U.S. Department of Housing and Urban Development 

Office of Policy Development and Research 

Review of Selected Underwriting 

Guidelines to Identify 

Potential Barriers to Hispanic 

Homeownership 
Review of Selected Underwriting 

Guidelines to Identify 

Potential Barriers to Hispanic 

Homeownership 

Prepared for 

U.S. Department of Housing and Urban Development 

Office of Policy Development and Research 

Prepared by 

Kimberly Burnett 

Alvaro Cortes 

Christopher E. Herbert 

Abt Associates Inc.

Cambridge, MA

March 2006 
Table of Contents 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table of Contents

 i 
Table of Contents

 ii 
Executive Summary 

Recent studies have identified several underwriting guidelines as particular barriers to Hispanic 

homeownership: establishing a credit history; verifying income; documenting employment history; 

verifying assets; and meeting requirements regarding citizenship or residency status. In addition, 

because Hispanics are disproportionately in low-income and low-wealth households, affordability is 

an important barrier to homeownership. 

This detailed review of mortgage underwriting guidelines used by three of the most common sources 

of residential mortgage finance – Fannie Mae, Freddie Mac, and the Federal Housing Administration 

(FHA) – finds that changes to standard products offered by these major participants over the last 

decade have addressed some of the barriers to homeownership for Hispanics. This is particularly true 

of FHA’s standard product. Furthermore, where barriers continue to exist in standard products, these 

issues are often remedied in special products targeted to low- and moderate-income borrowers. Some 

of these products include features specifically designed to serve an immigrant population. 

Underwriting guidelines used by one subprime lender, GMAC, were reviewed as a point of 

comparison to the prime loan products of Fannie Mae, Freddie Mac, and FHA. The review of 

GMAC’s guidelines suggests that subprime products also address some of the barriers to Hispanic 

homeownership, although they typically come at the cost of a higher interest rate. 

The review is not intended to compare the financial institutions’ offerings or to rank them, but rather 

to highlight the products that are currently available to overcome barriers to homeownership for 

Hispanics and to understand where gaps remain in the types of products needed to address different 

barriers. 

Establishing Credit History 

One of the biggest challenges in qualifying for a mortgage among low-income households, including 

many immigrants, is lack of a credit history with credit reporting agencies. Fannie Mae, Freddie 

Mac, and FHA all have standard products that allow a borrower to be approved for a mortgage 

without a formal credit history with credit reporting agencies. All allow the use of non-traditional 

credit reports or a credit history compiled by the lender, as long as it includes a minimum number of 

credit references. Credit scores are required, however, for GMAC’s subprime products and for some 

products that allow a high degree of flexibility in other respects. For example, Fannie Mae’s Flex 97 

and Flex 100 products allow a wide variety of sources of cash to be used for the downpayment and 

closing costs, but require traditional credit reports. 

For Hispanics and other borrowers with low credit scores, FHA’s standard product allows more 

flexibility than is typically available. For example, in January through June of 2000, the average 

FICO score for FHA purchase loans insured using a mortgage scorecard was about 630, compared 

with a minimum score of 660 typically required for prime mortgage approval. Targeted products 

offered by Fannie Mae and Freddie Mac also provide some options. For example, Fannie Mae’s 

Community Lending products allow approval of borrowers with credit scores of 600 to 620. In 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

iii 
addition, GMAC’s subprime products allow credit scores of as low as 520, although this likely is 

associated with a higher interest rate. 

Documenting Income and Employment History 

Traditional mortgage underwriting verifies income by reviewing paycheck stubs and tax returns, as 

well as by contacting employers of the borrower and co-borrower. It also generally requires 

documentation of a borrower’s work history over the previous two years as proof of income stability. 

Low-income individuals, and particularly immigrants, may not have income that can be documented 

by pay stubs because they are more likely to routinely be paid in cash. Potential borrowers may have 

difficulty documenting two years of work history if their employers are uncooperative or management 

has turned over. Borrowers may also have difficulty meeting this requirement if they have not been 

living in the U.S. for two years or if their employment history is marked by “job hopping” and 

lengthy gaps in employment – associated, for example, with return visits to their native country 

Another challenge for determining borrower income can arise when there are household members 

who are not family members but who contribute toward housing costs and will continue to be part of 

the household when a home is purchased. For example, income from boarders is traditionally not 

counted toward borrower income. 

Fannie Mae, Freddie Mac, and FHA do not require two years of employment history for mortgage 

approval in standard products (one year is acceptable for Fannie Mae and Freddie Mac; FHA has no 

minimum requirement). In addition, frequent job changes are generally ignored as long as the 

borrower can document that his or her income is stable. Documentation requirements, however, 

remain a barrier: some form of written documentation, such as paystubs, an employer-completed 

form, or W-2 forms, is required. 

With minor exceptions, income received in cash cannot be included as a primary or secondary source 

of income. This is true for standard products offered by FHA, Fannie Mae, and Freddie Mac, as well 

as the targeted products offered by Fannie Mae and Freddie Mac and the subprime products offered 

by GMAC. While Fannie Mae, Freddie Mac, and GMAC all have products that allow low or no 

income documentation, these allow less flexibility than standard and targeted products in other 

regards. For example, Freddie Mac’s stated income product requires high credit scores, a large 

downpayment, and large cash reserves. 

Widely available mortgage products allow rent paid by family members to be included in the 

borrower’s income. FHA’s standard product allows rental income from boarders in a one-unit 

property to be included in the borrower’s qualifying income, if the boarders are related to the 

borrower, and if the income is shown on the borrower’s tax return. Some of Freddie Mac and Fannie 

Mae’s targeted products allow rental income from boarders in a one-unit property to be included in 

the borrower’s qualifying income. The income does not have to be included on the borrower’s tax 

return, although documentation is required. For one of Fannie Mae’s Community Lending products, 

MyCommunityMortgage, the boarder is not required to be related to the borrower. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

iv
Documenting Assets 

Traditional underwriting requires verification that the borrower accumulated the funds used for 

downpayments over time through a review of bank statements. Borrowers who do not use banks for 

their savings, which is not uncommon among immigrants, will not be able to meet this requirement. 

FHA’s standard product allows both cash accumulated through savings clubs and cash saved at home 

to be considered acceptable sources of funds to close the mortgage if they are sufficiently 

documented. Targeted products offered by Fannie Mae and Freddie Mac also allow this flexibility. 

The documentation required to demonstrate that the borrower could have accumulated the assets over 

time, however, is substantial, and may discourage lenders from using this flexibility. 

Some products also allow related people living together to pool funds for closing costs and 

downpayments, improving borrowers’ ability to accumulate sufficient assets for a home purchase. 

Citizenship and Residency Status 

U.S. citizenship is not required for mortgage approval for standard products by any of the financial 

institutions reviewed in this report, although GMAC imposes some additional requirements for nonpermanent resident aliens. However, legal residence in the U.S. is required for mortgage approval. 

Nationwide, there are only a handful of pilot programs to extend mortgage credit to borrowers who do 

not have valid Social Security numbers. Given the number of undocumented immigrants in the 

country (an estimated 6 million), most of them Hispanic, this remains an important barrier to 

homeownership for Hispanics. Of course, it can also be argued that homeownership is not an 

appropriate goal for undocumented residents. 

Affordability 

Hispanics are disproportionately in low-income and low-wealth households compared to nonHispanics, so affordability may be the most important barrier to homeownership. FHA products, as 

well as products offered by Fannie Mae and Freddie Mac that are targeted to low- and moderateincome households, help to address this barrier in several ways. For example, a variety of lowdownpayment products are available, some requiring as little as $500 of the borrower’s own funds. 

Higher allowed housing expense-to-income and total debt-to-income ratios available through Fannie 

Mae’s Community Lending and Freddie Mac’s Affordable Gold products, as well as GMAC’s 

subprime products, also help to improve affordability. Some of Fannie Mae’s products do not have 

maximum housing expense-to-income ratios at all. In addition, low or no financial reserves are 

required for some products. Some low-downpayment products, however, require relatively high 

credit scores. 

Low downpayment mortgages generally come at the expense of monthly mortgage insurance 

payments. High-LTV products for FHA, Fannie Mae, and Freddie Mac all require mortgage 

insurance, and higher, more costly, levels of mortgage insurance are generally required for loans with 

higher LTV ratios. The low-downpayment products offered by subprime lenders typically carry 

higher interest rates, which also reduces the affordability of monthly payments. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

v 
Barriers Remaining in Available Products 

As described above, many of the barriers to homeownership for Hispanics that recently existed in 

common underwriting guidelines have been addressed by some widely available standard products 

and by products targeted to particular populations. However, a few important obstacles remain in the 

form of individual underwriting guidelines. In addition, the targeted products sometimes impose new 

requirements that pose barriers themselves. 

The requirement that borrowers be legal residents of the U.S. is obviously a challenging obstacle for 

the undocumented immigrants in this country. A handful of lenders are experimenting to determine 

whether lack of legal residence is an acceptable risk in extending mortgage credit; however, lending 

to illegal residents also involves political issues that may be extremely difficult to resolve. 

The lack of acceptability of cash income is also an important remaining underwriting obstacle. Some 

smaller community lenders have begun to experiment with approving mortgages that allow a limited 

share of the borrower’s total income to be earned in cash. If these mortgages prove to be acceptable 

risks, the GSEs may eventually make similar allowances in future offerings of targeted products. 

Lastly, one of the trade-offs for flexibility in underwriting in some targeted products is a requirement 

that borrowers receive homebuyer education and counseling. Fannie Mae’s Community Lending 

products require homebuyer education and counseling under most circumstances, as do Freddie 

Mac’s Affordable Gold products. Although homebuyer education and counseling can be a benefit to 

borrowers, this requirement could pose a barrier to homeownership if Spanish-language education 

and counseling programs are not available widely, and if this requirement leads to lender reluctance 

to promote the products. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

vi
Chapter One 

Introduction 

This report is part of a broader research effort by the U.S. Department of Housing and Urban 

Development (HUD) to examine barriers to Hispanic homeownership and to identify approaches that 

have the greatest potential for increasing homeownership opportunities for this important segment of 

the U.S. population. The first stage of this research effort was a thorough review of the literature to 

identify what is known about the causes of homeownership gaps between Hispanics and whites and 

what policies may be effective in closing these gaps.1

 A key focus of the literature review was on the 

barriers faced by Hispanics in obtaining mortgage financing. 

Following up on the literature review, the purpose of this report is to provide a detailed review of 

mortgage underwriting guidelines used by three of the most common sources of residential mortgage 

finance – Fannie Mae, Freddie Mac, and FHA – to examine the extent to which these guidelines may 

facilitate or impede the ability of Hispanics to qualify for a mortgage. The underwriting review 

covers both traditional mortgage products offered by the selected financial institutions as well as 

products for low- and moderate-income households that include features specifically designed to 

serve an immigrant population. As a point of comparison, we also review the underwriting guidelines 

used by one subprime lender to shed some light on the extent to which subprime products may better 

accommodate the needs of some segments of the Hispanic population.2 

The review is not intended to compare the financial institutions’ offerings or to rank them, but rather 

to highlight the products that are currently available to overcome barriers to homeownership for 

Hispanics and to understand where gaps remain in the types of products needed to address different 

barriers. Clearly, these organizations differ in their mission, market function, and regulatory 

constraints, all of which affect the types of products they can offer. Related to this, the use of 

underwriting flexibilities differs across the groups. For example, while the GSEs offer a range of 

affordable lending products, these loans account for a relatively small share of the GSEs’ purchases.3 

In contrast, low-downpayment mortgages account for a large majority of mortgages insured by FHA, 

1 Cortes, forthcoming, Abt Associates, Inc.: Cambridge, MA. 

2 Underwriting guidelines described were accurate as of fall 2004; however, underwriting guidelines are 

revised regularly so some product features and guidelines may have changed since then. 

3 For example, in 2003 Fannie Mae purchased or securitized 20,400 loans through its 

MyCommunityMortgage products and 100,866 loans through its Flexible 100 product line. Comparable 

volumes for Freddie Mac’s affordable loan products are not available. (Figures reported in “HUD’s 

Housing Goals for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan 

Mortgage Corporation (Freddie Mac) for the Years 2005–2008 and Amendments to HUD’s Regulation of 

Fannie Mae and Freddie Mac; Final Rule” Federal Register, November 2, 2004, Vol. 69, No. 211, page 

63655. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

1 
which focuses primarily on serving low-income and minority borrowers.4

 The remainder of this 

chapter describes the methodology used in this underwriting review and provides an overview of the 

rest of the report. 

Methodology 

FHA and the two GSEs (Fannie Mae and Freddie Mac) are included in the underwriting review 

because these organizations account for a large share of the home purchase mortgage market. 

Underwriting guidelines from these organizations are obtained from AllRegs, a public database of 

underwriting guides available by subscription. A review of the written underwriting guidelines was 

supplemented by telephone interviews with representatives from Fannie Mae and Freddie Mac to 

identify which products should be reviewed and to understand whether lenders could exercise 

discretion in how the written guidelines were implemented. 

Underwriting guidelines for subprime lenders are not available through AllRegs, so we also solicited 

the cooperation of a large subprime lender, GMAC-RFC. Although subprime lenders originate 

primarily refinance mortgages, they represent an increasing share of the home purchase market. The 

most recent study by ACORN on the use of subprime lenders reports that in 2002 subprime lenders 

accounted for 19.6 percent of home purchase mortgages among Hispanic buyers, up from about 12 

percent in 1997 (ACORN, 2004).5

 This share is more than twice as high as among non-Hispanic 

white homebuyers (7.8 percent), although not as high as the share among African-American buyers 

(28.0 percent). One of the factors that may lead borrowers into the subprime market is that these 

loans may require less documentation of credit, income, employment and assets. The review of 

subprime underwriting guidelines serves as a point of comparison with the requirements of the other 

prime market products. 

Outline of the Report 

The next section summarizes the key underwriting barriers to homeownership for Hispanics identified 

in the literature. In turn, the following sections then present findings from a review of underwriting 

guidelines from Fannie Mae, Freddie Mac, FHA, and GMAC-RFC. Where possible, the review of 

underwriting guidelines identifies trade-offs for various underwriting flexibilities offered, including 

tightening of other aspects of the underwriting guidelines and loan pricing. The review also identifies 

remaining barriers to homeownership for Hispanics, as well as differences in the use and 

implementation of flexible mortgage products by lenders. The report concludes with a comparison of 

findings across the four financial institutions reviewed and identifies the aspects of existing 

underwriting guidelines that are likely to represent the most significant barriers for Hispanics. 

4 See Issue Brief: FHA’s Impact on Increasing Homeownership Opportunities for Low-Income and Minority 

Families During the 1990s, U.S. Department of Housing and Urban Development, Office of Policy 

Development and Research, December 2000. 

5 ACORN, Separate and Unequal: Predatory Lending in America, February 2004. Updated HMDA data 

provided by HUD show the trend has continued to increase – considering conventional loans less than the 

GSE conforming loan limit, subprime lenders (as identified by HUD) accounted for 18 percent of Hispanic 

home purchase loans in 2002, 25 percent in 2003, and 33 percent in 2004. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

2 
Chapter Two 

Key Underwriting Barriers to Homeownership for 

Hispanics 

Two recent studies have provided a thorough review of key underwriting barriers to homeownership 

among low-income and immigrant households – Listokin and Wyly (2000) and Schoenholtz and 

Stanton (2001).6

 The findings from these studies are highly relevant for Hispanics, as the barriers 

they face relate to their high share among both low-income families and immigrants. The barriers 

identified by these studies include: 

• establishing a credit history; 

• verifying income; 

• documenting employment history; 

• affordability; 

• verifying assets; and 

• meeting requirements regarding citizenship or residency status. 

This section summarizes the findings from these studies regarding these underwriting barriers. These 

barriers are a key focus of the underwriting review presented in sections three through six of the 

report. 

Credit History 

One of the challenges for low-income households, including many immigrants, is lack of a credit 

history with credit reporting agencies. Since traditional underwriting requires an evaluation of 

information from credit reporting agencies, an absence of a formal credit history may make borrowers 

ineligible for a mortgage loan. A considerable number of Hispanics do not have credit scores, 

because they have immigrated to the U.S. recently. An analysis of Community Reinvestment Act 

(CRA) loans found that 22 percent of Hispanics had no credit score, compared with 3 percent of 

African Americans and 4 percent of whites.7 

6 David Listoken and Elvin K. Wyly, “Making New Mortgage Markets: Case Studies of Institutions, Home 

Buyers, and Communities,” Housing Policy Debate 11(3), 2000. Andrew I. Schoenholtz and Kristin 

Stanton, “Reaching the Immigrant Market: Creating Homeownership Opportunities for New Americans,” 

Fannie Mae Foundation, Washington, DC, 2001. The findings from these two studies were also 

synthesized in a report by Schoenholtz and Stanton, “Reaching Emerging and Underserved Home 

Ownership Markets,” LISC Center for Home Ownership, Summit 2001: Research Series. 

7 Stegman, Michael, Roberto Quercia, and Jennifer Lobenhofer, “Automated Underwriting: Getting to ‘Yes’ 

for More Low-Income Applicants,” Center for Community Capitalism, University of North Carolina - 

Chapel Hill, 2001. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

3 
Alternative approaches to documenting credit history have been developed to address this issue. 

These approaches involve documenting regular bill payments to demonstrate the prospective 

borrower’s willingness and ability to meet their financial obligations. This includes information on 

payments for rental housing, utilities, telephone service, medical bills, personal loans, school tuition 

or child care – none of which is gathered by credit reporting agencies. 

Many other low-income Hispanic borrowers may face limited mortgage options because of poor 

credit histories. Absent extenuating circumstances, the mortgage industry generally requires a credit 

score of 660 in order to qualify for a prime mortgage, while borrowers with scores between 620 and 

660 require further review in order to qualify.8

 A recent study by Bostic, Calem and Wachter (2004) 

estimates that 63.3 percent of Hispanic renters in 2001 had credit scores below 660, compared to 54.2 

percent of African-American renters and 35.4 percent of non-Hispanic white renters.9 

Documenting and Determining Borrower Income 

Traditional mortgage underwriting verifies income by reviewing paycheck stubs and tax returns, as 

well as by contacting employers of the borrower and co-borrower. There are several ways in which 

this traditional underwriting process may pose barriers for Hispanics. First, low-income households, 

particularly immigrants, may not have income that can be documented by pay stubs if they are 

routinely paid in cash. Second, even if their primary source of income is verifiable, these households 

may rely on supplemental income from part-time jobs that are “off the books,” such as childcare, day 

labor, or house cleaning. In these cases, alternative underwriting approaches to income verification 

may include using certified letters from employers to document income or documenting regular 

patterns of deposits into bank accounts. 

Another challenge for determining borrower income can arise when there are household members 

who are not family members but who contribute toward housing costs and will continue to be part of 

the household when a home is purchased. Income from boarders is traditionally not counted toward 

borrower income. Alternative underwriting guidelines may allow boarder income to count as part of 

the borrower’s income if the contribution toward housing costs can be documented and the boarder 

will continue to be part of the household after the move. 

Employment History 

Mortgage underwriting generally requires documentation of a borrower’s work history over the 

previous two years as proof of income stability. For the same reasons they may have trouble 

8 Credit scores in these ranges are not unheard of among loans purchased by FHA or the GSEs. Fannie 

Mae’s Annual Report for 2001 reported that 6 percent of the mortgages they purchased were made to 

borrowers with credit scores below 620 and an additional 11 percent were made to borrowers with credit 

scores between 620 and 660. 

9 Raphael Bostic, Paul Calem, and Susan Wachter, “Hitting the Wall: Credit as an Impediment to 

Homeownership,” paper presented at Building Assets, Building Credit: A Symposium on Improving 

Financial Services in Low-Income Communities, November 18-19, 2003, Joint Center for Housing Studies 

of Harvard University, Cambridge, MA. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

4 
documenting income, some Hispanic borrowers may have difficulty meeting this requirement if their 

employment is “off the books.” In other cases, potential borrowers may have difficulty meeting this 

requirement if their employers are uncooperative or management has turned over. Borrowers may 

also have difficulty meeting this requirement if they have not been living in the U.S. for two years or 

if their employment history is marked by “job hopping” and lengthy gaps in employment – 

associated, for example, with return visits to their native country. Alternative underwriting 

approaches may require a shorter work history for new arrivals or may use documentation of income 

through bank deposits or W-2 forms without verification directly from the employer. 

Affordability 

Affordability of homeownership is a challenge for a significant share of all would-be first-time 

homebuyers.10 Affordability is an even greater barrier for Hispanic households, who are more likely 

to have low- or moderate-incomes than their non-Hispanic counterparts. In addition, Hispanic 

families have significantly less wealth.11 The combination of low income and low wealth may make 

it difficult for Hispanic families to accumulate a sufficient downpayment for a conventional product 

that may require a 10 percent downpayment, even with satisfactory credit history. For the same 

reasons, Hispanics are disproportionately likely to have lower cash reserves, and this is a signal to 

lenders about their capacity to make mortgage payments on time, especially during a financial crisis. 

Affordable loan products help address this barrier through lower downpayments and higher 

qualifying ratios. 

Documenting Assets 

Traditional underwriting requires verification that the borrower accumulated the funds used for 

downpayments over time through a review of bank statements. Borrowers who do not use banks for 

their savings, which is not uncommon among immigrants, will not be able to meet this requirement. 

In some cases, immigrant groups may also use savings clubs12 as a source of downpayment funds, and 

these may not be easy to document. Alternative underwriting guidelines may allow borrowers to 

deposit funds in a bank account to document the existence of the savings and then use information on 

the household budget to support the borrower’s ability to have accumulated this level of savings. In 

the case of savings clubs, lenders may accept a certified letter from the club treasurer to document the 

borrower’s participation in the club and verify the club as the source of their savings. 

Citizenship and Residency Status 

Mortgage underwriting may preclude loans to borrowers who are not U.S. citizens. This requirement 

reflects a concern that non-citizens are not committed to permanent residency in the U.S. and, for that 

reason, may pose a risk of default. However, lenders have been relaxing these standards to allow 

10 Tong, Zhong Yi. Homeownership Affordability in Urban America: Past and Future, April 2004, Special 

Report, Fannie Mae Foundation. 

11 Cortes, forthcoming, Abt Associates, Inc.: Cambridge, MA. 

12 Savings clubs are also referred to as cultural savings clubs or private savings clubs. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

5 
loans to permanent and nonpermanent resident aliens. There are an estimated 6 million 

undocumented immigrants in the United States, the large majority of them Hispanic, so residency and 

immigration status are important barriers.13 

Recently, a few institutions have piloted programs to extend mortgage loans to borrowers who do not 

have a valid Social Security number. Instead, they use the borrower’s Income Tax Identification 

Number (ITIN), which can be assigned to foreign nationals who pay taxes on income earned in the 

U.S. so they can file U.S. income tax returns. For example, Mortgage Guaranty Insurance 

Corporation (MGIC) is piloting a program, Building a Life in America, available to borrowers using 

an ITIN regardless of their immigration status. Underwriting borrowers with ITINs is complex, 

because few borrowers have established credit histories under their ITIN. As a result, alternative 

methods of evaluating credit history are generally required.14 Citibank and Wells Fargo also recently 

piloted tax-ID loans, in a limited number of cities.15 

13 Paral, Robert. 2004. The Potential for New Homeownership Among Undocumented Latino Immigrants. 

Prepared for the National Association of Hispanic Real Estate Professionals. 

14 Culver, Curt, “Immigrant Lending: Finding the Right Way To Do the Right Thing,” Mortgage Banking, p. 

15-17, May 2004. 

15 Zuniga, Janine, “Home-Buying Program Has Cash, Controversy,” Copley News Service, February 6, 2006. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

6 
Chapter Three 

Fannie Mae’s Underwriting Guidelines 

Fannie Mae offers an array of loan products targeted toward low- and moderate-income households, 

immigrants, and the upper end of the subprime market. Many of the products targeted to immigrants 

and low- and moderate-income households are referred to collectively as Community Lending 

mortgages. One group of the Community Lending products, called MyCommunityMortgageTM, 

includes low-downpayment, homeownership voucher, and energy efficient mortgages. This section 

describes both the flexibilities for immigrants and low- and moderate-income borrowers in Fannie 

Mae’s standard underwriting guidelines and the additional flexibilities available in the Community 

Lending mortgage products. Barriers to homeownership for Hispanics that remain, even with these 

flexibilities, are also discussed. 

Standard Underwriting Guidelines 

Fannie Mae’s current standard underwriting guidelines address several of the barriers described in the 

previous section. These include barriers related to U.S. citizenship, credit history evaluation, length 

of employment in the borrower’s line of business, and the ratio between housing expenses and 

income. 

U.S. Citizenship 

U.S. citizenship is not required to qualify for a mortgage under Fannie Mae guidelines. Permanent 

and non-permanent resident aliens legally residing in the country are eligible for a mortgage on the 

same terms as a U.S. citizen. Social Security numbers are not required.16 

Credit History Evaluation 

When a borrower does not have the type of credit report typically provided by one of the national 

credit repositories, a non-traditional credit report may be used to evaluate creditworthiness. Fannie 

Mae’s guidelines require that a credit history of at least 12 months be established, and that four to six 

credit references be used. “Tier 1,” housing and utilities, credit references must be used first; if at 

least four tier 1 sources cannot be documented, then “tier 2” sources of credit, which are payments for 

medical, life, automobile, and household or renter’s insurance, can be used. If four to six total credit 

references cannot be obtained from these sources, then “tier 3” sources of credit can be used. Tier 3 

credit includes payments to local stores; rental payments for durable goods; payments for medical 

bills, school tuition, and childcare; and payments on a loan from an individual. 

A non-traditional credit report can be obtained from a repository that compiles the information, or the 

lender can compile the information him or herself by obtaining written credit references directly from 

creditors and reviewing the borrower’s bank statements. Credit histories from foreign countries can 

A borrower can get a loan with an ITIN, provided that he or she is a legal resident. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

7 

16 
also be used to evaluate creditworthiness, provided they are translated into English and meet the 

requirements for completeness, accuracy, and authenticity applied to other credit reports. 

Employment History and Income Stability 

Although two years of documentation for a borrower’s employment and income history are 

required,17 the borrower’s history in a particular line of business is not evaluated. Income stability is 

evaluated, but frequent changes in employment are not considered detrimental to a borrower’s ability 

to maintain homeownership. However, seasonal, part-time, or second job income is only considered 

to be stable income if the borrower has worked in the same line of business for the past two years and 

there is a strong likelihood of continuation. In addition, income received in cash is not included in the 

calculation of the borrower’s stable income. 

Housing Expense-to-Income Ratio 

Historically, standard mortgage underwriting guidelines set maximums for both the ratio of housing 

expense-to-income (typically 26 to 28 percent) and the ratio of total recurring debt and housing costs 

to income (typically 33 to 36 percent). Fannie Mae’s current standard underwriting guidelines do not 

set a maximum housing expense-to-income ratio, but rather have a single limit for total recurring debt 

of 36 percent. This flexibility allows borrowers who do not have non-housing debt (such as 

immigrants who are reluctant to become indebted to anyone other than a relative) to dedicate a larger 

share of their income to housing payments. 

Principal Remaining Barriers in Fannie Mae’s Standard Underwriting 

Fannie Mae’s underwriting guidelines for standard products continue to pose some barriers to some 

Hispanics seeking to attain homeownership. 

First, income received in cash is not an acceptable source. Hispanics working several jobs, some of 

which are paid in cash, may not be able to meet income stability and total debt-to-income ratio 

requirements if this income is not considered. 

Second, income from boarders in a one-family property generally cannot be considered as part of the 

borrower’s income in calculating the total debt-to-income ratio. For Hispanics who live with 

extended family members who contribute to housing payments but would not be named as borrowers 

on the mortgage, this requirement underestimates the resources available to pay the mortgage. 

Third, cash-on-hand is generally not considered an acceptable source of funds for the downpayment 

or closing costs. In addition, deposits with savings clubs are not specifically allowed in Fannie Mae’s 

Seller/Servicer Guide, making it unlikely that lenders consider these deposits to be an acceptable 

source of funds.18 Recent immigrants who do not have a relationship with a traditional financial 

17 Lenders may also consider borrowers with an income history of less than two years (but no less than one 

year), as long as the income is stable and likely to continue. 

18 A staff member interviewed for this study (Wendy Wood, Director of Community Lending, October 19, 

2004), thought some lenders’ individual negotiated contracts with Fannie Mae might allow them to 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

8 
institution and who may mistrust such institutions because of their lack of familiarity with them may 

be disqualified from homeownership by these requirements. 

Underwriting Guidelines for Community Lending and Flex 

Mortgages 

Exhibit 1 summarizes the features and underwriting requirements of several Fannie Mae products 

targeted to immigrants and low- and moderate-income borrowers, called Community Lending 

products. Summarized here are the Community Home Buyer’s ProgramTM, Fannie 3/2®, Fannie 97®, 

and the low-downpayment one- and two-family mortgage product in the MyCommunityMortgageTM

suite of products.19 

It is important to note that Community Lending products are not as widely available to borrowers as 

Fannie Mae’s standard products as lenders must meet special requirements to be able to originate 

these products. For example, lenders who are approved to offer Fannie Mae products need a 

negotiated commitment from Fannie Mae in order to be able to sell MyCommunityMortgageTM loans 

to Fannie Mae. In addition, Fannie Mae places limits on the volume of MyCommunityMortgageTM

loans they will commit to purchasing from each lender. Information from Fannie Mae’s Annual 

Housing Activities Report for 2003 submitted to HUD indicates that Fannie Mae purchased or 

securitized a total of 20,400 of these loans in that year.20 

Fannie Mae also offers “Flex” products, which are summarized in Exhibit 2. These products are not 

considered Community Lending products because, unlike the Community Lending products, they 

require traditional credit reports and do not allow other flexibilities identified below. Nonetheless, 

they require very low downpayments and allow a variety of sources of funds to be used for closing 

costs and the downpayment and, therefore, may offer opportunities for borrowers with limited 

downpayment funds. One advantage of the Flex products is that there is no borrower income limit, 

while borrowers approved for Community Lending mortgages cannot have income that exceeds 100 

percent of area median income for most geographic areas.21 

. 

consider deposits with savings clubs on an equivalent basis with cash-on-hand, which would make this a 

permissible source of funds for Community Lending products but not for standard Fannie Mae products. 

19 Other products in the suite, such as energy efficient mortgages, have slightly different features and 

requirements, but are not as relevant to the issue of Hispanic homeownership and so are not included in this 

review. 

20 Figures reported in “HUD’s Housing Goals for the Federal National Mortgage Association (Fannie Mae) 

and the Federal Home Loan Mortgage Corporation (Freddie Mac) for the Years 2005–2008 and 

Amendments to HUD’s Regulation of Fannie Mae and Freddie Mac; Final Rule” Federal Register, 

November 2, 2004, Vol. 69, No. 211, page 63655. 

21 There are exceptions to this limit for some high-cost areas. Also, the income limit for borrowers using the 

MyCommunityMortgageTM product in non-metropolitan areas is 115 percent of the area median income. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership

9 
Exhibit 1 

Fannie Mae Underwriting Guidelines for Com

munity Lending Mortgages 

Community H

ome 

Buyer’s Pro

gram 

Fannie 3/2 Fannie 97 My

Occupancy owner-occupied, must not have o

wnership interest in any other residential d

we

Property T

ype 1-family, condo, or unit in PUD 1-family, condo

Loan Purpose purchase or limited cash-out refinance purchase purchase 

Do

wnpay

ment 5% do

wn, borrower's o

wn funds 

5% do

wn, 3 percentage 

points from borro

wer's 

own funds 

3% do

wn, borrower's o

wn 

funds 

$500 minimum 

no minimum 

A

m

ortization Period 15 to 30 years, monthly or biweekly, fully amortizing up to 

Interest Rate Fixed, no temporary interest rate buydowns fixed, 7/1ARM

Total Debt-to-Income 

Ratio 38% 

Ma

ximum LTV/CLTV 95% LTV, 105% CLT

V (

with 

Community Second) 

95% LTV, 105% CLTV 

(with Community 

Second) 

97% LTV, 97% CLTV 

(subordinate financing 

generally not allo

wed) 

100% LTV; 

maximum 105% 

m

Credit Score 620 600 (97

Alternati

ve to credit 

score (traditional 

credit record) 

Minimum credit history of four tradelines active at least 24 months; no more than 9 open 

tradelines; no collections or judgments 

within past 24 months; no prior bankruptcy or 

foreclosure (

w/o re-established credit); no housing payment delinquency within 24 months; no 

delinquency on revolving or installment debt within 12 months; no more than one revolving or 

installment account 30 days past due during the 13-24 months preceding application. 

Enhanced cred

traditional cre

history of four t

no more tha

balances for the 

no more than 

credit at the 

addition, the bo

major delinqu

collections, 

delinquencies o

(3) no delinque

last 12 months, 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

10 
Exhibit 1 

Fannie Mae Underwriting Guidelines for Com

munity Lending Mortgages 

Community H

ome 

Buyer’s Pro

gram 

Fannie 3/2 Fannie 97 My

Alternati

ve to credit 

score (non-traditional 

credit record) 

Minimum four sources of non-traditional credit active at least 12 months. Sources must 

include utility company and housing payments. No delinquent rental housing payments 

within 

24 months; maximum of one 30-day delinquency on remaining accounts; no collections or 

judgments. 

was "1 x 30 day

Financial Reser

v

es One month of PITI in financial reserves after closing 

Income Limits Generally, borrower's income must be no more than 100 percent of AMI. 

Generally, bo

than 100 perce

no

Income 

Documentation 

Rental payments from a relative 

who resides 

with the borro

wer (but 

who is not obligated on the 

mortgage debt) may be considered as acceptable stable income—in an amount up to 30% of 

the total gross income that is used to qualify the borrower for the mortgage—if the relative has 

lived 

with (and paid rent to) the borro

wer for the last 12 months. 

Rental payme

relative) may b

Asset D

ocumentation 

Cash-on-hand may be an acceptable source of funds, if the borro

wer customarily uses cash for expenses an

borro

wer's credit profile and financial status. In such instances, the credit report or other verifications must ref

cannot identify any depository relationship between the borrower and a financial institution. Acceptability of ca

by-case basis. 

Home-buyer 

Education and 

Couns

eling 

Homebuyer education generally 

required (

waived for previous 

homeowners making 5% 

do

wnpayment 

with o

wn funds and 

with 

two months of financial reserves). 

Homebuyer education and post-purchase early 

delinquency counseling required. 

Home-buyer ed

buyers; landl

Credit Enhancements Generally standard mortgage insurance coverage requirements 

apply 

Generally standard 

mortgage insurance 

coverage requirements 

apply, but 35% required if 

manually underwritten. 

Standard 

requirements a

cover

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

11 
Exhibit 2 

Fannie Mae Underwriting Guidelines for Flex Products 

Flex 97 Flex 100 

Occup

ancy own

er-occupied princip

al resid

ence 

Property T

ype 1-family, condo, or unit in PUD 

Loan Purpose purchase 

Do

w

n

p

a

y

ment 

3% downpayment require

d from the borrower's own 

funds, a Com

munity Secon

ds subsidized second 

mortgage; or a gift or unsecured loan fro

m other than an 

interested party. An interested party to the transaction 

may contribute up to 3% of the property's sal

es price 

toward the payment of closing costs. 

No downpayment require

d, but bo

3% t

owar

d closing costs, from the 

Community Seconds subsi

dize

d 

gift or unsecured loan from other t

An interested party to the transact

3% of the property's sales price 

closing cost

Amortizatio

n Period 15 to 30 years 

Interest R

ate fixed, 7/1ARM, 10/1 ARM 

Ratios standard: 36% debt-to-income ratio 

Maximum LTV/CLTV 97% LTV; 100% CLTV or 105% CLTV with Com

munity 

Sec

ond 

100% LTV; 100% CLTV or 105% 

Sec

ond 

Credit Score Non

e specified, but intended for borrowers with very good credit 

Alternative to credit score 

(traditional credit record) Must be underwritten through Desktop Underwriter, so traditional credit report 

Alternative to credit score 

(non-traditional credit 

record) 

None 

Financial Reserves DU specifies the amount of reserves required to support its risk assessment; two month

satisfies basic risk t

olerances 

Income Limits None 

Income Doc

umentation Standard 

Ass

et Documentation Standard 

Home-bu

yer Education 

and 

Counseling 

N

one r

equired 

Credit Enh

ancements Standard mortgage insurance coverage requirements apply 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

12 
This section reviews the additional flexibilities available in Community Lending mortgages and Flex 

products that address barriers to homeownership for Hispanics. Some of the standard underwriting 

guidelines discussed in the previous section, including credit history, documenting employment, and 

U.S. citizenship, do not differ for these products and so are not discussed separately in this section. 

Documenting Income 

Rental income from boarders related to the borrower in a one-unit property can be included in the 

calculation of the borrower’s income in Community Lending products, but not in Flex products. For 

products that allow this flexibility, the boarder must have lived with and paid rent to the borrower for 

the past 12 months. MyCommunityMortgageTM allows the additional flexibility that the boarder does 

not have to be a relative. As in Fannie Mae’s standard products, cash income is not an acceptable 

source of income in Community Lending or Flex products. 

Documenting Assets 

Underwriting guidelines for Community Lending products allow cash on hand to be considered an 

acceptable source of funds for a downpayment and closing costs under some circumstances. 

However, the borrower must primarily use cash for expenses, and this must be reflected in the 

borrower’s credit profile and financial status. Specifically, the credit report must show limited or no 

use of credit and must not identify any depository relationship between the borrower and a financial 

institution. 

The ability to accept cash-on-hand in underwriting Community Lending products is available to 

lenders on a negotiated basis, and the details under which it is an acceptable source of funds, 

including the documentation required, are specified in individual agreements between Fannie Mae 

and the lender. Flex products do not allow the use of cash-on-hand. 

The acceptability of cash-on-hand potentially benefits Hispanics disproportionately in helping to 

overcome barriers to homeownership. A number of low-income and immigrant Hispanic households 

distrust mainstream financial institutions and eschew relations with them.

22 For example, a 1999 

survey of residents of low-income neighborhoods in New York and Los Angeles found that 45 

percent of Hispanics did not have a transaction account with a bank, compared to 31 percent of blacks 

and 9 percent of whites.23 

22 Congressional Hispanic Caucus Institute, 2004. 

23 The shares of unbanked are derived from data presented in Dunham, Constance R. 2001. “The Role of 

Banks and Nonbanks in Serving Low- and Moderate-Income Communities,” J.L. Blanton, et al., eds., 

Changing Financial Markets and Community Development: A Federal Reserve System Conference, 

Federal Reserve Bank of Richmond. Since these data only pertain to low-income neighborhoods in two 

cities, it is not known how representative this share is for Hispanics generally. Aizcorbe, Ana M., Arthur 

B. Kennickell, Kevin B. Moore, 2003. “Recent Changes in U.S. Family Finances: Evidence from the 1998 

and 2001 Survey of Consumer Finances,” Federal Reserve Bulletin, Volume 89, Number 1, (January), pp. 

1 to 29 serve as a point of comparison. They present tabulations of the share of families without 

transaction accounts based on the 2001 Consumer Finance Survey for the entire nation. These data find 

that 31.5 percent of families with income in the bottom quintile do not have transaction accounts. With 

regard to race and ethnicity, the same data find that 24.8 percent of minorities do not have transaction 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

13 
In addition to some flexibility in the use of cash-on-hand, Community Lending products are flexible 

in that they generally require low downpayments. The one-to-two family product in the 

MyCommunityMortgageTM suite of products reviewed in Exhibit 1, in particular, has a very low 

downpayment requirement of $500 of the borrower’s own funds (for a one-unit property), in addition 

to other closing costs. 

Flex 97TM and Flex 100TM also require very low downpayments. Flex 97TM requires a 3 percent 

downpayment, but these funds do not have to come from the borrower’s own funds. They can be 

from an unsecured loan or a gift from a variety of permissible parties (in particular, one that is not 

involved in the transaction). A party involved in the transaction can contribute up to 3 percent of the 

property’s sales price toward closing costs. Flex 100TM does not require a downpayment. The 

borrower must contribute 3 percent toward closing costs, but the sources of these funds are equally 

flexible as those allowed in the Flex 97TM product. As noted in Cortes, et al.,24 Hispanic families have 

significantly less wealth than non-Hispanic households. Given this relatively low wealth, low 

downpayment products may help to remove an important barrier to homeownership for Hispanics. 

The trade-off, as will be discussed more below, is that the Flex products also require very good credit. 

Debt-to-Income Ratios 

As noted above, Fannie Mae does not use housing expense-to-income ratios separate from overall 

debt ratios in its underwriting, even for standard products. In addition, Community Lending products 

allow higher total debt-to-income ratios than standard products: 38 percent for Community Lending 

and 43 percent for MyCommunityMortgageTM. Flex products require the same total debt-to-income 

ratio, 36 percent (or higher with compensating factors), as Fannie Mae’s standard products. Given 

that Hispanic households are disproportionately located in areas of the country with high housing 

costs,25 the flexibility in the Community Lending products, particularly MyCommunityMortgageTM, 

could be helpful in overcoming barriers to homeownership for Hispanics who must dedicate a 

relatively large proportion of their income for housing costs. 

Credit Quality 

Fannie Mae’s Seller/Servicer Guide does not specify minimum credit scores required to qualify for a 

standard mortgage. A large majority of loans are underwritten using Fannie Mae’s automated 

underwriting system, Desktop Underwriter® (DUTM). Automated underwriting systems are 

technological tools that combine statistical models with historical loan performance and mortgage 

lending factors. DUTM produces a mortgage score based on a variety of factors, including the 

borrower’s income, size of the downpayment, financial reserves, total debt-to-income ratio, type of 

product being used (such as fixed rate or adjustable rate), and the number of borrowers on the loan. 

accounts compared to 5.3 percent of whites (the survey does not have enough observations to provide 

tabulations for Hispanics separately). Thus, the survey data for New York and Los Angeles are not 

inconsistent with national data. 

24 Cortes, forthcoming, Abt Associates, Inc.: Cambridge, MA. 

25 Ibid. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

14 
In addition, in place of credit scores, DUTM uses credit characteristics such as credit history, 

delinquent accounts, and foreclosures from credit reports. DUTM weighs and balances these 

compensating factors statistically. 

However, Fannie Mae’s Seller/Servicer Guide, which applies to manually underwritten loans, does 

recommend the use of credit scores for certain products. As a rule, the mortgage industry standard is 

a score of 660 or above to qualify for a prime mortgage; scores from 620 to 660 would require further 

review and compensating factors. Fannie Mae’s Seller/Servicer Guide states that for manually 

underwritten Community Lending mortgages, a minimum score of 620 is generally required. 

Flex products, on the other hand, generally require “very good credit,” according to Fannie Mae press 

releases.26 Although “very good credit” is not defined in either the press releases or Fannie Mae’s 

underwriting guidelines, this language seems to imply that the minimum credit score is likely to be 

higher than that required for Fannie Mae’s standard products. 

Restrictions and Trade-offs Applied to Flexible Loans 

The additional flexibility offered through Community Lending products is available only for 

borrowers who have no more than 100 percent of area median income (AMI) in most areas, or 115 

percent of AMI in non-metropolitan areas for MyCommunityMortgageTM products. There is no 

income restriction for loans in eligible low- or moderate-income areas, and certain high-cost 

mortgage markets have higher income limits. In addition, there are requirements for homebuyer 

education and counseling and some product restrictions, as well as differences in pricing. The 

primary trade-off required for Flex products (Flex 97TM and Flex 100TM) is very good credit. 

Community Lending products require homebuyer education and counseling under most 

circumstances. Previous homeowners using a MyCommunityMortgageTM product are not required to 

undergo homebuyer education and counseling, nor are previous homeowners making at least a 5 

percent downpayment using their own funds and who will have at least two months of financial 

reserves after closing using the Community Home Buyer’s ProgramTM. Homebuyer education and 

counseling can be a benefit to borrowers if it improves their understanding of the mortgage process, 

helps them select a product that is most appropriate for their needs, and reduces the likelihood that 

they will lose their home through foreclosure. Many borrowers want to find and close a loan as 

quickly as possible, however, and to the extent that education and counseling slows the loan process, 

they may view this requirement as a burden. In addition, this requirement could pose a barrier to 

homeownership if Spanish-speaking education and counseling programs are not available widely, and 

if this requirement leads to lender reluctance to promote the products. Flex products do not require 

homebuyer education and counseling. 

Community Lending and Flex products both have some restrictions in terms of the loan purpose and 

interest rate. Fannie 97® can only be used for purchase loans, and the other products reviewed in 

Exhibit 1 can be used only for purchase, refinance, or limited cash-out refinance. Flex 97 and Flex 

100 can only be used for a home purchase. In addition, adjustable-rates are not allowed in Fannie 

“Fannie Mae in Connecticut: Flexible 97® through Desktop Underwriter,” from Fannie Mae’s website, 

http://www.fanniemae.com/partnershipoffices/connecticut/story1.jhtml, downloaded Nov. 1, 2004. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

15 

26 
97®, Fannie 3/2®, or the Community Home Buyer’s ProgramTM, although hybrid adjustable-rates27 

are allowed in MyCommunityMortgageTM products and Flex products. 

Finally, prices paid to lenders are very slightly lower for Community Lending and 

MyCommunityMortgageTM products compared to conventional 30-year fixed rate mortgages. For 

example, according to discount and premium pricing information for whole loans on Fannie Mae’s 

website, a 30-year fixed-rate MyCommunityMortgageTM with an LTV of 97 percent or less with a 

pass-through of 5.75 percent had a 90-day price of 100.358 in September 2004. In comparison, a 

standard 30-year fixed rate mortgage with the same pass-through had a 90-day price of 100.630.

28 

The quoted price is the percentage of the loan balance that Fannie Mae will pay for the loan. In 

general, lenders charge borrowers lower interest rates on loans for which they receive a higher price, 

so Community Lending products may have slightly higher interest rates than standard products. 

In addition to these price differences, some loans are eligible for sale to Fannie Mae only with a 

“loan-level price adjustment,” which is a deduction from the proceeds of the loan. For example, a 

Fannie 97 conventional fixed-rate loan receiving an “approve/eligible” recommendation from DU 

requires a loan-level price adjustment of 11⁄2 percent. Some lenders may also pass such lower loan 

sale prices on to borrowers in the form of either higher interest rates or up-front fees. 

In addition to higher interest rates or up-front fees, borrowers will likely be required to pay mortgage 

insurance premiums, which also affect the affordability of loans. All loans that are sold to Fannie 

Mae that have an LTV greater than 80 percent, including Community Lending products, must include 

a credit enhancement, which is most commonly private mortgage insurance paid by the borrower.29 

Higher, more costly, levels of mortgage insurance are generally required for loans with higher LTV 

ratios. For example, Fannie Mae requires 20 percent mortgage insurance coverage for 

MyCommunityMortgageTM products with LTVs from 97-100 percent; 18 percent for LTVs from 95­

97 percent; 16 percent for LTVs from 90-95 percent; 12 percent for LTVs from 85-90 percent; and 6 

percent for LTVs from 80-85 percent. The difference in premium for higher LTVs is significant. 

According to one mortgage insurer, the premium for 18 percent mortgage insurance coverage on a 

27 Hybrid adjustables have fixed rates for some number of years, following which the loan converts to an 

adjustable rate loan for the remaining term. The hybrids allowed under these Fannie Mae programs are socalled 7/1 or 10/1 ARMs, with fixed rates for the first seven or ten years of the term before converting to 

one-year ARMs for the remaining life of the loan. 

28 From Fannie Mae’s website, 

http://www.efanniemae.com/syndicated/documents/mbs/apeprices/public/30fraac.html. 

29 In addition to the use of mortgage insurance, the GSEs’ Charter Acts also authorize the purchase of singlefamily conventional mortgages with LTVs over 80 percent if: (1) the seller retains a participation of not 

less than 10 per centum in the mortgage; or (2) the seller agrees to repurchase or replace the mortgage upon 

demand of the corporation in the event of default. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

16 
loan with an LTV above 95.0 percent is 0.55 percent.30 In comparison, the premium for the required 

6 percent mortgage insurance coverage for a loan with an LTV of 85 percent is .26 percent.31 

Barriers Inadequately Addressed by Available Products 

Although several barriers to Hispanic homeownership are addressed in Fannie Mae’s Community 

Lending and Flex products, a few important barriers remain. These include requirements for legal 

residency in the United States, income documentation requirements, and asset documentation 

requirements. 

First, although permanent and non-permanent resident aliens can qualify for a mortgage on the same 

terms as a U.S. citizen, undocumented residents cannot. Lenders must represent and warrant to 

Fannie Mae that a borrower is residing in the country legally for the borrower to qualify for a 

mortgage. As noted above, a sizeable number of Hispanics reside in the country illegally and 

therefore do not have Social Security numbers, but do have income tax identification numbers. 

Although some lenders are originating mortgages to borrowers on the basis of ITINs, there is 

essentially no secondary market outlet for these loans because they cannot be purchased by Fannie 

Mae (or, as discussed below, by Freddie Mac or FHA). 

Second, some Hispanic borrowers, particularly those who are paid in cash, may have difficulty 

meeting the income and employment documentation requirements. Borrowers must document their 

employment for two years, although borrowers with a shorter work history than this (but no less than 

12 months) may also be considered. The lender must consider previous employment gaps that are 

likely to recur and that affect the stability of income. Income received in cash is not considered an 

acceptable income source, so borrowers paid in cash are not likely to meet the total debt-to-income 

requirement. 

Even for Hispanics who are not paid in cash, without a Spanish-speaking staff member, some lenders 

may have difficulty obtaining telephone verification of employment. In addition, employers of 

seasonal workers may be difficult to reach for verification during the off-season. Last, it is not clear 

how lenders treat applicants who experience gaps in employment because of lengthy return visits to 

their native country. These employment gaps likely increase the perception of the borrower as having 

unstable income. 

Third, cash from savings clubs is not specifically identified in Fannie Mae’s underwriting guidelines 

as an acceptable source of funds for the downpayment and closing costs. Although a Fannie Mae 

staff member suggested that this flexibility might be available to some lenders through their 

negotiated agreements, the ability to accept cash from savings clubs appears to be limited. For 

Hispanics who are uncomfortable with using banks or other formal financial institutions, savings 

clubs may be their primary method of accumulating cash for a home purchase. The lack of 

acceptability of this source of funds may be an important barrier for these Hispanics. 

30 This translates to approximately $1100 annually on a $200,000 mortgage. Premium on a fixed-rate from 

PMI Mortgage Insurance Company, effective February 2006. 

31 Approximately $520 annually on a $200,000 mortgage. Premium on a fixed-rate from PMI Mortgage 

Insurance Company, effective February 2006. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

17 
Implementation and Application of Underwriting Guidelines by 

Lenders 

Lenders are required to follow Fannie Mae’s underwriting guidelines in order to sell their loans to the 

GSE, although there is slightly more room for lender discretion for manually underwritten loans than 

for those underwritten through Fannie Mae’s automated underwriting system, Desktop Underwriter®. 

All applications that rely on non-traditional credit reports are underwritten manually, and Community 

Lending products are more likely to be manually underwritten than standard products. 

Fannie Mae staff interviewed for this report32 acknowledged that Community Lending products 

require more effort to underwrite than standard products, but said that lenders do offer the products to 

their clients. They noted that one tool offered by Fannie Mae, Home Counselor Online, walks 

borrowers and counselors through the process of developing a non-traditional credit history to 

streamline the underwriting process for lenders as much as possible. 

Wendy Wood, Director of Community Lending, and Anna Alvarez-Boyd, Director of Community Lending, 

telephone interview conducted October 19, 2004. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

18 

32 
Chapter Four 

Freddie Mac’s Underwriting Guidelines 

Freddie Mac’s products include both standard mortgage products and those targeted to particular 

populations. Similar to Fannie Mae’s products, some Freddie Mac products that target particular 

populations are limited to specific geographic areas or to borrowers with incomes below the area 

median income. This section reviews underwriting guidelines for both types of Freddie Mac products 

to examine how they address barriers that may limit Hispanics’ access to mortgage financing. The 

review focuses first on aspects of standard underwriting guidelines that facilitate homeownership for 

Hispanics by providing some flexibility, and then turns to a review of Freddie Mac’s special 

affordable lending products. The section concludes with a discussion of what is known about how 

lenders implement the written underwriting guidelines. 

Standard Underwriting Guidelines 

Freddie Mac’s standard underwriting guidelines offer flexibility in four main areas in which 

flexibility has not typically been available for conventional mortgages. These are discussed in turn 

below. 

U.S. Citizenship 

Neither citizenship nor permanent residence in the United States is required for a mortgage. 

According to Freddie Mac’s underwriting guide: “A non-U.S. citizen who is lawfully residing in the 

U.S. as a permanent or nonpermanent resident alien is eligible for a mortgage on the same terms as a 

U.S. citizen.” (Freddie Mac Single-Family Seller/Servicer Guide, Volume I, Chapter 22.10.1.) A 

Social Security number is not required for mortgage approval, but the borrower must be a legal 

resident of the United States. 

Credit History 

Freddie Mac’s standard underwriting guidelines do not require traditional credit reports to evaluate 

credit history. However, the guidelines require the use of a minimum number of credit references to 

properly assess credit history, whether or not these references appear on the borrower’s credit report. 

The minimum number of credit references must include at least three tradelines (accounts with credit 

granting firms such as credit cards or loans), or four noncredit payment references that have existed 

for at least 12 months (such as rent, utilities, or insurance33), or a total of four tradelines and noncredit 

payment references. Credit history from another country may also be used to supplement U.S. credit 

history, as long as the required minimum number of credit references has been established in the U.S. 

Although Freddie Mac does not require credit scores, low credit scores can affect loan pricing, as 

discussed below. 

A savings history of at least 12 months may also be used if it shows periodic deposits and a growing 

balance. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

19 

33 
Documenting Assets 

Some flexibility in the source of downpayment funds is provided. Related people living together can 

pool funds for use toward the downpayment and closing costs, as long as: they have been living 

together for the past 12 months; plan to continue living together in the new residence;34 and the 

borrower attests that the funds are not borrowed. In addition, deposits with a Community Savings 

System or savings club are acceptable sources of cash as long as the borrower’s deposits are 

documented. 

Employment History 

The applicant’s length of employment in a given line of work is not a factor in Freddie Mac’s 

underwriting guidelines. Freddie Mac’s underwriting guidelines focus on the stability of income 

rather than on the source of income. This emphasis allows borrowers who frequently change jobs to 

qualify for a loan. In addition, the guidelines treat income from part-time and multiple jobs the same 

as full-time employment income, as long as the income can be reasonably expected to continue for at 

least three years. Income received in cash is not included in the calculation of the borrower’s stable 

income. 

Barriers Inadequately Addressed by Available Products 

Despite the flexibilities in Freddie Mac’s standard underwriting guidelines, there are other important 

provisions that potentially limit the ability of Hispanic borrowers to qualify for a loan. For example, 

the guidelines do not consider cash-on-hand as an acceptable source of funds for downpayment and 

closing costs. In addition, the relatively low housing expense-to-income (25-28 percent) and total 

debt-to-income ratios (33-36 percent) may also prevent low- and moderate-income Hispanic 

households and households in high-cost housing markets from qualifying for a loan. As described in 

Cortes et al.,35 Hispanics are more likely to be low- and moderate-income households than their nonHispanic counterparts, and they disproportionately reside in metropolitan areas and in central cities 

with high housing costs. Thus, they are disproportionately affected by the qualifying ratios required 

in Freddie Mac’s standard products. 

In addition to the qualifying ratios, requirements related to income from boarders may be a barrier to 

mortgage qualification for Hispanics. Income from boarders is counted as qualifying income only for 

disabled borrowers and only if the boarder income comes from a live-in aide, although income from 

other boarders (such as family members) can be used as a compensating factor for exceeding the 

qualifying income ratios.36 Some of these potential barriers are addressed in Freddie Mac’s 

Affordable Lending underwriting guidelines, which are discussed in the following section. 

34 The borrower must attest that the related person intends to continue residing with the borrower for the 

foreseeable future. The affidavit does not need to be notarized or acknowledged, but must be kept in the 

mortgage file. 

35 Cortes, forthcoming, Abt Associates, Inc.: Cambridge, MA. 

36 For any manually underwritten mortgage for which either of the income ratio guidelines is exceeded, the 

loan seller must prepare and retain in the mortgage file a written explanation justifying its underwriting 

decision. In addition to rental income from a related boarder, conditions that can be used to justify 

qualifying ratios that exceed those specified in the underwriting guidelines include an energy efficient 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

20 
Flexible Product Underwriting Guidelines 

Several of the products offering additional flexibilities to low- and moderate-income and immigrant 

borrowers are considered affordable lending products, or “Affordable Gold.” Exhibit 3 presents 

information on three of these products, Affordable Gold 5, Affordable Gold 3/2, and Affordable Gold 

97. The three products are similar across several dimensions and differ primarily on the amount and 

source of the required downpayment. Affordable Gold 5 requires a downpayment of 5 percent from 

the borrower’s funds; Affordable Gold 3/2 requires a downpayment of 3 percent from the borrower’s 

funds and 2 percent from another source; and Affordable Gold 97 requires a downpayment of 3 

percent from the borrower’s funds. 

Exhibit 4 summarizes underwriting guidelines for two additional loan products, Alt 97 and Freddie 

Mac 100. Because they do not offer the same flexibilities as the Affordable Gold products, these are 

not considered affordable lending products. Nonetheless, they offer other flexibilities not available in 

affordable lending products. Specifically, both products permit even lower downpayments, and Alt 

97 allows “alternative” sources of funds for closing costs. 

This section reviews the flexibilities available in these products that are not available in Freddie 

Mac’s standard products and that may address barriers to homeownership for Hispanics. 

Underwriting guidelines that are the same for these products and standard products, including 

documenting employment and U.S. citizenship, are not discussed separately in this section. 

It is likely that Freddie Mac’s affordable lending and flexible products are not as widely available as 

their standard products. Some may require special approval or eligibility requirements that are in 

addition to Freddie Mac’s approval for selling standard products to the GSE. For example, in order to 

sell Freddie Mac 100 mortgages, the seller must also be approved as a servicer.37 Information about 

the number of Freddie Mac sellers that are also approved servicers is not publicly available. 

home, high levels of verifiable assets, and the borrower’s probability for increased earnings based on 

education or time employed in a profession. Conditions where exceeding the qualifying ratios would not 

be appropriate include those that would result in risk layering, such as an adjustable-rate mortgage or a 

marginal credit reputation. 

Freddie Mac Seller/Servicer Guide, Chapter G33.1: Overview, updated February 7, 2001. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

21 

37 
Exhibit 3 

Freddie Mac Underwriting Guidelines for Affordable Products 

Affordable Gold 5 Affordable Gold 3/2 

Occup

ancy/Property 

Ty

pe one-unit (SF, condo, PUD) primary residence 

Loan Purpose purchase or refinance (no cash-out) 

Do

w

n

p

a

y

ment At least 5% from borrower funds 

At least 5%, with at least 3% from borrower 

funds At le

Amortizatio

n Period 15, 20, or 30 years, fully amortizing 

Interest R

ate Fixed, no temporary subsi

dy buydown 

Ratios No maximum housing expense-to-inco

me, total debt-to-incom

e is 38-4

Maximum LTV/CLTV 95% LTV/105% TLTV (with Affordable Second) 97% LT

Seco

Credit Score Cre

dit scores recommen

d

e

d; otherwise non-credit payment references or n

ontraditional cre

dit report permitted. 

Cre

dit 

otherwise 

or non-tr

Financial Reserves Non

e require

d, but recom

mended Minimum on

e month's b

orrower reserves Minimum 

Income Limits Borrower's income must b

e no more than 100 p

ercent of AMI (with exceptions for high-cost a

Concentrated Area. 

Income 

Documentation 

Rental p

ayments from a relative who resid

es with the borrower (but who is n

ot obligate

d on the mo

as sta

ble income if the relative has lived with and p

aid rent to the borrower for the past 12 mon

account for no more than 30% of the total qualifying incom

e for the mortgage. Evidence of rent

Ass

et Documentation 

Cash-on-hand may be use

d as lon

g as the LTV is 90%-95%; the borrower is a cashbasis individual but may be a limited user of cre

dit (i.e., revolving or installment debt); 

lender documents the borrower's budget and cash receipts (6 months). Rel

ated people 

living together can pool fun

ds for the d

o

wnpayment. Funds on de

p

osit with a 

Community Savings Syste

m are cash if documente

d. Funds above this amount are an 

unsecure

d loan. 

Same as A

Gold 3/2, 

as lon

g as 

Homebuyer Education 

and Cou

nseling 

Homebuyer education and counseling is required for first-tim

e homebuyers and 

borrowers making d

ownpayments less than 5% and with less than 2 months financial 

reserves. Not required for refinance transactions. 

Hom

Credit Enh

ancements Standard mortgage insurance coverage requirements apply 35% m

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

22 
Exhibit 4 

Freddie Mac Underwriting Guidelines for Flexible Products 

Alt 97 Freddie 

Occup

ancy/Property T

ype one-unit (SF, condo, PUD) primary residence 

Loan Purpose purchase or refinance (no cash-out) 

Do

w

n

p

a

y

ment 

No minimum downpayment from Borrower Fun

ds; fun

ds 

may be obtained from an unsecured loan, gift, or secondary 

financing (not HELOC). 

Borrower must have 3% o

purchase (for closing 

prepaids/escrows); no b

downpayment. No borrower f

refin

Amortizatio

n Period 15, 20, or 30 years, fully amortizing 

Interest R

ate Fixed, no temporary subsi

dy buydown 

Ratios Guideline of 28% housing debt to incom

e; 36% total debt to 

incom

e. 

Guideline of 28% housing de

inco

Maximum LTV/CLTV 97% LTV/100% TLTV (with Affordable Second); minimum 90% LTV 100% LTV/103% TLTV (with 

97.01

Credit Score 

Minimum indicator score of 700 for manually underwritten 

loans; no pre

vious bankruptcy or foreclosure in the l

ast 7 

years. Non-traditional cre

dit report not p

ermitted. 

Minimum indicator score of 7

loans. Non-traditional c

Financial Reserves 

N

one r

equired. Minimum two month

Income Limits No income limit unless Afforda

ble Seconds are used; then borrower's incom

e must be no 

(with exceptions for high-cost areas); no incom

e limits in a Concentra

Income Doc

umentation Rental p

ayments on one-unit property not allowed in calculating in

Ass

et Documentation Cash-on-hand not allowed. Related people living tog

ether can po

ol funds to be use

d towa

deposit with a Community Savings System are cash if documen

Homebuyer Education 

and 

Counseling Not required. 

Credit Enh

ancements 35% mortga

g

e insurance coverag

e required 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

23 
Credit History 

As noted above, Freddie Mac’s standard products do not require borrowers to have a credit score to 

qualify. Lenders can assess borrowers’ credit by analyzing directly all of the information in the credit 

report or can use non-traditional credit reports to assess credit quality for both standard and 

Affordable Gold products. Non-traditional credit reports are not allowed for use in underwriting 

Freddie Mac 100 and Alt 97 products. Both of these require that the lender use the borrowers’ credit 

scores to identify the “indicator score,” which must be at least 700 to be eligible for delivery to 

Freddie Mac if it is manually underwritten.38,39 

Documenting Income 

In addition to the flexibility allowed by the standard underwriting guidelines that do not impose 

requirements about stability of employment, Affordable Gold products allow rental income from 

boarders to be included in the borrower’s qualifying income. Rental payments from a relative who 

resides with the borrower may be included in the borrower’s qualifying income if the relative has 

lived with and paid rent to the borrower for the past 12 months. The rental income may account for 

no more than 30 percent of the total qualifying income for the mortgage, and documentation must be 

provided for the rental payments. Cancelled checks, money orders, and regular deposits into a 

savings account serve as adequate documentation. The income does not have to be reported on the 

borrower’s tax return. Freddie Mac 100 and Alt 97 loan products do not allow income from boarders 

to be included in calculating income. 

Documenting Assets 

While Freddie Mac’s standard underwriting guidelines do not allow cash-on-hand as a source of 

downpayments, this is an acceptable source of assets for Affordable Gold products as long as the 

loan-to-value (LTV) ratio is a minimum of 90 percent. In addition, the borrower must be considered 

a cash-basis individual – that is, someone who does not use checking, savings or other similar 

accounts and is a limited user of credit (i.e., revolving or installment debt). To document the 

borrower’s ability to accumulate the cash, the borrower must provide six months of cash receipts, and 

the lender must provide a Monthly Budget and Residual Income Analysis that confirms that the 

borrower has sufficient residual income to have saved the downpayment. 

Cash-on-hand is not an acceptable source of cash for Freddie Mac 100 and Alt 97. However, Alt 97 

does allow alternative sources of assets to be used for the downpayment and closing costs, including 

an unsecured loan, a gift, or secondary financing. Freddie Mac 100 does not allow alternative sources 

of assets for closing costs, but does not require borrower funds for the downpayment. The borrower 

38 To identify the indicator score, the lender first identifies the appropriate “underwriting score” for each 

borrower on the mortgage. If a borrower has three FICO scores, the middle score is used; with only two 

FICO scores, the lower of the two scores is selected; and the underwriting score for a borrower with only 

one FICO score is the single FICO score. After the underwriting score is identified for each borrower, the 

preferred method for finding the indicator score across all borrowers is to take the lowest of the borrowers’ 

underwriting scores. At least one borrower must have a usable FICO score. 

39 “Affordable Gold At a Glance,” Publication Number 258, September 2004, downloaded from: 

http://www.freddiemac.com/singlefamily/news/pdf/affgold.pdf 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

24 
is required to contribute 3 percent of his or her own funds to the transaction, but these can be used for 

closing costs. 

Debt Ratios 

Qualifying ratios for Affordable Gold products are generally less restrictive than those for Freddie 

Mac’s standard products. None of the Affordable Gold products summarized in Exhibit 3 require that 

a housing expense-to-income ratio be calculated, and the maximum total debt-to-income ratio (38-40 

percent) is higher than the maximum allowed by standard guidelines. The higher ratio either allows 

borrowers to take on more housing debt than they would otherwise be able to or accommodates 

substantial non-housing debt. 

Unlike the Affordable Gold products, both the Freddie Mac 100 and Alt 97 loan products require 

calculation of a housing expense-to-income ratio. The ratios allowed under Alt 97 guidelines (28 

percent housing expense-to-income and 36 percent total debt-to-income) are at the high end of the 

range of ratios for Freddie Mac’s standard products (25-28 percent housing expense-to-income and 

33-36 percent total debt-to-income). Freddie Mac 100 allows higher levels of total debt, with a 

maximum total debt-to-income ratio of 41 percent, but the maximum housing expense-to-income 

ratio for Freddie Mac 100 is 28 percent. 

Restrictions and Trade-offs Applied to Flexible Loans 

Although Freddie Mac’s flexible products help borrowers overcome a number of barriers to 

homeownership, there are some restrictions associated with this flexibility. There are four primary 

restrictions or trade-offs associated with Freddie Mac’s Affordable Gold products. First, Affordable 

Gold products cannot be used for cash-out refinances or adjustable-rate mortgages, and they cannot 

be used to finance 2-4 unit properties. Second, as noted above, all of the Affordable Gold products 

reviewed in this section can be used only by borrowers below a certain income level or those buying 

in concentrated areas: central cities or census tracts with median income less than 80 percent of area 

median income. There are no income limits for borrowers within concentrated areas. 

Third, first-time homebuyers using Affordable Gold 5 and Affordable Gold 3/2 loan products are 

required to participate in homebuyer education. These courses are required for all borrowers using 

the Affordable Gold 97 product. This requirement could pose a barrier to homeownership for 

Hispanics if Spanish-speaking education and counseling programs are not available widely or if this 

requirement leads to lender reluctance to promote the products. There is some evidence that these 

services have limited availability. For example, of the 42 HUD-approved housing counseling 

agencies in Arizona, services are offered in Spanish at only 15. Similarly, only four HUD-approved 

counseling agencies in Utah offer services in Spanish. 

Fourth, although detailed pricing information is not available for Freddie Mac’s loan products, 

lenders are required under some circumstances to pay a delivery fee for Affordable Gold products. A 

delivery fee is an up-front fee paid to Freddie Mac in exchange for Freddie Mac’s purchase of the 

loan. Freddie Mac’s delivery fees appear to range from 0.25 percent of the loan amount for 

adjustable rate and other types of mortgages to 3.25 percent for loans designated as more risky 

(referred to as “A-minus” loans). Affordable Gold 97, 3/2, and 5 all require a delivery fee if 

borrowers have FICO scores below a given threshold and if they are not underwritten through Loan 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

25 
Prospector, Freddie Mac’s automated underwriting system. For Affordable Gold 97, manually 

underwritten mortgages with FICO scores below 680 require a delivery fee; for Affordable Gold 3/2 

and 5, manually underwritten mortgages with FICO scores below 660 require a delivery fee.40 The 

delivery fee may lead either to higher up-front fees for the borrower or to a higher interest rate than a 

product that does not require a delivery fee. 

In addition to higher interest rates or up-front fees, borrowers will likely be required to pay mortgage 

insurance premiums, which also affect the affordability of loans. As noted earlier, the GSEs’ Charter 

Acts require a credit enhancement on all loans that have an LTV greater than 80 percent, including 

Affordable Gold products. By far the most common form of credit enhancement is mortgage 

insurance.41 Higher, more costly, levels of mortgage insurance are generally required for loans with 

higher LTV ratios. Freddie Mac requires 35 percent mortgage insurance coverage for Affordable 

Gold 97, Affordable Gold Alt 97, and Freddie Mac 100 mortgages. Affordable Gold 5 and 

Affordable Gold 3/2 mortgages are subject to the same mortgage insurance coverage requirements as 

standard products: loans with LTV ratios greater than 90 percent must have 30 percent mortgage 

insurance coverage; loans with LTVs from 85 to 90 percent are required to have 25 percent coverage; 

and loans with LTVs from 80 to 85 percent are required to have 12 percent coverage. As noted in 

Chapter 3, the difference in insurance premiums associated with higher LTVs is significant. 

According to one mortgage insurer, the premium for 35 percent mortgage insurance coverage on a 

loan with an LTV above 95.0 percent is 0.96 percent.42 In comparison, the premium for the required 

25 percent mortgage insurance coverage for a loan with an LTV of 90 percent is .52 percent.43 

The primary trade-off for allowing low or no downpayments and accepting alternative sources of cash 

in the Freddie Mac 100 and Alt 97 products is that high credit scores are required for each borrower 

on the mortgage. To the extent that Hispanics have good credit, documented through traditional 

credit reports, but low savings, these products can be useful. But these products obviously cannot 

help Hispanics who lack a strong, documented credit history. 

Barriers Inadequately Addressed by Available Products 

Freddie Mac’s Affordable Gold, Alt 97, and Freddie Mac 100 products offer numerous flexibilities 

that deviate from standard underwriting guidelines and increase opportunities for Hispanic 

households to qualify for a home mortgage. Nonetheless, several important barriers to 

homeownership remain. First, although non-U.S. citizens can qualify for a mortgage, Hispanics who 

reside in the country illegally or are in the process of obtaining authorization for residency are 

ineligible for a mortgage. 

40 Freddie Mac, “Single-Family Seller/Servicer Guide: Volume 1,” page E19-1-6, 6/28/04. 

41 The GSEs’ Charter Acts also allows for at least 10 percent seller participation in the ownership of the 

mortgage or agreements for the seller to repurchase or replace loans that default as means of mitigating the 

risk of loans with LTVs over 80 percent. 

42 This translates to approximately $1920 annually on a $200,000 mortgage. Premium on a fixed-rate from 

PMI Mortgage Insurance Company, effective February 2006. 

43 Approximately $1040 annually on a $200,000 mortgage. Premium on a fixed-rate from PMI Mortgage 

Insurance Company, effective February 2006. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

26 
Second, some Hispanic borrowers may have difficulty meeting Freddie Mac’s income documentation 

requirements. Freddie Mac requires that the borrower’s income be verified for the most recent two 

full years. Employment can be documented by the "Verification of Employment" form and the 

borrower's most recent pay stub or by a combination of W-2 forms from the two previous years, the 

most recent pay stub, and telephone verification with each employer. The borrower must explain 

gaps in employment that span 60 days or more. 

These documentation requirements may significantly limit homeownership opportunities for Hispanic 

households. For example, applicants who are paid in cash may not receive a pay stub and may not 

fully report income to the IRS. Since many low-income Hispanics are migrant workers, day laborers, 

and other temporary workers who are paid in cash, a sizable segment of the Hispanic population will 

be unable to verify all employment income. Verification may be further complicated by a lack of 

Spanish-speaking lenders who are able to obtain telephone verification from Spanish-speaking 

employers and by difficulty reaching employers of seasonal workers during the off-season. It is also 

unclear how lenders treat applicants who experience gaps in employment because of lengthy return 

visits to their native country. 

Lastly, the restrictions on use of cash-on-hand as a source of downpayment funds may also represent 

a serious barrier to homeownership. Recall that in order to use cash-on-hand, the borrower’s ability 

to accumulate the cash must be documented with six months of cash receipts as well as a Monthly 

Budget and Residual Income Analysis completed by the lender that confirms that the borrower has 

sufficient residual income to have saved the downpayment. Applicants who do not routinely keep 

cash receipts and are unaware of this requirement may be forced to wait for six months while they 

accumulate cash receipts. A Freddie Mac employee noted that the company informs borrowers of 

this requirement as early in the homeownership process as possible, often during homeownership 

education.44 Also, documenting cash-on-hand through the Monthly Budget and Residual Income 

Analysis form places a significant burden on lenders, which may discourage lenders from allowing 

applicants to use this flexibility. 

Implementation and Application of Underwriting Guidelines by 

Lenders 

The impact of Freddie Mac’s underwriting guidelines on Hispanic homeownership opportunities is 

only partially understood through a review of the company’s underwriting guidelines. How and 

whether lenders implement these guidelines and flexibilities locally will also affect the ability of 

Hispanic households to qualify for a loan. 

A Freddie Mac employee stated that, although lenders comply with their underwriting guidelines, 

there are phases during the business cycle when lenders are more and less likely to use products that 

offer flexibility to the borrower but are more difficult to underwrite than Freddie Mac’s standard 

products. Thus, lenders tend to use products that require complicated manual underwriting during 

Phone interview with Matt Miller, Freddie Mac, Housing and Community Investments, October 4, 2004. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

27 

44 
periods when the overall level of loan applications is down, such as interest rate environments when 

refinancing is not as attractive.45 

Underwriting the affordable lending products can be more time consuming for several reasons. For 

example, non-traditional credit is more difficult to document than a FICO score, and income from 

multiple sources is more effort to verify than income from a single source.46 In addition, staff from 

Freddie Mac noted that the manual underwriting required to complete these Affordable Lending loan 

products leads to a higher likelihood of errors that might be uncovered during a post-purchase review 

and require the seller to repurchase the loan. The higher likelihood of errors may discourage lenders’ 

use of these products. In addition, the widespread use of automated underwriting has led lenders to 

retain fewer experienced underwriters on staff. As a result, there are fewer people with the necessary 

skills to perform the level of manual underwriting required by these products. 

45 Ibid. 

46 Ibid. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

28 
Chapter Five 

FHA’s Underwriting Guidelines 

FHA has long been a source of relatively low downpayment loans for low- and moderate-income 

borrowers. In FHA’s 2003 fiscal year, for example, 79.2 percent of purchase loan endorsements were 

for loans to first-time homebuyers, and 37.4 percent were for minority borrowers.47 In comparison, 

about 40 percent of all buyers in 2002 were first-time homebuyers,48 and 30 percent of conventional 

prime purchase loans were to minorities in 2001.49 FHA offers fixed- and adjustable-rate mortgages 

for purchase and refinance (including cash-out refinance), all of which are underwritten using 

essentially the same guidelines. Although FHA does not offer products specifically designed to target 

immigrants or Hispanics, their products include some flexibilities that address obstacles to 

homeownership for Hispanics. 

Flexibilities that Address Barriers to Homeownership for Hispanics 

FHA’s underwriting guidelines offer several flexibilities in the areas of credit history, documenting 

income and employment history, documenting assets, and citizenship that address some barriers to 

homeownership for Hispanics. A summary of key aspects of FHA’s underwriting guidelines is 

provided in Exhibit 5. 

Credit History 

FHA specifically instructs lenders not to use the lack of a traditional credit history as a basis for 

rejecting a loan. For borrowers lacking a traditional credit history, lenders are to use non-traditional 

credit reports, or to develop a credit history for the borrower using rent and utility payments and 

payments on installment and revolving accounts. 

Income and Employment Documentation 

FHA does not impose a minimum length of time a borrower must have held a position of primary 

employment to be eligible for a loan. Part-time and employment income from a second job may be 

used in qualifying the borrower, if the borrower can document that he or she has held the job 

uninterrupted for the last two years. Seasonal income is considered uninterrupted if there is 

documentation that the borrower expects to be rehired during the next season. 

47 “FHA Outlook: Single Family Operations, August 1-15, 2004,” Department of Housing and Urban 

Development, Housing – Deputy Assistant Secretary for Finance and Budget, Office of Evaluation. 

Downloaded from: http://www.hud.gov/offices/hsg/comp/rpts/ooe/olcurr.pdf on September 23, 2004. 

48 Bishop, Paul, Thomas Beers, Shonda Hightower, Kate Anderson, “The 2003 National Association of 

Realtors Profile of Home Buyers and Sellers,” The National Association of Realtors Research Division, 

Chicago, IL. 

49 “State of the Nation’s Housing,” Joint Center for Housing Studies, Harvard University, 2004, p. 36. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

29 
Exhibit 5 

FHA Single Family Underwriting Guidelines 

Single Family 

Occupancy Primary residence; secondary residence or investment property 

permitted in limited circumstances with approval from HOC 

Property Type 

1-4 unit detached or semidetached dwellings, townhouses or row 

houses, units in FHA-approved condo projects 

Loan Purpose Purchase, refinance, and cash-out refinance 

Downpayment 3% minimum borrower investment 

Amortization Period Up to 30 years for FRM, 30 years for ARM, fully amortizing 

Interest Rate Fixed or ARM; temporary interest-rate buydowns allowed on 

purchase FRMs 

Ratios 29%/41% 

Maximum LTV/CLTV 98.75% for purchase loans; 85% CLTV for cash-out refinances 

Credit Score None specified 

Financial Reserves 

None specified, but can be used as compensating factor for 

exceeding ratios 

Income Limits None 

Homebuyer Education and 

Counseling Not required 

Credit Enhancements FHA provides full insurance coverage; mortgage insurance 

premiums depend on LTV and loan type 

Rental income earned from boarders in a single-family property may be used in qualifying the 

borrower if the boarders are related to the borrower. The income must be shown on a borrower’s tax 

returns to be considered “effective income;” otherwise it may be considered a compensating factor 

only. Compensating factors are financial strengths that are used to offset a weakness of an 

application. For example, if the rental income cannot be included in effective income because it is 

not shown on the borrower’s tax returns, the borrower will have a higher housing debt-to-income 

ratio than would otherwise be the case. One of the permissible compensating factors for exceeding 

FHA’s 29 percent housing expense-to-income ratio (discussed below) is receipt of documented 

income not included in effective income but affecting directly the borrower’s ability to pay the 

mortgage. In general, lenders exercise some degree of judgment in what constitutes a sufficiently 

significant strength to compensate for a weakness. 

Documenting Assets 

Both cash accumulated through savings clubs and cash saved at home can be considered acceptable 

sources of funds to close the mortgage if they are sufficiently documented. For a savings club, 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

30 
borrowers must be able to document the accumulation of assets with the club based on account 

ledgers, receipts from the club, verification from the club treasurer, and identification of the club. It 

must also have been reasonable for the borrower to have saved the amount of money claimed, based 

on a review of the borrower’s income and expenses. Similarly, borrowers who have saved cash at 

home must be able to provide evidence of the ability to accumulate the savings. In addition, the 

money must be verified by deposit in a financial institution or an escrow account. 

U.S. Citizenship 

Citizenship in the United States is not required for eligibility for FHA loans. Loans can be made to 

lawful permanent resident aliens; nonpermanent resident aliens are eligible provided they have a valid 

Social Security number and are eligible to work in the U.S. In addition, the lender must determine the 

likelihood that borrowers’ authorization for temporary residency status will be renewed. 

Downpayment 

The downpayment required on FHA loans is relatively low. For a principal residence, FHA requires 

borrowers to invest a minimum of 3 percent of the sales price, but since closing costs can be financed 

by the mortgage, the LTV can exceed 97 percent. There are, however, limits on the total LTV that 

vary with the appraised value and sales price, whether the property is located in a state with high 

closing costs or low closing costs, and whether the property is newly constructed. The LTV ranges 

from a high of 98.75 percent for properties with sales prices of less than $50,000 to a low of 97.15 

percent for properties with sales prices greater than $125,000 and located in states with low closing 

costs. 

Barriers Inadequately Addressed by Available Products 

FHA’s underwriting guidelines offer relatively low downpayments, allow the use of non-traditional 

means of evaluating credit, allow the use of cash-on-hand and savings clubs, and allow income from 

rent paid by boarders to be included in income, all of which address barriers for Hispanics seeking 

homeownership. However, several important obstacles remain. 

Income and Employment Documentation 

While there is no minimum length of time that borrowers must have held their primary job, FHA 

requires that the borrower’s employment be verified for the most recent two full years. Employment 

for two years can be documented through either a "Verification of Employment" form and the 

borrower's most recent pay stub or a combination of W-2 forms from the two previous years, the most 

recent pay stub, and telephone verification with each employer. Any gaps in employment spanning 

one month or more must be explained. 

These documentation requirements may present obstacles for several reasons. Borrowers who are 

paid in cash are unlikely to receive a pay stub and may not fully report income to the IRS. Without a 

Spanish-speaking staff member, some lenders may have difficulty obtaining telephone verification 

from Spanish-speaking employers. In addition, employers of seasonal workers may be difficult to 

reach for verification during the off-season. Last, it is not clear how lenders treat applicants who 

experience gaps in employment because of lengthy return visits to their native country. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

31 
Although income from related boarders is an important flexibility in FHA’s underwriting guidelines, 

this income may also be difficult for borrowers to document. As noted above, consideration of this 

rental income (other than as a compensating factor) must be documented by tax returns. Given the 

likely informal and cash-oriented nature of many of these arrangements, it seems likely that many 

Hispanic applicants would not have reported this income on tax returns. Even if used only as a 

compensating factor, this income must be documented. Although acceptable documentation is not 

specified, underwriting guidelines from other institutions require cancelled checks. For households 

that do not use traditional financial institutions, this documentation requirement will remain an 

obstacle. 

Documenting Assets 

While cash accumulated through savings clubs is an acceptable sources of funds, the documentation 

requirements are substantial. In practice, lenders may find income from this source too difficult to 

verify. 

Citizenship 

Although non-U.S. citizens can qualify for an FHA mortgage, Hispanics who are working in the 

country illegally or who may be in the process of obtaining authorization for residency are ineligible. 

Borrowers must have valid Social Security numbers; loans cannot be made using ITINs. 

Housing expense-to-income ratio 

The 29 percent housing expense-to-income ratio is also likely to be an important barrier to Hispanic 

households with low or moderate incomes, as well as those living in expensive housing markets. 

According to FHA underwriting guidelines, this ratio can be exceeded only with documentation of 

significant compensating factors. Some of these are: 

• Demonstrated ability to make housing payments equal to or greater than those proposed 

under the new mortgage over the last 12-24 months; 

• Cash reserves of 3 months or more after closing; 

• A downpayment of 10 percent or more; and 

• Potential for increased earnings as a result of job training or education.50 

FHA underwriting guidelines, 4155.1 REV-5, Chapter 2-12, Debt-to-Income Ratios, 10/03. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

32 

50 
As discussed above, the focus of both Fannie Mae and Freddie Mac affordable lending products is on 

the total debt-to-income ratio, which provides the flexibility for borrowers who have little nonhousing debt to assume more housing debt. Low levels of non-housing debt may be common for 

Hispanic households who are recent immigrants, many of whom dislike being in debt to anyone other 

than relatives.51 

Schoenholtz, Andrew I., and Kristin Stanton, “Reaching the Immigrant Market: Creating Homeownership 

Opportunities for New Americans,” Fannie Mae Foundation, Washington, DC, 2001, p. 48. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

33 

51 
Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

34 
Chapter Six 

GMAC-RFC’s Underwriting Guidelines 

GMAC Residential Funding, part of GMAC-RFC, is a large mortgage conduit and leading issuer of 

non-agency prime mortgage-backed securities (MBS), Alt-A MBS, and subprime mortgage related 

asset-backed securities (ABS). GMAC-RFC specializes primarily in nonconforming mortgage 

products, including jumbo A loans, Alt-A and subprime loans, home equity loans, and 125 percent 

combined loan-to-value (CLTV) loans. 

Although GMAC Residential Funding does not currently offer products designed specifically to 

address the needs of Hispanic borrowers, its subprime products include options for lower 

documentation requirements for income, employment, and assets than those typically available 

through prime lenders. These flexibilities address some of the key barriers faced by Hispanic 

borrowers. 

AlterNet/Credit Gap Overview 

The products reviewed in this section are AlterNet, GMAC Residential Funding’s subprime product, 

and Credit Gap. AlterNet comprises a range of “credit grades” with underwriting guidelines that 

differ in many respects across these grades, so each credit grade can be viewed as a subset of 

AlterNet. The credit grades are, in order of credit quality: Ax, Am, B, B (1x60), C, and Cm. Credit 

Gap (credit grade A4) is intended for borrowers whose previous mortgage history fits “A” standards 

but are considered non-conforming because of credit score, debt-to-income ratio, bankruptcy, or 

foreclosure. A summary of some underwriting guidelines for AlterNet/Credit Gap products is 

presented in Exhibit 6. 

Underwriting Guidelines that Facilitate or Impede Homeownership 

for Hispanics 

GMAC’s subprime products’ underwriting flexibilities are designed primarily for borrowers with 

imperfect credit and high debt levels. The products do not target first-time homebuyers or recent 

immigrants, although these groups can use them. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

35 
Exhibit 6 

GMAC-RFC Underwriting Guidelines for AlterNet/Credit Gap 

A4 (Cr

editGap) Ax Am B B (1x60

Occupancy Primary residence, second/v

acation home, or investment property 

Pro

p

erty Type 1-4 unit, single-family detached, semi-detached or attached residential; condo; modular home, manufactured 

manufactured home dealer); leasehold 

Loan P

urpose purchase, rate/term refinance, cash-out refinance, construction 

Do

wnpay

ment 

85%-95%, depending on doc type. At least 

5% from borrow

er funds; a d

o

wnpayment 

from gift funds is allo

wed for LTVs of 80% or 

less when no secondary financing 

e

xists 

80%-90%, depending on doc type. 

75%-85%, 

depending on 

doc type. 

70%-80%

depending 

doc typ

Interest Rate Fixed, 1-year Treasury ARM, 6-month LIBOR ARM, 2-year/6-month LIBOR ARM, 3-year/6-month LIB

Ratios 50% debt-to-income 50% debt-to-income, or 55% 

with an approved co

Credit Score 600 600 580 560 560 

Housing 

Payment 

History 

0x30 delinquency in past 12 months 

1x30 delinquency 

in past 12 months. 

No rolling lates 

allo

wed. No more 

than 30 days down 

at closing. 

2x30 mortgage/ 

rental delinquency 

in past 12 months. 

Rolling 30-day 

lates allo

wed. No 

more than 30 days 

down at closing. 

30-day lates 

allo

wed. 1x60 

non-rolling late 

allo

wed. No 

more than 30 days do

wn at 

closing. 

30-day la

allo

wed. 1

non-rolling 

allo

wed. 

more than days do

w

closing

Foreclosure None in past 3 years. None in past 2 

Credit 

Verification 

Non-traditional credit not acceptable. Score must be based on minimum two-year credit history, at least five ra

and at least one trade reported in past six months. 

Financial 

Reser

v

es None required (can be used as compensating factor) 

Income 

Docum

entation 

Income doc types: full incom

e; lite income; 

fast income; and stated income (for wage 

earners only). All require 2 year history of 

employment in same business or line of 

w

ork; "stated income" requires verbal 

verification of employment. Boarder income 

not allo

wed. 

Income doc types: full incom

e; lite income; and fast income

employment in same business or line of 

w

ork. Board

Asset 

Docum

entation 

Most recent bank statement or Verification of Deposit required for verification of cash to close. Cash-on-hand n

to qualify for the loan must be derived from within the U.S. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

36 
Credit History 

To the extent that Hispanic households experience credit-related problems, products that allow 

borrowers with flawed credit histories access to credit help overcome an important obstacle to 

homeownership.52 The minimum credit scores required for GMAC’s lowest credit-grade products are 

quite low, at 520-560. Recent late housing payments (within the past 12 months) are allowed for all 

but grade A4, as are recent foreclosure and bankruptcy. However, scores must be based on a 

minimum of two years of credit history, and non-traditional credit is not acceptable, an important 

limitation for borrowers who have not been in the country long enough to establish credit or who have 

been reluctant to use traditional financial institutions. 

The low minimum credit scores required likely come at the cost of a higher probability of serious 

delinquency and/or foreclosure. Although information on GMAC’s delinquency and foreclosure rates 

is not available, subprime loans generally have higher foreclosure rates than FHA and prime loans. In 

the third quarter of 2005, for example, the seasonally adjusted percentage of new foreclosures was 

0.18 percent for prime loans, 0.88 percent for FHA loans, and 1.39 percent for subprime loans.53 

Documenting Income and Employment history 

Four levels of income documentation are available in the AlterNet/Credit Gap products: Full, Lite, 

Fast, and Stated. All of these require a two-year history of employment and an expectation that 

income will continue for three years. 

• Full documentation requires the most recent pay stub and W-2 forms from the most 

recent two years or written verification from the employer covering the most recent two 

years. 

• Lite and Fast income documentation both require documentation only for the most recent 

12 months. Lite income documentation is permitted only for borrowers who use only 

base income to qualify.

54 Fast income documentation can be used for borrowers using 

base income as well as commissions, overtime, and bonus income to qualify. 

• Stated income requires only verbal verification of employment, with no verification of 

income, but is available only to wage earners with credit grade A4. 

Seasonal unemployment compensation income can be considered if it is typical for the borrower’s 

employment type. 

52 One study suggests that credit history is an important barrier to access to prime credit for Hispanics 

households: in 2001 a higher share of Hispanic renters (63 percent) had credit scores below 660 than either 

Black (54 percent) or white, non-Hispanic renters (35 percent). (See Raphael Bostic, Paul Calem, and 

Susan Wachter, "Hitting the Wall: Credit as an Impediment to Homeownership," working draft, November 

2003.) 

53 “Residential Mortgage Delinquencies Rise Due to Hurricane, Loans in Foreclosure Fall, According to 

MBA National Delinquency Survey,” Industry News, American Land Title Association, December 15, 

2005. 

54 Base income excludes bonus, tips, overtime, and commission. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

37 
AlterNet/Credit Gap Full documentation is similar to that required by Fannie Mae and Freddie Mac. 

Stated income could be an important flexibility for Hispanic borrowers who are paid in cash and may 

not fully report income to the IRS. 

Income earned from boarders is not allowed, and this is an important remaining barrier to 

homeownership in the underwriting guidelines for Hispanic households comprised of extended family 

members. Finally, all income necessary to qualify for the loan must be derived from within the U.S. 

Documenting Assets 

All AlterNet/Credit Gap credit grades require the most recent bank statement or a “Request for 

Verification of Deposit” completed by the financial institution to verify that the borrower has 

sufficient cash to close. Large recent deposits or newly opened accounts with large deposits must be 

explained, and the explanation must be documented. Cash-on-hand is not an allowable source of cash 

to close. 

Citizenship and Residency Status 

Non-U.S. citizens can qualify for a mortgage. However, non-permanent resident aliens are eligible 

only for primary residence or second/vacation homes, not for investment properties. In addition, nonpermanent resident aliens are required to make larger downpayments than other borrowers (maximum 

LTVs are 10 percentage points below maximums shown in Exhibit 6), and no cash-out is permitted. 

LTV Ratio 

Most of the credit grades in AlterNet/Credit Gap are not low-downpayment products. Only Credit 

Gap, the highest credit grade, allows an LTV of up to 95 percent, for both Full and Lite 

documentation types. Fast documentation allows a maximum LTV of 90 percent, and Stated income 

requires an LTV of at most 85 percent. Thus, Hispanic borrowers who may benefit from the 

flexibilities of Stated income documentation will need a relatively large downpayment. 

Other Underwriting Guidelines 

In addition to flexible credit quality guidelines, AlterNet/Credit Gap requires no financial reserves, 

and debt-to-income ratios of 50 percent are allowed. No homebuyer education and counseling is 

required, which could be a benefit to Hispanic households if Spanish-speaking programs are not 

readily available. It could also be detrimental to Hispanic households if they do not have a good 

understanding of the loan product, the U.S. housing finance system, or their responsibilities under the 

new mortgage. 

Trade-offs for Underwriting Flexibilities 

Many of the flexibilities offered through AlterNet/Credit Gap in one underwriting guideline are 

associated with a tightened requirement in another guideline to compensate for the increased risk of 

the loan. The most important of these is evident in Exhibit 6: lower credit scores require a larger 

downpayment (lower LTV). Reduced levels of documentation also result in a lower maximum LTV. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

38 
These trade-offs are important limitations to the potential benefits of the flexibilities for Hispanic 

households. As noted above, although Stated income documentation could be useful to Hispanic 

borrowers who are paid in cash, this level of documentation allows a maximum LTV of 85 percent. 

Hispanics making their first home purchase who could benefit from reduced documentation are likely 

to have difficulty accumulating a downpayment this large. 

In addition, although pricing information is not available specifically for GMAC’s products, subprime 

loans (A-minus, B, and C) generally carry much higher interest rates than prime loans.55 For 

example, in the fourth quarter of 2001, interest rates on conventional 30-year fixed-rate mortgages 

were 6.5 percent compared with 10.1 percent for A-minus loans (Exhibit 7), a difference of 3.6 

percentage points. Over the period shown in Exhibit 7, A-minus loans had rates 3.1 percentage points 

higher than conventional loans on average; B loans had rates 3.3 percentage points higher; and C 

loans had rates 4.3 percentage points higher. The difference between interest rates on A-minus loans 

and conventional loans was never smaller than 2.7 percentage points (in the second quarter of 

2002).56 Clearly, the flexibility of subprime products can be costly for borrowers. 

55 Another factor that can affect pricing is whether or not the borrower buys mortgage insurance. Although 

mortgage insurance is not required, its absence almost certainly results in a higher interest rate. 

56 “Inside B&C Lending,” a publication of Inside Mortgage Finance, provides updated information on interest 

rates. Its January 20, 2006 issue reports 6.0% for a conventional 30-year, fixed-rate mortgage (FRM), 

compared with 8.2% for A-minus grade, 8.6% for B grade, and 9.3 percent for C grade subprime 30-year 

FRMs (page 10). 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

39 
Review o

f Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

40 

Exhibit 7 Interest Rate Spread for Subprime Loans (Interest Rate Premium Compared to Conventional 30-Year Fixed Rate Mortgages) 

6.0 5.0 4.0 3.0 2.0 1.0 0.0 

Interest Rate Spread

Q1 Q2 Q3 Q4 Q1 Q

2000 2000 2000 2000 2001 20

Source: Top Subprime Mortgage Market Players and Key Subprime Data 2002, Inside Mortgage Finance, Bethesda, MD. 
Chapter Seven 

Summary and Conclusions 

Recent studies have identified several underwriting guidelines as particular barriers to Hispanic 

homeownership: establishing a credit history; verifying income; documenting employment history; 

verifying assets; and meeting requirements regarding citizenship or residency status. Some of these 

barriers have been addressed recently by major participants in the mortgage market in their standard 

products. This is particularly true of FHA’s standard product. Where barriers continue to exist, these 

are often removed in products targeted to low- and moderate-income borrowers. Subprime products 

also address some of the barriers to Hispanic homeownership. 

The major barriers to homeownership for Hispanics identified in the literature, the currently available 

solutions, and continued challenges in overcoming the barriers are summarized in Exhibit 8. 

Credit History 

Fannie Mae, Freddie Mac, and FHA all have standard products that allow a borrower to be approved 

for a mortgage without a formal credit history with credit reporting agencies. All allow the use of 

non-traditional credit reports or a credit history compiled by the lender, as long as it includes a 

minimum number of credit references. Credit scores are required, however, for GMAC’s subprime 

products and for products that allow a high degree of flexibility in other respects. For example, 

Fannie Mae’s Flex 97 and Flex 100 allow a wide variety of sources of cash to be used for the 

downpayment and closing costs, but require traditional credit reports. 

For Hispanics and other borrowers with low credit scores, FHA’s standard product allows more 

flexibility than is typically available. For example, in January through June of 2000, the average 

FICO score for FHA purchase loans insured using a mortgage scorecard was about 630,57 compared 

with the 660 minimum FICO score often required for prime mortgage approval. Targeted products 

offered by Fannie Mae and Freddie Mac also provide some options. For example, Fannie Mae’s 

Community Lending products allow approval of borrowers with credit scores of 600 to 620. In 

addition, GMAC’s subprime products allow credit scores of as low as 520, although this likely is 

associated with a higher interest rate. 

Documenting Income and Employment History 

Fannie Mae, Freddie Mac, and FHA also do not require two years of employment history for 

mortgage approval (one year is acceptable for Fannie Mae and Freddie Mac; FHA has no minimum 

requirement). In addition, frequent job changes are generally ignored as long as the borrower can 

“FHA TOTAL Scorecard,” presentation at MBA's National Technology Conference April 17 - 20, 2001, 

based on information collected from scorecards developed by third-party vendors and approved for use by 

the FHA. Obtained from: http://www.mortgagebankers.org/present/tech01/fha_scorce.pdf. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

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57 
Exhibit 8 

Summary of Barriers to Hispanic Homeownership 

Barrier Available Solutions Continued Challenges 

Lack of Formal Credit 

History or Poor Credit 

• Underwriting generally 

accepts non-traditional credit 

• FHA and subprime accept 

lower credit scores 

• Other underwriting flexibilities 

(primarily low downpayment) 

often require high credit score 

Documenting 

Employment and Income 

• Two year stable employment 

not required by all products 

• Some products accept 

boarder income 

• Some products permit nontraditional documentation and 

sources of income 

• Some products do not require 

verification of income 

• Few products that allow 

income 

• Products not requiring 

income verification require 

relatively high credit scores 

and downpayments 

Affordability • Variety of low-downpayment 

products available 

• High total debt-to-income 

ratios allowed in some 

products 

• No maximum housing 

expense-to-income ratio for 

some products 

• Low/no financial reserves 

required for some products 

• Some low-downpayment 

products require high credit 

scores 

Documenting Assets • Cash an acceptable source of 

funds for closing costs and 

downpayment if verified with 

receipts or budget and 

residual income analysis for 

some products 

• Related people living together 

can pool funds for closing 

costs and downpayment for 

some products 

• Savings accumulated through 

a savings club are an 

acceptable source of funds 

for closing costs and 

downpayment for some 

products 

• Documentation requirements 

for cash-on-hand used to 

close and savings 

accumulated through a 

savings club are often 

cumbersome 

Citizenship • U.S. citizenship is not 

required for mortgage 

approval; permanent and 

nonpermanent resident aliens 

qualify for many products on 

the same terms as U.S. 

citizens 

• Hispanics who reside in the 

country illegally or in the 

process of obtaining 

authorization for residency 

are ineligible for a mortgage 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

42 
document that his or her income is stable. Although there is some flexibility in the length of 

employment history required for mortgage approval, documentation requirements remain a barrier, 

particularly for Hispanics. Some form of written documentation, such as paystubs and an employercompleted form or W-2 forms, is required. 

With minor exceptions, income received in cash cannot be included as a primary or secondary source 

of income. This is true for standard products offered by FHA, Fannie Mae, and Freddie Mac, as well 

as the targeted products offered by Fannie Mae and Freddie Mac and the subprime products offered 

by GMAC. While Fannie Mae, Freddie Mac, and GMAC all have products that allow low or no 

income documentation, these allow less flexibility than standard and targeted products in other 

regards. For example, Freddie Mac’s stated income product requires high credit scores, a large 

downpayment, and large cash reserves. In addition, although Freddie Mac’s stated income product 

does not require W-2 forms, it requires IRS forms authorizing the release of tax information. This is 

also true for self-employed borrowers using GMAC’s stated income product. 

Widely available mortgage products allow rent paid by family members to be included in the 

borrower’s income. FHA’s standard product allows rental income from boarders in a one-unit 

property to be included in the borrower’s qualifying income, if the boarders are related to the 

borrower and if the income is shown on the borrower’s tax return. Some of Freddie Mac and Fannie 

Mae’s targeted products allow rental income from boarders in a one-unit property to be included in 

the borrower’s qualifying income. The income does not have to be included on the borrower’s tax 

return, although documentation is required. For one of Fannie Mae’s Community Lending products, 

MyCommunityMortgage, the boarder is not required to be related to the borrower. 

Affordability 

Hispanics are disproportionately in low-income and low-wealth households compared to nonHispanics, so affordability may be the most important barrier to homeownership. FHA products, as 

well as products offered by Fannie Mae and Freddie Mac that are targeted to low- and moderateincome households, help to address this barrier. A variety of low-downpayment products are 

available, some requiring as little as $500 of the borrower’s own funds. Flexibility in housing 

expense-to-income and total debt-to-income ratios available through Fannie Mae’s Community 

Lending and Freddie Mac’s Affordable Gold products, as well as GMAC’s subprime products, also 

help to improve affordability. Some of Fannie Mae’s products do not have maximum housing 

expense-to-income ratios at all. In addition, low or no financial reserves are required for some 

products. Some low-downpayment products, however, require relatively high credit scores. 

Citizenship and Residency Status 

U.S. citizenship is not required for mortgage approval for standard products by any of the financial 

institutions reviewed in this report. GMAC imposes some additional requirements for non-permanent 

resident aliens, however, including lower maximum LTVs and some product restrictions (for 

example, cash-out refinances are not permitted, nor are purchases of investment property). 

However, legal residence in the U.S. is required for mortgage approval. Nationwide, there are only a 

handful of pilot programs to extend mortgage credit to borrowers who do not have valid Social 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

43 
Security numbers. Given the number of undocumented immigrants in the country (an estimated 6 

million), most of them Hispanic, this remains an important barrier to homeownership for Hispanics. 

Documenting Assets 

FHA’s standard product allows both cash accumulated through savings clubs and cash saved at home 

to be considered acceptable sources of funds to close the mortgage if they are sufficiently 

documented. Targeted products offered by Fannie Mae and Freddie Mac also allow this flexibility. 

The documentation required to demonstrate that the borrower could have accumulated the assets over 

time, however, is substantial, and may discourage lenders from using this flexibility. 

Some products also allow related people living together to pool funds for closing costs and 

downpayments, improving borrowers’ ability to accumulate sufficient assets for a home purchase. 

Some Barriers Remain in Available Products 

As described above, many of the barriers to homeownership for Hispanics that recently existed in 

common underwriting guidelines have been addressed by some widely available standard products 

and by products targeted to particular populations. However, a few important obstacles remain in the 

form of individual underwriting guidelines. 

The requirement that borrowers be legal residents of the U.S. is obviously an insurmountable obstacle 

for the undocumented immigrants in this country. A handful of lenders are experimenting to 

determine whether lack of legal residence is an acceptable risk in extending mortgage credit; 

however, lending to illegal residents also involves political issues that may be extremely difficult to 

resolve. 

The lack of acceptability of cash income is also an important remaining underwriting obstacle. 

According to senior staff from Fannie Mae, some smaller community lenders have begun to 

experiment with approving mortgages that allow a limited share of the borrower’s total income to be 

earned in cash. If these mortgages prove to be acceptable risks, the GSEs may eventually make 

similar allowances in future offerings of targeted products. 

Last, although products that address barriers to homeownership for Hispanics exist, an important 

caveat is that it is not clear how widely available they are. While all FHA-approved lenders can offer 

the full range of FHA loan products, Fannie Mae and Freddie Mac’s affordable lending products are 

offered only by a subset of their lenders. On the other hand, while subprime products are easily 

accessible, they typically come at the cost of higher interest rates. 

Review of Selected Underwriting Guidelines to Identify Potential 

Barriers to Hispanic Homeownership – Final Report 

44