Galton Funding Underwriting Guide

Transcription

U NDERWRITING
G UIDE
GALTON FUNDING
N O N -QM P R O G R A M S
Effective Date 7/7/2016
U N DE R W R I T I N G G U I D E - G ALT O N F U ND I N G N ON -QM P RO G R AM S
TABLE
OF
CONTENTS
1. UNDERWRITING ............................................................................................ 5
Introduction ............................................................................................................................. 7
Seller Underwriting Responsibility ...................................................................................... 7
Underwriting Review ........................................................................................................... 7
Underwriting Considerations .............................................................................................. 7
Ability to Repay (ATR), Qualified Mortgage, and Net Tangible Benefit Requirements ...... 8
Fraud Detection Requirements........................................................................................... 9
Electronic Signature and Disclosure Requirements ......................................................... 10
Borrower Eligibility ............................................................................................................... 11
Immigration and Naturalization Service (INS) Classifications .......................................... 11
Borrower Types ................................................................................................................ 12
Maximum Loans to One Borrower .................................................................................... 14
Loan Application Analysis ................................................................................................. 15
Credit ...................................................................................................................................... 16
Credit Report Requirements ............................................................................................. 19
Selecting the Credit Score ................................................................................................ 20
Limited, No Credit History or Alternative Credit History ................................................... 20
Minimum credit requirements/Tradelines ......................................................................... 20
Adverse Credit .................................................................................................................. 22
Bankruptcy ........................................................................................................................ 22
Consumer Credit Counseling Services (CCCS) ............................................................... 23
Foreclosures ..................................................................................................................... 24
Loss Mitigation History - Modifications, Forbearances, Rearrangements, Extensions, or
Workouts........................................................................................................................... 24
Mortgage/Housing History ................................................................................................... 25
Analyzing Delinquent Mortgage/Housing Payments ........................................................ 26
Grade Determination............................................................................................................. 26
Qualifying Ratios ................................................................................................................... 27
Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) Ratios ................................. 27
Housing and Debt-to-Income Ratios ................................................................................ 28
Payment Shock ................................................................................................................ 29
Second Trust Deeds, Junior Liens, and Secondary Financing ........................................ 29
Sales and Financing Concessions ................................................................................... 31
Liabilities ................................................................................................................................ 31
Debt to Income Calculations............................................................................................. 31
Installment Debt ................................................................................................................ 32
Revolving Debt ................................................................................................................. 32
Alimony/Child Support/Separate Maintenance Obligations ............................................. 32
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Negative Cash Flow from Rental Property/Other Real Estate Owned ............................. 32
Current Principal Residence – Pending Sale ................................................................... 33
Business Debts ................................................................................................................. 33
Un-Reimbursed Business expenses ................................................................................ 33
Automobile Depreciation .................................................................................................. 33
Debt Payoff ....................................................................................................................... 33
Co-Signed Debt / Contingent Liabilities ............................................................................ 33
Retirement / Savings Plan Loans ..................................................................................... 34
Student Loans .................................................................................................................. 34
Income .................................................................................................................................... 34
Income verification Requirements .................................................................................... 34
Income Types ................................................................................................................... 36
Full Documentation ........................................................................................................... 44
Reduced Documentation .................................................................................................. 46
Ineligible Income Documentation types ............................................................................ 46
Assets..................................................................................................................................... 46
Requirements and Guidelines .......................................................................................... 46
Asset Documentation ....................................................................................................... 47
Minimum Down Payment .................................................................................................. 47
Earnest Money Deposits .................................................................................................. 47
Age of Asset Documentation ............................................................................................ 47
Reserve Requirements ..................................................................................................... 48
Ineligible Assets and Sources of Funds ........................................................................... 48
Acceptable Assets and Sources of Funds ........................................................................ 48
Transaction Types ................................................................................................................ 52
Purchase........................................................................................................................... 52
Rate/Term Refinance ....................................................................................................... 53
Cash-Out Refinance ......................................................................................................... 54
1031 Tax Exchange .......................................................................................................... 54
Consolidation, Extension, and Modification Agreements (CEMA) ................................... 55
Continuity of obligation ..................................................................................................... 55
Delayed Financing ............................................................................................................ 55
Construction-to-Permanent Refinance ............................................................................. 55
Land Contract Refinance .................................................................................................. 55
Lease Option-To-Purchase .............................................................................................. 56
Inherited Properties .......................................................................................................... 57
Ineligible Transaction Types ............................................................................................. 57
2. LOAN PROGRAMS ...................................................................................... 58
Asset Qualifier Program ....................................................................................................... 59
Program Eligibility ............................................................................................................. 59
Income Verification ........................................................................................................... 60
Asset Documentation ....................................................................................................... 60
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Bank Statement Program (24-Month and 12-Month Verification Options) ...................... 64
Income Documentation Requirements ............................................................................. 64
Bank Statement Requirements......................................................................................... 65
Home Equity Loan Programs (A+ and A Grades only)...................................................... 69
Simultaneous and Stand-Alone Second Liens – Qualified Mortgages Only. ................... 69
Simultaneous Second Lien Program Restrictions ............................................................ 69
Stand-Alone Second Lien Program Restrictions .............................................................. 69
Non-Warrantable Condominiums ........................................................................................ 72
3. COLLATERAL .............................................................................................. 73
Eligible Property Types ........................................................................................................ 74
Single-Family Residence .................................................................................................. 74
Row Home ........................................................................................................................ 74
Townhouse ....................................................................................................................... 74
Multi-Family ...................................................................................................................... 74
Modular Homes (Panelized, Pre-Cut Homes) .................................................................. 74
Planned Unit Development (PUDs) .................................................................................. 74
Condominiums .................................................................................................................. 77
Rural Properties .................................................................................................................... 83
Ineligible Property Types ..................................................................................................... 84
Occupancy ............................................................................................................................. 85
Owner Occupied Primary Residence ............................................................................... 85
Second Home or Vacation Homes ................................................................................... 85
Non-Owner Occupied Investment Properties ................................................................... 85
Property Underwriting .......................................................................................................... 86
Seller Considerations: ...................................................................................................... 86
Appraiser Qualifications .................................................................................................... 87
Appraisal Requirements ................................................................................................... 87
Appraisal Evaluation ......................................................................................................... 89
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U N DE RW R I T I N G G U I D E - G ALT O N F U ND I N G N ON -QM P RO G R AM S
1. UNDERWRITING
Introduction .............................................................................................................................. 7
Seller Underwriting Responsibility ...................................................................................... 7
Underwriting Review ........................................................................................................... 7
Underwriting Considerations ............................................................................................... 7
Ability to Repay (ATR), Qualified Mortgage, and Net Tangible Benefit Requirements ...... 8
Fraud Detection Requirements ........................................................................................... 9
Electronic Signature and Disclosure Requirements ......................................................... 10
Borrower Eligibility ................................................................................................................ 11
Immigration and Naturalization Service (INS) Classifications........................................... 11
Borrower Types ................................................................................................................. 12
Maximum Loans to One Borrower .................................................................................... 14
Loan Application Analysis ................................................................................................. 15
Credit ...................................................................................................................................... 16
Credit Report Requirements ............................................................................................. 19
Selecting the Credit Score ................................................................................................ 20
Limited, No Credit History or Alternative Credit History .................................................... 20
Minimum credit requirements/Tradelines .......................................................................... 20
Adverse Credit .................................................................................................................. 22
Bankruptcy ........................................................................................................................ 22
Consumer Credit Counseling Services (CCCS) ............................................................... 23
Foreclosures ..................................................................................................................... 24
Loss Mitigation History - Modifications, Forbearances, Rearrangements, Extensions, or Workouts
.......................................................................................................................................... 24
Mortgage/Housing History .................................................................................................... 25
Analyzing Delinquent Mortgage/Housing Payments ......................................................... 26
Grade Determination ............................................................................................................. 26
Qualifying Ratios ................................................................................................................... 27
Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) Ratios ................................. 27
Housing and Debt-to-Income Ratios ................................................................................. 28
Payment Shock ................................................................................................................. 29
Second Trust Deeds, Junior Liens, and Secondary Financing ........................................ 29
Sales and Financing Concessions .................................................................................... 31
Liabilities ................................................................................................................................ 31
Debt to Income Calculations ............................................................................................. 31
Installment Debt ................................................................................................................ 32
Revolving Debt .................................................................................................................. 32
Alimony/Child Support/Separate Maintenance Obligations .............................................. 32
Negative Cash Flow from Rental Property/Other Real Estate Owned ............................. 32
Current Principal Residence – Pending Sale .................................................................... 33
Business Debts ................................................................................................................. 33
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Un-Reimbursed Business expenses ................................................................................. 33
Automobile Depreciation ................................................................................................... 33
Debt Payoff ....................................................................................................................... 33
Co-Signed Debt / Contingent Liabilities ............................................................................ 33
Retirement / Savings Plan Loans ...................................................................................... 34
Student Loans ................................................................................................................... 34
Income .................................................................................................................................... 34
Income verification Requirements ..................................................................................... 34
Income Types .................................................................................................................... 36
Full Documentation ........................................................................................................... 44
Reduced Documentation................................................................................................... 46
Ineligible Income Documentation types ............................................................................ 46
Assets ..................................................................................................................................... 46
Requirements and Guidelines ........................................................................................... 46
Asset Documentation ........................................................................................................ 47
Minimum Down Payment .................................................................................................. 47
Earnest Money Deposits ................................................................................................... 47
Age of Asset Documentation ............................................................................................ 47
Reserve Requirements ..................................................................................................... 48
Ineligible Assets and Sources of Funds ............................................................................ 48
Acceptable Assets and Sources of Funds ........................................................................ 48
Transaction Types ................................................................................................................. 52
Purchase ........................................................................................................................... 52
Rate/Term Refinance ........................................................................................................ 53
Cash-Out Refinance .......................................................................................................... 54
1031 Tax Exchange .......................................................................................................... 54
Consolidation, Extension, and Modification Agreements (CEMA) .................................... 55
Continuity of obligation ...................................................................................................... 55
Delayed Financing ............................................................................................................ 55
Construction-to-Permanent Refinance .............................................................................. 55
Land Contract Refinance .................................................................................................. 55
Lease Option-To-Purchase ............................................................................................... 56
Inherited Properties ........................................................................................................... 57
Ineligible Transaction Types ............................................................................................. 57
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INTRODUCTION
Galton Funding’s guidelines strive to provide clear underwriting standards to help Sellers understand the types of
loans eligible for purchase. These guidelines outline the level of risk acceptable to Galton Funding and describe
general and specific requirements for each program, including criteria pertaining to the Borrower’s employment,
income, assets and liabilities, credit, and qualifying ratios.
Although these guidelines cover most circumstances, they may not comprise all possible loan scenarios. Where a
specific circumstance is not addressed, Galton Funding will apply prudent underwriting principles at its sole discretion
to determine loan eligibility. These guidelines represent the minimum necessary for a loan to be purchased by Galton
Funding. The crucial requirements are that the terms of the loan must relate to the Borrower’s ability to repay and that
the value and marketability of the property is acceptable.
These guidelines must be interpreted and applied by the Seller in a manner that complies with all applicable laws and
regulations, including consumer protection laws and regulations.
These underwriting standards are intended to outline the underwriting criteria for loans that are eligible for purchase
by Galton Funding. Galton Funding is under no obligation to purchase any loan that satisfies these underwriting
standards. Compliance by the Seller with these underwriting standards shall not be deemed to create a Commitment
by Galton Funding to purchase, or cause any third-party to purchase any loan, such decision to purchase being at the
sole discretion of Galton Funding.
SELLER UNDERWRITING RESPONSIBILITY
The Seller has approved and determined that each loan is of investment quality. All eligibility and underwriting
guidelines set forth in this Guide must be met.
The Seller is responsible for the credit and property underwriting regardless of the program’s credit and appraisal
requirements, or if any loan processing functions were performed by an entity other than the Seller, its affiliates, or
agents.
To ensure that the Loan has been fully underwritten by the Seller, each Loan file delivered must contain the Seller’s
underwriting approval form and FNMA 1008. These forms must be signed, dated, and contain the underwriter’s
signature and contact information.
Galton Funding has a no-tolerance policy as it relates to fraud. Loans containing fraudulent documentation or
information will immediately be declined and forwarded to Quality Assurance. If there is any determination that there
has been any Originator involvement, the Originator will be made inactive and appropriate agencies notified. Galton
Funding will also pursue Borrower fraud to the fullest extent.
UNDERWRITING REVIEW
Galton Funding may perform, at its sole discretion, a quality-control review or underwriting of any loan prior to or after
Galton Funding has funded the loan. If a Seller is new to the Galton Funding Program or has performance or other
risk issues, there is potential for expanded review. Loans with high-risk characteristics may also receive an in-depth
review. Some examples of high-risk characteristics include, but are not limited to:

Loans that fail the credit guidelines for the programs and grades.

Low credit scores combined with higher LTVs.

High loan balances with large cash-out amounts.

High loan balances with little or no down payment.

Loans on properties in soft markets or areas of economic concern.

Loans on properties in natural disaster areas.
Upon completion of its review, Galton Funding or its designee may notify the Seller of any material loan deficiencies.
In its sole discretion, Galton Funding may deny funding for, re-price, or require repurchase of any loan that is
ineligible for the program under which the loan is submitted to Galton Funding.
UNDERWRITING CONSIDERATIONS
Galton Funding evaluates many aspects of the loan but relies principally on the credit scoring system that has proven
to consistently and accurately predict loan performance. Examining the characteristics of the loan, Galton Funding
will focus on the Borrower’s current credit, ability to repay, and the property being used for collateral.
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When underwriting a loan, all elements of the loan will be examined to determine the level of risk, including the
Borrower’s capacity and willingness to repay, the Borrower’s credit, compensating factors, the appraisal, and the
overall investment quality of the loan.
The following are examples of underwriting considerations and compensating factors:

Borrower’s demonstrated ability to pay housing expenses greater than or equal to the proposed
monthly housing expenses

Verified reserves of Principal, Interest, Taxes, Insurance and HOA dues in excess of Program
Requirements.

Borrower receives documented compensation or income (i.e., public benefits) that is not
reflected in effective income, but directly affects their ability to pay the mortgage.

A Borrower’s demonstrated ability to:

‒
Accumulate savings;
‒
Devote a greater portion of his or her income to housing expenses;
‒
Maintain a good credit history, including current and previous mortgage/housing
payments; and
‒
Provide a large (typically 10% more than required) down payment on the Mortgaged
Property.
A Borrower’s:
‒
Potential for increased earnings based on education, job training, and time employed, or
practice in a specific profession;
‒
Verified net worth, liquid, and other verified assets substantial enough to evidence an
ability to repay the loan regardless of income;
‒
Conservative attitude toward using credit;
‒
Evidence of significant monthly residual income (above program requirements).
Cash-out proceeds do not qualify as a compensating factor.
A loan may present a distinct circumstance or additional compensating factors not listed above. All underwriting
considerations must be well documented and will be reviewed on a case-by-case basis.
ABILITY TO REPAY (ATR), QUALIFIED MORTGAGE, AND NET TANGIBLE
BENEFIT REQUIREMENTS
The Consumer Financial Protection Bureau adopted a rule that implements the Ability to Repay (“ATR”) and Qualified
Mortgage (“QM”) provisions of the Dodd-Frank Act. Galton Funding will only purchase loans in which the Borrower’s
ability to repay has been established as laid out in the Truth In Lending Act. Investment properties used for business
purposes (Borrower does not intend to occupy property more than 14 days per year), are exempt from ATR, but must
still meet applicable points and fees threshold.
Sellers are responsible for providing evidence of compliance with ATR/QM rules.
The Originator must verify the income and assets used to determine the Borrower’s ability to repay the loan. Refer to
the Income and Assets sections of this Guide for additional information.
Benefit to the Borrower
In keeping with the Commitment to responsible lending, all Loans purchased by Galton Funding must have a
measurable benefit to the Borrower. When determining the benefit on a transaction, one of the following items must
exist to support the benefit to the Borrower:
1. Purchasing a home
2. Lower principal and interest housing payment
3. Lower total monthly payments
4. Lower interest rate
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5. Conversion from an adjustable rate to a fixed rate
6. Pay-off of a balloon payment
7. Conversion from negative amortization to fully amortization
8. Reduction of loan term
9. Reduction of total interest payments
10. Consolidation of debt
11. Resolution of loss mitigation actions
12. Pay-off of a tax lien
13. Proceeds (cash-out) to Borrower in excess of the costs and fees to refinance
14. Pay-off of a Construction Loan
15. Pay-off of property taxes
16. Title transfer/Court order
17. Eliminating mortgage insurance
18. Cash-out for medical needs
19. Cash-out for education needs
20. Pay-off of a privately held mortgage
21. Other as defined by the Borrower
On a Loan where the only benefit is monthly savings, closing costs and fees must be taken into account and
recouped within state-specified timeframes as applicable. Originators must adhere to any state-specific or federal
benefit to Borrower compliance requirements. Benefit to Borrower must be calculated based on the qualifying housing
payment.
Non-QM Loans
Galton Funding will purchase non-QM loans that meet ATR requirements. In addition, Galton Funding will only
purchase loans that conform to their program guidelines, even if the Borrower has a reasonable ability to repay the
loan according to its terms.
Points and Fees
Clear itemization of fees and application of all credits that indicate paid by/to will be required on all loans. Galton
Funding will accept a broad number of documents as evidence of compliance. Acceptable forms of evidence include,
but are not limited to:

Initial GFE

Initial TIL

Subsequent GFEs with accompanying Change of Circumstance forms

Subsequent TILs

Final HUD-1
Bona Fide Discount Points
To verify the exclusion of bona fide discount points from the points and fees calculation, Galton Funding will require:

Evidence of the base rate and points, and corresponding rate sheet(s); AND

Evidence of the delivery price to the Borrower (i.e., Commitment confirmation).
FRAUD DETECTION REQUIREMENTS
The Seller must obtain the following for each Loan submitted to Galton Funding for review and purchase.
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GSA, LDP and Exclusionary List
The Seller must verify that no company or individual who are material parties to the transaction is listed on HUD’s
“Limited Denial Participation” list, the federal General Services Administration (GSA) Excluded Party list, and Freddie
Mac’s Exclusionary List. All lists must be checked for all parties to the transaction.
If any of the names appear on either list, the Loan is not eligible for purchase. This applies to all Loans and is not
limited to FHA and VA loans.
Fraud Detection Reports
Galton Funding will use fraud detection tools (i.e. FraudGUARD) to screen every loan submitted for purchase. The
Seller must provide evidence in the Loan file that they have ordered third party fraud detection reports and resolved
any red flags, discrepancies, and conflicting information.
ELECTRONIC SIGNATURE AND DISCLOSURE REQUIREMENTS
Documents Eligible for Electronic Signatures (eSignatures)
Galton Funding will purchase loans on which certain documents are signed using an “Electronic Signature”.
Initial application documents associated with the 1003, (i.e. initial disclosures, sales contract) may be signed
electronically. The Seller is responsible for determining that the documents have been properly signed by all parties
(as with non-electronic documents). Any transaction involving the use of a Power of Attorney will not be permitted to
use an “eSignature”.
The Seller will not be permitted to submit any final documents with “eSignatures” other than an appraisal.
The documents received under the “E Signature” process must adhere to Uniform Electronic Transactions Act
(“UETA”), or the Electronic Signatures in Global and National Commerce Act (“ESIGN”), as applicable with the
eMortgage delivery process referenced in section 18D of the Seller Guide.
All disclosures must be in compliance with state, federal and local mortgage lending laws and regulations. Galton
Funding will accept loans for purchase, in which the Borrowers received initial federal and state disclosures
electronically according to the requirements outlined by the Electronic Signatures in Global and National Commerce
(E-SIGN) Act of 2000.
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BORROWER ELIGIBILITY
The guidelines below describe a person’s eligibility to be a Borrower in Galton Funding’s Loan Programs. Galton
Funding will purchase loans made to individual, natural persons only. Loan applications from corporations, general
partnerships, limited partnerships, and “Doing Business As” (DBAs) or religious/non-profit organizations are ineligible.
IMMIGRATION AND NATURALIZATION SERVICE (INS) CLASSIFICATIONS
The U.S. Department of Immigration and Naturalization Service (INS) has defined specific residency classifications.
Galton Funding offers programs to individual persons who are citizens and/or legal permanent residents of the United
States. For eligibility and restriction details, refer to the Galton Funding Loan Program Matrices.
The following are some of the classifications defined by the INS:
INS
Classification
INS Definition
Program Guideline
U.S. Citizen
A citizen of the United States is a native-born,
foreign-born, or naturalized person who owes
allegiance to the United States and who is entitled
to its protection.
United States citizens are eligible Borrowers for
all of Galton Funding’s Loan Programs.
Permanent
Resident Alien
A permanent resident alien is a person who is not a
U.S. citizen but is legally able to maintain
permanent residency in the United States.
A permanent resident alien may be an eligible
Borrower, if the Borrower is a holder of an alien
registration card (green card). The Seller is
responsible to verify that the Borrower has a
valid registration card.
Non-Permanent
Resident Alien
A non-permanent resident alien is a person who is
not a U.S. citizen but resides in the United States
under the terms of a Visa.
A non-permanent resident alien may be eligible
if they maintain a current G-1 to G-5, H-1, L-1,
or E-1 Visa and they can provide a copy of the
Visa with underwriting documentation.
Foreign
Nationals
A foreign national is a person who is not a U.S.
citizen and who lives and works outside of the
United States.
Not eligible
Persons with
Diplomatic
Immunity
A person with diplomatic immunity is allowed to live
in the United States to carry out their official
diplomatic duties. They are not U.S citizens, and
are exempt from lawsuit or prosecution under the
host country’s laws.
Not eligible
Evidence of Residency
Acceptable evidence of permanent residency for Borrowers who are not U.S. citizens must be provided. The
Borrower must provide the INS evidence as follows:

Alien Registration Receipt Card I-151 (referred to as a green card).

Alien Registration Receipt Card I-551 (Resident Alien Card) that does not have an expiration
date on the back (also known as a green card).

Alien Registration Receipt Card I-551 (Conditional Resident Alien Card) that has an expiration
date on the back, and is accompanied by a copy of the filed INS Form I-751 (petition to remove
conditions).

Non-expired foreign passport that contains a non-expired stamp (valid for a minimum of three
years) reading “Processed for I-551 Temporary Evidence of Lawful Admission for Permanent
Residence. Valid until [mm-dd-yy]. Employment Authorized.”

The U.S. Citizenship and Immigration Services Web site is:
https://egov.immigration.gov/cris/caseStatusSearchDisplay.do
Other forms of evidence of residency that are not listed may be acceptable, and will be reviewed on a case-by-case
basis.
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BORROWER TYPES
The following are the types of Borrowers allowed by Galton Funding programs. Galton Funding limits the number of
Borrowers per Loan to four. For eligibility and restriction details, refer to the Galton Funding Loan Program
Matrices.
Primary Borrower
The Primary Borrower is the individual who earns the most income. Non-Occupant Co-Borrowers cannot be the
Primary Borrower on the Mortgaged Property.
Co-Borrower
A Co-Borrower is an individual other than the Primary Borrower whose credit history, income, or assets are used for
qualifying the loan. The Co-Borrower is the Borrower’s spouse, domestic partner, or any individual jointly responsible
for repayment of the loan with the Borrower. All Co-Borrowers must be on title.
First-Time Homebuyers (FTHB)
Borrowers are considered First-Time Homebuyers (FTHB) when there is no evidence of owning residential property
in the previous three years. First-Time Homebuyers generally must fulfill specific requirements in addition to the
conditions stipulated for experienced homebuyers. A Borrower(s) who has experience owning a home, but has not
owned one in the past three years, will be considered a FTHB.
In the instance where one Borrower is a FTHB and the other Borrower(s) is not, Galton Funding will treat the
transaction as a non-FTHB transaction for grading and program eligibility.
For LTV/CLTV restrictions, reserve requirements and other guidelines specific to FTHBs, refer to the Galton
Funding Loan Program Matrices.
Non-Borrowing Occupant
A Non-Borrowing Occupant is the Borrower’s legal spouse, domestic partner, or any person residing in the
Mortgaged Property whose credit, income, and/or assets are not considered in the loan qualifying process. NonBorrowing Occupants that appear on title will have to execute the documents required by law to create a valid lien on
the property.
When a married Borrower purchases a property without involving a spouse, Galton Funding requires the spouse to
sign the security instrument, and any other applicable documentation under governing state law to confirm
relinquishment of their rights to the property.
Non-Occupant Co-Borrower
A Non-Occupant Co-Borrower (co-signer) is an individual who will not be living in the Mortgaged Property, but whose
income and/or assets have been used to qualify for the loan. The co-signer must sign the Note. Although the NonOccupant Co-Borrower does not reside in the Mortgaged Property, he or she is jointly responsible (with the Primary
Borrower) for repaying the loan. If the Loan Program allows for a Non-Occupant Co-Borrower, the loan is subject to
the following conditions:


Mortgage Loan:
‒
Owner occupied or second vacation home
‒
Full Documentation only
‒
The Primary (occupant) Borrower’s credit profile will be used for grade determination, and
the Primary Borrower must have a DTI of no more than 60%
‒
A minimum of 5% of the down payment must come from the Primary (occupant) Borrower’s
own funds. A down payment of 100% gift funds is allowed at LTVs less than 80% or the
program maximum, whichever requires the greater down payment. Secondary financing is
not allowed on Non-Occupant Co-Borrower or Non-Owner Occupied transactions. Closing
costs may also be in the form of a gift.
Non-Occupant Co-Borrower:
‒
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Individual cannot be the Primary Borrower, and must be a close family member such as a
parent, child, grandparent, or sibling. Credit must meet the minimum credit standards for
the grade assigned to the loan
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‒
Must provide income and asset documentation to be used for loan qualification
‒
Must be vested on the Mortgaged Property for a minimum of six months for a Rate/Term
Refinance and twelve months for a Cash-Out Refinance transaction

Up to two Non-Occupant Co-Borrowers allowed
Title Held in a Trust or LLC on Behalf of the Borrower
The Borrower must be an individual with the exception of inter-vivos revocable trusts and limited-liability companies
(LLCs) under certain circumstances. Inter vivos revocable trusts are created by individuals, while they are still living,
as an estate planning tool.
Title must generally be in the Borrower’s name as an individual, trust, or LLC at time of application for refinance
transactions and at the time of closing for all transactions.
Title in the name of an LLC at time of application is acceptable provided the Borrower is a member of the LLC and the
Loan will be in the Borrower’s name as an individual or acceptable trust at closing.
Non-individual legal entities such as corporations, general partnerships, limited partnerships, real estate syndications
or investment trust are not eligible.
The inter vivos revocable trust, also called a family trust, living trust, or revocable living trust, can be used as an
alternative form of property ownership. An inter vivos revocable trust (“living trust”) is a trust defined as follows:
Eligibility Requirements

Created by an individual during his/her lifetime

Becomes effective during its creator’s lifetime

Can be changed or canceled by its creator at any time, for any reason, during his or her lifetime

At least one individual establishing the trust must be on the Loan.
Trust Agreement Requirements
The Seller must obtain copies of the entire trust document and include them in the loan file submitted for purchase.
The copies must be certified by an attorney or the grantor/trustor/settlor. The title company must also be supplied with
copies of the trust.
A review of the trust agreement is required to ensure the agreements meets all of the following requirements:

The trust is established by one or more natural persons, solely or jointly. The person
establishing the trust is known as the “Settlor”, “Trustor”, or “Grantor”, referred to below as
“Settlor”.

The trust is effective during the Settlor’s lifetime

The Settlor is the primary beneficiary of the Trust. If there is more than one Settlor there can be
more than one primary beneficiary.

The Settlor is the trustee or one of the co-trustees

The trustee has the power to mortgage the Subject Property for the purpose of securing a loan
to the party (or parties) who are the borrowers on the Note.

The trustee is not required to obtain written consent from the beneficiaries to mortgage the
subject property if written consent has been provided.

There is no unusual risk or impairment of lender’s rights, such as distributions required to be
made in specified amounts other than net income

The trust is valid under federal, state, and local law

If the trust agreement requires more than one trustee to borrow money or purchase, construct,
or encumber realty, the Seller must confirm that the requisite number of trustees have signed
the loan documents.
Certification of Trust
A certification of trust or a summary of trust is acceptable if required by state law. In states that require a Seller to rely
on an abstract, summary or certification of the trust agreement instead of the trust agreement, a copy of the abstract,
summary or certification is acceptable.
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California (CA) Only Exception
California (CA) law provides for the use of a Certification of Trust that states the various facts about the trust in lieu of
obtaining copies of the trust. Sellers can rely upon this certification so long as it is signed by all of the trustees
(Powers of Attorney are not allowed). Sellers must review the certification to verify the above requirements are met.
Title
The title insurance policy must ensure full title protection, and must indicate that title to the subject property is vested
in the name of the trustees. The policy may not list any exceptions with regard to the trust or the trustees.
Additional documentation:

Inter Vivos Revocable Trust Rider to the Deed of Trust/Mortgage

Inter Vivos Trust as Borrower Acknowledgment

Verbiage on this Acknowledgement may be incorporated into the Inter Vivos Revocable Trust
Rider to the Deed of Trust/Mortgage. If the verbiage is included in the Rider, then the
Acknowledgement is not required
MAXIMUM LOANS TO ONE BORROWER
In order to reduce the level of risk and ensure lien security, Galton Funding limits the potential Borrower’s open loans,
total number of properties owned, and number of mortgaged properties owned in one area.
The occupancy of the property being financed will determine the limitations on how many other financed 1-4 family
properties the Borrower may own and/or be obligated on. These limitations apply to each Borrower, individually and
all Borrowers collectively that own and/or are obligated on a note secured by a mortgage. The Borrower(s) obligation
on a mortgage is important when evaluating capacity. Therefore, even if the Borrower is not an owner of record, but is
obligated on a note of a financed property, it must be included in the maximum number of financed properties.
The following are excluded from these limitations:

Properties owned free and clear

Joint or total ownership in property this is held in the name of a corporation, even if the
Borrower is the owner of the corporation. However, if the Borrower is individually obligated on
the note, it must be included

Ownership in a multi-family property (5+ units)

Ownership in commercial property

Ownership in timeshares

Ownership in unimproved land
For all loans, the Borrower's primary residence, the subject property and any properties owned separately by a CoBorrower must be included in the total number of properties owned.
Maximum Dollar Amount Sold to Galton
The aggregate dollar amount of all loans made to one Borrower sold or serviced by Galton Funding may not exceed
$4M.
Maximum Loans to One Borrower Sold to Galton
There is no limit to the number of loans that can be submitted for the same Borrower to be sold to Galton Funding.
Rather, the maximum number of loans to one Borrower is limited by the aggregate dollar amount of the total loans
sold or serviced by Galton Funding. The aggregate dollar amount of all loans sold or serviced by Galton Funding may
not exceed $4M.
Maximum Properties One Borrower May Own
A Borrower may finance or own multiple properties. Galton Funding offers two options for Borrowers that own multiple
properties. They include:
1)
If the Loan being sold to Galton Funding is secured by the Borrower’s principal residence, there are no
limitations to the number of properties that the Borrower can own or are currently financing.
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2)
If the Loan being sold to Galton Funding is secured by the Borrower’s second home or an investment
property:
a.
The Borrower may have up to ten financed properties (including their principal residence) OR
b.
The Borrower may own or have financed an unlimited number of properties if the Loan being sold
to Galton Funding has a maximum LTV/CLTV that does not exceed the lesser of the program
maximum or 70%.
More stringent lending practices should be implemented in cases where the Borrower’s loan documents exhibit
escalation of late payments and multiple refinances. New investors that have made multiple real estate acquisitions
(more than 50% of the properties purchased) in the past 12 months may require additional review, documentation, or
be ineligible for purchase.
In all cases the Borrower must have sufficient assets to close and meet reserve requirements. For more information,
refer to the Galton Funding Loan Program Matrices.
Maximum Loans in One Market Area Sold to Galton
The number of loans to one Borrower in any single market area is limited to two. The term “single market area” refers
to the physical location of the property—meaning two or more homes owned by the same Borrower within a several
block radius, defined neighborhood, or lending area.
Maximum Loans Purchased by Galton
Galton Funding reserves the right, at its sole discretion, to limit the number of units and overall concentration in any
specific project or condominium. Further, Galton Funding reserves the right, at its sole discretion, to limit the number
of Loans purchased in any one market area.
LOAN APPLICATION ANALYSIS
The Loan File assists in determining the Borrower’s eligibility for the loan. During the completion and review of the
application, the Seller should analyze the application in the following manner:

Verify and substantiate the quantity, quality, and durability of the Borrower’s income.

Verify and analyze the Borrower’s assets to determine if adequate funds are available to meet
the equity and reserve requirements of the transaction.

Verify and substantiate the Borrower’s liabilities and credit history in relation to the Borrower’s
assets and income.

Evaluate the Borrower’s net worth in relation to his or her ability to manage financial affairs and
accumulate assets/wealth.

Verify that the declarations are consistent with program eligibility.
The Loan File must contain a complete, fully executed Loan application (1003). Both the initial and final 1003’s must
be provided. The following applies:

Must be signed and dated by the Borrower

All HMDA data must be completed.

Seller is determined by auditing the interviewers section

Seller Contact information is included
Potential “Buy and Bail” Loan Scenarios
Loans that exhibit the following characteristics, sometimes referred to “Buy and Bail Characteristics”, may be deemed
ineligible for sale to Galton:
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
The borrower defaults on the original mortgage shortly after purchasing a second property

The borrower will be a first time landlord (renting out the original property)

The borrower has minimal or no equity in the original property

Inability to validate lease terms with the purported tenant

Purported tenant has a pre-existing relationship with the homeowner
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CREDIT
Credit is defined as the Borrower’s history of credit payments and financial obligations. An assessment of the
Borrower’s capacity and willingness to pay financial obligations is a major factor used in determining a Borrower’s
creditworthiness. A Borrower(s) who has consistently met financial obligations in the past may indicate reasonable
justification that he or she is likely to continue to do so in the future. A Borrower’s credit history provides a strong
measure of their intent to repay.
Credit history is measured on credit depth, number of obligations, delinquency patterns, and demonstrated intent to
repay. In a subjective evaluation of credit, many factors are considered when evaluating a Borrower’s credit history.
The factors include:

Credit repayment history

Line utilization

Proportion of balances versus limits on revolving accounts

Patterns of debt pyramiding

Recent inquiries and newly opened accounts

Recent changes in the number of open accounts or overall amount of credit outstanding

The number of open accounts and length of credit history

Public record information
For more information, refer to the Galton Funding Loan Program Matrices.
Equal Credit Opportunity Act
The Federal Equal Credit Opportunity Act prohibits lenders from discriminating against credit Borrowers on the basis
of race, color, religion, national or ethnic origin, sex, marital or familial status, age (provided the Borrower has the
capacity to enter into a binding contract), disability, because all or part of the Borrower’s income is derived from a
public assistance program or because the Borrower has, in good faith, exercised any rights under the Consumer
Credit Protection Act. State laws may also prohibit discrimination on certain additional basis such as sexual
orientation.
Number of Open Accounts
It is generally not one credit usage factor, but the combination of factors that establish whether or not the overall
pattern of credit use is acceptable.
In general, the greater the number of credit accounts, the higher the credit risks. However, it is important to analyze
the number of accounts within specific types of credit (i.e., retail, installment, revolving and mortgage). The higher risk
group includes Borrowers with a large number of bank revolving accounts, and/or accounts with outstanding
balances. On the other hand, if there is no bank revolving accounts, this could indicate an inability of the Borrower to
obtain credit.
The lack of acceptable credit cannot be compensated for by either capacity or collateral strengths. When determining
investment quality, the likelihood of timely repayment, as demonstrated by responsible credit, must always be
present. Once credit is established, however, collateral and capacity can be used to strengthen the loan’s overall
investment quality.
Recent Inquiry Risk Factors and Undisclosed Liabilities
Recent inquiries indicate that the consumer has actively been seeking credit. A Borrower with minimal credit
experience and a number of recent inquiries should be more closely scrutinized than a Borrower with the same
number of inquiries and a very long and stable credit history.
Multiple inquiries within the most recent 12 months generally increase risk and, when combined with high balancesto-limits on revolving accounts may indicate that the Borrower is in danger of becoming overextended. In addition,
several recent inquiries combined with a credit history of short duration may make even mild derogatory credit
information significant.
The following factors should be considered:

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Borrower’s payment experience
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
Type of credit being sought

Total amount of credit outstanding

Credit utilization reflected on the report
If the credit report indicated that a creditor has made multiple inquiries within the previous 90-day period, the
underwriter must determine whether additional credit was granted as a result of the Borrower’s request. A review and
evaluation of the inquiries section of the Borrower’s credit report is required to determine if the Borrower has received
additional credit that is not reflected in the credit report or disclosed in the Loan File. A detailed explanation letter that
specifically addresses both the purpose and outcome of each inquiry is required from the Borrower(s). An overall
generic credit explanation letter is not acceptable.
As a result of the credit inquiries, the loan may be subject to additional requirements. If additional credit was obtained,
a verification of that debt must be provided and the Borrower must be qualified with the monthly payment. The
verification can be achieved through a direct verification with the creditor or use of a credit supplement.
Sellers are expected to proactively identify any and all undisclosed liabilities that may affect the loan approval in
relation to underwriting guidelines, eligibility parameters, or pricing. It is the Seller’s responsibility to develop and
implement its own business processes to support compliance with Fannie Mae’s requirements for undisclosed
liabilities. Although Sellers may already have such processes in place, some best practices that may be incorporated
include:

Refreshing a credit report prior to closing to uncover additional debt or credit inquiries

Adopting new services from credit vendors that provide Borrower credit report monitoring
services between the time of loan application and closing

Investigating credit inquiries listed on the credit report to determine whether the Borrower did in
fact, open additional debt resulting in repayment obligations. In some cases, it is possible to
obtain a direct verification with the creditor associated with the inquiry
It is also highly recommended that a Mortgage Electronic Registration System (MERS) report be run, prior to closing,
to determine if the Borrower has undisclosed liens and/or if another mortgage is being originated. If new debt has
been obtained, the Loan File must be re-evaluated to ensure compliance with debt-to-income and Borrower eligibility
requirements.
Recently Opened Accounts
Like inquiries, several recently opened accounts may be a warning that the Borrower(s) may be getting
overextended. In addition, a credit history with all accounts recently opened may signal that the Borrower(s) do not
have sufficient experience managing financial obligations. The following factors should be considered:

Borrower’s payment experience

Utilization of revolving credit lines

Total amount of credit outstanding

Recent inquiries

Whether the Borrower has sufficient experience in managing investment property
Outstanding Debt/Line Utilization
Two very important indicators of repayment ability are the number of accounts with sizable outstanding balances and
high credit line utilization. The number of trade lines with balances reported in the last three years should be
considered and reviewed in relationship to the number and activity in the last 12 months.
Analyze the current balance for each open account to the high credit limit to determine whether there is a pattern of
accounts with balances at or near their limits. Generally, if a Borrower has credit balances that represent at or near
70% of their open and active credit limit, this may require additional review and/or compensating factors. The more
accounts with high balances-to-limits and the higher the percentage used, the higher the risk.
High balances-to-limits may also indicate the Borrower is making minimum payments on revolving accounts rather
than reducing the debt and may be at or near payment capacity. Any derogatory information in a credit history within
the most recent two years combined with several revolving accounts at or near their limits should be considered
derogatory information when evaluating the credit profile of the Borrower. Generally, the higher the Borrower’s
overall utilization of revolving credit, the higher the amount of risk. Compensating factors or additional documentation
may be required to offset this risk.
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Reason/Score Codes
Along with the credit scores, credit repositories return up to four reason codes with each credit score provided. These
codes are sometimes referred to as score factor codes. These reason codes provide an explanation as to why the
Borrower(s) did not receive a higher score. This is taken into consideration when evaluating borrower’s credit.
HAWK Alerts
All three national credit repositories have developed automated messages to help messages to help identify possible
fraudulent activity on a credit report. These alerts are commonly known as HAWK Alerts. All HAWK Alert messages
shown on a credit report, especially those in the Fraud Verification Information section must be addressed and
resolved.
Military Active Duty Alert
Military personnel are particularly susceptible to identity theft because many of their records, orders, and identification
documents display their social security number. An active duty alert is a type of fraud alert established under the Fair
and Accurate Credit Transactions Act (FACTA) that provides credit identity theft protection for U.S. military service
personnel.
The Mortgagee must contact the Borrower directly to verify identity whenever an active duty alert appears on the
Borrower’s credit report.
Customer Identification and OFAC Alert Screening
The mortgagee must comply with Section 326 of the USA Patriot Act and OFAC, including:

Provide each Borrower with a customer identification notice

Obtain at least four items verifying the Borrower’s identity through documentary or nondocumentary methods

OFAC alert screening

Determine if the Borrower is questionable or suspicious

Monitor questionable instance which may require internal and external reporting of suspected
individuals

Ensure Seller’s employees are trained and informed of suspicious activities related to antimoney laundering or terrorist activities
Weighing Risk Factors
When evaluating Borrower(s) with adverse credit information, more weight should be given to derogatory credit
information or late payments occurring within the past two years. The following factors should still be considered:

The number, timing and extent of the delinquency

Eventual repayment of delinquent obligations

Any previous bankruptcy, mortgage foreclosures, or deed-in-lieu of foreclosure within the past
seven years

Whether other characteristics of the Borrower’s credit profile, such as age of credit, use of
outstanding credit, and inquiries, make any significant difference in the derogatory credit
Delinquency and Derogatory Credit
There are a number of factors to consider in the analysis of delinquency or derogatory credit:
Page 18 of 96

The type of accounts on which the delinquency occurred

The reason for delinquency

The severity of the delinquency

The frequency of delinquent accounts, AND

How recently the delinquency occurred
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More weight is placed on installment loan delinquency than on revolving debt delinquency. The most weight is placed
on mortgage payment history. The most serious types of delinquency include foreclosures, bankruptcy, judgments,
collection accounts and tax liens. Explanations and supporting documentation should be in the file to show these
events were an isolated occurrence and are unlikely to happen again.
Accounts which are currently delinquent are closely scrutinized. All accounts past due must be brought current or
otherwise resolved prior to closing according to the Galton Funding program guidelines. Please refer to the Galton
Funding Credit Grade Matrix for details.
CREDIT REPORT REQUIREMENTS
For each Borrower whose income or assets are required to qualify for the loan, the Loan File must contain one of the
following:

A full Residential Mortgage Credit Report (RMCR)

An in-file merged credit report that accesses the three national credit repositories

Joint merged credit reports are allowed without regard to marital status
General Requirements
The following outlines the general requirements for credit reports. The credit report must contain merged credit
information provided by all three national repositories.
Residential Mortgage Credit Reports:

Credit Report must not be dated more than 90 days from the Note Date. In the event that the
Disbursement Date causes the Borrower’s credit report and/or credit file to be greater than 90 days
old, Galton reserves the right to request updated credit, asset, and/or income documentation.
Disbursement Date is the day on which the loan closes.

Must contain all discovered credit and legal information that is not considered obsolete under the
Fair Credit Reporting Act

Be issued by an independent consumer reporting agency that obtains or verifies all information
from sources other than the Borrower.

Identify the full name, address, and phone number of the consumer reporting agency

Identify the names of the national credit repositories from which the information was obtained. The
consumer reporting agency must contact at least two national credit repositories for each area in
which the Borrower has resided during the most recent two-year period.

Indicate the dates the accounts were last updated with creditors. Each account should have been
updated within 90 days of the credit report.

Include a certification stating that it meets the standards that Fannie Mae, Freddie Mac, the FHA,
and VA prescribe for an RMCR. Separate credit repository inquiries are necessary when CoBorrowers have maintained credit individually.

List all credit inquiries received within the previous 90 days.

Evidence the consumer reporting agency verified the Borrower's current employment and, if
obtainable, income. The report must show the date of verification. Verification may be made by
telephone. If there has been a change in employment in the past two years, the report must also
describe the Borrower's previous employment and income. In cases in which employment was not
verified, the report must indicate why it was not.

Show responsive statements concerning items on the report. For example, the consumer reporting
agency must report unable to verify or employer refused to verify. The same responsive reporting
applies to trade and credit history.

Must contain specific information regarding legal items found in public records, including
judgments, foreclosures, tax liens, bankruptcies, etc.
Tri-Merged Credit Reports:

Page 19 of 96
Must contain all the information from the three in-file credit reports.
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
If the information is not exactly the same on each report, then the merged report must repeat the
information as stated on each report or include the most derogatory of the duplicate information
that pertains to the payment history and/or current payment status.

Identify the repositories that were used for the in-file credit reports.

Must provide a credit bureau score, accompanied by reason codes, for each Borrower.

The report must include all of the information verified by the three repositories.

Any social security number discrepancy must be disclosed by the repositories.

Each individual trade line must identify the primary repository that provided the account information.
No Borrower in a transaction may have frozen credit. Frozen credit is where the Borrower’s credit has been
involuntarily frozen by a court order, government entity or similar mandate. If a Borrower has frozen credit and
unfreezes their credit after the original credit report was ordered, a new credit report must be obtained to reflect
current updated information for evaluation.
Each credit report must contain a Fair Isaac credit score (“Empirica” on TransUnion, “Beacon” on Equifax, and “FICO”
on Experian) for all Borrowers whose income and/or assets are used to qualify for the loan. The Seller must provide
at least two qualifying credit scores for each Borrower. These credit scores will be used as a component in
determining the credit grade of the loan. A Co-Borrower with no valid credit score will be allowed in cases where
income and/or assets are not required for qualification purposes. For grade determination, refer to the Galton
SELECTING THE CREDIT SCORE
Galton Funding will select the Borrower’s credit score using one of the following methods:

If all three scores are available, the middle score will be used.

If only two scores are available, the lower score will be used.
Once the score is selected for each Borrower, it is used for loan qualification as follows:

For Full/Alternative Documentation Loans, the Primary Borrower’s selected score is used.

For Reduced Documentation Loans, the lowest selected score among all Borrowers is used.

If in the case where both Borrowers earn equal income, the Borrower with the lower score will
be used for grade determination.
To ensure credit score validity, the Originator should review the scores, the score codes and the Borrower’s credit
history, Score codes must be consistent with tradeline information and use. Scores that do not appear to represent an
accurate assessment of the Borrower’s credit risk will not be considered usable and valid.
LIMITED, NO CREDIT HISTORY OR ALTERNATIVE CREDIT HISTORY
Borrowers with limited, no credit history, or that do not meet Galton Funding’s minimum credit requirements
are not eligible. Each Borrower must have at least two valid and usable credit scores as defined by Galton Funding.
A Borrower not using income to qualify and showing $0 earned or is not employed does not need to meet the
minimum trade line requirements.
MINIMUM CREDIT REQUIREMENTS/TRADELINES

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A Borrower(s) without an established credit history is ineligible. A valid and usable score is one
that is generated based upon credit history and credit patterns that accurately reflect the
Borrower’s history. It should contain at least:
‒ Three established open and active trade lines that reported for a minimum of 24 months
‒ At least one of the three established trade lines must have a minimum $2,500 high credit
limit
‒ At least one open mortgage trade line in the last 36 months
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
If the Borrower is a First-Time Homebuyer, the Borrower’s rental housing payment history for
the previous 12 months is required. Payments must be documented via an institutional VOR or
cancelled checks/bank statements.

For Borrowers that currently own or have owned a property free and clear, a copy of the title or
credit report must document the free and clear status.

If the Borrower is in college, is a recent college graduate or living with family members and is
not paying rent, he or she must meet the minimum credit requirements.
Borrower’s failing to meet the 3 trade lines criteria but have a minimum of 1 open trade line with 12 months or more
reporting history can be considered without exception if the following requirements are met:

8 or more trade lines reported with at least one being a mortgage trade line

Minimum 7 years of established credit history

If the mortgage history is not reported on the credit report, it may be verified through cancelled
checks, or verification of mortgage (VOM).
OR

6 months additional reserves and meets one of the following requirements: DTI < 35%, LTV <
70, or the program maximum, whichever is less.
Unacceptable Tradelines
The following cannot be used to meet the minimum trade line requirement:
Page 21 of 96

Collections

Charge-offs

Public records and derogatory credit, included in or prior to a bankruptcy

Accounts currently over 90 days delinquent

Student loans not currently in repayment

“Authorized User” accounts
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ADVERSE CREDIT
Collection accounts, charge-off accounts, judgments, liens, delinquent property taxes, repossessions, and
garnishments are considered to be adverse credit. Adverse credit does not impact the grade determination, since
these elements have already been included in the credit score; however, the allowance of adverse credit is restricted
by grade and program.
All delinquent credit that will impact title must be paid off prior to or at closing. Title must insure Galton Funding’s lien
position without exception.
However, Charge-Offs or collection accounts that do not impact title are not required to be paid off. For eligibility and
restriction details, refer to the Galton Funding Loan Program Matrices.
Derogatory Credit
Any derogatory information requires a full investigation including:

A written explanation from the Borrower that outlines the cause of the major derogatory credit
event and the likelihood of re-occurrence.

Explanations must make sense and cannot conflict with other verified information or
documentation in the Loan File. When a Borrower indicates unusual circumstances have
contributed to serious delinquencies or derogatory credit, documentation to support those
circumstances should be obtained to justify a decision to approve a loan with recent credit
problems.

Proper consideration must be given in evaluating the Borrower's creditworthiness

Proof that the incident has been resolved and documentation supporting the resolution and
conclusion of the matter. If a derogatory item is being paid through this transaction, the file
should note it in the closing statement.

A Borrower may provide medical information to explain a pattern of late payments. Medical
information must never be specifically requested. However, explanation for a pattern of late
payments or derogatory information on the credit report should be requested. The underwriting
decision to grant credit should not be based on a Borrower’s physical, mental or behavioral
health condition.
Divorce Debt
Delinquent credit which belongs to an ex-spouse may be excluded from the credit evaluation when all of the following
apply:

Loan File contains a copy of the filed/recorded divorce decree or recorded separation
agreement which shows the derogatory accounts belong solely to the ex-spouse;

Late payments that have occurred after the date of the divorce or separation; and

If debt in question is a mortgage, evidence of title transfer prior to any delinquent debt must be
provided and evidence of “buyout” as part of court proceedings.
Co-Signed Debt
Delinquent credit that belongs to a co-signer must be considered in determining the Borrower’s credit acceptance.
BANKRUPTCY
Bankruptcy is defined as court proceedings to relieve the debts of an individual or business unable to pay creditors.
Bankruptcy may be declared under one of the Chapters of the Federal Bankruptcy Code.

Chapter 7. Covers liquidation of individual or business assets.

Chapter 11. Covers reorganization of bankrupt businesses.

Chapter 13. Covers contractual repayment by individuals.
Requirements and Guidelines
The following requirements and guidelines apply to bankruptcies:
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
Loans to Borrowers with multiple bankruptcies are ineligible for purchase by Galton Funding.
For example, a Borrower who filed for bankruptcy in 2009 and later in 2012 is ineligible under
these guidelines regardless of whether the bankruptcy was discharged or dismissed. Galton
Funding does not consider the following scenarios as multiple bankruptcies:
‒
When a Chapter 13 rolls into a Chapter 7 bankruptcy
‒
When individual Borrowers each have filed separate bankruptcies.

Bankruptcy dismissal dates are treated the same as discharge dates.

If a discharge/dismissal date cannot be established, documentation validating the dates must
be provided.
If a Foreclosure is included in the Bankruptcy, each event is treated separately for grade determination. The
Seller must determine the seasoning for each event and grade the Loan accordingly.
Please refer to the Galton Funding Credit Grade Matrix for bankruptcy seasoning information, and Loan Program
restrictions. Credit depth requirements must be met post-bankruptcy. Credit prior to bankruptcy will not be considered
for meeting the tradeline requirements.
Chapter 7 Bankruptcy
Chapter 7, also called liquidation, is the most common type of bankruptcy. It provides for the absolute and complete
elimination of most types of debt, thereby giving the debtor a fresh start. The goal of a Chapter 7 bankruptcy is to
obtain a court order discharging one’s debts.
For all credit grades, the aging of the Chapter 7 bankruptcy is measured from the discharge date. For further details,
refer to the Galton Funding Credit Grade Matrix.
Chapter 11 bankruptcies allow businesses the opportunity to reorganize business debt without having to liquidate all
assets. The debtor presents a plan to creditors that allows the debtor to reorganize financial obligations in order to
improve the financial stability of the business.
For all credit grades, the aging of the Chapter 11 bankruptcy is measured from the discharge date. For further details,
refer to the Galton Funding Credit Grade Matrix.
Chapter 13 bankruptcies provide individuals who have a regular income, but are overcome with debt, the opportunity
to repay within a reasonable period of time. Chapter 13 bankruptcies permit the debtor to file a plan to pay a certain
percentage of future income to the bankruptcy court for payment to creditors. If the court approves the plan, the
debtor will be under the court’s protection while repaying stated debts.
Depending on the Loan Program, the aging of a Chapter 13 bankruptcy is measured from the discharge date. For
further details, refer to the Galton Funding Credit Grade Matrix. If Borrower enters into Bankruptcy and cancels,
the seasoning is measured from the Cancellation Date
CONSUMER CREDIT COUNSELING SERVICES (CCCS)
Consumer Credit Counseling Services (CCCS) assist Borrowers with financial management of debts in an attempt to
avoid further delinquencies or possible bankruptcy. Generally, creditors agree to a reduced repayment under a
consumer credit counseling plan. In all cases, the CCCS plan must have been paid in full. A payment history is
required in this situation and if delinquent in the most recent 12 months, the CCCS will be treated as an open Chapter
13 and is ineligible. The date the CCCS was paid off will be considered the discharge date. If Borrower enters into
CCCS and subsequently cancels, the seasoning is measured from the cancellation date.
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FORECLOSURES
A foreclosure is a proceeding that enables the creditor, in accordance with the terms of the security instrument, to
take legal action that could ultimately result in the forced sale of the collateral property for full or partial satisfaction of
the debt. Such action typically extinguishes the property owner’s rights, title, and interest. In the instance where a
Borrower has been or is currently delinquent 120 days or longer and the lender has not initiated formal actions, the
120 day plus delinquency will be treated as a foreclosure for grading purposes. Documentation should be provided to
show the individual Borrower’s circumstance.
Foreclosure is substantiated by real estate loans that are delinquent 120 days or longer, as mentioned above or the
existence of any of the following:

Breach

Service

Short Payoff

Lis Pendens

Sheriff’s Sale

Bankruptcy Notice

Notice of Sale
The following requirements and guidelines apply to foreclosures:

The length of time elapsed since the occurrence or completion of the foreclosure is considered
in the grade determination.

Applicants who have undergone foreclosure procedures must provide a mortgage/housing
history in accordance with specific Program Guidelines.

A Borrower with a history of more than one foreclosure is ineligible. For example, a Borrower
who had a foreclosure in 2009 and then loses a home through bankruptcy in 2012 is ineligible.

Any repossession or 120-day delinquency on a mobile home, manufactured home or timeshare,
even if shown as an installment debt, will be considered a foreclosure.
If a Foreclosure is included in the Bankruptcy, each event is treated separately for grade determination. The
Seller must determine the seasoning for each event and grade the Loan accordingly.
Please refer to the Galton Funding Credit Grade Matrix for foreclosure seasoning information, and Loan Program
restrictions.
LOSS MITIGATION HISTORY - MODIFICATIONS, FORBEARANCES,
REARRANGEMENTS, EXTENSIONS, OR WORKOUTS
Loss mitigation history includes the following:

Deed-in-Lieu

NOD

Pre-Foreclosure Sale

Short Sale

Short Refinance

Loan Extensions

Loan Modification
For further details, refer to the Galton Funding Credit Grade Matrix.
An agreement to forbear, workout, extend, or rearrange the terms of the original loan does not change the fact that
the loan was not paid in accordance with its original terms. This applies even if the extension or modification was
initiated by the Borrower, and the debt was subsequently paid in accordance with the rearranged terms. Any
forbearance on a mortgage including deed-in-lieu, NOD, pre-foreclosure sale, short sale, short refinance, modification
or non-foreclosure action will be considered a loss mitigation action for grading purposes.
Please refer to the Galton Funding Credit Grade Matrix for loss mitigation action seasoning information, and Loan
Program restrictions.
Lawsuits and Pending Litigation
If the application, title, or credit documents indicate that the Borrower is involved in a lawsuit or litigation additional
documentation, such as an attorney’s explanation, copy of the complaint and answer, etc. is required. The title
company closing the loan must provide a letter stating affirmative coverage of subject lien position.
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7/7/16
Generally, lawsuit and pending litigation is not eligible under the Galton Funding Program. Situations in which the
lawsuit or pending litigation does not have a meaningful impact on the borrower’s ability to repay the mortgage may
be permitted.
MORTGAGE/HOUSING HISTORY
Each loan must include a mortgage/housing history for the Borrower’s primary residence and any other properties the
Borrower owns. On non-owner occupied transactions, a mortgage/housing history is required on the Mortgaged
Property as well as the primary residence. For specific program requirements refer to the Galton Funding Loan
Program Matrices.
The requirements and guidelines for mortgage/housing payments are:

Mortgage/housing payment history on any property, regardless of the occupancy or lien status,
is considered mortgage/housing history for grading purposes.

If the Borrower does not own a property, a housing/rental payment history must be provided

Any payments on a manufactured home or timeshare are considered to be mortgage debt,
even if reported as an installment loan. They will be treated as installment debt rather than real
estate owned.

The existing mortgage on the Mortgaged Property can be no greater than the max delinquency
contractually allowed by the program.

Each contractual delinquency must be considered separately. (i.e. a first and second lien)

Any delinquency must be explained and documented in a letter of explanation.
Mortgage / Housing History Requirements

If the Borrower is a First-Time Homebuyer, the Borrower’s rental housing payment history is
required. Payments must be documented via an institutional VOR or cancelled checks/bank
statements.

If the Borrower is in college, is a recent college graduate, living with family members, is not
paying rent, or is otherwise unable to verify housing history, he or she must meet the minimum
credit requirements

For Borrowers that currently own or have owned a property free and clear, this requirement will
be waived for any period where there was free and clear ownership. A copy of the title or credit
report must document the free and clear status.
Verification of Mortgage (VOM)
The following are acceptable for verifying mortgage payments:

An institutional verification of mortgage (VOM)

Copies of canceled checks (front and back)

Bank statements

A current credit bureau report
Third-party verification or copies of canceled checks (front and back) are always required for non-arm’s length
verifications of mortgage (private mortgage, Land Contract/Contract-for-Deed, or Lease Option to purchase).
Verification of Rent (VOR)
Any of the following documents are acceptable for verifying rent payments:
Page 25 of 96

An institutional Verification of Rent form

A letter and rating from a property management company

Copies of canceled checks (front and back)

A credit supplement for a rental rating
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Third-party verification or copies of canceled checks (front and back) are always required for non-arm’s length or
private party verifications of rent (related landlords, seller landlords, employers or any interested party to the
transaction).
To use rental history as a tradeline, the Borrower must verify rent using copies of canceled checks (front and back).
If the Borrower does not have a checking account, money orders may be accepted if they are valid and legible, are
purchased from a legitimate vendor, and can be validated by conducting a telephone audit with the vendor.
ANALYZING DELINQUENT MORTGAGE/HOUSING PAYMENTS
Mortgage/housing payment history is determined as follows:

Rolling Lates. Consecutive, identical delinquencies. There is no limit to the number of rolling
delinquencies that can occur to be counted as one event.

Intermittent Lates A pattern of late payments that is not consecutive, but is broken into
intervals.

Progressive Lates Delinquencies that increase in severity. The most severe delinquency
reached is considered one event.
When evaluating the mortgage/housing history, all delinquencies must be added. For example, if the Borrower has a
First and Second Mortgage on his or her property and each one had one late payment (1x30) in the last 12 months,
the Borrower’s mortgage/housing history is equal to two late payments (2x30).
Mortgage/housing delinquencies must be calculated as follows (with the mortgage history beginning in January and
read from right to left):
Example 1:
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
1
1
C
1
1
1
1
1
1
2
2
2
30
30
30
30
30
30
30
30
60
60
60
This account would be counted as 1x60 rolling and 2x30 rolling for determining the mortgage/housing component of
the grade determination. The eight 30-day and the three 60-day delinquent payments are counted as two 30-day
rolling delinquencies and one 60-day rolling delinquency because there is no limit to the number of rolling lates that
are considered one event.
Example 2:
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
C
C
C
C
1
1
1
1
1
3
2
2
30
30
30
30
30
90
60
60
This account would be counted as 1x90 non-rolling and 1x30 rolling for determining the mortgage/housing component
of grade determination. The two 60-day and the one 90-day delinquency are considered a progressive delinquency
and one event. The five 30-day delinquencies are rolling and considered one event because there is no limit to the
number of rolling lates that are considered one event.
GRADE DETERMINATION
The Borrower’s grade is based on the following factors:
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
Housing (mortgage/rental) payment history

Credit score

Bankruptcy history

Foreclosure history

Loss mitigation history, including non-foreclosure actions such as deed-in-lieu, NOD, preforeclosure sale, short sale, short refinance and modification

Required Program Reserves
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The Borrower’s least favorable factor will determine the credit grade. For example, a negative rating on a mortgage
will determine the credit grade if it is worse than the aging of the bankruptcy.
The debt-to-income (DTI) ratio, adverse credit, residual income, and reserve requirements must also be met. For
details on determining grade, refer to the Galton Funding Credit Grade Matrix.
QUALIFYING RATIOS
Qualifying ratios are ratios used to calculate the Borrower’s debt versus collateral and debt versus income in order to
qualify the Borrower for a Loan Program. Note that all Loan Programs limit the ratios allowed when underwriting the
loan. For specific details, refer to the Galton Funding Loan Program Matrices.
LOAN-TO-VALUE (LTV) AND COMBINED LOAN-TO-VALUE (CLTV) RATIOS
Calculating LTV Ratio
The loan-to-value (LTV) ratio is the loan amount divided by the value of the Mortgaged Property. The combined loanto-value (CLTV) ratio is the sum of all liens on the Mortgaged Property divided by the value of the property. Note that
all Loan Programs offered limit the maximum LTV ratio allowed and may have seasoning requirements when
underwriting the loan. Value is determined as follows:
Determining the Value for LTV/CLTV
Purchase Transactions:

Purchase Transactions. Loans must use the lesser of the purchase price or the Appraised Value
as the value amount for calculating the LTV/CLTV ratios. The purchase price can be documented
using the original, fully executed purchase agreement or the closing statement (HUD-1).
Refinance Transactions:

Cash-Out Refinance. Loans on properties owned less than 12 months must use the lesser of the
purchase price plus the added value of any documented improvements or the Appraised Value as
the value amount for calculating the LTV/CLTV ratios. Cash-Out Refinance Loans on properties
owned more than 12 months may use the Appraised Value as the value amount for calculating the
LTV/CLTV ratios. The purchase price can be documented using the closing statement (HUD-1)
from the original financing. The value of the improvements must be documented for each
improvement.

Rate/Term Refinance. The Appraised Value can be used as the value amount for calculating the
LTV/CLTV ratios.
Lease Option to Purchase:
Lease Options must be treated as purchases for disclosure/documentation purposes. A rescission notice is
not required.

Less Than 12 Months’ Seasoning. A documented lease with a lease option-to-purchase will be
treated as a purchase transaction when there is less than 12 months of seasoning. The lesser of
the Lease Option price or the Appraised Value will be used to determine the LTV/CLTV.

At Least 12 Months’ Seasoning. The Lease Option will be treated as a refinance transaction if
there is at least 12 months of seasoning. The Appraised Value will be used to determine the
LTV/CLTV.
Construction-to-Permanent Refinances:
A Construction-to-Permanent transaction may be closed as a purchase, limited Cash-Out Refinance or a
Cash-Out Refinance. When a refinance is used, the Borrower must have held legal title to the lot before he
applied for the construction financing and must be named as the Borrower for the Construction Loan.

Cash Recapture. When the Borrower wishes to recapture monies paid out-of-pocket and to pay off
an existing Construction Loan, the loan will be considered a purchase transaction. Evidence of the
acquisition cost of the property will be required. The lower of the total acquisition cost (lot plus
improvements) or the Appraised Value will be used to determine the LTV/CLTV ratios:

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Owned Less Than 12 Months. If the lot was purchased less than 12 months prior to the
date of application, the value of the lot will be based on the lower of the purchase price or
land value as indicated on the appraisal.
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
Owned at Least 12 Months. If the lot has been owned for more than 12 months, the
value will be determined by the appraisal.

Construction Loan Payoff. When the Borrower does not require cash recapture and the proceeds
from the loan are being used to pay off the construction financing and closing costs, the loan will be
considered a Rate/Term Refinance transaction. The Appraised Value will be used to determine the
LTV/CLTV ratios.

Equity Withdrawal. When the Borrower wishes to withdraw equity, the loan will be considered a
Cash-Out Refinance transaction. Program guidelines for allowable cash-out limits must be met.
The LTV/CLTV is determined by one of the following:


Owned Less Than 12 Months. If the lot was purchased less than 12 months prior to the
date of application, the lesser of the Appraised Value or acquisition cost of the lot plus
the documented cost of property improvements will be used.

Owned at Least 12 Months. If the lot has been owned for more than 12 months, the
LTV/CLTV will be determined by the current Appraised Value.
Borrower/Builder Transactions are considered non-arm’s length transactions and are ineligible.
Land Contracts, Installment Land Contract, Contract for Deed Refinance (applies to both recorded
and unrecorded transactions):
Land Contracts must be treated as refinances for documentation purposes. The Borrower must be given the
right to rescind the transaction.

Executed Less Than 12 Months. If the Land Contract/Contract for Deed has been executed for less
than 12 months, then the LTV will be based on the current Appraised Value or the
purchase/contract price, whichever is less.

Executed at Least 12 Months. If the Land Contract/Contract for Deed has been executed for at
least 12 months, the LTV will be based on the current Appraised Value.
Inherited Property:
If the subject property was inherited less than 12 months prior to application, the transaction is deemed a
Special Purpose Cash-Out Refinance and is subject to the following:

Proceeds are used to buy-out the documented equity interest of others. Equity owners must be
paid through settlement

The Mortgaged Property has cleared probate and property is vested in the Borrower’s name, AND

Current Appraised Value is used for LTV/CLTV determination
HOUSING AND DEBT-TO-INCOME RATIOS
The debt-to-income (DTI) ratio is the sum of all the Borrower’s applicable monthly debt obligations divided by the
Borrower’s gross monthly income. The Seller must verify all of the Borrower’s outstanding liabilities. Note that all
Loan Programs offered limit the maximum DTI ratio allowed when underwriting the loan – refer to the Galton
Funding Credit Grade Matrix for details. The following debts must be included in the Borrower’s DTI ratio:


Page 28 of 96
Qualifying rate for monthly housing expense calculation:
‒
Fixed Rate Loans qualified using the fully amortized payment calculated at the note rate
‒
Adjustable Rate (ARM) Loans qualified using the higher of the fully indexed rate or the
initial note rate plus the periodic adjustment (2%)
‒
Interest Only Loans qualified at the note rate based on the fully amortizing Principal &
Interest payment during the principal repayment period. Borrowers will not be qualified on
the interest only payment amount.
Monthly housing expense includes the following charges divided by the Borrower’s stable
monthly income:
‒
Monthly principal and interest payment (as per the qualifying rate)
‒
1/12th of the annual hazard insurance premium
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

‒
1/12th of the annual real estate taxes and assessments
‒
1/12th of the annual flood insurance premium, when applicable
‒
1/12th of the annual private mortgage insurance premium (when applicable)
‒
Monthly leasehold payments (when applicable)
‒
Monthly HOA dues, condominium maintenance fees, monthly assessments (when
applicable)
‒
Monthly payment for other secured financing (when applicable).
For equity lines of credit (as applicable), the monthly payment used for qualification should be
based on the greater of:
‒
The payment noted on the credit, OR
‒
1% of the maximum current available draw
The DTI ratio includes the monthly housing expenses plus the following charges:
‒
Revolving charges (if no payment is showing on the credit report, use 5% of the
outstanding balance)
‒
Installment debt with 10 or more remaining payments if the inclusion of this installment debt
would cause the Borrower’s DTI to be > 5% over the program allowance, up to a max DTI
of 60%, additional compensating factors and/or documentation would be required to offset
the risk
‒
Real estate loans
‒
Real estate net rental losses from all investment properties owned
‒
Automobile loans
‒
Automobile leases (must be included in the DTI even if fewer than 10 payments remain)
‒
Net rental losses from real estate owned
‒
Alimony, child support, or maintenance payments with 10 or more remaining payments
‒
Joint obligations, if applicable, for divorced or separated Borrowers
‒
Student loans, whether deferred, in forebearance, or in repayment (not deferred)
‒
Monthly paid charge accounts, such as an Amex account, payment will not be included but
outstanding balance amount will be netted out of available assets
For maximum DTI ratio allowed when underwriting the loan, refer to the Galton Funding Credit Grade Matrix for
details.
PAYMENT SHOCK
Payment shock is the percentage that a Borrower’s mortgage/housing payment increases with the new loan. One of
the strongest indicators of a Borrower’s ability to repay is his/her past record of handling housing payments. The
percentage of payment shock, even when not limited expressly by the Loan Program will be analyzed to determine
the likelihood of the Borrower to pay promptly. Generally, payment shock >150%, may require further review and
additional compensating factors and/or documentation may be required.
SECOND TRUST DEEDS, JUNIOR LIENS, AND SECONDARY
FINANCING
Second trust deeds, junior liens, and secondary financing (subordinate liens) are defined as mortgages having rights
that are secondary to a First Mortgage. These are encumbrances on real estate (for example, a Second Mortgage, a
tax lien or a mechanic’s lien), where the priority of the secondary financing is subordinate to that of another recorded
interest in the same property.
This section outlines the requirements for junior liens or secondary financing that is not the subject Loan being sold to
Galton Funding.
Page 29 of 96
7/7/16
Seller must investigate whether the Borrower has applied for any simultaneous loan or subordinate financing,
including one that will occur after consummation of the Galton Funding First Mortgage if the simultaneous loan will
cover the closing costs of the First Mortgage. The following rights and restrictions apply to second trust deeds,
junior liens, and secondary financing when Galton Funding is purchasing a First Mortgage with non-Galton
Funding secondary financing:

The CLTV ratio of the first and secondary lien must not exceed the limit outlined in the
applicable Galton Funding program matrix. Refer to the Galton Funding Loan Program
Matrices for details. The CLTV is calculated by adding the principal balance of the First
Mortgage with the current principal balance of the subordinated closed-end second lien or the
maximum available credit line of a subordinated open-end second lien and then dividing the
sum by the Appraised Value of the property.

A copy of the executed second lien note, recorded trust deed, and signed subordination
agreement must be provided to confirm the loan amount, terms, and lien status.

Terms of the subordinate lien must be less than or equal to the term of the First Mortgage.

The subordinate lien must have a minimum remaining term of no less than five years, unless
the financing fully amortizes prior to that time.

The financing must not permit the note holder to “call” the financing within the first five years
following the loan closing.

The note rate must be at market rates.

The secondary financing must not have a negative amortization feature.

The terms of the note must provide for regular monthly payments of at least the interest due
with no provisions for future advances or wrap-around terms.

Monthly payments on the secondary financing must be included in the Borrower’s debt-toincome ratio.

Payments may be graduated or variable, as long as the annual payment adjustment of the
secondary financing does not exceed a 2% interest rate increase.

The subordinate lien must be from an institutional lender.
Home Equity Lines of Credit
Secondary or subordinate financing that is a Home Equity Line of Credit (HELOC) is subject to the following:

The calculation of the CLTV must include the total usable Home Equity Line of Credit.

For qualification purposes, in calculating the monthly housing payment, use the following:
‒
For an existing subordinate lien, use the total usable line of credit and the interest rate in
effect at the time of application. If there is no balance, then no payment will need to be
used.
‒
For a simultaneous Home Equity Line of Credit (originated with a new First Mortgage), use
the amount to be drawn at funding. The ATR repayment calculation method for
simultaneous loans must be used.
Second Trust Deeds, Junior Liens, and Secondary Financing Documentation Requirements
The following outlines the documentation requirements for secondary financing and junior liens.
If the secondary financing is a simultaneous closing, then the following items are required:

A copy of the loan approval from the institution providing the secondary financing prior to
closing, AND

A copy of the executed note at closing
If the secondary financing is a subordinate, then the following items are required.
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7/7/16

The terms of the current Second Mortgage. If unable to discern from credit, the Seller must
obtain a copy of the terms from the lender

An unsigned copy of the subordination agreement prior to closing, AND

A copy of the executed subordination agreement at closing.
SALES AND FINANCING CONCESSIONS
For purposes of determining the impact of costs paid by the Seller or an interested third-party, distinctions are made
between financing concessions and sales concessions.
Financing concessions are considered to be funds originating from an interested party to pay closing costs on a
purchase transaction. These are sometimes referred to as seller-paid closing costs. Allowable financing concessions
include:

Payments in any form that are related to the financing; for example, discount points,
Commitment fees, appraisal fees, and origination fees

Contributions related to the mortgage financing charges which traditionally would be paid by the
Borrower, including but not limited to the payment of discount points, loan fees, Commitment
fees and/or origination fees, property taxes, and insurance escrows

Cost of other items traditionally paid by the Borrower such as application fees, appraisal fees,
transfer taxes, tax stamps, attorney fees, surveys, non-recurring closing costs and title
insurance, AND

HOA dues are not allowed to be included in an interested party contribution
Concessions not addressed above or in excess of the allowed percentage of the purchase price are considered to be
a sales concession.
The Mortgaged Property sales price must be reduced to reflect the amount of any sales concession that exceeds the
limits below. The LTV ratio is calculated using the lesser of the reduced purchase price or Appraised Value.
Financing concessions for primary residences and second homes are limited to the following percentages:

6% of the value for Loans with LTV/CLTV ratios less than or equal to 90%

3% of the value for Loans with LTV/CLTV ratios greater than 90%
The appraisal must reflect subsidies, contributions, or sales concessions that have an effect on the market value of
the property.
LIABILITIES
The Borrower’s liabilities and debts include all installment loans, revolving charge accounts, contingent liabilities (cosigned debts), lines of credit, mortgage loans, alimony/child support, student loans, auto leases, and all other ongoing
debts. Seller must verify payments on all simultaneous loans, such as HELOCs. Auto lease payments are included in
the debt-to-income (DTI) ratio regardless of the remaining months indicated on the credit report.
DEBT TO INCOME CALCULATIONS
In addition to the subject mortgage payment, the following debts should be included in the calculation of the debt-toincome ratio (DTI):
Page 31 of 96

Other mortgage payments including principal, interest, property tax, and property insurance. If
the senior lien is an Adjustable Rate Mortgage (ARM), Borrowers must be qualified at the
greater of the Note rate plus 2%* or the fully indexed rate using the fully amortizing principal
and interest payment. Private mortgage insurance premiums and Homeowners’ Association
dues or ground rents should be included, if applicable.

Monthly payment reflected on credit report can be used to calculate the DTI. If no monthly
payment is stated on the credit report or other form of verification, 5% of the outstanding
balance on the account must be used.

Outstanding installment debts with 10 months or less remaining and debts to be paid off at
closing do not have to be calculated in the DTI.
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
Auto leases must always be included in the DTI, regardless of the number of payments
remaining.
Co-signed debts will not be included in the DTI if sufficient proof is provided that the primary debtor makes the
payments. Sufficient proof consists of at least six months canceled checks from the primary debtor evidencing the
proper payment amount and payable to the proper creditor.
INSTALLMENT DEBT
Installment debt is the monthly obligation on accounts with fixed payments and terms. Installment debts include car
loans, student loans, etc. The monthly payment may be excluded from the DTI calculation if there are less than 10
monthly payments remaining to pay the debt in full and the payment is not substantial. If there are less than 10
payments remaining and the payment is substantial (exceeds 5% of the Borrower’s qualifying income), the debt must
be included in the Borrower’s DTI calculation.
A payment is defined as substantial when it equals or exceeds 5% of the Borrower’s qualifying income. These
payments must be included in the Borrower’s DTI calculation. Installment debts showing the term of the debt to be 10
months or less at closing will not be considered in the debt-to-income (DTI) ratio. Paying down of installment debts
to 10 payments or less to qualify is not allowed. The installment debt must be paid off if the payment is excluded
from the Borrower’s DTI calculation.
Installment debt that is paid in full prior to or at closing may be excluded from the DTI provided the HUD-1 reflects the
payoff.
If an installment debt payment does not show on a credit report, a credit supplement or loan statement is required.
REVOLVING DEBT
Revolving debt is open-ended debt of which the principal balance on an account may vary from month to month. The
minimum required payment as stated on the credit report or current statement should be used in calculating the DTI
unless as noted below. Revolving debt may not be paid down for qualification purposes but may be paid off and
closed.
The following debts must be considered as a recurring monthly debt obligation:

The credit report balances suggest that more than 10 payments remain to be paid regardless of
whether the loan application indicates the debts will be paid off at or prior to closing

The credit report does not show a required minimum payment amount and there is no
supplemental documentation to support a payment of less than 5%. In this situation, an amount
equal to a minimum of $10.00 or 5% of the outstanding balance must be used as the
Borrower’s recurring monthly debt obligation.

If a revolving or open account is to be paid off or paid down but not closed, a monthly payment
on the current outstanding balance should be considered as a long-term debt.
ALIMONY/CHILD SUPPORT/SEPARATE MAINTENANCE OBLIGATIONS
Monthly alimony, child support or separate maintenance fees with 10 or more payments remaining must be included
in the DTI.
Divorce Debt
Debts opened jointly with a former spouse will be considered an obligation of the Borrower unless a legal separation
agreement or divorce decree is provided to prove the former spouse is responsible for the debt, otherwise it will be
counted as Adverse Credit.
NEGATIVE CASH FLOW FROM RENTAL PROPERTY/OTHER REAL ESTATE
OWNED
The tax and insurance expense for all properties owned by the Borrower must be documented and accounted for in
Borrower’s Debt-to-Income ratio. For properties that are rented, the expense may be deducted from rental income.
For properties that do not receive rental income, the tax and insurance expense must be part of the Borrower’s
liabilities.
Real estate net rental losses from all investment properties owned must be included in the DTI.
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CURRENT PRINCIPAL RESIDENCE – PENDING SALE
If the Borrower's current principal residence is pending sale, but the transaction will not close with title transfer to the
new owner prior to the subject transaction, and the Borrower is purchasing a new primary residence, the current
PITIA and the proposed PITIA must be used in qualifying the borrower for the new mortgage loan.
However, Galton Funding will not require the current principal residence's PITIA to be used in qualifying the Borrower
as long as the following documentation is provided:

The executed sales contract for the current residence, and

Confirmation that any financing contingencies have been cleared
BUSINESS DEBTS
Business debts for which the Borrower is personally liable must be included in the debt calculation. This includes
business paid personal debt, unless proof of payment by the business is established. If the account is new, it must be
included in the DTI calculations. These debts may be excluded if a minimum of 12 months of consecutive canceled
checks from the business are provided.
Business debts for which the Borrower is not personally liable will not be considered in the Borrower’s total monthly
debt if canceled checks drawn on the business account indicate they have been paid on a regular basis for a
minimum of six months.
UN-REIMBURSED BUSINESS EXPENSES
When evaluating the Borrower’s income, the Seller must consider certain tax deductions (as applicable for income
documentation program requirements) reported on IRS Form 2106 (Employee Business Expenses):

Out-of-pocket, unreimbursed business expenses: These expenses must be deducted from the
borrower’s income.

Actual expenses for a leased automobile, rather than the standard mileage rate. The Seller
must analyze the “Actual Expenses” section of IRS Form 2106 to determine the amount of the
lease payments, and make sure the lease expense is counted only once in its cash flow
analysis, either as an expense on IRS Form 2106 or as a monthly obligation.
AUTOMOBILE DEPRECIATION
If a borrower claims a “standard mileage” deduction, the business miles driven should be multiplied by the
depreciation factor for the appropriate year, and the calculated amount added to the borrower’s cash flow.
If a borrower claims an “actual depreciation expense” deduction, the amount the borrower claimed should be added
to the borrower’s cash flow.
DEBT PAYOFF
If the Borrower indicates debt will be paid at the closing of the new mortgage, Galton Funding will not include the
payment in the DTI ratio. The paid statement(s), canceled check(s), or a settlement statement (HUD-1) evidencing
payment must be submitted in the Loan File. Paying down of installment debts to less than 10 payments to qualify is
not allowed.
CO-SIGNED DEBT / CONTINGENT LIABILITIES
If the Borrower is a co-signer or guarantor on any loans, those liabilities must be indicated on the application. Debts
that have been co-signed by the Borrower may be excluded from the Borrower’s DTI under the following scenarios. In
every situation, the debt must be paid current and as agreed for at least the previous 12 months.
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
Satisfactory documentation is provided to prove that the primary debtor has been making the
payments on a regular basis. At least 12 consecutive months of canceled checks from the
primary debtor are required

Property resultant from buyout of former co-owner (i.e., divorce). The Loan File must include
evidence of transfer of ownership
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
Mortgage assumed by third-party without a release of liability. A copy of the formal assumption
agreement and evidence of transfer of ownership should be in the Loan File. Do not include
payment history and assumption does not need to release the Borrower from liability

Court ordered debts - a copy of the court order assigning the debt to another party is required

Co-signed accounts paid by a third-party, with 12 months of cancelled checks evidencing
payment by the third-party
If these requirements cannot be satisfied, then the liability must be indicated on the application and considered as a
monthly debt payment for mortgage eligibility purposes. Co-signed debts must be paid satisfactorily (0x30), or they
will be counted as Adverse Credit.
RETIREMENT / SAVINGS PLAN LOANS
Repayment for loans against a financial asset such as retirement, savings plan, or insurance policy may be excluded
from the DTI provided the Borrower can repay the debt by liquidating the asset. The value of the asset must be
reduced by the amount of the debt when calculating total assets and/or reserves.
STUDENT LOANS
Deferred student loans are included in the DTI as a long-term obligation. Student loans can be counted in credit
depth as long as they are in repayment and not being deferred. Student loans listed as delinquent must be brought
current.
If no payment is shown on the credit report for a student loan payment, then proof of payment should be provided by
student loan lender. If payment is unable to be determined, use 1% of the original loan amount.
If a student loan is charged off or in collection, the following must be provided:

A copy of repayment agreement and six months cancelled checks
OR

If not in repayment evidence it won’t affect title
INCOME
This section describes Borrower income. Income analysis is a key element of the underwriting process and is used to
determine whether the Borrower’s ability to repay is reasonable.
Income documentation provided by the Borrower must be reviewed and adequately verified. Additionally, the income
must be considered stable, likely to continue, and sufficient to enable the Borrower to repay the debt in a timely
manner. Material inconsistencies must be investigated.
INCOME VERIFICATION REQUIREMENTS
The Borrower must provide evidence of two years stable income derived from employment or other acceptable and
verifiable sources. A complete 2 year history of employment and/or source of income must be stated on the 1003
application. There must also be a reasonable expectation that the income will continue in the foreseeable future and
that such income must be sufficient for repaying the proposed monthly debts. Employment across different jobs in the
same or related line of work is acceptable. Borrowers who have made job changes for advancement and maintained
a stable earning capacity, as well as Borrowers with demonstrated job stability will receive favorable consideration.
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
Employment gaps that extend beyond 30 days require an explanation letter from the Borrower.

Paystubs and salary vouchers must be computer-generated or typed, not handwritten. In
addition, the documents must clearly identify the employer, the Borrower as an employee, show
the time period covered, and provide year-to-date earnings.

Income derived from a family-owned business must be documented by the Borrower’s federal
tax returns for the prior two years, in addition to a verification of employment.

A Borrower who finished school or military service and who does not meet the length of
employment required must provide a copy of his/her diploma or discharge papers. The potential
for future income based on job opportunities afforded such individuals, due to their extensive
training, may be considered favorable for qualification purposes.
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For loan amount and LTV/CLTV limitations, and for income type eligibility for documentation types, refer to the
Galton Funding Loan Program Matrices.
Significant Increases/Decreases in Income (Trending)
If the Borrower’s monthly income is stable or increasing, the amount of income should be averaged based on the
required number of years of documentation required for the program. A “significant“ increase or decrease is generally
considered to be anything greater than 25%.
Increase in Income: When the Borrower has experienced a significant increase in income, the higher income may
not be used to qualify the Borrower, unless there is sufficient documentation to determine that the increase is stable
and likely to continue at the level used for qualifying (e.g., that the income is not a one-time incentive payment).
When the Borrower’s current income decreased from the prior year, the lower income amount should be used for
qualifying purposes instead of the averaged income.
Decrease in Income: When the Borrower has experienced a significant decrease in income, the income cannot be
averaged using a previous higher level unless there is documentation of a one-time occurrence (e.g., injury) that
prevented the Borrower from working or earning full income for a period of time and proof that the Borrower is back to
the income amount that they previously earned.
Disposable/Residual Income
Borrowers must have residual income to maintain housing/living expenses. To calculate the Borrower’s residual
income, subtract the total monthly expenses from the total monthly income. For residual income requirement, refer to
the Galton Funding Loan Program Matrices.
Verbal Verification of Employment (VVOE)
A Verbal Verification of Employment (VVOE) must be performed for each Loan submitted to Galton Funding for
purchase. Written evidence of phone contact with the Borrower’s employers, completed within 10 calendar days prior
to the Note Date or prior to delivery to Galton Funding, The verification must identify the name of the person who
made the contact, identify the employer and the name and title of the person contacted, show the date of contact, the
source of the phone number and confirm that no change in employment status has occurred, regardless of
documentation and that the Borrower is currently employed.
Verbal Verification of Employment for Salaried, Hourly and Commission Income:

A verbal verification must be performed within 10 business days prior to the Note Date or prior
to delivery to Galton Funding.

The phone number of the employer should be obtained independently and not taken from the
application

Employer should confirm the Borrower’s current employment status and title.

Third-party verification sources may be used

The written VVOE Form should include:
‒
Date of the verification
‒
Source used to obtain the phone number (i.e. internet).
‒
Name and title of the person at the employer’s office who confirmed the employment
‒
Name and title of the person who completed the VVOE
Verbal Verification of Employment for Self-Employed:
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
Verbal Verification of Employment (VVOE) for Self-Employed Borrowers must verify the
existence of the Borrower’s business within 30 calendar days prior to the Note Date or for
escrow states, the Loan funding date, or prior to delivery to Galton Funding.

This verification can be made with a third party, such as a CPA, regulatory agency or
applicable licensing bureau, or by verifying the phone listing and address for the business using
the internet or directory assistance. It is also necessary to verify the phone listing and address
for the business.

The written VVOE Form should include:
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‒
Date of the verification
‒
Source of the verification of the phone listing and the address of the business ( i.e. internet)
‒
Name and title of the CPA or details of other source used to verify the business; and
‒
Name and title of the person who completed the VVOE
INCOME TYPES
The Borrower must be employed as a salary/wage earner, be self-employed, or have a source of verifiable nonemployment income. All income sources must be shown on the application and verified for each applicant.
Salary/Wage Earner Income
A salary/wage earner derives income through employment at a business where he or she has little or no ownership
interest. A two-year employment history must be established for each Borrower. Compensation may be based on an
hourly, weekly, bi-weekly, semi-monthly or monthly basis.
Bonus, commission, overtime, and gratuity income is compensation in addition to the Borrower’s straight salary or
hourly wage. Galton Funding will accept stable bonus, commission, overtime, or gratuity income that has been
received for two years and verified according to Galton Funding program guidelines. Borrowers must have a two
year history of earning bonus, commission, overtime or gratuity income in order for the income to be included for
qualification purposes.
Self-Employed Income
Self-Employed Borrowers must be carefully evaluated because their financial ability to repay debts is directly related
to the success of the company and to the stable income and expenses of the business.
Self-Employed Borrowers are identified as follows:

Borrowers who derive 25% or more of their primary income from a business in which they hold
a controlling interest.

Borrowers who do not own a business but who derive their primary income from commissions,
consultation fees, interest, capital gains, gratuities, or real estate rents.

Borrowers who rely on investments for income such as interest, dividends, capital gains, or real
estate.
At least two consecutive years of self-employment and evidence of ongoing stable income are required. Business
income must be reported as a sole proprietorship, partnership, or corporation.
Evidence of Self-Employment
Documentation to support the Borrower’s self-employment in a legitimate and active business covering the
most recent two years must be obtained.
One of the following may be used for verification of the business:

A copy of the business license covering the most recent two years.

A copy of the business license for the current business year and a verbal verification through the
issuing municipality confirming the business is current and active and has been in existence for two
full years.

Alternative documentation may be used only if a license is not required for the particular type of
business. They include:
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
Dunn and Bradstreet report

Articles of incorporation

Fictitious business name filing

Title registration

Liability insurance or surety bond

Letter from a certified public accountant (CPA)

Letters of reference (acceptable for small businesses only)
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For Borrowers who operate a business from the Mortgaged Property (such as a home day-care facility, a
bed and breakfast, or an auto repair shop), additional property type restrictions exist. For further details,
refer to the Property Type section in this Guide.
Self-Employed Income Calculation
Income documentation should be reviewed for increasing or decreasing trends by comparing the current
income and the income from the prior year. When calculating the Borrower’s self-employed income, use the
Fannie Mae Self-Employed Income Analysis Form 1084A or 1084B.
Sole Proprietorship Income
Self-employed income will be determined by averaging the income from the tax returns, including all
schedules and attachments (Schedule C). Income from the year-to-date Profit and Loss Statement (P&L)
may be included in the income calculation if consistent with earnings from previous years.
Deductible expenses for the business that are attributable to non-cash expenses are depreciation, depletion,
amortization, or non-operating losses (NOL) that have been carried forward (loss taken in previous years
that is taken as a deduction to taxes). These non-cash expenses may be added back to the net income/loss
for qualifying purposes and are defined as follows:

Depreciation is a deduction for the decline in value of an asset such as real or personal property
and is not an out-of-pocket expense.

Depletion is a deduction for the useful life of a natural resource and is not an out-of-pocket
expense.

Amortization of an asset spreads the asset’s cost over the asset’s useful life. It may include start-up
costs. Examples are a copyright or a patent. Amortization is not an out-of-pocket expense.

Non-operating loss (NOL) is a business loss that occurred prior to the current tax year. The full
loss is not recognized in the year it occurred, but is spread over future years and is not an outof-pocket expense after the year it occurred.
A partnership is formed when two or more individuals form a business and share profits, losses, and
responsibility for running the business. The partnership does not pay the taxes. The income/loss is passed
through to the partners based on the percentage of capital ownership and is reported on a K-1.
Partnership cash flow is determined by analyzing the 1065 tax return and giving credit for ordinary income,
depreciation, and depletion. Amortization or casualty loss deductions listed under other deductions may be
added to the total. Discretionary losses will be excluded from the cash flow analysis if the business is a
limited partnership and the Borrower provides a copy of the partnership agreement stating that all
subsequent contributions are voluntary.
Corporate Income
A corporation is a state-chartered business that is owned by stockholders. Stockholders are not personally
liable for the debts of the corporation. Although legal control of the corporation rests with its stockholders,
they are not responsible for the day-to-day operations of the business, as they delegate that responsibility to
a board of directors and officers of the company.
Corporations must file corporate tax returns (Form 1120) to report income and losses. Officers who are
principals of the corporation generally report their income on a W-2. Income may be determined by using an
average of the Borrower’s earnings for the past two years. Additionally, business tax returns must be
analyzed to assess the likelihood of continued personal income to the Borrower.
Corporate Income Analysis
To calculate corporate income, total tax must be deducted from taxable income, and factors such as
depreciation, depletion, or net operating loss (NOL) deductions listed on the return are added back. Other
deductions, including amortization and casualty losses, may also be added back.
Retained earnings in the business are not recognized as cash flow to the Borrower or to the company.
Income from the corporation is recognized as income to the Borrower if he or she is the sole and full owner,
and if the withdrawal of funds will have no effect on the corporation’s continued growth.
S-Corporation
An S-corporation operates like a standard corporation; however, any profit or loss from the company is
passed to the owners through Schedule E of the 1040s. Stockholders are taxed at individual tax rates for
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7/7/16
each proportionate share of ownership. Income for an owner that comes from wages is declared on the
individual’s tax return.
S-corporation K-1 income is determined by giving credit for any guaranteed payments or salary and property
distributions (including cash) made to the Borrower.
When analyzing Form 1120S, only the Borrower’s share of income or loss adjustment should be used to
calculate income. The Borrower’s share is based on his or her percentage of stock ownership as reported on
the Schedule K-1. Depreciation, depletion, and amortization or casualty loss may be added back to income.
Other non-recurring income/loss should be subtracted/added back.
Retained earnings in the business are not recognized as personal cash flow to the Borrower or to the
company.
Allowable Age of Federal Income Tax Returns
The “most recent year’s“ tax return is defined as the last return scheduled to have filed with the IRS.
If Today’s Date is:
Then the Most Recent Year’s Tax
Return would be:
February 15, 2016
2014
April 15, 2016
2015
December 15. 2016
2015
For business tax returns, if the Borrower’s business uses a fiscal year (a year ending on the last day of any
month except December), the Seller may adjust the dates in the above chart to determine what year(s) of
business tax returns are required.
In all cases, the tax returns for the current year are required as of June 30, rather than October 15th.
If the Borrower has filed an extension and does not file by June 30th, the Loan is ineligible.
Under the Alt Doc- 12 Month Verification (Self-Employed only) program, the Borrower must submit
the current year’s required tax returns. Extensions are not allowed.
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Application Date
th
October 15
(current year
minus 1) to April
th
14 , current year
Disbursement
Date
th
Documentation Required
October 15
(current year
minus 1) to April
th
14 , current year
The most recent year’s tax return is required. The use
of Tax Extension (IRS Form 4868) is not permitted.
April 15, current
year to June 30,
current year
The previous year’s tax return (the return date is April
of the current year)
If the Borrower has files their tax return for the previous
year, the Seller must obtain copies of that return. If the
Borrower has not filed their tax returns, the Seller must
obtain copies of the tax returns for the prior two years.
Galton Funding requires tax transcripts on all Borrowers for
the number of years required to verify income.
April 15, current
year to June 30,
current year
July 1 current year
to December 31,
current year
January 1, (current
year plus 1) to April
th
14 , (current year
plus 1)
The Seller must obtain:

The most recent year’s tax return, OR all of the
following:

A copy of IRS Form 4868 (Application for
automatic Extension of Time to file U.S Individual
Income Tax Return) filed with the IRS

The Seller must review the total tax liability
reported on IRS Form 4868 and compare it with
the Borrower’s tax liability from the previous two
years as a measure of income source stability and
continuance.

An estimated tax liability that is inconsistent with
previous years may make it necessary to require
the current returns in order to proceed.

IRS Form 4506-T transcripts confirming “No
Transcripts Available” for the applicable tax year,
AND

Tax Returns for the prior two years.
The most recent year’s tax return is required. The use of a
Tax Extension (IRS Form 4868) is not permitted.
Examples:
If the 2014 self-employed income has increased from 2013, is being used for qualifying purposes and the
Borrower has filed an extension for the 2014 tax returns:

The Seller must obtain the 2013 and 2012 tax returns and a year-to-date Profit and Loss
Statement (audited)
If the 2014 self-employed income has decreased from 2013, is being used for qualifying purposes and the
Borrower has filed an extension for the 2014 tax returns:

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The Seller must obtain the 2013 and 2012 tax returns and a year-to-date Profit and Loss
Statement (Unaudited)
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Borrowers Not Required to File Tax Returns with the IRS
There are some instances where a Borrower was not required to file a tax return for the prior year. Acceptable
examples may include:

Newly employed Borrower who was a full-time student the most recent tax year
‒ School transcripts are required for documentation

Borrower whose income level was below the minimum reporting standards as required by the
IRS
‒ Examples include Borrowers who receive disability, Social Security, or pension income
and indicate that they are not required to file tax returns

Active duty military that meet all the requirements to be granted an extension by IRS in
accordance with IRS Publication 3-Armed Forces’ Tax Guide.
In addition to the specific requirements noted above, the Loan must be satisfactorily documented to:

Support the income used for qualifying

Document the reason a tax transcript is not available

Include a tax transcript indication “No Record Found” or IRS Verification of Non-Filing Form
Amended Tax Returns
Tax Returns that are amended and filed by the Borrower with the IRS are acceptable in the following circumstances:


Tax Return Amendment filed prior to the Loan application date

Tax returns filed prior to application are acceptable. The original filed return, the amended return
and a letter of explanation from the Borrower (or Borrower’s accountant) are required.

If the file was amended 60 days or less prior to the application, evidence of payment must also be
provided.
Tax Return Amendment filed after the Loan application date

A letter of explanation regarding the reason for the re-file

Evidence of filing

Evidence of payment or the evidence of the ability to pay the tax

Borrower does not require use of amended income (if increased) for qualification
Under no circumstances are amended returns acceptable if the Loan has already been reviewed and/or deemed
ineligible for purchase by Galton Funding.
Bank Statement Income
For qualifying information and eligibility for use of Bank Statement Income, please refer to the Loan Programs chapter
of this guide.
Fixed Income
Galton Funding defines fixed income as income derived from sources such as social security and supplemental
(dependent’s) social security, temporary or permanent disability, VA disability, retirement/pension, or alimony/child
support. If a type of fixed income is used to qualify the Borrower, proof of income and probability of continuance for at
least three years must be provided. Some forms of fixed income can be non-taxable. Verified non-taxable income will
be given special consideration if it is determined that such income will continue for three years and that it will remain
untaxed.
Acceptable forms of non-taxable income include:

Certain military allowances

Disability retirement payments

Child support payments
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
Social security distributions

Non-taxable public assistance payments

Worker’s compensation benefits
Non-taxable income that is not allowed to be grossed up includes:

Foreign earned income

Foster care income

Housing allowance
Fixed Income Calculation
In order to evaluate a Borrower with non-taxable income in the same manner as a Borrower who has a
higher taxable income, the non-taxable income may be adjusted or grossed-up by 125%, provided that:

Only the net income will be used for determining disposable/residual income; Medicare and
insurance payments are to be omitted.

The Borrower clearly benefits as a result of income being grossed-up to qualify.

The Borrower’s net income (before gross-up) is sufficient to pay all debts.
Rental Income
Rental income may be used in qualifying a Borrower for a loan. All owner occupied two-to-four unit properties and all
investment properties require a rental income analysis to determine positive or negative cash flow. Rental income
on a second home is not allowed. One of the following is required to support leases or rental income on the
application:

Rent Survey Form 1007 and Operating Income Statement (FNMA Form 216)

Personal 1040s with Schedule E
Rental Income Calculation
Income received from rental properties will be calculated using one of the following methods:

Owned at Least One Year. For properties owned for one or more tax years, cash flow can be
calculated in one of the following manners:

75% of actual rents, established by copies of signed leases,
OR


Net income from 1040 tax return Schedule E, plus depreciation
Owned Less Than One Year. For properties owned less than one tax year, cash flow must be
based on 75% of the lesser of actual or market rents
Actual rents must be documented with copies of the signed leases. Net cash flow for properties, other than
the subject property, will be calculated using Schedule E from the Borrower’s tax returns for the past two
years.
A positive cash flow will be added to gross income; negative cash flow will be added to total liabilities and
used to qualify the Borrower.
Room rents are an ineligible source of income. If any of the units in a property are receiving room
rents than none of the rental income received for the property may be used as qualifying income.
Loans for investment properties that generate a negative cash flow will be closely scrutinized and must be
appropriate for the Borrower’s circumstances.
Rental income received from a family member may not be used as income without copies of a minimum of
six months’ cancelled rent checks provided by the tenant family member.
Rental Income from Departing Residence:
If the Borrower's current principal residence is going to be rented, the following documentation must be provided or
the entire PITIA will be included in the Borrower’s qualifying ratios. The rental amount must be documented with
either of the following:
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7/7/16


If a fully executed lease is not available:
‒
Rent Survey from the appraiser
‒
75% of the rental amount will be used
If an executed lease is available:
‒
Fully executed lease (must be non-arm’s length)
‒
Copy of cancelled check for the first month’s rent
‒
Copy of cancelled check for the security deposit
Interest and Dividend Income
Interest and dividend income may be used if verified through tax returns as stable for two years and if additional
verification is obtained as proof that the funds are still on deposit in the financial institution or investment portfolio
account.
Income must be proportionately reduced if funds are used to close in a purchase money transaction.
Capital Gain Income
Capital gain or loss that is a one-time transaction will not be considered as a gain or loss in determining the income
available to the Borrower. However, if the Borrower’s business has a constant turnover of assets that produce
recurring gains or losses, the capital gain or loss may be considered in line with the following:

An average of the gains or losses for the last two years as disclosed on the Borrower’s Form
1040 (Schedule D) will to be used to calculate the income.

When the income from this source represents a substantial portion of the Borrower’s income,
the Borrower’s tax returns for the past two years must be reviewed (regardless of
documentation type) to determine a more accurate estimate of average earnings. For example,
an asset sold during the year might be an income-producing asset, which could result in a
reduction in future income.

Borrowers must document an asset base in order to use capital gain or loss on an on-going
basis.
Farm Income
Net farm income reported on the Borrower’s income tax return (Schedule F) is eligible with the addition of
depreciation, pension, amortization, and depletion.
Military Income
Income verified for clothing allowance, quarters allowance, hardship or hazard pay may be included as stable income
if there is a likelihood of continuance. BAH and BAS allowances may be grossed up due to the nontaxable status.
Other allowances may be grossed up if documentation is provided evidencing it is nontaxable.
Employed by a Relative
Income derived from a family-owned business or from a relative must be Full or Alt documentation. Reduced income
documentation types are not eligible.
Trust Income
Trust income may only be derived from an irrevocable trust or a revocable trust where a Borrower who is the
beneficiary has also established the trust. In order to verify trust income, a copy must be provided of the original Trust
Agreement showing the length of time and amount of income that will be received. The income must continue for at
least three (3) years after closing. A Borrower’s trust income may be taxed at a lower rate or it may be part of a
partnership that writes off losses resulting in no tax liability.
A complete copy of trust agreement or certification letter from bank trust administrator outlining total income paid to
the Borrower, method of payment, duration of trust and any non-taxable portion is required. Additionally, personal tax
returns with all schedules, K-1s, or 1041s or other documentation per program guidelines are required.
Lump sum distributions made before loan closing may be used for down payment or closing costs if they are verified
by a copy of the check or the Trustee’s letter that shows the distribution amount. If a distribution was made that
reduces the Trust income, the reduction must be taken into consideration in computing the income.
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Annuity Income
Income from a retirement annuity may be used for qualification with proper documentation. A statement from the
financial institution managing the annuity is required to verify the balance in the annuity, the monthly payments and
the term of the payments to be distributed. Payments to the borrower must continue for a minimum of three years.
Note Income
Ongoing note income is eligible for loan qualification. A copy of the note outlining the amount and terms of repayment
must be provided. The repayment period must extend at least three years from the date of the new loan.
The Seller must document the regular receipt to the income for the most recent twelve months. Payments on a note
executed within the past twelve months, regardless of the duration, may not be used as stable income.
Inherited and Guaranteed Income
Ongoing income received from inheritance, prize earnings, or lottery winnings are eligible for loan qualification.
Documentation must verify that the income will continue for at least three years.
Other Income
The following income types will be considered provided that all of the specific stipulations outlined below are met, and
the income is fully documented. Furthermore, probability of income continuance for at least three years must be
verified.

Second Job Income. Second job income will be considered if income is based on a two-year average.

Seasonal Employment Income: Seasonal employment income, such as farm labor or construction
labor, will be considered if it is properly documented and consistent for a minimum of two years.
Seasonal employment income and unemployment income must be combined in order to calculate the
average annual income.

Unemployment Income: Unemployment Income may also be used if documentation shows that it has
been received for a specified length of time (usually a six month period) during the previous two years.

Housing Allowance: Housing allowance may be used as income for members of the military or clergy
only, provided that the income will continue for a minimum of two years, and the Borrower has a history
of receiving the income.

Trailing or Relocating Co-Borrower’s Income: A trailing or relocating Co-Borrower is one who trails
behind the primary Borrower during relocation. A trailing or relocating Co-Borrower’s income is the
amount of income previously received by the trailing or relocating Co-Borrower from employment at the
previous location. The use of a trailing or relocating Co-Borrower’s income for loan qualification will be
done on a case-by-case basis, and the following apply:
‒
The transaction must be a full documentation purchase that is secured by an owner occupied
primary residence.
‒
The Primary Borrower must be relocating with the same employer.
‒
The trailing or relocating Co-Borrower must be a spouse, domestic partner, or future spouse of
the Primary Borrower.
‒
The Primary Borrower and the trailing or relocating Co-Borrower must have verified cash
reserves (or other verified assets that are easily converted to cash) equal to six months of
payments for the mortgage and all other recurring debt obligations.
‒
The trailing or relocating Co-Borrower must have been employed as a salaried employee in the
same profession for the last two years and must provide documentation.
‒
As long as it can be determined and documented that a reasonable employment market exists
for positions that are the same as, or similar to, the trailing or relocating Co-Borrower’s previous
position, Galton Funding may consider 70% of the trailing or relocating Co-Borrower’s
documented income from his or her previous employment as “anticipated” income for future
employment. This income may be used for loan qualification.
Ineligible Income
The following income types are ineligible:
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
Foreign Income

Contributions or support from family members (other than alimony/child support)

Deferred income not presently available

Educational benefits

Illegal income

One-time capital gains (continuing capital gains is an acceptable source of income)

Projected income

Refund of federal or state income tax

Rental income on a second home or an ineligible second unit

Reimbursable income

Gambling winnings

Automobile allowances – this is used to offset the auto payment only

Per diem income

Unverified sources
FULL DOCUMENTATION
Galton Funding will accept these types of Full Documentation (Full Doc) with a verified two-year history of receipt.
Salary/Wage Earner Full Documentation Requirements
One of two methods must be used to provide full income documentation:

Pay stubs for the most recent 30-day period showing year-to-date income and two years’ W-2
forms as follows:
‒
If the Borrower has had different employers over the past two years, W-2 forms for the past
two years are required.
‒
If the bonus or commission income represents 25% or more of the Borrower’s income, two
years of personal tax returns may be required

Personal tax returns for the past two years, including all schedules.

Signed and executed 4506-T
Verbal Verification of Employment:

A verbal verification of employment is required within 5 days of the loan closing.
Self-Employed Full Documentation Requirements
Documentation includes the following:
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
Two years of personal tax returns, with all schedules

If the borrower has 25% or more ownership interest in a Partnership, S-Corp, or Corporation,
business tax returns for the past two years including all schedules must be provided.

For all self-employed borrowers, if more than 120 days has lapsed since filing the latest
Schedule C or business tax return, a dated year-to-date profit and loss (P&L) statement is
required.

A Certified Public Accountant (CPA) letter

A signed and executed 4506T
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Verbal Verification of Employment:

A verbal verification of employment is required within 5 days of the loan closing.
Alternative Documentation – Asset Qualifier Requirements:
Please refer to Chapter Six, Loan Programs for specifics regarding this income documentation type and program
requirements.
Alternative Documentation – Bank Statements (24-Month):
requirements.
Alternative Documentation - Salary/Wage Earner Requirements:
Alternative documentation may be used to document qualifying income for wage earners who have been with their
current employer for the past two years. The following documentation is required:

Pay stubs for the most recent 30-day period showing year-to-date income and one year’s W-2 forms

If the Borrower earns over 25% of their income from self-employment, commission, bonus, or tip
sources, two years of personal tax returns may be required (see Self-Employed Reduced
Documentation Requirements section below)

Signed and executed 4506-T
If the Borrower has been employed less than two years with the current employer, the Borrower is ineligible. W-2
form(s) from the prior year will also be required.
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REDUCED DOCUMENTATION
Galton Funding will accept these types of Reduced Documentation (Reduced Doc) with a verified, one-year history of
receipt. Anything less than a 12-month history of receipt is not allowed. Verification of two years of employment
history is required. The income must be reasonable for the profession and experience level of the Borrower.
Reduced – Bank Statements (12-Month):
requirements.
Reduced Documentation - Self-Employed Only Requirements

Personal tax returns for the past one year, including all schedules in addition to the following:

One year business tax returns, with all schedules. If more than 120 days has lapsed since filing,
a signed and dated year-to-date profit and loss (P&L) statement is required.

If the Borrower has 25% or more ownership interest in an S-corp., business tax returns for the
past one year including all schedules must be provided for the S-corp.

Proof of the existence of the business for two years. Acceptable documentation includes a copy
of the business license, business credit report, or a certified public accountant (CPA) letter.
INELIGIBLE INCOME DOCUMENTATION TYPES
No Ratio, NINA, Stated Income, and No Doc income documentation types are not allowed.
ASSETS
The Seller must determine and provide evidence that the Borrower has sufficient cash to pay the down payment,
prepaid items, financing cost, and closing costs, along with adequate cash reserves as the documentation type or
program requires. When the Borrower will be paying off debts, adequate funds should be documented to complete
the debt payoff, in addition to the funds required to close the transaction and any required cash reserves. For details
on a specific program’s asset verification requirements, refer to Galton Funding Loan Program Matrices.
The financial strength of the Borrower, including accumulation of verifiable assets, is a strong indication of
creditworthiness. An established pattern of savings demonstrates skill in financial management. Evidence that the
savings are liquid also strengthens the loan transaction as these funds are readily available to repay debt obligations,
pay unexpected expenses and provide protection against short-term interruption of income.
Galton Funding encourages the Seller to verify sources of liquid assets beyond the amount needed to meet the
requirement of the transaction so that, if necessary, these assets may be considered as a compensating factor when
the loan is reviewed.
REQUIREMENTS AND GUIDELINES
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
Assets and reserves must be sourced and seasoned for at least 60 days

All assets need to be deposited in U.S. financial institutions

If Borrower is not of retirement age, the Borrower must document that they have unrestricted
access to all retirement-based funds, including funds used for closing costs, down payments
and reserves

Large disparities between the current balance and the opening balances may require additional
verification or documentation

Large or irregular deposits must be explained and may require further documentation.
‒
A large deposit is considered any amount that exceeds 50% of the Borrower’s gross
monthly income.
‒
A signed letter of explanation from the Borrower is required and must sufficiently explain
and source the funds
‒
Documentation supporting the source of the funds may be required
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
Gift funds may not be used to meet the reserve requirements

Proceeds from a Cash-out Refinance on the Mortgaged Property may not be used to meet
reserve requirements.
ASSET DOCUMENTATION
The Loan File must disclose all sources of funds to close, unless it is not required by the income documentation
program. Assets must be sourced and seasoned for 60 days and may be verified with the following documentation:

Direct, written verification of deposit (VOD), completed by the depository. In cases where the
Borrower has a joint account with someone other than the Co-Borrower(s), the VOD must
clearly show the Borrower has authorized access to all the funds. The VOD must cover a
minimum of 60 consecutive days.

Two months’ current and consecutive account statements from each bank, brokerage, mutual
fund account, or investment portfolio covering a minimum of 60 consecutive days.

Account statements must include the following information:
‒ Borrower as the account holder
‒ Account number
‒ Time period covered
‒ Current balance
‒ Statement date
‒ Name of the depository or investment institution

The Borrower must explain any recent large deposits, newly opened accounts (within the last
90 days), or account balances that are considerably greater than the average balance over the
previous few months. Any indications of borrowed funds must be investigated.
‒
A written explanation of the source of funds from the Borrower must be obtained and the
source of funds verified.
MINIMUM DOWN PAYMENT
Galton Funding requires the Borrower to make a minimum down payment of 5% from his or her own funds. The
balance must be paid from cash, other equity, gift funds, or secondary financing. At LTVs of 80% or less, the full
down payment may come from a gift when no secondary financing exists. In this instance, closing costs may also be
in the form of a gift. The Loan File should clearly state the source of funds for the down payment and closing costs.
Gift funds are not allowed on Non-Owner-Occupied (NOO) transactions.
EARNEST MONEY DEPOSITS
Earnest money deposits are considered part of the down payment. The source of the earnest money deposit(s) must
be verified using the following:

Copy of the Borrower’s cancelled check and two months’ bank statements, up to and including
the date the check cleared, to evidence a sufficient average balance to support the amount of
the earnest money deposit.

Any large deposit to the account must be addressed in writing with supporting documentation.

Verification that there are sufficient funds on deposit to cover the earnest money deposit and
any other required funds to close.

The canceled check or bank statement and the deposit receipt must agree with the Purchase
Agreement.

If additional earnest money deposits are made, an amendment to the original Purchase
Agreement must be provided
AGE OF ASSET DOCUMENTATION
The verification of assets, including the source of funds, may not be greater than 90 days old at the time of closing. If
the funds are required for closing, then the most recent account statement(s) at the time of the validation will be
required. In the event that the Disbursement Date causes the Borrower’s verification of assets to be greater than 90
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days old, Galton reserves the right to request updated credit, asset, and/or income documentation. Disbursement
Date is the day on which the loan closes.
RESERVE REQUIREMENTS
When reserves are required by a Galton Funding program and documentation type, the number of months required
will be indicated in the Galton Funding Loan Program Matrices. To calculate the dollar amount of the required
reserves, multiply the Borrower’s new PITIA payment by the number of months indicated. Reserves are defined as
assets remaining, from down payment and closing costs, exclusive of cash-out received from the transaction.
Reserves must be verified, sourced, and seasoned for 60 days.
PITIA is defined as:

Principal and interest

Hazard, flood, mortgage insurance premiums (as applicable)

Real estate taxes

Ground rent

Special assessments

Association dues

Any subordinate financing payments on mortgages secured by the Mortgaged Property
INELIGIBLE ASSETS AND SOURCES OF FUNDS
The following are ineligible assets and sources of funds:

Stocks held by privately held corporations

Stock options

Non-vested restricted stock

Windfall assets (i.e., inherited funds, proceeds from a lawsuit, lottery winnings)

Cash-Out Refinance proceeds

Non-financial assets (collectibles, stamps, coins, artwork, etc.) unless liquidated

Assets titled in an irrevocable trust

Custodial accounts

Escrow accounts

529 Accounts

Accounts pledged as collateral on another loan

Below investment grade corporate and municipal bonds

Cash value of life insurance

Foreign assets.
ACCEPTABLE ASSETS AND SOURCES OF FUNDS
Checking/Savings/Deposit Accounts
Funds held in checking, savings, certificates of deposit, money market and other deposit accounts are acceptable
sources of funds provided verification of deposit (VOD) or acceptable alternative documentation is used to verify
these accounts.
The source of funds for a recently opened account or for a large increase must be explained and verified. Copies of
the Borrower’s bank statements must reliably document that the funds were not recently borrowed. The statements
should show that the funds were accumulated prior to funding.
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Business Funds
The use of business funds for down payment, closing costs and reserves is allowed for sole proprietors, partnerships
and corporations, including S-corporations. When using these funds, each transaction must be analyzed in order to
determine the Borrower’s percentage of ownership in the business, validate the Borrower’s ability to access business
funds without any detrimental effect to the business and to ensure there is strength and stability within the business.
Ownership Verification:
Borrower’s ownership or interest in the business must be confirmed by documentation such as a business
license or corporate or partnership tax returns.
Verification of the Availability of Funds:

Sole Proprietor: Verification that the Borrower has 100% ownership of the business, for example
using the tax returns provided or a copy of the business license.

Partnership: Borrower must be a general partner and verification of the percent of ownership is
required. Verification of the ability to withdraw funds to the extent of the percentage of ownership
and approval of the other general partners is required. The percentage of ownership can be
validated using the U.S. Partnership Return of Income (IRS Form 1065) and the Partner’s Share of
Income, Credits, Deductions, etc. (IRS Schedule K-1) for filing income tax returns for the
partnership.

Corporation: Verification that the Borrower is 100% owner of the corporation or if the Borrower is
not a 100% stockholder verification of the percent of ownership. In addition, verification of the ability
to withdraw funds to the extent of the percentage of ownership is required, along with approval of
the stockholders with a corporate resolution. The Borrower’s percentage of ownership can usually
be determined from the Compensation of Officers section of the corporate tax return.
Self-Employed Borrowers
The following requirements are applicable for Self-Employed Borrowers using business funds:

All funds must be seasoned with the source of funds for any large deposits fully documented and
explained.

Business assets must be verified using standard documentation requirements.

A cash flow analysis on the business is required. The cash flow analysis can be performed by the
accountant or CPA. The file must contain evidence the Borrower has full use of business funds and
there is no required repayment.

The Loan File must contain evidence that the funds are not advancement against future earnings or
future cash distributions. The Loan File documentation must include a review of any potential tax
implications on funds received.
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Credit Card Financing
Certain loan costs may be paid outside of closing by the Borrower’s use of a credit card. The following costs can be
financed:

Appraisal

Lock-in fees

Credit report
The aggregate total may not exceed $1,000. Sufficient funds to pay off the charged amounts must be verified. The
Borrower does not need to pay off the charged amounts. The minimum monthly payment will be added to the debt
ratios.
Retirement Accounts
Vested funds from individual retirement accounts (IRA/Keogh accounts) and tax-favored retirement savings accounts
(401(k) are acceptable sources of funds for down payment, closing costs and reserves.
Seller must verify the ownership of the accounts and the Borrower’s actual receipt of the funds from the liquidation of
the assets, if needed to complete the transaction.
When funds from retirement accounts are used for reserves, it is not necessary to withdraw the funds from the
account. It is necessary, however, to exercise caution when considering retirement accounts as reserves since these
accounts often feature significant penalties for early withdrawal or have limited access and have vesting
requirements.
When using the funds as reserves, the Seller may use the following percentage of the vested amount:
Retirement Accounts (401 (K) IRA, SEP, KEOUGH):

If the Borrower is < 59.5 years old)
55%

If the Borrower is > 59.5 years old)
65%
If the retirement account only allows withdrawals in connection with Borrower’s termination of employment, retirement
or death, the Seller may not consider the vested funds for reserves.
Stocks, Bonds, and Other Securities
If the source of funds to close is proceeds from the sale of stocks, bonds, or other securities, then the Loan File must
document their value and must contain proof that the Borrower owned such commodities. Acceptable evidence of
ownership and value include:

A statement from the brokerage company indicating ownership of the securities and verifying
the sale.

Verification from the bank where the securities were sold or redeemed.

Copies of sale documents.
A copy of the bond redemption tables (for value verification), and proof of liquidation, is required for government bond
proceeds.
Other Accounts
Accounts such as annuities, trust funds and hedge funds may be utilized. Documentation must be provided to show
that the funds are available to the Borrower and under what conditions the funds may be withdrawn. If being used for
reserves, annuities are treated the same as retirement accounts.
Borrowed Funds Secured by Assets
Proceeds from a loan that was fully secured by the Borrower’s assets qualify as a source of funds to close, subject to
the following requirements and guidelines:
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
The loan must be secured by an asset owned by the Borrower, such as a certificate of deposit,
stock, bond, real estate (other than the Mortgaged Property), life insurance policy, savings
account, or a bridge loan.

The loan must be from an institutional lender.

The DTI ratio calculation must show that the Borrower is qualified to pay the additional debt.

A copy of the executed note reflecting the terms and proof of the receipt of the funds must be
provided.
Sale of Real Property
If the source of funds to close is proceeds from the sale of real estate owned by the Borrower, the amount of net
proceeds must be documented with a copy of the final HUD-1 along with the receipt of the proceeds by the borrower.
Gift Funds
A Borrower purchasing may receive a gift to be used towards the down payment, prepaid items, closing cost and
financing cost. For details on a specific program’s gift of equity or gift fund requirements, refer to the Galton Funding
Loan Program Matrices.
Gift of equity is defined as equity in a property given by the owner to the Borrower when the Borrower purchases a
home from an immediate family member, defined as parents, grandparents, siblings, spouse, children, aunts, and
uncles. . Gift of equity is acceptable from immediate family members and no repayment is expected. Property must
be owner occupied. Verification of a gift of equity must be reflected on the purchase agreement or HUD-1. Gift of
equity transactions must also comply with Interfamily Transfer requirements in this chapter.
A down payment of 100% from gift funds is allowed for LTVs of less than or equal to 80% or the program max when
no secondary financing exists. In this instance, closing costs and reserves may also be in the form of a gift. Reserve
requirements must be met by the Borrower’s own funds. Gift funds are not allowed on Non-Owner-Occupied (NOO)
transactions.

Gift funds must be verified by the following:

Signed gift letter
‒
Must indicate the donor’s relationship to the Borrower
‒
Donor’s address and phone number
‒
Subject property address
‒
Dollar amount of the gift
‒
Certification that it is a gift with no repayment required

Receipt of funds*

Proof of the donor’s ability to provide the funds
‒ Must be sourced and seasoned for 60 days
Examples of acceptable proof of receipt of funds are a bank statement showing the deposit or a copy of the cashier’s
check.
If the Borrower received a gift from a relative or domestic partner who has lived with the Borrower for the last 12
months, or from a fiancée, the gift is considered the Borrower’s own funds and may be used to satisfy the minimum
Borrower contribution requirement if all individuals occupy the property.
Gift funds are not permitted from any donor that is a party to the transaction (except gifts of equity from the Seller) or
is a real estate builder, developer, or in the business of owning, financing, or selling real estate.
Gifts of Equity
Gift of equity is defined as equity in a property given by the owner to the Borrower when the Borrower purchases a
home from an immediate family member, defined as parents, grandparents, siblings, spouse, children, aunts, and
uncles. Gift of equity is acceptable from immediate family members and no repayment is expected. Property must be
owner occupied. Verification of a gift of equity must be reflected on the purchase agreement or HUD-1. Gift of equity
transactions must also comply with Interfamily Transfer requirements in this chapter. Gift of equity transactions
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should be supported by an appraisal at fair market value. Generally, sales prices less than or greater than 10% of fair
market value established by the appraisal are subject to further review and documentation.
TRANSACTION TYPES
This section describes the types of transactions for which Galton Funding will purchase loans.
PURCHASE
A Purchase transaction involves the purchase of a real property, as defined by a Sale and Purchase Agreement
executed by the Borrower and home Seller that represents a First or Second Mortgage on the property.
Non-Arm’s Length
A non-arm’s length transaction is a transaction between family members, co-workers, friends or anyone associated
with the transaction such as the listing agent, mortgage lender or broker.
Non-Arms’ length transactions are not eligible for purchase except for Gift of Equity (GOE) or inherited
properties. Examples of non-arm’s length transactions include but are not limited to:

Relatives: Relatives are defined as individuals related by blood, marriage, adoption, or legal
guardianship. Transactions between an individual and their spouse, parent, sibling,
grandparent, aunt, uncle, cousin, stepparent or stepchild, regardless of whether the relationship
is by blood, adoption, marriage, or legal guardianship are considered non-arm’s length. The
definition also includes domestic partners and fiancées.
‒ A purchase and sale transaction between relatives, including the estate of a deceased family
member unless the transaction is a probate sale.
‒ A financing transaction between relatives, such as the processing or origination of a Loan for
a relative by an employee of the Seller.
‒ Parents purchasing and financing a property for a child who then wants to refinance to payoff the parents

Employer/Employee
‒ A purchase and sale transaction between an employer and an employee.
‒ A financing transaction between an employer and an employee, including a Loan originated
by the Seller for the Seller’s employee, contractor, or principal.

Landlord/Tenant
‒ A purchase and sale transactions between a landlord and tenant, including lease option
purchase options.
‒ A financing transaction between a landlord and tenant, such as the processing or origination
of a Loan for a tenant when the landlord is an employee of the Seller.

Home Builders
‒ Purchase transactions where the Borrower is the owner of, or is employed by the
homebuilder who has constructed the subject property.
‒ Transactions where the principals of construction companies are involved in the sale and
financing of the subject property, with the exception of qualifying builder owned lending
operation transactions.

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Real Estate Brokers/Agents: A transaction where the Borrower or a relative of the Borrower,
is a licensed real estate broker or agent employed in the real estate industry and is involved in
the financing or sale of the subject property, regardless of whether he/she receives a sales
commission. This includes a Borrower or a relative of the Borrower.
‒ Acting as the property seller’s agent under a listing agreement with the seller of the
property;
‒ Acting as his/her selling agent for a real estate broker;
‒ Acting as both the listing agent and as the seller agent (dual representation); and
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‒
‒
Employed by the Galton Funding Seller acting as the Loan interviewer.
A transaction where the Borrower acts as his/her own real estate agent (buyer’s agent) in
the purchase of a property will be considered arm’s length.

Third Party Service Vendors: A transaction where the Borrower is also a principal of a third
party vendor, such as a settlement agent, escrow company, title company, appraisal company,
or credit reporting company providing such service for the subject Loan.

Seller Employees
‒

A Borrower who is employed by the Seller of the Loan (i.e. no employee loans)
Seller Financed
‒
The payoff of a loan currently financed by the Seller
Interfamily Transfer

The HUD-1 must reflect the gift of equity as part of the transaction or the purchase price.

The property must be owner occupied (non-owner occupied interfamily transfers will be
reviewed by Galton Funding on a case-by-case basis).
Interfamily transfers are considered Purchase transactions. For an interfamily transfer to be eligible for purchase by
Galton Funding, the appraisal must support the value, AND:

Existing liens on the property must be current.

Full Documentation loans only.

The HUD-1 must reflect the gift of equity as part of the transaction or the purchase price.

For owner occupied properties, the maximum LTV/CLTV is 80% or the program maximum,
whichever is lower.

For non-owner occupied properties, the maximum LTV/CLTV is 70% or the program maximum,
whichever is lower.
Family members are defined as parents, grandparents, siblings, spouses, children, aunts and uncles
Renting Back the Current Residence
The Borrower may rent back their current home for up to 30 days from the closing sale date. In some cases such as
relocations, Galton Funding, at their sole discretion may allow the rent-back period to be greater than 30 days
RATE/TERM REFINANCE
A Rate/Term Refinance represents a First Mortgage that is used to pay off an existing mortgage(s) or lien(s) with a
new loan. This loan secures the Mortgaged Property in order to acquire a different interest rate or loan term. Cash
removal or debt consolidation other than incidental cash (the lower of 1% of the loan amount or $2,000), is not
permitted.
A Rate/Term Refinance is when the Mortgage Loan proceeds are used for:

Reasonable and customary loan closing costs/fees.

Payoff of the First Mortgage.

Payoff of closed end subordinate mortgage(s) that:

‒
Are at least 12 months seasoned
‒
Were used to purchase the Mortgaged Property
‒
Were used for documented home improvements
Payoff of Home Equity Lines of Credit where:
‒
A cash draw greater than $2,000 has not been taken in the last 12 months.
OR
‒
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Proceeds have been used for documented home improvements.
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Refinance Resulting from Divorce
A refinance transaction resulting from a divorce settlement wherein either the Borrower or the Co-Borrower is
required to buy out the interest of the other spouse in the Mortgaged Property may be considered a Rate/Term
Refinance transaction if:

The Borrower who will be acquiring sole ownership of the property receives no cash-out from
the proceeds of the transaction.

The Borrower provides a copy of the divorce decree or the property settlement agreement
reflecting the required buy-out.
Other divorce-related property right dissolution shall be treated as a Cash-Out Refinance transaction.
CASH-OUT REFINANCE
A Cash-Out Refinance is a loan whose proceeds are distributed for:

Debt consolidation

Cash-in-hand

Payoff of non-seasoned, closed-end subordinate mortgage(s)

Payoff of Home Equity Lines of Credit where cash has been drawn in the last 12 months and/or
is greater than $2,000

Payoff of property tax liens

Payoff of federal and state tax liens
Here is an example of a Cash-Out Refinance:
Loan amount
$175,000
Mortgage payoffs
- $131,400
Consumer debt payoffs
- $ 25,000 (cash-out)
Payoff property tax liens
- $ 5,000 (cash-out)
Closing costs
- $ 7,000
Cash to Borrower
= $ 6,600 (cash-in-hand)
Total cash-out
= $ 36,600 (cash-in-hand + cash-out)
Debt Consolidation
A debt consolidation refinance transaction involves the repayment of an existing loan from the proceeds of a new
mortgage. If payment of credit cards or installment loans is a condition of loan qualification, the payoff must be
indicated on the HUD-1 or otherwise documented.
In all cases, a 6-month property seasoning is required for cash-out/cash-in-hand transactions.
Property Owned Free and Clear
A Borrower who obtains a mortgage on a property that does not already have a mortgage lien against it is also
defined as a Cash-Out Refinance transaction.
1031 TAX EXCHANGE
These transactions are not eligible.
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CONSOLIDATION, EXTENSION, AND MODIFICATION AGREEMENTS (CEMA)
These transactions are not eligible.
CONTINUITY OF OBLIGATION
For Refinance Transactions, there must be a continuity of obligation if there is currently an outstanding lien that will
be satisfied through the refinance transaction. Continuity of obligation is met when any one of the following exists:

At least one (1) borrower is obligated on the new loan who was also a borrower obligated on the
existing loan being refinanced;

The borrower has been on title and residing in the property for at least twelve (12) months or can
demonstrate a relationship (relative, domestic partner, etc.) with the current obligor;

The loan being refinanced and the title to the property are in the name of a natural person or a limited
liability company (LLC), as long as the borrower was a member of the LLC prior to transfer. Transfer of
ownership from a corporation to an individual does not meet the continuity of obligation requirements.

The borrower has recently inherited, or was legally awarded, the property (divorce, separation or
dissolution of a domestic partnership).
Loans with an acceptable continuity of obligation may be considered either a Cash Out or Limited Cash Out as
described in this Chapter.
If the borrower is currently on title but is unable to demonstrate an acceptable continuity of obligation, or if there is no
outstanding lien against the property, the loan is still acceptable as a Cash Out Refinance, as detailed below:



If the purchase date is within six (6) to twelve (12) months prior to application date and there is no lien,
the LTV must be based on the lesser of the original sales price or the current appraised value
If the purchase date is more than twelve (12) months and there is no lien, the LTV may be based on the
current appraised value
If there is a lien and the borrower has been on title for at least six (6) months, the LTV is limited to 50%,
or the program maximum, whichever is less based on the appraised value
DELAYED FINANCING
Borrowers who purchased the subject property less than six months prior to application are ineligible for a cash-out
refinance. This includes transactions where the Borrower purchased the Subject Property for cash and is looking to
obtain delayed financing.
CONSTRUCTION-TO-PERMANENT REFINANCE
A Construction-to-Permanent Refinance is a loan obtained to pay off an interim (short-term) loan used to finance the
construction of the subject property. The transaction may be treated as a Purchase, Rate/Term Refinance, or CashOut Refinance. For information regarding the treatment of the Construction-to-Permanent financing, refer to the Loanto-Value Ratio section in this chapter.
LAND CONTRACT REFINANCE
A Land Contract is an installment contract for the sale of land and improved structures. The home seller has legal title
until the installment is paid and the buyer has equitable title during the term of the contract. Land Contracts are
treated as refinance transactions. Land Contract transactions are acceptable on owner occupied properties only.
Land Contract/Contract for Deed (Recorded or Unrecorded)
A Land Contract/Contract for Deed is subject to the following:
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
The home seller must be the current owner of the property as reflected on the Preliminary Title
Report/Commitment.

A copy of the Land Contract/Contract for Deed is required.

Canceled checks (front and back) or bank statements are required to evidence the down
payment.
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
Copies of canceled checks (front and back) to evidence the monthly payments covering all
months of residency for the past 12 months are required.
The Borrower might be eligible for a cash-out transaction depending on when the Land Contract/Contract for Deed
was executed:

Executed Less Than 12 Months. If the Land Contract/Contract for Deed has been executed
for less than 12 months, then the transaction must be Rate/Term Refinance and it will be based
on the Appraised Value or contract price, whichever is less; OR

Executed at Least 12 Months. If the Land Contract/Contract for Deed has been executed for
at least 12 months, the Borrower may be eligible for a Cash-Out Refinance, and the transaction
may be based on the Appraised Value.
Note: Some states do not recognize the Borrower as having an equitable position in the property until they
have made their last payment under the Contract for Deed. In this case, the state would consider the
transaction to be a Purchase. However, pursuant to these underwriting guidelines, all loans that pay off a
Contract for Deed will be considered as a refinance.
Since the tax rate will be reassessed for the new transaction, the newly established tax rate will be used for
qualifying the borrower.
Multiple Transactions Executed by One Seller
Multiple applications for Land Contract/Contract for Deed transactions that are executed by the same Seller,
company, and/or individual are unacceptable.
A Land Contract/Contract for Deed executed by a company or property owner whose primary business is
investments in real estate or rehabilitation of deferred maintenance properties are not be eligible.
LEASE OPTION-TO-PURCHASE
A Lease Option-to-Purchase is an agreement to lease a property for a specified period of time at an agreed-upon
monthly rent payment. Under this option, a portion of the payments in excess of the market rents will be applied
toward the down payment. Once the potential buyer has satisfied the terms of the down payment, he or she may
execute the Option-to-Purchase the property at the sale price agreed upon in the Lease Option-to-Purchase
agreement. Lease Option-to-Purchase transactions are eligible on owner occupied properties only. Loan proceeds
can only be used to pay off the contract.
Rent Credit
Rent credit towards down payment will be accepted only for the portion of rent paid over and above established
market rents per the appraiser by a market rent analysis. The appraiser must determine the fair market rent on Form
1007 Single-Family Residence or Form 216 Multi-Family Residence. Any rents in excess of “fair market rent” may be
applied to the down payment.
Refund of Excess Deposit
If the Borrower earned a large amount of rental credit during the term of the Lease Option-to-Purchase, the Borrower
may receive a refund of excess deposits at close. For example:
Purchase price
Option credit earned
$100,000
- $36,000
Subtotal
$64,000
Loan amount (85% LTV)
$85,000
Balance due on lease
- $64,000
Excess deposit
= $21,000
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(Refund of excess deposit)
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The following requirements and guidelines apply to Lease Option-to-Purchase transactions:

A copy of the executed Lease Option-to-Purchase agreement is required.

Proof of the Borrower’s earnest money deposit, in the form of copies of canceled checks (front
and back) must be provided.

Copies of canceled checks (front and back) to evidence the monthly payments covering all
months of residency for the past 12 months.
A documented lease with a Lease Option-to-Purchase and less than 12 months of seasoning will be treated as a
Purchase transaction. The lesser of the purchase price or the Appraised Value will be used to determine the
LTV/CLTV.
A Lease Option-to-Purchase with at least 12 months of seasoning will be treated as a refinance transaction. The
Appraised Value will be used to determine the LTV/CLTV. Lease Option-to-Purchase transactions are eligible for
Rate/Term Refinances only to pay off the contract. They are ineligible for Cash-Out Refinance transactions.
Lease Option-to-Purchase transactions that do not involve an earnest money deposit and/or monthly rent in excess of
proven market rents will not be considered a Lease Option-to-Purchase transaction and must comply with standard
Purchase guidelines.
INHERITED PROPERTIES
If a Mortgaged Property was inherited within the past 12 months, the following limitations apply:

The Borrower must have clear title.

If the Borrower is paying only existing mortgages and heirs with cash-out, the maximum LTV/
CLTV is 80%, or the maximum allowed for the grade and program, whichever is less. This will
be treated as a Rate-Term Refinance.

The maximum LTV/CLTV on Cash-Out Refinances where the proceeds for debt consolidation
or cash-in-hand is 70% or the maximum allowed for the program, whichever is less.

Rate/Term Refinances only for non-owner occupied properties.
Buying out additional heirs identified in the related will is allowed. A copy of the will must be provided, along with the
buyout agreement signed by all of the beneficiaries identified in the will.
For inherited properties, there is no restriction for occupancy.
If the property was inherited more than 12 months ago, standard refinance guidelines apply.
INELIGIBLE TRANSACTION TYPES
A Lease Back Purchase Transaction, where the lease-back period is greater than 30 days is an ineligible
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2. LOAN PROGRAMS
Asset Qualifier Program ....................................................................................................... 59
Program Eligibility ............................................................................................................. 59
Income Verification ............................................................................................................ 60
Asset Documentation ........................................................................................................ 60
Bank Statement Program (24-Month and 12-Month Verification Options) ...................... 64
Income Documentation Requirements .............................................................................. 64
Bank Statement Requirements ......................................................................................... 65
Home Equity Loan Programs (A+ and A Grades only) ...................................................... 69
Simultaneous and Stand-Alone Second Liens – Qualified Mortgages Only. .................... 69
Simultaneous Second Lien Program Restrictions ............................................................ 69
Stand-Alone Second Lien Program Restrictions .............................................................. 69
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ASSET QUALIFIER PROGRAM
This program is designed for high net worth Borrowers. Borrowers are qualified on documented and verified liquid
assets. In all cases, the Borrower must have the demonstrated ability to repay the Loan. This program offers the
opportunity to utilize a qualifying calculation based on the verification of assets and accumulated wealth as an
alternative method to income verification to document the Borrower’s ability to repay.
PROGRAM ELIGIBILITY
The Asset Qualifier Loan program is eligible for Prime A+ and A credit grades only.
Loan amounts and LTV Limitations
Primary Residence – Purchase and Rate & Term Refinance
Property Type
Single-family, PUDS, Condos ,
and 2-4 Units
Credit
Score
LTV/CLTV
Maximum Loan Amount
680
70%/70%
$1,500,000
680
65%/65%
$2,000,000
720
60%/60%
$2,500,000
Primary Residence – Cash-out Refinance
Property Type
Single-family, PUDS,
Condos, and 2-4 Units
Credit
Score
LTV/CLTV
Maximum Loan
Amount
Maximum Cash-out
Amount
680
65%/65%
$1,500,000
$300,000
680
60%/60%
$2,000,000
$500,000
720
55%/55%
$2,500,000
$500,000
Second Home – Purchase and Rate &Term Refinance
Property Type
Single-family, PUDS, and
Condos
Credit
Score
LTV/CLTV
Maximum Loan Amount
680
65%/65%
$1,500,000
680
60%/60%
$2,000,000
720
55%/55%
$2,500,000
Second Home – Cash-out Refinance
Property Type
Single-family, PUDS,
and Condos
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Credit
Score
LTV/CLTV
Maximum Loan
Amount
Maximum Cash-out
Amount
680
60%/60%
$1,500,000
$300,000
680
55%/55%
$2,000,000
$500,000
720
55%/55%
$2,500,000
$500,000
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Prior Housing History
Borrowers with no history of mortgage or paying rent in the last two (2) years are not eligible. Borrowers who own
property free and clear are considered to have a mortgage history.
Eligible Borrowers:

U.S. Citizens

Permanent Resident Aliens

First-time Home Buyer
‒
A two (2) year rental history must be provided
‒
Maximum Loan amount of $1,500,000
‒
Maximum 60% LTV/CLTV or program maximum, whichever is less
‒
Non-occupant co-borrowers are not allowed

Inter Vivos Revocable Trust
‒

Must meet Galton Funding guidelines
Non-Permanent Resident Alien
Ineligible Borrowers

Non-occupant Co-Borrowers

Foreign Nationals
INCOME VERIFICATION
This program utilizes a qualifying calculation based on the verification of assets as an alternative method to income
verification to document a Borrower’s ability to repay. As such, tax returns are neither requested nor required and
must not be submitted with the Loan file. A 4506T is not required.
Employment and income must not be disclosed on the 1003. “Not applicable to this Loan” must be inserted into the
employment section. The income section is to remain blank. Business phone number, if applicable and contact
information must be reflected on the 1003. This will be used for contact and verification purposes only. A Debt-toIncome (DTI) is not calculated.
If employment or income information is provided on the 1003, the Loan is not eligible for this Loan program.
ASSET DOCUMENTATION
Full asset documentation is required for both funds to close and reserves. Assets can be cash, stocks, bonds, IRAs,
401Ks, mutual funds or retirement accounts. For most asset types, this would include all pages of the most recent
twelve (12) months. Asset levels in the verified accounts are expected to be consistent and sustained over the twelve
(12) month period. Assets must be in liquid or semi-liquid form.
Assets must be verified sufficient to cover the Loan amount requested with sufficient additional reserves to cover all
revolving, installment, alimony/child support, and other monthly debt for a period of no less than five (5) years, plus
the separate program reserve requirement based on the Loan amount.
Twelve (12) months of consecutive statements are required for each asset account. Any large increases or
decreases must be adequately sourced. Increases or decreases greater than 15% over the twelve (12) month period
must be explained by the Borrower. Additional supporting documentation may be required.
Asset statements reflecting other individuals who are not applicants for the Loan are not eligible. However, if the
Borrower’s spouse is on the account and not on the Loan, the funds may be considered if a 100% access letter is
provided.
Asset statements reflecting the occurrence (one time or isolated incident) of NSF checks, wire transfers, overdraft
protection transfers, negative ending balances and transfers from other accounts must be satisfactorily explained and
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documented. Asset statements reflecting multiple NSF checks, overdraft protection transfers, negative ending
balances, or lack a satisfactory explanation indicate cash flow problems and are not eligible.
Eligible Assets
Eligible assets must be comprised of the following asset types, be available to the Borrower, and are limited as
follows:
Asset Type
Qualifying Amount
Checking, Savings, and Money Market Accounts
100%
Publicly traded Stocks and Bonds
70%
Mutual Funds
70%
Retirement Accounts (401 (K) IRA, SEP, KEOUGH):
-
If the Borrower is < 59.5 years old
55%
-
If the Borrower is > 59.5 years old
65%
The above amounts shown for retirement accounts can only be used if a distribution has not already been set up. If a
distribution has begun, the asset is not eligible for this program.
For eligible asset types, any debt tied to that asset must be netted out. For example, if stocks were purchased on
margin or a 401(K) Loan was taken against the 401(K) account.
Ineligible Assets

Business funds

Stock options

Privately held stock

Deferred compensation

Non-regulated financial companies

Non-liquid assets (automobiles, artwork, business net worth, etc.)
Business Funds
Business funds are not eligible to be included in the total available asset calculation or qualifying calculation.
Payment Shock
Payment shock should not exceed 100% if the Borrower is currently renting or 250% if the Borrower has a mortgage
history in the past twenty-four months. The payment shock requirement will be waived if the LTV is less than 65%.
Payment shock is calculated by dividing the difference between the new and existing housing payments by the
existing housing payment. For example:
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New Payment (PITIA)
$1,500
Subtract Existing Payment (Rent or PITIA)
$1,000
Equals difference
$500
Divided by the Existing Payment
$1,000
Equals Payment Shock %
50%
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Reserve Requirements
Reserve requirements are in addition to the residual assets needed to cover debts for the initial sixty (60) month
period.
Loan Amount
Reserves Required
<= $1,000,000
9 months
>$1,000,000 up to $2,000,000
18 months
>$2,000,000 up to $2,500,000
24 months
Borrowers with other investment properties must also meet the following reserve requirement:

Additional two (2) months PITIA reserves for each NOO property regardless of financing up to a
maximum of thirty-six (36) months. The reserve calculation is based off the subject property PITIA.
Qualifying Examples
Example #1 - Qualifying Income:
Loan amount:
$300,000
PITIA for subject:
$2000
Verified Assets:

$200,000 Checking and Savings (100%usable)
= $200,000

$300,000 Stocks and Bonds ( 70% usable)
= $210,000

$400,000 401K (65% usable)
= $260,000

$300,000 Mutual Funds (70% usable)
= $210,000
Total Allowable Assets
= $880,000
$880,000 (allowable assets) minus $300,000 (Loan amount) = $580,000 residual assets
Total of monthly debt (revolving, installment, alimony/child support, hazard insurance, property tax on the
subject property, etc.) excluding subject P&I = $2500
$2500 X 60 months = $150,000
Required reserves for $300,000 Loan amount = 9
2,000 (PITIA) = $18,000
Since the residual assets are more than the required funds to cover all other debt for 60 months plus
required reserves, the Loan qualifies for the Loan program.
Example #2 - Qualifying Income:
Loan amount:
$300,000
PITIA for subject: $2000
Verified Assets:

$10,000 Checking and Savings (100%usable)
= $10,000

$20,000 Stocks and Bonds ( 70% usable)
= $140,000

$300,000 Mutual Funds (70% usable)
= $ 210,000
Total Allowable Assets
= $360,000
$360,000 (allowable assets) minus $300,000 (Loan amount) = $60,000 residual assets
Total of monthly debt (revolving, installment, alimony/child support, hazard insurance, property tax on the
subject property, etc.) excluding subject P&I = $800
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$700 X 60 months = $48,000
Required reserves for $300,000 Loan amount = 9 months X $2,000 (PITIA) = $18,000
Since the residual assets are less than the required funds to cover all other debt for 60 months plus required
reserves, the Loan does not qualify for the Loan program.
Limitations on Other Real Estate Owned
Ownership of investment properties by the Borrower requires additional reserves and Debt Coverage Ratio (DCR)
requirement. Any investment properties owned by the Borrower must show a debt coverage ratio of at least 1.20.
This may be cumulative if multiple properties are owned. Lease agreements must be provided for all investment
properties. If the DSC for the Borrower’s other investment properties falls short of the 1.20 requirement, additional
reserves will be required.
Debt Service Coverage (DSC)

The debt service coverage ratio is calculated by taking 75% of the gross rents divided by the
PITIA of the respective property

Rents are derived from the rental/lease agreement

DCR requirement is 1.20. Net rents must be > 1.2 times PITIA. This calculation may be
cumulative for all rents and all PITIAs.
Debt Service Coverage Example:
Gross Rent = $1,200
Vacancy/Expense Factor = 25% = $300
Net Rent = $900
DCR Requirement = 1.20
$900 divided by 1.20 = $750
PITIA may not exceed $750 per month
Debt Service Coverage Additional Reserve Requirement Example:
Program DCS Requirement = 1.2
Actual DCR for investment properties = .93
DCR Shortage = 1.20-.93 = .27
Additional monthly liability for reserve calculation = $1400 X .27 = $378
Additional reserves = 60 X $378 = $22,680
Gift Funds and Gifts of Equity
Gift funds and gifts of equity are not allowed.
4506-T Requirement
Not required.
Borrower Affirmation Regarding Ability to Repay
Each Loan submitted to Galton Funding must contain a signed acknowledgement from the Borrower regarding their
ability to repay the Loan under this program. The Seller may utilize their own form, if the language contained is
similar and inclusive of the language on the Galton Funding Form.
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BANK STATEMENT PROGRAM (24-MONTH AND 12-MONTH
VERIFICATION OPTIONS)
Galton Funding permits the use of personal or business bank statements to support a self-employed Borrower’s
income for qualification purposes. The documentation provided needs to document that the income is stable, likely to
continue and sufficient to enable the Borrower to repay the debt. The income presented must be reasonable for the
profession. In addition, when using business bank statements to support the Borrower’s income, the nature and
structure of the business must be evaluated to determine if the applied expense assumptions per Galton Funding’s
guidelines are reasonable. Galton Funding reserves the right to require additional documentation, up to and including
full documentation (i.e. tax returns) to determine the Borrower’s qualifying income.
For Loan amount and LTV/CLTV limitations, and for income documentation type and eligibility, refer to the Galton
Eligible Borrowers
To be eligible for this program, the Borrower must be self-employed or earn over 25% of their income from selfemployment, rental income, commission, bonus, or tip sources. Self-employed borrowers are:

Borrowers who derive 25% or more of their primary income from a business in which they hold
a controlling interest

Borrower who derive their primary income from commissions, consultation fees, interest, ,
gratuities, or real estate rents

Borrowers who rely on investments for income such as interest, dividends, capital gains, or real
estate rents.
If one of the Borrowers meets this eligibility requirement and the other does not, the Borrower that is not eligible must
fully document their income. The net deposits used from the bank statements for the self-employed borrower must
not reflect the income that is fully documented for the other applicant (i.e. deduct Social Security payments, W-2
wages, etc.).

The Borrower’s business may be a sole proprietorship, a partnership (general or limited), or a
corporation. They may also receive income documented by Form1099, or filed on a Schedule
C.

The Borrower must have been in the same line of work or own the same business entity for two
years. Self-employed Borrowers must be able to document by a neutral third-party that the
business has been in operation for the last two years and that they have had ownership for that
period of time. Third-party verification includes:
‒
A letter from a certified public accountant (CPA)
‒
A letter from a regulatory agency or professional organization
‒
Copy of business license
Non-arm’s length transactions or Borrowers that receive foreign income are ineligible.
INCOME DOCUMENTATION REQUIREMENTS
The Borrower’s application must include all sources and amounts of income. The bank statements must support the
income listed on the application. Deposits from income sources that are not reflected on the 1003 or those not
needed to qualify will not be included in the qualifying income calculation. Income sources separate from selfemployment must be verified. Examples of verification include social security letter, employment verification, or
divorce decree. If tax returns or VOE are provided for the Borrower using bank statements to support their income,
the Loan must be fully documented.
Given the difficulty tracking and validating that cash flows are not moving between business entities, Borrowers that
own multiple businesses must use personal bank statements to support their income. Their personal bank statements
should demonstrate the distributions they receive from their business interests to satisfy their personal obligations.
Also, business bank statements may not be used when the Borrower’s business has a number of employees,
significant overhead or operating expenses. These would suggest that the expense assumption used in this program
would not be applicable. This program is designed for the use of business bank statements when the Borrower’s
business is small in scope and has limited expenses.
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Non-taxable income, such as child support payments, disability retirement plans, and worker’s compensation may be
adjusted by 25% to determine the qualifying income. Verification must be made that the particular source of income
is nontaxable and that both the income and its nontaxable status are likely to continue.
Bank statements reflecting the occurrence (one time or isolated incident) of NSF checks, wire transfers overdraft
protection transfers, negative ending balances and transfers from other accounts must be satisfactorily explained and
documented. Bank statements reflecting multiple NSF checks, overdraft protection transfers, negative ending
balances, or lack a satisfactory explanation indicate cash flow problems and are not eligible.
BANK STATEMENT REQUIREMENTS
Income may be documented by either personal or business bank statements. The co-mingling of personal and
business or multiple business accounts is not allowed. If one account is used to show income and another account
used for reserves, documentation must be provided to show evidence that the funds are separate and distinct.
Please note: Only one set (twelve or twenty-four months) of bank statements will be used to determine qualifying
income. If another account is used for reserves, only two month’s statements to establish seasoning are required,
If additional bank statements are provided by the Seller they will be reviewed and become part of the overall review of
the Loan. Given the difficulty to reconcile funds between accounts, it may cause the Loan to become ineligible or
require the Loan to be fully documented.
Borrowers who own multiple business entities must use personal bank statements to support their income. The most
recent twenty-four (24) or twelve (12) months bank statements must be provided depending on the selected Loan
program.
For Loan amount and LTV/CLTV limitations, and for income documentation type and eligibility, refer to the Galton
Ineligible Bank Accounts
The following outlines the types of bank statements that are ineligible for the Galton Funding bank statement
programs.

Co-mingling of accounts whether personal and business or multiple business accounts is not
allowed.

Bank statements reflecting other individuals who are not applicants for the Loan are not eligible.
However, if the Borrower’s spouse is on the personal bank account and not on the Loan, only
50% of the total deposits may be used for qualifying.

Borrowers with multiple businesses may not use business bank statements to support their
income. Personal accounts are acceptable.

Business bank statements may not be used when the Borrower’s business exhibits a number of
employees, overhead, and operating expenses. In this case, personal bank statements may be
used.

Bank statements which exhibit recurring NSF, wire transfers, overdraft protection transfers, and
negative ending balances are unacceptable.

A current twenty-four (24) or twelve (12) month history or the same bank account is required.
Changing of accounts is not acceptable.
Eligible Bank Accounts
The following types of bank statements are eligible for the Galton Funding bank statement programs:
Page 65 of 96

Personal or business account such as a checking or savings account.

Deposits must be consistent and typical whether personal or business accounts are used.

Deposits that are larger than typical for the account may be included with a satisfactory
explanation. Supporting documentation may be required. Atypical deposits are defined as
more than 50% of the gross monthly determined income.
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

If the Borrower’s spouse is on the personal bank account and not on the Loan, only 50% of the
total deposits may be used towards qualifying income. Business accounts may only be used
when the following applies:
‒
Borrower (s) owns 100% of the business.
‒
The business must be small in nature and have minimal overhead and operating expenses.
Low beginning and /or ending balances may require additional documentation up to and
including full tax returns (1040’s, 1065’s 1120’s, etc.).
Determining Cash Flow from Bank Statements
Galton Funding takes a common sense approach to underwriting a Borrower’s creditworthiness to determine the
willingness and ability to repay the Loan. This program provides for income calculation based on bank statements as
an alternative method to tax returns to document the self-employed Borrower’s ability to repay. Each Borrower has a
different situation and each Loan needs to be weighed on its own merit. If the Borrower is self-employed or in a
unique business, a narrative must be provided by the Borrower that clearly outlines the nature of the business and
the cash flows. The expense assumptions must be reasonable for the type of self-employment. Decreasing income
trends must be explained and additional documentation may be required.
Any irregularity in the Borrower profile or the documentation provided may be cause for the Loan to become ineligible
for purchase.
Calculating Income from the Bank Statements:
The following outlines how to calculate the income using the Borrower’s bank statements. The lesser of the income
stated on the application or the calculated income using the cash flow from the bank statements will be used to
qualify the Borrower. The allowances below may be used to establish qualifying income:

100% of the deposits from the Borrower’s personal accounts

70% of the deposits from the Borrower’s business accounts
If the business expenses appear to be greater than 30%, the use of business bank statements to support the
Borrower’s income will not be accepted. Personal bank statements will need to be provided. Examples of businesses
that would typically have expenses that exceed 30% include a construction company, restaurant, or retail firm.
The average deposits will be used to determine the Borrower’s income for qualification purposes. Deposits must be
typical and consistent for the Borrower’s line of work. Transfers from a Borrower’s business account to a personal
account are acceptable if they are consistent, i.e. the Borrower is paying himself regular distributions.
Atypical deposits may not be included unless supporting documentation is provided to show that the monies would be
typical for the Borrower’s type of business or line of work. Credit back from returns and cash advances from credit
cards are not acceptable to be included in the qualifying income.
For assistance with the calculation of income from bank statements, please refer to the Galton Funding Bank
Statement Calculator. This tool is for reference and is not required at the time of submission to Galton Funding for
review.
Bank Statements with Rental Income
Rental income may be used in qualifying a Borrower under the Bank Statement Program. All the rental income must
be shown in the Borrower’s bank statements to be considered in qualifying income. The rental income shown on the
bank statements must support the rental lease amounts.
Room rents are an ineligible source of income. If any of the units in a property are receiving room rents than
none of the rental income received for the property may be used as qualifying income. If the Borrower is
receiving room rents on any of their properties, the Loan must be fully documented and is not eligible for the
Galton Funding Bank Statement Programs.
All owner- occupied two-to-four unit properties and all investment properties require a rental income analysis to
determine positive or negative cash flow. Rental income on a second home is not allowed. The following is required
to support the rental income shown on the application:
Page 66 of 96

Rent Survey Form 1007 and Operating Income Statement (FNMA Form 216) – Subject property
only

Complete Schedule of Real Estate Owned (1003)
7/7/16

Complete Rent Schedule outlining the property address, length of ownership, rent received, and
payment details (PITIA).

Copies of the fully executed lease agreements
If the rental income is not shown on the bank account used to determine the Borrower’s qualifying income, one
additional account may be used to support the rental income. The following applies:

Documentation must be provided to show the account is separate and distinct from the bank
account being used to determine the Borrower’s qualifying income

The account must have been set up for the management of the rental income only. If other
funds are co-mingled with the rental income the account is ineligible.

The bank statements must support the receipt of the income as outlined on the lease(s).

Six months bank statements will be required to show evidence of rental income receipt
Actual rents must be documented with copies of the signed leases. Room rents are an ineligible source of income. If
any of the units in a property are receiving room rents than none of the rental income received for the property may
be used as qualifying income. Rental income received from a family member may not be used as income without
copies of a minimum of six months’ cancelled rent checks provided by the tenant family member.
If multiple accounts have to be used to support the receipt of the rental income, the Loan must be fully documented.
If the bank statements presented do not support the rent schedule and the leases presented, the Loan must be fully
documented.
Rental Income Calculation
Income received from rental properties will be calculated as follows:

75% of actual rents, as established by the fully executed lease(s)

If the lease is incomplete, expired, or not yet in effect, the entire payment will be included in qualifying
ratios
A positive cash flow will be added to gross income; negative cash flow will be added to total liabilities and used to
qualify the Borrower.
A Loan for the refinance of an investment property generating a negative cash flow will be ineligible.
Verbal Verification of Employment
A verbal verification of employment within 10 days of the Loan closing must be performed.
4506T Requirement
A 4506T transcript is not required for the bank statement programs.
Borrower Affirmation Regarding Ability to Repay
Each Loan submitted to Galton Funding must contain a signed acknowledgement from the Borrower regarding their
ability to repay the Loan under this program. The Seller may utilize their own form, if the language contained is
similar and inclusive of the language on the Galton Funding Form.
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Galton Funding Bank Statement Calculation - Example
Less
Statement Date
Deposits
transfers
1
3/31/2015
$9,800.00
2
2/28/2015
$13,548.00
$2,354.00
3
1/31/2015
$5,489.00
4
12/31/2014
$14,752.00
$4,544.00
5
11/30/2014
$6,352.00
6
10/31/2014
$1,587.00
7
9/30/2014
$15,483.00
$3,254.00
8
8/31/2014
$3,657.00
9
7/31/2014
$45,638.00
$1,500.00
10
6/30/2014
$15,634.00
11
5/31/2014
$8,456.00
12
4/30/2014
$8,955.00
Totals month 1-12
$149,351.00
$11,652.00
Averages
$12,445.92
$971.00
Individual deposits over this amount require explanation
Statement Date
13
3/31/2014
14
2/28/2014
15
1/31/2014
16
12/31/2013
17
11/30/2013
18
10/31/2013
19
9/30/2013
20
8/31/2013
21
7/31/2013
22
6/30/2013
23
5/31/2013
24
4/30/2013
Totals month 13-24
Deposits
$6,500.00
$8,325.00
$4,896.00
$9,865.00
$15,478.00
$12,546.00
$3,520.00
$15,476.00
$9,854.00
$5,368.00
$4,589.00
$1,257.00
$97,674.00
Less
transfers
$25,000.00
$25,000.00
$2,083.33
Less one-time
deposits
$2,500.00
$2,541.00
$5,041.00
Totals months 1-24
$247,025.00
$16,693.00
Averages
$10,292.71
$695.54
Individual deposits over this amount require explanation
Page 68 of 96
Less one-time
deposits
$0.00
$25,000.00
$1,041.67
% Allowed for Personal
Bank Statements
100.00%
% Allowed for Business Bank
Statements
70.00%
Total Personal Deposits
$9,800.00
$11,194.00
$5,489.00
$10,208.00
$6,352.00
$1,587.00
$12,229.00
$3,657.00
$19,138.00
$15,634.00
$8,456.00
$8,955.00
$112,699.00
$9,391.58
$14,087.38
Total Business Deposits
$6,860.00
$7,835.80
$3,842.30
$7,145.60
$4,446.40
$1,110.90
$8,560.30
$2,559.90
$13,396.60
$10,943.80
$5,919.20
$6,268.50
$78,889.30
$6,574.11
$9,861.16
Total Deposits
$6,500.00
$8,325.00
$4,896.00
$9,865.00
$15,478.00
$12,546.00
$1,020.00
$15,476.00
$7,313.00
$5,368.00
$4,589.00
$1,257.00
$92,633.00
Total Business
$4,550.00
$5,827.50
$3,427.20
$6,905.50
$10,834.60
$8,782.20
$714.00
$10,833.20
$5,119.10
$3,757.60
$3,212.30
$879.90
$64,843.10
$205,332.00
$8,555.50
$12,833.25
$143,732.40
$5,988.85
$8,983.28
7/7/16
HOME EQUITY LOAN PROGRAMS (A+ AND A GRADES ONLY)
The following sections summarize the Galton Home Equity Programs. Please refer to the Galton Loan Program
Matrices and the appropriate Galton Seller Guide sections for additional information.
SIMULTANEOUS AND STAND-ALONE SECOND LIENS – QUALIFIED
MORTGAGES ONLY.
All second liens must meet Qualified Mortgage (QM) guidelines. Income documentation must meet Appendix Q. NonQualified Mortgages are not eligible for the second lien program.
SIMULTANEOUS SECOND LIEN PROGRAM RESTRICTIONS
The following restrictions apply to the Galton Simultaneous Second Lien Program. For additional details, please refer
to the Galton Loan Program Matrices for additional information.

Galton 1st lien Loan requirements apply to simultaneous second liens.

Simultaneous Second Lien allowable behind Agency (FNMA and FHLMC) and Galton 1st Liens
only
STAND-ALONE SECOND LIEN PROGRAM RESTRICTIONS
The following restrictions apply to the Galton Stand-Alone Second Lien Program. For additional details, please refer
to the Galton Loan Program Matrices for additional information.
Allowable First Lien Mortgages (Stand-Alone second lien)
Eligible:

Jumbo loan

Conventional (Agency) loan

FHA or VA loan

Balloon payment loans with remaining term greater than five years from the new Galton loan
closing date

First mortgage that allows interest only payments with remaining term greater than five years from
the new Galton loan closing date
Ineligible:

First mortgage with a negative amortization feature

Amortization term greater than 40 years

A contract for deed, contract for purchase, or land contract

Privately held 1st liens

Loans with provisions prohibiting the placement of additional liens on the mortgaged property

Loans with provisions for future advances
Borrower Eligibility
Eligible:

U.S citizens

Permanent Resident Aliens.
Ineligible:

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Non-permanent Resident Aliens
7/7/16

Non-occupant Co-Borrowers

Foreign Nationals
Occupancy Standards
Eligible:

Primary (1-4 Units) Residences

Second Homes

Investment Properties
Property Types
Eligible:

Single-family (detached, semi-detached, and attached)

PUD (Attached and Detached)

Condominiums (Must be warrantable, Low and High-Rise acceptable)

2-4 Units
Ineligible:

Non-Warrantable Condominiums
Down Payment
Not applicable for stand-alone seconds
Reserve Requirements
The reserve requirements must meet the reserve requirements for the Galton’s first lien mortgage programs.
Loan Balance Restrictions

Minimum Loan Amount - $50,000

Maximum Loan Amount - $500,000
Financing Closing Costs
Galton Funding does not limit the amount of closing costs that may be financed as part of the Home Equity Loan,
except for any limitations that are imposed by applicable State laws.
Eligible States
The Seller may sell to Galton Funding home equity loans secured by properties located in the states indicated on the
rate sheet. The Seller should be aware that certain states may have restrictions regarding loan size, maximum CLTV
or other issues. The Seller is responsible for ensuring compliance with all such restrictions.
Ownership Interests
Land Ownership

Fee Simple

Leasehold
Title Vesting

Individual

Joint Tenants

Tenants in Common

Trust
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Mortgage Insurance Requirements
Mortgage insurance is not required.
Hazard Insurance Requirements
Hazard insurance is required for all home equity loans. Proof of insurance includes a policy or certificate of coverage,
declarations page, a copy of the master policy from the homeowners association (if applicable), insurance binder,
property insurance form or payment receipt.
The subordinate lender must be added to the hazard insurance policy as second mortgagee. This information should
appear after the first mortgage holder.
The appropriate amount of hazard insurance is determined as the lesser of:


100% of the insurable value of the improvements with replacement cost coverage, as established by the
property insurer, or the unpaid principal balance of the mortgage (sufficient coverage for the new combined
loans), OR
The combined unpaid principal balance of the first and any secondary financing, as long as it equals the
minimum amount required to compensate for any damage or loss on a replacement cost basis, typically
80% of the insured value of the improvements. If it does not, then coverage that does provide the minimum
required amount must be obtained.
Individual hazard insurance policies for second lien loan transaction must comply with the following:


The coverage must be adequate and in place at time of closing.
If the policy is expiring within 45 days of closing, obtain the paid receipt and updated documentation from the
Borrower prior to closing.
Escrows
An escrow of funds for the payment of property taxes or hazard insurance premiums should not be set up for the
home equity loan, but the Seller may require such escrows on the first mortgage in conformance with its policies and
procedures, or those of an underlying first mortgage investor.
Rescission Period
The Seller must grant to the Borrower the right to rescind the home equity loan and notify the Borrower of that right in
each case to the full extent required under any applicable laws.
Appraisal Requirements
An original signed appraisal or a copy of the appraisal with legible copies of the original photographs or computerized
copies of the mortgage premises and comparables are required. All appraisals must be completed for the seller.
Appraisals may not be assigned/transferred to the Seller. Please refer to the Galton Funding Appraisal Valuation
Summary for additional information.
Additional Property Considerations
Page 71 of 96

Maximum of ten acres allowed for the Home Equity Program

Properties listed for sale within the last 12 months are not eligible

Rural Properties as classified by the Appraiser

All our other ineligible property types per the Ineligible Property Type section of this Guide
7/7/16
NON-WARRANTABLE CONDOMINIUMS
Non-warrantable condos are acceptable under the following circumstances. Projects with multiple non-warrantable
characteristics are ineligible due to risk layering.
Category
Non-Warrantable Allowances
Litigation
Projects involved in litigation are ineligible.
HOA Reserves
HOA Budget must include a dedicated line item allocation to replacement reserves of
at least 8% of the budget.
Completion Status
The project, or the subject’s legal phase along with all prior phases, must be
substantially complete (up to buyer preference items). All Common elements in the
project or legal phase must be 100% completed. At least 50% must be sold or under
bona-fide contract.
Investor Concentration
Maximum investor concentration of 60% for new construction projects, recent
conversions, or investment subject properties. Calculation based on total units in
current and previous legal phases.
Single Entity Ownership
No single entity (an individual, investor group, partnership or corporation) may own
more than 20% of the total units in the project.
HOA in Builder’s Name
The developer may be in control of the condominium association provided the Master
Agreement provides for the homeowners to take control upon either a predetermined
percentage of unit sales or within a defined time period.
Delinquent HOA Dues
No more than 20% of total units in a project may be 60 days or more past due on the
payment of condominium / association fees.
Property Type
Low-, mid- and high-rise condos are eligible. Complexes over four stories must be
common to the area. Projects less than 10 units must be typical and common for the
market area.
Commercial Space
Maximum 30% of the total space is used for non-residential purposes.
Note: projects with a rental desk on site are not allowed.
Eligible Loan Programs
Non-Warrantable Condominiums are allowed under the Prime Jumbo and Near Prime Loan programs. Refer to
Galton Funding Loan Program Matrices for additional information.
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3. COLLATERAL
Eligible Property Types ......................................................................................................... 74
Single-Family Residence .................................................................................................. 74
Row Home ........................................................................................................................ 74
Townhouse ........................................................................................................................ 74
Multi-Family ....................................................................................................................... 74
Modular Homes (Panelized, Pre-Cut Homes)................................................................... 74
Planned Unit Development (PUDs) .................................................................................. 74
Condominiums .................................................................................................................. 77
Rural Properties ..................................................................................................................... 83
Ineligible Property Types ...................................................................................................... 84
Occupancy ............................................................................................................................. 85
Owner Occupied Primary Residence ................................................................................ 85
Second Home or Vacation Homes.................................................................................... 85
Non-Owner Occupied Investment Properties ................................................................... 85
Property Underwriting ........................................................................................................... 86
Seller Considerations: ....................................................................................................... 86
Appraiser Qualifications .................................................................................................... 87
Appraisal Requirements .................................................................................................... 87
Appraisal Evaluation ......................................................................................................... 89
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ELIGIBLE PROPERTY TYPES
The property types eligible for purchase by Galton Funding programs are listed below. For property type eligibility,
refer to the Galton Funding Loan Program Matrices.
SINGLE-FAMILY RESIDENCE
A site-built dwelling designed for single-family use only. The dwelling may share one wall with a residence owned by
another. The units may be either detached or attached in groupings of two (“twin home”).
ROW HOME
A site built attached housing unit that is designed for the use of one family and is built on land owned by the
Borrower. A row home is not classified as a Planned Unit Development (PUD) or condo, does not share any common
areas, does not pay Homeowners’ Association fees or have covenants, conditions, and restrictions like other
attached dwellings. These homes are usually two or more stories with a front and rear entrance only. Row homes are
typically located in communities of row homes with similar construction type and appearance and typically fill an
entire block.
TOWNHOUSE
A site built attached dwelling unit generally having two or more floors, and attached to other similar units via party
walls. Townhomes are often used in Planned Unit Developments and condominium developments, which provide for
clustered or attached housing and common open space.
May be considered single-family, or a PUD depending on the above descriptions.
MULTI-FAMILY
Multi-family homes are a type of residential structure with more than one dwelling unit. Properties with more than four
units are ineligible.

Two-family. A site built dwelling designed for 2 families owned by the same party(s)

Three-family. A site built dwelling designed for 3 families owned by the same party(s)

Four-family. A site built dwelling designed for 4 families owned by the same party(s)
Additional scrutiny will be used in situations where a Borrower currently owns a residence and plans to rent it out
while purchasing a 3-4 unit property as an owner-occupied property.
The appraiser must provide three rental and three sale comps with legible photos. The income approach must be
completed.
MODULAR HOMES (PANELIZED, PRE-CUT HOMES)
Modular homes are factory-built homes constructed to the state, local, or regional building codes where the home will
be located. Modular homes are multi-sectioned units that are transported to the site and installed. Modular homes are
treated the same as single-family residences. One comparable must be a modular/prefabricated home. Manufactured
homes are not acceptable as comparables.
PLANNED UNIT DEVELOPMENT (PUDS)
Project Requirements for PUDs
The Seller must ensure that all PUD properties comply with the requirements and warranties described in this
section. A PUD must comply with PUD warranties. Galton Funding reserves the right to:

Determine whether a particular Mortgaged Property is a PUD.

Require the Seller to submit, at the Seller’s expense, an opinion of legal counsel, in form and
substance, satisfactory to Galton Funding, and all supporting data that supports the Seller’s
PUD warranties.
Fulfillment of these project requirements does not release the Seller from the responsibility of ensuring that the
project complies with additional requirements set forth in this Guide.
Planned Unit Development (PUD)
A Planned Unit Development (PUD) is a development that has all of the following characteristics:
Page 74 of 96
7/7/16

The individual unit owners own a parcel of land improved with a dwelling. This ownership is not
in common with other unit owners.

The development is administered by a Homeowners’ Association (HOA) that owns and is
obligated to maintain property and improvements within the development for the common use
and benefit of the unit owners.

The unit owners have an automatic, non-severable interest in the HOA and pay mandatory
assessments.
Classifications of a PUD are not based on its zoning. While there are many styles of homes that can be within a PUD
(townhouse, single-family, detached, quads, etc.), this is not the basis of determination. The development must meet
the above definitions, and the Seller must make all warranties required for this type of ownership.
Planned Unit Development (PUD) Classifications
There are two classifications for PUD projects; 1) Type E are established PUD projects and 2) Type F are new PUD
projects. If the Mortgaged Property is a detached PUD, no additional analysis is required.
If the subject is an attached PUD, the following review is required:
Type E Warranty:

Type E warranty applies to established PUD projects in which the HOA has been turned over to
the unit purchasers.

This is the sole eligibility criterion for qualifying as a Type E project.

Manufactured homes are not allowed.
Type F Warranty:

Type F warranty applies to new PUD projects that are still under control of the developer. The
project must meet the following eligibility criteria:

The project cannot have been created by the conversion of existing buildings into a PUD.

The project may not include any multi-dwelling units that represent the security for a single
mortgage.

A sufficient number of the total units in the project (or legal phase) must have been conveyed or
be under contract to be sold to the purchasers in order for the lender to determine whether the
presales will support the responsibilities of the HOA for at least two years.

The units must be owned in fee simple or leasehold and the unit purchasers must the sole
ownership interest in, and right to the use or, the projects’ facilities once control of the owners’
association has been turned over to them.

Manufactured homes are not allowed.
The HOA should complete a Limited Project Review Questionnaire (see Forms chapter) for a determination that the
Type F warranty requirements have been met. The Full Project Review Questionnaire (see Forms chapter) will be
required for all New Associations (less than 1 year) and all Non Fannie/Freddie Approved Projects.
Galton Funding reserves the right to limit the number and/or aggregate dollar amount of loans purchased in any one
subdivision or PUD project or to declare loans in any project ineligible for purchase.
PUD Warranties
The Seller must make the following warranties for each mortgage secured by a PUD unit:

The property meets the definition of a PUD as described above.

All property insurance requirements, as outlined in this Guide, have been met.

One entity does not own more than 10% of the subject project (applies to attached PUDs only).
Eligible PUD Project Types
If the Mortgaged Property is a detached PUD, additional restrictions are not required.
Attached PUD projects with the following characteristics are eligible:
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7/7/16

At least 90% of the total units in the project have been conveyed to the unit purchasers

The project is 100% complete, including all units and common elements

The project is not subject to additional phasing or annexation
Ineligible PUD Project Types
Attached PUD projects with any of the following characteristics are ineligible:

Properties less than 400 square feet. In all cases, the property must be typical and common for
the market area and supported by two comparables.

Projects in current or threatened litigation are typically ineligible. Litigation may be acceptable if
it is determined to be minor and immaterial. Any project for which the developer, project
sponsor, or HOA is named as a party to litigation or pending litigation that relates to the safety,
structural soundness, habitability, or functional use.
‒

Page 76 of 96
If the master liability policy does not cover a lawsuit or judgment, or special assessments
need to be imposed to cover the lawsuit or judgment
Projects managed and operated as a hotel/motel or contain the word hotel/motel in the name.
They may have the following characteristics, however, this list is not inclusive:
‒
Daily, monthly or seasonal rentals
‒
Centralized phone and/or key systems
‒
Food or beverage service (room service) is available to the individual units
‒
Lack of a full kitchen within the unit
‒
Housekeeping services on a daily or weekly basis
‒
Advertising of rental rates
‒
Registration service (check-in desk, off-site desk)
‒
Restrictions on interior decorating or furnishings, or the units are sold fully furnished
‒
Franchise agreements
‒
Low owner occupancy density with limited or no owner-occupants
‒
Affiliation with and/or managed by an entity such as a hotel or hospitality chain
‒
Impose black-out dates or do not have year-round access
‒
Shares facilities, common elements or amenities with a hotel or resort that is owned and
managed by the developer or another third-party entity

Projects with mandatory rental pooling agreements that require unit owners to either rent their
units or give a management firm control over unit occupancy

Project management and marketing practices such as:
‒
The developer or a third-party entity expects to retain ownership or control of the project
‒
The developer or a third-party entity retains ownership or control of any common elements
or amenities
‒
Unit owners have no control over any third-party entity that succeeds the developer
‒
Commercial space over which the unit owners have no control

The PUD documents and any amendments are silent on the presence of common elements
and/or amenities, their use and/or ownership, or they state that common elements and/or
amenities may be added to, expanded, or deleted as determined by the developer or another
third-party entity without the consent of the unit owners or the HOA.

Manufactured housing projects

Projects with revenue sharing by either the HOA or unit owner
7/7/16

Projects with non-incidental business operations (such as restaurants, health club, spa, etc.)
owned and operated by the HOA.

Time-share or segmented ownership projects

Common interest apartments

The developer, third-party entity, or the HOA operates commercial facilities within the project or
master association, such as retail stores, restaurants, golf course, common areas, recreational
facilities, and amenities usually associated with luxury hotels and resorts.

Assisted living or senior care facilities that have a minimum age requirement and/or provide
meal or healthcare services

Continuing care retirement community (CCRC) or life-care facilities. These are residential
projects that are designed to meet the health and housing needs of seniors as their needs
change over time.

Multi-unit PUDs that permit an owner to hold title to more than one unit, with ownership of all of
the owned unites evidenced by a single deed and financed by a single mortgage

Any project owned by several owners as tenants-in-common or by a HOA in which the
individuals have an undivided interest in a residential apartment building and land, and have the
right of exclusive occupancy of a specific unit in the building.

Live-work type PUDs such as artist’s studio, workshops, factories and galleries.

Own your own property situations where the legal description gives the Borrower the right to
occupy a given unit rather than the actual ownership of the unit.

Projects with commercial space used for non-residential purposes that exceeds 20% of the total
space

Projects in which a single entity (individual, investor group, partnership, or corporation) other
than the developer, owns more than 10% of the units.

New projects in which the property seller offers sales/financing structures in excess of the
maximum allowable contributions for individual loans.

Any project that represents a legal, but non-conforming uses of the land, if zoning regulations
prohibit re-building improvement to current density in the event of their full or partial destruction

Projects with mandatory club memberships or leased amenities.
CONDOMINIUMS
A condominium unit is a single-family dwelling located in a Condominium Project. Each unit owner has title to a single
unit in the building plus an undivided interest in the common areas of the project, and sometimes the exclusive use of
certain limited common areas. A condominium is real estate that is generally defined as separate ownership in a
residential unit with an undivided interest in the real estate designated for common ownership solely by unit owners.
Building types may be low-rise (less than four stories), mid-rise (five to eight stories) or high-rise (greater than eight
stories), attached, detached, and/or site condominiums.
Condominiums create additional risk because the Homeowners’ Association (HOA) has legal rights that could
adversely impact the mortgagee’s rights. Depending on the financial management of the HOA, the value of the
project (unit) can be adversely affected.
Galton Funding will purchase loans secured by units in Condominium Projects, relying primarily on the Seller’s
warranties. The sustainability, marketability, and financial stability of the project must be supported by the appraisal,
market information, and county records. The project must be located in an area where condominium ownership is
common and acceptable.
A Warrantable Condominium is a Condominium Project that meets Agency-eligibility standards and insurance
requirements.
Condominium Project Review
A project review is required for all Condominium Projects. If the project has not been approved by Fannie Mae, the
Originator must initiate the appropriate review, secure the approval, and deliver the approval documentation to Galton
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7/7/16
Funding as part of our project review. For projects that are already Fannie Mae-approved, approval-related
documentation must be included in the Loan File submitted for project review.
The following documentation must be supplied for project reviews:

The Seller’s Loan Approval (Fannie Mae Form 1008) with the type/class indicated on the form

Individual Condominium Unit Appraisal Report (Fannie Mae Form 1073/465 or Form 1075/466).
Site condominiums can be completed on either the Individual Condominium Unit Appraisal
Report or Single Family Residential Appraisal Report. Common areas and amenities must be
inspected by the appraiser and documented.

A completed copy of the Warranty of Condominium Project Legal Documents (Fannie Mae
Form 1054). Sellers may use their own form provided that it includes all the required
information.

HOA certification

Insurance declaration page

Flood determination certificate

Current project budget – at least 10% of the budget provides funding for replacement reserves
for capital expenditures and deferred maintenance

CPM/PERS project approval documentation (CPM project acceptance certificate). The
expiration date must not be prior to the Closing Date.

Attorney opinion letter, if applicable

An environmental hazard assessment is required for Condominium Projects if an environmental
problem is identified by the Seller or Galton Funding through performance of its project
underwriting or Due Diligence. The solution to the problem must be deemed acceptable by
Galton Funding.
The following Fannie Mae project types are acceptable:

S-CPM Expedited Review or Lender Full Review – established projects

Fannie Mae Full Review - Projects that received a final project approval (PERS)
Sellers must provide all documentation referenced above that supports the warranty of the project. Loans may be
suspended for purchase pending receipt of this information. While the Seller may need to obtain additional
documents as CC&Rs and bylaws, articles of incorporation, project legal documents, etc. to determine project
eligibility, it is not necessary to provide them in the Loan File. Condominium projects are divided into the following
categories:
New projects: A project in which:

Project or legal phase is not fully complete or subject to additional phasing or annexation,
proposed construction, or new construction, or

Less than 90% of the total units in the project have been conveyed (sold) to unit purchasers, or

The control of the HOA has not been turned over to the individual unit owners.
Established projects: A project which:

The project is 100% complete, and is not subject to additional phasing or annexation

90% or more of the total units have been conveyed (sold) to the unit purchasers (other than the
developer), and

The control of the HOA has been turned over to the individual unit owners.
Site (Detached) Condominium: A detached dwelling unit located in a Condominium Project comprised entirely of
site (detached) condominiums that are not manufactured housing.
Two- to Four-Unit Projects: A project that is comprised of at least two but no more than four one-unit dwellings that
are each separately owned with separate legal descriptions.
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Project Concentration Limits
Galton Funding limits each Seller and Borrower to no more than the greater of five units or 10% of the total units in a
specific project within a 12-month period. This restriction applies across all product lines. No single entity other than
the developer may own more than one unit in a two-to-four unit project.
Galton Funding reserves the right to limit the number and/or aggregate dollar amount of loans purchased in any one
subdivision or Condominium Project, or declare loans in any project ineligible for purchase.
Eligible Project Types
Condominium projects with the following characteristics are eligible:

At least 90% of the total units in the project have been conveyed to the unit purchasers.

The project is 100% complete, including all units and common elements

The project is not subject to additional phasing or annexation and;

Control of the HOA has been turned over to the unit owners
Note: Non-Warrantable Condominiums are eligible with restrictions. Please refer to the Non-Warrantable
Condominium section for program and guideline criteria
Ineligible Project Types
Condominium projects with any of the following characteristics are ineligible:

Condominium conversions

Properties less than 400 square feet. In all cases, the property must be typical and common for
the market area and supported by two comparables.

Projects in current or threatened litigation are typically ineligible. Litigation may be acceptable if
it is determined to be minor and immaterial. Details of the litigation must be submitted to Galton
Funding to determine acceptability.

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‒
Any project for which the developer, project sponsor, or HOA is named as a party to
litigation or pending litigation that relates to the safety, structural soundness, habitability, or
functional use.
‒
If the master liability policy does not cover a lawsuit or judgment, or special assessments
need to be imposed to cover the lawsuit or judgment
Projects managed and operated as a hotel/motel or contain the word hotel/motel in the name.
They may have the following characteristics, however, this list is not inclusive:
‒
Daily, monthly or seasonal rentals
‒
Centralized phone and/or key systems
‒
Food or beverage service (room service) is available to the individual units
‒
Lack of a full kitchen within the unit
‒
Housekeeping services on a daily or weekly basis
‒
Advertising of rental rates
‒
Registration service (check-in desk, off-site desk)
‒
Restrictions on interior decorating or furnishings, or the units are sold fully furnished
‒
Franchise agreements
‒
Low owner occupancy density with limited or no owner-occupants
‒
Affiliation with and/or managed by an entity such as a hotel or hospitality chain
‒
Impose black-out dates or do not have year-round access
‒
Shares facilities, common elements or amenities with a hotel or resort that is owned and
managed by the developer or another third-party entity
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
Projects with mandatory rental pooling agreements that require unit owners to either rent their
units or give a management firm control over unit occupancy

Project management and marketing practices such as:
‒
The developer or a third-party entity expects to retain ownership or control of the project
‒
The developer or a third-party entity retains ownership or control of any common elements
or amenities
‒
Unit owners have no control over any third-party entity that succeeds the developer
‒
Commercial space over which the unit owners have no control

The condominium documents and any amendments are silent on the presence of common
elements and/or amenities, their use and/or ownership, or they state that common elements
and/or amenities may be added to, expanded, or deleted as determined by the developer or
another third-party entity without the consent of the unit owners or the HOA.

Manufactured housing projects

Projects with revenue sharing by either the HOA or unit owner

Projects with non-incidental business operations (such as restaurants, health club, spa, etc.)
owned and operated by the HOA.

Time-share or segmented ownership projects

Common interest apartments

The developer, third-party entity, or the HOA operates commercial facilities within the project or
master association, such as retail stores, restaurants, golf course, common areas, recreational
facilities, and amenities usually associated with luxury hotels and resorts.

Assisted living or senior care facilities that have a minimum age requirement and provide meal
or healthcare services

Continuing care retirement community (CCRC) or life-care facilities. These are residential
projects that are designed to meet the health and housing needs of seniors as their needs
change over time.

Multi-unit condominiums that permit an owner to hold title to more than one unit, with ownership
of all of the owned unites evidenced by a single deed and financed by a single mortgage

Any project owned by several owners as tenants-in-common or by a HOA in which the
individuals have an undivided interest in a residential apartment building and land, and have the
right of exclusive occupancy of a specific unit in the building.

Live-work type condominiums such as artist’s studio, workshops, factories and galleries.

Own your own property situations where the legal description gives the Borrower the right to
occupy a given unit rather than the actual ownership of the unit.

Projects with commercial space used for non-residential purposes that exceeds 20% of the total
space

Projects in which a single entity (individual, investor group, partnership, or corporation) other
than the developer, owns more than 10% of the units.

New projects in which the property seller offers sales/financing structures in excess of the
maximum allowable contributions for individual loans.

Any project that represents a legal, but non-conforming uses of the land, if zoning regulations
prohibit re-building improvement to current density in the event of their full or partial destruction

Projects with mandatory club memberships or leased amenities.

Multiple property types within the project (e.g., townhomes and condominium units within the
same HOA)
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Site Condominiums
Condominium projects composed of detached, one-unit dwellings that meet the following conditions will be treated
the same as single-family residences:

The Condominium Project consists solely of detached one-unit dwellings. (Manufactured homes
are not permitted.)

The Mortgage Property is owner occupied.

These transactions must comply with all general condominium requirements outlined in this
section.
Warranties for Site Condominiums
If the Mortgaged Property is a site condominium unit, the Seller warrants the following to Galton Funding as of the
Purchase Date:

The mortgage on the subject property is covered by a title insurance policy that includes ALTA
Form A, Condominium endorsement.

The property is covered by hazard, flood, liability, and fidelity insurances as required under the
Insurance Requirements section of this chapter.
Insurance Requirements
The Seller must confirm the HOA has a legal obligation to maintain adequate insurance and the budget is sufficient to
cover insurance expenses.

Hazard Insurance. Blanket all risk policy with 100% of insurable replacement cost, the
deductible may not to exceed 5% of policy face amount per building. A hazard declaration page
must be included with the Loan File as evidence of insurance. The declaration page must also
contain a reference to the subject property. The policy should include a “severability of interest”
clause or a specific endorsement to preclude the Insurer’s denial of a unit owner’s claim
because of negligent acts of the HOA or other unit owners. The policy should also provide for
10 days’ notice of cancellation.

Flood Insurance. The policy must be less of 100% of insurable value or the maximum coverage
allowed per NFIP. Coverage of each unit should be the lesser of $250,000 or the amount of its
replacement cost. Deductible may not exceed $25,000 per building located in the flood zone.

Liability Insurance. General liability of $1,000,000 per occurrence is required for all
condominiums.

Fidelity Bond. Insurance equal to the greater of 1) three months of assessments/maintenance
fees of all units in the project, or 2) the maximum funds that will be in the custody of the HOA or
its agent at any time while the policy is in force is required or the following reviews:

Type R with 21 units or more in the project

Type S with 21 units or more in the project

Type T

Type U

HO6- (Walls-In) Coverage: that is no less than 20% of the condo unit’s Appraised Value
(5% deductible limit).
Legal Review
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
Compliance with Laws. The Condominium Project must be created and exist in full compliance
with state law requirements of the jurisdiction where the project is located an all other applicable
laws and regulations.

Right of First Refusal. Any right of first refusal in the Condominium Project documents will not
adversely impact the rights of a mortgagee or its assignee to:
‒
Foreclose or take title to a condominium unit pursuant to the remedies in the mortgage.
‒
Accept a deed or assignment in lieu of foreclosure in the event of default by a Borrower
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‒

Amendments to Documents. The project documents must provide that amendments of a
material adverse nature to mortgagees by agreed to by mortgagees that represent at least 51%
of the votes of unit estates that are subject to mortgages. The project documents must provide
for any action to terminate the legal status of the project after substantial destruction or
condemnation occurs or for other reasons to be agreed to by mortgagees that represent at least
51% of the votes of the units that are subject to mortgages. Finally the project documents may
provide for implied approval to be assumed when a mortgagee fails to submit a response to any
written proposal for an amendment within 60 days after it received proper notice of the
proposal, provided the notice was delivered by certified or registered mail with a return receipt
requested.

Unpaid Dues. Any first mortgagee who obtains title to a condominium unit pursuant to the
remedies in the mortgage or through foreclosure will not be liable for more than six months of
the unit’s unpaid regularly budgeted dues or charges accrued before acquisition of the title to
the unit by the mortgagee.

Rights of Condominium Mortgagees and Guarantors. The project documents must give the
mortgagee and guarantor of the mortgage on any unit of a project the right to timely written
notice of:

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Sell or lease a unit acquired by the mortgagee or its assignee.
‒
Any condemnation or casualty loss that affects either a material portion of the project or
the unit securing the mortgage.
‒
Any 60-day delinquency in the payment of assessments or charges owed by the owner of
any unit on which it holds the mortgage.
‒
A lapse, cancellation, or materials modification of any insurance policy maintained by the
HOA
‒
Any proposed action that required consent of a specified percentage of mortgagees
First Mortgagee’s Rights Confirmed. No provision of the Condominium Project documents
gives a condominium unit owner or any other party priority over any rights of the first mortgagee
of the condominium unit pursuant to its mortgage in the case of payment to the unit owner of
insurance proceeds or condemnation awards for losses to or a taking of condominium units
and/or common elements.
7/7/16
NON-WARRANTABLE CONDOMINIUMS
Non-warrantable condos are acceptable under the following circumstances. Projects with multiple non-warrantable
characteristics are ineligible due to risk layering.
Category
Non-Warrantable Allowances
Litigation
Projects involved in litigation are ineligible.
HOA Reserves
HOA Budget must include a dedicated line item allocation to replacement reserves of
at least 8% of the budget.
Completion Status
The project, or the subject’s legal phase along with all prior phases, must be
substantially complete (up to buyer preference items). All Common elements in the
project or legal phase must be 100% completed. At least 50% must be sold or under
bona-fide contract.
Investor Concentration
Maximum investor concentration of 60% for new construction projects, recent
conversions, or investment subject properties. Calculation based on total units in
current and previous legal phases.
Single Entity Ownership
No single entity (an individual, investor group, partnership or corporation) may own
more than 20% of the total units in the project.
HOA in Builder’s Name
The developer may be in control of the condominium association provided the Master
Agreement provides for the homeowners to take control upon either a predetermined
percentage of unit sales or within a defined time period.
Delinquent HOA Dues
No more than 20% of total units in a project may be 60 days or more past due on the
payment of condominium / association fees.
Property Type
Low-, mid- and high-rise condos are eligible. Complexes over four stories must be
common to the area. Projects less than 10 units must be typical and common for the
market area.
Commercial Space
Maximum 30% of the total space is used for non-residential purposes.
Note: projects with a rental desk on site are not allowed.
Eligible Loan Programs
Non-Warrantable Condominiums are allowed under the Prime Jumbo and Near Prime loan programs. Refer to
Galton Funding Loan Program Matrices for additional information.
RURAL PROPERTIES
In addition to one of the above property types, a property may be classified as a rural property if any of the following
conditions exits:

The property is classified as rural by the appraiser.

The property is located on a gravel road.

Two of the three comparable properties used by the appraiser are more than five miles from the
Mortgaged Property.

Less than 25% of the surrounding market area is developed.
In order to be eligible for any of Galton Funding’s Loan Programs, a rural property must be an owner occupied
single-family residence.
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7/7/16
INELIGIBLE PROPERTY TYPES
The following property types are not acceptable for any Galton Funding Loan Program:
Page 84 of 96

Mixed Use properties

Time share units/projects

Unimproved land

Mobile homes

Condo-hotels

Cooperatives

Log homes

Condominiums and PUDs with pending structural litigation

Properties located in a retirement or senior community with limited age restrictions.

Manufactured homes

Property that does not have full utilities installed to meet all local health and safety standards
including:
‒
A continuing supply of potable water
‒
A public sewer or certified septic system
‒
Public electricity
‒
Natural or LP gas

Properties zoned commercial, industrial, or business (where highest and best use is
commercial, industrial, or business)

Condominium conversions

Vacant land

“Subject to” values without a Completion Certificate (Fannie Mae Form 1004D)

Properties with square footage of less than 700 square feet (these may be acceptable if
acceptable comparables are within 100 square feet of the size of the Mortgaged Property)

Earth-sheltered or dome home

Any property in below average condition

Working farms, ranches, or orchards

Properties that have been modified to accommodate home businesses, such as catering
service, in-home day care, animal boarding facilities, or auto repair businesses

Properties currently listed for sale, or that have been listed for sale in the past six months are
ineligible for a refinance transaction

Multi-family properties greater than 4 units

Motel conversions

Group homes

Properties located in declining markets
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OCCUPANCY
The following sections outline the occupancy categories and the requirements and guidelines associated with them.
Occupancy types are:

Owner occupied primary residences

Second/vacation homes

Non-owner occupied investment properties
OWNER OCCUPIED PRIMARY RESIDENCE
An owner occupied primary residence is a 1-4 unit dwelling that is occupied by the Borrower as his or her principal
residence. A property will not be considered a primary residence unless at least one of the Borrowers occupies all or
part of the Mortgaged Property as a primary residence within 30 days of the note date. The following define primary
residency:

The Borrower occupies the property for a major part of the year.

The property location is convenient to the Borrower’s place of employment.

The property must possess the physical characteristics to accommodate the Borrower’s
immediate dependent family. Physical characteristics are considered those typical to both the
owner and the neighborhood.

The property’s address is on record for federal income tax reporting, voter registration, driver’s
license, and occupational licensing.

In the case of a purchase money transaction, the Borrower must state his or her intention to
occupy the Mortgaged Property as his or her principal residence.
SECOND HOME OR VACATION HOMES
A second home or vacation home is a one-unit dwelling owned and occupied by the Borrower for his or her exclusive
use and enjoyment. The property should be located at a sufficient distance and time of travel from the primary
residence. The following define a second/vacation home:

The property is suitable for year-round occupancy.

The property is not subject to timesharing, rental agreement ownership, rental pools, or
agreements that stipulate the rental of the property.

A management firm must not control occupancy.

The property may not be remote or inaccessible and may be used only for residential purposes.

Income from a second/vacation home is not acceptable.
Galton Funding limits the number of loans a Borrower may have for second/vacation homes to one. Two to four unit
properties are ineligible as second/vacation homes. Second homes are listed in the Owner Occupied section of the
Galton Funding Loan Program Matrices.
NON-OWNER OCCUPIED INVESTMENT PROPERTIES
An investment property is a 1-4 unit residential property that is neither the Borrower’s primary residence nor his or her
second/vacation home. Investment property is defined as property owned for the purpose of generating a positive net
cash flow.
A loan for investment property that generates a negative cash flow may be eligible for purchase by Galton Funding as
long as the Borrower’s credit and debt ratios strictly adhere to the Loan Program requirements. The overall
transaction will be closely scrutinized and must make sense for the Borrower’s circumstance.
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7/7/16
PROPERTY UNDERWRITING
The property used as collateral for the loan must provide sufficient value to recover the investment should the loan
default. The appraisal provides the basis for evaluating the value of the collateral. The appraiser must present a
concise picture of the neighborhood, the site, and the improvements to support an indicated value that adequately
supports the estimate of market value. The Seller must perform an audit of the appraisal for the following:

Consistency, logic, and accuracy of the appraisal

Reasonable support for the value of the property

Current and future marketability of the property

Appraiser qualifications

Timeliness and applicability of the data used to determine marketability

Completeness and accuracy of the appraisal forms and exhibits
Galton Funding may elect to require additional appraisal diligence based on the improvements and condition of the
property or data within the appraisal report. This increased diligence may include additional comparables, an AVM, a
field review, or a second full appraisal on a property.
SELLER CONSIDERATIONS:
The Seller should consider the following when reviewing collateral for the loan transaction:
Page 86 of 96

The accuracy and completeness of the appraisal and its assessment of the marketability of the
property;

Underwriting the completed appraisal report to determine whether the Mortgaged Property
presents adequate collateral for the mortgage;

Continually evaluating the quality of the appraiser’s work through normal underwriting review of
all appraisal reports and spot-check field review of appraisals as part of its quality control
program;

Ensuring that the appraiser uses sound reasoning and provides evidence to support the
methodology used for developing the value opinion;

Ensuring that the appraiser provides an accurate opinion, an adequately supported value, and
an accurate description of the property;

Ensuring that the appraiser provides his or her license or certification on the appraisal report;

Complying with the appraiser independence requirements outlined in Section 1026.42 of
Regulation Z under the Truth in Lending Act;

Disclosing to the appraiser any information about the Mortgaged Property of which it is aware of
that could impact the marketability of the property;

Providing the appraiser with the ratified sales contract and other financing or sales concessions
that are associated with the transaction;

Ordering and receiving the appraisal report for each mortgage transaction; and

Ensuring the appraiser does not use unsupported assumptions or use race, color, religion, sex,
handicap, familial status or national origin for any party in the transaction as the basis for
market value.
7/7/16
APPRAISER QUALIFICATIONS
The Seller should ensure that each appraiser meets the following qualifications:

Has a certified residential appraiser license or a certified general appraiser license in good
standing. All licenses must be issued in the state where the Mortgaged Property is located.

Meets the independent appraiser requirements for staff appraisers or, as appropriate, fee
appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of
the Federal Reserve System, the FDIC, and the Office of Thrift Supervision with their respective
real estate appraisal regulations adopted in accordance with Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (regardless of whether the Seller is subject to
those regulations).

Is actively engaged in appraisal work and experienced in the appraisal of properties similar to
the Mortgaged Property.
Galton Funding may at any time notify the Seller that Galton Funding will no longer approve loans secured by a
Mortgaged Property that was appraised by a particular appraiser.
APPRAISAL REQUIREMENTS
The mortgage underwriting and approval process depends upon the real estate appraisal report. All appraisals must
be in writing. The appraisal report must include sufficient and accurate information to assist in the review of the
proposed loans. An appraisal that meets all of the Galton Funding guideline requirements is required for all Loan
Programs. Each appraisal must satisfy the requirements of Title XI of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (regardless of whether the Seller is subject to those regulations).

All appraisers must be state licensed and a copy of the license must be submitted with the
appraisal

Appraisals must be dated within 120 days of the Note date. In the event that the Disbursement
Date causes the Borrower’s credit report and/or credit file to be greater than 120 days old,
Galton reserves the right to request updated credit, asset, and/or income documentation.
Disbursement Date is the day on which the loan closes.

All appraisals obtained during the loan origination and underwriting processes must be included
in the Loan File

Recertification of value is not allowed
Each Loan must include a third-party valuation review product. Please refer to the Galton Funding Appraisal
Valuation Summary for complete requirements.
A complete original summary appraisal report is required on each property. The appraisal report must support the
appraiser’s estimate of the Mortgaged Property market value. It must present a good visual representation of the
neighborhood, site, and improvements. The appraiser should use the comments section of the report to achieve this
goal and attach any additional documentation if needed.
The Seller must ensure that all appraisals are performed in strict accordance with all applicable local, state, and
federal laws, regulations, and orders.
All appraisals must conform to the Uniform Standards of Professional Appraisal Practice (USPAP) guidelines adopted
by the Appraisal Standards Board of Appraisal Foundation.
The appraisal report must include the following:
Page 87 of 96

The correct loan transaction type

Occupancy status of the property

Information about property taxes and any special assessments

Property rights appraised

The identity of the Borrower and the identity of the current owner

Address and legal description of the property

Tax Assessor’s Parcel Number (APN) for the Mortgaged Property
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
Any sales concessions and/or loan charges to be paid by the Seller, or any other party that has
a financial interest in the financing or sale of the Mortgaged Property

Identity and address of the appraiser
Required Appraisal Forms
All appraisals must be in writing. The appraisal report must be submitted on the current version of the appropriate
appraisal forms listed below.
Single-Family Properties and Detached PUD Units

Uniform Residential Appraisal Report (Fannie Mae Form 1004/Freddie Mac Form 70)

Statement of Limiting Conditions and Appraiser’s Certification (Fannie Mae Form
1004B/Freddie Mac Form 439)
For single-family investment properties, if the income is necessary for qualifying, the following forms are
required:

Single-Family Comparable Rent Schedule (Fannie Mae Form 1007)

Operating Income Statement (Fannie Mae Form 216)
Condominium Units

Individual Condominium or PUD Unit (Fannie Mae Form 1073/Freddie Mac Form 465) with
Statement of Limiting Conditions

Appraiser’s Certification (Fannie Mae Form 1004B/Freddie Mac Form 439)
Two-to-Four Unit Properties

Small Residential Income Property Appraisal Reports (Fannie Mae Form 1025)

Statement of Limiting Conditions

Appraiser’s Certification (Fannie Mae Form 1004B/Freddie Mac Form 430)

Operating Income Statement (Fannie Mae Form 216)
Field Reviews
Galton Funding may, at its discretion, require a field review appraisal to be performed. The Residential
Appraisal Field Review Report (Fannie Mae Form 2000/Freddie Mac Form 1032) must be used for all field
review appraisals. When a field review is requested, the lower value of the original appraisal or field review
will be used to determine LTV/CLTV.
Properties with “Subject to” Repairs or Completion
All properties where the value is defined as “subject to repairs, alterations, or conditions” or “subject to
completion per plans and specifications,” require the original Satisfactory Completion Certificate (Freddie
Mac Form 442) along with a photo of the completed property. Escrows for items to be completed or repaired
are not acceptable.
Required Appraisal Attachments
The following attachments must accompany each appraisal:
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
A location map showing the Mortgaged Property and comparables.

Three clear descriptive photographs (front, rear, and street scene) of the Mortgaged Property.

One original photograph (may be electronic) of each comparable in the Residential Appraisal
Report. The appraisal must also include photographs of the comparable listings and
comparable rentals in multi-family reports.

A diagram of the Mortgaged Property floor plan, detailing room layout, location of all rooms, and
exterior doors.

The appraiser’s cover letter explaining unusual items not adequately addressed in the
appraisal.
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Disasters Areas
If the Mortgaged Property is located in an area that is declared a federal disaster area, the Seller must ensure that
the property meets all Galton Funding pre- or post-disaster collateral requirements. The list of disaster areas can be
found on FEMA’s website at: http://www.fema.gov/disasters.
Property Appraised Prior to Disaster
For loans secured by properties appraised before the presidential/state disaster declaration, an interior and
exterior inspection of the Mortgaged Property is required and the following pre-disaster guidelines apply:


The original appraiser should perform the inspection and provide a certificate stating:

Mortgaged Property is free from damaged and is in the same condition as previously
apprised

Marketability and value remain the same
If the original appraiser is not available:

The inspection maybe be completed by any of the following:
o
Property / building inspection company
o
Licensed general contractor
o
Building or safety inspector for local municipality
o
Licensed structural engineer

The inspector must be given a copy of the original appraisal report

The inspector must provide certification, on their letterhead, stating:
o
Original appraisal has been reviewed
o
Interior inspection has been completed
o
To their best of their knowledge

Subject is free from significant damage

All repairs, if needed, have been completed
Property Appraised After Disaster
For loans secured by properties appraised after the presidential/state disaster declaration, an interior and
exterior inspection of the Mortgaged Property is required and the following post-disaster guidelines apply:

Appraiser must note any damage and its affect on marketability and value

Electronic evaluations are not acceptable

Galton Funding may at its sole discretion require an interior and exterior inspection of the
property by the original appraiser.
APPRAISAL EVALUATION
The appraisal is an opinion of the value that is objective, unbiased, and supported by research and data. The
following sections are used to evaluate the adequacy of the appraisal:
Neighborhood Analysis
The neighborhood in which a property is located is a critical determinant of its marketability and value. All factors
presented in the neighborhood analysis section of the appraisal report must be analyzed. This section must provide
an accurate description of the neighborhood along with any favorable or unfavorable factors and any changes that
influence the market value and marketability of the properties in the neighborhood. The neighborhood analysis should
take into consideration all elements of the property’s neighborhood including:
Neighborhood Property Values
The appraisal must indicate whether property values in the subject neighborhood are increasing, stable, or
declining. The appraiser must substantiate this by showing comparable sales within six months of the
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appraisal date. Property values should be stable or increasing. Declining values are a concern due to the
potential for equity erosion. If the neighborhood property values are declining, the appraiser must explain the
reasons for the decline and its effect on the value of the Mortgaged Property.
Neighborhood Composition
The degree to which a neighborhood is built up and its location within a metropolitan area or rural area is
used to assess the reasonableness of the comparable sales. An “urban” location generally relates to a city,
a “suburban” location relates to the areas adjacent to a city, and “rural” location relates to those areas
beyond the urban and suburban areas.
Rural Properties
Rural properties are generally more difficult to assess. Marketing times may be affected by their remote
location. There is greater emphasis placed on the proximity of the comparable sales in determining the rural
property’s marketability.
If any one of the following criteria exists, the property may be classified as rural:

The property is classified as rural by the appraiser.

The property is located on a gravel road.

Two of the three comparable properties used by the appraiser are more than 5 miles from the
Mortgaged Property.

Less than 25% of the surrounding market area is developed.
Marketing Time
Properties in the subject’s neighborhood should have a marketing time of less than six months.
Present Land Use of the Neighborhood
A likely change in the neighborhood’s land use would be of concern if the change negatively affects the
property’s future value.
Predominant Value and Price Range
A comparison of the predominant value for the neighborhood should favorably reflect the Mortgaged
Property’s value. If the Mortgaged Property sets the top value for the neighborhood, it may be an indication
that the property represents an over-improvement. Likewise, a property at the low end of the market’s value
may also be a concern. The Seller should consider whether the property in its current form is likely to
continue to be its highest and best use.
Site Analysis
It is important that the site of the Mortgaged Property is of a size, shape, and topography that is generally acceptable
in its market area in order to have a strong market appeal. The site should have street improvements, utilities, and
other amenities normally expected in the area.
Maximum Acceptable Acreage
The maximum acreage allowance by Galton Funding is 10 acres. Generally, value should only be given to 5
acres unless it can be shown with comparable sales that 5 to 10 acres is typical for the area. Acreage
exceeding 10 acres will be reviewed on a case-by-case basis. Comparable market activity of like-sized
parcels must align with the acreage of the Mortgaged Property. Ranches, working farms, orchards, and/or
commercial operations of any type are not permitted.
Land Values
Land value and the land-to-value ratio must be reviewed. For areas that are built up at more than 25%, the
Mortgaged Property’s land-to-value ratio should be consistent with other properties in the area. For areas
that are less than 25% built up, the property’s land-to-value ratio should not be more than 40% and must be
consistent with other properties in the area.
Lots with More Than One Contiguous Lot
Only the value for the lot upon which the Mortgaged Property is located will be recognized.
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Zoning
The zoning of the Mortgaged Property should be residential in nature.

Recent or pending zone changes that would have a negative impact on residential market
values are not acceptable.

Agriculturally zoned properties may be acceptable when their use is primarily residential. Value
given to outbuildings will not be allowed unless supported by comparables with similar
amenities.

For legal non-conforming property, if the appraisal indicates that the property is of a legal nonconforming use, then one of the following must be occur:

The appraiser must address the issue within the body of the appraisal or present a Letter of
Addendum that states the property can be rebuilt “as is” in the event of a loss. The source of
the information must also be indicated; OR

A letter from the county stating the property may be rebuilt “as-is” in the event of a loss must be
obtained.
Flood Zones
Properties that are uninsurable because they are located in a flood hazard area that is ineligible for the
National Flood Insurance Program are not acceptable.
Highest and Best Use
Properties should represent the “highest and best use” for the site. If the current improvements do not
represent the “highest and best use” for the Mortgaged Property, the property is not acceptable.
Subject Property Analysis
The Mortgaged Property should conform to the neighborhood in terms of age, design, and materials used for
construction. The appraiser should describe any unacceptable or unusual items that affect marketability. Where
appropriate, adjustments should be made for these items in the estimate of market value.
Acceptable marketability is supported by at least average ratings for quality, construction, condition, and appeal of the
property. Poor or fair ratings should be rare. If there are exceptions, the appraiser must provide sufficient explanation.
Living Area
Living areas of the Mortgaged Property should be typical of the marketing area. The appraisal should use
comparables of similar size to demonstrate the marketability of the property.
Galton Funding will critically analyze condominiums or attached properties with less than 700 square feet
and detached dwellings with less than 800 square feet of living area to determine if their size is typical and
readily marketable in the subject area. Properties with less than 700 square feet may be accepted for
purchase by Galton Funding at Galton Funding’s sole discretion on a case-by-case basis.
Design
The appraiser should assess the design and overall appeal of the Mortgaged Property and evaluate whether
similarly designed properties exist and are readily marketable in the subject area.
Outbuildings
Small outbuildings such as barns, stables, workshops, or guesthouses must be described on the appraisal
report. Outbuildings must be typical for the subject area and be supported by comparable sales of properties
with similar outbuildings.
Building Permits for Additions and Alterations
Building permits are generally not required if the conversion or addition to the living area was completed in a
workman-like manner, confirmed by the appraiser, and supported by photographs of the addition. The
addition or improvements must be of good quality and any possible health or safety violations must be noted
by the appraiser. Room additions or additional units must be permitted to ensure the dwelling was built to
code.
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Properties on Stilts, Posts or Piers
Post and pier foundations are acceptable if it can be shown they are common to the area and the property
meets FEMA standards (FEMA Technical bulletin 9-99).
Condition of Property
All properties are expected to have an “average” or “good” rating. The Seller must consider all factors
negatively affecting the property’s condition when assessing the overall risk of the loan. These factors may
include:

Deferred Maintenance. Appraisals on properties showing evidence of deferred maintenance or
“subject to” items must be described in detail. The appraiser must determine the nature of the
repairs and include the cost to cure. Deferred maintenance that exceeds 2.5% of the property
value or that affects its basic habitability will require a Satisfactory Completion Certificate (Form
442).

Debris, Graffiti, or Trash. Properties showing an excessive amount of debris, graffiti, or trash
may require cleanup. If necessary, a Satisfactory Completion Certificate (Freddie Mac Form
442) and photos will be required.

Infestation. If there is any indication of termites or any other infestation, the Seller ensures that
the infestation issue has been investigated, treated, and remedied.

Roof Damage. The Seller must address properties with visible evidence of roof leaks and/or
interior water damage (ceiling stains) even if the appraisal does not list them. If any of these
conditions exist, the Seller must obtain a roof certification, indicating a remaining useful and
physical life of at least three years.

Other Unacceptable Property Conditions:


Boarded-up properties

Properties that pose an imminent threat to the health and safety of the occupant

Inadequate foundations that do not meet current code requirements for the local
municipality

Inadequate heating (must be permanently affixed legal heating systems)

Properties that lack city or county maintenance services

Properties without water or public electricity

Cantilevered properties on stilts, posts, or piers

Shared services for well, septic or utilities that are private agreements

Cantilevered properties on stilts, posts, or piers

Properties showing evidence of mold
Environmental hazards or nuisances
Any nuisances or environmental hazards the Seller knows or suspects may exist that could adversely affect
the value of the Mortgaged Property must be disclosed. The appraiser must note these in the appraisal and
document any other nuisances or environmental hazards.
If Galton Funding suspects a nuisance or environmental hazard, it may require an environmental study be
completed prior to considering the loan for purchase. In this case, the Seller must hire a nationally
recognized and reputable environmental engineering firm to provide a written report. The report must include
an analysis and a detailed list of cleanup costs.
Galton Funding must be convinced that any known or suspected hazards will not have an adverse effect
upon the Appraised Value of the Mortgaged Property.
Cost Approach
The cost approach is used to determine a property’s market value based on the current cost of constructing a home
from materials that are as similar as possible to those used for the property being appraised. The cost approach is
important when appraising newer or substantially rehabilitated properties as a check for the market data approach. If
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the appraiser believes that the cost approach is not applicable (turn-of-the-century homes) and if sufficient sales of
comparable properties are available in the market, the cost approach may be omitted with comments explaining this
belief.
Whether or not the cost approach is used, the Seller must show an estimated land value. The Seller should base this
figure on the value of the land as though it were developed to its highest and best use consistent with its present
zoning classification.
External Obsolescence
External obsolescence is a devaluation of property value due to an undesirable or unnecessary condition
outside the property. The appraiser should address the impact on marketability that external obsolescence
has upon the Mortgaged Property. In addition, the appraiser must provide evidence of comparable market
sales that are similarly affected.
Functional Obsolescence
Functional obsolescence is defined as features of a property that has become unfashionable or unnecessary
in the eyes of potential purchasers. The appraiser should describe the functional obsolescence, and provide
similar comparables to demonstrate its marketability or provide the cost to cure, if applicable.
Market Data Approach
The greatest weight and reliance is placed on the market data approach. The value indicated by this approach must
be supported by an analysis of at least three recently closed comparables located near the Mortgaged Property.
Galton Funding considers the following key items in its review and analysis of the market data approach:
Proximity of Comparables to the Mortgaged Property
Comparable properties should be located in the same neighborhood and/or school district. Comparable
sales should be located within one mile of the Mortgaged Property in urban and suburban areas. If two of
three comparable properties used by the appraiser exceed a distance of five miles from the Mortgaged
Property, the property will be considered rural. The appraiser must explain the necessity of using any
comparable property located outside the neighborhood.
Comparables Inside and Outside New Projects
The appraiser must demonstrate the marketability of homes built within new subdivisions or Condominium
Projects through the use of at least one comparable from inside the subdivision or project and one
comparable from a competing subdivision or project.
Age of Comparable Sales
Comparables must have a recent date of sale, preferably within six months of Mortgaged Property’s sale
date. If any of the comparables are over six months old, the appraiser should comment on the market
conditions. If it is necessary to use older comparables, the appraiser should supplement them with pending
sales and/or current listings in the neighborhood.
Similarity of Comparables to Subject
The comparables used by the appraiser must represent the best market data available to support the
property’s estimated value. Comparable sales should be as similar as possible to the Mortgaged Property in
physical attributes, rights of ownership, zoning, and other amenities.
Adjustments to Comparables
The following are acceptable adjustments to comparables:
Number of Adjustments
The need for numerous adjustments indicates that the comparable is not similar to the Mortgaged Property.
Dollar Amount of Adjustments
The dollar amount of adjustments should reflect the market reaction to the difference between the
Mortgaged Property and the comparables, not the cost of a particular difference. The amount should be
realistic and consistent among the comparables.
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Adjusted Property Characteristics
Adjustments to certain items such as quality and age are more difficult to justify with direct market evidence
than other items such as garages and finished basements. If a comparable contains a significant number of
adjustments for difficult items, its accuracy as a value indicator decreases.
Time Adjustments
The appraiser should keep to a minimum those adjustments made due to the difference in time at which the
comparable sold compared to the Mortgaged Property. If used, these comparables should be supported by
documents showing that they are warranted.
Square Footage Adjustments
Adjustments for differences in square footage should be realistic for the marketplace.
Total Net Adjustments
Total net adjustments should be minimal if the comparable is truly similar. As a guideline, net adjustments
should not exceed 15% of the sales price of the comparable.
Bracketing
The appraiser should use a bracketing technique during the selection of comparables. This involves
choosing one comparable that is superior to the subject, one that is inferior and one that is most similar.
Through the adjustment process, the superior comparable adjusts downward to the subject, the inferior one
adjusts upward, and the most similar comparable requires few, if any, adjustments.
Descriptive Language
The appraiser should describe property characteristics using specific, factual, and detailed language. The
appraiser should use numerals whenever applicable (for lot size, age of improvements, etc.). Clear
descriptions (such as, good, average, fair, or poor) should be used to provide consistency between the
property and the comparables.
Sales or Financing Concessions
The subject and all comparables must show the form of financing (financing addenda are helpful).
Adjustments should be considered for different types of financing or special marketing concessions, such as
buy downs, apportionment of rent payments toward down payments, or decorating and other miscellaneous
credits.
The Seller should carefully review the appraisal to determine if the appraiser has adequately demonstrated
the effects of such financing or sales concessions on the property’s value.
Sales History
Galton Funding will review the sales history of the subject and comparables to determine if any substantial
appreciation or property churning has occurred. Large increases in value must be supported by market data
or documented improvements to the property.
Income Approach
The value indicated by the income approach, if considered applicable by the appraiser, must be derived by the gross
rent multiplier technique using economic market rent. The income approach is required for all two-to–four unit
properties and non-owner occupied, single-family properties. In general, due to the value dependence on rental
income for investment on two-to-four unit properties, Galton Funding may require additional substantiation if the value
for such properties exceeds a reasonable multiple gross annual economic market rent.
Reconciliation of Valuation Analysis
The value indicated by each of the applicable approaches, together with the final reconciliation, must support the
appraiser’s estimate of market value. This reconciliation is not an averaging technique; rather, it is a process by which
the appraiser explains the reasonableness of each approach and its applicability to the final estimate of value.
Additional Review Considerations
Attached housing and multiple units add another level of complexity when analyzing the collateral security of the loan.
In addition to the neighborhood, site, and market analysis already discussed above, the Seller should note these
additional components when appraising two-to-four unit properties, condominiums, and PUDs.
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Two-to-Four Unit Properties
Two-to-four unit properties present an additional level of property risk. Their marketability is tied to the level
of rent commanded by the property and its compatibility with the neighborhood.

Neighborhood. The extent to which other small residential income properties are located in the
area will influence the marketability of the property. Market rents should be stable or increasing.
The appraiser’s statement of market rents will be assessed by the comparable rental properties
used for comparison.

Comparable Rental Data. Market rent is an estimate of the property’s potential to generate
income from its units. Rental data should be supplied from other small, income-producing
properties that are similar in number of units, room count, and living area. Rental comparables
should be readily available and in close proximity to the subject. Going out of the immediate
neighborhood to obtain rental comparables might suggest a lack of rental activity and therefore,
lack of marketability.

Comparable Market Data. Galton Funding will analyze the adequacy of the comparable sales
by the date of sale, proximity to the subject, and number and amount of adjustments. As in the
rental comparables, the appraiser should assess the similarity of the sales comparables to the
subject in terms of gross building area, unit count, and room count.
Condominiums

Neighborhood. The presence of other Condominium Projects in the property’s market area
indicates the appeal and marketability of the condominium under review. Marketability of a
single Condominium Project will be difficult to demonstrate if the neighborhood lacks competing
projects.

Project Improvements. Condominium units are affected by the improvements and amenities of
the overall project. As amenities increase, required maintenance and related association fees
increase.

Number of Stories. The selection of comparable sales should be from projects that are similar
in height to the subject’s building.

Condominium Conversions. Projects that were not originally built for use as a condominium
are considered conversions (a project originally built for use as an apartment or hotel). As a
result, their market appeal may be impaired. Condominium conversions will be reviewed on a
case-by-case basis.

Age of the Project. A project’s age, construction status, and amount of time the Homeowners’
Association has been in control will determine the warranties that the Seller makes when selling
the loan to Galton Funding.

Stage of Completion. The Seller should consider whether the amenities are complete. Underfunded budgets may affect the developer’s ability to complete all expected improvements,
which may in turn affect the project’s future marketability.

Number of Units Sold or Rented. The appraiser should provide information on the number of
units sold and rented. The Seller should analyze the percentage of units sold and rented to
determine whether the project meets the warranties published in this Guide.
Project Analysis
A review of the appraisal’s project analysis section will indicate the adequacy of the project’s budget and of
the management practices of the Homeowners’ Association.
Sales Comparison
Galton Funding will analyze the market sales information in a similar manner to a single-family dwelling.
Recent sales comparables, similarity of living area, and number of adjustments are all considered in
analyzing the appropriateness of the comparables.
The Seller must provide comparables from competing projects that have similar amenities, association fees,
and number of stories. For high-rise condos, the appraiser should select sales comparables with a similar
floor location. For existing projects, re-sales from within the project are desirable along with at least one
competing project. When older sales indicate a higher price than more recent sales, project devaluation may
be taking place.
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Leasehold Properties
In addition to meeting leasehold loan eligibility requirements, at least one comparable must be leasehold.
Third-Party Property Review Requirements
Galton Funding will require varied third-party appraisal review products, based on loan program, product and
characteristics. Please refer to the Galton Funding Appraisal Valuation Summary (attached) for appraisal review
requirements by product.
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Galton Funding Underwriting Guide

Transcription

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