WHOLESALE UNDERWRITING GUIDELINES
EFFECTIVE DATE 01.10.2022
3530 TORINGDON WAY, SUITE 300
CHARLOTTE, NC 28277
800.983.0457
DEEPHAVEN WHOLESALE UNDERWRITING GUIDELINES
EFFECTIVE 01.10.2022
2
TABLE OF CONTENTS
TABLE OF CONTENTS .............................................................................................................................................................. 2
1 INTRODUCTION ................................................................................................................................................................... 14
1.1 LOAN PURCHASE PHILOSOPHY .................................................................................................................................. 14
1.2 FAIR LENDING STATEMENT .......................................................................................................................................... 14
1.3 RESPONSIBLE LENDING STATEMENT ........................................................................................................................ 15
2 GENERAL PROGRAM INFORMATION ........................................................................................................................... 16
2.1 PROGRAMS ........................................................................................................................................................................... 16
2.2 DOCUMENTATION .......................................................................................................................................................... 16
2.3 PRODUCTS ........................................................................................................................................................................... 16
2.4 LOAN AMOUNTS AND LOAN-TO-VALUES ............................................................................................................ 16
2.5 STATE RESTRICTIONS ...................................................................................................................................................... 16
2.6 LOAN AGE ............................................................................................................................................................................ 16
2.7 PREPAYMENT PENALTIES, POINTS, AND FEES ....................................................................................................... 17
2.8 EXCEPTIONS ........................................................................................................................................................................ 17
3 TRANSACTIONS .................................................................................................................................................................... 18
3.1 OCCUPANCY ...................................................................................................................................................................... 18
3.1.1 PRIMARY RESIDENCE ........................................................................................................................................... 18
3.1.2 SECOND HOME...................................................................................................................................................... 18
3.1.3 INVESTMENT PROPERTY .................................................................................................................................... 18
3.2 PURCHASE ............................................................................................................................................................................ 19
3.3 GENERAL REFINANCE REQUIREMENTS .................................................................................................................... 19
3.3.1 DETERMINING LOAN-TO-VALUE ................................................................................................................... 19
3.3.2 BENEFIT TO BORROWER ................................................................................................................................... 20
3.3.3 PROPERTIES LISTED FOR SALE ......................................................................................................................... 20
3.4 RATE/TERM REFINANCE .................................................................................................................................................. 21
3.5 CASH-OUT REFINANCE .................................................................................................................................................. 22
3.5.1 SEASONING ............................................................................................................................................................. 22
3.5.2 DELAYED FINANCING ......................................................................................................................................... 23
3.5.3 CASH-OUT LIMITS ................................................................................................................................................. 23
3.6 TEXAS HOME EQUITY LOANS ...................................................................................................................................... 24
DEEPHAVEN WHOLESALE UNDERWRITING GUIDELINES
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3.6.1 SELLER CERTIFICATION ...................................................................................................................................... 24
3.6.2 GENERAL REQUIREMENTS ................................................................................................................................. 25
3.6.3 LOAN PARAMETERS ............................................................................................................................................. 25
3.6.4 RESTRICTIONS ........................................................................................................................................................ 26
3.6.5 OCCUPANCY .......................................................................................................................................................... 26
3.6.6 BORROWERS ........................................................................................................................................................... 26
3.6.7 NON-BORROWING SPOUSE ............................................................................................................................ 27
3.6.8 REFINANCING AN EXISTING HOME EQUITY LOAN .............................................................................. 28
3.6.9 12-DAY COOLING OFF PERIOD ...................................................................................................................... 30
3.6.10 PAYOFF OF DEBT ................................................................................................................................................ 30
3.6.11 SECONDARY FINANCING ............................................................................................................................... 31
3.6.12 PROPERTY CHARACTERISTICS ...................................................................................................................... 31
3.6.13 URBAN AND RURAL HOMESTEAD DEFINITIONS .................................................................................. 32
3.6.14 CLOSING REQUIREMENTS ............................................................................................................................... 33
3.6.15 TEXAS HOME EQUITY DOCUMENTS .......................................................................................................... 36
3.7 FLIP TRANSACTIONS ........................................................................................................................................................ 37
3.8 NON-ARM’S LENGTH TRANSACTIONS .................................................................................................................... 38
3.9 INHERITED PROPERTIES AND PROPERTY BUYOUTS .......................................................................................... 39
3.10 LAND CONTRACT/CONTRACT FOR DEED ........................................................................................................ 39
3.11 LEASE WITH PURCHASE OPTION ............................................................................................................................. 40
3.12 PERMANENT FINANCING FOR NEW CONSTRUCTION ................................................................................. 40
4 BORROWERS .......................................................................................................................................................................... 41
4.1 CUSTOMER IDENTIFICATION PROGRAM (CIP) .................................................................................................... 41
4.2 FRAUD REPORT AND BACKGROUND CHECK ..................................................................................................... 41
4.3 U.S. CITIZENS ....................................................................................................................................................................... 42
4.4 PERMANENT RESIDENT ALIENS ................................................................................................................................... 42
4.5 NON-PERMANENT RESIDENT ALIENS ....................................................................................................................... 43
4.5.1 VERIFICATION OF RESIDENCY STATUS ....................................................................................................... 43
4.5.2 CREDIT REQUIREMENTS ..................................................................................................................................... 44
4.5.3 INCOME/EMPLOYMENT REQUIREMENTS .................................................................................................... 44
4.5.4 ASSETS ........................................................................................................................................................................ 44
4.6 ITIN BORROWERS ............................................................................................................................................................. 45
DEEPHAVEN WHOLESALE UNDERWRITING GUIDELINES
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4.6.1 VERIFICATION OF RESIDENCY STATUS ....................................................................................................... 45
4.6.2 CREDIT REQUIREMENTS ..................................................................................................................................... 46
4.6.3 INCOME/EMPLOYMENT REQUIREMENTS .................................................................................................... 46
4.6.4 ASSETS ........................................................................................................................................................................ 46
4.7 EXCLUSIONARY LIST/OFAC/DIPLOMATIC IMMUNITY ....................................................................................... 47
4.8 CO-BORROWERS ............................................................................................................................................................... 47
4.9 NON-OCCUPANT CO-BORROWERS ........................................................................................................................ 47
4.10 FIRST-TIME HOME BUYERS ........................................................................................................................................... 48
4.11 EMPLOYEES OF BROKER ............................................................................................................................................... 48
4.12 LIMITED POWER OF ATTORNEY .............................................................................................................................. 48
4.13 VESTING AND OWNERSHIP ........................................................................................................................................ 49
4.13.1 FEE SIMPLE OWNERSHIP ................................................................................................................................... 49
4.13.2 LEASEHOLD ESTATE ........................................................................................................................................... 52
4.14 MULTIPLE FINANCED PROPERTIES AND DEEPHAVEN EXPOSURE.............................................................. 55
4.15 INELIGIBLE BORROWERS ............................................................................................................................................. 55
5 CREDIT ANALYSIS ................................................................................................................................................................. 56
5.1 EQUAL CREDIT OPPORTUNITY ACT, FAIR HOUSING ACT & STATE FAIR LENDING LAWS ............. 56
5.2 CREDIT REPORT ................................................................................................................................................................. 56
5.2.1 AGE OF CREDIT REPORT/CREDIT DOCUMENTATION ......................................................................... 57
5.2.2 FRAUD ALERTS ....................................................................................................................................................... 57
5.2.3 CREDIT REPORT SECURITY FREEZE ............................................................................................................... 57
5.2.4 INQUIRIES ................................................................................................................................................................. 57
5.2.5 UPDATED PAYMENT HISTORIES ..................................................................................................................... 58
5.2.6 GAP CREDIT REPORT........................................................................................................................................... 58
5.3 CREDIT SCORE REQUIREMENTS .................................................................................................................................. 58
5.4 TRADELINE REQUIREMENTS ......................................................................................................................................... 59
5.4.1 STANDARD TRADELINES ................................................................................................................................... 60
5.4.2 LIMITED TRADELINES ........................................................................................................................................... 60
5.4.3 INSUFFICIENT TRADELINES/NON-TRADITIONAL CREDIT .................................................................. 60
5.5 MORTGAGE AND RENTAL PAYMENT VERIFICATION ........................................................................................ 61
5.5.1 EXPANDED PRIME HOUSING VERIFICATION ............................................................................................ 61
5.5.2 NON-PRIME HOUSING VERIFICATION ......................................................................................................... 61
DEEPHAVEN WHOLESALE UNDERWRITING GUIDELINES
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5.5.3 NO HOUSING HISTORY OR LESS THAN 12 MONTHS VERIFIED ........................................................ 61
5.5.4 MORTGAGE MODIFICATION ........................................................................................................................... 62
5.6 ROLLING LATE PAYMENTS ............................................................................................................................................ 62
5.7 PAST DUE ACCOUNTS .................................................................................................................................................... 62
5.8 DELINQUENT CREDIT BELONGING TO EX-SPOUSE .......................................................................................... 63
5.9 LAWSUIT/PENDING LITIGATION ................................................................................................................................ 63
5.10 CONSUMER CREDIT COUNSELING SERVICE (CCCS) ....................................................................................... 63
5.11 COLLECTIONS AND CHARGE-OFFS ........................................................................................................................ 64
5.12 JUDGMENTS AND TAX LIENS .................................................................................................................................... 65
5.13 BANKRUPTCY ................................................................................................................................................................... 65
5.13.1 EXPANDED PRIME PROGRAM ........................................................................................................................ 65
5.13.2 NON-PRIME PROGRAM .................................................................................................................................... 65
5.14 HOUSING EVENTS ........................................................................................................................................................... 66
5.14.1 EXPANDED PRIME PROGRAM ........................................................................................................................ 66
5.14.2 NON-PRIME PROGRAM .................................................................................................................................... 66
6 LIABILITIES ................................................................................................................................................................................ 67
6.1 INSTALLMENT DEBT ......................................................................................................................................................... 67
6.2 REVOLVING DEBT .............................................................................................................................................................. 67
6.3 AUTHORIZED USER ACCOUNTS ................................................................................................................................ 67
6.4 BUSINESS DEBT ................................................................................................................................................................... 68
6.5 CHILD SUPPORT, ALIMONY OR MAINTENANCE OBLIGATIONS .................................................................. 68
6.6 CONTINGENT LIABILITIES ............................................................................................................................................. 69
6.7 DEBTS PAID BY OTHERS ................................................................................................................................................. 69
6.8 HOUSING PAYMENTS ...................................................................................................................................................... 70
6.9 LEASE OBLIGATIONS ........................................................................................................................................................ 70
6.10 MATERIAL RECURRING NON-DEBT OBLIGATIONS ......................................................................................... 70
6.11 OPEN 30-DAY CHARGE ACCOUNTS ...................................................................................................................... 71
6.12 RETIREMENT/SAVINGS PLAN LOANS ...................................................................................................................... 71
6.13 STUDENT LOANS ............................................................................................................................................................ 72
6.14 TIMESHARES ....................................................................................................................................................................... 72
6.15 UNDISCLOSED DEBTS ................................................................................................................................................... 72
7 DOCUMENTATION .............................................................................................................................................................. 73
DEEPHAVEN WHOLESALE UNDERWRITING GUIDELINES
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7.1 AGE OF LOAN DOCUMENTATION ........................................................................................................................... 73
7.2 EMPLOYMENT/INCOME DOCUMENTATION ......................................................................................................... 73
7.2.1 IRS FORM 4506-C ................................................................................................................................................... 73
7.2.2 PAY STUBS AND W-2S ......................................................................................................................................... 73
7.2.3 FEDERAL INCOME TAX RETURNS .................................................................................................................. 73
7.2.4 WRITTEN VERIFICATION OF EMPLOYMENT (WVOE) ........................................................................... 74
7.2.5 VERBAL VERIFICATION OF EMPLOYMENT (VVOE) .................................................................................. 74
7.3 ASSET DOCUMENTATION ............................................................................................................................................. 75
8 EMPLOYMENT/INCOME ANALYSIS................................................................................................................................. 76
8.1 FULL DOCUMENTATION ............................................................................................................................................... 76
8.1.1 WAGE-EARNERS .................................................................................................................................................... 76
8.1.2 SELF-EMPLOYED BORROWERS ........................................................................................................................ 76
8.2 ALTERNATIVE INCOME DOCUMENTATION.......................................................................................................... 76
8.3 PERSONAL BANK STATEMENT DOCUMENTATION ........................................................................................... 77
8.3.1 REQUIREMENTS ...................................................................................................................................................... 77
8.3.2 DOCUMENTATION .............................................................................................................................................. 78
8.3.3 ANALYZING THE PERSONAL BANK STATEMENTS ................................................................................. 79
8.3.4 CALCULATING QUALIFYING INCOME ........................................................................................................ 79
8.4 BUSINESS BANK STATEMENT DOCUMENTATION .............................................................................................. 80
8.4.1 REQUIREMENTS ...................................................................................................................................................... 80
8.4.2 DOCUMENTATION .............................................................................................................................................. 81
8.4.3 ANALYZING THE BUSINESS BANK STATEMENTS .................................................................................... 82
8.4.4 CALCULATING QUALIFYING INCOME ........................................................................................................ 83
8.5 EMPLOYMENT HISTORY ................................................................................................................................................. 85
8.5.1 FREQUENT JOB CHANGES ................................................................................................................................ 85
8.5.2 GAPS IN EMPLOYMENT ....................................................................................................................................... 85
8.6 SOURCES OF INCOME ..................................................................................................................................................... 86
8.6.1 ANNUITY INCOME ............................................................................................................................................... 86
8.6.2 ASSET UTILIZATION ............................................................................................................................................. 87
8.6.3 AUTOMOBILE ALLOWANCE ............................................................................................................................ 88
8.6.4 BONUS AND OVERTIME ..................................................................................................................................... 88
8.6.5 CAPITAL GAINS ...................................................................................................................................................... 88
DEEPHAVEN WHOLESALE UNDERWRITING GUIDELINES
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8.6.6 CHILD SUPPORT, ALIMONY OR MAINTENANCE INCOME .................................................................. 89
8.6.7 COMMISSION INCOME ....................................................................................................................................... 89
8.6.8 DECLINING INCOME ........................................................................................................................................... 90
8.6.9 DISABILITY INCOME ............................................................................................................................................. 90
8.6.10 DIVIDEND/INTEREST INCOME ....................................................................................................................... 91
8.6.11 EMPLOYMENT BY A RELATIVE ....................................................................................................................... 91
8.6.12 EMPLOYMENT OFFERS AND CONTRACTS .............................................................................................. 92
8.6.13 FOREIGN INCOME .............................................................................................................................................. 93
8.6.14 FOSTER CARE INCOME..................................................................................................................................... 94
8.6.15 HOURLY WAGES ................................................................................................................................................. 94
8.6.16 LUMP-SUM DISTRIBUTIONS ............................................................................................................................ 94
8.6.17 MINISTER/CLERGY INCOME ............................................................................................................................ 94
8.6.18 NON-TAXABLE INCOME ................................................................................................................................. 95
8.6.19 NOTES RECEIVABLE INCOME......................................................................................................................... 95
8.6.20 PART-TIME/SECOND JOB INCOME .............................................................................................................. 95
8.6.21 PENSION/RETIREMENT ...................................................................................................................................... 96
8.6.22 PUBLIC ASSISTANCE .......................................................................................................................................... 96
8.6.23 RENTAL INCOME ................................................................................................................................................ 97
8.6.24 SEASONAL INCOME ........................................................................................................................................ 101
8.6.25 SELF-EMPLOYED INCOME ............................................................................................................................. 101
8.6.26 SOCIAL SECURITY INCOME ......................................................................................................................... 107
8.6.27 TEACHER INCOME .......................................................................................................................................... 107
8.6.28 TIPS AND GRATUITIES ................................................................................................................................... 107
8.6.29 TRAILING SPOUSE OR CO-BORROWER INCOME/RELOCATION ................................................ 107
8.6.30 TRUST INCOME ................................................................................................................................................ 108
8.6.31 UNACCEPTABLE INCOME ............................................................................................................................ 108
8.6.32 UNEMPLOYMENT COMPENSATION ........................................................................................................ 108
8.6.33 VA SURVIVORS’ BENEFITS/DEPENDENT CARE ..................................................................................... 108
9 RATIOS AND QUALIFYING ............................................................................................................................................ 109
9.1 RATIOS ................................................................................................................................................................................ 109
9.2 RESIDUAL INCOME ........................................................................................................................................................ 109
9.3 PAYMENT SHOCK........................................................................................................................................................... 109
DEEPHAVEN WHOLESALE UNDERWRITING GUIDELINES
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9.4 ADJUSTABLE-RATE QUALIFYING .............................................................................................................................. 110
9.5 INTEREST-ONLY QUALIFYING .................................................................................................................................. 110
10 ASSET ANALYSIS ............................................................................................................................................................... 111
10.1 DOWN PAYMENT ........................................................................................................................................................ 111
10.2 RESERVES .......................................................................................................................................................................... 111
10.3 VERIFICATION OF ASSETS ......................................................................................................................................... 112
10.3.1 BORROWED FUNDS SECURED BY AN ASSET ...................................................................................... 112
10.3.2 BUSINESS ASSETS .............................................................................................................................................. 112
10.3.3 DEPOSITORY ACCOUNTS ........................................................................................................................... 113
10.3.4 EARNEST MONEY/CASH DEPOSIT ON SALES CONTRACT ............................................................ 113
10.3.5 GIFT FUNDS ........................................................................................................................................................ 114
10.3.6 GIFT OF EQUITY ............................................................................................................................................... 115
10.3.7 FOREIGN ASSETS .............................................................................................................................................. 115
10.3.8 INTERESTED PARTY CONTRIBUTIONS ................................................................................................... 116
10.3.9 LIFE INSURANCE ............................................................................................................................................... 117
10.3.10 MINIMUM BORROWER CONTRIBUTION ............................................................................................ 117
10.3.11 NET PROCEEDS FROM SALE OF REAL ESTATE ................................................................................... 118
10.3.12 RENT CREDIT FOR LEASE WITH PURCHASE OPTION ................................................................... 118
10.3.13 RETIREMENT ACCOUNTS .......................................................................................................................... 119
10.3.14 SALE OF PERSONAL ASSETS ....................................................................................................................... 119
10.3.15 SECONDARY/SUBORDINATE FINANCING ......................................................................................... 120
10.3.16 SPOUSAL ACCOUNTS ................................................................................................................................. 121
10.3.17 STOCK OPTIONS ........................................................................................................................................... 121
10.3.18 STOCKS, BONDS, AND MUTUAL FUNDS ............................................................................................ 121
10.3.19 TRUST ACCOUNTS ....................................................................................................................................... 122
10.3.20 UNACCEPTABLE FUNDS ............................................................................................................................. 122
11 PROPERTY ........................................................................................................................................................................... 123
11.1 GENERAL PROPERTY REQUIREMENTS ................................................................................................................. 123
11.2 UNIFORM RESIDENTIAL APPRAISAL REPORT (URAR) .................................................................................... 124
11.2.1 APPRAISAL REPORT REQUIREMENTS ....................................................................................................... 125
11.2.2 APPRAISER QUALIFICATIONS ..................................................................................................................... 126
11.2.3 ELECTRONIC SUBMISSION OF APPRAISAL REPORT .......................................................................... 126
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11.2.4 TRANSFERRED APPRAISALS ......................................................................................................................... 126
11.2.5 AGE OF APPRAISAL AND APPRAISAL UPDATES .................................................................................. 127
11.3 MINIMUM PROPERTY STANDARDS ....................................................................................................................... 128
11.4 PROPERTY LOCATION ............................................................................................................................................... 128
11.5 ELIGIBLE PROPERTY TYPES ....................................................................................................................................... 129
11.6 MARKET ANALYSIS ....................................................................................................................................................... 130
11.6.1 NEIGHBORHOOD REVIEW .......................................................................................................................... 130
11.6.2 COMPATIBILITY OF SUBJECT PROPERTY AND NEIGHBORHOOD .............................................. 130
11.6.3 PROXIMITY OF COMPARABLES TO SUBJECT PROPERTY ................................................................ 130
11.6.4 AGE OF COMPARABLES ................................................................................................................................. 131
11.6.5 PROPERTY VALUES WITHIN MARKET AREA ......................................................................................... 131
11.6.6 REDLINING PROHIBITION ............................................................................................................................ 131
11.6.7 OVER-IMPROVEMENTS ................................................................................................................................... 131
11.7 VALUATION ANALYSIS .............................................................................................................................................. 132
11.7.1 SALES COMPARISON APPROACH ............................................................................................................. 132
11.7.2 COST APPROACH ............................................................................................................................................ 133
11.7.3 INCOME APPROACH ...................................................................................................................................... 133
11.7.4 VALUATION ANALYSIS AND FINAL RECONCILIATION .................................................................. 133
11.7.5 APPRAISAL REVIEW PROCESS ...................................................................................................................... 134
11.7.6 APPRAISAL REVIEW TOLERANCE .............................................................................................................. 134
11.8 PROPERTY CONSIDERATIONS................................................................................................................................ 135
11.8.1 ACCESSORY UNITS ......................................................................................................................................... 135
11.8.2 DAMPNESS .......................................................................................................................................................... 135
11.8.3 DEED RESTRICTIONS ...................................................................................................................................... 136
11.8.4 DEFERRED MAINTENANCE .......................................................................................................................... 136
11.8.5 DISASTER AREAS ............................................................................................................................................... 137
11.8.6 ELECTRICAL SYSTEMS ..................................................................................................................................... 139
11.8.7 ENVIRONMENTAL HAZARDS...................................................................................................................... 139
11.8.8 ESCROWS FOR WORK COMPLETION .................................................................................................... 139
11.8.9 FLOOD ZONE .................................................................................................................................................... 139
11.8.10 FOUNDATION SETTLEMENT .................................................................................................................... 140
11.8.11 HEATING SYSTEMS ........................................................................................................................................ 140
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11.8.12 LAND VALUE AND ACREAGE ................................................................................................................... 140
11.8.13 LEASEHOLD APPRAISAL REQUIREMENTS ............................................................................................. 141
11.8.14 LOG HOMES ..................................................................................................................................................... 145
11.8.15 MODULAR HOMES ........................................................................................................................................ 145
11.8.16 MULTIPLE DWELLINGS ON ONE LOT ................................................................................................... 145
11.8.17 MULTIPLE PARCELS ....................................................................................................................................... 145
11.8.18 NEW CONSTRUCTION ............................................................................................................................... 146
11.8.19 PEST INFESTATION ....................................................................................................................................... 146
11.8.20 PLUMBING......................................................................................................................................................... 146
11.8.21 PRIVATE ROADS ............................................................................................................................................. 146
11.8.22 PUD (PLANNED UNIT DEVELOPMENT) ................................................................................................ 147
11.8.23 REPAIRS .............................................................................................................................................................. 147
11.8.24 RURAL PROPERTIES ....................................................................................................................................... 148
11.8.25 SEPTIC SYSTEM/SEWAGE DISPOSAL SYSTEM ...................................................................................... 149
11.8.26 SOLAR PANELS ................................................................................................................................................ 149
11.8.27 UNCONVENTIONAL FLOOR PLANS ..................................................................................................... 150
11.8.28 WATER SUPPLY ............................................................................................................................................... 151
11.8.29 ZONING AND LAND-USE REGULATIONS .......................................................................................... 151
11.9 CONDOMINIUMS ......................................................................................................................................................... 152
11.9.1 DEFINITIONS OF ESTABLISHED AND NEW CONDOMINIUMS ..................................................... 152
11.9.2 GENERAL CONDOMINIUM REQUIREMENTS ........................................................................................ 153
11.9.3 CONDOMINIUM PROJECT REVIEWS ........................................................................................................ 154
11.9.4 NON-WARRANTABLE CONDOMINIUMS .............................................................................................. 156
11.9.5 CONDOMINIUM CONVERSIONS .............................................................................................................. 157
11.9.6 SITE CONDOMINIUMS ................................................................................................................................... 157
11.9.7 INELIGIBLE PROJECTS ..................................................................................................................................... 157
12 PROPERTY INSURANCE ................................................................................................................................................. 158
12.1 HAZARD INSURANCE ................................................................................................................................................ 158
12.1.1 MINIMUM HAZARD INSURANCE COVERAGE ...................................................................................... 158
12.1.2 DETERMINING THE AMOUNT OF REQUIRED HAZARD COVERAGE ......................................... 159
12.1.3 DEDUCTIBLE AMOUNT ................................................................................................................................. 160
12.1.4 EVIDENCE OF HAZARD INSURANCE....................................................................................................... 160
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12.1.5 OPTIONAL COVERAGE ................................................................................................................................. 161
12.1.6 RATING REQUIREMENTS .............................................................................................................................. 161
12.2 CONDOMINIUM AND PUD PROJECT INSURANCE REQUIREMENTS ...................................................... 162
12.2.1 MINIMUM HAZARD INSURANCE COVERAGE ...................................................................................... 162
12.2.2 DEDUCTIBLE AMOUNT ................................................................................................................................. 163
12.2.3 GENERAL LIABILITY COVERAGE ................................................................................................................ 163
12.2.4 FIDELITY BOND COVERAGE ....................................................................................................................... 163
12.3 FLOOD INSURANCE .................................................................................................................................................... 164
12.3.1 FLOOD CERTIFICATE ..................................................................................................................................... 164
12.3.2 MINIMUM FLOOD INSURANCE COVERAGE ......................................................................................... 164
12.3.3 PROJECT FLOOD INSURANCE REQUIREMENTS .................................................................................. 164
12.3.4 DEDUCTIBLE AMOUNT ................................................................................................................................. 165
12.3.5 EVIDENCE OF FLOOD INSURANCE .......................................................................................................... 165
13 TITLE INSURANCE ........................................................................................................................................................... 166
13.1 TITLE POLICY REQUIREMENTS................................................................................................................................ 166
13.1.1 BORROWER INFORMATION ....................................................................................................................... 166
13.1.2 COVERAGE AMOUNT .................................................................................................................................... 166
13.1.3 INSURED NAME ................................................................................................................................................. 166
13.1.4 AGE OF REPORT ............................................................................................................................................... 166
13.1.5 VESTING ............................................................................................................................................................... 166
13.1.6 GAP COVERAGE ............................................................................................................................................... 167
13.1.7 TITLE POLICY FORMS ..................................................................................................................................... 167
13.1.8 TITLE POLICY UNDERWRITER .................................................................................................................... 167
13.2 TITLE COMMITMENT REVIEW ................................................................................................................................. 168
13.2.1 CHAIN OF TITLE ............................................................................................................................................... 168
13.2.2 TITLE EXCEPTIONS .......................................................................................................................................... 168
13.2.3 SURVEY REQUIREMENTS ............................................................................................................................... 169
13.3 SERVICING ....................................................................................................................................................................... 169
14 DSCR PROGRAM .............................................................................................................................................................. 170
14.1 GENERAL PROGRAM INFORMATION .................................................................................................................. 170
14.1.1 DSCR PROGRAM .............................................................................................................................................. 170
14.1.2 PRODUCTS ......................................................................................................................................................... 170
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14.1.3 LOAN AMOUNTS AND LOAN-TO-VALUES .......................................................................................... 170
14.1.4 STATE RESTRICTIONS .................................................................................................................................... 170
14.1.5 AGE OF DOCUMENTATION ....................................................................................................................... 170
14.1.6 LOAN AGE .......................................................................................................................................................... 170
14.1.7 FORMS ................................................................................................................................................................... 171
14.1.8 PREPAYMENT PENALTIES, POINTS, AND FEES ...................................................................................... 171
14.1.9 EXCEPTIONS ...................................................................................................................................................... 171
14.2 TRANSACTIONS ........................................................................................................................................................... 172
14.2.1 OCCUPANCY .................................................................................................................................................... 172
14.2.2 PURCHASE........................................................................................................................................................... 172
14.2.3 GENERAL REFINANCE REQUIREMENTS .................................................................................................. 172
14.2.4 RATE/TERM REFINANCE ................................................................................................................................ 174
14.2.5 CASH-OUT REFINANCE ................................................................................................................................. 175
14.2.6 FLIP TRANSACTIONS ...................................................................................................................................... 175
14.2.7 INHERITED PROPERTIES AND PROPERTY BUYOUTS ........................................................................ 176
14.2.8 PERMANENT FINANCING FOR NEW CONSTRUCTION ................................................................. 176
14.3 BORROWERS .................................................................................................................................................................. 177
14.3.1 U.S. CITIZENS ..................................................................................................................................................... 177
14.3.2 PERMANENT RESIDENT ALIENS ................................................................................................................. 177
14.3.3 NON-PERMANENT RESIDENT ALIENS ..................................................................................................... 178
14.3.4 FOREIGN NATIONALS ................................................................................................................................... 180
14.3.5 CUSTOMER IDENTIFICATION PROGRAM (CIP) ................................................................................... 183
14.3.6 FRAUD REPORT AND BACKGROUND CHECK ................................................................................... 183
14.3.7 EXCLUSIONARY LIST/OFAC/DIPLOMATIC IMMUNITY ..................................................................... 184
14.3.8 FIRST-TIME INVESTOR .................................................................................................................................... 184
14.3.9 LIMITED POWER OF ATTORNEY ............................................................................................................... 185
14.3.10 VESTING AND OWNERSHIP ...................................................................................................................... 185
14.3.11 MULTIPLE FINANCED PROPERTIES AND DEEPHAVEN EXPOSURE ............................................ 188
14.3.12 INELIGIBLE BORROWERS ............................................................................................................................ 188
14.4 CREDIT ANALYSIS ........................................................................................................................................................ 189
14.4.1 CREDIT REPORT ............................................................................................................................................... 189
14.4.2 CREDIT SCORE REQUIREMENTS ................................................................................................................ 190
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14.4.3 TRADELINE REQUIREMENTS ....................................................................................................................... 191
14.4.4 EVIDENCE OF PRIMARY RESIDENCE ......................................................................................................... 192
14.4.5 MORTGAGE AND RENTAL PAYMENT VERIFICATION ...................................................................... 192
14.4.6 ROLLING LATE PAYMENTS .......................................................................................................................... 193
14.4.7 PAST DUE ACCOUNTS .................................................................................................................................. 193
14.4.8 DELINQUENT CREDIT BELONGING TO EX-SPOUSE ........................................................................ 193
14.4.9 LAWSUIT/PENDING LITIGATION .............................................................................................................. 193
14.4.10 CONSUMER CREDIT COUNSELING SERVICE (CCCS) ..................................................................... 193
14.4.11 COLLECTIONS AND CHARGE-OFFS ...................................................................................................... 194
14.4.12 JUDGMENTS AND TAX LIENS ................................................................................................................... 194
14.4.13 HOUSING EVENTS ......................................................................................................................................... 195
14.4.14 BANKRUPTCY ................................................................................................................................................. 195
14.5 EMPLOYMENT/INCOME ANALYSIS ........................................................................................................................ 196
14.6 RATIOS AND QUALIFYING ....................................................................................................................................... 196
14.6.1 DEBT-SERVICE COVERAGE RATIO ............................................................................................................ 196
14.6.2 ADJUSTABLE RATE AND INTEREST ONLY QUALIFYING ................................................................. 196
14.7 ASSET ANALYSIS ............................................................................................................................................................ 197
14.7.1 RESERVES.............................................................................................................................................................. 197
14.7.2 VERIFICATION OF ASSETS ............................................................................................................................ 197
14.8 PROPERTY ........................................................................................................................................................................ 198
14.8.1 ELIGIBLE PROPERTY TYPES ........................................................................................................................... 198
14.8.2 AGE OF APPRAISAL AND APPRAISAL UPDATES .................................................................................. 199
14.8.3 APPRAISAL REVIEW PROCESS ...................................................................................................................... 199
14.8.4 APPRAISAL REVIEW TOLERANCE .............................................................................................................. 199
14.8.5 LAND VALUE AND ACREAGE ..................................................................................................................... 199
14.9 INSURANCE .................................................................................................................................................................... 199
15 COVID-19 ADDENDA ..................................................................................................................................................... 200
16 FORMS .................................................................................................................................................................................. 201
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1 INTRODUCTION
These guidelines serve to provide direction and consistency in loan, borrower, and property eligibility.
1.1 LOAN PURCHASE PHILOSOPHY
Deephaven Mortgage LLC (hereafter referred to as Deephaven or Deephaven Mortgage) evaluates many aspects
of the loan but primarily relies on evaluation of the borrower’s ability to repay the loan to predict loan
performance. Additional characteristics of the loan are also examined including credit history, asset position, and
the property being used for collateral. Deephaven's Wholesale Underwriting Guidelines establish the criteria
under which a loan will be eligible for origination by Deephaven.
Deephaven Mortgage has a no-tolerance policy as it relates to fraud. Brokers should follow their own established
fraud and identity procedures on every loan in an effort to prevent and detect fraud. Loans containing fraudulent
documentation or information will immediately be declined and forwarded for further review. If there is any
determination of Broker involvement, the Broker will be made inactive and the appropriate agencies notified.
Deephaven Mortgage will also pursue borrower fraud to the fullest extent of the law.
1.2 FAIR LENDING STATEMENT
Deephaven Mortgage operates in accordance with the provisions of the Fair Housing Act and Equal Credit
Opportunity Act. The Fair Housing Act makes it unlawful to discriminate in housing-related activities against any
person because of race, color, religion, national origin, sex, handicap, or familial status. The Equal Credit
Opportunity Act prohibits discrimination with respect to any aspect of a credit transaction on the basis of sex,
race, color, religion, national origin, marital status, age (provided the borrower has the capacity to enter into a
binding contract), receipt of public assistance, or because the borrower has in good faith exercised any right
under the Consumer Credit Protection Act. Deephaven Mortgage fully supports the letter and spirit of both of
these laws and will not condone discrimination in any mortgage transaction.
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1.3 RESPONSIBLE LENDING STATEMENT
The primary focus of this lending program is the borrower’s ability to repay the mortgage obligation. Loans
originated by Deephaven Mortgage should be affordable to the borrower in his or her pursuit of homeownership.
Under the general Ability-to-Repay (ATR) standard, lenders must make a reasonable, good-faith determination
that the consumer has a reasonable ability to repay the loan. Lenders must verify information using third-party
records that provide reasonably reliable evidence of income or assets.
If a loan is subject to the ATR rules under the Federal Truth in Lending Act ("TILA"), lenders must consider
eight underwriting factors to be in compliance:
• Current or reasonably expected income or assets (other than the value of the property that secures the
loan) that the consumer will rely on to repay the loan
• Current employment status (if you rely on employment income when assessing the consumer’s ability
to repay)
• Monthly mortgage payment for this loan. You calculate this using the introductory or fully indexed rate,
whichever is higher, and monthly, fully amortizing payments that are substantially equal
• Monthly payment on any simultaneous loans secured by the same property
• Monthly payments for property taxes and insurance that you require the consumer to buy, and certain
other costs related to the property such as homeowner’s association fees or ground rent
• Debts, alimony, and child support obligations
• Monthly debt-to-income ratio or residual income, that you calculated using the total of all of the
mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income
• Credit history
Deephaven will not originate a loan subject to the ATR requirement under TILA unless it meets the requirements
of the rule. Certain loans may be exempt from TILA or otherwise exempt from the ATR rule. In those cases,
though Deephaven may choose to originate a loan that does not adhere to the formal requirements of the ATR
rule, Deephaven will only originate loans that the applicant appears able to afford based on application of prudent
underwriting standards.
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2 GENERAL PROGRAM INFORMATION
2.1 PROGRAMS
Deephaven offers several loan programs. See the Deephaven Matrices for complete details:
Expanded Prime Program
Non-Prime Program
DSCR Program
2.2 DOCUMENTATION
Documentation types include:
• Full Documentation
: 1- or 2-years W-2s or tax returns
• Alternative Income Documentation: Personal Bank Statements, Business Bank Statements, or 1099s
2.3 PRODUCTS
See applicable Deephaven Matrix
2.4 LOAN AMOUNTS AND LOAN-TO-VALUES
Minimum loan amount permitted is $100,000. See applicable Deephaven Matrix for max loan amounts and LTVs.
2.5 STATE RESTRICTIONS
See applicable Deephaven Matrix
2.6 LOAN AGE
All applications (per RESPA/TRID definition of the 6 pieces of information required to be an application) must
be submitted to Deephaven for Deephaven’s issuance of initial disclosures within 24 hours of receipt by the
Broker. This allows Deephaven 48 hours to issue initial disclosures to the applicant(s). Deephaven abides by
the federal requirement of issuing disclosures within 3 days of the application date, defined as receipt of the 6
pieces of information required from the borrower.
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2.7 PREPAYMENT PENALTIES, POINTS, AND FEES
Total points, fees, and APR may not exceed current state and federal high-cost thresholds.
Prepayment penalties may be required on investment property transactions as indicated via rate lock
confirmation and where permitted by applicable law. Buydown options are available to reduce or remove
prepayment penalties. See the appropriate Deephaven Mortgage Rate Sheet for details. Prepayment penalties on
primary residence and second home transactions are prohibited.
Note: States may impose different definitions of points and fees, rate/APR, or prepayment penalties than apply
under HOEPA. States may also use different triggers in each category for determining whether a loan will be a
"high-cost mortgage" (or equivalent terms) under state law. As a matter of policy, Deephaven does not purchase
or originate loans defined as high-cost mortgages (or equivalent terms) under Federal or state law, regardless of
the basis for the loan's treatment as such.
2.8 EXCEPTIONS
Exceptions to published guidelines are considered on a case-by-case basis. Loans with exception requests should
exhibit strong compensating factors. All exception requests must be submitted by the Broker in writing to
Deephaven Mortgage on the Deephaven Exception Request Form along with any supporting documentation.
Deephaven's decision to allow or deny any exception request relates only to whether Deephaven will approve
and originate the loan with the requested exception.
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3 TRANSACTIONS
3.1 OCCUPANCY
3.1.1 PRIMARY RESIDENCE
A primary residence (or owner-occupied property) is a dwelling occupied by the borrower as his or her
principal residence.
To qualify as a primary residence, the transaction must meet each of the following criteria:
Property is located in the same general area as the borrower’s employment
Borrower intends to occupy the subject property for the majority of the year
Property possesses physical characteristics that accommodate the borrower’s family
3.1.2 SECOND HOME
A second home is a dwelling occupied by the borrower in addition to their primary residence (may also be
referred to as a vacation home). Second homes are restricted to 1-unit dwellings.
Typical second homes should meet the following criteria:
Be located a reasonable distance away from the borrower’s primary residence
Must be occupied by the borrower for some portion of the year
Suitable for year-round occupancy
Borrower must have exclusive control over the property
Must not be subject to any timeshare arrangements, rental pools or other agreements which require
the borrower to rent the subject property or otherwise give control of the subject property to a
management firm
3.1.3 INVESTMENT PROPERTY
An investment property (or non-owner-occupied property) is an income-producing property that the
borrower does not occupy.
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3.2 PURCHASE
A purchase transaction is one which allows a buyer to acquire a property from a seller. A copy of the fully
executed purchase contract and all attachments or addenda is required.
The lesser of the purchase price or appraised value of the subject property is used to calculate the loan-to-value.
3.3 GENERAL REFINANCE REQUIREMENTS
Rate/term refinance and cash-out refinance are allowed.
All investment property refinances require an appraisal review product. See 11.7.5 Appraisal Review Process
for
detailed requirements.
3.3.1 DETERMINING LOAN-TO-VALUE
3.3.1.1 RATE/TERM REFINANCE
For rate/term refinance transactions, the current appraised value may be used to determine loan-to-
value.
3.3.1.2 CASH-OUT REFINANCE
If the subject property was acquired ˃ 12 months from application date, the appraised value must be
used to determine loan-to-value.
If the property was acquired ≤ 12 months from application date, the lesser of the current appraisal
value or previous purchase price plus documented improvements (if any) must be used. The purchase
settlement statement and any invoices for materials/labor will be required.
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3.3.2 BENEFIT TO BORROWER
In keeping with the commitment of responsible lending, all primary residence and second home refinance
transactions must have a measurable benefit to the borrower.
When determining the benefit on a refinance transaction, one or more of the following must exist to
support the benefit to the borrower:
Balloon payoff
Title transfer
Property retention
Rate reduction
P&I reduction
Debt reduction
Uncontrolled cash-out
State-specific and/or federal benefit to borrower compliance requirements must be adhered to. Deephaven
Underwriters will complete the Deephaven Benefit for Borrower Worksheet to ensure compliance with
the Deephaven benefit to borrower policy. Files must contain documentation supporting the acceptable
benefit.
Additional restrictions apply if the new loan refinances an existing loan considered to be a special mortgage.
A special mortgage is originated, subsidized, or guaranteed by or through a state, tribal, or local government,
or nonprofit organization that either bears a below-market interest rate at the time the loan was originated
or has nonstandard payment terms beneficial to the borrower, such as payments that vary with income, are
limited to a percentage of income, or where no payments are required under specified conditions.
If the borrower will lose one or more of the benefits of the special mortgage, then both of the following
apply:
Underwriter must check that the loan complies with all applicable state and local laws as well as laws
associated with the subject special loan program for compliance; and
Underwriter must take special care to ensure a net tangible benefit to the borrower
3.3.3 PROPERTIES LISTED FOR SALE
To be eligible for either a rate/term or a cash-out refinance, the subject property must be taken off the
market on or before application date. The borrower must also confirm in writing the reason for the prior
listing and intent to occupy the subject property.
For cash-out transactions, if the subject property was listed for sale in the 6 months prior to application
date, a 10% LTV reduction from the maximum available for the specific transaction is required.
The lesser of the most recent list price or the current appraised value should be used to determine loan-
to-value for both rate/term and cash-out transactions.
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3.4 RATE/TERM REFINANCE
A rate/term refinance is the refinancing of an existing mortgage for the purpose of changing the interest and/or
term of a mortgage without advancing new money on the loan.
The mortgage amount for a rate/term refinance is limited to the sum of the following:
Existing first mortgage payoff
Closing costs and prepaid items (interest, taxes, insurance) on the new mortgage
The amount of any subordinate mortgage liens used in their entirety to acquire the subject property
(regardless of seasoning)
The amount of a home equity line of credit in first or subordinate lien position that was used in its
entirety to acquire the subject property (regardless of seasoning)
Any subordinate financing that was not used to purchase the subject property provided:
For closed end seconds, the loan is at least one year seasoned as determined by the time between the
note date of the subordinate lien and the application date of the new mortgage
For HELOCs and other open-ended lines of credit, the loan is at least one year seasoned and there have
been less than $2,000 in total draws over the past 12 months
If the most recent first mortgage transaction on the property was a cash-out refinance within the last 6 months,
the new mortgage is not eligible as a rate/term and must proceed as a cash-out refinance. Note date to note
date is used to calculate the 6 months.
On rate/term transactions, the borrower may only receive cash back in an amount that is the lesser of 2% of
the new mortgage balance or $2,000.
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3.5 CASH-OUT REFINANCE
A cash-out refinance is a refinance that does not meet the rate/term refinance definition. Cash-out would include
a refinance where the borrower receives cash from the transaction or when an open-ended subordinate lien
(that does not meet the rate/term seasoning requirements) is refinanced into the new transaction.
A mortgage taken out on a property previously owned free and clear is always considered a cash-out refinance.
The mortgage amount for a cash-out refinance transaction may include any of the following:
Existing first mortgage payoff
Closing costs and prepaid items (interest, taxes, insurance) on the new mortgage
The amount of any subordinate mortgage liens being paid off that do not meet seasoning and draw
history requirements as described in 3.4 Rate/Term Refinance
The amount of any non-mortgage related debt paid off through closing
Additional cash in hand reflected on the settlement statement
A signed letter from the borrower disclosing the purpose of the cash-out must be obtained on all cash-out
transactions. The purpose of the cash-out should also be reflected on the loan application.
3.5.1 SEASONING
For all cash-out refinance transactions, a minimum of 6 months must have elapsed since the most recent
mortgage transaction on the subject property (either the original purchase transaction or subsequent
refinance). Note date to note date is used to calculate the 6 months. See also
3.3.1 Determining Loan-to-
Value for calculating LTV.
There is no waiting period if the borrower acquired the property through an inheritance or was legally
awarded the property through divorce, separation, or dissolution of a domestic partnership. See also
3.9
Inherited Properties and Property Buyouts.
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3.5.2 DELAYED FINANCING
Cash-out on properties purchased by the borrower with cash and owned less than 6 months is allowed.
The following requirements apply:
Original transaction was an arm’s-length transaction
Settlement statement from purchase confirms no mortgage financing used to acquire subject
Source of funds used for purchase documented (gift funds may not be included)
New loan amount can be no more than the actual documented amount of the borrower's initial
investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on
the new mortgage loan
All other cash-out refinance eligibility requirements must be met
3.5.3 CASH-OUT LIMITS
See applicable Deephaven Matrix
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3.6 TEXAS HOME EQUITY LOANS
A Texas Section 50(a)(6) mortgage is a home equity loan originated under the provisions of Article XVI, Section
50(a)(6), of the Texas Constitution, which allow a borrower to take equity out of a homestead property under
certain conditions.
All Texas Home Equity must comply with the more restrictive of the Deephaven Wholesale Underwriting
Guidelines or Section 3.6 Texas Home Equity Loans
.
3.6.1 SELLER CERTIFICATION
Deephaven will ensure that mortgages originated by Deephaven meet the following requirements, with
respect to all Texas Section 50(a)(6) provisions:
All Texas Section 50(a)(6) mortgages were (or will be) originated pursuant to written processes and
procedures that comply with the provisions of the Texas Constitution applicable to mortgage loans
authorized by Section 50(a)(6), Article XVI of the Texas Constitution, as amended from time to
time.
Deephaven has in place a specific process for the receipt, handling, and monitoring of notices from
borrowers (if received) that Deephaven failed to comply with the provisions of the law applicable
to Texas Section 50(a) (6) mortgages. Such process must be adequate to ensure that Deephaven
will correct the failure to comply by one of the authorized means no later than the 60th day after
the date the seller is notified of the failure to comply by the borrower.
An attorney familiar with the provisions of Section 50(a)(6), Article XVI of the Texas Constitution
was consulted (or will be consulted prior to origination of the Texas Section 50(a)(6) mortgages) in
connection with the development and implementation of the processes and procedures used for the
origination of the Texas Section 50(a)(6) mortgages.
To ensure ongoing compliance with the law applicable to mortgage loans authorized by Section 50(a)
(6), Article XVI of the Texas Constitution, the processes and procedures used for the origination of
the Texas Section 50(a)(6) mortgages will be reviewed by Deephaven regularly and will be updated
and revised, as appropriate pursuant to clarifications of the law, on a regular and continual basis.
Deephaven certifies that it is lawfully authorized to make loans described by Section 50(a)(6), Article
XVI, of the Texas Constitution.
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3.6.2 GENERAL REQUIREMENTS
The following parameters apply to Texas Section 50(a)(6) mortgages:
Fixed 30 product (fully amortized only)
Full Documentation and Alternative Income Documentation allowed
Maximum LTV/CLTV 80/80%
1-unit properties only
3.6.3 LOAN PARAMETERS
The following are considered Texas Section 50(a)(6) loans:
Loans using proceeds to pay off an existing 50(a)(6) loan (as identified in title work)
Loans using proceeds to pay off federal tax debt liens
Loans using proceeds to pay property tax liens on the property securing the new loan
Loans using proceeds to pay off or pay down debts that are not secured by the homestead property
Loans with any cash back to the borrower
The following are NOT considered Texas Section 50(a)(6) loans:
Loans using proceeds to pay current taxes due on the property securing the loan
Loans using proceeds to buy out equity pursuant to a court order or agreement of the parties
(usually applies to a divorce settlement)
Loan proceeds used to pay a prepayment penalty assessed on an existing non-50(a)(6) loan, and the
prepayment is included in the payoff amount (new loan must have a new title policy issued without
exception to the financing of the prepayment fee)
Loans that include the payment of HOA dues, if title company requires them to be paid
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3.6.4 RESTRICTIONS
The following restrictions apply to Texas Home Equity loans:
Texas Home Equity loans may not be refinanced more than once a year (>12 months)
There can be only one outstanding 50(a)(6) loan on a property at any given time
If the borrower has an existing 50(a)(6) second lien and is getting cash-out from the first mortgage,
that lien must be paid off
The 50(a)(6) loan may not be used to acquire the property or to finance construction
3.6.5 OCCUPANCY
Texas Home Equity loans are allowed on primary residences only. All borrowers on the loan must be in
title and occupy the subject property as their primary residence.
Cash-out transactions in the state of Texas are not permitted on 2
nd
homes. Cash-out transactions on
investment properties in Texas are permitted under the DSCR Program
.
3.6.6 BORROWERS
The following borrowers are permitted on Texas Home Equity loans. All borrowers must maintain primary
occupancy in the subject property:
U.S. Citizens
Permanent Resident Aliens
Non-Permanent Resident Aliens
The following borrowers are not allowed:
Co-signer(s)
Non-occupant co-borrowers
Borrowers not on title
Corporations, partnerships, or LLCs
Trusts
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3.6.7 NON-BORROWING SPOUSE
A married borrower may not create a lien against the property unless his/her spouse consents to the lien
by signing the following:
Notice Concerning Extension of Credit
Security Instrument (including any Riders)
Federal Truth-in-Lending (TIL) Disclosure Statement
Right of Rescission Notice
Discount Point Disclosure
Acknowledgment of Fair Market Value
Premium Pricing Disclosure
All owners must sign the application and the Notice Concerning Equity Loan Extension of Credit
(English or Spanish). The signing of both documents starts the 12-day ‘cooling off’ period.
Notice of Presentment of CD One Day Before Closing
Texas Home Equity Affidavit and Agreement
Owner’s Affidavit of Compliance
Receipt of Copies of Documents
Certificate of Non-Cancellation of Loan
An owner-in-title (whether a spouse or individual) must sign the application and Texas Home Equity Notice
(English or Spanish) at the time of application, along with all appropriate documentation.
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3.6.8 REFINANCING AN EXISTING HOME EQUITY LOAN
Effective for loans made on or after 1/1/18, existing home equity loans (as identified in title work) may be
refinanced as non-home equity loans and secured with a lien against the home, provided the following
conditions are met:
the refinance occurs at least a year after the home equity loan was closed;
the additional loan amount only covers the actual costs of the refinancing, and does not provide the
consumer with additional funds;
the value of the new loan combined with the total of the outstanding principal balances of all other
valid indebtedness secured by the homestead does not exceed 80% of the fair market value of the
homestead on the date the extension of credit is made; and
Deephaven provides the homeowner the written notice (required by and promulgated under
Section (f)(2)(D) and referenced below) on a separate document no later than the third business
day after the date the owner submits the loan application and at least 12 days before the closing of
the refinance.
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The ‘Notice Concerning Refinance of a Texas Home Equity Loan Pursuant to Subsection (f)(2) of Article
XVI, Section 50 of the Texas Constitution’, must be provided to the owner:
Note: All the above requirements must be met in order for the home equity loan to be refinanced as a non-
home equity loan.
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3.6.9 12-DAY COOLING OFF PERIOD
The Notice Concerning Equity Loan Extension of Credit must be provided to the borrower in English and
an additional copy of the notice translated into the written language in which the discussions were
conducted. To ensure the disclosure is provided to the borrower in the correct language, the loan officer
must add a comment to the Loan Submission form identifying the language spoken. The processor must
properly identify the language spoken when ordering documents.
Loan may not be closed until at least 12 calendar days after the borrower has dated and signed the
initial application and Notice Concerning Equity Loan Extension of Credit.
E-consent signatures are acceptable
The "cooling off" period in which the borrowers, owners-in-title, and/or spouse (including non-
borrowing spouse) can change his/her mind about the Texas Home Equity first mortgage runs from
the later of:
o The date the initial loan application is signed, or
o The date that the Notice Concerning Equity Loan Extension of Credit is signed and dated
by the borrowers, owners-in-title, and/or spouse.
3.6.10 PAYOFF OF DEBT
Deephaven may require the payoff of the existing first lien as part of the loan approval when the following
requirements are met:
Deephaven may not require any other Deephaven -owned debt be paid off as part of the transaction
as a condition of loan approval.
If the payoff of debts to other sellers/creditors is required in order to qualify the borrower, then
those payoffs must be shown on the settlement statement and disbursed directly to the creditor by
the title company.
Debts that are elected to be for paid off by the borrower but are not required to be paid off in
order to qualify the borrower, may be disbursed directly to the borrower.
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3.6.11 SECONDARY FINANCING
New subordinate financing is not allowed, but existing subordinate financing may remain in place. See 10.3.15
Secondary/Subordinate Financing. Existing subordinate financing is subject to the following:
Second lien must be re-subordinated
Maximum 80% CLTV
Second lien may not be a HELOC or a reverse mortgage
3.6.12 PROPERTY CHARACTERISTICS
All properties must be residential in nature. Tax certification and exemptions for the property are to be
reviewed and must meet the following requirements:
Property must be a principal residence constituting the borrower's homestead in state of Texas.
The homestead property may not exceed the applicable acreage limit as determined by Texas law.
All separate structures must be included in the homestead exemption.
The homestead parcel, as identified on the county appraisal district records, must include
ingress/egress to a properly identified public road.
The new lien may only be secured by the homestead parcel and the market value for LTV calculation
can only be assessed on that parcel.
Properties are subject to all other property and appraisal requirements detailed in the Deephaven
Wholesale Underwriting Guidelines.
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3.6.13 URBAN AND RURAL HOMESTEAD DEFINITIONS
TEXAS HOME EQUITY HOMESTEAD DEFINITIONS
URBAN HOMESTEAD DEFINITION RURAL HOMESTEAD DEFINITION
ACREAGE
Acreage securing the loan may not exceed 10
acres.
Acreage may exceed 10 acres. However, the lot size
must be typical and common with highest and best
use as residential. In no case may the lot size exceed
20 acres.
PROPERTY
LOCATION
AND
SERVICES
Property must be located:
- Within municipal boundaries, or
- Its extraterritorial jurisdiction, or
- A platted subdivision and be served by police
protection, paid or volunteer fire protection, and
at least three of the following services provided
by a M
unicipality or under contract to a
municipality:
Electric
Natural gas
Sewer
Storm sewer
Water
The prop
erty is not located within municipal
boundaries or its extraterritorial jurisdiction, or if
the property is located in one of those types of areas:
- It is not served by police protection or paid or
volunteer fire protection provided by the
municipality or under contact to a municipality, and
-
The municipality provides directly or under
contract less than three (3) of the following services:
Electric
Natural gas
Sewer
Storm sewer
Water
Properties determined to be ‘Urban’ cannot exceed 10 acres. Property determined to be ‘Rural’ may not
exceed 20 acres. The property should conform to and be acceptable in the market area. The appraisal must
include the actual size of the site and not a portion of the site.
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3.6.14 CLOSING REQUIREMENTS
3.6.14.1 ATTORNEY REVIEW
All documents will be reviewed by Black, Mann, and Graham, LLP prior to sending the closing package
to the settlement agent for closing.
3.6.14.2 CLOSING DISCLOSURE AND FINAL LOAN APPLICATION
The final Closing Disclosure (CD) and a copy of the final loan application must be delivered to/accepted
by the borrower(s) during normal business hours. Deephaven is responsible for ensuring all timing
requirements under Regulation Z and state law are complied with.
Borrower must sign the Acknowledgment of Itemization of Fees, Points, Interest, Costs and Charges
for Texas Home Equity Loan or Line of Credit to evidence their receipt of the final Closing Disclosure
and loan application.
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3.6.14.3 POINTS AND FEES
Borrower paid fees are limited to 2% of the principal balance (including the origination fee). The
following are not included in the 2% limitation:
Lender-paid closing costs
Per diem interest
Bona fide discount points used to reduce the interest rate
Escrow/impound funds
Appraisal fee paid to third-party appraiser
Surveys (completed by state registered or licensed surveyors)
A state base premium for a mortgagee policy of title insurance with endorsements established
in accordance with state law; or if a mortgagee title policy is not issued, a title examination
report (if cost is less than the state base premium for a mortgagee title policy without
endorsements)
If borrowers are paying discount points, the borrowers, owners-in-title and/or spouse must execute
the TX Home Equity Discount Point Acknowledgment.
Only fees which are allowed by State Law and RESPA/ECOA regulatory guidelines can be charged to
the borrower and MUST be accurate and reflected on the Loan Estimate (LE) and the Closing
Disclosure (CD).
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3.6.14.4 POWER OF ATTORNEY
Power of Attorney is not allowed.
3.6.14.5 SURVEY
Surveys are required on all Texas Home Equity transactions to ensure the following:
Confirm lot size
Evidence homestead property and any adjacent land are separate
Evidence of homestead and property is a separately platted and subdivided lot for which full
ingress and egress is available
Properties must be served by municipal utilities, fire, and police protection
Homestead must be separate parcel within permissible acreage
3.6.14.6 TITLE
A title insurance policy written on Texas Land Title Association forms (standard or short) including
T42 and T42.1 endorsements is required.
For self-employed borrowers operating a business from the homestead property, the title company
must issue a T42.1 endorsement without exception or deletion.
Title may not include language that:
excludes coverage for a title defect that arises because financed origination expenses are held
not to be “reasonable costs necessary to refinance”; or
defines the “reasonable costs necessary to refinance” requirement as a “consumer credit
protection” law since the standard title policy excludes coverage when lien validity is
questioned due to a failure to comply with consumer credit protection laws.
Loans must be closed in a Texas title company’s office or attorney’s office. No mobile notaries are
permitted.
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3.6.15 TEXAS HOME EQUITY DOCUMENTS
The following additional Texas Home Equity specific documents must be included in the closing package:
Notice Concerning Extension of Credit Defined by Section 50(a)(6) (signed by each owner of the
property and each spouse of an owner)
Acknowledgment of Fair Market Value of Homestead Property (borrower and seller must sign at
closing with an appraisal attached to the Acknowledgment)
Notice of Right to Cancel (signed by each owner of the property and each spouse of an owner)
Texas Home Equity Security Instrument (Form 3044.1)
Texas Home Equity Note (Form 3244.1)
Texas Home Equity Affidavit and Agreement (Form 3185)
Texas Home Equity Condo Rider (Form 3140.44), if applicable
Texas Home Equity PUD Rider (Form 3150.44), if applicable
Texas Home Equity Certificate from Originating Lender’s Regarding Compliance with Section
50(a)(6) Article XVI of the Texas Constitution signed by the Seller’s Attorney
Texas Home Equity Discount Point Acknowledgment, if applicable
Affidavit of Non-Homestead for all other dwellings, if borrower owns more than one
Detailed closing instruction letter acknowledged by title company (Compliance Requirements for
Texas Home Equity Loans)
Note for any re-subordinating second (cannot be an (a)(6) Note, a new loan or a HELOC) with
subordination agreement, if applicable
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3.7 FLIP TRANSACTIONS
When the subject property is being resold within 365 days of its acquisition by the seller and the sales price has
increased more than 10%, the transaction is considered a “flip”. To determine the 365-day period, the acquisition
date (the day the seller became the legal owner of the property) and the purchase date (the day both parties
executed the purchase agreement) should be used.
Flip transactions are subject to the following requirements:
All transactions must be arm’s length, with no identity of interest between the buyer and property seller
or other parties participating in the sales transaction
No pattern of previous flipping activity may exist in the last 12 months. Exceptions to ownership transfers
may include newly constructed properties, sales by government agencies, properties inherited or
acquired through divorce, and sales by the holder of a defaulted loan
The property was marketed openly and fairly, through a multiple listing service, auction, for sale by
owner offering (documented) or developer marketing
No assignments of the contract to another buyer
If the property is being purchased for more than 5% above the appraised value, a signed letter of
acknowledgement from the borrower must be obtained
An additional appraisal product is required. See 11.7.5 Appraisal Review Process
Flip transactions must comply with the HPML appraisal rules in Regulation Z. The full Reg Z revisions can be
found at
http://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/appraisals-higher-priced-
mortgage-loans/. A second appraisal is required in the following circumstances:
Greater than 10% increase in sales price if seller acquired the property in the past 90 days
Greater than 20% increase in sales price if seller acquired the property in the past 91-180 days
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3.8 NON-ARM’S LENGTH TRANSACTIONS
Non-arm’s length transactions involve a direct relationship outside of the subject transaction between a
borrower and a party to the loan. The appraiser must be informed of the relationship and address any impact
on market value.
Examples of non-arm’s length transactions include, but are not limited to, the following:
Family member sales
Renters purchasing from current landlord
Buyer trading properties with the seller
Property seller foreclosure bailouts
Existing buyer relationship with loan officer, real estate agents, closing agent, appraiser, builder, or
developer
Non-arm’s length transactions are subject to all of the following requirements:
Primary residence only
Relationship must be fully disclosed
An appraisal review product
is required
Borrower to provide a written explanation stating relationship to the seller and reason for purchase
Borrower to provide a copy of the canceled earnest money check paid to the property seller
Deephaven must be satisfied that the transaction makes sense and that the borrower will occupy the
property
All liens on title to be paid in full and reflected on the settlement statement
Lesser of sales price or current appraised value to be used to calculate the LTV
Borrowers cannot provide services on transaction (closing agent, title agent, appraiser, etc.)
Borrower may not be an owner of a business entity selling the subject property
The following additional requirements apply only to family sales:
Payment history for the seller’s mortgage on the subject property must be obtained and show no pattern
of delinquency within the past 12 months (if applicable)
Verification that the borrower has not been in title to the property in the past 24 months
Gift of equity
is permitted.
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3.9 INHERITED PROPERTIES AND PROPERTY BUYOUTS
Refinances of inherited properties and properties legally awarded to the borrower (divorce, separation, or
dissolution of a domestic partnership) are allowed. If the subject property was acquired < 12 months prior to
loan closing, the transaction is considered a cash-out.
These transactions are subject to the following:
Written agreement signed by all parties stating the terms of the buyout and property transfer must be
obtained
Equity owners must be paid through settlement
Subject property has cleared probate and property is vested in the borrower’s name
Current appraised value is used to determine loan-to-value
3.10 LAND CONTRACT/CONTRACT FOR DEED
When the proceeds of a mortgage transaction are used to pay off the outstanding balance on a land contract
that was executed more than 12 months prior to the date of the loan application, the transaction is considered
rate/term refinance.
If the land contract was executed within 12 months of the date of the loan application, the transaction is
considered a purchase.
The following requirements apply:
Primary residence only
Copy of fully executed land contract and payoff(s) to be obtained
Copies of canceled checks for 12 months (or term of the lease if less) as evidence of timely payments
If the land contract was executed less than 12 months ago, the borrower’s previous housing payment
history must also be verified to complete a completed 12-month history
Liens on title to be paid in full and reflected on settlement statement at closing
If the contract was executed less than 12 months ago, the lesser of the purchase price or the current
appraised value must be used to determine LTV. The current appraised value may be used to determine
LTV if the land contract was executed over 12 months ago.
Cash-out and non-arm’s length transactions not eligible
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3.11 LEASE WITH PURCHASE OPTION
Lease with purchase option transactions are allowed for primary residences only. Borrowers may apply a portion
of the rent paid to their down payment requirements. See 10.3.12 Rent Credit for Lease with Purchase Option
for detailed requirements.
For lease with purchase option transactions, the file must contain:
Copy of fully executed rental/purchase agreement verifying monthly rent and the specific terms of the
lease; and
Copies of canceled checks for 12 months (or term of lease if less) as proof of rental payments
3.12 PERMANENT FINANCING FOR NEW CONSTRUCTION
The conversion of construction-to-permanent financing involves the granting of a long-term mortgage to a
borrower to replace interim construction financing obtained by the borrower to fund the construction of a new
residence. The borrower must hold title to the lot, which may have been previously acquired or purchased as
part of the transaction.
When a refinance transaction is used, the borrower must have held legal title to the lot before he/she applied
for the construction financing and must be named as the borrower for the construction loan.
A construction-to-permanent transaction may be closed as a purchase, rate/term refinance or cash-out refinance.
All construction work must be complete. See 11.8.18 New Construction
.
For lots owned ≥12 months from application date for the subject transaction, LTV is based on the
current appraised value.
For lots owned < 12 months from application date for subject transaction, LTV is based on the lesser of
the current appraised value of the property or the total acquisition costs (sum of construction costs and
purchase price of lot).
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4 BORROWERS
A borrower is a credit applicant who will have ownership interest in the subject property, sign the security
instrument, and sign the mortgage/deed of trust and note. If two or more individuals own the property jointly,
and are jointly and severally liable for the note, all are considered to be borrowers. While only individuals may
act as borrowers, a related Business Entity or Inter Vivos Revocable Trust may have an ownership interest
through title to the subject property under certain circumstances as enumerated in Sections 4 and 14.
4.1 CUSTOMER IDENTIFICATION PROGRAM (CIP)
The USA Patriot Act requires banks and financial institutions to verify the name, date of birth, address and
identification number of all borrowers. Brokers are to follow the published CIP procedures for each borrower
to ensure the true identity of all borrowers has been documented. Deephaven will also require settlement
agents to verify identity at the time of closing on all loans.
4.2 FRAUD REPORT AND BACKGROUND CHECK
All loans must include a third-party fraud detection report for all borrowers. Report findings must cover standard
areas of quality control including, but not limited to: borrower validation, social security number verification,
criminal records, and property information (subject property and other real estate owned). All high-level alerts
on the report must be addressed by Deephaven.
If the Broker cannot electronically access the fraud report to clear high-level alerts within the fraud provider’s
system, an Underwriter’s Certification from the Broker is acceptable. The Certification must address each
individual high alert and explain what actions were taken to satisfy the issues. It must be signed and dated by a
member of the Broker’s underwriting staff or operations management personnel.
In addition to the fraud and background check requirements, Deephaven will upload, as a matter of file
documentation, any unsuccessful fraud report return if the background check is not available. The fraud check
should also include occupancy status to assist in the validation and endorsement of the Business Purpose &
Occupancy Affidavit.
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4.3 U.S. CITIZENS
U.S. citizens are eligible for financing.
4.4 PERMANENT RESIDENT ALIENS
A permanent resident alien is a non-U.S. citizen authorized to live and work in the U.S. on a permanent basis.
Permanent resident aliens are eligible for financing.
Acceptable evidence of lawful permanent residency must be documented and meet one of the following criteria:
I-151 – Permanent Resident Card (Green Card) that does not have an expiration date
I-551 – Permanent Resident Card (Green Card) issued for 10 years that has not expired
I-551 – Conditional Permanent Resident Card (Green Card) issued for 2 years that has an expiration
date, as long as it is accompanied by a copy of USCIS Form I-751 requesting removal of the conditions
Un-expired Foreign Passport with an un-expired stamp reading as follows: “Processed for I-551
Temporary Evidence of Lawful Admission for Permanent Residence. Valid until mm-dd-yy. Employment
Authorized.”
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4.5 NON-PERMANENT RESIDENT ALIENS
A Non-Permanent Resident Alien is a non-U.S. citizen authorized to live and work in the U.S. on a temporary
basis. Non-Permanent Resident Alien borrowers are eligible for all products and programs available on the
applicable Deephaven Matrix.
4.5.1 VERIFICATION OF RESIDENCY STATUS
The following visa classifications are allowed as Non-Permanent Resident Aliens:
E-1, E-2, E-3
G-1 through G-5
H-1B & C, H-2 through H-4
L-1B, L-2
NATO 1 through 6
O-1
R-1
TN-1 & 2 (NAFTA)
Copies of the borrower’s passport and unexpired visa must be obtained. Acceptable alternative
documentation to verify visa classification is an I-797 form (Notice of Action) with valid extension dates and
an I-94 form (Arrival/Departure Record). Borrowers unable to provide evidence of lawful residency status
in the U.S. are not eligible for financing.
A valid employment authorization document (EAD) must be obtained if the visa is not sponsored by the
borrower’s current employer. If the visa will expire within 6 months of loan application, it is acceptable to
obtain a letter from the employer documenting the borrower’s continued employment and continued visa
renewal sponsorship (employer on the loan application must be the same as on the unexpired visa).
If a non-U.S. citizen is borrowing with a U.S. citizen, it does not eliminate visa or other residency
requirements. Individuals in possession of spouse or family member visas are to qualify as co-borrowers
only. A valid EAD must be provided to use income for qualification.
Borrowers who are residents of countries which participate in the State Department’s Visa Waiver Program
(VWP) will not be required to provide a valid visa. Participating countries can be verified through the U.S.
Department of State website at
https://travel.state.gov/content/travel/en/us-visas/tourism-visit/visa-waiver-
program.html.
Citizens of Venezuela are ineligible for Deephaven programs.
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4.5.2 CREDIT REQUIREMENTS
A U.S. credit report is required for each borrower using a valid Social Security number. The primary wage-
earner must qualify using Standard Tradelines as outlined in 5.4 Tradeline Requirements
. A 12-month
housing history is also required. See 5 Credit Analysis for complete credit requirements.
4.5.3 INCOME/EMPLOYMENT REQUIREMENTS
Standard guidelines apply for verifying income and employment of Non-Permanent Resident Aliens.
4.5.4 ASSETS
All funds required for down payment, closing costs, and reserves on Non-Permanent Resident Alien
transactions must be seasoned for 60 days. See 7.3 Asset Documentation
. Foreign assets deposited into a
U.S. institution within 60 days of application are acceptable if there is evidence that the funds were
transferred from the country from which the borrower previously or currently resides. It must also be
established that the funds belonged to the borrower before the date of transfer.
Assets required for closing (down payment and closing costs) must also be seasoned in a U.S. depository
institution for 30 days prior to closing.
Borrowers must have 6 months of PITIA reserves for the subject property.
Assets held in a foreign account can be used for reserves. The most recent 30-day account statement is
required, and funds are to be converted to U.S. dollars using the current exchange rate. A letter of reference
on company letterhead from a verifiable banking institution may also be obtained. Contact information must
be provided by the person signing the letter, and the letter must state the type of relationship, length of the
relationship, how accounts are held, and current balance. Any translation must be signed and dated by a
certified translator.
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4.6 ITIN BORROWERS
Individual Taxpayer Identification Number (ITIN) borrowers are individuals with an ITIN who reside and work
within the United States but do not possess U.S. citizenship. ITIN borrowers are eligible for primary and second
home occupancy under select products and programs of the Non-Prime Program only. See the Deephaven Non-
Prime Matrix for additional information and restrictions.
4.6.1 VERIFICATION OF RESIDENCY STATUS
The following documentation is required for all ITIN borrowers:
• Unexpired ITIN card or letter from IRS assigning the ITIN to the borrower prior to application
• Unexpired government photo ID (driver’s license, passport, visa, etc.)
• Supplemental documentation consisting of one item from both Group A and Group B:
o Group A: birth certificate, tax return, W-2, tax bill, social security card, utility bill
o Group B: Employment Authorization Document (EAD), green card, work visa, entry
stamps, I-551 stamps
If a non-U.S. citizen is borrowing with a U.S. citizen, it does not eliminate the residency requirements listed
above. Citizens of Venezuela are ineligible for Deephaven programs.
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4.6.2 CREDIT REQUIREMENTS
A U.S. credit report is required for each borrower using a valid ITIN number. The primary wage-earner
must qualify using Standard Tradelines as outlined in 5.4 Tradeline Requirements
. Limited Tradeline are not
allowed. A 12-month housing history is also required. See 5 Credit Analysis for complete credit
requirements.
4.6.3 INCOME/EMPLOYMENT REQUIREMENTS
Standard guidelines apply for verifying income and employment of ITIN borrowers.
4.6.4 ASSETS
All funds required for down payment, closing costs, and reserves on ITIN transactions must be seasoned
for 60 days. See 7.3 Asset Documentation
. Foreign assets deposited into a U.S. institution within 60 days of
application are acceptable if there is evidence that the funds were transferred from the country from which
the borrower previously or currently resides. It must also be established that the funds belonged to the
borrower before the date of transfer.
Assets required for closing (down payment and closing costs) must also be seasoned in a U.S. depository
institution for 30 days prior to closing.
Borrowers must have 6 months of PITIA reserves for the subject property.
Assets held in a foreign account can be used for reserves. The most recent 30-day account statement is
required, and funds are to be converted to U.S. dollars using the current exchange rate. A letter of reference
on company letterhead from a verifiable banking institution may also be obtained. Contact information must
be provided by the person signing the letter, and the letter must state the type of relationship, length of the
relationship, how accounts are held, and current balance. Any translation must be signed and dated by a
certified translator.
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4.7 EXCLUSIONARY LIST/OFAC/DIPLOMATIC IMMUNITY
All parties involved on each transaction must be screened through exclusionary lists used by Deephaven. The
Broker should apply its exclusionary list policy to any loans originated under these guidelines.
Parties to the transaction must also be cleared through OFAC’s SDN List (borrowers, property sellers,
employers, banks, etc.). A search of the Specially Designated Nationals and Blocked Persons List may be
completed via the U.S. Department of the Treasury website: https://sanctionssearch.ofac.treas.gov/
Borrowers from OFAC sanctioned countries are ineligible. Access the link below for a list of sanctioned
countries: http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx
Individuals with diplomatic immunity are not eligible due to the inability to compel payment or seek judgment.
Verification the borrower does not have diplomatic immunity can be determined by reviewing the visa, passport,
and/or the U.S. Department of State’s Diplomatic List at http://www.state.gov/s/cpr/rls/
.
4.8 CO-BORROWERS
Co-borrower is often used to describe any borrower other than the first borrower whose name appears on
the note. All borrowers are evaluated on their ability to meet credit requirements and underwriting and eligibility
standards. All co-borrowers must occupy and take title to the subject property. A related Business Entity or
Inter Vivos Revocable Trust may have an ownership interest in title to the subject property as enumerated in
Section 4 and Section 14. Co-borrowers may not be an interested party to the transaction. Possible examples
include, but are not limited to, property seller, builder, realtor, appraiser (a buyer who also acts as their own
buying agent is generally permitted.)
4.9 NON-OCCUPANT CO-BORROWERS
Non-occupant co-borrowers are allowed. Pricing and eligibility are based upon the credit score of the occupying
borrower. The following requirements must be met:
Primary occupancy only
Purchase and rate/term only (non-occupant must be on the current mortgage for a rate/term refinance)
Non-occupant co-borrower must be an immediate relative
Max 80% LTV
Max 60% DTI (occupying borrower only)
Max 43% DTI (total for all borrowers combined)
Max loan amount $1,000,000
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4.10 FIRST-TIME HOME BUYERS
A First-Time Home Buyer is defined as a borrower who had no ownership interest in a residential property in
the United States during the preceding 3-year period.
First-Time Home Buyers are allowed on primary residence and second home transactions only.
If a borrower has not owned a property in the last 3 years but can document ownership in the preceding 5-year
period, the above criteria are waived.
4.11 EMPLOYEES OF BROKER
Loans to employees of the Broker are allowed. Transactions must meet the following requirements:
Primary residence and second homes only
Loan must adhere to non-arm’s length transaction guidelines
Officers of the Broker are permitted on an exception basis only
4.12 LIMITED POWER OF ATTORNEY
A Limited Power of Attorney (POA) is acceptable when following requirements are met:
POA is specific to the transaction
Recorded with the mortgage/deed of trust
Contains an expiration date
Used only to execute the final loan documents
Borrower who executed the POA signed the initial 1003
No interested party to the transaction (such as property seller, broker, loan officer, realtor, etc.) may
act as Power of Attorney
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4.13 VESTING AND OWNERSHIP
4.13.1 FEE SIMPLE OWNERSHIP
Acceptable forms of vesting with Fee Simple ownership are:
Individuals
Joint Tenants
Tenants in Common
Inter Vivos Revocable Trust
Business Entity
o Limited Liability Company (LLC)
o Limited and General Partnerships
o Corporations
o S Corporations
Note: Only individuals can act as borrowers. The other entities listed above relate only to an ownership
interest in the subject property.
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4.13.1.1 INTER VIVOS REVOCABLE TRUST
Inter Vivos Revocable Trusts are allowed as vested or titled owners of the subject property (but not
as borrowers). The trust must be established by one or more natural persons, solely or jointly. The
primary beneficiary of the trust must be the individual(s) who establishing the trust. The trust must
become effective during the lifetime of the person establishing the trust.
If the trust is established jointly, there may be more than one primary beneficiary as long as the income
or assets of at least one of the individuals establishing the trust will be used to apply and qualify for the
mortgage.
The trustee must include either:
The individual establishing the trust (or at least one of the individuals, if 2 or more); or
An institutional trustee that customarily performs trust functions in and is authorized to act as
trustee under the laws of the applicable state.
The trustee must have the power to hold the title and mortgage the property. This must be specified
in the trust. One or more of the individual parties establishing the trust must use personal income or
assets to apply and qualify for the mortgage.
A copy of the trust is required, or a signed attorney’s opinion may be obtained in lieu of the trust
documents. The opinion letter must indicate that the trust meets all published requirements and must
also include the following:
Name of the trust
Date executed
Settler(s) of the trust
Whether it is revocable or irrevocable
Whether the trust has multiple trustees
Name of trustees
Manner in which vesting will be held
The attorney needs to also verify that the trust has not been revoked, modified, or amended in any
manner that would cause the representations to be incorrect.
The deed of trust/mortgage and all attached riders must be completed by the authorized trustee(s) of
the trust that is the vested owner of the subject property.
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4.13.1.2 BUSINESS ENTITY
Ownership or title vesting in the name of an LLC, partnership, or corporation (collectively ‘Entity’) is
acceptable on investment property transactions only. While only individual owners of the Entity must
qualify as the borrowers, ownership of the subject property may vest in an Entity.
To vest ownership in an Entity, the following requirements must be met:
Business purpose and activities are limited to ownership and management of real estate
Entity limited to a maximum of 4 owners (aka members, partners, or shareholders)
Each Entity owner must apply as the borrower and complete a l003 as an individual applicant.
The loan application, credit report, income and assets for each individual owner will be used
to determine qualification and pricing
Each Entity owner must receive notice of the loan and its terms prior to closing
The following Entity documentation must be provided:
Entity Articles of Organization, Partnership, and Operating Agreements (if applicable)
Tax Identification Number
Certificate of Good Standing
Certificate of Authorization for the person executing all documents on behalf of the Entity
Documents must be completed and signed as follows:
Business Purpose and Occupancy Affidavit – signed by each individual owner (submission and
closing)
Loan Application (1003) - completed and signed by each individual owner. 1003 section labeled
“Title will be held in what Name(s)” should be completed with only the Entity name.
Disclosures (GFE, TIL, Notice of Intent to Proceed, Servicing Disclosure, etc.) - completed
and signed by each individual owner
Closing Disclosure - completed and signed by each individual owner
Other Closing Documents (Final TIL, Business Purpose and Occupancy Affidavit, etc.) -
completed by the individual owners(s) of the Entity
Note – signed by each individual borrower
Deed of Trust/Mortgage and all attached Riders – must be completed by the authorized
owner(s) of the Entity who can legally sign and bind the Entity that is the vested owner of the
subject property
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4.13.2 LEASEHOLD ESTATE
Mortgages secured by properties on leasehold estates are acceptable in areas in which this type of property
ownership has received market acceptance. The mortgage must be secured by the property improvements
and the borrower’s leasehold interest in the land. See also 11.8.13 Leasehold Appraisal Requirements
.
The leasehold estate and the improvements must constitute real property, be subject to the mortgage lien,
and be insured by the lender’s title policy.
The leasehold estate and the mortgage must not be impaired by any merger of title between the lessor and
lessee. In the event the mortgage is secured by a sublease of a leasehold estate, the documents must provide
that a default under the leasehold estate will not by such default result in the termination of the sublease.
4.13.2.1 LEASE REQUIREMENTS
The following requirements must be met for leases associated with leasehold estate mortgage loans:
The term of the leasehold estate must run for at least five years beyond the maturity date of
the mortgage, unless fee simple title will vest at an earlier date in the borrower.
The lease must provide that the leasehold can be assigned, transferred, mortgaged, and sublet
an unlimited number of times either without restriction or on payment of a reasonable fee and
delivery of reasonable documentation to the lessor.
The lessor may not require a credit review or impose other qualifying criteria on any assignee,
transferee, mortgagee, or sublessee.
The lease must provide for the borrower to retain voting rights in any homeowners’
association.
The lease must provide that in addition to the obligation to pay lease rents, the borrower
will pay taxes, insurance, and homeowners’ association dues (if applicable), related to the
land in addition to those he or she is paying on the improvements.
The lease must be valid, in good standing, and in full force and effect in all respects.
The lease must not include any default provisions that could give rise to forfeiture or
termination of the lease, except for nonpayment of the lease rents.
The lease must include provisions to protect the mortgagee’s interests in the event of a
property condemnation.
The lease must provide lenders with
o the right to receive a minimum of 30 days’ notice of any default by the borrower, and
o the option to either cure the default or take over the borrower’s rights under the
lease.
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4.13.2.2 ADDITIONAL ELIGIBILITY REQUIREMENTS
The following requirements must be met before a leasehold estate mortgage may be originated:
All lease rents, other payments, or assessments that have become due must be paid.
The borrower must not be in default under any other provision of the lease nor may such a
default have been claimed by the lessor.
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4.13.2.3 OPTION TO PURCHASE FEE INTEREST
The lease may, but is not required to, include an option for the borrower to purchase the fee interest
in the land. If the option is included, the purchase must be at the borrower’s sole option, and there
can be no time limit within which the option must be exercised. If the option to purchase the fee title
is exercised, the mortgage must become a lien on the fee title with the same degree of priority that it
had on the leasehold. Both the lease and the option to purchase must be assignable.
ESTABLISHING LAND PURCHASE PRICE
STATUS OF PROPERTY
IMPROVEMENTS
PURCHASE PRICEOF LAND
Already constructed at the time
the lease is executed.
The initial purchase price should be established as the appraised value of the
land on the date the lease is executed.
Already constructed at the time the
lease is executed, and the lease is tied
to an external index, such as the
Consumer Price Index (CPI).
The initial land rent should be established as a percentage of the appraised
value of the land on the date that the lease is executed.
The purchase price may be adjusted annually during the term of the lease to
reflect the percentage increase or decrease in the index from the preceding
year.
Leases may be offered with or without a limitation on increases or decreases
in the rent payments.
Will be constructed after
the lease is executed
The purchase price of the land should be the lower of the following:
the current appraised value of the land, or
the amount that results when the percentage of the total original
appraised value that represented the land alone is applied to the
current appraised value of the land and improvements.
For example, assume that the total original appraised value for a property was
$160,000, and the land alone was valued at $40,000 (thus representing 25% of
the total appraised value). If the current appraised value is $225,000, $50,000
for land and $175,000 for improvements, the purchase price would be $50,000
(the current appraised value of the land, because it is less than 25% of
$225,000).
Note: If the lease is tied to an external index, the initial land value may not
exceed 40% of the combined appraised value of the land and improvements.
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4.14 MULTIPLE FINANCED PROPERTIES AND DEEPHAVEN EXPOSURE
There is no limit on the number of other properties borrowers may currently have financed. When the
transaction is for a 2
nd
home or investment property, 2 months of additional reserves for each financed property
is required.
Deephaven Mortgage exposure may not exceed $5M aggregate with a maximum of five loans for each individual
borrower. Exceptions to this policy will be reviewed on a case-by-case basis.
4.15 INELIGIBLE BORROWERS
The following borrowers are not eligible:
LLCs, partnerships, or corporations (may qualify for vesting only)
Borrowers with diplomatic immunity or otherwise excluded from U.S. jurisdiction
Residents of any country not permitted to transact business with US companies are ineligible (as
determined by any U.S. government authority)
Trusts or Land Trusts (trusts may qualify for ownership vesting only)
Borrowers less than 18 years old
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5 CREDIT ANALYSIS
5.1 EQUAL CREDIT OPPORTUNITY ACT, FAIR HOUSING ACT & STATE
FAIR LENDING LAWS
The Federal Equal Credit Opportunity Act prohibits lenders from discriminating against credit borrowers on the
basis of race, color, religion, national or ethnic origin, sex, marital or familial status, age (provided the borrower
has the capacity to enter into a binding contract), disability, because all or part of the borrower’s income is
derived from a public assistance program or because the borrower has, in good faith, exercised any rights under
the Consumer Credit Protection Act. State laws may also prohibit discrimination on certain additional basis such
as sexual orientation.
Similarly, the Fair Housing Act prohibits lenders from discriminating against mortgage borrowers on the basis of
race, color, religion, sex, familial status, national origin, or disability.
Deephaven expects Brokers originating loans submitted to Deephaven to adhere to the letter and spirit of
federal and state fair lending laws.
5.2 CREDIT REPORT
A credit report is required for every borrower. The credit report should provide merged credit information
from the 3 major national credit repositories. A valid Social Security number (SSN) is required for all borrowers
on the loan.
Either a three-bureau merged report or a Residential Mortgage Credit Report (RMCR) is required. The credit
report should include verification of all credit references provided on the loan application and must certify the
results of public record searches for each city where the individual has resided in the last 2 years.
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5.2.1 AGE OF CREDIT REPORT/CREDIT DOCUMENTATION
All credit documentation, including the credit report, may not be more than 90 days old at the time of
closing. A credit refresh report will be obtained by Deephaven within 10 days of the closing/note date.
5.2.2 FRAUD ALERTS
The three national credit repositories have developed automated messaging to help identify possible
fraudulent activity on a credit report. Examples of fraud alerts include:
Initial 90-day Fraud Alert
Extended Fraud Alert
Active-Duty Alert
HAWK Alert
All Fraud Alerts must be properly addressed and resolved. The actions must be reasonable and compliant
with applicable laws. An underwriting decision cannot be made without full resolution of the alert.
5.2.3 CREDIT REPORT SECURITY FREEZE
The credit report used to evaluate a loan may not reflect a security freeze and must be resolved prior to
an underwriting decision. If a borrower unfreezes his or her credit after the date the original credit report
was ordered, a new three-bureau merged report must be obtained to reflect current and updated
information from all repositories.
5.2.4 INQUIRIES
A signed letter of explanation from the borrower or creditor is required for all inquiries within the most
recent 90 days to determine whether additional credit was granted as a result of the borrower’s request.
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5.2.5 UPDATED PAYMENT HISTORIES
Payment histories may be requested directly from a creditor when the credit report indicates delinquencies
have been removed or when the majority of credit is from a non-institutional lender.
5.2.6 GAP CREDIT REPORT
Deephaven will pull a gap credit report within 10 days of closing.
5.3 CREDIT SCORE REQUIREMENTS
The primary wage-earner score is used as the Representative Credit Score for each loan. The primary wage-
earner must have a valid score from at least 2 of the following 3 agencies: Experian (FICO), TransUnion
(Empirica), and Equifax (Beacon). Only scores from these agencies are acceptable. Additional borrowers on the
loan must have at least one valid score of 620 or greater.
To determine the Representative Credit Score for the primary wage-earner, select the middle score when 3
agency scores are provided and the lower score when only 2 agency scores are provided.
When qualifying income amount is equal for all borrowers on the loan, the highest Representative Credit
Score of all borrowers will be used
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5.4 TRADELINE REQUIREMENTS
MINIMUM TRADELINES
OCCUPANCY TRADELINE HISTORY MINIMUM STANDARDS
STANDARD
TRADELINES
Primary and
Second Homes
3 tradelines reporting for 12+ months
with activity in last 12 months
or
2 tradelines reporting for 24+ months
with activity in last 12 months
**0X60 for most recent
12 months
Investment
*LIMITED
TRADELINES
Primary and
Second Homes
Does not meet minimum tradeline
requirements
N/A
*Limited Tradelines allowed only on the Non-Prime Program
**Applies only to tradelines being used to meet minimum number of trades
To qualify as a valid tradeline, the following requirements apply:
The credit line must be reflected on the borrower’s credit report
The account must have activity in the past 12 months and may be open or closed
Tradelines used to qualify may not exceed 0x60 in the most recent 12 months
An acceptable 12- or 24-month housing history not reporting on credit may also be used as a tradeline
Only the primary wage-earner must meet the minimum tradeline requirements listed above.
Credit lines on which the borrower is not obligated to make payments are not acceptable for establishing a
minimum history. Examples of unacceptable tradelines include loans in a deferment period, collection or charged-
off accounts, accounts discharged through bankruptcy, and authorized user accounts. Student loans can be
counted as tradelines as long as they are in repayment and are not deferred.
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5.4.1 STANDARD TRADELINES
Borrowers qualifying with Standard Tradelines are eligible for all occupancy types and programs.
5.4.2 LIMITED TRADELINES
The following requirements apply when qualifying with Limited Tradelines:
Non-Prime Program only
Primary residence and second homes
10% minimum borrower contribution
Minimum 6 months reserves after closing
When qualifying with Limited Tradelines, the lower of either the Representative Loan Score or a 620 score
is used to qualify the borrower on the Deephaven Non-Prime Matrix. The loan may be priced using the
actual Representative Loan Score.
5.4.3 INSUFFICIENT TRADELINES/NON-TRADITIONAL CREDIT
Insufficient tradelines and non-traditional credit is not allowed. Each borrower must have a valid and usable
score as defined in 5.3 Credit Score Requirements
.
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5.5 MORTGAGE AND RENTAL PAYMENT VERIFICATION
Mortgage and rental payments not reflected on the original credit report must be documented via an institutional
Verification of Rent or Verification of Mortgage (VOR/VOM). A combined total of all late mortgage and rental
payments in the past 12 months must be used to determine the housing history.
If the borrower is making payments to an individual or interested party, 10-12 of the last 12 months or the most
recent 6 months of cancelled checks or bank statements must be obtained. A VOR/VOM is not required but
may be requested for clarification.
All mortgages and rental payments should be current at time of closing. If the credit report or VOR/VOM reflects
a past-due status, updated documentation is required to verify account is current.
5.5.1 EXPANDED PRIME HOUSING VERIFICATION
See the Deephaven Expanded Prime Matrix for max allowable mortgage and rental payment lates.
5.5.2 NON-PRIME HOUSING VERIFICATION
See the Deephaven Non-Prime Matrix for max allowable mortgage and rental payment lates.
5.5.3 NO HOUSING HISTORY OR LESS THAN 12 MONTHS VERIFIED
Borrowers who do not have a complete 12-month housing history are subject to the following restrictions:
Primary residence and second homes only
Minimum 6 months reserves after closing
10% minimum borrower contribution
Payment Shock is not considered
VOR/VOM must be obtained for all months available reflecting paid as agreed
Properties owned free and clear are considered 0x30 for grading purposes.
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5.5.4 MORTGAGE MODIFICATION
A mortgage modification resulting in any of the attributes listed below is subject to Housing Event seasoning
guidelines under 5.14 Housing Events
:
Forgiveness of a portion of principal and/or interest on either the first or second mortgage
Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness
Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage
Conversion of any portion of the original mortgage debt from secured to unsecured
5.6 ROLLING LATE PAYMENTS
Rolling late payments are not considered a single event. Each occurrence of a contractual delinquency is
considered individually for loan eligibility.
5.7 PAST DUE ACCOUNTS
Past due consumer debts can be no more than 30 days past due at time of closing.
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5.8 DELINQUENT CREDIT BELONGING TO EX-SPOUSE
Delinquent credit belonging to an ex-spouse can be excluded from the credit evaluation when all of the following
apply:
Borrower provides a copy of the divorce decree or separation agreement which shows the derogatory
accounts belong solely to the ex-spouse
Late payments occurred after the date of the divorce or separation
Evidence of title transfer prior to any delinquent debt must be provided if debt is a mortgage, and
evidence of buyout as part of court proceedings
Collection accounts assigned to an ex-spouse may be excluded from aggregate collection totals with a divorce
decree or separation agreement assigning the account solely to the ex-spouse.
See also 6.6 Contingent Liabilities
.
5.9 LAWSUIT/PENDING LITIGATION
If the application, title, or credit documents reveal that the borrower is presently involved in a lawsuit or pending
litigation, a statement from the borrower’s attorney is required. The statement must explain the circumstances
of the lawsuit or litigation and discuss the borrower’s liability and insurance coverage. A copy of the complaint
and answer may also be needed. The title company closing the loan must be informed of the lawsuit or litigation
and provide affirmative coverage of our first lien position.
5.10 CONSUMER CREDIT COUNSELING SERVICE (CCCS)
Borrower enrollment in CCCS is allowed when a minimum of 12 months have elapsed on the plan and evidence
of timely payments for the most recent 12 months is provided. The CCCS administrator must also provide a
letter allowing the borrower to seek financing on a new home while enrolled in the plan.
If accounts included in CCCS plan reflect as charge-off or collection accounts on the credit report, the balances
can be excluded from the charge-off and collection limits in 5.11 Collections and Charge-offs
. The monthly CCCS
plan payment must be included in the DTI calculation.
If a completion date is not shown on the credit report, the borrower is required to submit verification from the
counseling agency establishing the date of completion.
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5.11 COLLECTIONS AND CHARGE-OFFS
The following accounts may remain open:
Collections and charge-offs < 24 months old with a maximum cumulative balance of $2,000
Collections and charge-offs ≥ 24 months old with a maximum of $2,500 per occurrence
Collections and charge-offs that have passed beyond the statute of limitations for that state (supporting
documentation required)
All medical collections
Collection and charge-off balances exceeding the amounts listed above must be paid in full under the Expanded
Prime Program.
Under all other programs, collection and charge-off account balances remaining after the exclusions listed above
may remain open when one of the following is met:
Borrower has sufficient reserves to cover remaining collection and charge-off balances (in addition to
the published reserve requirement); or
Payment for remaining collections and charge-offs included in DTI results in final DTI ≤ 50% (payment
calculated at 5% of balance of remaining unpaid collections and charge-offs).
A combination of the two options above is allowed. A portion of the unpaid collection balance can be included
in the DTI while the remainder is covered by excess reserves. Collections and charge-offs that cannot be factored
into DTI or reserves must be paid off.
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5.12 JUDGMENTS AND TAX LIENS
All judgments or liens affecting title must be paid as title must insure our lien position without exception. Court-
ordered judgments may remain open when one of the following options is met:
The amount is the lessor of $5,000 per occurrence or 2% of the loan amount
The borrower is currently in a repayment agreement with the creditor (if the borrower is currently in
a repayment plan, the following requirements apply):
o A minimum of 3 months has elapsed on the plan and evidence of timely payments for the most
recent 3 months is provided; and
o The maximum payment required under the plan is included in the debt-to-income ratio.
o Judgments or lien has passed beyond the statute of limitations for that state (supporting
documentation required)
Outstanding state and federal tax liens or delinquent obligations may remain open on purchase transactions only
(additional LTV reductions may be required based on the size of the lien). All of the following requirements must
be met:
A copy of the repayment agreement is obtained;
A minimum of 3 months has elapsed on the plan and evidence of timely payments for the most recent 3
months is provided;
The maximum payment required under the plan is included in the debt-to-income ratio; and
The title company must provide written confirmation confirming (a) the title company is aware of the
outstanding tax lien, and (b) there is no impact to first lien position.
5.13 BANKRUPTCY
5.13.1 EXPANDED PRIME PROGRAM
All bankruptcies must be discharged or dismissed for a minimum of 48 months from closing date.
5.13.2 NON-PRIME PROGRAM
All bankruptcies must be discharged or dismissed for a minimum of 0 to 24 months from closing date. See
the Deephaven Non-Prime Matrix for seasoning requirements.
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5.14 HOUSING EVENTS
A Housing Event is any one of the following events listed below:
Foreclosure
Deed-in-Lieu
Short Sale
Modification
1x120 mortgage history
Seasoning of a foreclosure, deed-in-lieu, or short sale is measured from the date of completed sale or final
property transfer. The Housing Event must be completed prior to loan closing with no outstanding deficiency
balance remaining.
For a 120-day mortgage late, seasoning is from the date the mortgage was brought current. Seasoning for a
modification is from the date the modification was executed. See also 5.5.4 Mortgage Modification
.
If the property was surrendered in a Chapter 7 bankruptcy, the bankruptcy discharge date is used for seasoning.
Bankruptcy papers may be required to show the property was surrendered. The foreclosure action is not
required to be fully complete.
5.14.1 EXPANDED PRIME PROGRAM
Housing Events must be seasoned for a minimum of 48 months from closing date.
5.14.2 NON-PRIME PROGRAM
All Housing Events must be seasoned for a minimum of 0 to 24 months from closing date. See the
Deephaven Non-Prime Matrix for seasoning requirements.
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6 LIABILITIES
6.1 INSTALLMENT DEBT
Installment debt is a monthly obligation with fixed payments and terms. Payments on installment loans must be
included in the borrower’s debt-to-income ratio.
Payments can be excluded if there are 10 or fewer monthly payments remaining to pay the debt in full. If the
payment is substantial and exceeds 5% of the borrower’s qualifying income, the overall transaction should be
reviewed to ensure the remaining payments will not impact the borrower’s ability to handle the new mortgage
payment.
Installment debt paid in full prior to closing can be excluded from the debt-to-income ratio. Supporting
documentation, such as a credit supplement or direct verification from the creditor, must be obtained as
evidence the debt has been paid in full.
6.2 REVOLVING DEBT
Revolving debt is open-ended debt in which the principal balance may vary from month to month. The minimum
required payment as stated on the credit report or current account statement should be used to calculate the
debt-to-income ratio. If no payment is stated on the credit report, the greater of $10 or 5% of the current
balance should be included in the debt-to-income ratio calculation.
Revolving accounts are allowed to be paid off prior to or at closing in order to exclude the payment from the
debt ratio. Supporting documentation, such as a credit supplement or direct verification from the creditor, must
be obtained as evidence the debt has been paid in full. See 7.3 Asset Documentation
for sourcing and seasoning
requirements.
6.3 AUTHORIZED USER ACCOUNTS
Authorized user account should not be considered in the borrower’s debt-to-income ratio.
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6.4 BUSINESS DEBT
A business debt is a financial obligation of a business and can be the sole responsibility of the business or be
personally secured by the business owner, making that person also liable for the debt. If the debt is reflected on
the borrower’s personal credit report, the borrower is personally liable for the debt and it must be included in
the debt-to-income ratio.
Debts paid by the borrower’s business can be excluded from the debt-to-income ratio with any of the following
supporting documentation:
Most recent 3 months canceled checks drawn against the business account; or
Tax returns reflect the business expense deduction; or
Business bank account statement showing assets remain after funds to close and reserve requirements
are with a balance greater than or equal to the balance of the debt.
6.5 CHILD SUPPORT, ALIMONY OR MAINTENANCE OBLIGATIONS
Monthly alimony, child support or separate maintenance fees should be current at time of application and must
be included in the borrower’s debt-to-income ratio. File should contain supporting documentation as evidence
of the obligation, such as a final divorce decree, property settlement agreement, signed legal separation
agreement, or court order. If payments are past due, the arrearages must be brought current prior to loan
closing.
If 10 or fewer payments remain, see 6.1 Installment Debt
to determine if the obligation may be excluded from
the DTI calculation.
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6.6 CONTINGENT LIABILITIES
An individual has a contingent liability when an outstanding debt has been assigned to another party and the
creditor does not release the borrower from liability. Contingent liabilities can be excluded from the debt-to-
income ratio under any of the following scenarios:
Property resulting from buyout of former co-owner, e.g., divorce: file must include the court order and
evidence of transfer of ownership
Mortgage assumption by third party: file must include the formal assumption agreement and evidence of
transfer of ownership
Court ordered assignment of debts: file must include a copy of the court order assigning the debt to
another party
The payment history for the assigned debt after the effective date of the assignment does not need to be
evaluated.
6.7 DEBTS PAID BY OTHERS
When a borrower is obligated on a non-mortgage debt but is not the party actually repaying the debt, the
monthly payment may be excluded from the borrower's recurring monthly obligations. This policy applies
whether or not the other party is obligated on the debt but does not apply if the other party is an interested
party to the subject transaction (such as the seller or realtor). Non-mortgage debts include installment loans,
student loans, revolving accounts, lease payments, alimony, child support, and separate maintenance.
When a borrower is obligated on a mortgage debt but is not the party who is actually repaying the debt, the full
monthly payment may be excluded from the borrower’s recurring monthly obligations if:
the party making the payments is obligated on the mortgage debt,
there are no delinquencies in the most recent 12 months, and
the borrower is not using rental income from the applicable property to qualify.
In order to exclude non-mortgage or mortgage debts from the borrower’s DTI ratio, the most recent 12 months'
canceled checks (or bank statements) must be obtained from the other party making the payments that
document a 12-month payment history with no delinquent payments. When a borrower is obligated on a
mortgage debt, regardless of whether or not the other party is making the monthly mortgage payments, the
referenced property must be included in the count of financed properties.
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6.8 HOUSING PAYMENTS
The monthly mortgage payment (PITIA) used for qualification consists of the following:
Principal and Interest
Hazard and flood and insurance premiums
Real Estate Taxes
Special Assessments
Association Dues
Any subordinate financing payments on mortgages secured by the subject property
6.9 LEASE OBLIGATIONS
Lease obligations must be included in the debt-to-income ratio calculation, regardless of time remaining on the
lease.
6.10 MATERIAL RECURRING NON-DEBT OBLIGATIONS
Neither Brokers nor Deephaven are permitted to make inquiries or verifications prohibited by Regulation B.
A recurring non-debt obligation is defined as medical expenses for the borrower or a dependent of the borrower
that are expected to continue for greater than one year.
If the borrower informs the Broker or Deephaven of a recurring non-debt obligation, the loan file must be noted.
If the Broker or Deephaven believes it could be material to the borrower’s ability to repay the loan, escalation
is required.
Documentation of material recurring non-debt obligations will be consistent with Deephaven’s adherence to the
ability to repay regulation.
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6.11 OPEN 30-DAY CHARGE ACCOUNTS
For open 30-day charge accounts that do not reflect a monthly payment on the credit report, or 30-day accounts
that reflect a monthly payment that is identical to the account balance, 5% of the outstanding balance will be
considered to be the required monthly payment.
Open-end accounts do not have to be included in the monthly debt payment if the borrower has sufficient funds
to pay off the outstanding account balance. The funds must be verified in addition to any funds required for
closing and reserves.
If the borrower paid off the account balance prior to closing, proof of payoff may be provided in lieu of verifying
funds to cover the account balance.
6.12 RETIREMENT/SAVINGS PLAN LOANS
Repayment for loans against a financial asset (retirement/savings plan, insurance policy) can be excluded from
the total debt-to-income ratio provided the debt can be repaid by liquidating the asset. Value of the asset must
be reduced by the amount of the debt when calculating funds to close and reserves.
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6.13 STUDENT LOANS
If a monthly student loan payment is provided on the credit report, that amount may be used for qualifying
purposes. If the credit report does not reflect the correct monthly payment, the monthly payment that is on the
student loan documentation (the most recent student loan statement) may be used to qualify the borrower.
If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0
as the monthly payment, then the qualifying monthly payment must be determined using one of the options
below:
If the borrower is on an income-driven payment plan, student loan documentation may be obtained to
verify the actual monthly payment is $0. The borrower may then qualify with a $0 payment.
For deferred loans or loans in forbearance, the following must be calculated:
o a payment equal to .5% of the outstanding student loan balance (even if this amount is lower than
the actual fully amortizing payment); or
o fully amortizing payment using the documented loan repayment terms.
6.14 TIMESHARES
For credit review purposes, timeshare obligations will be considered installment loans.
6.15 UNDISCLOSED DEBTS
If asset statements provided reflect payments made on obligations not listed on the credit report or 1003,
additional information must be obtained to determine if the liability should be included in the borrower’s debt-
to-income ratio.
If the obligation does not belong to the borrower, supporting documentation is required. If there is a non-
borrower also on the account, a signed letter of explanation from the borrower is sufficient.
If the borrower is the obligor on the debt, an account statement and pay history should be obtained to review
the account for acceptability. The payment must be included in the debt ratio.
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7 DOCUMENTATION
7.1 AGE OF LOAN DOCUMENTATION
Unless otherwise noted, all loan documentation must be dated within 90 days of closing.
7.2 EMPLOYMENT/INCOME DOCUMENTATION
Documentation of income is allowed using Full Documentation or Alternative Income Documentation.
7.2.1 IRS FORM 4506-C
IRS Form 4506-C must be completed and signed by all borrowers both at application and closing. The form
must request the appropriate documentation type (W-2s, full tax transcripts, etc.) and be executed by the
Deephaven prior to closing. 4506-C forms and transcripts are not required for business tax returns or
loans utilizing Bank Statement Documentation for income.
Documentation received from executing the 4506-C must be reviewed and compared to the qualifying
income to confirm consistency. Results from processing the 4506-C should generally be equal to or greater
than the income used to qualify the loan. Any inconsistencies between the 4506-C results and qualifying
income should be addressed by the Deephaven Underwriter.
7.2.2 PAY STUBS AND W-2S
Pay stubs and W-2s must be typed or computer generated. They should provide the borrower’s full name,
address, employer name, year-to-date earnings, and rate of pay.
If pay stubs reflects garnishments (child support, IRS, etc.) or any loan deductions, additional information
will be required to determine if a monthly payment should be included in the debt-to-income ratio
calculation.
W-2s should reflect a nine-digit Employer ID Number (EIN). Also, Social Security and Medicare withholding
should be calculated at the appropriate rates on the W-2s and pay stubs.
7.2.3 FEDERAL INCOME TAX RETURNS
For some types of income, federal income tax returns (personal and/or business) are required. See 8.6.25
Self-Employed Income for detailed requirements.
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7.2.4 WRITTEN VERIFICATION OF EMPLOYMENT (WVOE)
Income and employment for wage-earners or salaried borrowers may be obtained via direct written
verification from the borrower’s employer (FNMA Form 1005). The verification should be signed by a
member of the company’s human resource department or one of the business owners or officers. At a
minimum, the verification must include the borrower’s name, position, dates of employment, and base
salary.
7.2.5 VERBAL VERIFICATION OF EMPLOYMENT (VVOE)
Verbal Verifications of Employment must be obtained for each borrower using employment income to
qualify. VVOEs must meet all of the following criteria:
Completed within 10 business days of closing
Confirm that the borrower is employed at time of verification
Include the name and phone number of the person processing the VVOE
Include the name, position and phone number of the person providing the verification (employer)
Telephone number for the borrower’s employer must be verified independently via any of the
following: telephone book, the internet, directory assistance, or by contacting the applicable licensing
bureau
For self-employed borrowers, the existence of the business must be independently verified through a
disinterested third party within 10 business days of closing. The loan file should reflect the documentation
secured from these sources. Sources may include:
CPA, regulatory agency, or applicable licensing bureau
Secretary of State listing reflecting current year registration
Verification of a phone and address listing using the internet
If the documentation is over 30 days old, an Account Manager’s Certification verifying employment with
the CPA is acceptable. An updated Secretary of State listing or phone and address listing from the internet
are also acceptable.
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7.3 ASSET DOCUMENTATION
Assets to be used for down payment, closing costs, debt payoff, and reserves must be seasoned for 60 days from
closing date or sourced.
Assets must be verified with one of the following:
Account statements for the most recent 2 months or quarter indicating opening and closing balances
and reflecting a consecutive 60 days of asset verification
o Supporting documentation should be obtained for single, unexplained deposits that exceed 50%
of the borrower’s gross monthly qualifying income for the loan
o Documentation of large deposits is not required on refinance transactions
If account summary page provides the required information, additional pages of the statement are not
required.
Written Verification of Deposit (VOD), completed by the financial institution
o Must include the current balance and the average balance for the most recent 2 months
o Large disparities between the current balance and the opening balance will require additional
verification or supporting documentation
Supporting documentation should be obtained for single, unexplained deposits that exceed 50% of the
borrower’s gross monthly qualifying income for the loan. Documentation of large deposits is not required on
refinance transactions.
Unsourced assets, assets seasoned for less than 30 days, and unexplained deposits exceeding 50% of the
borrower’s gross monthly income are allowed if the total amount is less than or equal to 10% of the total funds
required to close.
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8 EMPLOYMENT/INCOME ANALYSIS
8.1 FULL DOCUMENTATION
8.1.1 WAGE-EARNERS
Income derived from a consistent hourly, weekly, or monthly wage, must be verified by all of the following:
• W-2s for the most recent year, and
• Pay stub(s) covering the most recent 30-day period providing year-to-date earnings; and
• Signed and executed 4506-C (W-2 transcripts only); and
• Verbal Verification of Employment (VVOE) completed within 10 days of closing.
8.1.2 SELF-EMPLOYED BORROWERS
See 8.6.25 Self-Employed Income for detailed documentation requirements.
8.2 ALTERNATIVE INCOME DOCUMENTATION
Alternative Income Documentation is available under the Expanded Prime and Non-Prime Programs. See
applicable Deephaven Matrix for LTV and credit score restrictions.
In lieu of the standard income documentation requirements for self-employed borrowers, the following will be
accepted:
• 8.3 Personal Bank Statements
: 12 months complete personal bank statements
• 8.4 Business Bank Statements: 12 months complete business bank statements
• 8.6.25.5 1099: 1 year 1099 income
Self-employed borrowers must be self-employed for at least 2 years, and the business must be in existence for
at least 2 years.
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8.3 PERSONAL BANK STATEMENT DOCUMENTATION
Self-employed borrowers are eligible for Personal Bank Statement Documentation. Borrowers may provide 12
consecutive months of personal bank statements. See the applicable Deephaven Matrix for credit score and LTV
restrictions. See also 8.2 Alternative Income Documentation
.
8.3.1 REQUIREMENTS
The following requirements apply:
Borrower must be self-employed for at least 2 years.
Business must be in existence for at least 2 years.
Deephaven Self-Employed Business Narrative Form
(or equivalent) is required.
All parties listed on each bank account must be included as borrowers on the loan.
Statements must be consecutive and reflect the most recent months available.
Statements must support stable and generally predictable deposits. Unusual deposits must be
documented.
Multiple bank accounts may be used, but a combination of Personal Bank Statement Documentation
and Business Bank Statement Documentation is prohibited.
Evidence of a decline in earnings may result in disqualification.
NSF activity in the past 12 months must be satisfactorily explained by the borrower. Excessive NSF
or overdraft activity may preclude the borrower from bank statement eligibility.
If bank statements provided reflect payments being made on obligations not listed on the credit
report, see 6.15 Undisclosed Debts
for additional guidance.
1099 Documentation: 1099 may be obtained to replace 1 calendar year of personal bank statements:
o 1099 must be validated with a wage and income transcript from the IRS
o Evidence of year-to-date earnings must be verified via bank statements covering the YTD
period
W-2 Wages: Additional income deposited into the bank statements but derived from a source other
than the self-employed business may not be included in the bank statement average. W-2 earnings
must be documented as per the requirements in
8.1.1 Wage-Earners along with a processed 4506-
C verifying the W-2 earnings only.
Rental Income: Borrowers who receive rental income as a secondary income source may utilize
Personal Bank Statement Documentation on a case-by-case basis. Please consult the Deephaven
Scenario Desk prior to submission.
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8.3.2 DOCUMENTATION
The following documentation is required:
12 months complete personal bank statements from the same account (transaction history printouts
are not acceptable)
1099 in lieu of 12 months personal bank statements, if applicable
2 months most recent business bank statements:
o Statements must evidence activity to support business operations, and
o Statements must reflect transfers to the personal account being used.
o Note: If business bank statements are not available, the loan must be submitted/qualified as
a Business Bank Statement Documentation loan (see 8.4 Business Bank Statement
Documentation for complete requirements).
Initial signed 1003 with monthly income disclosed
Deephaven Self-Employed Business Narrative Form
(or equivalent) is required.
Verification borrower has owned and business has been in existence for 2 years
Verification of business existence required within 10 business days of closing
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8.3.3 ANALYZING THE PERSONAL BANK STATEMENTS
The following requirements apply when analyzing the personal bank statements:
100% of deposits used for income and averaged over 12 months (as applicable).
o Large deposits exceeding 50% of the gross monthly personal bank statement average must
be explained via LOE and be consistent with business profile, if included in Total Eligible
Deposits. Sourcing required if LOE is insufficient.
100% of 1099 gross income + YTD bank statement income averaged over total number of applicable
months (12 months minimum).
Transfers from a business account into a personal account are acceptable.
Transfers between personal accounts must be excluded.
Evidence of business receipt and expense activity is not permitted in personal bank accounts.
Evidence of such activity will require the loan to be submitted/qualified as a Business Bank Statement
Documentation loan (see 8.4 Business Bank Statement Documentation
for complete requirements).
8.3.4 CALCULATING QUALIFYING INCOME
Qualifying income using Personal Bank Statement Documentation is the lower of:
(1) the income indicated on the initial signed 1003, or (2) one of the following calculations:
Personal Bank Statement Average
total deposits (minus disallowed
deposits) / 12 months
OR
1099 Gross Income Calculation
(total gross 1099 income + YTD bank
statement income) / total number
of applicable months
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8.4 BUSINESS BANK STATEMENT DOCUMENTATION
Self-employed borrowers are eligible for Business Bank Statement Documentation. Borrowers may provide 12
consecutive months of business bank statements. See the applicable Deephaven Matrix for credit score and LTV
restrictions. See also 8.2 Alternative Income Documentation
.
8.4.1 REQUIREMENTS
The following requirements apply:
Borrower must be self-employed for at least 2 years.
Business must be in existence for at least 2 years.
Deephaven Self-Employed Business Narrative Form
(or equivalent) is required.
Statements must be consecutive and reflect the most recent months available.
Statements must support stable and generally predictable deposits. Unusual deposits must be
documented.
Multiple bank accounts may be used, but a combination of Personal Bank Statement Documentation
and Business Bank Statement Documentation is prohibited.
Evidence of a decline in earnings may result in disqualification.
NSF activity in the past 12 months must be satisfactorily explained by the borrower. Excessive NSF
or overdraft activity may preclude the borrower from bank statement eligibility.
If bank statements provided reflect payments being made on obligations not listed on the credit
report, see 6.15 Undisclosed Debts
for additional guidance.
1099 Documentation: 1099 may be obtained to replace 1 calendar year of business bank statements:
o 1099 must be validated with a wage and income transcript from the IRS
o Evidence of year-to-date earnings must be verified via bank statements covering the YTD
period
W-2 Wages: Additional income deposited into the bank statements but derived from a source
other than the self-employed business may not be included in the bank statement average. W-2
earnings must be documented as per the requirements in
8.1.1 Wage-Earners along with a
processed 4506-C verifying the W-2 earnings only.
Rental Income: Borrowers who receive rental income as a secondary income source may utilize
Business Bank Statement Documentation on a case-by-case basis. Please consult the Deephaven
Scenario Desk prior to submission.
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8.4.2 DOCUMENTATION
The following documentation is required:
12 months complete business bank statements from the same account (transaction history printouts
are not acceptable)
1099 in lieu of 12 months business bank statements, if applicable
Initial signed 1003 with monthly income disclosed
Required Expense Statement documentation applicable to Calculation Option chosen (see
Calculating Qualifying Income
for requirements)
Verification borrower is minimum 50% owner of business:
o Ownership percentage must be documented via CPA letter, Operating Agreement, or
equivalent.
o All non-borrowing owners of the business must provide a signed and dated letter
acknowledging the transaction and confirming the borrower’s access to the account for
income-related purposes.
o Qualifying Income must be multiplied by the ownership percentage to determine the
owner’s portion of income allowed for the transaction.
Deephaven Self-Employed Business Narrative Form
(or equivalent) is required.
Verification borrower has owned and business has been in existence for 2 years
Verification of business existence required within 10 business days of closing
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8.4.3 ANALYZING THE BUSINESS BANK STATEMENTS
The following requirements apply when analyzing the business bank statements:
Business bank accounts, personal bank accounts addressed to a DBA, or personal accounts with
evidence of business expenses can be used for qualification.
Wire transfers and transfers from other accounts must be documented or excluded.
Large deposits exceeding 50% of the total monthly gross deposit average must be explained via LOE
and be consistent with business profile, if included in Total Eligible Deposits. Sourcing required if
LOE is insufficient.
Statements should show a trend of ending balances that are stable or increasing over time.
Decreasing or negative ending balances must be explained.
Expense line items that can be added back to the net business income include depreciation,
depletion, amortization, casualty losses, and other losses that are not consistent and reoccurring.
Deephaven reserves the right to require additional information, including but not limited to, 3
rd
Party
Expense Ratio or Profit & Loss Statements, regardless of business type.
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8.4.4 CALCULATING QUALIFYING INCOME
To calculate qualifying income using Business Bank Statement Documentation, choose one of the
documentation options below applicable to the Expense Statement method chosen:
8.4.4.1 OPTION 1: THIRD-PARTY PREPARED P&L STATEMENT
The P&L Statement must be prepared, signed, and dated by a third-party Tax Professional (defined as
a CPA, Tax Attorney, Enrolled Agent (EA), or Paid Tax Professional (PTIN)). The P&L must be
provided on the Tax Professional’s letterhead addressed to the borrower and must not contain any
exculpatory language that may compromise the integrity of the information provided. Reverse
verification and validation of the statement must be completed by Deephaven’s operations personnel.
Qualifying Income is the lower of the following calculations:
Monthly net income from the P&L
Income indicated on the initial signed 1003
Required Expense Statement Documentation:
P&L Statement covering either the same 1-year period as the bank statements or most recent
complete calendar year; and
YTD P&L is required if the P&L is greater than 120 days old at time of closing.
The monthly gross revenue from the P&L must be supported by the business bank statements provided.
Total monthly average deposits per bank statements (minus any disallowed deposits) must be within
20% of monthly gross revenue reflected on P&L. Note: The total eligible deposits calculated with
business bank statements is used solely to validate self-employed earnings reported on the P&L.
The sum of disallowed deposits/transfers excluded from the bank statement total may be subtracted
from the P&L gross revenue. Total eligible deposits may then be compared to the revised gross revenue
amount for validation purposes. If validated within 20%, the lower of the revised monthly net income
average from the P&L OR the income indicated on the initial signed 1003 may be used for qualifying
income.
Net
Income
=
Net Income from P&L * Borrower Ownership Percentage
12 months
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8.4.4.2 OPTION 2: THIRD-PARTY PREPARED EXPENSE STATEMENT
The Expense Statement must be prepared, signed, and dated by a third-party Tax Professional (defined
as a CPA, Tax Attorney, Enrolled Agent (EA), or Paid Tax Professional (PTIN)), specifying business
expenses as a percentage of the gross annual sales/revenue prepared. The statement must be provided
on the Tax Professional’s letterhead addressed to the borrower and must not contain any exculpatory
language that may compromise the integrity of the information provided. Reverse verification and
validation of the statement must be completed by Seller’s operations personnel.
Qualifying Income is the lower of the following calculations:
Monthly net income using the Expense Statement
Income indicated on the initial signed 1003
Net income from the Expense Statement is calculated by determining total deposits per bank
statements (minus any disallowed deposits) multiplied by 100 minus the expense percentage provided
by CPA or tax preparer, and divided by 12 months.
Net
Income
=
Total Eligible Deposits * (1 – Expense Statement Percentage)
12 months
8.4.4.3 OPTION 3: FIXED EXPENSE RATIO OF 50%
Qualifying Income is the lower of the following calculations:
Monthly net income using 50% of Total Eligible Deposits
Income indicated on the initial signed 1003
Option 3 cannot be utilized if third-party documentation indicating an expense ratio greater than 50%
has been disclosed.
Net income is calculated by determining total eligible deposits per bank statements (minus any
disallowed deposits) multiplied by 50% after accounting for the borrower’s ownership percentage, and
divided by 12 months.
Net
Income
=
Total Eligible Deposits * Borrower Ownership Percentage * 50%
12 months
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8.5 EMPLOYMENT HISTORY
Employment must be stable with at least a 2-year history in the same job or jobs in the same field. Income from
self-employment is considered stable if the borrower has been self-employed for 2 or more years.
8.5.1 FREQUENT JOB CHANGES
Frequent job changes to advance within the same line of work may be considered favorable. Job changes
without advancement or in different fields of work should be carefully reviewed to ensure consistent or
increasing income levels and the likelihood of continued stable employment.
8.5.2 GAPS IN EMPLOYMENT
If the 1003 or other loan documentation suggests there may be a gap in employment, the gap must be
addressed. The borrower should provide a signed, written explanation for any employment gaps that exceed
30 days in the most recent 12-month period, or that exceed 60 days in months 13-24.
Recent graduates and borrowers re-entering the workforce after an extended period are allowed.
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8.6 SOURCES OF INCOME
For all income sources, borrowers are qualified based on calculated stable monthly income over the most recent
1- or 2-year period. Income may be obtained from a variety of sources such as salary, bonus, commission, self-
employment, etc., and should be reasonably expected to continue for the next 3 years.
See 8.1 Full Documentation
for detailed income documentation requirements.
8.6.1 ANNUITY INCOME
Annuity income can be used for qualification when the following requirements are met:
12-month history must be verified using 1099s, tax returns, and/or bank statements
Letter from issuer of annuity to be obtained stating that it has been set up on periodic withdrawal,
amount of withdrawal, duration, and balance
Account asset balance must support the continuance of the monthly payments for at least 3 years
after the close of escrow
Annuities less than 12 months old must be in a non-revocable trust with a minimum term of 40 months in
order to use the income to qualify.
For annuity distributions from a 401(k) or pension, see 8.6.21 Pension/Retirement
.
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8.6.2 ASSET UTILIZATION
Asset Utilization may be used to determine qualifying income. See the applicable Deephaven Matrix for
credit score and LTV restrictions. Asset Utilization is allowed under the Expanded-Prime program only and
may not be used on cash-out transactions.
Qualified Assets can be comprised of personally held stocks, bonds, mutual funds, vested amount of
retirement accounts and bank accounts. Business accounts are prohibited. If a portion of the Qualified
Assets is being used for down payment, closing costs, or reserves, those amounts must be excluded from
the balance before analyzing a portfolio for income determination.
Six-month seasoning of all assets is required. All asset documentation may not be more than 30 days old
at the time of closing.
The following personal assets are considered Qualified Assets and can be utilized to calculate income:
100% of checking, savings, and money market accounts
80% of the remaining value of stocks & bonds
70% of retirement assets
8.6.2.1 CALCULATING QUALIFYING INCOME
To calculate qualifying income using Asset Utilization, choose one of the options below:
OPTION 1: DEBT RATIO CALCULATION
Borrowers must have a minimum of the lesser of (a) 1.5 times the loan balance or (b) $1mm in Qualified
Assets, both of which must be net of down payment, closing costs, and required reserves to qualify.
See the applicable Deephaven Matrix for max debt ratios.
The income calculation is as follows:
Monthly Income = Net Qualified Assets / 84 Months
OPTION 2: TOTAL ASSET CALCULATION
Qualified Assets must be sufficient to cover the new loan amount, down payment, closing costs,
required reserves, and 5 years of current monthly obligations.
There is no debt ratio calculation for the Total Asset Calculation option. Employment and Income are
not required to be disclosed on the 1003.
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8.6.3 AUTOMOBILE ALLOWANCE
For an automobile allowance to be considered as acceptable stable income, the borrower must have
received payments for at least 2 years. The full amount of the allowance must be added to the borrower’s
monthly income, and the full amount of the lease or financing expenditure to the borrower’s monthly debt
obligations.
8.6.4 BONUS AND OVERTIME
Bonus and overtime can be used to qualify if the borrower has received the income for the past 1 year and
it is likely to continue. An average of bonus or overtime income should be used, when available.
A written Verification of Employment (FNMA Form 1005) should be obtained to provide a breakdown of
bonus or overtime earnings. If the employment verification states the income is unlikely to continue, it may
not be used in qualifying.
8.6.5 CAPITAL GAINS
When income from capital gains is used to qualify the borrower, tax returns for the most recent 2 years
are required to determine if the income is recurring and may be considered in qualifying. If a capital gain
appears to be a onetime occurrence, it should not be considered when calculating income available.
For the income to be considered stable and likely to continue, sufficient assets must be documented to
show the borrower will continue receiving the capital gains for a minimum of 3 years from note date. If the
income is declining and/or there will be no asset base to generate the capital gains, it cannot be used for
qualification purposes.
In addition, if assets that generated capital gains are being sold as part of the mortgage transaction, the
income from capital gains must be reduced by a percentage equal to the percentage reduction in the value
of the assets that generated the income.
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8.6.6 CHILD SUPPORT, ALIMONY OR MAINTENANCE INCOME
In order for child support, alimony, or separate maintenance to be considered stable income, it must
continue for at least 3 years from note date as specified by the court order. The following requirements
apply:
A copy of the divorce decree or legal separation agreement must be obtained
Documentation must be received to evidence receipt of the most recent 6 months of payments
through copies of deposit slips, canceled checks, and/or bank statements
Full and timely payments must have been received for 6 months or longer. Income received for less than 6
months is considered unstable and may not be used to qualify the borrower. Also, if full or partial payments
are made on an inconsistent or sporadic basis, the income is not acceptable for qualifying the borrower.
Note: Deephaven expects Brokers to make appropriate disclosures, as required under the federal Equal
Credit Opportunity Act, that child support, alimony, or maintenance income information need not be
provided unless the borrower wants the lender to consider such income in underwriting the loan.
8.6.7 COMMISSION INCOME
Commission earnings should be averaged over the most recent 1 year and require the following
documentation:
Most recent year-to-date pay stub reflecting the commission earnings; and
W-2 forms covering the most recent year period or a complete written Verification of Employment
If there are large fluctuations, the borrower must provide a signed, written explanation to support the
increase or decrease in income. Additional supporting documentation is required to use commission income
for qualification when documentation shows a decline in earnings
from one year to the next.
With borrowers that receive a draw against the commission earnings, the draw income is not to be
considered in addition to the commission income. Draws are only to be considered income paid in advance
of receiving commissions, where the amount is then subtracted once the commissions are earned.
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8.6.8 DECLINING INCOME
Declining income sources should be closely reviewed to determine if the income may be used for qualifying
purposes. Income showing a consistent decline equal to or greater than 25% over the prior years should
not be considered as stable or usable income for qualification purposes.
A signed, written explanation for the decline should be obtained from the borrower and/or employer. In
instances where there is sufficient information to support the use of the income, the most recent lower
income over the prior 2-year period must be used and may not be averaged.
8.6.9 DISABILITY INCOME
Long-term and short-term disability income can be used for qualification. The following documentation
should be obtained for both long-term and short-term disability:
Documentation from either the insurance company or employer providing the payment amount,
conditions for termination of payment, and the likelihood of it continuing for at least 3 years
Copy of most recent check or bank statement is required if the award letter does not reflect the
current payment being received
Short-term disability also requires the following documentation:
Signed letter from borrower stating intent to return to work, once the disability no longer exists
Verification from employer stating that the borrower will be allowed to return to work once the
disability no longer exists. The letter must identify the borrower’s position and rate of pay upon
return. If the future employment income will be less than the disability income, the lower income
amount must be used to qualify for the loan.
In documenting disability income, Brokers and Deephaven must not make inappropriate and/or unlawful
inquiries regarding the nature or severity of the borrower’s disability.
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8.6.10 DIVIDEND/INTEREST INCOME
Dividend and interest income derived from investments can be used as qualifying income when the following
requirements are met:
2 most recent years federal income tax returns received supporting a 2-year history of receipt; and
Verification of stock asset values no older than 30 days at closing.
Sufficient assets should remain after closing to continue to generate an acceptable level of earnings. If assets
that generated dividend/interest income are being sold as part of the mortgage transaction, the qualifying
income must be reduced by a percentage equal to the percentage reduction in the value of the assets that
generated the income.
Earnings should generally be averaged over the time period verified when current earnings are consistent
with historical dividend and interest earnings.
8.6.11 EMPLOYMENT BY A RELATIVE
Income for borrowers who are employed by a relative must be verified with all of the following:
Federal income tax returns for the most recent 2 years;
W-2s for the most recent 2 years; and
Pay stub(s) covering the most recent 30-day period.
Income should be averaged over the 2-year period. Clarification of potential ownership by the borrowers
of family-owned businesses may also be required. A borrower may be an officer of a family operated
business but not an owner. Verification of their status should be provided by written confirmation obtained
from a CPA or legal counsel.
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8.6.12 EMPLOYMENT OFFERS AND CONTRACTS
8.6.12.1 START DATE PRIOR TO LOAN CLOSING
If the borrower is scheduled to begin employment under the terms of an employment offer or contract,
an executed copy of the borrower's offer or contract for future employment and anticipated income
must be obtained. A paystub that includes sufficient information to support the income used to qualify
the borrower based on the offer or contract must be provided prior to closing.
8.6.12.2 START DATE AFTER LOAN CLOSING
If the borrower will not begin employment until after loan closing, a paystub may be obtained after
closing when each of the following criteria is met:
purchase transaction
principal residence
one-unit property
borrower is not employed by a family member or by an interested party to the transaction
the borrower is qualified using only fixed based income.
The borrower’s offer or contract for future employment must be provided. The employment offer or
contract must:
clearly identify the employer and the borrower, be signed by the employer, and be accepted
and signed by the borrower;
clearly identify the terms of employment, including position, type and rate of pay, and start
date; and
be non-contingent (Note: If conditions of employment exist, the underwriter must confirm
prior to closing that all conditions of employment are satisfied either by verbal verification or
written documentation).
For a union member who works in an occupation that results in a series of short-term job assignments
(such as a skilled construction worker, longshoreman, or stagehand), the union may provide the
executed employment offer or contract for future employment
If the borrower’s start date is no more than 30 days prior to the note date, a verbal verification of
employment that confirms active employment status must be obtained.
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If the borrower’s start date is no more than 90 days after the note date, one of the following must be
documented (in addition to the amount of reserves required for the transaction):
Financial reserves sufficient to cover PITIA for the subject property for 6 months; or
Financial resources sufficient to cover the monthly liabilities included in the debt-to-income
ratio, including the PITIA for the subject property, for the number of months between the
note date and the employment start date, plus one. For calculation purposes, consider any
portion of a month as a full month. Financial resources may include:
o financial reserves, and
o current income.
Note: Current income refers to net income that is currently being received by the borrower (or co-
borrower), may or may not be used for qualifying, and may or may not continue after the borrower
starts employment under the offer or contract. For this purpose, the amount of income the borrower
is expected to receive between the note date and the employment start date may be used. If the current
income is not being used for qualifying purposes, it can be documented using standard documentation,
such as a paystub, but a verification of employment is not required.
8.6.13 FOREIGN INCOME
Foreign income is income earned by a borrower who is employed by a foreign corporation or a foreign
government and is paid in foreign currency. Borrowers may use foreign income to qualify if the following
requirements are met:
Two years U.S. federal income tax returns reflecting the foreign income
Income is translated to U.S. dollars
Standard income stability and continuance requirements are met
Standard documentation requirements apply based on the type of income
Income from sanctioned countries administered by OFAC is not allowed
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8.6.14 FOSTER CARE INCOME
Income derived from foster care payments may be considered if there is a 2-year history of receipt and it
is expected to continue for the next 3 years.
The income can be verified by letters from the organizations and copies of borrower’s deposit slips or bank
statements showing regular deposit of the payments, or by providing federal income tax returns for the
most recent 2 years. The documentation received must clearly show the number of foster children involved,
their ages, and length of care.
Income must be averaged over the 2-year period and may not be considered for children who will reach
the age of 19 within 3 years.
8.6.15 HOURLY WAGES
Borrowers paid on an hourly basis, or who may not work a regular 40-hour work week throughout the
year, will generally have their income averaged over the minimum employment history required. If there is
an indication of declining income, the current income is used instead of the average.
8.6.16 LUMP-SUM DISTRIBUTIONS
Proceeds from the sale of investments held in a 401(k) or IRA account are not eligible as an income source.
See 8.6.10 Dividend/Interest Income
for related allowable income sources.
8.6.17 MINISTER/CLERGY INCOME
Ministers are individuals duly ordained, commissioned or licensed by a church or church denomination.
Ministers and members of the clergy are generally considered self-employed unless exempted by IRS from
self-employment taxes. If exempt, an exception from the IRS must be provided.
Rental or housing allowance received can be considered income for qualifying the borrower. Written
documentation, such as a WVOE provided by the church, must be obtained showing receipt of the income.
The borrower’s pay stub should also reflect receipt of the housing allowance. If the borrower is newly
employed, obtain a copy of the church budget (in lieu of a check) showing funds have been allocated for
housing allowance. Housing allowance for ministers is non-taxable income and can be grossed up for
qualifying.
The church may budget for educational, medical insurance, life insurance, retirement, etc. to be paid on
behalf of borrower; however, these items will not be considered as qualifying income, unless exempted by
the IRS. The housing allowance, although not subject to federal income taxes, is subject to self-employment
taxes. Gross income on Schedule SE of the borrower’s 1040 should include housing allowance paid.
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8.6.18 NON-TAXABLE INCOME
Non-taxable income can be grossed up by 25%. Examples of non-taxable income may include military
allowances for clothing, quarters, and subsistence, child support, worker’s compensation, disability
retirement, social security income, clergy housing allowance, foster care income, food stamps, income from
municipal bonds, and certain types of insurance benefits.
Some income types may contain both taxable and non-taxable income. Federal income tax returns may be
required to accurately determine the non-taxable portion.
Income may not be grossed-up for calculating Residual Income
.
8.6.19 NOTES RECEIVABLE INCOME
Income from notes receivables can be used to qualify provided the income is regular and recurring. The
borrower should have a documented history of receiving the income for at least 2 years and can verify that
the income will continue for at least 3 years from note on the new mortgage.
A copy of the note confirming the amount, frequency and duration of payments is required along with tax
returns for the most recent 2-year period (including Schedule B) and bank statements showing consistent
deposits of funds. Income from a recently executed note/contract (less than 12 months) may not be used
as qualifying income.
Evidence of receipt for the last 12 months must be verified with either canceled checks, bank deposit slips,
of federal income tax returns. A copy of the note verifying payment amount and remaining term of at least
3 years must also be obtained.
8.6.20 PART-TIME/SECOND JOB INCOME
Income from part-time employment or a second job can be considered stable income if it has been received
for the previous 2 years and is likely to continue. Earnings must be documented with current pay stubs and
W-2s for the most recent 2-year period.
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8.6.21 PENSION/RETIREMENT
Pension and retirement income must be verified with any of the following:
Letters from the organization providing the income
Copy of retirement award letters
Tax returns for the most recent 2 years
W-2 forms or 1099 forms for the most recent 2 years
Bank statements reflecting regular deposits for the most recent 2 months
8.6.21.1 PROOF OF CONTINUANCE
If the borrower is of retirement age, proof of continuance does not have to be documented when the
income is received from corporate, government or military retirement/pension.
If retirement income is in the form of monthly annuity distributions, such as 401(k) or IRA, proof of
continuance for 3 years is required. If the borrower intends to use the retirement account to also
satisfy asset requirements, the value of the asset must be reduced by the funds being withdrawn prior
to determining a 3-year continuance of income. Assets available beyond the deduction for continuance
of income may be used as reserves. See also 10.3.13 Retirement Accounts
.
8.6.21.2 FORTHCOMING RETIREMENT
Any borrower presently employed but anticipating retirement within 3 years from note date must be
evaluated upon the verified anticipated retirement income. Effective income for borrowers planning to
retire (or end employment for other reasons) during the period must include the amount of
documented retirement or other benefits to be received, Social Security payments, or other payments
expected to be received in retirement. A combination of present earnings and future retirement
income does not represent a supportable level of earnings.
8.6.22 PUBLIC ASSISTANCE
Income from government assistance programs, such as food stamps, Aid to Dependent Children, or welfare,
can be used as qualifying income provided such income has a reasonable likelihood of continuing for at least
3 years.
The applicant must provide a copy of a benefits awards letter as evidence of eligibility. This documentation
must verify the amount of assistance, duration of payment and what portion if any is non-taxable. Verification
of receipt of benefits for the previous 2 years can be documented with copies of checks, copies of bank
statements, copies of award letter or copies of grant statements.
In documenting and evaluating public assistance income, Deephaven expects Brokers to comply fully with
the requirements of the federal Equal Credit Opportunity Act and applicable state anti-discrimination laws.
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8.6.23 RENTAL INCOME
Rental income can be used for qualifying when disclosed on the loan application. Gross market rent must
be documented with FNMA Form 1007 or Form 1025, as applicable, when rental income from the subject
property is being used to qualify.
8.6.23.1 INCOME OR LOSS
The treatment of the monthly qualifying rental income or loss in the total debt-to-income ratio varies
based on occupancy of the property.
If the property is a primary residence, the following applies:
The monthly qualifying rental income must be added to the borrower’s total monthly income
(income is not netted against the PITIA); and
The full PITIA must be included in the borrower’s total monthly obligations when calculating
the DTI.
If the rental income or loss relates to a property other than the borrower’s primary residence, the
following calculations apply:
If the monthly qualifying rental income minus the full PITIA is positive, it must be added to the
borrower’s total monthly income
If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss
must be added to the borrower’s total monthly obligations
The full PITIA for the rental property is factored into the amount of the net rental income or
loss; therefore, it should not be counted as a monthly obligation
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8.6.23.2 CALCULATING RENTAL INCOME FROM THE SUBJECT PROPERTY
Rental income from the subject property owned prior to loan application should be calculated using
the borrower’s federal income tax returns for the most recent 2-year period (Cash Flow Analysis of
Schedule E). Income should be averaged. Net rental losses should be included in ratios as a liability.
For properties owned for less than 2 years, rental income should be calculated using the lesser of:
75% of the current lease minus the full PITIA; or
Cash flow analysis of the Schedule E from the most recent year’s federal income tax return (if
applicable)
Rental income from a new property being acquired through a purchase transaction can be used to
qualify, using the lesser of:
75% of the current lease minus the full PITIA (evidence of deposit must be obtained); or
75% of the appraiser’s opinion of market rent on FNMA Form 1007 or Form 1025, as
applicable, minus the full PITIA
If no lease exists and rental income is calculated using only the appraiser’s opinion of rent, an additional
3 months PITIA reserves is required.
8.6.23.3 RENTAL INCOME FROM OTHER REAL ESTATE OWNED
Rental income from another property owned prior to loan application should be calculated using the
borrower’s federal income tax returns for the most recent 2-year period (
Cash Flow Analysis of
Schedule E). Income should be averaged. Net rental losses should be included in ratios as a liability.
For properties owned for less than 2 years, rental income should be calculated using the lesser of:
75% of the current lease minus the full PITIA; or
Cash flow analysis of the Schedule E from the most recent year’s federal income tax return (if
applicable)
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8.6.23.4 RENTAL INCOME FROM DEPARTING RESIDENCE
Rental income from a departure residence can be used to qualify.
When the borrower has less than 2 years property management experience, the following apply:
Departing residence LTV is 75% or less:
o Copy of lease and 1007 or Online rent estimate (Zillow Rent Zestimate or equivalent)
are required, AND
o 75% vacancy factor to be used AND
o 4 months PITIA departing residence reserves required
Departing residence LTV is 75.01% to 90%:
o Copy of lease and 1007 or Online rent estimate (Zillow Rent Zestimate or equivalent)
are required, AND
o 75% occupancy calculation is used AND
o 6 months PITI reserves departing residence required
When the borrower has 2 or more years property management experience, the following apply:
Copy of lease and 1007 or Online rent estimate (Zillow Rent Zestimate or equivalent) are
required AND
75% occupancy calculation is used AND
Reserves not required on departing residence
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8.6.23.5 RENTAL INCOME FROM HOME-SHARING
Short-term rental income received directly from a home-sharing service (such as Airbnb, VRBO,
HomeAway) may be used for qualification when the following requirements are met:
Acceptable with 12 months evidence of receipt via the home-sharing service or bank statement
deposits
Property ownership report obtained and proof of property listing on service provider website
Income limited to 125% of market rents schedule for long-term tenancy
8.6.23.6 CASH FLOW ANALYSIS OF SCHEDULE E
Cash Flow Analysis of Schedule E should be completed as follows:
Gross Rents and Royalties Received
- Total Expenses
+ Depreciation
+ Insurance
+ Mortgage Interest
+ Taxes
+ HOA fees (if included on Schedule E)
Subtotal
Subtotal / 12 = Monthly Total
Monthly Total
- Proposed or Existing Monthly PITIA
MONTHLY NET RENTAL INCOME/LOSS
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8.6.24 SEASONAL INCOME
Income from seasonal employment can be considered if the applicant has worked the same job during the
season for the past 2 years and expects to be rehired for the next season.
A written Verification of Employment and W-2s for the most recent 2 years are required. The WVOE must
reference the likelihood of the borrowers rehire. Seasonal income should be averaged over a 2-year period.
8.6.25 SELF-EMPLOYED INCOME
A borrower is considered self-employed with 25% or more ownership interest in a business. The business
may be a sole proprietorship, general partnership, limited partnership, corporation, or S corporation.
To utilize self-employed income for loan qualification, borrowers must be self-employed for at least 2 years
and the business must be in existence for at least 2 years.
A Deephaven Self-Employed Business Narrative Form
(or equivalent) is also required for all self-employed
borrowers.
8.6.25.1 SOLE PROPRIETORSHIP
A sole proprietorship is a business structure in which an individual and his or her company are
considered a single entity for tax and liability purposes. Income and losses are reported on the owner’s
Schedule C of the individual federal income tax return.
Documents required for determining income from a sole proprietorship are:
Federal income tax returns (IRS Form 1040) for the most recent complete year, including all
schedules; and
Year-to-date profit and loss statement (if the loan application is > 120 days after the year-end
reflected on the most recent business tax returns provided); and
Signed and processed IRS Form 4506-C (full 1040 transcripts capturing all schedules); and
Verification of the existence of the business within 10 business days of closing.
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8.6.25.2 PARTNERSHIPS
A partnership is a business organization in which 2 or more individuals manage and operate the
business. The partners share profits and losses and control of the business.
Documents required for determining partnership income are:
Federal income tax returns (IRS Form 1040) for the most recent complete year, including all
schedules; and
W-2s for the most recent complete year (if applicable); and
Partnership tax returns (IRS Form 1065) for the most recent complete year, including all
schedules and K-1s (Note: If borrower is a limited partner with less than 50% ownership,
partnership tax returns are not required); and
Year-to-date profit and loss statement (if the loan application is > 120 days after the year-end
reflected on the most recent business tax returns provided); and
Signed and processed IRS Form 4506-C (full 1040 transcripts capturing all schedules); and
Verification of the existence of the business within 10 business days of closing.
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8.6.25.3 CORPORATIONS
A corporation is a legal entity that is separate and distinct from its owners. If a borrower has more
than 25% ownership in a corporation, they are considered to be self-employed. A borrower that is
self-employed as a corporate officer will receive a pay stub and W-2 and will report income on his or
her personal tax returns. Corporate income or losses are reported on the corporate tax returns (IRS
Form 1120).
Documents required for determining income from a corporation:
Federal income tax returns (IRS Form 1040) for the most recent complete year, including all
schedules; and
W-2s for the most recent year; and
Corporate tax returns (IRS Form 1120) for the most recent complete year, including all
schedules; and
Year-to-date profit and loss statement (if the loan application is > 120 days after the year-end
reflected on the most recent business tax returns provided); and
Signed and processed IRS form 4506-C (full 1040 transcripts capturing all schedules); and
Verification of the existence of the business within 10 business days of closing.
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8.6.25.4 S CORPORATIONS
A Subchapter S corporation is a type of corporation which enables the company to have the benefits
of a corporation but be taxed as if it were a partnership. S corporations are generally small
corporations. The profit of the corporation is given to each owner according to his or her share of
ownership. The adjusted profit is then divided by the borrower’s share of ownership and combined
with W-2 income used for qualifying. Income is reported with both a W-2 and K-1 (reporting on the
Schedule E) or only with a K-1.
Documents required for determining income from an S corporation:
Federal income tax returns (IRS Form 1040) for the most recent complete year, including all
schedules; and
W-2s for the most recent year; and
Corporate tax returns (IRS Form 1120-S) for the most recent complete year, including all
schedules and K-1s; and
Year-to-date profit and loss statement if the loan application is dated more than 120 days after
the end of the business’s tax year; and
Signed and processed IRS Form 4506-C (full 1040 transcripts capturing all schedules); and
Verification of the existence of the business within 10 business days of closing.
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8.6.25.5 1099 INCOME
Payments to sole proprietors or contract individuals are reported on IRS Form 1099 and included in
the borrower’s Schedule C. Documentation of 1099 income is considered
Alternative Income
Documentation. See matrix for specific restrictions.
To utilize 1099 income, the following requirements must be met:
1099 for the most recent complete year is provided
Borrower has been with same 1099 provider for the past 2 years
1099s are validated with a wage and income transcript from the IRS
Year-to-date earnings are verified via a YTD paystub, written VOE, or other equivalent third-
party documentation (Deephaven ‘Request for Verification of Earnings’ Form also acceptable)
Documentation is obtained from employer confirming borrower has no job-related expenses
Deephaven Self-Employed Business Narrative Form
(or equivalent) is required.
8.6.25.6 DEEPHAVEN SELF-EMPLOYED BUSINESS NARRATIVE FORM
All self-employed borrowers must provide a business narrative with detail related to the size, scope,
and operating profile of the business, including the following:
Description of business/business profile
Location & associated rent
Number of employees/contractors
Estimated cost of goods sold, if any
Materials/trucks/equipment
Commercial or retail client base
Impact of COVID-19 pandemic on current and future business outlook
An internet search of the business is required with documentation to be included in the credit file to
support the business narrative. Underwriter Certification (or notation on the 1008) is required if there
are no returns when attempting an internet search.
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8.6.25.7 REDUCED DOCUMENTATION FOR A SECONDARY BUSINESS
Business tax returns, associated schedules, and profit and loss statements may be waived when all of
the following requirements are met:
Income/loss referenced on personal tax returns is generated from a secondary business that
is not the borrower’s primary income source; and
Income/loss from each separate business is ≤ 10% of qualifying income for the transaction; and
All losses are subtracted from the borrower’s qualifying income.
If income from a business is used to qualify the borrower, or if business expenses are added back to
income or a loss, then business tax returns, associated schedules, and profit and loss statements must
be obtained. Discretion may be used whether or not to obtain all documentation for self-employed
earnings when the secondary business may have a significant impact on the loan.
8.6.25.8 CASH FLOW ANALYSIS
Deephaven will prepare a written evaluation of the analysis of a self-employed borrower’s personal
income, including the business income or loss, reported on the borrower’s federal income tax returns,
which will be included in the loan file.
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8.6.26 SOCIAL SECURITY INCOME
When a borrower is drawing Social Security benefits from their own account/work record in the form of
Retirement or Disability, one of the following items is required:
Social Security Administrator’s (SSA) Award letter, or
Proof of current receipt
When a borrower is drawing benefits from their own account/work record in the form of Supplemental
Security Income (SSI), both the award letter AND proof of current receipt must be obtained.
When a borrower is drawing Social Security benefits from another person’s account/work record, all of
the following items are required:
SSA Award letter
Proof of current receipt; and
Proof benefit will continue for at least 3 years (e.g., verification of beneficiary’s age)
See also 8.6.18 Non-Taxable Income
.
8.6.27 TEACHER INCOME
Teachers are paid on a 9-month, 10-month or 12-month basis. The pay structure should be determined
before calculating the monthly income. If uncertainty exists, the borrower may provide a copy of their
contract or the school district’s personnel office may provide verbal confirmation.
8.6.28 TIPS AND GRATUITIES
Tips and gratuity income can be considered if receipt of such income is typical for borrower’s occupation
(i.e., waitperson, taxi driver, etc.). Income should be received for at least 2 years and documented through
the most recent year-to-date pay stubs and federal income tax returns for the most recent 2 years. Income
should be averaged over the time period verified. If the tip income is not reported on the pay stubs or tax
returns, then it may not be included in qualifying income.
8.6.29 TRAILING SPOUSE OR CO-BORROWER INCOME/RELOCATION
Trailing spouse income or co-borrower income to be received when the borrower is being relocated is not
allowed to be used as qualifying income.
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8.6.30 TRUST INCOME
Trust income can be used for qualification when all of the following requirements are met:
Copy of the trust agreement or the trustee’s statement must be obtained to confirm the amount,
frequency, and duration of payments;
Trust income to continue for at least 3 years from date of the mortgage application; and
History of receiving the trust income must be documented for 1 month.
Lump-sum distributions from the trust made prior to loan closing can be used for down payment or closing
costs if the withdrawal does not affect the qualifying amount of continuing distributions to the borrower.
The funds must be verified by a copy of the check or the trustee’s letter that shows the distribution amount.
See also 10.3.19 Trust Accounts
.
8.6.31 UNACCEPTABLE INCOME
Gambling winnings (except lottery continuing for 5 years)
Educational benefits
Stock options
Refunds of federal, state, or local taxes
Illegal income
Expense account reimbursement
Proceeds of SBA/PPP loans or any other government assistance
8.6.32 UNEMPLOYMENT COMPENSATION
Income derived from unemployment compensation is generally not allowed due to the limited duration of
its receipt. Seasonal unemployment, however, can be considered if the borrower is employed in a field
where weather affects the ability to work and where unemployment compensation is often received (i.e.,
construction). The income can be used to qualify on with a 2-year employment history in the same field of
work and a 2-year history of receipt of unemployment compensation. Income should be averaged over the
time period verified.
8.6.33 VA SURVIVORS’ BENEFITS/DEPENDENT CARE
VA benefits must be documented with a copy of the award letter or distribution forms and must continue
for at least 3 years.
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9 RATIOS AND QUALIFYING
9.1 RATIOS
The debt-to-income ratio (DTI) is calculated by adding the borrower’s total PITIA and the borrower’s total
monthly obligations and dividing by the borrower’s total monthly qualifying income.
The maximum DTI allowed for the Expanded Prime and Non-Prime Programs is 50%.
9.2 RESIDUAL INCOME
Residual income is required for all primary and second home transactions using the following calculation:
Residual Income = Gross Monthly Income – Total Monthly Obligations
Residual Income of $2,500 is required for the Expanded Prime Program and $1,500 for the Non-Prime Program.
An additional $150 per dependent must also be included for all programs. The initial 1003 should reflect the
number of dependents for all borrowers on the transaction.
9.3 PAYMENT SHOCK
Payment Shock is limited to 150% on primary residence transactions, and is calculated as follows:
Payment Shock = (Proposed Housing Payment / Present Housing Payment) * 100
Payment Shock may be exceeded when one of the following factors is present:
Residual Income ≥ $2,500
Debt-to-Income Ratio ≤ 35%
Housing Ratio ≤ 25%
Reserves exceed minimum required by at least 3 months
Borrowers’ own funds contribution exceeds minimum required by at least 5%
All consumer credit paid as agreed in the most recent 12 months
Calculation is based upon the current monthly housing payment and proposed mortgage payment. When the
current payment has been made for less than 12 months, the payment made for the longest period during the
last 24 months should be used.
For borrowers who have less than a 12-month housing history, do not have a current housing payment, or own
a home free and clear, payment is shock is not considered. See
5.5.3 No Housing History or Less Than 12
Months Verified.
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9.4 ADJUSTABLE-RATE QUALIFYING
For all ARM loans, the greater of the note rate or the fully indexed rate is used to determine the qualifying PITIA.
The fully indexed rate is calculated by adding the margin to the index. See the applicable Deephaven Matrix for
the margin, index, and other restrictions.
9.5 INTEREST-ONLY QUALIFYING
Interest-only loans qualify using the fully amortized payment calculated over the fully amortizing period, based
on the greater of the note rate or the fully indexed rate to determine qualifying PITIA. The 40-year term has a
10-year initial interest-only period followed by a 30-year fully amortizing period.
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10 ASSET ANALYSIS
Loan files must evidence sufficient funds from acceptable sources for down payment, closing costs, prepaid items,
debt payoff, and applicable reserves. A borrower’s ability to accumulate assets provides insight into the
individual’s ability to successfully manage personal finances.
See 7.3 Asset Documentation
for sourcing and seasoning requirements.
10.1 DOWN PAYMENT
See applicable Deephaven Matrix for specific LTV and down payment requirements.
10.2 RESERVES
Reserves are measured by the number of months of housing expense a borrower could pay using his or her
financial assets. See the applicable Deephaven Matrix for complete reserve requirements. The highest reserve
requirement, rather than a cumulative total, should be used when a transaction has multiple required reserves.
Net proceeds from cash-out transactions may be used to meet the reserve requirement.
Additional reserves are required when the following situations are present:
Multiple Financed Properties
: 2 months for each additional property
Use of Rental Income Without a Lease: 3 months in addition to standard requirement
First-Time Homebuyer: 6 months
No Housing History or Less Than 12 Months Verified: 9 months
Use of Rental Income from a Departing Residence: see guidelines for specific requirements
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10.3 VERIFICATION OF ASSETS
10.3.1 BORROWED FUNDS SECURED BY AN ASSET
Borrowed funds that are secured by an asset can be used as a source of funds for down payment, closing
costs, and reserves. Assets that may be used to secure funds include automobiles, artwork, collectibles,
stocks and/or bonds, and 401(k) accounts.
The terms of the secured loan and transfer of funds to the borrower should be documented. The individual
providing the secured loan cannot be a party to the transaction.
The monthly payments for the loan secured by non-financial assets must be counted in the debt-to-income
ratio. However, when the loan is secured by the borrower’s financial assets and there are sufficient assets
to pay off the loan currently verified, the monthly payment for the loan does not have to be considered as
a long-term debt when qualifying the borrower (as in the case of a 401(k) loan).
If the same financial asset is also used as part of the borrower’s financial reserves, adequacy of the
borrower’s reserves must be determined after taking into consideration the net value of the asset after it
has been reduced by the proceeds from the secured loan (and any related fees).
10.3.2 BUSINESS ASSETS
Business assets are an acceptable source of funds for down payment, closing costs, and reserves for self-
employed borrowers.
The borrowers on the loan must have a minimum of 50% ownership of the business and must be owners
on the business account. Ownership percentage must be documented via CPA letter, Operating Agreement,
or equivalent. All non-borrowing owners of the business must provide a signed and dated letter
acknowledging the transaction and confirming the borrower’s access to funds in the account. The balance
of the business assets must be multiplied by the ownership percentage to determine the owner’s portion
of business assets allowed for the transaction.
A signed letter from a CPA or borrower must also be obtained verifying that the withdrawal of funds for
the transaction will not have a negative impact on the business.
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10.3.3 DEPOSITORY ACCOUNTS
Funds held in a checking, savings, money market, certificate of deposit, or other depository accounts can
be used for down payment, closing costs, and reserves.
Indications of borrowed funds must be investigated, including recently opened accounts, recent large
deposits, or account balances that are considerably greater than the average balance over the previous few
months. A signed, written explanation of the source of funds should be obtained from the borrower and
the source of funds verified. Unverified funds are not acceptable. See also 7.3 Asset Documentation
.
If the borrower does not hold the deposit account solely, all non-borrower parties on the account
(excluding a non-borrowing spouse) must provide a written statement that the borrower has full access
and use of the funds. See also 10.3.16 Spousal Accounts
.
If bank statements provided reflect payments being made on obligations not listed on the credit report, see
6.15 Undisclosed Debts
for additional guidance.
10.3.4 EARNEST MONEY/CASH DEPOSIT ON SALES CONTRACT
If earnest money is needed to meet the borrower’s minimum contribution requirement, it must be verified
that the funds are from an acceptable source. Satisfactory documentation includes any of the following:
Copy of the borrower’s canceled check
Certification from the deposit holder acknowledging receipt of funds
VOD or bank statement showing that the average balance was sufficient to cover the amount of the
earnest money at the time of the deposit
If the earnest money check has cleared the bank, bank statements should cover the period up to and
including the date the check cleared the account. A copy of the check that has not cleared may also be
obtained along with an Account Manager’s Certification verifying with the bank the date the check cleared,
the dollar amount of the check, and the individual providing the information.
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10.3.5 GIFT FUNDS
Gift funds are allowed after the borrower has documented the minimum required borrower contribution.
Gift funds can be used for down payment, closing costs, and reserves. Gift funds are not allowed on
investment property transactions.
A signed gift letter is required to provide all of the following information:
Donor’s name, address, phone, and relationship to borrower (donor must be a relative); and
Dollar amount of gift; and
Date funds were transferred; and
Donor’s statement that no repayment is expected.
Sufficient funds to cover the gift must be verified as either currently in the donor’s account or evidence of
transfer into the borrower’s account. Acceptable documentation includes any of the following:
Copy of the donor’s check and the borrower’s deposit slip
Copy of the donor’s withdrawal slip and the borrower’s deposit slip
Copy of the donor’s check to the closing agent
Evidence of wire transfer from donor to borrower
Settlement statement showing receipt of the donor’s check
When the funds are not transferred prior to closing, it must be documented that the donor gave the closing
agent the gift funds in the form of a certified check, a cashier’s check, money order, or wire transfer.
See also 10.3.16 Spousal Accounts
.
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10.3.6 GIFT OF EQUITY
Gifts of equity on non-arm’s length transactions are allowed. Transactions with gifts of equity are subject
to the maximum LTVs available for cash-out transactions, and no minimum borrower contribution is
required.
The following requirements apply:
Primary residence transactions only
Gift of equity is from an immediate family member
Six months of reserves required of borrower’s own funds
Non-arm’s length
criteria is met
Signed gift letter is provided
Gift of equity is listed on the settlement statement
10.3.7 FOREIGN ASSETS
For U.S. citizen and permanent resident alien borrowers, all funds required for down payment, closing costs,
and reserves must be seasoned for 60 days. See 7.3 Asset Documentation
. Foreign assets deposited into a
U.S. institution within 60 days of application are acceptable if there is evidence that the funds were
transferred from the country from which the borrower previously or currently resides. It must also be
established that the funds belonged to the borrower before the date of transfer.
Funds required for closing (down payment and closing costs) must be seasoned in a U.S. depository
institution for 30 days prior to closing.
Assets held in a foreign account can be used for reserves. The most recent 30-day account statement is
required, and funds are to be converted to U.S. dollars using the current exchange rate. A letter of reference
on company letterhead from a verifiable banking institution may also be obtained. Contact information must
be provided by the person signing the letter, and the letter must state the type of relationship, length of the
relationship, how accounts are held, and current balance. Any translation must be signed and dated by a
certified translator.
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10.3.8 INTERESTED PARTY CONTRIBUTIONS
MAXIMUM CONTRIBUTIONS
OCCUPANCY LTV MAX PERCENTAGE
Primary and 2
nd
Homes ALL 6%
Investment ALL 2%
Note: Percentage is based on of the lesser of the property’s sales price or appraised value and may be applied
towards the buyer’s closing costs, prepaid expenses, discount points, and other financing concessions.
Sales concessions include:
Financing concessions in excess of the max financing concession limitations; or
Contributions such as cash, furniture, automobiles, decorator allowances, moving costs, and other
giveaways granted by any interested party to the transaction (contributions with a combined value
under $1,000 should be excluded)
The value of sales concessions must be deducted from the sales price when calculating LTV for underwriting
and eligibility purposes. The LTV is then calculated using the lower of the reduced purchase price or the
appraised value.
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10.3.9 LIFE INSURANCE
Net proceeds from the surrender of a life insurance policy or from a loan against the cash value are
acceptable for down payment, closing costs, and reserves.
If the funds are needed for the down payment or closing costs, borrower’s receipt of the funds from the
insurance company must be documented by obtaining either a copy of the check from the insurer or a copy
of the payout statement issued by the insurer. If the cash value of the life insurance is being used for reserves,
the cash value must be documented but does not need to be liquidated and received by the borrower.
Any repayment obligations must be assessed to determine any impact on borrower qualification or reserves.
If penalties for failure to repay the loan are limited to the surrender of the policy, payments on a loan
secured by the cash value of a borrower’s life insurance policy do not have to be considered in the total
debt-to-income ratio. If additional obligations are indicated, the amount must be factored into the total
debt-to-income ratio or subtracted from the borrower’s reserves.
10.3.10 MINIMUM BORROWER CONTRIBUTION
Borrowers must document a minimum of 5% (of the sales price) of their own funds on purchase
transactions. Investment property transactions require all funds come from the borrower.
A minimum borrower contribution of 10% must be documented on the following transactions:
Primary residence with unverifiable housing history
Second home
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10.3.11 NET PROCEEDS FROM SALE OF REAL ESTATE
If part of the down payment is expected to be paid from the sale of the borrower’s current home, a final
settlement statement verifying sufficient net proceeds must be obtained.
10.3.12 RENT CREDIT FOR LEASE WITH PURCHASE OPTION
Borrowers may apply a portion of the rent paid to their down payment requirements. Credit for the down
payment is determined by calculating the difference between the market rent and the actual rent paid for
the last 12 months. The market rent is determined by the appraiser in the appraisal for the subject property.
See 3.11 Lease with Purchase Option
for full requirements.
The following documentation must be obtained:
Copy of the rental/purchase agreement evidencing a minimum original term of at least 12 months,
clearly stating the monthly rental amount and the terms of the lease
Copies of the borrower’s canceled checks or money order receipts for the last 12 months
evidencing the rental payments
Market rent as determined by the subject property appraisal
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10.3.13 RETIREMENT ACCOUNTS
Vested funds from individual retirement accounts (IRA/SEP/Keogh accounts) and tax-favored retirement
savings accounts (401(k) accounts) are acceptable sources of funds for the down payment, closing costs,
and reserves. Deephaven must verify the ownership of the account, and the account must be vested and
allow withdrawals regardless of current employment status.
If the retirement assets are in the form of stocks, bonds, or mutual funds, the account must meet the
requirements of 10.3.18 Stocks, Bonds, and Mutual Funds
for determining value and whether documentation
of the borrower’s actual receipt of funds is required when used for the down payment and closing costs.
When funds from retirement accounts are used for reserves, the funds do not have to be withdrawn from
the account.
If the borrower intends to use the retirement account to also satisfy income requirements, see also 8.6.21.1
Proof of Continuance.
10.3.14 SALE OF PERSONAL ASSETS
Proceeds from the sale of personal assets are an acceptable source of funds for down payment, closing
costs, and reserves, provided the individual purchasing the asset is not a party to the property sale or
mortgage financing transaction.
The following must be documented:
Borrower’s ownership of the asset
Value of the asset, as determined by an independent and reputable source
Transfer of ownership of the asset, as documented by either a bill of sale or a statement from the
purchaser
Borrower’s receipt of the sale proceeds from documents such as deposit slips, bank statements, or
copies of the purchaser’s canceled check
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10.3.15 SECONDARY/SUBORDINATE FINANCING
Secondary or subordinate financing is allowed with a maximum CLTV equaling maximum LTV per matrix.
Secondary financing is not permitted for investor-occupied properties.
If the subordinate financing has a simultaneous closing, the following is required:
A copy of the loan approval and repayment terms for the new financing; and
A copy of the executed note at closing.
If the subordinate financing is being subordinated, the following is required:
The repayment terms of the existing second lien;
An unsigned copy of the subordination agreement prior to closing; and
A copy of the executed subordination agreement at closing.
The following requirements apply to all subordinate liens:
Seller-held subordinate liens are not permitted
Subordinate financing must be recorded and clearly subordinate to the new mortgage
Payment on the subordinate financing must be included the borrower’s DTI. If a payment is unable
to be determined, 1.5% of the original loan balance can be used.
If the debt is an equity line of credit, the CLTV ratio is calculated by adding the total HELOC credit
line limit (rather than the amount of the HELOC in use) to the first mortgage amount, plus any
other subordinate financing, and dividing that sum by the value of the property
Negative amortization is not allowed, and the scheduled payments must be sufficient to cover at
least the interest due
Subordinate financing from the borrower’s employer may not include a provision requiring payment
upon termination
Subordinate liens can be paid off through closing. See 3.4 Rate/Term Refinance and 3.5 Cash-out Refinance
for more information.
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10.3.16 SPOUSAL ACCOUNTS
Accounts held solely in the name of a non-borrowing spouse may be used for down payment and closing
costs only and are subject to the seasoning requirements outlined in 7.3 Asset Documentation
.
Accounts held solely in the name of a non-borrowing spouse may not be used to meet reserve
requirements.
10.3.17 STOCK OPTIONS
Vested stock options are an acceptable source of funds for down payment and closing costs when
immediately available to the borrower. Stock options may not be used to meet reserve requirements. The
value of vested stock options can be documented by:
Referencing a statement listing the number of options and the option price; and
Determining the gain that would be realized from exercise of an option and the sale of the optioned
stock using the current stock price
10.3.18 STOCKS, BONDS, AND MUTUAL FUNDS
Vested assets in the form of stocks, government bonds, and mutual funds are acceptable sources of funds
for the down payment, closing costs, and reserves provided their value can be verified. The borrower’s
ownership of the account or asset must be verified.
When used for the down payment or closing costs, if the value of the asset is at least 20% more than the
amount of funds needed for the down payment and closing costs, no documentation of the borrower’s
actual receipt of funds realized from the sale or liquidation is required. Otherwise, evidence of the
borrower’s actual receipt of funds realized from the sale or liquidation must be documented.
When used for reserves, 100% of the value of the assets (as determined above) may be considered, and
liquidation is not required.
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10.3.19 TRUST ACCOUNTS
Funds disbursed from a borrower’s trust account are an acceptable source for down payment, closing costs,
and reserves provided the borrower has immediate access to the funds.
To document trust account funds, both of the following must be obtained:
Written documentation of the value of the trust account from either the trust manager or the
trustee; and
The conditions under which the borrower has access to the funds and the effect, if any, that the
withdrawal of funds will have on trust income used in qualifying the borrower for the mortgage.
See 8.6.30 Trust Income
if trust is also being used as a source of income to qualify the borrower.
10.3.20 UNACCEPTABLE FUNDS
Cash-on-hand
Sweat equity
Gift or grant funds which must be repaid
Down payment assistance programs
Bridge loans
Unsecured loans or cash advances
Section 8 Voucher Assistance
Proceeds of SBA/PPP loans or any other government assistance
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11 PROPERTY
11.1 GENERAL PROPERTY REQUIREMENTS
A completed appraisal report is required on all loan transactions to assess the adequacy of the property as
collateral for the mortgage requested. The Broker will order the appraisal report, and Deephaven will receive
the report and send it via both mail and portal to the Broker and client.
Deephaven will review and assess all of the following:
The accuracy and completeness of the appraisal and its assessment of the marketability of the property
Underwriting the completed appraisal report to determine whether the subject property presents
adequate collateral for the mortgage
Continually evaluating the quality of the appraiser’s work through normal underwriting review of all
appraisal reports and spot-check field review of appraisals as part of its quality control program
Ensuring that the appraiser uses sound reasoning and provides evidence to support the methodology
used for developing the value opinion
Ensuring that the appraiser provides an accurate opinion, an adequately supported value, and an accurate
description of the property
Ensuring that the appraiser provides his or her license or certification on the appraisal report
Complying with the Appraiser Independence Requirements published by Fannie Mae/Freddie Mac and
the requirements of the Federal Truth in Lending Act and Regulation Z with respect to valuation
independence
Disclosing to the appraiser any information about the subject property of which it is aware of that could
impact the marketability of the property
Providing the appraiser with the ratified sales contract and other financing or sales concessions that are
associated with the transaction
Ordering and receiving the appraisal report for each mortgage transaction
Ensuring the appraiser does not use unsupported assumptions or use race, color, religion, sex, handicap,
familial status, national origin for any party in the transaction, or impermissible demographics of the
community in which the property is located, as the basis for market value
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11.2 UNIFORM RESIDENTIAL APPRAISAL REPORT (URAR)
Appraisers are required to use current appraisal report forms that are acceptable to Fannie Mae and/or Freddie
Mac. The following appraisal report forms should be used, when applicable:
Uniform Residential Appraisal Form (FNMA Form 1004)
Small Residential Income Property Appraisal Report (FNMA Form 1025)
Individual Condominium Unit Appraisal Report (FNMA Form 1073)
Appraisal Update and/or Completion Report (FNMA Form 1004D)
Single Family Comparable Rent Schedule for all 1-unit investment properties (FNMA Form 1007)
1-4 Family Rider (Assignment of Rents) for all investment properties (FNMA Form 3170)
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11.2.1 APPRAISAL REPORT REQUIREMENTS
The following items must be contained in the appraisal report:
Street map showing the location of the subject property and all comparables used.
Exterior building sketch of the improvements indicating dimensions. A floor plan sketch is required
along with calculations demonstrating how the estimate for gross living area is determined. For a
unit in a condo project, the sketch of the unit must indicate interior perimeter unit dimensions
rather than exterior building dimensions.
Original color photographs or digital color images of the front, street, and rear views of the subject
property. Original digital black and white photographs/pictures are permitted if the appraisal clearly
indicates the subject property meets our standards.
Interior photos of the subject are required to include the kitchen, all bathrooms, the main living
area, any areas with physical deterioration, and any renovations/ improvements.
Any other data as an attachment or addendum to the appraisal report form necessary to provide
an adequately supported estimate of market value.
Appraisal report must contain analysis of all agreements of sale, options or listings for the subject
property current as of the effective date of the appraisal, and analysis of all sales of the subject
property that occurred within the 3 years prior to the effective date of the appraisal.
Appraisal report must include a completed Sales Comparison Approach section of FNMA Form
1004 where there are comparables used with more than one sale or transfer in the 12 months
prior to the effective date of the appraisal.
Appraiser comments on any unfavorable conditions, such as adverse environmental or economic
factors, and how those conditions impact the market value of the property. In those cases, the
appraiser’s analysis must reflect and include comparable sales that are similarly affected.
Certification and Statement of Limiting Conditions signed by the appraiser.
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11.2.2 APPRAISER QUALIFICATIONS
Real estate appraisers are to be state-certified or state-licensed in accordance with the provisions of Title
XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. They must have the requisite
knowledge required to perform a professional quality appraisal for the specific geographic location and
property type as well as have access to the necessary and appropriate data sources for the appropriate area
of the appraisal assignment.
Deephaven utilizes Appraisal Management Companies (AMCs) to ensure the appraisers selected have the
appropriate knowledge, experience, access to the appropriate data sources, geographic competence, and
the ability to generate a quality appraisal report. The Broker may choose any of the AMCs that Deephaven
has contracted with to order appraisals.
An unlicensed or uncertified appraiser who works as an employee or subcontractor of a licensed appraiser
may perform a significant amount of the appraisal as long as the appraisal report is signed by a licensed or
certified appraiser and is acceptable under state law. A supervisory appraiser or any appraiser signing on
the left-hand side of the appraisal report as the “Appraiser” must have performed the level of inspection of
the subject property required by the assignment.
11.2.3 ELECTRONIC SUBMISSION OF APPRAISAL REPORT
Appraisal reports which have been transmitted electronically using internet, wireless transmissions, or other
types of electronic transmissions are acceptable, provided the following are met:
The appraisal report accurately identifies the appraiser and is signed by the appraiser. Digitized
signatures are acceptable.
The appraisal report was created by the appraiser whose name appears on the appraisal report and
that the appraisal is complete, unaltered, and submitted by the identified appraiser.
11.2.4 TRANSFERRED APPRAISALS
Transferred appraisals are only allowed when the Broker explicitly follows the Deephaven Wholesale
Appraisal Transfer Policy which ensures compliance with the Home Valuation Code of Conduct (HVCC)
and Appraiser Independence Requirements. Transferred appraisals are subject to full underwriting review
and Deephaven acceptance. Deephaven reserves the right to not accept a transferred appraisal.
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11.2.5 AGE OF APPRAISAL AND APPRAISAL UPDATES
Properties must be appraised within the 12 months that precede the date of the note and mortgage.
When an appraisal report will be more than 4 months old on the date of the note and mortgage, regardless
of whether the property was appraised as proposed or existing construction, the appraiser must inspect
the exterior of the property and review current market data to determine whether the property has
declined in value since the date of the original appraisal. This inspection and results of the analysis must be
reported on the Appraisal Update and/or Completion Report (Form 1004D), with interior and exterior
photos.
If the appraiser indicates on the Form 1004D that the property value has declined, then the Broker
must obtain a new appraisal for the property.
If the appraiser indicates on the Form 1004D that the property value has not declined, then the
Broker may proceed with the loan in process without requiring any additional fieldwork.
Note: The appraisal update must occur within the 4 months that precede the date of the note and mortgage.
The original appraiser should complete the appraisal update; however, substitute appraisers may be used.
When updates are completed by substitute appraisers, the substitute appraiser must review the original
appraisal and express an opinion about whether the original appraiser’s opinion of market value was
reasonable on the date of the original appraisal report. The file must be noted as to why the original
appraiser was not used.
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11.3 MINIMUM PROPERTY STANDARDS
All properties must:
Be improved real property
Be designed and available for year around residential use
Contain a kitchen and a bathroom
Contain a minimum of 600 square feet of gross living area
Be heated by a continuously fueled heat source which is permanently affixed to the real estate.
Alternative heat sources are acceptable when marketability has been demonstrated.
Average or better than average condition
Represent the “highest and best” use of the subject
Be free of all health and safety violations
NOT be in violation of any housing codes or exhibit items that adversely affect the ownership,
habitability, or marketability of the subject property
Must have a remaining economic life of 30 years
11.4 PROPERTY LOCATION
See applicable Deephaven Matrix. Subject property must be subject to the laws of the state in which the loan is
made.
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11.5 ELIGIBLE PROPERTY TYPES
PROPERTY ELIGIBILITY
PROPERTY TYPE ELIGIBLE
Single-Family Residence Yes
Planned Unit Development (PUD) Yes
Townhomes Yes
2-4 Unit Multi-Family Properties* Yes
Condominium (low-rise and high-rise)* Yes
Log Homes* Yes
Modular Homes* Yes
Site Condominium Yes
Non-Warrantable Condominiums* Yes
Mixed-Use Properties
No
Assisted Living/Continuing Care Facilities No
Boarding Houses No
Co-operative Units No
Condotels or Condo Hotels No
Farms or Hobby Farms No
Manufactured Homes No
Properties Subject to Rent Control Regulations No
Unique Properties (Earth Homes, Berm Homes, Dome Homes, etc.) No
*See the applicable Deephaven Matrix for LTV restrictions.
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11.6 MARKET ANALYSIS
11.6.1 NEIGHBORHOOD REVIEW
The neighborhood section should contain an accurate description of the subject’s neighborhood and any
factors about the neighborhood that may influence value. Specific neighborhood characteristics include the
following:
Degree of development
Demand and supply
Present land use
Owner-occupancy
Price range and predominant value
Age of subject property
Appeal to market and marketing time
11.6.2 COMPATIBILITY OF SUBJECT PROPERTY AND NEIGHBORHOOD
The age and price of the subject property should generally be within the age and price ranges of properties
in the subject neighborhood as reported on the URAR. Neighborhood factors indicating compatibility of
the subject, such as present land use, predominant occupancy, and anticipated change in present land use
are considered. Residential properties in areas that are zoned as either agricultural or commercial may be
considered acceptable risks so long as their location does not impact marketability.
11.6.3 PROXIMITY OF COMPARABLES TO SUBJECT PROPERTY
Whenever possible, comparable sales in the same neighborhood as the subject property should be used.
Sales prices of comparable properties in the neighborhood should reflect the same positive and negative
location characteristics.
For properties in established subdivisions, condo projects or PUDs, comparable sales from within the same
subdivision or project as the subject property must be used if the subdivision or project has resale activity.
Use of comparable properties located outside of the established subject neighborhood must be explained
in the appraisal analysis.
For properties in new subdivisions, condo projects or PUDs, the subject property must be compared to
other properties in its general market area as well as to properties within the subject subdivision or project.
The appraiser must select one comparable sale from the subject subdivision or project and one comparable
sale from outside the subject subdivision or project. The third comparable sale can be from inside or outside
of the subject subdivision or project, provided it is a good indicator of value for the subject property.
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11.6.4 AGE OF COMPARABLES
Generally, appraisals should contain comparables sales dated within 6 months from the report date.
Comparables from 6 to 12 months are permitted on a limited basis with an explanation from the appraiser.
Older comparable sales that are the best indicator of value for the subject property may be used if
appropriate. Value must be supported and market acceptance demonstrated when older comparables are
utilized.
11.6.5 PROPERTY VALUES WITHIN MARKET AREA
The value of subject property should be in line with the home prices in the subject’s market area. The
appraiser must report the primary indicators of market condition for properties in the subject
neighborhood as of the effective date of the appraisal by noting the following:
the trend of property values
the supply of properties in the subject neighborhood
marketing time for properties
The appraiser must provide their conclusions for the reasons a market is experiencing declining property
values, an over-supply of properties, or marketing times over 6 months.
11.6.6 REDLINING PROHIBITION
Prohibited bases such as race, ethnicity, gender, minority geography or any other prohibited basis category
should not be included as an appraisal factor or considered when reviewing an appraisal. As a matter of
policy, appraisal reports which make reference to a prohibited basis category (e.g., race or minority
geography) are not acceptable. The use of code phrases as proxies for race which are not necessarily
descriptive of value or risk is unacceptable. The information in the appraisal report must support in an
objective manner any statement or conclusion contained in the report.
11.6.7 OVER-IMPROVEMENTS
An over-improvement is an improvement that costs more than its contributory value within the
marketplace. The appraiser must comment on over-improvements and indicate their contributory value in
the “sales comparison analysis” adjustment grid. Improvements can represent an over-improvement for the
neighborhood, but still be within the neighborhood price range—such as a property with an in-ground
swimming pool, a large addition, or an oversized garage in a market that does not demand these kinds of
improvements. Appraisals on properties with over-improvements that may not be acceptable to the typical
purchaser must be reviewed to ensure that only the contributory value of the over-improvement is
reflected in the appraisal analysis.
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11.7 VALUATION ANALYSIS
11.7.1 SALES COMPARISON APPROACH
Each appraisal must contain an estimate of market value. Market value is defined as the most probable price
which a property should bring in a competitive and open market under all conditions requisite to a fair sale,
the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by
undue stimulus. Implicit in this definition are the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby:
Buyer and seller of property are typically motivated
Both parties are well informed or well advised, acting in what they consider their best interest
A reasonable time is allowed for exposure in the open market
Payment is made in terms of cash in US dollars or in terms of comparable financial arrangements
comparable
The price represents the normal consideration for the subject property sold unaffected by special
financing or sales concessions granted by anyone associated with the sale
A minimum of 3 closed comparables must be reported in the sales comparison approach. Additional
comparable sales may be reported to support the opinion of market value provided by the appraiser. The
subject property can be used as a fourth comparable sale or as supporting data if it was previously closed.
Contract offerings and current listings can be used as supporting data, if appropriate.
Comparable sales utilized in the market approach should:
Be within one mile of the subject property
Have been closed within the last 6 months
Indicate properties that are similar to the subject property with respect to age, size, features,
amenities, etc.
Result in an overall net adjustment not exceeding 15% of the sales price of that comparable and a
gross adjustment not exceeding 25% of the sales price of that comparable
Reflect adjustments for individual line items not exceeding 10%
Have a sales price that is within the general range of value as the subject
Have at least 3 of the comparables should be recently closed sales
In instances where comparables conforming to the criteria stated above cannot be used, the appraiser must
clearly justify reasons for alternate comparables.
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11.7.2 COST APPROACH
When completed, the cost approach must clearly segregate value attributed to land, outbuildings, etc. If the
ratio of land value to total value exceeds 35%, an explanation from the appraiser may be required to
demonstrate conformance with neighboring properties. See also 11.8.12 Land Value
. Appraisals that rely
solely on the cost approach as an indicator of market value are not acceptable.
11.7.3 INCOME APPROACH
When the income approach to value is used, the appraisal report must include the supporting comparable
rental and sales data and the calculations used to determine the gross rent multiplier. Appraisals that rely
solely on the income approach as an indicator of market value are not acceptable.
11.7.4 VALUATION ANALYSIS AND FINAL RECONCILIATION
In the final reconciliation, appraisers must reconcile the reasonableness and reliability of each applicable
approach to value along with validity of the indicated values. The appraiser must select and report the
approaches that were given the most weight. An averaging technique cannot be used.
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11.7.5 APPRAISAL REVIEW PROCESS
All transactions require a Clear Capital CDA review product to support the appraisal value for the
transaction.
The following transactions require a 2nd full appraisal in lieu of a CDA:
Approved loan amount exceptions (when exceeding max loan amount available per matrix)
Loan amounts > $2,000,000
Deephaven reserves the right to request additional appraisal products at their discretion based on review
of the appraisal and loan file.
11.7.6 APPRAISAL REVIEW TOLERANCE
If two appraisals are required, the lower of the two values or the purchase price must be used. If there is
a variance greater than 10% between both appraisals, the property is considered ineligible.
A 10% tolerance is permitted for all other secondary review products. If the review product value is more
than 10% below the appraised value, the lower of the two values must be used. If the tolerance is exceeded,
the Broker or Deephaven may choose to order an additional review product of a higher-level review. The
original appraised value may then be used if the additional review product value is within 10% of the
appraised value. If the variance is greater than 10%, a second full appraisal is required.
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11.8 PROPERTY CONSIDERATIONS
11.8.1 ACCESSORY UNITS
Properties with accessory units, also known as Granny units, mother-in-law suites, etc., are acceptable if all
of the following are met:
Property is typical, readily acceptable, and common in the subject’s market area
Property must conform to all zoning laws and/or regulations
Appraisal contains 3 comparables with similar additional accessory units
Accessory unit is substantially smaller than the primary dwelling
Legal non-conforming use is acceptable provided its current use does not adversely affect value and
marketability
Any rental income received from the accessory unit may not be used for qualifying
Existence of the unit must not jeopardize any future hazard insurance claim that may need to be
filed for the property
11.8.2 DAMPNESS
If the appraisal report notes evidence of dampness, the appraiser must clearly define the effect on value and
marketability of the subject property, as well as comment regarding the probable cause of the dampness
problem. Generally, a structural engineer’s report is required prior to making a loan decision. The cause of
the dampness must be corrected prior to closing should the dampness problem indicate a structural
deficiency and/or significant negative impact on value or marketability.
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11.8.3 DEED RESTRICTIONS
Deed restrictions impact the future transferability of a property. The following deed restrictions are
allowed:
Age Restricted Communities
Deed restrictions must be reviewed to ensure all of the following requirements are met:
Appraisal supports property is common and typical for the market area
Deed restriction must not impair or restrict the first mortgage holder's legal rights in the event of
a default (or cure), foreclosure, or any other default measure
Declarations must not contain any provisions that would require the first mortgage holder to send
a notice of default or foreclosure to any third party
Deed restriction must not require the lender to provide notification to the governing authority of
any delinquency or default
11.8.4 DEFERRED MAINTENANCE
Property must be in average or better condition. Properties in C5 or C6 condition are not acceptable.
Deferred maintenance is allowed provided the neglected item is not structural in nature (as noted by the
appraiser). Deferred items may be left “as is” if the aggregate cost to cure the deficiency does not exceed
$2,000 or impact the safety or habitability of the property.
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11.8.5 DISASTER AREAS
Brokers and Deephaven are responsible for identifying areas impacted by disasters and taking the
appropriate steps to ensure the subject property has not been adversely affected. Examples of disasters
include, but are not limited to, hurricanes, earthquakes, floods, landslides, tornadoes, wildfires, volcanic
eruptions, civil unrest, and terrorist attacks.
Adverse events that receive a formal disaster declaration issued by local, state, or federal departments of
emergency management must follow the procedures listed below. A list of all federally declared disaster
areas may be found on the FEMA website at http://www.fema.gov/disasters
.
In addition, when there is knowledge of an adverse event occurring in and around the subject property’s
geographic region and a formal declaration has not yet been made, additional due diligence is required to
determine whether the disaster area guidelines must be followed.
Damage to the subject property must meet requirements in 11.8.4 Deferred Maintenance
.
11.8.5.1 PROPERTY APPRAISED PRIOR TO DISASTER INCIDENT
If the appraisal effective date is prior to the disaster incident, the following documentation is required:
Clear Capital Post Disaster Inspection Report (PDI or equivalent); or
An exterior inspection completed by licensed third-party professional:
o Exterior inspection must certify the condition of the subject property and identify any
impact to habitability or marketability
o Inspection report must include photographs of the front, street view, and any damage
to subject property
o Inspection report and evidence of inspector licensing must be retained in loan file
If the appraisal was complete at the time of the disaster but ‘subject to completion’ or ‘subject to
repairs’, an Appraisal Update and/or Completion Report (FNMA Form 1004D) is required in addition
to the inspections listed above.
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11.8.5.2 PROPERTY APPRAISED AFTER DISASTER INCIDENT
When the appraisal effective date is after the disaster incident, no additional documentation is required.
11.8.5.3 DISASTER INCIDENT OCCURS AFTER CLOSING OR PRIOR TO FUNDING
If the disaster incident occurred after closing, the loan is ineligible for purchase or funding until one of
the following is received certifying no damage to the subject property:
Clear Capital Post Disaster Inspection Report (PDI or equivalent); or
Appraisal Update and/or Completion Report (FNMA Form 1004D)
11.8.5.4 TIME PERIOD
Guidelines for disaster areas should be followed for 60 days from the incident period ending date or
the date the adverse event occurred, whichever is later.
11.8.5.5 VERBAL VERIFICATION OF EMPLOYMENT RE-VERIFICATION
If a disaster event occurs after the Verbal Verification of Employment (VVOE) has been completed, an
update must be obtained to ensure the borrower is still employed and that they are continuing to
receive the same amount of income.
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11.8.6 ELECTRICAL SYSTEMS
An electrical certification from a licensed electrician is required if the appraisal notes a fair or poor rating
concerning the adequacy or condition of the system. Any electrical inadequacies must be corrected prior
to closing.
11.8.7 ENVIRONMENTAL HAZARDS
The appraisal report should note the existence of known environmental hazards and its effect on value and
marketability of the subject property. Environmental hazards may include but are not limited to:
Evidence of radon above EPA safety levels which is left untreated
Properties built on or near toxic waste dumps, cleanup sites, etc.
Presence of urea formaldehyde foam insulation (UFFI)
A property inspection completed by a licensed inspector is required in order to make final determination
of the acceptability of the property. The mortgagor’s acknowledgment of condition is required.
11.8.8 ESCROWS FOR WORK COMPLETION
Not allowed
11.8.9 FLOOD ZONE
The appraisal should indicate if the property is located in a flood zone. Refer to 12.3 Flood Insurance for
additional information on flood certifications and flood insurance.
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11.8.10 FOUNDATION SETTLEMENT
If the appraisal report notes evidence of excessive settlement, the appraiser must clearly define the effect
on value and marketability of the subject property. Settlement problems which denote structural
deficiencies and/or significant negative impact on value and marketability must be corrected prior to closing.
Generally, a structural engineer’s report is required prior to making a loan decision.
Properties with evidence of sinkhole activity are ineligible for financing.
11.8.11 HEATING SYSTEMS
A central heat source with ductwork or baseboard in all rooms is required on all properties. If subject does
not have central heat, the appraiser must provide similar comparable properties and an addendum indicating:
the heat source is typical for the area
the heat source is permanently attached
the heat source is adequate for the dwelling
the heat source is externally vented
11.8.12 LAND VALUE AND ACREAGE
Acreage and land value must be typical and common for the subject’s market. Maximum acreage permitted
is 15 acres. Investment property transactions are limited to 2 acres.
Special consideration should be taken for properties with land values that exceed 35% of the total property
value to ensure the value is justified and the property has marketability. The appraisal report must provide
data which indicates like-size properties with similar land values are typical and common in the subject’s
market area.
See also 11.8.24 Rural Properties
.
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11.8.13 LEASEHOLD APPRAISAL REQUIREMENTS
A mortgage that is secured by a leasehold estate or is subject to the payment of “ground rent” gives the
borrower the right to use and occupy the real property under the provisions of a lease agreement or
ground lease, for a stipulated period of time, as long as the conditions of the lease are met.
When the lease holder is a community land trust, there may be significant restrictions on both the purchase
and resale of the property. See also 11.8.13.3 Community Land Trust Appraisal Requirements
.
11.8.13.1 APPRAISAL REQUIREMENTS FOR LEASEHOLD INTERESTS
The appraisal requirements for leasehold interest properties are as follows:
Appraisers must develop a thorough, clear, and detailed narrative that identifies the terms,
restrictions, and conditions regarding lease agreements or ground leases and include this
information as an addendum to the appraisal report.
Appraisers must discuss what effect, if any, the terms, restrictions, and conditions of the lease
agreement or ground lease have on the value and marketability of the subject property.
11.8.13.2 COMPARABLE REQUIREMENTS FOR LEASEHOLD INTERESTS
When there are a sufficient number of closed comparable property sales with similar leasehold
interests available, the appraiser must use the property sales in the analysis of market value of the
leasehold estate for the subject property.
However, if not enough comparable sales with the same lease terms and restrictions are available,
appraisers may use sales of similar properties with different lease terms or, if necessary, sales of similar
properties that were sold as fee simple estates. The appraiser must explain why the use of these sales
is appropriate and must make appropriate adjustments in the Sales Comparison Approach adjustment
grid to reflect the market reaction to the different lease terms or property rights appraised.
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11.8.13.3 COMMUNITY LAND TRUST APPRAISAL REQUIREMENTS
11.8.13.3.1 Appraiser Qualifications for Properties in a Community Land Trust
The appraiser must be knowledgeable and experienced in the appraisal techniques, namely the direct
capitalization and the market derivation of capitalization rates that are necessary to appraise a property
subject to a leasehold estate held by a community land trust. Policies and procedures should be
established to ensure that qualified individuals are being selected in accordance with the Appraiser
Independence Requirements.
11.8.13.3.2 Appraisal Requirements for Properties in a Community Land Trust
The appraisal requirements for community land trust properties are as follows:
The appraiser must analyze the property subject to the ground lease when a leasehold interest
is held by a community land trust. Because the community land trust typically subsidizes the
sales price to the borrower, that price may be significantly less than the market value of the
leasehold interest in the property.
The appraised value of the leasehold interest in the property must be well supported and
correctly developed by the appraiser because the resale restrictions, as well as other
restrictions that may be included in the ground lease, can also affect the value of the property.
The lender and the borrower must execute the Community Land Trust Ground Lease Rider
(FNMA Form 2100) to remove such restrictions from the community land trust’s ground lease.
The land records for the subject property must include adoption of the terms and conditions
that are incorporated in that ground lease rider. The appraiser must develop the opinion of
value for the leasehold interest under the hypothetical condition that the property rights being
appraised are the leasehold interest without the resale and other restrictions that the ground
lease rider removes when a property is disposed of through foreclosure.
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The appraiser must use a three-step process to develop an opinion of value (Note: When this
appraisal technique is used, there is no need to document the actual land value of the security
property).
o The appraiser must determine:
Step 1: the fee simple value of the property by using the sales comparison
analysis approach to value,
Step 2: the applicable capitalization rate and convert the income from the
ground lease into a leased fee value by using the market-derived capitalization
rate, and
Step 3: the leasehold value by reducing the fee simple value by the lease fee value
o On the actual appraisal report form, the appraiser must:
indicate “leasehold” as the property rights appraised,
provide the applicable ground rent paid to the community land trust,
show the estimated fee simple value for the property in the Sales Comparison
Approach adjustment grid,
report the “leasehold value” as the indicated value conclusion, and
check the box “as is” and include in the addendum the development of the
capitalization rate and an expanded discussion of the comparable sales used and
considered.
11.8.13.3.3 Comparable Requirements for Determining Fee Simple Value
In determining the fee simple value of the subject property, the appraiser must use comparable sales
of similar properties that are owned as fee simple estates. If this is not possible, the appraiser may use
sales of properties that are subject to other types of leasehold estates as long as he or she makes
appropriate adjustments, based on the terms of their leases, to reflect a fee simple interest.
When the community or neighborhood has sales activity for other leasehold estates held by a
community land trust, the appraiser must discuss them in the appraisal report, but must not use them
as comparable sales because, in all likelihood, the sales prices will have been limited by restrictions in
the ground lease. Therefore, these sales transactions would not be comparable to the hypothetical
condition that the property rights being appraised are the leasehold interest without the resale and
other restrictions on which the appraisal of the subject property must be based.
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11.8.13.3.4 Determining the Capitalization Rate
When the community has an active real estate market that includes sales of properties owned as fee
simple estates and sales of properties subject to leasehold estates other than those held by community
land trusts, the appraiser can use the most direct method for determining the capitalization rate,
extracting it from the market activity. To extract the capitalization rate, the appraiser must divide the
annual ground rent for the properties subject to leasehold estates by the difference in the sales prices
for the comparable sales of properties owned as fee simple estates and the comparable sales of
properties subject to leasehold estates.
If there are no available comparable sales of properties subject to leasehold estates other than those
held by a community land trust, the appraiser must develop a capitalization rate by comparing
alternative low-risk investment rates, such as the rates for long-term bonds, and selecting a rate that
best reflects a “riskless” (safe) rate.
11.8.13.3.5 Determining the Leasehold Value
To determine the leasehold value of the subject property, the appraiser must first convert the annual
income from the community land trust’s ground lease into a leased fee value by dividing the income by
the market-derived capitalization rate. The appraiser must then reduce the estimated fee simple value
of the subject property by this leased fee value to arrive at his or her opinion of the leasehold value of
the subject property. For example, assume that the annual ground rent from the community land trust’s
ground lease is $300, the market-derived capitalization rate is 5.75%, and the estimated fee simple
value of the subject property is $100,000:
$300 annual rent/5.75% capitalization rate = $5,217.39 (rounded to $5,200)
$100,000 fee simple value – $5,200 leased fee value = $94,800 (leasehold value)
11.8.13.3.6 Addendum to the Appraisal Report
Because appraisal report forms do not include space to provide all of the details required for appraising
a property subject to a leasehold held by a community land trust, the appraiser must attach an
addendum to the appraisal report to provide any information that cannot otherwise be presented on
the appraisal report form. As previously mentioned, the appraiser must check the box “as is” and
include in the addendum the development of the capitalization rate and an expanded discussion of the
comparable sales used and considered.
The addendum must also include the following statement: “This appraisal is made on the basis of the
hypothetical condition that the property rights being appraised are the leasehold interest without
resale and other restrictions that are removed by the Community Land Trust Ground Lease Rider.”
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11.8.14 LOG HOMES
Log homes are eligible for financing as a primary or second home at a maximum LTV of 80%. The appraisal
should provide a reliable opinion of market value supported by at least 2 similar log home comparables.
11.8.15 MODULAR HOMES
Modular, prefabricated, panelized, or sectional housing homes are eligible for financing at a maximum LTV
of 80%. Modular homes must meet all of the following requirements:
Must assume the characteristics of site-built housing; and
Must be legally classified as real property; and
Must conform to all local building codes in the jurisdiction in which they are permanently located.
11.8.16 MULTIPLE DWELLINGS ON ONE LOT
Properties with 2 or more detached single-family homes on a single lot are generally ineligible for financing.
Single-family properties containing additional residential dwellings (guesthouse, carriage house, etc.) must
comply with local zoning regulations. They must be typical and common within the subject’s neighborhood.
Typically, the additional dwelling is smaller than the main dwelling and will not be rented. The subject
property should be appraised as a single-family residence. Any value for additional dwellings should be
supported by comparable sales. See also 11.8.1 Accessory Units
.
11.8.17 MULTIPLE PARCELS
When a property consists of more than one parcel of real estate, the following requirements must be met:
Each parcel must be conveyed in its entirety.
Parcels must be adjoined to the other, unless they comply with the following exception. Parcels
that otherwise would be adjoined, but are divided by a road, are acceptable if the parcel without a
residence is a non-buildable lot (for example, waterfront properties where the parcel without the
residence provides access to the water). Evidence that the lot is non-buildable must be included in
the loan file.
Each parcel must have the same basic zoning (for example, residential, agricultural).
The entire property may contain only one dwelling unit. Limited additional nonresidential
improvements, such as a garage, are acceptable. For example, the adjoining parcel may not have an
additional dwelling unit. An improvement that has been built across lot lines is acceptable. For
example, a home built across both parcels where the lot line runs under the home is acceptable.
The mortgage must be a valid first lien that covers each parcel.
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11.8.18 NEW CONSTRUCTION
The following are required for all new construction properties:
Appraisal Update and/or Completion Report (FNMA Form 1004D) with complete interior and
exterior photos reflecting completion, if applicable. Proposed improvements are not allowed.
Property taxes are calculated at 1.5% of the sales price for qualification. 1.25% should be used for
properties located in CA.
11.8.19 PEST INFESTATION
If the appraisal report or sales contract notes evidence of termites or other insect infestation, a pest
inspection report certifying treatment of the infestation prior to closing is required. Any significant structural
damage due to pest infestation must be corrected prior to closing.
11.8.20 PLUMBING
A plumbing certification from a licensed plumber is required whenever the appraisal states a fair or poor
rating concerning the adequacy or condition of the system. Any inadequacies must be corrected prior to
closing.
11.8.21 PRIVATE ROADS
Properties on private roads are acceptable subject to the following:
The title company must insure access to the subject property from a public street; and
A legally enforceable agreement or covenant for maintenance of the street is required.
The agreement should include provisions for the responsibility for payment of repairs, including
each party’s representative share, default remedies in the event a party to the agreement or
covenant fails to comply with his or her obligations, and the effective term of the agreement which
in most cases should be perpetual and binding on any future owners.
If the property is located within a state that has statutory provisions that define the responsibilities
of property owners for the maintenance and repair of a private street, no separate agreement or
covenant is required. Any maintenance costs are to be included in the borrower’s housing payment
(PITIA).
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11.8.22 PUD (PLANNED UNIT DEVELOPMENT)
A Planned Unit Development (PUD) is a project or subdivision that consists of common property and
improvements that are owned and maintained by an HOA for the benefit and use of the individual PUD
units. In order for a project to qualify as a PUD, all of the following requirements must be met:
Each unit owner’s membership in the owners’ association must be automatic and non-severable
The payment of assessments related to the unit must be mandatory
Common property and improvements must be owned and maintained by an HOA for the benefit
and use of the unit owners
The subject unit must not be part of a condo or co-op project
Zoning is not a basis for classifying a project or subdivision as a PUD. The PUD project must be analyzed
to ensure that an individual unit in the project will be acceptable security for the mortgage.
11.8.23 REPAIRS
The appraisal must identify all items that require repair. It should also include and describe physical
deficiencies that could affect a property’s soundness, structural integrity, livability, or improvements that
are incomplete. Any immediate or necessary repairs must be completed and re-inspected by the appraiser
prior to closing. See also 11.8.4 Deferred Maintenance
.
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11.8.24 RURAL PROPERTIES
A property indicated by the appraisal as rural, or containing any of the following characteristics, is typically
considered a rural property:
Neighborhood is less than 25% built-up
Area around the subject is zoned agricultural
Photographs of the subject show a dirt road
Comparables are more than 5 miles away from the subject
Subject is located in a community with a population of less than 25,000
Distance to schools and/or amenities are greater than 25 miles
Subject property and or comparables have lot sizes greater than 10 acres
Subject property and or comparables have outbuilding or large storage sheds
Rural properties must comply with all of the following criteria:
Primary or 2
nd
home, and residential use only
Maximum LTV allowed is 80%
Maximum acreage allowed is 15, which includes road frontage and subject property
Property must not be agricultural or provide a source of income to the borrower
Lot size and acreage must be typical for the area and similar to surrounding properties
Property cannot be subject to idle acreage tax benefit or other tax incentive program
Present use as per the appraisal must be the “highest and best use” for the property
Condition, quality, and use of outbuildings should be considered in determining the market value of
the subject property when the appraiser clearly supports the adjustments with similar comparable
information
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11.8.25 SEPTIC SYSTEM/SEWAGE DISPOSAL SYSTEM
Sewage disposal systems may require certification if the appraiser or purchase contract indicates the
necessity. The report should be provided by a city, county, state (or governing body) official or qualified
entity stating:
Sewage disposal system complies with applicable local and/or state health standards, is in proper
working order, and can be expected to function satisfactorily; or
Local and/or state health standards do not apply for the sewage disposal system; however, it is found
to be in proper working order and adequate for the subject property.
For systems one-year-old or less, the certification may be no more than one-year-old on the date of
closing. For systems more than one-year old, the certification should be no more than 120 days old on
the date of closing.
11.8.26 SOLAR PANELS
Properties with solar panels are eligible for financing. If the property owner is the owner of the solar panels,
standard eligibility requirements apply (for example, appraisal, insurance, and title). If the solar panels are
leased from or owned by a third party under a power purchase agreement or other similar arrangement,
the following requirements apply (whether to the original agreement or as subsequently amended):
The solar panels may not be included in the appraised value of the property.
The property must maintain access to an alternate source of electric power that meets community
standards.
The monthly lease payment must be included in the debt-to-income (DTI) ratio calculation unless
the lease is structured to:
o provide delivery of a specific amount of energy at a fixed payment during a given period,
and
o have a production guarantee that compensates the borrower on a prorated basis in the
event the solar panels fail to meet the energy output required for in the lease for that
period.
Payments under power purchase agreements where the payment is calculated solely based on the
energy produced may be excluded from the DTI ratio.
The lease or power purchase agreement must indicate that:
o any damage that occurs as a result of installation, malfunction, manufacturing defect, or the
removal of the solar panels is the responsibility of the owner of the equipment and the
owner must be obligated to repair the damage and return the improvements to their
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original or prior condition (for example, sound and watertight conditions that are
architecturally consistent with the home);
o the owner of the solar panels agrees not to be named loss payee (or named insured) on
the property owner’s property insurance policy covering the residential structure on which
the panels are attached. As an alternative to this requirement, the lender may verify that
the owner of the solar panels is not a named loss payee (or named insured) on the property
owner’s property insurance policy; and
o in the event of foreclosure, the lender or assignee has the discretion to:
terminate the agreement and require third-party owner to remove the equipment;
become, without payment of any transfer or similar fee, the beneficiary of the
borrower’s lease/agreement with the third party; or
enter into a new lease/agreement with the third party, under terms no less
favorable than the prior owner.
11.8.27 UNCONVENTIONAL FLOOR PLANS
Properties with unusual floor plans or functional obsolescence are allowed if the appraisal demonstrates
acceptability in the marketplace and includes appropriate adjustments. A floor plan sketch is required for
all appraisals.
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11.8.28 WATER SUPPLY
Water certification must be obtained if required by the appraiser or purchase contract. The report should
be provided by a city, county, state (or governing body) official or a qualified entity stating:
The water supply system is in proper working order and pumping an adequate supply of water for
the subject property; and
The water supply is potable and complies with local and/or state health authority standards (in the
absence of a local health authority, a reputable chemical testing agency must certify that the water
is fit for human consumption). The water certification(s) for existing properties can be no more than
60 days old on the date of closing. If new construction, the report may be 1-year old as of the date
of closing.
11.8.29 ZONING AND LAND-USE REGULATIONS
Property improvements must constitute a legally permissible use of the land based on the zoning ordinance.
If the improvements represent a legal, non-conforming use of land, a letter from the local building authority
or appraiser must be obtained to certify the subject property can be rebuilt “as is” in the event of partial
or total destruction.
The appraiser must compare the existing and potential use of the subject property to the zoning regulations.
In addition, the appraiser should note any adverse effect that a non-conforming use has on the value and
marketability of the subject property.
Special consideration must be given to properties that are subject to other types of land use regulations,
such as coastal tideland or wetland laws, as setback lines or other provisions may prevent reconstruction
or maintenance of the property improvements in the event of damage or destruction. The intent of some
land-use regulations is to remove existing land uses and to stop land development (including the
maintenance, or new construction, or seawalls) within specific setback lines. Except as stated above,
properties with land-use restrictions which prohibit the reconstruction to maintenance the dwelling are
ineligible.
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11.9 CONDOMINIUMS
A condominium is a form of ownership in which the interior space is individually owned, and the balance of the
property (including land and building) is owned collectively with the other unit owners.
11.9.1 DEFINITIONS OF ESTABLISHED AND NEW CONDOMINIUMS
Specific eligibility criteria are dependent upon whether the condo project reviewed classified as established
or new.
Established condominium projects meet the following criteria:
At least 90% of the total units in the project have been conveyed to the unit purchasers
Project is 100% complete, including all units and common elements
Project is not subject to additional phasing or annexation
Control of the HOA has been turned over to the unit owners
New condominium projects meet the following criteria:
Fewer than 90% of the total units in the project have been conveyed to the unit purchasers
The project is not fully completed, such as proposed construction, new construction, or the
proposed or incomplete conversion of an existing building to a condo
The project is newly converted
The project is subject to additional phasing or annexation
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11.9.2 GENERAL CONDOMINIUM REQUIREMENTS
All condominium projects must meet the following requirements:
All common areas and amenities within the project or subject phase must be complete.
Subject unit must have at least 600 square feet of living space.
The sustainability, marketability and financial stability of the project must be supported.
Project must be located in an area where acceptability of condominium ownership is demonstrated.
The project must be in compliance with all applicable state or local laws. The homeowners’
association must be incorporated in the state where the project is located.
Condo projects must have acceptable insurance coverage
.
An environmental hazard assessment is required for condo projects if an environmental problem is
identified through performance underwriting or due diligence. The solution must be deemed
acceptable by Deephaven.
Projects with pending or threatened litigation are typically ineligible.
The project must be located on one contiguous parcel of land. The project may be divided by a
public street.
The structures within the project must be within a reasonable distance from each other. Common
elements and facilities, such as recreational facilities and parking, must be consistent with the nature
of the project and competitive in the marketplace.
All programs are limited to a maximum number of units originated by Deephaven within one project
of 20% or 20 loans, whichever is less.
The maximum loan concentration by an individual borrower in a single condo development is 10%.
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11.9.3 CONDOMINIUM PROJECT REVIEWS
A valid project review is required for all condominium transactions, along with a completed Deephaven
Mortgage Condominium Project Questionnaire (or equivalent form). The Condominium Project
Questionnaire may not be greater than 120 days old at the time of closing.
The project review methods below should be utilized to determine the acceptability of a condominium
project:
11.9.3.1 PERS (PROJECT ELIGIBILITY REVIEW SERVICE)
PERS project approvals: https://www.fanniemae.com/singlefamily/project-eligibility
Projects with Fannie Mae PERS approvals are acceptable and can be found on the Fannie Mae website.
Projects must also meet the General Condominium Requirements and may not be an Ineligible Project
.
A PERS approval is valid for 18 months from the date of issue and must be valid as of the note date.
New projects are acceptable only with a PERS approval.
11.9.3.2 FHA APPROVED CONDOMINIUMS
FHA condo approvals: https://entp.hud.gov/idapp/html/condlook.cfm
Projects with FHA condo approvals are acceptable and can be verified on the HUD website. Projects
must also meet the General Condominium Requirements and may not be an Ineligible Project
. An FHA
condo approval must be valid as of the date of the note.
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11.9.3.3 CONDOMINIUM PROJECT QUESTIONNAIRE REVIEW
For all established condominium projects without valid PERS or FHA
approvals, or for projects that
do not meet all the requirements of the various project review methods, a Condominium Project
Questionnaire Review is required. The completed Deephaven Mortgage Condominium Project
Questionnaire (or equivalent form) must reflect compliance with the following requirements:
Project must meet the definition of an established condo.
For investment property transactions only, at least 50% of the total units in the project must
be conveyed to purchasers as primary or second homes.
No more than 15% of the total units in a project may be 60 days or more past due on their
HOA dues.
No single entity, the same individual, investor group, partnership, or corporation may own
more than 20% of the total units in the project. For projects with 1-4 total units, single entity
ownership may not exceed 1 unit. For 5–20-unit projects, single entity ownership may not
exceed 2 units.
No more than 35% of the total square footage of the project may be used for commercial
purposes.
Mortgagee may not be responsible for more than the greater of 6 months or the maximum
amount permitted under applicable state law of delinquent HOA dues. For condos in Florida,
the first mortgagee’s liability for dues assessed prior to its acquisition of title is limited to the
lesser of 12 months’ assessments or 1% of the original mortgage debt.
All facilities related to the project must be owned by the unit owners or the HOA cannot be
subject to a lease between the unit owners or HOA and another party.
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11.9.4 NON-WARRANTABLE CONDOMINIUMS
Non-warrantable condominiums are allowed. A completed Deephaven Mortgage Condominium Project
Questionnaire is required.
See the applicable Deephaven Matrix for specific LTV restrictions.
NON-WARRANTABLE CONDOS
CHARACTERISTIC CONSIDERATIONS
COMMERCIAL SPACE
Commercial space in project up to 40%
COMPLETION STATUS
The project, or the subject’s legal phase along with other phases, must be
complete. All common elements in the project or legal phase must be 100%
completed. At least 50% must be sold or under a bona-fide contract.
If the LTV is ≤ 80% and credit score is ≥ 680, a minimum of 30% presale is allowed.
CONDOTELS
True Condotels with onsite reservation desks are prohibited. Short-term vacation
rental projects will be considered on a case-by-case basis.
DELINQUENT HOA DUES
No more than 20% of the total units in the project may be 60 days or more past
due on the payment of condominium/association fees.
INVESTOR
CONCENTRATION
Investor concentration in project up to 100%.
HOA CONTROL
The developer may be in control of the condominium association provided the
Master Agreement provides for the homeowners to take control upon either a
predetermined percentage of unit sales or within a defined time period.
LITIGATION
Projects involved in litigation are acceptable as long as the pending lawsuit(s) are
not structural in nature, do not affect the marketability of the units and:
- Potential damages do not exceed 25% of the HOA reserves, OR
- Documentation must be provided by the insurance carrier or the attorney
representing the insurance carrier that the insurance carrier has agreed to
provide the defense and the association’s insurance policy is sufficient to cover
the litigation.
SINGLE ENTITY
OWNERSHIP
Single entity ownership in project up to 30%.
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11.9.5 CONDOMINIUM CONVERSIONS
A condominium conversion is the conversion of an existing building to a condominium project. Project
conversions legally created in the past 3 years are not allowed.
11.9.6 SITE CONDOMINIUMS
Projects consisting of single-family detached dwellings (also known as site condominiums) are acceptable
provided the appraisal supports market acceptance of site condominiums in the subject’s market area. A
Condominium Project Questionnaire is not required
Appraisals for site condos are to be documented on FNMA Form 1004. The appraiser should include an
adequate description of the project, information about the homeowners’ association fees, and note the
quality of the project maintenance.
11.9.7 INELIGIBLE PROJECTS
Projects comprised of manufactured homes
Projects with units used for ‘live-work”
Projects managed and operated as a hotel or motel
Projects containing the word hotel or motel in the name
Projects that restrict the owner’s ability to occupy the unit
Projects with mandatory rental pooling agreements that require unit owners to either rent their
units or give a management firm control over unit occupancy
Projects with non-incidental business operations owned or operated by the homeowners’
association (such as a restaurant, spa, health club, etc.)
Common interest apartments
Timeshare or segmented ownership projects
Continuing Care Retirement Communities or Life Care Facilities
Multi-unit dwelling condos that permit an owner to hold title to more than one dwelling unit, with
ownership of all of his or her owned units evidenced by a single deed and financed by a single
mortgage
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12 PROPERTY INSURANCE
12.1 HAZARD INSURANCE
12.1.1 MINIMUM HAZARD INSURANCE COVERAGE
Hazard insurance must protect against loss or damage from fire and other hazards covered by the standard
extended coverage endorsement. The coverage must provide for claims to be settled on a replacement
cost basis. Extended coverage must include, at a minimum, wind, civil commotion (including riots), smoke,
hail, and damages caused by aircraft, vehicle, or explosion.
Hazard insurance policies that limit or exclude from coverage (in whole or in part) windstorm, hurricane,
hail damages, or any other perils that normally are included under an extended coverage endorsement are
not acceptable.
Borrowers may not obtain hazard insurance policies that include such limitations or exclusions, unless they
are able to obtain a separate policy or endorsement from another commercial insurer that provides
adequate coverage for the limited or excluded peril or from an insurance pool that the state has established
to cover the limitations or exclusions.
Hazard insurance coverage should be in the amount corresponding to:
100% of the insurable value of improvements, as established by the property insurer (Replacement
Cost Estimator or equivalent); or
The unpaid principal balance of the mortgage, as long as it equals the minimum amount (80% of the
insurable value of the improvements) required to compensate for damage or loss on a replacement
cost basis. If it does not, then coverage that does provide the minimum required amount must be
obtained; or
100% Replacement Cost Coverage as stated on the policy declaration page; or
Total dwelling coverage equal to the final loan amount.
If the policy does not have 100% replacement cost or a replacement cost estimate is not provided, an
Account Manager’s Certification from the seller verifying the insurer’s replacement cost estimate is
acceptable. The certification must include the insurance company’s complete information, subject property
details, confirm the replacement cost amount determined by the insurer, and be signed and dated by the
Account Manager.
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12.1.2 DETERMINING THE AMOUNT OF REQUIRED HAZARD COVERAGE
The following tables describes how to calculate the amount of required hazard insurance coverage when
the policy does not explicitly guarantee 100% replacement cost coverage:
DETERMINING HAZARD COVERAGE
STEP
DESCRIPTION
1
Compare the insurable value of the improvements as established by the property insurer to the
unpaid principal balance of the mortgage loan.
1A
If the insurable value of the improvements is less than the unpaid principal balance, the insurable
value is the amount of coverage required.
1B
If the unpaid principal balance of the mortgage loan is less than the insurable value of the
improvements, go to Step 2.
2
Calculate 80% of the insurable value of the improvements.
2A
If the result of this calculation is equal to or less than the unpaid principal balance of the mortgage,
the unpaid principal balance is the amount of coverage required.
2B
If the result of this calculation is greater than the unpaid principal balance of the mortgage, this
calculated figure is the amount of coverage required.
EXAMPLES
CATEGORY PROPERTY A PROPERTY B PROPERTY C
INSURABLE VALUE
$90,000 $100,000 $100,000
UNPAID BALANCE
$95,000 $ 90,000 $ 75,000
80% INSURABLE VALUE
— $ 80,000 $ 80,000
REQUIRED COVERAGE
$90,000 $ 90,000 $ 80,000
CALCULATION METHOD
Step 1A Step 2A Step 2B
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12.1.3 DEDUCTIBLE AMOUNT
The maximum allowable deductible for insurance covering a property securing a first mortgage loan is 5%
of the face amount of the policy. When a policy provides for a separate wind-loss deductible (either in the
policy itself or in a separate endorsement), that deductible must be no greater than 5% of the face amount
of the policy.
12.1.4 EVIDENCE OF HAZARD INSURANCE
Policy must be effective for at least 60 days after the date of funding (does not apply to condominium project
insurance policies). Evidence of Insurance may be provided in one of the following forms:
Policy
Certificate of Insurance (COI)
Insurance Binder
Evidence of Insurance must provide the following information:
Names of borrowers reflect the same as the names on the note
Property address agrees with the note/security instrument
Mailing address is the same as property address
Policy Number
Loan Number
Name of insurance company
Insurance Agent information
Effective and expiration dates of coverage
Premium Amount
Coverage amount and deductible
Loss payee clause as applicable
Signed and dated by agent
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12.1.5 OPTIONAL COVERAGE
Hazard insurance policies may include optional coverage(s) which are acceptable but are not required. For
example, a “homeowners” or “package” policy is acceptable as long as any part of the coverage that exceeds
the required coverage is not obligated for renewal.
12.1.6 RATING REQUIREMENTS
The hazard insurance policy must be written by a carrier that meets at least one of the following
requirements:
Carriers rated by A.M. Best Company, Inc. must have:
o a “B” or better Financial Strength Rating in Best’s Insurance Reports, or
o an “A” or better Financial Strength Rating and a Financial Size Category of “VIII” or greater
in Best’s Insurance Reports Non-US Edition
Carriers rated by Demotech, Inc. must have an “A” or better rating in Demotech’s Hazard
Insurance Financial Stability Ratings
Carriers rated by Kroll’s Bond Rating Agency must have a “BBB” or better rating in Kroll Bond
Rating Agency’s Insurance Financial Strength Rating (IRSR)
Carriers rated by Standard and Poor’s must have a “BBB” or better Insurer Financial Strength Rating
in the Standard and Poor’s Ratings Direct Insurance Service
The following types of property insurance policies are acceptable if they are the only coverage the borrower
can obtain:
policies underwritten by a state’s Fair Access to Insurance Requirements (FAIR) plan; and
policies obtained through state or territory insurance plans, such as the Hawaii Property Insurance
Association (HPIA), Florida’s Citizens Property Insurance Corporation, or other state-mandated
windstorm and beach erosion insurance pools.
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12.2 CONDOMINIUM AND PUD PROJECT INSURANCE REQUIREMENTS
12.2.1 MINIMUM HAZARD INSURANCE COVERAGE
Insurance must cover 100% of the insurable replacement cost of the project improvements, including the
individual units in the project. An insurance policy that includes any of the following coverage, either in the
policy language or in a specific endorsement to the policy, is acceptable:
Guaranteed Replacement Cost – the insurer agrees to replace the insurable property regardless of
the cost,
Extended Replacement Cost – the insurer agrees to pay more than the property’s insurable
replacement cost, or
Replacement Cost – the insurer agrees to pay up to 100% of the property’s insurable replacement
cost.
Acceptable policies must provide coverage for either an individual project or multiple affiliated projects.
The insurance policy must at a minimum protect against fire and all other hazards that are normally covered
by the standard extended coverage endorsement, and all other perils customarily covered for similar types
of projects, including those covered by the standard “all risk” or “special form” endorsement. If the policy
does not include an “all risk” or “special form” endorsement, a policy that includes the “broad form”
covered causes of loss is acceptable.
PUD Requirements: The HOA must maintain a property insurance policy, with premiums being paid as
a common expense. The policy must cover all of the common elements except for those that are normally
excluded from coverage, such as land, foundation, and excavations. Fixtures and building service equipment
that are considered part of the common elements, as well as common personal property and supplies,
should be covered.
Individual insurance policies are also required for each unit mortgage in the PUD project. If the project’s
legal documents allow for blanket insurance policies to cover both the individual units and the common
elements, blanket policies are acceptable to satisfy insurance requirements for the units.
Condo Requirements: The entire condo project insurance policy must be reviewed to ensure the HOA
maintains a master or blanket type of insurance policy, with premiums being paid as a common expense.
If the unit interior improvements are not included under the terms of the condominium policy, the
borrower is required to have a HO-6 hazard policy (“wall-in coverage”), which is sufficient to repair the
condo unit to its condition prior to a loss claim event.
The policy must require the insurer to notify in writing the HOA (or insurance trustee) and each first
mortgage loan holder named in the mortgagee clause at least 10 days before it cancels or substantially
changes a condo project’s coverage.
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12.2.2 DEDUCTIBLE AMOUNT
For policies covering the common elements in a PUD project and for policies covering condo projects, the
maximum deductible amount must be no greater than 5% of the face amount of the policy.
For losses related to individual PUD units that are covered by the blanket policy for the project, the
maximum deductible amount related to the individual unit should be no greater than 5% of the replacement
cost of the unit. If, however, the policy provides for a wind-loss deductible (either in the policy itself or in
a separate endorsement), that deductible must be no greater than 5% of the face amount of the policy.
For blanket insurance policies that cover both the individual units and the common elements, the maximum
deductible amount related to the individual unit should be no greater than 5% of the replacement cost of
the unit.
12.2.3 GENERAL LIABILITY COVERAGE
Project liability insurance requirements are as follows:
The homeowners’ association must maintain a commercial general liability insurance policy for
condo projects or Type F PUD projects, including all common areas and elements, public ways, and
any other areas that are under its supervision.
The insurance should cover commercial spaces that are owned by the homeowners’ association,
even if they are leased to others. The commercial general liability insurance policy should provide
coverage for bodily injury and property damage that result from the operation, maintenance, or use
of the project’s common areas and elements.
The amount of liability coverage should be at least $1,000,000 for bodily injury and property damage
for any single occurrence.
The policy should provide for at least ten days’ written notice to the owners’ association before the
insurer can cancel or substantially modify it. For condominium projects, similar notice must also be
given to each holder of a first mortgage or share loan on an individual unit in the project.
12.2.4 FIDELITY BOND COVERAGE
Fidelity bond coverage is required for condominium projects over 20 units (or per state requirements). The
insurance coverage must be at least equal to the greater of 3 months HOA dues or reserves or minimum
required by state law. Coverage is not required when the calculated amount is $5,000 or less.
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12.3 FLOOD INSURANCE
Flood insurance is required for any property located within any area designated by the Federal Emergency
Management Agency (FEMA) as a Special Flood Hazard Area (SFHA). A SFHA is typically denoted as Flood Zone
A or Zone V (coastal areas). Properties in Flood Zone A or V must be located in a community which participates
in the FEMA program to be eligible for financing.
12.3.1 FLOOD CERTIFICATE
Determination whether a subject property is in a flood zone must be established by a Flood Certificate
provided by the Federal Emergency Management Agency (FEMA). The appraisal report should also
accurately reflect the flood zone.
The flood insurance requirement can be waived if:
Subject property improvements are not in the area of Special Flood Hazard, even though part of
the land is in Flood Zone A or V; or
Borrower obtains a letter from FEMA stating that its maps have been amended so that the subject
property is no longer in an area of Special Flood Hazard
12.3.2 MINIMUM FLOOD INSURANCE COVERAGE
The minimum amount of flood insurance required for most first mortgages secured by 1-unit properties
and individual PUD units is the lower of:
100% of the replacement cost of the insurable value of the improvements;
the maximum insurance available from the National Flood Insurance Program (NFIP), which is
currently $250,000 per dwelling; or
the unpaid principal balance of the mortgage
12.3.3 PROJECT FLOOD INSURANCE REQUIREMENTS
The flood policy for a PUD or condominium project must cover any common element buildings and any
other common property located in a SFHA. The amount of flood insurance coverage for a PUD or condo
project should be at least equal to the lesser of 100% of the insurable value of the facilities or the maximum
coverage available under the appropriate National Flood Insurance Program (NFIP).
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12.3.4 DEDUCTIBLE AMOUNT
The maximum allowable deductible is the maximum available from the NFIP, which is currently $10,000.
The maximum allowed deductible for a PUD or condo project is $25,000.
12.3.5 EVIDENCE OF FLOOD INSURANCE
Flood insurance must be maintained throughout the duration of the loan. If final evidence of flood insurance
is not available at closing, the following may be used:
Completed and executed NFIP application with a copy of the borrower’s premium check, the
insurance agent’s paid receipt, or the final settlement statement reflecting the flood insurance
premium paid at closing
Completed and executed NFIP General Change Endorsement Form showing the assignment of the
current flood insurance policy by the property seller to the borrower
Agent-executed NFIP Certification of Proof of Purchase of Flood Insurance
Evidence of Insurance must provide the following information:
Names of borrowers reflect the same as the note
Property address agrees with the note/security instrument
Mailing address is the same as property address
Policy Number
Loan Number
Name of insurance company
Insurance Agent information
Effective and expiration dates of coverage
Premium Amount and deductible
Coverage amount
Loss payee clause as applicable
Signed and dated by agent
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13 TITLE INSURANCE
13.1 TITLE POLICY REQUIREMENTS
Loans must be covered by a title insurance policy that has been paid in full and is valid, binding, and remains in
full force and effect.
Preliminary title must indicate that the final title policy will be issued after funding.
The title insurer must be qualified to do business in the state where the subject property is located. The title
insurer and policy must conform to Fannie Mae/Freddie Mac requirements.
13.1.1 BORROWER INFORMATION
All borrower names must be indicated on the title commitment. If the borrower’s marital status appears to
be different than on 1003, the discrepancy must be addressed. The property seller’s name must be cross-
referenced to the purchase agreement and valuation chain of title.
13.1.2 COVERAGE AMOUNT
The amount of title insurance coverage must at least equal the original principal amount of the mortgage.
13.1.3 INSURED NAME
Title policy must insure Deephaven as Deephaven appears in the security instrument. It must also include
the language “its successors and assigns as their interest may appear.”
13.1.4 AGE OF REPORT
The preliminary title report/title commitment should be dated no later than 120 days prior to closing. Any
requirements by title, such as Statements of Information or copies of trust agreements, must be cleared
prior to closing.
13.1.5 VESTING
Final title policy vesting should reflect the name(s) of the individual borrower(s). See 4.13 Vesting and
Ownership.
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13.1.6 GAP COVERAGE
The preliminary title report/title commitment must be updated after closing in writing to ensure the
mortgage is in first lien position and documented through one of the following:
Final title policy
Title bring-down search representing the period of time from the original search through the time
the mortgage is recorded
Gap coverage from the time of the original search until the mortgage is recorded, when the mortgage
is not recorded at the time of diligence
13.1.7 TITLE POLICY FORMS
The final title policy must be written on one of the following forms:
2006 American Land Title Association (ALTA) standard form
ALTA short form
ALTA form with amendments required by state law in states in which standard ALTA forms of
coverage are not used or in which the 2006 ALTA forms have not yet been adopted, provided those
amendments are acceptable to Fannie Mae/Freddie Mac
13.1.8 TITLE POLICY UNDERWRITER
A title insurer must be:
duly authorized and licensed, as required, to issue title insurance in the state where the property is
located; and
further evaluated in accordance with the lender’s procedures for title insurer approval, which may
include factors such as
an acceptable rating from a rating agency,
financial strength of the title insurer,
adequate reserves, or
record related to satisfactory title claim resolution.
Note: Iowa Title Guaranty is an acceptable title guarantor for properties located in the state of Iowa
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13.2 TITLE COMMITMENT REVIEW
13.2.1 CHAIN OF TITLE
All files are to contain a 24-month title history from an acceptable source. Transfer date, price, and buyer
and seller names on any title transfers that occurred within the previous 24 months should be provided.
The vesting history should be reviewed for inconsistencies or any indication of flipping activity.
13.2.2 TITLE EXCEPTIONS
The following items are allowable title exceptions:
Customary public utility subsurface easements; the location of which are fixed and can be verified.
The exercise of rights of easement will not interfere with use and enjoyment of any improvement
of the subject property or proposed improvements upon which the appraisal or loan is based.
Above-surface public utility easements that extend along one or more property lines for distribution
purposes, or along the rear property line for drainage, provided they do not extend more than 12
feet from the subject property lines and do not interfere with any of the buildings or improvements,
or with the use of the subject property; and public utility restrictions, provided their violation will
not result in the forfeiture or reversion of title or a lien of any kind for damages, or have an adverse
effect on the fair market value of the subject property.
Mutual easement agreements that establish joint driveways or party walls constructed on the
subject property and on an adjoining property, provided all future owners have unlimited and
unrestricted use of them.
Encroachments on one foot or less on adjoining property by eaves or other overhanging projections
or by driveways provided there is at least a 10-foot clearance between the buildings on the subject
property and the property line affected by the encroachments.
Encroachments on the subject property by improvements on adjoining property provided these
encroachments extend one foot or less over the property line of the subject property, have a total
area of 50 square feet or less, do not touch any buildings, and do not interfere with the use of any
improvements on the subject property or the use of the subject property not occupied by
improvements.
Encroachments on adjoining properties by hedges or removable fences.
Liens for real estate or ad valor taxes and assessments not yet due and payable.
Outstanding oil, water, or mineral rights as long as they do not materially alter the contour of the
property or impair its value or usefulness for its intended purposes.
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13.2.3 SURVEY REQUIREMENTS
If the title company requires a survey or plat map due to an exception noted on the title policy, a copy must
be submitted in the loan file. Surveys must be certified, dated, and signed by the licensed civil engineer or
registered surveyor performing the survey. Unimproved land surveys are not acceptable.
Surveys should be reviewed for easements, encroachments, flood zone impacts, and possible boundary
violations, taking into account the location of the dwelling on the property.
13.3 SERVICING
All loans are to be serviced by a third-party servicer approved by Deephaven Mortgage.
Borrowers are required to establish initial and monthly escrow for annual taxes, hazard insurance, flood
insurance (if applicable), and HO-6 insurance coverage (if applicable), unless otherwise specified by applicable
state law. One twelfth (1/12) of the annual premiums are to be paid with the principal and interest payments.
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14 DSCR PROGRAM
14.1 GENERAL PROGRAM INFORMATION
14.1.1 DSCR PROGRAM
The DSCR Program is designed for investment or non-owner-occupied loans that are designated for
business purposes only. Section 14 outlines requirements specific to the DSCR Program.
14.1.2 PRODUCTS
See the Deephaven DSCR Matrix
14.1.3 LOAN AMOUNTS AND LOAN-TO-VALUES
Minimum loan amount permitted is $100,000. See the Deephaven DSCR Matrix for maximum loan amounts
and LTVs.
14.1.4 STATE RESTRICTIONS
See the Deephaven DSCR Matrix
14.1.5 AGE OF DOCUMENTATION
Unless otherwise noted, all loan documentation must be dated within 90 days of closing.
14.1.6 LOAN AGE
All applications (per RESPA/TRID definition of the 6 pieces of information required to be an application)
must be submitted to Deephaven for Deephaven’s issuance of initial disclosures within 24 hours of receipt
by the Broker. This allows Deephaven 48 hours to issue initial disclosures to the applicant(s). Deephaven
abides by the federal requirement of issuing disclosures within 3 days of the application date, defined as
receipt of the 6 pieces of information required from the borrower.
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14.1.7 FORMS
For the DSCR Program, the following forms are required:
Business Purpose & Occupancy Affidavit (all borrowers are required to sign prior to submission
and at closing to declare that the property is, or will be, for commercial business or investment
purpose only)
1-4 Family Rider/Assignment of Rents (FNMA Form 3170)
14.1.8 PREPAYMENT PENALTIES, POINTS, AND FEES
Total points, fees, and APR may not exceed current state and federal high-cost thresholds.
Prepayment penalties are required on DSCR transactions. Buydown options are available to reduce or
remove prepayment penalties. See the appropriate Deephaven Mortgage Rate Sheet for details.
Note: States may impose different definitions of points and fees, rate/APR, or prepayment penalties than
apply under HOEPA. States may also use different triggers in each category for determining whether a loan
will be a "high-cost mortgage" (or equivalent terms) under state law. As a matter of policy, Deephaven does
not purchase loans defined as high-cost mortgages (or equivalent terms) under Federal or state law,
regardless of the basis for the loan's treatment as such.
14.1.9 EXCEPTIONS
Exceptions to published guidelines are considered on a case-by-case basis. Loans with exception requests
should exhibit strong compensating factors. All exception requests must be submitted by the Broker in
writing to Deephaven Mortgage on the Deephaven Exception Request Form along with any supporting
documentation.
Deephaven's decision to allow or deny any exception request relates only to whether Deephaven will
approve and originate the loan with the requested exception.
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14.2 TRANSACTIONS
14.2.1 OCCUPANCY
The DSCR Program allows for financing of investment properties only.
14.2.2 PURCHASE
A copy of the fully executed purchase contract and all attachments or addenda is required for purchase
transactions. The lesser of the purchase price or appraised value of the subject property is used to calculate
the loan-to-value.
14.2.3 GENERAL REFINANCE REQUIREMENTS
14.2.3.1 DETERMINING LOAN-TO-VALUE
The following standards apply to refinance transactions under DSCR:
If the property was acquired ˃ 12 months from application date, the appraised value must be
used to determine loan-to-value.
For properties acquired between 6 and 12 months from application date, the maximum loan-
to-value cannot exceed 65% based on the current appraised value.
If the property was acquired
< 6 months from application date, the lesser of the current
appraised value or the previous purchase price plus documented improvements (if any) must
be used. The purchase settlement statement and any invoices for materials/labor will be
required.
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14.2.3.2 LEASE REQUIREMENTS
For refinance transactions, an executed lease with no less than 3 months remaining at time of close is
required for all units in the subject property. Month-to-month tenancy is not subject to this
requirement with sufficient evidence (such as a signed extension letter). Purchase transactions may be
vacant.
The following requirements apply to refinance transactions:
Lease term not to exceed 1 year
Monthly lease payments must be consistent with market rents
The Property must not and cannot be occupied by a borrower, any member of the borrower’s
LLC, or any family member.
If subject property is not leased, see the DSCR Matrix for LTV restrictions.
14.2.3.3 PROPERTIES LISTED FOR SALE
To be eligible for either a rate/term or a cash-out refinance, the subject property must be taken off
the market on or before application date. The borrower must also confirm in writing the reason for
the prior listing and intent to occupy the subject property.
For cash-out transactions, if the subject property was listed for sale in the 6 months prior to application
date, a 10% LTV reduction from the maximum available for the specific transaction is required.
The lesser of the most recent list price or the current appraised value should be used to determine
loan-to-value for both rate/term and cash-out transactions.
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14.2.4 RATE/TERM REFINANCE
A rate/term refinance is the refinancing of an existing mortgage for the purpose of changing the interest
and/or term of a mortgage without advancing new money on the loan.
The mortgage amount for a rate/term refinance is limited to the sum of the following:
Existing first mortgage payoff
Closing costs and prepaid items (interest, taxes, insurance) on the new mortgage
The amount of any subordinate mortgage liens used in their entirety to acquire the subject property
(regardless of seasoning)
The amount of a home equity line of credit in first or subordinate lien position that was used in its
entirety to acquire the subject property (regardless of seasoning)
Any subordinate financing that was not used to purchase the subject property provided:
o For closed end seconds, the loan is at least one year seasoned as determined by the time
between the note date of the subordinate lien and the application date of the new mortgage
o For HELOCs and other open-ended lines of credit, the loan is at least one year seasoned
and there have been less than $2,000 in total draws over the past 12 months
If the most recent first mortgage transaction on the property was a cash-out refinance within the last 6
months, the new mortgage is not eligible as a rate/term and must proceed as a cash-out refinance. Note
date to note date is used to calculate the 6 months.
On rate/term transactions, the borrower may only receive cash back in an amount that is the lesser of 2%
of the new mortgage balance or $2,000.
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14.2.5 CASH-OUT REFINANCE
A cash-out refinance is a refinance that does not meet the rate/term refinance definition. Cash-out would
include a refinance where the borrower receives cash from the transaction or when an open-ended
subordinate lien (that does not meet the rate/term seasoning requirements) is refinanced into the new
transaction.
A mortgage taken out on a property previously owned free and clear is always considered a cash-out
refinance.
The mortgage amount for a cash-out refinance transaction may include any of the following:
Existing first mortgage payoff
Closing costs and prepaid items (interest, taxes, insurance) on the new mortgage
The amount of any subordinate mortgage liens being paid off that do not meet seasoning and draw
history requirements as described in 14.2.4 Rate/Term Refinance
The amount of any non-mortgage related debt paid off through closing
Additional cash in hand reflected on the settlement statement
A signed letter from the borrower disclosing the purpose of the cash-out must be obtained on all cash-out
transactions. The purpose of the cash-out should also be reflected on the loan application. Proceeds of the
loan are limited to the improvement or maintenance the subject property, or for the purchase of an
investment property. Utilizing proceeds of the loan for personal, family, or household purposes is prohibited
under the DSCR Program.
14.2.6 FLIP TRANSACTIONS
Flips are not allowed under the DSCR Program. Seller must be on title for > 180 days.
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14.2.7 INHERITED PROPERTIES AND PROPERTY BUYOUTS
Refinances of inherited properties and properties legally awarded to the borrower (divorce, separation, or
dissolution of a domestic partnership) are allowed. If the subject property was acquired < 12 months prior
to loan closing, the transaction is considered a cash-out.
These transactions are subject to the following:
Written agreement signed by all parties stating the terms of the buyout and property transfer must
be obtained
Equity owners must be paid through settlement
Subject property has cleared probate and property is vested in the borrower’s name
Current appraised value is used to determine loan-to-value
14.2.8 PERMANENT FINANCING FOR NEW CONSTRUCTION
The conversion of construction-to-permanent financing involves the granting of a long-term mortgage to a
borrower to replace interim construction financing obtained by the borrower to fund the construction of
a new residence. The borrower must hold title to the lot, which may have been previously acquired or
purchased as part of the transaction.
When a refinance transaction is used, the borrower must have held legal title to the lot before he/she
applied for the construction financing and must be named as the borrower for the construction loan.
A construction-to-permanent transaction may be closed as a purchase, rate/term refinance or cash-out
refinance. All construction work must be complete. See 11.8.18 New Construction
.
For lots owned ≥12 months from application date for the subject transaction, LTV is based on the
current appraised value.
For lots owned < 12 months from application date for subject transaction, LTV is based on the
lesser of the current appraised value of the property or the total acquisition costs (sum of
construction costs and purchase price of lot).
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14.3 BORROWERS
14.3.1 U.S. CITIZENS
U.S. citizens are eligible for financing.
14.3.2 PERMANENT RESIDENT ALIENS
A permanent resident alien is a non-U.S. citizen authorized to live and work in the U.S. on a permanent
basis. Permanent resident aliens are eligible for financing.
Acceptable evidence of lawful permanent residency must be documented and meet one of the following
criteria:
I-151 – Permanent Resident Card (Green Card) that does not have an expiration date
I-551 – Permanent Resident Card (Green Card) issued for 10 years that has not expired
I-551 – Conditional Permanent Resident Card (Green Card) issued for 2 years that has an expiration
date, as long as it is accompanied by a copy of USCIS Form I-751 requesting removal of the
conditions
Un-expired Foreign Passport with an un-expired stamp reading as follows: “Processed for I-551
Temporary Evidence of Lawful Admission for Permanent Residence. Valid until mm-dd-yy.
Employment Authorized.”
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14.3.3 NON-PERMANENT RESIDENT ALIENS
A Non-Permanent Resident Alien is a non-U.S. citizen authorized to live and work in the U.S. on a
temporary basis. Non-Permanent Resident Alien borrowers are eligible for the DSCR Program.
14.3.3.1 VERIFICATION OF RESIDENCY STATUS
The following visa classifications are allowed as Non-Permanent Resident Aliens:
E-1, E-2, E-3
G-1 through G-5
H-1B & C, H-2 through H-4
L-1B, L-2
NATO 1 through 6
O-1
R-1
TN-1 & 2 (NAFTA)
Copies of the borrower’s passport and unexpired visa must be obtained. Acceptable alternative
documentation to verify visa classification is an I-797 Form (Notice of Action) with valid extension
dates and an I-94 Form (Arrival/Departure Record). Borrowers unable to provide evidence of lawful
residency status in the U.S. are not eligible for financing.
A valid employment authorization document (EAD) must be obtained if the visa is not sponsored by
the borrower’s current employer. If the visa will expire within 6 months of loan application, it is
acceptable to obtain a letter from the employer documenting the borrower’s continued employment
and continued visa renewal sponsorship (employer on the loan application must be the same as on the
unexpired visa).
If a non-U.S. citizen is borrowing with a U.S. citizen, it does not eliminate visa or other residency
requirements. Individuals in possession of spouse or family member visas are to qualify as co-borrowers
only. A valid EAD must be provided to use income for qualification.
Borrowers who are residents of countries which participate in the State Department’s Visa Waiver
Program (VWP) will not be required to provide a valid visa. Participating countries can be verified
through the U.S. Department of State website at
https://travel.state.gov/content/travel/en/us-
visas/tourism-visit/visa-waiver-program.html.
Citizens of Venezuela are ineligible for Deephaven programs.
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14.3.3.2 CREDIT REQUIREMENTS
A U.S. credit report is required for each borrower on the loan using a valid Social Security number.
The primary wage-earner must qualify using Standard Tradelines as outlined in
14.4.3 Tradeline
Requirements. A 12-month housing history is also required. See 14.4 Credit Analysis for complete
credit requirements.
14.3.3.3 ASSETS
All funds required for down payment and closing costs on Non-Permanent Resident Alien transactions
must be seasoned for 60 days. See 14.7 Asset Analysis
.
Assets required for closing must also be seasoned in a U.S. depository institution for 30 days prior to
closing. Foreign assets deposited into a U.S. institution within 60 days of application are acceptable if
there is evidence that the funds were transferred from the country from which the borrower
previously or currently resides. It must also be established that the funds belonged to the borrower
before the date of transfer.
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14.3.4 FOREIGN NATIONALS
A Foreign National is a non-U.S. citizen authorized to live in the U.S. on a temporary basis but does not
meet the definition of a Non-Permanent Resident Alien. Foreign National borrowers are eligible for the
DSCR Program.
14.3.4.1 VERIFICATION OF RESIDENCY STATUS
The following visa types are allowed as Foreign Nationals:
B-1and B-2
H-2 and H-3
I
J-1 and J-2
O-2
P-1 and P-2
Copies of the borrower’s passport and unexpired visa must be obtained. Acceptable alternative
documentation to verify visa classification is an I-797 Form (Notice of Action) with valid extension
dates and an I-94 form (Arrival/Departure Record). Borrowers unable to provide evidence of lawful
residency status in the U.S. are not eligible for financing.
If a non-U.S. citizen is borrowing with a U.S. citizen, it does not eliminate visa or other residency
requirements. Individuals in possession of spouse or family member visas are to qualify as co-borrowers
only. A valid EAD must be provided to use income for qualification.
Canadian citizens are not required to provide a valid visa. An unexpired passport is acceptable.
Borrowers who are residents of countries which participate in the State Department’s Visa Waiver
Program (VWP) will not be required to provide a valid visa. Participating countries can be verified
through the U.S. Department of State website at
https://travel.state.gov/content/travel/en/us-
visas/tourism-visit/visa-waiver-program.html. An unexpired passport is acceptable.
Citizens of Venezuela are ineligible for Deephaven programs.
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14.3.4.2 CREDIT REQUIREMENTS
A U.S. credit report should be obtained for each Foreign National borrower with a valid Social Security
Number. The credit report should provide merged credit information from the 3 major national credit
repositories.
For borrowers without a valid Social Security Number, an Individual Taxpayer Identification Number
(ITIN) is also allowed. An ITIN is acceptable if the borrower has the ITIN for purposes of reporting
taxes from passive income sources only and is not employed in the U.S. A traditional U.S. credit report
is not required for borrowers without a valid SSN.
Foreign National borrowers who do not have a SSN or ITIN may still proceed under the Foreign
National Program. All other program requirements still apply.
14.3.4.3 TRADELINES
A U.S. credit borrower has a valid Social Security Number and are subject to the requirements found
in 14.4.3 Tradeline Requirements
.
A foreign credit borrower may or may not have a U.S. credit report with no credit score, a single
score, or a score with insufficient tradelines. Foreign credit borrowers must establish an acceptable
credit history subject to the following requirements:
Three open accounts with a 2-year history must be documented for each borrower reflecting
no late payments
A 2-year housing history can be used as tradeline
U.S. credit accounts can be combined with letters of reference from verifiable financial
institutions in a foreign country to establish the 3 open accounts and an acceptable credit
reputation. If letters of reference are obtained, they must:
o State the type and length of the relationship, how the accounts are held, and status of
the account;
o Contact information must be provided for the person signing the letter; and
o Any translation must be signed and dated by a certified translator.
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14.3.4.4 MORTGAGE AND RENTAL PAYMENT VERIFICATION
A 12-month housing history is required for Foreign National transactions.
14.3.4.5 DEBT-SERVICE COVERAGE RATIO
The minimum DSCR required for Foreign National transactions is 1.00.
14.3.4.6 ASSETS
All funds required for down payment and closing costs on Foreign National transactions must be
seasoned for 60 days. See also 14.7 Asset Analysis
.
Assets required for closing must also be seasoned in a U.S. depository institution for 30 days prior to
closing. Foreign assets deposited into a U.S. institution within 60 days of application are acceptable if
there is evidence that the funds were transferred from the country from which the borrower
previously or currently resides. It must also be established that the funds belonged to the borrower
before the date of transfer.
Assets held in a foreign account can be used for reserves. The most recent 30-day account statement
is required, and funds are to be converted to U.S. dollars using the current exchange rate. A letter of
reference on company letterhead from a verifiable banking institution may also be obtained. Contact
information must be provided by the person signing the letter, and the letter must state the type of
relationship, length of the relationship, how accounts are held, and current balance. Any translation
must be signed and dated by a certified translator.
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14.3.5 CUSTOMER IDENTIFICATION PROGRAM (CIP)
The USA Patriot Act requires banks and financial institutions to verify the name, date of birth, address, and
identification number of all borrowers. Brokers are to follow the published CIP procedures for each
borrower to ensure the true identity of all borrowers has been documented. Deephaven will also require
settlement agents to verify identity at the time of closing on all loans.
14.3.6 FRAUD REPORT AND BACKGROUND CHECK
All loans must include a third-party fraud detection report for all borrowers. Report findings must cover
standard areas of quality control including, but not limited to: borrower validation, social security number
verification, criminal records, and property information (subject property and other real estate owned). All
high-level alerts on the report must be addressed by Deephaven.
If the Broker cannot electronically access the fraud report to clear high-level alerts within the fraud
provider’s system, an Underwriter’s Certification from the Broker is acceptable. The Certification must
address each individual high alert and explain what actions were taken to satisfy the issues. It must be signed
and dated by a member of the Broker’s underwriting staff or operations management personnel.
In addition to the fraud and background check requirements, Deephaven will upload, as a matter of file
documentation, any unsuccessful fraud report return if background check is not available. The fraud check
should also include occupancy status to assist in the validation and endorsement of the Business Purpose &
Occupancy Affidavit.
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14.3.7 EXCLUSIONARY LIST/OFAC/DIPLOMATIC IMMUNITY
All parties involved on each transaction must be screened through any exclusionary list used by the
Deephaven. The seller should apply its exclusionary list policy to any loans originated under these guidelines.
Parties to the transaction must also be cleared through OFAC’s SDN List (borrowers, property sellers,
employers, banks, etc.). A search of the Specially Designated Nationals and Blocked Persons List may be
completed via the U.S. Department of the Treasury website: https://sanctionssearch.ofac.treas.gov/
Borrowers from OFAC sanctioned countries are ineligible. Access the link below for a list of sanctioned
countries: http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx
Individuals with diplomatic immunity are not eligible due to the inability to compel payment or seek
judgment. Verification the borrower does not have diplomatic immunity can be determined by reviewing
the visa, passport, and/or the U.S. Department of State’s Diplomatic List at http://www.state.gov/s/cpr/rls/
.
14.3.8 FIRST-TIME INVESTOR
A First-Time Investor is a borrower who has not owned at least one investment property for at least 12
months anytime during the most recent 12-month period. See the DSCR Matrix for restrictions for First-
Time Investors.
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14.3.9 LIMITED POWER OF ATTORNEY
A Limited Power of Attorney (POA) is acceptable when following requirements are met:
POA is specific to the transaction
Recorded with the mortgage/deed of trust
Contains an expiration date
Used only to execute the final loan documents
Borrower who executed the POA signed the initial 1003
No interested party to the transaction (such as property seller, broker, loan officer, realtor, etc.)
may act as Power of Attorney
Not permitted on cash-out transactions
14.3.10 VESTING AND OWNERSHIP
Ownership must be fee simple. Acceptable forms of vesting are:
Individuals
Joint tenants
Tenants in Common
Inter Vivos Revocable Trust
Business Entity
o Limited Liability Company (LLC)
o Limited and General Partnerships
o Corporations
o S Corporations
Note: Only individuals can act as borrowers. The other entities listed above relate only to an ownership
interest in the subject property.
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14.3.10.1 INTER VIVOS REVOCABLE TRUST
Inter Vivos Revocable Trusts are allowed as vested or titled owners of the subject property (but not
as borrowers). The trust must be established by one or more natural persons, solely or jointly. The
primary beneficiary of the trust must be the individual(s) who establishing the trust. The trust must
become effective during the lifetime of the person establishing the trust.
If the trust is established jointly, there may be more than one primary beneficiary as long as the income
or assets of at least one of the individuals establishing the trust will be used to apply and qualify for the
mortgage.
The trustee must include either:
The individual establishing the trust (or at least one of the individuals, if 2 or more); or
An institutional trustee that customarily performs trust functions in and is authorized to act as
trustee under the laws of the applicable state.
The trustee must have the power to hold the title and mortgage the property. This must be specified
in the trust. One or more of the individual parties establishing the trust must use personal income or
assets to apply and qualify for the mortgage.
A copy of the trust is required, or a signed attorney’s opinion may be obtained in lieu of the trust
documents. The opinion letter must indicate that the trust meets all published requirements and must
also include the following:
Name of the trust
Date executed
Settler(s) of the trust
Whether it is revocable or irrevocable
Whether the trust has multiple trustees
Name of trustees
Manner in which vesting will be held
The Attorney needs to also verify that the trust has not been revoked, modified, or amended in any
manner that would cause the representations to be incorrect.
The deed of trust/mortgage and all attached riders must be completed by the authorized trustee(s) of
the trust that is the vested owner of the subject property.
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14.3.10.2 BUSINESS ENTITY
Ownership or title vesting in the name of an LLC, partnership, or corporation (collectively ‘Entity’) is
acceptable on investment property transactions only. While only individual owners of the Entity must
qualify as the borrowers, ownership of the subject property may vest in an Entity.
To vest ownership in an Entity, the following requirements must be met:
Business purpose and activities are limited to ownership and management of real estate
Entity limited to a maximum of 4 owners (aka members, partners, or shareholders)
Each Entity owner must apply as the borrower and complete a l003 as an individual applicant
The loan application, credit report, income and assets for each owner will be used to
determine qualification and pricing
Each Entity owner must receive notice of the loan and its terms prior to closing
The following Entity documentation must be provided:
Entity Articles of Organization, Partnership, and Operating Agreements (if applicable)
Tax Identification Number
Certificate of Good Standing
Certificate of Authorization for the person executing all documents on behalf of the Entity
Documents must be completed and signed by each individual applicant (in their capacity as an individual
only) that is an owner of the vesting Entity, as follows:
Business Purpose and Occupancy Affidavit – signed by each individual owner (both submission
and closing)
Loan Application (1003) - Completed and signed by each individual owner. 1003 section labeled
“Title will be held in what Name(s)” should be completed with only the Entity name
Disclosures (GFE, TIL, Notice of Intent to Proceed, Servicing Disclosure, etc.) - completed
and signed by each owner
Closing Disclosure - completed and signed by each individual owner
Other Closing Documents (Final TIL, Business Purpose and Occupancy Affidavit, etc.) -
completed by the individual owners(s) of the Entity
Note – signed by each individual borrower
Deed of Trust/Mortgage and all attached Riders – must be completed by the authorized
owner(s) of the Entity who can legally sign and bind the Entity that is the vested owner of the
subject property
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14.3.11 MULTIPLE FINANCED PROPERTIES AND DEEPHAVEN EXPOSURE
There is no limit on the number of other properties borrowers may currently have financed. Deephaven
Mortgage exposure may not exceed $5M aggregate with a maximum of five loans for each individual
borrower. Exceptions to this policy will be reviewed on a case-by-case basis.
14.3.12 INELIGIBLE BORROWERS
The following borrowers are not eligible:
LLCs, partnerships, or corporations (may qualify for vesting only)
Borrowers with diplomatic immunity or otherwise excluded from U.S. jurisdiction
Residents of any country not permitted to transact business with US companies are ineligible (as
determined by any U.S. government authority)
Trusts or Land Trusts (trusts may qualify for ownership vesting only)
Borrowers less than 18 years old
Loans to employees of Broker
First-Time Home Buyers
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14.4 CREDIT ANALYSIS
14.4.1 CREDIT REPORT
A credit report is required for every borrower. The credit report should provide merged credit information
from the 3 major national credit repositories. A valid Social Security number (SSN) is required for all
borrowers on the loan.
Either a three-bureau merged report or a Residential Mortgage Credit Report (RMCR) is required. The
credit report should include verification of all credit references provided on the loan application and must
certify the results of public record searches for each city where the individual has resided in the last 2 years.
14.4.1.1 AGE OF CREDIT REPORT/CREDIT DOCUMENTATION
All credit documentation, including the credit report, may not be more than 90 days old at the time of
closing.
14.4.1.2 FRAUD ALERTS
The three national credit repositories have developed automated messaging to help identify possible
fraudulent activity on a credit report. Examples of fraud alerts include:
Initial 90-day Fraud Alert
Extended Fraud Alert
Active-Duty Alert
HAWK Alert
All Fraud Alerts must be properly addressed and resolved prior to submitting the loan to underwriting.
The actions must be reasonable and compliant with applicable laws. An underwriting decision cannot
be made without full resolution of the alert.
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14.4.1.3 CREDIT REPORT SECURITY FREEZE
The credit report used to evaluate a loan may not reflect a security freeze and must be resolved prior
to an underwriting decision. If a borrower unfreezes his or her credit after the date the original credit
report was ordered, a new three-bureau merged report must be obtained to reflect current and
updated information from all repositories.
14.4.1.4 INQUIRIES
A signed letter of explanation from the borrower or creditor is required for all inquiries within the
most recent 90 days to determine whether additional credit was granted as a result of the borrower’s
request.
14.4.2 CREDIT SCORE REQUIREMENTS
Each borrower must have a valid score from at least 2 of the following 3 agencies: Experian (FICO), Trans
Union (Empirica), and Equifax (Beacon). Only scores from these agencies are acceptable.
The applicable credit score is the middle of three scores provided for any borrower. If only two credit
score are obtained, the lesser of two will be used. When there are multiple borrowers, the lowest applicable
score from the group of borrowers is the representative credit score for qualifying.
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14.4.3 TRADELINE REQUIREMENTS
DSCR MINIMUM TRADELINES
OCCUPANCY TRADELINE HISTORY MINIMUM STANDARDS
STANDARD
TRADELINES
Investment
3 tradelines reporting for 12+ months
with activity in last 12 months
or
2 tradelines reporting for 24+ months
with activity in last 12 months
*0X60 for most recent
12 months
**Applies only to tradelines being used to meet minimum number of trades
All borrowers must meet the minimum tradeline requirements under the DSCR Program.
To qualify as a valid tradeline, the following requirements apply:
The credit line must be reflected on the borrower’s credit report
The account must have activity in the past 12 months and may be open or closed
Tradelines used to qualify may not exceed 0x60 in the most recent 12 months
An acceptable 12- or 24-month housing history not reporting on credit may also be used as a
tradeline
Credit lines on which the borrower is not obligated to make payments are not acceptable for establishing
a minimum history. Examples of unacceptable tradelines include loans in a deferment period, collection or
charged-off accounts, accounts discharged through bankruptcy, and authorized user accounts. Student loans
can be counted as tradelines as long as they are in repayment and are not deferred.
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14.4.4 EVIDENCE OF PRIMARY RESIDENCE
All borrowers must presently maintain a primary residence. Evidence of primary occupancy is required.
Borrowers who own a primary residence must provide:
Proof of ownership of a primary home superior in value and/or appeal to subject
Borrowers who rent a primary residence must provide:
Evidence of an active lease in place
Primary residence should be supported by one of the following characteristics:
o Geographically consistent with borrower’s place of employment; or
o General appeal and location of primary is superior to subject property
14.4.5 MORTGAGE AND RENTAL PAYMENT VERIFICATION
See the Deephaven DSCR Matrix for max allowable housing payment lates.
Mortgage and rental payments not reflected on the original credit report must be documented via an
institutional Verification of Rent or Verification of Mortgage (VOR/VOM). A combined total of all late
mortgage and rental payments in the past 12 months must be used to determine the housing history.
If the borrower is making payments to an individual or interested party, 12 months of cancelled checks or
bank statements must be obtained. A VOR/VOM is not required but may be requested for clarification.
All mortgages and rental payments should be current at time of closing. If the credit report or VOR/VOM
reflects a past-due status, updated documentation is required to verify account is current.
Note: Minimum application requirements include the documentation of current residence and subject
property on the REO schedule only. PITIA from additional REO is not required to be verified.
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14.4.6 ROLLING LATE PAYMENTS
Rolling late payments are not considered a single event. Each occurrence of a contractual delinquency is
considered individually for loan eligibility.
14.4.7 PAST DUE ACCOUNTS
Past due consumer debts can be no more than 30 days past due at time of closing.
14.4.8 DELINQUENT CREDIT BELONGING TO EX-SPOUSE
Delinquent credit belonging to an ex-spouse can be excluded from the credit evaluation when all of the
following apply:
Borrower provides a copy of the divorce decree or separation agreement which shows the
derogatory accounts belong solely to the ex-spouse
Late payments occurred after the date of the divorce or separation
Evidence of title transfer prior to any delinquent debt must be provided if debt is a mortgage, and
evidence of buyout as part of court proceedings
Collection accounts assigned to an ex-spouse may be excluded from aggregate collection totals with a
divorce decree or separation agreement assigning the account solely to the ex-spouse.
14.4.9 LAWSUIT/PENDING LITIGATION
If the application, title, or credit documents reveal that the borrower is presently involved in a lawsuit or
pending litigation, a statement from the borrower’s attorney is required. The statement must explain the
circumstances of the lawsuit or litigation and discuss the borrower’s liability and insurance coverage. A copy
of the complaint and answer may also be needed. The title company closing the loan must be informed of
the lawsuit or litigation and provide affirmative coverage of our first lien position.
14.4.10 CONSUMER CREDIT COUNSELING SERVICE (CCCS)
Consumer Credit Counseling must be completed for a minimum of 24 months from closing date.
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14.4.11 COLLECTIONS AND CHARGE-OFFS
The following accounts may remain open:
Collections and charge-offs < 24 months old with a maximum cumulative balance of $2,000
Collections and charge-offs ≥ 24 months old with a maximum of $2,500 per occurrence
Collections and charge-offs that have passed beyond the statute of limitations for that state
(supporting documentation required)
All medical collections
Collection and charge-off balances exceeding the amounts listed above must be paid in full.
14.4.12 JUDGMENTS AND TAX LIENS
All judgments or liens affecting title must be paid as title must insure our lien position without
exception. Court-ordered judgments may remain open when one of the following options is met:
The amount is the lessor of $5,000 per occurrence or 2% of the loan amount
The borrower is currently in a repayment agreement with the creditor (if the borrower is currently
in a repayment plan, the following requirements apply):
o A minimum of 3 months has elapsed on the plan and evidence of timely payments for the
most recent 3 months is provided; and
o The maximum payment required under the plan is included in the debt-to-income ratio.
Judgments or lien has passed beyond the statute of limitations for that state (supporting
documentation required)
Outstanding state and federal tax liens or delinquent obligations may remain open on purchase transactions
only (additional LTV reductions may be required based on the size of the lien). All of the following
requirements must be met:
A copy of the repayment agreement is obtained;
A minimum of 3 months has elapsed on the plan and evidence of timely payments for the most
recent 3 months is provided;
The maximum payment required under the plan is included in the debt-to-income ratio; and
The title company must provide written confirmation confirming (a) the title company is aware of
the outstanding tax lien, and (b) there is no impact to first lien position.
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14.4.13 HOUSING EVENTS
A Housing Event is any one of the following events listed below:
Foreclosure
Deed-in-Lieu
Short Sale
Modification
1x120 mortgage history
Housing Events must be seasoned for a minimum of 36 months from loan closing.
Seasoning of a foreclosure, deed-in-lieu, or short sale is measured from the date of completed sale or final
property transfer. The Housing Event must be completed prior to loan closing with no outstanding
deficiency balance remaining.
For a 120-day mortgage late, seasoning is from the date the mortgage was brought current. Seasoning for
a modification is from the date the modification was executed.
If the property was surrendered in a Chapter 7 bankruptcy, the bankruptcy discharge date is used for
seasoning. Bankruptcy papers may be required to show the property was surrendered. The foreclosure
action is not required to be fully complete.
14.4.14 BANKRUPTCY
All bankruptcies must be discharged or dismissed for a minimum of 36 months from closing date.
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14.5 EMPLOYMENT/INCOME ANALYSIS
There is no employment verification or income analysis under the DSCR Program.
14.6 RATIOS AND QUALIFYING
14.6.1 DEBT-SERVICE COVERAGE RATIO
A Debt-Service Coverage Ratio (DSCR) must be calculated for the subject property. Market rent must be
documented with FNMA Form 1007 or Form 1025, as applicable.
The minimum DSCR required for the program is .75. The DSCR calculation is as follows:
Debt-Service Coverage Ratio = Gross Income / Proposed [P]ITIA*
To calculate Gross Income, use the lower of the (a) executed lease agreement or (b) market rent from
FNMA Form 1007 or Form 1025, as applicable. If the executed lease agreement reflects a higher monthly
rent, it may be used in the calculation when evidence of receipt of the higher amount for the 3 most recent,
consecutive months is provided.
*For interest-only loans, the DSCR calculation allows for the use of the interest-only payment including escrows.
14.6.2 ADJUSTABLE RATE AND INTEREST ONLY QUALIFYING
For all ARM loans, the greater of the note rate or the fully indexed rate is used to determine the qualifying
PITIA. The fully indexed rate is calculated by adding the margin to the index. See the DSCR Matrix for
margin, index, and other restrictions.
Interest-only loans qualify using the fully amortized payment calculated over the fully amortizing period,
based on the greater of the note rate or the fully indexed rate to determine qualifying PITIA.
DSCR interest-only products are 30-year terms. The 5/6 ARM and Fixed 40 products have an interest-only
option with a 10-year interest-only period followed by a 30-year amortizing period. The annual ARM
adjustments occur after the initial fixed-rate period expires.
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14.7 ASSET ANALYSIS
Verification of assets is required for purchase or refinance transactions to evidence sufficient funds to close and
reserves. See 10 Asset Analysis
for any asset requirements not specifically addressed in this section.
14.7.1 RESERVES
The DSCR Program requires reserves of 6 months of the subject property PITIA (or ITIA, if applicable). If
the DSCR is less than 1.00, 12 months reserves are required. Reserves are not required for additional real
estate owned.
14.7.2 VERIFICATION OF ASSETS
Assets must be seasoned for 60 days or sourced, and verified with one of the following:
Most recent 2 months’ account statements, or most recent quarterly account statement, indicating
opening and closing balances, and reflecting a consecutive 60 days of asset verification
If account summary page provides the required information, additional pages are not required.
Written Verification of Deposit (VOD), completed by the financial institution
Must include the current and average balances for the most recent 2 months
Large disparities between the current balance and the opening balances will require
additional verification or supporting documentation
Account statements must provide all of the following information:
Borrower as the account holder
Account number
Statement date and time period covered
Current balance in US dollars
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14.8 PROPERTY
See 11 Property for any property guidelines not specifically addressed in this section.
14.8.1 ELIGIBLE PROPERTY TYPES
PROPERTY ELIGIBILITY
PROPERTY TYPE ELIGIBLE
Single-Family Residence Yes
Planned Unit Development (PUD) Yes
Townhomes Yes
2-4 Unit Multi-Family Properties* Yes
Condominium (low-rise and high-rise) Yes
Site Condominium Yes
Non-Warrantable Condominiums Yes
Assisted Living/Continuing Care Facilities No
Boarding Houses No
Condotels or Condo Hotels No
Co-operative Units No
Farms or Hobby Farms No
Log Homes No
Manufactured Homes No
Mixed-Use Properties No
Modular Homes No
Properties Subject to Rent Control Regulations No
Unique Properties (Earth Homes, Berm Homes, Dome Homes, etc.) No
*See the applicable Deephaven Matrix for LTV restrictions.
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14.8.2 AGE OF APPRAISAL AND APPRAISAL UPDATES
For loans under the DSCR Program, appraisals are valid for 120 days and are not eligible for appraisal
updates.
14.8.3 APPRAISAL REVIEW PROCESS
All transactions under the DSCR Program require a Clear Capital CDA (or like product).
14.8.4 APPRAISAL REVIEW TOLERANCE
If two appraisals are required, the lower of the two values or the purchase price must be used. If there is
a variance greater than 10% between both appraisals, the property is considered ineligible.
A 10% tolerance is permitted for all other secondary review products. If the review product value is more
than 10% below the appraised value, the lower of the two values must be used. If the tolerance is exceeded,
the Broker or Deephaven may choose to order an additional review product of a higher-level review. The
original appraised value may then be used if the additional review product value is within 10% of the
appraised value. If the variance is greater than 10%, a second full appraisal is required.
14.8.5 LAND VALUE AND ACREAGE
Maximum acreage under the DSCR Program is 2 acres. Acreage and land value must be typical and common
for the subject’s market.
14.9 INSURANCE
See 12 Property Insurance and 13 Title Insurance for complete requirements.
In addition, Rent Loss Insurance for the subject property is required and must equal at least 6 months of local
average monthly rents. Blanket policies covering the subject property are permitted.
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15 COVID-19 ADDENDA
In response to the ongoing Covid-19 Pandemic, Deephaven Mortgage has instituted the following overlays on all
loans to be funded or reviewed for purchase.
1) Borrowers who have requested forbearance across either mortgage or consumer debt since March 1st,
2020 must provide a LOE explaining the reason for forbearance and provide payment history.
2) Borrowers may not be in an active forbearance plan (must have “opted out” or the plan must have
“expired”) across either mortgage or consumer debt.
3) Borrowers who obtained mortgage forbearance after March 1st, 2020 but nevertheless made all
contractual payments remaining current throughout the forbearance plan will follow standard
underwriting guidelines.
4) Borrowers who “opted out” of their mortgage forbearance plan without missing any payments will
follow standard underwriting guidelines.
5) Borrowers who obtained mortgage forbearance after March 1st, 2020 may be eligible depending on
payment history after the expiration of the forbearance plan:
Borrowers in a Repayment Plan or Payment Deferral Plan must be performing under the
agreement or have completed the agreement and have made three (3) consecutive payments
post plan.
Borrowers who received a Term Modification for the length of the forbearance period will be
eligible after they have made three (3) consecutive payments post plan.
Borrowers who received a Rate Modification, Principal Forgiveness Modification, or any
modification besides the extension of Term to match the missed forbearance payments will not
be eligible.
Borrower brought original loan up to date with borrower’s own funds documented from an
acceptable source (see 10 Asset Analysis
).
6) If a borrower was terminated or furloughed from work for a period of not more than six (6) months,
borrowers must be newly employed for a minimum of 60 days prior to closing, with income consistent
to previous earnings prior to termination.
7) Proceeds of loans under the CARES Act (PPP and SBA relief funds, for example), are ineligible for
income, asset, and reserve requirement consideration.
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16 FORMS
The most up-to-date versions of all Deephaven forms, matrices, rate sheets, and guidelines can be accessed
through the Deephaven Portal.
The following forms can be found via the Deephaven Portal:
Deephaven Exception Request Form
Deephaven Benefit to Borrower Form
Deephaven Loan Review Stacking Order
Deephaven Condominium Project Questionnaire Form
Deephaven Request for Verification of Earnings Form
Deephaven Self-Employed Business Narrative Form (or equivalent)
Business Purpose and Occupancy Affidavit
