Freddie Revises Income Requirements

Income and liability calculations were listed among the deficiencies listed in Bulletin Number 2009-18 issued today. Sellers are also providing inadequate asset verifications, while owner occupancy and appraisal quality is being misrepresented.

“Our research has shown that a mortgage that does not meet Freddie Mac Single-Family Seller/Servicer Guide requirements is substantially more likely to go into default,” the bulletin said.

Freddie reviewed existing requirements that income trends be considered, tax returns be reviewed on self-employed borrowers and income that won’t continue for at least three years be disregarded. On investor properties, income must be taken from Schedule E of federal tax returns. Even if income isn’t being used from another business, tax returns must be analyzed to determine the potential impact of losses from that business.

The secondary lender outlined changes to its underwriting requirements that go into effect on Oct. 1. Among the revisions is a minimum two-year history on income sources, including primary employment income unless the borrower was previously in school or training. Freddie is also requiring a written analysis of income calculation, eliminating the use of trailing spouse income and adding specific documentation requirements for a number of other income sources.

Sellers must verify that income from ex-spouses or co-parents has been in place for at least 12 months prior to the loan and will continue for at least three years after. But the McLean, Va.-based company has stopped requiring that the creditworthiness of the payor be considered.

To help sellers accurately calculate self-employed and commission income, Freddie introduced Guide Form 91, Income Analysis Form. Also, the existence of a borrower’s business must be verified through a third party no more than 30 days prior to the note date.

On salaried employees, a verbal verification of employment must be done within 10 days of the closing, and details about the contact information must be provided. Sellers can no longer obtain an additional paystub in lieu of verbal verification. Freddie recommended using Form 90, Verbal Verification of Employment.

An executed IRS Form 4506-T can now be used to verify income.

Verification of liquidation will now be needed on assets that will be used for the down payment, and cash deposits will need to be sourced.

Among other updates is a revision to Form 65, Fannie Mae/Freddie Mac Uniform Residential Loan Application, to address the new Federal Housing Finance Agency loan-level origination data requirements. Fannie announced updates to the Uniform Residential Loan Application and the Uniform Underwriting and Transmittal Summary last month.

The new form will be required on all applications take on Jan. 1, 2010, or later.

Also, condominium units that are part of a project operated as a hotel, resort, or similar type of entity will be ineligible for financing as of Sept. 1.