Freddie Mac Updates Selling Guide and Clarifies TRID Instructions
By Anna DeSimone
September 16, 2015, Freddie Mac issued Bulletin 2015-16: Selling Guide. The Single-Family Seller/Servicer Guide (“Guide”) Bulletin announced the following changes and, with the exception of certain topics unrelated to underwriting, the Bulletin is reproduced below in the format published by Freddie Mac:
Mortgage eligibility and credit underwriting
Removal of the requirement for a 5% contribution from Borrower Personal Funds for certain Mortgages – October 1, 2015
- Revisions to our refinance requirements, including:
- Removing the seasoning requirements for certain “no cash-out” refinance Mortgages
- Revising the requirements for cash-out refinance Mortgages when none of the Borrowers have been on the title to the subject property for at least six months prior to the Note Date, including:
- Changes regarding the amount of the cash-out refinance Mortgage – December 16, 2015
- Updates to our requirements for Loan Prospector® Mortgages with history of short sales
- Updates to our requirements for use of credit cards, cash advances or unsecured lines of credit as sources of Borrower Funds– October 26, 2015
- Revisions to our requirements for Mortgages for which the Borrower’s current Primary Residence is pending sale or being converted to a second home or an Investment Property – October 26, 2015
Condominium requirements
- Updates to our requirements for condominiums, including:
- Updates to our requirements for projects with commercial or non-residential space – March 31, 2016
Relocation Mortgages
- Updates to the definition for fixed-rate Mortgages that are relocation Mortgages
In addition to the changes listed above, we are making further updates and revisions as described in the “Additional Guide Updates” section of this Bulletin.
EFFECTIVE DATE
All of the changes announced in this Bulletin are effective immediately unless otherwise noted.
MORTGAGE ELIGIBILITY AND CREDIT UNDERWRITING
Minimum Borrower contribution from Borrower Personal Funds
Effective for Mortgages with Settlement Dates on or after October 1, 2015
In our continuing effort to increase access to mortgage credit and support the purchase market, we are no longer requiring a 5% contribution from Borrower Personal Funds for certain Mortgages. Specifically, we are removing the 5% contribution requirement for Mortgages that have loan-to-value (LTV) ratios greater than 80% and are secured by Primary Residences and for which a gift or gift of equity from a Related Person is used as a source of funds. In addition, we will no longer require the 5% contribution for Mortgages with LTV ratios greater than 80% for which an unsecured loan that is an Employer Assisted Homeownership (EAH) Benefit is used as a source of funds.
We are also removing the requirement that all Mortgages secured by Manufactured Homes must have a 5% contribution from Borrower Personal Funds. Mortgages secured by Manufactured Homes must comply with all requirements for Borrower Funds outlined in Guide Chapters 26 and A34, as applicable. A minimum contribution from Borrower Personal Funds is still required in some instances.
Loan Prospector feedback messages will be updated by October 1, 2015 to reflect these changes.
Guide impacts: Guide Sections 26.2, H33.5 and A34.10
Refinance changes
As a result of Seller inquiries, we have evaluated certain refinance requirements and are making the revisions below.
Guide impacts: Sections 24.2, 24.5 and 24.6
Removing the seasoning requirement for “no cash-out” refinance Mortgages
We are removing the 120-day seasoning requirement for a “no cash-out” refinance Mortgage when the Mortgage being refinanced is a purchase money transaction.
Length of time Borrower is on the title for cash-out refinance Mortgages
Currently for cash-out refinance Mortgages, we require at least one Borrower to have been on the title to the subject property for at least six months prior to the Note Date of the Mortgage, with certain exceptions.
Effective immediately, we are revising these exceptions, as follows:
- No Borrower is required to have been on the title to the subject property for at least six months prior to the Note Date if at least one Borrower on the cash-out refinance Mortgage either inherited or was legally awarded the subject property
- In a case where we require a Settlement/Closing Disclosure Statement, a trustee’s deed is acceptable if a Settlement/Closing Disclosure Statement was not used for the purchase transaction
In addition, effective for Mortgages with Settlement Dates on or after December 16, 2015, we are revising the maximum amount of the cash-out refinance Mortgage when none of the Borrowers have been on the title to the subject property for at least six months.
Currently, if none of the Borrowers have been on the title to the subject property for at least six months the amount of the cash-out refinance Mortgage must not exceed the sum of the original purchase price and related Closing Costs, Financing Costs and Prepaids/Escrows. We are revising this calculation to exclude any gift funds used to purchase the subject property. When determining the amount of the cash-out refinance Mortgage, any gift funds used to purchase the subject property must be deducted from the sum of the original purchase price and related Closing Costs, Financing Costs and Prepaids/Escrows.
Loan Prospector Mortgages with history of short sales
We are removing the requirement that the Seller must manually apply the requirements for Manually Underwritten Mortgages with significant or derogatory credit information to Loan Prospector Accept and A-minus Mortgages with evidence of a short sale on a credit report or elsewhere in the Mortgage file.
Guide impacts: Section 37.7
Use of credit cards, cash advances or unsecured lines of credit as sources of Borrower Funds
Effective for Mortgages with Settlement Dates on or after October 26, 2015
We are updating the requirements for using credit cards, cash advances and unsecured lines of credit to pay fees associated with the Mortgage application process. We are now permitting the option of either (1) verifying that the Borrower has sufficient funds to pay the charges or advances, or (2) including the payment for the amount charged or advanced in the monthly debt payment-to-income ratio (both were previously required).
Additionally, we are updating delivery instructions for ULDD Data Point Total Liabilities Monthly Payment Amount (Sort ID 290) in Section 17.38 to reflect this change.
Guide impacts: Sections 17.38, 26.6.4, 37.22 and 37.23
Sale or conversion of Primary Residence
Effective for Mortgages with Settlement Dates on or after October 26, 2015
We evaluated our requirements for Mortgages for which the Borrower’s current Primary Residence is:
- Pending sale, but the sale will not close prior to the closing of the new Mortgage, or
- Being converted to a second home, or
- Being converted to an Investment Property
Based on our evaluation, we are eliminating the additional reserves and rental income requirements for these Mortgages so that only the standard reserves and rental income requirements apply. As a result, Section 37.16.2 will be deleted. However, the provision in Section 37.16.2 that permits the monthly payment amount for the Borrower’s current Primary Residence pending sale to be excluded from the monthly debt payment-to-income ratio will be moved to Section 37.16 with revisions to provide additional flexibility. Currently the monthly payment amount can be excluded if the Mortgage file contains:
- An executed non-contingent sales contract for the property pending sale, or
- An executed sales contract for the property pending sale that includes a financing contingency and a lender’s commitment to the buyer of the property pending sale, or
- An executed buyout agreement that is part of an employer relocation plan where the employer/relocation company takes responsibility for the outstanding Mortgage(s)
With these revisions the monthly payment amount can be excluded if the Mortgage file contains:
- An executed sales contract for the property pending sale. If the executed sales contract includes a financing contingency, the Mortgage file must also contain evidence that the financing contingency has been cleared or a lender’s commitment to the buyer of the property pending sale;
OR
- An executed buyout agreement that is part of an employer relocation plan where the employer/relocation company takes responsibility for the outstanding Mortgage(s)
Loan Prospector feedback messages will be updated by October 26, 2015 to reflect these changes.
Guide impacts: Sections 26.5, 37.16 and 37.16.2
CONDOMINIUM CHANGES
In light of recent market and industry trends, and in response to Seller inquiries, we have evaluated and are revising certain requirements in Chapter 42 to provide additional flexibility and guidance when originating Mortgages secured by units in Condominium Projects.
We are deleting the Glossary term “Hotel/Resort Project,” updating the definition for the Glossary term “Condominium Hotel” and providing more specificity on what constitutes a Condominium Hotel to help Sellers better determine what is an ineligible project. As a result of these revisions, Condominium Projects in resort locations that do not meet the characteristics of a Condominium Hotel may be acceptable projects.
Other modifications include:
- Updates to our general Condominium Project eligibility requirements to accept projects with shared Amenities under certain circumstances
- Addition of a reserve study as an acceptable alternative if a project budget does not include at least a 10% replacement reserves
- Changes to project-level owner-occupancy requirements for Established Condominium Projects
ADDITIONAL GUIDE UPDATES
Settlement/Closing Disclosure Statement
Effective for Mortgages with Application Received Dates on or after October 3, 2015
In Bulletin 2015-10 we announced updates to the Guide in response to the Truth-in-Lending Act (TILA) – Real Estate Settlement Procedures Act (RESPA) Integrated Mortgage Disclosure Rule (i.e., “TRID Rule”) and indicated we would make additional updates once the date that the TRID Rule ultimately takes effect was confirmed by the Consumer Financial Protection Bureau (CFPB). On July 21, 2015, the CFPB announced that the TRID Rule applies to transactions for which an application is received on or after October 3, 2015. To align with the TRID Rule, we are making the following updates to the Guide:
- Removing the requirement that the Settlement/Closing Disclosure Statement must be executed or signed
- No longer requiring an estimated Settlement/Closing Disclosure Statement in the Mortgage file for the Mortgaged Premises in escrow states
- Updating Section 46.24, to reflect that a copy of the final Truth-in-Lending Disclosure Statement must be in the Mortgage file for Mortgages with Application Received Dates prior to October 3, 2015
- Revising the delivery instructions for ULDD Data Point Disclosed Index Rate Percent (Sort ID 312) to reference the new Closing Disclosure form
- Revising Guide Exhibit 7 to reference the Loan Estimate and Settlement/Closing Disclosure Statement
While the signature requirements are being removed from the Guide, Freddie Mac remains supportive of the current industry practice of collecting signatures on the Settlement/Closing Disclosure forms. Seller/Servicers may wish to consider collecting (or continuing to collect) signatures and/or additional permitted forms given their potential evidentiary value, and otherwise to help provide assurances that the Settlement/Closing Disclosure included in the Mortgage file is reflective of the final transaction terms.
GUIDE UPDATE SPREADSHEET
For a detailed list of the Guide updates associated with this Bulletin and the topics with which they correspond, refer to the Bulletin 2015-16 (Selling) Guide Updates Spreadsheet available on the Freddie Mac Website. To view the spreadsheet, click on the link below:
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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