Table of Contents FHA Conforming Loan Amounts -FHA Guidelines Effective for Case Numbers Assigned on Or After September 14, 2015

Wholesale and NDC FHA Conforming and High Balance

Table of Contents FHA Conforming Loan Amounts -FHA Guidelines Effective For Case Numbers Assigned On or After September 14, 2015 ...... 12 Program Description ...... 12 Product Codes ...... 12 Locks ...... 12 Price Adjustments ...... 12 Qualifying Rate (Fixed and ARM) ...... 12 ARM Rate Terms ...... 13 Fixed Rate Terms ...... 13 Loan Amounts ...... 13 Maximum Loan Amount ...... 14 Maximum Loan-to-Value (LTV) ...... 14 Maximum Combined Loan-to-Value (CLTV) ...... 14 Subordinate Financing for Purchase Transactions ...... 15 Subordinate Financing for Refinance Transactions ...... 15 Direct Endorsement Underwriters...... 15 Credit Scores ...... 15 Loan Applications and HUD/VA Addendum to Uniform Residential Loan Application HUD 92900- A Signature Requirement ...... 16 Non-Borrowing Spouse – Community Property State ...... 16 Social Security Requirements ...... 16 Government-Issued Photo ID ...... 17 Age of Credit Documents ...... 17 Appraisal Ordering ...... 17 Appraisal Effective Date ...... 17 Appraisal Update ...... 18 Case Numbers ...... 18 Transferring Existing Appraisals ...... 19 Transferring Existing Appraisal-New Borrower ...... 19

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Case Number Transfer Involving a Rejected Mortgage ...... 19 Automatic Case Number Cancellations ...... 19 Handling of Documents ...... 20 Code of Ethics and Conflict of Interest ...... 20 Electronic Signatures ...... 21 Power of Attorney Requirements ...... 21 Sales Contract and Supporting Addendums ...... 22 Amendatory Clause ...... 22 Real Estate Certification ...... 22 HUD Required Disclosures ...... 22 Statement of Appraised Value ...... 23 Validation of Income via Transcripts ...... 23 Amended Tax Returns ...... 24 Income Taxes Owed on Tax Returns or Tax Transcripts ...... 24 Excluded Parties ...... 24 Eligible Borrowers ...... 25 Qualified Mortgages/Ability to Repay ...... 25 Higher Priced Mortgage Loans (HPML) ...... 26 Compliance with all Applicable Laws, Rules and Requirements ...... 26 Dual or Outside Employment ...... 26 Ineligible Transactions ...... 26 Accuracy and Integrity of the Appraisal ...... 27 Requirements when Ordering the Appraisal ...... 27 Ordering Second Appraisal ...... 28 Second Appraisal by Original Lender ...... 28 Second Appraisal by Second Lender ...... 28 Ordering an Update to an Appraisal ...... 29 Program Eligibility ...... 29 Purchase of a Short Sale Property ...... 29 Properties Listed For Sale ...... 30

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Credit Score Requirement...... 30 Product Credit Score and DTI Matrices ...... 31 Co-Borrower vs. Co-Signer ...... 32 Eligibility for Military Personnel ...... 32 CAIVRS ...... 34 Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt ...... 34 Borrower Ineligibility Due to Delinquent Federal Tax Debt ...... 35 Eligibility Period for Borrowers Delinquent on FHA-Insured Mortgages ...... 35 Occupancy Types ...... 35 Seven Unit Limitation ...... 36 Property Eligibility and Acceptability Criteria ...... 37 Owner of Record ...... 38 Restrictions on Property Flipping ...... 38 Eligible Property Types ...... 39 Ineligible Property Types ...... 40 Property Types ...... 40 Mix Use of Property ...... 41 Property Assessed Clean Energy (PACE) ...... 41 Legal Restriction on Conveyance (Free Assumability) ...... 42 Allowable Sections of the Housing Act at FCBM ...... 42 Mortgage Parameters ...... 43 Calculating Maximum Mortgage Amounts on Purchase Transactions ...... 44 Purchase Transactions with An Identity-of-Interest ...... 44 Maximum LTV for Identity-of-Interest Transactions ...... 44 Exceptions to the Maximum LTV for Identity of Interest Transactions ...... 44 LTV Limitations when there is a Non-Occupying Borrower ...... 45 Required Investment ...... 45 Calculating Maximum Mortgage Amounts on New Construction ...... 45 Calculating Maximum Mortgage Amounts on Refinances ...... 45 Paying Off Land Contracts ...... 46

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Build on Own Land ...... 46 Refinance Transactions ...... 47 Cash-Out ...... 47 No Cash Out Refinances: ...... 48 Refinancing to Buy Out Title-Holder Equity ...... 50 Simple Refinance...... 51 Streamline Refinances ...... 52 Net Tangible Benefit Standards Chart for all Streamline Refinance transactions ...... 53 Maximum Mortgage Term ...... 57 Mortgage Insurance UFMIP/Monthly MIP ...... 58 Adjustable Rate Mortgages (Section 251) ARM Loans ...... 59 Underwriting Using Automated Underwriting System (AUS) ...... 60 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (TOTAL) ...... 61 Manual Downgrade or AUS Refer ...... 62 Debt-to-Income Ratio Requirements (AUS Approve/Eligible Underwriting) ...... 62 Debt-to-Income Ratio Requirements and Compensating Factors (Manual/Refer Underwriting) 62 The Table below denotes Ratio Requirements and Acceptable Compensating Factors ...... 63 See Residual Income Table ...... 65 TOTAL Scorecard Tolerance Levels for Rescoring ...... 66 Underwriting the Borrower Using the TOTAL Mortgage Scorecard (TOTAL) ...... 66 Underwriting the Borrower Using Manual Underwriting Guidelines (AUS Refer or Manual Downgrade) ...... 104 New Construction Program Requirements ...... 143 Underwriting The Collateral ...... 147 Appraisal Review ...... 147 Appraisal Requirements and Application of Minimum Property Requirements and Minimum Property ...... 148 Appraiser and Property Requirements ...... 153 Minimum Property Requirements and Minimum Property Standards by Construction Status . 153 Repair Requirements ...... 154 As-Is Condition and Cosmetic Repairs ...... 154

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Appraisal Reporting Forms ...... 155 Appraisal Photographs, Exhibits and Map Requirements ...... 155 Comparable Photos...... 156 Approaches to Value ...... 156 Comparable Selection ...... 156 Declining Market ...... 157 Zoning and Legal Use ...... 157 Accessory Dwelling Unit ...... 157 Leased Equipment, Components and Mechanical Systems ...... 157 Non-Residential Use of Property/Mix Use Properties ...... 158 Externalities ...... 158 Site Conditions ...... 158 Excess and Surplus Land ...... 159 Multiple Parcel Requirements ...... 159 Property Improvements ...... 160 Appliances ...... 160 Mechanical Components and Utilities ...... 160 Plumbing System ...... 161 Heating and Cooling Systems ...... 161 Additions ...... 161 Partially Below-Grade Habitable Space ...... 162 Attic ...... 162 Crawl Space ...... 162 Individual Water Supply Systems Required Analysis and Reporting ...... 163 Community Water Systems Required Analysis and Reporting ...... 163 Onsite Sewage Disposal Systems Required Analysis and Reporting...... 163 Effective Age and Remaining Economic Life ...... 164 FHA Electronic Appraisal Delivery Portal (EAD) ...... 164 Disaster Re-inspections ...... 164 Escrow Requirements for Taxes and Insurance ...... 165

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Escrow for Repairs/Work Completion ...... 165 HUD Real Estate Owned Purchasing (HUD REO Purchase Program) ...... 166 Termite Treatment Exception Areas ...... 172 High Balance Loan Amounts-FHA Guidelines Effective For Case Numbers Assigned On or After September 14, 2015 ...... 173 Program Description ...... 173 Product Codes ...... 173 Locks ...... 173 Price Adjustments ...... 173 Qualifying Rate ...... 173 Loan Terms ...... 173 FHA High Balance Loan Program ...... 174 Maximum Loan Amount for High Balance FHA loans ...... 174 Maximum Loan-to-Value (LTV) ...... 175 Maximum Combined Loan-to-Value (CLTV) ...... 175 Subordinate Financing for Purchase Transactions ...... 175 Subordinate Financing for Refinance Transactions ...... 176 Direct Endorsement Underwriters...... 176 Credit Scores ...... 176 Loan Applications and HUD/VA Addendum to Uniform Residential Loan Application HUD 92900- A Signature Requirement ...... 176 Non-Borrowing Spouse – Community Property State ...... 177 Social Security Requirements ...... 177 Government-Issued Photo ID ...... 177 Age of Credit Documents ...... 177 Appraisal Ordering ...... 178 Appraisal Effective Date ...... 178 Appraisal Update ...... 178 Case Numbers ...... 179 Transferring Existing Appraisal-New Borrower ...... 179 Case Number Transfer Involving a Rejected Mortgage ...... 179

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Automatic Case Number Cancellations ...... 180 Handling of Documents ...... 180 Code of Ethics and Conflict of Interest ...... 181 Electronic Signatures ...... 182 Power of Attorney Requirements ...... 182 Sales Contract and Supporting Addendums ...... 183 Amendatory Clause ...... 183 Real Estate Certification ...... 183 HUD Required Disclosures ...... 183 Statement of Appraised Value ...... 184 Validation of Income via Transcripts ...... 184 Amended Tax Returns ...... 184 Income Taxes Owed on Tax Returns or Tax Transcripts ...... 185 Excluded Parties ...... 185 Eligible Borrowers ...... 185 Qualified Mortgages/Ability to Repay ...... 186 Higher Priced Mortgage Loans (HPML) ...... 187 Compliance with all Applicable Laws, Rules and Requirements ...... 187 Dual or Outside Employment ...... 187 Ineligible Transactions ...... 187 Chain of Title ...... 188 Accuracy and Integrity of the Appraisal ...... 188 Requirements when Ordering the Appraisal ...... 188 Ordering Second Appraisal ...... 189 Second Appraisal by Original Lender ...... 189 Second Appraisal by Second Lender ...... 189 Ordering an Update to an Appraisal ...... 190 Program Eligibility ...... 190 Purchase of a Short Sale Property ...... 190 Properties Listed For Sale ...... 191

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Borrower and Co-Borrower Eligibility Requirements ...... 191 Credit Score Requirement...... 191 Product Credit Score and DTI Matrices ...... 192 Co-Borrower vs. Co-Signer ...... 193 Eligibility for Military Personnel ...... 193 Citizenship and Immigration Status ...... 193 CAIVRS ...... 195 Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt ...... 195 Borrower Ineligibility Due to Delinquent Federal Tax Debt ...... 196 Eligibility Period for Borrowers Delinquent on FHA-Insured Mortgages ...... 196 Occupancy Types ...... 196 Seven Unit Limitation ...... 197 Property Eligibility and Acceptability Criteria ...... 198 Owner of Record ...... 199 Restrictions on Property Flipping ...... 199 Eligible Property Types ...... 200 Ineligible Property Types ...... 201 Property Types ...... 202 Mix Use of Property ...... 203 Property Assessed Clean Energy (PACE) ...... 203 Legal Restriction on Conveyance (Free Assumability) ...... 203 Allowable Sections of the Housing Act at FCBM ...... 204 Parameters ...... 204 Financing of Upfront Mortgage Insurance Premium ...... 204 Calculating Maximum Mortgage Amounts on Purchase Transactions ...... 204 Purchase Transactions with An Identity-of-Interest ...... 204 Maximum LTV for Identity-of-Interest Transactions ...... 205 Exceptions to the Maximum LTV for Identity of Interest Transactions ...... 205 Required Investment ...... 206 Calculating Maximum Mortgage Amounts on New Construction ...... 206

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Calculating Maximum Mortgage Amounts on Refinances ...... 206 Paying Off Land Contracts ...... 206 Build on Own Land ...... 207 Refinance Transactions ...... 207 Cash-Out ...... 208 No Cash Out Refinances: ...... 209 Refinancing to Buy Out Title-Holder Equity ...... 211 Simple Refinance...... 212 Streamline Refinances ...... 213 Net Tangible Benefit Standards Chart for all Streamline Refinance transactions ...... 214 Maximum Mortgage Term ...... 218 Mortgage Insurance UFMIP/Monthly MIP ...... 219 Underwriting Using Automated Underwriting System (AUS) ...... 220 Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (TOTAL) ...... 220 Manual Downgrade or AUS Refer ...... 221 Debt-to-Income Ratio Requirements (AUS Approve/Eligible Underwriting) ...... 222 Debt-to-Income Ratio Requirements and Compensating Factors (Manual/Refer Underwriting) ...... 222 TOTAL Scorecard Tolerance Levels for Rescoring ...... 222 Underwriting the Borrower Using the TOTAL Mortgage Scorecard (TOTAL) ...... 223 Underwriting the Borrower Using Manual Underwriting Guidelines (AUS Refer or Manual Downgrade) ...... 261 New Construction Program Requirements ...... 299 Appraisal Review ...... 303 Appraisal Requirements and Application of Minimum Property Requirements and Minimum Property ...... 304 Standards by Construction Status Minimum Property Requirements and Minimum Property Standards ...... 304 Appraiser and Property Requirements ...... 309 Minimum Property Requirements and Minimum Property Standards by Construction Status . 309 Repair Requirements ...... 310

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As-Is Condition and Cosmetic Repairs ...... 310 Appraisal Report Conclusion and Appraisal Property Condition ...... 310 Appraisal Update and/or Completion Report 1004D and FHA Compliance Inspection Report on form HUD-92051 ...... 311 Appraisal Reporting Forms ...... 311 Appraisal Photographs, Exhibits and Map Requirements ...... 311 Comparable Photos...... 312 Approaches to Value ...... 312 Comparable Selection ...... 312 Declining Market ...... 313 Accessory Dwelling Unit ...... 313 Leased Equipment, Components and Mechanical Systems ...... 313 Non-Residential Use of Property/Mix Use Properties ...... 314 Externalities ...... 314 Site Conditions ...... 314 Excess and Surplus Land ...... 315 Multiple Parcel Requirements ...... 315 Property Improvements ...... 316 Appliances ...... 316 Mechanical Components and Utilities ...... 316 Plumbing System ...... 317 Heating and Cooling Systems ...... 317 Additions ...... 317 Partially Below-Grade Habitable Space ...... 318 Defective Paint ...... 318 Attic ...... 318 Crawl Space ...... 318 Individual Water Supply Systems Required Analysis and Reporting ...... 319 Shared Wells Required Analysis and Reporting ...... 319 Community Water Systems Required Analysis and Reporting ...... 319 Onsite Sewage Disposal Systems Required Analysis and Reporting...... 319

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Effective Age and Remaining Economic Life ...... 320 FHA Electronic Appraisal Delivery Portal (EAD) ...... 320 Disaster Re-inspections ...... 320 Escrow Requirements for Taxes and Insurance ...... 321 Escrow for Repairs/Work Completion ...... 322 HUD Real Estate Owned Purchasing (HUD REO Purchase Program) ...... 322 Termite Treatment Exception Areas ...... 328

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FHA Conforming Loan Amounts -FHA Guidelines Effective For Case Numbers Assigned On or After September 14, 2015

Program Description Federal Housing Administration (FHA) mortgage programs for Section 203(b), basic 1-4 family, and 234 (c) Condominiums. The FHA 203(b) and 234(c) mortgages are insured by the Department of Housing and Urban Development (HUD). Guidance not addressed in this product description will follow HUD Handbook 4000.1 and any other applicable Mortgagee Letters (ML). FHA Single Family Housing Policy Handbook at http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/ hsgh

Product Codes FHA30 – FHA Fixed 30 year FH3SA – FHA Fixed 30 year Simple Refinance FHA25 – FHA Fixed 25 year FH2SA – FHA Fixed 20 year Simple Refinance FHA20 – FHA Fixed 20 year FH1SA – FHA Fixed 15 year Simple Refinance FHA15 – FHA Fixed 15 year FHA5S – FHA 5/1 ARM 30 year Streamline Refinance FH215 – FHA Fixed 15 year FHA3S – FHA Fixed 30 year Streamline Refinance FHA51 – FHA 5 year ARM 30 year FHA2S – FHA Fixed 20 year Streamline Refinance FHA5A- FHA5/1 ARM 30 year Simple FHA1S – FHA Fixed 15 year Streamline Refinance Refinance

Locks Reference Buy Price Policy and Rate Sheet for specific day locks available

Price Adjustments Certain transactions may be subject to price adjustments. Refer to your rate sheet

Qualifying Rate (Fixed and ARM) Note Rate

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ARM Rate Terms • 30 Years. • Index is the 1 year Treasury. The weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year. • A margin of 2% is required. • The first adjustment may change the previous interest rate by no more than 1% up or down. • Each subsequent adjustment may change the interest rate by no more than 1% up or down. • The lifetime cap is 5% over the initial note rate. There is no downward cap, except for the margin. • First Interest Rate Change: o Fifty-nine (59) months from the first payment due date. • Subsequent Interest Rate Change Date: o Once every 12 months after the first interest rate change date. • Conversion to a fixed rate is not permitted.

Fixed Rate Terms 10, 15, 20, 25 and 30-year fixed Rate Mortgages

Loan Amounts Minimum Loan Amount: $50,000

FHA Loan Limits for 2016 Conforming Loan Amounts Continental US Conforming Loan Amounts 2016 Number of Units Low Cost Area “Floor” Highest Cost Areas “Ceiling” One $271,050 $417,000 Two $347,000 $533,850 Three $419,425 $645,300 Four $521,250 $801,950

The new maximum loan amounts for FHA Conforming Loan Amounts are effective with FHA Case Numbers assigned on or after January 1, 2017.

Continental U.S. High Balance Loan Amounts 2017

Number of Units Minimum Continental U.S. Maximum Continental U.S. Base Base Loan Amounts Loan Amounts One $424,101 $636,150

Two $543,001 $814,500

Three $655,351 $984,525

Four $815,651 $1,223,475

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Maximum Loan Amount The FHA Mortgage Amount cannot exceed FHA Statutory Mortgage Loan Limits for each county and the Maximum LTV. See this link for FHA County Mortgage Limits: https://entp.hud.gov/idapp/html/hicostlook.cfm Note: Restrictions to the loan amount and LTV are placed upon the Base Loan Amount prior to the financing of the Upfront Mortgage Insurance Premium. The total mortgage amount may be increased by the financed UFMIP amount.

Maximum Loan-to-Value (LTV) Purchase: 96.50% LTV of the Adjusted Value. For purchase transactions, the Adjusted Value is the lesser of the: - Purchase price less any Inducements to Purchase; or - Property Value. No Cash Out Refinance: - 97.75% of the Adjusted Value for a property that has been owner-occupied for previous 12 months or owner-occupied since acquisition if acquired within 12 months, of the case number assignment date. - 85% of the Adjusted Value if owned or occupied less than 12 months preceding the case assignment date. Cash-out: - 85% of the Adjusted Value. Simple Refinance: - 97.75% of the Adjusted Value. Streamline Refinance: - LTV Limits do not apply

Maximum Combined Loan-to-Value (CLTV) - The maximum CLTV of a Purchase is 96.5% if the secondary financing is from a Financial Institution; all other sources of secondary financing are not acceptable to FCBM. - The maximum CLTV of a No Cash Out Refinances regardless of months owned is 97.75%. - The maximum CLTV of a Cash Out Refinances with existing subordinate liens is 85%. - The maximum CLTV is 125% on Streamline Refinance (Credit Qualified or Non-Credit Qualified).

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Subordinate Financing for Purchase Transactions FHA will insure a first Mortgage on a Property that has a second Mortgage or lien held by a financing institution, provided that: the secondary financing is disclosed at the time of application; the secondary financing must not result in cash back to the Borrower except for refund of earnest money deposit or other Borrower costs paid outside of closing; the secondary financing may not be used to meet the Borrower’s minimum required investment; the second lien may not provide for a balloon payment within 10 years from the date of execution; any periodic payments are level and monthly; there is no prepayment penalty, after giving the Mortgagee 30 Days advance notice; the Base Loan Amount and secondary financing amount must not exceed the Maximum County Limits.

Secondary Financing Source Maximum Combined Loan-to-Value Financial Institutions Allowed up to a max of 96.5% CLTV Charitable Organization/ Non-Profit, Family Not allowed Members, Private Individuals.

Subordinate Financing for Refinance Transactions If there is an existing subordinate lien on the property, such as a Home Equity Line of Credit (HELOC), the entire lien must be subordinated at refinance. For the calculation of the Combined Loan to Value (CLTV) ratio, the Underwriter must use the maximum accessible credit limit of the existing subordinate lien.

Direct Endorsement Underwriters Manual Underwriting: The Direct Endorsement (DE) Underwriter must ensure compliance with all underwriting requirements in the 4000.1 Single Family Housing Handbook for manually underwritten mortgages. Underwriting responsibilities include, but are not limited to, the following: • Calculation of maximum mortgage amounts; • Underwriting the Property; and • Underwriting of the Borrower. TOTAL Scorecard Underwriting: The DE Underwriter must ensure compliance with all requirements underwriting the Property for mortgages underwritten using the TOTAL Scorecard (DU AUS) and demonstrate prudent underwriting practices in the Underwriting Decision even when using TOTAL as per the requirements described in the 4000.1 Single Family Housing Handbook.

Credit Scores • DU Approve/Eligible: Minimum credit score is 620 for all transactions except Streamline Refinances (refer to manual downgrade or DU Refer/eligible). Non-Traditional credit is not allowed. • Manual Downgrade or DU Refer/Eligible: Minimum credit score is 640. Note: If the underwriter deems necessary to augment a “thin” credit profile, a verification of rent and/or 12 months cancelled checks may be able required. Non-Traditional credit is not allowed

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Loan Applications and HUD/VA Addendum to Uniform Residential Loan Application HUD 92900-A Signature Requirement The Originator/Lender must obtain a completed and fully executed Initial Uniform Residential Loan Application (URLA) – 1003 and all Borrowers must sign and date page two of the initial form HUD-92900-A, HUD/VA Addendum to Uniform Residential Loan Application before the initial credit decision is rendered and provide all required Federal and State disclosures in order to begin the origination process, and obtain a borrower’s authorization to verify information needed to process the loan application. Note: All Borrowers must sign and date the Final Uniform Residential Loan Application (URLA) – 1003 and page two of the Final HUD-92900-A, HUD/VA Addendum to Uniform Residential Loan Application. Important: All loan applications must be executed in the legal names of all parties.

***Effective for FHA Case Numbers assigned on or after August 1, 2016, the Revised HUD 92900-A Form must be utilized containing updated language requirements including occupancy declaration in the Borrower Certification section and revised Lender Loan-Level Certification***

Non-Borrowing Spouse – Community Property State The originator/lender must obtain a consent and authorization from the non-borrowing spouse to verify his/her SSN with the Social Security Administration; also, evidence of non-borrowing spouse social security number verified with the Social Security Administration must be obtained. A credit report for non-borrowing spouse must be obtained if the borrower resides in a community property state, or property being insured is located in a community property state and include the debt of the non-borrowing spouse on the Loan Application. • Alaska • Arizona • California • Idaho • Louisiana • Nevada • New Mexico • Texas • Washington • Wisconsin Note: If the non-purchasing spouse does not have a social security number, the credit report must contain the non-borrowing spouse name, date of birth and addresses for the past 2 years.

Social Security Requirements The originator/lender must verify and resolve any inconsistencies or multiple social security number for each borrower revealed during the processing of the loan. This includes verifying the social security number with the Social Security Administration.

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Government-Issued Photo ID The loan package must include a statement the borrower’s identity has been validated with a government-issued photo identification or may include a copy of such photo identification in the loan submission.

Age of Credit Documents Documents used in the origination and underwriting of the loan cannot be more than 120 Days old at the Disbursement Date. For purposes of counting days, day one is the day after the effective or issue date of the document, whichever is later. Documents whose validity for underwriting purposes is not affected by the passage of time include divorce decrees or tax returns, may be more than 120 Days old at the Disbursement Date.

Appraisal Ordering The Originator/Lender must order an appraisal for each FHA Case Number assigned and may not reuse an appraisal that was completed under another FHA Case Number even if the prior appraisal is not yet more than 120 days old. The Originator/Lender must provide the appraiser with a copy of the FHA Case Number, a complete copy of the sales contract with all addendums, surveys and other legal documents necessary to analyze the property. Furthermore, the Originator/Lender must disclose all known information regarding any environmental hazard that is in or on the vicinity of the property or on the property.

Appraisal Effective Date The effective date of the appraisal cannot be before the FHA Case Number assignment date unless the Lender certifies in the Appraisal Logging Screen in FHA Connection via the certification field that the appraisal was ordered for a conventional mortgage loan or for a government guaranteed loan purposes and was performed by an approved FHA Appraiser and the lender must retain documentation substantiating the conversion of the Mortgage to FHA financing.

The Lender must also ensure that the appraisal was performed in accordance with FHA appraisal reporting instructions as detailed in the SF Handbook and the Appraisal Report and Data Delivery Guide http://portal.hud.gov/hudportal/documents/huddoc?id=SFH_POLI_APPR_RPT_FIN.PDF The intended use of the appraisal is to solely assist FHA in assessing the risk of the Property securing the FHA insured mortgage. In addition, FHA and the Lender must be indicated as the intended users of the appraisal report.

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Appraisal Update An Appraisal Update must be performed before the initial appraisal, with no extension, has expired. Where the initial appraisal is subsequently updated, the updated appraisal is valid for a period of 240 Days after the effective date of the initial appraisal report that is being updated.

The FNMA Form 1004D “Summary Appraisal Update Report” is to be completed by the original appraiser who must be in good standing on the FHA Appraiser Roster and; • Adhere to the Scope of Work and Appraiser’s Certification on the form which includes an exterior inspection of the subject property, at least from the street if the improvements can be observed; and • Provide a photo of the front of the subject property taken from the public street; and • Determine that the property has not declined in value since the effective date of the appraisal report being updated based on his/her research, analysis and verification of the current market data. The FNMA Form 1004D “Summary Appraisal Update Report” may not be used if any of the following apply: • The Property has declined in value. • Building improvements that contribute to value to the Property cannot be observed from the street or a Public way. • Exterior Property inspection reveals deficiencies or other significant changes that did not exist as of the original appraisal’s effective date.

Case Numbers o Can only be ordered with an active mortgage application for a borrower and a property. o FHA systems will automatically cancel any case number that has had no activity for six months. o Transfer of case number from one lender to another must be done upon request from the borrower, within 5 Business days of the request. Important: The FHA Case Number is assigned to the property, not to the borrower.

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Transferring Existing Appraisals In cases where a Borrower has switched Lender, the first Lender must, at the Borrower’s request, transfer the appraisal to the second Lender within five business days. The Appraiser is not required to provide the appraisal to the new Mortgagee. The client name on the appraisal does not need to reflect the new Lender. If the original Lender has not been reimbursed for the cost of the appraisal, the Lender is not required to transfer the appraisal until it is reimbursed. The second Lender may not request the Appraiser to re-address the appraisal. If the second Lender finds deficiencies in the appraisal, the Lender must order a new appraisal.

Transferring Existing Appraisal-New Borrower When an existing appraisal is being used for a different borrower, the Lender must: o Enter the new borrower’s information in FHA Connection; o Collect the appraisal fee from the new borrower and refund the fee to the original borrower; and o Have the appraiser review the purchase contract and revise the appraisal report for value adjustments accordingly. If the Lender uses an existing appraisal for a different Borrower, the Lender must enter the new Borrower’s information in FHA Connection. The Lender must collect an appraisal fee from the new Borrower and send the appraisal fee to the original Lender, who, in turn, must refund the fee to the original Borrower.

Case Number Transfer Involving a Rejected Mortgage If the transfer involves a rejected Mortgage, the original Lender must complete the Mortgage Credit Reject function in FHA Connection prior to transferring the Mortgage to new Lender.

Automatic Case Number Cancellations FHA will automatically cancel an uninsured case number where there has been no activity for six (6) months since the last action taken, except for: - An appraisal update; or, - Transmission of the UFMIP to FHA. Last action taken includes: - Case number assignment - Appraisal information entered - Firm commitment issued by FHA - Insurance application received and subsequent updates; and, - Notice of Return (NOR) and resubmissions. Last action taken does not include updates to borrower’s names and/or property addresses. For example, making changes to the number of borrowers on a loan will not reset the six (6) month timeframe for automatic cancellations.

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Handling of Documents Documents cannot be transmitted from or through equipment of interested third parties or unknown parties.

Information Sent Electronically: The Underwriter must authenticate all documents received electronically by examining the source identifiers such as fax banner header, or sender’s e-mail address for electronic transmissions, or by contacting the source of the document by telephone to verify the document’s validity. The Underwriter must document the name and telephone number of the individual with whom the Underwriter verified the validity of the document.

Information Obtained via Internet: The Underwriter must authenticate documents obtained from an Internet website and examine portions of printouts downloaded from the Internet including the Uniform Resource Locator (URL) address, as well as the date and time the documents were printed. Furthermore, the Underwriter must visit the URL or the main website listed in the URL if the page is password protected to verify the website exists and print out evidence documenting the lender’s visit to the URL and website.

Documentation obtained through the Internet must contain the same information as would be found in an original hard copy of the document.

Code of Ethics and Conflict of Interest As part of its effort to fight predatory lending and to promote honest and ethical conduct, FCBM r has established a Code of Ethics and Conflict of Interest and Conduct Policy as applicable to the company’s officers, employees, and customers to: • Engage in and promote ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, and to disclose to FCBM any material transaction or relationship that reasonably could be expected to give rise to such a conflict. Note: FCBM does not allow a loan originator to take a family member’s loan application; it is permissible however for another loan originator in the same office to take the loan application on his/her behalf. FCBM defines a family member as one’s spouse, child, spouse's child, daughter-in-law, son-in-law, brother, sister, mother, father, grandparents, grandchild, stepbrother, step-sister, step-parents, parents-in-law, brother-in-law, sister-in-law, aunt, uncle, niece, nephew, guardian, and ward. • Carry out your responsibilities honestly, in good faith and with integrity, due care and diligence, exercising at all times the best independent judgment. • Comply with applicable government laws, rules and regulations of federal, state and local governments and other appropriate regulatory agencies. • Never to take, directly or indirectly, any action to coerce, manipulate, mislead, or fraudulently influence company officers, employees and borrowers. • Provide written disclosure of all financial terms of the transaction. • Never condone, engage in or be a party to questionable appraisal values, falsified selling prices, concealment of pertinent information and/or misrepresentation of facts, including the cash equity of the mortgagor in the subject property. • Not knowingly put Borrowers in jeopardy of losing their property through fraudulent, unsafe or unsound lending practices.

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• Affirm commitment to the Fair Housing Act and the Equal Credit Opportunity Act, and always treating Borrowers consistently and equitably. • Avoid providing legal advice.

Electronic Signatures Electronic signatures are allowed on initial disclosures and loan application forms when provided by an approved e-signature vendor (please refer to the resource center for a list of approved e-signature vendors). Third Party Documents are those documents that are originated and signed outside of the control of the Lender, such as the sales contract. FHA will accept electronic signatures on Third Party Documents in accordance with the E- Sign Act and the Uniform Electronic Transactions Act (UETA). Originators/Lenders choosing to use electronic signatures must fully comply with Electronic Signatures in Global and National Commerce Act (“E-Sign Act”) Compliance and Technology relating to disclosures, consent, intent to sign, presentation, delivery, and retention and must be provided by an approved e- signature vendor (please refer to the resource center for a list of approved e-signature vendors). Important: Intent to Sign utilizing electronic signatures must be established by the lender and its evidence includes but is not limited to: • An online dialog box or alert advising the Borrower that continuing the process will result in an electronic signature; • An online dialog box or alert indicating that an electronic signature has just been created and giving the Borrower an opportunity to confirm or cancel the signature; or • A click-through agreement advising the Borrower that continuing the process will result in an electronic signature.

Power of Attorney Requirements A Power of Attorney (POA) may not be used to sign loan application forms and disclosures unless the Mortgagee verifies and documents the permissible use of a POA meets the following requirements have been satisfied: • For military personnel, a POA may only be used for one of the applications (initial or final), but not both: o When the service member is on overseas duty or on an unaccompanied tour; o When the Lender is unable to obtain the absent Borrower’s signature on the application by mail or via fax; and o Where the attorney-in-fact has specific authority to encumber the Property and to obligate the Borrower. Acceptable evidence includes a durable POA specifically designed to survive incapacity and avoid the need for court proceedings. • For incapacitated Borrowers, a POA may only be used where: o A Borrower is incapacitated and unable to sign the loan application; o The incapacitated individual will occupy the Property to be insured; and o The attorney-in-fact has specific authority to encumber the Property and to obligate the Borrower. Acceptable evidence includes a durable POA specifically designed to survive incapacity and avoid the need for court proceedings. Note: The Originator/Lender is not permitted to have Borrowers sign documents in blank, incomplete documents, or blank sheets of paper. For guidance on use of POA on closing documents refer to Use of Power of Attorney in our Fannie Mae guidelines.

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Sales Contract and Supporting Addendums Only Borrowers are permitted to be listed and to sign the sales contract. Exception: The non-borrowing spouse or a family member who is not a borrower may take interest ownership of the property and be listed and sign the sales contract. The family relationship must be disclosed in order to allow an exception.

Amendatory Clause The sales contract must include an amendatory clause where the actual dollar amount of the sales price is stated in the contract. Increases to the sales price require a revised amendatory clause. An amendatory clause is not required in connection with: o HUD REO sales, o 203(k) mortgages (FCBM does not participate in this mortgage type) o Sales transactions in which the seller is: Fannie Mae, Freddie Mac, The Department of VA, USDA, other Federal, State and Local Government Agencies, a Lender selling an REO asset, or seller at a foreclosure sale, or o Sales in which the Borrower is a nonprofit agency (FCBM does not lend to borrowers that are nonprofit agencies).

Real Estate Certification The Borrower, Seller, and the Real Estate Agent or Broker involved in the sales transaction must certify, to the best of their knowledge and belief, that The terms and conditions of the sales contract are true and Any other agreement entered into by any parties in connection with the real estate transaction is part of, or attached to, the sales agreement. Note: A separate certification is not needed if the sales contract contains a statement that there are no other agreements between parties and the terms constitute the entire agreement between the parties, and all parties are signatories to the sales contract submitted at the time of underwriting.

HUD Required Disclosures The Originator/Lender must provide the Borrower any disclosure required by FHA, including the following Disclosures: Form HUD-92900-B, Important Notice to Homebuyers, Informed Consumer Choice Disclosure, Lead-Based Paint if the Property was built before 1978 on purchase transactions, For Your Protection: Get a Home Inspection Form HUD-92564-CN. Furthermore, the originator must obtain the Borrower’s authorization to verify the information needed to process the Loan Application.

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Statement of Appraised Value (Conditional Commitment Direct Endorsement Statement of Appraised Value) The Borrower must receive a copy of Form HUD-92800.5B. A statement of appraised value is not required in connection with: • HUD REO sales; • FHA’s 203(k) mortgage program (not an eligible FHA program at FCBM); • Sales in which the seller is: o Fannie Mae; o Freddie Mac; o VA; o USDA Rural Housing Services; o Other federal, state, and local government agencies; o A Lender disposing of REO assets; or o A seller at a foreclosure sale.

Note: If multiple borrowers are qualifying but the tax returns are not filed jointly (when one borrower requires full returns), then it is acceptable to provide W2 transcripts for the salaried borrower and 1040 transcripts for the self-employed borrower.

If using the W2 transcript option, when ordering the transcripts must be sure to select the W2 option on the 4506T. Do not use the 1040 transcript option on the 4506T order form.

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Amended Tax Returns If Tax returns were amended or filed late a Record of Account will be required and depending on the circumstances why the tax returns were amended, the resulting income from the amended returns is not always acceptable to FCBM and additional documentation may be required. The underwriter must use prudent judgment with respects to: "Did the borrower not qualify originally, and now with the amended returns the borrower now qualifies". If this is the case then the income per the amended returns will not acceptable to be used for qualifying purposes. The underwriter must clearly document how the income was calculated and why it was determined to be acceptable. Please contact your CRR for assistance (FCBM to order) FCBM will only order once it is confirmed by the customer that the amended returns are available. NOTE: The official IRS period for extension expires October 15; therefore, any loan closing after October 15 that requires tax returns for income verification must have a copy of the signed tax returns and the borrower will not qualify until the required 4506-T Tax Transcripts are received.

Income Taxes Owed on Tax Returns or Tax Transcripts If the tax returns or tax transcripts reflect taxes owed by the borrower(s) greater than $5,000, the following is required: • Proof of payment must be provided; or • Verified assets must cover the income tax liability owed in addition to the required funds for down payment, • closing costs and reserve requirements; or • Confirmation of a payment plan with the IRS and monthly payment is to be included in the DTI. Note: Acceptable documentation to confirm proof of payment includes a returned Account Transcript for the applicable year(s) reflecting no income tax liability due.

Excluded Parties The Originator/Lender may not contract with Entities or persons that are suspended, debarred, or otherwise excluded from participation in HUD programs, or under a Limited Denial of Participation (LDP) that excludes their participation in FHA programs. The Lender must ensure that no sponsored TPO or contractor engages such an Entity or person to perform any function relating to the origination of an FHA-insured Mortgage. The mortgage loan file must reflect that none of the participants in the mortgage transactions are listed on HUD’s LDP list, or in SAM as being excluded from participating in HUD transactions. The list may include but is not limited to: o Borrower(s) o Seller o Listing and Selling Real Estate Agent o Loan Originator o Loan Processor o Underwriter o Appraiser o Closing Agent o Title Company

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Eligible Borrowers • U.S. Citizens • Permanent Resident Aliens • Non-permanent Resident Aliens • Co-borrowers/cosigners • First-time homebuyers • Military Personnel • Living Trusts (primary residence only)

Qualified Mortgages/Ability to Repay A Qualified Mortgage (QM) loan for FHA/HUD purposes is a mortgage that complies with HUD’s definition of QM that also aligns with the regulatory criteria given by the Consumer Financial Protection Bureau (CFPB) /Dodd-Frank Rule. A QM mortgage loan is defined as mortgage loan made by the creditor/lender on the premise that a reasonable and good faith determination based on verified and documented information that the consumer/borrower has a reasonable ability to repay the mortgage loan based on the terms, all applicable taxes, insurance (including mortgage insurance) and assessments. The rule is effective on applications dated on or after January 10, 2014 The requirements for a mortgage to meet the QM criteria limits the points and fees charged in relation to the transaction, and prohibit risky loan features. Further, the creditor/lender must verify and document the consumer’s Ability to Repay the Qualified Mortgage (ATR/QM).

Florida Capital Bank Mortgage offers financing only to Qualified Mortgages that are originated and closed in accordance to FHA QM Guidelines and FCBM’s underwriting guidelines. Florida Capital Bank Mortgage offers financing only to Qualified Mortgages (QM) that complies with the criteria set forth by the U.S. Department of Housing and Urban Development (HUD ) making a mortgage eligible for either “Safe Harbor” or a “Rebuttable Presumption” in compliance with the “Ability to Repay/Qualified Mortgage” Rule (ATR/QM).

In order to meet HUD’s QM definition, mortgage loans must: • Require periodic payments without risky features; • Have terms not to exceed 30 years; • Limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (except for Title I, Title II Manufactured Housing, Section 184,Section 184A loans and others as detailed below); and • Be insured or guaranteed by FHA or HUD.

The rule establishes two types of Qualified Mortgages that have different protective features for consumers and different legal consequences for lenders. HUD’s Qualified Mortgage classifies a loan as either Rebuttable Presumption Qualified Mortgages or Safe Harbor Qualified Mortgages depending on the relation of the loan’s Annual Percentage Rate (APR) to the Average Prime Offer Rate (APOR), the rate for the average borrower receiving a conventional mortgage. The two categories of Qualified Mortgages are: • Safe Harbor QM loans: Are mortgages that are not Higher Priced Mortgage Loans (HPML) under Regulation “Z” for the APR is equal to or less than APOR + 115 bps + on-going MIP. • Rebuttable Presumption QM Loans: Are mortgages that are Higher Priced Mortgage Loans

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(HPML) under Regulation “Z”. In other words, will have an APR greater than APOR + 115 basis points (bps) + on-going Mortgage Insurance Premium (MIP) rate.

Higher Priced Mortgage Loans (HPML) Florida Capital Bank Mortgage allows Higher Priced Mortgage Loans (HPML) on FHA fixed rate mortgages that comply with all federal and state regulations. If the Qualified Mortgage is a Higher Priced Mortgage Loan, the loan is allowed with the presumption that the ability to repay requirements has been met. This includes the following: • Escrow Accounts are required on all first-lien HPMLs but are also required on all FHA loans so in each case, this requirement will be met. • Ability to repay is required to be documented on HPMLs. This requirement is met on all fully qualifying FHA loans. • The maximum DTI ratios cannot exceed 31/43%.

Compliance with all Applicable Laws, Rules and Requirements The Originator/Lender is required to comply with all federal, state and local laws, rules, and requirements applicable to the mortgage transaction, including all applicable disclosure requirements and the requirements of the Consumer Financial Protection Bureau (CFPB), including those related to: • Truth in Lending Act (TILA); • Real Estate Settlement Procedure Act (RESPA) and • Fair Credit Reporting Act.

Dual or Outside Employment If an employee of the originator/lender has other outside employment, including any self-employment it cannot create a prohibited conflict of interest. Conflict of interest: • Employees are prohibited from having multiple roles in a single FHA‐insured transaction. • Employees are prohibited from having multiple sources of compensation, either directly or indirectly, from a single FHA insured transaction.

Ineligible Transactions Energy Efficiency Mortgages (EEM) FHA Single Construction to Permanent financing FHA Back to Work Program Purchase or Refinances of Manufactured homes Home Equity Conversion Mortgage (HECMs) Temporary Interest Rate Buy-downs 203(k) transactions Disaster and 203(h) transactions 1 year, 3 year, 7 year or 10 year ARM transactions FHA Section 248 Indian Reservations and other Restricted Lands FHA Refinance Program for borrowers in negative Section 247 Single Family Mortgage Insurance on equity positions (also known as a “Short Hawaiian Home Lands Refinance”)

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Chain of Title A 12 months chain of title is required to be provided on all transactions. Also, the Underwriter must review the appraisal to determine if the subject property has been sold within 12 months prior to the case number assignment date and if so, the Underwriter must review evidence of prior ownership to determine if there are any undisclosed Identity-of-Interest transactions, and for compliance with Restrictions on Property Flipping.

Accuracy and Integrity of the Appraisal The DE Underwriter is responsible for identifying any problems or potential problems with the integrity, accuracy and thoroughness of the FHA appraisal and to confirm that FHA is listed on the appraisal report as an Intended User of the appraisal. FHA Appraisers must comply with the Uniform Standards of Professional Appraisal Practice (USPAP) and have the competency to appraise Properties intended to serve as collateral for FHA-insured mortgages. Furthermore, the Appraiser must certify that he/she has the necessary qualifications and access to all necessary data to complete the report and that he/she is capable of performing the appraisal.

Purchase Transactions: • A complete copy of the subject sales contract including all addendums, • The land lease, if leasehold; • Surveys if available, and; • Any other legal documents contained in the loan file. • For new construction, provide the appraiser with a fully executed form HUD-92541 "Builder's Certification of Plans, Specifications, and Site" dated no more than 30 days prior to the date of appraisal order. • If the new construction property is less than 90% complete, provide the appraiser with a floor plan, a plot plan, and exhibits necessary to determine size and level of finish. • If the new construction property is 90% or more complete, provide the appraiser with a list of components to be installed/ completed after the date of the appraisal.

For Refinance transactions: • The land lease, if leasehold; • Surveys if available; • Contract for deed / Land contract if applicable.

For Refinance transactions, if building on owned land: • If the new construction property is less than 90% complete, provide the appraiser with a floor plan, a plot plan, and exhibits necessary to determine size and level of finish. • If the new construction property is 90% or more complete, provide the appraiser with a list of components to be installed/ completed after the date of the appraisal.

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Ordering Second Appraisal The Originator/Lender is prohibited from ordering an additional appraisal to achieve an increase in value for the Property and/or the elimination or reduction of deficiencies and/or repairs required. Note: Properties that fall into the “Property Flipping” characteristics require a second appraisal.

Second Appraisal by Original Lender A second appraisal may only be ordered if the DE Underwriter determines the first appraisal is materially deficient and the Appraiser is unable or uncooperative in resolving the deficiency. The file must document the rejection of the deficient appraisal. The Originator/Lender must pay for the second appraisal.

Material deficiencies on appraisals are those deficiencies that have a direct impact on value and marketability. Material deficiencies include, but are not limited to: • Failure to report readily observable defects that impact the health and safety of the occupants and/or structural soundness of the house; • Reliance upon outdated or dissimilar comparable sales when more recent and/or comparable sales were available as of the effective date of the appraisal; and • Fraudulent statements or conclusions when the Appraiser had reason to know or should have known that such statements or conclusions compromise the integrity, accuracy and/or thoroughness of the appraisal submitted to the client.

Second Appraisal by Second Lender A second appraisal may only be ordered by the second lender under the following limited circumstances: • The first appraisal contains material deficiencies as determined by the DE Underwriter for the second lender; • The Appraiser performing the first appraisal is prohibited from performing appraisals for the second lender; or • The first lender fails to provide a copy of the appraisal to the second lender in a timely manner, and the failure would cause a delay in closing and harm to the Borrower, including loss of interest rate lock, violation of purchase contract deadline, occurrence of foreclosure proceedings and imposition of late fees.

Use of Second Appraisal For the first two cases outlined above, the lender must rely only on the second appraisal and ensure that copies of both appraisals are retained in the case binder to be submitted to FHA. For the third case above, the first appraisal must be added to the case binder if it is received.

The lender must document why a second appraisal was ordered and retain the explanation and all appraisal reports in the case binder.

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Ordering an Update to an Appraisal The lender may only order an update if: a) It is a Mortgagee listed as an Intended User of the original appraisal, or b) It has received permission from the original client and the Appraiser.

The Appraiser must incorporate the original report being updated via an attachment rather than by reference per Advisory Opinion 3 of the USPAP. The lender may use an update of appraisal only if all of the following can be met: • It is performed by the FHA Appraiser who performed the original appraisal, who is currently in good standing on the FHA Appraiser Roster; • The Property has not declined in value; • The building improvements that contribute value to the Property can be observed from the street or a public way; • The exterior inspection of the Property reveals no deficiencies or other significant changes; • The update of appraisal is ordered by the lender and completed by the Appraiser prior to the expiration of the initial 120-Day period; and • The original appraisal report was not previously updated.

Program Eligibility I. Purchase Transaction: The FHA Mortgage may finance the purchase of an existing1-4 unit residence, and may also finance a 1-4 unit residence through a Construction to Permanent Mortgage (only “End Financing” is permitted at FCBM). a. Properties to be acquired through an unrecorded land contract must be treated as a purchase. b. Note: If a borrower has refinanced their primary residence in the last 12 months they are not eligible for a purchase transaction on a new primary residence. II. Refinance Transaction: Is a new mortgage utilized when a Borrower with legal title on the Property and its proceeds are used to pay off any existing lien. a. Types of Refinances: o No Cash Out Refinance. o Cash-out refinances (not allowed on owner occupied homestead property in Texas). o Simple Refinance. o Streamline Refinance (Non-Qualifying) o Streamline Refinance (Credit Qualifying)

Purchase of a Short Sale Property Borrowers purchasing a home that is being sold under a short sale are generally eligible provided the following is documented: • The transaction is arm’s length with no relationship or identity of interest between buyer and seller. • The Short sale approval from existing mortgage lien holders accepting the discounted sales price on the subject property is be provided.

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Properties Listed For Sale The Property cannot be listed at time of application. If the property was listed for sale in the past 12 months the following applies: • For No Cash Out, Simple or Streamline Refinances: The property must be taken off the market on or prior to the loan application date. Note: Documentation must be provided evidencing the list agreement was terminated. • For Cash Out Refinances: The property must be off of the market for 90 days prior to loan application and the borrower must confirm in writing his/her intent to occupy the property by signing a notarized occupancy affidavit statement.

Borrower and Co-Borrower Eligibility Requirements • All Borrowers must meet FHA’s eligibility criteria in order to obtain FHA-insured financing. • A party who has a financial interest in the mortgage transaction, such as the seller, builder or real estate agent, may not be a co-Borrower or a Cosigner. Note: Exceptions may be granted when the party with the financial interest is a Family Member. Refer to the Identity of Interest section of this guide and the FHA SFH 4000.1 Handbook.

The lender must validate and document the SSN for each Borrower, co-Borrower, or Cosigner on the Mortgage by: • Entering the Borrower’s name, date of birth, and SSN in the Borrower/address validation screen through FHAC; and • Examining the Borrower’s original pay stubs, W-2 forms, valid tax returns obtained directly from the IRS, or other document relied upon to underwrite the Mortgage; and Inconsistencies or multiple Social Security Numbers must be resolved with the Social Security Administration.

Credit Score Requirement Each Borrower must meet FCBM’s minimum credit score requirement and the selected credit score for eligibility purposes will be the lower of all Borrowers’ minimum credit score. Note: Borrowers without traditional credit or with insufficient credit in order to generate a credit score are not eligible for financing at FCBM. To select the appropriate credit score for eligibility, the underwriter is to review the credit report and determine: • If all credit scores on the Borrower’s credit report are the same, that score will be considered the credit score for eligibility. • Where three differing scores are reported, the middle score is the credit score. • Where two differing scores are reported, the lowest score is the credit score. • Where only one score is reported, that score is the credit score.

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Product Credit Score and DTI Matrices DU Approve/Eligible

Transaction Type Credit Score Max DTI₁ Purchase 620* 50% 660 55%** No Cash Out Refinance 620* 50% 660 55%** Simple Refinance 620* 50% 660 55%** Cash Out 620* 50% 660 55%** Note: *Escrow repair and HUD REOs with Escrow repair holdback require a 640 minimum credit score ** 2-4 Unit Properties have a maximum DTI of 50%

₁FCBM: Additional Requirements for Loans with Gift Funds: Maximum DTI Ratios of 40/50% with AUS Approve/Eligible. Exceptions for increased ratios up to 45/55% are permitted if any one of the following criteria can be met: o Verification of satisfactory similar housing payment via cancelled checks or an institutional VOR documenting that the proposed housing payment (PITIA) is no more than 25% higher than current housing payment; new total debts are similar or lower than current debts; and the borrower(s) has no less than 3 traditional credit tradelines reporting with a 24 months history; or o The LTV is 95% and the minimum required investment of 3.5% is from the borrower own funds; or o The LTV is equal to, or less than 90% (all funds for down payment can be derived from gift funds); or o Significant additional income not reflected in qualifying income; or potential of increased earnings based on employment/education career; residual income. Note: 2-4 Unit Properties have a maximum DTI of 50% DU Refer/Eligible – Manual Downgrade

Transaction Type Credit Reserves Required Max DTI₁ Score Purchase 640 1 Month = 1-2 Unit Properties Requirements for Manual 3 Months = 3-4 Unit Properties Underwriting/Downgraded Loans: • No Cash Out 640 1 Month = 1-2 Unit Properties 31%/43% Meet acceptable manual underwriting requirements (no additional Refinance 3 Months = 3-4 Unit Properties compensating factors required). Simple Refinance 640 1 Month = 1-2 Unit Properties • 37%/47% Meet acceptable manual 3 Months = 3-4 Unit Properties underwriting requirements and at least one compensating factor*. Cash Out 640 1 Month = 1-2 Unit Properties • 40%/40% Meet acceptable manual 3 Months = 3-4 Unit Properties underwriting requirements and have no Streamline discretionary debt. Refinance 640 • 40%/50% Meet acceptable manual Credit Qualifying No reserves required underwriting requirements and at least two compensating factors*. and Non-Credit Note: Maximum DTI ratios do not apply to non- Qualifying credit qualifying streamline refinances. ₁FCBM: Loans with Gift Funds: Maximum DTI Ratio of 31/43%. *Refer to the table for Acceptable Compensating Factors section of these guides.

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Co-Borrower vs. Co-Signer Co-Borrower Co-Signer

A Co-Borrower(s) must: A Co-signer is liable for the debt and must: - Take title to the Property, - Sign the Note. - Be obligated on the Note or credit A Cosigner does not hold an ownership interest instrument, and in the subject Property and therefore, does not - Sign all security instruments sign the security instrument. Note: In community property states, the Non-Borrowing Spouse must execute all necessary loan documents to make the lien valid and enforceable under State Law.

The required documentation includes a copy of the Borrower’s military orders documenting his/her Active Duty status and that the current duty of station is more than 100 miles from the subject Property. Furthermore, the borrower must provide a signed and dated letter with his/her intent to occupy the subject Property upon discharge from military service.

Requirements: o A copy of the “Green Card” is required for all Permanent Resident Aliens (front and back of the card). o The Permanent Resident Alien must have a valid Social Security number and must have a minimum of 24 months of history of employment, residency and credit in the U.S. as well as adhering to additional documentation required by the program applied for within FCBM guidelines. Note: If less than 3 months is remaining on the Permanente Resident Alien’s “Green Card” from loan closing, the borrowers must provide a copy of their application for the renewal of their “Green Card”.

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• Non-Permanent Resident Aliens: Non-permanent resident aliens are considered eligible Borrowers provided all of the following are met: o Property will be the Borrower’s Principal Residence, o Borrower has a valid SSN (social security card cannot be used as evidence of work status or proof of immigration status), o Standards for determining stable monthly income, adequate credit history and sufficient liquid assets must be applied to each borrower who is a non-permanent resident alien to be no less than 2 years from loan application, o Borrower is eligible to work in the U.S., as evidenced by an unexpired Employment Authorization Document (EAD) issued by USCIS or by copy of unexpired visa. Below is a list of acceptable visas: . A Series (A-1, A-2, A-3): these visas are given to officials of foreign governments, immediate family members and support staff. Only those without diplomatic immunity, as verified on the visa, are allowed. . E-1 Treaty Trader and E-2 Treaty Investor: this visa is essentially the same as an H-1 or L-1; the title refers to the foreign country's status with the United States. . G series (G-1, G-2, G-3, G-4, G-5): these visas are given to employees of international organizations that are located in the United States. Some examples include the United Nations, Red Cross, World Bank, UNICEF and the International Monetary Fund. Verification that the applicant does not have diplomatic immunity must be obtained from the applicant's employer and/or by the viewing the applicant's passport. . H-1 (includes H-1B and H-1C), Temporary Worker: this is the most common visa given to foreign citizens who are temporarily working in the United States. . L-1, Intra-Company Transferee: an L-1 visa is given to professional employees whose company's main office is in a foreign country. . TN, NAFTA visa: used by Canadian or Mexican citizens for professional or business purposes. . TC, NAFTA visa: used by Canadian citizens for professional or business purposes. . NACARA: Cuba, El Salvador, Guatemala, and Nicaragua beneficiaries . Employment Authorization Document (EAD Card) or work permit issued by The Department of Homeland Security is acceptable under Category (C9, C9P, C10, C11, C16, C19, A4, A5, A12). . The EAD is not required if documentation from USCIS reflects that the Borrower is a refugee or was granted asylum status. Note: If the EAD will expire within one (1) year, then document prior history of renewals as acceptable evidence of continued/residency status and the Underwriter may assume that continuation will be granted. If there are no prior renewals, the Underwriter must determine the likelihood of renewal based on information from the USCIS; this may be require for the borrowers to provide a letter explaining their intention to remain in the country.

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• Diplomatic Immunity: Due to the inability to compel payment or seek judgment, transactions with individuals who are not subject to United States jurisdiction are not eligible for FHA financing. This includes embassy personnel with diplomatic immunity. Verification the borrower does not have diplomatic immunity can be determined by reviewing the visa, passport or the U.S. Department of State's Diplomatic List at http://www.state.gov/s/cpr/rls/ • Foreign Nationals: Foreign nationals who have no lawful residency status in the U.S. are not considered to be non-permanent resident aliens and are not eligible for FHA financing.

CAIVRS HUD’s Credit Alert Verification Reporting Systems (CAIVRS) screening is required on each Borrower and any Co-Borrower. All negative alerts must be satisfactorily resolved before the application can proceed (refer to section regarding Borrower Ineligibility due to Delinquent Federal Tax or Non-Federal Tax Debt). Note: CAIVRS is not required to be obtained for Non-Borrowing Spouses.

The Underwriters may obtain information on delinquent federal debts from public records, credit reports or equivalent, and must check all Borrowers against the Credit Alert Verification Reporting System (CAIVRS).

Verification and Documentation Requirement If a delinquent federal debt is reflected in a public record, credit report or equivalent, or CAIVRS or an Equivalent System, the Underwriter must verify the validity and delinquency status of the debt and ensure that there is not a tax lien placed against their Property for a debt owed to the federal government. If the debt was identified through CAIVRS, the Creditor agency using the contact phone number and debt reference number reflected in the Borrower’s CAIVRS report must be contacted to verify the debt. If the Creditor confirms the debt is valid and in delinquent status, then the Borrower is ineligible for an FHA-insured Mortgage until the Borrower resolves the debt with the Creditor.

Documentation from the creditor/agency reflecting verification of the delinquent debt and/or of the resolution of the debt must be obtained. For debts reported through CAVIRS, the Underwriter may obtain a clear CAIVRS report as evidence of resolution.

Note: The Underwriter may not deny the loan solely on the basis of CAIVRS information that has not been verified by contacting the Creditor. If resolved either by determining that the information in CAIVRS is no longer valid or by resolving the delinquent status as stated above, the Underwriter may continue with the Mortgage Application.

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Borrower Ineligibility Due to Delinquent Federal Tax Debt Borrowers with delinquent Federal Tax Debt are ineligible. However, Federal and State Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three (3) months. The agreed upon payment amount must be included in the calculation of the Borrower’s Debt-to-Income (DTI) ratio. The Underwriter must obtain evidence from the IRS of the repayment agreement and verification of payments made.

Note: The Borrower cannot prepay the scheduled payments in order to meet the required minimum of three months of payments.

Eligibility Period for Borrowers Delinquent on FHA-Insured Mortgages If a Borrower is currently delinquent on an FHA-insured Mortgage, they are ineligible for a new FHA- insured Mortgage unless the delinquency is resolved.

Important: The Borrower must indicate on the Uniform Residential Loan Application (URLA) – 1003 that the Property will be the Borrower’s Principal Residence and certify to that fact on form HUD-92900-A, HUD/VA Addendum to URLA.

FHA Insured Mortgages FHA will not insure more than one Property as a Primary Residence for any Borrower, except as noted below. FCBM will not allow FHA financing as a vehicle for obtaining Investment Properties, even if the Property to be insured will be the only one owned using FHA Mortgage Insurance.

Exceptions to the FHA Policy Limiting the Number of Mortgages per Borrower The table below describes the only circumstances in which a Borrower with an existing FHA-insured Mortgage for a Primary Residence may obtain an additional FHA-insured Mortgage on a new Primary Residence.

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See below the policy exception eligibility requirements

Policy Exception Eligibility Requirements Relocation A Borrower may be eligible to obtain another FHA-insured Mortgage without being required to sell an existing Property covered by an FHA-insured Mortgage if the Borrower is: - Relocating or has relocated for an employment-related reason; and - Establishing or has established a new Principal Residence in an area more than 100 miles from the Borrower’s current Principal Residence. If the Borrower moves back to the original area, the Borrower is not required to live in the original house and may obtain a new FHA- insured Mortgage on a new Principal Residence, provided the relocation meets the two requirements above. Increase in Family Size A Borrower may be eligible for another house with an FHA-insured Mortgage if the Borrower provides satisfactory evidence that: - The Borrower has had an increase in legal dependents and the Property now fails to meet family needs; and - The Loan-to-Value (LTV) ratio on the current Principal Residence is equal to or less than 75% or is paid down to that amount, based on the outstanding Mortgage balance and a current residential appraisal. Vacating a Jointly-Owned A Borrower may be eligible for another FHA-insured Mortgage if the Property Borrower is vacating (with no intent to return) the Principal Residence which will remain occupied by an existing co-Borrower. Non-Occupying Co-Borrower A non-occupying co-Borrower on an existing FHA-insured Mortgage may qualify for an FHA-insured Mortgage on a new Property to be his/her own Principal Residence. Note: Second Home Residences are not eligible for financing at FCBM even though a Second Home may be permitted with written approval from the Jurisdictional HOC.

FHA does not provide financing for Investment Property residences. (Exception is permitted by FHA for investment properties when the Borrower is a HUD-approved Nonprofit Organization, or a State and local Government Agency or an Instrumentality of the Government; however, these types of Borrowers are not eligible for financing at FCBM).

Seven Unit Limitation HUD’S seven-unit limitation prohibits any borrower, including nonprofit organizations, state and local government agencies, and private investors from obtaining FHA-insured financing for a property that may be rented if it has or will have a financial interest in more than seven rental units (regardless of financing type on those properties) The underwriter must obtain a completed form HUD-92561 “Borrower’s Contract with Respect to Hotel and Transient Use of Property” for each Mortgage secured by a Single Family dwelling that is one of a group of five or more dwellings owned by the Borrower within a two block radius.

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Property Eligibility and Acceptability Criteria Special Flood Hazard Areas The Lender must determine if the Property is located in a Special Flood Hazard Area (SFHA) as designated by the Federal Emergency Management Agency (FEMA) by obtaining flood zone determination certificate to cover the Life of the Loan. If applicable, the Lender must also obtain a: • FEMA Letter of Map Amendment; • FEMA Letter of Map Revision; or • FEMA National Flood Insurance Program Elevation Certificate (FEMA 81-31).

A Property is not eligible for FHA insurance if: • A residential building and related improvements to the Property are located within SFHA Zone A, a Special Flood Zone Area, or Zone V, a Coastal Area, and insurance under the National Flood Insurance Program (NFIP) is not available in the community; or • The improvements are, or are proposed to be, located within a Coastal Barrier Resource System (CBRS) Note: see specific sections on required documentation and coverage for proposed or new construction below. • Proposed or New Construction in Special Flood Hazard Area (SFHAs): If any portion of the dwelling, related Structures or equipment essential to the value of the Property and subject to flood damage is located within an SFHA, the Property is not eligible for FHA mortgage insurance unless the Mortgagee: • Obtains from FEMA a final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removes the Property from the SFHA; or • Obtains a FEMA National Flood Insurance Program Elevation Certificate (FEMA Form 81-31) prepared by a licensed engineer or surveyor. The elevation certificate must document that the lowest floor including the basement of the residential building, and all related improvements/equipment essential to the value of the Property, is built at or above the 100-year flood elevation in compliance with the NFIP criteria, and insurance under the NFIP is obtained. • Existing Construction in Special Flood Hazard Area (SFHAs): When any portion of the residential improvements is determined to be located within an SFHA, insurance under the NFIP must be obtained. • Condominium Property in Special Flood Hazard Area (SFHAs): The Lender must ensure the Homeowners’ Association (HOA) obtains insurance under the NFIP on buildings located within the SFHA. The flood insurance coverage must protect the interest of the Borrowers who hold title to an individual unit, as well as the common areas of the Condominium Project.

Required Flood Insurance Amount For Properties located within a SFHA, flood insurance must be maintained for the life of the Mortgage in an amount at least equal to the lesser of: o The Appraiser’s estimated replacement cost, less the Appraiser’s estimated site value; o The outstanding balance of the Mortgage, less estimated land costs; or o The maximum amount of the NFIP insurance available with respect to the property improvements. Important: Properties Located within Coastal Barrier Resources are not eligible for FHA financing.

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Owner of Record The Property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. The lender must obtain documentation verifying that the Seller is the Owner of Record that is not limited to: • A property sales history report; • A copy of the recorded deed from the seller; or • Other documentation, such as a copy of a property tax bill, title commitment, or binder, demonstrating the seller’s ownership of the Property and the date it was acquired. Important: This requirement applies to all FHA purchase money transactions, regardless of the time between re-sales.

Restrictions on Property Flipping Property Flipping refers to the purchase and subsequent resale of a Property in a short period of time for a considerable profit.

FHA Time Restriction on Transfers of Title: The eligibility of a Property for FHA Mortgage Insurance is determined by the time that has elapsed between the date the seller acquired the Property and the date of execution of the sales contract for the new FHA purchase transaction. The Lender must obtain a 12 month chain of title documenting compliance with time restrictions on resales as noted below.

Resale within 90 days from Seller Acquisition: Any resale of the Property within 90 days from the date of the Seller’s acquisition is not permitted.

Exceptions to this time restrictions are identified below: o Properties acquired by an employer or relocation agency in connection with the relocation of an employee; o Re-sales by HUD under its REO program; o Sales by other U.S. government agencies of Single Family Properties pursuant to programs operated by these agencies; o Sales of Properties by nonprofits approved to purchase HUD owned Single Family Properties at a discount with resale restrictions; o Sales of Properties that are acquired by the seller by inheritance; o Sales of Properties by state and federally-chartered financial institutions and Government-Sponsored Enterprises (GSE); o Sales of Properties by local and state government agencies; and o Sales of Properties within PDMDAs, only upon issuance of a notice of an exception from HUD. Note: HUD’s flipping restrictions do not apply to a Builder selling a newly built home or building a home for a Borrower.

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o The Originator/Lender to obtain a second appraisal to validate the Property value; o The cost of the second appraisal cannot be paid by the Borrower (it may be paid by the Seller or Originator/Lender); o The second appraisal must be completed by independent FHA roster Appraisers who is currently state licensed; o Repairs, recommended by either Appraiser (original or second appraisal) must be completed prior to Closing if the repairs are necessary in order to meet FHA Minimum Property Standards; o If the difference in appraised values is greater than 5% between the two appraisals, the lower value must be used in determining the adjusted value and the maximum loan amount: . If the difference is appraised values < 5%; the maximum loan amount can be based off of the first appraisal and the Underwriter must comment in the 92900-LT on selected appraisal used to determine the adjusted value. . The Conditional Commitment and the appraisal logging in FHA Connection should reflect the Appraisal selected by the Underwriter.

Eligible Property Types 1-4 units * Condominiums Units within an FHA Site Condominium Unit (does not

approved Project have to be FHA Approved)

PUD's Detached & Attached Single Family Attached/Townhouse Single Family Detached

Important on 2-4 Unit Properties: The Lender must obtain a completed form HUD-92561, Borrower’s Contract with Respect to Hotel and Transient Use of Property.

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Ineligible Property Types Commercial Use: Condotels, Motel, Residences lacking kitchen Properties with Water Unimproved land Working farms, ranches, and full bathroom facilities Purification Systems orchards, Bed and Breakfast.

Excess of 20 acre No Land Trusts / Illinois Cooperatives Geodesic Domes properties Land Trusts

"Live-Work" loft-style Houseboats Unique Properties Mobile Homes Condominiums

Transient Housing, Manufactured housing Condominium Unit Vacation Homes, Private that less than 400 Metal Buildings Clubs, fraternity and Property subject to square feet sorority houses. Property Assessed Clean Energy (PACE) obligation

Properties with deed Properties with unexpired Condominium Unit restrictions that limit right of redemption periods Timeshare or segmented located in a non- transferability of title, or after a foreclosure or tax sale ownership properties approved FHA project contain a “first right of have occurred (except in the refusal provision State of Alabama*)

Note:* See the requirements for Right of Redemption in Alabama in the Conventional Collateral guidelines.

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• Two Units: 2 Unit Property is a Single Family residential Property with two individual dwellings. The Underwriter must obtain a completed HUD Form HUD-92561 “Borrower’s Contract with Respect to Hotel and Transient Use of Property” from the applicant. • Three to Four Units: 3 to 4 Unit Properties is a Single Family residential Property with three to four individual dwellings. The Underwriter must obtain a completed HUD Form HUD-92561 “Borrower’s Contract with Respect to Hotel and Transient Use of Property” from the applicant.

3-4 Unit Property Self-Sufficiency Eligibility The 3-4 Unit property must be self-sufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100%). In other words, the net self-sufficiency of the rental income produced or to be produced by the subject property over and above the PITIA. Net self-sufficiency rental income for three and four unit property is calculated using the following formula: 1. Using the Appraiser’s estimate of fair market rent from all units, including the unit the Borrower chooses for occupancy, and 2. Minus the greater of the a. Appraiser’s estimate for vacancies and maintenance, or b. 25% of the fair market rent. This net rental income calculation is used to determine the maximum loan amount. Borrowers must still qualify for the mortgage based on • Income • Credit • Cash to close, and • Projected rents received from remaining units. Projected rent may only be considered gross income for qualifying purposes. It cannot be used to offset the monthly mortgage payment.

Note: Please refer to our resource center to complete the 3-4 Family Unit Worksheet to verify self-sufficiency and eligibility for maximum loan amount.

Mix Use of Property Mixed Use 1-4 Unit Single Family Properties are eligible for FHA financing, provided that: • A minimum of 51% of the entire building square footage is for residential use; and • The commercial use will not affect the health and safety of the occupants of the residential Property.

Property Assessed Clean Energy (PACE) Not eligible for financing at FCBM

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Legal Restriction on Conveyance (Free Assumability) The Underwriter must determine if there are any legal restrictions on conveyance in accordance with 24 CFR § 203.41.

A Property that contains leased equipment, or operates with a leased energy system or Power Purchase Agreement (PPA), may be eligible for FHA-insured financing but only when such agreements are free of restrictions that prevent the Borrower from freely transferring the Property.

Such agreements are acceptable, provided they do not cause a conveyance (ownership transfer) of the insured Property by the Borrower to: • Be void, or voidable by a third party; • Be the basis of contractual liability of the Borrower (including rights of first refusal, pre-emptive rights or options related to a Borrower’s efforts to convey); • Terminate or be subject to termination all or part of the interest held by the Borrower; • Be subject to the consent of a third party; • Be subject to limits on the amount of sales proceeds a Borrower can retain (e.g., due to a lien, “due on sale” clause, etc.); • Be grounds for accelerating the insured Mortgage; or • Be grounds for increasing the interest rate of the insured Mortgage. Any restrictions resulting from provisions of the lease or PPA do not conflict with FHA regulations unless they include provisions encumbering the Real Property or restricting the transfer of the Real Property.

Legal restrictions on conveyance of Real Property (i.e., the house) that could require the consent of a third party (e.g., energy provider, system owner, etc.), include but are not limited to, credit approval of a new purchaser before the seller can convey the Real Property, unless such provisions may be terminated at the option of, and with no cost to, the owner.

If an agreement for an energy system lease or PPA could cause restriction upon transfer of the house, the Property is subject to impermissible legal restrictions and is generally ineligible for FHA insurance.

Allowable Sections of the Housing Act at FCBM • 203B: Owner Occupied 1-4 Family & Detached Condos • Detached Condo ADP Code 734 • 234C: Condo • XXXX/251: Adjustable Rate Mortgages (only 5/1 ARMs are eligible at FCBM)

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Mortgage Parameters The maximum loan amount is to be calculated as a percentage of the Adjusted Value or the maximum County Nationwide Limits. The maximum LTV ratios vary depending upon on the loan purpose (purchase or refinance), Borrower, program type, and stage of construction. • The Adjusted Value for Purchase transactions is the lesser of: o Purchase Price less any inducements to purchase; or o The Property Value. • The Adjusted Value for Refinance transactions depends upon length of ownership: • For a property acquired by the Borrower within 12 months of the case number assignment date, the Adjusted Value is the lesser of: . The Borrower’s purchase price, plus any documented improvements made subsequent to the purchase; or . The Property Value. • For a property acquired by the Borrower within 12 months of case number assignment by inheritance or through a gift from a Family Member, may utilize the calculation of Adjusted Value for properties purchased 12 months or greater. • For properties acquired by the Borrower greater than or equal to 12 months prior to the case number assignment date, the Adjusted Value is the Property Value.

Financing of Upfront Mortgage Insurance Premium The loan amounts and LTVs restrictions are based on the loan amount before the financing of the Upfront Mortgage Insurance Premium (UFMIP) (based on the “Base Loan Amount”). Thus the total loan amount may exceed National County Limits by the amount financed of the UFMIP.

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Calculating Maximum Mortgage Amounts on Purchase Transactions The Borrower must make a Minimum Required Investment (MRI) of at least 3.5% of the Adjusted Value and he maximum loan amount on a Purchase is calculated by taking the maximum LTV for the selected program and multiplying it by the lesser of the Adjusted Value, and not to exceed FHA Statutory Loan Limit for the applicable county.

Purchase Transactions with An Identity-of-Interest An Identity-of-Interest transaction is a sale between parties with an existing business relationship (refers to an association between individuals or companies entered into for commercial purposes), or between family members. Family Member is defined as follows, regardless of actual or perceived sexual orientation, gender identity, or legal marital status: • Child, parent, or grandparent; o a child is defined as a son, stepson, daughter, or stepdaughter; o a parent or grandparent includes a step-parent/grandparent or foster parent/grandparent; • Spouse or domestic partner; • Legally adopted son or daughter, including a child who is placed with the Borrower by an authorized agency for legal adoption; • Foster child; • Brother, stepbrother; • Sister, stepsister; • Uncle; • Aunt; or • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the Borrower.

Maximum LTV for Identity-of-Interest Transactions . The maximum LTV percentage for an Identity-of-Interest transaction on Primary Residences is restricted to 85%. . The maximum LTV percentage where a tenant/landlord relationship exists at the time of contract execution is restricted to 85%.

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Residence. c) Corporate Transfer: - The 85% LTV restriction may be exceeded if a corporation transfer an employee to another location, purchases the employee’s house, and sells it to another employee. d) Tenant Purchase: - The 85% LTV restriction may be exceeded if the current tenant purchases the Property where the tenant has rented the Property for at least six months immediately predating the Sales Contact. A lease or other written evidence to verify occupancy is required.

LTV Limitations when there is a Non-Occupying Borrower For Non-Occupying Borrower Transactions, the maximum LTV is 75%. The LTV can be increased to 96.5% if the Non-Occupying Co-Borrower is a Family Member of the Occupying Borrower, so long the transaction does not involve: • A Family Member selling to a Family Member who will be a non- occupying co-Borrower; or • A transaction on a two- to four-unit Property.

Required Investment Total Required Investment Minimum Required Investment (MRI) Total Required Investment refers to the amount Minimum Required Investment (MRI) refers to the the Borrower must contribute to the transaction Borrower’s contribution required which represents including the Borrower’s downpayment and the at least 3.5% of the Adjusted Value of the Property. Borrower-paid transaction costs. The Total Required Investment includes the Minimum Required Investment (MRI). Note: *Closing costs (non-recurring closing costs, prepaid expenses and discount points if any) may not be used to help meet the borrower’s minimum required investment). *Credit Card Payment for Appraisal/Credit Report The borrower may use a credit card to pay for the appraisal and/or credit report. However, these costs cannot be considered to help meet the required investment.

Calculating Maximum Mortgage Amounts on New Construction For New Construction transactions, the maximum LTV is determined in accordance with New Construction program requirements described in the New Construction section of these guides.

Calculating Maximum Mortgage Amounts on Refinances For refinance transactions, the maximum LTV is determined in accordance with Refinance program specific requirements described in the Refinances section of these guidelines.

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Paying Off Land Contracts When the purpose of the new mortgage is to pay off an outstanding recorded land contract, the unpaid principal balance shall be deemed to be the outstanding balance of the recorded land contract. Properties to be acquired through an unrecorded land contract must be treated as a purchase.

Proof of land ownership must be documented with a copy of the Settlement Statement/Closing Disclosure or similar legal document.

The Underwriter must document the required funds to close in accordance with either AUS Approve/Eligible or Manual Underwriting as applicable. If the land was given as a gift to the Borrower, the Underwriter must verify that the donor was an acceptable donor and obtain standard gift documentation for any gift of land.

Additional requirements include: • The builder must be a licensed general contractor. • The Borrower may act as the general contractor, only if the Borrower is also a licensed general contractor. • No cash back can be received at closing.

LTV Limits When building on a borrower’s own property, appropriate LTV limits are applied to the lesser of the; • Property Appraised Value d; or • The documented acquisition cost of the property. Documented acquisition cost of the property includes: • Builder’s price or sum of all subcontractor bids and materials; if the land is purchased from the builder, the cost must be included in the builder’s price to build. • Value of the land as shown in the site value of the appraisal; and • Interest and other costs association with any construction loan obtained by the borrower to fund the construction of the property. • Verify the cost and date of purchase of the land. If land is already owned, a copy of the Settlement Statement or similar legal document must be provided. Note: The Borrower may not receive cash back from the additional equity in the Property, but the Borrower may replenish his/her own cash expenditures for any paid extras over and above the contract specifications and any out-of-pocket expenses not included in the builder’s price. For this, the Underwriter must obtain an itemization of the extras and expenses and the cost of each item that the Borrower has paid.

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Refinance Transactions A Refinance is used to pay off the existing debt or to withdraw equity from the Property with the proceeds of a new Mortgage for a Borrower with legal title to the subject Property. At least one Borrower on the refinance must hold title to the Property being refinanced prior to case number assignment.

If the Borrower is refinancing his/her current FHA-insured Mortgage to another FHA- insured Mortgage within three (3) years, a refund credit is applied to reduce the amount of the Upfront Mortgage Insurance Premium (UFMIP) paid on the refinanced Mortgage. Refunds are based on the number of months the loan is insured through the date of the new refinance loan closing month.

Table for Upfront Mortgage Insurance Premium Refunds

Upfront Mortgage Insurance Premium Refund Percentages Year Month of Year after the Existing FHA Loan Closed 1 2 3 4 5 6 7 8 9 10 11 12 1 80 78 76 74 72 70 68 66 64 62 60 58 2 56 54 52 50 48 46 44 42 40 38 36 34 3 32 30 28 26 24 22 20 18 16 14 12 10 Example: Existing FHA Mortgage debt closed in June 2014 and the new FHA refinance debt closes on November 2015, a total of 18 months have passed (or 1 year and 6 months); therefore the refund factor for this example will be 46% (use the 2nd year factor plus 6 months).

Important: The FHA Case Assignment ordered with information regarding the existing Mortgage debt being FHA will provide the Refinance Authorization information containing the property refund percentage and the amount based on the month the new FHA refinance is closing.

Cash-Out A Cash-Out Refinance is a refinance of any Mortgage or a withdrawal of equity where no Mortgage currently exists, in which the mortgage proceeds are not limited to specific purposes.

Eligibility Income from a non-occupant co- Borrower may not be used to qualify for a cash-out refinance. The Property must have been owned and occupied by the Borrower as their Primary Residence for the 12 months prior to the date of case number assignment. Except in the case of inheritance, a Borrower is not required to occupy the Property for a minimum period of time before applying for a cash-out refinance, provided the Borrower has not treated the subject Property as an Investment Property at any point since inheritance of the Property.

If the Borrower rents the Property following inheritance, the Borrower is not eligible for cash-out refinance until the Borrower has occupied the Property as a Principal Residence for at least 12 months.

The Underwriter must review the Borrower’s employment documentation or obtain utility bills to evidence the Borrower has occupied the subject Property as their Primary Residence for the 12 months prior to case number assignment.

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Payment History Requirements and Documentation The Underwriter must verify and document that the Borrower has made all payments for all Mortgages for the previous 12 months or since the Borrower obtained the Mortgages, whichever is less. Additionally, the mortgage payments for all mortgages secured by the subject Property must have been paid within the month due for the month prior to mortgage Disbursement.

At least six (6) months of mortgage payment must be made to be eligible for cash out refinance. While properties owned free and clear may be refinanced as cash-out transactions.

If the mortgage on the subject Property is not reported in the Borrower’s credit report or is not in the name of the Borrower, the Underwriter must obtain a Verification of Mortgage (VOM), bank statements or other documentation evidencing that all payments have been made by the Borrower in the month due for the previous 12 months. Payoff statement for all existing Mortgages on the subject property.

Maximum Loan-to-Value and Maximum Combined Loan-to-Value o The maximum LTV is 85% of the Adjusted Value. o The maximum CLTV is 85 percent of the Adjusted Value. The combined mortgage amount of the first Mortgage and any subordinate liens cannot exceed the Nationwide Mortgage Limit described in National Housing Act’s Statutory Limits

No Cash Out Refinances: A No Cash-Out Refinance is a refinance of any Mortgage in which the mortgage proceeds are limited to the purpose of extinguishing the existing debt and costs associated with the transaction. FHA offers three types of no cash-out refinances:

Rate and Term Rate and Term refers to a no cash-out refinance of any Mortgage in which all proceeds are used to pay existing mortgage liens on the subject Property and costs associated with the transaction.

Borrower Eligibility Rate and Term refinance transactions are only permitted on owner occupied Primary Residences. The Underwriter must review the Borrower’s employment documentation or obtain utility bills to verify the Borrower currently occupies the Property and to determine the length of time the Borrower has occupied the subject Property as his/her Primary Residence.

Payment History Requirements (Manually Underwritten-Downgraded Loans) For all mortgages on all properties with< than six (6) months of Mortgage Payment history: the Borrower must have made all payments within the month due.

For all mortgages on all properties with > than six (6) months history: the Borrower must have made all Mortgage Payments within the month due for the six months prior to case

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number assignment and have no more than one (1) 30 Day late payment for the previous six months for all Mortgages.

Documentation The Borrower must have made the payments for all Mortgages secured by the subject Property for the month prior to mortgage Disbursement.

Maximum Loan-to-Value Ratio and Maximum Combined Loan-to-Value The maximum LTV/CLTV for a Rate and Term refinance is: o 97.75% LTV/97.75% CLTV if property has been owner-occupied for previous 12 months or owner-occupied since acquisition if acquired within 12 months, of the case number assignment date. o 85% LTV/97.75% CLTV if subject property has been occupied as a primary residence for less than 12mos from date of new case number assignment; or if owned less than 12mos, it has not been occupied for that entire ownership period.

Calculating Maximum Loan Amount The Lesser of: a) The FHA Loan Limits; b) The maximum LTV based on the LTV ratio above; or c) The sum of existing debt and costs associated with the transaction as follows: Existing debt includes: . The unpaid principal balance of the first mortgage as of the month prior to mortgage Disbursement; . The unpaid principal balance of any purchase monthly junior mortgages as of the month prior to mortgage Disbursement; . The unpaid principal balance of any junior liens over twelve (12) months old as of the date of mortgage disbursement*. If the balance or any portion of an equity line of credit in excess of $1,000 was advanced within the past twelve (12) months and was for purposes other than repairs and rehabilitation of the property, the portion above and beyond $1,000 of the line of credit is not eligible for inclusion in the new mortgage; *In order to pay off the non-purchase money junior lien with loan proceeds, FHA now requires at least 12 months seasoning on that junior lien (even if the proceeds were used for repair or rehabilitation). . Ex-spouse or Co-Borrower equity; as described in Refinancing to Buy out Title-Holder Equity; . Interest due on the existing mortgage(s); . Mortgage Insurance Premium (MIP) on the existing mortgage; . Any prepayment penalties assessed; . Late charges; and . Escrow shortages. Allowed costs include all Borrower paid costs associated with the new mortgage; and

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Any Borrower – paid repairs required by the appraisal. d) Less any refund of the Upfront Mortgage Insurance Premium (UFMIP). Important: If HELOC, must use the maximum accessible credit limit of the subordinate lien to calculate the CLTV ratio. Also, the cash back to the borrower cannot exceed $500

Refinancing to Buy Out Title-Holder Equity When the purpose of the new Mortgage is to refinance an existing Mortgage to buy out the existing equity of another title-holder, the specified equity to be paid is considered property-related indebtedness and eligible to be included in the new mortgage calculation. The Underwriter must obtain the divorce decree, settlement agreement, or other legally enforceable equity agreement to document the equity awarded to the title-holder.

Refinancing to Pay off Recorded Land Contracts When the purpose of the new Mortgage is to pay off an outstanding recorded land contract, the unpaid principal balance shall be deemed to be the outstanding balance on the recorded land contract.

Use of Estimates in Calculating Maximum Mortgage Amount The Underwriter may utilize estimates of existing debts and costs in calculating the maximum mortgage amount to the extent that the actual debts and costs do not result in the Borrower receiving more than $500 cash back at loan disbursement.

Refund from Unused Escrow Balance Cash to the Borrower resulting from the refund of Borrowers unused escrow balance from the previous Mortgage must not be considered in the $500 cash back limit whether received at or subsequent to mortgage Disbursement.

Excess Cash Back When the estimated costs utilized in calculating the maximum loan amount result in greater than $500 cash back to the Borrower at loan disbursement; the lender may reduce the Borrower’s outstanding principal balance to satisfy the $500 cash back requirement. The new refinance must be submitted to FHA at the reduced principle amount at the time for loan endorsement. Important: The payoff statement on all existing mortgages must be obtained and used in the calculation of the loan amount on all refinance types

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Simple Refinance Simple Refinance refers to a no cash-out refinance of an existing FHA-insured Mortgage in which all proceeds are used to pay the existing FHA-insured mortgage lien on the subject Property and costs associated with the transaction. Borrower Eligibility Simple Refinance is only permissible for owner-occupied Primary Residence

Documentation The Underwriter must review the Borrower’s employment documentation or obtain utility bills to evidence the Borrower currently occupies the Property as his/her Primary Residence.

Payment History Requirements (Manually Underwritten-Downgraded Loans) For all mortgages on all properties with < than six (6) months of Mortgage Payment history; the Borrower must have made all payments within the month due.

For all mortgages on all properties with > than six (6) months history: the Borrower must have made all Mortgage Payments within the month due for the six months prior to case number assignment and have no more than one (1) 30 Day late payment for the previous six months for all Mortgages. The Borrower must have made the payments for all Mortgages secured by the subject Property for the month prior to mortgage Disbursement.

If the Mortgage on the subject Property is not reported in the Borrower’s credit report, the Underwriter must obtain a verification of Mortgage to evidence payment history for the previous twelve (12) months

Maximum Loan-to-Value Ratio and Maximum Combined Loan-to-Value The maximum LTV/CLTV for a Simple refinance is: 97.75% LTV/97.75% CLTV

Calculating Maximum Loan Amount The maximum mortgage amount for a Simple Refinance is the lesser of: a) The FHA Loan Limits;

b) The maximum LTV based on the LTV ratio above; or

c) The sum of unpaid existing principal balance of the FHA-insured first mortgage, allowed closing costs, pre-paid items associated with the new transaction as follows:

Existing debt includes: . The unpaid principal balance of the first mortgage as of the month prior to mortgage Disbursement; . Interest due on the existing Mortgage; . MIP due on existing Mortgage;

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. late charges; and . escrow shortages; Allowed costs include all Borrower paid costs associated with the new Mortgage; and Borrower-paid repairs required by the appraisal; d) Less any refund of the Upfront Mortgage Insurance Premium (UFMIP). The Underwriter must use estimates of existing debts and costs in calculating the maximum mortgage amount to the extent that the actual debts and costs do not result in the Borrower receiving greater than $500 cash back at loan disbursement.

Note: FHA will not issue a new case number for any FHA to FHA refinance where the existing mortgage to be paid off has a Repair or Rehabilitation escrow account that has not been electronically closed out in FHA Connection.

On the date of the FHA case number assignment: o The Borrower must have made all mortgage payments for all mortgages on the property within the month due for at least six (6) months prior to the FHA Case Number assignment and have no more than 1x30 day late payment for the previous six (6) months; o At least six (6) full months must have passed since the first payment due date of the mortgage that is being refinanced; o At least 210 Days must have passed from the Disbursement Date of the mortgage that is being refinanced; and o If the Borrower assumed the mortgage that is being refinanced, they must have made six payments since the time of assumption.

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Net Tangible Benefit of Streamline Refinances The Underwriter must determine that there is a net tangible benefit to the Borrower meeting the standards in the chart below for all Streamline Refinance transactions. A Net Tangible Benefit is: • A reduced Combined Rate (refers to the interest rate on the mortgage plus the MIP rate), • A reduced term*, and/or • A change from an ARM to a fixed rate Mortgage, That results in a financial benefit to the Borrower.

* If a reduction in term, the Net Tangible Benefit is met if: • The remaining amortization period of the existing mortgage is reduced; • The new interest rate does not exceed the current interest rate; and • The combined principal, interest and the monthly paid MIP (P&I + Mo. MIP) of the new Mortgage does not exceed the combined principal, interest and the monthly paid MIP (P&I + Mo. MIP) of the refinanced Mortgage by more than $50.

Net Tangible Benefit Standards Chart for all Streamline Refinance transactions From → To Amortization Type Fixed Rate One-Year ARM Hybrid ARM New Combined Rate New Combined Rate New Combined Rate Fixed Rate Refinance At least 0.5% points At least 2% points below At least 2% points below the prior the prior Combined below the prior Combined Rate. Rate. Combined Rate. Any ARM with Less Than No more than 2% points At least 1% point below At least 1% point 15 Months to next above the prior the prior Combined below the prior payment change date Combined Rate. Rate. Combined Rate. Any ARM With Greater No more than 2% points At least 2% points below At least 1% point Than or above the prior the prior Combined below the prior Equal to 15 Months to Combined Rate. Rate. Combined Rate. Next Payment Change Date

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Maximum Mortgage Calculation for Streamline Refinances The Maximum Base Loan Amount for Streamline is • the lesser of: o The outstanding principal balance of the existing mortgage as of the month prior to mortgage disbursement; plus: . Interest due on the existing Mortgage; and . MIP due on existing Mortgage; or o The original principal balance of the existing Mortgage (including financed UFMIP); • Less any refund of UFMIP. Note: The Underwriter may utilize estimated closing costs in calculating the maximum loan amount to the extent that the total Loan Amount does not result in the Borrower receiving more than $500 cash back at mortgage disbursement. Any potential cash to the Borrower after the loan disbursement resulting from the refund of unused escrow balance from the previous mortgage must not be considered in the $500 cash back limit whether received at or subsequent to mortgage disbursement.

Maximum LTV/CLTV LTV is based on the original appraised value reported into FHA Connection as verified with a current FHA Refinance Netting Authorization.

The maximum CLTV at FCBM on all Streamline Refinances is 125%.

Subordinate Financing Existing subordinate financing, in place at the time of case number assignment, must be re-subordinated to the new Streamline Refinance Transaction. New Subordinate financing is permitted only when the proceeds of the subordinate financing are used to: o Reduce the principal amount of the existing FHA-insured Mortgage, or o Finance the origination fees, other closing costs, or discount points associated with the refinance

Maximum Mortgage Amortization Period The maximum amortization period of a Streamline Refinance is limited to the lesser of: o The remaining amortization period of the existing Mortgage plus 12 years; or o 30 years.

Principal Reduction due to Excess Cash Back The lender may reduce the Borrower’s outstanding principal balance at loan disbursement if necessary to prevent cash back in excess of $500.

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Funds to Close The Underwriter must verify the Borrower’s funds to close that are in excess of the total mortgage payment (PITI) of the new mortgage in accordance with the Source of Funds requirement noted in these Guidelines. There are two different streamline options available: 1. Credit Qualifying: Credit Qualifying Streamline Refinance is required if an obligor is being removed from the mortgage. 2. Non-Credit Qualifying: A Borrower is eligible for a Non-Credit Qualifying Streamline Refinance if all Borrowers on the existing mortgage remain as Borrowers on the new mortgage.

Credit Qualifying: The Underwriter must perform a credit and capacity analysis of the Borrower, but no appraisal is required.

Eligibility: At least one (1) Borrower from the existing mortgage must remain as a Borrower on the new mortgage.

Occupancy: The Underwriter must verify owner occupancy by reviewing the Borrower’s employment documentation or obtain utility bills evidencing that the Borrower currently occupies the Property as their Primary Residence.

Additions to Title: Individuals may not be added to Title on Streamline Refinance without creditworthiness review.

Other Requirements and Documentation • A Tri-Merge Credit Report for credit score, credit analysis and mortgage payment history purposes are required. • CAIVRS for all Borrowers. • The Borrower must have made all Mortgage Payments for all Mortgages on the subject property within the month due for the six (6) months prior to case number assignment. The Borrower must have made the payments for all Mortgages on the subject property within the month due for the month prior to the final approval. The Borrower must have no more than one (1) 30-Day late payment for the previous six (6) months for all Mortgages on all other properties. • The Underwriter must verify the Borrower made the payments for all Mortgages secured by the subject Property within the month due for the month prior to loan disbursement. • The Underwriter must verify Borrower’s funds to close, in excess of the total PITIA Payment of the new Mortgage, in accordance with Manual Sources of Funds requirements. • LDP/GSA is required. • The payoff statement on the existing mortgage. • The original Mortgage Note is to be provided or other alternative document with similar information. • The Condominium Unit is not required to be the FHA Condominium

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Approved list. • Maximum cash to the borrower cannot exceed $500. • In addition to the requirements in this section, credit qualifying Streamline Refinances must meet all requirements of Manual Underwriting.

The following does not apply to credit qualifying Streamline Refinances: • Ordering Appraisal • Transferring Existing Appraisal • Ordering Second Appraisal • Ordering an Update to an Appraisal • Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt • Delinquent Federal Tax Debt • Property Eligibility and Acceptability Criteria • Underwriting the Property • Underwriting the Borrower Using the TOTAL Mortgage Scorecard

Non-Credit Qualifying: The Underwriter does not need to perform credit or capacity analysis or obtain an appraisal.

Eligibility: A Borrower is eligible for a Streamline Refinance without credit qualification if all Borrowers on the existing mortgage remain as Borrowers on the new mortgage.

Exception – A borrower on the mortgage to be paid may be removed from title and new mortgage in cases of divorce, legal separation or death when:

o The divorce decree or legal separation agreement awarded the property and responsibility for payment to the remaining borrower, if applicable; and o The remaining borrower can demonstrate that they have made the mortgage payments for a minimum of six (6) months prior to case number assignment Mortgages that have been assumed are eligible provided the previous Borrower was released from liability.

Additions to Title: Individuals may be added to Title on Streamline Refinance without creditworthiness review.

Other Requirements • Tri-Merge Credit Report for credit score and mortgage payment history purposes is required. • The Borrower must have made all Mortgage payments on all properties with greater than six (6) months of Mortgage payment history within the

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month due for the six (6) months prior to the FHA Case Number assignment and have no more than one (1) 30-Day late payment for the previous six (6) months. • The Underwriter must verify Borrower’s funds to close, in excess of the total PITIA Payment of the new Mortgage, in accordance with Manual Sources of Funds requirements. • LDP/GSA is required. • The payoff statement on the existing mortgage. • The original Mortgage Note is to be provided or other alternative document with similar information. • The Condominium Unit is not required to be the FHA Condominium Approved list. • Maximum cash to the borrower cannot exceed $500. The following does not apply to non-credit qualifying Streamline Refinances: • Ordering Appraisal • Transferring Existing Appraisal • Ordering Second Appraisal • Ordering an Update to an Appraisal • Borrower and Co-Borrower Ownership and Obligation Requirements • Cosigner Requirements • Military Personnel Eligibility • Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt • Delinquent Federal Tax Debt • Property Eligibility and Acceptability Criteria • National Housing Act’s Statutory Limits • Nationwide Mortgage Limits • Underwriting the Property • Underwriting the Borrower Using the TOTAL Mortgage Scorecard • Credit Requirements (Manual) • Income Requirements (Manual) • Asset Requirements (Manual) • Underwriting of Credit and Debt (Manual) • Underwriting of Income (Manual) • Underwriting of Assets (Manual) • Calculating Qualifying Ratios (Manual) • Approvable Ratio Requirements (Manual) • Documenting Acceptable Compensating Factors (Manual)

Maximum Mortgage Term The maximum loan term for the FHA Mortgage may not exceed 30 years. Also the loan term may never exceed the remaining economic life of the Property as verified by the appraisal on transactions that require appraisals; whereas on Streamline refinances transactions, the mortgage term is the lesser of the remaining term of the existing Mortgage plus 12 years, or 30 years.

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Refund and Credit of Upfront Mortgage Insurance Premium The UFMIP is not refundable, except in connection with the refinancing to a new FHA-insured Mortgage. For details refer to the Refinance section of these guides.

Monthly MIP (Annual MIP) The periodic MIP is an annual MIP that is payable monthly. The amount of the annual MIP rate and the duration is based on the LTV ratio, Base Loan Amount and the term of the Mortgage.

The following chart provides the current upfront MIP and annual MIP factors for standard conforming loan amounts.

Mortgage Insurance Factors for FHA Case Numbers Assigned on or after January 26th

Base Loan >15 Year Term ≤15 Year Term Amount LTV UFMI Monthly Annual MIP LTV UFMI Monthly Annual MIP P MIP Assessment Period P MIP Assessment Period ≤$625,500 ≤90% 0.80% 11 years ≤78% 0.45% 11 years 1.75% 1.75% >90% but 0.80% >78% but 0.45% ≤95% Life of loan ≤ 90% Life of loan >95% 0.85% > 90% 0.70%

>95% 1.05% Life of loan Streamline Refinance and Simple Refinances endorsed on or before May 31, 2009 0.01% 0.55% ≤ 90.00% - 11 Years the UFMIP and Monthly MIP ≥ 90.01% - Life of Loan

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Adjustable Rate Mortgages (Section 251) ARM Loans FCBM only offers 5/1 ARM Transactions. An ARM mortgage refers to a loan in which the interest rate can change based on an index plus margin. The borrower must sign the ARM disclosure explaining the terms of the ARM mortgage the time of loan application. The initial rate will remain constant for an initial period of 5 years and then, may change annually for the remainder of the loan term. The 5 year ARM may either allow for increases of one (1) % percentage annually and five (5) % over the life of the Mortgage; or increases of two (2) % annually, and six (6) % over the life of the Mortgage.

Qualifying Rate Note Rate

Index Index is the 1 year Treasury. The weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board.

Margin A margin of 2% is required

First Adjustment Cap The first adjustment may change the previous interest rate by no more than 1% up or down.

Subsequent Adjustment Cap Each subsequent adjustment may change the interest rate by no more than 1% up or down.

Lifetime Cap The lifetime cap is 5% over the initial note rate. There is no downward cap, except for the margin.

First Interest Rate Change The Initial Interest Rate must take place not earlier than 60 months from the first payment due date.

Subsequent Interest Rate Change Date Subsequent interest rate change must occur once every 12 months after the first interest rate change date.

Mortgage Term The ARM must be fully amortizing over a period of no more than 30 years.

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Underwriting Using Automated Underwriting System (AUS) I. Approve/Eligible a. The use of AUS is mandatory for all loans with exception of Streamline Refinance. The Underwriter is responsible for the integrity of the data entered into the AUS to ensure the outcome of the credit risk evaluation performed by AUS is valid and the Underwriter using AUS remain solely responsible for prudent underwriting practices and the Final Underwriting Decision. b. The AUS evaluates the overall credit risk posed by the Borrower, based on a number of credit variables, when combined with the functionalities of an AUS. c. In Sponsored Third Party Originations (TPO) both the Originator and the Lender must ensure and verify all data entered into the AUS; nevertheless, the Underwriter must ensure full compliance with all FHA eligibility requirements, and all requirements of this section and remains ultimately responsible for ensuring the data entered into the AUS is correct but does not need to analyze the credit history, unless otherwise stated in this section, if an Accept or Approve recommendation is received. d. Note: The underwriter must still underwrite all appraisals according to standard FHA requirements.

II. Accept/Ineligible a. If the AUS risk assessment shows an Accept/Ineligible recommendation, its means that the Borrower’s credit and capacity appear to meet the threshold for approval, but the loan characteristics do not fully comply with FHA’s eligibility requirements. The AUS Feedback Certificate will identify the specific eligibility requirement that the Mortgage does not meet for the results to be “ineligible”. This generally occurs with HUD REO Purchase transactions involving escrow repairs financed into the loan amount. b. If the AUS Feedback Certificate for Accept/Ineligible is due to HUD REO escrow repairs financed, the loan may eligible for financing at FCBM.

III. Refer/Eligible or Manual Downgrades a. The underwriter must fully underwrite the applications where the AUS risk score results in a Refer feedback and examine the Borrower’s overall pattern of credit behavior, not just isolated unsatisfactory or slow payments, to determine the Borrower’s creditworthiness.

The Underwriter must evaluate the Borrower’s payment histories in the following order: (1) Previous housing expenses and related expenses, including utilities; (2) Installment debts; and (3) Revolving accounts.

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Accept Risk Classifications Requiring a Downgrade to Manual Underwriting (TOTAL) The Underwriter must downgrade and manually underwrite any Mortgage that received an Accept recommendation if: • The file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard – OR - additional information, not considered in the AUS recommendation affects the overall insurability of the Mortgage. • Disputed Derogatory Credit Accounts: 1,000 or more collectively; • The date of the Borrower’s bankruptcy discharge as reflected on bankruptcy documents is less than two years from the date of case number assignment; • Foreclosure, Pre-Foreclosure Sale, Short Sale or Deed-in-Lieu: occurred less than three years from deed transfer to case number assignment date. • Mortgage Payment- Purchase or No cash out: for any mortgage trade line reported on the credit report used to score the application reflects the following in the most recent 12 months: o 3 or more payments greater than 30 days o 1 or more payments of 60 days PLUS one or more 30 day o 1 payment greater than 90 days • Mortgage Payment – Cash Out: o A current delinquency or o Any delinquency within 12 months of cash assignment (NOTE: MUST MEET EXTENUATING CIRCUMSTANCE TO BE ELIGIBLE.) • The Borrower has undisclosed mortgage debt that requires a downgrade; or • Business income shows a greater than 20% decline over the analysis period. NOTE: If the loan application must be downgraded to manual underwriting, the Underwriter must comply with all requirements for manual underwriting when underwriting a downgraded Mortgage.

IV. Refer/Ineligible If the AUS risk assessment shows a Refer/Ineligible recommendation. The underwriter must manually underwrite the loan application and apply all manual credit requirements to determine whether the Borrower’s credit and capacity appear to meet the threshold for approval and review the AUS Feedback Certificate to identify the specific eligibility requirement that the Mortgage does not meet for the results to be “ineligible”. This generally occurs with HUD REO Purchase transactions involving escrow repairs financed into the loan amount.

If the AUS Feedback Certificate for Refer/Ineligible is due to HUD REO escrow repairs financed, the loan may eligible for financing at FCBM. The Underwriter must evaluate the Borrower’s payment histories in the following order: (1) Previous housing expenses and related expenses, including utilities; (2) Installment debts; and (3) Revolving accounts.

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Manual Downgrade or AUS Refer The Underwriter is required to: • Annotate the applicable compensating factor(s) used to determine Borrower’s creditworthiness assessment on HUD-92900-LT. • Underwrite the loan file in accordance to FHA standard underwriting guidelines as described in the HUD Handbook 4000.1. NOTE: The loan file must be documented according to FHA standard documentation requirements. The AUS documentation relief waiver does not apply as a consequence of the manual downgrade or refer risk score.

Debt-to-Income Ratio Requirements (AUS Approve/Eligible Underwriting) Maximum DTI ratio with AUS Approve/Eligible is 50% o 50% DTI with a minimum credit score of 620. o Increased DTI ratio up to 55% is permitted if the qualifying credit score is 660 or higher. Note: the maximum DTI cannot exceed 50% on 2-4 Unit Properties.

FHA Loans with Gift Funds with AUS Approve/Eligible o Maximum DTI Ratios of 40/50% with AUS Approve/Eligible. Exceptions for increased ratios up to 45/55% are permitted if any one of the following criteria can be met: o Verification of satisfactory similar housing payment via cancelled checks or an institutional VOR documenting that the proposed housing payment (PITIA) is no more than 25% higher than current housing payment; new total debts are similar or lower than current debts; and the borrower(s) has no less than 3 traditional credit tradelines reporting with a 24 months history; or o The LTV is 95% and the minimum required investment of 3.5% is from the borrower own funds; or o The LTV is equal to, or less than 90% (all funds for down payment can be derived from gift funds); or o Significant additional income not reflected in qualifying income; or potential of increased earnings based on employment/education career; residual income. Note: the maximum DTI cannot exceed 50% on 2-4 Unit Properties.

Debt-to-Income Ratio Requirements and Compensating Factors (Manual/Refer Underwriting) Mortgage Payment Expense to Effective Income Ratio is considered acceptable if the total mortgage payment does not exceed 31.00% of the gross effective income. Whereas, Total Fixed Payment to Effective Income Ratio is considered acceptable if the total mortgage payment and all recurring charges do not exceed 43% of the gross effective income. Note: Total Fixed Payment (total PITIA and total monthly obligations on all debts and liabilities).

Ratio exceeding 31.00%/43.00% may be acceptable only if significant compensating factors exists and are documented on the HUD-92900 Loan Transmittal.

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The Table below denotes Ratio Requirements and Acceptable Compensating Factors Maximum Ratios Credit Score Compensating Factors

31%/43% 640 Gift funds from an acceptable source and properly documented if needed for funds to close may be received by the borrower without restriction at FCBM with ratios in this category.

No compensating factors required.

Minimum standard reserves must be met o 1 - 2 Unit: 1 month o 3 - 4 Unit: 3 months 37%/47% 640 FCBM does not allow gift funds to be received by the borrower in connection with the loan transaction when the ratio threshold is in this category.

At least ONE of the following compensating factors must be present o Reserves o Minimal housing increase o Residual income

Minimum standard reserves must still be met: o 1 - 2 Unit: 1 month (3 months if using cash reserves as one of the compensating factors) o 3 - 4 Unit: 3 months (6 months if using cash reserves as one of the compensating factors) 40%/40% 640 FCBM does not allow gift funds to be received by the borrower in connection with the loan transaction when the ratio threshold is in this category.

Must meet all requirements of “no discretionary debt” criteria.

Minimum standard reserves must still be met: o 1 - 2 Unit: 1 month (3 months if using cash reserves as one of the compensating factors) o 3 - 4 Unit: 3 months (6 months if using cash reserves as one of the compensating factors) 40%/50% 640 FCBM does not allow gift funds to be received by the borrower in connection with the loan transaction when the ratio threshold is in this category.

At least TWO of the following compensating factors must be present o Cash reserves o Minimal housing increase o Residual income o Additional income not considered in gross effective income

Minimum standard reserves must still be met: o 1 - 2 Unit: 1 month (3 months if using cash reserves as one of the

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compensating factors) o 3 - 4 Unit: 3 months (6 months if using cash reserves as one of the compensating factors) FHA Loans with Gift Funds AUS Refer/Eligible or a Manual Downgrade Maximum DTI Ratio is 31/43%.

Reserve Definitions: The following assets cannot be considered “reserves”: Gift funds; borrowed funds; cash back received at closing; or cash received at closing in cash out refinance transaction.

Reserve Requirement: Verified and documented reserves may be used as a compensating factor only if: - Reserves are equal to or exceed three (3) total monthly mortgage payments for 1-2 unit properties. - Reserves are equal to or exceed six (6) total monthly mortgage payments for 3-4 unit properties.

Minimal Increase in Housing Payment: A minimal increase in housing payment may be used as a compensating factor is the following requirements are present: - The new total monthly mortgage payment (PITIA) does not exceed the current total monthly housing payment by more than $100 or 5%, whichever is less; AND - There is a documented twelve (12) month housing payment history with no more than one (1) 30 day late payment. - If the Borrower has no current housing payment the Underwriter may not use this compensating factor. Note: All payments must have been made satisfactory on cash-out transactions for the previous twelve (12) months (no late payments permitted).

Residual Income: Residual income may be used as a compensating factor provided it can be documented that is equal, or exceeds the amount required by VA Lenders Handbook - VA Pamphlet 26-7 http://www.benefits.va.gov/warms/pam26_7.asp

To use residual income as a compensating factor, count all members of the household of the occupying borrowers without regard to the nature of their relationship and without regard to whether they are joining on title or the note. However, if documentation is obtained verifying that a household member is fully supported by an income source not already included in the qualifying income then, that household member may be omitted from the family size calculation.

Residual income is calculated as total Effective Income of all Occupying Borrowers less: - State Income Taxes; - Federal Income Taxes; - Retirement or Social Security; - Total Fixed Payment (total PITIA and total monthly obligations on all debts and liabilities); - Estimated maintenance and utilities (multiply the gross living area of the property by the maintenance and utility factor of .14¢ (i.e., 1500 square feet x .14 = $210 per month); - Job related expenses or child care; and - The Grossed Up amount of any Non-Taxable Income. If available, the Underwriter must use federal and state returns from the most recent tax year to document state and local taxes, retirement, Social Security and Medicare. If tax returns are not available, the Underwriter may rely upon current pay stubs.

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See Residual Income Table

Additional income not considered in gross effective income Additional income from bonuses, overtime, part-time or seasonal employment that is not reflected in gross effective income can be used as a compensating factor subject to the following requirements: - The Underwriter must verify and document that the borrower has received this income for at least one (1) year and it will likely continue; and, - The income, if it were included in gross effective income, is sufficient to reduce the qualifying ratios to not more than 37.00%/47.00%. Note: Income from non-borrowing spouses or other household occupants not obligated to the mortgage cannot be counted. Also, this compensating factor may be used only in conjunction with another compensating factor when qualifying ratios exceed 37.00%/47.00% but are not more than 40.00%/50.00%.

No Discretionary Debt “No discretionary debt” may be used as a compensating factor subject to the following: - The borrower’s housing payment is the only open account with an outstanding balance that is not paid off monthly, - The credit report shows established credit lines in the borrower’s name open for at least six (6) months; and, - The borrower can document that these accounts have been paid off in full monthly for at least the past six (6) months. Note: Borrowers who have no established credit other than their housing payment, no other credit lines in their own name open for at least six (6) months, or who cannot document that all other accounts are paid off in full monthly for at least the past six (6) months, do not qualify under this criterion. Also, revolving credit lines not in the

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borrower’s name but for which he/she is an authorized user does not qualify under this criterion.

TOTAL Scorecard Tolerance Levels for Rescoring Origination through Final approval FCBM requires 100% data integrity and matching elements for income, assets, reserves and debt-to- income ratios between the HUD-92900-LT and the Final AUS Feedback Certificate used by the Underwriter to issue the Final Approval.

Post-Closing The Underwriter is not required to re-score the loan application through AUS if the following data elements change from the last scoring event (Final Approval) to the Post-Closing stage if the tolerances levels describe below are kept:

Data Change Resubmission to AUS is not Required if:

Reserves Reserves verified are not less than 10% below the previously scored amount Income Income verified is not less than 5% below the previously scored amount Tax and Insurance The cumulative monthly tax and insurance escrow does not result in more than a 2% increase in the Total Mortgage Payment to Effective Income Ratio (PTI)

Underwriting the Borrower Using the TOTAL Mortgage Scorecard (TOTAL) The underwriter remains solely responsible for prudent underwriting practices and the Final Underwriting Decision when using an AUS and must underwrite all appraisals according to standard FHA requirements. All conditions outlined in the Findings Report must be satisfied.

Credit Report and Requirements The Loan Originator must obtain a credit report for each Borrower who will be obligated on the Note and must obtain a credit report for a non-borrowing spouse who resides in a community property state, or if the subject Property is located in a community property state. The non-borrowing spouse’s SSN, must be validated with the SSA. If the non-borrowing spouse does not have a valid SSN, a credit report must still be obtained using at a minimum, the non- borrowing spouse’s full name, date of birth, and previous addresses for the last two years. The credit report must contain information from at least two (2) credit repositories pertaining to credit, residence history, and public records information and the Lender must a new credit report and rescore the loan through the AUS if the underwriter identifies inconsistencies between any information in the file and the original credit report. The Lender must retain copy of all credit reports. Must provide inquiries made within the last 90 Days.

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Evaluating Credit History The Underwriter must analyze the Borrower’s credit history in accordance with the Accept Risk Classifications and review if Manual Downgrade is required.

The Underwriter must downgrade and manually underwrite any Mortgage that received an Accept recommendation if: • The file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard – OR - additional information, not considered in the AUS recommendation affects the overall insurability of the Mortgage. • Disputed Derogatory Credit Accounts: 1,000 or more collectively; • The date of the Borrower’s bankruptcy discharge as reflected on bankruptcy documents is less than two years from the date of case number assignment; • Foreclosure, Pre-Foreclosure Sale, Short Sale or Deed-in-Lieu: occurred less than three years from deed transfer to case number assignment date. • Mortgage Payment- Purchase or No cash out: for any mortgage trade line reported on the credit report used to score the application reflects the following in the most recent 12 months: o 3 or more payments greater than 30 days o 1 or more payments of 60 days PLUS one or more 30 day o 1 payment greater than 90 days • Mortgage Payment – Cash Out: o A current delinquency or o Any delinquency within 12 months of cash assignment (NOTE: MUST MEET EXTENUATING CIRCUMSTANCE TO BE ELIGIBLE.) • The Borrower has undisclosed mortgage debt that requires a downgrade; or • Business income shows a greater than 20% decline over the analysis period. NOTE: If the loan application must be downgraded to manual underwriting, the Underwriter must comply with all requirements for manual underwriting when underwriting a downgraded Mortgage.

Authorized User Accounts for which the Borrower is an authorized user must be included in the Borrower’s DTI unless documentation evidencing that the primary account holder has made all required payments on the account for the previous 12 months is provided. If less than 3 payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower’s DTI.

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If the cumulative outstanding balance of all collections of all borrowers is equal to or greater than $2,000, the Underwriter must:

• Verify that the debt is paid in full at the time of or prior to settlement using acceptable funds; or • Verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower’s DTI; or • If a payment arrangement is not available, calculate the monthly payment using 5% of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI. Note: Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts, unless excluded by state law.

Charge Off Accounts do not need to be included in the Borrower’s Liabilities or Debt.

Disputed Derogatory Credit Accounts Disputed Derogatory Credit Account refers to disputed charge off accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months. If the credit report indicates that the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the loan must be downgraded to a refer and manually underwritten.

Note: Disputed Derogatory Credit Accounts of a non-borrowing spouse in a community property state are not included in the cumulative balance for determining if the mortgage application is downgraded to a Refer.

Exclusions from cumulative balance include: • Disputed medical accounts; and • Disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use. To exclude these balances, the Mortgagee must include a copy of the police report or other documentation from the creditor to support the status of the accounts.

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Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report If a Borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the Underwriter is not required to downgrade the application to a Refer. However, the Underwriter must analyze the effect of the disputed accounts on the Borrower’s ability to repay the Mortgage. If the dispute results in the Borrower’s monthly debt payments utilized in computing the Debt-to-Income (DTI) ratio being less than the amount indicated on the credit report, the Borrower must provide documentation of the lower payments.

Non-Derogatory Disputed Accounts include the following types of accounts: • disputed accounts with zero balance • disputed accounts with late payments aged 24 months or greater • disputed accounts that are current and paid as agreed Note: Non-derogatory disputed accounts are excluded from the $1,000 cumulative balance limit.

Judgments The presence of the judgments has already been taken into consideration in the Borrower’s credit score and no explanation is required. The Underwriter must verify that all outstanding Judgments are resolved or paid off prior to or at closing, including those of the non-borrowing spouse in a community property state must be resolved or paid in full with evidence of payment in full if paid prior to closing unless:

• Document and the Borrower has entered into a valid agreement with the creditor to make regular payments on the debt, • The Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments. • The monthly payment must be included in the Borrower’s DTI. Note: Judgments on title must be paid if they will impair FCBM’s first lien position.

Delinquent Federal Tax Liens Federal tax liens/delinquent taxes may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three (3) months of scheduled payments from the FHA Case Assignment date. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three (3) months of payments and the monthly payment amount must be included in the Borrower’s DTI ratio.

NOTE: Delinquent taxes that are not liens or judgments should be treated as follows:

If tax returns, and or tax transcripts provided indicate the borrower owes outstanding taxes, documentation must be provided to show these taxes have been paid, or valid IRS repayment plan is in place. If a repayment plan is established, documentation must be provided to support the borrower has made 3 months of payments following the requirements outlined above. The loan may not close until documentation is provided to support all three consecutive payments have been made.

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Undisclosed Debt (Not Mortgage Related) When a debt or obligation (other than a Mortgage debt) is not listed on the loan application and/or credit report and not considered by the AUS but is revealed during the application process, the Underwriter must: • Verify the actual monthly payment amount; • Re-submit the loan to the AUS if the cumulative change in the amount of the liabilities increases by more than $100 per month; and • Determine that the additional debt was not/will not be used for the Borrower’s Minimum Required Investment (MRI). Note: Undisclosed debt(s) may be revealed in Borrower’s asset statements, paystubs, or as a result of a credit inquiry.

Undisclosed Mortgage Debt When an existing debt or obligation that is secured by a Mortgage is not listed on the credit report but is revealed during the application process, the Underwriter must obtain a verification of Mortgage directly from the Mortgage Servicer. The mortgage payment must be: • Included in the Borrower’s monthly DTI; and • Must not reflect any delinquency within 12 months of the FHA Case Number assignment date; or • More than 2x30 days late payment within 24 months of the FHA Case Number assignment date.

Bankruptcy Chapter 7 The Chapter 7 bankruptcy must be discharged for at least two (2) years from discharge date of the bankruptcy to the FHA Case Number Assignment date. If the bankruptcy was discharged within two (2) years from the date of the FHA Case Number assignment, the loan must be downgraded to a Refer and manually underwritten (see Manual Underwriting criteria).

Chapter 13 The Chapter 13 bankruptcy must be discharged for at least two (2) years from discharge date to the FHA Case Number Assignment date.

If the Borrower is currently in Chapter 13 bankruptcy, this does not disqualify a Borrower from obtaining an FHA-insured Mortgage, if at the time of FHA Case Number Assignment at least 12 months of the pay-out period under the bankruptcy has elapsed, and the Borrower has received written permission from bankruptcy court to enter into the mortgage transaction.

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Bankruptcy Documentation If the credit report does not verify the discharge date of the bankruptcy or if additional documentation is necessary to determine if any liabilities were discharged in the bankruptcy, the Underwriter must obtain the bankruptcy and discharge documents.

Pre-Foreclosure/Short Sale The Underwriter must document the passage of three (3) years since the date of the Short Sale. If the Short Sale occurred within three (3) years of the FHA Case Number Assignment date, the loan must be downgraded to a Refer and manually underwritten. The three (3) year period begins on the date of transfer of title by Short Sale. Verify this if necessary with the Short Sale documents.

Foreclosures/Deed-in-Lieu Three (3) years seasoning must have passed from transfer of title to the FHA Case Assignment date is required for prior foreclosure and Deed-in-Lieu.

Refinance of a Prior Modified/Restructured Mortgage Refinance of a prior modified mortgage/restructured mortgage is permitted so long the new refinance affords a benefit to the applicant. The original mortgage note and the modified mortgage note must be documented; 24 months must have passed since the loan modification took place with satisfactory payments and the Borrower(s) are to document that the circumstances that forced them to enter into the loan modification have been corrected.

Consumer Credit Counseling/Payment Plan Participating in a consumer credit counseling program does not require a downgrade to a manual underwriting. No explanation or other documentation is needed.

Housing Payment History Purchase and No Cash-Out Refinance The loan must be downgraded to a Refer and manually underwritten if any mortgage tradeline, including HELOC reflects during the most recent 12 months: • 3 or more late payments of greater than 30 days; or • 1 or more late payments of 60 days plus one or more 30-Day late payments; or • 1 payment greater than 90 Days late.

Housing Payment Cash-Out Refinance The loan must be downgraded to a Refer and manually underwritten if any mortgage tradeline, including HELOC reflects during the most recent 12 months: • Currently delinquent; or • Any delinquency within 12 months of case assignment date.

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Evaluating Liabilities and Debts All applicable monthly liabilities must be included in the DTI ratio. • Installment/Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5% of the Borrower’s gross monthly income and the Borrower may not pay down the balance in order to meet the 10-month requirement. • The Borrower can pay off installment/closed-end debt to qualify. • Accounts for which the borrower is an authorized user must be included in the borrower’s DTI ratio unless documentation shows that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the borrower’s DTI. • If the Borrower resides in a community property state or the Property being insured is located in a community property state, debts of the non-borrowing spouse must be included in the Borrower’s qualifying ratios, except for obligations specifically excluded by state law. The non-borrowing spouse’s credit history is not considered a reason to deny a mortgage application Note: Negative income must be subtracted from the Borrower’s gross monthly income, and not treated as recurring monthly liabilities unless otherwise noted.

To verify the payment amount and the current status of the account, the Underwriter must obtain: • Copy of the official signed divorce decree, separation agreement, maintenance agreement, or other legal order. • Obtain the Borrower’s most recent paystubs covering no less than 28 consecutive days to verify any order of garnishment related to the Alimony, Child Support and Maintenance. To calculate the monthly obligation, the Underwriter must use the greater of either the amount shows on the most recent decree or agreement establishing the payment obligation or the monthly garnishment amount.

Note: Delinquent child support must be paid current or in a repayment plan.

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Deferred Obligations and Student Loans The Underwriter must include deferred obligations in the Borrower’s monthly liabilities.

Deferred Obligations: Regardless of when they will begin, must be included in the qualifying ratios. The Underwriter must obtain evidence of: o The deferral from the creditor; o The outstanding balance and terms of the liability; and o The anticipated monthly payment (if available). o If the actual monthly payment is not available for installment debt, the Underwriter must utilize the terms of the debt or 5% of the outstanding balance to establish the monthly payment.

Student Loans (FHA Case Number assigned prior to June 30, 2016): If the actual monthly payment is zero or is not reflected on the credit report, the Underwriter must utilize 2% of the outstanding balance to establish the monthly payment. For student loans currently in an income based repayment plan (there are various income based student loan repayment plans, some include increasing repayment amounts), utilize the payment noted on the income based repayment agreement. The current payment can be used even if a payment increase is reflected on an agreement.

Student Loans (Effective with FHA Case Numbers Assigned on or after Thursday, June 30, 2016): The Underwriter is to include all student loans in the borrower's liabilities, regardless of the payment type or status of payments and calculate the monthly obligation using either: • The greater of 1% of the outstanding balance of the loan; or the monthly payment reported on the credit report; OR • The actual documented payment provided that the payment will fully amortize over the loan term (this would apply only to fixed payment loans not to Graduated payments, IBR, adjustable rate student loans, interest only).

Revolving Accounts When the credit report does not reflect a monthly payment for the account, the Underwriter must use the payment shown on the current account statement or 5% of the outstanding balance.

Open 30-Day Charge Accounts Open 30-day charge accounts require the balance to be paid in full every month. If additional liquid assets are verified to cover the unpaid balance, the debts may be excluded from the DTI. If additional liquid assets are not verified to cover the unpaid balance, the Underwriter may utilize 5% of the outstanding balance as the Borrower’s’ monthly payment to be included in the DTI. Otherwise, the entire outstanding balance must be included in the DTI. If the credit report reflects any late payments in the last 12 months, utilize 5% of the outstanding balance as the Borrower’s monthly debt to be included in the DTI and additional liquid assets must be verified to cover the unpaid balance.

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Contingent Liability Contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or obligated, defaults on the payment and may include Co-Signed liabilities and liabilities resulting from a mortgage assumption without release of liability. The monthly payment of the contingent liabilities must be included in the calculation of the Borrower’s monthly obligations unless the Underwriter verifies and documents that there is no possibility that the creditor will pursue debt collection against the Borrower should the other obligor default or the other legally obligated party has made 12 months of timely payments.

The underwriter must obtain the agreement creating the contingent liability or assumption agreement and deed showing transfer of title out of the Borrower’s name.

Co-Signed Loan If the cosigned liability is not included in the monthly obligation, obtain documentation to evidence that the other party has been making regular on-time payments during the previous 12 months, and does not have a history of delinquent payments on the loan. Late payments reported on debts assigned to the ex-spouse in a divorce do not need to be charged to the Borrower if the delinquencies occurred after the divorce. The Underwriter must obtain a copy of the divorce decree ordering the spouse to make payments.

The debt is considered in the cash flow analysis when the Borrower’s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented as paid out of company funds. When the Borrower’s business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis.

Note: The Underwriter will need to verify with supporting documentation that business expenses are related to the obligation.

For example: An automobile debt obligation can only be excluded from the calculation of the DTI if the automobile is utilized for business purposes as noted on the business tax returns and documentation demonstrating the debt being paid from company funds. In the event of a revolving consumer debt; documentation demonstrating the charges to the revolving consumer debt are business related ONLY; business tax returns reflects a business expense related to the revolving consumer debt and evidence that the debt is paid from company funds is required in order for this debt obligation to be excluded from the calculation of the DTI.

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General Income Requirements Qualifying Effective Income must be reasonably likely to continue through at least the first three years of the Mortgage, and meet the specific requirements. The Underwriter must document the Borrower’s income and employment history, verify the accuracy of the amounts being reported and only consider income that legally derived and when required, properly reported on the Borrower’s tax returns.

Negative income must be subtracted from the Borrower’s gross monthly income, and not treated as a recurring monthly liability unless otherwise noted.

Employment Income Refers to income received as an employee of a business that is reported on IRS Form W-2.The Underwriter must verify the Borrower’s most recent 2 years of employment and income, and document using one of the following methods. Traditional Current Employment Documentation: The Underwriter must obtain the most recent pay stub and to verify current employment, a written Verification of Employment covering two years. Note: Re-verification of employment must be completed within 10 Days prior to the date of the note. A verbal Verification of Employment is acceptable.

Alternative Current Employment Documentation: The Underwriter must obtain copies of the most recent pay stub that shows the Borrower’s year- to-date earnings; copies of the W-2 forms from the previous two years; and document current employment by telephone, sign and date the verification documentation, and note the name, title, and telephone number of the person with whom employment was verified. Note: Re-verification of employment must be completed within 10 Days prior to the date of the Note. A verbal Verification of Employment is acceptable.

Previous Employment Documentation: A written Verification of Employment history for the previous 2 years is not required if all of the following conditions are met: o The current employer confirms a two year employment history, or a paystub reflects a hiring date. o Only base pay is used to qualify (no Overtime or Bonus Income). o The Borrower signs IRS Form 4506-T, Request for Transcript of Tax Return for the previous two tax years. If the applicant has not been employed with the same employer for the previous two years and/or not all conditions above can be met, then the Underwriter must obtain one or a combination of the following for the most recent 2 years to verify the applicant’s employment history: o W-2(s) o Written VOE(s) o Evidence supporting enrollment in school or the military during the most recent two full years.

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Calculation of Hourly Income: Employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower’s current hourly rate to calculate Effective Income.

Employees who are paid hourly and whose hours vary, the Underwriter must average the income over the previous 2 years. If the Underwriter can document an increase in pay rate the Underwriter may use the most recent 12 month average of hours at the current pay rate.

Part-Time Employment Part-Time Employment refers to employment that is not the Borrower’s primary employment and is generally performed for less than 40 hours per week. The Underwriter may use Income from Part-Time Employment as Effective Income if the Borrower has worked a part-time job uninterrupted for the past 2 years and the current position is reasonably likely to continue. Calculation of Effective Part-Time Income The Underwriter must average the income over the previous 2 years. If the Underwriter can document an increase in pay rate, a 12-month average of hours at the current pay rate may be used.

Overtime and Bonus Income Overtime and Bonus Income refers to income that the Borrower receives in addition to the Borrower’s normal salary and may be used as effective income if it has been received for the past 2 years and it is likely to continue. Periods of Overtime and Bonus Income less than 2 years may be considered if the Underwriter documents that the Overtime and Bonus Income has been consistently earned over a period of not less than one year and is reasonably likely to continue. Calculation of Effective Overtime and Bonus Income: For employees with Overtime or Bonus Income, the Underwriter must average the income earned over the previous 2 years. However, if the Overtime or Bonus Income from the current year has decreased by 20% or more from the previous year, the Underwriter must use the current year’s income.

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Seasonal Employment Seasonal Employment refers to employment that is not year round, regardless of the number of hours per week the Borrower works on the job. The Underwriter may consider income from Seasonal Employment as if the Borrower has worked the same line of work for the past 2 years and is reasonably likely to be rehired for the next season. Also, the Underwriter may consider unemployment income for those with income from Seasonal Employment.

Required Documentation: For seasonal employees with unemployment income, the Underwriter must document the unemployment income for 2 full years and there must be reasonable assurance that this income will continue with the following: • A written statement from the Borrower confirming his/her intent to return to work, and the intended date of return; • Documentation generated by the current employer confirming the Borrower’s eligibility to return to their current employer after seasonal leave; and • Documentation of sufficient liquid assets, in accordance with the sources of funds requirements, used to supplement the Borrower’s income through intended date of return to work with their current employer.

Calculation of Effective Income: the Underwriter must average the income earned over the previous 2 full years.

Calculation of Supplemental Income: For Borrowers returning to work before or at the time of the first mortgage payment due date, the Underwriter may use the Borrower’s current income plus available surplus liquid asset reserves (above and beyond the required reserves) as an income supplement up to the amount of the Borrower’s pre- leave income. The amount of the monthly income supplement is that total amount of surplus reserves divided by the number of months between the first payment due date and the Borrower’s intended date of return to work.

Additional Required Analysis of Stability of Employment Income Frequent Job Change If the Borrower has changed jobs more than 3 times in the previous 12 months, or has changed lines of work, the Underwriter must take additional steps to verify and document the stability of the Borrower’s employment income and obtain the following documentation: • Transcripts of training and education demonstrating qualification for a new position; or • Employment documentation evidencing continual increase in income and/or benefits.

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Employment Gaps Employment gaps of six months or more is considered an extended absence. In this case, the Underwriter may consider the Borrower’s current income if it can verify and document that: • The Borrower has been employed in the current job for at least 6 months at the time of case number assignment; and • A 2 year work history prior to the gap in employment is verified and documented using standard or alternative employment verification.

Temporary Reduction in Income For Borrowers with a temporary reduction of employment income due to short-term disability or similar temporary leave, the Underwriter may consider the Borrower’s current income as effective income, if it can verify and document: • The Borrower intends to return to work; • The Borrower has the right to return to work; and • The Borrower qualifies for the Mortgage taking into account any reduction of income due to the circumstances.

Employed by Family-Owned Business Income derived from a Family-Owned Business may be considered if the Borrower is not an owner in the family-owned business. Required Documentation: The Underwriter must verify and document that the Borrower is not an owner in the family-owned business by using official business documents showing the ownership percentage that include: corporate resolutions or other business organizational documents, business tax returns or Schedule K-1(IRS Form 1065), U.S. Return of Partnership Income, or an official letter from a certified public accountant on their business letterhead.

Also, in addition to the traditional or alternative income documentation, the Underwriter must obtain copies of signed personal tax returns with all schedules.

Calculation of Salary Income: For employees who are salaried and whose income has been and will likely continue to be consistently earned, the Underwriter must use the current salary.

Calculation of Hourly Income: For employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower’s current hourly rate.

For employees who are paid hourly and whose hours vary, the Underwriter must average the income over the previous 2 years. If the Underwriter can document an increase in pay rate, the Underwriter may use the most recent 12-month average of hours at the current pay rate.

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For Commission Income greater than 25% of the Borrower’s total earnings, the Underwriter must obtain signed tax returns, including all applicable schedules, for the last 2 years. In lieu of signed tax returns, the Underwriter may use Tax Transcripts.

Calculation of Commission Income: The Underwriter must calculate commission income by using the lesser of:

a) The average commission income earned over the previous 2 years, or for the length of time this income type has been earned if less than 2 years; or b) The average commission income earned over the previous 1-year. The Underwriter must subtract any unreimbursed employee business expenses as shown on the IRS Form 2106 (depreciation due to business use of a vehicle may be added to the gross income.

Note: For information on analyzing Tax Returns, refer to the income section titled “Analyzing IRS Tax Return Forms”.

Tip Income Tip income that has been received for at least the most recent 2 years may be considered as effective qualifying income. Required Documentation when Tip Income is included in the W-2: • A Written VOE with verified continuance and breakdown of tip income history for past 2 years and YTD; and • Most recent paystub and past 2 years W-2s. Required Documentation when Tip Income is not included in the W-2: • Tax returns for past 2 years, complete with all schedules and referenced statements; • Subtract any unreimbursed employee expenses; • Written VOE with verified continuance and breakdown of tip income history for past 2 years and YTD; • Most recent paystub and past 2 years W-2s.

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Disability Income Benefits Disability Benefits are benefits received from the Social Security Administration (SSA), Department of Veterans Affairs (VA), other public agencies, or a private disability insurance provider. • Long-term disability income (such as worker’s compensation or private insurance) may be considered qualifying income with a reasonable expectation of continuance for three (3) years from the date of Application. Disability Required Documentation (Not Derived from VA Disability Benefits): The Underwriter must verify and document the receipt of benefits from the SSA, or private disability insurance provider and obtain documentation that establishes award benefits to the Borrower and its continuance with: • Most recent Notice of Award or equivalent document that establishes the award benefit to the Borrower. If the letter does not have a defined expiration date, the income will be considered effective and reasonably likely to continue; and • Verify current receipt of disability income with most recent check, or bank statement with direct deposit, or copy of the Borrower’s SSA-1099 Form, or Federal Tax Returns. Note: If any disability income is due to expire within three (3) years from the date of mortgage application, that income cannot be used as Effective Income.

Important: The Underwriter may not rely upon a pending or current re-evaluation of medical eligibility for benefit payments as evidence that the benefit payment is not reasonably likely to continue and under no circumstance may request documentation concerning the nature of the disability or the medical condition of the Borrower.

Disability Required Documentation (VA Service Connected Disability): For VA disability benefit, the most recent VA Service Connected Disability Awards letter showing the amount of the assistance must be obtained and 1 of the following documents: • Federal tax returns; or • The most recent bank statement evidencing receipt of income from the VA. Note: Per VA Form Waiver, the lender is not required to obtain the VA Disability Benefits Form 26-8937 in order to verify VA Disability Benefits.

Calculation of Disability Income derived from the Social Security Administration (SSA), Department of Veterans Affairs (VA), other public agencies, or private disability insurance: The Underwriter must use the most recent amount of the benefits received to calculate qualifying effective income.

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• When using a final divorce decree, legal separation agreement or court order, the Underwriter must obtain evidence of receipt using deposits on bank statements; canceled checks; or documentation from the child support agency for the most recent 3 months that supports the amount used in qualifying. • If the income is through a voluntary payment agreement, the Underwriter must document the voluntary payment via 12 months of cancelled checks, deposit slips, or tax returns. The Underwriter must provide evidence that the income will continue for at least 3 years and may use the front and pertinent pages of the divorce decree/settlement agreement and/or court order showing the financial details.

Calculation of Income: When using a final divorce decree, legal separation agreement or court order, if the Borrower has received consistent Alimony, Child Support and Maintenance Income for the most recent 3 months, the Underwriter may use the current payment to calculate income.

When using evidence of voluntary payments, if the Borrower has received consistent Alimony, Child Support and Maintenance Income for the most recent 6 months, the Underwriter may use the current payment to calculate income.

If the Alimony, Child Support and Maintenance Income have not been consistently received for the most recent 6 months, the Underwriter must use the average of the income received over the previous 2 years to calculate income. If Alimony, Child Support and Maintenance Income have been received for less than 2 years, the Underwriter must use the average over the time of receipt

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Military Income Military income received by military personnel during their period of active, Reserve, or National Guard service, includes: • Base pay • Basic Allowance for Housing • Clothing allowances • Flight or hazard pay • Basic Allowance for Subsistence • Proficiency pay

Education benefits cannot be used as qualifying effective income. Require Documentation: The Underwriter must obtain a copy of the Borrower’s Military Leave and Earnings Statement (LES) and verify the Expiration Term of Service (ETS) date on the LES; if the ETS date is within the first 12 months from loan closing, this income may only be considered if the Borrower certifies his/her intent to continue military service. Calculation of Income: The current amount of Military Income receives must be used for qualification.

Automobile Allowance Income Automobile Allowance refers to the funds provided by the Borrower’s employer for automobile related expenses. Only the amount that an auto allowance and/or expense account payments exceed the actual expenditures can be considered income. Required Documentation: • The Underwriter must verify and document the Automobile Allowance received from the employer for the previous 2 years i.e. through a Written VOE or other alternative document such as a payroll ledger, and • The Underwriter must obtain Tax Returns with all schedules including IRS Form 2106, Employee Business Expenses, for the previous 2 years.

Calculation of Income: The Underwriter must average the auto expenses in the past 2 years filed under IRS Form 2106, and • If the Borrower uses standard per-mile rate in calculating auto expenses, as opposed to “actual cost” method, the portion that IRS considers depreciation may be added back to income. • Subtract the averaged expenses from the current amount of the auto allowance received; and • Add as qualifying income if positive amount. Expenses that must be treated as recurring debt include: • The monthly car payment; and • Any loss resulting from the calculation of the difference between the actual expenditures and the expense account allowance.

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Required Documentation: The Underwriter must verify and document the Borrower’s receipt of income from the Social Security Administration and that it is likely to continue for at least a 3 year period from the date of case number assignment.

The Underwriter must obtain one of the following documents: o Federal Tax Returns; o The most recent bank statement evidencing receipt of income; o Proof of income via the Benefit Awards Letter from the Social Security Administration; or o Copy of the Borrower’s SSA-1099 Form. In addition to verification of income, the Underwriter must document the continuance of this income by obtaining from the Borrower:

o A copy of the last Notice of Award letter which states the SSA’s determination on the Borrower’s eligibility for SSA income or o An equivalent document that establishes award benefits to the Borrower or equivalent document. If any income from the SSA is due to expire within 3 years from the date of case number assignment, that income may not be used for qualifying.

Pension Income Pension refers to income received from the Borrower’s former employer(s). Required Documentation: The Underwriter must verify and document the Borrower’s receipt of periodic payments from the Borrower’s Pension and that the payments are likely to continue for at least 3 years and must obtain one of the following: o Federal tax returns; o The most recent bank statement evidencing receipt of income from the former employer; or o A copy of the Borrower’s Pension/retirement letter from the former employer.

Calculation of Income: The Underwriter must use the current amount of Pension income received to calculate qualifying effective income.

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Individual Retirement Account (IRA) and 401(k) Individual Retirement Account (IRA)/401(k) Income refers to income received from an IRA. Required Documentation: The Underwriter must verify and document the Borrower’s receipt of recurring IRA/401(k) distribution income and that it is reasonably likely to continue for three years and must obtain the most recent IRA/401(k) statement and 1 of the following documents: o Federal tax returns; or o The most recent bank statement evidencing receipt of income. Calculation of Income: For Borrowers with IRA/401(k) Income that has been and will be consistently received, the Underwriter must use the current amount of IRA income received.

For Borrowers with fluctuating IRA/401(k) Income, the Underwriter must use the average of the IRA/401(k) Income received over the previous 2 years to calculate income

If IRA/401(k) Income has been received for less than 2 years, the Underwriter must use the average over the time of receipt.

Capital Gains/Losses Capital Gains refer to a profit that results from a disposition of a capital asset, such as a stock, bond or real estate, where the amount realized on the disposition exceeds the purchase price. Conversely, Capital Losses refer to a loss that results from a disposition of a capital asset, such as a stock, bond or real estate, where the amount realized on the disposition is less than the purchase price. Required Documentation: Capital gains or losses must be considered when determining Effective Income, when the individual has a constant turnover of assets resulting in gains or losses. 3 years’ tax returns are required to evaluate an earnings trend and: o Results in a gain, it may be added as Effective Income; or o Consistently shows a loss, it must be deducted from the total income. o The Borrower must document anticipated continuation of income through verified assets.

Trust Income Trust Income refers to income that is regularly distributed to a Borrower from a trust. Required Documentation: The Underwriter must verify and document the existence of the Trust Agreement or other trustee statement to verify: o The frequency, duration, and amount of the distribution by obtaining a bank statement or transaction history from the bank; and o Verify that regular payments will continue for at least the first 3 years of the mortgage term. Calculation of Income: The Underwriter must use the income based on the terms and conditions in the Trust Agreement or other trustee statement to calculate qualifying effective income.

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Calculation of Income: The Underwriter must use the current rate of the annuity to calculate qualifying effective income and must subtract any of the assets used for the Borrower’s required funds to close to purchase the subject Property from the Borrower’s liquid assets prior to calculating any Annuity Income.

Notes Receivable Income Notes Receivable Income refers to income received by the Borrower as payee or holder in due course of a promissory Note or similar credit instrument. Required Documentation: The Underwriter must verify and document the existence of the Note and must also verify and document that payments have been consistently received for the previous 12 months by obtaining tax returns, deposit slips or cancelled checks and that such payments are guaranteed to continue for the first 3 years of the Mortgage. Calculation of Income: o For Borrowers who have been and will be receiving a consistent amount of Notes Receivable Income, the Underwriter must use the current rate of income to calculate Effective Income. o For Borrowers whose Notes Receivable Income fluctuates, the Underwriter must use the average of the Notes Receivable Income received over the previous year to calculate Effective Income.

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The Underwriter must subtract any of the assets used for the Borrower’s required funds to close to purchase the subject Property from the Borrower’s liquid assets prior to calculating any interest or dividend income.

Analyzing IRS Schedule B form (Interest and Dividend Income) This taxable/tax-exempt income may be added back to the adjusted gross income only if it: has been received for the past two years; and is expected to continue.

Farm Income/Loss In reviewing tax returns or tax transcripts, farm income/loss filed on IRS Form Schedule F must be included in Borrower’s income analysis. • Depreciation may be added back for most recent 2 years; • If the farm income/loss is derived from the Subject Property, the Property is considered as ineligible for financing by FCBM.

Non-Taxable Income Non-Taxable Income refers to types of income not subject to federal taxes, which includes, but is not limited to: • Some portion of Social Security Income; • Some federal government employee Retirement Income; • Railroad Retirement benefits; • Some state government Retirement Income; • Certain types of disability and Public Assistance payments; • Child Support; • Military allowances; and • Other income that is documented as being exempt from federal income taxes.

Required Documentation: Non-taxable income may be “grossed up” based on the appropriate tax rate percentage for the income amount reflected on the Borrower’s tax returns. The Underwriter must document and support the amount of income to be grossed up for any Non-taxable income source.

Important: Do not include the non-taxable portion in the residual income calculation for consideration as a compensating factor.

Calculation of Income: The amount of tax savings attributed to non-taxable income may be added to the Borrower’s gross income. • The percentage of non-taxable income that may be added cannot exceed the greater of 15% or the appropriate tax rate for the income amount, based on the Borrower’s tax rate for the previous year. • If the Borrower was not required to file a federal tax return for the previous tax reporting period, the Underwriter may gross up the non-taxable income by 15%. The Underwriter may not make any additional adjustments or allowances based on the number of the Borrower’s dependents.

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The tables below contain the 2016, 2015 and 2014 Income Tax Bracket Tables per the IRS

2016 Income Tax Rate

Married filing jointly Married filing Tax rate Single filers or qualifying Head of household separately widow/widower

10% Up to $9,275 Up to $18,550 Up to $9,275 Up to $13,250

15% $9,276 - $37,650 $18,551 - $75,300 $9,276- $37,650 $13,251 - $50,400

25% $37,651 - $91,150 $75,301 - $151,900 $37,651 - $75,950 $50,401 - $130,150

28% $91,151 - $190,150 $151,901 - $231,450 $75,951 - $115,725 $130,150 - $210,800

33% $190,151 - $413,350 $231,451 - $413,350 $115,726 - $206,675 $210,801 - $413,350

35% $413,351 - $415,050 $413,351 - $466,950 $206,676 - $233,475 $413,351 - $441,000

39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more Source: IRS.gov

2015 Income Tax Rate

Married filing jointly Tax Married filing Single filers or qualifying Head of household rate separately widow/widower

10% Up to $9,225 Up to $18,450 Up to $9,225 Up to $13,150

15% $9,226 - $37,450 $18,451 - $74,900 $9,226- $37,450 $13,151 - $50,200

25% $37,451 - $74,901 - $151,200 $37,451 - $75,600 $50,201 - $129,600 $90,750

28% $90,751 - $151,201 - $230,450 $75,601 - $115,225 $129,601 - $189,300 $209,850

33% $189,301 - $230,451 - $411,500 $115,226 - $209,851 - $411,500 $205,750 $411,500

35% $411,501 - $411,501 - $464,850 $205,751 - $411,501 - $413,200 $232,425 $439,000

39.6% $413,201 or $464,851 or more $232,426 or more $439,001 or more more

Source: IRS.gov

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2014 Income Tax Rate

Married filing jointly or Tax rate Single filers qualifying Married filing separately Head of household widow/widower

10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950

15% $9,076 - $36,900 $18,151 - $73,800 $9,076- $36,900 $12,951 - $49,400

25% $36,901 - $89,350 $73,801 - $148,850 $36,901 - $74,425 $49,401 - $127,550

28% $89,351 - $186,350 $148,851 - $226,850 $74,426 - $113,425 $127,551 - $206,600

33% $186,351 - $405,100 $226,851 - $405,100 $113,426 - $202,550 $206,601 - $405,100

35% $405,101 - $406,750 $405,101 - $457,600 $202,551 - $228,800 $405,101 - $432,200

39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more

Source: IRS.gov

Example on how to determine the appropriate tax rate when grossing up non-taxable income: Single applicant with annual wages of $35,000 receiving VA service connected disability (non- taxable) of $10,000 per year in 2012 or $833.33 per month. The tax rate for the non-taxable income is 15% therefore, the annual grossed up non-taxable income would be $10,000 x 15% = $11,500 or $958.33 per month.

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Rental Income Rental Income refers to income received or to be received from the Subject Property or other Real Estate Property owned by the Borrower(s). If rental income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from his/her Primary Residence. • Rental Income Received from the Subject Property: Rental Income from the subject Property may be considered qualifying effective income when the Property is a 2-4 Unit dwelling. Required Documentation: The documentation varies depending upon the length of time the Borrower has owned the property. See the matrix below for the required documentation Limited or No History of Rental Income History of Rental Income Borrower does not have a history of Rental When the Borrower has a history of Rental Income from the subject since the previous tax Income from the subject since the previous tax filing: filing: • The Underwriter must verify and • The Underwriter must verify and document the proposed Rental document the existing Rental Income Income by obtaining an appraisal by obtaining the Borrower’s most showing fair market rent (use FNMA recent tax returns, including Schedule Form 1025/Freddie Mac Form 72, E, from the previous 2 years. Small Residential Income Property • For Properties with less than 2 years Appraisal Report evidencing market of Rental Income history, the rent; and Underwriter must document the date • Copy of the prospective lease. of acquisition by providing the deed, Settlement Statement or similar legal document.

Calculation of Rental Income Received from the Subject Property: The Underwriter must add the net subject property Rental Income to the Borrower’s gross income and may not reduce the Borrower’s total Mortgage Payment by the net subject property Rental Income. See the matrix below to calculate the rental income depending upon the length of time the borrower has owned the property. Limited or No History of Rental Income History of Rental Income To calculate the Effective Income from the The Underwriter must calculate the Rental subject Property where the Borrower does not Income by averaging the amount shown on have a history of Rental Income from the Schedule E. subject Property since the previous tax filing, - Depreciation, mortgage interest, the Underwriter must use the lesser of: taxes, insurance and any HOA dues • The monthly operating income shown on Schedule E may be reported on Freddie Mac Form 998; added back to the net income or or loss. • 75% of the lesser of: - If the Property has been owned for - Fair market rent reported by less than 2 years, the Underwriter the Appraiser; or must annualize the Rental Income - The rent reflected in the lease for the length of time the Property or other rental agreement. has been owned.

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• Rental Income Received from Vacated Primary Residence: FHA does not allow any rental income from the property being vacated except under the circumstances: o If Rental Income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from the Borrower’s current Principal Residence; o The Underwriter must obtain a lease agreement of at least 1 year in duration after the mortgage is closed; o Evidence of the payment of the security deposit o first month’s rent is verified; and o The Underwriter must obtain an appraisal evidencing market rent and that the Borrower has at least 25% equity in the Property. Note: the appraisal is not required to be completed by an FHA Roster Appraiser. If the above cannot be met, the Borrower must qualify with the full debt of both mortgages for the current and new homes without any rental income even if a lease is signed. Note: This guidance also applies when the Borrower has a pending sale that will close after to our subject transaction.

Required Documentation: The documentation varies depending upon the length of time the Borrower has owned the property. The Underwriter must obtain the Borrower’s last two (2) years’ tax returns with Schedule E and a copy of a lease agreement of at least 1 year’s duration after the mortgage is closed and evidence of the payment of the security deposit or first month’s rent. Limited or No History of Rental Income History of Rental Income Where the Borrower does not have a history of The Underwriter must obtain the Borrower’s Rental Income for the Property since previous tax last two (2) years’ tax returns with Schedule E. filing, the Underwriter must obtain: For One Unit Property: • A full appraisal 1004 Form with the Single Family Comparable Rent Schedule, and Fannie Mae Form 216/Freddie Mac Form 998, Operating Income Statement, showing fair market rent; • The Borrower must have at least 25% equity in the Property. The appraisal is not required to be completed by an FHA Roster Appraiser. • Copy of a lease agreement of at least 1 year’s duration after the mortgage is closed and evidence of the payment of the security deposit or first month’s rent For Two-to-Four Unit Properties: • A full appraisal 1004 Form with Fannie

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Mae’s 1025/Freddie Mac Form 72 “Small Residential Income Property Appraisal Report showing fair market rent; • The Borrower must have at least 25% equity in the Property. The appraisal is not required to be completed by an FHA Roster Appraiser. • Copy of a lease agreement of at least 1 year’s duration after the mortgage is closed and evidence of the payment of the security deposit or first month’s rent

Calculation of Rental Income Received from other Owned Real Estate Property(ies): Limited or No History of Rental Income History of Rental Income To calculate the effective net Rental Income from The Underwriter must calculate the net other real estate holdings where the Borrower Rental Income by averaging the amount does not have a history of Rental Income since shown on the Schedule E provided the the previous tax filing, the Underwriter must Borrower continues to own all Properties deduct the Principal, Interest, Taxes, and included on the Schedule E. Insurance (PITI) from the lesser of: - Depreciation shown on Schedule E • The monthly operating income reported may be added back to the net on Freddie Mac Form 998; or income or loss. • 75% of the lesser of: - If the Property has been owned for - Fair market rent reported by less than 2 years, the Mortgagee the Appraiser; or must annualize the Rental Income - The rent reflected in the lease for the length of time the Property or other rental agreement. has been owned. - For Properties with less than 2 years of Rental Income history, the Underwriter must document the date of acquisition by providing the deed, Closing Settlement Statement or similar legal document. - Positive net Rental Income must be added to the Borrower’s Effective Income. Negative net Rental Income must be included as a debt/liability.

Analyzing IRS Schedule E form (Rents, Royalties, Partnerships) Any income received from rental properties or royalties may be used as income, after adding back any depreciation shown on Schedule E.

Self Employed Income Self-Employment Income refers to income generated by a business in which the Borrower has a 25% or greater ownership interest. There are four basic types of business structures. They include: • Sole proprietorships (Schedule C);

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• Corporations (C-Corp); • Limited Liability, or “S” corporations; and • Partnerships.

Minimum Length of Self-Employment The Underwriter may consider Self-Employment income if the Borrower has been self-employed for at least 2 years. If the Borrower has been self-employed between 1 and 2 years, the Underwriter may only consider the income as qualifying effective income if the Borrower was previously employed in the same line of work in which the Borrower is self-employed or in a related occupation for at least 2 years.

Stability of Self-Employment Income Income obtained from businesses with annual earnings that are stable or increasing is acceptable. If the income from businesses shows declining income greater than 20% over the analysis period, the loan must be manually downgraded, and the Underwriter must document that the business income is now stable.

The income may be considered stable after a 20% reduction if the Underwriter can document the reduction in income was the result of an extenuating circumstance, the Borrower can demonstrate the income has been stable or increasing for a minimum of 12 months, and the Borrower qualifies utilizing the reduced income.

Business Financial Strength The business income should be analyzed to determine if the Borrower’s business is expected to generate sufficient income for his/her needs, the Underwriter must carefully analyze the business financial strength including the source of the business income and the general economic outlook for similar businesses in the area.

Self-Employed Income Documentation Requirements Individual and Business Tax Returns • The Underwriter must obtain complete individual federal income tax returns for the most recent two years, including all schedules. • No business tax returns required if all are met: o Individual federal income tax returns show increasing Self-Employment Income over the past two years; o Funds to close are not coming from business accounts; and o The FHA loan to be insured is not a cash-out refinance. • The Underwriter must obtain a YTD Profit &Loss (P&L) statement and Balance Sheet if more than a calendar quarter has elapsed since date of most recent calendar or fiscal yearend tax return was filed by the Borrower. Note: A Balance Sheet not required for self-employed Borrowers filing Schedule C income.

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Calculation of Self Employed Income the Underwriter must analyze the Borrower’s tax returns to determine Self-Employment Income. Requirements for analyzing self- employment documentation are found in Analyzing IRS Forms. The Underwriter must calculate gross Self-Employment Income by using the lesser of: • The average gross Self-Employment Income earned over the previous two (2) years; or • The average gross Self-Employment Income earned over the previous one (1) year.

Analyzing IRS Business Income and Loss from Schedule C Sole proprietorship income calculated on Schedule C is business income. Depreciation, depletion, amortization, and casualty losses may be added back to the gross income.

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General Asset Requirements The Underwriter may only consider assets derived from acceptable sources in accordance with the requirements outlined in these guidelines. All asset used to qualify borrowers must be legal at the local, state, and federal level. Any assets derived from an activity or source that violates Federal, state, or local laws cannot be considered for loan qualification. If the borrower’s sources of funds are from a country included on the OFAC Sanctioned Countries List that is found in the Resource Center, the funds are not eligible for use in the transaction. The Underwriter must verify and document that the Borrower has sufficient funds from an acceptable source.

Note: Closing costs, prepaid items and other fees may not be applied towards the Borrower’s MRI

Earnest Money Deposit (EMD) The Underwriter must verify and document the deposit amount and source of funds if the amount of the earnest money deposit exceeds 1% of the Sales Price, or is excessive based on the Borrower’s history of accumulating savings, by obtaining: • A copy of the Borrower’s cancelled check; • Certification from the deposit-holder acknowledging receipt of funds; or • A Verification of Deposit (VOD) or bank statement showing that the average balance was sufficient to cover the amount of the earnest money deposit at the time of the deposit. Note: If the source of the earnest money deposit was a gift, the Underwriter must verify that the gift is in compliance with the Gift requirements (Personal and Equity)

Cash to Close The Underwriter must document all funds that are used for the purpose of closing, including those to funds used or to be used to pay off debt or to pay costs outside of closing (POC) in addition to the Minimum Required Investment (MRI). Origination Fees and other Closing Costs: The Lender/Originator may charge a reasonable origination fee; also, only customary and reasonable closing costs necessary to close the Mortgage may be charged and the charges may not exceed actual costs.

Note: the loan must also comply with HUD’s Qualified Mortgage Rule for points and fees per 24 CFR § 203.19.

Discount Points: It refers to a charge from the Lender for the interest rate chosen that is paid by the Borrower and becomes part of the total cash required to close.

Prepaid Items (Including Per Diem Interest): May include flood and hazard insurance premiums, MIPs, real estate taxes, and per diem interest. They must comply with the requirements of the CFPB.

Upfront Mortgage Insurance Premium Amounts: Any UFMIP amounts paid in cash are added to the total cash settlement requirements. The UFMIP must be entirely financed into the Mortgage or paid entirely in cash. However, if the UFMIP is financed into the Mortgage, the entire amount is to be financed except for any amount less than $1.00.

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Real Estate Agent Fees: If a Borrower is represented by a real estate agent and must pay any fee directly to the agent, that expense must be included in the total of the Borrower’s cash to close requirements

Repairs and Improvements: Repairs and improvements, or any portion paid by the Borrower are part of the Borrower’s total cash to close requirements.

Premium Pricing: This refers to a credit from a Lender for the interest rate chosen and may be used to pay a Borrower’s actual closing costs and/or prepaid items. Closing costs paid in this manner do not need to be included as part of the Interested Party limitation.

The funds derived from a premium priced Mortgage: • Must be disclosed in accordance with RESPA; • Must be used to reduce the principal balance if the credit amount exceeds the actual dollar amount for closing costs and prepaid expenses; and • May not be used for payment of debts, collection accounts, escrow shortages or missed Mortgage Payments, or Judgments.

Interested Party Contributions: FCBM may apply Interested Party credits to the closing costs and prepaid items including any items Paid Outside Closing (POC). The refund of the Borrower’s POCs may be used toward the Borrower’s MRI if documentation is provided to FCBM that the POCs were paid with the Borrower’s own funds.

Note: The Lender/Settlement Agent must identify the total Interested Party credits on the front page of the Settlement Statement, Closing Disclosure or similar legal document or in an addendum. The Lender must identify each item paid by Interested Party Contributions.

Real Estate Tax Credits: Where real estate taxes are paid in arrears, the seller’s real estate tax credit may be used to meet the minimum required investment if the Underwriter documents that the Borrower had sufficient assets to meet the minimum required investment and to pay all Borrower paid closing costs at the time of the final credit decision.

Provide most recent bank statement (all pages) covering a full month with beginning and ending account balance. If the beginning and ending balances are not shown, an additional consecutive month’s bank statement must be provided.

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If the Borrower does not hold the bank account solely, all parties on the account must provide a written statement that the Borrower has full access and use of the funds.

Large Deposits If there is a large increase in an account, or the account was recently opened, the Underwriter must obtain from the borrower a credible explanation and documentation of the source of funds. • Obtain an explanation and documentation for recent large deposits in excess of 1% of the property sales price; or, • 1% of the adjusted value on refinance transactions when the borrower is to bring funds to closing; and, • Verify that any recent debts were not incurred to obtain part, or all, of the required MRI on the property being purchased.

Tax Refunds When the borrower will be utilizing tax refund for funds to close, the following documents need to be included in the loan file: 1) A copy of the signed personal federal tax return to verify the expected tax refund to be received. 2) Evidence of receipt of the refund from the IRS via copy of the electronic deposit made on the borrower’s bank statement, or copy of the tax refund check. Note: If the tax refund deposit on a bank statement does not identify the IRS as the institution that made the direct deposit, the refund did not come directly from the IRS but from a third party institution who is providing an anticipated refund loan to by-pass the waiting time for the IRS to process the borrowers tax refund process); in such cases; the deposit cannot be used for funds to close or reserves UNLESS the following documents are provided: • The borrower is to provide a copy of their signed personal tax return to verify the anticipated refund. • Provide a copy of the refund anticipation agreement/copy of contract form the tax preparer. • Evidence the refund anticipation loan has been paid by the IRS.

Retirement Accounts Retirement Accounts refer to assets accumulated by the Borrower for the purpose of retirement. The Underwriter must document with the most recent monthly or quarterly statement to verify and document the existence and amounts in the Borrower’s retirement accounts, the Borrower’s eligibility for withdrawals, and the terms and conditions for withdrawal from any retirement account. The Underwriter may include up to 60% of the value of assets, less any existing loans, from the Borrower’s retirement accounts, such as IRAs, thrift savings plans, 401(k) plan, and Keogh accounts, unless the Borrower provides conclusive evidence that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties.

If any portion of the asset is required for funds to close, evidence of liquidation is required. The portion of the assets not used to meet closing requirements, after adjusting for taxes and penalties may be counted as Reserves.

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Stocks and Bonds Stocks and Bonds are investment assets accumulated by the Borrower. The Underwriter must determine the value of the stocks and bonds from the most recent 2 months or quarterly statement. Evidence of liquidation is not required.

If the stocks and bonds are not held in a brokerage account, the Underwriter must determine the current value of the stocks and bonds through third party verification by obtaining a copy of each stock or bond certificate. Government-issued savings bonds are valued at the original purchase price, unless the Underwriter verifies and documents that the bonds are eligible for redemption when cash to close is calculated.

Reserves Reserves refer to the excess verified and documented liquid assets minus the total funds the borrower is required to pay at closing. The Underwriter must verify and document all the assets submitted to the AUS system. Reserves do not include: • The amount of cash taken at settlement in cash-out transactions; • Incidental cash received at settlement in other loan transactions; • Equity in another Property; or • Borrowed funds from any source. Required Reserves for 1-2 Unit Properties: There is no minimum reserves required on 1-2 Unit Properties.

Required Reserves for 3-4 Unit Properties: The Underwriter must verify and document 3 months reserves of PITIA after closing.

Minimum Required Investment Minimum Required Investment (MRI) refers to the Borrower’s contribution required which represents at least 3.5% of the Adjusted Value of the Property.

The funds for the Borrower’s MRI must not come from: 1) The seller of the Property; 2) Any other person or Entity who financially benefits from the transaction (directly or indirectly); or 3) Anyone who is or will be reimbursed, directly or indirectly, by any party included in (1) or (2) above. The Closing costs (non-recurring closing costs, prepaid expenses and discount points) ca not be used to help meet the borrower’s minimum required investment. Note: The borrower may use a credit card to pay for the appraisal and credit report. These costs cannot be considered to help meet the required 3.5% investment.

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Unacceptable Assets The list below provides example of some but not all type of unacceptable assets: • Unsecured financing or unsecured loans (i.e. signature loan). • Cash advances or credit cards. • Loans secured against household goods and furniture. • Collateralized Loans against personal property such as automobile, motorcycle, RV, etc. • Gift funds with repayment or from an unacceptable donor/source.

FCBM Requirements for Loans with Gift Funds Maximum DTI Ratios of 40/50% with AUS Approve/Eligible. Exceptions for increased ratios up to 45/55% are permitted if any one of the following criteria can be met: o Verification of satisfactory similar housing payment via cancelled checks or an institutional VOR documenting that the proposed housing payment (PITIA) is no more than 25% higher than current housing payment; new total debts are similar or lower than current debts; and the borrower(s) has no less than 3 traditional credit tradelines reporting with a 24 months history; or o The LTV is 95% and the minimum required investment of 3.5% is from the borrower own funds; or o The LTV is equal to, or less than 90% (all funds for down payment can be derived from gift funds); or o Significant additional income not reflected in qualifying income; or potential of increased earnings based on employment/education career; residual income. Note: the maximum DTI cannot exceed 50% on 2-4 Unit Properties.

o The donor’s name, address, and telephone number; o The donor’s relationship to the Borrower; o The dollar amount of the gift; and o A statement that no repayment is required. o The Gift of Equity must be noted on the fully executed Sales Contract and Closing Disclosure (CD). o Obtain a copy of the existing mortgage payoff to verify the family transfer is not a distress bail out sale.

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Personal Gift Acceptable Sources of Gifts Funds may be provided by: • The Borrower’s Family Member; • The Borrower’s employer or labor union; • A close friend with a clearly defined and documented interest in the Borrower (i.e. family friend, close friend, fiancée, fiancé). Note: A signed explanation alone does not document a relationship; Note: Other acceptable gift donor’s include charitable organizations and government agencies; however these types of donor’s are not acceptable to FCBM.

Gift Letter Requirement: The gift letter must be signed and dated by the donor and Borrower that includes the following: 1) The donor’s name, address, and telephone number; 2) The donor’s relationship to the Borrower; 3) The dollar amount of the gift; and 4) A statement that no repayment is required

Documenting Acceptability of Gift Funds o Obtain documentation to support the donor’s ability to provide gift funds are derived from an acceptable source. o Large deposits on the Donor’s bank statement must be sourced to document that the gift funds are not from an unacceptable source, or from a person or entity with an interest in the transaction. o Donor’s cash on hand is not acceptable as a source of gift funds.

Documenting Gift Transfer The Underwriter must verify and document the transfer of gift funds from the donor to the Borrower in accordance with the requirements below. If the gift funds… Then document gift transfer by…

Are already deposited in the - Obtain bank statement showing gift funds Borrower’s account withdrawn from the Donor’s account that was noted on the Gift Letter, and - Borrower’s deposit slip and bank statement showing gift funds available. Will be provided at closing via certified - Bank statement showing the gift funds withdrawn check, cashier’s check, money order, from the donor’s account that was noted on the official check, or other type of bank Gift Letter, and check - Copy of certified check; closing agent’s acknowledgement of gift receipt if check was payable to the Settlement Agent. Are being borrowed by the Donor, and - Having the donor provide written evidence that documentation from the bank or other the funds were borrowed from an acceptable savings account is not available source, not an interested party to the transaction. Regardless of when gift funds are made available to a borrower, underwriter must be able to make a reasonable determination that the gift funds were not provided by an unacceptable source

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Entering Gift funds in LOS System and Data Integrity • In Section II of the 1003 of the LOS system, in the Source of Down Payment segment tab, the full gift amount must be entered along with the source (i.e. family member, government agency, nonprofit) regardless if the amount has been partially spent and is not being used for down payment, or the gift amount exceeds the down payment amount. • In Section VI of the 1003 of the LOS system, in the Assets segment tab, all assets should be entered as verified. If the gift has not been deposited, then enter the full gift that will be given at Closing. However, if the borrower has received a gift and that gift has been deposited into a depository account, the gift should not be entered separately as a gift asset. If the gift has not been deposited into a depository account, it must be shown separately as a gift asset and if there are multiple gift funds, they should be listed individually in both sections when applicable. For example, if the borrower’s verified checking account reflects a balance of $15,000, and $5,000 of that amount was from a gift, the checking account balance should remain as $15,000, with the $5,000 shown as a gift in the Source of Downpayment in Section II. If the original gift has been partially spent or used for the earnest money, the Underwriter is to note on the 92900-LT that gift funds have partially been used but that Total Gifts received and deposited into the Borrower’s bank account : $_____; but only $_____ remain in deposit and available.

Interested Party Contributions Interested parties refer to Sellers, Real Estate Agents, Builders, Developers or other parties with an interest in the transaction and may contribute up to 6% of the lesser of the property’s sales price or appraised value toward the Borrower’s origination fees, other closing costs and discount points. Interested Party Contributions exceeding 6% are considered an inducement to purchase as well as contributions that exceed actual origination fees, other closing costs and discount.

The 6% limit also includes: • Interested Party payment for permanent or temporary interest rate buydowns and other payment supplements, • Payments of mortgage interest for fixed rate mortgages, • Mortgage payment protection insurance; and, • Payment of UFMIP. The Underwriter must document the total Interested Party Contributions on Form HUD-92900- LT, Settlement Statement or similar legal documentation, and the sales contract.

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Inducement to Purchase Inducements to Purchase refer to certain expenses paid by the seller and/or another Interested Party on behalf of the Borrower and result in a dollar-for-dollar reduction to the purchase price when computing the Adjusted Value of the Property before applying the appropriate LTV percentage. These inducements include, but are not limited to: • Contributions exceeding 6% of the purchase price; • Contributions exceeding the origination fees, other closing costs and discount points; • Decorating allowances; • Repair allowances; • Excess rent credit; • Moving costs; • Paying off consumer debt; • Personal Property; • Below-market rent, except for Borrowers who meet the Identity-of-Interest exception for Family Members. • An inducement to purchase exists when the seller and/or Interested Party agrees to pay any portion of the Borrower’s sales commission on the sale of the Borrower’s current primary residence; and • An inducement to purchase also exists when a Borrower is not paying a real estate commission on the sale of their present residence, and the same real estate broker or agent is involved in both transactions, and the seller is paying a real estate commission on the Property being purchased by the Borrower that exceeds what is typical for the area.

Personal property The replacement of existing Personal Property items listed below are not considered an inducement to purchase, provided the replacement is made prior to settlement and no cash allowance is given to the Borrower. The inclusion of the items below in the sales agreement is also not considered an inducement to purchase if inclusion of the item is customary for the area: • Range • Refrigerator • Dishwasher • Washer • Dryer • Carpeting • Window treatment • Other items determined appropriate by the HOC

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Real Estate Sales Commission • If the Borrower is a licensed Realtor, then he/she may use the entitled real estate commission from the sale of the Subject property toward the required cash investment and/or closing costs, with no adjustments to the maximum loan amount. • A family member whom is a Realtor may provide a gift to the Borrower that is sourced from the entitled commission from the sale or listing of the Subject Property. • If there is an identity of interest between the Buyer and Seller, then the real estate commission from the sale or listing of the Subject Property cannot be used for down payment. Note: The real estate agent for the subject property may not act as the Loan Originator for the Borrowers purchasing the property.

Rent Below Fair Market Rent may be an inducement to purchase when the sales agreement reveals that the Borrower has been living in the Property rent-free or has an agreement to occupy the Property at a rental amount considerably below fair market rent. Note: Rent below fair market is not considered an inducement to purchase when a builder fails to deliver the property at the agreed-upon time, and allows the Borrower to occupy an existing or other unit for less than market rent until construction is complete.

Rent Credit Rent Credits refer to the cumulative amount of rental payments that exceed the Appraiser’s estimate of fair market rent and may be considered as accumulation of the Borrower’s minimum required investment. The loan file must include the following documentation: • Rent with Option to Purchase Agreement; and • Appraiser’s estimate of market rent (1007). • Documentation of timely rental payments.

Sale of Personal Property Personal Property refers to tangible property such as vehicles, stamps, coins, baseball card collections, etc. that a Borrower may sell to document sufficient funds to close and the funds to close derived from this source of funds to be considered will be only the lesser of the estimated value or actual sales price. The list of required documentation to be provided by the Borrower: • Evidence of receipt and deposit of proceeds from the sale of personal property items; and • Satisfactory recent estimated valuation of the personal property (prior to sale date) by using: o Published value estimates issued by organizations such as auto dealers (N.A.D.A Guide or Kelly Blue Book); or o Professional associations related to the assets; or o A written appraisal by a qualified Appraiser with no financial interest in the loan transaction.

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Sale of Real Property Net proceeds from the Sale of Real Property owned by the Borrower may be used as an acceptable source of funds. Required Documentation: The Underwriter must obtain the fully executed Settlement Statement or Closing Disclosure and deposited receipt of Borrower’s share of the net proceeds.

Trade Equity Trade Equity refers to when a Borrower trades his/her Real Property to the seller as part of the cash investment. The amount of the Borrower’s equity contribution is determined by: • Using the lesser of the Property’s appraised value or sales price; and • Subtracting all liens against the Property being traded, along with any real estate commission. The Underwriter must obtain an appraisal report complying with FHA appraisal policy to determine the Property’s value and also obtain the Settlement Statement or similar legal document to document the sale of the Property.

Employer Relocation Guaranteed Purchase or Employer Assistance Employer assistance refers to benefits provided by an employer to relocate the Borrower or financial assistance with the Borrower’s housing purchase. Relocation Guaranteed Purchase: If the employer guarantees to purchase the Borrower’s previous residence as a result of relocation, obtain the executed Buyout Agreement along with documentation for the receipt of net proceeds based on guaranteed sales price minus the outstanding liens and expenses and verify the relocation firm takes responsibility for the outstanding mortgage debt.

Employer Assistance: The Borrower’s employer may provide financial assistance as employee compensation toward the Subject purchase. A salary advance cannot be considered as assets to close. The Underwriter must verify the assistance will be applied toward closing costs, MIP, and/or the minimum required investment; if received at Closing, document Borrower’s receipt of such funds; if received after Closing, document Borrower has sufficient cash for Closing.

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Underwriting the Borrower Using Manual Underwriting Guidelines (AUS Refer or Manual Downgrade) The Direct Endorsement (DE) Underwriter must manually underwrite those applications where the AUS issues a Refer or applications that are downgraded to a manual underwrite. Further, the DE Underwriter must evaluate the transaction in accordance with the guidance in this Manual Underwriting section.

The Direct Endorsement (DE) Underwriter Responsibilities(Refer or Manual) The DE Underwriter is ultimately responsible for making an underwriting decision on behalf of their DE Lender in compliance with HUD requirements performing: • Duty of Care/Due Diligence • Specific Underwriter Responsibilities As the responsible party, the underwriter must review appraisal reports, compliance inspections, and credit analyses to ensure reasonable conclusions, sound reports, and compliance with HUD requirements regardless of who prepared the documentation; determine the acceptability of the appraisal, the inspections, the Borrower’s capacity to repay the Mortgage, and the overall acceptability of the Mortgage for FHA insurance; identify any inconsistencies in information obtained by the Mortgagee in the course of reviewing the Borrower’s application regardless of the materiality of such information to the origination and underwriting of a Mortgage; and resolve all inconsistencies identified before approving the Borrower’s application, and document the inconsistencies and their resolutions of the inconsistencies in the file.

The DE Underwriter must identify and report any misrepresentations, violations of HUD requirements, and fraud to the appropriate party within their organization.

The DE Underwriter must determine the creditworthiness of the Borrower, which includes analyzing the Borrower’s overall pattern of credit behavior and the credit report. Furthermore, compensating factors cannot be used to compensate for any derogatory credit.

The DE Underwriter must review the income of a Borrower and verify that it has been supported with the proper documentation and calculate accurate DTI ratios.

The DE Underwriter must review the assets of a Borrower and verify that they have been supported with the proper documentation.

The DE Underwriter must review the MIP and mortgage amount and verify that they have been supported with the proper documentation.

Credit Report and Requirements (Refer or Manual) The Originator must obtain a credit report for each Borrower who will be obligated on the Note and must obtain a credit report for a non-borrowing spouse who resides in a community property state, or if the subject Property is located in a community property state. The non-borrowing spouse’s SSN must be validated with the SSA. If the non-borrowing spouse does not have a valid SSN, a credit report must still be obtained using at a minimum, the non- borrowing spouse’s full name, date of birth, and previous addresses for the last two years. The credit report must contain information from at least two (2) credit repositories pertaining to credit, residence history, and public records information and the Lender must a new credit report and rescore the loan through the AUS if the underwriter identifies inconsistencies between any

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information in the file and the original credit report. The Lender must retain copy of all credit reports. Must provide inquiries made within the last 90 Days. Note: The Underwriter must not consider the credit history of a non-borrowing spouse.

Evaluating Credit History (Refer or Manual) The underwriter must examine the Borrower’s overall pattern of credit behavior, not just isolated unsatisfactory or slow payments, to determine the Borrower’s creditworthiness and must obtain an updated credit report or supplement if the underwriter identifies inconsistencies between any information in the mortgage file and the original credit report. Furthermore, the Borrower must provide an explanation for all derogatory credit in the past 2 years.

The underwriter must evaluate the Borrower’s payment histories in the following order: • Previous housing expenses and related expenses, including utilities; • Installment debts; and • Revolving accounts.

Satisfactory Credit (Refer or Manual) • The Underwriter may consider a Borrower to have an acceptable payment history if the Borrower has made all housing and installment debt payments on time for the previous 12 months and has no more than 2x30 day late mortgage payments or installment payments in the previous 24 months. • The Underwriter may approve the Borrower with an acceptable payment history if the Borrower has no major derogatory credit on revolving accounts in the previous 12 months. Note: Major derogatory credit on revolving accounts refers to any payments made more than 90 Days after the due date, or three or more payments more than 60 Days after the due date.

Payment History Requiring Additional Analysis (Refer or Manual) If a Borrower’s credit history does not reflect satisfactory credit as stated above, the Borrower’s Payment history requires additional analysis where the Underwriter must analyze the Borrower’s delinquent accounts to determine whether late payments were based on a disregard for financial obligations, an inability to manage debt, or extenuating circumstances. The Underwriter must document this analysis in the loan file. Any explanation or documentation of delinquent accounts must be consistent with other information in the file.

For Borrowers who indicate they are living rent-free, the Underwriter must obtain verification from the property owner where they are residing that the Borrower has been living rent-free and the amount of time the Borrower has been living rent free.

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Authorized User (Refer or Manual) Accounts for which the Borrower is an authorized user must be included in the Borrower’s DTI unless documentation evidencing that the primary account holder has made all required payments on the account for the previous 12 months is provided. If less than 3 payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower’s DTI.

Collection Accounts (Refer or Manual) If the credit reports used in the analysis show cumulative outstanding collection account balances of $2,000 or greater, the Underwriter must: • Verify that the debt is paid in full prior to or at the time of loan closing using acceptable source of funds; • Verify that the Borrower has made payment arrangements with the creditor; or • If a payment arrangement is not available, calculate the monthly payment using 5% of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI ratio. Note: Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts, unless specifically excluded by state law.

Required Documentation: The must provide a letter of explanation for each outstanding collection.

Charge Off Accounts (Refer or Manual) Charge Off Account has been written off by the creditor and do not need to be included in the Borrower’s DTI.

Disputed Derogatory Credit Accounts (Refer or Manual) Disputed Derogatory Credit Account refers to disputed charge off accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months. The Underwriter must analyze the documentation provided for consistency with other credit information to determine if the derogatory credit account should be considered in the underwriting analysis.

If the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the Underwriter must include a monthly payment in the Borrower’s DTI calculation.

The following are excluded from the cumulative balance: • Disputed medical collections; and • Disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use provided the Underwriter obtains a copy of the police report or other documentation from the creditor to support the status of the account in the loan file. • Disputed Derogatory Credit Accounts of a non-borrowing spouse in a community property state are not included in the cumulative balance.

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Non-Derogatory Disputed Account and Disputed Accounts Not Indicated on the Credit Report (Refer or Manual) Non-Derogatory Disputed Accounts include the following types of accounts: • Disputed accounts with zero balance; • Disputed accounts with late payments aged 24 months or greater; or • Disputed accounts that are current and paid as agreed.

If a Borrower is disputing non-derogatory accounts, or is disputing accounts that are not indicated on the credit report as being disputed, the Underwriter must analyze the effect of the disputed accounts on the Borrower’s ability to repay the loan. If the dispute results in the Borrower’s monthly debt payments utilized in computing the DTI ratio being less than the amount indicated on the credit report, the Borrower must provide documentation of the lower payments.

Judgments (Refer or Manual) Judgment refers to any debt or monetary liability of the Borrower and of the Non-Borrowing spouse if in a community property state and must be resolved or paid in full. Judgments of the Non-Borrowing spouse in a community state do not have to be resolved or paid in full if the obligation is excluded by state law.

Regardless of the amount of outstanding Judgments, the Mortgagee must determine if the Judgment was a result of the Borrower’s disregard for financial obligations; the Borrower’s inability to manage debt; or extenuating circumstances.

A Judgment is considered resolved if the Borrower has entered into a valid agreement with the creditor; the Borrower has made timely payments for at least 3 months and the Judgment will not supersede the FHA-insured mortgage lien. The Underwriter must include the payment amount in the DTI ratio and must obtain a copy of the agreement and evidence that payments were made on time in accordance with the agreement Important: The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments. Required Documentation: The Underwriter must provide the following documentation: • Evidence of payment in full, if paid prior to settlement; • The payoff statement, if paid at settlement; or • The payment arrangement with creditor, if not paid prior to or at settlement, and a subordination agreement for any liens existing on title.

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• Can document that the bankruptcy was caused by extenuating circumstances beyond the Borrower’s control; and • Has since exhibited a documented ability to manage their financial affairs in a responsible manner with at least 3 consumer debts opened after the bankruptcy with satisfactory 12 month payment history. Note: Extenuating circumstances include serious uninsured illness, death of a wage earner, forced job relocation that were beyond the Borrower’s control and not likely to recur.

Chapter 13 A Chapter 13 discharge date that is less than 2 years, but at least 12 months to the FHA Case Number Assignment date may be acceptable documentation and explanation that circumstances that led up to the bankruptcy were beyond the Borrower’s control; and copy of the bankruptcy filing and discharge papers.

The Underwriter must determine that during this time, the Borrower’s payment performance has been satisfactory and all required payments have been made on time; and the Borrower has received written permission from bankruptcy court to enter into the mortgage transaction.

Required Documentation If the credit report does not verify the discharge date of the bankruptcy or if additional documentation is necessary to determine if any liabilities were discharged in the bankruptcy, the Underwriter must obtain the bankruptcy and discharge documents; and must also document that the Borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.

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Pre-Foreclosure/Short Sale (Refer or Manual) A Borrower is not eligible for a new FHA loan if he/she relinquished a property via a Short Sale within 3 years from the date of FHA Case Number Assignment. This 3 year waiting period begins the date of the transfer of property title via the Short Sale. Exception to 3 year wait-period when Borrower is Current at the Time of Short Sale: A Borrower is considered eligible for a new FHA-insured Mortgage if, from the date of FHA Case Number Assignment for the new Mortgage: • All Mortgage Payments on the prior Mortgage were made within the month due for the 12-month period preceding the Short Sale; and • Installment debt payments for the same time period were also made within the month due. Refer to Manual Underwriting Matrix and Compensating Factors sections for further requirement information.

Required Documentation: If the credit report does not indicate the date of the Short Sale, the Underwriter must obtain the Settlement Statement, deed or other legal documents evidencing the date of property transfer.

Foreclosure and Deed-in-Lieu of Foreclosure (Refer or Manual) A Borrower is not eligible for a new FHA loan if the Borrower had a foreclosure or a Deed in Lieu of foreclosure in the 3year period prior to the date of FHA Case Number Assignment. This 3 year waiting period begins on the date of the Deed in Lieu, or the date that the Borrower transferred ownership of the Property to the foreclosing Entity/designee.

Required Documentation: If the credit report does not indicate the date of the foreclosure or Deed in Lieu of foreclosure, the Mortgagee must obtain the Settlement Statement, deed or other legal documents evidencing the date of property transfer.

Consumer Credit Counseling/Payment Plan (Refer or Manual) Participating in a consumer credit counseling program does not disqualify a Borrower from obtaining an FHA loan provided the Underwriter obtains documentation that: • At least 1 year of the pay-out period has elapsed under the plan; • The Borrower’s payment performance has been satisfactory and all required payments have been made on time; and • The Borrower has received written permission from the counseling agency to enter into the mortgage transaction.

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borrower’s DTI ratio unless documentation shows that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the borrower’s DTI. • If the Borrower resides in a community property state or the Property being insured is located in a community property state, debts of the non-borrowing spouse must be included in the Borrower’s qualifying ratios, except for obligations specifically excluded by state law. The non-borrowing spouse’s credit history is not considered a reason to deny a mortgage application Note: Negative income must be subtracted from the Borrower’s gross monthly income, and not treated as recurring monthly liabilities unless otherwise noted.

Undisclosed Mortgage Debt (Refer or Manual) When an existing debt or obligation that is secured by a Mortgage is not listed on the credit report but is revealed during the application process, the Underwriter must obtain a verification of Mortgage directly from the Mortgage Servicer. The mortgage payment must be: • Included in the Borrower’s monthly DTI; and • Must not reflect any delinquency within 12 months of the FHA Case Number assignment date; or • More than 2x30 days late payment within 24 months of the FHA Case Number assignment date.

Credit Inquiries(Refer or Manual) The Underwriter must obtain a written explanation from the Borrower for all inquiries shown on the credit report that were made in the last 90 Days and be aware that undisclosed debt(s) may be revealed in Borrower’s asset statements, paystubs, or as a result of a credit inquiry. The Underwriter must determine that the additional debt was not/will not be used for the Borrower’s Minimum Required Investment (MRI).

Federal Debt (Refer or Manual) Federal Debt refers to debt owed to the federal government for which regular payments are being made. The Underwriter must include the debt in the calculation of the Borrower’s total debt to income. The Underwriter must include documentation from the federal agency evidencing the repayment agreement and verification of payments made, if applicable.

Alimony, Child Support, and Maintenance (Refer or Manual) Alimony obligation can be treated as a reduction of the Borrower’s gross monthly income or included as a monthly obligation in the calculation of the DTI. On the other hand, Child Support and Maintenance are to be treated as monthly obligations in the calculation of the DTI.

To verify the payment amount and the current status of the account, the Underwriter must obtain: • Copy of the official signed divorce decree, separation agreement, maintenance

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agreement, or other legal order. • Obtain the Borrower’s most recent paystubs covering no less than 28 consecutive days to verify any order of garnishment related to the Alimony, Child Support and Maintenance. To calculate the monthly obligation, the Underwriter must use the greater of either the amount shows on the most recent decree or agreement establishing the payment obligation or the monthly garnishment amount.

Note: Delinquent child support must be paid current or in a repayment plan.

Deferred Obligations and Student Loans (Refer or Manual) The Underwriter must include deferred obligations in the Borrower’s monthly liabilities.

Student Loans (Effective with FHA Case Numbers Assigned on or after Thursday, June 30, 2016) (Refer or Manual) The Underwriter is to include all student loans in the borrower's liabilities, regardless of the payment type or status of payments and calculate the monthly obligation using either: • The greater of 1% of the outstanding balance of the loan; or the monthly payment reported on the credit report; OR • The actual documented payment provided that the payment will fully amortize over the loan term (this would apply only to fixed payment loans not to Graduated payments, IBR, adjustable rate student loans, interest only).

Revolving Accounts (Refer or Manual) When the credit report does not reflect a monthly payment for the account, the Underwriter must use the payment shown on the current account statement or 5% of the outstanding balance.

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Open 30-Day Charge Accounts (Refer or Manual) Open 30-day charge accounts require the balance to be paid in full every month. If additional liquid assets are verified to cover the unpaid balance, the debts may be excluded from the DTI. If additional liquid assets are not verified to cover the unpaid balance, the Underwriter may utilize 5% of the outstanding balance as the Borrower’s’ monthly payment to be included in the DTI. Otherwise, the entire outstanding balance must be included in the DTI. If the credit report reflects any late payments in the last 12 months, utilize 5% of the outstanding balance as the Borrower’s monthly debt to be included in the DTI and additional liquid assets must be verified to cover the unpaid balance.

Contingent Liability (Refer or Manual) Contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or obligated, defaults on the payment and may include Co-Signed liabilities and liabilities resulting from a mortgage assumption without release of liability. The monthly payment of the contingent liabilities must be included in the calculation of the Borrower’s monthly obligations unless the Underwriter verifies and documents that there is no possibility that the creditor will pursue debt collection against the Borrower should the other obligor default or the other legally obligated party has made 12 months of timely payments.

The underwriter must obtain the agreement creating the contingent liability or assumption agreement and deed showing transfer of title out of the Borrower’s name.

Co-Signed Loan (Refer or Manual) If the cosigned liability is not included in the monthly obligation, obtain documentation to evidence that the other party has been making regular on-time payments during the previous 12 months, and does not have a history of delinquent payments on the loan. Late payments reported on debts assigned to the ex-spouse in a divorce do not need to be charged to the Borrower if the delinquencies occurred after the divorce. The Underwriter must obtain a copy of the divorce decree ordering the spouse to make payments.

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Business Debt (Refer or Manual) When business debt is reported on the Borrower’s personal credit report, the debt must be included in the DTI calculation, unless documentation can be obtained to show the debt is being paid by the Borrower’s business, and the debt was considered in the cash flow analysis of the Borrower’s business. The debt is considered in the cash flow analysis when the Borrower’s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented as paid out of company funds. When the Borrower’s business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis.

Note: The Underwriter will need to verify with supporting documentation that business expenses are related to the obligation.

General Income Requirements (Refer or Manual) Qualifying Effective Income must be reasonably likely to continue through at least the first three years of the Mortgage, and meet the specific requirements. The Underwriter must document the Borrower’s income and employment history, verify the accuracy of the amounts being reported and only consider income that legally derived and when required, properly reported on the Borrower’s tax returns.

Negative income must be subtracted from the Borrower’s gross monthly income, and not treated as a recurring monthly liability unless otherwise noted.

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Employment Income (Refer or Manual) Refers to income received as an employee of a business that is reported on IRS Form W-2.The Underwriter must verify the Borrower’s most recent 2 years of employment and income, and document using one of the following methods. Traditional Current Employment Documentation: The Underwriter must obtain the most recent pay stubs covering a minimum of 30 consecutive Days (if paid weekly or bi- weekly, pay stubs must cover a minimum of 28 consecutive Days) that show the Borrower’s YTD earnings, and one of the following to verify current employment: • A written Verification of Employment (VOE) covering two years; or • An electronic verification acceptable to FHA. Note: Re-verification of employment must be completed within 10 Days prior to the date of the Note. A verbal Verification of Employment is acceptable.

Alternative Current Employment Documentation: The Underwriter must obtain: • Obtain copies of the pay stubs covering the most recent 30 consecutive Days (if paid weekly or bi-weekly, pay stubs must cover a minimum of 28 consecutive Days) that show the Borrower’s year-to-date earnings; • Obtain copies of the original IRS W-2 forms from the previous two years; and • Document current employment by telephone, sign and date the verification documentation, and note the name, title, and telephone number of the person with whom employment was verified. Note: Re-verification of employment must be completed within 10 Days prior to the date of the Note. A verbal Verification of Employment is acceptable.

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Primary Employment (Refer or Manual) Primary Employment is the Borrower’s principal employment, unless the income falls within a specific category identified below. Primary employment is generally full-time employment and may be either salaried or hourly. The Underwriter may use primary Employment Income as Effective Income. Calculation of Salary Income: Employees who are salaried and whose income has been and will likely be consistently earned, the Underwriter must use the current salary to calculate Effective Income.

Calculation of Hourly Income: Employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower’s current hourly rate to calculate Effective Income.

Part-Time Employment (Refer or Manual) Part-Time Employment refers to employment that is not the Borrower’s primary employment and is generally performed for less than 40 hours per week. The Underwriter may use Income from Part-Time Employment as Effective Income if the Borrower has worked a part-time job uninterrupted for the past 2 years and the current position is reasonably likely to continue. Calculation of Effective Part-Time Income The Underwriter must average the income over the previous 2 years. If the Underwriter can document an increase in pay rate, a 12-month average of hours at the current pay rate may be used.

Overtime and Bonus Income (Refer or Manual) Overtime and Bonus Income refers to income that the Borrower receives in addition to the Borrower’s normal salary and may be used as effective income if it has been received for the past 2 years and it is likely to continue. Periods of Overtime and Bonus Income less than 2 years may be considered if the Underwriter documents that the Overtime and Bonus Income has been consistently earned over a period of not less than one year and is reasonably likely to continue.

Calculation of Effective Overtime and Bonus Income: For employees with Overtime or Bonus Income, the Underwriter must average the income earned over the previous 2 years. However, if the Overtime or Bonus Income from the current year has decreased by 20% or more from the previous year, the Underwriter must use the current year’s income.

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Seasonal Employment (Refer or Manual) Seasonal Employment refers to employment that is not year round, regardless of the number of hours per week the Borrower works on the job. The Underwriter may consider income from Seasonal Employment as if the Borrower has worked the same line of work for the past 2 years and is reasonably likely to be rehired for the next season. Also, the Underwriter may consider unemployment income for those with income from Seasonal Employment. Required Documentation: For seasonal employees with unemployment income, the Underwriter must document the unemployment income for 2 full years and there must be reasonable assurance that this income will continue with the following: • A written statement from the Borrower confirming his/her intent to return to work, and the intended date of return; • Documentation generated by the current employer confirming the Borrower’s eligibility to return to their current employer after seasonal leave; and • Documentation of sufficient liquid assets, in accordance with the sources of funds requirements, used to supplement the Borrower’s income through intended date of return to work with their current employer.

Calculation of Effective Income: the Underwriter must average the income earned over the previous 2 full years.

Additional Required Analysis of Stability of Employment Income (Refer or Manual)

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Employment Gaps (Refer or Manual) Employment gaps of six months or more is considered an extended absence. In this case, the Underwriter may consider the Borrower’s current income if it can verify and document that: • The Borrower has been employed in the current job for at least 6 months at the time of case number assignment; and • A 2 year work history prior to the gap in employment is verified and documented using standard or alternative employment verification.

Temporary Reduction in Income (Refer or Manual) For Borrowers with a temporary reduction of employment income due to short-term disability or similar temporary leave, the Underwriter may consider the Borrower’s current income as effective income, if it can verify and document: • The Borrower intends to return to work; • The Borrower has the right to return to work; and • The Borrower qualifies for the Mortgage taking into account any reduction of income due to the circumstances.

Employed by Family-Owned Business (Refer or Manual) Income derived from a Family-Owned Business may be considered if the Borrower is not an owner in the family-owned business. Required Documentation: The Underwriter must verify and document that the Borrower is not an owner in the family-owned business by using official business documents showing the ownership percentage that include: corporate resolutions or other business organizational documents, business tax returns or Schedule K-1(IRS Form 1065), U.S. Return of Partnership Income, or an official letter from a certified public accountant on their business letterhead.

Also, in addition to the traditional or alternative income documentation, the Underwriter must obtain copies of signed personal tax returns with all schedules.

Calculation of Salary Income: For employees who are salaried and whose income has been and will likely continue to be consistently earned, the Underwriter must use the current salary.

Calculation of Hourly Income: For employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower’s current hourly rate.

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Commission Income (Refer or Manual) Commission Income refers to income that is paid contingent upon the conducting of a business transaction or the performance of a service. The Underwriter may use Commission Income if the Borrower earned the income for at least one year in the same or similar line of work and it is reasonably likely to continue. Required Documentation: For Commission Income less than or equal to 25% of the Borrower’s total earnings, the Underwriter must use traditional or alternative employment documentation.

Calculation of Commission Income: The Underwriter must calculate commission income by using the lesser of: 1) The average commission income earned over the previous 2 years, or for the length of time this income type has been earned if less than 2 years; or 2) The average commission income earned over the previous 1-year. The Underwriter must subtract any unreimbursed employee business expenses as shown on the IRS Form 2106 (depreciation due to business use of a vehicle may be added to the gross income. Note: For information on analyzing Tax Returns, refer to the income section titled “Analyzing IRS Tax Return Forms”.

Tip Income (Refer or Manual) Tip income that has been received for at least the most recent 2 years may be considered as effective qualifying income. Required Documentation when Tip Income is included in the W-2: • A Written VOE with verified continuance and breakdown of tip income history for past 2 years and YTD; and • Most recent paystub and past 2 years W-2s.

Required Documentation when Tip Income is not included in the W-2: • Tax returns for past 2 years, complete with all schedules and referenced statements; • Subtract any unreimbursed employee expenses; • Written VOE with verified continuance and breakdown of tip income history for past 2 years and YTD; • Most recent paystub and past 2 years W-2s.

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Disability Income Benefits (Refer or Manual) Disability Benefits are benefits received from the Social Security Administration (SSA), Department of Veterans Affairs (VA), other public agencies, or a private disability insurance provider. • Long-term disability income (such as worker’s compensation or private insurance) may be considered qualifying income with a reasonable expectation of continuance for three (3) years from the date of Application.

Disability Required Documentation (Not Derived from VA Disability Benefits): The Underwriter must verify and document the receipt of benefits from the SSA, or private disability insurance provider and obtain documentation that establishes award benefits to the Borrower and its continuance with: o Most recent Notice of Award or equivalent document that establishes the award benefit to the Borrower. If the letter does not have a defined expiration date, the income will be considered effective and reasonably likely to continue; and o Verify current receipt of disability income with most recent check, or bank statement with direct deposit, or copy of the Borrower’s SSA-1099 Form, or Federal Tax Returns. Note: If any disability income is due to expire within three (3) years from the date of mortgage application, that income cannot be used as Effective Income.

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Alimony, Child Support and Maintenance Income (Refer or Manual) Alimony, Child Support, and Maintenance Income refers to income received from a former spouse or partner or from a non-custodial parent of the Borrower's minor dependent. Required Documentation: The Underwriter must obtain a fully executed copy of the Borrower’s final divorce decree, legal separation agreement, court order, or voluntary payment agreement with documented receipt. • When using a final divorce decree, legal separation agreement or court order, the Underwriter must obtain evidence of receipt using deposits on bank statements; canceled checks; or documentation from the child support agency for the most recent 3 months that supports the amount used in qualifying. • If the income is through a voluntary payment agreement, the Underwriter must document the voluntary payment via 12 months of cancelled checks, deposit slips, or tax returns. The Underwriter must provide evidence that the income will continue for at least 3 years and may use the front and pertinent pages of the divorce decree/settlement agreement and/or court order showing the financial details.

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Military Income (Refer or Manual) Military income received by military personnel during their period of active, Reserve, or National Guard service, includes: • Base pay • Basic Allowance for Housing • Clothing allowances • Flight or hazard pay • Basic Allowance for Subsistence • Proficiency pay

Automobile Allowance Income (Refer or Manual) Automobile Allowance refers to the funds provided by the Borrower’s employer for automobile related expenses. Only the amount that an auto allowance and/or expense account payments exceed the actual expenditures can be considered income. Required Documentation: a) The Underwriter must verify and document the Automobile Allowance received from the employer for the previous 2 years i.e. through a Written VOE or other alternative document such as a payroll ledger, and b) The Underwriter must obtain Tax Returns with all schedules including IRS Form 2106, Employee Business Expenses, for the previous 2 years. Calculation of Income: The Underwriter must average the auto expenses in the past 2 years filed under IRS Form 2106, and

• If the Borrower uses standard per-mile rate in calculating auto expenses, as opposed to “actual cost” method, the portion that IRS considers depreciation may be added back to income. • Subtract the averaged expenses from the current amount of the auto allowance received; and • Add as qualifying income if positive amount. Expenses that must be treated as recurring debt include:

• The monthly car payment; and • Any loss resulting from the calculation of the difference between the actual expenditures and the expense account allowance.

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Retirement Income (Refer or Manual) Retirement Income refers to income received from Pensions, 401(k) distributions, Individual Retirement Account (IRA) and Social Security.

Social Security Income or Supplemental Security Income (SSI) This type of income (Social Security Income or Supplemental Security Income) refers to income received from the Social Security Administration other than disability income. Required Documentation: The Underwriter must verify and document the Borrower’s receipt of income from the Social Security Administration and that it is likely to continue for at least a 3 year period from the date of case number assignment.

In addition to verification of income, the Underwriter must document the continuance of this income by obtaining from the Borrower: o A copy of the last Notice of Award letter which states the SSA’s determination on the Borrower’s eligibility for SSA income or o An equivalent document that establishes award benefits to the Borrower or equivalent document. If any income from the SSA is due to expire within 3 years from the date of case number assignment, that income may not be used for qualifying.

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For Borrowers with fluctuating IRA/401(k) Income, the Underwriter must use the average of the IRA/401(k) Income received over the previous 2 years to calculate income

If IRA/401(k) Income has been received for less than 2 years, the Underwriter must use the average over the time of receipt.

Capital Gains/Losses (Refer or Manual) Capital Gains refer to a profit that results from a disposition of a capital asset, such as a stock, bond or real estate, where the amount realized on the disposition exceeds the purchase price. Conversely, Capital Losses refer to a loss that results from a disposition of a capital asset, such as a stock, bond or real estate, where the amount realized on the disposition is less than the purchase price. Required Documentation: Capital gains or losses must be considered when determining Effective Income, when the individual has a constant turnover of assets resulting in gains or losses. 3 years’ tax returns are required to evaluate an earnings trend and:

o Results in a gain, it may be added as Effective Income; or o Consistently shows a loss, it must be deducted from the total income. o The Borrower must document anticipated continuation of income through verified assets.

Trust Income (Refer or Manual) Trust Income refers to income that is regularly distributed to a Borrower from a trust. Required Documentation: The Underwriter must verify and document the existence of the Trust Agreement or other trustee statement to verify: o The frequency, duration, and amount of the distribution by obtaining a bank statement or transaction history from the bank; and o Verify that regular payments will continue for at least the first 3 years of the mortgage term. Calculation of Income: The Underwriter must use the income based on the terms and conditions in the Trust Agreement or other trustee statement to calculate qualifying effective income.

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Annuities or Similar Income (Refer or Manual) Annuity Income refers to a fixed sum of money periodically paid to the Borrower from a source other than employment. Required Documentation: The Underwriter must verify and document the legal agreement establishing the annuity and guaranteeing the continuation of the annuity for the first 3 years of the Mortgage and must also obtain a bank statement evidencing receipt of the annuity.

Notes Receivable Income (Refer or Manual) Notes Receivable Income refers to income received by the Borrower as payee or holder in due course of a promissory Note or similar credit instrument. Required Documentation: The Underwriter must verify and document the existence of the Note and must also verify and document that payments have been consistently received for the previous 12 months by obtaining tax returns, deposit slips or cancelled checks and that such payments are guaranteed to continue for the first 3 years of the Mortgage.

Calculation of Income: o For Borrowers who have been and will be receiving a consistent amount of Notes Receivable Income, the Underwriter must use the current rate of income to calculate Effective Income. o For Borrowers whose Notes Receivable Income fluctuates, the Underwriter must use the average of the Notes Receivable Income received over the previous year to calculate Effective Income.

Interest and Dividend Income (Refer or Manual) Interest and dividend income received from assets such as certificates of deposits, mutual funds, stocks, bonds, money markets, and savings and checking accounts may be used as qualifying effective income if consistent history of receipt for the past 2 years and year-to-date interest earned dividend distributions are verified and documented. Required Documentation: Copy of previous 2 years of Federal Tax Returns with all schedules; copy of the most recent account statement; and obtain documentation of 3 years continuance with the most recent statement of the underlying assets that is the source of the income.

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Farm Income/Loss (Refer or Manual) In reviewing tax returns or tax transcripts, farm income/loss filed on IRS Form Schedule F must be included in Borrower’s income analysis. • Depreciation may be added back for most recent 2 years; • If the farm income/loss is derived from the Subject Property, the Property is considered as ineligible for financing by FCBM.

Non-Taxable Income (Refer or Manual) Non-Taxable Income refers to types of income not subject to federal taxes, which includes, but is not limited to: • Some portion of Social Security Income; • Some federal government employee Retirement Income; • Railroad Retirement benefits; • Some state government Retirement Income; • Certain types of disability and Public Assistance payments; • Child Support; • Military allowances; and • Other income that is documented as being exempt from federal income taxes.

Important: Do not include the non-taxable portion in the residual income calculation for consideration as a compensating factor.

Calculation of Income: The amount of tax savings attributed to non-taxable income may be added to the Borrower’s gross income. • The percentage of non-taxable income that may be added cannot exceed 15% or the appropriate tax rate for the income amount, based on the Borrower’s tax rate for the previous year. • If the Borrower was not required to file a federal tax return for the previous tax reporting period, the Underwriter may gross up the non-taxable income by 15%. The Underwriter may not make any additional adjustments or allowances based on the number of the Borrower’s dependents.

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The tables below contain the 2014, 2015 and 2016 Income Tax Rate Bracket Tables per the IRS

2016 Income Tax Rate

Married filing jointly Married filing Tax rate Single filers or qualifying Head of household separately widow/widower

10% Up to $9,275 Up to $18,550 Up to $9,275 Up to $13,250

15% $9,276 - $37,650 $18,551 - $75,300 $9,276- $37,650 $13,251 - $50,400

25% $37,651 - $91,150 $75,301 - $151,900 $37,651 - $75,950 $50,401 - $130,150

28% $91,151 - $190,150 $151,901 - $231,450 $75,951 - $115,725 $130,150 - $210,800

33% $190,151 - $413,350 $231,451 - $413,350 $115,726 - $206,675 $210,801 - $413,350

35% $413,351 - $415,050 $413,351 - $466,950 $206,676 - $233,475 $413,351 - $441,000

39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more Source: IRS.gov

2015 Income Tax Rate

Married filing jointly Tax Married filing Single filers or qualifying Head of household rate separately widow/widower

10% Up to $9,225 Up to $18,450 Up to $9,225 Up to $13,150

15% $9,226 - $37,450 $18,451 - $74,900 $9,226- $37,450 $13,151 - $50,200

25% $37,451 - $90,750 $74,901 - $151,200 $37,451 - $75,600 $50,201 - $129,600

28% $90,751 - $189,300 $151,201 - $230,450 $75,601 - $115,225 $129,601 - $209,850

33% $189,301 - $411,500 $230,451 - $411,500 $115,226 - $205,750 $209,851 - $411,500

35% $411,501 - $413,200 $411,501 - $464,850 $205,751 - $232,425 $411,501 - $439,000

39.6% $413,201 or more $464,851 or more $232,426 or more $439,001 or more

Source: IRS.gov

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2014 Income Tax Rate

Married filing jointly or Tax rate Single filers qualifying Married filing separately Head of household widow/widower

10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950

15% $9,076 - $36,900 $18,151 - $73,800 $9,076- $36,900 $12,951 - $49,400

25% $36,901 - $89,350 $73,801 - $148,850 $36,901 - $74,425 $49,401 - $127,550

28% $89,351 - $186,350 $148,851 - $226,850 $74,426 - $113,425 $127,551 - $206,600

33% $186,351 - $405,100 $226,851 - $405,100 $113,426 - $202,550 $206,601 - $405,100

35% $405,101 - $406,750 $405,101 - $457,600 $202,551 - $228,800 $405,101 - $432,200

39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more

Source: IRS.gov

Example on how to determine the appropriate tax rate when grossing up non-taxable income:

Single applicant with annual wages of $35,000 receiving VA service connected disability (non- taxable) of $10,000 per year in 2012 or $833.33 per month.

The tax rate for the non-taxable income is 15% therefore, the annual grossed up non-taxable income would be $10,000 x 15% = $11,500 or $958.33 per month.

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Required Documentation: The documentation varies depending upon the length of time the Borrower has owned the property. See the matrix below for the required documentation Limited or No History of Rental Income History of Rental Income Borrower does not have a history of Rental When the Borrower has a history of Rental Income from the subject since the previous tax Income from the subject since the previous tax filing: filing: • The Underwriter must verify and • The Underwriter must verify and document the proposed Rental document the existing Rental Income Income by obtaining an appraisal by obtaining the Borrower’s most showing fair market rent (use FNMA recent tax returns, including Schedule Form 1025/Freddie Mac Form 72, E, from the previous 2 years. Small Residential Income Property • For Properties with less than 2 years Appraisal Report evidencing market of Rental Income history, the rent; and Underwriter must document the date • Copy of the prospective lease. of acquisition by providing the deed, Settlement Statement or similar legal document.

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Calculation of Rental Income Received from the Subject Property: The Underwriter must add the net subject property Rental Income to the Borrower’s gross income and may not reduce the Borrower’s total Mortgage Payment by the net subject property Rental Income. See the matrix below to calculate the rental income depending upon the length of time the borrower has owned the property. Limited or No History of Rental Income History of Rental Income To calculate the Effective Income from the The Underwriter must calculate the Rental subject Property where the Borrower does not Income by averaging the amount shown on have a history of Rental Income from the subject Schedule E. Property since the previous tax filing, the - Depreciation, mortgage interest, Underwriter must use the lesser of: taxes, insurance and any HOA dues • The monthly operating income reported shown on Schedule E may be added on Freddie Mac Form 998; or back to the net income or loss. • 75% of the lesser of: - If the Property has been owned for - Fair market rent reported by less than 2 years, the Underwriter the Appraiser; or must annualize the Rental Income - The rent reflected in the lease for the length of time the Property or other rental agreement. has been owned.

• Rental Income Received from Vacated Primary Residence: FHA does not allow any rental income from the property being vacated except under the circumstances: • If Rental Income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from the Borrower’s current Principal Residence; • The Underwriter must obtain a lease agreement of at least 1 year in duration after the mortgage is closed; • Evidence of the payment of the security deposit o first month’s rent is verified; and • The Underwriter must obtain an appraisal evidencing market rent and that the Borrower has at least 25% equity in the Property. Note: the appraisal is not required to be completed by an FHA Roster Appraiser. If the above cannot be met, the Borrower must qualify with the full debt of both mortgages for the current and new homes without any rental income even if a lease is signed. Note: This guidance also applies when the Borrower has a pending sale that will close after to our subject transaction.

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Calculation of Rental Income Received from other Owned Real Estate Property(ies):

Limited or No History of Rental Income History of Rental Income To calculate the effective net Rental Income from The Underwriter must calculate the net other real estate holdings where the Borrower Rental Income by averaging the amount does not have a history of Rental Income since shown on the Schedule E provided the the previous tax filing, the Underwriter must Borrower continues to own all Properties deduct the Principal, Interest, Taxes, and included on the Schedule E. Insurance (PITI) from the lesser of: - Depreciation shown on Schedule E • The monthly operating income reported may be added back to the net on Freddie Mac Form 998; or income or loss. • 75% of the lesser of: - If the Property has been owned for - Fair market rent reported by less than 2 years, the Mortgagee the Appraiser; or must annualize the Rental Income - The rent reflected in the lease for the length of time the Property or other rental agreement. has been owned. - For Properties with less than 2 years of Rental Income history, the Underwriter must document the date of acquisition by providing the deed, Closing Settlement Statement or similar legal document. - Positive net Rental Income must be added to the Borrower’s Effective Income. Negative net Rental Income must be included as a debt/liability.

Analyzing IRS Schedule E form (Rents, Royalties, Partnerships) (Refer or Manual) Any income received from rental properties or royalties may be used as income, after adding back any depreciation shown on Schedule E.

Self Employed Income (Refer or Manual) Self-Employment Income refers to income generated by a business in which the Borrower has a 25% or greater ownership interest. There are four basic types of business structures. They include: • Sole proprietorships (Schedule C); • Corporations (C-Corp); • Limited Liability, or “S” corporations; and • Partnerships.

Minimum Length of Self-Employment (Refer or Manual) The Underwriter may consider Self-Employment income if the Borrower has been self-employed for at least 2 years. If the Borrower has been self-employed between 1 and 2 years, the Underwriter may only consider the income as qualifying effective income if the Borrower was previously employed in the same line of work in which the Borrower is self-employed or in a related occupation for at least 2 years.

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Stability of Self-Employment Income (Refer or Manual) Income obtained from businesses with annual earnings that are stable or increasing is acceptable. If the income from businesses shows declining income greater than 20% over the analysis period, the Underwriter must document that the business income is now stable.

Business Financial Strength (Refer or Manual) The business income should be analyzed to determine if the Borrower’s business is expected to generate sufficient income for his/her needs, the Underwriter must carefully analyze the business financial strength including the source of the business income and the general economic outlook for similar businesses in the area.

Self-Employed Income Documentation Requirements (Refer or Manual) 1. The Underwriter must obtain complete individual and business federal income tax returns for the most recent two years, including all schedules. 2. The Underwriter must obtain a YTD Profit &Loss (P&L) statement and Balance Sheet if more than a calendar quarter has elapsed since date of most recent calendar or fiscal year-end tax return was filed by the Borrower. Note: A Balance Sheet not required for self-employed Borrowers filing Schedule C income. 3. The Underwriter must obtain a business credit report for all Corporations and S- Corporations.

Calculation of Self Employed Income The Underwriter must analyze the Borrower’s tax returns to determine Self-Employment Income. Requirements for analyzing self-employment documentation are found in Analyzing IRS Forms. The Underwriter must calculate gross Self-Employment Income by using the lesser of: • The average gross Self-Employment Income earned over the previous two (2) years; or • The average gross Self-Employment Income earned over the previous one (1) year.

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General Asset Requirements (Refer or Manual) The Underwriter may only consider assets derived from acceptable sources in accordance with the requirements outlined in these guidelines. All asset used to qualify borrowers must be legal at the local, state, and federal level. Any assets derived from an activity or source that violates Federal, state, or local laws cannot be considered for loan qualification. If the borrower’s sources of funds are from a country included on the OFAC Sanctioned Countries List that is found in the Resource Center, the funds are not eligible for use in the transaction. The Underwriter must verify and document that the Borrower has sufficient funds from an acceptable source.

Note: Closing costs, prepaid items and other fees may not be applied towards the Borrower’s MRI.

Earnest Money Deposit (EMD) (Refer or Manual) The Underwriter must verify and document the deposit amount and source of funds if the amount of the earnest money deposit exceeds 1% of the Sales Price, or is excessive based on the Borrower’s history of accumulating savings, by obtaining: • A copy of the Borrower’s cancelled check; • Certification from the deposit-holder acknowledging receipt of funds; or • A Verification of Deposit (VOD) or bank statement showing that the average balance was sufficient to cover the amount of the earnest money deposit at the time of the deposit. Note: If the source of the earnest money deposit was a gift, the Underwriter must verify that the gift is in compliance with the Gift requirements (Personal and Equity)

Cash to Close (Refer or Manual) The Underwriter must document all funds that are used for the purpose of closing, including those to funds used or to be used to pay off debt or to pay costs outside of closing (POC) in addition to the Minimum Required Investment (MRI). Origination Fees and other Closing Costs: The Lender/Originator may charge a reasonable origination fee; also, only customary and reasonable closing costs necessary to close the Mortgage may be charged and the charges may not exceed actual costs.

Note: the loan must also comply with HUD’s Qualified Mortgage Rule for points and fees per 24 CFR § 203.19.

Discount Points: It refers to a charge from the Lender for the interest rate chosen that is paid by the Borrower and becomes part of the total cash required to close.

Prepaid Items (Including Per Diem Interest): May include flood and hazard insurance premiums, MIPs, real estate taxes, and per diem interest. They must comply with the requirements of the CFPB.

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Repairs and Improvements: Repairs and improvements, or any portion paid by the Borrower are part of the Borrower’s total cash to close requirements.

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Checking and Savings (Refer or Manual) The most recent asset account statements must be dated within 30 days of the loan application. The Underwriter must verify and document the existence of and amounts in the Borrower’s checking and savings accounts. For recently opened accounts and recent individual deposits of more than 1% of the Adjusted Value, the Underwriter must obtain documentation of the deposits and must also verify that no debts were incurred to obtain part or all of the MRI. Refer to the “Large Deposit” section of these guidelines.

If the Borrower does not hold the bank account solely, all parties on the account must provide a written statement that the Borrower has full access and use of the funds.

Large Deposits (Refer or Manual) If there is a large increase in an account, or the account was recently opened, the Underwriter must obtain from the borrower a credible explanation and documentation of the source of funds. • Obtain an explanation and documentation for recent large deposits in excess of 1% of the property sales price; or, • 1% of the adjusted value on refinance transactions when the borrower is to bring funds to closing; and, • Verify that any recent debts were not incurred to obtain part, or all, of the required MRI on the property being purchased.

Tax Refunds (Refer or Manual) When the borrower will be utilizing tax refund for funds to close, the following documents need to be included in the loan file: • A copy of the signed personal federal tax return to verify the expected tax refund to be received. • Evidence of receipt of the refund from the IRS via copy of the electronic deposit made on the borrower’s bank statement, or copy of the tax refund check. Note: If the tax refund deposit on a bank statement does not identify the IRS as the institution that made the direct deposit, the refund did not come directly from the IRS but from a third party institution who is providing an anticipated refund loan to by-pass the waiting time for the IRS to process the borrowers tax refund process); in such cases; the deposit cannot be used for funds to close or reserves UNLESS the following documents are provided:

• The borrower is to provide a copy of their signed personal tax return to verify the anticipated refund. • Provide a copy of the refund anticipation agreement/copy of contract form the tax preparer. • Evidence the refund anticipation loan has been paid by the IRS.

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The Underwriter may include up to 60% of the value of assets, less any existing loans, from the Borrower’s retirement accounts, such as IRAs, thrift savings plans, 401(k) plan, and Keogh accounts, unless the Borrower provides conclusive evidence that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties.

Stocks and Bonds (Refer or Manual) Stocks and Bonds are investment assets accumulated by the Borrower. The Underwriter must determine the value of the stocks and bonds from the most recent 2 months or quarterly statement. Evidence of liquidation is not required. If the stocks and bonds are not held in a brokerage account, the Underwriter must determine the current value of the stocks and bonds through third party verification by obtaining a copy of each stock or bond certificate. Government-issued savings bonds are valued at the original purchase price, unless the Underwriter verifies and documents that the bonds are eligible for redemption when cash to close is calculated.

Reserves (Refer or Manual) Reserves refer to the excess verified and documented liquid assets minus the total funds the borrower is required to pay at closing. Reserves do not include: • The amount of cash taken at settlement in cash-out transactions; • Incidental cash received at settlement in other loan transactions; • Gift Funds; • Equity in another Property; or • Borrowed funds from any source.

Required Reserves for 1-2 Unit Properties: The Underwriter must verify and document 1 month reserve of PITIA is available after closing. Note: If reserves are being used as a compensating factor on Manual Underwriting of 1-2 Unit properties, the reserves must equal to 3 months for 1-2 Unit properties.

Required Reserves for 3-4 Unit Properties: The Underwriter must verify and document 3 months reserves of PITIA is available after closing. Note: If reserves are being used as a compensating factor on Manual Underwriting of 3-4 Unit properties, the reserves must equal to 6 months for 3-4 Unit properties..

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Minimum Required Investment (Refer or Manual) Minimum Required Investment (MRI) refers to the Borrower’s contribution required which represents at least 3.5% of the Adjusted Value of the Property. The funds for the Borrower’s MRI must not come from: 1) The seller of the Property; 2) Any other person or Entity who financially benefits from the transaction (directly or indirectly); or 3) Anyone who is or will be reimbursed, directly or indirectly, by any party included in (1) or (2) above.

The Closing costs (non-recurring closing costs, prepaid expenses and discount points) ca not be used to help meet the borrower’s minimum required investment.

Note: The borrower may use a credit card to pay for the appraisal and credit report. These costs cannot be considered to help meet the required 3.5% investment.

Unacceptable Assets (Refer or Manual) The list below provides example of some but not all type of unacceptable assets: • Unsecured financing or unsecured loans (i.e. signature loan). • Cash advances or credit cards. • Loans secured against household goods and furniture. • Collateralized Loans against personal property such as automobile, motorcycle, RV, etc. • Gift funds with repayment or from an unacceptable donor/source.

FCBM Requirements for Loans with Gift Funds: Maximum DTI Rations on AUS Refer/Eligible or a Manual Downgrade is 31/43%.

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Personal Gift (Refer or Manual) Acceptable Sources of Gifts Funds may be provided by: • The Borrower’s Family Member; • The Borrower’s employer or labor union; • A close friend with a clearly defined and documented interest in the Borrower (i.e. family friend, close friend, fiancée, fiancé). Note: A signed explanation alone does not document a relationship; Note: Other acceptable gift donor’s include charitable organizations and government agencies; however these types of donor’s are not acceptable to FCBM.

Gift Letter Requirement: The gift letter must be signed and dated by the donor and Borrower that includes the following:

o The donor’s name, address, and telephone number; o The donor’s relationship to the Borrower; o The dollar amount of the gift; and o A statement that no repayment is required.

Documenting Gift Transfer The Underwriter must verify and document the transfer of gift funds from the donor to the Borrower in accordance with the requirements below.

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If the gift funds… Then document gift transfer by…

Entering Gift funds in LOS System and Data Integrity (Refer or Manual) • In Section II of the 1003 of the LOS system, in the Source of Down Payment segment tab, the full gift amount must be entered along with the source (i.e. family member, government agency, nonprofit) regardless if the amount has been partially spent and is not being used for down payment, or the gift amount exceeds the down payment amount. • In Section VI of the 1003 of the LOS system, in the Assets segment tab, all assets should be entered as verified. If the gift has not been deposited, then enter the full gift that will be given at Closing. However, if the borrower has received a gift and that gift has been deposited into a depository account, the gift should not be entered separately as a gift asset. If the gift has not been deposited into a depository account, it must be shown separately as a gift asset and if there are multiple gift funds, they should be listed individually in both sections when applicable. For example, if the borrower’s verified checking account reflects a balance of $15,000, and $5,000 of that amount was from a gift, the checking account balance should remain as $15,000, with the $5,000 shown as a gift in the Source of Downpayment in Section II. If the original gift has been partially spent or used for the earnest money, the Underwriter is to note on the 92900-LT that gift funds have partially been used but that Total Gifts received and deposited into the Borrower’s bank account : $_____; but only $_____ remain in deposit and available.

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Interested Party Contributions (Refer or Manual) Interested parties refer to Sellers, Real Estate Agents, Builders, Developers or other parties with an interest in the transaction and may contribute up to 6% of the lesser of the property’s sales price or appraised value toward the Borrower’s origination fees, other closing costs and discount points. Interested Party Contributions exceeding 6% are considered an inducement to purchase as well as contributions that exceed actual origination fees, other closing costs and discount.

Inducement to Purchase (Refer or Manual) Inducements to Purchase refer to certain expenses paid by the seller and/or another Interested Party on behalf of the Borrower and result in a dollar-for-dollar reduction to the purchase price when computing the Adjusted Value of the Property before applying the appropriate LTV percentage. These inducements include, but are not limited to: • Contributions exceeding 6% of the purchase price; • Contributions exceeding the origination fees, other closing costs and discount points; • Decorating allowances; • Repair allowances; • Excess rent credit; • Moving costs; • Paying off consumer debt; • Personal Property; • Below-market rent, except for Borrowers who meet the Identity-of-Interest exception for Family Members. • An inducement to purchase exists when the seller and/or Interested Party agrees to pay any portion of the Borrower’s sales commission on the sale of the Borrower’s current primary residence; and • An inducement to purchase also exists when a Borrower is not paying a real estate commission on the sale of their present residence, and the same real estate broker or agent is involved in both transactions, and the seller is paying a real estate commission on the Property being purchased by the Borrower that exceeds what is typical for the area.

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Personal property (Refer or Manual) The replacement of existing Personal Property items listed below are not considered an inducement to purchase, provided the replacement is made prior to settlement and no cash allowance is given to the Borrower. The inclusion of the items below in the sales agreement is also not considered an inducement to purchase if inclusion of the item is customary for the area: • Range • Refrigerator • Dishwasher • Washer • Dryer • Carpeting • Window treatment • Other items determined appropriate by the HOC

Real Estate Sales Commission (Refer or Manual) • If the Borrower is a licensed Realtor, then he/she may use the entitled real estate commission from the sale of the Subject property toward the required cash investment and/or closing costs, with no adjustments to the maximum loan amount. • A family member whom is a Realtor may provide a gift to the Borrower that is sourced from the entitled commission from the sale or listing of the Subject Property. • If there is an identity of interest between the Buyer and Seller, then the real estate commission from the sale or listing of the Subject Property cannot be used for down payment. Note: The real estate agent for the subject property may not act as the Loan Originator for the Borrowers purchasing the property.

Rent Below Fair Market (Refer or Manual) Rent may be an inducement to purchase when the sales agreement reveals that the Borrower has been living in the Property rent-free or has an agreement to occupy the Property at a rental amount considerably below fair market rent. Note: Rent below fair market is not considered an inducement to purchase when a builder fails to deliver the property at the agreed-upon time, and allows the Borrower to occupy an existing or other unit for less than market rent until construction is complete.

Rent Credit (Refer or Manual) Rent Credits refer to the cumulative amount of rental payments that exceed the Appraiser’s estimate of fair market rent and may be considered as accumulation of the Borrower’s minimum required investment. The loan file must include the following documentation: • Rent with Option to Purchase Agreement; and • Appraiser’s estimate of market rent (1007). • Documentation of timely rental payments.

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Sale of Personal Property (Refer or Manual) Personal Property refers to tangible property such as vehicles, stamps, coins, baseball card collections, etc. that a Borrower may sell to document sufficient funds to close and the funds to close derived from this source of funds to be considered will be only the lesser of the estimated value or actual sales price. The list of required documentation to be provided by the Borrower: • Evidence of receipt and deposit of proceeds from the sale of personal property items; and • Satisfactory recent estimated valuation of the personal property (prior to sale date) by using: o Published value estimates issued by organizations such as auto dealers (N.A.D.A Guide or Kelly Blue Book); or o Professional associations related to the assets; or o A written appraisal by a qualified Appraiser with no financial interest in the loan transaction. Net proceeds from the Sale of Real Property owned by the Borrower may be used as an acceptable source of funds. Required Documentation: The Underwriter must obtain the fully executed Settlement Statement or Closing Disclosure and deposited receipt of Borrower’s share of the net proceeds.

Trade Equity (Refer or Manual) Trade Equity refers to when a Borrower trades his/her Real Property to the seller as part of the cash investment. The amount of the Borrower’s equity contribution is determined by: • Using the lesser of the Property’s appraised value or sales price; and • Subtracting all liens against the Property being traded, along with any real estate commission. The Underwriter must obtain an appraisal report complying with FHA appraisal policy to determine the Property’s value and also obtain the Settlement Statement or similar legal document to document the sale of the Property.

Employer Relocation Guaranteed Purchase or Employer Assistance (Refer or Manual) Employer assistance refers to benefits provided by an employer to relocate the Borrower or financial assistance with the Borrower’s housing purchase. Relocation Guaranteed Purchase: If the employer guarantees to purchase the Borrower’s previous residence as a result of relocation, obtain the executed Buyout Agreement along with documentation for the receipt of net proceeds based on guaranteed sales price minus the outstanding liens and expenses and verify the relocation firm takes responsibility for the outstanding mortgage debt.

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DE Underwriter Final Underwriting Decision (Refer or Manual) The underwriter must complete the following documents to evidence their final underwriting decision: • HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary: Recording his/her decision; any compensating factors; any modification of the mortgage amount and approval conditions under “Underwriter Comments”; and His/her DE CHUMS ID Number and signature. • HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value: The DE Underwriter must confirm that form HUD-92800.5B is completed as directed in the form instructions. • HUD-92900-A, HUD/VA Addendum to Uniform Residential Loan Application: The DE Underwriter must complete form HUD-92900-A as directed in the form instructions. An authorized officer of the Lender, the Borrower, and the DE Underwriter must execute form HUD-92900-A, as indicated in the instructions. ***Effective for FHA Case Numbers assigned on or after August 1, 2016, the Revised HUD 92900-A Form must be utilized containing updated language requirements including occupancy declaration in the Borrower Certification section and revised Lender Loan-Level Certification***

New Construction Program Requirements New Construction refers to Proposed Construction, Properties Under Construction, and Properties Existing Less than One Year: • Proposed Construction refers to a Property where no concrete or permanent material has been placed. Note that digging of footing and placement of rebar is not considered permanent. • Under Construction refers to the period from the first placement of permanent material to 100% completion with no Certificate of Occupancy (CO) or equivalent document. • Existing for Less than One Year refers to a Property that is 100% complete and has been completed less than one year from the date of the issuance of the CO or equivalent document. The Property must have never been occupied. Note: FHA treats the sale of an occupied Property that has been completed less than one year from the issuance of the CO or equivalent as an existing Property.

Regardless of the inspection process used, the DE Underwriter must certify on form HUD-92900-A- HUD/VA Addendum to Uniform Residential Loan Application, that the Property is 100% complete and meets HUD’s MPR and MPS.

Documents to be Provided to Appraiser at Assignment The Originator/Lender must provide the Appraiser with a fully executed form HUD-92541- Builder’s Certification of Plans, Specifications, and Site, signed and dated no more than 30 Days prior to the date the appraisal was ordered. For Properties 90% completed or less, the Originator/Lender must provide a copy of the floor plan, plot plan, and any other exhibits necessary to allow the Appraiser to determine the size and level of finish of the house they are appraising. For Properties greater than 90% but less than 100% completed, the Originator/Lender must provide the Appraiser with a list of components to be installed or completed after the date of inspection. Important: New Construction must meet HUD Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).

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Maximum Financing Construction Inspections and Warranties Required by the Construction Status at the Time of the Appraisal Proposed Construction: The Lender must obtain one of the following • Copies of the Building Permit and CO (or equivalent); • Three Inspections (Footing, Framing and Final) performed by an FHA Roster Inspector on Form HUD-92051-Compliance Inspection Report (If the property is a Modular Housing, footing and final inspections only); • Three inspections (footing, framing and final) performed by the local authority with jurisdiction over the Property (If the property is a Modular Housing, footing and final inspections only); or • A 10-year warranty and Final Inspection issued by the local authority with jurisdiction over the Property or an FHA Roster Inspector.

Under Construction: The Lender must obtain one of the following • Copies of the Building Permit and CO (or equivalent); or • A 10-year warranty and Final Inspection issued by the local authority with jurisdiction over the Property or an FHA Roster Inspector.

Existing Less than One Year – 100% Complete: The Lender must obtain one of the following • Copies of the Building Permit and CO (or equivalent); or • A 10-year warranty and Final Inspection issued by the local authority with jurisdiction over the Property or an FHA Roster Inspector; or • An Appraisal evidencing Property is 100% complete.

Maximum Financing Required Documentation The Lender must obtain and include the following documents in the case binder: • Form HUD-92541-Builder’s Certification of Plans, Specifications, and Site; • Form HUD-92544-Warranty of Completion of Construction; • Evidence that the Property was pre-approved or the 10-year warranty plan: o Evidence of pre-approval is the Early Start Letter or copy of Building permit issued by local authority prior to start of construction. o For a 10-year warranty plan, evidence of acceptance or enrollment in the plan is required; the application alone is not acceptable. • Wood Infestation Report, unless the Property is located in an area of no to slight infestation as indicated on HUD’s “Termite Treatment Exception Areas” list: o Form HUD-NPMA-99-A, Subterranean Termite Protection Builder’s Guarantee, is required for all New Construction. If the building is constructed with steel, masonry or concrete building components with only minor interior wood trim and roof sheathing, no treatment is needed. The Underwriter must ensure that the builder notes on the form that the construction is masonry, steel, or concrete.

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o Form HUD-NPMA-99-B, New Construction Subterranean Termite Service Record, is required when the proposed Property is treated with a soil chemical termiticide. The Underwriter must reject the use of post construction soil treatment when the termiticide is applied only around the perimeter of the foundation. • Local Health Authority well water analysis and/or septic report, where required by the local jurisdictional authority.

LTV Financing Limit Properties that are Under Construction or Existing for Less than One Year are limited to a 90% LTV unless they meet the Pre-Approval requirements or are covered with a HUD-accepted insured ten- year protection plan, and they meet the Required Documentation for Maximum Financing noted above.

For a Mortgage with an LTV of 90% or less, the Underwriter must obtain: • Form HUD-92541-Builder’s Certification of Plans, Specifications, and Site; • Final Inspection or Appraisal, if the Property is 100% complete; • Wood Infestation Report, unless the Property is located in an area of no to slight infestation as indicated on HUD’s “Termite Treatment Exception Areas” list posted in these guidelines: o Form HUD-NPMA-99-A, Subterranean Termite Protection Builder’s Guarantee, is required for all New Construction. If the building is constructed with steel, masonry or concrete building components with only minor interior wood trim and roof sheathing, no treatment is needed. The Underwriter must ensure that the builder notes on the form that the construction is masonry, steel, or concrete. o Form HUD-NPMA-99-B, New Construction Subterranean Termite Service Record, is required when the proposed Property is treated with a soil chemical termiticide. The Underwriter must reject the use of post construction soil treatment when the termiticide is applied only around the perimeter of the foundation. • Local Health Authority well water analysis and/or septic report, where required by the local jurisdictional authority.

Operating Oil Gas or Gas Well: If a proposed or newly constructed dwelling is located within 75 feet of an operating oil or gas well, the DE Underwriter must reject the Property unless mitigation measures are completed.

Slush Pits: If a Property is Proposed Construction near an active or abandoned Slush Pit, the Appraiser must require a survey to locate the pit. The DE Underwriter is to assess any impact on the subject Property.

Special Airport Hazards: If a proposed or newly constructed Property is located within Runway Clear Zones (also known as Runway Protection Zones) at civil airports or within Clear Zones at military airfields, the DE Underwriter must reject the Property for insurance.

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A proposed or newly constructed Property located in Accident Potential Zone I at military airfields may be eligible for FHA Mortgage Insurance provided that the DE Underwriter determines that the Property complies with Department of Defense guidelines.

Flood Hazard Areas: If any portion of the property improvements (the dwelling and related Structures/equipment essential to the value of the Property and subject to flood damage) is located within a Special Flood Hazard Area (SFHA), the Mortgagee must reject the Property, unless: • A final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removes the Property from the SFHA is obtained from the Federal Emergency Management Agency (FEMA); or • The Lender obtains a FEMA National Flood Insurance Program (NFIP) Elevation Certificate (FEMA Form 81-31), that documents that the lowest floor (including the basement) of the residential building and all related improvements/equipment essential to the value of the Property, is built at or above the 100-year flood elevation in compliance with the NFIP criteria. The Lender must ensure that the flood elevation certificate is prepared by a licensed engineer or surveyor and completed based on finished construction.

Individual Water Supply Systems: The DE Underwriter must ensure that new wells are drilled and are no less than 20 feet deep and cased. Casing should be steel or other casing material that is durable, leak-proof, and acceptable to either the local health authority or the trade or profession licensed to drill and repair wells in the local jurisdiction. A well located within the foundation walls of New Construction is not acceptable except in arctic or sub-arctic regions. Minimums Standards for Water Well Location for New Construction The following tables provide the minimum distance required between wells and sources of pollution: Minimum distance required between wells and sources of pollution for News Construction: . Well to Property Line must be no less than 10 feet. . Well to Septic Tank must be no less than 50 feet. . Well to Absorption Field must be no less than 100 feet. . Well to Seepage pit or cesspool must be no less than 100 feet. . Well to Sewer lines with permanent water tight joints must be no less than 10 feet. . Well to other sewer lines must be no less than 50 fee. . Well to chemically poisoned soil must be no less than 25 feet (this distance can be reduced to 15 feet where the ground surface is protected by impervious strata of clay, hardpan or rock. . Well to dry well must be no less than 50 feet. . Well to other sources of pollution must meet the local health authority minimums. Note: The distance requirements of local authority prevail if greater than stated above. Minimum Requirements for Individual Water System for New Construction Water Wells Standards for New Construction properties per regulation 24 CFR § 200.926d(f)(1) can be found at http://www.gpo.gov/fdsys/pkg/CFR-2012-title24-vol2/pdf/CFR-2012-title24- vol2-sec200-926d.pdf include the following: . Lead-free piping. . If no local chemical and bacteriological water standards, state standards apply. . Connection of public water whenever feasible. . Wells must deliver water flow of five gallons per minute over at least a four-hour period.

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Shared Well: This is only permitted if the DE Underwriter obtains evidence that: . Acceptable public or Community Water System is not feasible to serve the property; and . The property is located in an area where public officials have not/cannot certify that the installation of Public or Community Water Systems and sewer systems is economically feasible.

Sales Comparison Approach: Comparable Selection: For Properties in new subdivisions, the selected comparable sales must include at least one sale outside the subdivision or project and at least one sale from within the subdivision or project.

Underwriting The Collateral The DE Underwriter must underwrite the completed appraisal report to determine if the Property provides sufficient collateral for the FHA-insured Mortgage and evaluate the appraisal for accuracy and completeness in order to determine whether the Appraisal and Property meets the requirements in Appraiser and Property Requirements noted further in these guidelines and the 4000.1 HUD Handbook at the http://portal.hud.gov/hudportal/documents/huddoc?id=40001HSGH.pdf . Also, the DE Underwriter must determine if the FHA appraisal complies with Acceptable Appraisal Reporting Forms and Protocols as noted in the FHA Single Family Housing Appraisal Report and Data Delivery Requirements (ARDDG) http://portal.hud.gov/hudportal/documents/huddoc?id=SFH_POLI_APPR_RPT_FIN.PDF. The ARDDG is a separate FHA publication, and FHA appraisers are required to follow its requirements in addition to those in Handbook 4000.1.

The DE Underwriter must evaluate the appraisal and any supporting documentation to determine if the Property complies with HUD’s Property Acceptability Criteria. Existing and New Construction Properties must comply with application of Minimum Property Requirements (MPS) and Minimum Property Standards (MPS) by Construction Status noted further in these guidelines.

Appraisal Review The DE Underwriter must review the appraisal and ensure that it is complete, accurate, and provides a credible analysis of the marketability and value of the Property and that complies with the requirements in Valuation and Reporting Protocols, and any additional appraisal requirements that are specific to the subject Property.

The effective date of the appraisal cannot be before the FHA case number assignment date unless the Lender certifies that the appraisal was ordered for conventional lending or government-guaranteed loan purposes and was performed pursuant to FHA guidelines. The appraisal must be in full compliance with the Uniform Standards of Professional Appraisal Practice (USPAP), which requires that this be classified as a new assignment. The intended use of the appraisal must indicate that it is solely to assist FHA in assessing the risk of the Property securing the FHA-insured Mortgage. Additionally, FHA and the Lender must be indicated as the intended users of the appraisal report. If the Appraiser determines that the scope of work is met with regard to MPR, MPS, and USPAP compliance, and further determines that a re-inspection of the Property is not necessary, the effective date of the appraisal may be the date of the original inspection. However, if an FHA-compliant inspection is required, the date of the inspection will become the effective date of the new appraisal.

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Upon the DE Underwriter acceptability of the Collateral, a Conditional Commitment Direct Endorsement Statement of Appraised Value Form HUD-92800.5B is to be issued which provides the terms and conditions to be met. A copy of the Statement of Appraised Value Form HUD-92800.5B must be provided to the Borrower.

Appraisal Requirements and Application of Minimum Property Requirements and Minimum Property Standards by Construction Status Minimum Property Requirements and Minimum Property Standards Minimum Property Requirements (MPR) refer to general requirements that all homes insured by FHA be safe, sound, and secure. Whereas, Minimum Property Standards (MPS) refer to regulatory requirements relating to the safety, soundness and security of New Construction. The DE Underwriter will review the appraisal for accuracy and completeness and use professional judgment in determining when a Property condition poses a threat to the health and safety of the occupant and/or jeopardizes the soundness and structural integrity of the Property, such that additional inspections and/or repairs are necessary.

The Underwriter must confirm that the Property complies with the following eligibility criteria: A. Requirements for the Living Units: The Lender must confirm that each living unit contains: . A continuing and sufficient supply of safe and potable water under adequate pressure and of appropriate quality for all household uses; . Sanitary facilities and a safe method of sewage disposal. Every living unit must have at least one bathroom, which must include, at a minimum, a water closet, lavatory, and a bathtub or shower; . Adequate space for healthful and comfortable living conditions; . Heating adequate for healthful and comfortable living conditions; . Domestic hot water; and . Electricity adequate for lighting, cooking and for mechanical equipment used in the living unit. The Lender must ensure that appliances that are to remain and that contribute to the opinion of market value are operational

B. Encroachment: The Lender must ensure the subject’s property structure, garage, or other improvements do not encroach onto an adjacent Property, right-of-way, utility Easement, or building restriction line. The Lender must also ensure a neighboring property, garage, or other improvements do not encroach onto the subject property. Encroachment by the subject or adjacent property fences is acceptable provided such Encroachment does not affect the marketability of the subject Property.

C. Overhead Electric Power and Residential Service Drop Lines: The Lender must confirm that any Overhead Electric Power Transmission Lines do not pass directly over any dwelling, Structure or related property improvement, including pools. The power line must be relocated for a Property to be eligible for FHA-insured financing. Also, the residential service drop line may not pass directly over any pool, spa or water feature.

If the dwelling or related property improvements are located within the Easement area, the Lender must obtain a certification from the appropriate utility company or local regulatory agency stating that the relationship between the improvements and Local Distribution Lines conforms to local standards and is safe.

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D. Access to Property: The Lender must confirm that the property is provided with a safe pedestrian access and adequate vehicular access from a public or private street. The streets must either be dedicated to public use and maintenance, or retained as private streets protected by permanent recorded Easements. Private streets, including shared driveways, must be protected by permanent recorded Easements, ownership interest, or be owned and maintained by an HOA. Shared driveways do not require a joint maintenance agreement.

E. Onsite Hazards and Nuisances: The Lender must require corrective work to mitigate potential adverse effects from any onsite hazards or nuisances reported by the Appraiser.

F. Abandoned Gas and Oil Well: If the Property contains any abandoned gas or oil wells, the Lender must obtain a letter from the local jurisdiction or appropriate state agency stating that the subject well was permanently abandoned in a safe manner. If the Property contains any abandoned petroleum product wells, the Lender must ensure that a qualified petroleum engineer has inspected the Property and assessed the risk, and that the appropriate state authorities have concurred on clearance recommendations.

G. Structural Conditions: The Lender must confirm that all foundations will be serviceable for the life of the loan and are adequate to withstand all normal loads imposed.

H. Economic Life: The Lender must confirm that the term of the Mortgage is less than or equal to the remaining economic life of the Property. I. Environmental: The Lender must confirm that the Property is free of all known environmental and safety hazards and adverse conditions that may affect the health and safety of the occupants, the property’s ability to serve as collateral, and the structural soundness of the improvements.

J. Lead-Based Paint: The Lender must confirm that the Property is free of lead paint hazards.

L. Repair Requirement: The Lender must determine which repairs must be made for an existing property to be eligible for FHA-insured financing.

M. Utility Services: If utilities are not located on Easements that have been permanently dedicated to the local government or appropriate public utility body, the Lender must confirm that this information is recorded on the deed record.

N. Water Supply Systems: a) Public Water Supply System: The Lender must confirm that a connection is made to a public or Community Water System whenever feasible and available at a reasonable cost. If connection costs to the public or community system are not reasonable, the existing onsite systems are acceptable, provided they are functioning properly and meet the requirements of the local

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health department. b) Individual Water Supply Systems (Wells): When an Individual Water Supply System is present; the Lender must ensure that the water quality meets the requirements of the health authority with jurisdiction. If there are no local (or state) water quality standards, then water quality must meet the standards set by the EPA, as presented in the National Primary Drinking Water regulations in 40 CFR §§ 141 and 142 which can be found at http://www.gpo.gov/fdsys/pkg/CFR-2011-title40- vol23/pdf/CFR-2011-title40-vol23-part141.pdf Note: Soil poisoning is an unacceptable method for treating termites unless the Mortgagee obtains satisfactory assurance that the treatment will not endanger the quality of the water supply.

Minimum distance required between wells and sources of pollution for Existing Construction: . Well to Property Line must be no less than 10 feet. . Well to Septic Tank must be no less than 50 feet. . Well to Drain Field must be no less than 100 feet. . If the subject Property line is adjacent to residential Property then local well distance requirements prevail. If the subject Property is adjacent to non-residential Property or roadway, there needs to be a separation distance of at least 10 feet from the property line. Note: The distance requirements of local authority prevail if greater than stated above.

Water Wells Minimum Property Requirements A. Water Wells Standards for New Construction properties per regulation 24 CFR § 200.926d(f)(1) can be found at http://www.gpo.gov/fdsys/pkg/CFR-2012-title24- vol2/pdf/CFR-2012-title24-vol2-sec200-926d.pdf include the following: . Lead-free piping. . If no local chemical and bacteriological water standards, state standards apply. . Connection of public water whenever feasible. . Wells must deliver water flow of five gallons per minute over at least a four-hour period. B. Water Wells Minimum Property Requirements for Existing Construction include the following: . Existing wells must deliver water flow of three to five gallons per minute. . No exposure to environmental contamination. . Continuing supply of safe and potable water. . Domestic hot water. . Water quality must meet requirements of local jurisdiction or the EPA if no local standard.

Shared Wells: The Lender must confirm that a Shared Well meets the following: . Serves existing Properties that cannot feasibly be connected to an acceptable Public or Community Water supply System; . Is capable of providing a continuous supply of water to involved Property Units so that each existing Property simultaneously will be assured of at least three gallons per minute (five gallons per minute for Proposed Construction) over a continuous four-hour period. (The well itself may have a lesser yield if pressurized storage is provided in an amount that will

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make 720 gallons of water available to each connected existing dwelling during a continuous four-hour period or 1,200 gallons of water available to each proposed dwelling during a continuous four-hour period. The shared well system yield must be demonstrated by a certified pumping test or other means acceptable to all agreeing parties.); . Provides safe and potable water. An inspection is required under the same circumstances as an individual well. This may be evidenced by a letter from the health authority having jurisdiction or, in the absence of local health department standards, by a certified water quality analysis demonstrating that the well water complies with the EPA’s National Interim Primary Drinking Water Regulations that are found at http://www.gpo.gov/fdsys/pkg/CFR- 2011-title40-vol23/pdf/CFR-2011-title40-vol23-part141.pdf; . Has a valve on each dwelling service line as it leaves the well so that water may be shut off to each served dwelling without interrupting service to the other Properties; and . Serves no more than 4 Properties. Shared Well Agreement Requirements for Proposed and Existing Properties o The shared well agreement must be binding upon signing and their successors in title; it must be recorded, and reflects joiner by any Lender holding a Mortgage on any Property connected to the Shared Well. o Permit well water sampling and testing by the local authority at the request of any party at any time. o Require that corrective measures be implemented if testing reveals a significant water quality deficiency, but only with the consent of a majority of all parties. o Ensure continuity of water service to “supplied” parties if the “supplying” party has no further need for the shared well system. (“Supplied” parties normally should assume all costs for their continuing water supply.) o Prohibit well water usage by any party for other than bona fide domestic purposes. o Prohibit connection of any additional living unit to the shared well system without: - The consent of all parties; - The appropriate amendment of the agreement; and - Compliance with item 3. o Prohibit any party from locating or relocating any element of an individual sewage disposal system within 75 feet (100 feet for Proposed Construction) of the Shared Well. o Establish Easements for all elements of the system, ensuring access and necessary working space for system operation, maintenance, improvement, inspection and testing. o Specify that no party may install landscaping or improvements that will impair use of the Easements. o Specify that any removal and replacement of pre-existing site improvements, necessary for system operation, maintenance, replacement, improvement, inspection or testing will be at the cost of their owner, except for costs to remove and replace common boundary fencing or walls, which must be shared equally between or among parties. o Establish the right of any party to act to correct an emergency in the absence of the other parties onsite. An emergency must be defined as failure of any shared portion of the system to deliver water upon demand. o Permit an agreement amendment to ensure equitable readjustment of shared costs

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when there may be significant changes in well pump energy rates or the occupancy or use of an involved Property. o Require the consent of a majority of all parties upon cost sharing, except in emergencies, before actions are taken for system maintenance, replacement or improvement. o Require that any necessary replacement or improvement of a system element(s) will at least restore original system performance. o Specify required cost sharing for: - The energy supply for the well pump; - System maintenance, including repairs, testing, inspection and disinfection; - System component replacement due to wear, obsolescence, incrustation or corrosion; and - System improvement to increase the service life of a material or component to restore well yield or to provide necessary system protection. o Specify that no party shall be responsible for unilaterally incurred shared well debts of another party, except for correction of emergency situations. Emergency correction costs must be equally shared. o Require that each party be responsible for: - Prompt repair of any detected leak in this water service line or plumbing system; - Repair costs to correct system damage caused by a resident or guest at their Property; and - Necessary repair or replacement of the service line connecting the system to the dwelling. o Require equal sharing of repair costs for system damage caused by persons other than a resident or guest at a Property sharing the well. o Ensure equal sharing of costs for abandoning all or part of the shared system so that contamination of ground water or other hazards will be avoided. o Ensure prompt collection from all parties and prompt payment of system operation, maintenance, replacement or improvement costs. o Specify that the recorded agreement may not be amended during the term of a federally-insured or -guaranteed Mortgage on any Property served, except as provided in items noted above in bullet points 5 and 11. o Provide for binding arbitration of any dispute or impasse between parties with regard to the system or terms of agreement. Binding arbitration must be through the American Arbitration Association or a similar body and may be initiated at any time by any party to the agreement. Parties to the agreement must equally share arbitration costs. O. Individual Residential Water Purification Systems An Individual Residential Water Purification System refers to equipment, either point-of-entry or point-of-use, installed on Properties that otherwise do not have access to a continuous supply of safe and potable water. Note: A property that needs the individual water purification system to make the water safe and to meet code is NOT eligible for financing at FCBM. P. Sewage System: The Lender must conform connection is made to a public or community sewage disposal system whenever feasible and available at a reasonable cost.

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Q. Termites: For existing Properties, the Lender must confirm that the Property is free of wood destroying insects and organisms. If the appraisal is made subject to inspection by a qualified pest control specialist, the Lender must obtain such inspection and evidence of any required treatment to confirm the Property is free of wood destroying insects and organisms with Form NPMA-33 or the State Mandated Wood Destroying Pests and Organism Inspection Report. For New Construction Properties the Lender must obtain Wood Infestation Report Subterranean Termite Protection Builder’s Guarantee - NPMA-99A and/or New Construction Subterranean Termite Service Record - NPMA-99B, unless the Property is located in an area of no to slight infestation as indicated on HUD’s “Termite Treatment Exception Areas” list included in these guidelines and in the following link http://portal.hud.gov/hudportal/documents/huddoc?id=SFH_POLI_TERMITE.pdf

Refer to the required documentation for New Construction section in these guidelines for additional information.

Appraiser and Property Requirements Appraiser Responsibility to Report Property Compliance The Appraiser is responsible to report property compliance. To do so, the appraiser must observe, analyze and report that the Property meets HUD’s MPR and MPS. • Minimum Property Requirements (MPR) refers to general requirements that all homes insured by FHA be safe, sound, and secure. • Minimum Property Standards (MPS) refer to regulatory requirements relating to the safety, soundness and security of New Construction. The Appraiser must note when the Property is not safe, sound, and secure and does not comply with FHA’s MPR and MPS so that the DE Underwriter can determine eligibility.

Existing Construction Existing Construction refers to a Property that has been 100% completed more than One Year or has been completed for less than One Year but has been previously occupied.

New Construction New Construction refers to Proposed Construction, Properties Under Construction, and Properties Existing Less than One Year. 1. Proposed Construction refers to a Property where no concrete or permanent material has been placed. Digging of footing is not considered permanent. 2. Under Construction refers to the period from the first placement of permanent material to 100% completion with no Certificate of Occupancy (CO) or equivalent document. 3. Existing Less than One Year refers to a Property that is 100% complete and has been completed less than one year from the date of the issuance of the CO or equivalent document. The Property must have never been occupied.

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The Appraiser must observe, analyze and report defective conditions and must also provide photographic documentation of those conditions in the appraisal report. If inspection is required, the Appraiser must cite the reason for requiring an inspection. Defective conditions refer to defective construction, evidence of continuing settlement, excessive dampness, leakage, decay, termites, environmental hazards or other conditions affecting the health and safety of occupants.

The Appraiser must limit the required repairs to those repairs necessary to: • Maintain the safety, security and soundness of the Property; • Preserve the continued marketability of the Property; and • Protect the health and safety of the occupants.

As-Is Condition and Cosmetic Repairs The Appraiser must report and consider cosmetic or minor repairs in the overall condition when rating and valuing the Property; these items are not required to be repaired if it does not affect the health and safety of the occupants, or the security and soundness of the property. Cosmetic repairs include missing handrails that do not pose a threat to safety, holes in window screens, cracked window glass, defective interior paint surfaces in housing constructed after 1978, minor plumbing leaks that do not cause damage (such as a dripping faucet), and other inoperable or damaged components that in the Appraiser’s professional judgment does not pose a health and safety issue to the occupants of the house.

Appraisal Report Conclusion and Appraisal Property Condition Appraisal Report Conclusion Appraisal Property Condition 1. There is/are no repair(s), alteration(s) or inspection “As-is” condition(s) noted by the Appraiser. 2. Intended use is for Real Estate Owned (REO) 3. The Property is being recommended for rejection. 1. Proposed Construction where construction has not started. “Subject to completion per plans and 2. Under Construction but not yet complete (less than 90%). specifications” 1. Repair or Alteration Condition(s) noted by the “Subject to the following repairs or Appraiser to: alterations” - Protect the health and safety of the occupants; - Protect the security of the Property; - Correct physical deficiencies or conditions affecting structural integrity. 2. Under Construction, more than 90% complete with only minor finish work remaining (buyer preference items e.g., floor coverings, appliances, fixtures, landscaping, etc.). This eliminates the need for plans and specifications. Required inspection(s) to meet HUD’s Minimum Property “Subject to the following required Requirements and Minimum Property Standards.as noted by inspection” the Appraiser.

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Appraisal Update and/or Completion Report 1004D and FHA Compliance Inspection Report on form HUD-92051 • Appraisal Update and/or Completion Report 1004D: This form is required to be used as follows: o Summary Appraisal Update Report (top portion of the form) may be used only once to extend the appraisal validity if completed by the original Appraiser before the original appraisal has expired (within 120 days of the original appraisal report’s effective date). o Certification of Completion, Part B (bottom portion of the form) may be used for an existing property to report completion of a repair and/or the satisfaction of requirements and conditions noted in the original appraisal report. • FHA Compliance Inspection Report on form HUD-92051: This form is required to be completed by a HUD Roster Inspector if the property is New Construction (Proposed/Under Construction, or Existing for less than One Year less not 100% Complete).

Appraisal Reporting Forms All FHA Appraisal s must be prepared in accordance to the most recently published FHA Single Family Housing Appraisal Report and Data Delivery Guide (ARDDG) http://portal.hud.gov/hudportal/documents/huddoc?id=SFH_POLI_APPR_RPT_FIN.PDF

Appraisal Photographs, Exhibits and Map Requirements The Appraiser must include a legible street map showing the location of the subject and each of the comparable properties, including sales, rentals, listings, and other data points utilized. If substantial distance exists between the subject and comparable properties, additional legible maps must be included. The Appraiser must include a building sketch showing the GLA, all exterior dimensions of the house, patios, porches, decks, garages, breezeways, and any other attachments or out buildings contributing value. The sketch must show “covered” or “uncovered” to indicate a roof or no roof (such as over a patio). The Appraiser must show the calculations used to arrive at the estimated GLA. The Appraiser must provide an interior sketch or floor plan for Properties exhibiting functional obsolescence attributable to the floor plan design. • Appraisal photos must be taken of the front and rear at opposite angles to show all sides of the subject property. Additional photos are required for any improvement/site feature with contributory market value that are not clearly seen in the Subject front and rear photographs. • Street scene photo must include a portion of the subject site. • If the subject property is new construction, include photos that depict the subject’s grade and drainage. • If the subject property is proposed construction and the improvements have not been started, the appraiser should take a photograph that shows the grade of the vacant lot. • Photo of the subject’s superior view when an adjustment is made for view amenity. Note: Condominium Projects require additional photos of common areas and shared amenities of the project.

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Interior Photos - Kitchen - All Bedrooms - All Bathrooms - Main Living Areas - Recent updates, such as restoration, remodeling and renovation - Basement - Attic - Crawl Space - Any deficiency or condition requiring inspection or repair, if present - 2-4 Unit Properties need to include photographs of hallways, foyers, laundry rooms and other common areas

Comparable Photos Photos depicting the front view of each comparable sale is to be included on the appraisal report. Photos taken at an angle to depict both the front and the side when possible. Multiple Listing Service (MLS) photos are acceptable to exhibit comparable condition at the time of sale. However, Appraisers must include their own photos as well, to document compliance.

Approaches to Value The Appraiser must consider and attempt all appropriate approaches to value when applicable. There are three valuation approaches as applied to one-to four-residential unit Properties: sales comparison approach; cost approach; and income approach to value. Note: The Sales Comparison Approach is required for all appraisals.

Furthermore, the Appraiser must use Bracketing techniques when possible and appropriate (select comparable properties with features that are superior to and inferior to the subject features). Comparable properties must be selected based on the principle of substitution, and the analysis will reveal the relevance of that data. Comparable properties should not be chosen only because their prices bracket a desired or estimated value. Comparable Selection in Subdivisions, Condominiums or Planned Unit Development Projects If the Appraiser uses sales of comparable properties that are located outside of the subject’s subdivision or project, the analysis must reflect typical Borrower expectations and behavior. For Properties in new subdivisions, or units in new (or recently converted) Condominium Projects, the Appraiser must include, for comparison, properties in the subject market area as well as properties within the subject subdivision or project. Whenever possible, the Appraiser must select at least one sale from a competing subdivision or project and one sale from within the subject subdivision or project so that this market acceptance may be directly compared. If the new project is mature enough to have experienced arm’s length resales, the Appraiser must

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also analyze and report those properties. Comparable Sale Selection in Rural and Slow Growth Markets If insufficient comparable sales have occurred within the previous six months, the Appraiser must include at least three sales that occurred less than 12 months prior to the date of appraisal. Where there is a scarcity of recent comparable sales data, the Appraiser may include sales older than 12 months as additional sales in markets. The Appraiser must report the most recent and relevant sales, and include a thorough explanation of the market conditions, the levels of supply and demand, and a reason for the lack of recent sales data.

Declining Market Properties located in a declining market require at least 2 comparable sales that closed within 90 days of the effective date of the appraisal that are similar to the subject property. If the Appraiser cannot comply with this requirement due to the lack of market data, a detailed explanation is required and the Appraiser must include a minimum of 2 active listings or pending sales on the appraisal grid in addition to the 3 required closed sales.

Zoning and Legal Use Appraiser must verify the Subject’s current use represents the highest and best use; and complies with zoning ordinances, and its number of units are legally permitted.

If “Legal Non-Conforming” (grandfathered use), the Appraiser must also explain and verify whether the Property may legally be rebuilt to its current use if destroyed.

Accessory Dwelling Unit An Accessory Dwelling Unit (ADU) refers to a habitable living unit added to the primary 1 Unit dwelling, which together constitute a single interest in real estate.

It is a separate additional living unit, containing a kitchen, sleeping, and bathroom facilities. The Appraiser will determine whether to classify the Subject as a 2-unit Property or as a Single Family with an ADU as part of the highest and best use analysis in relation to the neighborhood and the current market conditions.

Note: An Accessory Dwelling Unit (ADU) is usually subordinate in size, location and appearance to the primary Dwelling Unit and may or may not have separately metered utilities or separate means of ingress or egress. The Appraiser must not include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling. Important: A 2-4 Unit property with an ADU is ineligible for FHA financing.

Leased Equipment, Components and Mechanical Systems The appraiser must not include the value of a leased mechanical system and components in the Market Value of the subject property. This includes furnaces, water heaters, fuel or propane storage tanks, solar or wind systems (including power purchase agreements), and other mechanical systems and components that are not owned by the property owner. The appraiser must still identify such systems in the appraisal report.

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Non-Residential Use of Property/Mix Use Properties The Non-Residential portion of the total floor area may not exceed 49% and the non-residential use of the property must be subordinate to its residential use, character and appearance. The Non-residential use may not impair the residential character or marketability of the property and must be legally permitted and conform to current zoning requirements.

Externalities The Appraiser must report the presence of Externalities and consider how externalities affect the marketability and value of the Property, report the issue and the market’s reaction, and address any positive or negative effects on the value of the subject Property within the approaches to value so that the Lender can determine eligibility. Externalities refer to off-site conditions that affect a Property’s value which include: heavy traffic, airport noise and hazards, special airport hazards, proximity to high pressure gas lines, Overhead Electric Power Transmission Lines and Local Distribution Lines, smoke, fumes, and other offensive or noxious odors, and stationary storage tanks. For more details refer to the requirements noted in the 4000.1 HUD Handbook at the http://portal.hud.gov/hudportal/documents/huddoc?id=40001HSGH.pdf

Site Conditions Access to Property: The Appraiser must note on the appraisal report if the property has safe pedestrian access and adequate vehicular access from a public or private street that is an all- weather road surface over which emergency and passenger vehicles can pass at all times and analyze any effect on value or marketability by the private road or lane. The private road must be protected by a permanent recorded Easement, ownership interest, or is owned and maintained by an HOA. Note: Shared driveways that are not part of an HOA must also meet these requirements. Topography: The Appraiser must report to the Lender any danger due to topographic conditions such as: earth and mudslides from adjoining properties, falling rocks and avalanches to the subject Property or the adjoining land. The Appraiser must make the appraisal subject to an inspection by a qualified individual or Entity if the purchase contract or any other documentation indicates, or if the Appraiser observes dampness because of a foundation issue. Grading and Drainage: The Appraiser must check for evidence of grading and drainage problems. Proper drainage control measures may include gutters and downspouts or appropriate grading or landscaping to divert the flow of water away from the foundation. The Appraiser must make the appraisal subject to repair if the grading does not provide positive drainage away from the improvements. Oil and Gas Wells (Proposed, Operating or Abandoned): The appraiser must report to the lender the distance of any oil or gas well to the property. If the property is located within 75 feet from an operating or proposed well (the distance is measured from the dwelling to the site boundary of the well not to the actual well site) the property will not meet FHA’s MPR or MPS. If the property is located or adjacent to an abandoned gas or oil well, the appraiser must stop the working on the appraisal and wait to resume his work when the Originator/Lender provides him/her with a letter from the local jurisdiction of the appropriate state agency stating that the well was permanently abandoned in a safe manner. Mineral, Oil and Gas Reservations or Leases: The Appraiser must analyze and report the degree

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to which the residential benefits may be impaired or the Property damaged by the exercise of the rights set forth in oil, gas, and mineral reservations or leases. The Appraiser should consider the following: • The infringement on the property rights of the fee owner caused by the rights granted by the reservation or lease; and • The hazards, nuisances, or damages that may arise or accrue to the subject Property from exercise of reservation or lease privileges on neighboring properties. Residential Underground Storage Tanks: The Appraiser must note any evidence of residential underground storage tanks, such as fill pipes, pumps, ventilation caps, etc. and if there is observable evidence of leakage or onsite contamination, the Appraiser must make a requirement for further inspection. Environmental and Safety Hazards: The Appraiser must report known environmental and safety hazards and adverse conditions that may affect the health and safety of the occupants which include defective lead-based paint, mold, toxic chemicals, radioactive materials, other pollution, hazardous activities, and potential damage to the Structure from soil or other differential ground movements, subsidence, flood, and other hazards. Wood Destroying Organisms (Insects/Termites): If there is evidence or notification of infestation, including a prior treatment, the Appraiser must mark the evidence of infestation box in the “Improvements” section of the appraisal and make the appraisal subject to inspection by a qualified pest control specialist.

Surplus Land refers to land that is not currently needed to support the existing improvement but cannot be separated from the Property and sold off. Surplus Land does not have an independent highest and best use and may or may not contribute to the value of the improved parcels. The appraiser must comment and include the highest and best use analysis in the appraisal report to . support his/her conclusions of the existence of excess land. Note: Surplus land must be included in the valuation of the property.

Multiple Parcel Requirements If the subject property consist of two or more legally conforming platted lots/parcels under one legal description and ownership, and the second vacant lot is capable of being divided and/or developed as a separate parcel the second vacant lot is Excess Land and its value must be excluded from the value of the appraisal and the Appraiser must provide a value of only the principal site and improvements under a hypothetical condition. Note: The entire property may contain only one dwelling unit. Limited additional nonresidential improvements, such as a garage, are acceptable. For example, the adjoining parcel may not have an additional dwelling unit. An improvement that has been built across lot lines is acceptable. For example, a home built across both parcels where the lot line runs under the home is acceptable.

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Property Improvements The Appraiser must notify the Lender if the living unit does not contain any one of the following as deficiency of MPR or MPS: • Continuing and sufficient supply of safe and potable water under adequate pressure and of appropriate • quality for all household uses; • Sanitary facilities and a safe method of sewage disposal (every living unit must have at least one bathroom, which must include, at a minimum, a water closet, lavatory, and a bathtub or shower); • Adequate space for healthful and comfortable living conditions; • Heating adequate for healthful and comfortable living conditions; • Domestic hot water; or • Electricity adequate for lighting, cooking and for mechanical equipment used in the living unit.

Appliances Appliances that are to remain and that contribute to the market value opinion must be operational. The appraiser must note all appliances that remain and that contribute to the maker value. Appliances refer to refrigerators, ranges/ovens, dishwashers, disposals, microwaves and washers/dryers.

Mechanical Components and Utilities The appraiser must notify the Lender if mechanical systems do not appear: • To have reasonable future utility, durability and economy; • To be safe to operate; • To be protected from destructive elements; or • To have adequate capacity. The appraiser must observe the physical condition of the mechanical systems such as plumbing, heating and electrical systems and must be able to operate the systems and observe their performance. If the systems appear to be damaged or do not appear to function properly, the Appraiser must condition the appraisal for repair or further inspection.

If the Property is vacant and the utilities are not on at the time of observation and the systems could not be operated, the Appraiser must condition the appraisal to be subject to further observation to determine if the systems are in proper working order once the utilities are restored. On the other hand, if mechanical systems could not be operated due to weather conditions, the Appraiser must clearly note this in the report. Note: Electrical, plumbing, or heating/cooling certifications may be required when the Appraiser cannot determine if one or all of these systems are working properly.

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Plumbing System The appraiser must flush the toilets and operate a sample of faucets to observe water pressure and flow to determine that the plumbing system is: intact, that it does not emit foul odors, that the faucets function appropriately, that both cold and hot water run, and that there are no readily observable evidence of leaks or structural damage under fixtures.

The Appraiser must examine the water heater to ensure that it has a temperature and pressure-relief valve with piping to safely divert escaping steam or hot water.

If the Property has a septic system, the Appraiser must examine it for any signs of failure or surface evidence of malfunction. If there are readily observable deficiencies, the Appraiser must require repair or further inspection.

Heating and Cooling Systems The Appraiser must notify the Mortgagee of the deficiency of MPR or MPS if the permanently installed heating system does not: • Automatically heat the living areas of the house to a minimum of 50 degrees Fahrenheit in all GLAs, as well as in non-GLAs containing building or system components subject to failure or damage due to freezing; • Provide healthful and comfortable heat or is not safe to operate; • Rely upon a fuel source that is readily obtainable within the subject’s geographic area; • Have market acceptance within the subject’s marketplace; and • Operate without human intervention for extended periods of time. • Central air conditioning is not required but, if installed, must be operational. If the air conditioning system is not operational, the Appraiser must indicate the level of deferred maintenance, analyze and report the effect on marketability, and include the cost to cure.

Additions The Appraiser must treat room additions and garage conversions as part of the GLA of the dwelling, provided that the addition or conversion space: • Is accessible from the interior of the main dwelling in a functional manner; • Has a permanent and sufficient heat source; and • Was built in keeping with the design, appeal, and quality of construction of the main dwelling. Room additions and garage conversions that do not meet the criteria listed above are to be addressed as a separate line item in the sales grid, not in the GLA. The Appraiser must address the impact of inferior quality garage conversions and room additions on marketability as well as Contributory Value, if any. The Appraiser must analyze and report differences in functional utility when selecting comparable properties of similar total GLA that do not include converted living space. If the Appraiser chooses to include converted living spaces as GLA, the Appraiser must include an explanation detailing the composition of the GLA reported for the comparable sales, functional utility of the subject and comparable properties, and market reaction. Alternatively, the Appraiser may consider and analyze converted living spaces on a separate line within the sales comparison grid including the functional utility line in order to demonstrate market reaction. The Appraiser must not add an ADU or secondary living area to the GLA.

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Partially Below-Grade Habitable Space Partially Below-Grade Habitable Space must be noted on the appraisal report along with the market acceptance or how the levels and areas of the dwelling are being calculated. Regardless of the description of the rooms, bedrooms or baths as above grade or below grade, the Appraiser must analyze all components of the subject Property in the valuation process.

Defective Paint • If the property or related improvements were built after 1978, the Appraiser must report all defective paint surfaces on the exterior and require repair of any defective paint that exposes the subsurface to the elements. • If the dwelling or related improvements were built on or before December 31,1978, the Appraiser must note the condition and location of all defective paint and require repair in compliance with 24 CFR § 200.810(c) and any applicable EPA requirements. It is important to know that the Appraiser must observe all interior and exterior surfaces, including common areas, stairs, deck, porch, railings, windows and doors, for defective paint (cracking, scaling, chipping, peeling, or loose). Exterior surfaces include those surfaces on fences, detached garages, storage sheds, and other outbuildings and appurtenant Structures. If the property is a Condominium Unit Built on or before 1978, the Appraiser must observe the interior of the unit, common unit and exterior surfaces and appurtenant Structures of the specific unit being appraised; and address the overall condition, maintenance and appearance of the Condominium Project. The Appraiser must note the condition and location of all defective paint in the unit, common area and exterior, and require repair in compliance with 24 CFR § 200.810(c) and any applicable EPA requirements.

Attic The Appraiser must observe the interiors of all attic spaces. If there is no access or scuttle, the Appraiser must report the lack of accessibility to the area in the appraisal report and complete the appraisal report as “Subject To”.

Crawl Space The Appraiser must observe all areas of the crawl space and report any issues with structural support, dampness, damage, or vermin that may affect the safety, soundness and security of the Property. If there is no access to the crawl space, the Appraiser must report the lack of accessibility to the area in the appraisal report and complete the report “Subject To”.

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Individual Water Supply Systems Required Analysis and Reporting The water quality of an Individual Water Supply System must meet the requirements of the health authority with jurisdiction. If there are no local (or state) water quality standards, then water must be potable, which may be demonstrated by compliance with the current EPA Manual of Individual and Non-Public Water Supply Systems. Conditions for Individual Water Supplies: The well must meet the following requirements: o The water supply relies upon a water purification system due to the presence of contaminates; o corrosion of pipes (plumbing); o areas of intensive agricultural uses within one quarter mile; o coal mining or gas drilling operations within one quarter mile; o a dump, junkyard, landfill, factory, gas station, or dry cleaning operation within one quarter mile; or o an unusually objectionable taste, smell, or appearance of well water. The Appraiser is not required to sketch or note distances between the well, property lines, septic tanks, drain fields, or building Structures but may provide estimated distances where they are comfortable doing so. Please refer to the minimum distance required between wells and sources of pollution for Existing Construction and New Construction Property in these guidelines.

Shared Wells Required Analysis and Reporting Shared Well refers to a well that services two to four homes where there is a binding Shared Well Agreement between the property owners that meets FHA requirements. If the Property has a Shared Well, the Appraiser must obtain the Shared Well Agreement and include it in the appraisal report so that the Lender can review the agreement to determine eligibility. Note: The Appraiser will require an inspection under the same circumstances as an individual well.

Community Water Systems Required Analysis and Reporting A Community Water System refers to a central system that is owned, operated and maintained by a private corporation or a nonprofit property owners’ association. If the Property is on a Community Water System, the Appraiser must note the name of the water company on the appraisal report and report on the availability of connection to public and/or Community Water System or sewer system and any jurisdictional conditions requiring connection.

Onsite Sewage Disposal Systems Required Analysis and Reporting The Appraiser must notify the Lender if the Property is not served with an Onsite Sewage Disposal System adequate to dispose of all domestic wastes in a manner that will not create a nuisance, or in any way endanger the public health and must visually inspect the Onsite Sewage Disposal System and its surrounding area. Furthermore, the Appraiser must require an inspection to ensure that the system is in proper working order if there are signs of system failure or if the Appraiser has evidence that the Onsite Sewage Disposal System is not sufficient. Note: The Appraiser must report on the availability of public sewer to the site.

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The Appraiser must state the remaining economic life as a single number or as a range for all property types, including condominiums. The Appraiser must provide an explanation if the remaining economic life is less than 30 years.

The Lender or its designated AMC service providers may deliver appraisals through the EAD portal or continue delivery in accordance with the Post Closing and Endorsement Process of this Handbook until June 2016; when the Electronic Appraisal Delivery process will be mandatory. Currently, FHA recommends the FHA Lender to begin the delivery of appraisals through the EAD portal as soon as the Lender receives access credentials. Note: The appraisals submitted through EAD are the appraisals of record for loan endorsement.

Disaster Re-inspections For Appraisal Completed on or before a declared disaster incident period end date: • The Property must be re-inspected by the Appraiser and current photos depicting the front and the street of the subject property will be required along with the following commentary to be provided on the inspection report: “I have reviewed the subject property and noted no damage or deferred maintenance related to the recent disaster. The property has the same marketability and value as originally appraised”. • If the re-inspection indicates damage, the extent of the damage must be addressed. Completion of repairs is required prior to funding as evidenced by the Final Inspection Form 1004D with photos. • Non-Credit Qualifying Streamline Refinances will require an inspection on either appraisal form 2055 or 1004D to determine the Property is free from damage. For Appraisal Completed after a declared disaster incident period end date: • The Appraiser is required provide current front and street photos of the subject property and must comment on the overall marketability. Property must be free from damage and the disaster has had no effect on value or marketability. • If the re-inspection indicates damage, the extent of the damage must be addressed. Completion of repairs is required prior to funding as evidenced by the Final Inspection Form 1004D with photos. • Because FHA Streamline Refinances do not require an Appraisal, FCBM will require a Final Inspection Form 1004D to be completed. Important: If the property is damaged, the damage must be repaired prior to the loan closing which will require an additional final inspection to confirm that repairs were completed within code and by a licensed contractor. If the original appraiser is not available another licensed appraiser is acceptable if selected via an Appraisal Management Company per the FCBM AIR process utilizing the

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FCBM approved Appraisal Ordering Websites. The FEMA website listed below to identify incident period end dates and declared disaster information for your lending area at http://www.fema.gov/news/disasters.fema

Escrow Requirements for Taxes and Insurance Escrow for taxes and insurance is required for all loan transaction types in accordance with the regulatory requirements. The Lender must collect a monthly amount from the Borrower that will enable it to pay all escrow obligations in accordance with 24 CFR § 203.23. The escrow account must be sufficient to meet the following obligations when they become due: • Hazard insurance premiums; • Real estate taxes; • Mortgage Insurance Premiums (MIP); • Special assessments; • Flood insurance premiums if applicable; • Ground Rents if applicable; and • Any item that would create liens on the Property positioned ahead of the FHA-insured Mortgage, other than condominium or Homeowners’ Association (HOA) fees.

Escrow for Repairs/Work Completion Escrow holdbacks due to adverse weather conditions, are permitted for completion of repairs to the Subject to meet HUD Minimum Property Standards. The following requirements must be met: • The applicants must have a credit score of no less than 640. • The Subject Property is currently habitable and free of any health and safety issues. • There is legitimate weather related cause on why deferred repairs cannot be completed prior to the loan closing and will be completed within 30 up to 180 days. • The estimates for the cost of repair are provided by a Licensed Contractor or other qualified professional. • The Escrow holdback amount is funded at 150% of the repair estimate(s). Note: Refer to HUD REO Purchase section for specific program requirements. • At closing, Borrower will execute FCBM’s Escrow Holdback Agreement which identifies the escrow amount as well as the procedures and conditions upon which the required repairs must be completed. • There are also two (2) required HUD forms to be executed by the DE Underwriter: o The Underwriter will execute Form HUD-92300-Underwriter’s Assurance of Completion to indicate the repair escrow has been established at the time of final approval; and o The satisfactory completion of repairs with photos must be done by either the original appraiser or by an active HUD Roster Inspector using Form HUD-92051-Compliance Inspection Report which upon receipt will require the Underwriter to sign and certify that the incomplete construction, alterations and repairs have been satisfactory completed that the incomplete construction, alterations and repairs have been satisfactory completed. Important: A Final 1004-D Form may not be used. Effective with FHA Case Numbers assigned on or after October 31, 2016: The lender’s post-closing department must complete in FHA Connection the “Escrow Closeout Certification” screen within 30

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days after the escrow account is closed.

HUD Real Estate Owned Purchasing (HUD REO Purchase Program) HUD REO Property Purchase 203(b) Program The HUD REO Property Purchase 203(b) refers to a property that meets HUD’s Minimum Property Requirements (MPR) in its as-is condition with no repairs, alterations, or inspections.

HUD REO Property Purchase Programs 203(b) with Repair Escrow FCBM requires applicants to have a credit score of no less than 640 when an escrow holdback for repairs will be established.

The HUD REO Property Purchase 203(b) with Repair Escrow refers to a property that does not meet HUD’s MPR in its as-is condition so repairs of no more than $5,000 are to be completed for the HUD REO Property to meet HUD’s MPR. An escrow account to complete the repairs necessary to meet MPR after closing is required. Regardless of the type of HUD REO Purchase Program (with or without repair escrow), the Underwriter must obtain a copy of the HUD REO Sales Contract Form HUD-9548 and any applicable addenda, which will establish the purchase price, price discount, eligibility for GNND and eligibility for $100 Down, and meet the requirements for the Sales Contract.

Line 4 of the sales contract will specify the Insured HUD REO Property Purchase Program under which the Borrower is applying, the downpayment, and the mortgage amount. Regardless of the Insured HUD REO Property Purchase Program entered on Line 4 of form HUD-9548, the Underwriter must determine the eligibility of the Property, the eligibility of the Borrower, and the specific Insured HUD REO Property Purchase Program that must be used to finance the purchase.

The escrows repairs approved by HUD will be listed on the Sales Contract Form HUD-9548 with the first block in item #4 to be marked for 203(B) repair escrow. The escrow repairs approved by HUD on the Sales Contract represent 110% of estimated repairs determined by the appraiser or HUD’s inspector.

The amount on Line 5 specifies the amount of closing costs that HUD will pay on behalf of the Borrower. Contributions by HUD toward the Borrower’s closing costs are not defined as Interested Party Contributions (AUS Approve/Accept or Manual Underwriting) or Inducements to Purchase (AUS Approve/Accept or Manual Underwriting).

Effective for case numbers assigned on or after October 31, 2016, the Lender must comply with the Repair Completion Escrow Requirement.

Ordering the FHA Case Number for HUD REO Purchase Program: The FHA Case Number must be ordered as “Real Estate Owned w/o Appraisal” when using the HUD REO Appraisal that is still valid; whereas, the Lender is to ordered the FHA Case Number as “Real Estate Owned w/Appraisal” for Processing Type when using a new FHA appraisal. The property disposition must be “no”. The previous Case Number of the HUD REO Property must be entered in FHA Connection in the Prior Case Number field. The previous Case Number can be found on the top right hand corner of the HUD REO Sales Contract Form HUD-9548.

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HUD REO Repair Condition Requirements At closing: • Borrower will execute FCBM’s Escrow Holdback Agreement which identifies the escrow amount as well as the procedures and conditions upon which the required repairs must be completed within 90 days of closing unless weather related repairs which may require additional time to complete. • The Underwriter will execute Form HUD-92300-Underwriter’s Assurance of Completion to indicate the repair escrow has been established at the time of final approval. • The Underwriter will condition for satisfactory completion of repairs with photos to be done by either the original appraiser or by an active HUD Roster Inspector using Form HUD-92051- Compliance Inspection Report. Note: A Final 1004-D Form cannot be used. Upon Completion of repairs and Lender’s receipt of the satisfactory completion of repairs with photos completed by either the original appraiser or by an active HUD Roster Inspector using Form HUD-92051- Compliance Inspection Report: • The Underwriter is to sign and certify that the repairs have been satisfactory completed that the incomplete construction, alterations and repairs have been satisfactory completed on the Form HUD-92051 Compliance Inspection Report.

For required conditions to be set at closing and for verification of repairs completed, refer to the Escrow Holdback Repair guides in the collateral section of our conventional guidelines. For additional resources, please refer to the 4000.1 Handbook Section II.A.8.O.

Effective for FHA Case Numbers assigned on or after October 31, 2016, after the repair escrow account is closed, the Lender’s Post Closing Department must complete the Escrow Closeout Certification screen in FHAC within 30 Days after the escrow account is closed.

HUD REO Minimum Cash Investment The minimum statutory investment requirement of 3.5% down payment based on the lesser of the purchase price or appraised value is applied on a HUD REO purchase. The only exception is if the $100 down payment incentive is approved by HUD and specified on the HUD-9548 executed addendum to sales contract.

HUD REO Special Sales Incentives • HUD REO with up to 3% closing cost and up to 5% selling agent commissions paid by HUD if listed in the contract and approved by HUD. • $100 Down payment program (will be listed on line #4 of Sales Contract HUD-9548). • Good Neighbor Next Door (GNND) Program (will be listed on line #3 of Sales Contract HUD- 9548).

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Important: The contributions paid by HUD toward the Borrower closing costs are not considered to be Interested Party Contributions or Inducements to Purchase. HUD REO Earnest Money Deposit The buyer and selling broker must sign the earnest money forfeiture agreement. This document informs the buyer that HUD may consider the earnest money deposit forfeited or may return all or a portion of the earnest money deposit on owner occupant transactions depending on the circumstances. This disclosure must be provided to the lender with a copy of the HUD REO Sales Contract HUD Form- 9548 and can be obtained by going to: http://portal.hud.gov/hudportal/documents/huddoc?id=ModelDoc_EarnestMoney.pdf

HUD will return of the entire “EMD” to the applicant in the following circumstances: • Death in the immediate family (contract holder, spouse, or children living in the same household); • Recent serious illness in the immediate family that has resulted in significant medical expenses or substantial loss of income, thus adversely affecting the buyer’s financial ability to close the sale; • Loss of job by one of the primary wage earners, or substantial loss of income through no fault of the buyer; • HUD determines that the buyer is not an acceptable Borrower; • The buyer was pre-approved for FHA-insured mortgage financing by an FHA approved lender but, despite good faith efforts, was ultimately unable to receive a final approval for the mortgage financing; • The applicant provides HUD’s AM written documentation from a lender showing denial for financing within 30 Days of the contract ratification date; • HUD cancels the contract due to the documented presence and/or condition of lead- based paint and/or lead-based paint hazards; • Pursuant to the terms of the VA Amendatory Clause for purchasers using VA financing; or • Other circumstances evidencing equally good cause, as determined by HUD. Important: In order to receive any part of the earnest money deposit, the applicant must submit documentation to the Asset Manager (AM) within allowed time limits evidencing the circumstances related to the transaction’s failure to close.

Note: The Asset Managers (AM) are HUD’s M&M contractors responsible for the marketing and sale of Properties owned by or in the custody of HUD.

Maximum Loan Amount Calculations on HUD REO Transactions • When no sales incentives are specified in the HUD REO contract i.e. no $100 down payment; then: . Base loan amount = The lesser of HUD Sales Contract or the Appraised Value x 96.5% . Repair escrow amount listed in the HUD sales contract is added to the Base Loan Amount (as calculated in step 1) and this becomes the Modified Base Loan Amount . The UFMIP is calculated on the Modified Base Loan Amount, and added to it to

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determine the Total Loan Amount (Mortgage with UFMIP) • To calculate the maximum base loan amount for a home being sold under the $100 incentive with no escrow repair, take the sales price minus the $100 down payment - this will be the new base loan amount. The cost of the UFMIP may be financed into the loan PROVIDED that the total loan amount including the UFMIP does not exceed 100% of the “as is” appraised value. • To calculate the maximum base loan amount for a home being sold under the $100 incentive with HUD approved repair escrow in the Loan Amount: Take the sum of the sales price and the repair escrow, and subtract the $100 down payment - this will be the new base loan amount. The cost of the UFMIP may be financed into the loan PROVIDED that the total loan amount including the UFMIP does not exceed 100% of the “as is” appraised value. Note: If the applicant over bids the sales price vs. the appraised value, the buyer is to pay the difference with verified funds.

***DU will be Approve/Ineligible for LTV exceeding 96.5% due to the financing of the escrow repairs, this is acceptable but ONLY due to LTV exceeding 96.5%***

The HUD Form 9549 A-E is required as an addendum to the purchase contract. Under this program HUD offers for sale at a 50% discount from the listing price reflected on line 8 of the sales contract to full time: • Firefighters • Emergency Technicians • Teachers • Laws Enforcement Officers

General Qualifications for GNND program • Eligible F/T employment only. • Good faith intent to remain in employment status for one year. • Earnest money deposit required (1% of list price, but no less than $500 and no more than $2,000) • No ownership of residential real property for 1 year preceding offer submission date by either buyer or spouse. • Borrower(s) must occupy the property no less than 3 years after loan closing.

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Teacher • Employed as a full-time teacher by a state accredited public or private school that provides direct services to students in grades pre-kindergarten through 12; and • The public or private school where the person is employed as a teacher serves students from the area where the home is located in the normal course of business

Firefighter/EMT • Employed full-time as a firefighter or emergency medical technician • By a fire department or emergency medical services responder unit of the federal government, a state, unit of general local government, or an Indian tribal government, • Serving the area where the home is located.

Calculating the HUD Discounted Sales Price • GNND program borrowers are entitled to a discount against the sales price at settlement • 50% discount from the list price • the discounted amount is reduced by the closing costs and real estate commissions paid by HUD on behalf of borrower In other words: Contract Sales Price (from Line 3 of REO Sales Contract) Minus (-) Discount (from Line 8 of REO Sales Contract) Plus (+) HUD-Paid Closing Costs (from Line 5 of REO Sales Contract) Plus (+) HUD-Paid Sales Commission (from Line 6a of REO Sales Contract) Equals (=) HUD Discounted Sales Price

At closing; the borrower(s) is required to sign a Subordination Agreement to HUD that equals 50% of the list price with a 3 year term that self-amortizes monthly. The closing (or title) agent handling the closing of the new loan is to handle the paperwork and details to obtain the HUD subordination. Important: Broker Customers are to refer the closing company to this page or they can print the Subordination Information sheet and take it to the closing company. For more information, please visit http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/gnndserv For additional resources, please refer to the 4000.1 Handbook Section II.A.8.C.

Assumptions Not permitted at FCBM

Temporary Buydowns Not Allowed

Down Payment Assistance DPA’s are not allowed.

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Anti-Flipping Worksheet - Net Tangible Benefit

• All refinance loans will be conditioned for this requirement, as appropriate, based on the state matrix. • Please reference www.flcbmtg.com website resource center for worksheets/disclosures and/or matrix by state. • The FCBM underwriter will validate/confirm the information provided on the worksheet and clear the condition.

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Termite Treatment Exception Areas State Requirement Alaska Not required in any county. Colorado Not required in Clear Creek, Eagle, Gilpin, Grand, Jackson, Moffat, Routt, and Summit Counties. Required in any other county. Idaho Not required in any county. Maine Required in York and Cumberland counties. Not required in any other county. Michigan Not required in Alcona, Alger, Alpena, Antrium, Arenac, Baraga, Bay, Benzie, Charlevoix, Cheboygan, Chippewa, Clare, Crawford, Delta, Dickinson, Emmet, Gladwin, Gogebic, Grand Traverse, Houghton, Huron, Iosco, Iron, Isabella, Kalkaska, Keweenaw, Leelanau, Luce, Mackinac, Marquette, Menominee, Midland, Missaukee, Montmorency, Ogemaw, Ontonagon, Osceola, Oscoda, Otsego, Presque Island, Roscommon, Saginaw, Sanilac, Schoolcraft, Tuscola, and Wexford. Required in any other county. Minnesota Not required in Becker, Beltrami, Clay, Clearwater, Cook, Grant, Hubbard, Itasca, Kittson, Koochiching, Lake, Lake of the Woods, Mahnomen, Marshall, Norman, Otter Tail, Pennington, Polk, Roseau, Stevens, Traverse, Wadena, and Wilkin Counties. Required in any other county. Montana Not required in Blaine, Broadwater, Carbon, Cascade, Chouteau, Daniels, Fergus, Gallatin, Glacier, Golden Valley, Hill, Judith Basin, Lewis and Clark, Liberty, Meagher, Musselshell, Park, Petroleum, Phillips, Pondera, Roosevelt, Sheridan, Stillwater, Sweet Grass, Teton, Toole, Valley, Wheatland, and Yellowstone Counties. Required in any other county. New Hampshire Not required in Grafton, Carroll, and Coos Counties. Required in any other county. New York Not required in Clinton, Essex, Franklin, St Lawrence, Niagara and Orleans. Required in any other county. North Dakota Not required in any county. Oregon Not required in any county. South Dakota Not required in Bennett, Brown, Buffalo, Butte, Campbell, Corson, Custer, Day, Dewey, Edmunds, Faulk, Haakon, Hand, Harding, Hughes, Jackson, Jones, Lawrence, Marshall, McPherson, Meade, Mellette, Pennington, Perkins, Potter, Roberts, Shannon, Spink, Stanley, Sully, Walworth, and Ziebach Counties. Required in any other county. Utah Not required in Daggett, Morgan, Summit, and Wasatch. Required in any other county. Vermont Not required in Franklin, Grand Isle, Orleans, Essex, Chittenden, Lamoille, Caledonia, Washington, Addison and Orange. Required in any other county. Washington Not required in any county. Wyoming Not required in Fremont, Hot Springs, Lincoln, Park, Sublette, Sweetwater, Teton, and Uinta. Required in any other county. Reminder of Required States

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High Balance Loan Amounts-FHA Guidelines Effective For Case Numbers Assigned On or After September 14, 2015

Product Codes FJB30 – FHA Jumbo 30 year Fixed Rate Term FJ3SA – FHA Jumbo 30 year Fixed Rate Simple Refinance FJB3S – FHA Jumbo 30 year Fixed Rate Streamline Refinance

Locks Reference Buy Price Policy and Rate Sheet for specific day locks available

Price Adjustments Certain transactions may be subject to price adjustments. Refer to your rate sheet

Qualifying Rate Note Rate

Loan Terms 30-year Rate Mortgages

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FHA High Balance Loan Program The FHA loan is considered to be a High Balance FHA loan when the minimum Loan Amount meets the requirements below. The maximum loan amount for High Balance FHA loans cannot exceed FHA Loan Limits High Cost Area “Ceiling” criteria noted below: Number of Units* Minimum Continental U.S. Base Maximum Continental U.S. Base Loan Loan Amounts 2016 Amounts 2016 One $417,001 $625,500 Two $533,851 $800,775 Three $645,301 $967,950 Four $801,951 $1,202,925 *FCBM does not provide financing for the following multi-unit properties: • 2-4 Unit properties for Cash Out Refinances; • 2-4 Unit properties on Streamline Refinances.

Maximum Loan Amount for High Balance FHA loans is effective with FHA Case Numbers assigned on or after January 1, 2017. The new FHA Loan Limits High Cost Area “Ceiling” is noted below: Continental U.S. High Balance Loan Amounts for 2017

Number of Units Minimum Continental U.S. Base Maximum Continental U.S. Base Loan Loan Amounts Amounts One $424,101 $636,150 Two $543,001 $814,500 Three $655,351 $984,525 Four $815,651 $1,223,475 *FCBM does not provide financing for the following multi-unit properties: • 2-4 Unit properties for Cash Out Refinances; • 2-4 Unit properties on Streamline Refinances.

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Maximum Loan-to-Value (LTV) Purchase: 96.50% LTV of the Adjusted Value. For purchase transactions, the Adjusted Value is the lesser of the: - Purchase price less any Inducements to Purchase; or - Property Value. No Cash Out Refinance: - 97.75% of the Adjusted Value for the property that has been owner-occupied for previous 12 months or owner-occupied since acquisition if acquired within 12 months, of the case number assignment date. - 85% of the Adjusted Value if owned or occupied less than 12 months preceding the case assignment date. Cash-out: - 85% of the Adjusted Value. Simple Refinance: - 97.75% of the Adjusted Value. Streamline Refinance: - LTV Limits do not apply.

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TOTAL Scorecard Underwriting: The DE Underwriter must ensure compliance with all requirements underwriting the Property for mortgages underwritten using the TOTAL Scorecard (DU AUS) and demonstrate prudent underwriting practices in the Underwriting Decision even when using TOTAL as per the requirements described in the 4000.1 Single Family Housing Handbook.

Credit Scores • DU Approve/Eligible: Minimum credit score is 640 for Purchases, Rate Term and Streamline Refinances (refer to manual downgrade or DU Refer/eligible for streamline refinance information). Cash Out Refinances require a Minimum credit score of 660. • Manual Downgrade or DU Refer/Eligible: Minimum credit score is 660 for all loan purposes. Note: If the underwriter deems necessary to augment a “thin” credit profile, a verification of rent and/or 12 months cancelled checks may be able required. Non-Traditional credit is not allowed

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Non-Borrowing Spouse – Community Property State The originator/lender must obtain a consent and authorization from the non-borrowing spouse to verify his/her SSN with the Social Security Administration and evidence of non-borrowing spouse social security number verified with the Social Security Administration must be obtained. A credit report for non-borrowing spouse must be obtained if the borrower resides in a community property state, or property being insured is located in a community property state and include the debt of the non-borrowing spouse on the Loan Application. • Alaska • Arizona • California • Idaho • Louisiana • Nevada • New Mexico • Texas • Washington • Wisconsin Note: If the non-purchasing spouse does not have a social security number, the credit report must contain the non-borrowing spouse name, date of birth and addresses for the past 2 years.

Social Security Requirements The originator/lender must verify and resolve any inconsistencies or multiple social security number for each borrowers revealed during the processing of the loan. This includes verifying the social security number with the Social Security Administration.

Government-Issued Photo ID The loan package must include a statement the borrower’s identity has been validated with a government-issued photo identification or may choose to include a copy of such photo identification in the loan submission.

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The validity of the appraisal is 120 days which may be extended for 30 Days at the option of the lender if: (1) The DE Underwriter approved the Borrower before the expiration of the original appraisal; or (2) The Borrower signed a valid sales contract prior to the expiration date of the appraisal.

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• Building improvements that contribute to value to the Property cannot be observed from the street or a Public way. • Exterior Property inspection reveals deficiencies or other significant changes that did not exist as of the original appraisal’s effective date.

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Handling of Documents Documents cannot be transmitted from or through equipment of interested third parties or unknown parties. Information Sent Electronically: The Underwriter must authenticate all documents received electronically by examining the source identifiers such as fax banner header, or sender’s e-mail address for electronic transmissions, or by contacting the source of the document by telephone to verify the document’s validity. The Underwriter must document the name and telephone number of the individual with whom the Underwriter verified the validity of the document.

Documentation obtained through the Internet must contain the same information as would be found in an original hard copy of the document.

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Code of Ethics and Conflict of Interest As part of its effort to fight predatory lending and to promote honest and ethical conduct, FCBM r has established a Code of Ethics and Conflict of Interest and Conduct Policy as applicable to the company’s officers, employees, and customers to: 1) Engage in and promote ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, and to disclose to FCBM any material transaction or relationship that reasonably could be expected to give rise to such a conflict. Note: FCBM does not allow a loan originator to take a family member’s loan application; it is permissible however for another loan originator in the same office to take the loan application on his/her behalf. FCBM defines a family member as one’s spouse, child, spouse's child, daughter-in-law, son-in-law, brother, sister, mother, father, grandparents, grandchild, stepbrother, step-sister, step-parents, parents-in-law, brother-in-law, sister-in-law, aunt, uncle, niece, nephew, guardian, and ward. 2) Carry out your responsibilities honestly, in good faith and with integrity, due care and diligence, exercising at all times the best independent judgment. 3) Comply with applicable government laws, rules and regulations of federal, state and local governments and other appropriate regulatory agencies. 4) Never to take, directly or indirectly, any action to coerce, manipulate, mislead, or fraudulently influence company officers, employees and borrowers. 5) Provide written disclosure of all financial terms of the transaction. 6) Never condone, engage in or be a party to questionable appraisal values, falsified selling prices, concealment of pertinent information and/or misrepresentation of facts, including the cash equity of the mortgagor in the subject property. 7) Not knowingly put Borrowers in jeopardy of losing their property through fraudulent, unsafe or unsound lending practices. 8) Affirm commitment to the Fair Housing Act and the Equal Credit Opportunity Act, and always treating Borrowers consistently and equitably. 9) Avoid providing legal advice.

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Originators/Lenders choosing to use electronic signatures must fully comply with Electronic Signatures in Global and National Commerce Act (“E-Sign Act”) Compliance and Technology relating to disclosures, consent, intent to sign, presentation, delivery, and retention and must be provided by an approved e- signature vendor (please refer to the resource center for a list of approved e-signature vendors).

Important: Intent to Sign utilizing electronic signatures must be established by the lender and its evidence includes but is not limited to: • An online dialog box or alert advising the Borrower that continuing the process will result in an electronic signature; • An online dialog box or alert indicating that an electronic signature has just been created and giving the Borrower an opportunity to confirm or cancel the signature; or • A click-through agreement advising the Borrower that continuing the process will result in an electronic signature.

For guidance on use of POA on closing documents refer to Use of Power of Attorney in our Fannie Mae guidelines.

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Amendatory Clause The sales contract must include an amendatory clause where the actual dollar amount of the sales price is stated in the contract. Increases to the sales price require a revised amendatory clause. An amendatory clause is not required in connection with: o HUD REO sales, o 203(k) mortgages (FCBM does not participate in this mortgage type) o Sales transactions in which the seller is: Fannie Mae, Freddie Mac, The Department of VA, USDA, other Federal, State and Local Government Agencies, a Lender selling an REO asset, or seller at a foreclosure sale, or o Sales in which the Borrower is a nonprofit agencies (FCBM does not lend to borrowers that are nonprofit agencies).

Real Estate Certification The Borrower, Seller, and the Real Estate Agent or Broker involved in the sales transaction must certify, to the best of their knowledge and belief, that (1) The terms and conditions of the sales contract are true and (2) Any other agreement entered into by any parties in connection with the real estate transaction is part of, or attached to, the sales agreement. Note: A separate certification is not needed if the sales contract contains a statement that there are no other agreements between parties and the terms constitute the entire agreement between the parties, and all parties are signatories to the sales contract submitted at the time of underwriting.

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Validation of Income via Transcripts Tax Transcripts are required for each borrower whose income is utilized as a source of repayment and must be provided for the number of years of income used to qualify the borrower(s) and are required to support the income used to qualify the borrower. There are two options for tax transcripts: - 1040 transcripts or - W2 transcripts only. The W2 transcripts process is meant to be a tool to streamline documentation requirements and can only be used if only W2 income is used to qualify and there is no evidence of expenses incurred by the borrower that would reduce income, or if commission income exceeds 25% of borrower’s total annual employment income. If there is evidence or proof of expenses that would reduce income the W2 transcript option is not allowed to be utilized. Note: If multiple borrowers are qualifying but the tax returns are not filed jointly (when one borrower requires full returns), then it is acceptable to provide W2 transcripts for the salaried borrower and 1040 transcripts for the self-employed borrower. If using the W2 transcript option, when ordering the transcripts must be sure to select the W2 option on the 4506T. Do not use the 1040 transcript option on the 4506T order form.

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The mortgage loan file must reflect that none of the participants in the mortgage transactions are listed on HUD’s LDP list, or in SAM as being excluded from participating in HUD transactions. The list may include but is not limited to: o Borrower(s) o Seller o Listing and Selling Real Estate Agent o Loan Originator o Loan Processor o Underwriter o Appraiser o Closing Agent o Title Company

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Qualified Mortgages/Ability to Repay A Qualified Mortgage (QM) loan for FHA/HUD purposes is a mortgage that complies with HUD’s definition of QM that also aligns with the regulatory criteria given by the Consumer Financial Protection Bureau (CFPB) /Dodd-Frank Rule. A QM mortgage loan is defined as mortgage loan made by the creditor/lender on the premise that a reasonable and good faith determination based on verified and documented information that the consumer/borrower has a reasonable ability to repay the mortgage loan based on the terms, all applicable taxes, insurance (including mortgage insurance) and assessments. The rule is effective on applications dated on or after January 10th, 2014 The requirements for a mortgage to meet the QM criteria limits the points and fees charged in relation to the transaction, prohibits risky loan features. Further, the creditor/lender must verify and document the consumer’s Ability to Repay the Qualified Mortgage (ATR/QM). Florida Capital Bank Mortgage offers financing only to Qualified Mortgages that are originated and closed in accordance to FHA QM Guidelines and FCBM’s underwriting guidelines.

Florida Capital Bank Mortgage offers financing only to Qualified Mortgages (QM) that complies with the criteria set forth by the U.S. Department of Housing and Urban Development (HUD ) making a mortgage eligible for either “Safe Harbor” or a “Rebuttable Presumption” in compliance with the “Ability to Repay/Qualified Mortgage” Rule (ATR/QM). In order to meet HUD’s QM definition, mortgage loans must: • Require periodic payments without risky features; • Have terms not to exceed 30 years; • Limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (except for Title I, Title II Manufactured Housing, Section 184,Section 184A loans and others as detailed below); and • Be insured or guaranteed by FHA or HUD.

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This includes the following: • Escrow Accounts are required on all first-lien HPMLs but are also required on all FHA loans so in each case, this requirement will be met. • Ability to repay is required to be documented on HPMLs. This requirement is met on all fully qualifying FHA loans. • The maximum DTI ratios cannot exceed 31/43%.

Ineligible Transactions Energy Efficiency Mortgages (EEM) FHA Single Construction to Permanent financing FHA Back to Work Program Purchase or Refinances of Manufactured homes Home Equity Conversion Mortgage (HECMs) Temporary Interest Rate Buy-downs 203(k) transactions Disaster and 203(h) transactions 1 year, 3 year, 5 year, 7 year or 10 year ARM FHA Section 248 Indian Reservations and other transactions Restricted Lands FHA Refinance Program for borrowers in negative Section 247 Single Family Mortgage Insurance on equity positions (also known as a “Short Hawaiian Home Lands Refinance”)

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FHA Appraisers must comply with the Uniform Standards of Professional Appraisal Practice (USPAP) and have the competency to appraise Properties intended to serve as collateral for FHA-insured mortgages. Furthermore, the Appraiser must certify that he/she has the necessary qualifications and access to all necessary data to complete the report and that he/she is capable of performing the appraisal.

Requirements when Ordering the Appraisal The Originator/Lender is responsible for obtaining an appraisal to verify the value of the property and the property’s compliance with HUD’s Minimum Property Standards (MPS) and must provide to the AMC when ordering the appraisal: Purchase Transactions: • A complete copy of the subject sales contract including all addendums, • The land lease, if leasehold; • Surveys if available, and; • Any other legal documents contained in the loan file. • For new construction, provide the appraiser with a fully executed form HUD-92541 "Builder's Certification of Plans, Specifications, and Site" dated no more than 30 days prior to the date of appraisal order. • If the new construction property is less than 90% complete, provide the appraiser with a floor plan, a plot plan, and exhibits necessary to determine size and level of finish. • If the new construction property is 90% or more complete, provide the appraiser with a list of components to be installed/ completed after the date of the appraisal. For Refinance transactions: • The land lease, if leasehold; • Surveys if available; • Contract for deed / Land contract if applicable. For Refinance transactions, if building on owned land: • If the new construction property is less than 90% complete, provide the appraiser with a floor plan, a plot plan, and exhibits necessary to determine size and level of finish. • If the new construction property is 90% or more complete, provide the appraiser with a list of components to be installed/ completed after the date of the appraisal.

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The lender must document why a second appraisal was ordered and retain the explanation and all appraisal reports in the case binder.

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Ordering an Update to an Appraisal The lender may only order an update if: (1) It is a Mortgagee listed as an Intended User of the original appraisal, or (2) It has received permission from the original client and the Appraiser.

The Appraiser must incorporate the original report being updated via an attachment rather than by reference per Advisory Opinion 3 of the USPAP.

The lender may use an update of appraisal only if all of the following can be met: • It is performed by the FHA Appraiser who performed the original appraisal, who is currently in good standing on the FHA Appraiser Roster; • The Property has not declined in value; • The building improvements that contribute value to the Property can be observed from the street or a public way; • The exterior inspection of the Property reveals no deficiencies or other significant changes; • The update of appraisal is ordered by the lender and completed by the Appraiser prior to the expiration of the initial 120-Day period; and • The original appraisal report was not previously updated.

Note: If a borrower has refinanced their primary residence in the last 12 months they are not eligible for a purchase transaction on a new primary residence.

II. Refinance Transaction: Is a new mortgage utilized when a Borrower with legal title on the Property and its proceeds are used to pay off any existing lien. Types of Refinances: o No Cash Out Refinance. o Cash-out refinances (not allowed on owner occupied homestead property in Texas). o Simple Refinance. o Streamline Refinance (Non-Qualifying) o Streamline Refinance (Credit Qualifying)

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Product Credit Score and DTI Matrices DU Approve/Eligible

Transaction Type Credit Score Max DTI₁ Purchase 640 50% 680 55%* No Cash Out Refinance 640 50% 680 55%* Simple Refinance 640 50% 680 55%* Cash Out 660 50% 680 55%* Note:* 2-4 Unit Properties have a maximum DTI of 50%

DU Refer/Eligible – Manual Downgrade

Transaction Type Credit Reserves Required Max DTI₁ Score Purchase 660 1 Month = 1-2 Unit Properties Requirements for Manual 3 Months = 3-4 Unit Properties Underwriting/Downgraded Loans: No Cash Out 660 1 Month = 1-2 Unit Properties • The maximum DTI acceptable is Refinance 3 Months = 3-4 Unit Properties 31%/43% and the loan must Simple Refinance 660 1 Month = 1-2 Unit Properties meet all manual underwriting 3 Months = 3-4 Unit Properties requirements. Note: Maximum DTI ratios do not apply Cash Out 660 1 Month = 1-2 Unit Properties to non-credit qualifying streamline 3 Months = 3-4 Unit Properties refinances. Streamline

Refinance 640 Credit Qualifying No Reserves Required and Non-Credit Qualifying ₁FCBM: Loans with Gift Funds: Maximum DTI Ratio of 31/43%.

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Co-Borrower vs. Co-Signer Co-Borrower Co-Signer

Eligibility for Military Personnel Borrowers who are military Active Duty, who cannot physically reside in a Property are still considered owner occupants and are eligible for maximum financing if a Family Member of the Borrower will occupy the subject Property as their Principal Residence, or if the Borrower intends to occupy the subject Property upon discharge from military service. The required documentation includes a copy of the Borrower’s military orders documenting his/her Active Duty status and that the current duty of station is more than 100 miles from the subject Property. Furthermore, the borrower must provide a signed and dated letter with his/her intent to occupy the subject Property upon discharge from military service. Important: If a Family Member will not occupy the subject Property as their Principal Residence

Citizenship and Immigration Status • Citizenship: U.S. citizenship is not required for FHA Mortgage eligibility. • Permanent Resident Aliens: Eligibility for permanent resident aliens is the same as with U.S. citizens provided the Borrower satisfies the same requirements, terms, and conditions as those for U.S. Citizens. Each loan must include evidence of the permanent residency and indicate the Borrower is a lawful permanent resident alien on the URLA. Documentation from the U.S. Citizenship and Immigration Services (USCIS) evidencing lawful permanent residency status is required to be provided by the Borrower(s). Requirements: o A copy of the “Green Card” is required for all Permanent Resident Aliens (front and back of the card). o The Permanent Resident Alien must have a valid Social Security number and must have a minimum of 24 months of history of employment, residency and credit in the U.S. as well as adhering to additional documentation required by the program applied for within FCBM guidelines. Note: If less than 3 months is remaining on the Permanente Resident Alien’s “Green Card” from loan closing, the borrowers must provide a copy of their application for the renewal of their “Green Card”.

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• Non-Permanent Resident Aliens: Non-permanent resident aliens are considered eligible Borrowers provided all of the following are met: o Property will be the Borrower’s Principal Residence, o Borrower has a valid SSN (social security card cannot be used as evidence of work status or proof of immigration status), o Standards for determining stable monthly income, adequate credit history and sufficient liquid assets must be applied to each borrower who is a non-permanent resident alien to be no less than 2 years from loan application, o Borrower is eligible to work in the U.S., as evidenced by an unexpired Employment Authorization Document (EAD) issued by USCIS or by copy of unexpired visa. Below is a list of acceptable visas: . A Series (A-1, A-2, A-3): these visas are given to officials of foreign governments, immediate family members and support staff. Only those without diplomatic immunity, as verified on the visa, are allowed. . E-1 Treaty Trader and E-2 Treaty Investor: this visa is essentially the same as an H-1 or L-1; the title refers to the foreign country's status with the United States. . G series (G-1, G-2, G-3, G-4, G-5): these visas are given to employees of international organizations that are located in the United States. Some examples include the United Nations, Red Cross, World Bank, UNICEF and the International Monetary Fund. Verification that the applicant does not have diplomatic immunity must be obtained from the applicant's employer and/or by the viewing the applicant's passport. . H-1 (includes H-1B and H-1C), Temporary Worker: this is the most common visa given to foreign citizens who are temporarily working in the United States. . L-1, Intra-Company Transferee: an L-1 visa is given to professional employees whose company's main office is in a foreign country. . TN, NAFTA visa: used by Canadian or Mexican citizens for professional or business purposes. . TC, NAFTA visa: used by Canadian citizens for professional or business purposes. . NACARA: Cuba, El Salvador, Guatemala, and Nicaragua beneficiareis . Employment Authorization Document (EAD Card) or work permit issued by The Department of Homeland Security is acceptable under Category (C9, C9P, C10, C11, C16, C19, A4, A5, A12). . The EAD is not required if documentation from USCIS reflects that the Borrower is a refugee or was granted asylum status. Note: If the EAD will expire within one (1) year, /then document prior history of renewals as acceptable evidence of continued/residency status and the Underwriter may assume that continuation will be granted. If there are no prior renewals, the Underwriter must determine the likelihood of renewal based on information from the USCIS; this may be require for the borrowers to provide a letter explaining their intention to remain in the country.

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Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt The Underwriter is prohibited from approving a Loan Application for Borrowers with delinquent federal non-tax debt, including deficiencies and other debt associated with past FHA-insured Mortgages and s required to determine if the Borrower has delinquent federal non-tax debt. The Underwriters may obtain information on delinquent federal debts from public records, credit reports or equivalent, and must check all Borrowers against the Credit Alert Verification Reporting System (CAIVRS).

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Borrower Ineligibility Due to Delinquent Federal Tax Debt Borrowers with delinquent Federal Tax Debt are ineligible. However, Federal and State Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three (3) months and the agreed payment amount must be included in the calculation of the Borrower’s Debt-to-Income (DTI) ratio. The Underwriter must obtain evidence from the IRS evidencing the repayment agreement and verification of payments made. Note: The Borrower cannot prepay the scheduled payments in order to meet the required minimum of three months of payments.

Occupancy Types Primary Residence: A Principal Residence refers to a dwelling where the Borrower maintains or will maintain their permanent place of abode, and which the Borrower typically occupies or will occupy for the majority of the calendar year. A person may have only one Principal Residence at any one time. At least one Borrower must occupy the property within 60 days of signing the Security Instrument and intend to continue occupancy for at least one year. Important: The Borrower must indicate on the Uniform Residential Loan Application (URLA) – 1003 that the Property will be the Borrower’s Principal Residence and certify to that fact on form HUD-92900-A, HUD/VA Addendum to URLA.

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The underwriter must obtain a completed form HUD-92561 “Borrower’s Contract with Respect to Hotel and Transient Use of Property” for each Mortgage secured by a Single Family dwelling that is one of a group of five or more dwellings owned by the Borrower within a two block radius.

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A Property is not eligible for FHA insurance if: • A residential building and related improvements to the Property are located within SFHA Zone A, a Special Flood Zone Area, or Zone V, a Coastal Area, and insurance under the National Flood Insurance Program (NFIP) is not available in the community; or • The improvements are, or are proposed to be, located within a Coastal Barrier Resource System (CBRS) Note: see specific sections on required documentation and coverage for proposed or new construction below. a) Proposed or New Construction in Special Flood Hazard Area (SFHAs): If any portion of the dwelling, related Structures or equipment essential to the value of the Property and subject to flood damage is located within an SFHA, the Property is not eligible for FHA mortgage insurance unless the Mortgagee: o Obtains from FEMA a final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removes the Property from the SFHA; or o Obtains a FEMA National Flood Insurance Program Elevation Certificate (FEMA Form 81- 31) prepared by a licensed engineer or surveyor. The elevation certificate must document that the lowest floor including the basement of the residential building, and all related improvements/equipment essential to the value of the Property, is built at or above the 100-year flood elevation in compliance with the NFIP criteria, and insurance under the NFIP is obtained. b) Existing Construction in Special Flood Hazard Area (SFHAs): When any portion of the residential improvements is determined to be located within an SFHA, insurance under the NFIP must be obtained. c) Condominium Property in Special Flood Hazard Area (SFHAs): The Lender must ensure the Homeowners’ Association (HOA) obtains insurance under the NFIP on buildings located within the SFHA. The flood insurance coverage must protect the interest of the Borrowers who hold title to an individual unit, as well as the common areas of the Condominium Project.

Required Flood Insurance Amount For Properties located within an SFHA, flood insurance must be maintained for the life of the Mortgage in an amount at least equal to the lesser of: o The Appraiser’s estimated replacement cost, less the Appraiser’s estimated site value; o The outstanding balance of the Mortgage, less estimated land costs; or o The maximum amount of the NFIP insurance available with respect to the property improvements. Important: Properties Located within Coastal Barrier Resources are not eligible for FHA financing.

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Restrictions on Property Flipping Property Flipping refers to the purchase and subsequent resale of a Property in a short period of time for a considerable profit.

Resale within 90 days from Seller Acquisition: Any resale of the Property within 90 days from the date of the Seller’s acquisition is not permitted.

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Re-sales Between 91 Days and 180 Days After Acquisition: For a resale that occurs between 91 and 180 days following the Seller’s acquisition and the resale price is 100% or more than the Seller’s purchase price, HUD/FHA requires: o The Originator/Lender to obtain a second appraisal to validate the Property value; o The cost of the second appraisal cannot be paid by the Borrower (it may be paid by the Seller or Originator/Lender); o The second appraisal must be completed by independent FHA roster Appraisers who is currently state licensed; o Repairs, recommended by either Appraiser (original or second appraisal) must be completed prior to Closing if the repairs are necessary in order to meet FHA Minimum Property Standards; o If the difference in appraised values is greater than 5% between the two appraisals, the lower value must be used in determining the adjusted value and the maximum loan amount: . If the difference is appraised values < 5%; the maximum loan amount can be based off of the first appraisal and the Underwriter must comment in the 92900-LT on selected appraisal used to determine the adjusted value. . The Conditional Commitment and the appraisal logging in FHA Connection should reflect the Appraisal selected by the Underwriter.

Eligible Property Types

1-4 units Condominiums Units within an FHA Site Condominium Unit (does

approved Project not have to be FHA Approved) PUD's Detached & Attached Single Family Attached Single Family Detached Important on 2-4 Unit Properties: The Lender must obtain a completed form HUD-92561, Borrower’s Contract with Respect to Hotel and Transient Use of Property.

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Excess of 20 acre No Land Trusts / Illinois Cooperatives Geodesic Domes properties Land Trusts

"Live-Work" loft-style Houseboats Unique Properties Mobile Homes Condominiums

The following properties are not eligible for financing by FCBM: • 2-4 Unit properties for Cash Out Refinances; • 2-4 Unit properties on Streamline Refinances.

Note:* See the requirements for Right of Redemption in Alabama in the Conventional Collateral guidelines.

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Property Types FHA financing is limited to 1–4 Unit Properties that are owner-occupied Principal Residences. • One Unit: 1 Unit Property is a one-family dwelling (SFR Detached or Attached, or a Condominium Unit). Condominium Unit Property: Is a Property contained in a multi-unit project that has individually- owned dwelling units, which may be either attached or detached from each other. A Condominium Project must be FHA approved before a Mortgage on an individual condominium unit can be insured. The FHA Condominium Approved list can be found at https://entp.hud.gov/idapp/html/condlook.cfm also, the FCBM must certify the individual Condominium Unit is still eligible for FHA financing; therefore, FCBM’s Condo Review Department must certify that there have been no changes to the project since the Condominium Approval of the Project was issued by FHA that would cause the project to no longer be eligible. For more details visit FCBM’s Condo Review Guides at www.flcbmtg.com Note: Condominium projects do not need to be currently approved by FHA on HUD REO Purchase Transactions. Site Condominiums: Are Single Family detached dwellings encumbered by a declaration of condominium covenants or condominium form of ownership. Site Condominiums do not need to be FHA-approved. • Two Units: 2 Unit Property is a Single Family residential Property with two individual dwellings. The Underwriter must obtain a completed HUD Form HUD-92561 “Borrower’s Contract with Respect to Hotel and Transient Use of Property” from the applicant. • Three to Four Units: 3 to 4 Unit Properties is a Single Family residential Property with three to four individual dwellings. The Underwriter must obtain a completed HUD Form HUD-92561 “Borrower’s Contract with Respect to Hotel and Transient Use of Property” from the applicant. 3-4 Unit Property Self-Sufficiency Eligibility The 3-4 Unit property must be self-sufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment, divided by the monthly net rental income, does not exceed 100%). In other words, the net self-sufficiency of the rental income produced or to be produced by the subject property over and above the PITIA. Net self-sufficiency rental income for three and four unit property is calculated using the following formula: 1) Using the Appraiser’s estimate of fair market rent from all units, including the unit the Borrower chooses for occupancy, and 2) Minus the greater of the a. Appraiser’s estimate for vacancies and maintenance, or b. 25% of the fair market rent. This net rental income calculation is used to determine the maximum loan amount. Borrowers must still qualify for the mortgage based on • Income • Credit • Cash to close, and • Projected rents received from remaining units.

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Projected rent may only be considered gross income for qualifying purposes. It cannot be used to offset the monthly mortgage payment. Note: Please refer to our resource center to complete the 3-4 Family Unit Worksheet to verify self-sufficiency and eligibility for maximum loan amount.

Mix Use of Property Mixed Use 1-4 Unit Single Family Properties are eligible for FHA financing, provided that: 1. A minimum of 51% of the entire building square footage is for residential use; and 2. The commercial use will not affect the health and safety of the occupants of the residential Property.

Property Assessed Clean Energy (PACE) Not eligible for financing at FCBM

Legal Restriction on Conveyance (Free Assumability) The Underwriter must determine if there are any legal restrictions on conveyance in accordance with 24 CFR § 203.41.

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Allowable Sections of the Housing Act at FCBM • 203B: Owner Occupied 1-4 Family & Detached Condos • Detached Condo ADP Code 734 • 234C: Condo

Parameters The maximum loan amount is to be calculated as a percentage of the Adjusted Value or the maximum County Nationwide Limits. The maximum LTV ratios vary depending upon on the loan purpose (purchase or refinance), Borrower, program type, and stage of construction. • The Adjusted Value for Purchase transactions is the lesser of: o Purchase Price less any inducements to purchase; or o The Property Value. • The Adjusted Value for Refinance transactions depends upon length of ownership: • For a property acquired by the Borrower within 12 months of the case number assignment date, the Adjusted Value is the lesser of: . The Borrower’s purchase price, plus any documented improvements made subsequent to the purchase; or . The Property Value. • For a property acquired by the Borrower within 12 months of case number assignment by inheritance or through a gift from a Family Member, may utilize the calculation of Adjusted Value for properties purchased 12 months or greater. • For properties acquired by the Borrower greater than or equal to 12 months prior to the case number assignment date, the Adjusted Value is the Property Value.

Financing of Upfront Mortgage Insurance Premium The loan amounts and LTVs restrictions are based on the loan amount before the financing of the Upfront Mortgage Insurance Premium (UFMIP) (based of the “Base Loan Amount”). Thus the total loan amount may exceed National County Limits by the amount financed of the UFMIP.

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• Spouse or domestic partner; • Legally adopted son or daughter, including a child who is placed with the Borrower by an authorized agency for legal adoption; • Foster child; • Brother, stepbrother; • Sister, stepsister; • Uncle; • Aunt; or • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the Borrower.

Exceptions to the Maximum LTV for Identity of Interest Transactions The LTV restriction of 85% does not apply for Identity-of-Interest transactions under the following circumstances: a) Family Member Transactions: - The Borrower is purchasing another family member’s Primary Residence; or - Property owned by another family member in which the Borrower has been a tenant for at least six months immediately predating the Sales Contract. A lease or other written evidence to verify occupancy is required. b) Builder’s Employee Purchase: - The 85% LTV restriction may be exceeded if the employee of the Builder, who is not a family member, purchases one of the Builder’s new houses or models as a Primary Residence. c) Corporate Transfer: - The 85% LTV restriction may be exceeded if a corporation transfer an employee to another location, purchases the employee’s house, and sells it to another employee. d) Tenant Purchase: - The 85% LTV restriction may be exceeded if the current tenant purchases the Property where the tenant has rented the Property for at least six months immediately predating the Sales Contact. A lease or other written evidence to verify occupancy is required. LTV Limitations when there is a Non-Occupying Borrower For Non-Occupying Borrower Transactions, the maximum LTV is 75%. The LTV can be increased to 96.5% if the Non-Occupying Co-Borrower is a Family Member of the Occupying Borrower, so long the transaction does not involve: • A Family Member selling to a Family Member who will be a non- occupying co-Borrower; or • A transaction on a two- to four-unit Property.

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Required Investment Total Required Investment Minimum Required Investment (MRI) Total Required Investment refers to the amount Minimum Required Investment (MRI) refers to the the Borrower must contribute to the transaction Borrower’s contribution required which represents including the Borrower’s down payment and the at least 3.5% of the Adjusted Value of the Property. Borrower-paid transaction costs. The Total Required Investment includes the Minimum Required Investment (MRI). Note: *Closing costs (non-recurring closing costs, prepaid expenses and discount points if any) may not be used to help meet the borrower’s minimum required investment). *Credit Card Payment for Appraisal/Credit Report The borrower may use a credit card to pay for the appraisal and/or credit report. However, these costs cannot be considered to help meet the required investment.

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Build on Own Land A Borrower is eligible for FHA financing if building on land that has been owned by the Borrower for more than 6 month’s from the date of the FHA Case Assignment. The loan amount is calculated using the purchase LTV limits but the loan closing documents must be prepared as a refinance transaction. Proof of land ownership must be documented with a copy of the Settlement Statement/Closing Disclosure or similar legal document. The Underwriter must document the required funds to close in accordance with either AUS Approve/Eligible or Manual Underwriting as applicable. If the land was given as a gift to the Borrower, the Underwriter must verify that the donor was an acceptable donor and obtain standard gift documentation for any gift of land. Additional requirements include: • The builder must be a licensed general contractor. • The Borrower may act as the general contractor, only if the Borrower is also a licensed general contractor. • No cash back can be received at closing.

Note: The Borrower may not receive cash back from the additional equity in the Property, but the Borrower may replenish his/her own cash expenditures for any paid extras over and above the contract specifications and any out-of-pocket expenses not included in the builder’s price. For this, the Underwriter must obtain an itemization of the extras and expenses and the cost of each item that the Borrower has paid.

At least one Borrower on the refinance must hold title to the Property being refinanced prior to case number assignment. If the Borrower is refinancing his/her current FHA-insured Mortgage to another FHA- insured Mortgage within three (3) years, a refund credit is applied to reduce the amount of the Upfront Mortgage Insurance

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Premium (UFMIP) paid on the refinanced Mortgage. Refunds are based on the number of months the loan is insured through the date of the new refinance loan closing month.

Table for Upfront Mortgage Insurance Premium Refunds

Cash-Out A Cash-Out Refinance is a refinance of any Mortgage or a withdrawal of equity where no Mortgage currently exists, in which the mortgage proceeds are not limited to specific purposes. Note: FCBM only allows cash out on 1 Unit Properties.

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At least six (6) months of mortgage payment must be made to be eligible for cash out refinance. While properties owned free and clear may be refinanced as cash-out transactions.

FHA offers three types of no cash-out refinances: Rate and Term Rate and Term refers to a no cash-out refinance of any Mortgage in which all proceeds are used to pay existing mortgage liens on the subject Property and costs associated with the transaction.

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Documentation The Borrower must have made the payments for all Mortgages secured by the subject Property for the month prior to mortgage Disbursement

Maximum Loan-to-Value Ratio and Maximum Combined Loan-to-Value

The maximum LTV/CLTV for a Rate and Term refinance is: o 97.75% LTV/97.75% CLTV if property has been owner-occupied for previous 12 months or owner-occupied since acquisition if acquired within 12 months, of the case number assignment date. o 85% LTV/97.75% CLTV if subject property has been occupied as a primary residence for less than 12mos from date of new case number assignment; or if owned less than 12mos, it has not been occupied for that entire ownership period.

Calculating Maximum Loan Amount The Lesser of: a) The FHA Loan Limits; b) The maximum LTV based on the LTV ratio above; or c) The sum of existing debt and costs associated with the transaction as follows: Existing debt includes: . The unpaid principal balance of the first mortgage as of the month prior to mortgage Disbursement; . The unpaid principal balance of any purchase monthly junior mortgages as of the month prior to mortgage Disbursement; . The unpaid principal balance of any junior liens over twelve (12) months old as of the date of mortgage disbursement*. If the balance or any portion of an equity line of credit in excess of $1,000 was advanced within the past twelve (12) months and was for purposes other than repairs and rehabilitation of the property, the portion above and beyond $1,000 of the line of credit is not eligible for inclusion in the new mortgage; *In order to payoff the non-purchase money junior lien with loan proceeds, FHA now requires at least 12 months seasoning on that junior lien (even if the proceeds were used for repair or rehabilitation).

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. Ex-spouse or Co-Borrower equity; as described in Refinancing to Buy out Title-Holder Equity; . Interest due on the existing mortgage(s); . Mortgage Insurance Premium (MIP) on the existing mortgage; . Any prepayment penalties assessed; . Late charges; and . Escrow shortages. Allowed costs include all Borrower paid costs associated with the new mortgage; and any Borrower – paid repairs required by the appraisal. d) Less any refund of the Upfront Mortgage Insurance Premium (UFMIP). Important: If HELOC, must use the maximum accessible credit limit of the subordinate lien to calculate the CLTV ratio. Also, the cash back to the borrower cannot exceed $500.

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Borrower Eligibility Simple Refinance is only permissible for owner-occupied Primary Residence

Documentation The Underwriter must review the Borrower’s employment documentation or obtain utility bills to evidence the Borrower currently occupies the Property as his/her Primary Residence.

Maximum Loan-to-Value Ratio and Maximum Combined Loan-to-Value The maximum LTV/CLTV for a Simple refinance is: 97.75% LTV/97.75% CLTV

Calculating Maximum Loan Amount The maximum mortgage amount for a Simple Refinance is the lesser of: a) The FHA Loan Limits; b) The maximum LTV based on the LTV ratio above; or c) The sum of unpaid existing principal balance of the FHA-insured first mortgage, allowed closing costs, pre-paid items associated with the new transaction as follows: Existing debt includes: . The unpaid principal balance of the first mortgage as of the month prior to mortgage Disbursement; . Interest due on the existing Mortgage; . MIP due on existing Mortgage; . late charges; and . escrow shortages;

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Allowed costs include all Borrower paid costs associated with the new Mortgage; and Borrower-paid repairs required by the appraisal; d) Less any refund of the Upfront Mortgage Insurance Premium (UFMIP). The Underwriter must use estimates of existing debts and costs in calculating the maximum mortgage amount to the extent that the actual debts and costs do not result in the Borrower receiving greater than $500 cash back at loan disbursement.

Important: The payoff statement on all existing mortgages must be obtained and used in the calculation of the loan amount on all refinance types.

Streamline Refinances General Requirement for All Streamline Refinances (Credit or Non-Credit Qualifying Refinances) Streamline Refinance refers to the refinance of an existing FHA-insured Mortgage requiring limited Borrower credit documentation and underwriting. Underwriters must manually underwrite all Streamline Refinances in accordance with the guidance provided in this section. If the loan is scored through TOTAL Scorecard, the findings are invalid. On the date of the FHA case number assignment: o The Borrower must have made all mortgage payments for all mortgages on the property within the month due for at least six (6) months prior to the FHA Case Number assignment and have no more than 1x30 day late payment for the previous six (6) months; o At least six (6) full months must have passed since the first payment due date of the mortgage that is being refinanced; o At least 210 Days must have passed from the Closing Date of the mortgage that is being refinanced; and o If the Borrower assumed the mortgage that is being refinanced, they must have made six payments since the time of assumption.

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A Net Tangible Benefit is: a) A reduced Combined Rate (refers to the interest rate on the mortgage plus the MIP rate), b) A reduced term*, and/or c) A change from an ARM to a fixed rate Mortgage, That results in a financial benefit to the Borrower.

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Maximum LTV/CLTV LTV is based on the original appraised value reported into FHA Connection as verified with a current FHA Refinance Netting Authorization.

The maximum CLTV as FCBM on all Streamline Refinances is 125%.

Principal Reduction due to Excess Cash Back The lender may reduce the Borrower’s outstanding principal balance at loan disbursement if necessary to prevent cash back in excess of $500.

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There are two different streamline options available: 1) Credit Qualifying: Credit Qualifying Streamline Refinance is required if an obligor is being removed from the mortgage. 2) Non-Credit Qualifying: A Borrower is eligible for a Non-Credit Qualifying Streamline Refinance if all Borrowers on the existing mortgage remain as Borrowers on the new mortgage.

Credit Qualifying: The Underwriter must perform a credit and capacity analysis of the Borrower, but no appraisal is required. Eligibility: At least one (1) Borrower from the existing mortgage must remain as a Borrower on the new mortgage. Occupancy: The Underwriter must verify owner occupancy by reviewing the Borrower’s employment documentation or obtain utility bills evidencing that the Borrower currently occupies the Property as their Primary Residence. Additions to Title: Individuals may not be added to Title on Streamline Refinance without creditworthiness review. Other Requirements and Documentation • A Tri-Merge Credit Report for credit score, credit analysis and mortgage payment history purposes are required. • CAIVRS for all Borrowers. • The Borrower must have made all Mortgage Payments on all properties with less than six (6) months of Mortgage payment history within the month due for the six (6) months. The Borrower must have made all Mortgage payments on all properties with greater than six (6) months of Mortgage payment history within the month due for the six (6) months prior to the FHA Case Number assignment and have no more than one (1) 30-Day late payment for the previous six (6) months. • The Underwriter must verify the Borrower made the payments for all Mortgages secured by the subject Property within the month due for the month prior to loan disbursement. • The Underwriter must verify Borrower’s funds to close, in excess of the total PITIA Payment of the new Mortgage, in accordance with Manual Sources of Funds requirements. • LDP/GSA is required. • The payoff statement on the existing mortgage. • The original Mortgage Note is to be provided or other alternative document with similar information. • The Condominium Unit is not required to be the FHA Condominium Approved list. • Maximum cash to the borrower cannot exceed $500. • In addition to the requirements in this section, credit qualifying Streamline Refinances must meet all requirements of Manual Underwriting,

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Non-Credit Qualifying: The Underwriter does not need to perform credit or capacity analysis or obtain an appraisal. Eligibility: A Borrower is eligible for a Streamline Refinance without credit qualification if all Borrowers on the existing mortgage remain as Borrowers on the new mortgage. Exception – A borrower on the mortgage to be paid may be removed from title and new mortgage in cases of divorce, legal separation or death when: o The divorce decree or legal separation agreement awarded the property and responsibility for payment to the remaining borrower, if applicable; and o The remaining borrower can demonstrate that they have made the mortgage payments for a minimum of six (6) months prior to case number assignment Mortgages that have been assumed are eligible provided the previous Borrower was released from liability.

Additions to Title: Individuals may be added to Title on Streamline Refinance without creditworthiness review.

Other Requirements • Tri-Merge Credit Report for credit score and mortgage payment history purposes is required. • The Borrower must have made all Mortgage Payments for all Mortgages on the subject property within the month due for the six (6) months prior to case number assignment and have no more than one (1) 30-Day late payment for the previous six (6) months for all Mortgages on the subject property. • The Underwriter must verify the Borrower made the payments for all Mortgages secured by the subject Property within the month due for the month prior to loan disbursement. • The Underwriter must verify Borrower’s funds to close, in excess of the total

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PITIA Payment of the new Mortgage, in accordance with Manual Sources of Funds requirements. • LDP/GSA is required. • The payoff statement on the existing mortgage. • The original Mortgage Note is to be provided or other alternative document with similar information. • The Condominium Unit is not required to be the FHA Condominium Approved list. • Maximum cash to the borrower cannot exceed $500.

The following does not apply to non-credit qualifying Streamline Refinances: • Ordering Appraisal • Transferring Existing Appraisal • Ordering Second Appraisal • Ordering an Update to an Appraisal • Borrower and Co-Borrower Ownership and Obligation Requirements • Cosigner Requirements • Military Personnel Eligibility • Borrower Ineligibility Due to Delinquent Federal Non-Tax Debt • Delinquent Federal Tax Debt • Property Eligibility and Acceptability Criteria • National Housing Act’s Statutory Limits • Nationwide Mortgage Limits • Underwriting the Property • Underwriting the Borrower Using the TOTAL Mortgage Scorecard • Credit Requirements (Manual) • Income Requirements (Manual) • Asset Requirements (Manual) • Underwriting of Credit and Debt (Manual) • Underwriting of Income (Manual) • Underwriting of Assets (Manual) • Calculating Qualifying Ratios (Manual) • Approvable Ratio Requirements (Manual) • Documenting Acceptable Compensating Factors (Manual)

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Mortgage Insurance UFMIP/Monthly MIP The UFMIP to be charged for all loan terms is 1.75% unless otherwise stated in the specific FHA program, product or MIP Chart and may be financed into the loan amount and this fee is not considered when calculating LTV ratio limits. It must be entirely financed in the loan amount or paid entirely in cash except for any amount less than $1.00 Refund and Credit of Upfront Mortgage Insurance Premium The UFMIP is not refundable, except in connection with the refinancing to a new FHA-insured Mortgage. For details refer to the Refinance section of these guides. Monthly MIP (Annual MIP) The periodic MIP is an annual MIP that is payable monthly. The amount of the annual MIP rate and the duration is based on the LTV ratio, Base Loan Amount and the term of the Mortgage. The following chart provides the current upfront MIP and annual MIP factors for standard conforming loan amounts.

Mortgage Insurance Factors for FHA Case Numbers Assigned on or after January 26th 2015 Base Loan >15 Year Term ≤15 Year Term Amount LTV UFMIP Monthly Annual MIP LTV UFMIP Monthly Annual MIP MIP Assessment Period MIP Assessment Period ≤$625,500 ≤90% 0.80% 11 years ≤78% 0.45% 11 years 1.75% 1.75% >90% but 0.80% >78% but 0.45% ≤95% Life of loan ≤ 90% Life of loan >95% 0.85% > 90% 0.70%

>$625,500 ≤78% ≤78% 0.45% 1.75% 1.00% 11 years 1.75% 11 years >78% and 0.70% ≤90% >78% but 1.00% Life of loan ≤95% >90% 0.95% Life of loan >95% 1.05% Life of loan Streamline Refinance and Simple Refinances endorsed on or before May 31, 2009 the 0.01% 0.55% ≤ 90.00% - 11 UFMIP for all mortgages and Monthly MIP Years

≥ 90.01% - Life of Loan

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Underwriting Using Automated Underwriting System (AUS) I. Approve/Eligible The use of AUS is mandatory for all loans with exception of Streamline Refinance. The Underwriter is responsible for the integrity of the data entered into the AUS to ensure the outcome of the credit risk evaluation performed by AUS is valid and the Underwriter using AUS remain solely responsible for prudent underwriting practices and the Final Underwriting Decision. The AUS evaluates the overall credit risk posed by the Borrower, based on a number of credit variables, when combined with the functionalities of an AUS. In Sponsored Third Party Originations (TPO) both the Originator and the Lender must ensure and verify all data entered into the AUS; nevertheless, the Underwriter must ensure full compliance with all FHA eligibility requirements, and all requirements of this section and remains ultimately responsible for ensuring the data entered into the AUS is correct but does not need to analyze the credit history, unless otherwise stated in this section, if an Accept or Approve recommendation is received. Note: The underwriter must still underwrite all appraisals according to standard FHA requirements.

II. Accept/Ineligible If the AUS risk assessment shows an Accept/Ineligible recommendation, its means that the Borrower’s credit and capacity appear to meet the threshold for approval, but the loan characteristics do not fully comply with FHA’s eligibility requirements. The AUS Feedback Certificate will identify the specific eligibility requirement that the Mortgage does not meet for the results to be “ineligible”. This generally occurs with HUD REO Purchase transactions involving escrow repairs financed into the loan amount. If the AUS Feedback Certificate for Accept/Ineligible is due to HUD REO escrow repairs financed, the loan may eligible for financing at FCBM.

III. Refer/Eligible or Manual Downgrades The underwriter must fully underwrite the applications where the AUS risk score results in a Refer feedback and examine the Borrower’s overall pattern of credit behavior, not just isolated unsatisfactory or slow payments, to determine the Borrower’s creditworthiness.

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less than two years from the date of case number assignment; • Foreclosure, Pre-Foreclosure Sale, Short Sale or Deed-in-Lieu: occurred less than three years from deed transfer to case number assignment date. • Mortgage Payment- Purchase or No cash out: for any mortgage trade line reported on the credit report used to score the application reflects the following in the most recent 12 months: o 3 or more payments greater than 30 days o 1 or more payments of 60 days PLUS one or more 30 day o 1 payment greater than 90 days • Mortgage Payment – Cash Out: o A current delinquency or o Any delinquency within 12 months of cash assignment (NOTE: MUST MEET EXTENUATING CIRCUMSTANCE TO BE ELIGIBLE.) • The Borrower has undisclosed mortgage debt that requires a downgrade; or • Business income shows a greater than 20% decline over the analysis period. NOTE: If the loan application must be downgraded to manual underwriting, the Underwriter must comply with all requirements for manual underwriting when underwriting a downgraded Mortgage.

If the AUS Feedback Certificate for Refer/Ineligible is due to HUD REO escrow repairs financed, the loan may eligible for financing at FCBM.

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Debt-to-Income Ratio Requirements (AUS Approve/Eligible Underwriting) Maximum DTI ratio with AUS Approve/Eligible o 50% DTI with a minimum credit score of 640; o Increased DTI ratio up to 55% is permitted if the qualifying credit score is 680 or higher. Note: the maximum DTI cannot exceed 50% on 2-4 Unit Properties.

FHA High Balance Loan Amount have a maximum Debt-to-Income Ratio of 31.00%/43.00% and the mortgage loan must meet FHA Refer/Manual UW Guidelines; no additional compensating factors are required as maximum ratios cannot exceed 31%/43%.

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Data Change Resubmission to AUS is not Required if:

All conditions outlined in the Findings Report must be satisfied. Credit Report and Requirements The Loan Originator must obtain a credit report for each Borrower who will be obligated on the Note and must obtain a credit report for a non-borrowing spouse who resides in a community property state, or if the subject Property is located in a community property state. The non-borrowing spouse’s SSN, must be validated with the SSA. If the non-borrowing spouse does not have a valid SSN, a credit report must still be obtained using at a minimum, the non- borrowing spouse’s full name, date of birth, and previous addresses for the last two years.

The credit report must contain information from at least two (2) credit repositories pertaining to credit, residence history, and public records information and the Lender must a new credit report and rescore the loan through the AUS if the underwriter identifies inconsistencies between any information in the file and the original credit report. The Lender must retain copy of all credit reports. Must provide inquiries made within the last 90 Days.

Evaluating Credit History The Underwriter must analyze the Borrower’s credit history in accordance with the Accept Risk Classifications and review if Manual Downgrade is required. The Underwriter must downgrade and manually underwrite any Mortgage that received an Accept recommendation if: • The file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard – OR - additional information, not considered in the AUS recommendation affects the overall insurability of the Mortgage. • Disputed Derogatory Credit Accounts: 1,000 or more collectively;

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• The date of the Borrower’s bankruptcy discharge as reflected on bankruptcy documents is less than two years from the date of case number assignment; • Foreclosure, Pre-Foreclosure Sale, Short Sale or Deed-in-Lieu: occurred less than three years from deed transfer to case number assignment date. • Mortgage Payment- Purchase or No cash out: for any mortgage trade line reported on the credit report used to score the application reflects the following in the most recent 12 months: o 3 or more payments greater than 30 days o 1 or more payments of 60 days PLUS one or more 30 day o 1 payment greater than 90 days • Mortgage Payment – Cash Out: o A current delinquency or o Any delinquency within 12 months of cash assignment (NOTE: MUST MEET EXTENUATING CIRCUMSTANCE TO BE ELIGIBLE.) • The Borrower has undisclosed mortgage debt that requires a downgrade; or • Business income shows a greater than 20% decline over the analysis period. NOTE: If the loan application must be downgraded to manual underwriting, the Underwriter must comply with all requirements for manual underwriting when underwriting a downgraded Mortgage.

Collection Accounts and Charge Off Accounts No explanation is required when collections or charge offs are noted on the credit report submitted to the AUS. The presence of the collections has already been taken into consideration in the Borrower’s credit score. If the cumulative outstanding balance of all collections of all borrowers is less than $2,000, the Underwriter is not required to consider the collection accounts. If the cumulative outstanding balance of all collections of all borrowers is equal to or greater than $2,000, the Underwriter must: • Verify that the debt is paid in full at the time of or prior to settlement using acceptable funds; or • Verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower’s DTI; or • If a payment arrangement is not available, calculate the monthly payment using 5% of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI. Note: Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay

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all collection accounts, unless excluded by state law. Charge Off Accounts do not need to be included in the Borrower’s Liabilities or Debt.

If the credit report indicates that the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the loan must be downgraded to a refer and manually underwritten. Note: Disputed Derogatory Credit Accounts of a non-borrowing spouse in a community property state are not included in the cumulative balance for determining if the mortgage application is downgraded to a Refer.

Judgments The presence of the judgments has already been taken into consideration in the Borrower’s credit score and no explanation is required.

The Underwriter must verify that all outstanding Judgments are resolved or paid off prior to or at closing, including those of the non-borrowing spouse in a community property state must be resolved or paid in full with evidence of payment in full if paid prior to closing unless: • Document and the Borrower has entered into a valid agreement with the creditor to make regular payments on the debt, • The Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments.

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• The monthly payment must be included in the Borrower’s DTI. Note: Judgments on title must be paid if they will impair FCBM’s first lien position.

The Borrower cannot prepay scheduled payments in order to meet the required minimum of three (3) months of payments and the monthly payment amount must be included in the Borrower’s DTI ratio.

NOTE: Delinquent taxes that are not liens or judgments should be treated as follows: If tax returns, and or tax transcripts provided indicate the borrower owes outstanding taxes, documentation must be provided to show these taxes have been paid, or valid IRS repayment plan is in place. If a repayment plan is established, documentation must be provided to support the borrower has made 3 months of payments following the requirements outlined above. The loan may not close until documentation is provided to support all three consecutive payments have been made.

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Chapter 13 The Chapter 13 bankruptcy must be discharged for at least two (2) years from discharge date to the FHA Case Number Assignment date.

If the Chapter 13 bankruptcy is in the pay-out period (repayment period) at the time of FHA Case Number Assignment date, at least 12 months of the pay-out period under the bankruptcy must have elapsed and the Borrower has received written permission from bankruptcy court to enter into the mortgage transaction.

Foreclosures/Deed-in-Lieu Three (3) years seasoning must have passed from transfer of title to the FHA Case Assignment date is required for prior foreclosure and Deed-in-Lieu.

Consumer Credit Counseling/Payment Plan Participating in a consumer credit counseling program does not require a downgrade to a manual underwriting. No explanation or other documentation is needed.

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Alimony, Child Support, and Maintenance Alimony obligation can be treated as a reduction of the Borrower’s gross monthly income or included as a monthly obligation in the calculation of the DTI. On the other hand, Child Support and Maintenance are to be treated as monthly obligations in the calculation of the DTI. To verify the payment amount and the current status of the account, the Underwriter must obtain: • Copy of the official signed divorce decree, separation agreement, maintenance agreement, or other legal order. • Obtain the Borrower’s most recent paystubs covering no less than 28 consecutive days to verify any order of garnishment related to the Alimony, Child Support and Maintenance.

To calculate the monthly obligation, the Underwriter must use the greater of either the amount shows on the most recent decree or agreement establishing the payment obligation or the monthly garnishment amount. Note: Delinquent child support must be paid current or in a repayment plan.

Deferred Obligations and Student Loans The Underwriter must include deferred obligations in the Borrower’s monthly liabilities.

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Student Loans (Effective with FHA Case Numbers Assigned on or after Thursday, June 30, 2016): The Underwriter is to include all student loans in the borrower's liabilities, regardless of the payment type or status of payments and calculate the monthly obligation using either: 1. The greater of 1% of the outstanding balance of the loan; or the monthly payment reported on the credit report; OR 2. The actual documented payment provided that the payment will fully amortize over the loan term (this would apply only to fixed payment loans not to Graduated payments, IBR, adjustable rate student loans, interest only).

Late payments reported on debts assigned to the ex-spouse in a divorce do not need to be charged to the Borrower if the delinquencies occurred after the divorce. The Underwriter must obtain a copy of the divorce decree ordering the spouse to make payments.

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Business Debt When business debt is reported on the Borrower’s personal credit report, the debt must be included in the DTI calculation, unless documentation can be obtained to show the debt is being paid by the Borrower’s business, and the debt was considered in the cash flow analysis of the Borrower’s business. The debt is considered in the cash flow analysis when the Borrower’s business tax returns reflect a business expense related to the obligation, equal to or greater than the amount of payments documented as paid out of company funds. When the Borrower’s business tax returns show an interest expense related to the obligation, only the interest portion of the debt is considered in the cash flow analysis.

When a Self-Employed Borrower states debt appearing on their personal credit report is being paid by their business, the documentation must be obtained to show the debt is paid out of company funds and that the debt was considered in the cash flow analysis of the Borrower’s business Note: The Underwriter will need to verify with supporting documentation that business expenses are related to the obligation. For example: An automobile debt obligation can only be excluded from the calculation of the DTI if the automobile is utilized for business purposes as noted on the business tax returns and documentation demonstrating the debt being paid from company funds. In the event of a revolving consumer debt; documentation demonstrating the charges to the revolving consumer debt are business related ONLY; business tax returns reflects a business expense related to the revolving consumer debt and evidence that the debt is paid from company funds is required in order for this debt obligation to be excluded from the calculation of the DTI.

General Income Requirements Qualifying Effective Income must be reasonably likely to continue through at least the first three years of the Mortgage, and meet the specific requirements.

The Underwriter must document the Borrower’s income and employment history, verify the accuracy of the amounts being reported and only consider income that legally derived and when required, properly reported on the Borrower’s tax returns.

Negative income must be subtracted from the Borrower’s gross monthly income, and not treated as a recurring monthly liability unless otherwise noted.

Employment Income Refers to income received as an employee of a business that is reported on IRS Form W-2.The Underwriter must verify the Borrower’s most recent 2 years of employment and income, and document using one of the following methods. Traditional Current Employment Documentation: The Underwriter must obtain the most recent pay stub and to verify current employment, a written Verification of Employment covering two years. Note: Re-verification of employment must be completed within 10 Days prior to the date of the Note. A verbal Verification of Employment is acceptable.

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Primary Employment Primary Employment is the Borrower’s principal employment, unless the income falls within a specific category identified below. Primary employment is generally full-time employment and may be either salaried or hourly. The Underwriter may use primary Employment Income as Effective Income. Calculation of Salary Income: Employees who are salaried and whose income has been and will likely be consistently earned, the Underwriter must use the current salary to calculate Effective Income. Calculation of Hourly Income: Employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower’s current hourly rate to calculate Effective Income. Employees who are paid hourly and whose hours vary, the Underwriter must average the income over the previous 2 years. If the Underwriter can document an increase in pay rate the Underwriter may use the most recent 12 month average of hours at the current pay rate.

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Calculation of Effective Part-Time Income The Underwriter must average the income over the previous 2 years. If the Underwriter can document an increase in pay rate, a 12-month average of hours at the current pay rate may be used.

Periods of Overtime and Bonus Income less than 2 years may be considered if the Underwriter documents that the Overtime and Bonus Income has been consistently earned over a period of not less than one year and is reasonably likely to continue.

Calculation of Effective Income: the Underwriter must average the income earned over the previous 2 full years.

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Additional Required Analysis of Stability of Employment Income Frequent Job Change If the Borrower has changed employers more than 3 times in the previous 12 months, or has changed lines of work, the Underwriter must take additional steps to verify and document the stability of the Borrower’s employment income and obtain the following documentation: • Transcripts of training and education demonstrating qualification for a new position; or • Employment documentation evidencing continual increase in income and/or benefits. Borrowers working through Unions or employed fulltime by employment staffing companies requiring the Borrower to work for various employers do not require additional analysis to be performed by the underwriter.

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Calculation of Salary Income: For employees who are salaried and whose income has been and will likely continue to be consistently earned, the Underwriter must use the current salary.

Calculation of Hourly Income: For employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower’s current hourly rate. For employees who are paid hourly and whose hours vary, the Underwriter must average the income over the previous 2 years. If the Underwriter can document an increase in pay rate, the Underwriter may use the most recent 12-month average of hours at the current pay rate.

Commission Income Commission Income refers to income that is paid contingent upon the conducting of a business transaction or the performance of a service. The Underwriter may use Commission Income if the Borrower earned the income for at least one year in the same or similar line of work and it is reasonably likely to continue. Required Documentation: For Commission Income less than or equal to 25% of the Borrower’s total earnings, the Underwriter must use traditional or alternative employment documentation. For Commission Income greater than 25% of the Borrower’s total earnings, the Underwriter must obtain signed tax returns, including all applicable schedules, for the last 2 years. In lieu of signed tax returns, the Underwriter may use Tax Transcripts.

Calculation of Commission Income: The Underwriter must calculate commission income by using the lesser of: c) The average commission income earned over the previous 2 years, or for the length of time this income type has been earned if less than 2 years; or d) The average commission income earned over the previous 1-year. The Underwriter must subtract any unreimbursed employee business expenses as shown on the IRS Form 2106 (depreciation due to business use of a vehicle may be added to the gross income. Note: For information on analyzing Tax Returns, refer to the income section titled “Analyzing IRS Tax Return Forms”.

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Alimony, Child Support and Maintenance Income Alimony, Child Support, and Maintenance Income refers to income received from a former spouse or partner or from a non-custodial parent of the Borrower's minor dependent. Required Documentation: The Underwriter must obtain a fully executed copy of the Borrower’s final divorce decree, legal separation agreement, court order, or voluntary payment agreement with documented receipt. a) When using a final divorce decree, legal separation agreement or court order, the Underwriter must obtain evidence of receipt using deposits on bank statements; canceled checks; or documentation from the child support agency for the most recent 3 months that supports the amount used in qualifying. b) If the income is through a voluntary payment agreement, the Underwriter must document the voluntary payment via 12 months of cancelled checks, deposit slips, or tax returns. The Underwriter must provide evidence that the income will continue for at least 3 years and may use the front and pertinent pages of the divorce decree/settlement agreement and/or court order showing the financial details.

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Require Documentation: The Underwriter must obtain a copy of the Borrower’s Military Leave and Earnings Statement (LES) and verify the Expiration Term of Service (ETS) date on the LES; if the ETS date is within the first 12 months from loan closing, this income may only be considered if the Borrower certifies his/her intent to continue military service.

Calculation of Income: The current amount of Military Income receives must be used for qualification.

Automobile Allowance Income Automobile Allowance refers to the funds provided by the Borrower’s employer for automobile related expenses. Only the amount that an auto allowance and/or expense account payments exceed the actual expenditures can be considered income. Required Documentation: c) The Underwriter must verify and document the Automobile Allowance received from the employer for the previous 2 years i.e. through a Written VOE or other alternative document such as a payroll ledger, and d) The Underwriter must obtain Tax Returns with all schedules including IRS Form 2106, Employee Business Expenses, for the previous 2 years.

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Retirement Income Retirement Income refers to income received from Pensions, 401(k) distributions, Individual Retirement Account (IRA) and Social Security. Social Security Income or Supplemental Security Income (SSI) This type of income (Social Security Income or Supplemental Security Income) refers to income received from the Social Security Administration other than disability income. Required Documentation: The Underwriter must verify and document the Borrower’s receipt of income from the Social Security Administration and that it is likely to continue for at least a 3 year period from the date of case number assignment. The Underwriter must obtain one of the following documents: o Federal Tax Returns; o The most recent bank statement evidencing receipt of income; o Proof of income via the Benefit Awards Letter from the Social Security Administration; or o Copy of the Borrower’s SSA-1099 Form. In addition to verification of income, the Underwriter must document the continuance of this income by obtaining from the Borrower: o A copy of the last Notice of Award letter which states the SSA’s determination on the Borrower’s eligibility for SSA income or o An equivalent document that establishes award benefits to the Borrower or equivalent document. If any income from the SSA is due to expire within 3 years from the date of case number assignment, that income may not be used for qualifying.

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o Federal tax returns; or o The most recent bank statement evidencing receipt of income. Calculation of Income: For Borrowers with IRA/401(k) Income that has been and will be consistently received, the Underwriter must use the current amount of IRA income received. For Borrowers with fluctuating IRA/401(k) Income, the Underwriter must use the average of the IRA/401(k) Income received over the previous 2 years to calculate income If IRA/401(k) Income has been received for less than 2 years, the Underwriter must use the average over the time of receipt.

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Annuities or Similar Income Annuity Income refers to a fixed sum of money periodically paid to the Borrower from a source other than employment. Required Documentation: The Underwriter must verify and document the legal agreement establishing the annuity and guaranteeing the continuation of the annuity for the first 3 years of the Mortgage and must also obtain a bank statement evidencing receipt of the annuity. Calculation of Income: The Underwriter must use the current rate of the annuity to calculate qualifying effective income and must subtract any of the assets used for the Borrower’s required funds to close to purchase the subject Property from the Borrower’s liquid assets prior to calculating any Annuity Income.

Interest and Dividend Income Interest and dividend income received from assets such as certificates of deposits, mutual funds, stocks, bonds, money markets, and savings and checking accounts may be used as qualifying effective income if consistent history of receipt for the past 2 years and year-to-date interest earned dividend distributions are verified and documented. Required Documentation: Copy of previous 2 years of Federal Tax Returns with all schedules; copy of the most recent account statement; and obtain documentation of 3 years continuance with the most recent statement of the underlying assets that is the source of the income. Calculation of Income: The Underwriter must calculate Investment Income by using the lesser of: o The average Investment Income earned over the previous two years; or o The average Investment Income earned over the previous one year. The Underwriter must subtract any of the assets used for the Borrower’s required funds to close to purchase the subject Property from the Borrower’s liquid assets prior to calculating any interest or dividend income.

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Important: Do not include the non-taxable portion in the residual income calculation for consideration as a compensating factor.

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The tables below contain the 2014, 2015 and 2016 Income Tax Bracket Tables per the IRS

2016 Income Tax Rate

Married filing jointly Married filing Tax rate Single filers or qualifying Head of household separately widow/widower

10% Up to $9,275 Up to $18,550 Up to $9,275 Up to $13,250

15% $9,276 - $37,650 $18,551 - $75,300 $9,276- $37,650 $13,251 - $50,400

25% $37,651 - $91,150 $75,301 - $151,900 $37,651 - $75,950 $50,401 - $130,150

28% $91,151 - $190,150 $151,901 - $231,450 $75,951 - $115,725 $130,150 - $210,800

33% $190,151 - $413,350 $231,451 - $413,350 $115,726 - $206,675 $210,801 - $413,350

35% $413,351 - $415,050 $413,351 - $466,950 $206,676 - $233,475 $413,351 - $441,000

39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more Source: IRS.gov

2015 Income Tax Rate

Married filing jointly Married filing Tax rate Single filers or qualifying Head of household separately widow/widower

10% Up to $9,225 Up to $18,450 Up to $9,225 Up to $13,150

15% $9,226 - $37,450 $18,451 - $74,900 $9,226- $37,450 $13,151 - $50,200

25% $37,451 - $90,750 $74,901 - $151,200 $37,451 - $75,600 $50,201 - $129,600

28% $90,751 - $189,300 $151,201 - $230,450 $75,601 - $115,225 $129,601 - $209,850

33% $189,301 - $411,500 $230,451 - $411,500 $115,226 - $205,750 $209,851 - $411,500

35% $411,501 - $413,200 $411,501 - $464,850 $205,751 - $232,425 $411,501 - $439,000

39.6% $413,201 or more $464,851 or more $232,426 or more $439,001 or more Source: IRS.gov

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2014 Income Tax Rate

Married filing jointly or Tax rate Single filers qualifying Married filing separately Head of household widow/widower

10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950

15% $9,076 - $36,900 $18,151 - $73,800 $9,076- $36,900 $12,951 - $49,400

25% $36,901 - $89,350 $73,801 - $148,850 $36,901 - $74,425 $49,401 - $127,550

28% $89,351 - $186,350 $148,851 - $226,850 $74,426 - $113,425 $127,551 - $206,600

33% $186,351 - $405,100 $226,851 - $405,100 $113,426 - $202,550 $206,601 - $405,100

35% $405,101 - $406,750 $405,101 - $457,600 $202,551 - $228,800 $405,101 - $432,200

39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more

Source: IRS.gov

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Limited or No History of Rental Income History of Rental Income To calculate the Effective Income from the The Underwriter must calculate the Rental subject Property where the Borrower does not Income by averaging the amount shown on have a history of Rental Income from the Schedule E. subject Property since the previous tax filing, - Depreciation, mortgage interest, the Underwriter must use the lesser of: taxes, insurance and any HOA dues • The monthly operating income shown on Schedule E may be reported on Freddie Mac Form 998; added back to the net income or or loss. • 75% of the lesser of: - If the Property has been owned for - Fair market rent reported by less than 2 years, the Underwriter the Appraiser; or must annualize the Rental Income - The rent reflected in the lease for the length of time the Property or other rental agreement. has been owned.

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• Rental Income Received from other Owned Real Estate Property(ies): Rental Income from other real estate property owned may be considered Effective Income if the documentation requirements listed below are met. Required Documentation: The documentation varies depending upon the length of time the Borrower has owned the property. The Underwriter must obtain the Borrower’s last two (2) years’ tax returns with Schedule E and a copy of a lease agreement of at least 1 year’s duration after the mortgage is closed and evidence of the payment of the security deposit or first month’s rent. Limited or No History of Rental Income History of Rental Income Where the Borrower does not have a history of The Underwriter must obtain the Borrower’s Rental Income for the Property since previous tax last two (2) years’ tax returns with Schedule E. filing, the Underwriter must obtain: For One Unit Property: • A full appraisal 1004 Form with the Single Family Comparable Rent Schedule, and Fannie Mae Form 216/Freddie Mac Form 998, Operating Income Statement, showing fair market rent; • The Borrower must have at least 25% equity in the Property. The appraisal is not required to be completed by an FHA Roster Appraiser. • Copy of a lease agreement of at least 1 year’s duration after the mortgage is closed and evidence of the payment of the security deposit or first month’s rent For Two-to-Four Unit Properties: • A full appraisal 1004 Form with Fannie Mae’s 1025/Freddie Mac Form 72 “Small Residential Income Property Appraisal Report showing fair market rent; • The Borrower must have at least 25% equity in the Property. The appraisal is not required to be completed by an FHA Roster Appraiser. • Copy of a lease agreement of at least 1 year’s duration after the mortgage is closed and evidence of the payment of the security deposit or first month’s rent

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Analyzing IRS Schedule E form (Rents, Royalties, Partnerships) Any income received from rental properties or royalties may be used as income, after adding back any depreciation shown on Schedule E.

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General Asset Requirements The Underwriter may only consider assets derived from acceptable sources in accordance with the requirements outlined in these guidelines. All asset used to qualify borrowers must be legal at the local, state, and federal level. Any assets derived from an activity or source that violates Federal, state, or local laws cannot be considered for loan qualification. If the borrower’s source of funds are from a country included on the OFAC Sanctioned Countries List that is found in the Resource Center, the funds are not eligible for use in the transaction. The Underwriter must verify and document that the Borrower has sufficient funds from an acceptable source.

Note: Closing costs, prepaid items and other fees may not be applied towards the Borrower’s MRI.

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Discount Points: It refers to a charge from the Lender for the interest rate chosen that is paid by the Borrower and becomes part of the total cash required to close.

Prepaid Items (Including Per Diem Interest): May include flood and hazard insurance premiums, MIPs, real estate taxes, and per diem interest. They must comply with the requirements of the CFPB.

Repairs and Improvements: Repairs and improvements, or any portion paid by the Borrower are part of the Borrower’s total cash to close requirements.

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Checking and Savings The most recent asset account statements must be dated within 30 days of the loan application. The Underwriter must verify and document the existence of and amounts in the Borrower’s checking and savings accounts. For recently opened accounts and recent individual deposits of more than 1% of the Adjusted Value, the Underwriter must obtain documentation of the deposits and must also verify that no debts were incurred to obtain part or all of the MRI. Refer to the “Large Deposit” section of this guidelines. Provide most recent bank statement (all pages) covering a full month with beginning and ending account balance. If the beginning and ending balances are not shown, an additional consecutive month’s bank statement must be provided.

If the Borrower does not hold the bank account solely, all parties on the account must provide a written statement that the Borrower has full access and use of the funds.

Tax Refunds When the borrower will be utilizing tax refund for funds to close, the following documents need to be included in the loan file: 2) A copy of the signed personal federal tax return to verify the expected tax refund to be received. 3) Evidence of receipt of the refund from the IRS via copy of the electronic deposit made on the borrower’s bank statement, or copy of the tax refund check. Note: If the tax refund deposit on a bank statement does not identify the IRS as the institution that made the direct deposit, the refund did not come directly from the IRS but from a third party institution who is providing an anticipated refund loan to by-pass the waiting time for the IRS to process the borrowers tax refund process); in such cases; the deposit cannot be used for funds to close or reserves UNLESS the following documents are provided: • The borrower is to provide a copy of their signed personal tax return to verify the anticipated refund. • Provide a copy of the refund anticipation agreement/copy of contract form the tax preparer. • Evidence the refund anticipation loan has been paid by the IRS.

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Reserves do not include: • The amount of cash taken at settlement in cash-out transactions; • Incidental cash received at settlement in other loan transactions; • Equity in another Property; or • Borrowed funds from any source.

Required Reserves for 1-2 Unit Properties: There are no minimum reserves required on 1-2 Unit Properties.

Required Reserves for 3-4 Unit Properties: The Underwriter must verify and document 3 months reserves of PITIA after closing.

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Minimum Required Investment Minimum Required Investment (MRI) refers to the Borrower’s contribution required which represents at least 3.5% of the Adjusted Value of the Property.

The Closing costs (non-recurring closing costs, prepaid expenses and discount points) ca not be used to help meet the borrower’s minimum required investment.

Note: The borrower may use a credit card to pay for the appraisal and credit report. These costs cannot be considered to help meet the required 3.5% investment.

FCBM Requirements for Loans with Gift Funds Maximum DTI Ratios of 40/50% with AUS Approve/Eligible. Exceptions for increased ratios up to 45/55% are permitted if any one of the following criteria can be met: • Verification of satisfactory similar housing payment via cancelled checks or an institutional VOR documenting that the proposed housing payment (PITIA) is no more than 25% higher than current housing payment; new total debts are similar or lower than current debts; and the borrower(s) has no less than 3 traditional credit tradelines reporting with a 24 months history; or • The LTV is 95% and the minimum required investment of 3.5% is from the borrower own funds; or • The LTV is equal to, or less than 90% (all funds for down payment can be derived from gift funds); or • Significant additional income not reflected in qualifying income; or potential of increased earnings based on employment/education career; residual income. Note: the maximum DTI cannot exceed 50% on 2-4 Unit Properties

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Gift of E quity Only Family Members as defined by HUD may provide equity credit as a gift on Property being sold to other Family Members. Please refer to Identity of Interest section of the guidelines for eligible family members. Required Documentation: The Underwriter must obtain a gift letter signed and dated by the donor and Borrower that includes the following: o The donor’s name, address, and telephone number; o The donor’s relationship to the Borrower; o The dollar amount of the gift; and o A statement that no repayment is required. o The Gift of Equity must be noted on the fully executed Sales Contract and Closing Disclosure (CD). o Obtain a copy of the existing mortgage payoff to verify the family transfer is not a distress bail out sale.

Gift Letter Requirement: The gift letter must be signed and dated by the donor and Borrower that includes the following: 5) The donor’s name, address, and telephone number; 6) The donor’s relationship to the Borrower; 7) The dollar amount of the gift; and 8) A statement that no repayment is required.

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Are already deposited in the Borrower’s - Obtain bank statement showing gift account funds withdrawn from the Donor’s account that was noted on the Gift Letter, and - Borrower’s deposit slip and bank statement showing gift funds available. Will be provided at closing via certified check, - Bank statement showing the gift funds cashier’s check, money order, official check, or withdrawn from the donor’s account other type of bank check that was noted on the Gift Letter, and - Copy of certified check; closing agent’s acknowledgement of gift receipt if check was payable to the Settlement Agent. Are being borrowed by the Donor, and - Having the donor provide written documentation from the bank or other evidence that the funds were borrowed savings account is not available from an acceptable source, not an interested party to the transaction. Regardless of when gift funds are made available to a borrower, underwriter must be able to make a reasonable determination that the gift funds were not provided by an unacceptable source Entering Gift funds in LOS System and Data Integrity • In Section II of the 1003 of the LOS system, in the Source of Down Payment segment tab, the full gift amount must be entered along with the source (i.e. family member, government agency, nonprofit) regardless if the amount has been partially spent and is not being used for down payment, or the gift amount exceeds the down payment amount. • In Section VI of the 1003 of the LOS system, in the Assets segment tab, all assets should be entered as verified. If the gift has not been deposited, then enter the full gift that will be given at Closing. However, if the borrower has received a gift and that gift has been deposited into a depository account, the gift should not be entered separately as a gift asset. If the gift has not been deposited into a depository account, it must be shown separately as a gift asset and if there are multiple gift funds, they should be listed individually in both sections when applicable. For example, if the borrower’s verified checking account reflects a balance of $15,000, and $5,000 of that amount was from a gift, the checking account balance should remain as $15,000, with the $5,000 shown as a gift in the Source of Downpayment in Section II. If the original gift has been partially spent or used for the earnest money, the Underwriter is to note on the 92900-LT that gift funds have partially been used but that Total Gifts received and deposited into the Borrower’s bank account : $_____; but only $_____ remain in deposit and available.

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The Direct Endorsement (DE) Underwriter Responsibilities (Refer or Manual) The DE Underwriter is ultimately responsible for making an underwriting decision on behalf of their DE Lender in compliance with HUD requirements performing: • Duty of Care/Due Diligence • Specific Underwriter Responsibilities As the responsible party, the underwriter must review appraisal reports, compliance inspections, and credit analyses to ensure reasonable conclusions, sound reports, and compliance with HUD requirements regardless of who prepared the documentation; determine the acceptability of the appraisal, the inspections, the Borrower’s capacity to repay the Mortgage, and the overall acceptability of the Mortgage for FHA insurance; identify any inconsistencies in information obtained by the Mortgagee in the course of reviewing the Borrower’s application regardless of the materiality of such information to the origination and underwriting of a Mortgage; and resolve all inconsistencies identified before approving the Borrower’s application, and document the inconsistencies and their resolutions of the inconsistencies in the file.

The DE Underwriter must identify and report any misrepresentations, violations of HUD requirements, and fraud to the appropriate party within their organization.

The DE Underwriter must review the income of a Borrower and verify that it has been supported with the proper documentation and calculate accurate DTI ratios.

The DE Underwriter must review the assets of a Borrower and verify that they have been supported with the proper documentation.

The DE Underwriter must review the MIP and mortgage amount and verify that they have been supported with the proper documentation.

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information in the file and the original credit report. The Lender must retain copy of all credit reports.

Must provide inquiries made within the last 90 Days.

Note: The Underwriter must not consider the credit history of a non-borrowing spouse.

The underwriter must evaluate the Borrower’s payment histories in the following order: (1) Previous housing expenses and related expenses, including utilities; (2) Installment debts; and (3) Revolving accounts.

Payment History Requiring Additional Analysis (Refer or Manual) If a Borrower’s credit history does not reflect satisfactory credit as stated above, the Borrower’s payment history requires additional analysis where the Underwriter must analyze the Borrower’s delinquent accounts to determine whether late payments were based on a disregard for financial obligations, an inability to manage debt, or extenuating circumstances. The Underwriter must document this analysis in the loan file. Any explanation or documentation of delinquent accounts must be consistent with other information in the file.

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Payment History on Housing Obligations (Refer or Manual) The Underwriter must verify and document the previous 12 months’ housing payment history via the credit report; a verification of rent received directly from the landlord who has no Identity of Interest with the Borrower; verification of mortgage received directly from the servicing lender; or with the most recent 12 months canceled checks. For Borrowers who indicate they are living rent-free, the Underwriter must obtain verification from the property owner where they are residing that the Borrower has been living rent-free and the amount of time the Borrower has been living rent free.

Collection Accounts (Refer or Manual) If the credit reports used in the analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must: • Verify that the debt is paid in full prior to or at the time of loan closing using acceptable source of funds; • Verify that the Borrower has made payment arrangements with the creditor; or • If a payment arrangement is not available, calculate the monthly payment using 5% of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI ratio. Note: Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts, unless specifically excluded by state law.

Required Documentation: The must provide a letter of explanation for each outstanding collection.

Charge Off Accounts (Refer or Manual) Charge Off Account has been written off by the creditor and do not need to be included in the Borrower’s DTI.

If the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the Underwriter must include a monthly payment in the Borrower’s DTI calculation.

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A Judgment is considered resolved if the Borrower has entered into a valid agreement with the Creditor; the Borrower has made timely payments for at least 3 months and the Judgment will not supersede the FHA-insured mortgage lien. The Underwriter must include the payment amount in the DTI ratio and must obtain a copy of the agreement and evidence that payments were made on time in accordance with the agreement Important: The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments.

Required Documentation: The Underwriter must provide the following documentation: • Evidence of payment in full, if paid prior to settlement; • The payoff statement, if paid at settlement; or • The payment arrangement with creditor, if not paid prior to or at settlement, and a subordination agreement for any liens existing on title.

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Bankruptcy (Refer or Manual) Chapter 7 A least 2 years must have passed since the Chapter 7 bankruptcy discharge date to the FHA Case Number Assignment issuance date. During this time, the Borrower must have: • Re-established good credit; or • Chosen not to incur new credit obligations. A Chapter 7 discharge date that is less than 2 years, but at least 12 months to the FHA Case Number Assignment issuance date may be acceptable, if the Borrower: • Can document that the bankruptcy was caused by extenuating circumstances beyond the Borrower’s control; and • Has since exhibited a documented ability to manage their financial affairs in a responsible manner with at least 3 consumer debts opened after the bankruptcy with satisfactory 12 month payment history. Note: Extenuating circumstances include serious uninsured illness, death of a wage earner, forced job relocation that were beyond the Borrower’s control and not likely to recur.

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Exception to 3 year wait-period when Borrower is Current at the Time of Short Sale: A Borrower is considered eligible for a new FHA-insured Mortgage if, from the date of FHA Case Number Assignment for the new Mortgage: • All Mortgage Payments on the prior Mortgage were made within the month due for the 12-month period preceding the Short Sale; and • Installment debt payments for the same time period were also made within the month due. Refer to Manual Underwriting Matrix and Compensating Factors sections for further requirement information.

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Evaluating Liabilities and Debts (Refer or Manual) All applicable monthly liabilities must be included in the DTI ratio. • Installment/Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5% of the Borrower’s gross monthly income and the Borrower may not pay down the balance in order to meet the 10-month requirement. • The Borrower can pay off installment/closed-end debt to qualify. • Accounts for which the borrower is an authorized user must be included in the borrower’s DTI ratio unless documentation shows that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the borrower’s DTI. • If the Borrower resides in a community property state or the Property being insured is located in a community property state, debts of the non-borrowing spouse must be included in the Borrower’s qualifying ratios, except for obligations specifically excluded by state law. The non-borrowing spouse’s credit history is not considered a reason to deny a mortgage application Note: Negative income must be subtracted from the Borrower’s gross monthly income, and not treated as recurring monthly liabilities unless otherwise noted.

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Note: Delinquent child support must be paid current or in a repayment plan.

Deferred Obligations and Student Loans (Refer or Manual) The Underwriter must include deferred obligations in the Borrower’s monthly liabilities.

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The underwriter must obtain the agreement creating the contingent liability or assumption agreement and deed showing transfer of title out of the Borrower’s name.

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Note: The Underwriter will need to verify with supporting documentation that business expenses are related to the obligation.

Negative income must be subtracted from the Borrower’s gross monthly income, and not treated as a recurring monthly liability unless otherwise noted.

Traditional Current Employment Documentation: The Underwriter must obtain the most recent pay stubs covering a minimum of 30 consecutive Days (if paid weekly or bi- weekly, pay stubs must cover a minimum of 28 consecutive Days) that show the Borrower’s YTD earnings, and one of the following to verify current employment: • A written Verification of Employment (VOE) covering two years; or • An electronic verification acceptable to FHA. Note: Re-verification of employment must be completed within 10 Days prior to the date of the Note. A verbal Verification of Employment is acceptable.

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documentation, and note the name, title, and telephone number of the person with whom employment was verified. Note: Re-verification of employment must be completed within 10 Days prior to the date of the Note. A verbal Verification of Employment is acceptable.

Calculation of Hourly Income: Employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower’s current hourly rate to calculate Effective Income.

Calculation of Effective Part-Time Income The Underwriter must average the income over the previous 2 years.

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If the Underwriter can document an increase in pay rate, a 12-month average of hours at the current pay rate may be used. Overtime and Bonus Income (Refer or Manual) Overtime and Bonus Income refers to income that the Borrower receives in addition to the Borrower’s normal salary and may be used as effective income if it has been received for the past 2 years and it is likely to continue. Periods of Overtime and Bonus Income less than 2 years may be considered if the Underwriter documents that the Overtime and Bonus Income has been consistently earned over a period of not less than one year and is reasonably likely to continue.

Calculation of Effective Income: the Underwriter must average the income earned over the previous 2 full years.

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Additional Required Analysis of Stability of Employment Income (Refer or Manual)

Frequent Job Change (Refer or Manual) If the Borrower has changed jobs more than 3 times in the previous 12 months, or has changed lines of work, the Underwriter must take additional steps to verify and document the stability of the Borrower’s employment income and obtain the following documentation: • Transcripts of training and education demonstrating qualification for a new position; or • Employment documentation evidencing continual increase in income and/or benefits. Borrowers working through Unions or employed fulltime by employment staffing companies requiring the Borrower to work for various employers do not require additional analysis to be performed by the underwriter.

Also, in addition to the traditional or alternative income documentation, the Underwriter must obtain copies of signed personal tax returns with all schedules.

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Calculation of Salary Income: For employees who are salaried and whose income has been and will likely continue to be consistently earned, the Underwriter must use the current salary.

Calculation of Hourly Income: For employees who are paid hourly, and whose hours do not vary, the Underwriter must consider the Borrower’s current hourly rate.

Calculation of Commission Income: The Underwriter must calculate commission income by using the lesser of: • The average commission income earned over the previous 2 years, or for the length of time this income type has been earned if less than 2 years; or • The average commission income earned over the previous 1-year. The Underwriter must subtract any unreimbursed employee business expenses as shown on the IRS Form 2106 (depreciation due to business use of a vehicle may be added to the gross income. Note: For information on analyzing Tax Returns, refer to the income section titled “Analyzing IRS Tax Return Forms”.

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o Most recent Notice of Award or equivalent document that establishes the award benefit to the Borrower. If the letter does not have a defined expiration date, the income will be considered effective and reasonably likely to continue; and o Verify current receipt of disability income with most recent check, or bank statement with direct deposit, or copy of the Borrower’s SSA-1099 Form, or Federal Tax Returns. Note: If any disability income is due to expire within three (3) years from the date of mortgage application, that income cannot be used as Effective Income.

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• Federal tax returns; or • The most recent bank statement evidencing receipt of income from the VA. Note: Per VA Form Waiver, the lender is not required to obtain the VA Disability Benefits Form 26-8937 in order to verify VA Disability Benefits.

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Calculation of Income: The current amount of Military Income receives must be used for qualification.

Required Documentation: a) The Underwriter must verify and document the Automobile Allowance received from the employer for the previous 2 years i.e. through a Written VOE or other alternative document such as a payroll ledger, and b) The Underwriter must obtain Tax Returns with all schedules including IRS Form 2106, Employee Business Expenses, for the previous 2 years.

• The monthly car payment; and • Any loss resulting from the calculation of the difference between the actual expenditures and the expense account allowance.

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Retirement Income (Refer or Manual) Retirement Income refers to income received from Pensions, 401(k) distributions, Individual Retirement Account (IRA) and Social Security. Social Security Income or Supplemental Security Income (SSI) This type of income (Social Security Income or Supplemental Security Income) refers to income received from the Social Security Administration other than disability income. Required Documentation: The Underwriter must verify and document the Borrower’s receipt of income from the Social Security Administration and that it is likely to continue for at least a 3 year period from the date of case number assignment.

Pension Income (Refer or Manual) Pension refers to income received from the Borrower’s former employer(s). Required Documentation: The Underwriter must verify and document the Borrower’s receipt of periodic payments from the Borrower’s Pension and that the payments are likely to continue for at least 3 years and must obtain one of the following: o Federal tax returns; o The most recent bank statement evidencing receipt of income from the former employer; or o A copy of the Borrower’s Pension/retirement letter from the former employer. Calculation of Income: The Underwriter must use the current amount of Pension income received to calculate qualifying effective income.

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Individual Retirement Account (IRA) and 401(k) (Refer or Manual) Individual Retirement Account (IRA)/401(k) Income refers to income received from an IRA. Required Documentation: The Underwriter must verify and document the Borrower’s receipt of recurring IRA/401(k) distribution income and that it is reasonably likely to continue for three years and must obtain the most recent IRA/401(k) statement and 1 of the following documents: o Federal tax returns; or o The most recent bank statement evidencing receipt of income.

Calculation of Income: For Borrowers with IRA/401(k) Income that has been and will be consistently received, the Underwriter must use the current amount of IRA income received.

For Borrowers with fluctuating IRA/401(k) Income, the Underwriter must use the average of the IRA/401(k) Income received over the previous 2 years to calculate income

If IRA/401(k) Income has been received for less than 2 years, the Underwriter must use the average over the time of receipt.

o The frequency, duration, and amount of the distribution by obtaining a bank statement or transaction history from the bank; and o Verify that regular payments will continue for at least the first 3 years of the mortgage term.

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Calculation of Income: The Underwriter must use the income based on the terms and conditions in the Trust Agreement or other trustee statement to calculate qualifying effective income.

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Calculation of Income: The Underwriter must calculate Investment Income by using the lesser of: o The average Investment Income earned over the previous two years; or o The average Investment Income earned over the previous one year. The Underwriter must subtract any of the assets used for the Borrower’s required funds to close to purchase the subject Property from the Borrower’s liquid assets prior to calculating any interest or dividend income.

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Important: Do not include the non-taxable portion in the residual income calculation for consideration as a compensating factor.

Calculation of Income: The amount of tax savings attributed to non-taxable income may be added to the Borrower’s gross income.

• The percentage of non-taxable income that may be added cannot exceed 15% or the appropriate tax rate for the income amount, based on the Borrower’s tax rate for the previous year. • If the Borrower was not required to file a federal tax return for the previous tax reporting period, the Underwriter may gross up the non-taxable income by 15%. The Underwriter may not make any additional adjustments or allowances based on the number of the Borrower’s dependents.

The tables below contain the 2014, 2015 and 2016 Income Tax Bracket Tables per the IRS

2016 Income Tax Rate

Married filing jointly Married filing Tax rate Single filers or qualifying Head of household separately widow/widower

10% Up to $9,275 Up to $18,550 Up to $9,275 Up to $13,250

15% $9,276 - $37,650 $18,551 - $75,300 $9,276- $37,650 $13,251 - $50,400

25% $37,651 - $91,150 $75,301 - $151,900 $37,651 - $75,950 $50,401 - $130,150

28% $91,151 - $190,150 $151,901 - $231,450 $75,951 - $115,725 $130,150 - $210,800

33% $190,151 - $413,350 $231,451 - $413,350 $115,726 - $206,675 $210,801 - $413,350

35% $413,351 - $415,050 $413,351 - $466,950 $206,676 - $233,475 $413,351 - $441,000

39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more Source: IRS.gov

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2015 Income Tax Rate

Married filing jointly or Tax Married filing Single filers qualifying Head of household rate separately widow/widower

10% Up to $9,225 Up to $18,450 Up to $9,225 Up to $13,150

15% $9,226 - $37,450 $18,451 - $74,900 $9,226- $37,450 $13,151 - $50,200

25% $37,451 - $90,750 $74,901 - $151,200 $37,451 - $75,600 $50,201 - $129,600

28% $90,751 - $151,201 - $230,450 $75,601 - $115,225 $129,601 - $209,850 $189,300

33% $189,301 - $230,451 - $411,500 $115,226 - $209,851 - $411,500 $411,500 $205,750

35% $411,501 - $411,501 - $464,850 $205,751 - $411,501 - $439,000 $413,200 $232,425

39.6% $413,201 or more $464,851 or more $232,426 or more $439,001 or more Source: IRS.gov

2014 Income Tax Rate

Married filing jointly or Tax rate Single filers qualifying Married filing separately Head of household widow/widower

10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950

15% $9,076 - $36,900 $18,151 - $73,800 $9,076- $36,900 $12,951 - $49,400

25% $36,901 - $89,350 $73,801 - $148,850 $36,901 - $74,425 $49,401 - $127,550

28% $89,351 - $186,350 $148,851 - $226,850 $74,426 - $113,425 $127,551 - $206,600

33% $186,351 - $405,100 $226,851 - $405,100 $113,426 - $202,550 $206,601 - $405,100

35% $405,101 - $406,750 $405,101 - $457,600 $202,551 - $228,800 $405,101 - $432,200

39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more

Source: IRS.gov

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Rental Income (Refer or Manual) Rental Income refers to income received or to be received from the Subject Property or other Real Estate Property owned by the Borrower(s). If rental income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from his/her Primary Residence. • Rental Income Received from the Subject Property: Rental Income from the subject Property may be considered qualifying effective income when the Property is a 2-4 Unit dwelling. Required Documentation: The documentation varies depending upon the length of time the Borrower has owned the property. See the matrix below for the required documentation Limited or No History of Rental Income History of Rental Income Borrower does not have a history of Rental When the Borrower has a history of Rental Income from the subject since the previous tax Income from the subject since the previous tax filing: filing: • The Underwriter must verify and • The Underwriter must verify and document the proposed Rental document the existing Rental Income Income by obtaining an appraisal by obtaining the Borrower’s most showing fair market rent (use FNMA recent tax returns, including Schedule Form 1025/Freddie Mac Form 72, E, from the previous 2 years. Small Residential Income Property • For Properties with less than 2 years Appraisal Report evidencing market of Rental Income history, the rent; and Underwriter must document the date • Copy of the prospective lease. of acquisition by providing the deed, Settlement Statement or similar legal document.

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Calculation of Rental Income Received from the Subject Property: The Underwriter must add the net subject property Rental Income to the Borrower’s gross income and may not reduce the Borrower’s total Mortgage Payment by the net subject property Rental Income. See the matrix below to calculate the rental income depending upon the length of time the borrower has owned the property. Limited or No History of Rental Income History of Rental Income To calculate the Effective Income from the The Underwriter must calculate the Rental subject Property where the Borrower does not Income by averaging the amount shown on have a history of Rental Income from the subject Schedule E. Property since the previous tax filing, the - Depreciation, mortgage interest, Underwriter must use the lesser of: taxes, insurance and any HOA dues • The monthly operating income reported shown on Schedule E may be added on Freddie Mac Form 998; or back to the net income or loss. • 75% of the lesser of: - If the Property has been owned for - Fair market rent reported by less than 2 years, the Underwriter the Appraiser; or must annualize the Rental Income - The rent reflected in the lease for the length of time the Property or other rental agreement. has been owned.

Rental Income Received from Vacated Primary Residence: FHA does not allow any rental income from the property being vacated except under the circumstances:

• If Rental Income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from the Borrower’s current Principal Residence; • The Underwriter must obtain a lease agreement of at least 1 year in duration after the mortgage is closed; • Evidence of the payment of the security deposit o first month’s rent is verified; and • The Underwriter must obtain an appraisal evidencing market rent and that the Borrower has at least 25% equity in the Property. Note: the appraisal is not required to be completed by an FHA Roster Appraiser. If the above cannot be met, the Borrower must qualify with the full debt of both mortgages for the current and new homes without any rental income even if a lease is signed. Note: This guidance also applies when the Borrower has a pending sale that will close after to our subject transaction.

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General Asset Requirements (Refer or Manual) The Underwriter may only consider assets derived from acceptable sources in accordance with the requirements outlined in these guidelines. All asset used to qualify borrowers must be legal at the local, state, and federal level. Any assets derived from an activity or source that violates Federal, state, or local laws cannot be considered for loan qualification. If the borrower’s source of funds are from a country included on the OFAC Sanctioned Countries List that is found in the Resource Center, the funds are not eligible for use in the transaction. The Underwriter must verify and document that the Borrower has sufficient funds from an acceptable source.

Note: Closing costs, prepaid items and other fees may not be applied towards the Borrower’s MRI.

Discount Points: It refers to a charge from the Lender for the interest rate chosen that is paid by the Borrower and becomes part of the total cash required to close.

Prepaid Items (Including Per Diem Interest): May include flood and hazard insurance premiums, MIPs, real estate taxes, and per diem interest. They must comply with the requirements of the CFPB.

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Repairs and Improvements: Repairs and improvements, or any portion paid by the Borrower are part of the Borrower’s total cash to close requirements.

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If the Borrower does not hold the bank account solely, all parties on the account must provide a written statement that the Borrower has full access and use of the funds.

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Retirement Accounts (Refer or Manual) Retirement Accounts refer to assets accumulated by the Borrower for the purpose of retirement. The Underwriter must document with the most recent monthly or quarterly statement to verify and document the existence and amounts in the Borrower’s retirement accounts, the Borrower’s eligibility for withdrawals, and the terms and conditions for withdrawal from any retirement account. The Underwriter may include up to 60% of the value of assets, less any existing loans, from the Borrower’s retirement accounts, such as IRAs, thrift savings plans, 401(k) plan, and Keogh accounts, unless the Borrower provides conclusive evidence that a higher percentage may be withdrawn after subtracting any federal income tax and withdrawal penalties.

The Underwriter must verify and document 1 month reserve of PITIA is available after closing.

Note: If reserves are being used as a compensating factor on Manual Underwriting of 1-2 Unit properties, the reserves must equal to 3 months for 1-2 Unit properties.

Required Reserves for 3-4 Unit Properties:

The Underwriter must verify and document 3 months reserves of PITIA is available after closing .

Note: If reserves are being used as a compensating factor on Manual Underwriting of 3-4 Unit properties, the reserves must equal to 6 months for 3-4 Unit properties.

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Note: The borrower may use a credit card to pay for the appraisal and credit report. These costs cannot be considered to help meet the required 3.5% investment.

FCBM Requirements for Loans with Gift Funds: Maximum DTI Rations on AUS Refer/Eligible or a Manual Downgrade is 31/43%.

Gift of E quity (Refer or Manual) Only Family Members as defined by HUD may provide equity credit as a gift on Property being sold to other Family Members. Please refer to Identity of Interest section of the guidelines for eligible family members. Required Documentation: The Underwriter must obtain a gift letter signed and dated by the donor and Borrower that includes the following: o The donor’s name, address, and telephone number; o The donor’s relationship to the Borrower; o The dollar amount of the gift; and o A statement that no repayment is required. o The Gift of Equity must be noted on the fully executed Sales Contract and Closing Disclosure (CD). o Obtain a copy of the existing mortgage payoff to verify the family transfer is not a distress bail out sale.

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Gift Letter Requirement (Refer or Manual): The gift letter must be signed and dated by the donor and Borrower that includes the following: • The donor’s name, address, and telephone number; • The donor’s relationship to the Borrower; • The dollar amount of the gift; and • A statement that no repayment is required.

Documenting Acceptability of Gift Funds (Refer or Manual) o Obtain documentation to support the donor’s ability to provide gift funds are derived from an acceptable source. o Large deposits on the Donor’s bank statement must be sourced to document that the gift funds are not from an unacceptable source, or from a person or entity with an interest in the transaction. o Donor’s cash on hand is not acceptable as a source of gift funds. Documenting Gift Transfer (Refer or Manual) The Underwriter must verify and document the transfer of gift funds from the donor to the Borrower in accordance with the requirements below. If the gift funds… Then document gift transfer by…

Are already deposited in the Borrower’s - Obtain bank statement showing gift funds account withdrawn from the Donor’s account that was noted on the Gift Letter, and - Borrower’s deposit slip and bank statement showing gift funds available. Will be provided at closing via certified - Bank statement showing the gift funds check, cashier’s check, money order, withdrawn from the donor’s account that was official check, or other type of bank noted on the Gift Letter, and check - Copy of certified check; closing agent’s acknowledgement of gift receipt if check was payable to the Settlement Agent. Are being borrowed by the Donor, and - Having the donor provide written evidence documentation from the bank or other that the funds were borrowed from an savings account is not available acceptable source, not an interested party to the transaction. Regardless of when gift funds are made available to a borrower, underwriter must be able to make a reasonable determination that the gift funds were not provided by an unacceptable source

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The Underwriter must document the total Interested Party Contributions on Form HUD-92900- LT, Settlement Statement or similar legal documentation, and the sales contract.

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These inducements include, but are not limited to: • Contributions exceeding 6% of the purchase price; • Contributions exceeding the origination fees, other closing costs and discount points; • Decorating allowances; • Repair allowances; • Excess rent credit; • Moving costs; • Paying off consumer debt; • Personal Property; • Below-market rent, except for Borrowers who meet the Identity-of-Interest exception for Family Members. • An inducement to purchase exists when the seller and/or Interested Party agrees to pay any portion of the Borrower’s sales commission on the sale of the Borrower’s current primary residence; and • An inducement to purchase also exists when a Borrower is not paying a real estate commission on the sale of their present residence, and the same real estate broker or agent is involved in both transactions, and the seller is paying a real estate commission on the Property being purchased by the Borrower that exceeds what is typical for the area.

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Net proceeds from the Sale of Real Property owned by the Borrower may be used as an acceptable source of funds. Required Documentation: The Underwriter must obtain the fully executed Settlement Statement or Closing Disclosure and deposited receipt of Borrower’s share of the net proceeds.

Relocation Guaranteed Purchase: If the employer guarantees to purchase the Borrower’s previous residence as a result of relocation, obtain the executed Buyout Agreement along with documentation for the receipt of net proceeds based on guaranteed sales price minus the outstanding liens and expenses and verify the relocation firm takes responsibility for the outstanding mortgage debt.

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DE Underwriter Final Underwriting Decision (Refer or Manual) The underwriter must complete the following documents to evidence their final underwriting decision: 1) HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary: Recording his/her decision; any compensating factors; any modification of the mortgage amount and approval conditions under “Underwriter Comments”; and His/her DE CHUMS ID Number and signature. 2) HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised Value: The DE Underwriter must confirm that form HUD-92800.5B is completed as directed in the form instructions. 3) HUD-92900-A, HUD/VA Addendum to Uniform Residential Loan Application: The DE Underwriter must complete form HUD-92900-A as directed in the form instructions. An authorized officer of the Lender, the Borrower, and the DE Underwriter must execute form HUD-92900-A, as indicated in the instructions. ***Effective for FHA Case Numbers assigned on or after August 1, 2016, the Revised HUD 92900- A Form must be utilized containing updated language requirements including occupancy declaration in the Borrower Certification section and revised Lender Loan-Level Certification***

For Properties 90% completed or less, the Originator/Lender must provide a copy of the floor plan, plot plan, and any other exhibits necessary to allow the Appraiser to determine the size and level of finish of the house they are appraising. For Properties greater than 90% but less than 100% completed, the Originator/Lender must provide the Appraiser with a list of components to be installed or completed after the date of inspection.

Important: New Construction must meet HUD Minimum Property Requirements (MPR) and Minimum Property Standards (MPS).

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Maximum Financing Construction Inspections and Warranties Required by the Construction Status at the Time of the Appraisal (1) Proposed Construction: The Lender must obtain one of the following • Copies of the Building Permit and CO (or equivalent); • Three Inspections (Footing, Framing and Final) performed by an FHA Roster Inspector on Form HUD-92051-Compliance Inspection Report (If the property is a Modular Housing, footing and final inspections only); • Three inspections (footing, framing and final) performed by the local authority with jurisdiction over the Property (If the property is a Modular Housing, footing and final inspections only); or • A 10-year warranty and Final Inspection issued by the local authority with jurisdiction over the Property or an FHA Roster Inspector. (2) Under Construction: The Lender must obtain one of the following • Copies of the Building Permit and CO (or equivalent); or • A 10-year warranty and Final Inspection issued by the local authority with jurisdiction over the Property or an FHA Roster Inspector. (3) Existing Less than One Year – 100% Complete: The Lender must obtain one of the following • Copies of the Building Permit and CO (or equivalent); or • A 10-year warranty and Final Inspection issued by the local authority with jurisdiction over the Property or an FHA Roster Inspector; or • An Appraisal evidencing Property is 100% complete.

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• Local Health Authority well water analysis and/or septic report, where required by the local jurisdictional authority.

New Construction Underwriter Appraisal Review Site Considerations Environmental : The DE Underwriter must require corrective work to mitigate any condition that arises during construction that may affect the health and safety of the occupants, the Property’s ability to serve as collateral, or the structural soundness of the improvements. Operating Oil Gas or Gas Well: If a proposed or newly constructed dwelling is located within 75 feet of an operating oil or gas well, the DE Underwriter must reject the Property unless mitigation measures are completed. Slush Pits: If a Property is Proposed Construction near an active or abandoned Slush Pit, the Appraiser must require a survey to locate the pit. The DE Underwriter is to assess any impact on the subject Property. Special Airport Hazards: If a proposed or newly constructed Property is located within Runway Clear Zones (also known as Runway Protection Zones) at civil airports or within Clear Zones at military airfields, the DE Underwriter must reject the Property for insurance. A proposed or newly constructed Property located in Accident Potential Zone I at military airfields may be eligible for FHA Mortgage Insurance provided that the DE Underwriter determines that the Property complies with Department of Defense guidelines. Flood Hazard Areas: If any portion of the property improvements (the dwelling and related Structures/equipment essential to the value of the Property and subject to flood damage) is located within a Special Flood Hazard Area (SFHA), the Mortgagee must reject the Property, unless: • A final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that

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removes the Property from the SFHA is obtained from the Federal Emergency Management Agency (FEMA); or • The Lender obtains a FEMA National Flood Insurance Program (NFIP) Elevation Certificate (FEMA Form 81-31), that documents that the lowest floor (including the basement) of the residential building and all related improvements/equipment essential to the value of the Property, is built at or above the 100-year flood elevation in compliance with the NFIP criteria. The Lender must ensure that the flood elevation certificate is prepared by a licensed engineer or surveyor and completed based on finished construction.

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Underwriting The Collateral The DE Underwriter must underwrite the completed appraisal report to determine if the Property provides sufficient collateral for the FHA-insured Mortgage and evaluate the appraisal for accuracy and completeness in order to determine whether the Appraisal and Property meets the requirements in Appraiser and Property Requirements noted further in these guidelines and the 4000.1 HUD Handbook at the http://portal.hud.gov/hudportal/documents/huddoc?id=40001HSGH.pdf . Also, the DE Underwriter must determine if the FHA appraisal complies with Acceptable Appraisal Reporting Forms and Protocols as noted in the FHA Single Family Housing Appraisal Report and Data Delivery Requirements (ARDDG) http://portal.hud.gov/hudportal/documents/huddoc?id=SFH_POLI_APPR_RPT_FIN.PDF . The ARDDG is a separate FHA publication, and FHA appraisers are required to follow its requirements in addition to those in Handbook 4000.1.

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maintenance agreement.

E. Onsite Hazards and Nuisances: The Lender must require corrective work to mitigate potential adverse effects from any onsite hazards or nuisances reported by the Appraiser.

G. Structural Conditions: The Lender must confirm that all foundations will be serviceable for the life of the loan and are adequate to withstand all normal loads imposed.

H. Economic Life: The Lender must confirm that the term of the Mortgage is less than or equal to the remaining economic life of the Property.

I. Environmental: The Lender must confirm that the Property is free of all known environmental and safety hazards and adverse conditions that may affect the health and safety of the occupants, the property’s ability to serve as collateral, and the structural soundness of the improvements. J. Lead-Based Paint: The Lender must confirm that the Property is free of lead paint hazards.

K. Methamphetamine Contamination: If the Lender or the Appraiser identifies a property as contaminated by the presence of methamphetamine (meth), either by its manufacture or by consumption, the property is ineligible due to this environmental hazard until the Property is certified safe for habitation. L. Repair Requirement: The Lender must determine which repairs must be made for an existing property to be eligible for FHA-insured financing.

N. Water Supply Systems: 1) Public Water Supply System: The Lender must confirm that a connection is made to a public or Community Water System whenever feasible and available at a reasonable cost. If connection costs to the public or community system are not reasonable, the existing onsite systems are acceptable, provided they are functioning properly and meet the requirements of the local health department.

2) Individual Water Supply Systems (Wells): When an Individual Water Supply System is present, the Lender must ensure that the water quality meets the requirements of the health authority with jurisdiction. If there are no local (or state) water quality standards, then water quality must meet the standards set by the EPA, as presented in the National Primary Drinking Water regulations in 40

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CFR §§ 141 and 142 which can be found at http://www.gpo.gov/fdsys/pkg/CFR-2011-title40- vol23/pdf/CFR-2011-title40-vol23-part141.pdf Note: Soil poisoning is an unacceptable method for treating termites unless the Mortgagee obtains satisfactory assurance that the treatment will not endanger the quality of the water supply.

3) Shared Wells: The Lender must confirm that a Shared Well meets the following: . Serves existing Properties that cannot feasibly be connected to an acceptable Public or Community Water supply System; . Is capable of providing a continuous supply of water to involved Property Units so that each existing Property simultaneously will be assured of at least three gallons per minute (five gallons per minute for Proposed Construction) over a continuous four-hour period. (The well itself may have a lesser yield if pressurized storage is provided in an amount that will make 720 gallons of water available to each connected existing dwelling during a continuous four-hour period or 1,200 gallons of water available to each proposed dwelling during a continuous four-hour period. The shared well system yield must be demonstrated by a certified pumping test or other means acceptable to all agreeing parties.); . Provides safe and potable water. An inspection is required under the same circumstances as an individual well. This may be evidenced by a letter from the health authority having jurisdiction or, in the absence of local health department standards, by a certified water quality analysis demonstrating that the well water complies with the EPA’s National Interim

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Primary Drinking Water Regulations that are found at http://www.gpo.gov/fdsys/pkg/CFR- 2011-title40-vol23/pdf/CFR-2011-title40-vol23-part141.pdf; . Has a valve on each dwelling service line as it leaves the well so that water may be shut off to each served dwelling without interrupting service to the other Properties; and . Serves no more than 4 Properties.

Shared Well Agreement Requirements for Proposed and Existing Properties o The shared well agreement must be binding upon signing and their successors in title; it must be recorded, and reflects joiner by any Lender holding a Mortgage on any Property connected to the Shared Well. o Permit well water sampling and testing by the local authority at the request of any party at any time. o Require that corrective measures be implemented if testing reveals a significant water quality deficiency, but only with the consent of a majority of all parties. o Ensure continuity of water service to “supplied” parties if the “supplying” party has no further need for the shared well system. (“Supplied” parties normally should assume all costs for their continuing water supply.) o Prohibit well water usage by any party for other than bona fide domestic purposes. o Prohibit connection of any additional living unit to the shared well system without: - The consent of all parties; - The appropriate amendment of the agreement; and - Compliance with item 3. o Prohibit any party from locating or relocating any element of an individual sewage disposal system within 75 feet (100 feet for Proposed Construction) of the Shared Well. o Establish Easements for all elements of the system, ensuring access and necessary working space for system operation, maintenance, improvement, inspection and testing. o Specify that no party may install landscaping or improvements that will impair use of the Easements. o Specify that any removal and replacement of pre-existing site improvements, necessary for system operation, maintenance, replacement, improvement, inspection or testing will be at the cost of their owner, except for costs to remove and replace common boundary fencing or walls, which must be shared equally between or among parties. o Establish the right of any party to act to correct an emergency in the absence of the other parties onsite. An emergency must be defined as failure of any shared portion of the system to deliver water upon demand. o Permit an agreement amendment to ensure equitable readjustment of shared costs when there may be significant changes in well pump energy rates or the occupancy or use of an involved Property. o Require the consent of a majority of all parties upon cost sharing, except in emergencies, before actions are taken for system maintenance, replacement or improvement. o Require that any necessary replacement or improvement of a system element(s) will at least restore original system performance.

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o Specify required cost sharing for: - The energy supply for the well pump; - System maintenance, including repairs, testing, inspection and disinfection; - System component replacement due to wear, obsolescence, incrustation or corrosion; and - System improvement to increase the service life of a material or component to restore well yield or to provide necessary system protection. o Specify that no party shall be responsible for unilaterally incurred shared well debts of another party, except for correction of emergency situations. Emergency correction costs must be equally shared. o Require that each party be responsible for: - Prompt repair of any detected leak in this water service line or plumbing system; - Repair costs to correct system damage caused by a resident or guest at their Property; and - Necessary repair or replacement of the service line connecting the system to the dwelling. o Require equal sharing of repair costs for system damage caused by persons other than a resident or guest at a Property sharing the well. o Ensure equal sharing of costs for abandoning all or part of the shared system so that contamination of ground water or other hazards will be avoided. o Ensure prompt collection from all parties and prompt payment of system operation, maintenance, replacement or improvement costs. o Specify that the recorded agreement may not be amended during the term of a federally-insured or -guaranteed Mortgage on any Property served, except as provided in items noted above in bullet points 5 and 11. o Provide for binding arbitration of any dispute or impasse between parties with regard to the system or terms of agreement. Binding arbitration must be through the American Arbitration Association or a similar body and may be initiated at any time by any party to the agreement. Parties to the agreement must equally share arbitration costs. O. Individual Residential Water Purification Systems An Individual Residential Water Purification System refers to equipment, either point-of-entry or point-of-use, installed on Properties that otherwise do not have access to a continuous supply of safe and potable water. Note: A property that needs the individual water purification system to make the water safe and to meet code is NOT eligible for financing at FCBM. P. Sewage System: The Lender must conform connection is made to a public or community sewage disposal system whenever feasible and available at a reasonable cost. Q. Termites: For existing Properties, the Lender must confirm that the Property is free of wood destroying insects and organisms. If the appraisal is made subject to inspection by a qualified pest control specialist, the Lender must obtain such inspection and evidence of any required treatment to confirm the Property is free of wood destroying insects and organisms with Form NPMA-33 or the State Mandated Wood Destroying Pests and Organism Inspection Report. For New Construction Properties the Lender must obtain Wood Infestation Report Subterranean Termite Protection Builder’s Guarantee - NPMA-99A and/or New Construction Subterranean

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Termite Service Record - NPMA-99B, unless the Property is located in an area of no to slight infestation as indicated on HUD’s “Termite Treatment Exception Areas” list included in these guidelines and in the following link http://portal.hud.gov/hudportal/documents/huddoc?id=SFH_POLI_TERMITE.pdf

Refer to the required documentation for New Construction section in these guidelines for additional information.

Appraiser and Property Requirements Appraiser Responsibility to Report Property Compliance The Appraiser is responsible to report property compliance. To do so, the appraiser must observe, analyze and report that the Property meets HUD’s MPR and MPS. • Minimum Property Requirements (MPR) refer to general requirements that all homes insured by FHA be safe, sound, and secure. • Minimum Property Standards (MPS) refer to regulatory requirements relating to the safety, soundness and security of New Construction. The Appraiser must note when the Property is not safe, sound, and secure and does not comply with FHA’s MPR and MPS so that the DE Underwriter can determine eligibility.

Minimum Property Requirements and Minimum Property Standards by Construction Status The Appraiser is to report any issues that may affect the safety, soundness and security of the Property; as well as any readily observable defective conditions and/or lack of compliance with MPS or MPR and must provide photographic documentation of the defective conditions in the appraisal report. Existing Construction Existing Construction refers to a Property that has been 100% completed more than One Year or has been completed for less than One Year but has been previously occupied. New Construction New Construction refers to Proposed Construction, Properties Under Construction, and Properties Existing Less than One Year. (1) Proposed Construction refers to a Property where no concrete or permanent material has been placed. Digging of footing is not considered permanent. (2) Under Construction refers to the period from the first placement of permanent material to 100% completion with no Certificate of Occupancy (CO) or equivalent document. (3) Existing Less than One Year refers to a Property that is 100% complete and has been completed less than one year from the date of the issuance of the CO or equivalent document. The Property must have never been occupied. The Appraiser must observe, analyze and report defective conditions and must also provide photographic documentation of those conditions in the appraisal report. If inspection is required, the Appraiser must cite the reason for requiring an inspection. Defective conditions refer to defective construction, evidence of continuing settlement, excessive dampness, leakage, decay, termites, environmental hazards or other conditions affecting the health and safety of occupants.

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Repair Requirements The Appraiser must report all readily observable property deficiencies, as well as any adverse conditions Discovered in the reporting form. However, regardless of the Appraiser’s suggested repairs, the Mortgagee will determine which repairs are required. The Appraiser must limit the required repairs to those repairs necessary to: • Maintain the safety, security and soundness of the Property; • Preserve the continued marketability of the Property; and • Protect the health and safety of the occupants.

Appraisal Report Conclusion and Appraisal Property Condition Appraisal Report Conclusion Appraisal Property Condition 1. There is/are no repair(s), alteration(s) or “As-is” inspection condition(s) noted by the Appraiser. 2. Intended use is for Real Estate Owned (REO) 3. The Property is being recommended for rejection. 1. Proposed Construction where construction “Subject to completion per plans and specifications” Has not started. 2. Under Construction but not yet complete (less than 90%). 1. Repair or Alteration Condition(s) noted by the “Subject to the following repairs or alterations” Appraiser to: - Protect the health and safety of the occupants; - Protect the security of the Property; - Correct physical deficiencies or conditions affecting structural integrity. 2. Under Construction, more than 90% complete with only minor finish work remaining (buyer preference items e.g., floor coverings, appliances, fixtures, landscaping, etc.). This eliminates the need for plans and specifications. Required inspection(s) to meet HUD’s Minimum Property “Subject to the following required inspection” Requirements and Minimum Property Standards.as noted by the Appraiser.

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The Appraiser must include a building sketch showing the GLA, all exterior dimensions of the house, patios, porches, decks, garages, breezeways, and any other attachments or out buildings contributing value. The sketch must show “covered” or “uncovered” to indicate a roof or no roof (such as over a patio). The Appraiser must show the calculations used to arrive at the estimated GLA. The Appraiser must provide an interior sketch or floor plan for Properties exhibiting functional obsolescence attributable to the floor plan design. • Appraisal photos must be taken of the front and rear at opposite angles to show all sides of the subject property. Additional photos are required for any improvement/site feature with contributory market value that are not clearly seen in the Subject front and rear photographs. • Street scene photo must include a portion of the subject site. • If the subject property is new construction, include photos that depict the subject’s grade and drainage. • If the subject property is proposed construction and the improvements have not been started, the appraiser should take a photograph that shows the grade of the vacant lot. • Photo of the subject’s superior view when an adjustment is made for view amenity. Note: Condominium Projects require additional photos of common areas and shared amenities of the project.

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Comparable Selection Comparable sales should be selected based on similar locational and physical characteristics, not sales price and must apply all appropriate techniques and methods for adjusting the comparable properties; conduct an analysis, and report the result with the reasoning that supports the analyses, opinions, and conclusions in the report. Furthermore, the Appraiser must use Bracketing techniques when possible and appropriate (select comparable properties with features that are superior to and inferior to the subject features). Comparable properties must be selected based on the principle of substitution, and the analysis will reveal the relevance of that data. Comparable properties should not be chosen only because their prices bracket a desired or estimated value.

Comparable Selection in Subdivisions, Condominiums or Planned Unit Development Projects If the Appraiser uses sales of comparable properties that are located outside of the subject’s subdivision or project, the analysis must reflect typical Borrower expectations and behavior. For Properties in new subdivisions, or units in new (or recently converted) Condominium Projects, the Appraiser must include, for comparison, properties in the subject market area as well as properties within the subject subdivision or project. Whenever possible, the Appraiser must select at least one sale from a competing subdivision or project and one sale from within the subject subdivision or project so that this market acceptance may be directly compared. If the new project is mature enough to have experienced arm’s length resales, the Appraiser must also analyze and report those properties.

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Comparable Sale Selection in Rural and Slow Growth Markets If insufficient comparable sales have occurred within the previous six months, the Appraiser must include at least three sales that occurred less than 12 months prior to the date of appraisal. Where there is a scarcity of recent comparable sales data, the Appraiser may include sales older than 12 months as additional sales in markets. The Appraiser must report the most recent and relevant sales, and include a thorough explanation of the market conditions, the levels of supply and demand, and a reason for the lack of recent sales data.

Zoning and Legal Use Appraiser must verify the Subject’s current use represents the highest and best use; and complies with zoning ordinances, and its number of units is legally permitted.

If “Legal Non-Conforming” (grandfathered use), the Appraiser must also explain and verify whether the Property may legally be rebuilt to its current use if destroyed.

Accessory Dwelling Unit An Accessory Dwelling Unit (ADU) refers to a habitable living unit added to the primary 1 Unit dwelling, which together constitute a single interest in real estate. It is a separate additional living unit, containing a kitchen, sleeping, and bathroom facilities. The Appraiser will determine whether to classify the Subject as a 2-unit Property or as a Single Family with an ADU as part of the highest and best use analysis in relation to the neighborhood and the current market conditions. Note: An Accessory Dwelling Unit (ADU) is usually subordinate in size, location and appearance to the primary Dwelling Unit and may or may not have separately metered utilities or separate means of ingress or egress. The Appraiser must not include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling. Important: A 2-4 Unit property with an ADU is ineligible for FHA financing.

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Externalities refer to off-site conditions that affect a Property’s value which include: heavy traffic, airport noise and hazards, special airport hazards, proximity to high pressure gas lines, Overhead Electric Power Transmission Lines and Local Distribution Lines, smoke, fumes, and other offensive or noxious odors, and stationary storage tanks. For more details refer to the requirements noted in the 4000.1 HUD Handbook at the http://portal.hud.gov/hudportal/documents/huddoc?id=40001HSGH.pdf

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him/her with a letter from the local jurisdiction of the appropriate state agency stating that the well was permanently abandoned in a safe manner. Mineral, Oil and Gas Reservations or Leases: The Appraiser must analyze and report the degree to which the residential benefits may be impaired or the Property damaged by the exercise of the rights set forth in oil, gas, and mineral reservations or leases. The Appraiser should consider the following: • The infringement on the property rights of the fee owner caused by the rights granted by the reservation or lease; and • The hazards, nuisances, or damages that may arise or accrue to the subject Property from exercise of reservation or lease privileges on neighboring properties. Residential Underground Storage Tanks: The Appraiser must note any evidence of residential underground storage tanks, such as fill pipes, pumps, ventilation caps, etc. and if there is observable evidence of leakage or onsite contamination, the Appraiser must make a requirement for further inspection. Environmental and Safety Hazards: The Appraiser must report known environmental and safety hazards and adverse conditions that may affect the health and safety of the occupants which include defective lead-based paint, mold, toxic chemicals, radioactive materials, other pollution, hazardous activities, and potential damage to the Structure from soil or other differential ground movements, subsidence, flood, and other hazards. Wood Destroying Organisms (Insects/Termites): If there is evidence or notification of infestation, including a prior treatment, the Appraiser must mark the evidence of infestation box in the “Improvements” section of the appraisal and make the appraisal subject to inspection by a qualified pest control specialist.

Excess and Surplus Land Excess Land refers to land that is not needed to serve or support the existing improvement and has the potential to be sold separately. The highest and best use of the Excess Land may or may not be the same as the highest and best use of the improved parcel. Surplus Land refers to land that is not currently needed to support the existing improvement but cannot be separated from the Property and sold off. Surplus Land does not have an independent highest and best use and may or may not contribute to the value of the improved parcels.

The appraiser must comment and include the highest and best use analysis in the appraisal report to support his/her conclusions of the existence of excess land. Note: Surplus land must be included in the valuation of the property.

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The appraiser must observe the physical condition of the mechanical systems such as plumbing, heating and electrical systems and must be able to operate the systems and observe their performance. If the systems appear to be damaged or do not appear to function properly, the Appraiser must condition the appraisal for repair or further inspection.

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The Appraiser must examine the water heater to ensure that it has a temperature and pressure-relief valve with piping to safely divert escaping steam or hot water.

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Community Water Systems Required Analysis and Reporting A Community Water System refers to a central system that is owned, operated and maintained by a private corporation or a nonprofit property owners’ association. If the Property is on a Community Water System, the Appraiser must note the name of the water company on the appraisal report and report on the availability of connection to public and/or Community Water System, or sewer system and any jurisdictional conditions requiring connection.

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Effective Age and Remaining Economic Life The effective age reflects the condition of a Property relative to similar competitive properties. The effective age may be greater than, less than, or equal to the actual age. Any significant difference between the actual and effective ages requires an explanation. The Appraiser must state the remaining economic life as a single number or as a range for all property types, including condominiums. The Appraiser must provide an explanation if the remaining economic life is less than 30 years.

FHA Electronic Appraisal Delivery Portal (EAD) FHA’S Electronic Appraisal Delivery Portal (EAD) portal is a web-based platform where Lenders or their designated AMC service providers electronically deliver FHA Single Family appraisal reports prior to endorsement. The Lender or its designated AMC service providers may deliver appraisals through the EAD portal or continue delivery in accordance with the Post Closing and Endorsement Process of this Handbook until June 2016; when the Electronic Appraisal Delivery process will be mandatory. Currently, FHA recommends the FHA Lender to begin the delivery of appraisals through the EAD portal as soon as the Lender receives access credentials. Note: The appraisals submitted through EAD are the appraisals of record for loan endorsement.

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Escrow for Repairs/Work Completion Escrow holdbacks due to adverse weather conditions, are permitted for completion of repairs to the Subject to meet HUD Minimum Property Standards. The following requirements must be met: • The Subject Property is currently habitable and free of any health and safety issues. • There is legitimate weather related cause on why deferred repairs cannot be completed prior to the loan closing and will be completed within 30 up to 180 days. • The estimates for the cost of repair are provided by a Licensed Contractor or other qualified professional. • The Escrow holdback amount is funded at 150% of the repair estimate(s). Note: Refer to HUD REO Purchase section for specific program requirements. • At closing, Borrower will execute FCBM’s Escrow Holdback Agreement which identifies the escrow amount as well as the procedures and conditions upon which the required repairs must be completed. • There are also two (2) required HUD forms to be executed by the DE Underwriter: o The Underwriter will execute Form HUD-92300-Underwriter’s Assurance of Completion to indicate the repair escrow has been established at the time of final approval; and o The satisfactory completion of repairs with photos must be done by either the original appraiser or by an active HUD Roster Inspector using Form HUD-92051-Compliance Inspection Report which upon receipt will require the Underwriter to sign and certify that the incomplete construction, alterations and repairs have been satisfactory completed that the incomplete construction, alterations and repairs have been satisfactory completed. Important: A Final 1004-D Form may not be used.

Effective with FHA Case Numbers assigned on or after October 31, 2016: The lender’s post-closing department must complete in FHA Connection the “Escrow Closeout Certification” screen within 30 days after the escrow account is closed.

HUD REO Property Purchase Programs 203(b) with Repair Escrow FCBM requires applicants to have a credit score of no less than 640 when an escrow holdback for repairs will be established.

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Regardless of the type of HUD REO Purchase Program (with or without repair escrow), the Underwriter must obtain a copy of the HUD REO Sales Contract Form HUD-9548 and any applicable addenda, which will establish the purchase price, price discount, eligibility for GNND and eligibility for $100 Down, and meet the requirements for the Sales Contract.

Effective for case numbers assigned on or after October 31, 2016, the Lender must comply with the Repair Completion Escrow Requirement.

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• The Underwriter is to sign and certify that the repairs have been satisfactory completed that the incomplete construction, alterations and repairs have been satisfactory completed on the Form HUD-92051 Compliance Inspection Report.

Closing Costs and Commissions paid by HUD The amount of closing costs that HUD will pay at closing on behalf of the Borrower are specified on line #5 of the Sales Contract HUD-9548 and sales commissions to be paid by HUD to the selling and the listing agent are specified on line #6a and #6b. Important: The contributions paid by HUD toward the Borrower closing costs are not considered to be Interested Party Contributions or Inducements to Purchase.

HUD REO Earnest Money Deposit The buyer and selling broker must sign the earnest money forfeiture agreement. This document informs the buyer that HUD may consider the earnest money deposit forfeited or may return all or a portion of the earnest money deposit on owner occupant transactions depending on the circumstances.

This disclosure must be provided to the lender with a copy of the HUD REO Sales Contract HUD Form- 9548 and can be obtained by going to: http://portal.hud.gov/hudportal/documents/huddoc?id=ModelDoc_EarnestMoney.pdf

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Note: The Asset Managers (AM) are HUD’s M&M contractors responsible for the marketing and sale of Properties owned by or in the custody of HUD.

Maximum Loan Amount Calculations on HUD REO Transactions • When no sales incentives are specified in the HUD REO contract i.e. no $100 down payment; then: 1. Base loan amount = The lesser of HUD Sales Contract or the Appraised Value x 96.5% 2. Repair escrow amount listed in the HUD sales contract is added to the Base Loan Amount (as calculated in step 1) and this becomes the Modified Base Loan Amount 3. The UFMIP is calculated on the Modified Base Loan Amount, and added to it to determine the Total Loan Amount (Mortgage with UFMIP) • To calculate the maximum base loan amount for a home being sold under the $100 incentive with no escrow repair, take the sales price minus the $100 down payment - this will be the new base loan amount. The cost of the UFMIP may be financed into the loan PROVIDED that the total loan amount including the UFMIP does not exceed 100% of the “as is” appraised value. • To calculate the maximum base loan amount for a home being sold under the $100 incentive with HUD approved repair escrow in the Loan Amount: Take the sum of the sales price and the repair escrow, and subtract the $100 down payment - this will be the new base loan amount. The cost of the UFMIP may be financed into the loan PROVIDED that the total loan amount including the UFMIP does not exceed 100% of the “as is”

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appraised value. Note: If the applicant over bids the sales price vs. the appraised value, the buyer is to pay the difference with verified funds.

***DU will be Approve/Ineligible for LTV exceeding 96.5% due to the financing of the escrow repairs, this is acceptable but ONLY due to LTV exceeding 96.5%***

Good Neighbor Next Door (GNND) Program The GNND program is available in HUD designated revitalization areas to borrower(s) meeting the criteria as specified by HUD GNND guidelines and must work/serve in the designated revitalization area which they will be purchasing. The HUD Form 9549 A-E is required as an addendum to the purchase contract. Under this program HUD offers for sale at a 50% discount from the listing price reflected on line 8 of the sales contract to full time: • Firefighters • Emergency Technicians • Teachers • Laws Enforcement Officers

Eligible Borrower Criteria for GNND program Law Enforcement Officer • Employed full-time by a law enforcement agency of the federal government, a state, unit of general local government, or an Indian tribal government; and • In carrying out such full-time employment, the person is sworn to uphold, and make arrests for violations of federal, state, tribal, county, township, or municipal laws, • Serving the area where the home is located. Teacher • Employed as a full-time teacher by a state accredited public or private school that provides direct services to students in grades pre-kindergarten through 12; and • The public or private school where the person is employed as a teacher serves students from the area where the home is located in the normal course of business Firefighter/EMT • Employed full-time as a firefighter or emergency medical technician • By a fire department or emergency medical services responder unit of the federal government, a state, unit of general local government, or an Indian tribal government, • Serving the area where the home is located.

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In other words: Contract Sales Price (from Line 3 of REO Sales Contract) Minus (-) Discount (from Line 8 of REO Sales Contract) Plus (+) HUD-Paid Closing Costs (from Line 5 of REO Sales Contract) Plus (+) HUD-Paid Sales Commission (from Line 6a of REO Sales Contract) Equals (=) HUD Discounted Sales Price At closing; the borrower(s) is required to sign a Subordination Agreement to HUD that equals 50% of the list price with a 3 year term that self-amortizes monthly. The closing (or title) agent handling the closing of the new loan is to handle the paperwork and details to obtain the HUD subordination.

Important: Broker Customers are to refer the closing company to this page or they can print the Subordination Information sheet and take it to the closing company. For more information, please visit http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/gnndserv

For additional resources, please refer to the 4000.1 Handbook Section II.A.8.C

Assumptions Not permitted at FCBM

Temporary Buydowns Not Allowed

Down Payment Assistance DPA’s are not allowed.

Anti-Flipping Worksheet - Net Tangible Benefit • All refinance loans will be conditioned for this requirement, as appropriate, based on the state matrix. • Please reference www.flcbmtg.com website resource center for worksheets/disclosures and/or matrix by state. • The FCBM underwriter will validate/confirm the information provided on the worksheet and clear the condition.

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Termite Treatment Exception Areas State Requirement Alaska Not required in any county. Colorado Not required in Clear Creek, Eagle, Gilpin, Grand, Jackson, Moffat, Routt, and Summit Counties. Required in any other county. Idaho Not required in any county. Maine Required in York and Cumberland counties. Not required in any other county. Michigan Not required in Alcona, Alger, Alpena, Antrium, Arenac, Baraga, Bay, Benzie, Charlevoix, Cheboygan, Chippewa, Clare, Crawford, Delta, Dickinson, Emmet, Gladwin, Gogebic, Grand Traverse, Houghton, Huron, Iosco, Iron, Isabella, Kalkaska, Keweenaw, Leelanau, Luce, Mackinac, Marquette, Menominee, Midland, Missaukee, Montmorency, Ogemaw, Ontonagon, Osceola, Oscoda, Otsego, Presque Island, Roscommon, Saginaw, Sanilac, Schoolcraft, Tuscola, and Wexford. Required in any other county. Minnesota Not required in Becker, Beltrami, Clay, Clearwater, Cook, Grant, Hubbard, Itasca, Kittson, Koochiching, Lake, Lake of the Woods, Mahnomen, Marshall, Norman, Otter Tail, Pennington, Polk, Roseau, Stevens, Traverse, Wadena, and Wilkin Counties. Required in any other county. Montana Not required in Blaine, Broadwater, Carbon, Cascade, Chouteau, Daniels, Fergus, Gallatin, Glacier, Golden Valley, Hill, Judith Basin, Lewis and Clark, Liberty, Meagher, Musselshell, Park, Petroleum, Phillips, Pondera, Roosevelt, Sheridan, Stillwater, Sweet Grass, Teton, Toole, Valley, Wheatland, and Yellowstone Counties. Required in any other county New Hampshire Not required in Grafton, Carroll, and Coos Counties. Required in any other county. New York Not required in Clinton, Essex, Franklin, St Lawrence, Niagara and Orleans. Required in any other county. North Dakota Not required in any county. Oregon Not required in any county. South Dakota Not required in Bennett, Brown, Buffalo, Butte, Campbell, Corson, Custer, Day, Dewey, Edmunds, Faulk, Haakon, Hand, Harding, Hughes, Jackson, Jones, Lawrence, Marshall, McPherson, Meade, Mellette, Pennington, Perkins, Potter, Roberts, Shannon, Spink, Stanley, Sully, Walworth, and Ziebach Counties. Required in any other county. Utah Not required in Daggett, Morgan, Summit, and Wasatch. Required in any other county. Vermont Not required in Franklin, Grand Isle, Orleans, Essex, Chittenden, Lamoille, Caledonia, Washington, Addison and Orange. Required in any other county. Washington Not required in any county. Wyoming Not required in Fremont, Hot Springs, Lincoln, Park, Sublette, Sweetwater, Teton, and Uinta. Required in any other county. Reminder of States Required

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