|
100 Loan Eligibility
Our purpose is to originate loans based on sound underwriting principles, adherence to underwriting guidelines, and sound risk classification practices. Each loan is reviewed on an individual basis, based on its own merits. Credit history, capacity, stability, assets, and the collateral property are all reviewed and analyzed prior to a decision being made. Underwriters use their experience and common sense judgment in evaluating the overall qualifications of each Borrower and in determining when exceptions to the guidelines and/or documentation are warranted. The net benefit of the loan to the Borrower is also very closely analyzed and considered.
These underwriting guidelines are to be used as guidelines only. Exceptions are available for unique situations and will be evaluated on a case-by-case basis.
101 Loan Seasoning
There is no seasoning required on these transactions. The current value of the home is used to determine the LTV. Any significant increase in the value of the home must be addressed and well supported by the appraiser. A high rate of appreciation may result in an appraisal review with additional comps being ordered by LJL Funding.
There is no seller’s seasoning for purchases; significant increases in value from the seller’s purchase price and the new contracted sales price must be reasonable and addressed by the Appraiser. LJL Funding may not accept a loan with recent multiple transfers of title within the last 12 months.
102 Occupancy
Occupancy types are:
- Primary residence
- Second/vacation home
- Non-owner occupied
A. Primary Residence
A primary residence is a one to four family property that is physically occupied by the Borrower as his or her principal residence. The following criteria define residency:
1. Borrower occupies the property as his or her principal residence
2. Property is occupied by the Borrower for the major part of the year
3. Property location is convenient to the Borrower’s principal place of employment
4. Property address is on record for federal income tax reporting, voter registration, driver's license, occupational licensing, etc.
5. Property possesses physical characteristics to accommodate the Borrower’s immediate family (physical characteristics are considered those typical to both the owner and the neighborhood)
6. Multi-family purchases cannot be considered as owner occupied if the Borrower owns other real estate.
B. Second Vacation Home
A second vacation home is a one-unit property owned and occupied by the Borrower for his or her exclusive use and enjoyment. This property should be located at a sufficient distance or time of travel from the primary residence. Second/Vacation homes have the same LTV as a Primary Residence.
The following criteria define a second vacation home:
1. Property is suitable for year-round occupancy
2. Property is for the Borrower’s exclusive use and enjoyment
3. Property is not subject to any rental pools, agreements requiring the property to be rented
4. Property occupancy is not controlled by a management firm
5. A second home is generally in a recognized resort type area.
All files submitted as ‘second homes’ will be classified and underwritten as ‘non-owner occupied’ transactions. Timesharing or rental agreement ownership is not eligible under this definition.
C. Non-Owner Occupied Property
Any Loan that is secured by property that is neither the Borrower’s primary residence nor his or her second vacation home is a non-owner occupied (investment) property. “Investment property” is defined as property owned for the purpose of generating a positive net cash flow.
LJL Funding accepts non-owner occupied (investment) properties primarily for U.S. citizens, but will review non-residents on a case-by-case basis.
A Loan for investment property generating a negative cash flow will be closely scrutinized and must make sense for the Borrower’s circumstances. Investment homes have the same LTV as a Primary Residence.
103 Borrower Eligibility
Any regard to the Borrower’s race, color, religion, national origin, age, sex or marital status must be avoided during the origination and underwriting process.
A. U.S. Citizen
A United States citizen may be eligible as a Borrower for all Loan Programs. Citizens with unverifiable foreign income are ineligible.
B. Non-Occupant Co-Borrower
If there is a non-occupant co-borrower on the loan, the loan will be graded and priced as a non-owner occupied transaction. The non-occupant Co-Borrower must be a close family member (parent, child, sibling, grandchild, or grandparent).
C. Permanent Resident Alien
A permanent resident alien is a non-U.S. citizen who is legally able to maintain permanent residency in the United States. For all Loan Programs, a resident alien may be eligible as a Borrower on owner occupied properties only if the Borrower holds an alien registration card (“green card”). Borrower must meet all other Borrower eligibility requirements.
D. Non-Permanent Resident Alien
A non-permanent resident alien is a non-U.S. citizen who resides in the United States under the terms of a Visa. Non-permanent resident aliens are eligible as Borrowers on owner occupied properties only if they maintain a current G-1 to G-5, H-1, L-1, E-1 Visa and can supply a copy of the Visa. Applications for Visas are not accepted. Borrower must meet all other Borrower eligibility requirements. These types of borrowers are done on a case-by-case basis.
E. Foreign Nationals
A foreign national is a non-U.S. citizen who lives and works outside the United States. Foreign nationals will be reviewed on a case-by-base basis.
104 Required Signatures
Any individual(s) whose credit, income, or financial strength is included in the final underwriting approval of the loan must sign the Note. The Borrower’s name and signature must be consistent on all Loan Documents and must correspond with the name of the Borrower as it appears on the title insurance policy and/or Warranty Deed. The Borrower must sign all documents in ink.
Each owner of the property, as required under applicable law, must sign the Security Instrument. At least one individual should sign both the Note and the Security Instrument.
Once executed, delivered and recorded, the Security Instrument must create a valid first or second lien on the property even if the Borrower’s marital status is not indicated on, or if the Borrower’s spouse did not execute, the Security Instrument. Notwithstanding the foregoing, as allowed by and in compliance with all applicable law, the Borrower may use electronic means to execute the documents.
105 Power of Attorney
Use of a POA greatly increases the risk of fraud. Therefore, as a general rule, POAs should be used only as a last resort and never merely as a convenience for the Borrowers. We expect and require that the Borrowers will show up, in person, to sign the loan documents.
Nevertheless, LJL Funding recognizes that circumstances may arise unexpectedly, compelling use of a POA. Only the Underwriting Manager can authorize use of a POA to close a loan. Prior to authorizing the use of a POA, it must be confirmed with either the notary or the party executing the POA the validity of the document. Contact numbers for this must be located through a third party source, i.e. directory assistance, internet, etc.
If a POA is to be used, it must be a "specific POA" and not a "general POA." A specific POA refers to the specific loan transaction to be consummated under the POA. It might say, for example, that the principal authorizes the attorney-in-fact to "make, execute, acknowledge, amend, modify and deliver in my name any and all instruments and documents, including but not limited to written applications, authorizations, disclosures, notices, rescission notices, notes, agreements, promises to pay, affidavits, closing statements, contracts, instruments of conveyance, mortgage (including without limitation deeds of trust) or lease, as my said attorney may deem appropriate, that are in any way related to the consummation of a loan with LJL Funding in the amount of not more than $60,000, providing for repayment over a term not exceeding 180 months, to be secured by a lien, mortgage or security interest in or upon the property commonly known as 123 Oak Street, Smallville, OH 12345, which is more fully described in Exhibit “A” attached hereto."
Because the use of a POA should only be permitted when circumstances arise unexpectedly to prevent a signer from attending closing, a specific POA normally will be executed only a couple of days, or a week at most, before closing. It must be executed before a notary public, who cannot be anyone otherwise involved in the transaction in any way. Preferably, the notary will be an employee of the settlement agent closing the loan, and not someone identified by the attorney-in-fact.
Additionally, the person named as attorney-in-fact in an acceptable POA must be a party to the loan transaction. In other words, the attorney-in-fact must be either a Co-Borrower or a non-Borrower who has an interest in the collateral property (on title) and therefore will be required to sign certain portions of the loan documents. This means that LJL Funding will not allow a POA to be used to close a loan for which there is an individual sole Borrower.
LJL Funding will not take an initial application from an attorney-in-fact under a POA. At the initial application stage, information must be taken only from a Borrower or Co-Borrower.
The title company, which will insure LJL Funding’s lien against the collateral property, also must approve the form of any POA that will be used to close a loan. LJL Funding requires that the POA be recorded with the deed of trust or mortgage, and the title company therefore may impose additional requirements to allow the POA to be recorded in the jurisdiction where the collateral property is located. Completion of any such additional requirements is required.
Additionally, because even a durable specific POA is terminated by the death of the principal, LJL Funding will require the closing or settlement agent to confirm that the principal is alive shortly before the loan is closed.
If a POA is to be used to close a loan, the following signature blocks will appear on the loan documents:
__________________________________
John Q. Smith by Sally A. Smith, Attorney-in-Fact
__________________________________
Sally A. Smith
In this case, Sally Smith would sign "John Q. Smith by Sally A. Smith, Attorney-in-Fact" above line 1 and "Sally A. Smith" on line 2. Sally also would sign "John Q. Smith by Sally A. Smith, Attorney-in-Fact" in every signature block prepared in this way throughout the loan documents. If Sally were signing as co-owner and not as Co-Borrower, she would sign individually only as required by the loan documents. Abbreviations for Attorney-in-Fact are not allowed. These words must be spelled out completely.
Points of Reference for Power-of –Attorney Use:
1. POAs are always to be treated as the exception and never the rule.
2. All POAs must be specific and not general
3. When a POA is required, the Underwriting Manager must grant approval.
4. The POA must be faxed to LJL Funding for approval.
5. The POA must be specific
6. The reason for the need of the POA must be appropriate.
7. The attorney-in-fact must be a party to the loan transaction.
8. The validity of the document must be confirmed by the use of contact numbers derived through third party sources.
9. All documents must be executed at closing exactly as the signature lines appear, to include the attorney in fact language.
10. A certified copy of the executed POA must be included in the closed package.
11. The original POA must be recorded with the security instrument.
106 Loans to One Borrower
LJL Funding will typically provide financing under these guidelines up to a total of $2MM aggregate, but will allow higher levels on a case-by-case basis.
LJL Funding will allow loans for individuals with more than 10 properties.
107 Ownership Interests
A. Title Vesting
The types of Title Vesting are:
1. Individual - Individual vesting is an individual Borrower taking sole-ownership (title) to a property.
2. Joint Tenants – A joint tenant is defined as a form of co-ownership giving each tenant equal interest and equal rights in a property, including the right of survivorship.
3. Tenants In Common - Tenants in common is a form of individual ownership interest by two or more persons that provides for no right of survivorship. The interest need not be of equal percentage.
4. Family Trusts - Note that trust Loans including revocable and irrevocable inter-vivos trusts are typically not allowed,
5. Corporations or LLCs – are not permitted.
Note: Commitments must be dated within 90 days of funding.
B. Rights Of Ownership
The rights associated with ownership are given to an individual who acquires an interest in real estate.
1. Fee Simple - The term “Fee Simple” describes the greatest possible interest a person can have in real estate, including the right to dispose of the property or pass it on to one’s heirs.
2. Leasehold - Leasehold is defined as an estate or interest in real property held by virtue of a lease. In other words, Leasehold refers to land that is leased to the individual(s) who owns the structure. Loans on properties in Leasehold estates must comply with the warranties and other provisions outlined below:
a. Ground Lease Analysis - For Loans on property in Leasehold estates, you should analyze the ground lease. Underwriting may decline to approve a particular Leasehold Loan based on underwriting considerations from a ground lease analysis.
b. General Warranties - For each Loan on properties in a Leasehold estate sent for approval, you must ensure:
- The lease is of a fee or a sublease executed by the fee owner and the sublessor
- The use of the Leasehold or ground rent estates for residential properties is an accepted practice in the property’s area
- Residential properties in this area and of this type are readily marketable
- The lease, sublease or conveyance reserving ground rents and their provisions are in a format commonly accepted by private institutional mortgage investors in the property’s area
- The lease and sublease, if any, are recorded as required, and no party is in breach of any provision
- The Leasehold is in full force and effect and is not subject to any prior lien or encumbrance that could terminate it or subject it to any charge or penalty
- The remaining term or exercised renewal of the lease and sublease with any renewals enforceable by the mortgagee must not terminate earlier than 5 years after the Loan’s maturity date
- The sublease payments are at least equal to the lease payments. The sublease payments are due no less frequently than the lease payments
c. Provisions Excluded From The Lease - You must prove that the lease and sublease, if any, do not:
- Permit increases in the rent (lease payment) other than at a specified date or time interval, unless the rent increase provision becomes operative more than five years after the Loan’s maturity date. Increases based on cost of living or other economic indicators or reappraisals are not acceptable within the term of the Loan plus five years after its maturity date, unless they have the effect of limiting increased payment amounts to the lesser of the specific rate or the amount resulting from a new index or reappraisal
- Provide for termination of the Loan for the lessee's default unless the Leasehold mortgagee receives written notice of, and an opportunity to cure, the default
- Provide for Loan's termination in the event of damage or destruction as long as the Leasehold mortgage is in existence
- Prohibit the Leasehold mortgagee to be insured under hazard insurance policies
- Prohibit the payment of hazard insurance proceeds to the Leasehold mortgagee or insurance trustee
- Prohibit the payment to the Leasehold mortgagee of any condemnation award to which the mortgagee is entitled or
- Prohibit the Leasehold mortgagee from exercising renewal options
d. Provisions Included In The Lease - You must prove that the lease or sublease:
- Permits the mortgaging of the Leasehold estate
- Permits assignment without the lessor’s consent
- Grants to the Leasehold mortgagee the right to acquire in its own name (or in the name of its nominee) the rights of the lessee upon foreclosure or assignment in lieu of foreclosure
108 Transaction Types
LJL Funding will purchase Loans made for the purposes defined in this Section. Transaction types include:
- Purchase
- Cash-out Refinance
- Construction/permanent
A. Purchase Mortgages
A purchase mortgage loan involves the purchase of a property, as defined by a sale and purchase agreement executed by the Borrower and home-Seller that represents a first lien on the property. Twelve months chain-of-title is required on all purchase transactions to verify all conveyances and encumbrances affecting title for the last 12 months.
B. Rate/Term Refinance Mortgages
A rate/term refinance mortgage Loan represents a first lien and is used to pay off an existing mortgage(s) or lien(s) with a new Loan. This Loan secures the property in order to acquire a different interest rate or Loan term. Cash removal, or debt consolidation other than incidental cash, is not permitted.
LJL Funding, as general practice, will not lend on Rate and Term refinances.
C. Cash-out Refinance Mortgage
Cash-out Refinance Mortgage Loans are distributed for purposes such as:
- Debt consolidation
- Cash back (over and above 2% incidental amount allowed)
- Payoff of non-seasoned (less than 12 months) closed-end subordinate mortgages
- Payoff of lines of credit with cash advances in excess of 2% of the new Loan amount or a maximum of $2,000 within the past 12 months
- Payoff of Federal and State tax liens
D. Construction/Permanent Mortgages
A construction-to-perm Loan is a Loan obtained to pay off an interim (short term) Loan used to finance the construction of the subject property. 12 months’ seasoning is typically required. Seasoning begins when the lot is purchased. The Loan-to-Value (LTV) will be based on the lower of the documented acquisition cost or the current value.
E. Contract for Deed/Land Contracts/Bond for Deed
A mortgage Loan paying off a contract for deed should be handled as a refinance, therefore rescission is required.
LTV is based on current value. Debt consolidation and cash out is allowed.
Note: Some States do not recognize the Borrower as having an equitable position in the property until they have made their last payment under the contract for deed, and therefore, would consider our transaction to be a purchase. However, we have elected to handle all Loans paying off a contract for deed as a refinance.
F. Lease With Option To Purchase Transactions
Lease with option to purchase transactions require an LTV which is determined as follows:
- If contract is less than one year old, use the lesser of the purchase price or the current value
- If Borrower has occupied the subject property and paid on the contract for over one year, use the current value to determine the LTV.
Rent credit towards down payment will be accepted only for the portion of rent paid over and above established market rents per the Appraiser or by a market rent analysis from a licensed real estate agent. Typically, rent credits are applicable only when the lease is less than 12 months old. If contract is seasoned less than 12 months, transaction is treated as a purchase and rescission does not apply.
Eligible for rate/term refinance to payoff contract only.
109 Arm’s Length Transactions
An arm’s length transaction occurs when the parties involved are entirely independent of one another. That is, all parties deal with one another as strangers and have no reason to collude.
If a direct relationship exists between any of the parties to a transaction, then the transaction will be considered non-arm’s length. Non-arm’s length transactions will be subject to additional underwriting scrutiny.
In some cases, non-arm’s length transactions between relatives may be acceptable, such as when a parent sells a house to a child or when a relative inherits a home. In this case, we must fully and sufficiently document the property’s value. In cases where there is a gift of equity the Borrower does not have to provide any down payment funds. In addition to the gift of equity, the Seller/relative may pay all the closing cost.
For situations where Spouse A is on title but is not a loan applicant and Spouse B is the applicant but currently is not on title, the borrowing spouse must be added to title prior to close of escrow and the transaction will be treated as a refinance.
In general, Non-Arms Length (NAL) Transactions have a higher fraud risk. We say this to make it clear that accepting NAL transactions is our option and not a requirement. However, we also know there are many legitimate NAL transactions we do want to take. NAL transactions will be viewed on a case-by-case basis. The loan will be subject to full Quality Assurance review. The transaction requires approval by an Underwriting Manager.
Example - Acceptance
Realtor buying a home and representing self in transaction - Acceptable
Realtor buying a home and representing Seller and self - Considered NAL
Realtor is relative of applicant - Acceptable
Realtor is relative of applicant and represents Seller - Considered NAL
Realtor related to Buyer and wants to gift commission - Acceptable. Must be treated as gift funds.
Realtor is unrelated to anyone, but represents Seller and Buyer - Acceptable
Realtor and Broker are same person - Acceptable with broker being either Buyer’s or Seller’s Realtor. Cannot represent both parties.
Employed by family member - Considered NAL
Mortgage company employees; Builder firm employees - Considered NAL
Broker applies through another Approved Broker - Considered NAL
Renter buying from landlord;
Buyer is family/employee of property Seller;
Gift of equity transactions - All considered NAL. Acceptance is discretionary
Builder/Developer is applicant for property owned by own company - Acceptable
Appraiser affiliations - The Appraiser or its shop cannot be related to any party in the transaction including the broker without our prior written acceptance.
110 Inherited or Gifted Properties
If a property was inherited within the past 12 months, the borrower must have clear title to the property. A case in which the borrower is assuming ownership from an estate, and desires to buy out additional heirs identified in the Will is allowed. A copy of the will must be provided, along with the buyout agreement signed by all beneficiaries identified in the Will.
111 Calculating LTV Ratios
A. Definition of LTV
Loan-to-value ratios are calculated based on the current value. The current value is determined by using the lower of the appraised value (using an ‘as is’ approach) or the ’30 day sale value’ from a BPO.
B. Definition of Value
The value of the property may vary depending on the type of financing; the length of time the Borrower has owned the property and the property’s location.
1. Purchase Mortgage Value
The appraisal/BPO determines the current value. The executed purchase agreement or HUD-1 determines the sales price.
The value used in the evaluation of a loan will be determined as outlined in section 101 – Loan Seasoning.
2. Construction/Permanent Loan Value
- If the construction loan is in the Borrower’s name and the loan has been opened > 12 months treat as a refinance transaction.
- If the construction loan is in the builder’s name (or in any name other than the Borrower), treat as purchase. Use contract price from builder plus value of lot (length of ownership to dictate either original price or current value) to determine sales price.
Please note that newly constructed properties located in new subdivisions must be supported by comparables both in and out of the subdivision unless resales are available for comparison.
C. Maximum LTV/CLTV
The maximum permitted LTV is 60%. Subordinate financing is permitted with a maximum permitted CLTV of 60%.
112 Financing Closing Costs
There is no limit (within state and Federal guidelines) on the amount of closing costs (including prepaid items) that may be financed on Refinance Mortgages.
113 Secondary or Subordinate Financing
LJL Funding does permit subordinate financing.
114 Sales Concessions or Home-Seller Subsidy
Any costs that are normally the Borrower’s responsibility are considered sales concessions if the home-Seller pays them.
Sales concessions may include either:
- Payments in any form that are related to the financing costs (i.e., discount points, Commitment fees, appraisal fees, origination fees, interest shortfall, etc.)
- The portion of the costs of any other items related to the transaction that are traditionally paid by the Borrower (i.e., transfer taxes, stamps, attorneys' fees, surveys, title insurance, fees for the use of a real estate tax service, prepaid interest, taxes, or insurance, etc.)
The cost of any sales concessions in the form of furniture, decorator allowances, moving costs or other “giveaways” must always be deducted from the property’s sale price. Note that the appraisal must reflect the effect any subsidies, contributions or sales concessions have on the market value of the property.
The maximum allowable sales concession for each Loan Program is typically less than 6%.
115 Interest-Only
LJL Funding does not offer an interest only feature.
116 Age of Documents
A. Credit Documentation
For all credit grades, all credit documents must be dated no more than 60 days prior to the note date. Paystubs must be dated within 30 days of funding.
B. Appraisal Documentation
The appraisal report should be dated within 90 days of the date of the Note. If the appraisal report is dated more than 90 days but less than 120 days from the date of the Note, we must obtain from the original Appraiser an Update of value. The Appraiser must certify that the value of the property has not declined since the date of the original appraisal, and supply new subject photos of the exterior. The LJL Funding Appraisal Update must be dated within 60 days of the date of the funding.
If the appraisal is dated more than 120 days from the date of the funding a new appraisal is required.
C. Title Documentation
The title commitment must be dated within 90 days of funding.
117 Eligible Property Types
Eligible properties are listed below:
A. Single-Family Residence
A detached, semi-detached or attached single-family dwelling.
B. Multi-Family
A type of residential structure with more than one dwelling unit. Multi-family dwellings with more than 4 units are considered commercial transactions.
Multi-family purchases will generally be considered as non-owner occupied.
C. Attached Housing
Attached housing is a single-family or multi-family dwelling unit constructed in a group of attached units separated by property lines in which each unit extends from foundation to roof and with open space on at least two sides. LJL Funding defines a townhome as an attached housing unit that is located in a development that maintains a homeowners association.
For Attached Housing, such as row homes, excluding Townhouses and semi-attached properties, the following additional requirements must be met:
1. Minimum property value of $150,000
2. Board ups are not allowed for subject property or on subject’s street
3. Appraisals must be reviewed by the Appraisal Department
4. Note that semi-attached/semi-detached properties are not considered row homes.
D. Planned Unit Development (PUD)
LJL Funding will approve investment quality loans in condominium and PUD projects. We may limit the number and/or aggregate dollar amount of Loans purchased in any one subdivision, condominium or PUD project or may declare Loans in any project ineligible for purchase.
All condominiums and PUD properties must comply with the requirements set forth in this Section. A condominium unit located within a PUD must comply with both the condominium and PUD requirements
A Planned Unit Development (PUD) is a development that has all the following characteristics:
- The individual unit owners own a parcel of land improved with a dwelling. This ownership is NOT in common with other unit owners
- The development is administered by a homeowners’ association that owns and is obligated to maintain property and improvements within the development for the common use and benefit of the unit owners
- The unit owners have an automatic, non-severable interest in the homeowners’ association and pay mandatory assessment
Classification of a PUD is not based on its zoning. While there are many styles of homes that can be within a PUD (i.e., townhouse, single-family, detached, quads, etc.), this is not the basis of determination. The development must meet the above definitions. LJL Funding reserves the right to limit the number and/or aggregate dollar amount of Loans approved in any one subdivision, condominium, or PUD project or to declare Loans in any project ineligible for approval. The project cannot be involved in any type of adverse litigation.
PUD Warranties
In general, the following requirements should be met for each Mortgage secured by a PUD unit:
1. The property meets the definition of a PUD as described above
2. One entity does not own more than 10% of the subject project (applies only to attached PUDs)
E. Modular, Panelized, Pre-Cut Homes
Modular Homes are factory-built homes constructed to building codes. Like manufactured homes, modular homes are multi-sectioned units that are transported to the site and installed. However, a modular home does not have nor has it ever had a steel undercarriage or VIN number. Other ways to determine if modular:
1. Modulars have attics, manufactured do not
2. Modulars have no floor insulation
3. Modulars have no HUD seal
4. Modulars have never had a title
Modular Homes, Panelized Homes, and Pre-cut Homes will be treated the same as a site–built home as long as there are similar modular comparables. A minimum of two of the three comparables provided must be modular. A stick-built of similar design and market appeal may be substituted if a third modular comparable is not available. It the Appraiser cannot find two comparable sales of similar modular homes, the property is not eligible since the market value of the subject property cannot be adequately measured and supported.
The use of combining vacant land sales with the contract purchase price of the modular home to create a comparable is not acceptable.
F. Condominium Unit Within a Building
A condominium is a form of ownership in which the interior space is individually owned.
The balance of the property, land and building, is owned in common by the owners of the individual units. Units may be attached or detached. Building types may be low-rise (< four stories) or high-rise (> four stories), attached and detached.
All condominiums require a project review. In order for the project to be warrantable/certified it must meet a project review and be placed in Type A, Type B, or Type C. All programs are limited to a maximum number of loans within one project of 25% or 20 loans, whichever is less.
The Submission Transmittal, FNMA 1008 must identify the type of project review performed. Regardless of review type or classification, all projects must meet the following requirements:
1. Project must be located in an area where condominium ownership is readily acceptable.
2. Fannie Mae Insurance requirements must be met.
3. Studio apartments that are typical and common in the subject’s market area are eligible.
4. Ineligible projects include, but are not limited to projects with: time shares, manufactured homes, projects with multi-unit condominiums (properties where single ownership inclines more than 1 unit.
5. Subject unit must have at least 600 square feet of living space.
6. Commercial use of project may not exceed 25%.
7. Projects involved in litigation are closely reviewed and may be ineligible for financing.
8. Projects consisting of single-family detached dwellings (site-condominiums) are acceptable provided the appraisal market acceptance of site-built condominium ownership in the subject’s market area.
9. Exposure in any project (typically 20%) may be limited.
10. All projects must be in compliance with all applicable state or local laws.
11. Homeowner’s Association must be incorporated in the state in which it is located.
12. Earthquake Insurance Analysis, FHLMC Form 465S must be completed when subject property is located in California.
G. Condominium Project Reviews
FNMA 1028
An unexpired FNMA 1028 is accepted as evidence of project approval provided:
1. All conditions outlined on the 1028 have been satisfied.
FNMA Type A/FHLMC Class III
Description: An established condominium project in which a seller is providing spot loan funding or financing a resale.
1. The project must be covered by sufficient hazard, flood and liability insurance.
2. No phasing or additional annexation within the entire project (including those in part of a master association).
3. All units, common areas and facilities of the phase must have been 100% completed and the project cannot be subject to additional phasing.
4. Homeowners have had control of the association for at least one year.
5. 90% of the project is sold or under contract to be sold.
6. At least 60% of the total sold units has been sold to borrowers who will occupy as O/O or Second Home. This requirement may be waived if subject is the Borrower’s primary residence
7. No single entity may own more than 10% of the total units. Multiple sales to one borrower are counted as one.
8. If project has less than 10 units:
a. Legal documents must be provided and contain:
i. Procedures for arbitration in the event of a split vote and/or to facilitate disputes.
ii. Architectural restrictions to ensure all units are compatible with one another.
b. No single entity may own more than 1 unit.
9. Fee simple ownership unless leasehold ownership approved by Fannie Mae.
10. In the event of foreclosure, the Seller’s liability for HOA dues may not exceed six months.
11. The units must be owned in fee simple and the unit owners must have the sole ownership interest in and the right to use of the project facilities, common elements and limited common elements.
12. The project must not be involved in any litigation with the HOA pertaining to structural defects.
13. Commercial space cannot be >20% of total project.
14. There are a minimum of 5 units in the project.
15. No more than 15% of the unit owners are delinquent on their dues.
Required Documentation:
1. HOA questionnaire
2. Hazard insurance with replacement cost coverage.
3. General liability coverage
4. Any other applicable insurance
FNMA Type B/FHLMC Class II
FNMA Type B / FHLMC Class II projects are available on a case-by-case basis.
Site Condominiums
Site condominiums are projects consisting solely of detached one-unit dwellings and do not include manufactured housing units.
1. Limited project review may be performed.
2. Project or subject’s legal phase must be 100% complete.
a. Subject is the Borrower’s primary residence or second home. The appraiser is to comment on market acceptance of condominium ownership and its affect on the value. When project is new, at least one comparable must be from a competing project.
Condominium title insurance required, Condominium Endorsements ALTA, Form 4.
Individual or condominium master hazard insurance.
In lieu of the warranties usually made for classes stated above, the following are warranties/certifications for each mortgage secured by a site condominium:
1. The project consists solely of detached one-unit dwellings.
2. The mortgage on the subject property is covered by a title insurance policy that includes an ALTA Form 4, Condominium Endorsement, or its equivalent.
3. The subject property is covered by hazard, flood, and liability insurance as required by Fannie Mae/Freddie Mac.
4. If the condominium is on a leasehold estate, the condominium lease is a lease or sublease of the fee simple estate, and the provisions of the lease comply with the requirements set forth by Fannie Mae/Freddie Mac.
These projects are evaluated on a case by case basis.
Non-Warrantable Condominiums
1. Common areas are 100% complete prior to closing.
2. 50% of the project is sold or under contract to be sold.
3. Investor concentration in the project may not exceed 50%.
4. Number of units sold is sufficient to support any common areas or recreation areas.
5. No individual, other than the developer during the initial sales period, may own more than 10% of the project.
6. Projects currently under conversion or ones which have been converted within the past three years must meet the following additional requirements.
a. All rehabilitation work required for conversion must be completed in a workmanlike manner and 100% complete. File should contain a copy of the engineer’s or architect’s report/certification which must comment favorably on the quality of construction; compliance with code requirements; adequacy of mechanical systems; condition of major project components (roof, elevators, heating systems, etc.); soil characteristics, foundation design and drainage; sound transmission.
b. Occupancy ratio is based on the total number of units sold or under contract to be sold.
c. Pre-sale ratio is based on the total number of units in the entire project or legal phase.
d. Project must exhibit acceptable absorption rates. For example, marketing time for available units should not exceed six months.
e. Marketing materials which also contain a detailed summary of developer/sponsor’s condominium conversion experience.
7. Parameters can be applied to the entire project or the subject’s legal phase.
8. Project must have at least 10 units.
9. Broker to indicate Non-Warrantable Project Review on 1008.
10. Condominium questionnaire completed by the project management company is required if sufficient information to determine eligibility is not provided on the Appraisal.
These projects are evaluated on a case by case basis.
Non-Warrantable Projects with Less than Ten Units
1. Legal documents must be provided and contain:
a. Procedures for arbitration in the event of a split vote and/or to facilitate disputes.
b. Architectural restrictions to ensure all units are compatible with one another.
2. Exposure is limited to:
a. One unit in projects with eight or fewer units.
b. Two units in projects with more than eight units.
c. If project has less than five units, the subject property must be a primary residence or second home.
3. Maximum investor concentration:
a. One unit per project with more than five units.
b. None if project has four or fewer units.
4. Appraisal must address marketability of smaller size projects in the subject’s market area. Comparables should be from like-size projects.
5. Projects currently under construction, conversion or ones which have been converted within the past three years must meet the following additional requirements.
a. All rehabilitation work required for conversion must be completed in a workmanlike manner and 100% complete. File should contain a copy of the engineer’s or architect’s report/certification which must comment favorably on the quality of construction; compliance with code requirements; adequacy of mechanical systems; condition of major project components (roof, elevators, heating systems, etc.); soil characteristics, foundation design and drainage; sound transmission.
b. Pre-sale ratio is based on the total number of units in the entire project or legal phase. 100% of the project must be sold or under contract to be sold. Exceptions to the pre-sale ratio are considered on a case by case basis.
c. Seller to indicate project meets the projects with less than 10 Unit review requirements on the 1008. File must also contain supporting documentation.
These projects are evaluated on a case by case basis.
Properties not meeting the minimum condominium requirements may be available for exceptions.
118 Ineligible Property Types
The following property types are ineligible:
- Time Share Units/Projects
- Unimproved Land
- Cooperatives
- Modular Homes purchased from a Modular Home dealer
- Property does not have full utilities installed to meet all local health and safety standards including:
- Continuing supply of potable water
- Public sewer or certified septic system
- Public electricity
- Natural or LP gas
- Properties zoned commercial, industrial and business where highest and best use is commercial, industrial, or business – these will be referred to and closed through our commercial division
- Properties zoned for heavy industrial use– these will be referred to and closed through our commercial division
- Vacant land
- “Subject to” values without a 442
- Square footage < 700 sq. ft. is only acceptable on a case by case basis when comparable sales are within 100 sq. ft. of the subject in size
- Earth sheltered, earth berm or dome homes
- Log Homes
- Any property in below average condition
- Dwellings with more than 4 units
- Single, Double, or Triple-wide mobile homes
- Working farms or ranches
- Mixed use including storefronts and/or multi-family properties, except when single family dwelling, which has not been altered structurally, i.e. in home office, daycare, etc.
- Adult Care Facilities, elderly homes or group homes– these will be referred to and closed through our commercial division
- Parcel in excess of 20 acres
- Vacant properties (in case of refinance)
- Condominiums in litigation
- Properties currently in litigation
- Properties without safety releases on burglar bars
- Properties on Indian reservations
- Boarded properties
- Properties rented on a weekly basis
- Multiple properties under one mortgage (blanket mortgage)
- Condo-tels
119 High Cost Lending
Loans that are deemed to be “high cost” according to local, State, or Federal regulations (Section 32 loans) are not permitted.
120 Escrow/Impounds
Escrows/impounds are encouraged but not required on this program.
121 Ineligible Property Locations
LJL Funding does not mortgage residential property in the states in which we are not licensed.
122 Loan Size - Minimums and Maximums
The minimum first mortgage loan amount for all products is $150,000 and the maximum loan size is $500,000. All properties must have at least $50,000 in equity remaining after our loan is in place.
123 Community Assistance Loans
As part of our corporate Fair Lending policy, LJL Funding does not make loans to pay off below market interest rate loans made by non-profit Buyer assistance or other type programs. These loans are typically made by organizations that provide special concessions or assistance to first time, low income, or minority homebuyers or provide financing for home improvements in designated, usually urban areas.
If the loan will be forgiven without payment at some future point in time, we will not refinance it if the balance is over $5,000. If the balance is less than $5,000, we will consider refinancing the loan, if there is Reasonable Net Tangible Benefit.
If the loan is interest free and/or has no payments, but must be repaid if the home is sold, refinanced, or if the mortgagor dies, we will consider refinancing the loan if the cash to the Borrower exceeds the balance of the loan being refinanced plus the cost of refinancing, and there is Reasonable Net Tangible Benefit. In all cases, the Underwriting Manager must approve these requests.
124 Reasonable Net Tangible Benefit
Regardless of the purpose of the loan, there must be a reasonable net tangible benefit to the Borrower. Net benefit can be demonstrated by a new home purchase or on a refinance lowering rate, lowering payment, improved monthly budget, curing delinquency, better loan terms and/or cash to the Borrower. The cost of the refinance must be in line with any net benefit. In some cases, a letter from the Borrower stating, in his own words, what he sees as the benefit may be required.
125 Loan Terms
All loan terms will be 360 months. Standard loan terms are fully amortized 5/25 ARMs.
126 Loans to Industry Employees
In order to be eligible for purchase by LJL Funding, loans to be made to principals or employees of vendors or service providers (such as an appraiser, settlement agent, title company, etc.) cannot directly or indirectly provide these services on their own property.
127 Borrowers with Multiple Home Purchases in Past 12 months
LJL Funding will only lend on one owner occupied property for each borrower in a period of 12 months whether the loan was done from an outside source or done with LJL Funding. If the borrower has purchased a property within the last 12 months they can only purchase a property if we classify the property as a non owner occupied property.
Exception: If borrower is selling current home in which they have purchased in the last 12 months as an owner occupied, LJL Funding must verify that the sale transaction is closed via final HUD 1. If this is verified then the loan can be done as an owner occupied transaction.
If the borrower has purchased two or more owner occupied properties in the last 12 months and has sold properties LJL Funding will classify this borrower as an investor therefore we will classify the transaction as non owner occupied.
Any exceptions to this guideline will be made by management on a case-by-case basis.
128 Fraud Check Review
LJL Funding is committed to originating and funding transactions that are of high investment quality. Every transaction that is received under this program will be subject to multiple levels of fraud review. In addition to requesting a ‘fraud evaluation’ via the in-file credit report that is pulled, LJL Funding will be accessing a third party fraud detection service to provide additional information about the borrower, broker, and property involved in the transaction.
200 Underwriting
The purpose of credit and property underwriting is to ensure that each Loan meets LJL Funding’s quality standards. A loan meets LJL Funding’s underwriting quality standards if the credit, character, capacity and collateral are consistent with the program and grade. The likelihood of timely repayment is expected to be commensurate with the credit quality of the program and the represented value of the property is expected to accurately reflect its market value.
201 Loan Application Analysis
The initial loan application must be signed and dated by the Borrower and loan agent with all information completed accurately. The Loan application assists in determining the Borrower’s eligibility for the Loan. During the completion and review of the application, you must analyze this eligibility in the following manner:
- Verify and substantiate the quantity, quality and durability of the Borrower’s primary income and other income (not applicable to Stated Income Documentation)
- Verify and analyze the Borrower’s assets to determine if adequate funds are available to meet the equity requirements of the Loan transaction with liquid reserve requirements (not required on Stated Asset programs)
- Verify and substantiate the Borrower’s liabilities and credit history and relate those liabilities to the Borrower’s assets and income
- Evaluate the Borrower’s net worth in relation to his or her ability to manage financial affairs
- Verify that the declarations are consistent with program eligibility
202 Credit Report Requirements
The Loan file must contain, for each Borrower whose income or assets are required to qualify for the Loan, one of the following types of credit reports:
- In-File credit report that accesses at least two or three credit repositories (three sources are preferred)
- Full Residential Mortgage Credit Report (RMCR), which must conform in all respects to all applicable Fannie Mae and Freddie Mac requirements
The credit report must contain complete information provided by all repositories used and must be issued by an independent credit reporting agency from acceptable repositories.
Credit Supplements must provide the creditor name, contact person, and phone number for re-verification purposes.
LJL Funding will permit the use of broker pulled credit reports given that the pull date on the report is within 45 days of the funding date.
203 Credit Score Requirements
There are no minimum credit score requirements.
204 Selecting Credit Score
You should select the Credit Score for each Borrower by using one of the following methods:
- The lower score of two repositories or
- The middle score of three repositories or
- One (1) score for one repository
Borrowers and co-borrowers with no score are allowed.
205 Minimum Credit History
There are no minimum credit history requirements for borrowers. All borrowers must have an in-file credit report reflecting a valid social security number.
A. Alternative Credit
Alternative trade lines include telephone bills, gas and/or electric utility bills, cable television bills, auto insurance bills (if paid monthly), etc.
Alternative credit is not required to be documented, as this program has no minimum credit criteria.
B. No Credit
A Borrower has ‘no credit’, if a tri-merged credit bureau report was retrieved, but resulted in no tradelines being reflected and no scores being shown (scores of 9002 or 9003 are considered no-score). Borrowers with no credit are eligible for financing.
C. Non-Reporting Mortgages
If a borrower has a mortgage obligation that is not reflected on the credit bureau, and relates to the subject property, the following must occur:
- If our transaction is a first mortgage, a valid payoff must be included in the file and must be paid off at closing.
- If our transaction is a second mortgage and the non-reporting mortgage is a first mortgage that will be in senior position to our second, a valid pay history must be reflected to show that the file is not currently in NOD or foreclosure.
206 Credit Evaluation Overview
A. General Overview
The manner in which the Borrower has managed his/her previous credit is a strong indicator of future performance. In a subjective evaluation of credit, many factors are considered when evaluating a Borrower’s credit history. These include:
- Credit repayment history
- Line utilization
- Proportion of balances to limits on revolving accounts
- Proportion of current balances to original balances on installment accounts
- Patterns of debt pyramiding
- Recent inquiries and newly opened accounts
- Number of open accounts and length of credit history
- Public record information
There is compelling evidence that the Credit Score of the Borrower, based on empirically derived statistical models, provides an accurate objective evaluation of these same factors. LJL Funding will use the Credit Score, along with other credit information such as previous mortgage/rental payment, bankruptcy, foreclosure, and major derogatory account history to properly classify the credit quality of the Loan. Credit and collateral quality together with the Borrower’s capacity to handle the subject Loan, as measured by the total debt ratio, will drive the loan’s credit grade.
B. Layered Risk
In evaluating the credit risk of a transaction, the entire file must be reviewed and the factor of layered risk must be carefully examined. Many aspects of layered risk are reduced due to the structure of the lower LTV/CLTV levels permitted for this loan product.
207 Credit Evaluation Components
A. Housing Payment History
Mortgage history (or prior rental history) is reviewed but is not considered in credit grading. Any open NODs legal filings or foreclosure proceedings must be cured by our transaction. If our transaction is a second mortgage, proceeds from our second mortgage must be used to cure any delinquency on the senior first lien.
B. Bankruptcy
1. Chapter 7 Bankruptcy
For all credit grades Chapter 7 bankruptcy is measured from discharge date
2. Chapter 13 Bankruptcy
Chapter 13 bankruptcy is measured from the filing date. Chapter 13 bankruptcies may be paid off with the appropriate approval from the bankruptcy court.
C. Foreclosure and Forbearance
Foreclosures reflected in the public records section of the credit report will be graded according to the filing date. Foreclosure proceedings can be paid off (called a “foreclosure bailout”) with the appropriate documentation. A foreclosure is evidenced by the existence of the following:
- Notice of Sale
- Deed-in-lieu
- Foreclosure Filing
- Lis Pendens
If one of the above items has occurred, the property is considered to have been in foreclosure, even if the property was not ultimately taken over and/or sold by the foreclosing party.
We allow refinancing a mortgage that is currently in forbearance as long as the forbearance amount is included in the final payoff for the lien being cured.
D. Consumer Credit Counseling
Consumer credit counseling does not affect the grade and does not have to be paid. Use the payment amount listed on the CCCS paperwork to calculate the DTI.
E. Major Derogatory Credit
Collection accounts, charge-off accounts, judgments, liens, delinquent property taxes, repossessions, and garnishments.
- If there are charge-offs, judgments, collections, and/or disputed trade lines, no payoff is required unless they affect title. However, if a payment plan has been arranged, the monthly payment must be included in the debt ratio.
- Medical accounts will not be required to be paid and are ignored in the credit grading.
- IRS and property tax liens –
- Against borrowers already on title - If they are on title, and are to be kept on title, a subordination agreement is required. The monthly payments are included in the DTI, the liens will be calculated as part of the CLTV, and the program CLTV maximums are not permitted to be surpassed. If the liens cannot be subordinated and kept under the program maximum CLTV, then they must be paid off, or paid down, to comply with the maximum CLTV requirements.
- Against borrowers being added to title – Since IRS and property tax liens almost always attach to a property owned. If a borrower is being added to title, we will assume that these credit issues will attach to title and we will evaluate the loan as though these items will automatically be subordinated to our debt. We must comply with all CLTV requirements or have these items paid.
- State tax liens are not required to be paid if from a state other than the subject property’s location.
- All past due child support payments must be paid in full. Exceptions will be considered on case-by-case basis if there is an existing formal plan, reporting 0x30 for the past 12 months.
208 Borrower’s Income
If you are completing a full documentation loan, you must determine if the Borrower’s income is adequately verified, is sufficient to repay the debt in a timely manner and is likely to continue and is stable.
209 Borrower’s Liabilities
The borrower’s liabilities will be taken from the in-file credit report.
210 Debt Payoff (Debt Consolidation)
When the Borrower indicates debt will be paid at the closing of the new mortgage loan, you need not include the payment in the Debt-To-Income Ratio. The paid bill(s), canceled check(s) or a settlement statement (HUD-1) evidencing payment must be submitted.
211 Co-Signed Debt
If the Borrower is a co-signer or guarantor on any Loans, those liabilities must be indicated on the Loan application. The payments for these Loans will be included in the Borrower’s total monthly debt unless satisfactory documentation is provided to prove that the primary debtor has been making the payments on a regular basis. At least three consecutive months canceled checks from the primary debtor are required. Mortgages require 12 months cancelled checks to omit from debt. Mortgage delinquencies will be considered in grading.
Authorized signers should not be confused with co-signers. An authorized signer is simply authorized to use the account, typically a revolving account. These accounts will be designated with an “A” and should not be included in the DTI or used to meet minimum credit requirements.
212 Divorce Debt
Debts opened jointly with a former spouse will be considered as an obligation of the Borrower unless a legal separation agreement or divorce decree with a property settlement is provided to prove the former spouse is responsible for the debt.
213 Business Debt
Debts paid by the Borrower’s business will not be considered in the Borrower ratios if canceled checks drawn on the business account indicating they have been paid on a regular basis for a minimum of six months are provided.
214 Borrower Capacity
The Borrower’s ability to repay mortgage debt is critical in evaluating the asset quality. You must assess the Borrower’s liabilities for the number of active accounts, usage and repayment history. Evaluation of the Borrower’s capacity includes an assessment of the Borrower’s financial obligations in relation to income. The credit quality, coupled with the Borrower’s financial obligations, determines the acceptable grade of the Loan.
215 Student Loans
If the Borrower has a student loan that is currently deferred, the payment can be excluded from the debt ratio.
216 Qualifying Ratios
Sound judgment should be exercised when considering any ratio calculations. Ratios are general benchmarks, not definitive guidelines. The overall merits of the file are considered when applying ratio guidelines. As such, loans may have merit even with ratios exceeding guidelines. Fixed Rate and Adjustable Rate Loans will be qualified using the (initial) Note rate
A. Housing to Income Ratios
The Borrower’s income must support the total housing expense on an ongoing basis. LJL Funding will give consideration to Borrowers who have demonstrated an ability to carry a similar or greater housing expense for an extended period.
Monthly housing expenses include:
- Principal and interest payments on the first mortgage loan
- Hazard insurance premiums
- Real estate taxes
Additional housing expenses include:
- Principal and interest on subordinate financing
- Flood insurance premiums
- Leasehold payments
- Homeowners’ association dues or condominium maintenance
- Fees (excluding unit utility charges)
B. Total Debt-to-Income Ratios
In evaluating the total Debt-To-Income Ratio (DTI), you should be aware of the degree and frequency of credit usage and its impact on the Borrower’s ability to repay the Loan. Borrowers who lower their total obligations will receive favorable consideration. Borrowers with a history of heavy credit usage and a pattern of slow or late payments will receive less flexibility.
The following items are considered:
- Monthly housing expenses
- Revolving charges (If no payment is showing, use 3% of the outstanding balance.)
- Installment debt (Paying down to fewer than 11 payments is allowed for qualification purposes.) Paying down more than 1 account is discouraged and will be closely reviewed.
- Real estate Loans
- Automobile Loans
- Automobile leases (Must be included in the DTI even if fewer than 11 payments are remaining.)
- Net rental losses from real estate owned
- Alimony, child support or maintenance payments with 11 or more remaining payments
- Divorced and separated Borrower’s joint obligations will be considered in accordance with Co-Signed and Divorce Debt Section of this Guide
- Student Loans (unless deferred)
Loans secured by 401(k) may be excluded from DTI. Check stubs should always be analyzed for garnishments, child support, credit union loans, etc. for additional debt.
Life insurance or other liquid asset accounts may be excluded in the calculation of DTI unless the funds are used to meet program requirements for reserves and/or liquid assets.
Underwriting has the flexibility to accept higher DTIs if the overall credit profile of the Borrower warrants a higher DTI. Examples of factors that could suggest such flexibility include extremely high savings per month, exceptionally high residual income, or the demonstrated ability to build equity in one’s home.
217 Employment and Income Analysis
Stable income may come from many sources. All employment should be listed on the 1003.
Other income, such as bonus, commission, overtime, part-time or unemployment compensation will be considered if listed on the 1003. Borrowers, who have made job changes for advancement and maintained a stable earning capacity, as well as Borrowers with demonstrated job stability, will be eligible. Education or training to enhance job opportunities and income will receive favorable consideration.
Employment and income analysis is an area that demands case-by-case attention and Underwriters can use their judgment on the best ways to document and calculate income.
218 Documentation Standards
A. Full Income Documentation
Full documentation may be required on large property investors, brokers, loan officers, and Borrowers employed by family members (which requires 2 years 1040s). We typically do not offer financing to Borrowers where rental income constitutes > 50% of their income.
B. Alt Income Documentation
Six months verified income history required.
C. Stated Income Documentation
Stated Income Documentation requires that the Borrower’s income be stated on the application, which must be signed by the Borrower. No documentation of income is required. For these programs if stated income is chosen it will also be a stated asset program. Assets listed on the 1003 will not be verified.
For self-employed Borrowers, a business license and confirmation of the existence of the business through business directory listing is required. If a license is not required for the business, a signed confirmation of business is required by Borrower’s accountant or CPA. Other forms of verification for business ownership, such as proof of commercial liability insurance, website, yellow page listing or invoices from suppliers, along with a variety of other documentation may be used to verify self-employment. Additionally, signed IRS Forms 4506 or 8821 or an equivalent document, authorizing us or our investors to obtain income information may be required at closing.
Company policy prohibits a full or alt doc loan being resubmitted as stated income.
219 Income Types
LJL Funding defines income types as follows:
- Wage Earners
- Self Employed Income
- Fixed Income
- Rental Income
- Other Income
220 Wage Earners
Wage earners receive a wage or salary from an employer in return for a service rendered and has less than 25% ownership interest in a business. Compensation may be based on an hourly, weekly, monthly or semi-monthly basis. For full doc loans for employees paid on an hourly basis, where a written VOE is obtained, the verification must state the hourly wages, including the number of hours worked each week. The employer must list the hourly income earned for the previous two years and year-to-date income. If the number of hours is omitted from the employment verification, we will use income figures for the past two years to arrive at an average.
A. Wage Earner - Bonus or Overtime
Bonus or overtime income is compensation in addition to an employee’s straight salary or hourly wage. We will accept stable bonus or overtime income with a verified one-year history. This income will be averaged over the past one year unless declining.
B. Wage Earner - Tips or Gratuity
Tips or Gratuity income is compensation in addition to an employee’s straight salary or hourly wage. LJL Funding will accept stable tips or gratuity income with a verified one-year history. This income will be averaged over the past one year unless declining.
C. Wage Earner, Commission or Allowances (Housing/Auto)
Commission income is defined as a fee or percentage paid to an employee for performing a service. For Full Income Documentation Loans, you must provide evidence the Borrower has received commission income for one year. Commissioned wage earners do not qualify under the “self-employed” definition. Allowances will be considered income providing it is documented for the past year.
D. Required Documentation For Wage Earners
1. Full Income Documentation
Option 1
Written verification of employment covering most recent two years and current pay stub. VOE must include the following:
- Dates of employment
- Position
- Prospect of continued employment
- Base pay amount and frequency
Additional salary information, itemizing overtime, bonus income and allowances, if applicable. If the bonus or commission income represents 25% or more of the Borrower’s income, one year of personal tax returns are required OR
Option 2
- Pay stub for the most recent 30-day period showing year-to-date income, verbal VOE, and W-2 form(s) for the most recent year
OR
Option 3
12 months’ personal bank statements and verbal VOE.
- The average of the deposits will be used to determine income stream
- Atypical deposits may not be included to calculate average balances
The following are not acceptable:
- Co-mingled funds
- Multiple accounts
- Excessive NSF checks
- Transfer of funds from one account to another
- Account owner on statement who is not on note/loan
Verbal verification of employment is required five days prior to closing to ensure that no change in employment status has occurred (Verbal Re-verification of Employment.)
Written documentation of this verbal verification must be included with the Loan package. This documentation must include:
- Date of verification
- Employment status
- Name, phone number and title of verifier
- Name and title of the person making the call
Under certain circumstances, such as handwritten pay stubs or conflicting or incomplete information, we may require additional documentation.
2. Alt Income Documentation
This program is currently not being offered by LJL Funding.
- 6 months personal bank statements and
- Verbal verification of employment
The average of 100% of the deposits will be used to determine income stream
Atypical deposits may not be included to calculate average balances
The following are not acceptable:
- Co-mingled funds
- Multiple accounts
- Excessive NSF checks
- Transfer of funds from one account to another
- Account owner on statement who is not on note/loan
3. Stated Income Documentation
Stated Income Documentation requires that the Borrower’s income be stated on the application. No verification of income is required. The income listed on the 1003 must be reasonable for the position, time on the job, and overall profile of the borrower.
221 Self-Employed Income
We define business for self (BFS) and self-employed Borrowers as those who are principals of a corporation, controlling partners or sole proprietors.
Self-Employed income is received directly from a business in which the Borrower holds a 25% interest (25%+ stock ownership). For full doc loans, at least two consecutive years of self-employment and evidence of on-going stable income are required. Business income must be reported as a sole proprietorship, partnership or corporation. Proof that the business exists is required by third party source verification.
Employment history for at least two years must be listed on the 1003.
Borrowers who rely on investments for income (i.e., interest, dividends, capital gains or real estate) will be treated as self-employed. Borrowers who derive > 50% of their income from property investments are typically not allowed, but can be reviewed on a case by case basis. To determine a self-employed Borrower’s income, you should complete an Income Analysis Worksheet. The individual tax return worksheet utilizes a cash flow analysis of the Borrower’s wages and other income. You may also use Fannie Mae’s Self-Employed Income Analysis Form 1084A or 1084B. We will consider other income if tax returns indicate it has been received for at least two years at a consistent level. Interest and dividend income is eligible after deducting that portion listed on Schedule B that is derived from a partnership or S corporation. 1099 income will most often be considered as self-employed and should be treated as such. On case-by-case LJL Funding will consider treating as wage earner. Examples of when to treat as wage earner: If the Borrower does not own his own equipment; maintain an office; has no employees or does not have a business listing or phone number we may consider wage earner. If considering as self-employed 25% of the income must be deducted for qualifying purposes, if wage earner no deduction is required.
A. Full Income Documentation
Option 1
Available under all Loan Programs:
- Two years personal tax returns with all schedules and
- Two years business tax returns with all schedules, if applicable
Also available:
Option 2
12 months personal bank statements.
The average of the deposits will be used to determine income stream
Atypical deposits may not be included to calculate average balances
Option 3
24 months’ business or dba bank statements, using 50% of the deposits. Borrower must be sole owner of the company.
The following are not acceptable on either personal or business accounts:
- Co-mingled funds
- Multiple accounts
- Excessive NSF checks
- Transfer of funds from one account to another
- Account owner on statement who is not on note/loan
- Proof of the existence of the business for two years (business license, CPA letter, business credit report, etc.) is required
B. Alt Income Documentation
This program is currently not being offered by LJL Funding.
- Proof of the existence of the business for one year (business license, business credit report, etc.) is required AND
- Six months personal & business tax return and all schedules OR 6 months personal bank statements are required OR 6 months’ business or dba bank statements, using 50% of deposits.
The following is not acceptable:
- Atypical deposits may not be included to calculate average balances
- Account owner on statement who is not on note/loan
- Co-mingled funds
C. Stated Income Documentation
Stated Income Documentation requires that the Borrower’s income be stated on the application. No verification of income is required. The income listed on the 1003 must be reasonable for the position, time on the job, and overall profile of the borrower.
222 Second Job/Part Time Income
Income from second or part time jobs may be considered if applicant has been employed in concurrent jobs for at least one year.
A. Full Income Documentation
Option 1
Written verification of employment covering most recent one year and current pay stub. VOE must include the following:
- Dates of employment
- Position
- Prospect of continued employment
- Base pay amount and frequency
OR
Option 2
Pay stubs for the most recent 30-day period showing year-to-date income, verbal VOE, and W-2 form for the most recent year.
B. Alt Income Documentation
Not available for seasonal or part time income.
C. Stated Income Documentation
Stated Income Documentation requires that the Borrower’s income be stated on the application. No verification of income is required.
223 Fixed Income
We define fixed income as income derived from sources such as alimony and child support, Social Security, pension or disability. If a type of fixed income is used to qualify the Borrower, you must document a history of regular receipt.
A. Non-taxable Income
Verified non-taxable income will be given special consideration if it is determined that such income will remain untaxed. Examples of non-taxable income may include:
- Certain military allowances – BAS, BAH, VHA
- Disability retirement payments
- Workers compensation benefits
- Child support payments
- Social security distributions
Non-taxable trust and inheritance income will be considered provided supporting documentation is verified.
In order to evaluate a Borrower with non-taxable income in the same manner as a Borrower who has a higher-taxable income, the Underwriter will adjust, or gross-up, the non-taxable income by 125%. Income cannot be grossed up for the purposes of qualifying for the minimum disposable as dictated by number of persons in the household. Tax returns will be required to verify the non-taxable status of the income.
B. Fixed Income Types
Note that the requirement for proving continuance of most fixed income types, except as where specifically noted, has been removed.
1. Alimony, Child Support and Separate Maintenance Income
Alimony, child support and separate maintenance income will be considered, but must be based on a court order, and verification must include:
- A copy of the divorce decree or the court order showing that payments are obligated for a minimum of three years beyond the date of the Note and satisfactory proof of regular receipt of monthly payments for the past 3 months.
- Documentation for alimony, child support and household maintenance income need not be included in the file if the Borrower chooses not to have these sources of income considered.
2. Disability or Workers’ Compensation Income
Workers receiving this income must be qualified using this income rather than the potential income when returning to work. If the borrower is returning to work within the next 30 days, we will consider using the full time wages to determine DTI on a case by case basis.
3. Permanent Disability
Income verification must include a copy of the insurance award letter showing the percent or dollar amount for the permanent disability.
4. Pension Income
Pension income verification must include a copy of either one-year of checks, one year W-2P form, or a letter indicating the yearly pension amount.
5. Social Security Income
Social security income verification must include a copy of the current award letter or bank statements (within 30 days) showing automatic deposit and prior 1099. For children’s social security income or social security disability income, verification that the income will continue for a minimum of three years is required. Borrower’s Social security income being paid to a third party that is not on the loan will not be accepted for qualifying purposes. Likewise, income received by the Borrower on behalf of a third party not on the loan will not be used for qualifying purposes, except in the case of legal dependents (i.e. minor children, disabled major child).
C. Required Documentation For Fixed Income Earners
1. Full Income Documentation
Available under all Loan Programs. Documentation includes any of the following:
- W-2P Forms for the past two years – Social Security requires 1 year
- Current Award letter or Court Order and evidence of receipt
- Two years 1099 forms – Social Security requires 1 year & evidence of receipt
- Two years personal tax returns with all schedules
- Certified, signed copies of divorce stipulation and decree or Court Order, if applicable.
2. Alt Income Documentation
Not available.
3. Stated Income Documentation
Not available.
224 Rental Income
When considering income received from the subject property the following method is used:
- Take 75% of total rents and add to income for qualification purposes.
- For property owned less than one complete tax year; cash flow must be based on 75% of the lesser of actual rents or market rents indicated by the Appraiser.
When considering income received from rental properties owned by the Borrower that is NOT the subject property, you must calculate cash flow for rental property by one of the following methods:
1. For N/O/O properties, cash flow can be calculated in the following method:
- 75% of actual rents then subtract total mortgage payment to arrive at net rental income. Positive net rental income is added to income and Negative net rental income is added to the liabilities.
- If > 6 rental properties are owned, 1040 tax returns & schedule E are required to calculate rental income. Use net income adding back depreciation for the income calculation (no need to deduct the mortgage payment as it is already accounted for.) Positive net rental income is added to income and Negative net rental income is added to liabilities.
- For property owned less than one complete tax year; cash flow must be based on 75% of the actual rents documented with a current annual lease. For properties owned free & clear, evidence of ownership must be provided.
2. For properties leased by family members, cancelled checks must be provided to verify receipt.
3. Boarder income is not allowed unless reported on Schedule E.
4. We will typically not lend to Borrowers who have > 50% rental income based on net rental income.
Proposed rental income is acceptable on the purchase of investment property with an executed lease regardless of its previous use (owner occupied or non-owner occupied). Transfers of an existing list to the purchaser are also acceptable. Proposed rental from a related party is not allowed
Required Documentation for Rental Income Earners
A. Full Income Documentation
- Two years 1040s & Schedule E if > 6 properties owned and
- Current lease if < 6 properties are owned
- Operating Income Statement is required if subject is investment
B. Alt Income Documentation
- One year 1040s & Schedule E if > 6 properties are owned and
- Current lease(s) if 6 or fewer properties are owned.
- Operating Income Statement is required if subject is investment
C. Stated Income Documentation
- Income will be used as stated on the 1003.
225 Other Income
When the Borrower discloses income from an alternate source (i.e., interest, dividend, capital gains, trust, rental or Note income) and chooses to use the income to qualify for the Loan, you must document stability of income. We consider the following types of other income:
- Interest and dividend income
- Trust income
- Note income
- Inheritance and guaranteed income, such as lottery or prize earnings
- Temporary disability income
- Seasonal unemployment compensation
- Foster Care Income
A. Interest and Dividend Income
Required Documentation for Interest and Dividend Income Earners
1. Full Income Documentation
- Two years IRS Forms 1040 with Schedule B and
- Proof of assets to support the interest or dividend income
2. Alt Income Documentation
- One year IRS Form 1040 with Schedule B and
- Proof of assets to support the interest or dividend income for at least two years
3. Stated Income Documentation
- Income will be used as stated on the 1003.
B. Trust Income
A Borrower’s trust income may be taxed at a lower rate or it may be part of a partnership that writes off losses resulting in no tax liability. Trust income is reported on the 1041 fiduciary income tax return that includes a K-1 schedule. All beneficiaries of trust income receive K-1s from the trust.
Required Documentation for Trust Income Earners
1. Full Income Documentation
a) Trust agreement or Trustee’s statement outlining:
- Total income paid to Borrower as beneficiary
- Method of payment
- Duration of trust (minimum three years)
- What portion, if any, of income to Borrower is not taxable and
b) Two year personal tax returns with all schedules or
c) K-1 schedule (2 year) or
d) Two-year 1041 fiduciary tax returns
2. Alt Income Documentation
a) Trust agreement or Trustee’s statement outlining:
- Total income paid to Borrower as beneficiary
- Method of payment
- Duration of trust (minimum 3 yrs remaining)
- What portion, if any, of income to Borrower is not taxable and
b) One year personal tax returns with all schedules or
c) K-1 schedule (1 year) or
d) One-year 1041 fiduciary tax returns
e) Less than one year receipt will be considered on a case-by-case basis.
3. Stated Income Documentation
Not available.
C. Note Income
We recognize ongoing Note income as eligible for Loan qualification. You must submit a copy of the Note outlining the amount and terms of payment. The repayment period should extend at least three years from the date of the new mortgage Loan.
Required Documentation for Note Income Earners
1. Full Income Documentation
Copy of Note and evidence of receipt by either of the following:
- Two years tax returns with all schedules
- Bank statements showing Note income deposited for past two years
2. Alt Income Documentation
Copy of Note and evidence of receipt by either of the following:
- Prior one-year tax return with all schedules
- Bank statements showing Note income deposited for past year
3. Stated Income Documentation
Not available.
D. Inherited and Guaranteed Income
We recognize ongoing income received from inheritance or other guaranteed sources, such as prize earnings or lottery winnings as eligible for Loan qualification. You must document receipt of this income and determine the probability of continuance for at least three years.
Required Documentation for Guaranteed Income Earners
1. Full Income Documentation
The following documentation is required:
a) Award Letter and proof of receipt outlining:
- Total income paid to Borrower as beneficiary
- Method of payment
- Duration of income
- What portion, if any, of income to Borrower is not taxable
b) Two years personal tax returns with all schedules
2. Alt Income Documentation
The following documentation is required:
a) Award Letter and proof of receipt outlining:
- Total income paid to Borrower as beneficiary
- Method of payment
- Duration of income
- What portion, if any, of income to Borrower is not taxable
b) One-year personal tax return with all schedules
c) Less than one year receipt will be considered on a case-by-case basis.
3. Stated Income Documentation
Not available.
E. Temporary Disability Income
Temporary disability income may be eligible.
Required Documentation For Temporary Disability Income Earners
1. Full Income Documentation
Insurance Award Letter
2. Alt Income Documentation
Not available
3. Stated Income Documentation
Not available.
F. Seasonal Unemployment Compensation/ Inconsistent Wage Periods
Seasonal unemployment compensation may be eligible.
Required Documentation for Seasonal Unemployment Compensation Income Earners
1. Full Income Documentation
- Two years personal tax returns with all schedules
- Borrower must be currently employed
2. Alt Income Documentation
- Most recent personal tax return and all schedules
- Must be currently employed
3. Stated Income Documentation
Not available.
G. Foster Care Income Earners
Required Documentation for Foster Care Income Earners
1. Full Income Documentation
- 2 years’ tax returns or
- Letter from agency stating length of time in program & earnings for past 2 years and year to date earnings.
2. Alt Income Documentation
Not Available
3. Stated Income Documentation
Not available.
226 Residual Income
There are no requirements for residual income for borrowers.
227 Payment Shock
Payment shock is defined as the increase in the housing payment, expressed as a percentage of the existing housing payment, with the following formula:
(New Payment – Old Payment) ÷ Old Payment = Payment Shock (%)
Example:
Current Rent/Mortgage Payment: $1000
New Housing Payment on new Loan(s) $3800
Payment Shock = ($3800 - $1000) ÷ $1000 = 280% Payment Shock
Although payment shock is analyzed on all loan requests, proposed payments greater than 200% of current payment are considered payment shock and are analyzed very carefully to ensure that there is a Net Tangible Benefit to the borrower.
228 Cash to Close and Reserves
You must determine and provide evidence that the Borrower has sufficient cash to pay the down payment, prepaid items and closing costs, on a full doc transaction. Verification of assets is not required on refinance transactions, even if the borrower need to bring money to the table to close.
Purchase
- Full Doc - the funds to close must be verified, but not seasoned
- Stated Income – no funds are required to be verified
Refinance
Two months reserves (PITI) required. Cash out can be used to satisfy the reserve requirements. On stated income transactions, the assets stated on the 1003 plus the cash out must satisfy the reserve requirements.
A. Deposit Verification
For full doc types, cash to close on purchase transactions must be verified, but not seasoned.
Requirements for verification of cash to close are as follows:
- Most current bank statement OR
- Fannie Mae Verification of Deposit (VOD) (Fannie Mae Form 1006) without an average balance OR
- Internet printout of bank account with borrower’s name and account number
- Printout from the bank showing borrower’s name and account number certified by a bank agent
ATM printouts or receipts are not an acceptable verification of assets. Any large deposits (defined as a deposit that is more than 1.5 times the borrower’s monthly income as listed on the 1003) may require sourcing.
Note: Business bank accounts may be used if Borrower is sole proprietor and bank statements have not been used to determine income. For all Loan programs that require the monies be sourced and/or seasoned, if the verification of cash to close reveals a significant recent increase in the average balance of an existing account, recent large deposits or a newly opened account with a significant balance, the Borrower must explain the increase and you must document this explanation.
We encourage you to verify all sources of liquid assets beyond the amount needed to meet the requirement of the transaction so that, if necessary, these assets may be considered as a compensating factor in underwriting the Loan.
B. Minimum Down Payment
For most Loan Programs, we require the Borrower to make a minimum down payment from his or her own cash or other equity. A 100% gift fund is allowed if from a family member.
C. Definition of Cash
Cash is defined to be any of the following:
1. Funds on deposit in the Borrower’s checking, money market, savings account or marketable securities.
2. Cash value life insurance - You must verify the cash value of life insurance with a letter from the insurance company.
3. Proceeds of a Loan fully secured by the Borrower’s assets
Borrower Assets
Borrower assets are proceeds of a Loan fully secured by a Borrower’s assets. This includes funds such as those borrowed against a certificate of deposit, marketable securities, insurance policies, qualified retirement plans or a bridge Loan. You must verify the Loan’s terms in writing. Loans secured by 401(k) may be excluded from DTI. Life insurance or other liquid asset accounts may be excluded in the calculation of DTI unless the funds are used to meet program requirements for reserves and/or liquid assets or as a compensating factor. A Loan secured by the account may be used for down payment on the subject property or any other purpose. The unsecured portion of the account may be liquidated for the down payment of the subject property or for any other use. You may use 70% of the vested balance less any loans.
4. Proceeds from the sale of the Borrower’s assets. The verification of the sale of real estate must include a copy of a HUD-1 form.
5. Cash deposit toward the purchase of the property or the lot on which the improvements were constructed, the source of which is verifiable.
D. Definition of Other Equity
Other equity includes:
1. The current appraised value of the lot owned by the Borrower on which the subject improvement was constructed, less any lien. However, if the lot was purchased less than 12 months prior to the Loan's application date, the other equity must be based on the lesser of the purchase price or current appraised value of the lot.
2. Gift funds from a third party source that does not have to be repaid. Gift funds must be explained and certified funds must be received at closing.
3. Gift of equity in the subject property from the Borrower’s immediate family that does not have to be repaid. Gift funds must be explained and a gift letter must be signed by the seller at close of escrow.
E. Unacceptable Sources of Down Payment
None of the following is considered to be cash or other equity for the purpose of meeting down payment requirements:
1. Proceeds of a personal or unsecured Loan, such as a cash advance on a revolving charge account or an unsecured line of credit.
2. A gift that must be repaid in full or in part.
3. Labor performed (sweat equity) or material furnished by the Borrower that is not a part of a pre-closing agreement with the builder.
4. Any payment received as a result of being a party to the sales transaction (i.e., real estate commission payments).
F. Seller Contributions
We allow the Seller to contribute a maximum of 6% towards the Borrowers closing costs, both recurring and non-recurring. See section 114 for more details.
229 Collateral Property Underwriting
The purpose of property underwriting is to determine if a Loan is secured by property that provides sufficient value to recover the investment if Loan default occurs. Establishing the adequacy of the collateral for an investment quality Loan requires an accurate assessment of the current fair market value of the property and the factors, which are likely to affect the property’s future value. You must perform this function or must ensure that it is adequately performed.
A. We review each appraisal in detail to evaluate the following:
- Adequate support for the value of the property by the Appraiser
- Present and future marketability of the property
- Completeness and correctness of the appraisal forms and exhibits
- Applicability and timeliness of data used to determine marketability
- Consistency, logic and accuracy of the appraisal
B. Natural Disasters
In the event the subject property is located in an area, that is declared a federal disaster area, after the appraisal has been issued, we must ensure that the property meets the collateral requirements set forth above by a recertification of value and new photos.
230 Appraiser Requirements
The Appraiser must:
1. Be a State licensed or certified Appraiser in the state where the collateral is located.
2. Meet the independent Appraiser requirements for staff Appraisers or, as appropriate, fee Appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC and the Office of Thrift Supervision with their respective real estate appraisal regulations adopted in accordance with Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (regardless of whether the Client is subject to those regulations).
3. Be experienced in the appraisal of properties similar to the type being appraised.
4. Be actively engaged in appraisal work.
5. Subscribe to a code of ethics that is at least as strict as the code of the Institute or the National Association of Independent Fee Appraisers.
A. Discontinuance of Appraiser Services
We may at any time notify you that we will no longer approve Loans secured by properties that were appraised by a particular Appraiser.
B. Appraisal Review Policy
Underwriting and Appraisal Review Department’s Policies and Procedures:
As the collateral is a major factor in the issuance of a loan from LJL Funding, we are going to pay particular attention the valuation given to each property.
Upon loan submission we will order a BPO (Broker Price Opinion) from a national source. We will use the lower of the ’30 day sales value’ from the BPO or appraised value to determine the ‘current value’.
231 Appraisal Requirements
All appraisals shall be in writing. You must ensure that all appraisals are performed in strict accordance with all applicable local, State and federal laws, regulations and orders. In addition, all appraisals shall conform to the current Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation.
You must review each appraisal in detail for completeness, accuracy and appraising logic. Also, you assume sole responsibility for the quality of the appraisal report as well as its execution in strict accordance with all applicable local, State and federal laws, regulations and orders.
Loan Amounts > $650,000 require 2 full appraisals except in designated geographic areas where the median property values are higher.
A. Required Appraisal Forms
The appraisal form must be prepared and signed by a state licensed or certified Appraiser. We require you to submit the appraisal report on the current version of the appropriate appraisal forms listed below:
1. For all single-family properties and detached PUD units, use the Uniform Residential Appraisal Report (Fannie Mae Form 1004/ Freddie Mac Form 70) and Statement of Limiting Conditions and Appraiser’s Certification (Fannie Mae Form 1004B/Freddie Mac Form 439). For single-family investment properties, if the income is necessary for qualifying purposes, the following forms are required: Single-Family Comparable Rent Schedule (Fannie Mae Form 1007).
2. For condominium units, use the Appraisal Report – Individual Condominium or PUD Unit (Fannie Mae Form 1073/Freddie Mac Form 465) with Statement of Limiting Conditions and Appraiser’s Certification (Fannie Mae Form 1004B/Freddie Mac Form 439) and Condo Certification Form.
3. The Small Residential Income Property Appraisal Report (Fannie Mae Form 1025) must be used for all appraisals of two to four unit properties with Statement of Limiting Conditions and Appraiser’s Certification (Fannie Mae Form 1004B/Freddie Mac Form 439). Operating Income Statement (Fannie Mae 216) must be completed unless income is not being used to qualify.
4. If the estimate of value is defined as “subject to repairs, alterations or conditions” or “subject to completion per plans and specifications,” the original Appraiser must complete and submit the Satisfactory Completion Certificate (Form 442) with a photo of the completed property prior to approval.
B. Required Appraisal Attachments
Each full appraisal must have the following attachments:
1. Original descriptive color photographs of the subject property (front, rear, street scene, and all accessory improvements – pools, detached garages, outbuildings, etc.) Interior may be requested at Underwriter’s discretion.
2. One original descriptive color photograph of each comparable used on the Residential Appraisal Report. When access to photograph a comparable is not possible, Appraiser must provide an MLS listing photograph or public records photograph. Appraiser must also include photographs of the comparable listings and comparable rentals in multi-family appraisal reports.
3. Location map showing the subject property, comparables and neighborhood boundaries defined in the appraisal report.
4. Comment addendum explaining unusual items not adequately addressed in the apprai |
