TIP OF THE DAY- FANNIE EMPLOYMENT RELATED ASSETS

TIP OF THE DAY-FANNIE  EMPLOYMENT RELATED ASSETS AS INCOME

Employment-Related Assets as Qualifying Income

The following table provides the requirements for employment-related assets that may be used as qualifying income.

Asset Requirements

Assets used for the calculation of the monthly income stream must be owned individually by the borrower, or the co-owner of the assets must be a co-borrower of the mortgage loan.

The documentation must be in compliance with the Allowable Age of Credit Documents policy (see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns (02/27/2018), for additional information).

Assets must be liquid and available to the borrower and must be sourced as one of the following:

·         A non-self-employed severance package or non-self-employed lump sum retirement package (a lump sum distribution) — these funds must be documented with a distribution letter from the employer (Form 1099–R) and deposited to a verified asset account.

·         For 401(k) or IRA, SEP, Keogh retirement accounts – the borrower must have unrestricted access to the funds in the accounts and can only use the accounts if distribution is not already set up or the distribution amount is not enough to qualify. The account and its asset composition must be documented with the most recent monthly, quarterly, or annual statement.

If a penalty would apply to a distribution of funds from the account made at the time of calculation, then the amount of such penalty applicable to a complete distribution from the account (after costs for the transaction) must be subtracted to determine the income stream from these assets.

If the employment–related assets are in the form of stocks, bonds, and mutual funds, 70% of the value (remaining after costs for the transaction and consideration of any penalty) must be used to determine the income stream to account for the volatile nature of these assets.

A borrower shall only be considered to have unrestricted access to a 401(k) or IRA, SEP, Keogh retirement account if the borrower has, as of the time of calculation, the unqualified and unlimited right to request a distribution of all funds in the account (regardless of any possible tax withholding or applicable penalty applied to such distribution).

“Net documented assets” are equal to the sum of eligible assets minus:

(a) the amount of the penalty that would apply if the account was completely distributed at the time of calculation;

(b) the amount of funds used for down payment, closing costs, and required reserves;

(c) 30% of the remaining value of any stocks, bonds, or mutual funds assets (after the calculation in (b)).

Ineligible assets are non-employment-related assets (for example, stock options, non-vested restricted stock, lawsuits, lottery winnings, sale of real estate, inheritance, and divorce proceeds). Checking and savings accounts are generally not eligible as employment-related assets, unless the source of the balance in a checking or savings account was from an eligible employment-related asset (for example, a severance package or lump sum retirement distribution).

Example: Calculation of Net Documented Assets

IRA (made up of stocks and mutual funds)

$ 500,000

Minus 10% of $500,000 ($500,000 x .10)

(Assumes a 10% penalty applies for early distribution, which must be levied against any cash being withdrawn for closing the transaction as well as the remaining funds used to calculate the income stream.)

(-) $50,000

Total eligible documented assets

(=) $ 450,000

Minus funds required for closing

(down payment, closing costs, reserves)

(-) $100,000

(a) Subtotal

(=) $ 350,000

Minus 30% of $350,000 ($350,000 x .30)

(-) $105,000

(b) Net Documented Assets

(=) $245,000

Monthly income calculation

($245,000/360 (or applicable term of loan in months))

See Income Calculation/Payout Stream in table below.

$680.56/month

 

All of the following loan parameters must be met in order for employment-related assets to be used as qualifying income:

Loan Parameter

Requirement

Maximum LTV, CLTV, and HCLTV Ratio

70%

80% if the owner of the asset(s) being used to qualify is at least 62 years old at the time of closing. If the asset(s) is jointly owned, all owners must be borrowers on the loan and the borrower whose employment-related asset is being used as income must be at least 62 years old at the time of closing.

Minimum Credit Score

DU: 620

Manual: Higher of 620 or minimum credit score per the Eligibility Matrix

Loan Purpose

Purchase and limited cash-out refinance only

Occupancy

Principal residence and second home only

Number of Units

As permitted by occupancy type

Income Calculation/Payout Stream

Divide “Net Documented Assets” by the amortization term of the mortgage loan (in months).

Note: If the mortgage loan does not meet the above parameters, employment-related assets may still be eligible under other standard income guidelines, such as “Interest and Dividends Income,” or “Retirement, Government Annuity, and Pension Income.”

justin brown