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.”

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

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

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

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

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

substitute another word.

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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.

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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 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.

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

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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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:

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.

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:

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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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.

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.

program;

the United States;

apply equally to co-signers.

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.

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.

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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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, to be effective during his or her lifetime.

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

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.

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

act as Trustee under the law of such state.

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

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.

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.

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

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.

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)

Comments:

Completed By: Date:

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:

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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.

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.

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

Number Assignment form complete with accurate information.

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:

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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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.

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.

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.

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.

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

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.

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.

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)

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.

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.

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.

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:

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,

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.

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.

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:

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

Revision 5.6.2008 Page 18 of 139

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

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

assets;

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:

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

of the property;

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.

gifted, the identity of the land, etc.)

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

Page 19 of 139 Revision 5.6.2008

the contract and cost, but is not a requirement.

already owns the land.

the construction or manufactured unit contract.

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

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

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 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.

Uniform Residential Loan Application; or

a builder under FHA’s builder certification procedures before construction began; or

or equivalent (does not apply to condominiums or manufactured housing because of the special

circumstances regarding their approval); or

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

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.

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.

Revision 5.6.2008 Page 20 of 139

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.

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.

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:

conducted (e.g., electric, gas, and/or water) – Unable to verify their functionality.”

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.

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.

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.

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.

Page 21 of 139 Revision 5.6.2008

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.

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.

(MPR) at the time of the appraisal in their as-is condition without repairs necessary.

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.

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.

cost of repairs identified by the appraiser to meet MPR are estimated to exceed $5,000.

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.

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:

Revision 5.6.2008 Page 22 of 139

M&M contractor, mortgage lenders should not process a mortgage application.

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.

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.

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.

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.

not be credited at settlement for any unused portion. Pre-paid items may not be paid out of the amount on

Line 5.

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.

be closed. Mortgage lenders should be prepared to complete their processing in sufficient time to allow the

borrower to meet this time frame.

In regard to case numbers, please note the following:

properties. When entering the case information in FHA Connection, mortgagees should select “Real Estate

Owned” for processing type.

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.

appraisal, the appraiser fields should be left blank.

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.

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

Page 23 of 139 Revision 5.6.2008

– 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.

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:

sales price.

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.

one unit properties and 85% for two, three, and four unit 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.

Revision 5.6.2008 Page 24 of 139

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.

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:

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:

Page 25 of 139 Revision 5.6.2008

address, legal description, owner of record, occupancy, assessment/tax information, and property rights

appraised.

highest and best use, shape, topography, draining, utility availability, and location in a FEMA designated

Special Flood Hazard Area.

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.

The appraiser must develop and report the appraisal in accordance with the scope of work requirements

established by USPAP and HUD/FHA.

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.

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.

The intended users of a REO appraisal is the M&M contractor, the lender (under certain circumstances) and

HUD/FHA.

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 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.

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:

Revision 5.6.2008 Page 26 of 139

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.

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:

marketability of the property to provide an incentive to buy the property un-repaired as opposed to repaired.

lead-based paint test

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.

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.

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

Page 27 of 139 Revision 5.6.2008

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.

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:

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.

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:

fees;

*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.

Revision 5.6.2008 Page 28 of 139

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.

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.

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:

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

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

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

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.

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”

Page 29 of 139 Revision 5.6.2008

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:

and

relocation, or other circumstances not related to recreational use; and

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.

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.

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:

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.

without an appraisal is limited to the remaining term of the existing mortgage plus 12 years (not to exceed 30

years).

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.

Connection.

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.

calculations used on the Mortgage Credit Analysis Worksheet (Form HUD 92900-WS).

Revision 5.6.2008 Page 30 of 139

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:

Fannie Mae and Freddie Mac)

http://www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm

mortgagee letter specific to said disaster)

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.

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.

purchase money mortgages regardless of the time between resales.

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.

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

Page 31 of 139 Revision 5.6.2008

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.

If the resale date is between 91 and 180 days following acquisition by the seller, the lender is required to obtain a

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.

The following sales are exempt from the time restrictions

by these agencies.

resale restrictions.

employees.

Enterprises.

by the President as federal disaster areas, will be exempt from the restrictions of the property-flipping rule.

Revision 5.6.2008 Page 32 of 139

The notice will specify how long the exception will be in effect and the specific disaster area affected.

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.

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

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

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.

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.

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

Page 33 of 139 Revision 5.6.2008

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).

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:

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

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

Revision 5.6.2008 Page 34 of 139

incurred after the purchase of the property may be added to the original sales price in calculating the mortgage

amount.

Unlimited CLTV for new subordinate financing, and unlimited CLTV for re-subordination or modification of existing

subordinate financing.

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.

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.

Unlimited CLTV for re-subordination and/or modification of existing subordinate financing. Applicable for FHA

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:

preceding the date of the loan application.

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.

reference number 08312006-91).

the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making

scheduled payments on all liens.

Page 35 of 139 Revision 5.6.2008

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.

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.

appraised value provided the borrower has owned the property for at least one year.

amount must be calculated using the lesser of the appraised value or the original sales price of

the property multiplied by 85%.

limited to 85% of the appraised value. The lender must document the acquisition by the borrowers via

inheritance.

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.

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

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.

Revision 5.6.2008 Page 36 of 139

required to be checked, however there is no need to check the Credit Alert Interactive Voice Response System

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:

upfront MIP, plus the new UFMIP being charged on the refinance; OR

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.

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.

required to be checked, however there is no need to check the Credit Alert Interactive Voice Response System

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:

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.

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:

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The Credit qualified streamline refinance will be used:

Permitted on owner-occupied loans and on investment properties purchased by governmental agencies and

eligible non-profits;

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.

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.

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.

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.

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.

Revision 5.6.2008 Page 38 of 139

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.

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.

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.

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.

and will require lead paint abatement;

when applicable;

refinance);

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:

Commitment of Appraised Value, prior to the start of construction; OR

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

Page 39 of 139 Revision 5.6.2008

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.

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

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.

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.

Compliance Panel Inspector, or by the local building authority. HUD will also accept a final inspection with a

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.

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.

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.

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.

waive the 10 year warranty requirement when the loan was not Pre-approved.

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.

HUD will accept the following:

equivalent, and Certificate of Occupancy or its equivalent. The building permit must be issued prior to the

start of construction; OR

Revision 5.6.2008 Page 40 of 139

reflecting adequate grading and drainage.

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.”

of occupancy, or their equivalents, must be included in the case binder as evidence of the required

inspections.

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.

inspection if requirements of HUD Handbook are followed.

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.

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).

or V flood zone and flood insurance is not required.

loan will require flood insurance. Elevation Certifications are not approved for condominium properties.

return frequency flood elevation identified by FEMA.

finished grade beneath the manufactured home must be at or above the 100 year return frequency

flood elevation identified by FEMA.

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.

Letter.

Page 41 of 139 Revision 5.6.2008

manufactured home)

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)

manufactured home)

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)

condominium or manufactured home)

Revision 5.6.2008 Page 42 of 139

Letter for High Ratio loans.

inspection); OR 10 year warranty and final inspection by fee inspector (HUD-92051); OR Early Start Letter

not available. The lender must document their efforts to obtain a HUD fee inspector in the HUD endorsement file.

not available. The lender must document their efforts to obtain a HUD fee inspector in the HUD endorsement file.

Page 43 of 139 Revision 5.6.2008

not available. The lender must document their efforts to obtain a HUD fee inspector in the HUD endorsement file.

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.

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.

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:

Section 501a of the Internal Revenue Code of 1986; AND

Revision 5.6.2008 Page 44 of 139

moderate income persons; AND

any member, founder, contributor, or individual; AND

bee approved as an instrumentality of government by the HOC but meets the above requirements, they may

also provide secondary financing if:

area.

Other organizations and private individuals may provide secondary financing under the following conditions:

mortgage limit for the area.

The repayable terms of the second mortgage must:

is sold or refinanced; and

housing expenses and all recurring charges, cannot exceed the borrower’s reasonable ability to pay (normal

underwriting ratios/criteria apply);

amount;

must acknowledge that he or she understands and agrees to those terms;

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.

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

Page 45 of 139 Revision 5.6.2008

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.

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

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.

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

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.

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,

Revision 5.6.2008 Page 46 of 139

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.

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.

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.

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.

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.

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.

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

Page 47 of 139 Revision 5.6.2008

determining a borrower’s ability to make payments on a new loan provided the requirements under Qualifying