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Standard Underwriting Guidelines
Table of Contents
Appendix Q Criteria for Ability to Repay Rule
Under the new Ability-To-Repay (ATR) Rule, mortgage lenders must look at customer’s income, assets, savings, and debt then weigh those against their monthly payments over the long term. In order to satisfy the requirements for a Qualified Mortgage under Appendix Q (Reg. Z), the consumer’s DTI ratio may not exceed 43%, and a creditor must use the standards in Appendix Q to verify and document a consumer’s income and debt to calculate the DTI ratio. Please note that any requirements not specified or not addressed under Appendix Q must revert to the Fannie Mae Selling Guide. Effective January 10, 2014, Provident Savings Bank Portfolio Products are required to comply with Appendix Q rules established by the consumer Financial Protection Bureau (CFPB). Appendix Q requires mortgage lenders to consider the consumer’s Ability-to-Repay (ATR) a debt before extending credit. Provident Savings Bank must make a reasonable, good faith determination at or before closing a mortgage transaction secured by a dwelling, that a consumer will have a reasonable ability to repay the loan according to its terms.
  • Complete CFPB Appendix Q Summary-Standards For Determining Monthly Debt and Income
  • The ATR/QM rules established by the CFPB are under the Truth-In-Lending Act/Regulation Z. Appendix Q to Part 1026-Standards for Determining Mortgage Debt and Income for general QM mortgages is provided as an exhibit to this guideline.
Provident Savings Bank Ability to Repay (ATR) / Quality Mortgage (QM) Policy Statement
The SFR Division of Provident Bank must verify compliance with the CFPB’s final rules regarding Ability to Repay (ATR) and Quality Mortgage (QM). The ATR/QM rule requires the SFR Division to make a reasonable, good-faith determination before a mortgage is consummated, that the consumer has a reasonable ability to repay the loan.

The 2010 Dodd-Frank Wall Street Reform Act adopted Ability to Repay (ATR) requirements for virtually all closed-end residential mortgages and established a presumption of compliance with ATR requirements for a certain category of mortgages, called Qualified Mortgages (QMs).
  • The ATR rule describes the minimum standards you must use to determine that consumers have the ability to repay the mortgage they are extended. There are eight specific factors that you must consider (including verifications of income or assets relied on, employment if relied on, and a review of credit history); although the ATR rule does not dictate that you follow particular underwriting models.
  • The rule also defines the requirements for Qualified Mortgages; which have three types of requirements: restrictions on loan features, points and fees, and underwriting. Under the general definition for QM the borrower’s total debt-to-income ratios is not higher than 43 percent. For a loan to be a QM it must meet certain underwriting criteria. Use of Appendix Q – Standards for Determining Monthly Debt and Income are required.
  • Note: The standards in Appendix Q must be utilized to satisfy the requirements for a Qualified mortgage. Agency or GSE guidance that specifically addresses the same particular type of debt or income that is provided in Appendix Q may not be relied upon.
This Guide describes Provident Savings Bank program eligibility and underwriting requirements. In addition to the program eligibility and prudent underwriting, Provident Savings Bank requires all loans meet the Ability to Repay (ATR) rules established by the Consumer Financial Protection Bureau (CFPB).

The ATR rule requires that the originator make a reasonable, good-faith determination before or when the loan is consummated and that the consumer has a reasonable ability to repay the loan. The Underwriter must consider the eight underwriting factors established by the CFPB and the loan file must be documented accordingly.
  1. The borrower’s current or reasonably expected income or assets;
  2. The borrower’s current employment status;
  3. The borrower’s monthly payment on the covered transaction;
  4. The borrower’s monthly payment for mortgage-related obligations;
  5. The borrower’s current debt obligations, alimony and child support;
  6. The borrower’s monthly debt-to-income ratio or residual income; and
  7. The borrower’s credit history.
By submitting a loan for underwriting or purchase, Mortgage loan originator certifies that: (i) Mortgage loan originator has made, or is making its own credit decision with respect to the loan to the Borrower, regardless of whether Provident Bank approves or declines to purchase and/or approve the loan; (ii) none of Provident Bank, its directors, officers, employee’s, agents, or contractors, or any of its affiliates has influenced, or will influence Mortgage Loan Originators credit decision with respect to the loan to the Borrower by (a) indicating whether it will approve the loan if the Mortgage Loan originator, originates and closes the loan, or (b) any other action or statement; and (iii) if the Mortgage Loan Originator has closed, or in the future does close the loan to the Borrower, Mortgage Loan Originator did, or will, fund the closing of the loan with funds from a source other than Provident Bank or any of its affiliates.
Item ATR Standard General Definition QM
Underwriting Criteria Approach to 8 underwriting criteria Appendix Q
Loan Feature Limitations No limitations No negative amortization,interest-only or balloon payments
Points & Fees Limit No Limitations 3%
Payment Underwriting (3) Greater of fully indexed or introductory rate Max rate in first 5 years
Mortgage-related obligations (5) Consider and verify Included in underwriting monthly payment2 and DTI3
Income or Assets (1) Consider and verify Consider and verify
Employment Status (2) Consider and verify Included in underwriting DTI
Simultaneous Loans (4) Consider and verify Included in underwriting DTI
Debt, Alimony, Child Support (6) Consider and verify Included in underwriting DTI
DTI or Residual Income (7) Consider and verify DTI ≤ to 43 percent
Credit History (8) Consider and verify Included in underwriting DTI
1 This chart compares the general ATR requirements with the requirements for originating QM loans. Additional requirements may apply, particularly for balloon- payment QM loans. This chart is not a substitute for the rule. Only the rule and its Official Interpretations can provide complete and definitive information regarding its requirements. The complete rule, including the Official Interpretations is available at

2 "Included in underwriting monthly payment" means that the rule does not require the creditor to separately consider and verify this factor. However, a creditor must consider this factor when underwriting the consumer’s monthly payment under the rule.

3 "Included in underwriting DTI" means that the rule does not require the creditor to separately consider and verify these factors. However, a creditor considers and verifies these factors when calculating the consumer’s debt-to-income ratio.
Many of our employees have been with Provident Bank for more than 20 years, some much longer, they live locally and are actively involved in the community along with their families. We are very fortunate to have so many dedicated employees throughout our company to serve you. It is why we can deliver every day on the promise of providing outstanding service. We are confident that Provident Bank will exceed your expectations.

When evaluating home loan applications, do not consider the age or location of property, or the characteristics of the surrounding neighborhood in approving or denying a loan, except in the unusual case where it might be necessary to avoid unsafe business or unsound practice. Do not give preferences to those applicants who have previously owned real estate.

In addition, Provident Bank has established a Second Look policy to ensure that a decision to deny a loan application is reached fairly and does not constitute a violation of anti-discrimination (nondiscriminatory underwriting practices and guidelines) laws/regulations instituted to promote fair-lending.
When provident Bank receives an application, Provident Bank is required to notify and applicant of action taken within the following timeframes:

  • 30 days after receiving a completed application concerning Provident Bank’s approval of, counteroffer to or adverse action on the application;
  • 30 days after taking adverse action on an incomplete application, unless a notice of incompleteness is provided in accordance with the “Incomplete Application” requirements below;
  • 30 days after taking adverse action on an existing account; or
  • 90 days after notifying the applicant of counteroffer, if the applicant does not expressly accept or use the credit offered.
An adverse action notice must contain a statement of the action taken, the name and address of Provident Bank, the ECOA Notice, the name and address of the federal agency that administers compliance, and either a statement of the specific reasons for the action taken or a disclosure of the applicant’s right to receive a statement of specific reasons.

If the specific reasons for the adverse action are not provided, the disclosure of the applicant’s right to receive a statement of specific reasons must contain the following:
  • A disclosure of the applicant’s right to a statement of specific reasons within 30 days
  • If the statement is requested within 60 days of Provident Bank’s notification.
A notification of adverse action must be in writing; however, a notice of approval may be expressly stated or implied.

Provident Bank may provide disclosures in electronic form in compliance with the Electronic Signatures in Global and National Commerce Act (e-sign Act) (15 U.S. 7001 et seq.), when the application is accessed electronically by the consumer.
Provident Bank has established the following Second look policy and procedure to ensure that a decision to Decline a loan application is reached fairly and does not constitute a violation of anti-discrimination laws/regulations instituted to promote fair-lending.

The initiation of this process begins when an underwriter determines that a loan application, if approved, would constitute an unacceptable risk and a counter offer is not a reasonable option.

The following procedures are required:
  1. Prior to issuing a Statement of Denial and executing an Adverse Application in the LOS System, the primary underwriter must:
    1. Obtain a second signature from an individual per the SFR, Signing Authority Limits Loan Origination list. i.e. Sr. Corporate, SFR Loan Committee, Sr. Loan Committee, Sr. Loan Committee (Executive).
  2. The Second Signature Signer is responsible for the following:
    1. Reviewing the primary underwriter’s preliminary Transmittal Summary (1008), loan application and reasons for the declination.
    2. Reviewing the parameters of the denial to determine, if the loan application is eligible for a Counter Offer. i.e. Lower Loan Amount or credit score exception.
    3. Determine if other means of documentation may be available.
  3. The Second Signature Signer Determination Conclusion:
    1. If the authorized signer disagrees with the declination, he/she should discuss the disagreement with the primary Underwriter. If the loan application is determined to be an acceptable risk or is eligible Counter Offer, the primary Underwriter will complete the updated loan disposition and notify the Retail Processor and Loan Officer or the Wholesale Coordinator and Account Executive of the new Conditional Loan Approval.
    2. OR
    3. If the authorized signer agrees with the declination, he/she will co-sign the Statement of Denial along with the primary Underwriter. The primary Underwriter will then upload the fully executed Statement Denial into the LOS per the Encompass Support-Job Aid titled Adverse Applications.
As a federally insured savings institution, Provident is required to have a policy that limits overall credit risk exposure and loan committee approval requirements for all loans placed in the bank’s portfolio. To ensure compliance with this policy, the bank requires additional approval requirements on any combination of Loans To One Borrower (LTOB) that exceeds $15,000,000.00. The LTOB determination includes the full obligation of any loan to the borrower and any loan that lists the same individual as a guarantor.

All lending divisions of bank are required to implement procedures to review the current LTOB exposure in relationship to any new loan, any new pool loan or new guarantor status under consideration at loan submission, loan approval and prior to disbursement of funds.
  • SFR’s TLOB (Total Loan One Borrower) Credit Limit Exposure:
    • $3,000,000.00
  • Underwriter to run the LTOB- Credit Limit Exposure Report utilizing the borrower’s social security number for all Retail, Wholesale, Correspondent and Pool Loans.
  • The report is to be placed in the LOS system under the LTOB Credit Limit Exposure Report place holder or in the loan file for Pool Loans.
SFR’s Underwriting Exception Procedures defines the process of obtaining an underwriting exception to our published program guidelines. This applies to all delivery channels. SFR originates loans through Wholesale, Correspondent and Retail delivery channels and purchases loans through bulk agreements.

SFR publishes program guidelines for its Portfolio Loan Products with the knowledge that there may be instances when a loan does not meet the published criteria and requires an exception to the loan product guidelines. Exceptions to the guidelines are evaluated on a case by case basis, utilizing the compensating factors that are defined and properly documented for that particular loan transaction.

SFR underwriters are responsible for underwriting the entire loan package and assessing the total risk of the file inclusive of the exception request. The underwriter initiates the process by discussing the exception with the SFR Operations Manager or Sr. Loan Committee (Executive) depending on the nature of the exception prior to approving the loan file and exception request. Once, the exception has been approved or denied the Underwriter completes the Underwriting Exception Request Form within the loan origination system (LOS) and obtains the proper signing approval prior to rendering the SFR Final Loan Approval.

All fully executed approved or denied exception request are tracked within the LOS and a SFR Program Guideline exception report, whether approved or denied is provided to the Provident Savings Bank board of directors quarterly.
  1. Income, Credit, Asset and Collateral exceptions are approved by the SFR Operations Manager.
  2. Loan Amount, Cash-Out Amount, Credit Score and Occupancy exceptions are approved by a Sr. Loan Committee or Sr. Loan Committee Executive member.
  • The following are eligible borrowers:
    • US Citizens
    • Inter-Vivos Revocable Trusts
    • The primary beneficiary of the trust must be the individual(s) establishing the trust.
    • The mortgage must be underwritten as if the individual establishing the trust (or at least one of the individuals, if there are two or more) were the borrower (or a co-borrower, if there are additional individuals whose income or assets will be used to qualify for the mortgage).
  • Eligibility Requirements
    • At least one individual establishing the trust must be a borrower on the loan.
    • Occupancy must be as a primary residence.
    • 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 trustee(s). The policy may not list any exceptions arising from the trust ownership of the property.
    • Full title to the property must be vested either:
      1. Solely in the trustees, or
      2. Jointly in the trustees and in the name of an individual borrower.
  1. Definition: Contingent Liability.. A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment.
  2. Application of Contingent Liability Policies. The contingent liability policies described in this topic apply unless the borrower can provide conclusive evidence from the debt holder that there is no possibility that the debt holder will pursue debt collection against him/her should the other party default.
  3. Contingent Liability on Mortgage Assumptions. Contingent liability must be considered when the borrower remains obligated on an outstanding FHA-insured, VA-guaranteed, or conventional mortgage secured by property that:
    1. Has been sold or traded within the last 12 months without a release of liability, or
    2. Is to be sold on assumption without a release of liability being obtained.
  4. Exemption From Contingent Liability Policy on Mortgage Assumptions. When a mortgage is a assumed, contingent liabilities need not to be considered if the:
    1. Underwriter obtains, from the servicer of the assumed loan, a payment history showing that the mortgage has been current during the previous 12 months, or
    2. Value of the property, as established by an appraisal or the sales price on the HUD-1 Settlement Statement from the sale of the property, results in a loan-to-value (LTV) ratio of 75 percent or less.
  5. Contingent Liability on Cosigned Obligations.
    1. Contingent liability applies, and the debt must be included in the underwriting analysis, if an individual applying for a mortgage is a cosigner/co-obligor on:
      1. A car loan;
      2. A student loan;
      3. A mortgage; or
      4. Any other obligation;
    2. If the underwriter obtains documented proof that the primary obligor has been making regular payments during the previous 12 months, and does not have a history of delinquent payments on the loan during that time, the payment does not have to be included in the borrower's monthly obligations.
Original transaction must have closed within the last 12 months (measured from the date on which the property was purchased to the disbursement date of the new mortgage loan) are eligible for a cash-out refinance if all of the following are met.

  • The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV/CLTV/HCLTV ratios for the transaction based on current appraised value).
  • The purchase transaction was an arms-length transaction.
  • The original purchase transaction is documented by a settlement statement, which confirms that no mortgage financing was used to obtain the subject property. (A recorded trustee’s deed (or similar alternative) confirming the amount paid by the grantee to trustee may be substituted for a settlement statement if a settlement statement was not provided to the purchaser at time of sale
  • The sources of funds for the purchase transaction are documented (such as; bank statements, personal loan documents, HELOC on another property).
  • All other cash-out refinance eligibility requirements are met and cash-out pricing is applied.
Note: The preliminary title report must not reflect any existing liens on the subject property. If the source of funds used to acquire the property was an unsecured loan or a HELOC (secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property. Any payments on the balance remaining from the original loan must be included in the DTI.
Co-borrowers are acceptable provided that all parties sign the Note and take title to the property.

Co-Signers or Guarantors are not permitted. Co-Signers or Guarantors have income and credit that are considered in qualifying the applicant and are contractually liable for repayment of the debt. However, the cosigner has no vested interest in the subject property.

First Time Homebuyers are defined as borrowers who have not owned real estate property in the past three (3) years.
  • Provident Bank recognizes the inherent risk of financing First Time Homebuyers (FTHB) and the need to protect the borrower from participating in a program that may have a negative impact on the borrower’s credit profile over an extended period of time.
  • Individuals who are citizens or lawful residents of the United States.
  • Living or Inter Vivos Revocable Trust:
    • Owner-Occupied
    • Trust Certifications are allowed.
      • Trust Certification must be prepared by Borrower, notarized and approved by title.
      • Trust certification must answer all questions contained on Provident Bank Trust Checklist
        ✓ If not, complete, executed, notarized Trust Agreement must be supplied.
    • Underwriter must fully complete Trust Certification and it is good for 90 days. After 90 days, updated Trust Certification is required.
    • Power of Attorneys not allowed when a property will be vested is in a Trust.
  • Corporations
  • Foreign Nationals (including diplomatic immunity)
  • Partnerships
The spouse or domestic partner of any person who has an interest in the property, if his or her signature is necessary under applicable state law to waive any property right he or she has by virtue of being the owner’s spouse or domestic partner
A valid Social Security Number (SSN) is required for all non-U.S. citizen borrowers whose income and/or assets are being used to qualify for a loan.

  1. No Exceptions
  • Although there are other documents that are issued for tax (ITIN) or identification (Matricula Consular Card) purposes, they are not acceptable to Provident Bank in lieu of a valid Social Security Number.
  • The underwriter is required to obtain satisfactory documentation that the Permanent or Non-Permanent Resident Alien is a legal resident of this country. Permanent or Non- Permanent Resident Alien Status documentation must not be expired for each applicant and/or borrower that indicates an alien status in the loan file or in the declaration section of the Uniform Residential Loan Application.
  • A non-U.S. citizen who is lawfully residing in the U.S. as a permanent or nonpermanent resident alien is eligible for a mortgage on the same terms as a U.S. citizen.
A copy of the Green Card is required for all permanent resident aliens whose income and/or assets are being used to qualify for a loan. A copy of the front and back of the card is required and must be included in the loan file. Any of the following USCIS documents are acceptable:

  1. A Permanent Resident Card/Alien Registration Receipt Card (USCIS Form I-551) with an original term of ten years. The document is acceptable even if it is due to expire.
  2. Permanent Resident Card (USCIS Form I-551) that is valid for two years, accompanied by the applicable INS receipts.
  3. A USCIS receipt for a petition to remove conditions on residence (USCIS Form I- 751), filed by the noncitizen spouse.
  4. A USCIS receipt for a petition to change immigration status, filed by the citizen spouse.
  5. Unexpired foreign passport that contains an unexpired stamp reading "Processed for I-551". Temporary Evidence of Lawful Admission for Permanent Residence. Valid Until (mm-dd-yy). Employment authorized."
  6. Any other evidence of permanent residency issued by the INS.
Other Requirements
  • Employment: Minimum 2 years employment history with a U.S. Based employer. Income used for qualifying purposes must be from acceptable income sources generated from within the U.S.
  • Credit: Two (2) years U. S. credit history.
  • Funds: Funds from outside the U. S. are not acceptable. The borrower must have an established asset base in the U. S.
Non-Permanent Resident Aliens are permitted as long as they meet the credit, income and asset requirements

All non-permanent resident aliens must provide evidence of a valid, acceptable visa. A copy of the unexpired visa must be included in the loan file evidencing one of the following visa classes:
  1. A Series (A-1, A-2, A-3): these visas are given to officials of foreign governments, immediate family members and support staff. Only those without diplomatic immunity, as verified on the visa, are allowed.
  2. E-1, Treaty Trader: this visa is essentially the same as H-1 or L-1; the title refers to the foreign country’s status with the United States.
  3. G Series (G-1, G-2, G-3, G-4, G-5): these visas are given to employees of international organizations that are located in the United States. Verification that the applicant does not have diplomatic immunity must be obtained from the applicant’s employer and/or by the viewing of the applicant’s passport.
  4. H-1, Temporary Worker: this is the most common visa given to foreign citizens who are temporarily working in the United States.
  5. L-1, Intra-Company Transferee: an L-1 visa is given to professional employees whose company’s main office is a foreign country.
  6. TN, NAFTA visa: used by Canadian or Mexican citizens for professional or business purposes.
  7. TC, NAFTA visa: used by Canadian citizens for professional or business purposes.
  1. All standards for determining stable monthly income, adequate credit history and sufficient liquid assets must be applied in the same manner to each borrower including borrowers who are non-permanent resident aliens.
  2. A chart of Visa Types and Descriptions is provided as Exhibit B.
    ✓ For more information about visas, visit the USCIS website:
  • A work visa, student visa, or other permit to be in the U. S. that is renewable. Acceptable visas are B-1, B-2, E-1, H-1, H-2, H-3, L-1, G series and O-1;
  • Minimum two years employment history with a U. S. employer and income used for qualifying purposes must be from income sources generated from within the U. S. If such employment in the U. S. cannot be verified, the loan is not eligible;
  • Applicant must have an established two years credit history in the U. S. A credit history that indicates only recently opened accounts in the U. S. is not sufficient to establish a credit reputation. A shorter credit history is permissible, provided that the U. S. credit history can be supplemented with a credit history from a foreign country.
Owner Occupied Principal Residence
  • Borrowers stated intent to occupy;
  • Property location has relatively reasonable proximity to borrower’s place of employment;
  • If the transaction is a refinance then the borrower’s tax returns, W-2’s and etc., should indicate the subject property address, as the mailing address;
  • Property possesses the physical characteristics to accommodate the borrower’s immediate dependent family as listed on the (1003/URLA) Uniform Residential Loan Application.
Owner Occupied Principal Residence
Purchase Transaction
  • All Purchase Transactions require a copy of the fully executed sales contract and all addenda; and
  • Transfer Disclosure Statement per CA state law.
Exceptions may be approved provided there is an adequate reason and they can be documented, i.e. FSBO "For Sale By Owner".

Non-Contingent Second Trust Deeds
A non-contingent second trust deed occurs when you have a first trust deed application that will not close concurrently with a new second trust deed. The applicants are “pre-approved” for a stand-alone second, noncontingent to the new first. This concept could apply to a purchase or a refinance.
  • It is imperative that this second is treated as a stand-alone second. This will require a separate loan application, dated after the recording of the new first trust deed.
  • Loan transaction for the first trust deed is completely processed, underwritten and closed before the application for the second is created.
  • The following credit package documents from the first loan transaction can be used for the new second trust deed (as long as the documents adhere to the age of documents guidelines).
    • Credit Report (soft-pull if > 45 days at funding)
  • The following items from the first CANNOT be used in the new second and must be dated after the closing and recording of the first loan transaction.
    • The initial application.
    • The Escrow Instructions.
    • The title policy (must reflect the new first loan transaction).
If these procedures are not followed correctly the Final Title Policy for the new first transaction will reflect both liens, resulting in an ineligible mortgage loan transaction.

Borrower may pay additional fees and payments in connection with purchasing a short sale property that are typically the responsibility of the seller.
Examples of short sale fees and payments include, but are not limited to the following:
  • Short sale processing fee (i.e., short sale negotiation fees, buyer discount fees, short sale buyer fees).
    • The short sale processing fee is not a common and customary charge and must be treated as a sales concession if any portion is reimbursed by an interest party to the transaction.
  • Negotiated short payoff to a subordinate lien holder, and
  • Payment of delinquent taxes or delinquent homeowners association (HOA) dues
NOTE: The above referenced fees are non-Loan Estimate fees

These fees and payments cannot be financed into the loan amount and must be included on the settlement statement. Borrowers must fund the cost of additional fees and payments with their own funds. The additional funds to complete the transaction must be documented.
  • Sales contract will identify if the property being purchased is a short sale property.
  • The transaction must be an arm’s length transaction (i.e. all parties are unaffiliated and unrelated).
  • Underwriter must diligently review these purchase transactions for unusual fees, payments, and other possible red flags that could indicate fraudulent activity related to the short sale.
  • Maximum allowable short sale fees that can be paid by borrower are 3% of the sales price.
Any indications of borrowed funds, such as a recently opened account, a recently received large deposit, and/or an account balance that is considerably greater than the average balance over the previous two months must be investigated. Bank statements used for verifying assets must also be reviewed for monthly reoccurring payments, such as student loans, time shares, tax liens, and etc. that would be required to be included in debt ratios.
  • Down Payment
    • For Purchase Money Loans, sufficient funds to cover the down payment and closing costs must be verified. The borrower must contribute a minimum of 5% towards the down payment from his or her own cash funds unless stated otherwise in the product matrix.
    • To determine the amount of money a purchaser needs to close a mortgage transaction, use this calculation:
      • Total Closing Costs + down payment + reserves funds from borrower – initial deposit to escrow – seller and/or lender credits = estimated cash to close. Lender credit derived from premium pricing is not an acceptable source of funds for down payment or reserves.
  • Foreign Assets
    • All documents of foreign origin must be filled out in English or the originator must provide a translation, attached to each document, and warrant that the translation is complete and accurate. All foreign currency amounts must be converted to U.S. dollars.
  • Retirement Accounts
    • Vested funds from individual retirement accounts (IRA/SEP/Keogh accounts) and tax-favored retirement savings accounts 401k accounts are acceptable sources of funds for reserves. The underwriter must verify the ownership of the account and confirm that the account is vested and allows for withdrawals regardless of current employment status. When funds from retirement accounts are used for reserves, the funds do not have to be withdrawn from the account(s).
  • Trust Accounts
    • Funds disbursed from a borrower’s trust account are an acceptable source for reserves provided the borrower has immediate access to the funds. To document trust account funds, the underwriter must:
      • Obtain written documentation of the value of the trust account from either the trust manager or the trustee, and
      • Document the conditions under which the borrower has access to the funds and the effect, if any, that the withdrawal of funds will have on trust income used in qualifying the borrower for the mortgage loan.
All sources for funds must be determined that are used to pay closing costs. Typical sources include the following:
  • Checking and Savings Account
    • The two most recent, consecutive months statements for each account are required or 1 month Bank Statement and a VOD covering 60 day average balance.
    • Large deposits inconsistent with monthly income or other deposits must be verified and documented.
  • Marketable Securities
    • Two most recent, consecutive months stock/securities account statements are required.
    • Full value of stock accounts can be considered in the calculation of assets available for closing cost and reserves.
    • Non-vested accounts are not eligible for use as down payment or reserves
  • Retirement Accounts
    • Most recent retirement account statement covering a two month period.
    • Evidence of liquidation is required when funds are used for down payment or closing costs.
    • 100% of vested value of retirement accounts, after reduction of any outstanding loans, may be considered toward the required reserves.
    • Proof of liquidation or withdrawal
    • Terms of Withdrawal
    • Retirement accounts that do not allow any type of withdrawal are ineligible for use as reserves.
  • Business Funds
    • Business funds may be used for down payment and/or closing costs, not for purposes of calculating reserves.
    • CPA letter to confirm withdrawal will have no impact on business and Cash flow analysis required using:
      • Three (3) months business bank statements to determine no negative impact to business based on withdrawal of funds.
      • Borrower must have 100% access to funds.
      • The borrower must be the sole proprietor or 100% owner of the business (or all
        • Borrowers combined own 100%. i.e. husband 50% and wife 50%)
  • Restricted stock subject to U.S. Securities and Exchange Commission (SEC) Rule 144
    • Many executives receive a portion of their compensation in the form of company stock. When using vested company stock that is subject to SEC Rule 144 the following documentation is required:
      • When stock is used for down payment, provide:
        • proof of liquidation.
      • When stock used for reserves, provide:
      • A letter from the company which includes the following:
        • Vesting statement
        • Eligibility to liquidate stock
        • Current stock price
        • Addresses any additional restrictions on liquidating stock other than those imposed under SEC Rule 144
    • Refer to SEC Website for the current Trading Volume Formula for calculating eligible value.
Verification of Deposits and Assets
Asset verification, including Verification of Deposit (VOD), bank statements and retirement account statements must contain the following:
  1. Direct Account Verifications (i.e., verification of deposit form (VOD)) must:
    • Identify the financial institution
    • Identify the account owner(s)
    • Identify the account number, which at a minimum must include the last four digits
    • Identify the type of account
    • Identify the current account balance
    • Identify the average balance for the previous two months
    • Identify any outstanding loans secured by the asset
    • Include the title, signature and phone number of the depository representative who completed the verification

  2. When using a VOD, the Underwriter must include documentation of the source of funds when an account is opened within 90 days of verification and/or when the current balance in an account is significantly greater than the average balance.
  3. Asset account statements (bank statements, retirement accounts, etc.)
    • Identify the financial institution
    • Identify the account owner(s)
    • Identify the account number, which at a minimum must include the last four digits
    • Show all transactions
    • Show the period covered
    • Show the ending balance
    • Show any outstanding loans secured by the asset
A transaction history that is computer-generated and downloaded by the borrower from the Internet or by a financial institution representative from the institution’s system is acceptable. The transaction history must identify the name of the institution and the source, and includes the information required above for asset account statements, unless:
  • It is used in combination with other asset verifications containing the missing information, and
  • It can clearly establish that the transaction history pertains to the same account

Cash Deposit on Sales Contract (Earnest Money)
If the earnest money check has not cleared the borrower’s bank account, the amount can be included in a depository account, such as a checking or savings account. If the earnest money check has cleared the borrower’s bank account, the amount can be entered as Other Credits in Section VII of the 1003, where it is assumed to be verified. Underwriter to ensure the earnest money deposit is not counted twice in the evaluation of the assets.

Single Deposits
For purchase transactions, the underwriter must document the source of funds for any single deposit exceeding 50% of the totally monthly qualifying income for the mortgage if the deposit is needed to meet the requirements for borrower funds and/or reserves. The underwriter must document the source of a deposit of any amount regardless of the transaction type if he or she has any indication that the funds are borrowed or are not from an eligible source.

Necessary Documentation for Large Deposits
  • Borrower provides a letter of explanation for large deposit. Borrower(s) to provide the letter of explanation regardless if the large deposit is sourced or backed out to verify if this is an acceptable source.
    • If funds in question are being used for down payment, closing cost, earnest money deposit, or reserves, additional supporting documentation is required in order to adequately verify the source of funds is an acceptable source.
  • If a checking, savings or certificate of deposit (CD) account was opened within 90 days of the loan application date, documentation of the source of the funds indicating that they are from an acceptable source must be documented.
  • Account balances that are greater than the average balance over the previous two months must be addressed to ensure funds are from an acceptable source
  • Large deposit may need to be sourced for up to six months, if multiple account statements are in the file.
  • If funds in question are not being used for down payment, closing costs, earnest money deposit or reserves, and due diligence has been performed to ensure the funds are not from an unacceptable source, the underwriter may deduct the large deposit from the balance of the account and allow remaining funds to be used for qualifying. If the asset balance is reduced by the amount of the deposit, the reason for the change in the asset amount must be documented and explained. Underwriter Certification – required when an underwriter determines that a large deposit may be deducted, to document the underwriter’s thought process.

When bank statements are provided, borrower must include ALL pages even if the last page is blank (i.e. If the statement says 1 of 5, all 5 pages are needed)

NOTE: If the source of large deposit is readily identifiable on the account statement, such as a direct deposit from an employer (payroll), the Social Security Administration, or IRS or state income tax refund, and the source of the deposit is printed on the statement, the Underwriter does not have to obtain further explanation or documentation. However, if the source of the large deposit is printed on the statement but the Underwriter still has questions, as to whether the funds may have been borrowed the Underwriter may obtain additional documentation.

Examples of unacceptable Sources:
  • Personal Unsecured loan(s)
  • Cash on hand
  • Credit card advance(s)

Sale Proceeds
If the proceeds from pending sale of the borrower’s departing residence or other owned property are needed for the down payment and closing costs for the subject property, the underwriter must verify the source of funds by obtaining a copy of the Final Settlement Statement or Final Closing Disclosure for the departing residence or other owned property before or currently with, the closing on the subject property, verifying sufficient net cash proceeds to consummate the purchase of the subject property.

Anticipated Sales Proceeds
If the borrower’s currently owned home is listed for sale – but has not been sold, the borrower maybe qualified on the basis of his or her anticipated equity. Use of “anticipated equity” does not eliminate the responsibility for verifying the actual equity received by the borrower prior to loan closing.

The following table describes how to determine the amount of net proceeds based on a borrower’s anticipated equity

Sales Price Established? Net Proceeds Calculation
Yes Sales Price – (Sales Costs + All Liens) = Estimated Proceeds
No 90% of Listing Price – All Liens = Estimated Proceeds Note: the 10% adjustment factor that is applied to the listing price must be changed depending on market conditions.

Bridge Loans
Bridge (or swing) loans are a form of second trust deed secured by the borrower’s present home, which is usually for sale. By using funds from a bridge loan, the borrower can close on a new house before selling his or her existing house. This type of financing is acceptable if:
  • The purchaser has the ability to carry the payment on the new home;
  • The payment on other obligations;
  • The payment on the current home with the additional payment for the bridge loan.
Note: If the repayment schedule for the bridge loan is not monthly, it must be converted to a monthly amount for qualifying purposes. Finally, the new home or transaction cannot be used as additional collateral for the bridge loan.

Retirement Accounts
Vested funds from individual retirement accounts (IRA/SEP/Keogh accounts) and tax-favored retirement savings accounts (401(k) accounts) are acceptable sources of funds for the down payment, closing costs, and reserves. The underwriter must verify the ownership of the account and confirm that the account is vested and allows withdrawals regardless of current employment status.

If the retirement assets are in the form of stocks, bonds, or mutual funds, the account must meet the requirements of “Stocks, Stock Options, Bonds, and Mutual Funds” assets for determining value and whether documentation of the borrower’s actual receipt of funds is required when used for the down payment and closing costs. When funds from a retirement accounts are used for reserves, they are not required to be withdrawn from the accounts. However, the Underwriter must review the terms of withdrawal for the retirement account.

Cash-on-hand is not an acceptable source of funds for the down payment or closing costs.

1031 Exchange
  • A 1031 Exchange is only acceptable if used in conjunction with a non-owner occupied equity trade transaction. All trade equity requirements apply for 1031 Exchanges. The loan file must contain a certified copy of the escrow account must be obtained from the accommodator and must clearly show the amount of the equity for each property in the trade.

Rent Credit with Option to Purchase
Rent credit for option to purchase is an acceptable source of funds toward the down payment or minimum borrower contribution. Borrowers are not required to make a minimum borrower contribution from their own funds in order for the rental payments to be credited towards the down payment. Credit for the down payment is determined by calculating the difference between the market rent and the actual rent paid for the last 12 months. The market rent is determined by the appraiser in the appraisal for the subject property. The underwriter must obtain the following documentation:

  • A copy of the rental/purchase agreement evidencing a minimum original term of at least 12 months must clearly state the monthly rental amount and specify the terms of the lease.
    • Copies of the borrower’s canceled checks or money order receipts for the last 12 months evidencing the rental payments.
    • Market rent as determined by the subject property appraisal form 1007 (Rental Survey)

Sweat Equity
Sweat equity is not an acceptable source of funds.

Borrowed Funds Secured by an Asset
Borrowed funds that are secured by an asset represent a return of equity. Because of this, they may be used for down payment and closing costs. Assets that may be used to secure funds include certificates of deposit, stocks, bonds, automobiles, real estate, and life insurance policies.
Verification is required of both the terms of the loan and the fact that it is a secured loan. Monthly payments for the loan must be considered as debt when qualifying the borrower. When the loan does not require monthly payments, the payment must be calculated as the greater of 5% of the balance or $10.00 and considered a debt.
  • If the actual monthly payment is documented from the creditor or the creditor or the creditor obtains a copy of the current statement reflecting the monthly payment, the amount maybe used for qualifying purposes.
Sale of Personal Assets
Proceeds from the sale of personal assets are an acceptable source of funds for the down payment, closing costs, and reserves provided the individual purchasing the asset is not a party to the property sale transaction or the mortgage financing transaction.
  • Documentation Requirements;
    • The borrower’s ownership of asset.
    • The value of the asset, as determined by an independent and reputable source.
    • The transfer of ownership of the asset, as documented by either a bill of sale or a statement from the purchaser.
    • The borrower’s receipt of the sale proceeds from documents such as deposit slips, bank statements, or copies of the purchaser’s canceled check.

NOTE: Depending on the significance of the funds in question, the underwriter may accept alternatives to this required documentation, particularly when the proceeds of the sale represent a minor percentage of the borrower’s overall financial contribution.

Unacceptable Funds
Examples of unacceptable borrowed funds include signature loans, unsecured lines of credit on credit cards, and overdraft protection on checking accounts.

Gift funds may be used to fund all or part of the down payment, closing costs and reserves subject to minimum borrower contribution requirements.
  • Acceptable Gift Donors:
    • A relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship, or
    • A fiancé, fiancée, or domestic partner

The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.

Pooling Gift Funds
When a relative’s gift is being pooled with the borrower’s funds to make up the required 5% minimum cash down payment, the "gift" letter should also include the donor’s certification that he or she has lived with the borrower for the last 12 months and will continue to do so in the new residence. The donor should also provide appropriate documentation to demonstrate a history of share residency, such as a copy of a driver’s license, bill, bank statement, etc. that shows the donor’s address as being the same as the borrower’s address.

Gift of Equity
A "gift of equity" refers to a gift provided by the seller of a property to the buyer. The gift represents a portion of the seller’s equity in the property, and is transferred to the buyer as a credit in the transaction. A gift of equity is permitted for principal residence purchase transactions. The acceptable donor and minimum borrower contribution requirements for gifts also apply to gifts of equity.
  • Documentation Requirements;
    • A executed/signed gift letter, and
    • The settlement statement listing the gift of equity
Evidence of Gift Funds
A gift from a relative must be evidenced by a letter that is signed by the donor. The letter must include the following:
  • Specify the dollar amount of the gift and the date the funds were transferred;
  • Indicate the donor’s name, address, telephone number, relationship to the borrower, and the specific purpose of the gift, and;
  • Include the donor’s statement that no repayment is expected.
Verifying Donor Ability of Funds and Transfer of Gift Funds
The underwriter must verify that the donor had sufficient funds to cover the gift and verify the borrower has received the gift funds. Acceptable documentation includes:
  • A copy of the donor’s check and the borrower’s deposit slip
  • A copy of the donor’ withdrawal slip and the borrower’s deposit slip
  • A copy of the donor’s check to the closing agent
  • A settlement statement showing receipt of the donors check

When the funds are not transferred prior to settlement, the donor may give the closing agent a certified check for the amount of the gift. A copy of that check or a settlement statement showing receipt of that check will be sufficient documentation for the underwriter’s records. The above documentation refers to conventional lending.

Sales Concessions/Interested Party Contributions/Finance Concessions
Some closing costs and prepaid settlement costs generally are paid by the property purchaser, while other costs are the responsibility of the property seller. Other costs may be paid by either the property purchaser or the property seller. When any costs that are normally paid by the property purchaser are paid (indirectly or directly) by someone else, they are considered to be interested party contributions (IPCs). All IPCs may be paid by any interested party to the property sale transaction, although we may impose limitations on the amount of the contributions. In addition, listing and selling agent’s commissions and other related costs (i.e. Auction fee and Negotiator fee) are limited to a total combined 8%.

An interested party is anyone (other than the property purchaser) who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property. This includes the property seller, the builder/developer (or an affiliate who may benefit from the sale of the property), and the real estate agent or broker. When the property purchaser receives financial assistance from a relative, domestic partner, fiancé, fiancée, municipality, Non-profit organization, or employer, we do not consider the provider of the assistance to be an interested party to the sales transaction unless the person or entity is the property seller (or is affiliated with the property seller).

Interested Party Contributions
Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else who has financial interest in, or can influence the terms and the sale or transfer of, the subject property. A Provident Bank or Broker credit derived from premium pricing is not considered an IPC even if Provident Bank or Broker is an interested party to the transaction.

The maximum allowable contributions that interested parties may make for a conventional mortgage are limited to:

Occupancy Type LTV/CLTV Ratio Maximum IPC
Principal Residence 75.01% - 90% 6%
75% or less 9%

NOTE: IPCs are not permitted to be used for borrower’s down payment, reserve requirements or to meet minimum borrower contribution requirements.

For underwriting purposes, the underwriter must make a downward adjustment to the sales price of the property to reflect the amount of any contributions that exceed the limitations. In addition, the cost of any contributions that are in the form of personal property (such as furniture, decorator items, automobiles, club memberships, or other "giveaways") always must be deducted from the sales price of the property. The maximum LTV ratio (or CLTV) must then be calculated based on the lesser of the reduced sales price or the appraised value.

Some seller contributions—such as moving expenses, payment of various fees on the borrower's behalf, "silent" second mortgages held by the property seller, P&I abatements, and other contributions not disclosed on the settlement statement—often are given to home buyers outside of loan closing. These undisclosed contributions tend to reduce the effective sales price of a property; therefore, they may compromise the loan-to-value ratio for a mortgage. Consequently, a mortgage with undisclosed seller contributions is not eligible.

Lender Contributions
A lender-sourced contribution may not be:
  • Used to fund any portion of the down payment
  • Subject to repayment requirements, or require financial obligation apart from the subject mortgage; or
  • Passed to Provident Bank from a third party.
  • The amount of the Provident Bank or Broker credit should not exceed the amount of the borrower-paid closing costs and prepaids.

Any credit that is being added but is not listed on the Credit Report, or that is being omitted from qualifying ratios must be itemized on the Income and Debt Worksheet. The date of the credit report used in qualifying associated with the DU must be listed on the same Worksheet.

Credit Report
A Residential Mortgage Credit Report (RMCR) from an independent consumer-reporting agency is required. However, the use of “three file merged” credit report for certain mortgages is acceptable. All information in the applicant’s credit report must be obtained from or verified by, sources other than the applicant. The consumer reporting agency must contact at least two national repositories of accumulated credit records for each locality in which the borrower has lived during the most recent two-year period. When co-borrowers have individually obtained credit, separate repository inquiries are necessary. The results of both reports may be combined in one residential mortgage credit report if the report clearly indicates that this has been done. If a credit report is over 45 days old at funding, a soft-pull credit report must be pulled (no FICO's needed) to determine any changes. If there are no changes on soft-pull report compared to original credit report, the original credit report can be used to fund the loan, but CANNOT be older than 90 days at funding.

NOTE: A copy of the soft-pull is to be placed under credit in the LOS.

Credit Report – General Requirements
  • The report must include both credit and public record information for each locality in which the borrower has resided during the most recent two-year period.
  • The report must include all discovered credit and legal information that is not considered obsolete under the Fair Credit Reporting Act. Although the Fair Credit Reporting Act currently specifies that credit information is not considered obsolete until after seven years, and bankruptcy information after ten years.
  • The report must be an original report, with no erasures, white-outs, or alterations. An automated credit report is considered to be an “original” report.
  • The report must include the full name, address, and telephone number of the credit reporting agency, as well as the names of the national repositories that the agency used to provide information for the report.
  • The credit reporting agency must make responsive statements about all items on the credit report – indicating "unable to verify" or "employer refused to verify," when appropriate.
  • The credit report must indicate the dates that accounts were last updated with the creditors. Each account with a balance must have been checked with the creditor within 90 days of the date of the credit report.

Credit Reports – Consumer Report Disputes
Any and all consumer disputes received in person or by phone regarding information about an account or relationship with the Bank that is included in a credit report (e.g., Experian, Equifax, and TransUnion) will be referred to the Loan Service Department for investigation and resolution.

Public Records Information
The report must include all available public records information, identify the sources of the public records information, and disclose whether any judgments, foreclosures, tax liens, or bankruptcies were discovered (with these adverse items reported in accordance with the Fair Credit Reporting Act and to the extent reported by consumer reporting agencies participating in the National Consumer Assistance Plan).

Public records information must be obtained from two sources, which may include any combination of the following:
  • National repositories of accumulated credit records
  • Direct searches of court records by employees of Provident Savings Bank or the consumer reporting agency, or
  • Record searches made by other public records search firms.

Acceptable and Unacceptable Changes
Collected credit report information should not be changed. However, it is possible to delete duplicate information, translate codes to plain language, and make appropriate adjustments to resolve conflicting information to ensure the clarity of the report.

The following types of changes are unacceptable:
  • Deleting tradelines that pertain to a borrower’s bankruptcy
  • Adding a payment amount to a creditor’s tradeline when the creditor does not require a payment, or
  • Restricting information collection to a shorter time period.

Credit repositories should only change the information called to its attention by a creditor or a party that is not associated with either the real estate or purchase transaction or the mortgage financing.

Required Creditor Information
For each debt listed, the report must provide:
  • The creditor’s name,
  • The date the account was opened,
  • The amount of the highest credit,
  • The current status of the account,
  • The required payment amount,
  • The unpaid balance, and
  • A payment history

The report must indicate the dates that accounts were last updated with the creditors. Each account with a balance must have been checked with the creditor within 90 days of the date of the credit report.

The credit report must give all inquiries within the last 120 days. Explanation of the inquiries must be supplied by borrowers and the underwriter must be certain no new debt has been established.
  • Provident Bank inquiry may be noted on the credit report by the Processor or Underwriter

Non Traditional Mortgage Credit Report
Non-Traditional credit report is not acceptable.

Frozen Credit Reports
When a transaction has a frozen credit report, the following procedures should be followed:
  • California State law allows consumers whose primary residence is in California to request a security freeze on their credit bureau report.

Retail transactions: The loan agent must notify the borrower that the credit must be unfrozen within 10 days of the date of the application or the loan will be denied as an incomplete application.

Wholesale/Correspondent transactions: The broker may not submit a loan application with a credit report that has been frozen. If the broker does submit a loan application that has a frozen record the file will be recommended for denial.
  • Contact the borrower/broker to inform him or her that the loan will be declined within 10 days unless the credit record is temporarily unfrozen. The report should be unfrozen for the length of time Provident Bank requires for processing, underwriting and closing.
  • Document the notepad in the loan operating system regarding the conversation with the borrower/broker. When the credit report has been unfrozen, a new credit report will be requested. If no proper credit is received within 10 days, the underwriter will decline the loan for an incomplete application.
  • The reason for the declination on the Adverse Action should be both "Application Incomplete" and "Other, Credit Application Incomplete due to frozen credit bureau report".
Frozen Credit Requirements
If the borrower’s credit information is frozen at one of the credit repositories for borrowers who have traditional credit, the credit report is still acceptable as long as
  • Credit data is available from two repositories,
  • A credit score is obtained from at least one of those two repositories, and
  • Provident Bank requested a three in-file merged report.

Loans for borrowers with credit data frozen at two or more of the credit repositories will not be eligible.

Reviewing the Credit Report
The following items should be considered when reviewing the credit report:
  • Payment history on previous mortgage should cover activity for the previous 12 months or longer;
  • Undisclosed debt. If the credit report reveals significant debt that the borrower did not disclose on the application, he or she may have been attempting to conceal liabilities in order to qualify for the mortgage. The borrower must provide a written explanation for the omission
  • Revolving accounts. When revolving accounts with outstanding balances do not have stated minimum required payments, payments should be calculated at 5% of the outstanding balance.

Documenting Previous Mortgage Payment History
The underwriter must review the borrower’s credit report to determine the status of all mortgage accounts. If a borrower had previous mortgages, the underwriter does not have to independently verify the mortgage’s payment history provided the credit report includes a reference to the mortgage (or mortgages) and reflects 12 months of the most recent payment activity.

If adequate mortgage payment history is not included in the borrower’s credit report, the underwriter must use the following to verify the borrower’s payment history on a previous mortgage(s):
  • A standard mortgage verification
  • Loan payment history from the servicer;
  • The borrower’s canceled checks for the last 12 months

The borrower’s year-end mortgage account statement provided the statement includes a payment receipt history, and, if applicable, canceled checks for the months elapsed since the year-end mortgage account statement was issued.

Standard Mortgage Verifications from Servicers
When relying on standard mortgage verifications from servicers or holders, ensure that the verifications include:
  • The unpaid principal balance of the mortgage and monthly payment amount;
  • The present status of the mortgage, such as current, 30 days’ delinquent, etc.; and
  • The borrower’s payment history
When a servicer fails to provide all of the requested information, the underwriter must rely on information provided through the borrower’s canceled checks. The checks must:
  • Be legible
  • Identify the mortgage servicer or mortgage holder as the payee,
  • Indicate that the servicer or holder endorsed the check for deposit, and
  • Indicate the date the servicer or holder deposited the check.
Existing Mortgage Payment Requirements

On the date of the loan application, the borrower’s existing mortgage must be current, which means that no more than 30 days may have lapsed since the last paid installment date.

Excessive Mortgage Delinquency
The underwriter must review the borrower’s credit history to determine previous mortgage delinquency severity (e.g., 30, 60, or 90 days), and recent delinquency. Loans with excessive prior mortgage delinquencies are not eligible. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more 60-, 90-, 120-, or 150-day delinquency reported within the 12 months prior to the credit report date. Timeshare accounts identified as mortgage tradelines are not required to meet the requirements described above, and are considered to be installment accounts.

Deferred Installment Debt
Deferred Installment Debts must be included as part of the borrower’s recurring monthly debt obligations. For deferred installment debts, if the borrower’s credit report does not indicate the monthly amount that will be payable at the end of the deferment period, the Underwriter must obtain copies of the borrower’s payment letters or forbearance agreements so that a monthly payment amount can be determined and used in calculating the borrower’s total monthly obligations.

Revolving Account Monthly Payment Calculation
If the credit report shows any revolving accounts with an outstanding balance but no specific minimum monthly payment, the payment must be calculated as the greater of:
  1. 5 percent of the balance; or
  2. $10.00

Note: If the actual monthly payment is documented from the creditor or the Underwriter obtains a copy of the current statement reflecting the monthly payment, that amount may be used for qualifying purposes.

Reduction of Alimony Payment for Qualifying Ratio Calculation:
Since there are tax consequences of alimony payments, the Underwriter may choose to treat the monthly alimony obligation as a reduction from the borrower’s gross income when calculating the ratio, rather than treating it as a monthly obligation.

Collections, Charge-offs of Non-Mortgage Accounts, Judgments, and Liens
Delinquent credit – including taxes, judgments, charge-offs of non-mortgage accounts, tax liens, mechanics’ or materialmens liens, and liens that have the potential to affect lien position or diminish the borrower’s equity must be paid off prior to closing. Garnishments - All garnishments with more than ten months remaining must be included in the borrower’s recurring monthly debt obligations for qualifying purposes.

Collection accounts and charge-offs on non-mortgage accounts do not have to be paid off at or prior to closing if the balance of an individual account is less than $250 or the total balance of all accounts is $1000 or less. Collection accounts and charge-offs on non-mortgage accounts that exceed these limits do not have to be paid off at or prior to closing, provided the Underwriter can document a strong credit profile, and meaningful financial reserves.

Disputed Credit Report Tradelines
If there are multiple disputed tradelines or a dispute on a mortgage tradeline, the Underwriter should obtain correspondence directly from the borrower indicating the reason for the dispute. The aspect of the tradeline such as balance and payment history-that is being disputed is of particular interest when considering the impact of the borrower’s overall credit profile. The underwriter is responsible for determining whether the borrower’s explanation is reasonable and/or whether additional documentation (such as canceled checks) is necessary to disprove the adverse information. Underwriters are not required to investigate disputed medical tradelines.

Accuracy of Credit Information in a Credit Report
If a borrower indicates that any significant information in the credit file is inaccurate- such as reported accounts that do not belong to the borrower or derogatory information that is reported in error- the underwriter should carefully review the credit information with the borrower, then request the credit reporting company that provided the information to confirm its accuracy.

IRS/State Tax Liens
Must be reviewed on an EXCEPTION basis ONLY
  • Tax liens must have never been reflected on the borrower’s credit report and
  • Payment plans for Federal and/or State tax liens must not exceed 1 year of 1040s, i.e. tax lien Federal or State payment plan for 2015 is acceptable as long as the borrower does not have any other active tax lien payment plans for the previous tax years.
  • If the borrower has a payment plan(s) already set up for a State/Federal Tax lien this payment must be included in the Debt-To-Income Ratio for qualifying.
  • If the borrower has sufficient assets to cover the current year tax liability a payment plan does not need to be set up and payment does not have to be included in the Debt-To-Income Ratio.
Federal Income Tax Installment Agreements
When a borrower has entered into an installment agreement with the IRS to repay delinquent federal income taxes, the underwriter may include the monthly payment amount as part of the borrower’s monthly debt obligations (in lieu of requirement payment in full) if:
  • There is no indication that a Notice of Federal Tax Lien has been filed against the borrower in the county in which the subject property is located.
  • The Underwriter obtains the following documentation:
    • An approved IRS installment agreement with the terms of repayment, including the monthly payment amount and the total amount due; and
    • Evidence the borrower is current on the payments associated with the tax installment plan. Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date and the next payment amount owed and due date. At least one payment must be made prior to closing.
  • If any of the above conditions are not met, the borrower must pay off the outstanding balance due under the installment agreement with the IRS.

Credit History
The borrower's credit history should demonstrate his or her past willingness and ability to meet credit obligations in a way that will enable the underwriter to draw a logical conclusion about the borrower's commitment to making payments on the new mortgage obligation that he or she is taking on.

The borrower's credit history over the past seven years should be reviewed to determine whether there are any major indications of derogatory credit.

Credit Inquiries
The borrower must satisfactorily explain credit inquiries within the past (120) days of the credit report date. As deemed necessary, the borrower should provide documentation for proof of no new accounts.

Credit Scores
FICO Bureau Credit Scores provide an indication of the relative likelihood of credit risk and can direct the underwriter to an appropriate level of credit review. Each loan product may include program specific credit scoring requirements and guidelines.

Loans can be approved or declined based on credit scores. Credit scores are one indication of a borrower’s willingness to repay the debt. All Borrowers must have a credit score.

Adverse / Derogatory Credit
A history that consists of a minor, isolated instance of poor credit or a late payment is acceptable as long as the lapse is satisfactorily explained and the borrower has other credit accounts that have excellent payment records. However, if the credit history reflects a consistent pattern of slow payments, undisclosed debts, collections, judgments for nonpayment of obligations, bankruptcies, etc., these must be clearly defined and addressed as to how they impact the risk of the file.

General Information
The presence of significant derogatory credit events dramatically increases the likelihood of a future default and represents a significantly higher level of default risk. Examples of significant derogatory credit events include bankruptcies, foreclosures, deed-in-lieu of foreclosure, pre-foreclosure sales, and short sales and Charge-Off of mortgage accounts.

NOTE: The terms “pre-foreclosures sale” and “short sale” are used interchangeably in this guide and have the same meaning (see Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale, and Charge –Off of a mortgage account.

Provident Bank must determine the cause and significance of the derogatory information, verify that sufficient time has elapsed since the date of the last derogatory information, and confirm that the borrower has reestablished an acceptable credit history. The underwriter must make the final decision about the acceptability of a borrower’s credit history when significant derogatory credit information exists.

Identification of Significant Derogatory Credit Events in the Credit Report
Provident Bank must review the credit report and Section VIII, Declarations, of the loan application to identify instances of significant derogatory credit events. Provident Bank must also review the public records section of the credit report and all tradelines, including mortgage accounts (first liens, second liens, home improvement loans, HELOCs, and mobile home loans), to identify previous foreclosures, deeds-in-lieu or Pre-foreclosure sales, and bankruptcies. Provident Bank must carefully review the current status of each tradeline, manner of payment codes, and remarks (descriptive text or codes such as “Foreclosure,” “forfeit deed in lieu of foreclosure,” “settled for less than full balance”) to identify these types of significant derogatory credit events.

Significant derogatory credit events may not be accurately reported or consistently reported in the same manner by all creditors or credit reporting agencies. If not clearly identified in the credit report, the Underwriter must obtain copies of appropriate documentation. The documentation must establish the completion date of a previous foreclosure, deed-in-lieu or Pre-foreclosure sale; confirm bankruptcy discharge or dismissal date; and identify debts that were not satisfied by the bankruptcy. Debts that were not satisfied by a bankruptcy must be paid off or have an acceptable, established repayment schedule.

Note: Timeshares accounts are considered installment loans and are not subject to the waiting periods described below.

Bankruptcy (Chapter 7 or Chapter 11)
A four-year waiting period is required, measured from the discharge or dismissal date of the bankruptcy action.

Exceptions for Extenuating Circumstances
A two-year waiting period is permitted if extenuating circumstances can be documented, and is measured from the discharge or dismissal date of the bankruptcy action.

Bankruptcy (Chapter 13)
A distinction is made between Chapter 13 bankruptcies that were discharged and those that were dismissed. The waiting period required for Chapter 13 Bankruptcy actions is measured as follows:
  • Two years from the discharge date, or
  • Four years from the dismissal date.

The shorter waiting period based on the discharge date recognizes the borrowers have already met a portion of the waiting period within the time needed for the successful completion of a Chapter 13 plan and subsequent discharge. A borrower who was unable to complete the Chapter 13 plan and received a dismissal will be held to a four-year waiting period.

Exceptions for Extenuating Circumstances
A two-year waiting period is permitted after a Chapter 13 dismissal, if extenuating circumstances can be documented. There are no exceptions permitted to the two-year waiting period after a Chapter 13 discharge.

Multiple Bankruptcy Filings
For a borrower with more than one bankruptcy filing within the seven years, a five-year waiting period is required, measured from the most recent dismissal or discharge date.

Note: The presence of multiple bankruptcies in the borrower’s credit history is evidence of significant derogatory credit and increases the likelihood of future default. Two or more borrowers with individual bankruptcies are not cumulative, and do not constitute multiple bankruptcies. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy this is not considered a multiple bankruptcy.

Exceptions for Extenuating Circumstances
A three-year waiting period is permitted if extenuating circumstances can be documented, and is measured from the most recent bankruptcy discharge or dismissal date. The most recent bankruptcy filing must have been the result of extenuating circumstances.

A seven-year waiting period is required, and is measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower.

Exceptions for Extenuating Circumstances
A three-year waiting period is permitted if extenuating circumstances can be documented, and is measured from completion date of the foreclosure action. Additional requirements apply between three and seven years, which include:
  • Maximum LTV, CLTV, or HCLTV ratios of the lesser of 90% or the maximum LTV, CLTV, or HCLTV ratios for the transaction per the Matrix.
  • The purchase of a principal residence is permitted.
  • Limited cash-out refinances are permitted for owner occupied pursuant to the eligibility requirements in effect at that time.

Foreclosure and Bankruptcy on the Same Mortgage
If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied if the underwriter obtains the appropriated documentation to verify that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods must be applied.

Deed-in-Lieu of Foreclosure, Pre-foreclosure Sale, and Charge-Off of a Mortgage Account
These transaction types are completed as alternative to a foreclosure.
  • A deed-in-lieu of foreclosure is a transaction in which the deed to the real property is transferred back to the servicer. These are typically identified on the credit report through remarks Codes such as "Forfeit deed-in-lieu of foreclosure."
  • A pre-foreclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer. These are typically identified on the credit report through Remarks Codes such as "Settled for less than a full balance."
  • A charge-off of a mortgage account occurs when a creditor has determined that there is little (or no) likelihood that the mortgage debt will be collected. A charge-off is typically reported after an account reaches a certain delinquency status, and is identified on the credit report with a manner of payment (MOP) code of "9".

A four-year waiting period is required from the completion date of the deed-in-lieu of foreclosure, pre-foreclosure sale, or charge-off as reported on the credit report or other documentation provided by the borrower.

Exceptions for Extenuating Circumstances
A two-year waiting period is permitted if extenuating circumstances can be documented.

Note: Deed-in-lieu and pre-foreclosures sales may not be accurately or consistently reported in the same manner by all creditors or credit reporting agencies.

Summary — All Waiting Period Requirements
The following table summarizes the requirements for all significant derogatory credit events:

Derogatory Event Waiting Period Requirements Waiting Periods with Extenuating Circumstances
Bankruptcy — Chapter 7 or 11 7 years 4 years
Bankruptcy — Chapter 13 7 years from discharge date 4 years from discharge date
Multiple Bankruptcy Filings 7 years if more than one filing within the past 7 years 7 years from the most recent discharge or dismissal date
Foreclosurea 7 Years 7 years - Additional requirements after 3 years up to 7 years:
  • 90% maximum LTVb ratios
  • Purchase, principal residence
  • Limited cash-out refinance
Deed-in-Lieu of Foreclosure and Pre-foreclosure Sale 7 Years 7 Years

aWhen both a bankruptcy and foreclosure are disclosed on the loan application, or when both appear on the credit report, the Underwriter may apply the bankruptcy waiting period if the Underwriter obtains the appropriate documentation to verify that the mortgage loan in question was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting period must be applied.

bReferences to LTV ratios include LTV, CLTV, and HCLTV ratios. The maximum LTV ratios permitted are the lesser of the LTV ratios in the table or the maximum LTV ratios for the transaction per the Matrix.


Extenuating circumstance are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the underwriter must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include.
  • Documentation that confirm the event
    • Such as a copy of the divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.; and
  • Documentation that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event
    • Such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.

The underwriter must obtain written explanation from the borrower explaining the relevance of the documentation. The written explanation must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate that the borrower had no reasonable options other than to default on his or her financial obligations. The written explanation may be in the form of a letter from the borrower, an email from the borrower or some other form of written documentation provided by the borrower.

A restructured loan is a mortgage loan in which the terms of the original transaction have been changed, resulting in absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan that results in
  • Forgiveness of a portion of principal and/or interest on either the first or second mortgage,
  • Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness,
  • Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage, or
  • Conversion of any portion of the original mortgage debt from secured to unsecured.

With respect to restructured mortgages, Provident Bank can rely upon existing policy when determining whether the loan is eligible for delivery under a refinance transaction or as a modified mortgage loan. Fannie Mae has eliminated any restrictions on refinancing a modified or restructured mortgage loan.

Payoff of debt solely to qualify must be carefully evaluated and considered in the overall loan analysis. The borrower’s history of credit use should be a factor in determining whether the appropriate approach is to include or exclude debt for qualification.
  • Installment loans that are being paid off or that are less than 10 months or fewer remaining monthly payments do not need to be included in the borrower’s long-term debt.
  • If a revolving account balance is to be paid off at or prior to closing, a monthly payment on the current outstanding balance does not need to be included in the borrower’s long-term debt, i.e., not included in the debt-to-income (DTI) ratio. Such accounts do not need to be closed as a condition of excluding the payment from the DTI Ratio.
Stability of Income
  1. Effective Income
    Income may not be used in calculating the borrower’s debt-to-income ratio if it comes from any source that cannot be verified, is not stable, or will not continue. A borrower with 25 percent or greater ownership interest in a business is considered self-employed and will be evaluated as a self-employed borrower.
  2. Verifying Employment History
    1. The underwriter must verify the borrower’s employment for the most recent two full years, and the underwriter must require the borrower to:
      • Explain any gaps in employment that the span one or more months, and
      • Indicate if he/she was in school or military for the recent two full years, providing evidence supporting this claim, such as college transcripts, or discharge papers.
      • Allowances can be made for seasonal employment, typical for the building trades and agriculture, if documented by the underwriter.
  3. Analyzing a Borrower’s Employment Record
    Underwriters may assume that the employment is ongoing if a borrower’s employer verifies current employment and does not indicate that employment has been, or is set to be terminated. Underwriters should not rely upon a verification of current employment that includes an affirmative statement that the employment is likely to cease, such as a statement that indicates the employee statement that the employment is likely to cease, such as a statement that indicates the employee has given (or been given) notice of employment suspension or termination.
    1. When analyzing a borrower’s employment, creditors must examine:
      • The borrower’s past employment record; and
      • The employer’s confirmation of current, ongoing employment status.
    2. Underwriters may favorably consider the stability of a borrower’s income if he/she changes jobs frequently within the same line of work, but continues to advance in income or benefits. In this analysis, income stability takes precedence over job stability.
  4. Borrowers Returning to Work After an Extended Absence
    An acceptable employment situation includes individuals who took several years off from employment to raise children, then returned to the workforce.
    A borrower’s income may be considered effective and stable when recently returning to work after an extended absence if he/she:
    1. Is employed in the current job for six months or longer; and
    2. Can document a two year work history prior to an absence from employment using:
      • Traditional employment verifications; and/or
      • Copies of IRS Form W-2s or pay stubs
    3. Important: Situations not meeting the criteria listed above may not be used in qualifying. Extended absence is defined as six months.
  5. Salary, Wage and Other Forms of Income
    1. General Policy on Borrower Income Analysis
      • The income of each borrower who will be obligated for the mortgage debt and whose income is being relied upon in determining ability to repay must be analyzed to determine whether his/her income level can be reasonably expected to continue.
      • In most cases, a borrower’s income is limited to salaries or wages. Income from other sources can be considered as effective, when property verified and documented by the underwriter.
    2. Effective Income for borrowers planning to retire during the first three years period must include the amount of:
      • Documented retirement benefits;
      • Social Security payments; or
      • Other payments expected to be received in retirement
  6. Underwriters may not ask the borrower about possible, future maternity leave.

    Underwriters may assume that salary or wage income from employment verified in accordance with the section above can be reasonably to be expected to continue if a borrower’s employer verifies current employment and income and does not indicate that employment has been or is set to be terminated. Underwriters should assume that income can be reasonably can be reasonably expected to continue if a verification of current employment includes an affirmative statement that the employment is likely to cease, such as a statement that indicates the employee has given (or been given) notice of employment suspension or termination.

  7. Overtime and Bonus Income
    1. Overtime and bonus income can be used to qualify the borrower if he/she has received this income for the past two years, and documentation submitted for the loan does not indicate this income will likely cease. If, for example, the employment verification states that the overtime and bonus income is unlikely to continue, it may not be used in qualifying.
    2. The Underwriter must develop an average of bonus or overtime income for the past two years. Periods of overtime and bonus income less than two years may be acceptable, provided the underwriter can justify and document in writing the reason for using the income for qualifying purposes.
    3. Establishing an Overtime and Bonus Income Earning Trend.
      • The creditor must establish and document an earnings trend for overtime and bonus income. If either type of income shows a continual decline, the Underwriter must document in writing a sound rationalization for including the income when qualifying the borrower.
      • A period of more than two years must be used in calculating the average overtime and bonus income if the income varies significantly from year to year.
  8. Qualifying Part-Time Income
    For qualifying purpose, “part-time” income refers to employment taken to supplement the borrower's regular employment; part-time employment is not a primary job and it is worked less than 40 hours.
    1. Part-time and seasonal income can be used to qualify the borrower if the underwriter documents that the borrower has worked the part-time job uninterrupted for the past two years, and plans to continue. Many low and moderate income families rely on part-time and seasonal income for day to day needs, and underwriters should not restrict consideration of such income when qualifying the income of these borrowers.
    2. Part-time income received for less than two years may be included as effective income, provided that the underwriter justifies and documents that the income is likely to continue.
    3. Part-time income not meeting the qualifying requirements may not be used in qualifying.
  9. Income from Seasonal Employment
    1. Seasonal income is considered uninterrupted, and may be used to qualify the borrower, if the underwriter documents that the borrower:
      • Has worked the same job for the past two years, and
      • Expects to be rehired the next season.
    2. Seasonal employment includes, but is not limited to:
      • Umpiring baseball games in the summer; or
      • Working at a department store during the holiday shopping season.
  10. Primary Employment Less Than 40 Hour Work Week.
    1. When a borrower’s primary employment is less than a typical 40-hour work week, the borrower should evaluate the stability of that income a regular, on-going primary employment.
    2. Example: A registered nurse may have worked 24 hours per week for the last year. Although this job is less than the 40-hour work week, it is the consumer’s primary employment, and should be considered effective income.
  11. Commission Income.
    1. A commission income must be averaged over the previous two years. To qualify commission income, the consumer must provide:
      • Copies of signed tax returns for the last two years; and
      • The most recent pay stub.
    2. Borrowers whose commission income was received for more than one year; but less than two years may be considered favorably if the underwriter can:
      • Document the likelihood that the income will continue, and
      • Soundly rationalize accepting the commission income.
      • Unreimbursed business expenses must be subtracted from gross income.
      • A commissioned borrower is one who receives more than 25 percent of his/her annual income from commissions.
      • A tax transcript obtained directly from the IRS may be used in lieu of signed tax returns.
  12. Qualifying Commission Income Earned for Less Than One Year.
    1. Commission income earned for less than one year is not considered effective income. Exceptions may be made for situations in which the borrower’s compensation was changed from salary to commission within a similar position with the same employer.
    2. A borrower’s income may also qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the consumer for the mortgage.
  13. Employer Differential Payments
    If the employer subsidizes a borrower’s mortgage payment through direct payments, the amount of the payments:
    1. Is considered gross income, and
    2. Cannot be used offset the mortgage payment directly, even if the employer pays the servicing creditor directly.
  14. Retirement Income
    Retirement income must be verified from the former employer, or from Federal tax returns. If any retirement income, such as employer pensions or 401(k)’s , will cease within the first full three years of the mortgage loan, such income may not be used in qualifying.
  15. Social Security Income
    Social Security income must be verified by a Social Security Administration benefit verification letter (sometimes called a “proof of income letter,” “budget letter,” “benefits letter,” or “proof of award letter”). If any benefits expire within the first full three years of the loan, the income source may not be used in qualifying.
    1. If the Social Security Administration benefit verification letter does not indicate a defined expiration date within three years of loan origination, the underwriter shall consider the income effective and likely to continue. Pending or current re-evaluation of medical eligibility for benefit payments is not considered an indication that the benefit payments are not likely to continue.
    2. Some portion of Social Security income may be “grossed up” if deemed nontaxable by the IRS.
  16. Automobile Allowances and Expense Account Payments.
    1. Only the amount by which the borrower’s automobile allowance or expense account payments exceed actual expenditures may be considered income.
    2. To establish the amount to add to gross income, the borrower must provide following;
      • IRS Form 2106, Employee Business Expenses for the previous two years; and
      • Employer verification that the payments will continue
    3. If the consumer uses the standard per-mile rate in calculating automobile expenses, as opposed to the actual cost method, the portion that the IRS considers depreciation may be added back to income.
    4. Expenses that must be treated as recurring debt include:
      • The borrower’s monthly car payment; and
      • Any loss resulting from the calculation of the difference between the actual expenditures and the expense account allowance.
  17. Borrowers Employed by a Family Owned Business
    In addition to normal employment verification, a borrower employed by a family owned business is required to provide evidence that he/she is not an owner of the business, which may include:
    1. Copies of signed personal tax returns or
    2. A signed copy of the corporate tax return showing ownership percentage.
      • o A tax transcript obtained directly from the IRS may be used in lieu of signed tax returns.
A borrower with a 25 percent or greater ownership interest I a business is considered Self-Employed.
  1. There are four types of business structures. They include;
    • Sole proprietorships;
    • Corporations;
    • Limited liability or “S” corporations; and
    • Partnerships.
  2. Minimum Length of Self Employment
    • Income from self-employment is considered stable, and effective, if the borrower has been self employed for two or more years.
    • Due to the high probability of failure during the first few years of a business, the requirements described in the table below are necessary for borrowers who have been self-employed for less two years
  3. If the period of self-employment is: Then:
    Between one and two years For the individual’s income to be effective, the individual must have at least two years of document previous successful employment in the line of work in which the individual is self-employed, or in a related occupation.
    Note: A combination of year of employment and formal education or training in the line of work the individual is self-employed or in a related occupation is also acceptable.
    Less than one year The income from the borrower may not be considered effective income.
  4. General Documentation Requirements for Self-Employed Borrowers.
    • Self-employed borrowers must provide the following documentation:
      • Signed, dated individual tax returns with all applicable tax schedules for the most recent two years;
      • For a corporation, “S” corporation, or partnership, signed copies of Federal business income tax returns for the last two years, with all applicable tax schedules; and
      • Year to date profit and loss (P & L) statement and balance sheet.
  5. Establishing a Self-Employed Borrower’s Earnings Trend.
    • When qualifying income, the borrower must establish the borrower’s earnings trend from the previous two year using the borrower’s tax returns
    • If a borrower:
      • Provides quarterly tax returns, the income analysis may include income through the period covered by the tax filings, or
      • Is not subject to quarterly tax returns, or does not file them, then the income shown on the P & L statement may be included in the analysis, provided the income stream based on the P & L is consistent with the previous year’s earnings
  6. If the P &L statements submitted for the current year show an income stream considerably greater than what is supported by the previous year’s tax returns, the underwriter must base the income analysis solely on the income verified through the tax returns.
  7. If the borrower’s earnings trend for the previous two years is downward and the most recent tax return or P & L is less than the prior year’s tax return, the borrower’s most recent year’s tax return or P & L must be used to calculate his/her income.
  8. Analyzing the Business’s Financial Strength
    The underwriter must consider the business’s financial strength by examining annual earnings. Annual earnings that are stable or increasing are acceptable, while businesses that show a significant decline in the income over the analysis period are not acceptable.
Income Analysis: Individual Tax Returns (IRS Form 1040).
The amount shown on a borrower’s IRS Form 1040 as adjusted gross income must either be increased or decreased based on the borrower’s analysis of the individual tax return and any related tax schedules.

The underwriter must prepare a written evaluation of its analysis of a self-employed borrower’s personal income, including the business income or loss, reported on the borrower’s individual income tax returns. The purpose of this written analysis is to determine the amount of stable and continuous income that will be available to the borrower. This is not required when a borrower is qualified using only salaried income (not derived from self-employment) and self-employment is a secondary and separate sources of income (or loss).

The underwriter may use Fannie Mae’s Cash Flow Analysis (Form 1084) or Freddie Mac (Form 91). A copy of the written analysis must be included as part of any loan application package that the underwriter.

The table below contains guidelines for analyzing IRS Form 1040
IRS Form 1040 Description
Wages, Salaries and Tips An amount shown under this heading may indicate that the individual.
  • Is a salaried employee of a corporation , or
  • Have other sources of income.
  • This section may also indicate the spouse is employed, in which case the spouse’s income must be subtracted from the borrower’s adjusted gross income.
    Business Income and Loss (from Schedule C) Sole proprietorship income calculation on Schedule C is business income. Depreciation or depletion may be added back to the adjusted gross income.
    Rents, Royalties, Partnerships (from Schedule E) Any income received from rental properties or royalties may be used as income, after adding back any depreciation shown on Schedule E.
    Capital Gain and Losses (form Schedule D) Capital gains or losses generally occur only one time, and should not be considered when determining effective income. However, if the individual has constant turnover of assets resulting in gains or losses, the capital gain or loss must be considered when determining the income. Three years tax returns are required to evaluate an earnings trend. If the trend.
  • Results in a gain, it may be added as effective income, or
  • Consistently shows a loss, it must be deducted from the total income.
  • Underwriter must document anticipated continuation of income through verified assets. Example: An Underwriter can consider the capital gains for an individual who purchases old houses, remodels them, and sells them for profit.
  • Interest and Dividend Income(from Schedule B) This taxable/tax-exempt income may be added back to the adjusted gross income only if it:
  • Has been received for the past two years; and
  • Is expected to continue
  • If the interest-bearing asset will be liquidated as a source of the cash investment, the underwriter must appropriately adjust the amount.
    Farm Income or Loss (from Schedule F) Any depreciation shown on Schedule F may be added back to the adjusted gross income.
    IRA Distributions, Pensions, Annuities, and Social Security Benefits The non-taxable portion of these items may be added back to the adjusted gross income if the income is expected to continue for the first three years of the mortgage.
    Adjustments to Income Adjustments to income may be added back to the adjusted gross income if they are;
  • IRA and Keogh retirement deductions;
  • Penalties on early "withdrawal of savings"
  • Health insurance deductions; and
  • Alimony payments
  • Employee Business Expenses Employee business expenses are actually cash expenses that must be deducted from the adjusted gross income
  • A corporation is a State chartered business owned by its stockholders.
    1. Need to obtain Consumer Percentage of Ownership Information.
      1. Corporate compensation to the officers, generally in proportion to the percentage of ownership, is shown on the:
        • Corporate tax returns IRS Form 1120; and
        • Individual tax returns.
      2. When an underwriter’s percentage of ownership does not appear on the tax returns, the Underwriter must obtain the information from the corporation’s accountant, along with evidence that the consumer has the right to any compensation.
    2. Analyzing Corporate Tax Returns
      1. In order to determine a borrower’s self-employed income from a corporation the adjusted business income must:
        • Be determined; and
        • Multiplied by the borrower’s percentage of ownership in the business.
      2. The table below describes the items found on IRS Form 1120 for which an adjustment must be made in order to determine adjusted business income.
    Adjustment Item Description of Adjustment
    Depreciation and Depletion Add the corporation’ depreciation and depletion back to the after-tax income
    Taxable Income Taxable income is the corporation’s net income before Federal taxes. Reduce taxable income by the tax liability.
    Fiscal Year vs. Calendar Year If the corporation operates on a fiscal year that is different from the calendar year, an adjustment must be made to relate corporate income to the individual tax returns.
    Cash Withdrawals The borrower’s withdrawal of cash from the corporations may have a severe negative impact on the corporation’s ability to continue operating.
  • An "S" corporation is generally a small, start-up business, with gains and losses passed to stockholders in proportion to each stockholder’s percentage of business ownership.
    1. Income for owners of "S" corporations comes from IRS Form W-2 wages, and is taxes at the individual rate. The IRS form 1120S, Compensation of Officers line item is transferred to the borrower's individual IRS Form 1040.
    2. Analyzing "S" Corporation Tax returns
      1. "S" corporation depreciation and depletion may be added back to income in proportion to the borrower's share of the corporation’s income.
      2. In addition, the income must also be reduced proportionately by the total obligations to the payable by the corporation in less than one year.
      3. The borrower’s withdrawal of each from the corporation may have a severe negative impact on the corporation’s ability to continue operating, and must be considered in the income analysis.
  • A partnership is formed when two or more individuals form a business, and share in profits, losses and responsibility for running the company.
    1. Each partner pays taxes on his/her proportionate share of the partnership's net income.
    2. Analyzing Partnership Tax Returns
      1. Both general and limited partnerships report income on IRS Form 1065, and the partner's share of income is carried over to Schedule E of IRS Form 1040.
      2. The underwriter must review IRS Form 1065 to assess the viability of the business. Both depreciation and depletion may be added back to the income in proportion to the borrower’s share of income.
      3. Income must also be reduced proportionately by the total obligations payable by the partnership in less than one year
      4. Cash withdrawals from the partnership may have a severe negative impact on the partnership's ability to continue operating, and must be considered in the income analysis.
    Alimony, child support or maintenance income may be considered effective, if:
    1. Payments are likely to be received consistently for the first three years of the mortgage;
    2. The consumer provides the required documentation, which includes a copy of the:
      1. Final divorce decree;
      2. Legal separation agreement;
      3. Court order; or
      4. Voluntary payment agreement; and
    3. The borrower can provide acceptable evidence that payments have been received during the last 12 month, such as:
      1. Cancelled checks;
      2. Deposit slips;
      3. Tax returns; or
      4. Court records,
        • Periods less than 12 months may be acceptable, provided the underwriter can adequately document the payer’s ability and willingness to make timely payments.
        • Child support may be “grossed up” under the same provisions as non-taxable income sources.
    1. Analyzing Interest and Dividends
      1. Interest and dividend income may be used as long as tax returns or account statements support a two-year receipt history. This income must be averaged over the two years.
      2. Subtract any funds that are derived from these sources, and are required for the cash investment, before calculating the projected interest or dividend income.
      1. Income from trust may be used if constant payments will continue for at least the first three years of the mortgage term as evidenced by the trust income documentation.
      2. Required trust income documentation includes a copy of the Trust Agreement or other trustee statement, confirming the:
        • Amount of the trust;
        • Frequency of distributions; and
        • Duration of payments
      3. Trust account funds may be used for the required cash investment if the borrower provides adequate documentation that the withdrawal of funds will not negatively affect income. The borrower may use funds from the trust account for the required cash investment, but the trust income used to determine repayment ability cannot be affected negatively by its use.
      1. In order to include notes receivable income, the consumer must provide;
        • A copy of the note to establish the amount and length of payment, and
        • Evidence that these payments have been consistently received for the last 12 months through deposit slips, deposit receipts, cancelled checks, bank or other account statements, or tax returns
      2. If the borrower is not the original payee of the note, the underwriter must establish that the borrower is be to enforce the note.
      1. Follow the steps in the table below to calculate an investment property’s income or loss if the property to be subject to a mortgage is an eligible investment property.
    5. 1.

      Subtract the monthly payment (PITI) from the monthly net rental income of the subject property.

      Note: Calculate the monthly net rental by taking the gross rents subtracting 25 percent reduction for vacancies and repairs.

      2 Does the calculation in Step 1 yield a positive number?
      • If yes, add the number to the borrower’s monthly gross income.
      • If no, and the calculation yields a negative number, consider it a recurring monthly obligation.
      1. Military personnel not only receive base pay, but often times are entitled to additional forms of pay, such as;
        • Income from variable housing allowances;
        • Clothing allowances;
        • Flight or hazard pay;
        • Rations; and
        • Proficiency pay.
      2. The tax-exempt nature of some of the above payments should also be considered.
      3. These types of additional pay are acceptable when analyzing a borrower’s income as long as the probability of such pay to continue is verified in writing.
      1. Direction compensation for service-related disabilities from the Department of Veterans Affairs (VA) is acceptable, provided the borrower receives documentation form the VA.
      2. Education benefits used to offset education expenses are not acceptable.
      1. Income received from government assistance programs is acceptable as long as the playing agency provided documentation indicating that the income is expected to continue for at least three years.
      2. If the income from government assistance programs will not be received for at least three years, it may not be used for qualifying.
      3. Unemployment income must be documented for two years, and there must be reasonable assurance that this income will continue. This requirement may apply to seasonal employment.
      1. If the Dissipation/Annuitization of Assets Income is the sole income being used to qualify the Borrower(s) must be of Retirement Age (over 59.5 years old) and have had a history of retirement asset distribution as income.
      2. If used along with other income there must be a history of receiving regular annual, semi-annual, quarterly, monthly or semi-monthly disbursements of income coming from an acceptable Asset source.

    When 2019 income is used to qualify the borrower, below are the minimum documentation requirements. This guideline is effective through 7/15/2020; thereafter the verified tax return or extension with evidence of payment for each is required.

    • Copy of the 1040’s stamped by the IRS as "Received"
    • Cancelled check for the tax payment or evidence of receipt of refund
    • IRS Transcripts for 2017; 2017 a8d 2019 (2018 will reflect "no record found"). Use worst case scenario with minimum of 24 mos. average if 2019 is increasing and 12 mos. average if decreasing.
    • Audited P&L if the 2019 tax returns are not available and the income has increased and used to qualify. An unaudited P&L may be used to support previous year’s income. If the P&L indicates a significant decline, the 2019 income must be taken into consideration when qualifying
    • CPA letter addressing any significant decline if the tax returns/unaudited P&L cannot be verified
    • Borrowers final pay stub for 2019 (unless 2019 W2 available) OR
    • IRS Transcripts for 2018 & 2018 OR 2019 if available
    • IRS verified 2019 W2’s (when income cannot be verified by tax transcripts) OR
    • Written VOE confirming and explaining increase in income if the 2019 W2’s cannot be verified
    • In cases where the borrower is not required to file tax returns, 4506T transcripts are still required.
    • If "No Results" feedback is received, provide a copy of the feedback in the file with supporting documentation.

    As always, the decision to use 2019 income is at the discretion of the Underwriter.

    The decision to use the income largely depends on the industry and/or company the borrower owns or by which he/she is employed.

    The Underwriter must provide an explanation of their thought process in using income that cannot be adequately verified with IRS Tax Transcripts.

    If a borrower has filed an extension, we require:
    1. Evidence in the file that the extension was filed on or before July 15, 2020.
    2. A 2019 Tax Transcript showing "No Record of return filed," and
      1. For salaried borrowers: a 2018 Transcript, a current paycheck stub, and 2019 W-2.
      2. For self-employed borrowers: A 2018 transcript and Profit and Loss Statement for 2019.
      3. For retired borrowers: In cases where the borrower is not required to file, transcripts are still required.

    If "No Results" feedback is received, provide a copy of the feedback in the Loan file with supporting income documentation.

    Provident Bank requires each borrower (regardless of income source) completed and sign a separate IRS Form 4506-T at application and at closing. It may be necessary to have the borrower complete and sign multiple IRS 4506-T forms depending on the transcripts required to validate the information used in documenting income.
    1. Underwriter's discretion if personal tax returns and if, applicable (the borrower is 100% owner of the business), business returns are used to document the borrower’s income, those transcripts must be obtained from the IRS.

    Estimating Monthly Hazard Insurance Premium
    California: Loan Amount x.0035 divided by 12 = monthly figure

    Estimating Monthly Property Taxes
    Purchases and Construction to Permanent Financing in California
    All jurisdictions of California have various assessments and bond fees according to that jurisdiction. Processor/Underwriter must complete the “Tax Calculation Worksheet” (located in Provident Bank-Policies and Procedures-Forms) for the calculation of estimated monthly property taxes.
    • Form must be placed on top of the preliminary title report in the loan file.

    Refinances in California
    Property taxes from Preliminary Title Report divided by 12 = monthly figure + any assessments

    Estimating Mello-Roos
    If the exact figure is not available calculate monthly figure as follows:
    • Sales Price x .0150 divided by 12 = monthly figure

    Provident Bank must base it’s calculation of real estate taxes for borrower qualification on no less than the current assessed value. (Taxes are listed on the title commitment.) However, Provident Bank may (or must in some circumstances) project the real estate taxes if it can document one of the following:
    • The amount of taxes will be reduced based on federal, state, or local jurisdictional requirements. However, the taxes may not be reduced if an appeal to reduce them is only pending and has not been approved.
    • If the transaction is new construction, the Underwriter must use a reasonable estimate of the real estate taxes based on the value of the land and completed improvements.
    • There is tax abatement on the subject property that will last for no less than 5 years from note date. For example:
      • For a municipality with a 10-year abatement, the underwriter may qualify the borrower with the reduced tax amount;
      • For a municipality with 10-year abatement and with annual real estate tax increases in years 1 through 10, Provident Bank must qualify the borrower with the annual taxes that will be required at the end of the 5th year after the first mortgage payment date.

    Loan amount x .0035 divided by 12 = monthly figure; or if available use amount from insurance policy

    • Coverage must be equal to the lesser of loan amount or the amount reflected on the appraisal as "total estimated cost new". Guaranteed Replacement Cost Coverage is acceptable.
    • The maximum allowable deductible for insurance covering a property (including common elements in a PUD or condo) securing a first mortgage loan is 5% of the face amount of the policy. When a policy provides for a separate wind-loss deductible (either in the policy itself or in a separate endorsement), that deductible must be no greater than 5% of the face amount of the policy.
    • Lender’s Loss Payable endorsement (CA BFU438). Always verify insurance company will issue the 438. For example, Topa Insurance has the rating, but will not issue a 438. Form 370 is not acceptable.
    • Condos and PUD’s must maintain blanket insurance policy that provides for public liability and fidelity bond coverage that meets investor requirement. Walls in coverage must be obtained (HO6).
    • Six months remaining coverage for refinance transactions, 12 months for purchase transactions.

    Requirements for Properties with Solar Panels that are Leased or Covered by a Power Purchase Agreement
    The solar panels may not be included in the appraised value of the property.

    The property must maintain access to traditional electric utilities. For example, properties with lease solar panels must have traditional electrical utilities in addition to the electricity provided by the solar energy, to ensure consistent access to electricity in the event the solar panels become non-functioning or are removed.

    The lease payment must be included in the debt-to-income (DTI) ratio calculation unless the lease is structured to
    • Provide delivery of a specific amount of energy at a fixed payment during a given period, and
    • Have a production guarantee that compensates the borrower on a prorated basis in the even the solar panels fail to meet the energy output required for in the lease for that period.

    Payments under power purchase agreements where the payment is calculated solely based on the energy produced may be excluded from the DTI ratio.

    The owner of the solar panels must have a general liability insurance policy that covers damage to the mortgaged property caused by faulty installation, malfunction, or other manufacturing defects, whether or not covered by the warranty.

    The owner of the solar panels agrees:
    • Not to be named loss payee (or named insured) on the property owner’s property insurance policy.
    • As an alternative the underwriter may verify that the owner of the solar panels is not named a loss payee
    The lease or power purchase agreement must indicate that
    • Any damage that occurs as a result of the installation, malfunction, manufacturing defect, or the removal of the solar panels is the responsibility of the owner of the equipment and the owner must be obligated to repair the damage and return the improvements to their original or prior condition (for example, sound and watertight conditions that are architecturally consistent with the home).
    In the event of foreclosure, either:
    • Provident Bank may terminate the lease/agreement and require the third-party owner to remove the equipment;
    • Provident Bank has the right to become the beneficiary of the borrower’s lease/agreement with third party without charge; or
    • Provident Bank has the right, but not the obligation, to enter into a new lease/agreement with the third party, under terms no less favorable than the prior owner.

    Note: Any lease/agreement in which Provident Bank is a party in connection with a foreclosure (whether as beneficiary or direct party), must also be assignable to a subsequent purchaser of the realty from the Provident Bank. In addition, Provident Bank must also have the right to terminate the lease/agreement and require removal of the equipment (for example if the third party places restrictions on the assignment to a purchaser).

    Title exceptions with respect to the solar panels (for example, easements, notice of contract) may be present on the title provided the interest is not superior to Provident Savings Bank first lien position.

    The title cannot reflect any liens related to the ownership or maintenance of the solar panels that will result in a lien superior to Provident Bank’s first lien position.

    If the solar property owner is the owner of the solar panels, standard eligibility requirements apply (for example, appraisal, insurance and title)

    If the solar panels are leased from or owned by a third party under a power purchase agreement or other similar arrangement, the following requirements apply:

    • If the solar property owner is the owner of the solar panels, standard eligibility requirements apply (for example, appraisal, insurance and title).
    • If the solar panels are leased from or owned by a third party under a power purchase agreement or other similar arrangement.
    • Zero Option Monthly BPMI – A borrower may pay a MI premium in addition to their monthly payment. The first premium will be collected with the first or second loan payment.
    • Single Premium Cash BPMI – A borrower may pay on MI premium in cash at closing.
    • Lender Paid Mortgage Insurance LPMI - The loan has a higher interest rate and the Provident Bank pays for the Mortgage Insurance.
      • LPMI can only be done thru Radian, MGIC, Essent and Genworth at this time.

    NOTE: All loans that require Mortgage Insurance are subject to MI Approval. Contact one of the approved MI Companies above for guidance.

    Underwriter(s) are required to make sure the Mortgage Insurance Companies are using the correct forms when obtaining the Mortgage Insurance Certification.


    Underwriting the Preliminary Title Report
    Underwriters are responsible for underwriting the preliminary title report. The underwriting process includes marking each item on the Schedule B in ink, either “in or out”. Underwriters are responsible for giving instructions to the closing department. These instructions must be clear and consistent. The underwriter must add required endorsements.


    Closing Protection Letter dated within 30 days of funding is required on all loans.


    Private transfer fee covenants may be attached to real property by the owner or another private party, or the property developer and provide for a transfer fee to be paid to an identified third party, such as the developer or its trustee, upon each resale of the property. The fee typically is stated as a fixed amount or as a percentage, such as one percent of the property's sales price, and often exists for an extended period of time. Underwriters are required to ensure that properties approved under Provident Savings Bank Guidelines are not secured by properties encumbered with a private transfer fee that are unacceptable.


    Provident Bank’s Appraisal Underwriting Guidelines for Residential Units is published as our uniformed guide to the evaluation process.

    Note: The Appraisal Review Policy is included in the Appraisal Underwriting Guidelines. All appraisal underwriting must be documented on the appraisal underwriting checklist in the LOS.

    The following pre-funding quality control reviews are required on all closed loans:
    1. Run Data Verify with Property Verify may be required per specifications below.
      • Names and/or parties MUST be spelled correctly when run through LDP/GSA.
    2. Appraisal Review if deemed necessary by the underwriter or product guidelines.
    3. Appraisal Check List completed by the underwriter in the LOS.
    4. 4506T to be processed on all loans.
    5. Social Security Verification Review any conventional that has any kind of SS# Alert found in the credit report or on the Data Verify or any other place in the file.
    6. MERS to be run twice on all loans at processing/underwriting and funding
    7. Verbal VOE’s to be done by processor or funder within 10 days prior to the note date and at time of funding.
    8. Credit report to be no more than 45 days old at time of funding. If credit is aged a soft-pull updated report (do not need FICO's) must be run.
    9. Verify Initial and Final loan application is signed by the borrower and Loan Officer. NMLS Number for the Loan Officer must be reflected on both initial and final loan application

    The above requirements have been standardized to apply to all loan transactions Retail, Wholesale and Correspondent.

    An audit tool to be run on all loans prior to closing. The ID Verify, App Verify and Property Verify scores must be equal to or greater than 700. All findings in the “High Caution” range must be cleared by the underwriter with appropriate documentation or comments placed in the loan file. All findings in the Medium and Low Caution ranges must be reviewed for red flags and possible clearance. Medium and Low range findings deemed insignificant may have to be cleared to bring the score to 700+.

    Field or Desk Appraisal Reviews are at the discretion of the Underwriter unless the required by specific program guidelines.

    A tool for the underwriter to use to make sure the appraisal is thoroughly analyzed at underwriting and specific declining market requirements are met.

    Must be processed on all loans. The results must match/support the income documentation in the file. If the results reflect additional earnings/loss this income/loss must be documented, addressed and taken into consideration in qualifying.

    All loans require this when there is any discrepancy or variation in the credit report or the Data Verify or any other place in the loan file. Social Security Number must be consistent throughout the file (1040s, W-2’s, check stubs, credit report, etc.).

    Used to determine what if any open mortgages the borrowers may have. The SS# of the borrowers is used for the search. Any additional open mortgages found must be documented, addressed and considered in qualifying.

    A verbal VOE must be performed at underwriting/processing and again at funding. The verbal VOE at underwriting must include the borrower’s dates of employment and position. If the employer mentions future layoff or deferments, loan may not fund and the file must go back to the underwriter for further review. The verbal verification must be obtained within 10 business days prior to the note date for employment income and self-employment income.

    NOTE: Any change in the borrower’s employment status could have significant impact on the borrower’s capacity to repay the mortgage loan and must be fully reevaluated.


    The credit report used to qualify the borrower may not be older than 45 days at funding. The purpose of this is to determine that no new financing has occurred which could affect the qualification of the specific transaction and that there has been no new derogatory credit established. If a softpull update is needed, FICO's are not required unless there are significant changes found on the soft-pull report. Any significant changes such as newly opened accounts increase in accounts that would affect ratios, derogatory credit etc. would require re running of DU with updated credit and FICO’s. The loan would then need to be re-qualified and changes made in the loan operating system. If there are no changes on the soft-pull compared to the existing credit report, the existing credit report can be used to fund the loan, but CANNOT be more than 90 days old. Major changes could possibly result in a need to restructure or decline the loan.

    Should any of the above pre closing QC procedures reflect inconsistencies or misrepresentation, the file and its findings must be sent to Provident Bank QC department for immediate review. A cover letter explaining the concerns must accompany the file. The QC department will review the findings and if applicable will issue a Suspicious Activity Report (SAR) and notification to the appropriate departments.


    Risk is a characteristic that denotes a potential negative impact to the salability and/or performance of a loan. The layering of risk characteristics increases the probability of a negative impact on the salability and/or performance of a loan. Risk characteristics are attributes of each loan that impact the borrower’s motivation or capacity to repay the mortgage loan.

    When a number of risk factors are present without sufficient compensating factors, their cumulative effect can dramatically increase the likelihood of default. This is referred to as layered risk. Loans with layered risk characteristics can be measured through early payment default, common risk and quality errors, unsalable loans, and repurchase requests. Loans with risk and quality errors historically correlate to higher defaults.

    The following information provides guidance in the form of observations and recommendations specific to how loan scores, along with common risk and quality errors are related to layered risk.

    Document the comprehensive risk decision; provide a written statement for the underwriting rationale used to approve.

    Completing a comprehensive risk assessment, along with addressing common risk and quality errors is important to originating well underwritten loans. Implementing and promoting responsible lending practices is critical to protecting borrowers and Provident Bank.

    Revised September 2020