing must meet specific repayment terms. Documentation for subordinate financing must be reviewed by the Underwriter to ensure the first lien priority and eligibility of the loan.

Eligibility Requirements

Subordinate financing may not be eligible on all products, property, or occupancy types. Additionally, there may be specific loan-to-value (LTV) and combined loan-to-value (CLTV) limitations associated with the seasoning of the subordinate financing.

Refer to applicable Product Guide to determine eligibility.

The following restrictions apply:

Restriction Type Subordinate Financing Requirements

Negative Amortization• Not permitted

• Repayment terms must provide for regular payments that cover no less than interest due

Equity Sharing Terms of secondary financing may not allow the provider or another party to receive any equity sharing (unless the secondary financing is in the form of an Affordable/Community Second).

Arm’s Length Transaction must be considered arm’s length (refer to Arm’s Length and Non-Arm’s Length Transactions – Non-Agency)

Interest Rate Should be at market rate.

If subordinate financing is provided by the property seller and is more than 2% below current market rate for second mortgages, the subordinate financing:• Must be considered a sales concession

• Amount must be deducted from the sales price

Note: Include documentation in the Loan File to support determination of market rate.

Maturity Date Use the table below to determine if there is a maturity date restriction.

IF loan terms… THEN…

contain balloon or call option, maturity date must be five years or greater.

do not contain balloon or call option, no maturity date restriction.

Variable Payments Use the table below to determine variable payment restrictions.

IF… THEN…

first mortgage has an interest rate buydown,

• variable payments are not acceptable, and

• subordinate financing payments must be a fixed amount.

first mortgage does not have an interest rate buydown,

there are no variable payment restrictions.

variable rate subordinate loan is a closed-end second mortgage (not a HELOC),

• monthly payment must remain the same for each 12-month period, and

• interest rate may adjust no more than 1% each 12 months.

variable rate subordinate loan is a HELOC,

there are no variable payment restrictions.

Monthly Payment and DTI Ratios Payment for the subordinate financing must be included in the total monthly housing payment and DTI ratios.

Note: Refer to Debt Analysis Guidelines – Non-Agency > Home Equity Lines of Credit (HELOC) for determining HELOC payment used to calculate DTI.

CLTV/HCLTV If the subordinate loan is a home equity line of credit (HELOC), use:• Outstanding balance to calculate CLTV

• Line limit to calculate HCLTV

If documentation is obtained confirming the HELOC is no longer in its draw phase and cannot be opened to additional draws in the future, then the outstanding balance can be used to calculate CLTV/HCLTV.

Payment Terms that Restrict Prepayment

Subordinate financing cannot have payment terms that restrict prepayment (prepayment penalties).

Note: Subordinate financing that allows lenders to recoup closing costs is not considered a prepayment penalty for the purpose of subordinate financing eligibility.

Subordinate financing not paid off with proceeds of refinance transaction

When subordinate financing is not paid off with proceeds of the refinance transaction, and remains subordinate to the Chase first mortgage lien, the subordinate financing:• Has no seasoning requirement (unless defined by the product guide)

• Must re-subordinate to the Chase first mortgage (as evidenced by satisfactory documentation supporting re-subordination included in the Loan File)

• Must meet all product-specific eligibility requirement

A copy of the subordinate financing Note or HELOC Agreement for the subject property reflecting the terms of the subordinate loan must be included in the loan file delivered to Chase (regardless of lender).• If the borrower is unable to provide a copy of the Note or HELOC Agreement, a

written verification of mortgage (VOM) provided by the current loan servicer and that addresses all eligibility requirements is acceptable

Reduced or Frozen Home Equity Line of Credit (HELOC) - Definition

Definitions of reduced and frozen HELOCS:

IF line of credit… THEN line is considered…

• is frozen at the current outstanding balance (draws temporarily unavailable)

• may become available at a future date without borrower(s) reapplying,frozen.

• is permanently reduced and/or modified

• borrower(s) are required to reapply and qualify to increase the credit line at a future date,

reduced.

Reduced or Frozen Home Equity Line of Credit (HELOC) - Documentation and HCLTV Calculations

Refer to the table below to determine documentation and HCLTV calculation requirements for reduced and frozen HELOCs:

Frozen

Use the higher of the original line limit or unpaid principal balance to calculate HCLTV.

Reduced

If the reduced HELOC is…

AND loan file contains… THEN use the following to calculate HCLTV…

Chase, modification letter signed by the borrower(s) reflecting decreased line amount,

the higher of the reduced line or the unpaid principal balance.

letter from Chase indicating the HELOC was permanently reduced. Letter must:• State the amount to which the HELOC has been

reduced

• Include the date of the HELOC reduction

Non-Chase letter from the subordinate lien holder on their letterhead indicating the HELOC was permanently reduced. Letter must:• State the amount to which the HELOC has been

reduced

• Include the date of the HELOC reduction,

non-Chase, recorded modification agreement,

non-Chase, modification agreement that is executed but not recorded,

the higher of the original line limit or the unpaid principal balance.

Note: The CLTV ratio cannot exceed the HCLTV.

Resubordination

Contact Chase Servicing Department for Chase resubordination requests.

Small Business Administration (SBA) Liens

Small Business Administration (SBA) liens against an individual's personal residence is typically additional collateral for a business loan and not the primary collateral nor the primary source of repayment; however, the business must be analyzed to determine its ability to service the business debt as well as provide sufficient income for the borrower to service their debt.

SBA lien must:

• Be Included in the CLTV calculation

• Be subordinate to all Chase liens

• Not have a history of delinquency

• Be considered in the Underwriter’s analysis of the business obligation

Monthly payments on the SBA lien must be included in the DTI ratio unless the following proof is provided that the business is paying the debt:

• Minimum of the most recent 12 months canceled checks from business' checking account, and

• Business tax returns reflecting the related business expense deductions

Correspondent Lending Library/Credit Guide - Non-Agency/Employment/Corporate Relocation (08/24/17)

Corporate Relocation (08/24/17)

Table of Contents

This topic includes the following:

• Overview

• Verification of Relocation Benefits

• Guaranteed Buy-out Agreement

• Tax Returns

• Trailing Co-applicant Income

• Corporate-Financed Mortgages

Overview

In most cases, relocation is a transaction in which the borrower (or co-borrower) is relocating, at the employer's request, to another location at least 50 miles from the borrower's (or co-borrower's) current locale. However, these guidelines may also apply to other circumstances when an employer offers relocation benefits to an employee.

In all cases, obtain written verification from the employer stating they have sanctioned the relocation and that the employee will be receiving benefits to facilitate the move.

A relocation can involve temporary shifts and/or displacement to the borrowers' cash flow and balance sheet. Situations contributing to these shifts include, but are not limited to, any of these:

• Temporary loss of co-borrower income

• An artificially high DTI ratio due to duplicate housing expenses

• Depletion of liquid assets to accommodate these situations

When a corporate relocation impacts borrowers, the documentation and standards below may apply.

Verification of Relocation Benefits

Since some relocation benefits may not be available to all relocating employees, obtain employer verification detailing the specific benefits the borrower is to receive.

Acceptable benefits include, but are not limited to:

• Reimbursable expenses (e.g., house hunting expenses)

• Transportation of household goods

• Home sale or buy-out agreement

• Home purchase assistance

• Corporate-financed subordinate financing

• Temporary living arrangement

Note: An offer letter may provide details regarding salary, bonus, or other compensatory benefits. In such cases, the underwriter may use discretion as to its acceptability for verification of income (refer to Employment Income – Salaried Sources – Non-Agency for additional information).

See Asset Types – Non-Agency for more information.

Guaranteed Buy-out Agreement

A borrower may benefit from a guaranteed buy-out agreement from his/her employer, or third-party relocation company, acting on behalf of the employer.

Subject to the following, the buy-out agreement for the current primary residence is eligible to document employer confirmation of an equity advance and an allowance to exclude current housing debt from the DTI ratio:

• Obtain a copy of the executed guaranteed buy-out agreement verifying the employee has no additional financial responsibility toward the current mortgage.

• If the employee has not executed the guaranteed buy-out agreement by the settlement time, the borrower must provide a statement that he/she intends to accept the buy-out if they are unable to sell the property on their own prior to the buy-out's expiration date.

A Closing Disclosure (CD) is not required when the buy-out agreement, or equivalent, is in the file.

Refer to Debt Analysis Guidelines – Non-Agency for additional requirements.

To enter in AUS: When a borrower’s employer or relocation company assumes responsibility for paying off an existing mortgage, the transaction should be treated as a sale and the Equity Statement used instead of the Closing Disclosure for purposes of entry into the AUS.

Tax Returns

Do not waive the tax return requirement for relocating employees.

Trailing Co-applicant Income

Since trailing co-applicant income is based on projected employment, the income cannot be used as part of qualifying income for loan qualification purposes.

Corporate-Financed Mortgages

Many corporations offer company-assisted second mortgages that do not require payment, or forgive a portion of the principal balance over time.

Company sponsored second mortgages are accepted up to the product or program maximum CLTV guidelines when all of these are true:

• The transaction is for the purchase of a primary residence only

• Full standard or alternative documentation processing applies

• A copy of the executed Note, detailing the amount, tenure, and repayment/forgiveness schedule, is in the file.

Corporate Financed Mortgages must be approved by Chase. Documentation must be:

• emailed to [email protected] or

• faxed to 866-908-0647

Correspondent Lending Library/Credit Guide - Non-Agency/Employment/Employment Stability Standards - Non-Agency (04/03/18)

Employment Stability Standards - Non-Agency (04/03/18)

Table of Contents

This topic applies to Non-Agency loans and includes the following:

• Overview

• Economic Issues

• Analyzing Borrower’s Employment Record

• Employment Stability Standards and Analysis for Salaried Borrowers

• Employment Stability Standards and Analysis for Self-Employed Borrowers

• Borrowers Entering or Re-entering the Workforce

• Borrowers on Mandatory Furlough at Time of Closing

• Verification of Employment

Overview

Analyzing a borrower's present and past employment provides the basis to evaluate employment stability which is a precursor to income stability.

Economic Issues

The underwriter must not ignore national, regional or local economic issues in the employment analysis if it could affect the stability of the employment and income or impact the loan decision. Borrowers should exhibit the potential for maintaining continuous employment and/or income to meet minimum investor guidelines. Any known economic issue relating to employment and/or loss of income must be addressed by the borrower and the employer.

Analyzing Borrower’s Employment Record

When analyzing the borrower’s employment, the following must be considered as part of the analysis:

• Borrower’s past employment record

• Employer’s confirmation of current, ongoing employment status

Employment can be reasonably expected to continue if:

• Borrower’s employer verifies current employment as part of the standard VVOE process and does not indicate that the employment has been, or is set to be terminated. It cannot be assumed that employment can be reasonably expected to continue if a verification of current employment includes an affirmative statement that the employment is likely to cease, such as a statement that indicates the employee has given (or been given) notice of employment suspension or termination.

• Borrower changes jobs frequently within the same line of work, but continues to advance in income or benefits. Income stability takes precedence over job stability.

Note: A borrower with 25% or greater ownership interest in a business is considered self-employed and will be evaluated as a self-employed borrower.

Employment Stability Standards and Analysis for Salaried Borrowers

Chase requires the following for salaried borrowers (unless stated otherwise in the Product Guides):

• Full explanation of each employment gap of 30 days or more

◦ For seasonal employment, when Seasonal Income requirements are met, income is considered to be uninterrupted and documentation of gaps of 30 days or more is not required

• Exhibit the potential to maintain continuous employment and income

• Prior to closing, Correspondent must independently verify and note in the loan file that the borrower is employed

Use the table below to determine employment stability documentation requirements:

IF the borrower has… AND… THEN…

generated income for 2 or more current and consecutive years,

employment is in the same or related field with any number of employers,

underwriting decision may be based on the borrower's current income.

fewer than 2 years current and consecutive employment history,

is a new entrant into the workforce,

provide documentation to prove stability and potential (for example: diploma, military discharge papers, job training certificate, or transcripts).

is re-entering the workforce,

provide documentation to evidence:• minimum of a 6-month current and consecutive

employment history with the same employer, and

• previous work history.

If Correspondent is unable to determine the stability of the borrower’s income on the basis of the available documentation, the income source may not be used to qualify.

Employment Stability Standards and Analysis for Self-Employed Borrowers

Chase requires the following for self-employed borrowers (unless stated otherwise in the Product Guides):

• Minimum of two years operating same business

• Exhibit the potential to maintain continuous employment and income

• For fluctuating or diminishing income, must evidence business’s ability to meet current and future obligations

• Prior to closing, Correspondent must independently verify and note in the loan file that the borrower is employed

If Correspondent is unable to determine the stability of the borrower’s business income on the basis of the available documentation, the income source may not be used to qualify.

Refer to Employment Income – Self Employed Sources for additional information.

Borrowers Entering or Re-entering the Workforce

Income of borrowers who are re-entering the workforce after an absence of six months or more may be considered effective and stable and can be used for qualifying if:

• Borrower has been at the current employer for a minimum of six months

• Can document a two-year work history prior to an absence from employment using:

◦ Employment verifications, and/or

◦ Copies of IRS Form W-2s or pay stubs

Refer to Temporary Leave of Absence in the Employment Income – Non-Agency topic for information regarding maternity or parental leave, short-term medical disability, workers’ compensation, or other temporary leave types that are acceptable pursuant to applicable law or the borrower’s employer.

Borrowers on Mandatory Furlough at Time of Closing

Borrowers that are on a mandatory furlough from their job must return to work prior to closing in order to use the income for qualification purposes.

All of the following are required as evidence:

• Verbal verification from the employer that reflects the borrower has returned to work under the same terms as prior to the furlough

• Copy of most recent pay stub to verify that the borrower has returned to work and supports the qualifying income used for the loan

Verification of Employment

Two Year Previous and Current Employment History

Prior to closing, borrower's employment history must be verified for all employers for the most recent two full years and include:

• Direct verification (written or verbal) with all current and past employers, and

• Exact dates of employment (such as, start and end dates)

The borrower must provide a satisfactory explanation for any gaps in employment of 30 days or more.

Confirmation of Current Employment

A borrower’s employment status may change during the loan application process. Verification of employment or business operation must be completed for each borrower on all transactions regardless of the type of documentation used to verify income (unless otherwise stated in the Product Guides).

• Verification of employment is not required for:

◦ Employment with negative income amounts

◦ Employment income that is positive but is not used to qualify

◦ Passive income sources (such as Social Security, retirement income, investments)

• Written Verification of Employment completed by the borrower’s employer is acceptable instead of a VVOE when it is received within the same required time frames as the VVOE.

• Third-party verifications (for example, the Work Number) are acceptable for salaried borrowers. Verification must evidence that the information in the vendor's database is no more than 35 days old as of the Note date.

• For self-employed borrowers, third-party verification from a CPA or regulatory agency also requires the name and title of the Correspondent employee and the date the verification was performed.

The following requirements and timeframes apply to applicants, based on their employment type:

Employment Type Requirements VVOE Must be Dated…

Salaried (hourly, salary or commission)

Correspondent must:• Independently obtain a telephone number and, if possible,

an address for the borrower’s employer. Acceptable sources include: telephone book, internet, directory assistance, or applicable licensing bureau.

• Contact the employer and confirm borrower’s:

◦ Current employment status

◦ Position or title

Conversation must be documented; it should include:• Name and title of the person at employer who confirmed

employment

• Date of the call

• Source of the telephone number (must be from acceptable third party source)

• Borrower’s date of hire in MM/DD/YY formatNote: When it is apparent that employment extends over two years, the MM/YY format is acceptable. Number of months or years is not acceptable (for example, “3 years”)

• Name and title of Correspondent employee who obtained the information

Include VVOE in the closed loan file prior to delivery to Chase for purchase.

Note: If the borrower is in the military, a military Leave and Earnings Statement (LES) or verification of employment through the Defense Manpower Data Center dated within 30 days of closing is acceptable in lieu of a VVOE.

no earlier than 10 business days prior to the Note date

Self Employed Correspondent must verify the existence of the borrower’s business:• From a third party, such as a CPA, regulatory agency or the

applicable licensing bureau.

• By verifying a telephone listing and address for the borrower’s business using a telephone book, internet or directory assistance.

Correspondent must document the source of the information obtained, the name and title of the Correspondent employee who obtained the information, and the date the verification was performed.

When a VVOE form is not submitted with the alternate documentation for a self-employed borrower, the documentation submitted must include the following:• Source of information

• Name and title of the Correspondent employee who obtained or verified the information, and date they performed the verification

within 120 calendar days of the Note date

Important: Document all attempts made in verifying employment. If unable to verify, obtain the next level of documentation (such as tax returns or recent billing statements). Ensure all supporting documentation is provided in the file delivered to Chase.

Correspondent Lending Library/Credit Guide - Non-Agency/Income - Non-Agency/General Income Verification Requirements – Non-Agency (06/06/17)

General Income Verification Requirements – Non-Agency (06/19/18)


Table of Contents


General Information

Income Verification Requirements

Individual Federal Tax Return Requirement (IRS Form 1040)

Analyzing Borrower’s Income

Analyzing IRS Form 1040

Variable Income

Written Request for Verification of Employment

Non-Taxable Income

Borrower’s Application (1003/65) (Financial Statement)

Multiple Income Sources

Income that Cannot be Considered

General Information

Verification of qualifying income sources, amounts, taxable status, seasoning and probable continuance are required critical components in the determination of credit worthiness.

To assess the likelihood of continuity and stability, the greatest weight is given to historical experience that can be verified to the satisfaction of Underwriter.

All sources of income included in the loan qualification must be verifiable and stable, with a reasonable expectation that at least the same level of income will continue to be received for a minimum of three years. Income may not be used for qualification when there is any knowledge or documentation indicating that it will terminate within the next three years.

Notes:

• Refer to the Tax Transcripts for Income Documentation topic for federal tax return requirements for self-employed borrowers regardless of whether the income is being used to qualify. This determines if there is a business loss that may have an impact on the stable monthly income used for qualifying. Refer to Credit Guide – Non-Agency > Income – Non-Agency> Employment Income – Self Employed Sources – Non-Agency and Schedule K-1 Requirements for detailed requirements.

• Specific product or program income verification requirements may differ. Refer to the applicable Product Guide for additional information.

• The optional Chase Correspondent Customer Non-Agency Income Calculation Workbook is available in the ChaseLoanManager Resource Center to help you align your income calculations to Chase requirements.


Income verification is required for each applicant on all applications. Acceptable verification is written proof of the income stated by the applicant. Acceptable documentation varies by income source; refer to applicable Product Guide and Tax Transcript Requirements for Income Documentation > Documentation Requirements.

Use of the term "qualify" indicates that the debt-to-income (DTI) requirement is satisfied. Income that cannot be verified or that is from an ineligible source must be excluded from the applicant’s qualifying income.

Note: Individual applicants providing a joint federal tax return for verification of unearned income (i.e., rental, interest and dividend) must provide evidence of asset ownership to use the income in qualification.

Individual Federal Tax Return Requirement (IRS Form 1040)

A minimum of the most recent two years’ signed and dated individual tax returns from the borrower(s), including all schedules, are required when:

• Individual tax returns are needed to verify historic qualifying income amounts for certain salaried borrowers, investment income, rental income, and additional income sources.

• Borrower’s salary is commissioned (regardless of the percent of total annual income the commission represents)

• Borrower is employed by a family-owned business (but not self-employed) or employed by an interested party to the property sale, purchase, or financing transaction

• Borrower is self-employed (generally any borrower who owns 25% or more of a business) regardless of whether business income or loss is used to qualify

• Schedule K-1 income is used to qualify, regardless of percentage of ownership

• Schedule K-1 reports a loss (regardless of percentage of ownership)

Refer to Schedule K-1 Requirements for detailed requirements and exclusions.

Note: Refer to the following topics for specific requirements:

• Employment Income – Self Employed Sources – Non-Agency


• Schedule K-1 Requirements – Non-Agency

• Tax Transcript Requirements for Income Documentation

Analyzing Borrower’s Income

The income of each borrower who will be obligated for the mortgage debt and whose income is being relied upon in determining ability to repay must be analyzed to determine whether his/her income level can be reasonably expected to continue.

Income from sources other than salary and wages can be considered as potential qualifying income, when properly verified and documented.

Borrowers Planning to Retire

Qualifying income for borrowers planning to retire during the first three-year period of the mortgage term must include the verifiedamount of:

• Documented retirement benefits

• Social Security payments, or

• Other payments expected to be received in retirement

If it is confirmed that the retirement income will not be received prior to the date of the first mortgage payment, then qualifying income must be based on the lesser of the current income or the future income derived from the retirement sources.

Borrowers cannot be asked whether they are planning to retire; however, if the borrower discloses plans to retire or there is documentation in the file indicating the borrower will be relying on retirement income by the first payment due date, the income verification is required (refer to Other Income – Non-Agency in the Online Guide for requirements).

Notes:

• Salary or wage income from employment can be reasonably expected to continue if a borrower’s employer verifies current employment and income and does not indicate that employment has been, or is set to be terminated.

• Do not assume that income can be reasonably expected to continue if a verification of current employment includes an affirmative statement that the employment is likely to cease, such as a statement that indicates the employee has given (or been given) notice of employment suspension or termination.

Analyzing IRS Form 1040

The amount shown on a borrower’s signed and dated IRS Form 1040 as adjusted gross income must either be increased or decreased based on the Underwriter’s analysis of the individual federal tax return and any related tax schedules.

The table below contains guidelines for analyzing IRS Form 1040:

IRS Form 1040 Heading Description

Wages, Salaries and Tips An amount shown under this heading may indicate that the individual:• Is a salaried employee of a corporation, or

• Has other sources of income

This section may also indicate that the borrower’s spouse is employed, in which case the spouse’s income must be subtracted from the borrower’s gross income unless the spouse is a co-borrower.

Business Income and Loss (Schedule C)

Sole proprietorship income calculated on Schedule C is business income. Depreciation or depletion may be added back to the adjusted gross income.

Note: Adding back business use of home is not allowed.

Rents, Royalties, Partnerships (Schedule E)

Any income received from rental properties or royalties may be used as income.

Refer to Income – Non-Agency > Rental Income – Non-Agency for documentation and analysis requirements.

Capital Gains and Losses (Schedule D)

Capital gains or losses generally occur only one time, and should not be considered when determining qualifying income. However, if borrower has a constant turnover of assets resulting in losses, the capital loss must be considered. More than two years of tax returns may be required to analyze the trend.

If the trend consistently shows a loss, it must be deducted from total income.

Note: As a reminder the use of capital gains income is not permitted.

Interest and Dividend Income (Schedule B)

Interest and dividend income may be added back to the adjusted gross income only if it:• Has been received for the past two years, and

• Is expected to continue

If the interest-bearing asset will be liquidated as a source of the cash investment, the Underwriter must appropriately adjust the amount.

Farm Income or Loss (Schedule F)

Any depreciation shown on Schedule F may be added back to the adjusted gross income.

IRA Distributions, Pensions, Annuities, and Social Security

Non-taxable portion of these items may be added back to the adjusted gross income, if the income is expected to continue for the first three years of the mortgage.

Adjustments to Income Adjustments to income may be added back to the adjusted gross income if they are:• IRA and Keogh retirement deductions

• Penalties on early withdrawal of savings

• Health insurance deductions

• Alimony payments

Employee Business Expenses Employee business expenses are actual cash expenses that must be deducted from the adjusted gross income

Variable Income

Some sources of income are considered to be variable. Analyze these types of income sources with additional care as they are subject to external influences that may be beyond the borrower's control.

Using an average of the past two years is usually common and customary for income streams that are variable but evidence consistency and stability. If the Underwriter feels justified in using a probable amount other than the average, either higher or lower, the Underwriter should document those considerations and include any supporting documentation in the file.

• When used in qualifying income, variable sources must be reported separately when possible. This is especially important with commissions, bonuses, substantial amounts of overtime pay, and employment that is subject to time limits (such as contract employees or tradesmen).

• Underwriter has the authority to determine whether a VOE is required to calculate variable sources of income.

• Sufficient pay stubs or statements must be obtained to validate the monthly or annual income calculation. Unless otherwise required by the Underwriter, the most recent paystub is required and must:

◦ Be dated no earlier than 30 days prior to the application date and

◦ Reflect a minimum of 30 days of year-to-date (YTD) earnings

• Individual federal tax returns or other additional documentation may be required.

• Significant increases in income should be adequately explained.

• Declining income sources must be carefully analyzed, should not be averaged, and an explanation for the decline should be obtained. Use the most recent lower income for qualification purposes or the income source may be determined to be ineligible for qualification purposes.

When knowledge exists of negative market conditions that would suggest the income source is not sustainable, do not use it to qualify the borrower

Written Request for Verification of Employment

A written request for verification of employment completed by the employer can be obtained instead of a verbal verification of employment, provided it is dated no earlier than 10 business days prior to the Note date.

In addition, when using overtime, bonus, or commission income to qualify, a breakdown of that income is required. For certain types of employment where a borrower is paid for fewer than 52 weeks per year (for example, teachers who can be paid for the number of months in a school year), the number of pay periods must be provided. Year-end pay stubs frequently provide the breakdown, but when a borrower is unable to provide a year end pay stub, a written Request for Verification of Employment can be used instead.

The written Request for Verification of Employment must be sent by the Correspondent directly to the borrower’s employer for completion.

Note:

• The written Request for Verification of Employment cannot be completed by the borrower or provided to the borrower for the employer to complete.

Non-Taxable Income

Refer to Credit Guide – Non-Agency > Income – Non-Agency > Other Income – Non-Agency > Non-Taxable Income for information on non-taxable income and grossing up income.

Borrower’s Application – (1003/65) (Financial Statement)

Chase requires an initial application for all borrowers. The application:

• Functions as the borrower's financial statement

• Identifies the borrower and their request for credit

• Serves as the borrower's validation of the information disclosed

After all information on the initial application has been received and verified, a final application is prepared and signed by the borrower at closing.

Multiple Income Sources

To verify multiple acceptable income sources, apply the most conservative credit documentation requirements.

Income that Cannot be Considered

Income must be reasonable and consistent with the loan application. When calculating an applicant's income, certain types of income cannot be considered, including use as a compensating factor.

Examples include:

• Income that is not stable

• Non-verifiable, non-reportable, and undocumented income

• Income of a temporary or unknown origin

• Any income for a non-contractual party (for example, rental income without a lease agreement or evidenced on Schedule E of the 1040)

• Income that is earned by a person who is not on the application. Income used to decision an application must be earned by the applicant(s) only. (For example, Underwriter may not use income earned by a spouse who is not on the application. To use income earned by both, spouses must be joint applicants.

Note: Consult with your legal and compliance departments for possible state-specific requirements.

• Income derived from an activity that is deemed illegal by federal or state law (for example, income derived from a business that is legal by state law but illegal by federal law cannot be considered)

• Income received as a gift

• Health and Wellness Income

Correspondent Lending Library/Credit Guide - Non-Agency/Income - Non-Agency/Employment Income – Salaried Sources – Non-Agency (10/31/17)

Employment Income – Salaried Sources – Non-Agency (10/31/17)


Table of Contents


Overview

General Requirements for Salaried Borrowers

Partner Income

Military Leave and Earnings Statement (LES)

Partial Year Income

Primary Employment Less than 40 Hour Work Week

Employment Contracts

Temporary Leave of Absence

Other Salaried Income Sources

Overview

Salaried borrowers are individuals who have less than 25% ownership in the business from which they derive their salary. These borrowers receive annual or hourly wages, or commission.

• A borrower who is not self-employed but employed by a family-owned business, or is employed by an interested party to the property sale, purchase, or refinance transaction, may represent a less predictable source of income. Copies of the last two years income tax returns, filed with the IRS, are required

• Personal or business tax returns must evidence the borrower’s ownership percentage in the business (if any).

See Arms Length/Non-Arms Length Transactions for more information.

General Requirements for Salaried Borrowers

When documentation shows that the applicant has maintained a consistent level of income despite changes in the sources of income, the stability of that income level may be presumed.

Example: An applicant may change jobs frequently but is nonetheless able to earn consistent and predictable income.

Income may not be used in calculating the borrower’s debt-to income ratio if it comes from any source that cannot be verified, is not stable, or will not continue.

• Income of each borrower who will be obligated for the mortgage debt and whose income is being relied upon in determining ability to repay must be analyzed to determine whether his/her income level can be reasonably expected to continue.

• In most cases, a borrower’s income is limited to salaries or wages. Income from other sources may be considered for qualification purposes, when properly verified and documented.

Documentation Required

• Most recent paystub, dated no earlier than 30 days prior to initial application date and reflecting a minimum of 30 days of year-to-date (YTD) earnings

◦ If 30 days of year-to-date earnings are not reflected on the pay stub (due to timing within the calendar year); then a paystub from December evidencing prior year to date earnings is also required

• Most current two years W-2 forms

◦ If the most current two years W-2 forms are not available, year-end pay summaries or pay stubs containing comparable information are acceptable

See Tax Transcript Requirements for Income Documentation > Documentation Requirements for additional details.

Partner Income

When a borrower is made a partner in a business (such as law firm or accounting firm) and as a result has acquired an ownership interest of less than 25%, the borrower is not considered to be self-employed.

In many situations, these borrowers will receive higher levels of income than previously earned, which can include guaranteed payments. If the borrower's income is guaranteed, even if the borrower has become a partner recently, the increased guaranteed income level may be used for income qualification without an established two-year history of receipt.

Notes:

• Borrower must have a minimum two-year history of employment with the current employer

• Future income levels not yet received cannot be used for qualification.

• The 24 month average of the total income received and documented from the employer prior to the promotion to partner can be used for qualification, as long as the new guaranteed income plus anticipated bonus/partner pay (total potential income) as detailed in supplemental supporting documentation obtained from the employer is not lower than the prior 24 months average

Documentation requirements:

Available income documentation will vary, based on the time frame when the borrower was awarded the partnership interest and began receiving the higher level of income and/or additional guaranteed sources. Standard documentation requirements should be followed (for non self-employed borrowers) and be supplemented (as applicable) with additional supporting documentation such as:

• Signed and dated individual federal tax returns as indicated in General Income Verification Requirements – Non-Agency

• Two years of K-1 Statements from the Partnership to the individual

◦ Borrower’s proportionate share of income or loss is based on the borrower’s partnership percentage of Ending Capital in the business as shown on IRS Form 1065, Schedule K-1

◦ Income must have been distributed to the borrower

• Employment/Partner Letter or Agreement which clearly defines:

◦ Borrower's compensation package, including guaranteed payments

◦ Any salary "draws" for which the borrower is eligible

◦ Any partner loans, along with the associated terms and requirements

Partner Loans

If a partner loan debt exists, the payments must be considered in the qualifying ratio even if the payment is deferred.

Calculate the borrower’s DTI after subtracting the partner loan payment from the income (rather than calculating as a portion of the monthly debt).

Refer to Employment Income – Self Employed Sources – Non-Agency for Partner with 25% or more ownership requirements.

Military Leave and Earnings Statement (LES)

Military personnel often receive supplemental income in addition to regular base-salary income. The following supplemental income amounts can be used for military personnel provided the pay is verified in writing by the branch of the military the borrower is in and the income is not subject to near-term elimination:

• Flight/hazard pay

• Pro-pay (professional pay)

The following additional supplemental income amounts for military personnel must be grossed up by the tax rate used to calculate the borrower’s most recent year’s income tax return.

• Basic Allowance for Subsistence (rations or food) (BAS)

• Basic Allowance for Housing (BAH)

As part of the verification process, there must be letter from the commanding officer or his delegate in the file that supports supplemental income source(s) are likely to continue, regardless if borrower is on deployment.

Refer to Credit Guide – Non-Agency > Income – Non-Agency > Other Income – Non-Agency > Grossing Up Income for information about grossing up non-taxable income.

Partial Year Income

Certain borrowers (such as teachers and forest firefighters) may be paid for only part of the year. Underwriting must ensure that the monthly qualifying income calculation considers this partial-year employment. To determine partial-year qualifying income, multiply the monthly salary by the number of months the borrower is paid and divide by 12 ("annualizing" the income).

Primary Employment Less than 40 Hour Work Week

When a borrower’s primary employment is less than a typical 40-hour work week, the stability of that income should be evaluated as regular, on-going primary employment.

Example: A nurse may have worked 24 hours per week for the last year. Although this job is less than 40-hour work week, it is the borrower’s primary employment, and should be considered as potential qualifying income.

Employment Contracts (also known as Future Income)

Employment contracts are typically utilized with professionals such as doctors, lawyers, and teachers.

Definition

An employment contract is a legally enforceable written document executed jointly by the employer and employee. Employment agreements and offer letters are additional forms of employment contracts, provided they are fully executed by all parties and include all required information.

Requirements

The employment contract (including employment agreements and offer letters) should define pertinent employment details including:

• Employment start date

• Salary

• Length of employment

◦ Employment contracts that expire in less than three years must be carefully evaluated by the Underwriter, applying the same level of employment and income stability scrutiny applied to other salaried borrowers.

The contract may also include such things as benefits and other related terms of employment.

A borrower may be qualified using the income documented in the employment contract provided:

• Employment contract is fully executed by the employer and employee

• Employment contract does not contain contingencies

• Terms of the contract are deemed reasonable by the Underwriter

• Loan application and file documentation verify the required minimum two-year employment history for the borrower

◦ Underwriter may elect to accept college transcripts in lieu of employment history

• Contract is included within the closed loan file submitted to Chase

• Eligible transaction and additional requirement guidelines are followed based on the employment start date:

IF employment begins…

THEN eligible transactions are… AND…

prior to closing, ◦ purchase and refinance

◦ property type and occupancy as permitted by product type

N/A

within 60 days after closing,

◦ purchase only

◦ 1-unit primary residences onlyadditional six months reserves (plus any reserves required by Product Guide) must be documented in file.

more than 60 days after closing,

N/A loan is not eligible for sale to Chase.

• Verbal Verification of Employment (VVOE) is completed within 10 days of closing and confirms one of the following:

IF employment begins… THEN VVOE must confirm…

prior to closing, borrower has started his or her employment based on the terms reflected in the employment contract,

within 60 days after closing, terms of employment have not changed,

Temporary Leave of Absence

Chase will consider regular employment income or other alternative short-term sources of income from a borrower that is on a temporary leave of absence, even if the borrower will not be returning to work at the time of closing.

Acceptable reasons for the leave of absence include maternity or parental leave, short-term medical disability, workers’ compensation, or other temporary leave types that are acceptable by law or the borrower’s employer provided the following conditions are met:

• Written verification from the borrower confirming:

◦ Their intent to return to work upon completion of the leave of absence, under the same terms as prior to the leave, and

◦ Agreed upon date of the return to work

• Written verification or documentation from the borrower’s employer confirming borrower’s:

◦ Eligibility to return to the current employer after the temporary leave

◦ Agreed-upon date of return to work

Note: Documentation from the employer can be obtained either from the:

◦ Employer (or a designee of the employer when the employer uses a third party to administer employee leave), or

◦ Borrower; however, the documentation must have been generated by the employer (or designee)

• Verbal Verification of Employment (VVOE) following standard requirements and procedures is included in the file.

If the borrower’s employer indicates the borrower does not have the right to return to work after the leave period, the income cannot be used.

See Credit Guide – Non-Agency > Income – Non-Agency > Other Income – Non-Agency > Disability Income > Permanent Disability.


Verification of borrower’s income is required as follows:

• Standard documentation of the amount of regular employment income the borrower received prior to the temporary leave. This includes, but is not limited to base pay, overtime, commissions and bonus income.

• Documentation evidencing the amount and duration of all income sources being used to qualify the borrower during the temporary leave of absence period.

• If needed, documentation verifying all available liquid assets used to supplement a reduced income for the duration of the temporary leave of absence period.

Calculation of Qualifying Income

Use the chart below to determine the income calculation requirements for borrower on a temporary leave of absence.

IF it is verified that the borrower will... THEN...

return to work at their current employer as of the first mortgage payment,

borrower’s regular employment income (gross monthly income) that will be received upon return to work can be used for loan qualification purposes.

not return to work as of the first mortgage payment,

use the lesser of the borrower’s:• temporary leave income that will continue to be received for duration of leave

of absence (if any), or

• regular employment income

Use of Supplemental Income

If the temporary leave income is less than the regular employment income and is not sufficient to qualify, available liquid financial reserves may be used supplement the temporary leave income.

Supplemental income, if applicable, is calculated as follows:

Step Action

1 Determine amount of liquid reserves available for use as supplemental income by subtracting any funds needed to complete transaction (down payment, closing costs, other required debt payoff, escrows and minimum required reserves) from total verified liquid asset amount.

2 Determine number of months requiring supplemental income. This is number of months from first mortgage payment date to date borrower will begin receiving his or her regular employment income, rounded up to the next whole number.

3 Determine amount of qualifying supplemental income by taking available liquid reserves and dividing by the number of months of requiring supplemental income.

4 Calculate total qualifying income by adding supplemental income amount determined in steps 1-3 to temporary leave of absence income.

Note: The total qualifying income determined in Step 4 may not exceed the borrower’s regular employment income.

Important: If a borrower is not currently on temporary leave, do not ask if he or she intends to take leave in the future. In addition, under no circumstances should any information regarding a borrower’s personal medical history or condition be requested from the borrower or any third party source.

Other Salaried Income Sources

Refer to Credit Guide - Non-Agency > Income – Non-Agency > Other Income – Non-Agency for information regarding the following additional salaried income sources:

• Bonus Income

• Commissioned Borrowers

• Overtime Salary Income

• Part-Time or Second Job Income

• Seasonal Income

• Tips and Gratuities

Correspondent Lending Library/Credit Guide - Non-Agency/Income - Non-Agency/Employment Income – Self Employed Sources – Non-Agency (05/01/18)

Employment Income – Self Employed Sources – Non-Agency (05/01/18)


Table of Contents


Overview

General Requirements for Self-Employed Borrowers

Documentation Requirements – All Self-Employed Borrowers

Analyzing Individual Federal Tax Returns

Analyzing Business Tax Returns

Establishing a Self-Employed Borrower’s Earnings Trend

Self Employed Business Losses

Debts Payable in Less Than a Year

Contract Employees

Types of Business Structures

Sole Proprietor

Partnership

Corporation

S-Corporation

Limited Liability Company (LLC)

Overview

Self-employed income comes from an enterprise the borrower owns outright or substantially controls.

• An ownership share of 25% or more (or a combined ownership share of 25% or more for multiple applicants) determines "substantial control."

• When the borrower or multiple borrowers control(s) less than 25% of the business, refer to Employment Income - Salaried Sources and K-1 topics.

Income from self-employment is considered stable, and can be considered in qualification if the borrower has been self-employed for a minimum of two years. Analyze the business’s financial strength by examining annual earnings. Annual earnings that are stable or increasing may be acceptable, while businesses that show a significant decline in income over the analysis period are generally not acceptable.

Analyze a self-employed borrower’s business to determine that the income streams are reasonable and likely to continue. The determination must validate the business is:

• Profitable and viable

• Generating sufficient cash-flow to fund internal business needs

• Able to provide the owner (borrower) with sufficient income to repay all debt obligations

Individual Federal Tax returns must be obtained regardless of whether the income is being used to qualify, to determine if there is a business loss that may have an impact on the stable monthly income used for qualifying.

Note: Refer to Rental and Investment Property Income > Rental Property Reported through a Partnership or S-Corporation when business debt is a mortgage reported through partnership or S-Corporation.

General Requirements for Self-Employed Borrowers

For self-employed borrowers, the following factors must be considered when analyzing the stability of business income for potential use in income qualification:

• Minimum of two years operating the same business

• Location and nature of the borrower’s business

• Demand for product or service offered by the business

• Financial strength of the business

• Documented ability of the business to continue generating and distributing sufficient income to enable the borrower to make payments on current and future obligations when income is fluctuating or diminishing

The following are required for all self-employed borrowers:

• A 24-month history of self employment, regardless of prior work history

• A minimum of 12 months self-employment, reflected on federal tax returns

Note: If federal tax returns do not reflect the complete 24-month period (due to timing), an unaudited Profit and Loss (P&L) Statement and Balance Sheet prepared by an independent third-party (such as borrower’s tax preparer, CPA, or company bookkeeper) or by the borrower must be provided covering the remaining time period.

Documentation Requirements – All Self-Employed Borrowers

The following documentation is required for self-employed borrowers (including K-1 recipients) as indicated below:

IF borrower... THEN the following documentation is required...

• qualifies with self-employed business losses, including K-1 losses, or

• has positive K-1 income but does not use it to qualify,

• Minimum of the most recent two years of signed and dated individual federal tax returns including all schedules

• Tax returns must reflect a minimum of 12-months self-employment (losses must be considered in qualifying income regardless of length of self-employment reflected on tax returns)

Note: Internal Revenue Service (IRS) Form 4506-T is required (refer to Tax Transcript Requirements for Income Documentation > Documentation Requirements

• uses self-employed income (including K-1) to qualify, or

• needs full documentation to offset self-employed losses,

• Minimum of the most recent two years of signed and dated individual federal tax returns including all schedules, K-1s, statements, and attachments

◦ Tax returns must reflect a minimum of 12-months self-employment (losses must be considered in qualifying income regardless of length of self-employment reflected on tax returns)

• Minimum of the most recent two years signed and dated business tax returns including all schedules and statements

◦ Most recent two years of K-1s from Partnership, LLC, or S-Corporation (refer to K-1 Requirements topic for details)

• Most recent two years of W-2s from the corporation (if applicable)

• A year-to-date (YTD) Profit and Loss (P&L) Statement and Balance Sheet, signed and dated by the preparer. This is required when:

◦ Tax returns do not provide a full 24-month history of self employment (P&L to cover any part remaining), or

◦ Application is dated more than 90 days after the end of the business’ year end (calendar or fiscal), regardless of the type of business

◾ For Schedule C Businesses (Sole Proprietorship): A balance sheet is required for all transactions, regardless of the date of the mortgage application or most recent tax filing date.

◾ The P&L Statement and Balance Sheet can be prepared by the borrower or a third-party (such as borrower’s tax preparer, CPA, or company bookkeeper) and is not required to be audited

◾ When required, the P&L statement must reflect the information covering the interim period from the end of the most recently obtained tax returns through the business’s most recently completed financial quarter

◾ P&L Statement and Balance Sheet expire 120 days from the Note date

Note: Internal Revenue Service (IRS) Form 4506-T is required (refer to Tax Transcript Requirements for Income Documentation > Documentation Requirements

Analyzing Individual Federal Tax Returns

When analyzing a self-employed borrower’s personal income, the Underwriter must:

• Focus on earnings trends and the actual sources of the income, not just the total amount of the income

• Confirm the stability and likelihood of continuance for each source of income that the borrower reports on IRS Form 1040

• Consider all recurring income that the borrower can expect to continue receiving over time

• Not include any income that appears to be unstable or unlikely to continue

Income is considered stable if the loan file does not include any specific indication of an upcoming change in the borrower’s employment or income; the borrower’s employment history has no gaps or other significant fluctuations in income; and any income received under a contractual agreement (other than an “at will” contract) will continue to be received for at least three years.

Examples of stable income include:

• Regular salaries or wages

• Bonus or commission income that has been received on a consistent basis

• Interest income from long-term investments that are not being liquidated in connection with the mortgage transaction

• Earnings from the operation of the borrower’s business

Analyzing Business Tax Returns

When a borrower relies on self-employed income to qualify, the Underwriter must prepare a written evaluation of his or her analysis of the borrower’s business income.

The purpose of this analysis is to:

• Consider the recurring nature of the business income, including identification of pass-through income that may require additional evaluation. Pass-through income (or loss) is typically transferred through use of a K-1 to a Partnership or S-Corporation from another business

• Measure year-to-year trends for gross income, expenses, and taxable income for the business

• Determine (on a yearly or interim basis) the percentage of gross income attributed to expenses and taxable income; and

• Determine a trend for the business based on the change in these percentages over time

When using business income in qualification, the Underwriter must perform a written analysis using Fannie Mae Form 1088 to determine the business’s viability.

Establishing a Self-Employed Borrower’s Earnings Trend

The borrower’s self-employed earnings trend from the previous two years must be established using the borrower’s Individual federal tax returns and supplemented by P&L Statements (when applicable). In addition, the Underwriter must perform a written analysis of a business’s viability using Fannie Mae Form 1088.

If a borrower:

• Provides quarterly tax returns, the income analysis may include income through the period covered by the tax filings

◦ If the most recent quarterly tax return is less than the income calculated based on the analysis of the prior years' tax returns, the borrower's most recent quarterly tax return must be used to calculate his/her income.

• Provides P&L statements, they do not need to be audited in any instances. In addition:

◦ Any increase in income shown on the P&L Statement, when compared to the final income calculation from the tax returns, cannot be used to qualify, regardless of whether the P&L is audited or unaudited. Base the income analysis solely on the income verified through the tax returns.

◦ If the P&L Statement reflects a decrease in income when compared to the final income calculation from the tax returns, then the income reflected on the P&L statement alone must be used to qualify.

Self Employed Business Losses

Self employed business losses must be considered as part of the underwriting and risk assessment of the loan file. The amount of any losses incurred by the business must be deducted from qualifying income, based on the borrower’s percentage of ownership in the business.

Refer to Documentation Requirements – All Self Employed section in this topic for details.

Note: Losses are also considered in the analysis of the business as indicated in the Overview section above.

Debts Payable in Less Than a Year

Mortgages, Notes, and Bonds payable in less than one year must be deducted from the self-employed income by the amount of the debt, regardless if the business has sufficient assets to cover the debt or the debt has a history of rolling over.

Contract Employees

Chase considers contract employee borrowers (borrowers paid on an independent, contractual basis) to be self-employed borrowers. Contract employee borrowers must provide the same documentation as self-employed borrowers.

Types of Business Structures

The legal structure of a business determines the:

• Way business income or loss is reported to the IRS,

• Taxes that are paid,

• Ability of the business to accumulate capital, and

• Extent of the owner’s liability

The basic types of business structures are as following:

• Sole proprietorships

• Partnerships

• S Corporations and Corporations

• Limited Liability Companies (LLCs)

Sole Proprietor

A sole proprietor generally files a Schedule C with personal tax returns to report business income.

Sole proprietors must meet the following income verification requirements:

• Minimum of the most recent two years of signed and dated individual federal tax returns including all schedules, statements, and attachments are required

◦ When the returns are insufficient to analyze the business, request supplemental financial information, such as interim financial statements

• Signed IRS Form 4506-T to validate the tax returns, see Tax Transcripts for additional information

• Profit and Loss (P&L) Statement may be required (refer to Documentation Requirements – All Self Employed Borrowers in this topic for requirements)

• Balance Sheet is required for all Sole Proprietor transactions, regardless of the date of the mortgage application or most recent tax filing date

• Determine whether the business can accommodate the withdrawal of assets or revenues if the borrower needs them to pay the mortgage payment and/or other personal expenses

Income (or Loss) from a Sole Proprietorship

Income (or loss) from a borrower’s sole proprietorship is calculated on IRS Form 1040 Schedule C, then transferred to IRS Form 1040.

The Underwriter may need to make adjustments to the net profit or loss shown on Schedule C to arrive at the borrower’s cash flow (for example, Schedule C may include income that was not obtained from the profits of the borrower’s business). If the Underwriter determines that such income is not recurring, adjust the borrower’s cash flow by deducting the non-recurring income.

Note: Depreciation, depletion, and amortization/casualty loss expenses may be added back to income; however, business use of home and net operating losses cannot be added back to the income.

See Tax Transcripts > When Taxes not Filed by October 15th if the tax filing deadline has passed without the borrower filing.

Partnership

Both general and limited partnerships report profit or loss on IRS Form 1065, and each partner’s share of the profit or loss is carried over to IRS Form 1065, Schedule K; however, the partnership pays no tax on the partnership income. A borrower’s proportionate share of income or loss is based on the borrower’s partnership percentage of Ending Capital in the business as shown on IRS Form 1065 – Schedule K-1.

Each partner uses the information from IRS Form 1065, Schedule K-1, to report his or her share of the partnership’s net profit or loss (and special deductions and credits) on his or her IRS Form 1040- regardless of whether or not the partner receives a cash distribution from the partnership. Individual partners pay taxes on their proportionate share of the net partnership income at their individual tax rates.

To determine the level of the borrower’s financial risk, the Underwriter must determine:

• Whether the borrower has guaranteed any loans obtained by the partnership (other than loans that are considered as nonrecourse debt or qualified nonrecourse debt)

• If the borrower received a distribution from the partnership, and

• Borrower’s share of depreciation and depletion that can be added back to the cash flow of the partnership business

IRS Form 1065 must be reviewed to assess the viability of the business.

• Add depreciation, depletion, and amortization/casualty loss expenses back to the income in proportion to the borrower’s share of income.

• Income must also be reduced proportionately by the total obligations payable by the partnership in less than one year.

When the borrower, or multiple borrowers combined, controls 25% or more of the business, the following minimum requirements apply:

• Personal tax returns as indicated in the Documentation Requirements section in this topic

• Most recent 2 years Partnership tax returns (1065s)

• Most recent 2 years of the K-1s from the partnership to the individual

• Profit and Loss Statement and Balance Sheet (if applicable) (refer to Documentation Requirements – All Self Employed Borrowers in this topic for requirements)

See Tax Transcripts > When Taxes not Filed by October 15th if the tax filing deadline has passed without the borrower filing.

Income from partnerships can only be considered if the documentation received verifies that:

• Borrower has ownership of the income (Schedule K-1 may be used to document ownership share)

• Income was actually distributed to the borrower

• Partnership tax returns (form 1065) reflect positive sale and earning trends and liquidity as determined by the Comparative Income Analysis

Notes:

• Business use of Home and net operating losses cannot be added back to the income.

• Cash withdrawals from the partnership may have a severe negative impact on the partnership’s ability to continue operating, and must be considered in the income analysis.

• When a borrower has recently been made a partner in a business (such as law firm or accounting firm) and as a result has acquired a nominal ownership interest, the borrower is not considered to be self-employed (refer to Employment Income – Salaried Sources > Partner Income to use guaranteed income for income qualification without a two-year history of receipt)

Corporation

Corporations must report income and losses on IRS Form 1120 and pay taxes on the net income. The corporation distributes profits to its shareholders in the form of dividends, which it reports on IRS Form 1099-DIV. The shareholders must then report the dividends as income on their individual IRS Form 1040.

If the borrower or multiple borrowers control 25% or more of the business entity, the following documentation is required, at a minimum:

• Personal Tax Returns as indicated in the Documentation Requirements section in this topic

• Most recent two years of Corporate Tax Returns (1120 or 1120S) (if applicable)


See Tax Transcripts > When Taxes not Filed by October 15th if the tax filing deadline has passed without the borrower filing

NOTE: Corporate financial statements are useful as a supplement and an update, but are not a substitute for the Corporate Tax Returns.

Use of Profits from a Corporation

To use "net profits" from a Corporation as qualifying income, the borrower(s) on the application must have complete (100%) ownership of the Corporation as evidenced by the business tax returns or a letter from the accountant for the business.

The following requirements must also be documented:

• Borrower(s) must have a legal right to the additional income as evidenced by a corporate resolution or other comparable document.

• There must be a minimum two year history of stable and consistent business income earned by the Corporation (business profits)

• Business liquidity analysis supporting the borrower’s ability to withdraw cash without having negative effects (refer to Business Liquidity Calculation section of the Schedule K-1 Requirements – Non-Agency topic for details for completing the required analysis)

• Underwriter’s analysis of the business that supports it is capable of providing the borrower(s) with the additional income on a go-forward basis

◦ As part of the analysis, the business’s sales and earnings trend must be positive

Use the Funding Request Form to indicate net profits from a corporation were used as qualifying income.

The table below describes the items found on IRS Form 1120 for which adjustments are made to determine adjusted business income.

Adjustment Item Description of Adjustment

Depreciation, Depletion, and Amortization/Casualty Loss Expenses

Add the corporation’s depreciation, depletion, and amortization/casualty loss expenses back to the after-tax income.

Taxable Income Taxable income is the corporation’s net income before Federal taxes. Reduce taxable income by the tax liability.

Fiscal Year vs. Calendar Year If the corporation operates on a fiscal year that is different from the calendar year, an adjustment must be made to relate corporate income to the individual tax return.

Cash Withdrawals The borrower’s withdrawal of cash from the corporation may have a severe negative impact on the corporation’s ability to continue operating.

Notes:


• The requirements above do not apply to "S" Corporations.

• When a borrower’s percentage of ownership in a Corporation does not appear on the corporate tax returns, it must be obtained from the corporation’s accountant, along with evidence that the borrower has the right to any compensation.

S-Corporation

The ordinary income for an S corporation is reported on IRS Form 1120S, with each shareholder’s share of the income reported on IRS Form 1120S, Schedule K-1.

Because the income from the distribution of corporate earnings may or may not be distributed to the individual shareholders, the Underwriter must determine if the borrower received a cash distribution from the S corporation.

When the borrower, or multiple borrowers, controls 25% or more of the business, the following minimum requirements apply:

• Individual federal tax returns as indicated in Documentation Requirements in this topic

• Two years of K-1s from the S Corporation to the individual (see Schedule K-1 Requirements topic)

• Two years of the most recent S Corporation tax returns 1120S


The underwriter must perform a business cash flow analysis in order to evaluate the overall financial position of the business and confirm:

• The business income is stable and consistent, and

• The sales and earnings trends are positive

If the business does not meet these standards, business income cannot be used to qualify the borrower.

• Add S-Corporation depreciation, depletion, and amortization/casualty loss expenses back to income in proportion to the borrower’s share of the corporation’s income.

• In addition, the income must also be reduced proportionately by the total obligations payable by the corporation in less than one year.

Notes:


• Borrower’s withdrawal of cash from corporation may have a severe negative impact on corporation’s ability to continue operating and must be considered in income analysis.

Limited Liability Company (LLC)

An LLC can report its profit or loss on IRS Form 1065 or IRS Form 1120S with each member-owner’s share of the profit or loss on Schedule K-1, IRS Form 1065, or IRS Form 1120S; however, the LLC pays no tax on its income. Each member-owner uses the information from Schedule K-1 to report his or her share of the LLC’s net profit or loss (and special deductions and credits) on his or her individual IRS Form 1040, whether or not the member-owner receives a cash distribution from the LLC. Individual member-owners pay taxes on their proportionate share of the LLC’s net income at their individual tax rates (refer to Schedule K-1 Requirements topic for additional information).

When the borrower, or multiple borrowers, controls 25% or more of the business, the following requirements apply:

• Signed and dated individual federal tax returns as indicated in Documentation Requirements in this topic

• Minimum of the most recent two years signed and dated business tax returns including all schedules and statements

• Two years of K-1s (if applicable)


The underwriter must evaluate the LLC using IRS Form 1065 or IRS Form 1120S along with the Schedule K-1, as applicable, to determine whether the borrower:

• Actually received a cash distribution from the LLC, since profits may or may not be distributed to the individual member-owners; and

• Guaranteed any loans obtained by the LLC (other than loans that are considered as nonrecourse debt or qualified non-recourse debt)

Correspondent Lending Library/Credit Guide - Non-Agency/Income - Non-Agency/Schedule K-1 Requirements (05/01/18)

Schedule K-1 Requirements (05/01/18)

Table of Contents

This topic includes the following sections:

• Overview

• Documentation Requirements

• Income or Loss Reported on Schedule K-1 Regardless of Ownership Interest

• Business Stability and Liquidity

• Business Liquidity Calculation

Overview

Partnerships, some Limited Liability Companies (LLCs), and S-Corporations use specific IRS forms (1065 or 1120S) to file federal income tax returns for the business.

The partner’s or member-owner’s share of income (or loss) is carried over to IRS Form 1040, Schedule E using Schedule K-1.

The version of Schedule K-1 used to report a borrower’s share of business income (or loss) is based on how the business reports earnings for tax purposes:

Business Type Business Income Reported On

Partnership Schedule K-1 (IRS Form 1065)

LLC Schedule K-1 (reported on either IRS Form 1065 or IRS Form 1120S) depending on how the federal income tax returns are filed

S-Corporation Schedule K-1 (IRS Form 1120S)

A borrower with an ownership interest in a partnership, LLC, or S-Corporation may also receive income in the form of wages or other compensation from the partnership, LLC, or S-Corporation in addition to the borrower’s proportionate share of income (or loss) reported on the Schedule K-1.

Self-employed income comes from a business the borrower owns outright or substantially controls. An ownership share of 25% or more, or a combined ownership share of 25% or more for multiple applicants, determines "substantial control."


Use the table below to determine documentation requirements based on percentage of ownership:

IF the borrower(s) owns... THEN...

25% or more of the business,

refer to Employment Income – Self-Employed Sources – Non-Agency > Documentation Requirements – All Self-Employed Borrowers

less than 25% of the business, Borrower must provide:• Most recent two years of signed individual federal income tax returns, and

• Most recent two years of IRS Schedule K-1s

◦ K-1s are not required when income not needed to qualify or borrower qualifies with K-1 losses

Additionally, refer to Employment Income – Salaried Sources – Non-Agency > Partner Income

Income or Loss Reported on Schedule K-1 Regardless of Ownership Percentage

Use caution when including income that the borrower draws from the borrower’s partnership or S corporation as qualifying income. Ordinary business income, Net rental real estate income, and Other net rental income reported on Schedule K-1 may be included in the borrower’s cash flow when:

• Borrower documents ownership percentage (may use Schedule K-1) and provides all required income documentation

• Net rental income meets requirements reflected in the Rental and Investment Property topic

• Borrower has two-year history of receiving guaranteed payments from a partnership or LLC

• Business has adequate liquidity to support the withdrawal of earnings

Business Stability and Liquidity

Borrowers qualifying with Ordinary Income, Net Rental Real Estate Income, or Other Net Rental income reported on Schedule K-1for Partnership or S Corporations (regardless of percentage of ownership) require adequate business liquidity to support the withdrawal of earnings.

Use the following table to determine business stability and liquidity requirements:

IF the Schedule K-1... THEN...

reflects a consistent two-year history of receiving cash distributions of income from the business that is equal to or greater than the business income used to qualify (reflected as Ordinary income, Net rental real estate income, and Other net rental income on the Schedule K-1)

no additional documentation of access to the income or adequate business liquidity is required.

does not reflect a stable history of receiving cash distributions of income from the business that is equal to or greater than the business income used to qualify,

Based on ownership percentage:

Ownership Percentage Requirement

≥ 25% Refer to Business Liquidity Calculation in this topic to determine adequate business liquidity

< 25% One of the following is required:• The level of Schedule K-1 business

income used to qualify must be reduced to the amount of actual cash distributions, or

• Borrower must document actual receipt of Schedule K-1 income used to qualify equivalent to the number of years K-1s required (for example, document prepared by a third-party such as the borrower’s tax preparer, CPA or company bookkeeper; or cancelled check from borrower), or

• Business tax returns must be obtained and further analysis must be performed to assess adequate business liquidity prior to including the total business income for qualification (refer to Business Liquidity Calculation in this topic to determine adequate business liquidity).

Business Liquidity Calculation

Use the table below to determine the options for supporting adequate liquidity in order to use the K-1 business income to qualify:

Ratio Calculation

Quick Ratio (also known as the Acid Test Ratio)

Appropriate for businesses that rely heavily on inventory to generate income. This test excludes inventory from current assets in calculating the proportion of current assets available to meet current liabilities.

Quick Ratio = (current assets - inventory) ÷ current liabilities

Current Ratio (also known as the Working Capital Ratio)

More appropriate for businesses not relying on inventory to generate income.

Current Ratio = current assets ÷ current liabilities

For either ratio, use the following table to determine income eligibility:

IF result is... THEN business liquidity has...

one or greater, been evidenced and income is eligible for qualification

less than one, not been evidenced and income is not eligible for qualification.

Refer to the Business Liquidity Calculation tab in the Chase Correspondent Customer Non-Agency Income Calculation Workbook and the Income Calculation Workbook Job Aid in the ChaseLoanManager Resource Center to help you determine adequate business liquidity.

Correspondent Lending Library/Credit Guide - Non-Agency/Income - Non-Agency/Other Income – Non-Agency (04/03/18)

Other Income – Non-Agency (06/19/18)

Table of Contents


• Overview

• Non-Taxable Income

• Grossing Up Income

• Other Income Sources Taxability Table

• Alimony, Child Support and Separate Maintenance Income

• Annuity

• Automobile Allowance and Expense Account Payments

• Boarder Income

• Bonus Income

• Capital Gain or Loss

• Commissioned Borrowers and Borrowers Paid by Incentive

• Disability Income – Permanent Disability

• Foreign Income

• Foster Care Income

• Gambling (including Internet Gambling)/Lottery Income

• Gift Income

• Housing Allowance (non-military)

• Interest or Dividend Income

• Investment Gain or Loss from Business

• Military Allowances

• Mortgage Credit Certificate

• Mortgage Interest Differential

• Non-Qualifying Income

• Non-Reported Income

• Note Receivable Income

• Overtime Salary Income

• Part-Time or Second Job Income

• Public Assistance

• Relocations or Trailing Co-Applicant Income

• Restricted Stock Income

• Retirement or Pension Income

• Annuitization of Employment-Related Assets

• Royalty and Lease (other than rental)

• Seasonal Income

• Section 8 Homeownership Assistance Payments

• Social Security Income

• Social Security Survivor Benefits

• Stock Options

• Supplemental Security Income

• Tips and Gratuities

• Trust Income

• Unemployment Compensation - Seasonal

• Union Member Income

• Veterans Benefits

Overview

Other income sources, taxable and non-taxable, must be verified unless otherwise indicated by underwriting or specific product or program guides.

Distinguish non-taxable income from non-reported income. Non-taxable income sources are not taxed, resulting in a greater "value" to the borrower.

Non-Taxable Income

When needed for qualification and depending on the documentation available to the Underwriter, Non-taxable income must be grossed up. Grossing up is to consider the benefit of income not being taxed and including that additional benefit for income qualifying purposes. Non-taxable income types are indicated in the Other Income Sources Taxability Table section.

To gross-up non-taxable income, the file must contain a complete copy of the most recently filed federal tax return evidencing the non-taxable status of the income, unless the borrower is not required to file a tax return.

• Tax Returns (1040s) or Tax Transcripts must be used when grossing up non-taxable income to confirm if all or a portion of the income used is non-taxable.

• Amount of continuing tax savings attributed to regular income not subject to Federal taxes may be added to the borrower’s gross income.

• Percentage of non-taxable income that may be added cannot exceed the appropriate tax rate for the income amount. Additional allowances for dependents are not acceptable.

• Tax rate used to calculate the borrower’s most recent year’s income tax return must be used to gross-up acceptable sources of income.

• If borrower is not required to file a Federal tax return, use 25% as the tax rate.

• Gross up newly received sources of income only when the income source has been determined, via verifiable documentation, to be non-taxable in all instances

Note: Non-taxable interest income is usually reflected on the front page of the personal tax return.

Grossing Up Income

A loan must never be declined for insufficient income or debt-to-income (DTI) ratio without confirming all grossed up income scenarios have been explored.

Underwriters must always add comments regarding use or non-use of grossed up income in their underwriting analysis.

Refer to the following table when a customer discloses income eligible to be grossed up on the application:

IF borrower… AND full documentation meeting credit guideline requirements for the income eligible to be grossed up is…

THEN income…

does not qualify using the unadjusted income,

included in the loan file, must be grossed up by the tax rate used to calculate the borrower’s most recent year’s income tax return (or 25% if borrower is not required to file a federal tax return).

not included in the loan file, must be grossed up by the tax rate used to calculate the borrower’s most recent year’s income tax return (or 25% if borrower is not required to file a federal tax return).

Obtain the required documentation for income used in qualification and ensure documentation meets credit guidelines including tax returns (if applicable per income source).

qualifies using the unadjusted income,

included in the loan file, is not required to be grossed up.

not included in the loan file, is not required to be grossed up.

Obtain the required documentation for income used in qualification and ensure documentation meets credit guidelines including tax returns (if applicable per income source).

does not need income at all to qualify,

included in the loan file, is not required to be grossed up, but must be included in income used to qualify.

not included in the loan file, income is not required to be grossed up

Note: Income is not required to be used in qualification or grossed up when partial (does not meet credit guidelines) or no documentation to support the income is provided in the loan file.

Other Income Sources Taxability Table

Refer to the following table to determine whether the other income source is taxable or non-taxable.

• For all income types that are identified as non-taxable in the table below, additional due diligence is required.

• There are certain situations for which additional documentation is required to determine what portion of a borrower’s income is non-taxable.

• The non-taxable portion may be grossed up provided the non-taxable status of the income is verified

Income Type Taxable Non-Taxable

401k Distributions X

Alimony/Separate Maintenance X

Annuity X

Automobile Allowance X

Boarder Income X

Bonus Income X

Capital Gain or Loss N/A N/A

Child Support X

Commission/Incentive X

Disability – Permanent Disability Income

Examples of permanent disability income include but are not limited to:• Black Lung Benefits

• Social Security Disability

• Private Insurance Disability

• VA Disability

X

Farm Income X

Foreign Income X

Foster Care Income X

Gambling (including internet gambling)/Lottery Income N/A N/A

Gift Income N/A N/A

Housing Allowance X

Interest and Dividends X

Military Allowances

Examples of non-taxable income include but are not limited to:• Housing (BAH)

• Rations (food) (BAS)

X

Mortgage Credit Certificate N/A N/A

Mortgage Interest Differential X

Non-Qualifying Income N/A N/A

Non-Reported Income N/A N/A

Non-Taxable Interest X

Note Receivable Income X

Overtime Salary Income X

Part Time/Second Job X

Public Assistance Income

Examples include but are not limited to:• Aid to Dependent Children

• Welfare Benefits, including food stamps

X

Relocations/Trailing Co-Applicant Income N/A N/A

Rental Income (see Rental Income – Non-Agency) X

Restricted Stock Income X

Retirement – Pension Income

Generally, the majority of pension income is taxable. Examples of non-taxable income include but are not limited to:• Civil Service Annuity

• Civil Service Retirement

• Railroad Retirement/Pension

X X

Royalty/Lease Income (other than rental) X

Salaried Income X

Seasonal Income X

Self Employed Income X

Social Security Income – Retirement/Survivor Benefits X

Stock Options N/A N/A

Supplemental Security Income (SSI) X

Tips and Gratuities X

Trust Income X X

Unemployment Income – Seasonal X

Union Member Income X

Veterans Benefits X

Workers Compensation X

Alimony, Child Support and Separate Maintenance Income

When a borrower discloses receipt of alimony, child support or separate maintenance income, it can be included as qualifying income as long as the following documentation and seasoning requirements are met:


A minimum of 12 months proof of receipt is required. Any one of the following is acceptable proof of receipt:

• Municipal or court records of payment history

• Bank statements

• Bank deposit slips

• Tax returns

• Cancelled checks

Note: Income received for less than twelve months is considered unstable and may not be used towards loan qualification. In addition, if payments are not for the full amount or are made on an inconsistent or sporadic basis, the income is not acceptable.

Seasoning Requirements

Proof of obligation for the past 12 months is required and documented with a copy of any of the following:

• Divorce decree

• Signed separation agreement (if divorce is not final)

• Notarized agreement as dictated by local custom

Notes:

• Documentation must support that the alimony, child support or separate maintenance income will continue for at least three years. In addition, if the income source is from child support, then proof of the ages of the children receiving the support is required to confirm a three-year continuance of the income. Documentation to verify the date of birth can include but is not limited to:

◦ Birth certificate

◦ Court Document

◦ Divorce or Separation Agreement

◦ Notarized agreement

• Alimony payments are found on the front page of the personal tax return.

Annuity

To use annuity income in the qualification, a formal and structured annuity agreement must exist through a guaranteed income vehicle.

One of the following is required to show receipt of the income:

• Most recent one years W-2s, 1099s, or Federal Income Tax Returns with all schedules

• 12 months bank statements reflecting regular deposits of the annuity income

Notes:

• Funds in the annuity or investment vehicle used as an income source may not be used as an asset source, and must be deducted from the available funds for the loan transaction.

• Any lump sum amount (whether lottery income, bonus income, court settlement, etc.) is not allowed as income unless it can be established that it is received in consistent amounts on a regular basis and meets all other annuity income requirements.

• Implied annuitization of assets does not meet the requirements for use as Annuity Income. However, under certain circumstances, an income stream may be created from eligible assets and used as a source of qualifying income. See Annuitization of Assets for additional information and requirements.

Automobile Allowance and Expense Account Payments

An automobile allowance or expense account payment may be included in qualifying income provided evidence of receipt for two years is documented with one of the following:

• Written verification from the employer

• Pay statements

Only the amount by which the consumer’s automobile allowance or expense account payments exceed actual expenditures may be considered income.

To establish the amount to add to gross income, the following is required:

• IRS Form 2106, Employee Business Expenses, for previous two years (if applicable)

• Employer verification that payments will continue

◦ If borrower uses the standard per-mile rate in calculating automobile expenses, as opposed to the actual cost method, the portion that the IRS considers depreciation may be added back to income

Expenses that must be treated as recurring debt include:

• Consumer’s monthly car payment, and

• Any loss resulting from the calculation of the difference between the actual expenditures and expense account allowance

Boarder Income

Boarder income is not an eligible source of income.

Bonus Income

To use bonus income for qualification, Underwriter must carefully consider the source, method of payment, and the basis upon which the income is earned (such as, personal sales or company profit).

IF annual bonus income… THEN…

is level or increasing from one year to the next,

income is considered stable. See below for requirements.

shows a decline, • earnings should not be averaged, and

• must be carefully analyzed before considered stable income

• Underwriter must document in writing a sound rationalization for including the income when qualifying the borrower

To use bonus income for qualification:

• Document a consecutive, recent, two-year history with the same employer. If the borrower has changed employers, the bonus income can be accepted if borrower:

◦ Is employed in a similar position in the same industry, and

◦ Has received bonus income from the new employer

• Provide a year-to-date pay stub reflecting bonus income

• Bonus income must be separately stated for the two-year period

• Must be reasonable expectation the income will continue. Documentation must not indicate that the income will likely cease.

• Provide copies of the borrower’s W-2s or federal income tax returns for the past two years

◦ Tax returns must have been filed with the IRS

Notes:

• Sign on bonuses and similar one-time payout bonuses (such as, spot bonus/awards) are not eligible for use as a source of income (refer to Asset Types – Non-Agency for information regarding use as an asset)

• If bonus income varies significantly from year to year, documentation for more than two years is required to use the income to qualify borrower

• Underwriter has the authority to determine whether a Written Verification of Employment is required when the income documentation does not provide the breakdown of bonus income or is not clear. Refer to Credit Guide – Non-Agency > Income – Non-Agency > General Income Verification Requirements > Written Verification of Employment

• Projected bonus income that has no historical basis or bonus income structured as a forgivable loan is not an acceptable source of income

Capital Gain or Loss

Chase does not use capital gains that arise from the sale of assets as qualifying income. If borrower has a constant turnover of assets resulting in losses, the capital loss must be considered. More than two years of tax returns may be required to analyze the trend. If the trend consistently shows a loss, it must be deducted from total income.

Note: Schedule D must be analyzed to determine if the trend consistently shows a loss.

Commissioned Borrowers and Borrowers Paid by Incentive

Commission income may fluctuate from year to year. Use an average of the last two years of income to qualify the borrower, and consider the annualized YTD earnings. Annual earnings that are level or increasing from one year to the next are considered stable. However, if the trend for the commission income shows a decline, earnings should not be averaged and must be carefully analyzed before being considered as stable income.

To include commission income in the qualification:

• Document a consecutive, recent, two-year history in the same field

• It must be stated separately for the recent two-year period

• Copies of the borrower's W-2s (or 1099s) for the past two years are required

• Copies of the borrower's federal income tax returns for the past two years are required when commissions account for 25% or more of the borrower’s income from the commissioned employment (tax returns must have been filed with the IRS).

Notes:

• Underwriter has the authority to determine whether a Written Verification of Employment is required when the income documentation does not provide the breakdown of commissioned income or is not clear. Refer to Credit Guide – Non-Agency > Income – Non-Agency > General Income Verification Requirements > Written Verification of Employment.

• Commission income reported on the tax returns must cover at least a 12-month period and any non-reimbursed business expenses should be deducted from the income. Generally, these expenses are averaged, unless increasing.

• Refer to Debt Analysis Guidelines – Non-Agency for treatment of unreimbursed business expenses.

Disability Income – Permanent Disability

Permanent Disability (long-term disability) income may be included as qualifying income provided the borrower’s current eligibility including the source, amount and terms of the disability payment income is verified with copies of the most recent bank statement or equivalent check stubs, and one of the following:

• A copy of the awards letter

• Other verification provided by:

◦ Employer

◦ Insurance company

◦ Government agency (for example, Social Security Administration or VA)

Generally, long-term disability will not have a defined expiration date and must be expected to continue. The requirement for re-evaluation of benefits is not considered a defined expiration date.

In no event should the Underwriter request any medical documentation or make any inquiry regarding the nature of the disability or its duration. Any discussion regarding a borrower's disability should be limited to a request for the required documentation outlined above.

Refer to Credit Guide – Non-Agency > Income – Non-Agency > Employment Income Salaried Sources – Non-Agency for information regarding temporary leaves of absence including short-term disability and worker’s compensation.

Foreign Income

Foreign income is income that is earned by a borrower that resides and is employed in the United States by a foreign corporation or a foreign government and is paid in foreign currency.

Refer to Foreign Borrower, Income, Assets, and Documentation Considerations topic for requirements.

Foster Care Income

Foster care income may be included as qualifying income provided both conditions below are met:

• Proof of receipt of income for the previous 24 months

• Verification that the borrower is paid by a state or county-sponsored organization as evidenced by copies of the contract or agreement with the state or county-sponsored organization

Gambling (including Internet Gambling) and Lottery Income

Gambling, including internet gambling, and lottery income are not eligible sources of income.

Note: Lottery winnings in the form of annuity are acceptable and must be documented in accordance with annuity income requirements.

Gift Income

Gift income, even if received on a regular and on-going basis, is not eligible income.

Note: Gift income is not the same as a "one time" gift of funds considered as assets to cover down payment, closing costs, etc.

Housing Allowance (non-military)

Borrowers may be able to use certain housing allowances (such as clergy) as qualifying income provided all of the following conditions are met:

• Housing allowance has a history of being a part of the salary

• Amount and terms of the allowance is verified in writing by the employer

◦ When an employer letter is not available, a current pay stub and 2 years W-2s showing housing allowance is an acceptable substitution

• There is proof of receipt of the income for the most recent 12 months

• Documentation in the file that the applicable supplemental income source(s) are likely to continue

Use the lowest amount of monthly income when the allowance is declining over the previous 12 months. The housing allowance cannot be used to offset the monthly housing payment.

Refer to Employment Income Salaried Sources – Non-Agency > Military Leave and Earnings Statement (LES) for information regarding military allowances.

Interest or Dividend Income

To include interest or dividend income from cash or marketable securities in qualifying income, follow these guidelines:

• Verify that the borrower currently holds underlying cash deposits or securities that will support the income used to qualify.

• Subtract any funds required for closing on the subject transaction prior to the calculation of interest or dividend income.

• Non-taxable interest income should be grossed up

• Verify a two-year history of receipt of the income using tax returns. Average the year-to-date (YTD) interest and dividend income over the last two years with the borrowers' most recent tax returns, unless the income is declining.

◦ YTD earnings can be calculated by applying a realistic market interest rate to the account balances and averaging over the number of months the income has been received for the year.

◦ Do not include interest from pass-through tax entities (Partnerships and S Corporations), or from margined securities in the calculation of interest or dividend income. Refer to Employment Income – Self Employed Sources – Non-Agency > Use of Profits from a Corporation for information regarding corporations.

Notes:

• For assets identified on Schedule B that were transferred since the date of the last tax filing, the year end statements for the previous accounts must be provided to make an accurate comparison with current holdings

• Interest and dividend income is typically found on Schedule B of the personal tax return, but may be on Schedule D and Form 6252 - Installment Sales.

Non-Taxable Interest or Dividend

Fully document non-taxable income (such as municipal bond tax-exempt interest, etc.) as qualifying income.

Investment Gain or Loss from Business

Apparent gains or trivial losses on Schedule E of the personal tax return may indicate sizeable future liabilities or required contributions.

• Analyze the Schedules E and K-1 to project future liability or qualifying income. The Schedule K-1 reveals contingent liabilities, historic capital contributions and possible future liabilities.

• Obtain a letter from the Partnership or S Corporation tax return preparer specifying future contributions, obligations, debt responsibility and income projections.

• Any income derived from investment activity found on the Schedule E of the personal tax returns is based on a two year tax return analysis, and averaged, unless the income is declining.

Refer to Debt Analysis Guidelines – Non-Agency > Investment Gains and Losses for additional information.

Military Allowances

Military personnel often receive supplemental income allowances (paid by allotment) in addition to regular base-salary income. This supplemental income may or may not be taxable. In all cases the allowances are indicated on the Leave and Earnings Statement (LES).

Refer to the Military Leave and Earnings Statement (LES) in Credit Guide – Non-Agency > Income – Non-Agency > Employment Income Salaried Sources for additional information regarding military income and allowances.

Mortgage Credit Certificate

Mortgage Credit Certificate is not used as income or reduction of a housing payment for purposes of qualifying the borrower.

Mortgage Interest Differential

Mortgage interest-rate differential payments can be used as qualifying income provided the payments are pursuant to an established, ongoing and documented employer program.

To be considered an acceptable source of income, a copy of the agreement from the employer confirming the following is required:

• Amount, and

• Duration of the payments (must be likely to continue for a minimum of the next three years)

In addition, for refinance transactions where the income is continuing with the new loan, documentation evidencing receipt of the income for a minimum of the most recent two months is required.

Notes:

• Employer cannot be an interested party to the transaction.

• When the payment amount fluctuates, use an average.

• Mortgage differential payments cannot be subtracted from the principal, interest, taxes, insurance and assessments (PITIA) payment on the mortgage.

Non-Qualifying Income

There are other sources of income, such as stable short-term income, from a variety of sources that cannot be included in qualifying income or as a compensating factor for a high payment or high debt-to-income ratio.

Non-Reported Income

Non-reported income (also known as undocumented income) cannot be used as a qualifying income source.

Note Receivable

To use interest income from a Note Receivable:

• Obtain a copy of the Note to establish the amount and length of payment

• The Note must be seasoned for a minimum 12 months

• Document receipt of the most recent 12 payments

• Obtain the most recent two years tax returns

Notes:

• If the borrower is not original payee on Note, the current borrower as holder of the Note must establish that he or she is able to enforce the Note.

• Underwriter may require additional documentation when warranted.

• Interest income is found on Schedule B of the personal tax return, and sometimes on the Schedule D and Form 6252 - Installment Sales.

Overtime Salary Income

Overtime income may fluctuate from year to year. Use an average of the last two years of income for qualification, and consider the annualized YTD earnings. Annual earnings that are level or increasing from one year to the next are considered stable. However, if the trend for the overtime income shows a decline, earnings should not be averaged and must be carefully analyzed before considering as stable income. Underwriter must document in writing a sound rationalization for including the income when qualifying borrower.

To use overtime income for qualification, the following requirements must be met:

• Borrower must have a consecutive, recent, two-year history of receiving overtime income.

• Overtime income must be stated separately for the past two years and YTD period.

• Overtime income must be reasonably expected to continue. Documentation must not indicate that the income will likely cease.

• Overtime income must be documented on W-2s, tax returns, or paystubs for the past two years and YTD period.

Underwriter has the authority to determine whether a Written Verification of Employment is required to calculate variable sources of income when the income documentation does not provide the breakdown of overtime income or is not clear. Refer to Credit Guide – Non-Agency > Income – Non-Agency > General Income Verification Requirements > Written Verification of Employment.

Note: If overtime income varies significantly from year to year, documentation for more than two years is required to use the income to qualify borrower.

Part-Time or Second Job Income

To use part-time or second job income to qualify a borrower, carefully consider the source and sustainability of the income. In addition, the following is required:

• Minimum 24-month uninterrupted history of the borrower working two jobs (same or similar position, although not necessarily with the same employer) concurrently in order for the income from the second job to be included in the debt-to-income (DTI) calculation

Note: “Uninterrupted history” is no gap in employment of 30 days or more. Income is ineligible if there is any gap of 30 days or more.

• Recent pay stub showing YTD earnings

• Previous two years W-2s

• Reasonable expectation the income will continue

• Borrower must indicate intention to continue working part-time or second job

Public Assistance

Public assistance may be used as qualifying income and must be verified with copies of:

• Most recent bank statement or equivalent check stubs evidencing receipt of consistent payments, and

• Awards letters, grant statements, or other exhibits from the paying agency that includes all of the following:

◦ Amount of assistance

◦ Frequency of payments

◦ Duration of benefit payments which must be expected to continue for a minimum of three years

Relocations or Trailing Co-Applicant Income

Trailing co-applicant income cannot be used as part of qualifying income.

Restricted Stock Income

Income derived from restricted stocks may be granted as a component of employee compensation and are subject to a restriction period during which recipients are not allowed access to granted shares until either performance-based or time-based vesting requirements are met.

Restricted stock may be used as qualifying income when it meet the requirements in this section.

Use the optional Chase Correspondent Customer Non-Agency Underwriting Workbook available in the ChaseLoanManager Resource Center to help you align your income calculations to Chase requirements.

Requirements

In addition to standard income documentation requirements, include all of the following in the Loan File delivered to Chase:

• YTD paystub(s) documenting all YTD earnings, including payout(s) of stock

• Evidence stock is publicly traded (for example, by providing screen print from Google Finance, Nasdaq.com, E*Trade, etc.), and 52-week stock price daily closing average (the Chase Correspondent Customer Non-Agency Underwriting Workbook will perform this calculation for you)

• Restricted stock agreement

• Evidence that stock is vested and has been distributed to the borrower from the current employer, without restriction

• Most recent vesting schedule(s) detailing past and future vesting

• Evidence of consecutive two year history of receipt (such as, year-end paystubs, WVOEs, employer-provided statements paired with a brokerage or bank statements showing transfer of shares or funds) that must, at a minimum, include:

◦ Date(s) of the payout(s)

◦ Number of vested shares or its cash equivalent distributed to the Borrower (pre-tax)

Calculating Income from Restricted Stock

Based on the form in which vested restricted stock are distributed to the borrower (as shares or its cash equivalent), use the applicable method(s) below to calculate the monthly income:

Vesting Provision Type Calculate Monthly Income

• Performance Based – Distributed as Shares, or

• Time Based – Distributed as Shares

Multiply the 52-week average stock price as of the Application Received Date by the total number of vested shares distributed (pre-tax) to the Borrower in the past two years, then divide by 24.

Example:200 vested shares were distributed (pre-tax) in the past two years52-week average stock price as of the Application Received Date is $10Multiply 200 x $10, then divide by 24$83.33 monthly income

• Performance Based – Distributed as Cash Equivalent, or

• Time Based – Distributed as Cash Equivalent

Use the total dollar amount distributed (pre-tax) from the cash equivalent of vested shares in the past two years and divide by 24.

When restricted stocks are received as a bonus, requirements in the Bonus Income section of this topic must also be met.

Funding Request Form

Use the Funding Request Form to indicate income from restricted stock was used to qualify.

Retirement or Pension Income

Overview

Retirement or pension income and retirement assets that have been set up for regular distribution payments can be used as qualifying income. The regular distributions must be no less frequent than annual.

Note: Assets set aside for income qualification cannot also be used for closing costs or reserve requirements.

Refer to General Income Verification Requirements – Non-Agency for requirements for borrowers planning to retire. As a reminder, borrowers cannot be asked whether they are planning to retire.


Retirement or pension income must be verified with evidence of consistent receipt. The documentation required to verify consistent receipt of the income can vary based on verification of the source of the income, frequency of payments, and methods of receipt. At a minimum, the following documentation is required:

IF payments are received… THEN evidence of consistent receipt must include…

monthly, most recent bank statement, equivalent check stubs, or other equivalent documentation.

quarterly, semi-annually, annually, or any other consistent, recurring distribution interval,

bank statement, check stub or other equivalent documentation supporting receipt of the most recent payment within the past 12 months period.

In addition to evidence of receipt, one of the following documents that confirms the income type, source, amount, and frequency of payment must be provided:

• Written verification from the organization paying the income

• Copy of the most recent award letter

• Most recent two years personal tax returns

Note: For distributions from a 401(k), IRA, or Keogh retirement account, documentation evidencing that the borrower is required (under IRS Regulations) to take minimum annual distributions is acceptable in lieu of evidence that the account has been set up for formal distribution payments.

When retirement income is paid in the form of a distribution from an IRA, 401(k), or Keogh retirement account, verification of the following is required:

• Funds being used for the distribution is required

• Borrower’s unrestricted access without penalty to the accounts

If the assets are in the form of stocks, bonds, or mutual funds, use 70% of the value (remaining after deduction of any funds being used for the subject transaction) to determine the number of distributions remaining

Continuance

In addition to the requirements above, a minimum of three years continuance must be verified in all cases. If any retirement income will cease within the first three years of the mortgage loan, the income cannot be used in qualifying.

Refer to Veterans Benefits in this topic for veteran retirement benefit requirements

Annuitization of Employment-Related Assets

In some cases implied annuitization and the creation of an income stream from employment related assets may be used as a source of qualifying income.

• Eligibility

For employment-related assets to be used as qualifying income, the following criteria must be met:

◦ Assets must be able to be liquidated, owned solely by the borrowers, with unrestricted access

◦ 100% of the balance available without penalty if Asset is a retirement account recognized by the IRS (for example, 401K, IRA, KEOGH)

◦ Asset cannot also be used as separate source of income

◦ 70% maximum LTV/CLTV/HCLTV

◦ Minimum 700 credit score or per Product Guides, whichever is more restrictive.

◦ Purchase or limited cash-out refinance,

◦ Primary residence (1-unit) and second homes only (1-unit) (no investment properties).

• Ineligible Assets

Ineligible assets include, but are not limited to Non-employment related assets such as:

◦ Stock options

◦ Non-vested restricted stock

◦ Lawsuits

◦ Lottery winnings

◦ Sale of real estate

◦ Inheritance

◦ Divorce proceeds

◦ Retirement accounts not recognized by the IRS

Note: If the employment related assets do not meet these requirements, they still may be eligible under other standard income guidelines, such as Annuity Income, Interest and Dividends Income or Retirement/Pension Income.

Examples

Scenario Requirements

401K, IRA and Keogh accounts• Only eligible for use if distribution is not already set up or the distribution amount is

not enough to qualify.

• Account must be documented with the most recent statement.

• Employer-based rollover funds are permissible.

Non-Self Employed Severance and Lump Sum Retirement Packages deposited into a retirement account

• Must be documented with a distribution letter from the employer (1099R)

• Must provide evidence of deposit to a verified retirement account

• Must provide copies of the most recent three months personal depository or brokerage account statements

Non-Self Employed Severance and Lump Sum Retirement Packages not deposited into a retirement account

• Lump-sum distribution funds must be derived from a retirement account recognized by the IRS (e.g., 401(k), IRA) and must be deposited to a non-retirement brokerage or depository account

• A borrower on the Mortgage must have been the recipient of the lump-sum distribution funds

• Parties not obligated on the Mortgage may not have an ownership interest in the account that holds the funds from the lump-sum distribution

• Proceeds from the lump-sum distribution must be immediately accessible in their entirety

• Proceeds from the lump-sum distribution must not have been or currently be subject to a penalty

• Calculating Annuitization of Assets Income

Divide "net documented assets" by 360-Months (regardless of borrower age and current interest rate market.)

◦ Net documented assets = 70% of the sum of eligible documented assets minus any funds that will be used for closing costs or reserve requirements

◦ Assets used for income qualification cannot be used for closing costs or reserve requirements

Royalty and Lease (other than rental)

Carefully consider the source and method in calculating this type of income. To be considered qualifying income, payments must have been received on a consistent basis for a minimum of 12 months and continue for a minimum of three years.

Include the following in the Loan File to use royalty or lease income:

• Copies of the contracts, agreements or leases confirming:

◦ Amount of income

◦ Frequency

◦ Duration of the income

◦ Income continuance with no expiration date within three years

• Most recent year’s tax return, including Schedule E, and

• Documentation supporting receipt of payments on a consistent basis for the most recent 12 month period

Documentation required to verify consistent receipt of the income can vary based on verification of the source of the income, frequency of payments, and methods of receipt; at a minimum, the following documentation is required:

IF payments are received… THEN evidence of consistent receipt must include…

monthly, most recent 12 months bank statements, check stubs, or other equivalent documentation.

quarterly, semi-annually, annually, or any other consistent, recurring distribution interval,

bank statement(s), check stub(s) or other equivalent documentation supporting receipt of the payments for the past 12 month period.

Seasonal Income

Seasonal income is a recurring but temporary source. To use seasonal income to qualify the borrower, there must be:

• Two-year historical record of earnings in the same type of job

• Recent pay stubs or written VOE showing year-to-date earnings

• Previous two years W-2s

• Reasonable expectation the income will continue

• Borrower must indicate expectation to be rehired

Section 8 Homeownership Assistance Payments

Section 8 homeownership assistance payments that are paid directly to the borrower may be considered qualifying income.

• Payments may not be used to offset the monthly housing payment amount used for qualification.

• Borrower must provide documentation that shows the amount and terms of the monthly payment received from the public housing agency that issued the voucher.

• Documentation must reflect that the payments are made directly to the borrower.

• Section 8 homeownership assistance payments must be likely to continue for the next three years.

Note: Chase must approve all Section 8 Homeownership Assistance Programs. Refer to Housing Assistance Program for instructions for submitting a program for review prior to delivering the loan for purchase.

Social Security Income

Social Security income that the borrower is drawing from his or her own account/work record will typically not have a defined expiration date and can be expected to continue unless documentation indicates otherwise.

However, if Social Security benefits are being paid as a benefit for a family member of the benefit owner, that income may be used in qualifying if documentation confirms the remaining term is at least three years from the date of the mortgage application.

Social Security income is used as qualifying income provided it is verified with:

• Copies of the most recent bank statement or equivalent check stubs, and

• Copy of the Social Security Administration (SSA) award letter

• Evidence of three years continuance (such as, verification of beneficiary’s age using a birth certificate or state ID card) (only required when Social Security benefits are being paid as a benefit for a family member of the benefit owner)

Refer to General Income Verification Requirements – Non-Agency for requirements for borrowers planning to retire. As a reminder, borrowers cannot be asked whether they are planning to retire.

Notes:

• IRS form 1099 or personal tax return cannot be used in lieu of the award letter.

• If any benefits expire within the first full three years of the mortgage, income may not be used in qualifying.

• If Social Security Administration benefit verification letter does not indicate a defined expiration date within three years of loan origination, consider the income effective and likely to continue. Pending or current re-evaluation of medical eligibility for benefit payments is not considered an indication that the benefit payments are not likely to continue.

• Some Social Security income may be “grossed up” if deemed nontaxable by the IRS.

The following suffixes to the Social Security number indicate the type of benefit received:

Suffix Description

A Disability or retirement benefit

B The person is still alive and the spouse is receiving the benefit

C Child beneficiary

D The person is deceased and the surviving spouse is receiving the benefit

Social Security income is found on the front page of the personal tax return

Social Security Survivor Benefits

Survivor benefits for minor children are counted as qualifying income provided the income is verified with all of the following:

• Most recent bank statement or equivalent check stubs verifying receipt

• Copy of the awards letter or other equivalent documentation

• Evidence of three years continuance based on child’s age

Stock Options

Stock options are not permitted as a source of earned income to qualify as values are subject to significant fluctuations, or may not be readily quantified. Additionally, there are often restrictions on when and how the options may be exercised.

Supplemental Security Income

Supplemental Security Income may be included as qualifying income provided it is verified with both of the following:

• Most recent bank statement or equivalent check stubs or verifying receipt, and

• Copy of awards letter

Tips and Gratuities

Income derived from verified tips and gratuities is permitted as follows:

Borrower must provide copies of current pay stub showing YTD earnings, and at least one of the following:

• Two most recent W-2s (for employer-reported tips)

• Two most recent tax returns with all schedules including IRS Form 4137 (for borrower-reported tips)

Refer to General Income Verification Requirements – Non-Agency for additional requirements.

Trust Income

Trust income is an acceptable source of income and is verified with a Schedule K-1, Schedule B, Schedule D or Schedule E of the personal tax return, depending on the composition of the trust assets.

To use trust income, the Trust Agreement must meet the following requirements:

• It is irrevocable

• Applicant is the beneficiary

• Amount of trust

• Frequency of distributions

• Duration of payments (must support a minimum of three years continuance)

• Balance and assets of the trust principle support the continuance of the income stream.

• No restrictive beneficiary performance clauses that may stop, hinder, or reduce trust payments to the beneficiary

• Mandatory distributions or a history of previous distributions to the applicant

Note: Borrower may use funds from trust account for the required cash investment, but the trust income used to determine repayment ability cannot be affected negatively by its use.

Trust Income Documentation Requirements

The trust documentation requirements vary based on trust income percentage. Refer to the chart below for trust documentation requirements.

IF the trust income is…

THEN the following documents are required…

AND...

20% or more of the borrower’s qualifying income

• Copy of the Trust Agreement

• Proof of receipt of income for the most recent three months

• Two years most recent tax returns

• Registration confirmation or Chase loan number

• 1003, and

• Preliminary title report

• when the transaction is Non-Delegated, Chase Legal must review the trust agreement.

Forward the required documents listed in the previous column to Correspondent Customer Support at [email protected]

Note: Legal review of the trust agreement is not a substitute for meeting the requirements to support the use of income and does not relieve the underwriter of the responsibility to ensure the income source is stable.

• Chase prior approval is not required for Delegated transactions. If not submitted to Chase for approval, the Delegated Correspondent rep and warrants to Chase that loan meets Agency requirements. A copy of the Trust Agreement must be included in the closed loan file.

Less than 20% of the borrower’s qualifying income

• Copy of the Trust Agreement and one of the following:

◦ Proof of receipt of income for the most recent one month, or

◦ Two years most recent tax returns

Include this documentation along with all other income and asset documentation when delivering the loan file to Chase.

Unemployment Compensation - Seasonal

Unemployment compensation which is clearly associated with seasonal layoffs may be considered as acceptable stable income provided it:

• Is properly documented,

• Has been received for the past two years, as evidenced by the most recent two years personal tax returns

• Is predictable and likely to continue

In addition, the Seasonal Income must meet the documentation and stability requirements reflected in this topic.

Note: Unemployment income is found on the front page of the personal tax return.

Union Member Income

Income from direct union job assignments is included as qualifying income by averaging the income from both the following sources of documentation:

• Last two years W-2s from all employers, and

• Year-to-date (YTD) earnings from current pay stubs or statements from all job assignments

Veterans Benefits

Veterans benefits are included as qualifying income provided the income is verified with one of the following:

• Letter or distribution form from the Department of Veterans Affairs (VA)

• Statement of earnings from the VA

If the income is in the form of survivor or dependent benefit income, verify the income can be expected to continue for a minimum of three years from the date of the mortgage application (verification of continuity is not required for VA retirement or long-term disability benefits).

Notes:

• Educational assistance may not be used as qualifying income.

• Refer to General Income Verification Requirements – Non-Agency for additional requirements.

Correspondent Lending Library/Credit Guide - Non-Agency/Income - Non-Agency/Rental or Investment Property Income – Non-Agency (02/06/18)

Rental or Investment Property Income – Non-Agency (06/19/18)

Table of Contents

Included in this document:

Overview

Rental Management History

Analyzing the Stability of Rental Income

Seasoning

Property Type


Rental Income/Loss Calculation and Analysis

Overview

Rental or investment property income can be used as qualifying income when the borrower can provide a two-year history of managing 1- to 4-unit investment properties or additional reserves as outlined in this topic.

Note: The history requirement must be from the borrower’s direct management of personally owned investment properties and cannot be attained from properties owned and managed through business entities.

Underwriting analysis cannot include rental income from any property being vacated by borrower, except as indicated in the Occupancy – Non-Agency > Conversion of Primary Residence topic (refer to Occupancy – Non-Agency > Conversion of Primary Residence for special guidance on treatment of rental income for Conversion of Primary Residence)

Note: Specific product or program property standards may differ; refer to the applicable Product and Program Guidelines for details

Rental Income Not Used to Qualify

When rental income is earned but not used to qualify, the full principal, interest, taxes, insurance and assessments (PITIA) amount as well as recurring operating expenses must be included in recurring debts.

Required Documentation

Analysis of the following required documentation is necessary to verify rental income:

• IRS Form 1040 Schedule E if rental income is seasoned

• Current, fully executed Lease Agreement (seasoned and unseasoned property)

• Business returns and IRS Form 8825; lease agreement may be required

Income or Loss

Income or loss is calculated based on:

• Seasoning

• Property type

• Subject versus non-subject property

• Occupancy

Regardless of the method used to calculate rental or investment property income:

• When the total amount from all rental properties is positive, add it to the qualifying income

• When the total amount from all rental properties is negative, add it to the recurring debts

Refer to Rental Income/Loss Calculation and Analysis for detailed information.

Rental Management History

To use rental income from subject or non-subject investment properties in loan qualification, borrower must meet the requirements in the table below:

Transaction Type Requirements

Borrower is purchasing an investment property using rental income from the subject property and currently does notown their primary residence

• Borrower must demonstrate through tax returns at least a two-year history of managing 1- to 4-unit investment properties, The two-year management history must be consecutive and must have occurred (in part or in whole) during the 36 months prior to the mortgage application date

All other transaction types One of the following options is required: • Demonstrate through tax returns at least a two-year history of managing 1- to

4-unit investment properties. The two-year management history must be consecutive and must have occurred (in part or in whole) during the 36 months prior to the mortgage application date; or

• Provide evidence of an additional six months of reserves (based on the PITIA of the subject property). These reserves are in addition to any other reserves required for the loan transaction.

Notes:

• If other REO properties were acquired more than two years ago and subsequently do not reflect two years on Schedule E, then current, fully executed leases without gaps can be used along with the tax returns to complete the two-year personal management history

• The management history requirement must be from the borrower’s direct management of personally owned investment properties and cannot be attained from properties owned and managed through business entities.

Refer to Occupancy – Non-Agency > Conversion of Primary Residence for special guidance on treatment of rental income for Conversion of Primary Residence.

Analyzing the Stability of Rental Income

Rental income from properties owned by the borrower is acceptable, when the stability of the rental income can be documented through one of the following:

• Tax returns

• Rental history over the previous 24 months that is free of unexplained gaps greater than 90 days

• Current, fully executed lease/rental agreements (refer to Current, Fully Executed Lease Agreements in this topic for requirements)

Note: These requirements are specific to determining stability of the rental income source. For documentation required to verify rental income used to qualify, refer to Documentation Requirements in this topic.

Seasoning

Income from rental or investment properties is either:

Designation Description

Seasoned Has one-year history reported on federal tax returns

Unseasoned• Does not have a one year rental history reflected on personal tax returns, or

• Is a newly purchased investment or 2- to 4-unit property

Property Type

Rental and investment properties fit into one of the following two classifications:

Category Description

Residential 1- to 4-units

Non-Residential Any property that meets one of these criteria:• Has more than four units

• Is for commercial use

• Is for industrial use


Alert: Borrower must have a two-year history of personally managing 1- to 4-unit investment properties (as reflected on Schedule E) or additional reserves, if applicable to use rental income to qualify. Refer to Rental Management History and Rental Income Documentation and Analysis for additional guidance.

Subject Property

The following table provides subject property income documentation requirements for Non-Agency loans:

Occupancy Property Type Seasoning Income Documentation Requirements

Owner-Occupied 2- to 4-Unit Seasoned Average seasoned income over the last two years, unless declining. Verify by reviewing both of these documents:• Two most recent federal tax returns with

appropriate accompanying schedules and forms

• Current, fully executed lease agreement that reflects consistent gross rental income

Owner-Occupied 2- to 4-Unit Unseasoned Determine income (cash flow) using current, fully executed lease agreements* or agreements to lease.

Rental income for tenant-occupied units must also be supported by the appraiser-provided Operating Income Statement (Freddie Mac Form 998) or Small residential Income Property Appraisal Report (Fannie Mae Form 1025).

*Includes purchase transactions of 2- to 4-unit property where borrower intends to reside in one or more units and will receive rental income from the other unit(s)

Non-Owner Occupied (investment)

1- to 4-Unit Seasoned Average seasoned income over the last two years, unless declining. Verify by reviewing both of these documents:• Two most recent federal tax returns with




1 Unit Unseasoned Determine income (cash flow) using current, fully executed lease agreements or agreements to lease. Rental income must also be supported by the appraiser-provided schedules:• Operating Income Statement (Freddie Mac Form

998)

• Single-Family Comparable Rent Schedule (Fannie Mae Form 1007)


2- to 4-Unit Unseasoned Determine income (cash flow) using current, fully executed lease agreements or agreements to lease. Rental income for tenant-occupied units must also be supported by the appraiser-provided Operating Income Statement (Freddie Mac Form 998) or Small Income Property Appraisal Report (Fannie Mae Form 1025).

Notes:

• Income received from a single family ADU cannot be used to qualify. Refer to Accessory Dwelling Unit guidelines for property requirements.

• Refer to the applicable Non-Agency product guide for rental income and LTV/CLTV/HCLTV limits

Non-Subject Property

The following table provides non-subject property income documentation requirements for Non-Agency loans:

Occupancy Property Type Seasoning Income Documentation Requirements

Owner-Occupied 2- to 4-Unit Seasoned Average seasoned income over the last two years, unless declining. Verify by reviewing both of these documents:• Two most recent federal tax returns with



Non-Owner-Occupied (investment)

1- to 4-Unit

Owner-Occupied 2- to 4-Unit Unseasoned Fully executed lease agreements can be used to confirm rental income for a property that was acquired since the last income tax filing, and is not shown on Schedule E.

Non-Owner-Occupied

1- to 4-Unit

Note: If rental income is reported on Schedule E but represents less than one year of rental income, treat as unseasoned and use lease agreement to calculate income. Partial year rents reported on Schedule E must support the income amount reflected on the lease. When there are differences between the amount reported on Schedule E and the lease, the Underwriter must address why the amount used to qualify is stable.

Rental Income/Loss Calculation and Analysis

Alert: Borrower must have a two year history of personally managing 1- to 4-unit investment properties (as reflected on Schedule E) or additional reserves, if applicable to use rental income to qualify. Refer to Rental Management History for additional guidance.

Use the following table to analyze documents required to support rental income used to qualify:

Document Requirement

IRS Form Schedule E IRS Form 1040 Schedule E is required to verify all seasoned rental income. Follow these steps to perform a cash flow and calculate the net income or loss:

Step Action

1Identify Gross Rents from tax returns and add back the following to the borrower’s cash flow:• Property insurance

• Mortgage interest, taxes, and Homeowners Association (HOA) dues

• Amortization expenses/casualty loss expenses

• Depreciation

• Non-recurring or one-time expense (such as, roof replacement)

◦ Supporting documentation may be required when the expense is not clearly identified on the tax return

2 Subtract total property expenses from Schedule E.

3 Divide the net rental income by the number of months the property was actually leased for accurate reflection of monthly rental figure

4 Subtract the property’s current monthly principal, interest, taxes, insurance, and assessments (PITIA) (as verified with current documentation*) to determine whether the net result is income or expense:

IF resulting amount is…

THEN …

positive, • exclude the property’s PITIA from borrower’s monthly obligations when calculating debt-to income (DTI) ratio

• include positive amount toward income calculation

negative (rental income derived from the investment property is not sufficient to fully offset the property PITIA),

• exclude the PITIA and include the calculated negative amount in the borrower’s monthly obligations when calculating the DTI ratio

• include the negative amount in borrower’s recurring debts.

5 Confirm that borrower still owns each property listed by comparing Schedule E with the real estate owned section of the Uniform Residential Loan Application.

*Current documentation includes but is not limited to mortgage statement, current year’s tax bill or homeowner’s insurance policy, or HOA documentation. For non-subject properties, the current year’s Schedule E with itemized taxes and insurance can be used to document the property’s current monthly taxes and insurance.

Current Fully Executed Lease Agreement(s)

Current, fully executed lease agreements are required for both seasoned and unseasoned rental income. Follow IRS Form Schedule E for calculation and analysis of seasoned rental income. Note: If reported on tax return but returns reflect less than one year of rental income, treat as unseasoned.

Rental income derived from leases should be carefully analyzed to ensure there is a reasonable expectation that the income will continue.

Lease agreements must be current and enforceable at the time of underwriting.

IF the lease is expired and… THEN…

under state law, there are provisions under which a month-to-month lease becomes enforceable, the lease may be acceptable when it is fully

compliant with those state law requirements.

Include evidence of the most recent one month’s receipt of the rental income in the Loan File submitted to Chase.

• does not provide a month to month provision, and

• there is no provision under state law under which a month-to-month lease becomes enforceable,

the lease is not acceptable.

the lease contains provisions that convert it to a month-to-month lease,

include a copy of the lease and evidence of the most recent one month’s receipt of the rental income in the Loan File submitted to Chase.

Note: If the original term of the lease was always month to month, then evidence of receipt is required to support enforceability.

Lease agreements can be used to confirm rental income for a property that was acquired since the last income tax filing and is not shown on Schedule E.

To calculate rental income:• Reduce the gross rental amount by 25% for vacancies and maintenance

• Subtract the property’s current monthly PITIA

IF resulting amount is… THEN apply the resulting amount to…

positive, monthly gross income.


recurring monthly debts.

Rental Property Reported through a Partnership or S-Corporation

If a borrower is personally obligated on the mortgage debt (as evidenced by inclusion of the related mortgage(s) on the credit report), and gross rents and related expenses are reported through a Partnership or S-Corporation, the business tax returns can be used to offset the PITIA.

The individual property must be analyzed outside the business tax returns following guidelines for rental properties reported on personal IRS schedule E.

Notes:• Any rental income evaluated outside the business cannot then be included in the remaining business

income

• Borrower must meet all other rental income requirements in this topic, including but not limited to the two year personal rental management history requirement or additional PITIA, if applicable

• Borrower must meet all requirements for income received through a Partnership or S-Corporation (refer to Employment Income – Self Employed Sources – Non-Agency)

• Requirements for Business Debt in Borrower’s Name are not applied in this specific scenario

Borrower’s business tax returns, including IRS Form 8825 for the most recent year(s), are required to complete the analysis:

Step Action

1 Add back the following to the borrower’s cash flow:• Property insurance

• Mortgage interest, taxes, and Homeowners Association (HOA) dues

• Amortization expenses/casualty loss expenses

• Depreciation

• Non-recurring expense (such as, roof replacement) or one-time loss

2 Divide by the number of months the property was in service for accurate reflection of monthly rental figure

3 Subtract the property’s current monthly PITIA (as verified with current documentation*) to determine whether the net result is income or expense:

IF the net cash flow is…

THEN…

positive, • exclude the property’s PITIA from borrower’s monthly obligations when calculating debt-to-income (DTI) ratio.

• Include positive amount toward income calculation.


• exclude the PITIA and include the calculated negative amount in the borrower’s monthly obligations when calculating the DTI ratio.

• include negative amount in borrower’s recurring debts

*Current documentation includes but is not limited to mortgage statement, current year’s tax bill or homeowner’s insurance policy, or HOA documentation.

Note: To ensure adequate debt service is included in the DTI on Interest-Only or below-market ARM mortgage payments, the payment must include full PITIA (refer to Mortgage Debt in Debt Analysis Guidelines – Non-Agency)

Correspondent Lending Library/Credit Guide - Non-Agency/Occupancy - Non-Agency/Conversion of Primary Residence – Non-Agency (02/06/18)

Conversion of Primary Residence – Non-Agency (02/06/18)

Table of Contents


• Overview

• Applicability

• Reserve Requirements

• Options

• Requirements

Overview

Current market conditions have caused an increase in "Buy and Bail" schemes, in which current homeowners "walk away" from their existing properties. In these schemes, borrowers with good credit buy a new home often at a much lower price than their existing home. The borrowers are qualified by claiming the existing residence will be rented or sold. Once approved, instead of actually renting or selling the existing property, the buyer walks away, leaving the first loan to fall into foreclosure.

Applicability

These Conversion of Primary Residence guidelines apply to all loans attributed to the purchase of a new primary residence when the existing residence is retained or will not be sold prior to closing.

Note: Once a borrower purchases the primary residence, the Conversion of Primary Residence requirements no longer apply when refinancing that same property.

Reserve Requirements

The amount of reserves required must be manually calculated based on the requirements reflected in this topic.

Options

Existing homeowners typically have three options when deciding to purchase a new Primary residence. The current residence can be:

Option Existing Mortgage

Sold When the current residence is sold, generally any existing mortgage(s) are paid off.

Converted to a second home When the homeowner chooses to keep the property as a second residence, they must be able to qualify with both the existing and new mortgage payments.

Converted to an investment property When the property will be converted to an investment property, documentation must be provided to evidence this in order to use the income to offset the mortgage payment.

Note: Borrower must have two years of rental management experience or sufficient reserves, if applicable, to use rental income. Refer to Rental Management History and Stability in the Rental or Investment Property Income topic for additional income verification requirements.

Requirements

Chase requires the following to ensure borrowers have sufficient reserves to support both the existing and new mortgage obligations.

Note: If the current property is owned free and clear, appraisal or other valuation document is not required to support the 25% equity.

WHEN current primary residence is… THEN use…

pending sale but the sale will not close (with title transfer to a new owner) prior to closing on the new primary residence

• both the current and proposed mortgage payments (principal, interest, taxes, insurance and assessments, or PITIA) including any secured bridge financing to qualify the borrower for the new transaction, and

• four additional months PITIA reserves on the subject property

Note: Reserves requirements are in addition to standard Non-Agency product reserve requirements.

Exception:

Underwriter can exclude current principal residence's PITIA (including any secured bridge financing) when both of these are true:• Borrower meets the four additional months PITIA reserve requirement for the

subject property

• Borrower provides this additional documentation:

◦ Executed non-contingent sales contract for the current residence

◦ Lender's commitment to the buyer of the current residence, if the executed sales contract included a financing contingency

being converted to a second home and purchasing a new primary residence

• both the current and proposed mortgage payments (PITIA) to qualify the borrower for the new transaction, and



A 1-unit primary residence being converted to a 1-unit investment property and purchasing a new primary residence




In addition:• To use rental income from the existing property to qualify, document a minimum

of 25% equity in the property being converted by comparing the current unpaid principal balance of the mortgage(s) (as reflected on the credit report or other documentation in the file) to the value by using one of the following:

◦ Appraised value, based on a current appraisal (form 1004, 1073, 1025, or 2055) following standard appraisal age and expiration requirements, or

◦ Documented original sales price

Chase does not allow AVMs or field reviews to document equity.

• Use 75% of the rental income* to offset the mortgage payment when the borrower provides all of the following rental income documentation:

◦ Copy of the fully executed lease agreement

◦ Receipt of a security deposit from the tenant

◦ Verification of the deposit into the customer’s account

*To calculate rental income, reduce the gross rental amount by 25% for vacancies and maintenance, and subtract the property’s current monthly PITIA:

IF resulting amount is... THEN apply the resulting amount to...

positive, monthly gross income.


recurring monthly debts.

Do not use rental income to offset the mortgage payment if the borrower cannot document 25% equity in the property being converted.

Refer to Subject Property Income Verification Requirements and Non-Subject Property Income Verification Requirements in the Other Income – Non-Agency > Rental or Investment Income topic for additional income verification requirements.

Note: Funds being held by the borrower as a security deposit from the tenants cannot be used as a source of closing funds or reserves for the loan transaction

a 2-4 unit primary residence to an investment property and purchasing a new primary residence




In addition, to use rental income from the property being converted to qualify, document a minimum of 25% equity in the property being converted by comparing the current unpaid principal balance of the mortgage(s) (as reflected on the credit report or other documentation in the file) to the value by using one of the following:• Appraised value, based on a current appraisal (form 1004, 1073, 1025, or 2055)

following standard appraisal age and expiration requirements, or

• Documented original sales price

Notes:• Funds being held by the borrower as a security deposit from the tenants cannot

be used as a source of closing funds or reserves for the loan transaction

• Chase does not allow AVMs or field reviews to document equity.

• Do not use rental income from the unit previously occupied by the borrower to qualify if the borrower cannot document 25% equity in the property being converted; however, the borrower can still use rental income from the units they did not previous occupy according to the standard rental income requirements for 2- to 4-unit investment properties.

Important: In addition to the above rental income requirements for investment properties, the borrower must also meet additional income verification requirements in order to use rental income to qualify (including two-year history of managing 1- to 4-unit investment properties as verified by tax returns or additional reserves). Refer to the Subject Property Income Verification Requirements and Non-Subject Property Income Verification Requirements in the Income – Non-Agency > Rental or Investment Income – Non-Agency topic for the additional income verification requirements.

Correspondent Lending Library/Credit Guide - Non-Agency/Occupancy - Non-Agency/Multiple Financed Properties - Non-Agency (10/01/15)

Multiple Financed Properties - Non-Agency (10/01/15)

Included in this topic are:

Definition

Requirements

Reserves

Definition

A Financed Property is defined as any 1-4 unit residential property encumbered by a secured obligation used to purchase or withdraw equity (as well as any subsequent refinance of those obligations).

Financing vehicles could include but are not limited to:

• Lender mortgages

• Private mortgages

• Home equity loans

• Home equity lines of credit (HELOCs) (even if the outstanding balance is $0)

Requirements

Chase permits a maximum of four 1- to 4-unit financed residential properties for Second Home and Investment transactions.

• Each borrower individually and all borrowers collectively must not have an ownership interest in and/or be obligated on more than four 1-to-4 unit financed properties, including the subject property and the borrower(s) primary residence(s) (if applicable).

• Requirements and limits apply when borrower has an ownership interest in the financed property and also when the borrower is obligated on the secured financing, but is not on title to the property. In addition, the financed property limits are cumulative for all borrowers on the loan application, in that the limits apply individually or collectively.

• A transaction is ineligible if the limit of four maximum financed properties is exceeded at the time of application through the Correspondent’s funding date. Paying off secured liens on properties after the loan application date or with the proceeds of the transaction in order to meet these requirements is not permitted.

Note: There is no restriction on maximum number of financed properties for primary residence transactions.

Property ownership types that count toward the maximum limit

• Joint ownership of financed residential real estate

• Obligation on a financed debt for a residential property (regardless of whether or not the borrower is an owner of the property).

• Joint or total ownership of a property that is held in the name of a corporation or S-corporation (even if the borrower is the owner of the corporation) and the financing is in the name of the borrower.

• Ownership of a property that is held in the name of an LLC or partnership where:

◦ Borrower(s) have an individual or combined ownership in the LLC or partnership of 25% or more, and

◦ Financing is in the name of the borrower or LLC/partnership


◦ Borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25%, and

◦ Financing is in the name of the borrower

• Ownership of a manufactured home and the land on which it is situated that is titled as real property.

• Borrower is on title to the financed property but not obligated on the Note.

Property ownership types that do not count towards the maximum limit

• Ownership in a timeshare

• Loans secured by residential lots or vacant land

• Ownership in commercial real estate

• Ownership of a multifamily property consisting of more than four dwelling units.

• Joint or total ownership of a property that is held in the name of a Corporation or S-corporation (even if the borrower is the owner of the corporation) and the financing is in the name of the corporation or S-corporation.


◦ Borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25%, and

◦ Financing is in the name of the LLC or partnership

• Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).

Examples include:

IF… AND… THEN…

borrower owns two financed investment properties,

a co-borrower owns three other financed investment properties

jointly, the borrowers have five financed properties in addition to their principal residence(s), if applicable.

borrower is obligated on a financed debt for a residential property (though is not on title),

co-borrower owns a second home and an investment property (both of which are financed)

jointly, the borrowers have three financed properties that must be counted in addition to their principal residence(s), if applicable.

borrower and a co-borrower are purchasing an investment property,

they already own and/or are obligated on five other investment properties jointly

new property being purchased would be considered the borrowers' sixth investment property that must be counted in addition to their principal residence(s), if applicable.

Reserves

When a borrower owns multiple financed properties and is financing a second home or investment property, additional reserves are required. These additional reserve requirements are indicated in the Reserves section of the Non-Agency product guides.

Correspondent Lending Library/Credit Guide - Non-Agency/Occupancy - Non-Agency/Borrower’s Intended Occupancy - Non-Agency (06/09/15)

Borrower’s Intended Occupancy - Non-Agency (06/09/15)

Table of Contents

This topic applies to Non-Agency loans

• Eligible Residential Property Types

• Primary Residence (aka Principal Residence or Owner-Occupied)

• Second Home (aka Vacation Home)

• Investment Property (aka Non Owner-Occupied)

Eligible Residential Property Types

Chase permits three possible types of occupancy.


• Second Home

• Investment Property

To ensure that proper pricing and product standards are applied (such as maximum LTV, cash out eligibility, etc.) the underwriter is expected to review the stated occupancy to determine if it is reasonable and likely.

Eligible Occupancy Property Type

Primary residence• Single Family

• 2 - 4 Unit

• Condominium

• PUD

• Co-op Unit

Second Home• Single Family

• Condominium

• PUD

• Co-op Unit

Investment• Single Family

• 2 - 4 Unit

• Condominium

• PUD

See Product Guide for specific requirements.

Primary Residence (aka Principal Residence or Owner-Occupied)

Borrower(s) are limited to one primary residence. A primary residence is defined as:

• The property occupied the majority of the year by the borrower,

• Usually located in the same general area as the borrower's income source, and

• Typically, also the address of record used in filing Individual Income Tax Return form 1040.

When there are two or more borrowers, at least one borrower must be an owner-occupant and have an ownership interest in the property.

Second Home (aka Vacation Home)

A second home is defined as a:

• Residence secondary to a borrower’s primary residence; most commonly a vacation home, or

• Second home in the city, used for convenience when the primary home is in a distant suburb, but the owner works in the city.

The residence must meet the following requirements:

• No significant rental income or rental expenses are reported on Schedule E of the borrower's personal tax returns for the subject property - no rental income can be used to qualify the borrower.

• The borrower must have personally resided (or intends to personally reside), in the property for some part of the year as evidenced through:

◦ Mortgage interest tax deduction on the personal tax return on Schedule A for a refinance, or

◦ A signed statement (for example, occupancy certification) or other documentation affirming intent from the borrower on a purchase.

• The property cannot be leased or rented, or intended for lease or rental, other than on an occasional basis.

• The property must not be subject to a timeshare arrangement or other arrangement that gives a management firm control over the occupancy of the property.

• The borrower must have exclusive control over the property.

• The property must be suitable for year round residence. Any appraisal comment to the contrary (for example, lack of year round necessities or access), shall constitute reason for unacceptable collateral.

• Property should be in a typical second home area, otherwise satisfactorily justified by the borrowers as a second home.

Notes:

• When there are two or more borrowers, at least one borrower must personally reside in the property for some part of the year and have an ownership interest in the property.

• To ensure proper pricing and product standards are applied (maximum LTV; cash out eligibility; etc.) all loan requests for second homes should be carefully reviewed to ensure the request is not for an investment property.

Investment Property (aka Non Owner-Occupied)

Investment property is defined as any property owned for the purpose of generating income for the owner. Investment properties are generally considered to be the highest default risk; therefore, loan-to-values for investor properties are usually lower than for other types of properties.