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Tennessee Fha Mortgage Limits
January 7th, 2009 9:14 AM
FHA Mortgage Limits List - FHA Forward

Message:   MORTGAGE LIMITS SUCCESSFULLY COMPLETED


Mortgage maximums as of Tuesday December 16, 2008
(95 records were selected, records 1 through 50 displayed)
MSA Name MSA Code Division County Name County
Code
State One-Family Two-Family Three-Family Four-Family Last Revised Limit Year
KNOXVILLE, TN (MSA) 28940   ANDERSON 001 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
SHELBYVILLE, TN (MICRO) 43180   BEDFORD 003 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   BENTON 005 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   BLEDSOE 007 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
KNOXVILLE, TN (MSA) 28940   BLOUNT 009 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
CLEVELAND, TN (MSA) 17420   BRADLEY 011 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
LA FOLLETTE, TN (MICRO) 29220   CAMPBELL 013 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NASHVILLE-DAVIDSON--MURFREESBORO, TN (MSA) 34980   CANNON 015 TN $393,300 $503,500 $608,600 $756,350 01/01/2009 CY2009
NON-METRO 99999   CARROLL 017 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
JOHNSON CITY, TN (MSA) 27740   CARTER 019 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NASHVILLE-DAVIDSON--MURFREESBORO, TN (MSA) 34980   CHEATHAM 021 TN $393,300 $503,500 $608,600 $756,350 01/01/2009 CY2009
JACKSON, TN (MSA) 27180   CHESTER 023 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   CLAIBORNE 025 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   CLAY 027 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NEWPORT, TN (MICRO) 35460   COCKE 029 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
TULLAHOMA, TN (MICRO) 46100   COFFEE 031 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   CROCKETT 033 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
CROSSVILLE, TN (MICRO) 18900   CUMBERLAND 035 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NASHVILLE-DAVIDSON--MURFREESBORO, TN (MSA) 34980   DAVIDSON 037 TN $393,300 $503,500 $608,600 $756,350 01/01/2009 CY2009
NON-METRO 99999   DECATUR 039 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   DEKALB 041 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NASHVILLE-DAVIDSON--MURFREESBORO, TN (MSA) 34980   DICKSON 043 TN $393,300 $503,500 $608,600 $756,350 01/01/2009 CY2009
DYERSBURG, TN (MICRO) 20540   DYER 045 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
MEMPHIS, TN-MS-AR (MSA) 32820   FAYETTE 047 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   FENTRESS 049 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
TULLAHOMA, TN (MICRO) 46100   FRANKLIN 051 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
HUMBOLDT, TN (MICRO) 26480   GIBSON 053 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   GILES 055 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
MORRISTOWN, TN (MSA) 34100   GRAINGER 057 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
GREENEVILLE, TN (MICRO) 24620   GREENE 059 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   GRUNDY 061 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
MORRISTOWN, TN (MSA) 34100   HAMBLEN 063 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
CHATTANOOGA, TN-GA (MSA) 16860   HAMILTON 065 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   HANCOCK 067 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   HARDEMAN 069 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   HARDIN 071 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
KINGSPORT-BRISTOL-BRISTOL, TN-VA (MSA) 28700   HAWKINS 073 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
BROWNSVILLE, TN (MICRO) 15140   HAYWOOD 075 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   HENDERSON 077 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
PARIS, TN (MICRO) 37540   HENRY 079 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NASHVILLE-DAVIDSON--MURFREESBORO, TN (MSA) 34980   HICKMAN 081 TN $393,300 $503,500 $608,600 $756,350 01/01/2009 CY2009
NON-METRO 99999   HOUSTON 083 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   HUMPHREYS 085 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
COOKEVILLE, TN (MICRO) 18260   JACKSON 087 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
MORRISTOWN, TN (MSA) 34100   JEFFERSON 089 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   JOHNSON 091 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
KNOXVILLE, TN (MSA) 28940   KNOX 093 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   LAKE 095 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
NON-METRO 99999   LAUDERDALE 097 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009
LAWRENCEBURG, TN (MICRO) 29980   LAWRENCE 099 TN $271,050 $347,000 $419,425 $521,250 01/01/2009 CY2009

Selection criteria
Sorted by: County
State: TN
County:
County Code:
MSA Name:
MSA Code:
Limit Type: FHA Forward
Last Revised:  

The CY2009 basic standard mortgage limits for FHA insured loans are:
      One-family   Two-family   Three-family   Four-family  
  FHA Forward   $271,050.00   $347,000.00   $419,425.00   $521,250.00  
  HECM   $417,000.00      
  HOPE for Homeowners   $550,440.00      
  Fannie/Freddie   $417,000.00   $533,850.00   $645,300.00   $801,950.00  

High cost area limits are subject to a ceiling based on a percent of the Freddie Mac Loan limits
The ceilings for CY2009 are:
      One-family   Two-family   Three-family   Four-family  
  FHA Forward   $625,500.00   $800,775.00   $967,950.00   $1,202,925.00  
  HECM   $417,000.00      
  Fannie/Freddie   $625,500.00   $800,775.00   $967,950.00   $1,202,925.00  

Section 214 of the National Housing Act provides that mortgage limits for Alaska, Guam, Hawaii, and the Virgin Islands may be adjusted up to 150 percent of the new ceilings. This results in new CY2009 ceilings for these areas of:
      One-family   Two-family   Three-family   Four-family  
  FHA Forward   $938,250.00   $1,201,162.00   $1,451,925.00   $1,804,387.00  
  Fannie/Freddie   $938,250.00   $1,201,162.00   $1,451,925.00   $1,804,387.00  



Posted by Ronell Moore on January 7th, 2009 9:14 AMPost a Comment (0)

FHA SECURE CHANGES JULY 2008
June 2nd, 2008 5:46 PM

FHA Secure Changes July 14, 2008 (edit/delete)

 

Criteria

FHASecure  

FHA  95% Cash-out Refinance

FHA to FHA Refinance*

Eligible Loan Types

•·       Current conventional fixed-rate or ARM loan.

•·       Delinquent conventional ARM loan.

•o         Delinquency was caused by rate reset (recast) or extenuating circumstance but does not affect borrower's overall capacity to repay the FHA loan.

•·        Acceptable loan features include interest only, payment option and negative amortization.

•·      FHA or conventional loan that is seasoned at least 12 months with last 12 payments made within the month due.  Otherwise, limited to 85% LTV.

•·          FHA

Ineligible Loan Types

•·      FHA 

FHA or conventional loans seasoned less than 12 months.  Otherwise limited to 85% LTV.

•·      Conventional

LTV

•·          Standard LTV on FHA first mortgage.

•·          In addition to standard rate and term maximum mortgage calculation may include arrearages (PITI) incurred after reset or extenuating circumstance.

•·          Current appraised value is used to determine maximum loan amount.

•·          No seasoning requirement for purchase money seconds.

•·          Equity line in excess of $1000 advanced in last 12 months is not eligible for inclusion (unless documented for repair/renovation of subject property).

•·      Up to 95% LTV on FHA first mortgage that does not exceed $417,000.  Otherwise limited to 85% LTV.

•·      Standard cash-out maximum mortgage calculation up to 95%.

•·      Current appraised value is used in determining maximum loan amount.

•·      There are no seasoning requirements for subordinate liens.

•·      Standard LTV on FHA first mortgage.

•·      Standard rate and term maximum mortgage calculation.

•·      Current appraised value is used in determining maximum loan amount.

•·      No seasoning requirement for purchase money seconds.

•·      Equity line in excess of $1000 advanced in last 12 months is not eligible for inclusion (unless documented for repairs/renovation of subject property).

CLTV

•·          Unlimited CLTV for new subordinate financing.

•·          Unlimited CLTV for re-subordination or modification of existing subordinate financing.

•·      Unlimited CLTV for re-subordination and/or modification of existing subordinate financing. Also applicable for FHA first mortgages limited to 85% LTV.

 

•·      Standard FHA CLTV ratio on new subordinate financing: the combined 1st and 2nd liens do not exceed the applicable FHA LTV and maximum mortgage limit for the area.

•·      Unlimited CLTV for re-subordination or modification of existing subordinate financing.

 


Criteria

FHASecure

FHA 95% Cash-out Refinance

FHA to FHA Refinance*

Underwriting

  

FHA First Mortgage

•·     Borrower is delinquent but mortgage payment history shows that:

•o   during the 6 months prior to reset or extenuating circumstance there are no instances of making mortgage payments outside the month due; or

•o   during the 12 months prior to reset or extenuating circumstance there are no more than 1x60 late payment or 2x30 late payments; or

•o   no more than 1x90 or 3x30 during the 12 months prior to reset or extenuating circumstance provided the LTV on the FHA first does not exceed 90%.

•·Delinquency was caused by rate reset or extenuating circumstance but does not affect borrower's overall capacity to repay the FHA loan.

•·Borrower delinquent on IO and/or payment option ARMs must demonstrate that they were making their monthly mortgage payments within the month due during the 6 months prior to rate reset.

•·      Standard 31/43 ratios may be exceeded with compensating factor(s), except for loans limited to 90% LTV mortgage payment history.

•·       Non-occupant co-borrowers may be added.

FHA First Mortgage

•·      Borrower must have owned property for 12 months AND if encumbered by a mortgage made payments for the last 12 months within the month due.  Otherwise limited to 85% LTV.

•·      Standard 31/43 ratios, may be exceeded with compensating factor(s).

•·      Non-occupant co-borrowers may not be added for 95% cash-out refinance transactions but are permissible for those limited to 85% LTV.

FHA First Mortgage

•·      Borrower must be current and have an acceptable mortgage payment history.

•·      Standard 31/43 ratios, may be exceeded with compensating factor(s).

•·      Non-occupant co-borrowers may be added.

Secondary Financing

•·     If payments on the second are required, they must be included in the qualifying borrower unless deferred for a period of at least 36 months. 

•·      Secondary financing must meet the following requirements:

•ü  No prepayment penalty

•ü  No balloon payments less than 10 years

•ü  Payments on FHA 1st and subordinate liens, plus other housing expenses, cannot exceed borrower's capacity to repay.

•ü  Any periodic payments due on the second mortgage are due monthly and are essentially the same in dollar amount.

Secondary Financing

•·      If payments on the second are required, they must be included in qualifying the borrower.

•·      Secondary financing must meet the following requirements:

•ü  No prepayment penalty

•ü  No balloon payments less than 10 years

•ü  Payments on FHA 1st and subordinate liens, plus other housing expenses, cannot exceed borrower's capacity to repay.

•ü  Any periodic payments due on the second mortgage are due monthly and are essentially the same in dollar amount.

Secondary Financing

•·      If payments on the second are required, they must be included in qualifying the borrower.

•·      Secondary financing must meet the following requirements:

•ü  No prepayment penalty

•ü  No balloon payments less than 10 years

•ü  Payments on FHA 1st and subordinate liens, plus other housing expenses, cannot exceed borrower's capacity to repay.

•ü  Any periodic payments due on the second mortgage are due monthly and are essentially the same in dollar amount.

FHA Identifier

•·     Conventional not delinquent

•·     Conventional delinquent

Conventional not delinquent

FHA  to FHA Refinance, use appropriate identifier

New Mortgage

FHA Fixed, 1-year ARM or hybrid ARM

FHA Fixed, 1-year ARM or hybrid ARM

FHA Fixed, 1-year ARM or hybrid ARM

Mortgage Insurance

Delinquent

Current

1.5% UFMIP and .50% Annual Premium

1.5% UFMIP and .50% Annual Premium

2.25% UFMIP and .55% Annual Premium when LTV > 95%

1.5% UFMIP and .50% Annual Premium

 


Criteria

FHASecure

FHA 95% Cash-out  Refinance

FHA to FHA Refinance*

Expiration

Delinquency and/or > Std FHA CLTV Ratio:

Current and =/< Std FHA CLTV Ratio:

Permanent

Permanent

Applications on/or before 12/31/08

Permanent

Documentation Requirements

In addition to standard FHA documentation requirements, the following documents are needed for FHASecure:

•·          Evidence of the current loan type and reset date such as the current ARM Mortgage Note or Rider, if applicable.

•·          Evidence of occurrence of extenuating circumstance(s), if applicable.

•·          Explanation letter from borrower for delinquency and/or missed payments.

•·          Evidence that the payment history for the 6 months prior to reset had no payments outside the month due (credit report, payment history, etc); OR

•·          Evidence that the payment history has no more than 1x60 late payment or 2x30 late payments in the last 12 months (credit report, payment history, etc); OR

•·          Evidence that the payment history has no more than 1x90 or 3x30 late payments in the last 12 months.

•·          Include evidence of partial forbearance, if applicable.

•·          Evidence of terms and conditions of secondary financing, if applicable.

•·          MCAW (LT) with comments from the underwriter in the Remarks section to document decision that reset or temporary financial setback caused the loan to become delinquent.

Standard FHA documentation requirements

Standard FHA documentation requirements

Other

All other standard FHA requirements apply

All other standard FHA requirements apply

All other standard FHA requirements apply


Posted by Ronell Moore on June 2nd, 2008 5:46 PMPost a Comment (0)

A Life-Changing Procedure
June 2nd, 2008 5:44 PM

A Life-Changing Procedure

The eyes are the windows of the soul. So, to the person you are capable of

becoming, each evening, just before you go to bed, stand in front of a mirror

alone and in the first-person, present tense, look yourself in the eye and repeat

with passion and enthusiasm paragraphs A, B, C and D. Repeat this process

every morning and every evening from this day forward. Within one week you

will notice remarkable changes in your life. After thirty days add the procedure

at the bottom of this card.

“I, ___________, am an honest, intelligent, organized, responsible, committed,

teachable person who is sober, loyal, and clearly understands that regardless of

who signs my paycheck I am self-employed. I am an optimistic, punctual,

enthusiastic, goal-setting, smart working self-starter who is a

disciplined, focused, dependable, persistent positive thinker with

great self-control, and am an energetic and diligent team player and

hard worker who appreciates the opportunity my company and the

free enterprise system offer me. I am thrifty with my resources and

apply common sense to my daily tasks. I take honest pride in my competence,

appearance and manners, and am motivated to be and do my best so that my

healthy self-image will remain on solid ground. These are the qualities which

enable me to manage myself and help give me employment security in a nojob-

security world.

“I, ____________, am a compassionate, respectful encourager who is a

considerate, generous, gentle, patient, caring, sensitive, personable, attentive,

fun-loving person. I am a supportive, giving and forgiving, clean, kind,

unselfish, affectionate, loving, family-oriented human being and I am a

sincere and open-minded good listener and a good-finder who is

trustworthy. These are the qualities which enable me to build good

relationships with my associates, neighbors, mate and family.

“I, ____________, am a person of integrity, with the faith and wisdom

to know what I should do and the courage and convictions to follow through.

I have the vision to manage myself and to lead others. I am authoritative,

confident, and humbly grateful for the opportunity life offers me. I am

fair, flexible, resourceful, creative, knowledgeable, decisive and an

extra-miler with a servant’s attitude who communicates well with

others. I am a consistent, pragmatic teacher with character and a

finely-tuned sense of humor. I am an honorable person and am

balanced in my personal, family and business life, and have a passion for

being, doing and learning more today so I can be, do and have more tomorrow.

“These are the qualities of the winner I was born to be and I am fully committed

to developing these marvelous qualities with which I have been entrusted.

Tonight I’m going to sleep wonderfully well. I will dream powerful, positive

dreams. I will awaken energized and refreshed; tomorrow’s going to be

magnificent and my future is unlimited. Recognizing, claiming and

developing these qualities which I already have gives me a

legitimate chance to be happier, healthier, more prosperous, more

secure, have more friends, greater peace of mind, better family

relationships and legitimate hope that the future will be even better.”

Repeat the process the next morning and close by saying, These are

the qualities of the winner I was born to be and I will develop and use these

qualities to achieve my worthy objectives. Today is a brand new day and its

mine to use in a marvelously productive way.

After 30 days, add the next step:

Choose your strongest quality and the one you feel needs the most work.

Example: Strongesthonest. Needs most workorganized. On a separate

3x5 card, print I, ___________, am a completely honest person and every day

I am getting better and better organized.Keep this 3x5 card handy and read

it out loud at every opportunity for one week. Repeat this process with the

second strongest quality and the second one which needs the most work. Do

this until youve completed the entire list. Use this self-talk procedure as long

as you want to get more of the things money will buy and all of the things

money wont buy.

Note: Because of some painful experiences in the past (betrayal, abuse, etc.), there might be a word

or two that brings back unpleasant memories (example: discipline). Eliminate the word or

substitute another word.


Posted by Ronell Moore on June 2nd, 2008 5:44 PMPost a Comment (0)

FHA Credit Policy Manual
May 15th, 2008 5:58 PM

FHA Credit Policy Manual

Page 1 of 139 Revision 5.6.2008

THIS INFORMATION IS TO BE PROVIDED EXCLUSIVELY TO MORTGAGE PROFESSIONALS/REFERRAL SOURCES AND IS NOT INTENDED FOR PUBLIC USE. THIS IS NOT AN ADVERTISEMENT TO EXTEND CONSUMER CREDIT AS DEFINED IN REGULATION Z,

§226.2. ALL LOANS ARE SUBJECT TO CREDIT AND PROPERTY APPROVAL. PROGRAMS, RATES, TERMS AND CONDITIONS ARE SUBJECT TO CHANGE WITHOUT NOTICE. NOT ALL PRODUCTS ARE AVAILABLE IN ALL STATES OR FOR ALL LOAN AMOUNTS.

OTHER RESTRICTIONS APPLY. ALL RIGHTS RESERVED. 01/09/08

The Credit Policy Manual makes reference to “The Lender”. The Lender shall at all times refer to the institution or

business which is to ultimately fund or purchase the mortgage loan. Any outside business or entity involved, at

any time, in the process of the originating, processing, underwriting, or closing of the mortgage must comply with

The Lender’s credit policy as set forth in this manual.

Any discrepancies between this Credit Policy Manual and published Product Profiles will defer to whichever has

the most recent revision date. This manual was last revised REVISION 5.6.2008.

To Search this manual, Click Edit on your menu bar, and then Click Find; or type CTRL F. Enter a

simple keyword to search for. Adobe Acrobat will only search for the phrase exactly as you type it.

You may also click the Binoculars Icon in Adobe Acrobat, which will provide more search

options.

CHAPTER 1 – ELIGIBILITY REQUIREMENTS ....................................................................................................... 9

INTRODUCTION........................................................................................................................................................ 9

UNDERWRITING PHILOSOPHY .................................................................................................................................. 9

IMPLEMENTING CREDIT POLICY................................................................................................................................ 9

REGULATORY ISSUES............................................................................................................................................ 10

GUIDELINE CHANGES ............................................................................................................................................ 10

PRODUCT AVAILABILITY......................................................................................................................................... 10

SECTION 100.00 – GENERAL ELIGIBILITY ISSUES .................................................................................................... 10

100.01 - Applicant’s Age................................................................................................................................ 10

100.02 - Co-Borrower/Co-Signer.................................................................................................................... 11

100.03 - Foreign Documentation .................................................................................................................... 11

100.04 - Non-Borrowing/Non-Purchasing Spouse ......................................................................................... 11

100.05 - Residency Status............................................................................................................................. 11

100.06 - Trust Eligibility Criteria...................................................................................................................... 12

Checklist for Inter Vivos Revocable Trusts...................................................................................................... 12

SECTION 101.00 – OCCUPANCY ............................................................................................................................. 13

101.01 – Owner Occupied Principle Residence.............................................................................................. 13

CHAPTER 2 - FHA FINANCING........................................................................................................................... 14

SECTION 200.00 – INTRODUCTION......................................................................................................................... 14

SECTION 201.00 – BASIC ELIGIBILITY GUIDELINES................................................................................................... 14

201.01 - Case Number Assignment ............................................................................................................... 14

201.02 - Credit Alert Interactive Voice Response System (CAIVRS)............................................................. 14

201.03 - LDP and Federal Procurement / Non-Procurement ......................................................................... 15

201.04 - Citizenship and Residency Status.................................................................................................... 15

SECTION 202.00 – MAXIMUM LOAN LIMITS.............................................................................................................. 16

202.01 - Statutory Loan Limits........................................................................................................................ 16

202.02 - Loan-to-Value Limitations................................................................................................................. 16

SECTION 203.00 – TRANSACTIONS AFFECTING MORTGAGE CALCULATIONS ............................................................. 17

203.01 - Identity of Interest Transactions ....................................................................................................... 17

203.02 - Non-Occupying Co-Applicants ......................................................................................................... 17

203.03 - Three and Four Unit Properties........................................................................................................ 17

203.04 - Building on Own Land ...................................................................................................................... 18

203.05 - Military Impact Areas........................................................................................................................ 19

SECTION 204.00 – HUD OWNED PROPERTIES (PROPERTY DISPOSITION SALES)...................................................... 20

204.01 - Appraisal Requirements ................................................................................................................... 20

204.02 - HUD REO Marketing Approaches.................................................................................................... 21

204.03 - Sales Contract Requirements .......................................................................................................... 21

204.04 - Case Number Processing ................................................................................................................ 22

FHA Credit Policy Manual

Revision 5.6.2008 Page 2 of 139

204.05 - Mortgagee Appraisal and Property Review Requirements .............................................................. 22

204.06 - Maximum Mortgage Amount and Minimum Cash Investment ......................................................... 23

204.07 - Valuation of Real Estate Owned Properties..................................................................................... 23

SECTION 205.00 – ACQUISITION............................................................................................................................ 26

205.01 - Closing Cost Adjustments to Loan to Value..................................................................................... 26

205.02 - Closing Costs Guidelines ................................................................................................................. 26

205.03 - Seller Contributions .......................................................................................................................... 27

205.04 - Sales Concessions/Inducements to Purchase................................................................................. 27

SECTION 206.00 – PURCHASE TRANSACTIONS........................................................................................................ 28

206.01 - Owner Occupied Principal Residence.............................................................................................. 28

206.02 - Second Home/Secondary Residences............................................................................................. 28

206.03 - Non-Owner Occupied/Investment Properties................................................................................... 29

206.04 - FHA Refinance Transactions ........................................................................................................... 29

206.05 - Property Flipping .............................................................................................................................. 30

206.06 – Recently Listed Properties................................................................................................................ 32

206.07 – Good Neighbor Next Door ................................................................................................................ 32

SECTION 207.00 – NO CASH OUT REFINANCES ...................................................................................................... 33

207.01 - Purchasing Ex-Spouse’s/Co-Borrower Equity.................................................................................. 34

SECTION 208.00 – CASH OUT REGULAR REFINANCE............................................................................................... 34

SECTION 209.00 – STREAMLINE REFINANCES ......................................................................................................... 35

209.01 - Streamline Refinances Without Appraisals ...................................................................................... 35

209.02 - Streamline Refinances With Appraisals (No Credit Qualifying) ....................................................... 36

209.03 - Credit Qualifying Streamline Refinances.......................................................................................... 36

209.04 - MIP Refund for FHA-to-FHA Refinances ......................................................................................... 37

209.05 - Subordinate Financing for Streamline Refinances........................................................................... 37

209.06 - Adding or Deleting Individuals to Title on Streamline Refinance ..................................................... 37

209.07 - Streamline Refinance ARM-to-ARM Rate........................................................................................ 37

209.08 - Streamline Refinance ARM-to-Fixed Rate ....................................................................................... 38

209.09 - Streamline Refinance FHA Hybrid ARM-to-Fixed Rate ................................................................... 38

209.10 - Streamline Refinance Fixed Rate-to-ARM Rate .............................................................................. 38

209.11 - Appraisals for Streamline Refinance ................................................................................................ 38

SECTION 210.00 – NEW CONSTRUCTION ................................................................................................................ 38

210.01 - Construction Definitions ................................................................................................................... 38

210.02 - Requirements for New Properties .................................................................................................... 39

210.03 - Checklist for New Properties – Stick Built ........................................................................................ 40

210.04 - Checklist for Manufactured Housing ................................................................................................ 42

SECTION 211.00 – SUBORDINATE FINANCING ......................................................................................................... 43

211.01 - Secondary Financing from Federal, State and Local Government Agencies .................................. 43

211.02 - Secondary Financing from Non-Profit Agencies Considered Instrumentality’s ............................... 43

211.03 - Secondary Financing from Other Organizations and Private Individuals......................................... 44

211.04 - Grants.............................................................................................................................................. 44

SECTION 212.00 – TEMPORARY INTEREST RATE BUY DOWN ................................................................................... 44

SECTION 213.00 – 203(H) DISASTER RELIEF .......................................................................................................... 45

213.01 - Mortgage Insurance for Disaster Victims ......................................................................................... 45

213.02 - Program and Underwriting Requirements........................................................................................ 45

213.03 - Underwriting Guidance..................................................................................................................... 45

213.04 - Borrower Eligibility ............................................................................................................................ 46

213.05 - Credit ............................................................................................................................................... 46

213.06 - Income............................................................................................................................................. 46

213.07 - Qualifying Ratios .............................................................................................................................. 46

213.08 - Assets.............................................................................................................................................. 46

213.09 - Liabilities.......................................................................................................................................... 46

SECTION 214.00 – MORTGAGE INSURANCE PREMIUMS (MIP) .................................................................................. 47

214.01 - Upfront and Annual MIP Chart Mortgage Term More Than 15 Yrs ................................................. 47

214.02 - Upfront and Annual MIP Chart Mortgage Term 15 Years or Less ................................................... 47

SECTION 215.00 – UNDERWRITING DOCUMENTATION.............................................................................................. 47

215.01 – Face to Face Interview ..................................................................................................................... 47

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215.02 - Home Inspection/Lead Paint Hazard Notice .................................................................................... 47

215.03 - Social Security Number Validation ................................................................................................... 48

215.04 - Pay stubs/Verification of Employment.............................................................................................. 48

215.05 - Current Bank Statement/Verification of Deposit............................................................................... 48

215.06 - Real Estate Certification.................................................................................................................. 48

215.07 - Notice to Homebuyer....................................................................................................................... 48

215.08 - Amendatory Clause......................................................................................................................... 48

215.09 - FHA Sales Contract/Purchase Agreement....................................................................................... 48

215.10 - Hotel and Transient Use Certification............................................................................................... 49

215.11 - Mortgage Credit Analysis Worksheet (MCAW)................................................................................ 49

215.12 - Changes to Approved FHA Loans.................................................................................................... 49

215.13 - Use of More Than One DE Underwriter ........................................................................................... 49

215.14 - Qualifying the FHA Loan .................................................................................................................. 49

215.15 - Adjustable Rate Mortgages .............................................................................................................. 50

SECTION 216.00 – ASSUMABILITY OF FHA LOANS................................................................................................... 50

CHAPTER 3 - CREDIT.......................................................................................................................................... 51

SECTION 300.00 – INTRODUCTION......................................................................................................................... 51

SECTION 301.00 – DOCUMENTING CREDIT.............................................................................................................. 51

SECTION 302.00 – CREDIT HISTORY....................................................................................................................... 51

SECTION 303.00 – PREVIOUS RHCDS LOAN.......................................................................................................... 52

SECTION 304.00 – OTHER FEDERAL DEBTS............................................................................................................ 52

SECTION 305.00 – RESIDENTIAL MORTGAGE CREDIT REPORT................................................................................. 52

305.01 - Three Repository Merged Credit Report .......................................................................................... 53

305.02 - Unacceptable Credit Reporting Practices ........................................................................................ 53

305.03 - Credit Reports on Non-Borrowing Spouses ..................................................................................... 54

305.04 - Separate Verifications of Credit........................................................................................................ 54

305.05 - Non-Traditional Forms of Credit ....................................................................................................... 54

305.06 - Document Expiration Dates.............................................................................................................. 55

305.07 - Credit Explanation Letters ................................................................................................................ 55

SECTION 306.00 – REVIEWING CREDIT HISTORY / ANALYSIS OF RISK ...................................................................... 56

306.01 – Non-Traditional Credit Verification and Evaluation........................................................................... 56

306.02 - Applicant’s Willingness to Repay Debt/Manual Underwriting........................................................... 57

306.03 - Debt Payoff/Pay Down ..................................................................................................................... 58

306.04 - Paying Down Debt to Qualify ........................................................................................................... 58

SECTION 307.00 – CREDIT AND LIABILITY DOCUMENTATION..................................................................................... 58

307.01 - Alimony/Separate Maintenance ....................................................................................................... 58

307.02 - Automobile Leases.......................................................................................................................... 59

307.03 - Bankruptcy....................................................................................................................................... 59

307.04 - Business Debts (Self-employed Applicant) Corporations ................................................................ 60

307.05 - Child Care........................................................................................................................................ 60

307.06 - Child Support................................................................................................................................... 60

307.07 - Collection Accounts......................................................................................................................... 60

307.08 - Consumer Credit Counseling Services (CCCS)............................................................................... 60

307.09 - Contingent Liability/Co-Signed-Debts .............................................................................................. 61

307.10 - Deed in Lieu of Foreclosure ............................................................................................................. 61

307.11 - Delinquent Housing (Mortgage or Rental)........................................................................................ 61

307.12 - Delinquencies – Installment ............................................................................................................. 62

307.13 - Delinquencies - Revolving................................................................................................................ 62

307.14 - Delinquent Federal Debt-FHA .......................................................................................................... 62

307.15 - Defaulted Student Loans.................................................................................................................. 63

307.16 – Deferred Loans................................................................................................................................ 63

307.17 - Employee Savings Plan Loans (401K, etc.)..................................................................................... 63

307.18 – Foreclosure/Primary Residence ....................................................................................................... 63

307.19 - Foreclosures on Second Homes or Investment Property ................................................................ 63

307.20 - Garnishment.................................................................................................................................... 63

307.21 - Judgments ....................................................................................................................................... 64

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307.22 - Lawsuits........................................................................................................................................... 64

307.23 - Military Allotments ............................................................................................................................ 64

307.24 - Military Advance Pay........................................................................................................................ 64

307.25 - Mortgage History .............................................................................................................................. 64

307.26 - Mortgages........................................................................................................................................ 65

307.27 - Mortgages - Relocating Applicant .................................................................................................... 65

307.28 - Non-Borrowing Spouse/Non-Purchasing Spouse............................................................................ 65

307.29 - Projected Liabilities.......................................................................................................................... 66

307.30 - Real Estate Expense........................................................................................................................ 66

307.31 - Rental Loss...................................................................................................................................... 66

307.32 - Revolving Accounts......................................................................................................................... 66

307.33 - Installment Accounts ........................................................................................................................ 66

307.34 - Tax Liens ......................................................................................................................................... 66

307.35 - Term Notes...................................................................................................................................... 67

307.36 - Debts Owed to Relatives.................................................................................................................. 67

307.37 - Margin Loans/Stock Accounts.......................................................................................................... 67

307.38 - Repossessions ................................................................................................................................ 67

307.39 - Employment/Job Related Expense .................................................................................................. 68

307.40 - Short Pays at Loan Payoff................................................................................................................ 68

307.41 - Rent Payments ................................................................................................................................ 68

307.42 - NSF / Non-Sufficient Funds.............................................................................................................. 68

SECTION 308.00 – EXTENUATING CIRCUMSTANCES ................................................................................................ 68

308.01 - Examples of Extenuating Circumstances......................................................................................... 69

308.02 - Situations That Do Not Qualify as Extenuating Circumstances ....................................................... 69

308.03 - Financial Mismanagement ............................................................................................................... 69

SECTION 309.00 – RE-ESTABLISHING CREDIT......................................................................................................... 69

SECTION 310.00 – REVIEWING QUALIFYING............................................................................................................ 70

310.01 - Applicant’s Qualifying Ratios............................................................................................................ 70

310.02 - An Increase in Obligations ............................................................................................................... 70

SECTION 311.00 – QUALIFYING THE APPLICANT...................................................................................................... 70

311.01 - Monthly Housing Expense................................................................................................................ 70

311.02 - Total Monthly Obligations................................................................................................................. 71

311.03 - Long Term Obligations ..................................................................................................................... 71

311.04 - Qualifying Ratios .............................................................................................................................. 71

CHAPTER 4 - INCOME......................................................................................................................................... 72

SECTION 400.00 – INTRODUCTION......................................................................................................................... 72

400.01 - Income History................................................................................................................................. 72

400.02 - Stable Earnings ............................................................................................................................... 72

400.03 - Continuance of Income .................................................................................................................... 72

SECTION 401.00 – DOCUMENTING INCOME ............................................................................................................. 72

401.01 - Alternative Documentation ............................................................................................................... 73

401.02 - Written Verification of Employment .................................................................................................. 73

401.03 - Income Tax Returns ......................................................................................................................... 73

401.04 - Reviewing Employment Documentation........................................................................................... 74

SECTION 402.00 – CALCULATING INCOME............................................................................................................... 74

402.01 - Calculating Variable Forms of Income ............................................................................................. 74

402.02 - Source of Income ............................................................................................................................. 75

402.03 - Non-Taxable Income ........................................................................................................................ 75

SECTION 403.00 – TYPES OF INCOME..................................................................................................................... 76

403.01 – Alimony / Separate Maintenance ..................................................................................................... 76

403.02 – Auto Allowance................................................................................................................................ 76

403.03 - Bonus .............................................................................................................................................. 76

403.04 – Capital Gains ................................................................................................................................... 76

403.05 - Child Support................................................................................................................................... 77

403.06 - Clergy .............................................................................................................................................. 77

403.07 - Commission..................................................................................................................................... 77

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403.08 - Contractor/Consultant...................................................................................................................... 77

403.09 - Disability .......................................................................................................................................... 78

403.10 - Dividends and Interest...................................................................................................................... 78

403.11 - Family Owned Business................................................................................................................... 78

403.12 - Foster Care Income/Court Ordered Custody ................................................................................... 78

403.13 - Foreign Income................................................................................................................................ 78

403.14 - Government Assistance Programs................................................................................................... 79

403.15 - IRA/KEOGH Distributions................................................................................................................. 79

403.16 - Military (Active Duty)......................................................................................................................... 79

403.17 - Mortgage Differential Payments ....................................................................................................... 79

403.18 - Notes Receivable ............................................................................................................................. 79

403.19 - Overtime .......................................................................................................................................... 80

403.20 - Partnership Income .......................................................................................................................... 80

403.21 - Pension/Retirement .......................................................................................................................... 80

403.22 – W2 Professional Salaried Income .................................................................................................... 81

403.23 - Projected Income............................................................................................................................. 81

403.24 - Rental Income ................................................................................................................................. 81

403.25 - Reservist/National Guard ................................................................................................................. 82

403.26 - Room and Board .............................................................................................................................. 82

403.27 - Seasonal Employment..................................................................................................................... 82

403.28 - Second Job...................................................................................................................................... 82

403.29 - Shift Differential ............................................................................................................................... 83

403.30 - Social Security - Retirement............................................................................................................. 83

403.31 - Social Security -- Surviving Spouse and Child or Payments to Family Members............................ 83

403.32 - Temporary Employment ................................................................................................................... 83

403.33 - Tips.................................................................................................................................................. 83

403.34 - Trailing Spouse................................................................................................................................ 83

403.35 - Truck Drivers ................................................................................................................................... 84

403.36 - Trust Income.................................................................................................................................... 84

403.37 - Unemployment Compensation ......................................................................................................... 84

403.38 - Union Member................................................................................................................................. 84

403.39 - VA Benefits...................................................................................................................................... 84

403.40 - Workers Compensation................................................................................................................... 85

403.41 - Lottery Income................................................................................................................................. 85

SECTION 404.00 – SPECIAL INCOME CRITERIA ........................................................................................................ 85

404.01 - Maternity Leave............................................................................................................................... 85

404.02 - Payroll/Leasing Company Employees.............................................................................................. 85

404.03 - Unacceptable Forms of Income ....................................................................................................... 86

SECTION 405.00 – SELF-EMPLOYED APPLICANT ..................................................................................................... 86

405.01 - Length of Self-Employment .............................................................................................................. 86

SECTION 406.00 – SELF-EMPLOYED BUSINESS STRUCTURES.................................................................................. 86

406.01 - Sole Proprietorship ........................................................................................................................... 86

406.02 - Partnership ...................................................................................................................................... 87

406.03 - Corporation...................................................................................................................................... 87

406.04 - S Corporation .................................................................................................................................. 87

SECTION 407.00 – SELF-EMPLOYED BORROWERS.................................................................................................. 87

CHAPTER 5 - ASSETS......................................................................................................................................... 90

SECTION 500.00 – INTRODUCTION......................................................................................................................... 90

500.01 - Required Funds ............................................................................................................................... 90

SECTION 501.00 – DOCUMENTING ASSETS............................................................................................................. 90

501.01 - Alternative Documentation ............................................................................................................... 90

501.02 - Written Verification of Deposit (VOD)............................................................................................... 90

SECTION 502.00 – ACCESS TO FUNDS.................................................................................................................... 91

SECTION 503.00 – DETAILS OF THE TRANSACTION (URLA) ..................................................................................... 91

503.01 - Applicants Minimum Investment....................................................................................................... 91

503.02 - Required Reserves.......................................................................................................................... 91

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503.03 - Seller Contributions (Financing Concessions) ................................................................................. 92

503.04 - Sales Concessions.......................................................................................................................... 92

503.05 - Non-Arms Length Transactions........................................................................................................ 92

SECTION 504.00 – SOURCE OF FUNDS / ASSETS TO CLOSE..................................................................................... 93

504.01 - 1031 Exchange................................................................................................................................ 93

504.02 - Bank Account .................................................................................................................................. 93

504.03 - Bridge Loan ..................................................................................................................................... 93

504.04 - Cash ................................................................................................................................................ 94

504.05 - Cash Advance on Credit Card.......................................................................................................... 94

504.06 - Cash Saved at Home ....................................................................................................................... 95

504.07 – Collateralized/Secured Loans........................................................................................................... 95

504.08 - Commission From Sale of Subject Property .................................................................................... 95

504.09 - Corporate Funds.............................................................................................................................. 95

504.10 - Currency Conversions..................................................................................................................... 95

504.11 - Earnest Money Deposit .................................................................................................................... 96

504.12 - Employee Savings Plans (401K)..................................................................................................... 96

504.13 - Gambling or Lottery Winnings .......................................................................................................... 96

504.14 - Gifts ................................................................................................................................................. 96

504.15 - Gift of Equity .................................................................................................................................... 97

504.16 - Gift From a Relative......................................................................................................................... 97

504.17 - Gift from an Employer, Church, Municipality or Non-Profit .............................................................. 98

504.18 - Gift of Equity .................................................................................................................................... 98

504.19 - Government Bonds.......................................................................................................................... 99

504.20 - Grant................................................................................................................................................ 99

504.21 - Inheritance....................................................................................................................................... 99

504.22 - Lawsuit or Insurance Settlement ...................................................................................................... 99

504.23 - Relocation Benefits.......................................................................................................................... 99

504.24 - Relocation Equity Buyout ............................................................................................................... 100

504.25 - Rent Credit (Equity) ........................................................................................................................ 100

504.26 - Pension Plan ................................................................................................................................. 100

504.27 - Salary Advance .............................................................................................................................. 100

504.28 - Sale of Assets................................................................................................................................ 100

504.29 - Sale of Real Estate......................................................................................................................... 101

504.30 - Sale of Real Estate – Joint Ownership........................................................................................... 101

504.31 - Savings as a Source of Funds ....................................................................................................... 101

504.32 - Savings Bonds............................................................................................................................... 102

504.33 - Stocks............................................................................................................................................ 102

504.34 - Sweat Equity.................................................................................................................................. 102

504.35 - Tax Refunds .................................................................................................................................. 102

504.36 - Trade Equity .................................................................................................................................. 103

504.37 - Unsecured Loan ............................................................................................................................. 103

504.38 - Unverifiable Source of Funds ......................................................................................................... 104

504.39 - Life Insurance Cash Value ............................................................................................................. 104

CHAPTER 6 - APPRAISALS.............................................................................................................................. 105

SECTION 600.00 – PROPERTY AND APPRAISAL OVERVIEW .................................................................................... 105

600.01 - Ineligible Properties ........................................................................................................................ 105

600.02 - Types of Appraisals & Requirements............................................................................................. 105

600.03 - Appraisal and Inspection Report Forms......................................................................................... 106

600.04 - HUD Form 92051 – Compliance / Repair Inspection Report ......................................................... 106

600.05 - As Is Appraisals............................................................................................................................. 107

SECTION 601.00 – UNIQUE PROPERTIES............................................................................................................... 107

601.01 - Dome Homes................................................................................................................................. 107

601.02 - Earth Sheltered Homes .................................................................................................................. 107

601.03 - Leasehold Estates .......................................................................................................................... 107

601.04 - Log Homes .................................................................................................................................... 108

601.05 - Manufactured Homes ..................................................................................................................... 108

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601.06 - Mixed Use Property....................................................................................................................... 109

601.07 - Modular Homes .............................................................................................................................. 109

601.08 - Rural Property/ Excess Land.......................................................................................................... 109

601.09 - Limited Access Properties (Flag Lots)............................................................................................ 110

SECTION 602.00 – THE APPRAISER ...................................................................................................................... 110

602.01 - FHA Appraisers .............................................................................................................................. 110

602.02 - Responsibilities of the Appraiser .................................................................................................... 111

602.03 - Unacceptable Appraisal Practices.................................................................................................. 111

SECTION 603.00 – APPRAISAL REQUESTS AND DOCUMENTATION .......................................................................... 112

603.01 - Converting a VA Appraisal to FHA................................................................................................. 112

603.02 - Appraisal Extension / Reuse .......................................................................................................... 112

603.03 - Appraisal Expiration Dates ............................................................................................................. 113

603.04 - Statement of Limiting Conditions.................................................................................................... 113

603.05 - Required Appraisal Documents...................................................................................................... 113

603.06 - Owner of Record ............................................................................................................................ 113

603.07 - Electronic Imaging/Appraisal Software........................................................................................... 113

603.08 - Photographs .................................................................................................................................. 113

603.09 - Inspections Required By Underwriter............................................................................................. 114

603.10 - Inspections for New Construction................................................................................................... 114

603.11 - Repairs .......................................................................................................................................... 114

603.12 - Lender Certified Repairs ................................................................................................................ 115

SECTION 604.00 – APPRAISAL AND PROPERTY STANDARDS .................................................................................. 115

604.01 - Appraisal Description, Analysis and Adjustments .......................................................................... 116

604.02 - General Requirements ................................................................................................................... 124

604.03 - Negative Time Adjustments ........................................................................................................... 125

604.04 - Comparables ................................................................................................................................. 126

604.05 - Property Located in Areas Affected by Natural Disasters .............................................................. 126

604.06 - Purchase & Refinances/Damage Sustained .................................................................................. 126

604.07 - Value Conclusion and Appraiser Signatures.................................................................................. 127

604.08 - Burglar Bars................................................................................................................................... 127

604.09 - Common Use Agreements ............................................................................................................. 127

604.10 - Disaster Areas ............................................................................................................................... 127

604.11 - Earthquakes Fault Lines................................................................................................................. 128

604.12 - Encroachments.............................................................................................................................. 128

604.13 - Environmental Hazards .................................................................................................................. 128

604.14 - Excess Property/Land or Buildings ................................................................................................ 128

604.15 - Flood Insurance............................................................................................................................. 129

604.16 - Heat and Air Conditioning .............................................................................................................. 129

604.17 - High Pressure Gas and Liquid Petroleum Transmission Lines...................................................... 129

604.18 - Lot Dimension Variances ............................................................................................................... 130

604.19 - Private Road, Alley or Common Drive............................................................................................ 130

604.20 - Structural Damage......................................................................................................................... 130

604.21 - Termite Report Statement .............................................................................................................. 130

604.22 - High Tension Transmission Lines .................................................................................................. 131

604.23 - Zoning............................................................................................................................................ 131

604.24 - Zero Lot Line ................................................................................................................................. 131

604.25 - Underground Fuel Tanks................................................................................................................ 131

SECTION 605.00 – SEWAGE SYSTEMS.................................................................................................................. 132

605.01 - Cesspools...................................................................................................................................... 132

605.02 - Community Sewage Systems ........................................................................................................ 132

605.03 - Septic Systems.............................................................................................................................. 132

SECTION 606.00 – WATER SUPPLY SYSTEMS ....................................................................................................... 133

606.01 – Community Water System.............................................................................................................. 133

606.02 - Individual Wells.............................................................................................................................. 133

606.03 - Individual Springs/Cisterns as a Water Source.............................................................................. 133

606.04 - Shared Wells ................................................................................................................................. 134

SECTION 607.00 – CONDOMINIUMS ...................................................................................................................... 134

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SECTION 608.00 – ENERGY EFFICIENT PROPERTIES ............................................................................................. 134

608.01 - FHA Energy Efficient Mortgages .................................................................................................... 135

SECTION 609.00 – ESCROWS.............................................................................................................................. 138

609.01 - Escrows for New Construction ....................................................................................................... 138

609.02 - Escrow for Repairs or Improvements Existing Construction.......................................................... 138

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CHAPTER 1 – ELIGIBILITY REQUIREMENTS

INTRODUCTION

The Credit Policy Manual was developed to provide associates with a clear understanding of the elements

involved in evaluating the credit worthiness and financial capacity of an applicant, and the adequacy of the

proposed collateral.

Agency guidelines have been summarized and incorporated into the Credit Policy Manual by topic.

The Credit Policy Manual makes reference to “The Lender”. The Lender shall at all times refer to the

institution or business which is to ultimately fund or purchase the mortgage loan. Any outside business

or entity involved, at any time, in the process of the originating, processing, underwriting, or closing of

the mortgage must comply with The Lender’s credit policy as set forth in this manual.

UNDERWRITING PHILOSOPHY

The Lender is engaged in the origination of investment quality loans. The Credit Policy Manual is to provide

direction and consistency in determining the credit decision. The Lender’s intent is to describe the general

underwriting philosophy of the company on mortgage loans, however is not all inclusive of all situations that may

arise from loan to loan. In discussing this general approach we have presented the minimum guidelines

considered necessary for prudent mortgage compliance underwriting, the essential requirement being that the

terms of the loan be related to the probability of the borrower’s repayment and to the value and marketability of

the mortgaged property.

The Lender believes that there is no singular characteristic within a loan file that indicates the quality of a loan.

This concept is incorporated throughout these guidelines. While The Lender will not compromise quality, we are

not simply a ratio or matrix driven company. We will underwrite the entire package, analyzing and weighing all

aspects (i.e. loan to value ratio, collateral value, credit history, assets and in certain instances qualifying ratios).

The Lender’s underwriters approve loans of investment quality risk. All loans will be reviewed with a common

sense approach. Each loan is individually underwritten with emphasis placed on the overall quality of the loan.

Although multiple risk factors are assessed, the underwriter will attempt to balance the evaluation between the

borrower and the property.

As an innovative leader in the mortgage industry, The Lender expects to purchase loans that represent a

marketable risk. The Lender will analyze the performance of a loan based on the collateral, credit characteristics

and overall market conditions. Occasionally, The Lender may apply underwriting criteria, which is either more

stringent or more flexible, depending on the economic conditions of the particular market. The borrower’s loan

package must contain sufficient information to enable the underwriter to reach an informed and knowledgeable

decision.

IMPLEMENTING CREDIT POLICY

It is the responsibility of all associates to become familiar with:

Fair lending regulations; and

The Lender’s stated credit policy;

Laws and regulations that affect mortgage banking.

To assure all applicants of fair and equitable treatment, the underwriters are expected to exhaust all possibilities

before denying a loan. All reasonable alternatives must be considered and presented to the applicant, as a

counter offer, if it appears the loan may be approved under different terms than as submitted.

These efforts must be documented in the system notes or written documentation must be placed in the loan file.

The consideration is to be applied consistently to all loan applications.

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REGULATORY ISSUES

All associates who are involved in the mortgage origination process are expected to comply with all laws and

regulations, which apply to our industry. Each associate is responsible for becoming familiar with, and practicing,

the fair lending regulations set forth by the federal and state government.

Underwriters are especially cautioned to be conscious of the provisions for the Equal Credit Opportunity Act when

evaluating an applicant’s loan request. ECOA ensures that all persons have the same opportunity to obtain

credit. A creditor cannot discriminate against an applicant on the basis of:

Race;

Color;

Religion;

National Origin;

Sex;

Marital Status;

Family Status;

Age;

Receipt of income from a public assistance program; or

The fact that the applicant has exercised any right under the Consumer Credit Protection Act.

GUIDELINE CHANGES

We strive to ensure the Credit Policy manual is current on all issues; however in the event that Credit Policy

differs from specific investor and agency guideline changes, the most current release of the investor or agency

guidelines will apply.

PRODUCT AVAILABILITY

Many of The Lender’s available products are taken from negotiated commitments with investors. As a result of

these commitments, The Lender’s Product Summaries will define loan parameters and special underwriting

considerations when necessary. When information is specified in the Product Summary which conflicts with

existing Credit Policy, the Product Summary takes precedence over the Credit Policy Manual. It is essential that

everyone become familiar with the Product Summaries and be cognizant of variances in:

Documentation requirements;

Eligible Property types;

LTV and CLTV limits;

Mortgage Insurance requirements;

Occupancy limitations;

Qualifying rates on ARM products;

Qualifying ratios; and

Subordinate financing restrictions.

SECTION 100.00 – GENERAL ELIGIBILITY ISSUES

100.01 - Applicant’s Age

There is no maximum age limit for an applicant. The minimum age is the age that the mortgage note can be

legally enforced in the state or other jurisdiction where the property is located.

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100.02 - Co-Borrower/Co-Signer

Co-borrowers take title to the property and obligate themselves on the mortgage and note. A co-signer has no

ownership interest in the property (does not take title) but must execute the loan application and sign the

mortgage note and will be liable for the repayment of the loan. The co-borrower or co-signer’s income, assets,

liabilities, and credit history are included in the determination of creditworthiness. The co-signer must have a

principal residence in the United States and cannot be a party to the transaction such as seller, builder, real

estate agent, etc.

FHA will permit co-borrowers, who take title to the property and obligate themselves on the mortgage note. FHA

will also permit a co-signer with no ownership interest in the property to execute the loan application and

mortgage note and, thus become liable for repayment of the obligation. The co-signer’s income, assets, liabilities,

and credit history are included in the determination of creditworthiness.

Neither a co-borrower nor a co-signer may be a party that has an interest in the transaction, such as the

seller, builder, real estate agent, etc.;

Note: Exceptions may be granted if the seller and the co-borrower/co-signer is a family member of the

occupant owner.

An individual signing the loan application must not be otherwise ineligible for participation in the FHA loan

program;

Unless otherwise exempted, any non-occupying co-borrower or co-signer must have a principle residence in

the United States;

Except for any distinction listed here, all references to co-borrowers, including loan-to-value limitations, will

apply equally to co-signers.

100.03 - Foreign Documentation

Documents received from foreign sources that are not in English must be translated into English by a University

Foreign Language Department, Embassy Official, a recognized authority in translation, or an employee who is not

involved in the loan transaction. A translation to English must be attached to each individual document. The

name, address and telephone number of the translator must be indicated on the translation.

Funds received from a foreign source must be supported by evidence the funds were the applicant’s prior to the

transfer. Evidence of the current currency exchange rate must be provided as support for the amount converted

to US dollars.

100.04 - Non-Borrowing/Non-Purchasing Spouse

The Lender will accept loan applications from married applicants whose spouse is not a part of the loan

transaction. The non-borrowing spouse may be a purchaser and owner of the property, but not a borrower. The

applicant and spouse will take title but the non-borrowing spouse does not disclose any financial information.

Acceptability may vary based on the state law and must be confirmed with local Closing Manager.

The non-borrowing spouse will sign the security instrument if necessary under the applicable statutory or

decisional law of the state to create a valid lien, pass clear title, and waive inchoate rights to property or assigned

earnings. Contact compliance with any questions regarding specific state law.

100.05 - Residency Status

The Lender will purchase or securitize mortgages made to aliens who are lawful permanent or nonpermanent

residents of the United States. We do not specify the precise documentation that a lender must obtain to verify

that a permanent or nonpermanent resident alien borrower is a legal resident of the United States, rather, a lender

should make a determination of the alien’s residency status based on the circumstances of the individual case,

using whatever documentation it deems appropriate. Some products may limit LTV and occupancy based on

residency.

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100.06 - Trust Eligibility Criteria

Subject to the following criteria, an Inter Vivos Revocable Trust (“Trust”) is acceptable as a “borrower and

property owner”. The Trust must be established by a natural person. It may be established solely by one

individual or jointly by more than one individual. Each individual establishing a Trust is a

Trustor/Grantor/Settler/Donor (the Settler); the terminology used will depend upon the applicable state. At least

one of the individuals/Settler must be Primary Beneficiary and an occupying borrower whose income or assets

were used to qualify for the loan. In addition, if no institutional trustee was appointed, this same individual/Settler

must be a Trustee.

In order to consider the Trust as an eligible applicant, the following eligibility requirements must be met:

The Trust must be established by a written document during the lifetime of the individual/Settler establishing

the Trust, to be effective during his or her lifetime.

The Trust must be one in which the individual/Settler establishing the trust has reserved to himself or herself

the right to revoke the Trust during his or her lifetime.

The individual/Settler establishing the Trust must be the primary beneficiary. If there is more than one

individual/Settler, there may be more than one primary beneficiary. The income and/or assets of at least one

of the individuals/Settlers establishing the Trust must be used to qualify for the mortgage and that same

individual/Settler must occupy the subject property and sign the mortgage instruments.

The Trust document must name one or more Trustees to hold legal title to, and manage, the property that has

been placed in the Trust. The Trustees must include either:

at least one of the individuals/Settler establishing the trust, OR

An institutional Trustee that customarily performs trust functions in the relevant state and is authorized to

act as Trustee under the law of such state.

The Trustee must have the power to mortgage the subject property for the purpose of securing a loan to the

party or parties who are the “borrower (s)” under the mortgage Note.

Full title to the subject property (security) must be vested in the Trust(s); there may be no other owners.

A copy of the Trust documents must be provided to the Underwriter when submitting the loan file.

Underwriters are required to review the documents. Using the Trust documents, the Underwriter will

complete the Underwriter’s Checklist for Inter Vivos Revocable Trusts to ensure the Trust conforms to

investor and agency guidelines. The completed Underwriter’s Checklist for Inter Vivos Revocable Trusts

must be a permanent part of the loan file.

Settlement Agents must be instructed that the Mortgage Policy of Title Insurance must state that 1.) Title to

the security property is vested in the Trustee(s) of the Trust and 2.) Take no exception with respect to the

Trustee (s) holding title to the property or to the Trust.

Copies of any Trust documents that the title insurance company required to make its determination regarding

insurance coverage must be included in the loan file submitted to the Underwriting Department.

The title insurance policy must assure full title to The Lender and must state that the title to the subject

property is vested in the Trustee (s) of the Trust. The title policy must not take any exceptions with respect to

the Trustee (s) holding the title to the subject property or to the Trust.

IRS Form W-9 must be completed in the name of the Trust/Trustee (s) and must include either a Tax ID

Number designated for the Trust or the Trustee’s Social Security Number.

Checklist for Inter Vivos Revocable Trusts

Borrowers: __________________________________________________________ Loan Number: ____________

Note: An Inter Vivos Revocable Trust must be established, in writing, by a natural person(s) and may be established either solely or jointly

(more than one Trustor and Primary Beneficiary.) The Trust MUST RUN to at least one of the Borrowers who also is named as a Trustor,

Primary Beneficiary, and Trustee (unless an Institutional Trustee is appointed.)

1. Names of Inter Vivos Revocable Trust (“Trust”): ________________________________________________.

____________________________________________________ dated_______________________________.

2. The Trust is created under the laws of the State of _______________________________________________.

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3. The subject property is located in the State of ___________________________________________________.

(If the Trust state and the property state ARE NOT the same, STOP HERE: the Trust is not eligible.)

4. Trustor(s) / Grantor(s) / Settlor(s) / Donor(s): ____________________________________________________

Primary Beneficiary(ies):____________________________________________________________________.

(If at least one of the Borrowers IS NOT named as both a Primary Beneficiary and a Trustor, STOP HERE: the Trust is not eligible.)

5. Trustee(s): ________________________________________________________________________________

(If at least one of the Borrowers IS NOT named as a Trustee and a Trustor and a Primary Beneficiary, STOP HERE: the Trust is not eligible

UNLESS an Institutional Trustee has been appointed.)

6. At least one of the Borrowers who also is a Trustor and a Primary Beneficiary has reserved the right to REVOKE, alter or amend the

Trust during his/her lifetime.

____ Yes ____ No (If NO, STOP HERE: the Trust is not eligible.)

7. The income and/or assets of at least one of the Borrowers who is both a Trustor and a Primary Beneficiary were used to qualify for the

mortgage.

____ Yes ____ No (If NO, STOP HERE: the Trust is not eligible.)

8. At least on of the Borrowers who is both a Trustor and a Primary Beneficiary will occupy the property.

____ Yes ____ No (If NO, STOP HERE: the Trust is not eligible.)

9. Property is: ____ Primary Residence ____ Second Home (Investment Property is not eligible)

If Trust is acceptable, Loan Approval must request for a Title Policy with NO exception(s) with respect to the Inter Vivos Revocable

Trust.

Comments:

Completed By: Date:

SECTION 101.00 – OCCUPANCY

101.01 – Owner Occupied Principle Residence

A principal residence is a 1-4 unit dwelling that will be the applicant’s primary residence. At least one of the

applicants must occupy the dwelling as a principal residence within 60 days of closing. The following criteria

define residency:

Borrower occupies property as primary residence

Property is occupied by the borrower for a major part of the year

Property is convenient to the borrowers place of employment

Property address on record for Federal income tax reporting and driver’s license

Property possesses physical characteristics to accommodate borrowers immediate family

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CHAPTER 2 - FHA FINANCING

SECTION 200.00 – INTRODUCTION

HUD Case Number and Suffix Codes

Program Type Section of Act Suffix Code

Fixed Rate 203(b) 703

Single Family, PUD’s, Townhomes, and 2-4 Family Buydown 203(b) 796

ARM 203(b) / 251 729

Fixed Rate 234(c) 734

Condos Buydown 234(c) 797

ARM 234(c) / 251 731

The Federal Housing Administration (FHA) administers the single-family housing finance program for the

Department of Housing and Urban Development (HUD). FHA loans are insured by the Federal Government,

which is responsible for developing guidelines and applicant eligibility requirements.

Lenders have been given the ability and responsibility for reviewing and approving mortgages which meet HUD’s

established guidelines. The designated lenders representative responsible for issuing approvals is the Direct

Endorsements (DE) Underwriter.

A number of HUD programs exist which are designed to provide financing in markets where conventional

financing is not readily available. At this time, The Lender offers financing on 1-4 unit dwellings and

condominiums. Fixed rate and one year ARM products are available; please refer to the Product Summaries for

details. The eligible programs are as follows:

Approval must be received from Credit Policy Department to originate loan under HUD programs other than those

listed above. The approval must be received prior to accepting an application for a HUD program not listed

above.

SECTION 201.00 – BASIC ELIGIBILITY GUIDELINES

HUD imposes restrictions, which affect the applicants’ eligibility for FHA mortgages in addition to restrictions

placed on eligible purchases transactions. The intended use or occupancy status of the property and the state of

construction determine its eligibility for FHA mortgage insurance, as well as the percentage of financing available.

Unless otherwise stated, FHA’s single-family programs are limited to owner-occupied principal residences only.

201.01 - Case Number Assignment

The Lender approved correspondent is responsible for obtaining and submitting to Underwriting, the Case

Number Assignment form complete with accurate information.

201.02 - Credit Alert Interactive Voice Response System (CAIVRS)

All Applicants for an FHA loan (except streamline refinances) must be screened using the Credit Alert Interactive

Voice Response System (CAIVRS). The information provided by CAIVRS will be entered onto the Mortgage

Credit Analysis Worksheet (MCAW). If CAIVRS indicated the applicant is presently delinquent or has had a claim

paid within the previous three years, the applicant is not eligible for a new loan. Exceptions to this may be

granted under the following situations:

Assumptions: If the applicant sold the property, with or without a release of liability, to an individual who then

defaulted and it can be established that the loan was not in default at the time of the assumption; the applicant is

eligible for an FHA loan.

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Divorce: An applicant may be eligible is the divorce decree or legal separation agreement awarded the property

and responsibility for payment to the former spouse. However, if a claim was paid on a mortgage, which was in

default at the time of the divorce, the applicant is not eligible for an FHA loan.

Bankruptcy: When the property was included in a bankruptcy that was caused by circumstances beyond the

applicant’s control (such as the death of the principal wage earner; loss of employment due to factory closings,

reduction-in-force, etc., or serious long-term uninsured illness), the applicant may be eligible for an FHA loan.

If it is believed the CAIVRS message is erroneous or if the lender must establish the date of claim payment, the

local HUD Field Office must be contacted for instructions or documentation to support the applicant’s eligibility.

The local HUD offices can provide information regarding when the three-year waiting period has passed or that

the social security number on CAIVRS is an error.

HUD cannot alter or delete CAIVRS information reported from other Federal agencies such as the Department of

Education, Veterans Affair, etc. The applicant must contact those agencies to correct or remove incorrect or

outdated information.

HUD does not require a clear CAIVRS access number but the file must clearly document the justification of an

approval based on one of the three exceptions previously mentioned and the underwriter must note the reason for

the decision Mortgage Credit Analysis Worksheet (MCAW). An exception for an unclear CAIVR number requires

a counter signature from the Regional Underwriting Manager.

201.03 - LDP and Federal Procurement / Non-Procurement

All participants in an FHA loan transaction including sellers, purchasers, real estate agents and builder will be

screened using the HUD published “Limited Denial of Participation” list (LDP) and the General Service

Administration (GSA) “List of Parties Excluded from Federal Procurement or Non-Procurement Programs”. The

lists must be reviewed early in the loan process to avoid customer service issues with applicants or other parties

to the transaction who may be ineligible for an FHA loan.

Dates checked are confirming the information was checked and must be recorded on the MCAW. If the name of

any of the parties to the transaction appears on either list, the application is not eligible for processing and must

be denied for a HUD loan. An exception is made when a seller appears on the LDP list and the property being

sold is the seller’s primary residence. (The file must contain evidence of primary residency to support this

exception).

All information can be found at “www.hud.gov.com” under the lender section.

201.04 - Citizenship and Residency Status

Citizenship of the United States is not required for eligibility. When a mortgage loan applicant indicates on the

loan application that he or she holds something other than U.S. citizenship, the lender must determine residency

status from the documentation provided by the borrower.

Lawful Permanent Resident Aliens: For those borrowers with lawful permanent resident alien status, FHA will

insure the mortgage under the same terms and conditions as U.S. citizens. The lender must document the

mortgage file with evidence of permanent residency and indicate on the URLA that the borrower is a lawful

permanent resident alien. Evidence of lawful permanent residency is issued by the Bureau of Citizenship and

Immigration Services (BCIS), formerly INS, within the Department of Homeland Security

Non-Permanent Resident Aliens: FHA will also insure a mortgage made to a non-permanent resident alien

provided that the property will be the borrower’s principle residence, the borrower has a valid SSN, and the

borrower is eligible to work in the U.S. as evidenced by an Employment Authorization Document (EAD) issued by

BCIS. If the authorization for temporary residency status will expire within one year and a prior history of

residency status renewals exists, the lender may assume continuation will be granted. If there are no prior

renewals, the lender must determine the likelihood of renewal, based on information from the BCIS.

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Although social Security Cards may indicate work status, such as “not valid for work purposes,” an individual’s

work status may change without the change being reflected on the actual Social Security Care. Therefore the

Social Security Card is not to be used as evidence of work status for non-permanent resident aliens; the BCIS

employment authorization document is to be used instead.

Non-U.S. Citizens with no lawful residency in the U.S. are not eligible for FHA-insured mortgages.

SECTION 202.00 – MAXIMUM LOAN LIMITS

The National Housing Act specifies the maximum or statutory loan limit. These statutory loan limits vary by

location, program and the number of family units within a dwelling. The limits apply to both purchase and

refinance transactions. Maximum loan amounts will also be limited based on applicable loan-to-value

calculations.

Under most single-family mortgage programs, the FHA maximum insurance mortgage will be lesser of the

statutory loan limit for the area or of the applicable loan-to-value limit. The maximum loan amount applies to the

base loan amount (without MIP).

The mortgage amount, including any financed Upfront Mortgage Insurance Premium, will be rounded down to the

nearest dollar. Loans without UFMIP will be rounded down to the nearest dollar. If financed into the mortgage,

the UFMIP is not subject to the statutory loan amount limit or to the loan-to-value limits.

202.01 - Statutory Loan Limits

Statutory loan limits vary by FHA program and the number of units within the dwelling. Statutory loan limits apply

to both purchase transactions and refinances. The National Housing Act specifies the maximum amount for each

program.

Maximum mortgage limits for all areas are available through the HUD’s website

https://entp.hud.gov/idapp/html/hicostlook.cfm

The standard area limits for FHA section 203b are:

(Temporary Loan Limit Increase with Credit Approval on or before December 31, 2008)

Max Limits 1 Unit 2 Units 3 Units 4 Units

Low Cost Area $271,050 $347,000 $419,400 $521,250

High Cost Area $729,750 $934,200 $1,129,250 $1,403,400

Alaska, Guam, Hawaii and the Virgin Islands $1,094,625 $1,401,300 $1,693,875 $2,105,100

(In high cost areas, the maximum FHA Section 203b loan amount may be increased by the local FHA office

to 95% of the median one-family house price in an area or 75% of the FHLMC limit, whichever is lesser.

Above are the maximum mortgage limits for low cost and high cost areas at the time of publication of this

credit policy manual)

The local FHA office publishes the limits for each county or city within its jurisdiction. Underwriters must be aware

of the loan limits and loans must not exceed the maximum statutory or loan-to-value limits as set by FHA.

Credit Policy monitors the published maximum mortgage limits and will provide changes to this information, on a

regular basis, to AE’s, branches, and underwriting. This information is updated in the Credit Policy Manual on the

underwriting website.

202.02 - Loan-to-Value Limitations

Loan-to-value limits require that the amount of any FHA insured loan not exceed 97.75% of the appraised value of

the property or the sales prices (whichever is less) or 98.75% if the value is $50,000.00 of less. This limitation will

apply to all FHA loans currently offered by The Lender. Any part of the loan exceeding 97% must be closing

costs financed into the loan.

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In addition to the 97.75% or 98.75% limits, the loan-to-value is also limited by both occupancy and property

status. The loan-to-value limit is applied to the lesser of either 1.) sales price; or 2) appraised value.

SECTION 203.00 – TRANSACTIONS AFFECTING MORTGAGE CALCULATIONS

Certain types of loan transactions affect the amount of financing available and the calculation of the maximum

mortgage. The following sections will address these loan transactions.

203.01 - Identity of Interest Transactions

Identity of interest (or non arms-length) transactions on principal residences are usually restricted to a maximum

loan-to-value ratio of 85 percent. Identity-of-interest is defined as a transaction between family members,

business partners or other business affiliates. However, maximum financing is permissible under the following

circumstances:

A family member purchasing another family member’s principal residence;

An employee of a builder purchasing one of the builder’s new homes or models as a principal residence;

A current tenant purchasing the property that the applicant has rented for at least six months predating the

sales contract. A lease or other written evidence must be submitted verifying occupancy.

If a property being sold from one family to another is the seller’s investment property, the maximum mortgage is

the lesser of either,

85 percent of the sum of the sales price or appraised value; or

85% limit may be waived if the family member purchasing the property has been a tenant in the property for at

least six months predating the sales contract.

Written evidence such as canceled rent checks, paid utility bills, a lease or other evidence to support occupancy

must be provided.

203.02 - Non-Occupying Co-Applicants

When there are two or more applicants, but one or more will not occupy the property as a principal residence, the

maximum mortgage is limited to 75% LTV.

However, maximum financing is available on single unit properties for applicants related by blood (parent-child,

siblings, aunts-uncles/nieces-nephews, etc.), or for unrelated individual that can document evidence of a familytype,

long-standing and substantial relationship must sign the security instrument and mortgage note.

Legitimate transactions where the non-occupant applicant assists in the financing of the property, such as when

parents assist a child or children to purchase are acceptable. However, this arrangement will not be used to allow

non-occupant applicants to develop a portfolio of rental properties. The degree of financial contribution by the

non-occupant applicant and the number of properties similarly owned may indicate that an investor loan has

become the practical reality and that, in effect, family members are acting as “straw buyers”. The underwriter

must be able to determine that the occupying co-borrower will occupy the property. If owner occupancy cannot

be determined, the loan will be denied.

203.03 - Three and Four Unit Properties

The maximum mortgage, for three and four unit properties, is limited so that the ratio of the monthly mortgage

payment divided by the monthly net rental income does not exceed 100 percent, regardless of occupancy. The

projected rents from all units must be equal to or greater than the monthly mortgage payment. The mortgage

calculations described below are in addition to previous calculation requirements:

The monthly payment is defined as principal, interest, taxes, and insurance including mortgage insurance,

(PITI), as well as any homeowner’s association dues, computed at the note rate;

No consideration for buy downs will be given;

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Net rental income is the appraiser’s estimate of fair market rent from all units (including the unit chosen by the

applicant for occupancy) less a 25% allowance for vacancies and maintenance;

The above calculations will be used to determine the maximum loan amount;

The projected rent may be considered as gross income for qualifying purposes, but may not be used to offset

the monthly mortgage payment. The applicant must qualify for the mortgage based on income, credit and

assets;

On purchases transaction, the applicant must have 3 months PITI in reserves.

203.04 - Building on Own Land

If the applicant is acting as a general contractor or is having a house built on land already owned or being

acquired separately, maximum financing is available if the applicant receives no cash from the settlement.

This type of loan must be underwritten as a Purchase Transaction and must be run through LP or DU as a

Purchase Transaction.

The appropriate loan-to-value limits are applied to the lesser of: 1) The appraised value, or 2) The documented

acquisition cost of the property, which includes:

The builder’s price, or the sum of all subcontractors; bids, materials, etc.

Cost of the land. (If the land has been owned more than six (6) months, or was received as an acceptable

gift, the value of the land may be used instead of its cost);

Interest and other costs associated with any construction loan obtained by the applicant to fund construction

of the property;

Closing costs and reasonable discount points to be paid by the borrower.

The cost to payoff any existing liens on property other than the subject cannot be included in the acquisition

costs.

If the applicant receives cash at closing (exceeding $250), the loan is limited to 85% of the sum of the appraised

value and allowable percentage of closing costs. (Replenishment of the applicants own cash expended during

construction is not considered as ”cash back” provided the applicant can substantiate with canceled checks and

paid receipts all out-of-pocket funds used for construction).

Equity in the land (value or cost, as appropriate, minus the amount owned) may be used for the applicant’s entire

cash investment. However, the applicant may not receive any funds at closing in Texas.

The Underwriter must condition the approval to assure cash is not received at closing, where applicable.

Documentation

Acquisition of land

o Purchased:

?? Sales contract

?? HUD-1 or other settlement statement, if previously purchased

?? Payoff statement, if purchased with a loan

o Owned free and clear:

?? Warranty Deed

?? Evidence of no liens against the land (i.e., title policy, etc.)

o Acceptable gift:

?? Gift letter, fully executed and that includes all information (relationship, that land is being

gifted, the identity of the land, etc.)

?? Warranty Deed showing the donor owned the land

?? Evidence of no liens against the land (i.e., title policy, etc.)

?? Evidence the land was transferred to the borrower (Warranty Deed)

Agreement to Construct or Sales Contract for manufactured unit

o Valid (legally enforceable) contract for construction is required for “stick-built” homes. It usually

includes the required improvements as part of the contract and costs, but that is not a requirement.

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o Valid dealer contract for manufactured unit. It usually includes the required improvements as part of

the contract and cost, but is not a requirement.

?? The manufactured unit contract cannot include the cost of land unless the dealer/seller

already owns the land.

?? The borrower should not quit claim, or sell, the land to the dealer/builder

?? Required improvements to the land (utilities, etc.), and the cost. This is usually included in

the construction or manufactured unit contract.

Paying Off Land Contracts

If the borrower will use the loan to complete payment on a land contract, contract for deed or other similar type

financing arrangement in which the borrower does not have title to the property, the new mortgage may be

processed as either a purchase or a refinance transaction with maximum FHA-insured financing if the borrower

receives no cash at closing. If all loan proceeds are used to pay the outstanding balance on the land contract

and eligible repairs, renovations, etc., the appropriate LTV ratio is applied to the lesser of:

The appraised value; or

The total cost to acquire the property (the original purchase price, plus any documented costs the purchaser

incurs for rehabilitation, repairs, renovation, or weatherization), plus allowable closing costs and, if treated as

a refinance, reasonable discount points.

Equity in the property (original sales price minus the amount owed) may be used for the borrower’s entire cash in

investment. However, if the borrower receives more than $250 cash at closing, the loan is limited to 85% of the

sum of the appraised value and allowable closing costs. Replenishment of the borrower’s own cash expended for

repairs, improvements, renovation, etc., is not considered as “cash back,” provided the borrower can substantiate

with cancelled checks and paid receipts all out-of-pocket funds spent for those purposes.

Properties Under Construction or Existing Construction Less than One Year Old

Properties not meeting the criteria shown below are considered as under construction or existing construction less

than one year old and are limited to 90% financing. For a property to be eligible for greater than 90% financing,

whether or not it has been previously occupied, it must meet one of the criteria described below. Otherwise, the

property is classified as “under construction” or “less than one year old” and is limited to 90% financing.

Construction was completed more than one year preceding the borrower’s signature on the Addendum to

Uniform Residential Loan Application; or

The dwelling’s site plan and materials were approved by the Department of VA, an eligible DE underwriter, or

a builder under FHA’s builder certification procedures before construction began; or

The local jurisdiction has issued both a building permit (prior to construction) and a Certificate of Occupancy

or equivalent (does not apply to condominiums or manufactured housing because of the special

circumstances regarding their approval); or

The dwelling is covered by a builder’s ten-year insured warranty plan that is acceptable to HUD; or

The dwelling will be moved to a new location and the property is eligible for an insured mortgage at the new

location and was approved by the Department of VA, an eligible DE underwriter, or a builder under FHA’s

builder certification procedures before construction began

203.05 - Military Impact Areas

Section 238c is a rarely used FHA loan program. Under the requirements of Section 238c, an FHA mortgage

executed in connection with the construction, repair or purchase of property located near any installation of the

Armed Force of the United States in federally impacted areas will be eligible for insurance. Such mortgages are

insured under the Special Risk Insurance Fund.

Monthly MIP only, no Upfront MIP;

ADP code for Direct Endorsement Lending is 774.

In the Georgia counties of Bryan, Liberty and Camden, use of the Military Impact Loan 238c was authorized in

1986. There are no other known Military Impact Areas at this time.

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SECTION 204.00 – HUD OWNED PROPERTIES (PROPERTY DISPOSITION SALES)

204.01 - Appraisal Requirements

Appraisal for HUD REO properties may be performed only by an appraiser listed on the FHA Appraiser roster.

The appraisal must fully conform to HUD’s current requirements and processing procedures. There are, however,

unique challenges in preparing a HUD REO appraisal. Issues that need additional instruction are discussed

below.

Appraisal Type

Upon conveyance of properties to HUD’s REO inventory, HUD’s M&M contractor shall obtain an “As-is” appraisal

(not as-repaired) for each HUD REO property to determine the listing price. The appraiser is required to complete

both the Valuation Condition Sheet (HUD-92564-VC) and Homebuyer summary Form (HUD-92564-HS). The

Valuation Condition sheet must list needed repairs.

Utility Issues

Utilities should be on at the time the appraisal is conducted, unless there are documented extenuating

circumstances. In the event of extenuating circumstances, the appraiser should note the following:

On the URAR the appraiser will annotate “The following utilities were not on at the time the appraisal was

conducted (e.g., electric, gas, and/or water) – Unable to verify their functionality.”

On the VC sheet, it also should be clearly noted that “The following utilities were not on at the time the

appraisal was conducted (e.g., electric, gas, and/or water) – Unable to verify their functionality.” However, the

appraiser should note any readily observable condition that is evident. Completion of the VC sheet requires

observation of 13 areas that include, but is not limited to, the well and individual water supply, the septic

system, structural conditions and mechanical systems, to ascertain any obvious defects. Extra attention

should be given to the readily observable condition of the utility systems that are not activated at the time of

the appraisal.

HUD’s M&M contractor shall permit entry to the purchaser(s) during the contract period to activate the utilities

for the purposes of conducting a home inspection. If the HUD REO appraisal was completed without the

utilities being activated, the mortgage lender or purchaser(s) must complete the systems check while the

utilities are activated.

Release of the Appraisal to Lender/Purchaser

HUD’s REO appraisal is made available to the mortgage lender or purchaser(s) at no charge when a current

appraisal is available. This is done to reduce out of pocket expenses by the purchaser(s). The mortgage

lender should contact the M&M contractor to obtain a copy of the current appraisal.

Ordering Updated Appraisals

Mortgage lenders may not order an updated appraisal from a roster appraiser because the sales price exceeds

the as-is value specified on the M&M contractor’s appraisal. Mortgage lenders may order and the borrower may

be charged for an updated appraisal only under the following circumstances:

Appraisals over six months old. Appraisals have a life of six months for existing construction. The original

appraisal obtained by the M&M contractor must be used, provided the mortgage lender has approved the

purchase(s) or a valid HUD sales contract was executed prior to the expiration date of the appraisal. Mortgage

lenders must exercise sound judgment in determining if documentation updates are required on the purchaser(s).

In those instances where the M&M contractor’s appraisal is more than six months old and a valid HUD sales

contract was not executed prior to the expiration date of the appraisal, the mortgage lender must order, and the

purchaser(s) may be charged for, an updated appraisal. Mortgage lenders should instruct appraisers to perform

an as-is appraisal, not an as-repaired appraisal, in mortgage lenders request a copy of the M&M contractor’s

appraisal and such copy is not available, mortgage lenders order a new appraisal.

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If the updated appraisal results in a lower as-is value of the property, the purchaser(s) will be given the

opportunity to proceed with the transaction with no adjustment made to the sales price, requiring an additional

cash investment by the purchaser(s) or the purchaser(s) may withdraw their offer to purchase the property and

receive a full refund of the earnest money deposit.

Should the updated appraisal result in a higher as-is value, the sales price will not be adjusted. In these

situations, the mortgage amount will be based upon the value established by the updated appraisal. The

mortgage amount, however, cannot exceed the sales price indicated on the sales contract.

Note: If an updated appraisal is ordered, the updated appraisal must be used when processing the

application. Mortgage lenders do not have the option of ordering an updated appraisal and then deciding

whether to use that appraisal or the M&M contractor’s appraisal.

204.02 - HUD REO Marketing Approaches

The approach under which each property is being listed for sale is specified on the M&M contractor’s internet

property listings and on the form HUD-9548, Sale Contract. Properties are marketed based on the condition of

the property existing at the time of listing.

Insurable – Properties marketed as “insurable” are those which meet FHA’s Minimum Property Requirements

(MPR) at the time of the appraisal in their as-is condition without repairs necessary.

Insurable With Conditions – Insurable properties may have conditions which must be satisfied to fully meet

FHA’s MPR. The M&M contractor’s internet listings will disclose what conditions must be satisfied. For a

property that is listed as “insurable with conditions” (property appraised without the benefit of the utilities being

activated during the time of the appraisal, properties with flat roofs, and/or a property which appears to be

insurable but a certification for a specific item(s) is required), the mortgage lender/purchaser(s) must have a

complete systems check, the flat roof inspection to assure a two year life, and any other certification needed to

satisfy the appraiser’s concerns listed on the VC form performed by a reputable individual or firm at the

purchaser(s) expense to ensure complete system functionality prior to loan closing. If repairs are required that do

not exceed $5,000, the loan may be financed as a 203(b) repair escrow and the lender may process the loan

using the instructions for cases with repair escrow.

Insurable With Repair Escrow – A property that requires no more than $5,000 for repairs to meet FHA’s MPR

as determined by the appraiser, is eligible to be marketed for sale in its as-is condition with FHA mortgage

insurance available, provided the purchaser(s) establishes a cash escrow to ensure the completion of the

required repairs. Purchaser(s) are permitted to include in their mortgage an amount equal to 110% of the

estimated cost of the repairs.

Uninsurable – Properties offered for sale “Uninsured” do not meet, in their as-is condition, FHA’s MPR and the

cost of repairs identified by the appraiser to meet MPR are estimated to exceed $5,000.

204.03 - Sales Contract Requirements

Mortgage lenders may only accept a fully executed copy of form HUD-9548, Sales Contract from purchaser(s)

applying for FHA-insured financing to purchase a HUD REO property. The sales contract will specify the sales

price, the financing terms, the amount of closing costs HUD will pay at settlement, the real estate commission

HUD will pay, the closing date, and any discount on the sales price that will be provided at settlement. All

borrowers must occupy the property. Non-occupying co-borrowers are not allowed on REO properties.

Specified on Line 9 of the sales contract will be the number of days, normally 45 or 60, in which the sale must

be closed. Mortgage lenders should be prepared to complete their processing in sufficient time to allow the

borrower to meet this time frame.

If the contract is not complete, if there are questions about the terms or conditions, or if the contract must be

amended as a condition of loan approval, mortgagees should contact the M&M contractor. Mortgagees should

also be aware of the following:

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The sales contract must be signed by the M&M contractor. If the sales contract has not been signed by the

M&M contractor, mortgage lenders should not process a mortgage application.

In order to qualify for FHA-insured financing, the first block on Line 4 of the sales contract, as well as the

applicable block for FHA program 203(b), or 203(b) repair escrow must be checked. REO properties that are

condominiums which are offered for sale with FHA mortgage insurance should be processed under Section

234, even though Section 203(b) is specified on the sales contract.

In the event the home inspection or the systems check reveals that repairs are needed which no longer

makes the property eligible for and FHA-insured 203(b) mortgage, the mortgage lender should contact the

M&M contractor to discuss alternatives to allow the sale to continue. The M&M contractor may allow the

modification of the sales contract, as needed, to reflect an Insured with Repair Escrow sale in those instances

where the mortgage lender provides them with sufficient documentation to support the change in financing.

The sales contract must be revised to include this revision and initiated by both the purchaser and the M&M

contractor.

A specific down payment and mortgage amount is no longer required to be established on Line 4 of the form

HUD-9548 Sales contract. Under new direction to the M&M contractors, the mortgage amount and down

payment amounts will be left blank. The purchaser(s) must, however, continue to indicate the type of

financing being sought.

The amount on Line 5 of the Sales Contract represents actual borrower financing and closing costs to be paid

on their behalf by HUD (the Seller) out of the sales proceeds. It does not represent an amount which the

borrower may finance in the mortgage.

Only the actual amount of closing and financing costs will be paid by HUD at settlement. The borrower will

not be credited at settlement for any unused portion. Pre-paid items may not be paid out of the amount on

Line 5.

Specified on Line 8 of the Sales Contract will be the percentage discount, if any, that will be applied to the

sales price at settlement. Where the price will be discounted, the mortgage amount will be based on that

discounted sales price, not the contract sales price.

Specified on Line 9 of the sales contract will be the number of days, normally 45 or 60, in which the sale must

be closed. Mortgage lenders should be prepared to complete their processing in sufficient time to allow the

borrower to meet this time frame.

204.04 - Case Number Processing

In regard to case numbers, please note the following:

Mortgagees must obtain a new FHA case number for applications for FHA-insured financing involving REO

properties. When entering the case information in FHA Connection, mortgagees should select “Real Estate

Owned” for processing type.

During the case number processing procedure, CHUMS will require a response to the following question,

“Was this case previously sold as a Property Disposition?”. Mortgage lenders should always check YES

when processing an application for FHA-insured financing on an REO property. The mortgage should

complete the “Previous Case Number” filed. This field is designed to track REO properties sold with FHAinsured

financing and if they are subsequently sold by the individuals who purchased them from HUD. If entry

of the previous case number triggers an error message, the mortgage lender should request that the

Processing and Underwriting Division of their Homeownership Center post the number in the CHUMS

Property Disposition file.

Mortgage lenders should not order an appraisal on REO property transactions. When not ordering an

appraisal, the appraiser fields should be left blank.

If the REO property is a condominium, FHA connection will require the entry of the Condo ID. If FHA

financing was approved on the sales contract, but the condominium development is not approved and the

condominium project is in compliance with the Spot Loan procedure, mortgages should enter “Yes” in the

Spot Lot field. For the property to be FHA insured, the condominium project must be approved and in

compliance with FHA policies on condominiums.

204.05 - Mortgagee Appraisal and Property Review Requirements

In order to calculate the maximum mortgage amount and underwrite the loan, mortgage lenders must obtain from

the M&M contractor a complete copy of the as-is appraisal to include Form HUD 92564-VC, Valuation Conditions

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– Notice to Lenders, and Form HUD-92564-HS, Homebuyer Summary. Mortgage lenders should place two

copies of the M&M contractor’s appraisal in the case binder submitted for insurance endorsement.

Mortgage lenders are responsible for reviewing the property description, comparable and adjustments specified

on the appraisal, and for otherwise ensuring that the stated value is accurate. Mortgage lenders should also

ensure, to the best of their ability, that properties financed with FHA-insured mortgages meet the Department’s

MPR on the appraisal, the mortgage lender’s underwriter notes that the appraiser called for repairs which relate to

MPR. If the borrower has a home inspection performed, that inspection may also identify a need for repairs which

were not identified on the appraisal. In such cases, it is important that the underwriter address such issues.

Section 203(b) financing should not be automatically approved simply based on the terms of the sales contract.

Mortgage lenders should discuss any discrepancies with the M&M contractor for resolution.

The reverse situation is possible as well. It is not HUD’s intention to have purchaser(s) obtain financing for

repairs which are not required.

As a rule, the M&M contractor will not make repairs to HUD REO properties which are necessary to bring them up

to FHA’s MPR. Where repairs are determined to be necessary, they will generally have to accommodate through

Section 203(b) Repair Escrow.

Where a repair escrow is required, the escrow account should be established and administered in accordance

with the procedures outlined in HUD Handbook 4145.1. A complete form HUD-92300, Mortgagee’s Assurance of

Completion, should be included in the case binder submitted for insurance endorsement. A completed form HUD-

92051, compliance Inspection Report, must be submitted after the completion of repairs.

204.06 - Maximum Mortgage Amount and Minimum Cash Investment

The Lender does not participate in any $100 down program available to borrowers for REO properties.

HUD may authorize the M&M contractor to offer sales incentives. Where such incentives have been made

available, they shall be specified in writing by the M&M contractor on either the sales contract itself or on an

accompanying letter.

Absent such written authorization, maximum mortgage and minimum cash investments shall be calculated using

form HUD-92900-PUR, Mortgage Credit Analysis Worksheet, Purchase Money Mortgage. Specific instructions

on processing applications for these properties are provided below.

This does represent a change from the way financing for HUD REO properties has traditionally been processed.

Mortgagees should note that:

One Section 203(b) applications, the mortgage amount must be based on the lesser of the as-is value of the

sales price.

Where a discount on the sales price is being provided, the mortgage amount shall be based on the lesser of

the as-is value or the discounted sales price, not the contract sales price. Specific instructions on calculating

the discounted sales price are provided below.

Closing costs and pre-paids may not be included in the mortgage

Investors are eligible for Section 203(b) financing only. Maximum allowable financing for investors is 75% for

one unit properties and 85% for two, three, and four unit properties.

204.07 - Valuation of Real Estate Owned Properties

FHA’s Real Estate Owned (REO) properties are a result of paying a claim to a lending institution and the lender

transferring ownership of the property to HUD. Typically, title to REO properties is held by the lender prior to

transfer to HUD due to the borrower’s default on the mortgage.

The appraisal process is HUD’s primary tool for determining the listing price of FHA REO properties. FHA

appraisers provide preliminary verification that FHA’s MPR for existing housing and MPS for new construction

have been met for properties evaluated as “insurable” or “insurable with repair escrow” prior to being listed for

sale.

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Appraiser Requirements

Requirements for appraisers who perform REO appraisals are the same as for appraisers of any other property

type. An appraiser of REO property must be state licensed or certified in the state in which the property is located

and listed on the FHA Appraiser Roster.

Appraisal Requirements for REO Properties

The appraiser must report the appraisal on the applicable property specific revised appraisal reporting form.

Under “Assignment type” in the subject section of the applicable property specific appraisal reporting form, the

appraiser is to mark the box labeled “other” and indicate that the property being appraised is a HUD REO

property. If the appraiser is performing a land only appraisal, the appraisal must note, in bold font, that the

property being appraised is a REO property in the section of the report providing information on the subject

property.

REO properties are to be appraised “as-is”. “As-is” value definition is as follows:

The value of specific ownership rights to an identified parcel of real estate as of the effective date of the

appraisal; relates to what physically exists and is legally permissible and excludes all assumptions concerning

hypothetical market conditions or possible rezoning.

The as-is value is the market value for the property as it exists on the effective date of the appraisal. The

appraisal report shall consist of the applicable property specific appraisal reporting form, all required exhibits and

a copy of the Property Condition Report (PCR).

M&M contractors are required to complete a PCR to ordering an appraisal of a REO property. The PCR contains

information specific to the condition and functionality of the property. Prior to performing a site visit of a REO

property, the appraiser must be provided a copy of the PCR by the M&M contractor.

The appraiser must coordinate a specific time for a full site inspection of the property with the property manager.

Generally, a REO property is secured with the utilities, including the mechanical systems, are activated at the time

the appraiser makes the property inspection. If an appraisal is completed without the utilities turned on and/or

mechanical systems functioning, the appraiser must note this in the appraisal report and must rely upon the

information provided by the M&M contractor in its PCR; reference the PCR in the applicable sections of the

appraisal report (condition of property or physical deficiencies) as well as append a copy of the PCR to the

appraisal report.

There will be occasions when the appraisal of a REO property may involve extraordinary conditions which dictate

additional research, documentation and due diligence on the part of the appraiser. For example, a single family

property that features a second unit which is an illegal use due to non-compliance with the local zoning

code/regulations, the appraiser must provided an estimate of the costs necessary to bring the property into

compliance. The appraiser should provide documentation for such conclusions, such as a copy of the pertinent

portion of the zoning code and a summary of any discussions with local authorities. When appraising a REO

property that us impacted by complex or extraordinary circumstances, the appraiser must contact the M&M

Contractor for guidance and clarification before completing the appraisal. The M&M Contractor may, in turn and

in cases of problematic appraisals, seek additional guidance from the Homeownership Center that has jurisdiction

over the locality where the property is located. Any discrepancies between the information contained in the PCR

and what the appraiser observed during the inspection of the property must be noted and highlighted in the

appraisal report.

A land appraisal may be warranted when the improvements are in such deteriorated condition as t provided no

contributory value to the property or when condemnation proceedings by the local authority have acquired the

improvements in part or in their entirety. In such cases, when the supporting land represents the value of the

property, the appraiser must report the appraisal on a form or in a narrative format that must address, at

minimum, the following:

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Detailed information similar in scope to the subject section of the URAR including, but not limited to, property

address, legal description, owner of record, occupancy, assessment/tax information, and property rights

appraised.

Detailed information similar in scope to the Site section of the URAR including, but not limited to, size, zoning,

highest and best use, shape, topography, draining, utility availability, and location in a FEMA designated

Special Flood Hazard Area.

A sales grid similar in scope to that presented in the Sales Comparison Approach section of the URAR

including, but not limited to, detailed information on three comparable sales, attributes, number of comparable

unimproved sale properties and offered/listed for sale properties.

The Land Appraisal Report is an acceptable reporting format.

The appraiser must adjust the sales of comparable, unimproved building lots/sites for differences in location, size,

zoning, utility connection and/or availability, site improvement and any other pertinent factors. Any costs incurred

in razing the existing improvements and/or clean up should be extracted from the value of the supporting land to

arrive as a final conclusion of value.

Scope

The appraiser must develop and report the appraisal in accordance with the scope of work requirements

established by USPAP and HUD/FHA.

Contractual Responsibility of Appraisers

The appraiser is hired by the M&M contractor and, therefore, has a contractual responsibility to the M&M

contractor. Additionally, as with any appraisal performed for a HUD/FHA program, the appraiser has an obligation

to perform appraisal services commensurate the standards and requirements of HUD/FHA.

Intended Use of Appraisal

The intended use for an REO appraisal is to estimate the as-is market value of the property in order to provide a

basis for determining the listing price of the property for marketing purposes.

Intended User

The intended users of a REO appraisal is the M&M contractor, the lender (under certain circumstances) and

HUD/FHA.

Effective Date of Value

The effective date of value is the date when the appraiser performs the site visit for the subject property. If

another date is used as the effective date, the appraiser must specifically indicate:

The alternative date (with detailed explanation of why)

The date when the subject property was physically inspected

Additional Appraisal Requirements

The appraiser must value the subject property from the information gathered and arrive at an estimate market

value of the subject property based on the requirements detailed in the Appraisal Protocol. A building sketch is

required, but a floor plan or room layout of the property is not required unless there is evidence of functional

obsolescence. Representative interior photos are required in cases where there is significant repair (in excess of

$5,000 repair costs) required.

Sales Comparison Approach

Typically, the Sales comparison Approach is the most applicable approach to estimate the market value of a REO

property. Appraisers may utilize sales comparables from other REO transactions only when such sales are

deemed to be the best available for the market area and they meet all of the following criteria:

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Located in the subject neighborhood or reasonable proximity

Comparable property subject to reasonable adjustment

Sold with a willing buyer and seller

Exposed to the market for a reasonable period

Appraisers are reminded that an explanation, as well as support, must be provided for any adjustments to the

sales price of comparable sales that exceed the guidelines. Inclusion of vacancy rates, rates of foreclosure and a

discussion of foreclosure sales in the subject’s market area may be used as additional support for reliance on

sales of other REO transactions.

Do not use distressed sales such as Sheriff Sales. These sales do not involve a willing seller nor are they

exposed to the market under normal conditions. The resulting value indication derived from the use of such sales

is not consistent with the definition of market value.

Reporting Requirements

As with any appraisal performed by a FHA Roster Appraiser, an REO appraisal must be performed in accordance

with the USPAP.

Other reporting requirements are as follows:

With each appraisal, the appraiser must provide a list of any buyer incentives that would enhance the

marketability of the property to provide an incentive to buy the property un-repaired as opposed to repaired.

For all property constructed before 1978, the appraiser must condition the appraisal on the completion of a

lead-based paint test

For appraisals of vacant lots (land), complete a land appraisal report form

SECTION 205.00 – ACQUISITION

Acquisition is defined as the sum of the sales price for the property plus or minus the required adjustments. The

following sections provide information on required adjustments. In terms of new construction, acquisition is

defined as the documented cost to build.

205.01 - Closing Cost Adjustments to Loan to Value

Closing costs that may be added to the loan-to-value or refinance amount are those costs to be paid by the

borrower that are common and customary in the area. Not to exceed 75% of the sales price or appraised value.

Each local HUD office provides a list of maximum allowable closing costs to be used in computing acquisition

costs.

Closing costs do not include discount points.

Only those costs to be paid by the borrower are included in adjusting LTV.

All items being paid by a third party (seller, lender, builder, real estate agent, etc.) must be indicated as third party

paid and will not be added to the LTV.

Appraisal report costs and credit report costs paid by the applicant with a credit card will not be added to the LTV.

The Lender requires the estimate of closing costs used to calculate the amount during application, processing and

underwriting to be an accurate reflection of actual closing costs at the time of settlement.

205.02 - Closing Costs Guidelines

Mortgagees may charge and collect from mortgagors those customary and reasonable costs necessary to close

the mortgage. Except for discount points, these fees may also be used to meet the homebuyer’s minimum

investment requirement. Due to existing requirements, mortgagors may not pay a tax service fee, and may not be

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charged an origination fee greater than one percent. Mortgagors are also reminded that aggregate charges may

not violate FHA’s tiered pricing rules.

FHA will not allow “mark-ups,” i.e., charging a fee to the mortgagor for an amount greater than that charged the

mortgagee by the service provider; only the actual cost for the service may be charged the mortgagor.

205.03 - Seller Contributions

Sellers or other interested third parties such as real estate agents, builders, developers or a combination of

parties may contribute up to 6 percent of the property’s sales price toward the buyer’s actual closing costs,

prepaid expenses, discount points and other financing concessions. Closing costs normally paid by the borrower

are considered contributions if paid by the seller. Included in the 6% limitation are:

Permanent interest rate buy down;

Temporary interest rate buy down, except on ARMS;

Loan payment protection insurance;

Payments of Upfront Mortgage Insurance Premium;

Prepaid;

Buyer Closing Cost;

Discount points;

HOA dues that comes due during the first year of the mortgage;

Real estate taxes that come due in the first year of the mortgage.

Items typically paid by the seller, based on local law or custom or state law, are not considered contributions.

Attachment “A” of the Mortgage Credit Analysis Worksheet (MCAW) HUD 92900-WS will be used to indicate the

seller contributions. Any dollar amount which exceeds the allowable 6% Seller Contribution must be subtracted

from the sales price of the property before calculating the base loan amount.

205.04 - Sales Concessions/Inducements to Purchase

Sales concessions is defined as certain contributions or expenses paid on behalf of the borrower as an

inducement to purchase real property. A dollar for dollar reduction in the sales price will be made before

calculating the base loan amount. These inducements include, but are not limited to the following:

Seller paid contributions that exceed the 6% limitation;

Decorating allowances;

Repair allowances;

Moving costs;

Excess rent credit;

Gift Funds not meeting FHA gift requirements;

Seller payment of buyer’s sales commission on a present residence;

Seller payment of buyer’s real estate buyer agent fees above the normal and customary seller paid realty

fees;

Personal Property Items*.

*Personal property items such as cars, boats, riding lawn mowers, furniture, televisions or other gifts given to

consummate the sale result in a reduction to both the sales price and the appraised value prior to the calculation

of the base loan amount.

Certain items may be part of the real estate transaction without a reduction in value or sales price. These items

may include ranges, refrigerators, dishwashers, washers, dryers, etc. The FHA local office will determine if these

items affect value and are customary for the area. The FHA appraiser and DE Underwriter will be responsible for

determining if sales price or value is to be reduced.

Replacement of existing items (such as carpet, air conditioner or other equipment) completed by the seller, prior

to closing, will not require an adjustment to sales price or value, provided no cash allowance or credit or given to

the buyer.

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SECTION 206.00 – PURCHASE TRANSACTIONS

FHA mortgages were developed to provide low down payment mortgages to homebuyers, which would be

insured by the government. The intended use or occupancy status of the property and the stage of construction

determine its eligibility for FHA financing as well as the loan-to-value.

206.01 - Owner Occupied Principal Residence

The primary applicant or the applicant’s family for the majority of the calendar must occupy the property. At least

one borrower must occupy the property and sign the security instrument and mortgage note for the property to be

considered owner occupied. Current security instruments require a borrower to establish bona fide occupancy in

the home as the borrower’s principal residence within 60 days of signing the security instrument with continued

occupancy for one year.

Note: Requirements for one-year occupancy may be waived for case of undue hardship or extenuating

circumstances beyond the borrower’s control.

An applicant can have only one principal residence at any time whether rented or owned and regardless of the

type of financing. An applicant, who owns and intends to keep a principal residence with a HUD-insured

mortgage, may not purchase another principal residence with HUD mortgage insurance unless one of the

following circumstances applies:

The applicant is relocating (and re-establishing residency) to another area not within reasonable commuting

distance of the current principal residence. The principal balances on the existing FHA will not need to be

reduced.

The applicant’s number of dependents has increased to the point where the present house no longer meets the

family’s needs. In such cases, the following conditions apply:

The applicant must provide satisfactory evidence of the increase in dependents and how the property no

longer meets the family’s need. (Keep in mind; the applicants must be able to prove the house can no longer

physically accommodate the family. Each child wanting their own bedroom, or simply wanting a house with a

family room does not prove “need”); AND

The applicant must also pay down the outstanding mortgage balance on the present property to a 75% LTV

or less (excluding and financed MIP). A current residential appraisal must be used to determine loan-tovalue.

Tax assessments, market analyses by real estate broker, etc. will not be acceptable; OR

The applicant is vacating a residence that will remain occupied by a co-mortgagor, the individual vacating the

property is permitted to obtain another FHA-insured mortgage. This does not permit two married individuals

to own two primary residences but may be used in such circumstances as those following a divorce where the

vacating ex-spouse will be purchasing a new home or where one of the co-mortgagors will vacate the existing

property and is getting married; OR

An applicant that will be a non-occupying co-borrower on property being purchased with a FHA-insured loan

as a principal residence by other family members may have a joint interest in that property as will as his or her

own principal residence that is covered by a FHA-insured mortgage.

In all other cases, the purchasing applicant must either pay off the HUD-insured mortgage on the previous

residence or terminate ownership of the property.

206.02 - Second Home/Secondary Residences

FHA defines a secondary residence, as a property the applicant will occupy in addition to his or her principal

residence. Secondary residences are permitted when the local FHA office agrees that an “undue hardship”

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exists; meaning that affordable rental housing that meets the needs of the family is not available for lease in the

area or within reasonable commuting distance to work.

A person may have only one secondary residence at any time.

Direct Endorsement lenders are not authorized to grant hardship exceptions. Any request for a hardship

exception must be submitted to the local FHA office in writing.

Before submitting a request to the local FHA office, the correspondent must be aware that all of the following FHA

conditions apply:

The secondary residence must not be a vacation home or otherwise used primarily for recreational purposes;

and

The applicant must obtain the secondary residence because of seasonal employment, or employment

relocation, or other circumstances not related to recreational use; and

There must be a demonstration lack of rental housing meeting the needs of the applicant’s employment.

Documentation to support this must include: a) a satisfactory explanation from the applicant of his or her need

and that rental housing meeting these needs is not available; and b) written evidence from local real estate

professionals showing a lack of rental housing.

206.03 - Non-Owner Occupied/Investment Properties

The Lender will not lend on HUD secured investment property with no appraisal (i.e. borrower must pay closing

costs), with the exception of streamline of existing FHA loans.

206.04 - FHA Refinance Transactions

A refinance transaction involves repaying an existing real estate debt from the proceeds of a new mortgage that

has the same borrower(s) and the same property. As long as the borrower has legal title (even though not

originally on the loan), the borrower is eligible to refinance the loan. FHA offers three types of refinances; No-

Cash Out (full credit qualifying), Cash Out (full credit qualifying) and Streamline Refinancing – with or without

appraisals.

The following must be considered when processing a refinance transaction:

Maximum Percentage of Financing: The maximum percentage of financing is governed by the occupancy

status of the property, the use of the loan proceeds, and how and when the property was purchased. FHA

will insure several different types of refinance transactions including streamline refinances of existing FHAinsured

mortgages made with and without appraisals, “no cash-out” refinances of FHA insured mortgages

where all proceeds are used to pay existing liens and costs associated with the transaction, and “cash-out”

refinances.

Maximum Term: The maximum term of any refinance with an appraisal is 30 years. A streamline refinance

without an appraisal is limited to the remaining term of the existing mortgage plus 12 years (not to exceed 30

years).

Re-Using an Appraisal: FHA appraisals on existing properties remain valid for six months. However, they

cannot be re-used during this period once the mortgage, for which the appraisal was ordered, has closed. An

appraisal, used for the purchase of a property cannot be used again for a subsequent refinance, even if six

months have not passed. A new appraisal is required for each refinance transaction requiring an appraisal.

Refinance Authorization: A lender must obtain a Refinance Authorization Number from the FHA

Connection.

“Skipped” Payments Not Acceptable: Lenders are not permitted to allow borrowers to “skip” payments.

The borrower is either to make the payment when it is due or bring the monthly mortgage payment check to

settlement. When the new mortgage amount is calculated, FHA does not permit the inclusion of any

mortgage payments “skipped” by the homeowner in the new mortgage amount. For example, a borrower

whose mortgage payment is due June 1 and expects to close the refinance before the end of June is not

permitted to roll the June mortgage payment into the new FHA loan amount.

The case binder must include the payoff statements from all mortgages to be paid and also the loan amount

calculations used on the Mortgage Credit Analysis Worksheet (Form HUD 92900-WS).

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206.05 - Property Flipping

On June 7, 2006, HUD published a final rule in the Federal Register amending regulations regarding the

prohibition of property flipping in HUD’s single-family mortgage insurance programs by providing additional

exceptions to the time restrictions on sales. The rule and this mortgagee letter become effective for mortgages

endorsed for insurance on or after July 7, 2006. This Mortgagee Letter also rescinds, in their entirety, Mortgagee

Letters 2003-07 and 2005-05.

Below are additional categories of properties exempted from the time restrictions and they include sales of

properties by:

State and Federally chartered financial Institutions and government-sponsored enterprises (GSEs) (e.g.,

Fannie Mae and Freddie Mac)

Local and State government agencies

Nonprofits approved to purchase HUD REO properties at a discount

http://www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm

Sales of properties within Presidentially-Declared Disaster Areas (upon FHA’s announcement of eligibility in a

mortgagee letter specific to said disaster)

Prohibition on Property Flipping Described

Property flipping is a practice whereby a property is resold a short period of time after it is purchased by the seller

for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.

FHA’s policy prohibiting property flipping eliminates the most egregious examples of predatory flips of properties

within the FHA mortgage insurance programs.

Overview of FHA’s Property Flipping Policy

FHA requires that: a) only owners of record may sell properties that will be financed using FHA-insured

mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA

financing; and c) that for resales that occur between 91 and 180 days where the new sales price exceeds the

previous sales price by 100 percent or more, FHA will require additional documentation validating the property’s

value. FHA also has the flexibility to examine and require additional evidence of appraised value when properties

are re-sold within 12 months.

Sale by Owner of Record

To be eligible for a mortgage insured by FHA, the property must be purchased from the owner of record and the

transaction may not involve any sale or assignment of the sales contract. This requirement applies to all FHA

purchase money mortgages regardless of the time between resales.

The mortgage lender must obtain documentation verifying that the seller is the owner of record and submit this to

HUD as part of the insurance endorsement binder; it is to be placed behind the appraisal on the left side of the

case binder. This documentation may include, but 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. Mortgagees

participating in the Lender Insurance programs (see ML 2005-36) are to retain this documentation and provide it

to FHA upon request.

Resales Occurring 90 Days or Less Following Acquisition

If the owner sells a property within 90 days after the date of acquisition, that property is not eligible security for a

mortgage insured by FHA unless it falls within one of the exceptions to the time restrictions on resales as noted in

this section. FHA defines the seller’s date of acquisition as the date of settlement on the seller’s purchase of that

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property. The resale date is the date of execution of the sales contract by the buyer that will result in a mortgage

to be insured by FHA.

As an example, a property acquired by the seller is not eligible for a mortgage to be insured for the buyer unless

the seller has owned that property for at least 90 days. The seller must also be the owner of record.

If a purchase contract was executed within this 90 day period, the current contract need not be canceled and/or a

new contract is not required. The current contract is acceptable with the following conditions:

1) Loan does not close until the 90 day period has elapsed, AND

2) The underwriter to condition for the current sales contract to be re-executed (re-signed and re-dated) by all

parties at time of closing.

By re-executing (re-dating and re-signing) the sales contract after the 90 day period has elapsed, the contract will

then meet the minimum 90 day property flipping requirement.

Resales Occurring Between 91 and 180 Days Following Acquisition

If the resale date is between 91 and 180 days following acquisition by the seller, the lender is required to obtain a

second appraisal made by another appraiser if the resale price is 100 percent or more over the price paid by the

seller when the property was acquired.

As an example, if a property is resold for $80,000 within six months of the seller’s acquisition of that property for

$40,000, the mortgage lender must obtain a second independent appraisal supporting the $80,000 sales price.

The mortgage lender may also provide documentation showing the costs and extent of rehabilitation that went

into the property resulting in the increased value but must still obtain the second appraisal. The cost of the

second appraisal may not be charged to the homebuyer.

FHA also reserves the right to revise the resale percentage level at which this second appraisal is required by

publishing a notice in the Federal Register.

If the resale date is more than 90 days after the date of acquisition by the seller but before the end of the twelfth

month following the date of acquisition, FHA reserves the right to require additional documentation from the

lender to support the resale value if the resale price is 5 percent or greater than the lowest sales price of the

property during the preceding 12 months. At FHA’s discretion, such documentation may include, but is not limited

to, an appraisal from another appraiser.

FHA will announce its determination to require the additional appraisal and other value documentation, such as

an automated valuation method (AVM), through a Federal Register issuance. This requirement may be

established either nationwide or on a regional basis, at FHA’s discretion.

Exceptions to 90-day Restriction

The following sales are exempt from the time restrictions

Sales by HUD of its Real Estate Owned

Sales by other United States Government agencies of single family properties pursuant to programs operated

by these agencies.

Sales of properties by nonprofits approved to purchase HUD-owned single-family properties at a discount with

resale restrictions.

Sales of properties that are acquired by the sellers by inheritance.

Sales of properties purchased by employers or relocation agencies in connection with relocations of

employees.

Sales of properties by state and federally charted financial institutions (subsidiaries of State and Federally

chartered financial institutions are NOT eligible for this exemption) and Government Sponsored

Enterprises.

Sales of properties by local and state government agencies.

Upon FHA’s announcement of eligibility in a notice (i.e., ML), sales of properties located in areas designated

by the President as federal disaster areas, will be exempt from the restrictions of the property-flipping rule.

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The notice will specify how long the exception will be in effect and the specific disaster area affected.

Date of Property Acquisition Determined by the Appraiser

Mortgage lenders may rely on information provided by the appraiser in compliance with the updated Standard

Rule 1-5 of the Uniform Standards of Professional Appraisal Practice (USPAP). This rule requires appraisers to

analyze any prior sales of the subject property that occurred within specific time periods, now set for the previous

three years for one-to-four family residential properties.

As a result, the information contained on the Uniform Residential Appraisal Report or other applicable appraisal

report form describing the Date, Price and Data for prior Sales is to include all transactions for the subject

property within three years of the date of the appraisal and the comparable sales within 12 months of the date of

the comparable sale. Appraisers are responsible for considering and analyzing any prior sales of the property

being appraised within three years of the date of the appraisal and the comparables that are utilized within 12

months of the date of the comparable sale.

Therefore, provided that the URAR completed by the appraiser shows the most recent sale of the property to

have occurred at least one year previously, no additional documentation is required from the mortgage lender.

The mortgage lender remains accountable for verifying that the seller is the owner of record and may rely on

information developed by the appraiser for this purpose if provided. However, if the lender obtains conflicting

information before loan settlement, it must resolve the discrepancy and document the file accordingly.

New Construction

These restrictions are not applicable to a builder selling a newly built home or building a home for a homebuyer

wishing to use FHA-insured financing.

206.06 – Recently Listed Properties

Owner Occupied properties must have been off the market for 1 month

206.07 – Good Neighbor Next Door

Under the Good Neighbor Next Door (GNND) programs a buyer purchasing the property with an FHA mortgage

can finance into the mortgage all his reasonable and customary closing costs, including any prepaid items and

real estate broker's commission. HUD will not pay any closing costs or real estate broker commissions for the

buyer under the GNND programs.

Under the Good Neighbor Next Door (GNND) program, HUD offers for sale at 50% discount from the listing prices

certain properties in HUD designated revitalization areas to teachers. The teacher must be employed full-time by

a public school, private school, or federal, state, county, or municipal educational agency as a state-certified

classroom teacher or administrator in grades pre-Kindergarten through 12. The public or private school where the

teacher is employed must in the normal course of business serve the students from the area where the home is

located. A teacher doesn't have to be a first-time homebuyer to participate. However, neither the teacher nor

her/his spouse may have owned any residential real property during the year prior to the date of submitting a bid

on a home. In addition, the teacher and her/his spouse must not have purchased another home under the GNND

program or under the predecessor Officer Next Door or Teacher Next Door programs. Finally, the teacher must

agree to own and live in the home as her/his sole residence for three years after moving into it.

A police officer can buy a HUD home at a 50% discount from the listing price under HUD’s Good Neighbor Next

Door (GNND) program. These homes are located in HUD designated revitalization areas. Police officers that

meet the eligibility requirements for the program may submit offers to purchase a home during the bidding period

and the successful bidder is selected by an electronic lottery. Bids must be submitted through real estate brokers.

A firefighter or EMT can buy a HUD home at a 50% discount from the listing price under HUD’s Good Neighbor

Next Door (GNND) program. These homes are located in HUD designated revitalization areas. The home to be

purchased must be located in an area served by the firefighter/EMT's employer. Firefighters/EMTs that meet the

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eligibility requirements for the program may submit offers to purchase a home during the bidding period and the

successful bidder is selected by an electronic lottery. Bids must be submitted through real estate brokers.

Can time served on active military duty count toward occupancy for the Good Neighbor Next Door (GNND)

programs?

GNND participants who are called to active military duty at posts outside the commuting area of the home

purchased under the GNND Program may be unable to satisfy the three year occupancy requirement. For these

individuals, HUD will credit all time served on active military duty against the three-year occupancy requirement.

Properties sold under the GNND Program are located in revitalization areas of metropolitan cities. To lessen the

impact of vacant properties on these neighborhoods, HUD will allow GNND participants called to active military

duty to rent their homes during their absence. The term of the rental should not exceed the estimated period of

active duty. GNND Program participants will be expected to resume residence in the property once they are

released from a remote duty assignment.

GNND participants requesting this special accommodation must provide an approved request from HUD/C&L

Service Corp/Morris-Griffin Corp, along with a copy of: (1) Active Duty Orders, (2) Power of Attorney, and (3)

Rental Agreement (if applicable).

SECTION 207.00 – NO CASH OUT REFINANCES

The lender must provide a payoff statement in the case binder. For all refinance loan transactions, the borrower

will not be required to make or bring the current months payment due to closing, nor will the principal balance of

the existing loan be reduced by the amount of that unpaid principal.

As long as the borrower has legal title (even though not originally on the loan), the borrower is eligible to refinance

the loan. However, a 12 month mortgage payment history is required and any derogatory must be considered as

part of the borrower's credit history. Verification of the principal balance (i.e., payoff stmt) of all current mortgages

secured by the property must be in the file.

The maximum mortgage is based on the lesser of the two calculations below:

“Maximum loan-to-value percentages” multiplied by the appraised value, exclusive of closing costs. (Please

refer to HUD Handbook: 4155.1 Paragraph 1-11A chart); OR

Sum of existing first lien, any purchase money second mortgage and/or any junior liens over twelve (12)

months old, closing costs, prepaid expenses, accrued late charges, escrow shortages, borrower paid repairs

required by the appraisal, discount points, and other fees as determined by the appropriate HUD

Homeownership Center (HOC), subtract any refund of up-front MIP. The prepaid expenses may include per

diem interest to the end of the month on the new loan, hazard/flood insurance premiums, mortgage insurance

premiums and property tax deposits needed to establish the escrow account. The existing first lien may

include the interest charged by the servicing lender, when the payoff is not received by the first of the month,

but may not include any delinquent interest.

Subordinate liens, including credit lines, regardless of when taken, may remain outstanding, provided the FHAinsured

mortgage meets our eligibility criteria for mortgages with secondary financing as described in Section 5 of

this chapter.

If the purpose of the new loan is to refinance an existing mortgage to buy out an ex-spouse's or other coborrower's

equity, the specified equity to be paid is considered property-related indebtedness and is eligible for

inclusion in calculating the new mortgage. The divorce decree, settlement agreement, or other bona fide equity

agreement must be provided to document the equity awarded to the ex-spouse or co-borrower.

If the property was acquired less than one year before the loan application and is not already FHA-insured, in

addition to the calculations described above, the original sales price of the property also must be considered in

determining the maximum mortgage. With conclusive documentation, expenditures for repairs and rehabilitation

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incurred after the purchase of the property may be added to the original sales price in calculating the mortgage

amount.

Conventional to FHA Refinances and FHASecure Refinances

Unlimited CLTV for new subordinate financing, and unlimited CLTV for re-subordination or modification of existing

subordinate financing.

FHA to FHA Refinances

Standard FHA CLTV ratios apply on new subordinate financing as per Section 5 of HUD-4155.1 REV-5 (CLTV

cannot not exceed the applicable FHA LTV and maximum mortgage limit for the area). Unlimited CLTV for resubordination

or modification of existing subordinate financing.

207.01 - Purchasing Ex-Spouse’s/Co-Borrower Equity

If the new loan is to refinance an existing mortgage to buy out an ex-spouse’s or other co-borrower’s equity, the

specified equity to be paid is considered property-related indebtedness and is eligible for inclusion in calculating

the new mortgage. The divorce decree or settlement agreement of other bona fide equity agreement must be

provided to document the equity awarded to the ex-spouse or co-borrower.

The HUD-1 must show the funds were paid directly to the other party. The applicant must receive no cash from

the transaction.

SECTION 208.00 – CASH OUT REGULAR REFINANCE

The lender must provide a payoff statement in the case binder. For all refinance loan transactions, the borrower

will not be required to make or bring the current months payment due to closing, nor will the principal balance of

the existing loan be reduced by the amount of that unpaid principal.

As long as the borrower has legal title (even though not originally on the loan), the borrower is eligible to refinance

the loan. However, a 12 month mortgage payment history is required and any derogatories must be considered

as part of the borrower's credit history. Verification of the principal balance (i.e., payoff stmt) of all current

mortgages secured by the property must be in the file.

FHA Cash-Out Refinances

Unlimited CLTV for re-subordination and/or modification of existing subordinate financing. Applicable for FHA

85% and 95% LTV first mortgages.

Effective for mortgages endorsed on or after October 31, 2005, FHA offers a two-tier cash-out refinance program

and in computing maximum allowable mortgage amounts the following must be applied:

Loan-To-Value = 85.01% to 95%:

The loan is limited to 95% of the appraised value.

The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.

The borrower as his or her principal residence must have owned the subject property for at least 12 months

preceding the date of the loan application.

If the property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments

within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and

is current for the month due.

Properties that are owned free and clear may be refinanced as cash-out transactions (per HUD phone call

reference number 08312006-91).

Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of

the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making

scheduled payments on all liens.

Any co-borrower or co-signer being added to the note must be an occupant of the property.

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If the loan is scored through FHA TOTAL Scorecard and received an “Accept/Approve” recommendation, but

there are one or more 30-day late payments on the first mortgage in the past 12 months, then the loan is not

eligible for 95% LTV cash out.

Borrowers in Chapter 13 bankruptcies are not eligible for cash out refinances above 85% LTV. Since a

borrower in a Chapter 13 is also paying on delinquent mortgage payments and charges, their mortgage is not

considered current, even though they are paying the required amount on time each month. They can be

considered for an 85% cash out if there are no other risk factors in the file.

Loan-To-Value = Up to 85.00%

The loan is limited to a combined LTV (FHA insured first mortgage and any subordinated lien) of 85% of the

appraised value provided the borrower has owned the property for at least one year.

The property that is security for the refinanced mortgage may be a 1-4 unit property.

Property must be owner-occupied.

o If the property was purchased less than one year preceding the final application, the mortgage

amount must be calculated using the lesser of the appraised value or the original sales price of

the property multiplied by 85%.

Properties acquired by inheritances within the past 12 months are eligible for a cash-out refinance transaction

limited to 85% of the appraised value. The lender must document the acquisition by the borrowers via

inheritance.

SECTION 209.00 – STREAMLINE REFINANCES

The lender must provide a payoff statement in the case binder. For all refinance loan transactions, the borrower

will not be required to make or bring the current months payment due to closing, nor will the principal balance of

the existing loan be reduced by the amount of that unpaid principal.

Streamline refinances are designed to lower the monthly principle and interest payments on a current FHAinsured

mortgage and must involve no cash back to the borrower, except for minor adjustments at closing not to

exceed $500. Streamline refinances can be made with or without an appraisal. FHA does not require repairs to

be completed (except for lead-based paint repairs) on streamline refinances with appraisals.

HUD’s Credit Alert Interactive Voice Response System (CAIVRS) need not be checked, but HUD’s Limited Denial

of Participation (LDP) and General Services Administration (GSA) exclusion lists are still required to be checked

for all borrowers. FHA does not require a full credit report, only the most recent 12 month payment history on all

mortgages on subject property (except for the credit-qualifying streamline refinances) or a termite inspection on

this type of loan.

Loan must be current at the time of closing/funding.

A refinance transaction involves repaying an existing real estate debt from the proceeds of a new mortgage that

has the same borrower(s) and the same property. As long as the borrower has legal title (even though not

originally on the loan), the borrower is eligible to refinance the loan. Verification of the principal balance (i.e.,

payoff stmt) of all current mortgages secured by the property must be in the file.

A mortgage on a principal residence may be refinanced to a shorter-term mortgage, provided the monthly

principal and interest increases no more than 20 percent.

Unlimited CLTV for re-subordination or modification of existing subordinate financing.

209.01 - Streamline Refinances Without Appraisals

Streamline transactions involve the refinance of the FHA insured first mortgage only. This type of loan is designed

to lower the monthly principal and interest payments on the current FHA insured mortgage and involves no cash

back to the borrower, except for minor adjustments at closing not to exceed $500.

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The Limited Denial of Participation (LDP) and General Services Administration Debarment (GSA) lists are

required to be checked, however there is no need to check the Credit Alert Interactive Voice Response System

(CAIVRS).

FHA does not require repairs to be completed (except for lead-based paint) on streamline refinance transactions,

however the lender may require the repairs to be completed; if so, they must be an out of pocket expense to the

borrower.

The maximum insurable mortgage is the lower of the two calculations below:

Original Loan Amount: The original principal balance of the existing FHA insured mortgage, including any

upfront MIP, plus the new UFMIP being charged on the refinance; OR

Existing Debt: The sum of the existing FHA insured first lien, closing costs, accrued late charges, escrow

shortages, reasonable discount points and the prepaid expenses necessary to establish the escrow account

minus any refund of UFMIP plus the new up-front MIP. The existing first lien may include the interest charged

by the servicing lender when the payoff is not received by the first of the month but may not include

delinquent interest.

The above mortgage calculation applies only to owner-occupied properties. Investment properties, even if

originally acquired as principal residence by the current borrowers, may only be streamline refinanced (FHA to

FHA) without an appraisal for the outstanding principal balance. The term of the mortgage is the lesser of 30

years or the remaining term of the mortgage plus 12 years.

209.02 - Streamline Refinances With Appraisals (No Credit Qualifying)

Streamline transactions involve the refinance of the FHA insured first mortgage only. This type of loan is designed

to lower the monthly principal and interest payments on the current FHA insured mortgage and involves no cash

back to the borrower, except for minor adjustments at closing not to exceed $500.

The Limited Denial of Participation (LDP) and General Services Administration Debarment (GSA) lists are

required to be checked, however there is no need to check the Credit Alert Interactive Voice Response System

(CAIVRS).

FHA does not require repairs to be completed (except for lead-based paint) on streamline refinance transactions,

however the lender may require the repairs to be completed; if so, they must be an out of pocket expense to the

borrower.

The maximum insurable mortgage is the lower of the two calculations below:

“Maximum loan-to-value percentages” multiplied by the appraised value, exclusive of closing costs; OR

Sum of the existing FHA insured first lien, closing costs, accrued late charges, escrow shortages, reasonable

discount points and the pre-paid expenses necessary to establish the escrow account minus any refund of

up-front MIP. The existing first lien may include the interest charged by the servicing lender, when the payoff

is not received by the first of the month, but may not include any delinquent interest.

209.03 - Credit Qualifying Streamline Refinances

Certain circumstances may require evidence that the remaining borrowers on a mortgage loan have an

acceptable credit history and the ability to make the mortgage payments. In these cases, the calculation of the

mortgage amount is the same as other streamline refinances. However credit underwriting will be required and

the file must at minimum provide:

Normal disclosures are required;

A fully completed loan application and all addenda are required;

A Residential Mortgage Credit Report or a Three Merge Report; and

Verification of Income using standard or alternative documentation; and

Verification of assets, if funds are needed for closing, using standard or alternative documentation;

Applicant must meet acceptable mortgage payment and obligation to income ratios.

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Do not run through an AUS system

The Credit qualified streamline refinance will be used:

When a change in the mortgage term on a fixed rate loan will result in an increase in the mortgage payment.

Permitted on owner-occupied loans and on investment properties purchased by governmental agencies and

eligible non-profits;

When deletion of a borrower will trigger due-on-sale clause;

Following an assumption of a mortgage where the transferability restriction (due on sale clause) was not

triggered, such as when a property is transferred by a court order contained in a divorce decree or through an

inheritance by will of court order and the assumption occurred less than six months previously.

209.04 - MIP Refund for FHA-to-FHA Refinances

When an applicant refinances an FHA loan in which the Upfront MIP (or previous One-Time MIP) was financed,

the unearned premium must be subtracted from the outstanding principal balance.

The refund credit may not exceed the amount of the new MIP due to HUD. No more than the amount of the new

premium is to be shown as a credit towards the new MIP. Any excess amount will be refunded direct to the

applicant by HUD and is not to be reflected on the HUD-I Settlement Statement.

An MIP netting authorization is required to confirm the correct amount of the MIP refund to be credited to the

applicant. This is found on the case number of the assignment and must be recorded on the MCAW.

209.05 - Subordinate Financing for Streamline Refinances

Subordinate financing may remain in place without regard to the total indebtedness against the property only on

streamline refinances, with or without appraisals. The applicant is not required to satisfy any outstanding

subordinate liens as long as they will clearly be subordinate to the new HUD-insured refinance mortgage.

209.06 - Adding or Deleting Individuals to Title on Streamline Refinance

New individuals may be added to title on a streamline refinance without a credit worthiness review.

Deleting individuals from title on a streamline refinance is restricted to the following:

Credit qualifying streamline refinance. When an assumption of a mortgage not containing a due on sale clause

occurred more than six months previously and the assumption can document that he or she has made the

mortgage payments during this interim.

Following an assumption of a mortgage where the transferability restriction (due on sale clause) was not

triggered, such as in a divorce where a property transfer results from the divorce decree or by will or by court

order and the assumption or quit-claim of interest occurred more than six months previously and the remaining

owner-occupant can demonstrate that he or she has made the mortgage payments during this time.

Any other situation where an applicant desires to be deleted from title may be processed under the credit

qualifying streamline refinance guidelines.

209.07 - Streamline Refinance ARM-to-ARM Rate

On owner occupied principal residences only, an adjustable rate mortgage (ARM) may be refinanced to another

ARM, with or without an appraisal, provided that an immediate payment reduction occurs and that the maximum

interest rate of the new mortgage does not exceed the maximum interest rate of the old mortgage being

refinanced.

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209.08 - Streamline Refinance ARM-to-Fixed Rate

An FHA One Year ARM may be refinanced to a fixed-rate mortgage provided the interest on the new fixed-rate

mortgage will be no greater than two percent above the current rate of the ARM. In addition, all mortgage

payments must have been made been within the month due for the past twelve months or total number of months

the loans has been in force, if less than 12 months.

209.09 - Streamline Refinance FHA Hybrid ARM-to-Fixed Rate

A Hybrid ARM, (3-, 5, 7-, or 10-year mortgage) may be streamline refinanced to a fixed rate mortgage, with or

without an appraisal, provided that the payment will not increase by more than 20 percent and all mortgage

payments must have been made within the month due for the past 12 months or the period the mortgage has

been in force, if shorter.

209.10 - Streamline Refinance Fixed Rate-to-ARM Rate

Fixed –Rate mortgages, on owner-occupied principal residences only, may be refinanced to an adjustable rate

mortgage, with or without an appraisal, provided the interest rate of the new mortgage is at least two percent

below the interest rate of the mortgage being refinanced.

209.11 - Appraisals for Streamline Refinance

If the appraisal value comes in low, and the applicant could refinance a larger amount by refinancing without an

appraisal, the appraisal may be voided and the underwriter should note on the MCAW the loan is proceeding

without the appraisal (owner-occupied only).

When an appraisal is provided, the appraiser should indicate the required repairs. The underwriter will note on

the Conditional Commitment (92800.5B) the appraisal is valid for a streamline refinance only.

Minor repairs can be deleted. The Lender will require repairs that affect the structural integrity of the dwelling

and will require lead paint abatement;

Health and safety issues must be addressed by the appraiser and the underwriter. Repairs will be required,

when applicable;

Lead base paint abatement cannot be waived;

The cost of repairs cannot be financed. (The applicant could, however, convert to a credit qualifying

refinance);

Flood insurance cannot be waived.

SECTION 210.00 – NEW CONSTRUCTION

210.01 - Construction Definitions

Pre-approval on New Construction Properties – For a high ratio loan, HUD requires the property to be preapproved

prior to start of construction. If the property is not pre-approved, a final inspection and a 10-year

warranty are required for a high ratio loan.

Regardless of the process used, the lender must certify, by using form HUD 92900-A, that the property (both on

and off site improvements) is 100% complete and the property meets HUD’s minimum property standards.

HUD defines pre-approval as follows:

Appraised: The property is appraised and the DE lender issues form HUD-92800.5b, Conditional

Commitment of Appraised Value, prior to the start of construction; OR

Building Permit and Certificate of Occupancy: In those jurisdictions that issue BOTH a building permit prior to

the start of construction (or it’s equivalent) and a Certificate of Occupancy (or it’s equivalent), HUD will accept

these as evidence of pre-approval. For those jurisdictions that do not issue a Certificate of Occupancy, HUD

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will accept as its equivalent, a copy of the building permit and the inspection card reflecting all inspections

with a certificate from the DE underwriter indicating the final inspection on the inspection card is the

equivalent of the Certificate of occupancy. Additionally, the DE must certify the property is 100% complete

(both on site and off site improvements) and the property meets HUD’s minimum property standards by

properly completing page 3 of the HUD-92900-A.

o Note: This definition does not apply to condominium properties or manufactured housing due to

special requirements applicable to those housing types. A copy of both the permit and the Certificate

of Occupancy must be included in the case binder; OR

Early Start Letter: Use of the Early Start procedure allows relief when a backlog occurs during high volume

situations when an appraiser cannot be obtained to perform the appraisal in a timely manner. The procedure

allows builders to start construction to completing the appraisal.

Proposed Construction – A property prior approved for mortgage insurance prior to the beginning of

construction, first placement of concrete or other permanent construction materials. The appraisal’s site photos

should reflect a vacant lot, or site may be trenched and formed prior to placing of the concrete or other permanent

construction materials.

Inspections – HUD requires three inspections; Initial, Framing, and Final, to be completed by an FHA

Compliance Panel Inspector, or by the local building authority. HUD will also accept a final inspection with a

10 year warranty in lieu of the 1st and 2nd inspections.

Under Construction – A property that is not complete at the time of the appraisal. Under Construction status is

in effect with the first placement of concrete (permanent construction materials) through the point of being 99%

complete. The appraisal site photos in the appraisal should reflect this status.

Inspections – Final inspection by FHA compliance Panel Inspector, or local building authority.

Ten Year Warranty – Required for a high ratio loan if the property was not pre-approved. All three local

authority or FHA Compliance Inspections will not waive the 10 year warranty requirement if the property was

not pre-approved prior to the start of construction.

Existing construction – A property that is 100% complete at the time the appraisal is performed. “Complete”

means installation of all buyer preferences such as flooring and appliances, with utilities on and fully functioning,

and all site improvements completed at the time appraisal performed.

Existing Less than 1 Year vs. Existing – Less than 1 year the age of the property begins with the earliest:

o Date of the Certificate of Occupancy; OR

o Date of final approval reflected on the building inspection card; OR

o Date of a letter from the local or state authority showing the completion of construction.

Existing – the term existing typically refers to homes that have been 100% complete for more than 1 year

Inspections – Appraisal may serve as final inspection if the property is 100% complete at the time of appraisal

with no conditions. The appraiser is to provide photos of each diagonally opposite front and rear corner of the

house reflecting adequate grading and drainage and provide a specific statement that the grading and

drainage are acceptable. Appraiser is to verify general conformance with plans and specs.

Ten Year Warranty – Required for a high ratio loan. All three local of FHA Compliance inspections will not

waive the 10 year warranty requirement when the loan was not Pre-approved.

210.02 - Requirements for New Properties

For high ratio, HUD requires a minimum of three inspections; Initial, Framing, and Final, or a Final only inspection

with a HUD approved 10 year warranty.

Inspections

HUD will accept the following:

All three inspections by an approved FHA Compliance Inspector; OR

A Certificate of Occupancy from a local jurisdiction provided they issue BOTH a building permit (or its

equivalent, and Certificate of Occupancy or its equivalent. The building permit must be issued prior to the

start of construction; OR

Appraisal may serve as the final inspection, if the home is 100% complete at time of the appraisal:

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o The appraiser is to provide photos of each diagonally opposite front and rear corner of the house

reflecting adequate grading and drainage.

o Appraiser is to verify general conformance with Plans and specs for required statement

o If the appraisal serves as the final, Form HUD-92051 is not required.

o Should the appraiser find that the property is under construction and not 100% complete; the

appraiser will perform the appraisal and call for a final inspection. Appraiser cannot perform this final.

The appraiser will make the following statement on the appraisal report; “Property under construction;

complete according to submitted construction exhibits”; and check the box on page 2 of the URAR

“subject to completion per plans and specifications.”

Inspection documents

Local Inspections – When using local authority inspections, a copy of both the building permit and certificate

of occupancy, or their equivalents, must be included in the case binder as evidence of the required

inspections.

FHA Compliance Inspections – When using inspection(s) from FHA Compliance inspectors, the lender must

include the completed Compliance Inspection Report(s) form HUD 92051 in the case binder. The final

inspection will include photographs of each diagonally opposite front and rear corner of the house to record

adequate grading and drainage of the site, a specific statement on the acceptance of grading and drainage

and a statement on the HUD 92051 similar to “This is a newly completed dwelling and appears to be in

conformance with submitted construction exhibits.” The DE must complete, sign and date section IV of the

HUD 92051.

Appraisal – If the home is 100% complete at the time of the appraisal, the appraisal may serve as the final

inspection if requirements of HUD Handbook are followed.

10 Year Warranty

A 10 year warranty is required for all high ratio loans on properties that are not pre-approved prior to the start of

construction. Therefore, all properties appraised as under construction or existing less than 1 year old will require

a 10 year warranty for a high ratio loan, unless they were pre-approved per HUD guidelines. Evidence of all 3

local building department inspections or FHA Compliance inspections will not waive the 10 year warranty

requirement if the loan was not pre-approved prior to construction.

Flood Zones

New construction properties and ALL Manufactured Homes located in Flood Zones A or V are NOT ELIGIBLE for

FHA Insurance without a Letter of Map Amendment (LOMA), Letter of Map Revision (LOMR), or an elevation

Certification. An Elevation Certification (survey) is different from a Flood Determination (map/panel review).

LOMA and LOMR – HUD will accept a LOMA or LOMR issued by FEMA that removes the property from an A

or V flood zone and flood insurance is not required.

Elevation Certification – If an elevation certification is provided, the property is still in a flood zone and the

loan will require flood insurance. Elevation Certifications are not approved for condominium properties.

o Stick Built Homes – the elevation of the lowest floor of the home must be at or above the 100 year

return frequency flood elevation identified by FEMA.

o Manufactured Homes – New and existing homes cannot be located in Flood Zones A or V. The

finished grade beneath the manufactured home must be at or above the 100 year return frequency

flood elevation identified by FEMA.

o Condominium Properties – New, less than 1 year old, condominium properties are not eligible for

FHA insurance without a LOMA or LOMR, or until the entire project is over 1 year old. Elevation

Certifications are not approved for new condominium properties.

210.03 - Checklist for New Properties – Stick Built

Proposed – Approved prior to the beginning of construction by either a Conditional Commitment or Early Start

Letter.

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Low Ratio Loan (90% or less):

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541), not for endorsement binder

Final inspection by fee inspector (HUD-92051), or C.O., (C.O. is not acceptable on condominium or

manufactured home)

Health Authority Approval on well and septic if needed.

Flood Insurance, if needed.

High Ratio Loan (90.01% or higher)

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541), not on condominiums

1 year warranty (HUD-92544)

10 year warranty and final inspection by fee inspector (HUD-92051); OR Conditional Commitment and 3

inspections by fee inspector (HUD-92051); OR Early Start Letter and 3 inspections by fee inspector (HUD-

92051); OR Building Permit (or equivalent) and C.O. (or equivalent), (C.O. is not acceptable on condominium

or manufactured home)

Health Authority Approval, if needed

Flood Insurance, if needed

Under Construction

Low Ratio Loan (90% or less)

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite States)

Builder’s Certification (HUD-92541), not for endorsement binder

Final inspection by fee inspector (HUD-92051), or C.O., (C.O. is not acceptable on condominium or

manufactured home)

Health Authority Approval on well and septic if needed.

Flood Insurance, if needed.

High Ratio Loan (90.01% or higher)

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541), not on condominiums

1 year warranty (HUD-92544)

10 year warranty and final inspection by fee inspector (HUD-92051); OR Conditional Commitment and 3

inspections by fee inspector (HUD-92051); OR Building Permit (or equivalent) and C.O. (or equivalent), (C.O.

is not acceptable on condominium or manufactured home)

Health Authority Approval, if needed

Flood Insurance, if needed

Existing (New) – Less than 1 year

Low Ratio Loan (90% or less)

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite States)

Builder’s Certification (HUD-92541)

Health Authority Approval on well and septic if needed.

Flood Insurance, if needed.

High Ratio Loan (90.01% or higher)

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541), not on condominiums

1 year warranty (HUD-92544)

10 year warranty; OR Building Permit (or equivalent) and C.O. (or equivalent), (C.O. is not acceptable on

condominium or manufactured home)

Health Authority Approval, if needed

Flood Insurance, if needed

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210.04 - Checklist for Manufactured Housing

Proposed – Approved prior to the beginning of construction by either a Conditional Commitment or Early Start

Letter for High Ratio loans.

Low Ratio Loan (90% or less):

Engineer’s Certification

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541), not for endorsement binder

Final inspection by fee inspector (HUD-92051)

Health Authority Approval on well and septic if needed.

Flood Insurance, if needed.

High Ratio Loan (90.01% or higher)

Engineer’s Certification

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541)

1 year warranty (HUD-92544)

1st and Final inspection by fee inspector (Engineer may complete 1st inspection, there is no intermediate

inspection); OR 10 year warranty and final inspection by fee inspector (HUD-92051); OR Early Start Letter

and 1st and Final inspections by fee inspector (HUD-92051)

Health Authority Approval, if needed

Flood Insurance, if needed

NOTE: Engineer’s and inspections from local jurisdiction would be acceptable in areas where fee inspectors are

not available. The lender must document their efforts to obtain a HUD fee inspector in the HUD endorsement file.

Under Construction

Low Ratio Loan (90% or less):

Engineer’s Certification

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541), not for endorsement binder

Final inspection by fee inspector (HUD-92051)

Health Authority Approval on well and septic if needed.

Flood Insurance, if needed.

High Ratio Loan (90.01% or higher)

Engineer’s Certification

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541)

1 year warranty (HUD-92544)

10 year warranty

Final inspection by fee inspector (HUD-92051)

Health Authority Approval, if needed

Flood Insurance, if needed

NOTE: Engineer’s and inspections from local jurisdiction would be acceptable in areas where fee inspectors are

not available. The lender must document their efforts to obtain a HUD fee inspector in the HUD endorsement file.

Existing (New) less than 1 year

Low Ratio Loan (90% or less):

Engineer’s Certification

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

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Builder’s Certification (HUD-92541), not for endorsement binder

Health Authority Approval on well and septic if needed.

Flood Insurance, if needed.

High Ratio Loan (90.01% or higher)

Engineer’s Certification

Subterranean Termite Treatment Report – NPCA-99A and 99B (Termite State)

Builder’s Certification (HUD-92541)

1 year warranty (HUD-92544)

10 year warranty

Health Authority Approval, if needed

Flood Insurance, if needed

NOTE: Engineer’s and inspections from local jurisdiction would be acceptable in areas where fee inspectors are

not available. The lender must document their efforts to obtain a HUD fee inspector in the HUD endorsement file.

Existing over 1 year

Engineer’s Certification (except on FHA Refinance)

Comply with all conditions on 92800.5B

SECTION 211.00 – SUBORDINATE FINANCING

Secondary Financing is permitted in some instances, but not the same type of parameters customarily used for

conventional mortgages. The Lender will accept secondary financing under the following conditions:

The Chief Credit Officer has approved the program and updated the list online.

The first mortgage and the second mortgage conform to FHA criteria. The Subordinate lien cannot impose

conditions on The Lender or on the first lien held by The Lender.

211.01 - Secondary Financing from Federal, State and Local Government Agencies

The Lender will accept second liens on HUD/FHA loans from Federal, State and local government Agencies for

the applicant’s entire cash investment requirement. The following conditions will apply to such loans:

The FHA insured first lien when combined with the second mortgage, as well as any other mortgages, grants,

etc., may not result in cash back to the applicant.

The sum of all financing may not exceed 100% of the cost to acquire the property including down payment,

closing costs and any normal prepaid expenses.

The required monthly payment under both the insured mortgage and the second mortgage or lien, plus other

housing expenses and all recurring charges, cannot exceed the applicant’s reasonable ability to pay. The source,

amount, and repayment terms must be disclosed in the mortgage application and the applicant must acknowledge

understanding of and agreement to the terms.

211.02 - Secondary Financing from Non-Profit Agencies Considered Instrumentality’s

The Lender will originate FHA first mortgages which have acceptable secondary financing provided by non-profit

agencies that have been approved by the appropriate HOC for that area.

In addition the non-profit must meet the following requirements:

The non-profit agency is of the type described in FHA Section 501(c)(3) as exempt from taxation under FHA

Section 501a of the Internal Revenue Code of 1986; AND

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The non-profit provides evidence of having two years experience as a provider of housing for low and

moderate income persons; AND

The non-profit agency has a voluntary board with no part of the net earnings of the organization benefiting

any member, founder, contributor, or individual; AND

Has been approved as an instrumentality of the government by the appropriate HOC. If the non-profit has not

bee approved as an instrumentality of government by the HOC but meets the above requirements, they may

also provide secondary financing if:

o The borrower makes a cash investment of at least 3% of acquisition cost; AND

o The combined amounts of the 1st and 2nd mortgages do not exceed the statutory loan limit for the

area.

211.03 - Secondary Financing from Other Organizations and Private Individuals

Other organizations and private individuals may provide secondary financing under the following conditions:

The combined amount of the 1st and 2nd mortgages do not exceed the applicable LTV Ratio and the maximum

mortgage limit for the area.

The repayable terms of the second mortgage must:

Not provide for a balloon payment before ten years (or not such time acceptable to HUD), unless the property

is sold or refinanced; and

Must permit prepayment by the applicant, without penalty, after giving lender 30 days advance notice;

The required monthly payment under both the insured mortgage and the second mortgage or lien, plus other

housing expenses and all recurring charges, cannot exceed the borrower’s reasonable ability to pay (normal

underwriting ratios/criteria apply);

Any periodic payments due on the second mortgage are sue monthly and are substantially the same in

amount;

The source, amount, and repayment terms must be disclosed in the mortgage application and the applicant

must acknowledge that he or she understands and agrees to those terms;

The Lender providing the 1st mortgage cannot be the same as the one providing the 2nd mortgage.

211.04 - Grants

Down payment assistance or closing assistance “grants” must be a grant or gift, free and clear of other

requirements. The source of funds for a gift to the applicant must be totally unrelated to the loan transaction.

When a lien is filed against the property for recapture upon sale, the lien (so called “Soft Second”) is underwritten

using secondary financing criteria.

DE Underwriting are responsible for careful review of these loans to determine that all HUD/FHA financing criteria

have been met. In addition, the DE Underwriter will be responsible for determining that the property is free of

legal restrictions on conveyance, which do not meet HUD/FHA regulations.

All assistance programs, as well as second mortgage programs, should provide evidence of HUD/FHA approval.

If the homebuyer may only use the builder, developer, real estate firm, etc., which contributed funds, the program

will in all likelihood be unacceptable for FHA mortgage insurance.

The Lender requires all assistance or grant program to be approved by the Senior Credit Officer or Credit Policy

Department, prior to any application utilizing the program. The current approved list may be found on the

underwriting website.

SECTION 212.00 – TEMPORARY INTEREST RATE BUY DOWN

Interest rate buydowns, although a small percentage of FHA’s insured mortgage portfolio, have not performed as

well as those mortgages made without buydowns. Consequently, effective August 1, 2004, FHA will no longer

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permit underwriting at the buydown rate on fixed rate mortgages. Builders and sellers may still offer buydowns

but the borrower must qualify at the note rate.

Since the borrower must qualify at the rate exclusive of the payment reduction provided by the buydown account,

the underwriting requirements described in the HUD-4155.1 REV-5, paragraph 2-14B2(a) through (d) no longer

apply. All other programmatic instructions for temporary buydowns, including the buydown agreement

requirements, remain in effect.

SECTION 213.00 – 203(H) DISASTER RELIEF

213.01 - Mortgage Insurance for Disaster Victims

FHA provides mortgage insurance to assist victims of Presidentially-declared disasters. Under this program,

individuals or families whose residences were destroyed or damaged to such an extent that reconstruction or

repair is necessary are eligible for 100% financing for the purchase of a home. The Federal Emergency

Management Agency (FEMA) provides listings of the specific affected counties and cities and corresponding

declaration dates. This information can be found on the internet at http://www.fema.gov/disasters.

The procedures described are in effect whenever a disaster is declared by the President and remain in effect for

one year from the date of the President’s declaration.

213.02 - Program and Underwriting Requirements

The borrower’s previous residence must have been in the disaster area and must have been destroyed or

damaged to such an extent that reconstruction or replacement is necessary. The borrower must provide

conclusive evidence of this fact. Documentation showing a permanent residence in the affected area before the

disaster includes a valid driver’s license, a voter registration care, utility bills, etc. Documentation regarding

destruction of the residence includes an insurance report, an inspection report by an independent fee inspector or

government agency, or conclusive photographic evidence showing the destruction or damage. The borrower may

have been the owner of the property or a renter of the property affected.

The borrower is eligible for 100% financing of the sales price and no down payment is required. However, closing

costs and prepaid expenses not paid by the seller must be paid by the borrower in cash or paid through premium

pricing.

Maximum mortgage amounts are the same as for Section 203(b)/203(h). A list can be accessed from the lender

web page on HUD’s website at www.hud.gov or on FHA Connection at https://entp.hud.gov/clas/.

The program is limited to one-unit detached homes or units in an approved condominium project. “Spot units” in

condominiums are eligible also. Two-, three-, and four-unit properties may not be purchased under the Section

203(h) program.

The borrower’s mortgage loan application must be submitted to the lender within one year of the President’s

declaration of the disaster.

ARM’s may be used with the Section 203(h) program.

213.03 - Underwriting Guidance

Since many borrowers affected by a disaster will experience difficulty in providing traditional documentation

regarding employment and funds for closing due to the disaster, the underwriter should be as flexible as prudent

decision making permits when applying FHA’s underwriting criteria and documentation requirement. To the

extent possible, underwriters should be accommodating towards borrowers eligible for Section 203(h) regarding

gaps in employment, documentation for employment and funds available, qualifying ratios. In addition, lenders

should also be accommodating towards these borrowers when evaluating recent derogatory credit, bankruptcy,

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foreclosure, deed-in-lieu of foreclosure and delinquent federal obligations, as reported into HUD’s Credit Alert

Interactive Voice Response System (CAIVRS) that were the direct result of a disaster. The examples contained

below are meant to be general guidance only and are not the only circumstances in which alternative

documentation or other proof can be used when traditional documentation is not available. Each case is different

and will ultimately need to be evaluated on its own merits. The guiding principle should be to provide FHA

financing to disaster victims who can make mortgage payments but may not have all the traditional

documentation as proof of their ability to do so.

213.04 - Borrower Eligibility

In determining eligibility for Section 203(h), the borrower must have been an owner, renter or otherwise have

occupied the unit that was destroyed or damaged to such an extent that reconstruction or replacement is

necessary.

213.05 - Credit

The underwriter should be able to review credit reports and determine if derogatory credit occurred subsequently

to a disaster. If the credit report indicates satisfactory credit prior to a disaster, and any derogatory credit

subsequently to that date can be related to the effects of the disaster, FHA will consider, for its underwriting

standards, that the borrower is a satisfactory credit risk.

FHA is adding situations involving Presidentially-declared disasters to the list of exceptions on CAIVRS. If the

borrower is reported in CAIVRS but the credit report indicates the loan was current prior to the disaster, and any

delinquency or claim paid can be related to the effects of the disaster, the borrower may be considered eligible.

213.06 - Income

Borrowers affected by a disaster may not be able to document past or present employment. If prior employment

cannot be verified (business records destroyed, etc.), but the borrower has a current position in the same or

similar field, it still may be possible to consider the income. W2’s and tax returns may be obtained from the IRS to

confirm employment and income. If that cannot be done on a timely basis, it is possible the credit report will

indicate the borrower’s prior employment. Short-term employment will be considered in light of the

circumstances. Although it is anticipated that the Lender will make every effort to obtain documentation on prior

employment, FHA will be flexible on documentation requirements. In all cases where traditional documentation

cannot be obtained, lenders should document their efforts.

213.07 - Qualifying Ratios

When a borrower is purchasing a new home, yet still has an outstanding mortgage on a property located in a

FEMA disaster area, the lender may exclude the mortgage payment on the previous residence from the qualifying

ratio calculation provided the borrower provides the lender with information indicating they are working with the

service lender to appropriately address the mortgage obligation and that any property insurance proceeds will be

applied to the mortgage on the damaged home.

213.08 - Assets

Because “hard copy” bank statements may be unavailable, lenders should encourage borrowers to access their

financial institution’s websites to try to download statements confirming assets needed to close the loan. As

above, lenders should document their efforts to verify assets and make every effort to ensure that the borrower

will have funds to complete the transaction.

213.09 - Liabilities

With regard to the continued mortgage obligations on a prior loan securing a property that has been destroyed or

damaged, FHA understands that the record may show late payments as a result of a disaster. Lenders should

not consider the outstanding mortgage obligation on destroyed or seriously damaged properties when

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determining a borrower’s ability to make payments on a new loan provided the requirements under Qualifying

Ratios have been met. FHA has taken the position that insurance settlements are likely to pay off remaining

obligations. If the borrower was three or more months delinquent on the loan prior to the disaster and the

property has been destroyed, it would not be prudent for a lender to make a new loan unless they can show and

document extenuating circumstances.

SECTION 214.00 – MORTGAGE INSURANCE PREMIUMS (MIP)

All FHA loans have two different MIP (Mortgage Insurance Premium): Monthly Mortgage Insurance (MMI) those

loans which have a monthly premium, and those which have both an Upfront Mortgage Insurance Premium

(UFMIP) and a monthly insurance premium. The UFMIP will be paid at closing by either the applicant, in cash, by

seller contribution or it may be financed by adding the amount to the base loan amount.

Note: The upfront mortgage insurance premium must be 100% financed or paid 100% in cash. The upfront MIP

may not be partially financed. If the seller pays all or part of the upfront MIP (subject to the 6% contribution

limitation) or if all or any portion of the upfront MIP is paid by premium pricing, then the entire upfront MIP must be

paid in cash.

Note: The financed UFMIP is not included in the statutory loan limit.

The monthly MIP is calculated on the base loan amount (without financed MIP). Principal and interest payments

are calculated on the loan amount with financed MIP.

214.01 - Upfront and Annual MIP Chart Mortgage Term More Than 15 Yrs

Upfront LTV Ratio Premium Years

1.50% 89.99 & Under .50% 7

1.50% 90.00 - 95.00 .50% 12

1.50% 95.01 & Over .50% 30

214.02 - Upfront and Annual MIP Chart Mortgage Term 15 Years or Less

Upfront LTV Ratio Premium Years

1.50% 89.99 & Under None N/A

1.50% 90.00 – 95.00 .25% 4

1.50% 95.01 & Over .25% 8

SECTION 215.00 – UNDERWRITING DOCUMENTATION

215.01 – Face to Face Interview

Face to Face Interviews are no longer required as long as the two forms of identification are present in the loan

file satisfying the Patriot’s Act Disclosure requirement.

215.02 - Home Inspection/Lead Paint Hazard Notice

On purchases of residential property built prior to 1978, the seller is required to provide purchaser with information

concerning the existence of lead-based paint and to offer the homebuyer the opportunity to have the property

inspected.

FHA has developed a disclosure for all existing properties that will involve an FHA loan. Called “Importance of

Home Inspections”, the disclosure is to be signed and dated by the applicant(s) on or before the date that the

sales contract is executed or re-executed if necessary. New construction and refinances are exempt from this

requirement.

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The Lender will require a copy of the executed disclosure to be in the loan file at time of underwriting. The

executed disclosure must conform to FHA’s requirements.

215.03 - Social Security Number Validation

The applicants must provide evidence of their Social Security Number on all transactions. The actual Social

Security Card is not required as the number can be obtained from pay stubs, driver’s license, W-2’s, etc.

215.04 - Pay stubs/Verification of Employment

The applicant(s) must provide the most recent pay stub for each current employer to support the Verification of

Employment. The pay stub must be the most recent the applicant has available, but the document itself must not

be more than 120 days old when the loan closes (180 days on new construction). If used in lieu of a VOE, must

contain borrowers name, social security number and year-to-date earnings.

215.05 - Current Bank Statement/Verification of Deposit

VOD and most current bank statements or 2 most recent bank statements are required.

Automated findings may reduce the required 2 months bank statements; however, if a VOD is used a bank

statement must always be obtained as supporting documentation.

215.06 - Real Estate Certification

All applicants, sellers, builders, and real estate agents are required to sign a certification which indicates the sales

contract contains all terms and agreements among the parties. A separate Real Estate Certification (part of the

HUD addendum to sales contract) is to be utilized only when the executed sales contract does not contain the

necessary language.

215.07 - Notice to Homebuyer

Form HUD-92900-B (12/2004) must be read and signed at the time of application. The intent of the form is to

inform the homebuyer of their rights to:

Condition of Property

Loan Fraud

Discrimination

Prepayment

FHA Mortgage Insurance

215.08 - Amendatory Clause

The amendatory clause is required when an applicant for an FHA loan has not been informed of the property

appraised value at the time the contract is signed. It is a required addendum to (or a preprinted section of) the

Sales Contract.

The executed sales contract and all addenda, including the amendatory clause, must be in the file when loan is

underwritten. The amendatory clause, as a separate addendum or as part of the sales contract, must be signed

and dated by both the purchaser(s) and the seller(s).

215.09 - FHA Sales Contract/Purchase Agreement

The file must contain an original or certified true copy of the sales contract (purchase agreement) and all addenda

that has been signed and dated by all parties.

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Neither FHA nor The Lender are a party to the sales contract. The contract does not have to specify FHA

financing, but must clearly indicate the terms of the purchase, including the agreed upon date of closing. If the

agreed upon date of closing is extended, a copy of the modification or extension will be required.

When a sales contract contains conditions that, if performed, would violate FHA requirements, such as excess

seller contributions, a modification or addendum to the sales contract must be obtained. In all cases, the loan

must close in accordance with FHA requirements.

215.10 - Hotel and Transient Use Certification

A Hotel and Transient Use certification (form HUD-92561), signed by the applicant must be obtained for every

application on a three, or four-family dwellings, or if the property is a single-family dwelling which is one of a group

of five or more dwellings held by the same applicant. This is FHA’s assurance the property will not be used for

hotel or transient purposes, or otherwise rented for periods less than 30 days.

215.11 - Mortgage Credit Analysis Worksheet (MCAW)

The MCAW is a synopsis of the information verified about the applicant: income, assets and liabilities. It is the

review form where the underwriter evaluates the applicant’s adequacy of credit, funds to close, job stability and

income, and then renders a credit decision. A completed MCAW is required on all FHA loans regardless of status

as approved, pended, or denied. The MCAW on approved or denied files must be signed and dated by the DE

underwriter. There are two types of MCAW – one for purchase and one for refinances.

When a loan is approved with qualifying ratios in excess if FHA guidelines or other guidelines have been

exceeded, the DE Underwriter must justify the loan approval. The underwriter must disclose on the MCAW, the

compensation factors or other risk analysis used to determine that the loan should be approved.

215.12 - Changes to Approved FHA Loans

Only the Direct Endorsement Underwriter has authority to approve or deny an FHA loan. Underwriters must reunderwrite

an FHA loan when certain changes are made after the approval was issued. Loan files are to be reworked

(new URLA, 92900A and MCAW) by the DE Underwriter:

The loan is renegotiated to a higher interest rate which exceeds the interest rate at which the loan was

approved;

The mortgage amount is increased;

The mortgage term is decreased;

The discount points increase above the points shown on the loan approval;

The applicant’s cost to close exceeds the amount approved by Underwriting.

215.13 - Use of More Than One DE Underwriter

It is not necessary for the same DE to underwrite both the property and the applicant’s credit/income and assets.

The DE underwriter who underwrites the property and issues the 92800.5b DE Statement of Appraised Value

must indicate on the “5b” their name and CHUMS number.

The DE underwriter who underwrites the applicant’s credit, income and assets must indicate their name and

CHUMS number on the MCAW. The underwriter identified on the MCAW will be recorded in CHUMS as the

underwriter of record.

215.14 - Qualifying the FHA Loan

The applicant for an FHA-insured mortgage is qualified using gross income. The applicant’s gross income to total

new loan payment should not exceed 31%. The gross income to total debts should not exceed 43%. With

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automated underwriting the ratios may be exceeded. Automated approval must be document in the file and

validated by documentation in file.

215.15 - Adjustable Rate Mortgages

Applicants for the One Year Adjustable Rate Mortgage (ARM) must qualify using the mortgage payments based

on the contract or initial interest rate plus one (1%) percent; i.e., the anticipated second year rate when the loanto-

value is 95.00% or greater.

If the ratios exceed guidelines at the qualifying interest rate, then the underwriter’s justification for the excess ratio

and the compensating factors used, must be indicated in the loan file, on the MCAW unless the loan has an

automated approval through the Total Scorecard System.

Temporary buy downs will not be allowed on Adjustable Rate Mortgage (ARM).

Exceeding ratios is permitted upon Automated Underwriting approval. However, all documentation and ratios

must be run qualifying 1% above start rate.

SECTION 216.00 – ASSUMABILITY OF FHA LOANS

All FHA insured loans are assumable; however FHA has placed certain restrictions on the assumability of FHAinsured

mortgages originated since 1986. Depending on the date of loan origination, a creditworthiness review of

the assumptor by The Lender may be required. Mortgages originated before December 1, 1986 generally contain

no restrictions on assumability. To determine what restrictions to assumability have been placed on the

mortgage, The Lender must review the legal documents of the mortgage. Additional details regarding

assumability are contained in the HUD handbook 4330.1 REV-5, “Administration of Insured Home Mortgages”.

Some mortgages executed in years 1986 through 1989 contain language that is not enforced due to later

Congressional action. Mortgages from that period are now freely assumable, despite any restrictions stated in the

mortgage.

Streamline Refinances for FHA

Holding Period before Eligibility. A borrower who assumed or took title subject to an FHA-insured mortgage,

without being credit qualified and with the previous mortgagors receiving a release of liability, must have owned

the property for at least six months before being eligible for the streamline refinance program without credit

qualifying. This rule applies to mortgages that do not contain restrictions limiting the assumption only to

creditworthy assumptors. Typically those mortgages were made prior to December 1989

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CHAPTER 3 - CREDIT

SECTION 300.00 – INTRODUCTION

The applicant’s credit history must clearly document the ability and willingness to meet regularly scheduled

financial obligations.

The total extent of an applicant’s indebtedness has a direct bearing upon that individual’s ability to repay the

requested mortgage. An individual with an extensive amount of revolving and installment debts drawn to the limit,

though current, could indicate that an applicant may not be able to make payments on the mortgage in a timely

manner. Fully drawn credit lines, although current, represents a greater risk than non-fully drawn credit lines.

The applicant’s mortgage payment and total obligations must be at a manageable level.

In evaluating the applicant’s credit history, the underwriting criteria must be applied consistently to each applicant

regardless of race, color, religion, national origin, age, sex, familial status or handicap.

It is not the responsibility of an employee of The Lender to counsel any applicant on how to change the

applicant’s credit file. The employee is not to become directly involved in changing (cleaning up) the applicant’s

credit file. The applicant(s) must be directed to the repository that provided the credit information or to a

consumer agency whose main objective is to counsel and assist consumers regarding their credit standing.

SECTION 301.00 – DOCUMENTING CREDIT

Documentation in the file must clearly support an applicant’s ability to meet financial obligations in a timely,

responsible manner. Although more weight is given to the applicant’s payment experience within the past two

years, the underwriter must always consider the applicant’s entire credit history.

A Residential Mortgage Credit Report or a Merged Report must be obtained for all applicants where credit

qualification is required. The original credit report, as well as all updates, corrections, and supplements must be

included in the applicant’s submission package. When the credit report fails to verify the applicant’s payment

history for mortgage, rental, or other significant debts, separate evidence of a satisfactory payment history must

be developed.

The applicant’s credit history may contain traditional trade lines. A trade line is defined as the type of credit

obligation generally reported by a credit report indicating such information as date opened, high loan or credit

amount, the current credit balance and the periodic payment history. The credit history may also contain noncredit

or non-traditional references. These non-credit references are defined as continuing obligations, such as

rent, utilities and insurance, which require a periodic payment at least quarterly. Non-credit payment references

may appear on a credit report or may be verified by written verification.

Note: To be used to establish a minimum payment history, a non-credit payment reference must have existed for

at least 12 months.

A lack of credit history alone is not reason for denial of an FHA mortgage. Every effort must be made to develop

a history (minimum two (2) years) of the applicant, including residence, credit, income and assets. The credit

history may be developed by using non-credit payment references and/or non-traditional forms of credit.

SECTION 302.00 – CREDIT HISTORY

The applicant must have a credit history which indicates a reasonable ability and willingness to meet obligations

as they become due.

Any or all of the following are indicators of an unacceptable credit history unless the cause of the problem was

beyond the applicant's control:

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Incidents of more than one debt payments being more than 30 days late if the incidents have occurred within

the last 12 months. This includes more than one late payment on a single account.

Loss of security due to a foreclosure if the foreclosure has occurred within the last 36 months.

Outstanding tax liens or delinquent Government debts with no satisfactory arrangements for payments, no

matter what their age as long as they are currently delinquent and/or due and payable.

A court-created or affirmed obligation (judgment) caused by nonpayment that is currently outstanding or has

been outstanding within the last 12 months.

Two or more rent payments paid 30 days or more past due within the last 3 years.

Accounts which have been converted to collections within the last 12 months (utility bills, hospital bills, etc.).

Collection accounts outstanding, with no satisfactory arrangements for payments, no matter what their age as

long as they are currently delinquent and/or due and payable.

Any debts written off within the last 36 months.

The following will not indicate an unacceptable credit history:

"No history" of credit transactions by the applicant.

A bankruptcy in which applicant was discharged more than 36 months before application.

A satisfied judgment or foreclosure with no loss of security which was completed more than 12 months before

the date of application.

Mitigating circumstances to establish the borrower's intent for good credit when the applicant provides

documentation that may be considered if:

The circumstances were of a temporary nature, were beyond the applicant's control, and have been removed

(e.g., loss of job; delay or reduction in government benefits or other loss of income; increased expenses due

to illness, death, etc.); or

The adverse action or delinquency was the result of a refusal to make full payment because of defective

goods or services or as a result of some other justifiable dispute relating to the goods or services purchased

or contracted for.

SECTION 303.00 – PREVIOUS RHCDS LOAN

RHCDS shall determine whether the applicant has had a previous RHCDS debt which was settled, or is subject to

settlement, or whether RHCDS otherwise suffered a loss on a loan to the applicant. If RHCDS suffered any loss

related to a previous loan, a loan guarantee shall not be issued unless RHCDS determines the RHCDS loss was

beyond the applicant's control, and any identifiable reasons for the loss no longer exist.

SECTION 304.00 – OTHER FEDERAL DEBTS

Check HUD's Credit Alert Interactive Voice Response System (CAIVRS) to determine if the applicant is

delinquent on a Federal debt. The Lender will clearly document both its CAIVRS identifying number and the

borrower and co-borrower's CAIVRS access code near the signature line on the mortgage application form. No

decision to deny credit can be based solely on the results of the CAIVRS inquiry. If CAIVRS identifies a

delinquent Federal debt, the Lender will immediately suspend processing of the application.

The applicant will be notified that processing has been suspended and will be asked to contact the appropriate

Federal agency, at the telephone number provided by CAIVRS, to resolve the delinquency. When the applicant

provides the Lender with official documentation that the delinquency has been paid in full or otherwise resolved,

processing of the application will be continued. An outstanding judgment obtained by the United States in a

Federal Court (other than the United States Tax Court), which has been recorded, shall cause the applicant to be

ineligible to receive a loan guarantee until the judgment is paid in full or otherwise satisfied. RHCDS loan

guarantee funds may not be used to satisfy the judgment. If the judgment remains unsatisfied or if the applicant

is delinquent on a Federal debt and is unable to resolve the delinquency, the Lender will reject the applicant.

SECTION 305.00 – RESIDENTIAL MORTGAGE CREDIT REPORT

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A Residential Mortgage Credit Report (RMCR) requires that information be accessed from at least two national

repositories (data sources). The RMCR is a detailed account of the employment, credit history and residence

history as well as public records of the individual.

The credit report must:

Identify each applicant by name and verify the individual’s social security number.

Check that any social security number discrepancy must be disclosed by the Credit Reporting Agency.

Provide a bureau score, accompanied by reason codes, for each applicant on the report.

Be an original with no erasures, whiteout, or alterations.

Provide the name, address and phone number of the reporting agency preparing the report.

List all inquiries made in the last 90 days.

Search all repositories for each locality where the applicant has lived for the past two years.

Access no less than two national repositories and identify those which were accessed when compiling the

report (acceptable repositories are Equifax, Experian, TransUnion, and Consumer Credit Assoc.).

Attempt to verify all disclosed accounts and indicate if unable to verify certain references. The account

information must contain the date the account was opened, high credit limit, current status, required payment

amount, unpaid balance and payment history which lists a historical status of each account with the number

of times past due.

Contain a search at least two public record sources and disclose any discovered judgments, tax liens,

bankruptcies or foreclosures.

When the credit reporting agency is unable to verify a social security number as belonging to the applicant, refer

to the pre-funding guidelines.

305.01 - Three Repository Merged Credit Report

May utilize a three repository merged credit report in lieu of the Residential Mortgage Credit Report (RMCR). The

credit report must contain all credit that is available in the repositories, be accurate and complete and provide an

account of the credit, residence history and public record information of each applicant. The merged report must

meet all of the requirements of a RMCR, with the exception of the applicant interview and confirmation of

employment.

The report must provide a bureau score, accompanied by reason codes, for each applicant.

The report must include all of the information verified by the three repositories.

Any social security number discrepancy must be disclosed by the repositories.

Each individual trade line must identify the primary repository which provided the account information.

The applicant is unable to provide documentation to support payment of collections, judgments or liens which

reflect open balances on the merged report;

The applicant indicates the accounts have different balances than what is shown on the report, but is unable

to provided updated account statements; or

The underwriter determines a RMCR is required to properly underwrite the mortgage.

The faxed alternative documentation process was used.

Business Credit Report

A Business Credit Report is required for self-employment applicants on Corporations and S Corporations.

305.02 - Unacceptable Credit Reporting Practices

It is not acceptable for the credit reporting agency to change information collected from the repositories. It is

acceptable to delete duplications, to translate codes into plain language, and make appropriate adjustments to

resolve conflicting information. The credit reporting agency may not:

Restrict information collected to a period of time shorter than seven years.

Delete lines of trade which pertain to an applicant’s bankruptcy.

Remove any derogatory information without written authorization of the creditor.

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Remove any public record information.

Fail to report social security number discrepancies.

305.03 - Credit Reports on Non-Borrowing Spouses

FHA requires a credit report (RMCR) on the applicant’s spouse in community property states where the spouse

will not be an applicant. The community property states where this will be required are:

Arizona, Louisiana, Texas, California, Nevada, Washington, Idaho, New Mexico, Wisconsin

Although the credit history of the spouse will not be considered as a basis for loan approval, the borrowing spouse

must qualify with all obligations, personal, joint and those of the non-borrowing spouse.

305.04 - Separate Verifications of Credit

When the credit report does not contain a reference covering the most recent 12 months for the applicant’s

mortgage or rent payments, a direct verification will be required providing the mortgage payment history and/or

rental payment history for the 12 months preceding the loan application, as required.

305.05 - Non-Traditional Forms of Credit

When an applicant lacks a traditional established credit history, then an alternative credit history must be provided

using non-credit payment references. This non-traditional credit must cover a 12 month period and should

adequately demonstrate the applicant’s ability to successfully manage regularly scheduled financial obligations.

Forms of non-credit payment references must document timely payment of

Rental History

Appliance rental or purchase

Cable television bills

Daycare expense

Dealer financed auto loan

Electricity bills

Furniture rental or purchase

Gas company bills

Insurance premiums

Jewelry purchases (store financing)

Long term layaways

Medical bills paid per payment agreement directly to the provider

Owner financing on purchased goods

Rental of current or previous residence

Rent-to-own agreements

Store financing

Telephone Bills

Personal Property Tax bills

In developing non-traditional credit, only those types of credit that require the mortgage applicant to make periodic

payments on a regular basis should be considered (the payment schedule must call for payments at intervals that

are no longer than every three months).

In order for the underwriter to consider verified non-credit payment references, the documentation must provide

the following information:

To whom the payments were made;

The nature of the obligation (utilities, payment for purchases, insurance, etc.);

When the account was opened

The amount of the payment required or made;

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When the payments are due;

A payment history;

Any outstanding balance;

The historical status of the account in a format that indicates the number of times and duration of times past

due.

General reference letter without the above information are not sufficient documentation for establishing an

acceptable credit reputation.

In addition, the underwriter must be provided with one or more of the following:

Applicant’s letter explaining the lack of credit history/use;

Applicant’s budget indicating provision for new mortgage debt, any other recurring debt and personal

expenses;

Evidence of homebuyer counseling.

When no credit history can be established, adherence to standard ratios will be required, unless the applicant has

extraordinary compensating factors.

305.06 - Document Expiration Dates

Document expiration dates vary based upon whether the property is existing or under construction. The oldest

document being considered determines the expiration date. Documents considered are the credit report, the

most recent of a group of canceled checks provided to verify payment history, or individual written verifications of

mortgage, rental or other debts, bank statements or investment account statements. That will include all

documents provided for alternate documentation including pay stubs and bank account statements.

All asset verifications must be based upon current documentation; this includes the verification of assets for

reserves. Expired documents must be fully updated and all information re-verified.

Existing construction: not older than 120 days from the date of the note.

All pre-existing homes; or

FHA properties where construction began prior to the date of the appraisal.

Proposed or under construction: not older than 180 days from the date of the note.

FHA properties where construction had not been started at time of the appraisal.

305.07 - Credit Explanation Letters

Credit reporting agencies are required to report credit history for the past 7 years (bankruptcy and foreclosures

may be 10 years); the credit report may contain derogatory history for the same period of time (past seven to ten

years).

Outside of automated approvals, underwriters must provide justification for the underwriting decision. The

underwriter always has the right to ask for additional documentation and/or an explanation for any issue which

remains unclear or that may have an impact on the underwriting decision. The underwriter may require the

applicant’s explanation for derogatory credit that has occurred more than 24 months prior to application. Any

letter of explanation must be provided directly from the applicant. Applicants must provide a written explanation of

the circumstances surrounding the derogatory credit and must sign and date the letter.

Credit explanations must make sense and cannot conflict with other verified information or documentation in the

file. When an applicant indicates unusual circumstances have contributed to serious delinquencies or derogatory

credit, documentation to support those circumstances should be obtained if necessary to justify a decision to

approve a loan with recent credit problems.

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SECTION 306.00 – REVIEWING CREDIT HISTORY / ANALYSIS OF RISK

306.01 – Non-Traditional Credit Verification and Evaluation

FHA has long permitted mortgage lenders to establish a borrower’s credit history through nontraditional means,

including the compilation of performance on rental payments; utility bills; telephone and cellular phone services;

cable television service; payments to local stores, etc. This is further described in handbook HUD-4155.1 REV-5,

paragraphs 2-3 and 2-4B.

This practice is appropriate when the borrower has insufficient trade lines with Equifax, Experian, or TransUnion

and a credit bureau score cannot be derived. Lenders also may use nontraditional credit verification to augment

“thin-file” credit reports where a credit score was generated but based on only a few trade lines. However,

nontraditional credit reports may not be used to enhance any poor credit history on a traditional credit report.

Nontraditional Credit—Basic Guidance

The following provides guidance in establishing that a borrower has sufficient credit references for evaluating bill

paying habits, which include: three (3) credit references, including at least one from Group I, covering the most

recent 12 months activity from date of application. Group I references should be exhausted prior to considering

Group II for eligibility purposes, as Group I is considered more indicative of a borrower’s future housing payment

performance. Borrowers with no Group I trade references will be underwritten using the criteria set forth under

“insufficient credit” below.

Group I – rental housing payments (subject to independent verification if the borrower is a renter), utility

company reference (if not included in the rental housing payment), including gas, electricity, water, land-line home

telephone service, cable TV. If the borrower is renting from a family member, request independent

documents to prove regularity of payments, such as cancelled checks.

Group II – insurance coverage, i.e., medical, auto, life, renter’s insurance (not payroll deducted); payment to

child care providers – made to a business providing such services; school tuition; retail stores – department,

furniture, appliance stores, specialty stores; rent to own – i.e., furniture, appliances; payment of that part of

medical bills not covered by insurance; Internet/cell phone services; a documented 12 month history of saving by

regular deposits (at least quarterly/non-payroll deducted/no NSF checks reflected), resulting in an increasing

balance to the account; automobile leases, or a personal loan from an individual with repayment terms in writing

and supported by cancelled checks to document the payments.

Verifying Nontraditional Credit

We prefer all nontraditional credit references be verified by a credit bureau and reported back to the lender as a

nontraditional mortgage credit report (NTMCR) in the same manner as traditional credit references. A NTMCR

is designed to assess the credit history of the borrower without the benefit of institutional trade references and

should format as traditional references – including creditor’s name, date of opening, high credit, current status of

the account, required payment, unpaid balance, and a payment history in the delinquency categories of 0x30,

0x60 etc. It should not include subjective statements such as “satisfactory, acceptable, etc.”

Only if a NTMCR is impractical or such a service is unavailable may a lender choose to obtain independent

verification of trade references. Documents confirming the existence for a nontraditional credit provider may

include a public record from the state, county, or city records, or other means providing a similar level of objective

confirmation. To verify the credit information, lenders must use a published address or telephone number

for that creditor and not rely solely on information provided by the applicant. Rental references from

management companies with payment history for the most recent 12 months may be used in lieu of 12 months

cancelled checks. Credit references may also be developed via independent verification directly to the creditor. If

a method is used to verify credit information or rental references other than NTMCR, all references

obtained from individuals must be backed up with the most recent 12 months cancelled checks.

Evaluating Nontraditional Credit

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The following guidelines apply when evaluating borrowers with nontraditional credit histories. A satisfactory credit

history, at least 12 months in duration, must include:

No history of delinquency on rental housing payments

No more than one 30-day delinquency on payments due to other creditors

No collection accounts/court records reporting (other than medical) filed within the past 12 months

Insufficient Credit

The following guidelines apply when evaluating borrowers with no credit references, or otherwise having only

Group II references. A satisfactory credit history, at least 12 months in duration, must include:

No more than one 30-day delinquency on payments due to any Group II reference

No collection accounts/court records reporting (other than medical) filed within the past 12 months

In addition, for such borrowers, to enhance the likelihood of homeownership sustainability, the following

underwriting guidance is being provided:

Qualifying ratios are to be computed only on those occupying the property and obligated on the loan, and

may not exceed 31 percent for the payment-to-income ratio and 43 percent for the total debt-to-income ratio.

Compensating factors are not applicable for borrowers with insufficient credit references.

Borrowers must have two months of cash reserves following mortgage loan settlement from their own funds

(no cash gifts from any source should be counted in the cash reserves for borrowers in this

category).

306.02 - Applicant’s Willingness to Repay Debt/Manual Underwriting

When evaluating an applicant’s credit history, primary emphasis will be placed upon the manner in which the

monthly housing expenses have been paid. Consideration will next be given to the timeliness with which

installment loans, revolving accounts and other obligations have also been met.

The credit report must show the applicant has a history of paying obligations in a timely, responsible manner, and

if, for some reason, payment was delayed, every effort was made to rectify the situation as soon as financially

possible. This scenario represents a willingness to repay obligations.

Greater emphasis is to be placed upon the applicant’s overall history of repayment, than upon isolated incidents

of late payments which are not the result of an applicants disregard for obligations. The underwriter must take

into consideration that even the most creditworthy applicant occasionally may experience a problem, such as slow

or lost mail, or a disputed bill.

Credit history is considered for the past 7 years. Barring serious derogatory credit such as judgments,

bankruptcies and foreclosures, the past twenty four (24) months of an applicant’s credit is of primary concern.

Recently opened accounts do not establish credit history as they are not an indicator of an individual’s ability to

repay debt since only a limited number of payments have been made on the account.

Delinquencies of 60 days or more are considered serious and indicative of an applicant’s inability to manage

finances or a possible disregard for obligations. When the applicant’s credit history reflects a pattern of late

payments which involve several accounts and a significant amount of debt, the underwriter must determine

whether the delinquencies were an isolated incident due to unforeseen circumstances beyond the applicant’s

control, or whether the problems were due to the applicant’s financial mismanagement or disregard for

obligations. A 12 month period of clean credit is not sufficient for an applicant who has had a prior history of

serious, chronic delinquencies.

The minimum time period established following a bankruptcy or foreclosure indicates the earliest time an

individual may be eligible for consideration for a mortgage. This does not mean the individual’s request for a loan

will be approved because the minimum time period has passed. The same may be true of other derogatory

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credit. Having recently paid the debt does not automatically make the applicant eligible for loan approval.

Consideration must be given to the applicant’s efforts to repay those debts.

The underwriter must review all documents in the file to determine that the applicant had a willingness to repay

the debts involved but was unable to do so due to extenuating circumstances.

If it is determined that the applicant had the means to repay the debt but elected not to use available assets for

that purpose, the applicant will not be eligible for a mortgage even when a minimum time period has passed.

Examples of the situations which would be unacceptable are:

An individual who let a rental property be foreclosed upon because it had a negative cash flow;

A property which was foreclosed upon due to the applicant’s inability to sell it for the outstanding loan amount,

when the applicant had substantial assets or the ability to obtain funds sufficient to cover any short fall at

closing:

A bankruptcy which was filed due to an applicant becoming overextended for credit and the applicant

currently has numerous accounts with outstanding balances; or

An individual who filed bankruptcy for what does not appear to be insurmountable debt, especially when the

individual had a home with substantial equity exempt from the bankruptcy.

If there is a question about an applicant’s willingness to repay obligations, the underwriter should request and

review documents from that time period. The underwriter can utilize the applicant’s financial and income data to

determine whether sufficient assets were available to avoid the serious credit deficiencies. An applicant’s

unwillingness to use available assets to satisfy debt obligations indicates a high credit risk and unacceptable

credit behavior.

306.03 - Debt Payoff/Pay Down

In each application, the underwriter must evaluate the loan request to determine if liquid assets are available to

pay off debts for qualifying. The underwriter must consider debt payoff as an alternative in justifying each

approval or denial of a loan request. In those cases, the applicant must have sufficient funds to meet down

payments, closing costs, pre-paids, any required reserves and adequate funds to pay off any debt. Verification of

sufficient funds must be provided in the loan fife. Consideration must be given to the type of debt being paid off,

as well as the applicant’s spending habits, to determine if debt payoff actually succeeds in decreasing the risk.

An applicant must not be asked or encouraged to pay off debts prior to underwriting the loan. The loan file should

indicate those debts the applicant has elected to payoff and the underwriter will condition for evidence of payoff

prior to or at loan closing.

306.04 - Paying Down Debt to Qualify

It is’ not acceptable for an applicant to “pay down” the balance on an installment or revolving debt to fewer than

ten months remaining so that the debt will not count in the overall debt ratio.

On installment loans where the debt will not exceed ten months at closing, underwriting will not include the debt in

ratio unless the payment is substantial and the applicant has limited cash reserves. The underwriter should state

on the 1008, the Mortgage Credit Analysis Worksheet or the Loan Analysis why the debt was included, or

excluded, from the qualifying ratios.

SECTION 307.00 – CREDIT AND LIABILITY DOCUMENTATION

307.01 - Alimony/Separate Maintenance

Alimony and separate maintenance are considered to be long term obligations. The applicant must provide proof

of obligation arising from a divorce or legal separation.

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Because of the tax consequences of alimony payments, the lender may choose to treat the monthly alimony

obligation as a reduction from the borrower’s gross income in calculating qualifying ratios, rather than as a

monthly obligation.

307.02 - Automobile Leases

Automobile lease payments must be treated as an ongoing long term obligation, regardless of the remaining term

on the lease. The current lease payment must be included in the applicant’s long term obligations unless the

applicant can provide conclusive evidence that:

Another method of transportation has been secured (any new debt must be included in ratios); or

An agreement, signed prior to mortgage loan closing, will renew the lease or purchase the vehicle (any new

debt must be included in ratios).

If the debt is fully paid, no payment will be counted.

307.03 - Bankruptcy

When reviewing documents pertaining to an applicant’s bankruptcy, the type of bankruptcy must be determined.

In a Chapter 13 Bankruptcy, debts are frozen and no additional interest is charged on the debt. A schedule of

repayment is established and the debtor obligates themselves to repay the outstanding debt. In the Chapter 7

Bankruptcy, the debts are discharged (wiped out) and no repayment is made to the creditor. Care should be

taken to determine that the applicant did not change from a Chapter 13 to a Chapter 7 or vice versa. Guidelines

for these bankruptcies may differ

The schedule of debts must support the applicant’s explanation for the bankruptcy. For example, if a bankruptcy

was the result of excessive medical bills, numerous doctor and hospital bills should appear on the schedule of

debts contained in the bankruptcy petition. Review the debts to determine whether a foreclosure was included in

the bankruptcy, and if it was, then foreclosure guidelines will apply. If the bankruptcy was recent, any debts which

the applicant reaffirmed (continued to pay) should be verified and must reflect a satisfactory payment history

whether current or paid in full.

Each applicant, who has filed bankruptcy, must be evaluated on a case-by-case basis to determine eligibility for

financing. Generally, bankruptcy must be a result of extenuating circumstances over which the applicant had no

control. The underwriter must investigate the circumstances which caused the bankruptcy to be reasonably

certain the events which caused the bankruptcy are not likely to recur. In all cases, the applicant must have reestablished

good credit and demonstrated an ability to successfully manage personal finances. Re-established

credit is not accomplished through payroll deduction loans. The applicant must clearly take responsibility for

actively managing personal finances. The file must contain:

Copies of the bankruptcy petition, schedule of debts and the discharge papers indicating which debts were

discharged;

Evidence that all debts not satisfied by the bankruptcy have been paid or are being paid in a satisfactory

manner (only those payments or delinquencies which occurred during the bankruptcy are to be omitted from

credit reporting - those payments since discharge on reaffirmed debts must be verified and paid on time);

A written statement from the applicant satisfactorily explaining the causes of the bankruptcy, and

Any other evidence necessary to support the fact that factors outside the applicant’s control caused the

bankruptcy and the applicant has re-established and maintained an acceptable credit reputation.

A self employed applicant with a prior bankruptcy which was the result of a business failure is not a candidate for

financing unless three (3) years have passed since the bankruptcy and the file contains evidence the new

business is financially sound.

When an applicant has had a foreclosure on a mortgaged property included in a bankruptcy, a 3 year time period

will be used for determining eligibility for a mortgage.

A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at

least two years have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower(s)

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must have re-established good credit or chosen not to incur new credit obligations. The borrower(s) also must

have demonstrated a documented ability to responsibly manage their financial affairs. An elapsed period of less

than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was

caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to

manage his or her financial affairs in a responsible manner. Additionally, the lender must document that the

borrower’s current situation indicates that the events that led to the bankruptcy are not likely to recur.

A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage provided the

lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s

payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower

must receive permission from the court to enter into the mortgage transaction.

307.04 - Business Debts (Self-employed Applicant) Corporations

An applicant may be personally responsible for debts incurred for business related expenditures that appear on

the applicant’s credit report. The business debt will not be included in the applicants obligations if the applicant

can provide 12 months canceled checks showing the business makes all the payments.

307.05 - Child Care

Child care is not considered when qualifying an applicant.

307.06 - Child Support

Court ordered child support is considered to be a long term obligation. The payment from the 1003, pay stub or

other documentation in the file must be included in the debt to income ratio. In order to negate the payment the

borrower must provide documentation that there are less than 10 payments remaining.

Voluntary child support is also considered a long term debt when disclosed by the applicant or when disclosed by

documentation in the loan file.

Child support that is in arrears must be brought current. If a payment schedule has been established with the

Court for the past due amount and a history of satisfactory payments is provided, the applicant will not be required

to pay the past due amount in full. Both the payment for the past due child support and the regular court ordered

support payment will be included in the applicant’s income to total debt ratio.

Voluntary child support is considered to be a liability on FHA financing if disclosed by the applicant. The applicant

should provide documentation, such as a voluntary child support agreement or other documents, to support the

amount and duration of the child support to be paid.

307.07 - Collection Accounts

FHA does not require that collection accounts be paid off as a condition of mortgage approval. Collections

indicate a borrower’s regard for credit obligations and must be considered in the analysis of creditworthiness with

the DE Underwriter documenting their reasons for approving a mortgage where the borrower has collection

accounts on a manually underwritten loan. Also the borrower must explain in writing the circumstances

surrounding the collections. If loan is approved through the Total Scorecard AUS System (LP or DU), no further

explanation is required.

307.08 - Consumer Credit Counseling Services (CCCS)

Participation in a consumer credit counseling payment program does not disqualify a borrower from obtaining an

FHA-insured mortgage provided The Lender documents that one year of the pay-out period has elapsed under

the plan and the borrower’s payment performance has been satisfactory (i.e., all required payments made on

time). In addition, the borrower must receive written permission from the counseling agency to enter into the

mortgage transaction.

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Applicants who have fully completed CCCS or similar credit counseling are subject to normal, standard credit

criteria, including payment history and letter of credit explanation.

307.09 - Contingent Liability/Co-Signed-Debts

When the applicant has a contingent liability resulting from having co-signed for another party to obtain credit, the

debt must be included in the applicant’s total debts unless:

The applicant can provide evidence that the primary obligor has been making the payments on a regular

basis; and

There have been no delinquent payments in the previous 12 month period; and

The due date and amount of loan payment must be provided.

Cash as a source of payment is not acceptable. The applicant must be able to furnish canceled checks,

copies of consecutive money orders, etc. for a 12 month period when payment history is not shown on the

credit report.

If the co-signed account has had any late payments in the last 12 months, the payment will be included in the

applicant’s income for total debt ratio. A letter of explanation for the late payments must be provided by the

applicant - OR - If the co-signed account ,has had late payments-in the last 12 months and the applicant can

provide a court order, final decree of divorce, or legal separation indicating debt is the responsibility of the other

party, the debt will not be included in qualifying.

The underwriter must clearly document and justify any exception to this guideline.

When a mortgage applicant remains obligated on an outstanding FHA insured mortgage secured by a property

that has been sold or traded within the last twelve months without a release of liability, or is to be sold on

assumption without a release of liability being obtained, the contingent liability must be considered unless:

The originating lender of the mortgage being underwritten obtains from the servicer of the loan assumed, a

payment history showing that mortgage has been current during the previous 12 months: or

An appraisal or dosing statement from the sale of the property supports a value that results in a 76% loan-tovalue

ratio, i.e., the outstanding balance on the mortgage loan minus any UFMIP, if applicable cannot exceed

75% of the appraised value or sales price.

Co-signed Obligations – if the individual applying for an FHA-insured mortgage is a co-signer or is otherwise

co-obligated on a car loan, student loan, mortgage, or any other obligation, contingent liability applies unless

the lender obtains documented proof that the primary obligor has been making payments during the previous

12 months on a regular basis and does not have a history of delinquent payments on the loan.

307.10 - Deed in Lieu of Foreclosure

A conveyance of a deed-in-lieu of foreclosure disclosed on a credit report or by the applicant is considered

significant derogatory information and must be attributable to documented extenuating circumstances.

This derogatory information will be handled in the same manner as a foreclosure.

307.11 - Delinquent Housing (Mortgage or Rental)

An applicant’s ability to successfully pay his or her monthly housing expense is traditionally the most critical piece

of credit. All housing payments that are reported as over 30 days late are considered delinquent when evaluating

an applicant’s credit. In particular, payments for rent or mortgage that were paid over 30 days late, in the last 24

months, are considered a serious credit deficiency. An applicant with such late housing payments may be

considered if the credit deficiency is mitigated by a usable bureau score of 720 or greater.

An applicant with an isolated housing payment delinquency (such as one 30 day late) may be considered for loan

approval provided:

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The applicant provides a written explanation for the late payments that must indicate cause of the delinquency

was beyond the applicant’s control.

If available, documentation to support the cause of the delinquency must be provided.

The applicant must have demonstrated a prior satisfactory credit history over the last 24 months.

307.12 - Delinquencies – Installment

All installment accounts must be current. Installment debts are very similar to considering the individual’s ability

to repay these regularly scheduled, fixed payment an applicants housing expense when a debt.

One minor or isolated instance of an installment payment received no more than thirty days after the due date in

the past 24 months should not prevent an applicant from being approved. The applicant however, must provide a

satisfactory, written explanation for the late payment.

Multiple installment payments more than 30 days late or payments received 60 or more days after the due date

are considered a serious credit deficiency. In order for the applicant to be considered for loan approval, the

applicant must be able to show the delinquency occurred more than 24 months ago and was caused by

extenuating circumstances beyond the applicant’s control, circumstances that are not likely to reoccur.

Multiple installment payments paid more than 30 days after the due date, in the last 24 months, is considered

unacceptable credit and will be considered a reason to deny the loan request.

Satisfactory credit is considered to be re-established after the borrower, or borrower and spouse, have made

satisfactory payments for twelve (12) months after the date of the last derogatory credit item.

307.13 - Delinquencies - Revolving

All revolving loan accounts must be current. A minor or isolated 30 day late payment on a revolving account in

the past 24 months will not prevent loan approval. The applicant must provide a satisfactory, written explanation

for the late payment.

Repeated late payments to a substantial number of the applicant’s accounts or any payments received 60 or

more days past the due date, in the last 24 months, will be considered a reason to deny the loan request.

Late payments, 30 days or more, on revolving debt that occurred less than 24 months prior to loan application

must have a written explanation from the applicant.

Satisfactory credit is considered to be re-established after the borrower, or borrower and spouse, have made

satisfactory payments for twelve (12) months after the date of the last derogatory credit item.

307.14 - Delinquent Federal Debt-FHA

If the applicant is presently delinquent on to:

VA guaranteed mortgage

HUD Section 312 Rehabilitation Loan

Federal student loan;

Federal Taxes; or

Small Business Administration loan.

Any Federal debt including, but not limited or Title I loan;

The applicant is not eligible unless the delinquent account is brought current, or

The account is paid in full, or

A satisfactory repayment plan has been made between the applicant and the Federal agency owed and an

acceptable twelve (12) month payment history is provided.

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As in the case of other delinquent obligations, a written explanation from the applicant regarding the delinquent

debt will be required.

The overall analysis of the applicant’s credit worthiness must consider the applicant’s previous failure to make

payments to the Federal agency in the agreed to manner.

307.15 - Defaulted Student Loans

If on a defaulted student loan, the applicant and the agency or financial institution have re-negotiated a repayment

plan of the defaulted loan, copies of the last 12 months payments and Repayment Agreement will be acceptable.

If a repayment plan has not been re-established, the defaulted loan must be paid in full prior to loan closing.

307.16 – Deferred Loans

When an applicant has projected liabilities where payments are to begin at a future date, such as a student loan,

the first payment due date must be verified. When payments are scheduled to begin within 12 months of the date

of closing on the subject mortgage, the payment must be included in total liabilities unless the applicant can

provide written confirmation the debt has been deferred outside this time period.

Special deferments upon graduation are available for several years to doctors, teachers and other “in demand”

professions. These situations require evidence of the applicant’s ability to renew the deferment 12 months past

closing.

307.17 - Employee Savings Plan Loans (401K, etc.)

Retirement contributions such as a 401k, including the repayment of debt secured by these funds, will not be

considered as an obligation in determining the income to total debt ratio.

307.18 – Foreclosure/Primary Residence

When the property was financed on an FHA mortgage, the applicant is not eligible for a new FHA mortgage for 3

years from the date the claim was filed to the previous lender.

When a foreclosure was included in a bankruptcy, the three year waiting period takes precedence over the two

year period required for bankruptcies. When an ex-spouse was awarded both the property and the debt, it will not

be considered against the applicant if evidence is provided showing the mortgage was not in default at time of

divorce.

Exceptions to the three year requirement may be considered if the foreclosure, of the borrower’s principal

residence, was the result of extenuating circumstances and file can document the circumstances. The applicant

must complete a recovery period of not less than 12 months with no new delinquencies during that time.

Extenuating circumstances will not be given consideration if the foreclosure resulted in the payment of a claim on

an FHA or VA mortgage. The applicant must have a clear CAIVRS number.

307.19 - Foreclosures on Second Homes or Investment Property

Consideration will not be given to waiving the three year waiting period, even with extenuating circumstances,

when the applicant has had a foreclosure on an investment property or a second home. Applicants must wait the

full three years and must have re-established a satisfactory credit history. This restriction applies to all types of

mortgage loan requests.

307.20 - Garnishment

A garnishment is an order to attach property or income to satisfy a creditor. Generally, a garnishment of wages

will be indicated on an applicant’s pay stub or verification of employment. It may also appear on the credit report.

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Documentation to indicate the type of obligation, the amount of debt, the length of time required to repay the debt

in full and the applicant’s explanation for the garnishment will be required. The garnishment must be treated as a

debt and included in debt-to income ratios unless the underwriter determines, that due to the underlying reason

for the garnishment (such as a tax lien), the debt must be paid in full.

307.21 - Judgments

Court ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.

An exception may be made if documentation is provided there is a written repayment plan with the creditor, all

payments have been made in accordance with the agreement, and a six month payment history is obtained. The

monthly debt will be included in qualifying ratios.

307.22 - Lawsuits

When an applicant discloses involvement in a lawsuit, or a pending law suit appears on the credit report, it is

essential to determine the extent of the applicant’s exposure. Details of the lawsuit must be obtained from the

applicant’s attorney that outlines:

Whether the applicant is the plaintiff or defendant,

The amount of the lawsuit and potential damages which may be awarded;

The extent to which the applicant is covered by insurance against damages; and

The amount of the applicant’s potential out of pocket expenses.

When the applicant is the defendant, the applicant must have adequate insurance coverage and/or assets to

cover the amount of potential liability in the event the lawsuit is lost. If the applicant does not have adequate

resources, the loan may not be considered for approval until the lawsuit has been settled.

307.23 - Military Allotments

When reviewing the Leave and Earnings Statement (LES) for an active duty applicant, it is necessary to

determine the purpose of any allotments to determine if the allotments reveal additional undisclosed debt or are

merely reflecting payroll reductions for automatic payments. Only those allotments that meet the test for long

term obligations must be included in qualifying ratio. Allotments for insurance, etc. are not considered long term

debt.

307.24 - Military Advance Pay

When reviewing the Leave and Earnings Statement (LES) for an active duty application, it is necessary to

determine any deductions for advance pay. Any repayments of advance pay which meets the test for long term

obligations must be included in the qualifying ratio.

307.25 - Mortgage History

With the exception of automated approved loans, at minimum, a 12 month history of the applicant’s mortgage

history must be provided. FHA will accept the standard written verification of mortgage or rent. An original

verification form must be sent directly from The Lender’s correspondent to the applicant’s lender or landlord, and

upon completion, be returned directly by the lender or landlord to correspondent.

If verified on the RMCR or the tri-merged report, a separate verification is not required. If a mortgage payment

history is provided it must meet the following criteria:

Be computer generated or typed, not handwritten,

Identify the issuing lender or servicing agent,

Clearly identify the Borrower and the mortgage,

Show the total mortgage payment due,

Show the due date of each payment,

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Show a 12 month history of the dates when payments were applied, and show the current outstanding

principal balance.

Twelve (12) months of canceled checks must be obtained to support a satisfactory payment history, when the

applicant is renting from a family member, the seller, real estate agent, or other interested parties to the

transaction, or in transactions where there is an “identity of interest”.

Canceled checks must:

Be legible

Show the bank endorsement for deposit

Show the date of bank endorsement

Identify the servicer as payee

Be copied, front and back

307.26 - Mortgages

Currently Owned Real Estate Non-Income Producing: The monthly mortgage payment on all non-income

producing real estate owned by the applicant must be included in long term obligations. The payment must

include taxes and insurance (PITI). If owned free and clear, a monthly amount for taxes, insurance and HOA

dues must be counted as a debt.

Rental Properties: Rental losses are treated as long term obligations.

Applicants Current Residence: When the applicant will not have sold or leased his or her current residence by

the time of closing, the full mortgage payment (Pill) plus and HOA dues must be included in long term obligations.

If the residence is leased, the gross rents must be reduced to allow for maintenance and vacancy before the

outstanding mortgage payment is subtracted to determine net rental income or loss

If the applicant leases his or her current residence, only the net rental loss is considered as a long term obligation.

307.27 - Mortgages - Relocating Applicant

When the applicant is being relocated by an employer, the payment on the mortgage secured by the applicant’s

previous residence may be excluded from ratios provided a copy of the buyout, relocation, or purchase

agreement is provided and one of the following circumstances exist:

The applicant has executed a buyout agreement offered by his or her employer (or relocation company); or

The employer has agreed in writing to be responsible for payments on the mortgage loan until the property is

sold.

307.28 - Non-Borrowing Spouse/Non-Purchasing Spouse

A non-borrowing spouse is defined as a spouse who is taking title to the subject property, but who is not an

applicant for the mortgage loan. A non purchasing spouse is defined as a spouse who does not take title to the

subject property, is not included on the loan application and is not considered an applicant.

The applicant must disclose marital status on the initial application. Due to limitations set by FHA that loans must

be closed as processed, the spouse, who is not an applicant is considered a non-purchasing spouse.

Note: FHA closing instructions are that all individuals appearing on the loan application must appear on the

mortgage note. All owners of the property to be vested in title must sign the security instruments.

When either the applicant or the property is located in a community property state, the debts, except for those

obligations specifically excluded by state law, of the non-purchasing spouse must be considered in the same

manner as the applicants and must be included in the applicant’s total obligations. A Residential Mortgage Credit

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Report must be obtained, however the non-borrowing spouse’s credit history Is not to be considered a reason for

credit denial.

If required by state law, the non-purchasing spouse may be required to sign documentation, in order to perfect a

valid first lien. If the non purchasing spouse executes the security instrument for such reason, the individual will

not be required to sign the loan application and is not considered a borrower. In all other cases, the non

purchasing spouse is not to appear on the security instrument or otherwise take title to the property at loan

settlement.

307.29 - Projected Liabilities

When an applicant has projected liabilities where payments are to begin at a future date, such as a balloon note,

or a ninety day note, the first payment due date must be verified. When payments are scheduled to begin within

12 months of the date of closing on the subject mortgage, the payment must be included in total liabilities unless

the applicant can provide written confirmation the debt has been deferred outside this time period.

307.30 - Real Estate Expense

When an applicant owns property free and clear, expenses related to the property must be included in the

applicant’s long term debt before calculating ratios. Monthly property related expenses include: taxes, insurance,

maintenance, homeowners association dues, assessments and ground rents (leasehold payments). It these

expenses are already included in calculations used to determine net rental income or losses, they do not need to

be shown as a separate obligation. These expenses must be specifically included in obligations when the

property is not rented.

307.31 - Rental Loss

If net rental income is a loss, the amount of the loss must be included in the applicant’s total obligations.

307.32 - Revolving Accounts

Revolving accounts are credit cards or lines of credit (such as overdraft protection on a checking account) where

the balance fluctuates and the payment amount is based upon a percentage of the outstanding balance. In the

absence of a verified or stated payment amount according to the credit report, a payment will be calculated at 5%

of the outstanding balance, but not less than $10.

307.33 - Installment Accounts

All installment accounts with ten payments or more remaining will be included in long term obligations for

qualifying purposes. Payments less than 10 months remaining that are of such size as to impact applicant’s

ability to make the mortgage payments will be counted in the qualifying ratios.

Deduct significant debts and obligations from total effective income when determining ability to meet the mortgage

payments. Significant debts and obligations include:

Debt and obligations with a remaining term of 10 months or more, that is, long-term obligations, and

Accounts with a term less than 10 months that require payments so large as to cause a severe impact on the

family’s resources for any period of time.

Example: Monthly payments of $300 on an auto loan with a remaining balance of $1500, even though it should

be paid out in 5 months, would be considered significant.

Debts assigned to an ex-spouse by a divorce decree will not generally be charged against the borrower. This

includes debts that are now delinquent.

307.34 - Tax Liens

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Tax liens are of a great concern to The Lender, as the potential for additional liens against the subject property

would increase our risk as a lender. The applicant must explain the reasons for the tax lien (Federal, state, or

local).

Since the IRS or Department of Defense routinely take a second lien position on purchase money mortgages

without the necessity of independent documentation, eligibility for FHA mortgage insurance will not be jeopardized

by outstanding tax liens remaining on the property if a repayment plan has been made between the borrower and

the agency owed and is verified in writing with a 12 month satisfactory payment history.

Tax liens that are subordinated by the lien holder need not be paid in full providing all of the following criteria have

been met:

Taxing authority must provide copy of repayment agreement or terms of any repayment agreement. Monthly

debts will be included in ratios.

Taxing authority must provide an acceptable subordination agreement for review by underwriting prior to loan

approval..

A title insurance binder must be provided indicating no exception to subordinated tax lien prior to underwriting.

307.35 - Term Notes

When an applicant has a term note with interest only payments, the interest must be included in total obligations.

Additionally, if the applicant will not have sufficient liquid assets remaining after closing to repay the obligation, a

monthly principal reduction must be calculated and added to the applicant’s monthly obligations. If the note

becomes due and payable within 12 months of closing, the applicant must be able to either:

Pay the note in full or support sufficient payments to retire the debt; or

Provide the terms under which the note can be renewed and be able to qualify under those terms.

Computing the monthly principal reduction will be based upon the remaining term of the note.

307.36 - Debts Owed to Relatives

When an applicant has been renting from a relative, or has debts, including any mortgage, which are owed to a

relative, canceled cheeks must be obtained to support a satisfactory repayment history and to establish the

amount of the monthly payment. Since an applicant’s ability to repay debt is demonstrated by the manner in

which current debts are paid, confirmation that the applicant has been able to successfully meet a sizable

obligation is essential to evaluating the applicant’s ability to manage the proposed monthly housing expense.

307.37 - Margin Loans/Stock Accounts

Loans secured by stock are acceptable as assets to close and reserves. A margin loan from a stock broker is

also an acceptable source of funds for down payment and reserves. This allows the applicant to withdraw funds

from the brokerage account without having to sell the stock. Typically, no debt service is calculated on the margin

loan since the underlying value of the stock is at least twice the amount of the margin loan. The stock could be

sold at any time if needed to pay off the loan. If payments are required on the loan, they are to be included in the

total obligations ratio.

307.38 - Repossessions

Repossessions are considered to be major derogatory credit. A minimum period of two years must have elapsed

between the date of the repossession and the date of the application and a 24 month satisfactory, re-established

credit history must be documented.

When the repossession was a result of documented extenuating circumstances, a minimum period of 12 months

re-establishing credit and finances must have elapsed.

A repossession is considered derogatory credit. When a repossession is an isolated incident and applicant has

no other derogatory credit, extenuating circumstances may be considered without seasoning or time period.

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307.39 - Employment/Job Related Expense

Employment related expenses must be documented. Such costs may include but are not limited to dependent

care, significant (or unusual) commuting costs, tools or job specific costs, etc.

Employment related expenses must be included in total debts when qualifying the applicant(s).

307.40 - Short Pays at Loan Payoff

A “short pay” is defined as the proceeds a bank, mortgage lender, or private mortgage insurer accepts as payoff

that is less than the total principal and interest due on the loan. A short pay may occur when a property is sold as

a “pre-foreclosure” sale or at a sale that, due to lower property values, does not net sufficient proceeds to cover

the payoff of the mortgage loan. There may be other reasons why a borrower negotiates a short pay with a

lender.

The evidence of a short pay on the applicant’s credit will be viewed in the same manner as a foreclosure or deed

in lieu of foreclosure. The applicant must have reestablished a satisfactory credit history. The time period the

applicant must wait before obtaining a new loan will be the same as for foreclosures.

307.41 - Rent Payments

With the exception of automated approvals, at a minimum, 12 months of rental history must be verified. If the

credit report does not contain a reference covering the most recent 12 months of the applicant’s rent, then a direct

verification must be sent to the landlord.

Canceled checks to cover the most recent 12 month period application will be acceptable. The canceled checks

must:

Be legible.

Show the bank endorsement for deposit.

Show the date of bank endorsement

Identify the landlord as payee

Be copied, front and back

307.42 - NSF / Non-Sufficient Funds

Underwriters may require explanations for any NSFs found on an applicant’s bank statements, but generally will

not require an explanation for an isolated incident.

An isolated incident may be that loan file where there is no evidence of problems with cash flow (such as late

payments on credit accounts) and there is one or more NSF shown on the applicant’s bank statements in the past

60 days.

When review of the loan documents indicates cash flow difficulties and there are 2 or more NSFs in the last 60

days, the applicant’s written explanation will be required.

SECTION 308.00 – EXTENUATING CIRCUMSTANCES

When considering extenuating circumstances which apply to a bankruptcy, foreclosure, or deed-in-lieu of

foreclosure, a different level of scrutiny is applied than when reviewing delinquencies.

What is considered to be a reasonable excuse for a period of bad credit, such as a short term layoff, illness, or

similar incident, is not considered to be the caliber of financial hardship which should result in a bankruptcy,

foreclosure, or deed-in-lieu of foreclosure. The criteria which is applied to extenuating circumstances requires the

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occurrence of a catastrophic event which resulted in extreme financial hardship from which the applicant(s) could

not recover considering the income and debt load at that time. Specifically, events must have caused either a

long term loss of income which was not preventable or massive debt which the applicant was not able to pay.

Applicants must provide evidence of the events as well as an explanation.

An applicant who experienced financial difficulties due to extenuating circumstances in the past may present less

risk than that indicated by his or her credit score or other loan file documentation.

If there is a question about an applicant’s specific circumstances which is not addressed below, please contact

our Regional Underwriting Center.

308.01 - Examples of Extenuating Circumstances

Examples of situations which are considered to be extenuating circumstances and qualify for special

consideration when evaluating a bankruptcy, foreclosure, or deed-in-lieu of foreclosure are:

The death of a primary wage earner.

Loss of employment due to business closings and reductions-in-force which resulted in substantial

unemployment in the area, document with a copy of the Warren Act notice.

A primary wage earner suffered a serious long term illness or injury which resulted in a loss of income.

The uninsured extended illness or injury of an immediate family member which resulted in massive medical

bills.

308.02 - Situations That Do Not Qualify as Extenuating Circumstances

An applicant may be faced with a temporary financial hardship or an unrecoverable financial hardship that does

not fit the description of extenuating circumstances (that warrant special consideration when evaluating a past

bankruptcy, foreclosure, or deed-In-lieu of foreclosure). Examples of situations that do not qualify as extenuating

circumstances are:

A failed self-employed business venture;

The loss of a job in an area which is not experiencing high levels of unemployment or plant closures;

An applicant’s divorce;

The applicant was taken advantage of by a friend, relative, or spouse;

The applicant was out of town or out of the country and relied upon someone else to pay their bills; or

An individual moved or relocated (for whatever reason) and was unable to sell their home or other property.

308.03 - Financial Mismanagement

When an applicant has experienced significant adverse or derogatory credit caused by financial mismanagement,

the file must meet all of the following criteria:

Evidence on the credit report and other credit documentation that the applicant has re-established an

acceptable credit reputation for 1) at least a four year period; and 2) the applicant has the minimum number of

trade-line or non-credit payment references to meet guidelines.

Evidence on the credit report and other credit documentation that all of the applicant’s credit is current.

Evidence that the applicant’s credit history, in the most recent 48 months, shows no new public records for

bankruptcy, foreclosure, unpaid judgments or collections, no payments 60 days or more past due, and not

more than two payments 30 days past due.

An underwriting analysis on FHLMC Form 1077 or other file document relating the applicant’s explanation and

indicating the underwriter’s reasonable conclusion that the applicant has re-established an acceptable credit

reputation.

SECTION 309.00 – RE-ESTABLISHING CREDIT

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An important aspect of lending to an individual whose has experienced a period of flawed credit is the reestablishment

of an excellent credit history. A minimum period of twelve (12) months is necessary to determine

whether the individual has successfully recovered from their financial difficulties.

Recently opened credit accounts do not support a re-establishment of credit, as the payment history is too new to

evaluate.

Re-establishment of credit is considered for applicants who have a proven track record, i.e., applicants who had a

prior history of 24 to 36 months of excellent credit and experienced a period of difficulty but who have regained

their prior status.

Re-establishing credit must require a conscious effort on behalf of the individual to make timely payments.

Payroll deduction loans do not prove the applicant has the ability to actively manage monthly payments.

Alternative forms of credit or nontraditional credit documentation may not be used to re-establish credit that was

traditional and unsatisfactory. At a minimum, the applicant must be able to demonstrate an ability to manage

monthly housing expenses and payment of housing related utilities.

The period of flawed credit must be fully explained and the circumstances must be isolated and not likely to occur.

This section does not address chronic flawed credit. An applicant who has had prior credit pro