SECTION 6 ELIGIBLE MORTGAGE LOAN

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1 6.01 Loan Types The Agency will purchase the following types of Mortgage Loans: 1. FHA insured loans, including buy downs, excluding GPM loans. These include, but are not limited to Section 203(b), 203(k), 234, and 223(c). 2. RD Guaranteed Loans. Mortgage Loans on two- to four-unit Residences are not eligible for the RD Guarantee. 3. PMI insured conventional loans up to 97 percent LTV. The PMI coverage must insure the loan down to at least 72 percent exposure except in the following cases when a minimum of 35 percent coverage is required: a. The Mortgage Loan has an initial Loan-to-Value Ratio greater than 95 percent; or b. The DU or LP underwriting decision (risk class) is less than Approved (DU) or Accept (LP). Some PMI companies may not consider the Down Payment and Closing Costs Assistance Program (DCA) or Start as an eligible source of funds for the mortgagor(s) minimum down payment requirement. However, DCA or Start may be used for funding the mortgagor s closing costs and prepaids. Refer to Section 11 and 12 for more information on DCA and Start. FirstHome eligible PMI companies include: Arch MI, Essent Guaranty, Genworth, MGIC, National MI, Radian, and United Guaranty. 4. VA Guaranteed Loans that carry the maximum potential guarantee allowed by the VA. 5. Uninsured loans with 80 percent loan-to-value ratio or less and that are underwritten to Fannie Mae/Freddie Mac standards. See Section 6.14 for further guidance on subordinate financing and eligible sources of down payment assistance. 6. HUD Section 184 insured loans Pool Insurance Pool Insurance is no longer required on FirstHome loans effective August 20, Mortgage Loan Amount The Mortgage Loan amount, prior to adding in the appropriate RD Guarantee Fee, VA Funding Fee, or FHA up-front Mortgage Insurance Premium, cannot exceed the mortgagor(s) acquisition cost of the transaction. This is not to be confused with the Acquisition Cost Area Limit. For more information on calculating the acquisition cost, refer to section Also, the Mortgage Loan amount cannot include closing costs or financing costs regardless of the appraised value of the residence and irrespective of the ability to do so by the mortgage insurer/guarantor. The Agency requires the borrower(s) to have a minimum investment of $500 in all cases.

2 6.04 Interest Rate The Interest Rate(s) that the Agency offers are subject to change daily and are posted at 3:00 a.m. on NDHFA s website. Lenders should confirm what Interest Rates are available before making a commitment to the applicant. Except in the case of special loan programs, Mortgage Loans are always fixed-rate loans. Temporary buydowns are allowed under the Program. They must be in compliance with the loan insurer/guarantor guidelines or in the case of uninsured loans, in compliance with Fannie Mae/Freddie Mac guidelines. In all cases, Mortgage Loans will have a term of 30 years Terms and Conditions All Mortgage Loans to be purchased by the Agency shall comply with all the requirements set forth in this Section 6 including, but not limited to, the following: 1. The purpose of the Mortgage Loan is to finance the acquisition of a Qualified Residence. 2. Unless otherwise provided by Program Directive: (i) the term of the Mortgage Loan cannot be less than 29 years and 11 months nor more than 30 years and one month for 30 year loans; (ii) the principal and interest payments must be sufficient to amortize the loan over the term thereof and are established at the time of loan closing; and, (iii) the payment shall commence not later than 60 days following loan closing. 3. The term of the Mortgage Loan cannot exceed 90 percent of the remaining economic life of the Qualified Residence. Therefore, the remaining economic life must be 33 1/3 years for a 30-year mortgage. 4. The Mortgage Loan must provide that the mortgagee has the right, at the Agency s option, to forgive the outstanding principal balance at any time. 5. The Mortgage Loan must be subject to prepayment by the mortgagor in whole or in part at any time without penalty or premium. (Collecting an additional month s interest or interest to the end of the month on payoffs is prohibited.) 6. The Mortgage Loan shall provide that the mortgagee is authorized to impose late payment charges in an amount not to exceed 4 percent per month, with respect to payments of principal, interest and escrow that are delinquent for at least 15 days. 7. The mortgagor is required to make monthly Escrow Payments to the mortgagee, or its Servicer, in an amount sufficient to enable the mortgagee, or its Servicer, to pay when due all taxes, assessments, any applicable premiums for Standard Hazard Insurance Policies, Flood Insurance Policies, any applicable GMI or PMI, and other charges to the extent actually charged or assessed Permitted Closing Costs Since the Program provides assistance for low- to moderate-income borrowers, Lenders should use good judgment in avoiding excessive and unnecessary closing costs. The Lender may charge the mortgagor and the seller, or only the mortgagor if there is no seller, origination fees and discount points in the total amount not to exceed the amounts specified by the Agency by Program Directive.

3 The Lender may also charge and collect from mortgagors those costs that are customary, reasonable, and necessary to close the mortgage (underwriting fees, commitment fees, etc.). Mortgagors may not pay a tax service fee and mark ups on third-party services will not be allowed Establishing P&I Payment When determining the amount of the principal and interest payment, always use the P&I factors furnished by the Agency at the time the Interest Rate(s) are established. The P&I amount should be rounded up to the nearest penny to ensure that the Mortgage Loan amortizes over the term of the mortgage. The P&I factors are posted on the Agency s website on the same page as the interest rates. In all cases, these factors are to be applied to the original principal balance of the Mortgage Loan Required Documentation All Program loans are subject to, and the Mortgage must include, language consistent with the requirements of the North Dakota Century Code. All riders to a note or mortgage, whether Agency or industry required, must be referenced on such note or mortgage, executed by the mortgagor(s), attached to, and recorded, if applicable, with the appropriate document. The Agency s Tax-Exempt Financing Rider (see Forms section on NDHFA s website) must be executed by the mortgagor(s), attached to, and recorded with the Mortgage. The Mortgage Note must contain language describing the holder s right to collect a late fee. If the form of Mortgage Note to be used for a Mortgage Loan does not contain such language, the following must be inserted and initialed by the mortgagor(s) at loan closing: If the Note Holder has not received the full amount of any monthly payment by the end of fifteen calendar days after the payment is due, the Note Holder may collect a late charge in the amount of 4 percent of the overdue payment. I will pay this late charge promptly, but only once on each late payment. ALL MODIFICATIONS TO THE NOTE AND MORTGAGE MUST BE INITIALED BY THE MORTGAGOR(S) Title Insurance As of the Mortgage Purchase Date, a Qualified Residence must be covered by a valid and existing, fully paid American Land Title Association (ALTA) Lender s title insurance policy (or title commitment) subject only to the following exceptions: 1. Real Estate property taxes and assessments not yet due and payable. 2. Covenants, conditions and restrictions, right of way, easements and other matters of public record as of the date of the recording of the related mortgage: a. That is insured by the title insurance described above. b. That is generally acceptable to the issuer of GMI or PMI and to prudent mortgage lenders.

4 c. Shall not materially impair the use or value of the premises or as to which appropriate steps, in the judgment of the Agency, have been taken to secure the interests of the Agency. The policy must insure that the title is generally acceptable and that the Agency s mortgage constitutes a first mortgage on a fee simple or leasehold estate. The title insurance policy must list all subordinate liens and state they are subordinate to the Agency s first mortgage on Schedule B Part II. Refer to Section 11 or Section 12 for title insurance requirements pertaining to the DCA or Start programs. The amount of the title insurance coverage must be at least equal to the original principal amount of the mortgage. The title insurance policy must state the name of the insured as follows based upon the mortgagee or title insurance company choice of a short form or long form policy: Short Form - The Name of the Insured on Schedule A must recite the legal name of the mortgagee and must include the language, its successors and/or assigns as their interests may appear. Long Form - The Name of the Insured on Schedule A must recite the legal name of either the mortgagee or The Industrial Commission of North Dakota acting as the North Dakota Housing Finance Agency and must include the language, its successors and/or assigns as their interests may appear. On the Long Form Policy, Schedule A, Item 4 must include all recordings of the mortgage and assignment of mortgage The Mortgagee is required to provide a satisfactory plot drawing for all properties with the exception of a condominium. If the subject property is a condominium contact your title insurance company (before closing) to determine whether they will require a plot drawing in order to issue the required ALTA Endorsement (Location). The Agency does not participate in the MERS program so no language to that effect can appear on the title policy. The title policy must be written using the most recent ALTA standard (long) form or short form. The following ALTA endorsements are required, as applicable: 1. ALTA Endorsement 4-06 or Condominium (or their equivalent) 2. ALTA Endorsement 5-06 or Planned Unit Development (or their equivalent) 3. ALTA Endorsement 7-06 or Manufactured Housing Unit (or their equivalent) 4. ALTA Endorsement Environmental Protection Lien 5. ALTA Endorsement 9-06 Restrictions, Encroachment, Minerals (or their equivalent) 6. ALTA Endorsement Location All endorsements must be attached to each policy or incorporated in the text or added by reference. Under certain circumstances additional endorsements may be required, for example,

5 in the case of an encroachment by the subject property s main improvements. Consult your title company prior to closing to determine what additional endorsement(s) are available to further protect the Agency s interest in the subject property and consult the Agency prior to closing to determine if such endorsements will be acceptable Acceptable Mortgage Accounting The amortization method of individual loan accounting, with interest calculated in arrears, must be used on all loans sold to the Agency. Under this method, the application of principal and interest of an individual mortgage payment is determined by first calculating the interest portion and applying the remainder of the payment to the principal balance. The interest is calculated by using the outstanding principal balance after application of the preceding payment. The interest, so computed, applies to the period preceding the due date of the installment being applied. The due date on all payments is always the first of the month. Where computations involve a multiple of installments (such as for delinquent installments or prepaid installments), each installment must be calculated in succession using a principal balance resulting after the prior calculation and principal application. Similarly, a method that strictly applies payments in accordance with a predetermined amortization schedule is also acceptable. All monthly interest calculations shall be made using a 30-day month, 360-day year. Factors used for such calculations must be carried to not less than six decimal places. Interest calculations for periods of less than a month (loans paid in full, odd days interest calculated at closing) shall be based upon a 365-day year Escrow Account Standards Escrow accounts for taxes, insurance, assessments and other charges are required on all Mortgage Loans originated for the Agency, no exceptions. Lenders, who release servicing to the Agency, should round the total payment (PITI) down to the nearest dollar. This is accomplished by reducing the escrow constant portion of the payment. The Lender shall compute the required escrow payment based on assessments, bills, and/or measurable estimates thereof and advise the mortgagor of such required payment at loan closing. Mortgage Loans on newly constructed or rural properties may involve parcel splits. In some jurisdictions, parcel splits are done only once a year. Because of this, the handling of the proration of taxes and the payment of the taxes for that year should be addressed prior to closing to eliminate any confusion as to who should pay taxes when they are due. For Mortgage Loans where the servicing is released to the Agency, items that must be escrowed include property taxes, special assessments, hazard insurance, flood insurance (if applicable), and mortgage insurance premiums. Do not include items such as credit life or disability insurance in the escrow payment. The escrow constant must equal 1/12th of the annual amount due, rounded down to make the total payment an even dollar amount. Include on the Mortgage Submission Voucher, if available, the Tax Identification Number only for the parcel of land subject to the Mortgage Loan. On a newly constructed Residence, when establishing the escrow payment, always consider the estimated taxes for the upcoming end of the year, not the previously assessed amount. Usually, the tax assessor s office will estimate taxes on Residences due to be completed before assessment time. In addition, in cities where tax abatements are in effect for newly constructed

6 Residences, the Lender should not assume that the Residence would automatically receive the abatement. The contractor may not have applied for the abatement or the city may require the homeowner to make such application. Do not base the tax escrow payment on a lower amount unless it is confirmed the tax abatement is in effect. A Residence may also be subject to a homestead or disability tax credit. Since such credits are typically available to the selling owner/occupants only, they may not apply to the mortgagor(s). Conversely, since this type of credit(s) has to be applied for each year, do not base the tax escrow payment on a credit, unless and until, it is confirmed one will be in effect for the mortgagor. Lenders must use the aggregate accounting method when determining the escrow requirements at loan closing and collect a two-month cushion in all cases. Since a cushion is required on all loans, compute and include the aggregate adjustment on the HUD settlement statement. The Initial Escrow Account Disclosure Statement is required by federal regulation on all Mortgage Loans. The initial escrow deposit shown on this statement must match the amount collected on the HUD settlement statement. Also, the escrow payment amount shown on this statement must reflect the payment disclosed elsewhere (payment letter, etc.) and actually being established. If improperly disclosed, the Agency will decide whether a new disclosure will be required from the originating lender or if the Agency will perform an escrow analysis to correct the payment amount Refinancing Interim/Bridge Loans Proceeds of a Mortgage Loan may be used to refinance a construction period loan, a bridge, or other interim loan having a term not in excess of 24 months. The mortgagor must be a First- Time Homebuyer as defined in Section 4.01 at the time the interim financing is entered into to be eligible for Agency financing. No portion of the proceeds of a Mortgage Loan may be used to refinance, directly or indirectly, an existing mortgage loan or loans of the Eligible Mortgagor on the Qualified Residence except for Major Home Improvement loans. Mortgage Loan proceeds may not be used to finance, directly or indirectly, the purchase of a Qualified Residence, except for Major Home Improvement loans: 1. Which, at the time the proposed mortgagor applied for a Mortgage Loan, was being purchased by such mortgagor pursuant to an installment purchase contract; or, 2. From a seller who himself was the contract purchaser thereof at the time the proposed mortgagor entered into a contract for the purchase of such Qualified Residence. Mortgage Loan proceeds may not be used to pay any financing or settlement costs and any other adjustments or pay the cost of any items deducted from the sales contract price in computing the Acquisition Cost of such Qualified Residence. FHA insurance premiums, VA funding fee and the RD Guarantee Fee may be paid from Mortgage Loan proceeds; provided, however, that the Mortgage Loan amount may not exceed the lesser of the Principal Value or Acquisition Cost of a Single Family Residence.

7 6.13 Private Mortgage Insurance Cancellation and Termination Policy Definitions: 1. Original Value = lesser of original sales price or original appraised value. 2. Current Value = value of home as determined by agency ordered appraisal. 3. Good payment history = current at time of request, no payment past due in the last 12 months, and no payment 60 days or more past due in the last 24 months. Automatic Termination of PMI (Private Mortgage Insurance) If a loan is current, PMI will automatically terminate on the date the principal balance of the loan is first scheduled, based solely on the initial amortization schedule, to reach 78 percent of the original value of the property. If the loan is not current as of the termination date, PMI will automatically terminate as soon thereafter as the loan becomes current. Borrower Requested Cancellation of PMI based on Original Value A borrower has the right to request the loan servicer to cancel the PMI: 1. On the date the principal balance of the loan is first scheduled to reach 80 percent of the Original Value of the property. 2. On the date the principal balance actually reaches 80 percent of the Original Value of the property. 3. All of the following conditions are met: a. The combined loan to value ratio of all NDHFA loans does not exceed 80 percent of the Original Value. b. A written request from the borrower to cancel the PMI is submitted to the loan servicer. c. The loan has a Good Payment History. d. A Brokers Price Opinion, Appraisal, or Certificate of Value ordered by the servicer at the borrower s expense shows the Original Value has not declined. Borrower Requested Cancellation of PMI based on Current Value A borrower has the right to request the loan servicer to cancel the PMI based on Current Value if the following conditions are met: 1. If the loan is two to five years old, the combined loan-to-value ratio of all NDHFA loans must equal 75 percent or less. 2. If the loan is greater than five years old, the combined loan-to-value ratio of all NDHFA loans must equal 80 percent or less. 3. A written request from the borrower to cancel the PMI is submitted to the loan servicer. 4. The Current Value is determined by a servicer ordered appraisal at the borrower s expense.

8 5. The loan has a Good Payment History. 6. Conditions 1 and 2 can be waived if significant improvements have been made that are clearly identified by comparing the original appraisal to the new appraisal Subordinate Financing/Eligible Down Payment Sources On FirstHome loan cases where subordinate financing ( or loans) is used to reduce the amount of the first mortgage, the combined loan-to-value (CLTV) must be used when considering the need for mortgage insurance. Thus, if the CLTV is greater than 80 percent, mortgage insurance will be required in accordance with this Section. Subordinate financing that is being provided by the Agency, another governmental entity or an Agency approved non-profit organization may be exempt from this CLTV requirement. For a list of eligible down payment programs that can be used in conjunction with the FirstHome program, see NDHFA s website. If a program is not listed, contact the Agency to determine whether the program can be approved. If the subordinate financing is an amortizing second mortgage loan with monthly or other required payments NDHFA will require the following procedures be followed in order to obtain Compliance Approval: 1. The subordinate financing request must be due to a denial of or inability to obtain any type of mortgage insurance/guarantee coverage. 2. If the subordinate financing is less than 10 percent of the lesser of the appraised value or the purchase price: a. Obtain from the entity providing the loan an approval letter explaining the terms of and necessity for the secondary financing. b. Submit the letter to NDHFA or a Delegated Compliance Underwriter, if applicable, to obtain Compliance Approval. 3. If the amount of the secondary financing is 10 percent or more of the lesser of the appraised value or the purchase price: a. Submit the loan package (including the above required document) to NDHFA for a loan review prior to closing to determine eligibility for purchase. Down payment/closing costs assistance programs that are soft second mortgages and are forgiven after an affordability period or require repayment only upon the sale of the property are not subject to this secondary financing policy. Any such program must be approved by the Agency, visit our website for a list of programs currently approved. If a program is not listed, consult the Agency to obtain approval Loan Assumption All FirstHome loans are assumable subject to the underwriting standards of the mortgage insurer/guarantor or, in the case of an uninsured loan, the underwriting standards of Fannie Mae/Freddie Mac. The assuming borrower(s) must meet all the eligibility requirements for the FirstHome program in effect at the time of the assumption. This includes, but is not necessarily limited to, the First-Time buyer and owner occupancy requirements, the Annual Income limits, and the Acquisition Cost limits.