Announcement 19:0079: Carrington Advantage Program Guideline Updates

Overview

Carrington Mortgage Services, LLC (CMS) is pleased to announce the following guideline enhancements for the Carrington Advantage products (CFA/CFA+ and Investor Advantage):

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

Ÿ  More than 3 NSFs or overdrafts within the most recent 12 months require explanation, supporting documentation, and underwriter analysis for acceptability. Note: Overdraft Protection Transfers from a linked bank account or line of credit are not considered an NSF. Refer to NSF Checks and Overdrafts below for additional guidance.

Ÿ  If bank statements provided reflect payments being made on obligations not listed on the credit report, see Undisclosed Debts for additional guidance.

Ÿ  PayPal business account statements are not eligible. PayPal earnings must be deposited into a business or personal bank account for consideration.

Ÿ  W-2 Wages: Additional income deposited into the bank statements but derived from a source other than the self-employed business may not be included in the bank statement average. W-2 earnings must be documented as per the requirements in Wage-Earners along with a processed 4506-T verifying the W-2 earnings only.

Ÿ  Rental Income: Obtain the most recent lease agreement(s) for rental properties and proof of receipt at the current lease rate using a cancelled check or bank statement. Calculate the qualifying rents by using 75% of the current lease minus the full PITIA.

·       Statements must support stable and generally predictable deposits. Unusual deposits must be documented.

·       Evidence of a decline in earnings may result in disqualification.

·       More than 3 NSFs or overdrafts within the most recent 12 months require explanation, supporting documentation, and underwriter analysis for acceptability. Note: Overdraft Protection Transfers from a linked bank account or line of credit are not considered an NSF. Refer to NSF Checks and Overdrafts below for additional guidance.

·       If bank statements provided reflect payments being made on obligations not listed on the credit report, see Undisclosed Debts for additional guidance.

·       PayPal business account statements are not eligible. PayPal earnings must be deposited into a business or personal bank account for consideration.

·       W-2 Wages: Additional income deposited into the bank statements but derived from a source other than the self-employed business may not be included in the bank statement average. W-2 earnings must be documented as per the requirements in Wage-Earners along with a processed 4506-T verifying the W-2 earnings only.

·       Rental Income: Borrowers who receive rental income as a secondary income source may utilize Bank Statement Documentation for calculating business income and the most recent lease agreement(s) for rental properties for calculating rental income. Obtain proof of receipt at the current lease rate using a cancelled check or bank statement. Calculate the qualifying rents by using 75% of the current lease minus the full PITIA.

·       Borrowers whose primary source of income is derived solely from the ownership of rental properties as declared on personal or business tax returns must be calculated using Full Documentation of Income. See Rental Income.

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

Foreign Income

Foreign income is income earned by a borrower who is employed by a foreign corporation or a foreign government and is paid in foreign currency. Borrowers may use foreign income to qualify if the following requirements are met:

·       Two years U.S. federal income tax returns reflecting the foreign income

·       Income is translated to U.S. dollars

·       Standard income stability and continuance requirements are met

·       Standard documentation requirements apply based on the type of income

Income from sanctioned countries administered by OFAC is not allowed

Foreign Income

Foreign income is income earned by a borrower who is self-employed, employed by a foreign corporation or a foreign government and is paid in foreign currency. Borrowers may use foreign income to qualify if the following requirements are met:

·       Two years U.S. federal income tax returns reflecting the foreign income

·       Income is translated to U.S. dollars

·       Standard income stability and continuance requirements are met

·       Standard documentation requirements apply based on the type of income

Income from sanctioned countries administered by OFAC is not allowed

Royalty Payment Income

Obtain copies of the royalty contract, agreement, or statement confirming amount, frequency, and duration of the income; and borrower’s most recent signed federal income tax return, including the related IRS Form 1040, Schedule E.

Income from royalty payments may be considered with confirmation that the borrower has received royalty payments for at least 12 months and that the payments will continue for a minimum of three years after the date of the mortgage application.

Adjustable Rate Qualifying

For all ARM loans, the greater of the note rate or the fully indexed rate is used to determine the qualifying PITIA. The fully indexed rate is calculated by adding the margin to the index.  Floor is the start rate.

Investor products are 30-year terms.

Adjustable Rate Qualifying

For all ARM loans, the greater of the note rate or the fully indexed rate rounded up to the nearest eighth percentage is used to determine the qualifying PITIA. The fully indexed rate is calculated by adding the margin to the index.  Floor is the start rate.

Investor products are 30-year terms.

Interest Only Payment Qualifying

All Interest-only loans qualify using the fully amortized payment calculated over the fully amortizing period, based on the greater of the note rate or the fully indexed rate to determine the qualifying PITIA. For example, a 30-year loan with a 10-year interest-only period would have a 20-year fully amortizing period.

Interest Only Payment Qualifying

All Interest-only loans qualify using the fully amortized payment calculated over the fully amortizing period, based on the greater of the note rate or the fully indexed rate rounded up to the nearest eighth percentage to determine the qualifying PITIA. For example, a 30-year loan with a 10-year interest-only period would have a 20-year fully amortizing period.

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

Borrowed Funds Secured by an Asset

Borrowed funds that are secured by an asset can be used as a source of funds for down payment, closing costs, and reserves. Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, stocks and/or bonds, and 401(k) accounts.

The terms of the secured loan and transfer of funds to the borrower should be documented. The individual providing the secured loan cannot be a party to the transaction.

The monthly payments for the loan secured by non-financial assets must be counted in the debt-to-income ratio. However, when the loan is secured by the borrower’s financial assets and there are sufficient assets to pay off the loan currently verified, the monthly payment for the loan does not have to be considered as a long-term debt when qualifying the borrower (as in the case of a 401(k) loan). If the same financial asset is also used as part of the borrower’s financial reserves, adequacy of the borrower’s reserves must be determined after taking into consideration the net value of the asset after it has been reduced by the proceeds from the secured loan (and any related fees).

Borrowed Funds Secured by an Asset

Borrowed funds that are secured by an asset can be used as a source of funds for down payment, closing costs, and reserves. Assets that may be used to secure funds include automobiles, artwork, collectibles, real estate, stocks and/or bonds, and 401(k) accounts.

The terms of the secured loan and transfer of funds to the borrower should be documented. The individual providing the secured loan cannot be a party to the transaction.

The monthly payments for the loan secured by non-financial assets must be counted in the debt-to-income ratio. However, when the loan is secured by the borrower’s financial assets and there are sufficient assets to pay off the loan currently verified, the monthly payment for the loan does not have to be considered as a long-term debt when qualifying the borrower (as in the case of a 401(k) loan). After a 401(k) loan is distributed, if the account balance including the 401(k) loan balance is sufficient to cover the payoff of the loan, the monthly payment does not need to be included in the debt-to-income ratio

If the same financial asset is also used as part of the borrower’s financial reserves, adequacy of the borrower’s reserves must be determined after taking into consideration the net value of the asset after it has been reduced by the proceeds from the secured loan (and any related fees). If any 401(k) assets are to be used as reserves, the net value after the loan proceeds are deducted must be used when calculating the amount of reserves. See also Retirement Accounts.

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

New Construction

The following are required for all new construction properties:

·       Appraisal Update and/or Completion Report (FNMA Form 1004D) with complete interior and exterior photos reflecting completion, if applicable. Proposed improvements are not allowed.

·       To calculate property taxes for new construction, use the estimated taxes from the builder or escrow/closing agent or the following Prequalification Tax Rate Table can be used when other resources do not exist to provide tax information for the subject property county. This table contains recommended percentages; however, actual values should be used whenever possible.

Property taxes are calculated at 1.5% of the sales price for qualification. 1.25% should be used for properties located in CA.

New Construction

The following are required for all new construction properties:

·       Appraisal Update and/or Completion Report (FNMA Form 1004D) with complete interior and exterior photos reflecting completion, if applicable. Proposed improvements are not allowed.

·       To calculate property taxes for new construction, use the estimated taxes from the builder or escrow/closing agent or the following Prequalification Tax Rate Table can be used when other resources do not exist to provide tax information for the subject property county. This table contains recommended percentages; however, actual values should be used whenever possible.

·       Property taxes are calculated at 1.5% of the sales price for qualification. 1.25% should be used for properties located in CA.

·       Refer to the Property Tax Policy for calculation of monthly taxes for qualification.

Collections and Charge-Offs Paid through Closing Transaction

If collection or charge-off accounts are being paid off through our closing transaction, a payoff demand is not required.

The amount reflected on the credit report or supplement can be used UNLESS:

·       The account is listed on the Title report

·       The reporting date on the credit report is older than 90 days

·       Underwriter discretion for layered risk

Example: The account is not recently rated, large balance owed and the borrower is short to close.

Collections and Charge-Offs Paid through Closing Transaction

If collection or charge-off accounts are being paid off through our closing transaction, a payoff demand or credit report or supplement will be required. The credit report or supplement must list the same information as a payoff demand (e.g. per diem amount, balance, rate, mailing address.)

The amount reflected on the credit report or supplement can be used UNLESS:

·       The account is listed on the Title report

·       The reporting date on the credit report is older than 90 days

·       Underwriter discretion for layered risk

Example: The account is not recently rated, large balance owed and the borrower is short to close.

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

Bank Statement Documentation

The following requirements apply when analyzing the business bank statements:

Ÿ  Business bank accounts, personal bank accounts addressed to a DBA, or personal accounts with evidence of business expenses can be used for qualification

Ÿ  Wire transfers and transfers from other accounts must be documented or excluded

Ÿ  Statements should show a trend of ending balances that are stable or increasing over time

Ÿ  Decreasing or negative ending balances must be explained

Ÿ  Business expenses must be reasonable for the type of business (examples of businesses with higher expense ratios may include construction companies, builders, restaurants and retail firms) 

Bank Statement Documentation

The following requirements apply when analyzing the business bank statements:

Ÿ  Business bank accounts, personal bank accounts addressed to a DBA, or personal accounts with evidence of business expenses can be used for qualification

Ÿ  Wire transfers and transfers from other accounts must be documented or excluded

Ÿ  Statements should show a trend of ending balances that are stable or increasing over time

Ÿ  Decreasing or negative ending balances must be explained

Ÿ  Business expenses must be reasonable for the type of business (examples of businesses with higher expense ratios may include construction companies, builders, restaurants and retail firms) 

Ÿ  The business owner must provide a signed letter of explanation describing the business in order to differentiate as a “Service Business” or “Product Business”. The letter must include the number of years the business has been in operation. 

Ÿ  Underwriters have discretion to request a CPA letter if the business bank statements reflect expenses that appear higher than the factors set forth in these guidelines.

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

Calculating Qualifying Income

OPTION 1: 50% EXPENSE FACTOR

Add up the deposits over the 12 or 24 months of statements provided to determine a gross deposit number as follows:

Multiply Gross deposits by a 50% expense factor to determine a net deposit number. Divide the net deposit number by 12 or 24 months as determined by the number of months of bank statements utilized to support monthly income. Qualifying income must be multiplied by the percentage of ownership the borrower is entitled to.

If the borrower’s business expense factor is higher or lower than 50% an Expense Statement prepared and signed by a third-party (i.e. CPA or licensed tax preparer) (See OPTION 2 below) may be used to determine monthly income.

Calculating Qualifying Income

OPTION 1: DEFAULT EXPENSE FACTOR

Add up the deposits over the 12 or 24 months of statements provided to determine a gross deposit number as follows:

Multiply Gross deposits by the default expense factor to determine a net deposit number. Divide the net deposit number by 12 or 24 months as determined by the number of months of bank statements utilized to support monthly income. Qualifying income must be multiplied by the percentage of ownership the borrower is entitled to.

Default Expense Factors will be applied as follows:

Ÿ  Service Business = 50% Expense Factor (examples include Consulting, Accounting, Legal, Counseling, Therapy, Financial Services, Insurance, IT)

Ÿ  Product Business = 60% Expense Factor (examples include Retail, Food Services, Restaurant, Manufacturing, Contracting, Construction)

If the borrower’s business expense factor is higher or lower than 50% an Expense Statement prepared and signed by a third-party (i.e. CPA or licensed tax preparer) (See OPTION 2 below) may be used to determine monthly income.

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

Calculating Qualifying Income

OPTION 2: THIRD-PARTY PREPARED EXPENSE STATEMENT

Net income using the Expense Statement

Required Expense Statement Documentation:

Ÿ  Expense Statement prepared and signed by a third-party (CPA or licensed tax preparer) specifying business expenses as a percentage of the gross annual sales/revenue prepared

Net income from the Expense Statement is calculated by determining total deposits per bank statements (minus any disallowed deposits) multiplied by the expense percentage provided by CPA or tax preparer.

Qualifying income must be multiplied by the percentage of ownership the borrower is entitled to.  

Calculating Qualifying Income

OPTION 2: THIRD-PARTY PREPARED EXPENSE STATEMENT

Net income using the Expense Statement

If the borrower’s business operates more efficiently, or typically has a materially different expense factor than the default expense factors above, then a reduced expense factor is acceptable subject to the following requirements:

Ÿ  Expense Statements must be prepared and signed by a third-party licensed or registered tax preparer. Tax preparers must be a Certified Public Accounts (CPA), Enrolled Agent (EA), hold a state license for tax preparation, or belong to a professional trade organization within their state, such as the California Tax Education Council (CTEC).

Ÿ  Expense Statements must specify business expenses as a percentage of the gross annual sales/revenue of the business.

Ÿ  Expense Statements must not include unacceptable disclaimers or exculpatory language regarding its preparation.

Ÿ  Expense Factors may never be lower than:

o   Service Business = 20% Expense Factor Floor

o   Product Business = 35% Expense Factor Floor

Net income from the Expense Statement is calculated by determining total deposits per bank statements (minus any disallowed deposits) multiplied by the expense percentage provided by CPA or tax preparer.

Qualifying income must be multiplied by the percentage of ownership the borrower is entitled to.  

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

Notes Receivable Income

Income from notes receivables can be used to qualify provided the income is regular and recurring. The borrower should have a documented history of receiving the income for at least 2 years and can verify that the income will continue for at least 3 years from note on the new mortgage.

A copy of the note confirming the amount, frequency and duration of payments is required along with tax returns for the most recent 12-month period (including Schedule B) and bank statements showing consistent deposits of funds. Income from a recently executed note/contract (less than 12 months) may not be used as qualifying income.

Evidence of receipt for the last 12 months must be verified with either canceled checks, bank deposit slips, of federal income tax returns. A copy of the note verifying payment amount and remaining term of at least 3 years must also be obtained.

Notes Receivable Income

Income from notes receivables can be used to qualify provided the income is regular and recurring. The borrower should have a documented history of receiving the income for at least 12 months and can verify that the income will continue for at least 3 years from note on the new mortgage.

Evidence of receipt for the last 12 months must be verified with either canceled checks, bank deposit slips, of federal income tax returns. A copy of the note verifying payment amount and remaining term of at least 3 years must also be obtained.

Tips and Gratuities

Tips and gratuity income can be considered if receipt of such income is typical for borrower’s occupation (i.e., waitperson, taxi driver, etc.). Income should be received for at least 2 years and documented through the most recent year-to-date pay stubs, and federal income tax returns for the most recent 2 years. Income should be averaged over the time period verified. If the tip income is not reported on the pay stubs or tax returns, then it may not be included in qualifying income.

Tips and Gratuities

Tips and gratuity income can be considered if receipt of such income is typical for borrower’s occupation (i.e., waitperson, taxi driver, etc.). Income should be received for at least 2 years and documented through the most recent pay stub, 2 years W-2s and written verification of employment (VOE).  Income should be averaged over the time period verified. If the tip income is not reported on the pay stubs or tax returns, then it may not be included in qualifying income.

Carrington Flexible Advantage Guidelines, continued

Old Requirements

Updated Requirements

Unemployment Compensation

Income derived from unemployment compensation is generally not allowed due to the limited duration of its receipt. Seasonal unemployment, however, can be considered if the borrower is employed in a field where weather affects the ability to work and where unemployment compensation is often received (i.e., construction). The income can be used to qualify on with a 2-year employment history in the same field of work and a 2-year history of receipt of unemployment compensation. Income should be averaged over the time period verified.

Unemployment Compensation

Income derived from unemployment compensation is generally not allowed due to the limited duration of its receipt. Seasonal unemployment, however, can be considered if the borrower is employed in a field where weather affects the ability to work and where unemployment compensation is often received (i.e., construction). The income can be used to qualify on with a 2-year employment history in the same field of work and a 2-year history of receipt of unemployment compensation with 2 years tax returns or 2 years 1099 forms. Income should be averaged over the time period verified.

Ineligible Property Types

·       Manufactured Homes

·       Co-operative Units

·       Condotels or Condo Hotels

·       Leaseholds

·       Log Homes

·       Rural Properties

·       Farms or Hobby/Working Farms

·       Properties subject to Rent Control regulations

·       Unique Properties (Earth Homes, Berm Homes, Dome Homes, etc.)

·       Properties with active oil, gas, or mineral drilling, excavation, etc.

·       Hawaiian properties in lava zones 1 and 2

·       Builder Model Leaseback

·       Non-Conforming zoning regulations that prohibit rebuilding

·       State-approved medical marijuana producing properties

Ineligible Property Types

·       Manufactured/Mobile Homes

·       Co-operative Units

·       Condotels or Condo Hotels

·       Leaseholds

·       Log Homes

·       Rural Properties

·       Farms or Hobby/Working Farms

·       Properties subject to Rent Control regulations

·       Unique Properties (Earth Homes, Berm Homes, Dome Homes, etc.)

·       Properties with active oil, gas, or mineral drilling, excavation, etc.

·       Hawaiian properties in lava zones 1 and 2

·       Builder Model Leaseback

·       Non-Conforming zoning regulations that prohibit rebuilding

·       State-approved medical marijuana producing properties

Carrington Investor Advantage Guidelines

Old Requirements

Updated Requirements

Cash-Out Refinance

For all cash-out refinance transactions, a minimum of 6 months must have elapsed since the most recent mortgage transaction on the subject property (either the original purchase transaction or subsequent refinance).  Note date to note date is used to calculate the 6 months.  There is no waiting period if the borrower acquired the property through an inheritance or was legally awarded the property through divorce, separation, or dissolution of a domestic partnership.

For business purposes only.  Proceeds of the loan are limited to the purchase of an additional investment property or the improvement and/or maintenance of the subject property or other investment properties. Utilizing proceeds of the loan for personal, family, or household purposes is prohibited.

Cash-Out Refinance

For all cash-out refinance transactions: at least one borrower must have been on title a minimum of six (6) months prior to the new note date and a minimum of 6 months must have elapsed since the most recent mortgage transaction on the subject property (either the original purchase transaction or subsequent refinance). Note date to note date is used to calculate the 6 months.

For cash-out refinance transactions where the property is currently vested in a trust or LLC, the borrowers must have owned the property in the name of the trust or LLC for at least six (6) months prior to closing.

Note: Properties removed from a Trust are not required to meet the title seasoning requirement if the property moves from the Trust to the owner of Trust and 6 month seasoning is met in the Trust.

There is no waiting period if the borrower was legally awarded the property through divorce, separation, or dissolution of a domestic partnership.

For business purposes only.  Proceeds of the loan are limited to the purchase of an additional investment property or the improvement and/or maintenance of the subject property or other investment properties. Utilizing proceeds of the loan for personal, family, or household purposes is prohibited.

Carrington Investor Advantage Guidelines

Old Requirements

Updated Requirements

Vesting in the Name of a Business Entity

Vesting in the name of an LLC, partnership, corporation, or S-corporation is acceptable on investment property transactions only. To vest a loan in an Entity, the following requirements must be met:

·       Business purpose and activities are limited to ownership and management of real estate

·       Business Entity is limited to a maximum of 4 ‘owners’ (owners are members, partners, or shareholders, as the case may be)

·       All Entity owners must provide a personal Guaranty for the loan

·       Each Entity owner must complete a 1003. The loan application, credit report, property Debt Coverage Ratio (DCR) and assets for each owner will be used to determine qualification and pricing.

·       Each Entity owner must receive notice of the loan and its terms prior to closing

Vesting in the Name of a Business Entity

Vesting in the name of an LLC, partnership, corporation, or S-corporation is acceptable on investment property transactions only. To vest a loan in an Entity, the following requirements must be met:

·       Business purpose and activities are limited to ownership and management of real estate

·       Business Entity is limited to a maximum of 4 ‘owners’ (owners are members, partners, or shareholders, as the case may be)

·       All Entity owners must be natural persons and provide a personal Guaranty for the loan

·       Each Entity owner must complete a 1003. The loan application, credit report, property Debt Coverage Ratio (DCR) and assets for each owner will be used to determine qualification and pricing.

·       Each Entity owner must receive notice of the loan and its terms prior to closing

Collections and Charge-Offs Paid through Closing Transaction

If collection or charge-off accounts are being paid off through our closing transaction, a payoff demand is not required. The amount reflected on the credit report or supplement can be used UNLESS:

·       The account is listed on the Title report

·       The reporting date on the credit report is older than 90 days

·       Underwriter discretion for layered risk

Example: The account is not recently rated, large balance owed and the borrower is short to close

Collections and Charge-Offs Paid through Closing Transaction

If collection or charge-off accounts are being paid off through our closing transaction, a payoff demand or credit report or supplement will be required. The credit report or supplement must list the same information as a payoff demand (e.g. per diem amount, balance, rate, mailing address.)

The amount reflected on the credit report or supplement can be used UNLESS:

·       The account is listed on the Title report

·       The reporting date on the credit report is older than 90 days

·       Underwriter discretion for layered risk

Example: The account is not recently rated, large balance owed and the borrower is short to close