COVID-19 FAQs Selling - Underwriting & General
Last Updated: July 1, 2020
In response to the COVID-19 national emergency, Fannie Mae and Freddie Mac have provided temporary guidance to lenders on several policy areas that support selling mortgage originations. These FAQs provide additional information on the temporary policies. We will be adding more FAQs, therefore we encourage you to check in frequently for updates - refer to the "NEW" or "UPDATED" notations after the question.
Do Fannie Mae’s existing disaster policies in the Selling Guide apply to the COVID-19 pandemic?
No, Fannie Mae’s existing policies related to disasters do not apply to loans impacted by COVID-19. Instead, lenders can follow the guidance in Lender Letters LL-2020-03, Impact of COVID-19 on Originations, and LL-2020-04, Impact of COVID-19 on Appraisals. All guidance specific to COVID-19 will be communicated through Lender Letters and FAQ documents such as this.
Also, note that loans in forbearance due to COVID-19 are not subject to the disaster-related forbearance policies in A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility.
- Will Fannie Mae be extending the implementation timeline for the revised Form 1003 and related data set?
On Apr. 14, 2020 we announced that we will extend our implementation timeline for the redesigned URLA and automated underwriting systems (AUSs) to support the industry during the COVID-19 pandemic. The new mandate date for the use of the redesigned URLA and AUS specifications is Mar. 1, 2021. The extension provides lenders and other stakeholders additional time to prepare and implement the redesigned URLA (Fannie Mae Form 1003).
Income - General
Given the unprecedented and rapid instances of voluntary and mandated business closures, and the concerns over whether employees will continue to be paid, is updated income documentation required prior to closing?
Yes, in some cases income documentation may need to be updated. Refer to Lender Letter LL-2020-03, Impact of COVID-19 on Originations for details.
If a recent paystub or bank statement is obtained in lieu of the verbal verification of employment (VOE), and the documentation evidences reduced hours and/or pay due to the pandemic, what are the next steps?
For reduced hours or pay, continue to follow the requirements and guidance in the Selling Guide Chapter B3-3 related to income stability and calculation. For example, for declining variable income, the requirements and guidance for declining income trends in the B3-3.1-01, General Income Information are applicable. In those cases, the reduced amount of declining variable income can only be used for qualifying if it has since stabilized and there is no reason to believe the borrower will not continue to be employed at the current level. In no instance may income be averaged over the period of declination.
Can I use the requirements for income while on temporary leave?
Certain types of temporary leave may be eligible for qualifying. See B3-3.1-09, Other Sources of Income; Temporary Leave Income. However, please note that furloughed borrowers are currently ineligible under the temporary leave policy. See Lender Letter LL-2020-03.
If the borrower is furloughed but continues receiving income for a specified period of time, such as four weeks, can the income be used for qualifying?
No. This income is not stable, predictable, or likely to continue and therefore does not meet the requirements in Selling Guide B3-3.1-01, General Income Information; Continuity of Income.
Does Fannie Mae require deferred debt payments (for example, student loans, auto loans, etc.) to be considered in a borrower’s debt-to-income (DTI) ratio?
Yes. Even if a borrower’s debt payments are temporarily suspended due to COVID-19 response, the lender must consider the payment in the borrower’s DTI ratio in qualifying for a mortgage loan. Refer to the requirements in the B3-6-02, Debt-to-Income Ratios and B3-6-05, Monthly Debt Obligations.
What should the lender do when informed of a change in the borrower’s pay structure?
If the lender is notified that the borrower is transitioning to a lower pay structure, it must apply due diligence in determining the qualifying income amount. For example, if an employer lowers a borrower’s base salary, the lender must use the lower amount for qualifying. Or if an employer reduces a borrower’s potential for variable income, for example with a decreased bonus payment plan, additional analysis must be conducted to determine whether the new income amount can be used for qualifying. See B3-3.1-01, General Income Information; Continuity of Income.
Can lenders continue to use capital gains and interest and dividend income for qualifying a borrower?
Yes, however, lenders should apply additional due diligence to capital gains and interest and dividend income since it is calculated using a historical view which may not be sustainable given current market volatility. While two years of tax returns are still required to demonstrate a stable history of capital gains and interest and dividends income, lenders must consider the current value of the underlying asset when evaluating income for qualifying purposes.
- If the current value of the asset indicates a reduced amount when compared to historical levels, the lender must use the lower amount provided it is deemed stable at the current level.
- If, due to continued market volatility, the lender cannot determine the income is stable at its current level, the income should not be used for qualifying purposes.
- In the event the current value of the underlying asset indicates an increased amount of capital gains or interest or dividends, the lender should continue to use a two-year average calculated using the borrower’s tax returns.
Income - Self-Employed
The borrower is self-employed and owns a business that is closed due to the pandemic. Can the income be used to qualify?
No, if the business is not operating, the income may not be used to qualify.
Does the lender need to consider a Paycheck Protection Program (PPP) loan when analyzing a self-employed borrower?
The PPP is a loan issued by Small Business Administration lenders under the CARES Act. These loans are designed to provide a direct incentive for small businesses to keep their workers on the payroll. The existence of a PPP loan could be helpful information in analyzing the borrower's business. Lenders should apply due diligence and review the actions of the business and any impact the current situation has taken on the flow of income.
Does the lender need to consider a Paycheck Protection Program (PPP) loan in the borrower’s DTI?
Under the CARES Act, PPP loan terms allow deferred payments for a specified period, no personal loan guarantee, and the potential for all or some portion of the loan to be forgiven. Therefore, no payments would be expected to be included in the borrower’s liabilities at this time. Once it has been determined that any portion of the PPP loan must be repaid, follow the Selling Guide requirements for loans paid by a business.
- In light of the federal income tax filing deadline extension to Jul. 15, 2020, if a self-employed borrower has not filed 2019 income tax returns, is an audited Profit and Loss Statement for 2019 required in order to support qualifying income? NEW
No. As reflected in LL-2020-03, self-employed borrowers must provide either a 2020 audited year to date Profit and Loss Statement OR a 2020 unaudited year to date Profit and Loss Statement along with two months business depository account statements. Lenders must utilize these additional documents along with the standard documentation required in the Selling Guide (B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower) when calculating the income used to qualify the borrower.
Is it acceptable to follow DU messaging that permits only the most recent year individual and business tax returns? NEW
Yes. In addition to the year-to-date profit and loss statement and two months business depository account statements, as applicable, the lender can continue to follow the DU message for the required level of self-employment income documentation. The lender may find it necessary to obtain additional year(s) of individual and/or business tax returns to support the underwriting decision.
Can business tax returns continue to be waived in accordance with B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower? NEW
Yes. Lenders can continue to waive business income tax returns when the requirements of the Selling Guide are met.
What if the borrower does not have a business depository account but instead uses a personal checking, money market or savings account to manage business finances? NEW
When we refer to business depository accounts, we are referring to asset accounts the business uses to deposit business revenue and pay business expenses. In some cases, this may be the borrower’s personal depository accounts used for business purposes.
What are some examples of additional documentation that could be used to assess the impact of the pandemic on business operations and/or support the information reported on the year-to-date profit and loss statement? NEW
Additional documentation may include, but is not limited to, a year-to-date balance sheet, month-to-month or quarterly trending analysis, and/or additional depository account statements.
Lender Letter 2020-03 requires certain additional self-employment income documentation for all loan applications taken on or after Jun. 11, 2020. If the lender did not obtain any type of additional self-employment income documentation on loan applications taken before Jun. 11, 2020, is the loan eligible for delivery to Fannie Mae? NEW
The lender can continue to deliver loans with loan application dates prior to Jun. 11, 2020, without the additional level of documentation provided the lender determines the income amount used for qualifying purposes is stable and likely to continue by performing a self-employment income analysis in compliance with Selling Guide requirements. Lenders are encouraged to apply these temporary requirements to existing loans in process.
Do the temporary requirements for self-employed income announced in Lender Letter 2020-03 apply to the High Loan-to-Value Refinance Option? NEW
The temporary requirements apply to mortgages described in B5-7-03, High LTV Refinance Alternative Qualification Path.
Can the lender use the year-to-date profit and loss statement to calculate qualifying income? NEW
No. The lender must continue to use the required level of tax return documentation to calculate self-employment income. The lender must use the profit and loss statement (and other supplemental documentation) to determine the current level of stable income. When the current level is less than the calculated amount, the lender must adjust the income downward to reflect the current level of stable income. This may be less than the year-to-date average represented on the year-to-date profit and loss statement based on the timeframe the business was impacted.
What options are available if the business depository account statements for the most recent two months do not support the details in the year-to-date profit and loss statement due to the cyclical nature of the business income? NEW
In this case the lender must confirm the cyclical nature of the business income and assess the impact of the pandemic on business operations. The loan file must include other supplemental documentation, such as business contracts or additional depository account statements, to support the continuing nature of the amount of self-employment income used to qualify the borrower.
If loan proceeds from a PPP are reflected in the business depository accounts, can these funds be used to support the business revenue reported on the year-to-date profit and loss statement? NEW
No. An SBA PPP or any other similar COVID-19 related loan or grant is not considered a source of business revenue.
Is it acceptable to exclude the payroll and other expenses (e.g., utilities, business rent) covered by PPP loan proceeds when assessing current business cash flow? NEW
No. An SBA PPP or any other similar COVID-19 related loans are designed to provide short-term relief whereas the payroll, rent/mortgage payments and utilities are ongoing business expenses; therefore, those expenses must be considered in the analysis.
Can proceeds from an SBA PPP or any other similar COVID-19 related loans be considered business assets for the purpose of funding the transaction? NEW
No, loan proceeds are not considered business assets for the purpose of qualifying the borrower and cannot be used to fund the down payment, closing costs or satisfy reserve requirements.
How do the temporary self-employment income policies in LL-2020-03 impact the enforcement relief of representations and warranties when self-employment income is calculated using an approved vendor tool as outlined in Selling Guide A2-2-04, Limited Waiver and Enforcement Relief of Representations and Warranties for Mortgages Submitted to DU? NEW
The temporary self-employment income policy requirements in LL-2020-03 apply to all borrowers using self-employment income to qualify. Lenders must obtain the additional documentation, such as an audited profit and loss statement, or an unaudited profit and loss statement and two months’ business depository account statements and assess the impact to the business and adjust income accordingly.
If the lender determines that the business has not been adversely impacted and the amount of income calculated following standard 1084 methodology is accurate and meets the requirements outlined in Selling Guide A2-2-04, then rep and warrant relief will continue to be provided on the accuracy of the calculation of the amount of self-employment income by the tool.
- If the lender determines that the business has been adversely impacted and the amount of income calculated following standard 1084 methodology must be adjusted, rep and warrant relief does not apply since the lender must make manual adjustments to the output of the tool.
There are no changes for loans that receive self-employment income validation through the DU validation service.
Income - Variable
When variable income is used to qualify the borrower(s), can a gap of employment (due to COVID-19) be excluded from the method of calculation? NEW
A gap in employment or a reduction in income due to COVID-19 cannot be excluded from the calculation, and the year to date income must continue to be calculated over the entire time period. Refer to B3-3.1-01, General Income Information.
How do lenders determine stability of variable income when a borrower has been impacted by COVID-19? NEW
Income types such as hourly, commission and overtime, are variable by nature. Current Selling Guide policy requires these income types to be calculated considering the borrower’s history of receipt, the frequency of payment, and the trending of the amount of income being received. Lenders should also include any information or knowledge of any current issues in their analysis of the borrower’s continuance of income source. If the trending analysis indicates that the current year to date income has declined, but the borrower is actively employed and the lender has no reason to believe that the borrower will not continue to be employed at the current level, the income can be considered stable. Refer to B3-3.1-01, General Income Information.
Is it acceptable to only use year-to-date income to calculate qualifying variable income? NEW
When variable income is the source of income used in qualifying the borrower(s), lenders must follow the requirements as outlined in B3-3.1-01, General Income Information and perform a trending analysis. This includes determining the monthly year-to-date income amount and comparing that to prior years’ earnings to determine the appropriate amount of qualifying income for the loan transaction.
- If the trend in the amount of income is stable or increasing, the income amount should be averaged.
- If the trend was declining but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used (i.e., the monthly year to date income amount).
- If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used.
When the borrower experiences a gap of employment due to COVID-19 and their source of income is variable, is there a minimum amount of documented time the borrower is required to be back at work after the gap period? NEW
Unless the lender has knowledge to the contrary, if the borrower is actively employed, the income does not have a defined expiration date and the applicable history of receipt of the income is documented (per the specific income type), the lender may conclude that the income is stable, predictable, and likely to continue. The lender is not expected to request additional documentation from the borrower. Refer to B3-3.1-01, General Income Information for additional details.
What if an hourly borrower is working less hours now than they worked earlier in the year prior to the COVID-19 impact? NEW
Hourly workers are covered under our variable income policy. The year-to-date income amount being used will account for a decline in income when determining the amount of income to be used for the trending analysis and when determining the amount to be used for qualifying purposes.
Are there acceptable alternatives if a lender is unable to obtain a verbal (VOE)?
Yes, reference the guidelines and flexibilities announced in LL-2020-03.
If a VOE indicates the borrower is actively employed, but borrower discloses they are furloughed, what are the next steps?
The income may not be used for qualifying. A borrower who is furloughed or laid off is not considered to be actively employed. See LL-2020-03 for details.
Does the lender remain responsible for the representations and warranties related to the borrower’s employment status when using one of the verbal VOE flexibilities?
Yes. The lender’s representations and warranties related to the borrower’s employment status do not change. We are allowing certain documentation flexibilities due to the unique circumstances resulting from the COVID-19 pandemic to address the issue lenders have raised due to disruption of employer operations and their inability to be reached by phone. Lenders are not required to use these flexibilities if they are not comfortable with them.
Can borrowers still use trust accounts for down payment, closing costs, and reserves?
Yes, lenders can continue to follow the requirements in the B3-4.3-02, Trust Accounts. In addition, lenders must apply the age of document and other requirements and guidance in LL-2020-03 for any market-based assets in the trust account required for the transaction.
Does the tax deadline extension issued as a result of the COVID-19 emergency affect documentation requirements?
Lenders should continue to obtain the most recent year’s tax return filed by the borrower as indicated in B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns. However, lenders are not required to obtain a copy of the IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) filed with the IRS, until the point at which the tax deadline extension has expired. Accordingly, lenders are not required to review the total tax liability reported on IRS Form 4868 and compare it with the borrower’s tax liability from the previous two years as a measure of income source stability and continuance.
How do the temporary age of document requirements in Lender Letter LL-2020-03 impact single-closing construction-to-permanent transactions
For single-closing construction-to-permanent mortgages with loan applications dated during the timeframe covered in LL-2020-03, unless the loan meets the requirements for the extended 18 month timeframe permitted in the Selling Guide, the 60-day age of income and asset document requirements stated in the Lender Letter apply at both the time of the original closing date of the construction loan and the time of conversion to permanent financing. For loans meeting the 18 month extended timeframe requirements, the age of document requirements apply at the time of original loan closing only.