Section 4: Underwriting Guidelines - esnmc.com

1 Section : income SNMC Page | 1 February 22, 2011 income General Employment and income are essential ingredients to successful home ownership. Qualifying income should be stable, predictable, and likely to continue. The Underwriter must determine that the borrower demonstrates the financial wherewithal to repay the proposed real estate transaction as well as other obligations in addition to having an AUS approval. In determining stable income , underwriters must be able to conclude that the income is likely to continue for the next three years. Declining income : A two year income stream should be documented and analyzed in each loan file. Both salaried and self employed borrowers should be reviewed for stability of income . Any decline in income must be addressed and the income used to qualify must be justified by the underwriter.

2 self - employed borrowers: the underwriter must determine if the business can be expected to continue to generate sufficient income for the borrower s needs. The underwriter must analyze carefully the business s financial strength, the source of income , and the general economic outlook for similar businesses in the area. Annual earnings that are stable or increasing are acceptable. Conversely, a borrower whose business shows a significant decline in income over the period analyzed is not acceptable, even if current income and debt ratios meet Guidelines . Underwriters are encouraged to discuss individual cases with the Regional Operations Manager or Credit Policy Department prior to declining a file for declining income . Increase in income : When the borrower shows a significant increase in income , the higher income may not be used to qualify the borrower, unless there is sufficient documentation to determine that the increase is stable and likely to continue at the level used for qualifying.

3 When evaluating the borrower s capacity, consider the following factors: Payment shock Reserves income stability Debt ratios History of savings Section : income SNMC Page | 2 February 22, 2011 General (cont d) 2010 Tax Returns and self employed Borrowers All self - employed borrowers will be reviewed on a case by case basis until 2010 4506T transcripts can be obtained. 4506T transcripts from 2008 & 2009 will be required on all loans where the AUS calls for two years tax returns. 4506T transcripts from 2009 will be required on all loans where the AUS calls for one year tax returns. Whenever possible, documentation should be obtained to verify 2010 income . If the borrower s income is consistent between 2008 & 2009, tax returns for 2010 may not be required. If borrower s income declined between 2008 & 2009, obtain P&L and 12 months bank statements for review of 2010 income stream to support level income consistent with 2009.

4 (Need to show income has stopped declining). 2010 income will be used as a compensating factor only. If borrower needs 2010 income to qualify, the borrower must provide 2010 tax returns and a validated 4506T transcript for 2010. For borrowers with W-2 income , a copy of the 2010 W-2 must be provided. If the 2010 income /employment is consistent with 2009 income /employment, 2010 income can be used in qualification without the filed tax returns. If 2010 income /employment is significantly higher, and/or has a mix of commission/bonus, which may have 2106 expenses related to the income source, and tax returns are not provided, 2010 income will be used as a compensating factor only. If 2010 income is lower, additional Underwriting scrutiny must be given to income acceptability. Loans should be discussed with Regional Operations Managers to determine acceptability of credit risk, based on complete credit profile of transaction and borrower.

5 Documentation Types Overview The type of loan documentation used to verify the borrower s employment and income information in the loan application varies depending on the loan program and program requirements. Not all documentation types can be used on all loan programs. Always refer to the individual loan program and AUS to determine documentation eligibility. Age of credit documents Al l credit documents in the file cannot be over 60 days old at time of closing. This requirement applies regardless of the credit expiration date on the AUS findings. Section : income SNMC Page | 3 February 22, 2011 Documentation Types (cont d) Verification of Employment and income Verbal Verifications of Employment requirements for hourly, salary, and commission income A verbal verification of employment is required for all borrowers prior to note date, but no earlier than 3 business days prior to the note date; this requirement applies to all income types with the exception of passive income .

6 Verbal verifications should be completed with the borrower s human resource, Personnel Department, etc. The completed form must include the following: Identity of the employer information (company, HR or personnel address, phone number) Name and title of the person at employer who confirmed the employment Source of the phone number (attach copy of source to VOE form) Date of contact. Confirmation that the borrower is currently employed and start date. Signed and dated by the person (name/title) who made contact with the employer Note: The telephone number used to complete the verbal verification form must be independently obtained through a 3rd party source ( , , etc.). If unable to verify phone number through a 3rd party source, return file to Underwriting . If the verbal verification is obtained from a third party vendor (The Work Number), the verified date day timeframe is measured from the date of our request to the vendor, not the date the information was updated in the vendor s database.

7 However, the information must have been updated within the past 35 days. When this verification source is used, the printout is required in lieu of the SNMC Verbal VOE. If borrower is in the military, a military Leave and Earnings Statement (LES) dated within 30 days of closing is acceptable in lieu of the verbal or written VOE. Verbal Verification of Employment requirements for self - employed borrowers The existence of the borrower s business must be verified within 5 days of funding. SNMC must verify the existence of the borrower s business within 5 days prior to the closing/funding date from a third party, such as a CPA, regulatory agency, or the applicable licensing bureau, if possible and verify a phone listing and address for the borrower s business using a telephone book, the Internet, or directory assistance.

8 If contact is made verbally, SNMC must document the source of the information obtained and the name and title of our employee who obtained the information. This policy applies to both conventional and government loan programs (except non-credit qualifying FHA Streamline refinances). Standard Verification of Employment (VOE) Must be sent to and returned from the borrower s employer directly. The borrower or any other 3rd party should not be involved in this process. VOE should be supported by a paystub in file. Section : income SNMC Page | 4 February 22, 2011 Documentation Types (cont d) Verification of Employment and income (cont d) Paystubs Paystubs must be computer generated or typed; not handwritten. Identify the employer Identify borrower as an employee Time period covered Provide year to date earnings Must cover minimum 30 days of earnings W-2/1099 Statements Most recent two years of statements Identify employer Identify borrower as an employee Any above documents used must meet the following minimum requirements Complete and Legible copies of the original documents The original documents must not contain any alterations, erasures, correction fluid, or correction tape Electronic, Faxed, or Computer Generated o The source of the information must be clearly identified (Internet or fax banner at top)

9 O An acceptable verifier must provide documentation o Documents must clearly identify the name of the employer Automated Underwriting Requirements SNMC will not allow any AUS income documentation waivers that do not require at a minimum the following information: Verbal Verification of Employment Most recent paystub Previous year W-2 statement Previous year tax return, if applicable Section : income SNMC Page | 5 February 22, 2011 4506T The following number of years of IRS 1040 transcripts will be required in each loan file. The first column reflects the file documentation and/or AUS requirement, and the second column reflects the number of years of IRS 1040 transcripts required.** AUS Requirement Transcripts Required YTD pay stub and one W-2 One year YTD pay stub and two W-2 s Two years Personal returns (1040s) for one year One year Personal returns (1040s) for two years Two years Personal and business returns for two years* Two years * When multiple tax returns are used (ex.)

10 1040, 1120, 1065, etc.), the borrower s personal tax returns at a minimum, must be validated. **Additional transcripts may be required if you cannot validate the current year with current transcripts. For example if your AUS requires a YTD pay stub and one W-2, and the W-2 is for 2009, but you cannot validate the 2009 1040, you would need to get the 2008 W-2 and validate it with 2008 transcript in order to meet you one year requirement. The same would apply for the two year validation requirement. You must always be able to validate with transcripts the number of years in column 2. All loans delivered to the investor must have the 2009 Tax Transcripts for all borrowers and loan products. Note: If an AUS response requests more than the most recent tax transcript or if more than one year tax returns is required for Underwriting purposes, the additional tax transcripts are required.