Second Mortgage MUST CLOSE CONCURRENTLY WITH A FLAGSTAR FIRST MORTGAGE

PRIMARY RESIDENCE – PURCHASE and RATE/TERM REFINANCE 1 Maximum Maximum Minimum Total Type CLTV Loan Amount Score Ratio $150,000 700 89.99% 1-Unit $250,000 720 Condo 43% PUD $250,000 660 80% $500,000 680 2-Unit 75% $250,000 700 43%

SECOND HOME – PURCHASE and RATE/TERM REFINANCE 1 Maximum Maximum Minimum Total Property Type CLTV Loan Amount Credit Score Debt Ratio $150,000 720 89.99% 1-Unit $250,000 740 Condo 43% PUD $150,000 680 80% $250,000 700

1. Texas: Customers may originate only purchase-money Second Mortgage loans in Texas; refinances are not available.

PROGRAM SUMMARY Subordinate , closed-end fixed-rate loan. Loans under this program must be closed concurrently with a Flagstar conventional first mortgage. This is not a stand-alone second mortgage program. Loans will close in the customer’s usual closing name, and they are eligible for warehouse or table funding (depending on Correspondent or Broker approval status with Flagstar).

PRODUCTS OFFERED

Product Name Term Second Mortgage 15-Year Fixed (Concurrent) 180 months Second Mortgage 10-Year Fixed (Concurrent) 120 months

LICENSING Origination of secondary lien loans may require specific licensing in the state where the subject property is located. Such licensing may differ from what is required to originate first mortgage loans. Consult the appropriate state licensing authority, your Flagstar account executive or Flagstar’s Lending Service Center (LSC) for more information.

ELIGIBLE BORROWERS • Borrowers must be the same for both the first and second mortgage loans • U.S. citizens • Permanent resident aliens

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Second Mortgage • Non-permanent resident aliens • Non-occupant co-borrowers • Revocable/living trusts are acceptable provided it is established by, and the primary beneficiary is, an individual; o Loans closing in trust must follow the same requirements as the first mortgage

INELIGIBLE BORROWERS • Land trusts are not eligible, including Illinois land trusts

ELIGIBLE PROPERTY TYPES • 1 to 2-unit • Planned unit developments (PUDs) • Condominiums: o Must meet Fannie Mae warranty guidelines o Must be on Flagstar’s eligible projects list

INELIGIBLE PROPERTY TYPES • 3 to 4-unit properties • Condominiums not meeting the criteria listed under Eligible Property Types above • Manufactured/mobile homes (single- or double-wide) • • Properties over 10 acres (may be eligible with an exception) • Properties under construction at time of loan closing

MINIMUM LOAN AMOUNT $10,000

QUALIFYING RATE/PAYMENT The qualifying payment is a fully amortizing payment over the loan term calculated at the note rate.

TOTAL DEBT RATIO The maximum debt-to-income (DTI) ratio is 43%, regardless of any higher ratios permitted by the AUS response on the first mortgage.

APPRAISAL A full appraisal appropriate to the property type must be obtained. The appraisal from the first mortgage can be used; however, any reduced appraisal options offered by the first mortgage AUS findings, including a property inspection waiver (PIW), are not eligible.

Appraisals must be reviewed by a qualified, designated reviewer.

Broker and non-AIR compliant Correspondent appraisals must be ordered through Loantrac and will be eligible from any approved AMC listed in Appraisal Management Companies, Doc. #4903.

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Second Mortgage AIR compliant Correspondent appraisals must meet the following guidelines: • Appraisal is not required to be ordered from one of our approved AMCs • Upon Appraisal Review discretion, a review appraisal or a full appraisal from one of our approved AMCs may be required at the customer’s expense; it will be the responsibility of the customer to place the order

INITIAL DISCLOSURES Loan Estimates are required for second mortgage loans

UNDERWRITING All loans must meet the parameters as set out in Flagstar Bank’s current Conventional Guidelines, except as modified below: • This Second Mortgage program is offered only in conjunction with a concurrently closing conventional first underwritten by and to be funded or purchased by Flagstar Bank. • Delegated underwriting is not permitted • Both the first and second lien loans must be tied together using the Linked Loan functionality in Loantrac, and should be submitted to Underwriting at the same time. • The associated first mortgage loan application must receive a DU Approve or LPA Accept response.

CREDIT • The credit report issued for the first mortgage, and used in the AUS submission(s), should be reissued through Loantrac for the Second Mortgage transaction. • Minimum four tradelines; one currently active and open for more than 12 months with a minimum high balance of $1,000, regardless of credit score • Credit score for the file will be determined using the standard agency method (file score is lowest individual score; individual borrower scores determined as the middle score for a three repository credit report or the lower score for a two repository credit report) • Credit history must show 0x30 for all mortgages in last 12 months • /CCCS – discharged at least four years with excellent re-established credit • /repossessions/short sales – not allowed • Collections or charge-offs less than 24 months old or over $1,000 cumulative must be paid off prior to or at closing • All credit must be current at time of underwriting • Co-signers cannot be used to offset derogatory credit or the inability of the main borrower to budget

Borrowers can pay off to qualify; however, the debt must be paid in full and all remaining debt will be included in qualifying ratios; all debts to be paid off must be clearly identified on the closing disclosure; lease payments and student loans will always be included in the debt ratio.

EMPLOYMENT AND INCOME Income, employment and assets must be listed on the 1003 and verified. Documentation may not be more than 90 days from date note is signed.

Borrowers must have two years consistent employment with the same employer or in the same industry.

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Second Mortgage Standard Fannie Mae full documentation is required (two years W2s and current pay stub, etc.). Pay stubs must be computer generated. Handwritten pay stubs require a borrower to provide tax returns and all schedules.

The following income documentation must be provided for each borrower whose income is used to qualify:

Employment Income Income Type Required Documentation • An earnings trend must be established and documented. Large increases in over the previous two years must be explained and documented. • W-2 for prior two years. Salaried • Year-to-date pay stub up through and including the most current pay period at the time of application. • If borrower is claiming overtime pay, it must be shown on the YTD pay stub. An earnings trend must be established and documented. Stable to increasing income should be average over a minimum two year period. When declining income has occurred, the most recent 12 months should be used. In all cases, the decline in income must be analyzed to determine if the rate of decline would have a negative Hourly & Variable impact on the continuance of income and the borrower’s ability to repay. Declining Income income must be explained by the employer/borrower and a written determination by the underwriter must be provided if declining income is used for qualifying. • W-2 forms or personal tax returns, including all schedules, for prior two years. • Year-to-date pay stub up through and including the most current pay period at the time of application.

Borrower must have worked the part-time job uninterrupted for the past two years, and plans to continue. When declining income has occurred, the most recent 12 months should be used. In all cases, the decline in income must be analyzed to determine if the rate of decline would have a negative impact on the continuance of Part-Time Income income and the borrower’s ability to repay. If the part-time income shows a continual decline, income should not be used. • W-2 forms for prior two years. • Year-to-date pay stub up through and including the most current pay period at the time of application

Commission income must be averaged over the previous two years. When declining income has occurred, the most recent 12 months should be used. In all cases, the decline in income must be analyzed to determine if the rate of decline would have a negative impact on the continuance of income and the borrower’s ability to repay. If the commission income shows a continual decline, income should not be used. • W-2 forms for prior two years if commissions are less than 25% of the total Commission income. • Tax returns, including all schedules, and W-2 form from the previous two years if commissions are ≥ 25% of the total income. • Unreimbursed business expenses (form 2106) must be subtracted from income. • Year-to-date pay stub up through and including the most current pay period at the time of application.

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Second Mortgage

Employment Income Income Type Required Documentation An earnings trend for bonus and overtime must be established and documented. A period of more than two years must be used in calculating the average overtime and bonus income if the income varies significantly from year to year. When declining income has occurred, the most recent 12 months should be used. In all cases, the decline in income must be analyzed to determine if the rate of decline would have a Overtime & Bonus negative impact on the continuance of income and the borrower’s ability to repay. If either type of income shows a continual decline, income should not be used. • W-2 for prior two years. • Year-to-date pay stub up through and including the most current pay period at the time of application. For a Borrower who has less than a two-year employment and income history, the Borrower's income may be qualifying income if the Mortgage file contains documentation to support that the Borrower was either attending school or in a training program immediately prior to their current employment history. School transcripts must be provided to document. Returning to Work After an A borrower’s income may be considered effective and stable when recently returning Extended Absence to work after an extended absence if he/she: • Is employed in the current job for six months or longer; and • Can document a two year work history prior to an absence of employment using: o Traditional employment verifications; and/or o W-2 forms, for prior two years. If gap is in excess of 30 days during the past two years, a satisfactory letter of explanation is required and the borrower must be employed with current employer Employment Gaps for a minimum of six months. Gaps in employment due to the borrower attending training or schooling for a specific profession must be documented with diploma, transcripts, etc. See VOE requirements.

Self-employed borrowers are defined as those individuals who have 25% or greater ownership interest or receive a 1099 statement to document income. • When declining income has occurred, the most recent 12 months should be used. In all cases, the decline in income must be analyzed to determine if the rate of decline would have a negative impact on the continuance of income and the borrower’s ability to repay. Self-Employed Income • A signed 4506T for each business will be required for all business’ in which the business income/loss is being used to qualify the borrower(s). • If the borrower has self- employment income and/or zero income reported, and it is not needed to qualify, it is not required to obtain the P&L and balance sheet. If the borrower has a loss, regardless of the amount, the documentation will be required on the self-employment type and will be used to qualify the borrower(s).

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Second Mortgage

Employment Income Income Type Required Documentation

Borrowers who are employed by a family member are considered to be self- employed, regardless of the percentage of ownership, and self-employed documentation is required. Potential ownership by the borrower must be addressed. The underwriter must clarify potential ownership by the borrower. A borrower may be an officer of a family operated business but not an owner. Borrower Employed by Family • Written verification of the borrower’s status should be obtained by written Member confirmation from an accountant or legal counsel. • Borrowers must provide the preceding two years signed, dated individual and business (if applicable) tax returns, with all supporting schedules. • YTD pay stub up through and including the most current pay period at the time of application. • W-2 forms, for prior two years

• Current YTD P&L through the most recent quarter • YTD balance sheet through the most recent quarter. Sole Proprietorship • Personal tax returns, including all schedules, for prior two years. Note: only depreciation and depletion may be added back

• Current YTD P&L through the most recent quarter • YTD balance sheet through the most recent quarter. • Personal tax returns, including all schedules, for prior two years. • K-1s from prior two years, showing ownership percentage. K-1s are not required Partnerships (General, Limited), if the source is reporting positive income and the income is not used for Limited Liability Companies, qualification. If K-1s show a loss, they are required, regardless if they are used “S” Corporations, Corporations for qualifying purposes. If using capital gains, interest/dividend or W2 income from this source is used, K-1s are required. • Business tax returns (1065/1120), including all schedules, for the prior two years are required if the borrower has an ownership percentage ≥ 25%; they are not required if reporting positive income via a K-1, and the income is not used for qualification purposes.

Rental Income Income Type Required Documentation • Rental income may be used to qualify if the rental income can be documented with two years tax returns or a lease agreement due to the property being acquired after the most recent tax returns were filed. • Personal tax returns, including all schedules, for prior two years. • For properties listed on Schedule E of the borrower’s tax returns, net rental income should be calculated as the total of (income + depreciation + interest + taxes + insurance) divided by the applicable months minus the current PITI. All properties o If the subject property is the borrower’s primary residence and generating rental income, the full PITI must be included in the borrower’s total monthly obligations. • If rental income is not available on the borrower’s tax returns, a current executed lease agreement is required. Net rental income should be calculated as the gross monthly rent multiplied by 75%. • Net rental income must be added to the borrower’s total monthly income. Net rental losses must be added to the borrower’s total monthly obligations.

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Rental Income Income Type Required Documentation

When a borrower vacates a principal residence in favor of another principal residence, the rental income, reduced by the appropriate vacancy factor, may be considered in the underwriting analysis under the following circumstances: Departing Residence • Sufficient in Vacated Property: o The borrower has an LTV, CLTV or HCLTV of 70% or less as determined by a residential appraisal dated within 6 months. o Full appraisal or exterior only appraisal allowed.

Retirement Income Income Type Required Documentation • Fixed income payments such as social or income can be used at full value/distribution and may not be considered in any annuitization calculation. • Existing distribution of assets from an IRA, 401K or similar asset Pension, Annuity, and IRA account must be sufficient to sustain income continuance for the first three years distributions, of the loan o Verification of the assets of the plan and verification of receipt of the distribution of at least six (6) months is required, o Note: Distributions from asset accounts cannot be set up, or changed, solely for loan qualification purposes • Refer to Conventional Underwriting Guidelines, Employment - Related Assets as Asset Depletion/Dissipation Qualifying Income for Fannie Mae. Subject to Second Mortgage minimum Credit Score requirements. • Benefits (for children or surviving spouse) with a defined expiration date must have a remaining term of at least three years. • Acceptable documentation may include a copy of the Social Security Social Security Income Administration’s award letter, copies of the borrower’s previous 12 months bank statements to confirm regular payment deposits, or signed personal tax returns from the prior two years. • See non-taxable income for social security income treatment.

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Second Mortgage

Other Income Income Type Required Documentation

• Will be considered with a divorce decree, court ordered separation agreement, court decree, or other legal agreement providing the payment terms confirming Alimony, Separate that income will continue for at least the first three years of the loan three (3) Maintenance & Child years. Documentation evidencing that the borrower has been receiving full, Support Income regular, and timely payments for the past 6 months. • See non-taxable income for child support income treatment.

Capital gains for like assets may be considered as effective income. The earnings trend or loss must be considered in the overall analysis of this income type. If the trend results in a gain, it may be added as effective income. If the trend consistently Capital Gains shows a loss, it must be deducted from the total income. • Tax returns for the prior three years, including Schedule D. • Gains must be consistent amounts from consistent sources. • Verified assets to support continuance must be documented.

Interest and Dividend income may be used as long as documentation supports a two-year history of receipt. Dividend/Interest • Tax returns for the prior two years • Proof of asset(s) to support the continuation of interest and dividend income. Stock Options & Restricted • May not be used as qualifying income Stock Grants • A copy of the Note must document the amount, frequency and duration of payments • Regular receipt of note income for the past 12 months must be documented, and Note Income evidence of note income must be reflected on tax returns. • Verification that income is expected to continue for the first three years of the loan

Income from trusts may be used if guaranteed and regular payments will continue for the first three years of the loan • Regular receipt of trust income for the past 12 months must be documented. • A copy of the Trust Agreement or Trustee Statement showing: Trust Income o Total amount of borrower-designated trust funds o Terms of payment o Duration of trust o Portion of income that is not taxable • Non-taxable trust income must include proof of distribution.

Foreign income may be used only if its stability and continuance can be verified. • Personal tax returns, including all schedules, for prior two years. • Year-to-date pay stub up through and including the most current period at the Foreign Income time of application. • All income must be converted to U.S. currency. Note: Foreign Earned Self Employed Income is not acceptable

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Second Mortgage

Other Income Income Type Required Documentation • Documentation must be provided to support continuation of income for a Non-Taxable Income minimum of three (3) years. including child support, • Tax returns must be provided to confirm income is non-taxable. disability, foster care, military, • Income may be grossed up by the applicable tax amount (must use the tax rate etc. to calculate the consumers last year’s income tax). If the consumer is not required to file a tax return, the tax rate to use is 25%.

Trailing Co-borrowers • Income from trailing co-borrowers will not be considered.

Unacceptable Income Income Type Required Documentation • Any unverified source • Income that is temporary or a one-time occurrence Unacceptable income sources • Rental income received from the borrower’s single family primary residence or include, but are not limited to second home. • Retained earnings • Education benefits

• Income with a defined expiration date must continue for at least the first three years of the mortgage. • A separate IRS 4506-T form is required for each loan. However, it is not necessary to obtain transcripts a second time for the Second Mortgage loan; the results obtained for the first mortgage can simply be uploaded into Paperless File Manager for the Second Mortgage as well. The 4506-T will be used to validate all income used for qualifying prior to closing and acceptable results must be returned from the IRS prior to receiving a Clear to Close. • In the case where taxes have been filed and the tax transcripts are not available from the IRS, the IRS response to the request must reflect “No Record Found”. In these cases, an additional prior year’s tax transcript should be obtained. Large increases in income that cannot be validated through the tax transcript may only be considered for qualifying on a case by case basis. o In the case where taxes for the prior year have not been filed (between January 1 and the tax filing date (typically April 15) the following are required: . IRS form 1099 and W-2 forms from the previous year. . Loans closing in January prior to receipt of W-2’s may use the prior year year-end paystub. For borrowers using 1099’s, evidence of receipt of 1099 income must be provided. o Between the tax filing date and the extension expiration date (typically October 15), the following are required (as applicable): . Copy of the filed extension. . W-2 forms for corporations . Form 1099 for commission income. . Current year profit & loss (signed by the borrower). . Year-end profit and loss for prior year (signed by the borrower). . Balance sheet for prior calendar year if business is a sole proprietorship. o After the extension expiration date, loan is not eligible without prior year tax returns.

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Second Mortgage • Verbal VOE to be performed by Flagstar Bank prior to closing from non-self-employed borrower’s or if self-employed, an independent written confirmation of self-employment is required (i.e., copy of business license reflecting ownership of company, corporate minutes, etc.) as required. Two continuous years of self-employment in same business are required. o If borrower has been employed in current position for less than two years, VOE must be completed for all positions to verify that gaps are not 30 days or greater within the last 24 months. Written explanation from borrower must be obtained. • A Verbal Verification of Employment (VVOE) confirming the borrower’s employment status is required for all borrowers whose income is used for qualification purposes. The VVOE should be completed within 10 business days before the note date (or funding date for escrow states) for income. • Verification of self-employed businesses by a third-party source should be obtained within 30 calendar days from the note date (or funding date for escrow states).

ASSETS • Funds must be from the borrower’s own resources. Business funds may be used for down payment and/or closing costs but cannot be used in the reserve calculation. Cash flow analysis required using three months business bank statements to determine no negative impact to business based on withdrawal of funds. Funds must be available to the borrower prior to and after closing. Proceeds from the transaction (i.e. refinance proceeds, etc.) or sale of assets may not be used to meet cash reserves requirements. Documentation may not be more than 90 days old at the time of close. • Reserve requirements are based on the reserve requirements of the first mortgage; however, both the PITI of the first mortgage and the P & I payment of the second mortgage must be used when calculating the number of months of reserves. • All EMD funds must be verified. If EMD reflected on 1003 is different than the EMD disclosed on the purchase agreement, the underwriter will require verification of those funds. • Borrowers must disclose and verify all other liquid assets.

INSURANCE COVERAGE MORTGAGE INSURANCE Not required

TITLE INSURANCE Not required; title commitment from first mortgage will be used for the second mortgage

HAZARD INSURANCE Refer to Hazard Insurance Requirements, Doc. #4602 for hazard insurance guidelines

FLOOD CERTIFICATE/FLOOD INSURANCE A Flood Certificate must be obtained prior to closing for all loans; thus, a separate Flood Certificate will be required for both the first and second mortgage loans; flood insurance will be required where necessary; refer to Flood Insurance, Doc. #4603 for flood insurance requirements

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Second Mortgage STATE ELIGIBILITY Available with the following geographic restrictions State Restriction Puerto Rico Not eligible Texas Limited to purchase transactions only; refinance transactions are not eligible US Virgin Islands Not eligible

VARIABLE RATE DETAILS Not applicable; all loan products offered under this Second Mortgage program carry a fixed

CLOSING DOCUMENTATION All title holders must sign the mortgage even if they are not on the loan.

BROKER TRANSACTIONS Closing documents must be ordered through Web-Based Closing Documents (WBCD) and will close with the same closing name as the first mortgage loan.

CORRESPONDENT TRANSACTIONS Closing documents may be ordered through Flagstar’s Web-Based Closing Docs (WBCD) service available in Loantrac, or they may be prepared through the document vendor of your choice. For documents obtained outside of WBCD, Correspondents are fully responsible for ensuring closing documents are valid and legally enforceable in the jurisdiction where the property is located. All second mortgage loans will close in the name of the correspondent.

FIXED-RATE SECOND MORTGAGE • Fixed Rate Second Mortgage Note, 3900-series • Second Mortgage Security Instrument, 3800-series • Borrower Affidavit as to Other , Form #3252

IF APPLICABLE • Fannie Mae/Freddie Mac multi-state Condominium Rider, Form #3140 • Fannie Mae/Freddie Mac multi-state PUD Rider, Form #3150 • Fannie Mae/Freddie Mac multi-state 1-4 Family Rider, Form #3170, (for 2-unit primary residences) • Fannie Mae/Freddie Mac multi-state Second Home Rider, Form #3890

MORTGAGE ELECTRONIC REGISTRATION SYSTEM (MERS) Second mortgage loans require MERS registration and must have a MERS MIN number

HIGH COST (SECTION 32) OR HIGHER PRICED (SECTION 35/HPML) MORTGAGE LOANS Flagstar Bank will not fund or purchase any High Cost (Section 32) or Higher Priced (Section 35) mortgage loans under this program, or loans for which the points and/or exceed specific federal, state or local regulations.

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Second Mortgage RIGHT OF RESCISSION Standard rescission guidelines apply. For refinance transactions, all borrowers and title holders must execute a Notice of Right to Cancel form at closing.

POWER OF ATTORNEY Powers of Attorney are only acceptable for purchase money transactions and bona fide rate/term refinance transactions where the full amount of the line of credit is used to pay only outstanding mortgage debt on the subject property along with closing costs and prepaid expenses. The Power of Attorney must be specific to the proposed loan transaction. All borrowers must have signed the original loan application (Fannie Mae 1003).

ESCROWS An escrow account for taxes and insurance can be established with the first mortgage loan, but not with the second mortgage loan. However, regardless of whether an escrow account is established with the first mortgage loan, all housing expenses, including first and subordinate mortgage loan payments, property taxes, homeowner’s insurance, association fees, etc., must be included in the debt ratio calculation.

FEES ADMINISTRATIVE/COMMITMENT FEES Administrative/commitment fees are not charged for second mortgage transactions

ANNUAL MAINTENANCE None

PREPAYMENT PENALTY None

EARLY LOAN PAYOFF RECAPTURE PROVISION Flagstar’s standard recapture provisions apply. Refer to Early Loan Payoff, Doc. #4617

ASSUMPTION OF THE LOAN BY A SUBSEQUENT PURCHASER OF THE PROPERTY Not allowed

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