Last Updated: October 20 th, 2014 FHA Guidelines

Transcription

1 Nations Direct Mortgage Last Updated: October 20 th, 2014 Contents 4506-T... 9 APPRAISAL... 9 PROPERTY ADDRESSES... 9 AGE AND DATE OF APPRAISAL... 9 APPRAISER REQUIREMENTS FORM REQUIREMENTS APPRAISALS OF PROPERTIES LOCATED IN DECLINING MARKETS PHOTOGRAPHS HUD-OWNED PROPERTIES SECOND APPRAISAL REQUIREMENTS SALES WITHIN 180 DAYS OF SELLER ACQUISITION APPRAISAL PORTABILITY APPRAISAL RESOURCES ASSETS AGE OF ASSET STATEMENTS LARGE DEPOSITS CASH SAVED AT HOME CHECKING AND SAVINGS ACCOUNTS EARNEST MONEY DEPOSITS PROCEEDS FROM THE SALE OF A PERSONAL ASSET PROCEEDS FROM THE SALE OF REAL ESTATE REAL ESTATE COMMISSION FROM SUBJECT PROPERTY RENT CREDIT RETIREMENT SAVINGS SAVINGS BONDS SECURED LOANS STOCKS AND/OR BONDS SWEAT EQUITY HELPFUL LINKS ASSETS FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 1 of 75

2 AUS TOTAL SCORECARD SYSTEM BORROWERS ELIGIBLE AND INELIGIBLE ELIGIBLE BORROWERS INELIGIBLE BORROWERS HELPFUL LINKS AUS BUY-DOWNS CASE NUMBER ASSIGNMENT/TRANSFER BORROWERS PROPERTY ADDRESSES ORDERING CASE NUMBERS CASE NUMBER TRANSFERS CASH RESERVES TO 4-UNIT PROPERTIES NON-TRADITIONAL CREDIT FEWER THAN TEN PAYMENTS REMAIN ON EXCLUDED DEBT CLOSING COSTS ALLOWABLE/NON-ALLOWABLE CLOSING COSTS CLOSING REQUIREMENTS PROPERTY ADDRESSES CLOSING REQUIREMENTS ESCROW STATES COMPENSATING FACTORS CONDOMINIUMS SITE CONDOMIUMS CONDOMINIUM RESOURCES CONFLICT OF INTEREST CREDIT HISTORY CREDIT INQUIRIES DEROGATORY CREDIT EXPLANATIONS NON-TRADITIONAL CREDIT REQUIREMENTS BORROWERS HAVE CREDIT SCORES RENT VERIFICATION FORECLOSURES FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 2 of 75

3 CHAPTER 7 BANKRUPTCIES CHAPTER 13 BANKRUPTCIES JUDGMENTS TAX LIENS AUTHORIZED USER ACCOUNTS DISPUTED ACCOUNTS MORTGAGE LATE PAYMENTS SHORT SALES EXTENUTING CIRCUMSTANCES-STANDARD HUD S BACK TO WORK INITIATIVE- EXTENUATING CIRCUMSTANCES DEFAULTED CAIVR NUMBERS CREDIT HISTORY RESOURCES CREDIT REPORTS AGE OF CREDIT REPORTS CREDIT SCORES MEDIAN CREDIT SCORE (REPRESENTATIVE CREDIT SCORE) MINIMUM CREDIT SCORES DISCLOSURES/FORMS REQUIRED DISCLOSURES AND FORMS DOWN PAYMENT REQUIREMENTS PURCHASE TRANSACTIONS DOWN PAYMENT REQUIREMENT RESOURCES DOWN PAYMENT ASSISTANCE EMPLOYMENT HISTORY/VERIFICATION EMPLOYMENT HISTORY EMPLOYMENT GAPS MATERNITY LEAVE EMPLOYMENT RESOURCES ENERGY EFFICIENT MORTGAGES ESCROWS ESCROW HOLDBACKS BANK-OWNED PROPERTIES FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 3 of 75

4 GEOGRAPHIC RESTRICTIONS ELIGIBLE LENDING AREAS COMMUNITY PROPERTY STATES ARIZONA CALIFORNIA COLORADO HAWAII MICHIGAN NEVADA OREGON TEXAS UTAH WASHINGTON GIFT FUNDS GIFT DONORS GIFT OF EQUITY INELIGIBLE SOURCES FOR DOWN PAYMENT GIFT DOCUMENTATION GIFT OR GRANT PROGRAMS INCOME ALIMONY AND CHILD SUPPORT AUTOMOBILE ALLOWANCES COMMISSION INCOME DISABILITY INCOME DIVIDEND AND INTEREST INCOME EMPLOYER SUBSIDIZED MORTGAGE PAYMENTS (EMPLOYER DIFFERENTIAL PAYMENTS) BORROWERS EMPLOYED BY A FAMILY-OWNED BUSINESS GOVERNMENT ASSISTANCE PROGRAMS MILITARY INCOME NOTES RECEIVABLE INCOME OVERTIME AND BONUS INCOME PART-TIME PRIMARY EMPLOYMENT FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 4 of 75

5 PART-TIME INCOME FROM A SECOND JOB RENTAL INCOME RETIREMENT INCOME SEASONAL INCOME (SEASONAL COACHING, HOLIDAY EMPLOYMENT, ETC.) SELF-EMPLOYED BORROWERS SOCIAL SECURITY INCOME TRAILING SPOUSE INCOME TRUST INCOME UNEMPLOYMENT INCOME INCOME/EMPLOYMENT RESOURCES INDUCEMENTS TO PURCHASE INDUCEMENT TO PURCHASE RESOURCES INSURANCE HAZARD INSURANCE FLOOD INSURANCE CONDOMINIUM FIDELITY/LIABILITY INSURANCE HO-6 POLICY LAND CONTRACTS LAND CONTRACT RESOURCES LIABILITIES EXCLUDED LIABILITIES LOAN TERMS FIXED RATE MORTGAGES ARMS LTV/CLTV PURCHASES RATE AND TERM REFINANCE CASH-OUT REFINANCE STREAMLINE REFINANCE WITH OR WITHOUT AN APPRAISAL HUD REO WITH REPAIR ESCROW NON-OCCUPYING BORROWERS INCREASE IN FAMILY SIZE FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 5 of 75

6 IDENTITY OF INTEREST TRANSACTIONS MAXIMUM/MINIMUM LOAN AMOUNTS NATIONS DIRECT MAXIMUM LOAN AMOUNTS MORTGAGE INSURANCE UP-FRONT MORTGAGE INSURANCE ANNUAL MORTGAGE INSURANCE UP-FRONT MORTGAGE INSURANCE PREMIUM REFUNDS MULTIPLE FHA LOANS MULTIPLE FHA LOAN RESOURCES MULTIPLE PROPERTIES NET TANGIBLE BENEFIT STREAMLINE REFINANCE TRANSACTIONS RATE AND TERM REFINANCE TRANSACTIONS STATE-REQUIRED NET TANGIBLE BENEFIT FORMS NEW CONSTRUCTION PROPERTY TAXES NEW CONSTRUCTION RESOURCES NON-OCCUPANT CO-BORROWERS OCCUPANCY POWER OF ATTORNEY PRIVATE ROADS PROPERTY ELIGIBILITY ELIGIBLE INELIGIBLE PROPERTY FLIPPING/SELLER SEASONING TO 180-DAYS SINCE SELLER ACQUISITION: MONTHS SINCE SELLER ACQUISITION PROPERTY FLIPPING RESOURCES PROPERTY INSPECTIONS INSPECTION REQUIREMENTS FOR REQUIRED REPAIRS HUD REO PROPERTIES TERMITE, WELL AND SEPTIC INSPECTIONS FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 6 of 75

7 SNOW CLAD ROOF INSPECTIONS CHINESE DRYWALL FEMA-DECLARED DISASTER AREAS METHAMPHETAMINE CONTAMINATION PROPERTY INSPECTION RESOURCES PURCHASES/PURCHASE AGREEMENTS PURCHASES OF SHORT SALES PURCHASE/CONSTRUCTION AGREEMENTS QUALIFYING RATES FIXED RATE MORTGAGES ADJUSTABLE RATE MORTGAGES RATIOS MAXIMUM RATIOS PAYOFF LETTERS CASH-OUT REFINANCE TRANSACTIONS RATE AND TERM REFINANCE TRANSACTIONS STREAMLINE REFINANCE TRANSACTIONS ADDING OR DELETING BORROWERS/CREDIT QUALIFYING STREAMLINE REFINANCE STREAMLINE REFINANCE WITH APPRAISAL STREAMLINE REFINANCE WITHOUT APPRAISAL HELPFUL LINKS - REFINANCE TRANSACTIONS REO PROPERTIES SEASONING REQUIREMENTS PURCHASES CASH-OUT REFINANCES RATE AND TERM REFINANCES STREAMLINE REFINANCES SELLER CONTRIBUTIONS SELLER CONTRIBUTION RESOURCES SOCIAL SECURITY VERIFICATION SUBORDINATE FINANCING SUBORDINATE FINANCING RESOURCES FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 7 of 75

8 TITLE MINERAL RIGHTS EXCEPTIONS TO TITLE DEED RESTRICTIONS UTILITIES WATER SYSTEMS/WELLS/SEPTIC SYSTEMS COMMUNITY WATER SYSTEMS SHARED WELLS FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 8 of 75

9 4506-T transcript results for the most recent available tax year must be ordered and obtained from IRS for all income sources. o For borrowers employed by a family-owned business, must order and obtain the most recent 2 years available 1040 transcripts from the IRS. If the most recent tax year transcript is not available: Obtain the previous year s transcript and proof of extension for most recent year. If the extension is expired (loans closing with a note date on or after October 15 th ) must obtain tax return and transcript for most recent year. For income derived from self-employment, other business income, or rentals, qualifying income calculations must include the amounts verified with the most recent available tax transcript. If the loan is closing with a note date on or after October 15 th, qualifying income must include most recent year s figures, and a transcript for that year must be ordered and obtained APPRAISAL PROPERTY ADDRESSES The property addresses on the appraisal, case number assignment, flood certification, mortgage, and note must be identical. However, abbreviation of Street, Road, etc. is acceptable, even if Street or Road is fully spelled in another document. This is the only acceptable variance. Use the standardized USPS address. Compare the USPS address to the legal description on the title commitment and use the city in the legal description if that differs from the USPS address AGE AND DATE OF APPRAISAL The appraisal effective date must be after the case received date unless one of the following applies: o Appraisal was originally ordered for a conventional loan that subsequently converted to an FHA loan or o Appraisal is for a HUD REO property or o Appraisal was ordered for a government guaranteed loan such as a VA loan that subsequently converted to an FHA loan o Documentation of prior non-fha loan type required All appraisals are valid for a period of 120 days Refinance transactions require a new appraisal, regardless of the age of the appraisal used for any recent purchase or refinance transaction(s) o The loan approval date is the date the DE underwriter signs the LT Loan Transmittal FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 9 of 75

10 The validity period of an appraisal may be extended for up to 120 days, provided all of the following requirements are met: o Fannie Mae form 1004D o The original appraiser must be an FHA roster appraiser in good standing at the time of the update o A new Fannie Mae form 1004MC Market Conditions Addendum must be provided with the update form o If the update was ordered by any lender other than the original lender indicated on the initial appraisal, the original appraisal must also be attached o Only one appraisal update is permitted o The validity period of the update is 120 days o Summary updates are not permitted for loans having any one or more of the following characteristics: The original appraisal expired prior to the effective date on the update An underwriter extended the original appraisal for 30 days Property has declined in value Building improvements to the property cannot be observed from the street or public way Exterior inspection of the property reveals deficiencies or other significant changes that did not exist at the time of the original appraisal APPRAISER REQUIREMENTS - All appraisals must be ordered through a Nations Direct approved management company. FORM REQUIREMENTS 1-unit residences require Fannie Mae Form to 4-unit residences require Fannie Mae Form 1025 Condos, including site condos require Fannie Mae Form 1073 Market Conditions Addendum, Fannie Mae Form 1004MC is required for all appraisals APPRAISALS OF PROPERTIES LOCATED IN DECLINING MARKETS A property is located in a declining market if the Neighborhood section of the appraisal indicates the neighborhood is declining At least two comps must have closed within 90 days prior to the appraisal date (if recent comparable sales are not available, the appraiser must provide a detailed explanation) o The comparable sales that closed within 90 days prior to the appraisal date must be as similar as possible to the subject property In addition to at least three sales comparables, two active listing or pending sale comparables are required in comp position 4-6 or higher o The listing and/or pending sale comparables must have typical marketing times for the area and must be similar to the subject property in size and sales price o Listing comps must be adjusted to reflect list to sales price ratios for the market o Pending sale comps must be adjusted to reflect the contract purchase price If the sales price is not available, pending sale comps must be adjusted to reflect typical list to sales price ratios FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 10 of 75

11 PHOTOGRAPHS Photographs are required for all of the following rooms: Living rooms Kitchens Bathrooms Last Updated: October 20 th, 2014 HUD-OWNED PROPERTIES Appraisals are obtained by the Management and Marketing (M & M) company contracted by HUD To obtain the appraisal, contact the M & M company designated as the asset manager for the property Asset manager contact information is located in the property listing on the HUD Homes Website. Maximum financing is calculated using the lower of the purchase price or appraised value o If the purchase price is higher than the appraised value and the borrower wishes to continue with the transaction, he or she must pay the difference with acceptable verified assets. A second appraisal supporting the purchase price may not be obtained. Appraisals are valid for 120 days o The original appraisal ordered by the company marketing the property is used at no cost to the borrower. o If the appraisal is more than 120 days old, a new appraisal is required If the new appraised value is lower than M & M appraisal, borrowers may proceed with the transaction with no adjustment to the sales price or may withdraw the offer to purchase and receive a full refund of earnest money deposit. Borrowers who choose to proceed with the purchase must pay the difference between the sales price and appraised value plus the minimum down payment and required closing costs and pre-paid expenses If the new appraised value is higher than the M & M appraisal, the sales price will not be adjusted, and the LTV will be calculated using the lower of the original appraised value or sales price SECOND APPRAISAL REQUIREMENTS SALES WITHIN 180 DAYS OF SELLER ACQUISITION A second appraisal is required if any of the following are true, regardless of any property flipping exemption that may apply: Resale of a property is between 91 and 180 days following seller acquisition and resale price is 100% or more above the seller acquisition cost Second appraisal must be completed on the appropriate full appraisal form If the value indicated on the second appraisal is more than 5% lower than the value indicated on the original appraisal, the lower value of the second appraisal must be used to calculate maximum loan amounts and LTV/CLTV If the value indicated on the second appraisal is no more than 5% less than the value indicated on the original appraisal or the value indicated on the second appraisal exceeds the value on the original appraisal, the value of the original appraisal is used to calculate maximum loan amounts and LTV/CLTV For additional requirements and restrictions, refer to Property Flipping Borrowers are not permitted to pay for the second appraisal FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 11 of 75

12 APPRAISAL PORTABILITY The original appraisal must be provided to Nations Direct and no new appraisal may be ordered unless one of the following is true: o The underwriter determines the appraisal contains material deficiencies and it does not meet FHA s requirements and standards or o The appraisal was performed by an appraiser who is on Nations Directs ineligible appraiser list or o The original lender is not transferring the appraisal in a timely manner, and the borrower stands to suffer financial loss because the loan cannot close in a timely manner For additional appraisal portability guidance, refer to the following resources: o Instructions for transferring a Nations Direct appraisal to another lender, refer to the Appraisal Portability, FHA Mortgagee Letter APPRAISAL RESOURCES FHA Residential Appraisal Requirements Appendix D, Attachment to FHA Mortgagee Letter Revisions to Appraisal Protocol Appraiser Independence, FHA Mortgagee Letter Appraisal Portability, FHA Mortgagee Letter Appraisal Validity Periods, FHA Mortgagee Letter Second Appraisal Reporting Requirements, FHA Mortgagee Letter Appraisal Performance Standards and Sanctions, FHA Mortgagee Letter Adoption of the Appraisal Update and/or Completion Report, FHA Mortgagee Letter HUD REO Appraisal Validity Period and Second Appraisals, FHA Mortgagee Letter ASSETS Acceptable sources of funds to close and documentation requirements are described below. For TOTAL Scorecard Approve or Accept responses, refer to the findings for the number of required statements. AGE OF ASSET STATEMENTS As conditioned for by Total Scorecard/DU findings. For manually approved loans, most recent 60 days worth of statements. LARGE DEPOSITS Purchase Transactions: HUD requires verification of any one deposit or aggregate of deposits (not including payroll direct deposits) that exceeds 2% of the sales price Refinance Transactions: Nations Direct does not require verification of large deposits CASH SAVED AT HOME Borrowers who do not have bank accounts may use cash saved at home Allowable amount is determined on a case-by-case basis and decision is based on borrower s overall income and obligations and the length of time it took the borrower to save the money Borrower must explain in writing the length of time over which the funds were saved and how the funds were accumulated Borrower must provide evidence the funds were deposited into a bank account prior-to-closing FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 12 of 75

13 CHECKING AND SAVINGS ACCOUNTS All large deposits must be verified, regardless of whether the funds are required for closing. Large deposits are designated on a case-by-case basis and are non-payroll deposits that are unusual and high for the borrower s income and obligations Manually underwritten loans require one of the following: A VOD and most recent bank statement or Two most recent months bank statements (if the bank statements do not show the previous month s ending balance, three bank statements are required) When one or more of the bank account owners is not a borrower on the loan, the non-borrowing joint account owner(s) must provide a letter stating the borrower has access to the funds. However, if the account is joint with a non-borrowing spouse and there are no additional joint account owners, an access letter is not required Non-Sufficient Funds (NSFs) showing on a borrower s bank statement(s) are generally an indication of the borrower s financial mismanagement and are considered a negative layer of risk. Written explanations are required. Overdraft protection withdrawals are generally considered a neutral factor and are not considered negatively. Overdraft protection funds are frequently unsecured loans or lines of credit and may not be used for the borrower s EMD or funds to close unless they are transferred from another asset account held by the borrower and do not constitute an unsecured loan or line of credit. EARNEST MONEY DEPOSITS All earnest money deposits must be verified in accordance with the large deposit requirements Acceptable verification of EMD must be one or more of the following: o Copy of the borrower s canceled check o A copy of the bank statement or internet printout showing the check cleared the borrower s bank account o Certification from the EMD holder and separate evidence of source of funds o If the EMD was a gift, it must be from an acceptable source and must be documented with both of the following: A fully executed gift letter and Evidence of the donor s withdrawal of funds (Copy of the canceled check, bank statement showing check cleared or bank-validated withdrawal slip) PROCEEDS FROM THE SALE OF A PERSONAL ASSET The borrower may sell a car, motorcycle, recreational vehicle, jewelry, stamp, coin, or baseball card collection, etc. The following documentation is required: Evidence of borrower s ownership of the asset and Estimate of the asset s value and Bill of sale and Copy of purchaser s check and Evidence of deposit of purchaser s check into borrower s bank account PROCEEDS FROM THE SALE OF REAL ESTATE HUD-I Settlement Statement required REAL ESTATE COMMISSION FROM SUBJECT PROPERTY Real estate commission from the subject property may be used as funds to close when the borrower is the licensed real estate agent for the property FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 13 of 75

14 A family member who is a licensed real estate agent for the subject property may give the borrower commission received from the subject property. The following documentation is required: o Fully executed gift letter o HUD-I settlement statement reflecting credit of the family member/realtor s commission o Ratio requirements are subject to Nations Directs discretion on borrowers whose funds to close are derived from a gift, grant or eligible down payment assistance program RENT CREDIT Provide a copy of the rent-with-option-to-buy agreement that clearly defines the terms and conditions, including rent credit The portion of rent credit that exceeds fair market rents for the area may be credited toward borrower s funds to close (i.e. If the monthly fair market rent for the property is $750 and the option-to-buy agreement indicates a monthly rent credit of $800, then $50 times the number of payments the borrower has made may be credited to the borrower) Fair market rents for the area are estimated by the appraiser If the borrower lived in the property rent-free or paid rent below fair market value, the difference between rent paid and fair market rent must be treated as an inducement to purchase resulting in a dollar-for-dollar reduction in the sales price before calculating the maximum LTV (i.e. If the monthly fair market rent is $500 and the borrower paid $350 in monthly rent, then $150 times the number of payments the borrower made must be deducted from the purchase price before the maximum purchase LTV is calculated) RETIREMENT SAVINGS Document balances with the most recent statement Document the terms and conditions for withdrawal and/or borrowing, regardless of whether the borrower is using funds to close o When funds may only be withdrawn in the event of the borrower s retirement or death, the funds may not be used as reserves When used as reserves, 60% of the vested account balance may be used When funds are used to close on the subject loan, proof of liquidation is required, regardless of TOTAL Scorecard response SAVINGS BONDS Provide copies of bonds indicating ownership Provide evidence of redemption value Provide evidence proceeds were deposited to borrower s bank account SECURED LOANS Borrowed funds are acceptable, provided they are fully secured by investment accounts or real property such as stocks, bonds, real estate, etc. The secured loan must be obtained through an independent third party lender. Interested parties (sellers, realtors, etc.) may not supply loans, even when the loan is secured by an asset Unacceptable borrowed funds include, but are not limited to, signature loans, cash advances on credit cards, loans secured by household goods such as furniture, etc. FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 14 of 75

15 STOCKS AND/OR BONDS Provide most recent two months brokerage statements Proof of liquidation is not required with Total Scorecard Approve or Accept response Proof of liquidation is required for manual underwriting approval SWEAT EQUITY Not allowed HELPFUL LINKS ASSETS HUD Handbook , 5.B AUS TOTAL SCORECARD SYSTEM A TOTAL Scorecard response is required for all loan purposes except Streamline Refinances. BORROWERS ELIGIBLE AND INELIGIBLE ELIGIBLE BORROWERS U.S. Citizens with a valid U.S. Social Security Number Permanent Resident Aliens o Copy of permanent residency document issued by the Bureau of Citizenship and Immigration Services within the Department of Homeland Security required o Evidence of a valid Social Security Number required Non-Permanent Resident Aliens, provided they: o Have a valid SSN and o Occupy the property as a principal residence and o Are eligible to work in the U.S. Copy of Employment Authorization Document (EAD) issued by the Department of Homeland Security required. There must be at least one remaining year of authorization to work unless the borrower has a previous history of EAD renewal Only borrowers having refugee or asylee status granted by the USCIS are automatically eligible to work in the United States. Therefore, refugee or asylee borrowers are not required to provide an EAD Inter vivos or living revocable trusts, provided the individual borrower fulfills all of the following requirements: o Remains a beneficiary of the trust o Occupies the property as a principal residence o The trust must appear on the mortgage or deed of trust o Individual borrowers are not required to appear on the mortgage, deed of trust, property deed or title unless state law requires it o All borrowers must appear on the note with the trust o Attorney opinion letter required In California only, in lieu of the attorney opinion letter, a California Trust Certificate, is permitted FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 15 of 75

16 INELIGIBLE BORROWERS Any borrower not listed as eligible, including but not limited to: Any individual without a valid U.S. Social Security Number Individuals with a U.S. Individual Taxpayer Identification Number (ITIN) - An ITIN is formatted like a SSN but begins with 9. No valid SSN begins with 9 Investors Foreign nationals and borrowers with diplomatic immunity Illegal aliens HELPFUL LINKS AUS HUD Handbook , 4.A.1-8 BUY-DOWNS Ineligible CASE NUMBER ASSIGNMENT/TRANSFER BORROWERS The borrower s name on the case number assignment must match the borrower s name on the note and mortgage o The following name discrepancies are the only acceptable variations: James Everett Brown, James E. Brown, James Brown William Smith Jr., William Smith, William R. Smith, William Ryan Smith, Jr., William Ryan Smith, William R. Smith, Jr. o The following name discrepancies must be resolved prior to the loan closing (this list is not all-inclusive and name discrepancies are reviewed on a case-by-case basis): Name discrepancies due to marriage (Case number shows Mary Smith, but documentation and/or the note and mortgage shows Mary Jones) Hyphenated name discrepancies (Case number shows Bill Smith, but documentation and/or the note and mortgage shows Bill Smith-Jones) Middle name discrepancies (Case number shows Bill John Smith, but documentation and/or the note and mortgage shows Bill Robert Smith) First name discrepancies (Case number shows Bill Smith, but documentation and/or the note and mortgage shows William Smith) Last name prefix discrepancies (Case number shows Bill St. Pete, but documentation and/or the note and mortgage shows Bill Stpete) PROPERTY ADDRESSES FHA case numbers are assigned to the property and remain with the property, regardless of borrower changes after a prior sales transaction for the property fails to close. For additional information, see Case Number Expiration The property addresses on the appraisal, case number assignment, flood certification, mortgage, and note must be identical. However, abbreviation of Street, Road, etc. is acceptable, even if Street or Road is fully spelled in another document. This is the only acceptable variance FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 16 of 75

17 o Use the standardized USPS address. Compare the USPS address to the legal description on the title commitment and use the city in the legal description if that differs from the USPS address ORDERING CASE NUMBERS Case numbers may not be ordered unless the Nations Direct has received a completed application, case # request form, and the borrower has a property Nations Direct must certify in FHA Connection that at the time of requesting a case number they have an active loan application for the subject borrower and property Old case numbers may not be used to circumvent new FHA requirements Duplicate case numbers may not be ordered to circumvent using an appraisal already performed for the subject property Case numbers must be ordered and received prior to the appraisal effective date unless one of the following exceptions applies: o Appraisal was originally ordered for a conventional loan that subsequently converted to an FHA loan or o Appraisal is for a HUD REO property or o Appraisal was ordered for a government guaranteed loan such as a VA loan that subsequently converted to an FHA loan o Documentation of prior non-fha loan type required Case validation warnings must be resolved and duplicate case numbers may not be ordered to resolve a duplicate address, circumvent the case transfer requirement or any other case validation warning HUD will not assign a Streamline refinance case number until the loan being refinanced meets all of the following seasoning requirements: o 210 days have passed since the closing date of the FHA loan being refinanced and o The borrower has made at least six payments on the FHA loan being refinanced and o At least six full months have passed since the first payment due date of the FHA loan being refinanced o FHA does not permit ordering a case number as a rate and term refi to circumvent these requirements and FHA will not revise a case assigned as a rate and term or cash-out to a Streamline refinance. Beginning April 18, 2011, FHA will begin auto-canceling case numbers for which there has been no activity within the most recent six months since the last action in FHA Connection. If there has been not activity in the most recent six months, the only case numbers that will not be cancelled are those for which the upfront mortgage insurance premium has been paid or an appraisal update has been entered in FHA Connection within the most recent six months. The following FHA Connection activities are the only items FHA considers Last Activity : Case number assignment Appraisal logging completed FHA issued firm commitment FHA has received the insurance application and subsequent updates FHA has issued a Notice of Return (NOR) and/or received additional insuring resubmissions CASE NUMBER TRANSFERS Case numbers are transferred through FHA Connection DE lender must perform case number transfer o Complete the required information: FHA Case Number FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 17 of 75

18 New Originator ID New Sponsor/Agent ID, if applicable Date of Assignment Letter Last Updated: October 20 th, 2014 CASH RESERVES All reserves included in the TOTAL Scorecard data must be documented Cash reserves may not include funds received as a gift, regardless of the source 60% of the vested balance of a 401k may be used - Must document terms and conditions for withdrawal and/or borrowing and that the borrower is eligible for withdrawals 3 TO 4-UNIT PROPERTIES 3 months PITI is required on all 3 to 4-unit transactions, regardless of TOTAL Scorecard findings NON-TRADITIONAL CREDIT Is not allowed FEWER THAN TEN PAYMENTS REMAIN ON EXCLUDED DEBT Substantial reserves are a major compensating factor when excluding installment debts with fewer than ten remaining payments CLOSING COSTS ALLOWABLE/NON-ALLOWABLE CLOSING COSTS Borrowers may pay customary and reasonable closing costs, subject to the following limitations: o Commitment and/or lock-in fees may only be charged when the interest rate and discount points, if any, are guaranteed to the borrower in writing for a minimum of 15 days o Fees and charges must be reasonable and customary and comply with all Federal, State and local regulations and predatory lending rules o Broker Fees: Lenders may not charge both an origination fee and a broker fee A broker fee may only be charged if the borrower pays the fee directly to a mortgage broker and the borrower independently engages a mortgage broker exclusively to seek financing and pays the broker directly. The mortgage broker cannot be the same as the originating lender and the lending institution may not pay the broker fee o Brokers may charge only those discount points required to buy down the loan s interest rate The discount points charged must be reasonable and customary FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 18 of 75

19 CLOSING REQUIREMENTS Last Updated: October 20 th, 2014 PROPERTY ADDRESSES The property addresses on the appraisal, case number assignment, mortgage, and note must be identical. However, abbreviation of Street, Road, etc. is acceptable, even if Street or Road is fully spelled in another document. This is the only acceptable variance o Use the standardized USPS address. Compare the USPS address to the legal description on the title commitment and use the city in the legal description if that differs from the USPS address. CLOSING REQUIREMENTS In addition to the underwriter-performed VOE, a verbal VOE must be submitted with the o active probability verifications, business Verbal voice VOEs days of funding mail confirm continued for of hourly, box. the request note borrower If employment. the salaried, and company must is still or commission confirm employed If the company the via borrower income a receptionist, representative borrowers is currently phone must states employed extension be they completed do and not directory must perform within address and/or 10 verbal the representative indicates they do not comment on probability of continued employment, indicate that response on Verbal Verification of Employment, o Verifications for active-duty military borrowers may be in the form of a military Leave and Earnings Statement (LES) dated within 30 days of closing o Verifications for self-employed borrowers must be within the most recent 30 days and must be obtained from a third party such as a CPA, regulatory agency or the applicable licensing bureau and verification of the business phone listing and address via phone book, the internet or directory assistance is also required o Verification of employment/certification of non-employment income is required for all loans prior-to-funding and must be completed on Verbal Verification of Employment, Interest credit allowed - Loan must close by the 5th calendar day of the month preceding the first payment date Interest abatement not allowed In states where property taxes are paid in arrears, the tax pro-rations paid by the seller at closing may be used to reduce the borrower s required cash-to-close, and the borrower may bring less than 3.5% to closing. Lenders must always verify the borrower has assets from an acceptable source that are at least 3.5% of the purchase price, regardless of the amount of tax pro-rations credited for taxes paid in arrears. For rate and term and streamline refinance transactions, the existing escrow balance of the loan being refinanced may be credited to the borrower, provided the amount of the escrow balance is not netted from the total payoff amount on the payoff statement. o The current escrow balance must be stated in the escrow section of the payoff statement o No more than the escrow balance may be credited to the borrower and the credit must be listed in the 200 section of the HUD-I Settlement Statement o If the borrower s escrow balance is deducted from the total payoff amount on the payoff statement and/or HUD-I Settlement Statement or the escrow balance is credited in the 100 section of the HUD-I Settlement Statement, FHA requires the maximum loan amount for streamline and rate and term refis to be re-calculated using the reduced principal balance after netting out the escrow balance. For cash-out refinance transactions, the existing escrow balance of the loan being refinanced may be credited to the borrower, provided the escrow balance is included on the payoff statement and the amount of the escrow credit does not exceed the actual escrow balance. For cash-out refinance transactions only, in lieu of crediting the existing escrow balance to the borrower in section 100 or 200 of the HUD-I Settlement Statement, the escrow may be netted from the final payoff figure. For FHA to FHA refinance transactions, the up-front mortgage insurance premium refund FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 19 of 75

20 may be credited to the borrower in the 200, 800 or 900 section of the HUD-I Settlement Statement All closing/funding conditions must be collected and provided in the closing package Any changes to loan amount, upfront MIP, cash-to-close, interest rate, points, PITI, etc. must be reviewed by underwriting prior to closing and disbursing loan Principal reductions are required when the total of lender and/or seller credits reflected on the HUD-I Settlement Statement exceeds the total of the actual closing costs, pre-paid expenses and discount points. Principal reductions are required when the borrower receives any cash back at a purchase transaction closing o Documented funds paid by the borrower outside of closing for items such as the EMD, appraisal or credit report may be refunded to the borrower at closing Document funds paid outside of closing with one of the following: Cancelled checks Bank statement showing transfer of funds Money order receipts and evidence of source of funds Closing documents must be signed and notarized on or before the closing date indicated on the closing documents, regardless of the state in which the property is located and/or whether it s an escrow state A fully executed Social Security Number Validation, must be included in the loan package for all borrowers ESCROW STATES Arizona California Hawaii Idaho Montana Nevada Oregon Utah Washington COMPENSATING FACTORS Ratio guidelines may be exceeded when compensating factor(s) that support loan approval are documented in the file. The remarks section of HUD Form LT must contain the underwriter s list of compensating factors that were used to justify approval. The following items are FHA-recognized compensating factors: The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage in the most recent months The borrower makes a down payment 10% of the purchase price or for refinance transactions, there is a strong equity position The borrower has demonstrated the ability to accumulate savings and demonstrates a conservative attitude toward the use of credit FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 20 of 75

21 The borrower s previous credit history indicates the borrower is able to devote a greater portion of income to housing expenses The borrower receives documented compensation or income not reflected in the effective income on HUD Form LT but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits There is only a minimal increase in the borrower s housing expense The borrower has substantial cash reserves (at least three months PITI) after closing The borrower has substantial non-taxable income that was not grossed up when calculating the effective income The borrower has a potential for increased earnings, as indicated by job training or education in the borrower s profession The home is being purchased as a result of relocation of the primary wage-earner, and the secondary wage-earner has an established history of employment, is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. Available employment must be documented in the file No income for the trailing spouse is included in the ratios FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 21 of 75

22 CONDOMINIUMS Condos must be located in HUD-approved projects and the condo project must be listed as approved in FHA s Condominium Search Engine. When searching for approved condos, make certain HRAP/DELRAP is selected in the Approval Method drop down of the search engine. Only streamline refinance transactions without appraisals and purchases of HUD REO properties do not require evidence of condominium approval. o For all FHA loan purposes, Nations Direct will not approve or permit closing of any condominium-unit located in a project that is listed as denied or ineligible. Additionally, the condominium project may not have any characteristics listed in the Ineligible Projects section of Conventional Underwriting Guidelines o HRAP refers to condos approved by HUD through the HUD Review and Approval process o DELRAP refers to condos approved by a DE lender through the DE Lender and Approval process Nations Direct will not approve condominium projects through DELRAP. If a condominium project s approval expires or FHA removes the project approval after a case number is received, the loan may close, provided the case number correctly indicates the condominium project ID and all case expiration requirements defined in the Case Number Assignment/Transfer section of this document are met. Underwriters must certify the condominium-unit is located within an approved project and the project continues to meet FHA s requirements. If the Document Status indicates unrecorded or not on file, forward all recorded Declarations, By-Laws and Amendments to the attention of Condo Processing at the appropriate HOC. Turn time is generally one week before the Document Status field is revised by FHA. An HO-6 homeowner s policy in an amount 20% of the appraised value is required. The monthly payment must be included in the ratio calculation, and escrows must be collected for the annual premium at closing If flood insurance is required, an NFIP policy must be obtained by the homeowner s association. Borrower purchased flood insurance is not permitted unless the property is a site condominium. Loans must be denied if the HOA does not maintain adequate flood insurance, regardless of FHA condominium approval status In Colorado, HOA Association Assessments have a super-lien position over the first mortgage. For both condominiums and PUDs, provide the following prior to closing: o A copy of the HOA by-laws indicating HOA assessments are subordinate to the first lien or o A subordination agreement executed by a representative of the HOA indicating that all current and future HOA assessments are subordinate to the first lien mortgage Condos are ineligible unless at least 30% of the units within the entire project are sold and the homeowners have been in control of the Homeowner s Association at least 12 months. Condos are ineligible unless at least 51% of the units within the entire project are non-fha insured loans. SITE CONDOMIUMS Site condos do not require FHA approval, provided the property is a fully detached single-family site condo Appraisal must be completed on Fannie Mae Form 1073 Condominium appraisal form Condo rider must be included FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 22 of 75

23 Section of the Act is 203(b) ADP code is 431 (ARMS) or 734 Last Updated: October 20 th, 2014 CONDOMINIUM RESOURCES Condominium Approval Process for Single-Family Housing, FHA Mortgagee Letter FHA s Condominium Mortgage Insurance Webpage CONFLICT OF INTEREST Transactions in which the realtor and the broker are the same individual are ineligible. CREDIT HISTORY CREDIT INQUIRIES Inquiries within the most recent 90 days must be explained in writing, regardless of Total Scorecard response DEROGATORY CREDIT EXPLANATIONS Accept or Approve responses do not require credit explanation letters All refer response loans for borrowers having derogatory credit must contain a credit explanation letter at the time of initial submission. All of the following must be explained: o Late payments within the most recent two years o Collections, charge-offs, judgments, and public records, regardless of time frame NON-TRADITIONAL CREDIT REQUIREMENTS BORROWERS HAVE CREDIT SCORES Each credit reference must have at least a 12 month history A joint trade line reported on each borrower s individual credit report is one trade line Trade lines on which the borrower is an authorized user may not be counted as a traditional or non-traditional trade line Non-traditional credit may not be used to offset a borrower s poor credit, regardless of whether or not a credit score exists Borrowers having fewer than three traditional trade lines are ineligible for 3 to 4-unit purchase or rate and term refinance transactions. However, Streamline refinances of 3 to 4-unit properties are permitted NON-TRADITIONAL CREDIT REQUIREMENTS OCCUPANT BORROWERS DO NOT HAVE CREDIT SCORES Non-traditional credit cannot be used to offset any borrower s poor credit. RENT VERIFICATION Rent verification must be documented with one of the following: 12 months canceled checks Verification of rent from an apartment complex or management company Bank statements showing direct payment to the management company, apartment complex or management company Borrowers having fewer than three traditional trade lines are ineligible for 3 to 4-unit purchase FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 23 of 75

24 or rate and term refinance transactions. However, Streamline refinances of 3 to 4-unit properties are permitted Total Scorecard Approve or Accept responses may be honored when one borrower has a credit score but the other does not, provided the borrower with the credit score will occupy the property. If only non-occupant co-borrowers have credit scores, the Approve or Accept response must be downgraded to a refer, And is ineligible for financing with Nations Direct. Non-occupant co-borrowers are only permitted when the occupying borrower has sufficient credit references outlined above, including a 12 month rental history If the non-occupant co-borrowers do not have scores, but the occupying borrowers have credit scores, Total Scorecard response requirements are based on the occupant borrower s credit scores. If the non-occupant co-borrower s scores are lower than the occupant borrower s scores, the ratio guidelines and Total Scorecard response requirements are based on the lowest credit score for all borrowers FHA provides the following guidance in establishing that a borrower has sufficient references for evaluating bill paying habits: Credit references must be reported on a credit vendor generated Mortgage Credit Report, If the borrower rents from an individual, 12 months canceled are checks required, even if rental verification is also provided. Borrower may not have any rental housing payments 30 days in the most recent 12 months FORECLOSURES A borrower with a foreclosure or deed-in-lieu of foreclosure within the most recent *three years is ineligible for FHA financing. An LOE documenting significant extenuating circumstances must exist and there must be evidence of re-established good credit. If the foreclosed loan was an FHA loan, the three year time frame is measured from the date FHA paid the insurance claim. Defaulted time share loans are not considered foreclosures. If the loan receives a Total Scorecard Approve or Accept response and the borrower had a foreclosure within the most recent three years, the loan must be manually downgraded to a refer response Full manual underwrite is required and the file must be documented according to manual underwriting requirements. If the borrower s mortgage was included in the Chapter 7 Bankruptcy, and the credit report reflects a foreclosure but does not indicate the foreclosure completion date, a letter from the servicer is necessary to determine the foreclosure date. FHA does not permit lenders to use the bankruptcy discharge date. The borrower is eligible for FHA financing three years from the date the servicer indicates the foreclosure was financed. If the borrower s mortgage was included in the Chapter 7 Bankruptcy and the credit report does not reflect a foreclosure, a letter from the servicer must indicate the mortgage was paid in full, that no additional liabilities exist and there was NO foreclosure. The borrower is eligible for FHA financing two years from the date of the Chapter 7 Bankruptcy discharge, provided all other FHA requirements are met day mortgage late(s) and/or NOD reporting on credit are generally treated as foreclosures. However, exceptions will be considered on a case by case basis, with AUS approval and at underwriter discretion based upon past credit performance and overall assessment of file. *For qualification requirements for standard extenuating circumstance exceptions, see Extenuating Circumstance section. Exceptions with only 12 months seasoning may be FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 24 of 75

25 considered; See Back to Work Initiative-Extenuating Circumstance section for requirements on case numbers assigned 8/15/2013 through 9/30/2016. CHAPTER 7 BANKRUPTCIES A borrower with a Chapter 7 Bankruptcy discharged less than *two years is ineligible unless an Approve or Accept response is received through the Total Scorecard System and significant extenuating circumstances exist. Loans for borrowers with bankruptcies discharged less than one year will not be considered, regardless of Total Scorecard response If the loan receives a Total Scorecard Approve or Accept response and the borrower had a bankruptcy discharged within the most recent two years, the loan must be manually downgraded to a refer response Full manual underwrite is required and the file must be documented according to manual underwriting requirements. If the borrower s mortgage was included in the Chapter 7 Bankruptcy, and the credit report reflects a foreclosure but does not indicate the foreclosure completion date, a letter from the servicer is necessary to determine the foreclosure date. FHA does not permit lenders to use the bankruptcy discharge date. The borrower is eligible for FHA financing three years from the date the servicer indicates the foreclosure was financed. If the borrower s mortgage was included in the Chapter 7 Bankruptcy and the credit report does not reflect a foreclosure, a letter from the servicer must indicate the mortgage was paid in full, that no additional liabilities exist and there was NO foreclosure. The borrower is eligible for FHA financing two years from the date of the Chapter 7 Bankruptcy discharge, provided all other FHA requirements are met. *For qualification requirements for standard extenuating circumstance exceptions, see Extenuating Circumstance section. Exceptions with only 12 months seasoning may be considered; See Back to Work Initiative-Extenuating Circumstance section for requirements on case numbers assigned 8/15/2013 through 9/30/2016. CHAPTER 13 BANKRUPTCIES Document at least one year into the payout plan has elapsed. Document all required payments have been made on time If borrower is still in repayment, obtain court permission to enter into the new mortgage If the borrower is still in repayment, include the Chapter 13 payment in the debt ratio If the loan receives a Total Scorecard Approve or Accept response and the borrower had a bankruptcy discharged within the most recent two years, the loan must be manually downgraded to a refer response Full manual underwrite is required and the file must be documented according to manual underwriting requirements. JUDGMENTS Judgments must be paid in full prior to closing unless both of the following items are provided: o Fully executed repayment agreement. o Evidence timely payments have been made (Evaluated on a case-by-case basis generally for a minimum 12-month period) The payment must be included in the debt-to-income ratios when qualifying the borrower o Judgments belonging to a non-borrowing spouse are subject to all of the above requirements when the borrowers live in or purchase a property located in a community property state All outstanding judgments on title must be removed prior-to-closing FHA Underwriting Guidelines Nations Direct Mortgage, LLC. Page 25 of 75