1. Underwriting and Quality Assurance Toni Nisbit- Assistance Vice President Underwriting Sue Blagsvedt – Quality Assurance Review Analyst

2. An Important Note About the Seminar Contents Some slides have been taken from Fannie Mae training presentations. While every effort has been made to insure the reliability of the session contents, Fannie Mae and Freddie Mac Selling and Servicing Guides and updates including announcements and release notes are the official statements of Fannie Mae and Freddie Mac policies and procedures and will control in the event of discrepancies between information in this seminar and the guides.

3. Agenda 1. Income : Variable Income and Self-Employed Income 2. Student Loans 3. Privately Maintained Streets 4. 4506-T Tips

4. Variable Income 1)Is the income variable? 2)Appropriate documentation available? 3)Trending Analysis 4)Calculating accurate income

5. Is the Income Variable? Hourly workers with fluctuating hours (i.e. nurses, construction workers, railroad workers, etc.) Also includes income such as commissions, bonuses, and/or overtime If the income must be averaged, it is a key indicator that it is variable income

6. Is the Income Variable? (cont.) Two or more years of receipt is recommended; however, 12 to 24 months may be acceptable as long as borrower’s loan application demonstrates positive factors that offset the shorter history If a borrower is employed in a position with variable hours, length of employment less than 12 months is not acceptable.

7. Is the Income Variable? (cont.) What to look for on paystubs and other income documentation to determine if you have variable income: Varying hours Varying type of pay (shift differential, night pay, holiday premium pay) Overtime income Bonus income Commission income

8. Identifying Variable Income Example 1 Two week pay period ending 11/28/15

9. Identifying Variable Income Example 2 Two week pay period ending 12/06/15

10. Appropriate Documentation? Pay stubs Verification of Employment Verification of Employment from prior employers W-2s Tax returns Letters of explanation from employers Other supporting documentation – i.e. letters from union

11. Trending Analysis After the monthly year-to-date income amount is calculated, it must be compared to prior years’ earnings using the borrower’s W-2s or signed income tax returns (or a standard Verification of Employment completed by the employer or third- party employment verification vendor) If the trend in the amount of income is stable or increasing, the amount should be averaged over the entire period.

12. Trending Analysis (cont.) If the trend is declining, but has since stabilized and there is no reason to believe the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used. If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the decline occurred.

13. Trending Analysis (cont.)

14. Trending Analysis Example 1 Commission income decreased slightly from 2014 to 2015 and has increased YTD 2016; therefore, commission income is relatively stable, and a 24 month average of 2014 and 2015 should be utilized ($5,083.33). It is reasonable to assume commissions would decrease over the summer months because of the borrower’s line of work. Therefore, 2014 and 2015 show a more accurate picture of the full two-year history. YTD 2016 (3/15/16)20152014 Annual$16,000$60,000$62,000 Months2.4812 Monthly$6,451.61$5,000$5,166.67 Commission Income – Snowplow Salesperson

15. Trending Analysis Example 2a Commission income has steadily decreased. A satisfactory letter of explanation or comment on VOE for the decrease must be obtained from the employer to confirm dates of leave. An average of 2014 and 2015 is utilized ($5,083.33) in this situation. YTD 2016 (3/15/16)20152014 Annual$9,000$60,000$62,000 Months2.4812 Monthly$3,629.03$5,000$5,166.67 Commission Income – Software salesperson on family leave

16. Trending Analysis Example 2b Commission income has steadily decreased. A letter of explanation is not required, as this position typically has a lower commission in the winter. An average of 2014 and 2015 is utilized ($5,083.33) in this situation. YTD 2016 (3/15/16)20152014 Annual$9,000$60,000$62,000 Months2.4812 Monthly$3,629.03$5,000$5,166.67 Commission Income – Realtor

17. Calculating Variable Income Example #1 (ABC Construction Company) VOE

18. Calculating Variable Income Example #1 (ABC Construction Company) Base Pay (borrower is a seasonal operator) YTD 2015 (8/3/15)20142013 (hired 5/31/13) Annual$20,897.10$28,688.96$19,551.56 Months7.10127.03 Monthly$2,943.25$2,390.75$2,781.16 Base earnings declined in 2014; however, year-to-date earnings are up and higher than 2013 (relatively stable). An average of 2013, 2014 and 2015 (26.13 months) should be utilized ($20,897.10 + $28,688.96 + $19,551.56 / 26.13 months), or $2,645.91 because this reflects a full two-year period including two work seasons and two layoff seasons.

19. Calculating Variable Income Overtime will continue per the VOE and we have a two year history; therefore, if the trending analysis does not reflect negative results, it can be used for qualification. Overtime earnings in 2014 have increased; however, year-to-date earnings are down slightly, yet stable. Year-to-date earnings only should be utilized for overtime income, or $1,601.14. YTD 2015 (8/3/15)20142013 (hired 5/31/13) Annual$11,368.10$26,957.60$14,600.50 Months7.10127.03 Monthly$1,601.14$2,246.47$2,076.88 Overtime Income

20. Calculating Variable Income Bonus Income Continuance of bonus income is not indicated on the VOE; therefore, bonus income should not be utilized. Furthermore, there is not a two year history of receipt.

21. Calculating Variable Income Example #2 (America National Company)

22. Calculating Variable Income Example #2 (America National Company) Base income Base income does not appear to be variable income. The current annual income is supported based on year-to-date earnings as the borrower recently received a pay increase of $8,991.84 per year on 6/8/15. Therefore, the annual salary ($74,006/12 = $6.167.17) calculation can be utilized even though it is higher than the year-to-date earnings (49,741.36/8.37 months = $5,942.81) calculation. Auto Allowance Income This income should not be utilized because the borrower appears to be no longer receiving an auto allowance. However, if this income is to be used for qualifying, a comment from the employer must be obtained to confirm the borrower receives this at the end of each year and will again receive in the current year and two years tax returns must be provided.

23. Calculating Variable Income Incentive earnings increased significantly in 2014 and decreased slightly in 2015 (relatively stable). Therefore, an average over the entire period should be utilized ($7,325 + $11,700 + 4,000 / 32.37 mos), or $711.31. YTD 2015 (9/11/15)20142013 (hired 4/29/10) Annual$7,325$11,700$4,000 Months8.3712 Monthly$875.15$975.00$333.33 Example #2 (America National Company) Incentive Income Another name for commission income; trending analysis must be performed to determine accurate calculation of the variable income.

24. Quiz time!

25. Calculating Self-Employed Income Insight into Self-Employed Income Fannie Mae’s Updates Examples of How to Calculate Self-Employed Income Self-Employed Income Clarifications

26. Calculating Self-Employed Income

29. Freddie Mac The “When” When: Freddie Mac requires that personal tax returns be provided and analyzed for secondary self- employment regardless of whether or not the income is being used to qualify.

30. Calculating Self-Employed Income

32. Freddie Mac Freddie Mac does not allow for waiver of business returns.

35. Calculating Self-Employed Income

40. Current Liquidity= Current Assets/Current Liabilities Current Liquidity = 16,429/12,304 Current Liquidity = 1.34 If liquidity ratio is greater than 1, then the business is considered liquid.

42. In the K-1 sample shown, Box 1 shows income of $360,845 and the distribution amount shows $199,963. In this example, we would be able to use $199,963 as income without additional documentation as the borrower received $199,963 as an actual distribution and the income shown in Box 1 supports that. No additional documentation would be required. Distributions Box 19A Calculating Self Employed Income-Situation A

44. In the K-1 sample shown, if you needed to use more income than $199,963 distribution amount (for example, if we wanted to use the full $360,845 as we have done in the past) Additional documentation is required to show: – The borrower has access to the funds : 100% ownership Partnership Agreement Corporate Resolution – The business has the liquidity to support the withdrawal of earnings. Distributions Box 16A Calculating Self-Employed Income- Situation B

46. In the K-1 sample shown, you can add the guaranteed payments of $56,000 to the borrower’s cash flow No additional documentation is required Calculating Self-Employed Income-Situation C

47. Business Return Clarifications Fannie Mae & Freddie Mac The business portion of the SAM worksheet (1065/1120S/1120) only needs to be completed if we are trying to use business income over and above what is reflected on the personal tax returns (W-2s, K-1s). For example, adding back depreciation or interest for a debt that is being included in the liabilities already etc. Notes payable in < 12 months do need to be considered. Access to funds and liquidity requirements still apply.

48. Business Return Clarifications Fannie Mae & Freddie Mac FANNIE MAE: Business returns must be provided in the loan file unless the following waiver of business return requirements are met: the borrower is using his or her own personal funds to pay the down payment and closing costs and satisfy applicable reserve requirements, the borrower has been self-employed in the same business for at least five years, and the borrower’s individual tax returns show an increase in self-employment income over the past two years – Reminder: Certain DU case files may allow for one year tax returns, however if you are trying to utilize the waiver of business returns, two years of personal tax returns are required. FREDDIE MAC: Business returns must be provided in the loan file as Freddie does not allow for the waiver of business returns.

49. Distribution Clarifications Cannot use distributions that are greater than income. Can use $70,000 without additional documentation

50. Distribution Clarifications Can use income > distributions if extra steps are taken (document access and liquidity) Please see above slides for documentation requirements

51. Distribution Clarifications If the K-1 shows a loss, you cannot use the distribution as there is no income to support it.

52. Questions?

53. Student Loans Fannie Mae states that all student loans, whether deferred, in forbearance, or in repayment (not deferred), the lender must use the greater of the following to determine the monthly payment to be used as the borrower’s recurring monthly debt obligation: 1% of the outstanding balance; or The actual documented payment (documented in the credit report, in documentation obtained from the student loan lender, or in documentation supplied by the borrower). If the payment currently being made cannot be documented or verified, 1% of the outstanding balance must be used. – Exception: If the actual documented payment is less than 1% of the outstanding balance and it will fully amortize the loan with no payment adjustments, the lender may use the lower, fully-amortizing monthly payment to qualify the borrower.

54. Student Loans Freddie Mac allows the use of the payment shown on the credit report. – Can utilize 1% of the outstanding balance when no payment is shown on the credit report. – If no payment is indicated on the credit report, an alternative to using 1% would be to obtain direct verification of the payment amount from the creditor.

55. Student Loans (cont.) Student loans are often identified as undisclosed debt during the post closing review process. There are several ways to identify a student loan is in process: – Credit inquiries – Undisclosed Debt Monitoring reports – Watch for recent transfers – Ask! (Especially if there are student loans currently in process)

56. Questions?

57. Tips For Completing a 4506-T Common reasons for rejection: The 4506-T must be filled out completely. The 4506-T must be free of any cross-outs, re-writes, or add-ins. If a mistake is made, a new form must be completed. If the IRS detects any hint of alteration to the form, they will reject it. This includes adding missed information to a previously signed form and using multiple fonts on the same form. The 4506-T must be completely legible. The 4506-T must have the address the borrower used on the tax returns for the year requested.

58. Tips for completing a 4506-T Tips for ensuring the correct address is included on a 4506-T: If tax returns are available, they should be used as a reference. If tax returns are unavailable, confirm the address on tax returns with the borrower. If two years of tax returns are needed, make sure the correct address is used for both years on the 4506-T. If they are different, type the address used on the most current tax return in the current address, and the address on the previous tax return in the previous address.

59. Tips for completing a 4506-T Tips for ensuring the correct address is included on a 4506-T (cont.): Using the address from the W-2s, paystubs, etc. does NOT guarantee a correct 4506-T, but these documents may be helpful in determining that the borrower may have had multiple addresses within the most recent two years, and further questions should be asked. Make sure all information, such as PO Box or Apt number has been completed on the 4506-T exactly the same as on the tax return(s).

60. Questions?

61. Privately Maintained Streets Fannie Mae guidelines (B4-1.3-04) If the property is located on a community-owned or privately maintained street, a legally enforceable agreement or covenant for maintenance of the street is required and must be recorded. The agreement should include the following provisions: Responsibility for payment of repairs, including each party’s representative share; Default remedies in the event a party to the agreement or covenant fails to comply with or her obligations; and The effective term of the agreement or covenant, which in most cases should be perpetual and binding on any future owners.

62. Privately Maintained Streets Freddie Mac guidelines (5601.12) If the property is located on a community- owned or privately maintained street, the streets must be maintained in a manner that meets community standards. Subject must have legal ingress and egress, and appraiser should provide similar comparables or comments. A recorded agreement is not required.

63. Questions?

64. Thank You!