Bulleting 2023-059 Quality Control and Diligence Reminders (Conforming Loans)
Newrez LLC "Newrez" Approved Correspondent Clients; Newrez is sharing feedback regarding trends in post fund QC and diligence reviews and providing additional detail on defects around rental income, variable income and required documentation for a condo project warranty.
Rental Income
The guidelines for use of rental income can vary depending on where the rental income originates from (subject property, other REO, departing residence), the product, and is also dependent on whether the loan was run through and delivered as DU (Fannie Mae) or LPA (Freddie Mac). Recent deficiencies around use of rental income include:
- Using rental income from the subject property to qualify when the borrower does not own a primary residence.
- Not verifying the mortgage payment for other REO includes principle, interest, taxes, insurance, and HOA fees (PITIA).
- Not verifying HOA fees. Even if the mortgage payment includes escrows for taxes and insurance, HOA fees are never included in the mortgage payment and are always paid directly to the HOA by the borrower (all REO).
- Using a current lease to calculate rental income instead of schedule E for a property owned during the last tax year (investment refinance or other REO). Rental income for refinance transactions is verified using the most recent tax return/schedule E unless a qualifying exception to use the lease has been documented.
Qualifying exceptions include a property acquired during or subsequent to the most recent tax year filing, a property out of service for an extended period of time (due to significant renovations that caused the property to not be habitable during that time) or another documented situation that warrants using the lease instead of schedule E.
- When use of a lease is permissible, missing 1007 (single family rent schedule) or evidence of receipt of most recent 2 months’ rent (Freddie Mac)
Variable Income
Variable income shows fluctuating earnings per pay period and can include income from overtime, commission, bonus and even an hourly employee whose hours vary. Generally, a 2-year history for each type of variable income is required and the income is averaged to account for the highs and lows of the earnings.
Variable income that has been received for less than 2 years but at least 12 months may be considered if there are documented positive factors that reasonably justify the use of the shorter income history. This does not mean that income received for a minimum of 12 months is eligible, only that it may be considered with documented support for use of it with less than a 2-year history. Recent deficiencies around variable income include:
- Using variable income to qualify with an insufficient history of receipt, less than 12 months.
- Averaging variable income over an insufficient period, for example, using an average based on only a few months YTD earnings and disregarding lower prior year’s earnings.
- Averaging variable income over 2 years but not recognizing that the YTD earnings do not support the amount of income used to qualify (YTD declining).
Best practice: An income worksheet is a useful tool to help calculate income and document the qualifying income calculations. It can also help identify income trends (steady, increasing, or declining income) as well as demonstrate a history of receipt of income. All Newrez Clients can access an income worksheet under Job Aids on the Newrez Correspondent website via https://www.newrezcorrespondent.com/ or the Correspondent Client can utilize other valid income worksheets.
Condo Project Warranty
After the condo collapse in South Florida a few years ago, both Fannie Mae and Freddie Mac issued guidelines to address the aging infrastructure and deferred maintenance of projects throughout the country. Deficiency trends are around this topic and others include:
- Project needed repairs for significant structural issues, but repairs were not completed.
- The question of whether significant structural issues or deferred maintenance exist was not addressed.
- Pending litigation was identified but no determination was made if the litigation was minor in nature or significant.
- Budget provided and did not meet the minimum 10% replacement reserve requirement.
- Project shows status of “Unavailable” in Condo Project Manager (CPM)
Newrez believes that by sharing this feedback with our Correspondent Partners, it will result in decreased deficiencies and an increase in the quality of the loans received; which will improve purchase turn-times and avoid potential repurchase requests.