Chapter 4: Loan Eligibility
Loans to One Borrower
The subject property may be the borrower’s primary residence or second/vacation home, or 1-4 unit non-owner
occupied property, up to a total of four loans to one borrower (includes both first and second liens). There is no limit
on the number of other mortgaged properties the borrower may own.
NON-ARM’S LENGTH TRANSACTIONS
A non-ARM’s length/at interest transaction is one where the parties to the loan and/or sale transaction are related,
or where the transaction is between parties who have an interest in the transaction. Because this relationship may
influence the transaction there are additional risks associated with non-ARM’s length loans and special care in
underwriting them should be taken. Non-ARM’s length transactions are only permitted on full/alt documentation.
These transactions include:
Family sales or transfers
Corporate sales or transfers
Mortgagors employed in the real estate or construction trades who are involved in the construction, financing,
or sale of the subject property.
Some transactions involving principals or a seller or other vendor (such as an appraiser, settlement agent, title
company, and so on) who is involved in the lending process of the subject property.
If the borrowers are purchasing a property from a builder who is purchasing the borrowers’ existing residence, it is
considered a non-ARM’s length transaction and is not permitted.
Non-ARM’s length transactions with non-family members will be considered only if they are bona fide sales
transactions and the borrowers will occupy the property as their primary residence.
Non-ARM’s length transactions with a family member are generally acceptable under the following conditions:
The family member or relative is the borrowers’ spouse, child, parent, or any other individual related to the
borrowers by blood, adoption, or legal guardianship.
An executed purchase or sales agreement between the purchaser and the family member is in the loan file.
The source and ownership of funds for the down payment, closing costs, and
reserves are well documented in the loan file.
The appraised value of the property is well supported, particularly for gifts of equity or gifts of more than 20% of the
LTV.
Gifts are allowed for owner-occupied transactions if they meet the normal gifting guidelines as follows:
The borrowers must have 5% of their own funds as a down payment; however, if the LTV/CLTV is less than or
equal to 80% then the entire down payment may be a gift.
Gifts of equity are acceptable if verified by an appraisal and gift letter.
A signed gift letter and verification of the receipt of the funds are provided.
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Borrower is an Interested Party
If the builder and/or property seller is a company owned by the borrower or where the borrower is a registered
agent, sales agent, or partner for the builder or property seller, the loan is not permitted.
A borrower may act as an interested party to a sales transaction for the subject property; however, the borrower
may not use any payment for services rendered from the sales transaction of the subject party towards the down
payment, closing costs, or reserves requirements. Payment for services rendered means payment for, but not
limited to, realtor commissions, broker commissions, and sales associate commissions.
ELIGIBLE PROPERTY TYPES
RURAL PROPERTY REQUIREMENTS
The primary dwelling must represent 70% or more of the total appraised value of the property. Outbuildings are
not considered in the 70% calculation.
Value based on a lesser amount of acreage than the actual lot size is not acceptable. If a location is not
designated in the appraisal as rural, CFSB may deem the property as rural if the lot size exceeds typical urban
or suburban lot size, or if the location is remote from a metropolitan area.
Properties with outbuildings require special consideration. Properties with minimal outbuildings, such as a
small barn or stable that are of relatively insignificant value in relation to the total appraised value are
acceptable if they are typical residential improvements and support the residential use for the location and
property type. Comparable sales with similar improvements should show they are typical and have an existing
market. A property with an atypical minimal outbuilding is still acceptable as long as the appraiser's analysis
reflects little or no value for it. Properties with significant outbuildings must be reviewed with great care,
regardless of whether the appraiser assigns any value to them or not. Their existence may indicate the
property may be used for agriculture or other income producing purposes. Hobby farms are permitted if they
are non-income (or very minimal) producing.
If the property is on a community-owned or privately owned and maintained street, there should be an
adequate, legally enforceable agreement for maintenance of the street. If the loan to value is 75% or less, a
private road maintenance agreement is not necessary provided the property is located in an area where private
roads are customary and common, and a history of maintenance for the private road has been established.
However, in California, California Civil Code 845 takes precedence. California Civil Code 845 requires the
private road to be maintained, so in California, private road maintenance agreements are not required.
Lot size 10 Acres, but < = 20 Acres
Must be owner occupied primary residence or second home.
Two full appraisals are required. The value must be based on the lower of the two appraised values.
Comparables should be of similar acreage to the subject property.
The appraisal must indicate property values are stable or appreciating.
The appraiser must comment on the appraisal that the property is not being used as a working farm, and is
typical for the area.
No more than 35% of the appraised value may be attributed to land value.
Subject property parcel may not have been split from a larger parcel which has agricultural use.
Subject property may not be an over-improvement.
Subject must have adequate sewage, water, and utilities available and in service.
Subject property must be accessible by roads that meet local standards to allow legal ingress and egress.
Survey/ Recorded Plat is required in order to show that subject property is not split from a larger parcel which
has agricultural use and to show evidence of legal ingress and egress.
PUD REQUIREMENTS
The PUD must meet the following requirements:
The PUD meets and is warrantable to FNMA guidelines.
The PUD does not contain any 2-4 unit dwellings.
The PUD does not include space devoted to commercial use.
The PUD is not a conversion of an existing building.
All hazard, flood and liability insurance requirements set forth in the Guide have been met.
CFSB requires a HOA Questionnaire, Condominium/PUD Warranty signed by the Seller, and evidence of
Condominium/PUD project insurance, all of which must meet FNMA guidelines.
CONDOMINIUM REQUIREMENTS
Definitions
A condominium unit is a one unit dwelling located in a condominium project that has all of the following
characteristics:
A condominium project is real estate that includes the separate ownership in fee of a specified residential unit
with an undivided interest in real estate designated for common ownership solely by unit owners.
The structure is generally two or more units with the interior airspace individually owned. The balance of the
property (land and building) is owned, in common, by the individual owners.
High Rise Condominium—A condominium that is more than four stories.
Site Condominium—A detached one unit dwelling located within a Condo project that consists solely of
detached one-unit dwellings.
Condominium Conversion—Changing the ownership of a building, usually a rental project, to the condominium
form of ownership.
Condominium Hotel—A condominium project that has rental or registration desks, short-term occupancy, food
and telephone services and daily cleaning services and which is operated as a commercial hotel even though
the units are individually owned.
New Projects—New projects are projects in which 90% of the total units have been conveyed to the unit
purchasers. New projects also include projects that are not fully complete, such as proposed construction, new
construction, or the proposed or incomplete conversion of an existing building to a condominium.
Established Projects—Established projects are projects in which 90% or more of the total units have been
conveyed to the unit purchasers, and the project is complete.
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Condominium Requirements
If the mortgaged property is a unit within a Condominium project, it must meet the following requirements:
The property meets the definition of condominium unit as set forth in ―Definitions‖ on page 4.10.
The condominium project meets and is warrantable to FNMA guidelines, except as stated below regarding
Non-warrantable Condominium projects.
If the project is a conversion of an existing building to condominiums within the past three years, the architect’s
or engineer’s report originally obtained for the conversion must comment favorably on sound transmission, the
structural integrity of the project, and the condition of remaining useful life of the major project components –
such as heating and cooling systems, plumbing, electrical systems, elevators, boilers, roofs, etc.
The project is not a Condominium Hotel, except on CFSB Alt A (see ―Loan
Program Descriptions‖ beginning on page 5.1 for requirements)
The unit is not located within a Non Warrantable Condominium project (does not meet the FNMA/FHLMC
requirements to be considered warrantable), except as permitted on CFSB Alt A (see ―Loan Program
Descriptions‖ on page 5.1 for requirements).
All hazard, flood and liability insurance requirements have been met.
CFSB requires a HOA Questionnaire, Condominium/PUD Warranty signed by the Seller, and evidence of
Condominium/PUD project insurance, all of which must meet FNMA guidelines.
CFSB limits the number of units which it will purchase within any particular condominium project to 25%
maximum.
CFSB limits the number of non-owner-occupied units within a particular condominium project to 50% of total
units in a 5+ unit condominium project and no more than 1 unit in a < 5 unit condominium project.
No single entity may own more than 10% of the total units in a 5+ unit condominium project or more than 1 unit
in a < 5 unit condominium project.
LEASEHOLDS
In general, leasehold estates are permitted in areas in which they have received market acceptance, as long as the
mortgage not only covers the property improvements, but also the borrower’s leasehold interest in the land.
However, mortgages secured by manufactured homes located on leasehold estates are not eligible.
REFINANCE LOANS
A refinance transaction involves the repayment of an existing debt from the proceeds of a new loan that has the
same borrower and the same secured property. CFSB also considers as a refinance transaction the case in which
the present property owner obtains a loan on a property that does not already have a loan against it (i.e., owned
free and clear). Additionally, the creation of a new loan by converting an interim construction loan or short-term
note into permanent financing may be considered as a refinance transaction.
Properties Listed for Sale
CFSB will entertain for purchase, on an exception basis, any rate/term or cash-out refinance loan wherein the
secured property has been listed for sale anytime during the previous twelve months from the date of the
Residential Loan Application. A copy of the cancelled listing and an acceptable letter of explanation from the
borrower addressing why the property was previously listed for sale are required. The Broker will be required to
refund the premium paid on this loan if the property is sold and the loan paid in full within one year of purchase.
Texas Equity Refinances
CFSB will not purchase any loans considered to be Texas equity mortgage refinance loans originated under
Section 50(a)(6) of Article XVI of the Texas Constitution.
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RATE/TERM REFINANCE LOANS
The purpose of a rate/term refinance loan is to pay off existing mortgages or liens securing the mortgaged property
in order to secure a different interest rate or term. The Loan amount in a rate/term refinance transaction is limited
to the sum of…
the unpaid principal balance of the existing first mortgage,
the amount required to satisfy junior liens that are more than one year old as of the date of the Residential
Loan Application for the refinance Loan (For a HELOC, the one-year seasoning applies to the date of the most
recent draw. Draws of minimal amount, not exceeding an aggregate amount of $2,000, are exempt from this
requirement.), the amount required to satisfy junior liens if the documented proceeds of the entire amount of
the junior lien were used to purchase the property, regardless of its age (a copy of the HUD-1 Closing
Statement must be provided reflecting purchase money second used for purchase of the property), closing
costs, discount points and prepaid items which are reasonable and customary, and incidental cash back to the
borrower limited to a maximum of 2% of the loan amount or $2000 whichever is less.
Note: For the state of Texas, state requirements apply and cash back to the borrower is not permitted on owner
occupied properties.
A refinance that results from a divorce settlement in which one spouse is required to ―buyout‖ the interest of the
other spouse or any other refinancing in which an owner ―buys-out‖ the interest of another owner can be
considered a rate/term refinance if all of the following conditions are met:
The security property must have been jointly owned by all parties for at least the 12 months preceding the date
of the mortgage application (Parties of a divorce settlement or who inherit an interest in the property do not
have to satisfy this requirement.)
All parties must be able to demonstrate that they occupied the security property as their principal residence, by
providing an acceptable source of verification – such as a driver’s license, bank statement, credit card bill, utility
bill, etc. that was mailed to the individual at the address of the security property (Parties who inherit an interest
in the property do not have to satisfy this requirement.)
A copy must be provided of the divorce decree for divorce settlements reflecting the spousal buyout and terms
of buyout.
The written agreement signed by all parties for any other owner ―buy-out‖, that states the terms of the property
transfer and the proposed disposition of the proceeds from the refinancing transaction.
The borrower who acquires sole ownership of the property may not receive any of the proceeds of the
refinancing.
The party who is ―buying out‖ the other party’s interest must be able to qualify for the mortgage under standard
underwriting guidelines.
For rate/term refinances, the LTV is based on appraised value, regardless of length of ownership.
CASH-OUT REFINANCE LOANS
A refinance mortgage will be considered a cash-out refinance mortgage if the loan amount is used for any purpose
other than those listed above for a no cash-out refinance mortgage.
Note: For the state of Texas, state requirements apply and cash-out refinances are not permitted on owner
occupied properties.
CONTRACT FOR DEED
A mortgage loan paying off a contract for deed must be treated as a refinance. Some states do not recognize the
borrower as having an equitable position in the property until they have made their last payment under the contract
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for deed, and therefore, would consider the transaction to be a purchase; however, CFSB has elected to treat all
loans paying off a contract for deed as a refinance.
Recorded Contract with 12 Months or More Ownership
The LTV is determined by appraised value.
Payment history must be documented with one of the following: cancelled checks, bank statements or
money order receipts.
Cash out refinance is permitted.
Note: Must be recorded or sent to the county for recording at least 12 months prior to Note date. If not,
must be treated as unrecorded.
Recorded Contract with Less than 12 Months Ownership
The LTV is determined by lower of appraised value or purchase price.
Payment history must be documented with one of the following: cancelled checks, bank statements or
money order receipts.
Cash out refinance is not permitted.
Note: Must be recorded or sent to the county for recording at the time the contract was signed. If not,
must be treated as unrecorded.
Unrecorded Contract
The LTV is determined by lower of appraised value or purchase price.
Payment history must be documented with one of the following: cancelled checks, bank statements or
money order receipts.
Cash out refinance is not permitted.
LTV must be 5% below program maximum.
Source of Buydown Funds
Funds for buydown plans may be provided by any source or combination of sources—such as the property seller,
the borrower, a relative of the borrower, or the borrowers employer, etc. If the contributor of the buydown funds is
an interested party to the property sale or purchase transaction, the buydown funds may be subject to our
interested party contribution limit.
The buydown plan must be a written agreement between the party providing the buydown funds and the
borrower.
Buydown Terms
The buydown agreement must provide that the borrower will not be relieved of his or her obligation to make the
payments required by the terms of the mortgage note, if, for any reason, the buydown funds are not available. A
copy of the buydown agreement must be included in the delivery documentation for the mortgage. The buydown
account must have been established and fully funded by the time the Seller submits the mortgage for purchase.
The Seller must deposit funds for a buydown account into a custodial bank account and cannot include the funds in
an account with its other corporate funds.
The security instruments must reflect the permanent payment terms rather than the terms of the buydown plan. In
no event may the buydown plan change the terms of the Note. The buydown funds cannot be used to reduce the
mortgage amount for purposes of determining the loan-to-value ratio. In addition, all of the terms of the buydown
plan must be disclosed to us, the mortgage insurer, and the property appraiser.
There is no limit on the total dollar amount of an interest rate buydown. Rather, we require the amount be
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consistent with the terms of the buydown period. The interest rate buydown period must meet the requirements
stated in ―Loan Program Descriptions‖ beginning on page 5.1.
SECONDARY FINANCING
A lien for secondary financing that is recorded and clearly subordinate to the first mortgage Loan delivered to CFSB
is permitted, subject to the requirements set forth below.
The terms of any secondary financing must be disclosed on the Residential Loan Application. Monthly
payments on the secondary financing must be included in the calculation of the borrower’s housing and total
debt ratios.
Secondary financing is not allowed until the borrower meets the minimum down payment requirements
established for the applicable Loan Program.
Combined Loan-to-Value Ratios
The amount of secondary financing, when added to the amount of the first mortgage Loan, may not exceed the
Combined Loan-to-Value ratios (CLTV’s) specified under the applicable Loan Program criteria.
Term
The secondary financing must have an original term of five years or more after the date of the Note of the first
mortgage Loan. The secondary financing may not contain a balloon or call option within the five-year period
immediately described above.
Scheduled Payments
The terms of the secondary financing must provide for regular payments sufficient to meet, at a minimum, the
interest due. The payment for the secondary financing can be for a fixed amount, variable interest rate or an
adjustable rate.
Unacceptable Types of Secondary Financing
CFSB will not purchase loans that are subject to the following types of secondary financing:
Secondary financing that does not provide for either regular payments of principal and interest or of interest
only.
Secondary financing that has wraparound terms, thereby combining the
indebtedness of the first mortgage Loan with that of the secondary financing.
Secondary financing provided by Seller of property.
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