B3-1-01, Comprehensive Risk Assessment (12/16/2020)

Fannie Mae’s underwriting policies include an evaluation of the borrower’s (or spouse’s to the extent required by applicable law) equity investment, credit history, liquid reserves, reliable and recurring income, and the cumulative effect that these and other risk factors have on mortgage loan performance. Fannie Mae’s underwriting policies enable the lender to consider various scenarios in evaluating a borrower’s willingness and capacity to repay the mortgage loan. The lender must confirm that information provided by the borrower during the loan application process is accurate and complete; include documentation in the loan file that supports the lender’s assessment of the borrower’s credit history, employment and income, assets, and other financial information used for qualifying; conduct a comprehensive risk assessment of each mortgage loan application; and render a decision to either approve or decline the mortgage loan application.

Fannie Mae offers lenders two options for conducting a comprehensive risk assessment–automated underwriting through DU or manual underwriting. Both methods include an evaluation of the borrower’s equity investment, credit history, liquid reserves, reliable and recurring income, and the cumulative effect that these and other risk factors have on mortgage loan performance.

Lenders that choose to manually underwrite a mortgage application are expected to follow the comprehensive risk assessment approach. Under this approach, lenders evaluate certain key risk elements to assess the overall level of delinquency risk.

Lenders are fully responsible for:

• evaluating the delinquency risk of each loan;

• reviewing the credit report, as well as all other credit information, to determine that the credit report meets Fannie Mae’s requirements, that the data evaluated was accurate, and that the borrower has the capacity to repay the mortgage loan;

• assessing the adequacy of the property as collateral for the mortgage requested;

• determining whether or not the loan meets Fannie Mae's eligibility requirements as fully described in this Guide;

• determining whether or not it is appropriate to deliver the mortgage loan to Fannie Mae; and

• fully documenting the assessment and the documentation on which the assessment was based.

Lenders must evaluate the overall level of serious delinquency risk that is present in each mortgage application by taking into consideration any layering of risk factors, the significance of risk factors, and the overall risks present in the mortgage application. The Eligibility Matrix provides a solid foundation for assessing the risk of a manually underwritten loan, and identifies the risk elements to evaluate for each transaction type, including:

• LTV, CLTV, and HCLTV ratios (“LTV ratios”);

• credit score;

• occupancy;

• loan purpose;

• loan amortization type;

• property type and number of units;

• product type (if applicable);

• debt-to-income (DTI) ratio; and

• financial reserves.

For example, the purchase of a single unit principal residence must have LTV ratios no higher than 95%, a credit score of at least 680, and a DTI ratio no greater than 36%. If the DTI ratio is greater than 36% but less than 45%, a higher credit score is required. But if the LTV ratios are less than 75%, a credit score as low as 620 is permitted.

The lender's determination of the mortgage delinquency risk, the assessment of the adequacy of the property as security for the mortgage, the determination of whether the mortgage satisfies Fannie Mae's mortgage eligibility criteria, and the acceptability of the documentation in the mortgage file should all enter into the decision on whether to deliver the mortgage to Fannie Mae.

The lender must fully document the results of its comprehensive risk assessment and final underwriting decision, and ensure that the information used to reach its comprehensive risk assessment is valid, accurate, and substantiated.

For a more precise or definitive recommendation for determining whether to deliver a given mortgage to Fannie Mae, the lender should submit the mortgage application to DU. DU evaluates the probability of future serious delinquency and arrives at an underwriting recommendation by relying on a comprehensive examination of risk factors in a mortgage application. Furthermore, DU is the standard by which Fannie Mae assesses the delinquency risk on all mortgages sold to Fannie Mae.