Updated Non-QM Product Underwriting Guidelines

Overview

Carrington Mortgage Services, LLC (CMS) is pleased to announce the following Non-QM program underwriting updates (highlighted in red). Please note this is an abbreviated summary of the guideline changes and all updates should be viewed within the context of the full guidelines.  The pricing engine and loan origination system will be ready with these changes Thursday, March 23, 2023.

Please note: Loans that are already locked must follow the prior guidelines and any loans locked with UPE exceptions for prior guidelines will not be waived.

Prime Advantage Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Flip Transactions

A transaction will be considered a flip transactions when:

• The seller acquired the property 90 or fewer days prior to the sales contract date, and the new contract price exceeds the seller’s acquisition price by more than 10 percent; or
• The seller acquired the property 91 to 180 days prior to the sales contract date, and the new contract price exceeds the seller’s acquisition price by more than 20 percent.

The chain of title and appraisal report must be reviewed for prior sale and transfer history. Flip transactions are subject to the following requirements:

• All transactions must be arm’s length, with no identity of interest between the buyer and property seller or other parties participating in the sales transaction
• No pattern of previous flipping activity may exist in the last 12 months. Exceptions to ownership transfers may include sales by government agencies, properties inherited or acquired through divorce, and sales by the holder of a defaulted loan
• The property was marketed openly and fairly, through a multiple listing service, auction, for sale by owner offering (documented) or developer marketing 
• No assignments of the contract to another buyer
• If the property is being purchased for more than 5% above the appraised value, a signed letter of acknowledgement from the borrower must be obtained
• An additional appraisal product is required: 

Flip Transactions

A transaction will be considered a flip transactions when:

• The seller acquired the property 90 or fewer days prior to the sales contract date, and the new contract price exceeds the seller’s acquisition price by more than 10 percent; or
• The seller acquired the property 91 to 180 days prior to the sales contract date, and the new contract price exceeds the seller’s acquisition price by more than 20 percent.

The chain of title and appraisal report must be reviewed for prior sale and transfer history. Flip transactions are subject to the following requirements:

• All transactions must be arm’s length, with no identity of interest between the buyer and property seller or other parties participating in the sales transaction 
• No assignments of the contract to another buyer
• A second full appraisal is required

Prime Advantage Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Business Bank Statements

Business Bank Statement Documentation is allowed under all programs. See the applicable CMS Matrix for credit score and LTV restrictions.

The following documentation is required (see also 1-Year Alternative Income Documentation):

Note: If borrower elects 12 months, additional LLPA’s apply.

Business Bank Statements

Business Bank Statement Documentation is allowed under all programs. See the applicable CMS Matrix for credit score and LTV restrictions.

The following documentation is required (see also 1-Year Alternative Income Documentation):

Note: If borrower elects 12 months, additional LLPA’s apply.

Rental Income from an ADU

Rental income from an ADU may be considered when permitted by local zoning laws and/or regulations.  Any rental income received from the accessory unit and used for qualifying must be documented as follows:

• The loan file must contain documentation to support that the ADU may be legally rented per local codes or regulations.
• Purchase transactions involving a property with an ADU:

• Refinance transactions involving a property with an ADU:

Obtain the appraiser’s estimate of market rent on FNMA Form 1007, Comparable Rent Schedule or FNMA Form 1025, Small Residential Income Property Appraisal Report.

Prime Advantage Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Rental Income from an ADU (continued)

• Transactions where other Real Estate Owned has an ADU that may be legally rented:

Reserves

Cash-out proceeds are permitted for reserves with a FICO score greater than or equal to 700. Gift funds may not be considered.  

Reserves

Cash-out proceeds are permitted for reserves with a FICO score greater than or equal to 620. Gift funds may not be considered.  

Eligible Property Types

Eligible Property Types

Appraisal Review Process

The following require a Second Full Appraisal:

Please note: title transfers from a builder to a wholly owned subsidiary of the builder are considered a “change of ownership” and require a Second Full Appraisal.  

*Refer to HPML Requirements. Only Principal Dwellings are subject to HPML regulations, and the borrower may not pay for the second appraisal when ordered solely due to HPML flipping rules.

Appraisal Review Process

The following require a Second Full Appraisal:

Please note: title transfers from a builder to a wholly owned subsidiary of the builder are considered a “change of ownership” and require a Second Full Appraisal.  

*Refer to HPML Requirements. Only Principal Dwellings are subject to HPML regulations, and the borrower may not pay for the second appraisal when ordered solely due to HPML flipping rules.

Prime Advantage Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Appraisal Review Process

Desk Reviews, Field Reviews, and Second Full Appraisals, when required, must be ordered from a CMS-approved AMC. A Second Full Appraisal must be completed by a different AMC and a different, independent appraiser than the first appraisal. CMS reserves the right to request additional appraisal products at our discretion based on review of the appraisal and loan file. 

Appraisal Review Process

Desk Reviews, Field Reviews, and Second Full Appraisals, when required, must be ordered from a CMS-approved AMC. A Second Full Appraisal must be completed by a different, independent appraiser than the first appraisal. CMS reserves the right to request additional appraisal products at our discretion based on review of the appraisal and loan file.

Accessory Units

Properties with accessory units, also known as Granny units, mother-in-law suites, etc., are acceptable if all of the following are met:

• Property is typical, readily-acceptable, and common in the subject’s market area
• Property must conform to all zoning laws and/or regulations. 
• Appraisal contains 3 comparables with similar additional accessory units
• Accessory unit is substantially smaller than the primary dwelling
• Legal non-conforming use is acceptable provided its current use does not adversely affect value and marketability
• Any rental income received from the accessory unit may not be used for qualifying
• Existence of the unit must not jeopardize any future hazard insurance claim that may need to be filed for the property 

Accessory Units

Properties with accessory units, also known as Granny units, mother-in-law suites, etc., are acceptable if all of the following are met:

• Property is typical, readily-acceptable, and common in the subject’s market area
• Property must conform to all zoning laws and/or regulations. Illegal Accessory Units are not permitted.
• For an ADU that is legal non-conforming, the appraisal contains 2 comparables with similar additional accessory units
• Accessory unit is substantially smaller than the primary dwelling
• Legal non-conforming use is acceptable provided its current use does not adversely affect value and marketability
• Any rental income received from the accessory unit may not be used for qualifying
• Existence of the unit must not jeopardize any future hazard insurance claim that may need to be filed for the property 

Site Condominiums

Projects consisting of single-family detached dwellings (also known as site condominiums) are acceptable provided the appraisal supports market acceptance of site condominiums in the subject’s market area. A Homeowners’ Association Certification is not required

Appraisals for site condos are to be documented on FNMA Form 1004. The appraiser should include an adequate description of the project, information about the homeowners’ association fees, and note the quality of the project maintenance.

Site Condominiums

Projects consisting of single-family detached dwellings (also known as site condominiums) are acceptable provided the appraisal supports market acceptance of site condominiums in the subject’s market area. A Homeowners’ Association Certification is not required

Appraisals for site condos are to be documented on FNMA Forms 1004 Uniform Residential Appraisal Report or 1073 Individual Condominium Unit Appraisal Report. The appraiser should include an adequate description of the project, information about the homeowners’ association fees, and note the quality of the project maintenance.

Investor Advantage Underwriting Guidelines 

Old Requirements

Updated Requirements

Determining Loan-To-Value

If the property was acquired ˃ 6 months and < 12 months from the application date, the current appraised value can be used to determine loan-to-value. Two full appraisals are required and the lower of the two values will determine the loan to value.

If the property was acquired < 6 months from application date, the lesser of the current appraised value or the previous purchase price plus documented improvements (if any) must be used. The purchase settlement statement and any invoices for materials/labor will be required.

Determining Loan-To-Value

If the subject property was acquired between 6 months and 12 months from the note date of the new mortgage, the current appraised value may be used to determine the loan amount when two full appraisals are obtained.  The lower of the two values must be used. 

If the property was acquired < 6 months from application date, the lesser of the current appraised value or the previous purchase price plus documented improvements (if any) must be used. The purchase settlement statement and any invoices for materials/labor will be required.

Flip Transactions

Flips are not allowed under the Investor Advantage Program. The Seller must be in title for > 180 days

Flip Transactions

A transaction will be considered a flip transactions when:

The chain of title and appraisal report must be reviewed for prior sale and transfer history. Flip transactions are subject to the following requirements: 

First Time Investor

A First-Time Investor is a borrower who has not owned at least one investment property for at least 12 months anytime during the most recent 12-month period. See the Carrington Investor Advantage Program Matrix for restrictions when all borrowers are First-Time Investors.

First Time Investor

A First-Time Investor is a borrower who has not owned at least one investment property for at least 12 months anytime during the most recent 36-month period. See the Carrington Investor Advantage Program Matrix for restrictions when all borrowers are First-Time Investors.

Investor Advantage Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Evidence of Primary Residence

Borrowers who rent a primary residence and are purchasing a 1-unit Single Family Residence must provide:

• Evidence of an active lease in place
• Primary residence must be supported by one of the following characteristics:
  • Geographically consistent with borrower’s place of employment. If the URLA employment section is blank, the Underwriter must add a condition for the URLA to list the borrower’s Employer name and address; or
  • General appeal and location of primary is superior to subject property 

Evidence of Primary Residence

Borrowers who rent a primary residence and are purchasing a 1-unit Single Family Residence must provide:

• Evidence of an active lease in place or evidence of lease terms on an institutional VOR. VORs from property management companies and LLCs are considered institutional. 
• Primary residence must be supported by one of the following characteristics:
  • Geographically consistent with borrower’s place of employment. If the URLA employment section is blank, the Underwriter must add a condition for the URLA to list the borrower’s Employer name and address; or
  • General appeal and location of primary is superior to subject property 

Mortgage and Rental Payment Verification

Mortgage and rental payments not reflected on the original credit report must be documented via an institutional Verification of Rent or Verification of Mortgage (VOR/VOM). A combined total of all late mortgage and rental payments in the past 12 months must be used to determine the housing history. All mortgages on the subject property and the borrower’s primary residence must be rated even if the mortgage is not in the borrower’s name.

Mortgage and Rental Payment Verification

Mortgage and rental payments not reflected on the original credit report must be documented via an institutional Verification of Rent or Verification of Mortgage (VOR/VOM). VORs from property management companies and LLCs are considered institutional. A combined total of all late mortgage and rental payments in the past 12 months must be used to determine the housing history. All mortgages on the subject property and the borrower’s primary residence must be rated even if the mortgage is not in the borrower’s name.

Mortgage Modification

A mortgage modification resulting in any of the attributes listed below is subject to Housing Event seasoning guidelines under Housing Events: 

• Forgiveness of a portion of principal and/or interest on either the first or second mortgage 
• Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness
• Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage 
• Conversion of any portion of the original mortgage debt from secured to unsecured

Reserves

Cash-out proceeds are permitted for reserves with a FICO score greater than or equal to 700. Gift funds may not be considered.

Reserves

Cash-out proceeds are permitted for reserves with a FICO score greater than or equal to 620. Gift funds may not be considered.

Investor Advantage Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Appraisal Review Process

The Appraisal Review Process requires a secondary due diligence product to support the appraised value for the transaction. Acceptable products, subject to the restrictions below, include:

• FNMA Collateral Underwriter (CU) score of 2.5 or lower
• Desk Review (must contain a value and comparative sales data to support the valuation result)
• Second Full Appraisal (Note: appraisals must be completed by different AMCs and different, independent appraisers and the lower of the two appraised values used to determine value)
• Review by Carrington Capital Management (CCM)

Due diligence product restrictions:

Desk Reviews and Second Full Appraisals, when required, must be ordered from a CMS-approved AMC. A Second Full Appraisal must be completed by a different appraiser and a different AMC than the first appraisal. CMS reserves the right to request additional appraisal products at our discretion based on review of the appraisal and loan file.

Appraisal Review Process

The Appraisal Review Process requires a secondary due diligence product to support the appraised value for the transaction. Acceptable products, subject to the restrictions below, include:

• FNMA Collateral Underwriter (CU) score of 2.5 or lower
• Desk Review (must contain a value and comparative sales data to support the valuation result)
• Second Full Appraisal (Note: appraisals must be completed by different, independent appraisers and the lower of the two appraised values used to determine value)
• Review by Carrington Capital Management (CCM)

Due diligence product restrictions:

Desk Reviews and Second Full Appraisals, when required, must be ordered from a CMS-approved AMC. A Second Full Appraisal must be completed by a different appraiser than the first appraisal. CMS reserves the right to request additional appraisal products at our discretion based on review of the appraisal and loan file.

Investor Advantage Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Accessory Units

Properties with accessory units, also known as Granny units, mother-in-law suites, etc., are acceptable if all of the following are met:

• Property is typical, readily-acceptable, and common in the subject’s market area
• Property must conform to all zoning laws and/or regulations
• Appraisal contains 3 comparables with similar additional accessory units
• Accessory unit is substantially smaller than the primary dwelling
• Legal non-conforming use is acceptable provided its current use does not adversely affect value and marketability
• Any rental income received from the accessory unit must not be used for qualifying
• Existence of the unit must not jeopardize any future hazard insurance claim that may need to be filed for the property 

Accessory Units

Properties with accessory units, also known as Granny units, mother-in-law suites, etc., are acceptable if all of the following are met:

• Property is typical, readily-acceptable, and common in the subject’s market area
• Property must conform to all zoning laws and/or regulations. Illegal Accessory Units are not permitted.
• For an ADU that is legal non-conforming, the appraisal contains 2 comparables with similar additional accessory units
• Accessory unit is substantially smaller than the primary dwelling
• Legal non-conforming use is acceptable provided its current use does not adversely affect value and marketability
• Any rental income received from the accessory unit must not be used for qualifying
• Existence of the unit must not jeopardize any future hazard insurance claim that may need to be filed for the property 

Rental Income from an ADU

Rental income from an ADU may be considered when permitted by local zoning laws and/or regulations.  Any rental income received from the accessory unit and used for qualifying must be documented as follows:

• For ADUs that are currently leased, obtain a copy of the current lease.
• Obtain the appraiser’s estimate of market rent on FNMA Form 1007, Comparable Rent Schedule or FNMA Form 1025, Small Residential Income Property Appraisal Report.
• The lesser of the actual or market may be used for qualifying.  
• If the executed lease agreement reflects a higher monthly rent, it may be used when evidence of receipt of the higher amount for the 3 most recent, consecutive months is provided. 
• Rental income from an unleased ADU on a refinance transaction may only be considered if the ADU is vacant, subject to the LTV restrictions for unleased properties.
• The loan file must contain documentation to support that the ADU may be legally rented per local codes or regulations.

Flexible Advantage/Advantage Plus Underwriting Guidelines

Old Requirements

Updated Requirements

Determining Loan-To-Value

If the property was acquired ˃ 6 months and < 12 months from the application date, the current appraised value can be used to determine loan-to-value. Two full appraisals are required and the lower of the two values will determine the loan to value.

If the property was acquired < 6 months from application date, the lesser of the current appraised value or the previous purchase price plus documented improvements (if any) must be used. The purchase settlement statement and any invoices for materials/labor will be required.

Determining Loan-To-Value

If the subject property was acquired between 6 months and 12 months from the note date of the new mortgage, the current appraised value may be used to determine the loan amount when two full appraisals are obtained.  The lower of the two values must be used. 

If the property was acquired < 6 months from application date, the lesser of the current appraised value or the previous purchase price plus documented improvements (if any) must be used. The purchase settlement statement and any invoices for materials/labor will be required.

Appraisals Required

A second appraisal, at no cost to the consumer, must be obtained if:

The second appraisal must be obtained by a different certified or licensed appraiser and a different AMC than the one who prepared the first appraisal.

Appraisals Required

A second appraisal, at no cost to the consumer, must be obtained if:

The second appraisal must be obtained by a different certified or licensed appraiser than the one who prepared the first appraisal.

Flip Transactions

A transaction will be considered a flip transactions when:

• The seller acquired the property 90 or fewer days prior to the sales contract date, and the new contract price exceeds the seller’s acquisition price by more than 10 percent; or
• The seller acquired the property 91 to 180 days prior to the sales contract date, and the new contract price exceeds the seller’s acquisition price by more than 20 percent.

Flip Transactions

A transaction will be considered a flip transactions when:

• The seller acquired the property 90 or fewer days prior to the sales contract date, and the new contract price exceeds the seller’s acquisition price by more than 10 percent; or
• The seller acquired the property 91 to 180 days prior to the sales contract date, and the new contract price exceeds the seller’s acquisition price by more than 20 percent. 

Flexible Advantage/Advantage Plus Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Flip Transactions (continued) 

The chain of title and appraisal report must be reviewed for prior sale and transfer history. Flip transactions are subject to the following requirements:

• All transactions must be arm’s length, with no identity of interest between the buyer and property seller or other parties participating in the sales transaction
• No pattern of previous flipping activity may exist in the last 12 months. Exceptions to ownership transfers may include sales by government agencies, properties inherited or acquired through divorce, and sales by the holder of a defaulted loan
• The property was marketed openly and fairly, through a multiple listing service, auction, for sale by owner offering (documented) or developer marketing 
• If the property is being purchased for more than 5% above the appraised value, a signed letter of acknowledgement from the borrower must be obtained. Borrower(s) must write, sign, and date all Letters of Explanation themselves. The Lender or Broker may identify the subject matter only and not contribute to the letter’s content.
• An additional appraisal product is required: 

Flip Transactions (continued) 

The chain of title and appraisal report must be reviewed for prior sale and transfer history. Flip transactions are subject to the following requirements:

• All transactions must be arm’s length, with no identity of interest between the buyer and property seller or other parties participating in the sales transaction
• No assignments of the contract to another buyer 

Flexible Advantage/Advantage Plus Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Business Bank Statements

Business Bank Statement Documentation is allowed under all programs. See the applicable CMS Matrix for credit score and LTV restrictions.

The following documentation is required (see also 1-Year Alternative Income Documentation):

Note: If borrower elects 12 months, additional LLPA’s apply.

Business Bank Statements

Business Bank Statement Documentation is allowed under all programs. See the applicable CMS Matrix for credit score and LTV restrictions.

The following documentation is required (see also 1-Year Alternative Income Documentation):

Note: If borrower elects 12 months, additional LLPA’s apply.

1099 Income Documentation

1099 Income Documentation is permitted under the Carrington Flexible Advantage Plus (CFA+) program. 

1099 Income Documentation

1099 Income Documentation is permitted under the Carrington Flexible Advantage (CFA) and Carrington Flexible Advantage Plus (CFA+) program. Refer to matrix for FICO and reserve requirements.

Profit & Loss Income Documentation

Profit and Loss Income Documentation is permitted under the Carrington Flexible Advantage Plus (CFA+) program. 

Profit & Loss Income Documentation

Profit and Loss Income Documentation is permitted under the Carrington Flexible Advantage (CFA) and Carrington Flexible Advantage Plus (CFA+) program. Refer to matrix for FICO and reserve requirements.

Flexible Advantage/Advantage Plus Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Rental Income from an ADU

Rental income from an ADU may be considered when permitted by local zoning laws and/or regulations.  Any rental income received from the accessory unit and used for qualifying must be documented as follows:

Reserves

Cash-out proceeds are permitted for reserves with a FICO score greater than or equal to 700. Gift funds may not be considered.  

Reserves

Cash-out proceeds are permitted for reserves with a FICO score greater than or equal to 620. Gift funds may not be considered.  

Appraisal Review Process

Second Full Appraisal (Note: appraisals must be completed by different AMCs and different, independent appraisers and the lower of the two appraised values used to determine value)

Appraisal Review Process

Second Full Appraisal (Note: appraisals must be completed by different, independent appraisers and the lower of the two appraised values used to determine value)

Flexible Advantage/Advantage Plus Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Appraisal Review Process

The following require a Second Full Appraisal:

Please note: title transfers from a builder to a wholly owned subsidiary of the builder are considered a “change of ownership” and require a Second Full Appraisal.  

*Refer to HPML Requirements. Only Principal Dwellings are subject to HPML regulations, and the borrower may not pay for the second appraisal when ordered solely due to HPML flipping rules.

Desk Reviews, Field Reviews, and Second Full Appraisals, when required, must be ordered from a CMS-approved AMC. A Second Full Appraisal must be completed by a different AMC and a different, independent appraiser than the first appraisal. CMS reserves the right to request additional appraisal products at our discretion based on review of the appraisal and loan file. 

Appraisal Review Process

The following require a Second Full Appraisal:

Please note: title transfers from a builder to a wholly owned subsidiary of the builder are considered a “change of ownership” and require a Second Full Appraisal.  

*Refer to HPML Requirements. Only Principal Dwellings are subject to HPML regulations, and the borrower may not pay for the second appraisal when ordered solely due to HPML flipping rules.

Desk Reviews, Field Reviews, and Second Full Appraisals, when required, must be ordered from a CMS-approved AMC. A Second Full Appraisal must be completed by a different, independent appraiser than the first appraisal. CMS reserves the right to request additional appraisal products at our discretion based on review of the appraisal and loan file. 

Accessory Units

Properties with accessory units, also known as Granny units, mother-in-law suites, etc., are acceptable if all of the following are met:

Accessory Units

Properties with accessory units, also known as Granny units, mother-in-law suites, etc., are acceptable if all of the following are met:

Existence of the unit must not jeopardize any future hazard insurance claim that may need to be filed for the property

Investor Advantage Underwriting Guidelines (continued)

Old Requirements

Updated Requirements

Site Condominiums

Projects consisting of single-family detached dwellings (also known as site condominiums) are acceptable provided the appraisal supports market acceptance of site condominiums in the subject’s market area. A Homeowners’ Association Certification is not required

Appraisals for site condos are to be documented on FNMA Form 1004. The appraiser should include an adequate description of the project, information about the homeowners’ association fees, and note the quality of the project maintenance.

Site Condominiums

Projects consisting of single-family detached dwellings (also known as site condominiums) are acceptable provided the appraisal supports market acceptance of site condominiums in the subject’s market area. A Homeowners’ Association Certification is not required

Appraisals for site condos are to be documented on FNMA Forms 1004 Uniform Residential Appraisal Report or 1073 Individual Condominium Unit Appraisal Report. The appraiser should include an adequate description of the project, information about the homeowners’ association fees, and note the quality of the project maintenance.