Review of Selected underwriting Guidelines to Identify Potential Barriers to Hispanic Homeownership

by HUD USER

U.S. Department of Housing and Urban Development
Ofﬁce of Policy Development and Research
Review of Selected Underwriting
Guidelines to Identify
Potential Barriers to Hispanic
Homeownership

Review of Selected Underwriting
Guidelines to Identify
Potential Barriers to Hispanic
Homeownership
Prepared for
U.S. Department of Housing and Urban Development
Office of Policy Development and Research
Prepared by
Kimberly Burnett
Alvaro Cortes
Christopher E. Herbert
Abt Associates Inc.
Cambridge, MA
March 2006

Table of Contents

Executive Summary ............................................................................................................................iii

Establishing Credit History.........................................................................................................iii

Documenting Income and Employment History.........................................................................iv

Documenting Assets ....................................................................................................................v

Citizenship and Residency Status ................................................................................................v

Affordability ................................................................................................................................v

Barriers Remaining in Available Products..................................................................................vi

Chapter One – Introduction................................................................................................................1

Methodology ................................................................................................................................2

Outline of the Report ...................................................................................................................2

Chapter Two – Key Underwriting Barriers to Homeownership for Hispanics..............................3

Credit History...............................................................................................................................3

Documenting and Determining Borrower Income.......................................................................4

Affordability ................................................................................................................................5

Documenting Assets ....................................................................................................................5

Citizenship and Residency Status ................................................................................................5

Chapter Three –Fannie Mae’s Underwriting Guidelines .................................................................7

Standard Underwriting Guidelines...............................................................................................7

Underwriting Guidelines for Community Lending and Flex Mortgages.....................................9

Implementation and Application of Underwriting Guidelines by Lenders................................18

Chapter Four – Freddie Mac’s Underwriting Guidelines ..............................................................19

Standard Underwriting Guidelines.............................................................................................19

Flexible Product Underwriting Guidelines ................................................................................21

Implementation and Application of Underwriting Guidelines by Lenders................................27

Chapter Five – FHA’s Underwriting Guidelines.............................................................................29

Flexibilities that Address Barriers to Homeownership for Hispanics........................................29

Barriers Inadequately Addressed by Available Products...........................................................31

Chapter Six – GMAC-RFC’s Underwriting Guidelines .................................................................35

AlterNet/Credit Gap Overview ..................................................................................................35

Underwriting Guidelines that Facilitate or Impede Homeownership for Hispanics..................35

Chapter Seven – Summary and Conclusions...................................................................................41

Credit History.............................................................................................................................41

Documenting Income and Employment History........................................................................41

Affordability ..............................................................................................................................43

Citizenship and Residency Status ..............................................................................................43

Documenting Assets ..................................................................................................................44

Some Barriers Remain in Available Products............................................................................44

Table of Contents
i

Table of Contents
ii

Executive Summary
Recent studies have identified several underwriting guidelines as particular barriers to Hispanic
homeownership: establishing a credit history; verifying income; documenting employment history;
verifying assets; and meeting requirements regarding citizenship or residency status. In addition,
because Hispanics are disproportionately in low-income and low-wealth households, affordability is
an important barrier to homeownership.
This detailed review of mortgage underwriting guidelines used by three of the most common sources
of residential mortgage finance – Fannie Mae, Freddie Mac, and the Federal Housing Administration
(FHA) – finds that changes to standard products offered by these major participants over the last
decade have addressed some of the barriers to homeownership for Hispanics. This is particularly true
of FHA’s standard product. Furthermore, where barriers continue to exist in standard products, these
issues are often remedied in special products targeted to low- and moderate-income borrowers. Some
of these products include features specifically designed to serve an immigrant population.
Underwriting guidelines used by one subprime lender, GMAC, were reviewed as a point of
comparison to the prime loan products of Fannie Mae, Freddie Mac, and FHA. The review of
GMAC’s guidelines suggests that subprime products also address some of the barriers to Hispanic
homeownership, although they typically come at the cost of a higher interest rate.
The review is not intended to compare the financial institutions’ offerings or to rank them, but rather
to highlight the products that are currently available to overcome barriers to homeownership for
Hispanics and to understand where gaps remain in the types of products needed to address different
barriers.
Establishing Credit History
One of the biggest challenges in qualifying for a mortgage among low-income households, including
many immigrants, is lack of a credit history with credit reporting agencies. Fannie Mae, Freddie
Mac, and FHA all have standard products that allow a borrower to be approved for a mortgage
without a formal credit history with credit reporting agencies. All allow the use of non-traditional
credit reports or a credit history compiled by the lender, as long as it includes a minimum number of
credit references. Credit scores are required, however, for GMAC’s subprime products and for some
products that allow a high degree of flexibility in other respects. For example, Fannie Mae’s Flex 97
and Flex 100 products allow a wide variety of sources of cash to be used for the downpayment and
closing costs, but require traditional credit reports.
For Hispanics and other borrowers with low credit scores, FHA’s standard product allows more
flexibility than is typically available. For example, in January through June of 2000, the average
FICO score for FHA purchase loans insured using a mortgage scorecard was about 630, compared
with a minimum score of 660 typically required for prime mortgage approval. Targeted products
offered by Fannie Mae and Freddie Mac also provide some options. For example, Fannie Mae’s
Community Lending products allow approval of borrowers with credit scores of 600 to 620. In
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addition, GMAC’s subprime products allow credit scores of as low as 520, although this likely is
associated with a higher interest rate.
Documenting Income and Employment History
Traditional mortgage underwriting verifies income by reviewing paycheck stubs and tax returns, as
well as by contacting employers of the borrower and co-borrower. It also generally requires
documentation of a borrower’s work history over the previous two years as proof of income stability.
Low-income individuals, and particularly immigrants, may not have income that can be documented
by pay stubs because they are more likely to routinely be paid in cash. Potential borrowers may have
difficulty documenting two years of work history if their employers are uncooperative or management
has turned over. Borrowers may also have difficulty meeting this requirement if they have not been
living in the U.S. for two years or if their employment history is marked by “job hopping” and
lengthy gaps in employment – associated, for example, with return visits to their native country
Another challenge for determining borrower income can arise when there are household members
who are not family members but who contribute toward housing costs and will continue to be part of
the household when a home is purchased. For example, income from boarders is traditionally not
counted toward borrower income.
Fannie Mae, Freddie Mac, and FHA do not require two years of employment history for mortgage
approval in standard products (one year is acceptable for Fannie Mae and Freddie Mac; FHA has no
minimum requirement). In addition, frequent job changes are generally ignored as long as the
borrower can document that his or her income is stable. Documentation requirements, however,
remain a barrier: some form of written documentation, such as paystubs, an employer-completed
form, or W-2 forms, is required.
With minor exceptions, income received in cash cannot be included as a primary or secondary source
of income. This is true for standard products offered by FHA, Fannie Mae, and Freddie Mac, as well
as the targeted products offered by Fannie Mae and Freddie Mac and the subprime products offered
by GMAC. While Fannie Mae, Freddie Mac, and GMAC all have products that allow low or no
income documentation, these allow less flexibility than standard and targeted products in other
regards. For example, Freddie Mac’s stated income product requires high credit scores, a large
downpayment, and large cash reserves.
Widely available mortgage products allow rent paid by family members to be included in the
borrower’s income. FHA’s standard product allows rental income from boarders in a one-unit
property to be included in the borrower’s qualifying income, if the boarders are related to the
borrower, and if the income is shown on the borrower’s tax return. Some of Freddie Mac and Fannie
Mae’s targeted products allow rental income from boarders in a one-unit property to be included in
the borrower’s qualifying income. The income does not have to be included on the borrower’s tax
return, although documentation is required. For one of Fannie Mae’s Community Lending products,
MyCommunityMortgage, the boarder is not required to be related to the borrower.
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Documenting Assets
Traditional underwriting requires verification that the borrower accumulated the funds used for
downpayments over time through a review of bank statements. Borrowers who do not use banks for
their savings, which is not uncommon among immigrants, will not be able to meet this requirement.
FHA’s standard product allows both cash accumulated through savings clubs and cash saved at home
to be considered acceptable sources of funds to close the mortgage if they are sufficiently
documented. Targeted products offered by Fannie Mae and Freddie Mac also allow this flexibility.
The documentation required to demonstrate that the borrower could have accumulated the assets over
time, however, is substantial, and may discourage lenders from using this flexibility.
Some products also allow related people living together to pool funds for closing costs and
downpayments, improving borrowers’ ability to accumulate sufficient assets for a home purchase.
Citizenship and Residency Status
U.S. citizenship is not required for mortgage approval for standard products by any of the financial
institutions reviewed in this report, although GMAC imposes some additional requirements for non
permanent resident aliens. However, legal residence in the U.S. is required for mortgage approval.
Nationwide, there are only a handful of pilot programs to extend mortgage credit to borrowers who do
not have valid Social Security numbers. Given the number of undocumented immigrants in the
country (an estimated 6 million), most of them Hispanic, this remains an important barrier to
homeownership for Hispanics. Of course, it can also be argued that homeownership is not an
appropriate goal for undocumented residents.
Affordability
Hispanics are disproportionately in low-income and low-wealth households compared to non-
Hispanics, so affordability may be the most important barrier to homeownership. FHA products, as
well as products offered by Fannie Mae and Freddie Mac that are targeted to low- and moderate-
income households, help to address this barrier in several ways. For example, a variety of low
downpayment products are available, some requiring as little as $500 of the borrower’s own funds.
Higher allowed housing expense-to-income and total debt-to-income ratios available through Fannie
Mae’s Community Lending and Freddie Mac’s Affordable Gold products, as well as GMAC’s
subprime products, also help to improve affordability. Some of Fannie Mae’s products do not have
maximum housing expense-to-income ratios at all. In addition, low or no financial reserves are
required for some products. Some low-downpayment products, however, require relatively high
credit scores.
Low downpayment mortgages generally come at the expense of monthly mortgage insurance
payments. High-LTV products for FHA, Fannie Mae, and Freddie Mac all require mortgage
insurance, and higher, more costly, levels of mortgage insurance are generally required for loans with
higher LTV ratios. The low-downpayment products offered by subprime lenders typically carry
higher interest rates, which also reduces the affordability of monthly payments.
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Barriers Remaining in Available Products
As described above, many of the barriers to homeownership for Hispanics that recently existed in
common underwriting guidelines have been addressed by some widely available standard products
and by products targeted to particular populations. However, a few important obstacles remain in the
form of individual underwriting guidelines. In addition, the targeted products sometimes impose new
requirements that pose barriers themselves.
The requirement that borrowers be legal residents of the U.S. is obviously a challenging obstacle for
the undocumented immigrants in this country. A handful of lenders are experimenting to determine
whether lack of legal residence is an acceptable risk in extending mortgage credit; however, lending
to illegal residents also involves political issues that may be extremely difficult to resolve.
The lack of acceptability of cash income is also an important remaining underwriting obstacle. Some
smaller community lenders have begun to experiment with approving mortgages that allow a limited
share of the borrower’s total income to be earned in cash. If these mortgages prove to be acceptable
risks, the GSEs may eventually make similar allowances in future offerings of targeted products.
Lastly, one of the trade-offs for flexibility in underwriting in some targeted products is a requirement
that borrowers receive homebuyer education and counseling. Fannie Mae’s Community Lending
products require homebuyer education and counseling under most circumstances, as do Freddie
Mac’s Affordable Gold products. Although homebuyer education and counseling can be a benefit to
borrowers, this requirement could pose a barrier to homeownership if Spanish-language education
and counseling programs are not available widely, and if this requirement leads to lender reluctance
to promote the products.
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Chapter One
Introduction
This report is part of a broader research effort by the U.S. Department of Housing and Urban
Development (HUD) to examine barriers to Hispanic homeownership and to identify approaches that
have the greatest potential for increasing homeownership opportunities for this important segment of
the U.S. population. The first stage of this research effort was a thorough review of the literature to
identify what is known about the causes of homeownership gaps between Hispanics and whites and
what policies may be effective in closing these gaps.
1
A key focus of the literature review was on the
barriers faced by Hispanics in obtaining mortgage financing.
Following up on the literature review, the purpose of this report is to provide a detailed review of
mortgage underwriting guidelines used by three of the most common sources of residential mortgage
finance – Fannie Mae, Freddie Mac, and FHA – to examine the extent to which these guidelines may
facilitate or impede the ability of Hispanics to qualify for a mortgage. The underwriting review
covers both traditional mortgage products offered by the selected financial institutions as well as
products for low- and moderate-income households that include features specifically designed to
serve an immigrant population. As a point of comparison, we also review the underwriting guidelines
used by one subprime lender to shed some light on the extent to which subprime products may better
accommodate the needs of some segments of the Hispanic population.
2
The review is not intended to compare the financial institutions’ offerings or to rank them, but rather
to highlight the products that are currently available to overcome barriers to homeownership for
Hispanics and to understand where gaps remain in the types of products needed to address different
barriers. Clearly, these organizations differ in their mission, market function, and regulatory
constraints, all of which affect the types of products they can offer. Related to this, the use of 
underwriting flexibilities differs across the groups. For example, while the GSEs offer a range of
affordable lending products, these loans account for a relatively small share of the GSEs’ purchases.
3
In contrast, low-downpayment mortgages account for a large majority of mortgages insured by FHA,
1
Cortes, forthcoming, Abt Associates, Inc.: Cambridge, MA.
2
Underwriting guidelines described were accurate as of fall 2004; however, underwriting guidelines are
revised regularly so some product features and guidelines may have changed since then.
3
For example, in 2003 Fannie Mae purchased or securitized 20,400 loans through its
MyCommunityMortgage products and 100,866 loans through its Flexible 100 product line. Comparable
volumes for Freddie Mac’s affordable loan products are not available. (Figures reported in “HUD’s
Housing Goals for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) for the Years 2005–2008 and Amendments to HUD’s Regulation of
Fannie Mae and Freddie Mac; Final Rule” Federal Register, November 2, 2004, Vol. 69, No. 211, page
63655.
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which focuses primarily on serving low-income and minority borrowers.
4
The remainder of this
chapter describes the methodology used in this underwriting review and provides an overview of the
rest of the report.
Methodology
FHA and the two GSEs (Fannie Mae and Freddie Mac) are included in the underwriting review
because these organizations account for a large share of the home purchase mortgage market.
Underwriting guidelines from these organizations are obtained from AllRegs, a public database of
underwriting guides available by subscription. A review of the written underwriting guidelines was
supplemented by telephone interviews with representatives from Fannie Mae and Freddie Mac to
identify which products should be reviewed and to understand whether lenders could exercise
discretion in how the written guidelines were implemented.
Underwriting guidelines for subprime lenders are not available through AllRegs, so we also solicited
the cooperation of a large subprime lender, GMAC-RFC. Although subprime lenders originate
primarily refinance mortgages, they represent an increasing share of the home purchase market. The
most recent study by ACORN on the use of subprime lenders reports that in 2002 subprime lenders
accounted for 19.6 percent of home purchase mortgages among Hispanic buyers, up from about 12
percent in 1997 (ACORN, 2004).
5
This share is more than twice as high as among non-Hispanic
white homebuyers (7.8 percent), although not as high as the share among African-American buyers
(28.0 percent). One of the factors that may lead borrowers into the subprime market is that these
loans may require less documentation of credit, income, employment and assets. The review of
subprime underwriting guidelines serves as a point of comparison with the requirements of the other
prime market products.
Outline of the Report
The next section summarizes the key underwriting barriers to homeownership for Hispanics identified
in the literature. In turn, the following sections then present findings from a review of underwriting
guidelines from Fannie Mae, Freddie Mac, FHA, and GMAC-RFC. Where possible, the review of
underwriting guidelines identifies trade-offs for various underwriting flexibilities offered, including
tightening of other aspects of the underwriting guidelines and loan pricing. The review also identifies
remaining barriers to homeownership for Hispanics, as well as differences in the use and
implementation of flexible mortgage products by lenders. The report concludes with a comparison of
findings across the four financial institutions reviewed and identifies the aspects of existing
underwriting guidelines that are likely to represent the most significant barriers for Hispanics.
4
See Issue Brief: FHA’s Impact on Increasing Homeownership Opportunities for Low-Income and Minority
Families During the 1990s, U.S. Department of Housing and Urban Development, Office of Policy
Development and Research, December 2000.
5
ACORN, Separate and Unequal: Predatory Lending in America, February 2004. Updated HMDA data
provided by HUD show the trend has continued to increase – considering conventional loans less than the
GSE conforming loan limit, subprime lenders (as identified by HUD) accounted for 18 percent of Hispanic
home purchase loans in 2002, 25 percent in 2003, and 33 percent in 2004.
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Chapter Two
Key Underwriting Barriers to Homeownership for
Hispanics
Two recent studies have provided a thorough review of key underwriting barriers to homeownership
among low-income and immigrant households – Listokin and Wyly (2000) and Schoenholtz and
Stanton (2001).
6
The findings from these studies are highly relevant for Hispanics, as the barriers
they face relate to their high share among both low-income families and immigrants. The barriers
identified by these studies include:
• establishing a credit history;
• verifying income;
• documenting employment history;
• affordability;
• verifying assets; and
• meeting requirements regarding citizenship or residency status.
This section summarizes the findings from these studies regarding these underwriting barriers. These
barriers are a key focus of the underwriting review presented in sections three through six of the
report.
Credit History
One of the challenges for low-income households, including many immigrants, is lack of a credit
history with credit reporting agencies. Since traditional underwriting requires an evaluation of
information from credit reporting agencies, an absence of a formal credit history may make borrowers
ineligible for a mortgage loan. A considerable number of Hispanics do not have credit scores,
because they have immigrated to the U.S. recently. An analysis of Community Reinvestment Act
(CRA) loans found that 22 percent of Hispanics had no credit score, compared with 3 percent of
African Americans and 4 percent of whites.
7
6
David Listoken and Elvin K. Wyly, “Making New Mortgage Markets: Case Studies of Institutions, Home
Buyers, and Communities,” Housing Policy Debate 11(3), 2000. Andrew I. Schoenholtz and Kristin
Stanton, “Reaching the Immigrant Market: Creating Homeownership Opportunities for New Americans,”
Fannie Mae Foundation, Washington, DC, 2001. The findings from these two studies were also
synthesized in a report by Schoenholtz and Stanton, “Reaching Emerging and Underserved Home
Ownership Markets,” LISC Center for Home Ownership, Summit 2001: Research Series.
7
Stegman, Michael, Roberto Quercia, and Jennifer Lobenhofer, “Automated Underwriting: Getting to ‘Yes’
for More Low-Income Applicants,” Center for Community Capitalism, University of North Carolina -
Chapel Hill, 2001.
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Alternative approaches to documenting credit history have been developed to address this issue.
These approaches involve documenting regular bill payments to demonstrate the prospective
borrower’s willingness and ability to meet their financial obligations. This includes information on
payments for rental housing, utilities, telephone service, medical bills, personal loans, school tuition
or child care – none of which is gathered by credit reporting agencies.
Many other low-income Hispanic borrowers may face limited mortgage options because of poor
credit histories. Absent extenuating circumstances, the mortgage industry generally requires a credit
score of 660 in order to qualify for a prime mortgage, while borrowers with scores between 620 and
660 require further review in order to qualify.
8
A recent study by Bostic, Calem and Wachter (2004)
estimates that 63.3 percent of Hispanic renters in 2001 had credit scores below 660, compared to 54.2
percent of African-American renters and 35.4 percent of non-Hispanic white renters.
9
Documenting and Determining Borrower Income
Traditional mortgage underwriting verifies income by reviewing paycheck stubs and tax returns, as
well as by contacting employers of the borrower and co-borrower. There are several ways in which
this traditional underwriting process may pose barriers for Hispanics. First, low-income households,
particularly immigrants, may not have income that can be documented by pay stubs if they are
routinely paid in cash. Second, even if their primary source of income is verifiable, these households
may rely on supplemental income from part-time jobs that are “off the books,” such as childcare, day
labor, or house cleaning. In these cases, alternative underwriting approaches to income verification
may include using certified letters from employers to document income or documenting regular
patterns of deposits into bank accounts.
Another challenge for determining borrower income can arise when there are household members
who are not family members but who contribute toward housing costs and will continue to be part of
the household when a home is purchased. Income from boarders is traditionally not counted toward
borrower income. Alternative underwriting guidelines may allow boarder income to count as part of
the borrower’s income if the contribution toward housing costs can be documented and the boarder
will continue to be part of the household after the move.
Employment History
Mortgage underwriting generally requires documentation of a borrower’s work history over the
previous two years as proof of income stability. For the same reasons they may have trouble
8
Credit scores in these ranges are not unheard of among loans purchased by FHA or the GSEs. Fannie
Mae’s Annual Report for 2001 reported that 6 percent of the mortgages they purchased were made to
borrowers with credit scores below 620 and an additional 11 percent were made to borrowers with credit
scores between 620 and 660.
9
Raphael Bostic, Paul Calem, and Susan Wachter, “Hitting the Wall: Credit as an Impediment to
Homeownership,” paper presented at Building Assets, Building Credit: A Symposium on Improving
Financial Services in Low-Income Communities, November 18-19, 2003, Joint Center for Housing Studies
of Harvard University, Cambridge, MA.
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documenting income, some Hispanic borrowers may have difficulty meeting this requirement if their
employment is “off the books.” In other cases, potential borrowers may have difficulty meeting this
requirement if their employers are uncooperative or management has turned over. Borrowers may
also have difficulty meeting this requirement if they have not been living in the U.S. for two years or
if their employment history is marked by “job hopping” and lengthy gaps in employment –
associated, for example, with return visits to their native country. Alternative underwriting
approaches may require a shorter work history for new arrivals or may use documentation of income
through bank deposits or W-2 forms without verification directly from the employer.
Affordability
Affordability of homeownership is a challenge for a significant share of all would-be first-time
homebuyers.
10
Affordability is an even greater barrier for Hispanic households, who are more likely
to have low- or moderate-incomes than their non-Hispanic counterparts. In addition, Hispanic
families have significantly less wealth.
11
The combination of low income and low wealth may make
it difficult for Hispanic families to accumulate a sufficient downpayment for a conventional product
that may require a 10 percent downpayment, even with satisfactory credit history. For the same
reasons, Hispanics are disproportionately likely to have lower cash reserves, and this is a signal to
lenders about their capacity to make mortgage payments on time, especially during a financial crisis.
Affordable loan products help address this barrier through lower downpayments and higher
qualifying ratios.
Documenting Assets
Traditional underwriting requires verification that the borrower accumulated the funds used for
downpayments over time through a review of bank statements. Borrowers who do not use banks for
their savings, which is not uncommon among immigrants, will not be able to meet this requirement.
In some cases, immigrant groups may also use savings clubs
12
as a source of downpayment funds, and
these may not be easy to document. Alternative underwriting guidelines may allow borrowers to
deposit funds in a bank account to document the existence of the savings and then use information on
the household budget to support the borrower’s ability to have accumulated this level of savings. In
the case of savings clubs, lenders may accept a certified letter from the club treasurer to document the
borrower’s participation in the club and verify the club as the source of their savings.
Citizenship and Residency Status
Mortgage underwriting may preclude loans to borrowers who are not U.S. citizens. This requirement
reflects a concern that non-citizens are not committed to permanent residency in the U.S. and, for that
reason, may pose a risk of default. However, lenders have been relaxing these standards to allow
10
Tong, Zhong Yi. Homeownership Affordability in Urban America: Past and Future, April 2004, Special
Report, Fannie Mae Foundation.
11
Cortes, forthcoming, Abt Associates, Inc.: Cambridge, MA.
12
Savings clubs are also referred to as cultural savings clubs or private savings clubs.
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loans to permanent and nonpermanent resident aliens. There are an estimated 6 million
undocumented immigrants in the United States, the large majority of them Hispanic, so residency and
immigration status are important barriers.
13
Recently, a few institutions have piloted programs to extend mortgage loans to borrowers who do not
have a valid Social Security number. Instead, they use the borrower’s Income Tax Identification
Number (ITIN), which can be assigned to foreign nationals who pay taxes on income earned in the
U.S. so they can file U.S. income tax returns. For example, Mortgage Guaranty Insurance
Corporation (MGIC) is piloting a program, Building a Life in America, available to borrowers using
an ITIN regardless of their immigration status. Underwriting borrowers with ITINs is complex,
because few borrowers have established credit histories under their ITIN. As a result, alternative
methods of evaluating credit history are generally required.
14
Citibank and Wells Fargo also recently
piloted tax-ID loans, in a limited number of cities.
15
13
Paral, Robert. 2004. The Potential for New Homeownership Among Undocumented Latino Immigrants.
Prepared for the National Association of Hispanic Real Estate Professionals.
14
Culver, Curt, “Immigrant Lending: Finding the Right Way To Do the Right Thing,” Mortgage Banking, p.
15-17, May 2004.
15
Zuniga, Janine, “Home-Buying Program Has Cash, Controversy,” Copley News Service, February 6, 2006.
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Chapter Three
Fannie Mae’s Underwriting Guidelines
Fannie Mae offers an array of loan products targeted toward low- and moderate-income households,
immigrants, and the upper end of the subprime market. Many of the products targeted to immigrants
and low- and moderate-income households are referred to collectively as Community Lending
mortgages. One group of the Community Lending products, called MyCommunityMortgage™,
includes low-downpayment, homeownership voucher, and energy efficient mortgages. This section
describes both the flexibilities for immigrants and low- and moderate-income borrowers in Fannie
Mae’s standard underwriting guidelines and the additional flexibilities available in the Community
Lending mortgage products. Barriers to homeownership for Hispanics that remain, even with these
flexibilities, are also discussed.
Standard Underwriting Guidelines
Fannie Mae’s current standard underwriting guidelines address several of the barriers described in the
previous section. These include barriers related to U.S. citizenship, credit history evaluation, length
of employment in the borrower’s line of business, and the ratio between housing expenses and
income.
U.S. Citizenship
U.S. citizenship is not required to qualify for a mortgage under Fannie Mae guidelines. Permanent
and non-permanent resident aliens legally residing in the country are eligible for a mortgage on the
same terms as a U.S. citizen. Social Security numbers are not required.
16
Credit History Evaluation
When a borrower does not have the type of credit report typically provided by one of the national
credit repositories, a non-traditional credit report may be used to evaluate creditworthiness. Fannie
Mae’s guidelines require that a credit history of at least 12 months be established, and that four to six
credit references be used. “Tier 1,” housing and utilities, credit references must be used first; if at
least four tier 1 sources cannot be documented, then “tier 2” sources of credit, which are payments for
medical, life, automobile, and household or renter’s insurance, can be used. If four to six total credit
references cannot be obtained from these sources, then “tier 3” sources of credit can be used. Tier 3
credit includes payments to local stores; rental payments for durable goods; payments for medical
bills, school tuition, and childcare; and payments on a loan from an individual.
A non-traditional credit report can be obtained from a repository that compiles the information, or the
lender can compile the information him or herself by obtaining written credit references directly from
creditors and reviewing the borrower’s bank statements. Credit histories from foreign countries can
A borrower can get a loan with an ITIN, provided that he or she is a legal resident.
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16

also be used to evaluate creditworthiness, provided they are translated into English and meet the
requirements for completeness, accuracy, and authenticity applied to other credit reports.
Employment History and Income Stability
Although two years of documentation for a borrower’s employment and income history are
required,
17
the borrower’s history in a particular line of business is not evaluated. Income stability is
evaluated, but frequent changes in employment are not considered detrimental to a borrower’s ability
to maintain homeownership. However, seasonal, part-time, or second job income is only considered
to be stable income if the borrower has worked in the same line of business for the past two years and
there is a strong likelihood of continuation. In addition, income received in cash is not included in the
calculation of the borrower’s stable income.
Housing Expense-to-Income Ratio
Historically, standard mortgage underwriting guidelines set maximums for both the ratio of housing
expense-to-income (typically 26 to 28 percent) and the ratio of total recurring debt and housing costs
to income (typically 33 to 36 percent). Fannie Mae’s current standard underwriting guidelines do not
set a maximum housing expense-to-income ratio, but rather have a single limit for total recurring debt
of 36 percent. This flexibility allows borrowers who do not have non-housing debt (such as
immigrants who are reluctant to become indebted to anyone other than a relative) to dedicate a larger
share of their income to housing payments.
Principal Remaining Barriers in Fannie Mae’s Standard Underwriting
Fannie Mae’s underwriting guidelines for standard products continue to pose some barriers to some
Hispanics seeking to attain homeownership.
First, income received in cash is not an acceptable source. Hispanics working several jobs, some of
which are paid in cash, may not be able to meet income stability and total debt-to-income ratio
requirements if this income is not considered.
Second, income from boarders in a one-family property generally cannot be considered as part of the
borrower’s income in calculating the total debt-to-income ratio. For Hispanics who live with
extended family members who contribute to housing payments but would not be named as borrowers
on the mortgage, this requirement underestimates the resources available to pay the mortgage.
Third, cash-on-hand is generally not considered an acceptable source of funds for the downpayment
or closing costs. In addition, deposits with savings clubs are not specifically allowed in Fannie Mae’s
Seller/Servicer Guide, making it unlikely that lenders consider these deposits to be an acceptable
source of funds.
18
Recent immigrants who do not have a relationship with a traditional financial
17
Lenders may also consider borrowers with an income history of less than two years (but no less than one
year), as long as the income is stable and likely to continue.
18
A staff member interviewed for this study (Wendy Wood, Director of Community Lending, October 19,
2004), thought some lenders’ individual negotiated contracts with Fannie Mae might allow them to
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institution and who may mistrust such institutions because of their lack of familiarity with them may
be disqualified from homeownership by these requirements.
Underwriting Guidelines for Community Lending and Flex
Mortgages
Exhibit 1 summarizes the features and underwriting requirements of several Fannie Mae products
targeted to immigrants and low- and moderate-income borrowers, called Community Lending
products. Summarized here are the Community Home Buyer’s Program™, Fannie 3/2
®
, Fannie 97
®
,
and the low-downpayment one- and two-family mortgage product in the MyCommunityMortgage™
suite of products.
19
It is important to note that Community Lending products are not as widely available to borrowers as
Fannie Mae’s standard products as lenders must meet special requirements to be able to originate
these products. For example, lenders who are approved to offer Fannie Mae products need a
negotiated commitment from Fannie Mae in order to be able to sell MyCommunityMortgage™ loans
to Fannie Mae. In addition, Fannie Mae places limits on the volume of MyCommunityMortgage™
loans they will commit to purchasing from each lender. Information from Fannie Mae’s Annual
Housing Activities Report for 2003 submitted to HUD indicates that Fannie Mae purchased or
securitized a total of 20,400 of these loans in that year.
20
Fannie Mae also offers “Flex” products, which are summarized in Exhibit 2. These products are not
considered Community Lending products because, unlike the Community Lending products, they
require traditional credit reports and do not allow other flexibilities identified below. Nonetheless,
they require very low downpayments and allow a variety of sources of funds to be used for closing
costs and the downpayment and, therefore, may offer opportunities for borrowers with limited
downpayment funds. One advantage of the Flex products is that there is no borrower income limit,
while borrowers approved for Community Lending mortgages cannot have income that exceeds 100
percent of area median income for most geographic areas.
21
.
consider deposits with savings clubs on an equivalent basis with cash-on-hand, which would make this a
permissible source of funds for Community Lending products but not for standard Fannie Mae products.
19
Other products in the suite, such as energy efficient mortgages, have slightly different features and
requirements, but are not as relevant to the issue of Hispanic homeownership and so are not included in this
review.
20
Figures reported in “HUD’s Housing Goals for the Federal National Mortgage Association (Fannie Mae)
and the Federal Home Loan Mortgage Corporation (Freddie Mac) for the Years 2005–2008 and
Amendments to HUD’s Regulation of Fannie Mae and Freddie Mac; Final Rule” Federal Register,
November 2, 2004, Vol. 69, No. 211, page 63655.
21
There are exceptions to this limit for some high-cost areas. Also, the income limit for borrowers using the
MyCommunityMortgage™ product in non-metropolitan areas is 115 percent of the area median income.
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Exhibit 1
Fannie Mae Underwriting Guidelines for Community Lending Mortgages
Community Home
Buyer’s Program
Fannie 3/2 Fannie 97 MyCommunityMortgage
Occupancy owner-occupied, must not have ownership interest in any other residential dwelling
Property Type 1-family, condo, or unit in PUD
1-family, condo, or unit in PUD; 2-family (no condo
or PUD)
Loan Purpose purchase or limited cash-out refinance purchase purchase or limited cash-out refinance
Downpayment 5% down, borrower's own funds
5% down, 3 percentage
points from borrower's
own funds
3% down, borrower's own
funds
$500 minimum contribution for 1-unit, 3% for 2-unit,
no minimum for limited cash-out refinance
Amortization Period 15 to 30 years, monthly or biweekly, fully amortizing up to 30 years, fully amortizing
Interest Rate Fixed, no temporary interest rate buydowns
fixed, 7/1ARM, 10/1 ARM, no temporary interest
rate buydowns
Total Debt-to-Income
Ratio
38% 43%
Maximum LTV/CLTV
95% LTV, 105% CLTV (with
Community Second)
95% LTV, 105% CLTV
(with Community
Second)
97% LTV, 97% CLTV
(subordinate financing
generally not allowed)
100% LTV; 97% for 2-unit; 90% for co-ops;
maximum 105% CLTV (with Community Second);
minimum 95% CLTV
Credit Score 620 600 (97% LTV) or 620 (100% LTV)
Alternative to credit
score (traditional
credit record)
Minimum credit history of four tradelines active at least 24 months; no more than 9 open
tradelines; no collections or judgments within past 24 months; no prior bankruptcy or
foreclosure (w/o re-established credit); no housing payment delinquency within 24 months; no
delinquency on revolving or installment debt within 12 months; no more than one revolving or
installment account 30 days past due during the 13-24 months preceding application.
Enhanced credit evaluation for traditional or non-
traditional credit, which require minimum credit
history of four tradelines active at least 24 months;
no more than 9 open tradelines; outstanding
balances for the revolving accounts may represent
no more than 50% of the borrower's outstanding
credit at the time of the loan application. In
addition, the borrower must have (1) no history of
major delinquencies (bankruptcy, foreclosure,
collections, or judgments); (2) no history of
delinquencies on installment or housing debt; and
(3) no delinquencies for revolving accounts in the
last 12 months, and no more than one account that
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Exhibit 1
Fannie Mae Underwriting Guidelines for Community Lending Mortgages
Community Home
Buyer’s Program
Fannie 3/2 Fannie 97 MyCommunityMortgage
Alternative to credit
score (non-traditional
credit record)
Minimum four sources of non-traditional credit active at least 12 months. Sources must
include utility company and housing payments. No delinquent rental housing payments within
24 months; maximum of one 30-day delinquency on remaining accounts; no collections or
judgments.
was “1 x 30 days” delinquent in the 12 months prior
to that.
Financial Reserves One month of PITI in financial reserves after closing None
Income Limits Generally, borrower's income must be no more than 100 percent of AMI.
Generally, borrower's income must be no more
than 100 percent of AMI or 115 percent of AMI in
non-metropolitan areas.
Income
Documentation
Rental payments from a relative who resides with the borrower (but who is not obligated on the
mortgage debt) may be considered as acceptable stable income—in an amount up to 30% of
the total gross income that is used to qualify the borrower for the mortgage—if the relative has
lived with (and paid rent to) the borrower for the last 12 months.
Rental payments from a boarder (need not be a
relative) may be considered as acceptable stable
income.
Asset Documentation
Cash-on-hand may be an acceptable source of funds, if the borrower customarily uses cash for expenses and that usage is consistent with the
borrower's credit profile and financial status. In such instances, the credit report or other verifications must reflect limited (or no) use of credit and
cannot identify any depository relationship between the borrower and a financial institution. Acceptability of cash-on-hand determined on a case-
by-case basis.
Home-buyer
Education and
Counseling
Homebuyer education generally
required (waived for previous
homeowners making 5%
downpayment with own funds and with
two months of financial reserves).
Homebuyer education and post-purchase early
delinquency counseling required.
Home-buyer education required for first-time home
buyers; landlord counseling required for 2-unit
borrowers
Credit Enhancements
Generally standard mortgage insurance coverage requirements
apply
Generally standard
mortgage insurance
coverage requirements
apply, but 35% required if
manually underwritten.
Standard mortgage insurance coverage
requirements apply; reduced MI and lower-cost MI
coverage options do not apply
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Exhibit 2
Fannie Mae Underwriting Guidelines for Flex Products
Flex 97 Flex 100
Occupancy owner-occupied principal residence
Property Type 1-family, condo, or unit in PUD
Loan Purpose purchase
Downpayment
3% downpayment required from the borrower's own
funds, a Community Seconds subsidized second
mortgage; or a gift or unsecured loan from other than an
interested party. An interested party to the transaction
may contribute up to 3% of the property's sales price
toward the payment of closing costs.
No downpayment required, but borrower must contribute
3% toward closing costs, from the borrower's own funds, a
Community Seconds subsidized second mortgage; or a
gift or unsecured loan from other than an interested party.
An interested party to the transaction may contribute up to
3% of the property's sales price toward the payment of
closing costs.
Amortization Period 15 to 30 years
Interest Rate fixed, 7/1ARM, 10/1 ARM
Ratios standard: 36% debt-to-income ratio
Maximum LTV/CLTV
97% LTV; 100% CLTV or 105% CLTV with Community
Second
100% LTV; 100% CLTV or 105% CLTV with Community
Second
Credit Score None specified, but intended for borrowers with very good credit
Alternative to credit score
(traditional credit record)
Must be underwritten through Desktop Underwriter, so traditional credit report is required.
Alternative to credit score
(non-traditional credit
record)
None
Financial Reserves
DU specifies the amount of reserves required to support its risk assessment; two months' reserves generally
satisfies basic risk tolerances
Income Limits None
Income Documentation Standard
Asset Documentation Standard
Home-buyer Education and
Counseling
None required
Credit Enhancements Standard mortgage insurance coverage requirements apply
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This section reviews the additional flexibilities available in Community Lending mortgages and Flex
products that address barriers to homeownership for Hispanics. Some of the standard underwriting
guidelines discussed in the previous section, including credit history, documenting employment, and
U.S. citizenship, do not differ for these products and so are not discussed separately in this section.
Documenting Income
Rental income from boarders related to the borrower in a one-unit property can be included in the
calculation of the borrower’s income in Community Lending products, but not in Flex products. For
products that allow this flexibility, the boarder must have lived with and paid rent to the borrower for
the past 12 months. MyCommunityMortgage™ allows the additional flexibility that the boarder does
not have to be a relative. As in Fannie Mae’s standard products, cash income is not an acceptable
source of income in Community Lending or Flex products.
Documenting Assets
Underwriting guidelines for Community Lending products allow cash on hand to be considered an
acceptable source of funds for a downpayment and closing costs under some circumstances.
However, the borrower must primarily use cash for expenses, and this must be reflected in the
borrower’s credit profile and financial status. Specifically, the credit report must show limited or no
use of credit and must not identify any depository relationship between the borrower and a financial
institution.
The ability to accept cash-on-hand in underwriting Community Lending products is available to
lenders on a negotiated basis, and the details under which it is an acceptable source of funds,
including the documentation required, are specified in individual agreements between Fannie Mae
and the lender. Flex products do not allow the use of cash-on-hand.
The acceptability of cash-on-hand potentially benefits Hispanics disproportionately in helping to
overcome barriers to homeownership. A number of low-income and immigrant Hispanic households
distrust mainstream financial institutions and eschew relations with them.
22
For example, a 1999
survey of residents of low-income neighborhoods in New York and Los Angeles found that 45
percent of Hispanics did not have a transaction account with a bank, compared to 31 percent of blacks
and 9 percent of whites.
23
22
Congressional Hispanic Caucus Institute, 2004.
23
The shares of unbanked are derived from data presented in Dunham, Constance R. 2001. “The Role of
Banks and Nonbanks in Serving Low- and Moderate-Income Communities,” J.L. Blanton, et al., eds.,
Changing Financial Markets and Community Development: A Federal Reserve System Conference,
Federal Reserve Bank of Richmond. Since these data only pertain to low-income neighborhoods in two
cities, it is not known how representative this share is for Hispanics generally. Aizcorbe, Ana M., Arthur
B. Kennickell, Kevin B. Moore, 2003. “Recent Changes in U.S. Family Finances: Evidence from the 1998
and 2001 Survey of Consumer Finances,” Federal Reserve Bulletin, Volume 89, Number 1, (January), pp.
1 to 29 serve as a point of comparison. They present tabulations of the share of families without
transaction accounts based on the 2001 Consumer Finance Survey for the entire nation. These data find
that 31.5 percent of families with income in the bottom quintile do not have transaction accounts. With
regard to race and ethnicity, the same data find that 24.8 percent of minorities do not have transaction
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In addition to some flexibility in the use of cash-on-hand, Community Lending products are flexible
in that they generally require low downpayments. The one-to-two family product in the
MyCommunityMortgage™ suite of products reviewed in Exhibit 1, in particular, has a very low
downpayment requirement of $500 of the borrower’s own funds (for a one-unit property), in addition
to other closing costs.
Flex 97™ and Flex 100™ also require very low downpayments. Flex 97™ requires a 3 percent
downpayment, but these funds do not have to come from the borrower’s own funds. They can be
from an unsecured loan or a gift from a variety of permissible parties (in particular, one that is not
involved in the transaction). A party involved in the transaction can contribute up to 3 percent of the
property’s sales price toward closing costs. Flex 100™ does not require a downpayment. The
borrower must contribute 3 percent toward closing costs, but the sources of these funds are equally
flexible as those allowed in the Flex 97™ product. As noted in Cortes, et al.,
24
Hispanic families have
significantly less wealth than non-Hispanic households. Given this relatively low wealth, low
downpayment products may help to remove an important barrier to homeownership for Hispanics.
The trade-off, as will be discussed more below, is that the Flex products also require very good credit.
Debt-to-Income Ratios
As noted above, Fannie Mae does not use housing expense-to-income ratios separate from overall
debt ratios in its underwriting, even for standard products. In addition, Community Lending products
allow higher total debt-to-income ratios than standard products: 38 percent for Community Lending
and 43 percent for MyCommunityMortgage™. Flex products require the same total debt-to-income
ratio, 36 percent (or higher with compensating factors), as Fannie Mae’s standard products. Given
that Hispanic households are disproportionately located in areas of the country with high housing
costs,
25
the flexibility in the Community Lending products, particularly MyCommunityMortgage™,
could be helpful in overcoming barriers to homeownership for Hispanics who must dedicate a
relatively large proportion of their income for housing costs.
Credit Quality
Fannie Mae’s Seller/Servicer Guide does not specify minimum credit scores required to qualify for a
standard mortgage. A large majority of loans are underwritten using Fannie Mae’s automated
underwriting system, Desktop Underwriter® (DU™). Automated underwriting systems are
technological tools that combine statistical models with historical loan performance and mortgage
lending factors. DU™ produces a mortgage score based on a variety of factors, including the
borrower’s income, size of the downpayment, financial reserves, total debt-to-income ratio, type of
product being used (such as fixed rate or adjustable rate), and the number of borrowers on the loan.
accounts compared to 5.3 percent of whites (the survey does not have enough observations to provide
tabulations for Hispanics separately). Thus, the survey data for New York and Los Angeles are not
inconsistent with national data.
24
Cortes, forthcoming, Abt Associates, Inc.: Cambridge, MA.
25
Ibid.
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In addition, in place of credit scores, DU™ uses credit characteristics such as credit history,
delinquent accounts, and foreclosures from credit reports. DU™ weighs and balances these
compensating factors statistically.
However, Fannie Mae’s Seller/Servicer Guide, which applies to manually underwritten loans, does
recommend the use of credit scores for certain products. As a rule, the mortgage industry standard is
a score of 660 or above to qualify for a prime mortgage; scores from 620 to 660 would require further
review and compensating factors. Fannie Mae’s Seller/Servicer Guide states that for manually
underwritten Community Lending mortgages, a minimum score of 620 is generally required.
Flex products, on the other hand, generally require “very good credit,” according to Fannie Mae press
releases.
26
Although “very good credit” is not defined in either the press releases or Fannie Mae’s
underwriting guidelines, this language seems to imply that the minimum credit score is likely to be
higher than that required for Fannie Mae’s standard products.
Restrictions and Trade-offs Applied to Flexible Loans
The additional flexibility offered through Community Lending products is available only for
borrowers who have no more than 100 percent of area median income (AMI) in most areas, or 115
percent of AMI in non-metropolitan areas for MyCommunityMortgage™ products. There is no
income restriction for loans in eligible low- or moderate-income areas, and certain high-cost
mortgage markets have higher income limits. In addition, there are requirements for homebuyer
education and counseling and some product restrictions, as well as differences in pricing. The
primary trade-off required for Flex products (Flex 97™ and Flex 100™) is very good credit.
Community Lending products require homebuyer education and counseling under most
circumstances. Previous homeowners using a MyCommunityMortgage™ product are not required to
undergo homebuyer education and counseling, nor are previous homeowners making at least a 5
percent downpayment using their own funds and who will have at least two months of financial
reserves after closing using the Community Home Buyer’s Program™. Homebuyer education and
counseling can be a benefit to borrowers if it improves their understanding of the mortgage process,
helps them select a product that is most appropriate for their needs, and reduces the likelihood that
they will lose their home through foreclosure. Many borrowers want to find and close a loan as
quickly as possible, however, and to the extent that education and counseling slows the loan process,
they may view this requirement as a burden. In addition, this requirement could pose a barrier to
homeownership if Spanish-speaking education and counseling programs are not available widely, and
if this requirement leads to lender reluctance to promote the products. Flex products do not require
homebuyer education and counseling.
Community Lending and Flex products both have some restrictions in terms of the loan purpose and
interest rate. Fannie 97® can only be used for purchase loans, and the other products reviewed in
Exhibit 1 can be used only for purchase, refinance, or limited cash-out refinance. Flex 97 and Flex
100 can only be used for a home purchase. In addition, adjustable-rates are not allowed in Fannie
“Fannie Mae in Connecticut: Flexible 97® through Desktop Underwriter,” from Fannie Mae’s website,
http://www.fanniemae.com/partnershipoffices/connecticut/story1.jhtml, downloaded Nov. 1, 2004.
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26

97®, Fannie 3/2®, or the Community Home Buyer’s Program™, although hybrid adjustable-rates
27
are allowed in MyCommunityMortgage™ products and Flex products.
Finally, prices paid to lenders are very slightly lower for Community Lending and
MyCommunityMortgage™ products compared to conventional 30-year fixed rate mortgages. For
example, according to discount and premium pricing information for whole loans on Fannie Mae’s
website, a 30-year fixed-rate MyCommunityMortgage™ with an LTV of 97 percent or less with a
pass-through of 5.75 percent had a 90-day price of 100.358 in September 2004. In comparison, a
standard 30-year fixed rate mortgage with the same pass-through had a 90-day price of 100.630.
28
The quoted price is the percentage of the loan balance that Fannie Mae will pay for the loan. In
general, lenders charge borrowers lower interest rates on loans for which they receive a higher price,
so Community Lending products may have slightly higher interest rates than standard products.
In addition to these price differences, some loans are eligible for sale to Fannie Mae only with a
“loan-level price adjustment,” which is a deduction from the proceeds of the loan. For example, a
Fannie 97 conventional fixed-rate loan receiving an “approve/eligible” recommendation from DU
requires a loan-level price adjustment of 1½ percent. Some lenders may also pass such lower loan
sale prices on to borrowers in the form of either higher interest rates or up-front fees.
In addition to higher interest rates or up-front fees, borrowers will likely be required to pay mortgage
insurance premiums, which also affect the affordability of loans. All loans that are sold to Fannie
Mae that have an LTV greater than 80 percent, including Community Lending products, must include
a credit enhancement, which is most commonly private mortgage insurance paid by the borrower.
29
Higher, more costly, levels of mortgage insurance are generally required for loans with higher LTV
ratios. For example, Fannie Mae requires 20 percent mortgage insurance coverage for
MyCommunityMortgage™ products with LTVs from 97-100 percent; 18 percent for LTVs from 95
97 percent; 16 percent for LTVs from 90-95 percent; 12 percent for LTVs from 85-90 percent; and 6
percent for LTVs from 80-85 percent. The difference in premium for higher LTVs is significant.
According to one mortgage insurer, the premium for 18 percent mortgage insurance coverage on a
27
Hybrid adjustables have fixed rates for some number of years, following which the loan converts to an
adjustable rate loan for the remaining term. The hybrids allowed under these Fannie Mae programs are so-
called 7/1 or 10/1 ARMs, with fixed rates for the first seven or ten years of the term before converting to
one-year ARMs for the remaining life of the loan.
28
From Fannie Mae’s website,
http://www.efanniemae.com/syndicated/documents/mbs/apeprices/public/30fraac.html.
29
In addition to the use of mortgage insurance, the GSEs’ Charter Acts also authorize the purchase of single-
family conventional mortgages with LTVs over 80 percent if: (1) the seller retains a participation of not
less than 10 per centum in the mortgage; or (2) the seller agrees to repurchase or replace the mortgage upon
demand of the corporation in the event of default.
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loan with an LTV above 95.0 percent is 0.55 percent.
30
In comparison, the premium for the required
6 percent mortgage insurance coverage for a loan with an LTV of 85 percent is .26 percent.
31
Barriers Inadequately Addressed by Available Products
Although several barriers to Hispanic homeownership are addressed in Fannie Mae’s Community
Lending and Flex products, a few important barriers remain. These include requirements for legal
residency in the United States, income documentation requirements, and asset documentation
requirements.
First, although permanent and non-permanent resident aliens can qualify for a mortgage on the same
terms as a U.S. citizen, undocumented residents cannot. Lenders must represent and warrant to
Fannie Mae that a borrower is residing in the country legally for the borrower to qualify for a
mortgage. As noted above, a sizeable number of Hispanics reside in the country illegally and
therefore do not have Social Security numbers, but do have income tax identification numbers.
Although some lenders are originating mortgages to borrowers on the basis of ITINs, there is
essentially no secondary market outlet for these loans because they cannot be purchased by Fannie
Mae (or, as discussed below, by Freddie Mac or FHA).
Second, some Hispanic borrowers, particularly those who are paid in cash, may have difficulty
meeting the income and employment documentation requirements. Borrowers must document their
employment for two years, although borrowers with a shorter work history than this (but no less than
12 months) may also be considered. The lender must consider previous employment gaps that are
likely to recur and that affect the stability of income. Income received in cash is not considered an
acceptable income source, so borrowers paid in cash are not likely to meet the total debt-to-income
requirement.
Even for Hispanics who are not paid in cash, without a Spanish-speaking staff member, some lenders
may have difficulty obtaining telephone verification of employment. In addition, employers of
seasonal workers may be difficult to reach for verification during the off-season. Last, it is not clear
how lenders treat applicants who experience gaps in employment because of lengthy return visits to
their native country. These employment gaps likely increase the perception of the borrower as having
unstable income.
Third, cash from savings clubs is not specifically identified in Fannie Mae’s underwriting guidelines
as an acceptable source of funds for the downpayment and closing costs. Although a Fannie Mae
staff member suggested that this flexibility might be available to some lenders through their
negotiated agreements, the ability to accept cash from savings clubs appears to be limited. For
Hispanics who are uncomfortable with using banks or other formal financial institutions, savings
clubs may be their primary method of accumulating cash for a home purchase. The lack of
acceptability of this source of funds may be an important barrier for these Hispanics.
30
This translates to approximately $1100 annually on a $200,000 mortgage. Premium on a fixed-rate from
PMI Mortgage Insurance Company, effective February 2006.
31
Approximately $520 annually on a $200,000 mortgage. Premium on a fixed-rate from PMI Mortgage
Insurance Company, effective February 2006.
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Implementation and Application of Underwriting Guidelines by
Lenders
Lenders are required to follow Fannie Mae’s underwriting guidelines in order to sell their loans to the
GSE, although there is slightly more room for lender discretion for manually underwritten loans than
for those underwritten through Fannie Mae’s automated underwriting system, Desktop Underwriter®.
All applications that rely on non-traditional credit reports are underwritten manually, and Community
Lending products are more likely to be manually underwritten than standard products.
Fannie Mae staff interviewed for this report
32
acknowledged that Community Lending products
require more effort to underwrite than standard products, but said that lenders do offer the products to
their clients. They noted that one tool offered by Fannie Mae, Home Counselor Online, walks
borrowers and counselors through the process of developing a non-traditional credit history to
streamline the underwriting process for lenders as much as possible.
Wendy Wood, Director of Community Lending, and Anna Alvarez-Boyd, Director of Community Lending,
telephone interview conducted October 19, 2004.
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32

Chapter Four
Freddie Mac’s Underwriting Guidelines
Freddie Mac’s products include both standard mortgage products and those targeted to particular
populations. Similar to Fannie Mae’s products, some Freddie Mac products that target particular
populations are limited to specific geographic areas or to borrowers with incomes below the area
median income. This section reviews underwriting guidelines for both types of Freddie Mac products
to examine how they address barriers that may limit Hispanics’ access to mortgage financing. The
review focuses first on aspects of standard underwriting guidelines that facilitate homeownership for
Hispanics by providing some flexibility, and then turns to a review of Freddie Mac’s special
affordable lending products. The section concludes with a discussion of what is known about how
lenders implement the written underwriting guidelines.
Standard Underwriting Guidelines
Freddie Mac’s standard underwriting guidelines offer flexibility in four main areas in which
flexibility has not typically been available for conventional mortgages. These are discussed in turn
below.
U.S. Citizenship
Neither citizenship nor permanent residence in the United States is required for a mortgage.
According to Freddie Mac’s underwriting guide: “A non-U.S. citizen who is lawfully residing in the
U.S. as a permanent or nonpermanent resident alien is eligible for a mortgage on the same terms as a
U.S. citizen.” (Freddie Mac Single-Family Seller/Servicer Guide, Volume I, Chapter 22.10.1.) A
Social Security number is not required for mortgage approval, but the borrower must be a legal
resident of the United States.
Credit History
Freddie Mac’s standard underwriting guidelines do not require traditional credit reports to evaluate
credit history. However, the guidelines require the use of a minimum number of credit references to
properly assess credit history, whether or not these references appear on the borrower’s credit report.
The minimum number of credit references must include at least three tradelines (accounts with credit
granting firms such as credit cards or loans), or four noncredit payment references that have existed
for at least 12 months (such as rent, utilities, or insurance
33
), or a total of four tradelines and noncredit
payment references. Credit history from another country may also be used to supplement U.S. credit
history, as long as the required minimum number of credit references has been established in the U.S.
Although Freddie Mac does not require credit scores, low credit scores can affect loan pricing, as
discussed below.
A savings history of at least 12 months may also be used if it shows periodic deposits and a growing
balance.
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33

Documenting Assets
Some flexibility in the source of downpayment funds is provided. Related people living together can
pool funds for use toward the downpayment and closing costs, as long as: they have been living
together for the past 12 months; plan to continue living together in the new residence;
34
and the
borrower attests that the funds are not borrowed. In addition, deposits with a Community Savings
System or savings club are acceptable sources of cash as long as the borrower’s deposits are
documented.
Employment History
The applicant’s length of employment in a given line of work is not a factor in Freddie Mac’s
underwriting guidelines. Freddie Mac’s underwriting guidelines focus on the stability of income
rather than on the source of income. This emphasis allows borrowers who frequently change jobs to
qualify for a loan. In addition, the guidelines treat income from part-time and multiple jobs the same
as full-time employment income, as long as the income can be reasonably expected to continue for at
least three years. Income received in cash is not included in the calculation of the borrower’s stable
income.
Barriers Inadequately Addressed by Available Products
Despite the flexibilities in Freddie Mac’s standard underwriting guidelines, there are other important
provisions that potentially limit the ability of Hispanic borrowers to qualify for a loan. For example,
the guidelines do not consider cash-on-hand as an acceptable source of funds for downpayment and
closing costs. In addition, the relatively low housing expense-to-income (25-28 percent) and total
debt-to-income ratios (33-36 percent) may also prevent low- and moderate-income Hispanic
households and households in high-cost housing markets from qualifying for a loan. As described in
Cortes et al.,
35
Hispanics are more likely to be low- and moderate-income households than their non-
Hispanic counterparts, and they disproportionately reside in metropolitan areas and in central cities
with high housing costs. Thus, they are disproportionately affected by the qualifying ratios required
in Freddie Mac’s standard products.
In addition to the qualifying ratios, requirements related to income from boarders may be a barrier to
mortgage qualification for Hispanics. Income from boarders is counted as qualifying income only for
disabled borrowers and only if the boarder income comes from a live-in aide, although income from
other boarders (such as family members) can be used as a compensating factor for exceeding the
qualifying income ratios.
36
Some of these potential barriers are addressed in Freddie Mac’s
Affordable Lending underwriting guidelines, which are discussed in the following section.
34
The borrower must attest that the related person intends to continue residing with the borrower for the
foreseeable future. The affidavit does not need to be notarized or acknowledged, but must be kept in the
mortgage file.
35
Cortes, forthcoming, Abt Associates, Inc.: Cambridge, MA.
36
For any manually underwritten mortgage for which either of the income ratio guidelines is exceeded, the
loan seller must prepare and retain in the mortgage file a written explanation justifying its underwriting
decision. In addition to rental income from a related boarder, conditions that can be used to justify
qualifying ratios that exceed those specified in the underwriting guidelines include an energy efficient
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Flexible Product Underwriting Guidelines
Several of the products offering additional flexibilities to low- and moderate-income and immigrant
borrowers are considered affordable lending products, or “Affordable Gold.” Exhibit 3 presents
information on three of these products, Affordable Gold 5, Affordable Gold 3/2, and Affordable Gold
97. The three products are similar across several dimensions and differ primarily on the amount and
source of the required downpayment. Affordable Gold 5 requires a downpayment of 5 percent from
the borrower’s funds; Affordable Gold 3/2 requires a downpayment of 3 percent from the borrower’s
funds and 2 percent from another source; and Affordable Gold 97 requires a downpayment of 3
percent from the borrower’s funds.
Exhibit 4 summarizes underwriting guidelines for two additional loan products, Alt 97 and Freddie
Mac 100. Because they do not offer the same flexibilities as the Affordable Gold products, these are
not considered affordable lending products. Nonetheless, they offer other flexibilities not available in
affordable lending products. Specifically, both products permit even lower downpayments, and Alt
97 allows “alternative” sources of funds for closing costs.
This section reviews the flexibilities available in these products that are not available in Freddie
Mac’s standard products and that may address barriers to homeownership for Hispanics.
Underwriting guidelines that are the same for these products and standard products, including
documenting employment and U.S. citizenship, are not discussed separately in this section.
It is likely that Freddie Mac’s affordable lending and flexible products are not as widely available as
their standard products. Some may require special approval or eligibility requirements that are in
addition to Freddie Mac’s approval for selling standard products to the GSE. For example, in order to
sell Freddie Mac 100 mortgages, the seller must also be approved as a servicer.
37
Information about
the number of Freddie Mac sellers that are also approved servicers is not publicly available.
home, high levels of verifiable assets, and the borrower’s probability for increased earnings based on
education or time employed in a profession. Conditions where exceeding the qualifying ratios would not
be appropriate include those that would result in risk layering, such as an adjustable-rate mortgage or a
marginal credit reputation.
Freddie Mac Seller/Servicer Guide, Chapter G33.1: Overview, updated February 7, 2001.
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37

Exhibit 3
Freddie Mac Underwriting Guidelines for Affordable Products
Affordable Gold 5 Affordable Gold 3/2 Affordable Gold 97
Occupancy/Property
Type
one-unit (SF, condo, PUD) primary residence
Loan Purpose purchase or refinance (no cash-out)
Downpayment At least 5% from borrower funds
At least 5%, with at least 3% from borrower
funds
At least 3% from borrower funds
Amortization Period 15, 20, or 30 years, fully amortizing
Interest Rate Fixed, no temporary subsidy buydown
Ratios No maximum housing expense-to-income, total debt-to-income is 38-40%.
Maximum LTV/CLTV 95% LTV/105% TLTV (with Affordable Second)
97% LTV/105% TLTV (with Affordable
Second); minimum 95.01% LTV
Credit Score
Credit scores recommended; otherwise non-credit payment references or non-
traditional credit report permitted.
Credit scores required if available;
otherwise non-credit payment references
or non-traditional credit report permitted.
Financial Reserves None required, but recommended Minimum one month's borrower reserves Minimum one month's borrower reserves
Income Limits
Borrower's income must be no more than 100 percent of AMI (with exceptions for high-cost areas); no income limits in a
Concentrated Area.
Income
Documentation
Rental payments from a relative who resides with the borrower (but who is not obligated on the mortgage debt) may be considered
as stable income if the relative has lived with and paid rent to the borrower for the past 12 months. Such rental income may
account for no more than 30% of the total qualifying income for the mortgage. Evidence of rental payments must be provided.
Asset Documentation
Cash-on-hand may be used as long as the LTV is 90%-95%; the borrower is a cash-
basis individual but may be a limited user of credit (i.e., revolving or installment debt);
lender documents the borrower's budget and cash receipts (6 months). Related people
living together can pool funds for the downpayment. Funds on deposit with a
Community Savings System are cash if documented. Funds above this amount are an
unsecured loan.
Same as Affordable Gold 5 and Affordable
Gold 3/2, but cash-on-hand may be used
as long as the LTV is at least 90% and no
more than 97%.
Homebuyer Education
and Counseling
Homebuyer education and counseling is required for first-time homebuyers and
borrowers making downpayments less than 5% and with less than 2 months financial
reserves. Not required for refinance transactions.
Homebuyer education required.
Credit Enhancements Standard mortgage insurance coverage requirements apply
35% mortgage insurance coverage
required
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Exhibit 4
Freddie Mac Underwriting Guidelines for Flexible Products
Alt 97 Freddie Mac 100
Occupancy/Property Type one-unit (SF, condo, PUD) primary residence
Loan Purpose purchase or refinance (no cash-out)
Downpayment
No minimum downpayment from Borrower Funds; funds
may be obtained from an unsecured loan, gift, or secondary
financing (not HELOC).
Borrower must have 3% own funds in transaction for
purchase (for closing costs, financing costs,
prepaids/escrows); no borrower funds required for
downpayment. No borrower funds required in transaction for
refinance.
Amortization Period 15, 20, or 30 years, fully amortizing
Interest Rate Fixed, no temporary subsidy buydown
Ratios
Guideline of 28% housing debt to income; 36% total debt to
income.
Guideline of 28% housing debt to income; 41% total debt to
income.
Maximum LTV/CLTV
97% LTV/100% TLTV (with Affordable Second); minimum
90% LTV
100% LTV/103% TLTV (with Affordable Second); minimum
97.01% LTV
Credit Score
Minimum indicator score of 700 for manually underwritten
loans; no previous bankruptcy or foreclosure in the last 7
years. Non-traditional credit report not permitted.
Minimum indicator score of 700 for manually underwritten
loans. Non-traditional credit report not permitted.
Financial Reserves None required. Minimum two month's borrower reserves
Income Limits
No income limit unless Affordable Seconds are used; then borrower's income must be no more than 100 percent of AMI
(with exceptions for high-cost areas); no income limits in a Concentrated Area.
Income Documentation Rental payments on one-unit property not allowed in calculating income.
Asset Documentation
Cash-on-hand not allowed. Related people living together can pool funds to be used toward a downpayment. Funds on
deposit with a Community Savings System are cash if documented.
Homebuyer Education and
Counseling
Not required.
Credit Enhancements 35% mortgage insurance coverage required
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Credit History
As noted above, Freddie Mac’s standard products do not require borrowers to have a credit score to
qualify. Lenders can assess borrowers’ credit by analyzing directly all of the information in the credit
report or can use non-traditional credit reports to assess credit quality for both standard and
Affordable Gold products. Non-traditional credit reports are not allowed for use in underwriting
Freddie Mac 100 and Alt 97 products. Both of these require that the lender use the borrowers’ credit
scores to identify the “indicator score,” which must be at least 700 to be eligible for delivery to
Freddie Mac if it is manually underwritten.
38,39
Documenting Income
In addition to the flexibility allowed by the standard underwriting guidelines that do not impose
requirements about stability of employment, Affordable Gold products allow rental income from
boarders to be included in the borrower’s qualifying income. Rental payments from a relative who
resides with the borrower may be included in the borrower’s qualifying income if the relative has
lived with and paid rent to the borrower for the past 12 months. The rental income may account for
no more than 30 percent of the total qualifying income for the mortgage, and documentation must be
provided for the rental payments. Cancelled checks, money orders, and regular deposits into a
savings account serve as adequate documentation. The income does not have to be reported on the
borrower’s tax return. Freddie Mac 100 and Alt 97 loan products do not allow income from boarders
to be included in calculating income.
Documenting Assets
While Freddie Mac’s standard underwriting guidelines do not allow cash-on-hand as a source of
downpayments, this is an acceptable source of assets for Affordable Gold products as long as the
loan-to-value (LTV) ratio is a minimum of 90 percent. In addition, the borrower must be considered
a cash-basis individual – that is, someone who does not use checking, savings or other similar
accounts and is a limited user of credit (i.e., revolving or installment debt). To document the
borrower’s ability to accumulate the cash, the borrower must provide six months of cash receipts, and
the lender must provide a Monthly Budget and Residual Income Analysis that confirms that the
borrower has sufficient residual income to have saved the downpayment.
Cash-on-hand is not an acceptable source of cash for Freddie Mac 100 and Alt 97. However, Alt 97
does allow alternative sources of assets to be used for the downpayment and closing costs, including
an unsecured loan, a gift, or secondary financing. Freddie Mac 100 does not allow alternative sources
of assets for closing costs, but does not require borrower funds for the downpayment. The borrower
38
To identify the indicator score, the lender first identifies the appropriate “underwriting score” for each
borrower on the mortgage. If a borrower has three FICO scores, the middle score is used; with only two
FICO scores, the lower of the two scores is selected; and the underwriting score for a borrower with only
one FICO score is the single FICO score. After the underwriting score is identified for each borrower, the
preferred method for finding the indicator score across all borrowers is to take the lowest of the borrowers’
underwriting scores. At least one borrower must have a usable FICO score.
39
“Affordable Gold At a Glance,” Publication Number 258, September 2004, downloaded from:
http://www.freddiemac.com/singlefamily/news/pdf/affgold.pdf
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is required to contribute 3 percent of his or her own funds to the transaction, but these can be used for
closing costs.
Debt Ratios
Qualifying ratios for Affordable Gold products are generally less restrictive than those for Freddie
Mac’s standard products. None of the Affordable Gold products summarized in Exhibit 3 require that
a housing expense-to-income ratio be calculated, and the maximum total debt-to-income ratio (38-40
percent) is higher than the maximum allowed by standard guidelines. The higher ratio either allows
borrowers to take on more housing debt than they would otherwise be able to or accommodates
substantial non-housing debt.
Unlike the Affordable Gold products, both the Freddie Mac 100 and Alt 97 loan products require
calculation of a housing expense-to-income ratio. The ratios allowed under Alt 97 guidelines (28
percent housing expense-to-income and 36 percent total debt-to-income) are at the high end of the
range of ratios for Freddie Mac’s standard products (25-28 percent housing expense-to-income and
33-36 percent total debt-to-income). Freddie Mac 100 allows higher levels of total debt, with a
maximum total debt-to-income ratio of 41 percent, but the maximum housing expense-to-income
ratio for Freddie Mac 100 is 28 percent.
Restrictions and Trade-offs Applied to Flexible Loans
Although Freddie Mac’s flexible products help borrowers overcome a number of barriers to
homeownership, there are some restrictions associated with this flexibility. There are four primary
restrictions or trade-offs associated with Freddie Mac&rsquo;s Affordable Gold products. First, Affordable
Gold products cannot be used for cash-out refinances or adjustable-rate mortgages, and they cannot
be used to finance 2-4 unit properties. Second, as noted above, all of the Affordable Gold products
reviewed in this section can be used only by borrowers below a certain income level or those buying
in concentrated areas: central cities or census tracts with median income less than 80 percent of area
median income. There are no income limits for borrowers within concentrated areas.
Third, first-time homebuyers using Affordable Gold 5 and Affordable Gold 3/2 loan products are
required to participate in homebuyer education. These courses are required for all borrowers using
the Affordable Gold 97 product. This requirement could pose a barrier to homeownership for
Hispanics if Spanish-speaking education and counseling programs are not available widely or if this
requirement leads to lender reluctance to promote the products. There is some evidence that these
services have limited availability. For example, of the 42 HUD-approved housing counseling
agencies in Arizona, services are offered in Spanish at only 15. Similarly, only four HUD-approved
counseling agencies in Utah offer services in Spanish.
Fourth, although detailed pricing information is not available for Freddie Mac’s loan products,
lenders are required under some circumstances to pay a delivery fee for Affordable Gold products. A
delivery fee is an up-front fee paid to Freddie Mac in exchange for Freddie Mac’s purchase of the
loan. Freddie Mac’s delivery fees appear to range from 0.25 percent of the loan amount for
adjustable rate and other types of mortgages to 3.25 percent for loans designated as more risky
(referred to as “A-minus” loans). Affordable Gold 97, 3/2, and 5 all require a delivery fee if
borrowers have FICO scores below a given threshold and if they are not underwritten through Loan
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Prospector, Freddie Mac’s automated underwriting system. For Affordable Gold 97, manually
underwritten mortgages with FICO scores below 680 require a delivery fee; for Affordable Gold 3/2
and 5, manually underwritten mortgages with FICO scores below 660 require a delivery fee.
40
The
delivery fee may lead either to higher up-front fees for the borrower or to a higher interest rate than a
product that does not require a delivery fee.
In addition to higher interest rates or up-front fees, borrowers will likely be required to pay mortgage
insurance premiums, which also affect the affordability of loans. As noted earlier, the GSEs’ Charter
Acts require a credit enhancement on all loans that have an LTV greater than 80 percent, including
Affordable Gold products. By far the most common form of credit enhancement is mortgage
insurance.
41
Higher, more costly, levels of mortgage insurance are generally required for loans with
higher LTV ratios. Freddie Mac requires 35 percent mortgage insurance coverage for Affordable
Gold 97, Affordable Gold Alt 97, and Freddie Mac 100 mortgages. Affordable Gold 5 and
Affordable Gold 3/2 mortgages are subject to the same mortgage insurance coverage requirements as
standard products: loans with LTV ratios greater than 90 percent must have 30 percent mortgage
insurance coverage; loans with LTVs from 85 to 90 percent are required to have 25 percent coverage;
and loans with LTVs from 80 to 85 percent are required to have 12 percent coverage. As noted in
Chapter 3, the difference in insurance premiums associated with higher LTVs is significant.
According to one mortgage insurer, the premium for 35 percent mortgage insurance coverage on a
loan with an LTV above 95.0 percent is 0.96 percent.
42
In comparison, the premium for the required
25 percent mortgage insurance coverage for a loan with an LTV of 90 percent is .52 percent.
43
The primary trade-off for allowing low or no downpayments and accepting alternative sources of cash
in the Freddie Mac 100 and Alt 97 products is that high credit scores are required for each borrower
on the mortgage. To the extent that Hispanics have good credit, documented through traditional
credit reports, but low savings, these products can be useful. But these products obviously cannot
help Hispanics who lack a strong, documented credit history.
Barriers Inadequately Addressed by Available Products
Freddie Mac’s Affordable Gold, Alt 97, and Freddie Mac 100 products offer numerous flexibilities
that deviate from standard underwriting guidelines and increase opportunities for Hispanic
households to qualify for a home mortgage. Nonetheless, several important barriers to
homeownership remain. First, although non-U.S. citizens can qualify for a mortgage, Hispanics who
reside in the country illegally or are in the process of obtaining authorization for residency are
ineligible for a mortgage.
40
Freddie Mac, “Single-Family Seller/Servicer Guide: Volume 1,” page E19-1-6, 6/28/04.
41
The GSEs’ Charter Acts also allows for at least 10 percent seller participation in the ownership of the
mortgage or agreements for the seller to repurchase or replace loans that default as means of mitigating the
risk of loans with LTVs over 80 percent.
42
This translates to approximately $1920 annually on a $200,000 mortgage. Premium on a fixed-rate from
PMI Mortgage Insurance Company, effective February 2006.
43
Approximately $1040 annually on a $200,000 mortgage. Premium on a fixed-rate from PMI Mortgage
Insurance Company, effective February 2006.
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Second, some Hispanic borrowers may have difficulty meeting Freddie Mac’s income documentation
requirements. Freddie Mac requires that the borrower’s income be verified for the most recent two
full years. Employment can be documented by the “Verification of Employment” form and the
borrower's most recent pay stub or by a combination of W-2 forms from the two previous years, the
most recent pay stub, and telephone verification with each employer. The borrower must explain
gaps in employment that span 60 days or more.
These documentation requirements may significantly limit homeownership opportunities for Hispanic
households. For example, applicants who are paid in cash may not receive a pay stub and may not
fully report income to the IRS. Since many low-income Hispanics are migrant workers, day laborers,
and other temporary workers who are paid in cash, a sizable segment of the Hispanic population will
be unable to verify all employment income. Verification may be further complicated by a lack of
Spanish-speaking lenders who are able to obtain telephone verification from Spanish-speaking
employers and by difficulty reaching employers of seasonal workers during the off-season. It is also
unclear how lenders treat applicants who experience gaps in employment because of lengthy return
visits to their native country.
Lastly, the restrictions on use of cash-on-hand as a source of downpayment funds may also represent
a serious barrier to homeownership. Recall that in order to use cash-on-hand, the borrower’s ability
to accumulate the cash must be documented with six months of cash receipts as well as a Monthly
Budget and Residual Income Analysis completed by the lender that confirms that the borrower has
sufficient residual income to have saved the downpayment. Applicants who do not routinely keep
cash receipts and are unaware of this requirement may be forced to wait for six months while they
accumulate cash receipts. A Freddie Mac employee noted that the company informs borrowers of
this requirement as early in the homeownership process as possible, often during homeownership
education.
44
Also, documenting cash-on-hand through the Monthly Budget and Residual Income
Analysis form places a significant burden on lenders, which may discourage lenders from allowing
applicants to use this flexibility.
Implementation and Application of Underwriting Guidelines by
Lenders
The impact of Freddie Mac’s underwriting guidelines on Hispanic homeownership opportunities is
only partially understood through a review of the company’s underwriting guidelines. How and
whether lenders implement these guidelines and flexibilities locally will also affect the ability of
Hispanic households to qualify for a loan.
A Freddie Mac employee stated that, although lenders comply with their underwriting guidelines,
there are phases during the business cycle when lenders are more and less likely to use products that
offer flexibility to the borrower but are more difficult to underwrite than Freddie Mac’s standard
products. Thus, lenders tend to use products that require complicated manual underwriting during
Phone interview with Matt Miller, Freddie Mac, Housing and Community Investments, October 4, 2004.
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44

periods when the overall level of loan applications is down, such as interest rate environments when
refinancing is not as attractive.
45
Underwriting the affordable lending products can be more time consuming for several reasons. For
example, non-traditional credit is more difficult to document than a FICO score, and income from
multiple sources is more effort to verify than income from a single source.
46
In addition, staff from
Freddie Mac noted that the manual underwriting required to complete these Affordable Lending loan
products leads to a higher likelihood of errors that might be uncovered during a post-purchase review
and require the seller to repurchase the loan. The higher likelihood of errors may discourage lenders’
use of these products. In addition, the widespread use of automated underwriting has led lenders to
retain fewer experienced underwriters on staff. As a result, there are fewer people with the necessary
skills to perform the level of manual underwriting required by these products.
45
Ibid.
46
Ibid.
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Chapter Five
FHA’s Underwriting Guidelines
FHA has long been a source of relatively low downpayment loans for low- and moderate-income
borrowers. In FHA’s 2003 fiscal year, for example, 79.2 percent of purchase loan endorsements were
for loans to first-time homebuyers, and 37.4 percent were for minority borrowers.
47
In comparison,
about 40 percent of all buyers in 2002 were first-time homebuyers,
48
and 30 percent of conventional
prime purchase loans were to minorities in 2001.
49
FHA offers fixed- and adjustable-rate mortgages
for purchase and refinance (including cash-out refinance), all of which are underwritten using
essentially the same guidelines. Although FHA does not offer products specifically designed to target
immigrants or Hispanics, their products include some flexibilities that address obstacles to
homeownership for Hispanics.
Flexibilities that Address Barriers to Homeownership for Hispanics
FHA’s underwriting guidelines offer several flexibilities in the areas of credit history, documenting
income and employment history, documenting assets, and citizenship that address some barriers to
homeownership for Hispanics. A summary of key aspects of FHA’s underwriting guidelines is
provided in Exhibit 5.
Credit History
FHA specifically instructs lenders not to use the lack of a traditional credit history as a basis for
rejecting a loan. For borrowers lacking a traditional credit history, lenders are to use non-traditional
credit reports, or to develop a credit history for the borrower using rent and utility payments and
payments on installment and revolving accounts.
Income and Employment Documentation
FHA does not impose a minimum length of time a borrower must have held a position of primary
employment to be eligible for a loan. Part-time and employment income from a second job may be
used in qualifying the borrower, if the borrower can document that he or she has held the job
uninterrupted for the last two years. Seasonal income is considered uninterrupted if there is
documentation that the borrower expects to be rehired during the next season.
47
“FHA Outlook: Single Family Operations, August 1-15, 2004,” Department of Housing and Urban
Development, Housing – Deputy Assistant Secretary for Finance and Budget, Office of Evaluation.
Downloaded from: http://www.hud.gov/offices/hsg/comp/rpts/ooe/olcurr.pdf on September 23, 2004.
48
Bishop, Paul, Thomas Beers, Shonda Hightower, Kate Anderson, “The 2003 National Association of
Realtors Profile of Home Buyers and Sellers,” The National Association of Realtors Research Division,
Chicago, IL.
49
“State of the Nation’s Housing,” Joint Center for Housing Studies, Harvard University, 2004, p. 36.
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Exhibit 5
FHA Single Family Underwriting Guidelines
Single Family
Occupancy
Primary residence; secondary residence or investment property
permitted in limited circumstances with approval from HOC
Property Type
1-4 unit detached or semidetached dwellings, townhouses or row
houses, units in FHA-approved condo projects
Loan Purpose Purchase, refinance, and cash-out refinance
Downpayment 3% minimum borrower investment
Amortization Period Up to 30 years for FRM, 30 years for ARM, fully amortizing
Interest Rate
Fixed or ARM; temporary interest-rate buydowns allowed on
purchase FRMs
Ratios 29%/41%
Maximum LTV/CLTV 98.75% for purchase loans; 85% CLTV for cash-out refinances
Credit Score None specified
Financial Reserves
None specified, but can be used as compensating factor for
exceeding ratios
Income Limits None
Homebuyer Education and
Counseling
Not required
Credit Enhancements
FHA provides full insurance coverage; mortgage insurance
premiums depend on LTV and loan type
Rental income earned from boarders in a single-family property may be used in qualifying the
borrower if the boarders are related to the borrower. The income must be shown on a borrower’s tax
returns to be considered “effective income;” otherwise it may be considered a compensating factor
only. Compensating factors are financial strengths that are used to offset a weakness of an
application. For example, if the rental income cannot be included in effective income because it is
not shown on the borrower’s tax returns, the borrower will have a higher housing debt-to-income
ratio than would otherwise be the case. One of the permissible compensating factors for exceeding
FHA’s 29 percent housing expense-to-income ratio (discussed below) is receipt of documented
income not included in effective income but affecting directly the borrower’s ability to pay the
mortgage. In general, lenders exercise some degree of judgment in what constitutes a sufficiently
significant strength to compensate for a weakness.
Documenting Assets
Both cash accumulated through savings clubs and cash saved at home can be considered acceptable
sources of funds to close the mortgage if they are sufficiently documented. For a savings club,
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borrowers must be able to document the accumulation of assets with the club based on account
ledgers, receipts from the club, verification from the club treasurer, and identification of the club. It
must also have been reasonable for the borrower to have saved the amount of money claimed, based
on a review of the borrower’s income and expenses. Similarly, borrowers who have saved cash at
home must be able to provide evidence of the ability to accumulate the savings. In addition, the
money must be verified by deposit in a financial institution or an escrow account.
U.S. Citizenship
Citizenship in the United States is not required for eligibility for FHA loans. Loans can be made to
lawful permanent resident aliens; nonpermanent resident aliens are eligible provided they have a valid
Social Security number and are eligible to work in the U.S. In addition, the lender must determine the
likelihood that borrowers’ authorization for temporary residency status will be renewed.
Downpayment
The downpayment required on FHA loans is relatively low. For a principal residence, FHA requires
borrowers to invest a minimum of 3 percent of the sales price, but since closing costs can be financed
by the mortgage, the LTV can exceed 97 percent. There are, however, limits on the total LTV that
vary with the appraised value and sales price, whether the property is located in a state with high
closing costs or low closing costs, and whether the property is newly constructed. The LTV ranges
from a high of 98.75 percent for properties with sales prices of less than $50,000 to a low of 97.15
percent for properties with sales prices greater than $125,000 and located in states with low closing
costs.
Barriers Inadequately Addressed by Available Products
FHA’s underwriting guidelines offer relatively low downpayments, allow the use of non-traditional
means of evaluating credit, allow the use of cash-on-hand and savings clubs, and allow income from
rent paid by boarders to be included in income, all of which address barriers for Hispanics seeking
homeownership. However, several important obstacles remain.
Income and Employment Documentation
While there is no minimum length of time that borrowers must have held their primary job, FHA
requires that the borrower’s employment be verified for the most recent two full years. Employment
for two years can be documented through either a “Verification of Employment” form and the
borrower's most recent pay stub or a combination of W-2 forms from the two previous years, the most
recent pay stub, and telephone verification with each employer. Any gaps in employment spanning
one month or more must be explained.
These documentation requirements may present obstacles for several reasons. Borrowers who are
paid in cash are unlikely to receive a pay stub and may not fully report income to the IRS. Without a
Spanish-speaking staff member, some lenders may have difficulty obtaining telephone verification
from Spanish-speaking employers. In addition, employers of seasonal workers may be difficult to
reach for verification during the off-season. Last, it is not clear how lenders treat applicants who
experience gaps in employment because of lengthy return visits to their native country.
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Although income from related boarders is an important flexibility in FHA’s underwriting guidelines,
this income may also be difficult for borrowers to document. As noted above, consideration of this
rental income (other than as a compensating factor) must be documented by tax returns. Given the
likely informal and cash-oriented nature of many of these arrangements, it seems likely that many
Hispanic applicants would not have reported this income on tax returns. Even if used only as a
compensating factor, this income must be documented. Although acceptable documentation is not
specified, underwriting guidelines from other institutions require cancelled checks. For households
that do not use traditional financial institutions, this documentation requirement will remain an
obstacle.
Documenting Assets
While cash accumulated through savings clubs is an acceptable sources of funds, the documentation
requirements are substantial. In practice, lenders may find income from this source too difficult to
verify.
Citizenship
Although non-U.S. citizens can qualify for an FHA mortgage, Hispanics who are working in the
country illegally or who may be in the process of obtaining authorization for residency are ineligible.
Borrowers must have valid Social Security numbers; loans cannot be made using ITINs.
Housing expense-to-income ratio
The 29 percent housing expense-to-income ratio is also likely to be an important barrier to Hispanic
households with low or moderate incomes, as well as those living in expensive housing markets.
According to FHA underwriting guidelines, this ratio can be exceeded only with documentation of
significant compensating factors. Some of these are:
• Demonstrated ability to make housing payments equal to or greater than those proposed
under the new mortgage over the last 12-24 months;
• Cash reserves of 3 months or more after closing;
• A downpayment of 10 percent or more; and
• Potential for increased earnings as a result of job training or education.
50
FHA underwriting guidelines, 4155.1 REV-5, Chapter 2-12, Debt-to-Income Ratios, 10/03.
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50

As discussed above, the focus of both Fannie Mae and Freddie Mac affordable lending products is on
the total debt-to-income ratio, which provides the flexibility for borrowers who have little non-
housing debt to assume more housing debt. Low levels of non-housing debt may be common for
Hispanic households who are recent immigrants, many of whom dislike being in debt to anyone other
than relatives.
51
Schoenholtz, Andrew I., and Kristin Stanton, “Reaching the Immigrant Market: Creating Homeownership
Opportunities for New Americans,” Fannie Mae Foundation, Washington, DC, 2001, p. 48.
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Chapter Six
GMAC-RFC’s Underwriting Guidelines
GMAC Residential Funding, part of GMAC-RFC, is a large mortgage conduit and leading issuer of
non-agency prime mortgage-backed securities (MBS), Alt-A MBS, and subprime mortgage related
asset-backed securities (ABS). GMAC-RFC specializes primarily in nonconforming mortgage
products, including jumbo A loans, Alt-A and subprime loans, home equity loans, and 125 percent
combined loan-to-value (CLTV) loans.
Although GMAC Residential Funding does not currently offer products designed specifically to
address the needs of Hispanic borrowers, its subprime products include options for lower
documentation requirements for income, employment, and assets than those typically available
through prime lenders. These flexibilities address some of the key barriers faced by Hispanic
borrowers.
AlterNet/Credit Gap Overview
The products reviewed in this section are AlterNet, GMAC Residential Funding’s subprime product,
and Credit Gap. AlterNet comprises a range of “credit grades” with underwriting guidelines that
differ in many respects across these grades, so each credit grade can be viewed as a subset of
AlterNet. The credit grades are, in order of credit quality: Ax, Am, B, B (1x60), C, and Cm. Credit
Gap (credit grade A4) is intended for borrowers whose previous mortgage history fits “A” standards
but are considered non-conforming because of credit score, debt-to-income ratio, bankruptcy, or
foreclosure. A summary of some underwriting guidelines for AlterNet/Credit Gap products is
presented in Exhibit 6.
Underwriting Guidelines that Facilitate or Impede Homeownership
for Hispanics
GMAC’s subprime products’ underwriting flexibilities are designed primarily for borrowers with
imperfect credit and high debt levels. The products do not target first-time homebuyers or recent
immigrants, although these groups can use them.
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Exhibit 6
GMAC-RFC Underwriting Guidelines for AlterNet/Credit Gap
A4 (CreditGap) Ax Am B B (1x60) C Cm
Occupancy Primary residence, second/vacation home, or investment property
Property Type
1-4 unit, single-family detached, semi-detached or attached residential; condo; modular home, manufactured home (unless purchased from a
manufactured home dealer); leasehold
Loan Purpose purchase, rate/term refinance, cash-out refinance, construction
Downpayment
85%-95%, depending on doc type. At least
5% from borrower funds; a downpayment
from gift funds is allowed for LTVs of 80% or
less when no secondary financing exists
80%-90%, depending on doc type.
75%-85%,
depending on
doc type.
70%-80%,
depending on
doc type.
65%-75%,
depending
on doc type.
60%-70%,
depending on
doc type.
Interest Rate Fixed, 1-year Treasury ARM, 6-month LIBOR ARM, 2-year/6-month LIBOR ARM, 3-year/6-month LIBOR ARM, 30/15 balloon
Ratios 50% debt-to-income 50% debt-to-income, or 55% with an approved compensating factor.
Credit Score 600 600 580 560 560 540 520
Housing
Payment
History
0x30 delinquency in past 12 months
1x30 delinquency
in past 12 months.
No rolling lates
allowed. No more
than 30 days down
at closing.
2x30 mortgage/
rental delinquency
in past 12 months.
Rolling 30-day
lates allowed.
No
more than 30 days
down at closing.
30-day lates
allowed. 1x60
non-rolling late
allowed. No
more than 30
days down at
closing.
30-day lates
allowed. 1x60
non-rolling late
allowed. No
more than 60
days down at
closing.
30- and 60-
day lates
allowed. No
more than
60 days
down at
closing.
30- and 60-day
lates allowed.
1x90 non-rolling
late allowed. No
more than 90
days down at
closing.
Foreclosure None in past 3 years. None in past 2 years.
None in past 1
year.
Credit
Verification
Non-traditional credit not acceptable. Score must be based on minimum two-year credit history, at least five rated trade lines for first mortgage,
and at least one trade reported in past six months.
Financial
Reserves
None required (can be used as compensating factor)
Income
Documentation
Income doc types: full income; lite income;
fast income; and stated income (for wage
earners only). All require 2 year history of
employment in same business or line of
work; “stated income” requires verbal
verification of employment. Boarder income
not allowed.
Income doc types: full income; lite income; and fast income. All require 2 year history of
employment in same business or line of work. Boarder income not allowed.
Asset
Documentation
Most recent bank statement or Verification of Deposit required for verification of cash to close. Cash-on-hand not allowed. All income necessary
to qualify for the loan must be derived from within the U.S.
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Credit History
To the extent that Hispanic households experience credit-related problems, products that allow
borrowers with flawed credit histories access to credit help overcome an important obstacle to
homeownership.
52
The minimum credit scores required for GMAC’s lowest credit-grade products are
quite low, at 520-560. Recent late housing payments (within the past 12 months) are allowed for all
but grade A4, as are recent foreclosure and bankruptcy. However, scores must be based on a
minimum of two years of credit history, and non-traditional credit is not acceptable, an important
limitation for borrowers who have not been in the country long enough to establish credit or who have
been reluctant to use traditional financial institutions.
The low minimum credit scores required likely come at the cost of a higher probability of serious
delinquency and/or foreclosure. Although information on GMAC’s delinquency and foreclosure rates
is not available, subprime loans generally have higher foreclosure rates than FHA and prime loans. In
the third quarter of 2005, for example, the seasonally adjusted percentage of new foreclosures was
0.18 percent for prime loans, 0.88 percent for FHA loans, and 1.39 percent for subprime loans.
53
Documenting Income and Employment history
Four levels of income documentation are available in the AlterNet/Credit Gap products: Full, Lite,
Fast, and Stated. All of these require a two-year history of employment and an expectation that
income will continue for three years.
• Full documentation requires the most recent pay stub and W-2 forms from the most
recent two years or written verification from the employer covering the most recent two
years.
• Lite and Fast income documentation both require documentation only for the most recent
12 months. Lite income documentation is permitted only for borrowers who use only
base income to qualify.
54
Fast income documentation can be used for borrowers using
base income as well as commissions, overtime, and bonus income to qualify.
• Stated income requires only verbal verification of employment, with no verification of
income, but is available only to wage earners with credit grade A4.
Seasonal unemployment compensation income can be considered if it is typical for the borrower’s
employment type.
52
One study suggests that credit history is an important barrier to access to prime credit for Hispanics
households: in 2001 a higher share of Hispanic renters (63 percent) had credit scores below 660 than either
Black (54 percent) or white, non-Hispanic renters (35 percent). (See Raphael Bostic, Paul Calem, and
Susan Wachter, “Hitting the Wall: Credit as an Impediment to Homeownership,” working draft, November
2003.)
53
“Residential Mortgage Delinquencies Rise Due to Hurricane, Loans in Foreclosure Fall, According to
MBA National Delinquency Survey,” Industry News, American Land Title Association, December 15,
2005.
54
Base income excludes bonus, tips, overtime, and commission.
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AlterNet/Credit Gap Full documentation is similar to that required by Fannie Mae and Freddie Mac.
Stated income could be an important flexibility for Hispanic borrowers who are paid in cash and may
not fully report income to the IRS.
Income earned from boarders is not allowed, and this is an important remaining barrier to
homeownership in the underwriting guidelines for Hispanic households comprised of extended family
members. Finally, all income necessary to qualify for the loan must be derived from within the U.S.
Documenting Assets
All AlterNet/Credit Gap credit grades require the most recent bank statement or a “Request for
Verification of Deposit” completed by the financial institution to verify that the borrower has
sufficient cash to close. Large recent deposits or newly opened accounts with large deposits must be
explained, and the explanation must be documented. Cash-on-hand is not an allowable source of cash
to close.
Citizenship and Residency Status
Non-U.S. citizens can qualify for a mortgage. However, non-permanent resident aliens are eligible
only for primary residence or second/vacation homes, not for investment properties. In addition, non
permanent resident aliens are required to make larger downpayments than other borrowers (maximum
LTVs are 10 percentage points below maximums shown in Exhibit 6), and no cash-out is permitted.
LTV Ratio
Most of the credit grades in AlterNet/Credit Gap are not low-downpayment products. Only Credit
Gap, the highest credit grade, allows an LTV of up to 95 percent, for both Full and Lite
documentation types. Fast documentation allows a maximum LTV of 90 percent, and Stated income
requires an LTV of at most 85 percent. Thus, Hispanic borrowers who may benefit from the
flexibilities of Stated income documentation will need a relatively large downpayment.
Other Underwriting Guidelines
In addition to flexible credit quality guidelines, AlterNet/Credit Gap requires no financial reserves,
and debt-to-income ratios of 50 percent are allowed. No homebuyer education and counseling is
required, which could be a benefit to Hispanic households if Spanish-speaking programs are not
readily available. It could also be detrimental to Hispanic households if they do not have a good
understanding of the loan product, the U.S. housing finance system, or their responsibilities under the
new mortgage.
Trade-offs for Underwriting Flexibilities
Many of the flexibilities offered through AlterNet/Credit Gap in one underwriting guideline are
associated with a tightened requirement in another guideline to compensate for the increased risk of
the loan. The most important of these is evident in Exhibit 6: lower credit scores require a larger
downpayment (lower LTV). Reduced levels of documentation also result in a lower maximum LTV.
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These trade-offs are important limitations to the potential benefits of the flexibilities for Hispanic
households. As noted above, although Stated income documentation could be useful to Hispanic
borrowers who are paid in cash, this level of documentation allows a maximum LTV of 85 percent.
Hispanics making their first home purchase who could benefit from reduced documentation are likely
to have difficulty accumulating a downpayment this large.
In addition, although pricing information is not available specifically for GMAC’s products, subprime
loans (A-minus, B, and C) generally carry much higher interest rates than prime loans.
55
For
example, in the fourth quarter of 2001, interest rates on conventional 30-year fixed-rate mortgages
were 6.5 percent compared with 10.1 percent for A-minus loans (Exhibit 7), a difference of 3.6
percentage points. Over the period shown in Exhibit 7, A-minus loans had rates 3.1 percentage points
higher than conventional loans on average; B loans had rates 3.3 percentage points higher; and C
loans had rates 4.3 percentage points higher. The difference between interest rates on A-minus loans
and conventional loans was never smaller than 2.7 percentage points (in the second quarter of
2002).
56
Clearly, the flexibility of subprime products can be costly for borrowers.
55
Another factor that can affect pricing is whether or not the borrower buys mortgage insurance. Although
mortgage insurance is not required, its absence almost certainly results in a higher interest rate.
56
“Inside B&C Lending,” a publication of Inside Mortgage Finance, provides updated information on interest
rates. Its January 20, 2006 issue reports 6.0% for a conventional 30-year, fixed-rate mortgage (FRM),
compared with 8.2% for A-minus grade, 8.6% for B grade, and 9.3 percent for C grade subprime 30-year
FRMs (page 10).
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Exhibit 7
Interest Rate Spread for Subprime Loans
(Interest Rate Premium Compared to Conventional 30-Year Fixed Rate Mortgages)
6.0
5.0
4.0
“A-” Credit
3.0 “B” Credit
“C” Credit
2.0
1.0
0.0
Interest Rate Spread
Q1 Q2 Q3 Q4 Q1 Q2
2000 2000 2000 2000 2001 2001
Source: Top Subprime Mortgage Market Players and Key Subprime Data 2002, Inside Mortgage Finance, Bethesda, MD.

Chapter Seven
Summary and Conclusions
Recent studies have identified several underwriting guidelines as particular barriers to Hispanic
homeownership: establishing a credit history; verifying income; documenting employment history;
verifying assets; and meeting requirements regarding citizenship or residency status. Some of these
barriers have been addressed recently by major participants in the mortgage market in their standard
products. This is particularly true of FHA’s standard product. Where barriers continue to exist, these
are often removed in products targeted to low- and moderate-income borrowers. Subprime products
also address some of the barriers to Hispanic homeownership.
The major barriers to homeownership for Hispanics identified in the literature, the currently available
solutions, and continued challenges in overcoming the barriers are summarized in Exhibit 8.
Credit History
Fannie Mae, Freddie Mac, and FHA all have standard products that allow a borrower to be approved
for a mortgage without a formal credit history with credit reporting agencies. All allow the use of
non-traditional credit reports or a credit history compiled by the lender, as long as it includes a
minimum number of credit references. Credit scores are required, however, for GMAC’s subprime
products and for products that allow a high degree of flexibility in other respects. For example,
Fannie Mae’s Flex 97 and Flex 100 allow a wide variety of sources of cash to be used for the
downpayment and closing costs, but require traditional credit reports.
For Hispanics and other borrowers with low credit scores, FHA’s standard product allows more
flexibility than is typically available. For example, in January through June of 2000, the average
FICO score for FHA purchase loans insured using a mortgage scorecard was about 630,
57
compared
with the 660 minimum FICO score often required for prime mortgage approval. Targeted products
offered by Fannie Mae and Freddie Mac also provide some options. For example, Fannie Mae’s
Community Lending products allow approval of borrowers with credit scores of 600 to 620. In
addition, GMAC’s subprime products allow credit scores of as low as 520, although this likely is
associated with a higher interest rate.
Documenting Income and Employment History
Fannie Mae, Freddie Mac, and FHA also do not require two years of employment history for
mortgage approval (one year is acceptable for Fannie Mae and Freddie Mac; FHA has no minimum
requirement). In addition, frequent job changes are generally ignored as long as the borrower can
“FHA TOTAL Scorecard,” presentation at MBA's National Technology Conference April 17 - 20, 2001,
based on information collected from scorecards developed by third-party vendors and approved for use by
the FHA. Obtained from: http://www.mortgagebankers.org/present/tech01/fha_scorce.pdf.
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Exhibit 8
Summary of Barriers to Hispanic Homeownership
Barrier Available Solutions Continued Challenges
Lack of Formal Credit
History or Poor Credit
• Underwriting generally
accepts non-traditional credit
• FHA and subprime accept
lower credit scores
• Other underwriting flexibilities
(primarily low downpayment)
often require high credit score
Documenting
Employment and Income
• Two year stable employment
not required by all products
• Some products accept
boarder income
• Some products permit non-
traditional documentation and
sources of income
• Some products do not require
verification of income
• Few products that allow
income
• Products not requiring
income verification require
relatively high credit scores
and downpayments
Affordability • Variety of low-downpayment
products available
• High total debt-to-income
ratios allowed in some
products
• No maximum housing
expense-to-income ratio for
some products
• Low/no financial reserves
required for some products
• Some low-downpayment
products require high credit
scores
Documenting Assets • Cash an acceptable source of
funds for closing costs and
downpayment if verified with
receipts or budget and
residual income analysis for
some products
• Related people living together
can pool funds for closing
costs and downpayment for
some products
• Savings accumulated through
a savings club are an
acceptable source of funds
for closing costs and
downpayment for some
products
• Documentation requirements
for cash-on-hand used to
close and savings
accumulated through a
savings club are often
cumbersome
Citizenship • U.S. citizenship is not
required for mortgage
approval; permanent and
nonpermanent resident aliens
qualify for many products on
the same terms as U.S.
citizens
• Hispanics who reside in the
country illegally or in the
process of obtaining
authorization for residency
are ineligible for a mortgage
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document that his or her income is stable. Although there is some flexibility in the length of
employment history required for mortgage approval, documentation requirements remain a barrier,
particularly for Hispanics. Some form of written documentation, such as paystubs and an employer-
completed form or W-2 forms, is required.
With minor exceptions, income received in cash cannot be included as a primary or secondary source
of income. This is true for standard products offered by FHA, Fannie Mae, and Freddie Mac, as well
as the targeted products offered by Fannie Mae and Freddie Mac and the subprime products offered
by GMAC. While Fannie Mae, Freddie Mac, and GMAC all have products that allow low or no
income documentation, these allow less flexibility than standard and targeted products in other
regards. For example, Freddie Mac’s stated income product requires high credit scores, a large
downpayment, and large cash reserves. In addition, although Freddie Mac’s stated income product
does not require W-2 forms, it requires IRS forms authorizing the release of tax information. This is
also true for self-employed borrowers using GMAC’s stated income product.
Widely available mortgage products allow rent paid by family members to be included in the
borrower’s income. FHA’s standard product allows rental income from boarders in a one-unit
property to be included in the borrower’s qualifying income, if the boarders are related to the
borrower and if the income is shown on the borrower’s tax return. Some of Freddie Mac and Fannie
Mae’s targeted products allow rental income from boarders in a one-unit property to be included in
the borrower’s qualifying income. The income does not have to be included on the borrower’s tax
return, although documentation is required. For one of Fannie Mae’s Community Lending products,
MyCommunityMortgage, the boarder is not required to be related to the borrower.
Affordability
Hispanics are disproportionately in low-income and low-wealth households compared to non-
Hispanics, so affordability may be the most important barrier to homeownership. FHA products, as
well as products offered by Fannie Mae and Freddie Mac that are targeted to low- and moderate-
income households, help to address this barrier. A variety of low-downpayment products are
available, some requiring as little as $500 of the borrower’s own funds. Flexibility in housing
expense-to-income and total debt-to-income ratios available through Fannie Mae’s Community
Lending and Freddie Mac’s Affordable Gold products, as well as GMAC’s subprime products, also
help to improve affordability. Some of Fannie Mae’s products do not have maximum housing
expense-to-income ratios at all. In addition, low or no financial reserves are required for some
products. Some low-downpayment products, however, require relatively high credit scores.
Citizenship and Residency Status
U.S. citizenship is not required for mortgage approval for standard products by any of the financial
institutions reviewed in this report. GMAC imposes some additional requirements for non-permanent
resident aliens, however, including lower maximum LTVs and some product restrictions (for
example, cash-out refinances are not permitted, nor are purchases of investment property).
However, legal residence in the U.S. is required for mortgage approval. Nationwide, there are only a
handful of pilot programs to extend mortgage credit to borrowers who do not have valid Social
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Security numbers. Given the number of undocumented immigrants in the country (an estimated 6
million), most of them Hispanic, this remains an important barrier to homeownership for Hispanics.
Documenting Assets
FHA’s standard product allows both cash accumulated through savings clubs and cash saved at home
to be considered acceptable sources of funds to close the mortgage if they are sufficiently
documented. Targeted products offered by Fannie Mae and Freddie Mac also allow this flexibility.
The documentation required to demonstrate that the borrower could have accumulated the assets over
time, however, is substantial, and may discourage lenders from using this flexibility.
Some products also allow related people living together to pool funds for closing costs and
downpayments, improving borrowers’ ability to accumulate sufficient assets for a home purchase.
Some Barriers Remain in Available Products
As described above, many of the barriers to homeownership for Hispanics that recently existed in
common underwriting guidelines have been addressed by some widely available standard products
and by products targeted to particular populations. However, a few important obstacles remain in the
form of individual underwriting guidelines.
The requirement that borrowers be legal residents of the U.S. is obviously an insurmountable obstacle
for the undocumented immigrants in this country. A handful of lenders are experimenting to
determine whether lack of legal residence is an acceptable risk in extending mortgage credit;
however, lending to illegal residents also involves political issues that may be extremely difficult to
resolve.
The lack of acceptability of cash income is also an important remaining underwriting obstacle.
According to senior staff from Fannie Mae, some smaller community lenders have begun to
experiment with approving mortgages that allow a limited share of the borrower’s total income to be
earned in cash. If these mortgages prove to be acceptable risks, the GSEs may eventually make
similar allowances in future offerings of targeted products.
Last, although products that address barriers to homeownership for Hispanics exist, an important
caveat is that it is not clear how widely available they are. While all FHA-approved lenders can offer
the full range of FHA loan products, Fannie Mae and Freddie Mac’s affordable lending products are
offered only by a subset of their lenders. On the other hand, while subprime products are easily
accessible, they typically come at the cost of higher interest rates.
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